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Segment Information

6 Months Ended

Jun. 30, 2020

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

The Payment Services - Puerto Rico & Caribbean segment revenues are comprised of revenues related to providing access to the ATH debit network and other card networks to financial institutions, including related services such as authorization, processing, management and recording of ATM and point of sale ("POS") transactions, and ATM management and monitoring. The segment revenues also include revenues from card processing services (such as credit and debit card processing, authorization and settlement and fraud monitoring and control to debit or credit issuers), payment processing services (such as payment and billing products for merchants, businesses and financial institutions) and EBT (which principally consist of services to the government of Puerto Rico for the delivery of benefits to participants). For ATH debit network and processing services, revenues are primarily driven by the number of transactions processed. Revenues are derived primarily from network fees, transaction switching and processing fees, and the leasing of POS devices. For card issuer processing, revenues are primarily dependent upon the number of cardholder accounts on file, transactions and authorizations processed, the number of cards embossed and other processing services. For EBT services, revenues are primarily derived from the number of beneficiaries on file.

The Payment Services - Latin America segment revenues consist of revenues related to providing access to the ATH network of ATMs and other card networks to financial institutions, including related services such as authorization, processing, management and recording of ATM and POS transactions, and ATM management and monitoring. The segment revenues also include revenues from card processing services (such as credit and debit card processing, authorization and settlement and fraud monitoring and control to debit or credit issuers), payment processing services (such as payment and billing products for merchants, businesses and financial institutions), as well as licensed software solutions for risk and fraud management and card payment processing. For network and processing services, revenues are primarily driven by the number of transactions processed. Revenues are derived primarily from network fees, transaction switching and processing fees, and the leasing of POS devices. For card issuer processing, revenues are primarily dependent upon the number of cardholder accounts on file, transactions and authorizations processed, the number of cards embossed, and other processing services.

The Merchant Acquiring segment consists of revenues from services that allow merchants to accept electronic methods of payment. In the Merchant Acquiring segment, revenues include a discount fee and membership fees charged to merchants, debit network fees and rental fees from POS devices and other equipment, net of credit card interchange and assessment fees charged by credit cards associations (such as VISA or MasterCard) or payment networks. The discount fee is generally a percentage of the transaction value. EVERTEC also charges merchants for other services that are unrelated to the number of transactions or the transaction value.

The Business Solutions segment consists of revenues from a full suite of business process management solutions in various product areas such as core bank processing, network hosting and management, IT professional services, business process outsourcing, item processing, cash processing, and fulfillment. Core bank processing and network services revenues are derived in part from a recurrent fixed fee and from fees based on the number of accounts on file (i.e. savings or checking accounts, loans, etc.) or computer resources utilized. Revenues from other processing services within the Business Solutions segment are generally volume-based and depend on factors such as the number of accounts processed. In addition, EVERTEC is a reseller of hardware and software products and these resale transactions are generally non-recurring.

In addition to the four operating segments described above, management identified certain functional cost areas that operate independently and do not constitute businesses in themselves. These areas could neither be concluded as operating segments nor could they be combined with any other operating segments. Therefore, these areas are aggregated and presented within the “Corporate and Other” category in the financial statements alongside the operating segments. The Corporate and Other category consists of corporate overhead expenses, intersegment eliminations, certain leveraged activities and other non-operating and miscellaneous expenses that are not included in the operating segments. The overhead and leveraged costs relate to activities such as:


•	marketing,


•	corporate finance and accounting,


•	human resources,


•	legal,


•	risk management functions,


•	internal audit,


•	corporate debt related costs,


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


•	intersegment revenues and expenses, and


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

The Chief Operating Decision Maker ("CODM") reviews the operating segments separate financial information to assess performance and to allocate resources. Management evaluates the operating results of each of its operating segments based upon revenues and Adjusted EBITDA. Adjusted EBITDA is defined as EBITDA further adjusted to exclude unusual items and other adjustments. Adjusted EBITDA, as it relates to operating segments, is presented in conformity with ASC Topic 280, Segment Reporting, given that it is reported to the CODM for purposes of allocating resources. Segment asset disclosure is not used by the CODM as a measure of segment performance since the segment evaluation is driven by revenues and Adjusted EBITDA. As such, segment assets are not disclosed in the notes to the accompanying unaudited condensed consolidated financial statements.

