MONEYGRAM INTERNATIONAL, INC.
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. This MD&A is provided as a supplement to, and should be
read in conjunction with, our Condensed Consolidated Financial Statements and
related Notes included in this Quarterly Report on Form 10-Q and the
Consolidated Financial Statements and Notes included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2019 . 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 and Estimates
•Cautionary Statements Regarding Forward-Looking Statements
OVERVIEW
MoneyGram is a global leader in cross-border peer-to-peer payments and money
transfers. Our consumer-centric capabilities enable the quick and affordable
transfer of money to family and friends around the world. Whether through online
and mobile platforms, integration with mobile wallets, a kiosk, or any one of
the hundreds of thousands of agent locations in approximately 200 countries and
territories, with over 70 countries now digitally enabled, the innovative
MoneyGram platform connects consumers in ways designed to be convenient for
them. In the U.S. and in select countries and territories, we also provide bill
payment services, issue money orders and process official checks. We primarily
offer our services and products through third-party agents and directly to
consumers through our digital solutions. Third-party agents include retail
chains, independent retailers, post offices and financial institutions. Digital
solutions include moneygram.com, mobile solutions, digital partners, wallets and
account deposit services. MoneyGram also has a limited number of
Company-operated retail locations.
We manage our revenue and related commissions expense through two reporting
segments: Global Funds Transfer and Financial Paper Products. The Global Funds
Transfer segment provides global money transfer services in more than 390,000
agent locations. Our global money transfer services are our primary revenue
driver, accounting for 90% and 89% of total revenue for the three and six months
ended June 30, 2020 , respectively. The Global Funds Transfer segment also
provides bill payment services to consumers through substantially all of our
money transfer agent locations in the U.S. , at certain agent locations in select
Caribbean and European countries and through our digital solutions. The
Financial Paper Products segment provides money order services to consumers
through retail locations and financial institutions located in the U.S. and
Puerto Rico and provides official check services to financial institutions in
the U.S. Corporate expenses that are not related to our segments' performance
are excluded from operating income for Global Funds Transfer and Financial Paper
Products segments.
COVID-19 Update
General Economic Conditions and MoneyGram Impact
Since the outbreak of COVID-19 began, we have seen the profound effect it is
having on human health, the global economy and society at large. Public and
private sector policies aimed at reducing the transmission of COVID-19 have
varied significantly in different regions of the world but have resulted in
shelter-in-place orders and the mandatory closing of various businesses across
many of the countries in which we operate.
MoneyGram experienced a decline in transaction volume and related revenue in its
walk-in channel in the middle of March 2020 as the impact of mandatory closures
and stay-at-home orders took effect. Many of our agents around the world were
forced to suspend operations due to mandatory government closure orders. In
addition, demand for money transfer services decreased as restrictions on
mobility, lower levels of economic activity and unemployment impacted consumers.
During the second quarter of 2020, progress was made toward containment of
COVID-19, and governmental authorities began removing restrictions such as
quarantines, shutdowns and some shelter-in-place orders. As the restrictions are
eased, the ability to transact on a more normal basis has been restored in many
markets.
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The impact of COVID-19 for the remainder of the year and beyond will depend on
the duration and severity of economic conditions resulting from the crisis,
public policy actions, new initiatives undertaken by the Company and changes in
consumer behavior over the longer term.
MoneyGram Response to COVID-19
The Company continues to address the COVID-19 situation and its impact globally
with an internal COVID Task Force composed of a cross-functional group of
employees working to mitigate the potential impacts to our people and business.
Shortly after the onset of the pandemic, MoneyGram took the following steps to
preserve liquidity and value and maintain continuity of operations in response
to the pandemic:
•Implemented its global Business Continuity Plan;
•Established employee support initiatives including mandatory work from home
arrangements;
•Reduced expenses and preserved cash by:
•Suspending significant discretionary expenses not directly related to
revenue-generating activity;
•Reducing salaries of non-hourly employees, including executive officers and
board of director cash retainers, by 20%; and
•Deferring employer Social Security tax payments as allowed by the Coronavirus
Aid, Relief, and Economic Security ("CARES") Act; and
•Borrowing $23.0 million in the first quarter of 2020 under the revolving credit
facility to increase our cash position and preserve financial flexibility.
•Conducted proactive outreach to governmental and regulatory bodies;
•Proactively managed fraud prevention programs to protect consumers from
COVID-19-related financial scams; and
•Alerted and directed consumers to the website and app, and encouraged
direct-to-account transfers.
As transaction volume and revenue began to improve during the second quarter,
the Company reversed certain of these actions. Specifically, we repaid the
entire $23.0 million that we borrowed under the revolving credit facility, and
we returned salaries to their normal levels effective June 27, 2020 for U.S.
employees and July 1, 2020 for non-U.S. employees.
We continue to place a priority on business continuity and contingency planning,
including for potential extended closures of any key agents or disruptions
related to our contractual counterparties that might arise as a result of
COVID-19. While we have not experienced disruptions in our service offerings
aside from mandatory agent location closures, it is possible that further
disruptions could occur as the pandemic continues, though we cannot reasonably
estimate the potential impact or timing of those events, and we may not be able
to mitigate such impact.
