EEFT 6/30/2014 10Q

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
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 or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

On August 1, 2014, Euronet Worldwide, Inc. had 52,470,039 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
 
June 30,
2014
 
December 31,
2013
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
408,370

 
$
209,826

Restricted cash
63,437

 
77,987

Inventory — PINs and other
69,139

 
92,757

Trade accounts receivable, net of allowances for doubtful accounts of $22,389 at June 30, 2014 and $22,079 at December 31, 2013
328,371

 
390,563

Prepaid expenses and other current assets
104,487

 
69,242

Total current assets
973,804

 
840,375

Property and equipment, net of accumulated depreciation of $249,140 at June 30, 2014 and $231,327 at December 31, 2013
125,293

 
116,230

Goodwill
662,035

 
498,435

Acquired intangible assets, net of accumulated amortization of $143,976 at June 30, 2014 and $132,927 at December 31, 2013
181,263

 
93,026

Other assets, net of accumulated amortization of $27,302 at June 30, 2014 and $25,363 at December 31, 2013
52,114

 
50,049

Total assets
$
1,994,509

 
$
1,598,115

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Trade accounts payable
$
393,593

 
$
457,274

Accrued expenses and other current liabilities
335,530

 
213,284

Current portion of capital lease obligations
2,215

 
2,361

Short-term debt obligations and current maturities of long-term debt obligations
10,179

 
10,903

Income taxes payable
15,634

 
15,656

Deferred revenue
30,101

 
32,533

Total current liabilities
787,252

 
732,011

Debt obligations, net of current portion
396,839

 
188,510

Capital lease obligations, net of current portion
1,929

 
2,872

Deferred income taxes
38,937

 
17,695

Other long-term liabilities
18,328

 
18,572

Total liabilities
1,243,285

 
959,660

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; 56,097,945 issued at June 30, 2014 and 54,276,761 issued at December 31, 2013
1,122

 
1,086

Additional paid-in-capital
879,242

 
809,640

Treasury stock, at cost, 3,666,899 shares at June 30, 2014 and 3,650,519 shares at December 31, 2013
(68,839
)
 
(68,122
)
Accumulated deficit
(59,505
)
 
(96,029
)
Accumulated other comprehensive loss
(3,106
)
 
(10,453
)
Total Euronet Worldwide, Inc. stockholders’ equity
748,914

 
636,122

Noncontrolling interests
2,310

 
2,333

Total equity
751,224

 
638,455

Total liabilities and equity
$
1,994,509

 
$
1,598,115

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
June 30,
 
Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Revenues
$
395,462

 
$
341,543

 
$
748,777

 
$
677,187

Operating expenses:
 
 
 
 
 
 
 
Direct operating costs
242,637

 
214,295

 
468,975

 
433,382

Salaries and benefits
60,368

 
51,752

 
113,942

 
100,479

Selling, general and administrative
40,981

 
31,457

 
73,852

 
62,460

Depreciation and amortization
17,348

 
16,239

 
33,498

 
33,908

Total operating expenses
361,334

 
313,743

 
690,267

 
630,229

Operating income
34,128

 
27,800

 
58,510

 
46,958

Other income (expense):
 
 
 
 
 
 
 
Interest income
627

 
417

 
1,159

 
911

Interest expense
(2,442
)
 
(2,575
)
 
(4,430
)
 
(5,434
)
(Loss) income from unconsolidated affiliates
(31
)
 
136

 
(31
)
 
260

Foreign currency exchange (loss) gain, net
(3,087
)
 
1,460

 
(4,356
)
 
(241
)
Other losses

 
(412
)
 

 
(412
)
Other expense, net
(4,933
)
 
(974
)
 
(7,658
)
 
(4,916
)
Income before income taxes
29,195

 
26,826

 
50,852

 
42,042

Income tax expense
(8,707
)
 
(8,661
)
 
(14,431
)
 
(11,817
)
Net income
20,488

 
18,165

 
36,421

 
30,225

Net loss (income) attributable to noncontrolling interests
14

 
(54
)
 
103

 
(108
)
Net income attributable to Euronet Worldwide, Inc.
$
20,502

 
$
18,111

 
$
36,524

 
$
30,117

 
 
 
 
 
 
 
 
Earnings per share attributable to Euronet Worldwide, Inc. stockholders:
 
 
 
 
 
 
 
Basic
$
0.40

 
$
0.36

 
$
0.71

 
$
0.61

Diluted
$
0.38

 
$
0.35

 
$
0.69

 
$
0.59

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
51,675,775

 
49,889,640

 
51,231,997

 
49,697,176

Diluted
53,773,759

 
51,517,640

 
53,279,782

 
51,122,810

See accompanying notes to the unaudited consolidated financial statements.

4

Table of Contents

EURONET WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
20,488

 
$
18,165

 
$
36,421

 
$
30,225

Translation adjustment
4,137

 
(10,927
)
 
7,336

 
(28,077
)
Comprehensive income
24,625

 
7,238

 
43,757

 
2,148

Comprehensive loss (income) attributable to noncontrolling interests
26

 
(108
)
 
114

 
(99
)
Comprehensive income attributable to Euronet Worldwide, Inc.
$
24,651

 
$
7,130

 
$
43,871

 
$
2,049

See accompanying notes to the unaudited consolidated financial statements.

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Table of Contents

EURONET WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
Six Months Ended
June 30,
 
2014
 
2013
Net income
$
36,421

 
$
30,225

 
 
 
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
33,498

 
33,908

Share-based compensation
6,511

 
6,152

Unrealized foreign exchange loss, net
4,356

 
241

Deferred income taxes
(2,896
)
 
(427
)
Loss (income) from unconsolidated affiliates
31

 
(260
)
Amortization of debt issuance costs
583

 
500

Changes in working capital, net of amounts acquired:
 
 
 
Income taxes payable, net
(1,113
)
 
(1,314
)
Restricted cash
16,574

 
7,116

Inventory — PINs and other
24,720

 
13,471

Trade accounts receivable
64,960

 
34,175

Prepaid expenses and other current assets
(5,911
)
 
(10,872
)
Trade accounts payable
(69,469
)
 
(66,475
)
Deferred revenue
(2,298
)
 
(2,856
)
Accrued expenses and other current liabilities
(4,587
)
 
