Business context and reporting period
Euronet Worldwide, Inc. is a global electronic payments provider operating EFT Processing, epay and Money Transfer segments. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $360.6 million | $316.4 million | $1,037.8 million | $916.4 million |
| Operating income, reported | $55.3 million | $24.2 million | $102.3 million | $59.9 million |
| Net income attributable to Euronet | $47.9 million | $14.6 million | $78.0 million | $33.5 million |
| Diluted EPS | $0.92 | $0.28 | $1.51 | $0.65 |
Reported operating income includes a $19.3 million non-cash gain from remeasuring Pure Commerce acquisition-related contingent consideration. Excluding that gain, operating income was $36.0 million for Q3 and $83.0 million for the nine months, versus $24.2 million and $59.9 million, respectively, in 2012. Adjusted operating margins were 30.3% and 21.4% for EFT Processing, 6.6% and 7.2% for epay, and 7.9% and 8.2% for Money Transfer in Q3 and the nine-month period, respectively.
- Cash flow: Nine-month operating cash flow was $150.6 million, compared with $143.4 million in 2012. Investing used $55.0 million and financing used $52.5 million. Cash and cash equivalents ended at $244.5 million; restricted cash was a separate $63.1 million balance.
- Liquidity: Working capital was $119.1 million and the current ratio was 1.19 at September 30, 2013. The revolving facility had $191.5 million available after borrowings and letters of credit.
- Debt: Total debt obligations were approximately $244.3 million, plus $5.8 million in capital leases. Debt was primarily variable-rate. The remaining $3.6 million of convertible debentures was repurchased in September.
- Other balance-sheet items: Total assets were $1.515 billion and total equity was $613.5 million at September 30, 2013.
Material changes versus the prior period
- Revenue increased 14% in Q3 and 13% for the first nine months. EFT Processing and Money Transfer led segment growth; epay growth was more modest.
- EFT Processing revenue rose 29% in Q3, supported by dynamic currency conversion and value-added services, ATM growth, India transactions and Pure Commerce. Excluding the contingent-consideration gain, segment operating income also improved.
- Money Transfer revenue grew 19% in both periods, reflecting higher transfer volumes and network expansion. epay revenue grew 6% in Q3 and 7% year to date, with growth in the U.S., Germany and cadooz partly offset by declines in Australia and the U.K.
- Interest expense fell to $8.4 million for the nine months from $16.5 million, primarily following the 2012 repurchase of most convertible debentures. A $2.8 million gain was recorded on the July sale of the epay Malaysia investment.
- Foreign currency translation produced a $22.1 million comprehensive-income gain in Q3, but a $6.0 million loss for the nine-month period.
Outlook, risks and unusual items
- Management estimated 2013 capital expenditures of approximately $35–$40 million; $28.5 million had been incurred in the first nine months. It expected operating cash flow, cash on hand and available financing to cover obligations and planned investment, while noting refinancing or additional capital may not be available on favorable terms.
- No specific earnings guidance was provided. Management cited growth opportunities in ATM/POS outsourcing, value-added services, electronic payment products and money transfer, alongside segment-specific competitive, contract-renewal, regulatory and execution risks. Fourth-quarter and first-quarter seasonality affects EFT and epay; tourist-season demand benefits EFT in Q3.
- The $19.3 million Pure Commerce contingent-consideration gain followed management’s conclusion that delays in merchant implementations and lower transaction volumes made the earnout performance thresholds unlikely to be met. The liability’s fair value depends on unobservable forecasts and is sensitive to assumptions.
- Management highlighted competitive pressure and mobile-operator distribution changes in Australia, the Middle East and the U.K.; further weakness could affect profitability or trigger impairment of related goodwill and intangible assets. The company also reported prior goodwill and intangible-asset impairment charges in 2012.
- Currency exposure is significant: 75% of nine-month revenue was generated outside the U.S. A 10% exchange-rate fluctuation was estimated to affect annualized reported net income and working capital by $45–$50 million, and total comprehensive income by $50–$55 million. A 1% rate increase under the stated borrowing assumptions could add about $4.3 million in annual interest expense.
- Contingencies include a Delaware unclaimed-property voluntary disclosure review covering 1996–2007, a class-action wage-and-hour settlement awaiting finalization, and possible claims related to a 2011 security breach. Management did not expect these matters to have a material adverse effect; breach-related losses through the period were covered by insurance.
- A new stockholder rights agreement may deter or delay a takeover; rights generally become exercisable if a person acquires or seeks to acquire 20% or more of the common stock. The board authorized up to $100 million or 5 million shares of repurchases, but credit-agreement restrictions prevent repurchases from beginning before December 31, 2013.
Important facts for investors to verify
- How much of earnings growth is supported by ongoing segment performance versus the one-time $19.3 million contingent-consideration gain and other non-operating items.
- Whether Pure Commerce integration, merchant launches and transaction volumes develop as expected, and whether earnout estimates or acquisition-related valuations change.
- Working-capital needs and revolving-facility availability as Money Transfer expands, including the effect of settlement timing and letters of credit.
- Exposure to foreign exchange and variable interest rates, and the potential effect of continued competition in epay’s Australia, Middle East and U.K. markets.
- Developments in the Delaware review, security-breach claims and wage-and-hour settlement, as well as any impairment indicators for goodwill and acquired intangible assets.