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EVOTEC AG ADS 10-Q 2014
10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2014

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)

 

 

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in rule 12b-2 of the Exchange Act).

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

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

At August 1, 2014, there were 78,657,848 outstanding shares of common stock of EVERTEC, Inc.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page  

Part I. FINANCIAL INFORMATION

     1   

Item 1.

 

Financial Statements

     1   
 

Unaudited Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013

     1   
 

Unaudited Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the three and six months ended June 30, 2014 and 2013

     2   
 

Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the six months ended June  30, 2014

     3   
 

Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013

     4   
 

Notes to Unaudited Consolidated Financial Statements

     6   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     17   

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     29   

Item 4.

 

Controls and Procedures

     29   

Part II. OTHER INFORMATION

     30   

Item 1.

 

Legal Proceedings

     30   

Item 1A.

 

Risk Factors

     30   

Item 2.

 

Unregistered Sales of Equity in Securities and Use of Proceeds

     30   

Item 3.

 

Defaults Upon Senior Securities

     30   

Item 4.

 

Mine Safety Disclosures

     30   

Item 5.

 

Other Information

     30   

Item 6.

 

Exhibits

     30   

SIGNATURES

     S-1   


Table of Contents

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of, and subject to the protection of, the Private Securities Litigation Reform Act of 1995. Such statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “estimates,” “will,” “should,” “plans” or “anticipates” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and may involve significant risks and uncertainties, and that actual results may vary materially from those in the forward-looking statements as a result of various factors. Among the factors that significantly impact our business and could impact our business in the future are:

 

    our reliance on our relationship with Popular, Inc. (“Popular”) for a significant portion of our revenue and with Banco Popular de Puerto Rico (“Banco Popular”), Popular’s principal banking subsidiary, to grow our Merchant Acquiring business;

 

    our ability to renew our client contracts on terms favorable to us;

 

    the effectiveness of our risk management procedures;

 

    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;

 

    the risk that our technology infrastructure and systems may experience breakdowns or fail to prevent security breaches or fraudulent transfers;

 

    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 despite competition and potential shifts in consumer payment preferences;

 

    our dependence on credit card associations, including any adverse changes in credit card association or network rules or fees;

 

    regulatory limitations on our activities due to our relationship with Popular and our role as a service provider to financial institutions;

 

    changes in the regulatory environment and changes in international, legal, political, administrative or economic conditions;

 

    the geographical concentration of our business in Puerto Rico;

 

    operating an international business in multiple regions with potential political and economic instability, including Latin America;

 

    operating in countries and with counterparties that put us at risk of violating U.S. sanctions laws;

 

    our ability to execute our geographic expansion and acquisition strategies;

 

    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 generate sufficient cash to service our indebtedness and to generate future profits; and

 

    other factors discussed in this Report, including in the section entitled “Risk Factors.”

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. The Company does not undertake, and specifically disclaims any obligation, to update any of the “forward-looking statements” to reflect occurrences or unanticipated events or circumstances after the date of such statements except as required by the federal securities laws.

Investors should refer to the Company’s Form 10-K for the year ended December 31, 2013 (the “2013 Form 10-K”) for a discussion of factors that could cause events to differ from those suggested by the forward-looking statements, including factors set forth in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.


Table of Contents

EVERTEC, Inc. (Unaudited) Consolidated Balance Sheets

(Dollar amounts in thousands, except for share information)

 

 

     June 30, 2014     December 31, 2013  

Assets

    

Current Assets:

    

Cash

   $ 27,831      $ 22,485   

Restricted cash

     5,195        5,433   

Accounts receivable, net

     71,479        68,434   

Deferred tax asset

     2,812        2,537   

Prepaid expenses and other assets

     21,846        17,524   
  

 

 

   

 

 

 

Total current assets

     129,163        116,413   

Investment in equity investee

     11,287        10,639   

Property and equipment, net

     29,371        33,240   

Goodwill

     369,203        373,119   

Other intangible assets, net

     347,114        367,780   

Other long-term assets

     13,745        18,162   
  

 

 

   

 

 

 

Total assets

   $ 899,883      $ 919,353   
  

 

 

   

 

 

 

Liabilities and stockholders’ equity

    

Current Liabilities:

    

Accrued liabilities

   $ 29,159      $ 26,571   

Accounts payable

     14,256        18,630   

Unearned income

     8,498        5,595   

Income tax payable

     1,801        259   

Current portion of long-term debt

     19,000        19,000   

Short-term borrowings

     23,000        51,200   

Deferred tax liability, net

     461        543   
  

 

 

   

 

 

 

Total current liabilities

     96,175        121,798   

Long-term debt

     656,626        665,680   

Long-term deferred tax liability, net

     20,702        20,212   

Other long-term liabilities

     251        333   
  

 

 

   

 

 

 

Total liabilities

     773,754        808,023   
  

 

 

   

 

 

 

Commitments and contingencies (Note 10)

    

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; 78,631,847 shares issued and outstanding at June 30, 2014 (December 31, 2013- 78,286,465)

     786        783   

Additional paid-in capital

     82,167        80,718   

Accumulated earnings

     49,701        29,403   

Accumulated other comprehensive (loss) income, net of tax

     (6,525     426   
  

 

 

   

 

 

 

Total stockholders’ equity

     126,129        111,330   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 899,883      $ 919,353   
  

 

 

   

 

 

 

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

 

1


Table of Contents

EVERTEC, Inc. (Unaudited) Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)

(Dollar amounts in thousands, except per share information)

 

 

     Three months ended June 30,     Six months ended June 30,  
     2014     2013     2014     2013  

Revenues

        

Merchant acquiring, net

   $ 19,827      $ 18,165      $ 39,118      $ 35,624   

Payment processing (from affiliates: $7,303, $7,298, $14,407 and $14,508)

     26,406        24,285        51,408        48,397   

Business solutions (from affiliates: $34,243, $35,051, $67,601 and $69,496)

     44,888        46,725        87,805        92,493   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     91,121        89,175        178,331        176,514   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses

        

Cost of revenues, exclusive of depreciation and amortization shown below

     38,839        41,771        76,484        82,273   

Selling, general and administrative expenses

     10,463        12,624        18,525        21,487   

Depreciation and amortization

     16,390        17,842        33,004        35,417   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     65,692        72,237        128,013        139,177   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     25,429        16,938        50,318        37,337   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-operating (expenses) income

        

Interest income

     79        49        154        93   

Interest expense

     (6,501     (9,747     (13,410     (25,011

Earnings of equity method investment

     343        348        664        625   

Other income (expenses):

        

Loss on extinguishment of debt

     —          (58,464     —          (58,464

Termination of consulting agreements

     —          (16,718     —          (16,718

Other income (expenses)

     385        (2,353     2,376        (2,286
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expenses)

     385        (77,535     2,376        (77,468
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-operating (expenses) income

     (5,694     (86,885     (10,216     (101,761
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     19,735        (69,947     40,102        (64,424

Income tax expense (benefit)

     1,962        (5,012     4,123        (4,961
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     17,773        (64,935     35,979        (59,463

Other comprehensive income (loss), net of tax of $48, $18, $54 and $18

        

Foreign currency translation adjustments

     794        (394     (6,951     1,960   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

   $ 18,567      $ (65,329   $ 29,028      $ (57,503
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per common share - basic

   $ 0.23      $ (0.82   $ 0.46      $ (0.78
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per common share - diluted

   $ 0.22      $ (0.82   $ 0.45      $ (0.78
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

2


Table of Contents

EVERTEC, Inc. (Unaudited) Consolidated Statement 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
Income (Loss)
    Total
Stockholders’
Equity
 

Balance at December 31, 2013

     78,286,465       $ 783       $ 80,718      $ 29,403      $ 426      $ 111,330   

Share-based compensation recognized

           665            665   

Tax windfall benefit on exercises of stock options

           1,482            1,482   

Stock options exercised, net of cashless exercise

     345,382         3         (719         (716

Dividend(1)

           21            21   

Net income

             35,979          35,979   

Cash dividends declared on common stock

     —                (15,681       (15,681

Other comprehensive loss

               (6,951     (6,951
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

     78,631,847         786         82,167        49,701        (6,525     126,129   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Related to dividend declared in 2012 and accrued upon vesting of stock options. Such options were forfeited during the six months ended June 30, 2014.

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

 

3


Table of Contents

EVERTEC, Inc. (Unaudited) Consolidated Statements of Cash Flows

(Dollar amounts in thousands)

 

 

     Six months ended June 30,  
     2014     2013  

Cash flows from operating activities

    

Net income (loss)

   $ 35,979      $ (59,463

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

    

Depreciation and amortization

     33,004        35,417   

Amortization of debt issue costs and premium and accretion of discount

     1,538        2,369   

Write-off of debt issue costs, premium and discount accounted as loss on extinguishment

     —          16,555   

Provision for doubtful accounts and sundry losses

     1,058        826   

Deferred tax benefit

     (430     (6,251

Share-based compensation

     665        5,483   

Unrealized loss (gain) of indemnification assets

     173        (19

Loss on disposition of property and equipment and other intangibles

     64        32   

Earnings of equity method investment

     (664     (625

Dividend received from equity method investment

     326        500   

(Increase) decrease in assets:

    

Accounts receivable, net

     (2,045     492   

Prepaid expenses and other assets

     (4,267     (5,417

Other long-term assets

     1,811        (323

(Decrease) increase in liabilities:

    

Accounts payable and accrued liabilities

     (4,120     (3,347

Income tax payable

     1,542        (1,867

Unearned income

     2,903        1,736   
  

 

 

   

 

 

 

Total adjustments

     31,558        45,561   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     67,537        (13,902
  

 

 

   

 

 

 

Cash flows from investing activities

    

Net decrease (increase) in restricted cash

     238        (44

Intangible assets acquired

     (5,841     (7,927

Property and equipment acquired

     (3,895     (4,384

Proceeds from sales of property and equipment

     3        11   
  

 

 

   

 

 

 

Net cash used in investing activities

     (9,495     (12,344
  

 

