The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") covers: (i) the results of operations for the three months ended
March 31, 2022and 2021 and (ii) the financial condition as of March 31, 2022. You should read the following discussion and analysis in conjunction with the audited consolidated financial statements (the "Audited Consolidated Financial Statements") and related notes for the fiscal year ended December 31, 2021, included in the Company's Annual Report on Form 10-K as filed with the SECon February 25, 2022and with the unaudited condensed consolidated financial statements (the "Unaudited Condensed Consolidated Financial Statements") and related notes appearing elsewhere herein. This MD&A contains forward-looking statements that involve risks and uncertainties. Our actual results may differ from those indicated in the forward-looking statements. See "Forward-Looking Statements" for a discussion of the risks, uncertainties and assumptions associated with these statements. Except as otherwise indicated or unless the context otherwise requires, (a) the terms " EVERTEC," "we," "us," "our," "our Company" and "the Company" refer to EVERTEC, Inc.and its subsidiaries on a consolidated basis, (b) the term "Holdings" refers to EVERTEC Intermediate Holdings, LLC, but not any of its subsidiaries and (c) the term "EVERTEC Group" refers to EVERTEC Group, LLCand its predecessor entities and their subsidiaries on a consolidated basis. EVERTEC Inc.'ssubsidiaries include Holdings, EVERTEC Group, EVERTEC Dominicana, SAS, Evertec Chile Holdings SpA (formerly known as Tecnopago SpA), Evertec Chile SpA (formerly known as EFT Group SpA), Evertec Chile Global SpA (formerly known as EFT Global Services SpA), Evertec Chile Servicios Profesionales SpA (formerly known as EFT Servicios Profesionales SpA), EFT Group S.A., Tecnopago España SL, Paytrue S.A., Caleidon, S.A., Evertec Brasil Informática Ltda. (formerly known as Paytrue Solutions Informática Ltda.), EVERTEC Panamá, S.A., EVERTEC Costa Rica, S.A.("EVERTEC CR"), EVERTEC Guatemala, S.A., Evertec Colombia, SAS (formerly known as Processa, SAS), EVERTEC USA, LLC, Evertec Placetopay, SAS (formerly known as EGM Ingeniería sin Fronteras, S.A.S. ("PlacetoPay")) and EVERTEC México Servicios de Procesamiento, S.A. de C.V.Neither EVERTECnor Holdings conducts any operations other than with respect to its indirect or direct ownership of EVERTEC Group.
EVERTECis a leading full-service transaction-processing business in Puerto Rico, the Caribbeanand Latin America, providing a broad range of merchant acquiring, payment services and business process management services. We believe that we are one of the largest merchant acquirers in Latin Americabased on total number of transactions and the largest merchant acquirer in the Caribbean. We serve 26 countries out of 11 offices, including our headquarters in Puerto Rico. We own and operate the ATH network, one of the leading personal identification number ("PIN") debit and automated teller machine ("ATM") networks in the Caribbeanand Latin America. We manage a system of electronic payment networks and offer a comprehensive suite of services for core banking, cash processing, and fulfillment in Puerto Rico, that process over three billion transactions annually. Additionally, we offer technology outsourcing in all the regions we serve. We serve a diversified customer base of leading financial institutions, merchants, corporations, and government agencies with "mission-critical" technology solutions that enable them to issue, process and accept transactions securely. We believe our business is well-positioned to continue to expand across the fast-growing Latin American region. We are differentiated, in part, by our diversified business model, which enables us to provide our varied customer base with a broad range of transaction-processing services from a single source across numerous channels and geographic markets. We believe this capability provides several competitive advantages that will enable us to continue to penetrate our existing customer base with complementary new services, win new customers, develop new sales channels, and enter new markets. We believe these competitive advantages include: •Our ability to provide competitive products; •Our ability to provide in one package a range of services that traditionally had to be sourced from different vendors; •Our ability to leverage proprietary IP that enables us to be nimble and flexible when it comes to client requirements; •Our ability to put forth Spanish speaking developers in front of our Spanish speaking customers making communication much more effective and integrations more efficient; •Our ability to serve customers with disparate operations across several geographies with technology solutions that enable them to manage their business as one enterprise; and •Our ability to capture and analyze data across the transaction-processing value chain and use that data to provide value-added services that are differentiated from those offered by pure-play vendors that serve only one portion of the transaction-processing value chain (such as only merchant acquiring or payment services). 