WESTERN UNION CO, 10-K filed on 2/24/2012
Annual Report
Document and Entity Information (USD $)
In Billions, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2011
Feb. 17, 2012
Jun. 30, 2011
Document and Entity Information [Abstract]
 
 
 
Entity Registrant Name
Western Union CO 
 
 
Entity Central Index Key (CIK)
0001365135 
 
 
Form Type
10-K 
 
 
Report Period
Dec. 31, 2011 
 
 
Amendment Flag
false 
 
 
Document Fiscal Year Focus
2011 
 
 
Document Fiscal Period Focus
FY 
 
 
Company Fiscal Year End Date
--12-31 
 
 
Company Well-known Seasoned Issuer (WKSI)
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Current with Filings
No 
 
 
Accelerated Filing Status
Large Accelerated Filer 
 
 
Entity Public Float
 
 
$ 12.6 
Entity Common Stock, Shares Outstanding
 
620,333,912 
 
Consolidated Statements of Income (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
Revenues:
 
 
 
Transaction fees
$ 4,220.2 
$ 4,055.3 
$ 4,036.2 
Foreign exchange revenues
1,151.2 
1,018.8 
910.3 
Other revenues
120.0 
118.6 
137.1 
Total revenues
5,491.4 
5,192.7 
5,083.6 
Expenses:
 
 
 
Cost of services
3,102.0 
2,978.4 
2,874.9 
Selling, general and administrative
1,004.4 
914.2 
926.0 
Total expenses
4,106.4 1
3,892.6 1
3,800.9 1
Operating income
1,385.0 
1,300.1 
1,282.7 
Other income/(expense):
 
 
 
Interest income
5.2 
2.8 
9.4 
Interest expense
(181.9)
(169.9)
(157.9)
Derivative gains/(losses), net
14.0 
(2.5)
(2.8)
Other income, net
52.3 
14.7 
0.1 
Total other expense, net
(110.4)
(154.9)
(151.2)
Income before income taxes
1,274.6 
1,145.2 
1,131.5 
Provision for income taxes
109.2 
235.3 
282.7 
Net income
$ 1,165.4 
$ 909.9 
$ 848.8 
Earnings per share:
 
 
 
Basic
$ 1.85 
$ 1.37 
$ 1.21 
Diluted
$ 1.84 
$ 1.36 
$ 1.21 
Weighted-average shares outstanding:
 
 
 
Basic
630.6 
666.5 
698.9 
Diluted
634.2 
668.9 
701.0 
Consolidated Statements of Income (Parenthetical) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
Consolidated Statements of Income [Abstract]
 
 
 
Total related party expenses
$ 190.7 
$ 236.4 
$ 257.4 
Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Dec. 31, 2011
Dec. 31, 2010
Assets
 
 
Cash and cash equivalents
$ 1,370.9 
$ 2,157.4 
Settlement assets
3,091.2 
2,635.2 
Property and equipment, net of accumulated depreciation of $429.7 and $383.6, respectively
198.1 
196.5 
Goodwill
3,198.9 
2,151.7 
Other intangible assets, net of accumulated amortization of $462.5 and $441.2, respectively
847.4 
438.0 
Other assets
363.4 
350.4 
Total assets
9,069.9 
7,929.2 
Liabilities:
 
 
Accounts payable and accrued liabilities
535.0 
520.4 
Settlement obligations
3,091.2 
2,635.2 
Income taxes payable
302.4 
356.6 
Deferred tax liability, net
389.7 
289.9 
Borrowings
3,583.2 
3,289.9 
Other liabilities
273.6 
254.5 
Total liabilities
8,175.1 
7,346.5 
Commitments and contingencies (Note 6)
   
   
Stockholders' equity:
 
 
Preferred stock, $1.00 par value; 10 shares authorized; no shares issued
Common stock, $0.01 par value; 2,000 shares authorized; 619.4 shares and 654.0 shares issued and outstanding as of December 31,2011 and 2010, respectively
6.2 
6.5 
Capital surplus
247.1 
117.4 
Retained earnings
760.0 
591.6 
Accumulated other comprehensive loss
(118.5)
(132.8)
Total stockholders' equity
894.8 
582.7 
Total liabilities and stockholders' equity
$ 9,069.9 
$ 7,929.2 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Per Share data, unless otherwise specified
Dec. 31, 2011
Dec. 31, 2010
Consolidated Balance Sheets [Abstract]
 
 
Accumulated depreciation
$ 429.7 
$ 383.6 
Accumulated amortization
$ 462.5 
$ 441.2 
Preferred stock, par value
$ 1.00 
$ 1.00 
Preferred stock, shares authorized
10 
10 
Preferred stock, shares issued
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
2,000 
2,000 
Common stock, shares issued
619.4 
654.0 
Common stock, shares outstanding
619.4 
654.0 
Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
Cash flows from operating activities
 
 
 
Net income
$ 1,165.4 
$ 909.9 
$ 848.8 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
61.0 
61.5 
55.9 
Amortization
131.6 
114.4 
98.3 
Deferred income tax provision/(benefit)
21.2 
28.6 
(20.8)
Stock compensation expense
31.2 
35.9 
31.9 
Gain on revaluation of equity interests (Note 3)
(49.9)
Other non-cash items, net
(1.4)
2.0 
44.1 
Increase/(decrease) in cash, excluding the effects of acquisitions, resulting from changes in:
 
 
 
Other assets
(27.7)
28.1 
(31.4)
Accounts payable and accrued liabilities
(43.0)
10.5 
75.5 
Income taxes payable (Note 10)
(62.3)
(159.2)
138.3 
Other liabilities
(51.2)
(37.3)
(22.5)
Net cash provided by operating activities
1,174.9 
994.4 
1,218.1 
Cash flows from investing activities
 
 
 
Capitalization of contract costs
(96.7)
(35.0)
(27.3)
Capitalization of purchased and developed software
(13.0)
(25.4)
(11.9)
Purchases of property and equipment
(52.8)
(53.3)
(59.7)
Acquisition of businesses, net of cash acquired
(1,218.6)
(4.7)
(515.9)
Net proceeds from settlement of foreign currency forward contracts related to acquisitions
20.8 
Proceeds from receivable for securities sold
36.9 
255.5 
Repayments of notes receivable issued to agents
16.9 
35.2 
Net cash used in investing activities
(1,360.3)
(64.6)
(324.1)
Cash flows from financing activities
 
 
 
Proceeds from exercise of options
100.0 
42.1 
23.2 
Cash dividends paid
(194.2)
(165.3)
(41.2)
Common stock repurchased
(803.9)
(581.4)
(400.2)
Net proceeds from/(repayments of) commercial paper
297.0 
(82.8)
Net proceeds from issuance of borrowings
696.3 
247.0 
496.6 
Principal payments on borrowings
(696.3)
(500.0)
Net cash used in financing activities
(601.1)
(457.6)
(504.4)
Net change in cash and cash equivalents
(786.5)
472.2 
389.6 
Cash and cash equivalents at beginning of year
2,157.4 
1,685.2 
1,295.6 
Cash and cash equivalents at end of year
1,370.9 
2,157.4 
1,685.2 
Supplemental cash flow information:
 
 
 
Interest paid
191.3 
175.5 
150.0 
Income taxes paid (Note 10)
144.9 
365.4 
162.8 
Non-cash exchange of 5.400% notes due 2011 for 5.253% notes due 2020 (Note 15)
$ 0 
$ 303.7 
$ 0 
Consolidated Statements of Stockholders' Equity/(Deficiency) (USD $)
In Millions
Total
Common Stock
Capital Surplus/(Deficiency)
Retained Earnings
Accumulated Other Comprehensive Loss
Comprehensive Income/(Loss)
Beginning Balance at Dec. 31, 2008
$ (8.1)
$ 7.1 
$ (14.4)
$ 29.2 
$ (30.0)
 
Beginning Balance, shares at Dec. 31, 2008
 
709.6 
 
 
 
 
Net income
848.8 
 
 
848.8 
 
848.8 
Stock-based compensation
31.9 
 
31.9 
 
 
 
Common stock dividends
(41.2)
 
 
(41.2)
 
 
Repurchase and retirement of common shares
(403.8)
(0.2)
 
(403.6)
 
 
Repurchase and retirement of common shares, shares
(24.8)
(24.9)
 
 
 
 
Shares issued under stock-based compensation plans
23.9 
 
23.9 
 
 
 
Shares issued under stock-based compensation plans, shares
 
1.8 
 
 
 
 
Tax adjustments from employee stock option plans
(0.7)
 
(0.7)
 
 
 
Unrealized gains on investment securities, net of tax
5.5 
 
 
 
5.5 
5.5 
Unrealized losses on hedging activities, net of tax
(62.5)
 
 
 
(62.5)
(62.5)
Foreign currency translation adjustment, net of tax
(29.0)
 
 
 
(29.0)
(29.0)
Pension liability adjustment, net of tax
(11.3)
 
 
 
(11.3)
(11.3)
Comprehensive income
 
 
 
 
 
751.5 
Ending Balance at Dec. 31, 2009
353.5 
6.9 
40.7 
433.2 
(127.3)
 
Ending Balance, shares at Dec. 31, 2009
 
686.5 
 
 
 
 
Net income
909.9 
 
 
909.9 
 
909.9 
Stock-based compensation
35.9 
 
 
 
 
 
Stock-based compensation and other
34.6 
 
34.6 
 
 
 
Common stock dividends
(165.3)
 
 
(165.3)
 
 
Repurchase and retirement of common shares
(586.6)
(0.4)
 
(586.2)
 
 
Repurchase and retirement of common shares, shares
(35.6)
(35.7)
 
 
 
 
Shares issued under stock-based compensation plans
44.1 
 
44.1 
 
 
 
Shares issued under stock-based compensation plans, shares
 
3.2 
 
 
 
 
Tax adjustments from employee stock option plans
(2.0)
 
(2.0)
 
 
 
Unrealized gains on investment securities, net of tax
(3.3)
 
 
 
(3.3)
(3.3)
Unrealized losses on hedging activities, net of tax
(4.9)
 
 
 
(4.9)
(4.9)
Foreign currency translation adjustment, net of tax
6.6 
 
 
 
6.6 
6.6 
Pension liability adjustment, net of tax
(3.9)
 
 
 
(3.9)
(3.9)
Comprehensive income
 
 
 
 
 
904.4 
Ending Balance at Dec. 31, 2010
582.7 
6.5 
117.4 
591.6 
(132.8)
 
Ending Balance, shares at Dec. 31, 2010
 
654.0 
 
 
 
 
Net income
1,165.4 
 
 
1,165.4 
 
1,165.4 
Stock-based compensation
31.2 
 
31.2 
 
 
 
Common stock dividends
(194.2)
 
 
(194.2)
 
 
Repurchase and retirement of common shares
(803.2)
(0.4)
 
(802.8)
 
 
Repurchase and retirement of common shares, shares
(40.3)
(40.5)
 
 
 
 
Shares issued under stock-based compensation plans
98.8 
0.1 
98.7 
 
 
 
Shares issued under stock-based compensation plans, shares
 
5.9 
 
 
 
 
Tax adjustments from employee stock option plans
(0.2)
 
(0.2)
 
 
 
Unrealized gains on investment securities, net of tax
1.8 
 
 
 
1.8 
1.8 
Unrealized losses on hedging activities, net of tax
27.0 
 
 
 
27.0 
27.0 
Foreign currency translation adjustment, net of tax
(2.0)
 
 
 
(2.0)
(2.0)
Pension liability adjustment, net of tax
(12.5)
 
 
 
(12.5)
(12.5)
Comprehensive income
 
 
 
 
 
1,179.7 
Ending Balance at Dec. 31, 2011
$ 894.8 
$ 6.2 
$ 247.1 
$ 760.0 
$ (118.5)
 
Ending Balance, shares at Dec. 31, 2011
 
619.4 
 
 
 
 
Formation of the Entity and Basis of Presentation
Formation of the Entity and Basis of Presentation

1. Formation of the Entity and Basis of Presentation

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

The Western Union business consists of the following segments:

 

   

Consumer-to-consumer — money transfer services between consumers, primarily through a global network of third-party agents using the Company’s multi-currency, real-time money transfer processing systems. This service is available for international cross-border transfers — that is, the transfer of funds from one country to another—and, in certain countries, intra-country transfers — that is, money transfers from one location to another in the same country.

