Western Union(WU) - 2023 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Presents unaudited condensed consolidated financial statements, including income, balance sheets, cash flows, equity, and detailed notes Condensed Consolidated Statements of Income | Metric | 2023 (millions) | 2022 (millions) | Change (%) | | :----- | :-------------- | :-------------- | :--------- | | Revenues | $1,170.0 | $1,138.3 | 2.8% | | Net Income | $176.2 | $194.0 | -9.2% | | Diluted EPS | $0.47 | $0.50 | -6.0% | | Metric | 2023 (millions) | 2022 (millions) | Change (%) | | :----- | :-------------- | :-------------- | :--------- | | Revenues | $2,206.9 | $2,294.0 | -3.8% | | Net Income | $328.0 | $487.3 | -32.7% | | Diluted EPS | $0.87 | $1.25 | -30.4% | Condensed Consolidated Statements of Comprehensive Income | Metric | 2023 (millions) | 2022 (millions) | Change (%) | | :------------------ | :-------------- | :-------------- | :--------- | | Comprehensive Income | $154.0 | $193.4 | -20.4% | | Metric | 2023 (millions) | 2022 (millions) | Change (%) | | :------------------ | :-------------- | :-------------- | :--------- | | Comprehensive Income | $315.5 | $422.6 | -25.3% | | Metric | 2023 (millions) | 2022 (millions) | | :-------------------------- | :-------------- | :-------------- | | Total Other Comprehensive Loss | $(22.2) | $(0.6) | Condensed Consolidated Balance Sheets | Metric | June 30, 2023 (millions) | December 31, 2022 (millions) | Change (%) | | :---------- | :----------------------- | :--------------------------- | :--------- | | Total Assets | $8,487.4 | $8,496.3 | -0.1% | | Total Liabilities | $7,860.9 | $8,018.5 | -1.9% | | Total Stockholders' Equity | $626.5 | $477.8 | 31.1% | Condensed Consolidated Statements of Cash Flows | Metric | 2023 (millions) | 2022 (millions) | Change (%) | | :-------------------------------- | :-------------- | :-------------- | :--------- | | Net Cash Provided by Operating Activities | $264.0 | $306.8 | -13.9% | | Metric | 2023 (millions) | 2022 (millions) | | :-------------------------------------- | :-------------- | :-------------- | | Net Cash (Used in)/Provided by Investing Activities | $(65.1) | $292.3 | | Metric | 2023 (millions) | 2022 (millions) | | :---------------------------------- | :-------------- | :-------------- | | Net Cash Used in Financing Activities | $(609.5) | $(788.0) | Condensed Consolidated Statements of Stockholders' Equity - Total Stockholders' Equity as of June 30, 2023, was $626.5 million, an increase from $477.8 million as of December 31, 2022[15][21] - Net income for the three months ended June 30, 2023, was $176.2 million[21] - Common stock dividends and dividend equivalents declared for the three months ended June 30, 2023, totaled $(89.5) million[21] Notes to Condensed Consolidated Financial Statements Note 1. Business and Basis of Presentation - The Western Union Company is a leader in global money movement and payment services, providing services through a network of agent locations in over 200 countries and territories, as well as through Branded Digital and third-party digital partners[24] - The Company's business consists of two primary segments: Consumer-to-Consumer (money transfers via retail and digital channels) and Business Solutions (payment and foreign exchange solutions for SMEs, which was fully divested on July 1, 2023). Other services include bill payment and money order services[25][28] - As of December 31, 2022, the Company's restricted net assets associated with asset limitations and minimum capital requirements totaled approximately $710 million[26] Note 2. Revenue - Revenues are primarily derived from customer consideration for money transfers, varying by channel, locations, principal amount, and foreign exchange rate differences. Other services, such as bill payment, also contribute to revenue[35] | Product Type | Three Months Ended June 30, 2023 (millions) | | :------------------------------------ | :---------------------------------------- | | Consumer Money Transfers | $1,037.7 | | Foreign Exchange and Payment Services | $6.5 | | Other Services | $65.9 | | Other revenues | $59.9 | | Total Revenues | $1,170.0 | | Product Type | Six Months Ended June 30, 2023 (millions) | | :------------------------------------ | :-------------------------------------- | | Consumer Money Transfers | $1,943.0 | | Foreign Exchange and Payment Services | $13.0 | | Other Services | $133.1 | | Other revenues | $117.8 | | Total Revenues | $2,206.9 | Note 3. Earnings Per Share | Metric | Three Months Ended June 30, 2023 (millions) | Three