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MGI > SEC Filings for MGI > Form 10-Q on 3-May-2013All Recent SEC Filings

Show all filings for MONEYGRAM INTERNATIONAL INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for MONEYGRAM INTERNATIONAL INC


3-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated Financial Statements and related Notes of MoneyGram International, Inc. ("MoneyGram," the "Company," "we," "us" and "our"). This discussion contains forward-looking statements that involve risks and uncertainties. MoneyGram's actual results could differ materially from those anticipated due to various factors discussed below under "Cautionary Statements Regarding Forward-Looking Statements" and elsewhere in this Quarterly Report on Form 10-Q.
OVERVIEW
MoneyGram is a leading global money transfer and payment services company. Our major products include global money transfers, bill payment solutions and financial paper products. We help people and businesses by providing affordable, reliable and convenient money transfer and payment services. The following is a summary of the key metrics and trends reviewed by the Company:
Management evaluates operating performance through EBITDA (earnings before interest, taxes, depreciation and amortization, including agent signing bonus amortization), Adjusted EBITDA (EBITDA adjusted for significant items) and Free Cash Flow (Adjusted EBITDA less cash interest expense, cash tax expense, cash payments for capital expenditures and cash payments for agent signing bonuses) financial measures. As disclosed on page 43, management of the Company uses EBITDA and Adjusted EBITDA to review results of operations, to forecast and budget, to assess cash flow and capital and to allocate resources. Our debt agreements also require compliance with financial measures similar to Adjusted EBITDA. As disclosed on page 52, management of the Company uses Free Cash Flow to assess cash flow of the business as well as capital resources.

We believe that EBITDA, Adjusted EBITDA and Free Cash Flow enhance investors' understanding of our business and performance. Since EBITDA, Adjusted EBITDA and Free Cash Flow are non-GAAP measures, the Company believes it is more appropriate to disclose these metrics after discussion and analysis of the GAAP financial measures. While we believe that these metrics enhance investors' understanding of our business, these metrics are not necessarily comparable with similarly named metrics of other companies.
Management assesses financial condition through assets in excess of payment service obligations. The Company's management utilizes assets in excess of payment service obligations in assessing the Company's liquidity and capital resources. The assets in excess of payment service obligations metric is discussed in the introduction to the Liquidity and Capital Resources section on page 48.

The Company disclosed a summary of significant actions it has taken in addition to describing the economic conditions during the year that impacted our operating results, liquidity and capital structure in this Management's Discussion and Analysis of Financial Condition and Results of Operations.

Significant Financial Highlights
The following is a summary of our operating results for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012:
Total fee and other revenue increased seven percent for the three months ended March 31, 2013 as a result of continued growth from the money transfer product. Money transfer fee and other revenue grew 10 percent, which was driven by volume growth of 11 percent, the volume growth was partially offset by lower average face value per transaction and unfavorable corridor mix. The fee and other revenue growth from money transfer was partially offset by volume declines from the bill payment products and the Financial Paper Products segment. See further discussion in the "Fee and other revenue and commissions expense" section.

Total commissions expense increased nine percent for the three months ended March 31, 2013, due to money transfer volume growth, partially offset by volume declines for the bill payment products and Financial Paper Products. See further discussion in the "Fee and other revenue and commissions expense" section.

Total operating expenses increased five percent for the three months ended March 31, 2013, driven by increased compensation and benefits expense and increased commissions expense, partially offset by decreased transaction and operations expense. For the three months ended March 31, 2013, operating expenses include $3.2 million of costs associated with reorganization and restructuring activities.


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Other expense increased primarily due to the $45.3 million of debt extinguishment costs incurred in connection with the 2013 Credit Agreement (defined below), which included a prepayment penalty for the redemption of the second lien notes. Interest expense decreased three percent for the three months ended March 31, 2013, primarily due to lower interest rates from our refinancing activity.

For the three months ended March 31, 2013, the Company had income tax benefit of $5.8 million on pre-tax loss of $18.4 million, which reflects the deductibility of the debt extinguishment costs.

