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MGI > SEC Filings for MGI > Form 10-Q on 6-Aug-2014All Recent SEC Filings

Show all filings for MONEYGRAM INTERNATIONAL INC

Form 10-Q for MONEYGRAM INTERNATIONAL INC


6-Aug-2014

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, or 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. This 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 operating in over 345,000 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. Unbanked consumers do not have a relationship with a traditional financial institution. Underbanked consumers are not fully served by 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 or transfers. 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 and 94 percent of total revenue for the three and six months ended June 30, 2014, respectively. 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 2013), 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. The Global Funds Transfer segment provides global money transfers and, in the U.S., Canada and Puerto Rico, 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. Other also contains corporate items. Our sales efforts are organized based on the nature of the products and services offered. Operating expenses are analyzed on the functional nature of the expense.
Business Environment and Trends
Overall, our total revenue growth for the three and six months ended June 30, 2014 was two percent and six percent, respectively, which was driven by the growth of the money transfer product, specifically the U.S Outbound and Non-U.S corridors. Our money transfer fee and other revenue growth for the three and six months ended June 30, 2014 was three percent and seven percent, respectively. Our money transfer transaction growth for the three and six months ended June 30, 2014 was four percent and eight percent, respectively. The World Bank, a key source of industry analysis for developing countries, has projected long-term growth rates of remittances worldwide in the single digits. On April 17, 2014, Wal-Mart Stores, Inc. ("Walmart") announced the launch of the Walmart-2-Walmart money transfer service, a program operated by a competitor of MoneyGram, that allows consumers to transfer money between its U.S. store locations. This program limits consumers to transferring $900 per transaction. We are unable to determine the overall extent of the long-term negative impact of this program to our business. However, the Company's Walmart U.S. to U.S. transactions declined 31 percent and 14 percent for the three and six months ended June 30, 2014, respectively.


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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.
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. Compliance with laws and regulations is a highly complex and integral part of our day-to-day operations, thus we have continued to increase our compliance personnel headcount and make investments in our compliance-related technology and infrastructure. 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 ("MDPA"), and the Asset Forfeiture and Money Laundering Section of the Criminal Division of the Department of Justice ("U.S. DOJ"). The first annual monitor report was provided to MoneyGram in November of 2013 and per this report MoneyGram is required to make investments ranging from enhanced systems to more resources deployed in the field. We incurred $0.1 million and $0.9 million of expense related to the monitor for the three and six months ended June 30, 2014, respectively. 2014 Events
Global Transformation Program - In the first quarter of 2014, the Company announced the implementation of the 2014 Global Transformation Program, which consists of three key components: reorganization and restructuring, compliance enhancement and a focus on self-service revenue.
Our reorganization and restructuring activities are centered around facilities and headcount rationalization, system efficiencies and headcount right-shoring and outsourcing. The Company projects that these activities will be concluded at the end of the 2015 fiscal year. The following figures include Company estimates and are subject to change as the proposed global transformation program continues to be implemented. The Company is 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 savings of $15.0 million to $20.0 million exiting fiscal year 2015. For the three months ended June 30, 2014, the Company recorded total reorganization and restructuring expenses of $6.7 million. For the six months ended June 30, 2014, the Company recorded total reorganization and restructuring expenses of $9.8 million.
Our compliance enhancement program is focused on improving our services for the consumers and completing the programs recommended in adherence with our settlement with the MDPA and U.S. DOJ. At the beginning of 2014, the Company announced that we expect to make investments totaling $80.0 million to $90.0 million related to the compliance enhancement program over the next three years. For the three and six months ended June 30, 2014, we incurred $7.4 million and $14.5 million, respectively, of compliance enhancement program expense primarily related to contractor and consultant expense for systems and process redesign. For the three and six months ended June 30, 2014, we recorded $0.1 million and $0.9 million, respectively, of expense related to direct monitor costs, as discussed above.
Our increased investment in the growth of our self-service revenue channel, which includes MoneyGram Online, mobile, account deposit services, kiosk-based and money transfer options, will enable us to achieve our goal of generating 15 percent to 20 percent of money transfer revenue from the self-service channel in 2017. For the three and six months ended June 30, 2014, the self-service channel accounted for eight percent and seven percent, respectively, of money transfer fee and other revenue.
Financial Measures and Key Metrics
This Form 10-Q includes financial information prepared in accordance with accounting principles generally accepted in the U.S. ("GAAP") as well as certain non-GAAP financial measures that we use to assess our overall performance. 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 1 - Description of the Business and Basis of Presentation 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)


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Adjusted EBITDA (EBITDA adjusted for certain 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.
The Company utilizes specific terms as related to our business throughout this document, including the following:
Corridor - With regard to a money transfer transaction, the originating "send" location and the designated "receive" location are referred to as a corridor. Transactions and the related fee and other revenue are viewed as originating from the "send side" of a transaction.
Corridor mix - The relative impact of consumers completing increased or decreased 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 is 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 transactional currency is not the U.S. dollar.


