e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
September 30,
2010
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number:
001-32903
THE WESTERN UNION
COMPANY
(Exact name of registrant as
specified in its charter)
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DELAWARE
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20-4531180
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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12500 EAST BELFORD AVENUE
ENGLEWOOD, CO
(Address of Principal Executive
Offices)
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80112
(Zip Code)
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Registrants telephone number, including area code
(866) 405-5012
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of October 29, 2010, 655,867,275 shares of our common
stock were outstanding.
THE
WESTERN UNION COMPANY
INDEX
2
PART I
FINANCIAL
INFORMATION
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Item 1.
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Financial
Statements
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2010
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2009
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2010
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2009
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Revenues:
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Transaction fees
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$
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1,036.1
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$
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1,040.0
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$
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2,997.3
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$
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2,998.4
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Foreign exchange revenues
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263.1
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237.6
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750.5
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659.9
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Commission and other revenues
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30.4
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36.5
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87.9
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111.3
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Total revenues
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1,329.6
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1,314.1
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3,835.7
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3,769.6
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Expenses:
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Cost of services
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752.6
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742.6
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2,194.9
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2,112.0
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Selling, general and administrative
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225.8
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290.0
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662.8
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693.5
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Total expenses
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978.4
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1,032.6
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2,857.7
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2,805.5
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Operating income
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351.2
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281.5
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978.0
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964.1
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Other income/(expense):
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Interest income
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0.5
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1.9
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1.9
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8.4
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Interest expense
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(44.8
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(39.3
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(124.7
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(119.1
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Derivative gains/(losses), net
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1.0
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0.4
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0.8
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(2.4
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Other income/(expense), net
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0.7
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2.0
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0.9
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(3.6
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Total other expense, net
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(42.6
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(35.0
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(121.1
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(116.7
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Income before income taxes
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308.6
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246.5
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856.9
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847.4
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Provision for income taxes
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70.2
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65.5
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189.6
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222.3
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Net income
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$
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238.4
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$
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181.0
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$
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667.3
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$
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625.1
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Earnings per share:
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Basic
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$
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0.36
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$
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0.26
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$
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1.00
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$
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0.89
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Diluted
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$
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0.36
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$
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0.26
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$
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0.99
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$
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0.89
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Weighted-average shares outstanding:
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Basic
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659.1
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698.4
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670.1
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702.0
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Diluted
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661.3
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701.6
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672.4
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703.9
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See Notes to Condensed Consolidated Financial Statements.
3
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September 30,
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December 31,
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2010
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2009
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Assets
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Cash and cash equivalents
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$
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1,996.7
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$
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1,685.2
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Settlement assets
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2,393.4
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2,389.1
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Property and equipment, net of accumulated depreciation of
$369.8 and $335.4, respectively
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195.2
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204.3
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Goodwill
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2,145.3
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2,143.4
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Other intangible assets, net of accumulated amortization of
$426.1 and $355.4, respectively
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462.8
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489.2
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Other assets
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377.0
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442.2
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Total assets
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$
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7,570.4
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$
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7,353.4
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Liabilities and Stockholders Equity
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Liabilities:
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Accounts payable and accrued liabilities
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$
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574.5
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$
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501.2
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Settlement obligations
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2,393.4
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2,389.1
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Income taxes payable
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363.4
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519.0
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Deferred tax liability, net
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255.3
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268.9
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Borrowings
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3,296.5
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3,048.5
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Other liabilities
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249.5
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273.2
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Total liabilities
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7,132.6
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6,999.9
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Commitments and contingencies (Note 7)
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Stockholders equity:
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Preferred stock, $1.00 par value; 10 shares
authorized; no shares issued
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Common stock, $0.01 par value; 2,000 shares
authorized; 656.2 shares and 686.5 shares issued and
outstanding at September 30, 2010 and December 31,
2009, respectively
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6.6
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6.9
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Capital surplus
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87.7
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40.7
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Retained earnings
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465.3
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433.2
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Accumulated other comprehensive loss
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(121.8
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(127.3
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Total stockholders equity
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437.8
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353.5
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Total liabilities and stockholders equity
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$
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7,570.4
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$
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7,353.4
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See Notes to Condensed Consolidated Financial Statements.
4
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Nine Months Ended
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September 30,
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2010
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2009
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Cash flows from operating activities
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Net income
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$
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667.3
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$
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625.1
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Adjustments to reconcile net income to net cash provided by
operating activities:
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Depreciation
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46.0
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41.1
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Amortization
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84.5
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70.4
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Stock compensation expense
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29.2
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24.9
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Other non-cash items, net
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(10.2
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14.1
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Increase/(decrease) in cash, excluding the effects of
acquisitions, resulting from changes in:
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Other assets
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49.4
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(20.8
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Accounts payable and accrued liabilities
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29.9
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88.4
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Income taxes payable (Note 14)
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(153.5
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)
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131.2
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Other liabilities
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(32.7
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(16.4
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Net cash provided by operating activities
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709.9
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958.0
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Cash flows from investing activities
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Capitalization of contract costs
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(27.5
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(18.2
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Capitalization of purchased and developed software
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(23.2
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(8.6
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Purchases of property and equipment
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(37.1
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)
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(40.1
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Acquisition of businesses, net of cash acquired
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(2.3
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(514.9
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Proceeds from receivable for securities sold
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234.9
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Repayments of notes receivable issued to agents
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16.9
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17.4
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Net cash used in investing activities
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(73.2
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(329.5
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Cash flows from financing activities
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Proceeds from exercise of options
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19.0
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12.7
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Cash dividends paid
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(80.1
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)
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Common stock repurchased
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(511.2
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)
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(225.2
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Net repayments of commercial paper
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(82.8
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Net proceeds from issuance of borrowings
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247.1
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496.6
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Principal payments on borrowings
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(500.0
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)
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Net cash used in financing activities
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(325.2
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)
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(298.7
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)
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Net change in cash and cash equivalents
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311.5
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329.8
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Cash and cash equivalents at beginning of period
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1,685.2
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1,295.6
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Cash and cash equivalents at end of period
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$
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1,996.7
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$
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1,625.4
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Supplemental cash flow information:
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Interest paid
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$
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102.3
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$
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104.9
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Income taxes paid (Note 14)
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$
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355.0
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$
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111.3
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Dividends declared but not paid
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$
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39.4
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$
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Non-cash exchange of 5.400% notes due 2011 for
5.253% notes due 2020
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$
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303.7
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$
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See Notes to Condensed Consolidated Financial Statements.
5
THE
WESTERN UNION COMPANY
(Unaudited)
|
|
1.
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Business
and Basis of Presentation
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Business
The Western Union Company (Western Union or the
Company) is a leader in global money transfer 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 Companys services are
available through a network of agent locations in more than 200
countries and territories. Each location in the Companys
agent network is capable of providing one or more of the
Companys services.
The Western Union business consists of the following segments:
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Consumer-to-consumer
money transfer services between consumers, primarily through a
global network of third-party agents using the Companys
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.
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Global business payments the processing of payments
from consumers or businesses to other businesses. The
Companys business payments services allow consumers to
make payments to a variety of organizations including utilities,
auto finance companies, mortgage servicers, financial service
providers, government agencies and other businesses. As
described further in Note 4, in September 2009, the Company
acquired Canada-based Custom House, Ltd. (Custom
House), a provider of international
business-to-business
payment services, which is included in this segment. Custom
House, which has been rebranded Western Union Business
Solutions, facilitates cross-border, cross-currency
payment transactions. While the Company continues to pursue
further international expansion of its offerings in this
segment, the majority of the segments revenue was
generated in the United States during all periods presented.
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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 Companys money
order services business.
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
September 30, 2010, the amount of net assets subject to
these limitations totaled nearly $200 million.
Various aspects of the Companys services and businesses
are subject to United States federal, state and local
regulation, as well as regulation by foreign jurisdictions,
including certain banking and other financial services
regulations.
Basis of
Presentation
The accompanying condensed consolidated financial statements are
unaudited and were prepared in accordance with the instructions
for
Form 10-Q
and Article 10 of
Regulation S-X.
In compliance with those instructions, certain information and
footnote disclosures normally included in annual consolidated
financial statements prepared in accordance with generally
accepted accounting principles in the United States of America
(GAAP) have been condensed or omitted.
The unaudited condensed consolidated financial statements in
this quarterly report are presented on a consolidated basis and
include the accounts of the Company and its majority-owned
subsidiaries. Results of
6
THE
WESTERN UNION COMPANY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
operations and cash flows for the interim periods are not
necessarily indicative of the results that may be expected for
the entire year. All significant intercompany transactions and
accounts have been eliminated.
