EEFT 6/30/2012 10Q
Table of Contents

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-31648
EURONET WORLDWIDE, INC.
(Exact name of registrant as specified in its charter)
Delaware
74-2806888
(State or other jurisdiction
(I.R.S. Employer
of incorporation or organization)
Identification No.)
 
 
3500 College Boulevard
 
Leawood, Kansas
66211
(Address of principal executive offices)
(Zip Code)
(913) 327-4200
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer R
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No R
The number of shares of the issuer’s common stock, $0.02 par value, outstanding as of July 31, 2012 was 50,830,210 shares.
 
 
 
 
 



Table of Contents
 EX-12.1
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

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Table of Contents

PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EURONET WORLDWIDE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share and per share data)
 
As of
 
June 30,
2012
 
December 31,
2011
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
178,554

 
$
170,663

Restricted cash
71,106

 
73,305

Inventory — PINs and other
75,852

 
98,819

Trade accounts receivable, net of allowances for doubtful accounts of $17,210 at June 30, 2012 and $14,787 at December 31, 2011
286,721

 
349,543

Prepaid expenses and other current assets
71,820

 
61,640

Total current assets
684,053

 
753,970

Property and equipment, net of accumulated depreciation of $190,190 at June 30, 2012 and $175,875 at December 31, 2011
108,033

 
102,900

Goodwill
485,495

 
488,628

Acquired intangible assets, net of accumulated amortization of $128,549 at June 30, 2012 and $129,119 at December 31, 2011
89,613

 
99,878

Other assets, net of accumulated amortization of $21,807 at June 30, 2012 and $19,529 at December 31, 2011
58,499

 
60,953

Total assets
$
1,425,693

 
$
1,506,329

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Trade accounts payable
$
318,258

 
$
351,360

Accrued expenses and other current liabilities
175,560

 
216,794

Current portion of capital lease obligations
1,928

 
2,178

Short-term debt obligations and current maturities of long-term debt obligations
175,571

 
170,654

Income taxes payable
4,321

 
5,228

Deferred revenue
26,813

 
28,272

Total current liabilities
702,451

 
774,486

Debt obligations, net of current portion
140,757

 
161,694

Capital lease obligations, net of current portion
3,076

 
4,249

Deferred income taxes
24,256

 
26,003

Other long-term liabilities
12,429

 
13,152

Total liabilities
882,969

 
979,584

Equity:
 
 
 
Euronet Worldwide, Inc. stockholders’ equity:
 
 
 
Preferred Stock, $0.02 par value. 10,000,000 shares authorized; none issued

 

Common Stock, $0.02 par value. 90,000,000 shares authorized; 52,413,515 issued at June 30, 2012 and 51,982,227 issued at December 31, 2011
1,048

 
1,040

Additional paid-in-capital
774,808

 
766,221

Treasury stock, at cost, 1,590,477 shares at June 30, 2012 and 1,543,441 shares at December 31, 2011
(22,764
)
 
(21,869
)
Accumulated deficit
(185,631
)
 
(204,550
)
Restricted reserve
1,016

 
1,001

Accumulated other comprehensive loss
(30,290
)
 
(21,408
)
Total Euronet Worldwide, Inc. stockholders’ equity
538,187

 
520,435

Noncontrolling interests
4,537

 
6,310

Total equity
542,724

 
526,745

Total liabilities and equity
$
1,425,693

 
$
1,506,329

See accompanying notes to the unaudited consolidated financial statements.

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Table of Contents

EURONET WORLDWIDE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited, in thousands, except share and per share data)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Revenues
$
302,377

 
$
279,802

 
$
599,999

 
$
542,395

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Direct operating costs
192,589

 
175,392

 
386,587

 
346,276

Salaries and benefits
44,809

 
43,758

 
89,075

 
80,093

Selling, general and administrative
29,027

 
27,073

 
56,667

 
50,286

Depreciation and amortization
16,098

 
14,779

 
31,974

 
29,723

Total operating expenses
282,523

 
261,002

 
564,303

 
506,378

Operating income
19,854

 
18,800

 
35,696

 
36,017

 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Interest income
1,306

 
1,472

 
2,616

 
2,587

Interest expense
(5,579
)
 
(5,171
)
 
(11,059
)
 
(10,506
)
Income from unconsolidated affiliates
278

 
366

 
610

 
840

Legal settlement

 

 

 
1,000

Other (losses) gains, net
(154
)
 

 
4,171

 

Foreign currency exchange (loss) gain, net
(4,792
)
 
3,652

 
(2,656
)
 
12,937

Other (expense) income, net
(8,941
)
 
319

 
(6,318
)
 
6,858

 
 
 
 
 
 
 
 
Income before income taxes
10,913

 
19,119

 
29,378

 
42,875

 
 
 
 
 
 
 
 
Income tax expense
(5,187
)
 
(6,825
)
 
(10,554
)
 
(12,950
)
 
 
 
 
 
 
 
 
Net income
5,726

 
12,294

 
18,824

 
29,925

Less: Net loss (income) attributable to noncontrolling
  interests
21

 
(405
)
 
95

 
(752
)
Net income attributable to Euronet Worldwide, Inc.
$
5,747

 
$
11,889

 
$
18,919

 
$
29,173

 
 
 
 
 
 
 
 
Earnings per share attributable to Euronet Worldwide, Inc.
  stockholders — basic
$
0.11

 
$
0.23

 
$
0.37

 
$
0.57

 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
50,765,005

 
51,219,681

 
50,643,949

 
51,144,154

 
 
 
 
 
 
 
 
Earnings per share attributable to Euronet Worldwide, Inc.
  stockholders — diluted
$
0.11

 
$
0.23

 
$
0.37

 
$
0.56

 
 
 
 
 
 
 
 
Diluted weighted average shares outstanding
51,671,501

 
51,957,942

 
51,483,148

 
51,950,613

See accompanying notes to the unaudited consolidated financial statements.

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Table of Contents

EURONET WORLDWIDE, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive (Loss) Income
(Unaudited, in thousands)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
Net income
$
5,726

 
$
12,294

 
$
18,824

 
$
29,925

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Translation adjustment
(27,267
)
 
12,577

 
(8,658
)
 
30,943

Comprehensive (loss) income
(21,541
)
 
24,871

 
10,166

 
60,868

Comprehensive loss (income) attributable to noncontrolling interests
331

 
(571
)
 
213

 
(1,287
)
Comprehensive (loss) income attributable to Euronet Worldwide, Inc.
$
(21,210
)
 
$
24,300

 
$
10,379

 
$
59,581

See accompanying notes to the unaudited consolidated financial statements.

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Table of Contents

EURONET WORLDWIDE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited, in thousands)
 
Six Months Ended June 30,
 
2012
 
2011
Net income
$
18,824

 
$
29,925

 
 
 
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
31,974

 
29,723

Share-based compensation
6,625

 
5,244

Unrealized foreign exchange gain, net
2,656

 
(12,937
)
Gain on step acquisition
(4,388
)
 

Deferred income taxes
(2,550
)
 
(1,597
)
Income from unconsolidated affiliates
(610
)
 
(840
)
Accretion of convertible debentures discount and amortization of debt issuance costs
4,656

 
4,680

Changes in working capital, net of amounts acquired:
 
 
 
Income taxes payable, net
(695
)
 
3,041

Restricted cash
1,377

 
333

Inventory — PINs and other
21,001

 
33,323

Trade accounts receivable
60,915

 
22,174

Prepaid expenses and other current assets
(9,555
)
 
671

Trade accounts payable
(29,606
)
 
(43,949
)
Deferred revenue
(1,191
)
 
(2,321
)
Accrued expenses and other current liabilities
(40,241
)
 
(8,054
)
Changes in noncurrent assets and liabilities
2,477

 
(3,500
)
Net cash provided by operating activities
61,669

 
55,916

 
 
 
 
Cash flows from investing activities:
 
 
 
Acquisitions, net of cash acquired
(5,854
)
 
(3,399
)
Purchases of property and equipment
(24,775
)
 
(16,743
)
Purchases of other long-term assets
(2,503
)
 
(1,540
)
Other, net
745

 
425

Net cash used in investing activities
(32,387
)
 
(21,257
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Proceeds from issuance of shares
1,900

 
1,861

Borrowings from revolving credit agreements
179,658

 
127,700

Repayments of revolving credit agreements
(197,399
)
 
(127,700
)
Repayments of long-term debt obligations
(2,000
)
 
(1,000
)
Repayments of capital lease obligations
(1,378
)
 
(1,647
)
Debt issuance costs
(905
)
 

Payment of acquisition contingent consideration

 
(5,455
)
Other, net
119

 
614

Net cash used in financing activities
(20,005
)
 
(5,627
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(1,386
)
 
9,239

 
 
 
 
Increase in cash and cash equivalents
7,891

 
38,271

 
 
 
 
Cash and cash equivalents at beginning of period
170,663

 
187,235

 
 
 
 
Cash and cash equivalents at end of period
$
178,554

 
$
225,506

 
 
 
 
Interest paid during the period
$
5,968

 
$
5,826

Income taxes paid during the period
14,311

 
12,471

See accompanying notes to the unaudited consolidated financial statements.