 

   

Global business payments — the processing of payments from consumers or businesses to other businesses. The Company’s business payments services allow consumers to make payments to a variety of organizations including utilities, auto finance companies, mortgage servicers, financial service providers, government agencies and other businesses. The Company’s existing Western Union Business Solutions business (“Business Solutions”) and Travelex Global Business Payments (“TGBP”), which was acquired in November 2011 (see Note 3), are also included in this segment. These businesses facilitate business-to-business payments, primarily for cross-border, cross-currency transactions. The majority of the segment’s revenue was generated in the United States during all periods presented. However, international expansion and other key strategic initiatives, including TGBP, have resulted in international revenue continuing to increase in this segment.

All businesses that have not been classified into the consumer-to-consumer or global business payments segments are reported as “Other” and primarily include the Company’s money order and prepaid services business. Prior to October 1, 2009, the Company’s money orders were issued by Integrated Payment Systems Inc. (“IPS”), a subsidiary of First Data Corporation (“First Data”), to consumers at retail locations primarily in the United States and Canada. Effective October 1, 2009, the Company assumed the responsibility for issuing money orders.

There are legal or regulatory limitations on transferring certain assets of the Company outside of the countries where these assets are located, or which constitute undistributed earnings of affiliates of the Company accounted for under the equity method of accounting. However, there are generally no limitations on the use of these assets within those countries. Additionally, the Company must meet minimum capital requirements in some countries in order to maintain operating licenses. As of December 31, 2011, the amount of net assets subject to these limitations totaled approximately $230 million.

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

Spin-off from First Data

On January 26, 2006, the First Data Board of Directors announced its intention to pursue the distribution of all of its money transfer and consumer payments 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

2. Summary of Significant Accounting Policies

Use of Estimates

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

Principles of Consolidation

The Company consolidates financial results when it has both the power to direct the activities of an entity that most significantly impact the entity’s economic performance and the ability to absorb losses or the right to receive benefits of the entity that could potentially be significant to the entity. The Company utilizes the equity method of accounting when it is able to exercise significant influence over the entity’s operations, which generally occurs when the Company has an ownership interest of between 20% and 50% in an entity.

Earnings Per Share

The calculation of basic earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Unvested shares of restricted stock are excluded from basic shares outstanding. Diluted earnings per share reflects the potential dilution that could occur if outstanding stock options at the presented dates are exercised and shares of restricted stock have vested, using the treasury stock method. The treasury stock method assumes proceeds from the exercise price of stock options, the unamortized compensation expense and assumed tax benefits of options and restricted stock are available to acquire shares at an average market price throughout the year, and therefore, reduce the dilutive effect.

As of December 31, 2011, 2010 and 2009, there were 17.1 million, 34.0 million and 37.5 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,          
    2011     2010     2009  

Basic weighted-average shares outstanding

    630.6       666.5       698.9  

Common stock equivalents

    3.6       2.4       2.1  
   

 

 

   

 

 

   

 

 

 
       

Diluted weighted-average shares outstanding

    634.2       668.9       701.0  
   

 

 

   

 

 

   

 

 

 

Fair Value Measurements

The Company determines the fair values of its assets and liabilities that are recognized or disclosed at fair value in accordance with the hierarchy described below. The fair values of the assets and liabilities held in the Company’s defined benefit plan trust (“Trust”) are recognized or disclosed utilizing the same hierarchy. The following three levels of inputs may be used to measure fair value:

 

   

Level 1: Quoted prices in active markets for identical assets or liabilities.

 

   

Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. For most of these assets, the Company utilizes pricing services that use multiple prices as inputs to determine daily market values. In addition, the Trust has other investments that fall within Level 2 that are valued at net asset value which is not quoted on an active market; however, the unit price is based on underlying investments which are traded on an active market.

 

   

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include items where the determination of fair value requires significant management judgment or estimation. The Company has Level 3 assets that are recognized and disclosed at fair value on a non-recurring basis related to the Company’s business combinations, where the values of the intangible assets and goodwill acquired in a purchase are derived utilizing one of the three recognized approaches: the market approach, the income approach or the cost approach.

Carrying amounts for many of the Company’s financial instruments, including cash and cash equivalents, settlement cash and cash equivalents, settlement receivables, settlement obligations, borrowings under the commercial paper program and other short-term notes payable, approximate fair value due to their short maturities. Investment securities, included in settlement assets, and derivative financial instruments are carried at fair value and included in Note 8. Fixed rate notes are carried at their original issuance values as adjusted over time to accrete that value to par, except for portions of notes hedged by interest rate swap agreements as disclosed in Note 14. The fair values of fixed rate notes are also disclosed in Note 15 and are based on market quotations. For more information on the fair value of financial instruments, see Note 8.

The fair values of non-financial assets and liabilities related to the Company’s business combinations are disclosed in Note 3. 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 market value.

The Company maintains cash and cash equivalent balances with various financial institutions, including a substantial portion in money market funds. The Company limits the concentration of its cash and cash equivalents with any one institution. 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 $28.5 million and $21.1 million as of December 31, 2011 and 2010, respectively, and is recorded in the same Consolidated Balance Sheet caption as the related receivable. During the years ended December 31, 2011, 2010 and 2009, the provision for doubtful accounts (bad debt expense) reflected in the Consolidated Statements of Income was $24.3 million, $19.1 million and $36.2 million, respectively.

Settlement Assets and Obligations

Settlement assets represent funds received or to be received from agents for unsettled money transfers, money orders and consumer payments. The Company records corresponding settlement obligations relating to amounts payable under money transfers, money orders and consumer payment service arrangements. Settlement assets and obligations also include amounts receivable from and payable to businesses for the value of customer cross-currency payment transactions related to the global business payments segment.

 

Settlement assets consist of cash and cash equivalents, receivables from selling agents and business-to-business customers, and investment securities. Cash received by Western Union agents generally becomes available to the Company within one week after initial receipt by the agent. Cash equivalents consist of short-term time deposits, commercial paper and other highly liquid investments. Receivables from selling agents represent funds collected by such agents, but in transit to the Company. Western Union has a large and diverse agent base, thereby reducing the credit risk of the Company from any one agent. In addition, the Company performs ongoing credit evaluations of its agents’ financial condition and credit worthiness. See Note 7 for information concerning the Company’s investment securities.

Receivables from business-to-business customers arise from cross-currency payment transactions in the global business payments segment. Receivables occur when funds have been paid out to a beneficiary but not yet received from the customer. The credit risk associated with the receivables from these 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. Money order payables represent amounts not yet presented for payment. Most agents typically settle with transferees first and then obtain reimbursement from the Company. Payment service payables represent amounts to be paid to utility companies, auto finance companies, mortgage servicers, financial service providers, government agencies and others. Due to the agent funding and settlement process, payables to agents represent amounts due to agents for money transfers that have been settled with transferees.

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

 

 

                 
    December 31,  
    2011     2010  

Settlement assets:

               
     

Cash and cash equivalents

  $ 712.5     $ 133.8  
     

Receivables from selling agents and business-to-business customers

    1,046.7       1,132.3  
     

Investment securities

    1,332.0       1,369.1  
   

 

 

   

 

 

 
     
    $ 3,091.2     $ 2,635.2  
   

 

 

   

 

 

 
     

Settlement obligations:

               
     

Money transfer, money order and payment service payables

  $     2,242.3     $     2,170.0  
     

Payables to agents

    848.9       465.2  
   

 

 

   

 

 

 
     
    $ 3,091.2     $ 2,635.2  
   

 

 

   

 

 

 

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the lesser of the estimated life of the related assets (generally three to 10 years for equipment, furniture and fixtures, and 30 years for buildings) or the lease term. Maintenance and repairs, which do not extend the useful life of the respective assets, are charged to expense as incurred.

 

Property and equipment consisted of the following (in millions):

 

 

                 
    December 31,  
    2011     2010  

Equipment

  $     434.8     $     401.5  
     

Buildings

    80.1       77.5  
     

Leasehold improvements

    61.1       51.9  
     

Furniture and fixtures

    33.1       30.3  
     

Land and improvements

    16.9       16.9  
     

Projects in process

    1.8       2.0  
   

 

 

   

 

 

 
     
      627.8       580.1  
     

Less accumulated depreciation

    (429.7     (383.6
   

 

 

   

 

 

 
     

Property and equipment, net

  $ 198.1     $ 196.5  
   

 

 

   

 

 

 

Amounts charged to expense for depreciation of property and equipment were $61.0 million, $61.5 million and $55.9 million during the years ended December 31, 2011, 2010 and 2009, respectively.

Deferred Customer Set Up Costs

The Company capitalizes direct incremental costs not to exceed related deferred revenues associated with the enrollment of customers in the Equity Accelerator program, a service that allows consumers to make mortgage payments based on a customized payment program. Deferred customer set up costs, included in “Other assets” in the Consolidated Balance Sheets, are amortized to “Cost of services” in the Consolidated Statements of Income over the length of the customer’s expected participation in the program, generally five to seven years. Actual customer attrition data is assessed at least annually and the amortization period is adjusted prospectively.

Goodwill

Goodwill represents the excess of purchase price over the fair value of tangible and other intangible assets acquired, less liabilities assumed arising from business combinations. The Company’s annual impairment assessment did not identify any goodwill impairment during the years ended December 31, 2011, 2010 and 2009.

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 approximately $131.6 million, $114.4 million and $98.3 million for the years ended December 31, 2011, 2010 and 2009, 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 develops software that is used in providing services. Software development costs are capitalized once technological feasibility of the software has been established. Costs incurred prior to establishing technological feasibility are expensed as incurred. Technological feasibility is established when the Company has completed all planning and designing activities that are necessary to determine that a product can be produced to meet its design specifications, including functions, features and technical performance requirements. Capitalization of costs ceases when the product is available for general use. Software development costs and purchased software are generally amortized over a term of three to five years.

