Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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, which are sent from our retail agent locations worldwide or through websites and mobile devices, including our fast-growing money transfer transactions conducted and funded through websites and mobile applications marketed under our brands (“westernunion.com”) and transactions initiated on the internet and mobile applications hosted by our third-party white label or co-branded digital partners (together with westernunion.com, “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 significant majority of our Business Solutions 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. On August 4, 2021, we entered into an agreement to sell our Business Solutions business to Goldfinch Partners LLC and The Baupost Group LLC, as further discussed below.
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. Our other services, in addition to certain corporate costs such as costs related to strategic initiatives, including costs for the review and closing of mergers, acquisitions, and divestitures, are also included in Other. Additional information on our segments is provided in the Segment Discussion below.
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Results of Operations
The following discussion of our consolidated results of operations and segment results refers to the year ended December 31, 2021 compared to the same period in 2020. For discussion of our consolidated results of operations and segment results for the year ended December 31, 2020 compared to the same period in 2019, 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 ended December 31, 2020, filed with the SEC on February 19, 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 Consolidated Statements of Income. All significant intercompany accounts and transactions between our segments have been eliminated. The below information has been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”) unless otherwise noted. All amounts provided in this section are rounded to the nearest tenth of a million, except as otherwise noted. As a result, the percentage changes and margins disclosed herein may not recalculate precisely using the rounded amounts provided.
In March 2020, the World Health Organization declared the outbreak associated with a novel coronavirus a pandemic (“COVID-19”), and many governments implemented policies intended to stop or slow the further spread of the disease. These policies have resulted in lower consumer and commercial activity across many markets in which we operate and the closure of Western Union locations and agent locations in certain areas.As a result, customers have experienced and may continue to experience reduced access to, or desire or ability to use, retail agent locations. However, since March 2020, we have also experienced significant revenue growth from westernunion.com and other digital transactions, as further described below. While the duration and severity of this pandemic and related impacts have varied across time and locations and remain uncertain, our results of operations in future periods may also be negatively impacted by COVID-19.
Our revenues and operating income for the year ended December 31, 2021 were impacted by fluctuations in the United States dollar compared to foreign currencies. Fluctuations in the United States dollar compared to foreign currencies, net of the impact of foreign currency hedges, resulted in an increase to revenues of $18.3 million for the year ended December 31, 2021 relative to the prior year. Fluctuations in the United States dollar compared to foreign currencies positively impacted operating income by $30.5 million for the year ended December 31, 2021 relative to the prior year.
On August 4, 2021, we entered into an agreement to sell our Business Solutions business to Goldfinch Partners LLC and The Baupost Group LLC (collectively, the "Buyer") for cash consideration of $910 million, subject to regulatory and working capital adjustments. The divestiture is expected to result in a gain on the sale and is subject to regulatory approval and other closing conditions. The sale is expected to be completed in two primary closings, with the entirety of the cash consideration due at the first closing. The expected gain on the sale will be recognized at each closing, based on the book values and fair values of the operations sold at each closing. The first closing is expected to be completed during the first quarter of 2022 and to primarily exclude the operations in the European Union and the United Kingdom. The second closing is currently expected by late 2022, pending required regulatory approvals. During the period between the closings, we will pay to the Buyer a measure of profit of the European Union and United Kingdom operations, adjusted for the provision for income taxes, occupancy charges for employees of the Buyer using our facilities, and other items. Business Solutions revenues were $421.8 million and $356.1 million, and direct operating expenses were $317.7 million and $319.5 million for the years ended December 31, 2021 and 2020, respectively.
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The following table sets forth our consolidated results of operations for the years ended December 31, 2021 and 2020:
Year Ended December 31,
(in millions, except per share amounts) 2021 2020 % Change
Expenses:
Selling, general, and administrative 1,051.3 1,041.2 1 %
Other income/(expense):
Gain on sale of noncontrolling interest in a private company 47.9 — (a)
Pension settlement charges (109.8 ) — (a)
Other income/(expense), net (21.7 ) 3.1 (a)
Earnings per share:
Weighted-average shares outstanding:
(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 and the significance of our Consumer-to-Consumer segment to our overall results, constant currency results have been provided in the table below for consolidated revenues and for our Consumer-to-Consumer segment revenues. Constant currency results assume foreign revenues are translated from foreign currencies to the United States dollar, net of the effect of foreign currency hedges, at rates consistent with those in the 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, 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 year ended December 31, 2021 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.
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The following table sets forth our consolidated revenue results for the years ended December 31, 2021 and 2020:
Year Ended December 31,
Foreign currency impact(a) 1 %
Revenue change, constant currency adjusted - (Non-GAAP) 4 %
(a)
Fluctuations in the United States dollar compared to foreign currencies, net of the impact of foreign currency hedges, resulted in an increase to revenues of $18.3 million for the year ended December 31, 2021 when compared to foreign currency rates in the prior year.
For the year ended December 31, 2021, GAAP revenues increased when compared to the prior year, primarily due to continued recovery from the negative impacts of COVID-19 on our prior year results as previously discussed above. For the year ended December 31, 2021, transactions and revenues from our Digital Money Transfer services, including from white label partnerships, continued to grow. We believe that our growth in Digital Money Transfer transactions for the year ended December 31, 2021 was due, in part, to shifts in consumer behavior to send money through digital channels, including as a result of COVID-19. However, this growth rate decelerated throughout the year as a result of the strong growth in Digital Money Transfer transactions we experienced in the prior year. Revenues were also positively impacted by growth in our Business Solutions segment. Fluctuations between the United States dollar and other currencies positively impacted GAAP revenues by 1% for the year ended December 31, 2021 when compared to the prior year.
Operating Expenses Overview
Enhanced Regulatory Compliance
The financial services industry, including money services businesses, continues to be subject to increasingly strict legal and regulatory requirements, and we continue to focus on and regularly review our compliance programs. In connection with these reviews, and in light of growing and rapidly evolving regulatory complexity and heightened attention of, and increased dialogue with, governmental and regulatory authorities related to our compliance activities, we have made, and continue to make, enhancements to our processes and systems designed to detect and prevent money laundering, terrorist financing, and fraud and other illicit activity, and enhancements designed to improve consumer protection. Some of these changes have had, and we believe will continue to have, an adverse effect on our business, financial condition, and results of operations.
Restructuring-Related Expenses
On August 1, 2019, our Board of Directors approved a plan to change our operating model and improve our business processes and cost structure by reorganizing our senior management, including those managers reporting to our chief executive officer, reducing our headcount, and consolidating various facilities. We incurred approximately $150 million of total expenses through December 31, 2020, with approximately $110 million related to severance and employee-related benefits and approximately $40 million related to costs associated with the relocation of various operations to other Company facilities, facility closures, lease terminations, consulting, and other expenses. As of December 31, 2020, all expenses associated with this plan have been incurred. In 2020, the plan generated expense savings of more than $50 million. For 2021, the plan generated expense savings of approximately $100 million.
