Evertec Earnings 2020-09-30

Evertec Earnings 2020-09-30

EVTC 10Q Quarterly Report

Balance Sheet	Income Statement	Cash Flow
Assets, Equity	Rev, G Profit, Net Income	Ops, Inv, Fin

Document

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020 or



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

COMMISSION FILE NUMBER 001-35872

EVERTEC, Inc.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)



Puerto Rico		66-0783622
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification number)

Cupey Center Building,	Road 176, Kilometer 1.3,
San Juan,	Puerto Rico	00926
(Address of principal executive offices)		(Zip Code)

(787) 759-9999

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value per share	EVTC	New York Stock Exchange

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 ☐

Table of Contents

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 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 ☒

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 the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

At October 23, 2020, there were 71,906,983 outstanding shares of common stock of EVERTEC, Inc.

Table of Contents

TABLE OF CONTENTS



		Page
Part I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Unaudited Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019	1
	Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2020 and 2019	2
	Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2020 and 2019	3
	Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	38
Item 4.	Controls and Procedures	38
Part II. OTHER INFORMATION		40
Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity in Securities and Use of Proceeds	40
Item 3.	Defaults Upon Senior Securities	40
Item 4.	Mine Safety Disclosures	40
Item 5.	Other Information	40
Item 6.	Exhibits	41
SIGNATURES		42

All reports we file with the Securities and Exchange Commission ("SEC") are available free of charge via the Electronic Data Gathering Analysis and Retrieval (EDGAR) System on the SEC’s website at www.sec.gov. We also provide copies of our SEC filings at no charge upon request and make electronic copies of our reports available through our website at www.evertecinc.com as soon as reasonably practicable after filing such material with the SEC.

Table of Contents

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q 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 political and 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;


•	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;

Table of Contents


•	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 government of Puerto Rico or by the PROMESA Board to address the fiscal crisis in Puerto Rico;


•	the aftermath of Hurricanes Irma and Maria and their continued 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;


•	uncertainty related to the effect of the discontinuation of the London Interbank Offered Rate at the end of 2021;


•	the nature, timing and amount of any restatement; and


•	the impact of a novel strain of coronavirus ("COVID-19"), and measures taken in response to the outbreak, on our revenues, net income and liquidity due to current and future disruptions in operations as well as the macroeconomic instability caused by the pandemic.

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 2. 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.

Table of Contents

EVERTEC, Inc. Unaudited Condensed Consolidated Balance Sheets

(Dollar amounts in thousands, except for share information)



	September 30, 2020			December 31, 2019
Assets
Current Assets:
Cash and cash equivalents	$	144,147		$	111,030
Restricted cash	18,049			20,091
Accounts receivable, net	111,852			106,812
Prepaid expenses and other assets	44,835			38,085
Total current assets	318,883			276,018
Investment in equity investee	12,417			12,288
Property and equipment, net	43,255			43,791
Operating lease right-of-use asset	26,824			29,979
Goodwill	395,048			399,487
Other intangible assets, net	222,085			241,937
Deferred tax asset	3,657			2,131
Net investment in leases	394			722
Other long-term assets	5,511			5,323
Total assets	$	1,028,074		$	1,011,676
Liabilities and stockholders’ equity
Current Liabilities:
Accrued liabilities	$	54,099		$	58,160
Accounts payable	36,057			39,165
Unearned income	19,800			20,668
Income tax payable	7,475			6,298
Current portion of long-term debt	14,250			14,250
Current portion of operating lease liability	5,877			5,773
Total current liabilities	137,558			144,314
Long-term debt	484,306			510,947
Deferred tax liability	2,575			4,261
Unearned income - long term	30,827			28,437
Operating lease liability - long-term	21,380			24,679
Derivative liability	27,370			14,452
Other long-term liabilities	13,850			12,963
Total liabilities	717,866			740,053
Commitments and contingencies (Note 13)
Stockholders’ equity
Preferred stock, par value $0.01; 2,000,000 shares authorized; none issued	—			—
Common stock, par value $0.01; 206,000,000 shares authorized; 71,906,983 shares issued and outstanding as of September 30, 2020 (December 31, 2019 - 72,000,261)	719			720
Additional paid-in capital	6,552			—
Accumulated earnings	351,252			296,476
Accumulated other comprehensive loss, net of tax	(52,386		)	(30,009		)
Total EVERTEC, Inc. stockholders’ equity	306,137			267,187
Non-controlling interest	4,071			4,436
Total equity	310,208			271,623
Total liabilities and equity	$	1,028,074		$	1,011,676

