Moneygram International, Inc.
MONEYGRAM INTERNATIONAL INC (Form: 10-Q, Received: 11/02/2017 16:34:00)
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, 2017
¨
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,” “smaller reporting company,” and “emerging growth 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
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
¨

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 November 1, 2017 , 54,231,330  shares of common stock, $0.01 par value, were outstanding.
 


Table of Contents

 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 


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, 2017
 
December 31, 2016
ASSETS
 
 
 
Cash and cash equivalents
$
170.4

 
$
157.2

Settlement assets
3,499.5

 
3,634.3

Property and equipment, net
215.0

 
201.0

Goodwill
442.2

 
442.2

Other assets
219.0

 
162.7

Total assets
$
4,546.1

 
$
4,597.4

 
 
 
 
LIABILITIES
 
 
 
Payment service obligations
$
3,499.5

 
$
3,634.3

Debt, net
909.9

 
915.2

Pension and other postretirement benefits
84.2

 
99.0

Accounts payable and other liabilities
236.5

 
164.5

Total liabilities
4,730.1

 
4,813.0

 
 
 
 
COMMITMENTS AND CONTINGENCIES (NOTE 11)

 

 
 
 
 
STOCKHOLDERS’ DEFICIT
 
 
 
Participating convertible preferred stock - series D, $0.01 par value, 200,000 shares authorized, 71,282 issued at September 30, 2017 and December 31, 2016
183.9

 
183.9

Common stock, $0.01 par value, 162,500,000 shares authorized, 58,823,567 shares issued at September 30, 2017 and December 31, 2016
0.6

 
0.6

Additional paid-in capital
1,031.3

 
1,020.3

Retained loss
(1,282.9
)
 
(1,252.6
)
Accumulated other comprehensive loss
(50.8
)
 
(56.1
)
Treasury stock: 4,605,928 and 6,058,856 shares at September 30, 2017 and December 31, 2016, respectively
(66.1
)
 
(111.7
)
Total stockholders’ deficit
(184.0
)
 
(215.6
)
Total liabilities and stockholders’ deficit
$
4,546.1

 
$
4,597.4

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)
2017
 
2016
 
2017
 
2016
REVENUE
 
 
 
 
 
 
 
Fee and other revenue
$
390.1

 
$
408.2

 
$
1,161.5

 
$
1,201.5

Investment revenue
7.7

 
4.6

 
32.4

 
12.7

Total revenue
397.8

 
412.8

 
1,193.9

 
1,214.2

EXPENSES
 
 
 
 
 
 
 
Fee and other commissions expense
190.1

 
199.9

 
570.3

 
594.4

Investment commissions expense
2.6

 
0.6

 
5.9

 
1.7

Total commissions expense
192.7

 
200.5

 
576.2

 
596.1

Compensation and benefits
69.1

 
72.5

 
207.5

 
218.9

Transaction and operations support
78.3

 
79.5

 
240.2

 
227.1

Occupancy, equipment and supplies
15.5

 
15.6

 
49.0

 
46.8

Depreciation and amortization
18.9

 
18.6

 
55.8

 
60.2

Total operating expenses
374.5

 
386.7

 
1,128.7

 
1,149.1

OPERATING INCOME
23.3

 
26.1

 
65.2

 
65.1

Other expense
 
 
 
 
 
 
 
Interest expense
11.6

 
11.3

 
33.6

 
33.8

Total other expense
11.6

 
11.3

 
33.6

 
33.8

Income before income taxes
11.7

 
14.8

 
31.6

 
31.3

Income tax expense
4.0

 
4.7

 
8.9

 
22.4

NET INCOME
$
7.7

 
$
10.1

 
$
22.7

 
$
8.9

 
 
 
 
 
 
 
 
EARNINGS PER COMMON SHARE
 
 
 
 
 
 
 
Basic
$
0.12

 
$
0.16

 
$
0.36

 
$
0.14

Diluted
$
0.12

 
$
0.15

 
$
0.34

 
$
0.13

 
 
 
 
 
 
 
 
Weighted-average outstanding common shares and equivalents used in computing earnings per common share
 
 
 
 
 
 
 
Basic
63.1

 
62.2

 
62.8

 
62.4

Diluted
66.2

 
66.4

 
66.2

 
66.2

See Notes to the Condensed Consolidated Financial Statements


2


MONEYGRAM INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
UNAUDITED
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Amounts in millions)
2017
 
2016
 
2017
 
2016
NET INCOME
$
7.7

 
$
10.1

 
$
22.7

 
$
8.9

OTHER COMPREHENSIVE INCOME
 
 
 
 
 
 
 
Net change in unrealized holding gains on available-for-sale securities arising during the period, net of tax benefit of $0.0 for the three and nine months ended September 30, 2017, respectively, and $0.0 and $0.1 for the three and nine months ended September 30, 2016, respectively
(0.4
)
 

 
3.8

 
(0.2
)
Net reclassification adjustment for net realized gains included in net earnings, net of tax expense of $0.0 for the three and nine months ended September, 30, 2017 and 2016

 

 
(12.2
)
 

Net change in pension liability due to amortization of prior service credit and net actuarial loss, net of tax benefit of $0.5 and $0.4 for the three months ended September 30, 2017 and 2016, respectively, and $1.2 and $1.5 for the nine months ended September 30, 2017 and 2016, respectively
0.7

 
0.9

 
2.1

 
2.5

Valuation adjustment for pension and postretirement benefits, net of tax expense of $0.1 and $0.0 for the three and nine months ended September 30, 2017, and 2016, respectively
(0.3
)
 

 
(0.3
)
 

Unrealized foreign currency translation adjustments, net of tax expense of $2.2 and $0.2 for the three months ended September 30, 2017 and 2016, respectively, and $6.2 and $2.0 for the nine months ended September 30, 2017 and 2016, respectively
4.9

 
0.4

 
11.9

 
(0.7
)
Other comprehensive income
4.9

 
1.3

 
5.3

 
1.6

COMPREHENSIVE INCOME
$
12.6

 
$
11.4

 
$
28.0

 
$
10.5

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)
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
22.7

 
$
8.9

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
55.8

 
60.2

Signing bonus amortization
39.0

 
41.0

Signing bonus payments
(24.6
)
 
