Euronet Worldwide, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. Euronet provides electronic payment processing and distribution services through EFT Processing, epay, and Money Transfer. This unaudited report covers the three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $691.9 million | $622.2 million | $1,269.4 million | $1,172.7 million |
| Operating income | $117.9 million | $90.4 million | $174.0 million | $135.8 million |
| Operating margin | 17.0% | 14.5% | 13.7% | 11.6% |
| Net income attributable to Euronet | $68.2 million | $43.7 million | $102.7 million | $70.1 million |
| Diluted EPS | $1.25 | $0.82 | $1.90 | $1.30 |
| Cash provided by operating activities | Not separately stated | Not separately stated | $56.7 million | $69.3 million |
- Q2 revenue increased 11% and first-half revenue increased 8% year over year. Operating income rose 30% in Q2 and 28% in the first half; attributable net income increased about 56% and 46%, respectively.
- Segment revenue and operating income grew in all three businesses. Q2 EFT Processing revenue rose 19% and operating income 45%; epay revenue rose 11% and operating income 8%; Money Transfer revenue rose 6% and operating income 8%.
- Management attributed EFT growth and stronger margins principally to more ATMs and transactions, including higher DCC, surcharge and foreign-currency-dispensing activity. Visa’s rule change permitting DCC on Euronet ATMs took effect in Q2. epay growth included promotional digital-media transactions recorded gross, while Money Transfer growth reflected higher transfer volumes.
- Cash from operations declined despite higher earnings, primarily due to working-capital timing, including settlements with epay content providers and Money Transfer correspondents. Investing activities used $68.8 million; financing activities provided $505.9 million in the first half.
Balance sheet, liquidity and debt
- At June 30, 2019, cash and cash equivalents were $1,558.5 million, restricted cash was $71.3 million, and total debt carrying value was $1,120.7 million. Working capital was $1,220 million and the current ratio was 1.82, compared with $709 million and 1.51 at year-end 2018.
- Cash and cash equivalents plus restricted cash totaled $1,629.8 million. Management reported $1,294 million of cash held outside the U.S. and expected to remain indefinitely reinvested; repatriation could have negative tax consequences. Approximately $809 million of company cash was in use or designated for ATM operations.
- Debt obligations increased substantially from year-end, mainly reflecting the March issuance of $525 million of 0.75% convertible notes due 2049 and the May issuance of €600 million of 1.375% senior notes due 2026. Proceeds also funded ATM cash needs and repayment or retirement of existing debt. The company recorded a $9.8 million first-half loss on early retirement/conversion of the prior convertible notes.
- The $1.0 billion revolving credit facility had $6.1 million borrowed and $46.3 million of letters of credit outstanding; $947.6 million was reported available subject to borrowing-base and covenant conditions. Management said operating cash, cash on hand and available financing were expected to meet debt, lease and capital needs.
Outlook, commentary and risks
- No specific revenue or earnings guidance was provided. Estimated 2019 capital expenditures were $140–$150 million; first-half capital expenditures, including capital leases, were $72.8 million.
- Foreign exchange was a material headwind: management estimated currency movements reduced reported operating income by about 5% in both Q2 and the first half versus 2018. About 72% of first-half revenue was denominated in currencies other than the U.S. dollar. A 10% exchange-rate fluctuation was estimated to affect annualized net income and working capital by approximately $90–$95 million, and comprehensive income by approximately $140–$145 million through translation effects.
- The effective tax rate was 31.5% in Q2 and 31.6% for the first half, above the 21% U.S. statutory rate, reflecting foreign tax rates and GILTI; the first-half rate also reflected prior-year tax-benefit releases and the mix of foreign earnings.
- Key disclosed risks include currency movements; economic, political and regulatory developments; competition and pricing; contract renewals and partner relationships; cybersecurity, fraud and service interruptions; compliance obligations; and access to funding. Seasonality affects ATM/DCC activity, epay holiday-related transactions and Money Transfer volumes.
- Commitments include approximately $718 million of ATM network cash for which Euronet is responsible, as well as $12.6 million of cash-related guarantees and approximately $41.6 million of performance guarantees. The company reported no known material legal proceedings or significant claims under its guarantees and indemnifications. Management reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether operating cash flow recovers from the first-half working-capital outflow and how much of reported cash is operationally available, restricted, or held overseas.
- How the new debt issuance, convertible-note terms and outstanding debt affect future interest expense, dilution, refinancing needs and covenant headroom.
- Whether Q2 EFT/DCC growth persists and whether epay’s gross-presented promotional transactions sustain margins and earnings per transaction.
- How foreign exchange movements and the elevated effective tax rate affect reported and underlying earnings.
- Whether capex remains within the stated $140–$150 million estimate and whether ATM-network cash and guarantee exposures change materially.