WESTERN UNION CO, 10-K filed on 2/20/2015
Annual Report
Document and Entity Information (USD $)
In Billions, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Feb. 13, 2015
Jun. 30, 2014
Document and Entity Information [Abstract]
 
 
 
Entity Registrant Name
Western Union CO 
 
 
Entity Central Index Key
0001365135 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2014 
 
 
Document Fiscal Year Focus
2014 
 
 
Document Fiscal Period Focus
FY 
 
 
Amendment Flag
false 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Common Stock, Shares Outstanding
 
521,445,073 
 
Entity Public Float
 
 
$ 9.1 
Consolidated Statements of Income (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 12 Months Ended
Dec. 31, 2014
Sep. 30, 2014
Jun. 30, 2014
Mar. 31, 2014
Dec. 31, 2013
Sep. 30, 2013
Jun. 30, 2013
Mar. 31, 2013
Dec. 31, 2012
Sep. 30, 2012
Jun. 30, 2012
Mar. 31, 2012
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Transaction fees
 
 
 
 
 
 
 
 
 
 
 
 
$ 4,083.6 
$ 4,065.8 
$ 4,210.0 
Foreign exchange revenues
 
 
 
 
 
 
 
 
 
 
 
 
1,386.3 
1,348.0 
1,332.7 
Other revenues
 
 
 
 
 
 
 
 
 
 
 
 
137.3 
128.2 
122.1 
Total revenues
1,409.9 
1,440.9 
1,405.6 
1,350.8 
1,421.9 
1,408.8 
1,385.9 
1,325.4 
 
 
 
 
5,607.2 
5,542.0 
5,664.8 
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of services
 
 
 
 
 
 
 
 
 
 
 
 
3,297.4 
3,235.0 
3,194.2 
Selling, general and administrative
 
 
 
 
 
 
 
 
 
 
 
 
1,169.3 
1,199.6 
1,140.6 
Total expenses
1,133.8 1
1,126.8 
1,127.3 
1,078.8 
1,183.5 2 3
1,113.5 2 3
1,109.1 2 3
1,028.5 2 3
 
 
 
 
4,466.7 1 4
4,434.6 2 3 4
4,334.8 4
Operating income
276.1 
314.1 
278.3 
272.0 
238.4 
295.3 
276.8 
296.9 
 
 
 
 
1,140.5 
1,107.4 
1,330.0 
Other income/(expense):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
 
 
 
 
 
 
 
 
 
 
 
11.5 
9.4 
5.5 
Interest expense
 
 
 
 
 
 
 
 
 
 
 
 
(176.6)
(195.6)
(179.6)
Derivative gains/(losses), net
 
 
 
 
 
 
 
 
 
 
 
 
(2.2)
(1.3)
0.5 
Other income/(expense), net
 
 
 
 
 
 
 
 
 
 
 
 
(5.0)
7.0 
12.4 
Total other expense, net
(40.2)
(41.3)
(46.2)
(44.6)
(45.6)
(43.6)
(44.6)
(46.7)
 
 
 
 
(172.3)
(180.5)
(161.2)
Income before income taxes
235.9 
272.8 
232.1 
227.4 
192.8 
251.7 
232.2 
250.2 
 
 
 
 
968.2 
926.9 
1,168.8 
Provision for income taxes
14.4 
38.7 
38.3 
24.4 
19.4 
37.3 
33.6 
38.2 
 
 
 
 
115.8 
128.5 
142.9 
Net income
$ 221.5 
$ 234.1 
$ 193.8 
$ 203.0 
$ 173.4 
$ 214.4 
$ 198.6 
$ 212.0 
 
 
 
 
$ 852.4 
$ 798.4 
$ 1,025.9 
Earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic (in dollars per share)
$ 0.42 
$ 0.44 
$ 0.36 
$ 0.37 
$ 0.31 
$ 0.39 
$ 0.36 
$ 0.37 
 
 
 
 
$ 1.60 
$ 1.43 
$ 1.70 
Diluted (in dollars per share)
$ 0.42 
$ 0.44 
$ 0.36 
$ 0.37 
$ 0.31 
$ 0.39 
$ 0.36 
$ 0.37 
 
 
 
 
$ 1.59 
$ 1.43 
$ 1.69 
Weighted-average shares outstanding, basic:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic (in shares)
522.8 
527.8 
537.1 
545.9 
551.2 
552.1 
555.7 
567.6 
 
 
 
 
533.4 
556.6 
604.9 
Weighted-average shares outstanding, diluted:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted (in shares)
526.9 
531.2 
539.9 
549.2 
555.0 
555.8 
558.3 
569.7 
 
 
 
 
536.8 
559.7 
607.4 
Cash dividends declared per common share (in dollars per share)
$ 0.125 
$ 0.125 
$ 0.125 
$ 0.125 
$ 0.125 
$ 0.125 
$ 0.125 
$ 0.125 
$ 0.125 
$ 0.1 
$ 0.1 
$ 0.1 
$ 0.5 
$ 0.5 
$ 0.425 
Consolidated Statements of Income (Parentheticals) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Income Statement [Abstract]
 
 
 
Total related party expenses
$ 70.2 
$ 80.6 
$ 95.0 
Consolidated Statements of Comprehensive Income (USD $)
In Millions, unless otherwise specified
3 Months Ended 12 Months Ended
Dec. 31, 2014
Sep. 30, 2014
Jun. 30, 2014
Mar. 31, 2014
Dec. 31, 2013
Sep. 30, 2013
Jun. 30, 2013
Mar. 31, 2013
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Statement of Comprehensive Income [Abstract]
 
 
 
 
 
 
 
 
 
 
 
Net income
$ 221.5 
$ 234.1 
$ 193.8 
$ 203.0 
$ 173.4 
$ 214.4 
$ 198.6 
$ 212.0 
$ 852.4 
$ 798.4 
$ 1,025.9 
Other comprehensive income/(loss), net of tax (Note 13):
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains/(losses) on investment securities
 
 
 
 
 
 
 
 
4.8 
(3.6)
2.8 
Unrealized gains/(losses) on hedging activities
 
 
 
 
 
 
 
 
81.6 
(11.1)
(27.0)
Foreign currency translation adjustments
 
 
 
 
 
 
 
 
(27.6)
(13.1)
(2.2)
Defined benefit pension plan adjustments
 
 
 
 
 
 
 
 
(8.7)
11.4 
(7.7)
Total other comprehensive income/(loss)
 
 
 
 
 
 
 
 
50.1 
(16.4)
(34.1)
Comprehensive income
 
 
 
 
 
 
 
 
$ 902.5 
$ 782.0 
$ 991.8 
Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
Assets
 
 
Cash and cash equivalents
$ 1,783.2 
$ 2,073.1 
Settlement assets
3,313.7 
3,270.4 
Property and equipment, net of accumulated depreciation of $478.5 and $428.6, respectively
206.4 
209.9 
Goodwill
3,169.2 
3,172.0 
Other intangible assets, net of accumulated amortization of $820.0 and $672.3, respectively
748.1 
833.8 
Other assets
669.8 
562.1 
Total assets
9,890.4 
10,121.3 
Liabilities:
 
 
Accounts payable and accrued liabilities
600.4 
638.9 
Settlement obligations
3,313.7 
3,270.4 
Income taxes payable
166.3 
216.9 
Deferred tax liability, net
305.0 
319.2 
Borrowings
3,720.4 1
4,213.0 
Other liabilities
484.2 
358.2 
Total liabilities
8,590.0 
9,016.6 
Commitments and contingencies (Note 5)
   
   
Stockholders' equity:
 
 
Preferred stock, $1.00 par value; 10 shares authorized; no shares issued
Common stock, $0.01 par value; 2,000 shares authorized; 521.5 shares and 548.8 shares issued and outstanding as of December 31, 2014 and 2013, respectively
5.2 
5.5 
Capital surplus
445.4 
390.9 
Retained earnings
968.7 
877.3 
Accumulated other comprehensive loss
(118.9)
(169.0)
Total stockholders' equity
1,300.4 
1,104.7 
Total liabilities and stockholders' equity
$ 9,890.4 
$ 10,121.3 
Consolidated Balance Sheets (Parentheticals) (USD $)
In Millions, except Share data, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
Assets
 
 
Accumulated depreciation
$ 478.5 
$ 428.6 
Accumulated amortization
$ 820.0 
$ 672.3 
Stockholders' equity:
 