For the year ended December 31, 2020, we incurred $36.8 million related to this plan. Of this amount, $4.5 million and $32.3 million are included within Cost of services and Selling, general, and administrative, respectively, in the Consolidated Statements of Income. Refer to Part II, Item 8, Financial Statements and Supplementary Data, Note 4, Restructuring-Related Expenses for further discussion.
These expenses are specific to this initiative; however, the types of expenses related to this initiative are similar to expenses that we have previously incurred and can reasonably be expected to incur in the future.
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Cost of Services
Cost of services primarily consists of agent commissions, which represented approximately 60% of total cost of services for the year ended December 31, 2021. Cost of services increased for the year ended December 31, 2021 compared to the prior year primarily due to increases in information technology costs, bank fees associated with digital transactions, and agent commissions in our Consumer-to-Consumer money transfer business, partially offset by a reduction in credit losses.
Selling, General, and Administrative
Selling, general, and administrative expenses increased for the year ended December 31, 2021 compared to the prior year due to increases in employee-related expenses, including incentive compensation and as a result of reduced hiring that we implemented in response to COVID-19 in the prior year, and costs related to strategic initiatives, including for the review and closing of mergers, acquisitions, and divestitures, partially offset by a reduction in restructuring-related expenses and fluctuations between the United States dollar and foreign currencies.
Total Other Expense, Net
Total other expense, net during the year ended December 31, 2021 compared to the prior year was impacted by $109.8 million in pension settlement charges, as further described in Part II, Item 8, Financial Statements and Supplementary Data, Note 12, Employee Benefit Plans, and costs associated with the April 2021 repayment of our 3.6% unsecured notes due in 2022. These impacts were partially offset by a $47.9 million gain recorded from the sale of a substantial majority of the shares we held as a noncontrolling investor in a private company for cash proceeds of $50.9 million and a reduction in interest expense driven by lower average debt balances outstanding and a lower weighted-average interest rate on our outstanding debt.
Income Taxes
Our effective tax rates on pre-tax income were 13.9% and 12.9% for the years ended December 31, 2021 and 2020, respectively. The increase in our effective tax rate for the year ended December 31, 2021 compared to the prior year was primarily due to deferred taxes from changes in certain of our permanent reinvestment assertions relating to our decision to classify our Business Solutions business as held for sale in the current period, partially offset by discrete tax benefits associated with the pension termination and other items.
We have established contingency reserves for a variety of material, known tax exposures. As of December 31, 2021, the total amount of tax contingency reserves was $318.6 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 ended December 31, 2021 and 2020, 106% and 100%, 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.
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Earnings Per Share
During the years ended December 31, 2021 and 2020, basic earnings per share were $1.98 and $1.81, respectively, and diluted earnings per share were $1.97 and $1.79, respectively. Outstanding options to purchase Western 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 of December 31, 2021 and 2020, there were 2.3 million and 1.6 million, respectively, of shares excluded from the diluted earnings per share calculation under the treasury stock method, primarily due to outstanding restricted stock units and options to purchase shares of Western Union stock, as the assumed proceeds of the restricted stock and options per unit were above our weighted-average share price during the periods and their effect was anti-dilutive.
Earnings per share for the year ended December 31, 2021 compared to the prior year was positively impacted by the previously described factors impacting net income and a lower number of shares outstanding. The lower number of shares outstanding for the year ended December 31, 2021 compared to the prior year 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. On August 4, 2021, we entered into an agreement to sell our Business Solutions business to Goldfinch Partners LLC and The Baupost Group LLC, as further described above.
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, on August 1, 2019, our Board of Directors approved an overall plan to change our operating model and improve our business processes and cost structure by reducing our headcount and consolidating various facilities. For the year ended December 31, 2020, we incurred $36.8 million related to this plan. While 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 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 ended December 31, 2021 and 2020:
Year Ended December 31,
Consumer-to-Consumer 87 % 87 %
Business Solutions 8 % 8 %
Other 5 % 5 %
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Consumer-to-Consumer Segment
The following table sets forth our Consumer-to-Consumer segment results of operations for the years ended December 31, 2021 and 2020:
Year Ended December 31,
(dollars and transactions in millions) 2021 2020 % Change
Operating income margin 22 % 22 %
Key indicator:
Consumer-to-Consumer transactions 305.9 290.5 5 %
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 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 years ended December 31, 2021 and 2020. Where reported separately in the discussion below, Digital Money Transfer, and its subset westernunion.com, 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 prior year. Consumer-to-Consumer segment constant currency revenue growth/(decline) is a non-GAAP financial measure, as further discussed in Revenues Overview above.
Constant
Revenue Foreign Currency
Growth Exchange Revenue
as Reported - Translation Growth(a) - Transaction
(GAAP) Impact (Non-GAAP) Growth / (Decline)
Consumer-to-Consumer regional growth/(decline):
North America (United States & Canada) ("NA") 1 % 0 % 1 % (1 )%
Europe and Russia/CIS ("EU & CIS") 3 % 3 % 0 % 13 %
Middle East, Africa, and South Asia ("MEASA") 4 % 0 % 4 % 10 %
Latin America and the Caribbean ("LACA") 22 % (2 )% 24 % 9 %
East Asia and Oceania ("APAC") 6 % 3 % 3 % (7 )%
Total Consumer-to-Consumer growth: 4 % 1 % 3 % 5 %
Digital Money Transfer(b) 22 % 1 % 21 % 32 %
westernunion.com(b) 18 % 1 % 17 % 19 %
(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 prior year.
(b)
Digital Money Transfer revenues have been included in the regions above. As noted above, westernunion.com is a subset of Digital Money Transfer and is included in the regions and Digital Money Transfer revenues.
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The table below sets forth regional revenues as a percentage of our Consumer-to-Consumer revenue for the years ended December 31, 2021 and 2020:
Year Ended December 31,
Consumer-to-Consumer revenue as a percentage of segment revenue:
LACA 9 % 8 %
APAC 7 % 6 %
Digital Money Transfer, which is included in the regional percentages above, represented approximately 24% and 20% of our Consumer-to-Consumer revenues for the years ended December 31, 2021 and 2020, respectively.
