EEFT 9/30/2013 10Q

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
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 þ 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 þ 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 þ
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 þ

On October 29, 2013, Euronet Worldwide, Inc. had 50,268,267 shares of Common Stock outstanding.
 
 
 
 
 



Table of Contents
 
 

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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
 
September 30,
2013
 
December 31,
2012
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
244,471

 
$
201,435

Restricted cash
63,107

 
71,608

Inventory — PINs and other
61,339

 
101,168

Trade accounts receivable, net of allowances for doubtful accounts of $20,687 at September 30, 2013 and $21,512 at December 31, 2012
317,882

 
370,836

Prepaid expenses and other current assets
58,201

 
68,132

Total current assets
745,000

 
813,179

Property and equipment, net of accumulated depreciation of $232,547 at September 30, 2013 and $207,282 at December 31, 2012
111,885

 
115,475

Goodwill
510,780

 
481,760

Acquired intangible assets, net of accumulated amortization of $157,722 at September 30, 2013 and $140,829 at December 31, 2012
97,377

 
83,389

Other assets, net of accumulated amortization of $24,645 at September 30, 2013 and $24,247 at December 31, 2012
49,464

 
57,733

Total assets
$
1,514,506

 
$
1,551,536

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Trade accounts payable
$
326,835

 
$
459,847

Accrued expenses and other current liabilities
246,962

 
183,406

Current portion of capital lease obligations
2,393

 
2,397

Short-term debt obligations and current maturities of long-term debt obligations
9,029

 
7,551

Income taxes payable
12,903

 
9,396

Deferred revenue
27,805

 
34,109

Total current liabilities
625,927

 
696,706

Debt obligations, net of current portion
235,252

 
286,703

Capital lease obligations, net of current portion
3,382

 
4,589

Deferred income taxes
20,299

 
22,031

Other long-term liabilities
16,106

 
14,967

Total liabilities
900,966

 
1,024,996

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; 53,891,965 issued at September 30, 2013 and 52,976,558 issued at December 31, 2012
1,078

 
1,060

Additional paid-in-capital
799,702

 
782,506

Treasury stock, at cost, 3,676,370 shares at September 30, 2013 and 3,653,958 shares at December 31, 2012
(68,210
)
 
(67,327
)
Accumulated deficit
(106,024
)
 
(184,015
)
Restricted reserve
1,035

 
1,002

Accumulated other comprehensive loss
(17,170
)
 
(10,850
)
Total Euronet Worldwide, Inc. stockholders’ equity
610,411

 
522,376

Noncontrolling interests
3,129

 
4,164

Total equity
613,540

 
526,540

Total liabilities and equity
$
1,514,506

 
$
1,551,536

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
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Revenues
$
360,580

 
$
316,356

 
$
1,037,767

 
$
916,355

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Direct operating costs
223,551

 
200,378

 
656,933

 
586,965

Salaries and benefits
52,819

 
45,549

 
153,298

 
134,624

Selling, general and administrative
33,254

 
30,071

 
95,714

 
86,738

Acquisition-related contingent consideration gain
(19,319
)
 

 
(19,319
)
 

Depreciation and amortization
14,930

 
16,163

 
48,838

 
48,137

Total operating expenses
305,235

 
292,161

 
935,464

 
856,464

Operating income
55,345

 
24,195

 
102,303

 
59,891

 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Interest income
527

 
877

 
1,438

 
3,493

Interest expense
(2,938
)
 
(5,483
)
 
(8,372
)
 
(16,542
)
Other gains (losses), net
2,809

 
(25
)
 
2,397

 
4,146

Foreign currency exchange gain (loss), net
2,899

 
1,419

 
2,658

 
(1,237
)
Income from unconsolidated affiliates

 
185

 
260

 
795

Other income (expense), net
3,297

 
(3,027
)
 
(1,619
)
 
(9,345
)
 
 
 
 
 
 
 
 
Income before income taxes
58,642

 
21,168

 
100,684

 
50,546

 
 
 
 
 
 
 
 
Income tax expense
(10,668
)
 
(6,827
)
 
(22,485
)
 
(17,381
)
 
 
 
 
 
 
 
 
Net income
47,974

 
14,341

 
78,199

 
33,165

Less: Net (income) loss attributable to noncontrolling
  interests
(100
)
 
289

 
(208
)
 
384

Net income attributable to Euronet Worldwide, Inc.
$
47,874

 
$
14,630

 
$
77,991

 
$
33,549

 
 
 
 
 
 
 
 
Earnings per share attributable to Euronet Worldwide, Inc.
  stockholders:
 
 
 
 
 
 
 
Basic
$
0.96

 
$
0.29

 
$
1.57

 
$
0.66

Diluted
$
0.92

 
$
0.28

 
$
1.51

 
$
0.65

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
50,093,786

 
50,827,767

 
49,829,379

 
50,705,222

Diluted
52,200,472

 
51,597,319

 
51,579,644

 
51,521,203

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 Income
(Unaudited, in thousands)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Net income
$
47,974

 
$
14,341

 
$
78,199

 
$
33,165

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Translation adjustment
22,072

 
10,577

 
(6,004
)
 
1,919

Comprehensive income
70,046

 
24,918

 
72,195

 
35,084

Comprehensive (income) loss attributable to noncontrolling interests
(207
)
 
222

 
(306
)
 
435

Comprehensive income attributable to Euronet Worldwide, Inc.
$
69,839

 
$
25,140

 
$
71,889

 
$
35,519

See accompanying notes to the unaudited consolidated financial statements.

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EURONET WORLDWIDE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited, in thousands)
 
Nine Months Ended
September 30,
 
2013
 
2012
Net income
$
78,199

 
$
33,165

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
48,838

 
48,137

Share-based compensation
9,012

 
8,812

Unrealized foreign exchange loss, net
(2,658
)
 
1,237

Deferred income taxes
(93
)
 
(2,838
)
Income from unconsolidated affiliates
(260
)
 
(795
)
Accretion of convertible debentures discount and amortization of debt issuance costs
797

 
7,032

Acquisition-related contingent consideration gain
(19,319
)
 

Gain on sale of equity method investment
(2,827
)
 

Gain on step acquisition

 
(4,388
)
Changes in working capital, net of amounts acquired:
 
 
 
Income taxes payable, net
3,181

 
(811
)
Restricted cash
5,206

 
(19,759
)
Inventory — PINs and other
37,599

 
31,319

Trade accounts receivable
50,767

 
36,276

Prepaid expenses and other current assets
8,782

 
2,191

Trade accounts payable
(128,449
)
 
16,169

Deferred revenue
(6,697
)
 
(2,274
)
Accrued expenses and other current liabilities
66,097

 
(13,678
)
Changes in noncurrent assets and liabilities
2,389

 
3,627

Net cash provided by operating activities
150,564

 
143,422

Cash flows from investing activities:
 
 
 
Acquisitions, net of cash acquired
(30,847
)
 
(2,655
)
Purchases of property and equipment
(27,631
)
 
(33,247
)
Purchases of other long-term assets
(4,856
)
 
(3,463
)
Proceeds from sale of equity method investment
7,609

 

Other, net
731

 
1,106

Net cash used in investing activities
(54,994
)
 
(38,259
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of shares
7,487

 
2,109

Borrowings from revolving credit agreements
1,508,463

 
282,055

Repayments of revolving credit agreements
(1,550,329
)
 
(360,596
)
Repayments of long-term debt obligations
(8,086
)
 
(3,000
)
Repayments of capital lease obligations
(2,016
)
 
(2,009
)
Purchase of subsidiary shares from noncontrolling interests
(7,878
)
 
(3,321
)
Other, net
(163
)
 
(791
)
Net cash used in financing activities
(52,522
)
 
(85,553
)
Effect of exchange rate changes on cash and cash equivalents
(12
)
 
864

Increase in cash and cash equivalents
43,036

 
20,474

Cash and cash equivalents at beginning of period
201,435

 
177,327

Cash and cash equivalents at end of period
$
244,471

 
$
197,801

Supplemental disclosure of cash flow information:
 
 
 
Interest paid during the period
$
6,143

 
$
7,518

Income taxes paid during the period
23,227

 
21,972

Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Equity issued in connection with acquisition
$
5,295

 
$

Contingent consideration in connection with acquisition
21,725

 

See accompanying notes to the unaudited consolidated financial statements.