(17.2
)
Amortization of debt issuance costs and debt discount
2.4

 
2.5

Non-cash compensation and pension expense
15.4

 
19.1

Gain on redemption of asset-backed security
(12.2
)
 

Change in other assets
(60.4
)
 
2.7

Change in accounts payable and other liabilities
48.0

 
(29.4
)
Other non-cash items, net
3.7

 
(0.7
)
Net cash provided by operating activities
89.8

 
87.1

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(63.1
)
 
(60.4
)
Net cash used in investing activities
(63.1
)
 
(60.4
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Principal payments on debt
(7.3
)
 
(7.3
)
Proceeds from exercise of stock options
1.8

 

Stock repurchases

 
(7.5
)
Payment for contingent consideration

 
(0.7
)
Payments to tax authorities for stock-based compensation
(8.0
)
 
(2.6
)
Net cash used in financing activities
(13.5
)
 
(18.1
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
13.2

 
8.6

CASH AND CASH EQUIVALENTS—Beginning of period
157.2

 
164.5

CASH AND CASH EQUIVALENTS—End of period
$
170.4

 
$
173.1

Supplemental cash flow information:
 
 
 
Cash payments for interest
$
31.1

 
$
31.4

Cash taxes, net
$
6.4

 
$
7.1

See Notes to the Condensed Consolidated Financial Statements


4


MONEYGRAM INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT 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, 2017
$
183.9

 
$
0.6

 
$
1,020.3

 
$
(1,252.6
)
 
$
(56.1
)
 
$
(111.7
)
 
$
(215.6
)
Net income

 

 

 
22.7

 

 

 
22.7

Stock-based compensation activity

 

 
11.0

 
(53.0
)
 

 
45.6

 
3.6

Other comprehensive income

 

 

 

 
5.3

 

 
5.3

September 30, 2017
$
183.9

 
$
0.6

 
$
1,031.3

 
$
(1,282.9
)
 
$
(50.8
)
 
$
(66.1
)
 
$
(184.0
)
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, 2017 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, 2016 .
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.
Immaterial error correction — During the third quarter of 2017, the Company noted an error with respect to the defined pension plan (the “Pension Plan”). The Company assessed the materiality of the misstatement both quantitatively and qualitatively and determined the correction of this error to be immaterial to all prior consolidated financial statements taken as a whole. Accordingly, the Company adjusted its consolidated financial statements for the period ended December 31, 2016. The adjustment has no impact to "Total liabilities and stockholders' deficit" on the Consolidated Balance Sheet as of December 31, 2016. The effect of the correction is as follows:
 
 
December 31, 2016
(Amounts in millions)
 
As Previously Reported
 
Correction
 
As Corrected
LIABILITIES
 
 
 
 
 
 
Pension and other postretirement benefits
 
$
87.6

 
$
11.4

 
$
99.0

Accounts payable and other liabilities
 
$
168.7

 
$
(4.2
)
 
$
164.5

 
 
 
 
 
 
 
STOCKHOLDERS’ DEFICIT
 
 
 
 
 
 
Retained loss
 
$
(1,247.6
)
 
$
(5.0
)
 
$
(1,252.6
)
Accumulated other comprehensive loss
 
$
(53.9
)
 
$
(2.2
)
 
$
(56.1
)
The impact of the immaterial error correction on "Compensation and benefits" and "Net income" on the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2016, was an increase of $0.1 million and $0.4 million to compensation and benefits, and a decrease of $0.1 million and $0.2 million to net income, respectively.


6


Recent Accounting Pronouncements and Related Developmen ts — In May 2014, the Financial Accounting Standards Board (the "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
ASU 2016-20 (Issued December 2016) —   Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
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. Based on our initial evaluation for money transfer and bill payment services provided by the Global Funds Transfer segment, the Company has determined that each of these services includes only one performance obligation to the customer and the satisfaction of that performance obligation occurs at a point in time, which is not a change from how we currently recognize revenue. Management believes that the adoption of this standard will not have a material impact on the Company’s consolidated financial statements and our internal controls over financial reporting. Management is finalizing its disclosure requirements of this standard.  
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's leases consist primarily of operating leases for buildings, equipment and vehicles. The impact of this ASU on the Company’s consolidated financial statements is still being evaluated.
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 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. The Company adopted ASU 2016-09 in the first quarter of 2017. Prior to the adoption of ASU 2016-09, the Company presented 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. Upon adoption of this ASU, the presentation of these payments was reclassified to a financing activity and prior period Condensed Consolidated Statements of Cash Flows have been updated to reflect this change.
In October 2016, the FASB issued ASU 2016-16,  Income Taxes (Topic 740) - Intra- Entity Transfers of Assets Other Than Inventory . This standard requires that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Consequently, the amendments in this standard eliminate the exception for an intra-entity transfer of an asset other than inventory. ASU 2016-16 is effective for public companies for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. The Company will not be early adopting this standard but, upon adoption, will use the modified retrospective approach, which will result in a reclassification of a net deferred charge of approximately $52.0 million from “Other assets” to “Retained loss” on the Condensed Consolidated Balance Sheets.
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.
Merger Agreement  — On January 26, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) among the Company, Alipay (UK) Limited, a United Kingdom limited company (“Alipay”), Matrix Acquisition Corp., a Delaware corporation and wholly owned subsidiary of Alipay (“Merger Sub”) and, solely for purposes of certain specified provisions in the Merger Agreement, Alipay (Hong Kong) Holding Limited, a Hong Kong limited company. The Merger Agreement provides that, subject to the terms and conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Alipay, and holders of the Company’s common stock would be entitled to receive $13.25 in cash, less any required withholding taxes, for each share of the Company’s common


7


stock, on an as-converted basis, owned at the effective time of the Merger. On April 15, 2017, the Company entered into the First Amendment to the Agreement and Plan of Merger (the “Merger Agreement Amendment”). The Merger Agreement Amendment increased the merger consideration to $18.00 per share and also increased the termination fee payable by the Company in connection with the termination of the Merger Agreement under specified circumstances, including the termination of the Merger Agreement by the Company to accept a Company Superior Proposal (as defined in the Merger Agreement), the termination of the Merger Agreement by Alipay following a change of recommendation by the Company’s Board of Directors, and other customary circumstances. Completion of the Merger is subject to a number of conditions, including the receipt of regulatory approvals. On May 16, 2017, the Company's stockholders voted to approve the Merger.