 
Preferred stock, par value (in dollars per share)
$ 1 
$ 1 
Preferred stock, shares authorized
10,000,000 
10,000,000 
Preferred stock, shares issued
Common stock, par value (in dollars per share)
$ 0.01 
$ 0.01 
Common stock, shares authorized
2,000,000,000 
2,000,000,000 
Common stock, shares issued
521,500,000 
548,800,000 
Common stock, shares outstanding
521,500,000 
548,800,000 
Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Cash flows from operating activities
 
 
 
Net income
$ 852.4 
$ 798.4 
$ 1,025.9 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
66.6 
64.2 
61.7 
Amortization
205.3 
198.6 
184.4 
Deferred income tax benefit
(26.8)
(39.3)
(35.2)
Other non-cash items, net
49.5 
53.3 
77.2 
Increase/(decrease) in cash, excluding the effects of acquisitions, resulting from changes in:
 
 
 
Other assets
(31.1)
(55.4)
(27.8)
Accounts payable and accrued liabilities
(29.4)
81.1 
9.3 
Income taxes payable (Note 10)
(39.3)
3.4 
(79.9)
Other liabilities
(1.3)
(15.7)
(30.3)
Net cash provided by operating activities
1,045.9 
1,088.6 
1,185.3 
Cash flows from investing activities
 
 
 
Capitalization of contract costs
(73.1)
(119.3)
(174.9)
Capitalization of purchased and developed software
(38.1)
(41.8)
(32.4)
Purchases of property and equipment
(67.8)
(80.2)
(60.9)
Purchases of non-settlement related investments
(100.0)
Proceeds from sale of non-settlement related investments
100.2 
Acquisition of businesses, net (Note 4)
(10.6)
10.0 
Net cash used in investing activities
(89.4)
(341.3)
(258.2)
Cash flows from financing activities
 
 
 
Proceeds from exercise of options
14.2 
28.9 
53.4 
Cash dividends paid
(265.2)
(277.2)
(254.2)
Common stock repurchased (Note 13)
(495.4)
(399.7)
(766.5)
Net repayments of commercial paper
(297.0)
Net proceeds from issuance of borrowings
497.3 
742.8 
Principal payments on borrowings
(500.0)
(300.0)
Net cash used in financing activities
(1,246.4)
(450.7)
(521.5)
Net change in cash and cash equivalents
(289.9)
296.6 
405.6 
Cash and cash equivalents at beginning of year
2,073.1 
1,776.5 
1,370.9 
Cash and cash equivalents at end of year
1,783.2 
2,073.1 
1,776.5 
Supplemental cash flow information:
 
 
 
Interest paid
170.8 
193.7 
181.8 
Income taxes paid (Note 10)
$ 179.4 
$ 158.0 
$ 257.1 
Consolidated Statements of Stockholders' Equity (USD $)
In Millions, unless otherwise specified
Total
Common Stock
Capital Surplus
Retained Earnings
Accumulated Other Comprehensive Loss
Balance at Dec. 31, 2011
$ 894.8 
$ 6.2 
$ 247.1 
$ 760.0 
$ (118.5)
Balance, shares at Dec. 31, 2011
 
619.4 
 
 
 
Increase/(Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
Net income
1,025.9 
 
 
1,025.9 
 
Stock-based compensation and other
34.0 
 
34.0 
 
 
Common stock dividends
(254.2)
 
 
(254.2)
 
Repurchase and retirement of common shares, shares
 
(51.3)
 
 
 
Repurchase and retirement of common shares
(777.5)
(0.5)
 
(777.0)
 
Shares issued under stock-based compensation plans, shares
 
4.0 
 
 
 
Shares issued under stock-based compensation plans
51.9 
 
51.9 
 
 
Tax adjustments from employee stock option plans
(0.2)
 
(0.2)
 
 
Unrealized gains/(losses) on investment securities, net of tax
2.8 
 
 
 
2.8 
Unrealized gains/(losses) on hedging activities, net of tax
(27.0)
 
 
 
(27.0)
Foreign currency translation adjustment, net of tax
(2.2)
 
 
 
(2.2)
Defined benefit pension plan adjustment, net of tax
(7.7)
 
 
 
(7.7)
Balance at Dec. 31, 2012
940.6 
5.7 
332.8 
754.7 
(152.6)
Balance, shares at Dec. 31, 2012
 
572.1 
 
 
 
Increase/(Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
Net income
798.4 
 
 
798.4 
 
Stock-based compensation and other
34.2 
 
34.2 
 
 
Common stock dividends
(277.2)
 
 
(277.2)
 
Repurchase and retirement of common shares, shares
 
(26.1)
 
 
 
Repurchase and retirement of common shares
(398.8)
(0.2)
 
(398.6)
 
Shares issued under stock-based compensation plans, shares
 
2.8 
 
 
 
Shares issued under stock-based compensation plans
28.6 
 
28.6 
 
 
Tax adjustments from employee stock option plans
(4.7)
 
(4.7)
 
 
Unrealized gains/(losses) on investment securities, net of tax
(3.6)
 
 
 
(3.6)
Unrealized gains/(losses) on hedging activities, net of tax
(11.1)
 
 
 
(11.1)
Foreign currency translation adjustment, net of tax
(13.1)
 
 
 
(13.1)
Defined benefit pension plan adjustment, net of tax
11.4 
 
 
 
11.4 
Balance at Dec. 31, 2013
1,104.7 
5.5 
390.9 
877.3 
(169.0)
Balance, shares at Dec. 31, 2013
548.8 
548.8 
 
 
 
Increase/(Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
Net income
852.4 
 
 
852.4 
 
Stock-based compensation and other
39.7 
 
39.7 
 
 
Common stock dividends
(265.2)
 
 
(265.2)
 
Repurchase and retirement of common shares, shares
 
(29.8)
 
 
 
Repurchase and retirement of common shares
(496.1)
(0.3)
 
(495.8)
 
Shares issued under stock-based compensation plans, shares
 
2.5 
 
 
 
Shares issued under stock-based compensation plans
14.8 
 
14.8 
 
 
Unrealized gains/(losses) on investment securities, net of tax
4.8 
 
 
 
4.8 
Unrealized gains/(losses) on hedging activities, net of tax
81.6 
 
 
 
81.6 
Foreign currency translation adjustment, net of tax
(27.6)
 
 
 
(27.6)
Defined benefit pension plan adjustment, net of tax
(8.7)
 
 
 
(8.7)
Balance at Dec. 31, 2014
$ 1,300.4 
$ 5.2 
$ 445.4 
$ 968.7 
$ (118.9)
Balance, shares at Dec. 31, 2014
521.5 
521.5 
 
 
 
Formation of the Entity and Basis of Presentation
Formation of the Entity and Basis of Presentation
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 primarily 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 - The Consumer-to-Consumer operating segment facilitates money transfers between two consumers, primarily through a network of third-party agents. The Company's multi-currency, real-time money transfer service is viewed by the Company as one interconnected global network where a money transfer can be sent from one location to another, around the world. 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. This segment also includes money transfer transactions that can be initiated through websites, mobile devices, and account based money transfers.

Consumer-to-Business - The Consumer-to-Business operating segment facilitates bill payments from consumers to businesses and other organizations, including utilities, auto finance companies, mortgage servicers, financial service providers, government agencies and other businesses. The significant majority of the segment's revenue was generated in the United States during all periods presented, with the remainder primarily generated in Argentina.

Business Solutions - The Business Solutions operating segment facilitates payment and foreign exchange solutions, primarily cross-border, cross-currency transactions, for small and medium size enterprises and other organizations and individuals. The majority of the segment's business relates to exchanges of currency at the spot rate which enables customers to make cross-currency payments. In addition, in certain countries, the Company writes foreign currency forward and option contracts for customers to facilitate future payments.

All businesses that have not been classified in the above segments are reported as "Other" and include the Company's money order and other services, in addition to costs for the review and closing of acquisitions.

There are legal or regulatory limitations on transferring certain assets of the Company outside of the countries where these assets are located. However, there are generally no limitations on the use of these assets within those countries. Additionally, the Company must meet minimum capital requirements in some countries in order to maintain operating licenses. As of December 31, 2014, the amount of net assets subject to these limitations totaled approximately $300 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 Corporation ("First Data") Board of Directors announced its intention to pursue the distribution of all of its money transfer and consumer payments businesses 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
Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.

