EVERTEC, Inc. (Form: 10-Q, Received: 10/31/2019 16:30:27)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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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, 2019 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.

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 25, 2019, there were 71,925,843 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 at September 30, 2019 and December 31, 2018	1
	Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2019 and 2018	2
	Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2019 and 2018	3
	Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	37
Item 4.	Controls and Procedures	37
Part II. OTHER INFORMATION		39
Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity in Securities and Use of Proceeds	39
Item 3.	Defaults Upon Senior Securities	39
Item 4.	Mine Safety Disclosures	39
Item 5.	Other Information	39
Item 6.	Exhibits	40
SIGNATURES		41

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.

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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;

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•	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 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; and


•	the nature, timing and amount of any restatement.

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.

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EVERTEC, Inc. Unaudited Condensed Consolidated Balance Sheets

(Dollar amounts in thousands, except for share information)



	September 30, 2019			December 31, 2018
Assets
Current Assets:
Cash and cash equivalents	$	102,535		$	69,973
Restricted cash	13,399			16,773
Accounts receivable, net	92,195			100,323
Prepaid expenses and other assets	36,405			29,124
Total current assets	244,534			216,193
Investment in equity investee	12,257			12,149
Property and equipment, net	43,179			36,763
Operating lease right-of-use asset	30,920			—
Goodwill	395,848			394,644
Other intangible assets, net	244,672			259,269
Deferred tax asset	2,020			1,917
Net investment in lease	780			1,060
Other long-term assets	5,856			5,297
Total assets	$	980,066		$	927,292
Liabilities and stockholders’ equity
Current Liabilities:
Accrued liabilities	$	64,226		$	57,006
Accounts payable	24,966			47,272
Unearned income	14,596			11,527
Income tax payable	4,595			6,650
Current portion of long-term debt	14,250			14,250
Current portion of operating lease liability	5,704			—
Total current liabilities	128,337			136,705
Long-term debt	514,217			524,056
Deferred tax liability	4,565			9,950
Unearned income - long term	29,722			26,075
Operating lease liability - long-term	25,686			—
Other long-term liabilities	28,283			14,900
Total liabilities	730,810			711,686
Commitments and contingencies (Note 12)
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; 71,947,563 shares issued and outstanding at September 30, 2019 (December 31, 2018 - 72,378,710)	719			723
Additional paid-in capital	3,058			5,783
Accumulated earnings	274,518			228,742
Accumulated other comprehensive loss, net of tax	(33,094		)	(23,789		)
Total EVERTEC, Inc. stockholders’ equity	245,201			211,459
Non-controlling interest	4,055			4,147
Total equity	249,256			215,606
Total liabilities and equity	$	980,066		$	927,292

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

(Dollar amounts in thousands, except per share information)



	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019			2018

Revenues (affiliates Note 13)	$	118,804		$	112,017		$	360,188		$	335,638

Operating costs and expenses
Cost of revenues, exclusive of depreciation and amortization shown below	51,878			49,464			154,498			146,015
Selling, general and administrative expenses	15,152			14,404			45,355			45,684
Depreciation and amortization	16,972			15,788			50,440			47,383
Total operating costs and expenses	84,002			79,656			250,293			239,082
Income from operations	34,802			32,361			109,895			96,556
Non-operating income (expenses)
Interest income	348			205			864			526
Interest expense	(7,267		)	(7,557		)	(22,191		)	(22,901		)
Earnings of equity method investment	371			238			726			612
Other income (expenses)	252			1,130			(619		)	1,878
Total non-operating expenses	(6,296		)	(5,984		)	(21,220		)	(19,885		)
Income before income taxes	28,506			26,377			88,675			76,671
Income tax expense	3,720			3,302			10,018			10,349
Net income	24,786			23,075			78,657			66,322
Less: Net income attributable to non-controlling interest	32			78			201			251
Net income attributable to EVERTEC, Inc.’s common stockholders	24,754			22,997			78,456			66,071
Other comprehensive income (loss), net of tax of $(278), $180, $(1,279) and $348
Foreign currency translation adjustments	(576		)	(4,325		)	3,714			(6,225		)
(Loss) gain on cash flow hedges	(2,922		)	219			(13,019		)	2,109
Total comprehensive income attributable to EVERTEC, Inc.’s common stockholders	$	21,256		$	18,891		$	69,151		$	61,955
Net income per common share - basic attributable to EVERTEC, Inc.’s common stockholders	$	0.34		$	0.32		$	1.09		$	0.91
Net income per common share - diluted attributable to EVERTEC, Inc.’s common stockholders	$	0.34		$	0.31		$	1.07		$	0.89

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

(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, 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, net of cashless	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, net of cashless	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, net of cashless	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

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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, 2017	72,393,933	$	723	$	5,350		$	148,887		$	(10,848	)	$	3,864		$	147,976
Cumulative adjustment from implementation of ASC 606	—	—		—			858			—			(16		)	842
Share-based compensation recognized	—	—		3,637			—			—			—			3,637
Restricted stock units delivered, net of cashless	35,208	1		(205		)	—			—			—			(204		)
Net income	—	—		—			23,022			—			92			23,114
Other comprehensive income	—	—		—			—			3,910			—			3,910
Balance at March 31, 2018	72,429,141	724		8,782			172,767			(6,938		)	3,940			179,275
Share-based compensation recognized	—	—		3,685			—			—			—			3,685
Restricted stock units delivered, net of cashless	287,997	3		(1,813		)	—			—			—			(1,810		)
Net income	—	—		—			20,052			—			81			20,133
Other comprehensive loss	—	—		—			—			(3,920		)	—			(3,920		)
Balance at June 30, 2018	72,717,138	727		10,654			192,819			(10,858		)	4,021			197,363
Share-based compensation recognized	—	—		2,370			—			—			—			2,370
Restricted stock units delivered, net of cashless	23,139	—		(114		)	—			—			—			(114		)
Net income	—	—		—			22,997			—			78			23,075
Cash dividends declared on common stock							(3,636		)							(3,636		)
Other comprehensive loss	—	—		—			—			(4,106		)	—			(4,106		)
Balance at September 30, 2018	72,740,277	$	727	$	12,910		$	212,180		$	(14,964	)	$	4,099		$	214,952

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

(Dollar amounts in thousands)



	Nine months ended September 30,
	2019			2018
Cash flows from operating activities
Net income	$	78,657		$	66,322
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	50,440			47,383
Amortization of debt issue costs and accretion of discount	1,256			3,410
Operating lease amortization	3,966			—
Provision for doubtful accounts and sundry losses	3,224			1,065
Deferred tax benefit	(4,197		)	(2,734		)
Share-based compensation	10,168			9,692
Loss on disposition of property and equipment and other intangibles	691			12
Earnings of equity method investment	(726		)	(612		)
Dividend received from equity method investment	485			390
(Increase) decrease in assets:
Accounts receivable, net	6,475			(64		)
Prepaid expenses and other assets	(7,268		)	(4,462		)
Other long-term assets	(1,450		)	(280		)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities	(6,834		)	(3,674		)
Income tax payable	(2,080		)	4,278
Unearned income	6,718			7,655
Operating lease liabilities	(4,825		)	—
Other long-term liabilities	1,467			62
Total adjustments	57,510			62,121
Net cash provided by operating activities	136,167			128,443
Cash flows from investing activities
Additions to software	(27,969		)	(15,385		)
Property and equipment acquired	(21,994		)	(9,620		)
Proceeds from sales of property and equipment	101			15
Net cash used in investing activities	(49,862		)	(24,990		)
Cash flows from financing activities
Statutory withholding taxes paid on share-based compensation	(6,304		)	(2,128		)
Net decrease in short-term borrowings	—			(12,000		)
Repayment of short-term borrowings for purchase of equipment and software	(852		)	(686		)
Dividends paid	(10,824		)	(3,636		)
Repurchase of common stock	(28,449		)	—
Repayment of long-term debt	(10,688		)	(41,374		)
Net cash used in financing activities	(57,117		)	(59,824		)
Net increase in cash, cash equivalents and restricted cash	29,188			43,629
Cash, cash equivalents and restricted cash at beginning of the period	86,746			60,367
Cash, cash equivalents and restricted cash at end of the period	$	115,934		$	103,996
Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents	$	102,535		$	91,310
Restricted cash	13,399			12,686
Cash, cash equivalents and restricted cash	$	115,934		$	103,996
Supplemental disclosure of cash flow information:
Cash paid for interest	$	21,668		$	19,923
Cash paid for income taxes	12,535			7,150
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	5,266			—
Supplemental disclosure of non-cash activities:
Payable due to vendor related to equipment and software acquired	2,707			330

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	7
Note 2 - Recent Accounting Pronouncements	7
Note 3 - Property and Equipment, Net	8
Note 4 - Goodwill and Other Intangible Assets	8
Note 5 - Debt and Short-Term Borrowings	9
Note 6 - Financial Instruments and Fair Value Measurements	11
Note 7 - Equity	12
Note 8 - Share-based Compensation	12
Note 9 - Revenues	12
Note 10 - Income Tax	15
Note 11 - Net Income per Common Share	16
Note 12 - Commitments and Contingencies	17
Note 13 - Related Party Transactions	19
Note 14 - Segment Information	19
Note 15 - Subsequent Events	23

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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. The Company provides services across 26 countries in the region. EVERTEC owns and operates the ATH network, one of the leading debit networks in 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 SEC and, accordingly, these condensed consolidated financial statements should be read in conjunction with the Audited Consolidated Financial Statements of the Company for the year ended December 31, 2018, included in the Company’s Annual Report on Form 10-K. In the opinion of management, the accompanying 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.

