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MGI > SEC Filings for MGI > Form 10-K on 3-Mar-2014All Recent SEC Filings

Show all filings for MONEYGRAM INTERNATIONAL INC

Form 10-K for MONEYGRAM INTERNATIONAL INC


3-Mar-2014

Annual Report


Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our Consolidated Financial Statements and related Notes. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated due to various factors discussed below under "Cautionary Statements Regarding Forward-Looking Statements" and under the caption "Risk Factors" in Part 1, Item 1A of this Annual Report on Form 10-K. 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 and Estimates

Cautionary Statements Regarding Forward-Looking Statements

OVERVIEW
MoneyGram is a leading global money transfer and payment services company operating in approximately 336,000 agent locations in more than 200 countries and territories. Our major products include global money transfers, bill payment services, money order services and official check processing. As an alternative financial services provider, our primary consumers are unbanked or underbanked consumers. We primarily offer services through third-party agents, including retail chains, independent retailers, post offices and other financial institutions. We continue to be an innovator in the industry by diversifying our core money transfer revenue through new channels, such as online, mobile, kiosks and other self-service channels.
Our global money transfer and bill payment services are our primary revenue drivers, accounting for 95 percent of total fee and other revenue for the year ended December 31, 2013. 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. We manage our revenue and related commission expenses through two reporting segments: Global Funds Transfer and Financial Paper Products. Businesses that are not operated within these segments are categorized as "Other," and are primarily related to discontinued products and businesses, and also contain corporate items. Our sales efforts are organized based on the nature of products and the services offered. Operating expenses are discussed based on the functional nature of the expense.
See summary of key 2013 events as disclosed in Part 1, Item 1, "2013 Events" of this Annual Report on Form 10-K.
Business Environment
Overall, our total revenue growth for the year ended December 31, 2013 was 10 percent, which was driven by the success of the money transfer product. Our money transfer fee and other revenue growth for the year ended December 31, 2013 was 12 percent, as our money transfer transaction growth for the year ended December 31, 2013 was 13 percent.
Throughout 2013, worldwide economic conditions continued to remain weak, as evidenced by high unemployment rates, government assistance to citizens and businesses on a global basis, restricted lending activity and low consumer confidence, among other factors. Historically, the remittance industry has generally been resilient during times of economic softness as money transfers are deemed essential to many, with the funds used by the receiving party for food, housing and other basic needs. Given the global reach and extent of the current economic recession, the growth of money transfer volumes and the average principal of money transfers continued to fluctuate by corridor and country in 2013, particularly in Europe. Also, there is continued political unrest in parts of the Middle East and Africa that contributed to volatile fluctuations in selected countries such as Egypt and Libya.
In 2013, the U.S. to Outbound corridors generated 18 percent transaction growth, which was primarily driven by sends to Mexico, which had transaction growth of 31 percent. Transaction growth originating outside of the U.S. grew 13 percent on a year over year basis, which was primarily driven by the Western European, Latin American and Caribbean regions. The U.S. to U.S. corridor grew seven percent and accounted for 30 percent of total money transfer transactions. At the end of 2012, our largest competitor announced significant price cuts in several markets. To date, we have limited our pricing actions primarily to certain online corridors and matched lower prices at our U.S. Walmart agent locations.
As of December 31, 2013, our money transfer agent base expanded eight percent to approximately 336,000 locations, compared to over 310,000 locations as of December 31, 2012, primarily due to expansion in the U.S., Russia and India. We continue to