Note 2 — 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, 2017
 
December 31, 2016
Settlement assets:
 
 
 
Settlement cash and cash equivalents
$
1,418.0

 
$
1,365.0

Receivables, net
920.1

 
999.4

Interest-bearing investments
1,153.9

 
1,252.1

Available-for-sale investments
7.5

 
17.8

 
$
3,499.5

 
$
3,634.3

Payment service obligations
$
(3,499.5
)
 
$
(3,634.3
)

Note 3 — 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 table summarizes 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, 2017
 
 
 
 
 
Financial assets:
 
 
 
 
 
Available-for-sale investments:
 
 
 
 
 
Residential mortgage-backed securities
$
6.1

 
$

 
$
6.1

Asset-backed and other securities

 
1.4

 
1.4

Forward contracts
1.5

 

 
1.5

Total financial assets
$
7.6

 
$
1.4

 
$
9.0

Financial liabilities:
 
 
 
 
 
Forward contracts
$
0.5

 
$

 
$
0.5

 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
Financial assets:
 
 
 
 
 
Available-for-sale investments:
 
 
 
 
 
Residential mortgage-backed securities
$
7.2

 
$

 
$
7.2

Asset-backed and other securities

 
10.6

 
10.6

Forward contracts
2.4

 

 
2.4

Total financial assets
$
9.6

 
$
10.6

 
$
20.2

Financial liabilities:
 
 
 
 
 
Forward contracts
$
0.1

 
$

 
$
0.1



8


The following table provides a roll-forward of the asset-backed and other 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)
2017
 
2016
 
2017
 
2016
Beginning balance
$
1.8

 
$
11.0

 
$
10.6

 
$
11.6

Principal paydowns

 
(0.3
)
 
(0.8
)
 
(1.1
)
Change in unrealized gains
(0.4
)
 
0.2

 
3.8

 
0.3

Net realized gains

 
(0.3
)
 
(12.2
)
 
(0.2
)
Ending balance
$
1.4

 
$
10.6

 
$
1.4

 
$
10.6

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, 2017
 
December 31, 2016
 
September 30, 2017
 
December 31, 2016
Senior secured credit facility
$
915.5

 
$
912.5

 
$
916.7

 
$
924.0

The carrying amounts for the Company's cash and cash equivalents, settlement cash and cash equivalents, interest-bearing investments and payment service obligations approximate fair value as of  September 30, 2017 and December 31, 2016 .

Note 4 — Investment Portfolio

The following table shows the components of the investment portfolio:
(Amounts in millions)
September 30, 2017
 
December 31, 2016
Cash
$
1,583.1

 
$
1,514.5

Money market securities
5.4

 
7.7

Cash and cash equivalents (1)
1,588.5

 
1,522.2

Interest-bearing investments
1,153.9

 
1,252.1

Available-for-sale investments
7.5

 
17.8

Total investment portfolio
$
2,749.9

 
$
2,792.1

(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.


9


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, 2017
 
 
 
 
 
Residential mortgage-backed securities
$
5.5

 
$
0.6

 
$
6.1

Asset-backed and other securities
0.2

 
1.2

 
1.4

Total
$
5.7

 
$
1.8

 
$
7.5

 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
Residential mortgage-backed securities
$
6.6

 
$
0.6

 
$
7.2

Asset-backed and other securities
1.0

 
9.6

 
10.6

Total
$
7.6

 
$
10.2

 
$
17.8

As of September 30, 2017 and December 31, 2016 , 81% and 40% , respectively, of the available-for-sale portfolio were invested in residential mortgage-backed securities issued by U.S. government agencies. 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 months ended September 30, 2017 and 2016 , the Company had nominal net realized losses from its available-for-sale portfolio. For the nine months ended September 30, 2017 , the Company recognized $12.2 million of investment income from the redemption at par value of $12.7 million of a previously impaired asset-backed security in "Investment revenue" on the Condensed Consolidated Statement of Operations. Prior to the redemption, the security had $0.5 million in book value with $7.9 million in unrealized gains. For the nine months ended September 30, 2016 , the Company had nominal net realized losses from its available-for-sale portfolio. The Company had nominal and no unrealized losses in its available-for-sale portfolio as of September 30, 2017 and  December 31, 2016 , respectively. See summary of net unrealized gains included in Accumulated other comprehensive loss in Note 8 — 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 asset-backed and other securities depend on the repayment characteristics and experience of the underlying obligations.  

Note 5 — 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 provided by operating activities" line in the Condensed Consolidated Statements of Cash Flows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Amounts in millions)
2017
 
2016
 
2017
 
2016
Net realized foreign currency gains
$
3.6

 
$
0.9

 
$
17.9

 
$
5.5

Net (losses) gains from the related forward contracts
(2.0
)
 
0.7

 
(12.2
)
 
10.6

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

 
$
1.6

 
$
5.7

 
$
16.1



10


As of September 30, 2017 and December 31, 2016 , the Company had $348.9 million and $294.5 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, 2017
 
December 31, 2016
 
September 30, 2017
 
December 31, 2016
 
September 30, 2017
 
December 31, 2016
(Amounts in millions)
 
 
 
 
 
 
Forward contracts
Other assets
 
$
1.6

 
$
2.6

 
$
(0.1
)
 
$
(0.2
)
 
$
1.5

 
$
2.4

 
 
 
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, 2017
 
December 31, 2016
 
September 30, 2017
 
December 31, 2016
 
September 30, 2017
 
December 31, 2016
(Amounts in millions)
 
 
 
 
 
 
Forward contracts
Accounts payable and other liabilities
 
$
0.6

 
$
0.3

 
$
(0.1
)
 
$
(0.2
)
 
$
0.5

 
$
0.1

The Company's forward contracts are primarily executed with counterparties governed by International Swaps and Derivatives Association agreements that generally include standard netting arrangements. Asset and liability positions from forward contracts and all other foreign exchange transactions with the same counterparty are net settled upon maturity.
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 6 — Debt

The following is a summary of the Company’s outstanding debt:
 
September 30, 2017
 
December 31, 2016
(Amounts in millions, except percentages)
Effective Interest Rate
 
 
 
Effective Interest Rate
 
 
Senior secured credit facility due 2020
4.55
%
 
$
916.7

 
4.25
%
 
$
924.0

Unamortized debt issuance costs and debt discount
 
 
(6.8
)
 
 
 
(8.8
)
Total debt, net
 
 
$
909.9

 
 
 
$
915.2

Revolving Credit Facility — As of September 30, 2017 , the Company had no outstanding letters of credit and no borrowings under its revolving credit facility, leaving $125.0 million of availability thereunder. The Company's effective interest rate on senior secured borrowings increased from 4.25% as of December 31, 2016 to 4.55% as of September 30, 2017 due to an increase in the Eurodollar rate.
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.


