THE WESTERN UNION COMPANY The following discussion should be read in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Certain statements contained in the Management's Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in other sections of this Annual Report on Form 10-K. See "Risk Factors" and "Forward-Looking Statements."
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. Our money order and 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.
Results of Operations
The following discussion of our consolidated results of operations and segment results refers to the year endedDecember 31, 2019 compared to the same period in 2018. For discussion of our consolidated results of operations and segment results for the year endedDecember 31, 2018 compared to the same period in 2017, refer to Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year endedDecember 31, 2018 filed with theSEC onFebruary 21, 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 Consolidated Statements of Income/(Loss). 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 inthe 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.
Our revenues and operating income for the year ended
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endedDecember 31, 2019 relative to the respective prior year. Included within this amount are impacts related to the strengthening of the dollar against the Argentine peso, which resulted in a reduction to revenues of$161.2 million for the year endedDecember 31, 2019 relative to the respective prior year. Fluctuations inthe United States dollar compared to foreign currencies negatively impacted operating income by$63.5 million for the year endedDecember 31, 2019 relative to the respective prior year. Included within this amount are impacts related to the strengthening of the dollar against the Argentine peso, which resulted in a reduction to operating income of$43.4 million for the year endedDecember 31, 2019 relative to the respective prior year. OnFebruary 28, 2019 , we entered into an agreement withACI Worldwide Corp. andACW Worldwide, Inc. to sell ourUnited States 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 all-cash transaction that closed onMay 9, 2019 . Speedpay revenues included in our results were$125.4 and$352.0 million for the years endedDecember 31, 2019 and 2018, respectively. Speedpay direct operating expenses were$98.2 million and$251.2 million for the years endedDecember 31, 2019 and 2018, respectively.
The following table sets forth our consolidated results of operations for the
years ended
Year Ended December 31,
(in millions, except per share amounts) 2019 2018 % Change
Revenues $ 5,292.1 $ 5,589.9 (5) %
Expenses:
Cost of services 3,086.5 3,300.8 (6) %Selling, general, and administrative 1,271.6 1,167.0
9 % Total expenses 4,358.1 4,467.8 (2) % Operating income 934.0 1,122.1 (17) % Other income/(expense): Gain on divestitures of businesses 524.6 - (a) Interest income 6.3 4.8 31 % Interest expense (152.0) (149.6) 2 % Other income, net 8.5 14.1 (40) % Total other income/(expense), net 387.4 (130.7) (a) Income before income taxes 1,321.4 991.4 33 % Provision for income taxes 263.1 139.5 89 % Net income$ 1,058.3 $ 851.9 24 % Earnings per share: Basic$ 2.47 $ 1.89 31 % Diluted$ 2.46 $ 1.87 32 % Weighted-average shares outstanding: Basic 427.6 451.8 Diluted 430.9 454.4
(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 againstthe United States dollar can have on our reported revenues, constant currency results have been provided in the table below for consolidated revenues. 47
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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 tothe United States dollar, net of the effect of foreign currency hedges, at rates consistent with those in the prior year. Constant currency measures are non-GAAP financial measures and are provided so that revenue can be viewed without the effect of fluctuations in foreign currency exchange rates, 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 provides greater clarity regarding, and increases the comparability of, our underlying results and trends. This constant currency disclosure is provided in addition to, and not as a substitute for, the percentage change in revenue on a GAAP basis for the year endedDecember 31, 2019 compared to the prior year. Other companies may calculate and define similarly labeled items differently, which may limit the usefulness of this measure for comparative purposes.
The following table sets forth our consolidated revenue results for the years
ended
Year Ended December 31,
(dollars in millions) 2019 2018 % Change
Revenues, as reported - (GAAP) $ 5,292.1 $ 5,589.9 (5) %
Foreign currency impact (a) 4 %
Divestitures impact (b) 4 %
Revenue change, constant currency adjusted and
excluding divestitures - (Non-GAAP) 3 %
Fluctuations in
of the impact of foreign currency hedges, resulted in a reduction to revenues
of
impacts related to the strengthening of the dollar against the Argentine
peso, which resulted in a reduction to revenues of
the year ended
the prior year.
In May 2019 , we sold a substantial majority of our United States basedelectronic bill payments services. Speedpay revenues included in our results
were
and 2018, respectively. Paymap, which we sold in
electronic mortgage bill payment services, and related revenues included in
(b) our results were
these divestitures on our revenues because management believes that
presenting the revenue change, as adjusted to exclude divestitures, will
provide investors with a more meaningful comparison of results for the
periods presented.
For the year endedDecember 31, 2019 , GAAP revenues decreased when compared to the prior year due to fluctuations in the exchange rate betweenthe United States dollar and other currencies, and the divestitures of the Speedpay and Paymap businesses during the second quarter of 2019, partially offset by an increase in transactions in our Consumer-to-Consumer segment. Fluctuations in the exchange rate betweenthe United States dollar and other currencies negatively impacted revenue by 4%. The increase in revenues constant currency adjusted and excluding divestitures (Non-GAAP) of 3% was the result of an increase in local currency revenue per transaction in our Argentine operations, including our cash-based bill payment business, primarily due to inflation, and revenue growth in our Consumer-to-Consumer segment.
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. We also continue to improve consumer protection, including enhancements related to the Joint Settlement Agreements and the NYDFS Consent Order described further in Part II, Item 8, Financial Statements and Supplementary Data, Note 6, Commitments and Contingencies, and similar regulations outsidethe United States , and other matters. 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. 48
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Restructuring-Related Expenses
OnAugust 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, costs related to 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 approximately$50 million in 2020 and approximately$100 million in 2021. The foregoing figures are our estimates and are subject to change. For the year endedDecember 31, 2019 , we incurred$115.5 million related to this plan, with a significant majority of these expenses related to severance and employee benefits. Of this amount,$39.8 million and$75.7 million are included within Cost of services and Selling, general, and administrative, respectively, in the Consolidated Statements of Income/(Loss). Refer to Part II, Item 8, Financial Statements and Supplementary Data, Note 4, Restructuring-Related Expenses and Business Transformation 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 the year endedDecember 31, 2019 . Cost of services decreased for the year endedDecember 31, 2019 compared to the prior year due to the Speedpay divestiture during the second quarter of 2019, and a decrease in variable costs, including agent commissions in our Consumer-to-Consumer money transfer business, which vary with revenues, including due to fluctuations in the exchange rate betweenthe United States dollar and foreign currencies. These decreases were partially offset by an increase in severance and employee benefits related to our restructuring plan, as further discussed above.
Selling, General, and Administrative
Selling, general, and administrative expenses increased for the year endedDecember 31, 2019 compared to the prior year due to restructuring-related expenses, including severance and related employee benefits, costs associated with the relocation of various operations to our other facilities, and costs related to facility closures, lease terminations, and consulting. In addition, selling, general, and administrative increased due to higher marketing costs compared to the prior year.
