Document
 
 
 
 
 
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, 2017
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period
to
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o
Emerging growth company o
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
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 26, 2017, Euronet Worldwide, Inc. had 52,681,034 shares of Common Stock outstanding.
 
 
 
 
 



EURONET WORLDWIDE, INC. AND SUBSIDIARIES
Table of Contents
 
 
Page
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
Item 1.
Item 1A.
Item 2.
Item 6.
 
 
 
 


Table of Contents

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

EURONET WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
 
As of
 
September 30,
2017
 
December 31,
2016
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,062,241

 
$
734,414

Restricted cash
113,617

 
77,674

Inventory — PINs and other
49,108

 
78,115

Trade accounts receivable, net of allowances for doubtful accounts of $20,033 at September 30, 2017 and $18,369 at December 31, 2016
547,383

 
502,989

Prepaid expenses and other current assets
152,913

 
191,796

Total current assets
1,925,262

 
1,584,988

Property and equipment, net of accumulated depreciation of $325,521 at September 30, 2017 and $262,470 at December 31, 2016
250,436

 
202,145

Goodwill
743,860

 
689,713

Acquired intangible assets, net of accumulated amortization of $176,495 at September 30, 2017 and $150,347 at December 31, 2016
155,155

 
165,331

Other assets, net of accumulated amortization of $42,549 at September 30, 2017 and $36,984 at December 31, 2016
103,208

 
70,695

Total assets
$
3,177,921

 
$
2,712,872

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Trade accounts payable
$
365,952

 
$
456,682

Accrued expenses and other current liabilities
704,200

 
615,153

Current portion of capital lease obligations
4,977

 
3,293

Short-term debt obligations and current maturities of long-term debt obligations
136,896

 
32,161

Income taxes payable
41,883

 
27,611

Deferred revenue
45,218

 
44,200

Total current liabilities
1,299,126

 
1,179,100

Debt obligations, net of current portion
592,924

 
561,663

Capital lease obligations, net of current portion
9,168

 
6,969

Deferred income taxes
46,361

 
44,079

Other long-term liabilities
32,828

 
20,504

Total liabilities
1,980,407

 
1,812,315

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; 58,758,343 issued at September 30, 2017 and 58,389,242 issued at December 31, 2016
1,175

 
1,168

Additional paid-in-capital
1,065,987

 
1,045,663

Treasury stock, at cost, 6,088,055 shares at September 30, 2017 and 6,085,841 shares at December 31, 2016
(216,843
)
 
(215,462
)
Retained earnings
459,887

 
278,842

Accumulated other comprehensive loss
(113,523
)
 
(210,662
)
Total Euronet Worldwide, Inc. stockholders’ equity
1,196,683

 
899,549

Noncontrolling interests
831

 
1,008

Total equity
1,197,514

 
900,557

Total liabilities and equity
$
3,177,921

 
$
2,712,872

See accompanying notes to the unaudited consolidated financial statements.

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Table of Contents

EURONET WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands, except share and per share data)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Revenues
$
637,834

 
$
524,025

 
$
1,647,777

 
$
1,438,786

Operating expenses:
 
 
 
 
 
 
 
Direct operating costs
364,815

 
300,159

 
978,768

 
853,544

Salaries and benefits
82,134

 
71,899

 
232,617

 
212,974

Selling, general and administrative
49,279

 
41,379

 
139,708

 
121,678

Acquired intangible assets impairment

 

 
2,286

 

Depreciation and amortization
24,705

 
20,120

 
69,520

 
58,923

Total operating expenses
520,933

 
433,557

 
1,422,899

 
1,247,119

Operating income
116,901

 
90,468

 
224,878

 
191,667

Other income (expense):
 
 
 
 
 
 
 
Interest income
380

 
349

 
2,009

 
1,244

Interest expense
(9,534
)
 
(7,724
)
 
(25,058
)
 
(20,968
)
Foreign currency exchange gain (loss), net
8,179

 
(1,527
)
 
21,035

 
(1,299
)
Other gains

 

 
35

 
19,903

Other expense, net
(975
)
 
(8,902
)
 
(1,979
)
 
(1,120
)
Income before income taxes
115,926

 
81,566

 
222,899

 
190,547

Income tax expense
(15,573
)
 
(20,784
)
 
(43,130
)
 
(45,104
)
Net income
100,353

 
60,782

 
179,769

 
145,443

Net (income) loss attributable to noncontrolling interests
(63
)
 
(49
)
 
9

 
61

Net income attributable to Euronet Worldwide, Inc.
$
100,290

 
$
60,733

 
$
179,778

 
$
145,504

 
 
 
 
 
 
 
 
Earnings per share attributable to Euronet Worldwide, Inc. stockholders:
 
 
 
 
 
 
 
Basic
$
1.91

 
$
1.16

 
$
3.43

 
$
2.78

Diluted
$
1.80

 
$
1.11

 
$
3.23

 
$
2.66

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
52,590,837

 
52,134,500

 
52,463,511

 
52,293,808

Diluted
55,784,485

 
54,523,211

 
55,582,583

 
54,641,388

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,
 
2017
 
2016
 
2017
 
2016
Net income
$
100,353

 
$
60,782

 
$
179,769

 
$
145,443

Translation adjustment
26,703

 
6,849

 
97,311

 
13,522

Comprehensive income
127,056

 
67,631

 
277,080

 
158,965

Comprehensive (income) loss attributable to noncontrolling interests
(113
)
 
(64
)
 
(163
)
 
14

Comprehensive income attributable to Euronet Worldwide, Inc.
$
126,943

 
$
67,567

 
$
276,917

 
$
158,979

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)
 
Nine Months Ended
September 30,
 
2017
 
2016
Net income
$
179,769

 
$
145,443

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
69,520

 
58,923

Share-based compensation
11,817

 
11,352

Unrealized foreign exchange (gain) loss, net
(21,035
)
 
1,299

Deferred income taxes
(14,856
)
 
993

Accretion of convertible debt discount and amortization of debt issuance costs
10,068

 
9,056

Gain on sale of investment

 
(19,449
)
Non-cash impairment of acquired intangible assets
2,286

 

Changes in working capital, net of amounts acquired:
 
 
 
Income taxes payable, net
10,924

 
16,006

Restricted cash
(3,633
)
 
(10,227
)
Inventory — PINs and other
33,712

 
25,948

Trade accounts receivable
(7,861
)
 
54,356

Prepaid expenses and other current assets
43,826

 
(76,594
)
Trade accounts payable
(118,677
)
 
(133,207
)
Deferred revenue
(2,497
)
 
3,181

Accrued expenses and other current liabilities
30,678

 
135,431

Changes in noncurrent assets and liabilities
6,455

 
(5,020
)
Net cash provided by operating activities
230,496

 
217,491

Cash flows from investing activities:
 
 
 
Acquisitions, net of cash acquired

 
(2,183
)
Purchases of property and equipment
(70,871
)
 
(61,597
)
Purchases of other long-term assets
(4,651
)
 
(4,501
)
Proceeds from sale of investment

 
11,900

Other, net
1,499

 
800

Net cash used in investing activities
(74,023
)
 
(55,581
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of shares
8,328

 
5,098

Repurchase of shares
(2,310
)
 
(76,510
)
Borrowings from revolving credit agreements
1,839,963

 
1,961,814

Repayments of revolving credit agreements
(1,808,695
)
 
(1,855,053
)
Repayments of long-term debt obligations
(6,563
)
 
(5,156
)
Repayments of capital lease obligations
(3,473
)
 
(1,997
)
Borrowings from short-term debt obligations, net
99,081

 
2,290

Other, net
284

 
748

Net cash provided by financing activities
126,615

 
31,234

Effect of exchange rate changes on cash and cash equivalents
44,739

 
10,634

Increase in cash and cash equivalents
327,827

 
203,778

Cash and cash equivalents at beginning of period
734,414

 
457,518

 
 
