Euronet Worldwide, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unaudited consolidated results under U.S. GAAP. Euronet provides electronic payments and transaction processing through EFT Processing, epay, and Money Transfer segments.
Key financial results
Amounts below are in millions of U.S. dollars, except per-share data. Comparisons are with the corresponding 2012 period.
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $341.5 (+13%) | $302.4 | $677.2 (+13%) | $600.0 |
| Operating income | $27.8 (+40%) | $19.9 | $47.0 (+32%) | $35.7 |
| Operating margin | 8.1% | 6.6% | 6.9% | 5.9% |
| Net income attributable to Euronet | $18.1 | $5.7 | $30.1 | $18.9 |
| Diluted EPS | $0.35 | $0.11 | $0.59 | $0.37 |
| Net cash from operating activities | Not provided separately for the quarter | $51.2 | $61.0 |
Q2 income before tax was $26.8 million versus $10.9 million; first-half income before tax was $42.0 million versus $29.4 million. Reported effective tax rates were 32.3% and 47.5% for Q2, and 28.1% and 35.9% for the first half, respectively.
Liquidity, debt and cash flow
- At June 30, cash and cash equivalents were $189.9 million and restricted cash was $58.4 million. Working capital was $102.3 million; the current ratio was 1.16.
- Total debt obligations, including capital leases, were $295.6 million, down from $301.2 million at December 31, 2012. The company reported $213.1 million outstanding on revolving facilities and $71.5 million on the term loan. Of the $390 million revolving facility, $144.7 million remained available after borrowings and letters of credit.
- First-half operating cash flow of $51.2 million was below $61.0 million in 2012, primarily due to working-capital timing. Investing cash use was $48.8 million, including $30.8 million for acquisitions; financing cash use was $9.5 million. Cash decreased $11.6 million during the period.
- Management estimated 2013 capital expenditures of approximately $35–$45 million and stated that expected operating cash flow, cash on hand, and available financing should be sufficient for obligations and planned needs. This is not earnings guidance.
Material changes and operating drivers
- All three operating segments grew revenue and operating income in Q2 and the first half. EFT Processing revenue increased 24% in Q2 and 25% year to date; Money Transfer increased 20% and 18%; epay increased 6% and 7%, respectively.
- Growth reflected ATM and transaction expansion, dynamic currency conversion and other value-added services, higher money-transfer volumes and network expansion, and epay growth in the U.S., Germany and cadooz. Pure Commerce, acquired in January 2013, contributed to EFT Processing.
- epay continued to face revenue declines in Australia and the U.K. as mobile operators shifted distribution toward online and mobile channels, alongside competitive pressure. Management cited these markets as a potential near-term profitability and impairment risk.
- First-half revenue growth and higher operating income helped raise net income, alongside lower interest expense following the 2012 convertible-debenture repurchase. Q2 results also benefited from a $1.5 million foreign-exchange gain, compared with a $4.8 million loss in Q2 2012.
Outlook, risks and unusual items
- Pure Commerce purchase consideration included cash and shares plus contingent earnout consideration of up to A$30 million. Its estimated fair value was $18.9 million at June 30; the purchase accounting remained preliminary.
- Foreign-currency translation reduced comprehensive income by $10.9 million in Q2 and $28.1 million in the first half. Approximately 74% of revenue was generated outside the U.S. Management estimated that a 10% currency fluctuation could affect annualized reported net income and working capital by approximately $30–$35 million, and total comprehensive income by approximately $50–$55 million.
- About 97% of debt obligations carried variable interest rates. Management estimated a 100-basis-point rate increase would add approximately $4.3 million of annual interest expense under the stated borrowing assumptions.
- Other exposures include working-capital demands in Money Transfer, mobile-operator commission and distribution changes, competition, regulatory requirements, and indirect exposure to European sovereign-debt risks. The company had $92.9 million of standby letters of credit and bank guarantees, and responsibility for approximately $360 million of ATM network cash; it maintained insurance for relevant exposures.
- A 2011 security breach had generated claims, but no additional related expenses were incurred in the first half of 2013. Management did not expect the net impact after insurance to be material, while noting insurance and reputational risks. A former-employee wage-and-hour class action was subject to an agreement in principle to settle for an immaterial amount.
- The company adopted a new stockholder rights agreement, which may delay or deter a takeover. Management reported disclosure controls as effective and no material second-quarter change in internal control over financial reporting.
Key facts for investors to verify
- Whether segment growth, especially Money Transfer volume and EFT value-added services, can continue and convert into cash.
- How Australia and U.K. epay performance develops, and whether those reporting units face impairment.
- The final Pure Commerce purchase-price allocation and whether earnout targets trigger additional consideration.
- Working-capital trends, available revolver capacity, and the sensitivity of earnings and comprehensive income to foreign exchange and interest rates.
- Developments in security-breach claims, insurance recoveries, and the wage-and-hour settlement.