Euronet Worldwide, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. The company provides electronic payment processing, prepaid product distribution and money transfer services through EFT Processing, epay and Money Transfer segments. Unless stated otherwise, amounts below are U.S. dollars.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $316.4m | $299.5m | $916.4m | $841.9m |
| Operating income | $24.2m | $20.1m | $59.9m | $56.1m |
| Net income (loss) attributable to Euronet | $14.6m | $(3.2)m | $33.5m | $26.0m |
| Diluted EPS | $0.28 | $(0.06) | $0.65 | $0.50 |
Margins: Consolidated operating margin was 7.6% in Q3 and 6.5% for the first nine months. Q3 adjusted for segment-specific operating patterns, management reported segment margins of 22.3% for EFT Processing, 5.9% for epay and 7.8% for Money Transfer; nine-month margins were 17.8%, 6.5% and 7.5%, respectively.
Cash flow: Operating cash flow was $144.4m for the first nine months, versus $78.0m in 2011. Investing used $38.3m (including $33.2m for property and equipment); financing used $85.6m. Cash and cash equivalents increased $21.1m to $191.8m. Restricted cash was $93.2m.
Balance sheet and debt: At September 30, total assets were $1.472bn and total liabilities $903.0m. Current assets of $728.0m compared with current liabilities of $784.9m, resulting in negative working capital of $56.8m and a 0.93 current ratio. Debt obligations were $261.7m, including $171.1m carrying value of convertible debentures classified as current; capital leases were $5.0m. The company reported $229.5m available under its revolving facility at quarter-end.
Material changes and segment trends
- EFT Processing: Revenue rose 29% in Q3 and 19% year to date; operating income rose 61% and 27%, respectively. ATM expansion, higher transaction volumes and value-added services supported results. ATMs increased 37% year over year to 17,370. Weaker foreign currencies and lower revenue per ATM partly offset growth.
- epay: Q3 revenue fell 2% and operating income fell 24%; nine-month revenue rose 6% while operating income declined 16%. Australia, Brazil and Spain faced lower volumes or revenue from operator distribution changes, competition and economic pressure; bad-debt costs also increased. cadooz acquisition contributions and growth in the U.S. and Germany partly offset declines.
- Money Transfer: Revenue increased 7% in Q3 and 8% year to date; operating income increased 29% and 36%. Transaction growth, including U.S.-to-Mexico transfers, and cost controls helped, while weaker currencies and a higher mix of lower-revenue non-transfer transactions reduced revenue per transaction and gross margin.
- Currency translation was a significant headwind: management estimated exchange-rate movements reduced operating income by approximately 9% in Q3 and 8% year to date versus 2011. Approximately 77% of revenue was denominated in currencies other than the U.S. dollar.
Outlook, risks and unusual items
- No specific revenue or EPS guidance was provided. Management estimated full-year 2012 capital expenditures of approximately $40m–$50m and said operating cash flow, cash on hand and available financing were expected to meet projected obligations.
- On October 11, 2012, after quarter-end, the company increased revolving credit commitments by $125m, from $275m to $400m. On October 15, it repurchased $167.8m principal amount of its 3.50% convertible debentures using cash and revolver borrowings; $3.6m principal remained outstanding.
- The January 2012 acquisition of the remaining 51% of Euronet Middle East generated a $4.4m remeasurement gain. Q3 2012 also benefited from a $1.4m foreign-exchange gain, compared with an $11.9m loss in Q3 2011; these items materially affected the year-over-year net-income comparison.
- Management was adjusting epay Brazil’s strategy and costs and planned to introduce additional electronic payment products there in 2013. If profitability does not recover, the $24.1m goodwill and $5.4m acquired intangible assets associated with that reporting unit could be impaired.
- A 2011 security breach affected a business representing less than 5% of revenue, profits and transactions. Management could not estimate a possible claim-loss range but did not expect the net impact after probable insurance recovery to be material; first-nine-month 2012 breach expenses were $0.5m net of $1.9m insurance recoveries. The DOJ notified the company in September 2012 that its money-transfer antitrust investigation was complete; the company believed the matter was closed without further implications.
- Other exposures include regulatory and pricing changes affecting ATM interchange and value-added services, mobile operator commission or distribution changes, credit and collection risks, and foreign-exchange volatility. Management estimated a 10% currency-rate fluctuation could affect annualized reported net income and working capital by approximately $30m–$35m, and total comprehensive income by approximately $50m–$55m.
- Guarantees included $93.2m of standby letters of credit and bank guarantees, $17.1m of ATM cash-supply guarantees and approximately $35.9m of performance guarantees. The company was responsible for approximately $345m of ATM network cash, with insurance maintained to mitigate exposure. No liability was recorded for these guarantees as of quarter-end.
Important facts for investors to verify
- Whether epay weakness in Australia, Brazil and Spain persists, and whether the Brazil recovery plan avoids impairment.
- The funding, liquidity and interest-cost effects of the post-quarter $167.8m debenture repurchase and increased revolving commitments.
- Underlying operating trends excluding foreign-exchange movements, acquisitions and unusual gains or losses.
- Whether money-transfer volume growth and working-capital needs remain manageable as the business expands.
- Developments in security-breach claims, insurance recoveries, regulatory requirements and ATM fee or service-rule changes.