 
 
Cash and cash equivalents at end of period
$
1,062,241

 
$
661,296

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Interest paid during the period
$
17,359

 
$
12,598

Income taxes paid during the period
$
34,769

 
$
31,751

Supplemental disclosure of non-cash investing and financing activities
 
 
 
Non-cash consideration received from sale of investment
$

 
$
7,549

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. (together with its subsidiaries, the “Company” or “Euronet”) is a leading electronic payments provider. Euronet offers payment and transaction processing and distribution solutions to financial institutions, retailers, service providers and individual consumers. Euronet's primary product offerings include comprehensive automated teller machine (“ATM”), point-of-sale (“POS”), card outsourcing, card issuing and merchant acquiring services, software solutions, electronic distribution of prepaid mobile airtime and other electronic payment products, foreign currency exchange services and global 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 only of normal recurring adjustments) necessary to fairly present the consolidated financial position and the results of operations, comprehensive income and cash flows for the interim periods. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2016, including the notes thereto, set forth in the Company’s 2016 Annual Report on Form 10-K.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reported period. Significant items subject to such estimates and assumptions include computing income taxes, estimating the useful lives and potential impairment of long-lived assets and goodwill, as well as allocating the purchase price to assets acquired and liabilities assumed in acquisitions and revenue recognition. Actual results could differ from those estimates. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year ending December 31, 2017.
Seasonality
Euronet’s EFT Processing Segment experiences its heaviest demand for dynamic currency conversion ("DCC") services during the third quarter of the fiscal year, coinciding with tourism season. Additionally, the EFT Processing and epay Segments are impacted by seasonality during the fourth quarter and the first quarter of each year due to higher transaction levels during the holiday season and lower levels following the holiday season. Seasonality in the Money Transfer Segment varies by regions of the world. In most markets, Euronet 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 experiences its lowest transaction levels during the first quarter of each year.
(2) RECENTLY ISSUED AND ADOPTED ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In July 2015, the FASB approved a one-year deferral of the effective date of the new revenue recognition standard. The new standard will become effective for the Company on January 1, 2018. The standard permits the use of either the full retrospective or modified retrospective transition method.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue versus Net). In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing. In May 2016, the FASB issued ASU 2016-11, Revenue from Contracts with Customers (Topic 606) and Derivatives and Hedging (Topic 815) - Rescission of SEC Guidance Because of ASU 2014-09 and 2014-16, and ASU 2016-12, Revenue from Contracts with Customers (Topic 606) - Narrow Scope Improvements and Practical Expedients. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers (Topic 606). These ASUs clarify the implementation guidance on a few narrow areas, make minor corrections and adds some practical expedients to the guidance in Topic 606.

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Table of Contents

Lastly, in February 2017, the FASB issued ASU 2017-05, Other Income -Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, which clarifies the scope of asset derecognition guidance and provide guidance on partial sales of nonfinancial assets. This ASU clarifies the scope and accounting of a financial asset that meets the definition of an “in-substance nonfinancial asset” and defines the term, “in-substance nonfinancial asset.” This ASU must be adopted at the same time as ASC 606.
The Company has performed a review of the requirements of the new revenue standards and is in the process of reviewing customer contracts under the new revenue standards but does not expect the new revenue standards will have a material impact on the timing of revenue recognition on its consolidated financial statements. The Company continues to assess all potential effects of the standards and it believes the principal versus agent guidance will affect the presentation and classification of revenue for certain epay and EFT segment arrangements. The Company estimates revenue would have been approximately $125 million to $200 million greater in 2016 under the new standard due to the change in presentation and classification of certain revenue for the epay segment. The Company will continue to update its assessment of the effect the new revenue standards will have on its consolidated financial statements and will disclose the final determination of the transition method and material effects, if any, when known.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which will update the existing guidance on accounting for leases and require new qualitative and quantitative disclosures about the Company’s leasing activities. The new standard requires lessees to account for all leases on the balance sheet, except for certain short-term leases that have a maximum possible lease term of 12 months. The accounting for lessors is largely unchanged from the previous accounting guidance, except for leverage lease accounting which is not permitted for leases entered into or modified after the effective date of the new standard. The new standard is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods, with early adoption permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that the Company may elect to apply. The Company is currently evaluating the expected impact of the adoption of this standard on its consolidated financial statements and related disclosures.
In March 2016, FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which addresses how companies account for certain aspects of share-based payments to employees. This ASU requires all excess tax benefits and tax deficiencies be recognized in the statement of income as a component of income tax expense or benefit. The tax effects of exercised, expired or vested awards are treated as discrete items in the reporting period in which they occur and may result in increased volatility in the Company's effective tax rate. As part of the adoption of this standard during the first quarter, the Company was required to recognize previously unrecognized excess tax benefits on a modified retrospective basis and record an adjustment to deferred tax assets and retained earnings. Additionally, the Company applied the prospective transition method for the presentation of excess tax benefits from a financing activity to an operating activity in the Company’s consolidated statements of cash flows. Cash paid by the Company when directly withholding shares for tax withholding purposes is classified as a financing activity in the Consolidated Statements of Cash Flows. The Company made an accounting election to continue to estimate forfeitures when determining amortization expense of stock-based compensation.
The adoption of the provisions of this ASU did not have a material impact on the Company’s consolidated statement of income. A cumulative effect adjustment of $40.2 million for previously unrecognized excess tax benefits from prior fiscal years was recognized in beginning Retained earnings as of January 1, 2017. As a result of recognizing this excess tax benefit, the Company recorded a deferred tax asset of $40.2 million and an associated valuation allowance of $38.9 million to beginning Retained earnings. The offsetting deferred tax asset and valuation allowance resulted in a net increase of $1.3 million to beginning Retained earnings at adoption. 
Prior to 2017, excess tax benefits were recognized in additional paid-in capital and tax deficiencies were recognized either as an offset to accumulated excess tax benefits, if any, or in the consolidated statements of income. Excess tax benefits were not recognized until the deduction reduced taxes payable. Additionally, excess tax benefits from stock-based compensation were included in financing activities within the Company’s consolidated statements of cash flows.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies the changes to terms or conditions of a share-based payment award that require an entity to apply modification accounting. The amendments of this ASU are effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. Early application is permitted and prospective application is required. The Company does not expect that the adoption of this guidance to have a significant impact on its consolidated financial statements.


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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 periods. 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 from options to purchase the Company's common stock, assumed vesting of restricted stock and the assumed conversion of the Company’s convertible debentures. 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,
 
2017
 
2016
 
2017
 
2016
Computation of diluted weighted average shares outstanding:
 
 
 
 
 
 
 
Basic weighted average shares outstanding
52,590,837

 
52,134,500

 
52,463,511

 
52,293,808

Incremental shares from assumed exercise of stock options and vesting of restricted stock
1,863,883

 
1,731,451

 
1,789,307

 
1,690,320

Incremental shares from assumed conversion of convertible notes
1,329,765

 
657,260

 
1,329,765

 
657,260

Diluted weighted average shares outstanding
55,784,485

 
54,523,211

 
55,582,583

 
54,641,388

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 months ended September 30, 2017 and 2016. 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 458,000 and 884,000 for the three and nine months ended September 30, 2017, respectively, and approximately 552,000 and 555,000 for the three and nine months ended September 30, 2016, respectively.
The Company's convertible notes have settlement features requiring the Company upon conversion to settle the principal amount of the debt and the conversion value in excess of the principal value ("conversion premium") for cash or shares of the Company's common stock, at the Company's option. At issuance, the Company stated its intent to settle any conversion of these notes by paying cash for the principal value and issuing common stock for any conversion premium.  Accordingly, the convertible notes are included in the calculation of diluted earnings per share if their inclusion is dilutive. The convertible notes would only have a dilutive effect if the market price per share of common stock exceeds the conversion price of $72.18 per share and the dilutive effect increases the more the market price exceeds the conversion price. As of September 30, 2017 and 2016, the stock price exceeded the conversion price and these notes were dilutive to earnings per share. Further, as a result of the share price increasing from $81.83 at September 30, 2016 to $94.79 at September 30, 2017, there was an increase in shares from the assumed conversion of convertible notes.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive income consists entirely of foreign currency translation adjustments. The Company recorded foreign currency translation gains of $26.7 million and $97.3 million for the three and nine months ended September 30, 2017, respectively, and gains of $6.8 million and $13.5 million for the three and nine months ended September 30, 2016, respectively. There were no reclassifications of foreign currency translation into the consolidated statements of income for the three and nine months ended September 30, 2017 and 2016.

