EVERTEC, Inc. [EVTC] Filings

10-Q 1 evtc-20220930.htm 10-Q evtc-20220930

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, 2022 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 ☐

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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.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth 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 ☒

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

At October 27, 2022, there were 65,202,196 outstanding shares of common stock of EVERTEC, Inc.

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		Page
Part I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Unaudited Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021	1
	Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2022 and 2021	2
	Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2022 and 2021	3
	Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021	5
	Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	40
Item 4.	Controls and Procedures	41
Part II. OTHER INFORMATION		42
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity in Securities and Use of Proceeds	42
Item 3.	Defaults Upon Senior Securities	42
Item 4.	Mine Safety Disclosures	43
Item 5.	Other Information	43
Item 6.	Exhibits	44
SIGNATURES		45

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Report”) contains “forward-looking statements” within the meaning of, and subject to the protection of, the Private Securities Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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 differ 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 second amended and restated Master Services Agreement (“MSA”) with them, and as it may impact our ability to grow our merchant acquiring business;

•our ability to renew our client contracts on terms favorable to us, including but not limited to the current term and any extension of the MSA with Popular;

•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 macroeconomic, market, international, legal, tax, political, or administrative conditions, including inflation or the risk of recession;

•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;

•operating an international business in Latin America and the Caribbean, in jurisdictions with potential political and economic instability;

•the impact of foreign exchange rates on operations;

•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 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 level of indebtedness and the impact of rising interest rates, restrictions contained in our debt agreements, including the secured credit facilities, as well as debt that could be incurred in the future;

•our ability to prevent a cybersecurity attack or breach to our information security;

•the possibility that we could lose our preferential tax rate in Puerto Rico;

•the possibility of future catastrophic hurricanes, earthquakes and other potential natural disasters affecting our main markets in Latin America and the Caribbean;

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

•the elimination of Popular's ownership of our common stock; and

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•the other factors set forth under "Part 1, Item 1A. Risk Factors," in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the Securities and Exchange Commission (the "SEC") on February 25, 2022, as updated by Part II, Item 1A. “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 “Part 1, Item 1A. Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on February 25, 2022, as updated by Part II, Item 1A. “Risk Factors” in this Report, and as updated in our subsequent filings with the SEC, and 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.

WHERE YOU CAN FIND MORE INFORMATION

All reports we file with the 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 for download through our website at www.evertecinc.com as soon as reasonably practicable after filing such material with the SEC.

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EVERTEC, Inc. Unaudited Condensed Consolidated Balance Sheets

(In thousands, except for share information)


	September 30, 2022		December 31, 2021
Assets
Current Assets:
Cash and cash equivalents	$	224,971	$	266,351
Restricted cash	18,705		19,566
Accounts receivable, net	112,293		113,285
Prepaid expenses and other assets	40,992		37,148

Total current assets	396,961		436,350
Debt securities available-for-sale, at fair value	2,198		3,041
Investment in equity investee	14,071		12,054
Property and equipment, net	49,928		48,533

Operating lease right-of-use asset	17,799		21,229
Goodwill	417,819		393,318
Other intangible assets, net	196,316		213,288
Deferred tax asset	5,414		6,910
Net investment in leases	14		107
Derivative asset	7,070		—
Other long-term assets	13,378		9,926
Total assets	$	1,120,968	$	1,144,756
Liabilities and stockholders’ equity
Current Liabilities:
Accrued liabilities	$	82,798	$	74,540
Accounts payable	33,489		28,484
Contract liability	17,051		17,398
Income tax payable	10,757		7,132
Current portion of long-term debt	28,813		19,750


