Moneygram International, Inc.
MONEYGRAM INTERNATIONAL INC (Form: 10-Q, Received: 10/31/2016 17:30:11)
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________ 
FORM 10-Q
 ___________________________________ 
(mark one)
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the Quarterly Period Ended September 30, 2016
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from            to            .
Commission File Number: 001-31950
___________________________________  
MONEYGRAM INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
 ___________________________________ 
Delaware
16-1690064
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
2828 N. Harwood St., 15 th  Floor
Dallas, Texas
75201
(Address of principal executive offices)
(Zip Code)
(214) 999-7552
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
___________________________________  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x    No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
¨
  
Accelerated filer
 
x
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of October 28, 2016 , 53,074,238  shares of common stock, $0.01 par value, were outstanding.
 


Table of Contents


TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
EX-10.1
 
EX-31.1
 
EX-31.2
 
EX-32.1
 
EX-32.2
 


Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MONEYGRAM INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
 
(Amounts in millions, except share data)
September 30, 2016
 
December 31, 2015
ASSETS
 
 
 
Cash and cash equivalents
$
173.1

 
$
164.5

Settlement assets
3,440.4

 
3,505.6

Property and equipment, net
201.3

 
199.7

Goodwill
442.2

 
442.2

Other assets
169.1

 
193.2

Total assets
$
4,426.1

 
$
4,505.2

 
 
 
 
LIABILITIES
 
 
 
Payment service obligations
$
3,440.4

 
$
3,505.6

Debt
937.3

 
942.6

Pension and other postretirement benefits
86.5

 
96.3

Accounts payable and other liabilities
170.4

 
183.5

Total liabilities
4,634.6

 
4,728.0

 
 
 
 
COMMITMENTS AND CONTINGENCIES (NOTE 12)

 

 
 
 
 
STOCKHOLDERS’ DEFICIT
 
 
 
Participating convertible preferred stock - series D, $0.01 par value, 200,000 shares authorized, 71,282 issued at September 30, 2016 and December 31, 2015
183.9

 
183.9

Common stock, $0.01 par value, 162,500,000 shares authorized, 58,823,567 shares issued at September 30, 2016 and December 31, 2015
0.6

 
0.6

Additional paid-in capital
1,016.1

 
1,002.4

Retained loss
(1,251.7
)
 
(1,226.8
)
Accumulated other comprehensive loss
(47.1
)
 
(48.7
)
Treasury stock: 5,757,015 and 5,612,188 shares at September 30, 2016 and December 31, 2015, respectively
(110.3
)
 
(134.2
)
Total stockholders’ deficit
(208.5
)
 
(222.8
)
Total liabilities and stockholders’ deficit
$
4,426.1

 
$
4,505.2

See Notes to the Condensed Consolidated Financial Statements



1


MONEYGRAM INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Amounts in millions, except per share data)
2016
 
2015
 
2016
 
2015
REVENUE
 
 
 
 
 
 
 
Fee and other revenue
$
378.5

 
$
365.8

 
$
1,112.5

 
$
1,049.5

Investment revenue
4.6

 
2.8

 
12.7

 
8.5

Total revenue
383.1

 
368.6

 
1,125.2

 
1,058.0

EXPENSES
 
 
 
 
 
 
 
Fee and other commissions expense
170.2

 
168.7

 
505.4

 
485.3

Investment commissions expense
0.6

 
0.2

 
1.7

 
0.5

Total commissions expense
170.8

 
168.9

 
507.1

 
485.8

Compensation and benefits
72.4

 
73.1

 
218.5

 
235.6

Transaction and operations support
79.5

 
78.2

 
227.1

 
238.9

Occupancy, equipment and supplies
15.6

 
15.0

 
46.8

 
46.3

Depreciation and amortization
18.6

 
16.8

 
60.2

 
48.8

Total operating expenses
356.9

 
352.0

 
1,059.7

 
1,055.4

OPERATING INCOME
26.2

 
16.6

 
65.5

 
2.6

Other expense
 
 
 
 
 
 
 
Interest expense
11.3

 
11.2

 
33.8

 
33.7

Total other expense
11.3

 
11.2

 
33.8

 
33.7

Income (loss) before income taxes
14.9

 
5.4

 
31.7

 
(31.1
)
Income tax expense
4.7

 
0.5

 
22.6

 
48.4

NET INCOME (LOSS)
$
10.2

 
$
4.9

 
$
9.1

 
$
(79.5
)
 
 
 
 
 
 
 
 
INCOME (LOSS) PER COMMON SHARE
 
 
 
 
 
 
 
Basic
$
0.16

 
$
0.08

 
$
0.15

 
$
(1.28
)
Diluted
$
0.15

 
$
0.08

 
$
0.14

 
$
(1.28
)
 
 
 
 
 
 
 
 
Weighted-average outstanding common shares and equivalents used in computing income (loss) per common share
 
 
 
 
 
 
 
Basic
62.2

 
62.1

 
62.4

 
62.1

Diluted
66.4

 
63.8

 
66.2

 
62.1

See Notes to the Condensed Consolidated Financial Statements


2


MONEYGRAM INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
UNAUDITED
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Amounts in millions)
2016
 
2015
 
2016
 
2015
NET INCOME (LOSS)
$
10.2

 
$
4.9

 
$
9.1

 
$
(79.5
)
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
 
 
Net change in unrealized holding gains on available-for-sale securities arising during the period, net of tax benefit of $0.0 and $0.1 for the three months ended September 30, 2016 and 2015, respectively, and $0.1 and $0.0 for the nine months ended September 30, 2016 and 2015, respectively

 
(0.2
)
 
(0.2
)
 
(0.2
)
Net change in pension liability due to amortization of prior service cost and net actuarial losses, net of tax benefit of $0.4 and $0.6 for the three months ended September 30, 2016 and 2015, respectively, and $1.4 and $2.2 for the nine months ended September 30, 2016 and 2015, respectively
0.9

 
1.2

 
2.5

 
4.0

Valuation adjustment for pension and postretirement benefits, net of tax (benefit) expense of $0.0 and ($2.1) for the three months ended September 30, 2016 and 2015, respectively, and $0.0 and $1.6 for the nine months ended September 30, 2016 and 2015, respectively

 
(3.6
)
 

 
2.7

Pension settlement charge, net of tax benefit of $0.0 for both the three months ended September 30, 2016 and 2015, and $0.0 and $5.0 for the nine months ended September 30, 2016 and 2015, respectively

 

 

 
8.8

Unrealized foreign currency translation adjustments, net of tax expense (benefit) of $0.2 and ($1.4) for the three months ended September 30, 2016 and 2015, respectively, and $2.0 and ($5.9) for the nine months ended September 30, 2016 and 2015, respectively
0.4

 
(2.4
)
 
(0.7
)
 