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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”), card outsourcing, card issuing and merchant acquiring 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 September 30, 2013, and the results of its operations and cash flows for the three- and nine-month periods ended September 30, 2013 and 2012. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of Euronet for the year ended December 31, 2012, including the notes thereto, set forth in the Company’s 2012 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.
Seasonality
The Company’s EFT and epay segments are significantly impacted by seasonality during the fourth quarter and first quarter of each year due to higher transaction levels during the holiday season and lower levels following the holiday season. Additionally, mostly in Europe, the EFT business experiences its heaviest demand for dynamic currency conversion services during the third quarter of the fiscal year, coinciding with the tourist season. Seasonality in the money transfer segment varies by region of the world. In most markets, the Company usually experiences increased demand for money transfer services from the month of May through the fourth quarter of each year, coinciding with the increase in worker migration patterns and various holidays, and our lowest transaction levels during the first quarter of the year. As a result, quarterly financial results are not necessarily indicative of the results to be expected for the year or other interim periods.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
Recently Issued and Adopted Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board ("FASB") issued amended guidance that requires an entity to present information about significant items reclassified out of accumulated other comprehensive income, referred to as AOCI, on the face of the statement where net income is presented or as a separate disclosure in the notes to the financial statements. Additionally, the guidance expands the disclosure requirements for presentation of changes in AOCI by component. The guidance is effective for the Company for interim and annual reporting periods beginning January 1, 2013, and its adoption did not have an impact on the Company's results of operations, cash flows or financial position.
In July 2013, the FASB issued Accounting Standards Update ("ASU") ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists ("ASU 2013-11"). The amendments in ASU 2013-11 provide guidance on the financial statement presentation of unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company does not anticipate a material impact to the Company's financial position, results of operations or cash flows as a result of this change.



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(3) STOCKHOLDERS' EQUITY

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
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Computation of diluted weighted average shares outstanding:
 
 
 
 
 
 
 
Basic weighted average shares outstanding
50,093,786

 
50,827,767

 
49,829,379

 
50,705,222

Incremental shares from assumed exercise of stock options and vesting of restricted stock
2,025,802

 
769,552

 
1,664,274

 
815,981

Incremental shares from assumed conversion of convertible debentures
80,884

 

 
85,991

 

Diluted weighted average shares outstanding
52,200,472

 
51,597,319

 
51,579,644

 
51,521,203

The table includes the impact of all stock options and restricted stock that are dilutive to the Company’s weighted average common shares outstanding during the three- and nine-month periods ended September 30, 2013 and 2012. 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 528,000 and 1,029,000 for the three- and nine-month periods ended September 30, 2013, respectively, and approximately 3,567,000 and 3,593,000 for the three- and nine-month periods ended September 30, 2012, respectively.
During the three- and nine-month periods ended September 30, 2013 and 2012, the Company had convertible debentures outstanding that, if converted, would have a potentially dilutive effect on the Company’s stock. In September 2013, the Company repurchased at par the remaining $3.6 million of principal amount of the convertible debentures outstanding. 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. Under the if-converted method, the dilutive effect of the assumed conversion of the debentures was 80,884 shares and 85,991 shares for the three- and nine-month periods ended September 30, 2013, respectively. For the three- and nine-month periods ended September 30, 2012, the assumed conversion of the convertible debentures was anti-dilutive and, accordingly, the associated shares have been excluded from diluted weighted average shares outstanding.

Stockholder Rights Agreement
On March 26, 2013, the Company entered into a new Rights Agreement (the "Rights Agreement") with Computershare Trust Company, N.A., as Rights Agent. The Rights Agreement became effective at the close of business on April 3, 2013, immediately following the expiration of the prior rights agreement. In connection with its approval of the Rights Agreement, the Board of Directors also declared a dividend of one "Right" for each outstanding share of Euronet's common stock, payable on April 3, 2013 to stockholders of record at the close of business on April 3, 2013. As long as the Rights are attached to the common shares, the Company will issue one Right (subject to adjustment) with each new common share that is issued so that all such shares will have attached Rights. When exercisable, each Right will initially entitle the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock at a price of $125 per one one-hundredth of a share, subject to adjustment. Upon occurrence of a trigger event under the Rights Agreement, each holder of a Right (excluding certain holders) thereafter would have the right to receive upon exercise a number of common shares having a market value of two times the then current price of the Right.

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The Rights are not exercisable until the earlier of (i) ten business days following a public announcement that (or a majority of the Board of Directors of the Company becoming aware that) a person or group of affiliated or associated persons or any person acting in concert therewith, has acquired, or obtained the right to acquire beneficial ownership of 20% or more of the Company's common shares (as defined in the Rights Agreement); or (ii) ten business days following the commencement or announcement of an intention to make a tender offer or exchange offer, the consummation of which would result in any person becoming an acquiring person (as defined in the Rights Agreement), unless the Board of Directors sets a later date in either event.
The Rights Agreement is intended to encourage a potential acquiring person to negotiate directly with the Board of Directors, but may have certain anti-takeover effects. The Rights Agreement could significantly dilute the interests in the Company of an acquiring person. The Rights may therefore have the effect of delaying, deterring or preventing a change in control of the Company. The Rights have a de minimus fair value and expire on April 3, 2016.

Accumulated other comprehensive loss
As of September 30, 2013, accumulated other comprehensive loss consists entirely of foreign currency translation adjustments. The Company's reporting currency is the U.S. dollar. The financial statements of foreign subsidiaries where the functional currency is not the U.S. dollar are translated to U.S. dollars using (i) exchange rates in effect at period end for assets and liabilities, and (ii) weighted average exchange rates during the period for revenues and expenses. The resulting currency translation adjustments are recorded as a component of accumulated other comprehensive income (loss) as a separate component of consolidated stockholders' equity. The Company recorded a foreign currency translation gain of $22.1 million and $10.6 million for the three-month periods ended September 30, 2013 and 2012, respectively. For the nine-month periods ended September 30, 2013 and 2012, the Company recorded a foreign currency translation loss of $6.0 million and a foreign currency translation gain of $1.9 million, respectively. For the three- and nine-month periods ended September 30, 2013, the Company reclassified $0.3 million of foreign currency translation into the consolidated statements of operations. There were no reclassifications of foreign currency translation into the consolidated statements of operations for the three- and nine-month periods ended September 30, 2012.

