WESTERN UNION CO, 10-K filed on 2/25/2011
Annual Report
Document and Entity Information
In Billions, except Share data
Year Ended
Dec. 31, 2010
Feb. 18, 2011
Jun. 30, 2010
Document and Entity Information [Abstract]
 
 
 
Company Name
Western Union CO 
 
 
Entity Central Index Key (CIK)
0001365135 
 
 
Form Type
10-K 
 
 
Report Period
2010-12-31 
 
 
Amendment Flag
FALSE 
 
 
Document Fiscal Year Focus
2010 
 
 
Document Fiscal Period Focus
FY 
 
 
Company Fiscal Year End Date
12/31 
 
 
Company Well-known Seasoned Issuer (WKSI)
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Current with Filings
Yes 
 
 
Accelerated Filing Status
Large Accelerated Filer 
 
 
Public Float
 
 
10 
Entity Common Stock, Shares Outstanding
 
646,777,157 
 
Consolidated Statements of Income (USD $)
In Millions, except Per Share data
Year Ended
Dec. 31,
2010
2009
2008
Revenues:
 
 
 
Transaction fees
$ 4,055 
$ 4,036 
$ 4,241 
Foreign exchange revenues
1,019 
910 
896 
Commission and other revenues
119 
137 
145 
Total revenues
5,193 
5,084 
5,282 
Expenses:
 
 
 
Cost of services
2,978 
2,875 
3,093 
Selling, general and administrative
914 
926 
834 
Total expenses
3,893 1
3,801 1
3,927 1
Operating income
1,300 
1,283 
1,355 
Other income/(expense):
 
 
 
Interest income
45 
Interest expense
(170)
(158)
(171)
Derivative losses, net
(3)
(3)
(7)
Other income, net
15 
17 
Total other expense, net
(155)
(151)
(116)
Income before income taxes
1,145 
1,132 
1,239 
Provision for income taxes
235 
283 
320 
Net income
910 
849 
919 
Earnings per share:
 
 
 
Basic
1.37 
1.21 
1.26 
Diluted
$ 1.36 
$ 1.21 
$ 1.24 
Weighted-average shares outstanding:
 
 
 
Basic
667 
699 
730 
Diluted
669 
701 
738 
Consolidated Statements of Income (Parenthetical) (USD $)
In Millions
Year Ended
Dec. 31,
2010
2009
2008
Expenses:
 
 
 
Total related party expenses
$ 236 
$ 257 
$ 306 
Consolidated Balance Sheets(USD ($))
In Millions
Year Ended
Dec. 31, 2010
Dec. 31, 2009
Assets
 
 
Cash and cash equivalents
$ 2,157 
$ 1,685 
Settlement assets
2,635 
2,389 
Property and equipment, net of accumulated depreciation of $383.6 and $335.4, respectively
197 
204 
Goodwill
2,152 
2,143 
Other intangible assets, net of accumulated amortization of $441.2 and $355.4, respectively
438 
489 
Other assets
350 
442 
Total assets
7,929 
7,353 
Liabilities:
 
 
Accounts payable and accrued liabilities
520 
501 
Settlement obligations
2,635 
2,389 
Income taxes payable
357 
519 
Deferred tax liability, net
290 
269 
Borrowings
3,290 
3,049 
Other liabilities
255 
273 
Total liabilities
7,347 
7,000 
Commitments and contingencies (Note 6)
 
 
Stockholders' equity:
 
 
Preferred stock, $1.00 par value; 10 shares authorized; no shares issued
Common stock, $0.01 par value; 2,000 shares authorized; 654.0 and 686.5 shares issued and outstanding at December 31, 2010 and 2009, respectively
Capital surplus
117 
41 
Retained earnings
592 
433 
Accumulated other comprehensive loss
(133)
(127)
Total stockholders' equity
583 
354 
Total liabilities and stockholders' equity
$ 7,929 
$ 7,353 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Per Share data
Dec. 31, 2010
Dec. 31, 2009
Assets
 
 
Accumulated depreciation
$ 384 
$ 335 
Accumulated amortization
441 
355 
Stockholders' equity:
 
 
Preferred stock, par value
Preferred stock, shares authorized
10 
10 
Preferred stock, shares issued
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
2,000 
2,000 
Common stock, shares issued
654 
687 
Common stock, shares outstanding
654 
687 
Consolidated Statements of Cash Flows (USD $)
In Millions
Year Ended
Dec. 31,
2010
2009
2008
Cash flows from operating activities
 
 
 
Net income
$ 910 
$ 849 
$ 919 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
62 
56 
62 
Amortization
114 
98 
82 
Deferred income tax provision/(benefit)
29 
(21)
16 
Stock compensation expense
36 
32 
26 
Other non-cash items, net
44 
43 
Increase/(decrease) in cash, excluding the effects of acquisitions, resulting from changes in:
 
 
 
Other assets
28 
(31)
Accounts payable and accrued liabilities
11 
76 
35 
Income taxes payable (Note 10)
(159)
138 
91 
Other liabilities
(37)
(23)
(28)
Net cash provided by operating activities
994 
1,218 
1,254 
Cash flows from investing activities
 
 
 
Capitalization of contract costs
(35)
(27)
(83)
Capitalization of purchased and developed software
(25)
(12)
(17)
Purchases of property and equipment
(53)
(60)
(54)
Acquisition of businesses, net of cash acquired
(5)
(516)
(43)
Proceeds from/(increase in) receivable for securities sold
37 
256 
(298)
Notes receivable issued to agents
(1)
Repayments of notes receivable issued to agents
17 
35 
42 
Net cash used in investing activities
(65)
(324)
(454)
Cash flows from financing activities
 
 
 
Proceeds from exercise of options
42 
23 
301 
Cash dividends paid
(165)
(41)
(28)
Common stock repurchased
(581)
(400)
(1,315)
Net repayments of commercial paper
(83)
(255)
Net proceeds from issuance of borrowings
247 
497 
500 
Principal payments on borrowings
(500)
(500)
Net cash used in financing activities
(458)
(504)
(1,298)
Net change in cash and cash equivalents
472 
390 
(498)
Cash and cash equivalents at beginning of year
1,685 
1,296 
1,793 
Cash and cash equivalents at end of year
2,157 
1,685 
1,296 
Supplemental cash flow information:
 
 
 
Interest paid
176 
150 
172 
Income taxes paid (Note 10)
365 
163 
230 
Non-cash exchange of 5.400% notes due 2011 for 5.253% notes due 2020
$ 304 
$ 0 
$ 0 
Consolidated Statements of Stockholders' Equity (Deficiency) (USD $)
In Millions
Common Stock
Capital Surplus/(Deficiency)
Retained Earnings
Accumulated Other Comprehensive Loss
Comprehensive Income/ (Loss)
Total
Beginning Balance at Dec. 31, 2007
$ 8 
$ (341)
$ 453 
$ (69)
$ 0 
$ 51 
Beginning Balance, shares at Dec. 31, 2007
750 
 
 
 
 
 
Net income
 
 
919 
 
919 
919 
Stock-based compensation
 
26 
 
 
 
26 
Common stock dividends
 
 
(28)
 
 
(28)
Repurchase and retirement of common shares
(1)
 
(1,315)
 
 
(1,315)
Repurchase and retirement of common shares, shares
(58)
 
 
 
 
58 
Shares issued under stock-based compensation plans
290 
 
 
 
290 
Shares issued under stock-based compensation plans, shares
18 
 
 
 
 
 
Tax adjustments from employee stock option plans
 
11 
 
 
 
11 
Effects of pension plan measurement date change
 
 
 
 
Unrealized gains/(losses) on investment securities, net of tax
 
 
 
Unrealized gains/(losses) on hedging activities, net of tax
 
 
 
89 
89 
89 
Foreign currency translation adjustment, net of tax
 
 
 
(5)
(5)
(5)
Pension liability adjustment, net of tax
 
 
 
(46)
(46)
(46)
Comprehensive income
 
 
 
 
958 
 
Ending Balance, shares at Dec. 31, 2008
710 
 
 
 
 
 
Ending Balance at Dec. 31, 2008
(14)
29 
(30)
 
(8)
Net income
 
 
849 
 
849 
849 
Stock-based compensation
 
32 
 
 
 
32 
Common stock dividends
 
 
(41)
 
 
(41)
Repurchase and retirement of common shares
(0)
 
(404)
 
 
(404)
Repurchase and retirement of common shares, shares
(25)
 
 
 
 
25 
Shares issued under stock-based compensation plans
 
24 
 
 
 
24 
Shares issued under stock-based compensation plans, shares
 
 
 
 
 
Tax adjustments from employee stock option plans
 
(1)
 
 
 
(1)
Unrealized gains/(losses) on investment securities, net of tax
 
 
 
Unrealized gains/(losses) on hedging activities, net of tax
 
 
 
(63)
(63)
(63)
Foreign currency translation adjustment, net of tax
 
 
 
(29)
(29)
(29)
Pension liability adjustment, net of tax
 
 
 
(11)
(11)
(11)
Comprehensive income
 
 
 
 
752 
 
Ending Balance, shares at Dec. 31, 2009
687 
 
 
 
 
 
Ending Balance at Dec. 31, 2009
41 
433 
(127)
 
354 
Net income
 
 
910 
 
910 
910 
Stock-based compensation and other
 
35 
 
 
 
35 
Common stock dividends
 
 
(165)
 
 
(165)
Repurchase and retirement of common shares
(0)
 
(586)
 
 
(587)
Repurchase and retirement of common shares, shares
(36)
 
 
 
 
36 
Shares issued under stock-based compensation plans
 
44 
 
 
 
44 
Shares issued under stock-based compensation plans, shares
 
 
 
 
 
Tax adjustments from employee stock option plans
 
(2)
 
 
 
(2)
Unrealized gains/(losses) on investment securities, net of tax
 
 
 
(3)
(3)
(3)
Unrealized gains/(losses) on hedging activities, net of tax
 
 
 
(5)
(5)
(5)
Foreign currency translation adjustment, net of tax
 
 
 
Pension liability adjustment, net of tax
 
 
 
(4)
(4)
(4)
Comprehensive income
 
 
 
 
904 
 
Ending Balance, shares at Dec. 31, 2010
654 
 
 
 
 
 
Ending Balance at Dec. 31, 2010
117 
592 
(133)
 
583 
Formation of the Entity and Basis of Presentation
Formation of the Entity And Basis Of Presentation
 
1.  Formation of the Entity and Basis of Presentation
 
The Western Union Company (“Western Union” or the “Company”) is a leader in global money movement and payment services, providing people and businesses with fast, reliable and convenient ways to send money and make payments around the world. The Western Union® brand is globally recognized. The Company’s services are available through a network of agent locations in 200 countries and territories. Each location in the Company’s agent network is capable of providing one or more of the Company’s services.
 
The Western Union business consists of the following segments:
 
  •   Consumer-to-consumer—money transfer services between consumers, primarily through a global network of third-party agents using the Company’s multi-currency, real-time money transfer processing systems. This service is available for international cross-border transfers—that is, the transfer of funds from one country to another—and, in certain countries, intra-country transfers—that is, money transfers from one location to another in the same country.
 
  •   Global business payments—the processing of payments from consumers or businesses to other businesses. The Company’s business payments services allow consumers to make payments to a variety of organizations including utilities, auto finance companies, mortgage servicers, financial service providers, government agencies and other businesses. As described further in Note 4, in September 2009, the Company acquired Canada-based Custom House, Ltd. (“Custom House”), which has been rebranded “Western Union Business Solutions” (“Business Solutions”) and is included in this segment. This business facilitates cross-border, cross-currency business-to-business payment transactions. The international expansion and other key strategic initiatives have resulted in international revenue continuing to increase in this segment. However, the majority of the segment’s revenue was generated in the United States during all periods presented.
 
All businesses that have not been classified into the consumer-to-consumer or global business payments segments are reported as “Other” and primarily include the Company’s money order services business. Prior to October 1, 2009, the Company’s money orders were issued by Integrated Payment Systems Inc. (“IPS”), a subsidiary of First Data Corporation (“First Data”), to consumers at retail locations primarily in the United States and Canada. Effective October 1, 2009, the Company assumed the responsibility for issuing money orders.
 
There are legal or regulatory limitations on transferring certain assets of the Company outside of the countries where these assets are located, or which constitute undistributed earnings of affiliates of the Company accounted for under the equity method of accounting. However, there are generally no limitations on the use of these assets within those countries. Additionally, the Company must meet minimum capital requirements in some countries in order to maintain operating licenses. As of December 31, 2010, the amount of net assets subject to these limitations totaled approximately $210 million.
 
Various aspects of the Company’s services and businesses are subject to United States federal, state and local regulation, as well as regulation by foreign jurisdictions, including certain banking and other financial services regulations.
 
Spin-off from First Data
 
On January 26, 2006, the First Data Board of Directors announced its intention to pursue the distribution of all of its money transfer and consumer payments business and its interest in a Western Union money transfer agent, as well as its related assets, including real estate, through a tax-free distribution to First Data shareholders (the “Spin-off”). Effective on September 29, 2006, First Data completed the separation and the distribution of these businesses by distributing The Western Union Company common stock to First Data shareholders (the “Distribution”). Prior to the Distribution, the Company had been a segment of First Data.
 
Basis of Presentation
 
The financial statements in this Annual Report on Form 10-K are presented on a consolidated basis and include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated.
 
Consistent with industry practice, the accompanying Consolidated Balance Sheets are unclassified due to the short-term nature of the Company’s settlement obligations contrasted with the Company’s ability to invest cash awaiting settlement in long-term investment securities.
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
 
2.  Summary of Significant Accounting Policies
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.
 
Principles of Consolidation
 
The Company consolidates financial results when it has both the power to direct the activities of an entity that most significantly impact the entity’s economic performance and the ability to absorb losses or the right to receive benefits of the entity that could potentially be significant to the entity. The Company utilizes the equity method of accounting when it is able to exercise significant influence over the entity’s operations, which generally occurs when the Company has an ownership interest of between 20% and 50% in an entity.
 