Note 2 – Recent Accounting Pronouncements

Accounting pronouncements issued prior to 2019 and not yet adopted

In June 2016, November 2018, April 2019 and May 2019, the Financial Accounting Standards Board ("FASB") issued updated guidance for the measurement of credit losses on financial instruments, which replaces the incurred loss impairment methodology 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 these updates 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 updates affect trade receivables, debt securities, net investment in leases, and most other financial assets that represent a right to receive cash. Additional disclosures about significant estimates and credit quality are also required. In addition, the updated guidance also clarifies that receivables from operating leases are accounted for using the lease guidance and not as financial instruments. The updates provide an option to irrevocably elect to measure certain individual financial assets at fair value instead of amortized cost. The standards will be effective for the Company beginning January 1, 2020. The Company will adopt the updated guidance using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date to align the credit loss methodology with the new standard. The Company is in the process of implementing its new credit loss model and updating its processes and controls in preparation for the adoption of the updated guidance. Based on the initial assessment, the updates are expected to have an impact on trade receivables, and other assets that represent rights to receive cash. However, the Company does not expect this standard to have a material effect on the 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 to all entities for the 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. Mainly given that the Company does not currently have any assets or liabilities classified as level 3 in the fair

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value hierarchy, the adoption of this update is not expected to have an impact on the disclosures currently included in the notes to the condensed consolidated financial statements.

In August 2018, the FASB issued updated guidance for customer’s accounting for implementation, set-up and other upfront 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 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, with early adoption permitted, 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 will adopt the update effective January 1, 2020 and will apply the guidance in this update to all implementation costs prospectively.

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 will adopt this guidance effective January 1, 2020. 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 will adopt this guidance effective January 1, 2020 with no impact on its consolidated financial statements. Future contracts will be evaluated under the updated guidance once effective.

Note 3 – Property and Equipment, net

Property and equipment, net consists of the following:



(Dollar amounts in thousands)	Useful life in years	September 30, 2019			December 31, 2018
Buildings	30	$	1,481		$	1,440
Data processing equipment	3 - 5	119,386			110,673
Furniture and equipment	3 - 20	6,780			7,761
Leasehold improvements	5 -10	2,782			2,625
		130,429			122,499
Less - accumulated depreciation and amortization		(88,561		)	(86,990		)
Depreciable assets, net		41,868			35,509
Land		1,311			1,254
Property and equipment, net		$	43,179		$	36,763

Depreciation and amortization expense related to property and equipment for the three and nine months ended September 30, 2019 amounted to $4.1 million and $12.4 million, respectively, compared to $3.7 million and $10.9 million, for the same periods in 2018, respectively.

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Note 4 – Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill, allocated by operating segments, were as follows (See Note 14):



(In thousands)	Payment Services - Puerto Rico & Caribbean		Payment Services - Latin America		Merchant Acquiring, net		Business Solutions		Total
Balance at December 31, 2018	$	160,972	$	49,728	$	138,121	$	45,823	$	394,644
Foreign currency translation adjustments	—		1,204		—		—		1,204
Balance at September 30, 2019	$	160,972	$	50,932	$	138,121	$	45,823	$	395,848

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. No impairment losses were recognized as of September 30, 2019.

The carrying amount of other intangible assets at September 30, 2019 and December 31, 2018 was as follows:



		September 30, 2019
(Dollar amounts in thousands)	Useful life in years	Gross amount		Accumulated amortization			Net carrying amount
Customer relationships	8 - 14	$	343,174	$	(213,989	)	$	129,185
Trademark	2 - 15	41,596		(31,565		)	10,031
Software packages	3 - 10	247,650		(164,810		)	82,840
Non-compete agreement	15	56,539		(33,923		)	22,616
Other intangible assets, net		$	688,959	$	(444,287	)	$	244,672



		December 31, 2018
(Dollar amounts in thousands)	Useful life in years	Gross amount		Accumulated amortization			Net carrying amount
Customer relationships	8 - 14	$	342,738	$	(194,570	)	$	148,168
Trademark	2 - 15	41,357		(28,888		)	12,469
Software packages	3 - 10	224,855		(151,666		)	73,189
Non-compete agreement	15	56,539		(31,096		)	25,443
Other intangible assets, net		$	665,489	$	(406,220	)	$	259,269

For the three and nine months ended September 30, 2019, the Company recorded amortization expense related to other intangibles of $12.9 million and $38.0 million, respectively, compared to $11.9 million and $36.4 million for the corresponding 2018 periods.

The estimated amortization expense of the balances outstanding at September 30, 2019 for the next five years is as follows:



(Dollar amounts in thousands)
Remaining 2019	$	12,688
2020	45,952
2021	40,965
2022	36,224
2023	33,950

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Note 5 – Debt and Short-Term Borrowings

Total debt at September 30, 2019 and December 31, 2018 follows:



(In thousands)	September 30, 2019		December 31, 2018
Secured Credit Facility (2023 Term A) due on November 27, 2023 paying interest at a variable interest rate (LIBOR plus applicable margin⁽¹⁾⁽²⁾)	$	209,892	$	217,791
Senior Secured Credit Facility (2024 Term B) due on November 27, 2024 paying interest at a variable interest rate (LIBOR plus applicable margin⁽²⁾⁽³⁾)	318,575		320,515
Senior Secured Revolving Credit Facility⁽¹⁾	—		—
Note Payable due on April 30, 2021⁽²⁾	207		300
Note Payable due on December 28, 2019	2,500		—
Total debt	$	531,174	$	538,606


(1)	Applicable margin of 2.00% at September 30, 2019 and 2.25% at December 31, 2018.


(2)	Net of unaccreted discount and unamortized debt issue costs, as applicable.


(3)	Subject to a minimum rate ("LIBOR floor") of 0% plus applicable margin of 3.50% at September 30, 2019 and December 31, 2018.

2018 Secured Credit Facilities

On November 27, 2018, EVERTEC and EVERTEC Group (“Borrower”) entered into a credit agreement governing the 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 unpaid principal balance at September 30, 2019 of the 2023 Term A Loan and the 2024 Term B Loan was $211.8 million and $322.6 million, respectively. The additional borrowing capacity for the Revolving Facility at September 30, 2019 was $116.9 million. The Company issues letters of credit against the Revolving Facility which reduce the additional borrowing capacity of the Revolving Facility.

Notes payable

In May 2016, EVERTEC Group entered into a non-interest bearing financing agreement amounting to $0.7 million to purchase software. As of September 30, 2019 and December 31, 2018, the outstanding principal balance of the note payable was $0.2 million and $0.3 million, respectively. The current portion of this note is recorded as part of accounts payable and the long-term portion is included in other long-term liabilities.

In January 2019, EVERTEC Group entered into a non-interest bearing financing agreement amounting to $10.0 million to purchase data processing equipment and maintenance. As of September 30, 2019, the outstanding principal balance of the note payable was $2.5 million, recorded as part of accounts payable.

Interest Rate Swaps

At September 30, 2019, the Company has two interest rate swap agreements, entered in December 2015 and December 2018, which convert a portion of the interest rate payments on the Company's 2024 Term B Loan from variable to fixed:



Swap Agreement	Effective date	Maturity Date	Notional Amount	Variable Rate	Fixed Rate
2015 Swap	January 2017	April 2020	$200 million	1-month LIBOR	1.9225%
2018 Swap	April 2020	November 2024	$250 million	1-month LIBOR	2.89%

The Company has accounted for these transactions as cash flow hedges.

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At September 30, 2019 and December 31, 2018, the carrying amount of the derivatives on the Company’s consolidated balance sheets is as follows:



(In thousands)	September 30, 2019		December 31, 2018
Other long-term assets	$	—	$	1,683
Other long-term liabilities	$	16,687	$	4,059

During the three and nine months ended September 30, 2019, the Company reclassified gains of $0.2 million and $0.7 million, respectively, from accumulated other comprehensive loss into income through interest expense. Based on current LIBOR rates, the Company expects to reclassify losses of $1.1 million from accumulated other comprehensive loss into income through interest expense over the next 12 months. Refer to Note 6 for tabular disclosure of the fair value of derivatives and to Note 7 for tabular disclosure of losses recorded on cash flow hedging activities.

The cash flow hedges are considered highly effective.

Note 6 – Financial Instruments and Fair Value Measurements

Recurring Fair Value Measurements

Fair value measurement provisions establish a fair value hierarchy which 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 an active market 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 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 the fair value measurement by level at September 30, 2019 and December 31, 2018 for assets and liabilities measured at fair value on a recurring basis:



(In thousands)	Level 1		Level 2		Level 3		Total
September 30, 2019
Financial liability:
Interest rate swap	$	—	$	16,687	$	—	$	16,687
December 31, 2018
Financial asset:
Interest rate swap	$	—	$	1,683	$	—	$	1,683
Financial liability:
Interest rate swap	—		4,059		—		4,059

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The following table presents the carrying value, as applicable, and estimated fair values for financial instruments at September 30, 2019 and December 31, 2018:



	September 30, 2019				December 31, 2018
(In thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Interest rate swap	$	—	$	—	$	1,683	$	1,683
Financial liabilities:
Interest rate swap	16,687		16,687		4,059		4,059
2023 Term A	209,892		209,103		217,791		218,625
2024 Term B	318,575		324,579		320,515		319,517

The fair values of the term loans at September 30, 2019 and December 31, 2018 were 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 secured term loans, which are not measured at fair value in the balance sheets, would be categorized as Level 3 in the fair value hierarchy.