(4) ACQUISITIONS

On January 4, 2013, the Company acquired all of the common stock of an Australian company, Pure Commerce Pty Limited. (“Pure Commerce”), which offers industry leading currency conversion and multi-currency acquiring products to global, local and online merchant acquirers, banks and retailers. The purchase price consisted of cash of approximately $31.3 million, subject to customary purchase price adjustments, and $5.3 million of the Company's common stock. With respect to the stock portion of the purchase price and pursuant to the acquisition agreement, the Company issued at closing 224,425 shares of common stock to the shareholders of Pure Commerce. The common stock will be held in escrow through September 2014 to secure certain obligations of the sellers. Further, Euronet has agreed pursuant to an earnout provision to pay additional purchase consideration of up to 30.0 million Australian dollars, with half due in cash and the remaining half payable in Euronet common stock in March 2014, if certain performance targets are met during a measurement period ending December 31, 2013. As of the acquisition date, the fair value of the contingent consideration liability was $21.7 million. See Note 8, Fair Value Measurements, for additional information related to the contingent consideration liability.


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

(dollar amounts in thousands)
Estimated Life
 
Current assets
 
$
4,818

Property and equipment
2-8 years
331

Non-compete agreements
4 years
755

Trade names
20 years
2,382

Proprietary software
10 years
11,912

Customer relationships
12 years
18,230

Goodwill
Indefinite
26,228

Other non-current assets
 
402

Fair value of assets acquired
 
65,058

Current liabilities
 
(4,762
)
Non-current liabilities
 
(2,028
)
Net assets acquired
 
$
58,268


The net assets of Pure Commerce and its results from operations are included in the EFT Processing Segment's results.

(5) GOODWILL AND ACQUIRED INTANGIBLE ASSETS, NET
A summary of acquired intangible assets and goodwill activity for the nine-month period ended September 30, 2013 is presented below:
  (in thousands)
 
Acquired
Intangible
Assets
 
Goodwill
 
Total
Intangible
Assets
Balance as of December 31, 2012
 
$
83,389

 
$
481,760

 
$
565,149

Increases (decreases):
 
 
 
 
 
 
Acquisition
 
33,279

 
26,228

 
59,507

Amortization
 
(16,128
)
 

 
(16,128
)
Other (primarily changes in foreign currency exchange rates)
 
(3,163
)
 
2,792

 
(371
)
Balance as of September 30, 2013
 
$
97,377

 
$
510,780

 
$
608,157

Estimated amortization expense on intangible assets with finite lives, before income taxes, as of September 30, 2013, is expected to total $4.8 million for the remainder of 2013, $18.1 million for 2014, $12.8 million for 2015, $11.2 million for 2016, $9.4 million for 2017 and $7.0 million for 2018.
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, 2012 resulted in the Company recording a non-cash goodwill impairment charge of $23.5 million and an additional $5.2 million impairment charge relating to acquired intangible assets.
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 the estimates or assumptions included in the 2012 analysis could change, which may result in the Company recording additional material non-cash impairment charges during the year in which these changes take place.


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(6) DEBT OBLIGATIONS
A summary of debt obligation activity for the nine-month period ended September 30, 2013 is presented below:
  (in thousands)
 
Revolving
Credit
Facilities
 
Other Debt
Obligations
 
Capital
Leases
 
3.5%
Convertible
Debentures
Due 2025
 
Term Loan
 
Total
Balance at December 31, 2012
 
$
215,117

 
$
1,051

 
$
6,986

 
$
3,586

 
$
74,500

 
$
301,240

Increases (decreases):
 
 
 
 
 

 
 
 
 
 
 
Net repayments
 
(41,811
)
 

 
(1,402
)
 
(3,586
)
 
(4,500
)
 
(51,299
)
Capital lease interest
 

 

 
350

 

 

 
350

Foreign currency exchange gain
 
(54
)
 
(22
)
 
(159
)
 

 

 
(235
)
Balance at September 30, 2013
 
173,252

 
1,029

 
5,775

 

 
70,000

 
250,056

Less — current maturities
 

 
(1,029
)
 
(2,393
)
 

 
(8,000
)
 
(11,422
)
Long-term obligations at September 30, 2013
 
$
173,252

 
$

 
$
3,382

 
$

 
$
62,000

 
$
238,634

The convertible debentures had a principal amount outstanding of $3.6 million as of December 31, 2012. In September 2013, the Company repurchased at par the remaining $3.6 million of principal amount of the convertible debentures outstanding. Interest expense, including contractual interest and discount accretion, which was fully amortized through October 15, 2012, was $29 thousand and $92 thousand for the three- and nine-month periods ended September 30, 2013, respectively, and $3.5 million and $10.4 million for the three- and nine-month periods ended September 30, 2012, respectively. The effective interest rate was 3.5% for the three- and nine-month periods ended September 30, 2013 and 8.4% for the three- and nine-month periods ended September 30, 2012.

(7) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
As of September 30, 2013, the Company had foreign currency forward contracts outstanding with a notional value of $134.2 million, primarily in Australian dollars, British pounds, euros and Mexican pesos, which were not designated as hedges and had a weighted average remaining maturity of two days. Although the Company enters into foreign currency contracts to offset foreign currency exposure related to the notional value of money transfer transactions collected in currencies other than the U.S. dollar and, on occasion, short-term loans payable 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 one 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's derivative contracts are executed with counterparties governed by an International Swaps and Derivatives Association agreement that includes standard netting arrangements; therefore, asset and liability positions from forward contracts and all other foreign exchange transactions with the same counterparty are net settled upon maturity.
The required tabular disclosures for derivative instruments are as follows:
 
 
 
 
Gross Amount of Recognized Assets
 
Gross Amount of Offset in the Consolidated Balance Sheets
 
Net Amount of Assets Presented in the Consolidated Balance Sheets

(in thousands)
 
Consolidated Balance
Sheet Location
 
September 30,
2013
 
December 31, 2012
 
September 30,
2013
 
December 31, 2012
 
September 30,
2013
 
December 31, 2012
Foreign currency
 derivative contracts
 
Other Current Assets
 
$
162

 
$
177

 
$
(73
)
 
$
(142
)
 
$
89

 
$
35

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross Amount of Recognized Liabilities
 
Gross Amount of Offset in the Consolidated Balance Sheets
 
Net Amount of Liabilities Presented in the Consolidated Balance Sheets
(in thousands)
 
Consolidated Balance
Sheet Location
 
September 30,
2013
 
December 31, 2012
 
September 30,
2013
 
December 31, 2012
 
September 30,
2013
 
December 31, 2012
Foreign currency
 derivative contracts
 
Other Current Liabilities
 
$
(137
)
 
$
(142
)
 
$
73

 
$
142

 
$
(64
)
 
$


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Amount of (Loss) Gain Recognized
in Income on Derivative Contracts
 
 
Location of (Loss) Gain Recognized
in Income on Derivative Contracts
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
 
 
2013
 
2012
 
2013
 
2012
Foreign currency derivative contracts
 
Foreign currency exchange gain (loss), net
 
$
(48
)
 
$
46

 
$
(242
)
 
$
755

See Note 8, Fair Value Measurements, for the determination of the fair values of derivatives.