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(4) GOODWILL AND ACQUIRED INTANGIBLE ASSETS, NET
A summary of acquired intangible assets and goodwill activity for the nine months ended September 30, 2017 is presented below:
(in thousands)
 
Acquired
Intangible
Assets
 
Goodwill
 
Total
Intangible
Assets
Balance as of December 31, 2016
 
$
165,331

 
$
689,713

 
$
855,044

Increases (Decreases):
 
 
 
 
 
 
Amortization
 
(18,840
)
 

 
(18,840
)
Other (primarily changes in foreign currency exchange rates and impairment)
 
8,664

 
54,147

 
62,811

Balance as of September 30, 2017
 
$
155,155

 
$
743,860

 
$
899,015

Estimated amortization expense on intangible assets with finite lives, before income taxes, as of September 30, 2017, is expected to total $5.7 million for the remainder of 2017, $22.8 million for 2018, $21.8 million for 2019, $21.0 million for 2020, $20.1 million for 2021 and $19.0 million for 2022.
The Company’s annual goodwill impairment test is performed during the fourth quarter of its fiscal year. The annual impairment test for the year ended December 31, 2016 resulted in no impairment charge. The Company recorded a non-cash impairment charge to customer relationships of $2.3 million in the first nine months of 2017 as a result of the closure of the Pure Commerce office in South Korea within the EFT Processing Segment.
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 2016 annual impairment test could change, which may result in the Company recording material non-cash impairment charges during the year in which these changes take place.
(5) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
 
As of
(in thousands)
September 30, 2017
 
December 31, 2016
Accrued expenses
$
278,078

 
$
210,275

Money transfer settlement obligations
289,640

 
219,601

Accrued amounts due to mobile operators and other content providers
104,535

 
121,505

Derivative liabilities
31,947

 
63,772

Total
$
704,200

 
$
615,153



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(6) DEBT OBLIGATIONS
Debt obligations consist of the following:
 
As of
(in thousands)
September 30, 2017
 
December 31, 2016
Credit Facility:
 
 
 
Term loan, due 2019
$
53,438

 
$
60,000

Revolving credit agreements, due 2019
191,590

 
159,963

 
245,028

 
219,963

Convertible Debt:
 
 
 
1.50% convertible notes, unsecured, due 2044
366,464

 
358,293

 
 
 
 
ATM credit facility
100,000

 

 
 
 
 
Other obligations
24,782

 
23,892

 
 
 
 
Total debt obligations
736,274

 
602,148

Unamortized debt issuance costs
(6,454
)
 
(8,324
)
Carrying value of debt
729,820

 
593,824

Short-term debt obligations and current maturities of long-term debt obligations
(136,896
)
 
(32,161
)
Long-term debt obligations
$
592,924

 
$
561,663


Credit Facility
As of September 30, 2017, the Company had a $675 million senior secured credit facility (the "Credit Facility") consisting of a $600 million revolving credit facility and a $75 million term loan ("Term Loan A"), which had been reduced to $53.4 million through principal amortization payments. The Credit Facility expires April 9, 2019.
Interest on borrowings under the revolving credit facility and Term Loan A varies based upon the Company's consolidated total leverage ratio, as defined in the Company's credit agreement, and is based on a margin over the London Inter-Bank Offered Rate (“LIBOR”) or a margin over a base rate, as selected by the Company, with the applicable margin ranging from 1.375% to 2.375% for LIBOR loans or 0.375% to 1.375% for base rate loans. Accordingly, the weighted average interest rate for borrowings outstanding under the Company's revolving credit facility and Term Loan A was 3.04% and 2.86%, respectively, as of September 30, 2017.
Convertible Debt
The Convertible Senior Notes (“Convertible Notes”) had a principal amount outstanding of $402.5 million as of September 30, 2017. The Convertible Notes mature in October 2044 unless repurchased or converted prior to such date, and are convertible into shares of Euronet Common Stock at a conversion price of approximately $72.18 per share. Holders of the Convertible Notes have the option to require the Company to purchase their notes at par on October 1, 2020, and have additional options to require the Company to purchase their notes at par on October 1, 2024, 2029, 2034, and 2039, or upon a change in control of the Company.
Holders may convert all or any portion of their Convertible Notes at their option at any time prior to October 1, 2044 only under the following circumstances: (1) during any calendar quarter (and only during such calendar quarter), if the closing sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than 130% of the conversion price on each applicable trading day; (2) during the five consecutive business day period after any ten consecutive trading day period (the measurement period) in which the trading price for the Convertible Notes for each trading day of the measurement period was less than 98% of the product of the closing sale price of the Company's common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. If the holders exercise their option to convert, the Company is required to deliver cash or shares of the Company's common stock, at the Company's option, to satisfy the principal amount and the conversion premium.