2013 Events
2013 Credit Agreement and Note Repurchase - On March 28, 2013, the Company entered into an Amended and Restated Credit Agreement ("the 2013 Credit Agreement"). The 2013 Credit Agreement provides for (i) a senior secured five-year revolving credit facility that may be used for revolving credit loans, swingline loans and letters of credit up to an aggregate principal amount of $125.0 million and (ii) a senior secured seven-year term loan facility up to an aggregate principal amount of $850.0 million.
In connection with the Company's entry into the 2013 Credit Agreement, the Company repaid in full all outstanding indebtedness and terminated all of the commitments under the 2011 Credit Agreement. The Company also purchased all $325.0 million of the outstanding second lien notes for a purchase price equal to 106.625 percent of the principal amount purchased, plus accrued and unpaid interest. As a result, the Company incurred a pre-tax debt extinguishment charge of $45.3 million. The Company expects to realize estimated annual cash interest savings of $28.0 million as a result of the refinancing.
Global Business Transformation Initiative - In the second quarter of 2010, we announced the implementation of a global transformation initiative to realign our management and operations with the changing global market and streamline operations to promote a more efficient and scalable cost structure. The initiative includes investment in technology, organizational changes and relocation of certain operations, among other items. The Company has incurred $2.3 million, $25.1 million, $20.7 million and $5.4 million of cash outlays in 2013, 2012, 2011 and 2010, respectively, and recorded $3.2 million, $19.8 million, $23.5 million and $5.9 million of expenses during 2013, 2012, 2011 and 2010, respectively. While the Company's reorganization and restructuring activities were substantially complete in 2012, they will continue on a limited basis in 2013 with approximately $5.0 million expected to be incurred. Components of Revenues and Expense
Fee and Other Revenue - Fee and other revenue consists of transaction fees, foreign exchange revenue and miscellaneous revenue. Transaction fees are earned on money transfer, money order, bill payment and official check transactions. Money transfer transaction fees vary based on the principal amount of the transaction and the selected corridor in which the transaction will be completed. Money order, bill payment and official check transaction fees are fixed per transaction. Foreign exchange revenue is derived from the management of currency exchange spreads on money transfer transactions involving different "send" and "receive" currencies. Miscellaneous revenue primarily consists of processing fees on rebate checks and controlled disbursements, service charges on aged outstanding money orders and money order dispenser fees. Investment Revenue - Investment revenue consists of interest and dividends generated through the investment of cash balances received primarily from the sale of official checks, money orders and other payment instruments. These cash balances are available to us for investment until the payment instrument is presented for payment. Investment revenue varies depending on the level of investment balances and the yield on our investments. Investment balances vary based on the number of payment instruments sold, the principal amount of those payment instruments and the length of time that passes until the instruments are presented for payment.
Fee and Other Commissions Expense - We incur fee commissions primarily on our money transfer products. In a money transfer transaction, both the agent initiating the transaction and the receiving agent receive a commission that is generally based on a percentage of the fee charged to the consumer. In a bill payment transaction, the agent initiating the transaction receives a commission that is generally based on a percentage of the fee charged to the consumer and, in limited circumstances, the biller receives a commission that is based on a percentage of the fee charged to the consumer. We generally do not pay commissions to agents on the sale of money orders. In certain limited circumstances for large agents, we may pay a fixed commission amount based on money order volumes transacted by that agent. Other commissions expense includes the amortization of capitalized agent signing bonus payments.
Investment Commissions Expense - Investment commissions consist of amounts paid to financial institution official check customers based on short-term interest rate indices times the average outstanding cash balances of official checks sold by that financial institution.
Compensation and Benefits - Compensation and benefits includes salaries and benefits, management incentive programs, related payroll taxes and other employee related costs.
Transaction and Operations Support - Transaction and operations support expense primarily includes: marketing; professional fees and other outside services; telecommunications; agent support costs, including forms related to our products; non-compensation


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employee costs, including training, travel and relocation; bank charges; and the impact of foreign exchange rate movements on our monetary transactions, assets and liabilities denominated in a currency other than the U.S. dollar. Occupancy, Equipment and Supplies - Occupancy, equipment and supplies expense includes facilities rent and maintenance costs, software and equipment maintenance costs, freight and delivery costs and supplies.
Depreciation and Amortization - Depreciation and amortization expense includes depreciation on point of sale equipment, agent signage, computer hardware and software, capitalized software development costs, office furniture, equipment and leasehold improvements and amortization of intangible assets.