Business Environment
The global pandemic has had a significant impact on economic and political
conditions throughout most of the world. As a result, the market for money
transfers, the average face amount of funds that are transferred, the volume of
transactions and trends in product pricing will continue to fluctuate. The World
Bank has predicted a significant global contraction in the amount of funds
transferred for the remainder of 2020 and for the duration of the economic
contraction induced by COVID-19.
The competitive environment continues to change as both established players and
new, digital-only entrants work to innovate and deliver a low cost and
convenient customer experience to win market share. Our competitors include a
small number of large money transfer and bill payment providers, financial
institutions, banks and a large number of small niche money transfer service
providers that serve select regions. We generally compete on the basis of price,
agent commissions, brand awareness, customer experience and convenience.
In 2018, the Company and Walmart announced the launch of Walmart2World, Powered
by MoneyGram , a white-label money transfer service that allows customers to send
money from Walmart in the U.S. to any non-U.S. MoneyGram location. The lower
price point of the white-label service has negatively impacted our revenue and
operating income. On November 4, 2019 , Walmart announced that the white-label
money transfer service would be joined by other brands in becoming part of a
marketplace of money transfer services at Walmart stores across the U.S. For the
three and six months ended June 30, 2020 , the MoneyGram "powered by" white-label
Walmart2World product represented approximately 9% of total revenue. In the
second quarter of 2020, the Walmart marketplace revenue decreased quarter over
quarter and year over year while transaction activity had a slight decrease over
the same periods.
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As of June 30, 2020 , the Company has digital capabilities through which
consumers can send and receive money in over 70 countries across the globe.
Furthermore, the Company is expanding its online presence through the continued
growth of its native application, which was available in 26 countries as of June
30, 2020 . In the first quarter of 2020, the Company removed its kiosk-based
services from its digital channel. Prior year amounts have been updated to
reflect this change. Digital solutions revenue for the three and six months
ended June 30, 2020 was $44.2 million and $77.2 million , or 17% and 15%,
respectively, of money transfer revenue, compared to $27.0 million and $55.3
million , respectively, or 10% of money transfer revenue for each period, for the
three and six months ended June 30, 2019 . Total digital transactions represented
27% and 23%, respectively, of money transfer transactions for the three and six
months ended June 30, 2020 .
In 2019, we announced a commercial agreement with Ripple, which is scheduled to
expire on July 1, 2023 . The commercial agreement allows MoneyGram to utilize
Ripple's ODL platform (formerly known as xRapid), as well as XRP, to facilitate
foreign exchange trading. The Company is compensated by Ripple for developing
and bringing trading volume and liquidity to foreign exchange markets,
facilitated by the ODL platform, and providing a reliable level of foreign
exchange trading activity. For the three months ended June 30, 2020 , the Company
received a net benefit of $8.8 million composed of $15.1 million of Ripple
market development fees, which were partially offset by related transaction and
trading expenses of $6.3 million , both of which were included in the
"Transaction and operations support" line on the Condensed Consolidated
Statements of Operations. For the six months ended June 30, 2020 , the Company
received a net benefit of $20.9 million composed of $31.7 million of Ripple
market development fees, which were partially offset by related transaction and
trading expenses of $10.8 million .
In the fourth quarter of 2019, the Company committed to an operational plan to
reduce overall operating expenses, including the elimination of approximately
120 positions across the Company (the "2019 Organizational Realignment"). In the
second quarter of 2020, this number was revised to approximately 100 positions
as the operational plan gets closer to completion. The workforce reduction was
designed to streamline operations and structure the Company in a way that will
be more agile and aligned around our plan to execute market-specific strategies
tailored to different segments. The workforce reduction was substantially
completed in the first quarter of 2020 with $8.2 million of costs incurred
consisting primarily of one-time termination benefits for employee severance and
related costs, all of which resulted in cash expenditures that were
substantially paid out in the first quarter of 2020. We expect the 2019
Organizational Realignment to reduce annualized operating expenses by
approximately $18.0 million beginning in 2020.
Anticipated Trends
This discussion of trends expected to impact our business in 2020 is based on
information presently available and reflects certain assumptions, including
assumptions regarding future economic conditions. Differences in actual economic
conditions compared with our assumptions could have a material impact on our
results. See Cautionary Statements Regarding Forward-Looking Statements and
Part II, Item 1A, Risk Factors of this Quarterly Report on Form 10-Q for
additional factors that could cause results to differ materially from those
contemplated by the following forward-looking statements.
As a result of the uncertainty created by the COVID-19 pandemic, the Company is
unable to predict whether the trends discussed below will continue during the
remainder of the year. As a result of COVID-19, we expect pricing pressure and
competition to be continuous challenges through 2020. Currency volatility,
liquidity pressure on central banks, geopolitical volatility and pressure on
labor markets may also continue to impact our business. To position the Company
to respond to these trends, we are continuing to focus on our strategy to
deliver a differentiated customer experience, accelerate digital growth, be the
preferred partner for agents and evaluate new revenue streams by pursuing
business models of the future.
From a digital channel perspective, we are focusing on new products and
expanding our digital capabilities into new countries. In February 2020 , the
Company launched MoneyGram FastSend, a new service through which consumers can
send money quickly and easily to their friend's mobile phone number via the
MoneyGram website and mobile app.