Our consumers transferred $109.0 billion and $96.1 billion in Consumer-to-Consumer principal for the years ended December 31, 2021 and 2020, of which $104.1 billion and $90.6 billion, respectively, related to cross-border principal. The increase in principal and cross-border principal transferred during the year ended December 31, 2021 compared to the prior year is primarily attributable to growth in Digital Money Transfer. 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 increased 4% and transactions increased 5% for the year ended December 31, 2021 compared to the prior year, including as a result of the impacts from the worldwide actions related to COVID-19. Revenues increased primarily due to continued recovery from the negative impacts of COVID-19 on our prior year results as previously discussed above. For the year ended December 31, 2021 compared to the prior year, transactions and revenues from our Digital Money Transfer services, including from white label partnerships, continued to grow. We believe that our growth in Digital Money Transfer transactions was due, in part, to shifts in consumer behavior to send money through digital channels, including as a result of COVID-19. However, this growth rate decelerated throughout the year as a result of the strong growth in Digital Money Transfer transactions we experienced in the prior year. The spread between transaction volumes and revenue was primarily attributable to growth in our digital white label partnerships, which have a lower revenue per transaction than Western Union branded transactions. Fluctuations in the United States dollar compared to foreign currencies, net of the impact of foreign currency hedges, positively impacted revenue by 1% for the year ended December 31, 2021 compared to the prior year. Constant currency revenue increased 3% for the year ended December 31, 2021.
In our Consumer-to-Consumer regions, the increase in NA revenue for the year ended December 31, 2021 compared to the prior year was primarily due to cross-border transaction growth, partially offset by declines in transactions sent and received within the United States and in transactions sent from the United States to Cuba, as these money transfer services have been suspended since the fourth quarter of 2020. The EU & CIS region experienced strong revenue growth in Russia, and transaction volumes for both the EU & CIS and MEASA regions continued to benefit from growth in Digital Money Transfer, including white label partnerships. The revenue growth in the LACA region was primarily due to an increase in principal transferred during the year ended December 31, 2021, compared to the prior year. Price increases in APAC were offset by transaction declines for the year ended December 31, 2021, compared to the prior year. Digital Money Transfer revenue, including westernunion.com, increased compared to the prior year due to an increase in digital transaction volumes, partially offset by price reductions.
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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 increased 6% during the year ended December 31, 2021 compared to the prior year primarily due to the increase in revenues, as discussed above, a reduction in credit losses, and fluctuations in the United States dollar compared to foreign currencies, partially offset by increases in information technology costs and employee-related expenses, including incentive compensation and as a result of reduced hiring that we implemented in response to COVID-19 in the prior year period, and increases in agent commissions and bank fees, which generally vary with revenues.
Business Solutions
The following table sets forth our Business Solutions segment results of operations for the years ended December 31, 2021 and 2020:
Year Ended December 31,
Operating income $ 95.5 $ 24.4 (a)
Operating income margin 23 % 7 %
(a)
Calculation not meaningful.
Revenues
Business Solutions revenue increased 18% for the year ended December 31, 2021 compared to the prior year, primarily due to an increase in payment services activity in Europe and North America and increased hedging activity. We believe this increase was due, in part, to the continued recovery from the downturn in economic activity and trade caused by the negative impacts of COVID-19 on our prior year results. Fluctuations in the exchange rates between the United States dollar and foreign currencies positively impacted revenue by 4% for the year ended December 31, 2021 compared to the prior year.
Operating Income
For the year ended December 31, 2021, Business Solutions operating income and operating income margin increased when compared to the prior year due to the increase in revenues, as discussed above, a reduction in depreciation and amortization expenses, including as a result of classifying our Business Solutions business as held for sale in August 2021, and costs incurred in the prior year associated with the termination of a property lease in the United States, partially offset by an increase in employee-related expenses, including as a result of reduced hiring that we implemented in response to COVID-19 in the prior year.
Other
Other primarily consists of our cash-based bill payment businesses in Argentina and the United States, in addition to our money order services.
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The following table sets forth Other results for the years ended December 31, 2021 and 2020:
Year Ended December 31,
Operating income $ 50.0 $ 55.0 (9 )%
Operating income margin 20 % 21 %
Revenues
Other revenue decreased 1% for the year ended December 31, 2021 compared to the prior year due to the strengthening of the United States dollar against the Argentine peso, partially offset by an increase in local currency revenue per transaction, primarily due to inflation, and an increase in transaction volumes in our cash-based bill payment services offered at retail locations.
Operating Income
Other operating income decreased for the year ended December 31, 2021 compared to the prior year primarily due to an increase in costs associated with strategic initiatives, including for the review and closing of mergers, acquisitions, and divestitures.
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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, which results in a decrease in the amount of cash provided by operating activities in those quarters and a corresponding increase to the first and third quarters. The annual payments resulting from the United States tax reform legislation enacted in 2017 (the “Tax Act”) include amounts related to the 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 and including as a result of COVID-19 related impacts, 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. See also Part II, Item 8, Financial Statements and Supplementary Data, Note 1, Business and Basis of Presentation.
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 in January 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 of December 31, 2021, we had no outstanding borrowings on our Revolving Credit Facility and $275.0 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 our United 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.
Cash and Investment Securities
As of December 31, 2021 and 2020, we had Cash and cash equivalents of $1,246.0 million, which includes $37.7 million related to Business Solutions, and $1,428.2 million, respectively. As described in Part II, Item 8, Financial Statements and Supplementary Data, Note 5, Divestitures, Investment Activities, and Goodwill, we have agreed to sell our Business Solutions business. We expect that our use of the net proceeds on the sale, after taxes on the gain from the transaction, 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 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.
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Investment securities, classified within Settlement assets on the Consolidated Balance Sheets, were $1,398.9 million and $1,990.6 million as of December 31, 2021 and 2020, 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 in the 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 of December 31, 2021, 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 ended December 31, 2021 and 2020, cash provided by operating activities was $1,045.3 million and $877.5 million, respectively. Cash provided by operating activities can be impacted by changes to our consolidated net income, in addition to fluctuations in our working capital balances, among other factors.
Financing Resources
As of December 31, 2021, we had the following outstanding borrowings (in millions):
Commercial paper $ 275.0
Notes:
Term loan facility borrowing (effective rate of 1.4%) 300.0
Total borrowings at par value 3,025.0
Debt issuance costs and unamortized discount, net (16.6 )
Total borrowings at carrying value(b) $ 3,008.4
(a)
The difference between the stated interest rate and the effective interest rate is not significant.
(b)
As of December 31, 2021, our weighted-average effective rate on total borrowings was approximately 3.3%.
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, 2021 and 2020, we had $275.0 million and $80.0 million in commercial paper borrowings outstanding, respectively. Our commercial paper borrowings as of December 31, 2021 had a weighted-average annual interest rate of approximately 0.2% and a weighted-average term of approximately 5 days. During the years ended December 31, 2021 and 2020, the average commercial paper balance outstanding was $140.0 million and $181.6 million, respectively, and the maximum balance outstanding was $575.0 million and $690.0 million, respectively. Proceeds from our commercial paper borrowings were used for general corporate purposes and working capital needs.