Months Ended June 30, 2022 (millions) | | :-------------------------------- | :---------------------------------------- | :---------------------------------------- | | Diluted weighted-average shares outstanding | 375.6 | 387.6 | | Metric | Six Months Ended June 30, 2023 (millions) | Six Months Ended June 30, 2022 (millions) | | :-------------------------------- | :-------------------------------------- | :-------------------------------------- | | Diluted weighted-average shares outstanding | 375.6 | 391.0 | - Shares excluded from diluted EPS calculation due to their anti-dilutive effect were 10.1 million (Q2 2023) and 9.7 million (H1 2023)[45] Note 4. Assets Held for Sale and Related Divestiture - The sale of the Business Solutions business was completed in three closings, with the final closing on July 1, 2023. The first closing (March 1, 2022) resulted in a $151.4 million gain, and the second (December 31, 2022) resulted in a $96.9 million gain[47][49] | Metric | Three Months Ended June 30, 2023 (millions) | Three Months Ended June 30, 2022 (millions) | | :-------------------------- | :---------------------------------------- | :---------------------------------------- | | Business Solutions Revenues | $14.3 | $35.7 | | Direct Operating Expenses | $12.6 | $27.8 | | Metric | June 30, 2023 (millions) | December 31, 2022 (millions) | | :------------------------------------ | :----------------------- | :--------------------------- | | Total Assets Held for Sale | $240.6 | $261.6 | | Total Liabilities Associated with Assets Held for Sale | $161.5 | $182.5 | Note 5. Fair Value Measurements | Metric | June 30, 2023 (millions) | | :---------------- | :----------------------- | | Total Fair Value of Assets | $1,508.4 | | Total Fair Value of Liabilities | $70.3 | - As of June 30, 2023, the carrying value of the Company's borrowings was $2,813.0 million, and the fair value was $2,668.1 million[59] - The Company fully redeemed its reverse repurchase agreements as of June 30, 2023[60] Note 6. Commitments and Contingencies - The Company had approximately $160 million in outstanding letters of credit and bank guarantees as of June 30, 2023[61] - Reasonably possible potential litigation losses in excess of the Company's recorded liability for probable and estimable losses were approximately $30 million as of June 30, 2023[63] - The Company is involved in several legal matters, including a class action in Argentina, a class action in the U.S. regarding financial privacy, and a lawsuit in the Democratic Republic of Congo, with unpredictable outcomes[67][68][69] Note 7. Related Party Transactions | Metric | Three Months Ended June 30, 2023 (millions) | Three Months Ended June 30, 2022 (millions) | | :------------------------------------ | :---------------------------------------- | :---------------------------------------- | | Commission expense recognized for equity method agents | $11.5 | $12.8 | | Metric | Six Months Ended June 30, 2023 (millions) | Six Months Ended June 30, 2022 (millions) | | :------------------------------------ | :-------------------------------------- | :-------------------------------------- | | Commission expense recognized for equity method agents | $22.3 | $24.3 | Note 8. Settlement Assets and Obligations | Metric | June 30, 2023 (millions) | | :------------------------------------ | :----------------------- | | Total Settlement Assets | $3,419.7 | | Receivables from agents, Business Solutions customers, and others, net | $1,988.9 | | Investment securities, net | $1,419.7 | | Total Settlement Obligations | $3,419.7 | | Allowance for Credit Losses (millions) | Agents and Others | Business Solutions Customers | | :------------------------------------- | :---------------- | :--------------------------- | | As of June 30, 2023 | $11.7 | $0 | - Investment securities had total net unrealized losses of $(73.7) million as of June 30, 2023, primarily due to rising U.S. Treasury interest rates[85][88] | Contractual Maturities of Available-for-Sale Securities (June 30, 2023) | | :------------------------------------ | :----------------------- | | Due within 1 year | $115.9 million | | Due after 1 year through 5 years | $676.8 million | | Due after 5 years through 10 years | $437.6 million | | Due after 10 years | $189.7 million | | Total | $1,420.0 million | Note 9. Stockholders' Equity - Accumulated Other Comprehensive Loss (AOCL) was $(180.4) million as of June 30, 2023, primarily driven by foreign currency translation and investment securities losses[93] - Quarterly cash dividends of $0.235 per