In 2020, we expect to continue to enhance our global walk-in business across
several key regions. In the first quarter of 2020, we signed a partnership with
EBIX Inc. to become the Company's exclusive walk-in provider in India . This
partnership will provide the Company with a significantly increased reach in the
rural areas of India , the world's largest receive market. Additionally, we
signed a strategic partnership with LuLu Money to extend the Company's network
in the Asia-Pacific region and Oman .
In the second quarter of 2020, the Company announced the following partnerships:
•Al Rajhi Bank, the largest Islamic bank in the world, and Tahweel Al Rajhi, the
remittances arm of Al Rajhi Bank, to provide money transfer services in Saudi
Arabia ;
•E9Pay, one of the largest money transfer companies in South Korea , which will
benefit consumers who send money between Southeast Asia , Russia and the
Commonwealth of Independent States;
•Global Money Express Co., Ltd, one of the largest money transfer and companies
in South Korea , which will benefit consumers who send money from South Korea to
China and South Asia ; and
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•Digital Financial Services LLC, a joint venture of Etisalat and Noor Bank ,
which enables millions of eWallet customers to make cross-border money transfers
in real-time.
These partnerships will contribute to the growth of both the digital and walk-in
channels.
For our Financial Paper Products segment, we expect the decline in overall
paper-based transactions to continue primarily due to continued migration by
customers to other payment methods. Our investment revenue, which consists
primarily of interest income generated through the investment of cash balances
received from the sale of our Financial Paper Products, is dependent on the
interest rate environment. The Company would see a positive impact on its
investment revenue if interest rates rise, and conversely, a negative impact if
interest rates decline. The decline in interest rates due to the COVID-19
pandemic has negatively impacted our investment revenue.
Financial Measures and Key Metrics
This Quarterly Report on 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.
GAAP Measures - We utilize certain financial measures prepared in accordance
with GAAP to assess the Company's overall performance. These measures include
fee and other revenue, fee and other commissions expense, fee and other revenue
less commissions, operating income and operating margin.
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 are non-GAAP financial
measures we use to assess our overall performance:
EBITDA (Earnings before interest, taxes, depreciation and amortization,
including agent signing bonus amortization)
Adjusted EBITDA (EBITDA adjusted for certain significant items) - Adjusted
EBITDA does not reflect cash requirements necessary to service interest or
principal payments on our indebtedness or tax payments that may result in a
reduction in cash available.
Adjusted Free Cash Flow (Adjusted EBITDA less cash interest, cash taxes, cash
payments for capital expenditures and cash payments for agent signing bonuses) -
Adjusted Free Cash Flow does not reflect cash payments related to the adjustment
of certain significant items in Adjusted EBITDA.
Constant Currency - Constant currency metrics assume that amounts denominated in
non-U.S. dollars are translated to the U.S. dollar at rates consistent with
those in the prior year.
The Company utilizes specific terms 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.
Corridor mix - The relative impact of increases or decreases in money transfer
transaction volume in each corridor versus the comparative prior period.
Face value - The principal amount of each completed transaction, excluding any
fees related to the transaction.
Non-U.S. Dollars - The impact of non-U.S. dollar exchange rate fluctuations on
our financial results is typically calculated as the difference between current
period activity translated using the current period's exchange rates and the
comparable prior-year period's exchange rates. We use this method to calculate
the impact of changes in non-U.S. dollar exchange rates on revenues, commissions
and other operating expenses for all countries where the functional currency is
not the U.S. dollar.
Walk-In Channel - Transactions in which both the send transaction and the
receive transaction occur at one of our physical agent locations.
Digital Channel - Transactions in which either the send transaction, the receive
transaction, or both occur through one of our digital solutions such as
moneygram.com, mobile solutions, digital partners, wallets or account deposit
services.
