Euronet Worldwide, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited consolidated results. Euronet provides electronic payment processing, prepaid-content distribution, and money-transfer services through EFT Processing, epay, and Money Transfer segments.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $550.5 million | $473.4 million | +16% |
| Operating income | $45.5 million | $41.3 million | +10% |
| Operating margin | 8.3% | 8.7% | Down 0.4 percentage points |
| Net income attributable to Euronet | $26.4 million | $28.1 million | Down $1.7 million |
| Diluted EPS | $0.49 | $0.51 | Down $0.02 |
| Operating cash flow | $27.8 million | $70.8 million | Down $43.0 million |
Revenue growth reflected higher activity across all segments and a weaker U.S. dollar, which benefited reported results. Management estimated foreign-exchange movements increased consolidated operating income by 10% versus Q1 2017. Higher income tax expense—$13.7 million versus $9.0 million—was a key reason net income declined despite operating-income growth; the effective tax rate rose to 34.2% from 24.2%, primarily reflecting U.S. tax-law changes and GILTI.
- EFT Processing: Revenue of $135.7 million, up 28%; operating income of $11.5 million, up 5%. ATM growth, recovering Indian cash supply, POS-device sales in Greece, and currency translation supported revenue. Operating margin fell to 8.5% from 10.4%, with network costs and lower-margin activity weighing on results.
- epay: Revenue of $176.8 million, up 8%; operating income of $16.9 million, up 21%. Non-mobile products and vouchers supported margins, while prepaid-mobile transaction volumes declined 16%. Topic 606 adoption reduced both reported revenue and direct costs by $22.6 million in the quarter for certain contracts.
- Money Transfer: Revenue of $238.8 million, up 17%; operating income of $26.5 million, up 1%. Transactions increased 17%, but the Walmart-2-Walmart rate reduction and higher support costs lowered operating margin to 11.1% from 12.8%.
Cash, debt, and liquidity
- Cash and cash equivalents were $885.6 million at March 31, 2018; restricted cash was $63.8 million. Of cash and cash equivalents, $708.9 million was held outside the U.S. and expected to remain invested in foreign operations; repatriation could have adverse tax consequences.
- Working capital was $551.6 million, and the current ratio was 1.42. Operating cash flow declined mainly because of working-capital timing, including settlements with epay content providers and Money Transfer correspondents.
- Cash used in investing was $33.3 million, including $24.4 million of property and equipment purchases and $7.3 million for an acquisition. First-quarter capital expenditures, including capital leases, were $26.7 million.
- Debt obligations totaled $625.7 million before unamortized issuance costs; carrying value was $620.6 million. The company had $885.6 million of cash and $14.9 million of capital lease obligations.
- The $675 million senior secured credit facility matures April 9, 2019. At quarter-end, revolving borrowings were $171.8 million, term-loan borrowings were $48.8 million, and $371.4 million remained available under the revolver. The company was evaluating replacement financing and said it expected similar terms, but gave no assurance.
- Net financing cash inflow was $41.9 million, including $168.0 million of net borrowings, alongside $126.6 million of share repurchases.
Material changes, outlook, and risks
- Share repurchases: Euronet repurchased $125.0 million of shares under its program in Q1. The program was expanded to up to $375 million or 10 million shares through March 31, 2020.
- Capital spending outlook: Management estimated 2018 capital expenditures of approximately $95 million to $115 million and stated that available cash, operating cash flow, and borrowing capacity were expected to meet obligations and investment needs.
- Accounting change: Topic 606 was adopted January 1, 2018 using the modified retrospective method. Certain epay contracts are reported net as an agent, reducing both revenue and direct costs; prior-year figures were not restated. The company also adopted restricted-cash cash-flow presentation requirements.
- Regulatory exposure: Proposed EU rules could authorize DCC transparency requirements and a margin cap; the potential timing and final terms were uncertain. GDPR was scheduled to take effect May 25, 2018, with significant potential penalties for noncompliance.
- Other risks: About 69% of revenue was denominated in currencies other than the U.S. dollar. The filing highlights foreign-exchange sensitivity, payment-system security and availability, regulatory compliance, competition, contract renewals, and the ability to recover funds from agents and counterparties.
- Commitments and contingencies: Stand-by letters of credit and bank guarantees totaled $85.4 million, including $56.8 million under the credit facility. Euronet reported approximately $422 million of cash in its ATM networks for which it was responsible, mitigated in part by insurance. Management reported no legal or regulatory proceedings expected to have a material adverse effect and no significant claims under guarantees or indemnities.
- No specific earnings guidance: The filing provides capital-expenditure estimates and financing expectations, but no quantified revenue or earnings forecast. Results are subject to seasonal patterns, including typically lower first-quarter Money Transfer activity.
Important facts for investors to verify
- Progress and terms for replacing the credit facility before its April 2019 maturity, and the effect of refinancing costs or availability.
- Whether operating cash flow recovers as working-capital settlement timing normalizes, given the Q1 year-over-year decline.
- The durability of segment margins, particularly EFT network economics and Money Transfer profitability after Walmart pricing changes.
- The eventual impact and implementation timing of potential EU DCC regulation and GDPR compliance costs or penalties.
- How the 2018 tax rate develops as the company finalizes its accounting for the Tax Cuts and Jobs Act, including its GILTI treatment.
- The effects of foreign-exchange movements and the company’s substantial foreign-currency exposure on reported earnings and comprehensive income.