Revolving Credit Facility
On December 18, 2018, we entered into a credit agreement 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.
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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.
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 of December 31, 2021 and 2020, 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.
Term Loan Facility
On December 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. In October 2016, we borrowed $575.0 million under our prior term loan facility. In December 2018, we borrowed the remaining amount available under the Term Loan Facility. In the first quarter of 2021, proceeds from the 2026 Notes and the 2031 Notes (as defined below), and cash, including cash generated from operations, were used to repay $650.0 million of the Term Loan Facility. On January 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.
Notes
On March 9, 2021, we issued $600.0 million and $300.0 million of aggregate principal amount of 1.350% and 2.750% unsecured notes due March 15, 2026 (“2026 Notes”) and March 15, 2031 (“2031 Notes”), respectively. We used the net proceeds from the sale of our 2026 Notes and 2031 Notes to pay down our 2022 Notes (as defined below) and a portion of our Term Loan Facility. Interest with respect to these notes is payable semi-annually in arrears on March 15 and September 15 of each year, beginning on September 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 to February 15, 2026 and December 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 after February 15, 2026 and December 15, 2030, respectively, at a price equal to par, plus accrued interest.
On November 25, 2019, we issued $500.0 million of aggregate principal amount of unsecured notes due January 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 on January 10 and July 10 of each year, beginning on July 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 to December 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 after December 10, 2024 at a price equal to par, plus accrued interest.
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On June 11, 2018, we issued $300.0 million of aggregate principal amount of unsecured notes due June 9, 2023 (“2023 Notes”). Interest with respect to the 2023 Notes is payable semi-annually in arrears on June 9 and December 9 of each year, beginning on December 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 to May 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 after May 9, 2023 at a price equal to par, plus accrued interest.
On August 22, 2017, we issued $250.0 million of aggregate principal amount of unsecured floating rate notes due May 22, 2019 (“Floating Rate Notes”). The Floating Rate Notes were repaid in May 2019 using proceeds from the Speedpay divestiture, commercial paper, and cash, including cash generated from operations.
On March 15, 2017, we issued $400.0 million of aggregate principal amount of unsecured notes due March 15, 2022. On August 22, 2017, we issued an additional $100.0 million of aggregate principal amount of unsecured notes due March 15, 2022, for an aggregate principal total of $500.0 million of 3.600% unsecured notes (“2022 Notes”). The 2022 Notes were repaid in April 2021 using proceeds from the 2026 Notes and the 2031 Notes.
On November 22, 2013, we issued $250.0 million of aggregate principal amount of unsecured notes due May 22, 2019 (“2019 Notes”). The 2019 Notes were repaid in May 2019 using proceeds from the Speedpay divestiture, commercial paper, and cash, including cash generated from operations.
On June 21, 2010, we issued $250.0 million of aggregate principal amount of unsecured notes due June 21, 2040 (“2040 Notes”). Interest with respect to the 2040 Notes is payable semi-annually on June 21 and December 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.
On March 30, 2010, we exchanged $303.7 million of aggregate principal amount of unsecured notes due November 17, 2011 for unsecured notes due April 1, 2020 (“2020 Notes”). Interest with respect to the 2020 Notes was payable semi-annually on April 1 and October 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. On November 18, 2019, we announced a cash tender offer on our outstanding 2020 Notes. On November 25, 2019, we purchased the principal amount of $56.1 million, plus accrued interest, pursuant to the tender offer. On December 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.
On November 17, 2006, we issued $500.0 million of aggregate principal amount of unsecured notes due November 17, 2036 (“2036 Notes”). Interest with respect to the 2036 Notes is payable semi-annually on May 17 and November 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 contains interest rate margins which are determined based on certain of our credit ratings and also contains a facility fee that is based on our credit ratings. In addition, the interest rates payable on our 2023 Notes, 2025 Notes, 2026 Notes, and 2031 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 contains 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 requires us to maintain a consolidated adjusted Earnings before Interest, Taxes, Depreciation, and Amortization ("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 with United 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 13:1 for the year ended December 31, 2021.
For the year ended December 31, 2021, we were in compliance with our debt covenants. A violation of our debt covenants could impair our ability to borrow and outstanding amounts borrowed could become due, thereby restricting our ability to use our excess cash for other purposes.
Certain of our notes (including the 2023 Notes, 2025 Notes, 2026 Notes, 2031 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.
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 of Equity Securities.
Investment in Saudi Digital Payments Company
We entered into an agreement in November 2020, which was subsequently amended, to acquire an ownership interest in stc Bank (formerly Saudi Digital Payments Company), a subsidiary of Saudi Telecom Company and one of our Consumer-to-Consumer digital white label partners. Under the terms of the amended agreement, we agreed to invest $200.0 million for a 15% ownership in stc Bank, and this transaction closed in October 2021.
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Capital Expenditures
The total aggregate amount paid for contract costs, purchases of property and equipment, and purchased and developed software was $214.6 million and $156.8 million in 2021 and 2020, 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 and purchased and developed software.
Share Repurchases and Dividends
During the years ended December 31, 2021 and 2020, 19.5 million and 8.5 million shares, respectively, have been repurchased for $400.0 million and $217.4 million, respectively, excluding commissions, at an average cost of $20.56 and $25.45, respectively, under the share repurchase authorization approved by our Board of Directors which expired on December 31, 2021. On February 10, 2022, our Board of Directors authorized $1.0 billion of common stock repurchases through December 31, 2024.
Our Board of Directors declared quarterly cash dividends of $0.235 per common share in all four quarters of 2021, representing $380.5 million in total dividends. Our Board of Directors declared quarterly cash dividends of $0.225 per common share in all four quarters of 2020, representing $369.9 million in total dividends. These amounts were paid to shareholders of record in the respective quarter the dividend was declared.
On February 10, 2022, the Board of Directors declared a quarterly cash dividend of $0.235 per common share payable on March 31, 2022.
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. Refer to Part II, Item 8, Financial Statements and Supplementary Data, Note 16, Borrowings for details on our outstanding borrowings, including future principal payments on our notes, and commercial paper. As of December 31, 2021, the total projected interest payments on our borrowings were $935.6 million, of which $89.9 million is expected to be paid in the next 12 months. We have estimated our future interest payments based on the assumption that no debt issuances or renewals will occur upon the maturity dates of our notes. 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 December 31, 2021 for our current and future interest rates, respectively.
