Business context and reporting period
Euronet Worldwide, Inc. (NASDAQ: EEFT) filed this Form 10-K for the fiscal year ended December 31, 2010. It provides electronic payment processing and distribution services through three segments: EFT Processing (ATMs, POS and card services), epay (prepaid airtime and other electronic products), and Money Transfer (RIA consumer transfers and related services). The filing reports annual results; fourth-quarter figures are noted separately below.
In 2010, epay generated about 58% of consolidated revenue, Money Transfer 23%, and EFT Processing 19%. Euronet acquired a Brazilian prepaid distributor in September and operated in approximately 150 countries.
Financial results and liquidity
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Revenue | $1,038.3 million | $1,032.7 million |
| Operating income | $5.3 million | $72.3 million |
| Income (loss) from continuing operations | $(37.9) million | $31.3 million |
| Net income (loss) attributable to Euronet | $(38.4) million | $30.3 million |
| Diluted EPS from continuing operations | $(0.75) | $0.58 |
| Cash provided by operating activities | $108.1 million | $96.1 million |
| Cash used in investing activities | $55.4 million | $39.8 million |
| Cash used in financing activities | $44.8 million | $57.5 million |
Operating margin was approximately 0.5%, down from 7.0%; the $70.9 million non-cash goodwill impairment was a major contributor. Excluding impairment charges, operating income declined about 7% year over year. FY 2010 also included a $7.6 million foreign-exchange loss and a $3.1 million net gain on settlement of an RIA acquisition dispute. The income tax expense was $22.9 million despite a pretax loss, reflecting, among other items, valuation allowances on U.S. tax losses.
At December 31, 2010, total assets were $1,409.4 million and total liabilities $890.5 million. Cash and cash equivalents were $187.2 million; restricted cash was $108.7 million. Working capital was $156.7 million and the current ratio was 1.27, compared with $167.0 million and 1.34 a year earlier. Restricted balances include customer/vendor funds and collateral and are not all available for general use.
Long-term debt was $286.1 million; the company reported total debt obligations of approximately $293.4 million, excluding? The filing’s debt disclosures separately identify $4.8 million of capital leases and $0.6 million of short-term debt. The term loan balance was $127.0 million, and the $175 million face-value 3.50% convertible debentures had a $161.0 million carrying value. There were no revolving-facility borrowings at year-end, but $41.7 million of letters of credit and guarantees reduced availability; $58.3 million remained available. Cash flow from operations exceeded investing outflows in 2010.
Material changes versus the prior comparable period
- Revenue increased by about 0.5% (reported as 1% rounded). Growth in Money Transfer transactions, the Brazil acquisition and currency effects largely offset lower epay commissions and Polish ATM interchange revenue.
- Operating income fell from $72.3 million to $5.3 million, and the company moved from net income to a $38.4 million attributable net loss. The impairment charge rose to $70.9 million from $9.9 million.
- EFT Processing revenue decreased 1% and operating income decreased 21%; ATM transactions grew 13% to 794 million, but lower Polish interchange fees and the absence of 2009 contract termination fees pressured revenue and margins.
- epay revenue decreased 1%, while transactions increased 15% to 891 million. Gross profit increased to $129.7 million from $116.8 million, but the $70.9 million impairment drove the segment to a $24.3 million operating loss, versus $49.4 million operating income in 2009.
- Money Transfer revenue increased 5%, transactions rose 7% to 18.8 million and the segment returned to $13.4 million operating income from a $0.4 million loss. Transfers to Mexico, about 21% of segment transactions, fell 8%; transfers to other countries increased 11%.
- Operating cash flow increased to $108.1 million from $96.1 million. Investing outflows increased, including $24.4 million for acquisitions and $29.2 million for property and equipment purchases.
Guidance, outlook, risks and unusual items
- Outlook: Management expected the German ATM fee structure to shift in first-quarter 2011 to market-driven surcharges at considerably lower rates, reducing EFT Processing revenue and operating income by approximately $10 million each in 2011 versus 2010. Estimated 2011 capital expenditures were $35–$45 million. No consolidated earnings or revenue guidance was provided.
- Impairment and operating risks: The 2010 $70.9 million goodwill impairment related to epay operations in the U.K. ($58.2 million), Spain ($11.2 million) and Romania ($1.5 million). Further impairment is possible if performance or assumptions weaken.
- Debt and liquidity: Holders may put the $175 million convertible debentures to the company at par on October 15, 2012, 2015 and 2020, or upon a change in control. The credit facility may require repayment six months before a put date unless specified borrowing or liquidity conditions are met. Variable rates, debt covenants and refinancing access are additional risks.
- Market and operating exposures: Approximately 78% of revenue was denominated in currencies other than the U.S. dollar. Management estimated a 10% exchange-rate fluctuation could affect reported net income and working capital by approximately $25–$35 million, and comprehensive income by $35–$45 million. Other risks include seasonality, interchange/commission pressure, contract renewals, competition, retailer and agent credit/fraud exposure, cybersecurity and regulatory compliance.
- Contingencies: The DOJ investigation into possible price collusion involving money transfers to the Dominican Republic remained unresolved; the company could not estimate any loss or consequences. A California wage-and-hour class action was also pending. Management reported no other proceedings believed likely to have a material adverse effect.
- Other matters: Euronet reported no common-stock dividends and did not intend to pay them in the foreseeable future. The independent auditor issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective.
Most important facts for investors to verify
- Whether the lower German ATM surcharge structure produced the forecast approximately $10 million reduction in EFT revenue and operating income in 2011, and whether Polish interchange pressure persisted.
- How epay performance and margins developed in the U.K., Spain and Romania after the $70.9 million impairment, and whether further impairment indicators arose.
- Cash availability after excluding restricted cash, compliance with credit-facility covenants, and refinancing or liquidity plans for the 2012 convertible-debenture put and facility maturities.
- Whether Money Transfer growth outside the U.S. offset continued weakness in the U.S.-to-Mexico corridor, and the outcome and potential consequences of the DOJ investigation.
- Acquisition integration and returns from epay Brazil, alongside the company’s currency exposure, agent/retailer credit risks and 2011 capital-spending requirements.