19 -------------------------------------------------------------------------------- Table of Contents Our broad suite of services spans the entire transaction-processing value chain and includes a range of front-end customer-facing solutions such as the electronic capture and authorization of transactions at the point-of-sale, as well as back-end support services such as the clearing and settlement of transactions and account reconciliation for card issuers. These include: (i) merchant acquiring services, which enable point of sales ("POS") and e-commerce merchants to accept and process electronic methods of payment such as debit, credit, prepaid and electronic benefit transfer ("EBT") cards; (ii) payment processing services, which enable financial institutions and other issuers to manage, support and facilitate the processing for credit, debit, prepaid, automated teller machines ("ATM") and EBT card programs; and (iii) business process management solutions, which provide "mission-critical" technology solutions such as core bank processing, as well as IT outsourcing and cash management services to financial institutions, corporations and governments. We provide these services through scalable, end-to-end technology platforms that we manage and operate in-house and that generate significant operating efficiencies that enable us to maximize profitability. We sell and distribute our services primarily through a proprietary direct sales force with established customer relationships. We continue to pursue joint ventures and merchant acquiring alliances. We benefit from an attractive business model, the hallmarks of which are recurring revenue, scalability, significant operating margins, and moderate capital expenditure requirements. Our revenue is predominantly recurring in nature because of the mission-critical and embedded nature of the services we provide. In addition, we generally negotiate multi-year contracts with our customers. We believe our business model should enable us to continue to grow our business organically in the primary markets we serve without significant incremental capital expenditures.
Relationship with popular
September 30, 2010, EVERTEC Groupentered into a 15-year MSA, and several related agreements with Popular. Under the terms of the MSA, Popular agreed to use EVERTECservices on an ongoing exclusive basis for the duration of the agreement. Additionally, Popular granted us a right of first refusal on the development of certain new financial technology products and services for the duration of the MSA. On February 24, 2022, we entered into an agreement to modify and extend the main commercial agreements with Popular, including a 10-year extension of the Merchant Acquiring Independent Sales OrganizationAgreement (the "ISO Agreement"), a 5-year extension of the ATH Network Participation Agreement and a 3-year extension of the MSA. The ISO Agreement, which sets our merchant acquiring relationship with Popular, will now include revenue sharing provisions with Popular. The MSA modifications include the elimination of the exclusivity requirement, the inclusion of annual MSA minimums through 2028, a 10% discount on certain MSA services in October 2025and adjustments to the existing CPI pricing escalator clause. We also entered into an agreement to sell Popular certain assets in exchange for Popular owned Evertecstock ("Popular Transaction"). As part of this transaction, Popular has agreed to take certain actions after closing to ensure that Evertecis no longer deemed a "subsidiary" of Popular for purposes of the Bank Holding Company Act, including reducing Popular's voting interest in Evertecto 4.5% over a period of three months after the close of the transaction through either the sale of shares or conversion to non-voting preferred shares. The Popular Transaction is expected to close mid-year 2022, at which point the contract extensions will become effective.
Factors and trends affecting the results of our operations
The ongoing migration from cash and paper methods of payment to electronic payments continues to benefit the transaction- processing industry globally. We believe that the penetration of electronic payments in the markets in which we operate is significantly lower relative to the U.S. market, which, coupled with the ongoing shift from cash and paper methods of payment to electronic payments will continue to generate growth opportunities for our business. For example, currently the adoption of banking products, including electronic payments, in the Latin American and
Caribbeanregion is lower relative to the mature U.S.and European markets. We believe that the unbanked and underbanked population in our markets will continue to shrink, and therefore drive incremental penetration and growth of electronic payments in Puerto Ricoand other Latin American regions. We also benefit from the outsourcing of technology systems and processes trend for financial institutions and government. Many medium- and small-size institutions in the Latin American markets in which we operate have outdated computer systems and updating these IT legacy systems is financially and logistically challenging, which presents a business opportunity for us. As a result of the COVID-19 pandemic, consumer preference has accelerated its shift away from cash and paper payment methods, noting increased demand for omni-channel payment services that facilitate cashless and contactless transactions. The ongoing migration from cash and paper methods of payment to electronic payments continues to benefit the transaction-processing industry globally. The markets in which we operate, particularly in the Latin American and Caribbeanregion continue to grow and consumer preference is driving an increase for electronic payments usage. Latin Americais one of the fastest-growing mobile markets globally, with a growing base of tech-savvy customers that demonstrate a preference for credit cards, digital wallets, contactless payments, and other value-added offerings. The region's FinTech sector is driving change via new contactless payment technology that are becoming popular alternatives to cash payments. We continue to believe that the 20
Table of Contents The attractive characteristics of our markets and our position in multiple services and sectors will continue to drive the growth and profitability of our business.