Total Other Income/Expense, Net
Total other income/expense, net for the year ended
Income Taxes
Our effective tax rates on pre-tax income were 19.9% and 14.1% for the years endedDecember 31, 2019 and 2018, respectively. The increase in our effective tax rate for the year endedDecember 31, 2019 compared to the prior year is primarily due to an increase in 2019 domestic pre-tax income due to the net gain on the sales of the Speedpay and Paymap businesses and certain discrete items recognized in the prior year, partially offset by adjustments to our accounting for the implementation of the Tax Act, which increased our effective tax rate by 2.3% for the year endedDecember 31, 2018 . 49
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We have established contingency reserves for a variety of material, known tax exposures. As ofDecember 31, 2019 , the total amount of tax contingency reserves was$309.0 million , including accrued interest and penalties, net of related items. Our tax reserves reflect our judgment as to the resolution of the issues involved if subject to judicial review or other settlement. While we believe that our reserves are adequate to cover reasonably expected tax risks, there can be no assurance that, in all instances, an issue raised by a tax authority will be resolved at a financial cost that does not exceed our related reserve. With respect to these reserves, our income tax expense would include: (i) any changes in tax reserves arising from material changes in facts and circumstances (i.e., new information) surrounding a tax issue during the period, and (ii) any difference from our tax position as recorded in the financial statements and the final resolution of a tax issue during the period. Such resolution could materially increase or decrease income tax expense in our consolidated financial statements in future periods and could impact our operating cash flows. A significant proportion of our profits are foreign-derived. For the years endedDecember 31, 2019 and 2018, 67% and 101%, respectively, of our pre-tax income was derived from foreign sources. While the income tax imposed by any one foreign country is not material to us, our overall effective tax rate could be adversely affected by changes in foreign tax laws.
Earnings Per Share
During the years endedDecember 31, 2019 and 2018, basic earnings per share were$2.47 and$1.89 respectively, and diluted earnings per share were$2.46 and$1.87 , respectively. Outstanding options to purchaseWestern Union stock and unvested shares of restricted stock are excluded from basic shares outstanding. Diluted earnings per share reflects the potential dilution that could occur if outstanding stock options at the presented dates are exercised and shares of restricted stock have vested. As ofDecember 31, 2019 and 2018, there were 1.9 million and 2.6 million, respectively, of shares excluded from the diluted earnings per share calculation under the treasury stock method, primarily due to outstanding options to purchase shares ofWestern Union stock, as their exercise prices were above our weighted-average share price during the periods and their effect was anti-dilutive. Earnings per share for the year endedDecember 31, 2019 compared to the prior year was impacted by the previously described factors impacting net income, including the gain on the sale of Speedpay during the second quarter of 2019 and expenses associated with our restructuring activities, and a lower number of shares outstanding. The lower number of shares outstanding is due to stock repurchases exceeding stock issuances related to our stock compensation programs. Segment Discussion
We manage our business around the consumers and businesses we serve and the types of services we offer. Each of our segments addresses a different combination of consumer groups, distribution networks, and services offered. Our segments are Consumer-to-Consumer and Business Solutions.
The business segment measurements provided to, and evaluated by, our Chief Operating Decision Maker ("CODM") are computed in accordance with the following principles:
? The accounting policies of the segments are the same as those described in the
summary of significant accounting policies.
Corporate costs, including stock-based compensation and other overhead, are
? allocated to the segments primarily based on a percentage of the segments'
revenue compared to total revenue.
As described in Part II, Item 8, Financial Statements and Supplementary Data,
Note 4, Restructuring-Related Expenses and Business Transformation Expenses on
operating model and improve our business processes and cost structure by
? reducing our headcount and consolidating various facilities. For the year ended
certain of these expenses may be identifiable to our segments, primarily our
Consumer-to-Consumer segment, the expenses are not included in the measurement
of segment operating income provided
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to the CODM for purposes of assessing segment performance and decision making
with respect to resource allocation.
? All items not included in operating income are excluded from the segments.
The following table sets forth the components of segment revenues as a percentage of the consolidated totals for the years endedDecember 31, 2019 and 2018: Year Ended December 31, 2019 2018 Consumer-to-Consumer 83 % 80 % Business Solutions 7 % 7 % Other 10 % 13 % 100 % 100 % Corporate costs, including stock-based compensation and other overhead, continue to be consistently allocated to our segments based on historical practice. For the year endedDecember 31, 2019 , approximately$51 million of corporate expenses were allocated to the Consumer-to-Consumer segment that would have previously been included in Other prior to the sale of Speedpay onMay 9, 2019 . Consumer-to-Consumer Segment
The following table sets forth our Consumer-to-Consumer segment results of
operations for the years ended
Year Ended December 31,
(dollars and transactions in millions) 2019 2018 % Change
Revenues $ 4,407.8 $ 4,453.6 (1) %
Operating income $ 975.4 $ 1,048.2 (7) %
Operating income margin 22 % 24 %
Key indicator:Consumer-to-Consumer transactions 289.4 287.0
1 %
Our Consumer-to-Consumer money transfer service, including our online money transfer transactions conducted and funded throughWestern Union branded websites and mobile apps ("westernunion.com"), is provided through one interconnected global network where a money transfer can be sent from one location to another, around the world. The segment includes five geographic regions whose functions are primarily related to generating, managing and maintaining agent relationships and localized marketing activities. We include westernunion.com in our regions. By means of common processes and systems, these regions, including westernunion.com, create an interconnected network for consumer transactions, thereby constituting one global Consumer-to-Consumer money transfer business and one operating segment. The geographic split for transactions and revenue in the table that follows, including transactions conducted and funded through westernunion.com, is determined entirely based upon the region where the money transfer is initiated. Included in each region's transaction and revenue percentages in the tables below are transactions conducted and funded through westernunion.com for the years endedDecember 31, 2019 and 2018, respectively. Where reported separately in the discussion below, westernunion.com consists of 100% of the transactions that are conducted and funded through westernunion.com and the related revenues. 51 Table of Contents The table below sets forth revenue and transaction changes by geographic region compared to the prior year. Consumer-to-Consumer segment constant currency revenue growth/(decline) is a non-GAAP financial measure, as further discussed in Revenues overview above. Year Ended December 31, 2019 Revenue Growth/ Foreign Constant Currency (Decline), as Exchange Revenue Growth/ Transaction Reported - Translation (Decline) (a) - Growth/ (GAAP) Impact (Non-GAAP) (Decline) Consumer-to-Consumer regional growth/(decline):North America (United States & Canada) ("NA") 2 % 0 % 2 % (2) %Europe andRussia /CIS ("EU & CIS") (2) % (3) % 1 % 5 %Middle East ,Africa , and South Asia ("MEASA") (1) % (1) % 0 % (1) %Latin America and the Caribbean ("LACA") (b) 1 % (10) % 11 % 8 %
East Asia and Oceania ("APAC") (13) % (1) % (12) % (7) % Total Consumer-to-Consumer growth/(decline): (1) % (2) % 1 % 1 % westernunion.com (c) 17 % (1) % 18 % 16 %
Constant currency revenue growth assumes that revenues denominated in foreign
(a) currencies are translated to
foreign currency hedges, at rates consistent with those in the prior year.
Our LACA region results were impacted by the strengthening of the United (b) States dollar against the Argentine peso, in addition to an increase in local
currency revenue per transaction, primarily due to inflation.