The following table provides the components of other intangible assets (in millions):

 

 

                                         
    December 31, 2011     December 31, 2010  
    Weighted-
Average
Amortization
Period
(in years)
    Initial
Cost
    Net of
Accumulated
Amortization
    Initial
Cost
    Net of
Accumulated
Amortization
 
           

Acquired contracts (a)

    10.5     $ 629.5     $ 526.5     $ 256.5     $ 186.8  
           

Capitalized contract costs

    6.7       399.1       213.8       350.3       164.6  
           

Purchased or acquired software (a)

    3.5       132.2       57.9       113.9       30.7  
           

Developed software

    3.3       65.2       3.1       86.1       13.7  
           

Acquired trademarks

    24.5       41.5       31.0       42.3       33.4  
           

Projects in process

    3.0       0.8       0.8       6.1       6.1  
           

Other intangibles (a)

    3.8       41.6       14.3       24.0       2.7  
           

 

 

   

 

 

   

 

 

   

 

 

 
           

Total other intangible assets

    8.5     $     1,309.9     $   847.4     $     879.2     $     438.0  
           

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(a)

Total other intangible assets includes $299.7 million of identifiable intangible assets related to the preliminary allocation of purchase price for the TGBP acquisition (see Note 3).

The estimated future aggregate amortization expense for existing other intangible assets as of December 31, 2011 is expected to be $160.6 million in 2012, $131.0 million in 2013, $107.3 million in 2014, $89.1 million in 2015, $70.7 million in 2016 and $288.7 million thereafter.

Other intangible assets are reviewed for impairment on an annual basis and whenever events indicate that their carrying amount may not be recoverable. In such reviews, estimated undiscounted cash flows associated with these assets or operations are compared with their carrying values to determine if a write-down to fair value (normally measured by the present value technique) is required. The Company did not record any impairment related to other intangible assets during the years ended December 31, 2011 and 2009, and recorded impairments of approximately $9 million for the year ended December 31, 2010.

 

Revenue Recognition

The Company’s revenues are primarily derived from consumer money transfer transaction fees that are based on the principal amount of the money transfer and the locations from and to which funds are transferred. The Company also offers several global business payments services, including payments from consumers or businesses to other businesses. Transaction fees are set by the Company and recorded as revenue at the time of sale.

In certain consumer money transfer and global business payments transactions involving different currencies, the Company generates revenue based on the difference between the exchange rate set by the Company to the customer and the rate at which the Company or its agents are able to acquire currency. This foreign exchange revenue is recorded at the time the related consumer money transfer transaction fee revenue is recognized or at the time a customer initiates a transaction through the Company’s business-to-business payment service operations.

The Company’s Equity Accelerator service generally requires a consumer to pay an upfront enrollment fee to participate in this mortgage payment service. These enrollment fees are deferred and recognized into income over the length of the customer’s expected participation in the program, generally five to seven years. Actual customer attrition data is assessed at least annually and the period over which revenue is recognized is adjusted prospectively. Many factors impact the duration of the expected customer relationship, including interest rates, refinance activity and trends in consumer behavior.

Cost of Services

Cost of services primarily consists of agent commissions and expenses for call centers, settlement operations and related information technology costs. Expenses within these functions include personnel, software, equipment, telecommunications, bank fees, depreciation, amortization and other expenses incurred in connection with providing money transfer and other payment services.

Advertising Costs

Advertising costs are charged to operating expenses as incurred or at the time the advertising first takes place. Advertising costs for the years ended December 31, 2011, 2010, and 2009 were $174.8 million, $163.9 million and $201.4 million, respectively.

Income Taxes

The Company accounts for income taxes under the liability method, which requires that deferred tax assets and liabilities be determined based on the expected future income tax consequences of events that have been recognized in the consolidated financial statements. Deferred tax assets and liabilities are recognized based on temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the temporary differences are expected to reverse.

The Company recognizes the tax benefits from uncertain tax positions only when it is more likely than not, based on the technical merits of the position, the tax position will be sustained upon examination, including the resolution of any related appeals or litigation. The tax benefits recognized in the consolidated financial statements from such a position are measured as the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.

 

Foreign Currency Translation

The United States dollar is the functional currency for 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 entities for which the local currency is the functional currency are translated into United States dollars based on exchange rates at the end of the period. The effects of foreign exchange gains and losses arising from the translation of assets and liabilities of these entities are included as a component of “Accumulated other comprehensive loss.” Foreign currency denominated monetary assets and liabilities of operations in which the United States dollar is the functional currency are remeasured based on exchange rates at the end of the period and are recognized in operations. Non-monetary assets and liabilities of these operations are remeasured at historical rates in effect when the asset was recognized or the liability was incurred.

Derivatives

The Company utilizes derivatives to (a) minimize its exposures related to changes in foreign currency exchange rates and interest rates and (b) facilitate cross-currency business-to-business payments by writing derivatives to customers. The Company recognizes all derivatives in the “Other assets” and “Other liabilities” captions in the accompanying Consolidated Balance Sheets at their fair value. All cash flows associated with derivatives are included in cash flows from operating activities in the Consolidated Statements of Cash Flows, except for cash flows associated with foreign currency forward contracts entered into in order to reduce the economic variability related to the cash amounts used to fund acquisitions of businesses with purchase prices denominated in foreign currencies, which are recorded in investing activities.

 

   

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. The portions of the change in fair value that 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 of a few days up to one month, and (b) certain money transfer related foreign currency denominated cash positions and intercompany loans, generally with maturities of less than one year, are not designated as hedges for accounting purposes and changes in their fair value are included in “Selling, general and administrative.” In addition, changes in fair value of derivative contracts, consisting of forward contracts with maturities of less than one year entered into to reduce the economic variability related to the cash amounts used to fund acquisitions of businesses with purchase prices denominated in foreign currencies, are recorded in “Derivative gains/(losses), net.” The Company is also exposed to risk from derivative contracts written to its customers arising from its cross-currency business-to-business payments operations. These contracts have durations generally of nine months or less. The Company aggregates its foreign exchange exposures in its cross-currency business-to-business payments operations, including the exposure generated by the derivative contracts it writes to its customers, and typically hedges the net exposure through offsetting contracts with established financial institution counterparties (economic hedge contract) as part of a broader foreign currency portfolio, including significant spot exchanges of currency in addition to forwards and options. The changes in fair value related to these contracts are recorded in “Foreign exchange revenues.”

The fair value of the Company’s derivatives is derived from standardized models that use market based inputs (e.g., forward prices for foreign currency).

The details of each designated hedging relationship are formally documented at the inception of the arrangement, including the risk management objective, hedging strategy, hedged item, specific risks being hedged, the derivative instrument, how effectiveness is being assessed and how ineffectiveness, if any, will be measured. The derivative must be highly effective in offsetting the changes in cash flows or fair value of the hedged item, and effectiveness is evaluated quarterly on a retrospective and prospective basis.

Stock-Based Compensation

The Company currently has a stock-based compensation plan that provides for grants of Western Union stock options, restricted stock awards and restricted stock units to employees who perform services for the Company. In addition, the Company has a stock-based compensation plan that provides for grants of Western Union stock options and stock unit awards to non-employee directors of the Company. Prior to the Spin-off, employees of Western Union participated in First Data’s stock-based compensation plans.

All stock-based compensation to employees is required to be measured at fair value and expensed over the requisite service period and also requires an estimate of forfeitures when calculating compensation expense. The Company recognizes compensation expense on awards on a straight-line basis over the requisite service period for the entire award. Refer to Note 16 for additional discussion regarding details of the Company’s stock-based compensation plans.

Restructuring and Related Expenses

The Company records severance-related expenses once they are both probable and estimable in accordance with the provisions of the applicable accounting guidance for severance provided under an ongoing benefit arrangement. One-time, involuntary benefit arrangements and other exit costs are generally recognized when the liability is incurred. Expenses arising under the Company’s defined benefit pension plans from curtailing future service of employees participating in the plans and providing enhanced benefits are recognized in earnings when it is probable and reasonably estimable. The Company also evaluates impairment issues associated with restructuring activities when the carrying amount of the assets may not be fully recoverable, in accordance with the appropriate accounting guidance. Restructuring and related expenses consist of direct and incremental expenses associated with restructuring and related activities, including severance, outplacement and other employee related benefits; facility closure and migration of the Company’s IT infrastructure; and other expenses related to the relocation of various operations to new or existing Company facilities and third-party providers, including hiring, training, relocation, travel and professional fees. Also included in the facility closure expenses are non-cash expenses related to fixed asset and leasehold improvement write-offs and accelerated depreciation at impacted facilities. For more information on the Company’s restructuring and related expenses, see Note 4.

 

Acquisitions
Acquisitions

3. Acquisitions

2011 Acquisitions

On November 7, 2011, the Company acquired the business-to-business payment business known as Travelex Global Business Payments (“TGBP”) from Travelex Holdings Limited for cash consideration of £603 million ($967.8 million), plus an initial working capital adjustment. The acquisition of the French assets of TGBP for cash consideration of £3 million (approximately $4.7 million based on currency exchange rates at December 31, 2011) has not been finalized as of December 31, 2011. This acquisition is expected to close in 2012, subject to regulatory approval and satisfaction of closing conditions. The final consideration and the final purchase price allocation are subject to an additional working capital adjustment, further analysis of tax balances, final valuation of identifiable intangible assets, and other items. For the year ended December 31, 2011, the Company incurred $20.7 million of costs associated with the closing of this acquisition. With the acquisition of TGBP and the Company’s existing Business Solutions business, the Company has the ability to leverage TGBP’s business-to-business payments market expertise, distribution, product and capabilities with Western Union’s brand, existing Business Solutions operations, global infrastructure and relationships, and financial strength. The results of operations for TGBP have been included in the Company’s consolidated financial statements from the date of acquisition.

On October 31, 2011 and April 20, 2011, the Company acquired the remaining 70% interests in European-based Finint S.r.l. (“Finint”) and Angelo Costa S.r.l. (“Costa”), respectively, two of the Company’s largest agents providing services in a number of European countries. The Company previously held a 30% equity interest in each of these agents. The Company expects these acquisitions will help accelerate the introduction of additional Western Union products and services and will leverage its existing European infrastructure to build new opportunities across the European Union. The acquisitions do not impact the Company’s money transfer revenue, because the Company was already recording all of the revenue arising from money transfers originating at Finint’s and Costa’s subagents. As of the acquisition dates, the Company no longer incurs commission costs for transactions related to Finint and Costa; rather the Company now pays commissions to Finint and Costa subagents, resulting in lower overall commission expense. The Company’s operating expenses include costs attributable to Finint’s and Costa’s operations subsequent to the acquisition dates.

The Company acquired the remaining 70% interest in Finint for cash consideration of €99.6 million ($139.4 million). The final purchase price allocation is subject to further analysis of tax balances and other items. The Company revalued its previous 30% equity interest to fair value of approximately $47.8 million on the acquisition date, resulting in total value of $187.2 million. In conjunction with the revaluation, the Company recognized a gain of $20.5 million, recorded in “Other income, net” in the Company’s Consolidated Statements of Income, for the amount by which the fair value of the 30% equity interest exceeded its previous carrying value.

The Company acquired the remaining 70% interest in Costa for cash consideration of €95 million ($135.7 million), which included a reduction of €5 million ($7.1 million) for an initial working capital adjustment pursuant to the terms of the purchase agreement. The final consideration and the final purchase price allocation are subject to an additional working capital adjustment. The Company revalued its previous 30% equity interest to fair value of approximately $46.2 million on the acquisition date, resulting in total value of $181.9 million. In conjunction with the revaluation, the Company recognized a gain of $29.4 million, recorded in “Other income, net” in the Company’s Consolidated Statements of Income, for the amount by which the fair value of the 30% equity interest exceeded its previous carrying value.