7,599

Changes in noncurrent assets and liabilities
1,744

 
39

Net cash provided by operating activities
103,124

 
51,222

Cash flows from investing activities:
 
 
 
Acquisitions, net of cash acquired
(83,408
)
 
(30,847
)
Purchases of property and equipment
(29,268
)
 
(16,117
)
Purchases of other long-term assets
(2,922
)
 
(2,409
)
Other, net
206

 
535

Net cash used in investing activities
(115,392
)
 
(48,838
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of shares
5,148

 
4,907

Borrowings from revolving credit agreements
1,206,556

 
1,009,853

Repayments of revolving credit agreements
(1,008,600
)
 
(1,011,830
)
Proceeds from long-term debt obligations
9,000

 

Repayments of long-term debt obligations
(2,938
)
 
(3,000
)
Repayments of capital lease obligations
(1,231
)
 
(1,383
)
Borrowings from short-term debt obligations, net
3,597

 

Purchase of subsidiary shares from noncontrolling interests

 
(7,878
)
Other, net
(2,154
)
 
(163
)
Net cash provided by (used in) financing activities
209,378

 
(9,494
)
Effect of exchange rate changes on cash and cash equivalents
1,434

 
(4,460
)
Increase (decrease) in cash and cash equivalents
198,544

 
(11,570
)
 
 
 
 
Cash and cash equivalents at beginning of period
209,826

 
201,435

 
 
 
 
Cash and cash equivalents at end of period
$
408,370

 
$
189,865

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Interest paid during the period
$
3,314

 
$
4,017

Income taxes paid during the period
$
17,655

 
$
16,992

Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Equity issued in connection with acquisitions
$
56,554

 
$
5,296

Contingent consideration in connection with acquisition
$

 
$
21,725

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”) was established as a Delaware corporation on December 13, 1997 and succeeded Euronet Holding N.V. as the group holding company, which was founded and established in 1994. 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; electronic distribution of prepaid mobile airtime and other electronic payment products; 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 of normal interim closing procedures) necessary to present fairly on a consolidated basis the financial position of the Company as of June 30, 2014, the results of its operations for the three and six months ended June 30, 2014 and 2013 and cash flows for the six months ended June 30, 2014 and 2013. 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, 2013, including the notes thereto, set forth in the Company’s 2013 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. 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, 2014.
Seasonality
Euronet’s EFT Processing segment and epay segment are significantly impacted by seasonality during the fourth quarter and first quarter of each year due to higher transaction levels during the holiday season and lower levels following the holiday season. Additionally, mostly in Europe, the EFT Processing business experiences its heaviest demand for dynamic currency conversion services during the third quarter of the fiscal year, coinciding with the tourist season. Seasonality in the money transfer segment varies by 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 Euronet usually experiences its lowest transaction levels during the first quarter of each year.

(2) RECENTLY ISSUED AND ADOPTED ACCOUNTING PRONOUNCEMENTS

Recently Issued
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), 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. The new standard will become effective for the Company on January 1, 2017 and early adoption is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

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Table of Contents

Recently Adopted
In July 2013, the FASB issued Accounting Standards Update No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists ("ASU 2013-11"). The amendments in ASU 2013-11 provide guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The Company adopted ASU 2013-11 as of January 1, 2014, and its adoption did not have a material impact on the Company's results of operations, cash flows or financial position.

(3) STOCKHOLDERS' EQUITY

Earnings Per Share
Basic earnings per share has been computed by dividing earnings available to common stockholders by the weighted average number of common shares outstanding during the respective period. Diluted earnings per share has been computed by dividing earnings available to common stockholders by the weighted average shares outstanding during the respective period, after adjusting for the potential dilution of options to purchase the Company's common stock and assumed vesting of restricted stock. The following table provides the computation of diluted weighted average number of common shares outstanding:

Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Computation of diluted weighted average shares outstanding:
 
 
 
 
 
 
 
Basic weighted average shares outstanding
51,675,775

 
49,889,640

 
51,231,997

 
49,697,176

Incremental shares from assumed exercise of stock options and vesting of restricted stock
2,097,984

 
1,628,000

 
2,047,785

 
1,425,634

Diluted weighted average shares outstanding
53,773,759

 
51,517,640

 
53,279,782

 
51,122,810

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 six months ended June 30, 2014 and 2013. 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 674,000 for both the three and six months ended June 30, 2014 and approximately 1,034,000 and 1,078,000 for the three and six months ended June 30, 2013, respectively.

Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss consists entirely of foreign currency translation adjustments. The Company recorded a foreign currency translation gain of $4.1 million and $7.3 million for the three and six months ended June 30, 2014, respectively and a foreign currency translation loss of $10.9 million and $28.1 million for the three and six months ended June 30, 2013, respectively. There were no reclassifications of foreign currency translation into the Consolidated Statements of Income for the three and six months ended June 30, 2014 and 2013.

(4) ACQUISITIONS
On May 20, 2014, the Company completed the acquisition of all of the capital stock of EIM (FX) Limited and TBK (FM) Limited (the "Acquired Companies") pursuant to a Share Purchase Agreement dated March 7, 2014 (the "Purchase Agreement") among the Company and the selling shareholders (the "Sellers"). The Acquired Companies, each a United Kingdom limited company, operate under the brand names HiFX and HiFM, respectively.
HiFX offers account-to-account international payment services to high-income individuals and small-to-medium sized businesses, complementing Euronet’s existing consumer-to-consumer money transfer business. HiFX has an innovative multi-channel platform which allows customers to make transfers, track payments and manage their international payment activity online or through a customer service representative. HiFM offers cash management solutions and foreign currency risk management services to small-to-medium sized businesses.