(10.2
)
Other comprehensive income (loss)
1.3

 
(5.0
)
 
1.6

 
5.1

COMPREHENSIVE INCOME (LOSS)
$
11.5

 
$
(0.1
)
 
$
10.7

 
$
(74.4
)
See Notes to the Condensed Consolidated Financial Statements


3


MONEYGRAM INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED


 
Nine Months Ended September 30,
(Amounts in millions)
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income (loss)
$
9.1

 
$
(79.5
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
60.2

 
48.8

Signing bonus amortization
41.0

 
45.3

Signing bonus payments
(17.2
)
 
(71.3
)
Amortization of debt issuance costs and debt discount
2.5

 
2.2

Non-cash compensation and pension expense
18.7

 
37.7

Change in other assets
2.7

 
52.9

Change in accounts payable and other liabilities
(32.0
)
 
(38.7
)
Other non-cash items, net
(0.5
)
 
0.1

Net cash provided by (used in) operating activities
84.5

 
(2.5
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(60.4
)
 
(88.8
)
Proceeds from disposal of assets

 
0.1

Net cash used in investing activities
(60.4
)
 
(88.7
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Principal payments on debt
(7.3
)
 
(7.4
)
Stock repurchases
(7.5
)
 
(0.4
)
Payment for contingent consideration
(0.7
)
 

Net cash used in financing activities
(15.5
)
 
(7.8
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
8.6

 
(99.0
)
CASH AND CASH EQUIVALENTS—Beginning of period
164.5

 
250.6

CASH AND CASH EQUIVALENTS—End of period
$
173.1

 
$
151.6

Supplemental cash flow information:
 
 
 
Cash payments for interest
$
31.4

 
$
31.6

Cash taxes, net
$
7.1

 
$
67.2

See Notes to the Condensed Consolidated Financial Statements


4


MONEYGRAM INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
UNAUDITED

(Amounts in millions)
Preferred
Stock
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Loss
 
Accumulated
Other
Comprehensive
Loss
 
Treasury
Stock
 
Total
January 1, 2016
$
183.9

 
$
0.6

 
$
1,002.4

 
$
(1,226.8
)
 
$
(48.7
)
 
$
(134.2
)
 
$
(222.8
)
Net income

 

 

 
9.1

 

 

 
9.1

Stock-based compensation activity

 

 
13.7

 
(34.0
)
 

 
31.4

 
11.1

Stock repurchases

 

 

 

 

 
(7.5
)
 
(7.5
)
Other comprehensive income

 

 

 

 
1.6

 

 
1.6

September 30, 2016
$
183.9

 
$
0.6

 
$
1,016.1

 
$
(1,251.7
)
 
$
(47.1
)
 
$
(110.3
)
 
$
(208.5
)

(Amounts in millions)
Preferred
Stock
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Loss
 
Accumulated
Other
Comprehensive
Loss
 
Treasury
Stock
 
Total
January 1, 2015
$
183.9

 
$
0.6

 
$
982.8

 
$
(1,144.6
)
 
$
(67.1
)
 
$
(138.3
)
 
$
(182.7
)
Net loss

 

 

 
(79.5
)
 

 

 
(79.5
)
Stock-based compensation activity

 

 
13.9

 
(4.9
)
 

 
4.3

 
13.3

Stock repurchases

 

 

 

 

 
(0.4
)
 
(0.4
)
Other comprehensive income

 

 

 

 
5.1

 

 
5.1

September 30, 2015
$
183.9

 
$
0.6

 
$
996.7

 
$
(1,229.0
)
 
$
(62.0
)
 
$
(134.4
)
 
$
(244.2
)
See Notes to the Condensed Consolidated Financial Statements


5


MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 — Description of the Business and Basis of Presentation
References to “MoneyGram,” the “Company,” “we,” “us” and “our” are to MoneyGram International, Inc. and its subsidiaries.
Nature of Operations — MoneyGram offers products and services under its two reporting segments: Global Funds Transfer and Financial Paper Products. The Global Funds Transfer segment provides global money transfer services and bill payment services to consumers. We primarily offer services through third-party agents, including retail chains, independent retailers, post offices and other financial institutions. We also offer Digital solutions such as moneygram.com, mobile solutions, account deposit and kiosk-based services. Additionally, we have Company-operated retail locations in the U.S. and Western Europe. The Financial Paper Products segment provides official check outsourcing services and money orders through financial institutions and agent locations.
Basis of Presentation — The accompanying unaudited condensed consolidated financial statements of MoneyGram are prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”) and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature. Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for future periods. For further information, refer to the Consolidated Financial Statements and Notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015 .
Use of Estimates — The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on historical experience, future expectations and other factors and assumptions the Company believes to be reasonable under the circumstances. These estimates and assumptions are reviewed on an ongoing basis and are revised when necessary. Changes in estimates are recorded in the period of change. Actual amounts may differ from these estimates.
Recent Accounting Pronouncements and Related Developmen ts — In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09,  Revenue from Contracts with Customers (Topic 606) . The new guidance sets forth a five-step revenue recognition model which replaces the current revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance and requires more detailed disclosures. To further assist with adoption and implementation of ASU 2014-09, the FASB issued the following ASUs:
ASU 2016-08 (Issued March 2016) —  Principal versus Agent Consideration (Reporting Revenue Gross versus Net)
ASU 2016-10 (Issued April 2016) —  Identifying Performance Obligations and Licensing
ASU 2016-12 (Issued May 2016) —  Narrow-Scope Improvements and Practical Expedients
These ASUs are effective for public entities for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, but not before interim and annual reporting periods beginning after December 15, 2016. The Company will not be early adopting these standards and will use the cumulative effect transition method upon adoption. The Company continues to evaluate the impact these standards will have on the consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) . ASU 2016-02 requires organizations to recognize lease assets and lease liabilities on the balance sheet and to disclose key information about leasing arrangements. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous lease guidance. The FASB retained the distinction between finance leases and operating leases, leaving the effect of leases in the statement of comprehensive income and the statement of cash flows largely unchanged from previous GAAP. ASU 2016-02 mandates a modified retrospective transition method and is effective for fiscal years beginning after December 15, 2018. Early adoption of the amendment is permitted. The Company is currently evaluating the impact this standard will have on the consolidated financial statements.
In April 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This standard makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. Under the new ASU, companies are allowed to withhold up to the employees' maximum statutory tax rates in the applicable jurisdictions without resulting in liability classification. Further, the ASU requires that cash payments to tax authorities


6


in connection with shares withheld to meet statutory tax withholding requirements be presented as a financing activity in the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016 and early adoption of the amendment is permitted. The Company currently presents cash payments to tax authorities in connection with shares withheld to meet statutory tax withholdings requirements as an operating activity in its statement of cash flows and upon adoption of this ASU we will present these payments as a financing activity, which will be applied retrospectively. The Company does not expect this ASU to have significant impact on the consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new credit impairment standard changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking expected loss model that generally will result in the earlier recognition of allowances for credit losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than as reductions in the amortized cost of the securities. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019 and early adoption of the amendment is permitted. The adoption of ASU 2016-13 will not have a significant impact on our consolidated financial statements.
The Company has determined that there have been no other recently adopted or issued accounting standards that had, or will have, a material impact on its consolidated financial statements.