 

All assets and liabilities have been recorded at fair value, excluding deferred tax liabilities. The following table summarizes the preliminary allocations of purchase price (in millions):

 

 

                         
Assets:   Travelex Global
Business
Payments
    Finint S.r.l     Angelo Costa
S.r.l
 
       

Cash and cash equivalents

  $ 40.0     $     $  
       

Settlement assets

    169.1       52.2       48.0  
       

Property and equipment

    4.9       0.5       3.0  
       

Goodwill

    728.7       153.1       172.3  
       

Other intangible assets

    299.7       64.8       51.4  
       

Other assets

    30.0       2.4       1.7  
   

 

 

   

 

 

   

 

 

 
       

Total assets

  $ 1,272.4     $ 273.0     $ 276.4  
   

 

 

   

 

 

   

 

 

 
       

Liabilities:

                       
       

Accounts payable and accrued liabilities

  $ 43.2     $ 6.0     $ 10.8  
       

Settlement obligations

    169.1       57.5       55.7  
       

Income taxes payable

    1.1       3.1       10.3  
       

Deferred tax liability, net

    69.4       15.8       15.5  
       

Other liabilities

    21.8       3.4       2.2  
   

 

 

   

 

 

   

 

 

 
       

Total liabilities

    304.6       85.8       94.5  
   

 

 

   

 

 

   

 

 

 
       

Total purchase price (a)

  $ 967.8     $     187.2     $     181.9  
   

 

 

   

 

 

   

 

 

 

 

(a)

Total purchase price includes cash consideration transferred and the revaluation of the Company’s previous equity interest, if any, to fair value on the acquisition date.

The preliminary valuation of assets acquired were derived using primarily unobservable Level 3 inputs, which require significant management judgment and estimation, and resulted in identifiable intangible assets as follows (in millions):

 

 

                         
    Travelex Global
Business
Payments
    Finint S.r.l     Angelo Costa
S.r.l
 
       

Customer and other contractual relationships

  $ 276.6     $     $  
       

Network of subagents

          53.9       44.6  
       

Other

    23.1       10.9       6.8  
   

 

 

   

 

 

   

 

 

 
       

Total identifiable intangible assets

  $     299.7     $     64.8     $     51.4  
   

 

 

   

 

 

   

 

 

 

Customer and other contractual relationships and network of subagents identifiable intangible assets were valued using an income approach and are being amortized over 10 to 11 years, subject to valuation completion. Other intangibles were valued using both income and cost approaches and are being amortized over one to five years. For the remaining assets and liabilities excluding goodwill and deferred tax liabilities, fair value approximated carrying value.

The goodwill recognized for TGBP of $728.7 million is attributable to expected synergies, the projected long-term business growth in current and new markets and an assembled workforce and relates entirely to the global business payments segment. The goodwill recognized for Finint and Costa of $153.1 million and $172.3 million, respectively, is attributable to growth opportunities that will arise from the Company directly managing its agent relationships, expected synergies, projected long-term business growth and an assembled workforce and relates entirely to the consumer-to-consumer segment. Based on the preliminary allocation of purchase price, goodwill expected to be deductible for income tax purposes for TGBP, Finint and Costa is approximately $470.6 million, $97.0 million and $104.9 million, respectively.

Other acquisitions

On September 1, 2009, the Company acquired Canada-based Custom House, a provider of international business-to-business payment services, for $371.0 million. The acquisition of Custom House allowed the Company to enter the international business-to-business payments market. Custom House facilitates cross-border, cross-currency payment transactions. These payment transactions are conducted through various channels including the phone and Internet. The significant majority of Custom House’s revenue is from exchanges of currency at the spot rate enabling customers to make cross-currency payments. In addition, this business writes foreign currency forward and option contracts for its customers to facilitate future payments. The duration of these derivatives contracts is generally nine months or less. The results of operations for Custom House have been included in the Company’s consolidated financial statements from the date of acquisition.

The Company recorded the assets and liabilities of Custom House at fair value, excluding the deferred tax liability. The valuation of assets acquired resulted in $118.1 million of identifiable intangible assets, $99.8 million of which were attributable to customer and other contractual relationships and were valued using an income approach and $18.3 million of other intangibles, which were valued using both income and cost approaches. For the remaining assets and liabilities, excluding goodwill, fair value approximated carrying value. The intangible assets related to customer and other contractual relationships are being amortized over 10 to 12 years. The remaining intangibles are being amortized over three to five years. The goodwill recognized of $264.3 million is attributable to the projected long-term business growth in current and new markets and an assembled workforce. All goodwill relates entirely to the global business payments segment. Goodwill expected to be deductible for United States income tax purposes is approximately $231.3 million.

On February 24, 2009, the Company acquired the money transfer business of European-based FEXCO, one of the Company’s largest agents providing services in a number of European countries, primarily the United Kingdom, Spain, Sweden and Ireland. The acquisition of FEXCO’s money transfer business has assisted the Company in the implementation of the Payment Services Directive (“PSD”) in the European Union by providing an initial operating infrastructure. The PSD has allowed the Company to operate under a single license in 27 European countries and, in those European Union countries where the Company has been limited to working with banks, post-banks and foreign exchange houses, to expand its network to additional types of businesses. The acquisition does not impact the Company’s revenue, because the Company was already recording all of the revenue arising from money transfers originating at FEXCO’s locations. As of the acquisition date, the Company no longer incurs commission costs for transactions related to FEXCO; rather, the Company now pays commissions directly to former FEXCO subagents, resulting in lower overall commission expense. The Company’s operating expenses include costs attributable to FEXCO’s operations subsequent to the acquisition date.

 

Prior to the acquisition, the Company held a 24.65% interest in FEXCO Group Holdings (“FEXCO Group”), which was a holding company for both the money transfer business as well as various unrelated businesses. The Company surrendered its 24.65% interest in FEXCO Group as non-cash consideration, which had an estimated fair value of $86.2 million on the acquisition date, and paid €123.1 million ($157.4 million) as additional consideration for all of the common shares of the money transfer business, resulting in a total purchase price of $243.6 million. The Company recognized no gain or loss in connection with the disposition of its equity interest in the FEXCO Group, because its estimated fair value approximated its carrying value. The Company recorded the assets and liabilities of FEXCO at fair value, excluding the deferred tax liability. The valuation of assets acquired resulted in $74.9 million of identifiable intangible assets, $64.8 million of which were attributable to the network of subagents, with $10.1 million relating to other intangibles. The subagent network intangible assets are being amortized over 10 to 15 years, and the remaining intangibles are being amortized over two to three years. Goodwill of $190.6 million was recognized, of which $91.1 million is expected to be deductible for United States income tax purposes.

The following table presents changes to goodwill for the years ended December 31, 2011 and 2010 (in millions):

 

 

                                 
    Consumer-to-
Consumer
    Global  Business
Payments
    Other     Total  
         

January 1, 2010 balance

  $ 1,619.9     $ 509.2     $ 14.3     $ 2,143.4  
         

Purchase price adjustments

          (7.9           (7.9
         

Currency translation

          16.3       (0.1     16.2  
   

 

 

   

 

 

   

 

 

   

 

 

 
         

December 31, 2010 balance

  $ 1,619.9     $ 517.6     $ 14.2     $ 2,151.7  
         

Acquisitions

    325.4       728.7             1,054.1  
         

Currency translation

          (6.7     (0.2     (6.9
   

 

 

   

 

 

   

 

 

   

 

 

 
         

December 31, 2011 balance

  $     1,945.3     $ 1,239.6     $     14.0     $   3,198.9  
   

 

 

   

 

 

   

 

 

   

 

 

 
Related Party Transactions
Related Party Transactions

5. Related Party Transactions

The Company has ownership interests in certain of its agents accounted for under the equity method of accounting. The Company pays these agents, as it does its other agents, commissions for money transfer and other services provided on the Company’s behalf. Commission expense recognized for these agents for the years ended December 31, 2011, 2010 and 2009 totaled $131.9 million, $183.5 million and $203.2 million, respectively. Commission expense recognized for Finint prior to October 31, 2011, Costa prior to April 20, 2011, and FEXCO prior to February 24, 2009, the date of the acquisitions (see Note 3), was considered a related party transaction.

In July 2009, the Company appointed a director who is also a director for a company holding significant investments in two of the Company’s existing agents. These agents had been agents of the Company prior to the director being appointed to the board. The Company recognized commission expense of $58.8 million, $52.9 million and $54.2 million for the years ended December 31, 2011, 2010 and 2009, respectively, related to these agents.

Commitments and Contingencies
Commitments and Contingencies

6. Commitments and Contingencies

Letters of Credit and Bank Guarantees

The Company had approximately $120 million in outstanding letters of credit and bank guarantees as of December 31, 2011 with expiration dates through 2015, the majority of which contain a one-year renewal option. The letters of credit and bank guarantees are primarily held in connection with lease arrangements and certain agent agreements. The Company expects to renew the letters of credit and bank guarantees prior to expiration in most circumstances.

Litigation and Related Contingencies

In the second quarter of 2009, the Antitrust Division of the United States Department of Justice (“DOJ”) served one of the Company’s subsidiaries with a grand jury subpoena requesting documents in connection with an investigation into money transfers, including related foreign exchange rates, from the United States to the Dominican Republic from 2004 through the date of subpoena. The Company is cooperating fully with the DOJ investigation. Due to the stage of the investigation, the Company is unable to predict the outcome of the investigation, or the possible loss or range of loss, if any, which could be associated with the resolution of any possible criminal charges or civil claims that may be brought against the Company. Should such charges or claims be brought, the Company could face significant fines, damage awards or regulatory consequences which could have a material adverse effect on the Company’s business, financial condition and results of operations.

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 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 Western Union Financial Services, Inc. as a defendant. On April 25, 2011, the Company and Western Union Financial Services, Inc. filed a motion to dismiss the breach of fiduciary duty and declaratory relief claims. Western Union Financial Services, Inc. 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. The plaintiffs have not sought and the Court has not granted class certification. The Company and Western Union Financial Services, Inc. intend to vigorously defend themselves against both lawsuits. However, due to the preliminary stages of these lawsuits, the fact the plaintiffs have not quantified their damage demands, and the uncertainty as to whether they will ever be certified as class actions, the potential outcome cannot be determined.

During 2009, the Company recorded an accrual of $71.0 million for an agreement and settlement with the State of Arizona and other states, which was paid in 2010. On February 11, 2010, the Company signed this agreement and settlement, which resolved all outstanding legal issues and claims with the State of Arizona 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. The accrual included amounts for reimbursement to the State of Arizona for its costs associated with this matter. In addition, as part of the agreement and settlement, the Company has made and expects to make certain investments in its compliance programs along the United States and Mexico border and a monitor has been engaged for those programs. The costs of the investments in the Company’s programs and for the monitor are expected to reach up to $23 million over the period from signing to 2013.

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

 

Pursuant to the separation and distribution agreement with First Data in connection with the Spin-off, First Data and the Company are each liable for, and agreed to perform, all liabilities with respect to their respective businesses. In addition, the separation and distribution agreement also provides for cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of the Company’s business with the Company and financial responsibility for the obligations and liabilities of First Data’s retained businesses with First Data. The Company also entered into a tax allocation agreement that sets forth the rights and obligations of First Data and the Company with respect to taxes imposed on their respective businesses both prior to and after the Spin-off as well as potential tax obligations for which the Company may be liable in conjunction with the Spin-off (see Note 10).