Earnings Per Share
 
The calculation of basic earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Unvested shares of restricted stock are excluded from basic shares outstanding. Diluted earnings per share reflects the potential dilution that could occur if outstanding stock options at the presented dates are exercised and shares of restricted stock have vested, using the treasury stock method. The treasury stock method assumes proceeds from the exercise price of stock options, the unamortized compensation expense and assumed tax benefits of options and restricted stock are available to acquire shares at an average market price throughout the year, and therefore, reduce the dilutive effect.
 
As of December 31, 2010, 2009 and 2008, there were 34.0 million, 37.5 million and 8.0 million, respectively, of outstanding options to purchase shares of Western Union stock excluded from the diluted earnings per share calculation, as their effect was anti-dilutive. During the years ended December 31, 2010 and 2009, the average market price of the Company’s common stock was lower than the exercise price for most of its outstanding options, resulting in higher anti-dilutive shares than in 2008.
 
The following table provides the calculation of diluted weighted-average shares outstanding (in millions):
 
                         
    For the Year Ended December 31,  
    2010     2009     2008  
 
Basic weighted-average shares outstanding
    666.5       698.9       730.1  
Common stock equivalents
    2.4       2.1       8.1  
                         
                         
Diluted weighted-average shares outstanding
    668.9       701.0       738.2  
                         
 
Fair Value Measurements
 
The Company determines the fair values of its assets and liabilities that are recognized or disclosed at fair value in accordance with the hierarchy described below. The fair values of the assets and liabilities held in the Company’s defined benefit plan trust (“Trust”) are recognized or disclosed utilizing the same hierarchy. The following three levels of inputs may be used to measure fair value:
 
  •   Level 1: Quoted prices in active markets for identical assets or liabilities.
 
  •   Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. For most of these assets, the Company utilizes pricing services that use multiple prices as inputs to determine daily market values. In addition, the Trust has other investments that fall within Level 2 that are valued at net asset value which is not quoted on an active market, however, the unit price is based on underlying investments which are traded on an active market.
 
  •   Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include items where the determination of fair value requires significant management judgment or estimation. The Company has Level 3 assets that are recognized and disclosed at fair value on a non-recurring basis related to the Company’s business combinations, where the values of the intangible assets and goodwill acquired in a purchase are derived utilizing one of the three recognized approaches: the market approach, the income approach or the cost approach.
 
Except as it pertains to an investment redemption discussed in Note 9, carrying amounts for many of the Company’s financial instruments, including cash and cash equivalents, settlement cash and cash equivalents, settlement receivables, settlement obligations, borrowings under the commercial paper program and other short-term notes payable, approximate fair value due to their short maturities. Investment securities, included in settlement assets, and derivative financial instruments are carried at fair value and included in Note 8. Fixed rate notes are carried at their original issuance values as adjusted over time to accrete that value to par, except for portions of notes hedged by interest rate swap agreements as disclosed in Note 14. The fair values of fixed rate notes are also disclosed in Note 15 and are based on market quotations. For more information on the fair value of financial instruments see Note 8.
 
The fair values of non-financial assets and liabilities related to the Company’s business combinations are disclosed in Note 4. The fair values of financial assets and liabilities related to the Trust are disclosed in Note 11.
 
Business Combinations
 
The Company accounts for all business combinations where control over another entity is obtained using the acquisition method of accounting, which requires that most assets (both tangible and intangible), liabilities (including contingent consideration), and remaining noncontrolling interests be recognized at fair value at the date of acquisition. The excess of the purchase price over the fair value of assets less liabilities and noncontrolling interests is recognized as goodwill. Certain adjustments to the assessed fair values of the assets, liabilities, or noncontrolling interests made subsequent to the acquisition date, but within the measurement period, which is one year or less, are recorded as adjustments to goodwill. Any adjustments subsequent to the measurement period are recorded in income. Any cost or equity method interest that the Company holds in the acquired company prior to the acquisition is remeasured to fair value at acquisition with a resulting gain or loss recognized in income for the difference between fair value and existing book value. Results of operations of the acquired company are included in the Company’s results from the date of the acquisition forward and include amortization expense arising from acquired intangible assets. Effective January 1, 2009, the Company expenses all costs as incurred related to or involved with an acquisition in “Selling, general and administrative” expenses. Previously, such amounts were capitalized as part of the acquisition.
 
Cash and Cash Equivalents
 
Highly liquid investments (other than those included in settlement assets) with maturities of three months or less at the date of purchase (that are readily convertible to cash) are considered to be cash equivalents and are stated at cost, which approximates market value.
 
The Company maintains cash and cash equivalent balances with various financial institutions, including a substantial portion in money market funds. The Company limits the concentration of its cash and cash equivalents with any one institution; however, such balances often exceed United States federal deposit insurance limits. The Company regularly reviews investment concentrations and credit worthiness of these institutions, and has relationships with a globally diversified list of banks and financial institutions.
 
Allowance for Doubtful Accounts
 
The Company records an allowance for doubtful accounts when it is probable that the related receivable balance will not be collected based on its history of collection experience, known collection issues, such as agent suspensions and bankruptcies, and other matters the Company identifies in its routine collection monitoring. The allowance for doubtful accounts was $21.1 million and $33.7 million at December 31, 2010 and 2009, respectively, and is recorded in the same Consolidated Balance Sheet caption as the related receivable. During the years ended December 31, 2010, 2009 and 2008, the provision for doubtful accounts (bad debt expense) reflected in the Consolidated Statements of Income was $19.1 million, $36.2 million and $26.6 million, respectively.
 
Settlement Assets and 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 settlement obligations relating to amounts payable under money transfers, money orders and consumer payment service arrangements. Settlement assets and obligations also include amounts receivable from and payable to businesses for the value of customer cross-currency payment transactions related to the global business payments segment.
 
Settlement assets consist of cash and cash equivalents, receivables from selling agents and business-to-business customers, and investment securities. Cash received by Western Union agents generally becomes available to the Company within one week after initial receipt by the agent. Cash equivalents consist of short-term time deposits, commercial paper and other highly liquid investments. Receivables from selling agents represent funds collected by such agents, but in transit to the Company. Western Union has a large and diverse agent base, thereby reducing the credit risk of the Company from any one agent. In addition, the Company performs ongoing credit evaluations of its agents’ financial condition and credit worthiness. See Note 7 for information concerning the Company’s investment securities.
 
Receivables from business-to-business customers arise from cross-currency payment transactions in the global business payments segment. Receivables (for currency to be received) and payables (for the cross-currency payments to be made) are recognized at trade date for these transactions. The credit risk arising from these spot foreign currency exchange contracts is largely mitigated, as in most cases Business Solutions requires the receipt of funds from customers before releasing the associated cross-currency payment.
 
Settlement obligations consist of money transfer, money order and payment service payables and payables to agents. Money transfer payables represent amounts to be paid to transferees when they request their funds. Money order payables represent amounts not yet presented for payment. Most agents typically settle with transferees first and then obtain reimbursement from the Company. Payment service payables represent amounts to be paid to utility companies, auto finance companies, mortgage servicers, financial service providers, government agencies and others. Due to the agent funding and settlement process, payables to agents represent amounts due to agents for money transfers that have been settled with transferees.
 
Settlement assets and obligations consisted of the following (in millions):
 
                 
    December 31,  
    2010     2009  
 
Settlement assets:
               
Cash and cash equivalents
  $ 133.8     $ 161.9  
Receivables from selling agents and business-to-business customers
    1,132.3       1,004.4  
Investment securities
    1,369.1       1,222.8  
                 
                 
    $ 2,635.2     $ 2,389.1  
                 
Settlement obligations:
               
Money transfer, money order and payment service payables
  $ 2,170.0     $ 1,954.8  
Payables to agents
    465.2       434.3  
                 
                 
    $   2,635.2     $   2,389.1  
                 
 
Property and Equipment
 
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the lesser of the estimated life of the related assets (generally three to 10 years for equipment, furniture and fixtures, and 30 years for buildings) or the lease term. Maintenance and repairs, which do not extend the useful life of the respective assets, are charged to expense as incurred.
 
Property and equipment consisted of the following (in millions):
 
                 
    December 31,  
    2010     2009  
 
Equipment
  $ 401.5     $ 368.5  
Buildings
    77.5       75.2  
Leasehold improvements
    51.9       50.0  
Furniture and fixtures
    30.3       28.1  
Land and improvements
    16.9       16.9  
Projects in process
    2.0       1.0  
                 
                 
      580.1       539.7  
Less accumulated depreciation
    (383.6 )     (335.4 )
                 
Property and equipment, net
  $   196.5     $   204.3  
                 
 
Amounts charged to expense for depreciation of property and equipment were $61.5 million, $55.9 million and $61.7 million during the years ended December 31, 2010, 2009 and 2008, respectively.
 
Deferred Customer Set Up Costs
 
The Company capitalizes direct incremental costs not to exceed related deferred revenues associated with the enrollment of customers in the Equity Accelerator program, a service that allows consumers to make mortgage payments based on a customized payment program. Deferred customer set up costs, included in “Other assets” in the Consolidated Balance Sheets, are amortized to “Cost of services” in the Consolidated Statements of Income over the length of the customer’s expected participation in the program, generally five to seven years. Actual customer attrition data is assessed at least annually and the amortization period is adjusted prospectively.
 
Goodwill
 
Goodwill represents the excess of purchase price over the fair value of tangible and other intangible assets acquired, less liabilities assumed arising from business combinations. The Company’s annual goodwill impairment test did not identify any goodwill impairment during the years ended December 31, 2010, 2009 and 2008.
 
Other Intangible Assets
 
Other intangible assets primarily consist of contract costs (primarily amounts paid to agents in connection with establishing and renewing long-term contracts), acquired contracts and software. Other intangible assets are amortized on a straight-line basis over the length of the contract or benefit periods. Included in the Consolidated Statements of Income is amortization expense of approximately $114.4 million, $98.3 million and $82.3 million for the years ended December 31, 2010, 2009 and 2008, respectively.
 
The Company capitalizes initial payments for new and renewed agent contracts to the extent recoverable through future operations or penalties in the case of early termination. The Company’s accounting policy is to limit the amount of capitalized costs for a given contract to the lesser of the estimated future cash flows from the contract or the termination fees the Company would receive in the event of early termination of the contract.
 
Acquired contracts include customer and contractual relationships and networks of subagents that are recognized in connection with the Company’s acquisitions.
 
The Company develops software that is used in providing services. Software development costs are capitalized once technological feasibility of the software has been established. Costs incurred prior to establishing technological feasibility are expensed as incurred. Technological feasibility is established when the Company has completed all planning and designing activities that are necessary to determine that a product can be produced to meet its design specifications, including functions, features and technical performance requirements. Capitalization of costs ceases when the product is available for general use. Software development costs and purchased software are generally amortized over a term of three to five years.
 
The following table provides the components of other intangible assets (in millions):
 
                                         
    December 31, 2010     December 31, 2009  
    Weighted-
                         
    Average
                         
    Amortization
          Net of
          Net of
 
    Period
    Initial
    Accumulated
    Initial
    Accumulated
 
    (in years)     Cost     Amortization     Cost     Amortization  
 
Capitalized contract costs
    6.7     $ 350.3     $ 164.6     $ 331.0     $ 189.7  
Acquired contracts
    10.7       256.5       186.8       250.0       205.5  
Purchased or acquired software
    3.7       113.9       30.7       102.7       35.5  
Developed software
    4.3       86.1       13.7       78.1       11.0  
Acquired trademarks
    24.5       42.3       33.4       42.7       35.6  
Projects in process
    3.0       6.1       6.1       6.0       6.0  
Other intangibles
    4.1       24.0       2.7       34.1       5.9  
                                         
                                         
Total other intangible assets
    8.0     $   879.2     $   438.0     $   844.6     $   489.2  
                                         
 
The estimated future aggregate amortization expense for existing other intangible assets as of December 31, 2010 is expected to be $103.8 million in 2011, $77.9 million in 2012, $58.0 million in 2013, $43.3 million in 2014, $33.5 million in 2015 and $121.5 million thereafter.
 
Other intangible assets are reviewed for impairment on an annual basis and whenever events indicate that their carrying amount may not be recoverable. In such reviews, estimated undiscounted cash flows associated with these assets or operations are compared with their carrying values to determine if a write-down to fair value (normally measured by the present value technique) is required. The Company recorded other intangible asset impairments of approximately $9 million for the year ended December 31, 2010 and did not record any impairment related to other intangible assets during the years ended December 31, 2009 and 2008.
 
Revenue Recognition
 
The Company’s revenues are primarily derived from consumer money transfer transaction fees that are based on the principal amount of the money transfer and the locations from and to which funds are transferred. The Company also offers several global business payments services, including payments from consumers or businesses to other businesses. Transaction fees are set by the Company and recorded as revenue at the time of sale.
 
In certain consumer money transfer and global business payments transactions involving different currencies, the Company generates revenue based on the difference between the exchange rate set by the Company to the customer and the rate at which the Company or its agents are able to acquire currency. This foreign exchange revenue is recorded at the time the related consumer money transfer transaction fee revenue is recognized or at the time a customer initiates a transaction through the Company’s cross-border, cross-currency international business-to-business payment service operations.
 
The Company’s Equity Accelerator service generally requires a consumer to pay an upfront enrollment fee to participate in this mortgage payment service. These enrollment fees are deferred and recognized into income over the length of the customer’s expected participation in the program, generally five to seven years. Actual customer attrition data is assessed at least annually and the period over which revenue is recognized is adjusted prospectively. Many factors impact the duration of the expected customer relationship, including interest rates, refinance activity and trends in consumer behavior.
 
Cost of Services
 
Cost of services primarily consists of agent commissions and expenses for call centers, settlement operations, and related information technology costs. Expenses within these functions include personnel, software, equipment, telecommunications, bank fees, depreciation and amortization and other expenses incurred in connection with providing money transfer and other payment services.
 
Advertising Costs
 
Advertising costs are charged to operating expenses as incurred or at the time the advertising first takes place. Advertising costs for the years ended December 31, 2010, 2009 and 2008 were $163.9 million, $201.4 million and $247.1 million, respectively.
 
Income Taxes
 
The Company accounts for income taxes under the liability method, which requires that deferred tax assets and liabilities be determined based on the expected future income tax consequences of events that have been recognized in the consolidated financial statements. Deferred tax assets and liabilities are recognized based on temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the temporary differences are expected to reverse.
 