(c) Westernunion.com revenues have also been included in each region, as
described earlier.
The table below sets forth regional revenues as a percentage of our Consumer-to-Consumer revenue for the years endedDecember 31, 2019 and 2018: Year Ended December 31, 2019 2018 Consumer-to-Consumer revenue as a percentage of segment revenue: NA 38 % 37 % EU & CIS 32 % 32 % MEASA 15 % 15 % LACA 9 % 9 % APAC 6 % 7 %
Westernunion.com, which is included in the regional percentages above,
represented approximately 14% and 12% of our Consumer-to-Consumer revenues for
the years ended
Our consumers transferred$87.7 billion in Consumer-to-Consumer principal for the years endedDecember 31, 2019 and 2018, of which$80.7 billion and$79.9 billion , respectively, related to cross-border principal.
Revenues
Consumer-to-Consumer money transfer revenue decreased 1% for the year endedDecember 31, 2019 compared to the prior period, with transaction growth of 1%. Fluctuations inthe United States dollar compared to foreign currencies, net of the impact of foreign currency hedges, negatively impacted revenue by 2% for the year endedDecember 31, 2019 compared to the prior year. Constant currency revenue increased 1% for the year endedDecember 31, 2019 , primarily due to transaction growth. Our NA region revenue increased 2% for the year endedDecember 31, 2019 compared to the prior year, with a transaction decline of 2%. The increase in revenue was primarily due to net price increases and transaction growth in ourUnited States outbound services, including toMexico , partially offset by lower revenue generated from money transfers sent and received withinthe United States . Our EU & CIS region decreased 2% for the year endedDecember 31, 2019 compared to the prior year, with transaction growth of 5%. Fluctuations in the exchange rate betweenthe United States dollar and the euro, the British 52
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pound, and other currencies, net of the impact of foreign currency hedges, negatively impacted revenue by 3% for the year endedDecember 31, 2019 . Revenue was positively impacted by transaction growth inSpain ,France , andRussia for the year endedDecember 31, 2019 . Our MEASA region revenue decreased 1% for the year endedDecember 31, 2019 compared to the prior year, with a transaction decline of 1%. Fluctuations in the exchange rate betweenthe United States dollar and other currencies negatively impacted revenue by 1% for the year endedDecember 31, 2019 . Net pricing increases positively affected revenue for the year endedDecember 31, 2019 . Our LACA region revenue increased 1% for the year endedDecember 31, 2019 compared to the prior year, with transaction growth of 8%. Fluctuations in the exchange rate betweenthe United States dollar and other currencies negatively impacted revenue by 10% for the year endedDecember 31, 2019 . Revenues were negatively impacted by the strengthening ofthe United States dollar against the Argentine peso, partially offset by an increase in local currency revenue per transaction, primarily due to inflation.
Our APAC region revenue decreased 13% for the year ended
We have historically implemented price reductions or price increases throughout many of our global corridors. We will likely continue to implement price changes from time to time in response to competition and other factors. Price reductions generally reduce margins and adversely affect financial results in the short term and may also adversely affect financial results in the long term if transaction volumes do not increase sufficiently. Price increases may adversely affect transaction volumes, as consumers may not use our services if we fail to price them appropriately. Operating Income Consumer-to-Consumer operating income decreased 7% during the year endedDecember 31, 2019 compared to the prior year. Results for the year endedDecember 31, 2019 were negatively impacted by increased allocations of corporate overhead as a result of the Speedpay divestiture, as previously discussed, and higher marketing costs compared to the prior year, partially offset by decreased variable costs, including agent commissions. Additionally, fluctuations inthe United States dollar compared to foreign currencies, net of the impact of foreign currency hedges, negatively impacted revenues and favorably impacted expenses for the year endedDecember 31, 2019 .
Business Solutions
The following table sets forth our Business Solutions segment results of
operations for the years ended
Year Ended December 31,
(dollars in millions) 2019 2018 % Change
Revenues $ 388.8 $ 386.8 0 %
Operating income $ 46.8 $ 23.4 (a)
Operating income margin 12 % 6 %
(a) Calculation not meaningful.
Revenues
Business Solutions revenue was flat for the year ended
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Operating Income
For the year ended December 31, 2019 , Business Solutions operating income and
operating income margin increased when compared to the prior year due to
decreased information technology costs and certain other expense reductions,
some of which are not expected to recur.
Other
Other primarily consisted of Speedpay and our cash-based bill payments businesses inArgentina , both of which facilitate bill payments from consumers to businesses and other organizations. As previously described, we entered into an agreement onFebruary 28, 2019 to sell Speedpay and closed the transaction onMay 9, 2019 . Speedpay revenues included in our results were$125.4 million and$352.0 million for the years endedDecember 31, 2019 and 2018, respectively. Speedpay direct operating expenses were$98.2 million and$251.2 million for the years endedDecember 31, 2019 and 2018, respectively. OnMay 6, 2019 , we completed the sale of Paymap for contingent consideration and immaterial cash proceeds received at closing. Paymap revenues included in our results were$5.3 million and$16.2 million for the years endedDecember 31, 2019 and 2018, respectively. Paymap direct operating expenses were$2.2 million and$6.7 million for the years endedDecember 31, 2019 and 2018, respectively. The following table sets forth Other results for the years endedDecember 31, 2019 and 2018: Year Ended December 31, (dollars in millions) 2019 2018 % Change Revenues$ 495.5 $ 749.5 (34) % Operating income$ 27.3 $ 50.5 (46) % Operating income margin 6 % 7 % Revenues Other revenue decreased 34% for the year endedDecember 31, 2019 compared to the prior year, primarily due to the impact of the sale of Speedpay. In addition, the decrease in revenues was also due to a decrease in our Argentine bill payments business due to the strengthening ofthe United States dollar against the Argentine peso. The decrease for the year endedDecember 31, 2019 was partially offset by an increase in local currency revenue per transaction, primarily due to inflation.
Operating Income
Other operating income decreased for the year endedDecember 31, 2019 due to a decrease in Speedpay and Paymap revenues, net of a reduction in direct expenses and allocated expenses, as previously discussed.