Note 7 – Equity

Accumulated Other Comprehensive Loss

The following table provides a summary of the changes in the balances of accumulated other comprehensive loss for the nine months period ended September 30, 2019:



(In thousands)	Foreign Currency Translation Adjustments			Cash Flow Hedges			Total
Balance - December 31, 2018, net of tax	$	(21,626	)	$	(2,163	)	$	(23,789	)
Other comprehensive income (loss) before reclassifications	3,714			(12,305		)	(8,591		)
Effective portion reclassified to Net Income	—			(714		)	(714		)
Balance - September 30, 2019, net of tax	$	(17,912	)	$	(15,182	)	$	(33,094	)

Note 8 – Share-based Compensation

Long-term Incentive Plan ("LTIP")

In the first quarter of 2017, 2018 and 2019, the Compensation Committee of the Company's Board of Directors ("Board") approved grants of restricted stock units (“RSUs”) to executives and certain employees pursuant to the 2017 LTIP, 2018 LTIP and 2019 LTIP, respectively, all under the terms of our 2013 Equity Incentive Plan. 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 vest over a period of three years in substantially equal installments commencing on the grant date and ending on February 24 of each year for the 2017 LTIP, February 28 of each year for the 2018 LTIP, and February 22 of each year for the 2019 LTIP.

For the performance-based awards under the 2017 LTIP, 2018 LTIP, and 2019 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 total shareholder return ("TSR") performance modifier. The TSR modifier adjusts the shares earned based on the core Adjusted EBITDA performance upwards

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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 an additional two-year service vesting period.

Performance and market-based awards vest at the end of the performance period that commenced on February 24, 2017 for the 2017 LTIP, February 28, 2018 for the 2018 LTIP, and February 22, 2019 for the 2019 LTIP. The periods end on February 24, 2020 for the 2017 LTIP, February 28, 2021 for the 2018 LTIP, and February 22, 2022 for the 2019 LTIP. Unless otherwise specified in the award agreement, or in an employment agreement, awards are forfeited if the employee voluntarily ceases to be employed by the Company prior to vesting.

The following table summarizes nonvested restricted shares and RSUs activity for the nine months ended September 30, 2019:



Nonvested restricted shares and RSUs	Shares		Weighted-average grant date fair value
Nonvested at December 31, 2018	2,036,163		$	15.09
Forfeited	(18,775	)	17.14
Vested	(687,198	)	28.68
Granted	373,286		29.46
Nonvested at September 30, 2019	1,703,476		$	18.47

For the three and nine months ended September 30, 2019, the Company recognized $3.5 million and $10.2 million of share based compensation expense, respectively, compared with $2.4 million and $9.7 million, respectively for the same period in 2018.

As of September 30, 2019, the maximum unrecognized cost for restricted stock and RSUs was $16.7 million. The cost is expected to be recognized over a weighted average period of 1.7 years.

Note 9 - Revenues

Summary of Revenue Recognition Accounting Policy

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 in consolidated financial statements.

Revenue is measured 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. 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.

At contract inception, the Company assesses the goods and service 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.

Disaggregation of revenue

The Company disaggregates revenue from contracts with customers into primary geographical markets, nature of the products and services, and timing of transfer of goods and services. The Company's operating segments are determined by the nature of the products and services the Company provides and the primary geographical markets in which the Company operates. Revenue disaggregated by segment is discussed in Note 14, Segment Information.

In the following tables, revenue is disaggregated by timing of revenue recognition for the periods indicated.

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	Three months ended September 30, 2019
(In thousands)	Payment Services - Puerto Rico & Caribbean		Payment Services - Latin America		Merchant Acquiring, net		Business Solutions		Total
Timing of revenue recognition
Products and services transferred at a point in time	$	43	$	228	$	—	$	2,939	$	3,210
Products and services transferred over time	20,299		18,853		26,436		50,006		115,594
	$	20,342	$	19,081	$	26,436	$	52,945	$	118,804



	Three months ended September 30, 2018
(In thousands)	Payment Services - Puerto Rico & Caribbean		Payment Services - Latin America		Merchant Acquiring, net		Business Solutions		Total
Timing of revenue recognition
Products and services transferred at a point in time	$	114	$	15	$	—	$	1,652	$	1,781
Products and services transferred over time	19,679		18,892		24,486		47,179		110,236
	$	19,793	$	18,907	$	24,486	$	48,831	$	112,017



	Nine months ended September 30, 2019
(In thousands)	Payment Services - Puerto Rico & Caribbean		Payment Services - Latin America		Merchant Acquiring, net		Business Solutions		Total
Timing of revenue recognition
Products and services transferred at a point in time	$	2,835	$	419	$	—	$	6,590	$	9,844
Products and services transferred over time	60,957		57,282		79,203		152,902		350,344
	$	63,792	$	57,701	$	79,203	$	159,492	$	360,188



	Nine months ended September 30, 2018
(In thousands)	Payment Services - Puerto Rico & Caribbean		Payment Services - Latin America		Merchant Acquiring, net		Business Solutions		Total
Timing of revenue recognition
Products and services transferred at a point in time	$	307	$	444	$	—	$	3,861	$	4,612
Products and services transferred over time	56,983		58,090		73,829		142,124		331,026
	$	57,290	$	58,534	$	73,829	$	145,985	$	335,638

Contract balances

The following table provides information about contract assets from contracts with customers.

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(In thousands)	September 30, 2019
December 31, 2018	$	996
Services transferred to customers	544
Transfers to accounts receivable	(416		)
September 30, 2019	$	1,124

The current portion of 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 September 30, 2019 amounted to $92.2 million. Unearned income and Unearned income - Long term, which refer to contract liabilities, at September 30, 2019 amounted to $14.6 million and $29.7 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 managed services. During the three and nine months ended September 30, 2019, the Company recognized revenue of $1.8 million and $13.1 million, respectively, that were included in unearned income at December 31, 2018. During the three and nine months ended September 30, 2018, the Company recognized revenue of $1.2 million and $6.9 million, respectively, that were included in unearned income at December 31, 2017.

The estimated aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially satisfied at September 30, 2019 is $261.7 million. This amount primarily consists of professional service fees for implementation or set up activities related to managed 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.

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Note 10 – Income Tax

The components of income tax expense for the three and nine months ended September 30, 2019 and 2018, respectively, consisted of the following:



	Three months ended September 30,						Nine months ended September 30,
(In thousands)	2019			2018			2019			2018
Current tax provision	$	6,096		$	4,923		$	14,215		$	13,083
Deferred tax benefit	(2,376		)	(1,621		)	(4,197		)	(2,734		)
Income tax expense	$	3,720		$	3,302		$	10,018		$	10,349

The Company conducts operations in Puerto Rico and certain countries in Latin America. As a result, the income tax expense includes the effect of taxes paid to the Puerto Rico government as well as foreign jurisdictions. The following table presents the components of income tax expense for the three and nine months ended September 30, 2019 and 2018, and its segregation based on location of operations:



	Three months ended September 30,						Nine months ended September 30,
(In thousands)	2019			2018			2019			2018
Current tax provision (benefit)
Puerto Rico	$	2,117		$	2,208		$	5,433		$	6,063
United States	187			(31		)	202			142
Foreign countries	3,792			2,746			8,580			6,878
Total current tax provision	$	6,096		$	4,923		$	14,215		$	13,083
Deferred tax benefit
Puerto Rico	$	(1,583	)	$	(1,026	)	$	(3,178	)	$	(2,059	)
United States	(169		)	(11		)	(168		)	(109		)
Foreign countries	(624		)	(584		)	(851		)	(566		)
Total deferred tax benefit	$	(2,376	)	$	(1,621	)	$	(4,197	)	$	(2,734	)

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.

As of September 30, 2019, the Company has $58.5 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.

As of September 30, 2019, the gross deferred tax asset amounted to $14.1 million and the gross deferred tax liability amounted to $16.7 million, compared to $10.8 million and $18.8 million, respectively, as of December 31, 2018.

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Note 11 – Net Income Per Common Share

The reconciliation of the numerator and denominator of the income per common share is as follows:



	Three months ended September 30,				Nine months ended September 30,
(Dollar amounts in thousands, except per share information)	2019		2018		2019		2018
Net income attributable to EVERTEC, Inc.’s common stockholders	$	24,754	$	22,997	$	78,456	$	66,071
Less: non-forfeitable dividends on restricted stock	2		2		2		2
Net income available to EVERTEC, Inc.’s common shareholders	$	24,752	$	22,995	$	78,454	$	66,069
Weighted average common shares outstanding	71,942,403		72,721,414		72,148,312		72,590,679
Weighted average potential dilutive common shares ⁽¹⁾	1,372,301		1,935,686		1,382,553		1,532,752
Weighted average common shares outstanding - assuming dilution	73,314,704		74,657,100		73,530,865		74,123,431
Net income per common share - basic	$	0.34	$	0.32	$	1.09	$	0.91
Net income per common share - diluted	$	0.34	$	0.31	$	1.07	$	0.89


(1)	Potential common shares consist of common stock issuable under the assumed release of restricted stock awards using the treasury stock method.

