EVERTEC, Inc. (EVTC) FY 2022 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) focuses on discussion of our 2022 results as compared to our 2021 results. For discussion of our 2021 results as compared to our 2020 results, see “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation” within our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 25, 2022. See Note 1 of the Notes to Audited Consolidated Financial Statements for additional information about the Company and the basis of presentation of our financial statements. You should read the following discussion and analysis in conjunction with the 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

EVERTEC is a leading full-service transaction-processing business in Puerto Rico, the Caribbean and Latin America, providing a broad range of merchant acquiring, payment services and business process management services. According to the September 2022 Nilson Report, we are one of the largest merchant acquirers in Latin America based on total number of transactions and we believe we are the largest merchant acquirer in the Caribbean. We serve 26 countries in the region out of 12 offices, including our headquarters in Puerto Rico. We own and operate the ATH network, which we believe is one of the leading personal identification number (“PIN”) debit networks in Latin America. We process over six billion transactions annually through a system of electronic payment networks in Puerto Rico and Latin America and a comprehensive suite of services for core banking, cash processing, and fulfillment in Puerto Rico. Additionally, we offer technology outsourcing and payment transactions fraud monitoring to 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 serve customers with disparate operations in 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).

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 for both card present transactions and card not present transactions, 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 enter into multi-year contracts with our customers. We believe our business

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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

On September 30, 2010, EVERTEC Group entered into a 15-year MSA, and several related agreements with Popular. Under the terms of the MSA, Popular agreed to use EVERTEC services on an ongoing exclusive basis for the duration of the agreement. On July 1, 2022, we modified and extended the main commercial agreements with Popular, which had initial terms ending in 2025, including a 10-year extension of the Merchant Acquiring Independent Sales Organization Agreement (as amended, the “A&R ISO Agreement”), a 5-year extension of the ATH Network Participation Agreement and a 3-year extension of the MSA (the “A&R MSA Agreement”). The A&R ISO Agreement, which sets our merchant acquiring relationship with Popular, now includes revenue sharing provisions with Popular. The MSA modifications include the elimination of the exclusivity requirement, the inclusion of annual MSA minimums through September 30, 2028, a 10% discount on certain MSA services beginning in October of 2025 and adjustments to the existing CPI pricing escalator clause. On the same date, we also sold to Popular certain assets in exchange for 4.6 million shares of EVERTEC common stock owned by Popular (collectively with the contract amendments, the “Popular Transaction”). On August 15, 2022, through a secondary offering, Popular sold its remaining shares of EVERTEC common stock and as of this date no longer holds any shares of EVERTEC common stock. EVERTEC is no longer deemed a subsidiary of Popular under the Bank Holding Company Act. Popular continues to be the Company’s largest customer and at December 31, 2022 approximately 39% of our revenues were generated from this relationship.

2022 Developments

The Company’s Board of Directors approved regular quarterly dividends of $0.05 per common share in February, April, July and October of 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.

On July 1, 2022, EVERTEC completed the Popular Transaction as described above.

Additionally, on July 1, 2022, EVERTEC Group completed the purchase of 100% of the share capital of BBR SpA, a Santiago, Chile based payment and technology solutions company with an office in Perú ("BBR"). The aggregate purchase price for the shares is CLP 48,600 million, approximately USD$53 million.

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, together 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 America and Caribbean region 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 Rico and other Latin America 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.

In recent years, 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 markets in which we operate, particularly Latin America and the Caribbean continue to grow and consumer preference is driving an increase for electronic payments usage. Latin America is 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 attractive characteristics of our markets and our position across multiple services and sectors will continue to drive growth and profitability in our businesses.

On July 1, 2022, we closed the previously announced Popular Transaction, which includes extensions and amendments to the main commercial agreements with Banco Popular. The extension of the A&R ISO Agreement includes a revenue sharing provision which will be treated as an expense and has resulted, and we expect will continue to result in a decline to the Merchant Acquiring Segment Adjusted EBITDA and margin. The extension of the MSA includes a reduction in the CPI cap

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from 5% to 1.5%, as well as a retroactive one-time credit for the 5% CPI price increase applied to certain services since October 1, 2021 through closing, both of which negatively impacted our results of operations, and we expect will continue to negatively impact revenue and consequently, margin of our Business Solutions Segment and, to a lesser extent, the Payment Services – Puerto Rico Segment. Additionally, as part of the amendments to the MSA, there will be contractual revenue minimums through 2028. As part of the Popular Transaction, we also sold certain assets from our Business Solutions Segment to Banco Popular, which has resulted, and we expect will continue to result in a reduction in revenue and margin for this segment.