11


The Company's assets in excess of payment service obligations used for the asset coverage calculation, which is equal to total cash and cash equivalents and settlement assets less payment service obligations, are $170.4 million and $157.2 million as of September 30, 2017 and December 31, 2016 , respectively.
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, 2017 through December 31, 2017
2.25:1
 
4.250:1
January 1, 2018 through June 30, 2018
2.25:1
 
4.000:1
July 1, 2018 through December 31, 2018
2.25:1
 
3.750:1
January 1, 2019 through maturity
2.25:1
 
3.500:1
As of September 30, 2017 , the Company was in compliance with its financial covenants: our interest coverage ratio was 6.49 to 1.00 and our secured leverage ratio was 3.395 to 1.00. We continuously monitor our compliance with our debt covenants.

Note 7 — Pensions and Other Benefits

The following table is a summary of net periodic benefit expense for the Company's 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)
2017
 
2016
 
2017
 
2016
Interest cost
$
1.8

 
$
1.7

 
$
4.9

 
$
5.2

Expected return on plan assets
(1.3
)
 
(1.2
)
 
(3.8
)
 
(3.8
)
Amortization of net actuarial loss
1.3

 
1.4

 
3.5

 
4.3

Net periodic benefit expense
$
1.8

 
$
1.9

 
$
4.6

 
$
5.7

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)
2017
 
2016
 
2017
 
2016
Amortization of prior service credit
$
(0.1
)
 
$
(0.1
)
 
$
(0.3
)
 
$
(0.4
)
Amortization of net actuarial loss

 

 
0.1

 
0.1

Net periodic benefit income
$
(0.1
)
 
$
(0.1
)
 
$
(0.2
)
 
$
(0.3
)


Note 8 — Stockholders’ Deficit

Common Stock No dividends were paid during the three or nine months ended September 30, 2017 or September 30, 2016 .


12


Accumulated Other Comprehensive Loss  — The following tables summarize 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
January 1, 2017
$
10.8

 
$
(19.9
)
 
$
(47.0
)
 
$
(56.1
)
Other comprehensive income before reclassification
3.8

 
11.9

 
(0.3
)
 
15.4

Amounts reclassified from accumulated other comprehensive loss
(12.2
)
 

 
2.1

 
(10.1
)
Net current period other comprehensive (loss) income
(8.4
)
 
11.9

 
1.8

 
5.3

September 30, 2017
$
2.4

 
$
(8.0
)
 
$
(45.2
)
 
$
(50.8
)
 
 
 
 
 
 
 
 
January 1, 2016
$
11.1

 
$
(13.5
)
 
$
(48.4
)
 
$
(50.8
)
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
)
 
$
(45.9
)
 
$
(49.2
)
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)
2017
 
2016
 
2017
 
2016
 
Change in unrealized gains on securities classified as available-for-sale, before tax
$

 
$
(0.2
)
 
$
(12.2
)
 
$
(0.3
)
 
"Investment revenue"
Tax expense

 
0.1

 

 
0.1

 
 
Total, net of tax

 
(0.1
)
 
(12.2
)
 
(0.2
)
 
 
 
 
 
 
 
 
 
 
 
 
Pension and Postretirement Benefits adjustments:
 
 
 
 
 
 
 
 
 
Amortization of prior service credit
(0.1
)
 
(0.1
)
 
(0.3
)
 
(0.4
)
 
"Compensation and benefits"
Amortization of net actuarial loss
1.3

 
1.4

 
3.6

 
4.4

 
"Compensation and benefits"
Total before tax
1.2

 
1.3

 
3.3

 
4.0

 
 
Tax benefit
(0.5
)
 
(0.4
)
 
(1.2
)
 
(1.5
)
 
 
Total, net of tax
0.7

 
0.9

 
2.1

 
2.5

 
 
 
 
 
 
 
 
 
 
 
 
Total reclassified for the period, net of tax
$
0.7

 
$
0.8

 
$
(10.1
)
 
$
2.3

 
 


13



Note 9 — 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)
2017
 
2016
 
2017
 
2016
Expense recognized related to stock options
$
0.1

 
$
0.6

 
$
0.5

 
$
2.2

Expense recognized related to restricted stock units
3.4

 
3.6

 
10.5

 
11.5

Stock-based compensation expense
$
3.5

 
$
4.2

 
$
11.0

 
$
13.7

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, 2016
2,485,461

 
$
18.02

 
4.0 years
 
$

Exercised
(109,731
)
 
14.49

 
 
 
 
Forfeited/Expired
(335,790
)
 
21.10

 
 
 
 
Options outstanding at September 30, 2017
2,039,940

 
$
17.70

 
3.1 years
 
$
2.2

Vested or expected to vest at September 30, 2017
2,039,775

 
$
17.70

 
3.1 years
 
$
2.2

Options exercisable at September 30, 2017
2,018,170

 
$
17.74

 
3.0 years
 
$
2.2

As of September 30, 2017 , the unrecognized stock option expense related to outstanding options was nominal with a remaining weighted-average vesting period of 0.1 years .
Restricted Stock Units — In February 2017, 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, 2017. 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 revenue is achieved for the year ended December 31, 2017. 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, 2016
4,630,038

 
$
7.68

 
0.9 years
 
$
54.7

Granted
1,361,986

 
12.87

 
 
 
 
Vested and converted to shares
(2,010,441
)
 
7.59

 
 
 
 
Forfeited
(635,873
)
 
13.35

 
 
 
 
Restricted stock units outstanding at September 30, 2017
3,345,710

 
$
8.77

 
1.0 years
 
$
53.9

Restricted stock units vested and outstanding at September 30, 2017
32,680

 
$
6.12

 
 
 
$
0.5



14


As of September 30, 2017 , the Company’s outstanding restricted stock units had unrecognized compensation expense of $17.5 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 and converted was $0.9 million and $15.3 million for the three and nine months ended September 30, 2017 , respectively, and $0.8 million and $14.7 million for the three and nine months ended September 30, 2016 , respectively.

