WESTERN UNION CO, 10-Q filed on 5/4/2009
Quarterly Report
Condensed Consolidated Statements of Income (Unaudited) (USD $)
In Millions, except Per Share data
3 Months Ended
Mar. 31,
2009
2008
Revenues:
 
 
Transaction fees
$ 958.5 
$ 1,020.8 
Foreign exchange revenue
205.1 
210.0 
Commission and other revenues
37.6 
35.1 
Total revenues
1,201.2 
1,265.9 
Expenses:
 
 
Cost of services
669.1 
758.6 
Selling, general and administrative
191.2 
198.0 
Total expenses
860.3 1
956.6 1
Operating income
340.9 
309.3 
Other income/(expense):
 
 
Interest income
3.7 
17.7 
Interest expense
(40.0)
(45.0)
Derivative (losses)/gains, net
(3.6)
6.8 
Other income, net
4.2 
3.7 
Total other expense, net
(35.7)
(16.8)
Income before income taxes
305.2 
292.5 
Provision for income taxes
81.3 
85.4 
Net income
223.9 
207.1 
Earnings per share:
 
 
Earnings per share: Basic
0.32 
0.28 
Earnings per share: Diluted
0.32 
0.27 
Weighted-average shares outstanding:
 
 
Weighted-average shares outstanding: Basic
707.1 
746.7 
Weighted-average shares outstanding: Diluted
708.0 
756.8 
Condensed Consolidated Balance Sheets (Unaudited) (USD $)
In Millions, except Per Share data
Mar. 31, 2009
Dec. 31, 2008
Assets
 
 
Cash and cash equivalents
$ 1,510.0 
$ 1,295.6 
Settlement assets
1,182.2 
1,207.5 
Property and equipment, net of accumulated depreciation of $296.7 and $284.0, respectively
192.4 
192.3 
Property and equipment, accumulated depreciation
296.7 
284.0 
Goodwill
1,852.9 
1,674.2 
Other intangible assets, net of accumulated amortization of $287.7 and $276.5, respectively
401.8 
350.6 
Other intangible assets, accumulated amortization
287.7 
276.5 
Other assets
514.7 
858.1 
Total assets
5,654.0 
5,578.3 
Liabilities and Stockholders' Equity/(Deficiency)
 
 
Liabilities:
 
 
Accounts payable and accrued liabilities
390.0 
385.7 
Settlement obligations
1,182.2 
1,207.5 
Income taxes payable
451.6 
381.6 
Deferred tax liability, net
271.0 
270.1 
Borrowings
3,056.6 
3,143.5 
Other liabilities
188.7 
198.0 
Total liabilities
5,540.1 
5,586.4 
Commitments and contingencies (Note 7)
 
 
Stockholders' equity/(deficiency):
 
 
Preferred stock, $1.00 par value; 10 shares authorized; no shares issued
Preferred stock, par value
1.00 
1.00 
Preferred stock, shares authorized
10 
10 
Preferred stock, shares issued
Common stock, $0.01 par value; 2,000 shares authorized; 701.2 shares and 709.6 shares issued and outstanding at March 31, 2009 and December 31, 2008, respectively
7.0 
7.1 
Common stock, par value
0.01 
0.01 
Common stock, shares authorized
2,000 
2,000 
Common stock, shares issued
701.2 
709.6 
Common stock, shares outstanding
701.2 
709.6 
Capital deficiency
(1.5)
(14.4)
Retained earnings
153.1 
29.2 
Accumulated other comprehensive loss
(44.7)
(30.0)
Total stockholders' equity/(deficiency)
113.9 
(8.1)
Total liabilities and stockholders' equity/(deficiency)
$ 5,654.0 
$ 5,578.3 
Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Millions
3 Months Ended
Mar. 31,
2009
2008
Cash flows from operating activities
 
 
Net income
$ 223.9 
$ 207.1 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
35.7 
32.8 
Stock compensation expense
8.4 
7.7 
Other non-cash items, net
13.5 
4.2 
Increase/(decrease) in cash, excluding the effects of acquisitions, resulting from changes in:
 
 
Other assets
20.6 
(28.1)
Accounts payable and accrued liabilities
(8.2)
36.4 
Income taxes payable
68.9 
58.1 
Other liabilities
(6.2)
(0.2)
Net cash provided by operating activities
356.6 
318.0 
Cash flows from investing activities
 
 
Capitalization of contract costs
(3.2)
(7.1)
Capitalization of purchased and developed software
(2.2)
(5.6)
Purchases of property and equipment
(10.4)
(10.8)
Acquisition of business, net of cash acquired
(143.6)
0.0 
Proceeds from receivable for securities sold
193.6 
0.0 
Notes receivable issued to agents
0.0 
(0.3)
Repayments of notes receivable issued to agents
5.4 
5.5 
Net cash provided by/(used in) investing activities
39.6 
(18.3)
Cash flows from financing activities
 
 
Net repayments of commercial paper
(82.8)
(11.3)
Net proceeds from net borrowings under credit facilities
0.0 
49.8 
Net proceeds from issuance of borrowings
496.6 
0.0 
Principal payments on borrowings
(500.0)
0.0 
Proceeds from exercise of options
4.5 
61.5 
Common stock repurchased
(100.1)
(297.4)
Net cash used in financing activities
(181.8)
(197.4)
Net change in cash and cash equivalents
214.4 
102.3 
Cash and cash equivalents at beginning of period
1,295.6 
1,793.1 
Cash and cash equivalents at end of period
1,510.0 
1,895.4 
Supplemental cash flow information:
 
 
Interest paid
10.8 
10.3 
Income taxes paid
$ 8.0 
$ 24.6 
Notes to Condensed Consolidated Financial Statements (Unaudited)
3 Months Ended
Mar. 31, 2009
1. Business and Basis of Presentation
2. Earnings Per Share
3. Acquisitions
4. Receivable for Securities Sold
5. Restructuring and Related Expenses
6. Fair Value Measurements
7. Commitments and Contingencies
8. Related Party Transactions
9. Settlement Assets and Settlement Obligations
10. Comprehensive Income
11. Employee Benefit Plans
12. Derivatives
13. Borrowings
14. Income Taxes
15. Stock Compensation Plans
16. Segments

1. Business and Basis of Presentation

The Western Union Company (“Western Union” or the “Company”) is a leader in global money transfer, providing people with fast, reliable and convenient ways to send money around the world. The Western Union® brand is globally recognized. The Company’s services are available through a network of agent locations in more than 200 countries and territories. 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.

