Attached files
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EXCEL - IDEA: XBRL DOCUMENT - EVERTEC Group, LLC | Financial_Report.xls |
EX-10.9 - EX-10.9 - EVERTEC Group, LLC | d333610dex109.htm |
EX-10.7 - EX-10.7 - EVERTEC Group, LLC | d333610dex107.htm |
EX-32.1 - EX-32.1 - EVERTEC Group, LLC | d333610dex321.htm |
EX-10.8 - EX-10.8 - EVERTEC Group, LLC | d333610dex108.htm |
EX-31.2 - EX-31.2 - EVERTEC Group, LLC | d333610dex312.htm |
EX-31.1 - EX-31.1 - EVERTEC Group, LLC | d333610dex311.htm |
EX-32.2 - EX-32.2 - EVERTEC Group, LLC | d333610dex322.htm |
EX-10.2 - EX-10.2 - EVERTEC Group, LLC | d333610dex102.htm |
EX-10.6 - EX-10.6 - EVERTEC Group, LLC | d333610dex106.htm |
EX-10.5 - EX-10.5 - EVERTEC Group, LLC | d333610dex105.htm |
EX-10.4 - EX-10.4 - EVERTEC Group, LLC | d333610dex104.htm |
EX-10.1 - EX-10.1 - EVERTEC Group, LLC | d333610dex101.htm |
EX-10.3 - EX-10.3 - EVERTEC Group, LLC | d333610dex103.htm |
EX-10.11 - EX-10.11 - EVERTEC Group, LLC | d333610dex1011.htm |
EX-10.12 - EX-10.12 - EVERTEC Group, LLC | d333610dex1012.htm |
EX-10.10 - EX-10.10 - EVERTEC Group, LLC | d333610dex1010.htm |
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 March 31, 2012
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 333-173504
EVERTEC, LLC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Puerto Rico | 66-0449729 | |
(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
(Registrants 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 ¨ No x
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 issuers classes of common stock, as of the latest practicable date.
At May 11, 2012, there were 100 outstanding Limited Liability Company Membership Units of EVERTEC, LLC.
Table of Contents
Page | ||||||
1 | ||||||
Item 1. |
1 | |||||
Unaudited Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011 |
1 | |||||
2 | ||||||
3 | ||||||
Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011 |
4 | |||||
5 | ||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
25 | ||||
Item 3. |
33 | |||||
Item 4. |
33 | |||||
34 | ||||||
Item 1. |
34 | |||||
Item 1A. |
34 | |||||
Item 2. |
Unregistered Sales of Equity in Securities and Use of Proceeds |
34 | ||||
Item 3. |
34 | |||||
Item 4. |
34 | |||||
Item 5. |
34 | |||||
Item 6. |
34 | |||||
S-1 |
Table of Contents
FORWARD-LOOKING STATEMENTS
Certain statements in this Report contain 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 high level of indebtedness and restrictions contained in our debt agreements, including our senior secured credit facilities and the indenture governing our senior notes, 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; |
| our reliance on our relationship with Popular, Inc. (Popular) for a significant portion of our revenues and with Banco Popular de Puerto Rico, Populars principal banking subsidiary, to grow our Merchant Acquiring business; |
| our ability to renew our client contracts on terms favorable to us; |
| 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; |
| 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; |
| 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; |
| 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 federal, state and local regulatory requirements; |
| evolving industry standards and adverse changes in global economic, political and other conditions; 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. Forward-looking statements should, therefore, be considered in light of various factors, including those set forth under Risk Factors, in Managements Discussion and Analysis of Financial Condition and Results of Operations elsewhere in this Report and in the Companys Annual Report on Form 10-K for the year ended December 31, 2011 (the Annual Report on Form 10-K). These forward-looking statements speak only as of the date of this Report, and we do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events.
Table of Contents
EVERTEC, Inc. (Unaudited) Consolidated Balance Sheets
(Dollar amounts in thousands)
March 31, 2012 | December 31, 2011 | |||||||
Assets |
||||||||
Current Assets: |
||||||||
Cash |
$ | 80,358 | $ | 53,523 | ||||
Restricted cash |
5,508 | 5,288 | ||||||
Accounts receivable, net |
57,230 | 60,930 | ||||||
Prepaid expenses and other assets |
19,592 | 21,526 | ||||||
|
|
|
|
|||||
Total current assets |
162,688 | 141,267 | ||||||
Investments in equity investees |
12,292 | 12,267 | ||||||
Property and equipment, net |
35,163 | 36,685 | ||||||
Goodwill |
372,506 | 371,712 | ||||||
Other intangible assets, net |
436,416 | 448,914 | ||||||
Other long-term assets |
21,731 | 22,894 | ||||||
|
|
|
|
|||||
Total assets |
$ | 1,040,796 | $ | 1,033,739 | ||||
|
|
|
|
|||||
Liabilities and stockholders equity |
||||||||
Current Liabilities: |
||||||||
Accrued liabilities |
$ | 37,783 | $ | 29,581 | ||||
Accounts payable |
17,473 | 21,786 | ||||||
Unearned income |
915 | 900 | ||||||
Income tax payable |
2,002 | 3,383 | ||||||
Deferred tax liability, net |
9,900 | 9,321 | ||||||
|
|
|
|
|||||
Total current liabilities |
68,073 | 64,971 | ||||||
Long-term debt |
524,367 | 523,833 | ||||||
Long-term deferred tax liability, net |
89,955 | 91,431 | ||||||
Other long-term liabilities |
449 | 449 | ||||||
|
|
|
|
|||||
Total liabilities |
682,844 | 680,684 | ||||||
|
|
|
|
|||||
Commitments and contingencies (Note 11) |
||||||||
Stockholders equity |
||||||||
Preferred stock (Par value $1.00; 0.5 million shares authorized; none issued) |
| | ||||||
Common stock (Par value $1.00; 2.5 million shares authorized; 100 shares issued and outstanding) |
| | ||||||
Additional paid-in capital |
326,627 | 326,367 | ||||||
Retained earnings |
31,537 | 28,006 | ||||||
Accumulated other comprehensive loss, net of tax of $19 and $13 |
(212 | ) | (1,318 | ) | ||||
|
|
|
|
|||||
Total stockholders equity |
357,952 | 353,055 | ||||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 1,040,796 | $ | 1,033,739 | ||||
|
|
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
1
Table of Contents
EVERTEC, Inc. (Unaudited) Consolidated Statements of Income and Comprehensive Income
(Dollar amounts in thousands)
Three months ended March 31, | ||||||||
2012 | 2011 | |||||||
Revenues |
||||||||
Transaction processing (from affiliates: $7,127 and $6,074) |
$ | 22,899 | $ | 20,271 | ||||
Merchant acquiring, net (from affiliates: $1,929 and $2,226) |
17,661 | 14,748 | ||||||
Business solutions (from affiliates: $30,147 and $30,651) |
41,928 | 40,771 | ||||||
|
|
|
|
|||||
Total revenues |
82,488 | 75,790 | ||||||
|
|
|
|
|||||
Operating costs and expenses |
||||||||
Cost of revenues, exclusive of depreciation and amortization shown below |
37,741 | 37,504 | ||||||
Selling, general and administrative expenses |
8,987 | 8,495 | ||||||
Depreciation and amortization |
17,922 | 17,372 | ||||||
|
|
|
|
|||||
Total operating costs and expenses |
64,650 | 63,371 | ||||||
|
|
|
|
|||||
Income from operations |
17,838 | 12,419 | ||||||
|
|
|
|
|||||
Non-operating expenses |
||||||||
Interest income |
117 | 314 | ||||||
Interest expense |
(11,176 | ) | (14,122 | ) | ||||
Earnings of equity method investments |
66 | | ||||||
Other expenses |
(2,260 | ) | (3,886 | ) | ||||
|
|
|
|
|||||
Total non-operating expenses |
(13,253 | ) | (17,694 | ) | ||||
|
|
|
|
|||||
Income (loss) before income taxes |
4,585 | (5,275 | ) | |||||
Income tax expense (benefit) |
1,054 | (29,146 | ) | |||||
|
|
|
|
|||||
Net income |
3,531 | 23,871 | ||||||
Other comprehensive income, net of tax of $6 and $0 |
||||||||
Foreign currency translation adjustments |
1,106 | 444 | ||||||
|
|
|
|
|||||
Total comprehensive income |
$ | 4,637 | $ | 24,315 | ||||
|
|
|
|
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)
Number of Shares of Common Stock |
Common Stock |
Additional Paid-in Capital |
Retained Earnings |
Accumulated Other Comprehensive Loss |
Total Stockholders Equity |
|||||||||||||||||||
Balance at December 31, 2011 |
100 | $ | | $ | 326,367 | $ | 28,006 | $ | (1,318 | ) | $ | 353,055 | ||||||||||||
Share-based compensation recognized |
260 | 260 | ||||||||||||||||||||||
Net income |
3,531 | 3,531 | ||||||||||||||||||||||
Other comprehensive income, net of tax of $6 |
1,106 | 1,106 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance at March 31, 2012 |
100 | $ | | $ | 326,627 | $ | 31,537 | $ | (212 | ) | $ | 357,952 | ||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
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)
Three months ended March 31, | ||||||||
2012 | 2011 | |||||||
Cash flows from operating activities |
||||||||
Net income |
$ | 3,531 | $ | 23,871 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
17,922 | 17,372 | ||||||
Amortization of debt issue costs and accretion of discount |
1,170 | 2,192 | ||||||
Provision for doubtful accounts and sundry losses |
396 | 231 | ||||||
Deferred tax benefit |
(962 | ) | (29,334 | ) | ||||
Share-based compensation |
260 | 112 | ||||||
Realized loss on derivative |
| 1,214 | ||||||
Unrealized loss of indemnification assets |
175 | 476 | ||||||
Amortization of a contract liability |
(703 | ) | (1,053 | ) | ||||
Loss on disposition of property and equipment and other intangibles |
20 | | ||||||
Equity in earnings of investment |
(66 | ) | | |||||
Prepayment penalty related to debt refinancing |
| (3,387 | ) | |||||
(Increase) decrease in assets: |
||||||||
Accounts receivable, net |
3,930 | 8,333 | ||||||
Prepaid expenses and other assets |
1,934 | (627 | ) | |||||
Increase (decrease) in liabilities: |
||||||||
Accounts payable and accrued liabilities |
4,477 | 2,545 | ||||||
Income tax payable |
(1,381 | ) | (190 | ) | ||||
Unearned income |
15 | 52 | ||||||
Other long-term liabilities |
| (113 | ) | |||||
|
|
|
|
|||||
Total adjustments |
27,187 | (2,177 | ) | |||||
|
|
|
|
|||||
Net cash provided by operating activities |
30,718 | 21,694 | ||||||
|
|
|
|
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Cash flows from investing activities |
||||||||
Net (increase) decrease in restricted cash |
(220 | ) | 577 | |||||
Intangible assets acquired |
(1,139 | ) | (4,448 | ) | ||||
Property and equipment acquired |
(2,532 | ) | (2,702 | ) | ||||
Proceeds from sales of property and equipment |
8 | | ||||||
Acquisition of an equity method investment |
| (9,244 | ) | |||||
|
|
|
|
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Net cash used in investing activities |
(3,883 | ) | (15,817 | ) | ||||
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|
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Cash flows from financing activities |
||||||||
Repayment and repurchase of long-term debt and other liabilities |
| (888 | ) | |||||
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|
|
|
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Net cash used in financing activities |
| (888 | ) | |||||
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|
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|
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Net increase in cash |
26,835 | 4,989 | ||||||
Cash at beginning of the period |
53,523 | 55,199 | ||||||
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|
|
|
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Cash at end of the period |
$ | 80,358 | $ | 60,188 | ||||
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|
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Supplemental disclosure of non-cash activities: |
||||||||
Foreign currency translation adjustments |
$ | 1,106 | $ | (444 | ) |
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 Summary of Significant Accounting Policies |
6 | |||
7 | ||||
7 | ||||
8 | ||||
8 | ||||
9 | ||||
10 | ||||
12 | ||||
12 | ||||
13 | ||||
14 | ||||
15 | ||||
16 | ||||
Note 14 Guarantor of the Senior Notes and Non-Guarantor Consolidated Financial Information |
17 | |||
22 |
5
Table of Contents
EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements
Note 1 The Company and Summary of Significant Accounting Policies
The Company
EVERTEC, LLC (formerly known as EVERTEC, Inc.) and its subsidiaries are a diversified processing business, offering transaction and payment processing services, merchant acquiring services and business process management solutions in Puerto Rico and certain countries throughout the Caribbean and Latin America. We own and operate the ATH network, the leading debit payment and automated teller machine (ATM) network in Puerto Rico. Our products and services include point-of-sale (POS) processing, network and switch services, ATM driving services, core bank processing, business process outsourcing solutions, technology infrastructure management and merchant acquiring services. Our Merchant Acquiring business is the largest merchant acquirer in Puerto Rico, and the fifth largest in Latin America, providing an end-to-end electronic payment offering to over 16,000 merchants. EVERTECs subsidiaries include Sense Software International Corp. (Sense), EVERTEC Dominicana SAS., EVERTEC Latinoamérica, S.A., ATH Costa Rica, S.A. (ATH CR), EVERTEC Finance Corp. and T.I.I. Smart Solutions, Inc.