Note 2 — Reorganization and Restructuring Costs

In the first quarter of 2014, the Company announced the implementation of a global transformation program (the "2014 Global Transformation Program"), which included certain reorganization and restructuring activities centered around facilities and headcount rationalization, system efficiencies and headcount right-shoring and outsourcing. The Company completed these reorganization and restructuring activities as of June 30, 2016. In the third quarter of 2015, the Company initiated other reorganization and restructuring activities to further improve operational efficiencies and concluded these activities as of June 30, 2016.
The following table is a roll-forward of the restructuring costs accrual as of September 30, 2016 :
 
2014 Global Transformation Program
 
Other Restructuring
 
 
(Amounts in millions)
Severance, Outplacement and Related Benefits
 
Other (1)
 
Severance, Outplacement and Related Benefits
 
Total
Balance, December 31, 2015
$
3.8

 
$

 
$
0.2

 
$
4.0

Expenses
0.2

 
0.1

 

 
0.3

Cash payments
(4.0
)
 
(0.1
)
 
(0.2
)
 
(4.3
)
Balance, September 30, 2016
$

 
$

 
$

 
$

(1) Other primarily relates to expenses for facilities relocation and professional fees. Such costs are expensed as incurred.
The following table is a summary of the cumulative restructuring costs incurred to date in operating expenses as of September 30, 2016 :
(Amounts in millions)
2014 Global Transformation Program
 
Other Restructuring
 
Total
Severance, Outplacement and Related Benefits
 
Other (1)
 
Severance, Outplacement and Related Benefits
 
Restructuring costs
 
 
 
 
 
 
 
Cumulative restructuring costs incurred to date in operating expenses
$
17.9

 
$
3.1

 
$
0.6

 
$
21.6

(1) Other primarily relates to expenses for facilities relocation and professional fees. Such costs are expensed as incurred.


7


The following table summarizes the reorganization and restructuring costs recorded:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Amounts in millions)
2016
 
2015
 
2016
 
2015
Restructuring costs in operating expenses:
 
 
 
 
 
 
 
Compensation and benefits
$

 
$
0.7

 
$
0.2

 
$
3.4

Transaction and operations support

 
0.3

 
0.1

 
0.9

Total restructuring costs in operating expenses

 
1.0

 
0.3

 
4.3

Reorganization costs in operating expenses:
 
 
 
 
 
 
 
Compensation and benefits

 
0.5

 

 
6.4

Transaction and operations support

 
0.9

 
0.1

 
5.2

Occupancy, equipment and supplies

 
0.5

 
0.1

 
1.5

Total reorganization costs in operating expenses

 
1.9

 
0.2

 
13.1

Total reorganization and restructuring costs
$

 
$
2.9

 
$
0.5

 
$
17.4

The following table is a summary of the total cumulative restructuring costs incurred to date in operating expenses by reportable segment as of September 30, 2016 :
(Amounts in millions)
Global Funds Transfer
 
Financial Paper Products
 
Other
 
Total
2014 Global Transformation Program
 
 
 
 
 
 
 
Balance, December 31, 2015
$
17.8

 
$
2.2

 
$
0.7

 
$
20.7

First quarter 2016
0.3

 

 

 
0.3

Total cumulative restructuring costs incurred to date in operating expenses
18.1

 
2.2

 
0.7

 
21.0

Other Restructuring
 
 
 
 
 
 
 
Total cumulative restructuring costs incurred to date in operating expenses
0.6

 

 

 
0.6

 
 
 
 
 
 
 
 
Total restructuring costs incurred
$
18.7

 
$
2.2

 
$
0.7

 
$
21.6


Note 3 — Settlement Assets and Payment Service Obligations

Settlement assets represent funds received or to be received from agents for unsettled money transfers, money orders and consumer payments. The Company records corresponding payment service obligations relating to amounts payable under money transfers, money orders and consumer payment service arrangements. These obligations are recognized by the Company at the time the underlying transactions occur.
The following table summarizes the amount of Settlement assets and Payment service obligations:
(Amounts in millions)
September 30, 2016
 
December 31, 2015
Settlement assets:
 
 
 
Settlement cash and cash equivalents
$
1,373.3

 
$
1,560.7

Receivables, net
847.4

 
861.4

Interest-bearing investments
1,201.4

 
1,062.4

Available-for-sale investments
18.3

 
21.1

 
$
3,440.4

 
$
3,505.6

Payment service obligations
$
(3,440.4
)
 
$
(3,505.6
)


8



Note 4 — Fair Value Measurement

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, or the exit price, in an orderly transaction between market participants on the measurement date.
The following tables summarize the Company’s financial assets and liabilities measured at fair value by hierarchy level on a recurring basis:
(Amounts in millions)
Level 2
 
Level 3
 
Total
September 30, 2016
 
 
 
 
 
Financial assets:
 
 
 
 
 
Available-for-sale investments:
 
 
 
 
 
Residential mortgage-backed securities
$
7.7

 
$

 
$
7.7

Other asset-backed securities

 
10.6

 
10.6

Forward contracts
0.3

 

 
0.3

Total financial assets
$
8.0

 
$
10.6

 
$
18.6

Financial liabilities:
 
 
 
 
 
Forward contracts
$
0.2

 
$

 
$
0.2

 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
Financial assets:
 
 
 
 
 
Available-for-sale investments:
 
 
 
 
 
Residential mortgage-backed securities
$
9.5

 
$

 
$
9.5

Other asset-backed securities

 
11.6

 
11.6

Forward contracts
0.8

 

 
0.8

Total financial assets
$
10.3

 
$
11.6

 
$
21.9

Financial liabilities:
 
 
 
 
 
Forward contracts
$
0.1

 
$

 
$
0.1

The following table is a summary of the unobservable inputs used in the valuation of other asset-backed securities classified as Level 3:
 
 
 
 
 
 
September 30, 2016
 
December 31, 2015
(Amounts in millions, except net average price)
 
Unobservable Input
 
Pricing
Source
 
Market
Value
 
Net   Average Price  (1)
 