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 $541 million remained as of December 31, 2021. We have elected to pay this liability in periodic installments through 2025. Under the terms of the law, we owe 8% of the original liability in 2022, with 15%, 20%, and 25% of the tax owed in 2023, 2024, and 2025, respectively. During the years ended December 31, 2021 and 2020, we made installment payments of $63.4 million and $64.0 million, respectively. 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 for details on our leasing arrangements, including future maturities of our operating lease liabilities.
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Foreign Currency Derivative Contracts
We use derivatives to minimize our exposures related to changes in foreign currency exchange rates, which fluctuate based on market conditions. Refer to Part II, Item 8, Financial Statements and Supplementary Data, Note 15, Derivatives. The substantial majority of these derivative contracts relate to our Business Solutions segment, which facilitates cross-currency payments by writing derivatives to customers, and a majority of these derivative contracts have a duration at inception of less than one year.
Purchase Obligations
A purchase obligation is an agreement to purchase goods or services that is enforceable, legally binding, and specifies all significant terms. As of December 31, 2021, we had approximately $310 million of outstanding purchase obligations, of which approximately $160 million is expected to be paid in the next 12 months. 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 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.
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 had a frozen defined benefit pension plan (the “Plan”), for which the funded status was measured as the difference between the fair value of the plan assets and the projected benefit obligation. We were not required to and did not make material contributions to the Plan in either 2021 or 2020.
On July 22, 2021, our Board of Directors approved a plan to terminate and settle the Plan. Upon settlement in the fourth quarter of 2021, we transferred Plan assets to an insurance company that will provide for and pay the remaining benefits to participants. We incurred approximately $109.8 million of charges associated with this settlement. The pre-tax balance in Accumulated other comprehensive loss associated with the Plan, along with costs related to the settlement, were recorded as a component of Total other income/(expense), net, with the related income tax effects recorded in Provision for income taxes, in the Consolidated Statements of Income. As of December 31, 2021, we had $18.4 million of restricted cash and $11.9 million of investments remaining from the settlement, which are included in Other assets in the Consolidated Balance Sheets. These assets will be used to fund contributions to our defined contribution plan in future periods.
Other Commercial Commitments
We had approximately $450 million in outstanding letters of credit and bank guarantees as of December 31, 2021 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, while certain letters of credit will be terminated, released, or transferred as a result of the sale of our Business Solutions business.
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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 in the 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 during the period in the facts and circumstances (i.e., new information) surrounding a tax issue 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 of December 31, 2021 were $318.6 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. Furthermore, the timing of related cash payments for these tax liabilities is inherently uncertain and is affected by variable factors outside our control.
Derivative Financial Instruments
We have used derivatives to: (i) minimize our exposures related to changes in foreign currency exchange rates and, periodically, 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.
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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.
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Fair value hedges - Fair value hedges consist of hedges of fixed-rate debt, through interest rate swaps. Changes in the fair value of these hedges, along with offsetting changes in the 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 and interest rate 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 of December 31, 2021, the cumulative pre-tax unrealized gain currently classified within AOCL that would be reflected in earnings if these hedges were disqualified from hedge accounting was $24.3 million.
Goodwill
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 our 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 unit 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.
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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 of December 31, 2021 was $2,566.6 million, which represented approximately 29% of our consolidated assets. As of December 31, 2021, 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 ended December 31, 2021 and 2020, we did not record any goodwill impairments. For the reporting units that comprise Consumer-to-Consumer and Other, the fair values of the businesses significantly exceed their carrying amounts. On August 4, 2021, we entered into an agreement to sell our Business Solutions business to Goldfinch Partners LLC and The Baupost Group LLC for $910 million in cash,and we expect to recognize a gain upon completion of the sale in 2022. As of December 31, 2021, the goodwill related to the Business Solutions reporting unit is included in Assets held for sale on the Consolidated Balance Sheets.
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 evaluate the recoverability of the asset and could result in an impairment charge. The net carrying value of our other intangible assets as of December 31, 2021 was $467.5 million and includes $50.4 million of other intangibles related to the Business Solutions business, which is classified as held for sale. During the years ended December 31, 2021 and 2020, we recorded immaterial impairments related to other intangible assets.
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.
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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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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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 substantial majority of our agents in United 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 from a few days up 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 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. The significant majority of our Business Solutions business relates to exchanges of currency at spot rates, which enable customers to make cross-currency payments. In certain countries, this business also writes foreign currency forward and option contracts for our customers to facilitate future payments. The majority of these derivative contracts have a duration at inception of less than one year. Business Solutions aggregates its foreign exchange exposures arising from customer contracts, including the derivative contracts described above, and hedges the resulting net currency risks by entering into offsetting contracts with established financial institution counterparties.
As of December 31, 2021, a hypothetical uniform 10% strengthening or weakening in the value of the 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 $50 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.
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Interest Rates
We invest in several types of interest-bearing assets, with a total value as of December 31, 2021 of approximately $2.9 billion. Approximately $1.6 billion of these assets bear interest at floating rates. These assets primarily include cash in banks, money market instruments, and state and municipal variable-rate securities and are included in our Consolidated Balance Sheets within Cash and cash equivalents and Settlement 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 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 values of the securities. We have classified these investments as available-for-sale within Settlement assets in the 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 Consolidated Balance Sheets.
As of December 31, 2021, we had a total of $300.0 million of borrowings under our term loan that were subject to floating interest rates. The interest on these borrowings was calculated using a selected LIBOR rate plus an interest rate margin of 125 basis points. On January 4, 2022, we repaid all remaining borrowings owed under the Term Loan Facility. Borrowings under our commercial paper program mature in such a short period that the financing is also effectively floating rate. As of December 31, 2021, there were $275.0 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 of December 31, 2021, our weighted-average effective rate on total borrowings was approximately 3.3%. For further detail on our variable rate borrowings, see risk factor “We have substantial debt and other obligations that could restrict our operations” in Part I, Item 1A, Risk Factors.
A hypothetical 100 basis point increase/decrease in interest rates would result in a decrease/increase to annual pre-tax income of approximately $6 million based on borrowings that are sensitive to interest rate fluctuations, net of the impact of hedges, on December 31, 2021. The same 100 basis point increase/decrease in interest rates, if applied to our cash and investment balances on December 31, 2021 that bear interest at floating rates, would result in an offsetting increase/decrease to annual pre-tax income of approximately $16 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.
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.
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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 were less than 2% of our consolidated revenues in all periods presented.
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ITEM 8. Financial Statements and Supplementary Data
THE WESTERN UNION COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Management’s Report on Internal Control Over Financial Reporting 74
Reports of Independent Registered Public Accounting Firm (PCAOB ID: 42) 75
Consolidated Balance Sheets as of December 31, 2021 and 2020 80
Notes to Consolidated Financial Statements 84
All other financial statement schedules for The Western Union Company have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the respective consolidated financial statements or notes thereto.