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RESULTS OF OPERATIONS
The following table presents the year over year results of operations for the
three and six months ended June 30, 2014 and 2013:
                                       Three Months Ended June 30,          %           Six Months Ended June 30,          %
(Dollars in millions)                    2014               2013          Change         2014               2013         Change
REVENUE
Fee and other revenue              $       368.8       $       361.6         2  %   $      736.5       $      699.3         5  %
Investment revenue                           3.6                 3.5         3  %           10.8                6.3        71  %
Total revenue                              372.4               365.1         2  %          747.3              705.6         6  %
OPERATING EXPENSES
Fee and other commissions expense          171.6               169.6         1  %          342.5              323.9         6  %
Investment commissions expense               0.1                 0.1         -  %            0.2                0.2         -  %
Total commissions expense                  171.7               169.7         1  %          342.7              324.1         6  %
Compensation and benefits                   75.0                66.4        13  %          144.7              131.9        10  %
Transaction and operations support          77.3                62.4        24  %          148.6              113.9        30  %
Occupancy, equipment and supplies           13.7                11.9        15  %           26.5               24.9         6  %
Depreciation and amortization               13.6                12.2        11  %           26.7               24.0        11  %
Total operating expenses                   351.3               322.6         9  %          689.2              618.8        11  %
OPERATING INCOME                            21.1                42.5       (50 )%           58.1               86.8       (33 )%
OTHER (INCOME) EXPENSE
Securities settlements                     (22.4 )                 -      (100 )%          (22.4 )                -      (100 )%
Interest expense                            11.4                 9.9        15  %           21.1               27.3       (23 )%
Debt extinguishment costs                      -                   -         -  %              -               45.3      (100 )%
Total other (income) expense               (11.0 )               9.9        NM              (1.3 )             72.6        NM
Income before income taxes                  32.1                32.6        (2 )%           59.4               14.2        NM
Income tax expense (benefit)                 6.5                13.5       (52 )%           (5.2 )              7.7        NM
NET INCOME                         $        25.6       $        19.1        34  %   $       64.6       $        6.5        NM

NM = Not meaningful

Fee and Other Revenue and Related Commission Expense The following summary provides fee and other revenue and related commission expense results for the three and six months ended June 30, 2014 and 2013:

                                         Three Months Ended June 30,        %          Six Months Ended June 30,         %
(Dollars in millions)                      2014               2013        Change        2014               2013        Change
Fee and other revenue                 $      368.8       $      361.6       2%     $      736.5       $      699.3       5%
Fee and other commissions expense            171.6              169.6       1%            342.5              323.9       6%
Fee and other commissions expense as
a percent of fee and other revenue            46.5 %             46.9 %                    46.5 %             46.3 %


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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.
For the three and six months ended June 30, 2014, fee and other revenue grew two percent and five percent, respectively, when compared to the same periods in 2013. Fee and other revenue growth was primarily driven by transaction growth from the money transfer product, which was partially offset by transaction declines from the money order and official check products. The overall transaction growth from the money transfer product is net of a 31 percent and 14 percent decline in Walmart U.S. to U.S. send transactions for the three and six months ended June 30, 2014, respectively. 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.
As a result of the continued growth of the money transfer offering, fee and other commissions expense grew one percent and six percent for the three and six months ended June 30, 2014, respectively, when compared to the same periods in 2013. For the three months ended June 30, 2014, fee and other commissions expense as a percentage of fee and other revenue decreased from 46.9 percent to 46.5 percent, when compared to the same period in 2013, primarily due to a shift in agent mix. For the six months ended June 30, 2014, fee and other commissions expense as a percentage of fee and other revenue grew from 46.3 percent to 46.5 percent, when compared to the same period in 2013. Our fee and other commissions expense growth rate outpaced the fee and other revenue growth rate in the six months ended June 30, 2014 primarily due to changes in the corridor and agent mix and increased signing bonus amortization from our agent expansion and retention efforts.
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, 2014 and 2013. Investment revenue is not included in the analysis below. For further detail, see Investment Revenue Analysis.