Principles of Consolidation

The Company consolidates financial results when it has 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. Outstanding options to purchase Western Union stock and unvested shares of restricted stock are excluded from basic shares outstanding. Diluted earnings per share reflects the potential dilution that could occur if outstanding stock options at the presented dates are exercised and shares of restricted stock have vested, using the treasury stock method. The treasury stock method assumes proceeds from the exercise price of stock options, 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 period, and therefore, reduce the dilutive effect.

For the years ended December 31, 2014, 2013 and 2012, there were 15.5 million, 21.2 million and 23.3 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.

The following table provides the calculation of diluted weighted-average shares outstanding (in millions):
 
For the Year Ended December 31,
 
2014
 
2013
 
2012
Basic weighted-average shares outstanding
533.4

 
556.6

 
604.9

Common stock equivalents
3.4

 
3.1

 
2.5

Diluted weighted-average shares outstanding
536.8

 
559.7

 
607.4



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. The individual redemption restrictions of Trust investments measured at net asset value are also considered when determining whether Level 2 classification is appropriate.

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.

Carrying amounts for many of the Company's financial instruments, including cash and cash equivalents, settlement cash and cash equivalents, and settlement receivables and settlement obligations approximate fair value due to their short maturities. Investment securities 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 8 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. The Company expenses all costs as incurred related to or involved with an acquisition in "Selling, general and administrative" expenses.

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 fair value.

The Company maintains cash and cash equivalent balances with various financial institutions, including a portion in money market funds. The Company limits the concentration of its cash and cash equivalents with any one institution. 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 $37.2 million and $38.3 million as of December 31, 2014 and 2013, respectively, and is recorded in the same Consolidated Balance Sheet caption as the related receivable. During the years ended December 31, 2014, 2013 and 2012, the provision for doubtful accounts (bad debt expense) reflected in the Consolidated Statements of Income was $50.7 million, $50.1 million and $44.9 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, customers for the value of their cross-currency payment transactions related to the Business Solutions segment.

Settlement assets consist of cash and cash equivalents, receivables from selling agents and Business Solutions 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 Solutions customers arise from cross-currency payment transactions in the Business Solutions segment. Receivables occur when funds have been paid out to a beneficiary but not yet received from the customer. Aside from these receivables, the credit risk associated with spot foreign currency exchange contracts is largely mitigated, as in most cases the Company 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. Most agents typically settle with transferees first and then obtain reimbursement from the Company. Money order payables represent amounts not yet presented for payment. Payment service payables represent amounts to be paid to utility companies, auto finance companies, mortgage servicers, financial service providers, government agencies and others. Due to the agent funding and settlement process, payables to agents represent amounts due to agents for money transfers that have been settled with transferees.

Settlement assets and obligations consisted of the following (in millions):
 
December 31,
 
2014
 
2013
Settlement assets:
 
 
 
Cash and cash equivalents
$
834.3

 
$
538.6

Receivables from selling agents and Business Solutions customers
1,006.9

 
981.3

Investment securities
1,472.5

 
1,750.5

 
$
3,313.7

 
$
3,270.4

Settlement obligations:
 
 
 
Money transfer, money order and payment service payables
$
2,356.7

 
$
2,376.6

Payables to agents
957.0

 
893.8

 
$
3,313.7

 
$
3,270.4



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 and 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,
 
2014
 
2013
Equipment
$
464.6

 
$
416.1

Buildings
87.8

 
82.3

Leasehold improvements
81.1

 
80.3

Furniture and fixtures
32.2

 
33.3

Land and improvements
17.0

 
16.9

Projects in process
2.2

 
9.6

 
684.9

 
638.5

Less accumulated depreciation
(478.5
)
 
(428.6
)
Property and equipment, net
$
206.4

 
$
209.9



Amounts charged to expense for depreciation of property and equipment were $66.6 million, $64.2 million and $61.7 million during the years ended December 31, 2014, 2013 and 2012, respectively.

Goodwill

Goodwill represents the excess of purchase price over the fair value of tangible and other intangible assets acquired, less liabilities assumed arising from business combinations. The Company's annual impairment assessment did not identify any goodwill impairment during the years ended December 31, 2014, 2013 and 2012.

Other Intangible Assets

Other intangible assets primarily consist of acquired contracts, contract costs (primarily amounts paid to agents in connection with establishing and renewing long-term 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 $205.3 million, $198.6 million and $184.4 million for the years ended December 31, 2014, 2013 and 2012, respectively.

Acquired contracts include customer and contractual relationships and networks of subagents that are recognized in connection with the Company's acquisitions.

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.

The Company purchases and develops software that is used in providing services and in performing administrative functions. 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, 2014
 
December 31, 2013
 
 
Weighted-
Average
Amortization
Period
(in years)
 
Initial Cost
 


Net of
Accumulated
Amortization
 
Initial Cost
 


Net of
Accumulated
Amortization
Acquired contracts
 
11.4
 
$
630.8

 
$
374.9

 
$
632.0

 
$
414.3

Capitalized contract costs
 
5.6
 
559.6

 
276.6

 
528.5

 
315.2

Internal use software
 
3.3
 
301.6

 
60.1

 
264.9

 
65.1

Acquired trademarks
 
24.5
 
36.4

 
22.7

 
38.0

 
25.3

Projects in process
 
3.0
 
12.2

 
12.2

 
9.6

 
9.6

Other intangibles
 
3.9
 
27.5

 
1.6

 
33.1

 
4.3

Total other intangible assets
 
7.9
 
$
1,568.1

 
$
748.1

 
$
1,506.1

 
$
833.8



The estimated future aggregate amortization expense for existing other intangible assets as of December 31, 2014 is expected to be $209.7 million in 2015, $152.6 million in 2016, $124.3 million in 2017, $65.8 million in 2018, $55.7 million in 2019 and $140.0 million thereafter.

Other intangible assets are reviewed for impairment on an annual basis or whenever events or changes in circumstances 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 immaterial impairments related to other intangible assets during the years ended December 31, 2014 and December 31, 2013, and did not record any impairment during the year ended December 31, 2012.

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 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 Business Solutions transactions involving different send and receive currencies, the Company generates revenue based on the difference between the exchange rate set by the Company to the consumer or business and the rate at which the Company or its agents are able to acquire the 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 Business Solutions payment service operations.

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, 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. Advertising costs for the years ended December 31, 2014, 2013 and 2012 were $162.7 million, $165.1 million and $177.5 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 assesses the realizability of its deferred tax assets. A valuation allowance must be established when, based upon available evidence, it is more likely than not that all or a portion of the deferred tax assets will not be realized.

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 substantially all of the Company's businesses. Revenues and expenses are translated at average exchange rates prevailing during the period. Foreign currency denominated assets and liabilities for those businesses for which the local currency is the functional currency are translated into United States dollars based on exchange rates at the end of the year. The effects of foreign exchange gains and losses arising from the translation of assets and liabilities of these businesses are included as a component of "Accumulated other comprehensive loss" in the accompanying Consolidated Balance Sheets. Foreign currency denominated monetary assets and liabilities of businesses for which the United States dollar is the functional currency are remeasured based on exchange rates at the end of the period, and the resulting remeasurement gains and losses are recognized in net income. 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 uses derivatives to (a) minimize its exposures related to changes in foreign currency exchange rates and interest rates and (b) facilitate cross-currency Business Solutions 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 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, to the extent the instrument is effective in offsetting the change in cash flows attributable to the risk being hedged. The portions of the change in fair value that are either considered ineffective or are excluded from the measure of effectiveness are recognized immediately in "Derivative gains/(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 from a few days up to one month, and (b) certain foreign currency denominated cash and other asset and liability positions, typically with maturities of less than one year at inception, are not designated as hedges for accounting purposes and changes in their fair value are included in "Selling, general and administrative." The Company is also exposed to risk from derivative contracts written to its customers arising from its cross-currency Business Solutions payments operations. The duration of these derivative contracts at inception is generally less than one year. The Company aggregates its Business Solutions payments 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) as part of a broader foreign currency portfolio, including significant spot exchanges of currency in addition to forwards and options. 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.

