Euronet Worldwide, Inc. — Q2 2015 Form 10-Q
Business context and reporting period
Unaudited results cover the quarter and six months ended June 30, 2015, compared with the same periods in 2014. Euronet provides electronic payments and transaction processing through EFT Processing, epay and Money Transfer segments. About 70% of revenue is generated in currencies other than the U.S. dollar.
Financial performance and liquidity
- Q2 revenue: $425.1 million, up 8%; operating income was $47.2 million, up 38%. Net income attributable to Euronet was $26.8 million versus $20.5 million; diluted EPS was $0.50 versus $0.38.
- First-half revenue: $820.3 million, up 10%; operating income was $79.3 million, up 36%. Net income attributable to Euronet was $34.0 million, down from $36.5 million; diluted EPS was $0.64 versus $0.69. Operating margin was approximately 9.7%, compared with 7.8%.
- Segment trends: Q2 Money Transfer revenue rose 33% and operating income 64%; epay revenue fell 8% while operating income increased 14%; EFT Processing revenue rose 4% and operating income 2%. First-half Money Transfer revenue rose 42% and operating income 114%; epay revenue fell 7% while operating income rose 9%; EFT revenue rose 2% while operating income fell 3%.
- Cash flow: First-half operating cash flow was $156.9 million, versus $103.1 million. Investing used $66.2 million, including $34.4 million for property and equipment and $29.3 million for acquisitions. Cash and cash equivalents increased to $538.1 million from $468.0 million at year-end; exchange-rate movements reduced cash by $20.9 million.
- Liquidity: Working capital was $242.6 million and the current ratio was 1.29 at June 30. Of cash, $490.7 million was held outside the U.S. and expected to remain invested in foreign operations.
- Debt: Total debt obligations including capital leases were $436.1 million. The company reported $8.0 million drawn on its revolving facility, $69.8 million outstanding on Term Loan A, and $549.5 million of remaining revolving availability after borrowings and letters of credit. Convertible notes carry a 1.5% coupon; their June 30 fair value was $448.5 million versus a $342.9 million carrying value.
Material changes versus prior comparable periods
Growth was led by Money Transfer, including the Walmart product, HiFX and the June acquisition of Malaysian provider IME. Money Transfer transactions increased 43% in Q2 and 50% in the first half. epay processed more transactions, but revenue declined amid currency translation, weaker activity in Brazil and the U.K., and lower rates on certain U.S. transactions. EFT Processing benefited from a larger ATM base and dynamic currency conversion, partly offset by lower rates on certain European outsourcing services and currency effects.
First-half net income declined despite higher operating income, primarily because foreign-exchange losses increased by $13.7 million and interest expense increased by $7.4 million versus 2014. First-half net foreign-exchange loss was $18.1 million; interest expense was $11.8 million.
Outlook, risks and unusual items
- Management estimated 2015 capital expenditures of approximately $55 million to $65 million; $38.1 million had been spent in the first half. It expected operating cash, cash on hand and available credit to meet anticipated obligations, but gave no specific earnings guidance in the provided filing text.
- The stronger U.S. dollar reduced reported operating income by management’s estimate of 17% in Q2 and 16% in the first half versus the comparable 2014 periods. The company estimated a 10% currency-rate movement could affect annualized reported net income and working capital by approximately $50 million to $55 million, and comprehensive income by approximately $70 million to $75 million.
- Greek capital controls constrained access to bank cash for ATMs, while lower tourist traffic reduced transactions. Alternative cash sources largely mitigated supply risk, but management expected near-term operating effects; longer-term risks included possible Greek exit from the EU and currency conversion exposure.
- IME was acquired June 17 for $79.6 million cash and 49,941 shares valued at $3.0 million. XE Corporation was acquired July 2, after quarter-end, for $90.6 million cash and 642,912 shares valued at $40.1 million.
- Other notable items include a $34.9 million first-half foreign-currency translation loss in comprehensive income and a $0.4 million Q2 gain from selling a minor business. The Delaware unclaimed-property matter was settled for an amount described as immaterial. Management reported no other legal proceedings expected to materially affect results.
Important facts for investors to verify
- Clarify the significant gap between convertible notes’ fair value and carrying value, and the terms and potential dilution associated with conversion.
- Review the reported 10.75% weighted-average rate on revolving borrowings, alongside the facility’s stated pricing margins, and confirm current borrowing costs and availability.
- Assess whether Money Transfer growth and IME/XE integration can offset epay weakness, FX headwinds and lower-margin product mix.
- Track Greek operating conditions, foreign-exchange exposure and the effect of cash held abroad on practical U.S. liquidity.
- Monitor capital spending, acquisition-related cash needs and future cash generation against debt and working-capital requirements.