Market Value
 
Net Average Price  (1)
Alt-A
 
Price
 
Third-party pricing service
 
$
0.1

 
$
79.05

 
$
0.1

 
$
79.19

Home equity
 
Price
 
Third-party pricing service
 
0.1

 
33.50

 
0.1

 
29.40

Indirect exposure  high grade
 
Price
 
Third-party pricing service
 
8.4

 
21.87

 
8.3

 
21.65

Indirect exposure  mezzanine
 
Price
 
Third-party pricing service
 
0.7

 
0.68

 
0.8

 
0.75

Indirect exposure  mezzanine
 
Price
 
Broker
 
0.9

 
1.31

 
1.1

 
1.58

Other
 
Net asset value
 
Third-party pricing service
 
0.4

 
2.04

 
1.2

 
6.34

Total
 
 
 
 
 
$
10.6

 
 
 
$
11.6

 
 
(1) Net average price is per $100.00


9


The following table provides a roll-forward of the other asset-backed securities classified as Level 3, which are measured at fair value on a recurring basis:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Amounts in millions)
2016
 
2015
 
2016
 
2015
Beginning balance
$
11.0

 
$
12.2

 
$
11.6

 
$
12.6

Principal paydowns
(0.3
)
 
(0.6
)
 
(1.1
)
 
(0.8
)
Change in unrealized gains
0.2

 
0.2

 
0.3

 

Net realized losses
(0.3
)
 

 
(0.2
)
 

Ending balance
$
10.6

 
$
11.8

 
$
10.6

 
$
11.8

Assets and liabilities that are disclosed at fair value Debt and interest-bearing investments are carried at amortized cost; however, the Company estimates the fair value of debt for disclosure purposes. The fair value of debt is estimated using an observable market quotation (Level 2). The following table is a summary of the Company's fair value and carrying value of debt:
 
Fair Value
 
Carrying Value
(Amounts in millions)
September 30, 2016
 
December 31, 2015
 
September 30, 2016
 
December 31, 2015
Senior secured credit facility
$
916.2

 
$
858.9

 
$
947.0

 
$
954.3

The carrying amounts for the Company's cash and cash equivalents, settlement cash and cash equivalents and interest-bearing investments approximate fair value as of September 30, 2016 and December 31, 2015 .

Note 5 — Investment Portfolio

The following table shows the components of the investment portfolio:
(Amounts in millions)
September 30, 2016
 
December 31, 2015
Cash
$
1,538.7

 
$
1,717.3

Money market securities
7.7

 
7.9

Cash and cash equivalents (1)
1,546.4

 
1,725.2

Interest-bearing investments
1,201.4

 
1,062.4

Available-for-sale investments
18.3

 
21.1

Total investment portfolio
$
2,766.1

 
$
2,808.7

(1) For purposes of the disclosure of the investment portfolio as a whole, the cash and cash equivalents balance includes settlement cash and cash equivalents.


10


The following table is a summary of the amortized cost and fair value of available-for-sale investments:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Fair
Value
(Amounts in millions)
 
 
September 30, 2016
 
 
 
 
 
Residential mortgage-backed securities
$
6.9

 
$
0.8

 
$
7.7

Other asset-backed securities
1.0

 
9.6

 
10.6

Total
$
7.9

 
$
10.4

 
$
18.3

 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
Residential mortgage-backed securities
$
8.7

 
$
0.8

 
$
9.5

Other asset-backed securities
1.7

 
9.9

 
11.6

Total
$
10.4

 
$
10.7

 
$
21.1

As of September 30, 2016 and December 31, 2015 , 42% and 45% , respectively, of the available-for-sale portfolio were invested in U.S. government agency residential mortgage-backed securities. These securities have the implicit backing of the U.S. government and the Company expects to receive full par value upon maturity or pay-down, as well as all interest payments.
Gains and Losses  — For the three and nine months ended September 30, 2016 and 2015 , the Company had nominal net realized losses. The Company had no unrealized losses in its available-for-sale portfolio as of  September 30, 2016 and December 31, 2015 . See summary of net unrealized gains included in Accumulated other comprehensive loss in Note 9 — Stockholders' Deficit .
Contractual Maturities  — Actual maturities may differ from contractual maturities as borrowers may have the right to call or prepay obligations, sometimes without call or prepayment penalties. Maturities of residential mortgage-backed and other asset-backed securities depend on the repayment characteristics and experience of the underlying obligations.  

Note 6 — Derivative Financial Instruments

The following gains (losses) related to assets and liabilities denominated in foreign currencies are included in the “Transaction and operations support” line in the Condensed Consolidated Statements of Operations and in the "Net cash used in operating activities" line in the Condensed Consolidated Statements of Cash Flows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Amounts in millions)
2016
 
2015
 
2016
 
2015
Net realized foreign currency gains (losses)
$
0.9

 
$
(0.6
)
 
$
5.5

 
$
(19.4
)
Net gains from the related forward contracts
0.7

 
4.9

 
10.6

 
26.0

Net gains from foreign currency transactions and related forward contracts
$
1.6

 
$
4.3

 
$
16.1

 
$
6.6



11


As of September 30, 2016 and December 31, 2015 , the Company had $354.9 million and $295.8 million , respectively, of outstanding notional amounts relating to its foreign currency forward contracts. The Company reflects the following fair values of derivative forward contract instruments in its Condensed Consolidated Balance Sheets:
 
 
 
Gross Amount of Recognized Assets
 
Gross Amount of Offset
 
Net Amount of Assets Presented in the Condensed Consolidated Balance Sheets
 
Balance Sheet
Location
 
September 30, 2016
 
December 31, 2015
 
September 30, 2016
 
December 31, 2015
 
September 30, 2016
 
December 31, 2015
(Amounts in millions)
 
 
 
 
 
 
Forward contracts
Other assets
 
$
0.5

 
$
1.0

 
$
(0.2
)
 
$
(0.2
)
 
$
0.3

 
$
0.8

 
 
 
Gross Amount of Recognized Liabilities
 
Gross Amount of Offset
 
Net Amount of Liabilities Presented in the Condensed Consolidated Balance Sheets
 
Balance Sheet
Location
 
September 30, 2016
 
December 31, 2015
 
September 30, 2016
 
December 31, 2015
 
September 30, 2016
 
December 31, 2015
(Amounts in millions)
 
 
 
 
 
 
Forward contracts
Accounts payable and other liabilities
 
$
0.4

 
$
0.3

 
$
(0.2
)
 
$
(0.2
)
 
$
0.2

 
$
0.1

The Company is exposed to credit loss in the event of non-performance by counterparties to its derivative contracts. In the unlikely event the counterparty fails to meet the contractual terms of the derivative contract, the Company’s risk is limited to the fair value of the instrument. The Company has not had any historical instances of non-performance by any counterparties, nor does it anticipate any future instances of non-performance.