Legal Contingencies

The Company is a party to certain legal and regulatory proceedings with respect to a variety of matters. The Company records an accrual for these contingencies to the extent that a loss is both probable and reasonably estimable. If some amount within a range of loss appears to be a better estimate than any other amount within the range, that amount is accrued. When no amount within a range of loss appears to be a better estimate than any other amount, the lowest amount in the range is accrued.

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 and unrestricted stock units to employees and non-employee directors of the Company 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.

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.

Severance and Other 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 costs are generally recognized when the liability is incurred. The Company also evaluates impairment issues associated with restructuring and other activities when the carrying amount of the assets may not be fully recoverable, in accordance with the appropriate accounting guidance.

New Accounting Pronouncement

In May 2014, the Financial Accounting Standards Board issued a new accounting pronouncement regarding revenue from contracts with customers. This new standard provides guidance on recognizing revenue, including a five step model to determine when revenue recognition is appropriate. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Adoption of the new standard is effective for reporting periods beginning after December 15, 2016, with early adoption not permitted. Management is currently evaluating the potential impact that the adoption of this standard will have on the Company's financial position, results of operations, and related disclosures, and will adopt the provisions of this new standard in the first quarter of 2017.
Productivity and Cost-Savings Initiatives Expenses
Productivity and Cost-Savings Initiatives Expenses
Productivity and Cost-Savings Initiatives Expenses

During each of the three years in the period ended December 31, 2014, the Company implemented initiatives to improve productivity and reduce costs. A significant majority of the productivity and cost-savings initiatives costs relate to severance and related expenses, and for the year ended December 31, 2013, these costs also included costs related to termination benefits received by certain of the Company's former executives. During the years ended December 31, 2014, 2013 and 2012, the Company incurred $30.3 million, $56.9 million and $30.9 million of expenses and made cash payments of $42.9 million, $41.8 million and $5.6 million, respectively, related to productivity and cost-savings initiatives.

The following table presents the above expenses related to productivity and cost-savings initiatives as reflected in the Consolidated Statements of Income (in millions):
 
Year Ended December 31,
 
2014
 
2013
 
2012
Cost of services
$
11.6

 
$
24.3

 
$
5.5

Selling, general and administrative
18.7

 
32.6

 
25.4

Total expenses, pre-tax
$
30.3

 
$
56.9

 
$
30.9

Total expenses, net of tax
$
20.2

 
$
40.2

 
$
20.2


The following table summarizes the above expenses incurred by reportable segment (in millions):
 
 
Consumer-to-Consumer
 
Consumer-to-Business
 
Business Solutions
 
Other
 
Total
2012 expenses
 
$
20.9

 
$
4.0

 
$

 
$
6.0

 
$
30.9

2013 expenses
 
43.8

 
5.4

 
3.6

 
4.1

 
56.9

2014 expenses
 
15.7

 
6.7

 
7.3

 
0.6

 
30.3



As of December 31, 2014 and 2013, amounts remaining to be paid related to productivity and cost-savings initiatives were $33.6 million and $46.4 million, respectively.
Acquisitions
Acquisitions
Acquisitions

During the first quarter of 2014, the Company acquired the Brazilian retail, walk-in foreign exchange operations of Fitta DTVM S.A. and Fitta Turismo Ltda. for total consideration of $18.5 million. Of the total consideration, $15.6 million was allocated to identifiable intangible assets, the majority of which relates to contractual relationships. The identifiable intangible assets are being amortized over a period of two to twelve years with a weighted average life of ten years. The Company recognized $2.4 million of goodwill related to this acquisition.

The following table presents changes to goodwill for the years ended December 31, 2014 and 2013 (in millions):


Consumer-to-Consumer
 
Consumer-to-Business
 
Business Solutions
 
Other
 
Total
January 1, 2013 balance
$
1,947.7

 
$
221.1

 
$
996.0

 
$
14.9

 
$
3,179.7

Currency translation

 
(6.4
)
 

 
(1.3
)
 
(7.7
)
December 31, 2013 balance
$
1,947.7

 
$
214.7

 
$
996.0

 
$
13.6

 
$
3,172.0

Acquisitions
2.4

 

 

 

 
2.4

Currency translation

 
(5.0
)
 

 
(0.2
)
 
(5.2
)
December 31, 2014 balance
$
1,950.1

 
$
209.7

 
$
996.0

 
$
13.4

 
$
3,169.2

Commitments and Contingencies
Commitments and Contingencies
Commitments and Contingencies

Letters of Credit and Bank Guarantees

The Company had approximately $210 million in outstanding letters of credit and bank guarantees as of December 31, 2014. The letters of credit and bank guarantees are primarily held in connection with lease arrangements, certain agent agreements, and in relation to an uncertain tax position. The letters of credit and bank guarantees have expiration dates through 2018, with the majority having a one-year renewal option. The Company expects to renew the letters of credit and bank guarantees prior to expiration in most circumstances. The bank guarantees related to the uncertain tax position were extinguished in January 2015 after resolution of the related matter.

Litigation and Related Contingencies

The Company is subject to certain claims and litigation that could result in losses, including damages, fines and/or civil penalties, which could be significant, or criminal charges. Substantially all of the Company's contingencies are subject to significant uncertainties and, therefore, determining the likelihood of a loss and/or the measurement of any loss can be complex. The Company does not currently believe that any of these matters, individually or in the aggregate, will have a material adverse effect on its financial position. However, litigation is inherently unpredictable and the Company could incur judgments, enter into settlements or revise its expectations regarding the outcome of certain matters, and such developments could have a material adverse effect on its financial position, results of operations or cash flows in the periods in which amounts are accrued or paid. The principal pending matters the Company is a party to are discussed below.
State of Arizona Settlement Agreement

On February 11, 2010, Western Union Financial Services, Inc. ("WUFSI"), a subsidiary of the Company, signed a settlement agreement ("Southwest Border Agreement"), which resolved all outstanding legal issues and claims with the State of Arizona (the "State") and required 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. As part of the Southwest Border Agreement, the Company has made and expects to make certain investments in its compliance programs along the United States and Mexico border and a monitor (the "Monitor") has been engaged for those programs. The Company has incurred, and expects to continue to incur, significant costs in connection with the Southwest Border Agreement. The Monitor has made a number of recommendations related to the Company's compliance programs, which the Company is implementing, including programs related to our Business Solutions segment.

On January 31, 2014, the Southwest Border Agreement was amended to extend its term until December 31, 2017 (the "Amendment"). The Amendment imposes additional obligations on the Company and WUFSI in connection with WUFSI’s anti-money laundering ("AML") compliance programs and cooperation with law enforcement. In particular, the Amendment requires WUFSI to continue implementing the primary and secondary recommendations made by the Monitor appointed pursuant to the Southwest Border Agreement related to WUFSI’s AML compliance program, and includes, among other things, timeframes for implementing such primary and secondary recommendations. Under the Amendment, the Monitor could make additional primary recommendations until January 1, 2015 and may make additional secondary recommendations until January 31, 2017. After these dates, the Monitor may only make additional primary or secondary recommendations, as applicable, that meet certain requirements as set forth in the Amendment. Primary recommendations may also be re-classified as secondary recommendations.

The Amendment provides that if WUFSI is unable to implement an effective AML compliance program along the U.S. and Mexico border, as determined by the Monitor and subject to limited judicial review, within the timeframes to implement the Monitor’s primary recommendations, the State may, within 180 days after the Monitor delivers its final report on the primary recommendations on December 31, 2016, and subsequent to any judicial review of the Monitor’s findings, elect one, and only one, of the following remedies: (i) assert a willful and material breach of the Southwest Border Agreement and pursue remedies under the Southwest Border Agreement, which could include initiating civil or criminal actions; or (ii) require WUFSI to pay (a) $50 million plus (b) $1 million per primary recommendation or group of primary recommendations that WUFSI fails to implement successfully. There are currently more than 70 primary recommendations and groups of primary recommendations.

If the Monitor concludes that WUFSI has implemented an effective AML compliance program along the U.S. and Mexico border within the timeframes to implement the Monitor’s primary recommendations, the State cannot pursue either of the remedies above, except that the State may require WUFSI to pay $1 million per primary recommendation or group of primary recommendations that WUFSI fails to implement successfully.