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Table of Contents

EURONET WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(1) GENERAL
Organization
Euronet Worldwide, Inc. and its subsidiaries (the “Company” or “Euronet”) is a leading global electronic payments provider. Euronet offers payment and transaction processing and distribution solutions to financial institutions, retailers, service providers and individual consumers. The Company's primary product offerings include: comprehensive automated teller machine (“ATM”), point-of-sale (“POS”) and card outsourcing services; electronic distribution of prepaid mobile airtime and other electronic payment products; and global consumer money transfer services.
Basis of presentation
The accompanying unaudited consolidated financial statements have been prepared from the records of the Company, in conformity with accounting principles generally accepted in the U.S. (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, such unaudited consolidated financial statements contain all adjustments (consisting of normal interim closing procedures) necessary to present fairly on a consolidated basis the financial position of the Company as of June 30, 2012, and the results of its operations for the three- and six-month periods ended June 30, 2012 and 2011 and cash flows for the six-month periods ended June 30, 2012 and 2011. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of Euronet for the year ended December 31, 2011, including the notes thereto, set forth in the Company’s 2011 Annual Report on Form 10-K.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The results of operations for the three- and six-month periods ended June 30, 2012 are not necessarily indicative of the results to be expected for the full year ending December 31, 2012.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
Recent accounting pronouncements

In September 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-08, Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit's fair value is less than its carrying amount before applying the two-step goodwill impairment test. If an entity concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not be required to perform the two-step impairment test for that reporting unit. The qualitative assessment is applicable to the annual test of goodwill impairment as well as determining if an interim test of goodwill impairment is necessary. The Company adopted ASU 2011-08 effective January 1, 2012 and its adoption did not materially affect the Company's financial statements.
Money transfer settlement obligations
Money transfer settlement obligations are recorded in accrued expenses and other current liabilities on the Company’s unaudited Consolidated Balance Sheet and consist of amounts owed by the Company to money transfer recipients. As of June 30, 2012, the Company’s money transfer settlement obligations were $48.4 million.



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(3) EARNINGS PER SHARE
Basic earnings per share has been computed by dividing earnings available to common stockholders by the weighted average number of common shares outstanding during the respective period. Diluted earnings per share has been computed by dividing earnings available to common stockholders by the weighted average shares outstanding during the respective period, after adjusting for any potential dilution of the assumed conversion of the Company’s convertible debentures, restricted stock and options to purchase the Company’s common stock. The following table provides the computation of diluted weighted average number of common shares outstanding:

Three Months Ended
 
Six Months Ended

June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
Computation of diluted weighted average shares outstanding:
 
 
 
 
 
 
 
Basic weighted average shares outstanding
50,765,005

 
51,219,681

 
50,643,949

 
51,144,154

Incremental shares from assumed conversion of stock options and restricted stock
906,496

 
738,261

 
839,199

 
806,459

Diluted weighted average shares outstanding
51,671,501

 
51,957,942

 
51,483,148

 
51,950,613

The table includes the impact of all stock options and restricted stock that are dilutive to Euronet’s weighted average common shares outstanding during the periods. The calculation of diluted earnings per share excludes stock options or shares of restricted stock that are anti-dilutive to the Company’s weighted average common shares outstanding of approximately 3,496,000 and 3,662,000 for the three- and six-month periods ended June 30, 2012, respectively, and approximately 1,817,000 and 1,751,111 for the three- and six -month periods ended June 30, 2011, respectively.
The Company has convertible debentures that, if converted, would have a potentially dilutive effect on the Company’s stock. As required by Accounting Standards Codification (“ASC”) Topic 260, Earnings per Share, if dilutive, the impact of the contingently issuable shares must be included in the calculation of diluted earnings per share under the “if-converted” method, regardless of whether the conditions upon which the debentures would be convertible into shares of the Company’s common stock have been met. The Company’s outstanding 3.50% debentures are convertible into 4.2 million shares of common stock only upon the occurrence of certain conditions. Under the if-converted method, the assumed conversion of the 3.50% debentures was anti-dilutive for the three- and six-month periods ended June 30, 2012 and 2011 and, accordingly, associated shares have been excluded from diluted weighted average shares outstanding.

(4) ACQUISITIONS

In January 2012, the Company acquired the remaining 51% of the common stock, which it did not previously own, of Euronet Middle East W.L.L. The purchase price of approximately $6.4 million was paid from cash on hand. Accordingly, all assets and liabilities of Euronet Middle East W.L.L. were recorded at fair value which resulted in a $4.4 million gain on the increase of the book value of the 49% interest previously owned.

The following table summarizes the fair values of the acquired net assets at the acquisition date:

(dollar amount in thousands)
Estimated Life
 
Current assets
 
$
4,413

Property and equipment
3-5 years
84

Customer relationships
8 years
2,735

Goodwill
Indefinite
5,869

Other non-current assets
 
1

Fair value of net assets
 
13,102

Current liabilities
 
(602
)
Net assets acquired
 
$
12,500




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(5) GOODWILL AND ACQUIRED INTANGIBLE ASSETS, NET
A summary of acquired intangible assets and goodwill activity for the six-month period ended June 30, 2012 is presented below:
  (in thousands)
 
Acquired
Intangible
Assets
 
Goodwill
 
Total
Intangible
Assets
Balance as of December 31, 2011
 
$
99,878

 
$
488,628

 
$
588,506

Increases (decreases):
 
 
 
 
 
 
Acquisition
 
2,735

 
5,869

 
8,604

Amortization
 
(11,471
)
 

 
(11,471
)
Other (primarily changes in foreign currency exchange rates)
 
(1,529
)
 
(9,002
)
 
(10,531
)
Balance as of June 30, 2012
 
$
89,613

 
$
485,495

 
$
575,108


Estimated annual amortization expense on intangible assets with finite lives, before income taxes, as of June 30, 2012, is expected to total $22.2 million for 2012, $17.5 million for 2013, $14.9 million for 2014, $9.7 million for 2015, $8.1 million for 2016 and $6.7 million for 2017.
The Company’s annual goodwill impairment test is performed during the fourth quarter. The Company’s annual impairment test for the year ended December 31, 2011 resulted in no impairment charges. Determining the fair value of reporting units requires significant management judgment in estimating future cash flows and assessing potential market and economic conditions. It is reasonably possible that the Company’s operations will not perform as expected, or that estimates or assumptions could change, which may result in the Company recording material non-cash impairment charges during the year in which these changes take place.


(6) DEBT OBLIGATIONS
A summary of debt obligation activity for the six-month period ended June 30, 2012 is presented below:
  (in thousands)
 
Revolving
Credit
Facilities
 
Other Debt
Obligations
 
Capital
Leases
 
3.5%
Convertible
Debentures
Due 2025
 
Term Loans
 
Total
Balance at December 31, 2011
 
$
87,194

 
$
981

 
$
6,427

 
$
165,173

 
$
79,000

 
$
338,775

Increases (decreases):
 
 
 
 
 

 
 
 
 
 
 
Net additions (repayments)
 
(16,546
)
 
119

 
(1,498
)
 

 
(2,000
)
 
(19,925
)
Accretion
 

 

 

 
3,906

 

 
3,906

Capital lease interest
 

 

 
206

 

 

 
206

Foreign currency exchange gain
 
(1,391
)
 
(108
)
 
(131
)
 

 

 
(1,630
)
Balance at June 30, 2012
 
69,257

 
992

 
5,004

 
169,079

 
77,000

 
321,332

Less — current maturities
 

 
(992
)
 
(1,928
)
 
(169,079
)
 
(5,500
)
 
(177,499
)
Long-term obligations at June 30, 2012
 
$
69,257

 
$

 
$
3,076

 
$

 
$
71,500

 
$
143,833


The 3.50% convertible debentures had principal amounts outstanding of $171.4 million and unamortized discounts outstanding of $2.3 million and $6.3 million as of June 30, 2012 and December 31, 2011, respectively. The discount will be amortized through October 15, 2012. Interest expense, including contractual interest and discount accretion, was $3.5 million and $3.4 million for the three-month periods ended June 30, 2012 and 2011, respectively, and $6.9 million and $6.8 million for the six-month periods ended June 30, 2012 and 2011, respectively. The effective interest rate was 8.4% for the three- and six-month periods ended June 30, 2012 and 2011.



