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MGI > SEC Filings for MGI > Form 10-Q on 30-Jul-2013All Recent SEC Filings

Show all filings for MONEYGRAM INTERNATIONAL INC

Form 10-Q for MONEYGRAM INTERNATIONAL INC


30-Jul-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is to provide an understanding of MoneyGram International, Inc.'s ("MoneyGram," the "Company," "we," "us" and "our") financial condition, results of operations and cash flows by focusing on changes in certain key measures. The MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and accompanying notes. 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.
The comparisons presented in this MD&A refer to the same period in the prior year, unless otherwise noted. This MD&A is organized in the following sections:
Overview

Results of Operations

Liquidity and Capital Resources

Critical Accounting Policies

Cautionary Statements regarding Forward Looking Statements

OVERVIEW
MoneyGram is a leading global money transfer and payment services company. Our major products include global money transfers, bill payment services, and financial paper products. Our global money transfer and bill payment services are our primary revenue drivers. We help people and businesses by providing affordable, reliable and convenient money transfer and payment services. Our primary consumers may not be fully served by other financial institutions, referred to as unbanked or underbanked consumers. Unbanked consumers do not have a relationship with a traditional financial institution. Underbanked consumers have limited access to services normally offered through traditional financial institutions. Other consumers who use our services are convenience users and emergency users who may use traditional banking services, but prefer to use our services based on convenience, cost or to make emergency payments. We primarily offer services through third-party agents, including retail chains, independent retailers, post offices and other financial institutions.
Our sales efforts are organized based on the nature of products and the services offered. We primarily manage our revenue and related commission expenses through two reporting segments: Global Funds Transfer and Financial Paper Products. The Global Funds Transfer segment provides global money transfers and bill payment services to consumers through a network of agents and, in select markets, company-operated locations. The Financial Paper Products segment provides money order services to consumers through our retail and financial institution locations in the U.S. and Puerto Rico, and provides official check services to financial institutions in the U.S. Businesses that are not operated within these segments are categorized as "Other," and are primarily related to discontinued products and businesses. Operating expenses are discussed based on the functional nature of the expense.
Business Environment and Trends
The market for money transfer and bill payment services remains very competitive, consisting of a small number of large competitors and a large number of small, niche competitors. While we are the second largest money transfer company in the world, based on total face value of remittances in 2012, we will encounter increasing competition as new technologies emerge that allow consumers to send and receive money in a variety of ways.
Overall, our total revenue growth for the three and six months ended June 30, 2013 was 11 percent and nine percent, respectively, which was driven by the success of the money transfer product. Our money transfer fee and other revenue growth for the three and six months ended June 30, 2013 was 13 percent and 12 percent, respectively. Our money transfer transaction growth for the three and six months ended June 30, 2013 was 14 percent and 13 percent, respectively. The World Bank, a key source of industry analysis for developing countries, has projected long term growth rates in the high single digits.
Our money transfer agent base has expanded 15 percent to approximately 327,000 locations as of June 30, 2013, compared to over 284,000 locations as of June 30, 2012, primarily due to expansion in the United States, Russia and India. We continue to review markets where we may have an opportunity to increase our presence through agent signings and acquisition. Commissions expense and signing bonuses may increase as we continue our agent expansion and retention efforts throughout 2013.
We generally compete for money transfer consumers on the basis of trust, convenience, availability of outlets, price, technology and brand recognition. We are monitoring consumer behavior to ensure that we continue our transaction growth trend. Additionally, we continue to review markets where we may have an opportunity to increase prices based on brand awareness, loyalty and competitive positioning. Pricing actions from our competitors may also result in pricing changes for our products and services.
Compliance with laws and regulations is a highly complex and integral part of our day-to-day operations. Our operations are subject to a wide range of laws and regulations in the U.S. and other countries. We continue to see a trend among state, federal