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review markets where we may have an opportunity to increase our presence through agent signings and acquisitions, specifically in countries or cities where we are underrepresented based on the World Bank's estimated country market size. 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 have continued to increase our compliance personnel headcount and make investments in our compliance-related technology and infrastructure. Since 2009 we have invested over $120.0 million in our compliance and anti-fraud programs and prevented more than $365.0 million in fraud losses during the same time period. In December of 2013, we launched our Compliance Enhancement Program, which is focused on improving our services for the consumers and completing the programs recommended in adherence with the DPA. On an ongoing basis we see a trend among state, federal and international regulators towards enhanced scrutiny of anti-money laundering compliance programs, as well as consumer fraud prevention and education.
Anticipated Trends for 2014
This discussion of trends expected to impact our business in 2014 is based on information presently available and contains certain assumptions, including assumptions regarding future economic conditions. Differences in actual economic conditions during 2014 compared with our assumptions could have a material impact on our results. See "Cautionary Statements Regarding Forward-Looking Statements" and Part I, Item 1A, "Risk Factors" of this Annual Report on Form 10-K for additional factors that could cause results to differ materially from those contemplated by the following forward-looking statements. Throughout 2013, global economic conditions remained weak. We cannot predict the duration or extent of the severity of these weak economic conditions, nor the extent to which these conditions could negatively affect our business, operating results or financial condition. While the money remittance industry has generally been resilient during times of economic softness, the current global economic conditions have continued to adversely impact the demand for money remittances. The World Bank is projecting eight percent remittance growth in 2014, which is an acceleration from 2013 estimates. Our growth has historically exceeded the World Bank projections.
We continue to review markets in which we may have an opportunity to increase prices based on increased brand awareness, loyalty and competitive positioning. We are monitoring consumer behavior to ensure that we continue our market share growth. Pricing actions from our competitors may also result in pricing changes for our products and services. As a result of our agent expansion and retention efforts, commissions expense and signing bonuses may increase throughout 2014. We believe self-service channels are incremental to our existing strong cash-to-cash business and that MoneyGram can continue to strengthen our overall market position with accelerated investments. In 2014, we anticipate increasing our investment in our self-service channels business, which includes MoneyGram Online, mobile, account deposit services and kiosk-based money transfer and bill payment options. These channels for the money transfer products performed extremely well, recording 30% fee and other revenue growth as a result of 47% transaction growth for the twelve months ended December 31, 2013. For our Financial Paper Products segment, we expect the decline in overall paper-based transactions to continue in 2014. As a result of the pricing initiatives undertaken in prior years, we have reduced the commission rates paid to our official check financial institution customers and instituted certain per item and other fees for both the official check and money order services. In addition, the historically low interest rate environment has resulted in low or no commissions being paid to our official check financial institution customers. As a result, we anticipate that the Financial Paper Products segment will continue to experience a decline in outstanding balances in 2014. We continue to see a trend among state, federal and international regulators toward enhanced scrutiny of anti-money laundering compliance, as well as consumer fraud prevention and education. We have taken and will continue to take proactive steps that we feel are in the best interest of consumers to prevent consumer fraud, although we do not know which regions we may choose in which to take future action. Additionally, the terms of the DPA impose additional costs upon the Company related to compliance and other required terms, and such additional compliance costs could be substantial. As a result of the first annual monitor report, most of the major technology upgrades will need to be implemented in the next 12 months. As we continue to revise our processes and enhance our technology systems to meet regulatory trends and to comply with the terms of the DPA, our operating expenses for compliance may increase. Additional compliance obligations could also have an adverse impact on the Company's operations.
In February 2014, we announced our Global Transformation Program, which is centered around facilities and headcount rationalization, system efficiencies and headcount right-shoring and outsourcing. In relation to the Global Transformation Program, we are estimating to incur $30.0 million to $40.0 million in cash outlays over the next two years and generate an annual estimated pre-tax cost savings of approximately $15.0 million to $20.0 million exiting fiscal year 2015.
Financial Measures and Key Metrics
This Form 10-K includes financial information prepared in accordance with accounting principles generally accepted in the U.S., or GAAP, as well as certain non-GAAP financial measures that we use to assess our overall performance.


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GAAP Measures - We utilize certain financial measures prepared in accordance with 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. Due to our regulatory capital requirements, we deem the following payment service assets, in their entirety, to be substantially restricted: cash and cash equivalents, receivables, net, interest-bearing investments and available-for-sale investments. Assets in excess of payment service obligations is our payment service assets less our payment service obligations. We use assets in excess of payment service obligations when assessing capital resources and liquidity. See Note 2 - Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements for additional disclosure. Non-GAAP Measures - 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. 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 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)

Adjusted 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 Adjusted 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 allocate capital resources. We use Adjusted 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. 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.


