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Segment Information

9 Months Ended

Sep. 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 September 30, 2020
(In thousands)	Payment Services - Puerto Rico & Caribbean		Payment Services - Latin America		Merchant Acquiring, net		Business Solutions		Corporate and Other ⁽¹⁾			Total

Revenues	$	33,284	$	21,241	$	30,646	$	63,018	$	(11,682	)	$	136,507
Operating costs and expenses	19,045		18,284		15,643		35,276		4,415			92,663
Depreciation and amortization	3,349		2,936		477		4,372		6,993			18,127
Non-operating income (expenses)	127		2,959		161		411		(970		)	2,688
EBITDA	17,715		8,852		15,641		32,524		(10,073		)	64,659
Compensation and benefits ⁽²⁾	258		686		244		466		2,015			3,669
Transaction, refinancing and other fees ⁽³⁾	500		—		—		—		1,205			1,705
Adjusted EBITDA	$	18,473	$	9,538	$	15,885	$	32,990	$	(6,853	)	$	70,033

(1)

Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and intersegment eliminations. Intersegment revenue eliminations predominantly reflect the $9.1 million processing fee from Payments Services - Puerto Rico & Caribbean to Merchant Acquiring and intercompany software developments and transaction processing of $2.6 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, an impairment charge and the elimination of non-cash equity earnings from our 19.99% equity investment in Consorcio de Tarjetas Dominicanas S.A.



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

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

(1)

Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and intersegment eliminations. Intersegment revenue eliminations predominantly reflect the $10.0 million processing fee from Payments Services - Puerto Rico & Caribbean to Merchant Acquiring and intercompany software sale and developments of $1.6 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 $5.2 million.


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


(3)	Primarily represents the elimination of non-cash equity earnings from our 19.99% equity investment in Consorcio de Tarjetas Dominicanas S.A., net of cash dividends received.



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

Revenues	$	90,632	$	62,678	$	80,531	$	174,455	$	(31,910	)	$	376,386
Operating costs and expenses	53,904		53,882		42,579		105,901		17,923			274,189
Depreciation and amortization	9,791		8,508		1,431		13,049		20,982			53,761
Non-operating income (expenses)	62		4,297		473		1,482		(2,815		)	3,499
EBITDA	46,581		21,601		39,856		83,085		(31,666		)	159,457
Compensation and benefits ⁽²⁾	742		2,263		695		1,374		5,846			10,920
Transaction, refinancing and other fees ⁽³⁾	500		—		—		—		5,647			6,147
Adjusted EBITDA	$	47,823	$	23,864	$	40,551	$	84,459	$	(20,173	)	$	176,524

(1)

Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and intersegment eliminations. Intersegment revenue eliminations predominantly reflect the $25.4 million processing fee from Payments Services - Puerto Rico & Caribbean to Merchant Acquiring and intercompany software developments and transaction processing of $6.5 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 $13.7 million.


(2)	Primarily represents share-based compensation.


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



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

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

(1)

Corporate and Other consists of corporate overhead, certain leveraged activities, other non-operating expenses and intersegment eliminations. Intersegment revenue eliminations predominantly reflect the $29.0 million processing fee from Payments Services - Puerto Rico & Caribbean to Merchant Acquiring and intercompany software sale and developments of $4.9 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 $15.6 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 September 30,				Nine months ended September 30,
(In thousands)	2020		2019		2020		2019
Total EBITDA	$	64,659	$	52,397	$	159,457	$	160,442
Less:
Income tax expense	6,513		3,720		15,551		10,018
Interest expense, net	5,438		6,919		17,664		21,327
Depreciation and amortization	18,127		16,972		53,761		50,440
Net income	$	34,581	$	24,786	$	72,481	$	78,657

- 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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