Finally, our financial condition and results of operations depend in part on economic and general conditions in the regions in which we operate.
Results of Operations
Comparison of the three months ended
Three months ended March 31, In thousands 2022 2021 Variance Revenues
$ 150,248 $ 139,528 $ 10,7208 % Operating costs and expenses Cost of revenues, exclusive of depreciation and amortization 64,659 59,804 4,855 8 % Selling, general and administrative expenses 20,384 16,102 4,282 27 % Depreciation and amortization 19,160 18,623 537 3 % Total operating costs and expenses 104,203 94,529 9,674 10 % Income from operations $ 46,045 $ 44,999 $ 1,0462 % Revenues Total revenues for the quarter ended March 31, 2022was $150.2 million, an increase of 8% compared with $139.5 millionin the prior year reflecting increases across all of the Company's segments. Revenue in Puerto Ricobenefited from sales volume growth, driven by a full quarter of revenue contribution from the FirstBankexpanded relationship, with a higher average ticket and slightly higher spread, as well as, growth in POS transactions processed and the continued growth of our digital solutions, ATH Movil and ATH Business. Revenue also benefited from the year over year CPI impact on the current Popular MSA and revenue generated from the printing contract entered into in the prior year. Latin Americarevenue reflected organic growth that includes revenue generated from new client contracts. Cost of Revenues Cost of revenues for the three months ended March 31, 2022amounted to $64.7 million, an increase of $4.9 millionor 8% when compared to the same period in the prior year. The increase during the three months is primarily driven by an increase in personnel costs, mainly due to increased headcount, and equipment expenses, mainly as a result of increases in repairs and maintenance of software and hardware, and an increase in cloud services as utilization continues to grow.
Selling, general and administrative expenses
Selling, general and administrative expenses for the three months ended
March 31, 2022increased by $4.3 millionor 27% when compared to the same period in the prior year. The increase is driven by an increase in professional fees for corporate transactions and increased personnel costs.
Depreciation and amortization
Depreciation and amortization expense for the three months ended
March 31, 2022amounted to $19.2 million, an increase of $0.5 millionor 3% when compared to the same period in the prior year. Increased expense during the three months is driven by an increase in software amortization as a result of key projects that went into production in the prior years and an increase in the amortization of customer relationships. 21
Table of Contents Non-Operating Expenses Three months ended March 31, In thousands 2022 2021 Variance Interest income $ 667
$ 389 $ 27871 % Interest expense (5,547) (5,906) 359 6 % Earnings of equity method investment 570 502 68 14 % Other income 3,306 328 2,978 908 % Total non-operating expenses $ (1,004) $ (4,687) $ 3,68379 % Non-operating expenses for the three months ended March 31, 2022decreased by $3.7 millionto $1.0 millionwhen compared to the same period in the prior year. The decrease is mainly related to a $3.0 millionincrease in other income driven by the favorable impact of the remeasurement of assets and liabilities denominated in US dollars and a $0.4 milliondecrease in interest expense, resulting from a reduction in interest rates and a lower outstanding balance. Income Tax Expense Three months ended March 31, In thousands 2022 2021 Variance Income tax expense $ 6,175 $ 4,708 $ 1,46731 % Income tax expense for the three months ended March 31, 2022amounted to $6.2 million, an increase of $1.5 millionwhen compared to the same period in the prior year. The effective tax rate for the period was 13.7%, compared with 11.7% in the 2021 period. The increase in the effective tax rate primarily reflects an increase in revenues in higher taxed jurisdictions, in addition to higher withholding taxes and the impact of higher net discrete tax items recorded in the prior year quarter. Segment Results of Operations
The Company operates through four business segments: Payment Services –
The Payment Services -
Puerto Rico& Caribbeansegment 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), ATH Movil (person-to-person) and ATH Business (person-to-merchant) digital transactions and EBT (which principally consist of services to the government of Puerto Ricofor 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 Americasegment 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 22 -------------------------------------------------------------------------------- Table of Contents 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 VISAor MasterCard) or payment networks. The discount fee is generally a percentage of the transaction value. EVERTECalso 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.), server capacity usage 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, EVERTECis 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:
•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. 23 -------------------------------------------------------------------------------- Table of Contents The following tables set forth information about the Company's operations by its four business segments for the periods indicated below.