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Table of Contents

EVERTEC, Inc. Unaudited Condensed Consolidated Statements of Income and Comprehensive Income

(Dollar amounts in thousands, except per share information)



	Three months ended September 30,						Nine months ended September 30,
	2020			2019			2020			2019

Revenues (affiliates Note 14)	$	136,507		$	118,804		$	376,386		$	360,188

Operating costs and expenses
Cost of revenues, exclusive of depreciation and amortization	57,854			51,878			168,900			154,498
Selling, general and administrative expenses	16,682			15,152			51,528			45,355
Depreciation and amortization	18,127			16,972			53,761			50,440
Total operating costs and expenses	92,663			84,002			274,189			250,293
Income from operations	43,844			34,802			102,197			109,895
Non-operating (expenses) income
Interest income	429			348			1,165			864
Interest expense	(5,867		)	(7,267		)	(18,829		)	(22,191		)
Earnings of equity method investment	202			371			733			726
Other income (expense)	2,486			252			2,766			(619		)
Total non-operating expenses	(2,750		)	(6,296		)	(14,165		)	(21,220		)
Income before income taxes	41,094			28,506			88,032			88,675
Income tax expense	6,513			3,720			15,551			10,018
Net income	34,581			24,786			72,481			78,657
Less: Net income attributable to non-controlling interest	118			32			323			201
Net income attributable to EVERTEC, Inc.’s common stockholders	34,463			24,754			72,158			78,456
Other comprehensive income (loss), net of tax of $123, $(278), $(964) and $(1,279)
Foreign currency translation adjustments	(3,245		)	(576		)	(10,483		)	3,714
Gain (loss) on cash flow hedges	643			(2,922		)	(11,894		)	(13,019		)
Total comprehensive income attributable to EVERTEC, Inc.’s common stockholders	$	31,861		$	21,256		$	49,781		$	69,151
Net income per common share - basic attributable to EVERTEC, Inc.’s common stockholders	$	0.48		$	0.34		$	1.00		$	1.09
Net income per common share - diluted attributable to EVERTEC, Inc.’s common stockholders	$	0.47		$	0.34		$	0.99		$	1.07

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Table of Contents

EVERTEC, Inc. Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Dollar amounts in thousands, except share information)