common share were declared in Q1 and Q2 2023, totaling $176.0 million[97] - No shares were repurchased under the $1.0 billion share repurchase authorization during the six months ended June 30, 2023. $648.2 million remained available under this authorization[98] Note 10. Derivatives - The Company uses foreign currency forward contracts as cash flow hedges for forecasted revenues (up to 24-month maturities) and as undesignated hedges for settlement assets/obligations and foreign currency positions (short-duration)[103][104] | Derivative Type | Notional Amount (June 30, 2023, millions) | | :------------------------------------ | :---------------------------------------- | | Contracts designated as hedges | $546.0 | | Contracts not designated as hedges | $1,306.6 | - The aggregate notional amount of derivative customer contracts in Business Solutions operations was approximately $1.5 billion as of June 30, 2023, down from $3.0 billion at December 31, 2022[110] | Derivative Type | Fair Value (June 30, 2023, millions) | | :------------------------------------ | :----------------------------------- | | Total Derivative Assets | $80.8 | | Total Derivative Liabilities | $70.3 | - A pre-tax gain of $7.5 million related to foreign currency forward contracts is expected to be reclassified into Revenues within the next 12 months[127] Note 11. Borrowings | Metric | June 30, 2023 (millions) | | :------------------------------------ | :----------------------- | | Total borrowings at carrying value | $2,813.0 | | Commercial paper | $674.6 | - The Company repaid $300.0 million of 4.250% unsecured notes due in June 2023 using commercial paper and cash[128] - Commercial paper borrowings as of June 30, 2023, had a weighted-average annual interest rate of approximately 5.3% and a weighted-average term of approximately 5 days[129] | Maturity of Notes (June 30, 2023) | Par Value (millions) | | :-------------------------------- | :------------------- | | Due within 1 year | $0 | | Due after 1 year through 2 years | $500.0 | | Due after 2 years through 3 years | $600.0 | | Due after 5 years | $1,050.0 | | Total | $2,150.0 | Note 12. Income Taxes - The effective tax rate for the three months ended June 30, 2023, increased to 18.6% from 17.9% in 2022, primarily due to discrete tax effects, partially offset by the Business Solutions sale and lower R&D capitalization[132] - The effective tax rate for the six months ended June 30, 2023, decreased to 17.4% from 18.6% in 2022, primarily due to the Business Solutions sale and lower R&D capitalization, partially offset by discrete tax effects[132] - Total unrecognized tax benefits were $297.5 million as of June 30, 2023, including interest and penalties[133] Note 13. Stock-Based Compensation Plans | Metric | Three Months Ended June 30, 2023 (millions) | Three Months Ended June 30, 2022 (millions) | | :------------------------------------ | :---------------------------------------- | :---------------------------------------- | | Stock-based compensation expense | $9.5 | $12.3 | | Metric | Six Months Ended June 30, 2023 (millions) | Six Months Ended June 30, 2022 (millions) | | :------------------------------------ | :-------------------------------------- | :-------------------------------------- | | Stock-based compensation expense | $17.5 | $23.0 | - As of June 30, 2023, the Company had 7.1 million outstanding options (weighted-average exercise price of $18.09) and 8.0 million outstanding performance-based restricted stock units and restricted stock units (weighted-average grant date fair value of $16.72)[138] Note 14. Segments - The Company's segments are Consumer-to-Consumer and Business Solutions. Business Solutions revenues and operating expenses will no longer be reported in future periods due to its divestiture[139][141] - Effective January 1, 2022, corporate costs are no longer allocated to the Business Solutions segment[143] | Segment | Three Months Ended June 30, 2023 (millions) | Six Months Ended June 30, 2023 (millions) | | :------------------ | :---------------------------------------- | :-------------------------------------- | | Consumer-to-Consumer | $1,072.2 | $2,010.5 | | Business Solutions | $14.3 | $29.7 | | Other | $83.5 | $166.7 | | Total Revenues | $1,170.0 | $2,206.9 | | Segment | Three Months Ended June 30, 2023 (millions) | Six Months Ended June 30, 2023 (millions) | | :-------------------------- | :---------------------------------------- | :-------------------------------------- | | Consumer-to-Consumer | $230.7 | $408.5 | | Business Solutions | $1.8 | $3.7 | | Other | $18.4 | $50.5 | | Total Segment Operating Income | $250.9 | $462.7 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, condition, and outlook, detailing revenues, expenses, segment results, capital, liquidity, and risk management Overview - The Western Union Company is a leading provider of money movement and payment services, operating in Consumer-to-Consumer and Business Solutions segments, with the latter fully divested on July 1, 2023[154][155] - Revenue growth for the three and six months ended June 30, 2023, was significantly impacted by increased business originating from Iraq (10% and 6% contribution, respectively), though this volume is expected to decrease due to recent U.S. government actions[160] - The suspension of operations in Russia and Belarus in March 2022 impacted revenues by approximately $28 million for the six months ended June 30, 2022[161] Results of Operations Revenues Overview | Metric | 2023 (millions) | 2022 (millions) | % Change (GAAP) | Foreign Currency Impact | Divestitures Impact | % Change (Constant Currency, ex-BS) | | :-------------------------------------- | :-------------- | :-------------- | :---------------- | :---------------------- | :------------------ | :----------------------------------- | | Revenues (3 months ended June 30) | $1,170.0 | $1,138.3 | 3% | -3% | -3% | 9% | | Revenues (6 months ended June 30) | $2,206.9 | $2,294.0 | (4)% | -4% | -4% | 4% | - GAAP revenues for the three and six months ended June 30, 2023, benefited from increased Consumer-to-Consumer revenues in Iraq and higher local currency revenue per transaction in Argentina due to inflation, partially offset by declines in Europe and CIS and North America[167] Operating Expenses Overview - The Company announced an operating expense redeployment program in October 2022, aiming to redeploy approximately $150 million in expenses over five years through optimizations in vendor management, real estate, marketing, and people strategy[168] - Expenses incurred under the redeployment program were $8.3 million for the three months ended June 30, 2023, and $15.4 million for the six months ended June 30, 2023, totaling $37.2 million through June 30, 2023[168] - Cost of services increased primarily due to higher agent commissions and increased investment in information technology, partially offset by the Business Solutions divestiture[169] - Selling, general, and administrative expenses decreased due to the Business Solutions divestiture, reductions in shared services G&A, and lower advertising, partially offset by redeployment program costs and increased employee incentive compensation[170] Total Other Income/(Expense), Net - Total other income/(expense), net for the six months ended June 30, 2023, was negatively impacted by the absence of the gain on the first closing of the Business Solutions divestiture recognized in the prior year[171] Income Taxes | Metric | Three Months Ended June 30 | Six Months Ended June 30 | | :---------------- | :------------------------- | :----------------------- | | Effective Tax Rate | 18.6% (2023) vs 17.9% (2022) | 17.4% (2023) vs 18.6% (2022) | - As of June 30, 2023, tax contingency reserves totaled $243.1 million, including accrued interest and penalties[173] Earnings Per Share | Metric | Three Months Ended June 30 | Six Months Ended June 30 | | :---------------- | :------------------------- | :----------------------- | | Basic EPS | $0.47 (2023) vs $0.50 (2022) | $0.88 (2023) vs $1.25 (2022) | | Diluted EPS | $0.47 (2023) vs $0.50 (2022) | $0.87 (2023) vs $1.25 (2022) | - EPS was impacted by changes in net income and a lower number of average shares outstanding[175] Segment Discussion Consumer-to-Consumer Segment | Metric | Three Months Ended June 30, 2023 (millions) | Six Months Ended June 30, 2023 (millions) | | :-------------------------- | :---------------------------------------- | :-------------------------------------- | | Revenues | $1,072.2 (4% increase YoY) | $2,010.5 (1% decrease YoY) | | Operating Income | $230.7 (2% increase YoY) | $408.5 (6% decrease YoY) | | Transactions | 70.6 (4% increase YoY) | 135.9 (1% decrease YoY) | - Cross-border principal transferred increased to $27.5 billion (Q2 2023) and $50.5 billion (H1 2023), driven by monetary policy changes in Iraq and growth in North America, Latin America and the Caribbean, and East Asia and Oceania regions[186] | Region (3 months ended June 30, 2023) | Constant Currency Revenue Growth / (Decline) | Transaction Growth / (Decline) | | :------------------------------------ | :----------------------------------------- | :----------------------------- | | North America | (7)% | 4% | | Europe and CIS | (10)% | (1)% | | Middle East, Africa, and South Asia | 67% | 8% | | Latin America and the Caribbean | 8% | 8% | | East Asia and Oceania | (4)% | 1% | - Branded Digital transactions represented approximately 21% of Consumer-to-Consumer revenues for both the three and six months ended June 30, 2023[185] Business Solutions Segment | Metric | Three Months Ended June 30, 2023 (millions) | Six Months Ended June 30, 2023 (millions) | | :---------------- | :---------------------------------------- | :-------------------------------------- | | Revenues | $14.3 (60% decrease YoY) | $29.7 (76% decrease YoY) | | Operating Income | $1.8 (79% decrease YoY) | $3.7 (90% decrease YoY) | - The significant declines in revenue and operating income were primarily due to the first and second closings of the Business Solutions divestiture in March 2022 and December 2022[193][195] Other Segment | Metric | Three Months Ended June 30, 2023 (millions) | Six Months Ended June 30, 2023 (millions) | | :---------------- | :---------------------------------------- | :-------------------------------------- | | Revenues | $83.5 (10% increase YoY) | $166.7 (16% increase YoY) | | Operating Income | $18.4 (39% decrease YoY) | $50.5 (3% decrease YoY) | - Revenue increases were driven by higher investment revenues from money order investment securities and increased local currency revenue per transaction in Argentina due to inflation[198] - Operating income decreased due to increased investment in information technology, higher consulting expenses for new services, and reduced reimbursement for transition services after the Business Solutions divestiture[199] Capital Resources and Liquidity Outlines sources of funds, resource management for business needs, debt, and shareholder returns, detailing cash, investments, and material cash requirements Cash and Investment Securities - Cash and cash equivalents were $1,585.9 million as of June 30, 2023, an increase from $1,291.1 million at December 31, 2022[206] - Investment securities, primarily highly-rated state and municipal debt securities, totaled $1,419.7 million as of June 30, 2023, up from $1,333.4 million at December 31, 2022[208] - The investment portfolio is diversified, with no single issuer or security representing more than 10% of the total[209] Cash Flows from Operating Activities - Cash provided by operating activities decreased to $264.0 million for the six months ended June 30, 2023, from $306.8 million in the prior year, primarily due to increased transition tax payments[211] Financing Resources - Outstanding borrowings at par value totaled $2,824.6 million as of June 30, 2023, predominantly unsecured fixed-rate notes[212] - The Company has a $1.5 billion revolving credit facility, expiring in January 2025, with no outstanding borrowings as of June 30, 2023[204][214] - Commercial paper borrowings outstanding were $674.6 million as of June 30, 2023, with a weighted-average annual interest rate of approximately 5.3% and a weighted-average term of approximately 5 days[215] Cash Priorities - The Company aims to maintain strong liquidity and a capital structure consistent with investment-grade credit ratings, supported by existing cash, operating cash flows, commercial paper markets, and the Revolving Credit Facility[217] Capital Expenditures - Total capital expenditures for contract costs, property and equipment, and software were $90.1 million for the six months ended June 30, 2023, compared to $84.3 million in the prior year[220] Share Repurchases and Dividends - No shares were repurchased under the $1.0 billion share repurchase authorization during the six months ended June 30, 2023, with $648.2 million remaining available[221] - Quarterly cash dividends of $0.235 per common share were declared in the first and second quarters of 2023, totaling $176.0 million[222] Material Cash Requirements - The next scheduled principal payment on outstanding notes is in 2025[223] - Approximately $358 million of the 2017 United States federal tax liability remained as of June 30, 2023, with $119.5 million paid in Q2 2023, and remaining installments due through 2025[224] - The Company had approximately $160 million in outstanding letters of credit and bank guarantees as of June 30, 2023[228] - Unrecognized income tax benefits totaled $297.5 million as of June 30, 2023, with uncertain timing for cash payments[229] Critical Accounting Policies and Estimates - There were no material