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The Company's common stock was greater than 130% of the conversion price for at least 20 trading days during the 30 consecutive trading days ending on the last trading day of the calendar quarter ended September 30, 2017. Therefore, as of September 30, 2017, the conversion threshold had been met and the Convertible Notes became convertible at the holders’ option beginning on October 1, 2017 and ending on December 31, 2017.
Contractual interest expense for the Convertible Notes was $1.5 million and $4.5 million for the three and nine months ended September 30, 2017 and 2016, respectively. Accretion expense was $2.8 million and $8.2 million for the three and nine months ended September 30, 2017, respectively, and $2.6 million and $7.8 million for the three and nine months ended September 30, 2016, respectively. The effective interest rate was 4.7% for the three and nine months ended September 30, 2017. As of September 30, 2017, the unamortized discount was $36.0 million, and will be amortized through October 1, 2020.
ATM Credit Facility
On June 27, 2017, the Company entered into a new credit facility (the "ATM Facility") agreement in which the lender has made available an aggregate $100 million uncommitted short-term credit facility to provide cash to support the Company's ATM network. Interest is charged on this financing on an annual basis at the Overnight LIBOR rate plus 2.0%. The ATM facility expires on November 30, 2017.
(7) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company is exposed to foreign currency exchange risk resulting from (i) the collection of funds or the settlement of money transfer transactions in currencies other than the U.S. Dollar, (ii) derivative contracts written to its customers in connection with providing cross-currency money transfer services and (iii) short-term borrowings that are payable in currencies other than the U.S. dollar. The Company enters into foreign currency derivative contracts, primarily foreign currency forwards and cross-currency swaps, to minimize its exposure related to fluctuations in foreign currency exchange rates. As a matter of Company policy, the derivative instruments used in these activities are economic hedges and are not designated as hedges under ASC Topic 815, Derivatives and Hedging, primarily due to either the relatively short duration of the contract term or the effects of fluctuations in currency exchange rates being reflected concurrently in earnings for both the derivative instrument and the transaction and having an offsetting effect.
Foreign currency exchange contracts - Ria Operations and Corporate
In the United States, the Company's Ria operations use short-duration foreign currency forward contracts, generally with maturities up to 14 days, to offset the fluctuation in foreign currency exchange rates on the collection of money transfer funds between initiation of a transaction and its settlement. Due to the short duration of these contracts and the Company’s credit profile, the Company is generally not required to post collateral with respect to these foreign currency forward contracts. Most derivative contracts executed with counterparties in the U.S. are 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. As of September 30, 2017, the Company held in its Ria operations foreign currency forward contracts outstanding in the U.S. with a notional value of $244 million, primarily in Australian dollars, Canadian dollars, British pounds, euros and Mexican pesos.
In addition, the Company uses forward contracts, typically with maturities from a few days to less than one year, to offset foreign exchange rate fluctuations on certain foreign currency denominated other asset and liability positions. As of September 30, 2017, the Company had foreign currency forward contracts outstanding with a notional value of $282 million, primarily in British pounds, euros and Polish zloty.
Foreign currency exchange contracts - HiFX Operations
HiFX writes derivative instruments, primarily foreign currency forward contracts and cross-currency swaps, mostly with counterparties comprised of individuals and small-to-medium size businesses and derives a currency margin from this activity as part of its operations. HiFX aggregates its foreign currency exposures arising from customer contracts and may hedge some or all of the resulting net currency risks by entering into offsetting contracts with established financial institution counterparties. Foreign exchange revenues from HiFX's total portfolio of positions were $16.7 million and $48.4 million for the three and nine months ended September 30, 2017, respectively, and $14.4 million and $48.3 million for the three and nine months ended September 30, 2016, respectively. All of the derivative contracts used in the Company's HiFX operations are economic hedges and are not designated as hedges under ASC Topic 815. The duration of these derivative contracts is generally less than one year.
The fair value of HiFX's total portfolio of positions can change significantly from period to period based on, among other factors, market movements and changes in customer contract positions. HiFX manages counterparty credit risk (the risk that counterparties will default and not make payments according to the terms of the agreements) on an individual counterparty basis. It mitigates this risk by entering into contracts with collateral posting requirements and/or by performing financial

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assessments prior to contract execution, conducting periodic evaluations of counterparty performance and maintaining a diverse portfolio of qualified counterparties. HiFX does not expect any significant losses from counterparty defaults.
The aggregate equivalent U.S. dollar notional amounts of foreign currency derivative customer contracts held by the Company in its HiFX operations as of September 30, 2017 was approximately $1.3 billion. The majority of customer contracts are written in major currencies such as the U.S. dollar, euro, New Zealand dollar, British pound, and Australian dollar.
Balance Sheet Presentation
The following table summarizes the fair value of the derivative instruments as recorded in the Consolidated Balance Sheets as of the dates below:
 
 
Asset Derivatives
 
Liability Derivatives
 
 
 
 
Fair Value
 
 
 
Fair Value
(in thousands)
 
Balance Sheet Location
 
September 30, 2017
 
December 31, 2016
 
Balance Sheet Location
 
September 30, 2017
 
December 31, 2016
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
Other current assets
 
$
44,603

 
$
75,307

 
Other current liabilities
 
$
(31,947
)
 
$
(63,772
)
The following tables summarize the gross and net fair value of derivative assets and liabilities as of September 30, 2017 and December 31, 2016 (in thousands):
Offsetting of Derivative Assets
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Consolidated Balance Sheet
 
 
As of September 30, 2017
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Consolidated Balance Sheet
 
Net Amounts Presented in the Consolidated Balance Sheet
 
Financial Instruments
 
Cash Collateral Received
 
Net Amounts
Derivatives subject to a master netting arrangement or similar agreement
 
$
44,603

 
$

 
$
44,603

 
$
(20,071
)
 
$
(8,268
)
 
$
16,264

 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives subject to a master netting arrangement or similar agreement
 
$
75,307

 
$

 
$
75,307

 
$
(49,752
)
 
$
(7,562
)
 
$
17,993

Offsetting of Derivative Liabilities
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Consolidated Balance Sheet
 
 
As of September 30, 2017
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Consolidated Balance Sheet
 
Net Amounts Presented in the Consolidated Balance Sheet
 
Financial Instruments
 
Cash Collateral Paid
 
Net Amounts
Derivatives subject to a master netting arrangement or similar agreement
 
$
(31,947
)
 
$

 
$
(31,947
)
 
$
20,071

 
$
2,581

 
$
(9,295
)
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives subject to a master netting arrangement or similar agreement
 
$
(63,772
)
 
$

 
$
(63,772
)
 
$
49,752

 
$
1,106

 
$
(12,914
)
See Note 8, Fair Value Measurements, for the determination of the fair values of derivatives.

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Income Statement Presentation
The following tables summarize the location and amount of gains and losses on derivatives in the Consolidated Statements of Income for the three and nine months ended September 30, 2017 and 2016:
 
 
 
 
Amount of Gain (Loss) Recognized in Income on Derivative Contracts (a)
 
 
Location of Gain (Loss) Recognized in Income on Derivative Contracts
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in thousands)
 
 
2017
 
2016
 
2017
 
2016
Foreign currency exchange contracts
 
Foreign currency exchange gain (loss), net
 
$
3,062

 
$
(1,825
)
 
$
(3,007
)
 
$
(646
)
(a) The Company enters into derivative contracts such as foreign currency exchange forwards and cross-currency swaps as part of its HiFX operations. These derivative contracts are excluded from this table as they are part of the broader disclosure of foreign currency exchange revenues for this business discussed above.
(8) FAIR VALUE MEASUREMENTS
Fair value measurements used in the unaudited 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 and liabilities measured and recorded at fair value on a recurring basis:
 
 
 
 
As of September 30, 2017
(in thousands)
 
Balance Sheet Classification
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
Other current assets
 
$

 
$
44,603

 
$

 
$
44,603

Liabilities
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
Other current liabilities
 
$

 
$
(31,947
)
 
$

 
$
(31,947
)
 
 
 
 
As of December 31, 2016
(in thousands)
 
Balance Sheet Classification
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
Other current assets
 
$

 
$
75,307

 
$

 
$
75,307

Liabilities
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
Other current liabilities
 
$

 
$
(63,772
)
 
$

 
$
(63,772
)


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Other Fair Value Disclosures
The carrying amounts of cash and cash equivalents, accounts receivable, trade accounts payable, accrued expenses and other current obligations approximate their fair values because of the relatively short-term maturities of these financial instruments. The carrying values of the Company’s long-term debt (other than the Convertible Notes), including the current portion, approximate fair value because interest is primarily based on LIBOR, which resets at various intervals of less than one year. The Company estimates the fair value of the Convertible Notes using quoted prices in inactive markets for identical liabilities (Level 2). As of September 30, 2017 and December 31, 2016, the fair values of the Convertible Notes were $550.5 million and $475.1 million, respectively, with carrying values of $366.5 million and $358.3 million, respectively.
(9) SEGMENT INFORMATION
The Company’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, the United States and South America.
3)
Through the Money Transfer Segment, the Company provides global money transfer services under the brand names Ria, HiFX, IME and xe. Ria and IME provide global consumer-to-consumer money transfer services through a network of sending agents, Company-owned stores and Company-owned websites, disbursing money transfers through a worldwide correspondent network. HiFX offers account-to-account international payment services to high-income individuals and small-to-medium sized businesses. xe is a provider of foreign currency exchange information and offers money transfers on its currency data websites. 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. The Company provides cash management solutions and foreign currency risk management services to small-to-medium sized businesses under the brand name HiFM.
In addition, the Company accounts for non-operating activity, most 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.