	Number of Shares of Common Stock		Common Stock			Additional Paid-in Capital			Accumulated Earnings			Accumulated Other Comprehensive Loss			Non-Controlling Interest			Total Stockholders’ Equity
Balance at December 31, 2019	72,000,261		$	720		$	—		$	296,476		$	(30,009	)	$	4,436		$	271,623
Share-based compensation recognized	—		—			3,483			—			—			—			3,483
Repurchase of common stock	(336,022	)	(3		)	(775		)	(6,522		)	—			—			(7,300		)
Restricted stock units delivered, net of cashless	201,066		2			(2,708		)	—			—			—			(2,706		)
Net income	—		—			—			22,211			—			64			22,275
Cash dividends declared on common stock, $0.05 per share	—		—			—			(3,600		)	—			—			(3,600		)
Other comprehensive loss	—		—			—			—			(20,164		)	(853		)	(21,017		)
Cumulative adjustment for the implementation of ASU 2016-13	—		—			—			(74		)	—			—			(74		)
Balance at March 31, 2020	71,865,305		719			—			308,491			(50,173		)	3,647			262,684
Share-based compensation recognized	—		—			3,639			—			—			—			3,639
Restricted stock units delivered, net of cashless	(2,445	)	—			(71		)	—			—			—			(71		)
Net income	—		—			—			15,484			—			141			15,625
Cash dividends declared on common stock, $0.05 per share	—		—			—			(3,593		)	—			—			(3,593		)
Other comprehensive income	—		—			—			—			389			295			684
Balance at June 30, 2020	71,862,860		719			3,568			320,382			(49,784		)	4,083			278,968
Share-based compensation recognized	—		—			3,663			—			—			—			3,663
Restricted stock units delivered, net of cashless	43,385		—			(679		)	—			—			—			(679		)
Net income	—		—			—			34,463			—			118			34,581
Cash dividends declared on common stock, $0.05 per share	—		—			—			(3,593		)	—			—			(3,593		)
Other comprehensive loss	—		—			—			—			(2,602		)	(130		)	(2,732		)
Balance at September 30, 2020	71,906,245		$	719		$	6,552		$	351,252		$	(52,386	)	$	4,071		$	310,208

Table of Contents



	Number of Shares of Common Stock		Common Stock			Additional Paid-in Capital			Accumulated Earnings			Accumulated Other Comprehensive Loss			Non-Controlling Interest			Total Stockholders’ Equity
Balance at December 31, 2018	72,378,710		$	723		$	5,783		$	228,742		$	(23,789	)	$	4,147		$	215,606
Share-based compensation recognized	—		—			3,279			—			—			—			3,279
Repurchase of common stock	(618,573	)	(6		)	(3,129		)	(14,351		)	—			—			(17,486		)
Restricted stock units delivered	507,308		5			(5,933		)	—			—			—			(5,928		)
Net income	—		—			—			26,644			—			90			26,734
Cash dividends declared on common stock, $0.05 per share	—		—			—			(3,617		)	—			—			(3,617		)
Other comprehensive loss	—		—			—			—			(2,090		)	—			(2,090		)
Balance at March 31, 2019	72,267,445		722			—			237,418			(25,879		)	4,237			216,498
Share-based compensation recognized	—		—			3,436			—			—			—			3,436
Repurchase of common stock	(368,293	)	(4		)	(3,201		)	(7,505		)	—			—			(10,710		)
Restricted stock units delivered	38,364		1			(235		)	—			—			—			(234		)
Net income	—		—			—			27,058			—			79			27,137
Cash dividends declared on common stock, $0.05 per share	—		—			—			(3,610		)	—			—			(3,610		)
Other comprehensive loss	—		—			—			—			(3,717		)	—			(3,717		)
Balance at June 30, 2019	71,937,516		$	719		$	—		$	253,361		$	(29,596	)	$	4,316		$	228,800
Share-based compensation recognized	—		—			3,453			—			—			—			3,453
Repurchase of common stock	(8,120	)	—			(253		)	—			—			—			(253		)
Restricted stock units delivered	18,167		—			(142		)	—			—			—			(142		)
Net income	—		—			—			24,754			—			32			24,786
Cash dividends declared on common stock, $0.05 per share	—		—			—			(3,597		)	—			—			(3,597		)
Other comprehensive loss	—		—			—			—			(3,498		)	(293		)	(3,791		)
Balance at September 30, 2019	71,947,563		719			3,058			274,518			(33,094		)	4,055			249,256

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Table of Contents

EVERTEC, Inc. Unaudited Condensed Consolidated Statements of Cash Flows

(Dollar amounts in thousands)



