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Aug. 5, 2020, 6:17 a.m. EDT

10-Q: WESTERN UNION CO

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(EDGAR Online via COMTEX) -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 2.

The following discussion should be read in conjunction with the condensed consolidated financial statements and the notes to those statements included elsewhere in this report on Form 10-Q. This report on Form 10-Q contains certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict. Actual outcomes and results may differ materially from those expressed in, or implied by, our forward-looking statements. Words such as "expects," "intends," "targets," "anticipates," "believes," "estimates," "guides," "provides guidance," "provides outlook," and other similar expressions or future or conditional verbs such as "may," "will," "should," "would," "could," and "might" are intended to identify such forward-looking statements. Readers of the Form 10-Q of The Western Union Company (the "Company," "Western Union," "we," "our," or "us") should not rely solely on the forward-looking statements and should consider all uncertainties and risks discussed in the Risk Factors section and throughout the Annual Report on Form 10-K for the year ended December 31, 2019. The statements are only as of the date they are made, and the Company undertakes no obligation to update any forward-looking statement.

Possible events or factors that could cause results or performance to differ materially from those expressed in our forward-looking statements include the following: (i) events related to our business and industry, such as: changes in general economic conditions and economic conditions in the regions and industries in which we operate, including global economic downturns and trade disruptions, or significantly slower growth or declines in the money transfer, payment service, and other markets in which we operate, including downturns or declines related to interruptions in migration patterns or other events, such as public health emergencies, epidemics, or pandemics such as COVID-19, civil unrest, war, terrorism, or natural disasters, or non-performance by our banks, lenders, insurers, or other financial services providers; failure to compete effectively in the money transfer and payment service industry, including among other things, with respect to price, with global and niche or corridor money transfer providers, banks and other money transfer and payment service providers, including electronic, mobile and internet-based services, card associations, and card-based payment providers, and with digital currencies and related protocols, and other innovations in technology and business models; political conditions and related actions, including trade restrictions and government sanctions, in the United States and abroad, which may adversely affect our business and economic conditions as a whole, including interruptions of United States or other government relations with countries in which we have or are implementing significant business relationships with agents or clients; deterioration in customer confidence in our business, or in money transfer and payment service providers generally; our ability to adopt new technology and develop and gain market acceptance of new and enhanced services in response to changing industry and consumer needs or trends; changes in, and failure to manage effectively, exposure to foreign exchange rates, including the impact of the regulation of foreign exchange spreads on money transfers and payment transactions; any material breach of security, including cybersecurity, or safeguards of or interruptions in any of our systems or those of our vendors or other third parties; cessation of or defects in various services provided to us by third-party vendors; mergers, acquisitions, and the integration of acquired businesses and technologies into our Company, divestitures, and the failure to realize anticipated financial benefits from these transactions, and events requiring us to write down our goodwill; decisions to change our business mix; our ability to realize the anticipated benefits from restructuring-related initiatives, which may include decisions to downsize or to transition operating activities from one location to another, and to minimize any disruptions in our workforce that may result from those initiatives; failure to manage credit and fraud risks presented by our agents, clients, and consumers; failure to maintain our agent network and business relationships under terms consistent with or more advantageous to us than those currently in place, including due to increased costs or loss of business as a result of increased compliance requirements or difficulty for us, our agents, or their subagents in establishing or maintaining relationships with banks needed to conduct our services; changes in tax laws or their interpretation, any subsequent regulation, and potential related state income tax impacts, and unfavorable resolution of tax contingencies; adverse rating actions by credit rating agencies; our ability to protect our brands and our other intellectual property rights and to defend ourselves against potential intellectual property infringement claims; our ability to attract and retain qualified key employees and to manage our workforce successfully; material changes in the market value or liquidity of securities that we hold; restrictions imposed by our debt obligations;

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(ii) events related to our regulatory and litigation environment, such as:

Overview

We are a leading provider of money movement and payment services, operating in two business segments:

Consumer-to-Consumer - Our Consumer-to-Consumer operating segment facilitates money transfers between two consumers, primarily through a network of third-party agents. Our multi-currency money transfer service is provided ? through one interconnected global network where a money transfer can be sent from one location to another around the world. This service is available for international cross-border transfers and, in certain countries, intra-country transfers. This segment also includes money transfer transactions that can be initiated through websites and mobile devices.

Business Solutions - Our Business Solutions operating segment facilitates payment and foreign exchange solutions, primarily cross-border, cross-currency transactions, for small and medium size enterprises and other organizations and ? individuals. The majority of the segment's business relates to exchanges of currency at spot rates, which enable customers to make cross-currency payments. In addition, in certain countries, we write foreign currency forward and option contracts for customers to facilitate future payments.