Current portion of operating lease liability	6,007		5,580
Total current liabilities	178,915		152,884
Long-term debt	426,691		444,785
Deferred tax liability	7,998		2,369
Contract liability - long term	34,726		36,258
Operating lease liability - long-term	13,320		16,456
Derivative liability	—		13,392
Other long-term liabilities	4,063		8,344
Total liabilities	665,713		674,488
Commitments and contingencies (Note 14)
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; 65,588,270 shares issued and outstanding as of September 30, 2022 (December 31, 2021 - 71,969,856)	655		719
Additional paid-in capital	—		7,565
Accumulated earnings	480,740		506,051
Accumulated other comprehensive loss, net of tax	(29,586)		(48,123)
Total EVERTEC, Inc. stockholders’ equity	451,809		466,212
Non-controlling interest	3,446		4,056
Total equity	455,255		470,268
Total liabilities and equity	$	1,120,968	$	1,144,756

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

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

(In thousands, except per share information)


	Three months ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021

Revenues (affiliates Note 16)	$	145,803	$	145,883	$	456,622	$	434,559





Operating costs and expenses
Cost of revenues, exclusive of depreciation and amortization	76,272		62,995		215,244		182,180
Selling, general and administrative expenses	26,001		17,126		66,436		49,980
Depreciation and amortization	19,712		18,745		58,432		56,091
Total operating costs and expenses	121,985		98,866		340,112		288,251
Income from operations	23,818		47,017		116,510		146,308
Non-operating income (expenses)
Interest income	807		504		2,279		1,343
Interest expense	(6,763)		(5,684)		(18,242)		(17,248)
Earnings of equity method investment	688		411		2,120		1,307
(Loss) gain on foreign currency remeasurement	(7,779)		(304)		(6,858)		652
Gain on sale of a business	135,642		—		135,642		—
Other income (expenses)	374		450		1,621		2,067
Total non-operating income (expenses)	122,969		(4,623)		116,562		(11,879)
Income before income taxes	146,787		42,394		233,072		134,429
Income tax expense	9,048		7,134		22,911		14,474
Net income	137,739		35,260		210,161		119,955
Less: Net loss attributable to non-controlling interest	(75)		(54)		(140)		(59)
Net income attributable to EVERTEC, Inc.’s common stockholders	137,814		35,314		210,301		120,014
Other comprehensive income (loss), net of tax of $716, $382, $1,442 and $817
Foreign currency translation adjustments	4,125		(6,942)		(210)		(7,823)
Gain on cash flow hedges	5,762		1,537		18,824		6,814
Unrealized (loss) gain on change in fair value of debt securities available-for-sale	$	(21)	$	8	$	(77)	$	97
Total comprehensive income attributable to EVERTEC, Inc.’s common stockholders	$	147,680	$	29,917	$	228,838	$	119,102
Net income per common share - basic attributable to EVERTEC, Inc.’s common stockholders	$	2.08	$	0.49	$	3.01	$	1.66
Net income per common share - diluted attributable to EVERTEC, Inc.’s common stockholders	$	2.06	$	0.48	$	2.98	$	1.65

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

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

(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, 2021	71,969,856	$	719	$	7,565	$	506,051	$	(48,123)	$	4,056	$	470,268
Share-based compensation recognized	—	—		4,279		—		—		—		4,279
Repurchase of common stock	(521,643)	(5)		(6,193)		(14,981)		—		—		(21,179)
Restricted stock units delivered	251,085	3		(5,651)		—		—		—		(5,648)
Net income (loss)	—	—		—		38,898		—		(32)		38,866
Cash dividends declared on common stock, $0.05 per share	—	—		—		(3,598)		—		—		(3,598)
Other comprehensive income	—	—		—		—		11,912		248		12,160

Balance at March 31, 2022	71,699,298	$	717	$	—	$	526,370	$	(36,211)	$	4,272	$	495,148
Share-based compensation recognized	—	—		5,165		—		—		—		5,165
Repurchase of common stock	(357,114)	(4)		(3,466)		(10,566)		—		—		(14,036)
Restricted stock units delivered	25,149	—		(28)		—		—		—		(28)
Net income (loss)	—	—		—		33,589		—		(33)		33,556
Cash dividends declared on common stock, $0.05 per share	—	—		—		(3,579)		—		—		(3,579)
Other comprehensive income (loss)	—	—		—		—		(3,241)		(384)		(3,625)