Note 7 — Debt

The following is a summary of the Company’s outstanding debt:
(Amounts in millions, except percentages)
Effective Interest Rate
 
September 30, 2016
 
December 31, 2015
Senior secured credit facility due 2020
4.25
%
 
$
947.0

 
$
954.3

Unamortized debt issuance costs and debt discount
 
 
(9.7
)
 
(11.7
)
Total debt, net
 
 
$
937.3

 
$
942.6

Revolving Credit Facility — As of September 30, 2016 , the Company had no outstanding letters of credit and no borrowings under its revolving credit facility, leaving $150.0 million of availability thereunder.
Debt Covenants and Other Restrictions  — Borrowings under the credit agreement that provides for the senior secured facility due 2020 and the revolving credit facility are subject to various limitations that restrict the Company’s ability to: incur additional indebtedness; create or incur additional liens; effect mergers and consolidations; make certain acquisitions or investments; sell assets or subsidiary stock; pay dividends and other restricted payments; and effect loans, advances and certain other transactions with affiliates. In addition, the revolving credit facility has covenants that place limitations on the use of proceeds from borrowings under the facility.
The revolving credit facility contains certain financial covenants, in addition to the non-financial covenants described above. The Company is required to maintain asset coverage greater than its payment service obligations. Assets used in the determination of the asset coverage covenant are cash and cash equivalents and settlement assets.
The following table shows the components of our assets in excess of payment service obligations used for the asset coverage calculation:
(Amounts in millions)
September 30, 2016
 
December 31, 2015
Cash and cash equivalents
$
173.1

 
$
164.5

Settlement assets
3,440.4

 
3,505.6

Total cash and cash equivalents and settlement assets
3,613.5

 
3,670.1

Payment service obligations
(3,440.4
)
 
(3,505.6
)
Assets in excess of payment service obligations
$
173.1

 
$
164.5



12


The credit agreement also has quarterly financial covenants to maintain the following interest coverage and secured leverage ratios:
 
Interest Coverage Minimum Ratio
 
Secured Leverage Not to Exceed
January 1, 2016 through December 31, 2016
2.25:1
 
4.250:1
January 1, 2017 through December 31, 2017
2.25:1
 
3.750:1
January 1, 2018 through maturity
2.25:1
 
3.500:1
As of September 30, 2016 , the Company was in compliance with its financial covenants: our interest coverage ratio was 6.55 to 1.00 and our secured leverage ratio was 3.448 to 1.00. We continuously monitor our compliance with our debt covenants.
Subsequent Event — On October 28, 2016, the Company made a principal payment on its senior secured credit facility of $10.0 million and repurchased $0.5 million of its senior secured credit facility in the open market.

Note 8 — Pensions and Other Benefits

The following table is a summary of net periodic benefit expense for the Company's defined pension plan ("Pension Plan") and supplemental executive retirement plans ("SERPs"), collectively referred to as "Pension":
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Amounts in millions)
2016
 
2015
 
2016
 
2015
Pension settlement charge
$

 
$

 
$

 
$
13.8

Interest cost
1.6

 
2.2

 
4.9

 
7.2

Expected return on plan assets
(1.2
)
 
(1.2
)
 
(3.8
)
 
(4.5
)
Amortization of net actuarial losses
1.4

 
1.9

 
4.2

 
6.5

Net periodic benefit expense
$
1.8

 
$
2.9

 
$
5.3

 
$
23.0

The Company made contributions to the Pension Plan of $4.0 million and $8.0 million for the three and nine months ended September 30, 2016 and 2015 , respectively. Contributions made to the SERPs were $1.2 million and $2.9 million for the three and nine months ended September 30, 2016 , respectively, and $1.3 million and $3.2 million for the three and nine months ended September 30, 2015 , respectively.
The following table is a summary of net periodic benefit income for the Company’s postretirement medical benefit plan ("Postretirement Benefits"):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Amounts in millions)
2016
 
2015
 
2016
 
2015
Amortization of prior service credits
$
(0.1
)
 
$
(0.2
)
 
$
(0.4
)
 
$
(0.5
)
Amortization of net actuarial losses

 
0.1

 
0.1

 
0.2

Net periodic benefit income
$
(0.1
)
 
$
(0.1
)
 
$
(0.3
)
 
$
(0.3
)


13



Note 9 — Stockholders’ Deficit

Common Stock No dividends were paid during the three or nine months ended September 30, 2016 or September 30, 2015 .
Accumulated Other Comprehensive Loss  — The following tables are a summary of the changes to Accumulated other comprehensive loss by component:
(Amounts in millions)
Net Unrealized Gains on Securities Classified as Available-for-sale, Net of Tax
 
Cumulative Foreign Currency Translation Adjustments, Net of Tax
 
Pension and Postretirement Benefits Adjustment, Net of Tax
 
Total
December 31, 2015
$
11.1

 
$
(13.5
)
 
$
(46.3
)
 
$
(48.7
)
Other comprehensive loss before reclassification

 
(0.7
)
 

 
(0.7
)
Amounts reclassified from accumulated other comprehensive loss
(0.2
)
 

 
2.5

 
2.3

Net current period other comprehensive (loss) income
(0.2
)
 
(0.7
)
 
2.5

 
1.6

September 30, 2016
$
10.9

 
$
(14.2
)
 
$
(43.8
)
 
$
(47.1
)
 
 
 
 
 
 
 
 
December 31, 2014
$
11.2

 
$
(5.4
)
 
$
(72.9
)
 
$
(67.1
)
Other comprehensive income (loss) before reclassification
0.4

 
(10.2
)
 
2.7

 
(7.1
)
Amounts reclassified from accumulated other comprehensive loss
(0.6
)
 

 
12.8

 
12.2

Net current period other comprehensive (loss) income
(0.2
)
 
(10.2
)
 
15.5

 
5.1

September 30, 2015
$
11.0

 
$
(15.6
)
 
$
(57.4
)
 
$
(62.0
)
The following table is a summary of the significant amounts reclassified out of each component of Accumulated other comprehensive loss:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Statement of Operations Location
(Amounts in millions)
2016
 
2015
 
2016
 
2015
 
Change in unrealized gains on securities classified as available-for-sale, before tax
$
(0.2
)
 
$
(0.1
)
 
$
(0.3
)
 
$
(0.6
)
 
"Investment revenue"
Tax expense
0.1

 
0.1

 
0.1

 

 
 
Total, net of tax
(0.1
)
 

 
(0.2
)
 
(0.6
)
 
 
 
 
 
 
 
 
 
 
 
 
Pension and Postretirement Benefits adjustments:
 
 
 
 
 
 
 
 
 
Amortization of prior service credits
(0.1
)
 
(0.2
)
 
(0.4
)
 
(0.5
)
 
"Compensation and benefits"
Amortization of net actuarial losses
1.4

 
2.0

 
4.3

 
6.7

 
"Compensation and benefits"
Settlement charges

 

 

 
13.8

 
"Compensation and benefits"
Total before tax
1.3

 
1.8

 
3.9

 
20.0

 
 
Tax benefit
(0.4
)
 
(0.6
)
 
(1.4
)
 
(7.2
)
 