All businesses and other services that have not been classified in the above segments are reported as Other, which primarily includes our cash-based and electronic-based bill payment services which facilitate payments from consumers to businesses and other organizations and our money order services. Our other services, in addition to certain corporate costs such as costs related to strategic initiatives, including costs for the review and closing of mergers, acquisitions, and divestitures, are also included in Other. Additional information on our segments is further described in the Segment Discussion below.

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Results of Operations

The following discussion of our consolidated results of operations and segment results refers to the three and six months ended June 30, 2020 compared to the same periods in 2019. The results of operations should be read in conjunction with the discussion of our segment results of operations, which provide more detailed discussions concerning certain components of the Condensed Consolidated Statements of Income. All significant intercompany accounts and transactions between our segments have been eliminated. The below information has been prepared in conformity with generally accepted accounting principles in the United States of America ("GAAP") unless otherwise noted. All amounts provided in this section are rounded to the nearest tenth of a million, except as otherwise noted. As a result, the percentage changes and margins disclosed herein may not recalculate precisely using the rounded amounts provided.

In March 2020, the World Health Organization declared the outbreak associated with a novel coronavirus a pandemic ("COVID-19"), and governments throughout the world instituted various actions such as lockdowns, stay-at-home orders, travel restrictions, and closures of non-essential businesses in an effort to reduce the spread of COVID-19. These actions negatively impacted our ability to offer our services through a portion of our locations and our retail agent locations, at least temporarily during the three and six months ended June 30, 2020. As a result, our revenues for the second quarter of 2020 were negatively impacted by the effects of COVID-19. We experienced a significant decline in our Consumer-to-Consumer transactions beginning in the second half of March and continuing into the first half of April, which we believe to be due in part to economic decline and uncertainty resulting from the outbreak. However, since the second half of April, we generally experienced gradually improving transaction trends in our Consumer-to-Consumer segment throughout the remainder of the second quarter, with significant growth in westernunion.com and other digital transactions, as further described below. While the duration and severity of this pandemic and the related impacts are uncertain, we expect that our results of operations in the second half of 2020 will continue to be negatively impacted by these effects. Further, we expect that to the extent the pandemic or the related macro-economic consequences continue, we will continue to experience negative impacts on our results of operations, including the potential for increased credit losses or intangible asset impairments in future periods.

Our revenues and operating income for the three and six months ended June 30, 2020 were negatively impacted by fluctuations in the United States dollar compared to foreign currencies. Fluctuations in the United States dollar compared to foreign currencies, net of the impact of foreign currency hedges, resulted in a reduction to revenues of $46.4 million and $93.7 million for the three and six months ended June 30, 2020 relative to the corresponding periods in the prior year. Included within these amounts are impacts related to the strengthening of the dollar against the Argentine peso, which resulted in a reduction to revenues of $31.0 million and $67.7 million for the three and six months ended June 30, 2020 relative to the corresponding periods in the prior year. Fluctuations in the United States dollar compared to foreign currencies negatively impacted operating income by $4.9 million and $28.6 million for the three and six months ended June 30, 2020 relative to the corresponding periods in the prior year. Included within these amounts are impacts related to the strengthening of the dollar against the Argentine peso, which resulted in a reduction to operating income of $6.6 million and $12.3 million for the three and six months ended June 30, 2020 relative to the corresponding periods in the prior year.

On February 28, 2019, we entered into an agreement with ACI Worldwide Corp. and ACW Worldwide, Inc. to sell our United States based electronic bill payments business known as "Speedpay," which had been included as a component of Other in our segment reporting. We received approximately $750 million and recorded a pre-tax gain on the sale of approximately $523 million in the second quarter of 2019 in the all-cash transaction that closed on May 9, 2019. Speedpay revenues and direct operating expenses included in our results were $37.2 million and $30.6 million, respectively, for the three months ended June 30, 2019 and $125.4 million and $98.2 million, respectively, for the six months ended June 30, 2019.