Note 10 — Income Taxes
The Company recognized income tax expense of $4.0 million and $8.9 million on a pre-tax income of $11.7 million and $31.6 million for the three and nine months ended September 30, 2017 , respectively. The recorded income tax expense differs from taxes calculated at the statutory rate for the three months ended September 30, 2017 , primarily due to a net favorable change in estimate for certain tax credits generated in both 2017 and 2016. For the nine months ended September 30, 2017 , the recorded income tax expense differs from taxes calculated at the statutory rate primarily due to a net tax benefit recognized for the redemption of a previously impaired asset-backed security, a tax benefit on stock-based compensation, a benefit on the estimated income tax credits generated in 2017 and a tax benefit from the reorganization of our international business activities, partially offset by the related amortization of the deferred charge. For more information related to the redemption see Note 4 Investment Portfolio.
For the three months ended September 30, 2016 , the Company recognized income tax expense of $4.7 million on pre-tax income of $14.8 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 an income tax expense of  $22.4 million on pre-tax income of $31.3 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 IRS 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.
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, 2016, the Company had fully settled this matter with $21.2 million of existing deferred tax assets and $0.5 million of cash after recognizing an additional $7.7 million of Income tax expense for the three months ended March 31, 2016. The state tax liabilities related to the federal settlement have yet to be settled due to the pending implications of the security losses.
Unrecognized tax benefits are recorded in “Accounts payable and other liabilities” in the Condensed Consolidated Balance Sheets. As of September 30, 2017 and December 31, 2016 , the liability for unrecognized tax benefits was $32.2 million and $24.2 million , respectively, and the net amount of unrecognized tax benefits that if recognized could impact the effective tax rate was $24.7 million and $16.7 million , respectively. For the nine months ended September 30, 2017 , the Company's unrecognized tax benefits increased by $8.0 million primarily as a result of a reorganization of our international business activities. 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, 2017 , the Company's accrual for interest and penalties increased by $1.7 million . For the nine months ended September 30, 2016 , the Company's accrual for interest and penalties increased by $1.0 million , which was offset by $0.5 million from the settlement of the U.S. DOJ tax matter. As of September 30, 2017 and December 31, 2016 , the Company had a liability of $8.1 million and $6.4 million , respectively, for interest and penalties related to its unrecognized tax benefits. As a result of the Company's litigation related to its securities losses discussed below in Note 11 Commitments and Contingencies , 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, 2017 , it is not possible to reasonably estimate the expected change to the total amount of unrecognized tax positions over the next 12 months.
In the first half of 2017, the Company initiated a reorganization to more closely align our operations to our international business activities, which resulted in a deferred charge of $60.2 million recorded in "Other assets" with an offset to "Accounts payable and other liabilities" in the Condensed Consolidated Balance Sheets as of September 30, 2017 . The deferred charge is amortized on a straight-line basis over five years through the Company's est imated annual effective tax rate as a component of "Income tax expense" in the Condensed Consolidated Statements of Operations. As of September 30, 2017 , the net deferred charge balance was $54.3 million .


15



Note 11 — Commitments and Contingencies
Participation Agreement between the Investors and Wal-Mart Stores, Inc.  — Affiliates of Thomas H. Lee Partners, L.P. and Goldman, Sachs & Co. (collectively, the “Investors”) have a Participation Agreement (the “Participation Agreement”) with Wal-Mart Stores, Inc. (“Walmart”), under which the Investors are obligated to pay Walmart certain percentages of any accumulated cash payments received by the Investors in excess of the Investors’ original investment in the Company. While the Company is not a party to, and has no obligations to Walmart or additional obligations to the Investors under, the Participation Agreement, the Company must recognize the Participation Agreement in its consolidated financial statements as the Company indirectly benefits from the agreement. Any future payments by the Investors to Walmart may result in an expense that could be material to the Company’s financial position or results of operations, but would have no impact on the Company’s cash flows. Upon completion of the proposed Merger, described in Note 1 — Description of the Business and Basis of Presentation , the Company may recognize an expense and a corresponding increase to additional paid-in capital in regards to the Participation Agreement of approximately $30 million . As of September 30, 2017 , the Company has not recognized any further liability or expense because completion of the Merger remains subject to certain closing conditions that have not yet been satisfied.
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 $0.6 million and $1.2 million of liability recorded in the “Accounts payable and other liabilities” line in the Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016 , respectively. A nominal charge was recorded in the "Transaction and operations support" line in the Condensed Consolidated Statements of Operations during the three months ended September 30, 2017 , while a charge of $0.9 million was recorded for legal proceedings during the nine months ended September 30, 2017 in the "Transaction and operations support" line in the Condensed Consolidated Statements of Operations. A nominal charge was recorded for legal proceedings during the three and nine months ended September 30, 2016 .
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, L.P., Goldman, Sachs & Co. 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 alleged 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. On July 24, 2017, the plaintiff voluntarily dismissed its complaint without prejudice.
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:
OFAC — 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 notified OFAC of the internal investigation, which was conducted in conjunction with the Company's outside counsel. On March 28, 2017, we filed a Voluntary Self-Disclosure with OFAC regarding the findings of our internal investigation. OFAC is currently reviewing the results of the Company’s investigation. At this time, it is not possible to determine the outcome of this matter, or the significance, if any, to our business, financial condition, or operations, and we cannot predict when OFAC will conclude their review of our Voluntary Self-Disclosure.
Deferred Prosecution Agreement — In November 2012, we announced that a settlement was reached with the U.S. Attorney's Office for the Middle District of Pennsylvania (the "MDPA") and the U.S. Department of Justice ("U.S. DOJ") relating to the previously disclosed investigation of transactions involving certain of our U.S. and Canadian agents, as well as fraud complaint data and the consumer anti-fraud program, during the period from 2003 to early 2009. In connection with this settlement, we entered into a five-year deferred prosecution agreement (the "DPA") with the MDPA and U.S. DOJ dated November 8, 2012. 
On November 1, 2017, the Company agreed to a stipulation with the MDPA and the DOJ (collectively, the “Government”) that the term of the Company’s DPA be extended for 90 days to February 6, 2018 during which the Company and the Government can discuss whether the Company is in compliance with the DPA. There can be no assurance that the Company and the Government