 
Total, net of tax
0.9

 
1.2

 
2.5

 
12.8

 
 
 
 
 
 
 
 
 
 
 
 
Total reclassified for the period, net of tax
$
0.8

 
$
1.2

 
$
2.3

 
$
12.2

 
 


14



Note 10 — Stock-Based Compensation

The following table is a summary of the Company's stock-based compensation expense:
   
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Amounts in millions)
2016
 
2015
 
2016
 
2015
Expense recognized related to stock options
$
0.6

 
$
0.9

 
$
2.2

 
$
3.4

Expense recognized related to restricted stock units
3.6

 
4.0

 
11.5

 
10.5

Stock-based compensation expense
$
4.2

 
$
4.9

 
$
13.7

 
$
13.9

Stock Options  — The following table is a summary of the Company’s stock option activity:
 
Shares
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
($000,000)
Options outstanding at December 31, 2015
3,092,581

 
$
19.20

 
5.2 years
 
$

Forfeited/Expired
(545,816
)
 
24.73

 
 
 
 
Options outstanding at September 30, 2016
2,546,765

 
$
18.01

 
4.4 years
 
$

Vested or expected to vest at September 30, 2016
2,541,534

 
$
18.01

 
4.4 years
 
$

Options exercisable at September 30, 2016
2,265,967

 
$
18.15

 
4.0 years
 
$

As of September 30, 2016 , the unrecognized stock option expense related to outstanding options was $1.3 million with a remaining weighted-average vesting period of 0.5 years .
Restricted Stock Units — In February 2016, the Company issued time-based and performance-based restricted stock units. The time-based restricted stock units vest in three equal installments on each anniversary of the grant date. The performance-based restricted stock units are subject to performance conditions that must be satisfied. If such performance conditions are satisfied at the conclusion of a one-year performance period, the performance-based restricted stock units will vest in three equal installments on each anniversary of the grant date. With respect to the performance-based restricted stock units, up to 50% of such awards become eligible to vest over such three year period if a target level of Adjusted EBITDA is achieved for the year ended December 31, 2016. Adjusted EBITDA is EBITDA (earnings before interest, taxes, depreciation and amortization, including agent signing bonus amortization) adjusted for certain significant items. The other 50% of the performance-based restricted stock units become eligible to vest over such three year period if a target level of Digital revenue is achieved for the year ended December 31, 2016. The performance-based restricted stock units have a threshold level of performance for each of the target levels. Achievement of the threshold level will result in vesting of 50% of the target levels discussed above. The number of performance-based restricted stock units that will vest for performance achievement between the threshold and target will be determined based on a straight-line interpolation. No performance-based restricted stock units will vest for performance achievement below the thresholds.
The following table is a summary of the Company’s restricted stock unit activity:
 
Total
Shares
 
Weighted
Average
Price
 
Weighted-
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
($000,000)
Restricted stock units outstanding at December 31, 2015
4,162,568

 
$
10.68

 
1.0 year
 
$
26.1

Granted
3,030,548

 
5.13

 
 
 
 
Vested and converted to shares
(1,531,734
)
 
9.59

 
 
 
 
Forfeited
(630,935
)
 
10.97

 
 
 
 
Restricted stock units outstanding at September 30, 2016
5,030,447

 
$
7.63

 
1.1 years
 
$
35.7



15


As of September 30, 2016 , the Company’s outstanding restricted stock units had unrecognized compensation expense of $19.8 million . Unrecognized restricted stock unit expense and the remaining weighted-average vesting period are presented using the Company’s current estimate of achievement of performance goals. The grant-date fair value of restricted stock units vested was $0.8 million and $14.7 million for the three and nine months ended September 30, 2016 , respectively, and $0.1 million and $3.9 million for the three and nine months ended September 30, 2015 , respectively.

Note 11 — Income Taxes
For the three months ended September 30, 2016 , the Company recognized income tax expense of $4.7 million on pre-tax income of $14.9 million . The recorded income tax differs from the taxes calculated at the statutory rate primarily due to a favorable change in estimate for certain tax credits generated in both 2016 and 2015 . For the nine months ended September 30, 2016 , the Company recognized income tax expense of $22.6 million on a pre-tax income of $31.7 million . The recorded income tax expense for the nine months ended September 30, 2016 differs from taxes calculated at the statutory rate primarily due to tax expense of $7.7 million from the settlement reached with the Internal Revenue Service (the "IRS") on the matter discussed below related to the deduction of payments previously made by the Company to the Asset Forfeiture and Money Laundering Section of the Department of Justice ("U.S. DOJ") pursuant to the Deferred Prosecution Agreement with the U.S. Attorney's Office for the Middle District of Pennsylvania and the U.S. DOJ (the "Deferred Prosecution Agreement"), the reversal of tax benefits of $3.6 million on share-based compensation and a tax expense of $1.6 million related to non-deductible executive compensation, offset by $1.7 million of tax benefit related to the Company's increase in estimate for certain tax credits.
For the  three months ended September 30, 2015 , the Company recognized an income tax expense of $0.5 million on a pre-tax income of  $5.4 million . The recorded income tax differed from taxes calculated at the statutory rate primarily due to a favorable change in the valuation allowance related to capital gains realized on the sale of an investment and discrete tax benefits recognized on certain tax credits claimed on the Company's 2014 federal return. For the nine months ended September 30, 2015 , although the Company recognized a pre-tax loss of  $31.1 million , an income tax expense of $48.4 million  was recorded primarily as a result of the U.S. Tax Court decision related to the IRS matter discussed below.
The IRS completed its examination of the Company’s consolidated income tax returns through 2013 and issued Notices of Deficiency for 2005-2007 and 2009 and an Examination Report for 2008. The Notices of Deficiency and Examination Report disallow, among other items, approximately $900.0 million of deductions on securities losses in the 2007, 2008 and 2009 tax returns. In 2013, the Company reached a partial settlement with the IRS allowing ordinary loss treatment on $186.9 million of deductions in dispute. In January 2015, the U.S. Tax Court granted the IRS's motion for summary judgment upholding the remaining adjustments in the Notices of Deficiency. On July 27, 2015, the Company filed a notice of appeal with the U.S. Tax Court. The U.S. Tax Court has transferred jurisdiction over the case to the U.S. Court of Appeals for the Fifth Circuit. All appellate briefs were filed by the end of January 2016, and oral arguments were held before the Fifth Circuit on June 7, 2016.
The Tax Court's decision was a change in facts which warranted reassessment of the Company's uncertain tax position. Although the Company believes that it has substantive tax law arguments in favor of its position and has appealed the ruling, the reassessment resulted in the Company determining that it is no longer more likely than not that its existing position will be sustained. Accordingly, the Company re-characterized certain deductions relating to securities losses to be capital in nature, rather than ordinary. The Company recorded a full valuation allowance against these losses in the quarter ended March 31, 2015. This change increased "Income tax expense" in the Condensed Consolidated Statements of Operations in the quarter ended March 31, 2015 by $63.7 million . During 2015 , the Company made payments to the IRS of $61.0 million for federal tax payments and associated interest related to the matter. Pending the outcome of the appeal, the Company may be required to file amended state returns and make additional cash payments of up to $17.0 million on amounts that have previously been accrued.
The IRS completed its examination of the Company’s consolidated income tax returns for the tax years 2011 through 2013 and issued a Revenue Agent Report (“RAR”) in the first quarter of 2015 that included disallowing $100.0 million of deductions related to payments the Company made to the U.S. DOJ pursuant to the Deferred Prosecution Agreement. In April 2016, the Company entered into a settlement agreement with the IRS allowing a deduction of $39.3 million . As of December 31, 2015, the Company had recognized a cumulative benefit of approximately $23.3 million related to this matter. “Income tax expense” in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2016 increased by $7.7 million as a result of the settlement.