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The following table sets forth our consolidated results of operations for the three and six months ended June 30, 2020 and 2019:







                                                      Three Months Ended June 30,              Six Months Ended June 30,
        (in millions, except per share amounts)      2020         2019       % Change        2020         2019       % Change
        Revenues                                   $ 1,114.7    $ 1,340.5        (17) %    $ 2,304.7    $ 2,677.5        (14) %
        Expenses:
        Cost of services                               662.2        776.4        (15) %      1,345.6      1,561.4        (14) %
        Selling, general, and administrative           230.7        305.2        (24) %        504.1        606.0        (17) %
        Total expenses                                 892.9      1,081.6        (17) %      1,849.7      2,167.4        (15) %
        Operating income                               221.8        258.9        (14) %        455.0        510.1        (11) %
        Other income/(expense):
        Gain on divestitures of businesses                 -        524.6         (a)              -        524.6         (a)
        Interest income                                  0.8          1.0        (24) %          2.4          3.1        (24) %
        Interest expense                              (29.3)       (38.6)        (24) %       (62.2)       (78.3)        (21) %
        Other income/(expense), net                    (0.1)        (0.3)        (68) %        (0.1)          2.2         (a)
        Total other income/(expense), net             (28.6)        486.7         (a)         (59.9)        451.6         (a)
        Income before income taxes                     193.2        745.6        (74) %        395.1        961.7        (59) %
        Provision for income taxes                      31.3        130.8        (76) %         56.5        173.8        (67) %
        Net income                                 $   161.9    $   614.8        (74) %    $   338.6    $   787.9        (57) %
        Earnings per share:
        Basic                                      $    0.39    $    1.43        (73) %    $    0.82    $    1.82        (55) %
        Diluted                                    $    0.39    $    1.42        (73) %    $    0.81    $    1.81        (55) %
        Weighted-average shares outstanding:
        Basic                                          411.5        430.0                      412.9        433.8
        Diluted                                        413.6        432.3                      415.9        436.1
        


(a) Calculation not meaningful.

Revenues Overview

Transaction volume is the primary generator of revenue in our businesses. Revenues are primarily derived from consideration paid by customers to transfer money. These revenues vary by transaction based upon factors such as channel, send and receive locations, the principal amount sent, whether the money transfer involves different send and receive currencies, the difference between the exchange rate we set to the customer and the rate available in the wholesale foreign exchange market, and speed of service, as applicable. We also offer several other services, including foreign exchange and payment services and other bill payment services, for which revenue is impacted by similar factors.

Due to the significance of the effect that foreign exchange fluctuations against the United States dollar can have on our reported revenues, constant currency results have been provided in the table below for consolidated revenues. We have also disclosed the impact of divestitures on our revenues in the table below. Additionally, due to the significance of our Consumer-to-Consumer segment to our overall results, we have also provided constant currency results for our Consumer-to-Consumer segment revenues. Constant currency results assume foreign revenues are translated from foreign currencies to the United States dollar, net of the effect of foreign currency hedges, at rates consistent with those in the same period of the prior year. Constant currency measures and measures that exclude the impact of divestitures are non-GAAP financial measures and are provided so that revenue can be viewed without the effect of fluctuations in foreign currency exchange rates and divestitures of our businesses, which is consistent with how management evaluates our revenue results and trends. We believe that these measures provide management and investors with information about revenue results and trends that eliminates currency volatility and divestitures, thereby providing greater clarity regarding, and increasing the comparability of, our underlying results and trends. These disclosures are provided in addition to, and not as a substitute for, the percentage change in revenue on a GAAP basis for the three and six months ended June 30, 2020 compared to the corresponding periods in the prior year. Other companies may calculate and define similarly labeled items differently, which may limit the usefulness of this measure for comparative purposes.

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The following table sets forth our consolidated revenue results for the three and six months ended June 30, 2020 and 2019:







                                             Three Months Ended June 30,            Six Months Ended June 30,
        (dollars in millions)               2020         2019       % Change      2020         2019       % Change
        Revenues, as reported - (GAAP)    $ 1,114.7    $ 1,340.5        (17) %  $ 2,304.7    $ 2,677.5        (14) %
        Foreign currency impact (a)                                        3 %                                   4 %
        Divestitures impact (b)                                            3 %                                   4 %
        Revenue change, constant
        currency adjusted and
        excluding divestitures -
        (Non-GAAP)                                                      (11) %                                 (6) %
        


Fluctuations in the United States dollar compared to foreign currencies, net of the impact of foreign currency hedges, resulted in a reduction to revenues of $46.4 million and $93.7 million for the three and six months ended June 30, 2020 when compared to foreign currency rates in the prior year

In May 2019, we sold a substantial majority of our United States based electronic bill payments services. Speedpay revenues included in our results were $37.2 million and $125.4 million for the three and six months ended June

For the three and six months ended June 30, 2020, GAAP revenues decreased when compared to the corresponding periods in the prior year primarily due to the impacts from the worldwide actions related to COVID-19, as discussed above, divestitures of the Speedpay and Paymap businesses during the second quarter of 2019, and fluctuations in the exchange rates between the United States dollar and foreign currencies. Fluctuations in the exchange rates between the United States dollar and foreign currencies negatively impacted revenue by 3% and 4% for the three and six months ended June 30, 2020, respectively. The decrease in revenues constant currency adjusted and excluding divestitures (Non-GAAP) for the six months ended June 30, 2020 was primarily the result of the impacts from the worldwide actions related to COVID-19, as discussed above.