Comparison of the three months ended
Payment services –
Three months ended March 31, In thousands 2022 2021 Revenues
$40,008 $36,264Adjusted EBITDA 23,781 20,803 Adjusted EBITDA Margin 59.4 % 57.4 % Payment Services - Puerto Rico& Caribbeansegment revenues for the three months ended March 31, 2022increased by $3.7 millionto $40.0 millionwhen compared to the same period in the prior year. The increase in revenues was primarily driven by an increase in POS processing and continued strong digital payments growth from ATH Movil and ATH Business, as well as an increase in transaction processing and monitoring revenue recognized for services provided to the Payment Services - Latin America Segment. Adjusted EBITDA increased by $3.0 millionto $23.8 milliondriven by the increase in revenues partially offset by higher operating expenses, including costs related to POS equipment maintenance.
Payment services –
Three months ended March 31, In thousands 2022 2021 Revenues
$28,783 $25,014Adjusted EBITDA 12,427 10,019 Adjusted EBITDA Margin 43.2 % 40.1 % Payment Services - Latin Americasegment revenues for the three months ended March 31, 2022increased by $3.8 millionto $28.8 milliondriven mainly by organic growth including revenue generated by new client contracts signed in prior years. Adjusted EBITDA increased by $2.4 millionwhen compared to the same period in the prior year primarily due to the increase in revenues and the $3.1 millionfavorable impact of the remeasurement of assets and liabilities denominated in US dollars, partially offset by an increase in fees for transaction processing and monitoring services from the Payment Services - Puerto Rico& Caribbeansegment. Merchant Acquiring Three months ended March 31, In thousands 2022 2021 Revenues $35,629 $30,867Adjusted EBITDA 17,084 15,517 Adjusted EBITDA Margin 47.9 % 50.3 % Merchant Acquiring segment revenues for the three months ended March 31, 2022increased by $4.8 millionto $35.6 millionmainly as a result of an increase in sales volume with a higher average ticket and a slightly higher spread per transaction. The higher volume was driven mainly by a full quarter contribution from the FirstBankexpanded relationship, compared with one month in the prior year quarter. Adjusted EBITDA increased by $1.6 milliondriven by the increase in revenues, partially offset by higher operating costs from a full quarter of FirstBankand higher operating expenses. 24 --------------------------------------------------------------------------------
Table of Contents Business Solutions Three months ended March 31, In thousands 2022 2021 Revenues
$62,624 $60,611Adjusted EBITDA 29,604 29,632 Adjusted EBITDA Margin 47.3 % 48.9 % Business Solutions segment revenues for the three months ended March 31, 2022increased by $2.0 millionto $62.6 millionas a result of higher transactions and account volumes, and the benefit of the CPI impact on the current MSA. In addition, the quarter benefited from incremental printing volume resulting from the printing contract entered into in the prior year and that began to have an impact in the second half of 2021. These increases were partially offset by hardware and software sales as well as services provided to the Puerto Rico Department of Educationsin the prior year quarter that did not recur. Adjusted EBITDA remained relatively flat at $29.6 millionas the increase in revenue was offset by increased expenses, mainly software and hardware maintenance costs.