On April 17, 2012, EVERTEC was converted from a Puerto Rico corporation to a Puerto Rico limited liability company (the Conversion) for the purpose of improving the consolidated tax efficiency of EVERTEC and its subsidiaries by taking advantage of recent changes to the Puerto Rico Internal Revenue Code, as amended, that permit limited liability companies to be treated as partnerships that are pass-through entities for Puerto Rico tax purposes. Concurrent with the Conversion, Carib Holdings, LLC (formerly known as Carib Holdings, Inc., Carib Holdings), which is EVERTECs direct parent, was also converted from a Puerto Rico corporation to a Puerto Rico limited liability company. Prior to these conversions, Carib Latam Holdings, Inc. (Carib Inc.) was formed in order to act as the new parent company of Carib Holdings and its subsidiaries, including EVERTEC. In addition, in connection with the Conversion, EVERTEC formed a new wholly owned subsidiary, EVERTEC Finance Corp., a corporation organized under the laws of the Commonwealth of Puerto Rico (EVERTEC Finance), to act as co-issuer of the 11% senior notes due 2018. See Note 15 for additional information regarding these and other significant transactions that occurred after March 31, 2012.
Except as otherwise indicated or unless the context otherwise requires, (a) the terms EVERTEC, LLC, EVERTEC,we, us, our and our company refer for periods on and after the Conversion to EVERTEC, LLC and its subsidiaries (including EVERTEC Finance) on a consolidated basis and refer for periods prior to the Conversion to EVERTEC, Inc. and its subsidiaries on a consolidated basis, (b) the term Carib Holdings refers for periods on or after the Conversion to Carib Holdings, LLC and for periods prior to the Conversion to Carib Holdings, Inc. and (c) the term Co-Issuers refers to EVERTEC and EVERTEC Finance and none of EVERTECs other subsidiaries.
Basis of Presentation
The unaudited consolidated financial statements include the accounts of EVERTEC and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The preparation of the accompanying unaudited consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements. Actual results could differ from the estimates.
In the opinion of management, the accompanying unaudited 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. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from the unaudited consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). All of these unaudited consolidated financial statements should be read in conjunction with the audited consolidated and combined financial statements for the fiscal year ended December 31, 2011, included in the Companys Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results of operations for the full year or any future period.
Consolidated Balance Sheet as of December 31, 2011 was derived from the audited consolidated and combined financial statements for the fiscal year ended December 31, 2011 included in the Annual Report on Form 10-K.
Certain reclassifications have been made to the March 31, 2011 unaudited consolidated financial statements and related notes to conform with the presentation in 2012.
6
Table of Contents
EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements
The Merger
On June 30, 2010, Popular, Inc. (Popular), EVERTEC, and two newly formed subsidiaries of a fund managed by an affiliate of Apollo Global Management, LLC (Apollo), AP Carib Holdings, Ltd. (AP Carib) and Carib Acquisition, Inc. (Merger Sub), entered into an Agreement and Plan of Merger pursuant to which, on September 30, 2010, Merger Sub was merged with and into EVERTEC (the Merger), with EVERTEC continuing as the surviving entity. Following the effective time of the Merger, AP Carib and Popular contributed their respective shares of EVERTEC capital stock to Carib Holdings, Inc. (now known as Carib Holdings, LLC) (Carib Holdings) in exchange for shares of Carib Holdings voting capital stock. Following that contribution, EVERTEC became a wholly-owned subsidiary of Carib Holdings, with AP Carib and Popular owning approximately 51% and 49%, respectively, of the outstanding voting capital stock of Carib Holdings. The acquisition of EVERTEC was accounted for as a business combination using the purchase method of accounting, whereby the purchase price was allocated to tangible and intangible assets acquired and liabilities assumed, based on their estimated fair market values. Fair value measurements have been applied based on assumptions that market participants would use in the pricing of the assets or liabilities.
During 2011, retrospective adjustments were made to the estimated fair values of assets acquired and liabilities assumed associated with the Merger to reflect new information obtained during the measurement period, about facts and circumstances that existed as of the acquisition date that, if known, would have affected the acquisition date fair value measurements.
The following table presents the changes in the unaudited consolidated statement of income as a result of the retrospective adjustments driven by refinements in the tax treatment assumptions of the indemnification assets and the unfavorable contract liability related to a contract with one of Populars clients for the periods below.
(Dollar amounts in thousands) | Three months ended March 31, 2011, as adjusted |
Three months ended March 31, 2011, as reported |
||||||
Loss before income taxes |
$ | (5,275 | ) | $ | (5,275 | ) | ||
Income tax benefit |
(29,146 | ) | (29,046 | ) | ||||
|
|
|
|
|||||
Net income |
$ | 23,871 | $ | 23,771 | ||||
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The Acquisition of an Equity Interest in Consorcio de Tarjetas Dominicanas, S.A. (CONTADO)
On March 31, 2011, the Company acquired a 19.99% interest in CONTADO from a subsidiary of Popular. Popular paid to the Company $10.8 million, which represented 50% of the after tax proceeds received by Popular from the sale of its remaining 33.98% equity interest in CONTADO that was not transferred to the Company, and the Company paid to Popular the $20.0 million held back at the Merger closing date in connection with the anticipated transfer of equity interest in CONTADO. The Company recorded the 19.99% equity interest in CONTADO at approximately $13.0 million, which was the fair value as of March 31, 2011 and accounted for the investment under the equity method of accounting. The purchase price was allocated to assets and liabilities based on their estimated fair values. Fair value measurements have been applied based on assumptions that market participants would use in the pricing of the assets or liabilities.
The agreement to purchase the equity interest in CONTADO and the Companys right to dividends declared or paid by CONTADO during the period required pursuant to certain rights of first refusal held by the other shareholders of CONTADO were treated as freestanding derivatives since the Merger closing date. The derivatives were settled on March 31, 2011. For the three months ended March 31, 2011, the resulting loss of $1.2 million from settlement of the derivatives was recorded in the other expenses line item in the unaudited consolidated statements of income and comprehensive income.
Note 3 Investment in Equity Investees
CONTADO is the largest merchant acquirer and ATM network in the Dominican Republic. The Company used the equity method of accounting to account for its 19.99% equity interest in CONTADO. As a result of the acquisition of the equity interest in CONTADO in 2011, the Company calculated an excess cost of the investment in CONTADO over the amount of underlying equity in net assets of approximately $9.0 million, which was mainly attributed to customer relationships, trademark and goodwill intangibles. The Companys excess basis allocated to amortizable assets is recognized on a straight-line basis over the lives of the appropriate intangibles. The
7
Table of Contents
EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements
Company recognized $66,000 as equity in CONTADOs net income, net of amortization, in the unaudited consolidated statements of income and comprehensive income for the three months ended March 31, 2012.
Note 4 Property and Equipment, net
Property and equipment, net consists of the following:
(Dollar amounts in thousands) | Useful life in years |
March 31, 2012 | December 31, 2011 | |||||||
Buildings |
30 | $ | 2,099 | $ | 2,091 | |||||
Data processing equipment |
3 -5 | 48,275 | 45,883 | |||||||
Furniture and equipment |
3 -10 | 5,974 | 5,912 | |||||||
Leasehold improvements |
5 -10 | 634 | 610 | |||||||
|
|
|
|
|||||||
56,982 | 54,496 | |||||||||
Less - accumulated depreciation and amortization |
(23,329 | ) | (19,316 | ) | ||||||
|
|
|
|
|||||||
Depreciable assets, net |
33,653 | 35,180 | ||||||||
Land |
1,510 | 1,505 | ||||||||
|
|
|
|
|||||||
$ | 35,163 | $ | 36,685 | |||||||
|
|
|
|
Depreciation and amortization expense related to property and equipment was $4.0 million and $3.8 million for the three months ended March 31, 2012 and 2011, respectively.
Note 5 Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill, allocated by reportable segments, were as follows (See Note 13):
(Dollar amounts in thousands) | Transaction processing |
Merchant acquiring, net |
Business solutions | Total | ||||||||||||
Balance at December 31, 2011 |
$ | 199,745 | $ | 166,959 | $ | 5,008 | $ | 371,712 | ||||||||
Foreign currency translation adjustments |
718 | | 76 | 794 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at March 31, 2012 |
$ | 200,463 | $ | 166,959 | $ | 5,084 | $ | 372,506 | ||||||||
|
|
|
|
|
|
|
|
Goodwill is tested for impairment at least annually using a two-step process at each reporting unit level. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired and the second step of the impairment test is unnecessary.
During 2011, the Company completed the impairment evaluation, as described above, and determined that there are no impairment losses to be recognized during the period. The present value of future cash flows was used to determine the fair value of each reporting unit. There were no triggering events or changes in circumstances that subsequent to the impairment test would have required an additional impairment evaluation.
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Table of Contents
EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements
The carrying amount of other intangible assets for the three months ended March 31, 2012 and the year ended December 31, 2011 consisted of the following:
(Dollar amounts in thousands) | March 31, 2012 | |||||||||||||
Useful life in years | Gross amount |
Accumulated amortization |
Net carrying amount |
|||||||||||
Customer relationships |
14 | $ | 313,786 | $ | (33,966 | ) | $ | 279,820 | ||||||
Trademark |
10-14 | 39,950 | (5,196 | ) | 34,754 | |||||||||
Software packages |
3-5 | 108,003 | (37,046 | ) | 70,957 | |||||||||
Non-compete agreement |
15 | 56,539 | (5,654 | ) | 50,885 | |||||||||
|
|
|
|
|
|
|||||||||
$ | 518,278 | $ | (81,862 | ) | $ | 436,416 | ||||||||
|
|
|
|
|
|
|||||||||
(Dollar amounts in thousands) | December 31, 2011 | |||||||||||||
Useful life in years | Gross amount |
Accumulated amortization |
Net carrying amount |
|||||||||||
Customer relationships |
14 | $ | 313,543 | $ | (28,372 | ) | $ | 285,171 | ||||||
Trademark |
10-14 | 39,950 | (4,330 | ) | 35,620 | |||||||||
Software packages |
3-5 | 106,865 | (30,569 | ) | 76,296 | |||||||||
Non-compete agreement |
15 | 56,539 | (4,712 | ) | 51,827 | |||||||||
|
|
|
|
|
|
|||||||||
$ | 516,897 | $ | (67,983 | ) | $ | 448,914 | ||||||||
|
|
|
|
|
|
For the three months ended March 31, 2012 and 2011, the Company recorded amortization expense related to other intangibles of $13.9 million and $13.6 million, respectively.
Net debt as of March 31, 2012 and December 31, 2011 was as follows:
(Dollar amounts in thousands) | March 31, 2012 | December 31, 2011 | ||||||
Senior Secured Credit Facility due in September 2016 paying interest at a variable interest rate (London InterBank Offered Rate (LIBOR) plus margin(1) ) |
$ |
313,867 |
|
$ |
313,333 |
| ||
Senior Notes due on October 1, 2018, paying interest semi-annually at a rate of 11% per annum |
210,500 | 210,500 |
(1) | Subject to a minimum rate (LIBOR floor) of 1.50% at March 31, 2012 and December 31, 2011, respectively. |
See Note 15 for changes to our long-term debt that occurred after March 31, 2012.