	Nine months ended September 30,
	2020			2019
Cash flows from operating activities
Net income	$	72,481		$	78,657
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	53,761			50,440
Amortization of debt issue costs and accretion of discount	1,530			1,256
Operating lease amortization	4,377			3,966
Provision for expected credit losses and sundry losses	1,732			3,224
Deferred tax benefit	(2,082		)	(4,197		)
Share-based compensation	10,785			10,168
Loss on disposition of property and equipment and other intangibles	753			691
Earnings of equity method investment	(733		)	(726		)
Dividend received from equity method investment	—			485
Decrease (increase) in assets:
Accounts receivable, net	(7,096		)	6,475
Prepaid expenses and other assets	(7,138		)	(7,268		)
Other long-term assets	284			(1,450		)
(Decrease) increase in liabilities:
Accrued liabilities and accounts payable	(7,969		)	(6,834		)
Income tax payable	1,548			(2,080		)
Unearned income	2,350			6,718
Operating lease liabilities	(5,720		)	(4,825		)
Other long-term liabilities	2,296			1,467
Total adjustments	48,678			57,510
Net cash provided by operating activities	121,159			136,167
Cash flows from investing activities
Additions to software	(23,521		)	(27,969		)
Property and equipment acquired	(13,402		)	(21,994		)
Proceeds from sales of property and equipment	3			101
Net cash used in investing activities	(36,920		)	(49,862		)
Cash flows from financing activities
Statutory withholding taxes paid on share-based compensation	(3,456		)	(6,304		)
Repayment of short-term borrowings for purchase of equipment and software	(1,553		)	(852		)
Dividends paid	(10,786		)	(10,824		)
Repurchase of common stock	(7,300		)	(28,449		)
Repayment of long-term debt	(27,685		)	(10,688		)
Net cash used in financing activities	(50,780		)	(57,117		)
Effect of foreign exchange rate on cash, cash equivalents and restricted cash	(2,384		)	—
Net increase in cash, cash equivalents and restricted cash	31,075			29,188
Cash, cash equivalents and restricted cash at beginning of the period	131,121			86,746
Cash, cash equivalents and restricted cash at end of the period	$	162,196		$	115,934
Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents	$	144,147		$	102,535
Restricted cash	18,049			13,399
Cash, cash equivalents and restricted cash	$	162,196		$	115,934
Supplemental disclosure of cash flow information:
Cash paid for interest	$	18,081		$	21,668
Cash paid for income taxes	15,257			12,535
Supplemental disclosure of non-cash activities:
Payable due to vendor related to equipment and software acquired	$	1,486		$	2,707

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Table of Contents

Notes to Unaudited Condensed Consolidated Financial Statements

Table of Contents

Note 1 – The Company and Basis of Presentation

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 processing and business process management services. The Company provides services across 26 countries in the region. EVERTEC owns and operates the ATH network, one of the leading personal identification number ("PIN") debit networks and automated teller machine ("ATM") in the Caribbean and Latin America. In addition, EVERTEC provides a comprehensive suite of services for core bank processing and cash processing in Puerto Rico and technology outsourcing in all 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. EVERTEC's common stock is listed under the ticker symbol "EVTC" on the New York Stock Exchange.

Basis of Presentation

The unaudited condensed consolidated financial statements of EVERTEC have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of the accompanying unaudited condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the unaudited condensed consolidated financial statements. Actual results could differ from these estimates.

Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted from these statements pursuant to the rules and regulations of the Securities and Exchange Commission and, accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the Audited Consolidated Financial Statements of the Company for the year ended December 31, 2019, included in the Company’s 2019 Annual Report on Form 10-K. In the opinion of management, the accompanying unaudited condensed consolidated financial statements, prepared in accordance with GAAP, contain all adjustments necessary for a fair presentation. Intercompany accounts and transactions are eliminated in consolidation.

Risks and Uncertainties due to COVID-19 Pandemic

COVID-19 presents material uncertainty and risk with respect to EVERTEC’s business, results of operations and cash flows, as well as with respect to changes in laws and regulations and government and regulatory policy. COVID-19’s impact on global economies could have a material adverse effect on (among other things) the profitability, capital and liquidity of the Company, particularly if consumer spending levels are depressed for a prolonged period of time. While the rapid development and fluidity of the situation prevents management from having clear visibility into the medium and long-term impacts, management believes possible effects may include, but are not limited to, disruption to the Company’s customers and revenue, absenteeism in the Company’s workforce, unavailability of products and supplies used in operations, and a decline in the value of assets held by the Company, including, among other things, tangible and intangible long-lived assets, and increased levels in the Company's current expected credit loss reserve.

