THE WESTERN UNION COMPANY Item 2.
The following discussion should be read in conjunction with the condensed consolidated financial statements and the notes to those statements included elsewhere in this report on Form 10-Q. This report on Form 10Q contains certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict. Actual outcomes and results may differ materially from those expressed in, or implied by, our forward-looking statements. Words such as "expects," "intends," "targets," "anticipates," "believes," "estimates," "guides," "provides guidance," "provides outlook," "projects," "designed to," and other similar expressions or future or conditional verbs such as "may," "will," "should," "would," "could," and "might" are intended to identify such forward-looking statements. Readers of the Form 10Q ofThe Western Union Company (the "Company," "Western Union ," "we," "our," or "us") should not rely solely on the forward-looking statements and should consider all uncertainties and risks discussed in the Risk Factors section and throughout the Annual Report on Form 10K for the year endedDecember 31, 2021 . The statements are only as of the date they are made, and the Company undertakes no obligation to update any forward-looking statement. Possible events or factors that could cause results or performance to differ materially from those expressed in our forward-looking statements include the following: (i) events related to our business and industry, such as: changes in general economic conditions and economic conditions in the regions and industries in which we operate, including global economic downturns and trade disruptions, or significantly slower growth or declines in the money transfer, payment service, and other markets in which we operate, including downturns or declines related to interruptions in migration patterns or other events, such as public health emergencies, epidemics, or pandemics, such as COVID-19, civil unrest, war, terrorism, natural disasters, or non-performance by our banks, lenders, insurers, or other financial services providers; failure to compete effectively in the money transfer and payment service industry, including among other things, with respect to price or customer experience, with global and niche or corridor money transfer providers, banks and other money transfer and payment service providers, including digital, mobile and internet-based services, card associations, and card-based payment providers, and with digital currencies and related exchanges and protocols, and other innovations in technology and business models; geopolitical tensions, political conditions, and related actions, including trade restrictions and government sanctions, which may adversely affect our business and economic conditions as a whole, including interruptions ofUnited States or other government relations with countries in which we have or are implementing significant business relationships with agents, clients, or other partners; deterioration in customer confidence in our business, or in money transfer and payment service providers generally; failure to maintain our agent network and business relationships under terms consistent with or more advantageous to us than those currently in place; our ability to adopt new technology and develop and gain market acceptance of new and enhanced services in response to changing industry and consumer needs or trends; mergers, acquisitions, and the integration of acquired businesses and technologies into our Company, divestitures, and the failure to realize anticipated financial benefits from these transactions, and events requiring us to write down our goodwill; decisions to change our business mix; changes in, and failure to manage effectively, exposure to foreign exchange rates, including the impact of the regulation of foreign exchange spreads on money transfers and payment transactions; changes in tax laws, or their interpretation, any subsequent regulation, and potential related state income tax impacts, and unfavorable resolution of tax contingencies; any material breach of security, including cybersecurity, or safeguards of or interruptions in any of our systems or those of our vendors or other third parties; cessation of or defects in various services provided to us by third-party vendors; our ability to realize the anticipated benefits from restructuring-related initiatives, which may include decisions to downsize or to transition operating activities from one location to another, and to minimize any disruptions in our workforce that may result from those initiatives; failure to manage credit and fraud risks presented by our agents, clients, and consumers; adverse rating actions by credit rating agencies; our ability to protect our trademarks, patents, copyrights, and other intellectual property rights, and to defend ourselves against potential intellectual property infringement claims; our ability to attract and retain qualified key employees and to manage our workforce successfully; material changes in the market value or liquidity of securities that we hold; restrictions imposed by our debt obligations; (ii) events related to our regulatory and litigation environment, such as: liabilities or loss of business resulting from a failure by us, our agents, or 39
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their subagents to comply with laws and regulations and regulatory or judicial interpretations thereof, including laws and regulations designed to protect consumers, or detect and prevent money laundering, terrorist financing, fraud, and other illicit activity; increased costs or loss of business due to regulatory initiatives and changes in laws, regulations, and industry practices and standards, including changes in interpretations, inthe United States and abroad, affecting us, our agents or their subagents, or the banks with which we or our agents maintain bank accounts needed to provide our services, including related to anti-money laundering regulations, anti-fraud measures, our licensing arrangements, customer due diligence, agent and subagent due diligence, registration and monitoring requirements, consumer protection requirements, remittances, and immigration; liabilities, increased costs or loss of business and unanticipated developments resulting from governmental investigations and consent agreements with or enforcement actions by regulators; liabilities resulting from litigation, including class-action lawsuits and similar matters, and regulatory enforcement actions, including costs, expenses, settlements, and judgments; failure to comply with regulations and evolving industry standards regarding consumer privacy, data use, the transfer of personal data between jurisdictions, and information security, including with respect to the General Data Protection Regulation in theEuropean Union and the California Consumer Privacy Act; failure to comply with the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as regulations issued pursuant to it and the actions of theConsumer Financial Protection Bureau and similar legislation and regulations enacted by other governmental authorities inthe United States and abroad related to consumer protection and derivative transactions; effects of unclaimed property laws or their interpretation or the enforcement thereof; failure to maintain sufficient amounts or types of regulatory capital or other restrictions on the use of our working capital to meet the changing requirements of our regulators worldwide; changes in accounting standards, rules and interpretations, or industry standards affecting our business; and (iii) other events, such as: catastrophic events; and management's ability to identify and manage these and other risks.
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, which are sent from our retail agent locations worldwide or
through websites and mobile devices, including our money transfer transactions
conducted and funded through websites and mobile applications marketed under our
brands ("Branded Digital") and transactions initiated on websites and mobile
applications hosted by our third-party white label or co-branded digital
partners (together with Branded Digital, "Digital Money Transfer"). Our money
transfer service is provided through one interconnected global network. This
service is available for international cross-border transfers and, in certain
countries, intra-country transfers.