In the opinion of management, these condensed consolidated
financial statements include all the normal recurring
adjustments necessary to fairly present the Companys
condensed consolidated results of operations, financial position
and cash flows as of September 30, 2010 and for all periods
presented. These condensed consolidated financial statements
should be read in conjunction with the Companys
consolidated financial statements within the Companys
Annual Report on
Form 10-K
for the year ended December 31, 2009.
Consistent with industry practice, the accompanying Condensed
Consolidated Balance Sheets are unclassified due to the
short-term nature of Western Unions settlement obligations
contrasted with the Companys ability to invest cash
awaiting settlement in long-term investment securities.
Use of
Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these
estimates.
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. 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
Companys IT infrastructure; and other expenses related to
the relocation of various operations to new or existing Company
facilities and third-party providers, including hiring,
training, relocation, travel and professional fees. Also
included in the facility closure expenses are non-cash expenses
related to fixed asset and leasehold improvement write-offs and
the acceleration of depreciation. For more information on the
Companys restructuring and related expenses, see
Note 3.
Consolidation
of Variable Interest Entities
On January 1, 2010, the Company adopted new accounting
standards for the consolidation of variable interest entities.
These new accounting standards amend the evaluation criteria to
determine whether an enterprise has a controlling financial
interest in a variable interest entity. This determination
identifies the primary beneficiary of a variable interest entity
as the enterprise that has both the power to direct the
activities of a variable interest entity that most significantly
impacts the entitys economic performance and the ability
to absorb losses or the right to receive benefits of the entity
that could potentially be significant to the variable interest
entity. The new guidance also requires an ongoing reassessment
of the primary beneficiary. Adoption of these new requirements
did not have an impact on the Companys consolidated
financial position, results of operations or cash flows.
|
|
2.
|
Earnings
Per Share and Dividends
|
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
7
THE
WESTERN UNION COMPANY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
For the three months ended September 30, 2010 and 2009,
there were 36.0 million and 30.0 million,
respectively, of outstanding options to purchase shares of
Western Union stock excluded from the diluted earnings per share
calculation as their effect was anti-dilutive. For the nine
months ended September 30, 2010 and 2009, there were
36.1 million and 38.1 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Basic weighted-average shares outstanding
|
|
|
659.1
|
|
|
|
698.4
|
|
|
|
670.1
|
|
|
|
702.0
|
|
Common stock equivalents
|
|
|
2.2
|
|
|
|
3.2
|
|
|
|
2.3
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average shares outstanding
|
|
|
661.3
|
|
|
|
701.6
|
|
|
|
672.4
|
|
|
|
703.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Dividends Paid
During the nine months ended September 30, 2010, the
Companys Board of Directors declared quarterly cash
dividends of $0.06 per common share representing
$119.5 million in total dividends. Of this amount,
$40.5 million was paid on March 31, 2010,
$39.6 million was paid on June 30, 2010 and
$39.4 million was paid on October 14, 2010. During the
nine months ended September 30, 2009, no dividend was
declared or paid.
|
|
3.
|
Restructuring
and Related Expenses
|
On May 25, 2010, the Companys Board of Directors
approved a restructuring plan (the Restructuring
Plan) designed to reduce the Companys overall
headcount by approximately 175 positions and migrate
approximately 550 positions from various facilities, primarily
within the United States and Europe, to regionalized operating
centers. The Company expects to incur approximately
$80 million of expenses, including expenses related to the
Restructuring Plan and the planned departure of an executive
announced in the second quarter of 2010. The $80 million in
expenses consists of approximately $60 million for
severance and employee related benefits, approximately
$10 million for facility closures, including lease
terminations; and approximately $10 million for other
expenses. Included in these estimated expenses are approximately
$2 million of non-cash expenses related to fixed asset and
leasehold improvement write-offs and accelerated depreciation at
impacted facilities. Subject to complying with and undertaking
the necessary individual and collective employee information and
consultation obligations as may be required by local law for
potentially affected employees, the Company expects all of these
activities to be completed by the end of 2011, with the
significant majority of these expenses expected to be incurred
by the end of 2010. The foregoing figures are the Companys
estimates and are subject to change as the proposed
Restructuring Plan continues to be implemented.
8
THE
WESTERN UNION COMPANY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the activity for the
restructuring and related expenses discussed above and the
related restructuring accruals for the nine months ended
September 30, 2010 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
Fixed Asset
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
Write-Offs and
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
|
|
|
Accelerated
|
|
|
Lease
|
|
|
|
|
|
|
|
|
|
Related
|
|
|
Depreciation
|
|
|
Terminations
|
|
|
Other (b)
|
|
|
Total
|
|
|
Balance, December 31, 2009
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Expenses (a)
|
|
|
44.3
|
|
|
|
0.4
|
|
|
|
|
|
|
|
3.8
|
|
|
|
48.5
|
|
Cash payments
|
|
|
(6.1
|
)
|
|
|
|
|
|
|
|
|
|
|
(2.7
|
)
|
|
|
(8.8
|
)
|
Non-cash charges (a)
|
|
|
(0.4
|
)
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2010
|
|
$
|
37.8
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1.1
|
|
|
$
|
38.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative expenses incurred to date
|
|
$
|
44.3
|
|
|
$
|
0.4
|
|
|
$
|
|
|
|
$
|
3.8
|
|
|
$
|
48.5
|
|
Additional expenses expected to be incurred
|
|
|
15.7
|
|
|
|
1.6
|
|
|
|
8.0
|
|
|
|
6.2
|
|
|
|
31.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expected expenses
|
|
$
|
60.0
|
|
|
$
|
2.0
|
|
|
$
|
8.0
|
|
|
$
|
10.0
|
|
|
$
|
80.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Expenses include non-cash write-offs and accelerated
depreciation of fixed assets and leasehold improvements.
However, these amounts were recognized outside of the
restructuring accrual. |
|
(b) |
|
Other expenses related to the relocation of various operations
to new and existing Company facilities include expenses for
hiring, training, relocation, travel and professional fees. All
such expenses will be recorded when incurred. |
Restructuring and related expenses are reflected in the
Condensed Consolidated Statements of Income as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2010
|
|
|
September 30, 2010
|
|
|
Cost of services
|
|
$
|
4.6
|
|
|
$
|
14.0
|
|
Selling, general and administrative
|
|
|
9.4
|
|
|
|
34.5
|
|
|
|
|
|
|
|
|
|
|
Total restructuring and related expenses, pre-tax
|
|
$
|
14.0
|
|
|
$
|
48.5
|
|
|
|
|
|
|
|
|
|
|
Total restructuring and related expenses, net of tax
|
|
$
|
9.5
|
|
|
$
|
31.9
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the restructuring and related
expenses, including expenses recorded to date, along with the
additional expenses expected to be incurred, by reportable
segment (in millions). These expenses have not been allocated to
the Companys segments disclosed in Note 16. While
these items are identifiable to the Companys segments,
these expenses have been excluded from the measurement of
segment operating profit provided to the chief operating
decision maker (CODM) for purposes of assessing
segment performance and decision making with respect to resource
allocation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
|
|
|
|
|
|
|
|
|
|
Consumer-to-
|
|
|
Business
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
Payments
|
|
|
Other
|
|
|
Total
|
|
|
Second quarter 2010
|
|
$
|
26.2
|
|
|
$
|
6.9
|
|
|
$
|
1.4
|
|
|
$
|
34.5
|
|
Third quarter 2010
|
|
|
12.0
|
|
|
|
1.4
|
|
|
|
0.6
|
|
|
|
14.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses incurred to date
|
|
|
38.2
|
|
|
|
8.3
|
|
|
|
2.0
|
|
|
|
48.5
|
|
Additional expenses expected to be incurred
|
|
|
26.7
|
|
|
|
3.8
|
|
|
|
1.0
|
|
|
|
31.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expected expenses
|
|
$
|
64.9
|
|
|
$
|
12.1
|
|
|
$
|
3.0
|
|
|
$
|
80.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
THE
WESTERN UNION COMPANY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Custom
House, Ltd.
On September 1, 2009, the Company acquired Canada-based
Custom House, a provider of international
business-to-business
payment services, for $371.0 million. The acquisition of
Custom House has allowed the Company to enter the international
business-to-business
payments market. Custom House facilitates cross-border,
cross-currency payment transactions. These payment transactions
are conducted through various channels including the telephone
and internet. The significant majority of Custom Houses
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 Companys consolidated financial statements from the
date of acquisition, September 1, 2009.