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



	Three months ended June 30, 2020
(In thousands)	Payment Services - Puerto Rico & Caribbean			Payment Services - Latin America		Merchant Acquiring, net		Business Solutions		Corporate and Other ⁽¹⁾			Total

Revenues	$	27,461		$	19,797	$	24,764	$	55,495	$	(9,580	)	$	117,937
Operating costs and expenses	17,453			17,947		12,230		37,008		7,709			92,347
Depreciation and amortization	3,193			2,815		455		4,381		6,995			17,839
Non-operating income (expenses)	(178		)	584		158		684		(883		)	365
EBITDA	13,023			5,249		13,147		23,552		(11,177		)	43,794
Compensation and benefits ⁽²⁾	253			835		235		472		1,956			3,751
Transaction, refinancing and other fees ⁽³⁾	—			—		—		—		2,656			2,656
Adjusted EBITDA	$	13,276		$	6,084	$	13,382	$	24,024	$	(6,565	)	$	50,201

(1)

Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and intersegment eliminations. Intersegment revenue eliminations predominantly reflect the $7.3 million processing fee from Payments Services - Puerto Rico & Caribbean to Merchant Acquiring and intercompany software developments and transaction processing of $2.3 million from Payment Services - Latin America to Payment Services - Puerto Rico & Caribbean. Corporate and Other was impacted by the intersegment elimination of revenue recognized in the Payment Services - Latin America segment and capitalized in the Payment Services - Puerto Rico & Caribbean segment; excluding this impact, Corporate and Other Adjusted EBITDA would be $4.3 million.


(2)	Primarily represents share-based compensation.


(3)	Primarily represents fees and expenses associated with corporate transactions as defined in the 2018 Credit Agreement and the elimination of non-cash equity earnings from our 19.99% equity investment in Consorcio de Tarjetas Dominicanas S.A.



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

Revenues	$	30,482	$	21,106	$	26,793	$	55,183	$	(11,016	)	$	122,548
Operating costs and expenses	13,630		17,654		15,230		35,959		2,387			84,860
Depreciation and amortization	2,740		2,547		423		4,479		7,006			17,195
Non-operating income (expenses)	470		1,601		10		34		(3,061		)	(946		)
EBITDA	20,062		7,600		11,996		23,737		(9,458		)	53,937
Compensation and benefits ⁽²⁾	257		173		255		529		2,284			3,498
Transaction, refinancing and other fees ⁽³⁾	—		—		—		—		362			362
Adjusted EBITDA	$	20,319	$	7,773	$	12,251	$	24,266	$	(6,812	)	$	57,797

(1)

Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and intersegment eliminations. Intersegment revenue eliminations predominantly reflect the $9.7 million processing fee from Payments Services - Puerto Rico & Caribbean to Merchant Acquiring and intercompany software sale and developments of $1.3 million from Payment Services - Latin America to Payment Services - Puerto Rico & Caribbean. Corporate and Other was impacted by the intersegment elimination of revenue recognized in the Payment Services - Latin America segment and capitalized in the Payment Services - Puerto Rico & Caribbean segment; excluding this impact, Corporate and Other Adjusted EBITDA would be $5.5 million.


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


(3)	Primarily represents fees and expenses associated with corporate transactions as defined in the 2018 Credit Agreement and the elimination of non-cash equity earnings from our 19.99% equity investment in Consorcio de Tarjetas Dominicanas S.A., net of cash dividends received.