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The following tables present the Company’s reportable segment results for the three and nine months ended September 30, 2017 and 2016:

 
 
For the Three Months Ended September 30, 2017
(in thousands)
 
EFT
Processing
 
epay
 
Money
Transfer
 
Corporate
Services,
Eliminations
and Other
 
Consolidated
Total revenues
 
$
226,321

 
$
184,234

 
$
228,105

 
$
(826
)
 
$
637,834

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Direct operating costs
 
99,024

 
143,023

 
123,588

 
(820
)
 
364,815

Salaries and benefits
 
16,817

 
13,955

 
44,110

 
7,252

 
82,134

Selling, general and administrative
 
8,878

 
9,145

 
28,648

 
2,608

 
49,279

Depreciation and amortization
 
14,805

 
2,461

 
7,403

 
36

 
24,705

Total operating expenses
 
139,524

 
168,584

 
203,749

 
9,076

 
520,933

Operating income (expense)
 
$
86,797

 
$
15,650

 
$
24,356

 
$
(9,902
)
 
$
116,901


 
 
For the Three Months Ended September 30, 2016
(in thousands)
 
EFT
Processing
 
epay
 
Money
Transfer
 
Corporate
Services,
Eliminations
and Other
 
Consolidated
Total revenues
 
$
152,586

 
$
167,226

 
$
204,611

 
$
(398
)
 
$
524,025

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Direct operating costs
 
62,401

 
128,212

 
109,944

 
(398
)
 
300,159

Salaries and benefits
 
12,954

 
13,352

 
38,365

 
7,228

 
71,899

Selling, general and administrative
 
7,642

 
8,133

 
23,924

 
1,680

 
41,379

Depreciation and amortization
 
10,151

 
2,734

 
7,195

 
40

 
20,120

Total operating expenses
 
93,148

 
152,431

 
179,428

 
8,550

 
433,557

Operating income (expense)
 
$
59,438

 
$
14,795

 
$
25,183

 
$
(8,948
)
 
$
90,468



 
 
For the Nine Months Ended September 30, 2017
(in thousands)
 
EFT
Processing
 
epay
 
Money
Transfer
 
Corporate
Services,
Eliminations
and Other
 
Consolidated
Total revenues
 
$
488,030

 
$
512,531

 
$
649,205

 
$
(1,989
)
 
$
1,647,777

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Direct operating costs
 
238,753

 
393,269

 
348,724

 
(1,978
)
 
978,768

Salaries and benefits
 
46,125

 
39,606

 
125,273

 
21,613

 
232,617

Selling, general and administrative
 
23,960

 
27,628

 
77,912

 
10,208

 
139,708

Acquired intangible assets impairment
 
2,286

 

 

 

 
2,286

Depreciation and amortization
 
39,816

 
7,667

 
21,941

 
96

 
69,520

Total operating expenses
 
350,940

 
468,170

 
573,850

 
29,939

 
1,422,899

Operating income (expense)
 
$
137,090

 
$
44,361

 
$
75,355

 
$
(31,928
)
 
$
224,878







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For the Nine Months Ended September 30, 2016
(in thousands)
 
EFT
Processing
 
epay
 
Money
Transfer
 
Corporate
Services,
Eliminations
and Other
 
Consolidated
Total revenues
 
$
354,282

 
$
497,945

 
$
587,664

 
$
(1,105
)
 
$
1,438,786

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Direct operating costs
 
165,520

 
379,423

 
309,706

 
(1,105
)
 
853,544

Salaries and benefits
 
37,601

 
38,052

 
114,582

 
22,739

 
212,974

Selling, general and administrative
 
22,154

 
25,291

 
68,930

 
5,303

 
121,678

Depreciation and amortization
 
28,411

 
8,498

 
21,868

 
146

 
58,923

Total operating expenses
 
253,686

 
451,264

 
515,086

 
27,083

 
1,247,119

Operating income (expense)
 
$
100,596

 
$
46,681

 
$
72,578

 
$
(28,188
)
 
$
191,667


The following table presents the Company’s property and equipment and total assets by reportable segment:
 
 
Property and Equipment, net as of
 
Total Assets as of
(in thousands)
 
September 30, 2017
 
December 31, 2016
 
September 30, 2017
 
December 31, 2016
EFT Processing
 
$
181,188

 
$
139,161

 
$
1,310,607

 
$
786,166

epay
 
27,139

 
23,939

 
616,596

 
733,514

Money Transfer
 
42,047

 
38,954

 
1,229,899

 
1,136,722

Corporate Services, Eliminations and Other
 
62

 
91

 
20,819

 
56,470

   Total
 
$
250,436

 
$
202,145

 
$
3,177,921

 
$
2,712,872


(10) INCOME TAXES
The Company's effective income tax rate was 13.4% and 19.3% for the three and nine months ended September 30, 2017, respectively, compared to 25.5% and 23.7% for the three and nine months ended September 30, 2016, respectively. The Company's effective income tax rate for the three and nine months ended September 30, 2017 and 2016 was lower than the applicable statutory income tax rate of 35% primarily attributable to the release in 2017 of a $16.3 million valuation allowance against certain foreign net deferred tax assets and, to a lesser extent, the Company's continued U.S. income tax positions. Due to the recent significant year-over-year and year-to-date profitability of ATMs under management in Europe, the Company believes certain foreign net deferred tax assets, including net operating loss carryforwards, will more likely than not be realized in future periods. In addition to the foreign valuation allowance release, the Company continues to have significant net operating loss carryforwards in the U.S. with no recent history of taxable income; therefore, the Company has recorded a valuation allowance against its U.S. net deferred tax assets. Accordingly, in instances when the Company generates U.S. GAAP income for the period, no income tax expense is recognized to the extent there are net operating loss carryforwards to offset that income.
(11) COMMITMENTS
As of September 30, 2017, the Company had $73.6 million of stand-by letters of credit/bank guarantees issued on its behalf, of which $45.1 million are outstanding under the Credit Facility. The remaining stand-by letters of credit/bank guarantees are collateralized by $3.4 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, 2017, the Company had granted off balance sheet guarantees for cash in various ATM networks amounting to $16.9 million over the terms of the cash supply agreements and performance guarantees amounting to approximately $21.8 million over the terms of agreements with the customers.
Once each of Euronet's subsidiaries reaches a certain size, it is required under the Credit Facility to provide a guarantee of all or a portion of the outstanding obligations under the Credit Facility depending upon whether the subsidiary is a domestic or foreign entity.
From time to time, the Company enters into agreements with commercial counterparties 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

17

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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, 2017, the balance of cash used in the Company's ATM networks for which the Company was responsible was approximately $283 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 systems of internal controls and insurance policies to mitigate this exposure;
In connection with the license of proprietary systems to customers, the Company 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 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, 2017 or December 31, 2016.
(12) LITIGATION AND CONTINGENCIES
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 on the Company's consolidated financial condition or results of operations. 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

The terms "Euronet," the "Company," "we" and "us" as used herein refer to Euronet Worldwide, Inc. and its subsidiaries.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains statements that constitute forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934 (“Exchange Act”). Generally, the words "believe," "expect," "anticipate," "intend," "estimate," "will" and similar expressions identify forward-looking statements. However, the absence of these words or similar expressions does not mean the statement is not forward-looking. All statements other than statements of historical facts included in this document are forward-looking statements, including, but not limited to, statements regarding the following:
our business plans and financing plans and requirements;
trends affecting our business plans and financing plans and requirements;
trends affecting our business;
the adequacy of capital to meet our capital requirements and expansion plans;
the assumptions underlying our business plans;
our ability to repay indebtedness;
our estimated capital expenditures;
the potential outcome of loss contingencies;
our expectations regarding the closing of any pending acquisitions;
business strategy;
government regulatory action;
technological advances; and
projected costs and revenues.