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Table of Contents
EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements
Note 7 Financial Instruments and Fair Value Measurements
Recurring Fair Value Measurements
Fair value measurement provisions establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. This guidance describes three levels of input that may be used to measure fair value:
Level 1: Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
Level 2: Inputs, other than quoted prices included in Level 1, which are observable for the asset or liability through corroboration with market data at the measurement date.
Level 3: Unobservable inputs that reflect managements best estimate of what market participants would use in pricing the asset or liability at the measurement date.
The Company uses observable inputs when available. Fair value is based upon quoted market prices when available. If market prices are not available, the Company may employ internally-developed models that primarily 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 instruments 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 March 31, 2012 and December 31, 2011 for assets measured at fair value on a recurring basis:
(Dollar amounts in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
March 31, 2012 |
||||||||||||||||
Financial assets: |
||||||||||||||||
Indemnification assets: |
||||||||||||||||
Software cost reimbursement |
$ | | $ | | $ | 6,580 | $ | 6,580 | ||||||||
December 31, 2011 |
||||||||||||||||
Financial assets: |
||||||||||||||||
Indemnification assets: |
||||||||||||||||
Software cost reimbursement |
$ | | $ | | $ | 7,113 | $ | 7,113 | ||||||||
Expected reimbursement |
| | 351 | 351 |
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 managements 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 are a result of the purchase accounting related to the Merger dated September 30, 2010, and have termination dates ranging from February 2012 until September 2015. 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 March 31, 2012, therefore resulting in a net unrealized loss of approximately $0.2 million, which is reflected within the other expense caption in the unaudited consolidated statements of income and comprehensive income. 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 sheet.
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Table of Contents
EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements
The unobservable inputs related to the Companys indemnification assets as of March 31, 2012 using the discounted cash flow model include the discounted rate of 7.88% and the present value of the cash flows amounting to $6.7 million.
For indemnification assets a significant increase or decrease in market rates and cash flows could result in a significant impact 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.
The following table presents the carrying value, as applicable, and estimated fair values for financial instruments at March 31, 2012 and December 31, 2011:
March 31, 2012 | December 31, 2011 | |||||||||||||||
(Dollar amounts in thousands) | Carrying Amount |
Fair Value |
Carrying Amount |
Fair Value |
||||||||||||
Financial assets: |
||||||||||||||||
Indemnification assets |
||||||||||||||||
Software cost reimbursement |
$ | 6,580 | $ | 6,580 | $ | 7,113 | $ | 7,113 | ||||||||
Expected reimbursements |
| | 351 | 351 | ||||||||||||
Financial liabilities: |
||||||||||||||||
Senior secured term loan |
$ | 313,867 | $ | 325,429 | $ | 313,333 | $ | 317,979 | ||||||||
Senior notes |
210,500 | 228,129 | 210,500 | 213,921 |
The senior secured term loan and the senior notes prices at March 31, 2012 and December 31, 2011 were obtained using 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 senior secured term loan and senior notes, which are not measured at fair value in the balance sheet, could be categorized as level 3 in the fair value hierarchy.
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EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements
The following table provides a summary of the change in fair value of the Companys Level 3 assets:
Three months ended March 31, | ||||||||
(Dollar amounts in thousands) | 2012 | 2011 | ||||||
Indemnification assets: |
||||||||
Beginning balance |
$ | 7,464 | $ | 14,836 | ||||
Payments received |
(709 | ) | (1,823 | ) | ||||
Unrealized loss recognized in other expenses |
(175 | ) | (476 | ) | ||||
|
|
|
|
|||||
Ending balance |
$ | 6,580 | $ | 12,537 | ||||
|
|
|
|
|||||
Derivatives assets: |
||||||||
Beginning balance |
$ | | $ | 4,960 | ||||
Net settlement of derivative |
| (3,746 | ) | |||||
Realized loss on derivative recognized in other expenses |
| (1,214 | ) | |||||
|
|
|
|
|||||
Ending balance |
$ | | $ | | ||||
|
|
|
|
Note 8 Merchant Acquiring Revenues
Merchant acquiring revenues are presented net of interchange fees and assessments charged by credit and debit card associations. Said interchange fees and assessments charged by credit and debit card associations to the Company amounted to $21.1 million and $23.9 million for the three months ended March 31, 2012 and 2011, respectively.
Note 9 Share-based Compensation
The following table summarizes the nonvested stock options activity for the three months ended March 31, 2012:
Nonvested stock options |
Shares | Weighted-average exercise prices |
||||||
Nonvested at December 31, 2011 |
2,530,987 | $ | 10.00 | |||||
Granted(1) |
398,955 | 16.38 | ||||||
Forfeitures |
(545,365 | ) | 10.00 | |||||
|
|
|
|
|||||
Nonvested at March 31, 2012 |
2,384,577 | $ | 11.07 | |||||
|
|
|
|
(1) | Relates to new options granted in February 2012. |
Management uses the fair value method of recording stock-based compensation as described in the guidance for stock compensation in ASC topic 718. The fair value of the stock options granted during 2012 was estimated using the Black-Scholes-Merton (BSM) option pricing model for Tranche A options granted under the Stock Incentive Plan and the Monte Carlo simulation analysis for Tranche B and Tranche C options granted under the Stock Incentive Plan.
The following table summarizes the nonvested restricted shares activity for the three months ended March 31, 2012:
Nonvested restricted shares |
Shares | Weighted-average grant date fair value |
||||||
Nonvested at December 31, 2011 |
63,058 | $ | 10.00 | |||||
Granted |
14,646 | 17.07 | ||||||
Vested |
(5,383 | ) | 10.00 | |||||
|
|
|
|
|||||
Nonvested at March 31, 2012 |
72,321 | $ | 11.43 | |||||
|
|
|
|
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Table of Contents
EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements
Share-based compensation recognized was as follows:
Three months ended March 31, | ||||||||
(Dollar amounts in thousands) | 2012 | 2011 | ||||||
Share-based compensation recognized, net |
||||||||
Stock options, tax benefit of $47 and $29 |
$ | 157 | $ | 96 | ||||
Restricted shares, tax benefit of $31 and $5 |
103 | 16 |
The maximum unrecognized cost for stock options was $7.2 million as of March 31, 2012, which includes $2.3 million, $2.5 million and $2.4 million related to Tranche A, Tranche B and Tranche C options, respectively.
The maximum unrecognized compensation cost for restricted stock was $0.8 million as of March 31, 2012.
See Note 15 for information regarding the payment of a dividend during the second quarter of 2012, which also resulted in a change to the exercise price of the stock options.
Under Puerto Rico income tax law, the Company is not allowed to file consolidated tax returns with its subsidiaries. On January 21, 2011 a new Internal Revenue Code (the Code) was approved by the Commonwealth of Puerto Rico providing a maximum corporate income tax rate of 30%, as well as additional tax credits and deductions, among other tax reliefs and changes. As a result, during the first quarter of 2011, the Company recognized a reduction in its deferred tax liability of $27.6 million, which had been recognized at a higher marginal corporate income tax rate.
The components of income tax expense (benefit) for the three months ended March 31, 2012 and 2011 consisted of the following:
Three months ended March 31, | ||||||||
(Dollar amounts in thousands) | 2012 | 2011 | ||||||
Current tax provision |
$ | 2,016 | $ | 188 | ||||
Deferred tax benefit |
(962 | ) | (29,334 | ) | ||||
|
|
|
|
|||||
$ | 1,054 | $ | (29,146 | ) | ||||
|
|
|
|
As discussed above, the Company conducts operations in Puerto Rico and certain countries throughout the Caribbean and Latin America. As a result, the income tax expense (benefit) includes the effect of taxes paid to the Puerto Rico government as well as foreign jurisdictions. The following table presents the segregation of income tax expense (benefit) based on location of operations:
Three months ended March 31, | ||||||||
(Dollar amounts in thousands) | 2012 | 2011 | ||||||
Current tax provision |
||||||||
Puerto Rico |
$ | 1,908 | $ | (386 | ) | |||
United States |
184 | 123 | ||||||
Foreign countries |
(76 | ) | 451 | |||||
|
|
|
|
|||||
$ | 2,016 | $ | 188 | |||||
|
|
|
|
|||||
Deferred tax benefit |
||||||||
Puerto Rico |
$ | (809 | ) | $ | (29,178 | ) | ||
Foreign countries |
(153 | ) | (156 | ) | ||||
|
|
|
|
|||||
$ | (962 | ) | $ | (29,334 | ) | |||
|
|
|
|
13
Table of Contents
EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements
The following table presents the components of the Companys deferred tax assets and liabilities:
(Dollar amounts in thousands) | March 31, 2012 | December 31, 2011 | ||||||
Deferred tax assets |
||||||||
Allowance for doubtful accounts |
$ | 542 | $ | 540 | ||||
Unfavorable contract liability |
195 | 211 | ||||||
Other temporary assets |
1,035 | 909 | ||||||
|
|
|
|
|||||
Total gross deferred tax assets |
1,772 | 1,660 | ||||||
|
|
|
|
|||||
Deferred tax liabilities (DTL) |
||||||||
Deferred compensation |
$ | 2,946 | $ | 2,915 | ||||
Difference between the assigned values and the tax basis of assets and liabilities recognized in purchase |
89,883 | 90,766 | ||||||
Debt issue cost |
8,409 | 8,513 | ||||||
Other temporary liabilities |
389 | 218 | ||||||
|
|
|
|
|||||
Total gross deferred tax liabilities |
101,627 | 102,412 | ||||||
|
|
|
|
|||||
Deferred tax liability, net |
$ | (99,855 | ) | $ | (100,752 | ) | ||
|
|
|
|
The income tax expense (benefit) differs from the amount computed by applying the Puerto Rico statutory income tax rate to the income before income taxes as a result of the following:
(Dollar amounts in thousands) | Three months ended March 31, | |||||||
2012 | 2011 | |||||||
Computed income tax at statutory rates |
$ | 1,376 | $ | (1,582 | ) | |||
Benefit of net tax-exempt interest income |
(2 | ) | (1 | ) | ||||
Tax benefit due to a change in estimate |
| (676 | ) | |||||
Differences in tax rates due to multiple jurisdictions |
152 | 101 | ||||||
Effect of income subject to tax-exemption grant |
(126 | ) | (214 | ) | ||||
Adjustment to DTL due to changes in enacted tax rate |
| (27,629 | ) | |||||
Reversal of tax uncertainties reserve |
(640 | ) | | |||||
Other |
294 | 855 | ||||||
|
|
|
|
|||||
Income tax expense (benefit) |
$ | 1,054 | $ | (29,146 | ) | |||
|
|
|
|
For the quarter ended March 31, 2012, EVERTEC derecognized a liability balance of $0.6 million and estimated accumulated interest of $0.1 million related to a tax position previously recognized because it was no longer more likely than not that the position will be sustained upon examination by the correspondent authorities. The determination was made due to the expiration of the statute of limitations of the corresponding tax authorities. Accordingly, as of March 31, 2012 EVERTEC recorded a revised liability for unrecognized tax benefits of approximately $0.7 million with accrued estimated interest of $0.1 million. The remaining balance of $0.8 million is expected to be reversed within the next twelve months.
On April 17, 2012, as explained above in Note 1, the Company was converted from a Puerto Rico corporation into a Puerto Rico limited liability company in order to take advantage of recent changes to the Code that allow limited liability companies to be treated as partnerships that are pass-through entities for Puerto Rico tax purposes. Also, the Company entered into a Tax Payment Agreement pursuant to which the Company will be obligated to make certain payments to Carib Holdings or Carib Inc. for taxable periods or portions thereof occurring on or after April 17, 2012, among other things. See Note 15 for additional information regarding this transaction.
Note 11 Commitments and Contingencies
Certain lease agreements with related parties 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 March 31, 2012 and December 31, 2011 amounted to $0.4 million and $0.5 million, respectively, and is included within the accounts receivable, net caption in the accompanying consolidated balance sheets.
Rent expense of office facilities and real estate for the three months ended March 31, 2012 and 2011 amounted to $2.0 million and $2.0 million, respectively. Also, rent expense for telecommunications and other equipment for the three months ended March 31, 2012 and 2011 amounted to $1.8 million and $2.0 million, respectively.