•
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. OnAugust 4, 2021 , we entered into an agreement to sell our Business Solutions business toGoldfinch Partners LLC andThe Baupost Group LLC . During the third quarter of 2022, all parties agreed for the sale to be completed in three closings instead of two. The first closing occurred onMarch 1, 2022 , the second is expected to occur inDecember 2022 , and the third is expected in the first quarter of 2023. See below for additional information regarding this transaction. All businesses and other services that have not been classified in the above segments are reported as Other, which primarily includes our bill payment services which facilitate payments from consumers to businesses and other organizations and our money order services. Certain of our 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 provided in the Segment Discussion below. 40
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Table of Contents Results of Operations The following discussion of our consolidated results of operations and segment results refers to the three and nine months endedSeptember 30, 2022 compared to the same periods in 2021. The results of operations should be read in conjunction with the discussion of our segment results of operations, which provide more detailed discussions concerning certain components of the Condensed Consolidated Statements of Income. All significant intercompany accounts and transactions between our segments have been eliminated. The below information has been prepared in conformity with generally accepted accounting principles 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 three and nine months endedSeptember 30, 2022 were impacted by fluctuations inthe United States dollar compared to foreign currencies. Fluctuations inthe United States dollar compared to foreign currencies, net of the impact of foreign currency hedges, resulted in decreases to revenues of$60.8 million and$136.1 million for the three and nine months endedSeptember 30, 2022 , respectively, relative to the corresponding periods in the prior year. Fluctuations inthe United States dollar compared to foreign currencies negatively impacted operating income by$0.6 million for the three months endedSeptember 30, 2022 and positively impacted operating income by$7.5 million for the nine months endedSeptember 30, 2022 , relative to the corresponding periods in the prior year. OnAugust 4, 2021 , we entered into an agreement to sell our Business Solutions business toGoldfinch Partners LLC andThe Baupost Group LLC (collectively, the "Buyer") for cash consideration of$910.0 million . During the third quarter of 2022, we agreed with the Buyer to complete the divestiture in three closings instead of two, the first of which occurred onMarch 1, 2022 with the entirety of the cash consideration collected and allocated to the closings on a relative fair value basis. The first closing excluded the operations in theEuropean Union and theUnited Kingdom and resulted in a gain of$151.4 million . The second closing, which includes theUnited Kingdom operations, is expected to occur inDecember 2022 , pending required regulatory approvals. The third closing, which includes theEuropean Union operations, is expected to occur in the first quarter of 2023, pending required regulatory approvals. The gains associated with the second and third closings are subject to regulatory capital adjustments and will be recognized at the time of each closing. The Buyer has rebranded the sold operations within a new standalone company (now referred to as "Convera"). Refer to Part I, Item 1, Financial Statements, Note 4, Divestitures and Investment Activities for further discussion. Business Solutions revenues included in our Condensed Consolidated Statements of Income were$42.6 million and$116.8 million and direct operating expenses, excluding corporate allocations, were$27.0 million and$77.1 million for the three months endedSeptember 30, 2022 and 2021, respectively. For the nine months endedSeptember 30, 2022 and 2021, Business Solutions revenues were$167.4 million and$312.6 million , respectively, and direct operating expenses, excluding corporate allocations, were$117.4 million and$244.5 million , respectively. For the three months endedSeptember 30, 2022 and 2021, divestiture costs directly associated with this transaction were$0.4 million and$5.2 million , respectively. For the nine months endedSeptember 30, 2022 and 2021, divestiture costs directly associated with this transaction were$4.4 million and$10.7 million , respectively. InMarch 2022 , we suspended our operations inRussia andBelarus , which are included in our Consumer-to-Consumer segment, due to theRussia /Ukraine conflict (the "Conflict"). Revenues associated with theRussia andBelarus operations, including transactions sent from, into, and within these countries for the three months endedSeptember 30, 2021 were approximately$40 million , and for the nine months endedSeptember 30, 2022 and 2021 and the year endedDecember 31, 2021 , were approximately$28 million ,$106 million , and$145 million , respectively. The Conflict has had and is expected to continue to have broader implications to our overall business, including reduced transaction activity inUkraine . We expect that our results of operations will continue to be negatively impacted by this Conflict for the remainder of 2022 and likely thereafter. 41
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The following table sets forth our consolidated results of operations for the
three and nine months ended
Three Months Ended September 30, Nine Months Ended September 30,
(in millions, except per share
amounts) 2022 2021 % Change 2022 2021 % Change
Revenues $1,089.6 $1,286.3 (15)% $3,383.6 $3,786.0 (11)%
Expenses:
Cost of services 637.3 720.1 (12)% 1,945.4 2,181.1 (11)%
Selling, general, and
administrative 220.5 247.6 (11)% 704.9 798.6 (12)%
Total expenses 857.8 967.7 (11)% 2,650.3 2,979.7 (11)%
Operating income 231.8 318.6 (27)% 733.3 806.3 (9)%
Other income/(expense):
Gain on divestiture of business - - (a) 151.4 - (a)
Interest income 4.9 0.4 (a) 7.3 1.1 (a)
Interest expense (25.2) (25.7) (2)% (74.8) (79.7) (6)%
Other income/(expense), net (17.8) (1.8) (a) (25.1) 26.8 (a)
Total other income/(expense),
net (38.1) (27.1) 41% 58.8 (51.8) (a)
Income before income taxes 193.7 291.5 (34)% 792.1 754.5 5%
Provision for income taxes 19.8 58.8 (66)% 130.9 117.5 11%
Net income $173.9 $232.7 (25)% $661.2 $637.0 4%
Earnings per share:
Basic $0.45 $0.57 (21)% $1.70 $1.56 9%
Diluted $0.45 $0.57 (21)% $1.70 $1.55 10%
Weighted-average shares
outstanding:
Basic 386.5 406.3 388.8 409.1
Diluted 387.6 408.0 389.9 411.3
(a)
Calculation not meaningful.
Revenues Overview
Revenues are primarily derived from consideration paid by customers to transfer
money. These revenues vary by transaction based upon factors such as channel,
send and receive locations, the principal amount sent, whether the money
transfer involves different send and receive currencies, the difference between
the exchange rate we set to the customer and the rate available in the wholesale
foreign exchange market, and speed of service, as applicable. We also offer
several other services, including foreign exchange and payment services and
other bill payment services, for which revenue is impacted by similar factors.
Due to the significance of the effect that foreign exchange fluctuations against
the United States dollar can have on our reported revenues, constant currency
results have been provided in the table below for consolidated revenues.