 

   

 

 

 

Cash flows from financing activities

    

Proceeds from initial public offering, net of offering costs of $12,567

     —          112,432   

Proceeds from issuance of long-term debt

     —          700,000   

Statutory minimum withholding taxes paid on cashless exercises of stock options

     (770     (16,688

Debt issuance costs

     —          (12,077

Net decrease in short-term borrowing

     (27,000     (14,000

Repayment of short-term borrowing for purchase of equipment

     (1,200     (4,332

Dividends paid

     (15,680     —     

Tax windfall benefits on exercises of stock options

     1,482        470   

Issuance of common stock, net

     54        28   

Repayment of other financing agreement

     (82     (112

Repayment of long-term debt

     (9,500     (745,522
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (52,696     20,199   
  

 

 

   

 

 

 

Net increase (decrease) in cash

     5,346        (6,047

Cash at beginning of the period

     22,485        25,634   
  

 

 

   

 

 

 

Cash at end of the period

   $ 27,831      $ 19,587   
  

 

 

   

 

 

 

Supplemental disclosure of non-cash activities:

    

Dividend declared not received from equity method investment

   $ 325      $ 500   

Foreign currency translation adjustments

     (6,951     2,354   

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

 

4


Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

Note 1 – The Company and Basis of Presentation

     6   

Note 2 – Recent Accounting Pronouncements

     6   

Note 3 – Property and Equipment, net

     7   

Note 4 – Goodwill and Other Intangible Assets

     7   

Note 5 – Debt and Short-Term Borrowings

     8   

Note 6 – Financial Instruments and Fair Value Measurements

     9   

Note 7 – Share-based Compensation

     11   

Note 8 – Income Tax

     12   

Note 9 – Net Income (Loss) Per Common Share

     13   

Note 10 – Commitments and Contingencies

     13   

Note 11 – Related Party Transactions

     14   

Note 12 – Segment Information

     15   

Note 13 – Subsequent Events

     16   

 

5


Table of Contents

EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements

 

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 the leading full-service transaction processing business in Latin America and the Caribbean. The Company is based in Puerto Rico and provides a broad range of merchant acquiring, payment processing and business process management services across 19 countries in the region. EVERTEC owns and operates the ATH network, one of the leading automated teller machine (“ATM”) and personal identification number (“PIN”) debit networks in Latin America. In addition, EVERTEC provides a comprehensive suite of services for core bank processing, cash processing and technology outsourcing in the regions the Company serves. EVERTEC serves a broad and diversified customer base of leading financial institutions, merchants, corporations and government agencies with “mission-critical” technology solutions that are essential to their operations, enabling them to issue, process and accept transactions securely, and Management believes that the Company’s business is well-positioned to continue to expand across the fast-growing Latin American region.

On April 13, 2012, EVERTEC was formed in order to act as the new parent company of EVERTEC Intermediate Holdings, LLC (formerly known as Carib Holdings, LLC and Carib Holdings, Inc., hereinafter “Holdings”) and its subsidiaries, including EVERTEC Group, LLC (formerly known as EVERTEC, LLC and EVERTEC, Inc., hereinafter “EVERTEC Group”). The Company’s subsidiaries include Holdings, EVERTEC Group, EVERTEC Dominicana, SAS, EVERTEC Panamá, S.A., EVERTEC Costa Rica, S.A. (“EVERTEC CR”), EVERTEC Guatemala, S.A. and EVERTEC México Servicios de Procesamiento, S.A. de C.V.

Basis of Presentation

The unaudited consolidated financial statements of EVERTEC have been prepared in accordance with accounting principles generally accepted in the United Stated of America (“GAAP”). The preparation of the accompanying unaudited 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 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 financial statements should be read in conjunction with the Audited Consolidated Financial Statements of the Company for the year ended December 31, 2013, included in the Company’s 2013 Form 10-K. In the opinion of management, the accompanying consolidated financial statements, prepared in accordance with GAAP, contain all adjustments, all of which are normal and recurring in nature, necessary for a fair presentation. All significant intercompany accounts and transactions have been eliminated in consolidation.

Certain reclassifications have been made to the June 30, 2013 unaudited consolidated financial statements and related notes to conform with the presentation in 2014.

Note 2 – Recent Accounting Pronouncements

The Financial Accounting Standards Board (“FASB”) has issued the following accounting pronouncements and guidance relevant to the Company’s operations:

In May 2014, the FASB issued updated guidance for revenue recognition. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: identify the contract(s) with a customer; identify the performance obligations in the contract; determine the transaction price; allocate the transaction price to the performance obligations in the contract; and recognize revenue when (or as) the entity satisfies a performance obligation. The guidance also specifies the accounting for some costs to obtain or fulfill a contract with a customer. In addition, the updated guidance enhances and expands disclosures regarding revenue recognition. The amendments in this Update are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The Company is currently evaluating the impact of the adoption of this guidance on its financial statements.

 

6


Table of Contents

EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements

 

 

Note 3 – Property and Equipment, net

Property and equipment, net consists of the following:

 

(Dollar amounts in thousands)    Useful life
in years
   June 30, 2014     December 31, 2013  

Buildings

   30    $ 1,590      $ 1,726   

Data processing equipment

   3 - 5      70,243        68,273   

Furniture and equipment

   3 - 20      7,500        6,385   

Leasehold improvements

   5 - 10      2,878        2,880   
     

 

 

   

 

 

 
        82,211        79,264   

Less - accumulated depreciation and amortization

        (54,250     (47,555
     

 

 

   

 

 

 

Depreciable assets, net

        27,961        31,709   

Land

        1,410        1,531   
     

 

 

   

 

 

 

Property and equipment, net

      $ 29,371      $ 33,240   
     

 

 

   

 

 

 

Depreciation and amortization expense related to property and equipment for the three and six months ended June 30, 2014 amounted to $3.8 million and $7.7 million, respectively, compared to $4.1 million and $8.1 million, respectively, for the same periods in 2013.

Note 4 – Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill, allocated by reportable segments, were as follows (See Note 12):

 

(Dollar amounts in thousands)    Merchant
Acquiring, net
     Payment
Processing
    Business
Solutions
    Total  

Balance at December 31, 2013

   $ 138,121       $ 187,622      $ 47,376      $ 373,119   

Foreign currency translation adjustments

     —           (2,923     (993     (3,916
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

   $ 138,121       $ 184,699      $ 46,383      $ 369,203   
  

 

 

    

 

 

   

 

 

   

 

 

 

Goodwill is tested for impairment at least annually, or more often if events or circumstances indicate there may be impairment, using the qualitative assessment option or step zero process. Using this process, the Company first assesses whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount.

During the third quarter of 2013, the Company completed the qualitative assessment described above and determined that there were no impairment losses to be recognized during the period. There were no triggering events or changes in circumstances that subsequent to the impairment test would have required an additional impairment evaluation. As part of the Company’s qualitative assessment, EVERTEC considered the results for the 2011 impairment test (which indicated that the fair value of each reporting unit was in excess of 30% of its carrying amount) as well as current market conditions and changes in the carrying amount of the Company’s reporting units that occurred subsequent to the 2011 impairment test.

 

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EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements

 

 

The carrying amount of other intangible assets for the six months ended June 30, 2014 and the year ended December 31, 2013 consisted of the following:

 

(Dollar amounts in thousands)         June 30, 2014  
     Useful life in years    Gross
amount
     Accumulated
amortization
    Net carrying
amount
 

Customer relationships

   14    $ 312,747       $ (84,336   $ 228,411   

Trademark

   10 - 15      39,950         (12,990     26,960   

Software packages

   3 - 10      125,508         (76,169     49,339   

Non-compete agreement

   15      56,539         (14,135     42,404   
     

 

 

    

 

 

   

 

 

 

Other intangible assets, net

      $ 534,744       $ (187,630   $ 347,114   
     

 

 

    

 

 

   

 

 

 
(Dollar amounts in thousands)         December 31, 2013  
     Useful life in years    Gross
amount
     Accumulated
amortization
    Net carrying
amount
 

Customer relationships

   14    $ 314,036       $ (73,180   $ 240,856   

Trademark

   10 -15      39,950         (11,258     28,692   

Software packages

   3 - 10      119,598         (65,655     53,943   

Non-compete agreement

   15      56,539         (12,250     44,289   
     

 

 

    

 

 

   

 

 

 

Other intangible assets, net

      $ 530,123       $ (162,343   $ 367,780   
     

 

 

    

 

 

   

 

 

 

For the three and six months ended June 30, 2014, the Company recorded amortization expense related to other intangibles of $12.6 million and $25.3 million, respectively, compared to $13.7 million and $27.3 million for the corresponding 2013 periods.

The estimated amortization expense of the balances outstanding at June 30, 2014 for the next five years is as follows:

 

(Dollar amounts in thousands)  

Remaining 2014

   $ 24,698   

2015

     45,742   

2016

     35,741   

2017

     32,988   

2018

     31,336   

2019

     30,609   

Note 5 – Debt and Short-Term Borrowings

Total debt as of June 30, 2014 and December 31, 2013 was as follows:

 

(Dollar amounts in thousands)    June 30, 2014      December 31, 2013  

Senior Secured Credit Facility (Term A) due on April 17, 2018 paying interest at a variable interest rate (London InterBank Offered Rate (“LIBOR”) plus applicable margin(1)(3))

   $ 284,697       $ 292,153   

Senior Secured Credit Facility (Term B) due on April 17, 2020 paying interest at a variable interest rate (LIBOR plus applicable margin(2)(3))

     390,929         392,527   

Senior Secured Revolving Credit Facility expiring on April 17, 2018 paying interest at a variable interest rate

     23,000         50,000   

Other short-term borrowing

     —           1,200   
  

 

 

    

 

 

 

Total debt

   $ 698,626       $ 735,880   
  

 

 

    

 

 

 

 

(1) Applicable margin of 2.50% at June 30, 2014 and December 31, 2013.
(2) Subject to a minimum rate (“LIBOR floor”) of 0.75% plus applicable margin of 2.75% at June 30, 2014 and December 31, 2013.
(3) Includes unamortized discount.

