Euronet Worldwide, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Euronet provides electronic payments, ATM/POS processing, prepaid product distribution, and money transfer services through EFT Processing, epay, and Money Transfer segments. Financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $622.2 million | $536.6 million | $1,172.7 million | $1,009.9 million |
| Operating income | $90.4 million | $66.7 million | $135.8 million | $108.0 million |
| Operating margin | 14.5% | 12.4% | 11.6% | 10.7% |
| Net income attributable to Euronet | $43.7 million | $51.4 million | $70.1 million | $79.5 million |
| Diluted EPS | $0.82 | $0.93 | $1.30 | $1.44 |
| Operating cash flow | Not separately reported | Not separately reported | $69.3 million | $103.2 million |
Q2 gross profit was $260.7 million, or about 41.9% of revenue; first-half gross profit was $467.9 million, or about 39.9%. First-half investing cash outflow was $69.0 million, financing cash inflow was $360.9 million, and cash plus restricted cash increased by $335.8 million.
At June 30, cash and cash equivalents were $1,163.4 million, with another $72.9 million in restricted cash. Working capital was $326.7 million and the current ratio was 1.18. Total debt obligations were $995.3 million before $4.5 million of unamortized issuance costs; $618.8 million was classified as current. The $300 million ATM facility and substantial revolving-credit borrowings supported ATM network cash needs.
Changes versus prior comparable periods
- Revenue rose 16% in both Q2 and the first half. Operating income increased 36% in Q2 and 26% in the first half, while attributable net income fell about 15% and 12%, respectively.
- Revenue and operating-income growth was broad-based: Q2 EFT Processing revenue increased 25%, epay 1%, and Money Transfer 21%. First-half increases were 26%, 5%, and 19%, respectively.
- Operating performance benefited from higher transaction volumes, expanded ATM and agent networks, and a weaker U.S. dollar. Management estimated currency movements lifted reported operating income by 6% in Q2 and 7% in the first half versus 2017.
- Net foreign-exchange results swung to losses of $20.7 million in Q2 and $18.8 million in the first half, versus gains of $11.1 million and $12.9 million a year earlier. The first-half net-income decline also reflected higher taxes and interest expense.
- First-half operating cash flow decreased by $33.9 million, which management attributed mainly to working-capital timing, including settlements with epay content providers and Money Transfer correspondents.
- Euronet repurchased $175.0 million of shares in the first half, compared with $2.3 million in the prior-year period. The board-authorized program permits up to $375 million or 10 million shares of repurchases through March 31, 2020.
Outlook, commentary, risks, and notable items
- Management estimated 2018 capital expenditures of approximately $110 million to $135 million. It expected operating cash flow, cash on hand, and available financing to cover debt, lease, and capital-expenditure needs, while noting refinancing or equity issuance could be sought if resources prove insufficient.
- The senior secured credit facility matures in April 2019. Management was evaluating replacement financing and expected to complete a replacement transaction before September 30, 2018, but gave no assurance of favorable terms.
- The $300 million ATM credit facility, entered into in May 2018 to fund ATM-network cash, expires November 30, 2018. Its stated rate is Overnight LIBOR plus 1.75%.
- Adoption of Topic 606 reduced both reported revenue and direct operating costs by $14.3 million in Q2 and $36.9 million in the first half, with no impact on net income. Prior-year figures were not restated, so revenue comparisons are affected by presentation differences.
- The Tax Cuts and Jobs Act, including the transition-tax and GILTI provisions, contributed to the higher 2018 effective tax rate: 27.3% in Q2 and 30.1% in the first half, compared with 26.6% and 25.8% in 2017.
- Foreign-exchange exposure is significant: about 70% of revenue is generated outside the U.S. Management estimated a 10% currency move could affect reported net income and working capital by approximately $125–$130 million annualized, and comprehensive income by approximately $100–$105 million through translation effects. These are estimates and have stated limitations.
- Other risks include cybersecurity incidents or service interruptions, regulatory changes, competition, contract renewals and pricing, and dependence on banking, agent, and correspondent relationships. The company reported approximately $451 million of cash in its ATM networks for which it was responsible and maintains insurance to mitigate related exposures.
- Management said no current legal or regulatory proceedings were expected to have a material adverse effect. It reported disclosure controls as effective and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether operating growth converts to stronger cash generation as working-capital settlement timing normalizes.
- Progress and final terms of the replacement for the April 2019 credit facility, and refinancing of the short-term ATM facility.
- Whether segment volume and margin trends persist, especially epay’s declining transaction counts and growth in non-mobile products.
- The continuing effects of currency movements, the Tax Act, and Topic 606 on reported comparisons and earnings.
- Actual capital spending versus the $110–$135 million estimate, and the cash and leverage impact of share repurchases.