Euronet Worldwide, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; comparisons are with 2016 unless noted. Euronet provides electronic payments through EFT Processing, epay and Money Transfer segments, operating across approximately 160 countries. The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting.
Financial performance
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $2.252 billion | $1.959 billion | +15% |
| Operating income | $266.0 million | $249.8 million | +6% |
| Operating margin | 11.8% | 12.8% | Down |
| Net income attributable to Euronet | $156.8 million | $174.4 million | -10% |
| Diluted EPS | $2.85 | $3.23 | -12% |
| Operating cash flow | $291.3 million | $368.2 million | -21% |
Revenue growth reflected more ATMs under management and stronger DCC and other value-added services, growth in money transfers, and increased non-mobile epay activity. These gains were partly offset by declining prepaid mobile transactions. Operating income rose less quickly than revenue, while net income fell principally because of higher tax expense, including U.S. tax reform, and lower non-operating gains.
- EFT Processing: Revenue $634.6 million (+37%); operating income $162.9 million (+39%). Transactions increased 25% to 2.352 billion and year-end ATMs rose 9% to 37,133. Gross margin declined to 49.7% from 51.6%, reflecting expansion costs, YourCash’s lower-margin business and lower-margin India activity.
- epay: Revenue $734.0 million (+6%); operating income $38.1 million (-44%). Transactions fell 8% to 1.186 billion. A $31.8 million non-cash goodwill impairment materially reduced reported segment income; mobile transaction declines continued, while non-mobile products supported revenue.
- Money Transfer: Revenue $886.9 million (+11%); operating income $104.5 million (+3%). Transactions rose 12% to 92.2 million. Lower Walmart-2-Walmart rates and the product’s lower margins contributed to lower segment gross and operating margins.
Liquidity, debt and capital
- Cash and cash equivalents were $819.1 million, including $544.3 million held outside the U.S. and expected to remain invested in foreign operations; restricted cash was a further $81.4 million.
- Working capital was $482.5 million, up from $405.9 million; the current ratio was 1.34 at both year-ends. Management noted working-capital needs fluctuate with settlement timing and money-transfer funding cycles.
- Gross debt obligations were $451.1 million, with a reported carrying value of $445.3 million after debt issuance costs. Long-term debt on the balance sheet was $404.0 million. The $675 million secured credit facility matures in April 2019; $539.7 million of revolving capacity was available at year-end, after borrowings and letters of credit.
- The $402.5 million principal amount of 1.5% convertible notes is puttable by holders beginning October 2020. The company also has variable-rate borrowings and financial covenants.
- 2017 investing cash outflow was $101.9 million, including $97.2 million for property and equipment. Management estimated 2018 capital expenditures of approximately $110–$120 million and expected operating cash, cash on hand and available financing to cover planned needs.
Material changes, outlook and risks
- Tax and impairments: The 2017 effective tax rate was 38.8%, including a provisional $41.6 million net tax expense related to the Tax Cuts and Jobs Act. The company said the tax accounting remained subject to completion and possible adjustment. It recorded $31.8 million of goodwill impairment in epay reporting units in the U.S., U.K. and Middle East, plus a $2.3 million acquired-intangible impairment in EFT Processing.
- Fourth quarter: Revenue was $604.6 million and operating income was $41.1 million, but the company reported a net loss attributable to Euronet of $22.9 million, or diluted loss per share of $0.44. The fourth-quarter loss included the impairment charges and tax-related effects.
- Foreign exchange: Approximately 75% of revenue was generated in non-U.S.-dollar countries. Management estimated that a 10% currency fluctuation could affect reported net income and working capital by approximately $85–$90 million, and comprehensive income by approximately $100–$105 million. A stronger dollar generally harms reported results.
- Operating and regulatory risks: Key exposures include cyber and processing-system disruptions, fraud and cash theft, counterparty and agent credit risk, ATM cash-supply arrangements, contract renewals and pricing pressure, and compliance with money-transfer, anti-money-laundering and consumer-protection rules. PSD2 reauthorization deadlines and the EU GDPR were upcoming in 2018; the company warned that noncompliance could disrupt operations or lead to penalties.
- Business outlook: Management identified network expansion, value-added services, electronic content and money-transfer growth as priorities. The filing provides no specific revenue or earnings guidance. A proposed MoneyGram acquisition was referenced as a source of corporate costs; its status and outcome are not established in the supplied filing text.
- Other items: The company adopted the new goodwill impairment testing guidance early. It expected the 2018 revenue standard to have no material effect on timing of recognition or net income, but estimated principal-versus-agent presentation changes could have made 2017 revenue between $25 million lower and $75 million higher, without affecting net income.
Important facts for investors to verify
- How much of 2017 earnings growth and segment performance persists after excluding the $34.1 million impairment charges, the provisional tax-reform charge and foreign-exchange effects.
- Whether epay can stabilize mobile activity and improve results in the impaired U.S., U.K. and Middle East businesses.
- The quality and timing of operating cash flow, especially the working-capital movements and growth in trade receivables.
- Refinancing plans for the credit facility maturing in 2019 and capacity to meet the convertible-note put option beginning in 2020, while maintaining covenant compliance.
- Final tax-reform accounting, the effect of revenue-standard presentation changes, and compliance readiness for PSD2 and GDPR.
- Whether the proposed MoneyGram transaction proceeded and what its financing, integration and strategic consequences would be.