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Table of Contents

Under the terms of the Purchase Agreement, the Sellers received purchase consideration (the "Purchase Consideration") of £111 million in cash ($186.7 million) and 1,262,654 shares of Euronet common stock, with a fair value at date of acquisition of $56.6 million (the "Consideration Shares"). An amount equal to $16.0 million of the cash portion of the Purchase Consideration and all of the Consideration Shares were placed in escrow at closing as security for the Sellers' indemnification and other obligations under the Purchase Agreement. Any Purchase Consideration remaining in escrow will be released to the Sellers two years following the closing date, net of any pending indemnification or other claims under the Purchase Agreement.
The Purchase Consideration was allocated to the assets acquired and liabilities assumed, including identifiable intangible assets, based on their respective fair values at the date of acquisition. The valuation of the Acquired Companies' net assets remains preliminary while management completes its valuation, particularly the valuation of acquired intangible assets. None of the goodwill or intangible asset amounts are expected to be deductible for income tax purposes. Pro-forma results of operations, assuming this acquisition was made at the beginning of the earliest period presented, have not been presented because the effect of this acquisition was not material to our results. The net assets of the Acquired Companies and their results from operations are included in the Money Transfer Segment's results.
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed as of the acquisition date.
(in thousands)
 
As of May 20, 2014

Cash and cash equivalents
 
$
103,319

Derivative assets
 
26,597

Other current assets
 
2,902

Intangible assets
 
95,658

Other long-term assets
 
627

Total assets acquired
 
229,103

 
 
 
Trade accounts payable
 
(1,253
)
Accrued expenses and other current liabilities
 
(7,037
)
Derivative liabilities
 
(18,187
)
Settlement obligations and customer deposits
 
(97,781
)
Deferred tax liabilities
 
(21,826
)
Other long-term liabilities
 
(677
)
Total liabilities assumed
 
(146,761
)
 
 
 
Goodwill
 
160,939

 
 
 
Net assets acquired
 
$
243,281


The intangible assets of the Acquired Companies are being amortized on a straight-line basis, and the preliminary fair values consist of the following:

(in thousands)
 
Fair Value
 
Estimated
Useful Life
Proprietary Software
 
$
59,904

 
10 years
Customer relationships
 
18,168

 
8 years
Trade names
 
15,662

 
20 years
Non-compete agreements
 
1,924

 
3 years
Total intangible assets
 
$
95,658

 
 


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Table of Contents

(5) GOODWILL AND ACQUIRED INTANGIBLE ASSETS, NET
A summary of acquired intangible assets and goodwill activity for the six months ended June 30, 2014 is presented below:
(in thousands)
 
Acquired
Intangible
Assets
 
Goodwill
 
Total
Intangible
Assets
Balance as of December 31, 2013
 
$
93,026

 
$
498,435

 
$
591,461

Increases (decreases):
 
 
 
 
 
 
Acquisition
 
95,658

 
160,939

 
256,597

Amortization
 
(10,450
)
 

 
(10,450
)
Other (primarily changes in foreign currency exchange rates)
 
3,029

 
2,661

 
5,690

Balance as of June 30, 2014
 
$
181,263

 
$
662,035

 
$
843,298

Estimated amortization expense on intangible assets with finite lives, before income taxes, as of June 30, 2014, is expected to total $13.9 million for the remainder of 2014, $23.0 million for 2015, $21.4 million for 2016, $19.1 million for 2017, $16.5 million for 2018 and $15.6 million for 2019.
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, 2013 resulted in the Company recording a non-cash goodwill impairment charge of $18.4 million during the fourth quarter of 2013 with respect to certain reporting units included in the Company's epay 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 2013 annual impairment test could change, which may result in the Company recording additional material non-cash impairment charges during the year in which these changes take place.

(6) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
 
 
As of
(in thousands)
 
June 30, 2014
 
December 31, 2013
Accrued expenses
 
$
94,120

 
$
84,429

Accrued amounts due to mobile operators and other content providers
 
50,355

 
78,398

Money transfer settlement obligations
 
170,057

 
49,757

Derivative liabilities
 
20,093

 
82

Deferred income taxes
 
905

 
618

Total
 
$
335,530

 
$
213,284



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(7) DEBT OBLIGATIONS
A summary of debt obligation activity for the six months ended June 30, 2014 is presented below:
(in thousands)
 
Revolving
Credit
Facilities
 
Other Debt
Obligations
 
Capital
Leases
 
Term Loan A
 
Total
Balance at December 31, 2013
 
$
129,010

 
$
2,403

 
$
5,233

 
$
68,000

 
$
204,646

Increases (decreases):
 
 
 
 
 

 
 
 
 
Net borrowings (repayments)
 
197,191

 
3,597

 
(1,275
)
 
6,062

 
205,575

Capital lease interest
 

 

 
153

 

 
153

Foreign currency exchange loss (gain)
 
795

 
(40
)
 
33

 

 
788

Balance at June 30, 2014
 
326,996

 
5,960

 
4,144

 
74,062

 
411,162

Less — current maturities
 

 
(5,960
)
 
(2,215
)
 
(4,219
)
 
(12,394
)
Long-term obligations at June 30, 2014
 
$
326,996

 
$

 
$
1,929

 
$
69,843

 
$
398,768


Credit Facility
As of June 30, 2014, 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 (which has been reduced to $74.1 million through principal amortization payments) ("Term Loan A").
On April 9, 2014, the Company amended and restated the Credit Agreement to, among other things, (i) increase the amount of Term Loan A from $66 million to $75 million, (ii) increase the aggregate credit commitments under the revolving credit facility from $400 million to $600 million, (iii) reduce the margin over the London Inter-Bank Offered Rate (“LIBOR”) rate and base rate by 12.5 basis points, and (iv) extend the expiration date of the Credit Agreement from August 18, 2016 to April 9, 2019. In connection with the amendment, the Company incurred $2.5 million in debt issuance costs, which are being amortized over the term of the Credit Facility.
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 during the second quarter of fiscal 2014 was based on a margin over 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 1.71% and 1.52%, respectively, as of June 30, 2014, excluding amortization of deferred financing costs.
(8) 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 policy, the derivative instruments used in these activities are deemed economic hedges and are not designated as hedges under Accounting Standards Codification ("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 have an offsetting effect.
Foreign currency exchange contracts - Ria Operations
In the United States, the Company uses 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 June 30, 2014, the Company had foreign currency forward contracts outstanding in the U.S. with a notional value of $127 million, primarily in Australian dollars, Canadian dollars, British pounds, euros and Mexican pesos.