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RESULTS OF OPERATIONS
The following table is a summary of the results of operations for the years ended December 31:

                                      2013          2012          2011        2013 vs 2012     2012 vs 2011    2013 vs 2012    2012 vs 2011
(Amounts in millions)                                                             ($)              ($)              (%)             (%)
Revenue
Fee and other revenue              $ 1,456.8     $ 1,328.6     $ 1,230.9     $      128.2     $       97.7           10  %            8  %
Investment revenue                      17.6          12.6          16.9              5.0             (4.3 )         40  %          (25 )%
Total revenue                        1,474.4       1,341.2       1,247.8            133.2             93.4           10  %            7  %
Expenses
Fee and other commissions expense      677.8         599.2         547.6             78.6             51.6           13  %            9  %
Investment commissions expense           0.4           0.3           0.4              0.1             (0.1 )         33  %          (25 )%
Total commissions expense              678.2         599.5         548.0             78.7             51.5           13  %            9  %
Compensation and benefits              264.9         241.6         235.7             23.3              5.9           10  %            3  %
Transaction and operations support     253.7         355.7         227.8           (102.0 )          127.9          (29 )%           56  %
Occupancy, equipment and supplies       49.0          47.7          47.7              1.3                -            3  %            -  %
Depreciation and amortization           50.7          44.3          46.0              6.4             (1.7 )         14  %           (4 )%
Total operating expenses             1,296.5       1,288.8       1,105.2              7.7            183.6            1  %           17  %
Operating income                       177.9          52.4         142.6            125.5            (90.2 )        240  %          (63 )%
Other (income) expense
Net securities gains                       -         (10.0 )       (32.8 )           10.0             22.8         (100 )%           70  %
Interest expense                        47.3          70.9          86.2            (23.6 )          (15.3 )        (33 )%          (18 )%
Debt extinguishment costs               45.3             -          37.5             45.3            (37.5 )        100  %         (100 )%
Other costs                                -           0.4          11.9             (0.4 )          (11.5 )       (100 )%          (97 )%
Total other expense, net                92.6          61.3         102.8             31.3            (41.5 )         51  %          (40 )%
Income (loss) before income taxes       85.3          (8.9 )        39.8             94.2            (48.7 )        NM              NM
Income tax expense (benefit)            32.9          40.4         (19.6 )           (7.5 )           60.0          (19 )%          NM
Net Income (loss)                  $    52.4     $   (49.3 )   $    59.4     $      101.7     $     (108.7 )        NM              NM

NM = Not meaningful
Fee and Other Revenue and Related Commission Expense The following is a summary of fee and other revenue and related commission expense results for the years ended December 31:

                                                2013          2012          2011       2013 vs 2012    2012 vs 2011
(Amounts in millions)
Fee and other revenue                        $ 1,456.8     $ 1,328.6     $ 1,230.9           10 %           8 %
Fee and other commissions expense                677.8         599.2         547.6           13 %           9 %
Fee and other commissions expense as a % of
fee and other revenue                             46.5 %        45.1 %        44.5 %


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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. 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.
In 2013 and 2012, the Company generated fee and other revenue growth of $128.2 million, or 10 percent, and $97.7 million, or eight percent, respectively. For both 2013 and 2012, fee and other revenue growth was driven by transaction growth of the money transfer product and was partially offset by transaction declines from the bill payment, money order and official check products. Fee and Other Commissions Expense
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 and, in limited circumstances, the biller will generally earn 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 based on total money order transactions. Other commissions expense includes the amortization of capitalized agent signing bonus payments.
In 2013, fee and other commissions expense growth of $78.6 million, or 13 percent, was primarily due to the transaction growth from the money transfer product, changes in the corridor and agent mix, a step-up in the commission rate for a large agent and increased signing bonus amortization from our agent expansion and retention efforts. Commissions expense as a percentage of fee and other revenue increased to 46.5 percent in 2013 from 45.1 percent in 2012. In 2012, fee and other commissions expense growth of $51.6 million, or nine percent, was primarily due to money transfer volume growth and increased commission rate. Commissions expense as a percentage of fee and other revenue increased to 45.1 percent in 2012 from 44.5 percent in 2011. 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 years ended December 31. Investment revenue is not included in the analysis. See "Investment Revenue Analysis" for additional information.

(Amounts in millions)                        2013          2012          2011       2013 vs 2012    2012 vs 2011
Money transfer:
Fee and other revenue                     $ 1,287.5     $ 1,148.5     $ 1,039.5         12  %           10  %
Bill payment:
Fee and other revenue                         102.0         106.1         112.6         (4 )%           (6 )%
Total Global Funds Transfer:
Fee and other revenue                     $ 1,389.5     $ 1,254.6     $ 1,152.1         11  %            9  %
Fee and other commissions expense         $   676.9     $   597.6     $   545.7         13  %           10  %