 

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Table of Contents

EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements

 

 

On April 17, 2013, EVERTEC Group entered into a credit agreement (the “2013 Credit Agreement”) governing the senior secured credit facilities, consisting of a $300.0 million term loan A facility (the “Term A Loan”) which matures on April 17, 2018, a $400.0 million term loan B facility (the “Term B Loan”) which matures on April 17, 2020 and a $100.0 million revolving credit facility which matures on April 17, 2018.

Term A Loan

As of June 30, 2014, the unpaid principal balance of the Term A Loan was $285.0 million. The Term A Loan requires principal payments on the last business day of each quarter equal to (a) 1.250% of the original principal amount commencing on September 30, 2013 through June 30, 2016; (b) 1.875% of the original principal amount from September 30, 2016 through June 30, 2017; (c) 2.50% of the original principal amount from September 30, 2017 through March 31, 2018; and (d) the remaining outstanding principal amount on the maturity of the Term A Loan on April 17, 2018. Interest is based on EVERTEC Group’s first lien secured net leverage ratio and payable at a rate equal to, at the Company’s option, either (a) LIBOR plus an applicable margin ranging from 2.00% to 2.50%, or (b) Base Rate, as defined in the 2013 Credit Agreement, plus an applicable margin ranging from 1.00% to 1.50%. Term A Loan has no LIBOR or Base Rate minimum or floor.

Term B Loan

As of June 30, 2014, the unpaid principal balance of the Term B Loan was $396.0 million. The Term B Loan requires principal payments on the last business day of each quarter equal to 0.250% of the original principal amount commencing on September 30, 2013 and the remaining outstanding principal amount on the maturity of the Term B Loan on April 17, 2020. Interest is based on EVERTEC Group’s first lien secured net leverage ratio and payable at a rate equal to, at the Company’s option, either (a) LIBOR plus an applicable margin ranging from 2.50% to 2.75%, or (b) Base Rate plus an applicable margin ranging from 1.50% to 1.75%. The LIBOR and Base Rate are subject to floors of 0.75% and 1.75%, respectively.

Revolving Credit Facility

The revolving credit facility has an available balance up to $100.0 million, with an interest rate on loans calculated the same as the applicable Term A Loan rate. The facility matures on April 17, 2018 and has a “commitment fee” payable one business day after the last business day of each quarter calculated based on the daily unused commitment during the preceding quarter. The commitment fee for the unused portion of this facility ranges from 0.125% to 0.375% and is based on EVERTEC Group’s first lien secured net leverage ratio.

The senior secured credit facilities contain various restrictive covenants. The Term A Loan and the revolving credit facility (subject to certain exceptions) require us to maintain on a quarterly basis a specified maximum senior secured leverage ratio of up to 6.60 to 1.00 as defined in the 2013 Credit Agreement (total first lien secured debt to adjusted EBITDA). In addition, the 2013 Credit Agreement, among other things: (a) limits our ability and the ability of our subsidiaries to incur additional indebtedness, incur liens, pay dividends or make certain other restricted payments and enter into certain transactions with affiliates; (b) restricts our ability to enter into agreements that would limit the ability of our subsidiaries to pay dividends or make certain payments to us; and (c) places restrictions on our ability and the ability of our subsidiaries to merge or consolidate with any other person or sell, assign, transfer, convey or otherwise dispose of all or substantially all of our assets. As of June 30, 2014, the Company was in compliance with the applicable restrictive covenants under the 2013 Credit Agreement.

Note 6 – Financial Instruments and Fair Value Measurements

Recurring Fair Value Measurements

Fair value measurement provisions establish a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. These provisions describe three levels of input that may be used to measure fair value:

Level 1: Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.

Level 2: Inputs, other than quoted prices included in Level 1, that 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.

 

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EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements

 

 

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 internally-developed 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 following table summarizes fair value measurements by level at June 30, 2014 and December 31, 2013 for assets measured at fair value on a recurring basis:

 

(Dollar amounts in thousands)    Level 1      Level 2      Level 3      Total  

June 30, 2014

           

Financial assets:

           

Indemnification assets:

           

Software cost reimbursement

   $ —         $ —         $ 2,114       $ 2,114   

December 31, 2013

           

Financial assets:

           

Indemnification assets:

           

Software cost reimbursement

   $ —         $ —         $ 3,586       $ 3,586   

The fair value of financial instruments is the amount at which an asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced liquidation sale. 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.

For those financial instruments with no quoted market prices available, fair values have been estimated using present value calculations or other valuation techniques, as well as management’s best judgment with respect to current economic conditions, including discount rates and estimates of future cash flows.

Indemnification assets include the present value of the expected future cash flows of certain expense reimbursement agreements with Popular. These contracts have termination dates up to September 2015 and were entered into in connection with the merger transaction completed on September 30, 2010 (“the Merger”). Management prepared estimates of the expected reimbursements to be received from Popular until the termination of the contracts, discounted the estimated future cash flows and recorded the indemnification assets as of the Merger closing date. Payments received during the quarters reduced the indemnification asset balance. The remaining balance was adjusted to reflect its fair value as of June 30, 2014, therefore resulting in a net unrealized gain of approximately $6,000 and a net unrealized loss of approximately $0.2 million for the three and six months ended June 30, 2014, respectively, and a net unrealized gain of approximately $3,000 and $19,000 for the three and six months ended June 30, 2013, respectively, which are reflected within the other expenses caption in the unaudited consolidated statements of income (loss) and comprehensive income (loss). The current portion of the indemnification assets is included within accounts receivable, net, and the other long-term portion is included within other long-term assets in the accompanying unaudited consolidated balance sheets.

The unobservable inputs related to the Company’s indemnification assets as of June 30, 2014 using the discounted cash flow model include the discount rate of 5.33% and the projected cash flows of $2.3 million.

For indemnification assets a significant increase or decrease in market rates or cash flows could result in a significant change to the fair value. Also, the credit rating and/or the non-performance credit risk of Popular, which is subjective in nature, also could increase or decrease the sensitivity of the fair value of these assets.

 

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Table of Contents

EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements

 

 

The following table presents the carrying value, as applicable, and estimated fair values for financial instruments at June 30, 2014 and December 31, 2013:

 

     June 30, 2014      December 31, 2013  
(Dollar amounts in thousands)    Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 

Financial assets:

           

Indemnification assets:

           

Software cost reimbursement

   $ 2,114       $ 2,114       $ 3,586       $ 3,586   

Financial liabilities:

           

Senior secured term loan A

   $ 284,697       $ 280,905       $ 292,153       $ 284,091   

Senior secured term loan B

     390,929         389,565         392,527         387,055   

The fair value of the senior secured term loans at June 30, 2014 and December 31, 2013 were obtained using prices supplied 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. The pricing inputs also may include the use of an algorithm that could take into account movement in the general high-yield market, among other variants.

The senior secured term loans, which are not measured at fair value in the balance sheets, if measured, could be categorized as Level 3 in the fair value hierarchy.

The following table provides a summary of the change in fair value of the Company’s Level 3 assets:

 

     Three months ended June 30,     Six months ended June 30,  
(Dollar amounts in thousands)    2014     2013     2014     2013  

Indemnification assets:

        

Beginning balance

   $ 2,947      $ 5,558      $ 3,586      $ 6,099   

Payments received

     (839     (1,021     (1,299     (1,578

Unrealized gain (loss) recognized in other expenses

     6        3        (173     19   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 2,114      $ 4,540      $ 2,114      $ 4,540   
  

 

 

   

 

 

   

 

 

   

 

 

 

Note 7 – Share-based Compensation

The following table summarizes stock options activity for the six months ended June 30, 2014:

 

     Shares      Weighted-average
exercise prices
 

Outstanding at December 31, 2013

     1,285,536       $ 4.77   

Granted

     100,000         24.01   

Forfeited

     31,164         1.30   

Exercised

     406,999         1.95   
  

 

 

    

 

 

 

Outstanding at June 30, 2014

     947,373       $ 8.12   
  

 

 

    

 

 

 

Exercisable at June 30, 2014

     49,374       $ 1.30   
  

 

 

    

 

 

 

Management uses the fair value method of recording stock-based compensation as described in the guidance for stock compensation in ASC topic 718.

 

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EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements

 

 

The following table summarizes nonvested restricted shares activity for the six months ended June 30, 2014:

 

Nonvested restricted shares

   Shares      Weighted-average
grant date fair value
 

Nonvested at December 31, 2013

     9,133       $ 24.64   
  

 

 

    

 

 

 

Nonvested at June 30, 2014

     9,133       $ 24.64   
  

 

 

    

 

 

 

For the three and six months ended June 30, 2014 and June 30, 2013, the Company recognized $0.3 million and $0.7 million and $5.2 million and $5.5 million of share-based compensation expense, respectively. As of June 30, 2014, there was $2.2 million of total unrecognized compensation cost related to stock options, which is expected to be recognized over the next 2.3 years. In addition, for the same period, there was approximately $25,000 of total unrecognized compensation cost related to nonvested shares of restricted stock. That cost is expected to be fully recognized during 2014.