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RESULTS OF OPERATIONS
The following table is a summary of the results of operations:
Three Months Ended June 30, Six Months Ended June 30,
(Amounts in millions, except
percentages) 2020 2019 % Change 2020 2019 % Change
Revenue
Fee and other revenue $ 275.5 $ 309.3 (11) % $ 556.3 $ 610.3 (9) %
Investment revenue 4.3 14.5 (70) % 14.4 28.9 (50) %
Total revenue 279.8 323.8 (14) % 570.7 639.2 (11) %
Expenses
Fee and other commissions expense 141.4 155.4 (9) % 284.6 305.0 (7) %
Investment commissions expense 0.2 6.2 (97) % 3.2 12.5 (74) %
Direct transaction expense 11.3 6.2 82 % 19.5 11.2 74 %
Total commissions and direct
transaction expenses 152.9 167.8 (9) % 307.3 328.7 (7) %
Compensation and benefits 53.2 53.5 (1) % 106.6 112.9 (6) %
Transaction and operations
support 21.3 54.5 (61) % 59.3 106.6 (44) %
Occupancy, equipment and supplies 14.2 15.5 (8) % 29.1 30.9 (6) %
Depreciation and amortization 16.2 18.2 (11) % 33.3 37.2 (10) %
Total operating expenses 257.8 309.5 (17) % 535.6 616.3 (13) %
Operating income 22.0 14.3 54 % 35.1 22.9 53 %
Other expenses
Interest expense 22.7 14.0 62 % 46.5 27.9 67 %
Other non-operating expense 1.2 35.3 (97) % 2.3 36.9 (94) %
Total other expenses 23.9 49.3 (52) % 48.8 64.8 (25) %
Loss before income taxes (1.9) (35.0) (95) % (13.7) (41.9) (67) %
Income tax expense (benefit) 2.7 (7.8) NM 12.4 (1.2) NM
Net loss $ (4.6) $ (27.2) (83) % $ (26.1) $ (40.7) (36) %
RevenuesThe following table is a summary of the Company's revenues:
Three Months Ended June 30, Six Months Ended June 30,
Percent of Percent of Percent of Percent of
(Amounts in millions, except Total Total Total Total
percentages) 2020 Revenue 2019 Revenue 2020 Revenue 2019 Revenue
Global Funds Transfer fee
and other revenue $ 263.9 94 % $ 297.2 92 % $ 533.2 93 % $ 586.4 92 %
Financial Paper Product fee
and other revenue 11.6 4 % 12.1 4 % 23.1 4 % 23.9 4 %
Investment revenue 4.3 2 % 14.5 4 % 14.4 3 % 28.9 5 %
Total revenue $ 279.8 100 % $ 323.8 100 % $ 570.7 100 % $ 639.2 100 %
For the three and six months ended June 30, 2020 , Global Funds Transfer fee and
other revenue declined when compared to the prior reporting period, primarily
due to the decrease in money transfer revenue. For the three and six months
ended June 30, 2020 , Financial Paper Product fee and other revenue remained
relatively flat when compared to 2019. See the "Segments Results" section below
for a detailed discussion of revenues by segment. For the three and six months
ended June 30, 2020 , investment revenue decreased primarily due to lower
interest rates when compared to the prior period.
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Operating Expenses
The following table is a summary of the operating expenses:
Three Months Ended June 30, Six Months Ended June 30,
Percent of Percent of Percent of Percent of
(Amounts in millions, except Total Total Total Total
percentages) 2020 Revenue 2019 Revenue 2020 Revenue 2019 Revenue
Total commissions and direct
transaction expenses $ 152.9 55 % $ 167.8 52 % $ 307.3 54 % $ 328.7 51 %
Compensation and benefits 53.2 19 % 53.5 17 % 106.6 19 % 112.9 18 %
Transaction and operations
support 21.3 8 % 54.5 17 % 59.3 10 % 106.6 17 %
Occupancy, equipment and
supplies 14.2 5 % 15.5 5 % 29.1 5 % 30.9 5 %
Depreciation and
amortization 16.2 6 % 18.2 6 % 33.3 6 % 37.2 6 %
Total operating expenses $ 257.8 92 % $ 309.5 96 % $ 535.6 94 % $ 616.3 96 %
For the three and six months ended June 30, 2020 , total operating expenses as a
percentage of total revenue declined when compared to the prior period,
primarily due to a decrease in transaction and operations support, driven by the
benefit from the Ripple market development fees and disciplined expense
management in response to COVID-19. For the six months ended June 30, 2020 , the
decline was also impacted by the realization of cost efficiencies from our 2019
Organizational Realignment.
Total Commissions and Direct Transaction Expenses
For the three and six months ended June 30, 2020 , total commissions and direct
transaction expenses as a percentage of total revenue increased when compared to
the prior period, primarily due to the increase in direct transaction expense.
See the "Segments Results" section below for more information on commissions and
direct transaction expense by segment.
Compensation and Benefits
Compensation and benefits include salaries and benefits, management incentive
programs, related payroll taxes and other employee related costs. The following
table is a summary of the change in compensation and benefits from 2019 to 2020:
(Amounts in millions) Three Months Ended Six Months Ended
For the period ended June 30, 2019 $ 53.5 $ 112.9
Change resulting from:
Impact from changes in exchange rates (0.8) (1.3)
Restructuring and reorganization costs 0.4 (2.2)
Employee stock-based compensation (0.3) (0.9)
Net salaries, related payroll taxes and cash incentive compensation
- (1.2)
Other 0.4 (0.7)
For the period ended June 30, 2020 $ 53.2 $ 106.6
For the three months ended June 30, 2020 , compensation and benefits remained
relatively flat.
For the six months ended June 30, 2020 , compensation and benefits decreased
primarily due to a reduction in headcount and the completion of the
restructuring and reorganization activities.
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Transaction and Operations Support
Transaction and operations support primarily includes marketing, professional
fees and other outside services, telecommunications, agent support costs,
including forms related to our products, non-compensation employee costs,
including training, travel and relocation costs, non-employee director
stock-based compensation expense, bank charges, the impact of non-U.S. dollar
exchange rate movements on our monetary transactions and assets and liabilities
denominated in a currency other than the U.S. dollar, and Ripple market
development fees and related transaction and trading expenses.