Investment Securities
Investment Securities

7. Investment Securities

Investment securities, classified within “Settlement assets” in the Consolidated Balance Sheets, consist primarily of highly-rated state and municipal debt securities, including variable rate demand notes. 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 that 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 specific highly-rated, investment grade securities and such investments are restricted to satisfy outstanding settlement obligations in accordance with applicable state and foreign country requirements. The substantial majority of the Company’s investment securities are classified as available-for-sale and recorded at fair value. Investment securities are exposed to market risk due to changes in interest rates and credit risk. Western Union regularly monitors credit risk and attempts to mitigate its exposure by investing in highly-rated securities and through investment diversification. As of December 31, 2011, the majority of the Company’s investment securities had credit ratings of “AA–” or better from a major credit rating agency.

On October 1, 2009 (the “Transition Date”), the Company assumed IPS’s role as issuer of money orders and terminated the existing agreement whereby IPS paid the Company a fixed return of 5.5% on the outstanding money order balances. Following the Transition Date, the Company invested the cash received from IPS in highly-rated, investment grade securities, primarily tax exempt United States state and municipal debt securities, in accordance with applicable regulations.

Subsequent to the Transition Date, all revenue generated from the investment portfolio is being retained by the Company. IPS continues to provide the Company with clearing services necessary for payment of the money orders in exchange for the payment by the Company to IPS of a per-item processing fee. The Company no longer provides to IPS the services required under the original money order agreement or receives from IPS the fee for such services.

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, 2011, 2010 and 2009 were $14.2 billion, $14.7 billion and $8.4 billion, respectively. The transition of the money order business from IPS in October 2009, as described above, increased the frequency of purchases and proceeds received by the Company in 2010 and 2011.

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, 2011

  Amortized
Cost
    Fair
Value
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Net
Unrealized
Gains/(Losses)
 
           

State and municipal debt securities (a)

  $ 858.5     $ 866.5     $ 10.4     $ (2.4   $ 8.0  
           

State and municipal variable rate demand notes

    376.9       376.9                 —        
           

Corporate debt and other

    88.7       88.6       0.6       (0.7     (0.1
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
           
    $     1,324.1     $     1,332.0     $ 11.0     $ (3.1   $     7.9  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
           

December 31, 2010

  Amortized
Cost
    Fair
Value
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Net
Unrealized
Gains/(Losses)
 
           

State and municipal debt securities (a)

  $ 844.1     $ 849.1     $ 7.0     $ (2.0   $ 5.0  
           

State and municipal variable rate demand notes

    490.0       490.0                    
           

Agency mortgage-backed securities and other

    29.9       30.0       0.1             0.1  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
           
    $ 1,364.0     $ 1,369.1     $ 7.1     $ (2.0   $ 5.1  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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, 2011 and 2010.

The following summarizes contractual maturities of investment securities as of December 31, 2011 (in millions):

 

 

                 
    Amortized
Cost
    Fair
Value
 
     

Due within 1 year

  $ 180.0     $ 180.5  
     

Due after 1 year through 5 years

    705.6       713.3  
     

Due after 5 years through 10 years

    115.8       114.6  
     

Due after 10 years

    322.7       323.6  
   

 

 

   

 

 

 
     
    $     1,324.1     $     1,332.0  
   

 

 

   

 

 

 

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 $12.4 million, $65.4 million, $6.0 million and $293.1 million are included in the “Due within 1 year,” “Due after 1 year through 5 years,” “Due after 5 years through 10 years” and “Due after 10 years” categories, respectively, in the table above.

Fair Value Measurements
Fair Value Measurements

8. Fair Value Measurements

Fair value, as defined by the relevant accounting standards, represents the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. For additional information on how the Company measures fair value, refer to Note 2.

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

 

 

                                 
    Fair Value Measurement Using     Assets/Liabilities
at Fair Value
 

December 31, 2011

  Level 1     Level 2     Level 3    

Assets:

                               

State and municipal debt securities

  $     $ 866.5     $     $ 866.5  

State and municipal variable rate demand notes

          376.9             376.9  

Corporate debt and other

    0.1       88.5             88.6  

Derivatives

          124.8             124.8  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $                 0.1     $             1,456.7     $                 —     $         1,456.8  
   

 

 

   

 

 

   

 

 

   

 

 

 
         

Liabilities:

                               

Derivatives

  $     $ 86.6     $     $ 86.6  
   

 

 

   

 

 

   

 

 

   

 

 

 
         

Total liabilities

  $     $ 86.6     $     $ 86.6  
   

 

 

   

 

 

   

 

 

   

 

 

 
     
    Fair Value Measurement Using     Assets/Liabilities
at Fair Value
 

December 31, 2010

  Level 1     Level 2     Level 3    

Assets:

                               

State and municipal debt securities

  $     $ 849.1     $     $ 849.1  

State and municipal variable rate demand notes

          490.0             490.0  

Agency mortgage-backed securities and other

    0.1       29.9             30.0  
         

Derivatives

          69.8             69.8  
   

 

 

   

 

 

   

 

 

   

 

 

 
         

Total assets

  $ 0.1     $ 1,438.8     $     $ 1,438.9  
   

 

 

   

 

 

   

 

 

   

 

 

 
         

Liabilities:

                               

Derivatives

  $     $ 80.9     $     $ 80.9  
   

 

 

   

 

 

   

 

 

   

 

 

 
         

Total liabilities

  $     $ 80.9     $     $ 80.9  
   

 

 

   

 

 

   

 

 

   

 

 

 

 

No non-recurring fair value adjustments were recorded during the years ended December 31, 2011 and 2010, except those associated with acquisitions, as disclosed in Note 3.

Other Fair Value Measurements

The carrying amounts for the Company’s financial instruments, including cash and cash equivalents, settlement cash and cash equivalents, settlement receivables and settlement obligations approximate fair value due to their short maturities. The Company’s borrowings had a carrying value and fair value of $3,583.2 million and $3,563.5 million, respectively, as of December 31, 2011 and had a carrying value and fair value of $3,289.9 million and $3,473.6 million, respectively, as of December 31, 2010 (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

9. Other Assets and Other Liabilities

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

 

 

                 
    December 31,  
    2011     2010  

Other assets:

               

Derivatives

  $ 124.8     $ 69.8  

Prepaid expenses

    54.5       50.1  

Equity method investments

    41.3       85.7  

Other receivables

    37.6       26.2  

Amounts advanced to agents, net of discounts

    34.1       25.3  

Deferred customer set up costs

    18.0       20.4  

Debt issue costs

    15.8       12.8  

Accounts receivable, net

    14.8       13.8  

Receivables from First Data

    3.6       24.1  

Other

    18.9       22.2  
   

 

 

   

 

 

 
     

Total other assets

  $ 363.4     $ 350.4  
   

 

 

   

 

 

 
     

Other liabilities:

               

Pension obligations

  $ 112.7     $ 112.8  

Derivatives

    86.6       80.9  

Deferred revenue

    33.6       37.3  

Other

    40.7       23.5  
   

 

 

   

 

 

 
     

Total other liabilities

  $   273.6     $   254.5  
   

 

 

   

 

 

 

 

Receivable for securities sold

On September 15, 2008, Western Union requested redemption of its shares from the Reserve International Liquidity Fund, Ltd. (the “Fund”), a money market fund, totaling $298.1 million. Western Union included the value of the receivable in “Other assets” in the Consolidated Balance Sheets. At the time the redemption request was made, the Company was informed by the Reserve Management Company, the Fund’s investment advisor, that the Company’s redemption trades would be honored at a $1.00 per share net asset value despite losses the Fund had incurred on certain holdings resulting in the Fund subsequently reducing its net asset value. In 2009, the Company received partial distributions totaling $255.5 million from the Fund and recorded a reserve of $12 million, representing the estimated impact of a pro-rata distribution of the Fund. On December 31, 2010, the Company received a final distribution from the Fund totaling $36.9 million. As a result of the final distribution, the Company recovered $6.3 million of the related reserve, the impact of which is included in “Other income” in the Consolidated Statements of Income.

Income Taxes
Income Taxes

10. Income Taxes

The components of pre-tax income, generally based on the jurisdiction of the legal entity, were as follows (in millions):

 

 

                         
    Year Ended December 31,  
    2011     2010     2009  

Components of pre-tax income:

                       

Domestic

  $ 423.9     $ 151.4     $ 249.7  

Foreign

    850.7       993.8       881.8  
   

 

 

   

 

 

   

 

 

 
    $ 1,274.6     $ 1,145.2     $ 1,131.5  
   

 

 

   

 

 

   

 

 

 

For the year ended December 31, 2011, the increase in domestic pre-tax income and decrease in foreign pre-tax income are primarily due to the current year pre-tax impact of the Company’s agreement with the United States Internal Revenue Service (“IRS Agreement”) resolving substantially all of the issues related to the Company’s restructuring of its international operations in 2003.

The provision for income taxes was as follows (in millions):

 

 

                         
    Year Ended December 31,  
    2011     2010     2009  

Federal

  $ 78.1     $ 132.2     $ 217.3  

State and local

    4.5       39.8       28.0  

Foreign

    26.6       63.3       37.4  
   

 

 

   

 

 

   

 

 

 
    $   109.2     $   235.3     $   282.7  
   

 

 

   

 

 

   

 

 

 

Domestic taxes have been incurred on certain pre-tax income amounts that were generated by the Company’s foreign operations. Accordingly, the percentage obtained by dividing the total federal, state and local tax provision by the domestic pre-tax income, all as shown in the preceding tables, may be higher than the statutory tax rates in the United States.

 

The Company’s effective tax rates differed from statutory rates as follows:

 

 

                         
    Year Ended December 31,  
    2011     2010     2009  

Federal statutory rate

    35.0     35.0     35.0

State income taxes, net of federal income tax benefits

    2.0     1.9     1.5

Foreign rate differential

    (13.9 )%      (15.3 )%      (12.5 )% 

IRS Agreement

    (16.1 )%      —         —    

Other

    1.6     (1.1 )%      1.0
   

 

 

   

 

 

   

 

 

 

Effective tax rate

    8.6     20.5     25.0
   

 

 

   

 

 

   

 

 

 

The decrease in the Company’s effective tax rate for the year ended December 31, 2011 is primarily due to an agreement with the United States Internal Revenue Service (“IRS”) resolving substantially all of the issues related to the Company’s restructuring of its international operations in 2003, as described below, slightly offset by higher taxes associated with the Finint and Costa remeasurement gains. The tax rate for the year ended December 31, 2010 was impacted by a cumulative tax planning benefit from certain foreign acquisitions and the settlement with the IRS of certain issues relating to the 2002-2004 tax years. The Company continues to benefit from an increasing proportion of profits being foreign-derived, and therefore taxed at lower rates than its combined federal and state tax rates in the United States.