(8) FAIR VALUE MEASUREMENTS
Fair value measurements used in the consolidated financial statements are based upon the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities. 
Level 2 – Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the inputs that market participants would use in pricing.
The following table details financial assets measured and recorded at fair value on a recurring basis:

 
 
 
As of September 30, 2013
(in thousands)
Balance Sheet Classification
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
Foreign currency derivative contracts
Other current assets
 
$

 
$
89

 
$

 
$
89

Foreign currency derivative contracts
Other current liabilities
 
$

 
$
(64
)
 
$

 
$
(64
)
 
 
 
As of December 31, 2012
(in thousands)
Balance Sheet Classification
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
Foreign currency derivative contracts
Other current assets
 
$

 
$
35

 
$

 
$
35


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 Company estimates the fair value of the convertible debentures using quoted prices in inactive markets for identical liabilities (Level 2). As of December 31, 2012, the fair value and carrying amount of the convertible debentures were $3.6 million.

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Contingent Consideration Liability
The contingent consideration liability relating to the Pure Commerce acquisition is recorded at fair value using a Monte Carlo simulation. The significant unobservable inputs used in the fair value measurement of the contingent consideration liability are forecasted financial results, including estimates of future revenues, gross profit, and EBITDA (Level 3). As of the acquisition date, the fair value of the contingent consideration liability was $21.7 million. Changes in any of these inputs could result in a significantly higher or lower fair value measurement. Changes in the fair value of the contingent consideration liability are recorded as income or expense within operating income in our consolidated statements of operations.
During the first nine months of 2013, the Company recorded a $2.4 million foreign currency exchange gain related to this contingent consideration liability as a result of fluctuations in the value of the Australian dollar against the U.S. dollar. In the third quarter of 2013, the Company adjusted to fair value the contingent consideration liability based on its assessment that the performance targets for gross profit and EBITDA would not be met. The change in fair value resulted in the recognition of a $19.3 million gain.
Although certain elements of Pure Commerce’s business plan changed during the first half of 2013, its management team had specific plans in place to achieve the performance targets.  At June 30, 2013, the Company determined that the performance targets were probable of achievement because Pure Commerce’s business can experience significant impacts on results when key customers launch its services and implementation timeframes are usually short. However, as the actual results through the third quarter were realized, the Company determined that delays in implementing contracts with certain merchants and merchant acquirers and lower than expected transaction volume on certain contracts would not allow Pure Commerce to meet the minimum threshold necessary to require the Company to pay contingent consideration. This assessment was primarily due to the short one-year timeframe to achieve the performance targets and the targets’ high sensitivity to changes in performance.  While these factors contributed to Pure Commerce not achieving the performance targets, they are not expected to adversely affect the fair value of Pure Commerce.

(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 cash withdrawal services, 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, foreign currency exchange services and mobile top-up.
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 in its administrative division, “Corporate Services, Eliminations and Other.” These services are not directly identifiable with the Company’s reportable operating segments.The following tables present the segment results of the Company’s operations for the three- and nine-month periods ended September 30, 2013 and 2012:

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For the Three Months Ended September 30, 2013
(in thousands)
 
EFT
Processing
 
epay
 
Money
Transfer
 
Corporate
Services,
Eliminations
and Other
 
Consolidated
Total revenues
 
$
83,594

 
$
182,629

 
$
95,276

 
$
(919
)
 
$
360,580

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Direct operating costs
 
36,576

 
142,284

 
45,588

 
(897
)
 
223,551

Salaries and benefits
 
10,195

 
13,494

 
23,120

 
6,010

 
52,819

Selling, general and administrative
 
5,249

 
10,687

 
14,521

 
2,797

 
33,254

Acquisition-related contingent consideration gain
 
(19,319
)
 

 

 

 
(19,319
)
Depreciation and amortization
 
6,273

 
4,036

 
4,530

 
91

 
14,930

Total operating expenses
 
38,974

 
170,501

 
87,759

 
8,001

 
305,235

Operating income (expense)
 
$
44,620

 
$
12,128

 
$
7,517

 
$
(8,920
)
 
$
55,345


 
 
For the Three Months Ended September 30, 2012
(in thousands)
 
EFT
Processing
 
epay
 
Money
Transfer
 
Corporate
Services,
Eliminations
and Other
 
Consolidated
Total revenues
 
$
64,888

 
$
171,529

 
$
80,042

 
$
(103
)
 
$
316,356

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Direct operating costs
 
30,075

 
131,999

 
38,394

 
(90
)
 
200,378

Salaries and benefits
 
8,700

 
12,717

 
19,450

 
4,682

 
45,549

Selling, general and administrative
 
5,195

 
11,757

 
11,250

 
1,869

 
30,071

Depreciation and amortization
 
6,435

 
4,925

 
4,734

 
69

 
16,163

Total operating expenses
 
50,405

 
161,398

 
73,828

 
6,530

 
292,161

Operating income (expense)
 
$
14,483

 
$
10,131

 
$
6,214

 
$
(6,633
)
 
$
24,195


 
 
For the Nine Months Ended September 30, 2013
(in thousands)
 
EFT
Processing
 
epay
 
Money
Transfer
 
Corporate
Services,
Eliminations
and Other
 
Consolidated
Total revenues
 
$
219,149

 
$
548,867

 
$
271,536

 
$
(1,785
)
 
$
1,037,767

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Direct operating costs
 
104,103

 
424,343

 
130,221

 
(1,734
)
 
656,933

Salaries and benefits
 
29,409

 
41,976

 
64,601

 
17,312

 
153,298

Selling, general and administrative
 
16,530

 
30,689

 
40,621

 
7,874

 
95,714

Acquisition-related contingent consideration gain
 
(19,319
)
 

 

 

 
(19,319
)
Depreciation and amortization
 
22,242

 
12,569

 
13,751

 
276

 
48,838

Total operating expenses
 
152,965

 
509,577

 
249,194

 
23,728

 
935,464

Operating income (expense)
 
$
66,184

 
$
39,290

 
$
22,342

 
$
(25,513
)
 
$
102,303


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For the Nine Months Ended September 30, 2012
(in thousands)
 
EFT
Processing
 
epay
 
Money
Transfer
 
Corporate
Services,
Eliminations
and Other
 
Consolidated
Total revenues
 
$
173,114

 
$
514,543

 
$
228,960

 
$
(262
)
 
$
916,355

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Direct operating costs
 
83,965

 
395,185

 
108,037

 
(222
)
 
586,965

Salaries and benefits
 
24,455

 
38,409

 
56,067

 
15,693

 
134,624

Selling, general and administrative
 
15,128

 
32,563

 
33,578

 
5,469

 
86,738

Depreciation and amortization
 
18,710

 
15,064

 
14,092

 
271

 
48,137

Total operating expenses
 
142,258

 
481,221

 
211,774

 
21,211

 
856,464

Operating income (expense)
 
$
30,856

 
$
33,322

 
$
17,186

 
$
(21,473
)
 
$
59,891


(10) COMMITMENTS
As of September 30, 2013, the Company had $86.6 million of stand-by letters of credit/bank guarantees issued on its behalf, of which $35.2 million are outstanding under the revolving credit facility. The remaining stand-by letters of credit/bank guarantees are collateralized by $5.0 million of cash deposits held by the respective issuing banks.
Under certain circumstances, Euronet grants guarantees in support of obligations of subsidiaries. As of September 30, 2013, the Company had granted off balance sheet guarantees for cash in various ATM networks amounting to $15.8 million over the terms of the cash supply agreements and performance guarantees amounting to approximately $39.2 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. Euronet's 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 September 30, 2013, the balance of ATM network cash for which the Company was responsible was approximately $435 million. The Company maintains insurance policies to mitigate this exposure;
In connection with contracts with financial institutions in the EFT Processing Segment, the Company is responsible for losses suffered by its customers and other parties as a result of the breach of its computer systems, including in particular, losses arising from fraudulent transactions made using information stolen through its processing systems. 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

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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 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 September 30, 2013 or December 31, 2012.

