Euronet Worldwide, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited results compare with Q1 2019. Euronet provides electronic payment processing, prepaid content distribution and money transfer services through EFT Processing, epay and Money Transfer segments. COVID-19 restrictions began affecting operations in late February and March.
Key financial results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $583.9 million | $577.5 million | Up 1% |
| Operating income | $31.6 million | $56.1 million | Down 44% |
| Net income attributable to Euronet | $1.9 million | $34.5 million | Down $32.6 million |
| Diluted EPS | $0.04 | $0.62 | Down $0.58 |
| Operating cash flow | $105.9 million | $13.0 million | Up $92.9 million |
| Capital expenditures | $30.4 million | $31.4 million | Down $1.0 million |
Operating margin was approximately 5.4%, versus 9.7% a year earlier. Net income was pressured by lower operating income, a $18.8 million foreign-exchange loss versus a $3.2 million gain, and higher interest expense. Income tax expense was $2.4 million; the effective tax rate was 58.7%, compared with 31.6%.
Segment performance
- EFT Processing: Revenue was $145.8 million, essentially flat year over year; operating income fell 71% to $4.9 million. COVID-related travel restrictions reduced high-margin cross-border and DCC transactions, while operating costs rose to support a larger ATM network.
- epay: Revenue declined 2% to $172.9 million and operating income declined 9% to $16.5 million. More digital transactions were offset by currency translation, retail closures and lower revenue per transaction.
- Money Transfer: Revenue rose 4% to $266.2 million, but operating income fell 28% to $22.3 million. Higher growth-related expenses and charges for anticipated agent receivable defaults weighed on results; store and agent closures also affected March activity.
Balance sheet, liquidity and capital
- At March 31, cash and cash equivalents were $709.5 million; ATM cash was $558.6 million and restricted cash was $29.0 million. Settlement assets and settlement obligations were each $773.3 million. These categories are not all unrestricted corporate cash.
- Working capital was $1.011 billion, down from $1.285 billion at December 31, 2019; the current ratio was 1.69. Management attributed much of the working-capital decline to $239.8 million of Q1 share repurchases.
- Debt carrying value was $1.087 billion, including $440.7 million of 0.75% convertible notes due 2049 and $661.6 million of 1.375% senior notes due 2026. The company had no revolving-credit borrowings and reported $950.3 million available under its $1.0 billion facility, after letters of credit. It was in compliance with debt covenants.
- Cash and restricted cash decreased $227.6 million, reflecting $240.5 million of share repurchases and a $59.3 million adverse currency effect, partly offset by operating cash generation. Operating cash flow benefited substantially from working-capital timing, including settlement-related changes.
- Share repurchases totaled $239.8 million for 2.1 million shares at an average $114.41 per share. The company estimated 2020 capital expenditures of $65 million to $70 million, reduced in response to COVID-19.
Material changes, outlook and risks
Management reported pandemic-related declines in transaction volumes across all three segments, especially cross-border EFT activity, and temporary closures of retail locations, company-owned stores and money-transfer agents. Digital content purchases increased in some markets, partially offsetting weaker in-person activity. Money Transfer also reported increased agent receivable delinquencies and additional anticipated-default charges.
Management said cash from operations, cash on hand and available credit were expected to be sufficient for debt, lease and capital expenditure obligations. The filing provided no earnings or revenue guidance. Management said it had reduced planned 2020 capital expenditures, negotiated certain third-party contracts, reduced travel and expanded ATM winterizations. The duration and severity of the pandemic and its effects remained uncertain.
- Foreign currency risk is material: about 70% of revenue is generated in non-U.S.-dollar currencies. Management estimated that a 10% exchange-rate fluctuation could affect annualized net income and working capital by approximately $38 million to $43 million, and comprehensive income by approximately $138 million to $143 million.
- Foreign-currency derivative fair values rose substantially: derivative assets were $142.1 million and liabilities $130.6 million at quarter-end. These instruments are generally economic, not accounting, hedges; market movements and counterparty exposure can affect results.
- Management reported no goodwill impairment at March 31, 2020, but warned that changed business conditions or assumptions could lead to material non-cash impairment charges.
- Commitments included $73.0 million of standby letters of credit and bank guarantees, $11.4 million of off-balance-sheet ATM cash guarantees, and approximately $37.5 million of performance guarantees. Management reported no legal or regulatory proceedings expected to have a material adverse effect and no material changes to previously disclosed risk factors other than the COVID-19 discussion.
Important facts for investors to verify
- Whether COVID-19 restrictions, transaction declines and agent or merchant credit losses persisted or worsened after March 31, 2020.
- Whether operating performance and margins recovered, particularly in EFT Processing and Money Transfer, and whether segment expenses adjusted to lower activity.
- How much of Q1 operating cash flow reflected sustainable earnings versus temporary settlement and working-capital timing.
- Current unrestricted liquidity, credit-facility availability, covenant headroom and the effect of share repurchases on cash resources.
- Exposure to foreign-exchange movements, derivative valuation changes, and potential goodwill or intangible-asset impairment.