Western Union Company — Q2 2009 Form 10-Q
Reporting period: Three and six months ended June 30, 2009; filed August 4, 2009. Western Union provides consumer money transfers and business payment services through a global agent network. Financial statements are unaudited.
Financial performance
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Revenue | $1,254.3 million | $1,347.1 million | $2,455.5 million | $2,613.0 million |
| Operating income | $341.7 million | $336.2 million | $682.6 million | $645.5 million |
| Operating margin | 27% | 25% | 28% | 25% |
| Net income | $220.2 million | $231.5 million | $444.1 million | $438.6 million |
| Diluted EPS | $0.31 | $0.31 | $0.63 | $0.58 |
- Q2 revenue decreased 7%, while operating income increased 2% and net income decreased 5%. For the first half, revenue declined 6%, operating income increased 6%, and net income increased 1%.
- Transaction fees and foreign-exchange revenue declined; commission and other revenue rose. Cost of services fell 12% in both comparable periods, reflecting lower commissions, stronger-dollar translation, savings from 2008 restructuring, and FEXCO-related commission savings.
- Consumer-to-consumer revenue fell 7% in Q2 and 6% in the first half, while transaction volumes grew 3% and 5%. Global business payments revenue decreased 8% in both periods, despite transaction growth of 3%.
- Operating cash flow for the first half was $606.3 million, up 8% year over year. Cash and cash equivalents were $1,782.4 million at June 30, up from $1,295.6 million at year-end. Investing activities provided $60.9 million, including $234.9 million of proceeds from the Reserve Fund receivable; financing activities used $180.4 million.
- Borrowings were $3,049.8 million, down from $3,143.5 million at year-end. The $1.5 billion revolving credit facility was undrawn, and there was no commercial paper outstanding. Settlement assets and corresponding settlement obligations were each $1,219.7 million.
Changes, outlook and management commentary
- Revenue pressure reflected the weak economy, lower transaction growth in certain markets, product and geographic mix, price reductions, and a stronger U.S. dollar. Currency movements reduced first-half transaction-fee and foreign-exchange revenue by $120.8 million, net of hedges. Management expected continued adverse currency effects for the rest of 2009 if exchange rates remained at first-half levels.
- Management indicated fee reductions and foreign-exchange spread actions could equal about 2% of full-year 2009 revenue, versus 1% in 2008. It noted these actions may reduce margins initially, with the aim of supporting transaction volumes and revenue over time. No specific earnings or revenue forecast is provided in the filing.
- FEXCO’s money-transfer business was acquired in February for $243.6 million, including $157.4 million cash consideration; the acquisition changed agent commission economics but did not add revenue previously unrecognized. A $370 million Custom House acquisition was pending, subject to regulatory approval and closing conditions, and was expected to close in Q3 2009.
- Beginning October 1, 2009, Western Union planned to assume issuance and settlement of its money orders from First Data subsidiary IPS, along with approximately $800 million of related funds and liabilities. Management expected investment income and interest-rate swaps to support a comparable return through 2011.
- Capital priorities included liquidity, dividends, share repurchases, and the pending Custom House acquisition. The company repurchased $100.0 million of shares during the first half; $839.7 million remained under the 2008 authorization through year-end.
Risks, contingencies and unusual items
- The remaining Reserve International Liquidity Fund receivable was $51.2 million, net of a $12 million reserve. Further deterioration or legal and administrative costs could require additional reserves.
- Tax uncertainty was significant: unrecognized tax benefits were $414.2 million, excluding interest and penalties; the filing’s MD&A reported $456.6 million including interest and penalties. The IRS asserted approximately $114 million of disputed additional tax and penalties, plus about $26 million interest. Western Union contested the adjustments in Tax Court; an adverse outcome could materially increase tax expense.
- Arizona’s Supreme Court ruled for Western Union on jurisdiction over transfers sent from other states to Mexico, but state scrutiny and information requests continued. Further civil or criminal actions remained possible; no liability was accrued because the outcome and amounts were uncertain.
- Two frozen pension plans had an unfunded obligation of $106.5 million. Planned contributions were approximately $4 million in the second half of 2009 and $25 million in 2010. Outstanding letters of credit and bank guarantees totaled $87.8 million.
- Foreign-exchange, interest-rate, agent credit, fraud, regulatory, litigation, acquisition-integration, and tax risks could affect results. A 100-basis-point rate increase was estimated to reduce annual pretax income by $7.5 million on rate-sensitive borrowings, offset by an estimated $17.4 million benefit on rate-sensitive cash and investments.
Important facts for investors to verify
- Whether transaction growth can translate into revenue growth despite currency effects, pricing actions, and lower revenue per transaction.
- The final recovery from the Reserve Fund and any additional impairment or reserve requirement.
- The outcome and potential cash cost of the IRS dispute, and the distinction between tax reserves excluding and including interest and penalties.
- Completion and integration of Custom House, and the financial impact of taking over money-order issuance and settlement from IPS.
- Liquidity, leverage, and capital returns after acquisitions, pension contributions, dividends, and any further share repurchases.