 

   

Consumer-to-business—the processing of payments from consumers to businesses and other organizations that receive consumer payments, including utilities, auto finance companies, mortgage servicers, financial service providers and government agencies, sometimes referred to as “billers,” through Western Union’s network of third-party agents and various electronic channels. While the Company continues to pursue international expansion of its offerings in selected markets, such as its offerings of walk-in, cash bill payment service in certain countries in Central and South America, the segment’s revenue was primarily generated in the United States during all periods presented.

All businesses that have not been classified into the consumer-to-consumer or consumer-to-business segments are reported as “Other” and include the Company’s money order and prepaid services businesses. The Company’s money orders are 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. See Note 9, “Settlement Assets and Settlement Obligations” for discussion regarding the agreement executed between the Company and IPS on July 18, 2008 whereby the Company will assume the responsibility for issuing money orders effective October 1, 2009. Western Union also markets a Western Union branded prepaid MasterCard® card, a Western Union branded prepaid Visa® card, and provides top-up services for third parties that allow consumers to pay in advance for mobile phone and other services.

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. As of March 31, 2009, the amount of net assets subject to these limitations totaled approximately $177 million.

Various aspects of the Company’s services and businesses are subject to United States federal, state and local regulation, as well as regulation by foreign jurisdictions, including certain banking and other financial services regulations.

Basis of Presentation

The accompanying condensed consolidated interim financial statements are unaudited and are prepared in accordance with the instructions for Form 10-Q and Article 10 of Regulation S-X. In compliance with those instructions, certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted.

The unaudited condensed consolidated financial statements in this quarterly report are presented on a consolidated basis and include the accounts of the Company and its majority-owned subsidiaries. Results of operations and cash flows for the interim periods are not necessarily indicative of the results that may be expected for the entire year in part due to seasonality of the business. All significant intercompany transactions and accounts have been eliminated.

In the opinion of management, these condensed consolidated financial statements include all the normal recurring adjustments necessary to fairly present the Company’s condensed consolidated results of operations, financial position and cash flows as of March 31, 2009 and for all periods presented. These condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements within the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

Consistent with industry practice, the accompanying Condensed Consolidated Balance Sheets are unclassified due to the short-term nature of Western Union’s settlement obligations contrasted with the Company’s ability to invest cash awaiting settlement in long-term investment securities.

Use of Estimates

The preparation of financial statements in conformity with 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.

Fair Value Measurements

On January 1, 2009, the Company adopted the deferred provisions of Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”) as defined by Financial Accounting Standards Boards (“FASB”) Staff Position (“FSP”) No. 157-2, “Effective Date of FASB Statement No. 157” (“FSP No. 157-2”). FSP No. 157-2 deferred the adoption date for certain non-financial assets and liabilities that are recognized or disclosed at fair value on a non-recurring basis. Refer to Note 3, “Acquisitions” for a discussion of the fair value considerations related to the Company’s acquisition of FEXCO.

Business Combinations

Effective January 1, 2009, the Company adopted the provisions of SFAS No. 141R, “Business Combinations” (“SFAS No. 141R”). This statement establishes a framework to disclose and account for business combinations consummated on or after January 1, 2009 and applies to all transactions in which an entity gains control of one or more businesses. Under SFAS No. 141R, the Company accounts for business combinations achieved in stages by re-measuring any noncontrolling equity investments in the acquiree to fair value as of the acquisition date immediately before obtaining control. All re-measurement gains and losses are recognized in earnings and the total fair values of the identifiable assets, liabilities and any noncontrolling interests are recorded in the consolidated balance sheet. The Company is also impacted by the adoption as it relates to costs involved with an acquisition, which are expensed as incurred. Additionally, under SFAS No. 141R, assets and liabilities are recorded at their fair market values as of the date of acquisition with the remaining excess of purchase price over the fair market value of the net assets acquired going to goodwill. Any contingent consideration related to the acquisition is recognized at its acquisition date fair value with subsequent changes in fair value generally reflected in earnings. SFAS No. 141R requires any adjustments to the assessed fair values of the assets, liabilities and any noncontrolling interests made subsequent to the acquisition date but within the measurement period, due to facts that existed at the acquisition date, to be recorded as an adjustment to goodwill. All other adjustments are recorded in income, including changes in tax contingencies. Refer to Note 3, “Acquisitions” for a discussion of the Company’s acquisition of FEXCO.

 

Disclosures about Derivative Instruments and Hedging Activities

The Company adopted the provisions of SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133” (“SFAS No. 161”) on January 1, 2009. SFAS No. 161 requires additional disclosures about how and why companies use derivatives, how derivatives and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” as amended and interpreted (“SFAS No. 133”), and how derivatives and related hedged items affect a company’s financial position, results of operations and cash flows. The Company incorporated many of the derivative disclosure provisions of SFAS No. 161 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, and the adoption resulted in no impact on the Company’s financial position, results of operations and cash flows.

New Accounting Pronouncements

In April 2009, the FASB issued FSP No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP No. 157-4”) which is required for interim and annual periods ending after June 15, 2009. FSP No. 157-4, which amends SFAS No. 157, provides additional guidance on estimating fair value when an asset or liability’s volume and level of activity has significantly decreased in relation to normal market activity for the asset or liability thus indicating the need for additional considerations when estimating fair value. The Company will adopt these provisions effective June 30, 2009. The Company does not expect the impact to be significant on its financial position, results of operations and cash flows.

