Euronet Worldwide, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; compared with Q1 2010. Unaudited consolidated financial statements. Euronet provides electronic payment processing and distribution, prepaid products, and consumer money transfer services through EFT Processing, epay, and Money Transfer segments.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $262.6 million | $250.0 million | +5% |
| Operating income | $17.2 million | $18.2 million | -6% |
| Net income attributable to Euronet | $17.3 million | $2.8 million | +$14.5 million |
| Diluted EPS | $0.33 | $0.05 | +$0.28 |
| Cash from operations | $33.9 million | $52.8 million | -$18.9 million |
| Capital expenditures | $7.1 million | Not clearly stated as total capex | — |
Operating margin was approximately 6.6%, versus 7.3% a year earlier. The filing reports segment gross margins of 50% for EFT Processing, 23% for epay, and 54% for Money Transfer. The large increase in attributable net income chiefly reflects a $9.3 million foreign-exchange gain, compared with a $5.1 million loss in Q1 2010, plus a $1.0 million legal settlement gain; operating income declined.
Liquidity, cash flow, and debt
- At March 31, cash and cash equivalents were $220.7 million; restricted cash was $93.5 million. Working capital was $181.5 million and the current ratio was 1.36, up from 1.27 at year-end 2010.
- Operating cash flow fell to $33.9 million, primarily due to working-capital timing in epay and Money Transfer. Investing activities used $6.7 million; financing activities provided $0.8 million.
- Total debt obligations were $294.1 million, including $162.9 million carrying value of 3.50% convertible debentures, $126.5 million of term loans, and capital leases and other debt. The term loan’s weighted-average rate was 2.3%; revolving-facility borrowings were zero, with $54.5 million available after outstanding letters of credit.
- The $175 million principal convertible debentures may be put to the company at par on October 15, 2012, among other specified dates. Management cautioned it could not guarantee sufficient cash or acceptable financing to meet a required repurchase.
Material changes and segment results
- EFT Processing: Revenue fell 9% to $44.4 million and operating income fell 37% to $6.1 million. Lower transaction fees in Germany and interchange revenue in Poland outweighed network growth. Management expected segment revenue and operating income to be lower for full-year 2011 than in 2010.
- epay: Revenue rose 7% to $155.1 million and operating income rose 9% to $13.1 million. Growth reflected the 2010 epay Brazil acquisition and higher volumes in Germany and Italy; declines in the U.K., U.S., and Spain and a shift toward lower-revenue transactions partly offset growth.
- Money Transfer: Revenue increased 13% to $63.2 million and operating income increased 86% to $2.8 million. Transaction volume rose 10%, with an 18% increase in transfers initiated outside the U.S. and growth in check-cashing and bill-payment products.
- Approximately 79% of revenue was generated in non-U.S.-dollar currencies. Currency translation and remeasurement therefore materially affect reported results; management estimated exchange-rate changes increased Q1 2011 consolidated operating income by approximately 3% versus Q1 2010.
Outlook, risks, and contingencies
- No consolidated earnings or revenue guidance was provided. Management estimated 2011 capital expenditures of approximately $35–$45 million and expected operating cash, cash on hand, and available financing to fund obligations and investment needs, subject to business developments and cash-flow performance.
- Management expects epay growth to depend on new electronic payment products, developing markets, and acquisitions. Money Transfer expansion is expected to rely on new products and agent and correspondent network growth, particularly outside the U.S.
- Currency exposure is significant: management estimated a 10% exchange-rate fluctuation could affect annualized reported net income and working capital by approximately $30–$40 million, and total comprehensive income by approximately $40–$50 million.
- The DOJ investigation into possible price collusion involving Ria money transfers to the Dominican Republic remains unresolved. The company could not estimate a loss or predict potential fines, licensing consequences, civil liability, or related expenses.
- A California wage-and-hour class action against a subsidiary is in preliminary stages; a loss range could not be determined. The company also disclosed $102.4 million of standby letters of credit/bank guarantees and other guarantee exposures, including responsibility for approximately $325 million of ATM network cash, mitigated in part by insurance.
- The company recorded a $70.9 million non-cash goodwill impairment in Q4 2010 for epay reporting units in the U.K., Spain, and Romania, and warned further impairment could occur if forecasts or assumptions change.
Most important facts to verify
- How much of reported earnings improvement was attributable to foreign-exchange gains and the one-time legal settlement rather than recurring operations.
- Whether EFT Processing fee pressure in Germany and Poland and the expected 2011 segment decline are offset by growth elsewhere.
- Cash conversion and working-capital needs, especially for Money Transfer and restricted epay balances.
- Funding capacity for the October 2012 convertible-debenture put, including credit-facility covenant and refinancing conditions.
- Developments in the DOJ investigation, California litigation, contingent acquisition consideration, and potential goodwill impairment.