Western Union(WU) - 2020 Q3 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) The unaudited financial statements for Q3 and 9M 2020 reflect revenue and net income declines for the nine-month period, influenced by COVID-19 and a 2019 divestiture, while Q3 operating and net income increased due to lower restructuring expenses Condensed Consolidated Statements of Income Q3 2020 revenues decreased 4% to $1,258.5 million, but net income increased 69% to $228.6 million due to lower operating expenses, while 9M revenues fell 11% to $3,563.2 million and net income decreased 39% to $567.2 million Consolidated Statements of Income Highlights (in millions, except per share data) | Metric | Q3 2020 | Q3 2019 | YoY Change | 9M 2020 | 9M 2019 | YoY Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Revenues | $1,258.5 | $1,306.9 | -3.7% | $3,563.2 | $3,984.4 | -10.6% | | Operating Income | $285.2 | $197.4 | +44.5% | $740.2 | $707.5 | +4.6% | | Net Income | $228.6 | $135.0 | +69.3% | $567.2 | $922.9 | -38.5% | | Diluted EPS | $0.55 | $0.32 | +71.9% | $1.37 | $2.13 | -35.7% | Condensed Consolidated Balance Sheets As of September 30, 2020, total assets slightly increased to $8,827.2 million, liabilities marginally decreased, and stockholders' equity shifted from a $39.5 million deficit to a $67.1 million surplus Balance Sheet Summary (in millions) | Account | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $1,251.4 | $1,450.5 | | Total assets | $8,827.2 | $8,758.5 | | Borrowings | $3,036.5 | $3,229.3 | | Total liabilities | $8,760.1 | $8,798.0 | | Total stockholders' equity/(deficit) | $67.1 | ($39.5) | Condensed Consolidated Statements of Cash Flows Net cash from operations for 9M 2020 decreased to $585.6 million, with $709.8 million used in financing for dividends and repurchases, while prior year investing included significant divestiture proceeds Cash Flow Summary for Nine Months Ended Sep 30 (in millions) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $585.6 | $665.3 | | Net cash (used in)/provided by investing activities | ($68.7) | $657.0 | | Net cash used in financing activities | ($709.8) | ($903.8) | Notes to Condensed Consolidated Financial Statements Notes detail business segments, revenue recognition, COVID-19 impact on retail volumes offset by digital growth, ongoing restructuring, the 2019 Speedpay divestiture, and dividend/share repurchase activities - The company's business consists of two main segments: Consumer-to-Consumer (C2C) money transfers and Business Solutions for enterprise payments, with other services including bill payments and money orders[15][16][17] - The COVID-19 pandemic negatively impacted retail transaction volumes starting in March 2020, which was partially offset by revenue growth from westernunion.com and other digital channels[26] - In May 2019, the company sold its Speedpay business, which resulted in a pre-tax gain of approximately $523 million and affects year-over-year comparability in the 'Other' segment[45] - A restructuring plan approved in August 2019 is expected to incur total expenses of approximately $150 million through 2020, with $24.8 million incurred for the nine months ended Sep 30, 2020, compared to $98.9 million in the same period of 2019[48][52] - The company declared quarterly cash dividends of $0.225 per share in each of the first three quarters of 2020[95] - During the nine months ended Sep 30, 2020, the company repurchased 8.5 million shares for $217.4 million, with share repurchases temporarily paused during the first quarter of 2020[96] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes Q3 revenue decline to COVID-19 and FX, offset by digital growth, with operating income up due to lower restructuring; C2C saw transaction growth but revenue decline from mix shift, while Business Solutions declined - The COVID-19 pandemic negatively impacted retail transaction volumes, which was partially offset by strong growth in digital channels (westernunion.com and other digital transactions)[148] - Fluctuations in the USD, particularly its strengthening against the Argentine peso, negatively impacted revenues by $41.1 million in Q3 2020 and $134.8 million in the first nine months of 2020[149] - The 2019 restructuring plan is expected to generate expense savings of at least $50 million in 2020 and approximately $100 million in 2021[161] - The company temporarily paused share repurchases in Q1 2020, and as of September 30, 2020, $782.6 million remained available under the share repurchase authorization[216] Results of Operations Consolidated revenue decreased 4% in Q3 and 11% in 9M 2020 due to COVID-19, FX, and divestitures, while Q3 operating expenses declined 12%, leading to a 44% increase in operating income to $285.2 million Consolidated Revenue Change Analysis | Period | GAAP Revenue Change | Foreign Currency Impact | Divestitures Impact | Adjusted Revenue Change (Non-GAAP) | | :--- | :--- | :--- | :--- | :--- | | Q3 2020 | (4)% | 3% | 0% | (1)% | | 9M 2020 | (11)% | 4% | 3% | (4)% | - Cost of Services decreased in Q3 and 9M 2020 due to lower agent commissions (tied to revenue), reduced restructuring expenses, and lower employee-related costs[164] - Selling, General, and Administrative expenses decreased due to lower employee-related expenses (including incentive pay and restructuring savings) and reduced restructuring costs[165] - The effective tax rate decreased to 12.4% for Q3 2020 (vs. 16.8% in Q3 2019) and 13.5% for 9M 2020 (vs. 17.9% in 9M 2019), primarily due to higher domestic pre-tax income in the prior year from the Speedpay sale[167][168] Segment Discussion C2C segment transactions grew 6% but revenue fell 1% due to a digital mix shift, with