Western Union Company — Q3 2009 Form 10-Q
Reporting period: Quarter ended September 30, 2009; comparisons are with the three and nine months ended September 30, 2008. Amounts are in U.S. dollars and, unless stated otherwise, millions. Western Union provides consumer-to-consumer money transfers and business payment services through a network spanning more than 200 countries and territories.
Financial performance
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Revenue | $1,314.1 | $1,377.4 | $3,769.6 | $3,990.4 |
| Operating income | $281.5 | $375.2 | $964.1 | $1,020.7 |
| Operating margin | 21% | 27% | 26% | 26% |
| Net income | $181.0 | $240.8 | $625.1 | $679.4 |
| Diluted EPS | $0.26 | $0.33 | $0.89 | $0.91 |
| Cash from operating activities | Not reported for quarter | Not reported for quarter | $958.0 | $925.3 |
- Quarterly revenue declined 5%; nine-month revenue declined 6%. Transaction fees fell 5% and 6%, respectively. Foreign-exchange revenue was nearly flat in Q3 and down 3% year to date.
- Q3 operating income declined 25%, primarily reflecting a $71.0 million accrual for an anticipated Arizona and multi-state settlement. Nine-month operating income declined 6%; 2008 included $50.3 million of restructuring expense, while 2009 had no material restructuring expense.
- The settlement reduced Q3 and nine-month net income by $53.9 million after tax. The nine-month effective tax rate was 26.2%, compared with 27.2% in 2008.
- Consumer-to-consumer revenue fell 5% in Q3 and 6% year to date, despite transaction growth of 3% and 4%. Segment operating income declined 6% and 2%, respectively. Global business payments revenue fell 3% and 7%, while transactions grew 2% in both periods; segment operating income declined 11% in both.
Financial position, liquidity and capital
- At September 30, 2009, cash and cash equivalents were $1,625.4 million; borrowings were $3,052.4 million. Borrowings had a $3,243.4 million fair value. Stockholders’ equity was $327.6 million, versus a deficiency of $8.1 million at December 31, 2008.
- Operating cash flow for the first nine months rose to $958.0 million from $925.3 million, which management attributed primarily to favorable working-capital changes. Investing cash use was $329.5 million and financing cash use was $298.7 million.
- The company had a $1.5 billion undrawn revolving credit facility and no commercial paper outstanding at quarter-end. Settlement assets and settlement obligations were each $1,256.1 million; settlement assets are not available to fund operations.
- Nine-month share repurchases were $225.2 million. $714.7 million remained under the 2008 repurchase authorization, which was due to expire December 31, 2009.
Material developments and outlook
- Western Union acquired FEXCO’s money-transfer business in February for $243.6 million and Custom House, an international business-to-business payments provider, on September 1 for $371.0 million. Custom House contributed $7.9 million of revenue in the reported periods. Its purchase-price allocation was preliminary and included $274.3 million of goodwill.
- Effective October 1, 2009, Western Union took over issuance of its branded money orders from First Data subsidiary IPS and received approximately $860 million of cash to cover outstanding money-order liabilities. Management expected investment income and interest-rate-swap savings to provide a comparable after-tax return through 2011 to the prior IPS arrangement.
- Management expected a negative full-year 2009 revenue effect from currency movements and expected strategic fee reductions and foreign-exchange actions to represent about 2% of full-year revenue, compared with 1% in 2008. It also cited weak economic conditions, slower transaction growth, pricing and product/geographic mix as pressures. The filing gives no specific full-year revenue or earnings guidance.
- Management said liquidity was adequate for business needs, dividends and repurchases, subject to economic, tax and regulatory uncertainties. It expected annual bad-debt losses to remain below 1% of revenue.
Risks, contingencies and unusual items
- The anticipated Arizona and multi-state settlement had not been finalized. The $71.0 million accrual was subject to change; Western Union also expected about $23 million of compliance-program investments over two to three years. A DOJ grand-jury investigation into transfers from the United States to the Dominican Republic was ongoing; the company said it could not estimate any possible loss.
- The company reported $501.9 million of unrecognized tax benefits, including accrued interest and penalties. It was contesting IRS adjustments alleging approximately $114 million of additional tax and penalties, plus about $28 million of interest. An adverse outcome could materially increase tax expense.
- A remaining $51.2 million receivable from the Reserve International Liquidity Fund was recorded net of a $12 million reserve. Further deterioration or fund-related costs could require additional reserves.
- Foreign-exchange exposure, market and credit risks, regulatory compliance, agent performance, litigation, and acquisition integration were identified as risks. The filing reported no material changes to the risk factors in the 2008 Form 10-K.
- Western Union had $85.5 million of outstanding letters of credit and bank guarantees. It also expected to fund approximately $15 million to its frozen pension plans in 2010.
- The company had won a $16.5 million patent-infringement jury award against MoneyGram but recognized no gain because the verdict was being challenged and collection was not assured.
Important facts for investors to verify
- Whether and on what final terms the Arizona/multi-state settlement was completed, including total costs and compliance spending.
- Developments and potential financial exposure in the DOJ investigation and IRS tax dispute.
- Recovery of the remaining Reserve International Liquidity Fund receivable and any additional reserve requirements.
- Post-acquisition performance and integration costs for FEXCO and Custom House, including final purchase-accounting adjustments.
- Effects of currency rates, transaction trends, pricing and product mix on revenue and margins, and the money-order transition’s actual returns.
- Ability to sustain operating cash generation and manage borrowings, repurchases and liquidity as economic and regulatory conditions change.
The interim financial statements were unaudited. Ernst & Young reported that its review identified no material modifications needed for GAAP conformity; it did not express an audit opinion.