Euronet Worldwide, Inc. — Q2 2011 Form 10-Q
Business context and period: Euronet provides electronic payment processing, prepaid product distribution and consumer money transfers. This unaudited filing covers the quarter and six months ended June 30, 2011; comparisons are with the same 2010 periods unless noted.
Financial results and liquidity
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Revenue | $279.8m | $244.2m | $542.4m | $494.2m |
| Operating income | $18.8m | $16.5m | $36.0m | $34.8m |
| Net income attributable to Euronet | $11.9m | $(1.5)m | $29.2m | $1.3m |
| Diluted EPS | $0.23 | $(0.03) | $0.56 | $0.03 |
| Operating cash flow | Not stated separately | Not stated separately | $55.9m | $88.0m |
- Q2 revenue rose 15% and first-half revenue rose 10%. Operating income increased 14% in Q2 and 4% in the first half. Consolidated operating margin was approximately 6.7% in Q2 and 6.6% for the first half, versus approximately 6.8% and 7.0% in 2010.
- Net income improved substantially, but comparisons were materially affected by foreign currency exchange results: a $3.7m gain in Q2 and $12.9m gain in the first half of 2011, versus losses of $9.3m and $14.4m in 2010. First-half results also included a $1.0m legal settlement gain.
- At June 30, cash and cash equivalents were $225.5m; restricted cash was $112.6m. Working capital was $198.1m and the current ratio was 1.37. The company said much of its cash was held outside the U.S. and expected to remain invested in foreign operations.
- Total debt obligations were $295.5m, including $164.8m carrying value of convertible debentures, $126.0m of term loans and $4.0m of capital leases and other debt. The $100m revolving facility had no borrowings and $58.2m available after letters of credit.
- First-half investing cash outflow was $21.3m, including $16.7m for property and equipment and $3.4m for acquisitions. Financing cash outflow was $5.6m. Cash increased $38.3m, to $225.5m.
Material changes and segment performance
- EFT Processing: Q2 revenue increased 8% to $50.4m and operating income rose 12% to $9.2m. First-half revenue was essentially flat at $94.7m, while operating income fell 15% to $15.3m. Management cited lower transaction fees in Germany and lower interchange revenue in Poland; Q1 included $1.2m of accelerated deferred revenue in Greece.
- epay: Q2 revenue increased 14% to $156.5m and operating income rose 42% to $13.5m. First-half revenue increased 10% to $311.6m and operating income rose 23% to $26.6m. Growth reflected the 2010 Brazil acquisition, higher German activity and currency translation; declines in Australia and the U.K. and commission pressure were offsets.
- Money Transfer: Q2 revenue increased 22% to $73.0m and operating income rose 18% to $5.0m. First-half revenue increased 17% to $136.2m and operating income rose 36% to $7.8m. Higher transaction volumes, international network expansion, product growth and stronger currencies contributed; higher expansion-related costs partly offset gains.
- Weaker U.S. dollar translation benefited reported results. Management estimated currency movements increased operating income by approximately 18% in Q2 and 10% in the first half versus 2010. About 79% of first-half revenue was denominated in non-U.S. currencies.
- First-half operating cash flow declined $32.1m year over year, primarily due to working-capital timing in epay and Money Transfer settlement processes.
Outlook, risks and unusual items
- Management estimated 2011 capital expenditures of approximately $40m–$50m. It expected operating cash, cash on hand and available financing to meet obligations and capital needs, but gave no specific revenue or earnings guidance.
- The revolving credit facility expires in April 2012. The $175m principal amount of 3.50% convertible debentures may be put to the company at par on October 15, 2012; management cautioned that it could not guarantee sufficient cash or acceptable financing for a required repurchase. The credit facility may also require repayment six months before a potential debenture repurchase unless specified conditions are met.
- Foreign exchange is a significant exposure. Management estimated a 10% currency fluctuation could affect annualized reported net income and working capital by approximately $30m–$40m, and total comprehensive income by approximately $40m–$50m from translating non-current assets and liabilities.
- The DOJ was investigating possible price collusion involving Ria money transfers to the Dominican Republic. The company was cooperating but could not estimate the outcome or any potential loss; possible consequences include fines, penalties, licensing restrictions and civil liability.
- A California wage-and-hour class action against a subsidiary remained at a preliminary stage; the company could not estimate a potential loss. No liability was recorded for these matters as of June 30.
- Other exposures include $102.8m of standby letters of credit and bank guarantees, and responsibility for approximately $300m of ATM network cash, mitigated in part by insurance. The filing reported no significant claims under guarantees or indemnities.
- Management identified potential goodwill impairment as an ongoing uncertainty following a $70.9m non-cash charge in 2010 for certain epay reporting units. Australia epay transaction declines and competitive pressure may also weigh on near-term profitability.
Important facts for investors to verify
- How much of reported earnings growth reflects operating performance versus foreign-exchange gains and the one-time legal settlement.
- Whether Germany pricing pressure, Poland interchange reductions and Australia weakness persist, and whether epay growth and margins can be sustained.
- Cash availability and working-capital needs, including restricted cash and funds held overseas.
- Plans to renew or replace the April 2012 revolving facility and funding capacity for the October 2012 convertible-debenture put.
- Developments in the DOJ investigation, the California class action and goodwill impairment assessments.