Cash and capital resources
Our principal source of liquidity is cash generated from operations, and our primary liquidity requirements are the funding of working capital needs, capital expenditures, dividend payments, share repurchases, debt service, and acquisitions. We also have a
$125.0 millionRevolving Facility, of which $119.1 millionwas available for borrowing as of March 31, 2022. The Company issues letters of credit against our Revolving Facility which reduce our availability of funds to be drawn. As of March 31, 2022, we had cash and cash equivalents of $283.6 million, of which $103.7 millionresides in our subsidiaries located outside of Puerto Ricofor purposes of (i) funding the respective subsidiary's current business operations and (ii) funding potential future investment outside of Puerto Rico. We intend to indefinitely reinvest these funds outside of Puerto Rico, and based on our liquidity forecast, we will not need to repatriate this cash to fund the Puerto Ricooperations or to meet debt-service obligations. However, if in the future we determine that we no longer need to maintain cash balances within our foreign subsidiaries, we may elect to distribute such cash to the Company in Puerto Rico. Distributions from the foreign subsidiaries to Puerto Ricomay be subject to tax withholding and other tax consequences. Additionally, our credit agreement imposes certain restrictions on the distribution of dividends from subsidiaries. Based on our current level of operations, we believe our cash flows from operations and the available secured Revolving Facility will be adequate to meet our liquidity needs for the next twelve months. However, our ability to fund future operating expenses, dividend payments, capital expenditures, mergers and acquisitions, and our ability to make scheduled payments of interest, to pay principal on or refinance our indebtedness and to satisfy any other of our present or future debt obligations will depend on our future operating performance, which may be affected by general economic, financial and other factors beyond our control. Three months ended March 31, (In thousands) 2022 2021 Cash provided by operating activities $ 70,350 $ 34,746Cash used in investing activities (14,290) (34,413) Cash used in financing activities (36,169) (48,716)
Effect of exchange rate on cash, cash equivalents and restricted cash
(1,903) 2,700 Increase (decrease) in cash, cash equivalents and restricted cash
$ 17,988 $ (45,683)Net cash provided by operating activities for the three months ended March 31, 2022was $70.4 millioncompared to $34.7 millionfor the same period in the prior year. The $35.6 millionincrease in cash provided by operating activities is primarily driven by an increase in collections for accounts receivable as well as less cash used to pay down accounts payable and accrued liabilities as the Company continues to effectively manage working capital. Net cash used in investing activities for the three months ended March 31, 2022was $14.3 millioncompared to $34.4 millionfor the same period in the prior year. The $20.1 milliondecrease is primarily attributable to the acquisition in the prior year of a 25 -------------------------------------------------------------------------------- Table of Contents $14.8 millioncustomer relationship and $3.0 millionin available-for-sale debt securities in addition to a decrease in additions to software of $3.3 million. Net cash used in financing activities for the three months ended March 31, 2022was $36.2 millioncompared to $48.7 millionfor the same period in the prior year. The $12.5 milliondecrease was mainly attributed to a decrease of $16.4 millionin cash used to pay down long-term debt and a $3.1 milliondecrease in withholding taxes paid on share-based compensation partially offset by an increase in cash used to repurchase common stock of $6.9 million.
Our principal capital expenditures are for hardware and computer software (purchased and internally developed) and additions to property and equipment. During the three months ended
March 31, 2022and 2021, we invested approximately $14.3 millionand $16.7 million, respectively. In addition, during the three month period ended March 31, 2021, the Company acquired a $14.8 millioncustomer relationship as well as $3.0 millionin available-for-sale debt securities. Generally, we fund capital expenditures with cash flow generated from operations and, if necessary, borrowings under our Revolving Facility.
February 15, 2022, the Board declared quarterly cash dividends of $0.05per share of common stock, which were paid on March 25, 2022, to stockholders of record as of the close of business on February 25, 2022. On April 21, 2022, our Board declared a regular quarterly cash dividend of $0.05per share on the Company's outstanding shares of common stock. The dividend will be paid on June 3, 2022to stockholders of record as of the close of business on May 2, 2022. The Board anticipates declaring this dividend in future quarters on a regular basis; however future declarations of dividends are subject to the Board's approval and may be adjusted as business needs or market conditions change. Financial Obligations Secured Credit Facilities On November 27, 2018, EVERTECand EVERTEC Group("Borrower") entered into a credit agreement providing for the secured credit facilities, consisting of a $220.0 millionterm loan A facility that matures on November 27, 2023(the "2023 Term A Loan"), a $325.0 millionterm loan B facility that matures on November 27, 2024(the "2024 Term B Loan"), and a $125.0 millionrevolving credit facility (the "Revolving Facility") that matures on November 27, 2023, with a syndicate of lenders and Bank of America, N.A. (" Bank of America"), as administrative agent, collateral agent, swingline lender and line of credit issuer (collectively the "2018 Credit Agreement"). The 2018 Credit Agreement requires mandatory repayment of outstanding principal balances based on a percentage of excess cash flow, provided that no such payment shall be due if the resulting amount of the excess cash flow multiplied by the applicable percentage is less than $10 millionor if the leverage ratio is below 1.75x. On March 8, 2021, in connection with this mandatory repayment clause, the Company repaid $17.8 million, as a result of excess cash flow calculation performed for the year ended December 31, 2020. No mandatory repayment was required in the first quarter of 2022 in connection with the excess cash flow calculation performed for the year ended December 31, 2021as the leverage ratio was below 1.75x. The unpaid principal balance at March 31, 2022of the 2023 Term A Loan and the 2024 Term B Loan was $167.5 millionand $295.0 million, respectively. The additional borrowing capacity under our Revolving Facility at March 31, 2022was $119.1 million. The Company issues letters of credit against the Revolving Facility which reduce the additional borrowing capacity of the Revolving Facility.