Digital Money Transfer revenue up 45%; Business Solutions and 'Other' segments declined due to COVID-19 and the Speedpay divestiture Consumer-to-Consumer Segment Performance | Metric | Q3 2020 | Q3 2019 | % Change | 9M 2020 | 9M 2019 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Revenues | $1,106.5M | $1,113.0M | (1)% | $3,098.5M | $3,282.8M | (6)% | | Transactions | 77.3M | 73.0M | 6% | 212.1M | 215.6M | (2)% | | Operating Income | $272.4M | $263.8M | 3% | $695.1M | $747.3M | (7)% | - Digital Money Transfer revenue grew 45% in Q3 2020 (46% constant currency) and accounted for 21% of total C2C revenue, up from 14% in Q3 2019[179][180] - The spread between C2C transaction growth (up 6%) and revenue decline (down 1%) in Q3 was attributed to a business mix shift, primarily growth in digital white label partnerships which have a lower revenue per transaction[182] Business Solutions Segment Performance | Metric | Q3 2020 | Q3 2019 | % Change | | :--- | :--- | :--- | :--- | | Revenues | $89.1M | $100.6M | (11)% | | Operating Income | $9.4M | $16.7M | (44)% | Capital Resources and Liquidity Operating cash flow decreased to $585.6 million for 9M 2020, but the company maintains adequate liquidity via cash, operations, and a $1.5 billion credit facility, with a remaining $604 million tax liability payable through 2025 - The company believes it has adequate liquidity from existing cash, operating cash flows, and its $1.5 billion revolving credit facility, which had no outstanding borrowings as of September 30, 2020[201] - Cash provided by operating activities decreased to $585.6 million in 9M 2020 from $665.3 million in 9M 2019, due to timing of restructuring payments, incentive payments, and vendor payments[206] - A 2017 US federal tax liability of approximately $800 million is being paid in installments through 2025, with about $604 million remaining as of September 30, 2020[218] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from foreign currency, interest rates, and credit, mitigated by derivatives; a 10% USD strengthening could reduce pre-tax income by $45 million, and credit losses remain below 2% of revenues - The company uses longer-term foreign currency forward contracts (up to 36 months) to mitigate risk on revenues denominated in foreign currencies like the euro, British pound, and Canadian dollar[228] - A hypothetical 10% uniform strengthening of the U.S. dollar would result in an estimated decrease to pre-tax annual income of approximately $45 million, based on the company's unhedged exposure forecast[231] - The company is exposed to credit risk from agent receivables and consumer transactions, particularly chargebacks from electronic channels, with total losses remaining approximately 2% or less of consolidated revenues[239][243] Item 4. Controls and Procedures Management concluded disclosure controls were effective as of September 30, 2020, despite significant employee turnover in technology and accounting due to restructuring, which is being actively managed to maintain internal controls - The Principal Executive Officer and Principal Financial Officer concluded that as of September 30, 2020, the company's disclosure controls and procedures were effective[245] - The company's 2019 restructuring plan has caused significant employee turnover in technology and accounting functions, which management is actively monitoring to maintain internal controls[246] PART II OTHER INFORMATION Item 1. Legal Proceedings Legal proceedings, detailed in Note 8, include shareholder and class actions, with reasonably possible potential losses exceeding recorded liabilities estimated at $30 million as of September 30, 2020 - Information on legal proceedings is incorporated by reference from Note 8, Commitments and Contingencies[252] - As of September 30, 2020, the company estimated reasonably possible potential litigation losses in excess of its recorded liability to be approximately $30 million[66] Item 1A. Risk Factors The COVID-19 pandemic is a significant risk, negatively impacting retail transactions and agent access, with its future extent highly uncertain and dependent on duration, government actions, and economic conditions - The primary updated risk factor relates to the COVID-19 pandemic, which has negatively impacted the business and its future impact is highly uncertain[254] - The pandemic has resulted in lower consumer and commercial activity and the closure of some agent locations, leading to declines in retail C2C transactions[255] - Future impacts depend on uncertain developments, including the duration of the outbreak, the availability of a vaccine, government actions, and its effects on the global economy and migration patterns[257] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds In Q3 2020, 21,912 shares were repurchased at an average of $22.12 for tax withholding, not under the public program, with $782.6 million remaining for future repurchases Share Repurchases for Q3 2020 | Period | Total Shares Purchased | Average Price Paid per Share | Shares Purchased as Part of Publicly Announced Program | | :--- | :--- | :--- | :--- | | July 2020 | 11,949 | $21.19 | 0 | | August 2020 | 4,170 | $23.00 | 0 | | September 2020 | 5,793 | $23.41 | 0 | | Total | 21,912 | $22.12 | 0 | - As of September 30, 2020, $782.6 million remained available for repurchase under the board's authorization, which runs through December 31, 2021[259] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and Inline XBRL financial data files - The filing includes required certifications from the Chief Executive Officer and Chief Financial Officer[262] - Interactive Data Files (Inline XBRL) are included as exhibits to the filing[262]