Given the uncertain and rapidly evolving situation, management has taken certain precautionary measures intended to help minimize the risk of COVID-19 to the Company, its employees, and customers, including the following:

•

The Company deployed its business continuity plan for the entire organization a few days before the government of Puerto Rico enacted a shelter-in-place directive on March 16, 2020. Since then, every country in which the Company operates has implemented some type of social distancing measures. Management expects that most of our employees will remain working remotely for an undetermined period, until it is deemed safe by management to return to our offices and as permitted or advised by local authorities in each country where the Company operates;

•

In connection with the Company's business continuity plan, the Company transitioned most of its employees to a work from home environment. For certain critical employees who are required to remain working on-site in order to, among other things, maintain network operations oversight functions, cash handling and other critical operations for our customers, we have implemented safety measures including administering daily temperature checks upon entry into the work site, providing protective gear, developing safe social distancing workspaces and increasing overall sanitation at our offices;

Table of Contents


•	On May 1, 2020, the Company commenced deferral of payroll taxes as permitted under the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the "CARES Act"); management anticipates a $2.9 million deferral of payroll taxes during the allowed time under the CARES Act. Through September 30, 2020, the Company has deferred payroll taxes amounting to $1.7 million;


•	Management identified additional expense reductions that are intended to be implemented as necessary; and


•	Management has suspended all non-essential travel for employees.

While the Company anticipates that the foregoing measures are temporary, management cannot predict their duration, and management may elect or need to take additional precautions as more information related to COVID-19 becomes available, as may be required by governmental authorities, or as we determine are in the best interests of our employees, customers and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or will otherwise be satisfactory to government authorities. The extent to which the COVID-19 pandemic and EVERTEC’s precautionary measures in response to it, may impact the Company’s business, financial condition or results of operations will depend on the ongoing developments related to the pandemic and its direct and indirect consequences, all of which are highly uncertain and cannot be predicted at this time.

Note 2 – Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board ("FASB") issued updated guidance for the measurement of credit losses on financial instruments, which replaces the incurred loss impairment model with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The main objective of this update and subsequent clarifications and corrections, including ASU 2018-19, ASU 2019-04, ASU 2019-05, and ASU 2020-03, is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments affect the Company's trade receivables. Additional disclosures about significant estimates and credit quality are also required. The Company adopted this new guidance effective January 1, 2020, using a modified retrospective approach through a cumulative-effect adjustment to accumulated earnings, considered immaterial to the consolidated financial statements. Results for reporting periods beginning after January 1, 2020 are presented under the new guidance provided by Accounting Standards Codification ("ASC") Topic 326, while prior period amounts are not adjusted and continue to be reported under legacy GAAP.

Refer to Note 3, Current Expected Credit Losses, for discussions of the implementation of ASC Topic 326 with respect to the Company’s consolidated financial statements.

In August 2018, the FASB issued updated guidance for customer’s accounting for implementation, set-up and other upfront costs (collectively referred to as implementation costs) incurred in a cloud computing arrangement constituting 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 (and hosting arrangements that include an internal-use software license). The updated guidance does not impact the accounting for the service element of a hosting arrangement that is a service contract. The Company adopted this guidance prospectively effective January 1, 2020 with respect to all implementation costs incurred in a cloud computing arrangement constituting a service contract.

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 ASC Topic 606, Revenue from Contracts with Customers. The Company adopted the amendments in this update effective January 1, 2020. All contracts after this date are being evaluated under the updated guidance.