The legal entities within EVERTEC are defendants in a number of legal proceedings arising in the ordinary course of business. Based on the opinion of legal counsel, management believes that the final disposition of these matters will not have a material adverse effect on the business, results of operations or financial condition of the Company.
14
Table of Contents
EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements
On a quarterly basis, the Company assesses its liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. For matters where it is probable that the Company will incur a loss and the amount can be reasonably estimated, an accrual for the loss is established. Once established, the accrual is adjusted as appropriate to reflect any relevant developments. For matters where a loss is not probable or the amount of the loss cannot be estimated, no accrual is established. Based on this process, the Company has identified certain claims where it is probable that it will incur a loss, but in the aggregate the loss would be minimal. For other claims, where the proceedings are in an initial phase, the Company is unable to estimate the range of possible loss for such legal proceedings. However, the Company at this time believes that any loss related to these latter claims will not be material.
Note 12 Related Party Transactions
The following table presents the Companys transactions with related parties for the three months ended March 31, 2012 and 2011:
Three months ended March 31, | ||||||||
(Dollar amounts in thousands) | 2012 | 2011 | ||||||
Total revenues from affiliates (1)(2) |
$ | 39,203 | $ | 38,951 | ||||
|
|
|
|
|||||
Selling, general and administrative expenses |
||||||||
Rent and other fees (3) |
$ | 3,159 | $ | 2,967 | ||||
|
|
|
|
|||||
Interest earned from and charged by affiliates |
||||||||
Interest income |
$ | 93 | $ | 295 | ||||
|
|
|
|
|||||
Interest expense(4) |
$ | 1,885 | $ | 2,309 | ||||
|
|
|
|
(1) | Total revenues from Popular represent 46% and 51% of total revenues for each of the periods presented above. |
(2) | Includes revenues generated from investees accounted for under the equity method (CONTADO) of $0.9 million for the quarter ended March 31, 2012. |
(3) | Includes management fees paid to stockholders amounting to $1.3 million and $0.7 million for the quarters ended March 31, 2012 and 2011, respectively. |
(4) | Interest expense relates to interest accrued on our senior secured term loan and senior notes held by Popular. |
At March 31, 2012 and December 31, 2011, EVERTEC had the following balances arising from transactions with related parties:
(Dollar amounts in thousands) | March 31, 2012 | December 31, 2011 | ||||||
Cash and restricted cash deposits in affiliated bank |
$ | 77,074 | $ | 52,613 | ||||
|
|
|
|
|||||
Indemnification assets from Popular |
||||||||
Accounts receivable |
$ | 1,895 | $ | 2,553 | ||||
|
|
|
|
|||||
Other long-term assets |
$ | 4,685 | $ | 5,212 | ||||
|
|
|
|
|||||
Liability related to contract with Popular(2) |
||||||||
Accounts payable |
$ | | $ | 703 | ||||
|
|
|
|
|||||
Other due from affiliates |
||||||||
Accounts receivable |
$ | 15,820 | $ | 21,077 | ||||
|
|
|
|
|||||
Accounts payable |
$ | (3,060 | ) | $ | (3,036 | ) | ||
|
|
|
|
|||||
Long-term debt due to affiliate |
$ | 90,186 | $ | 90,186 | ||||
|
|
|
|
(1) | Recorded in connection with (a) reimbursement from Popular regarding services the Company provides to certain customers of Popular at preferential prices and (b) reimbursement from Popular regarding certain software license fees. For the quarter ended March 31, 2012 and the year ended December 31, 2011, the Company received $0.7 million and $7.1 million, respectively, related to these reimbursements. |
(2) | Represents a contract liability to provide certain services to a customer of Popular until February 2012. |
From time to time, EVERTEC obtains performance bonds from insurance companies covering the obligations of EVERTEC under certain contracts. Under the Merger Agreement, Popular is required to, subject to certain exceptions, cause the then outstanding performance bonds to remain outstanding or replace such bonds as needed for five years from the closing date of the Merger. EVERTEC entered into a reimbursement agreement with Popular to mirror Populars obligations. As a result, EVERTEC is required to reimburse Popular for payment of premiums and related charges and indemnify Popular for certain losses, in case EVERTEC fails to perform or otherwise satisfy its obligations covered by such performance bonds.
15
Table of Contents
EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements
EVERTEC had outstanding letters of credit of $2.9 million at March 31, 2012 for which Popular provided collateral. EVERTEC entered into a reimbursement agreement with Popular to mirror Populars obligations. As a result, EVERTEC is required to indemnify Popular for losses, in case EVERTEC fails to honor these letters of credit.
The Company operates in three business segments: transaction processing, merchant acquiring and business solutions.
The transaction processing segment includes diversified payment products and services, including the ATH network and processing services, card processing, payment processing and electronic benefit transfer (EBT) services.
The merchant acquiring segment provides services that allow merchants to accept electronic methods of payment such as debit, credit, prepaid and EBT cards carrying the ATH, Visa, MasterCard, Discover and American Express brands. Services include terminal sales and deployment, front-end authorization processing, settlement and funding processing and customer support.
The business solutions segment offers a full suite of business process management solutions, which include core bank processing, cash processing, item processing, network services, business process outsourcing, professional services for developing customized business solutions and fulfillment for producing and distributing various printed documents.
The Companys business segments are organized based on the nature of products and services. The Chief Operating Decision Maker (CODM) reviews their separate financial information to assess performance and to allocate resources.
Management evaluates the operating results of each of its reportable segments based upon revenues and operating income. Segment asset disclosure is not used by the CODM as a measure of segment performance since the segment evaluation is driven by earnings. As such, segment assets are not disclosed in the notes to the accompanying unaudited consolidated financial statements.
The following tables set forth information about the Companys operations by its three business segments for the periods indicated:
(Dollar amounts in thousands) | Transaction processing |
Merchant acquiring, net |
Business solutions |
Other | Total | |||||||||||||||
Three months ended March 31, 2012 |
||||||||||||||||||||
Revenues |
$ | 28,229 | $ | 17,661 | $ | 41,928 | $ | (5,330 | ) (1) | $ | 82,488 | |||||||||
Income from operations |
12,309 | 8,541 | 9,080 | (12,092 | ) (2) | 17,838 | ||||||||||||||
Three months ended March 31, 2011 |
||||||||||||||||||||
Revenues |
24,842 | 14,748 | 40,771 | (4,571 | ) (1) | 75,790 | ||||||||||||||
Income from operations |
10,886 | 7,369 | 7,411 | (13,247 | ) (2) | 12,419 |
(1) | Represents the elimination of intersegment revenues for services provided by the transaction processing segment to merchant acquiring segment, and other miscellaneous intersegment revenues. |
(2) | Represents non-recurring compensation and benefits, professional fees, transaction and/or transition costs, and incremental depreciation and amortization from purchase accounting adjustments and other miscellaneous intersegment revenues. |
16
Table of Contents
EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements
The reconciliation of income from operations to consolidated net income for the three months ended March 31, 2012 and 2011 is as follows:
Three months ended March 31, | ||||||||
(Dollar amounts in thousands) | 2012 | 2011 | ||||||
Segment income from operations |
||||||||
Transaction processing |
$ | 12,309 | $ | 10,886 | ||||
Merchant acquiring |
8,541 | 7,369 | ||||||
Business solutions |
9,080 | 7,411 | ||||||
Other(1) |
(12,092 | ) | (13,247 | ) | ||||
|
|
|
|
|||||
Income from operations |
$ | 17,838 | $ | 12,419 | ||||
|
|
|
|
|||||
Interest expense |
(11,059 | ) | (13,808 | ) | ||||
Earnings of equity method investments |
66 | | ||||||
Other expenses |
(2,260 | ) | (3,886 | ) | ||||
Income tax expense (benefit) |
1,054 | (29,146 | ) | |||||
|
|
|
|
|||||
Net income |
$ | 3,531 | $ | 23,871 | ||||
|
|
|
|
(1) | Represents non- recurring compensation and benefits, professional fees, transaction and/or transition costs, and incremental depreciation and amortization from purchase accounting adjustments and other miscellaneous intersegment revenues. |
Note 14 Guarantor of the Senior Notes and Non-Guarantor Consolidated Financial Information
On September 30, 2010, the Company issued senior notes with a principal amount of $220.0 million, which were guaranteed by the Companys 100% owned subsidiaries (see Note 11 of the Companys audited consolidated and combined financial statements for the year ended December 31, 2011 included in the Companys Annual Report on Form 10-K). The following financial information presents the balance sheets as of March 31, 2012 and December 31, 2011, the statements of income and the statements of cash flows for the three months ended March 31, 2012 and 2011 of (i) EVERTEC (Parent); (ii) the subsidiaries that are guarantors of the senior notes; (iii) the non-guarantor subsidiaries; and (iv) the Company on a consolidated basis. Investments in subsidiaries are accounted for using the equity method for purposes of the consolidating presentation. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions. The guarantor subsidiaries are 100% owned by EVERTEC (Parent) and all guarantees are full and unconditional and joint and several. There are no significant restrictions on the ability of Parent to obtain funds from any of the guarantor subsidiaries by dividends or loan.