Capital Resources and Liquidity
Our primary source of liquidity has been cash generated from our operating activities, primarily from net income and fluctuations in working capital. Our working capital is affected by the timing of interest payments on our outstanding borrowings and timing of income tax payments, among other items. The annual payments of our 2017 United States federal tax liability, including amounts related tothe United States taxation of certain previously undistributed earnings of foreign subsidiaries, as specified in the Tax Act, are due in the second quarter of each year through 2025. Our future cash flows could be impacted by a variety of factors, some of which are out of our control, including changes in economic conditions, especially those impacting migrant populations, changes in income tax laws, or the status of income tax audits, including the resolution of outstanding tax matters, and the settlement or resolution of legal contingencies. 54
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Substantially all of our cash flows from operating activities have been generated from subsidiaries. Most of these cash flows are generated from our regulated subsidiaries. Our regulated subsidiaries may transfer all excess cash to the parent company for general corporate use, except for assets subject to legal or regulatory restrictions, including: (i) requirements to maintain cash and other qualifying investment balances, free of any liens or other encumbrances, related to the payment of certain of our money transfer and other payment obligations, (ii) other legal or regulatory restrictions, including statutory or formalized minimum net worth requirements, and (iii) restrictions on transferring assets outside of the countries where these assets are located. See also Part II, Item 8, Financial Statements and Supplementary Data, Note 1, Business and Basis of Presentation, in this Annual Report on Form 10-K. We currently believe we have adequate liquidity to meet our business needs, including payments under our debt and other obligations, through our existing cash balances, our ability to generate cash flows through operations, and our$1.5 billion revolving credit facility ("Revolving Credit Facility"), which expires inJanuary 2025 and supports our commercial paper program. Our commercial paper program enables us to issue unsecured commercial paper notes in an amount not to exceed$1.5 billion outstanding at any time, reduced to the extent of any borrowings outstanding on our Revolving Credit Facility. As ofDecember 31, 2019 , we had no outstanding borrowings on our Revolving Credit Facility and$245.0 million of outstanding borrowings on the commercial paper program. To help ensure availability of our worldwide cash where needed, we utilize a variety of planning and financial strategies, including decisions related to the amounts, timing, and manner by which cash is made available from our international subsidiaries. These decisions can influence our overall tax rate and impact our total liquidity. We regularly evaluate, taking tax consequences and other factors into consideration, ourUnited States cash requirements and also the potential uses of cash internationally to determine the appropriate level of dividend repatriations of our foreign source income.
As ofDecember 31, 2019 and 2018, we had cash and cash equivalents of$1,450.5 million and$973.4 million , respectively. As described in Part II, Item 8, Financial Statements, Note 5, Divestitures, Business Combinations, andGoodwill , we completed the sale of Speedpay during the second quarter of 2019 and received approximately$750 million in cash, a portion of which we used to fund our note maturities, as discussed below, and for ongoing share repurchases. In many cases, we receive funds from money transfers and certain other payment services before we settle the payment of those transactions. These funds, referred to as Settlement assets on our Consolidated Balance Sheets, are not used to support our operations. However, we earn income from investing these funds. We maintain a portion of these settlement assets in highly liquid investments, classified as Cash and cash equivalents within Settlement assets, to fund settlement obligations. Investment securities, classified within Settlement assets, were$1.7 billion and$1.2 billion as ofDecember 31, 2019 and 2018, respectively, and consist primarily of highly-rated state and municipal debt securities, including fixed-rate term notes and variable-rate demand notes. The substantial majority of our investment securities are held in order to comply with state licensing requirements inthe United States and are required to have credit ratings of "A-" or better from a major credit rating agency. Investment securities are exposed to market risk due to changes in interest rates and credit risk. We regularly monitor credit risk and attempt to mitigate our exposure by investing in highly-rated securities and diversifying our investment portfolio. Our investment securities are also actively managed with respect to concentration. As ofDecember 31, 2019 , all investments with a single issuer and each individual security represented less than 10% of our investment securities portfolio.
Cash Flows from Operating Activities
During the years endedDecember 31, 2019 and 2018, cash provided by operating activities was$914.6 million and$821.3 million , respectively. Cash provided by operating activities during the year endedDecember 31, 2019 increased compared to 2018 due to the timing of significant payments made during 2018, including payments of approximately$120 million related to an agreement with theUnited States Internal Revenue Service resolving substantially all of the issues 55
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related to our restructuring of our international operations in 2003, as further described in Part II, Item 8, Financial Statements and Supplementary Data, Note 11, Income Taxes, and approximately$60 million related to the NYDFS Consent Order. This increase was partially offset by taxes resulting from the net gain on the sale of our Speedpay and Paymap businesses and payments made during the year endedDecember 31, 2019 related to the restructuring plan of approximately$38 million . Financing Resources As ofDecember 31, 2019 , we had the following outstanding borrowings (in millions): Commercial paper$ 245.0 Notes: 3.600% notes due 2022 (a) 500.0 4.250% notes due 2023 (a) 300.0 2.850% notes due 2025 (effective rate of 3.1%) (b) 500.0 6.200% notes due 2036 (a) 500.0 6.200% notes due 2040 (a) 250.0
Term loan facility borrowing (effective rate of 3.1%) 950.0 Total borrowings at par value
3,245.0
Debt issuance costs and unamortized discount, net (15.7)
Total borrowings at carrying value (c) $ 3,229.3 (a) The difference between the stated interest rate and the effective interest
rate is not significant.
On
below.
(c) As of
borrowings was approximately 4.0%.
Commercial Paper Program
Pursuant to our commercial paper program, we may issue unsecured commercial
paper notes in an amount not to exceed $1.5 billion outstanding at any time,
reduced to the extent of borrowings outstanding on our Revolving Credit
Facility. Our commercial paper borrowings may have maturities of up to 397 days
from date of issuance. Interest rates for borrowings are based on market rates
at the time of issuance. As of December 31, 2019 and 2018, we had $245.0 million
and $125.0 million in commercial paper borrowings outstanding, respectively. Our
commercial paper borrowings as of December 31, 2019 had a weighted-average
annual interest rate of approximately 2.1% and a weighted-average term of
approximately 3 days. During the years ended December 31, 2019 and 2018, the
average commercial paper balance outstanding was $193.6 million and $115.1
million , respectively, and the maximum balance outstanding was $630.0 million
and $570.0 million , respectively. Proceeds from our commercial paper borrowings
were used for the repayment of notes, general corporate purposes, and working
capital needs.
Revolving Credit Facility
On December 18, 2018 , we entered into a credit agreement with an original
expiration date of January 2024 providing for unsecured financing facilities in
an aggregate amount of $1.5 billion , including a $250.0 million letter of credit
sub-facility. On December 18, 2019 , we extended the final maturity date of the
Revolving Credit Facility to January 8, 2025 .
Interest due under the Revolving Credit Facility is fixed for the term of each
borrowing and is payable according to the terms of that borrowing. Generally,
interest is calculated using a selected LIBOR rate plus an interest rate margin
of 110 basis points. A facility fee of 15 basis points is also payable quarterly
on the total facility, regardless of usage. Both the interest rate margin and
facility fee percentage are based on certain of our credit ratings.
The purpose of our Revolving Credit Facility, which is diversified through a
group of 19 participating institutions, is to provide general liquidity and to
support our commercial paper program, which we believe enhances our short-term
credit rating. The largest commitment from any single financial institution
within the total committed balance of $1.5
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billion is approximately 11%. As of
Term Loan Facility
OnDecember 18, 2018 , we extended the Term Loan Facility providing for an unsecured delayed draw term loan facility in an aggregate amount of$950.0 million . InOctober 2016 , we borrowed$575.0 million under our prior term loan facility. InDecember 2018 , we borrowed the remaining amount available under the Term Loan Facility. Generally, interest under the Term Loan Facility is calculated using a selected LIBOR rate plus an interest rate margin of 125 basis points. The interest rate margin percentage is based on certain of our credit ratings and will increase or decrease in the event of certain upgrades or downgrades in our credit ratings. In addition to the payment of interest, we are required to make certain periodic amortization payments with respect to the outstanding principal of the term loan, beginning in 2021. The final maturity date of the Term Loan Facility isJanuary 8, 2024 .