	Six months ended June 30, 2020
(In thousands)	Payment Services - Puerto Rico & Caribbean			Payment Services - Latin America		Merchant Acquiring, net		Business Solutions		Corporate and Other ⁽¹⁾			Total

Revenues	$	57,348		$	41,437	$	49,885	$	111,438	$	(20,229	)	$	239,879
Operating costs and expenses	34,859			35,598		26,936		70,625		13,508			181,526
Depreciation and amortization	6,442			5,572		954		8,677		13,989			35,634
Non-operating income (expenses)	(65		)	1,338		312		1,071		(1,845		)	811
EBITDA	28,866			12,749		24,215		50,561		(21,593		)	94,798
Compensation and benefits ⁽²⁾	484			1,577		451		908		3,831			7,251
Transaction, refinancing and other fees ⁽³⁾	—			—		—		—		4,442			4,442
Adjusted EBITDA	$	29,350		$	14,326	$	24,666	$	51,469	$	(13,320	)	$	106,491

(1)

Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and intersegment eliminations. Intersegment revenue eliminations predominantly reflect the $16.3 million processing fee from Payments Services - Puerto Rico & Caribbean to Merchant Acquiring and intercompany software developments and transaction processing of $3.9 million from Payment Services - Latin America to Payment Services - Puerto Rico & Caribbean. Corporate and Other was impacted by the intersegment elimination of revenue recognized in the Payment Services - Latin America segment and capitalized in the Payment Services - Puerto Rico & Caribbean segment; excluding this impact, Corporate and Other Adjusted EBITDA would be $9.4 million.


(2)	Primarily represents share-based compensation.


(3)	Primarily represents fees and expenses associated with corporate transactions as defined in the 2018 Credit Agreement and the elimination of non-cash equity earnings from our 19.99% equity investment in Consorcio de Tarjetas Dominicanas S.A.



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

Revenues	$	62,499	$	41,937	$	52,767	$	106,547	$	(22,366	)	$	241,384
Operating costs and expenses	27,845		35,227		29,948		68,869		4,402			166,291
Depreciation and amortization	5,383		4,743		891		8,333		14,118			33,468
Non-operating income (expenses)	1,051		4,235		31		220		(6,053		)	(516		)
EBITDA	41,088		15,688		23,741		46,231		(18,703		)	108,045
Compensation and benefits ⁽²⁾	494		339		475		1,083		4,546			6,937
Transaction, refinancing and other fees ⁽³⁾	—		2		—		—		409			411
Adjusted EBITDA	$	41,582	$	16,029	$	24,216	$	47,314	$	(13,748	)	$	115,393

(1)

Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and intersegment eliminations. Intersegment revenue eliminations predominantly reflect the $18.9 million processing fee from Payments Services - Puerto Rico & Caribbean to Merchant Acquiring and intercompany software sale and developments of $3.4 million from Payment Services - Latin America to the Payment Services - Puerto Rico & Caribbean. Corporate and Other was impacted by the intersegment elimination of revenue recognized in the Payment Services - Latin America segment and capitalized in the Payment Services - Puerto Rico & Caribbean segment; excluding this impact, Corporate and Other Adjusted EBITDA would be $10.3 million.


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


(3)	Primarily represents fees and expenses associated with corporate transactions as defined in the 2018 Credit Agreement and the elimination of non-cash equity earnings from our 19.99% equity investment in Consorcio de Tarjetas Dominicanas S.A., net of cash dividends received.

The reconciliation of EBITDA to consolidated net income is as follows:



	Three months ended June 30,				Six months ended June 30,
(In thousands)	2020		2019		2020		2019
Total EBITDA	$	43,794	$	53,937	$	94,798	$	108,045
Less:
Income tax expense	4,520		2,489		9,038		6,298
Interest expense, net	5,810		7,116		12,226		14,408
Depreciation and amortization	17,839		17,195		35,634		33,468
Net income	$	15,625	$	27,137	$	37,900	$	53,871

- Definition

The entire disclosure for reporting segments including data and tables. Reportable segments include those that meet any of the following quantitative thresholds a) it's reported revenue, including sales to external customers and intersegment sales or transfers is 10 percent or more of the combined revenue, internal and external, of all operating segments b) the absolute amount of its reported profit or loss is 10 percent or more of the greater, in absolute amount of 1) the combined reported profit of all operating segments that did not report a loss or 2) the combined reported loss of all operating segments that did report a loss c) its assets are 10 percent or more of the combined assets of all operating segments.

+ References

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