Constant currency results assume foreign revenues are translated from foreign
currencies to the United States dollar, net of the effect of foreign currency
hedges, at rates consistent with those in the prior year. We have also disclosed
the impact of our Business Solutions divestiture on our revenues in the table
below. Constant currency measures and measures that exclude the impact of
divestitures are non-GAAP financial measures and are provided so that revenue
can be viewed without the effect of fluctuations in foreign currency exchange
rates and divestitures of our businesses, which is consistent with how
management evaluates our revenue results and trends. We believe that these
measures provide management and investors with information about revenue results
and trends that eliminates currency volatility and divestitures, thereby
providing greater clarity regarding, and increasing the comparability of, our
underlying results and trends. These disclosures are provided in addition to,
and not as a substitute for, the percentage change in revenue on a GAAP basis
for the three and nine months ended September 30, 2022 compared to the
corresponding periods in the prior year. Other companies may calculate and
define similarly labeled items differently, which may limit the usefulness of
this measure for comparative purposes.
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The following table sets forth our consolidated revenue results for the three
and nine months ended
Three Months Ended September 30, Nine Months Ended September 30,
(dollars in millions) 2022 2021 % Change 2022 2021 % Change
Revenues, as reported (GAAP) $1,089.6 $1,286.3 (15)% $3,383.6 $3,786.0 (11)%
Foreign currency impact (a) 4% 4%
Divestitures impact (b) 5% 3%
Revenue change, constant
currency adjusted, excluding
Business Solutions (Non-GAAP) (6)%
(4)%
(a)
Fluctuations in the United States dollar compared to foreign currencies, net of
the impact of foreign currency hedges, resulted in decreases to revenues of
$60.8 million and $136.1 million for the three and nine months ended September
30, 2022 , respectively, when compared to foreign currency rates in the
corresponding periods in the prior year.
(b)
InMarch 2022 , we completed the first closing of the sale of our Business Solutions business, as discussed above. Business Solutions revenues included in our results were$42.6 million and$116.8 million for the three months endedSeptember 30, 2022 and 2021, respectively, and$167.4 million and$312.6 million for the nine months endedSeptember 30, 2022 and 2021, respectively. For the three and nine months endedSeptember 30, 2022 , revenues decreased 15% and 11%, respectively, when compared to the corresponding periods in the prior year due to a transaction decline in our Consumer-to-Consumer segment, including as a result of the suspension of our operations inRussia andBelarus , as well as the first closing of the divestiture of our Business Solutions business, as described above. Fluctuations in the exchange rates betweenthe United States dollar and foreign currencies negatively impacted revenue by 4% for the three and nine months endedSeptember 30, 2022 compared to the corresponding periods in the prior year. Operating Expenses Overview
Operational efficiency program
OnOctober 20, 2022 , we announced an operational efficiency program which aims to redeploy approximately$150 million in expenses in our current cost base over the next 5 years, accomplished through optimizations in vendor management, our real estate footprint, marketing, and people costs. We believe these changes will allow us to invest in strategic initiatives. The timing and pace of this redeployment may vary, and we believe that we will continue to refine aspects of the program during the remainder of 2022 and into 2023.
Enhanced Regulatory Compliance
The financial services industry, including money services businesses, continues to be subject to increasingly strict legal and regulatory requirements, and we continue to focus on and regularly review our compliance programs. In connection with these reviews, and in light of growing and rapidly evolving regulatory complexity and heightened attention of, and increased dialogue with, governmental and regulatory authorities related to our compliance activities, we have made, and continue to make, enhancements to our processes and systems designed to detect and prevent money laundering, terrorist financing, and fraud and other illicit activity, and enhancements designed to improve consumer protection. Some of these changes have had, and we believe will continue to have, an adverse effect on our business, financial condition, and results of operations. Cost of Services Cost of services primarily consists of agent commissions, which represented approximately 60% of total cost of services for both the three and nine months endedSeptember 30, 2022 . For the three and nine months endedSeptember 30, 2022 , Cost of services decreased compared to the corresponding periods in the prior year due to a decrease in Consumer-to-Consumer money transfer agent commissions, which generally vary with revenues and a decrease associated with the Business Solutions divestiture, as discussed above. In addition, for the nine months endedSeptember 30, 2022 compared to the corresponding prior period, Cost of services decreased due to timing of investments in information technology and reductions in chargebacks and other losses. 43
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Selling, General, and Administrative
Selling, general, and administrative expenses decreased for the three and nine months endedSeptember 30, 2022 compared to the corresponding periods in the prior year due to a decrease associated with the Business Solutions divestiture, as discussed above, and fluctuations betweenthe United States dollar and foreign currencies. For the three months endedSeptember 30, 2022 compared to the corresponding period in the prior year, the decrease was partially offset by increased marketing costs. For the nine months endedSeptember 30, 2022 compared to the corresponding period in the prior year, the decrease was also due to decreases in employee-related expenses, partially offset by exit costs associated with the suspension of our Russian andBelarus operations and the Business Solutions divestiture, as discussed below.
Total Other Income/(Expense), Net
Total other income/(expense), net during the three months endedSeptember 30, 2022 when compared to the corresponding period in the prior year was impacted by the expense associated with payment obligations to the Buyer of the Business Solutions business for a measure of the profits, as contractually agreed, from theEuropean Union andUnited Kingdom operations subsequent to the first closing, which will continue until the third closing. Total other income/(expense), net for the nine months endedSeptember 30, 2022 , when compared to the corresponding period in the prior year benefited from the gain on the first closing of the Business Solutions divestiture, debt extinguishment costs incurred in the prior period, and a reduction in net periodic pension costs due to the termination of ourU.S. defined benefit pension plan in the fourth quarter of 2021. This was partially offset by a prior year gain of$47.9 million recorded from the sale of a substantial majority of shares we held as a noncontrolling investor in a private company and the measure of profits paid to the Buyer of Business Solutions.