Under the terms of the prior term loan facility, we were required to make
certain amortization payments with respect to the outstanding principal of the
prior term loan. For the year ended
Notes
OnNovember 25, 2019 , we issued$500.0 million of aggregate principal amount of unsecured notes dueJanuary 10, 2025 ("2025 Notes"). We used the net proceeds from the sale of the 2025 Notes to redeem our 2020 Notes, as defined below, and for general corporate purposes. Interest with respect to the 2025 Notes is payable semi-annually in arrears onJanuary 10 andJuly 10 of each year, beginning onJuly 10, 2020 , based on the per annum rate of 2.850%. The interest rate payable on the 2025 Notes will be increased if the debt rating assigned to these notes is downgraded by an applicable credit rating agency, beginning at a downgrade below investment grade. However, in no event will the interest rate on the 2025 Notes exceed 4.850% per annum. The interest rate payable on the 2025 Notes may also be adjusted downward for debt rating upgrades subsequent to any debt rating downgrades but may not be adjusted below 2.850% per annum. We may redeem the 2025 Notes, in whole or in part, at any time prior toDecember 10, 2024 at the greater of par or a price based on the applicable treasury rate plus 20 basis points. We may redeem the 2025 Notes at any time afterDecember 10, 2024 at a price equal to par, plus accrued interest. OnJune 11, 2018 , we issued$300.0 million of aggregate principal amount of unsecured notes dueJune 9, 2023 ("2023 Notes"). Interest with respect to the 2023 Notes is payable semi-annually in arrears onJune 9 andDecember 9 of each year, beginning onDecember 9, 2018 , based on the per annum rate of 4.250%. The interest rate payable on the 2023 Notes will be increased if the debt rating assigned to these notes is downgraded by an applicable credit rating agency, beginning at a downgrade below investment grade. However, in no event will the interest rate on the 2023 Notes exceed 6.250% per annum. The interest rate payable on the 2023 Notes may also be adjusted downward for debt rating upgrades subsequent to any debt rating downgrades but may not be adjusted below 4.250% per annum. We may redeem the 2023 Notes, in whole or in part, at any time prior toMay 9, 2023 at the greater of par or a price based on the applicable treasury rate plus 25 basis points. We may redeem the 2023 Notes at any time afterMay 9, 2023 at a price equal to par, plus accrued interest. OnAugust 22, 2017 , we issued$250.0 million of aggregate principal amount of unsecured floating rate notes dueMay 22, 2019 ("Floating Rate Notes"). The Floating Rate Notes were repaid inMay 2019 using proceeds from the Speedpay divestiture, commercial paper, and cash, including cash generated from operations. OnMarch 15, 2017 , we issued$400.0 million of aggregate principal amount of unsecured notes dueMarch 15, 2022 . OnAugust 22, 2017 , we issued an additional$100.0 million of aggregate principal amount of unsecured notes dueMarch 15, 2022 , for an aggregate principal total of$500.0 million of 3.600% unsecured notes ("2022 Notes"). The notes issued onAugust 22, 2017 are part of the same series and, accordingly, have the same terms and conditions as the notes 57
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issued onMarch 15, 2017 ; however, the notes issued onAugust 22, 2017 were issued at a premium of 101.783% and we received$1.57 million of accrued interest upon issuance. Interest with respect to the 2022 Notes is payable semi-annually in arrears onMarch 15 andSeptember 15 of each year, beginning onSeptember 15, 2017 , based on the per annum rate of 3.600%. The interest rate payable on the 2022 Notes will be increased if the debt rating assigned to the note is downgraded by an applicable credit rating agency, beginning at a downgrade below investment grade. However, in no event will the interest rate on the 2022 Notes exceed 5.600% per annum. The interest rate payable on the 2022 Notes may also be adjusted downward for debt rating upgrades subsequent to any debt rating downgrades but may not be adjusted below 3.600% per annum. We may redeem the 2022 Notes at any time prior toFebruary 15, 2022 at the greater of par or a price based on the applicable treasury rate plus 25 basis points. We may redeem the 2022 Notes at any time afterFebruary 15, 2022 at a price equal to par, plus accrued interest. OnNovember 22, 2013 , we issued$250.0 million of aggregate principal amount of unsecured notes dueMay 22, 2019 ("2019 Notes"). The 2019 Notes were repaid inMay 2019 using proceeds from the Speedpay divestiture, commercial paper, and cash, including cash generated from operations. OnAugust 22, 2011 , we issued$400.0 million of aggregate principal amount of unsecured notes dueAugust 22, 2018 ("2018 Notes"). InAugust 2018 , the 2018 Notes matured and were repaid. OnJune 21, 2010 , we issued$250.0 million of aggregate principal amount of unsecured notes dueJune 21, 2040 ("2040 Notes"). Interest with respect to the 2040 Notes is payable semi-annually onJune 21 andDecember 21 each year based on the fixed per annum rate of 6.200%. We may redeem the 2040 Notes at any time prior to maturity at the greater of par or a price based on the applicable treasury rate plus 30 basis points. OnMarch 30, 2010 , we exchanged$303.7 million of aggregate principal amount of unsecured notes dueNovember 17, 2011 for unsecured notes dueApril 1, 2020 ("2020 Notes"). Interest with respect to the 2020 Notes is payable semi-annually onApril 1 andOctober 1 each year based on the fixed per annum rate of 5.253%. In connection with the exchange, note holders were given a 7% premium ($21.2 million ), which approximated market value at the exchange date, as additional principal. As this transaction was accounted for as a debt modification, this premium was not charged to expense. Rather, the premium, along with the offsetting hedge accounting adjustments, was accreted into Interest expense over the life of the notes. OnNovember 18, 2019 , we announced a cash tender offer on our outstanding 2020 Notes. OnNovember 25, 2019 , we purchased the principal amount of$56.1 million , plus accrued interest, pursuant to the tender offer. OnDecember 27, 2019 , we redeemed the remaining principal amount of$268.8 million , plus accrued interest. The total premium paid to redeem the 2020 Notes was$3.1 million . OnNovember 17, 2006 , we issued$500.0 million of aggregate principal amount of unsecured notes dueNovember 17, 2036 ("2036 Notes"). Interest with respect to the 2036 Notes is payable semi-annually onMay 17 andNovember 17 each year based on the fixed per annum rate of 6.200%. We may redeem the 2036 Notes at any time prior to maturity at the greater of par or a price based on the applicable treasury rate plus 25 basis points.
Credit Ratings and Debt Covenants
The credit ratings on our debt are an important consideration in our overall
business, managing our financing costs and facilitating access to additional
capital on favorable terms. Factors that we believe are important in assessing
our credit ratings include earnings, cash flow generation, leverage, available
liquidity, and the overall business.
Our Revolving Credit Facility and our Term Loan Facility contain interest rate
margins which are determined based on certain of our credit ratings, and our
Revolving Credit Facility also contains a facility fee that is based on our
credit ratings. In addition, the interest rates payable on our 2022 Notes, 2023
Notes, and 2025 Notes can be impacted by our credit ratings. We are also subject
to certain provisions in many of our notes and certain of our derivative
contracts, which could require settlement or collateral posting in the event of
a change in control combined with a downgrade below investment grade, as further
described below. We do not have any other terms within our debt agreements that
are tied to changes in our credit ratings.