The Company recognizes the tax benefits from uncertain tax positions only when it is more likely than not, based on the technical merits of the position, the tax position will be sustained upon examination, including the resolution of any related appeals or litigation. The tax benefits recognized in the consolidated financial statements from such a position are measured as the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.
 
Foreign Currency Translation
 
The United States dollar is the functional currency for all of the Company’s businesses except global business payments subsidiaries located primarily in Canada and South America. Revenues and expenses are translated at average exchange rates prevailing during the period. Foreign currency denominated assets and liabilities for those entities for which the local currency is the functional currency are translated into United States dollars based on exchange rates at the end of the period. The effects of foreign exchange gains and losses arising from the translation of assets and liabilities of these entities are included as a component of “Accumulated other comprehensive loss.” Foreign currency denominated monetary assets and liabilities of operations in which the United States dollar is the functional currency are remeasured based on exchange rates at the end of the period and are recognized in operations. Non-monetary assets and liabilities of these operations are remeasured at historical rates in effect when the asset was recognized or the liability was incurred.
 
Derivatives
 
The Company utilizes derivatives to (a) minimize its exposures related to changes in foreign currency exchange rates and interest rates and (b) facilitate cross-currency business-to-business payments by writing derivatives to customers. The Company recognizes all derivatives in the “Other assets” and “Other liabilities” captions in the accompanying Consolidated Balance Sheets at their fair value. All cash flows associated with derivatives are included in cash flows from operating activities in the Consolidated Statements of Cash Flows.
 
  •   Cash Flow hedges—Changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recorded in “Accumulated other comprehensive loss.” Cash flow hedges consist of foreign currency hedging of forecasted revenues, as well as, from time to time, hedges of the forecasted issuance of fixed rate debt. Derivative fair value changes that are captured in “Accumulated other comprehensive loss” are reclassified to earnings in the same period or periods the hedged item affects earnings. The portions of the change in fair value that are excluded from the measure of effectiveness are recognized immediately in “Derivative losses, net.”
 
  •   Fair Value hedges—Changes in the fair value of derivatives that are designated as fair value hedges of fixed rate debt are recorded in “Interest expense.” The offsetting change in value of the related debt instrument attributable to changes in the benchmark interest rate is also recorded in “Interest expense.”
 
  •   Undesignated—Derivative contracts entered into to reduce the variability related to (a) money transfer settlement assets and obligations, generally with maturities of a few days up to one month, and (b) certain money transfer related foreign currency denominated cash positions and intercompany loans, generally with maturities of less than one year, are not designated as hedges for accounting purposes and changes in their fair value are included in “Selling, general and administrative.” Subsequent to the acquisition of Custom House, the Company is also exposed to risk from derivative contracts written to its customers arising from its cross-currency business-to-business payments operations. These contracts have durations generally of nine months or less. The Company aggregates its foreign exchange exposures in its Business Solutions business, including the exposure generated by the derivative contracts it writes to its customers as part of its cross-currency payments business, and typically hedges the net exposure through offsetting contracts with established financial institution counterparties (economic hedge contract) as part of a broader foreign currency portfolio, including significant spot exchanges of currency in addition to forwards and options. To mitigate credit risk, the Company performs credit reviews of the customer on an ongoing basis. The changes in fair value related to these contracts are recorded in “Foreign exchange revenues.”
 
The fair value of the Company’s derivatives is derived from standardized models that use market based inputs (e.g., forward prices for foreign currency).
 
The details of each designated hedging relationship are formally documented at the inception of the arrangement, including the risk management objective, hedging strategy, hedged item, specific risks being hedged, the derivative instrument, how effectiveness is being assessed and how ineffectiveness, if any, will be measured. The derivative must be highly effective in offsetting the changes in cash flows or fair value of the hedged item, and effectiveness is evaluated quarterly on a retrospective and prospective basis.
 
Stock-Based Compensation
 
The Company currently has a stock-based compensation plan that provides for grants of Western Union stock options, restricted stock awards and restricted stock units to employees who perform services for the Company. In addition, the Company has a stock-based compensation plan that provides for grants of Western Union stock options and stock unit awards to non-employee directors of the Company. Prior to the Spin-off, employees of Western Union participated in First Data’s stock-based compensation plans.
 
All stock-based compensation to employees is required to be measured at fair value and expensed over the requisite service period and also requires an estimate of forfeitures when calculating compensation expense. The Company recognizes compensation expense on awards on a straight-line basis over the requisite service period for the entire award. Refer to Note 16 for additional discussion regarding details of the Company’s stock-based compensation plans.
 
Restructuring and Related Expenses
 
The Company records severance-related expenses once they are both probable and estimable in accordance with the provisions of the applicable accounting guidance for severance provided under an ongoing benefit arrangement. One-time, involuntary benefit arrangements and other exit costs are generally recognized when the liability is incurred. Expenses arising under the Company’s defined benefit pension plans from curtailing future service of employees participating in the plans and providing enhanced benefits are recognized in earnings when it is probable and reasonably estimable. The Company also evaluates impairment issues associated with restructuring activities when the carrying amount of the assets may not be fully recoverable, in accordance with the appropriate accounting guidance. Restructuring and related expenses consist of direct and incremental expenses associated with restructuring and related activities, including severance, outplacement and other employee related benefits; facility closure and migration of the Company’s IT infrastructure; and other expenses related to the relocation of various operations to new or existing Company facilities and third-party providers, including hiring, training, relocation, travel and professional fees. Also included in the facility closure expenses are non-cash expenses related to fixed asset and leasehold improvement write-offs and the acceleration of depreciation and amortization. For more information on the Company’s restructuring and related expenses see Note 3.
Acquisitions
Acquisitions
 
4.  Acquisitions
 
Angelo Costa, S.r.l.
 
In December 2010, the Company entered into an agreement to acquire the remaining 70% interest which the Company currently does not own, in Angelo Costa S.r.l. (“Costa”), one of the Company’s largest money transfer agents in Europe. The Company will acquire the 70% interest for cash of €100 million (approximately $133 million based on currency exchange rates at December 31, 2010), less a working capital deficiency adjustment to be determined at closing. The acquisition is expected to close in the first half of 2011, subject to regulatory approval and satisfaction of closing conditions. The acquisition will be recognized at 100% of the fair value of Costa, which will exceed the estimated cash consideration due to the revaluation of the Company’s 30% interest to fair value, which is expected to result in a gain. Both the fair value amount of the acquisition and the amount of the gain will be determined and recorded upon closing and are subject to fluctuation based on changes in exchange rates and other valuation inputs.
 
Custom House, Ltd.
 
On September 1, 2009, the Company acquired Canada-based Custom House, a provider of international business-to-business payment services, for $371.0 million. The acquisition of Custom House has allowed the Company to enter the international business-to-business payments market. Custom House facilitates cross-border, cross-currency payment transactions. These payment transactions are conducted through various channels including the telephone and internet. The significant majority of Custom House’s revenue is from exchanges of currency at the spot rate enabling customers to make cross-currency payments. In addition, this business writes foreign currency forward and option contracts for its customers to facilitate future payments. The duration of these derivatives contracts is generally nine months or less. The results of operations for Custom House have been included in the Company’s consolidated financial statements from the date of acquisition, September 1, 2009.
 
The Company recorded the assets and liabilities of Custom House at fair value, excluding the deferred tax liability. The following table summarizes the final allocation of purchase price, which differs only slightly from the preliminary allocation primarily due to an $8.3 million adjustment related to tax, which resulted in reductions to the deferred tax liability and goodwill (in millions):
 
         
Assets:
       
Cash acquired
  $ 2.5  
Settlement assets
    153.6  
Property and equipment
    6.7  
Goodwill
    264.3  
Other intangible assets
    118.1  
Other assets
    77.6  
         
Total assets
  $ 622.8  
         
Liabilities:
       
Accounts payable and accrued liabilities
  $ 23.3  
Settlement obligations
    153.6  
Deferred tax liability, net
    23.6  
Other liabilities
    51.3  
         
Total liabilities
    251.8  
         
Total consideration, including cash acquired
  $   371.0  
         
 
The valuation of assets acquired resulted in $118.1 million of identifiable intangible assets, $99.8 million of which were attributable to customer and other contractual relationships and were valued using an income approach and $18.3 million of other intangibles, which were valued using both income and cost approaches. These fair values were derived using primarily unobservable Level 3 inputs which require significant management judgment and estimation. For the remaining assets and liabilities, excluding goodwill, fair value approximated carrying value. The intangible assets related to customer and other contractual relationships are being amortized over 10 to 12 years. The remaining intangibles are being amortized over three to five years. The goodwill recognized of $264.3 million is attributable to the projected long-term business growth in current and new markets and an assembled workforce. All goodwill relates entirely to the global business payments segment. Goodwill expected to be deductible for United States income tax purposes is approximately $231.3 million.
 
Other acquisitions
 
On February 24, 2009, the Company acquired the money transfer business of European-based FEXCO, one of the Company’s largest agents providing services in a number of European countries, primarily the United Kingdom, Spain, Sweden and Ireland. The acquisition of FEXCO’s money transfer business has assisted the Company in the implementation of the Payment Services Directive (“PSD”) in the European Union by providing an initial operating infrastructure. The PSD has allowed the Company to operate under a single license in 27 European countries and, in those European Union countries where the Company has been limited to working with banks, post-banks and foreign exchange houses, to expand its network to additional types of businesses. The acquisition does not impact the Company’s revenue, because the Company was already recording all of the revenue arising from money transfers originating at FEXCO’s locations. As of the acquisition date, the Company no longer incurs commission costs for transactions related to FEXCO; rather, the Company now pays commissions directly to former FEXCO subagents, resulting in lower overall commission expense. The Company’s operating expenses include costs attributable to FEXCO’s operations subsequent to the acquisition date.
 
Prior to the acquisition, the Company held a 24.65% interest in FEXCO Group Holdings (“FEXCO Group”), which was a holding company for both the money transfer business as well as various unrelated businesses. The Company surrendered its 24.65% interest in FEXCO Group as non-cash consideration, which had an estimated fair value of $86.2 million on the acquisition date, and paid €123.1 million ($157.4 million) as additional consideration for all of the common shares of the money transfer business, resulting in a total purchase price of $243.6 million. The Company recognized no gain or loss in connection with the disposition of its equity interest in the FEXCO Group, because its estimated fair value approximated its carrying value. The Company recorded the assets and liabilities of FEXCO at fair value, excluding the deferred tax liability. The valuation of assets acquired resulted in $74.9 million of identifiable intangible assets, $64.8 million of which were attributable to the network of subagents, with $10.1 million relating to other intangibles. The subagent network intangible assets are being amortized over 10 to 15 years, and the remaining intangibles are being amortized over two to three years. Goodwill of $190.6 million was recognized, of which $91.1 million is expected to be deductible for United States income tax purposes.
 
In December 2008, the Company acquired 80% of its existing money transfer agent in Peru for a purchase price of $35.0 million. The aggregate consideration paid was $29.7 million, net of a holdback reserve of $3.0 million. The Company acquired cash of $2.3 million as part of the acquisition. $1.0 million holdback reserve payments were made in both 2009 and 2010, and the remaining $1.0 million is scheduled to be paid in December 2011, subject to the terms of the agreement. The results of operations of the acquiree have been included in the Company’s consolidated financial statements since the acquisition date. The purchase price allocation resulted in $10.1 million of identifiable intangible assets, a significant portion of which were attributable to the network of subagents acquired by the Company. The identifiable intangible assets are being amortized over three to 10 years and goodwill of $27.1 million was recorded, most of which is expected to be deductible for income tax purposes. In addition, the Company has the option to acquire the remaining 20% of the money transfer agent and the money transfer agent has the option to sell the remaining 20% to the Company within 12 months after December 2013 at fair value.
 
In August 2008, the Company acquired the money transfer assets from its then-existing money transfer agent in Panama for a purchase price of $18.3 million. The consideration paid was $14.3 million, net of a holdback reserve of $4.0 million. In 2009 and 2010, the Company paid $1.7 million and $1.2 million, respectively, of the holdback reserve, with the remainder scheduled to be paid in August 2011, subject to the terms of the agreement. The results of operations of the acquiree have been included in the Company’s consolidated financial statements since the acquisition date. The purchase price allocation resulted in $5.6 million of identifiable intangible assets, a significant portion of which were attributable to the network of subagents acquired by the Company. The identifiable intangible assets are being amortized over three to seven years and goodwill of $14.2 million was recorded, which is not expected to be deductible for income tax purposes.
 
The following table presents changes to goodwill for the years ended December 31, 2010 and 2009 (in millions):
 
                                 
    Consumer-to-
    Global Business
             
    Consumer     Payments     Other     Total  
 
January 1, 2009 balance
  $ 1,427.0     $ 232.7     $ 14.5     $ 1,674.2  
Acquisitions
    190.6       272.2             462.8  
Purchase price adjustments
    2.3                   2.3  
Currency translation
          4.3       (0.2 )     4.1  
                                 
December 31, 2009 balance
  $ 1,619.9     $ 509.2     $ 14.3     $ 2,143.4  
Purchase price adjustments
          (7.9 )           (7.9 )
Currency translation
          16.3       (0.1 )     16.2  
                                 
December 31, 2010 balance
  $   1,619.9     $   517.6     $   14.2     $   2,151.7  
                                 
Related Party Transactions
Related Party Transactions
 
5.  Related Party Transactions
 
The Company has ownership interests in certain of its agents accounted for under the equity method of accounting. The Company pays these agents, as it does its other agents, commissions for money transfer and other services provided on the Company’s behalf. Commission expense recognized for these agents for the years ended December 31, 2010, 2009 and 2008 totaled $183.5 million, $203.2 million and $305.9 million, respectively. Commission expense recognized for FEXCO prior to February 24, 2009, the date of the acquisition (see Note 4), was considered a related party transaction.
 