Income Taxes
Our effective tax rates on pre-tax income were 10.2% and 20.2% for the three months endedSeptember 30, 2022 and 2021, respectively, and 16.5% and 15.6% for the nine months endedSeptember 30, 2022 and 2021, respectively. The decrease in our effective tax rate for the three months endedSeptember 30, 2022 compared to the corresponding period in the prior year was primarily due to discrete tax expenses in the prior period and discrete tax benefits in the current period related to the completion of the examination of our consolidated federal income tax returns for 2017 and 2018 (the "IRS Examination "), partially offset by the sale of our Business Solutions business and our decision to suspend operations inRussia andBelarus . The increase in our effective tax rate for the nine months endedSeptember 30, 2022 compared to the corresponding period in the prior year was primarily due to the sale of our Business Solutions business and our decision to suspend operations inRussia andBelarus , partially offset by discrete tax expenses in the prior period and discrete tax benefits in the current period related to the completion of theIRS Examination . The impact of the sale of our Business Solutions business is included in our estimated annual effective rate, the ongoing effects of which are expected to continue throughout the year. As ofSeptember 30, 2022 , the total amount of tax contingency reserves was$302.4 million , including accrued interest and penalties, net of related items. As previously disclosed in Part II, Item 8, Financial Statements and Supplementary Data, Note 11, Income Taxes, in our Annual Report on Form 10-K, we continue to believe that it is reasonably possible that our total unrecognized tax benefits could decrease byDecember 31, 2022 , in connection with various matters which may be resolved.
Earnings Per Share
During the three months endedSeptember 30, 2022 and 2021, both basic and diluted earnings per share were$0.45 and$0.57 , respectively. During the nine months endedSeptember 30, 2022 and 2021, basic earnings per share were$1.70 and$1.56 , respectively, and diluted earnings per share were$1.70 and$1.55 , 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. For the three months endedSeptember 30, 2022 and 2021 there were 8.1 million and 2.2 million, respectively, and for the nine months endedSeptember 30, 2022 and 2021, there were 8.0 million and 1.7 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 and restricted stock units, as the assumed 44
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proceeds of the options and restricted stock per unit were above our average share price during the periods and their effect was anti-dilutive.
Earnings per share for both the three and nine months endedSeptember 30, 2022 compared to the corresponding periods in the prior year were impacted by the previously described factors impacting net income and a lower number of shares outstanding. The lower number of shares outstanding was due to stock repurchases exceeding stock issuances under 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. OnAugust 4, 2021 , we entered into an agreement to sell our Business Solutions business and completed the first closing onMarch 1, 2022 . During the third quarter of 2022, we agreed with the Buyer to complete the divestiture in three closings instead of two. The operations of the Business Solutions business to be sold in the second and third closings continue to be included in Revenues and Operating income after the first closing. However, between the first and third closings, we will pay the Buyer a measure of the profits from these operations, adjusted for other charges, and this expense is recognized in Other income/(expense), net in the Condensed Consolidated Statements of Income. During the nine months endedSeptember 30, 2022 , we incurred$10.6 million and$7.7 million of exit costs associated with the suspension of ourRussia andBelarus operations and the Business Solutions divestiture, respectively. These exit costs are primarily related to severance and non-cash impairments of property and equipment, an operating lease right-of-use asset, and other intangible assets. While certain of the expenses are identifiable to our segments, the expenses are not included in the measurement of segment operating income provided to the Chief Operating Decision Maker for purposes of performance assessment and resource allocation. These expenses are therefore excluded from our segment operating income results.
The following table sets forth the components of segment revenues as a
percentage of the consolidated totals for the three and nine months ended
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Consumer-to-Consumer 90 % 86 % 89 % 87 %
Business Solutions 4 % 9 % 5 % 8 %
Other 6 % 5 % 6 % 5 %
100 % 100 % 100 % 100 %
Consumer-to-Consumer Segment
The following table sets forth our Consumer-to-Consumer segment results of
operations for the three and nine months ended
Three Months Ended September 30, Nine Months Ended September 30,
(dollars and transactions in
millions) 2022 2021 % Change 2022 2021 % Change
Revenues $982.4 $1,104.5 (11)% $3,008.3 $3,282.5 (8)%
Operating income $193.7 $268.2 (28)% $626.5 $708.1 (12)%
Operating income margin 20% 24% 21% 22%
Key indicator:
Consumer-to-Consumer
transactions 66.9 76.6 (12)% 204.8 227.6 (10)%
Our Consumer-to-Consumer money transfer service facilitates money transfers sent
from our retail agent locations worldwide and our Digital Money Transfer
services. The segment includes five geographic regions whose functions are
primarily related to generating, managing, and maintaining agent relationships
and localized marketing activities. We include Digital Money Transfer
transactions in our regions, including transactions from our arrangements with
financial institutions and other third parties to enable such entities to offer
money transfer services to their own customers under
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their brands. By means of common processes and systems, these regions, including Digital Money Transfer transactions, create one interconnected global network for consumer transactions, thereby constituting one Consumer-to-Consumer money transfer business and one operating segment. Transaction volume is the primary generator of revenue in our Consumer-to-Consumer segment. A Consumer-to-Consumer transaction constitutes the transfer of funds to a designated recipient utilizing one of our consumer money transfer services. The geographic split for transactions and revenue in the table that follows, including Digital Money Transfer transactions, is determined based upon the region where the money transfer is initiated. Included in each region's transaction and revenue percentages in the tables below are Digital Money Transfer transactions for the three and nine months endedSeptember 30, 2022 and 2021. Where reported separately in the discussion below, Digital Money Transfer, and its subset Branded Digital, consist of 100% of the transactions conducted and funded through those respective channels. The table below sets forth revenue and transaction changes by geographic region compared to the same period in the prior year. 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. Consumer-to-Consumer segment constant currency revenue growth/(decline) is a non-GAAP financial measure, as further discussed in Revenues Overview above. Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022 Constant Revenue Constant Revenue Currency Growth / Currency Decline Foreign Revenue (Decline) Foreign Revenue as Exchange Growth / Transaction as Exchange Growth / Transaction Reported Translation (Decline)(a) Growth / Reported Translation (Decline)(a) Growth / (GAAP) Impact (Non-GAAP) (Decline) (GAAP) Impact (Non-GAAP) (Decline) Consumer-to-Consumer regional growth/(decline):North America (United States & Canada) ("NA") (5)% 0% (5)% (5)% (3)% 0% (3)% (6)%Europe andRussia /CIS ("EU & CIS") (23)% (7)% (16)%
(32)% (20)% (6)% (14)% (23)%
(5)% (2)% (3)% (1)% (2)% (1)% (1)% 0%
Latin America and the Caribbean
("LACA") 0% (4)% 4% 3% 1% (4)% 5% 3%
(11)% (11)% (4)% (7)% (12)%
Total Consumer-to-Consumer
segment: (11)% (3)% (8)% (12)% (8)% (2)% (6)% (10)%
Digital Money Transfer(b) (12)% (3)% (9)% (20)% (4)% (2)% (2)% (13)%
Branded Digital(b) (8)% (3)% (5)% (1)% (2)% (3)% 1% (1)%
(a)
Constant currency revenue growth assumes that revenues denominated in foreign
currencies are translated to the United States dollar, net of the effect of
foreign currency hedges, at rates consistent with those in the corresponding
prior period.