17
Table of Contents
EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements
Consolidated Balance Sheet as of March 31, 2012 |
||||||||||||||||||||
(Dollar amounts in thousands) | EVERTEC, Inc. (Parent Only) |
Guarantor Subsidiaries |
Non-Guarantor Subsidiary |
Eliminations | EVERTEC,
Inc. (Consolidated) |
|||||||||||||||
Assets |
||||||||||||||||||||
Current Assets: |
||||||||||||||||||||
Cash |
$ | 63,032 | $ | 10,275 | $ | 7,051 | $ | | $ | 80,358 | ||||||||||
Restricted cash |
5,508 | | | | 5,508 | |||||||||||||||
Accounts receivable, net |
39,311 | 8,470 | 9,449 | | 57,230 | |||||||||||||||
Prepaid expenses and other assets |
18,578 | 560 | 656 | (202 | ) | 19,592 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current assets |
126,429 | 19,305 | 17,156 | (202 | ) | 162,688 | ||||||||||||||
Investment in subsidiaries, at equity |
138,460 | | | (126,168 | ) | 12,292 | ||||||||||||||
Property and equipment, net |
29,382 | 773 | 5,008 | | 35,163 | |||||||||||||||
Goodwill |
296,980 | 44,010 | 31,516 | | 372,506 | |||||||||||||||
Other intangible assets, net |
407,692 | 16,957 | 11,767 | | 436,416 | |||||||||||||||
Other long-term assets |
21,731 | | | | 21,731 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 1,020,674 | $ | 81,045 | $ | 65,447 | $ | (126,370 | ) | $ | 1,040,796 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Liabilities and stockholders equity |
||||||||||||||||||||
Current Liabilities: |
||||||||||||||||||||
Accrued liabilities |
$ | 36,387 | $ | 697 | $ | 699 | $ | | $ | 37,783 | ||||||||||
Accounts payable |
9,109 | 421 | 7,943 | | 17,473 | |||||||||||||||
Unearned income |
557 | 358 | | | 915 | |||||||||||||||
Income tax payable |
| 1,384 | 618 | | 2,002 | |||||||||||||||
Deferred tax liability, net |
8,959 | 565 | 443 | (67 | ) | 9,900 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current liabilities |
55,012 | 3,425 | 9,703 | (67 | ) | 68,073 | ||||||||||||||
Long-term debt |
524,367 | | | | 524,367 | |||||||||||||||
Long-term deferred tax liability, net |
82,894 | 3,890 | 3,171 | | 89,955 | |||||||||||||||
Other long-term liabilities |
449 | | | | 449 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities |
662,722 | 7,315 | 12,874 | (67 | ) | 682,844 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Stockholders equity |
||||||||||||||||||||
Common stock |
| 55 | 998 | (1,053 | ) | | ||||||||||||||
Additional paid-in capital |
326,627 | 69,678 | 50,851 | (120,529 | ) | 326,627 | ||||||||||||||
Retained earnings |
31,537 | 4,097 | 726 | (4,823 | ) | 31,537 | ||||||||||||||
Accumulated other comprehensive loss |
(212 | ) | (100 | ) | (2 | ) | 102 | (212 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total stockholders equity |
357,952 | 73,730 | 52,573 | (126,303 | ) | 357,952 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilties and stockholders equity |
$ | 1,020,674 | $ | 81,045 | $ | 65,447 | $ | (126,370 | ) | $ | 1,040,796 | |||||||||
|
|
|
|
|
|
|
|
|
|
18
Table of Contents
EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements
Consolidated Balance Sheet as of December 31, 2011 |
||||||||||||||||||||
(Dollar amounts in thousands) | EVERTEC, Inc. (Parent Only) |
Guarantor Subsidiaries |
Non-Guarantor Subsidiary |
Eliminations | EVERTEC,
Inc. (Consolidated) |
|||||||||||||||
Assets |
||||||||||||||||||||
Current Assets: |
||||||||||||||||||||
Cash |
$ | 36,868 | $ | 11,179 | $ | 5,476 | $ | | $ | 53,523 | ||||||||||
Restricted cash |
5,288 | | | | 5,288 | |||||||||||||||
Accounts receivable, net |
41,435 | 7,097 | 12,398 | | 60,930 | |||||||||||||||
Prepaid expenses and other assets |
20,642 | 530 | 504 | (150 | ) | 21,526 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current assets |
104,233 | 18,806 | 18,378 | (150 | ) | 141,267 | ||||||||||||||
Investment in subsidiaries, at equity |
135,384 | | | (123,117 | ) | 12,267 | ||||||||||||||
Property and equipment, net |
30,823 | 719 | 5,143 | | 36,685 | |||||||||||||||
Goodwill |
296,980 | 43,389 | 31,343 | | 371,712 | |||||||||||||||
Other intangible assets, net |
419,835 | 17,104 | 11,975 | | 448,914 | |||||||||||||||
Other long-term assets |
22,894 | | | | 22,894 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 1,010,149 | $ | 80,018 | $ | 66,839 | $ | (123,267 | ) | $ | 1,033,739 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Liabilities and stockholders equity |
||||||||||||||||||||
Current Liabilities: |
||||||||||||||||||||
Accrued liabilities |
$ | 28,473 | $ | 573 | $ | 535 | $ | | $ | 29,581 | ||||||||||
Accounts payable |
11,192 | 838 | 9,756 | | 21,786 | |||||||||||||||
Unearned income |
504 | 404 | | (8 | ) | 900 | ||||||||||||||
Income tax payable |
| 2,424 | 959 | | 3,383 | |||||||||||||||
Deferred tax liability, net |
8,835 | 295 | 246 | (55 | ) | 9,321 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current liabilities |
49,004 | 4,534 | 11,496 | (63 | ) | 64,971 | ||||||||||||||
Long-term debt |
523,833 | | | | 523,833 | |||||||||||||||
Long-term deferred tax liability, net |
83,808 | 4,204 | 3,419 | | 91,431 | |||||||||||||||
Other long-term liabilities |
449 | | | | 449 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities |
657,094 | 8,738 | 14,915 | (63 | ) | 680,684 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Stockholders equity |
||||||||||||||||||||
Common stock |
| 55 | 998 | (1,053 | ) | | ||||||||||||||
Additional paid-in capital |
326,367 | 69,358 | 50,851 | (120,209 | ) | 326,367 | ||||||||||||||
Retained earnings |
28,006 | 2,827 | 357 | (3,184 | ) | 28,006 | ||||||||||||||
Accumulated other comprehensive loss |
(1,318 | ) | (960 | ) | (282 | ) | 1,242 | (1,318 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total stockholders equity |
353,055 | 71,280 | 51,924 | (123,204 | ) | 353,055 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilties and stockholders equity |
$ | 1,010,149 | $ | 80,018 | $ | 66,839 | $ | (123,267 | ) | $ | 1,033,739 | |||||||||
|
|
|
|
|
|
|
|
|
|
19
Table of Contents
EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements
Consolidated Statement of Income for the three months ended March 31, 2012 |
||||||||||||||||||||
(Dollar amounts in thousands) | EVERTEC, Inc. (Parent Only) |
Guarantor Subsidiaries |
Non-Guarantor Subsidiary |
Eliminations | EVERTEC,
Inc. (Consolidated) |
|||||||||||||||
Revenues |
||||||||||||||||||||
Transaction processing |
$ | 16,454 | $ | 2,881 | $ | 3,572 | $ | (8 | ) | $ | 22,899 | |||||||||
Merchant acquiring, net |
17,661 | | | | 17,661 | |||||||||||||||
Business solutions |
40,312 | 1,656 | 63 | (103 | ) | 41,928 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total revenues |
74,427 | 4,537 | 3,635 | (111 | ) | 82,488 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating costs and expenses |
||||||||||||||||||||
Cost of revenues, exclusive of depreciation and amortization shown below |
32,894 | 2,661 | 2,237 | (51 | ) | 37,741 | ||||||||||||||
Selling, general and administrative expenses |
8,344 | 443 | 633 | (433 | ) | 8,987 | ||||||||||||||
Depreciation and amortization |
16,911 | 431 | 580 | | 17,922 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total operating costs and expenses |
58,149 | 3,535 | 3,450 | (484 | ) | 64,650 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income from operations |
16,278 | 1,002 | 185 | 373 | 17,838 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Non-operating (expenses) income |
||||||||||||||||||||
Interest income |
92 | 19 | 6 | | 117 | |||||||||||||||
Interest expense |
(11,176 | ) | | | | (11,176 | ) | |||||||||||||
Earnings of equity method investments |
1,656 | | | (1,590 | ) | 66 | ||||||||||||||
Other (expenses) income |
(2,053 | ) | (129 | ) | 355 | (433 | ) | (2,260 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total non-operating (expenses) income |
(11,481 | ) | (110 | ) | 361 | (2,023 | ) | (13,253 | ) | |||||||||||
Income before income taxes |
4,797 | 892 | 546 | (1,650 | ) | 4,585 | ||||||||||||||
Income tax expense (benefit) |
1,266 | (378 | ) | 177 | (11 | ) | 1,054 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
3,531 | 1,270 | 369 | (1,639 | ) | 3,531 | ||||||||||||||
Other comprehensive income, net of tax of $6 |
||||||||||||||||||||
Foreign currency translation adjustments |
1,106 | 860 | 280 | (1,140 | ) | 1,106 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total comprehensive income |
$ | 4,637 | $ | 2,130 | $ | 649 | $ | (2,779 | ) | $ | 4,637 | |||||||||
|
|
|
|
|
|
|
|
|
|
20
Table of Contents
EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements
Consolidated Statement of Income for the three months ended March 31, 2011 |
||||||||||||||||||||
(Dollar amounts in thousands) | EVERTEC, Inc. (Parent Only) |
Guarantor Subsidiaries |
Non-Guarantor Subsidiary |
Eliminations | EVERTEC,
Inc. (Consolidated) |
|||||||||||||||
Revenues |
||||||||||||||||||||
Transaction processing |
$ | 14,829 | $ | 2,142 | $ | 3,300 | $ | | $ | 20,271 | ||||||||||
Merchant acquiring, net |
14,748 | | | | 14,748 | |||||||||||||||
Business solutions |
39,200 | 1,589 | 52 | (70 | ) | 40,771 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total revenues |
68,777 | 3,731 | 3,352 | (70 | ) | 75,790 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating costs and expenses |
||||||||||||||||||||
Cost of revenues, exclusive of depreciation and amortization shown below |
32,398 | 2,615 | 2,537 | (46 | ) | 37,504 | ||||||||||||||
Selling, general and administrative expenses |
8,094 | 136 | 265 | | 8,495 | |||||||||||||||
Depreciation and amortization |
16,254 | 548 | 570 | | 17,372 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total operating costs and expenses |
56,746 | 3,299 | 3,372 | (46 | ) | 63,371 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income from operations |
12,031 | 432 | (20 | ) | (24 | ) | 12,419 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Non-operating (expenses) income |
||||||||||||||||||||
Interest income |
293 | 9 | 12 | | 314 | |||||||||||||||
Interest expense |
(14,122 | ) | | | | (14,122 | ) | |||||||||||||
Earnings of equity method investments |
338 | | | (338 | ) | | ||||||||||||||
Other expenses |
(3,887 | ) | 1 | | | (3,886 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total non-operating (expenses) income |
(17,378 | ) | 10 | 12 | (338 | ) | (17,694 | ) | ||||||||||||
(Loss) income before income taxes |
(5,347 | ) | 442 | (8 | ) | (362 | ) | (5,275 | ) | |||||||||||
Income tax (benefit) expense |
(29,218 | ) | 36 | 51 | (15 | ) | (29,146 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
23,871 | 406 | (59 | ) | (347 | ) | 23,871 | |||||||||||||
Other comprehensive income, net of tax |
||||||||||||||||||||
Foreign currency translation adjustments |
444 | 207 | 236 | (444 | ) | 444 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total comprehensive income |
$ | 24,315 | $ | 613 | $ | 177 | $ | (791 | ) | $ | 24,315 | |||||||||
|
|
|
|
|
|
|
|
|
|
21
Table of Contents
EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements
Consolidated Statement of Cash
Flows for the three months ended March 31, 2012 |
||||||||||||||||||||
(Dollar amounts in thousands) | EVERTEC, Inc. (Parent Only) |
Guarantor Subsidiaries |
Non-Guarantor Subsidiary |
Eliminations | EVERTEC,
Inc. (Consolidated) |
|||||||||||||||
Cash flows from operating activities |
$ | 29,754 | $ | (767 | ) | $ | 1,731 | $ | | $ | 30,718 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash flows from investing activities |
||||||||||||||||||||
Net increase in restricted cash |
(220 | ) | | | | (220 | ) | |||||||||||||
Intangible assets acquired |
(1,091 | ) | (35 | ) | (13 | ) | | (1,139 | ) | |||||||||||
Property and equipment acquired |
(2,287 | ) | (102 | ) | (143 | ) | | (2,532 | ) | |||||||||||
Proceeds from sales of property and equipment |
8 | | | | 8 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash used in investing activities |
(3,590 | ) | (137 | ) | (156 | ) | | (3,883 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash flows from financing activities |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net increase (decrease) in cash |
26,164 | (904 | ) | 1,575 | | 26,835 | ||||||||||||||
Cash at beginning of the period |
36,868 | 11,179 | 5,476 | | 53,523 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash at end of the period |
$ | 63,032 | $ | 10,275 | $ | 7,051 | $ | | $ | 80,358 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Cash
Flows for the three months ended March 31, 2011 |
||||||||||||||||||||
(Dollar amounts in thousands) | EVERTEC, Inc. (Parent Only) |
Guarantor Subsidiaries |
Non-Guarantor Subsidiary |
Eliminations | EVERTEC,
Inc. (Consolidated) |
|||||||||||||||
Cash flows from operating activities |
$ | 19,560 | $ | 2,111 | $ | 23 | $ | | $ | 21,694 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash flows from investing activities |
||||||||||||||||||||
Net decrease in restricted cash |
577 | | | | 577 | |||||||||||||||
Intangible assets acquired |
(4,449 | ) | (3 | ) | 4 | | (4,448 | ) | ||||||||||||
Property and equipment acquired |
(2,561 | ) | (16 | ) | (125 | ) | | (2,702 | ) | |||||||||||
Acquisition of an equity method investee |
(9,244 | ) | | | | (9,244 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash used in investing activities |
(15,677 | ) | (19 | ) | (121 | ) | | (15,817 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash flows from financing activities |
||||||||||||||||||||
Repayment of long-term debt |
(888 | ) | | | | (888 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash used in financing activities |
(888 | ) | | | | (888 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net increase (decrease) in cash |
2,995 | 2,092 | (98 | ) | | 4,989 | ||||||||||||||
Cash at beginning of the period |
45,551 | 5,739 | 3,909 | | 55,199 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash at end of the period |
$ | 48,546 | $ | 7,831 | $ | 3,811 | $ | | $ | 60,188 | ||||||||||
|
|
|
|
|
|
|
|
|
|
The Company evaluated subsequent events through the date that these unaudited consolidated financial statements were issued. There were no additional subsequent events requiring disclosure other than those disclosed below.