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Foreign currency exchange contracts - HiFX Operations
As discussed in Note 4, Acquisitions, on May 20, 2014, the Company acquired EIM (FX) Limited, which operates under the brand name HiFX. 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 hedges 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 $7.1 million for the three months ended June 30, 2014. All of the derivative contracts used in the Company' s HiFX operations are designated as economic hedges and are not designated as hedges under ASC Topic 815, Derivatives and Hedging. 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 our positions. The Company manages counterparty credit risk (the risk that counterparties will default and not make payments to us according to the terms of our agreements) on an individual counterparty basis. We mitigate this risk by entering into contracts with collateral posting requirements and/or by performing financial assessments prior to contract execution, conducting periodic evaluations of counterparty performance and maintaining a diverse portfolio of qualified counterparties. We do 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 June 30, 2014 was approximately $810 million. The significant majority of customer contracts are written in major currencies such as the euro, Canadian dollar, British pound, and the 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
 
June 30, 2014
 
December 31, 2013
 
Balance Sheet Location
 
June 30, 2014
 
December 31, 2013
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
Other current assets
 
$
29,256

 
$

 
Other current liabilities
 
$
(20,093
)
 
$
(82
)
The following tables summarize the gross and net fair value of derivative assets and liabilities as of June 30, 2014 and December 31, 2013 (in thousands):
Offsetting of Derivative Assets
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Consolidated Balance Sheet
 
 
As of June 30, 2014
 
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
 
$
29,320

 
$
(64
)
 
$
29,256

 
$
(11,195
)
 
$
(10,724
)
 
$
7,337

 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives subject to a master netting arrangement or similar agreement
 
$
96

 
$
(96
)
 
$

 
$

 
$

 
$


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Offsetting of Derivative Liabilities
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Consolidated Balance Sheet
 
 
As of June 30, 2014
 
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
 
$
(20,157
)
 
$
64

 
$
(20,093
)
 
$
11,195

 
$
5,798

 
$
(3,100
)
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives subject to a master netting arrangement or similar agreement
 
$
(178
)
 
$
96

 
$
(82
)
 
$

 
$

 
$
(82
)
Income Statement Presentation
The following tables summarize the location and amount of gains and losses of derivatives in the Consolidated Statements of Income for the three and six months ended June 30, 2014 and 2013:
 
 
 
 
Amount of Loss Recognized in Income on Derivative Contracts (a)
 
 
Location of Loss Recognized in Income on Derivative Contracts
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in thousands)
 
 
2014
 
2013
 
2014
 
2013
Foreign currency exchange contracts - Ria Operations
 
Foreign currency exchange loss (gain), net
 
$
(406
)
 
$
(887
)
 
$
(1,153
)
 
$
(194
)
(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.
See Note 9, Fair Value Measurements, for the determination of the fair values of derivatives.


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(9) FAIR VALUE MEASUREMENTS
Fair value measurements used in the consolidated financial statements are based upon the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities. 
Level 2 – Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the inputs that market participants would use in pricing.
The following table details financial assets and liabilities measured and recorded at fair value on a recurring basis:
 
 
 
 
As of June 30, 2014
(in thousands)
 
Balance Sheet Classification
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
Other current assets
 
$

 
$
29,256

 
$

 
$
29,256

Liabilities
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
Other current liabilities
 
$

 
$
(20,093
)
 
$

 
$
(20,093
)
 
 
 
 
As of December 31, 2013
(in thousands)
 
Balance Sheet Classification
 
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
Other current liabilities
 
$

 
$
(82
)
 
$

 
$
(82
)

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, including the current portion, approximate fair value because interest is primarily based on LIBOR, which resets at various intervals of less than one year.


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(10) 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 and HiFX. Ria provides global consumer-to-consumer money transfer services through a network of sending agents, Company-owned stores and Company owned website, 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. 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.
The following tables present the Company’s reportable segment results for the three and six months ended June 30, 2014 and 2013:

 
 
For the Three Months Ended June 30, 2014
(in thousands)
 
EFT
Processing
 
epay
 
Money
Transfer
 
Corporate
Services,
Eliminations
and Other
 
Consolidated
Total revenues
 
$
89,472

 
$
181,979

 
$
124,318

 
$
(307
)
 
$
395,462

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Direct operating costs
 
41,823

 
138,522

 
62,558

 
(266
)
 
242,637

Salaries and benefits
 
11,877

 
13,906

 
27,943

 
6,642

 
60,368

Selling, general and administrative
 
6,549

 
11,186

 
17,546

 
5,700

 
40,981

Depreciation and amortization
 
7,645

 
4,179

 
5,458

 
66

 
17,348

Total operating expenses
 
67,894

 
167,793

 
113,505

 
12,142

 
361,334

Operating income (expense)
 
$
21,578

 
$
14,186

 
$
10,813

 
$
(12,449
)
 
$
34,128


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For the Three Months Ended June 30, 2013
(in thousands)
 
EFT
Processing
 
epay
 
Money
Transfer
 
Corporate
Services,
Eliminations
and Other
 
Consolidated
Total revenues
 
$
72,221

 
$
176,663

 
$
93,357

 
$
(698
)
 
$
341,543

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Direct operating costs
 
34,615

 
135,402

 
44,961

 
(683
)
 
214,295

Salaries and benefits
 
9,569

 
14,387

 
21,397

 
6,399

 
51,752

Selling, general and administrative
 
5,433

 
10,335

 
13,753

 
1,936

 
31,457

Depreciation and amortization
 
7,653

 
4,030

 
4,463

 
93

 
16,239

Total operating expenses
 
57,270

 
164,154

 
84,574

 
7,745

 
313,743

Operating income (expense)
 
$
14,951

 
$
12,509

 
$
8,783

 
$
(8,443
)
 
$
27,800


 
 
For the Six Months Ended June 30, 2014
(in thousands)
 
EFT
Processing
 
epay
 
Money
Transfer
 
Corporate
Services,
Eliminations
and Other
 
Consolidated
Total revenues
 
$
164,077

 
$
367,043

 
$
218,318

 
$
(661
)
 
$
748,777

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Direct operating costs
 
79,161

 
281,863

 
108,530

 
(579
)
 
468,975

Salaries and benefits
 
22,972

 
27,500

 
51,253

 
12,217

 
113,942

Selling, general and administrative
 
12,651

 
20,273

 
33,691

 
7,237

 
73,852

Depreciation and amortization
 
14,941

 
8,325

 
10,091

 
141

 
33,498

Total operating expenses
 
129,725

 
337,961

 
203,565

 
19,016

 
690,267

Operating income (expense)
 
$
34,352

 
$
29,082

 
$
14,753

 
$
(19,677
)
 