The Company recorded the assets and liabilities of Custom House
at fair value, excluding the deferred tax liability. The
following table summarizes the final allocation of purchase
price, which differs only slightly from the preliminary
allocation primarily due to an $8.3 million adjustment related
to tax, which resulted in reductions to the deferred tax
liability and goodwill (in millions):
|
|
|
|
|
Assets:
|
|
|
|
|
Cash acquired
|
|
$
|
2.5
|
|
Settlement assets
|
|
|
153.6
|
|
Property and equipment
|
|
|
6.7
|
|
Goodwill
|
|
|
264.3
|
|
Other intangible assets
|
|
|
118.1
|
|
Other assets
|
|
|
77.6
|
|
|
|
|
|
|
Total assets
|
|
$
|
622.8
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
23.3
|
|
Settlement obligations
|
|
|
153.6
|
|
Deferred tax liability, net
|
|
|
23.6
|
|
Other liabilities
|
|
|
51.3
|
|
|
|
|
|
|
Total liabilities
|
|
|
251.8
|
|
|
|
|
|
|
Total consideration, including cash acquired
|
|
$
|
371.0
|
|
|
|
|
|
|
The valuation of assets acquired resulted in $118.1 million
of identifiable intangible assets, $99.8 million of which
were attributable to customer and other contractual
relationships and were valued using an income approach and
$18.3 million of other intangibles, which were valued using
both income and cost approaches. These fair values were derived
using primarily unobservable Level 3 inputs which require
significant management judgment and estimation. For the
remaining assets and liabilities excluding goodwill, fair value
approximated carrying value. The intangible assets related to
customer and other contractual relationships are being amortized
over 10 to 12 years. The remaining intangibles are being
amortized over three to five years. The goodwill recognized of
$264.3 million is attributable to the projected long-term
business growth in current and new markets and an assembled
workforce. All goodwill relates entirely to the global business
payments segment. Goodwill expected to be deductible for United
States income tax purposes is approximately $231.3 million.
10
THE
WESTERN UNION COMPANY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FEXCO
On February 24, 2009, the Company acquired the money
transfer business of European-based FEXCO, one of the
Companys largest agents providing services in a number of
European countries, primarily the United Kingdom, Spain, Sweden
and Ireland. The acquisition of FEXCOs 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
Companys revenue, because the Company was already
recording all of the revenue arising from money transfers
originating at FEXCOs 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 Companys operating
expenses include costs attributable to FEXCOs 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.
|
|
5.
|
Receivable
for Securities Sold
|
On September 15, 2008, Western Union requested redemption
of its shares in 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 Condensed
Consolidated Balance Sheets. At the time the redemption request
was made, the Company was informed by the Reserve Management
Company, the Funds investment advisor (the
Manager), that the Companys redemption trades
would be honored at a $1.00 per share net asset value. In 2009,
the Company received partial distributions totaling
$255.5 million from the Fund. The Company continues to
vigorously pursue collection of the remaining balance. However,
given the uncertainty surrounding the numerous third-party legal
claims associated with the Fund, the Company reserved
$12 million representing the estimated impact of a pro-rata
distribution of the Fund during the second quarter of 2009. As
of September 30, 2010, the Company had a remaining
receivable balance of $30.6 million, net of the related
reserve. The Company anticipates receiving a distribution upon
the resolution of the legal matters surrounding the Fund. If the
Fund incurs significant legal, administrative or other costs
during the distribution process, the Company may record
additional reserves related to the remaining receivable balance,
although such amounts are not expected to be significant.
|
|
6.
|
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 Western
Union measures fair value, refer to the Companys Annual
Report on
Form 10-K
for the year ended December 31, 2009.
11
THE
WESTERN UNION COMPANY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table reflects assets and liabilities that were
measured and carried at fair value on a recurring basis as of
September 30, 2010 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets/
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
Fair Value Measurement Using
|
|
|
at Fair
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Value
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal debt securities
|
|
$
|
|
|
|
$
|
790.1
|
|
|
$
|
|
|
|
$
|
790.1
|
|
State and municipal variable rate demand notes
|
|
|
|
|
|
|
354.4
|
|
|
|
|
|
|
|
354.4
|
|
Corporate debt and other
|
|
|
0.1
|
|
|
|
29.9
|
|
|
|
|
|
|
|
30.0
|
|
Derivatives
|
|
|
|
|
|
|
83.3
|
|
|
|
|
|
|
|
83.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
0.1
|
|
|
$
|
1,257.7
|
|
|
$
|
|
|
|
$
|
1,257.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
|
|
|
$
|
80.3
|
|
|
$
|
|
|
|
$
|
80.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
|
|
|
$
|
80.3
|
|
|
$
|
|
|
|
$
|
80.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No non-recurring fair value adjustments were recorded during the
three and nine months ended September 30, 2010.
Other
Fair Value Measurements
The carrying amounts for Western Union 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
Companys borrowings had a carrying value and fair value of
$3,296.5 million and $3,634.0 million, respectively,
at September 30, 2010 and had a carrying value and fair
value of $3,048.5 million and $3,211.3 million,
respectively, at December 31, 2009 (see Note 13).
|
|
7.
|
Commitments
and Contingencies
|
Letters
of Credit and Bank Guarantees
The Company had approximately $85 million in outstanding
letters of credit and bank guarantees at September 30, 2010
with expiration dates through 2015, the majority of which
contain a one-year renewal option. The letters of credit and
bank guarantees are primarily held in connection with lease
arrangements and certain agent agreements. The Company expects
to renew the letters of credit and bank guarantees prior to
expiration in most circumstances.
Litigation
and Related Contingencies
In the second quarter of 2009, the Antitrust Division of the
United States Department of Justice (DOJ) served one
of the Companys 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 the 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 adversely affect our business,
financial position and results of operations.
12
THE
WESTERN UNION COMPANY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the third quarter of 2009, the Company recorded an
accrual of $71.0 million for an agreement and settlement
with the State of Arizona and other states. On February 11,
2010, the Company signed this agreement and settlement, which
resolved all outstanding legal issues and claims with the State
and requires the Company to fund a multi-state
not-for-profit
organization promoting safety and security along the United
States and Mexico border, in which California, Texas and New
Mexico are participating with Arizona. The accrual includes
amounts for reimbursement to the State of Arizona for its costs
associated with this matter. In addition, as part of the
agreement and settlement, the Company has made and expects to
make certain investments in its compliance programs along the
United States and Mexico border and has engaged a monitor for
those programs, which are expected to cost up to
$23 million over the period from signing to 2013. During
the nine months ended September 30, 2010, cash payments of
$65.0 million were made related to the agreement and
settlement.
In the normal course of business, Western Union 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 Companys financial position, results of
operations and cash flows. The Company accrues for loss
contingencies as they become probable and estimable.
In May 2007, the Company initiated litigation against MoneyGram
Payment Systems, Inc. (MoneyGram) for infringement
of the Companys Money Transfer by Phone patents by
MoneyGrams FormFree service. On September 24, 2009, a
jury found that MoneyGram was liable for patent infringement and
awarded the Company $16.5 million in damages. This case is
on appeal to the United States Court of Appeals for the Federal
Circuit. In accordance with its policies, the Company does not
recognize gain contingencies in earnings until realization and
collectability are assured and, therefore, due to
MoneyGrams challenges to the verdict, the Company has not
recognized any amounts in its condensed consolidated financial
statements through September 30, 2010.
On January 26, 2006, the First Data Corporation
(First Data) Board of Directors announced its
intention to pursue the distribution of all of its money
transfer and consumer payments business and its interest in a
Western Union money transfer agent, as well as its related
assets, including real estate, through a tax-free distribution
to First Data shareholders (the Separation or
Spin-off). The Spin-off resulted in the formation of
the Company and these assets and businesses no longer being part
of First Data. Pursuant to the separation and distribution
agreement with First Data in connection with the Spin-off, First
Data and the Company are each liable for, and agreed to perform,
all liabilities with respect to their respective businesses. In
addition, the separation and distribution agreement also
provides for cross-indemnities principally designed to place
financial responsibility for the obligations and liabilities of
the Companys business with the Company and financial
responsibility for the obligations and liabilities of First
Datas retained businesses with First Data. The Company
also entered into a tax allocation agreement that sets forth the
rights and obligations of First Data and the Company with
respect to taxes imposed on their respective businesses both
prior to and after the Spin-off as well as potential tax
obligations for which the Company may be liable in conjunction
with the Spin-off (see Note 14).
|
|
8.
|
Related
Party Transactions
|
The Company has ownership interests in certain of its agents
accounted for under the equity method of accounting. The Company
pays these agents, as it does its other agents, commissions for
money transfer and other services provided on the Companys
behalf. Commission expense recognized for these agents for the
three months ended September 30, 2010 and 2009 totaled
$46.6 million and $52.2 million, respectively, and
$135.8 million and $151.9 million for the nine months
ended September 30, 2010 and 2009, respectively. Commission
expense recognized for FEXCO prior to February 24, 2009,
the date of the acquisition (see Note 4), was considered a
related party transaction.
