Euronet Worldwide, Inc. — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010; filed August 5, 2010. Amounts are U.S. dollars in millions unless otherwise noted. Euronet provides electronic funds transfer (EFT) processing, prepaid-product distribution (epay), and money-transfer services.
Financial results and liquidity
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Revenue | $244.2 | $248.6 | $494.2 | $482.3 |
| Operating income | $16.5 | $18.0 | $34.8 | $27.7 |
| Income (loss) attributable to Euronet | $(1.5) | $15.5 | $1.3 | $3.2 |
| EPS, diluted | $(0.03) | $0.30 | $0.03 | $0.06 |
- Operating margin was 6.8% in Q2 and 7.0% for the first half. Q2 net loss reflected $9.3 million of foreign-exchange losses and a $4.3 million income-tax expense despite $3.2 million of pretax income.
- First-half operating cash flow was $88.0 million, versus $50.0 million a year earlier. Investing cash use was $14.6 million and financing cash use was $42.3 million. Cash and cash equivalents rose to $202.6 million; restricted cash was $72.8 million.
- At June 30, working capital was $149.3 million and the current ratio was 1.33. Total assets were $1,271.6 million and total liabilities were $762.5 million.
- Debt obligations were approximately $289.2 million, including $128.0 million under the term loan and $175 million principal amount of 3.50% convertible debentures. The revolver had no borrowings, $35.9 million of letters of credit, and $64.1 million available. The company reported $53.9 million of standby letters of credit/bank guarantees overall.
Material changes and segment performance
- First-half revenue increased 2%, while Q2 revenue declined 2%. First-half operating income rose 25%, helped in part by the absence of the $9.9 million goodwill and intangible impairment charge recorded in 2009; Q2 operating income fell 8% year over year.
- Q2 segment revenue and operating income: EFT Processing $46.5 million and $8.2 million; epay $137.7 million and $9.5 million; Money Transfer $60.1 million and $4.2 million.
- For the first half, EFT revenue rose 4% but operating income declined 17%, partly reflecting lower Polish interchange fees and the prior-year $4.4 million contract-termination revenue. epay revenue rose 1%, while operating income fell 6% amid lower commissions and higher operating expenses. Money Transfer revenue rose 5%; operating income was $5.7 million versus a $5.2 million loss, with the comparison benefiting from the prior-year impairment.
- Currency translation supported first-half operating income by an estimated 8%, according to management, but foreign-exchange remeasurement losses were $14.4 million for the half versus $0.9 million in the prior-year period. First-half translation adjustment was a negative $63.6 million, contributing to comprehensive loss attributable to Euronet of $61.2 million.
- Debt obligations declined by $41.8 million during the first half, and the remaining $1.2 million of 1.625% convertible debentures was redeemed in January 2010.
Outlook, risks, and unusual items
- No specific earnings or revenue guidance is provided. Management estimated 2010 capital expenditures of approximately $30–$40 million and said operating cash, cash on hand, and available financing were expected to cover obligations and investment needs, while noting refinancing or equity issuance could be needed if resources proved insufficient.
- Management cited uncertainty around bank contract renewals and pricing, prepaid commission reductions and market competition, money-transfer volumes and immigration/economic conditions, and the ability to fund working capital as the businesses expand. Approximately 76% of first-half revenue was denominated in currencies other than the U.S. dollar.
- Management estimated that a 10% move in key currencies could affect annualized reported net income and working capital by approximately $20–$30 million, and noncash comprehensive income by approximately $40–$50 million.
- The $175 million convertible debentures are puttable by holders at par on October 15, 2012, 2015, and 2020, and upon a change in control. The company cautioned that it could not guarantee financing would be available for a required repurchase; the credit facility may also require repayment six months before a potential put date unless specified conditions are met.
- A DOJ investigation into possible price collusion concerning money transfers to the Dominican Republic remains unresolved. The company is cooperating and cannot estimate potential losses or collateral consequences, which could include fines, civil liability, or licensing restrictions. Related transactions were approximately 0.3% of 2009 revenue.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing states no material changes to previously disclosed risk factors.
Key facts for investors to verify
- Whether foreign-exchange losses and translation volatility persist, and how reported results compare with underlying operating trends.
- Progress in restoring EFT and epay operating margins amid interchange and commission pressure.
- Liquidity and refinancing capacity ahead of the October 2012 convertible-debenture holder put and related credit-facility provisions.
- Developments and potential financial or licensing consequences of the DOJ investigation.
- Whether projected capital spending and working-capital needs remain covered by operating cash flow and available credit.