Reorganization. On April 17, 2012, EVERTEC was converted from a Puerto Rico corporation to a Puerto Rico limited liability company for the purpose of improving the consolidated tax efficiency of EVERTEC and its subsidiaries by taking advantage of recent changes to the 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, Carib Holdings, EVERTECs direct parent, was also converted from a Puerto Rico corporation to a Puerto Rico limited liability company. Prior to these conversions, Carib Inc. was formed in order to act as the new parent company of Carib Holdings and its subsidiaries, including EVERTEC. Carib Inc., Carib Holdings, AP Carib, Popular and each of the holders of then outstanding shares of Class B Non-Voting Common Stock of Carib Holdings entered into a Stock Contribution and Exchange Agreement (the Contribution and Exchange Agreement) pursuant to which each of the then outstanding shares of common stock of Carib Holdings was contributed to Carib Inc. in exchange for the same number and class of shares of common stock of Carib Inc. In addition, in accordance with the terms and conditions set forth in the Stock Contribution and Exchange Agreement,
22
Table of Contents
EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements
Carib Inc. assumed the Carib Holdings, Inc. 2010 Equity Incentive Plan (the Plan) and all of the outstanding equity awards issued thereunder or subject thereto. As a result, each of the then outstanding stock options to purchase shares of Carib Holdings Class B Non-Voting Common Stock became a stock option to purchase the same number and class of shares of Carib Inc.s Class B Non-Voting Common Stock, in each case on the same terms (including exercise price) as the original stock option. Similarly, each of the then outstanding shares of restricted stock of Carib Holdings was converted into the same number of shares of restricted stock of Carib Inc. In addition, in connection with the Conversion, EVERTEC formed a new wholly owned subsidiary, EVERTEC Finance, to act as co-issuer of the senior notes.
The consolidated financial statements of EVERTEC, LLC following the Conversion will be substantially the same in all material respects as the consolidated financial statements of EVERTEC, Inc. except that separate financial statements of EVERTEC, LLC, included in the consolidated financial statements of EVERTEC, LLC, will not include tax expense, deferred tax assets or liabilities or tax receivables or payables as EVERTEC, LLC will be considered a flow through entity from a Puerto Rico tax perspective.
Supplemental Indenture regarding the Conversion. On April 17, 2012, the Company, EVERTEC Finance, and Wilmington Trust, National Association, as trustee (the Trustee), entered into Supplemental Indenture No. 1 (the First Supplemental Indenture) to the indenture dated as of September 30, 2010 among the Company, the guarantors named therein and the Trustee (as amended, the Indenture). Pursuant to the First Supplemental Indenture, (a) the Company affirmed and, to the extent required under the Indenture, assumed its obligations following the Conversion as issuer under the Indenture and the 11% senior notes due 2018 issued thereunder, (b) EVERTEC Finance was added as a co-issuer under the Indenture and the senior notes, (c) the limitation on restricted payments covenant was amended to permit the Company to make payments to its direct parent company, Carib Holdings, and to Caribs newly formed direct parent company and the Companys indirect parent company, Carib Inc., pursuant to the Tax Payment Agreement so long as (i) the Company is not in default under the Indenture, (ii) such payments are with respect to taxes imposed by Puerto Rico, the United States of America or by any other jurisdictions that the Company would have been required to pay if it was a corporation instead of being treated as a partnership for tax purposes in those jurisdictions, reduced by taking into account the amount of any applicable net operating losses or other tax attributes of Carib Holdings or Carib Inc. that reduce Carib Holdings or Carib Inc.s taxes in such period and (iii) the payments do not exceed the net amount of taxes that Carib Holdings and Carib Inc. actually owe to the appropriate taxing authority for a taxable period and (d) the definitions of Consolidated Net Income and Consolidated Taxes were adjusted so that payments under the Tax Payment Agreement would reduce Consolidated Net Income and be treated as Consolidated Taxes even if they do not reduce Consolidated Net Income under GAAP. The First Supplemental Indenture also added a covenant that limits the ability of EVERTEC Finance to hold assets, incur Indebtedness or become liable for obligations, engage in business activities or consolidate, amalgamate or merge with or into or wind up into any person, subject in each case to certain exceptions.
Separately, following the execution of the First Supplemental Indenture, EVERTEC Finance also became a guarantor under the Companys senior secured credit facility in accordance with the terms thereof.
Tax Payment Agreement. On April 17, 2012, the Company, Carib Holdings and Carib Inc. entered into a Tax Payment Agreement pursuant to which the Company will be obligated to make certain payments to Carib Holdings or Carib Inc. for taxable periods or portions thereof occurring on or after April 17, 2012. Under the Tax Payment Agreement, the Company will make payments with respect to any and all taxes (including estimated taxes) imposed under the laws of Puerto Rico, the United States of America and any other jurisdiction or any political (including municipal) subdivision or authority or agency in Puerto Rico, the United States of America or such other jurisdiction, that would have been imposed on the Company if the Company had been a corporation for tax purposes of that jurisdiction, together with all interest and penalties with respect thereto (Taxes), reduced by taking into account any applicable net operating losses or other tax attributes of Carib Holdings or Carib Inc. that reduce Carib Holdings or Carib Inc.s taxes in such period. For the avoidance of doubt, the Tax Payment Agreement provides that the payments thereunder shall not exceed the net amount of Taxes that Carib Holdings and Carib Inc. actually owe to the appropriate taxing authority for a taxable period. Further, the Tax Payment Agreement provides that if Carib Holdings or Carib Inc. receives a tax refund attributable to any taxable period or portion thereof occurring on or after the Effective Date, Carib Inc. shall be required to recalculate the payment for such period required to be made by the Company to Carib Holdings or Carib Inc. If the payment, as recalculated, is less than the amount of the payment the Company already made to Carib Holdings or Carib Inc. in respect of such period, Carib Holdings or Carib Inc. shall promptly make a payment to the Company in the amount of such difference.
New Notes. On May 7, 2012, EVERTEC and EVERTEC Finance, as co-issuers, issued $40.0 million aggregate principal amount of 11% senior notes due 2018 (the New Notes) as Additional Notes under the Indenture pursuant to which $220.0 million aggregate principal amount of 11% senior notes due 2018 were originally issued on September 30, 2010 and $210.5 million principal amount were outstanding as of March 31, 2012 (the Existing Notes). The New Notes were issued pursuant to Supplemental Indenture No. 2 to the Indenture and will be treated as a single class under the Indenture with the Existing Notes.
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EVERTEC, Inc. Notes to Unaudited Consolidated Financial Statements
Consent Solicitation. On May 4, 2012, the Company and EVERTEC Finance obtained the requisite consents from holders of at least a majority of the aggregate principal amount of all outstanding Existing Notes on the record date of April 27, 2012, pursuant to their previously announced consent solicitation. As a result, on May 7, 2012, the Company, EVERTEC Finance, certain subsidiaries of the Company and the Trustee executed Supplemental Indenture No. 3 to the Indenture to provide the Company with additional dividend capacity of up to $270.0 million (the Proposed Amendment). On May 9, 2012, the Company paid an aggregate consent fee of approximately $2.8 million and, as a result, the Proposed Amendment became operative.
Credit Agreement Amendment and Incremental Term Loan Facility. On May 9, 2012, the Company entered into an amendment to the agreement governing its senior secured credit facilities to allow, among other things, a restricted payment in an amount not to exceed $270.0 million and certain adjustments to the financial covenant therein. In addition, the Company borrowed an additional $170.0 million under a secured incremental term loan.
Dividend. On May 9, 2012, the Company used the net proceeds from the incremental term loan described above and the New Notes, together with cash on hand, to pay a cash distribution of approximately $267.0 million to its direct parent, Carib Holdings (which in turn was ultimately paid, together with cash on hand at Carib Holdings of approximately $3.0 million, as a cash dividend to the stockholders of Carib Inc., the Companys indirect parent). As a result of the dividend, on May 9, 2012, the board of directors of Carib Inc. approved an equitable adjustment to stock options previously granted pursuant to the Plan in order to reduce the exercise price of the outstanding options granted under or subject to the terms of the Plan by $7.41 per share.
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following Managements Discussion and Analysis (MD&A) covers: (i) the results of operations for the three months ended March 31, 2012 and 2011, respectively; and (ii) the financial condition as of March 31, 2012. You should read the following discussion and analysis in conjunction with the audited consolidated and combined financial statements and related notes for the fiscal year ended December 31, 2011, included in the Companys Annual Report on 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.
Overview
We are a diversified processing business, offering transaction and payment processing services, merchant acquiring services and business process management solutions in Puerto Rico and certain countries throughout the Caribbean and Latin America. We are based in San Juan, Puerto Rico. Our business segments are based on the products we offer and the markets we serve. While we often provide multiple services to various customers, we generally view our business as operating in three reportable segments: Transaction Processing, Merchant Acquiring and Business Solutions. Further discussion of our operating results and our results by reportable segments are presented in this MD&A.
The Transaction Processing segment includes diversified payment products and services including the ATH Network and Processing Services, Card Processing, Payment Processing and Electronic Benefit Transfer (EBT) services. We own and operate the ATH network, the leading debit payment and automated teller machine (ATM) network in Puerto Rico. The ATH network processed over 625 million transactions in 2011. Over 70% of all ATM transactions and over 80% of all debit transactions in Puerto Rico are processed over the ATH network.
The Merchant Acquiring segment provides an end-to-end electronic payment offering to more than 16,000 merchants in Puerto Rico and the U.S. and British Virgin Islands. This segment provides services that allow merchants to accept electronic methods of payment such as debit, credit, prepaid and EBT cards carrying the ATH, Visa, MasterCard, Discover and American Express brands. Services include terminal sales and deployment, front-end authorization processing, settlement and funding processing, and customer support.
The Business Solutions segment offers a full suite of business process management solutions, which include Core Bank Processing, Network Hosting and Management, Information Technology (IT) Professional Services, Business Process Outsourcing, Item Processing, Cash Processing, and Fulfillment.
We continue to implement a series of strategic initiatives to achieve our principal business objectives: (i) penetrate our broad financial institution customer base by offering incremental business solutions products and services to clients that currently perform similar functions in-house, (ii) expand our business geographically in the Latin America region, both through the introduction of new products and services to customers in existing Latin American markets and by entering new markets, (iii) leverage the ATH network and technology platform to develop new products and services, taking advantage of our access to Puerto Ricos entire cardholder base as well as our real-time, data-based knowledge of consumer spending behaviors, (iv) leverage our broad merchant customer base by developing and offering additional products and services to cross sell along with our core merchant offerings, (v) improve and increase operating efficiency and scale in order to deliver revenue growth and improve profitability, and (vi) selectively acquire complementary businesses to further expand geographically and broaden our product offering.
Recent Developments
On April 17, 2012, EVERTEC was converted from a Puerto Rico corporation to a Puerto Rico limited liability company (the Conversion) for the purpose of improving the consolidated tax efficiency of EVERTEC and its subsidiaries by taking advantage of recent changes to the Code that permit limited liability companies to be treated as partnerships that are pass-through entities for Puerto Rico tax purposes. Through this new structure, the Company will benefit from at least $30.0 million of net operating losses and certain other tax attributes for Puerto Rico income tax purposes that prior to the Conversion and change in tax law were available to the Companys parent but not to the Company. Concurrent with the Conversion, Carib Holdings, LLC (formerly known as Carib Holdings, Inc., Carib Holdings), which is EVERTECs direct parent, was also converted from a Puerto Rico corporation to a Puerto Rico limited liability company and Carib Latam Holdings, Inc. (Carib Inc.) was formed in order to act as the new parent company of Carib Holdings.
In addition, in May 2012, among other things, we (i) issued $40.0 million principal amount of additional senior notes, (ii) incurred $170.0 million of secured incremental term loans and (iii) paid a dividend of approximately $267.0 million to Carib Holdings. For additional information regarding these recent events, see Note 15 of the Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Overview of Results of Operations
The following briefly describes the components of revenues and expenses as presented in the unaudited consolidated statements of income and comprehensive income. Descriptions of the revenue recognition policies are detailed in Note 1 of the Audited Financial Statements included in our Annual Report on Form 10-K.