If, at the conclusion of the timeframe to implement the secondary recommendations on December 31, 2017, the Monitor concludes that WUFSI has not implemented an effective AML compliance program along the U.S. and Mexico border, the State cannot assert a willful and material breach of the Southwest Border Agreement but may require WUFSI to pay an additional $25 million. Additionally, if the Monitor determines that WUFSI has implemented an effective AML compliance program along the U.S. and Mexico border but has not implemented some of the Monitor’s secondary recommendations or groups of secondary recommendations that were originally classified as primary recommendations or groups of primary recommendations on the date of the Amendment, the State may require WUFSI to pay $500,000 per such secondary recommendation or group of recommendations. There is no monetary penalty associated with secondary recommendations that are classified as such on the date of the Amendment or any new secondary recommendations that the Monitor makes after the date of the Amendment.

The Amendment requires WUFSI to continue funding the Monitor’s reasonable expenses in $500,000 increments as requested by the Monitor. The Amendment also requires WUFSI to make a one-time payment of $250,000, which was paid in March 2014, and thereafter $150,000 per month for five years to fund the activities and expenses of a money transfer transaction data analysis center formed by WUFSI and a Financial Crimes Task Force comprised of federal, state and local law enforcement representatives, including those from the State. In addition, California, Texas, and New Mexico are also participating in the money transfer transaction data analysis center.

The changes in WUFSI’s AML program required by the Southwest Border Agreement, including the Amendment, and the Monitor’s recommendations have had, and will continue to have, adverse effects on the Company’s business, including additional costs. Additionally, if WUFSI is not able to implement a successful AML compliance program along the U.S. and Mexico border or timely implement the Monitor’s recommendations, each as determined by the Monitor, the State may pursue remedies under the Southwest Border Agreement and Amendment, including assessment of fines and civil and criminal actions. Such fines and actions could have a material adverse effect on the Company’s business, financial condition or results of operations.

United States Department of Justice Investigations

On March 20, 2012, the Company was served with a federal grand jury subpoena issued by the United States Attorney's Office for the Central District of California ("USAO-CDCA") seeking documents relating to Shen Zhou International ("US Shen Zhou"), a former Western Union agent located in Monterey Park, California. The principal of US Shen Zhou was indicted in 2010 and in December 2013, pled guilty to one count of structuring international money transfers in violation of United States federal law in U.S. v. Zhi He Wang (SA CR 10-196, C.D. Cal.). Concurrent with the government's service of the subpoena, the government notified the Company that it is a target of an ongoing investigation into structuring and money laundering. Since March 20, 2012, the Company has received additional subpoenas from the USAO-CDCA seeking additional documents relating to US Shen Zhou, materials relating to certain other former and current agents and other materials relating to the Company's AML compliance policies and procedures. The government has interviewed several current and former Western Union employees and has served grand jury subpoenas seeking testimony from several current and former employees. The government's investigation is ongoing and the Company may receive additional requests for information as part of the investigation. The Company is cooperating fully with the government. The Company is unable to predict the outcome of the government's 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 condition and results of operations.

In March 2012, the Company was served with a federal grand jury subpoena issued by the United States Attorney’s Office for the Eastern District of Pennsylvania (“USAO-EDPA”) seeking documents relating to Hong Fai General Contractor Corp. (formerly known as Yong General Construction) (“Hong Fai”), a former Western Union agent located in Philadelphia, Pennsylvania. Since March 2012, the Company has received additional subpoenas from the USAO-EDPA seeking additional documents relating to Hong Fai. The government has interviewed several current Western Union employees. The government's investigation is ongoing and the Company may receive additional requests for information as part of the investigation. The Company is cooperating fully with the government. The Company is unable to predict the outcome of the government's 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 condition and results of operations.

On November 25, 2013, the Company was served with a federal grand jury subpoena issued by the United States Attorney’s Office for the Middle District of Pennsylvania (“USAO-MDPA”) seeking documents relating to complaints made to the Company by consumers anywhere in the world relating to fraud-induced money transfers since January 1, 2008. Concurrent with the government's service of the subpoena, the government notified the Company that it is the subject of the investigation. Since November 25, 2013, the Company has received additional subpoenas from the USAO-MDPA seeking documents relating to certain Western Union agents and Western Union’s agent suspension and termination policies. The government's investigation is ongoing and the Company may receive additional requests for information as part of the investigation. The Company is cooperating fully with the government. The Company is unable to predict the outcome of the government's 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 condition and results of operations.

On March 6, 2014, the Company was served with a federal grand jury subpoena issued by the United States Attorney’s Office for the Southern District of Florida (“USAO-SDFL”) seeking a variety of AML compliance materials, including documents relating to the Company’s AML, Bank Secrecy Act (“BSA”), Suspicious Activity Report (“SAR”) and Currency Transaction Report procedures, transaction monitoring protocols, BSA and AML training programs and publications, AML compliance investigation reports, compliance-related agent termination files, SARs, BSA audits, BSA and AML-related management reports and AML compliance staffing levels. The subpoena also calls for Board meeting minutes and organization charts. The period covered by the subpoena is January 1, 2007 to November 27, 2013. The Company has received additional subpoenas from the USAO-SDFL and the Broward County, Florida Sheriff’s Office relating to the investigation, including a federal grand jury subpoena issued by the USAO-SDFL on March 14, 2014, seeking information about 33 agent locations in Costa Rica such as ownership and operating agreements, SARs and AML compliance and BSA filings for the period January 1, 2008 to November 27, 2013. Subsequently, the USAO-SDFL served the Company with seizure warrants requiring the Company to seize all money transfers sent from the United States to two agent locations located in Costa Rica for a 10-day period beginning in late March 2014. On July 8, 2014, the government served a grand jury subpoena calling for records relating to transactions sent from the United States to Nicaragua and Panama between September 1, 2013 and October 31, 2013. The government has also notified the Company that it is a target of the investigation. The investigation is ongoing and the Company may receive additional requests for information or seizure warrants as part of the investigation. The Company is cooperating fully with the government. The Company is unable to predict the outcome of the government's 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 condition and results of operations.

Shareholder Action and Other Matters

On December 10, 2013, City of Taylor Police and Fire Retirement System filed a purported class action complaint in the United States District Court for the District of Colorado against The Western Union Company, its President and Chief Executive Officer and a former executive officer of the Company, asserting claims under sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Securities and Exchange Commission rule 10b-5 against all defendants. On September 26, 2014, the Court appointed SEB Asset Management S.A. and SEB Investment Management AB as lead plaintiffs. On October 27, 2014, lead plaintiffs filed a consolidated amended class action complaint, which asserts the same claims as the original complaint, except that it brings the claims under section 20(a) of the Exchange Act only against the individual defendants. The consolidated amended complaint also adds as a defendant another former executive officer of the Company. The consolidated amended complaint alleges that, during the purported class period, February 7, 2012 through October 30, 2012, defendants made false or misleading statements or failed to disclose adverse material facts known to them, including those regarding: (1) the competitive advantage the Company derived from its compliance program; (2) the Company’s ability to increase market share, make limited price adjustments and withstand competitive pressures; (3) the effect of compliance measures under the Southwest Border Agreement on agent retention and business in Mexico; and (4) the Company’s progress in implementing an anti-money laundering program for the Southwest Border Area. On December 11, 2014, the defendants filed a motion to dismiss the consolidated amended complaint. On January 5, 2015, plaintiffs filed an opposition to defendants’ motion to dismiss the consolidated amended complaint. On January 23, 2015, defendants filed a reply brief in support of their motion to dismiss the consolidated amended complaint. This action is in a preliminary stage and the Company is unable to predict the outcome, or the possible loss or range of loss, if any, which could be associated with this action. The Company and the named individuals intend to vigorously defend themselves in this matter.