On February 15, 2019, April 25, 2019 and July 25, 2019, the Board declared a quarterly cash dividends of $0.05 per share of common stock, which were paid on March 22, 2019, June 7, 2019 and September 6, 2019, respectively, to stockholders of record as of the close of business on February 26, 2019, May 6, 2019 and August 5, 2019, respectively.

Note 12 – Commitments and Contingencies

EVERTEC is a defendant in a number of legal proceedings arising in the ordinary course of business. Based on the opinion of legal counsel and other factors, Management believes that the final disposition of these matters will not have a material adverse effect on the business, results of operations, financial condition, or cash flows of the Company. The Company has identified certain claims as a result of which a loss may be incurred, but in the aggregate the loss would be insignificant. For other claims regarding proceedings that are in an initial phase, the Company is unable to estimate the range of possible loss, if any, but at this time believes that any loss related to such claims will not be material.

Leases

The Company’s leases accounting policy follows the guidance from Accounting Standards Codification (“ASC”) 842, Leases, which provides guidance on the recognition, presentation and disclosure of leases in condensed consolidated financial statements.

The Company determines if an arrangement is or contains a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease payable, and operating lease liabilities in the condensed consolidated balance sheet. Finance leases are included in property and equipment, accrued liabilities, and other long-term liabilities in the condensed consolidated balance sheet.

ROU assets and lease liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate, Management used the Company’s collateralized incremental borrowing rate (“IBR”) based on the information available at commencement date in determining the present value of future payments. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. We monitor events or changes in circumstances that change the timing or amount of future lease payments which results in the remeasurement of a lease liability, with a corresponding adjustment to the ROU asset. The lease payment terms may include fixed payment terms and variable payments. Fixed payment terms and variable payments that depend on an index (i.e., Consumer Price Index or “CPI”) or rate are considered in the determination of the operating lease liabilities. While lease liabilities are not remeasured because of changes to the CPI, changes are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred. Variable payments that do not depend on an index or rate are not included in the lease liabilities determination. Rather, these payments are recognized as variable lease expense when incurred. Variable lease payments are included within operating costs and

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expenses in the condensed consolidated statement of income and comprehensive income. For operating leases, lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. For finance leases, lease expense is composed of interest expense and amortization expense. The lease liability of these leases is measured using the interest rate method. The ROU asset from financing leases are amortized on a straight-line basis, as part of Property and Equipment, net.

The Company has lease agreements with lease and non-lease components, which are accounted for as a single lease component. The Company elected the practical expedient of not separating lease and related non-lease components for all classes of underlying assets (i.e., building and equipment). The Company also elected as an accounting policy to not recognize lease liabilities and ROU assets for any future short-term leases (i.e., leases with a lease term of 12 months or less).

The Company has operating leases for certain office facilities, buildings, telecommunications and other equipment; and finance leases for certain equipment. The Company’s lease contracts have remaining terms ranging from 1 year to 10 years, some of which may include options to extend the leases for up to 5 years, and some which may include the option to terminate the lease within 1 year.

At September 30, 2019, equipment leases classified as finance leases, which are included within Property and Equipment, net, were $0.7 million, net of accumulated depreciation.

Total lease cost for the three and nine months ended September 30, 2019, was as follows:



	Three months ended		Nine months ended
	September 30, 2019		September 30, 2019
(in thousands)
Operating lease cost	$	1,907	$	5,833
Finance lease cost	—		—
Amortization of right-of-use assets	63		196
Interest on lease liabilities	5		20
Variable lease cost	700		2,117
	$	2,675	$	8,166

Other information related to leases, at September 30, 2019, was as follows:



(In thousands)
Right-of-use assets obtained in exchange for operating lease obligations:	$	273
Weighted average remaining lease term, in years
Operating leases	6.0
Finance leases	1.0
Weighted Average Discount Rate
Operating leases	4.5		%
Finance leases	4.2		%

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Future minimum lease payments under leases at September 30, 2019 were as follows:



(In thousands)	Operating Leases			Finance Leases
Remaining 2019	$	1,698		$	99
2020	6,492			311
2021	5,680			32
2022	5,419			—
2023	5,385			—
Thereafter	11,184			—
Total future minimum lease payments	35,858			442
Less: imputed interest	(4,468		)	(25		)
	$	31,390		$	417
Reported as of September 30, 2019
Accrued liabilities	$	—		$	349
Operating lease payable	5,704			—
Operating lease liabilities - long term	25,686			—
Other long-term liabilities	—			68
	$	31,390		$	417

Note 13 – Related Party Transactions

The following table presents the Company’s transactions with related parties for the three and nine months ended September 30, 2019 and 2018:



	Three months ended September 30,				Nine months ended September 30,
(Dollar amounts in thousands)	2019		2018		2019		2018
Total revenues ⁽¹⁾⁽²⁾	$	52,702	$	47,216	$	154,022	$	139,954
Cost of revenues	$	1,719	$	840	$	3,580	$	2,192
Operating lease cost and other fees	$	1,959	$	2,016	$	6,177	$	5,984
Interest earned from affiliate
Interest income	$	43	$	37	$	98	$	101


(1)	Popular revenues as a percentage of total revenues were 44%, 42%, 43%, and 41% for each of the periods presented above, respectively.


(2)	Includes revenues generated from investee accounted for under the equity method of $0.3 million, $0.3 million, $0.8 million and $1.0 million for each the periods presented above, respectively.

At September 30, 2019 and December 31, 2018, EVERTEC had the following balances arising from transactions with related parties:



(Dollar amounts in thousands)	September 30, 2019		December 31, 2018
Cash and restricted cash deposits in affiliated bank	$	47,442	$	29,136
Other due/to from affiliate
Accounts receivable	$	35,054	$	25,714
Prepaid expenses and other assets	$	2,504	$	2,796
Operating lease right-of use assets	$	21,474	$	—
Other long-term assets	$	76	$	166
Accounts payable	$	2,006	$	6,344
Unearned income	$	32,177	$	25,401
Operating lease liabilities	$	21,688	$	—

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Note 14 – Segment Information

The Company operates in four business segments: Payment Services - Puerto Rico & Caribbean, Payment Services - Latin America, 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 point of sale ("POS") transactions, and ATM management and monitoring. The segment revenues also include revenues from card processing services (such as credit and debit card processing, authorization and settlement and fraud monitoring and control to debit or credit issuers), payment processing services (such as payment and billing products for merchants, businesses and financial institutions) 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 managed services, 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,

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•	non-operating depreciation and amortization expenses generated as a result of merger and acquisition activity,


•	intersegment revenues and expenses, and


•	other non-recurring fees and expenses that are not considered when management evaluates financial performance at a segment level

The Chief Operating Decision Maker ("CODM") reviews the operating segments separate financial information to assess performance and to allocate resources. Management evaluates the operating results of each of its operating segments based upon revenues and Adjusted 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 condensed consolidated financial statements.

The following tables set forth information about the Company’s operations by its four business segments for the periods indicated:



	Three months ended September 30, 2019
(In thousands)	Payment Services - Puerto Rico & Caribbean		Payment Services - Latin America			Merchant Acquiring, net		Business Solutions		Corporate and Other ⁽¹⁾			Total

Revenues	$	30,411	$	20,596		$	26,436	$	52,945	$	(11,584	)	$	118,804
Operating costs and expenses	15,821		11,943			15,978		32,259		8,001			84,002
Depreciation and amortization	3,093		2,650			457		3,780		6,992			16,972
Non-operating income (expenses)	410		(3,824		)	8		67		3,962			623
EBITDA	18,093		7,479			10,923		24,533		(8,631		)	52,397
Compensation and benefits ⁽²⁾	284		109			285		549		2,228			3,455
Transaction, refinancing and other fees ⁽³⁾	—		—			—		—		(372		)	(372		)
Adjusted EBITDA	$	18,377	$	7,588		$	11,208	$	25,082	$	(6,775	)	$	55,480

(1)

Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and intersegment eliminations. Intersegment revenue eliminations predominantly reflect the $10.0 million processing fee from the Payments Services - Puerto Rico & Caribbean segment to the Merchant Acquiring segment and intercompany software sale and developments of $1.6 million from the Payment Services - Latin America segment charged to the Payment Services - Puerto Rico & Caribbean segment. Corporate and Other was impacted by the intersegment elimination of revenue recognized in the Payment Services - Latin America segment and capitalized in the Payment Services - Puerto Rico & Caribbean segment; excluding this impact, Corporate and Other Adjusted EBITDA would be $5.2 million.


(2)	Primarily represents share-based compensation.


(3)	Primarily represents 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.