Balance at June 30, 2022	71,367,333	$	713	$	1,671	$	545,814	$	(39,452)	$	3,855	$	512,601
Share-based compensation recognized	—	—		5,296		—		—		—		5,296
Repurchase of common stock	(1,190,388)	(12)		(6,958)		(30,347)		—		—		(37,317)
Restricted stock units delivered	485	—		(9)		—		—		—		(9)
Net income (loss)	—	—		—		137,814		—		(75)		137,739
Cash dividends declared on common stock, $0.05 per share	—	—		—		(3,338)		—		—		(3,338)
Other comprehensive income (loss)	—	—		—		—		9,866		(334)		9,532
Common stock received in exchange of the sale of a Business	(4,589,160)	(46)		—		(169,203)		—		—		(169,249)
Balance at September 30, 2022	65,588,270	$	655	$	—	$	480,740	$	(29,586)	$	3,446	$	455,255

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	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, 2020	72,137,678	$	721	$	5,340	$	379,934	$	(48,254)	$	4,688	$	342,429
Share-based compensation recognized	—	—		3,380		—		—		—		3,380
Repurchase of common stock	(382,974)	(4)		(1,290)		(12,974)		—		—		(14,268)
Restricted stock units delivered	411,739	4		(7,430)		(1,302)		—		—		(8,728)
Net income	—	—		—		35,503		—		101		35,604
Cash dividends declared on common stock, $0.05 per share	—	—		—		(3,605)		—		—		(3,605)
Other comprehensive income (loss)	—	—		—		—		1,576		(381)		1,195

Balance at March 31, 2021	72,166,443	$	721	$	—	$	397,556	$	(46,678)	$	4,408	$	356,007
Share-based compensation recognized	—	—		3,855		—		—		—		3,855
Repurchase of common stock	(231,314)	(2)		(3,790)		(6,328)		—		—		(10,120)
Restricted stock units delivered	34,727	—		(65)		—		—		—		(65)
Net income (loss)	—	—		—		49,197		—		(106)		49,091
Cash dividends declared on common stock, $0.05 per share	—	—		—		(3,608)		—		—		(3,608)
Other comprehensive income (loss)	—	—		—		—		2,909		(25)		2,884
Balance at June 30, 2021	71,969,856	$	719	$	—	$	436,817	$	(43,769)	$	4,277	$	398,044
Share-based compensation recognized	—	—		3,708		—		—		—		3,708


Net income (loss)	—	—		—		35,314		—		(54)		35,260
Cash dividends declared on common stock, $0.05 per share	—	—		—		(3,598)		—		—		(3,598)
Other comprehensive loss	—	—		—		—		(5,397)		(87)		(5,484)
Balance at September 30, 2021	71,969,856	719		3,708		468,533		(49,166)		4,136		427,930

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

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EVERTEC, Inc. Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands)

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	Nine months ended September 30,
	2022		2021
Cash flows from operating activities
Net income	$	210,161	$	119,955
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	58,432		56,091
Amortization of debt issue costs and accretion of discount	1,187		1,423
Operating lease amortization	4,576		4,443
Provision for expected credit losses and sundry losses	3,363		1,428
Deferred tax benefit	(1,699)		(1,119)
Share-based compensation	14,740		10,943
Gain on sale of a business	(135,642)		—
Gain from sale of assets	—		(778)
Loss on disposition of property and equipment and impairment of software	4,691		1,168
Earnings of equity method investment	(2,120)		(1,307)
Dividend received from equity method investment	2,053		1,183
Loss (gain) on valuation of foreign currency	6,858		(652)
(Increase) decrease in assets:
Accounts receivable, net	3,503		(593)
Prepaid expenses and other assets	(3,417)		(3,070)
Other long-term assets	(4,389)		(339)
Increase (decrease) in liabilities:
Accrued liabilities and accounts payable	468		(773)
Income tax payable	2,921		(2,685)