Operating Expenses Overview

Enhanced Regulatory Compliance

The financial services industry, including money services businesses, continues to be subject to increasingly strict legal and regulatory requirements, and we continue to focus on and regularly review our compliance programs. In connection with these reviews, and in light of growing and rapidly evolving regulatory complexity and heightened attention of, and increased dialogue with, governmental and regulatory authorities related to our compliance activities, we have made, and continue to make, enhancements to our processes and systems designed to detect and prevent money laundering, terrorist financing, and fraud and other illicit activity, and enhancements designed to improve consumer protection. Some of these changes have had, and we believe will continue to have, an adverse effect on our business, financial condition, and results of operations.

Restructuring-Related Expenses

On August 1, 2019, our Board of Directors approved a plan to change our operating model and improve our business processes and cost structure by reorganizing our senior management, including those managers reporting to our chief executive officer, reducing our headcount, and consolidating various facilities. We expect to incur approximately $150 million of total expenses through 2020, with approximately $110 million related to severance and employee-related benefits and approximately $40 million related to costs associated with the relocation of various operations to other Company facilities, facility closures, lease terminations, consulting, and other expenses. Substantially all of these expenses are expected to be paid in cash. We expect the plan to generate expense savings of at least $50 million in 2020 and approximately $100 million in 2021. The foregoing figures are our estimates and are subject to change.

For the three and six months ended June 30, 2020, we incurred $5.2 million and $15.7 million related to this plan, the majority of which is related to consulting service fees, severance, and other costs. For the three and six months ended June

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30, 2020, $0.8 million and $1.7 million, respectively, is included within Cost of services and $4.4 million and $14.0 million, respectively, is included within Selling, general, and administrative in the Condensed Consolidated Statements of Income. For the three and six months ended June 30, 2019, we incurred $7.4 million of expenses related to this plan which is included within Selling, general, and administrative. Refer to Part I, Item 1, Financial Statements, Note 5, Restructuring-Related Expenses for further discussion.

These expenses are specific to this initiative; however, the types of expenses related to this initiative are similar to expenses that we have previously incurred and can reasonably be expected to incur in the future.

Cost of Services

Cost of services primarily consists of agent commissions, which represented approximately 60% of total cost of services for both the three and six months ended June 30, 2020. Cost of services decreased for the three and six months ended June 30, 2020 compared to the corresponding period in the prior year due to a decrease in agent commissions in our Consumer-to-Consumer money transfer business, which generally vary with revenues, including due to fluctuations in the exchange rate between the United States dollar and foreign currencies, the Speedpay divestiture during the second quarter of 2019, and a decrease in employee-related expense, including as a result of reduced hiring, partially offset by an increase in credit losses.

Selling, General, and Administrative

Selling, general, and administrative expenses decreased for the three and six months ended June 30, 2020 compared to the corresponding period in the prior year due to decreases in employee-related expenses, including incentive compensation and as a result of reduced hiring and savings from our restructuring plan. In addition, selling, general, and administrative expenses benefited from decreases in marketing costs and costs related to strategic initiatives, including for the review and closing of mergers, acquisitions, and divestitures. For the six months ended June 30, 2020, these decreases were partially offset by the impacts of the strengthening of the United States dollar against foreign currencies.

Total Other Income/Expense, Net

Total other income/expense, net during the three and six months ended June 30, 2019 was impacted by the non-recurring gain on the sale of our United States based electronic bill payments business, known as Speedpay. In addition, total other income/expense, net during the three and six months ended June 30, 2020 compared to the corresponding periods benefited from a reduction in interest expense driven by a lower weighted-average interest rate on our outstanding debt.

Income Taxes

Our provision for income taxes for the three and six months ended June 30, 2020 and 2019 is based on the estimated annual effective tax rate, in addition to discrete items. Our effective tax rates on pre-tax income were 16.2% and 17.5% for the three months ended June 30, 2020 and 2019, respectively, and 14.3% and 18.1% for the six months ended June 30, 2020 and 2019, respectively. The decrease in our effective tax rate for the three months ended June 30, 2020 compared to the prior period was primarily due to an increase in prior period domestic pre-tax income due to the sales of the Speedpay and Paymap businesses, partially offset by increased discrete expenses in the current period. The . . .

Aug 05, 2020

COMTEX_368908400/2041/2020-08-05T06:16:38

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