Euronet Worldwide, Inc. — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010; balance-sheet comparisons are with December 31, 2009. Dollar amounts are in millions unless stated otherwise. Euronet provides electronic funds transfer (EFT) processing, prepaid product distribution (epay), and money transfer services.
Financial results and liquidity
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $260.2 | $264.8 | $754.5 | $747.1 |
| Operating income | $20.3 | $22.1 | $55.0 | $49.8 |
| Income from continuing operations | $21.1 | $18.6 | $23.4 | $22.6 |
| Net income attributable to Euronet | $21.0 | $18.9 | $22.3 | $22.1 |
| Diluted EPS | $0.41 | $0.36 | $0.43 | $0.43 |
- Q3 revenue fell 2% year over year; operating income fell 8%. Nine-month revenue rose 1% and operating income rose 10%. Net income attributable to Euronet increased 11% in Q3 and 1% year to date.
- Operating margin was approximately 7.8% in Q3 2010 versus 8.3% in Q3 2009, and 7.3% for the first nine months of 2010 versus 6.7% in 2009.
- Cash and cash equivalents were $178.7 at September 30, down from $183.5 at year-end; restricted cash was $102.2, up from $73.1. Working capital was $136.5 versus $167.0, and the current ratio was 1.27 versus 1.34.
- Nine-month operating cash flow was $85.8, compared with $117.3 in 2009. Investing cash outflow was $46.7 versus $35.4; financing cash outflow was $43.6 versus $48.0. Cash declined $4.8 during the period.
- Total debt obligations were $292.4, including $5.0 of capital leases, versus $327.9 at December 31, 2009. This included $127.5 under the term loan and $159.2 carrying value for the 3.50% convertible debentures. The revolving facility had no borrowings and $59.3 available, after $40.7 of letters of credit.
Material changes and segment performance
- EFT Processing: Q3 revenue declined 4% to $49.1 and operating income declined 14% to $10.5. Nine-month revenue increased 1% to $144.2, while operating income fell 16% to $28.5. ATM transaction volumes and the managed ATM base grew, but lower Polish interchange fees, currency effects, and comparison with 2009 contract-termination fees pressured results.
- epay: Q3 revenue declined 4% to $148.0 and operating income declined 13% to $11.8. Nine-month revenue was down 1% to $431.1 and operating income down 9% to $33.4. Transaction volumes rose, but lower operator commissions and mix shifts reduced revenue per transaction; gross profit increased, while higher operating expenses weighed on operating income.
- Money Transfer: Q3 revenue rose 5% to $63.1 and operating income rose 45% to $3.7. Nine-month revenue rose 5% to $179.2; operating income was $9.5, compared with a $2.6 loss in 2009, which included a $9.9 impairment charge. Growth in transactions and non-U.S. markets helped; transfers to Mexico remained weaker.
Outlook, commentary, risks and unusual items
- Management expected 2010 capital expenditures of approximately $30–$35. It anticipated German EFT fee-structure changes in 2011 could reduce EFT segment revenue and operating income by approximately $10.0.
- Management said cash from operations, cash on hand and available financing were expected to cover debt, leases, contingent acquisition payments and capital spending, but gave no assurance of favorable refinancing or equity-issuance terms. It also noted that the 2010 interim results are not necessarily indicative of full-year results.
- The $175.0 principal amount of 3.50% convertible debentures gives holders put rights beginning October 15, 2012. The filing cautions that the company may not have sufficient cash or acceptable financing to fund a required repurchase. Credit-facility repayment could also be required six months before a put date absent specified financing or liquidity conditions.
- Foreign currency exposure is significant: 77% of nine-month revenue was generated outside the U.S. The filing estimates a 10% exchange-rate fluctuation could affect reported net income and working capital by approximately $25–$35 annually, and comprehensive income by approximately $45–$55 on a non-cash translation basis.
- Q3 included a $3.1 gain, net of costs, from settling a dispute with RIA’s sellers; the company received 226,634 shares previously held in escrow. Foreign currency exchange produced a $9.0 Q3 gain, but a $5.5 loss for the first nine months. Prior-year comparisons include a $9.9 goodwill and intangible impairment and a $1.8 gain on sale of investment securities.
- In September, Euronet acquired 98.8% of Telecomnet, expanding epay into Brazil, for approximately $44.5, including $5.0 of contingent consideration. A short-form merger increased ownership to 100% in October. The purchase-price allocation remained preliminary; $4.9 was held in escrow for seller obligations.
- The DOJ investigation into possible price collusion involving RIA money-transfer services to the Dominican Republic remained unresolved. The company said it could not predict the outcome or any potential loss, fines, licensing consequences or civil liability; it was cooperating with the investigation.
- Other exposures include $86.9 of standby letters of credit and bank guarantees, approximately $20.6 of guarantees for ATM network cash and $28.9 of performance guarantees. Euronet was responsible for approximately $265 of ATM network cash and maintained insurance to mitigate that exposure. No related significant claims or guarantee liabilities were reported.
- Management noted possible goodwill impairment at certain epay reporting units if weaker economic conditions prove longer-lasting. The annual impairment test was scheduled for the fourth quarter.
Important facts for investors to verify
- Whether the expected 2011 German EFT fee changes occur and whether the estimated $10.0 impact is realized.
- Liquidity and refinancing capacity ahead of the convertible debenture holder put date in October 2012, including compliance with credit-facility terms.
- Progress and potential consequences of the DOJ investigation, and any related legal or regulatory developments.
- Brazil acquisition performance, final purchase accounting and any Telecomnet contingent consideration payable.
- Foreign-exchange sensitivity, restricted-cash requirements, and the timing-driven working-capital needs of epay and Money Transfer.
- Results of the fourth-quarter goodwill impairment testing, particularly for epay reporting units facing weaker performance.