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	Three months ended September 30, 2018
(In thousands)	Payment Services - Puerto Rico & Caribbean		Payment Services - Latin America		Merchant Acquiring, net			Business Solutions		Corporate and Other ⁽¹⁾			Total

Revenues	$	28,951	$	18,907	$	24,486		$	48,831	$	(9,158	)	$	112,017
Operating costs and expenses	13,021		18,890		14,160			30,983		2,602			79,656
Depreciation and amortization	2,505		2,337		427			3,398		7,121			15,788
Non-operating income (expenses)	602		3,834		—			12		(3,080		)	1,368
EBITDA	19,037		6,188		10,753			21,258		(7,719		)	49,517
Compensation and benefits ⁽²⁾	207		363		196			485		1,117			2,368
Transaction, refinancing and other fees ⁽³⁾	—		—		(1		)	1		215			215
Adjusted EBITDA	$	19,244	$	6,551	$	10,948		$	21,744	$	(6,387	)	$	52,100


(1)	Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and intersegment eliminations. Intersegment revenue eliminations predominantly reflect the $9.2 million processing fee from the Payments Services - Puerto Rico & Caribbean segment to the Merchant Acquiring segment.


(2)	Primarily represents share-based compensation.


(3)	Primarily 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 and fees and expenses associated with corporate transactions as defined in the Credit Agreement.



	Nine months ended September 30, 2019
(In thousands)	Payment Services - Puerto Rico & Caribbean		Payment Services - Latin America		Merchant Acquiring, net		Business Solutions		Corporate and Other ⁽¹⁾			Total

Revenues	$	92,910	$	62,533	$	79,203	$	159,492	$	(33,950	)	$	360,188
Operating costs and expenses	43,666		47,170		45,926		101,128		12,403			250,293
Depreciation and amortization	8,476		7,393		1,348		12,113		21,110			50,440
Non-operating income (expenses)	1,461		411		39		287		(2,091		)	107
EBITDA	59,181		23,167		34,664		70,764		(27,334		)	160,442
Compensation and benefits ⁽²⁾	778		448		760		1,632		6,774			10,392
Transaction, refinancing and other fees ⁽³⁾	—		2		—		—		37			39
Adjusted EBITDA	$	59,959	$	23,617	$	35,424	$	72,396	$	(20,523	)	$	170,873

(1)

Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and intersegment eliminations. Intersegment revenue eliminations predominantly reflect the $29.0 million processing fee from the Payments Services - Puerto Rico & Caribbean segment to the Merchant Acquiring segment, intercompany software sale and developments of $4.9 million from the Payment Services - Latin America segment charged to the Payment Services - Puerto Rico & Caribbean segment. Corporate and Other was impacted by the intersegment elimination of revenue recognized in the Payment Services - Latin America segment and capitalized in the Payment Services - Puerto Rico & Caribbean segment; excluding this impact, Corporate and Other Adjusted EBITDA would be $15.6 million.


(2)	Primarily represents share-based compensation, other compensation expense and severance payments.


(3)	Primarily represents 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 and fees and expenses associated with corporate transactions as defined in the Credit Agreement.

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	Nine months ended September 30, 2018
(In thousands)	Payment Services - Puerto Rico & Caribbean			Payment Services - Latin America		Merchant Acquiring, net		Business Solutions		Corporate and Other ⁽¹⁾			Total

Revenues	$	84,162		$	58,534	$	73,829	$	145,985	$	(26,872	)	$	335,638
Operating costs and expenses	39,084			55,357		41,413		90,349		12,879			239,082
Depreciation and amortization	7,230			7,035		1,268		10,437		21,413			47,383
Non-operating income (expenses)	1,969			7,048		8		378		(6,913		)	2,490
EBITDA	54,277			17,260		33,692		66,451		(25,251		)	146,429
Compensation and benefits ⁽²⁾	885			1,080		746		1,609		6,350			10,670
Transaction, refinancing and other fees ⁽³⁾	(250		)	—		—		1		2,986			2,737
Adjusted EBITDA	$	54,912		$	18,340	$	34,438	$	68,061	$	(15,915	)	$	159,836


(1)	Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and intersegment eliminations. Intersegment revenue eliminations predominantly reflect the $26.9 million processing fee from the Payments Services - Puerto Rico & Caribbean segment to the Merchant Acquiring segment.


(2)	Primarily represents share-based compensation, other compensation expense and severance payments.


(3)	Primarily represents fees and expenses associated with corporate transactions as defined in the Credit Agreement 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:



	Three months ended September 30,				Nine months ended September 30,
(In thousands)	2019		2018		2019		2018
Total EBITDA	$	52,397	$	49,517	$	160,442	$	146,429
Less:
Income tax expense	3,720		3,302		10,018		10,349
Interest expense, net	6,919		7,352		21,327		22,375
Depreciation and amortization	16,972		15,788		50,440		47,383
Net Income	$	24,786	$	23,075	$	78,657	$	66,322

Note 15 – Subsequent Events

On October 23, 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 December 6, 2019 to stockholders of record as of the close of business on November 4, 2019. 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.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis (“MD&A”) covers: (i) the results of operations for the three and nine months ended September 30, 2019 and 2018 and (ii) the financial condition as of September 30, 2019. You should read the following discussion and analysis in conjunction with the audited consolidated financial statements (the “Audited Consolidated Financial Statements”) and related notes for the fiscal year ended December 31, 2018, included in the Company’s Annual Report on Form 10-K and with the unaudited condensed consolidated financial statements (the “Unaudited Condensed Consolidated Financial Statements”) and related notes appearing elsewhere herein. This MD&A contains forward-looking statements that involve risks and uncertainties. Our actual results may differ from those indicated in the forward-looking statements. See “Forward-Looking Statements” for a discussion of the risks, uncertainties and assumptions associated with these statements.

Except as otherwise indicated or unless the context otherwise requires, (a) the terms “EVERTEC,” “we,” “us,” “our,” “our Company” and “the Company” refer to EVERTEC, Inc. and its subsidiaries on a consolidated basis, (b) the term “Holdings” refers to EVERTEC Intermediate Holdings, LLC, but not any of its subsidiaries and (c) the term “EVERTEC Group” refers to EVERTEC Group, LLC and its predecessor entities and their subsidiaries on a consolidated basis, 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.

Executive Summary

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 and cash processing in Puerto Rico and technology outsourcing in all the regions we serve. In addition, we own and operate the ATH network, one of the leading 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).

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

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services, which enable financial institutions and other issuers to manage, support and facilitate the processing of credit, debit, prepaid, automated teller machines (“ATM”) and EBT card programs; and (iii) business process management solutions, which provide “mission-critical” technology solutions such as core bank processing, as well as IT outsourcing and cash management services to financial institutions, corporations and governments. We provide these services through scalable, end-to-end technology platforms that we manage and operate in-house and that generate significant operating efficiencies that enable us to maximize profitability.

We sell and distribute our services primarily through a proprietary direct sales force with established customer relationships. We continue to pursue joint ventures and merchant acquiring alliances. We benefit from an attractive business model, the hallmarks of which are recurring revenue, scalability, significant operating margins and moderate capital expenditure requirements. Our revenue is predominantly recurring in nature because of the mission-critical and embedded nature of the services we provide. In addition, we generally negotiate multi-year contracts with our customers. We believe our business model should enable us to continue to grow our business organically in the primary markets we serve without significant incremental capital expenditures.

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.”

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 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 (the “MSA”), and several related agreements with Popular. Under the terms of the MSA, Popular agreed to continue to use EVERTEC services on an ongoing and exclusive basis, for the duration of the agreement, on commercial terms consistent with those of our historical relationship. 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. Additionally, Popular granted us a right of first refusal on the development of certain new financial technology products and services for the duration of the MSA.

Factors and Trends Affecting the Results of Our Operations

The ongoing migration from cash and paper methods of payment to electronic payments continues to benefit the transaction-processing industry globally. We believe that the penetration of electronic payments in the markets in which we operate is significantly lower relative to the U.S. market, and that this ongoing shift will continue to generate substantial growth opportunities for our business. For example, currently the adoption of banking products, including electronic payments, in the Latin American and Caribbean regions 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 of financial institutions and government agencies outsourcing technology systems and processes. Many medium- and small-size institutions in the Latin American markets in which we operate have outdated computer systems and updating these IT legacy systems is financially and logistically challenging, which presents a business opportunity for us.

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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 will have 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.

Furthermore, as to the macroeconomic trends described above, Management currently estimates that we will continue to experience a revenue attrition in Latin America of approximately $2 million to $3 million for previously disclosed migrations anticipated in 2019. The clients' decisions, which were made prior to 2015, for these anticipated migrations were driven by a variety of historical factors, most importantly customer service experience. Management believes that these customer decisions are unlikely to change, however timing is subject to change based on customer's conversion schedules.

In addition, we are currently negotiating with Popular in connection with a disagreement with respect to certain pricing terms under the MSA. Both parties are negotiating to find a mutually agreeable resolution. If we are unable to reach an agreement, the parties may pursue the dispute resolution mechanism under the MSA.

Results of Operations

Comparison of the three months ended September 30, 2019 and 2018



	Three months ended September 30,
In thousands	2019		2018		Variance 2019 vs. 2018

Revenues	$	118,804	$	112,017	$	6,787	6	%
Operating costs and expenses
Cost of revenues, exclusive of depreciation and amortization shown below	51,878		49,464		2,414		5	%
Selling, general and administrative expenses	15,152		14,404		748		5	%
Depreciation and amortization	16,972		15,788		1,184		7	%
Total operating costs and expenses	84,002		79,656		4,346		5	%
Income from operations	$	34,802	$	32,361	$	2,441	8	%

Revenues

Total revenues in the third quarter of 2019 increased by $6.8 million or 6% to $118.8 million when compared with the prior year period. Revenue increase in the quarter reflected growth across all segments and included benefits from value added solutions, new managed services and other pricing actions. Additionally, increased revenue was driven by the completion of projects for approximately $2.0 million.