Finally, our financial condition and results of operations are, in part, dependent on the economic and general conditions of the geographies in which we operate. Rising interest rates, inflationary pressures and economic uncertainty in the markets in which we operate may affect consumer confidence which could result in a decrease in consumer spending and an impact to our financial results.

Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of our financial statements, we are required to make estimates and assumptions about future events and apply judgments that affect the reported amounts of certain assets and liabilities, and in some instances, the reported amounts of revenues and expenses during the period.

We base our assumptions, estimates, and judgments on historical experience, current events, and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. However, because future events are inherently uncertain and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. A summary of significant accounting policies is included in Note 1 of the Notes to Audited Consolidated Financial Statements appearing elsewhere in this Annual Report on Form 10-K. We believe that the following accounting estimates is the most critical; require the most difficult, subjective, or complex judgments; and thus, results in estimates that are inherently uncertain.

Revenue Recognition

The Company’s revenue recognition policy follows the guidance from Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, which provide guidance on the recognition, presentation, and disclosure of revenue in consolidated financial statements. Application of this policy requires us to make certain judgements and estimates.

Complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting. Specifically, when another party is involved in providing goods or services to a customer, the Company evaluates, for each performance obligation, whether it is providing the goods or services itself (i.e., as principal), or if it is only arranging on behalf of the other party. Changes in judgement with respect to assumptions and estimates in revenue recognition could impact the amount of revenue recognized.

Valuation of Goodwill

The valuation of goodwill for impairment require the use of significant estimates and assumptions. The Company may test for goodwill impairment using a qualitative or a quantitative analysis. In a qualitative analysis, the Company assesses whether it is "more likely than not" that the fair value of a reporting unit is less than its carrying amount. In the quantitative analysis, the Company compares the estimated fair value of the reporting units to their carrying values, including goodwill. The estimated fair value of the reporting units is computed using a combination of an income approach and a market approach. The income approach involves projecting the cash flows that the reporting unit is expected to generate and converting these cash flows into a present value equivalent through discounting. Significant estimates and assumptions used in the cash flow projection include, among others, earnings before interest, taxes, depreciation and amortization ("EBITDA") margins, and the selection of discount rates. Internal projections are based on the Company’s historical experience and estimated future business performance. The discount rate used is based on the weighted-average cost of capital, which reflects the rate of return expected to be earned by market participants and the estimated cost to obtain long-term debt financing. The market approach estimates the value of a reporting unit by using multiples of revenue and EBITDA based on the guidelines of publicly traded companies. Valuation using the market approach requires management to make assumptions related to EBITDA multiples. Comparable businesses are selected based on the market in which the reporting units operate, considering size, profitability and growth.

Recent Accounting Pronouncements

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For a description of recent accounting standards, see Note 2 of the Notes to Audited Consolidated Financial Statements included in this Annual Report on Form 10-K.

Non-GAAP Financial Measures

EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share, as presented in this Annual Report on Form 10-K, are supplemental measures of our performance that are not required by or presented in accordance with GAAP. They are not measurements of our financial performance under GAAP and should not be considered as alternatives to total revenues, net income or any other performance measures derived in accordance with GAAP or as alternatives to cash flows from operating activities as measures of our liquidity. Adjusted EBITDA at the segment level 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 280, Segment Reporting, and is excluded from the definition of non-GAAP financial measures under the Securities and Exchange Commission's Regulation G and Item 10(e) of Regulation S-K.

For more information regarding EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share, including a quantitative reconciliation of EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share to the most directly comparable GAAP financial performance measure, which is net income, see “—Net Income Reconciliation to EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings per common share” and “—Covenant Compliance” below.

