Western Union(WU) - 2019 Q3 - Quarterly Report

Part I - Financial Information Financial Statements (Unaudited) Revenue and operating income declined in Q3 and the first nine months of 2019 due to divestiture and currency impacts, while nine-month net income significantly increased from a divestiture gain Condensed Consolidated Statements of Income (in millions) | | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $1,306.9 | $1,387.8 | $3,984.4 | $4,188.3 | | Operating Income | $197.4 | $302.6 | $707.5 | $851.1 | | Gain on divestitures | — | — | $524.6 | — | | Net Income | $135.0 | $208.6 | $922.9 | $639.8 | | Diluted EPS | $0.32 | $0.46 | $2.13 | $1.40 | Condensed Consolidated Balance Sheets (in millions) | | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total Assets | $8,803.7 | $8,996.8 | | Cash and cash equivalents | $1,390.9 | $973.4 | | Goodwill | $2,566.6 | $2,725.0 | | Total Liabilities | $8,823.4 | $9,306.6 | | Borrowings | $3,248.0 | $3,433.7 | | Total Stockholders' Deficit | $(19.7) | $(309.8) | Condensed Consolidated Statements of Cash Flows (in millions) | | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $665.3 | $518.5 | | Net cash provided by/(used in) investing activities | $657.0 | $(229.8) | | Net cash used in financing activities | $(903.8) | $(356.4) | - In May 2019, the company sold its Speedpay business for approximately $750 million, resulting in a pre-tax gain of about $523 million, significantly impacting the income statement and cash flows from investing activities[41] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Q3 2019 revenue and operating income declined due to divestiture and restructuring, with nine-month net income boosted by a divestiture gain Results of Operations Consolidated revenue for Q3 2019 decreased 6% due to the Speedpay divestiture and negative foreign currency impacts, while operating income dropped 35% from restructuring expenses Consolidated Results of Operations (in millions) | | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | % Change | | :--- | :--- | :--- | :--- | | Revenues | $1,306.9 | $1,387.8 | (6)% | | Operating Income | $197.4 | $302.6 | (35)% | | Net Income | $135.0 | $208.6 | (35)% | | Diluted EPS | $0.32 | $0.46 | (30)% | - A restructuring plan approved on August 1, 2019, is expected to incur approximately $150 million in expenses through 2020, with $98.9 million incurred in the first nine months of 2019, projected to generate annual expense savings of approximately $100 million by 2021[168][170][171] - The divestiture of the Speedpay business in May 2019 resulted in a pre-tax gain of approximately $523 million, with Speedpay contributing $85.3 million in revenue in Q3 2018[157] - Fluctuations in the U.S. dollar, particularly its strengthening against the Argentine peso, negatively impacted revenues by $45.8 million in Q3 2019 and $197.2 million in the first nine months of 2019[156] Segment Discussion The C2C segment saw a 1% revenue increase driven by transaction growth, westernunion.com grew 16%, Business Solutions revenue was flat, and the 'Other' segment's revenue plummeted 48% due to the Speedpay divestiture Consumer-to-Consumer Segment Performance (Q3 2019 vs Q3 2018) | Metric | Q3 2019 | Q3 2018 | % Change | | :--- | :--- | :--- | :--- | | Revenues | $1,113.0M | $1,107.4M | 1% | | Operating Income | $263.8M | $277.8M | (5)% | | Transactions | 73.0M | 71.8M | 2% | - The westernunion.com business continued its strong growth, with revenue increasing 16% in Q3 2019 (17% constant currency) and representing 14% of total Consumer-to-Consumer revenues[186][188] - The LACA region's revenue grew 4% despite an 8% negative currency impact, driven by 10% transaction growth and inflation-related price increases in Argentina[186][196] Business Solutions Segment Performance (Q3 2019 vs Q3 2018) | Metric | Q3 2019 | Q3 2018 | % Change | | :--- | :--- | :--- | :--- | | Revenues | $100.6M | $100.2M | 0% | | Operating Income | $16.7M | $14.3M | 18% | - The 'Other' segment's revenue decreased 48% in Q3 2019, primarily due to the sale of Speedpay, which had revenues of $85.3 million in Q3 2018[203][205] Capital Resources and Liquidity Cash from operations increased to $665.3 million for the nine months ended Sep 30, 2019, with priorities including capital expenditures, debt service, and returning capital to shareholders through repurchases and dividends - Cash provided by operating activities increased to $665.3 million for the nine months ended Sep 30, 2019, up from $518.5 million in the prior-year period[217] - The company completed the sale of Speedpay for