16


will continue to be able to negotiate a mutually satisfactory outcome during such 90 day period (or any further short-term extension of the DPA) or that such outcome will not include a further extension of the DPA, financial penalties or additional restrictions on the Company, including a monitorship period beyond the current monitorship that ends on April 30, 2018. Furthermore, there can be no assurance that the Government will not seek any other remedy, including criminal prosecution and financial penalties, in lieu of an extension of the DPA and monitorship.
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.
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. The Company filed a notice of appeal with the U.S. Tax Court on July 27, 2015 for an appeal to the U.S. Court of Appeals for the Fifth Circuit. Oral arguments were held before the Fifth Circuit on June 7, 2016, and on November 15, 2016, the Fifth Circuit vacated the Tax Court's decision and remanded the case to the Tax Court for further proceedings. The Company filed a motion for summary judgment in the Tax Court on May 31, 2017. On August 23, 2017, the IRS filed a motion for summary judgment and its response to the Company’s motion for summary judgment.
The January 2015 Tax Court 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 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. The November 2016 Fifth Circuit decision to remand the case back to the U.S. Tax Court does not change the Company’s current assessment regarding the likelihood that these deductions will be sustained. Accordingly, no change in the valuation allowance was made as of September 30, 2017 . Pending the outcome of the Tax Court proceeding, the Company may be required to file amended state returns and make additional cash payments of up to $18.3 million on amounts that have previously been accrued.

Note 12 — 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 per common share because the D Stock is deemed a common stock equivalent. Diluted earnings 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 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 per share:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Amounts in millions)
2017
 
2016
 
2017
 
2016
Basic common shares outstanding
63.1

 
62.2

 
62.8

 
62.4

Shares related to stock options and restricted stock units
3.1

 
4.2

 
3.4

 
3.8

Diluted common shares outstanding
66.2

 
66.4

 
66.2

 
66.2



17


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 per common share, as their effect would be anti-dilutive:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Amounts in millions)
2017
 
2016
 
2017
 
2016
Shares related to stock options
1.6

 
2.7

 
1.7

 
2.8

Shares related to restricted stock units
0.3

 
0.8

 
0.2

 
0.8

Shares excluded from the computation
1.9

 
3.5

 
1.9

 
3.6


Note 13 — 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 18% of total revenue for the three and nine months ended September 30, 2017 , and 18% and 19% of total revenue for the three and nine months ended September 30, 2016 , respectively.
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)
2017
 
2016
 
2017
 
2016
Global Funds Transfer revenue:
 
 
 
 
 
 
 
Money transfer revenue
$
356.8

 
$
369.3

 
$
1,055.4

 
$
1,086.3

Bill payment revenue
20.3

 
24.6

 
66.1

 
71.9

Total Global Funds Transfer revenue
377.1

 
393.9

 
1,121.5

 
1,158.2

Financial Paper Products revenue:
 
 
 
 
 
 
 
Money order revenue
12.8

 
12.6

 
42.0

 
38.2

Official check revenue
7.9

 
6.3

 
30.4

 
17.8

Total Financial Paper Products revenue
20.7

 
18.9

 
72.4

 
56.0

Total revenue
$
397.8

 
$
412.8

 
$
1,193.9

 
$
1,214.2

The following table is a summary of the operating income by segment and detail of the income before income taxes:
   
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Amounts in millions)
2017
 
2016
 
2017
 
2016
Global Funds Transfer operating income
$
29.6

 
$
26.6

 
$
70.4

 
$
70.0

Financial Paper Products operating income
4.6

 
4.5

 
26.6

 
13.6

Total segment operating income
34.2

 
31.1

 
97.0

 
83.6

Other operating loss
(10.9
)
 
(5.0
)
 
(31.8
)
 
(18.5
)
Total operating income
23.3

 
26.1

 
65.2

 
65.1

Interest expense
11.6

 
11.3

 
33.6

 
33.8

Income before income taxes
$
11.7

 
$
14.8

 
$
31.6

 
$
31.3

The following table sets forth the assets by segment:
(Amounts in millions)
September 30, 2017
 
December 31, 2016
Global Funds Transfer
$
2,315.4

 
$
2,213.9

Financial Paper Products
2,036.0

 
2,198.3

Other
194.7

 
185.2

Total assets
$
4,546.1

 
$
4,597.4



18


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), is to provide an understanding of MoneyGram International, Inc.'s (“MoneyGram,” the “Company,” “we,” “us” and “our”) financial condition, results of operations and cash flows by focusing on changes in certain key measures. This MD&A is provided as a supplement to, and should be read in conjunction with, our Condensed Consolidated Financial Statements and related Notes included in this Quarterly Report on Form 10-Q and the Consolidated Financial Statements and Notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016 . This discussion contains forward-looking statements that involve risks and uncertainties. MoneyGram’s actual results could differ materially from those anticipated due to various factors discussed below under “Cautionary Statements Regarding Forward-Looking Statements” and elsewhere in this Quarterly Report on Form 10-Q.
The comparisons presented in this MD&A refer to the same period in the prior year, unless otherwise noted. This MD&A is organized in the following sections:
Overview
Results of Operations
Liquidity and Capital Resources
Critical Accounting Policies and Estimates
Cautionary Statements Regarding Forward-Looking Statements
OVERVIEW
MoneyGram is a global provider of innovative money transfer services and is recognized worldwide as a financial connection to friends and family. Whether online, through a mobile device, at a kiosk or in a local store, we connect consumers in any way that is convenient for them. We also provide bill payment services, issue money orders and process official checks in the U.S. and in select countries and territories. We primarily offer services through third-party agents, including retail chains, independent retailers, post offices and financial institutions. We also have Company-operated retail locations in the U.S. and Western Europe. Additionally, we offer Digital solutions, which include moneygram.com, mobile solutions, account deposit and kiosk-based services.
We manage our revenue and related commissions expense through two reporting segments: Global Funds Transfer and Financial Paper Products. The Global Funds Transfer segment provides global money transfer services in approximately 360,000 agent locations in more than 200 countries and territories. Our global money transfer services are our primary revenue driver, accounting for 90% and 88% of total revenue for the three and nine months ended September 30, 2017 , respectively. The Global Funds Transfer segment also provides bill payment services to consumers through substantially all of our money transfer agent and Company-operated locations in the U.S., Canada and Puerto Rico, at certain agent locations in select Caribbean and European countries and through our Digital solutions. The Financial Paper Products segment provides money order services to consumers through retail locations and financial institutions located in the U.S. and Puerto Rico, and provides official check services to financial institutions in the U.S. Corporate expenses that are not related to our segments' performance are excluded from operating income for Global Funds Transfer and Financial Paper Products segments.
Business Environment
During the nine months ended September 30, 2017 , worldwide political and economic conditions remained highly variable, as evidenced by economic uncertainty in key markets, weak currencies, low currency reserves, currency controls, and a volatile immigration environment, among other factors. Also, there is continued political and economic unrest in parts of the Middle East and Africa that contributed to the volatility. Given the global reach and extent of the current economic conditions, the growth of money transfer volumes and the average face value of money transfers continued to fluctuate by corridor and country.
We generally compete for money transfer consumers on the basis of trust, convenience, price, technology and brand recognition. The market for money transfer services remains very competitive, consisting of a small number of large competitors and a large number of small, niche competitors. In addition to the competitive environment, global compliance requirements are becoming increasingly more complex, which has been affecting our top line growth. We have continued to implement solutions to comply with various government and other regulatory programs around the globe as well as introduce self-imposed compliance measures to further protect our customers and the integrity of our network.
We also continue to encounter competition from new technologies that allow consumers to send and receive money in a variety of ways. We believe that our investment in innovative products and services, particularly Digital solutions such as moneygram.com, mobile solutions, account deposit and kiosk-based services, positions the Company to grow our revenues and diversify our product and service offerings to meet consumers' needs. Digital solutions revenue for the three and nine months ended September 30, 2017 was $52.7 million and $155.9 million , respectively, or 15% of money transfer revenue for each period. Digital solutions revenue for the three and nine months ended September 30, 2016 was $49.6 million and $142.0 million , respectively, or 13%  of money


