Euronet Worldwide, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing is an annual report, not a quarterly filing; fourth-quarter results are also shown below. Euronet provides electronic payment processing and distribution through EFT Processing, epay, and Money Transfer segments, operating across approximately 160 countries.
Financial performance
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $1,958.6 million | $1,772.3 million |
| Operating income | $249.8 million | $204.8 million |
| Net income attributable to Euronet | $174.4 million | $98.8 million |
| Diluted EPS | $3.23 | $1.83 |
| Operating cash flow | $368.2 million | $215.1 million |
| Capital expenditures | $93.2 million | $80.0 million |
| Cash and cash equivalents, year-end | $734.4 million | $457.5 million |
| Total debt obligations, before unamortized issuance costs | $602.1 million | $428.3 million |
Revenue grew approximately 11%; operating income increased 22%. Operating margin was approximately 12.8%, versus 11.6% in 2015, and net income attributable to Euronet margin was approximately 8.9%, versus 5.6%. Operating cash flow less property-and-equipment purchases was approximately $280.8 million. Working capital was $405.9 million, with a 1.34 current ratio. Of cash and equivalents, $632.3 million was held outside the U.S. and expected to remain invested in foreign operations; repatriation could have adverse tax consequences. Restricted cash was an additional $77.7 million.
Fourth quarter: Revenue was $519.8 million versus $470.6 million in Q4 2015; operating income was $58.1 million versus $55.2 million. Net income attributable to Euronet was $28.9 million versus $33.5 million, and diluted EPS was $0.54 versus $0.61.
Segments and material changes
- EFT Processing: Revenue rose 22% to $464.3 million and operating income rose 24% to $117.2 million. Transactions increased 24% to 1.885 billion; ATMs grew to 33,973 from 21,360, partly due to the October acquisition of YourCash. Growth in DCC and managed ATMs was partly offset by lower average ATM revenue, including expansion in lower-margin India.
- epay: Revenue declined 2% to $694.0 million, while operating income increased 3% to $68.2 million. Transactions fell 3% to 1.294 billion, mainly reflecting competitive pressure and fewer prepaid mobile transactions in the U.S. and U.K. Growth in higher-revenue non-mobile products and cost management supported operating results.
- Money Transfer: Revenue increased 17% to $801.9 million and operating income increased 29% to $101.5 million. Transactions grew 20% to 82.3 million, driven by Walmart-2-Walmart, organic growth, and the prior-year IME and xe acquisitions. Walmart transactions add volume but earn lower revenue per transaction.
Reported net income benefited from a $19.4 million gain associated with Visa Europe’s sale to Visa and a $31.2 million reduction in net foreign-exchange losses year over year. Net foreign-exchange losses were $10.2 million, compared with $41.4 million in 2015. Foreign-currency translation losses of $45.2 million were recorded in comprehensive income. The effective tax rate was 25.2%, versus 30.2% in 2015.
Liquidity, debt and capital allocation
Year-end debt included $220.0 million under the credit facility, $358.3 million carrying value for 1.5% convertible notes, and $23.9 million of other obligations. The credit facility matures in April 2019; $395.1 million remained available under the revolving facility after outstanding borrowings and letters of credit. The convertible notes have a 2020 holder put option and a stated 2044 maturity. Credit-facility covenants include maximum consolidated total leverage of 4.0:1 and minimum fixed-charge coverage of 1.5:1. Management stated that cash, operating cash flow, and available credit were expected to cover projected needs.
Operating cash flow increased substantially, but working-capital timing is significant across the settlement-heavy businesses. The company repurchased 1.1 million shares for $75.6 million in 2016. It estimated 2017 capital expenditures of $90 million to $100 million. No dividends have been paid, and none were expected for the foreseeable future.
Outlook, risks and contingencies
- Management’s stated priorities include growing ATM networks and outsourced services, expanding DCC and other value-added offerings, diversifying epay beyond mobile top-up, and extending money-transfer products and corridors. The filing provides no earnings or revenue guidance.
- India’s November 2016 withdrawal of high-denomination banknotes reduced cash availability and adversely affected Q4 ATM withdrawal revenue and remittance payouts; the filing does not quantify the impact. Management noted that cash supply was progressively recovering in early 2017 but warned further delays could continue to affect results.
- Approximately 72% of revenue was generated outside the U.S. Management estimated that a 10% movement in key foreign-exchange rates could affect reported net income and working capital by approximately $75 million to $80 million, and comprehensive income by approximately $90 million to $95 million. These are sensitivity estimates, not forecasts.
- Other significant risks include regulation and licensing, anti-money-laundering and consumer-protection compliance, cybersecurity and service interruptions, fraud and counterparty exposure, cash-provider availability, contract renewal and fee pressure, competition and technology shifts, political or economic instability, and acquisition integration. The filing also identifies potential effects from U.S.–Mexico remittance policy proposals and Brexit-related licensing uncertainty.
- Long-term debt, operating leases, capital leases and purchase obligations totaled $854.9 million in scheduled payments, including interest, as of year-end. The company disclosed $395.2 million of other guarantees, plus ATM cash and performance guarantees; it reported no material legal or regulatory proceedings and no recorded liability for significant guarantee claims. Unrecognized tax benefits were $18.0 million, with the possible range of change not estimable.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. YourCash, acquired in 2016, was excluded from the internal-control assessment; its included year-end assets were $87.9 million and its included 2016 revenue was $9.6 million.
Investor verification points
- Separate recurring operating growth from the Visa Europe gain, foreign-exchange effects, and acquisition contributions when assessing earnings quality.
- Track ATM and money-transfer growth against margins, India cash normalization, and Walmart-2-Walmart’s lower unit revenue.
- Review debt maturities, variable-rate exposure, covenant headroom, and the 2019 credit-facility refinancing requirement.
- Assess how much reported cash is operationally restricted or held abroad, and the working-capital and cash-provider requirements of the networks.
- Monitor acquisition integration, contract renewals, regulatory or tax developments, and the potential financial impact of cybersecurity or compliance incidents.