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and international regulators towards enhanced scrutiny of anti-money laundering compliance, as well as consumer fraud prevention and education. We will continue to take proactive steps that we feel are in the best interest of consumers to prevent consumer fraud. Since 2009, we have increased our compliance personnel headcount and made investments in our compliance-related technology and infrastructure.
GAAP Measures
We utilize certain financial measures prepared in accordance with accounting principles generally accepted in the United States ("GAAP") to assess the Company's overall performance. These measures include, but are not limited to:
fee and other revenue, fee and other commission expense, fee and other revenue less commissions, operating income and operating margin. Additionally, we use assets in excess of payment service obligations when assessing capital resources and liquidity. Assets in excess of payment service obligations is comprised of:
cash and cash equivalents (substantially restricted), receivables, net (substantially restricted), interest-bearing investments (substantially restricted) and available-for-sale investments (substantially restricted), less payment service obligations.
Non-GAAP Measures
This Form 10-Q includes financial information prepared in accordance with GAAP, as well as certain non-GAAP financial measures that we use to assess our overall performance. Generally, a non-GAAP financial measure is a numerical measure of financial performance, financial position, or cash flows that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. The non-GAAP financial measures should be viewed as a supplement to, and not a substitute for, financial measures presented in accordance with GAAP. We strongly encourage investors and stockholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure. The following non-GAAP financial measures include:
EBITDA (earnings before interest, taxes, depreciation and amortization, including agent signing bonus amortization)

Adjusted EBITDA (EBITDA adjusted for significant items)

Free Cash Flow (Adjusted EBITDA less cash interest expense, cash tax expense, cash payments for capital expenditures and cash payments for agent signing bonuses)

We believe that EBITDA, Adjusted EBITDA and Free Cash Flow enhance investors' understanding of our business and performance. We use EBITDA and Adjusted EBITDA to review results of operations, forecast and budget, assess cash flow and capital and allocate resources. We use Free Cash Flow to assess our cash flow and capital resources. Since these 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. Non-Financial Measures
We also use certain non-financial measures to assess our overall performance. These measures include, but are not limited to: transaction growth and money transfer agent base.
Key Business Terms:
Corridor - With regard to a money transfer transaction, a corridor is referred to as the originating "send" location and the designated "receive" location. Transactions and the related fee and other revenue are viewed as originating from the "send side" of a transaction.
Corridor mix - Relative impact of consumers completing more or less transactions in each available corridor versus the comparative prior period.
Face value - The principal amount of each completed transaction, excluding any fees related to the transaction.
Foreign currency - The impact of foreign currency exchange rate fluctuations are typically calculated as the difference between current period activity translated using the current period's currency exchange rates and the comparable prior-year period's currency exchange rates. We use this method to calculate the impact of changes in foreign currency exchange rates for all countries where the functional currency is not the U.S. dollar.
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.


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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 13.25% senior secured second lien notes due 2018 of Moneygram Payment Systems Worldwide, Inc. for a purchase price equal to 106.625 percent of the principal amount purchased, plus accrued and unpaid interest, referred to herein as the Note Repurchase. 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.
Deferred Prosecution Agreement - In the first quarter of 2013, a compliance monitor was selected pursuant to a requirement of our settlement with the U.S. Attorney's Office for the Middle District of Pennsylvania, or MDPA, and the Asset Forfeiture and Money Laundering Section of the Criminal Division of the Department of Justice, or US DOJ. Aaron Marcu is a litigation partner with Freshfields Bruckhaus Deringer LLP in New York and heads its global financial institutions litigation group. Aaron Marcu was among the original list of potential monitors that we submitted to the government. As a result of the settlement, we incurred $2.4 million of expense in the second quarter of 2013, with an annual estimated expense of $7.2 million.
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 $3.2 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.

RESULTS OF OPERATIONS
The following table presents the year over year results of operations for the
three and six months ended June 30, 2013 and 2012:
                                           Three Months Ended                                Six Months Ended
                                                 June 30,                    %                    June 30,                   %
(Dollars in millions)                      2013               2012         Change           2013              2012         Change
                                       (unaudited)         (unaudited)                  (unaudited)        (unaudited)
REVENUE
Fee and other revenue              $       361.6          $     326.7        11  %   $       699.3        $     641.6         9  %
Investment revenue                           3.5                  3.4         3  %             6.3                6.6        (5 )%
Total revenue                              365.1                330.1        11  %           705.6              648.2         9  %
OPERATING EXPENSES
Fee and other commissions expense          169.6                146.7        16  %           323.9              288.6        12  %
Investment commissions expense               0.1                  0.1         -  %             0.2                0.2         -  %
Total commissions expense                  169.7                146.8        16  %           324.1              288.8        12  %
Compensation and benefits                   66.4                 59.0        13  %           131.9              118.1        12  %
Transaction and operations support          62.4                 98.0       (36 )%           113.9              156.2       (27 )%
Occupancy, equipment and supplies           11.9                 12.2        (2 )%            24.9               24.4         2  %
Depreciation and amortization               12.2                 11.0        11  %            24.0               21.7        11  %
Total operating expenses                   322.6                327.0        (1 )%           618.8              609.2         2  %
OPERATING INCOME                            42.5                  3.1        NM               86.8               39.0       123  %
OTHER EXPENSE
Interest expense                             9.9                 17.7       (44 )%            27.3               35.5       (23 )%
Debt extinguishment costs                      -                    -         -  %            45.3                  -       100  %
Other                                          -                  0.3      (100 )%               -                0.3      (100 )%
Total other expense                          9.9                 18.0       (45 )%            72.6               35.8       103  %
Income (loss) before income taxes           32.6                (14.9 )      NM               14.2                3.2       344  %
Income tax expense                          13.5                 10.2        32  %             7.7               18.0       (57 )%
NET INCOME (LOSS)                  $        19.1          $     (25.1 )      NM      $         6.5        $     (14.8 )      NM