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Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a‐15(f) under the Securities Exchange Act of 1934. The Western Union Company’s (“Western Union” or the “Company”) internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Western Union’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and Board of Directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of Western Union’s internal control over financial reporting as of December 31, 2021, utilizing the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013 framework). Based on the results of its evaluation, the Company’s management concluded that as of December 31, 2021, the Company’s internal control over financial reporting is effective. Western Union’s internal control over financial reporting as of December 31, 2021 has been audited by Ernst & Young LLP, Western Union’s independent registered public accounting firm, as stated in their attestation report included in this Annual Report on Form 10‐K.
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of The Western Union Company
Opinion on Internal Control Over Financial Reporting
We have audited The Western Union Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, The Western Union Company (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, and the related consolidated statements of income, comprehensive income, cash flows and stockholders' equity/(deficit) for each of the three years in the period ended December 31, 2021, and the related notes and financial statement schedule listed in the Index at Item 15(a) and our report dated February 24, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Denver, Colorado
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of The Western Union Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The Western Union Company (the Company) as of December 31, 2021 and 2020, and the related consolidated statements of income, comprehensive income, cash flows and stockholders’ equity/(deficit) for each of the three years in the period ended December 31, 2021 and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 24, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
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Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Income taxes - Uncertain tax positions
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2006.
Denver, Colorado
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THE WESTERN UNION COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share amounts)
Year Ended December 31,
Expenses:
Other income/(expense):
Gain on divestitures of businesses (Note 5) — — 524.6
Gain on sale of noncontrolling interest in a private company (Note 5) 47.9 — —
Pension settlement charges (Note 12) (109.8 ) — —
Other income/(expense), net (21.7 ) 3.1 8.5
Earnings per share:
Weighted-average shares outstanding:
(a)
As further described in Note 7, total expenses include amounts incurred with related parties of $54.7 million, $54.6 million, and $57.1 million for the years ended December 31, 2021, 2020, and 2019, respectively.
See Notes to Consolidated Financial Statements.
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THE WESTERN UNION COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
Year Ended December 31,
Other comprehensive income, net of reclassifications and tax (Note 14):
Unrealized gains/(losses) on investment securities (27.9 ) 33.6 25.8
Unrealized gains/(losses) on hedging activities 49.2 (26.9 ) (11.0 )
Defined benefit pension plan adjustments (Note 12) 86.1 42.8 7.2
See Notes to Consolidated Financial Statements.
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THE WESTERN UNION COMPANY
CONSOLIDATED BALANCE SHEETS
(in millions, except per share amounts)
December 31,
Assets
Assets held for sale (Note 5) 1,452.9 —
Liabilities and stockholders' equity
Liabilities:
Accounts payable and accrued liabilities $ 450.2 $ 500.9
Liabilities associated with assets held for sale (Note 5) 821.9 —
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock, $1.00 par value; 10 shares authorized; no shares issued — —
Accumulated other comprehensive loss (52.1 ) (159.5 )
Total liabilities and stockholders' equity $ 8,823.5 $ 9,496.3
See Notes to Consolidated Financial Statements.
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THE WESTERN UNION COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Year Ended December 31,
Cash flows from operating activities
Pension settlement charges (Note 12) 109.8 — —
Deferred income tax provision/(benefit) (Note 11) (2.6 ) 13.9 (24.5 )
Accounts payable and accrued liabilities (24.8 ) (96.6 ) 94.3
Cash flows from investing activities
Payments for capitalized contract costs (107.5 ) (69.1 ) (46.6 )
Payments for internal use software (69.4 ) (51.2 ) (33.0 )
Purchases of property and equipment (37.7 ) (36.5 ) (48.1 )
Purchase of noncontrolling interest in stc Bank (Note 5) (200.0 ) — —
Other investing activities 3.7 (6.0 ) 48.3
Net cash (used in)/provided by investing activities 192.0 (373.5 ) 167.0
Cash flows from financing activities
Cash dividends and dividend equivalents paid (381.6 ) (370.3 ) (340.8 )
Net proceeds from/(repayments of) commercial paper 195.0 (165.0 ) 120.0
Net proceeds from issuance of borrowings 891.7 — 495.9
Principal payments on borrowings (1,150.0 ) — (824.9 )
Make-whole premium on early extinguishment of debt (Note 16) (14.3 ) — —
Proceeds from exercise of options 11.6 2.2 36.7
Other financing activities 0.2 (0.7 ) (4.1 )
See Notes to Consolidated Financial Statements.
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THE WESTERN UNION COMPANY
SUPPLEMENTAL CASH FLOW INFORMATION
(in millions)
Year Ended December 31,
Reconciliation of balance sheet cash and cash equivalents to cash flows:
Restricted cash in Other assets 29.4 19.2 6.3
Cash and cash equivalents included in Assets held for sale (Note 5) 37.7 — —
Supplemental cash flow information:
Cash paid for lease liabilities $ 46.5 $ 65.9 $ 53.8
Internal use software capitalized but not yet paid $ 26.4 $ 0.2 $ 1.6
See Notes to Consolidated Financial Statements.
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THE WESTERN UNION COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY/(DEFICIT)
(in millions)
Accumulated
Other Total
Common Stock Capital Accumulated Comprehensive Stockholders'
Shares Amount Surplus Deficit Loss Equity/(Deficit)
Stock-based compensation — — 48.9 — — 48.9
Repurchase and retirement of common shares (27.6 ) (0.2 ) — (552.8 ) — (553.0 )
Shares issued under stock-based compensation plans 4.4 — 36.7 — — 36.7
Other comprehensive income (Note 14) — — — — 22.0 22.0
Adoption of new accounting pronouncement (Note 2) — — — (0.6 ) — (0.6 )
Stock-based compensation — — 41.7 — — 41.7
Repurchase and retirement of common shares (9.4 ) (0.1 ) — (237.7 ) — (237.8 )
Shares issued under stock-based compensation plans 2.6 — 2.2 — — 2.2
Other comprehensive income (Note 14) — — — — 49.5 49.5
Stock-based compensation — — 44.3 — — 44.3
Repurchase and retirement of common shares (20.1 ) (0.2 ) — (415.1 ) — (415.3 )
Shares issued under stock-based compensation plans 2.7 — 11.6 — — 11.6
Other comprehensive income (Note 14) — — — — 107.4 107.4
See Notes to Consolidated Financial Statements.