Note 8 – Income Tax

The components of income tax expense (benefit) for the three and six months ended June 30, 2014 and 2013 consisted of the following:

 

     Three months ended June 30,     Six months ended June 30,  
(Dollar amounts in thousands)    2014      2013     2014     2013  

Current tax provision

   $ 964       $ 1,005      $ 4,553      $ 1,290   

Deferred tax provision (benefit)

     998         (6,017     (430     (6,251
  

 

 

    

 

 

   

 

 

   

 

 

 

Income tax expense (benefit)

   $ 1,962       $ (5,012   $ 4,123      $ (4,961
  

 

 

    

 

 

   

 

 

   

 

 

 

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 (benefit) for the three and six months ended June 30, 2014 and 2013 and its segregation based on location of operations:

 

     Three months ended June 30,     Six months ended June 30,  
(Dollar amounts in thousands)    2014     2013     2014     2013  

Current tax provision (benefit)

        

Puerto Rico

   $ 423      $ (122   $ 1,360      $ 256   

United States

     217        210        415        429   

Foreign countries

     324        917        2,778        605   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total current tax provision (benefit)

   $ 964      $ 1,005      $ 4,553      $ 1,290   
  

 

 

   

 

 

   

 

 

   

 

 

 

Deferred tax provision (benefit)

        

Puerto Rico

   $ 805      $ (5,880   $ 832      $ (5,956

United States

     (2     —          (3     (2

Foreign countries

     195        (137     (1,259     (293
  

 

 

   

 

 

   

 

 

   

 

 

 

Total deferred tax provision (benefit)

   $ 998      $ (6,017   $ (430   $ (6,251
  

 

 

   

 

 

   

 

 

   

 

 

 

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 June 30, 2014, the gross deferred tax asset amounted to $11.0 million and the gross deferred tax liability amounted to $29.4 million, compared with $13.5 million and $31.7 million as of December 31, 2013. At June 30, 2014, the recorded value of the Company’s net operating loss (“NOL”) carryforwards was $15.1 million. The recorded value of the NOL carryforwards is approximately $7.0 million lower than the total NOL carryforwards available because of a windfall tax benefit. The windfall tax benefit is available to offset future taxable income and is considered an off-balance sheet item until the deduction reduces taxes payable. This windfall tax benefit results from tax deductions that were in excess of previously recorded compensation expense because the fair value of stock options at the time they were granted differed from their fair value when they were exercised. The total gross NOL carryforwards available, including the windfall benefit, amounted to $58.2 million as of June 30, 2014.

There are no open uncertain tax positions as of June 30, 2014.

 

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Table of Contents

EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements

 

 

Note 9 – Net Income (Loss) Per Common Share

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

 

     Three months ended June 30,     Six months ended June 30,  
(Dollar amounts in thousands, except per share data)    2014      2013     2014      2013  

Net income (loss)

   $ 17,773       $ (64,935   $ 35,979       $ (59,463
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted average common shares outstanding

     78,410,554         78,928,780        78,393,042         75,849,551   

Weighted average potential dilutive common shares(1)(2)

     789,410         —          811,600         —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted average common shares outstanding - assuming dilution

     79,199,964         78,928,780        79,204,642         75,849,551   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income (loss) per common share - basic

   $ 0.23       $ (0.82   $ 0.46       $ (0.78
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income (loss) per common share - diluted

   $ 0.22       $ (0.82   $ 0.45       $ (0.78
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)  Potential common shares consist of common stock issuable under the assumed exercise of stock options and restricted stock awards using the treasury stock method.
(2)  For the three and six months ended June 30, 2013, 3,818,727 and 4,227,114 potential common shares, respectively, consisting of common stock under the assumed exercise of stock options and restricted stock awards using the treasury stock method were not included in the computation of the diluted net income (loss) per share since their inclusion would have an antidilutive effect.

On February 12, 2014, our Board declared a quarterly cash dividend of $0.10 per share of common stock, which was paid on March 14, 2014 to stockholders of record as of February 25, 2014. On May 7, 2014, our Board declared a quarterly cash dividend of $0.10 per share of common stock, which was paid on June 6, 2014 to stockholders of record as of May 19, 2014.

Note 10 – Commitments and Contingencies

Certain lease agreements contain provisions for future rent increases. The total amount of rental payments due over the lease term is being charged to rent expense on the straight-line method over the term of the lease. The difference between rent expense recorded and the amount paid is recorded as a deferred rent obligation. Total deferred rent obligation as of June 30, 2014 and December 31, 2013 amounted to $0.2 million and $0.3 million, respectively, and is included within the accounts receivable, net caption in the accompanying unaudited consolidated balance sheets.

Rent expense of office facilities and real estate for the three and six months ended June 30, 2014 amounted to $2.1 million and $4.1 million, respectively, compared to $2.0 million and $4.0 million for the corresponding 2013 periods. Rent expense for telecommunications and other equipment for the three and six months ended June 30, 2014 amounted to $1.6 million and $3.0 million, respectively, compared to $1.8 million and $3.5 million for the corresponding 2013 periods.

In the ordinary course of business, the Company may enter into commercial commitments. As of June 30, 2014, EVERTEC has an outstanding letter of credit of $1.1 million with a maturity of less than three months.

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 minimal. For other claims regarding which proceedings are in an initial phase, the Company is unable to estimate the range of possible loss but at this time believes that any loss related to such claims will not be material.

 

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Table of Contents

EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements

 

 

Note 11 – Related Party Transactions

The following table presents the Company’s transactions with related parties for the three and six months ended June 30, 2014 and 2013:

 

     Three months ended June 30,      Six months ended June 30,  
(Dollar amounts in thousands)    2014      2013      2014      2013  

Total revenues(1)(2)

   $ 41,546       $ 42,349       $ 82,008       $ 84,004   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cost of revenues

   $ 528       $ 2,506       $ 619       $ 5,110   
  

 

 

    

 

 

    

 

 

    

 

 

 

Rent and other fees(3)(4)

   $ 2,084       $ 27,212       $ 4,001       $ 30,072   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest earned from and charged by affiliate

           

Interest income

   $ 50       $ 23       $ 102       $ 42   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense(5)

   $ —         $ 577       $ —         $ 2,471   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  Total revenues from Popular as a percentage of revenues were 45%, 47%, 45% and 47% for each of the periods presented above.
(2)  Includes revenues generated from investee accounted for under the equity method of $0.7 million and $1.4 million for the three and six months ended June 30, 2014, respectively, and $0.8 million and $1.7 million for the corresponding 2013 periods.
(3)  Includes management fees to equity sponsors amounting to $19.4 million and $20.3 million for the three and six months ended June 30, 2013, respectively. Management fees paid during 2013 includes $16.7 million resulting from the termination of the consulting agreements as explained below. Rent and other fees also includes $5.9 million paid to Popular in connection with the redemption premium on the senior notes for the three and six months ended June 30, 2013.
(4)  For the periods presented above, $2.1 million, $4.6 million, $4.0 million and $7.5 million were recorded as selling, general and administrative expenses, and $22.6 million was recorded as non-operating expenses for the three and six months ended June 30, 2013 in the unaudited consolidated statement of income (loss) and comprehensive income (loss).
(5)  Interest expense relates to interest accrued on the senior secured term loan and senior notes held by Popular. As a result of the debt refinancing and the redemption of the senior notes in April 2013, Popular’s participation in such debt was extinguished.

On April 17, 2013, EVERTEC entered into a termination agreement with Holdings, EVERTEC Group and Popular and a termination agreement with Holdings, EVERTEC Group and Apollo Management VII, L.P. in connection with our initial public offering in April 2013 (the “Termination Agreements”). The Termination Agreements terminated the consulting agreements (the “Consulting Agreements”), each dated September 30, 2010, entered into by Holdings and EVERTEC Group with each of Popular and Apollo Management, pursuant to which Holdings and EVERTEC Group received certain advisory services from each of Popular and Apollo Management. The Consulting Agreements were terminated in their entirety upon payment of termination fees of approximately $8.5 million to Apollo Management and $8.2 million to Popular, in each case, plus any unreimbursed expenses payable in accordance with the terms of the Termination Agreements.

At June 30, 2014 and December 31, 2013, EVERTEC had the following balances arising from transactions with related parties:

 

(Dollar amounts in thousands)    June 30, 2014      December 31, 2013  

Cash and restricted cash deposits in affiliated bank

   $ 14,847       $ 13,933   
  

 

 

    

 

 

 

Indemnification assets from Popular reimbursement(1)

     

Accounts receivable

   $ 1,941       $ 1,900   
  

 

 

    

 

 

 

Other long-term assets

   $ 173       $ 1,686   
  

 

 

    

 

 

 

Other due/to from affiliate

     

Accounts receivable

   $ 20,078       $ 18,799   
  

 

 

    

 

 

 

Prepaid expenses and other assets

   $ 322       $ 216   
  

 

 

    

 

 

 

Accounts payable(2)

   $ 4,088       $ 8,886   
  

 

 

    

 

 

 

Unearned income

   $ 6,964       $ 4,100   
  

 

 

    

 

 

 

Other long-term liabilities(2)

   $ 253       $ 333   
  

 

 

    

 

 

 

 

(1)  Recorded in connection with reimbursements from Popular regarding certain software license fees.
(2)  Includes an account payable of $0.2 million for both periods and a long-term liability of $0.2 million and $0.3 million for June 30, 2014 and December 31, 2013, respectively, related to the unvested portion of stock options as a result of the equitable adjustment approved by our Board of Directors on December 18, 2012 that will be payable to executive officers and employees upon vesting of stock options.

At June 30, 2014, EVERTEC Group has a credit facility with Popular for $3.6 million, on behalf of EVERTEC CR, under which a letter of credit of a similar amount was issued.

 

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EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements

 

 

Note 12 – Segment Information

The Company operates in three business segments: Merchant Acquiring, Payment Processing and Business Solutions.

The Merchant Acquiring segment consists of revenue from services that allow merchants to accept electronic methods of payment. In the Merchant Acquiring segment, revenue includes a discount fee (generally a percentage of the transaction value) and membership fees charged to merchants, debit network fees and rental fees from point of sales (“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.

Payment Processing segment revenue comprises income related to providing financial institutions access to the ATH network and other card networks, including related services such as authorization, processing, management and recording of ATM and POS transactions, and ATM management and monitoring. Payment Processing revenue also includes income from card processing services for debit or credit issuers such as credit and debit card processing, authorization and settlement, and fraud monitoring and control services, payment processing services (such as payment and billing products for merchants, businesses and financial institutions) and electronic benefit transfer (“EBT”), which principally consists of services to the government of Puerto Rico for the delivery of benefits to participants.

