Western Union Company — Q1 2009 Form 10-Q
Reporting period: Three months ended March 31, 2009; comparative period is Q1 2008. Western Union provides consumer-to-consumer money transfers, consumer-to-business payments, and other services through a network spanning more than 200 countries and territories. Interim results are unaudited and may be affected by seasonality.
Financial performance
| Metric | Q1 2009 | Q1 2008 | Change |
|---|---|---|---|
| Revenue | $1,201.2 million | $1,265.9 million | Down 5% |
| Operating income | $340.9 million | $309.3 million | Up 10% |
| Operating margin | 28% | 24% | Up 4 percentage points |
| Net income | $223.9 million | $207.1 million | Up 8% |
| Diluted EPS | $0.32 | $0.27 | Up 19% |
| Operating cash flow | $356.6 million | $318.0 million | Up 12% |
Cost of services fell 12% to $669.1 million; SG&A fell 3% to $191.2 million. Q1 2008 operating income included $24.2 million of restructuring costs that did not recur. Excluding those costs, prior-year operating income was $333.5 million, so reported Q1 2009 operating income increased about 2% on that comparison. The effective tax rate was 26.6%, versus 29.2%.
Cash and cash equivalents were $1.510 billion at March 31, 2009, up from $1.296 billion at year-end 2008. Borrowings were $3.057 billion, down from $3.144 billion; stockholders’ equity was $113.9 million, compared with a $8.1 million deficiency at year-end. The company had a $1.5 billion undrawn revolving credit facility and no commercial paper outstanding. Settlement assets and obligations were each $1.182 billion and should be distinguished from operating liquidity.
Business trends and changes
- Consumer-to-consumer revenue declined 5% to $1.004 billion, while transactions rose 7% to 45.9 million. Segment operating income increased 5% to $286.7 million, and margin rose to 29% from 26%.
- Consumer-to-business revenue declined 8% to $174.2 million; transactions increased 2% to 105.9 million. Segment operating income fell 10% to $50.5 million, with margin down to 29% from 30%.
- Management attributed lower revenue mainly to the stronger U.S. dollar, weaker economic conditions, transaction and geographic mix, and price reductions. Currency movements reduced transaction-fee and foreign-exchange revenue by $60.7 million net of hedges. Consumer-to-consumer principal transferred fell 4% to $16 billion.
- On February 24, Western Union acquired FEXCO’s money-transfer business for $243.6 million, including $157.4 million cash consideration and surrender of its prior 24.65% FEXCO Group interest. The acquisition did not add revenue previously recognized from FEXCO subagents; management expects lower commission costs and distribution benefits.
- Net cash from investing activities was $39.6 million, including $193.6 million received from redemption of a money-market fund investment. Financing cash outflow was $181.8 million, including $100.1 million of share repurchases.
Outlook, risks and unusual items
- No quantified full-year earnings or revenue guidance is provided. Management expected continued negative revenue effects from exchange rates for the remainder of 2009 if rates remained at Q1 levels. It expected 2009 fee reductions and foreign-exchange actions to represent about 2% of revenue, versus 1% in 2008; these actions may pressure margins.
- Beginning October 1, 2009, Western Union planned to assume money-order issuance and settlement responsibilities from First Data subsidiary IPS, along with the related cash and approximately $800 million of variable outstanding obligations. Management expected investment income and interest-rate swaps to support a comparable return through 2011; actual returns will be sensitive to interest rates and investment performance.
- A remaining $104.5 million redemption claim against the Reserve International Liquidity Fund was carried in other assets. Recovery timing and amount were uncertain; management estimated possible loss exposure of about $12 million in a pro-rata distribution, excluding potential fund costs.
- The IRS Notice of Deficiency for 2003–2004 returns alleges approximately $114 million of additional tax and penalties on disputed adjustments, plus approximately $25 million of interest as of March 31. Western Union contested the disputed adjustments in Tax Court; management said reserves were adequate, but an adverse outcome could materially increase tax expense. Total unrecognized tax benefits, including accrued interest and penalties, were reported as $426.0 million.
- Western Union disclosed ongoing Arizona scrutiny and litigation involving money transfers to Mexico, including possible additional civil or criminal actions that could materially affect the business. Management said ordinary-course claims were not expected to have a material adverse effect overall.
- Other exposures include foreign-exchange and interest-rate movements, economic weakness and agent credit risk, regulation and anti-money-laundering compliance, and the ability to maintain agent relationships. The company reported $87.1 million of letters of credit and bank guarantees.
Most important facts for investors to verify
- Whether transaction growth can translate into revenue growth despite currency effects, pricing actions, and mix shifts.
- Recovery and valuation of the $104.5 million Reserve Fund balance, including any impairment or distribution shortfall.
- Developments in the IRS dispute, associated reserves, and the Arizona legal and regulatory matters.
- Execution and economics of the October 2009 money-order transition, including investment returns and interest-rate exposure.
- FEXCO integration costs and whether expected commission savings and growth benefits materialize.
The independent accountant conducted an interim review, not an audit, and reported no material modifications needed to the condensed financial statements.