Although we believe that the expectations reflected in these forward-looking statements are reasonable, we can give no assurance that these expectations will prove to be correct.
Investors are cautioned that any forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may materially differ from those in the forward-looking statements as a result of various factors, including, but not limited to, conditions in world financial markets and general economic conditions, including the effects in Europe of the recent Brexit vote and economic conditions in specific countries and regions; the effects of demonetization in India; technological developments affecting the market for our products and services; our ability to successfully introduce new products and services; foreign currency exchange rate fluctuations; the effects of any breach of our computer systems or those of our customers or vendors, including our financial processing networks or those of other third parties; interruptions in any of our systems or those of our vendors or other third parties; our ability to renew existing contracts at profitable rates; changes in fees payable for transactions performed for cards bearing international logos or over switching networks such as card transactions on ATMs; our ability to comply with increasingly stringent regulatory requirements, including anti-money laundering, anti-terrorism, anti-bribery and consumer and data protection requirements; changes in laws and regulations affecting our business, including immigration laws; changes in our relationships with, or in fees charged by, our business partners; competition; the outcome of claims and other loss contingencies affecting Euronet; and those factors referred to above and as set forth  and more fully described in Part I, Item 1A — Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2016. Our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q are available on the SEC's EDGAR website at www.sec.gov, and copies may also be obtained by contacting the Company. Any forward-looking statements made in this Form 10-Q speak only as of the date of this report. Except as required by law, we do not intend, and do not undertake any obligation, to update any forward-looking statements to reflect future events or circumstances after the date of such statements.


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OVERVIEW
COMPANY OVERVIEW, GEOGRAPHIC LOCATIONS AND PRINCIPAL PRODUCTS AND SERVICES
Euronet 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, software solutions, electronic distribution of prepaid mobile airtime and other electronic payment products, foreign currency exchange services and global money transfer services. We operate in the following three segments:
The EFT Processing Segment, which processes transactions for a network of 38,105 ATMs and approximately 227,000 POS terminals across Europe, the Middle East and Asia Pacific. We provide comprehensive electronic payment solutions consisting of ATM cash withdrawal and deposit services, ATM network participation, outsourced ATM and POS management solutions, credit and debit card outsourcing, dynamic currency conversion ("DCC"), 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 696,000 POS terminals providing electronic processing of prepaid mobile airtime top-up services and other electronic payment products in Europe, the Middle East, Asia Pacific, the United States 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 names Ria, IME and xe, and global account-to-account money transfer services under the brand name HiFX. We offer services under the brand names Ria and IME through a network of sending agents, Company-owned stores (primarily in North America, Europe and Malaysia) and Ria branded websites (riamoneytransfer.com and imeremit.com), disbursing money transfers through a worldwide correspondent network that includes approximately 332,000 locations. xe is a provider of foreign currency exchange information and offers money transfer services on its currency data websites (xe.com and x-rates.com). We offer services under the brand name HiFX through HiFX branded websites and HiFX customer service representatives. 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 and prepaid mobile top-up. Through our HiFM brand, we offer cash management solutions and foreign currency risk management services to small-to-medium sized businesses.
We have six processing centers in Europe, five in Asia Pacific and two in North America. We have 35 principal offices in Europe, 11 in Asia Pacific, nine in North America, three in the Middle East, two in South America and one in Africa. Our executive offices are located in Leawood, Kansas, USA. With approximately 74% of our revenues denominated in currencies other than the U.S. dollar, any significant changes in foreign 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 from 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 35% and 30% of total consolidated revenues for the third quarter and first nine months of 2017, are primarily 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 DCC 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.

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epay Segment — Revenues in the epay Segment, which represented approximately 29% and 31% of total consolidated revenues for the third quarter and first nine months of 2017, are derived from commissions or processing fees received from mobile phone operators for the processing and distribution of prepaid mobile airtime and commissions earned from the distribution of other electronic payment products, vouchers, and physical gifts. The proportion of epay Segment revenues earned from the distribution of prepaid mobile phone time as compared with other electronic products has decreased over time, and non-mobile content now produces approximately 67% of epay Segment revenues. Other electronic payment products offered by this segment include digital content such as music, games and software, as well as other products, including prepaid long distance calling card plans, prepaid Internet plans, prepaid debit cards, gift cards, vouchers, transport payments, lottery payments, bill payment, and money transfer. Agreements with mobile operators and prepaid content providers are important to the success of our business and these agreements permit us to distribute prepaid mobile airtime and other electronic payment products to retailers.
Money Transfer Segment — Revenues in the Money Transfer Segment, which represented approximately 36% and 39% of total consolidated revenues for the third quarter and first nine months of 2017, are primarily derived from transaction fees, as well as the margin earned from purchasing foreign currency at wholesale exchange rates and selling the foreign currency to customers at retail exchange rates. We have a sending agent network in place comprised of agents, customer service representatives, Company-owned stores, primarily in North America, Europe, and Malaysia, and Ria, xe and HiFX branded websites, 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, which are recognized as direct operating costs at the time of sale.
The Company offers a money transfer product called Walmart-2-Walmart Money Transfer Service which allows customers to transfer money to and from Walmart stores in the U.S. Our Ria business executes the transfers with Walmart serving as both the sending agent and payout correspondent. Ria earns a lower margin from these transactions than its traditional money transfers; however, the arrangement has added a significant number of transactions to Ria’s business. The agreement with Walmart establishes Ria as the only party through which Walmart will sell U.S. domestic money transfers branded with Walmart marks. The agreement had an initial term of three years from the launch date of April 2014, and was renewed for an additional three years until April 2020 and will automatically renew for subsequent one year terms unless either party provides notice to the contrary. The agreement imposes certain obligations on each party, the most significant being service level requirements by Ria and money transfer compliance requirements by Walmart. Any violation of these requirements by Ria could result in an obligation to indemnify Walmart or termination of the contract by Walmart. However, the agreement allows the parties to resolve disputes by mutual agreement without termination of the agreement.
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 most share-based compensation expense. These services are not directly identifiable with our reportable operating segments.

OPPORTUNITIES AND CHALLENGES
Our expansion plans and opportunities are focused on eight primary areas:
increasing the number of ATMs and cash deposit terminals in our independent networks;
increasing transactions processed on our network of owned and operated ATMs and POS devices;
signing new outsourced ATM and POS terminal management contracts;
expanding value added services and other products offered by our EFT Processing Segment, including the sale of DCC, acquiring and other prepaid card services to banks and retailers;
expanding our epay processing network and portfolio of digital content;
expanding our money transfer services, cross-currency payment products and bill payment network;
expanding our cash management solutions and foreign currency risk management services; 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;

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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;
our ability to enter into and renew ATM network cash supply agreements with financial institutions;
the availability of financing for expansion;
our ability efficiently to 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.

We consistently evaluate and add prospects to our list of potential ATM outsource customers. However, we cannot predict the increase or decrease in the number of ATMs we manage under outsourcing agreements because this depends largely on the willingness of banks to enter into outsourcing contracts with us. Due to the thorough internal reviews and extensive negotiations conducted by existing and prospective banking customers in choosing outsource vendors, the process of entering into or renewing outsourcing agreements can take several months. The process is further complicated by the legal and regulatory considerations of local countries. These agreements tend to cover large numbers of ATMs, so significant increases and decreases in our pool of managed ATMs could result from the acquisition or termination of one or more of these management contracts. Therefore, the timing of both current and new contract revenues is uncertain and unpredictable.