In July 2009, the Company appointed a director who is also a director for a company holding significant investments in two of the Company’s existing agents. These agents had been agents of the Company prior to the director being appointed to the board. The Company recognized commission expense of $52.9 million and $54.2 million for the years ended December 31, 2010 and 2009 related to these agents.
Commitments and Contingencies
Commitments and Contingencies
 
6.  Commitments and Contingencies
 
Letters of Credit and Bank Guarantees
 
The Company had approximately $85 million in outstanding letters of credit and bank guarantees at December 31, 2010 with expiration dates through 2015, the majority of which contain a one-year renewal option. The letters of credit and bank guarantees are primarily held in connection with lease arrangements and certain agent agreements. The Company expects to renew the letters of credit and bank guarantees prior to expiration in most circumstances.
 
Litigation and Related Contingencies
 
In the second quarter of 2009, the Antitrust Division of the United States Department of Justice (“DOJ”) served one of the Company’s subsidiaries with a grand jury subpoena requesting documents in connection with an investigation into money transfers, including related foreign exchange rates, from the United States to the Dominican Republic from 2004 through the date of subpoena. The Company is cooperating fully with the DOJ investigation. Due to the stage of the investigation, the Company is unable to predict the outcome of the investigation, or the possible loss or range of loss, if any, which could be associated with the resolution of any possible criminal charges or civil claims that may be brought against the Company. Should such charges or claims be brought, the Company could face significant fines, damage awards or regulatory consequences which could have a material adverse effect on the Company’s business, financial position and results of operations.
 
The Company is a defendant in two purported class action lawsuits: James P. Tennille v. The Western Union Company, and Robert P. Smet v. The Western Union Company, both of which are pending in the United States District Court for the District of Colorado. The complaints assert claims for violation of various consumer protection laws, unjust enrichment, conversion and declaratory relief, based on allegations that the Company waits too long to inform consumers if their money transfers are not redeemed by the recipients and that the Company uses the unredeemed funds to generate income until the funds are escheated to state governments. The Tennille complaint was served on the Company on April 27, 2009. The Smet complaint was served on the Company on April 6, 2010. On September 21, 2009, the Court granted the Company’s motion to dismiss the Tennille complaint and gave the plaintiff leave to file an amended complaint. On October 21, 2009, Tennille filed an amended complaint. The Company moved to dismiss the Tennille amended complaint and the Smet complaint. On November 8, 2010, the Court denied Western Union’s motion to dismiss as to the plaintiffs’ unjust enrichment and conversion claims. On February 4, 2011, the Court dismissed plaintiffs’ consumer protection claims. The plaintiffs have not sought and the Court has not granted class certification. The Company intends to vigorously defend itself against both lawsuits. However, due to the preliminary stages of these lawsuits, the fact the plaintiffs have not quantified their damage demands, and the uncertainty as to whether they will ever be certified as class actions, the Company is unable to determine the potential outcome.
 
During the third quarter of 2009, the Company recorded an accrual of $71.0 million for an agreement and settlement with the State of Arizona and other states, which was paid in 2010. On February 11, 2010, the Company signed this agreement and settlement, which resolved all outstanding legal issues and claims with the State and requires the Company to fund a multi-state not-for-profit organization promoting safety and security along the United States and Mexico border, in which California, Texas and New Mexico are participating with Arizona. The accrual includes amounts for reimbursement to the State of Arizona for its costs associated with this matter. In addition, as part of the agreement and settlement, the Company has made and expects to make certain investments in its compliance programs along the United States and Mexico border and has engaged a monitor for those programs, which are expected to cost up to $23 million over the period from signing to 2013.
 
In the normal course of business, the Company is subject to claims and litigation. Management of the Company believes such matters involving a reasonably possible chance of loss will not, individually or in the aggregate, result in a material adverse effect on the Company’s financial position, results of operations and cash flows. The Company accrues for loss contingencies as they become probable and estimable.
 
In May 2007, the Company initiated litigation against MoneyGram Payment Systems, Inc. (“MoneyGram”) for infringement of the Company’s Money Transfer by Phone patents by MoneyGram’s FormFree service. On September 24, 2009, a jury found that MoneyGram was liable for patent infringement and awarded the Company $16.5 million in damages. On December 7, 2010, the United States Court of Appeals for the Federal Circuit reversed the trial court’s judgment. On January 6, 2011, the Company filed a Combined Petition for Panel Rehearing and Rehearing En Banc in the Federal Circuit, which was denied on February 8, 2011. In accordance with its policies, the Company does not recognize gain contingencies in earnings until realization and collectability are assured.
 
Pursuant to the separation and distribution agreement with First Data in connection with the Spin-off, First Data and the Company are each liable for, and agreed to perform, all liabilities with respect to their respective businesses. In addition, the separation and distribution agreement also provides for cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of the Company’s business with the Company and financial responsibility for the obligations and liabilities of First Data’s retained businesses with First Data. The Company also entered into a tax allocation agreement that sets forth the rights and obligations of First Data and the Company with respect to taxes imposed on their respective businesses both prior to and after the Spin-off as well as potential tax obligations for which the Company may be liable in conjunction with the Spin-off (see Note 10).
Investment Securities
Investment Securities
 
7.  Investment Securities
 
Investment securities, classified within “Settlement assets” in the Consolidated Balance Sheets, consist primarily of high-quality state and municipal debt securities. The Company is required to maintain specific high-quality, investment grade securities and such investments are restricted to satisfy outstanding settlement obligations in accordance with applicable state and foreign country requirements. The substantial majority of the Company’s investment securities are classified as available-for-sale and recorded at fair value. Investment securities are exposed to market risk due to changes in interest rates and credit risk. The Company regularly monitors credit risk and attempts to mitigate its exposure by making high-quality investments and through investment diversification. At December 31, 2010, the majority of the Company’s investment securities had credit ratings of “AA-” or better from a major credit rating agency.
 
On October 1, 2009 (the “Transition Date”), the Company assumed IPS’s role as issuer of money orders and terminated the existing agreement whereby IPS paid the Company a fixed return of 5.5% on the outstanding money order balances. Following the Transition Date, the Company invested the cash received from IPS in high-quality, investment grade securities, primarily tax exempt United States state and municipal debt securities, in accordance with applicable regulations. Prior to the Transition Date, the Company had entered into interest rate swaps on certain of its fixed rate notes to reduce its exposure to fluctuations in interest rates. Through a combination of the revenue generated from these investment securities and the anticipated interest expense savings resulting from the interest rate swaps, the Company estimates that it should be able to retain a materially comparable after-tax rate of return through 2011 as it was receiving under its agreement with IPS. Refer to Note 14 for additional information on the interest rate swaps.
 
Subsequent to the Transition Date, all revenue generated from the investment portfolio is being retained by the Company. IPS continues to provide the Company with clearing services necessary for payment of the money orders in exchange for the payment by the Company to IPS of a per-item processing fee. The Company no longer provides to IPS the services required under the original money order agreement or receives from IPS the fee for such services.
 
In 2008, the Company began increasing its investment levels in various state and municipal variable rate demand note securities which can be put (sold at par) typically on a daily basis with settlement periods ranging from the same day to one week, but that have varying maturities through 2042. Generally, these securities are used by the Company for short-term liquidity needs and are held for short periods of time, typically less than 30 days. As a result, this has increased the frequency of purchases and proceeds received by the Company.
 
Unrealized gains and losses on available-for-sale securities are excluded from earnings and presented as a component of accumulated other comprehensive income or loss, net of related deferred taxes. Proceeds from the sale and maturity of available-for-sale securities during the years ended December 31, 2010, 2009 and 2008 were $14.7 billion, $8.4 billion and $2.8 billion, respectively. The transition of the money order business from IPS in October 2009, as described above, increased the frequency of purchases and proceeds received by the Company in 2010.
 
Gains and losses on investments are calculated using the specific-identification method and are recognized during the period in which the investment is sold or when an investment experiences an other-than-temporary decline in value. Factors that could indicate an impairment exists include, but are not limited to: earnings performance, changes in credit rating or adverse changes in the regulatory or economic environment of the asset. If potential impairment exists, the Company assesses whether it has the intent to sell the debt security, more likely than not will be required to sell the debt security before its anticipated recovery or expects that some of the contractual cash flows will not be received. The Company had no material other-than-temporary impairments during the periods presented.
 
The components of investment securities are as follows (in millions):
 
                                         
                Gross
    Gross
    Net
 
    Amortized
    Fair
    Unrealized
    Unrealized
    Unrealized
 
December 31, 2010   Cost     Value     Gains     Losses     Gains/(Losses)  
 
State and municipal debt securities (a)
  $ 844.1     $ 849.1     $ 7.0     $ (2.0 )   $ 5.0  
State and municipal variable rate demand notes
    490.0       490.0                    
Agency mortgage-backed securities and other
    29.9       30.0       0.1             0.1  
                                         
                                         
    $   1,364.0     $   1,369.1     $   7.1     $   (2.0 )   $   5.1  
                                         
 
                                         
                Gross
    Gross
    Net
 
    Amortized
    Fair
    Unrealized
    Unrealized
    Unrealized
 
December 31, 2009   Cost     Value     Gains     Losses     Gains/(Losses)  
 
State and municipal debt securities (a)
  $ 686.4     $ 696.4     $ 10.6     $ (0.6 )   $ 10.0  
State and municipal variable rate demand notes
    513.8       513.8                    
Corporate debt and other
    12.3       12.6       0.3             0.3  
                                         
                                         
    $   1,212.5     $   1,222.8     $   10.9     $   (0.6 )   $   10.3  
                                         
 
 
(a) The majority of these securities are fixed rate instruments.
 
There were no investments with a single issuer or individual securities representing greater than 10% of total investment securities as of December 31, 2010 and 2009.
 
The following summarizes contractual maturities of investment securities as of December 31, 2010 (in millions):
 
                 
    Amortized
    Fair
 
    Cost     Value  
 
Due within 1 year
  $ 114.7     $ 115.0  
Due after 1 year through 5 years
    659.7       664.4  
Due after 5 years through 10 years
    156.0       155.9  
Due after 10 years
    433.6       433.8  
                 
    $   1,364.0     $   1,369.1  
                 
 
Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay the obligations or the Company may have the right to put the obligation prior to its contractual maturity, as with variable rate demand notes. Variable rate demand notes, having a fair value of $38.0 million, $71.8 million and $380.2 million are included in the “Due after 1 year through 5 years,” “Due after 5 years through 10 years” and “Due after 10 years” categories, respectively, in the table above.
Fair Value Measurements
Fair Value Measurements
 
8.  Fair Value Measurements
 
Fair value, as defined by the relevant accounting standards, represents the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. For additional information on how the Company measures fair value, refer to Note 2.
 
The following table reflects assets and liabilities that were measured and carried at fair value on a recurring basis (in millions):
 
                                 
    Fair Value Measurement Using     Assets/Liabilities
 
December 31, 2010   Level 1     Level 2     Level 3     at Fair Value  
 
Assets:
                               
State and municipal debt securities
  $     $ 849.1     $     $ 849.1  
State and municipal variable rate demand notes
          490.0             490.0  
Agency mortgage-backed securities and other
    0.1       29.9             30.0  
Derivatives
          69.8             69.8  
                                 
                                 
Total assets
  $        0.1     $   1,438.8     $        —     $   1,438.9  
                                 
Liabilities:
                               
Derivatives
  $     $ 80.9     $     $ 80.9  
                                 
                                 
Total liabilities
  $   —     $   80.9     $   —     $   80.9  
                                 
 
                                 
    Fair Value Measurement Using     Assets/Liabilities
 
December 31, 2009   Level 1     Level 2     Level 3     at Fair Value  
 
Assets:
                               
State and municipal debt securities
  $     $ 696.4     $     $ 696.4  
State and municipal variable rate demand notes
          513.8             513.8  
Corporate debt and other
    0.2       12.4             12.6  
Derivatives
          109.4       0.5       109.9  
                                 
                                 
Total assets
  $        0.2     $   1,332.0     $        0.5     $   1,332.7  
                                 
Liabilities:
                               
Derivatives
  $     $ 80.6     $     $ 80.6  
                                 
                                 
Total liabilities
  $   —     $   80.6     $   —     $   80.6  
                                 
 
Except for purchase price adjustments discussed in Note 4, no non-recurring fair value adjustments were recorded during the year ended December 31, 2010.
 
Other Fair Value Measurements
 
The carrying amounts for the Company’s financial instruments, including cash and cash equivalents, settlement cash and cash equivalents, settlement receivables and settlement obligations approximate fair value due to their short maturities. The Company’s borrowings had a carrying value and fair value of $3,289.9 million and $3,473.6 million, respectively, at December 31, 2010 and had a carrying value and fair value of $3,048.5 million and $3,211.3 million, respectively, at December 31, 2009 (see Note 15).
 
The fair value of the assets in the Trust, which holds the assets for the Company’s defined benefit plans, are disclosed in Note 11.
Other Assets and Other Liabilities
Other Assets and Other Liabilities
 
9.  Other Assets and Other Liabilities
 
The following table summarizes the components of other assets and other liabilities (in millions):
 
                 
    December 31,  
    2010     2009  
 
Other assets:
               
Equity method investments
  $ 85.7     $ 87.4  
Derivatives
    69.8       109.9  
Prepaid expenses
    50.1       27.1  
Other receivables
    26.2       63.4  
Amounts advanced to agents, net of discounts
    25.3       37.5  
Receivables from First Data
    24.1       24.8  
Deferred customer set up costs
    20.4       26.1  
Accounts receivable, net
    13.8       12.1  
Debt issue costs
    12.8       12.3  
Receivable for securities sold, net of reserve
          30.6  
Other
    22.2       11.0  
                 
                 
Total other assets
  $ 350.4     $ 442.2  
                 
Other liabilities:
               
Pension obligations
  $ 112.8     $ 124.2  
Derivatives
    80.9       80.6  
Deferred revenue
    37.3       45.4  
Other
    23.5       23.0  
                 
                 
Total other liabilities
  $   254.5     $   273.2  
                 
 
Receivable for securities sold
 
On September 15, 2008, Western Union requested redemption of its shares from the Reserve International Liquidity Fund, Ltd. (the “Fund”), a money market fund, totaling $298.1 million. Western Union included the value of the receivable in “Other assets” in the Consolidated Balance Sheets. At the time the redemption request was made, the Company was informed by the Reserve Management Company, the Fund’s investment advisor, that the Company’s redemption trades would be honored at a $1.00 per share net asset value despite losses the Fund had incurred on certain holdings resulting in the Fund subsequently reducing its net asset value. In 2009, the Company received partial distributions totaling $255.5 million from the Fund and recorded a reserve of $12 million, representing the estimated impact of a pro-rata distribution of the Fund. On December 31, 2010, the Company received a final distribution from the Fund totaling $36.9 million. As a result of the final distribution, the Company recovered $6.3 million of the related reserve, the impact of which is included in “Other income” in the Consolidated Statements of Income.
Income Taxes
Income Taxes
10.  Income Taxes
 
The components of pre-tax income, generally based on the jurisdiction of the legal entity, were as follows (in millions):
 
                         
    Year Ended December 31,  
    2010     2009     2008  
 
Components of pre-tax income:
                       
Domestic
  $ 151.4     $ 249.7     $ 416.3  
Foreign
    993.8       881.8       822.4  
                         
                         
    $  1,145.2     $  1,131.5     $  1,238.7  
                         
 
The provision for income taxes was as follows (in millions):
 
                         
    Year Ended December 31,  
    2010     2009     2008  
 
Federal
  $ 132.2     $ 217.3     $ 234.8  
State and local
    39.8       28.0       30.3  
Foreign
    63.3       37.4       54.6  
                         
                         
    $   235.3     $   282.7     $   319.7  
                         
 
Domestic taxes have been incurred on certain pre-tax income amounts that were generated by the Company’s foreign operations. Accordingly, the percentage obtained by dividing the total federal, state and local tax provision by the domestic pre-tax income, all as shown in the preceding tables, may be higher than the statutory tax rates in the United States.
 