(b)
Digital Money Transfer revenues have been included in the regions above. As noted above, Branded Digital is a subset of Digital Money Transfer and is included in the regions and Digital Money Transfer revenues.
The table below sets forth regional revenues as a percentage of our Consumer-to-Consumer revenue for the three and nine months endedSeptember 30, 2022 and 2021: Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Consumer-to-Consumer revenue as a percentage of segment revenue: NA 40 % 37 % 39 % 37 % EU & CIS 28 % 32 % 29 % 33 % MEASA 16 % 15 % 16 % 15 % LACA 10 % 9 % 10 % 9 % APAC 6 % 7 % 6 % 6 % Digital Money Transfer, which is included in the regional percentages above, represented approximately 24% of our Consumer-to-Consumer revenues for the three months endedSeptember 30, 2022 and 2021 and 25% and 24% for the nine months endedSeptember 30, 2022 and 2021, respectively. 46
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Our consumers transferred$24.1 billion and$27.7 billion in Consumer-to-Consumer principal for the three months endedSeptember 30, 2022 and 2021, of which$23.0 billion and$26.5 billion related to cross-border principal for the same corresponding periods described above, respectively. Our consumers transferred$73.4 billion and$81.3 billion in Consumer-to-Consumer principal for the nine months endedSeptember 30, 2022 and 2021, of which$70.2 billion and$77.6 billion related to cross-border principal for the same corresponding periods described above, respectively. The decrease in principal and cross-border principal transferred during the three and nine months endedSeptember 30, 2022 compared to the corresponding periods in the prior year was primarily attributable to a decline in Consumer-to-Consumer transactions, including as a result of the suspension of our operations inRussia andBelarus , as discussed above, as well as fluctuations in exchange rates betweenthe United States dollar and foreign currencies. Consumer-to-Consumer principal is the amount of consumer funds transferred to the designated recipient. Cross-border principal is the amount of consumer funds transferred to a designated recipient in a country or territory that differs from the country or territory from which the transaction was initiated. Consumer-to-Consumer principal and cross-border principal are metrics used by management to monitor and better understand the growth in our underlying business relative to competitors, as well as changes in our market share of global remittances.
Revenues
Consumer-to-Consumer money transfer revenue and transactions decreased 11% and 12%, respectively, for the three months endedSeptember 30, 2022 compared to the corresponding period in the prior year, and decreased 8% and 10%, respectively, for the nine months endedSeptember 30, 2022 , compared to the corresponding period in the prior year, including due to the suspension of our operations inRussia andBelarus . Fluctuations inthe United States dollar compared to foreign currencies, net of the impact of foreign currency hedges, negatively impacted revenue by 3% and 2% for the three and nine months endedSeptember 30, 2022 , respectively, compared to the corresponding periods in the prior year. In our Consumer-to-Consumer regions, the decrease in NA revenue for the three and nine months endedSeptember 30, 2022 compared to the corresponding periods in the prior year was primarily due to decreases in transactions sent fromthe United States .The EU & CIS region experienced transaction volume and revenue declines inRussia andBelarus ,France ,Germany , and theUnited Kingdom and was also impacted by promotional pricing. Our revenues associated with Digital Money Transfer, including white label partnerships, were negatively impacted by our suspension of operations inRussia andBelarus in the three and nine months endedSeptember 30, 2022 and will be negatively impacted for the year endingDecember 31, 2022 and likely thereafter. These white label transactions had lower revenues per transaction, causing a greater decrease to EU & CIS transactions, as compared to revenues. 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. We believe that revenues could be adversely impacted in connection with promotional pricing we recently implemented for Branded Digital transactions, including those sent fromthe United States .
Operating Income
Consumer-to-Consumer operating income decreased 28% and 12% for the three and nine months endedSeptember 30, 2022 compared to the corresponding periods in the prior year, primarily due to the decreases in revenues, as discussed above, partially offset by decreases in agent commissions, which generally vary with revenues. For the three months endedSeptember 30, 2022 compared to the corresponding period in the prior year, the decrease was also a result of increased marketing costs. In addition, for the nine months endedSeptember 30, 2022 compared to the corresponding prior period, the decrease in operating income was partially offset by reductions in employee-related expenses, the timing of investments in information technology, and decreased chargebacks and other losses. Business Solutions
The following table sets forth our Business Solutions segment results of
operations for the three and nine months ended
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Three Months Ended September 30 ,
Nine Months Ended
%
(dollars in millions) 2022 2021 Change 2022 2021 % Change
Revenues $42.6 $116.8 (63)% $167.4 $312.6 (46)%
Operating income $15.9 $38.4 (59)% $51.7 $61.9 (17)%
Operating income margin 37% 33% 31% 20%
Revenues
Business Solutions revenue decreased 63% and 46% for the three and nine months
ended September 30, 2022 , respectively, compared to the corresponding periods in
the prior year primarily due to the first closing of the sale of our Business
Solutions business, which occurred on March 1, 2022 , as described further above.
Fluctuations in the exchange rates between the United States dollar and foreign
currencies negatively impacted revenue by 6% and 4% for the three and nine
months ended September 30, 2022 , respectively, compared to the corresponding
periods in the prior year.
Operating Income
For the three and nine months ended September 30, 2022 , operating income when
compared to the corresponding periods in the prior year was impacted by the
first closing of the sale of our Business Solutions business, partially offset
by a reduction in depreciation and amortization expenses, including as a result
of classifying our Business Solutions business as held for sale in August 2021 .