For ATH network and processing services, revenue is driven mainly by the number of transactions processed. Revenue is derived mainly from network fees, transaction switching and processing fees, and the leasing of POS devices. For card issuer processing, revenue is mostly 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, revenue is derived mainly from the number of beneficiaries on file.

The Business Solutions segment consists of revenue from a full suite of business process management solutions in various product areas, such as core bank processing, network hosting and management, IT professional services, business process outsourcing, item processing, cash processing, and fulfillment. Core bank processing and network services revenues are derived in part from a recurrent fee and from fees based on the number of accounts on file (i.e.; savings or checking accounts, loans, etc.) or computer resources utilized. Revenue from other processing services within the Business Solutions segment is 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 one-time transactions.

The Company’s business segments are organized based on the nature of products and services. The Chief Operating Decision Maker (“CODM”) reviews their individual financial information to assess performance and to allocate resources.

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

 

(Dollar amounts in thousands)    Merchant
Acquiring, net
     Payment
Processing
     Business
Solutions
     Other     Total  

Three months ended June 30, 2014

             

Revenues

     19,827         33,040         44,888         (6,634 )(1)      91,121   

Income from operations

     8,777         15,314         12,113         (10,774 )(2)      25,429   

Three months ended June 30, 2013

             

Revenues

     18,165         30,603         46,725         (6,318 )(1)      89,175   

Income from operations

     8,161         11,720         8,784         (11,727 )(2)      16,938   

 

(1)  Represents the elimination of intersegment revenues for services provided by the Payment Processing segment to the Merchant Acquiring segment, and other miscellaneous intersegment revenues.
(2)  Primarily represents non-operating depreciation and amortization expenses generated as a result of the Merger and certain non-recurring fees and expenses.

 

(Dollar amounts in thousands)    Merchant
Acquiring, net
     Payment
Processing
     Business
Solutions
     Other     Total  

Six months ended June 30, 2014

             

Revenues

     39,118         64,659         87,805         (13,251 )(1)      178,331   

Income from operations

     17,181         30,031         23,537         (20,431 )(2)      50,318   

Six months ended June 30, 2013

             

Revenues

     35,624         59,826         92,493         (11,429 )(1)      176,514   

Income from operations

     17,395         24,480         19,318         (23,856 )(2)      37,337   

 

(1)  Represents the elimination of intersegment revenues for services provided by the Payment Processing segment to the Merchant Acquiring segment, and other miscellaneous intersegment revenues.
(2)  Primarily represents non-operating depreciation and amortization expenses generated as a result of the Merger and certain non-recurring fees and expenses.

 

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EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements

 

 

The reconciliation of income from operations to consolidated net income for the three and six months ended June 30, 2014 and 2013 is as follows:

 

     Three months ended June 30,     Six months ended June 30,  
(Dollar amounts in thousands)    2014     2013     2014     2013  

Segment income from operations

        

Merchant acquiring

   $ 8,777      $ 8,161      $ 17,181      $ 17,395   

Payment processing

     15,314        11,720        30,031        24,480   

Business solutions

     12,113        8,784        23,537        19,318   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segment income from operations

     36,204        28,665        70,749        61,193   

Merger related depreciation and amortization and other unallocated expenses(1)

     (10,775     (11,727     (20,431     (23,856
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

   $ 25,429      $ 16,938      $ 50,318      $ 37,337   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense, net

     (6,422     (9,698     (13,256     (24,918

Earnings of equity method investment

     343        348        664        625   

Other income (expenses)

     385        (77,535     2,376        (77,468

Income tax (expense) benefit

     (1,962     5,012        (4,123     4,961   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 17,773      $ (64,935   $ 35,979      $ (59,463
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Primarily represents non-operating depreciation and amortization expenses generated as a result of the Merger and certain non-recurring fees and expenses.

Note 13 – Subsequent Events

On August 6, 2014, the Company’s Board of Directors (the “Board”) declared a regular quarterly cash dividend of $0.10 per share on the Company’s outstanding shares of common stock. The Board anticipates declaring this dividend in future quarters on a regular basis, however future declarations of dividends are subject to Board approval and may be adjusted as business needs or market conditions change. The cash dividend of $0.10 per share will be paid on September 5, 2014 to stockholders of record as of the close of business on August 18, 2014.

The Company performed an evaluation of all other events occurring subsequent to June 30, 2014, Management has determined that there are no additional events occurring in this period that require disclosure in or adjustment to the accompanying unaudited financial statements.

 

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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 six months ended June 30, 2014 and 2013, respectively; and (ii) the financial condition as of June 30, 2014. You should read the following discussion and analysis in conjunction with the audited consolidated financial statements and related notes for the fiscal year ended December 31, 2013, included in the Company’s annual report on Form 10-K (the “2013 Form 10-K”) and with the unaudited 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 Panamá, S.A., EVERTEC Costa Rica, S.A. (“EVERTEC CR”), EVERTEC Guatemala, S.A. 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 the leading full-service transaction processing business in Latin America, providing a broad range of merchant acquiring, payment processing and business process management services. According to the July 2013 Nilson Report, we are the largest merchant acquirer in the Caribbean and Central America and one of the largest in Latin America, based on total number of transactions. We serve 19 countries in the region from our base in Puerto Rico. We manage a system of electronic payment networks that process more than 2.1 billion transactions annually, and offer a comprehensive suite of services for core bank processing, cash processing and technology outsourcing. In addition, we own and operate the ATH network, one of the leading personal identification number (“PIN”) debit networks in Latin America. We serve a diversified customer base of leading financial institutions, merchants, corporations and government agencies with “mission-critical” technology solutions that enable them to issue, process and accept transactions securely. We believe our business is well-positioned to continue to expand across the fast-growing Latin American region.

We are differentiated, in part, by our diversified business model, which enables us to provide our varied customer base with a broad range of transaction-processing services from a single source across numerous channels and geographic markets. We believe this single-source 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 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 a single integrated technology solution that enables 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 only have the technology, capabilities and products to serve just one portion of the transaction processing value chain (such as only merchant acquiring or payment processing).

Our broad suite of services spans the entire transaction processing value chain and includes a range of front-end customer-facing solutions such as the electronic capture and authorization of transactions at the point-of-sale, as well as back-end support services such as the clearing and settlement of transactions and account reconciliation for card issuers. These include: (i) merchant acquiring services, which enable point of sales (“POS”) and e-commerce merchants to accept and process electronic methods of payment such as debit, credit, prepaid and electronic benefit transfer (“EBT”) cards; (ii) payment processing services, which enable financial institutions and other issuers to manage, support and facilitate the processing for credit, debit, prepaid, automated teller machines (“ATM”) and EBT card programs; and (iii) business process management solutions, which provide “mission-critical” technology solutions such as core bank processing, as well as IT outsourcing and cash management services to financial institutions, corporations and governments. We provide these services through a highly scalable, end-to-end technology platform that we manage and operate in-house and that generates significant operating efficiencies that enable us to maximize profitability.

 

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We sell and distribute our services mainly through a proprietary direct sales force with strong customer relationships. We are also building a variety of indirect sales channels that enable us to leverage the distribution capabilities of partners in adjacent markets, including value-added resellers. Also, 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 low capital expenditure requirements. Our revenue is recurring in nature because of the “mission-critical” and embedded nature of the services we provide, the high switching costs associated with these services and the multi-year contracts we negotiate with our customers. Our business model enables us to continue to grow our business organically without significant additional capital expenditures.

Corporate Background

EVERTEC, Inc. (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”) 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 remains 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. 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 region is lower relative to the more mature U.S. and European markets. We believe that the unbanked and underbanked population in our markets will continue to shrink, therefore driving incremental penetration and growth of electronic payments in Puerto Rico and other Latin American regions. We also benefit from the trend for financial institutions and government agencies to outsource technology systems and processes. Many medium- and small-size institutions in the Latin American markets in which we operate have outdated computer systems and updating these IT legacy systems is financially and logistically challenging. We believe that our technology and business outsourcing solutions cater to the evolving needs of the financial institution customer base we target, providing integrated, open, flexible, customer-centric and efficient IT products and services.

Our results of operations may be affected by regulatory changes that will occur as the payments industry has come under increased scrutiny from lawmakers and regulators.

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.

 

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Overview of Results of Operations

The following briefly describes the components of revenue and expenses as presented in the unaudited consolidated statements of income (loss) and comprehensive income (loss). Descriptions of the revenue recognition policies are detailed in Note 1 of the Notes to the Audited Consolidated Financial Statements included in our 2013 Form 10-K.

Merchant Acquiring, net. Merchant Acquiring revenue consists of income from services that allow merchants to accept electronic methods of payment. Our standard merchant contract has an initial term of one or three years, with automatic one-year renewal periods. In the Merchant Acquiring segment, sources of revenue include a discount fee (generally a percentage of the sales amount of a credit or debit card transaction value) and membership fees charged to merchants, debit network fees and rental income 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.

Merchant Acquiring accounted for $19.8 million, or 21.7% of total revenues, and $8.8 million or 24.2% of total segment income from operations for the three months ended June 30, 2014, compared with $18.2 million, or 20.4%, of total revenues and $8.2 million, or 28.5% of total segment income from operations for the comparable period in 2013. For the six months ended June 30, 2014, our Merchant Acquiring business accounted for $39.1 million, or 21.9% of total revenues and $17.2 million or 24.3% of total segment income from operations compared with $35.6 million, or 20.2%, of total revenues and $17.4 million, or 28.4%, of total segment income from operations for the six months ended June 30, 2013.

Payment Processing. Payment Processing revenue comprises income related to providing financial institutions access to the ATH network and other card networks, including related services such as authorization, processing, management and recording of ATM and POS transactions, and ATM management and monitoring. Payment Processing revenue also includes income from card processing services for debit or credit issuers, such as credit and debit card processing, authorization and settlement and fraud monitoring and control services; payment processing services such as payment and billing products for merchants, businesses and financial institutions and EBT; which principally consists of services to the Puerto Rico government for the delivery of government benefits to participants. Payment products include electronic check processing, automated clearing house (“ACH”), lockbox, interactive voice response and web-based payments through personalized websites, among others.