(11) INCOME TAXES
The Company's effective income tax rates were 18.2% and 32.3% for the three-month periods ended September 30, 2013 and 2012, respectively, and 22.3% and 34.4% for the nine-month periods ended September 30, 2013 and 2012, respectively. The effective tax rates were significantly influenced by the acquisition-related contingent consideration gain, foreign currency exchange gains and losses and other non-operating gains, net in the respective periods. Excluding these items from pre-tax income, as well as the related tax effects for these items, the Company's effective tax rates were 32.0% and 34.4% for the three-month periods ended September 30, 2013 and 2012, respectively, and 29.3% and 36.6% for the nine-month periods ended September 30, 2013 and 2012.
The Company's effective tax rate, as adjusted for the items above, for the third quarter 2013 was lower than the applicable statutory tax rate of 35% primarily because of the Company's U.S. income tax positions. The Company's effective tax rate, as adjusted for the items above, for the nine-month period ended September 30, 2013 was lower than the applicable statutory tax rate of 35% primarily because of the Company's U.S. income tax positions and a change in the reserve for uncertain tax benefits. The Company does not have a history of significant taxable income in the U.S., therefore, the Company has recorded a valuation allowance against the tax net operating loss carryforwards. Accordingly, in instances when the Company’s U.S. legal entities generate pre-tax book income, no income tax expense is recognized to the extent there are net operating loss carryforwards to offset pre-tax book income.
During the first nine months of 2013, the Company recorded a $2.2 million decrease in the reserve for uncertain tax benefits related to the closure of an income tax audit in Germany, resulting in a decrease in income tax expense for the nine-month period ended September 30, 2013. In connection with the acquisition of Pure Commerce in January 2013, the Company recorded a $2.0 million reserve for uncertain tax benefits in the opening balance sheet. There were no other material changes in the reserve for unrecognized tax benefits during the nine month period ended September 30, 2013.

(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.
Certain claims arising from such breach were asserted against the Company, and it is possible that additional claims may be asserted in the future. However, the Company maintains insurance to cover the financial exposure for response costs, losses by the card issuer and fines or penalties from incidents of this nature. To date, the aggregate amount of expenses incurred and losses asserted against the Company for which the Company ultimately bore liability have been within the limits of our insurance and the only cost to the Company has been its retention amount under its insurance. The Company does not currently expect the net financial impact of expenses or losses from the breach, after insurance recovery, to be material to the consolidated results of operations or financial condition of the Company.
Expenses related to the breach through December 31, 2012 were $0.5 million, net of $1.9 million in amounts recovered from the Company's insurance carrier. For the first nine months of 2012, the Company incurred $0.5 million in expenses related to the breach, net of insurance recoveries of $1.7 million. No additional related expenses were incurred during the first nine months of 2013, as all losses incurred were covered by insurance.

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Unclaimed property compliance - During the third quarter of 2013, the Company entered into a voluntary disclosure agreement (“VDA”) with the Secretary of State of the State of Delaware to determine compliance with Delaware unclaimed property laws. Types of property under examination include, but are not limited to, payroll checks, accounts payable checks and accounts receivable credits for the period 1996 through 2007. The total amount of exposure of this contingency is dependent upon the manner in which the State of Delaware applies its unclaimed property laws. The Company does not expect the outcome of this matter to have a material adverse effect on the consolidated results of operations or financial condition of the Company.
Legal Proceedings
During 2012, the Company was served with a class action lawsuit filed by a former employee alleging wage and hour violations relating to meal and rest period requirements. The Company has reached an agreement to settle this lawsuit for an immaterial amount and, together with the plaintiffs in the case, is following court procedures to finalize the settlement. The Company expects such procedures to be completed within the next twelve months.
From time to time, the Company is a party to legal or regulatory proceedings arising in the ordinary course of its business. Currently, there are no legal proceedings or regulatory findings 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,” "our" 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”), card outsourcing, card issuing and merchant acquiring services; electronic distribution of prepaid mobile airtime and other electronic payment products and global consumer money transfer services. We operate in the following three segments:
The EFT Processing Segment, which processes transactions for a network of 17,795 ATMs and approximately 68,000 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, dynamic currency conversion, and other value added services. 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. We operate a network of approximately 636,000 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 and gift card distribution and processing services in most of our markets.
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, Company-owned stores (primarily in North America and Europe) and via a desktop or mobile device at riamoneytransfer.com, disbursing money transfers through a worldwide correspondent network that includes approximately 207,000 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, three in Asia Pacific and two in North America. We have 30 principal offices in Europe, six in North America, nine in Asia Pacific, three in the Middle East, two in South America, and one in Africa. Our executive offices are located in Leawood, Kansas, USA. With approximately 75% 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 exchange margin. Each operating segment’s sources of revenues are described below.
EFT Processing Segment — Revenues in the EFT Processing Segment, which represented approximately 23% and 21% of our total consolidated revenues for the third quarter and first nine months of 2013, respectively, 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, foreign currency exchange margin on dynamic currency conversion transactions, and other value added services such as advertising, prepaid telecommunication recharges, bill payment, and money transfers provided over ATMs. 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 51% and 53% of our total consolidated revenues for the third quarter and first nine months of 2013, respectively, are derived from (i) commissions or processing fees received from mobile phone operators for the sale and distribution of prepaid mobile airtime and, (ii) commissions earned from the distribution of other electronic payment products, gift cards, 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 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 26% of our total consolidated revenues for both the third quarter and first nine months of 2013, 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 network in place comprised of agents, Company-owned stores, primarily in North America and Europe and our riamoneytransfer.com website, along with 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
Our expansion plans and opportunities are currently focused on six primary areas:
signing new outsourced ATM and POS terminal management contracts and adding ATMs to our owned network;
increasing transactions processed on our network of owned and operated ATMs and POS devices;
expanding value added services in our EFT Processing Segment, including the sale of dynamic currency conversion services to banks and retailers;
expanding our epay processing network and portfolio of electronic payment products;
expanding our money transfer and bill payment network; and
developing our credit and debit card outsourcing business.
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 and revenues;
the expansion of our various business lines in markets where we operate and in new markets;
our entry 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;

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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 maintain and renew existing agreements, and 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 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 develop and effectively market additional value added services;
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 continued 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;

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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.


