Euronet Worldwide, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Financial statements are unaudited. Amounts below are in U.S. dollars; financial figures are rounded to millions unless stated otherwise.
Business context and performance
Euronet provides electronic payment processing and distribution services through EFT Processing, epay, and Money Transfer. Approximately 77% of revenue was generated in currencies other than the U.S. dollar.
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Revenue | $302.4m | $279.8m | $600.0m | $542.4m |
| Operating income | $19.9m | $18.8m | $35.7m | $36.0m |
| Net income attributable to Euronet | $5.7m | $11.9m | $18.9m | $29.2m |
| Diluted EPS | $0.11 | $0.23 | $0.37 | $0.56 |
| Operating margin | 6.6% | 6.7% | 5.9% | 6.6% |
Revenue grew 8% in Q2 and 11% in the first half, while operating income was up 6% for Q2 and down 1% for the half. Net income attributable to Euronet fell about 52% in Q2 and 35% in the first half. A $4.8m Q2 foreign-exchange loss, versus a $3.7m gain a year earlier, was a major factor in the quarterly earnings decline. For the first half, foreign exchange was a $2.7m loss versus a $12.9m gain in 2011; the prior-year period also included a $1.0m legal-settlement gain.
Segments and material changes
- EFT Processing: Q2 revenue increased 16% to $58.3m and operating income rose 13% to $10.3m. ATM count increased 41% year over year to 17,048, and processed transactions rose 25%. Growth in ATMs and value-added services was partly offset by lower revenue per ATM and transaction, a stronger U.S. dollar, and lower margins associated with new installations and growth in India and Pakistan.
- epay: Q2 revenue increased 7% to $166.7m, but operating income fell 26% to $10.0m; first-half operating income declined 13% to $23.2m. The cadooz acquisition and growth in Germany and the U.S. supported revenue, while revenue declines in Australia, Brazil, and Spain, higher bad-debt expense, and cadooz’s gross-revenue presentation pressured margins. Management said Brazilian mobile-operator distribution changes are expected to weigh on revenue through the rest of 2012; it is adjusting costs and plans to introduce additional products in 2013. Longer-term underperformance could trigger impairment of Brazilian goodwill or intangibles.
- Money Transfer: Q2 revenue increased 6% to $77.5m and operating income increased 33% to $6.7m. Transactions grew 21%, with growth in U.S.-to-Mexico activity and expanded agent and correspondent networks. Revenue per transaction declined as lower-revenue non-transfer products grew and currencies weakened; cost controls helped margins.
Cash flow, liquidity, and debt
- First-half cash from operating activities was $61.7m, versus $55.9m in 2011. Investing cash use was $32.4m, including $24.8m of property and equipment purchases; financing cash use was $20.0m, primarily reflecting net debt repayments. Cash and cash equivalents increased by $7.9m to $178.6m.
- Cash and cash equivalents were $178.6m and restricted cash was $71.1m at June 30. Current assets of $684.1m were below current liabilities of $702.5m, resulting in negative working capital of $18.4m; the current ratio was 0.97. Management attributed much of the negative working capital to classifying the convertible debentures as current.
- Debt obligations were $316.3m excluding capital leases; debt and capital lease obligations together totaled approximately $321.3m. The $171.4m principal amount of 3.5% convertible debentures has a holder put option on October 15, 2012. Euronet expected holders to exercise it, but said cash on hand and revolving-credit availability would be sufficient to fund repurchases and other current obligations.
- The $355m senior secured credit facility had $77.0m of term loans and $69.3m of revolving borrowings outstanding; $34.4m of letters of credit also used revolving capacity. The company reported $171.3m available for borrowing under the revolving facility. First-half 2012 capital expenditures were $24.9m; management estimated full-year capital expenditures of $40m–$50m.
Outlook, risks, and unusual items
- Management said the stronger U.S. dollar reduced operating income by an estimated 11% in Q2 and 8% in the first half compared with the corresponding 2011 periods. It also estimated that a 10% currency-rate fluctuation could affect annualized reported net income and working capital by approximately $35m–$40m, and total comprehensive income by approximately $50m–$55m.
- Other risks include competition and pressure on ATM interchange fees, mobile-operator commission or distribution changes, weak economic conditions, regulatory requirements, and working-capital needs as Money Transfer expands. Management noted indirect exposure to European sovereign-debt risks through customers and economic activity.
- A European processing unit suffered a criminal security breach in late 2011. It represented less than 5% of company revenue, profit, and transactions. The company could not estimate a possible loss range, but did not expect the net impact after probable insurance recovery to be material. First-half breach expenses were $0.5m, with $1.7m recovered and a further $0.2m recovery expected.
- A U.S. Department of Justice antitrust investigation concerning Ria money-transfer pricing to the Dominican Republic remains unresolved. Euronet said it could not predict the outcome or any potential loss or business consequences.
- The January 2012 acquisition of the remaining 51% of Euronet Middle East cost approximately $6.4m and generated a $4.4m gain on remeasurement of the previously held interest. The company recorded a valuation allowance against U.S. tax net operating losses, as it concluded the related tax benefit was more likely than not not realizable.
- Management stated that the interim results are not necessarily indicative of full-year results. No specific full-year revenue or earnings guidance was provided in the filing text.
Important facts for investors to verify
- Whether holders exercised the October 15, 2012 convertible-debenture put, and how any repurchase affected cash, borrowing capacity, and subsequent debt balances.
- Whether epay’s Brazil cost changes and planned 2013 product additions improved profitability, and whether impairment indicators emerged.
- Subsequent outcomes and insurance recoveries related to the security breach, and developments or potential exposure in the DOJ investigation.
- Whether foreign-exchange movements, European economic conditions, and mobile-operator changes continued to affect revenue, margins, and liquidity.
- Whether actual 2012 capital expenditures were within the $40m–$50m estimate and whether available liquidity remained adequate as Money Transfer working-capital needs grew.