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THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business and Basis of Presentation
Business
The Western Union Company (“Western Union” or the “Company”) is a leader in global money movement and payment services, providing people and businesses with fast, reliable, and convenient ways to send money and make payments around the world. The Western Union® brand is globally recognized. The Company’s services are available through a network of agent locations in more than 200 countries and territories and also through money transfer transactions conducted and funded through websites and mobile applications marketed under the Company’s brands (“westernunion.com”) and transactions initiated on internet and mobile applications hosted by the Company’s third-party white label or co-branded digital partners (together with westernunion.com, “Digital Money Transfer”). Each location in the Company’s agent network is capable of providing one or more of the Company’s services.
The Western Union business consists of the following segments:
•
Consumer-to-Consumer - The Consumer-to-Consumer operating segment facilitates money transfers, which are sent from retail agent locations worldwide or through websites and mobile devices, including Digital Money Transfer services. The Company’s 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 - The 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 significant majority of the Business Solutions business relates to exchanges of currency at spot rates, which enable customers to make cross-currency payments. In addition, in certain countries, the Company writes foreign currency forward and option contracts for customers to facilitate future payments. On August 4, 2021, the Company entered into an agreement to sell its Business Solutions business to Goldfinch Partners LLC and The Baupost Group LLC. See Note 5 for further 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 the Company’s bill payment services which facilitate payments from consumers to businesses and other organizations and the Company’s money order services. In May 2019, the Company sold a substantial majority of its United States based electronic bill payment services, as discussed in Note 5. The Company’s 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. See Note 18 for further information regarding the Company’s segments.
There are legal or regulatory limitations on transferring certain assets of the Company outside of the countries where these assets are located. However, there are generally no limitations on the use of these assets within those countries. Additionally, the Company must meet minimum capital requirements in some countries in order to maintain operating licenses. As of December 31, 2021, the Company's restricted net assets associated with these asset limitations and minimum capital requirements totaled approximately $460 million.
Various aspects of the Company’s services and businesses are subject to United States federal, state, and local regulation, as well as regulation by foreign jurisdictions, including certain banking and other financial services regulations.
Basis of Presentation
The financial statements in this Annual Report on Form 10‐K are presented on a consolidated basis and include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated.
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THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Consistent with industry practice, the accompanying Consolidated Balance Sheets are unclassified due to the short-term nature of the Company’s settlement obligations contrasted with the Company’s ability to invest cash awaiting settlement in long-term investment securities.
Cash Flow Classification Revision
Beginning in the fourth quarter of 2021, the Company revised its presentation to include changes in settlement cash associated with settlement obligations as a financing activity and changes in settlement cash from purchases, proceeds, and maturities of settlement investments as an investing activity within its Consolidated Statements of Cash Flows. Previously, the changes in settlement assets and settlement obligations were presented on a net basis within operating activities in the Company’s Consolidated Statements of Cash Flows.
Prior year amounts have been revised to conform to this presentation. These changes in presentation have been concluded to be immaterial, having no impact on the Company’s previously reported net income, financial position, or cash flows from operating activities, as changes in the Company’s settlement assets exactly offset changes in its settlement obligations. However, the revised presentation shows all changes associated with settlement cash in the Consolidated Statements of Cash Flows instead of in the Notes to the Consolidated Financial Statements.
The following tables present the effects of the changes in presentation of these cash flows, compared to the previously reported Consolidated Statements of Cash Flows (in millions):
As Previously
Reported(a) Revisions As Revised
Net cash provided by/(used in):
(a)
As reported in the Company's Form 10-K filed with the SEC on February 19, 2021.
(b)
The financial statement lines included in Investing activities are Purchases of settlement investments, Proceeds from the sale of settlement investments, and Maturities of settlement investments.
(c)
The financial statement line included in Financing activities is Net change in settlement obligations.
As Previously
Reported(a) Revisions As Revised
Net cash provided by/(used in):
(a)
As reported in the Company's Form 10-K filed with the SEC on February 20, 2020.
(b)
The financial statement lines included in Investing activities are Purchases of settlement investments, Proceeds from the sale of settlement investments, and Maturities of settlement investments.
(c)
The financial statement line included in Financing activities is Net change in settlement obligations.
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THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.
Principles of Consolidation
The Company consolidates financial results when it has a controlling financial interest in a subsidiary via voting rights or when it has both the power to direct the activities of an entity that most significantly impact the entity’s economic performance and the ability to absorb losses or the right to receive benefits of the entity that could potentially be significant to the entity. The Company utilizes the equity method of accounting when it is able to exercise significant influence over an entity’s operations, which generally occurs when the Company has an ownership interest between 20% and 50%.
Earnings Per Share
The calculation of basic earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Outstanding options to purchase Western 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, using the treasury stock method. The treasury stock method assumes proceeds from the exercise price of stock options and the unamortized compensation expense of options and restricted stock are available to acquire shares at an average market price throughout the period, and therefore, reduce the dilutive effect.
Shares excluded from the diluted earnings per share calculation under the treasury stock method, primarily due to outstanding restricted stock units and options to purchase shares of Western Union stock, as the assumed proceeds of the restricted stock and options per unit were above the Company’s average share price during the periods and their effect was anti-dilutive, were 2.3 million, 1.6 million, and 1.9 million, respectively, of shares for the years ended December 31, 2021, 2020, and 2019.
The following table provides the calculation of diluted weighted-average shares outstanding (in millions):
Year Ended December 31,
Common stock equivalents 2.1 2.9 3.3
Diluted weighted-average shares outstanding 408.9 415.2 430.9
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THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair Value Measurements
The Company determines the fair values of its assets and liabilities that are recognized or disclosed at fair value in accordance with the hierarchy described below. The fair values of the assets and liabilities held in the Company’s defined benefit plan trust (“Trust”) have been recognized or disclosed utilizing the same hierarchy. The following three levels of inputs may be used to measure fair value:
•
Level 1 - Quoted prices in active markets for identical assets or liabilities.
•
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. For most of these assets, the Company utilizes pricing services that use multiple prices as inputs to determine daily market values.
•
Level 3 -Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include items where the determination of fair value requires significant management judgment or estimation. The Company holds assets classified as Level 3 that are recognized and disclosed at fair value on a non-recurring basis related to the Company’s business combinations, where the values of the intangible assets and goodwill acquired in a purchase are derived utilizing one of the three recognized approaches: the market approach, the income approach, or the cost approach.
Carrying amounts for many of the Company’s financial instruments, including cash and cash equivalents, settlement cash and cash equivalents, and settlement receivables and settlement obligations approximate fair value due to their short maturities. Available-for-sale investment securities, as further discussed in Notes 8 and 9, and derivative financial instruments, as further discussed in Notes 9 and 15, are carried at fair value. Fixed-rate notes are carried at their original issuance values and adjusted over time to amortize or accrete that value to par, except for portions of notes that were hedged by interest rate swap agreements in prior years, as disclosed in Note 15. The fair values of fixed-rate notes are disclosed in Note 9 and are based on market quotations.
