EURONET WORLDWIDE, INC. annual report, FY2011

Euronet Worldwide, Inc. — FY 2011 Form 10-K

Reporting period: Fiscal year ended December 31, 2011. This is an annual filing, not a standalone Q4 filing; quarterly figures below identify the fourth quarter. Euronet provides electronic payment processing through EFT Processing, epay and Money Transfer segments. epay generated approximately 58% of FY 2011 revenue, Money Transfer 25% and EFT Processing 17%.

Financial performance

Metric	FY 2011	FY 2010
Revenue	$1,161.3 million	$1,038.3 million
Operating income	$79.1 million	$5.3 million
Net income (loss) attributable to Euronet	$37.0 million	$(38.4) million
Diluted EPS	$0.71	$(0.75)
Cash from operations	$99.3 million	$108.1 million
Cash and cash equivalents at year-end	$170.7 million	$187.2 million

Revenue rose 12%, supported by acquisitions, higher money-transfer volumes and favorable currency translation. Operating margin was approximately 6.8% in 2011.
2010 operating income included a $70.9 million non-cash goodwill impairment; 2011 had no impairment charge. Management said operating income excluding impairment increased 4% in 2011.
Cash used in investing was $124.1 million, including $78.7 million for acquisitions and $46.0 million for property and equipment. Financing activities provided $13.9 million. Cash declined $16.6 million during the year.
Year-end current assets were $754.0 million and current liabilities $774.5 million: negative working capital of $20.5 million and a current ratio of 0.97. Management attributed the deterioration largely to classifying the convertible debentures as current ahead of the October 2012 holder put option.
Balance-sheet debt obligations were $332.3 million, including $165.2 million carrying value of convertible debentures and $166.2 million of term-loan and revolving-credit borrowings; capital leases were separately reported at $6.4 million. The debentures had $171.4 million principal outstanding and holders could require repurchase at par in October 2012.

Fourth-quarter results

Q4 2011 revenue was $319.4 million, operating income $23.0 million, net income attributable to Euronet $11.0 million and diluted EPS $0.21. Q4 2010 revenue was $283.8 million, operating loss $49.8 million, attributable net loss $60.7 million and diluted loss per share $1.19; the 2010 quarter included the $70.9 million impairment charge.

Segment developments and material changes

EFT Processing: Revenue increased 2% to $199.2 million, while operating income fell 13% to $33.2 million. ATM transactions rose 19% to 943 million and year-end ATMs increased 32% to 14,224. Lower transaction fees in Germany and lower interchange fees in Poland pressured revenue per ATM and margins.
epay: Revenue increased 13% to $677.1 million and operating income was $56.8 million, versus a $24.3 million operating loss in 2010, principally reflecting the absence of the prior-year impairment and growth in Brazil and Germany. Transactions rose 19% to 1.064 billion. Australia and the U.K. faced transaction declines; management expected a Brazilian mobile operator’s distribution change to weigh on epay Brazil revenue into 2012.
Money Transfer: Revenue rose 17% to $285.3 million and operating income rose 28% to $17.1 million. Transactions increased 15% to 24.3 million, with growth in non-U.S. markets and additional products. U.S.-to-Mexico volumes recovered in the second half and were approximately flat for the full year versus 2010.
2011 acquisitions included cadooz, a German vouchers and incentives provider, and ATM/card-processing businesses in Poland and Romania. Acquisition cash outflow was $78.7 million.

Outlook, risks and unusual items

No formal revenue or earnings guidance is provided in the filing. Management estimated 2012 capital expenditures of approximately $40–$50 million and expected operating cash, cash on hand and available credit to fund obligations and planned investment, while noting financing terms cannot be assured.
Management described seasonality: EFT revenue may be 5%–10% lower in Q1 than Q4; epay about 5% lower; Money Transfer typically sees a 5%–10% Q1 transaction decline versus Q4.
A late-2011 criminal security breach affected a European processing unit representing less than 5% of company revenue, profits and transactions. Related Q4 expense was $0.4 million. No claims had been asserted; the potential loss range was not estimable, though management did not expect a material net impact after insurance.
A U.S. Department of Justice antitrust investigation concerning possible price collusion in transfers to the Dominican Republic remained unresolved. The filing does not provide a reliable estimate of potential loss or outcome.
Other key exposures include foreign exchange (about 80% of 2011 revenue was generated outside the U.S.; management estimated a 10% currency move could affect annualized reported net income and working capital by approximately $25–$35 million), variable-rate debt, acquisition integration and goodwill risk, changing interchange and commission rates, regulatory and anti-money-laundering compliance, and competitive pressure.
The company reported effective internal control over financial reporting; KPMG issued an unqualified opinion on the financial statements and internal controls.

Investor verification priorities

Review the October 2012 convertible-debenture put: $171.4 million principal, liquidity sources and refinancing or repayment plans.
Assess whether segment growth and margin trends persist, particularly German and Polish EFT pricing, epay Brazil and Australia, and Money Transfer expansion outside the U.S.
Monitor claims, insurance recoveries and any regulatory or customer consequences from the security breach, as well as developments in the DOJ investigation.
Reconcile cash generation with acquisition spending, capital expenditure plans, restricted cash and negative working capital; note that much cash is held outside the U.S. and may have tax consequences if repatriated.
Check debt covenant headroom, floating-rate exposure, and the company’s sensitivity to foreign exchange movements.