The Company’s provision for income taxes consisted of the following components (in millions):

 

 

                         
    Year Ended December 31,  
    2011     2010     2009  

Current:

                       

Federal

  $ 36.2     $ 103.6     $ 235.8  

State and local

    0.6       30.1       26.0  

Foreign

    51.2       73.0       41.8  
   

 

 

   

 

 

   

 

 

 

Total current taxes

    88.0       206.7       303.6  
       

Deferred:

                       

Federal

    41.9       28.6       (18.5

State and local

    3.9       9.7       2.0  

Foreign

    (24.6     (9.7     (4.4
   

 

 

   

 

 

   

 

 

 
       

Total deferred taxes

    21.2       28.6       (20.9
   

 

 

   

 

 

   

 

 

 
       
    $   109.2     $   235.3     $   282.7  
   

 

 

   

 

 

   

 

 

 

 

Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the book and tax bases of the Company’s assets and liabilities. The following table outlines the principal components of deferred tax items (in millions):

 

 

                 
    December 31,  
    2011     2010  

Deferred tax assets related to:

               

Reserves, accrued expenses and employee-related items

  $ 40.6     $ 61.6  

Pension obligations

    40.0       38.7  

Tax attribute carryovers

    11.9       7.4  

Other

    20.6       16.7  
   

 

 

   

 

 

 
     

Total deferred tax assets

    113.1       124.4  
   

 

 

   

 

 

 
     

Deferred tax liabilities related to:

               

Intangibles, property and equipment

    502.8       411.8  

Other

    —        2.5  
   

 

 

   

 

 

 
     

Total deferred tax liabilities

    502.8       414.3  
   

 

 

   

 

 

 
     

Net deferred tax liability

  $   389.7     $   289.9  
   

 

 

   

 

 

 

Uncertain Tax Positions

The Company has established contingency reserves for a variety of material, known tax exposures. As of December 31, 2011, the total amount of tax contingency reserves was $135.0 million, including accrued interest and penalties, net of related benefits. The Company’s tax reserves reflect management’s judgment as to the resolution of the issues involved if subject to judicial review. While the Company believes its reserves are adequate to cover reasonably expected tax risks, there can be no assurance that, in all instances, an issue raised by a tax authority will be resolved at a financial cost that does not exceed its related reserve. With respect to these reserves, the Company’s income tax expense would include (i) any changes in tax reserves arising from material changes during the period in the facts and circumstances (i.e., new information) surrounding a tax issue, and (ii) any difference from the Company’s tax position as recorded in the financial statements and the final resolution of a tax issue during the period. 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 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):

 

 

                 
    2011     2010  

Balance as of January 1,

  $   618.7     $   477.2  

Increases—positions taken in current period (a)

    143.1       134.1  

Increases—positions taken in prior periods (b)

    34.1       33.4  

Increases—acquisitions

    9.7        

Decreases—positions taken in prior periods

    (27.9     (21.8

Decreases—settlements with taxing authorities

    (650.9     (0.8

Decreases—lapse of applicable statute of limitations

    (3.1     (3.4
   

 

 

   

 

 

 

Balance as of December 31, (c)

  $ 123.7     $ 618.7  
   

 

 

   

 

 

 

 

(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.

 

(c)

Balance at December 31, 2011, includes amounts related to a variety of U.S. federal and state and foreign tax matters.

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. As a result of the IRS Agreement, the Company expects to make cash payments to the IRS and various state tax authorities in 2012 of approximately $190 million, which are in addition to the $250 million tax deposit (see below) the Company made with the IRS in 2010. This deposit limits the further accrual of interest charges with respect to the Company’s related tax liabilities, to the extent of the deposit. Also as a result of the IRS Agreement, the Company recorded a tax benefit of $204.7 million related to the adjustment of reserves associated with this matter.

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $115.6 million and $555.5 million as of December 31, 2011 and 2010, 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 ($4.0) million, $6.9 million and $11.0 million in interest and penalties during the years ended December 31, 2011, 2010 and 2009, respectively. The Company has accrued $20.7 million and $52.4 million for the payment of interest and penalties as of December 31, 2011 and 2010, respectively.

The Company has identified no uncertain tax positions for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within 12 months. The change in unrecognized tax benefits during the year ended December 31, 2011 is substantially attributable to the settlement with the IRS discussed above. The unrecognized tax benefits accrual as of December 31, 2011, consists of federal, state and foreign tax matters.

The Company and its subsidiaries file tax returns for the United States, for multiple states and localities, and for various non-United States jurisdictions, and the Company has identified the United States and Ireland as its two major tax jurisdictions. The United States federal income tax returns of First Data, which include the Company, are eligible to be examined for the years 2003 through 2006. The Company’s United States federal income tax returns since the Spin-off are also eligible to be examined. The IRS completed its examination of the United States federal consolidated income tax returns of First Data for 2003 and 2004, which included the Company, and issued a Notice of Deficiency in December 2008. The Notice of Deficiency alleged significant additional taxes, interest and penalties owed with respect to a variety of adjustments involving the Company and its subsidiaries, and the Company generally has responsibility for taxes associated with these potential Company-related adjustments under the tax allocation agreement with First Data executed at the time of the Spin-off. A substantial part of the alleged amounts due related to the Company’s international restructuring, which took effect in the fourth quarter of 2003. 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, as noted above. An examination of the United States federal consolidated income tax returns of First Data that cover the Company’s 2005 and pre-Spin-off 2006 taxable periods is ongoing, as is an examination of the Company’s United States federal consolidated income tax returns for the 2006 post-Spin-off period through 2009. The Irish income tax returns of certain subsidiaries for the years 2007 and forward are eligible to be examined by the Irish tax authorities, although no examinations have commenced.

In the first quarter of 2010, the Company made a $250 million tax deposit relating to United States federal tax liabilities, including those arising from the Company’s 2003 international restructuring, which have been previously accrued in the Company’s consolidated financial statements. The deposit was recorded as a reduction to “Income taxes payable” in the Consolidated Balance Sheets and a decrease in cash flows from operating activities in the Consolidated Statement of Cash Flows. Making the deposit limits the further accrual of interest charges with respect to such tax liabilities, to the extent of the deposit.

As of December 31, 2011, no provision had 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 $3.7 billion, which are expected to be reinvested outside the United States indefinitely. Upon distribution of those earnings to the United States in the form of actual or constructive dividends, the Company would be subject to United States income taxes (subject to an adjustment for foreign tax credits), state income taxes and possible withholding taxes payable to various foreign countries. Such taxes could be significant. Determination of this amount of unrecognized deferred United States tax liability is not practicable because of the complexities associated with its hypothetical calculation.

Tax Allocation Agreement with First Data

The Company and First Data each are liable for taxes imposed on their respective businesses both prior to and after the Spin-off. If such taxes have not been appropriately apportioned between First Data and the Company, subsequent adjustments may occur that may impact the Company’s financial 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

11. Employee Benefit Plans

Defined Contribution Plans

The Western Union Company Incentive Savings Plan (“401(k)”) covers eligible employees on the United States payroll of the Company. Employees who make voluntary contributions to this plan receive up to a 4% Company matching contribution. All matching contributions are immediately vested.

The Company administers more than 25 defined contribution plans in various countries globally on behalf of approximately 1,300 employee participants as of December 31, 2011. Such plans have vesting and employer contribution provisions that vary by country.

In addition, the Company sponsors a non-qualified deferred compensation plan for a select group of highly compensated employees. The plan provides tax-deferred contributions, matching and the restoration of Company matching contributions otherwise limited under the 401(k).

The aggregate amount charged to expense in connection with all of the above plans was $12.8 million, $12.0 million and $11.2 million during the years ended December 31, 2011, 2010 and 2009, respectively.

Defined Benefit Plan

On December 31, 2010, the Company merged its two frozen defined benefit pension plans into one plan (“Plan”). The Plan assets were held in a master trust and were identical in terms of their benefit entitlements and other provisions (except for participant eligibility requirements) and consequently, the financial effect of the merger was not significant.

The Plan had recorded unfunded pension obligations of $112.7 million and $112.8 million as of December 31, 2011 and 2010, respectively, included in “Other liabilities” in the Consolidated Balance Sheets. In both the years ended December 31, 2011 and 2010, the Company made contributions of approximately $25 million to the Plan, including discretionary contributions of $3 million and $10 million, respectively. Due to the closure of one of its facilities in Missouri and an agreement with the Pension Benefit Guaranty Corporation, the Company funded $4.1 million during 2009. The Company will be required to fund approximately $20 million to the Plan in 2012 and may make a discretionary contribution of up to approximately $5 million.

The Company recognizes the funded status of the Plan in its Consolidated Balance Sheets with a corresponding adjustment to “Accumulated other comprehensive loss,” net of tax.

 

The following table provides a reconciliation of the changes in the Plan’s projected benefit obligation, fair value of assets and the funded status (in millions):

 

 

                 
    2011     2010  

Change in projected benefit obligation

               

Projected benefit obligation as of January 1,

  $ 402.9     $ 400.1  

Interest cost

    17.9       20.1  

Actuarial loss

    35.3       25.3  

Benefits paid

    (41.7     (42.6
   

 

 

   

 

 

 

Projected benefit obligation as of December 31,

  $ 414.4     $ 402.9  
   

 

 

   

 

 

 

Change in plan assets

               

Fair value of plan assets as of January 1,

  $ 290.1     $ 275.9  

Actual return on plan assets

    28.3       31.9  

Benefits paid

    (41.7     (42.6

Company contributions

    25.0       24.9  
   

 

 

   

 

 

 

Fair value of plan assets as of December 31,

    301.7       290.1  
   

 

 

   

 

 

 

Funded status of the plan as of December 31,

  $ (112.7   $ (112.8
   

 

 

   

 

 

 

Accumulated benefit obligation as of December 31,

  $     414.4     $     402.9  
   

 

 

   

 

 

 

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, 2011 is $10.5 million ($6.5 million, net of tax) of actuarial losses that are expected to be recognized in net periodic pension cost during the year ended December 31, 2012.

The following table provides the amounts recognized in the Consolidated Balance Sheets (in millions):

 

 

                 
    December 31,  
    2011     2010  

Accrued benefit liability

  $ (112.7   $ (112.8

Accumulated other comprehensive loss (pre-tax)

        196.8           176.5  
   

 

 

   

 

 

 

Net amount recognized

  $ 84.1     $ 63.7  
   

 

 

   

 

 

 

 

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

 

 

                         
    Year Ended December 31,  
    2011     2010     2009  

Interest cost

  $     17.9     $     20.1     $     23.6  

Expected return on plan assets

    (21.3     (20.4     (24.7

Amortization of actuarial loss

    8.1       6.2       3.6  
   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

  $ 4.7     $ 5.9     $ 2.5  
   

 

 

   

 

 

   

 

 

 

The accrued loss related to the pension liability included in “Accumulated other comprehensive loss”, net of tax, increased $12.5 million, $3.9 million and $11.3 million in 2011, 2010 and 2009, respectively.

The rate assumptions used in the measurement of the Company’s benefit obligation were as follows:

 

 

                 
    2011     2010  

Discount rate

    3.72%       4.69%  

The rate assumptions used in the measurement of the Company’s net cost were as follows:

 

 

                         
    2011     2010     2009  

Discount rate

    4.69%       5.30%       6.26%  

Expected long-term return on plan assets

    7.00%       6.50%       7.50%  

The Company measures the Plan’s obligations and annual expense using assumptions that reflect best estimates and are consistent to the extent that each assumption reflects expectations of future economic conditions. As the bulk of the pension benefits will not be paid for many years, the computation of pension expenses and benefits is based on assumptions about future interest rates and expected rates of return on plan assets. In general, pension obligations are most sensitive to the discount rate assumption, and it is set based on the rate at which the pension benefits could be settled effectively. The discount rate is determined by matching the timing and amount of anticipated payouts under the Plan to the rates from an AA spot rate yield curve. The curve is derived from AA bonds of varying maturities.

