Business context and reporting period
Euronet Worldwide, Inc. provides electronic payment processing and distribution services through EFT Processing, epay and Money Transfer. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2014; comparisons are with the corresponding 2013 periods. Results are affected by seasonality, including stronger tourist-season demand for some EFT services and holiday-related transaction patterns.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $453.4M | $360.6M | $1,202.2M | $1,037.8M |
| Operating income | $50.7M | $55.3M | $109.2M | $102.3M |
| Net income attributable to Euronet | $35.0M | $47.9M | $71.6M | $78.0M |
| Diluted EPS | $0.64 | $0.92 | $1.33 | $1.51 |
| Operating cash flow | — | — | $224.6M | $150.6M |
Revenue increased 26% in Q3 and 16% for the nine months. Operating income declined 8% in Q3 but rose 7% year to date. Net income attributable to Euronet declined in both comparisons. Gross margin, calculated as revenue less direct operating costs, was approximately 39.4% in Q3 2014 versus 38.0% in Q3 2013, and 38.1% versus 36.7% for the nine-month periods.
At September 30, 2014, cash and cash equivalents were $451.2M, working capital was $191.2M, and the current ratio was 1.24. Total debt obligations were $378.6M, including capital leases; the filing reports $374.4M of variable-rate debt. The company had $296.5M drawn under its revolving facility, $49.9M of letters of credit outstanding, and $253.6M available. Cash flow from investing was an outflow of $134.4M, including $84.7M for acquisitions and $45.7M for property and equipment. Financing provided $179.1M. Cash increased by $241.4M, including a $28.0M unfavorable foreign-exchange effect.
Material changes versus prior periods
- Money Transfer revenue rose 59% in Q3 and 36% year to date, reflecting higher transfer volumes, Walmart-related growth, network expansion and the May 2014 HiFX/HiFM acquisition. Segment operating income rose 67% in Q3 and 22% year to date.
- EFT Processing revenue increased 29% in Q3 and 24% year to date, supported by ATM growth and dynamic currency conversion (DCC). Q3 segment operating income fell 23%, in part because Q3 2013 included a $19.3M contingent-consideration gain; excluding that gain, management reported higher operating margins in 2014.
- epay revenue increased 7% in Q3 and 2% year to date, while operating income rose 3% and 6%, respectively. Growth in Germany was partly offset by weaker prepaid mobile activity in Brazil and competitive pressure in Australia and the U.S.
- The HiFX/HiFM acquisition closed May 20 for £111.8M ($188.0M) in cash plus 1,262,654 Euronet shares valued at $56.6M. Its results are included in Money Transfer; pro forma results were not presented because the acquisition’s effect was deemed immaterial.
- Q3 and nine-month 2013 comparisons benefited from the $19.3M contingent-consideration gain; 2013 also included a $2.8M gain on sale of an equity-method investment. In 2014, foreign-currency remeasurement losses were $0.7M in Q3 and $5.1M year to date, compared with gains in 2013.
Outlook, commentary and risks
Management estimated 2014 capital expenditures of approximately $55M–$65M and expected operating cash flow, cash on hand and available credit to be sufficient for debt, lease and capital spending needs. No earnings or revenue guidance was provided. Management cited future growth opportunities in ATM and POS expansion, DCC and other value-added services, additional epay products, and money-transfer and cross-currency offerings.
The April 2014 credit amendment increased revolving commitments to $600M, increased Term Loan A to $75M, reduced borrowing margins by 12.5 basis points and extended maturity to April 9, 2019. Approximately 75% of revenue is denominated in non-U.S. currencies. Management estimated that a 10% exchange-rate fluctuation could affect annualized net income and working capital by approximately $40M–$45M, and total comprehensive income by approximately $70M–$75M through translation of non-cash assets and liabilities. A 1% rate increase, assuming current and maximum revolver borrowings were maintained for a year, could add approximately $6.2M in annual interest expense.
Other risks include variable interest rates, foreign-exchange movements, competition and pricing pressure, dependence on operator and retailer agreements, regulatory and anti-money-laundering compliance, technology and security breaches, contract renewals, and the ability to integrate acquisitions. The company reported $433M of ATM network cash for which it was responsible, along with letters of credit, guarantees and other indemnities. A Delaware unclaimed-property review covers certain property from 1996–2007; management did not expect a material adverse effect. Management reported no other legal or regulatory matter expected to have a material adverse effect and no material change in previously disclosed risk factors.
Investor verification priorities
- Assess how much revenue and earnings growth reflects organic activity versus the HiFX/HiFM acquisition, currency effects and new Walmart transfers.
- Reconcile Q3 operating-income and EPS declines with the prior-year $19.3M contingent-consideration gain, and assess current-period acquisition, customer-acquisition-cost and bad-debt expenses.
- Review the acquisition’s final purchase-price allocation, integration progress, and the performance of its foreign-exchange derivatives and customer exposures.
- Monitor revolver use, variable-rate debt, liquidity needs, and whether projected capital spending and working-capital requirements remain within management’s expectations.
- Track foreign-exchange sensitivity, unclaimed-property exposure, ATM cash and indemnity obligations, and the effect of regulatory, competitive and technology risks.