December 2019, EVERTEC Groupentered into two non-interest bearing financing agreements amounting to $2.4 millionto purchase software and maintenance, which were fully repaid in January 2022. As of December 31, 2021, the outstanding principal balance of the notes payable was $0.8 million. These notes were included in accounts payable in the Company's unaudited condensed consolidated balance sheets. 26 -------------------------------------------------------------------------------- Table of Contents Interest Rate Swaps As of March 31, 2022, the Company has an interest rate swap agreement, entered into in December 2018, which converts a portion of the interest rate payments on the Company's 2024 Term B Loan from variable to fixed: Swap Agreement Effective date Maturity Date Notional Amount Variable Rate Fixed Rate 2018 Swap April 2020 November 2024 $250 million1-month LIBOR 2.89%
The Company has accounted for this arrangement as a cash flow hedge.
March 31, 2022and December 31, 2021, the carrying amount of the derivative included on the Company's unaudited condensed consolidated balance sheets was $2.8 millionand $13.4 million, respectively. The fair value of this derivative is estimated using Level 2 inputs in the fair value hierarchy on a recurring basis. Refer to Note 7 of the unaudited condensed consolidated financial statements for disclosure of losses recorded on cash flow hedging activities. During the three months ended March 31, 2022and 2021, the Company reclassified losses of $1.7 millionand losses of $1.7 million, respectively, from accumulated other comprehensive loss into interest expense. Based on current LIBOR rates, the Company expects to reclassify losses of $2.8 millionfrom accumulated other comprehensive loss into interest expense over the next 12 months.
Cash flow hedging is considered highly effective.
Compliance with commitments
March 31, 2022, our secured leverage ratio was 1.36 to 1.00, as determined in accordance with the 2018 Credit Agreement. As of the date of filing of this Form 10-Q, no event has occurred that constitutes an Event of Default or Default under our 2018 Credit Agreement.
Reconciliation of Net Earnings to EBITDA, Adjusted EBITDA, Adjusted Net Earnings and Adjusted Earnings per Common Share (Non-GAAP Measures)
We define "EBITDA" as earnings before interest, taxes, depreciation and amortization. We define "Adjusted EBITDA" as EBITDA further adjusted to exclude unusual items and other adjustments described below. Adjusted EBITDA by segment is reported to the chief operating decision maker for purposes of making decisions about allocating resources to the segments and assessing their performance. For this reason, Adjusted EBITDA, as it relates to our segments, is presented in conformity with ASC Topic 280, Segment Reporting, and is excluded from the definition of non-GAAP financial measures under the
Securities and Exchange Commission'sRegulation G and Item 10(e) of Regulation S-K. We define "Adjusted Net Income" as net income adjusted to exclude unusual items and other adjustments described below. We define "Adjusted Earnings per common share" as Adjusted Net Income divided by diluted shares outstanding. We present EBITDA and Adjusted EBITDA because we consider them important supplemental measures of our performance and believe they are frequently used by securities analysts, investors and other interested parties in the evaluation of ourselves and other companies in our industry. In addition, our presentation of Adjusted EBITDA is substantially consistent with the equivalent measurements that are contained in the senior secured credit facilities in testing EVERTEC Group'scompliance with covenants therein such as the secured leverage ratio. We use Adjusted Net Income to measure our overall profitability because we believe better reflects our comparable operating performance by excluding the impact of the non-cash amortization and depreciation that was created as a result of merger and acquisition activity. In addition, in evaluating EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share, you should be aware that in the future we may incur expenses such as those excluded in calculating them. Further, our presentation of these measures should not be construed as an inference that our future operating results will not be affected by unusual or nonrecurring items.