The FASB also issued FSP SFAS No. 115-2 and SFAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP No. 115-2”) in April 2009, which is required for interim and annual periods ending after June 15, 2009. FSP No. 115-2 provides guidance on other-than-temporary impairments for debt securities. The Company will adopt these provisions effective June 30, 2009. The Company does not expect the impact to be significant on its financial position, results of operations and cash flows.

2. 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 price throughout the year, and therefore, reduce the dilutive effect throughout the year.

As of March 31, 2009 and 2008, there were 43.1 million and 8.2 million, respectively, of outstanding options to purchase shares of Western Union stock excluded from the diluted earnings per share calculation under the treasury stock method as their effect was anti-dilutive. The increase in anti-dilutive shares is primarily due to the majority of the Company’s outstanding options having an exercise price higher than the Company’s average stock price for the three months ended March 31, 2009.

The following table provides the calculation of diluted weighted-average shares outstanding (in millions):

 

     Three Months Ended
March 31,
     2009    2008

Basic weighted-average shares outstanding

   707.1    746.7

Common stock equivalents

   0.9    10.1
         

Diluted weighted-average shares outstanding

   708.0    756.8
         

3. 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 will position the Company to benefit from the upcoming implementation of the Payment Services Directive (“PSD”) in the European Union. The PSD will make it possible to operate in 27 countries under a single license and allow the Company to expand its distribution beyond banks and post-banks in most of those countries. The acquisition does not impact the Company’s revenue, because the Company was already recording 100% of the revenue arising from money transfers originating at FEXCO’s subagents. As of the acquisition date, the Company no longer incurs commission costs for transactions related to FEXCO; rather, the Company now only 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. All acquisition costs have been expensed in “Selling, general and administrative” in the Company’s Condensed Consolidated Statements of Income.

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 100% 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. Pursuant to SFAS No. 141R, the Company recorded the assets and liabilities of FEXCO at fair value. The following table summarizes the allocation of purchase price for this acquisition:

 

Assets:

  

Cash acquired

   $ 11.8

Settlement assets

     43.0

Property and equipment

     3.1

Goodwill

     181.4

Other intangible assets

     74.9

Other assets

     2.3
      

Total assets

   $ 316.5
      

Liabilities:

  

Accounts payable and accrued liabilities

   $ 2.7

Settlement obligations

     43.0

Income taxes payable

     0.2

Deferred tax liability, net

     10.0

Other liabilities

     17.0
      

Total liabilities

     72.9
      

Total consideration, including cash acquired

   $ 243.6
      

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, which were valued using an income approach, and $10.1 million relating to other intangibles, which were valued using both income and cost approaches. These fair values, along with the fair value of the Company’s 24.65% interest in FEXCO Group, were derived using primarily Level 3 inputs, as defined by SFAS No. 157. For the remaining assets and liabilities, fair value approximated carrying value. The subagent network intangible assets are being amortized over 10 to 15 years. The remaining intangibles are being amortized over two to three years. The goodwill recognized of $181.4 million is attributable to growth opportunities that will arise from the Company directly managing its agent relationships via a dedicated sales force, expected synergies, projected long-term business growth and an assembled workforce. All goodwill relates entirely to the consumer-to-consumer segment. The preliminary assessment of goodwill expected to be deductible for income tax purposes is approximately $90 million.

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. The $3.0 million holdback reserve will be paid in annual $1.0 million increments beginning December 2009, 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 $24.8 million was recorded, 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 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 February 2009, $0.5 million of the holdback reserve was paid. The remainder is scheduled to be paid $1.2 million, $1.2 million, and $1.1 million in August 2009, August 2010 and August 2011, respectively, 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.

4. Receivable for Securities Sold

On September 15, 2008, Western Union requested redemption of its shares in the Reserve International Liquidity Fund, Ltd., a money market fund, (the “Fund”) totaling $298.1 million, which was included in “Other assets” in the Condensed Consolidated Balance Sheet as of December 31, 2008. At the time the redemption request was made, the Company was informed by the Reserve Management Company, the Fund’s investment advisor (the “Manager”), that the Company’s redemption trades would be honored at a $1.00 per share net asset value. In January 2009, the Company received a partial distribution of $193.6 million from the Fund. As of March 31, 2009, the Company had a remaining balance of $104.5 million which is included in “Other assets” in the Condensed Consolidated Balance Sheet. The Company expects to receive and is vigorously pursuing collection of the remaining balance based on the maturities of the underlying investments in the Fund, the written and verbal representations from the Manager to date and the Company’s legal position regarding its right to full payment. Nevertheless, due to uncertainty surrounding the outcome of litigation facing the Fund, as well as potential variability in the ultimate amount and timing of the recovery of the remaining balance, the fair value of this financial asset may be less than the related carrying value. There is a risk that the redemption process could be delayed and that the Company could receive less than the $1.00 per share net asset value should pro-rata distribution occur. Based on net asset information provided by the Fund, the Company’s exposure related to pro-rata distribution could be approximately $12 million, excluding potential costs incurred by the Fund.

5. Restructuring and Related Expenses

Missouri and Texas Closures

During 2008, the Company closed substantially all of its facilities in Missouri and Texas and did not renew the Company’s collective bargaining agreement with the unionized workers employed at these locations. The decision also resulted in the elimination of certain management positions in these same facilities and resulted, along with other actions, in the Company no longer having employees working in the United States under a collective bargaining agreement.

 

The Company incurred severance and employee related benefit expenses for all union and certain affected management employees, facility closure expenses and other expenses associated with the relocation of these operations to existing Company facilities and third-party providers, including costs related to hiring, training, relocation, travel and professional fees.

The Company incurred cumulative total expenses of $46.3 million comprised of $13.1 million, $7.3 million, $7.8 million and $18.1 million in severance and other employee related costs, asset write-offs and incremental depreciation, lease terminations and other restructurings expenses, respectively, through December 31, 2008. No additional restructuring and related expenses were incurred in the three months ended March 31, 2009.