The fair values of non-financial assets and liabilities related to the Company’s business combinations, as applicable, will be disclosed in Note 5. The fair value of the assets in the Trust, which held the assets for the Company’s defined benefit pension plan, is disclosed in Note 12.
Business Combinations
The Company accounts for all business combinations where control over another entity is obtained using the acquisition method of accounting, which requires that most assets (both tangible and intangible), liabilities (including contingent consideration), and remaining noncontrolling interests be recognized at fair value at the date of acquisition. The excess of the purchase price over the fair value of assets less liabilities and noncontrolling interests is recognized as goodwill. Certain adjustments to the assessed fair values of the assets, liabilities, or noncontrolling interests made subsequent to the acquisition date, but within the measurement period, which is one year or less, are recorded as adjustments to goodwill. Any adjustments subsequent to the measurement period are recorded within Net income. Any cost or equity method interest that the Company holds in the acquired company prior to the acquisition is remeasured to fair value at acquisition with a resulting gain or loss recognized within Other income/(expense), net for the difference between fair value and existing book value. Results of operations of the acquired company are included in the Company’s results from the date of the acquisition forward and include amortization expense arising from acquired intangible assets. The Company expenses all costs as incurred related to or involved with an acquisition in Selling, general, and administrative expenses.
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THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash and Cash Equivalents
Highly liquid investments (other than those included in settlement assets) with maturities of three months or less at the date of purchase (that are readily convertible to cash) are considered cash equivalents and are stated at cost, which approximates fair value.
The Company maintains cash and cash equivalent balances, including a portion in money market funds, with a group of globally diversified banks and financial institutions. The Company limits the concentration of its cash and cash equivalents with any one institution and regularly reviews investment concentrations and credit worthiness of these institutions.
Allowance for Credit Losses
For the Company’s accounting policies with respect to the allowance for credit losses, refer to Note 8.
Settlement Assets and Obligations
Settlement assets represent funds received or to be received from agents and others for unsettled money transfers, money orders, and consumer payments. The Company records corresponding settlement obligations relating to amounts payable under money transfers, money orders, and consumer payment service arrangements. Settlement assets and obligations also include amounts receivable from, and payable to, customers for the value of their cross-currency payment transactions related to the Business Solutions segment.
Settlement assets consist of cash and cash equivalents, receivables from agents, Business Solutions customers, and others,and investment securities. Cash received by Western Union agents generally becomes available to the Company within one week after initial receipt by the agent. Cash equivalents consist of short-term time deposits, commercial paper, and other highly liquid investments. Receivables from agents represent funds collected by such agents, but in transit to the Company. Western Union has a large and diverse agent base, thereby reducing the credit risk of the Company from any one agent. The Company performs ongoing credit evaluations of its agents’ financial condition and credit worthiness.
Receivables from Business Solutions customers arise from cross-currency payment transactions in the Business Solutions segment. Receivables occur when funds have been paid out to a beneficiary but not yet received from the customer. Collection of these receivables ordinarily occurs within a few days. To mitigate risk associated with potential Business Solutions customer defaults, the Company performs credit reviews on an ongoing basis.
Settlement obligations consist of money transfer, money order and payment service payables, and payables to agents. Money transfer payables represent amounts to be paid to transferees when they request their funds. Most agents typically settle with transferees first and then obtain reimbursement from the Company. Money order payables represent amounts not yet presented for payment. Payment service payables represent amounts to be paid to utility companies, auto finance companies, mortgage servicers, financial service providers, government agencies, and others. Due to the agent funding and settlement process, payables to agents represent amounts due to agents for money transfers that have been settled with transferees.
Refer to Note 8 for additional details on the Company’s settlement assets and obligations.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the lesser of the estimated life of the related assets (generally three to seven years for equipment and furniture and fixtures) or the lease term. Maintenance and repairs, which do not extend the useful life of the respective assets, are charged to expense as incurred.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Property and equipment consisted of the following (in millions):
December 31,
Leasehold improvements and other 151.2 153.7
Furniture and fixtures 46.2 45.4
Projects in process 0.3 2.3
Total property and equipment, gross 805.4 810.3
Less accumulated depreciation (669.7 ) (659.9 )
Property and equipment, net(a) $ 135.7 $ 150.4
(a)
As of December 31, 2021, Property and equipment, net includes Assets held for sale of $6.3 million, which consists of property and equipment of the Company's Business Solutions business, as further described in Note 5.
Amounts charged to expense for depreciation of property and equipment were $49.6 million, $61.3 million, and $79.6 million during the years ended December 31, 2021, 2020, and 2019, respectively.
Goodwill
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. In the event a reporting unit’s carrying amount exceeds its fair value, the Company recognizes an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value. The Company’s annual impairment assessment did not identify any goodwill impairment during the years ended December 31, 2021, 2020, and 2019.
Other Intangible Assets
Other intangible assets primarily consist of contract costs (primarily amounts paid to agents in connection with establishing and renewing long-term contracts), software, and acquired contracts. Other intangible assets are generally amortized on a straight-line basis over the length of the contract or benefit period. Included in the Consolidated Statements of Income is amortization expense of $158.6 million, $164.3 million, and $178.1 million for the years ended December 31, 2021, 2020, and 2019, respectively.
Acquired contracts include customer and contractual relationships and networks of subagents that are recognized in connection with the Company’s acquisitions.
The Company purchases and develops software that is used in providing services and in performing administrative functions. Internal and external software development costs incurred that are directly related to the chosen design, development, and testing phases of the software are capitalized once the Company has completed all planning and analysis activities. Any other software development related costs are expensed as incurred. Capitalization of costs ceases when the product is available for general use. Software development costs and purchased software are generally amortized over a term of three to seven years.
The Company capitalizes initial payments for new and renewed agent contracts to the extent recoverable through future operations or penalties in the case of early termination. The Company’s accounting policy is to limit the amount of capitalized costs for a given contract to the lesser of the estimated future cash flows from the contract or the termination fees the Company would receive in the event of early termination of the contract.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table provides the components of other intangible assets (in millions):
Weighted-
Average
Amortization Net of Net of
Period Initial Accumulated Initial Accumulated
(in years) Cost Amortization Cost Amortization
(a)
Not applicable as the assets have not been placed in service.
(b)
As of December 31, 2021, Projects in process and Total other intangible assets, net includes Assets held for sale of $2.3 million and $50.4 million, respectively, which consists of Other intangible assets associated with the Company's Business Solutions business as further described in Note 5.