Euronet Worldwide, Inc. — FY 2012 Form 10-K
Reporting period: Year ended December 31, 2012. This is an annual filing, not a standalone fourth-quarter report; selected quarterly results are included. Euronet provides electronic payment processing, prepaid payment distribution and consumer money transfers through EFT Processing, epay and Money Transfer segments.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $1,267.6 million | $1,161.3 million |
| Operating income | $58.0 million | $79.1 million |
| Net income attributable to Euronet | $20.5 million | $37.0 million |
| Diluted earnings per share | $0.40 | $0.71 |
| Cash from operating activities | $181.5 million | $99.3 million |
Revenue rose 9%, but operating income fell 27% and attributable net income fell 44%. Reported operating margin was approximately 4.6%, down from 6.8%; net margin was approximately 1.6%, versus 3.2%. The 2012 results included a $28.7 million non-cash impairment charge in epay Brazil. Excluding that charge, management said operating income increased 10% year over year.
Fourth-quarter revenue was $351.2 million, the highest of the year, but the company reported an operating loss of $1.9 million and a net loss attributable to Euronet of $13.0 million, or $0.26 diluted loss per share. The quarter included the Brazil impairment; the filing does not provide a clear quarterly breakdown of all drivers of the loss.
Cash and cash equivalents were $191.2 million, with an additional $81.9 million in restricted cash. Working capital was $116.5 million, compared with negative $20.5 million a year earlier; the current ratio was 1.17 versus 0.97. Operating cash flow increased substantially, partly reflecting timing-related working-capital movements. Capital expenditures were $49.6 million.
Debt obligations totaled approximately $301.2 million at year-end, including $215.1 million drawn on the revolving facility, $74.5 million under the term loan and $3.6 million of convertible debentures. The company had $137.4 million of revolving borrowing capacity available and $47.5 million of letters of credit outstanding under that facility. Most debt carried variable rates; the company reported weighted-average rates of 2.5% on revolving borrowings and 2.0% on the term loan.
Segments and material changes
| Segment | 2012 revenue | 2012 operating income | Year-over-year change |
|---|---|---|---|
| EFT Processing | $237.9 million | $44.4 million | Revenue +19%; operating income +34% |
| epay | $714.1 million | $19.5 million | Revenue +5%; operating income −66%, including impairment |
| Money Transfer | $316.1 million | $24.6 million | Revenue +11%; operating income +44% |
- EFT Processing growth reflected more ATMs under management and higher value-added service revenue, particularly dynamic currency conversion. ATMs increased to 17,600 from 14,224, and transactions rose 23%.
- epay revenue grew on U.S. transaction gains, German non-mobile products and a full year of cadooz, but declines in Australia, Brazil, Spain and the U.K. weighed on performance. Brazil’s impairment followed mobile-operator distribution changes and weaker-than-expected recovery prospects from new products and cost actions.
- Money Transfer transactions increased 25% to 30.7 million, with growth in U.S. and non-U.S. markets. Management said U.S.-to-Mexico activity improved in 2012.
- Notable transactions included acquiring full ownership of Euronet Middle East, acquiring ezi-pay assets and retail contracts in New Zealand, and repurchasing $167.9 million principal amount of 3.5% convertible debentures. The expanded revolving facility’s capacity increased to $400 million.
Outlook, risks and other items
- Management estimated 2013 capital expenditures of approximately $40 million to $50 million and expected operating cash, cash on hand and available financing to cover planned needs; this is not earnings guidance.
- Key risks include foreign exchange exposure (77% of 2012 revenue was generated in non-U.S.-dollar countries), variable-rate debt, competition and fee pressure, contract renewals, acquisition integration, economic and political conditions, and extensive money-transfer and payments regulation. A 10% currency-rate fluctuation was estimated to affect reported net income and working capital by approximately $30 million to $40 million.
- The company disclosed claims arising from a late-2011 security breach affecting a business representing less than 5% of company revenue, profits and transactions. It expected insurance to cover the exposure and did not expect a material net impact, but noted actual claims, fines or insurance recovery could differ. A 2012 wage-and-hour class action remained pending; the company could not estimate a loss range. The DOJ’s antitrust investigation was reported closed without further implications.
- The effective tax rate was 56.9%, elevated by impairment and other items; the adjusted rate disclosed by management was 39.8%. No common-stock dividends had been paid, and none were planned for the foreseeable future.
- After year-end, Euronet acquired Australian company Pure Commerce for approximately $31.2 million plus $5.2 million in stock, with potential additional earnout consideration of up to A$30 million.
Important facts for investors to verify
- Whether epay Brazil’s revised products, distribution channels and cost base can offset lost mobile-operator business, and whether further impairment is possible.
- Whether growth in EFT and Money Transfer transactions translates into sustained margins amid pricing pressure, contract renewals and seasonal fluctuations.
- Debt repayment capacity, covenant headroom and exposure to variable interest rates, particularly given the revolving facility and 2016 maturities.
- Actual cash conversion after working-capital timing effects, restricted cash requirements and planned capital expenditures.
- Final exposure and insurance recovery relating to the security breach, and developments in the pending wage-and-hour lawsuit.
- Foreign-exchange sensitivity and the consequences of holding substantial cash and reinvested earnings outside the United States.