Some of the limits for EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per Common Share are as follows:
•they do not reflect cash outlays for capital expenditures or future contractual commitments; •they do not reflect changes in, or cash requirements for, working capital; 27 -------------------------------------------------------------------------------- Table of Contents •although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash requirements for such replacements; •in the case of EBITDA and Adjusted EBITDA, they do not reflect interest expense, or the cash requirements necessary to service interest, or principal payments, on indebtedness; •in the case of EBITDA and Adjusted EBITDA, they do not reflect income tax expense or the cash necessary to pay income taxes; and •other companies, including other companies in our industry, may not use EBITDA, Adjusted EBITDA, Adjusted Net Income, and Adjusted Earnings per common share or may calculate EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share differently than as presented in this Report, limiting their usefulness as a comparative measure. EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share are not measurements of liquidity or financial performance under GAAP. You should not consider EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share as alternatives to cash flows from operating activities or any other performance measures determined in accordance with GAAP, as an indicator of cash flows, as a measure of liquidity or as an alternative to operating or net income determined in accordance with GAAP.
A reconciliation of net earnings to EBITDA, adjusted EBITDA, adjusted net earnings and adjusted earnings per common share is shown below:
Three months ended March 31, Twelve months ended (In thousands, except per share information) 2022 2021 March 31, 2022 Net income
$ 38,866 $ 35,604 $ 164,405Income tax expense 6,175 4,708 22,029 Interest expense, net 4,880 5,517 20,284 Depreciation and amortization 19,160 18,623 75,607 EBITDA 69,081 64,452 282,325 Equity income (1) (570) (502) (463) Compensation and benefits (2) 4,279 3,504 15,919 Transaction, refinancing and other fees (3) 2,595 1,435 3,533 Adjusted EBITDA 75,385 68,889 301,314 Operating depreciation and amortization (4) (11,252) (10,882) (43,808) Cash interest expense, net (5) (4,629) (5,076) (19,357) Income tax expense (6) (8,677) (7,756) (32,605) Non-controlling interest (7) 10 (143) (8) Adjusted net income $ 50,837 $ 45,032 $ 205,536Net income per common share (GAAP): Diluted $ 0.53 $ 0.49Adjusted Earnings per common share (Non-GAAP): Diluted $ 0.70 $ 0.62Shares used in computing adjusted earnings per common share: Diluted 72,853,216 72,949,401 1)Represents the elimination of non-cash equity earnings from our 19.99% equity investment in Dominican Republic, Consorcio de Tarjetas Dominicanas S.A.("CONTADO"), net of cash dividends received. 2)Primarily represents share-based compensation and severance payments. 3)Represents fees and expenses associated with corporate transactions as defined in the 2018 Credit Agreement, recorded as part of selling, general and administrative expenses, a software impairment charge and a gain from sale of assets. 4)Represents operating depreciation and amortization expense, which excludes amounts generated as a result of merger and acquisition activity. 28 -------------------------------------------------------------------------------- Table of Contents 5)Represents interest expense, less interest income, as they appear on the condensed consolidated statements of income and comprehensive income, adjusted to exclude non-cash amortization of the debt issue costs, premium and accretion of discount. 6)Represents income tax expense calculated on adjusted pre-tax income using the applicable GAAP tax rate, adjusted for certain discrete items. 7)Represents the 35% non-controlling equity interest in Evertec Colombia, net of amortization for intangibles created as part of the purchase.
Our payment businesses generally experience moderate increased activity during the traditional holiday shopping periods and around other nationally recognized holidays, which follow consumer spending patterns.
Effect of inflation
While inflation has had minimal net effect on our operating results during the last three years given that overall inflation has been offset by sales and cost reduction actions, the rate of inflation can impact certain input costs, such as occupancy, labor and benefits, and general administrative costs, which may not be readily recoverable from our customers and could affect our results of operations and financial condition. In addition, if inflation were to result in rising interest rates, it could result in an adverse effect on our cost of funding due to increased interest expense on our outstanding debt.
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