Other Reorganizations

Also during 2008, in addition to the Missouri and Texas closures, the Company restructured some of its operations and relocated or eliminated certain shared service and call center positions. The relocated positions were moved to the Company’s existing facilities or outsourced service providers in 2008.

The Company incurred cumulative total expenses of $36.6 million comprised of $31.2 million, $0.6 million and $4.8 million in severance and other employee related costs, asset write-offs and incremental depreciation and other restructuring expenses, respectively, through December 31, 2008. No additional restructuring and related expenses were incurred in the three months ended March 31, 2009.

Total Plans

The following table summarizes the activity for the related restructuring accrual balances for the three months ended March 31, 2009 (in millions):

 

     Restructuring accrual
balances at
December 31, 2008
   Cash Payments     Restructuring accrual
balances at
March 31, 2009
Missouri and Texas Closures:        

Severance and employee related

   $ 2.7    $ (1.6 )   $ 1.1

Other

     0.3      (0.2 )     0.1
                     

Total

   $ 3.0    $ (1.8 )   $ 1.2
                     
Other Reorganizations:        

Severance and employee related

   $ 22.1    $ (9.2 )   $ 12.9

Other

     0.7      (0.4 )     0.3
                     

Total

   $ 22.8    $ (9.6 )   $ 13.2
                     

Through December 31, 2008, the Company recognized cumulative expenses of $62.8 million and $20.1 million in “Cost of services” and “Selling, general and administrative expenses,” respectively. The Company did not incur any material restructuring and related expenses in the three months ended March 31, 2009. Restructuring and related expenses reflected in the Condensed Consolidated Statements of Income for the three months ended March 31, 2008 were as follows (in millions):

 

     Three Months Ended
March 31, 2008

Cost of services

   $ 22.4

Selling, general and administrative

     1.8
      

Total restructuring and related expenses, pre-tax

   $ 24.2
      

Total restructuring and related expenses, net of tax

   $ 15.1
      

 

While these items were identifiable to the Company’s segments, these expenses were excluded from the measurement of segment operating profit provided to the chief operating decision maker (“CODM”) for purposes of assessing segment performance and decision making with respect to resource allocation. Of the Company’s total restructuring and related expenses of $24.2 million incurred in the three months ended March 31, 2008, $18.5 million, $4.5 million and $1.2 million were attributable to the Company’s consumer-to-consumer, consumer-to-business and other segments, respectively. Of the Company’s cumulative restructuring and related expenses of $82.9 million incurred through December 31, 2008, $56.1 million, $23.4 million and $3.4 million were attributable to the Company’s consumer-to-consumer, consumer-to-business and other segments, respectively.

6. Fair Value Measurements

SFAS No. 157 defines fair value as 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 Western Union measures fair value, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

The following table reflects assets and liabilities that are measured and carried at fair value on a recurring basis (in millions):

 

     March 31, 2009
       Fair Value Measurement Using      Assets/Liabilities
at Fair Value
     Level 1    Level 2    Level 3   

Assets

           

State and municipal debt instruments

   $ —      $ 456.1    $ —      $ 456.1

Debt investments held with foreign banks

     —        9.9      —        9.9

Debt securities issued by foreign governments

     0.1      3.6      —        3.7

Derivatives

     —        118.0      —        118.0
                           

Total assets

   $ 0.1    $ 587.6    $ —      $ 587.7
                           

Liabilities

           

Derivatives

   $ —      $ 7.7    $ —      $ 7.7
                           

Total liabilities

   $ —      $ 7.7    $ —      $ 7.7
                           

No non-recurring fair value adjustments were recorded in the three months ended March 31, 2009 except those associated with the acquisition of FEXCO as disclosed in Note 3, “Acquisitions.”

7. Commitments and Contingencies

In the normal course of business, Western Union is subject to claims and litigation. Management of Western Union believes such matters involving a reasonably possible chance of loss will not, individually or in the aggregate, result in a material adverse effect on Western Union’s financial position, results of operations and cash flows. Western Union accrues for loss contingencies as they become probable and estimable.

The Company has $87.1 million in outstanding letters of credit and bank guarantees at March 31, 2009 with expiration dates through 2015, certain 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.

Pursuant to the separation and distribution agreement with First Data in connection with Western Union’s spin-off from First Data on September 29, 2006 (“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 14).

8. 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. Commissions paid to these agents for the three months ended March 31, 2009 and 2008 totaled $53.5 million and $73.3 million, respectively. Commissions paid to FEXCO prior to February 24, 2009, the date of the acquisition, were considered related party transactions.

9. Settlement Assets and Settlement Obligations

Settlement assets represent funds received or to be received from agents for unsettled money transfers and consumer payments. Western Union records corresponding settlement obligations relating to amounts payable under money transfer and payment service arrangements.

Settlement assets and obligations are comprised of the following (in millions):

 

     March 31,
2009
   December 31,
2008

Settlement assets:

     

Cash and cash equivalents

   $ 20.0    $ 42.3

Receivables from selling agents

     692.5      759.6

Investment securities

     469.7      405.6
             
   $ 1,182.2    $ 1,207.5
             

Settlement obligations:

     

Money transfer and payment service payables

   $ 787.4    $ 799.5

Payables to agents

     394.8      408.0
             
   $ 1,182.2    $ 1,207.5
             

Investment securities consist primarily of high-quality state and municipal debt instruments. Substantially all of the Company’s investment securities were marketable securities during the periods presented. 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 regulations. Western Union does not hold financial instruments for trading purposes. All 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. Western Union regularly monitors credit risk and attempts to mitigate its exposure by making high-quality investments. At March 31, 2009, the significant majority of the Company’s investment securities had credit ratings of “AA-” or better from a major credit rating agency.

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. As of March 31, 2009 and December 31, 2008, gross unrealized gains were $2.3 million and $2.5 million, respectively, offset by gross unrealized losses of $0.4 million and $1.0 million, respectively.