RESULTS OF OPERATIONS
                                        Three Months Ended March 31,         %
(Amounts in millions)                      2013               2012        Change
                                       (unaudited)        (unaudited)
REVENUE
Fee and other revenue                $       337.7       $       314.9       7  %
Investment revenue                             2.8                 3.2     (13 )%
Total revenue                                340.5               318.1       7  %
OPERATING EXPENSES
Fee and other commissions expense            154.3               141.9       9  %
Investment commissions expense                 0.1                 0.1       -  %
Total commissions expense                    154.4               142.0       9  %
Compensation and benefits                     65.5                59.1      11  %
Transaction and operations support            51.5                58.2     (12 )%
Occupancy, equipment and supplies             13.0                12.2       7  %
Depreciation and amortization                 11.8                10.7      10  %
Total operating expenses                     296.2               282.2       5  %
OPERATING INCOME                              44.3                35.9      23  %
OTHER EXPENSE
Interest expense                              17.4                17.9      (3 )%
Debt extinguishment costs                     45.3                   -      NM
Total other expense                           62.7                17.9     250  %
(Loss) income before income taxes            (18.4 )              18.0    (202 )%
Income tax (benefit) expense                  (5.8 )               7.7    (175 )%
NET (LOSS) INCOME                    $       (12.6 )     $        10.3    (222 )%

NM = Not meaningful
Fee and Other Revenue and Related Commission Expense The following discussion provides a summary overview of results. See discussion for the "Global Funds Transfer Segment" and "Financial Paper Products Segment" for more detailed explanations of our results.

                                                       Three Months Ended March 31,           %
(Amounts in millions)                                     2013               2012          Change
Fee and other revenue                               $       337.7       $       314.9         7 %
Fee and other commissions expense                           154.3               141.9         9 %
Fee and other commissions expense as a percent of
fee and other revenue                                        45.7 %              45.1 %


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Fee and Other Revenue
For the three months ended March 31, 2013, fee and other revenue grew $22.8 million, or seven percent, primarily driven by money transfer volume growth, partially offset by lower average face value per transaction and unfavorable corridor mix. Bill payment products experienced decreased fee and other revenue due to volume declines and lower average fees per transaction, while the money order and official check products also experienced volume declines driving decreased fee and other revenue. See the "Segment Performance" section for a more detailed discussion.
Fee and Other Commissions
For the three months ended March 31, 2013, fee and other commissions expense grew $12.4 million, or nine percent, primarily due to money transfer volume growth and unfavorable corridor mix, partially offset by volume declines for both the bill payment products and Financial Paper Product segment. Commissions expense as a percentage of fee and other revenue increased to 45.7 percent from 45.1 percent in the three months ended March 31, 2013 and 2012, respectively, primarily from the continued shift in the overall product mix towards the money transfer product. See the "Segment Performance" section for a more detailed discussion.

Net Investment Revenue Analysis
                                              Three Months Ended March 31,           %
(Amounts in millions)                           2013                 2012         Change
Investment revenue                        $          2.8       $          3.2      (13 )%
Investment commissions expense(1)                   (0.1 )               (0.1 )      -  %
Net investment revenue                    $          2.7       $          3.1      (13 )%
Average balances:
Investable balances (2)                   $      2,891.1       $      3,139.1       (8 )%
Average yields earned and rates paid (2):
Investment yield                                    0.39 %               0.41 %
Investment commission rate                          0.02 %               0.01 %
Net investment margin (2)                           0.37 %               0.40 %