Results of Operations

Revenues

Total revenues for the year ended December 31, 2022 were $618.4 million, an increase of $28.6 million compared to $589.8 million in the prior year. Revenue in Puerto Rico increased in both the Merchant Acquiring and Payment Services segments, benefiting from increased transaction volumes as well as pricing initiatives implemented during the year. Merchant Acquiring revenue also benefited from two additional months in 2022 from the expanded FirstBank relationship. Payment Services in Puerto Rico continues to benefit from growth from ATH Movil Business as well as revenue generated from an acquisition completed in the second quarter. Business Solutions revenue decreased primarily due to the impact from assets sold as part of the Popular Transaction and the one-time credit granted upon closing, partially offset by revenue generated from projects completed in connection with closing, one-time hardware and software sales and revenue generated from the printing contract entered into in June 2021. Latin America revenue benefited from strong organic growth from existing customers and the revenue contribution from the BBR acquisition completed in the third quarter.

Cost of revenues

Cost of revenues for the year ended December 31, 2022 amounted to $292.6 million, an increase of $42.5 million or 17% when compared to the same period in the prior year. The increase in cost of revenues was primarily driven by an increase in personnel costs, in part due to the impact of increased headcount in Latin America and the added headcount from the BBR acquisition. The year over year variance also reflected higher equipment expenses for cloud services as utilization continues to grow, an increase in printing supply expense, an increase in provisions for operational losses and an increase in cost of sales mainly due to the new revenue sharing agreement with Popular resulting from the Popular Transaction. Cost of revenues also includes a $4.1 million impairment loss related to a multi-year software development recorded during the second quarter.

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Selling, general and administrative

Selling, general and administrative expenses for the year ended December 31, 2022 amounted to $89.8 million, an increase of $21.7 million or 32% when compared to the same period in the prior year driven by an increase in personnel costs as well as an increase in professional fees.

Depreciation and amortization

Depreciation and amortization expense for the year ended December 31, 2022 amounted to $78.6 million, an increase of $3.5 million or 5% when compared to the same period in the prior year. Increased expense during the year is driven by the amortization of intangible assets created in connection with acquisitions completed in 2022, as well as increased depreciation expense for hardware upgrades completed during the year.

Non-operating income (expenses)

Non-operating income for the year ended December 31, 2022 increased by $125.3 million to $110.5 million when compared to the same period in the prior year, as it includes the gain from the Popular Transaction of $135.6 million, an increase of $1.3 million in earnings from the Company’s equity method investment and an increase of $1.2 million in interest income. Partially offsetting these increases was a loss on foreign currency remeasurement of $7.6 million for the year ended December 31, 2022 compared with a gain of $1.9 million in prior year, a $2.0 million increase in interest expense due to an increase in interest rates and the benefit of the gain on sale of assets included in other income in the prior year, while none in 2022.

Income tax expense

Income tax expense for the year ended December 31, 2022 amounted to $29.0 million, an increase of $8.4 million when compared to the same period in the prior year. The effective tax rate for the period was 10.8%, compared with 11.3% in the 2021 period. The decrease in the effective tax rate was primarily driven by the impact of the Popular Transaction which was taxed at a preferential tax rate and the impact from the reversal of a potential liability for uncertain tax positions because of the expiration of the statute of limitation, partially offset by the impact of higher revenues in higher taxed jurisdictions, a shift in the mix of business in Puerto Rico and higher withholding taxes.

Segment Results of Operations

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.

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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, ATM management and monitoring, ATH Movil and ATH Business. 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, fees from payment and collection platforms, 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, 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 as “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.

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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 Earnings before Interest, Taxes, Depreciation and Amortization (“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 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 consolidated financial statements.

See Note 25 of the Audited Consolidated Financial Statements appearing elsewhere in this Annual Report on Form 10-K for the reconciliation of EBITDA to consolidated net income.