16


Unrecognized tax benefits are recorded in “Accounts payable and other liabilities” in the Condensed Consolidated Balance Sheets. As of September 30, 2016 and December 31, 2015 , the liability for unrecognized tax benefits was $17.4 million and $30.5 million , respectively, all of which could impact the effective tax rate if recognized. The decrease in unrecognized tax benefits was driven by $21.2 million relating to the settlement of the U.S. DOJ tax matter discussed above. The Company accrues interest and penalties for unrecognized tax benefits through “Income tax expense” in the Condensed Consolidated Statements of Operations. For the nine months ended September 30, 2016 , interest and penalties increased by $1.0 million , offset by $0.5 million from the settlement of the U.S. DOJ tax matter. For the nine months ended September 30, 2015 , the Company's accrual for interest and penalties decreased by $1.2 million . As of September 30, 2016 and December 31, 2015 , the Company had a liability of $5.0 million and $4.5 million , respectively, for interest and penalties related to its unrecognized tax benefits. As a result of the Company's appeal with the U.S. Court of Appeals related to its securities losses previously discussed, it is possible that there could be a significant decrease to the total amount of unrecognized tax benefits over the next 12 months. As of September 30, 2016 , it is not possible to reasonably estimate the expected change to the total amount of unrecognized tax positions over the next 12 months.

Note 12 — Commitments and Contingencies

Legal Proceedings — The matters set forth below are subject to uncertainties and outcomes that are not predictable. The Company accrues for these matters as any resulting losses become probable and can be reasonably estimated. Further, the Company maintains insurance coverage for many claims and litigation matters. In relation to various legal matters, including those described below, the Company had $1.5 million and $16.3 million of liability recorded in the “Accounts payable and other liabilities” line in the Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015 , respectively. A nominal charge was recorded for legal proceedings during the three and nine months ended September 30, 2016 compared to a nominal and a  $2.2 million charge recorded for the  three and nine months ended September 30, 2015 , respectively, in the "Transaction and operations support" line in the Condensed Consolidated Statements of Operations.
Litigation Commenced Against the Company:
Class Action Securities Litigation — On April 15, 2015, a securities class action lawsuit was filed in the Superior Court of the State of Delaware, County of New Castle, against MoneyGram, all of its directors, certain of its executive officers, Thomas H. Lee Partners, Goldman Sachs & Co., Inc. and the underwriters of the secondary public offering of the Company’s common stock that closed on April 2, 2014 (the “2014 Offering”). The lawsuit was brought by the Iron Workers District Council of New England Pension Fund seeking to represent a class consisting of all purchasers of the Company’s common stock issued pursuant and/or traceable to the Company’s registration statement and prospectus, and all documents incorporated by reference therein, for the 2014 Offering. The lawsuit alleges violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended, due to allegedly false and misleading statements in connection with the 2014 Offering and seeks unspecified damages and other relief. In May 2015, MoneyGram and the other defendants filed a notice of removal to the federal district court of the District of Delaware. In September 2016, the court denied plaintiffs' motion to remand. The Company believes that the claims are without merit and intends to vigorously defend against the lawsuit. The Company is unable to predict the outcome, or the possible loss or range of loss, if any, related to this matter.
Other Matters — The Company is involved in various other claims and litigation that arise from time to time in the ordinary course of the Company's business. Management does not believe that after final disposition any of these matters is likely to have a material adverse impact on the Company's financial condition, results of operations and cash flows.
Government Investigations:
State Civil Investigative Demands — MoneyGram received Civil Investigative Demands from a working group of nine state attorneys general who initiated an investigation into whether the Company took adequate steps to prevent consumer fraud during the period from 2007 to 2014. On February 11, 2016, the Company entered into a settlement agreement with 49 states and the District of Columbia to settle any civil or administrative claims such attorneys general may have asserted under their consumer protection laws through the date of the settlement agreement in connection with the investigation. Under the settlement agreement, the Company made a non-refundable payment of $13.0 million to the participating states in March 2016 to be used by the states to provide restitution to consumers. The Company also agreed to implement certain enhancements to its compliance program and provide periodic reports to the states party to the settlement agreement.
Other Matters — The Company is involved in various other government inquiries and other matters that arise from time to time. Management does not believe that after final disposition any of these other matters is likely to have a material adverse impact on the Company’s financial condition, results of operations and cash flows.


17


In 2015, we initiated an internal investigation to identify any payments processed by the Company that were violations of the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) sanctions regulations. We have notified OFAC of the ongoing internal investigation, which is being conducted in conjunction with the Company’s outside counsel. If any violations are confirmed as part of our investigation, we could be subject to fines or penalties.
Actions Commenced by the Company:
Tax Litigation — The IRS completed its examination of the Company’s consolidated income tax returns through 2013 and issued Notices of Deficiency for 2005-2007 and 2009 and an Examination Report for 2008. The Notices of Deficiency and Examination Report disallow, among other items, approximately $900.0 million of ordinary deductions on securities losses in the 2007, 2008 and 2009 tax returns. In May 2012 and December 2012, the Company filed petitions in the U.S. Tax Court challenging the 2005-2007 and 2009 Notices of Deficiency, respectively. In 2013, the Company reached a partial settlement with the IRS allowing ordinary loss treatment on $186.9 million of deductions in dispute. In January 2015, the U.S. Tax Court granted the IRS's motion for summary judgment upholding the remaining adjustments in the Notices of Deficiency. On July 27, 2015, the Company filed a notice of appeal with the U.S. Tax Court. The U.S. Tax Court has transferred jurisdiction over the case to the U.S. Court of Appeals for the Fifth Circuit. All appellate briefs were filed by the end of January 2016, and oral arguments were held before the Fifth Circuit on June 7, 2016.
The Tax Court's decision was a change in facts which warranted reassessment of the Company's uncertain tax position. Although the Company believes that it has substantive tax law arguments in favor of its position and has appealed the ruling, the reassessment resulted in the Company determining that it is no longer more likely than not that its existing position will be sustained. Accordingly, the Company re-characterized certain deductions relating to securities losses to be capital in nature, rather than ordinary. The Company recorded a full valuation allowance against these losses in the quarter ended March 31, 2015. This change increased "Income tax expense" in the Condensed Consolidated Statements of Operations in the quarter ended March 31, 2015 by $63.7 million . During 2015 , the Company made payments to the IRS of $61.0 million for federal tax payments and associated interest related to the matter. Pending the outcome of the appeal, the Company may be required to file amended state returns and make additional cash payments of up to $17.0 million on amounts that have previously been accrued.

