Euronet Worldwide, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited consolidated financial statements prepared under U.S. GAAP. Euronet provides ATM, POS and card processing, prepaid electronic payment distribution, and money transfer services through EFT Processing, epay, and Money Transfer segments. The business is seasonal, with typically lower activity in the first quarter in epay and money transfer.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 / prior balance |
|---|---|---|
| Revenue | $353.3 million | $335.6 million; up 5% |
| Operating income | $24.4 million | $19.2 million; up 27% |
| Operating margin | 6.9% | 5.7% |
| Net income attributable to Euronet | $16.0 million; diluted EPS $0.30 | $12.0 million; diluted EPS $0.24 |
| Operating cash flow | $53.1 million | $15.7 million |
| Investing cash flow | $(12.2) million | $(37.6) million |
| Financing cash flow | $39.8 million | $(16.7) million |
| Cash and cash equivalents | $292.3 million | $209.8 million at December 31, 2013 |
| Working capital / current ratio | $173.3 million / 1.28 | $108.4 million / 1.15 at December 31, 2013 |
| Total debt obligations, including current maturities | $238.4 million, plus $4.8 million of capital leases | $204.6 million debt and leases at December 31, 2013 |
Consolidated gross margin is not stated as a single measure in the filing. Income tax expense was $5.7 million and the effective tax rate was 26.4%, versus 20.7% in Q1 2013. The higher rate primarily reflects the prior-year benefit from closing a German tax audit, partly offset by valuation-allowance changes in 2014.
Cash from operations increased substantially, which management attributed to improved operating results and working-capital timing, including settlement timing with mobile operators and money-transfer correspondents. The company held $70.5 million of restricted cash; $219.3 million of cash was held outside the U.S. and expected to remain invested in foreign operations.
Material changes and segment results
- EFT Processing: Revenue rose 18% to $74.6 million and operating income increased 93% to $12.8 million. Higher ATM volumes, dynamic currency conversion (DCC), and card outsourcing growth in Greece contributed; operating margin rose to 17.1% from 10.4%.
- epay: Revenue fell 2% to $185.1 million, while operating income increased 2% to $14.9 million. Lower prepaid mobile activity in Australia and Brazil and fewer physical gift fulfillments were partly offset by non-mobile transaction growth in Germany and the U.K.; operating margin improved to 8.0% from 7.7%.
- Money Transfer: Revenue increased 13% to $94.0 million and processed transfers grew 12%, but operating income fell 35% to $3.9 million. Higher salaries, professional and acquisition-related fees, bad debt expense, and customer-acquisition-cost write-downs contributed; operating margin declined to 4.2% from 7.2%.
- Foreign-currency translation produced a $3.2 million gain in comprehensive income, compared with a $17.2 million loss in Q1 2013. The company reported a $1.3 million net foreign-exchange loss in earnings, versus $1.7 million.
Outlook, financing, risks and unusual items
- Management estimated 2014 capital expenditures of approximately $45–$50 million; Q1 spending was $11.0 million. It expected cash generated from operations, cash on hand, and available credit to meet anticipated obligations and capital needs.
- On April 9, 2014, after quarter-end, the company amended its credit agreement: revolving commitments increased from $400 million to $600 million, Term Loan A increased from $66 million to $75 million, the applicable rate margins were reduced by 12.5 basis points, and maturity was extended to April 9, 2019. At March 31, $171.4 million was drawn on the revolver and $47.9 million of letters of credit was outstanding; $180.7 million was available for borrowing under the then-existing facility.
- A March 2014 agreement to acquire HiFX/HiFM for £145 million in cash and Euronet stock was expected to close in Q2, subject to customary conditions and regulatory approvals. At the March 31 exchange rate, consideration was estimated at $184.5 million cash and $56.5 million in stock. The acquisition had not closed by quarter-end.
- Interest-rate exposure is material: 98% of debt obligations were variable-rate; a 1 percentage-point increase, assuming specified borrowings were maintained and available revolver capacity fully borrowed for a year, was estimated to add about $4.2 million of annual interest expense. Management estimated a 10% currency-rate fluctuation could affect annualized reported net income and working capital by approximately $35–$40 million and comprehensive income by approximately $50–$55 million. About 75% of revenue was generated outside the U.S.
- Key business risks include foreign-exchange movements, competition and pricing pressure, dependence on bank, mobile-operator, retailer and agent relationships, regulatory and anti-money-laundering requirements, security breaches, contract renewals, and the ability to manage growth and integration. Management noted that an additional non-cash goodwill impairment is possible if performance or valuation assumptions change; a $18.4 million epay impairment had been recorded in Q4 2013.
- Commitments included $95.4 million of standby letters of credit and bank guarantees, $16.3 million of ATM cash guarantees, and approximately $27.6 million of performance guarantees. Euronet was responsible for approximately $440 million of ATM network cash under certain contracts; insurance is maintained to mitigate exposures. The Delaware unclaimed-property review for 1996–2007 remained unresolved, though management did not expect a material adverse effect. A former-employee wage-and-hour class action was settled for an immaterial amount in 2014.
Important facts for investors to verify
- Whether the HiFX acquisition closed on expected terms, and its subsequent financing, integration costs, and contribution to results.
- Whether improved EFT Processing performance and epay cost controls can persist, and whether Money Transfer growth can translate into operating-margin recovery.
- How working-capital timing affects operating cash flow and borrowing needs, particularly as the money-transfer network expands.
- Actual availability and use of the amended credit facility, variable-rate exposure, and compliance with credit-agreement terms.
- Foreign-currency sensitivity, including the effects of exchange rates on earnings, working capital, and translated goodwill and intangible assets.
- Developments in the Delaware unclaimed-property review, guarantees and indemnities, and potential goodwill impairment risks.