SEGMENT SUMMARY RESULTS OF OPERATIONS
Revenues and operating income by segment for the three- and nine-month periods ended September 30, 2013 and 2012 are summarized in the tables below:
 
 
Revenues for the Three Months Ended September 30,
 
Year-over-Year Change
 
Revenues for the Nine Months Ended
September 30,
 
Year-over-Year Change
(dollar amounts in thousands)
 
2013
 
2012
 
Increase
(Decrease)Amount
 
Increase
Percent
 
2013
 
2012
 
Increase
(Decrease)Amount
 
Increase
Percent
EFT Processing
 
$
83,594

 
$
64,888

 
$
18,706

 
29
%
 
$
219,149

 
$
173,114

 
$
46,035

 
27
%
epay
 
182,629

 
171,529

 
11,100

 
6
%
 
548,867

 
514,543

 
34,324

 
7
%
Money Transfer
 
95,276

 
80,042

 
15,234

 
19
%
 
271,536

 
228,960

 
42,576

 
19
%
Total
 
361,499

 
316,459

 
45,040

 
14
%
 
1,039,552

 
916,617

 
122,935

 
13
%
Eliminations
 
(919
)
 
(103
)
 
(816
)
 
n/m

 
(1,785
)
 
(262
)
 
(1,523
)
 
n/m

Total
 
$
360,580

 
$
316,356

 
$
44,224

 
14
%
 
$
1,037,767

 
$
916,355

 
$
121,412

 
13
%
______________________
n/m — Not meaningful

 
 
Operating Income (Expense) for the Three Months Ended September 30,
 
Year-over-Year Change
 
Operating Income (Expense) for the Nine Months Ended September 30,
 
Year-over-Year Change
(dollar amounts in thousands)
 
2013
 
2012
 
Increase
(Decrease)Amount
 
Increase
Percent
 
2013
 
2012
 
Increase
(Decrease)Amount
 
Increase
Percent
EFT Processing (1)
 
$
44,620

 
$
14,483

 
$
30,137

 
208
%
 
$
66,184

 
$
30,856

 
$
35,328

 
114
%
epay
 
12,128

 
10,131

 
1,997

 
20
%
 
39,290

 
33,322

 
5,968

 
18
%
Money Transfer
 
7,517

 
6,214

 
1,303

 
21
%
 
22,342

 
17,186

 
5,156

 
30
%
Total
 
64,265

 
30,828

 
33,437

 
108
%
 
127,816

 
81,364

 
46,452

 
57
%
Corporate services, eliminations and other
 
(8,920
)
 
(6,633
)
 
(2,287
)
 
34
%
 
(25,513
)
 
(21,473
)
 
(4,040
)
 
19
%
Total (1)
 
$
55,345

 
$
24,195

 
$
31,150

 
129
%
 
$
102,303

 
$
59,891

 
$
42,412

 
71
%
______________________
(1) For the three- and nine-month periods ended September 30, 2013, both operating income for our EFT Processing segment and total consolidated operating income include a $19.3 million gain related to the change in fair value of an acquisition-related contingent consideration liability. Adjusted for this gain, operating income for our EFT processing segment would have been $25.3 million and $46.9 million for the three- and nine month periods ended September 30, 2013, respectively. Additionally, adjusted for this gain, total consolidated operating income would have been $36.0 million and $83.0 million for the three and nine-month periods ended September 30, 2013, respectively.

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Impact of changes in foreign currency exchange rates
Because our revenues and local expenses are recorded in the functional currencies of our operating entities, amounts we earned for the third quarter and first nine months of 2013 reflected the impact of changes in currency values relative to the U.S. dollar. Considering the results by country and the associated functional currency, our consolidated operating income was not significantly influenced by the changes in foreign currency exchange rates when compared to the third quarter and first nine-months of 2012. 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 third quarter and first nine months of 2012 to the same periods of 2013 for the countries and regions in which we have our most significant operations:

 
 
Average Translation Rate
 
 
 
Average Translation Rate
 
 
 
 
Three Months Ended September 30,
 
Increase
(Decrease)Percent
 
Nine Months Ended September 30,
 
Increase
(Decrease)Percent
Currency (dollars per foreign currency)
 
2013
 
2012
 
 
2013
 
2012
 
Australian dollar
 
$
0.9155

 
$
1.0391

 
(12
)%
 
$
0.9812

 
$
1.0349

 
(5
)%
Brazilian real
 
$
0.4373

 
$
0.4936

 
(11
)%
 
$
0.4740

 
$
0.5237

 
(9
)%
British pound
 
$
1.5517

 
$
1.5808

 
(2
)%
 
$
1.5464

 
$
1.5784

 
(2
)%
euro
 
$
1.3256

 
$
1.2520

 
6
 %
 
$
1.3174

 
$
1.2825

 
3
 %
Hungarian forint
 
$
0.0045

 
$
0.0044

 
2
 %
 
$
0.0044

 
$
0.0044

 
 %
Indian rupee
 
$
0.0161

 
$
0.0182

 
(11
)%
 
$
0.0175

 
$
0.0189

 
(7
)%
Polish zloty
 
$
0.3126

 
$
0.3033

 
3
 %
 
$
0.3140

 
$
0.3054

 
3
 %
COMPARISON OF OPERATING RESULTS FOR THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2013 AND 2012
EFT PROCESSING SEGMENT
The following table presents the results of operations for the three- and nine-month periods ended September 30, 2013 and 2012 for our EFT Processing Segment:
 
 
Three Months Ended
September 30,
 
Year-over-Year Change
 
Nine Months Ended
September 30,
 
Year-over-Year Change
(dollar amounts in thousands)
 
2013
 
2012
 
Increase
(Decrease)Percent
 
Increase
(Decrease)Percent
 
2013
 
2012
 
Increase Amount
 
Increase Percent
Total revenues
 
$
83,594

 
$
64,888

 
$
18,706

 
29
 %
 
$
219,149

 
$
173,114

 
$
46,035

 
27
%
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Direct operating costs
 
36,576

 
30,075

 
6,501

 
22
 %
 
104,103

 
83,965

 
20,138

 
24
%
Salaries and benefits
 
10,195

 
8,700

 
1,495

 
17
 %
 
29,409

 
24,455

 
4,954

 
20
%
Selling, general and administrative
 
5,249

 
5,195

 
54

 
1
 %
 
16,530

 
15,128

 
1,402

 
9
%
Acquisition-related contingent consideration gain
 
(19,319
)
 

 
(19,319
)
 
n/m

 
(19,319
)
 

 
(19,319
)
 
n/m

Depreciation and amortization
 
6,273

 
6,435

 
(162
)
 
(3
)%
 
22,242

 
18,710

 
3,532

 
19
%
Total operating expenses
 
38,974

 
50,405

 
(11,431
)
 
(23
)%
 
152,965

 
142,258

 
10,707

 
8
%
Operating income
 
$
44,620

 
$
14,483

 
$
30,137

 
208
 %
 
$
66,184

 
$
30,856

 
$
35,328

 
114
%
Transactions processed (millions)
 
304

 
304

 

 
n/m

 
877

 
865

 
12

 
1
%
ATMs as of September 30,
 
17,795

 
17,370

 
425

 
2
 %
 
17,795

 
17,370

 
425

 
2
%
Average ATMs
 
17,595

 
17,295

 
300

 
2
 %
 
17,671

 
16,414

 
1,257

 
8
%

n/m — Not meaningful.