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Cost of revenues

Cost of revenues amounted to $51.9 million, an increase of $2.4 million or 5% when compared with the prior year period. The increase is primarily related to an increase in professional fees driven by programming fees coupled with a slight increase in equipment expenses. These increases were partially offset by a decrease in salaries and compensation mainly driven by deferred salaries in connection with internal software developments, decreased communications expense and lower bad debt expense.

Selling, general and administrative

Selling, general and administrative expenses in the third quarter of 2019 increased by $0.7 million or 5% when compared with the same quarter in 2018. The increase is primarily related to an increase in salaries and compensation as the prior year includes a significant reversal in share-based compensation expense in connection with a former executive's forfeiture for unvested RSUs, partially offset by lower professional fees and other operating expenses.

Depreciation and amortization

Depreciation and amortization expense amounted to $17.0 million, an increase of $1.2 million or 7% when compared with the prior year period. The increase is related to both higher depreciation and amortization and includes impact from development projects going into production and purchases of data processing equipment.

Non-operating income (expenses)



	Three months ended September 30,
In thousands	2019			2018			Variance 2019 vs. 2018

Interest income	$	348		$	205		$	143		70	%
Interest expense	(7,267		)	(7,557		)	290			(4	)%
Earnings of equity method investment	371			238			133			56	%
Other income (expenses)	252			1,130			(878		)	(78	)%
Total non-operating expenses	$	(6,296	)	$	(5,984	)	$	(312	)	5	%

Non-operating expenses increased by $0.3 million to $6.3 million when compared with the prior year period. The increase is mainly related to a $0.9 million decrease in Other income (expenses) due to higher foreign exchange losses relative to the same quarter in 2018.

Income tax expense



	Three months ended September 30,
In thousands	2019		2018		Variance 2019 vs. 2018
Income tax expense	$	3,720	$	3,302	$	418	13	%

Income tax expense amounted to $3.7 million, an increase of $0.4 million when compared with the prior year quarterly period. The effective tax rate for the quarter was 13.0%, compared with 12.5% in the 2018 period. The increase in effective tax rate is primarily driven by an increase in foreign taxes in connection with the increased intercompany transactions. This increase was partially offset by a decrease in Puerto Rico taxes due to a shift in fully taxable operations to partially taxable operations and a tax benefit recorded during the period related to a decrease in effective tax rate for certain activities.

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Comparison of the nine months ended September 30, 2019 and 2018



	Nine months ended September 30,
In thousands	2019		2018		Variance 2019 vs. 2018

Revenues	$	360,188	$	335,638	$	24,550		7	%
Operating costs and expenses
Cost of revenues, exclusive of depreciation and amortization shown below	154,498		146,015		8,483			6	%
Selling, general and administrative expenses	45,355		45,684		(329		)	(1	)%
Depreciation and amortization	50,440		47,383		3,057			6	%
Total operating costs and expenses	250,293		239,082		11,211			5	%
Income from operations	$	109,895	$	96,556	$	13,339		14	%

Revenues

Total revenues for the nine months ended September 30, 2019 amounted to $360.2 million, an increase of $24.6 million or 7%. Revenue benefited from the impact of a higher net spread driven by pricing actions, elevated sales volumes in Puerto Rico, higher core banking transactions and an increase in fees generated by network services related to new managed services projects. Additionally, revenue growth was impacted by one-time revenue related to an electronic benefits contract of approximately $2.7 million and revenue from hardware sales and the completion of several projects of approximately $4.5 million.

Cost of revenues

Cost of revenues amounted to $154.5 million, an increase of $8.5 million or 6% when compared with the prior year period. The increase is primarily related to an increase in cost of sales associated with the increased hardware sales coupled with higher professional fees and equipment expenses, partially offset by a decrease in salaries and compensation for the same reason explained above for the quarter.

Selling, general and administrative

Selling, general and administrative expenses in the nine months ended September 30, 2019 decreased by $0.3 million or 1% to $45.4 million when compared with the same period in 2018. The decrease is mainly driven by lower professional services as the prior year included fees in connection with due diligence for a potential transaction that the Company decided not to pursue, almost entirely offset by an increase in salaries and compensation.

Depreciation and amortization

Depreciation and amortization expense amounted to $50.4 million, an increase of $3.1 million when compared with the prior year. The increase is due to the same reasons explained above for the quarter.

Non-operating income (expenses)



	Nine months ended September 30,
In thousands	2019			2018			Variance 2019 vs. 2018

Interest income	$	864		$	526		$	338		64	%
Interest expense	(22,191		)	(22,901		)	$	710		(3	)%
Earnings of equity method investment	726			612			$	114		19	%
Other (expenses) income	(619		)	1,878			$	(2,497	)	(133	)%
Total non-operating expenses	$	(21,220	)	$	(19,885	)	$	(1,335	)	7	%

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Non-operating expenses increased by $1.3 million to $21.2 million when compared with the prior year period. The increase is driven by a decrease in Other income (expenses) of $2.5 million due to an increase in foreign exchange losses, partially offset by a decrease in interest expense as a result of improved rates from the debt refinancing completed in the fourth quarter of the prior year.

Income tax expense



	Nine months ended September 30,
In thousands	2019		2018		Variance 2019 vs. 2018
Income tax expense	$	10,018	$	10,349	$	(331	)	(3	)%

Income tax expense amounted to $10.0 million for the nine months ended September 30, 2019, a decrease of $0.3 million when compared with the prior year period. The effective tax rate for the period was 11.3% compared with 13.5% in the prior year. The decrease in the effective tax rate is a result of a decrease in Puerto Rico taxes for the same reasons explained above for the quarter coupled with a discrete item in LATAM, partially offset by an increase in foreign taxes for intercompany transactions.

Segment Results of Operations

The Company operates in four business segments: Payment Services - Puerto Rico & Caribbean, Payment Services - Latin America, Merchant Acquiring, and Business Solutions.

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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.


•	marketing,


•	corporate finance and accounting,


•	human resources,


•	legal,


•	risk management functions,


•	internal audit,


•	corporate debt related costs,


•	non-operating depreciation and amortization expenses generated as a result of merger and acquisition activity,


•	intersegment revenues and expenses, and


•	other non-recurring fees and expenses that are not considered when management evaluates financial performance at a segment level

The following tables set forth information about the Company’s operations by its four business segments for the periods indicated below.

Comparison of the three months ended September 30, 2019 and 2018

Payment Services - Puerto Rico & Caribbean



	Three months ended September 30,
In thousands	2019	2018
Revenues	$30,411	$28,951
Adjusted EBITDA	18,377	19,244

Payment Services - Puerto Rico & Caribbean segment revenue increased by $1.5 million to $30.4 million when compared with the 2018 period. The increase in revenues was driven by higher transaction volumes for POS and ATM coupled with new transaction fees, partially offset by delays in the renewal of a government contract. Adjusted EBITDA decreased by $0.9 million to $18.4 million primarily due to an increase in operating expenses, mainly professional services and programming expenses, that entirely offset the increase in revenue and a decrease in bad debt expenses recorded in the prior year period.

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Payment Services - Latin America



	Three months ended September 30,
In thousands	2019	2018
Revenues	$20,596	$18,907
Adjusted EBITDA	7,588	6,551

Payment Services - Latin America segment revenue increased $1.7 million to $20.6 million driven mainly by higher intercompany software sale and development revenues from the Payment Services - Latin America segment to the Payment Services Puerto Rico & Caribbean segment, partially offset by anticipated client attrition. Adjusted EBITDA increased $1.0 million when compared to the prior year period primarily due to the revenue associated to intercompany services and license sales, partially offset by the impact of foreign exchange losses.

Merchant Acquiring



	Three months ended September 30,
In thousands	2019	2018
Revenues	$26,436	$24,486
Adjusted EBITDA	11,208	10,948

Merchant Acquiring segment revenue increased to $26.4 million driven primarily by pricing actions impacting both spread and transactional revenue, partially offset by a lower average ticket and sales volume. Adjusted EBITDA increased $0.3 million as a result of the increased revenues, partially offset by higher internal processing costs due to an increase in transactions.

Business Solutions



	Three months ended September 30,
In thousands	2019	2018
Revenues	$52,945	$48,831
Adjusted EBITDA	25,082	21,744

Business Solutions segment revenue increased $4.1 million to $52.9 million. Revenue growth in the segment was driven by new services for both Popular and the Government of Puerto Rico and other projects completed in the quarter representing revenue of $2.0 million. Adjusted EBITDA increased $3.3 million to $25.1 million when compared with the prior year as a result of the higher revenues partially offset by an increase in operating expenses.

Comparison of the nine months ended September 30, 2019 and 2018

Payment Services - Puerto Rico & Caribbean



	Nine months ended September 30,
In thousands	2019	2018
Revenues	$92,910	$84,162
Adjusted EBITDA	59,959	54,912

Payment Services - Puerto Rico & Caribbean revenues increased by $8.7 million to $92.9 million. The increase in revenues was driven by the same reasons explained above for the quarter coupled with one-time revenue related to an electronic benefits contract of approximately $2.7 million. Adjusted EBITDA increased by $5.0 million mainly as a result of the increase in revenues, partially offset by higher operating expenses.