In addition, for the nine months ended September 30, 2022 compared to the
corresponding period in the prior year, operating income was impacted by
decreases in employee-related expenses, including incentive compensation.
Effective
Other
Other primarily consists of our cash-based bill payments businesses in
The following table sets forth Other results for the three and nine months endedSeptember 30, 2022 and 2021: Three Months EndedSeptember 30 ,
Nine Months Ended
%
(dollars in millions) 2022 2021 Change 2022 2021 % Change
Revenues $64.6 $65.0 0% $207.9 $190.9 9%
Operating income $21.6 $12.0 82% $73.4 $36.3 (a)
Operating income margin 33% 18% 35% 19%
(a)
Calculation not meaningful.
Revenues
For the three and nine months ended September 30, 2022 compared to the
corresponding periods in the prior year, Other revenues remained consistent and
increased, respectively, primarily due to transaction growth in our cash-based
bill payments services offered at retail locations in Argentina , as well as
growth in our business-to-consumer payments, partially offset by the
strengthening of the United States dollar against the Argentine peso and
investment losses.
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Operating Income
Other operating income increased for the three and nine months endedSeptember 30, 2022 compared to the corresponding periods in the prior year due to the reimbursement of expenses associated with transition services provided after the first closing of the sale of our Business Solutions business and decreased costs associated with strategic initiatives, including for the review of mergers, acquisitions, and divestitures. Additionally, for the nine months endedSeptember 30, 2022 compared to the corresponding period in the prior year, Other operating income increased due to increased revenues, as discussed above.
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 payments for employee and agent incentives, interest payments on our outstanding borrowings and timing of income tax payments, among other items. Many of our annual employee incentive compensation and agent incentive payments are made in the first quarter following the year they were incurred. The majority of our interest payments are due in the second and fourth quarters. The annual payments resulting fromthe United States tax reform legislation enacted in 2017 (the "Tax Act") include amounts related tothe United States taxation of certain previously undistributed earnings of foreign subsidiaries. These payments are typically 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. These factors include, but are not limited to, 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. 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. In connection with our decision to suspend operations inRussia andBelarus , as well as the ongoing nature of the conflict and recent related restrictions imposed on our Russian subsidiary, we have classified approximately$17 million of our cash balance held inRussia as restricted and are continuing to pursue the distribution of this amount to the parent. 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 ofSeptember 30, 2022 , we had no outstanding borrowings on our Revolving Credit Facility and$175.0 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 ourUnited States cash requirements, taking tax consequences and other factors into consideration and also the potential uses of cash internationally to determine the appropriate level of dividend repatriations of our foreign source income.
As ofSeptember 30, 2022 andDecember 31, 2021 , we had Cash and cash equivalents of$1,240.1 million and$1,246.0 million , which includes$64.0 million and$37.7 million related to Business Solutions, respectively. As described in Part I, Item 1, Financial Statements, Note 4, Divestitures and Investment Activities, we collected the entirety of the cash 49
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consideration related to the sale of our Business Solutions business, subject to regulatory approval and other closing conditions. We invested a portion of these proceeds temporarily in reverse repurchase agreements, as discussed in Part 1, Item 1, Financial Statements, Note 5, Fair Value Measurements. We believe that the longer-term use of the Business Solutions proceeds will be consistent with our objective to maintain strong liquidity and a capital structure consistent with investment-grade credit ratings, as further described below. 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 Condensed 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 on the Condensed Consolidated Balance Sheets, were$1,243.5 million and$1,398.9 million as ofSeptember 30, 2022 andDecember 31, 2021 , respectively, and consist primarily of highly-rated state and municipal debt securities, including fixed-rate term notes and variable-rate demand notes. These 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 ofSeptember 30, 2022 , all investments with a single issuer and each individual security represented less than 10% of our investment securities portfolio.
Cash Flows from Operating Activities
Cash provided by operating activities decreased to$522.4 million during the nine months endedSeptember 30, 2022 , from$686.0 million in the corresponding period in the prior year. Excluding the gain on the sale of the Business Solutions business, as the pre-tax proceeds from this divestiture are reflected in Cash provided by investing activities, net income would have decreased during the nine months endedSeptember 30, 2022 , which resulted in the decrease to cash provided by operating activities. Cash provided by operating activities is also impacted by fluctuations in our working capital balances, among other factors.
Financing Resources
OnDecember 18, 2018 , we entered into an amended and restated term loan facility providing for up to$950.0 million in borrowings and extending the final maturity of the facility toJanuary 2024 (the "Term Loan Facility"). In the first quarter of 2021, we repaid$650.0 million of the Term Loan Facility. OnJanuary 4, 2022 , we repaid all remaining borrowings owed under the Term Loan Facility for total consideration of$300.0 million , using proceeds from our commercial paper and cash, including cash generated from operations. We are no longer able to borrow money under this facility. OnMarch 9, 2021 , we issued$600.0 million and$300.0 million of aggregate principal amount of 1.350% and 2.750% unsecured notes dueMarch 15, 2026 ("2026 Notes") andMarch 15, 2031 ("2031 Notes"), respectively. Interest with respect to these notes is payable semi-annually in arrears onMarch 15 andSeptember 15 of each year, beginning onSeptember 15, 2021 . If a change of control triggering event occurs, holders of the 2026 Notes and 2031 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. We may redeem the 2026 Notes and the 2031 Notes, in whole or in part, at any time prior toFebruary 15, 2026 andDecember 15, 2030 , respectively, at the greater of par or a price based on the applicable treasury rate plus 15 and 25 basis points, respectively. We may redeem the 2026 Notes and the 2031 Notes at any time afterFebruary 15, 2026 andDecember 15, 2030 , respectively, at a price equal to par, plus accrued interest. Proceeds from the 2026 Notes and 2031 Notes and cash, including cash generated from operations, were used to repay$650.0 million of the term loan facility in the first quarter of 2021 and$500.0 million of the aggregate principal amount of 3.600% unsecured notes due inMarch 2022 in the second quarter of 2021. 50
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As of
Our Revolving Credit Facility provides for unsecured financing facilities in an aggregate amount of$1.5 billion , including a$250.0 million letter of credit sub-facility. 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 is also payable quarterly at an annual rate of 15 basis points on the total facility, regardless of usage. Both the interest rate margin and facility fee percentage are based on certain of our credit ratings. While we have not drawn on our Revolving Credit Facility since its inception, during the fourth quarter of 2022, we amended our Revolving Credit Facility to allow us to draw loans payable based upon the Secured Overnight Financing Rate, the Euro Interbank Offered Rate, or the Sterling Overnight Index Average. 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 billion is approximately 11%. As ofSeptember 30, 2022 , we had no outstanding borrowings under our Revolving Credit Facility. If the amount available to borrow under the Revolving Credit Facility decreased, or if the Revolving Credit Facility were eliminated, the cost and availability of borrowing under the commercial paper program may be impacted. 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. We had$175.0 million of commercial paper borrowings outstanding as ofSeptember 30, 2022 . Our commercial paper borrowings as ofSeptember 30, 2022 had a weighted-average annual interest rate of approximately 3.4% and a weighted-average term of approximately 3 days. During the nine months endedSeptember 30, 2022 , the average commercial paper balance outstanding was$200.6 million , and the maximum balance outstanding was$725.0 million . Proceeds from our commercial paper borrowings were used for general corporate purposes and working capital needs. 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. 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. For additional information, please refer to Part II, Item 5, Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities in our Annual Report on Form 10K for the year endedDecember 31, 2021 .