In July 2009, the Company appointed a director who is also a
director for a company holding significant investments in two of
the Companys 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
$14.0 million and
13
THE
WESTERN UNION COMPANY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$13.8 million for the three months ended September 30,
2010 and 2009, respectively, and $40.3 million and
$39.4 million for the nine months ended September 30,
2010 and 2009, respectively, related to these agents.
|
|
9.
|
Settlement
Assets and Obligations
|
Settlement assets represent funds received or to be received
from agents for unsettled money transfers, money orders and
consumer payments. Western Union 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 and obligations consisted of the following (in
millions):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Settlement assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
246.4
|
|
|
$
|
161.9
|
|
Receivables from selling agents and
business-to-business
customers
|
|
|
972.5
|
|
|
|
1,004.4
|
|
Investment securities
|
|
|
1,174.5
|
|
|
|
1,222.8
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,393.4
|
|
|
$
|
2,389.1
|
|
|
|
|
|
|
|
|
|
|
Settlement obligations:
|
|
|
|
|
|
|
|
|
Money transfer, money order and payment service payables
|
|
$
|
1,925.2
|
|
|
$
|
1,954.8
|
|
Payables to agents
|
|
|
468.2
|
|
|
|
434.3
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,393.4
|
|
|
$
|
2,389.1
|
|
|
|
|
|
|
|
|
|
|
Investment securities consist primarily of high-quality state
and municipal debt securities. The Company is required to
maintain specific high-quality, investment grade securities and
such investments are restricted to satisfy outstanding
settlement obligations in accordance with applicable state and
foreign country requirements. Western Union does not hold
investment securities for trading purposes. All investment
securities are classified as
available-for-sale
and recorded at fair value. Investment securities are exposed to
market risk due to changes in interest rates and credit risk.
Western Union regularly monitors credit risk and attempts to
mitigate its exposure by making high-quality investments and
through investment diversification. At September 30, 2010,
the majority of the Companys investment securities had
credit ratings of AA- or better from a major credit
rating agency.
Unrealized gains and losses on
available-for-sale
securities are excluded from earnings and presented as a
component of accumulated other comprehensive income or loss, net
of related deferred taxes. Gains and losses on investments are
calculated using the specific-identification method and are
recognized during the period the investment is sold or when an
investment experiences an
other-than-temporary
decline in value.
In the fourth quarter of 2009, the Company received cash from
Integrated Payment Systems Inc. (IPS), a subsidiary
of First Data, in connection with the Company assuming the
responsibility of issuing money orders. The Company invested the
cash received from IPS in investment securities, including
variable rate demand notes. Generally, variable rate demand
notes are used by the Company for short-term liquidity needs and
are held for short periods of time, typically less than
30 days, although they have varying maturity dates through
2049. As a result, the frequency of purchases and proceeds
received by the Company has increased. Proceeds from the sale
and maturity of
available-for-sale
securities during the nine months ended September 30, 2010
and 2009 were $10.8 billion and $4.9 billion,
respectively.
14
THE
WESTERN UNION COMPANY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of investment securities, all of which are
classified as
available-for-sale,
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Unrealized
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Gains/
|
|
September 30, 2010
|
|
Cost
|
|
|
Value
|
|
|
Gains
|
|
|
Losses
|
|
|
(Losses)
|
|
|
State and municipal debt securities (a)
|
|
$
|
776.7
|
|
|
$
|
790.1
|
|
|
$
|
14.6
|
|
|
$
|
(1.2
|
)
|
|
$
|
13.4
|
|
State and municipal variable rate demand notes
|
|
|
354.4
|
|
|
|
354.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt and other
|
|
|
29.2
|
|
|
|
30.0
|
|
|
|
0.8
|
|
|
|
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,160.3
|
|
|
$
|
1,174.5
|
|
|
$
|
15.4
|
|
|
$
|
(1.2
|
)
|
|
$
|
14.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Unrealized
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Gains/
|
|
December 31, 2009
|
|
Cost
|
|
|
Value
|
|
|
Gains
|
|
|
Losses
|
|
|
(Losses)
|
|
|
State and municipal debt securities (a)
|
|
$
|
686.4
|
|
|
$
|
696.4
|
|
|
$
|
10.6
|
|
|
$
|
(0.6
|
)
|
|
$
|
10.0
|
|
State and municipal variable rate demand notes
|
|
|
513.8
|
|
|
|
513.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt and other
|
|
|
12.3
|
|
|
|
12.6
|
|
|
|
0.3
|
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,212.5
|
|
|
$
|
1,222.8
|
|
|
$
|
10.9
|
|
|
$
|
(0.6
|
)
|
|
$
|
10.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The majority of these securities are fixed rate instruments. |
The following summarizes the contractual maturities of
investment securities as of September 30, 2010
(in millions):
|
|
|
|
|
|
|
Fair
|
|
|
|
Value
|
|
|
Due within 1 year
|
|
$
|
113.0
|
|
Due after 1 year through 5 years
|
|
|
628.7
|
|
Due after 5 years through 10 years
|
|
|
87.7
|
|
Due after 10 years
|
|
|
345.1
|
|
|
|
|
|
|
|
|
$
|
1,174.5
|
|
|
|
|
|
|
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
$4.0 million, $18.0 million, $16.0 million and
$316.4 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.
15
THE
WESTERN UNION COMPANY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of other comprehensive income, net of tax, were
as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Net income
|
|
$
|
238.4
|
|
|
$
|
181.0
|
|
|
$
|
667.3
|
|
|
$
|
625.1
|
|
Unrealized gains/losses on investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains
|
|
|
5.6
|
|
|
|
3.1
|
|
|
|
6.3
|
|
|
|
6.1
|
|
Tax expense
|
|
|
(2.2
|
)
|
|
|
(1.2
|
)
|
|
|
(2.4
|
)
|
|
|
(2.3
|
)
|
Reclassification of gains into earnings
|
|
|
(1.3
|
)
|
|
|
(0.9
|
)
|
|
|
(2.4
|
)
|
|
|
(2.6
|
)
|
Tax expense
|
|
|
0.5
|
|
|
|
0.4
|
|
|
|
0.9
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains/(losses) on investment securities
|
|
|
2.6
|
|
|
|
1.4
|
|
|
|
2.4
|
|
|
|
2.2
|
|
Unrealized gains/losses on hedging activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains/(losses)
|
|
|
(69.6
|
)
|
|
|
(32.2
|
)
|
|
|
14.6
|
|
|
|
(52.8
|
)
|
Tax benefit/(expense)
|
|
|
9.6
|
|
|
|
6.0
|
|
|
|
(0.2
|
)
|
|
|
9.8
|
|
Reclassification of gains into earnings
|
|
|
(13.6
|
)
|
|
|
(5.7
|
)
|
|
|
(23.4
|
)
|
|
|
(38.6
|
)
|
Tax expense
|
|
|
1.6
|
|
|
|
0.8
|
|
|
|
2.2
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains/(losses) on hedging activities
|
|
|
(72.0
|
)
|
|
|
(31.1
|
)
|
|
|
(6.8
|
)
|
|
|
(75.8
|
)
|
Foreign currency translation adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(10.8
|
)
|
|
|
4.9
|
|
|
|
8.7
|
|
|
|
(17.4
|
)
|
Tax benefit/(expense)
|
|
|
2.4
|
|
|
|
(1.5
|
)
|
|
|
(1.7
|
)
|
|
|
6.3
|
|
Reclassification of gains into earnings (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23.1
|
)
|
Tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net foreign currency translation adjustments
|
|
|
(8.4
|
)
|
|
|
3.4
|
|
|
|
7.0
|
|
|
|
(26.1
|
)
|
Pension liability adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of losses into earnings
|
|
|
1.5
|
|
|
|
0.9
|
|
|
|
4.6
|
|
|
|
2.7
|
|
Tax benefit
|
|
|
(0.5
|
)
|
|
|
(0.3
|
)
|
|
|
(1.7
|
)
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension liability adjustments
|
|
|
1.0
|
|
|
|
0.6
|
|
|
|
2.9
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income
|
|
$
|
161.6
|
|
|
$
|
155.3
|
|
|
$
|
672.8
|
|
|
$
|
527.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The nine months ended September 30, 2009 includes the
impact to the foreign currency translation account of the
surrender of the Companys interest in FEXCO Group. See
Note 4. |
|
|
11.
|
Employee
Benefit Plans
|
The Company has two frozen defined benefit pension plans for
which it had a recorded unfunded pension obligation of
$101.7 million and $124.2 million as of
September 30, 2010 and December 31, 2009,
respectively, included in Other liabilities in the
Condensed Consolidated Balance Sheets. Through September 2010,
the Company has made contributions totaling approximately
$22 million to the plans, including a discretionary
contribution of $10 million.