The following table is a summary of the change in transaction and operations
support from 2019 to 2020:
(Amounts in millions) Three Months Ended Six Months Ended
For the period ended June 30, 2019 $ 54.5 $ 106.6
Change resulting from:
Market development fees (15.1) (31.7)
Marketing costs (14.8) (17.8)
Outsourcing, independent contractor and consultant costs (6.5) (8.9)
Transaction and trading expenses 6.3 10.8
Non-income taxes 4.7 4.8
Direct monitor (3.1) (2.4)
Travel and entertainment expenses (1.9) (2.0)
Provision for loss 1.6 3.7
Realized foreign exchange gains (1.4) (2.3)
Other (3.0) (1.5)
For the period ended June 30, 2020 $ 21.3 $ 59.3
For the three and six months ended June 30, 2020 , transaction and operations
support decreased primarily due to the benefit from Ripple market development
fees and disciplined expense management in response to COVID-19, which were
partially offset by transaction and trading expenses related to the market
development fees.
Occupancy, Equipment and Supplies
Occupancy, equipment and supplies expense includes facilities rent and
maintenance costs, software and equipment maintenance costs, freight and
delivery costs, supplies and gains or losses on the liquidation of
cryptocurrency intangible assets.
For the three months ended June 30, 2020 , occupancy, equipment and supplies
expense decreased by $1.3 million when compared to the prior period primarily
due to the disciplined expense management in response to COVID-19. For the six
months ended June 30, 2020 , occupancy, equipment and supplies expense decreased
by $1.8 million primarily due to a gain on cryptocurrency revaluation.
Depreciation and Amortization
Depreciation and amortization includes depreciation on computer hardware and
software, agent signage, point of sale equipment, capitalized software
development costs, office furniture, equipment and leasehold improvements and
amortization of intangible assets.
For the three and six months ended June 30, 2020 , depreciation and amortization
decreased by $2.0 million and $3.9 million when compared to the prior period due
to a decrease in capital expenditures as a result of our migration to cloud
computing.
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Segments Results
Global Funds Transfer
The following table sets forth our Global Funds Transfer segment results of
operations for the three and six months ended June 30, 2020 :
Three Months Ended June 30, Six Months Ended June 30,
(Amounts in millions) 2020 2019 2020 vs 2019 2020 2019 2020 vs 2019
Money transfer revenue$ 253.1 $ 282.2 $ (29.1) $ 509.0 $ 555.5 $ (46.5) Bill payment revenue 10.8 15.0 (4.2) 24.2 30.9 (6.7) Total Global Funds Transfer$ 263.9 $ 297.2 $ (33.3) $ 533.2 $ 586.4 $ (53.2)
revenue
Fee and other commissions and direct transaction expenses$ 152.7 $ 161.4 $ (8.7) $ 304.0 $ 315.7 $ (11.7) Money Transfer Revenue The following table details the changes in money transfer fee and other revenue from 2019 to 2020: (Amounts in millions) Three Months Ended Six Months Ended For the period ended June 30, 2019 $ 282.2$ 555.5 Change resulting from: Average face value per transaction and pricing (12.2) (38.5) Corridor mix (10.6) (4.4) Money transfer volume (5.8) (1.3) Impact from changes in exchange rates (2.7) (5.5) Other 2.2 3.2 For the period ended June 30, 2020 $
253.1
For the three and six months endedJune 30, 2020 , the decrease in money transfer fee and other revenue was primarily driven by the decrease in average face value per transaction and pricing due to the economic impacts of COVID-19, including agent locations closing, and the Walmart2World service. The negative change in corridor mix also impacted the three months endedJune 30, 2020 . Bill Payment Fee Revenue For the three and six months endedJune 30, 2020 , bill payment fee and other revenue decreased by$4.2 million and$6.7 million , respectively, or 28% and 22% when compared to the prior period due to the impact of COVID-19. Fee and Other Commissions Expense The following table details the changes in fee and other commissions expense for the Global Funds Transfer segment from 2019 to 2020: (Amounts in millions) Three Months Ended Six Months Ended For the period ended June 30, 2019 $ 155.2 $
304.5
Change resulting from: Money transfer revenue (13.1)
(20.1)
Money transfer corridor and agent mix (1.3)
0.7
Impact from changes in exchange rates (1.3)
(2.6)
Signing bonuses 1.0
2.0
Bill payment revenue and commission rates 0.9
-
For the period ended June 30, 2020 $ 141.4 $
284.5
For the three and six months ended
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Direct Transaction Expense
For the three and six months ended June 30, 2020 , direct transaction expense of
$11.3 million and $19.5 million , respectively, increased by $5.1 million and
$8.3 million when compared to the same period in 2019, due to an increase in
moneygram.com transactions.
Financial Paper Products
The following table sets forth our Financial Paper Products segment results of
operations:
Three Months Ended June 30, Six Months Ended June 30,
(Amounts in millions) 2020 2019 2020 vs 2019 2020 2019 2020 vs 2019
Money order revenue $ 10.8 $ 13.6 $ (2.8) $ 22.9 $ 27.5 $ (4.6)
Official check revenue 5.1 13.0 (7.9) 14.6 25.3 (10.7)
Total Financial Paper
Products $ 15.9 $ 26.6 $ (10.7) $ 37.5 $ 52.8 $ (15.3)
revenue
Commissions expense $ 0.2 $ 6.4 $ (6.2) $ 3.3 $ 13.0 $ (9.7)
Financial Paper Products revenue decreased by $10.7 million or 40% during the
three months ended June 30, 2020 , and $15.3 million or 29% during the six months
ended June 30, 2020 , primarily due to the decline in investment revenue.