$
58,510

 
 
For the Six Months Ended June 30, 2013
(in thousands)
 
EFT
Processing
 
epay
 
Money
Transfer
 
Corporate
Services,
Eliminations
and Other
 
Consolidated
Total revenues
 
$
135,555

 
$
366,238

 
$
176,260

 
$
(866
)
 
$
677,187

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Direct operating costs
 
67,527

 
282,059

 
84,633

 
(837
)
 
433,382

Salaries and benefits
 
19,214

 
28,482

 
41,481

 
11,302

 
100,479

Selling, general and administrative
 
11,281

 
20,002

 
26,100

 
5,077

 
62,460

Depreciation and amortization
 
15,969

 
8,533

 
9,221

 
185

 
33,908

Total operating expenses
 
113,991

 
339,076

 
161,435

 
15,727

 
630,229

Operating income (expense)
 
$
21,564

 
$
27,162

 
$
14,825

 
$
(16,593
)
 
$
46,958


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)
 
June 30, 2014
 
December 31, 2013
 
June 30, 2014
 
December 31, 2013
EFT Processing
 
$
73,298

 
$
64,972

 
$
466,399

 
$
347,073

epay
 
26,327

 
27,176

 
639,769

 
757,942

Money Transfer
 
25,434

 
23,768

 
868,135

 
472,390

Corporate Services, Eliminations and Other
 
234

 
314

 
20,206

 
20,710

Total
 
$
125,293

 
$
116,230

 
$
1,994,509

 
$
1,598,115


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(11) INCOME TAXES
The Company's effective income tax rates were 29.8% and 32.3% for the three months ended June 30, 2014 and 2013, respectively, and 28.4% and 28.1% for the six months ended June 30, 2014 and 2013, respectively. The Company's effective income tax rates for the three and six months ended June 30, 2014 and 2013 were lower than the applicable statutory income tax rate of 35% primarily because of the Company's U.S. income tax positions. The Company does not have a history of significant taxable income in the U.S.; therefore, the Company has recorded a valuation allowance against its U.S. federal tax net operating loss carryforwards. Accordingly, in instances when the Company's U.S. legal entities generate pre-tax U.S. GAAP income, no income tax expense is recognized to the extent there are net operating loss carryforwards to offset pre-tax U.S. GAAP income.
(12) COMMITMENTS
As of June 30, 2014, the Company had $98.3 million of stand-by letters of credit/bank guarantees issued on its behalf, of which $51.3 million are outstanding under the revolving credit facility. The remaining stand-by letters of credit/bank guarantees are collateralized by $5.1 million of cash deposits held by the respective issuing banks.
Under certain circumstances, Euronet grants guarantees in support of obligations of subsidiaries. As of June 30, 2014, the Company had granted off balance sheet guarantees for cash in various ATM networks amounting to $16.3 million over the terms of the cash supply agreements and performance guarantees amounting to approximately $31.6 million over the terms of the agreements with the customers.
Once each of Euronet's subsidiaries reaches a certain size, it is required under the Credit Agreement to provide a guarantee of all or a portion of the outstanding obligations under the Credit Agreement 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 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 is not recorded on the Company’s Consolidated Balance Sheets. As of June 30, 2014, the balance of ATM network cash for which the Company was responsible was approximately $428 million. The Company maintains insurance policies to mitigate this exposure;
In connection with contracts with financial institutions in the EFT Processing Segment, the Company is responsible for losses suffered by its customers and other parties as a result of the breach of its computer systems, including in particular, losses arising from fraudulent transactions made using information stolen through its processing systems. The Company maintains insurance policies to mitigate this exposure;
In connection with the license of proprietary systems to customers, 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

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Euronet has entered into agreements with certain third parties, including banks that provide fiduciary and other services to Euronet or to the Company’s benefit plans. Under such agreements, the Company has agreed to indemnify such service providers for third-party claims relating to carrying out their respective duties under such agreements.
The Company is also required to meet minimum capitalization and cash requirements of various regulatory authorities in the jurisdictions in which the Company has money transfer operations. The Company has obtained surety bonds in compliance with money transfer licensing requirements of the applicable governmental authorities.
To date, the Company is not aware of any significant claims made by the indemnified parties or third parties to guarantee agreements with the Company and, accordingly, no liabilities were recorded as of June 30, 2014 or December 31, 2013.

(13) LITIGATION AND CONTINGENCIES

Contingencies
Unclaimed property compliance - In September 2013, the Company entered into a voluntary disclosure agreement with the Secretary of State of the State of Delaware to determine compliance with Delaware unclaimed property laws. Types of property under examination include, but are not limited to, payroll checks, accounts payable checks and accounts receivable credits for the period 1996 through 2007. The total amount of exposure of this contingency is dependent upon the manner in which the State of Delaware applies its unclaimed property laws. The Company does not currently expect the outcome of this matter to have a material adverse effect on the Company's consolidated financial condition or results of operations.
Legal Proceedings
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 proceeding 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 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 economic conditions in specific countries and regions; 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 potential future security breaches; 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 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 other 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, 2013. Our Annual Report on Form 10-K is available on the SEC's EDGAR website at www.sec.gov, and a copy may also be obtained by contacting the Company. All forward-looking statements made in this Form 10-Q speak only as of the date of this report. 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
We are a leading electronic payments provider. We offer payment and transaction processing and distribution solutions to financial institutions, retailers, service providers and individual consumers. Our primary product offerings include comprehensive automated teller machine (“ATM”), point-of-sale (“POS”) and card outsourcing services, card issuing and merchant acquiring services; electronic distribution of prepaid mobile airtime and other electronic payment products; and global money transfer services. We operate in the following three segments:
The EFT Processing Segment, which processes transactions for a network of 19,313 ATMs and approximately 69,000 POS terminals across Europe, the Middle East and Asia Pacific. We provide comprehensive electronic payment solutions consisting of ATM cash withdrawal services, ATM network participation, outsourced ATM and POS management solutions, credit and debit card outsourcing, dynamic currency conversion, and other value added services. Through this segment, we also offer a suite of integrated electronic financial transaction software solutions for electronic payment and transaction delivery systems.
The epay Segment, which provides distribution, processing and collection services for prepaid mobile airtime and other electronic payment products. We operate a network of approximately 664,000 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 name Ria and global account-to-account money transfer services under the brand name HiFX. We offer services under Ria, through a network of sending agents, Company-owned stores (primarily in North America and Europe) and via the Company's website (riamoneytransfer.com), disbursing money transfers through a worldwide correspondent network that includes approximately 235,000 locations. We offer services under HiFX via the Company's website (www.hifx.com) or by contacting a HiFX customer service representative. 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 mobile top-up. Under our HiFM brand, we offer cash management solutions and foreign currency risk management services to small-to-medium sized businesses.
We have five processing centers in Europe, four in Asia Pacific and two in North America. We have 31 principal offices in Europe, 11 in Asia Pacific, six 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 75% 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 based on ATM management fees, transaction fees, commissions and foreign currency exchange margin. Each operating segment’s sources of revenues are described below.
EFT Processing Segment — Revenues in the EFT Processing Segment, which represented 23% and 22% of our total consolidated revenues for the second quarter and first half of 2014, respectively, 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 dynamic currency conversion transactions, and other value added services such as advertising, prepaid telecommunication recharges, bill payment, and money transfers provided over ATMs. Revenues in this segment are also derived from license fees, professional services and maintenance fees for proprietary application software and sales of related hardware.