16
THE
WESTERN UNION COMPANY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table provides the components of net periodic
benefit cost for the plans (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Interest cost
|
|
$
|
5.1
|
|
|
$
|
5.9
|
|
|
$
|
15.1
|
|
|
$
|
17.7
|
|
Expected return on plan assets
|
|
|
(5.1
|
)
|
|
|
(6.2
|
)
|
|
|
(15.3
|
)
|
|
|
(18.5
|
)
|
Amortization of actuarial loss
|
|
|
1.5
|
|
|
|
0.9
|
|
|
|
4.6
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
1.5
|
|
|
$
|
0.6
|
|
|
$
|
4.4
|
|
|
$
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company is exposed to foreign currency exchange risk
resulting from fluctuations in exchange rates, primarily the
euro, and to a lesser degree the British pound, Canadian dollar
and other currencies, related to forecasted money transfer
revenues and on money transfer settlement assets and
obligations. Subsequent to the acquisition of Custom House, the
Company is also exposed to risk from derivative contracts
written to its customers arising from its cross-currency
business-to-business
payments operations. Additionally, the Company is exposed to
interest rate risk related to changes in market rates both prior
to and subsequent to the issuance of debt. The Company uses
derivatives to (a) minimize its exposures related to
changes in foreign currency exchange rates and interest rates
and (b) facilitate cross-currency
business-to-business
payments by writing derivatives to customers.
The Company executes derivatives related to its
consumer-to-consumer
business with established financial institutions, with the
substantial majority of these financial institutions having
credit ratings of A− or better from a major
credit rating agency. The Company executes global business
payments derivatives, as a result of its acquisition of Custom
House, mostly with small and medium size enterprises. The credit
risk inherent in both the
consumer-to-consumer
and global business payments agreements represents the
possibility that a loss may occur from the nonperformance of a
counterparty to the agreements. The Company performs a review of
the credit risk of these counterparties at the inception of the
contract and on an ongoing basis. The Company also monitors the
concentration of its contracts with any individual counterparty.
The Company anticipates that the counterparties will be able to
fully satisfy their obligations under the agreements, but takes
action (including termination of contracts) when doubt arises
about the counterparties ability to perform. The
Companys 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 Companys policy is to use longer-term foreign currency
forward contracts, with maturities of up to 36 months at
inception and a targeted weighted-average maturity of
approximately one year, to mitigate some of the risk that
changes in foreign currency exchange rates compared to the
United States dollar could have on forecasted revenues
denominated in other currencies related to its business. At
September 30, 2010, the Companys 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 Companys Condensed 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
17
THE
WESTERN UNION COMPANY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
to offset foreign exchange rate fluctuations on certain foreign
currency denominated cash positions. None of these contracts are
designated as accounting hedges.
The aggregate United States dollar notional amounts of foreign
currency forward contracts as of September 30, 2010 were as
follows (in millions):
|
|
|
|
|
Contracts not designated as hedges:
|
|
|
|
|
Euro
|
|
$
|
237.8
|
|
British pound
|
|
|
29.2
|
|
Other
|
|
|
51.8
|
|
Contracts designated as hedges:
|
|
|
|
|
Euro
|
|
$
|
508.3
|
|
Canadian dollar
|
|
|
104.5
|
|
British pound
|
|
|
88.2
|
|
Other
|
|
|
90.6
|
|
Foreign
Currency Global Business Payments
As a result of the acquisition of Custom House, the Company
writes derivatives, primarily foreign currency forward contracts
and, to a much smaller degree, option contracts, mostly with
small and medium size enterprises (customer contracts) and
derives a currency spread from this activity as part of its
global business payments operations. In this capacity, the
Company facilitates cross-currency payment transactions for its
customers but aggregates its Custom House foreign currency
exposures arising from customer contracts, including the
derivative contracts described above, and hedges the resulting
net currency risks by entering into offsetting contracts with
established financial institution counterparties (economic hedge
contracts). The derivatives written are part of the broader
portfolio of foreign currency positions arising from its
cross-currency
business-to-business
payments operation, which includes significant spot exchanges of
currency in addition to forwards and options. None of these
contracts are designated as accounting hedges. The duration of
these derivative contracts is generally nine months or less.
The aggregate United States dollar notional amounts of foreign
currency derivative customer contracts held by the Company as of
September 30, 2010 were approximately $1.4 billion.
The significant majority of customer contracts are written in
major currencies such as the Canadian dollar, euro, Australian
dollar and the British pound.
The Company has a forward contract to offset foreign exchange
rate fluctuations on a Canadian dollar denominated position in
connection with the Companys investment in Custom House.
This contract, which is not designated as an accounting hedge,
had a notional amount of approximately 250 million and
230 million Canadian dollars at September 30, 2010 and
December 31, 2009, respectively.
Interest
Rate Hedging Corporate
The Company utilizes interest rate swaps to effectively change
the interest rate payments on a portion of its notes from
fixed-rate payments to short-term LIBOR-based variable rate
payments in order to manage its overall exposure to interest
rates. The Company designates these derivatives as fair value
hedges utilizing the short-cut method, which permits an
assumption of no ineffectiveness if certain criteria are met.
The change in fair value of the interest rate swaps is offset by
a change in the carrying value of the debt being hedged within
the Companys Borrowings in the Condensed
Consolidated Balance Sheets and Interest expense in
the Condensed 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
18
THE
WESTERN UNION COMPANY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
issued. The effective portion of the change in fair value of the
derivatives is recorded in Accumulated other comprehensive
loss. Such derivatives were used in connection with the
2010 issuances discussed in Note 13.
At both September 30, 2010 and December 31, 2009, the
Company held interest rate swaps in an aggregate notional amount
of $750 million. Of this aggregate notional amount held at
September 30, 2010, $695 million related to notes due
in 2011 and $55 million related to notes due in 2014.
Balance
Sheet
The following table summarizes the fair value of derivatives
reported in the Condensed Consolidated Balance Sheets as of
September 30, 2010 and December 31, 2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets
|
|
|
Derivative Liabilities
|
|
|
|
|
|
Fair Value
|
|
|
|
|
Fair Value
|
|
|
|
Balance Sheet
|
|
September 30,
|
|
|
December 31,
|
|
|
Balance Sheet
|
|
September 30,
|
|
|
December 31,
|
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
Derivatives hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate fair value hedges Corporate
|
|
Other assets
|
|
$
|
16.1
|
|
|
$
|
31.0
|
|
|
Other liabilities
|
|
$
|
|
|
|
$
|
|
|
Foreign currency cash flow hedges
Consumer-to-consumer
|
|
Other assets
|
|
|
14.3
|
|
|
|
15.1
|
|
|
Other liabilities
|
|
|
30.5
|
|
|
|
31.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
30.4
|
|
|
$
|
46.1
|
|
|
|
|
$
|
30.5
|
|
|
$
|
31.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives undesignated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency Global business payments
|
|
Other assets
|
|
$
|
51.3
|
|
|
$
|
58.9
|
|
|
Other liabilities
|
|
$
|
44.7
|
|
|
$
|
48.2
|
|
Foreign currency
Consumer-to-consumer
|
|
Other assets
|
|
|
1.6
|
|
|
|
4.9
|
|
|
Other liabilities
|
|
|
5.1
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
52.9
|
|
|
$
|
63.8
|
|
|
|
|
$
|
49.8
|
|
|
$
|
49.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
$
|
83.3
|
|
|
$
|
109.9
|
|
|
|
|
$
|
80.3
|
|
|
$
|
80.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Statement
The following tables summarize the location and amount of gains
and losses of derivatives in the Condensed Consolidated
Statements of Income segregated by designated, qualifying