The Company’s effective tax rates differed from statutory rates as follows:
 
                         
    Year Ended December 31,
    2010   2009   2008
 
Federal statutory rate
    35 .0%     35 .0%     35 .0%
State income taxes, net of federal income tax benefits
    1 .9%     1 .5%     1 .3%
Foreign rate differential
     (15 .3)%      (12 .5)%      (11 .4)%
Other
    (1 .1)%     1 .0%     0 .9%
                         
                         
Effective tax rate
    20 .5%     25 .0%     25 .8%
                         
 
The Company continues to benefit from an increasing proportion of profits being foreign-derived and therefore taxed at lower rates than its combined federal and state tax rates in the United States. In addition, during 2010 the Company has also benefitted from cumulative and ongoing tax planning benefits, including benefits related to certain previous foreign acquisitions, and certain IRS settlements related to 2002 through 2004.
 
The Company’s provision for income taxes consisted of the following components (in millions):
 
                         
    Year Ended December 31,  
    2010     2009     2008  
 
Current:
                       
Federal
  $ 103.6     $ 235.8     $ 219.6  
State and local
    30.1       26.0       34.5  
Foreign
    73.0       41.8       49.7  
                         
Total current taxes
    206.7       303.6       303.8  
Deferred:
                       
Federal
    28.6       (18.5 )     15.2  
State and local
    9.7       2.0       (4.2 )
Foreign
    (9.7 )     (4.4 )     4.9  
                         
Total deferred taxes
    28.6       (20.9 )     15.9  
                         
    $   235.3     $   282.7     $   319.7  
                         
 
Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the book and tax bases of the Company’s assets and liabilities. The following table outlines the principal components of deferred tax items (in millions):
 
                 
    December 31,  
    2010     2009  
 
Deferred tax assets related to:
               
Reserves, accrued expenses and employee-related items
  $ 61.6     $ 91.0  
Pension obligations
    38.7       43.5  
Deferred revenue
    3.6       3.6  
Other
    20.5       10.7  
                 
Total deferred tax assets
    124.4       148.8  
                 
Deferred tax liabilities related to:
               
Intangibles, property and equipment
    411.8       416.7  
Other
    2.5       1.0  
                 
Total deferred tax liabilities
    414.3       417.7  
                 
Net deferred tax liability
  $   289.9     $   268.9  
                 
 
Uncertain Tax Positions
 
The Company has established contingency reserves for material, known tax exposures, including potential tax audit adjustments with respect to its international operations, which were restructured in 2003. The Company’s tax reserves reflect management’s judgment as to the resolution of the issues involved if subject to judicial review. While the Company believes its reserves are adequate to cover reasonably expected tax risks, there can be no assurance that, in all instances, an issue raised by a tax authority will be resolved at a financial cost that does not exceed its related reserve. With respect to these reserves, the Company’s income tax expense would include (i) any changes in tax reserves arising from material changes during the period in the facts and circumstances (i.e., new information) surrounding a tax issue and (ii) any difference from the Company’s tax position as recorded in the financial statements and the final resolution of a tax issue during the period.
 
Unrecognized tax benefits represent the aggregate tax effect of differences between tax return positions and the amounts otherwise recognized in the Company’s financial statements, and are reflected in “Income taxes payable” in the Consolidated Balance Sheets. A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, is as follows (in millions):
 
                 
    2010     2009  
 
Balance at January 1,
  $ 477.2     $ 361.2  
Increases—positions taken in current period (a)
    134.1       124.3  
Increases—positions taken in prior periods (b)
    33.4       0.4  
Decreases—positions taken in prior periods
    (21.8 )      
Decreases—settlements with taxing authorities
    (0.8 )     (4.4 )
Decreases—lapse of applicable statute of limitations
    (3.4 )     (4.3 )
                 
                 
Balance at December 31,
  $   618.7     $   477.2  
                 
 
 
(a) Includes recurring accruals for issues which initially arose in previous periods.
 
(b) Changes to positions taken in prior periods relate to changes in estimates used to calculate prior period unrecognized tax benefits.
 
In the first quarter of 2010, the Company made a $250 million refundable tax deposit relating to potential United States federal tax liabilities, including those arising from the Company’s 2003 international restructuring, which have been previously accrued in the Company’s financial statements. The deposit was recorded as a reduction to “Income taxes payable” in the Consolidated Balance Sheets and a decrease in cash flows from operating activities in the Consolidated Statement of Cash Flows. Making the deposit limits the further accrual of interest charges with respect to such potential tax liabilities, to the extent of the deposit.
 
A substantial portion of the Company’s unrecognized tax benefits relate to the 2003 restructuring of the Company’s international operations whereby the Company’s income from certain foreign-to-foreign money transfer transactions has been taxed at relatively low foreign tax rates compared to the Company’s combined federal and state tax rates in the United States. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $555.5 million and $468.6 million as of December 31, 2010 and 2009, respectively, excluding interest and penalties.
 
The Company recognizes interest and penalties with respect to unrecognized tax benefits in “Provision for income taxes” in its Consolidated Statements of Income, and records the associated liability in “Income taxes payable” in its Consolidated Balance Sheets. The Company recognized $6.9 million, $11.0 million and $11.6 million in interest and penalties during the years ended December 31, 2010, 2009 and 2008, respectively. The Company has accrued $52.4 million and $45.5 million for the payment of interest and penalties at December 31, 2010 and 2009, respectively.
 
Subject to the matter referenced in the paragraph below, the Company has identified no other uncertain tax positions for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within 12 months, except for recurring accruals on existing uncertain tax positions. The change in unrecognized tax benefits during the years ended December 31, 2010 and 2009 is substantially attributable to such recurring accruals.
 
The Company and its subsidiaries file tax returns for the United States, for multiple states and localities, and for various non-United States jurisdictions, and the Company has identified the United States and Ireland as its two major tax jurisdictions. The United States federal income tax returns of First Data, which include the Company, are eligible to be examined for the years 2002 through 2006. The Company’s United States federal income tax returns since the Spin-off are also eligible to be examined. In the second quarter of 2010, the IRS, First Data and the Company reached a resolution of all outstanding issues related to First Data’s United States federal consolidated income tax return for 2002 (which included issues related to the Company). The resolution did not result in a material change to the Company’s financial position. In addition, the IRS completed its examination of the United States federal consolidated income tax returns of First Data for 2003 and 2004, which included the Company, and issued a Notice of Deficiency in December 2008. The Notice of Deficiency alleges significant additional taxes, interest and penalties owed with respect to a variety of adjustments involving the Company and its subsidiaries, and the Company generally has responsibility for taxes associated with these potential Company-related adjustments under the tax allocation agreement with First Data executed at the time of the Spin-off. The Company agrees with a number of the adjustments in the Notice of Deficiency; however, the Company does not agree with the Notice of Deficiency regarding several substantial adjustments representing total alleged additional tax and penalties due of approximately $114 million. As of December 31, 2010, interest on the alleged amounts due for unagreed adjustments would be approximately $36 million. A substantial part of the alleged amounts due for these unagreed adjustments relates to the Company’s international restructuring, which took effect in the fourth quarter of 2003, and accordingly, the alleged amounts due related to such restructuring largely are attributable to 2004. On March 20, 2009, the Company filed a petition in the United States Tax Court contesting those adjustments with which it does not agree. In September 2010, IRS Counsel referred the case to the IRS Appeals Division for possible settlement. The Company believes its overall reserves are adequate, including those associated with the adjustments alleged in the Notice of Deficiency. If the IRS’ position in the Notice of Deficiency is sustained, the Company’s tax provision related to 2003 and later years would materially increase. An examination of the United States federal consolidated income tax returns of First Data that cover the Company’s 2005 and pre-spin-off 2006 taxable periods is ongoing, as is an examination of the Company’s United States federal consolidated income tax returns for the 2006 post-spin-off period, 2007 and 2008. The Irish income tax returns of certain subsidiaries for the years 2006 and forward are eligible to be examined by the Irish tax authorities, although no examinations have commenced.
 
At December 31, 2010, no provision had been made for United States federal and state income taxes on foreign earnings of approximately $2.5 billion, which are expected to be reinvested outside the United States indefinitely. Upon distribution of those earnings to the United States in the form of actual or constructive dividends, the Company would be subject to United States income taxes (subject to an adjustment for foreign tax credits), state income taxes and possible withholding taxes payable to various foreign countries. Determination of this amount of unrecognized deferred United States tax liability is not practicable because of the complexities associated with its hypothetical calculation.
 
Tax Allocation Agreement with First Data
 
The Company and First Data each are liable for taxes imposed on their respective businesses both prior to and after the Spin-off. If such taxes have not been appropriately apportioned between First Data and the Company, subsequent adjustments may occur that may impact the Company’s financial position or results of operations.
 
Also under the tax allocation agreement, with respect to taxes and other liabilities that result from a final determination that is inconsistent with the anticipated tax consequences of the Spin-off (as set forth in the private letter ruling and relevant tax opinion) (“Spin-off Related Taxes”), the Company will be liable to First Data for any such Spin-off Related Taxes attributable solely to actions taken by or with respect to the Company. In addition, the Company will also be liable for half of any Spin-off Related Taxes (i) that would not have been imposed but for the existence of both an action by the Company and an action by First Data or (ii) where the Company and First Data each take actions that, standing alone, would have resulted in the imposition of such Spin-off Related Taxes. The Company may be similarly liable if it breaches certain representations or covenants set forth in the tax allocation agreement. If the Company is required to indemnify First Data for taxes incurred as a result of the Spin-off being taxable to First Data, it likely would have a material adverse effect on the Company’s business, financial position and results of operations. First Data generally will be liable for all Spin-off Related Taxes, other than those described above.
Employee Benefit Plans
Employee Benefit Plans
 
11.  Employee Benefit Plans
 
Defined Contribution Plans
 
The Western Union Company Incentive Savings Plan (“401(k)”) covers eligible employees on the United States payroll of the Company. Employees who make voluntary contributions to this plan receive up to a 4% Company matching contribution. All matching contributions are immediately vested.
 
On September 30, 2009, the Company merged its defined contribution plan covering its former union employees and transferred the plan assets into the 401(k).
 
The Company administers more than 20 defined contribution plans in various countries globally on behalf of approximately 1,000 employee participants as of December 31, 2010. Such plans have vesting and employer contribution provisions that vary by country.
 
In addition, the Company sponsors a non-qualified deferred compensation plan for a select group of highly compensated employees. The plan provides tax-deferred contributions, matching and the restoration of Company matching contributions otherwise limited under the 401(k).
 
The aggregate amount charged to expense in connection with all of the above plans was $12.0 million, $11.2 million and $12.5 million during the years ended December 31, 2010, 2009 and 2008, respectively.
 
Defined Benefit Plan
 
On December 31, 2010, the Company merged its two frozen defined benefit pension plans into one plan (“Plan”). The Plan assets were held in a master trust and were identical in terms of their benefit entitlements and other provisions (except for participant eligibility requirements) and consequently, the financial effect of the merger was not significant.
 
The Plan had a recorded unfunded pension obligation of $112.8 million as of December 31, 2010, included in “Other liabilities” in the Consolidated Balance Sheets. In the year ended December 31, 2010, the Company made approximately $25 million in contributions to the Plan, including a discretionary contribution of $10 million. Due to the closure of one of its facilities in Missouri (see Note 3) and an agreement with the Pension Benefit Guaranty Corporation, the Company funded $4.1 million during 2009. No contributions were made to the Plan during the year ended December 31, 2008. The Company will be required to fund approximately $22 million to the Plan in 2011 and may make a discretionary contribution of up to approximately $3 million.
 
The Company recognizes the funded status of the Plan in its Consolidated Balance Sheets with a corresponding adjustment to “Accumulated other comprehensive loss,” net of tax.
 
The following table provides a reconciliation of the changes in the Plan’s projected benefit obligation, fair value of assets and the funded status (in millions):
 
                     
    2010     2009  
 
Change in projected benefit obligation
                   
Projected benefit obligation at January 1,
  $   400 .1     $   398 .8  
Interest cost
    20 .1       23 .6  
Actuarial loss
    25 .3       21 .1  
Benefits paid
    (42 .6)       (43 .4)  
                     
                     
Projected benefit obligation at December 31,
  $ 402 .9     $ 400 .1  
                     
Change in plan assets
                   
Fair value of plan assets at January 1,
  $ 275 .9     $ 291 .7  
Actual return on plan assets
    31 .9       23 .5  
Benefits paid
    (42 .6)       (43 .4)  
Company contributions
    24 .9       4 .1  
                     
Fair value of plan assets at December 31,
    290 .1       275 .9  
                     
                     
Funded status of the plan at December 31,
  $ (112 .8)     $ (124 .2)  
                     
                     
Accumulated benefit obligation at December 31,
  $ 402 .9     $ 400 .1  
                     
 
Differences in expected returns on plan assets estimated at the beginning of the year versus actual returns, and assumptions used to estimate the beginning of year projected benefit obligation versus the end of year obligation (principally discount rate and mortality assumptions) are, on a combined basis, considered actuarial gains and losses. Such actuarial gains and losses are recognized as a component of “Comprehensive income” and amortized to income over the average remaining life expectancy of the plan participants. Included in “Accumulated other comprehensive loss” at December 31, 2010 is $8.1 million ($5.0 million, net of tax) of actuarial losses that are expected to be recognized in net periodic pension cost during the year ended December 31, 2011.
 