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Transaction processing. Transaction processing revenues are comprised of revenues related to providing access to the ATH network and other card networks to financial institutions, including related services such as authorization, processing, management and recording of ATM and POS transactions, ATM management and monitoring. Transaction processing revenues also include revenues from card processing services (such as credit and debit card processing, authorization and settlement and fraud monitoring and control to debit or credit issuers), payment processing services (such as payment and billing products for merchants, businesses and financial institutions) and electronic benefits transfer (which principally consist of services to the Puerto Rico government for the delivery of government benefits to participants).
Merchant acquiring, net. Merchant acquiring revenues consist of revenues from services that allow merchants to accept electronic methods of payment. In the merchant acquiring segment, revenues include a discount fee and membership fees charged to merchants, debit network fees and rental 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. The discount fee is generally a percentage of the transaction value. We also charge merchants for other services that are unrelated to the number of transactions or the transaction value.
Business solutions. Business solutions revenues consist of revenues from a full suite of business process management solutions in various product areas such as core bank processing, network hosting and management, information technology professional services, business process outsourcing, item processing, cash processing, and fulfillment.
Cost of revenues. Cost of revenues includes the costs directly associated with providing services to customers and 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. Selling, general and administrative expenses (SG&A) primarily consists 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.
Results of Operations
Comparison of the three months ended March 31, 2012 to March 31, 2011
The following tables present the components of our unaudited consolidated statements of income and comprehensive income by business segment and the change in those amounts for the three months ended March 31, 2012 and 2011.
Revenues
Three months ended March 31, |
Variance | |||||||||||||||
(Dollar amounts in thousands) | 2012 | 2011 | ||||||||||||||
Transaction processing |
$ | 22,899 | $ | 20,271 | $ | 2,628 | 13 | % | ||||||||
Merchant acquiring, net |
17,661 | 14,748 | 2,913 | 20 | % | |||||||||||
Business solutions |
41,928 | 40,771 | 1,157 | 3 | % | |||||||||||
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Total revenues |
$ | 82,488 | $ | 75,790 | $ | 6,698 | 9 | % | ||||||||
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Revenue growth across our three reportable segments was primarily attributable to higher sales volume and transactions in both our local and international markets and the increased penetration of our products and services in the markets we serve.
Reconciliation of Total Revenues to Gross Revenues
We define gross revenues as total revenues including interchange fees (related to our Merchant Acquiring business) from our merchant customers that we collect on behalf of, and remit entirely to, the cards associations whose transactions we process. Total revenues is calculated and presented in EVERTECs financial statements net of these fees. Therefore, gross revenues is a
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supplemental measure of our performance that is not in accordance with GAAP. We caution investors that amounts presented in accordance with our definition of gross revenues may not be comparable to similar measures disclosed by other issuers, because not all issuers and analysts calculate gross revenues in the same manner. We present gross revenues because we consider it an important supplemental measure of our performance to compare ourselves to competitors and the industry and to monitor margins. We also believe it is frequently used by securities analysts, investors, and other interested parties in the evaluation of companies in our industry.
A reconciliation of total revenues to gross revenues of the continuing operations is provided below.
Three months ended March 31, |
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(Dollar amounts in thousands) | 2012 | 2011 | Variance | |||||||||||||
Total revenues |
$ | 82,488 | $ | 75,790 | $ | 6,698 | 9 | % | ||||||||
Plus: Interchange fees and assessments in Merchant acquiring |
21,128 | 23,866 | (2,738 | ) | -11 | % | ||||||||||
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Total gross revenues |
$ | 103,616 | $ | 99,656 | $ | 3,960 | 4 | % | ||||||||
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Gross revenues |
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Transaction processing |
22,899 | 20,271 | 2,628 | 13 | % | |||||||||||
Merchant acquiring |
38,789 | 38,614 | 175 | 0 | % | |||||||||||
Business solutions |
41,928 | 40,771 | 1,157 | 3 | % | |||||||||||
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Total gross revenues |
$ | 103,616 | $ | 99,656 | $ | 3,960 | 4 | % | ||||||||
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Operating costs and expenses
Three months ended March 31, |
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(Dollar amounts in thousands) | 2012 | 2011 | Variance | |||||||||||||
Cost of revenues |
$ | 37,741 | $ | 37,504 | $ | 237 | 1 | % | ||||||||
Selling, general and administrative expenses |
8,987 | 8,495 | 492 | 6 | % | |||||||||||
Depreciation and amortization |
17,922 | 17,372 | 550 | 3 | % | |||||||||||
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Total operating costs and expenses |
$ | 64,650 | $ | 63,371 | $ | 1,279 | 2 | % | ||||||||
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Total operating costs and expenses, excluding depreciation and amortization, were $46.7 million for the three months ended March 31, 2012, an increase of $0.7 million, or 2%, from $46.0 million for the three months ended March 31, 2011.
Cost of revenues were flat when compared to the same period in 2011. Gross margin percentage for the three months ended March 31, 2012 improved to 54.3% from 50.5% for the corresponding 2011 period. The improvement in margin was mainly driven by our ability to support incremental business volume with lower incremental costs due to our highly scalable technology platform and to cost control initiatives.
Selling, general and administrative expenses for the three months ended March 31, 2012 increased by $0.5 million, or 6%, when compared to the same period in 2011. The increase was mainly related to one-time, non-recurring expenses associated with changes in management.
Depreciation and amortization expense for the three months ended March 31, 2012 increased by $0.6 million, or 3%, mostly related to certain software licenses transferred to the Company as part of a reimbursement agreement with Popular.
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Income from operations
The following table presents income from operations by reportable segments.
Three months ended March 31, |
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(Dollar amounts in thousands) | 2012 | 2011 | Variance | |||||||||||||
Segment income from operations |
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Transaction processing |
$ | 12,309 | $ | 10,886 | $ | 1,423 | 13 | % | ||||||||
Merchant acquiring |
8,541 | 7,369 | 1,172 | 16 | % | |||||||||||
Business Solutions |
9,080 | 7,411 | 1,669 | 23 | % | |||||||||||
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Income from operations before non-recurring costs and depreciation and amortization |
29,930 | 25,666 | 4,264 | 17 | % | |||||||||||
Other(1) |
(12,092 | ) | (13,247 | ) | 1,155 | -9 | % | |||||||||
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Income from operations |
$ | 17,838 | $ | 12,419 | $ | 5,419 | 44 | % | ||||||||
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(1) | Represents non-recurring compensation and benefits, professional fees, transaction and/or transition costs, and incremental depreciation and amortization from purchase accounting adjustments and other miscellaneous intersegment revenues. |
Income from operations for the three months ended March 31, 2012, excluding non-recurring costs and depreciation and amortization, was $29.9 million, which is an increase of $4.2 million from the $25.7 million for the corresponding 2011 period.
Income from operations for the first quarter of 2012 increased in each of our reportable segments as compared to the corresponding 2011 period due to higher revenues partially offset by incremented costs related to business growth. The increase in revenues was driven by transaction and dollar volume growth in our Transaction Processing and Merchant Acquiring businesses. In our Business Solutions segment, revenue growth resulted from an increase in volume, new sales and clients and incremental services to existing clients.
See Note 13 of the Unaudited Consolidated Financial Statements for additional information on the Companys reportable segments and for a reconciliation of the income from operations of the segments to the unaudited consolidated net income.
Non-operating expenses
Three months ended March 31, |
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(Dollar amounts in thousands) | 2012 | 2011 | Variance | |||||||||||||
Non-operating expenses |
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Interest income |
$ | 117 | $ | 314 | $ | (197 | ) | -63 | % | |||||||
Interest expense |
(11,176 | ) | (14,122 | ) | 2,946 | -21 | % | |||||||||
Earnings of equity method investments |
66 | | 66 | 0 | % | |||||||||||
Other expense |
(2,260 | ) | (3,886 | ) | 1,626 | -42 | % | |||||||||
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Total non-operating expenses |
$ | (13,253 | ) | $ | (17,694 | ) | $ | 4,441 | -25 | % | ||||||
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Non-operating expenses for the three months ended March 31, 2012 decreased as a result of a reduction in interest expense of $2.9 million due to lower outstanding debt attributed to prepayments and the refinancing completed during the first quarter of 2011 and to a reduction of $1.6 million in other expenses. Other expenses for the quarter ended March 31, 2012 are mainly due to a one-time payment of $2.2 million as a result of changes in personnel. Other expenses for the corresponding period in 2011 were due to a one-time, non-recurring $2.2 million expense related to the refinancing of our senior secured credit facilities and a loss of $1.2 million from the settlement of the derivative related to our acquisition of an equity interest in CONTADO from Popular.
Income tax expense (benefit)
Three months ended March 31, |
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(Dollar amounts in thousands) | 2012 | 2011 | Variance | |||||||||||||
Income tax expense (benefit) |
$ | 1,054 | $ | (29,146 | ) | $ | 30,200 | -104 | % | |||||||
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Income-tax expense for the three months ended March 31, 2012 was $1.1 million, compared to an income-tax benefit of $29.1 million for the corresponding 2011 period. Income tax benefit for the three months ended March 31, 2011 was driven by a reduction in the marginal corporate income-tax rate from 39% to 30%, as a result of the tax reform enacted in Puerto Rico on January 31, 2011. The change in tax rates caused a reduction in current tax expense and in the Companys deferred tax liability.
Net Income
Net income for the three months ended March 31, 2012 was $3.5 million, compared to net income of $23.9 million for the corresponding 2011 period. The change in net income mainly reflects the income tax benefit for the three months ended March 31, 2011 of $29.1 million. Income before income taxes for the three months ended March 31, 2012 was $4.6 million compared to a loss before income taxes of $5.3 million for the corresponding 2011 period.
Liquidity and Capital Resources
Our principal source of liquidity is cash generated from operations, while our primary liquidity requirements are the funding of capital expenditures and working capital needs. We also has available a revolving credit facility of $50.0 million that as of March 31, 2012 was undrawn. Our primary use of cash is for operating expenses, working capital requirements, capital expenditures and debt service obligations as they become due. Also, we may pay dividends to the holders of our equity interests if approved by our board of managers at its sole discretion and in compliance with our debt covenants. In May 2012, among other things, we paid a dividend of approximately $267.0 million to Carib Holdings. For additional information, see Note 15 of the Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Based on our current level of operations, we believe our cash flows from operations and 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 and capital expenditures and our ability to make scheduled payments of interest, to pay principal 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. The following table presents our cash flows from operations.
Three months ended March 31, |
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(Dollar amounts in thousands) | 2012 | 2011 | ||||||
Cash provided by operating activities |
$ | 30,718 | $ | 21,694 | ||||
Cash used in investing activities |
(3,883 | ) | (15,817 | ) | ||||
Cash used in financing activities |
| (888 | ) | |||||
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Increase in cash |
$ | 26,835 | $ | 4,989 | ||||
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Cash provided by operating activities for the three months ended March 31, 2012 increased by $9.0 million when compared to the corresponding period in 2011. Lower cash provided by operating activities for 2011 resulted from a net loss before income taxes of $5.2 million and a prepayment penalty related to the Companys debt refinancing in the amount of $3.4 million.
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Cash used in investing activities for the three months ended March 31, 2012 decreased by $12.0 million when compared to the corresponding 2011 period. Prior period results were primarily driven by the acquisition of an equity interest in CONTADO for $9.2 million and to $3.3 million in higher acquisition of intangibles when compared to the corresponding 2012 period.
Cash used in financing activities for the three months ended March 31, 2011 consisted of a repayment of $0.9 million of our senior secured term loan. No repayments were made for the three months ended March 31, 2012.
Capital Resources
Our principal capital expenditures are related to computer software (purchased and internally developed) and additions to property and equipment. We invested approximately $3.6 million and $7.2 million for the three months ended March 31, 2012 and 2011, respectively. Capital expenditures are expected to be funded by cash flows from operations and, if necessary, borrowings under our revolving credit facility.