NM = Not meaningful


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Fee and Other Revenue and Related Commission Expense The following discussion provides fee and other revenue and related commission expense results for the three and six months ended June 30, 2013 and 2012:

                         Three Months Ended June 30,         %           Six Months Ended June 30,          %
(Dollars in millions)      2013               2012         Change         2013               2012         Change
Fee and other revenue $      361.6       $      326.7        11 %    $      699.3       $      641.6         9 %
Fee and other
commissions expense          169.6              146.7        16 %           323.9              288.6        12 %
Fee and other
commissions expense
as a percent of fee
and other revenue             46.9 %             44.9 %                      46.3 %             45.0 %

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, bill payment, money order and official check transactions. The Company derives money transfer revenues primarily from consumer transaction fees and the management of currency exchange spreads involving different "send" and "receive" countries. The Company has corridor pricing capabilities that provide us flexibility when establishing consumer fees and foreign exchange rates for our money transfer services and, in certain countries, we provide consumers with the ability to complete their transactions in a choice of local currencies, also known as multi-currency. 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. For the three and six months ended June 30, 2013, fee and other revenue grew 11 percent and nine percent, respectively, when compared to the same periods in 2012. Fee and other revenue growth was primarily driven by transaction growth from the money transfer product, which was partially offset by shifts in corridor mix and average face value per transaction for the money transfer product. An additional offset was realized as a result of transaction declines from the bill payment, money order and official check products.
Fee and Other Commissions - The Company incurs fee commissions primarily on our Global Funds Transfer products. In a money transfer transaction, both the agent initiating the transaction and the receiving agent earn 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, except in certain limited circumstances for large agents where we may pay a fixed commission amount based on total money order transactions. Other commissions expense includes the amortization of capitalized agent signing bonus payments.
As a result of the continued money transfer growth, fee and other commissions expense grew 16 percent and 12 percent for the three and six months ended June 30, 2013, respectively, when compared to the same periods in 2012. Our fee and other commissions expense growth rate is out pacing the fee and other revenue growth rate as a result of the continued shift in the overall product mix towards the money transfer product and increased signing bonus payments as we continue our agent expansion and retention efforts. For the three months ended June 30, 2013, commissions expense as a percentage of fee and other revenue grew from 44.9 percent to 46.9 percent, when compared to the same period in 2012. For the six months ended June 30, 2013, commissions expense as a percentage of fee and other revenue grew from 45.0 percent to 46.3 percent, when compared to the same period in 2012.
Global Funds Transfer Fee and Other Revenue The following discussion provides a summary of fee and other revenue for the Global Funds Transfer segment for the three and six months ended June 30, 2013 and 2012. Investment revenue is not included in the analysis below. For further detail, see Net Investment Revenue Analysis.


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                               Three Months Ended June 30,          %          Six Months Ended June 30,          %
(Dollars in millions)              2013             2012         Change           2013            2012          Change
Money transfer:
Fee and other revenue        $         319.7     $   282.1          13  %    $       614.0     $   550.4           12  %
Bill payment:
Fee and other revenue                   24.8          26.0          (5 )%             50.8          53.6           (5 )%
Total Global Funds Transfer:
Fee and other revenue        $         344.5     $   308.1          12  %    $       664.8     $   604.0           10  %
Commissions expense          $         169.4     $   146.3          16  %    $       323.3     $   287.8           12  %