The following table provides the amounts recognized in the Consolidated Balance Sheets (in millions):
 
                 
    December 31,  
    2010     2009  
 
Accrued benefit liability
  $   (112.8 )   $   (124.2 )
Accumulated other comprehensive loss (pre-tax)
    176.5       169.0  
                 
Net amount recognized
  $ 63.7     $ 44.8  
                 
 
The following table provides the components of net periodic benefit cost for the Plan (in millions):
 
                         
    Year Ended December 31,  
    2010     2009     2008  
 
Interest cost
  $   20.1     $   23.6     $   24.4  
Expected return on plan assets
    (20.4 )     (24.7 )     (27.5 )
Amortization of actuarial loss
    6.2       3.6       2.7  
Employee termination costs
                2.8  
                         
                         
Net periodic benefit cost
  $ 5.9     $ 2.5     $ 2.4  
                         
 
During 2008, the Company recorded $2.8 million of expense relating to the termination of certain retirement eligible union and management plan participants in connection with the restructuring and related activities disclosed in Note 3.
 
The accrued loss related to the pension liability included in accumulated other comprehensive loss, net of tax, increased $3.9 million, $11.3 million and $46.4 million in 2010, 2009 and 2008, respectively. The significant increase in the accrued loss included in accumulated other comprehensive loss in 2008 was caused by a decline in the fair value of plan assets, which was primarily attributable to a decrease in the value of the equity securities within the plan asset portfolio.
 
The rate assumptions used in the measurement of the Company’s benefit obligation were as follows:
 
                 
    2010   2009
 
Discount rate
    4.69 %     5.30 %
 
The weighted-average rate assumptions used in the measurement of the Company’s net cost were as follows:
 
                         
    2010   2009   2008
 
Discount rate
    5.30 %     6.26 %     6.02 %
Expected long-term return on plan assets
    6.50 %     7.50 %     7.50 %
 
The Company measures the Plan’s obligations and annual expense using assumptions that reflect best estimates and are consistent to the extent that each assumption reflects expectations of future economic conditions. As the bulk of the pension benefits will not be paid for many years, the computation of pension expenses and benefits is based on assumptions about future interest rates and expected rates of return on plan assets. In general, pension obligations are most sensitive to the discount rate assumption, and it is set based on the rate at which the pension benefits could be settled effectively. The discount rate is determined by matching the timing and amount of anticipated payouts under the Plan to the rates from an AA spot rate yield curve. The curve is derived from AA bonds of varying maturities.
 
The Company employs a building block approach in determining the long-term rate of return for plan assets. Historical markets are studied and long-term historical relationships between equities and fixed-income securities are considered consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. Current market factors such as inflation and interest rates are evaluated before long-term capital market assumptions are determined. Consideration is given to diversification, re-balancing and yields anticipated on fixed income securities held. Historical returns are reviewed to check for reasonableness and appropriateness. The Company then applies this rate against a calculated value for its plan assets. The calculated value recognizes changes in the fair value of plan assets over a five-year period.
 
Pension plan asset allocation at December 31, 2010 and 2009, and target allocations based on investment policies, were as follows:
 
                 
    Percentage of Plan Assets
 
    at Measurement Date  
Asset Class   2010     2009  
 
Equity investments
    31%       32%  
Debt securities
    69%       68%  
                 
                 
      100%       100%  
                 
 
         
    Target Allocation
 
Equity investments
    25-35 %
Debt securities
    65-75 %
 
The assets of the Company’s Plan are managed in a third-party Trust. The investment policy and allocation of the assets in the Trust are overseen by the Company’s Investment Council. The Company employs a total return investment approach whereby a mix of equities and fixed income investments are used in an effort to maximize the long-term return of plan assets for a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities and plan funded status. The investment portfolio contains a diversified blend of equity and fixed-income investments. Furthermore, equity investments are diversified across United States and non-United States stocks, as well as securities deemed to be growth, value, and small and large capitalizations. Other assets, primarily private equity, are used judiciously in an effort to enhance long-term returns while improving portfolio diversification. The investments in the Trust also include certain derivatives. On behalf of the Plan, investment advisors may enter into derivative contracts to manage interest rate risks. These contracts are contractual obligations to buy or sell a United States treasury bond or note at predetermined future dates and prices. Futures are transacted in standardized amounts on regulated exchanges. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements, and periodic asset and liability studies. In early 2011, the Company revised its target asset allocation to approximately 15% in equity investments, 60% in fixed income securities and 25% in alternative investment strategies in order to increase diversification.
 
The following tables reflect investments of the Trust that were measured and carried at fair value (in millions). For information on how the Company measures fair value, refer to Note 2.
 
                                 
December 31, 2010   Fair Value Measurement Using     Total Assets
 
Asset Class   Level 1     Level 2     Level 3     at Fair Value  
 
Equity investments
                               
Domestic
  $   3.1     $   40.9     $   —     $   44.0  
International
          45.2             45.2  
Private equity
                1.3       1.3  
Debt securities
                               
Corporate debt (a)
          117.3             117.3  
U.S. treasury bonds
    57.9                   57.9  
U.S. government agencies
          6.8             6.8  
Asset-backed
          6.0             6.0  
Other bonds
          9.0             9.0  
                                 
                                 
Total investments of the Trust at fair value
  $ 61.0     $ 225.2     $ 1.3     $ 287.5  
Other assets
                            2.6  
                                 
                                 
Total investments of the Trust
  $ 61.0     $ 225.2     $ 1.3     $ 290.1  
                                 
 
                                 
December 31, 2009   Fair Value Measurement Using     Total Assets
 
Asset Class   Level 1     Level 2     Level 3     at Fair Value  
 
Equity investments
                               
Domestic
  $   5.7     $   35.4     $   —     $   41.1  
International
          43.1             43.1  
Private equity
                2.0       2.0  
Debt securities
                               
Corporate debt (a)
          119.3             119.3  
U.S. treasury bonds
    46.6                   46.6  
U.S. government agencies
          9.6             9.6  
Asset-backed
          8.7             8.7  
Other bonds
          2.9             2.9  
                                 
                                 
Total investments of the Trust at fair value
  $ 52.3     $ 219.0     $ 2.0     $ 273.3  
Other assets
                            2.6  
                                 
                                 
Total investments of the Trust
  $ 52.3     $ 219.0     $ 2.0     $ 275.9  
                                 
 
 
(a) Substantially all corporate debt securities are investment grade securities.
 
The maturities of debt securities at December 31, 2010 range from less than one year to approximately 49 years with a weighted-average maturity of 22 years.
 
The following tables provide summaries of changes in the fair value of the Trust’s Level 3 financial assets (in millions):
 
           
    Private equity
 
For the year ended December 31, 2010   securities  
 
Beginning balance, January 1, 2010
  $   2 .0  
Actual return on plan assets:
         
Relating to assets still held at the reporting date
    (0 .4)  
Relating to assets sold during the period
    0 .2  
Net purchases and sales
    (0 .5)  
           
           
Ending balance, December 31, 2010
  $ 1 .3  
           
 
                           
    Asset-backed
    Private equity
       
For the year ended December 31, 2009   securities     securities     Total  
 
Beginning balance, January 1, 2009
  $ 9.8      $ 2.8      $  12 .6  
Actual return on plan assets:
                         
Relating to assets still held at the reporting date
    1.0        (0.8)       0 .2  
Relating to assets sold during the period
    0.2        —        0 .2  
Net purchases and sales
    (2.3)       —        (2 .3)  
Transfers out of Level 3 (a)
    (8.7)       —        (8 .7)  
                           
                           
Ending balance, December 31, 2009
  $ —      $ 2.0      $ 2 .0  
                           
 
 
(a) Market liquidity for these assets has significantly improved since 2008 resulting in improved price transparency.
 
The estimated undiscounted future benefit payments are expected to be $41.4 million in 2011, $40.2 million in 2012, $38.8 million in 2013, $37.3 million in 2014, $35.8 million in 2015 and $154.2 million in 2016 through 2020.
Operating Lease Commitments
Operating Lease Commitments
 
12.  Operating Lease Commitments
 
The Company leases certain real properties for use as customer service centers and administrative and sales offices. The Company also leases data communications terminals, computers and office equipment. Certain of these leases contain renewal options and escalation provisions. Total rent expense under operating leases, net of sublease income, was $34.7 million, $34.0 million and $39.7 million during the years ended December 31, 2010, 2009 and 2008, respectively.
 
As of December 31, 2010, the minimum aggregate rental commitments under all noncancelable operating leases, net of sublease income commitments aggregating $1.8 million through 2015, were as follows (in millions):
 
         
Year Ending December 31,      
 
2011
  $   29.9  
2012
    21.6  
2013
    16.8  
2014
    12.5  
2015
    10.1  
Thereafter
    15.0  
         
         
Total future minimum lease payments
  $ 105.9  
         
 
Stockholders' Equity
Stockholders' Equity
13.  Stockholders’ Equity
 
Accumulated other comprehensive loss
 
Accumulated other comprehensive loss includes all changes in equity during a period that have yet to be recognized in income, except those resulting from transactions with shareholders. The major components include unrealized gains and losses on investment securities, gains or losses from cash flow hedging activities, foreign currency translation adjustments and pension liability adjustments.
 
Unrealized gains and losses on investment securities that are available for sale, primarily state and municipal debt securities, are included in accumulated other comprehensive loss until the investment is either sold or deemed other-than-temporarily impaired. See Note 7 for further discussion.
 
The effective portion of the change in fair value of derivatives that qualify as cash flow hedges are recorded in accumulated other comprehensive loss. Generally, amounts are recognized in income when the related forecasted transaction affects earnings. See Note 14 for further discussion.
 
The assets and liabilities of foreign subsidiaries whose functional currency is not the United States dollar are translated using the appropriate exchange rate as of the end of the year. Foreign currency translation adjustments represent unrealized gains and losses on assets and liabilities arising from the difference in the foreign country currency compared to the United States dollar. These gains and losses are accumulated in comprehensive income. When a foreign subsidiary is substantially liquidated, the cumulative translation gain or loss is removed from “Accumulated other comprehensive loss” and is recognized as a component of the gain or loss on the sale of the subsidiary.
 
A pension liability adjustment associated with the defined benefit pension plan is recognized for the difference between estimated assumptions (e.g., asset returns, discount rates, mortality) and actual results. The amount in “Accumulated other comprehensive loss” is amortized to income over the remaining life expectancy of the plan participants. Details of the pension plan’s assets and obligations are explained further in Note 11.
 
The income tax effects allocated to and the cumulative balance of each component of accumulated other comprehensive loss were as follows (in millions):
 
                         
    2010     2009     2008  
 
Beginning balance, January 1
  $  (127.3 )   $   (30.0 )   $   (68.8 )
Unrealized gains/(losses) on investment securities:
                       
Unrealized gains/(losses)
    (0.5 )     11.5       (2.4 )
Tax (expense)/benefit
    0.1       (4.3 )     0.9  
Reclassification of (gains)/losses into earnings
    (4.7 )     (2.7 )     4.3  
Tax expense/(benefit)
    1.8       1.0       (1.6 )
                         
Net unrealized gains/(losses) on investment securities
    (3.3 )     5.5       1.2  
Unrealized gains/(losses) on hedging activities:
                       
Unrealized gains/(losses)
    15.8       (43.6 )     82.6  
Tax (expense)/benefit
    0.7       8.9       (15.0 )
Reclassification of (gains)/losses into earnings
    (23.0 )     (32.9 )     25.1  
Tax expense/(benefit)
    1.6       5.1       (3.5 )
                         
Net unrealized gains/(losses) on hedging activities
    (4.9 )     (62.5 )     89.2  
Foreign currency translation adjustments:
                       
Foreign currency translation adjustments
    8.4       (21.6 )     (8.0 )
Tax (expense)/benefit
    (1.8 )     7.6       2.8  
Reclassification of gains into earnings (a)
          (23.1 )      
Tax expense (a)
          8.1        
                         
Net foreign currency translation adjustments
    6.6       (29.0 )     (5.2 )
Pension liability adjustments:
                       
Unrealized losses
    (13.7 )     (22.2 )     (76.1 )
Tax benefit
    5.9       8.7       28.0  
Reclassification of losses into earnings
    6.2       3.6       2.7  
Tax benefit
    (2.3 )     (1.4 )     (1.0 )
                         
Net pension liability adjustments
    (3.9 )     (11.3 )     (46.4 )
                         
Other comprehensive (loss)/income
    (5.5 )     (97.3 )     38.8  
                         
Ending balance, December 31
  $ (132.8 )   $ (127.3 )   $ (30.0 )
                         
 
 
(a) The year ended December 31, 2009 includes the impact to the foreign currency translation account of the surrender of the Company’s interest in FEXCO Group. See Note 4.
 
The components of accumulated other comprehensive loss, net of tax, were as follows (in millions):
 
                         
    2010     2009     2008  
 
Unrealized gains on investment securities
  $ 3.1     $ 6.4     $ 0.9  
Unrealized gains/(losses) on hedging activities
    (21.9 )     (17.0 )     45.5  
Foreign currency translation adjustment
    (4.3 )     (10.9 )     18.1  
Pension liability adjustment
    (109.7 )     (105.8 )     (94.5 )
                         
                         
    $   (132.8 )   $   (127.3 )   $   (30.0 )
                         
 
 
Cash Dividends Paid
 
During 2010, the Company’s Board of Directors declared quarterly cash dividends of $0.07 per common share in the fourth quarter and $0.06 per common share in each of the first three quarters representing $165.3 million in total dividends. Of this amount, $40.5 million was paid on March 31, 2010, $39.6 million was paid on June 30, 2010, $39.4 million was paid on October 14, 2010 and $45.8 million was paid on December 31, 2010. During the fourth quarter of 2009, the Company’s Board of Directors declared an annual cash dividend of $0.06 per common share representing $41.2 million in total dividends, paid on December 30, 2009. During the fourth quarter of 2008, the Company’s Board of Directors declared an annual dividend of $0.04 per common share representing $28.4 million in total dividends, paid on December 31, 2008.
 