For the three and six months ended June 30, 2020 , commissions expense for
Financial Paper Products decreased by $6.2 million and $9.7 million when
compared to the prior period, due to a decrease in investment commissions
expense.
Operating Income and Operating Margin
The following table provides a summary overview of operating income and
operating margin:
Three Months Ended June 30, Six Months Ended June 30,
(Amounts in millions, except
percentages) 2020 2019 2020 vs 2019 2020 2019 2020 vs 2019
Operating income:
Global Funds Transfer $ 16.5 $ 5.6 $ 10.9 $ 23.2 $ 6.7 $ 16.5
Financial Paper Products 6.2 10.0 (3.8) 13.2 18.2 (5.0)
Total segment operating
income 22.7 15.6 7.1 36.4 24.9 11.5
Other (0.7) (1.3) 0.6 (1.3) (2.0) 0.7
Total operating income $ 22.0 $ 14.3 $ 7.7 $ 35.1 $ 22.9 $ 12.2
Total operating margin 7.9 % 4.4 % 3.5 % 6.2 % 3.6 % 2.6 %
Global Funds Transfer 6.3 % 1.9 % 4.4 % 4.4 % 1.1 % 3.3 %
Financial Paper Products 39.0 % 37.6 % 1.4 % 35.2 % 34.5 % 0.7 %
For the three and six months ended June 30, 2020 , the Global Funds Transfer
segment operating income and margin increased when compared to the three and six
months ended June 30, 2019 , primarily due to the decrease in operating expenses
resulting from the benefit of the Ripple market development fees, which were
partially offset by the decline in money transfer fee and other revenue.
For the three and six months ended June 30, 2020 , the Financial Paper Products
segment operating income decreased when compared to the three and six months
ended June 30, 2019 , primarily due to the decrease in investment revenue. The
Financial Paper Products operating margin increased for the three and six months
ended June 30, 2020 when compared to the prior year primarily due to the
decrease in investment commissions expense.
For the three and six months ended June 30, 2020 , the Company's other operating
loss decreased primarily due to reduced contractor and consultant expenses.
Other Expenses
For the three and six months ended June 30, 2020 , total other expenses decreased
by $25.4 million and $16.0 million , respectively, primarily due to the non-cash
settlement charge from the partial sale of the Company's Pension Plan in 2019 as
well as debt extinguishment costs incurred in 2019. The decrease was partially
offset by an increase in interest expense as a
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Table of Contents result of the credit facilities entered into in 2019, which are discussed in
Note 7 - Debt of the Notes to the Condensed Consolidated Financial Statements. Income Taxes For the three months endedJune 30, 2020 , the Company recognized an income tax expense of$2.7 million on a pre-tax loss of$1.9 million primarily due to non-deductible expenses, foreign taxes net of federal income tax benefits, an increase in the valuation allowance andU.S. taxation of foreign earnings, all of which were partially offset byU.S. tax credits. For the six months endedJune 30, 2020 , the Company recognized an income tax expense of$12.4 million on a pre-tax loss of$13.7 million primarily due to an increase in the valuation allowance, foreign taxes net of federal income tax benefits, non-deductible expenses,U.S. taxation of foreign earnings and the reversal of tax benefits on share-based compensation, all of which were partially offset byU.S. tax credits. The change in the valuation allowance was triggered by a three-year cumulative pre-tax loss position inclusive of 2020 forecasted earnings. While the Company has a long history of profitable operations prior to recent declines, the expected cumulative loss position is significant negative evidence in assessing the recoverability of our deferred tax assets. Therefore, we recorded an additional valuation allowance of$11.4 million , of which$10.1 million related to balances which existed at the beginning of the year, against our deferred tax assets for which ultimate realization is dependent upon the generation of future taxable income during the periods in which they become deductible. The valuation allowance does not, however, impact our cash position, liquidity or tax returns. For the three months endedJune 30, 2019 , the Company recognized an income tax benefit of$7.8 million on a pre-tax loss of$35.0 million . For the three months endedJune 30, 2019 , our income tax rate did not differ significantly from our statutory tax rate. For the six months endedJune 30, 2019 , the Company recognized an income tax benefit of$1.2 million on a pre-tax loss of$41.9 million . Our income tax rate was lower than the statutory rate primarily due to non-deductible expenses,U.S. taxation of foreign earnings, the reversal of tax benefits on share-based compensation, partially offset byU.S. tax credits net of a valuation allowance. Additionally, as a result of the issuance of the final Section 965 regulations by theU.S. Treasury Department and theIRS onJanuary 15, 2019 , the Company recorded a discrete tax expense of$0.7 million for an increase in its one-time transition tax. See Note 11 - In come Taxes in the Notes to the Condensed Consolidated Financial Statements for additional information related to our unrecognized tax benefits. EBITDA, Adjusted EBITDA, Adjusted Free Cash Flow and Constant Currency We believe that EBITDA (earnings before interest, taxes, depreciation and amortization, including agent signing bonus amortization), Adjusted EBITDA (EBITDA adjusted for certain significant items), Adjusted Free Cash Flow (Adjusted EBITDA less cash interest, cash taxes, cash payments for capital expenditures and cash payments for agent signing