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transfer revenue for each period. Moneygram.com, which was 43% and 25% of Digital solutions revenue for the three and nine months ended September 30, 2017 , respectively, grew by 23% and 26%, respectively, over the same periods in 2016.
Anticipated Trends
This discussion of trends expected to impact our business in  2017  is based on information presently available and reflects certain assumptions, including assumptions regarding future economic conditions. Differences in actual economic conditions compared with our assumptions could have a material impact on our results. See “Cautionary Statements Regarding Forward-Looking Statements" included further below and Part I, Item 1A, “Risk Factors" included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016 for additional factors that could cause results to differ materially from those contemplated by the following forward-looking statements.
We continue to see increased opportunities to capitalize on growth and expansion both geographically and through product and service offerings. However, the strengthened U.S. dollar and political instability, which have led to increased currency volatility, liquidity pressure on central banks and pressure on labor markets in certain countries, may continue to impact our business in 2017. Additionally, competitors' pricing continues to negatively affect our growth in the U.S. to U.S. channel, along with macroeconomic issues in Africa, which have restricted our ability to transact.
The June 23, 2016 referendum by British voters to exit the European Union (referred to as Brexit), which was followed by Britain providing official notice to leave the European Union in March of 2017, introduced additional volatility and uncertainty in global markets and currency exchange rates. We are currently unable to determine the long term impact that Brexit will have on us and the global economic environment, as any impact will depend, in part, on the outcome of tariff, trade, regulatory and other negotiations.
For our Financial Paper Products segment, we expect the decline in overall paper-based transactions to continue primarily due to continued migration by customers to other payment methods. Our investment revenue, which consists primarily of interest income generated through the investment of cash balances received from the sale of our Financial Paper Products, is dependent on the interest rate environment. The Company expects to see a positive impact on our investment revenue if interest rates increase.
We continue to see a trend among state, federal and international regulators toward enhanced scrutiny of anti-money laundering compliance programs, as well as consumer fraud prevention and education. Compliance with laws and regulations is a highly complex and integral part of our day-to-day operations; thus we have continued to increase our compliance personnel headcount and make investments in our compliance-related technology and infrastructure. Our compliance enhancement program is focused on improving our services for consumers and completing the programs recommended in adherence with our settlement with the U.S. Attorney’s Office for the Middle District of Pennsylvania ("MDPA") and the Asset Forfeiture and Money Laundering Section of the Criminal Division of the Department of Justice ("U.S. DOJ"). For the nine months ended September 30, 2017 , the Company has invested $23.3 million in its compliance enhancement program, which includes $14.9 million of capital expenditures and $8.4 million of expenses incurred.
In the first quarter of 2013, a compliance monitor was selected pursuant to a requirement of our settlement with the MDPA and U.S. DOJ. We have received four annual reports from the compliance monitor and we are continuing to make investments in our compliance systems and operations as part of our compliance enhancement program. We incurred $4.4 million and $12.6 million of expense directly related to the compliance monitor for the three and nine months ended September 30, 2017 , respectively.
Financial Measures and Key Metrics
This Quarterly Report on Form 10-Q includes financial information prepared in accordance with generally accepted accounting principles in the U.S. ("GAAP") as well as certain non-GAAP financial measures that we use to assess our overall performance.
GAAP Measures We utilize certain financial measures prepared in accordance with GAAP to assess the Company's overall performance. These measures include, but are not limited to: fee and other revenue, fee and other commissions expense, fee and other revenue less commissions, operating income and operating margin. Due to our regulatory capital requirements, we deem certain payment service assets as settlement assets. Settlement assets represent funds received or to be received from agents for unsettled money transfers, money orders and customer payments. Settlement assets include settlement cash and cash equivalents, receivables, net, interest-bearing investments and available-for-sale investments. See Note 2  — Settlement Assets and Payment Service Obligations of the Notes to the Condensed Consolidated Financial Statements for additional disclosure.
Non-GAAP Measures Generally, a non-GAAP financial measure is a numerical measure of financial performance, financial position or cash flows that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. The non-GAAP financial measures should be viewed as a supplement to, and not a substitute for, financial measures presented in accordance with GAAP. We strongly encourage investors and stockholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure. While we believe that these metrics enhance investors' understanding of our business, these metrics are not necessarily