On February 25, 2011, the Company’s Board of Directors declared a quarterly cash dividend of $0.07 per share payable on March 31, 2011.
 
Share Repurchases
 
During the years ended December 31, 2010, 2009 and 2008, 35.6 million, 24.8 million and 58.1 million shares, respectively, have been repurchased for $584.5 million, $400.0 million and $1,313.9 million, respectively, excluding commissions, at an average cost of $16.44, $16.10 and $22.60 per share, respectively. At December 31, 2010, $415.5 million remains available under share repurchase authorizations approved by the Board of Directors through December 31, 2012. On February 1, 2011, the Board of Directors authorized an additional $1 billion of common stock repurchases through December 31, 2012.
Derivatives
Derivatives
 
14.  Derivatives
 
The Company is exposed to foreign currency exchange risk resulting from fluctuations in exchange rates, primarily the euro, and to a lesser degree the British pound, Canadian dollar and other currencies, related to forecasted money transfer revenues and on money transfer settlement assets and obligations. Subsequent to the acquisition of Custom House, the Company is also exposed to risk from derivative contracts written to its customers arising from its cross-currency business-to-business payments operations. Additionally, the Company is exposed to interest rate risk related to changes in market rates both prior to and subsequent to the issuance of debt. The Company uses derivatives to (a) minimize its exposures related to changes in foreign currency exchange rates and interest rates and (b) facilitate cross-currency business-to-business payments by writing derivatives to customers.
 
The Company executes derivatives related to its consumer-to-consumer business with established financial institutions, with the substantial majority of these financial institutions having credit ratings of “A−” or better from a major credit rating agency. The Company executes global business payments derivatives, as a result of its acquisition of Custom House, mostly with small and medium size enterprises. The credit risk inherent in both the consumer-to-consumer and global business payments agreements represents the possibility that a loss may occur from the nonperformance of a counterparty to the agreements. The Company performs a review of the credit risk of these counterparties at the inception of the contract and on an ongoing basis. The Company also monitors the concentration of its contracts with any individual counterparty. The Company anticipates that the counterparties will be able to fully satisfy their obligations under the agreements, but takes action (including termination of contracts) when doubt arises about the counterparties’ ability to perform. The Company’s hedged foreign currency exposures are in liquid currencies, consequently there is minimal risk that appropriate derivatives to maintain the hedging program would not be available in the future.
 
Foreign Currency—Consumer-to-Consumer
 
The Company’s policy is to use longer-term foreign currency forward contracts, with maturities of up to 36 months at inception and a targeted weighted-average maturity of approximately one year, to mitigate some of the risk that changes in foreign currency exchange rates compared to the United States dollar could have on forecasted revenues denominated in other currencies related to its business. At December 31, 2010, the Company’s longer-term foreign currency forward contracts had maturities of a maximum of 24 months with a weighted-average maturity of approximately one year. These contracts are accounted for as cash flow hedges of forecasted revenue, with effectiveness assessed based on changes in the spot rate of the affected currencies during the period of designation. Accordingly, all changes in the fair value of the hedges not considered effective or portions of the hedge that are excluded from the measure of effectiveness are recognized immediately in “Derivative losses, net” within the Company’s Consolidated Statements of Income.
 
The Company also uses short duration foreign currency forward contracts, generally with maturities from a few days up to one month, to offset foreign exchange rate fluctuations on settlement assets and obligations between initiation and settlement. In addition, forward contracts, typically with maturities of less than one year, are utilized to offset foreign exchange rate fluctuations on certain foreign currency denominated cash positions. None of these contracts are designated as accounting hedges.
 
The aggregate equivalent United States dollar notional amounts of foreign currency forward contracts as of December 31, 2010 were as follows (in millions):
 
         
Contracts not designated as hedges:
       
Euro
  $   206.5  
British pound
    26.6  
Other
    48.4  
Contracts designated as hedges:
       
Euro
  $ 485.3  
Canadian dollar
    107.7  
British pound
    94.3  
Other
    87.4  
 
Foreign Currency—Global Business Payments
 
As a result of the acquisition of Custom House, the Company writes derivatives, primarily foreign currency forward contracts and, to a much smaller degree, option contracts, mostly with small and medium size enterprises (customer contracts) and derives a currency spread from this activity as part of its global business payments operations. In this capacity, the Company facilitates cross-currency payment transactions for its customers but aggregates its Business Solutions foreign currency exposures arising from customer contracts, including the derivative contracts described above, and hedges the resulting net currency risks by entering into offsetting contracts with established financial institution counterparties (economic hedge contracts). The derivatives written are part of the broader portfolio of foreign currency positions arising from its cross-currency business-to-business payments operation, which includes significant spot exchanges of currency in addition to forwards and options. None of these contracts are designated as accounting hedges. The duration of these derivative contracts is generally nine months or less.
 
The aggregate equivalent United States dollar notional amounts of foreign currency derivative customer contracts held by the Company as of December 31, 2010 were approximately $1.5 billion. The significant majority of customer contracts are written in major currencies such as the Canadian dollar, euro, Australian dollar and the British pound.
 
The Company has a forward contract to offset foreign exchange rate fluctuations on a Canadian dollar denominated intercompany loan in connection with the Company’s acquisition of Custom House. This contract, which is not designated as an accounting hedge, had a notional amount of approximately 245 million and 230 million Canadian dollars at December 31, 2010 and December 31, 2009, respectively.
 
Interest Rate Hedging—Corporate
 
The Company utilizes interest rate swaps to effectively change the interest rate payments on a portion of its notes from fixed-rate payments to short-term LIBOR-based variable rate payments in order to manage its overall exposure to interest rates. The Company designates these derivatives as fair value hedges utilizing the short-cut method, which permits an assumption of no ineffectiveness if certain criteria are met. The change in fair value of the interest rate swaps is offset by a change in the carrying value of the debt being hedged within the Company’s “Borrowings” in the Consolidated Balance Sheets and “Interest expense” in the Consolidated Statements of Income has been adjusted to include the effects of interest accrued on the swaps.
 
The Company, at times, utilizes derivatives to hedge the forecasted issuance of fixed rate debt. These derivatives are designated as cash flow hedges of the variability in the fixed rate coupon of the debt expected to be issued. The effective portion of the change in fair value of the derivatives is recorded in “Accumulated other comprehensive loss.” Such derivatives were used in connection with the 2010 issuances discussed in Note 15.
 
At December 31, 2010 and 2009, the Company held interest rate swaps in an aggregate notional amount of $1,195 million and $750 million, respectively. Of this aggregate notional amount held at December 31, 2010, $695 million related to notes due in 2011 and $500 million related to notes due in 2014.
 
Balance Sheet
 
The following table summarizes the fair value of derivatives reported in the Consolidated Balance Sheets as of December 31, 2010 and 2009 (in millions):
 
                                                 
    Derivative Assets     Derivative Liabilities  
    Balance Sheet
    Fair Value     Balance Sheet
    Fair Value  
    Location     2010     2009     Location     2010     2009  
 
Derivatives—hedges:
                                               
Interest rate fair value hedges—Corporate
    Other assets     $   8.0     $   31.0       Other liabilities     $   1.6     $  
Foreign currency cash flow hedges—Consumer-to-consumer
    Other assets       14.7       15.1       Other liabilities       31.1       31.0  
                                                 
                                                 
Total
          $ 22.7     $ 46.1             $ 32.7     $ 31.0  
                                                 
Derivatives—undesignated:
                                               
Foreign currency—Global business payments
    Other assets     $ 46.9     $ 58.9       Other liabilities     $ 36.2     $ 48.2  
Foreign currency—Consumer-to-consumer
    Other assets       0.2       4.9       Other liabilities       12.0       1.4  
                                                 
                                                 
Total
          $ 47.1     $ 63.8             $ 48.2     $ 49.6  
                                                 
                                                 
Total derivatives
          $ 69.8     $ 109.9             $ 80.9     $  80.6  
                                                 
 
The following table summarizes the net fair value of derivatives held at December 31, 2010 and their expected maturities (in millions):
 
                                                 
    Total     2011     2012     2013     2014     Thereafter  
 
Foreign currency cash flow hedges—Consumer-to-consumer
  $  (16.4 )   $  (9.6 )   $  (6.8 )   $  —     $  —     $  —  
Foreign currency undesignated hedges—Consumer-to-consumer
    (11.8 )     (11.8 )                        
Foreign currency undesignated hedges—Global business payments
    10.7       10.6       0.1                    
Interest rate fair value hedges—Corporate
    6.4       3.8                   2.6        
                                                 
                                                 
Total
  $ (11.1 )   $ (7.0 )   $ (6.7 )   $     $ 2.6     $  
                                                 
 
Income Statement
 
The following tables summarize the location and amount of gains and losses of derivatives in the Consolidated Statements of Income segregated by designated, qualifying hedging instruments and those that are not, for the years ended December 31, 2010, 2009 and 2008 (in millions):
 
Fair Value Hedges
 
                                                                         
                                  Gain/(Loss) Recognized in Income on Related
 
    Gain/(Loss) Recognized in Income on Derivatives           Hedged Item (a)  
    Income Statement
    Amount           Income Statement
    Amount  
Derivatives   Location     2010     2009     2008     Hedged Items     Location     2010     2009     2008  
 
Interest rate contracts
    Interest expense     $  13.3     $  12.9     $  58.5       Fixed-rate debt       Interest expense     $  10.5     $  11.1     $  (54.6 )
                                                                         
Total gain/(loss)
          $ 13.3     $ 12.9     $ 58.5                     $ 10.5     $ 11.1     $ (54.6 )
                                                                         
 
 
Cash Flow Hedges
 
                                                                                 
    Amount of Gain/(Loss)
                          Gain/(Loss) Recognized in Income on Derivative
 
    Recognized in OCI on
    Gain/(Loss) Reclassified from Accumulated OCI into
    (Ineffective Portion and Amount
 
    Derivatives
    Income (Effective Portion)
    Excluded from Effectiveness Testing) (b)  
    (Effective Portion)     Income Statement
  Amount     Income Statement
  Amount  
Derivatives   2010     2009     2008     Location   2010     2009     2008     Location   2010     2009     2008  
 
Foreign currency contracts
  $  20.0     $  (43.6 )   $  82.6     Revenue   $  24.5     $  34.6     $  (23.4 )   Derivative losses, net   $  (1.5 )   $  (1.2 )   $  (9.9 )
Interest rate contracts (c)
    (4.2 )               Interest expense     (1.5 )     (1.7 )     (1.7 )   Interest expense     (0.1 )            
                                                                                 
Total gain/(loss)
  $ 15.8     $ (43.6 )   $ 82.6         $ 23.0     $ 32.9     $ (25.1 )       $ (1.6 )   $ (1.2 )   $ (9.9 )
                                                                                 
 
Undesignated Hedges
 
                             
    Gain/(Loss) Recognized in Income on Derivatives  
    Income Statement Location                  
        Amount  
Derivatives       2010     2009     2008  
 
Foreign currency contracts (d)
  Foreign exchange revenues   $   25.8     $   4.5     $   —  
Foreign currency contracts (e)
  Selling, general and administrative     (1.0 )     (7.4 )     13.0  
Foreign currency contracts (f)
  Derivative losses, net     0.6       (2.8 )     3.9  
                             
Total gain/(loss)
      $ 25.4     $ (5.7 )   $ 16.9  
                             
 
 
(a) The 2010 gain of $10.5 million is comprised of a loss in value on the debt of $13.3 million and amortization of hedge accounting adjustments of $23.8 million. The 2009 gain of $11.1 million is comprised of a loss in value on the debt of $12.9 million and amortization of hedge accounting adjustments of $24.0 million. The 2008 loss of $54.6 million is comprised of a loss in value on the debt of $58.5 million and amortization of hedge accounting adjustments of $3.9 million.
 
(b) The portion of the change in fair value of a derivative excluded from the effectiveness assessment for foreign currency forward contracts designated as cash flow hedges represents the difference between changes in forward rates and spot rates.
 
(c) The Company uses derivatives to hedge the forecasted issuance of fixed rate debt and records the effective portion of the derivative’s fair value in “Accumulated other comprehensive loss” in the Consolidated Balance Sheets. These amounts are reclassified to “Interest expense” over the life of the related notes.
 
(d) The Company uses foreign currency forward and option contracts as part of its international business-to-business payments operation. The derivative contracts are managed as part of a broader currency portfolio that includes non-derivative currency exposures.
 
(e) The Company uses foreign currency forward contracts to offset foreign exchange rate fluctuations on settlement assets and obligations as well as certain foreign currency denominated positions. Foreign exchange gain/(loss) on settlement assets and obligations and cash balances were ($2.5) million, $2.8 million and ($24.9) million in 2010, 2009 and 2008, respectively.
 
(f) The derivative contracts used in the Company’s revenue hedging program are not designated as hedges in the final month of the contract.
 