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The Revolving Credit Facility and Term Loan Facility contain covenants, subject to certain exceptions, that, among other things, limit or restrict our ability to sell or transfer assets or merge or consolidate with another company, grant certain types of security interests, incur certain types of liens, impose restrictions on subsidiary dividends, enter into sale and leaseback transactions, incur certain subsidiary level indebtedness, or use proceeds in violation of anti-corruption or anti-money laundering laws. Our notes are subject to similar covenants except that only the 2036 Notes contain covenants limiting or restricting subsidiary indebtedness and none of our notes are subject to a covenant that limits our ability to impose restrictions on subsidiary dividends. Our Revolving Credit Facility and Term Loan Facility require us to maintain a consolidated adjusted EBITDA interest coverage ratio of greater than 3:1 (ratio of consolidated adjusted EBITDA, defined as net income/(loss) plus the sum of (i) interest expense, (ii) income tax expense, (iii) depreciation expense, (iv) amortization expense, (v) any other non-cash deductions, losses or charges made in determining net income/(loss) for such period, and (vi) extraordinary, non-recurring, or unusual losses or charges (including costs and expenses of litigation included in operating income), minus extraordinary, non-recurring or unusual gains provided that the amount added back to net income (or net loss) for such extraordinary, non-recurring or unusual losses, expenses or charges may not exceed 10% of adjusted EBITDA, in each case determined in accordance withUnited States generally accepted accounting principles for such period, to interest expense) for each period comprising the four most recent consecutive fiscal quarters. Our consolidated interest coverage ratio was 9:1 for the year endedDecember 31, 2019 .
For the year ended
Certain of our notes (including the 2022 Notes, 2023 Notes, 2025 Notes, and 2040 Notes) include a change of control triggering event provision, as defined in the terms of the notes. If a change of control triggering event occurs, holders of the notes may require us to repurchase some or all of their notes at a price equal to 101% of the principal amount of their notes, plus any accrued and unpaid interest. A change of control triggering event will occur when there is a change of control involving us and among other things, within a specified period in relation to the change of control, the notes are downgraded from an investment grade rating to below an investment grade rating by certain major credit rating agencies. Cash Priorities Liquidity Our objective is to maintain strong liquidity and a capital structure consistent with investment-grade credit ratings. We have existing cash balances, cash flows from operating activities, access to the commercial paper markets, and our Revolving Credit Facility available to support the needs of our business.
Capital Expenditures
The total aggregate amount paid for contract costs, purchases of property and equipment, and purchased and developed software was$127.7 million and$339.0 million in 2019 and 2018, respectively. Amounts paid for new and renewed agent contracts vary depending on the terms of existing contracts as well as the timing of new and renewed contract signings. Other capital expenditures during these periods included investments in our information technology infrastructure, purchased and developed software, and, primarily in 2018, leasehold improvements related to our corporate headquarters.
Share Repurchases and Dividends
During the years endedDecember 31, 2019 and 2018, 26.9 million and 20.2 million shares, respectively, were repurchased for$540.0 million and$399.2 million , respectively, excluding commissions, at an average cost of$20.07 and$19.81 per share, respectively. As ofDecember 31, 2019 ,$1.0 billion remained available under a share repurchase authorization approved by our Board of Directors throughDecember 31, 2021 .
Our Board of Directors declared quarterly cash dividends of
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common share in all four quarters of 2018, representing $341.7 million in total
dividends. These amounts were paid to shareholders of record in the respective
quarter the dividend was declared.
On
Debt Service Requirements
Our 2020 and future debt service requirements will include payments on all outstanding indebtedness, including any borrowings under our commercial paper program.
2017 United States Federal Tax Liability
As previously discussed, the Tax Act imposed a tax on certain of our previously undistributed foreign earnings. This tax charge, combined with our other 2017United States taxable income and tax attributes, resulted in a 2017 United States federal tax liability of approximately$800 million , of which approximately$668 million remained as ofDecember 31, 2019 . We have elected to pay this liability in periodic installments through 2025. During both the years endedDecember 31, 2019 and 2018, we made installment payments of$64.0 million . Under the terms of the law, we are required to pay the remaining installment payments as summarized in Contractual Obligations located in Part II, Item 7, Management's Discussion and Analysis of Financial Conditions and Results of Operations. These payments have affected and will continue to adversely affect our cash flows and liquidity and may adversely affect future share repurchases. Our ability to grow the business, make investments in our business, make acquisitions, return capital to shareholders, including through dividends and share repurchases, and service our debt and tax obligations will depend on our ability to continue to generate excess operating cash through our operating subsidiaries and to continue to receive dividends from those operating subsidiaries, our ability to obtain adequate financing and our ability to identify acquisitions that align with our long-term strategy.
Restructuring Activities
As previously discussed, onAugust 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. As ofDecember 31, 2019 , the accrual balance related to our restructuring plan was approximately$73 million . We plan to pay these restructuring accruals, and any additional restructuring accruals, using our existing cash balances and cash generated from operations.
Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources.
Pension Plan
We have a frozen defined benefit pension plan ("Plan"), for which we had a
recorded unfunded pension obligation of $11.4 million and $16.0 million as of
December 31, 2019 and 2018, respectively. We were not required to and did not
make a contribution to the Plan during the years ended December 31, 2019 and
2018, and we are not required to make any contributions to the Plan in 2020.
Our most recent measurement date for our pension plan was December 31, 2019 . The
calculation of the funded status and net periodic benefit cost is dependent upon
three primary assumptions: (i) expected long-term return on plan assets, (ii)
discount rate, and (iii) life expectancy trends.
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The expected long-term return on plan assets is 6.25% for 2020. As of ourDecember 31, 2019 measurement date, pension plan target allocations were approximately 60% in fixed income, 20% in equity investments, and 20% in alternative investment strategies (e.g., hedge funds, royalty rights, and private equity funds). Hedge fund strategy types include equity long/short, commodities/currencies, relative value, event driven, and multi-strategy. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements, and periodic asset and liability studies. The discount rate assumption is based on the rate at which pension benefits could be effectively settled and is determined by matching the timing and balance of anticipated payouts under the Plan to the rates from an AA spot rate yield curve, which is derived from AA bonds of varying maturities. The discount rate assumption for our benefit obligation was 2.66% and 3.79% for the years endedDecember 31, 2019 and 2018, respectively. A 100 basis point change to both the discount rate and long-term rate of return on plan assets would not have a material impact to our annual pension expense. The assumptions related to life expectancy are used to estimate the expected period over which pension benefits will be required to be paid. Projections used for life expectancy are based on mortality tables and mortality improvement tables, which are statistical tables of expected annual mortality rates and expected future mortality improvements, respectively. We utilize a mortality table that we believe best aligns with the underlying demographics and census data of the Plan participants.