 

On July 18, 2008, the Company entered into an agreement with IPS, a subsidiary of First Data, which modified the existing business relationship with respect to the issuance and processing of money orders. Under the terms of the agreement, beginning on October 1, 2009 (the “Transition Date”), IPS will assign and transfer to the Company certain operating assets used by IPS to issue money orders and an amount of cash sufficient to satisfy all outstanding money order liabilities. On the Transition Date, the Company will assume IPS’s role as issuer of the money orders, including its obligation to pay outstanding money orders, and will terminate the existing agreement whereby IPS pays Western Union a fixed return on the outstanding money order balances (which vary from day to day but approximate $800 million). Following the Transition Date, Western Union will invest the cash received from IPS in high-quality, investment grade securities in accordance with applicable regulations, which are the same as those currently governing the investment of the Company’s United States originated money transfer principal. In anticipation of the Company’s exposure to fluctuations in interest rates, the Company has entered into interest rate swaps on certain of its fixed rate notes. 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 subsequent to the Transition Date a comparable rate of return through 2011 as it is receiving under its current agreement with IPS. Refer to Note 12 for additional information on the interest rate swaps.

Subsequent to the Transition Date, all revenue generated from the management of the investment portfolio will be retained by the Company and none will be shared with its agents. IPS will continue to provide to the Company clearing services necessary for payment of the money orders in exchange for the payment by the Company to IPS of a per-item administrative fee. The Company will no longer provide to IPS the services required under the original money order agreement or receive from IPS the fee for such services.

10. Comprehensive Income

The components of other comprehensive income, net of tax, are as follows (in millions):

 

     Three Months Ended
March 31,
 
     2009      2008  

Net income

   $ 223.9      $ 207.1  

Unrealized gain/(loss) on investment securities, net of tax (expense)/benefit of $(0.1) million and $0.0 million, respectively

     0.2        (0.1 )

Unrealized gain/(loss) on hedging activities, net of tax (expense)/benefit of $(1.9) million and $3.1 million, respectively (a).

     12.8        (29.4 )

Pension liability adjustment, net of tax expense of $0.4 million and $0.2 million, respectively

     0.5        0.5  

Foreign currency translation adjustment, net of tax benefit/(expense) of $15.2 million and $(3.6) million, respectively (b)

     (28.2 )      6.7  
                 

Total other comprehensive income

   $ 209.2      $ 184.8  
                 

 

(a) Unrealized gains on hedging activities of $12.8 million, net of tax, for the three months ended March 31, 2009 represent changes in fair value of derivatives of $27.5 million, net of tax, offset by reclassifications into earnings of $14.7 million, net of tax.
(b) The three months ended March 31, 2009 includes the impact to the foreign currency translation account of the surrender of the Company’s interest in the FEXCO Group. See Note 3, “Acquisitions.”

11. Employee Benefit Plans

Defined Benefit Plans

The Company has two frozen defined benefit pension plans for which it has a recorded unfunded pension obligation of $106.8 million and $107.1 million as of March 31, 2009 and December 31, 2008, respectively, included in “Other liabilities” in the Condensed Consolidated Balance Sheets. No contributions were made to these plans by the Company in 2008 or during the three months ended March 31, 2009. Due to the impact of legislation enacted in late 2008, the Company will not be required to contribute to these plans during 2009, but estimates it will be required to fund approximately $20 to $25 million in 2010.

The following table provides the components of net periodic benefit cost for the defined benefit pension plans (in millions):

 

     Three Months Ended
March 31,
 
     2009     2008  

Interest cost

   $ 5.9     $ 6.1  

Expected return on plan assets

     (6.2 )     (6.9 )

Amortization of actuarial loss

     0.9       0.7  

Employee termination costs

     —         2.5  
                

Net periodic benefit cost

   $ 0.6     $ 2.4  
                

The Company recorded $2.5 million of expense in the three months ended March 31, 2008 related to the termination of certain retirement eligible union and management plan participants in connection with the restructuring and related activities disclosed in Note 5.

12. Derivatives

The Company is exposed to foreign currency risk resulting from fluctuations in exchange rates, primarily the euro, and to a lesser degree the British pound, Canadian dollar, Australian dollar and other currencies, related to forecasted revenues and also on settlement assets and obligations denominated in these and other currencies. 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 minimize its exposures related to changes in foreign currency exchange rates and interest rates and not to engage in speculative derivative activities. Foreign currency forward contracts and interest rate swaps of varying maturities are used in these risk management activities.

The Company executes derivative financial instruments, which it designates as hedges, with established financial institutions having credit ratings of “A” or better from major rating agencies. The credit risk inherent in these 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 hedge, on a quarterly basis and as circumstances warrant. 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 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.

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.

Foreign Currency Hedging

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 at any point in time, 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. At March 31, 2009, the Company’s longer-term foreign currency forward contracts had maturities of a maximum of 24 months with a weighted-average maturity of one year. The Company assesses the effectiveness of these foreign currency forward contracts 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)/gains, net” within the Company’s Condensed Consolidated Statements of Income. Differences between changes in the forward rates and spot rates, along with all changes in the fair value during periods in which the instrument is not designated as a hedge, were excluded from the measure of effectiveness.

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 hedges pursuant to SFAS No. 133.

The aggregate United States dollar notional amount of foreign currency forward contracts held by the Company as of March 31, 2009 are as follows (in millions):

 

 

Contracts not designated as hedges:

  

Euro

   $ 250.6

British pound

   $ 35.4

Other

   $ 28.1

Contracts designated as hedges:

  

Euro

   $ 533.3

British pound

   $ 102.1

Canadian dollar

   $ 100.5

Other

   $ 74.5

Interest Rate Hedging

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 in SFAS No. 133, 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 balance of the debt being hedged within the Company’s “Borrowings” in the Condensed Consolidated Balance Sheets and interest expense has been adjusted to include the effects of payments made and received under the swaps.