Contract liability	1,344		(2,654)
Operating lease liabilities	(4,450)		(4,107)
Other long-term liabilities	(3,571)		(2,702)
Total adjustments	(51,152)		55,900
Net cash provided by operating activities	159,009		175,855
Cash flows from investing activities


Additions to software	(28,287)		(31,004)
Acquisition of customer relationships	(10,607)		(14,750)
Acquisitions, net of cash acquired	(44,369)		—
Property and equipment acquired	(16,313)		(12,388)
Proceeds from sales of property and equipment	77		805
Purchase of certificates of deposit	(7,264)		—
Proceeds from maturities of available-for-sale debt securities	1,015		—
Acquisition of available-for-sale debt securities	(254)		(2,968)
Net cash used in investing activities	(106,002)		(60,305)
Cash flows from financing activities
Statutory withholding taxes paid on share-based compensation	(5,685)		(8,793)


Repayment of short-term borrowings for purchase of equipment and software	(901)		(1,603)
Dividends paid	(10,515)		(10,811)

Repurchase of common stock	(72,532)		(24,388)
Repayment of long-term debt	(9,875)		(28,482)
Net cash used in financing activities	(99,508)		(74,077)
Effect of foreign exchange rate on cash, cash equivalents and restricted cash	4,260		215
Net (decrease) increase in cash, cash equivalents and restricted cash	(42,241)		41,688
Cash, cash equivalents and restricted cash at beginning of the period	285,917		221,105
Cash, cash equivalents and restricted cash at end of the period	$	243,676	$	262,793
Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents	$	224,971	$	244,129
Restricted cash	18,705		18,664
Cash, cash equivalents and restricted cash	$	243,676	$	262,793
Supplemental disclosure of cash flow information:
Cash paid for interest	$	18,523	$	16,289
Cash paid for income taxes	24,386		19,468

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Supplemental disclosure of non-cash activities:
Payable due to vendor related to equipment and software acquired	—	739
Non-cash investing activities
Software exchanged for common stock	18,761	—
Goodwill exchanged for common stock	5,813	—
CDs transferred in the acquisition of a business	7,169	—
Non-cash financing and investing activities
Common stock received and retired for sale of a business	169,249	—

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

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Notes to Unaudited Condensed Consolidated Financial Statements


Note 1 - The Company and Basis of Presentation			8
Note 2 - Recent A ccounting P ronouncements			9
Note 3 - Business Acquisitions and Dispositions			9
Note 4 - Debt Securities			12
Note 5 - Property and Equipment, net			12
Note 6 - Goodwill and Other Intangible Assets			12
Note 7 - Debt and Short-Term Borrowings			14
Note 8 - Financial Instruments and Fair Value Measurements			15
Note 9 - Equity			16
Note 10 - Share-based Compensation			16
Note 11 - Revenues			17
Note 12 - Current Expected Credit Losses			19
Note 13 - Income Tax			20
Note 14 - Net Income per Common Share			21
Note 15 - Commitments and Contingencies			21
Note 16 - Related Party Transactions			21
Note 17 - Segment Information			22
Note 18 - Subsequent Events			26

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Note 1 – The Company and Basis of Presentation

The Company

EVERTEC, 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 and automated teller machine ("ATM") networks 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 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.

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, 2021, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. 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. Certain amounts from prior periods have been reclassified to conform to the current period presentation.

Note 2 – Recent Accounting Pronouncements

Recently adopted accounting pronouncements

In October 2021, the FASB issued ASU 2021-08 to update ASC 805, Business Combinations, to require that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company selected to early adopt this guidance for its most recent business combination.