(1) Commissions are paid to financial institution customers based on amounts generated from the sale of official checks only.
(2) Average yields and rates are calculated by dividing the applicable amount of "Net investment revenue" by the applicable amount shown in the "Average balances" section. "Average balances" are calculated using an average of the monthly balances. The "Net investment margin" is calculated by dividing "Net investment revenue" by the average "Investable balances" during the period. Our "Investable balances" consists of cash and cash equivalents, short term investments and available-for-sale securities. Investment Revenue
For the three months ended March 31, 2013, compared to March 31, 2012, investment revenue decreased $0.4 million, or 13 percent. Lower yields earned on our investable balances and valuation adjustments related to private equity securities drove a decrease of $0.1 million, while lower average investable balances from the attrition of certain official check financial institution customers terminated in prior periods drove $0.3 million of decrease. Investment Commissions
For the three months ended March 31, 2013 compared to March 31, 2012, investment commissions expense experienced a nominal change. The majority of our financial institution customers continued to be in a "negative" commission position at March 31, 2013, meaning we do not owe any commissions to our customers. While the majority of our contracts require that the financial institution customers pay us for the negative commission amounts, we have opted at this time to impose certain per-item and other fees rather than require payment of the negative commission amounts. We continue to monitor the negative commissions and assess our current fee structure for possible further changes.


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Operating Expenses
The following discussion relates to operating expenses, excluding fee and other
commissions expense.
Compensation and Benefits
The following is a summary of the change in compensation and benefits:
(Amounts in millions)                                       Three Months Ended
For the period ended March 31, 2012                        $           59.1
Change from:
Salaries, related payroll taxes and incentive compensation              7.4
Employee stock-based compensation                                      (1.1 )
Other employee benefits                                                 0.5
Reorganization and restructuring                                       (0.4 )
For the period ended March 31, 2013                        $           65.5

For the three months ended March 31, 2013, compensation and benefits expense increased due to the following items:
Increased headcount, ordinary salary increases and changing employee base mix as we invest in our sales, market development and compliance functions.

Other employee benefits increased due to higher insurance costs and increased benefit plan expense.

Employee stock-based compensation decreased from grants fully vesting in prior periods and forfeitures, partially offset by new grants with longer vesting periods.

Transaction and Operations Support
The following is a summary of the change in transaction and operations support:
(Amounts in millions)                Three Months Ended
For the period ended March 31, 2012 $           58.2
Change from:
Legal expenses                                  (5.0 )
Reorganization and restructuring                (2.9 )
Provision for loss                               0.9
Other                                            0.3
For the period ended March 31, 2013 $           51.5

For the three months ended March 31, 2013, transaction and operations support expense decreased due to the following items:
Legal expenses decreased primarily due to the Shareholder Litigation and the U.S. Attorney's Office for the Middle District of Pennsylvania Investigation, both settled in 2012, partially offset by the ongoing IRS Tax Litigation.

Reorganization and restructuring costs decreased primarily due to reduced consulting resource requirements as we near the conclusion of our Global Transformation Initiative.


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Occupancy, Equipment and Supplies
The following is a summary of the change in occupancy, equipment and supplies:
(Amounts in millions)                  Three Months Ended
For the period ended March 31, 2012   $           12.2
Change from:
Rent and building operating costs                  0.4
Forms & supplies - inventory controls             (0.2 )
Fixed asset disposal                               0.1
Equipment maintenance                             (0.2 )
Reorganization and restructuring                   0.7
For the period ended March 31, 2013   $           13.0