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Payment Services - Latin America



	Nine months ended September 30,
In thousands	2019	2018
Revenues	$62,533	$58,534
Adjusted EBITDA	23,617	18,340

Payment services - Latin America revenue increased $4.0 million to $62.5 million driven by higher intercompany software sale and development revenues from the Payment Services - Latin America segment to the Payment Services Puerto Rico & Caribbean segment, partially offset by one-time sales and revenue from completed implementations in the prior year that did not recur and by the impact from client attrition. Adjusted EBITDA increased $5.3 million when compared to the prior year period due to higher revenue associated to intercompany services and licenses sold to Payment Services - Puerto Rico & Caribbean segment, coupled with a decrease in operating expenses.

Merchant Acquiring



	Nine months ended September 30,
In thousands	2019	2018
Revenues	$79,203	$73,829
Adjusted EBITDA	35,424	34,438

Merchant acquiring revenues increased $5.4 million to $79.2 million when compared with the prior year period, driven by the same reasons above explained for the quarter coupled with electronic benefit disaster relief recovery funding that ended in March 2019. Increases in transactional fees contributed to higher net spreads versus the same period in the previous year. Adjusted EBITDA increased $1.0 million reflecting the increased revenues, partially offset by higher transaction processing charges and a lower average ticket.

Business Solutions



	Nine months ended September 30,
In thousands	2019	2018
Revenues	$159,492	$145,985
Adjusted EBITDA	72,396	68,061

Business solutions revenue increased by $13.5 million to $159.5 million when compared with the prior year mainly driven by the same reasons as in the quarter described above. These revenue increases were coupled with revenue from incremental managed services from the Government of Puerto Rico. Adjusted EBITDA increased $4.3 million as a result of the increase in revenue, partially offset by higher costs of sales and costs incurred related to support and maintenance hours for Business Solutions applications. Additionally, the Company incurred in higher maintenance expenses related to infrastructure supporting the Business Solutions segment as we continue to replace obsolete assets.

Liquidity and Capital Resources

Our principal source of liquidity is cash generated from operations, and our primary liquidity requirements are the funding of capital expenditures, working capital needs and acquisitions. We also have a $125.0 million Revolving Facility, of which $116.9 million was available as of September 30, 2019. The Company issues letters of credit against our Revolving Facility which reduce our availability of funds to be drawn.

At September 30, 2019, we had cash and cash equivalents of $102.5 million, of which $55.9 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

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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.

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.

Based on our current level of operations, we believe our cash flows from operations and the available 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 may be affected by general economic, financial and other factors beyond our control.



	Nine months ended September 30,
(In thousands)	2019			2018

Cash provided by operating activities	$	136,167		$	128,443
Cash used in investing activities	(49,862		)	(24,990		)
Cash used in financing activities	(57,117		)	(59,824		)
Increase in cash, cash equivalents and restricted cash	$	29,188		$	43,629

Net cash provided by operating activities for the nine months ended September 30, 2019 was $136.2 million compared with cash provided by operating activities of $128.4 million for the corresponding 2018 period. The $7.7 million increase in cash provided by operating activities is primarily driven by higher net income coupled with more cash received from accounts receivable.

Net cash used in investing activities for the nine months ended September 30, 2019 was $49.9 million compared with $25.0 million for the corresponding period in 2018. The $24.9 million increase is attributable to increases in capital expenditures.

Net cash used in financing activities for the nine months ended September 30, 2019 was $57.1 million compared with $59.8 million for the corresponding 2018 period. The $2.7 million decrease was mainly related to a $12.0 million paydown in the prior year on the Revolving Facility, coupled with a $30.7 million decrease in cash used to paydown long-term debt. This decrease was partially offset by cash dividends paid amounting to $10.8 million and cash used for repurchases of common stock of $28.4 million, compared with $3.6 million in dividends paid in the prior year and no cash used for stock repurchases, and a $4.2 million increase in cash used for payment of statutory withholding taxes for share-based compensation.

Capital Resources

Our principal capital expenditures are for hardware and computer software (purchased and internally developed) and additions to property and equipment. We invested approximately $50.0 million and $25.0 million for the nine months ended September 30, 2019 and 2018, respectively. Capital expenditures are expected to be funded by cash flow from operations and, if necessary, borrowings under our Revolving Facility. We expect capital expenditures to be in a range of $50 million to $55 million in 2019.

Dividend Payments

On February 15, 2019 , April 25, 2019 and July 25, 2019, the Board declared a regular quarterly cash dividend of $0.05 per share on the Company’s outstanding shares of common stock, which was paid on March 22, 2019, June 7, 2019 and September 6, 2019, respectively, to stockholders of record as of the close of business on February 26, 2019, May 6, 2019 and August 5, 2019, respectively.

On October 23, 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 December 6, 2019, to stockholders of record as of the close of business on November 4, 2019. 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.

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Financial Obligations

Secured Credit Facilities

On November 27, 2018, EVERTEC and EVERTEC Group (“Borrower”) entered into a credit agreement governing the 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”).

Notes payable

Interest Rate Swaps

At September 30, 2019, the Company has the following interest rate swap agreements converting a portion of the interest rate exposure on the Company's Term B Loan from variable to fixed:



Swap Agreement	Effective date	Maturity Date	Notional Amount	Variable Rate	Fixed Rate
2015 Swap	January 2017	April 2020	$200 million	1-month LIBOR	1.9225%
2018 Swap	April 2020	November 2024	$250 million	1-month LIBOR	2.89%

The Company has accounted for these transactions as cash flow hedges.

At September 30, 2019 and December 31, 2018, the carrying amount of the derivatives on the Company’s balance sheets is as follows:



(In thousands)	September 30, 2019		December 31, 2018
Other long-term assets	$	—	$	1,683
Other long-term liabilities	$	16,687	$	4,059

During the nine months ended September 30, 2019, the Company reclassified gains of $0.7 million from accumulated other comprehensive loss into income through interest expense. Based on current LIBOR rates, the Company expects to reclassify gains of $1.1 million from accumulated other comprehensive loss into income through interest expense over the next 12 months. Refer to Note 6 for tabular disclosure of the fair value of derivatives and to Note 7 for tabular disclosure of losses recorded on cash flow hedging activities.

The cash flow hedge is considered highly effective.

Covenant Compliance

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As of September 30, 2019, the secured leverage ratio was 2.12 to 1.00. As of the date of filing of this Form 10-Q, no event has occurred that constitutes an Event of Default or Default.

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 senior secured leverage ratio. We use Adjusted Net Income to measure our overall profitability because we believe better reflects our comparable operating performance by excluding the impact of the non-cash amortization and depreciation that was created as a result of the Merger. In addition, in evaluating EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share, you should be aware that in the future we may incur expenses such as those excluded in calculating them. Further, our presentation of these measures should not be construed as an inference that our future operating results will not be affected by unusual or nonrecurring items.

Some of the limitations of EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted earnings per common share are as follows:


•	they do not reflect cash outlays for capital expenditures or future contractual commitments;


•	they do not reflect changes in, or cash requirements for, working capital;


•	although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash requirements for such replacements;


•	in the case of EBITDA and Adjusted EBITDA, they do not reflect interest expense, or the cash requirements necessary to service interest, or principal payments, on indebtedness;


•	in the case of EBITDA and Adjusted EBITDA, they do not reflect income tax expense or the cash necessary to pay income taxes; and


•	other companies, including other companies in our industry, may not use EBITDA, Adjusted EBITDA, Adjusted Net Income, and Adjusted Earnings per common share or may calculate EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share differently than as presented in this Report, limiting their usefulness as a comparative measure.

EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share are not measurements of liquidity or financial performance under GAAP. You should not consider EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share as alternatives to cash flows from operating activities or any other performance measures determined in accordance with GAAP, as an indicator of cash flows, as a measure of liquidity or as an alternative to operating or net income determined in accordance with GAAP.

A reconciliation of net income to EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share is provided below:

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	Three months ended September 30,						Nine months ended September 30,						Twelve months ended
(Dollar amounts in thousands, except per share information)	2019			2018			2019			2018			September 30, 2019
Net income	$	24,786		$	23,075		$	78,657		$	66,322		$	98,904
Income tax expense	3,720			3,302			10,018			10,349			12,265
Interest expense, net	6,919			7,352			21,327			22,375			28,209
Depreciation and amortization	16,972			15,788			50,440			47,383			66,124
EBITDA	52,397			49,517			160,442			146,429			205,502
Equity income ⁽¹⁾	(372		)	(238		)	(241		)	(179		)	(321		)
Compensation and benefits⁽²⁾	3,455			2,368			10,392			10,670			13,381
Transaction, refinancing and other fees ⁽³⁾	—			453			280			2,916			4,934
Adjusted EBITDA	55,480			52,100			170,873			159,836			223,496
Operating depreciation and amortization ⁽⁴⁾	(8,673		)	(7,365		)	(25,516		)	(21,909		)	(32,815		)
Cash interest expense, net ⁽⁵⁾	(6,644		)	(6,473		)	(20,774		)	(19,396		)	(27,481		)
Income tax expense ⁽⁶⁾	(5,509		)	(4,558		)	(15,454		)	(15,492		)	(19,476		)
Non-controlling interest ⁽⁷⁾	(63		)	(121		)	(287		)	(385		)	(374		)
Adjusted net income	$	34,591		$	33,583		$	108,842		$	102,654		$	143,350
Net income per common share (GAAP):
Diluted	$	0.34		$	0.31		$	1.07		$	0.89
Adjusted Earnings per common share (Non-GAAP):
Diluted	$	0.47		$	0.45		$	1.48		$	1.38
Shares used in computing adjusted earnings per common share:
Diluted	73,314,704			74,657,100			73,530,865			74,123,431


1)	Represents 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.

