Business Context and Reporting Period
This Form 10-Q covers The Western Union Company for the quarterly period ended September 30, 2006. The filing is significant as it marks the company's first quarter as a standalone public entity following its spin-off from First Data Corporation, which became effective on September 29, 2006. Prior to this date, Western Union operated as a segment of First Data. The financial statements for periods prior to the spin-off are presented on a combined basis, reflecting the historical results of the businesses transferred to Western Union.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2006 | Nine Months Ended Sep 30, 2006 |
|---|---|---|
| Total Revenues | $1,140.4 million | $3,297.0 million |
| Net Income | $258.1 million | $696.8 million |
| Operating Income | $337.1 million | $976.2 million |
| Earnings Per Share (Diluted) | $0.34 | $0.91 |
| Cash and Cash Equivalents | $1,327.6 million | $1,327.6 million (Balance Sheet) |
| Total Debt | $3,499.6 million | $3,499.6 million (Balance Sheet) |
| Operating Cash Flow (9 Months) | N/A | $777.6 million |
Debt Structure: As of September 30, 2006, total borrowings consisted of a $2.4 billion bridge loan facility (due September 2007), $100 million under a revolving credit facility, and $1.0 billion in 5.930% notes due 2016. No borrowings existed at December 31, 2005.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 12% for the three months and 13% for the nine months ended September 30, 2006, compared to the prior year. This was driven by a 24% increase in consumer-to-consumer transactions (37.6 million vs. 30.3 million) and the inclusion of Vigo Remittance Corporation, acquired in October 2005.
- Expense Increases: Total expenses rose 19% (three months) and 18% (nine months). Cost of services increased due to a shift in business mix toward higher-cost international transactions and the Vigo acquisition. Selling, general, and administrative (SG&A) expenses increased due to spin-off costs, higher overhead allocations from First Data, and the adoption of SFAS No. 123R for stock-based compensation.
- Operating Income: Operating income decreased slightly by 2% for the three months ($337.1 million vs. $342.7 million) but increased 2% for the nine months ($976.2 million vs. $955.3 million).
- Balance Sheet Transformation: The company transitioned from a net investment position within First Data to a standalone entity with significant debt ($3.5 billion) and increased cash reserves ($1.3 billion) resulting from the spin-off settlement.
Guidance, Outlook, and Risks
- Spin-Off Impact on Costs: Management expects interest expense and corporate overhead costs to be higher in the future than historical amounts. Incremental annualized costs associated with being a standalone company are estimated at $65 million to $75 million in 2007.
- Capital Expenditures: Estimated capital expenditures for 2007 are projected to be between $200 million and $250 million.
- Regulatory and Immigration Risks: The company noted that the U.S. immigration debate and related regulatory activities (specifically in Arizona) have created fear among Hispanic consumers, adversely affecting transaction frequency in U.S. domestic and Mexico corridors. Management expects these issues to continue impacting the business.
- Tax Contingencies: A Russian tax audit asserted claims for approximately $20 million in unpaid VAT and penalties. Western Union intends to defend this position vigorously and has not accrued a loss. Additionally, the IRS declined to conclude an Advance Pricing Agreement regarding the 2003 restructuring, meaning tax aspects will be addressed in ongoing audits.
- Derivative Accounting: The company restated prior financial statements regarding derivative instruments. As of September 29, 2006, new hedging processes were implemented to qualify for cash flow hedge accounting, which is expected to reduce income statement volatility going forward.
Key Facts for Investor Verification
- Debt Servicing: Verify the company's ability to service the $3.5 billion debt load incurred during the spin-off, particularly the $2.4 billion bridge loan maturing in September 2007.
- Immigration Impact: Monitor transaction volumes in the U.S. to Mexico corridor and U.S. domestic markets for continued volatility due to immigration policy debates.
- Standalone Cost Structure: Track the realization of the estimated $65-$75 million in incremental annualized standalone operating costs.
- Tax Resolution: Watch for developments in the Russian VAT dispute and the U.S. federal income tax audit regarding the 2003 restructuring.
- Refinancing: Assess the company's progress in refinancing the short-term bridge loan and managing interest rate exposure on floating-rate debt.