Euronet Worldwide, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; filed February 27, 2014. This is an annual report, not a standalone fourth-quarter filing. Euronet provides electronic payment processing, prepaid-product distribution and consumer money transfers through EFT Processing, epay and Money Transfer segments.
Financial performance
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue | $1.413 billion | $1.268 billion |
| Operating income | $118.4 million | $58.0 million |
| Net income attributable to Euronet | $88.0 million | $20.5 million |
| Diluted earnings per share | $1.69 | $0.40 |
| Cash from operating activities | $169.3 million | $184.7 million |
| Cash and cash equivalents at year-end | $209.8 million | $201.4 million |
| Total debt obligations | $199.4 million | $294.3 million |
| Working capital | $108.4 million | $116.5 million |
| Current ratio | 1.15 | 1.17 |
Revenue grew 11.5% and operating margin was approximately 8.4%, versus 4.6% in 2012. Operating cash flow declined about 8%. The company reported $959.7 million in total liabilities and $638.5 million in equity. Cash includes $164.5 million held outside the U.S. and expected to remain invested in foreign operations; restricted cash was an additional $78.0 million.
Cash used in investing activities was $69.5 million, including $40.9 million for property and equipment purchases and $30.8 million for acquisitions, partly offset by proceeds from an equity investment sale. Cash used in financing activities was $91.2 million, principally reflecting net debt repayments. The filing does not report a consolidated gross-margin figure; calculated from revenue less direct operating costs, gross margin was approximately 36.8%, compared with 35.9% in 2012.
Segments and changes versus 2012
- EFT Processing: Revenue rose 24% to $296.2 million and operating income rose to $81.4 million from $44.4 million. Growth reflected more ATMs under management, stronger dynamic currency conversion (DCC) and value-added services, and Pure Commerce. The segment recorded a $19.3 million acquisition-related contingent-consideration gain; excluding it, operating margin was 20.9%, versus 18.7%.
- epay: Revenue rose 5% to $748.7 million; operating income was $39.5 million, including $18.4 million of impairment charges. Excluding impairment, operating income was $57.9 million, versus $48.2 million. Growth in the U.S. and Germany and acquisitions was partly offset by declines in Australia, Brazil and the U.K.
- Money Transfer: Revenue rose 17% to $370.4 million and operating income rose 26% to $31.1 million. Transactions increased 15% to 35.2 million, supported by expansion of agent and correspondent networks.
Consolidated earnings improvement was affected by both operating growth and unusual items: the $19.3 million contingent-consideration gain in 2013 and $18.4 million in non-cash impairments, compared with $28.7 million of impairments in 2012. The 2013 impairments related to epay Australia ($12.3 million) and Spain ($6.1 million). The filing reports 2013 fourth-quarter revenue of $375.4 million, operating income of $16.1 million and net income attributable to Euronet of $10.0 million; third-quarter operating income was $55.3 million and attributable net income was $47.9 million.
Liquidity, debt and outlook
- At year-end, $197.0 million of debt was under the credit facility; the reported weighted-average rate was 1.7%. The facility matures in August 2016. The company reported $212.3 million of remaining revolving borrowing availability after outstanding borrowings and letters of credit.
- Debt is primarily variable-rate. Management estimated that a 1% rate increase, assuming specified borrowing levels, could add approximately $4.1 million of annual interest expense.
- Management expects 2014 capital expenditures of approximately $40–$50 million and stated that operating cash flow, cash on hand and available financing are expected to cover obligations and investment needs. No specific earnings or revenue guidance is provided.
- Management’s growth priorities include ATM outsourcing and DCC, expanding epay products and markets, growing money-transfer networks, and cross-selling among segments. It cautions that contract renewals, competition, transaction volumes and acquisition integration affect results.
Risks, contingencies and other notable items
- Foreign-exchange exposure is material: 76% of 2013 revenue was generated in non-U.S.-dollar countries. Management estimated a 10% currency fluctuation could affect reported net income and working capital by approximately $30–$40 million, and total comprehensive income by approximately $50–$60 million through translation effects.
- epay faces pressure from mobile operators and major retailers shifting top-ups to direct, online or mobile channels, declining commissions, and retailer credit or collection risk. Australia and Spain incurred 2013 goodwill impairments; Brazil recorded goodwill and intangible-asset impairments in 2012.
- Money Transfer depends on agent and correspondent networks and is subject to licensing, anti-money-laundering, consumer-protection, privacy and other regulatory requirements. Across the businesses, cybersecurity, fraud, settlement, political and economic conditions, and contract non-renewals are significant risks.
- Contractual obligations totaled $368.4 million, including $205.7 million of scheduled long-term debt payments and interest and $150.5 million of operating lease commitments. Separately, the company disclosed $105.4 million of standby letters of credit and guarantees, and responsibility for approximately $480 million of ATM network cash, mitigated in part by insurance.
- A Delaware voluntary disclosure review concerning unclaimed property for 1996–2007 was ongoing; management did not expect a material adverse effect. A prior European processing-system security breach generated no additional 2013 expenses, and management reported insurance coverage for incurred losses. The company reported no other proceedings expected to materially affect its financial statements.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Key investor verification points
- Separate recurring operating improvement from the $19.3 million contingent-consideration gain and impairment charges when assessing earnings quality.
- Monitor epay performance and recovery plans in Australia, Spain and Brazil, including retailer and mobile-operator channel changes.
- Review 2016 credit-facility maturity, covenant headroom, variable-rate exposure and actual liquidity available after working-capital needs and restricted cash.
- Track foreign-exchange sensitivity, cash held abroad and the effects of currency translation on reported results.
- Assess whether transaction growth, DCC and new products can offset fee and commission pressure, contract-renewal risk and competitive shifts toward direct digital channels.