hedging instruments and those that are not, for the three and
nine months ended September 30, 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 three months ended
September 30, 2010 and 2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain/(Loss) Recognized in Income on
|
|
|
|
|
Gain/(Loss) Recognized in Income on
|
|
|
|
Derivatives
|
|
|
|
|
Related Hedged Item (b)
|
|
|
|
Income
|
|
Amount
|
|
|
|
|
|
|
Amount
|
|
|
|
Statement
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
Income Statement
|
|
September 30,
|
|
|
September 30,
|
|
Derivatives
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
Hedged Items
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
Interest rate contracts
|
|
Interest expense
|
|
$
|
4.9
|
|
|
$
|
9.0
|
|
|
Fixed-rate debt
|
|
Interest expense
|
|
$
|
0.7
|
|
|
$
|
(3.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gain
|
|
|
|
$
|
4.9
|
|
|
$
|
9.0
|
|
|
|
|
|
|
$
|
0.7
|
|
|
$
|
(3.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
THE
WESTERN UNION COMPANY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents the location and amount of
gains/(losses) from fair value hedges for the nine months ended
September 30, 2010 and 2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain/(Loss) Recognized in Income on
|
|
|
|
|
Gain/(Loss) Recognized in Income on
|
|
|
|
Derivatives
|
|
|
|
|
Related Hedged Item (b)
|
|
|
|
Income
|
|
Amount
|
|
|
|
|
Income
|
|
Amount
|
|
|
|
Statement
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
Statement
|
|
September 30,
|
|
|
September 30,
|
|
Derivatives
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
Hedged Items
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
Interest rate contracts
|
|
Interest expense
|
|
$
|
14.8
|
|
|
$
|
10.0
|
|
|
Fixed-rate debt
|
|
Interest expense
|
|
$
|
3.3
|
|
|
$
|
2.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gain
|
|
|
|
$
|
14.8
|
|
|
$
|
10.0
|
|
|
|
|
|
|
$
|
3.3
|
|
|
$
|
2.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow
Hedges
The following table presents the location and amount of
gains/(losses) from cash flow hedges for the three months ended
September 30, 2010 and 2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain/(Loss) Reclassified from
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain/(Loss)
|
|
|
Accumulated OCI
|
|
|
Gain/(Loss) Recognized in Income on
|
|
|
|
Recognized in OCI on
|
|
|
into Income
|
|
|
Derivatives (Ineffective Portion and Amount
|
|
|
|
Derivatives (Effective
|
|
|
(Effective Portion)
|
|
|
Excluded from Effectiveness Testing) (c)
|
|
|
|
Portion)
|
|
|
Income
|
|
Amount
|
|
|
Income
|
|
Amount
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Statement
|
|
September 30,
|
|
|
September 30,
|
|
|
Statement
|
|
September 30,
|
|
|
September 30,
|
|
Derivatives
|
|
2010
|
|
|
2009
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
Foreign currency contracts
|
|
$
|
(69.6
|
)
|
|
$
|
(32.2
|
)
|
|
Revenue
|
|
$
|
13.9
|
|
|
$
|
6.1
|
|
|
Derivative gains/
(losses), net
|
|
$
|
3.6
|
|
|
$
|
1.0
|
|
Interest rate contracts (d)
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(0.3
|
)
|
|
|
(0.4
|
)
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gain/(loss)
|
|
$
|
(69.6
|
)
|
|
$
|
(32.2
|
)
|
|
|
|
$
|
13.6
|
|
|
$
|
5.7
|
|
|
|
|
$
|
3.6
|
|
|
$
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the location and amount of
gains/(losses) from cash flow hedges for the nine months ended
September 30, 2010 and 2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain/(Loss) Reclassified from
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain/(Loss)
|
|
|
Accumulated OCI
|
|
|
Gain/(Loss) Recognized in Income on
|
|
|
|
Recognized in OCI on
|
|
|
into Income
|
|
|
Derivatives (Ineffective Portion and Amount
|
|
|
|
Derivatives (Effective
|
|
|
(Effective Portion)
|
|
|
Excluded from Effectiveness Testing) (c)
|
|
|
|
Portion)
|
|
|
Income
|
|
Amount
|
|
|
Income
|
|
Amount
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Statement
|
|
September 30,
|
|
|
September 30,
|
|
|
Statement
|
|
September 30,
|
|
|
September 30,
|
|
Derivatives
|
|
2010
|
|
|
2009
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
Foreign currency contracts
|
|
$
|
18.8
|
|
|
$
|
(52.8
|
)
|
|
Revenue
|
|
$
|
24.5
|
|
|
$
|
39.8
|
|
|
Derivative gains/
(losses), net
|
|
$
|
0.6
|
|
|
$
|
(0.7
|
)
|
Interest rate contracts (d)
|
|
|
(4.2
|
)
|
|
|
|
|
|
Interest expense
|
|
|
(1.1
|
)
|
|
|
(1.2
|
)
|
|
Interest expense
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gain/(loss)
|
|
$
|
14.6
|
|
|
$
|
(52.8
|
)
|
|
|
|
$
|
23.4
|
|
|
$
|
38.6
|
|
|
|
|
$
|
0.5
|
|
|
$
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
THE
WESTERN UNION COMPANY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Undesignated
Hedges
The following table presents the location and amount of net
gains/(losses) from undesignated hedges for the three and nine
months ended September 30, 2010 and 2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain/(Loss) Recognized in Income on Derivatives
|
|
|
|
|
|
Amount
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
Derivatives
|
|
Income Statement Location
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Foreign currency contracts (e)
|
|
Foreign exchange revenue
|
|
$
|
6.1
|
|
|
$
|
1.4
|
|
|
$
|
16.2
|
|
|
$
|
1.4
|
|
Foreign currency contracts (a)
|
|
Selling, general and administrative
|
|
|
(36.0
|
)
|
|
|
(23.0
|
)
|
|
|
12.3
|
|
|
|
(9.5
|
)
|
Foreign currency contracts (f)
|
|
Derivative gains/(losses), net
|
|
|
(4.1
|
)
|
|
|
(1.7
|
)
|
|
|
0.9
|
|
|
|
(3.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gain/(loss)
|
|
|
|
$
|
(34.0
|
)
|
|
$
|
(23.3
|
)
|
|
$
|
29.4
|
|
|
$
|
(11.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The Company uses foreign currency forward contracts to offset
foreign exchange rate fluctuations on settlement assets and
obligations as well as certain foreign currency denominated
positions. The (loss)/gain of ($36.0) million and
$12.3 million generated by the undesignated foreign
currency contracts for the three and nine months ended
September 30, 2010, respectively, was offset by a foreign
exchange gain/(loss) on settlement assets and obligations and
cash balances of $34.3 million and ($15.1) million,
respectively. The foreign exchange loss of $23.0 million
and $9.5 million generated by the undesignated foreign
currency contracts for the three and nine months ended
September 30, 2009, respectively, was offset by a foreign
exchange gain on settlement assets and obligations and cash
balances of $20.6 million and $3.0 million,
respectively. |
|
(b) |
|
The net gain/(loss) of $0.7 million and ($3.9) million
in the three months ended September 30, 2010 and 2009,
respectively, was comprised of a loss in value on the debt of
$4.9 million and $9.0 million, respectively, and
amortization of hedge accounting adjustments of
$5.6 million and $5.1 million, respectively. The net
gain of $3.3 million and $2.8 million in the nine
months ended September 30, 2010 and 2009, respectively, was
comprised of a loss in value on the debt of $14.8 million
and $10.0 million, respectively, and amortization of hedge
accounting adjustments of $18.1 million and
$12.8 million, respectively. |
|
(c) |
|
The portion of the change in fair value of a derivative excluded
from the effectiveness assessment for foreign currency forward
contracts designated as cash flow hedges represents the
difference between changes in forward rates and spot rates. |
|
(d) |
|
The Company uses derivatives to hedge the forecasted issuance of
fixed rate debt and records the effective portion of the
derivatives fair value in Accumulated other
comprehensive loss in the Condensed Consolidated Balance
Sheets. These amounts are reclassified to Interest
expense over the life of the related notes. |
|
(e) |
|
The Company uses foreign currency forward and option contracts
as part of its international
business-to-business
payments operation. The derivative contracts are managed as part
of a broader currency portfolio that includes non-derivative
currency exposures. |
|
(f) |
|
The derivative contracts used in the Companys revenue
hedging program are not designated as hedges in the final month
of the contract. |
An accumulated other comprehensive pre-tax loss of
$12.5 million related to the foreign currency forward
contracts is expected to be reclassified into revenue within the
next 12 months as of September 30, 2010. Approximately
$1.6 million of net losses on the forecasted debt issuance
hedges are expected to be recognized in interest expense within
the next 12 months as of September 30, 2010. No
amounts have been reclassified into earnings as a result of the
underlying transaction being considered probable of not
occurring within the specified time period.