Primarily represents share-based compensation of $3.5 million and $2.4 million for the quarters ended September 30, 2019 and 2018, respectively. Primarily represents share-based compensation and other compensation expense of $10.2 million and $9.7 million for the nine months ended September 30, 2019 and 2018 and severance payments of $0.2 million and $1.0 million for the same periods, respectively.


3)	Represents fees and expenses associated with corporate transactions as defined in the Credit Agreement, recorded as part of selling, general and administrative expenses and cost of revenues.


4)	Represents operating depreciation and amortization expense, which excludes amounts generated as a result of merger and acquisition activity.


5)	Represents interest expense, less interest income, as they appear on our 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, net of amortization for intangibles created as part of the purchase.

Off Balance Sheet Arrangements

In the ordinary course of business the Company may enter into commercial commitments. With the exception of the letters of credit issued against the Revolving Facility which reduce the additional borrowing capacity of the Revolving Facility, as of September 30, 2019, 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.

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Effect of Inflation

While inflationary increases in certain input costs, such as occupancy, labor and benefits, and general administrative costs, have an impact on our operating results, inflation has had minimal net effect on our operating results during the last three years as overall inflation has been offset by increased selling process and cost reduction actions. We cannot assure you, however, that we will not be affected by general inflation in the future.

Item 3. 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 changes in interest rates that will adversely affect the value of our financial assets and liabilities or future cash flows and earnings. 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 secured credit facilities accrue interest at variable rates and only the 2024 Term B is subject to a floor or a minimum rate. A 100 basis point increase in interest rates over our floor(s) on our debt balances outstanding as of September 30, 2019, under the secured credit facilities, would increase our annual interest expense by approximately $3.3 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 5 of the Unaudited Condensed Consolidated Financial Statements for additional information related to the senior secured credit facilities.

Foreign 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 unaudited condensed consolidated balance sheets, except for highly inflationary environments in which the effects would be included in other operating income in the condensed consolidated statements of income and comprehensive income. At September 30, 2019, the Company had $17.9 million in an unfavorable foreign currency translation adjustment as part of accumulated other comprehensive loss compared with an unfavorable foreign currency translation adjustment of $21.6 million at December 31, 2018.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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 September 30, 2019, the Company’s disclosure controls and procedures are effective.

Changes in Internal Control Over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a -15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. 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 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed under Item 1A. of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

The risks described in our Annual Report on Form 10-K for the year ended December 31, 2018 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.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table summarizes repurchases of the Company’s common stock in the three months period ended September 30, 2019:



	Total number of shares	Average price paid		Total number of shares purchased as part of a publicly	Approximate dollar value of shares that may yet be purchased
Period	purchased	per share		announced program (1)	under the program
7/1/2019-7/31/2019	8,020	$	30.920	8,020
9/1/2019-9/30/2019	100	30.970		100
Total	8,120	$	30.920	8,120	$	33,898,048

(1)

On February 17, 2016, the Company announced that its Board of Directors 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 of Directors approved an extension to the expiration date of the current stock repurchase program to December 31, 2020.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits



10.1*	Form of Indemnification Agreement by and among EVERTEC, Inc. and its directors.
31.1*	CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**	CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**	CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS XBRL**	Instance document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH XBRL**	Taxonomy Extension Schema
101.CAL XBRL**	Taxonomy Extension Calculation Linkbase
101.DEF XBRL**	Taxonomy Extension Definition Linkbase
101.LAB XBRL**	Taxonomy Extension Label Linkbase
101.PRE XBRL**	Taxonomy Extension Presentation Linkbase

* Filed herewith.

** Furnished herewith.

+ This exhibit is a management contract or a compensatory plan or arrangement.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.



	EVERTEC, Inc. (Registrant)

Date: October 31, 2019	By:	/s/ Morgan Schuessler
		Morgan Schuessler Chief Executive Officer

Date: October 31, 2019	By:	/s/ Joaquin A. Castrillo-Salgado
		Joaquin A. Castrillo-Salgado Chief Financial Officer (Principal Financial and Accounting Officer)


(c)	“Disinterested Director” means a director of the Company who (i) is not and was not a party to the Proceeding in respect of which indemnification is sought by the Indemnitee and (ii) is determined to be “disinterested” under applicable Puerto Rico law.


(d)	“Entity” shall mean any corporation, partnership (general or limited), limited liability company, joint venture, trust, employee benefit plan, company, foundation, non-profit entity, association, organization or other legal entity, other than the Company.


(f)	“Indemnifiable Expenses,” “Indemnifiable Liabilities” and “Indemnifiable Amounts” shall have the meanings ascribed to those terms in Section 3(a) hereof.


(h)	“Liabilities” shall be broadly construed to mean, without limitation, all judgments, damages, liabilities, losses, penalties, taxes, fines and amounts paid in settlement, in each case, of any type whatsoever, in connection with a Proceeding. References herein to “fines” shall include any excise tax assessed with respect to any employee benefit plan.


(i)	“Partial Rights Transferee” shall have the meaning set forth in the Stockholder Agreement.


(j)	“Principal Stockholder” shall have the meaning set forth in the Stockholder Agreement.


(l)	“Stockholder Agreement” shall mean that certain Stockholder Agreement, dated as of April 17, 2012, as amended or supplemented from time to time in accordance with its terms.


(m)	“Subsidiary” shall mean any Entity of which the Company owns (either directly or indirectly) either (i) a general partner, managing member or other similar interest or (ii) (A) 50% or more of the voting power of the voting capital equity interests of such Entity, or (B) 50% or more of the outstanding voting capital stock or other voting equity interests of such Entity.


3.	Agreement to Indemnify. The Company agrees to indemnify the Indemnitee to the fullest extent permitted, and in the manner permitted, by the General Corporations Law or other applicable law as in effect as of the date hereof or as such laws may, from time to time, be amended (but only if amended in a way that broadens the right to indemnification and advancement of expenses) as follows:


(b)	Indemnification in Derivative Actions and Direct Actions by the Company. Subject to the exceptions contained in Section 4(b) hereof, if the Indemnitee was or is a party to, threatened to be made a party to or otherwise involved in


4.	Exceptions to Indemnification. The Indemnitee shall be entitled to indemnification under Section 3(a) and Section 3(b) hereof in all circumstances other than the following:


(e)	The knowledge and/or actions, or failure to act, of any other director, officer, agent, or employee of the Company or of another Entity shall not be imputed to the Indemnitee for purposes of determining the Indemnitee’s right to indemnification or advancement of Indemnifiable Expenses under this Agreement.


(c)	Validity of Agreement. The Company shall be precluded from asserting in any Proceeding, including, without limitation, an action under Section 11(a) hereof, that the provisions of this Agreement are not valid, binding and enforceable or that there is insufficient consideration for this Agreement and shall stipulate in court that the Company is bound by all the provisions of this Agreement.


14.	Representations and Warranties of the Company. The Company hereby represents and warrants to the Indemnitee as follows:


(a)	Authority. The Company has all necessary power and authority to enter into, and be bound by the terms of, this Agreement, and the execution, delivery and performance of the undertakings contemplated by this Agreement have been duly authorized by the Company.


(c)	No Conflicts. This Agreement, when executed and delivered by the Company in accordance with the provisions hereof, does not, and the Company’s performance of its obligations under the Agreement will not, violate the Company’s certificate of incorporation, bylaws, other agreements to which the Company is a party to or applicable law.


20.	General Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given (a) when delivered by hand, (b) when transmitted by facsimile and receipt is acknowledged, or (c) if mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed:


22.	Governing Law. This Agreement shall be exclusively governed by and construed and enforced under the laws of the Commonwealth of Puerto Rico without giving effect to the provisions thereof relating to conflicts of law of such state.


24.	Counterparts. This Agreement may be executed in one or more counterparts (including by PDF or facsimile), each of which shall for all purposes be deemed to be an original but all of which together shall constitute but one and the same Agreement. Only one such counterpart need be produced to evidence the existence of this Agreement.


25.	Headings. The headings of the sections of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction hereof.


26.	Effective Date. The provisions of this Agreement shall cover claims, actions, suits or proceedings whether now pending or hereafter commenced and shall be retroactive to cover acts or omissions or alleged acts or omissions which have taken place between the date when the Indemnitee was duly elected or appointed as a director or officer of the Company and the Effective Date of this Agreement.



EVERTEC, INC. ______________________________________ Morgan M. Schuessler President & Chief Executive Officer	INDEMNITEE ______________________________________ [•] Director


1.	I have reviewed this report on Form 10-Q of EVERTEC, Inc.;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:


a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;


c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and