Euronet Worldwide, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparative period is Q1 2012. Financial statements are unaudited. Euronet provides electronic payments and processing through EFT Processing, epay, and Money Transfer segments.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Revenue | $335.6 million | $297.6 million; up 13% |
| Gross profit, calculated as revenue less direct operating costs | $116.6 million; 34.7% margin | $103.6 million; 34.8% margin |
| Operating income | $19.2 million; 5.7% margin | $15.8 million; 5.3% margin |
| Net income attributable to Euronet | $12.0 million; diluted EPS $0.24 | $13.2 million; diluted EPS $0.26 |
| Operating cash flow | $19.9 million | $22.8 million |
| Cash and cash equivalents at period end | $155.3 million | $191.2 million at Dec. 31, 2012 |
| Working capital / current ratio | $70.4 million / 1.11 | $116.5 million / 1.17 at Dec. 31, 2012 |
| Total debt obligations, as reported in MD&A | $291.1 million | $301.2 million at Dec. 31, 2012 |
Investing activities used $37.6 million, including $30.8 million for acquisitions; financing activities used $16.7 million. Cash declined by $35.9 million during the quarter. At March 31, the company had $206.4 million drawn on its revolving facility and $158.4 million available; the $480 million credit facility matures in August 2016. Approximately 96% of total debt obligations bore variable rates.
Material changes and segment performance
- EFT Processing: Revenue rose 27% to $63.3 million and operating income rose 10% to $6.6 million. Growth reflected more ATMs under management and higher DCC and value-added-service revenue, including Pure Commerce. Operating margin fell to 10.4% from 12.1%, in part due to acquisition-related amortization.
- epay: Revenue increased 8% to $189.6 million and operating income increased 11% to $14.7 million. U.S. and German activity, cadooz products, and the ezi-pay acquisition contributed; declines in Australia, Spain, and the U.K. partly offset growth. Management cited mobile operators’ shift toward online and mobile top-ups as a continuing challenge.
- Money Transfer: Revenue increased 16% to $82.9 million and operating income increased 41% to $6.0 million. Transactions rose 19%; U.S.-to-Mexico activity and network expansion contributed. Operating margin improved to 7.3% from 6.0%, while revenue per transaction declined with a higher U.S. transaction mix.
- Net income attributable to Euronet declined despite higher operating income. The prior-year quarter included a $4.3 million gain on the Euronet Middle East step acquisition; Q1 2013 also had a $1.7 million foreign-exchange loss versus a $2.1 million gain a year earlier. Lower interest expense and tax expense partly offset these effects.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance was provided. Management estimated 2013 capital expenditures of approximately $35–$45 million and said operating cash flow, cash on hand, and available facilities were expected to cover anticipated obligations and investment needs.
- In January, Euronet acquired Pure Commerce for approximately $31.3 million cash and $5.3 million in shares. Earnout consideration of up to A$30 million is subject to performance targets; its March 31 fair value was $21.7 million. Purchase-price allocations remained preliminary.
- Foreign-exchange exposure is significant: approximately 75% of revenue is generated outside the U.S. A 10% currency fluctuation was estimated to affect annualized reported net income and working capital by approximately $30–$35 million, and comprehensive income by approximately $50–$55 million from translation of non-current assets and liabilities.
- Management noted possible impairment risk for Australia and U.K. epay reporting units amid continued revenue declines and competition. It also cited economic, regulatory, pricing, technology, partner, and working-capital risks across its businesses.
- The company disclosed $99.1 million of standby letters of credit and bank guarantees, $16.8 million of ATM cash-supply guarantees, and approximately $27.5 million of customer performance guarantees. It was responsible for approximately $365 million of ATM network cash; insurance was maintained to mitigate exposure.
- Claims related to a 2011 security breach remain possible. Management expected the net financial impact after insurance, if any, not to be material, but noted coverage may not cover all losses. A former-employee wage-and-hour class action was being defended; management did not expect a material adverse effect from that suit.
- A new stockholder rights agreement became effective April 3, 2013. It may dilute an acquiring person and delay or deter a change in control. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Key facts for investors to verify
- Whether segment growth and margins persist, particularly amid Australia and U.K. epay weakness and changing mobile distribution channels.
- Pure Commerce earnout performance, final purchase accounting, and the acquired business’s contribution to results and cash needs.
- Working-capital requirements in Money Transfer and epay, cash availability, revolving-facility capacity, and variable-rate debt exposure.
- Foreign-currency effects, potential impairment assumptions, security-breach claims and insurance recoveries, and the status of disclosed litigation and guarantees.
- The effect of the rights agreement and the company’s capital-allocation plans, including the remaining share-repurchase authorization.