bonuses) and constant currency measures (which assume that amounts denominated in non-U.S. dollars are translated to theU.S. dollar at rates consistent with those in the prior year) provide useful information to investors because they are indicators of the strength and performance of our ongoing business operations. These calculations are commonly used as a basis for investors, analysts and other interested parties to evaluate and compare the operating performance and value of companies within our industry. In addition, our debt agreements require compliance with covenants that incorporate a financial measure similar to Adjusted EBITDA. EBITDA, Adjusted EBITDA, Adjusted Free Cash Flow and constant currency are financial and performance measures used by management in reviewing results of operations, forecasting, allocating resources and establishing employee incentive programs. We also present Adjusted EBITDA growth, constant currency adjusted, which provides information to investors regardingMoneyGram's performance without the effect of non-U.S. dollar exchange rate fluctuations year-over-year. Although we believe that EBITDA, Adjusted EBITDA, Adjusted Free Cash Flow and constant currency measures enhance investors' understanding of our business and performance, these non-GAAP financial measures should not be considered in isolation or as substitutes for the accompanying GAAP financial measures. These metrics are not necessarily comparable with similarly named metrics of other companies. 32 -------------------------------------------------------------------------------- Table of Contents The following table is a reconciliation of our non-GAAP financial measures to the related GAAP financial measures: Three Months Ended June 30, Six Months Ended June 30, (Amounts in millions) 2020 2019 Change 2020 2019 Change
Income (Loss) before income taxes
$ 33.1 $ (13.7) $ (41.9) $ 28.2 Interest expense 22.7 14.0 8.7 46.5 27.9 18.6 Depreciation and amortization 16.2 18.2 (2.0) 33.3 37.2 (3.9) Signing bonus amortization 12.6 11.7 0.9 25.1 23.4 1.7 EBITDA 49.6 8.9 40.7 91.2 46.6 44.6 Significant items impacting EBITDA: Direct monitor costs 3.1 6.2 (3.1) 7.9 10.3 (2.4) Stock-based, contingent and incentive compensation 1.6 1.9 (0.3) 3.6 4.5 (0.9) Compliance enhancement program 1.2 2.3 (1.1) 3.2 3.8 (0.6) Restructuring and reorganization costs 0.7 0.5 0.2 1.2 4.0 (2.8) Legal and contingent matters 0.2 0.7 (0.5) 0.6 1.3 (0.7) Non-cash pension settlement charge (1) - 31.3 (31.3) - 31.3 (31.3) Debt extinguishment costs (2) - 2.4 (2.4) - 2.4 (2.4) Severance and related costs - 0.1 (0.1) 0.2 0.2 - Adjusted EBITDA$ 56.4 $ 54.3 $ 2.1 $ 107.9 $ 104.4 $ 3.5 Adjusted EBITDA change, as reported 4 % 3 % Adjusted EBITDA change, constant currency adjusted 5 % 5 % Adjusted EBITDA$ 56.4 $ 54.3 $ 2.1 $ 107.9 $ 104.4 $ 3.5 Cash payments for interest (16.8) (13.2) (3.6) (34.4) (26.0) (8.4) Cash payments for taxes, net of refunds (0.4) 0.7 (1.1) (2.5) (0.5) (2.0) Cash payments for capital expenditures (9.8) (16.5) 6.7 (19.9) (29.2) 9.3 Cash payments for agent signing bonuses (4.7) (5.3) 0.6 (29.7) (15.4) (14.3) Adjusted Free Cash Flow$ 24.7 $ 20.0 $ 4.7 $ 21.4 $ 33.3 $ (11.9)
(1) Non-cash charge of
For the three and six months endedJune 30, 2020 , the Company generated EBITDA of$49.6 million and$91.2 million , respectively, and Adjusted EBITDA of$56.4 million and$107.9 million , respectively. EBITDA increased when compared to the same period in 2019 because of the decrease in operating expense, which was partially offset by the decrease in fee and other revenue. Adjusted EBITDA increased when compared to the same period in 2019 primarily due to the increased EBITDA, which were partially offset by pension settlement charge of$31.3 million and the debt extinguishment costs of$2.4 million in 2019. Additionally, For the three and six months endedJune 30, 2020 , EBITDA and Adjusted EBITDA include the impact from the net benefit of$8.8 million and$20.9 million , respectively, composed of$15.1 million and$31.7 million of Ripple market development fees, respectively, which were partially offset by related transaction and trading expenses of$6.3 million and$10.8 million , respectively. For the three months endedJune 30, 2020 , Adjusted Free Cash Flow increased by$4.7 million when compared to the same periods in 2019. The increase was primarily due to the decrease in cash payments for capital expenditures. For the six months endedJune 30, 2020 , Adjusted Free Cash Flow decreased by$11.9 million when compared to the same periods in 2019. The decline was primarily due to the increase in signing bonuses and cash payments for interest partially offset by the decrease in capital expenditures. See Results of Operations and Analysis of Cash Flows sections for additional information regarding these changes. 33