Capital Expenditures
The total aggregate amount paid for contract costs, purchases of property and equipment, and purchased and developed software was$147.5 million and$180.2 million for the nine months endedSeptember 30, 2022 and 2021, 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. 51
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Share Repurchases and Dividends
During the nine months endedSeptember 30, 2022 and 2021, 9.6 million and 9.6 million shares were repurchased for$176.8 million and$225.0 million , respectively, excluding commissions, at an average cost of$18.45 and$23.45 , respectively, under the share repurchase authorizations approved by our Board of Directors, including one which expired onDecember 31, 2021 . OnFebruary 10, 2022 , our Board of Directors authorized$1.0 billion of common stock repurchases throughDecember 31, 2024 . As ofSeptember 30, 2022 ,$823.2 million remained available under this share repurchase program. Our Board of Directors declared a quarterly cash dividend of$0.235 per common share in each of the first three quarters of 2022, representing$273.2 million in total dividends. Material Cash Requirements Debt Service Requirements Our 2022 and future debt service requirements will include payments on all outstanding indebtedness, including any borrowings under our commercial paper program. Our next scheduled principal payment on our outstanding notes is in 2023.
2017 United States Federal Tax Liability
The Tax Act imposed a tax on certain of our previously undistributed foreign earnings. This tax charge, combined with our other 2017 United States taxable income and tax attributes, resulted in a 2017 United States federal tax liability of approximately$800 million , of which approximately$478 million remained as ofSeptember 30, 2022 . We have elected to pay this liability in periodic installments through 2025. Under the terms of the law, we are required to pay the remaining installment payments as summarized in the Capital Resources and Liquidity discussion located in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10K for the year endedDecember 31, 2021 . These payments have affected and will continue to adversely affect our cash flows and liquidity and may adversely affect future share repurchases.
Operating Leases
We lease real properties for use as administrative and sales offices, in addition to transportation, office, and other equipment. Refer to Part II, Item 8, Financial Statements and Supplementary Data, Note 13, Leases, in our Annual Report on Form 10-K for the year endedDecember 31, 2021 for details on our leasing arrangements, including future maturities of our operating lease liabilities. 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.
Other Commercial Commitments
We had approximately$330 million in outstanding letters of credit and bank guarantees as ofSeptember 30, 2022 primarily held in connection with safeguarding consumer funds, lease arrangements, and certain agent agreements. We expect to renew many of our letters of credit and bank guarantees prior to expiration. As ofSeptember 30, 2022 , our total amount of unrecognized income tax benefits was$356.1 million , including associated interest and penalties. The timing of any related cash payments for substantially all of these liabilities is inherently uncertain because the ultimate amount and timing of such liabilities are affected by factors which are variable and outside our control. 52
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Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted inthe United States requires management to make estimates and assumptions that affect the amounts and disclosures in the financial statements and accompanying notes. Actual results could differ from those estimates. Our Critical Accounting Policies and Estimates disclosed in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10K for the year endedDecember 31, 2021 , for which there were no material changes, included:
•
Income taxes, including income tax contingencies
•
Derivative financial instruments
•Goodwill • Other intangible assets • Legal contingencies Risk Management We are exposed to market risks arising from changes in market rates and prices, including changes in foreign currency exchange rates and interest rates and credit risk related to our agents and customers. A risk management program is in place to manage these risks.
Foreign Currency Exchange Rates
We provide our services primarily through a network of agent locations in more than 200 countries and territories. We manage foreign exchange risk through the structure of the business and an active risk management process. We currently settle with the significant majority of our agents inUnited States dollars, Mexican pesos, or euros, requiring those agents to obtain local currency to pay recipients, and we generally do not rely on international currency markets to obtain and pay illiquid currencies. However, in certain circumstances, we settle in other currencies. The foreign currency exposure that does exist is limited by the fact that the majority of transactions are paid by the next day after they are initiated, and agent settlements occur within a few days in most instances. To mitigate this risk further, we enter into short duration foreign currency forward contracts, generally with maturities ranging from a few days to one month, to offset foreign exchange rate fluctuations between transaction initiation and settlement. We also have exposure to certain foreign currency denominated cash and other asset and liability positions and may utilize foreign currency forward contracts, typically with maturities of less than one year at inception, to offset foreign exchange rate fluctuations on these positions. In certain consumer money transfer, bill payment, and Business Solutions transactions involving different send and receive currencies, we generate revenue based on the difference between the exchange rate set by us to the consumer or business and the rate available in the wholesale foreign exchange market, helping to provide protection against currency fluctuations. We attempt to promptly buy and sell foreign currencies as necessary to cover our net payables and receivables which are denominated in foreign currencies. We use longer-term foreign currency forward contracts to help mitigate risks associated with changes in foreign currency exchange rates on revenues denominated primarily in the euro, and, to a lesser degree, the Canadian dollar, the Mexican peso, and other currencies. We use contracts with maturities of up to 36 months at inception to mitigate some of the impact that changes in foreign currency exchange rates could have on forecasted revenues, with a targeted weighted-average maturity of approximately one year. We believe the use of longer-term foreign currency forward contracts provides predictability of future cash flows from our international operations. We have additional foreign exchange risk and associated foreign exchange risk management requirements due to the nature of our Business Solutions business. Our Business Solutions business writes derivatives as part of the broader portfolio of foreign currency positions arising from our cross-currency payments operations, which primarily include spot exchanges of currency in addition to forwards and options in certain countries. The majority of these derivative contracts have a duration at inception of less than one year. Business Solutions aggregates its foreign exchange exposures arising 53
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from customer contracts, including the derivative contracts described above, and hedges the resulting net currency risks by entering into offsetting contracts withConvera through the end of the third closing of the Business Solutions divestiture. As ofSeptember 30, 2022 , a hypothetical uniform 10% strengthening or weakening in the value ofthe United States dollar relative to all other currencies in which our net income is generated would have resulted in a decrease/increase to pre-tax annual income of approximately$15 million , based on our forecast of unhedged exposure to foreign currency at that date. There are inherent limitations in this sensitivity analysis, primarily due to the following assumptions: (i) foreign exchange rate movements are linear and instantaneous, (ii) fixed exchange rates between certain currency pairs are retained, (iii) the unhedged exposure is static, and (iv) we would not hedge any additional exposure. As a result, the analysis is unable to reflect the potential effects of more complex market changes that could arise, which may positively or negatively affect income.