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Revenues
Our revenues for the third quarter and first nine months of 2013 increased when compared to the same periods of 2012, primarily due to an increase in the number of ATMs under management, an increase in transactions processed on brown label ATMs in India, an increase in demand for dynamic currency conversion ("DCC") and other valued added services on our ATMs under management, and the impact of DCC revenues earned on POS devices from our acquisition of Pure Commerce Pty Limited ("Pure Commerce") in January 2013.
Average monthly revenues per ATM were $1,584 for the third quarter and $1,378 for the first nine months of 2013 compared to $1,251 for the third quarter and $1,172 for the first nine months of 2012. Revenues per transaction were $0.27 for the third quarter and $0.25 for the first nine months of 2013 compared to $0.21 for the third quarter and $0.20 for the first nine months of 2012. These increases were primarily the result of revenue growth from DCC and value added services, both of which earn higher revenues per transaction than other ATM services and the cancellation of an ATM driving and managed services contract in India. The revenues per ATM and per transaction earned under the canceled contract were significantly lower than other ATM services.
Direct operating costs
Direct operating costs consist primarily of site rental fees, cash delivery costs, cash supply costs, maintenance, insurance, telecommunications, the cost of data center operations-related personnel, as well as the processing centers’ facility-related costs and other processing center-related expenses and commissions paid to retail merchants, banks and card processors involved with POS DCC transactions. Direct operating costs increased in the third quarter and first nine months of 2013 compared to the same periods of 2012, primarily due to an increase in the number of ATMs under management and the acquisition of Pure Commerce.
Gross profit
Gross profit, which is calculated as revenues less direct operating costs, was $47.0 million for the third quarter and $115.0 million for the first nine months of 2013 compared to $34.8 million for the third quarter and $89.1 million for the first nine months of 2012. This increase was primarily due to the growth in revenues from DCC and value added services, including revenues from DCC earned on POS devices from our acquisition of Pure Commerce, the increase in ATMs under management and the increase in transactions processed on brown label ATMs in India. Gross profit as a percentage of revenues (“gross margin”) was 56.2% for the third quarter and 52.5% for the first nine months of 2013 compared to 53.7% for the third quarter and 51.5% for the first nine months of 2012. This increase was primarily due to the increase in revenues from DCC and value added services discussed above, both of which earn a higher gross profit than other services.
Salaries and benefits
The increase in salaries and benefits for the third quarter and first nine months of 2013 compared to the same periods of 2012 was primarily due to adding employees to support the growth in ATMs under management, along with the impact of our acquisition of Pure Commerce. As a percentage of revenues, these costs decreased to 12.2% for the third quarter and 13.4% for the first nine months of 2013 from 13.4% for the third quarter and 14.1% for the first nine months of 2012. This decrease was primarily due to the growth in revenues earned from DCC and value added services on our ATMs under management, which require minimal incremental support costs.
Selling, general and administrative
The increase in selling, general and administrative expenses for the third quarter and first nine months of 2013 compared to the same periods of 2012 was primarily due to the impact of our acquisition of Pure Commerce, partly offset by a decrease in bad debt expense due to the favorable resolution of a specific dispute. The increase for the first nine months of 2013 compared to the same period of 2012 was also due to an increase in professional expenses during the first half of 2013. As a percentage of revenues, these expenses decreased to 6.3% for the third quarter and 7.5% for the first nine months of 2013 from 8.0% for the third quarter and 8.7% for the first nine months of 2012, primarily due to the growth in revenues earned from DCC and value added services on our ATMs under management, which require minimal incremental support costs.

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Table of Contents

Acquisition-related contingent consideration gain
In the third quarter of 2013, the Company adjusted to fair value the contingent consideration liability based on its assessment that the performance targets for gross profit and EBITDA would not be met. The change in fair value resulted in the recognition of a $19.3 million gain.
Although certain elements of Pure Commerce’s business plan changed during the first half of 2013, its management team had specific plans in place to achieve the performance targets.  At June 30, 2013, the Company determined that the performance targets were probable of achievement because Pure Commerce’s business can experience significant impacts on results when key customers launch its services and implementation timeframes are usually short. However, as the actual results through the third quarter were realized, the Company determined that delays in implementing contracts with certain merchants and merchant acquirers and lower than expected transaction volume on certain contracts would not allow Pure Commerce to meet the minimum threshold necessary to require the Company to pay contingent consideration. This assessment was primarily due to the short one-year timeframe to achieve the performance targets and the targets’ high sensitivity to changes in performance.  While these factors contributed to Pure Commerce not achieving the performance targets, they are not expected to adversely affect the fair value of Pure Commerce.
Depreciation and amortization
Depreciation and amortization expense decreased for the third quarter of 2013 compared to the same period of 2012, primarily due to final purchase accounting true-up adjustments to certain acquired intangible assets related to the acquisition of Pure Commerce, partly offset by an increase in depreciation of ATMs under management. Depreciation and amortization expense increased for the first nine months of 2013 compared to the same period of 2012, primarily due to the amortization of intangible assets related to the acquisition of Pure Commerce recorded during the first half of 2013 and an increase in deprecation of ATMs under management. As a percentage of revenues, depreciation and amortization expense decreased to 7.5% for the third quarter and 10.1% for the first nine months of 2013 from 9.9% for the third quarter and 10.8% for the first nine months of 2012, mainly due to the growth in revenues from DCC and value added services on our ATMs under management. The decrease for the third quarter of 2013 compared to the same period of 2012 is also due to the purchase accounting true-up adjustments discussed above.
Operating income
Operating income increased for the third quarter and first nine months of 2013 compared to the same periods of 2012, primarily due to the acquisition-related contingent consideration gain, an increase in the number of ATMs under management, an increase in the number of transactions processed on brown label ATMs in India, growth in revenues earned from DCC and value added services and the decrease in bad debt expense. The increase in operating income for the first nine months of 2013 compared to the same period of 2012 was partly offset by the increase in amortization expense. Excluding the acquisition-related contingent consideration gain, operating income as a percentage of revenues (“operating margin”) increased to 30.3% for the third quarter and 21.4% for the first nine months of 2013 from 22.3% for the third quarter and 17.8% for the first nine months of 2012 and operating income per transaction increased to $0.08 for the third quarter and $0.05 for the first nine months of 2013 from $0.05 for the third quarter and $0.04 for the first nine months of 2012. Theses increases were primarily due to the increase in revenues earned from DCC and value added services on our ATMs under management.