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LIQUIDITY AND CAPITAL RESOURCES We have various resources available for purposes of managing liquidity and capital needs, including our investment portfolio, credit facilities and letters of credit. We refer to our cash and cash equivalents, settlement cash and cash equivalents, interest-bearing investments and available-for-sale investments collectively as our "investment portfolio." The Company utilizes cash and cash equivalents in various liquidity and capital assessments. Cash and Cash Equivalents, Settlement Assets and Payment Service Obligations The following table shows the components of the Company's cash and cash equivalents and settlement assets: (Amounts in millions) June 30, 2020 December 31, 2019 Cash and cash equivalents$ 130.6 $ 146.8 Settlement assets: Settlement cash and cash equivalents 2,040.8 1,531.1 Receivables, net 742.5 715.5 Interest-bearing investments 714.3 985.9 Available-for-sale investments 3.9 4.5 Total settlement assets$ 3,501.5 $ 3,237.0 Payment service obligations$ (3,501.5) $ (3,237.0) Our primary sources of liquidity include cash flows generated by the sale of our payment instruments, our cash and cash equivalents and interest-bearing investment balances, and proceeds from our investment portfolio. Our primary operating liquidity needs are related to the settlement of payment service obligations to our agents and financial institution customers, general operating expenses and debt service. To meet our payment service obligations at all times, we must have sufficient highly-liquid assets and be able to move funds globally on a timely basis. On average, we receive in and pay out a similar amount of funds on a daily basis to collect and settle the principal amount of our payment instruments sold and related fees and commissions with our end-consumers and agents. This pattern of cash flows allows us to settle our payment service obligations through existing cash balances and ongoing cash generation rather than liquidating investments or utilizing the remaining balance under our First Lien Revolving Credit Facility. We have historically generated, and expect to continue generating, sufficient cash flows from daily operations to fund ongoing operational needs. We preposition cash in various countries and currencies to facilitate settlement of transactions. We also maintain funding capacity beyond our daily operating needs to provide a cushion through the normal fluctuations in our payment service obligations, as well as to provide working capital for the operational and growth requirements of our business. We believe we have sufficient liquid assets and funding capacity to operate and grow our business for the next 12 months. Should our liquidity needs exceed our operating cash flows, we believe that external financing sources, including the remaining availability under our credit facilities, will be sufficient to meet our anticipated funding requirements. Cash and Cash Equivalents and Interest-bearing Investments To ensure we maintain adequate liquidity to meet our payment service obligations at all times, we keep a significant portion of our investment portfolio in cash and cash equivalents and interest-bearing investments at financial institutions rated A- or better by two of the following three rating agencies: Moody's Investor Service ("Moody's"),Standard & Poor's ("S&P") andFitch Ratings, Inc. ; and in AAA ratedU.S. government money market funds. If the rating agencies have split ratings, the Company uses the lower of the highest two out of three ratings across the agencies for disclosure purposes. If the institution has only two ratings, the Company uses the lower of the two ratings for disclosure purposes. As ofJune 30, 2020 , cash and cash equivalents (including unrestricted and settlement cash and cash equivalents) and interest-bearing investments totaled$2.9 billion . Cash and cash equivalents consist of interest-bearing deposit accounts, non-interest-bearing transaction accounts and money market securities; interest-bearing investments consist of time deposits and certificates of deposit with maturities of up to 24 months. Available-for-sale Investments Our investment portfolio includes$3.9 million of available-for-sale investments as ofJune 30, 2020 .U.S. government agency residential mortgage-backed securities comprise$3.3 million of our available-for-sale investments, while asset-backed and other securities compose the remaining$0.6 million . 34 -------------------------------------------------------------------------------- Table of Contents Credit Facilities The following is a summary of the Company's outstanding debt: (Amounts in millions, except percentages) June
30, 2020
7.00% first lien credit facility due 2023 638.6 641.8 13.00% second lien credit facility due 2024 254.6 251.4 Senior secured credit facilities 893.2 893.2 Unamortized debt issuance costs and debt discounts (37.6) (42.9) Total debt, net$ 855.6 $ 850.3 As ofJune 30, 2020 , the Company had no borrowings and nominal outstanding letters of credit under its revolving credit facility and had$34.9 million of availability. The First Lien Credit Agreement provides that in the event the Company's cash balance exceeds$130.0 million at the end of any month, the Company would be required to use such excess cash to pay any outstanding obligations to the revolving lenders under our First Lien Revolving Credit Facility, and that the Company may not draw on the First Lien Revolving Credit Facility to the extent that the Company would have a cash balance in excess of$130.0 million after giving effect to such borrowing. As ofJune 30, 2020 , the Company had cash and cash equivalents of$130.6 million . The effective interest rate on the first lien credit facility decreased from 7.80% as ofDecember 31, 2019 , to 7.00% as ofJune 30, 2020 , due to decreases in the Eurodollar rate. See Note 7 - Debt of the Notes to the Condensed Consolidated Financial Statements for additional disclosure related to the credit facilities. Credit Ratings As ofJune 30, 2020 , our credit ratings from Moody's and S&P were B3 with a negative outlook and B with a negative outlook, respectively. Our credit facilities, regulatory capital requirements and other obligations are not linked or impacted by changes in our credit ratings.
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