Western Union CO - 10-Q Summary (Period Ended Sep 30, 2007)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2007, and the nine months ended on that date. 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 as a stand-alone public entity following its spin-off from First Data Corporation on September 29, 2006. As of October 31, 2007, there were 750,917,400 shares of common stock outstanding.
Key Financial Metrics
| Metric (in millions) | 3 Months Ended Sep 30, 2007 | 9 Months Ended Sep 30, 2007 |
|---|---|---|
| Total Revenues | $1,257.2 | $3,591.1 |
| Operating Income | $330.1 | $957.4 |
| Net Income | $216.3 | $614.0 |
| Diluted EPS | $0.28 | $0.79 |
| Operating Cash Flow (9mo) | $883.3 | |
| Total Borrowings | $3,272.6 | |
| Cash & Equivalents | $1,669.0 |
Margins: Operating income margin for the C2C segment was 26% for both the three and nine-month periods. The C2B segment operating margin was 29% (3 months) and 31% (9 months).
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 10% for the quarter and 9% for the nine-month period compared to 2006. This was driven by a 15% increase in C2C transactions and a 71% increase in C2B transactions (the latter significantly boosted by the acquisition of Pago Fácil).
- Profitability Decline: Net income decreased 16% for the quarter and 12% for the nine-month period. Operating income declined 2% in both periods.
- Expense Increases: Cost of services rose 15% (quarter) and 16% (9 months), while SG&A expenses rose 16% and 7%, respectively. These increases were driven by higher stand-alone public company costs, the inclusion of Pago Fácil, and a one-time non-cash stock compensation charge of $22.3 million related to the KKR acquisition of First Data.
- Interest Expense: Interest expense increased significantly (from $1.2M to $47.1M for the quarter) due to the full-year impact of debt issued during the 2006 spin-off.
Guidance, Outlook, and Risks
- Outlook: Management expects 2007 operating cash flows to exceed $1.0 billion. Capital expenditures for 2007 are estimated to be under $200 million. The company anticipates pricing decreases and foreign exchange actions will impact approximately 3.3% of consolidated revenue for the full year.
- Segment Performance: International C2C revenue grew 16% (quarter) and 15% (9 months), offsetting declines in domestic U.S. and Mexico businesses due to immigration debates, construction slowdowns, and tightened card fraud controls.
- Risks & Contingencies:
- Tax Litigation: A Russian tax audit asserted a $20 million VAT claim for 2003-2004. Western Union has won at lower court levels but faces potential appeal to the supreme court; no loss has been accrued.
- Unrecognized Tax Benefits: As of September 30, 2007, unrecognized tax benefits totaled $248.4 million (including interest/penalties), primarily related to the 2003 international restructuring.
- Market Risks: Exposure to foreign currency fluctuations (hedged via forwards) and interest rate changes (floating rate debt of $500M and commercial paper of $274.9M).
Investor Verification Checklist
- Verify the sustainability of international transaction growth (up 20%) versus domestic declines (down 4-5%) and the impact of U.S. immigration policy and fraud controls.
- Assess the impact of the $22.3 million non-cash stock compensation charge on reported earnings and future expense baselines.
- Review the status of the Russian VAT litigation and the $248.4 million unrecognized tax benefit liability.
- Monitor the integration and margin performance of the Pago Fácil acquisition within the C2B segment.
- Confirm the company's ability to maintain liquidity given $3.27 billion in borrowings and ongoing share repurchases ($580.8M in the first nine months).