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epay Segment — Revenues in the epay Segment, which represented 46% and 49% of our total consolidated revenues for the second quarter and first half of 2014, respectively, are primarily 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. Due to certain provisions in our mobile phone operator agreements, the operators have the ability to reduce the overall commission paid on top-up transactions. However, by virtue of our agreements with retailers (distributors where POS terminals are located) in certain markets, not all of these reductions are absorbed by us because we are able to pass a significant portion of the reductions to retailers. Accordingly, under certain retailer agreements, the effect is to reduce revenues and reduce our direct operating costs resulting in only a small impact on gross profit and operating income. In some markets, reductions in commissions can significantly impact our results as it may not be possible, either contractually or commercially in the concerned market, to pass a reduction in commissions to the retailers. In certain markets, retailers may negotiate directly with the mobile phone operators and prepaid content providers for their own commission rates, which also limits our ability to pass through reductions in commissions. Agreements with mobile operators and prepaid content providers are important to the success of our business. These agreements permit us to distribute prepaid mobile airtime and other electronic payment products to the end consumer. Other electronic payment products offered by this segment include prepaid long distance calling card plans, prepaid Internet plans, prepaid debit cards, gift cards, vouchers, transport payments, lottery payments, bill payment, money transfer and digital content such as music, games and software.
Money Transfer Segment — Revenues in the Money Transfer Segment, which represented 31% and 29% of our total consolidated revenues for the second quarter and first half of 2014, respectively, 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 network in place comprised of agents, customer service representatives, Company-owned stores, primarily in North America and Europe, and our websites riamoneytransfer.com and www.hifx.com, along with a worldwide network of correspondent agents, consisting primarily of financial institutions in the transfer destination countries. Sending and correspondent agents each earn fees for cash collection and distribution services. These fees are recognized as direct operating costs at the time of sale.
Corporate Services, Eliminations and Other - In addition to operating in our principal operating segments described above, our “Corporate Services, Eliminations and Other” category includes non-operating activity, certain inter-segment eliminations and the cost of providing corporate and other administrative services to the operating segments, including 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 currently focused on eight primary areas:
increasing the number of ATMs in our independent ATM 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 in our EFT Processing Segment, including the sale of dynamic currency conversion services to banks and retailers;
expanding our epay processing network and portfolio of electronic payment products;
expanding our money transfer 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;
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;

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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 to efficiently install ATMs contracted under newly awarded outsourcing agreements;
our ability to renew existing contracts at profitable rates;
our ability to maintain pricing at current levels or mitigate price reductions in certain markets;
the impact of reductions in ATM interchange fees;
our ability to expand and sign additional customers for the cross-border merchant processing and acquiring business; and
the continued development and implementation of our software products and their ability to interact with other leading products.

We consistently evaluate and add prospects to our list of potential ATM outsourcing customers. However, we cannot predict any 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 our epay Segment business will depend on various factors, including, but not necessarily limited to, the following:
our ability to maintain and renew existing agreements, and to negotiate new agreements in additional markets with mobile phone operators, content providers, agent financial institutions and retailers;
our ability to use existing expertise and relationships with mobile operators, content providers and retailers to our advantage;
the continued use of third-party providers such as ourselves to supply electronic processing solutions for existing and additional content;
the development of mobile phone networks in the markets in which we do business and the increase in the number of mobile phone users;
the overall pace of growth in the prepaid mobile phone market, including consumer shifts between prepaid and postpaid services;
our market share of the retail distribution capacity;
the development of new technologies that may compete with POS distribution of prepaid mobile airtime and other products;
the level of commission that is paid to the various intermediaries in the electronic payment distribution chain;
our ability to fully recover monies collected by retailers;
our ability to add new and differentiated products in addition to those offered by mobile operators;
our ability to develop and effectively market additional value added services;
our ability to take advantage of cross-selling opportunities with our Money Transfer Segment, including providing money transfer services through our distribution network; and
the availability of financing for further expansion.


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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 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 distributors, offer a superior product offering and demonstrate the value of a global network. In certain markets in which we operate, we believe that many of the factors that may contribute to rapid growth (growth in electronic payment products, expansion of our network of retailers and access to all mobile operators' products) 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 U.S.;
the continuation of the trend of increased use of electronic money transfer and bill payment services among immigrant workers and the unbanked population in our markets;
our ability to maintain our agent and correspondent networks;
our ability to offer our products and services or develop new products and services at competitive prices to drive increases in transactions;
the development of new technologies that may compete with our money transfer network;
the expansion of our services in markets where we operate and in new markets;
our ability to strengthen our brands;
our ability to fund working capital requirements;
our ability to recover from agents funds collected from customers and our ability to recover advances made to correspondents;
our ability to maintain compliance with the regulatory requirements of the jurisdictions in which we operate or plan to operate;
our ability to take advantage of cross-selling opportunities with our epay Segment, including providing prepaid services through Ria’s stores and agents worldwide;
our ability to leverage our banking and merchant/retailer relationships to expand money transfer corridors to Europe, Asia and Africa, including high growth corridors to Central and Eastern European countries;
the availability of financing for further expansion; and
our ability to successfully expand our agent network in Europe using our payment institution licenses under the Payment Services Directive and in the United States.