For 2013 and 2012, Global Funds Transfer fee and other revenue increased $134.9 million and $102.5 million, respectively, driven by money transfer volume growth of 13 percent and 14 percent, respectively. In 2013, bill payment revenue declined four percent as a result of transaction decline of two percent and a decrease in average fee per transactions as a result of industry mix. In 2012, bill payment fee and other revenue decreased primarily due to the 2011 PropertyBridge divestiture (See Note 3 - Acquisitions and Disposals of the Notes to the Consolidated Financial Statements for additional disclosure). Excluding the divestiture, fee and other revenue decreased one percent and transactions grew five percent.
Money Transfer Transactions
The following table displays the percentage distribution of total money transfer transactions for the years ended December 31:

                                2013    2012    2011
U.S. to U.S.                     30 %    31 %    32 %
U.S. to Outbound                 36 %    35 %    35 %

Originating outside of the U.S. 34 % 34 % 33 %


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The following table displays year over year money transfer transaction growth for the years ended December 31:

                                2013 vs 2012    2012 vs 2011
Total transactions                    13 %            14 %
U.S. to U.S.                           7 %            10 %
U.S. to Outbound                      18 %            13 %
Originating outside of the U.S.       13 %            18 %

In 2013, the U.S. to Outbound corridors generated 18 percent transaction growth while accounting for 36 percent of our total money transfer transactions. The success in the U.S. to Outbound corridor was primarily driven by sends to Mexico, which had transaction growth of 31 percent for 2013. Transaction growth originating outside of the U.S. continued to grow at a double digit rate on a year over year basis and accounted for 34 percent of total money transfer transactions. The growth was primarily driven by the Western European, Latin American and Caribbean regions. The U.S. to U.S. corridor grew seven percent and accounted for 30 percent of total money transfer transactions.
In 2012, transaction growth originating outside of the U.S. was 18 percent and accounted for 34 percent of total money transfer transactions, as the growth was primarily driven by the Middle East and Latin American and Caribbean regions. The U.S. Outbound corridors generated 13 percent transaction growth while accounting for 35 percent of our total money transfer transactions. The success in the U.S. to outbound corridor was primarily driven by sends to Mexico, which had transaction growth of 21 percent for 2012. The U.S. to U.S. corridor grew 10 percent and accounted for 31 percent of total money transfer transactions. Money Transfer Fee and Other Revenue
The following table details the changes in money transfer fee and other revenue from the respective prior year for the years ended December 31:

(Amounts in millions)                                      2013          2012
Money transfer fee and other revenue for the prior year $ 1,148.5     $ 1,039.5
Change resulting from:
Money transfer volume growth                                147.1         141.6
Foreign currency exchange rate                                5.4         (20.7 )
Corridor mix and average face value per transaction          (6.6 )       (10.5 )
Other                                                        (6.9 )        (1.4 )
Money transfer fee and other revenue                    $ 1,287.5     $ 1,148.5

In 2013, fee and other revenue growth was generated by transaction growth of 13 percent and positively impacted by movement in foreign currency exchange rates, partially offset by our corridor mix and average face value per transaction. In 2012, transaction growth of 14 percent was partially offset by movement in foreign currency exchange rates and our corridor mix and average face value per transaction.
Bill Payment Fee and Other Revenue
The following table details the changes in bill payment fee and other revenue from the respective prior year for the years ended December 31:

(Amounts in millions)                                   2013        2012
Bill payment fee and other revenue for the prior year $ 106.1     $ 112.6
Change resulting from:
Bill payment volume                                      (2.5 )       4.6
Industry mix                                             (1.6 )      (6.0 )
Divestiture                                                 -        (5.1 )
Bill payment fee and other revenue                    $ 102.0     $ 106.1

In 2013, bill payment fee and other revenue decreased four percent, or $4.1 million as a result of transaction declines of two percent 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 industry verticals that generate a lower fee per transaction than our traditional industry verticals. Our traditional industry verticals, such as auto and credit card, have been negatively impacted by the economic conditions in the U.S.


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In 2012, bill payment fee and other revenue decreased six percent and transactions declined three percent. Excluding the 2011 PropertyBridge divestiture, fee and other revenue decreased one percent and transactions grew five percent. The divestiture accounted for $5.1 million of the decline. Excluding the divestiture, volume growth accounted for an increase of $4.6 million, which was offset by a $6.0 million decline related to the lower average fees from changes in industry mix.
Global Funds Transfer Fee and Other Commissions Expense The following table details the changes in fee and other commissions for the . . .

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