Business context and reporting period
Euronet Worldwide, Inc. is an electronic payments provider operating in EFT Processing, epay and Money Transfer. This unaudited Form 10-Q covers the three and nine months ended September 30, 2018; comparative results are for the same periods in 2017. Unless otherwise stated, dollar amounts below are in millions.
Results reflect seasonal strength in EFT Processing’s third-quarter dynamic currency conversion activity. Euronet reported that approximately 72% of revenue was generated in currencies other than the U.S. dollar.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $714.5 | $637.8 | $1,887.2 | $1,647.8 |
| Operating income | $150.9 | $116.9 | $286.8 | $224.9 |
| Net income attributable to Euronet | $102.7 | $100.3 | $172.9 | $179.8 |
| Diluted EPS | $1.89 | $1.80 | $3.17 | $3.23 |
| Operating margin | 21.1% | 18.3% | 15.2% | 13.7% |
Revenue rose 12% in Q3 and 15% year to date; operating income rose 29% and 28%, respectively. Q3 attributable net income increased 2%, while year-to-date attributable net income declined about 4%. Year-to-date results were weighed down principally by a $42.5 million adverse year-over-year swing in foreign-exchange results and a $21.9 million increase in income tax expense, partly offset by higher operating income. Effective tax rates were 25.5% for Q3 and 27.4% year to date, versus 13.4% and 19.3% in 2017.
Segment operating income increased across all three businesses. Q3 revenue and operating income were: EFT Processing $261.7 million and $110.4 million; epay $185.4 million and $16.4 million; Money Transfer $268.3 million and $34.3 million. EFT benefited from ATM growth and higher value-added transactions; Money Transfer from increased transaction volumes; epay operating income improved modestly despite lower processed transaction counts. Management attributed growth in epay’s non-mobile products partly to a shift toward higher-margin content.
For the first nine months, operating cash flow was $192.6 million, down from $257.7 million. Investing cash outflow was $99.4 million, including $82.1 million for property and equipment and $12.9 million for acquisitions. Financing cash inflow was $247.1 million, including significant net borrowings and $177.2 million of share repurchases. Cash and cash equivalents were $1,129.3 million, with an additional $73.5 million of restricted cash at September 30.
At September 30, total debt obligations were $878.3 million before $3.8 million of unamortized issuance costs; the balance-sheet carrying value was $874.5 million. Current liabilities included $233.1 million of short-term debt and current maturities. Working capital was $702.8 million and the current ratio was 1.46. Cash includes amounts supporting operations and ATM networks; $941.5 million was held outside the U.S. and expected to remain invested in foreign operations.
Material changes and unusual items
- Adoption of Topic 606 reduced reported revenue and direct operating costs by $16.4 million in Q3 and $53.3 million year to date, with no effect on net income. Prior-year revenue was not recast, so reported revenue comparisons are not fully like-for-like.
- Foreign currency results shifted from gains of $8.2 million in Q3 2017 and $21.0 million year to date to losses of $2.7 million and $21.5 million in 2018. Currency translation reduced comprehensive income by $40.2 million year to date, compared with a $97.3 million gain in 2017.
- Share repurchases totaled $175.0 million under a program authorizing up to $375 million or 10 million shares through March 2020. Treasury shares increased during the period.
- The $75 million term loan was retired early in Q3. On October 17, 2018, after quarter-end, Euronet replaced its $675 million secured facility with a $1.0 billion unsecured revolving credit agreement expiring in October 2023.
- A separate $300 million ATM credit facility had $200 million outstanding at quarter-end and was scheduled to expire November 30, 2018.
Outlook, risks and contingencies
Management estimated 2018 capital expenditures of approximately $120–$130 million and stated that operating cash flow, cash on hand and available financing were expected to cover debt, lease and capital expenditure needs. The filing provides no specific revenue or earnings guidance. Management noted that the interim results are not necessarily indicative of full-year results.
Key disclosed risks include proposed E.U. rules for dynamic currency conversion, which could affect transaction volumes or margins; foreign-exchange volatility; competition and pricing pressure; regulatory compliance, including GDPR and payments rules; cyberattacks and service interruptions; and dependence on agents, counterparties, banking relationships and customer contracts. Euronet estimated that a 10% foreign-exchange rate fluctuation could have a combined annualized effect of approximately $150–$155 million on reported net income and working capital, and a non-cash comprehensive-income effect of approximately $100–$105 million.
The company reported no legal or regulatory proceedings that management believed would materially adversely affect its consolidated financial condition or results. It disclosed guarantees, letters of credit and indemnities, but recorded no liabilities for these items at quarter-end. The company also expected adoption of the new lease standard in 2019 to materially affect its balance sheet, principally through recognition of operating lease assets and liabilities.
Important facts for investors to verify
- Assess the effect of the Topic 606 gross-presentation change when comparing revenue and direct costs with 2017.
- Review the drivers of the year-to-date decline in attributable net income, particularly foreign-exchange losses and the higher effective tax rate.
- Confirm the status and repayment or refinancing of the $200 million ATM facility that was due to expire November 30, 2018, and the terms and availability of the new $1.0 billion revolver.
- Monitor proposed E.U. DCC regulation and its potential impact on EFT margins and transaction activity.
- Evaluate capital spending, share repurchases, ATM-network cash requirements and cash held overseas alongside reported liquidity.