Software products are an integral part of our product lines, and our investment in research, development, delivery and customer support reflects our ongoing commitment to an expanded customer base.
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 operators, digital content providers, agent financial institutions and retailers;
our ability to use existing expertise and relationships with mobile operators, digital 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 digital 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 and digital content 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;

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our ability to take advantage of cross-selling opportunities with our EFT Processing and Money Transfer Segments, including providing money transfer services through our distribution network; and
the availability of financing for further expansion.

In all of the markets in which we operate, we are experiencing significant competition which will impact the rate at which we may be able to grow organically. Competition among prepaid mobile airtime and digital content distributors results in the increase of commissions paid to retailers and increases in retailer attrition rates. To grow, we must capture market share from other prepaid mobile airtime and digital content distributors, offer a superior product offering and demonstrate the value of a global network. In certain markets in which we operate, many of the factors that may contribute to rapid growth (growth in electronic payment products, expansion of our network of retailers and access to products of mobile operators and other content providers) remain present.
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 countries in which we operate;
the continuation of the trend of increased use of electronic money transfer and bill payment services among high-income individuals, 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 the epay Segment, including providing prepaid services through our 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;
the ability to maintain banking relationships necessary for us to service our customers;
our ability to successfully expand our agent network in Europe using our payment institution licenses under the Payment Services Directive and in the United States; and
our ability to provide additional value-added products under the xe brand.

For all segments, our continued expansion may involve additional acquisitions that could divert our resources and management time and require integration of new assets with our existing networks and services. Our ability to effectively manage our growth has required us to expand our operating systems and employee base, particularly at the management level, which has added incremental operating costs. An inability to continue to effectively manage expansion could have a material adverse effect on our business, growth, financial condition or results of operations. Inadequate technology and resources would impair our ability to maintain current processing technology and efficiencies, as well as deliver new and innovative services to compete in the marketplace.


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SEGMENT SUMMARY RESULTS OF OPERATIONS
Revenues and operating income by segment for the three and nine months ended September 30, 2017 and 2016 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)
 
2017
 
2016
 
Increase
(Decrease)
Amount
 
Increase
Percent
 
2017
 
2016
 
Increase
(Decrease) Amount
 
Increase
Percent
EFT Processing
 
$
226,321

 
$
152,586

 
$
73,735

 
48
%
 
$
488,030

 
$
354,282

 
$
133,748

 
38
%
epay
 
184,234

 
167,226

 
17,008

 
10
%
 
512,531

 
497,945

 
14,586

 
3
%
Money Transfer
 
228,105

 
204,611

 
23,494

 
11
%
 
649,205

 
587,664

 
61,541

 
10
%
Total
 
638,660

 
524,423

 
114,237

 
22
%
 
1,649,766

 
1,439,891

 
209,875

 
15
%
Corporate services, eliminations and other
 
(826
)
 
(398
)
 
(428
)
 
108
%
 
(1,989
)
 
(1,105
)
 
(884
)
 
80
%
Total
 
$
637,834

 
$
524,025

 
$
113,809

 
22
%
 
$
1,647,777

 
$
1,438,786

 
$
208,991

 
15
%
 
 
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)
 
2017
 
2016
 
Increase
(Decrease)Amount
 
Increase
(Decrease) Percent
 
2017
 
2016
 
Increase
(Decrease)Amount
 
Increase
(Decrease) Percent
EFT Processing
 
$
86,797

 
$
59,438

 
$
27,359

 
46
 %
 
$
137,090

 
$
100,596

 
$
36,494

 
36
 %
epay
 
15,650

 
14,795

 
855

 
6
 %
 
44,361

 
46,681

 
(2,320
)
 
(5
)%
Money Transfer
 
24,356

 
25,183

 
(827
)
 
(3
)%
 
75,355

 
72,578

 
2,777

 
4
 %
Total
 
126,803

 
99,416

 
27,387

 
28
 %
 
256,806

 
219,855

 
36,951

 
17
 %
Corporate services, eliminations and other
 
(9,902
)
 
(8,948
)
 
(954
)
 
11
 %
 
(31,928
)
 
(28,188
)
 
(3,740
)
 
13
 %
Total
 
$
116,901

 
$
90,468

 
$
26,433

 
29
 %
 
$
224,878

 
$
191,667

 
$
33,211

 
17
 %


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Impact of changes in foreign currency exchange rates
Our revenues and local expenses are recorded in the functional currencies of our operating entities and translated into U.S. dollars for financial reporting purposes; therefore, amounts we earn outside the U.S. are negatively impacted by a stronger U.S. dollar and positively impacted by a weaker U.S. dollar. Considering the results by country and the associated functional currency, we estimate that our reported consolidated operating income for the third quarter and the first nine months of 2017 was 5% and 1% more due to the changes in foreign currency exchange rates when compared to the same periods of 2016.
To provide further perspective on the impact of foreign currency exchange rates, the following table shows the changes in values relative to the U.S. dollar of the currencies of the countries in which we have our most significant operations:

 
 
Average Translation Rate
Three Months Ended September 30,
 
Increase (Decrease) Percent
 
Average Translation Rate
Nine Months Ended September 30,
 
Increase (Decrease) Percent
Currency (dollars per foreign currency)
 
2017
 
2016
 
 
2017
 
2016
 
Australian dollar
 
$
0.7896

 
$
0.7577

 
4
 %
 
$
0.7661

 
$
0.7418

 
3
 %
British pound
 
$
1.3091

 
$
1.3125

 
 %
 
$
1.2756

 
$
1.3931

 
(8
)%
euro
 
$
1.1754

 
$
1.1156

 
5
 %
 
$
1.1136

 
$
1.1162

 
 %
Hungarian forint
 
$
0.0038

 
$
0.0036

 
6
 %
 
$
0.0036

 
$
0.0036

 
 %
Indian rupee
 
$
0.0156

 
$
0.0149

 
5
 %
 
$
0.0153

 
$
0.0149

 
3
 %
Malaysian ringgit
 
$
0.2347

 
$
0.2472

 
(5
)%
 
$
0.2302

 
$
0.2452

 
(6
)%
New Zealand dollar
 
$
0.7309

 
$
0.7221

 
1
 %
 
$
0.7156

 
$
0.6922

 
3
 %
Polish zloty
 
$
0.2762

 
$
0.2573

 
7
 %
 
$
0.2613

 
$
0.2563

 
2
 %

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COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
EFT PROCESSING SEGMENT
The following table presents the results of operations for the three and nine months ended September 30, 2017 and 2016 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)
 
2017
 
2016
 
Increase Amount
 
Increase Percent
 
2017
 
2016
 
Increase Amount
 
Increase Percent
Total revenues
 
$
226,321

 
$
152,586

 
$
73,735

 
48
%
 
$
488,030

 
$
354,282

 
$
133,748

 
38
%
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Direct operating costs
 
99,024

 
62,401

 
36,623

 
59
%
 
238,753

 
165,520

 
73,233

 
44
%
Salaries and benefits
 
16,817

 
12,954

 
3,863

 
30
%
 
46,125

 
37,601

 
8,524

 
23
%
Selling, general and administrative
 
8,878

 
7,642

 
1,236

 
16
%
 
23,960

 
22,154

 
1,806

 
8
%
Acquired intangible assets impairment
 

 

 

 
n/m

 
2,286

 

 
2,286

 
n/m

Depreciation and amortization
 
14,805

 
10,151

 
4,654

 
46
%
 
39,816

 
28,411

 
11,405

 
40
%
Total operating expenses
 
139,524

 
93,148

 
46,376

 
50
%
 
350,940

 
253,686

 
97,254

 
38
%
Operating income
 
$
86,797

 
$
59,438

 
$
27,359

 
46
%
 
$
137,090

 
$
100,596

 
$
36,494

 
36
%
Transactions processed (millions)
 