21
THE
WESTERN UNION COMPANY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys outstanding borrowings consisted of the
following (in millions):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
Due in greater than one year (a):
|
|
|
|
|
|
|
|
|
5.400% notes (effective rate of 2.8%) due 2011 (b) (c)
|
|
$
|
696.3
|
|
|
$
|
1,000.0
|
|
6.500% notes due 2014 (d)
|
|
|
500.0
|
|
|
|
500.0
|
|
5.930% notes due 2016 (d)
|
|
|
1,000.0
|
|
|
|
1,000.0
|
|
5.253% notes due 2020 (b)
|
|
|
324.9
|
|
|
|
|
|
6.200% notes due 2036 (d)
|
|
|
500.0
|
|
|
|
500.0
|
|
6.200% notes due 2040 (e)
|
|
|
250.0
|
|
|
|
|
|
Other borrowings
|
|
|
5.9
|
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
Total borrowings at par value
|
|
|
3,277.1
|
|
|
|
3,006.0
|
|
Fair value hedge accounting adjustments, net (a)
|
|
|
43.9
|
|
|
|
47.1
|
|
Unamortized discount, net (b)
|
|
|
(24.5
|
)
|
|
|
(4.6
|
)
|
|
|
|
|
|
|
|
|
|
Total borrowings at carrying value (f)
|
|
$
|
3,296.5
|
|
|
$
|
3,048.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The Company utilizes interest rate swaps designated as fair
value hedges to effectively change the interest rate payments on
a portion of its notes from fixed-rate payments to short-term
LIBOR-based variable rate payments in order to manage its
overall exposure to interest rates. The changes in fair value of
these interest rate swaps result in an offsetting hedge
accounting adjustment recorded to the carrying value of the
related note. These hedge accounting adjustments will be
reclassified as reductions to Interest expense over
the life of the related notes, and cause the effective rate of
interest to differ from the notes stated rate. |
|
(b) |
|
On March 30, 2010, the Company exchanged
$303.7 million of aggregate principal amount of the
5.400% notes due 2011 (2011 Notes) for 5.253%
unsecured notes due 2020 (2020 Notes). The 5.7%
effective interest rate of the 2020 Notes differs from the
stated rate as the notes have a par value of
$324.9 million. The $21.2 million difference between
the carrying value and the par value is being accreted over the
life of the 2020 Notes. See below for additional detail relating
to the note exchange. |
|
(c) |
|
The effective interest rate related to the 2011 Notes includes
the impact of the interest rate swaps entered into in
conjunction with the assumption of the money order investments
from IPS. |
|
(d) |
|
The difference between the stated interest rate and the
effective interest rate is not significant. |
|
(e) |
|
On June 21, 2010, the Company issued $250.0 million of
aggregate principal amount of 6.200% unsecured notes due 2040
(the 2040 Notes). In anticipation of this issuance,
the Company entered into interest rate swaps to fix the interest
rate of the debt issuance, and recorded a loss on the swaps of
$7.5 million, which increased the effective rate to 6.3%,
in Accumulated other comprehensive loss, which will
be amortized into interest expense over the life of the 2040
Notes. See below for additional detail relating to the debt
issuance. |
|
(f) |
|
At September 30, 2010, the Companys weighted average
effective rate on total borrowings was approximately 5.3%. |
The aggregate fair value of our long-term debt, based on quotes
from multiple banks, excluding the impact of related interest
rate swaps, was $3,634.0 million and $3,211.3 million
at September 30, 2010 and December 31, 2009,
respectively.
The Companys maturities of borrowings at par value as of
September 30, 2010 are $700 million in November 2011,
$500 million in 2014 and $2.1 billion thereafter.
The Companys obligations with respect to its outstanding
borrowings, as described above, rank equally.
22
THE
WESTERN UNION COMPANY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2040
Notes
On June 21, 2010, the Company issued $250.0 million of
aggregate principal amount of unsecured notes due June 21,
2040. Interest with respect to the 2040 Notes is payable
semiannually on June 21 and December 21 each year based on the
fixed per annum interest rate of 6.200%. The 2040 Notes contain
covenants that, among other things, limit or restrict the
ability of the Company and certain of its subsidiaries to grant
certain types of security interests or enter into sale and
leaseback transactions. The Company may redeem the 2040 Notes at
any time prior to maturity at the greater of par or a price
based on the applicable treasury rate plus 30 basis points.
2020
Notes
On March 30, 2010, the Company exchanged
$303.7 million of aggregate principal amount of the 2011
Notes for unsecured notes due April 1, 2020. Interest with
respect to the 2020 Notes is payable semiannually on April 1 and
October 1 each year based on the fixed per annum interest rate
of 5.253%. In connection with the exchange, note holders were
given a 7% premium ($21.2 million), which approximated
market value at the exchange date, as additional principal. As
this transaction was accounted for as a debt modification, this
premium was not charged to expense. Rather, the premium, along
with the offsetting hedge accounting adjustments, will be
accreted into interest expense over the life of the notes. The
2020 Notes contain covenants that, among other things, limit or
restrict the ability of certain subsidiaries of the Company to
incur certain indebtedness, and limit or restrict the ability of
the Company and certain of its subsidiaries to grant certain
types of security interests or enter into sale and leaseback
transactions. The Company may redeem the 2020 Notes at any time
prior to maturity at the greater of par or a price based on the
applicable treasury rate plus 15 basis points.
The 2020 Notes were originally issued in reliance on exemptions
from the registration requirements of the Securities Act of
1933, as amended (the Securities Act). On
October 8, 2010, the Company exchanged the 2020 Notes for
notes registered under the Securities Act, pursuant to the terms
of the Registration Rights Agreement.
The Companys effective tax rates on pre-tax income for the
three months ended September 30, 2010 and 2009 were 22.7%
and 26.6%, respectively, and 22.1% and 26.2% for the nine months
ended September 30, 2010 and 2009, respectively. During the
three months ended September 30, 2010, the Company
continued to benefit from an increasing proportion of profits
being foreign-derived, and therefore, taxed at lower rates than
its combined federal and state tax rates in the United States.
In addition, during the third quarter of 2010 the Company began
recognizing cumulative and ongoing tax planning benefits from
certain foreign acquisitions.
Uncertain
Tax Positions
The Company has established contingency reserves for material,
known tax exposures, including potential tax audit adjustments
with respect to its international operations, which were
restructured in 2003. The Companys tax reserves reflect
managements 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 Companys 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 Companys tax
position as recorded in the financial statements and the final
resolution of a tax issue during the period.
Unrecognized tax benefits represent the aggregate tax effect of
differences between tax return positions and the amounts
otherwise recognized in the Companys financial statements,
and are reflected in Income taxes payable in the
Condensed Consolidated Balance Sheets. The total amount of
unrecognized tax benefits as of September 30, 2010 and
December 31, 2009 was $559.4 million and
$477.2 million, respectively, excluding interest and
penalties.
23
THE
WESTERN UNION COMPANY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A substantial portion of the Companys unrecognized tax
benefits relate to the 2003 restructuring of the Companys
international operations whereby the Companys income from
certain
foreign-to-foreign
money transfer transactions has been taxed at relatively low
foreign tax rates compared to the Companys combined
federal and state tax rates in the United States. The total
amount of unrecognized tax benefits that, if recognized, would
affect the effective tax rate was $555.4 million and
$468.6 million as of September 30, 2010 and
December 31, 2009, respectively, excluding interest and
penalties.
The Company recognizes interest and penalties with respect to
unrecognized tax benefits in Provision for income
taxes in its Condensed Consolidated Statements of Income,
and records the associated liability in Income taxes
payable in its Condensed Consolidated Balance Sheets. The
Company recognized $1.9 million and $3.9 million in
interest and penalties during the three months ended
September 30, 2010 and 2009, respectively, and
$4.6 million and $10.4 million during the nine months
ended September 30, 2010 and 2009, respectively. The
Company has accrued $50.1 million and $45.5 million
for the payment of interest and penalties at September 30,
2010 and December 31, 2009, respectively.
Subject to the matter referenced in the paragraph below, the
Company has identified no other uncertain tax positions for
which it is reasonably possible that the total amount of
unrecognized tax benefits will significantly increase or
decrease within 12 months, except for recurring accruals on
existing uncertain tax positions. The change in unrecognized tax
benefits during the nine months ended September 30, 2010 is
substantially attributable to such recurring accruals.