The Company and one of its subsidiaries are defendants 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 original complaints asserted 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 the motion to dismiss as to the plaintiffs' unjust enrichment and conversion claims. On February 4, 2011, the Court dismissed the plaintiffs' consumer protection claims. On March 11, 2011, the plaintiffs filed an amended complaint that adds a claim for breach of fiduciary duty, various elements to its declaratory relief claim and WUFSI as a defendant. On April 25, 2011, the Company and WUFSI filed a motion to dismiss the breach of fiduciary duty and declaratory relief claims. WUFSI also moved to compel arbitration of the plaintiffs' claims and to stay the action pending arbitration. On November 21, 2011, the Court denied the motion to compel arbitration and the stay request. Both companies appealed the decision. On January 24, 2012, the United States Court of Appeals for the Tenth Circuit granted the companies' request to stay the District Court proceedings pending their appeal. During the fourth quarter of 2012, the parties executed a settlement agreement, which the Court preliminarily approved on January 3, 2013. On June 25, 2013, the Court entered an order certifying the class and granting final approval to the settlement. Under the approved settlement, a substantial amount of the settlement proceeds, as well as all of the class counsel’s fees, administrative fees and other expenses, would be paid from the class members' unclaimed money transfer funds, which are included within "Settlement obligations" in the Company's Consolidated Balance Sheets. During the final approval hearing, the Court overruled objections to the settlement that had been filed by several class members. In July 2013, two of those class members filed notices of appeal. The United States Court of Appeals for the Tenth Circuit heard oral arguments on March 18, 2014. The settlement requires Western Union to deposit the class members' unclaimed money transfer funds into a class settlement fund, from which class member claims, administrative fees and class counsel’s fees, as well as other expenses will be paid. On November 6, 2013, the Attorney General of California notified Western Union of the California Controller’s position that Western Union’s deposit of the unclaimed money transfer funds into the class settlement fund pursuant to the settlement “will not satisfy Western Union’s obligations to report and remit funds” under California’s unclaimed property law, and that “Western Union will remain liable to the State of California” for the funds that would have escheated to California in the absence of the settlement. The State of Pennsylvania and District of Columbia have expressed similar views. Thus, there is reason to believe that these and potentially other jurisdictions may bring actions against the Company seeking reimbursement for amounts equal to the class counsel’s fees, administrative costs and other expenses that are paid from the class settlement fund. If such actions are brought or claims that may otherwise require Western Union to incur additional escheatment-related liabilities are asserted, Western Union would defend itself vigorously.

In August 2013, the Consumer Financial Protection Bureau (the “CFPB”) served Paymap, Inc. (“Paymap”), a subsidiary of the Company which operates solely in the United States, with a civil investigative demand requesting information and documents about Paymap’s Equity Accelerator service, which is designed to help consumers pay off their mortgages more quickly. The CFPB’s investigation sought to determine whether Paymap’s marketing of the Equity Accelerator service violated the Consumer Financial Protection Act’s prohibition against unfair, deceptive and abusive acts and practices (“UDAAP”). The Company cooperated with the investigation. After reviewing information and documents provided by the Company, in August 2014, the CFPB advised the Company of its view that certain aspects of Paymap’s marketing violated UDAAP. The Company has advised the CFPB that it disagrees with the CFPB’s position. The Company is in discussions with the CFPB and is seeking to reach an appropriate resolution of this matter. Due to the early stage of the discussions, the Company is unable to predict whether the CFPB will institute an enforcement action to bring any claims against the Company as a result of the investigation, or the possible range of loss, if any, which could be associated with such an action. Should the CFPB institute an enforcement action against the Company, the Company could face significant restitution payments to certain Equity Accelerator consumers, civil money penalties, or regulatory consequences that could have a material adverse effect on the Company’s business, financial condition and results of operations.

On March 12, 2014, Jason Douglas filed a purported class action complaint in the United States District Court for the Northern District of Illinois asserting a claim under the Telephone Consumer Protection Act, 47 U.S.C. § 227, et seq., based on allegations that since 2009, the Company has sent text messages to class members’ wireless telephones without their consent. The plaintiff has not sought and the Court has not granted class certification. The Company intends to vigorously defend itself in this matter. However, due to the preliminary stage of the lawsuit and the uncertainty as to whether it will ever be certified as a class action, the potential outcome cannot be determined.

On January 26, 2006, the First Data Corporation ("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”). The Spin-off resulted in the formation of the Company and these assets and businesses no longer being part of First Data. 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).
Related Party Transactions
Related Party Transactions
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, 2014, 2013 and 2012 totaled $70.2 million, $65.5 million and $66.1 million, respectively.

Prior to 2014, the Company had a director who was also a director for a company that previously held significant investments in two of the Company's existing agents. During the first quarter of 2012, this company sold its interest in one of these agents, so that for the year ended December 31, 2013, this company held a significant investment in only one agent. These agents had been agents of the Company prior to the director being appointed to the board. The Company recognized commission expense of $15.1 million and $28.9 million for the years ended December 31, 2013 and 2012, respectively, related to these agents during the periods the agents were affiliated with the Company's director. In 2014, this director did not stand for re-election as a director with the Company.
Investment Securities
Investment Securities
Investment Securities

Investment securities included in "Settlement assets" in the Consolidated Balance Sheets consist primarily of highly-rated state and municipal debt securities, including fixed rate term notes, variable rate demand notes and a short-term bond mutual fund. The short-term bond mutual fund can be redeemed daily and holds fixed income securities with combined average maturities of one year or less. Variable rate demand note securities can be put (sold at par) typically on a daily basis with settlement periods ranging from the same day to one week, but have varying maturities through 2050. 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. The Company is required to hold highly-rated, investment grade securities and such investments are restricted to satisfy outstanding settlement obligations in accordance with applicable state and foreign country requirements.

In 2013, the Company invested in a short-term taxable bond mutual fund which held a diversified portfolio of fixed income securities. During the first quarter of 2014, the Company sold this investment for $100.2 million, which was also the fair value of this investment as of December 31, 2013. The investment was included in "Other assets" in the Company's Consolidated Balance Sheets as of December 31, 2013.

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. Western Union regularly monitors credit risk and attempts to mitigate its exposure by investing in highly-rated securities and through investment diversification.

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, 2014, 2013 and 2012 were $17.7 billion, $19.0 billion and $16.3 billion, respectively.

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):
December 31, 2014
 
Amortized
Cost
 
 
Fair
Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Net
Unrealized
Gains/ (Losses)
Settlement assets:
 
 
 
 
 
 
 
 
 
State and municipal debt securities (a)
$
1,024.2


$
1,038.1


$
15.1


$
(1.2
)

$
13.9

State and municipal variable rate demand notes
316.8


316.8







Corporate and other debt securities
70.5

 
70.5

 
0.1

 
(0.1
)
 

Short-term state and municipal bond mutual fund
47.1

 
47.1

 

 

 

 
$
1,458.6

 
$
1,472.5

 
$
15.2

 
$
(1.3
)
 
$
13.9

 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
Amortized
Cost
 
 
Fair
Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Net
Unrealized
Gains/ (Losses)
Settlement assets:
 
 
 
 
 
 
 
 
 
State and municipal debt securities (a)
$
868.1


$
874.2


$
7.8


$
(1.7
)

$
6.1

State and municipal variable rate demand notes
865.0


865.0







Other debt securities
11.2


11.3


0.1




0.1

 
$
1,744.3


$
1,750.5


$
7.9


$
(1.7
)

$
6.2

Other assets:
 
 
 
 
 
 
 
 
 
Short-term taxable bond mutual fund
100.0

 
100.2

 
0.2

 

 
0.2

 
$
1,844.3

 
$
1,850.7

 
$
8.1

 
$
(1.7
)
 
$
6.4

____________

(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, 2014 and 2013.

The following summarizes the contractual maturities of settlement-related debt securities as of December 31, 2014 (in millions):

 
Amortized
Cost
 
Fair
Value
Due within 1 year
$
150.5


$
151.1

Due after 1 year through 5 years
556.0


558.7

Due after 5 years through 10 years
383.1


393.7

Due after 10 years
321.9


321.9

 
$
1,411.5

 
$
1,425.4



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 $6.0 million, $3.5 million and $307.3 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
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 tables reflect assets and liabilities that were measured at fair value on a recurring basis (in millions):
  
Fair Value Measurement Using
 
Assets/
Liabilities at
Fair
Value
December 31, 2014
Level 1
 
Level 2
 
Level 3
 
Assets:
 
 
 
 
 
 
 
Settlement assets:
 
 
 
 
 
 
 
State and municipal debt securities
$

 
$
1,038.1

 
$

 
$
1,038.1

State and municipal variable rate demand notes

 
316.8

 

 
316.8

Corporate and other debt securities

 
70.5

 

 
70.5

Short-term state and municipal bond mutual fund
47.1

 

 

 
47.1

Other assets:
 
 
 
 
 
 
 
Derivatives

 
423.0

 

 
423.0

Total assets
$
47.1

 
$
1,848.4

 
$

 
$
1,895.5

Liabilities:
 
 
 
 
 
 
 
Notes and other borrowings
$

 
$
3,890.5

 
$

 
$
3,890.5

Derivatives

 
317.1

 