We generally enter into one to five year contracts with our private payment processing clients and one year contracts with our government payment processing clients. For ATH network and processing services, revenue is driven mainly by the number of transactions processed. Revenue is derived mainly from network fees, transaction switching and processing fees, and leasing of POS devices. For card issuer processing, revenue is dependent mostly upon the number of cardholder accounts on file, transactions and authorizations processed, the number of cards embossed and other processing services. For EBT services, revenue is derived mainly from the number of beneficiaries on file.

Payment Processing accounted for $26.4 million, or 29.0%, of total revenues and $15.3 million, or 42.3%, of total segment income from operations for the three months ended June 30, 2014, compared with $24.3 million, or 27.2%, of total revenues and $11.7 million, or 40.9%, of total segment income from operations for the three months ended June 30, 2013. For the six months ended June 30, 2014, our Payment Processing business accounted for $51.4 million, or 28.8%, of total revenues and $30.0 million, or 42.4%, of total segment income from operations, compared with $48.4 million, or 27.4%, of total revenues and $24.5 million, or 40.0%, of total segment income from operations for the six months ended June 30, 2013.

Business Solutions. Business Solutions revenue consists of income from a full suite of business process management solutions including core bank processing, network hosting and management, IT consulting services, business process outsourcing, item and cash processing, and fulfillment. We generally enter into one to five year contracts with our private Business Solutions clients and one year contracts with our government Business Solutions clients.

In addition, we are a reseller of hardware and software products and these resale transactions are generally one-time transactions. Revenue from sales of hardware or software products is recognized once the following four criteria are met: (i) evidence of an agreement exists, (ii) delivery and acceptance has occurred or services have been rendered, (iii) the selling price is fixed or determinable, and (iv) collection of the selling price is reasonably assured or probable, as applicable.

Business Solutions accounted for $44.9 million, or 49.3%, of total revenues and $12.1 million, or 33.5%, of total segment income from operations for the three months ended June 30, 2014, compared with $46.7 million, or 52.4%, of total revenues and $8.8 million, or 30.6%, of total segment income from operations for the three months ended June 30, 2013. For the six months ended June 30, 2014, Business Solutions accounted for $87.8 million, or 49.2%, of total revenues and $23.5 million, or 33.3%, of total segment income from operations, compared with $92.5 million, or 52.4%, of total revenues and $19.3 million, or 31.6%, of total segment income from operations for the six months ended June 30, 2013.

 

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Cost of revenues. This caption includes the costs directly associated with providing services to customers, as well as, product and software sales, including software licensing and maintenance costs; telecommunications costs; personnel and infrastructure costs to develop and maintain applications, operate computer networks and provide associated customer support; and other operating expenses.

Selling, general and administrative. This caption consists mainly of salaries, wages and related expenses paid to sales personnel, administrative employees and management, advertising and promotional costs, audit and legal fees, and other selling expenses.

Depreciation and amortization. This caption consists of our depreciation and amortization expense. Following the completion of the Merger, our depreciation and amortization expense increased as a result of the purchase price allocation adjustments to reflect the fair market value and revised useful life assigned to property and equipment and intangible assets in connection with the Merger.

Results of Operations

The following tables set forth certain consolidated financial information for the three and six months ended June 30, 2014 and 2013. The following tables and discussion should be read in conjunction with the information contained in our unaudited consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.

Comparison of the three months ended June 30, 2014 and 2013

The following tables present the components of our unaudited consolidated statements of income (loss) and comprehensive income (loss) by business segment and the change in those amounts for the three months ended June 30, 2014 and 2013.

Revenues

 

     Three months ended June 30,               
(Dollar amounts in thousands)    2014      2013      Variance  

Merchant Acquiring, net

   $ 19,827       $ 18,165       $ 1,662        9

Payment Processing

     26,406         24,285         2,121        9

Business Solutions

     44,888         46,725         (1,837     -4
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

   $ 91,121       $ 89,175       $ 1,946        2
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues for the three months ended June 30, 2014 increased by $1.9 million or 2% as compared to the corresponding 2013 period, driven by revenue growth of 9% in each our Merchant Acquiring and Payment Processing businesses, partially offset by a reduction in revenue of 4% in our Business Solutions segment.

Merchant Acquiring revenue for the three months ended June 30, 2014 increased by $1.7 million or 9% compared with the corresponding 2013 period. The revenue growth was due mainly to an increase in transaction volumes.

Payment Processing revenues for the three months ended June 30, 2014 increased $2.1 million or 9% compared with the corresponding 2013 period. Revenue growth was driven mainly by an increase in ATH and POS network and processing transactions and an increase in card products business resulting from new customer additions and more accounts on file in our Latin America operations. As well, during the second quarter of 2014, we provided a service related to a Department of Education program; in 2013 the Department of Education service was provided in the first, rather than the second, quarter.

Business Solutions revenues for the three months ended June 30, 2014 decreased $1.8 million or 4% compared with the corresponding 2013 period. The decrease is almost entirely attributable to a decline in hardware and software sales of $2.9 million, partially offset by an increase in demand for other services.

 

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Operating costs and expenses

 

     Three months ended June 30,               
(Dollar amounts in thousands)    2014      2013      Variance  

Cost of revenues, exclusive of depreciation and amortization shown below

   $ 38,839       $ 41,771       $ (2,932     -7

Selling, general and administrative expenses

     10,463         12,624         (2,161     -17

Depreciation and amortization

     16,390         17,842         (1,452     -8
  

 

 

    

 

 

    

 

 

   

 

 

 

Total operating costs and expenses

   $ 65,692       $ 72,237       $ (6,545     -9
  

 

 

    

 

 

    

 

 

   

 

 

 

Total operating costs and expenses for the three months ended June 30, 2014 decreased $6.5 million or 9% as compared to the corresponding 2013 period.

Cost of revenues for the three months ended June 30, 2014 decreased $2.9 million or 7% as compared with the corresponding 2013 period. The reduction was due mainly to lower cost of sales incurred as a result of the aforementioned decrease in hardware and software sales.

Selling, general and administrative expenses for the three months ended June 30, 2014 decreased $2.2 million or 17% as compared with the corresponding 2013 period. This decrease was due primarily to a $3.1 million non-cash charge taken last year in connection with the vesting of all Tranche B and C stock options. This decrease was partially offset by $1.1 million in professional expenses related to a debt offering in the second quarter of 2014 which was withdrawn.

Depreciation and amortization expense for the three months ended June 30, 2014 decreased $1.5 million or 8% as compared with the corresponding 2013 period. The decrease is related primarily to lower amortization of software packages that became fully depreciated.

Income from operations

The following table presents income from operations by reportable segments.

 

     Three months ended June 30,               
(Dollar amounts in thousands)    2014     2013     Variance  

Segment income from operations

         

Merchant acquiring, net

   $ 8,777      $ 8,161      $ 616         8

Payment processing

     15,314        11,720        3,594         31

Business solutions

     12,113        8,784        3,329         38
  

 

 

   

 

 

   

 

 

    

 

 

 

Total segment income from operations

     36,204        28,665        7,539         26

Merger related depreciation and amortization and other unallocated expenses(1)

     (10,775     (11,727     952         8
  

 

 

   

 

 

   

 

 

    

 

 

 

Income from operations

   $ 25,429      $ 16,938      $ 8,491         50
  

 

 

   

 

 

   

 

 

    

 

 

 

 

(1)  Primarily represents non-operating depreciation and amortization expenses generated as a result of the Merger and certain non-recurring fees and expenses.

Income from operations for the three months ended June 30, 2014 increased $8.5 million or 50% compared with the corresponding 2013 period. The increase in income from operations was the result of the aforementioned factors affecting our revenues and operating costs and expenses.

See Note 12 of the Notes to Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information on the Company’s reportable segments and for a reconciliation of income from operations to net income (loss).

 

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Non-operating (expenses) income

 

     Three months ended June 30,              
(Dollar amounts in thousands)    2014     2013     Variance  

Non-operating (expenses) income

        

Interest income

   $ 79      $ 49      $ 30        61

Interest expense

     (6,501     (9,747     3,246        33

Earnings of equity method investment

     343        348        (5     -1

Other income (expense)

     385        (77,535     77,920        101
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-operating (expenses) income

   $ (5,694   $ (86,885   $ 81,191        93
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-operating expenses for the three months ended June 30, 2014 decreased $81.2 million compared with the corresponding 2013 period. This decrease in non-operating expenses was mostly a result of two extraordinary expenses incurred in the second quarter of 2013, a $58.5 million charge related to the extinguishment of debt and a $16.7 million expense related to the termination of the consulting agreements with Apollo and Popular. In addition, interest expense decreased by $3.2 million as a result of the debt refinancing in April 2013.

Income tax expense (benefit)

Income tax expense for the three months ended June 30, 2014 amounted to $2.0 million compared with an income tax benefit of $5.0 million in the prior year period, mainly as a result of an increase in taxable income. The prior year tax benefit was attributable to a taxable loss as a result of higher non-operating expenses related to the aforementioned extinguishment of debt, the termination of the consulting agreements and the vesting of all Tranche B and C stock options.

See Note 8 of the Notes to Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information regarding income taxes.

Comparison of the six months ended June 30, 2014 and 2013

The following tables present the components of our unaudited consolidated statements of income (loss) and comprehensive income (loss) by business segment and the change in those amounts for the six months ended June 30, 2014 and 2013.

Revenues

 

     Six months ended June 30,               
(Dollar amounts in thousands)    2014      2013      Variance  

Merchant Acquiring, net

   $ 39,118       $ 35,624       $ 3,494        10

Payment Processing

     51,408         48,397         3,011        6

Business Solutions

     87,805         92,493         (4,688     -5
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

   $ 178,331       $ 176,514       $ 1,817        1
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues for the six months ended June 30, 2014 increased $1.8 million or 1% compared with the corresponding 2013 period, driven by revenue growth of 10% and 6% in our Merchant Acquiring and Payment Processing segments, respectively, partially offset by a reduction in revenue of 5% in our Business Solutions segment.

