Euronet Worldwide, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report; fourth-quarter figures are separately identified below. Euronet operates EFT Processing, epay, and Money Transfer businesses in approximately 165 countries.
Financial performance
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $2,536.6 million | $2,252.4 million | +13% |
| Operating income | $357.9 million | $266.0 million | +35% |
| Operating margin | 14.1% | 11.8% | +2.3 percentage points |
| Income before taxes | $294.9 million | $256.3 million | +15% |
| Net income attributable to Euronet | $232.9 million | $156.8 million | +48% |
| Diluted EPS | $4.26 | $2.85 | +49% |
| Operating cash flow | $397.2 million | $286.3 million | +$110.9 million |
Attributable net margin was approximately 9.2%, versus 7.0% in 2017. Reported tax expense fell to $62.8 million from $99.4 million; the effective tax rate was 21.3% versus 38.8%, with the prior year affected by U.S. tax reform charges. The filing’s adjusted effective tax rates, excluding specified impairment, foreign-exchange and other items, were 26.0% and 21.7%, respectively.
Segment results
| Segment | 2018 revenue | Revenue growth | Operating income | Operating income growth |
|---|---|---|---|---|
| EFT Processing | $753.7 million | 19% | $197.2 million | 21% |
| epay | $743.8 million | 1% | $79.0 million | 107% |
| Money Transfer | $1,043.0 million | 18% | $122.5 million | 17% |
Growth was led by more ATMs under management, increased DCC and surcharge activity, higher money-transfer volumes, and a greater contribution from non-mobile epay products. epay’s operating-income comparison benefited substantially from the absence of the $31.8 million goodwill impairment recorded in 2017. Money Transfer recorded a $7.0 million non-cash impairment of the HiFX trade name as it moved toward the xe brand.
Cash, debt and liquidity
- Cash and cash equivalents were $1,054.4 million at year-end; restricted cash was $76.6 million. Working capital was $709.2 million, and the current ratio was 1.51.
- Cash from operations was $397.2 million; investing cash use was $132.3 million, including $112.5 million for property and equipment and $12.9 million for acquisitions. Capital expenditures totaled $119.4 million.
- Gross debt obligations were $634.1 million, including $215.7 million drawn on the revolving facility, $379.9 million carrying value of convertible notes, and $38.5 million of other obligations. The new unsecured $1.0 billion credit facility matures in 2023; $737.2 million remained available at year-end, before considering facility conditions and covenants.
- The company repurchased $175.0 million of shares under its buyback program during 2018. No common-stock dividend was paid, and management said it did not intend to pay dividends for the foreseeable future.
Management expects 2019 capital expenditures of approximately $120–$130 million and believes operating cash flow, cash on hand and available financing will be sufficient for debt, lease and capital-expenditure needs. No specific earnings or revenue guidance is provided.
Material changes, outlook and risks
- Fourth quarter: Revenue was $649.4 million, operating income $71.2 million, net income attributable to Euronet $60.0 million and diluted EPS $1.10. In fourth-quarter 2017, revenue was $604.6 million, operating income $41.1 million, attributable net loss $22.9 million and diluted loss per share $0.44.
- Accounting change: Adoption of ASC 606 reduced 2018 epay revenue and direct operating costs by $88.5 million each, with no reported net-income effect. Prior-year figures were not restated, limiting direct revenue comparability.
- Foreign exchange and tax: Foreign-currency transaction losses were $26.7 million, compared with a $20.3 million gain in 2017; translation adjustments reduced comprehensive income by $56.7 million. Approximately 72% of revenue was generated outside the U.S. The company finalized its U.S. tax-reform accounting, reducing the previously recorded net provisional expense by about $12.3 million.
- Business and regulatory risks: Key exposures include currency movements, changes to ATM interchange and DCC economics, competitive pressure and declining prepaid-mobile transactions, dependence on agents, correspondents, banks and cash providers, cybersecurity and operational outages, and extensive licensing, anti-money-laundering, consumer-protection and data-privacy requirements. New EU DCC disclosure rules are expected to take effect in mid-2020; Brexit could affect U.K. license passporting and service continuity.
- Other commitments and contingencies: The company disclosed $988.2 million in contractual obligations, including operating leases, debt and purchase obligations. It had $30.9 million of unrecognized tax benefits; the possible range of near-term change was not estimable. Management reported no legal or regulatory proceedings believed likely to materially adversely affect the financial statements.
- Lease accounting: Euronet estimated that adopting the new lease standard in 2019 would add approximately $375 million of right-of-use assets and lease liabilities to the balance sheet, without an expected material effect on results or cash flows.
Important facts for investors to verify
- Reconcile reported growth with the $88.5 million ASC 606 gross presentation reduction and assess underlying segment volumes and margins.
- Assess the sustainability of 2018 earnings improvement, including the unusual tax comparison, foreign-exchange losses, and prior-year epay goodwill impairment.
- Review revolving-credit covenant headroom, convertible-note holder put rights beginning in 2020, and the company’s financing needs for ATM cash and investment.
- Monitor the effect of EU DCC regulation, Brexit-related licensing changes, and currency movements on revenue, profitability and liquidity.
- Evaluate the quality and availability of cash: $844.9 million was held outside the U.S. and expected to remain invested in foreign operations, while some cash balances are restricted or used in ATM networks.