An accumulated other comprehensive pre-tax loss of ($9.1) million related to the foreign currency forward contracts is expected to be reclassified into revenue within the next 12 months as of December 31, 2010. Approximately $1.5 million of net losses on the forecasted debt issuance hedges are expected to be recognized in interest expense within the next 12 months as of December 31, 2010. No amounts have been reclassified into earnings as a result of the underlying transaction being considered probable of not occurring within the specified time period.
Borrowings
Borrowings
15.  Borrowings
 
The Company’s outstanding borrowings at December 31, 2010 and 2009 consisted of the following (in millions):
 
                 
    December 31, 2010     December 31, 2009  
 
Due in less than one year (a):
               
5.400% notes (effective rate of 2.7%) due November 2011 (b)(c)
  $ 696.3     $ 1,000.0  
Due in greater than one year (a):
               
6.500% notes (effective rate of 5.5%) due 2014
    500.0       500.0  
5.930% notes due 2016 (d)
    1,000.0       1,000.0  
5.253% notes due 2020 (b)
    324.9        
6.200% notes due 2036 (d)
    500.0       500.0  
6.200% notes due 2040 (e)
    250.0        
Other borrowings
    5.9       6.0  
                 
Total borrowings at par value
    3,277.1       3,006.0  
Fair value hedge accounting adjustments, net (a)
    36.6       47.1  
Unamortized discount, net (b)
    (23.8 )     (4.6 )
                 
                 
Total borrowings at carrying value (f)
  $  3,289.9     $  3,048.5  
                 
 
 
(a) The Company utilizes interest rate swaps designated as fair value hedges to effectively change the interest rate payments on a portion of its notes from fixed-rate payments to short-term LIBOR-based variable rate payments in order to manage its overall exposure to interest rates. The changes in fair value of these interest rate swaps result in an offsetting hedge accounting adjustment recorded to the carrying value of the related note. These hedge accounting adjustments will be reclassified as reductions to or increases in “Interest expense” over the life of the related notes, and cause the effective rate of interest to differ from the notes’ stated rate.
 
(b) On March 30, 2010, the Company exchanged $303.7 million of aggregate principal amount of the 5.400% notes due 2011 (“2011 Notes”) for 5.253% unsecured notes due 2020 (“2020 Notes”). The 5.7% effective interest rate of the 2020 Notes differs from the stated rate as the notes have a par value of $324.9 million. The $21.2 million difference between the carrying value and the par value is being accreted over the life of the 2020 Notes. See below for additional detail relating to the note exchange.
 
(c) The effective interest rate related to the 2011 Notes includes the impact of the interest rate swaps entered into in conjunction with the assumption of the money order investments from IPS.
 
(d) The difference between the stated interest rate and the effective interest rate is not significant.
 
(e) On June 21, 2010, the Company issued $250.0 million of aggregate principal amount of 6.200% unsecured notes due 2040 (the “2040 Notes”). In anticipation of this issuance, the Company entered into interest rate swaps to fix the interest rate of the debt issuance, and recorded a loss on the swaps of $7.5 million, which increased the effective rate to 6.3%, in “Accumulated other comprehensive loss,” which will be amortized into interest expense over the life of the 2040 Notes. See below for additional detail relating to the debt issuance.
 
(f) At December 31, 2010, the Company’s weighted average effective rate on total borrowings was approximately 5.2%.
 
The aggregate fair value of the Company’s long-term debt, based on quotes from multiple banks, excluding the impact of related interest rate swaps, was $3,473.6 million and $3,211.3 million at December 31, 2010 and December 31, 2009, respectively.
 
The Company’s maturities of borrowings at par value as of December 31, 2010 are $700 million in November 2011, $500 million in 2014 and $2.1 billion beyond 2015.
 
The Company’s obligations with respect to its outstanding borrowings, as described below, rank equally.
 
Commercial Paper Program
 
On November 3, 2006, the Company established a commercial paper program pursuant to which the Company may issue unsecured commercial paper notes (the “Commercial Paper Notes”) in an amount not to exceed $1.5 billion outstanding at any time, reduced to the extent of borrowings outstanding on the Revolving Credit Facility as described below. The Commercial Paper Notes may have maturities of up to 397 days from date of issuance. Interest rates for borrowings are based on market rates at the time of issuance. The Company had no commercial paper borrowings outstanding at December 31, 2010 and 2009, respectively.
 
Revolving Credit Facility
 
On September 27, 2006, the Company entered into a five-year unsecured revolving credit facility, which includes a $1.5 billion revolving credit facility, a $250.0 million letter of credit sub-facility and a $150.0 million swing line sub-facility (the “Revolving Credit Facility”). On September 28, 2007, the Company entered into an amended and restated credit agreement, the primary purpose of which was to extend the maturity by one year from its original five-year $1.5 billion facility entered into in 2006. No other material changes were made in the amended and restated facility. The Revolving Credit Facility, which is diversified through a group of 15 participating institutions, is used to meet additional liquidity needs that might arise for the Company and to support borrowings under the Company’s commercial paper program. The Revolving Credit Facility contains certain covenants that, among other things, limit or restrict the ability of the Company and other significant subsidiaries to grant certain types of security interests, incur debt or enter into sale and leaseback transactions. The Company is also required to maintain compliance with a consolidated interest coverage ratio covenant.
 
Interest due under the Revolving Credit Facility is fixed for the term of each borrowing and is payable according to the terms of that borrowing. Generally, interest is calculated using a selected LIBOR rate plus an interest rate margin of 19 basis points. A facility fee of 6 basis points on the total facility is also payable quarterly, regardless of usage. The facility fee percentage is determined based on certain of the Company’s credit ratings. In addition, to the extent the aggregate outstanding borrowings under the Revolving Credit Facility exceed 50% of the related aggregate commitments, a utilization fee of 5 basis points as of December 31, 2010 based upon such ratings is payable to the lenders on the aggregate outstanding borrowings.
 
As of and during the year ended December 31, 2010, the Company had $1.5 billion available to borrow, as the Company had no borrowings outstanding under the Revolving Credit Facility.
 
Term Loan
 
On December 5, 2008, the Company entered into a senior, unsecured, 364-day term loan in an aggregate principal amount of $500 million with a syndicate of lenders. The Term Loan was paid and financed with the issuance of the 2014 Notes on February 26, 2009.
 
Notes
 
On June 21, 2010, the Company issued $250.0 million of aggregate principal amount of unsecured notes due June 21, 2040. Interest with respect to the 2040 Notes is payable semiannually on June 21 and December 21 each year based on the fixed per annum interest rate of 6.200%. The 2040 Notes are subject to covenants that, among other things, limit or restrict the ability of the Company and certain of its subsidiaries to grant certain types of security interests or enter into sale and leaseback transactions. The Company may redeem the 2040 Notes at any time prior to maturity at the greater of par or a price based on the applicable treasury rate plus 30 basis points.
 
On March 30, 2010, the Company exchanged $303.7 million of aggregate principal amount of the 2011 Notes for unsecured notes due April 1, 2020. Interest with respect to the 2020 Notes is payable semiannually on April 1 and October 1 each year based on the fixed per annum interest rate of 5.253%. In connection with the exchange, note holders were given a 7% premium ($21.2 million), which approximated market value at the exchange date, as additional principal. As this transaction was accounted for as a debt modification, this premium was not charged to expense. Rather, the premium, along with the offsetting hedge accounting adjustments, will be accreted into interest expense over the life of the notes. The 2020 Notes are subject to covenants that, among other things, limit or restrict the ability of the Company and certain of its subsidiaries to grant certain types of security interests, incur debt (in the case of significant subsidiaries), or enter into sale and leaseback transactions. The Company may redeem the 2020 Notes at any time prior to maturity at the greater of par or a price based on the applicable treasury rate plus 15 basis points.
 
The 2020 Notes were originally issued in reliance on exemptions from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). On October 8, 2010, the Company exchanged the 2020 Notes for notes registered under the Securities Act, pursuant to the terms of the Registration Rights Agreement.
 
On February 26, 2009, the Company issued $500 million of aggregate principal amount of the 2014 Notes to repay the balance of the Term Loan which was scheduled to mature in December 2009. Interest with respect to the 2014 Notes is payable semiannually on February 26 and August 26 each year based on the fixed per annum interest rate of 6.500%. The 2014 Notes are subject to covenants that, among other things, limit or restrict the ability of the Company and certain of its subsidiaries to grant certain types of security interests or enter into sale and leaseback transactions. The Company may redeem the 2014 Notes at any time prior to maturity at the greater of par or a price based on the applicable treasury rate plus 50 basis points.
 
On November 17, 2006, the Company issued $2 billion of aggregate principal amount of the Company’s unsecured fixed and floating rate notes, comprised of $500 million aggregate principal amount of the Company’s Floating Rate Notes due 2008 (the “Floating Rate Notes”), $1 billion aggregate principal amount of 5.400% Notes due 2011 and $500 million aggregate principal amount of 6.200% Notes due 2036 (the “2036 Notes”). The Floating Rate Notes were redeemed upon maturity in November 2008.
 
Interest with respect to the 2011 Notes and 2036 Notes is payable semiannually on May 17 and November 17 each year based on fixed per annum interest rates of 5.400% and 6.200%, respectively. The 2011 Notes and 2036 Notes are subject to covenants that, among other things, limit or restrict the ability of the Company and certain of its subsidiaries to grant certain types of security interests, incur debt (in the case of significant subsidiaries), or enter into sale and leaseback transactions. The Company may redeem the 2011 Notes and the 2036 Notes at any time prior to maturity at the greater of par or a price based on the applicable treasury rate plus 15 basis points and 25 basis points, respectively.
 
On September 29, 2006, the Company issued $1.0 billion of aggregate principal amount of unsecured notes maturing on October 1, 2016. Interest on the 2016 Notes is payable semiannually on April 1 and October 1 each year based on a fixed per annum interest rate of 5.930%. The 2016 Notes are subject to covenants that, among other things, limit or restrict the ability of the Company and certain of its subsidiaries to grant certain types of security interests, incur debt (in the case of significant subsidiaries) or enter into sale and leaseback transactions. The Company may redeem the 2016 Notes at any time prior to maturity at the greater of par or a price based on the applicable treasury rate plus 20 basis points.
Stock Compensation Plans
Stock Compensation Plans
 
16.  Stock Compensation Plans
 
Stock Compensation Plans
 
The Western Union Company 2006 Long-Term Incentive Plan
 
The Western Union Company 2006 Long-Term Incentive Plan (“2006 LTIP”) provides for the granting of stock options, restricted stock awards and units, unrestricted stock awards and other equity-based awards to employees who perform services for the Company. A maximum of 120.0 million shares of common stock may be awarded under the 2006 LTIP, of which 36.2 million shares are available as of December 31, 2010.
 
Options granted under the 2006 LTIP are issued with exercise prices equal to the fair value of Western Union common stock on the grant date, have 10-year terms, and vest over four equal annual increments beginning 12 months after the date of grant. Compensation expense related to stock options is recognized over the requisite service period. The requisite service period for stock options is the same as the vesting period, with the exception of retirement eligible employees, who have shorter requisite service periods ending when the employees become retirement eligible.
 
Restricted stock awards and units granted under the 2006 LTIP typically become 100% vested on the three year anniversary of the grant date. The fair value of the awards granted is measured based on the fair value of the shares on the date of grant. Certain share unit grants do not provide for the payment of dividend equivalents. For those grants, the value of the grants is reduced by the net present value of the foregone dividend equivalent payments. The related compensation expense is recognized over the requisite service period which is the same as the vesting period.
 
In February 2009, the Compensation Committee of the Company’s board of directors granted the Company’s executives long-term incentive awards under the 2006 LTIP which consisted of one-third restricted stock units, one-third stock option awards and one-third performance-based cash awards. The performance-based cash awards are based on strategic performance objectives for 2009 and 2010 and are payable in equal installments on the second and third anniversaries of the award, assuming the applicable performance objectives are satisfied. Based on their contributions to the Company and additional assumed responsibilities, certain executives received an incremental grant of restricted stock units which fully vest on the fourth anniversary of the grant date. Additionally, non-executive employees of the Company participating in the 2006 LTIP received annual equity grants of 50% stock option awards and 50% restricted stock units.
 
The Western Union Company 2006 Non-Employee Director Equity Compensation Plan
 
The Western Union Company 2006 Non-Employee Director Equity Compensation Plan (“2006 Director Plan”) provides for the granting of equity-based awards to non-employee directors of the Company. Options granted under the 2006 Director Plan are issued with exercise prices equal to the fair value of Western Union common stock at the grant date, have 10-year terms, and vest immediately. Since options and deferred stock units under this plan vest immediately, compensation expense is recognized on the date of grant based on the fair value of the awards when granted. Awards under the plan may be settled immediately unless the participant elects to defer the receipt of the common shares under applicable plan rules. A maximum of 1.5 million shares of common stock may be awarded under the 2006 Director Plan. As of December 31, 2010, the Company has issued 0.7 million options and 0.2 million unrestricted stock units to non-employee directors of the Company.
 
Impact of Spin-Off to Stock—Based Awards Granted Under First Data Plans
 
At the time of the Spin-off, First Data converted stock options, restricted stock awards and restricted stock units (collectively, “Stock-Based Awards”) of First Data stock held by Western Union and First Data employees. For Western Union employees, each outstanding First Data Stock-Based Award was converted to new Western Union Stock-Based Awards. For First Data employees, each outstanding First Data Stock-Based Award held prior to the Spin-off was converted into one replacement First Data Stock-Based Award and one Western Union Stock-Based Award. The new Western Union and First Data Stock-Based Awards maintained their pre-conversion aggregate intrinsic values, and, in the case of stock options, their ratio of the exercise price per share to their fair value per share.
 
All converted Stock-Based Awards, which had not vested prior to September 24, 2007, were subject to the terms and conditions applicable to the original First Data Stock-Based Awards, including change of control provisions which required full vesting upon a change of control of First Data. Accordingly, upon the completion of the acquisition of First Data on September 24, 2007 by an affiliate of Kohlberg Kravis Roberts & Co.’s (“KKR”), all of these remaining converted unvested Western Union Stock-Based Awards vested. As a result of this accelerated vesting, there is no remaining unamortized compensation expense associated with such converted Stock-Based Awards.
 
After the Spin-off, the Company receives all cash proceeds related to the exercise of all Western Union stock options, recognizes all stock compensation expense and retains the resulting tax benefits relating to Western Union awards held by Western Union employees. First Data recognizes all stock-based compensation expense and retains all associated tax benefits for Western Union Stock-Based Awards held by First Data employees.
 
Stock Option Activity
 
A summary of Western Union stock option activity for the year ended December 31, 2010 was as follows (options and aggregate intrinsic value in millions):
 
                                 
    Year Ended December 31, 2010  
                Weighted-Average
       
                Remaining
    Aggregate
 
          Weighted-Average
    Contractual Term
    Intrinsic
 
    Options     Exercise Price     (Years)     Value  
 
Outstanding at January 1,
    42.8     $  18.77                  
Granted
    4.3       16.15                  
Exercised
    (2.9 )     14.97                  
Cancelled/forfeited (a)
    (6.7