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comparable with similarly named metrics of other companies. The following are non-GAAP financial measures we use to assess our overall performance:
EBITDA (Earnings before interest, taxes, depreciation and amortization, including agent signing bonus amortization)
Adjusted EBITDA (EBITDA adjusted for certain significant items) Adjusted EBITDA does not reflect cash requirements necessary to service interest or principal payments on our indebtedness or tax payments that may result in a reduction in cash available.
Adjusted Free Cash Flow (Adjusted EBITDA less cash interest, cash taxes, cash payments for capital expenditures and cash payments for agent signing bonuses) Adjusted Free Cash Flow does not reflect cash payments related to the adjustment of certain significant items in Adjusted EBITDA.
Constant Currency Constant currency metrics assume that amounts denominated in foreign currencies are translated to the U.S. dollar at rates consistent with those in the prior year.
The Company utilizes specific terms related to our business throughout this document, including the following:
Corridor With regard to a money transfer transaction, the originating "send" location and the designated "receive" location are referred to as a corridor.
Corridor mix The relative impact of increases or decreases in money transfer transaction volume in each corridor versus the comparative prior period.
Face value The principal amount of each completed transaction, excluding any fees related to the transaction.
Foreign currency The impact of foreign currency exchange rate fluctuations on our financial results is typically calculated as the difference between current period activity translated using the current period’s currency exchange rates and the comparable prior-year period’s currency exchange rates. We use this method to calculate the impact of changes in foreign currency exchange rates on revenues, commissions and other operating expenses for all countries where the functional currency is not the U.S. dollar.
RESULTS OF OPERATIONS
The following table is a summary of the results of operations:
 
Three Months Ended September 30,
 
%
Change
 
Nine Months Ended September 30,
 
%
Change
(Amounts in millions, except percentages)
2017
 
2016
 
 
2017
 
2016
 
REVENUE
 
 
 
 
 
 
 
 
 
 
 
Fee and other revenue
$
390.1

 
$
408.2

 
(4
)%
 
$
1,161.5

 
$
1,201.5

 
(3
)%
Investment revenue
7.7

 
4.6

 
67

 
32.4

 
12.7

 
NM

Total revenue
397.8

 
412.8

 
(4
)
 
1,193.9

 
1,214.2

 
(2
)
EXPENSES
 
 
 
 
 
 
 
 
 
 
 
Fee and other commissions expense
190.1

 
199.9

 
(5
)
 
570.3

 
594.4

 
(4
)
Investment commissions expense
2.6

 
0.6

 
NM

 
5.9

 
1.7

 
NM

Total commissions expense
192.7

 
200.5

 
(4
)
 
576.2

 
596.1

 
(3
)
Compensation and benefits
69.1

 
72.5

 
(5
)
 
207.5

 
218.9

 
(5
)
Transaction and operations support
78.3

 
79.5

 
(2
)
 
240.2

 
227.1

 
6

Occupancy, equipment and supplies
15.5

 
15.6

 
(1
)
 
49.0

 
46.8

 
5

Depreciation and amortization
18.9

 
18.6

 
2

 
55.8

 
60.2

 
(7
)
Total operating expenses
374.5

 
386.7

 
(3
)
 
1,128.7

 
1,149.1

 
(2
)
OPERATING INCOME
23.3

 
26.1

 
(11
)
 
65.2

 
65.1

 

Other expense
 
 
 
 
 
 
 
 
 
 

Interest expense
11.6

 
11.3

 
3

 
33.6

 
33.8

 
(1
)
Total other expense
11.6

 
11.3

 
3

 
33.6

 
33.8

 
(1
)
Income before income taxes
11.7

 
14.8

 
(21
)
 
31.6

 
31.3

 
1

Income tax expense
4.0

 
4.7

 
(15
)
 
8.9

 
22.4

 
(60
)
NET INCOME
$
7.7

 
$
10.1

 
(24
)%
 
$
22.7

 
$
8.9

 
NM

NM=Not meaningful

Global Funds Transfer  
The following discussion provides a summary of fee and other revenue and fee and other commissions expense for the Global Funds Transfer segment for the three and nine months ended September 30, 2017 and 2016 .
 
Three Months Ended September 30,
 
%
Change
 
Nine Months Ended September 30,
 
%
Change
(Amounts in millions, except percentages)
2017
 
2016
 
 
2017
 
2016
 
Money transfer fee and other revenue
$
356.8

 
$
369.3

 
(3
)%
 
$
1,055.4

 
$
1,086.3

 
(3
)%
Bill payment fee and other revenue
20.3

 
24.6

 
(17
)
 
66.1

 
71.9

 
(8
)
Global Funds Transfer fee and other revenue
$
377.1

 
$
393.9

 
(4
)
 
$
1,121.5

 
$
1,158.2

 
(3
)
Fee and other commissions expense
$
189.8

 
$
199.5

 
(5
)%
 
$
569.3

 
$
593.6

 
(4
)%


21

Table of Contents

Money Transfer Fee and Other Revenue
The following table details the changes in money transfer fee and other revenue from 2016 to 2017 :
(Amounts in millions)
Three Months Ended
 
Nine Months Ended
For the period ended September 30, 2016
$
369.3

 
$
1,086.3

Change resulting from:
 
 
 
Corridor mix
(8.6
)
 
(30.3
)
Average face value per transaction and pricing
(7.2
)
 
(18.8
)
Impact from changes in exchange rates
4.3

 
(7.1
)
Money transfer volume
0.8

 
23.4

Other
(1.8
)
 
1.9

For the period ended September 30, 2017
$
356.8

 
$
1,055.4

For the three and nine months ended September 30, 2017 , the decrease in money transfer fee and other revenue was primarily driven by a negative change in corridor mix and a decrease in the average face value per transaction and pricing, partially offset by increased Non-U.S. and U.S. Outbound money transfer volume discussed further below. For the three months ended September 30, 2017, the decrease in money transfer fee and other revenue was also offset by the impact from changes in exchange rates driven by the euro.
The following table displays year-over-year money transfer fee and other revenue growth by geographic channel (the region originating the transaction):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017 vs 2016
 
2017 vs 2016
Total money transfer fee and other revenue
(3)%
 
(3)%
U.S. Outbound
1%
 
1%
Non-U.S.
(3)%
 
(3)%
U.S. to U.S.
(18)%
 
(17)%
Money Transfer Transactions
The following table displays the percentage distribution of total money transfer transactions by geographic channel (the region originating the transaction):
 
Three Months Ended September 30,