Merchant Acquiring revenue for the six months ended June 30, 2014 increased $3.5 million or 10% as compared to the corresponding 2013 period. The revenue growth for 2014 was primarily a result of an increase in transaction volumes.

Payment Processing revenue for the six months ended June 30, 2014 increased $3.0 million or 6% compared with the corresponding 2013 period. Revenue growth was driven mainly by an increase in our card products business resulting from higher accounts on file due to new customer additions in our Latin America operations and by an increase in ATH and POS network and processing transactions.

Business Solutions revenues for the six months ended June 30, 2014 decreased $4.7 million or 5% compared with the corresponding 2013 period. The decrease is almost entirely attributable to a decline in hardware and software sales of $6.4 million, partially offset by an increase in demand for core banking and other services.

 

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Operating costs and expenses

 

     Six months ended June 30,               
(Dollar amounts in thousands)    2014      2013      Variance  

Cost of revenues, exclusive of depreciation and amortization shown below

   $ 76,484       $ 82,273       $ (5,789     -7

Selling, general and administrative expenses

     18,525         21,487         (2,962     -14

Depreciation and amortization

     33,004         35,417         (2,413     -7
  

 

 

    

 

 

    

 

 

   

 

 

 

Total operating costs and expenses

   $ 128,013       $ 139,177       $ (11,164     -8
  

 

 

    

 

 

    

 

 

   

 

 

 

Total operating costs and expenses for the six months ended June 30, 2014 decreased $11.2 million or 8% as compared with the corresponding 2013 period.

Cost of revenue for the six months ended June 30, 2014 decreased $5.8 million or 7% compared with the corresponding 2013 period. The decrease was due mainly to lower cost of sales incurred as a result of the aforementioned decrease in hardware and software sales.

Selling, general and administrative expenses for the six months ended June 30, 2014 decreased $3.0 million or 14% compared with the corresponding 2013 period. The decrease was due mainly to the impact in the prior year of a $3.1 million non-cash charge taken in connection with the vesting of all Tranche B and C stock options.

Depreciation and amortization expense for the six months ended June 30, 2014 decreased $2.4 million or 7% compared with the corresponding 2013 period. The decrease resulted from lower amortization of software packages that became fully depreciated.

Income from operations

The following table presents income from operations by reportable segments.

 

     Six months ended June 30,              
(Dollar amounts in thousands)    2014     2013     Variance  

Segment income from operations

        

Merchant acquiring, net

   $ 17,181      $ 17,395      $ (214     -1

Payment processing

     30,031        24,480        5,551        23

Business solutions

     23,537        19,318        4,219        22
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segment income from operations

     70,749        61,193        9,556        16

Merger related depreciation and amortization and other unallocated expenses(1)

     (20,431     (23,856     3,425        14
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

   $ 50,318      $ 37,337      $ 12,981        35
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Primarily represents non-operating depreciation and amortization expenses generated as a result of the Merger and certain non-recurring fees and expenses.

Income from operations for the six months ended June 30, 2014 increased $13.0 million or 35% as compared to the corresponding 2013 period. The increase in income from operations was the result of the aforementioned factors affecting revenues and operating costs and expenses.

See Note 12 of the Notes to Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information on the Company’s reportable segments and for a reconciliation of income from operations to net income (loss).

 

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Non-operating (expenses) income

 

     Six months ended June 30,               
(Dollar amounts in thousands)    2014     2013     Variance  

Non-operating (expenses) income

         

Interest income

   $ 154      $ 93      $ 61         66

Interest expense

     (13,410     (25,011     11,601         46

Earnings of equity method investment

     664        625        39         6

Other income (expense)

     2,376        (77,468     79,844         103
  

 

 

   

 

 

   

 

 

    

 

 

 

Total non-operating (expenses) income

   $ (10,216   $ (101,761   $ 91,545         90
  

 

 

   

 

 

   

 

 

    

 

 

 

Total non-operating expenses for the six months ended June 30, 2014 decreased $91.5 million compared with the corresponding 2013 period. Non-operating expenses in 2013 were driven mainly by the aforementioned factors affecting our quarterly results in non-operating (expenses) income related to expenses incurred in the prior year, coupled with a decrease in interest expense of $11.6 million as a result of the debt refinancing transaction completed during the second quarter of 2013.

Income tax expense (benefit)

Income tax expense for the six months ended June 30, 2014 amounted to $4.1 million compared with an income tax benefit of $5.0 million for the corresponding 2013 period. The income tax expense for 2014 is a result of taxable income, while the income tax benefit in the 2013 period was attributable to a taxable loss resulting from higher non-operating expenses related to the extinguishment of debt, the termination of the consulting agreements and the vesting of all Tranche B and C stock options, as explained above.

See Note 8 of the Notes to Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information regarding income taxes.

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 and working capital needs. We also have a $100.0 million revolving credit facility, of which $77.0 million was available as of June 30, 2014.

At June 30, 2014, we had cash of $27.8 million, of which $17.7 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 such cash balances within our foreign subsidiaries, we may elect to distribute such cash to the Company in Puerto Rico. Distributions from the foreign subsidiaries to Puerto Rico may be subject to tax withholding and other tax consequences.

Our primary use of cash is for operating expenses, working capital requirements, capital expenditures, dividend payments and debt service.

Based on our current level of operations, we believe our cash flows from operations and the available senior secured revolving credit facility will be adequate to meet our liquidity needs for the next twelve months. However, our ability to fund future operating expenses, dividend payments and capital expenditures and our ability to make scheduled payments of interest, to pay principal on or refinance our indebtedness and to satisfy any other of our present or future debt obligations will depend on our future operating performance, which will be affected by general economic, financial and other factors beyond our control.

 

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     Six months ended June 30,  
(Dollar amounts in thousands)    2014     2013  

Cash provided by (used in) operating activities

   $ 67,537      $ (13,902

Cash used in investing activities

     (9,495     (12,344

Cash (used in) provided by financing activities

     (52,696     20,199   
  

 

 

   

 

 

 

Increase (decrease) in cash

   $ 5,346      $ (6,047
  

 

 

   

 

 

 

Net cash provided by operating activities for the six months ended June 30, 2014 was $67.5 million compared with cash used in operating activities of $13.9 million for the corresponding 2013 period. The increase of $81.4 million was driven by an increase in income from operations, while cash used in operating activities in the prior year includes cash used to pay certain amounts related to the redemption of the senior notes and the extinguishment of debt of $41.9 million, and a $16.7 million payment related to the termination of the consulting agreements with Popular and Apollo.

Net cash used in investing activities for the six months ended June 30, 2014 was $9.5 million compared with $12.3 million for the corresponding period in 2013. The decrease was mainly attributable to lower purchases of intangible assets and property and equipment in 2014.

Net cash used in financing activities for the six months ended June 30, 2014 was $52.7 million as compared to cash provided by financing activities of $20.2 million in the corresponding 2013 period. Cash used in financing activities consisted of $37.7 million in debt repayment and $15.7 million in quarterly dividends paid. Cash provided by financing activities in 2013 consisted of proceeds from the Initial Public Offering and from the issuance of additional debt amounting to $812.4 million, partially offset by $763.9 million of debt repayment, $12.1 million of debt issuance costs and $16.7 million in taxes paid as a result of cashless exercise of stock options.

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 $9.7 million and $12.3 million for the six months ended June 30, 2014 and 2013, respectively. Capital expenditures are expected to be funded by cash flow from operations and, if necessary, borrowings under our revolving credit facility.

Dividend Payments

We currently have a policy under which we pay a regular quarterly dividend on our common stock, subject to the declaration thereof by our Board each quarter. On February 12, 2014, our Board declared a quarterly cash dividend of $0.10 per share of common stock, which was paid on March 14, 2014 to stockholders of record as of February 25, 2014.

On May 7, 2014, our Board declared a quarterly cash dividend of $0.10 per share of common stock. The cash dividend of $0.10 per share was paid on June 6, 2014 to stockholders of record as of close of business on May 19, 2014.

On August 6, 2014, our Board declared a quarterly cash dividend of $0.10 per share of common stock. The cash dividend of $0.10 per share will be paid on September 5, 2014 to stockholders of record as of close of business on August 18, 2014.

Financial Obligations

Senior Secured Credit Facilities

Term A Loan

As of June 30, 2014, the unpaid principal balance of the Term A Loan was $285.0 million. The Term A Loan requires principal payments on the last business day of each quarter equal to (a) 1.250% of the original principal amount commencing on September 30, 2013 through June 30, 2016; (b) 1.875% of the original principal amount from September 30, 2016 through June 30, 2017; (c) 2.50% of the original principal amount from September 30, 2017 through March 31, 2018; and (d) the remaining outstanding principal amount on the maturity of the Term A Loan on April 17, 2018. For the six months ended June 30, 2014, the Company made principal payments amounting to $7.5 million on the Term A Loan. Interest is based on EVERTEC Group’s first lien secured net leverage ratio and payable at a rate equal to, at the Company’s option, either (a) LIBOR plus an applicable margin ranging from 2.00% to 2.50% or (b) Base Rate, as defined in our 2013 Credit Agreement, plus an applicable margin ranging from 1.00% to 1.50%. The Term A Loan has no LIBOR or Base Rate minimum or floor.

 

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Term B Loan

As of June 30, 2014, the unpaid principal balance of the Term B Loan was $396.0 million. The Term B Loan requires principal payments on the last business day of each quarter equal to 0.250% of the original principal amount commencing on September 30, 2013 and the remaining outstanding principal amount on the maturity of the Term B Loan on April 17, 2020. For the six months ended June 30, 2014, the Company made principal payments amounting to $2.0 million on the Term B Loan. Interest is based on EVERTEC Group’s first lien secured net leverage ratio and payable at a rate equal to, at the Company’s option, either (a) LIBOR plus an applicable margin ranging from 2.50% to 2.75%, or (b) Base Rate plus an applicable margin ranging from 1.50% to 1.75%. The LIBOR and Base Rate are subject to floors of 0.75% and 1.75%, respectively.