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(7) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
As of June 30, 2012, the Company had foreign currency forward contracts outstanding with a notional value of $80.6 million, primarily in euros and Mexican pesos, which were not designated as hedges and had a weighted average remaining maturity of 3 days. Although the Company enters into foreign currency forward contracts to offset foreign currency exposure related to the notional value of money transfer transactions collected in currencies other than the U.S. dollar, they are not designated as hedges under ASC Topic 815, Derivatives and Hedging. This is mainly due to the relatively short duration of the contracts, typically 1 to 14 days, and the frequency with which the Company enters into them. Due to the short duration of the contracts and the Company’s credit profile, the Company is generally not required to post collateral with respect to its foreign currency forward contracts.
The Company has an office lease in a foreign country that requires payment in a currency that is not the functional currency of either party to the lease or the Company’s reporting currency. Therefore, the lease contains an embedded derivative per ASC Topic 815. At June 30, 2012 and December 31, 2011, the embedded derivative is recorded at fair value in the Consolidated Balance sheets.
The required tabular disclosures for derivative instruments are as follows:
 
 
 
 
Fair Values of Derivative
Instruments as of
(in thousands)
 
Consolidated Balance
Sheet Location
 
June 30, 2012
 
December 31, 2011
Derivatives not designated as hedging instruments under ASC Topic 815
 
 
 
 
 
 
 
 
 
 
Liability Derivatives
Foreign currency derivative contracts — gross gains
 
Other current liabilities
 
$
106

 
$
100

Foreign currency derivative contracts — gross losses
 
Other current liabilities
 
(671
)
 
(178
)
Embedded derivative in foreign lease
 
Other long-term liabilities
 
(46
)
 
(141
)
Total derivatives
 
 
 
$
(611
)
 
$
(219
)
 
 
 
 
Amount of Gain (Loss) Recognized
in Income on Derivative
 
 
Location of (Loss) Gain Recognized
in Income on Derivative
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands)
 
 
2012
 
2011
 
2012
 
2011
Derivatives not designated as hedging instruments under ASC Topic 815
 
 
 
 
 
 
 
 
 
 
Foreign currency derivative contracts
 
Foreign currency exchange (loss)gain, net
 
$
1,295

 
$
(621
)
 
$
709

 
$
(1,754
)
Embedded derivative in foreign lease
 
Foreign currency exchange (loss) gain, net
 
35

 
14

 
95

 
71

Total
 
 
 
$
1,330

 
$
(607
)
 
$
804

 
$
(1,683
)
See Note 8, Fair Value Measurements, for the determination of the fair values of derivatives.



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(8) FAIR VALUE MEASUREMENTS
The carrying amounts of cash and cash equivalents, trade accounts receivable, trade accounts payable and short-term debt obligations approximate fair values due to their short maturities. The carrying values of the Company’s term loan due 2016 and revolving credit agreements approximate fair values because interest is based on the London Inter-Bank Offered Rate ("LIBOR") that resets at various intervals of less than one year. The following table provides the estimated fair values of the Company’s other financial instruments, based on quoted market prices or significant other observable inputs.
 
 
As of
 
 
June 30, 2012
 
December 31, 2011
(in thousands)
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
3.50% convertible debentures, unsecured, due 2025
 
$
(169,079
)
 
$
(171,224
)
 
$
(165,173
)
 
$
(170,581
)
Foreign currency derivative contracts
 
(565
)
 
(565
)
 
(78
)
 
(78
)
Embedded derivative in foreign lease
 
(46
)
 
(46
)
 
(141
)
 
(141
)
The fair values disclosed above for the Company's convertible debentures are based on quoted prices in active markets for identical assets and liabilities (Level 1). The Company’s assets and liabilities recorded at fair value on a recurring basis using significant other observable inputs (Level 2) are the foreign currency derivative contracts and the embedded derivative in foreign lease. The Company values foreign currency derivative contracts using foreign currency exchange quotations for similar assets and liabilities. The embedded derivative in foreign lease is valued using present value techniques and foreign currency exchange quotations.

(9) SEGMENT INFORMATION
Euronet’s reportable operating segments have been determined in accordance with ASC Topic 280, Segment Reporting. The Company currently operates in the following three reportable operating segments:
1)
Through the EFT Processing Segment, the Company processes transactions for a network of ATMs and POS terminals across Europe, the Middle East and Asia Pacific. The Company provides comprehensive electronic payment solutions consisting of ATM network participation, outsourced ATM and POS management solutions, credit and debit card outsourcing, dynamic currency conversion and other value added services. Through this segment, the Company also offers a suite of integrated electronic financial transaction software solutions for electronic payment and transaction delivery systems.
2)
Through the epay Segment, the Company provides distribution, processing and collection services for prepaid mobile airtime and other electronic payment products in Europe, the Middle East, Asia Pacific, North America and South America.
3)
Through the Money Transfer Segment, the Company provides global consumer-to-consumer money transfer services through a network of sending agents and Company-owned stores (primarily in North America and Europe), disbursing money transfers through a worldwide correspondent network. The Company also offers customers bill payment services, payment alternatives such as money orders and prepaid debit cards, comprehensive check cashing services and foreign currency exchange services.
In addition, the Company accounts for non-operating activity, share-based compensation expense, certain intersegment eliminations and the costs of providing corporate and other administrative services to the three segments in its administrative division, “Corporate Services, Eliminations and Other.” These services are not directly identifiable with the Company’s reportable operating segments.

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The following tables present the segment results of the Company’s operations for the three- and six-month periods ended June 30, 2012 and 2011:
 
 
For the Three Months Ended June 30, 2012
(in thousands)
 
EFT
Processing
 
epay
 
Money
Transfer
 
Corporate
Services,
Eliminations
and Other
 
Consolidated
Total revenues
 
$
58,309

 
$
166,671

 
$
77,483

 
$
(86
)
 
$
302,377

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Direct operating costs
 
28,231

 
127,993

 
36,438

 
(73
)
 
192,589

Salaries and benefits
 
8,408

 
12,428

 
18,442

 
5,531

 
44,809

Selling, general and administrative
 
5,023

 
11,220

 
11,291

 
1,493

 
29,027

Depreciation and amortization
 
6,306

 
5,040

 
4,638

 
114

 
16,098

Total operating expenses
 
47,968

 
156,681

 
70,809

 
7,065

 
282,523

Operating income (expense)
 
$
10,341

 
$
9,990

 
$
6,674

 
$
(7,151
)
 
$
19,854


 
 
For the Three Months Ended June 30, 2011
(in thousands)
 
EFT
Processing
 
epay
 
Money
Transfer
 
Corporate
Services,
Eliminations
and Other
 
Consolidated
Total revenues
 
$
50,378

 
$
156,479

 
$
73,005

 
$
(60
)
 
$
279,802

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Direct operating costs
 
23,401

 
118,554

 
33,497

 
(60
)
 
175,392

Salaries and benefits
 
8,026

 
11,521

 
17,360

 
6,851

 
43,758

Selling, general and administrative
 
4,502

 
8,443

 
12,166

 
1,962

 
27,073

Depreciation and amortization
 
5,258

 
4,476

 
4,960

 
85

 
14,779

Total operating expenses
 
41,187

 
142,994

 
67,983

 
8,838

 
261,002

Operating income (expense)
 
$
9,191

 
$
13,485

 
$
5,022

 
$
(8,898
)
 
$
18,800


 
 
For the Six Months Ended June 30, 2012
(in thousands)
 