Note 3 – Business Acquisitions and Dispositions

Acquisition of a Business

On July 1, 2022, EVERTEC's main operating subsidiary, EVERTEC Group closed on the acquisition of 100% of the share capital of BBR SpA ("BBR"), a payment solutions and business technology company with operations in Chile and Peru, by entering into a share purchase agreement (Contrato de Compraventa de Acciones), between EVERTEC Group and IG Capital, Cuatro R, Rivers and Brela ( collectively, the "Sellers"). As consideration for the purchase, the Company transferred to the sellers upon closing cash that amounted to $45.9 million and certificates of deposits that amounted to $7.3 million. The BBR acquisition increases the Company's payment solution offerings, provides access to larger merchants in Chile and expands the Company's physical presence into Peru.

The Company accounted for this transaction as a business combination. The following table details the preliminary fair value of assets acquired and liabilities assumed from the BBR acquisition:

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	Assets/Liabilities (at fair value)
( In thousands)
Cash and cash equivalents	$	1,551
Accounts receivable, net	2,969

Property and equipment, net	3
Operating lease right-of-use asset	76
Goodwill	33,247
Other intangible assets, net	24,850
Deferred tax asset	267
Total assets acquired	62,963
Accounts payable	1,039
Contract liability	1,136
Operating lease liability	85
Deferred tax liability	7,614
Total liabilities assumed	$	9,874

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The following table details the major groups of intangible assets acquired and the weighted average amortization period for these assets:


	Amount		Weighted-average life
(Dollar amounts in thousands)

Customer relationships	$	22,500	15
Trademark	1,250		5
Software packages	1,100		5
Total	$	24,850	14

Refer to Note 6 Goodwill and Other Intangible Assets for detail of goodwill allocated by reportable segments. The goodwill is primarily attributed to synergies. None of the goodwill is deductible for income tax purposes.

Revenues and earnings from the BBR acquisition were not material for either the three or nine months ended September 30, 2022. Pro forma results of operations have not been presented because the effect of this business combination is not material to the consolidated financial condition and results of operations.

Sale of a Business

On July 1, 2022, the Company closed on a definitive agreement with Banco Popular de Puerto Rico and its parent, Popular, to sell software and prepaid assets and transfer certain employees in connection with those assets (the "Business"). As consideration for the sale of the Business, Popular delivered 4.6 million shares of Evertec common stock held by Popular with a value of $169.2 million at close (the "Popular Transaction"). Additionally, management concluded that $15.4 million included in the Company's contract liability should be treated as consideration for the sale therefore, total consideration for the sale of the Business amounted to $184.7 million. The Company also modified and extended the main commercial agreements with Popular, including a 10-year extension of the Merchant Acquiring Independent Sales Organization Agreement, a 5-year extension of the ATH Network Participation Agreement and a 3-year extension of the MSA. The MSA modifications, among other things, includes the elimination of the exclusivity requirement which was the basis for a non-compete intangible asset recorded in 2010 as part of the original MSA that was amortized over a 15 year period. The Company also entered into new contracts and transition services agreements concurrently with the close of the Popular Transaction with terms between 3 months and 36 months.

Given the elimination of the exclusivity clause discussed above, the Company determined that the balance of the non-compete intangible asset on July 1, 2022 of $12.3 million, should be written off as a component of the gain on sale of a business. The Company also concluded that certain provisions in the new contracts and transition services agreements with Popular were not at fair value, therefore requiring that a portion of the gain be allocated to these contracts. The Company recorded a contract liability based on relative fair value of $11.7 million in connection with this conclusion.

The following table details the consideration for the sale of the business, major classes of assets and liabilities included in the business sale and the gain on sale of a business:


	July 1, 2022
(In thousands)

Common stock received in exchange for the sale of a business	$	169,249
Contract liability representing consideration for the sale of a business	15,426
Total consideration for the sale of a business	184,675
Goodwill	(5,813)
Other intangible assets, net	(31,011)
Prepaid expenses and other assets	(497)
Contract liability	(11,712)
Gain on sale of a business	$	135,642