At March 31, 2009, the Company held interest rate swaps in an aggregate notional amount of $600 million on its 5.400% notes due 2011. The notional amounts outstanding at March 31, 2009 included interest rate swaps entered into by the Company to reduce the economic exposure from fluctuations in interest rates that will impact the return the Company receives under its existing agreement with IPS (Note 9).

During the first quarter of 2009, the Company terminated an interest rate swap with a notional amount of $110 million and received cash, excluding interest, of $14.6 million related to this swap, the offset of which was recognized in “Borrowings” and will be reclassified as a reduction to “Interest expense” over the life of the related 5.930% notes due 2016.

 

Balance Sheet

The following table summarizes the fair value of derivatives reported in the Condensed Consolidated Balance Sheets as of March 31, 2009 and December 31, 2008 (in millions):

 

     Asset Derivatives    Liability Derivatives
     Balance Sheet
Location
   Fair Value    Balance Sheet
Location
   Fair Value
      March 31,
2009
   December 31,
2008
      March 31,
2009
   December 31,
2008

Derivatives—hedges:

                 

Interest rate fair value hedges

   Other assets    $ 41.2    $ 48.9    Other liabilities    $ —      $ —  

Foreign currency cash flow hedges

   Other assets      73.5      65.0    Other liabilities      4.3      6.7
                                 

Total

      $ 114.7    $ 113.9       $ 4.3    $ 6.7
                                 

Derivatives—undesignated:

                 

Foreign currency

   Other assets    $ 3.3    $ 2.9    Other liabilities    $ 3.4    $ 4.1
                                 

Total

      $ 3.3    $ 2.9       $ 3.4    $ 4.1
                                 

Total derivatives

      $ 118.0    $ 116.8       $   7.7    $ 10.8
                                 

Income Statement

The following tables summarize the location and amount of gains and losses of derivatives in the Condensed Consolidated Statements of Income segregated by designated, qualifying SFAS No. 133 hedging instruments and those that are not, for the three months ended March 31, 2009 and 2008 (in millions):

Fair Value Hedges – Gain/(Loss)

 

      Gain Recognized in Income on
Derivatives (b)
   Hedged Items    Gain/(Loss) Recognized in Income on
Related Hedged Item (b)
 
      Location    Amount       Location    Amount  

Derivatives

        March 31,
2009
   March 31,
2008
           March 31,
2009
   March 31,
2008
 

Interest rate contracts

   Interest expense    $ 2.1    $ 2.9    Fixed-rate debt    Interest expense    $ 1.1    $ (2.7 )
                                      

Total gain/(loss)

      $ 2.1    $ 2.9          $ 1.1    $ (2.7 )
                                      

Cash Flow Hedges – Gain/(Loss)

 

Derivatives

   Amount of Gain/(Loss)
Recognized in OCI on
Derivative (Effective
Portion)
    Gain/(Loss) Reclassified from
Accumulated OCI into Income

(Effective Portion)
    Gain/(Loss) Recognized in Income on
Derivative (Ineffective Portion and Amount
Excluded from Effectiveness Testing) (c)
     Location    Amount         Location            Amount    
   March 31,
2009
   March 31,
2008
         March 31,
2009
    March 31,
2008
         March 31,
2009
    March 31,
2008

Foreign currency contracts

   $ 32.1    $ (44.1 )   Revenue    $ 17.8     $ (11.2 )   Derivative
(losses)/gains, net
   $ (4.1 )   $ 7.5

Interest rate contracts (d)

     —        —       Interest expense      (0.4 )     (0.4 )   Derivative
(losses)/gains, net
     —         —  
                                                   

Total gain/(loss)

   $ 32.1    $ (44.1 )      $ 17.4     $ (11.6 )      $ (4.1 )   $ 7.5
                                                   

 

Undesignated – Gain/(Loss)

 

Derivatives

   Gain/(Loss) Recognized in Income on Derivative  
       Location           Amount      
       March 31,
2009
   March 31,
2008
 

Foreign currency contracts (a)

   Selling, general and administrative   $ 12.0    $ (26.7 )

Foreign currency contracts (e)

   Derivative (losses)/gains, net     1.6      (2.3 )
                 

Total gain/(loss)

     $ 13.6    $ (29.0 )
                 

 

(a) 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. The gain of $12.0 million generated by the undesignated foreign currency contracts for the three months ended March 31, 2009 was offset by a foreign exchange loss on settlement assets and obligations and cash balances of $(15.4) million. The foreign exchange loss of $(26.7) million generated by the undesignated foreign currency contracts for the three months ended March 31, 2008 was offset by a foreign exchange gain on settlement assets and obligations and cash balances of $27.7 million.
(b) The net gain of $3.2 million and $0.2 million in interest expense in the three months ended March 31, 2009 and 2008, respectively, from the fair value hedges represents the net interest benefit accrued on the swaps during the period. The fair value of all future receipts and payments on the swaps are completely offset by changes in the value of the hedged debt.
(c) 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. The ineffectiveness recognized in interest rate contracts is attributable to certain forecasted debt hedges and the timing of the related debt issuance changing from original expectation.
(d) The Company incurred an $18.0 million loss on the termination of these swaps in 2006 which is included in “Accumulated other comprehensive loss” and is reclassified as an increase to interest expense over the life of the related notes.
(e) 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 gain of $58.5 million related to the foreign currency forward contracts is expected to be reclassified into revenue within the next 12 months as of March 31, 2009. Approximately $1.7 million of losses on the forecasted debt issuance hedges are expected to be recognized in interest expense within the next 12 months as of March 31, 2009. 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.