Note 13 — Earnings per Common Share

For all periods in which it is outstanding, the Series D Participating Convertible Preferred Stock (the "D Stock") is included in the weighted-average number of common shares outstanding utilized to calculate basic earnings (loss) per common share because the D Stock is deemed a common stock equivalent. Diluted earnings (loss) per common share reflects the potential dilution that could result if securities or incremental shares arising out of the Company’s stock-based compensation plans were exercised or converted into common stock. Diluted earnings (loss) per common share assumes the exercise of stock options using the treasury stock method.
The following table is a reconciliation of the weighted-average amounts used in calculating earnings (loss) per share:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Amounts in millions)
2016
 
2015
 
2016
 
2015
Basic common shares outstanding
62.2

 
62.1

 
62.4

 
62.1

Shares related to stock options and restricted stock units
4.2

 
1.7

 
3.8

 

Diluted common shares outstanding
66.4

 
63.8

 
66.2

 
62.1

Potential common shares are excluded from the computation of diluted earnings per common share when the effect would be anti-dilutive. All potential common shares are anti-dilutive in periods of net loss available to common stockholders. Stock options are anti-dilutive when the exercise price of these instruments is greater than the average market price of the Company’s common stock for the period and restricted stock units are anti-dilutive if they are subject to performance conditions that have not been met. The following table summarizes the weighted-average potential common shares excluded from diluted earnings (loss) per common share, as their effect would be anti-dilutive:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Amounts in millions)
2016
 
2015
 
2016
 
2015
Shares related to stock options
2.7

 
3.3

 
2.8

 
3.5

Shares related to restricted stock units
0.8

 
2.6

 
0.8

 
3.7

Shares excluded from the computation
3.5

 
5.9

 
3.6

 
7.2



18



Note 14 — Segment Information

The Company’s reporting segments are primarily organized based on the nature of products and services offered and the type of consumer served. The Company has two reporting segments: Global Funds Transfer and Financial Paper Products. See Note 1 — Description of the Business and Basis for Presentation for further discussion on our segments. One of the Company’s agents for both the Global Funds Transfer segment and the Financial Paper Products segment accounted for 19 percent of total revenue for the three and nine months ended September 30, 2016 and 2015 .
The following table is a summary of the total revenue by segment:
   
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Amounts in millions)
2016
 
2015
 
2016
 
2015
Global Funds Transfer revenue:
 
 
 
 
 
 
 
Money transfer revenue
$
339.6

 
$
326.6

 
$
997.3

 
$
930.0

Bill payment revenue
24.6

 
24.4

 
71.9

 
74.0

Total Global Funds Transfer revenue
364.2

 
351.0

 
1,069.2

 
1,004.0

Financial Paper Products revenue:
 
 
 
 
 
 
 
Money order revenue
12.6

 
12.5

 
38.2

 
38.4

Official check revenue
6.3

 
5.1

 
17.8

 
15.6

Total Financial Paper Products revenue
18.9

 
17.6

 
56.0

 
54.0

Total revenue
$
383.1

 
$
368.6

 
$
1,125.2

 
$
1,058.0

The following table is a summary of the operating income by segment and detail of the income (loss) before income taxes:
   
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Amounts in millions)
2016
 
2015
 
2016
 
2015
Global Funds Transfer operating income
$
26.6

 
$
18.9

 
$
70.0

 
$
19.5

Financial Paper Products operating income
4.5

 
3.4

 
13.6

 
12.8

Total segment operating income
31.1

 
22.3

 
83.6

 
32.3

Other operating loss
(4.9
)
 
(5.7
)
 
(18.1
)
 
(29.7
)
Total operating income
26.2

 
16.6

 
65.5

 
2.6

Interest expense
11.3

 
11.2

 
33.8

 
33.7

Income (loss) before income taxes
$
14.9

 
$
5.4

 
$
31.7

 
$
(31.1
)
The following table sets forth the assets by segment:
(Amounts in millions)
September 30, 2016
 
December 31, 2015
Global Funds Transfer
$
2,162.2

 
$
1,982.0

Financial Paper Products
2,064.0

 
2,326.4

Other
199.9

 
196.8

Total assets
$
4,426.1

 
$
4,505.2



19



Note 15 — Condensed Consolidating Financial Statements

In the event the Company offers debt securities pursuant to an effective registration statement on Form S-3, these debt securities may be guaranteed by certain of its subsidiaries. Accordingly, the Company is providing condensed consolidating financial information in accordance with the Securities and Exchange Commission Regulation S-X Rule 3-10, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered. If the Company issues debt securities, the following 100 percent directly or indirectly owned subsidiaries could fully and unconditionally guarantee the debt securities on a joint and several basis: MoneyGram Payment Systems Worldwide, Inc.; MoneyGram Payment Systems, Inc.; and MoneyGram of New York LLC (collectively, the “Guarantors”).
The following information represents Condensed Consolidating Balance Sheets as of September 30, 2016 and December 31, 2015 , Condensed Consolidating Statements of Operations for the three and nine months ended September 30, 2016 and 2015 and Condensed Statements of Cash Flows for the nine months ended September 30, 2016 and 2015 . The condensed consolidating financial information presents financial information in separate columns for MoneyGram International, Inc. on a Parent-only basis carrying its investment in subsidiaries under the equity method; Guarantors on a combined basis, carrying investments in subsidiaries that are not expected to guarantee the debt (collectively, the “Non-Guarantors”) under the equity method; Non-Guarantors on a combined basis; and eliminating entries. The eliminating entries primarily reflect intercompany transactions, such as accounts receivable and payable, fee revenue and commissions expense and the elimination of equity investments and income in subsidiaries.


20


MONEYGRAM INTERNATIONAL, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF SEPTEMBER 30, 2016
 
(Amounts in millions)
Parent
 
Subsidiary Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
102.7

 
$
70.4

 
$

 
$
173.1

Settlement assets

 
3,350.9

 
89.5

 

 
3,440.4

Property and equipment, net

 
182.1

 
19.2

 

 
201.3

Goodwill

 
315.3

 
126.9

 

 
442.2

Other assets
29.0

 
126.6

 
30.7

 
(17.2
)