Recently Issued Accounting Pronouncements

In March 2020, the FASB issued updated guidance for ASC Topic 848, Reference Rate Reform, to provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met for a limited period of time in order to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this update are elective and apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract

Table of Contents

modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The amendments to this update are effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating whether to elect the adoption of this guidance with respect to the consolidated financial statements.

Accounting Pronouncements Issued Prior to 2020 and Not Yet Adopted

In December 2019, the FASB issued updated guidance for ASC Topic 740, Income Taxes, as part of its initiative to reduce complexity in accounting standards. The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles set out in ASC Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of ASC Topic 740 by clarifying and amending existing guidance. The amendments to this update are effective for fiscal years, and interim periods within such fiscal years, beginning after December 15, 2020. Early adoption of the amendments is permitted, including adoption in any interim period for public business entities for periods for which financial statements have not yet been issued. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity that elects early adoption must adopt all the amendments in the same period. The Company is currently evaluating the impact, if any, of the adoption of this guidance on the consolidated financial statements.

Note 3 – Current Expected Credit Losses

Allowance for Current Expected Credit Losses

The Company has only one type of financial asset that is subject to the expected credit loss model, which is trade receivables from contracts with customers. While contract assets and net investments in leases are also subject to the impairment requirements of ASC Topic 326, no impairment losses were recognized for these financial assets as of September 30, 2020.

To measure expected credit losses, trade receivables are grouped based on shared risk characteristics (i.e., the relevant industry sector and customer's geographical location) and days past due (i.e., delinquency status), while considering the following:


•	Customers in the same geographical location share similar risk characteristics associated with the macroeconomic environment of their country.

•

The Company has two main industry sectors: private and governmental. The private pool is comprised mainly of leading financial institutions, merchants and corporations, while the governmental pool is comprised by government agencies. The governmental customers possess different risk characteristics than private customers because although all invoices are due 30 days after issuance, governmental customers usually pay within 60 to 90 days after issuance (i.e., between 30 to 60 more days than private customers). The Company provides to its customers a broad range of merchant acquiring, payment services and business process management services, which constitute mission-critical technology solutions enabling customers to issue, process and accept transactions securely.


•	The expected credit loss rate is likely to increase as receivables move to older aging buckets. The Company used the following aging categories to estimate the risk of delinquency status: (i) 0 days past due; (ii) 1-30 days past due; (iii) 31-60 days past due; (iv) 61-90 days past due; and (v) over 90 days past due.

The credit losses of the Company’s trade receivables have been historically low and most balances are collected within one year. Therefore, the Company determined that the expected loss rates should be calculated using the historical loss rates adjusted by macroeconomic factors. The historical rates are calculated for each of the aging categories used for pooling trade receivables. To determine the collected portion of each bucket, the collection time of each trade receivable is identified, to estimate the proportion of outstanding balances per aging bucket that ultimately will not be collected. This is used to determine the expectation of losses based on the history of uncollected trade receivables once the specific past due period is surpassed. The historical rates are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of customers to settle the receivables by applying a country risk premium as the forward-looking macroeconomic factor. Specific reserves are established for certain customers for which collection is doubtful.

Table of Contents

Rollforward of the Allowance for Expected Current Credit Losses

The activity in the allowance for expected current credit losses on trade receivables during the period from January 1, 2020 to September 30, 2020, was as follows:



(In thousands)	September 30, 2020
Balance at beginning of period	$	3,460
Current period provision for expected credit losses	1,058
Write-offs	(1,428		)
Recoveries of amounts previously written-off	3
Balance at end of period	$	3,093

The Company does not have a delinquency threshold for writing-off trade receivables. The Company has a formal process for the review and approval of write-offs.

Impairment losses on trade receivables are presented as net impairment losses within cost of revenue, exclusive of depreciation and amortization in the unaudited condensed consolidated statement of income and comprehensive income. Subsequent recoveries of amounts previously written-off are credited against the allowance for expected current credit losses within accounts receivable, net on the unaudited condensed consolidated balance sheet.