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

Payment Services - Puerto Rico & Caribbean

Payment Services - Puerto Rico & Caribbean segment revenues for the year ended December 31, 2022 increased by $23.1 million to $178.5 million when compared to the same period in the prior year. The increase in revenues was primarily driven by an increase in transaction volumes, mainly POS processing, the continued strong digital payments growth from ATH Movil Business, higher issuing services and the revenue contribution from the acquisition completed in the second quarter. Segment revenue also benefited from an increase in transaction processing and monitoring revenue recognized for services provided to the Payment Services - Latin America Segment. Adjusted EBITDA increased by $10.8 million to $100.8 million driven by the increase in revenues partially offset by higher operating expenses, including the $4.1 million impairment charge discussed in Cost of Revenues above, higher personnel costs, cloud services, and the impact from the one-time credit granted upon closing of the Popular Transaction.

Payment Services - Latin America

Payment Services - Latin America segment revenues for the year ended December 31, 2022 increased by $22.3 million to $128.2 million driven mainly by organic growth in all regions as well as revenue generated from the BBR acquisition completed in the third quarter. Additionally, revenues benefited from an increase in intercompany software developments and transaction processing revenue recognized for services provided to the Payment Services - Puerto Rico & Caribbean segment. Adjusted EBITDA decreased by $6.4 million primarily due to a $6.6 million loss from foreign currency remeasurement of assets and liabilities denominated in US dollars compared with a $1.9 million gain in the prior year, an increase in operating expenses driven by higher personnel costs, mainly due to an increase in headcount including employees from the BBR acquisition, and increases in fees for transaction processing and monitoring services from the Payment Services - Puerto Rico & Caribbean segment as more transactions are processed in the Company's centralized platforms, partially offset by the increase in revenues.

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Merchant Acquiring

Merchant Acquiring segment revenues for the year ended December 31, 2022 increased by $7.1 million to $151.1 million mainly as a result of an increase in sales volume as well as the benefit of pricing initiatives implemented throughout the year. Additionally, the current year benefited from two additional months of the expanded relationship with FirstBank of Puerto Rico in connection with the acquisition of the customer relationship in the first quarter of 2021. Adjusted EBITDA decreased by $10.3 million as the increase in revenues was entirely offset by an increase in operating expenses driven by the impact of the revenue sharing agreement with Popular that began on July 1, 2022 and higher transaction processing costs as a result of a lower average ticket.

Business Solutions

Business Solutions segment revenues for the year ended December 31, 2022 decreased by $8.5 million to $235.3 million primarily driven by the impact from the Popular Transaction, specifically, the one-time credit granted to Popular upon closing amounting to $6.3 million and the impact from the sale of assets to Popular which the Company estimates at $30 million annually, in addition to lower hardware and software sales. These negative impacts were partially offset by revenue generated from projects completed in connection with closing of the Popular Transaction. Adjusted EBITDA decreased by $15.9 million to $100.6 million because of the decrease in revenue, the impact from the sale of assets included in the Popular Transaction which were of higher margin, and an increase in operating expenses, mainly printing supplies expense that has been impacted by the inflationary environment.

Liquidity and Capital Resources

Liquidity

Our principal source of liquidity is cash generated from operations, and our primary liquidity requirements are the funding of working capital needs, capital expenditures, and acquisitions. We also have a $200.0 million Revolving Facility, of which $174.0 million was available for borrowing as of December 31, 2022. The Company issues letters of credit against our Revolving Facility which reduce our availability of funds to be drawn.

As of December 31, 2022, we had cash and cash equivalents of $197.2 million, of which $119.7 million resides in our subsidiaries located outside of Puerto Rico for purposes of (i) funding the respective subsidiary’s current business operations and (ii) funding potential future investment outside of Puerto Rico. We intend to indefinitely reinvest these funds outside of Puerto Rico, and based on our liquidity forecast, we will not need to repatriate this cash to fund the Puerto Rico operations or to meet debt-service obligations. However, if in the future we determine that we no longer need to maintain cash balances within our foreign subsidiaries, we may elect to distribute such cash to the Company in Puerto Rico. Distributions from the foreign subsidiaries to Puerto Rico may be subject to tax withholding and other tax consequences. Additionally, our credit agreement imposes certain restrictions on the distribution of dividends from subsidiaries.

Our primary use of cash is for operating expenses, working capital requirements, capital expenditures, acquisitions, dividend payments, share repurchases, debt service, and other transactions as opportunities present themselves.