                                      Three Months Ended June
                                                30,                 %        Six Months Ended June 30,        %
(Dollars in millions)                    2014         2013       Change          2014           2013       Change
Money transfer fee and other revenue  $   328.2     $ 319.7         3  %    $       654.3     $ 614.0         7  %
Bill payment fee and other revenue         24.5        24.8        (1 )%             50.1        50.8        (1 )%
Global Funds Transfer fee and other
revenue                               $   352.7     $ 344.5         2  %    $       704.4     $ 664.8         6  %
Fee and other commissions expense     $   171.5     $ 169.5         1  %    $       342.2     $ 323.4         6  %

For the three months ended June 30, 2014, Global Funds Transfer fee and other revenue increased $8.2 million, when compared to the same period in 2013. The increase was driven by money transfer fee and other revenue growth of three percent, primarily due to a four percent transaction growth and favorable movement in foreign currency exchange rates, slightly offset by our corridor mix and a lower average face value per transaction. The money transfer transaction growth is net of a 31 percent decline in Walmart U.S.-to-U.S. send transactions. Walmart U.S- to-U.S. revenue versus the prior year declined 33 percent. Excluding U.S.-to-U.S. Walmart transactions, money transfer revenue increased 10 percent. Bill payment fee and other revenue declined one percent, primarily due to a lower average fee per transaction as a result of industry mix. For the six months ended June 30, 2014, Global Funds Transfer fee and other revenue increased $39.6 million, when compared to the same period in 2013. The increase was driven by money transfer fee and other revenue growth of seven percent, primarily due to an eight percent transaction growth and favorable movement in foreign currency exchange rates, slightly offset by our corridor mix and a lower average face value per transaction. The money transfer transaction growth is net of a 14 percent decline in Walmart U.S. to U.S. send transactions. Walmart U.S- to-U.S. revenue versus the prior year declined 14 percent. Excluding U.S.-to-U.S. Walmart transactions, money transfer revenue increased 11 percent. Bill payment fee and other revenue declined one percent, primarily due to a lower average fee per transaction as a result of industry mix.


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Money Transfer Transactions
The following table displays the percentage distribution of total money transfer
transactions by geographic location (the region originating the transaction) for
the three and six months ended June 30:
                                                       Three Months Ended June 30,        Six Months Ended June 30,
                                                         2014               2013            2014              2013
U.S. to U.S.                                               23 %               30 %            26 %               30 %
U.S. Outbound                                              41 %               36 %            39 %               36 %
Originating outside of the U.S.                            36 %               34 %            35 %               34 %

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:

                                                       Three Months    Six Months
                                                        Ended June     Ended June
                                                           30,            30,
                                                       2014 vs 2013   2014 vs 2013
Total transactions                                          4%             8%
U.S. to U.S.                                              (15)%           (4)%
U.S. Outbound                                              15%            16%
Originating outside of the U.S.                            10%            10%

For the three months ended June 30, 2014, the U.S. Outbound corridors generated 15 percent transaction growth while accounting for 41 percent of our total money transfer transactions. The success in the U.S. Outbound corridor was primarily driven by sends to Mexico, which had transaction growth of 21 percent. Transactions originating outside of the U.S. continued to grow at a double digit rate on a year over year basis and accounted for 36 percent of total money transfer transactions. The growth was primarily driven by the Eastern Europe, Mexico and Middle East regions. The U.S. to U.S. corridor declined 15 percent and accounted for 23 percent of total money transfer transactions. The decline was primarily driven by a 31 percent decline in Walmart U.S. to U.S transactions, partially offset by 17 percent growth in U.S. to U.S. transactions excluding Walmart U.S. to U.S.
For the six months ended June 30, 2014, the U.S. Outbound corridors generated 16 percent transaction growth while accounting for 39 percent of our total money transfer transactions. The success in the U.S. Outbound corridor was primarily driven by sends to Mexico, which had transaction growth of 25 percent. Transactions originating outside of the U.S. continued to grow at a double digit rate on a year over year basis and accounted for 35 percent of total money transfer transactions. The growth was primarily driven by the Eastern Europe, Mexico and Middle East regions. The U.S. to U.S. corridor declined four percent and accounted for 26 percent of total money transfer transactions. The decline was primarily driven by a 14 percent decline in Walmart U.S. to U.S transactions, partially offset by 17 percent growth in U.S. to U.S. transactions excluding Walmart U.S. to U.S.
Money Transfer Fee and Other Revenue
As detailed in the table above, for the three and six months ended June 30, 2014, money transfer fee and other revenue growth was primarily driven by transaction growth of four percent and eight percent, respectively. The following table details the changes in money transfer fee and other revenue from 2013 to 2014, for the three and six months ended June 30:

(Amounts in millions)                                  Three Months Ended      Six Months Ended
For the period ended June 30, 2013                    $           319.7       $          614.0
Change resulting from:
Money transfer volume growth                                       13.3                   48.0
Foreign currency exchange rate                                      4.2                    6.3
Pricing, corridor mix and average face value per
. . .
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