EFT
Processing
 
epay
 
Money
Transfer
 
Corporate
Services,
Eliminations
and Other
 
Consolidated
Total revenues
 
$
108,226

 
$
343,014

 
$
148,918

 
$
(159
)
 
$
599,999

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Direct operating costs
 
53,890

 
263,186

 
69,643

 
(132
)
 
386,587

Salaries and benefits
 
15,755

 
25,692

 
36,617

 
11,011

 
89,075

Selling, general and administrative
 
9,933

 
20,806

 
22,328

 
3,600

 
56,667

Depreciation and amortization
 
12,275

 
10,139

 
9,358

 
202

 
31,974

Total operating expenses
 
91,853

 
319,823

 
137,946

 
14,681

 
564,303

Operating income (expense)
 
$
16,373

 
$
23,191

 
$
10,972

 
$
(14,840
)
 
$
35,696





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For the Six Months Ended June 30, 2011
(in thousands)
 
EFT
Processing
 
epay
 
Money
Transfer
 
Corporate
Services,
Eliminations
and Other
 
Consolidated
Total revenues
 
$
94,739

 
$
311,592

 
$
136,182

 
$
(118
)
 
$
542,395

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Direct operating costs
 
45,465

 
238,465

 
62,464

 
(118
)
 
346,276

Salaries and benefits
 
14,921

 
21,940

 
33,365

 
9,867

 
80,093

Selling, general and administrative
 
8,847

 
15,574

 
22,187

 
3,678

 
50,286

Depreciation and amortization
 
10,182

 
8,998

 
10,374

 
169

 
29,723

Total operating expenses
 
79,415

 
284,977

 
128,390

 
13,596

 
506,378

Operating income (expense)
 
$
15,324

 
$
26,615

 
$
7,792

 
$
(13,714
)
 
$
36,017


 
(10) GUARANTEES
As of June 30, 2012, the Company had $89.2 million of stand-by letters of credit/bank guarantees issued on its behalf, of which $34.4 million are outstanding under the revolving credit facility. The remaining stand-by letters of credit/bank guarantees are collateralized by $14.8 million of cash deposits held by the respective issuing banks.
Under certain circumstances, Euronet grants guarantees in support of obligations of subsidiaries. As of June 30, 2012, the Company had granted off balance sheet guarantees for cash in various ATM networks amounting to $16.5 million over the terms of the cash supply agreements and performance guarantees amounting to approximately $27.5 million over the terms of the agreements with the customers.
From time to time, Euronet enters into agreements with unaffiliated parties that contain indemnification provisions, the terms of which may vary depending on the negotiated terms of each respective agreement. The amount of such potential obligations is generally not stated in the agreements. Our liability under such indemnification provisions may be mitigated by relevant insurance coverage and may be subject to time and materiality limitations, monetary caps and other conditions and defenses. Such indemnification obligations include the following:
In connection with contracts with financial institutions in the EFT Processing Segment, the Company is responsible for damage to ATMs and theft of ATM network cash that, generally, is not recorded on the Company’s Consolidated Balance Sheets. As of June 30, 2012, the balance of ATM network cash for which the Company was responsible was approximately $315 million. The Company maintains insurance policies to mitigate this exposure;
In connection with the license of proprietary systems to customers, Euronet provides certain warranties and infringement indemnities to the licensee, which generally warrant that such systems do not infringe on intellectual property owned by third parties and that the systems will perform in accordance with their specifications;
Euronet has entered into purchase and service agreements with vendors and consulting agreements with providers of consulting services, pursuant to which the Company has agreed to indemnify certain of such vendors and consultants, respectively, against third-party claims arising from the Company’s use of the vendor’s product or the services of the vendor or consultant;
In connection with acquisitions and dispositions of subsidiaries, operating units and business assets, the Company has entered into agreements containing indemnification provisions, which can be generally described as follows: (i) in connection with acquisitions of operating units or assets made by Euronet, the Company has agreed to indemnify the seller against third party claims made against the seller relating to the operating unit or asset and arising after the closing of the transaction, and (ii) in connection with dispositions made by Euronet, Euronet has agreed to indemnify the buyer against damages incurred by the buyer due to the buyer’s reliance on representations and warranties relating to the subject subsidiary, operating unit or business assets in the disposition agreement if such representations or warranties were untrue when made; and
Euronet has entered into agreements with certain third parties, including banks that provide fiduciary and other services to Euronet or to the Company’s benefit plans. Under such agreements, the Company has agreed to indemnify such service providers for third party claims relating to carrying out their respective duties under such agreements.
The Company is also required to meet minimum capitalization and cash requirements of various regulatory authorities in the

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jurisdictions in which the Company has money transfer operations. The Company has obtained surety bonds in compliance with money transfer licensing requirements of the applicable governmental authorities.
To date, the Company is not aware of any significant claims made by the indemnified parties or third parties to guarantee agreements with the Company and, accordingly, no liabilities were recorded as of June 30, 2012 or December 31, 2011.

(11) INCOME TAXES
The Company’s effective tax rates were 47.5% and 35.7% for the three-month periods ended June 30, 2012 and 2011, respectively, and 35.9% and 30.2% for the six-month periods ended June 30, 2012, and 2011, respectively. The effective tax rates were significantly influenced by the foreign currency exchange gains and losses, $4.4 million gain on acquisition during the six-month period ended June 30, 2012 and a $1.0 million gain on legal settlement during the six-month period ended June 30, 2011. Excluding these items from pre-tax income, as well as the related tax effects for these items, the Company’s effective tax rates were 33.6% and 44.2% for the three-month periods ended June 30, 2012 and 2011, respectively, and 38.1% and 44.5% for the six-month periods ended June 30, 2012 and 2011, respectively.
The Company's effective tax rate, as adjusted, for the second quarter of 2012 was lower than the applicable statutory rate of 35% primarily because of the recognition of previously unrecognized tax benefits and tax return true ups in foreign jurisdictions. The Company's effective tax rate, as adjusted, for the first half of 2012 was higher than the applicable statutory rate of 35% primarily because of our U.S. income tax positions, partly offset by the recognition of previously unrecognized tax benefits and tax return true ups in foreign jurisdictions. For the six-month period ended June 30, 2012, we have recorded a valuation allowance against our U.S. income tax net operating losses as it is more likely than not that a tax benefit will not be realized. Accordingly, the income tax benefits associated with pre-tax book losses generated by our U.S. entities have not been recognized in these periods.


(12) LITIGATION AND CONTINGENCIES

Contingencies

Computer Security Breach - A unit of the Company's European processing business was the subject of a criminal security breach in late 2011. The affected business represents less than 5% of the Company's revenues, profits and transactions. Euronet took immediate steps to remediate the breach and ensure its impact was contained.

Bank card association rules provide a process by which loss and expense arising from such breaches is allocated among card issuers, acquirers and service providers such as Euronet. The Company expects that some claims may be asserted against it under such rules or under its agreements with acquiring banks. However, the Company believes that any liability under such claims will be limited by a number of factors including the fact that the majority of cards processed by the affected business were EMV compliant chip and PIN cards to which such rules either do not apply or apply a lower level of liability. Losses from fraudulent card activity appear to have been limited to magnetic stripe transactions processed on the affected systems. In addition, the Company maintains insurance to cover the financial exposure for response costs, losses by card issuers and fines or penalties from such incidents.

At this time, the Company is unable to predict the possible range of loss, if any, associated with the resolution of claims against it in connection with the breach. However, the Company does not at this time expect the net financial impact of loss or expense from the breach after the probable insurance recovery to be material.

The Company is continuing to take aggressive measures to strengthen its security controls, and is working closely with computer security specialists in this regard.

Expenses related to the breach were $0.5 million in the first half of 2012, net of $1.7 million in amounts recovered from our insurance carrier and expected additional insurance recoveries of $0.2 million.

Antitrust Investigation - In the second quarter of 2009, the Antitrust Division of the United States Department of Justice (the “DOJ”) served Continental Exchange Solutions, Inc. d/b/a Ria Financial Services (“CES”), an indirect, wholly owned subsidiary of the Company, with a grand jury subpoena requesting documents from CES and its affiliates in connection with an investigation into possible price collusion related to money transmission services to the Dominican Republic (“D.R.”) during the period from January 1, 2004 to the date of the subpoena. The Company acquired all of the stock of Ria Envia, Inc., the parent of CES, in April 2007. CES foreign exchange transactions between the U.S and the D.R. generated approximately 0.3% of the Company’s 2009 consolidated revenues. The Company and CES are fully cooperating with the DOJ in its investigation.