approximately $750 million in cash, a portion of which was used to repay $500 million in maturing notes in May 2019[214][226] Capital Return (Nine Months Ended Sep 30, 2019) | Activity | Amount | | :--- | :--- | | Share Repurchases | $475.2 million | | Dividends Paid | $257.1 million | - As of September 30, 2019, the company had $435.0 million of commercial paper outstanding and no borrowings under its $1.5 billion revolving credit facility[212] - The company has a significant 2017 U.S. federal tax liability of approximately $800 million from the Tax Act, which is being paid in installments through 2025 and will continue to adversely affect cash flows[229] Risk Management The company manages market risks from foreign currency exchange rates, interest rates, and credit risk through operational structuring, forward contracts, and balancing fixed/floating rate assets and liabilities - The company actively manages foreign currency risk, particularly from the euro, Canadian dollar, and British pound, using forward contracts with maturities up to 36 months to provide predictability on future revenues[239] - Operations in Argentina, representing less than 5% of consolidated revenue, are subject to significant risk from the devaluation of the Argentine peso and government-imposed currency restrictions[240][241] - A hypothetical 10% strengthening of the U.S. dollar would decrease pre-tax annual income by approximately $35 million, based on the company's unhedged exposure forecast[243] - The company manages interest rate risk on its borrowings and investments; as of Sep 30, 2019, a hypothetical 100 basis point change in interest rates would have a net negative impact of approximately $2 million on pre-tax income over the next twelve months[250] Quantitative and Qualitative Disclosures About Market Risk This section incorporates by reference the information provided under the 'Risk Management' section within Management's Discussion and Analysis (MD&A) - The disclosures about market risk are detailed in the Risk Management section of the MD&A[255] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2019, despite anticipated employee turnover from an ongoing restructuring plan - The Principal Executive Officer and Principal Financial Officer concluded that disclosure controls and procedures were effective as of September 30, 2019[256] - A restructuring plan approved on August 1, 2019, is expected to cause significant employee turnover, and management is actively monitoring internal controls to mitigate associated risks[257] Part II - Other Information Legal Proceedings The company is involved in various legal matters, including compliance with 2017 Joint Settlement Agreements, a shareholder class action lawsuit, and a consumer class action in Argentina, with a reasonably possible potential loss of approximately $30 million in excess of recorded liabilities - The company is operating under a Deferred Prosecution Agreement (DPA) with the DOJ and a Consent Order with the FTC from January 2017, requiring enhanced compliance programs and the payment of $586 million to a consumer victim fund, which was paid in 2017[63][64] - A shareholder class action lawsuit (Smallen v. The Western Union Company) alleging false and misleading statements regarding the company's compliance programs was dismissed by the District Court in March 2019, but is currently under appeal by the plaintiffs[77][79] - In January 2018, the company's subsidiary WUFSI entered into a consent order with the New York State Department of Financial Services (NYDFS) and paid a $60 million civil monetary penalty to resolve an investigation into anti-money laundering programs from 2004-2012[81] - As of September 30, 2019, the company estimated the reasonably possible potential litigation losses in excess of its recorded liability to be approximately $30 million[61] Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2018 - No material changes to risk factors from the 2018 Form 10-K were reported[265] Share Repurchases During Q3 2019, the company repurchased 6.5 million shares at an average price of $21.53 per share, with approximately $1.07 billion remaining available for future repurchases Share Repurchases (Quarter Ended September 30, 2019) | Month | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July | 2,351,562 | $20.55 | | August | 2,247,002 | $21.50 | | September | 1,923,762 | $22.77 | | Total | 6,522,326 | $21.53 | - As of September 30, 2019, $69.0 million remained under a repurchase authorization through Dec 31, 2019, and $1.0 billion remained under an authorization through Dec 31, 2021[266]