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. Any inability to continue to effectively manage expansion could have a material adverse effect on our business, growth, financial condition and 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 six months ended June 30, 2014 and 2013 are summarized in the tables below:
 
 
Revenues for the Three Months Ended June 30,
 
Year-over-Year Change
 
Revenues for the Six Months Ended June 30,
 
Year-over-Year Change
(dollar amounts in thousands)
 
2014
 
2013
 
Increase
Amount
 
Increase
Percent
 
2014
 
2013
 
Increase
Amount
 
Increase
Percent
EFT Processing
 
$
89,472

 
$
72,221

 
$
17,251

 
24
%
 
$
164,077

 
$
135,555

 
$
28,522

 
21
%
epay
 
181,979

 
176,663

 
5,316

 
3
%
 
367,043

 
366,238

 
805

 
n/m

Money Transfer
 
124,318

 
93,357

 
30,961

 
33
%
 
218,318

 
176,260

 
42,058

 
24
%
Total
 
395,769

 
342,241

 
53,528

 
16
%
 
749,438

 
678,053

 
71,385

 
11
%
Corporate services, eliminations and other
 
(307
)
 
(698
)
 
391

 
n/m

 
(661
)
 
(866
)
 
205

 
n/m

Total
 
$
395,462

 
$
341,543

 
$
53,919

 
16
%
 
$
748,777

 
$
677,187

 
$
71,590

 
11
%
 
 
Operating Income (Expense) for the Three Months Ended June 30,
 
Year-over-Year Change
 
Operating Income (Expense) for the Six Months Ended June 30,
 
Year-over-Year Change
(dollar amounts in thousands)
 
2014
 
2013
 
Increase
(Decrease)Amount
 
Increase
Percent
 
2014
 
2013
 
Increase
(Decrease)Amount
 
Increase
Percent
EFT Processing
 
$
21,578

 
$
14,951

 
$
6,627

 
44
%
 
$
34,352

 
$
21,564

 
$
12,788

 
59
%
epay
 
14,186

 
12,509

 
1,677

 
13
%
 
29,082

 
27,162

 
1,920

 
7
%
Money Transfer
 
10,813

 
8,783

 
2,030

 
23
%
 
14,753

 
14,825

 
(72
)
 
n/m

Total
 
46,577

 
36,243

 
10,334

 
29
%
 
78,187

 
63,551

 
14,636

 
23
%
Corporate services, eliminations and other
 
(12,449
)
 
(8,443
)
 
(4,006
)
 
47
%
 
(19,677
)
 
(16,593
)
 
(3,084
)
 
19
%
Total
 
$
34,128

 
$
27,800

 
$
6,328

 
23
%
 
$
58,510

 
$
46,958

 
$
11,552

 
25
%
___________________
n/m — Not meaningful
Impact of changes in foreign currency exchange rates
Our revenues and local expenses are recorded in the functional currencies of our operating entities; therefore, amounts we earn outside the U.S. are negatively impacted by the stronger U.S. dollar and positively impacted by the weaker U.S. dollar. Considering the results by country and the associated functional currency, we estimate that our consolidated operating income for the second quarter and first half of 2014 was approximately 5% and 4% higher, respectively, when compared to the same periods of 2013 as a result of changes in foreign currency exchange rates. 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 June 30,
 
Increase
(Decrease)Percent
 
Average Translation Rate
Six Months Ended June 30,
 
Increase
(Decrease)Percent
Currency (dollars per foreign currency)
 
2014
 
2013
 
 
2014
 
2013
 
Australian dollar
 
$
0.9330

 
$
0.9897

 
(6
)%
 
$
0.9146

 
$
1.0141

 
(10
)%
Brazilian real
 
$
0.4489

 
$
0.4837

 
(7
)%
 
$
0.4362

 
$
0.4923

 
(11
)%
British pound
 
$
1.6833

 
$
1.5360

 
10
 %
 
$
1.6692

 
$
1.5437

 
8
 %
euro
 
$
1.3714

 
$
1.3061

 
5
 %
 
$
1.3708

 
$
1.3133

 
4
 %
Hungarian forint
 
$
0.0045

 
$
0.0044

 
2
 %
 
$
0.0045

 
$
0.0044

 
2
 %
Indian rupee
 
$
0.0167

 
$
0.0179

 
(7
)%
 
$
0.0165

 
$
0.0182

 
(10
)%
Polish zloty
 
$
0.3295

 
$
0.3113

 
6
 %
 
$
0.3286

 
$
0.3148

 
4
 %


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COMPARISON OF OPERATING RESULTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2013
EFT PROCESSING SEGMENT
The following table presents the results of operations for the three and six months ended June 30, 2014 and 2013 for our EFT Processing Segment:
 
 
Three Months Ended
June 30,
 
Year-over-Year Change
 
Six Months Ended
June 30,
 
Year-over-Year Change
(dollar amounts in thousands)
 
2014
 
2013
 
Increase (Decrease) Amount
 
Increase
Percent
 
2014
 
2013
 
Increase (Decrease) Amount
 
Increase (Decrease) Percent
Total revenues
 
$
89,472

 
$
72,221

 
$
17,251

 
24
%
 
$
164,077

 
$
135,555

 
$
28,522

 
21
 %
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Direct operating costs
 
41,823

 
34,615

 
7,208

 
21
%
 
79,161

 
67,527

 
11,634

 
17
 %
Salaries and benefits
 
11,877

 
9,569

 
2,308

 
24
%
 
22,972

 
19,214

 
3,758

 
20
 %
Selling, general and administrative
 
6,549

 
5,433

 
1,116

 
21
%
 
12,651

 
11,281

 
1,370

 
12
 %
Depreciation and amortization
 
7,645

 
7,653

 
(8
)
 
n/m

 
14,941

 
15,969

 
(1,028
)
 
(6
)%
Total operating expenses
 
67,894

 
57,270

 
10,624

 
19
%
 
129,725

 
113,991

 
15,734

 
14
 %
Operating income
 
$
21,578

 
$
14,951

 
$
6,627

 
44
%
 
$
34,352

 
$
21,564

 
$
12,788

 
59
 %
Transactions processed (millions)
 