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The Company believes that, during the period covered by the DOJ investigation, CES generally derived part of its charge for exchanging U.S. dollars into D.R. pesos from a reference rate recommended by ADEREDI, a trade association in the D.R. composed of a CES subsidiary and other D.R. money transfer firms. The Company further believes, however, that CES set its own service fee on the D.R. transactions and its overall transaction price to customers. Customers were also free during this time period to use CES and other firms to transmit dollars into the D.R., without conversion into D.R. pesos, and the Company believes such transmissions occurred with increasing frequency over the course of this time period.
At this time, the Company is unable to predict the outcome of the DOJ investigation, or, if charges were to be brought against CES, the possible range of loss, if any, associated with the resolution of any such charges. Nor can the Company predict any potential effect on the Company’s business, results of operations or financial condition arising from such charges or potential collateral consequences, which could include fines, penalties, limitations on or revocation of CES’s license to engage in the money transfer business in one or more states, and civil liability. During the three- and six-month periods ended June 30, 2012, no significant fees were incurred related to this investigation and related matters. In addition, the Company may incur in the future significant fees and expenses in connection with the DOJ investigation and related matters.

Litigation

From time to time, the Company is a party to litigation arising in the ordinary course of its business. Currently, there are no legal proceedings that management believes, either individually or in the aggregate, would have a material adverse effect upon the consolidated results of operations or financial condition of the Company. In accordance with U.S. GAAP, the Company records a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case.



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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
COMPANY OVERVIEW, GEOGRAPHIC LOCATIONS AND PRINCIPAL PRODUCTS AND SERVICES
Euronet Worldwide, Inc. and its subsidiaries (“Euronet,” the “Company,” “we” or “us”) is a leading electronic payments provider. We offer payment and transaction processing and distribution solutions to financial institutions, retailers, service providers and individual consumers. Our primary product offerings include comprehensive automated teller machine (“ATM”), point-of-sale (“POS”) and card outsourcing services; electronic distribution of prepaid mobile airtime and other electronic payment products; and global consumer money transfer services. As of June 30, 2012, we operate in the following three principal operating segments:
The EFT Processing Segment, which processes transactions for a network of 17,048 ATMs and approximately 69,000 POS terminals across Europe, the Middle East and Asia Pacific. We provide comprehensive electronic payment solutions consisting of ATM cash withdrawal services, ATM network participation, outsourced ATM and POS management solutions, credit and debit card outsourcing, and value added services, including dynamic currency conversion. Through this segment, we also offer a suite of integrated electronic financial transaction software solutions for electronic payment and transaction delivery systems.
The epay Segment, which provides distribution, processing and collection services for prepaid mobile airtime and other electronic payment products. Including terminals operated by unconsolidated subsidiaries, we operate a network of approximately 617,000 POS terminals providing electronic processing of prepaid mobile airtime top-up services and other electronic payment products in Europe, the Middle East, Asia Pacific, North America and South America. We also provide vouchers and physical gift fulfillment services in Europe.
The Money Transfer Segment, which provides global consumer-to-consumer money transfer services, primarily under the brand name Ria. We offer this service through a network of sending agents and Company-owned stores (primarily in North America and Europe), disbursing money transfers through a worldwide correspondent network that includes approximately 158,000 locations. In addition to money transfers, we also offer customers bill payment services (primarily in the U.S.), payment alternatives such as money orders and prepaid debit cards, comprehensive check cashing services for a wide variety of issued checks, along with competitive foreign currency exchange services.
We have four processing centers in Europe, two in Asia Pacific, two in North America and one in the Middle East. We have 28 principal offices in Europe, six in North America, nine in Asia Pacific, one in South America, and two in Africa. Our executive offices are located in Leawood, Kansas, USA. With approximately 77% of our revenues denominated in currencies other than the U.S. dollar, any significant changes in currency exchange rates will likely have a significant impact on our results of operations.

SOURCES OF REVENUES AND CASH FLOW
Euronet primarily earns revenues and income based on ATM management fees, transaction fees, commissions and foreign currency spreads. Each operating segment’s sources of revenues are described below.
EFT Processing Segment — Revenues in the EFT Processing Segment, which represented approximately 18% of total consolidated revenues for the first half of 2012, are derived from fees charged for transactions made by cardholders on our proprietary network of ATMs, fixed management fees and transaction fees we charge to customers for operating ATMs and processing debit and credit cards under outsourcing and cross-border acquiring agreements and other value added services such as advertising, money transfers and foreign currency exchange margin on dynamic currency conversion transactions provided over ATMs. Through our proprietary network, we generally charge fees or earn margin on four types of ATM transactions: i) cash withdrawals, ii) balance inquiries, iii) transactions not completed because the relevant card issuer did not give authorization, and iv) value added services such as prepaid telecommunication recharges, dynamic currency conversion, bill payment and ATM advertising. Revenues in this segment are also derived from license fees, professional services and maintenance fees for proprietary application software and sales of related hardware.
epay Segment — Revenues in the epay Segment, which represented approximately 57% of total consolidated revenues for the first half of 2012, are primarily derived from commissions or processing fees received from mobile phone operators for the sale and distribution of prepaid mobile airtime. We also generate revenues from commissions earned from the distribution of other electronic payment products, vouchers and physical gifts. Due to certain provisions in our mobile phone operator agreements, the operators have the ability to reduce the overall commission paid on top-up transactions. However, by virtue of our

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agreements with retailers (distributors where POS terminals are located) in certain markets, not all of these reductions are absorbed by us because we are able to pass a significant portion of the reductions to retailers. Accordingly, under certain retailer agreements, the effect is to reduce revenues and reduce our direct operating costs resulting in only a small impact on gross profit and operating income. In some markets, reductions in commissions can significantly impact our results as it may not be possible, either contractually or commercially in the concerned market, to pass a reduction in commissions to the retailers. In Australia, certain retailers negotiate directly with the mobile phone operators for their own commission rates, which also limits our ability to pass through reductions in commissions. Agreements with mobile operators are important to the success of our business. These agreements permit us to distribute prepaid mobile airtime to the mobile operators’ customers. Other electronic payment products offered by this segment include prepaid long distance calling card plans, prepaid Internet plans, prepaid debit cards, gift cards, vouchers, transport payments, lottery payments, bill payment, money transfer and digital content such as music, games and software.
Money Transfer Segment — Revenues in the Money Transfer Segment, which represented approximately 25% of total consolidated revenues for the first half of 2012, are primarily derived from charging a transaction fee, as well as the margin earned from purchasing foreign currency at wholesale exchange rates and selling the foreign currency to consumers at retail exchange rates. We have a sending agent network in place comprised of agents and Company-owned stores primarily in North America and Europe and a worldwide network of correspondent agents, consisting primarily of financial institutions in the transfer destination countries. Sending and correspondent agents each earn fees for cash collection and distribution services. These fees are recognized as direct operating costs at the time of sale.
Corporate Services, Eliminations and Other - In addition to operating in our principal operating segments described above, our “Corporate Services, Eliminations and Other” category includes non-operating activity, certain inter-segment eliminations and the cost of providing corporate and other administrative services to the operating segments, including share-based compensation expense. These services are not directly identifiable with our reportable operating segments.