 
317.1

Total liabilities
$

 
$
4,207.6

 
$

 
$
4,207.6

 
 
 
 
 
 
 
 
 
Fair Value Measurement Using
 
Assets/
Liabilities at
Fair
Value
December 31, 2013
Level 1
 
Level 2
 
Level 3
 
Assets:
 
 
 
 
 
 
 
Settlement assets:
 
 
 
 
 
 
 
State and municipal debt securities
$

 
$
874.2

 
$

 
$
874.2

State and municipal variable rate demand notes

 
865.0

 

 
865.0

Other debt securities

 
11.3

 

 
11.3

Other assets:
 
 
 
 
 
 
 
Short-term taxable bond mutual fund
100.2

 

 

 
100.2

Derivatives

 
224.3

 

 
224.3

Total assets
$
100.2

 
$
1,974.8

 
$

 
$
2,075.0

Liabilities:
 
 
 
 
 
 
 
Notes and other borrowings
$

 
$
4,343.2

 
$

 
$
4,343.2

Derivatives

 
223.4

 

 
223.4

Total liabilities
$

 
$
4,566.6

 
$

 
$
4,566.6



No non-recurring fair value adjustments were recorded during the years ended December 31, 2014 and 2013, except those associated with acquisitions. The valuation of assets acquired, as disclosed in Note 4, was derived primarily using unobservable Level 3 inputs, which require significant management judgment and estimation.

Other Fair Value Measurements

The carrying amounts for many of the Company's financial instruments, including cash and cash equivalents, settlement cash and cash equivalents, and settlement receivables and settlement obligations approximate fair value due to their short maturities. The aggregate fair value of the Company's borrowings was based on quotes from multiple banks and excluded the impact of related interest rate swaps. All the assets and liabilities in the above tables were carried at fair value in the Consolidated Balance Sheets, with the exception of borrowings, which had a carrying value of $3,720.4 million and $4,213.0 million as of December 31, 2014 and 2013, respectively (see Note 15).

The fair value of the assets in the Trust, which holds the assets for the Company's defined benefit plan, is disclosed in Note 11.
Other Assets and Other Liabilities
Other Assets and Other Liabilities
Other Assets and Other Liabilities

The following table summarizes the components of other assets and other liabilities (in millions):

 
December 31,
 
2014
 
2013
Other assets:
 
 
 
Derivatives
$
423.0

 
$
224.3

Short-term taxable bond mutual fund (Note 7)

 
100.2

Prepaid expenses
63.0

 
69.0

Amounts advanced to agents, net of discounts
45.2

 
41.8

Equity method investments
41.6

 
41.0

Other
97.0

 
85.8

Total other assets
$
669.8

 
$
562.1

Other liabilities:
 
 
 
Derivatives
$
317.1

 
$
223.4

Pension obligations
74.9

 
70.4

Other
92.2

 
64.4

Total other liabilities
$
484.2

 
$
358.2

Income Taxes
Income Taxes
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,
 
2014
 
2013
 
2012
Domestic
$
34.7

 
$
(28.4
)
 
$
94.8

Foreign
933.5

 
955.3

 
1,074.0

 
$
968.2

 
$
926.9

 
$
1,168.8



For the years ended December 31, 2014, 2013 and 2012, 96%, 103% and 92% of the Company's pre-tax income was derived from foreign sources, respectively.

The provision for income taxes was as follows (in millions):
 
Year Ended December 31,
 
2014
 
2013
 
2012
Federal
$
57.0

 
$
88.3

 
$
92.5

State and local
4.9

 
(3.7
)
 
(14.8
)
Foreign
53.9

 
43.9

 
65.2

 
$
115.8

 
$
128.5

 
$
142.9



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,
 
2014
 
2013
 
2012
Federal statutory rate
35.0
 %
 
35.0
 %
 
35.0
 %
State income taxes, net of federal income tax benefits
0.6
 %
 
0.7
 %
 
0.6
 %
Foreign rate differential, net of U.S. tax paid on foreign earnings (4.3%, 9.2% and 5.1%, respectively)
(24.0
)%
 
(22.9
)%
 
(22.5
)%
Other
0.4
 %
 
1.1
 %
 
(0.9
)%
Effective tax rate
12.0
 %
 
13.9
 %
 
12.2
 %


The decrease in the Company's effective tax rate for the year ended December 31, 2014 compared to 2013 is primarily due to the combined effect of various discrete items, including those related to foreign currency fluctuations on certain income tax attributes, and changes in tax contingency reserves, partially offset by changes in the composition of earnings between foreign and domestic. The increase in the Company's effective tax rate for the year ended December 31, 2013 compared to 2012 is primarily due to the combined effect of various discrete items, partially offset by an increasing proportion of profits that were foreign-derived in 2013, and generally taxed at lower rates than the Company's combined federal and state tax rates in the United States. The Company continues to benefit from a significant proportion of its profits being foreign-derived, and generally taxed at lower rates than its combined federal and state tax rates in the United States. Certain portions of the Company's foreign source income are subject to United States federal and state income tax as earned due to the nature of the income, and dividend repatriations of the Company's foreign source income are generally subject to United States federal and state income tax.
The Company's provision for income taxes consisted of the following components (in millions):
 
Year Ended December 31,
 
2014
 
2013
 
2012
Current:
 
 
 
 
 
Federal
$
76.1

 
$
86.1

 
$
117.2

State and local
4.7

 
8.1

 
(2.5
)
Foreign
61.8

 
73.6

 
63.4

Total current taxes
142.6

 
167.8

 
178.1

Deferred:
 
 
 
 
 
Federal
(19.1
)
 
2.2

 
(24.7
)
State and local
0.2

 
(11.8
)
 
(12.3
)
Foreign
(7.9
)
 
(29.7
)
 
1.8

Total deferred taxes
(26.8
)
 
(39.3
)
 
(35.2
)
 
$
115.8

 
$
128.5

 
$
142.9



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,
 
2014
 
2013
Deferred tax assets related to:
 
 
 
Reserves, accrued expenses and employee-related items
$
81.8

 
$
57.0

Tax attribute carryovers
41.0

 
22.3

Pension obligations
26.7

 
25.6

Intangibles, property and equipment
12.1

 
14.9

Other
13.6

 
29.7

Valuation allowance
(46.6
)
 
(16.4
)
Total deferred tax assets
128.6

 
133.1

Deferred tax liabilities related to:
 
 
 
Intangibles, property and equipment
428.1

 
449.2

Other
5.5

 
3.1

Total deferred tax liabilities
433.6

 
452.3

Net deferred tax liability
$
305.0

 
$
319.2



The valuation allowances are primarily the result of uncertainties regarding the Company's ability to recognize tax benefits associated with certain foreign net operating losses, certain U.S. foreign tax credit carryforwards, and certain foreign undistributed earnings. Such uncertainties include generating sufficient income, generating sufficient U.S. foreign tax credit limitation related to passive income, and demonstrating the ability to distribute certain foreign earnings. Changes in circumstances, or the identification and implementation of relevant tax planning strategies, could make it foreseeable that the Company will recover these deferred tax assets in the future, which could lead to a reversal of these valuation allowances and a reduction in income tax expense.
Uncertain Tax Positions

The Company has established contingency reserves for a variety of material, known tax exposures. As of December 31, 2014, the total amount of tax contingency reserves was $96.8 million, including accrued interest and penalties, net of related items. The Company's tax reserves reflect management's judgment as to the resolution of the issues involved if subject to judicial review or other settlement. 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. Such resolution could materially increase or decrease income tax expense in the Company's consolidated financial statements in future periods and could impact operating cash flows.

Unrecognized tax benefits represent the aggregate tax effect of differences between tax return positions and the amounts otherwise recognized in the Company's consolidated 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):
 
2014
 
2013
Balance as of January 1,
$
117.5

 
$
103.2

Increases - positions taken in current period (a)
12.2

 
18.5

Increases - positions taken in prior periods (b)
5.7

 
15.6

Decreases - positions taken in prior periods
(23.9
)
 
(8.7
)
Decreases - settlements with taxing authorities
(8.1
)
 
(4.1
)
Decreases - lapse of applicable statute of limitations
(7.2
)
 
(7.0
)
Decreases - effects of foreign currency exchange rates
(2.8
)
 

Balance as of December 31,
$
93.4

 
$
117.5

____________

(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.