Revolving Credit Facility

The revolving credit facility has a balance up to $100.0 million, with an interest rate on loans calculated the same as the applicable Term A Loan rate. The facility matures on April 17, 2018 and has a “commitment fee” payable one business day after the last business day of each quarter calculated based on the daily unused commitment during the preceding quarter. The commitment fee for the unused portion of this facility ranges from 0.125% to 0.375% based on EVERTEC Group’s first lien secured net leverage ratio. As of June 30, 2014, the outstanding balance of the revolving credit facility was $23.0 million. For the six months ended June 30, 2014, the Company made payments amounting to $27.0 million on the revolving credit facility.

All loans may be prepaid without premium or penalty. The new senior secured credit facilities allow EVERTEC Group to obtain, on an uncommitted basis at the sole discretion of participating lenders, an incremental amount of term loan and/or revolving credit facility commitments not to exceed the greater of (i) $200.0 million and (ii) maximum amount of debt that would not cause EVERTEC Group’s pro forma first lien secured net leverage ratio to exceed 4.25 to 1.00.

The senior secured revolving credit facility is available for general corporate purposes and includes borrowing capacity available for letters of credit and for short-term borrowings referred to as swing line borrowings. All obligations under the new senior secured credit facilities are unconditionally guaranteed by Holdings and, subject to certain exceptions, each of EVERTEC Group’s existing and future wholly-owned subsidiaries. All obligations under the new senior secured credit facilities, and the guarantees of those obligations, are secured by substantially all of EVERTEC Group’s assets and the assets of the guarantors, subject to certain exceptions.

See Note 5 of the Notes to Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information.

Other Short-Term Borrowing

In August 2013, we entered into a financing agreement in the ordinary course of business to purchase certain hardware, software and maintenance and related services in the amount of $1.8 million to be repaid in three installments over a term of eight months. As of June 30, 2014, this other short-term borrowing had been fully repaid.

Covenant Compliance

The credit facilities contain various restrictive covenants. The Term A Loan and the revolving facility (subject to certain exceptions) require EVERTEC Group to maintain on a quarterly basis a specified maximum senior secured leverage ratio of up to 6.60 to 1.00 as defined in the 2013 Credit Agreement (total first lien senior secured debt to Adjusted EBITDA). In addition, the 2013 Credit Agreement, among other things: (a) limits EVERTEC Group’s ability and the ability of its subsidiaries to incur additional indebtedness, incur liens, pay dividends or make certain other restricted payments and enter into certain transactions with affiliates; (b) restricts EVERTEC Group’s ability to enter into agreements that would limit the ability of its subsidiaries to pay dividends or make certain payments to its parent company; and (c) places restrictions on EVERTEC Group’s ability and the ability of its subsidiaries to merge or consolidate with any other person or sell, assign, transfer, convey or otherwise dispose of all or substantially all of their assets. However, all of the covenants in these agreements are subject to significant exceptions. As of June 30, 2014, the senior secured leverage ratio was 3.69 to 1.00 and we were in compliance with the applicable restrictive covenants under the 2013 Credit Agreement.

 

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In this Quarterly Report on Form 10-Q, we refer to the term “Adjusted EBITDA” to mean EBITDA as so defined and calculated for purposes of determining compliance with the senior secured leverage ratio based on the financial information for the last twelve months at the end of each quarter.

Net Income Reconciliation to EBITDA, Adjusted EBITDA and Adjusted Net Income

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. We define “Adjusted Net Income” as net income adjusted to exclude unusual items and other adjustments described below.

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 companies in our industry. In addition, our presentation of Adjusted EBITDA is 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 it better reflects our cash flows generation by capturing the actual cash taxes paid rather than our tax expense as calculated under GAAP and excludes the impact of the non-cash amortization and depreciation that was created as a result of the Merger. In evaluating EBITDA, Adjusted EBITDA and Adjusted Net Income, 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 and Adjusted Net Income 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 and Adjusted Net Income or may calculate EBITDA, Adjusted EBITDA and Adjusted Net Income differently than as presented in this Report, limiting their usefulness as a comparative measure.

EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Net Income 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 Net Income 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.

 

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

 

(Dollar amounts in thousands)    Three months ended
June 30, 2014
    Six months ended
June 30, 2014
    Twelve months ended
June 30, 2014
 

Net income

   $ 17,773      $ 35,979      $ 70,821   

Income tax expense

     1,962        4,123        7,094   

Interest expense, net

     6,422        13,256        25,963   

Depreciation and amortization

     16,390        33,004        67,953   
  

 

 

   

 

 

   

 

 

 

EBITDA

     42,547        86,362        171,831   

Software maintenance reimbursement and other costs(1)

     563        1,109        2,316   

Equity income(2)

     (15     (338     (165

Compensation and benefits(3)

     437        925        1,845   

Pro forma cost reduction adjustments(4)

     —          —          25   

Transaction, refinancing and other non-recurring fees(5)

     1,999        2,516        6,886   

Purchase accounting(6)

     (8     173        542   
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

     45,523        90,747        183,280   

Pro forma cost reduction adjustments(7)

     —          —          (25

Operating depreciation and amortization(8)

     (7,281     (14,764     (30,515

Cash interest expense, net(9)

     (5,655     (11,410     (22,582

Cash income taxes(10)

     (402     (402     (1,074
  

 

 

   

 

 

   

 

 

 

Adjusted net income

   $ 32,185      $ 64,171      $ 129,084   
  

 

 

   

 

 

   

 

 

 

Adjusted net income per common share:

      

Basic

   $ 0.41      $ 0.82     

Diluted

   $ 0.41      $ 0.81     

Shares used in computing adjusted net income per common share:

      

Basic

     78,410,554        78,393,042     

Diluted

     79,199,964        79,204,642     

 

(1)  Primarily represents reimbursements received for certain software maintenance expenses as part of the Merger.
(2)  Represents the elimination of non-cash equity earnings from our 19.99% equity investment in CONTADO, net of cash dividends received.
(3)  Primarily represents non-cash equity based compensation expense.
(4)  Represents the pro forma effect of the expected net savings mainly in compensation and benefits from the reduction of certain employees. This pro forma amount was calculated using the net amount of actual expenses for the twelve-month period prior to their separation.
(5)  Represents fees and expenses associated with non-recurring corporate transactions, including the withdrawn senior secured notes offering in the second quarter of 2014 and refinancing and debt extinguishment in the second quarter of 2013.
(6)  Represents the elimination of the effects of purchase accounting in connection with certain software related arrangements where EVERTEC receives reimbursements from Popular.
(7)  Represents the elimination of the pro-forma benefits described in note (4) above.
(8)  Represents operating depreciation and amortization expense which excludes amortization generated as a result of the Merger.
(9)  Represents interest expense, less interest income, as they appear on our consolidated statement of income (loss) and comprehensive income (loss), adjusted to exclude non-cash amortization of the debt issuance costs, premium and accretion of discount and other adjustment related to interest expense.
(10)  Represents cash taxes paid for each period presented.

Off Balance Sheet Arrangements

In the ordinary course of business the Company may enter into commercial commitments. As of June 30, 2014, we had an outstanding letter of credit of $1.1 million with a maturity of less than three months. Also, as of June 30, 2014 we had an off balance sheet item of $36.6 million related to the unused amount of the windfall that is available to offset future taxable income.

See Note 8 of the Unaudited Consolidated Financial Statements within Item I of this Quarterly Report on Form 10-Q for additional information related to this off balance sheet item.

 

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Seasonality

Our payment businesses generally experiences increased activity during the traditional holiday shopping periods and around other nationally recognized holidays.

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 senior secured credit facilities accrue interest at variable rates and only the Term B Loan is subject to floors or minimum rates. A 100 basis point increase in interest rates over our floor(s) on our debt balances outstanding as of June 30, 2014 under the senior secured credit facilities would increase our annual interest expense by approximately $6.8 million, excluding the revolving credit facility. 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.

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) income in the unaudited consolidated balance sheet, except for highly inflationary environments in which the effects would be included in Other operating income in the consolidated statements of income (loss) and comprehensive income (loss). At June 30, 2014, the Company had $6.5 million in an unfavorable foreign currency translation adjustment as part of accumulated other comprehensive (loss) income compared with a favorable foreign currency translation adjustment of $0.4 million at December 31, 2013.

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) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act. Based upon their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of June 30, 2014, the Company’s disclosure controls and procedures are effective at the reasonable assurance level.

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 June 30, 2014 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 2013 Form 10-K.

The risks described in our 2013 Form 10-K and in this report 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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

 

  10.61*   Amended and Restated Employment agreement dated July 1, 2014, by and between EVERTEC Group, LLC and Carlos J. Ramírez
  10.62*   Amended and Restated Employment agreement dated July 1, 2014, by and between EVERTEC Group, LLC and Eduardo Franco de Camargo
  10.63*   Amended and Restated Employment agreement dated July 1, 2014, by and between EVERTEC Group, LLC and Juan J. Román Jiménez
  10.64*   Amended and Restated Employment agreement dated July 1, 2014, by and between EVERTEC Group, LLC and Miguel Vizcarrondo
  10.65*   Amended and Restated Employment agreement dated July 1, 2014, by and between EVERTEC Group, LLC and Peter Harrington
  10.66*   Amended and Restated Employment agreement dated July 1, 2014, by and between EVERTEC Group, LLC and Phil Steurer
  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

 

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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.
*** Pursuant to applicable securities laws and regulations, the Company is deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and is not subject to liability under any anti-fraud provisions of the federal securities laws as long as the Company has made a good faith attempt to comply with the submission requirements and promptly amends the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability.

 

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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: August 7, 2014     By:  

/s/ Peter Harrington

   

Peter Harrington

Chief Executive Officer

Date: August 7, 2014     By:  

/s/ Juan J. Román

   

Juan J. Román

Chief Financial Officer

 

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