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 at least for the next twelve months from the date of this Annual Report on Form 10-K. However, our ability to fund future operating expenses, dividend payments, capital expenditures, mergers and

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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.

Comparison of the years ended December 31, 2022 and 2021

The following table presents our cash flows from operations for the years ended December 31, 2022 and 2021:

Net cash provided by operating activities for the year ended December 31, 2022 was $223.4 million, a decrease of $5.1 million compared to 2021. The decrease was primarily driven by the effects from the sale of a business to Popular and the one-time credit granted to them upon closing, partially offset by 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 increased $49.5 million to $133.3 million. The increase is primarily attributable to the BBR acquisition closed on July 1, 2022 for $44.4 million and a $7.3 million purchase of certificates of deposit, which were transferred upon closing of the BBR acquisition, and an increase in capital expenditures for additions to software and purchases of property, plant and equipment of $5.0 million, partially offset by proceeds from the maturity of available-for-sale debt securities of $1.0 million, as well as a decrease in acquisitions of customer relationships of $4.1 million given that the prior year acquisition amounted to $14.8 million while the acquisition in the current year amounted to $10.6 million.

Net cash used in financing activities for the year ended December 31, 2022 was $156.8 million, compared to $81.3 million in prior year. Financing activities reflect the impact of the issuance of new debt as part of the 2022 Credit Agreement and concurrent termination of the long-term debt issued under the 2018 Credit Agreement as well as a $20 million draw on our Revolving Credit Facility. Additionally cash used to repurchase stock increased by $72.2 million.

Capital Resources

Our principal capital expenditures are for hardware and computer software (purchased and internally developed) and additions to property and equipment. During the years ended December 31, 2022 and 2021, the Company invested approximately $71.9 million and $66.9 million, respectively. Additionally, the Company acquired a business for $44.4 million, net of cash acquired, as well as $7.3 million in certificates of deposit in connection with this business acquisition in 2022. The Company acquired customer relationships amounting to $10.6 million and $14.8 million during the year ended December 31, 2022 and 2021, respectively and acquired $0.3 million in available-for-sale debt securities, compared with $3.0 million in 2021. Generally, we fund capital expenditures with cash flow generated from operations and, if necessary, borrowings under our Revolving Facility.

Dividend Payments

The Company pays a regular quarterly dividend on common stock, subject to the declaration thereof by our Board each quarter. Any declaration and payment of future dividends to holders of our common stock will be at the discretion of our Board and will depend on many factors, including our financial condition, earnings, available cash, business opportunities, legal requirements, restrictions in our debt agreements and other contracts, capital requirements, level of indebtedness and other factors that our

Board deems relevant. Refer to the table below for details regarding our dividends in 2022 and 2021:

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Stock Repurchase

During 2022, the Company repurchased 2,810,182 shares of the Company’s common stock at a cost of $96.6 million. The Company funded such repurchase with cash on hand. At December 31, 2022, the Company's share repurchase program has approximately $78 million remaining and approved for future use. The Company may repurchase shares in the open market, through accelerated share repurchase programs, 10b5-1 plans, or in privately negotiated transactions, subject to business opportunities and other factors.

Financial Obligations

Leases

The Company has operating leases for certain office facilities, buildings, telecommunications and other equipment; and finance leases for certain equipment. The Company’s lease contracts have remaining terms ranging from 1 year to 6 years, some of which may include options to extend the leases for up to 5 years, and some which may include the option to terminate the lease within 1 year.

The following table presents the balance of operating lease obligations:

See Note 24 of the Notes to Audited Consolidated Financial Statements for additional information regarding operating lease obligations.

2022 Secured Credit Facilities

On December 1, 2022 (the “Closing Date”), EVERTEC and EVERTEC Group, entered into a credit agreement (the “Credit Agreement”) with a syndicate of lenders and Truist Bank (“Truist”), as administrative agent and collateral agent, providing for (i) a $415.0 million term loan A facility (the “Term Loan Facility”) and (ii) a $200.0 million revolving credit facility (the “Revolving Facility”, and together with the Term Loan Facility, the “2022 Credit Facilities”). The 2022 Credit Facilities mature on December 1, 2027 (the “Maturity Date”). Concurrently with the execution of the 2022 Credit Agreement, the Company terminated the existing senior secured credit facilities.