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $82.4 million and $108.9 million as of December 31, 2014 and 2013, 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 $1.5 million, $(1.8) million and $0.5 million in interest and penalties during the years ended December 31, 2014, 2013 and 2012, respectively. The Company has accrued $15.1 million and $17.7 million for the payment of interest and penalties as of December 31, 2014 and 2013, respectively.

The unrecognized tax benefits accrual as of December 31, 2014 consists of federal, state and foreign tax matters. It is reasonably possible that the Company's total unrecognized tax benefits will decrease by approximately $26 million during the next 12 months in connection with various matters which may be resolved.

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 as its major tax jurisdiction, as the income tax imposed by any one foreign country is not material to the Company. The United States federal income tax returns of First Data, which include the Company, are eligible to be examined for 2005 and 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") 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. In December 2011, the Company reached an agreement with the IRS resolving substantially all of the issues related to the Company's restructuring of its international operations in 2003 ("IRS Agreement"). As a result of the IRS Agreement, the Company expects to make cash payments of approximately $190 million, plus additional accrued interest, of which $94.1 million has been paid as of December 31, 2014. A substantial majority of these payments were made in the year ended December 31, 2012. The Company expects to pay the remaining amount in 2015 and beyond. The IRS completed its examination of the United States federal consolidated income tax returns of First Data, which include the Company's 2005 and pre-Spin-off 2006 taxable periods and issued its report on October 31, 2012 ("FDC 30-Day Letter"). Furthermore, the IRS completed its examination of the Company's United States federal consolidated income tax returns for the 2006 post-Spin-off period through 2009 and issued its report also on October 31, 2012 ("WU 30-Day Letter"). Both the FDC 30-Day Letter and the WU 30-Day Letter propose tax adjustments affecting the Company, some of which are agreed and some of which are unagreed. Both First Data and the Company filed their respective protests with the IRS Appeals Division on November 28, 2012 related to the unagreed proposed adjustments. Discussions with the IRS concerning these adjustments are ongoing. The Company believes its reserves are adequate with respect to both the agreed and unagreed adjustments.

As of December 31, 2014, no provision has been made for United States federal and state income taxes on certain of the Company's outside tax basis differences, which primarily relate to accumulated foreign earnings of approximately $5.6 billion, which have been reinvested and are expected to continue to be reinvested outside the United States indefinitely. Over the last several years, such earnings have been used to pay for the Company's international acquisitions and operations and provide initial Company funding of global principal payouts for Consumer-to-Consumer and Business Solutions transactions. 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. Such taxes could be significant. Determination of this amount of unrecognized United States deferred 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 condition 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 condition 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
Employee Benefit Plans

Defined Contribution Plans

The Western Union Company Incentive Savings Plan (the "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.

The Company administers more than 25 defined contribution plans in various countries globally on behalf of approximately 2,000 employee participants as of December 31, 2014. 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 United States employees. The plan provides tax-deferred contributions 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 $17.4 million, $16.9 million and $15.3 million during the years ended December 31, 2014, 2013 and 2012, respectively.

Defined Benefit Plan

The Company has a frozen defined benefit pension plan (the "Plan") for which it had a recorded unfunded pension obligation of $74.9 million and $70.4 million as of December 31, 2014 and 2013, respectively, included in "Other liabilities" in the Consolidated Balance Sheets. The Company made contributions of $13.2 million and $15.7 million to the Plan in the years ended December 31, 2014 and 2013, respectively. The Company will be required to fund approximately $18 million to the Plan in 2015.

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):
 
2014
 
2013
Change in projected benefit obligation:
 
 
 
Projected benefit obligation as of January 1,
$
366.2

 
$
418.8

Interest cost
13.6

 
12.1

Actuarial loss/(gain)
35.8

 
(25.4
)
Benefits paid
(37.8
)
 
(39.3
)
Projected benefit obligation as of December 31,
$
377.8

 
$
366.2

Change in plan assets:

 


Fair value of plan assets as of January 1,
$
295.8

 
$
316.7

Actual return on plan assets
31.7

 
2.7

Benefits paid
(37.8
)
 
(39.3
)
Company contributions
13.2

 
15.7

Fair value of plan assets as of December 31,
302.9

 
295.8

Funded status of the Plan as of December 31,
$
(74.9
)
 
$
(70.4
)
Accumulated benefit obligation as of December 31,
$
377.8

 
$
366.2



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" as of December 31, 2014 is $11.5 million ($7.2 million, net of tax) of actuarial losses that are expected to be recognized in net periodic benefit cost during the year ended December 31, 2015.

The following table provides the amounts recognized in the Consolidated Balance Sheets (in millions):
 
December 31,
 
2014
 
2013
Accrued benefit liability
$
(74.9
)
 
$
(70.4
)
Accumulated other comprehensive loss (pre-tax)
200.9

 
187.0

Net amount recognized
$
126.0

 
$
116.6



The following table provides the components of net periodic benefit cost for the Plan (in millions):
 
Year Ended December 31,
 
2014
 
2013
 
2012
Interest cost
$
13.6

 
$
12.1

 
$
14.7

Expected return on plan assets
(20.2
)
 
(20.7
)
 
(20.8
)
Amortization of actuarial loss
10.4

 
12.4

 
10.5

Net periodic benefit cost
$
3.8

 
$
3.8

 
$
4.4



The rate assumptions used in the measurement of the Company's benefit obligation were as follows:
 
2014
 
2013
Discount rate
3.27
%
 
3.91
%


The rate assumptions used in the measurement of the Company's net cost were as follows:
 
2014
 
2013
 
2012
Discount rate
3.91
%
 
3.03
%
 
3.72
%
Expected long-term return on plan assets
7.00
%
 
7.00
%
 
7.00
%


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 estimated undiscounted future benefit payments are expected to be $36.4 million in 2015, $35.0 million in 2016, $33.5 million in 2017, $32.0 million in 2018, $30.5 million in 2019 and $128.5 million in 2020 through 2024.

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 risk, return, and co-variance relationships between equities, fixed-income securities, and alternative investments 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 within the context of current economic conditions 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 as of December 31, 2014 and 2013, and target allocations based on investment policies, were as follows:
 
Percentage of Plan Assets
as of Measurement Date
Asset Class
2014
 
2013
Equity investments
17
%
 
18
%
Debt securities
63
%
 
59
%
Alternative investments
20
%
 
23
%

 
Target Allocation
Equity investments
20%
Debt securities
60%
Alternative investments
20%


The Plan's assets 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 equity, fixed income, and alternative investments are used in an effort to improve the long-term risk adjusted return of plan assets. Risk tolerance is established through careful consideration of plan liabilities and plan funded status. The investment portfolio contains a diversified blend of equity, fixed-income, and alternative investments (e.g. hedge funds, royalty rights and private equity funds). 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. Alternative investments, the majority of which are hedge funds, are used in an effort to enhance long-term returns while improving portfolio diversification. Hedge fund strategy types include, but are not limited to: relative value, equity long-short, commodities/currencies, multi-strategy, event driven, and global-macro. The Plan holds interest rate derivative contracts directly, including interest rate futures that are based on U.S. treasury bond rates ranging from two years to twenty-five years. The Plan may also hold interest rate swaps, under which the Plan is committed to pay or receive a short-term LIBOR-based variable interest rate in exchange for a fixed interest rate, primarily based on five and ten-year maturities. Additionally, derivatives are held indirectly through funds in which the Plan is invested. Derivatives are used by the Plan to help reduce the Plan's exposure to interest rate volatility and to provide an additional source of return. Cash held by the Plan is used to satisfy margin requirements on the derivatives or meet liquidity needs, including benefit payments. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements, and periodic asset and liability studies.

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, 2014
Fair Value Measurement Using
 
Total Assets
Asset Class
Level 1
 
Level 2
 
Level 3
 
at Fair Value
Equity investments:
 
 
 
 
 
 
 
Domestic
$
26.8


$


$

 
$
26.8

International (a)
1.5


24.0



 
25.5

Debt securities:








 
 
Corporate debt (b)


132.9



 
132.9

U.S. treasury bonds
44.8





 
44.8

State and municipal debt securities


4.4



 
4.4

Other


5.6



 
5.6

Alternative investments:








 
 
Hedge funds (c)


31.9



 
31.9

Royalty rights and private equity (d)




28.5

 
28.5