OPPORTUNITIES AND CHALLENGES
EFT Processing Segment — The continued expansion and development of our EFT Processing Segment business will depend on various factors including, but not necessarily limited to, the following:
the impact of competition by banks and other ATM operators and service providers in our current target markets;
the demand for our ATM outsourcing services in our current target markets;
our ability to develop products or services, including value added services, to drive increases in transactions;
the expansion of our various business lines in markets where we operate and in new markets;
the entrance into additional card acceptance and ATM management agreements with banks;
our ability to obtain required licenses in markets we intend to enter or expand services;
the availability of financing for expansion;
our ability to efficiently install ATMs contracted under newly awarded outsourcing agreements;
our ability to renew existing contracts at profitable rates;
our ability to maintain pricing at current levels or mitigate price reductions in certain markets;
the impact of reductions in ATM interchange fees;
our ability to expand and sign additional customers for the cross-border merchant processing and acquiring business; and
the continued development and implementation of our software products and their ability to interact with other leading products.
epay Segment — The continued expansion and development of the epay Segment business will depend on various factors, including, but not necessarily limited to, the following:
our ability to negotiate new agreements in additional markets with mobile phone operators, content providers, agent financial institutions and retailers;
our ability to use existing expertise and relationships with mobile operators, content providers and retailers to our advantage;
the continued use of third-party providers such as ourselves to supply electronic processing solutions for existing

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and additional content;
the development of mobile phone networks in the markets in which we do business and the increase in the number of mobile phone users;
the overall pace of growth in the prepaid mobile phone market, including consumer shifts between prepaid and postpaid services;
our market share of the retail distribution capacity;
the development of new technologies that may compete with POS distribution of prepaid mobile airtime and other products;
the level of commission that is paid to the various intermediaries in the electronic payment distribution chain;
our ability to fully recover monies collected by retailers;
our ability to add new and differentiated products in addition to those offered by mobile operators;
our ability to take advantage of cross-selling opportunities with our Money Transfer Segment, including providing money transfer services through our distribution network; and
the availability of financing for further expansion.
Money Transfer Segment — The expansion and development of our Money Transfer Segment business will depend on various factors, including, but not necessarily limited to, the following:
the continued growth in worker migration and employment opportunities;
the mitigation of economic and political factors that have had an adverse impact on money transfer volumes, such as changes in the economic sectors in which immigrants work and the developments in immigration policies in the U.S.;
the continuation of the trend of increased use of electronic money transfer and bill payment services among immigrant workers and the unbanked population in our markets;
our ability to maintain our agent and correspondent networks;
our ability to offer our products and services or develop new products and services at competitive prices to drive increases in transactions;
the development of new technologies that may compete with our money transfer network;
the expansion of our services in markets where we operate and in new markets;
our ability to strengthen our brands;
our ability to fund working capital requirements;
our ability to recover from agents funds collected from customers and our ability to recover advances made to correspondents;
our ability to maintain compliance with the regulatory requirements of the jurisdictions in which we operate or plan to operate;
our ability to take advantage of cross-selling opportunities with our epay Segment, including providing prepaid services through Ria’s stores and agents worldwide;
our ability to leverage our banking and merchant/retailer relationships to expand money transfer corridors to Europe, Asia and Africa, including high growth corridors to Central and Eastern European countries;
the availability of financing for further expansion; and
our ability to successfully expand our agent network in Europe using our Payment Services Directive license.




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Table of Contents

SEGMENT SUMMARY RESULTS OF OPERATIONS
Revenues and operating income by segment for the three- and six-month periods ended June 30, 2012 and 2011 are summarized in the tables below:
 
 
Revenues for the Three Months Ended June 30,
 
Year-over-Year Change
 
Revenues for the Six Months Ended June 30,
 
Year-over-Year Change
 
 
 
 
 
 
Increase
(Decrease)
 
Increase
 
 
 
 
 
Increase
(Decrease)
 
Increase
(dollar amounts in thousands)
 
2012
 
2011
 
Amount
 
Percent
 
2012
 
2011
 
Amount
 
Percent
EFT Processing
 
$
58,309

 
$
50,378

 
$
7,931

 
16
%
 
$
108,226

 
$
94,739

 
$
13,487

 
14
%
epay
 
166,671

 
156,479

 
10,192

 
7
%
 
343,014

 
311,592

 
31,422

 
10
%
Money Transfer
 
77,483

 
73,005

 
4,478

 
6
%
 
148,918

 
136,182

 
12,736

 
9
%
Total
 
302,463

 
279,862

 
22,601

 
8
%
 
600,158

 
542,513

 
57,645

 
11
%
Eliminations
 
(86
)
 
(60
)
 
(26
)
 
43
%
 
(159
)
 
(118
)
 
(41
)
 
35
%
Total
 
$
302,377

 
$
279,802

 
$
22,575

 
8
%
 
$
599,999

 
$
542,395

 
$
57,604

 
11
%

 
 
Operating Income (Loss) for the Three Months Ended June 30,
 
Year-over-Year Change
 
Operating Income (Loss) for the Six Months Ended June 30,
 
Year-over-Year Change
 
 
 
 
 
 
Increase
(Decrease)
 
Increase
(Decrease)
 
 
 
 
 
Increase
(Decrease)
 
Increase
(Decrease)
(dollar amounts in thousands)
 
2012
 
2011
 
Amount
 
Percent
 
2012
 
2011
 
Amount
 
Percent
EFT Processing
 
$
10,341

 
$
9,191

 
$
1,150

 
13
 %
 
$
16,373

 
$
15,324

 
$
1,049

 
7
 %
epay
 
9,990

 
13,485

 
(3,495
)
 
(26
)%
 
23,191

 
26,615

 
(3,424
)
 
(13
)%
Money Transfer
 
6,674

 
5,022

 
1,652

 
33
 %
 
10,972

 
7,792

 
3,180

 
41
 %
Total
 
27,005

 
27,698

 
(693
)
 
(3
)%
 
50,536

 
49,731

 
805

 
2
 %
Corporate services, eliminations and other
 
(7,151
)
 
(8,898
)
 
1,747

 
(20
)%
 
(14,840
)
 
(13,714
)
 
(1,126
)
 
8
 %
Total
 
$
19,854

 
$
18,800

 
$
1,054

 
6
 %
 
$
35,696

 
$
36,017

 
$
(321
)
 
(1
)%


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Impact of changes in foreign currency exchange rates
Compared to most of the currencies of the foreign countries in which we operate, the U.S. dollar was stronger during the second quarter and first half of 2012 than it was during the comparable 2011 periods. Because our revenues and local expenses are recorded in the functional currencies of our operating entities, amounts we earned for the second quarter and first half of 2012 reflected a negative impact due to the weaker foreign currencies. Considering the results by country and the associated functional currency, we estimate that our consolidated operating income for the second quarter and first half of 2012 was approximately 11% and 8% lower, respectively, when compared to the same periods of 2011 as a result of changes in foreign currency exchange rates. If significant, in our discussion we will refer to the impact of fluctuations in foreign currency exchange rates in our comparison of operating segment results for the three- and six-month periods ended June 30, 2012 and 2011. To provide further perspective on the impact of foreign currency exchange rates, the following table shows the changes in currency values relative to the U.S. dollar from the second quarter and first half of 2011 to the same periods of 2012 for the countries and regions in which we have our most significant operations:

 
 
Average Translation Rate
 
 
 
Average Translation Rate
 
 
 
 
Three Months Ended
 
Three Months Ended
 
 
 
Six Months Ended
 
Six Months Ended
 
 
Currency (dollars per foreign currency)
 
June 30, 2012
 
June 30, 2011
 
 Decrease Percent
 
June 30, 2012
 
June 30, 2011
 
Decrease Percent
Australian dollar
 
$
1.0100

 
$
1.0626

 
(5
)%
 
$
1.0327

 
$
1.0343

 
 %
Brazilian real
 
$
0.5110

 
$
0.6272

 
(19
)%
 
$
0.5388

 
$
0.6136

 
(12
)%
British pound
 
$
1.5826

 
$
1.6313

 
(3
)%
 
$
1.5772

 
$
1.6168

 
(2
)%
euro
 
$
1.2837

 
$
1.4391

 
(11
)%
 
$
1.2977

 
$
1.4037

 
(8
)%
Hungarian forint
 
$
0.0044

 
$
0.0054

 
(19
)%
 
$
0.0044

 
$
0.0052

 
(16
)%
Indian rupee
 
$
0.0185

 
$
0.0224

 
(17
)%
 
$
0.0192

 
$
0.0223

 
(14
)%
Polish zloty
 
$
0.3021

 
$
0.3640

 
(17
)%
 
$
0.3064

 
$
0.3556

 
(14
)%

COMPARISON OF OPERATING RESULTS FOR THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2012 AND 2011
EFT PROCESSING SEGMENT
The following table presents the results of operations for the three- and six-month periods ended June 30, 2012 and 2011 for our EFT Processing Segment:
 
 
Three Months Ended June 30,
 
Year-over-Year Change
 
Six Months Ended June 30,
 
Year-over-Year Change
 
 
 
 
 
 
Increase
 
Increase
 
 
 
 
 
Increase
 
Increase
(dollar amounts in thousands)
 