13. Borrowings

The Company’s outstanding borrowings consisted of the following (in millions):

 

     March 31, 2009    December 31, 2008
   Carrying Value    Fair Value (e)    Carrying Value    Fair Value (e)

Due in less than one year:

           

Commercial paper

   $ —      $ —      $ 82.9    $ 82.9

Term loan (a)

     —        —        500.0      500.0

Due in greater than one year:

           

5.400% notes, net of discount, due 2011 (b)

     1,040.9      1,012.0      1,042.8      962.9

6.500% notes, net of discount, due 2014 (c)

     498.3      506.9      —        —  

5.930% notes, net of discount, due 2016 (d)

     1,013.9      917.2      1,014.4      903.5

6.200% notes, net of discount, due 2036

     497.5      387.2      497.4      391.4

Other borrowings

     6.0      6.0      6.0      6.0
                           

Total borrowings

   $ 3,056.6    $ 2,829.3    $ 3,143.5    $ 2,846.7
                           

 

(a) The term loan due in December 2009 (“Term Loan”) was paid and financed with the issuance of the 6.500% notes due 2014 (“2014 Notes”) on February 26, 2009.
(b) At March 31, 2009 and December 31, 2008, the Company held interest rate swaps related to the 5.400% notes due 2011 (“2011 Notes”) with an aggregate notional amount of $600 million and $550 million, respectively. During 2008, the Company terminated an aggregate notional amount of $195 million of interest rate swaps. The Company received cash, excluding interest, of $10.7 million on the termination of these swaps the offset of which is reflected in “Borrowings” and will be reclassified as a reduction to “Interest expense” over the life of the 2011 Notes.
(c) The 2014 Notes were issued on February 26, 2009 and the proceeds were used to redeem the Term Loan.
(d) At December 31, 2008, the Company held an interest rate swap related to the 5.930% notes due 2016 (“2016 Notes”) with an aggregate notional amount of $110 million. During the first quarter of 2009, the Company terminated the swap. The Company received cash, excluding interest, of $14.6 million on the termination of this swap, the offset of which is reflected in “Borrowings” and will be reclassified as a reduction to “Interest expense” over the life of the 2016 Notes. For further information regarding the interest rate swap, refer to Note 12, “Derivatives.”
(e) At December 31, 2008, the fair value of commercial paper approximates its carrying value due to the short term nature of the obligations. The fair value of the Term Loan approximates its carrying value as it was a variable rate loan and Western Union credit spreads did not move significantly between the date of the borrowing (December 5, 2008) and December 31, 2008. The fair value of the fixed rate notes is determined by obtaining quotes from multiple, independent banks and excludes the impact of discounts and related interest rate swaps.

Exclusive of discounts and the fair value of the interest rate swaps, maturities of borrowings as of March 31, 2009 are $1.0 billion in 2011, $500 million in 2014 and $1.5 billion thereafter. At March 31, 2009, there are no contractual maturities on borrowings during 2009 and 2010.

The Company’s obligations with respect to its outstanding borrowings as described above rank equally.

2014 Notes

On February 26, 2009, the Company issued $500 million of aggregate principal amount of 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 contain 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 the applicable make whole premium.

14. Income Taxes

The Company’s effective tax rates on pre-tax income for the three months ended March 31, 2009 and 2008 were 26.6% and 29.2%, respectively. 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, the decreasing effective tax rate in 2009 compared to 2008 is also attributed to the implementation in 2008 of foreign tax efficient strategies consistent with the Company’s overall tax planning.

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 Condensed Consolidated Balance Sheets. The total amount of unrecognized tax benefits as of March 31, 2009 and December 31, 2008, was $386.1 million and $361.2 million, respectively, excluding interest and penalties. 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 $377.2 million and $352.4 million as of March 31, 2009 and December 31, 2008, respectively, excluding interest and penalties.

The Company recognizes interest and penalties with respect to unrecognized tax benefits in income tax expense and records the associated liability in “Income taxes payable” in its Condensed Consolidated Balance Sheets. The Company recognized $4.3 million and $3.9 million in interest and penalties during the three months ended March 31, 2009 and 2008, respectively. The Company has accrued $39.9 million and $35.8 million for the payment of interest and penalties at March 31, 2009 and December 31, 2008, respectively.

Subject to the matter referenced in the paragraph below, the Company has identified no other uncertain tax position 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 three months ended March 31, 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. The United States Internal Revenue Service (“IRS”) has issued a report of the results of its examination of the United States federal consolidated income tax return of First Data for 2002, and the Company believes that the resolution of the adjustments that affect the Company proposed in the report will 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 March 31, 2009, interest on the alleged amounts due for unagreed adjustments would be approximately $25 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 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. 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. The Irish income tax returns of certain subsidiaries for the years 2004 and forward are eligible to be examined by the Irish tax authorities, although no examinations have commenced.

At March 31, 2009, no provision had been made for United States federal and state income taxes on foreign earnings of approximately $1.7 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 50% 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.

15. Stock Compensation Plans

2006 LTIP

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 Long-Term Incentive Plan (“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 the next two years 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, representing a change from the 75% stock option awards and 25% restricted stock awards or units previously granted under the 2006 LTIP. The employee stock option awards vest in 25% increments on each of the first through fourth anniversaries of the grant date and restricted stock units vest in full on the third anniversary of the grant date.

 

Stock Option Activity

A summary of Western Union stock option activity for the three months ended March 31, 2009 is as follows (options and aggregate intrinsic value in millions):

 

     Three Months Ended March 31, 2009
     Options     Weighted-Average
Exercise Price
   Weighted-Average
Remaining
Contractual Term
(Years)
   Aggregate
Intrinsic
Value

Outstanding at January 1,

   43.6     $ 19.11      

Granted

   3.4       11.88      

Exercised

   (0.4 )     12.48      

Cancelled/forfeited

   (1.3 )     18.58      
              

Outstanding at March 31,

   45.3     $ 18.64    5.9    $ 4.6
              

Options exercisable at March 31,

   37.0     $ 19.00    5.2    $ 2.3
              

As of March 31, 2009 and 2008, approximately 43% and 53% of outstanding options to purchase shares of common stock of the Company were held by employees of First Data, respectively.

The total intrinsic value of stock options exercised during the three months ended March 31, 2009 and 2008 were $0.7 million and $22.3 million, respectively.