changes to the Company's critical accounting policies and estimates, which include income taxes, derivative financial instruments, goodwill, and other intangible assets[230] Risk Management Details strategies for managing market risks, including foreign currency, interest rates, and credit risk, through business structure, hedging, and diversification Foreign Currency Exchange Rates - The Company manages foreign exchange risk through its business structure (e.g., settling with agents in major currencies), short-duration foreign currency forward contracts for settlement assets/obligations, and longer-term forward contracts (up to 36 months) for forecasted revenues[232][233] - A hypothetical 10% strengthening or weakening of the United States dollar would result in an approximate $17 million decrease/increase to pre-tax annual income based on unhedged exposure[235] Interest Rates - The Company has approximately $2.6 billion in interest-bearing assets, with about $1.3 billion bearing floating rates (cash, money market, variable-rate securities) and the remainder at fixed rates (debt securities)[236][237] - Borrowings under the commercial paper program are effectively floating rate. The weighted-average effective rate on total borrowings was approximately 4.1% as of June 30, 2023[238][239] - A hypothetical 100 basis point increase/decrease in interest rates would result in an approximate $7 million decrease/increase to pre-tax income from borrowings and an offsetting $13 million increase/decrease from floating-rate cash and investments[240] Credit Risk - Credit risk for investment securities, money market funds, and derivatives is managed through reviewing concentrations, trading levels, credit spreads, ratings, and diversifying investments[241] - Credit risk related to agent receivables and consumer transactions (especially digital channels) is managed through credit reviews and monitoring. Losses have been less than 2% of consolidated revenues[242][243] Item 3. Quantitative and Qualitative Disclosures About Market Risk Incorporates by reference the detailed discussion on market risk management, including foreign currency, interest rates, and credit risk, from the MD&A section Item 4. Controls and Procedures Confirms the effectiveness of disclosure controls and procedures as of June 30, 2023, with no material changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures - Management concluded that the disclosure controls and procedures were effective as of June 30, 2023[245] Changes in Internal Control over Financial Reporting - There were no material changes in internal control over financial reporting during the fiscal quarter ended June 30, 2023[246] Review Report of Independent Registered Public Accounting Firm Ernst & Young LLP reviewed interim financial statements, finding no material modifications for U.S. GAAP conformity, and confirmed the December 31, 2022 balance sheet is fairly stated PART II OTHER INFORMATION Item 1. Legal Proceedings Incorporates by reference the discussion of legal proceedings from Note 6, Commitments and Contingencies, detailing ongoing lawsuits and potential losses Item 1A. Risk Factors States no material changes to risk factors previously described in the Annual Report on Form 10-K for the year ended December 31, 2022 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Details common stock repurchases during the quarter ended June 30, 2023, including shares withheld for tax obligations and remaining repurchase authorization - Total shares purchased during the quarter ended June 30, 2023, were 30,414 at an average price of $11.43, primarily representing shares withheld from employees for tax obligations[256] - As of June 30, 2023, $648.2 million remained available under the $1.0 billion common stock repurchase authorization through December 31, 2024. No shares were repurchased under this authorization during the quarter[257] Item 3. Defaults Upon Senior Securities States there were no defaults upon senior securities Item 4. Mine Safety Disclosures States this item is not applicable to the company Item 5. Other Information Confirms no directors or executive officers adopted, modified, or terminated Rule 10b5-1 trading plans or non-Rule 10b5-1 arrangements during the quarter Item 6. Exhibits Provides a list of exhibits filed or furnished with the Form 10-Q, including amendments, severance policy, certifications, and XBRL documents SIGNATURES Contains signatures of the Registrant's authorized officers, including CEO, CFO, and Chief Accounting Officer, certifying the report