The Company employs a building block approach in determining the long-term rate of return for plan assets. Historical markets are studied and long-term historical 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, 2011 and 2010, and target allocations based on investment policies, were as follows:

 

 

                 
    Percentage of Plan  Assets
as of Measurement Date
 

Asset Class

      2011             2010      

Equity investments

    17%       31%  

Debt securities

    61%       69%  

Alternative investments

    22%       0%  
   

 

 

   

 

 

 
      100%       100%  
   

 

 

   

 

 

 

 

 

         
    Target Allocation  

Equity investments

    15

Debt securities

    60

Alternative investments

    25

The assets of the Company’s Plan are managed in a third-party Trust. The investment policy and allocation of the assets in the Trust are overseen by the Company’s Investment Council. The Company employs a total return investment approach whereby a mix of equity, fixed income, and alternative investments are used in an effort to maximize the long-term 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 significant 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: commodities/currencies, equity long-short, relative value, multi-strategy, event driven, and global-macro. The Plan holds derivative contracts directly which consist of standardized obligations to buy or sell United States treasury bonds or notes at predetermined future dates and prices which are transacted on regulated exchanges. 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. 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, 2011

  Fair Value Measurement Using     Total Assets
at  Fair Value
 

Asset Class

    Level 1         Level 2         Level 3      

Equity investments

                               

Domestic

  $   28.1     $     $     $ 28.1  

International

          22.4             22.4  

Debt securities

                               

Corporate debt (a)

          134.1             134.1  

U.S. treasury bonds

    39.8                   39.8  

U.S. government agencies

          4.7             4.7  

Other

          3.0             3.0  

Alternative investments

                               

Hedge funds (b)

          52.8             52.8  

Royalty rights and private equity (c)

                13.6       13.6  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments of the Trust at fair value

  $ 67.9     $   217.0     $   13.6     $   298.5  

Other assets

                            3.2  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments of the Trust

  $ 67.9     $ 217.0     $ 13.6     $ 301.7  
   

 

 

   

 

 

   

 

 

   

 

 

 

 

                                 

December 31, 2010

    Fair Value Measurement Using       Total Assets
at  Fair Value
 

Asset Class

  Level 1     Level 2     Level 3    

Equity investments

                               

Domestic

  $ 3.1     $ 40.9     $     $ 44.0  

International

          45.2             45.2  

Private equity

                1.3       1.3  

Debt securities

                               

Corporate debt (a)

          117.3             117.3  

U.S. treasury bonds

    57.9                   57.9  

U.S. government agencies

          6.8             6.8  

Asset-backed

          6.0             6.0  

Other bonds

          9.0             9.0  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments of the Trust at fair value

  $ 61.0     $ 225.2     $ 1.3     $ 287.5  

Other assets

                            2.6  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments of the Trust

  $   61.0     $   225.2     $   1.3     $   290.1  
   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

Substantially all corporate debt securities are investment grade securities.

 

(b)

Hedge funds generally hold liquid and readily priceable securities, such as public equities, exchange-traded derivatives, and corporate bonds. Hedge funds themselves do not have readily available market quotations, and therefore are valued using the NAV per share provided by the investment sponsor or third party administrator. Funds investing in diverse hedge fund strategies (primarily commingled funds) with the following composition of underlying hedge fund investments within the pension plans at December 31, 2011: commodities/currencies (34%), equity long/short (20%), relative value (17%), multi-strategy (11%), event driven (10%), and global-macro (8%). There are no redemption restrictions, and redemptions can generally be done monthly or quarterly with required notice ranging from one to 45 days.

 

(c)

Diversified investments in royalty rights related to the sale of pharmaceutical and biotechnology products by third parties. Also included are private equity funds with a focus on venture capital and mezzanine financing strategies.

The maturities of debt securities as of December 31, 2011 range from less than one year to approximately 38 years with a weighted-average maturity of 15 years.

The following tables provide summaries of changes in the fair value of the Trust’s Level 3 financial assets (in millions):

 

 

                         
    Royalty
Rights
    Private
Equity
    Total  

Balance, January 1, 2010

  $     $ 2.0     $ 2.0  

Actual return on plan assets:

                       

Relating to assets still held as of the reporting date

          (0.4     (0.4

Relating to assets sold during the period

          0.2       0.2  

Net purchases and sales

          (0.5     (0.5
   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2010

  $     $ 1.3     $ 1.3  

Actual return on plan assets:

                       

Relating to assets still held as of the reporting date

          (0.8     (0.8

Relating to assets sold during the period

          0.9       0.9  

Net purchases and sales

    11.4       0.8       12.2  
   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

  $   11.4     $      2.2     $     13.6  
   

 

 

   

 

 

   

 

 

 

The estimated undiscounted future benefit payments are expected to be $40.4 million in 2012, $39.0 million in 2013, $37.5 million in 2014, $36.0 million in 2015, $34.5 million in 2016 and $147.2 million in 2017 through 2021.

Operating Lease Commitments
Operating Lease Commitments

12. Operating Lease Commitments

The Company leases certain real properties for use as customer service centers and administrative and sales offices. The Company also leases data communications terminals, computers and office equipment. Certain of these leases contain renewal options and escalation provisions. Total rent expense under operating leases, net of sublease income, was $44.2 million, $34.7 million and $34.0 million during the years ended December 31, 2011, 2010 and 2009, respectively.

 

As of December 31, 2011, the minimum aggregate rental commitments under all noncancelable operating leases, net of sublease income commitments aggregating $2.0 million through 2016, were as follows (in millions):

 

 

         

Year Ending December 31,

     

2012

  $ 38.8  

2013

    29.9  

2014

    23.1  

2015

    18.8  

2016

    13.0  

Thereafter

    19.1  
   

 

 

 

Total future minimum lease payments

  $     142.7  
   

 

 

 
Stockholders' Equity
Stockholders Equity

13. Stockholders’ Equity

Accumulated other comprehensive loss

Accumulated other comprehensive loss includes all changes in equity during a period that have yet to be recognized in income, except those resulting from transactions with shareholders. The major components include unrealized gains and losses on investment securities, gains or losses from cash flow hedging activities, foreign currency translation adjustments and pension liability adjustments.

Unrealized gains and losses on investment securities that are available for sale, primarily state and municipal debt securities, are included in “Accumulated other comprehensive loss” until the investment is either sold or deemed other-than-temporarily impaired. See Note 7 for further discussion.

The effective portion of the change in fair value of derivatives that qualify as cash flow hedges are recorded in “Accumulated other comprehensive loss.” Generally, amounts are recognized in income when the related forecasted transaction affects earnings. See Note 14 for further discussion.

The assets and liabilities of foreign subsidiaries whose functional currency is not the United States dollar are translated using the appropriate exchange rate as of the end of the year. Foreign currency translation adjustments represent unrealized gains and losses on assets and liabilities arising from the difference in the foreign country currency compared to the United States dollar. These gains and losses are accumulated in comprehensive income. When a foreign subsidiary is substantially liquidated, the cumulative translation gain or loss is removed from “Accumulated other comprehensive loss” and is recognized as a component of the gain or loss on the sale of the subsidiary.

A pension liability adjustment associated with the defined benefit pension plan is recognized for the difference between estimated assumptions (e.g., asset returns, discount rates, mortality) and actual results. The amount in “Accumulated other comprehensive loss” is amortized to income over the remaining life expectancy of the plan participants. Details of the pension plan’s assets and obligations are explained further in Note 11.

 

The income tax effects allocated to and the cumulative balance of each component of accumulated other comprehensive loss were as follows (in millions):

 

 

                         
    2011     2010     2009  

Beginning balance, January 1

  $ (132.8   $ (127.3   $ (30.0

Unrealized gains/(losses) on investment securities:

                       

Unrealized gains/(losses)

    9.7       (0.5     11.5  

Tax (expense)/benefit

    (3.6     0.1       (4.3

Reclassification of gains into earnings

    (6.9     (4.7     (2.7

Tax expense

    2.6       1.8       1.0  
   

 

 

   

 

 

   

 

 

 

Net unrealized gains/(losses) on investment securities

    1.8       (3.3     5.5  

Unrealized gains/(losses) on hedging activities:

                       

Unrealized gains/(losses)

    (5.2     15.8       (43.6

Tax (expense)/benefit

    5.6       0.7       8.9  

Reclassification of (gains)/losses into earnings

    33.0       (23.0     (32.9

Tax expense/(benefit)

    (6.4     1.6       5.1  
   

 

 

   

 

 

   

 

 

 

Net unrealized gains/(losses) on hedging activities

    27.0       (4.9     (62.5

Foreign currency translation adjustments:

                       

Foreign currency translation adjustments

    (3.7     8.4       (21.6

Tax (expense)/benefit

    1.7       (1.8     7.6  

Reclassification of gains into earnings (a)

                (23.1

Tax expense (a)

                8.1  
   

 

 

   

 

 

   

 

 

 

Net foreign currency translation adjustments

    (2.0     6.6       (29.0

Pension liability adjustments:

                       

Unrealized losses

    (28.4     (13.7     (22.2

Tax benefit

          10.9               5.9               8.7  

Reclassification of losses into earnings

    8.1       6.2       3.6  

Tax benefit

    (3.1     (2.3     (1.4
   

 

 

   

 

 

   

 

 

 

Net pension liability adjustments

    (12.5     (3.9     (11.3
   

 

 

   

 

 

   

 

 

 

Other comprehensive income/(loss)

    14.3       (5.5     (97.3
   

 

 

   

 

 

   

 

 

 

Ending balance, December 31

  $ (118.5   $ (132.8   $ (127.3
   

 

 

   

 

 

   

 

 

 

 

(a)

The year ended December 31, 2009 includes the impact to the foreign currency translation account of the surrender of the Company’s interest in FEXCO Group. See Note 3.

 

As of December 31, the components of accumulated other comprehensive loss, net of tax, were as follows (in millions):

 

 

                         
    2011     2010     2009  

Unrealized gains on investment securities

  $         4.9     $         3.1     $         6.4  

Unrealized gains/(losses) on hedging activities

    5.1       (21.9     (17.0

Foreign currency translation adjustment

    (6.3     (4.3     (10.9

Pension liability adjustment

    (122.2     (109.7     (105.8
   

 

 

   

 

 

   

 

 

 
    $ (118.5   $ (132.8   $ (127.3
   

 

 

   

 

 

   

 

 

 

Cash Dividends Paid

During 2011, the Company’s Board of Directors declared quarterly cash dividends of $0.08 per common share in the second through fourth quarters of 2011 and $0.07 per share in the first quarter representing $194.2 million in total dividends. Of this amount, $49.6 million was paid on both December 30, 2011 and October 7, 2011, $50.3 million was paid on June 30, 2011 and $44.7 million was paid on March 31, 2011. During 2010, the Company’s Board of Directors declared quarterly cash dividends of $0.07 per common share in the fourth quarter and $0.06 per common share in each of the first three quarters representing $165.3 million in total dividends. Of this amount, $45.8 million was paid on December 31, 2010, $39.4 million was paid on October 14, 2010, $39.6 million was paid on June 30, 2010 and $40.5 million was paid on March 31, 2010. During the fourth quarter of 2009, the Company’s Board of Directors declared an annual cash dividend of $0.06 per common share representing $41.2 million in total dividends, paid on December 30, 2009.