Scheduled Amortization Payments

The Term Loan Facility amortizes in equal quarterly installments at a rate per annum equal to, initially, 5% of the principal amount and, for any installment payments to be made in the calendar year ending 2027, 7.5% of the principal amount, with the balance payable on the Maturity Date. The Revolving Credit Facility terminates on the Maturity Date, and loans thereunder may be borrowed, repaid and reborrowed prior thereto.

Voluntary Prepayments and Reduction and Termination of Commitments

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EVERTEC Group may prepay loans under the Term Loan Facility and permanently reduce the loan commitments under the Revolving Facility at any time without premium or penalty, subject to compensation for any break funding costs incurred by a lender and timely submission of a notice of prepayment or commitment reduction, as applicable. EVERTEC Group is required to make certain mandatory prepayments of the 2022 Credit Facilities in certain circumstances.

Interest

The interest rates under the 2022 Credit Facilities denominated in US Dollars, are based on, at EVERTEC Group’s option (a) the Adjusted Term SOFR for the Interest Period in effect for such borrowing plus an applicable margin of 1.50% per annum, which applicable margin is subject to four 25 bps step-ups (i.e. 1.75%, 2.00%, 2.25% or 2.50% per annum) based upon the Company’s total net leverage ratio or (b) the ABR plus an applicable margin of 0.50% per annum, which applicable margin is subject to four 25 bps step-ups (i.e. 0.75%, 1.00%, 1.25% or 1.50% per annum) based upon the Company’s total net leverage ratio. Borrowings under the Revolving Credit Facility that are denominated in a currency other than Dollars will bear interest at the Alternative Currency Rate for the Interest Period in effect for such borrowing plus an applicable margin of 1.50% per annum, which applicable margin is subject to four 25 bps step-ups (i.e. 1.75%, 2.00%, 2.25% or 2.50% per annum) based upon the Company’s total net leverage ratio.

Guarantees and Collateral

The 2022 Credit Facilities are secured by substantially all assets of EVERTEC and its existing and future material subsidiaries (including EVERTEC Group), subject to customary exceptions, and guarantee repayment of the 2022 Credit Facilities.

In connection with the Credit Agreement, on December 1, 2022, EVERTEC, EVERTEC Group and the subsidiary guarantors party thereto, entered into a Guarantee Agreement (the “Guarantee Agreement”), pursuant to which EVERTEC Group’s obligations under the 2022 Credit Facilities and under any cash management, interest rate protection or other hedging arrangements entered into with a lender or any affiliate thereof are guaranteed by EVERTEC and each of EVERTEC’s existing wholly-owned subsidiaries (other than EVERTEC Group) and subsequently acquired or organized subsidiaries, subject to certain exceptions.

In addition, on December 1, 2022, EVERTEC, EVERTEC Group and the subsidiaries party thereto, entered into a Collateral Agreement (the “Collateral Agreement”), pursuant to which, subject to certain exceptions, the 2022 Credit Facilities are secured, to the extent legally permissible, by substantially all of the assets of (1) EVERTEC, including a perfected pledge of all of the limited liability company interests of EVERTEC Intermediate Holdings, LLC (“Holdings”), (2) Holdings, including a perfected pledge of all of the limited liability company interests of EVERTEC Group and (3) EVERTEC Group and the subsidiary guarantors, including but not limited to: (a) a pledge of substantially all capital stock held by EVERTEC Group or any guarantor and (b) a perfected security interest in substantially all tangible and intangible assets of EVERTEC Group and each guarantor.

Covenants

The 2022 Credit Facilities are subject to customary affirmative and negative covenants. The negative covenants in the 2022 Credit Facilities include, among other things, limitations (subject to exceptions) on the ability of EVERTEC and its restricted subsidiaries to:

•declare dividends and make other distributions;

•redeem or repurchase capital stock;

•grant liens;

•make loans or investments (including acquisitions);

•merge or enter into acquisitions

•sell assets;

•enter into any sale or lease-back transactions;

•incur additional indebtedness;

•prepay, redeem or repurchase certain indebtedness;

•modify the terms of certain debt;

•restrict dividends from subsidiaries;

•change the business of EVERTEC or its subsidiaries; and

•enter into transactions with their affiliates.