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Note 4 – Debt Securities

The amortized cost, gross unrealized gains and losses recorded in OCI and estimated fair value of debt securities available-for-sale by contractual maturity as of September 30, 2022 and December 31, 2021 were as follows:


	September 30, 2022
(In thousands)			Gross unrealized
	Amortized cost		Gains	Losses	Fair Value
Costa Rica Government Obligations
After 1 to 5 years	$	2,219	—	(21)	$	2,198


	December 31, 2021
(In thousands)			Gross unrealized
	Amortized cost		Gains		Losses		Fair Value
Costa Rica Government Obligations
After 1 to 5 years	$	2,963	$	78	$	—	$	3,041

Debt securities are held by a trust in the Costa Rica National Bank as a collateral requirement for settlement activities. The Company may substitute securities as needed but must maintain certain levels of collateral based on transaction volumes.

For both the three and nine months period ended September 30, 2022, the Company purchased $0.3 million in debt securities that were classified as available-for-sale. No debt securities were sold during the nine months ended September 30, 2022, while $1.0 million matured during the same period. A provision for credit losses was not required for the periods presented above. Refer to Note 8 for disclosure requirements related to the fair value hierarchy.

Note 5 – Property and Equipment, net

Property and equipment, net consists of the following:


(In thousands)	Useful life in years	September 30, 2022		December 31, 2021
Buildings	30	$	1,387	$	1,359
Data processing equipment	3 - 5	151,545		141,359
Furniture and equipment	3 - 20	8,742		7,718
Leasehold improvements	5 -10	3,572		3,277
		165,246		153,713
Less - accumulated depreciation and amortization		(116,531)		(106,365)
Depreciable assets, net		48,715		47,348
Land		1,213		1,185
Property and equipment, net		$	49,928	$	48,533

Depreciation and amortization expense related to property and equipment for three and nine months ended September 30, 2022 amounted to $4.6 million and $13.9 million, respectively, compared to $4.2 million and $13.0 million for the corresponding periods in 2021.

During the nine months ended September 30, 2021, the Company recorded a loss on the disposition of damaged POS devices amounting to $0.5 million through cost of revenues.

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Note 6 – Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill, allocated by operating segments, were as follows (see Note 17):


(In thousands)	Payment Services - Puerto Rico & Caribbean		Payment Services - Latin America		Merchant Acquiring, net		Business Solutions		Total
Balance at December 31, 2021	$	160,972	$	48,402	$	138,121	$	45,823	$	393,318
Goodwill attributable to acquisition	—		33,247

EVERTEC, Inc. [EVTC] Filings
10-Q	[2022-11-04]
10-Q	[2022-08-05]
10-Q	[2022-04-29]
10-K	[2022-02-25]
10-Q	[2021-10-28]
10-Q	[2021-08-04]
10-Q	[2021-04-30]
10-K	[2021-03-01]
10-Q	[2020-10-30]
10-Q	[2020-08-05]
10-Q	[2020-05-11]
10-K	[2020-02-27]
10-Q	[2019-10-31]
10-Q	[2019-08-02]
10-Q	[2019-05-03]
10-K	[2019-02-26]
10-Q	[2018-10-31]
10-Q	[2018-08-02]
10-Q	[2018-05-03]
10-K	[2018-02-28]
10-Q	[2017-11-09]
10-Q	[2017-08-03]
10-Q	[2017-05-05]
10-K	[2017-02-24]
10-Q	[2016-11-03]
10-Q	[2016-08-02]
10-K	[2016-05-26]
10-Q	[2016-05-26]
10-Q	[2015-11-06]
10-Q	[2015-08-07]
10-Q	[2015-05-11]
10-K	[2015-03-02]
10-Q	[2014-11-06]
10-Q	[2014-08-07]
10-Q	[2014-05-08]
10-K	[2014-03-17]
S-1	[2013-12-03]
10-Q	[2013-11-07]
S-1	[2013-08-29]
10-Q	[2013-08-14]
10-Q	[2013-05-15]
S-1	[2013-02-06]