Contractual Obligations
The following table summarizes our contractual obligations to third parties as ofDecember 31, 2019 and the effect such obligations are expected to have on our liquidity and cash flows in future periods (in millions): Payments Due by Period Total Less than 1 Year 1-3 Years 3-5 Years After 5 Years Items related to amounts included on our balance sheet: Borrowings, including interest (a)$ 4,352.6 $ 358.4$ 818.0 $ 1,306.9 $ 1,869.3 2017 United States federal income taxes (including Tax Act taxes on certain previously undistributed foreign earnings) (b) 668.0 64.0 128.0 278.0 198.0 Unrecognized tax benefits (c) 319.5 -
- - -
Operating leases 302.5 53.2 83.7 63.1 102.5
Foreign currency derivative
contracts (d) 159.5 131.4 27.6 0.5 -
Other 20.5 16.2 4.3 - -
Other contractual obligations:
Purchase obligations (e) 166.3 102.0 57.2 6.8 0.3
Total $ 5,988.9 $ 725.2 $ 1,118.8 $ 1,655.3 $ 2,170.1 We have estimated our interest payments based on the assumption that no debt
issuances or renewals will occur upon the maturity dates of our notes. (a) However, we may refinance all or a portion of our borrowings in future
periods. Estimated interest payments on floating-rate debt are calculated by
utilizing the effective rate and forward rates as of
our current and future interest payments, respectively.
Represents the remaining 2017 United States federal tax liability resulting
(b) from the Tax Act, which imposed
previously undistributed foreign earnings. Under the terms of the law, we
have elected to pay this liability in periodic installments through 2025.
Unrecognized tax benefits include associated interest and penalties. The
timing of related cash payments for substantially all of these liabilities is (c) inherently uncertain because the ultimate amount and timing of such
liabilities is affected by factors which are variable and outside our
control.
Represents the liability position of our foreign currency derivative
(d) contracts as of
conditions.
Many of our contracts contain clauses that allow us to terminate the contract
with notice and with a termination penalty. Termination penalties are
generally an amount less than the original obligation. Obligations under (e) certain contracts are usage-based and are, therefore, estimated in the above
amounts. Historically, we have not had any significant defaults on our
contractual obligations or incurred significant penalties for termination of
our contractual obligations.
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Other Commercial Commitments
We had approximately $335 million in outstanding letters of credit and bank
guarantees as of December 31, 2019 that are primarily held in connection with
safeguarding consumer funds, lease arrangements, and certain agent agreements.
The letters of credit and bank guarantees have expiration dates through 2024,
with many having a one-year renewal option. We expect to renew the letters of
credit and bank guarantees prior to expiration in most circumstances.
Critical Accounting Policies and Estimates
Management's discussion and analysis of results of operations and financial condition is based on our consolidated financial statements that have been prepared in accordance with generally accepted accounting principles inthe United States of America . The preparation of these consolidated financial statements requires that management make estimates and assumptions that affect the amounts reported for revenues, expenses, assets, liabilities and other related disclosures. Actual results may or may not differ from these estimates. Our significant accounting policies are discussed in Part II, Item 8, Financial Statements and Supplementary Data, Note 2, Summary of Significant Accounting Policies. Our critical accounting policies and estimates, described below, are very important to the portrayal of our financial condition and our results of operations and applying them requires our management to make difficult, subjective, and complex judgments. We believe that the understanding of these key accounting policies and estimates is essential in achieving more insight into our operating results and financial condition.
Income Taxes
Income taxes, as reported in our consolidated financial statements, represent the net amount of income taxes we expect to pay to various taxing jurisdictions in connection with our operations. We provide for income taxes based on amounts that we believe we will ultimately owe after applying the required analyses and judgments. The determination of our worldwide provision for income taxes requires significant judgment. We routinely receive, and may in the future receive, questions from taxing authorities on various tax-related assertions. In many of these instances, the ultimate tax determination is uncertain, given the complexities in interpreting tax laws and applying our facts and circumstances to these laws in many jurisdictions throughout the world.
Income Tax Contingencies
We recognize the tax benefit from an uncertain tax position only when it is more likely than not, based on the technical merits of the position, that the tax position will be sustained upon examination, including the resolution of any related appeals or litigation. The tax benefits recognized in the consolidated financial statements from such a position are measured as the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. We have established contingency reserves for a variety of material, known tax exposures. Our tax reserves reflect our judgment as to the resolution of the issues involved if subject to judicial review or other settlement. While we believe that our reserves are adequate to cover reasonably expected tax risks, there can be no assurance that, in all instances, an issue raised by a tax authority will be resolved at a financial cost that does not exceed our related reserve. With respect to these reserves, our income tax expense would include (i) any changes in tax reserves arising from material changes in facts and circumstances (i.e., new information) surrounding a tax issue during the period and (ii) any difference from our tax position as recorded in the consolidated financial statements and the final resolution of a tax issue during the period. Our tax contingency reserves for our uncertain tax positions as ofDecember 31, 2019 were$309.0 million , including accrued interest and penalties, net of related items. While we believe that our reserves are adequate to cover reasonably expected tax risks, in the event that the ultimate resolution of our uncertain tax positions differs from our estimates, we may be exposed to material increases in income tax expense, which could materially impact our financial condition, results of operations, and cash flows. 62
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Derivative Financial Instruments
We use derivatives to (i) minimize our exposures related to changes in foreign currency exchange rates and, from time to time, interest rates and (ii) facilitate cross-currency Business Solutions payments by writing derivatives to customers. We recognize all derivatives in Other assets and Other liabilities in our Consolidated Balance Sheets at their fair value. Certain of our derivative arrangements are designated as either cash flow hedges or fair value hedges at the time of inception, and others are not designated as accounting hedges.
Cash flow hedges - Cash flow hedges consist of foreign currency hedging of
forecasted revenues, as well as hedges of the forecasted issuance of fixed-rate
debt. Derivative fair value changes that are captured in Accumulated other
comprehensive loss ("AOCL") are reclassified to earnings in the same period the
hedged item affects earnings when the instrument is effective in offsetting the
change in cash flows attributable to the risk being hedged. As discussed in
? Part II, Item 8, Financial Statements and Supplementary Data, Note 2, Summary
of Significant Accounting Policies, we early adopted an accounting
pronouncement related to hedging activities as of
of the new accounting pronouncement, for foreign currency cash flow hedges
entered into on or after
assessment of effectiveness, and the initial value of the excluded components
is amortized into Revenues within our Consolidated Statements of Income/(Loss).
Fair value hedges - Fair value hedges consist of hedges of fixed-rate debt,
through interest rate swaps. The changes in fair value of these hedges, along
? with offsetting changes in fair value of the related debt instrument
attributable to changes in the benchmark interest rate, are recorded in
Interest expense.
The accounting guidance related to derivative accounting is complex and contains strict documentation requirements. The details of each designated hedging relationship must be formally documented at the inception of the arrangement, including the risk management objective, hedging strategy, hedged item, specific risks being hedged, the derivative instrument, and how effectiveness is being assessed. The derivative must be highly effective in offsetting the changes in cash flows or fair value of the hedged item, and effectiveness is evaluated quarterly on a retrospective and prospective basis. If the hedge is no longer deemed effective, we discontinue applying hedge accounting to that relationship on a prospective basis. We have foreign currency derivative instruments that qualify for hedge accounting and are designated as cash flow hedges. If these hedges no longer qualify under hedge accounting, the change in the fair value of these derivatives would be reflected into earnings, which could have a significant impact on our reported results. As ofDecember 31, 2019 , the cumulative pre-tax unrealized gains currently classified within AOCL was$4.7 million and would be reflected in earnings if these hedges were disqualified from hedge accounting.