615

 
488

 
127

 
26
%
 
1,726

 
1,370

 
356

 
26
%
ATMs as of September 30,
 
38,105

 
29,276

 
8,829

 
30
%
 
38,105

 
29,276

 
8,829

 
30
%
Average ATMs
 
38,123

 
27,350

 
10,773

 
39
%
 
36,524

 
25,802

 
10,722

 
42
%

Revenues
EFT Processing Segment total revenues for the three and nine months ended September 30, 2017 were $226.3 million and $488.0 million, respectively, an increase of $73.7 million or 48% and $133.7 million or 38% as compared to the same periods in 2016. The increases in total revenues for the three and nine months ended September 30, 2017 were primarily due to an increase in the number of ATMs under management in Europe. Specifically, the increase in the number of ATMs contributed to increases in the number of transactions processed, including dynamic currency conversion ("DCC") transactions. For the
three months ended September 30, 2017, revenues were also higher than the same period in the prior year as a result of a higher
volume of sales of POS devices in Greece and the acquisition of YourCash, completed during the fourth quarter of 2016. The acquisition of YourCash also contributed to the increase in total revenues for the first nine months of 2017. The increase for the nine months ended September 30, 2017 was partially offset by the impact of a cash shortage due to the demonetization initiated in the fourth quarter of 2016 in India. In the third quarter, the India cash supply was returned to near pre-demonetization levels. Foreign currency movements increased total revenues by approximately $10.3 million for the three months ended September 30, 2017 as compared to the same period in 2016 and had minimal effect on total revenues for the first nine months of 2017 as compared to the same period in 2016.
Average monthly revenues per ATM were $1,979 and $1,485 for the three and nine months ended September 30, 2017, respectively, compared to $1,860 and $1,526 for the three and nine months ended September 30, 2016, respectively. The decrease for the nine months ended September 30, 2017 was primarily due to the India cash shortage and low-margin ATMs in India. Revenues per transaction were $0.37 for the third quarter and $0.28 for the first nine months of 2017, respectively, compared to $0.31 for the third quarter and $0.26 for the first nine months of 2016, respectively. The increases in revenue per transaction were primarily the result of revenue growth from DCC, which earns higher revenues per transaction than other ATM or card-based services, which were partially offset by the impact of the low margin ATM transactions in India.
Direct operating costs
EFT Processing Segment direct operating costs were $99.0 million and $238.8 million for the three and nine months ended September 30, 2017, respectively, an increase of $36.6 million or 59% and $73.2 million or 44% as compared to the same periods in 2016. Direct operating costs in the EFT Processing Segment consist primarily of site rental fees, cash delivery costs, cash supply costs, maintenance, insurance, telecommunications, data center operations-related personnel, as well as the

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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. The increases in direct operating costs for the three and nine months ended September 30, 2017 were primarily due to an increase in the number of ATMs under management, particularly our independent ATM network which has more seasonal revenue generation and the impact of our acquisition of YourCash. The increase for the three months ended September 30, 2017 was also due to the net impact of the U.S. dollar weakening against key foreign currencies.
Gross profit
Gross profit, which is calculated as revenues less direct operating costs, was $127.3 million and $249.3 million for the three and nine months ended September 30, 2017, respectively, as compared to $90.2 million and $188.8 million for the three and nine months ended September 30, 2016, respectively. The increases in gross profit were primarily due to the growth in revenues from the increase in ATMs under management, DCC transactions processed and the net impact of the U.S. dollar weakening against key foreign currencies. Gross profit as a percentage of revenues (“gross margin”) was 56.2% and 51.1% for the three and nine months ended September 30, 2017, respectively, as compared to 59.1% and 53.3% for the three and nine months ended September 30, 2016, respectively. The decreases in gross profit as a percentage of revenue were primarily due to increased operating costs due to the expansion of our ATM network, which includes fixed costs for our independent ATMs, the YourCash transactions which earn lower margins per transaction than other ATM or card-based services in Europe, along with ATM growth in the India market where we earn lower revenue per transaction and have experienced a cash shortage due to the demonetization initiative in the region. For the third quarter, the decrease in gross margins was also attributable to the higher volume of sales of POS devices in Greece from which we earn a lower margin from these transactions.
Salaries and benefits
Salaries and benefits expense increased $3.9 million or 30% and $8.5 million or 23% for the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016. The increases in salaries and benefits were primarily attributable to additional headcount to support an increase in the number of ATMs and POS devices under management. As a percentage of revenues, these costs decreased to 7.4% for the third quarter and 9.5% for the first nine months of 2017, respectively, compared to 8.5% for the third quarter and 10.6% for the first nine months of 2016, respectively. The decreases were primarily due to the growth in revenues earned from DCC and other value added service transactions on our ATMs under management, which require minimal incremental support costs.
Selling, general and administrative
Selling, general and administrative expenses for the three and nine months ended September 30, 2017 were $8.9 million and $24.0 million, respectively, an increase of $1.2 million or 16% and $1.8 million or 8% as compared to the same periods in 2016. The increases in selling, general and administrative expenses were primarily due to the impact of our acquisition of YourCash which was partly offset by an increase in additional support cost in 2016 that did not recur in 2017. As a percentage of revenues, selling, general and administrative expenses were 3.9% and 4.9% for the three and nine months ended September 30, 2017, respectively, compared to 5.0% and 6.3% for the three and nine months ended September 30, 2016, respectively. The decreases were primarily due to the growth in revenues earned from DCC and other value added service transactions on our ATMs under management, which require minimal incremental support costs.
Acquired intangible assets impairment
The Company recorded a non-cash impairment charge of $2.3 million for the nine months ended September 30, 2017 related to certain customer relationships as a result of the closure of the Pure Commerce office in South Korea. No impairment charges were recorded in 2016.
Depreciation and amortization
Depreciation and amortization expense increased $4.7 million and $11.4 million for the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016. The increases were primarily attributable to the deployment of additional ATMs under management, including more expensive cash recycling ATMs, software assets, and the amortization of intangible assets related to the acquisition of YourCash. As a percentage of revenues, depreciation and amortization expense was 6.5% for the third quarter and 8.2% for the first nine months of 2017 as compared to 6.7% and 8.0% for the same periods of 2016.

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Table of Contents

Operating income
EFT Processing Segment operating income for the three and nine months ended September 30, 2017 was $86.8 million and $137.1 million, respectively, an increase of $27.4 million or 46% and $36.5 million or 36% as compared to the same periods in 2016. EFT Processing Segment operating income for the three and nine months ended September 30, 2017 increased primarily due to higher operating revenues from the additional number of ATMs under management, the YourCash acquisition, growth in revenues earned from DCC transactions and the net impact of the U.S. dollar weakening against key foreign currencies.
Operating income as a percentage of revenues (“operating margin”) was 38.4% for the third quarter and 28.1% for the first nine months of 2017 compared to 39.0% for the third quarter and 28.4% for the first nine months of 2016. The slight decreases in operating margins were attributable to additional costs for ATMs added throughout the year and the impact of lower margin ATM transactions for YourCash and in India. Operating income per transaction was $0.14 for the third quarter and $0.08 for the first nine months of 2017 as compared to $0.12 and $0.07 for the same periods of 2016.
EPAY SEGMENT
The following table presents the results of operations for the three and nine months ended September 30, 2017 and 2016 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)
 
2017
 
2016
 
Increase (Decrease) Amount
 
Increase (Decrease) Percent
 
2017
 
2016
 
Increase
(Decrease)Amount
 
Increase
(Decrease)Percent
Total revenues
 
$
184,234

 
$
167,226

 
$
17,008

 
10
 %
 
$
512,531

 
$
497,945

 
$
14,586

 
3
 %
Operating expenses: