Euronet Worldwide, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Unaudited results; amounts below are in millions of dollars unless stated otherwise. Euronet provides electronic payment processing and distribution through EFT Processing, epay and Money Transfer segments.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $299.5 | $260.2 | $841.9 | $754.5 |
| Operating income | $20.1 | $20.3 | $56.1 | $55.0 |
| Operating margin | 6.7% | 7.8% | 6.7% | 7.3% |
| Net income (loss) attributable to Euronet | $(3.2) | $21.0 | $26.0 | $22.3 |
| Diluted EPS | $(0.06) | $0.41 | $0.50 | $0.43 |
| Operating cash flow | Not separately reported | Not separately reported | $78.0 | $85.8 |
Q3 revenue rose 15%, but operating income was nearly flat and the company reported a net loss. The quarter included an $11.9 million foreign-exchange loss, a $1.9 million debt-retirement loss and $6.5 million of income tax expense; the effective tax rate was 182.2%. For the first nine months, revenue increased 12% and operating income 2%. Net income attributable to Euronet increased from $22.3 million to $26.0 million, helped by improved foreign-exchange results and lower net interest expense, partly offset by higher tax expense and debt-retirement costs.
Segments and drivers
- EFT Processing: Q3 revenue increased 2% to $50.2 million, while operating income fell 14% to $9.0 million. Nine-month operating income declined 15% to $24.3 million. German transaction-fee reductions, lower revenue per ATM and higher overhead pressured results; transaction volumes grew.
- epay: Q3 revenue increased 18% to $174.3 million and operating income 13% to $13.3 million. Nine-month operating income rose 19% to $39.9 million. Growth reflected currency translation, epay Brazil, German non-mobile products and the cadooz acquisition; Australian and U.K. transaction declines and higher expenses were offsets.
- Money Transfer: Q3 revenue increased 19% to $75.1 million and operating income 29% to $4.8 million. Nine-month operating income rose 33% to $12.6 million, supported by higher transaction volumes, non-U.S. market growth and currency translation.
Management estimated stronger foreign currencies increased consolidated operating income by approximately 12% in Q3 and 11% for the first nine months compared with 2010. About 79% of revenue was denominated in currencies other than the U.S. dollar.
Cash, liquidity and debt
- At September 30, cash and cash equivalents were $180.9 million; restricted cash was $89.7 million. Working capital was $144.8 million and the current ratio was 1.29.
- Nine-month operating cash flow of $78.0 million was below $85.8 million in 2010. Investing used $89.4 million, including $54.1 million for acquisitions and $32.7 million for property and equipment. Financing provided $8.7 million.
- Total debt obligations, including capital leases, were $322.4 million. The company entered a five-year, $355 million secured credit facility in August, including an $80 million term loan. At quarter-end, revolving borrowings were $75.3 million, with $161.1 million available after outstanding letters of credit; term-loan borrowings were $80.0 million. Reported weighted-average rates were 3.0% on revolver borrowings and 2.2% on the term loan.
- The company had $171.4 million principal amount of 3.50% convertible debentures outstanding, with holder put rights on October 15, 2012, 2015 and 2020. Management said it expected available cash and revolver capacity to fund a possible 2012 put.
Outlook, risks and unusual items
- Management estimated 2011 capital expenditures of approximately $45–$55 million; $33.3 million had been spent in the first nine months. It said current projected cash flows, cash on hand and available credit were expected to cover obligations and investment needs, while noting refinancing or equity issuance might be needed if resources proved insufficient.
- Management expected German fee reductions to continue to affect EFT Processing revenue and operating income through 2011. It also cited near-term profitability pressure in Australia’s epay business from economic and competitive conditions.
- The September acquisition of cadooz was funded with cash; its purchase-price allocation remained preliminary. The acquisition added vouchers and physical gift fulfillment to epay. A contingent payment is tied to a subsidiary’s revenue through February 2014.
- Foreign-exchange volatility materially affected reported earnings and comprehensive income: Q3 translation adjustment was a loss of $46.7 million. Management estimated a 10% currency-rate fluctuation could affect annualized reported net income and working capital by $30–$40 million and total comprehensive income by $40–$50 million.
- The company reported a continuing DOJ investigation into possible price collusion involving Ria money transfers to the Dominican Republic. The outcome and any loss could not be estimated; possible consequences include fines, penalties, license restrictions or civil liability. The company said it was cooperating. A separate California wage-and-hour class action was dismissed October 12, 2011 for a nominal payment.
- Guarantees included $92.5 million of standby letters of credit and bank guarantees. The company also had responsibility for approximately $360 million of ATM network cash; it maintained insurance against this exposure. No liabilities were recorded for guarantees or indemnifications because no significant claims were known.
Most important facts for investors to verify
- Whether Q3’s net loss was principally a foreign-exchange and tax effect, and how operating performance develops excluding currency movements.
- Whether EFT fee reductions in Germany and interchange pressures in Poland continue to weigh on margins, and whether epay’s Australian declines persist.
- Cash conversion, working-capital needs in Money Transfer, and actual remaining borrowing capacity under facility terms and covenants.
- Funding plans for the convertible debenture holder put in October 2012 and any further debt or equity repurchases.
- Final cadooz purchase accounting, contingent consideration and integration costs, as well as any resolution or financial impact from the DOJ investigation.