For the three months ended March 31, 2013, occupancy, equipment and supplies expense increased as a result of higher reorganization and restructuring costs and increased rent and building operation costs, partially offset by decreased forms and supplies costs due to tighter inventory controls and decreased equipment maintenance costs.
Depreciation and amortization
For the three months ended March 31, 2013, depreciation and amortization increased $1.1 million, or 10 percent, primarily from increased depreciation expense for signage and computer software, partially offset by lower depreciation expense on computer hardware and lower total amortization expense. Other Expenses, Net
Interest Expense
Interest expense decreased $0.5 million, or three percent for the three months ended March 31, 2013, due to lower interest rates resulting from our refinancing activities.
Debt Extinguishment Costs
The Company recognized debt extinguishment costs of $45.3 million as of March 31, 2013 in connection with the termination of the 2011 Credit Agreement and the repayment of the second lien notes. The Company expensed $20.0 million of unamortized deferred financing costs and $2.3 million of debt discount and incurred $1.5 million of debt modification costs. Additionally, the Company incurred a prepayment penalty of $21.5 million for the redemption of the second lien notes, which was expensed as debt extinguishment costs. The Company had no debt extinguishment costs for the three months ended March 31, 2012. Income Taxes
For the three months ended March 31, 2013, the Company had $5.8 million of income tax benefit on pre-tax loss of $18.4 million. The tax benefit was primarily due to the debt extinguishment costs. For the three months ended March 31, 2012, the Company had $7.7 million of income tax expense on pre-tax income of $18.0 million.


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EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION ("EBITDA") AND ADJUSTED EBITDA
We believe that EBITDA (earnings before interest, taxes, depreciation and amortization, including agent signing bonus amortization) and Adjusted EBITDA (EBITDA adjusted for significant items) provide useful information to investors because they are indicators of the strength and performance of ongoing business operations, including our ability to service debt and fund capital expenditures, acquisitions and operations. These calculations are commonly used as a basis for investors, analysts and credit rating agencies to evaluate and compare the operating performance and value of companies within our industry. In addition, our debt agreements require compliance with financial measures similar to Adjusted EBITDA. Finally, EBITDA and Adjusted EBITDA are financial measures used by management in reviewing results of operations, forecasting, assessing cash flow and capital, allocating resources and establishing employee incentive programs.
Although we believe that EBITDA and Adjusted EBITDA enhance investors' understanding of our business and performance, these non-GAAP financial measures should not be considered an exclusive alternative to accompanying GAAP financial measures. While we believe that these metrics enhance investors' understanding of our business, these metrics are not necessarily comparable with similarly named metrics of other companies. The following table is a reconciliation of these non-GAAP financial measures to the related GAAP financial measures.

                                                             Three Months Ended March 31,
(Amounts in millions)                                          2013                  2012           Change
(Loss) income before income taxes                       $         (18.4 )       $        18.0     $   (36.4 )
Interest expense                                                   17.4                  17.9          (0.5 )
Depreciation and amortization                                      11.8                  10.7           1.1
Amortization of agent signing bonuses                               8.8                   8.4           0.4
EBITDA                                                             19.6                  55.0         (35.4 )
Significant items impacting EBITDA:
Severance and related costs (1)                                       -                   0.5          (0.5 )
Reorganization and restructuring costs                              3.2                   5.8          (2.6 )
Debt extinguishment (2)                                            45.3                     -          45.3
Stock-based and contingent performance compensation (3)             3.1                   3.5          (0.4 )
Legal expenses (4)                                                  1.1                   3.6          (2.5 )

Adjusted EBITDA $ 72.3 $ 68.4 $ 3.9

(1) Severance and related costs from executive terminations.
(2) Debt extinguishment costs upon the termination of the 2011 Credit Agreement and second lien notes in connection with the 2013 Credit Agreement.
(3) Stock based compensation and one-time contingent performance award payable after three years based on achievement of revenue growth targets.
(4) Legal expenses are primarily in connection with the settlement related to the U.S. Attorney's Office for the Middle District of Pennsylvania investigation, the IRS tax litigation and the shareholder derivative litigation, and legal fees and expenses related to these matters. For the three months ended March 31, 2013, EBITDA decreased $35.4 million, or 64 percent, to $19.6 million from $55.0 million primarily due to increased debt extinguishment costs of $45.3 million, which is partially offset by increased operating income of $8.4 million. Adjusted EBITDA for the three months ended March 31, 2013 increased $3.9 million, or six percent, to $72.3 million from $68.4 million, primarily due increased operating income of $8.4 million, offset by decreased reorganization and restructuring costs of $2.6 million and legal expenses of $2.5 million.


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SEGMENT PERFORMANCE
Our reporting segments are primarily organized based on the nature of products and services offered and the type of consumer served. We primarily manage our . . .

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