320

 
297

 
23

 
8
%
 
621

 
573

 
48

 
8
 %
ATMs as of June 30,
 
19,313

 
17,242

 
2,071

 
12
%
 
19,313

 
17,242

 
2,071

 
12
 %
Average ATMs
 
18,993

 
17,694

 
1,299

 
7
%
 
18,702

 
17,709

 
993

 
6
 %

Revenues
Our revenues for the second quarter and first half of 2014 increased when compared to the same periods of 2013, primarily due to an increase in the number of transactions processed in Poland as a result of an increase in the number of ATMs under management, an increase in the number of ATMs in India, an increase in demand for dynamic currency conversion ("DCC") on both our ATMs and POS devices under management, growth in revenues from debit and credit card outsourcing services in Greece and the net impact of the U.S. dollar weakening against key foreign currencies.
Average monthly revenues per ATM were $1,570 for the second quarter and $1,462 for the first half of 2014 compared to $1,361 for the second quarter and $1,276 for the first half of 2013. Revenues per transaction were $0.28 for the second quarter and $0.26 for the first half of 2014 compared to $0.24 for both the second quarter and first half of 2013. These increases were primarily the result of revenue growth from DCC on our ATMs under management, which earns higher revenues per transaction than other ATM or card based services, and the net impact of the U.S. dollar weakening against key foreign currencies.
Direct operating costs
Direct operating costs consist primarily of site rental fees, cash delivery costs, cash supply costs, maintenance, insurance, telecommunications, data center operations-related personnel, as well as the processing centers’ facility-related costs and other processing center-related expenses and commissions paid to retail merchants, banks and card processors involved with POS DCC transactions. Direct operating costs increased for the second quarter and first half of 2014 compared to the same periods of 2013, primarily due to an increase in the number of ATMs under management, an increase in demand for DCC on POS devices, growth in revenues from debit and credit card outsourcing services in Greece and 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 $47.6 million for the second quarter and $84.9 million for the first half of 2014 compared to $37.6 million for the second quarter and $68.0 million for the first half of 2013. The increase in gross profit was primarily due to growth in revenues from DCC, an increase in ATMs under management in Poland, growth in revenues from debit and credit card outsourcing services in Greece and the net impact of the U.S. dollar weakening against key foreign currencies. Gross profit as a percentage of revenues (“gross margin”) was 53.3% for the second quarter and 51.8% for the first half of 2014 compared to 52.1% for the second quarter and 50.2% for the first half of 2013. The

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increase in gross margin was primarily due to growth in revenues from DCC on our ATMs under management, which earns a higher gross profit than other services.
Salaries and benefits
The increase in salaries and benefits for the second quarter and first half of 2014 compared to the same periods of 2013 was primarily due to additional headcount to support the increase in the number of ATMs under management. As a percentage of revenues, these costs increased slightly to 13.3% for the second quarter of 2014 from 13.2% for same period of 2013, while decreasing slightly to 14.0% for the first half of 2014 from 14.2% for the same period of 2013.
Selling, general and administrative
The increase in selling, general and administrative expenses for the second quarter and first half of 2014 compared to the same periods of 2013 was primarily due to increased support costs as a result of the increase in the number of ATMs under management and growth in DCC transactions on POS devices. As a percentage of revenues, these expenses decreased slightly to 7.3% for the second quarter and 7.7% for the first half of 2014 from 7.5% for the second quarter and 8.3% for the first half of 2013. These decreases were primarily due to the growth in revenues earned from DCC transactions on our ATMs under management, which require minimal incremental support costs.
Depreciation and amortization
The decrease in depreciation and amortization expense for the second quarter and first half of 2014 compared to the same periods of 2013 was primarily due to certain software assets becoming fully amortized during 2013, partly offset by an increase in depreciation on our ATMs under management. As a percentage of revenues, depreciation and amortization expense decreased to 8.5% for the second quarter and 9.1% for the first half of 2014 from 10.6% for the second quarter and 11.8% for the first half of 2013, primarily due to the growth in revenues from DCC transactions on our ATMs under management, while depreciation and amortization expense has decreased.
Operating income
The increase in operating income for the second quarter and first half of 2014 compared to the same periods of 2013 was primarily due to the increase in the number of ATMs under management discussed above, growth in revenues earned from DCC transactions, growth in revenues from debit and credit card management services in Greece, the decrease in amortization expense related to software assets and the net impact of the U.S. dollar weakening against key foreign currencies. Operating income as a percentage of revenues (“operating margin”) increased to 24.1% for the second quarter and 20.9% for the first half of 2014 from 20.7% for the second quarter and 15.9% for the first half of 2013. The increase in operating margin was primarily due to growth in revenues earned from DCC on our ATMs under management.
Operating income per transaction increased to $0.07 for the second quarter and $0.06 for the first half of 2014 from $0.05 for the second quarter and $0.04 for the first half of 2013. The increase in operating income per transaction was primarily due to growth in revenues earned from DCC on our ATMs under management and the net impact of the U.S. dollar weakening against key foreign currencies.


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EPAY SEGMENT
The following table presents the results of operations for the three and six months ended June 30, 2014 and 2013 for our epay Segment:
 
 
Three Months Ended
June 30,
 
Year-over-Year Change
 
Six Months Ended
June 30,
 
Year-over-Year Change
(dollar amounts in thousands)
 
2014
 
2013
 
Increase (Decrease) Amount
 
Increase (Decrease) Percent
 
2014
 
2013
 
Increase
(Decrease)Amount
 
Increase
(Decrease)Percent
Total revenues
 
$
181,979

 
$
176,663

 
$
5,316

 
3
 %
 
$
367,043

 
$
366,238

 
$
805

 
n/m

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Direct operating costs
 
138,522

 
135,402

 
3,120

 
2
 %
 
281,863

 
282,059

 
(196
)
 
n/m

Salaries and benefits
 
13,906

 
14,387

 
(481
)
 
(3
)%
 
27,500

 
28,482

 
(982
)
 
(3
)%
Selling, general and administrative
 
11,186

 
10,335

 
851

 
8
 %
 
20,273

 
20,002

 
271

 
1
 %
Depreciation and amortization
 
4,179

 
4,030

 
149

 
4
 %
 
8,325

 
8,533

 
(208
)
 
(2
)%
Total operating expenses
 
167,793

 
164,154

 
3,639