2012
 
2011
 
Amount
 
Percent
 
2012
 
2011
 
Amount
 
Percent
Total revenues
 
$
58,309

 
$
50,378

 
$
7,931

 
16
%
 
$
108,226

 
$
94,739

 
$
13,487

 
14
%
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Direct operating costs
 
28,231

 
23,401

 
4,830

 
21
%
 
53,890

 
45,465

 
8,425

 
19
%
Salaries and benefits
 
8,408

 
8,026

 
382

 
5
%
 
15,755

 
14,921

 
834

 
6
%
Selling, general and administrative
 
5,023

 
4,502

 
521

 
12
%
 
9,933

 
8,847

 
1,086

 
12
%
Depreciation and amortization
 
6,306

 
5,258

 
1,048

 
20
%
 
12,275

 
10,182

 
2,093

 
21
%
Total operating expenses
 
47,968

 
41,187

 
6,781

 
16
%
 
91,853

 
79,415

 
12,438

 
16
%
Operating income
 
$
10,341

 
$
9,191

 
$
1,150

 
13
%
 
$
16,373

 
$
15,324

 
$
1,049

 
7
%
Transactions processed (millions)
 
291

 
233

 
58

 
25
%
 
557

 
439

 
118

 
27
%
ATMs as of June 30
 
17,048

 
12,058

 
4,990

 
41
%
 
17,048

 
12,058

 
4,990

 
41
%
Average ATMs
 
16,756

 
11,692

 
5,064

 
43
%
 
15,972

 
11,319

 
4,653

 
41
%

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Revenues
Our revenues for the second quarter and first half of 2012 increased when compared to the same periods of 2011, primarily due to an increase in the number of ATMs under management, including those added from 2011 acquisitions, and growth in value added services, including dynamic currency conversion. These increases were partly offset by the impact of the weaker foreign currencies in 2012. The increase for the first half was also partly offset by the $1.2 million previously deferred revenue recognized in the first quarter of 2011 related to a customer discontinuing a certain product in Greece.
Average monthly revenue per ATM was $1,160 for the second quarter and $1,129 for the first half of 2012 compared to $1,436 for the second quarter and $1,395 for the first half of 2011. These decreases were primarily the result of ATM and transaction growth in India and Pakistan, where revenues per ATM and revenues per transaction are generally lower than those in Europe, and the impact of the weaker foreign currencies. Revenue per transaction was $0.20 for the second quarter and $0.19 for the first half of 2012 compared to $0.22 each for the second quarter and the first half of 2011. These decreases were primarily due to transaction growth in India and Pakistan along with the impact of the weaker foreign currencies in 2012.
Direct operating costs
Direct operating costs consist primarily of site rental fees, cash delivery costs, cash supply costs, maintenance, insurance, telecommunications and the cost of data center operations-related personnel, as well as the processing centers’ facility-related costs and other processing center-related expenses. Direct operating costs increased in the second quarter and first half of 2012 compared to the same periods of 2011, primarily due to the increase in the number of ATMs under management, partly offset by the impact of the weaker foreign currencies.
Gross profit
Gross profit, which is calculated as revenues less direct operating costs, was $30.1 million for the second quarter and $54.3 million for the first half of 2012 compared to $27.0 million for the second quarter and $49.3 million for the first half of 2011. The increase for the second quarter of 2012 was primarily due to the increase in ATMs under management and the growth in value added services, partly offset by the impact of the weaker foreign currencies. The increase for the first half of 2012 was also partly offset by the additional revenue recognized in Greece in the first quarter of 2011. Gross profit as a percentage of revenues (“gross margin”) was 52% for the second quarter and 50% for the first half of 2012 compared to 54% for the second quarter and 52% for the first half of 2011; these decreases were largely due to the greater number of newly installed ATMs in the second quarter and first half of 2012 compared to the same periods of 2011.
Salaries and benefits
The increases in salaries and benefits for the second quarter and first half of 2012 was primarily due to adding employees to support the growth in ATMs under management, including those obtained through acquisitions, partly offset by the impact of the weaker foreign currencies. As a percentage of revenues, these costs decreased to 14.4% for the second quarter and 14.6% for the first half of 2012 compared to 15.9% for the second quarter and 15.7% for the first half of 2011; these decreases resulted from revenue growth that did not require similar increases in support costs.
Selling, general and administrative
The increases in selling, general and administrative expenses for the second quarter and first half of 2012 compared to the same periods of 2011 was primarily due to increased costs in growing markets, including those in which acquisitions were made in the past year. These increases were partly offset by the impact of the weaker foreign currencies. As a percentage of revenues, selling, general and administrative expenses decreased to 8.6% for the second quarter and 9.2% for the first half of 2012 from 8.9% for the second quarter and 9.3% for the first half of 2011. These decreases were primarily due to the growth in value added services, including dynamic currency conversion.
Depreciation and amortization
Depreciation and amortization expense increased for the second quarter and first half of 2012 compared to the same periods of 2011, primarily due to the increase in ATMs under management and the amortization of intangible assets related to recent acquisitions, partly offset by the impact of the weaker foreign currencies. As a percentage of revenues, depreciation and amortization expense increased to 10.8% for the second quarter and 11.3% for the first half of 2012 compared to 10.4% for the second quarter and 10.7% for the first half of 2011, mainly as a result of the amortization of intangible assets related to recent acquisitions.



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Table of Contents

Operating income
Operating income increased for the second quarter and first half of 2012 compared to the same periods of 2011, primarily due to an increase in ATMs under management and growth in value added services, including dynamic currency conversion, partly offset by the impact of the weaker foreign currencies. The increase for the first half of 2012 was also partly offset by the additional revenue recognized in Greece in the first quarter of 2011. Operating income per transaction was $0.04 for both the second quarter of 2012 and 2011 and $0.03 for both the first half of 2012 and 2011. Operating income as a percentage of revenues (“operating margin”) decreased to 17.7% for the second quarter and 15.1% for the first half of 2012 compared to 18.2% for the second quarter and 16.2% for the first half of 2011. These decreases reflect the increase in amortization of intangible assets related to recent acquisitions and the transaction growth in India, where the revenues per ATM and revenues per transaction are generally lower than Europe. The decrease for the first half of 2012 also reflects the additional revenues recognized in Greece in the first quarter of 2011.
EPAY SEGMENT
The following table presents the results of operations for the three- and six-month periods ended June 30, 2012 and 2011 for our epay Segment:
 
 
Three Months Ended June 30,
 
Year-over-Year Change
 
Six Months Ended June 30,
 
Year-over-Year Change
 
 
 
 
 
 
Increase
(Decrease)
 
Increase
(Decrease)
 
 
 
 
 
Increase
(Decrease)
 
Increase
(Decrease)
(dollar amounts in thousands)
 
2012
 
2011
 
Amount
 
Percent
 
2012
 
2011
 
Amount
 
Percent
Total revenues
 
$
166,671

 
$
156,479

 
$
10,192

 
7
 %
 
$
343,014

 
$
311,592

 
$
31,422

 
10
 %
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Direct operating costs
 
127,993

 
118,554

 
9,439

 
8
 %
 
263,186

 
238,465

 
24,721

 
10
 %
Salaries and benefits
 
12,428

 
11,521

 
907

 
8
 %
 
25,692

 
21,940

 
3,752

 
17
 %
Selling, general and administrative
 
11,220

 
8,443

 
2,777

 
33
 %
 
20,806

 
15,574

 
5,232

 
34
 %
Depreciation and amortization
 
5,040

 
4,476

 
564

 
13
 %
 
10,139

 
8,998

 
1,141

 
13
 %
Total operating expenses
 
156,681

 
142,994

 
13,687

 
10
 %
 
319,823

 
284,977

 
34,846

 
12
 %
Operating income
 
$
9,990

 
$
13,485

 
$
(3,495
)
 
(26
)%
 
$
23,191

 
$
26,615

 
$
(3,424
)
 
(13
)%
Transactions processed (millions)
 