On February 7, 2012, the Company’s Board of Directors declared a quarterly cash dividend of $0.10 per share payable on March 30, 2012.

Share Repurchases

During the years ended December 31, 2011, 2010 and 2009, 40.3 million, 35.6 million and 24.8 million shares, respectively, have been repurchased for $800.0 million, $584.5 million and $400.0 million, respectively, excluding commissions, at an average cost of $19.83, $16.44 and $16.10 per share, respectively. As of December 31, 2011, $615.5 million remains available under share repurchase authorizations approved by the Board of Directors through December 31, 2012.

Derivatives
Derivatives

14. Derivatives

The Company is exposed to foreign currency exchange risk resulting from fluctuations in exchange rates, primarily the euro, and to a lesser degree the British pound, Canadian dollar and other currencies, related to forecasted money transfer revenues and on money transfer settlement assets and obligations. The Company is also exposed to risk from derivative contracts written to its customers arising from its cross-currency business-to-business payments operations. Additionally, the Company is exposed to interest rate risk related to changes in market rates both prior to and subsequent to the issuance of debt. The Company uses derivatives to (a) minimize its exposures related to changes in foreign currency exchange rates and interest rates and (b) facilitate cross-currency business-to-business payments by writing derivatives to customers.

 

The Company executes derivatives with established financial institutions, with the substantial majority of these financial institutions having credit ratings of “A–” or better from a major credit rating agency. The Company also executes global business payments derivatives mostly with small and medium size enterprises. The primary credit risk inherent in derivative agreements represents the possibility that a loss may occur from the nonperformance of a counterparty to the agreements. The Company performs a review of the credit risk of these counterparties at the inception of the contract and on an ongoing basis. The Company also monitors the concentration of its contracts with any individual counterparty. The Company anticipates that the counterparties will be able to fully satisfy their obligations under the agreements, but takes action (including termination of contracts) when doubt arises about the counterparties’ ability to perform. The Company’s hedged foreign currency exposures are in liquid currencies; consequently, there is minimal risk that appropriate derivatives to maintain the hedging program would not be available in the future.

Foreign Currency—Consumer-to-Consumer

The Company’s policy is to use longer-term foreign currency forward contracts, with maturities of up to 36 months at inception and a targeted weighted-average maturity of approximately one year, to mitigate some of the risk that changes in foreign currency exchange rates compared to the United States dollar could have on forecasted revenues denominated in other currencies related to its business. As of December 31, 2011, the Company’s longer-term foreign currency forward contracts had maturities of a maximum of 24 months with a weighted-average maturity of approximately one year. These contracts are accounted for as cash flow hedges of forecasted revenue, with effectiveness assessed based on changes in the spot rate of the affected currencies during the period of designation. Accordingly, all changes in the fair value of the hedges not considered effective or portions of the hedge that are excluded from the measure of effectiveness are recognized immediately in “Derivative gains/(losses), net” within the Company’s Consolidated Statements of Income.

The Company also uses short duration foreign currency forward contracts, generally with maturities from a few days up to one month, to offset foreign exchange rate fluctuations on settlement assets and obligations between initiation and settlement. In addition, forward contracts, typically with maturities of less than one year, are utilized to offset foreign exchange rate fluctuations on certain foreign currency denominated cash positions. None of these contracts are designated as accounting hedges.

The aggregate equivalent United States dollar notional amounts of foreign currency forward contracts as of December 31, 2011 were as follows (in millions):

 

 

         

Contracts not designated as hedges:

       

Euro

  $     159.9  

British pound

    48.4  

Other

    142.6  

Contracts designated as hedges:

       

Euro

  $ 500.1  

Canadian dollar

    116.8  

British pound

    106.4  

Other

    117.0  

 

Foreign Currency—Global Business Payments

The Company writes derivatives, primarily foreign currency forward contracts and option contracts, mostly with small and medium size enterprises and derives a currency spread from this activity as part of its global business payments operations. The Company aggregates its global business 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). The derivatives written are part of the broader portfolio of foreign currency positions arising from its cross-currency business-to-business payments operations, which primarily include spot exchanges of currency in addition to forwards and options. Foreign exchange revenues from the total portfolio of positions were $154.6 million, $105.0 million, and $28.8 million for the years ended December 31, 2011, 2010 and 2009, respectively. None of the derivative contracts used in global business payments operations are designated as accounting hedges. The duration of these derivative contracts is generally nine months or less.

The aggregate equivalent United States dollar notional amounts of foreign currency derivative customer contracts held by the Company in its global business payments operations as of December 31, 2011 were approximately $3.3 billion. The significant majority of customer contracts are written in major currencies such as the euro, Canadian dollar, British pound, and Australian dollar.

The Company has forward contracts to offset foreign exchange rate fluctuations on a Canadian dollar denominated intercompany loan. These contracts, which are not designated as accounting hedges, had a notional amount of approximately 240 million and 245 million Canadian dollars as of December 31, 2011 and 2010, respectively.

Interest Rate Hedging—Corporate

The Company utilizes interest rate swaps to effectively change the interest rate payments on a portion of its notes from fixed-rate payments to short-term LIBOR-based variable rate payments in order to manage its overall exposure to interest rates. The Company designates these derivatives as fair value hedges utilizing the short-cut method, which permits an assumption of no ineffectiveness if certain criteria are met. The change in fair value of the interest rate swaps is offset by a change in the carrying value of the debt being hedged within the Company’s “Borrowings” in the Consolidated Balance Sheets and “Interest expense” in the Consolidated Statements of Income has been adjusted to include the effects of interest accrued on the swaps.

The Company, at times, utilizes derivatives to hedge the forecasted issuance of fixed rate debt. These derivatives are designated as cash flow hedges of the variability in the fixed rate coupon of the debt expected to be issued. The effective portion of the change in fair value of the derivatives is recorded in “Accumulated other comprehensive loss.”

As of December 31, 2011 and 2010, the Company held interest rate swaps in an aggregate notional amount of $500.0 million and $1,195.0 million, respectively. The aggregate notional amount held at December 31, 2011 related to notes due in 2014.

 

Balance Sheet

The following table summarizes the fair value of derivatives reported in the Consolidated Balance Sheets as of December 31, 2011 and 2010 (in millions):

 

 

                                                 
    Derivative Assets     Derivative Liabilities  
    Balance  Sheet
Location
    Fair Value     Balance  Sheet
Location
    Fair Value  
      2011     2010       2011     2010  

Derivatives—hedges:

                                               

Interest rate fair value hedges—Corporate

    Other assets     $ 4.4     $ 8.0       Other liabilities     $     $ 1.6  

Foreign currency cash flow hedges—Consumer-to-consumer

    Other assets       37.0       14.7       Other liabilities       6.6       31.1  
           

 

 

   

 

 

           

 

 

   

 

 

 

Total

          $ 41.4     $ 22.7             $ 6.6     $ 32.7  
           

 

 

   

 

 

           

 

 

   

 

 

 

Derivatives—undesignated:

                                               

Foreign currency—Global business payments

    Other assets     $ 79.8     $ 46.9       Other liabilities     $ 67.6     $ 36.2  

Foreign currency—Consumer-to-consumer

    Other assets       3.6       0.2       Other liabilities       12.4       12.0  
           

 

 

   

 

 

           

 

 

   

 

 

 

Total

          $ 83.4     $ 47.1             $ 80.0     $ 48.2  
           

 

 

   

 

 

           

 

 

   

 

 

 

Total derivatives

          $     124.8     $     69.8             $     86.6     $     80.9  
           

 

 

   

 

 

           

 

 

   

 

 

 

The following table summarizes the net fair value of derivatives held as of December 31, 2011 and their expected maturities (in millions):

 

 

                                         
    Total     2012     2013     2014     Thereafter  

Foreign currency undesignated hedges—Consumer-to-consumer

  $ (8.8   $ (4.8   $ (4.0   $     $  

Interest rate fair value hedges—Corporate

    4.4                   4.4        

Foreign currency undesignated hedges—Global business payments

    12.2       12.3       (0.1            

Foreign currency cash flow hedges—Consumer-to-consumer

    30.4       15.4       15.0              
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $     38.2     $     22.9     $     10.9     $     4.4     $     —  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Income Statement

The following tables summarize the location and amount of gains and losses of derivatives in the Consolidated Statements of Income segregated by designated, qualifying hedging instruments and those that are not, for the years ended December 31, 2011, 2010 and 2009 (in millions):

Fair Value Hedges

The following table presents the location and amount of gains/(losses) from fair value hedges for the years ended December 31, 2011, 2010 and 2009 (in millions):

 

 

                                                                     
    Gain/(Loss) Recognized in Income on
Derivatives
          Gain/(Loss) Recognized in Income on
Related Hedged Item (a)
 
     Income Statement
Location
  Amount           Income  Statement
Location
    Amount  

Derivatives

    2011     2010     2009     Hedged Items       2011     2010     2009  

Interest rate contracts

  Interest expense   $ 11.8     $ 13.3     $ 12.9       Fixed-rate debt       Interest expense     $ 12.6     $ 10.5     $ 11.1  
       

 

 

   

 

 

   

 

 

                   

 

 

   

 

 

   

 

 

 

Total gain

      $     11.8     $     13.3     $     12.9                     $     12.6     $     10.5     $     11.1  
       

 

 

   

 

 

   

 

 

                   

 

 

   

 

 

   

 

 

 

Cash Flow Hedges

The following table presents the location and amount of gains/(losses) from cash flow hedges for the years ended December 31, 2011, 2010 and 2009 (in millions):

 

 

                                                                                 
    Amount of Gain/
(Loss)

Recognized in OCI on
Derivatives

(Effective Portion)
      Gain/(Loss) Reclassified from Accumulated  
OCI into Income (Effective Portion)
   

Gain/(Loss) Recognized in Income on
Derivatives (Ineffective Portion and
Amount Excluded from Effectiveness
Testing) (b)

 
      Income  Statement
Location
  Amount    

Income Statement

Location

  Amount  

Derivatives

  2011     2010     2009       2011     2010     2009       2011     2010     2009  

Foreign currency contracts

  $   16.4     $ 20.0     $ (43.6   Revenue   $ (30.3   $ 24.5     $ 34.6    

Derivative gains/(losses), net

  $ (10.2   $ (1.5   $ (1.2

Interest rate contracts (c)

    (21.6     (4.2           —     Interest expense     (2.7     (1.5     (1.7   Interest expense           (0.1      
   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Total gain/(loss)

  $ (5.2   $   15.8     $ (43.6       $   (33.0   $   23.0     $   32.9         $   (10.2   $   (1.6   $   (1.2
   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Undesignated Hedges

The following table presents the location and amount of net gains/(losses) from undesignated hedges for the years ended December 31, 2011, 2010 and 2009 (in millions):

 

 

                             
    Gain/(Loss) Recognized in Income on Derivatives (d)  
     Income Statement Location   Amount