Price	30.75	EPS	1
Shares	74	P/E	29
MCap	2,261	P/FCF	17
Net Debt	415	EBIT	115
TEV	2,676	TEV/EBIT	23
TTM 2019-09-30, in MM, except price, ratios

10-Q	2020-09-30	Filed 2020-10-30
10-Q	2020-06-30	Filed 2020-08-05
10-Q	2020-03-31	Filed 2020-05-11
10-K	2019-12-31	Filed 2020-02-27
10-Q	2019-09-30	Filed 2019-10-31
10-Q	2019-06-30	Filed 2019-08-02
10-Q	2019-03-31	Filed 2019-05-03
10-K	2018-12-31	Filed 2019-02-26
10-Q	2018-09-30	Filed 2018-10-31
10-Q	2018-06-30	Filed 2018-08-02
10-Q	2018-03-31	Filed 2018-05-03
10-K	2017-12-31	Filed 2018-02-28
10-Q	2017-09-30	Filed 2017-11-09
10-Q	2017-06-30	Filed 2017-08-03
10-Q	2017-03-31	Filed 2017-05-05
10-K	2016-12-31	Filed 2017-02-24
10-Q	2016-09-30	Filed 2016-11-03
10-Q	2016-06-30	Filed 2016-08-02
10-K	2016-03-31	Filed 2016-05-26
10-K	2015-12-31	Filed 2016-05-26
10-Q	2015-09-30	Filed 2015-11-06
10-Q	2015-06-30	Filed 2015-08-07
10-Q	2015-03-31	Filed 2015-05-11
10-K	2014-12-31	Filed 2015-03-02
10-Q	2014-09-30	Filed 2014-11-06
10-Q	2014-06-30	Filed 2014-08-07
10-Q	2014-03-31	Filed 2014-05-08
10-K	2013-12-31	Filed 2014-03-17
10-Q	2013-09-30	Filed 2013-11-07
10-Q	2013-06-30	Filed 2013-08-14
10-Q	2013-03-31	Filed 2013-05-15

8-K	2020-10-29	Earnings, Exhibits
8-K	2020-10-20	Regulation FD, Exhibits
8-K	2020-08-04	Earnings, Exhibits
8-K	2020-07-24	Regulation FD, Exhibits
8-K	2020-05-28
8-K	2020-05-08
8-K	2020-04-21
8-K	2020-02-25
8-K	2020-02-20
8-K	2019-10-30
8-K	2019-10-24
8-K	2019-07-31
8-K	2019-07-26
8-K	2019-05-24
8-K	2019-05-01
8-K	2019-04-25
8-K	2019-02-22
8-K	2019-02-20
8-K	2019-02-15
8-K	2018-12-21
8-K	2018-11-28
8-K	2018-11-08
8-K	2018-10-30
8-K	2018-10-26
8-K	2018-10-26
8-K	2018-08-07
8-K	2018-07-31
8-K	2018-07-26
8-K	2018-05-24
8-K	2018-05-02
8-K	2018-02-21

EX-31.1	ex31109302020.htm
EX-31.2	ex31209302020.htm
EX-32.1	ex32109302020.htm
EX-32.2	ex32209302020.htm



Note 1 - The Company and Basis of Presentation	7
Note 2 - Recent Accounting Pronouncements	8
Note 3 - Current Expected Credit Losses	9
Note 4 - Property and Equipment, Net	10
Note 5 - Goodwill and Other Intangible Assets	10
Note 6 - Debt and Short-Term Borrowings	11
Note 7 - Financial Instruments and Fair Value Measurements	12
Note 8 - Equity	13
Note 9 - Share-based Compensation	13
Note 10 - Revenues	14
Note 11 - Income Tax	16
Note 12 - Net Income per Common Share	17
Note 13 - Commitments and Contingencies	17
Note 14 - Related Party Transactions	17
Note 15 - Segment Information	18
Note 16 - Subsequent Events	22

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company