Financial Obligations
Senior Secured Credit Facilities
In connection with the Merger, on September 30, 2010 we entered into senior secured credit facilities consisting of (1) a $355.0 million six-year term loan facility and (2) a $50.0 million five-year revolving credit facility. The term loan facility was subject to quarterly amortization payments totaling 1% per annum of the original principal amount of the facility, with the balance payable on the final maturity date. As a result of a voluntary repayment made on May 4, 2011, we have no scheduled quarterly amortization payment obligation until the final lump-sum payment at the maturity date. However, from time to time we may make voluntary payments at our discretion. The senior secured credit facilities allow us 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 $125.0 million and the maximum principal amount of debt that would not cause our senior secured leverage ratio to exceed 3.25 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 senior secured credit facilities are unconditionally guaranteed by Carib Holdings and, subject to certain exceptions, each of our existing and future wholly-owned subsidiaries. All obligations under the senior secured credit facilities, and the guarantees of those obligations, are secured by substantially all of our assets and the assets of the guarantors, subject to certain exceptions. Borrowings under the senior secured term loan facility and the revolving credit facility bear interest, at our option, at a rate equal to a margin over either (a) a base rate as defined in the credit agreement or (b) a LIBOR rate. The senior secured credit facilities are subject to amortization and prepayment requirements and contain customary representations and warranties, covenants, events of default and other provisions.
On May 9, 2012, we increased the size of our incremental term loan B and incurred an additional $170.0 million principal amount of borrowings thereunder. See Note 15 of the Notes to the Unaudited Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for additional information.
Senior Notes
In connection with the Merger on September 30, 2010, we issued $220.0 million of senior unsecured notes, of which $210.5 million principal amount was outstanding as of March 31, 2012. Our existing wholly-owned subsidiaries that guarantee our obligations under the senior secured credit facilities also guarantee the senior notes. The senior notes bear interest at a fixed rate of 11.0% per annum and mature on October 1, 2018. The senior notes are not subject to any mandatory or sinking fund payments. However, under certain circumstances related to change of control or asset sales, we may be required to offer to purchase senior notes.
On May 7, 2012, we and EVERTEC Finance, as co-issuers, issued $40.0 million aggregate principal amount of 11% Senior Notes due 2018 (the New Notes). The New Notes constitute Additional Notes under the Indenture pursuant to which the existing senior notes were originally issued on September 30, 2010. In addition, we obtained a consent from the holders of the senior notes as of the record date of April 27, 2012 to amend the limitation on restricted payments covenant in the indenture governing the senior notes (as amended, the Indenture) in order to allow additional dividend or distribution payments by us in an aggregate amount not to exceed $270.0 million. See Note 15 of the Notes to the Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for additional information.
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Covenant Compliance
Our senior secured credit facilities and the Indenture contain various restrictive covenants. Our secured credit facilities require us to maintain on a quarterly basis a specified maximum senior secured leverage ratio. The senior secured leverage ratio as defined in our credit facility (total first lien senior secured debt minus available cash, up to a maximum of $50.0 million, as defined, to Adjusted EBITDA) must be less than 3.60 to 1.0 at March 31, 2012. In addition, our senior secured credit facilities, among other things, restrict our ability to incur indebtedness or liens, make investments, declare or pay any dividends to our parent and prepay indebtedness that is junior to such debt. The Indenture, among other things: (a) limit our ability and the ability of our subsidiaries to incur additional indebtedness, issue certain preferred shares, incur liens, pay dividends or make certain other restricted payments and enter into certain transactions with affiliates; (b) limits our ability to enter into agreements that would restrict 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. However, all of the covenants in these agreements are subject to significant exceptions. As of March 31, 2012, the Company was in compliance with the applicable restrictive covenants under its debt agreements.
We have the ability to incur additional debt, subject to limitations imposed by our senior secured credit facilities and the Indenture. Under the Indenture, in addition to specified permitted indebtedness, we will be able to incur additional indebtedness as long as on a pro forma basis our fixed charge coverage ratio (the ratio of Adjusted EBITDA to fixed charges, as defined) is at least 2.0 to 1.0. In this Report, 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 and Adjusted EBITDA
We define EBITDA as earnings before interest, taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA as further 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 our senior secured credit facilities and the indenture governing the notes in testing our compliance with covenants therein such as the senior secured leverage ratio and the fixed charge coverage ratio. In addition, in evaluating EBITDA and Adjusted EBITDA, 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 and Adjusted EBITDA 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; |
| they do not reflect interest expense, or the cash requirements necessary to service interest, or principal payments, on indebtedness; |
| they do not reflect income tax expense or the cash necessary to pay income taxes; |
| 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; and |
| other companies, including other companies in our industry, may not use EBITDA and Adjusted EBITDA or may calculate EBITDA and Adjusted EBITDA differently than as presented in this Report, limiting their usefulness as a comparative measure. |
Adjusted EBITDA is not a measurement of liquidity or financial performance under GAAP. You should not consider Adjusted EBITDA as an alternative to cash flows from operating activities 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 and Adjusted EBITDA is provided below:
(Dollar amounts in thousands) | Three months ended March 31, 2012 |
Twelve months ended March 31, 2012 |
||||||
Net income |
$ | 3,531 | $ | 7,664 | ||||
Income tax expense |
1,054 | (2,854 | ) | |||||
Interest expense |
11,059 | 47,448 | ||||||
Depreciation and amortization |
17,922 | 70,441 | ||||||
|
|
|
|
|||||
EBITDA |
33,566 | 122,699 | ||||||
Software maintenance reimbursement and other costs (1) |
640 | 2,963 | ||||||
Equity income (2) |
(66 | ) | 569 | |||||
Compensation and benefits (3) |
2,507 | 18,376 | ||||||
Pro forma VRP benefits (4) |
| 3,168 | ||||||
Transaction and other non-recurring fees (5) |
1,257 | 5,088 | ||||||
Management fees (6) |
745 | 2,653 | ||||||
Purchase accounting (7) |
(143 | ) | (1,584 | ) | ||||
|
|
|
|
|||||
Adjusted EBITDA |
$ | 38,506 | $ | 153,932 | ||||
|
|
|
|
(1) | Primarily represents reimbursements received for certain software maintenance expenses as part of the Merger. |
(2) | Represents CONTADOs non-cash equity income. In addition, for the last twelve months period includes cash dividends received during 2011. |
(3) | For the three months ended March 31, 2012, mainly represents a one-time payment of $2.2 million as a result of the former CEOs employment modification agreement. For the last twelve months period, also includes a one-time cost related to the Voluntary Retirement Program (VRP). Both periods include other adjustments related to non-cash equity based compensation. |
(4) | Adjustment represents the pro forma effect of the expected net savings in compensation and benefits related to employees that participated in the VRP offered by the Company during the third quarter of 2011. |
(5) | Primarily relates to non-recurring fees to support additional requirements of a stand-alone entity and to certain other adjustments permitted under the credit facility and indenture agreements. |
(6) | Represents the management fee payable to the equity sponsors which commenced in January 2011. |
(7) | Primarily represents the elimination of the effects of purchase accounting in connection with certain customer service and software related arrangements where EVERTEC receives reimbursements from Popular. |
Contractual Obligations
Our contractual obligations have not changed materially from those reported at December 31, 2011 in the Annual Report on Form 10-K, except as described in Financial Obligations above.
Off Balance Sheet Arrangements
Currently, we do not have any off balance sheet arrangements.
Debt Repurchases
We have in the past purchased and we or our affiliates in the future may, from time to time, purchase our senior notes. Any such future purchase may be made through open market or privately negotiated transactions with third parties (who may be our affiliates) or pursuant to one or more tender or exchange offers or otherwise, upon such terms and at such prices as we or any such affiliates may determine. See Note 6 of the Notes to Unaudited Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for additional information regarding our past purchases of senior notes.
Seasonality
EVERTECs business generally experiences increased activity during the traditional holiday shopping periods and around other nationally recognized holidays.
Effect of Inflation
While inflationary increases in certain inputs costs, such as occupancy, labor and benefits, and general administrative costs, have an impact on our operating results, inflation has had minimal net impact on our operating results during the last three years as overall inflation has been 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.
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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 risk
We issued fixed and floating-rate debt which is subject to the fluctuations in interest rates in respect of our floating-rate debt. Borrowings under our senior secured credit facilities accrue interest at variable rates but are subject to floors or minimum rates. A 100 basis points increase in the applicable margins over our floor(s) on our debt balances outstanding as of March 31, 2012, under our senior secured credit facilities would increase our annual interest expense by approximately $3.3 million.
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 income (loss) in the consolidated balance sheet, except for highly inflationary environments in which the effects would be included in other operating income in the consolidated statements of income and comprehensive income. At March 31, 2012 and December 31, 2011, the Company had $0.2 million and $1.3 million, respectively, in an unfavorable foreign currency translation adjustment as part of accumulated other comprehensive loss.
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 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 SECs rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to the Companys management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Notwithstanding the foregoing, our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives.
As of March 31, 2012, an evaluation was performed under the supervision and with the participation of the Companys management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures pursuant to Rule 15d-15 under the Securities Exchange Act of 1934. Based upon their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of March 31, 2012, the Companys 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 Companys internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Item 1. | Legal Proceedings |
From time to time, we are subject to litigation and arbitration in the ordinary course of business. We are not party to any material litigation or arbitration and are not currently aware of any pending or threatened material litigation at this time.
Item 1A. | Risk Factors |
There have been no material changes from the risk factors previously disclosed in the Annual Report on Form 10-K.
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 |
Exhibit Number |
Description | |
10.1* | Employment Agreement, dated as of February 22, 2012, by and between EVERTEC, Inc. and Peter Harrington. | |
10.2* | Subscription Agreement, dated as of February 22, 2012, by and between Carib Holdings, Inc. and Peter Harrington. | |
10.3* | Confidential Modification Agreement and General Release, dated as of February 24, 2012, by and between EVERTEC, Inc., Carib Holdings, Inc., Felix M. Villamil Pagani and Lourdes Duran. | |
10.4* | Carib Latam Holdings, Inc. Amended and Restated Stock Option Agreement, dated as of May 9, 2012, by and between Carib Latam Holdings, Inc. and Peter Harrington. | |
10.5* | Carib Latam Holdings, Inc. Amended and Restated Stock Option Agreement, dated as of May 9, 2012, by and between Carib Latam Holdings, Inc. and Felix M. Villamil Pagani. | |
10.6* | Carib Latam Holdings, Inc. Amended and Restated Stock Option Agreement, dated as of May 9, 2012, by and between Carib Latam Holdings, Inc. and Juan Jose Roman-Jimenez. | |
10.7* | Carib Latam Holdings, Inc. Amended and Restated Stock Option Agreement, dated as of May 9, 2012, by and between Carib Latam Holdings, Inc. and Carlos J. Ramirez. | |
10.8* | Carib Latam Holdings, Inc. Amended and Restated Stock Option Agreement, dated as of May 9, 2012, by and between Carib Latam Holdings, Inc. and Luis G. Alvarado. | |
10.9* | Carib Latam Holdings, Inc. Amended and Restated Stock Option Agreement, dated as of May 9, 2012, by and between Carib Latam Holdings, Inc. and Miguel Vizcarrondo. | |
10.10* | Carib Latam Holdings, Inc. Amended and Restated Stock Option Agreement, dated as of May 9, 2012, by and between Carib Latam Holdings, Inc. and Miguel Vizcarrondo. | |
10.11* | Carib Latam Holdings, Inc. Amended and Restated Stock Option Agreement, dated as of May 9, 2012, by and between Carib Latam Holdings, Inc. and Nathaniel Lipman. | |
10.12* | Carib Latam Holdings, Inc. Amended and Restated Stock Option Agreement, dated as of May 9, 2012, by and between Carib Latam Holdings, Inc. and Thomas M. White 2006 Trust. | |
31.1* | Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a) | |
31.2* | Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a) |
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Exhibit Number |
Description | |
32.1** | Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 | |
32.2** | Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 | |
101.INS XBRL*** | Instance document | |
101.SCH XBRL*** | Taxonomy Extension Schema | |
101.CAL XBRL*** | Taxonomy Extension Calculation Linkbase | |
101.DEF XBRL*** | Taxonomy Extension Definition Linkbase | |
101.LAB XBRL*** | Taxonomy Extension Label Linkbase | |
101.PRE XBRL*** | Taxonomy Extension Presentation Linkbase |
* | Filed herewith. |
** | Furnished herewith. |
*** | 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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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, LLC (Registrant) | ||||||
Date: May 15, 2012 |
By: | /s/ Peter Harrington | ||||
Peter Harrington Chief Executive Officer | ||||||
Date: May 15, 2012 |
By: | /s/ Juan J. Román | ||||
Juan J. Román Chief Financial Officer |
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