272

 
264

 
8

 
3
 %
 
538

 
507

 
31

 
6
 %
Revenues
The increase in revenues for the second quarter and first half of 2012 compared to the same periods of 2011 was primarily due to the impact of our third quarter 2011 acquisition of cadooz Holding GmbH ("cadooz") and an increase in transactions processed in Germany – mainly from increased demand for non-mobile products – and the U.S. These increases were partly offset by revenue declines in Australia, Brazil, Spain and the U.K., as well as the impact of the weaker foreign currencies. Revenues in Brazil decreased for the second quarter and first half of 2012 compared to the same period of 2011 due to certain mobile operators modifying their distribution strategies beginning in the fourth quarter of 2011. These mobile operator changes are expected to negatively impact revenues for the remainder of 2012. The revenue declines in Spain and the U.K. were mostly driven by economic and competitive pressures. Revenues in Australia decreased for the second quarter and first half of 2012 compared to the same periods of 2011 primarily due to the impact of certain large retailers entering into direct agreements with two mobile operators during the second half of 2011.
In certain markets, our revenues have declined or growth has slowed due to mobile phone operators driving competitive reductions in commissions or removing us from the airtime distribution chain by using alternative distribution strategies, as well as overall economic conditions impacting customers' buying decisions. We expect most of our future revenue growth to be derived from: (i) additional electronic payment products sold over the base of POS terminals, (ii) developing markets or markets in which there is organic growth in the electronic top-up sector overall, and (iii) acquisitions, if available and commercially appropriate.
Revenues per transaction were $0.61 for the second quarter and $0.64 for the first half of 2012 compared to $0.59 for the second quarter and $0.61 for the first half of 2011. The increase in revenues per transaction was mainly due to the impact of cadooz transactions, which are recorded at gross value, in contrast to our other electronic payment products which are recorded at net value. This increase was partly offset by the impact of the weaker foreign currencies and other changes in the mix of transactions, particularly due to growth in India, and our ATX subsidiary. ATX and India provide only transaction processing

22

Table of Contents

services without significant direct costs and other operating costs related to installing and managing terminals; therefore, the revenues we recognize from these transactions are a fraction of those recognized on average transactions, but with strong contribution to gross profit.
Direct operating costs
Direct operating costs in the epay Segment include the commissions we pay to retail merchants for the distribution and sale of prepaid mobile airtime and other prepaid products, as well as expenses required to operate POS terminals, and the cost of vouchers sold and physical gifts fulfilled. The increase in direct operating costs was primarily attributable to the impact of cadooz transactions, as well as the growth in transactions in Germany and the U.S., partly offset by the decrease in the number of transactions processed in Australia, Brazil, and Spain, lower commission costs in the U.K. and the impact of the weaker foreign currencies.
Gross profit
Gross profit, which represents revenues less direct costs, was $38.7 million for the second quarter and $79.8 million for the first half of 2012 compared to $37.9 million for the second quarter and $73.1 million for the first half of 2011. The primary factors behind the increase in gross profit are the impact of cadooz transactions and the increased transaction volumes in Germany – mainly from increased demand for non-mobile products – and the U.S. These increases were partly offset by a decline in transaction volume in Australia, Brazil, and Spain and the impact of weaker foreign currencies. Gross margin declined to 23% for the second quarter of 2012 from 24% in the same period of 2011, reflecting the impact of the cadooz transactions and lower gross margins in Brazil and Spain. Gross margin was flat at 23% for both the first half of 2012 and 2011. Gross profit per transaction was flat at $0.14 for the second quarter of 2012 and 2011. Gross profit per transaction increased to $0.15 for the first half of 2012 compared to $0.14 for the first half of 2011. This increase reflects the impact of cadooz transactions, partly offset by the impact of weaker foreign currencies and a higher percentage of lower profit transactions.
Salaries and benefits
The increase in salaries and benefits for the second quarter and first half of 2012 compared to the same periods of 2011 was primarily due to the impact of the cadooz acquisition, growth of sales staff and additional headcount to support development of new products and growing markets, partly offset by the impact of the weaker foreign currencies. As a percentage of revenues, salaries and benefits increased to 7.5% for both the second quarter and the first half of 2012 from 7.4% for the second quarter and 7.0% the first half of 2011. These increases were primarily due to a decrease in revenues in Australia and Brazil for the first half of 2012 compared to the same period of 2011.
Selling, general and administrative
The increase in selling, general and administrative expenses for the second quarter and first half of 2012 compared to the same periods of 2011 was mainly due to the impacts of the cadooz acquisition and increased bad debt expense in certain countries, partly offset by the impact of the weaker foreign currencies. As a percentage of revenues, these expenses increased to 6.7% for the second quarter and 6.1% for the first half of 2012 from 5.4% for the second quarter and 5.0% for the first half of 2011, primarily because of the decreases in epay Australia's and epay Spain's revenues for the second quarter and first half of 2012. The increase for the second quarter of 2012 was also due to the increase in bad debt expense compared to the second quarter of 2011.
Depreciation and amortization
Depreciation and amortization expense primarily represents amortization of acquired intangible assets and the depreciation of POS terminals we install in retail stores. Depreciation and amortization expense increased for the second quarter and first half of 2012 compared to the same periods of 2011 mainly due to the impact of the cadooz acquisition, including amortization of acquired intangible assets, and the addition of POS terminals in growing markets. These increases were partly offset by decreased expense in markets where acquired intangible assets became fully amortized, as well as the impact of the weaker foreign currencies. As a percentage of revenues, these expenses increased slightly to 3.0% for both the second quarter and the first half of 2012 from 2.9% in the same periods of 2011.
Operating income
The decrease in operating income for the second quarter and first half of 2012 compared to the same periods of 2011 was primarily due to transaction volume and revenue declines in Australia, Brazil, and Spain, and the impact of the weaker foreign currencies. The declines in volume and revenue in Brazil were due to certain mobile operators modifying their distribution strategies beginning in the fourth quarter of 2011. These mobile operator changes are expected to negatively impact revenues for the remainder of 2012. The declines in volume and revenue in Spain were mostly driven by economic and competitive pressures. In addition, the declines in volume and revenues in Australia were due to certain large retailers entering into direct

23

Table of Contents

agreements with two mobile operators during the second half of 2011. These decreases were partly offset by increases in transaction volumes in the U.S. and Germany and the impact of the cadooz acquisition. Operating margin was 6.0% for the second quarter and 6.8% for the first half of 2012 compared to 8.6% for the second quarter and 8.5% for the first half of 2011. These decreases were primarily due to the inclusion of cadooz revenues at gross value and the increase in bad debt expense. Also contributing to these decreases were the revenue declines in Australia, Brazil, and Spain for both the second quarter and first half of 2012 compared to 2011. Operating income per transaction declined to $0.04 for both second quarter and first half of 2012 and compared to $0.05 for the same periods of 2011, primarily due to the declines in operating income discussed above.
As discussed earlier, in our epay Brazil operations, operating expenses have increased significantly and revenues are expected to be negatively impacted by certain mobile operators' distribution strategies throughout 2012. To regain our desired profitability in Brazil, we are adjusting our strategy and making changes in the business to better align costs with its revenues. Additionally, we expect to introduce other electronic payment products in this market during 2013 to increase revenues. However, if we are unable to achieve adequate profitability within epay Brazil in the longer term, it is possible that the goodwill or other acquired intangible assets of this reporting unit could become impaired.
MONEY TRANSFER SEGMENT
The following tables present the results of operations for the three- and six-month periods ended June 30, 2012 and 2011 for the Money Transfer Segment:
 
 
Three Months Ended June 30,
 
Year-over-Year Change
 
Six Months Ended June 30,
 
Year-over-Year Change
 
 
 
 
 
 
Increase
(Decrease)
 
Increase
(Decrease)
 
 
 
 
 
Increase
(Decrease)
 
Increase
(Decrease)
(dollar amounts in thousands)
 
2012
 
2011
 
Amount
 
Percent
 
2012
 
2011
 
Amount
 
Percent
Total revenues
 
$
77,483

 
$
73,005

 
$
4,478

 
6
 %
 
$
148,918

 
$
136,182

 
$
12,736

 
9
 %
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Direct operating costs
 
36,438

 
33,497

 
2,941

 
9
 %
 
69,643

 
62,464

 
7,179

 
11
 %
Salaries and benefits
 
18,442

 
17,360

 
1,082

 
6
 %
 
36,617

 
33,365

 
3,252

 
10
 %
Selling, general and administrative
 
11,291

 
12,166

 
(875
)
 
(7
)%
 
22,328

 
22,187

 
141

 
1
 %
Depreciation and amortization
 
4,638

 
4,960

 
(322
)
 
(6
)%
 
9,358

 
10,374

 
(1,016
)
 
(10
)%
Total operating expenses
 
70,809

 
67,983

 
2,826