Restricted Stock Awards and Restricted Stock Units

A summary of Western Union activity for restricted stock awards and units for the three months ended March 31, 2009 is listed below (awards/units in millions):

 

     Three Months Ended
March 31, 2009
     Number
Outstanding
    Weighted-Average
Grant-Date
Fair Value

Non-vested at January 1,

   1.2     $ 20.32

Granted

   1.5       11.87

Vested

   —         15.62

Forfeited

   (0.1 )     19.01
        

Non-vested at March 31,

   2.6     $ 15.45
        

Stock-Based Compensation

The following table sets forth the total impact on earnings for stock-based compensation expense recognized in the Condensed Consolidated Statements of Income resulting from stock options, restricted stock awards, and restricted stock units for the three months ended March 31, 2009 and 2008 (in millions, except per share data). A benefit to earnings is reflected as a positive and a reduction to earnings is reflected as a negative.

 

     Three Months Ended
March 31,
 
         2009             2008      

Stock-based compensation expense impact on income before income taxes

   $ (8.4 )   $ (7.7 )

Income tax benefit from stock-based compensation expense

     2.7       2.2  
                

Net income impact

   $ (5.7 )   $ (5.5 )
                

Earnings per share:

    

Basic

   $ (0.01 )   $ (0.01 )

Diluted

   $ (0.01 )   $ (0.01 )

 

The Company used the following assumptions for the Black-Scholes option pricing model to determine the value of Western Union options granted.

 

     Three Months Ended
March 31,
 
         2009             2008      

Stock options granted:

    

Weighted-average risk-free interest rate

     1.9 %     2.9 %

Weighted-average dividend yield

     0.2 %     0.2 %

Volatility

     46.9 %     31.2 %

Expected term (in years)

     5.5       5.9  

Weighted-average fair value

   $ 5.24     $ 7.30  

All assumptions used to calculate the fair market value of Western Union’s stock options granted during the three months ended March 31, 2009 were determined on a consistent basis with those assumptions disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, except for changes in the volatility calculation. The Company updated the historical volatility portion of its volatility assumption to include a blend of historical volatility of Western Union and First Data stock instead of peer group historical volatility which was used prior to 2009.

16. Segments

As previously described in Note 1, the Company classifies its businesses into two reportable segments: consumer-to-consumer and consumer-to-business. Operating segments are defined by SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” as components of an enterprise which constitute businesses, about which separate financial information is available that is evaluated regularly by the Company’s chief operating decision maker (“CODM”) in deciding where to allocate resources and in assessing performance.

The consumer-to-consumer reporting segment is viewed as one global network where a money transfer can be sent from one location to another, anywhere in the world. The segment, which consists of three regions, is now managed as two areas, primarily to coordinate agent network management and marketing activities. The CODM makes decisions regarding resource allocation and monitors performance based on specific corridors within and across these regions, but also reviews total revenue and operating profit of each region. These regions frequently interact on transactions with consumers and share processes, systems and licenses, thereby constituting one global consumer-to-consumer money transfer network. The regions and corridors offer generally the same services distributed by the same agent network, have the same types of customers, are subject to similar regulatory requirements, are processed on the same system, and have similar economic characteristics, allowing the geographic regions to be aggregated into one reporting segment.

Historically, consumer-to-consumer segment revenue has increased sequentially from the first quarter to the fourth quarter in most years and declined from the fourth quarter to the first quarter of the following year. This seasonal fluctuation is related to the holiday season in various countries during the fourth quarter.

All businesses that have not been classified into consumer-to-consumer or consumer-to-business are reported as “Other.” These businesses primarily include the Company’s money order and prepaid services businesses. Expenses incurred in connection with the development of certain new service offerings, including costs to develop mobile money transfer services, new prepaid service offerings and costs incurred in connection with mergers and acquisitions are included in “Other”.

During the three months ended March 31, 2008, the Company incurred expenses of $24.2 million for restructuring and related activities, which were not allocated to the segments. While these items were identifiable to the Company’s segments, they were not included in the measurement of segment operating profit provided to the CODM for purposes of assessing segment performance and decision making with respect to resource allocation. For additional information on restructuring and related activities refer to Note 5.

The following table presents the Company’s reportable segment results for the three months ended March 31, 2009 and 2008 (in millions):

 

     Three Months Ended
March 31,
 
     2009    2008  

Revenues:

     

Consumer-to-Consumer:

     

Transaction fees

   $ 785.6    $ 834.6  

Foreign exchange revenue

     204.3      209.3  

Other revenues

     13.8      9.9  
               
     1,003.7      1,053.8  

Consumer-to-Business:

     

Transaction fees

     163.0      176.6  

Foreign exchange revenue

     0.8      0.7  

Other revenues

     10.4      12.5  
               
     174.2      189.8  

Other:

     

Transaction fees

     9.9      9.6  

Commission and other revenues

     13.4      12.7  
               
     23.3      22.3  
               

Total consolidated revenues

   $ 1,201.2    $ 1,265.9  
               

Operating income:

     

Consumer-to-Consumer

   $ 286.7    $ 273.3  

Consumer-to-Business

     50.5      56.2  

Other

     3.7      4.0  
               

Total segment operating income

     340.9      333.5  

Restructuring and related expenses

     —        (24.2 )
               

Total consolidated operating income

   $ 340.9    $ 309.3  
             
Document Information
3 Months Ended
Mar. 31, 2009
Form Type
10-Q 
Amendment
FALSE 
Amendment Description
n.a. 
Report Period
03/31/2009 
Document Fiscal Year Focus
2009 
Document Fiscal Period Focus
Q1 
Entity Information (USD $)
3 Months Ended
Mar. 31, 2009
Company Name
Western Union CO 
Central Index Key (CIK)
0001365135 
Company Fiscal Year End Date
12/31 
Company Well-known Seasoned Issuer (WKSI)
Yes 
Voluntary Filers
No 
Current with Filings
Yes 
Accelerated Filing Status
Large Accelerated Filer 
Public Float
$ 17,900,000,000 
Common Stock Shares Outstanding
701,287,685 
Trading Symbol
WU