EURONET WORLDWIDE, INC. quarterly report, Q2 FY2014

Euronet Worldwide, Inc. — Q2 2014 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2014. Unaudited consolidated results are compared with the corresponding 2013 periods. Euronet provides electronic payment processing, prepaid product distribution and money transfer services through EFT Processing, epay and Money Transfer.

Financial results

Metric	Q2 2014	Q2 2013	Six months 2014	Six months 2013
Revenue	$395.5m	$341.5m	$748.8m	$677.2m
Operating income	$34.1m	$27.8m	$58.5m	$47.0m
Net income attributable to Euronet	$20.5m	$18.1m	$36.5m	$30.1m
Diluted EPS	$0.38	$0.35	$0.69	$0.59
Operating margin	8.6%	8.1%	7.8%	6.9%

• Q2 revenue rose 16% and operating income 23% year over year; six-month revenue rose 11% and operating income 25%. Net income attributable to Euronet increased 13% in Q2 and 21% for the first half.
• Six-month operating cash flow was $103.1m, versus $51.2m in 2013. Investing cash outflow was $115.4m, including $83.4m for acquisitions and $29.3m for property and equipment. Financing provided $209.4m, principally reflecting net debt borrowing.
• Cash and cash equivalents were $408.4m at June 30, up from $209.8m at year-end 2013. Working capital was $186.6m and the current ratio was 1.24, versus $108.4m and 1.15 at year-end.
• Total debt obligations, including capital leases, were $411.2m. Debt excluding leases was approximately $407.0m. The company reported $327.0m drawn on its revolving facility, $74.1m outstanding on Term Loan A, and $221.7m of revolving availability after letters of credit.
• Q2 gross profit and margins varied by segment: EFT Processing operating income increased 44% to $21.6m; epay increased 13% to $14.2m; Money Transfer increased 23% to $10.8m. For the first half, Money Transfer operating income was slightly lower, at $14.8m versus $14.8m in 2013.

Material changes and business developments

• On May 20, Euronet acquired HiFX and HiFM, adding account-to-account international payments and foreign-exchange risk management services. Consideration was £111m ($186.7m) cash plus 1,262,654 shares valued at $56.6m. The preliminary purchase accounting included $160.9m goodwill and $95.7m acquired intangible assets; valuation remained in progress.
• EFT Processing growth reflected more ATMs and transactions, increased dynamic currency conversion (DCC), Greek card outsourcing growth and currency effects. Transactions processed increased 8% in both the quarter and first half.
• epay revenue was nearly flat for the first half. Growth in Germany and the U.K. was offset by weaker prepaid mobile activity in Australia, Brazil and the U.S.; management cited competitive pressure and changes in Brazilian operators’ distribution strategies.
• Money Transfer growth reflected higher transfer volumes, Walmart product launch, network expansion, HiFX and currency effects. The Walmart offering contributed volume but had lower revenue and gross profit per transaction than other services. A first-quarter write-down of customer acquisition costs weighed on first-half segment results.
• Foreign exchange movements were estimated to have increased reported operating income by approximately 5% in Q2 and 4% in the first half. Separately, net foreign-exchange losses were $3.1m for Q2 and $4.4m for the first half.

Outlook, risks and unusual items

• Management estimated 2014 capital expenditures of approximately $50m–$60m. It expected operating cash flow, cash on hand and available financing to cover debt, lease and capital expenditure needs, while cautioning that future refinancing or equity financing terms could be unfavorable or unavailable.
• The April 2014 credit amendment increased revolving commitments from $400m to $600m, increased Term Loan A to $75m before amortization, reduced interest margins by 12.5 basis points and extended maturity to April 9, 2019.
• Foreign-currency exposure is substantial: about 75% of first-half revenue was generated outside the U.S. Management estimated that a 10% currency movement could affect annualized reported net income and working capital by $30m–$35m, and total comprehensive income by $75m–$80m through translation of non-U.S. assets and liabilities.
• Approximately 99% of debt obligations bore variable interest. A 1 percentage-point rate increase, assuming current and maximum revolving borrowings were maintained for a year, was estimated to add about $6.2m in annual interest expense.
• ATM operations rely in part on third-party cash providers: approximately $428m of provider cash was used in ATM networks and was not recorded as Euronet cash. Provider withdrawal or termination could disrupt service, require greater use of company cash and increase costs. Euronet also had about $122m of its own cash in use or designated for ATM networks.
• Commitments included $98.3m of standby letters of credit and bank guarantees, $16.3m of ATM cash guarantees and approximately $31.6m of performance guarantees. The company reported no significant guarantee claims and recorded no related liability.
• A Delaware unclaimed-property review covering 1996–2007 remained unresolved; management did not expect a material adverse effect. Management reported no other current legal or regulatory matter expected to have a material adverse effect.
• The filing identifies potential goodwill impairment risk, particularly for epay reporting units, following an $18.4m non-cash impairment charge in 2013. The HiFX/HiFM purchase price allocation was preliminary. Management also noted seasonality, competitive and commission pressures, regulatory and technology risks, and uncertainty around contract renewals and growth.

Important facts for investors to verify

• Track whether the HiFX/HiFM acquisition’s preliminary valuation, integration and expected contribution develop as anticipated, including the effect of acquired intangibles and goodwill.
• Assess the sustainability of earnings and cash generation, especially segment margins, Money Transfer customer-acquisition costs, bad-debt expense and working-capital timing.
• Monitor revolving-credit usage, available liquidity, variable-rate exposure and whether forecast capital spending remains within the stated range.
• Review foreign-exchange sensitivity and the company’s ability to manage currency exposures, including derivative and counterparty risks.
• Evaluate continuity of third-party ATM cash supply and the potential operational and financial consequences of provider withdrawal or non-renewal.
• Follow the Delaware unclaimed-property review and any changes in goodwill impairment assessments or other contingencies.