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Table of Contents

EPAY SEGMENT
The following table presents the results of operations for the three- and nine-month periods ended September 30, 2013 and 2012 for our epay Segment:
 
 
Three Months Ended
September 30,
 
Year-over-Year Change
 
Nine Months Ended
September 30,
 
Year-over-Year Change
(dollar amounts in thousands)
 
2013
 
2012
 
Increase
(Decrease)Amount
 
Increase
(Decrease)Percent
 
2013
 
2012
 
Increase
(Decrease)Amount
 
Increase
(Decrease)Percent
Total revenues
 
$
182,629

 
$
171,529

 
$
11,100

 
6
 %
 
$
548,867

 
$
514,543

 
$
34,324

 
7
 %
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Direct operating costs
 
142,284

 
131,999

 
10,285

 
8
 %
 
424,343

 
395,185

 
29,158

 
7
 %
Salaries and benefits
 
13,494

 
12,717

 
777

 
6
 %
 
41,976

 
38,409

 
3,567

 
9
 %
Selling, general and administrative
 
10,687

 
11,757

 
(1,070
)
 
(9
)%
 
30,689

 
32,563

 
(1,874
)
 
(6
)%
Depreciation and amortization
 
4,036

 
4,925

 
(889
)
 
(18
)%
 
12,569

 
15,064

 
(2,495
)
 
(17
)%
Total operating expenses
 
170,501

 
161,398

 
9,103

 
6
 %
 
509,577

 
481,221

 
28,356

 
6
 %
Operating income
 
$
12,128

 
$
10,131

 
$
1,997

 
20
 %
 
$
39,290

 
$
33,322

 
$
5,968

 
18
 %
Transactions processed (millions)
 
269

 
277

 
(8
)
 
(3
)%
 
829

 
815

 
14

 
2
 %
Revenues
The increase in revenues for the third quarter and first nine months of 2013 compared to the same periods of 2012 was primarily due to an increase in the number of prepaid mobile transactions processed in the U.S., increased demand for non-mobile products in Germany, an increase in voucher redemptions and physical gift fulfillments at our cadooz subsidiary, and the impact of our acquisition of ezi-pay Limited ("ezi-pay") in November 2012. These increases were partly offset by revenue declines in Australia and the U.K. as a result of competitive pressures and certain mobile operators modifying their distribution strategies to drive consumer demand for top-up services to on-line or mobile device channels.
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) valued added services, (iii) developing markets or markets in which there is organic growth in the electronic top-up sector overall, and (iv) acquisitions, if available and commercially appropriate.
Revenues per transaction were $0.68 for the third quarter and $0.66 for the first nine months of 2013 compared to $0.62 for the third quarter and $0.63 for the first nine months of 2012. The increase in revenues per transaction was mainly due to an increase in transactions processed at our cadooz subsidiary, where revenues are recorded at gross value, in contrast to our other electronic payment products which are recorded at net value, and other non-mobile products. These increases were partly offset by a shift in the mix of transactions, particularly due to growth in India, where revenues per transaction are considerably lower than average and a decrease in transactions processed at our ATX subsidiary. The decrease in the number of transactions processed for the third quarter of 2013 compared to the same period of 2012, and partial offset to the increase in the number of transactions processed for the first nine months of 2013 compared to the same period of 2012, was due to a decrease in transactions processed at our ATX subsidiary. At our ATX subsidiary and in India we provide only transaction processing 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 for the third quarter and first nine months of 2013 compared to the same periods of 2012 was primarily due to the growth in transactions processed in the U.S. and Germany, increased voucher redemptions and physical gifts fulfilled at our cadooz subsidiary, increased commissions costs in Brazil, and the impact of our acquisition of ezi-pay. These increases were partly offset by the decrease in the number of transactions processed in Australia and the U.K.

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Table of Contents

Gross profit
Gross profit, which represents revenues less direct costs, was $40.3 million for the third quarter and $124.5 million for the first nine months of 2013 compared to $39.5 million for the third quarter and $119.4 million for the first nine months of 2012. The increase in gross profit was primarily due to the increase in transactions processed in Germany (mainly from increased demand for non-mobile products), the U.S. and at our cadooz subsidiary, along with the impact of our acquisition of ezi-pay. These increases were partly offset by the decrease in transactions processed in Australia and at our ATX subsidiary, and the increase in commission costs in Brazil, as a result of a larger percentage of transactions being conducted through large retailers. Gross profit per transaction increased slightly to $0.15 for the third quarter of 2013 from $0.14 for the third quarter of 2012, primarily due to the growth in revenues at our cadooz subsidiary. Gross profit per transaction was unchanged at $0.15 for the first nine months of 2013 and 2012.
Salaries and benefits
The increase in salaries and benefits for the third quarter and first nine months of 2013 compared to the same periods of 2012 was primarily due to an increase in staff in Germany, the U.S. and at our cadooz subsidiary to support the increases in transactions processed discussed above and the impact of our acquisition of ezi-pay. These increases were partly offset by a decrease in salaries and benefits in Brazil in response to a decrease in revenues. As a percentage of revenues, salaries and benefits was unchanged at 7.4% for both the third quarter of 2013 and 2012 and increased slightly to 7.6% for the first nine months of 2013 from 7.5% for the same period of 2012.
Selling, general and administrative
The decrease in selling, general and administrative expenses for the third quarter and first nine months of 2013 compared to the same periods of 2012 was primarily due to a decrease in professional fees, partly offset by the impact of our acquisition of ezi-pay. Additionally, the decrease for the first nine months of 2013 compared to the same period of 2012 was due to a decrease in bad debt expense during the first half of 2013. As a percentage of revenues, selling, general and administrative expenses decreased to 5.9% for the third quarter and 5.6% for the first nine months of 2013 from 6.9% for the third quarter and 6.3% for the first nine months of 2012, primarily due to the decrease in professional fees and the increase in revenues in the U.S., in Germany, and at our cadooz subsidiary, which did not require similar increases in support costs.
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 decreased for the third quarter and first nine months of 2013 compared to the same periods of 2012. As a percentage of revenues, these expenses decreased to 2.2% for the third quarter and 2.3% for the first nine months of 2013 from 2.9% for both the third quarter and first nine months of 2012. These decreases were the result of certain acquired intangible assets becoming fully amortized during 2012 and first quarter of 2013, partly offset by the impact of our acquisition of ezi-pay.
Operating income
Operating income increased for the third quarter and first nine months of 2013 compared to the same periods of 2012, primarily due to the growth in transactions processed in Germany and the U.S., along with the operating income from the acquisition ezi-pay and the decrease in amortization expense and professional fees. The increase for the first nine months of 2013 compared to the same period of 2012 was also due to an increase in transactions processed at our cadooz subsidiary and the decrease in bad debt expense. These increases were partly offset by declines in revenues and transactions processed in Australia and increased commission costs in Brazil. Operating margin was 6.6% for the third quarter and 7.2% for the first nine months of 2013 compared to 5.9% for the third quarter and 6.5% for the first nine months of 2012. This increase was primarily due to the increase in revenues discussed above, along with the decrease in amortization expense, partly offset by increased commission costs in Brazil. Operating income per transaction increased to $0.05 for both the third quarter and first nine months of 2013 from $0.04 for the same periods of 2012.
 

25

Table of Contents

MONEY TRANSFER SEGMENT
The following tables present the results of operations for the three- and nine-month periods ended September 30, 2013 and 2012 for the Money Transfer Segment:
 
 
Three Months Ended
September 30,
 
Year-over-Year Change
 
Nine Months Ended
September 30,
 
Year-over-Year Change
(dollar amounts in thousands)
 
2013
 
2012
 
Increase
(Decrease)Amount
 
Increase
(Decrease)Percent
 
2013
 
2012
 
Increase
(Decrease)Amount
 
Increase
(Decrease)Percent
Total revenues
 
$
95,276

 
$
80,042

 
$
15,234

 
19
 %
 
$
271,536

 
$
228,960

 
$
42,576

 
19
 %
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Direct operating costs
 
45,588

 
38,394

 
7,194

 
19
 %
 
130,221

 
108,037

 
22,184

 
21
 %
Salaries and benefits
 
23,120

 
19,450

 
3,670

 
19
 %
 
64,601

 
56,067

 
8,534

 
15
 %
Selling, general and administrative
 
14,521

 
11,250

 
3,271

 
29