Interest Rates
We invest in several types of interest-bearing assets, with a total value as ofSeptember 30, 2022 of approximately$3.0 billion . Approximately$2.0 billion of these assets bear interest at floating rates. Our interest-bearing assets primarily include cash in banks, money market instruments, state and municipal variable-rate securities, and reverse repurchase agreements and are included in our Condensed Consolidated Balance Sheets within Cash and cash equivalents, Settlement assets, and Other assets. To the extent these assets are held in connection with money transfers and other related payment services awaiting redemption, they are classified as Settlement assets. Earnings on these investments will increase and decrease with changes in the underlying short-term interest rates. The remainder of our interest-bearing assets primarily consists of highly-rated state and municipal debt securities, which are fixed-rate term notes. These investments may include investments made from cash received from our money order services, money transfer business, and other related payment services awaiting redemption and are classified within Settlement assets in the Condensed Consolidated Balance Sheets. As interest rates rise, the fair value of these fixed-rate interest-bearing securities will decrease; conversely, a decrease to interest rates would result in an increase to the fair value of the securities. We have classified these investments as available-for-sale within Settlement assets in the Condensed Consolidated Balance Sheets, and accordingly, recorded these instruments at their fair value with the net unrealized gains and losses, net of the applicable deferred income tax effect, being added to or deducted from our Total stockholders' equity in our Condensed Consolidated Balance Sheets. Borrowings under our commercial paper program mature in such a short period that the financing is effectively floating rate. As ofSeptember 30, 2022 , there were$175.0 million in outstanding borrowings under our commercial paper program. We review our overall exposure to floating and fixed rates by evaluating our net asset or liability position and the duration of each individual position. We manage this mix of fixed versus floating exposure in an attempt to minimize risk, reduce costs, and improve returns. Our exposure to interest rates can be modified by changing the mix of our interest-bearing assets as well as adjusting the mix of fixed versus floating rate debt. The latter is accomplished primarily through the use of interest rate swaps and the decision regarding terms of any new debt issuances (i.e., fixed versus floating). From time to time, we use interest rate swaps designated as hedges to vary the percentage of fixed to floating rate debt, subject to market conditions. As ofSeptember 30, 2022 , our weighted-average effective rate on total borrowings was approximately 3.8%. AtSeptember 30, 2022 , a hypothetical 100 basis point increase/decrease in interest rates would result in a decrease/increase to pre-tax income for the next twelve months of approximately$2 million based on borrowings that are sensitive to interest rate fluctuations, net of the impact of hedges. The same 100 basis point increase/decrease in interest rates, if applied to our cash and investment balances onSeptember 30, 2022 that bear interest at floating rates, would result in an offsetting increase/decrease to pre-tax income for the next twelve months of approximately$20 million . There are inherent limitations in the sensitivity analysis presented, primarily due to the assumptions that interest rate changes would be instantaneous and consistent across all geographies in which our interest-bearing assets are held and our liabilities are payable. As a result, the analysis is unable to reflect the potential effects of more complex market changes, including changes in credit risk regarding our investments, which may positively or negatively affect income. In addition, the mix of fixed versus floating rate debt and investments and the level of assets and liabilities will change over time, including the impact from commercial paper borrowings that may be outstanding in future periods. 54
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Credit Risk
To manage our exposures to credit risk with respect to investment securities, money market fund investments, derivatives, and other credit risk exposures resulting from our relationships with banks and financial institutions, we regularly review investment concentrations, trading levels, credit spreads, and credit ratings, and we attempt to diversify our investments among global financial institutions. We are also exposed to credit risk related to receivable balances from agents in the money transfer, walk-in bill payment, and money order settlement process. We perform a credit review before each agent signing and conduct periodic analyses of agents and certain other parties we transact with directly. In addition, we are exposed to losses directly from consumer transactions, particularly through our digital channels, where transactions are originated through means other than cash and are therefore subject to "chargebacks," insufficient funds or other collection impediments, such as fraud, which are anticipated to increase as digital channels become a greater proportion of our money transfer business. We are exposed to credit risk in our Business Solutions business relating to: (i) derivatives written by us, primarily to our customers, and (ii) the extension of trade credit when transactions are paid to recipients prior to our receiving cleared funds from the sending customers. For the derivatives, the duration of these contracts at inception is generally less than one year. The credit risk associated with our derivative contracts increases when foreign currency exchange rates move against our customers, possibly impacting their ability to honor their obligations to deliver currency to us or to maintain appropriate collateral with us. For those receivables where we have extended trade credit, collection ordinarily occurs within a few days. To mitigate the risk associated with potential customer defaults, we perform credit reviews of the customer on an ongoing basis, and, for our derivatives, we may require certain customers to post or increase collateral.
Our losses have been less than 2% of our consolidated revenues in all periods presented.
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