Other Intangible Assets
We capitalize acquired intangible assets as well as certain initial payments for new and renewed agent contracts and software. We evaluate such intangible assets for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. In such reviews, estimated undiscounted cash flows associated with these assets or operations are compared with their carrying amounts to determine if a write-down to fair value (normally measured by the present value technique) is required. The capitalization of initial payments for new and renewed agent contracts is subject to strict accounting policy criteria and requires management judgment as to the amount to capitalize and the related period of benefit. Our accounting policy is to limit the amount of capitalized costs for a given agent contract to the lesser of the estimated future cash flows from the contract or the termination fees we would receive in the event of early termination of the contract. Additionally, the estimated undiscounted cash flows associated with each asset requires us to make estimates and assumptions, including, among other things, revenue growth rates and operating margins based on our budgets and business plans. Disruptions to contractual relationships, significant declines in cash flows or transaction volumes associated with contracts, or other issues significantly impacting the future cash flows associated with the contract would cause us
to
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evaluate the recoverability of the asset and could result in an impairment
charge. The net carrying value of our other intangible assets as of
Goodwill represents the excess of purchase price over the fair value of tangible and other intangible assets acquired, less liabilities assumed arising from business combinations. An impairment assessment of goodwill is conducted annually during the Company's fourth quarter at the reporting unit level. This assessment of goodwill is performed more frequently if events or changes in circumstances indicate that the carrying value of the goodwill may not be recoverable. Reporting units are determined by the level at which management reviews segment operating results. In some cases, that level is the operating segment and in others it is one level below the operating segment. Our impairment assessment typically begins with a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. The initial qualitative assessment includes comparing the overall financial performance of the reporting units against the planned results. Additionally, each reporting unit's fair value is assessed under certain events and circumstances, including macroeconomic conditions, industry and market considerations, cost factors, and other relevant entity-specific events. Periodically, we perform a quantitative assessment, as described below, for each of our reporting units, regardless of the results of prior qualitative assessments. If we determine in the qualitative assessment that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then we estimate the fair value of the reporting unit using discounted cash flows and compare the estimated fair value to its carrying value. If the carrying value exceeds the fair value of the reporting unit, then an impairment is recognized for the difference. Refer to Part II, Item 8, Financial Statements and Supplementary Data, Note 2, Summary of Significant Accounting Policies, for further discussion regarding our accounting policies for goodwill and any related impairments. The determination of the reporting units and which reporting units to include in the qualitative assessment requires significant judgment. Also, all of the assumptions used in the qualitative assessment require judgment. Additionally, for the quantitative goodwill impairment test, we calculate the fair value of reporting units through discounted cash flow analyses which require us to make estimates and assumptions including, among other items, revenue growth rates, operating margins, and capital expenditures based on our budgets and business plans. Development of such estimates and assumptions and the resultant fair value takes into consideration expected regulatory, marketplace, and other economic factors as well as relevant discount rates and terminal values. We could be required to evaluate the recoverability of goodwill if we experience disruptions to the business, unexpected significant declines in operating results, a divestiture of a significant component of our business, or other triggering events. In addition, as our business or the way we manage our business changes, our reporting units may also change. If an event described above occurs and causes us to recognize a goodwill impairment charge, it would impact our reported earnings in the period such charge occurs. The carrying value of goodwill as ofDecember 31, 2019 was$2,566.6 million which represented approximately 30% of our consolidated assets. As ofDecember 31, 2019 , goodwill of$1,980.7 million and$532.0 million resides in our Consumer-to-Consumer and Business Solutions reporting units, respectively, while the remaining$53.9 million resides in Other. For the years endedDecember 31, 2019 and 2018, we did not record any goodwill impairments. For the reporting units that comprise Consumer-to-Consumer and Other, the fair value of the businesses significantly exceed their carrying amounts. The fair value of the Business Solutions reporting unit continues to be sensitive to changes in projections for revenue growth rates and EBITDA margins. Our current expectation is for Business Solutions to average low to mid-single digit annual revenue growth over the 10-year forecast period, with EBITDA margins dependent on revenue growth. Our ability to achieve the projected revenue growth and EBITDA margins may be affected by, amongst other factors, (i) pricing and product competition from direct competitors, banks and new market entrants; (ii) our success and speed to market in developing new products; (iii) the foreign exchange impact from revenues generated in currencies other than the United 64
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States dollar; (iv) increased regulatory compliance requirements; (v) our ability to enter relationships with partners that can accelerate our time to market; (vi) failure of long-term import growth rates returning to historic levels; (vii) our ability to continue to maintain our payment network and bank account infrastructure; (viii) foreign currency volatility impacts on customer activity; and (ix) continued opportunities for cost reduction. Based on assumptions used within the Business Solutions reporting unit valuation, we believe a decrease of 100 basis points in the ten-year compound annual growth rate of revenue (also reflecting the assumed impact such a reduction would have on EBITDA margins) would result in a reduction in the fair value of the Business Solutions reporting unit of approximately$250 million . Such a reduction would result in the fair value approximating the carrying value of the reporting unit.
Legal Contingencies
We are subject to certain claims and litigation that could result in losses, including damages, fines, and/or civil penalties, which could be significant, and in some cases, criminal charges. We regularly evaluate the status of legal matters to assess whether a loss is probable and reasonably estimable in determining whether an accrual is appropriate. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. When a potential loss is considered probable and the reasonable estimate is a range, we accrue on the low end of the range when no amount is a better estimate than any other amount. Significant judgment is required in determining whether a loss is probable and whether the loss can be reasonably estimated, including determining a loss value within a range. Our judgments are subjective and are based on considerations such as the status of the legal or regulatory proceedings, the merits of our defenses, and consultations with in-house and outside legal counsel. As the outcome of claims and litigation is uncertain, accruals are based on the best information available at the time the judgment is made. As additional information becomes available, which may include information we learn through the discovery process, settlement discussions, or rulings by courts, arbitrators or others, we reassess the potential liability related to pending claims and litigation and may revise our estimates. In determining whether disclosure is appropriate, we evaluate each legal matter to assess if there is at least a reasonable possibility that a material loss or additional material losses may have been incurred beyond those amounts which we have already accrued. If such a reasonable possibility exists, we include an estimate of possible loss or range of loss in our disclosure of reasonably possible potential litigation losses or we state if such an estimate of possible loss or range of loss cannot be made. Due to the inherent uncertainties of the legal and regulatory process in the multiple jurisdictions in which we operate, and to the varied range of potential outcomes, the actual outcomes may differ materially from our judgments.
Recent Accounting Pronouncements
Refer to Part II, Item 8, Financial Statements and Supplementary Data, Note 2, Summary of Significant Accounting Policies for further discussion.
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