For the three months ended June 30, 2013, Global Funds Transfer fee and other revenue increased $36.4 million, when compared to the same period in 2012. The increase was a result of the 13 percent fee and other revenue growth by the money transfer product, which was driven by transaction growth of 14 percent, slightly offset by continued shifts in our corridor mix and average face value per transaction. Bill payment fee and other revenue experienced a decline of five percent, as transactions declined two percent, coupled with lower average fee per transaction as a result of industry mix.
For the six months ended June 30, 2013, Global Funds Transfer fee and other revenue increased $60.8 million, when compared to the same period in 2012. The increase was driven by money transfer fee and other revenue growth of 12 percent, which was generated by transaction growth of 13 percent, which was slightly offset by continued shifts in our corridor mix and average face value per transaction. Bill payment fee and other revenue declined five percent, primarily due to declined transactions of two percent, coupled with lower average fee per transaction as a result of industry mix. Money Transfer Transactions
The following table displays year over year money transfer transaction growth by geographic location (the region originating the transaction) for the three and six months ended June 30, 2013:

                                Three Months Ended     Six Months Ended
Total transactions                        14 %                 13 %
U.S. to U.S.                               8 %                  7 %
U.S. Outbound                             19 %                 16 %
Originating outside of the U.S.           16 %                 15 %

Growth in the U.S. Outbound corridors was primarily driven by sends to Mexico. For the three and six months ended June 30, 2013, transactions from this corridor represented 11 percent and 10 percent of our total transactions, respectively. Transaction growth originating outside of the U.S. was primarily driven by strong growth in the Western European and Latin American and Caribbean regions.


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Money Transfer Fee and Other Revenue
As detailed in the table below, for the three and six months ended June 30,
2013, money transfer transaction growth was partially offset by continued shifts
in corridor mix and average face value per transaction. The following table
details the changes in money transfer fee and other revenue from 2012 to 2013,
for the three and six months ended June 30:
(Amounts in millions)                                       Three Months Ended      Six Months Ended
For the period ended June 30, 2012                         $           282.1       $          550.4
Change resulting from:
Money transfer volume growth                                            40.5                   71.2
Foreign currency exchange rate                                           0.4                    0.5
Corridor mix and average face value per transaction                     (2.2 )                 (7.1 )
Other                                                                   (1.1 )                 (0.9 )
For the period ended June 30, 2013                         $           319.7       $          614.1

Bill Payment Fee and Other Revenue
The following table details the changes in bill payment fee and other revenue
from 2012 to 2013, for the three and six months ended June 30:
(Amounts in millions)               Three Months Ended     Six Months Ended
For the period ended June 30, 2012 $           26.0       $          53.6
Change resulting from:
Bill payment volume decline                    (0.7 )                (1.7 )
Industry mix                                   (0.5 )                (1.1 )
For the period ended June 30, 2013 $           24.8       $          50.8

For the three and six months ended June 30, 2013, bill payment fee and other revenue declines were a result of transaction declines of two percent, for both periods when compared to 2012, and lower average fees as a result of shifts in industry mix. The impact of changes in industry mix reflects our continued growth in new emerging verticals that generate a lower fee per transaction than our traditional verticals. Our traditional verticals, such as auto and credit card, have been negatively impacted by the economic conditions in the U.S. For the three months ended June 30, 2013, fee and other revenue decreased five percent, or $1.2 million, when compared to the same period in 2012. For the six months ended June 30, 2013, fee and other revenue decreased five percent, or $2.8 million, when compared to the same period in 2012.


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Global Funds Transfer Commissions Expense The following table details the changes in fee and other commissions for the Global Funds Transfer segment from 2012 to 2013, for the three and six months ended June 30:

(Amounts in millions)               Three Months Ended      Six Months Ended
For the period ended June 30, 2012 $           146.3       $          287.8
Change resulting from:
   Money transfer volume growth                 16.8                   28.6
   Money transfer commission rates               5.3                    6.3
   Bill payment volumes                         (0.4 )                 (1.1 )
   Bill payment commission rates                 0.3                    0.2
   Signing bonuses                               1.9                    2.4
   Foreign currency exchange rate                0.4                    0.5
   Other                                        (1.2 )                 (1.4 )
For the period ended June 30, 2013 $           169.4       $          323.3

Due to the growth of the money transfer product and the increased signing bonus expense from new agent signings, partially offset by the transaction declines from the bill payment product, fee and other commission expense increased 16 percent and 12 percent for the three and six months ended June 30, 2013, respectively, when compared to the same periods in 2012. As a result of the continued shift in the overall product mix towards the money transfer product, commissions expense as a percentage of fee and other revenue grew for both the . . .

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