In addition, the 2022 Credit Facilities require EVERTEC Group to maintain a maximum total net leverage ratio of 4.50 to 1.00 (i) from March 31, 2023 to September 30, 2024, and 4.00 to 1.00 (ii) thereafter.

Events of Default

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The events of default under the 2022 Credit Facilities include, without limitation, nonpayment, material misrepresentation, breach of covenants, insolvency, bankruptcy, certain judgments, change of control (as defined in the Credit Agreement) and cross-events of default on material indebtedness.

The unpaid principal balance at December 31, 2022 of the Term Loan Facility was $415.0 million. The additional borrowing capacity for the Revolving Facility at December 31, 2022 was $174.0 million. The Company issues letters of credit against the Revolving Facility which reduce the additional borrowing capacity of the Revolving Facility.

2018 Secured Credit Facilities

On November 27, 2018, EVERTEC and EVERTEC Group (“Borrower”) entered into a credit agreement providing for the secured credit facilities, consisting of a $220.0 million term loan A facility (“2023 Term A Loan”), a $325.0 million term loan B facility (“2024 Term B Loan”) and a $125.0 million revolving credit facility (the “Revolving Facility”), 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 was terminated on December 1, 2022.

Notes payable

In December 2019, EVERTEC Group entered into two non interest-bearing financing agreements amounting to $2.4 million to 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 are included in accounts payable in the Company’s consolidated balance sheet as of December 31, 2021.

Interest Rate Swaps

As of December 31, 2022, the Company has an interest rate swap agreement, entered in December 2018, which converts a portion of the interest rate payments on the Company’s 2024 Term B Loan from variable to fixed:

In connection with the Credit Agreement, the Company amended the 2018 Swap variable rate from 1-month LIBOR to 1-month SOFR as allowed by the expedients included in ASC Topic 848 Reference Rate Reform. The Company continues to account for this agreement as a cash flow hedge.

As of December 31, 2022, and 2021, the carrying amount of the derivatives included on the Company’s consolidated balance sheets was an asset of $7.4 million and a liability of $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.

During the years ended December 31, 2022, 2021 and 2020, the Company reclassified losses of $3.0 million, $7.1 million and $5.1 million, respectively, from accumulated other comprehensive loss into interest expense. Based on current SOFR rates, the Company expects to reclassify gains of $3.7 million from accumulated other comprehensive loss into interest expense over the next 12 months. Refer to Note 15 of the Notes to Audited Consolidated Financial Statements for tabular disclosure of the fair value of derivatives and to Note 17 of the Notes to Audited Consolidated Financial Statements for tabular disclosure of gains (losses) recorded on cash flow hedging activities.

At December 31, 2022, the cash flow hedge is considered highly effective.

Covenant Compliance

As of December 31, 2022, the total secured net leverage ratio was 0.99 to 1.00. As of the date of filing of this Annual Report on Form 10-K, no event has occurred that constitutes an Event of Default or Default.

In this Annual Report on Form 10-K, we refer to the term “Adjusted EBITDA” to mean EBITDA as so defined and calculated in a substantially consistent manner for purposes of determining compliance with the total secured net leverage ratio based on the financial information for the last twelve months at the end of each quarter.

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Net Income Reconciliation to EBITDA, Adjusted EBITDA, Adjusted Net Income 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 CODM 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 Accounting Standards Codification 280, Segment Reporting, and is excluded from the definition of non-GAAP financial measures under the Securities and Exchange Commission's Regulation 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 secured credit facilities in testing EVERTEC Group’s compliance with covenants therein such as the total secured net leverage ratio. We use Adjusted Net Income to measure our overall profitability because we believe it 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 limitations of 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;

•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.

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

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 2022 Credit Agreement and the gain from the Popular transaction.

4)Represents operating depreciation and amortization expense, which excludes amounts generated as a result of merger and acquisition activity.

5)Represents interest expense, less interest income, as they appear on our 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.