Business Context and Reporting Period
Company: The Western Union Company
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2008
Business Overview: Western Union is a global leader in money transfer services, operating primarily through two segments: Consumer-to-Consumer (C2C) and Consumer-to-Business (C2B). The company operates a network of over 365,000 agent locations in more than 200 countries and territories.
Key Financial Metrics
| Financial Metric (in millions) | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Total Revenues | $1,377.4 | $3,990.4 |
| Operating Income | $375.2 | $1,020.7 |
| Net Income | $240.8 | $679.4 |
| Diluted Earnings Per Share | $0.33 | $0.91 |
| Operating Cash Flow (9 months) | N/A | $925.3 |
| Cash and Cash Equivalents (Sep 30, 2008) | $1,129.6 | $1,129.6 |
| Total Borrowings (Sep 30, 2008) | $3,082.5 | $3,082.5 |
Segment Performance (Nine Months 2008):
- Consumer-to-Consumer: Revenue of $3,377.3 million; Operating Income of $906.8 million.
- Consumer-to-Business: Revenue of $545.6 million; Operating Income of $152.5 million.
- Other: Revenue of $67.5 million; Operating Income of $11.7 million.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 10% for the quarter and 11% for the nine-month period compared to 2007. Growth was driven by international C2C transactions, particularly in the Europe, Middle East, Africa, and South Asia (EMEASA) region.
- Profitability: Operating income rose 14% (quarter) and 7% (nine months). Net income increased 11% in both periods.
- Restructuring Expenses: The company incurred $3.2 million in restructuring costs for the quarter and $50.3 million for the nine months ended September 30, 2008. This relates to the closure of facilities in Missouri and Texas and other reorganizations. Total expected expenses for these initiatives are approximately $70 million.
- Stock Repurchases: The company repurchased 50.4 million shares for $1,205.4 million during the first nine months of 2008, significantly higher than the $580.8 million spent in the same period in 2007.
- Derivative Losses: Derivative losses were $14.4 million for the quarter and $10.0 million for the nine months, compared to gains of $2.0 million and $5.1 million in the prior year periods, due to credit market volatility.
Guidance, Outlook, and Risks
Outlook and Commentary:
- Currency Impact: Fluctuations in the euro provided a revenue benefit of $24 million (quarter) and $95 million (nine months). Management expects a negative impact on revenue in Q4 2008 and 2009 if the euro continues to weaken, though hedging programs are expected to mitigate the impact on operating profit.
- Fee Reductions: Strategic fee decreases and foreign exchange spread reductions are expected to impact 2008 consolidated revenue by approximately 1%, a lower rate than historical averages.
- Restructuring Savings: The $70 million in restructuring expenses is expected to yield operating expense savings of $10 million in 2008 and $35 million annually starting in 2009.
Risks and Contingencies:
- Investment Liquidity Risk: Western Union requested the redemption of $298.1 million from the Reserve International Liquidity Fund, Ltd. on September 15, 2008, following Lehman Brothers' bankruptcy. The fund has suspended redemptions. While the company believes the funds are fully collectible, payment may be delayed until 2009, and there is a risk of receiving less than the $1.00 per share net asset value.
- Legal Proceedings: A class action complaint was filed in September 2008 alleging violations of the Fair and Accurate Credit Transactions Act (FACTA) regarding debit/credit card expiration dates on receipts. The company intends to vigorously defend the claim.
- Tax Uncertainty: The company has $383.1 million in unrecognized tax benefits (including interest and penalties) related to international operations restructured in 2003. Resolution of these matters could materially impact future tax expense.
Investor Verification Checklist
- Reserve Fund Redemption: Monitor the status of the $298.1 million redemption request from the Reserve International Liquidity Fund and any potential impairment charges.
- Restructuring Progress: Verify the timeline and cost realization of the Missouri and Texas facility closures and the associated $35 million annual savings target.
- Currency Hedging Effectiveness: Assess the impact of a weakening euro on Q4 2008 and 2009 revenues versus the effectiveness of the company's hedging program.
- FACTA Litigation: Track developments in the class action lawsuit regarding receipt disclosures and potential statutory damages.
- Debt Refinancing: Evaluate the company's ability to refinance $500 million in floating rate notes maturing in November 2008 given current credit market conditions.