The Company and its subsidiaries file tax returns for the United
States, for multiple states and localities, and for various
non-United
States jurisdictions, and the Company has identified the United
States and Ireland as its two major tax jurisdictions. The
United States federal income tax returns of First Data, which
include the Company, are eligible to be examined for the years
2002 through 2006. The Companys United States federal
income tax returns since the Spin-off are also eligible to be
examined. In the second quarter of 2010, the IRS, First Data and
the Company reached a resolution of all outstanding issues
related to First Datas United States federal consolidated
income tax return for 2002 (which included issues related to the
Company). The resolution did not result in a material change to
the Companys financial position. In addition, the IRS
completed its examination of the United States federal
consolidated income tax returns of First Data for 2003 and 2004,
which included the Company, and issued a Notice of Deficiency in
December 2008. The Notice of Deficiency alleges significant
additional taxes, interest and penalties owed with respect to a
variety of adjustments involving the Company and its
subsidiaries, and the Company generally has responsibility for
taxes associated with these potential Company-related
adjustments under the tax allocation agreement with First Data
executed at the time of the Spin-off. The Company agrees with a
number of the adjustments in the Notice of Deficiency; however,
the Company does not agree with the Notice of Deficiency
regarding several substantial adjustments representing total
alleged additional tax and penalties due of approximately
$114 million. As of September 30, 2010, interest on
the alleged amounts due for unagreed adjustments would be
approximately $34 million. A substantial part of the
alleged amounts due for these unagreed adjustments relates to
the Companys international restructuring, which took
effect in the fourth quarter of 2003, and, accordingly, the
alleged amounts due related to such restructuring largely are
attributable to 2004. On March 20, 2009, the Company filed
a petition in the United States Tax Court contesting those
adjustments with which it does not agree. In September 2010, IRS
Counsel referred the case to the IRS Appeals Division for
possible settlement. The Company believes its overall reserves
are adequate, including those associated with the adjustments
alleged in the Notice of Deficiency. If the IRS position
in the Notice of Deficiency is sustained, the Companys tax
provision related to 2003 and later years would materially
increase. An examination of the United States federal
consolidated income tax returns of First Data that cover the
Companys 2005 and pre-spin-off 2006 taxable periods is
ongoing, as is an examination of the Companys United
States federal consolidated income tax returns for the 2006
post-spin-off period, 2007 and 2008. The Irish income tax
returns of certain subsidiaries for the years 2005 and forward
are eligible to be examined by the Irish tax authorities,
although no examinations have commenced.
24
THE
WESTERN UNION COMPANY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In the first quarter of 2010, the Company made a
$250 million refundable tax deposit relating to potential
United States federal tax liabilities, including those arising
from the Companys 2003 international restructuring, which
have been previously accrued in the Companys financial
statements. The deposit was recorded as a reduction to
Income taxes payable in the Condensed Consolidated
Balance Sheets and a decrease in cash flows from operating
activities in the Condensed Consolidated Statement of Cash
Flows. Making the deposit limits the further accrual of interest
charges with respect to such potential tax liabilities, to the
extent of the deposit.
At September 30, 2010, no provision had been made for
United States federal and state income taxes on foreign earnings
of approximately $2.4 billion, which are expected to be
reinvested outside the United States indefinitely. Upon
distribution of those earnings to the United States in the form
of actual or constructive dividends, the Company would be
subject to United States income taxes (subject to an adjustment
for foreign tax credits), state income taxes and possible
withholding taxes payable to various foreign countries.
Determination of this amount of unrecognized deferred United
States tax liability is not practicable because of the
complexities associated with its hypothetical calculation.
Tax
Allocation Agreement with First Data
The Company and First Data each are liable for taxes imposed on
their respective businesses both prior to and after the
Spin-off. If such taxes have not been appropriately apportioned
between First Data and the Company, subsequent adjustments may
occur that may impact the Companys financial position or
results of operations.
Also under the tax allocation agreement, with respect to taxes
and other liabilities that result from a final determination
that is inconsistent with the anticipated tax consequences of
the Spin-off (as set forth in the private letter ruling and
relevant tax opinion) (Spin-off Related Taxes), the
Company will be liable to First Data for any such Spin-off
Related Taxes attributable solely to actions taken by or with
respect to the Company. In addition, the Company will also be
liable for half of any Spin-off Related Taxes (i) that
would not have been imposed but for the existence of both an
action by the Company and an action by First Data or
(ii) where the Company and First Data each take actions
that, standing alone, would have resulted in the imposition of
such Spin-off Related Taxes. The Company may be similarly liable
if it breaches certain representations or covenants set forth in
the tax allocation agreement. If the Company is required to
indemnify First Data for taxes incurred as a result of the
Spin-off being taxable to First Data, it likely would have a
material adverse effect on the Companys business,
financial position and results of operations. First Data
generally will be liable for all Spin-off Related Taxes, other
than those described above.
|
|
15.
|
Stock
Compensation Plans
|
For the three and nine months ended September 30, 2010, the
Company recognized stock-based compensation expense of
$8.6 million and $29.2 million, respectively,
resulting from stock options, restricted stock awards,
restricted stock units and deferred stock units in the Condensed
Consolidated Statements of Income. For the three and nine months
ended September 30, 2009, the Company recognized
stock-based compensation expense of $8.7 million and
$24.9 million, respectively. During the nine months ended
September 30, 2010, the Company granted 4.0 million
options at a weighted-average exercise price of $16.06 and
1.4 million restricted stock units at a weighted-average
grant date fair value of $15.64. During the nine months ended
September 30, 2010, the Company had stock option and
restricted stock cancellations and forfeitures of
3.6 million and 0.6 million, respectively, mainly due
to restructuring activities.
As of September 30, 2010, the Company had 42.0 million
outstanding options at a weighted-average exercise price of
$18.66, and had 35.2 million options exercisable at a
weighted-average exercise price of $19.15. Approximately 36% of
the outstanding options at September 30, 2010 were held by
employees of First Data. The Company had 2.7 million
non-vested restricted stock awards and units at a
weighted-average grant-date fair value of $15.28 as of
September 30, 2010.
25
THE
WESTERN UNION COMPANY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company used the following assumptions for the Black-Scholes
option pricing model to determine the value of Western Union
options granted in the nine months ended September 30, 2010:
|
|
|
|
|
Stock options granted:
|
|
|
|
|
Weighted-average risk-free interest rate
|
|
|
2.7
|
%
|
Weighted-average dividend yield
|
|
|
1.3
|
%
|
Volatility
|
|
|
34.0
|
%
|
Expected term (in years)
|
|
|
5.7
|
|
Weighted-average grant date fair value
|
|
$
|
5.10
|
|
All assumptions used to calculate the fair value of Western
Unions stock options granted during the nine months ended
September 30, 2010 were determined on a consistent basis
with those assumptions disclosed in the Companys Annual
Report on
Form 10-K
for the year ended December 31, 2009.
As previously described in Note 1, the Company classifies
its businesses into two reportable segments:
consumer-to-consumer
and global business payments. Operating segments are defined as
components of an enterprise that engage in business activities,
about which separate financial information is available that is
evaluated regularly by the Companys CODM in deciding where
to allocate resources and in assessing performance.
The
consumer-to-consumer
reporting segment is viewed as one global network where a money
transfer can be sent from one location to another, around the
world. The segment consists of three regions, which primarily
coordinate agent network management and marketing activities.
The CODM makes decisions regarding resource allocation and
monitors performance based on specific corridors within and
across these regions, but also reviews total revenue and
operating profit of each region. These regions frequently
interact on transactions with consumers and share processes,
systems and licenses, thereby constituting one global
consumer-to-consumer
money transfer network. The regions and corridors generally
offer the same services distributed by the same agent network,
have the same types of customers, are subject to similar
regulatory requirements, are processed on the same system and
have similar economic characteristics, allowing the geographic
regions to be aggregated into one reporting segment.
The global business payments segment processes payments from
consumers or businesses to other businesses. The results of the
Companys existing
consumer-to-business
operations as well as the acquired Custom House business have
been combined in this segment as both are focused on
facilitating payments. For further information on Custom House,
see Note 4.
All businesses that have not been classified into
consumer-to-consumer
or global business payments are reported as Other.
These businesses primarily include the Companys money
order services businesses.
During the three and nine months ended September 30, 2010,
the Company incurred expenses of $14.0 million and
$48.5 million, respectively, for restructuring and related
activities, which were not allocated to segments. While these
items were identifiable to the Companys segments, they
were not included in the measurement of segment operating profit
provided to the CODM for purposes of assessing segment
performance and decision making with respect to resource
allocation. For additional information on restructuring and
related activities refer to Note 3.
During the three and nine months ended September 30, 2009,
the Company recorded an accrual of $71.0 million for an
agreement and settlement with the State of Arizona and other
states. The agreement and settlement includes resolution of all
outstanding legal issues and claims with the State and a
multi-state agreement to fund a
not-for-profit
organization promoting safety and security along the United
States and Mexico border. While this item was identifiable to
the Companys
consumer-to-consumer
segment, it was not included in the measurement of segment
operating profit provided to the CODM for purposes of assessing
segment performance and decision making with respect to resource
allocation. For additional information on the settlement
accrual, refer to Note 7.
26
THE
WESTERN UNION COMPANY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents the Companys reportable
segment results for the three and nine months ended
September 30, 2010 and 2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer-to-consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction fees
|
|
$
|
881.1
|
|
|
$
|
875.9
|
|
|
$
|
2,531.1
|
|
|
$
|
2,497.1
|
|
Foreign exchange revenues
|
|
|
235.4
|
|
|
|
229.3
|
|
|
|
667.3
|
|
|
|
650.1
|
|
Other revenues
|
|
|
11.8
|
|
|
|
12.6
|
|
|
|
33.2
|
|
|
|
39.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,128.3
|
|
|
|
1,117.8
|
|
|
|
3,231.6
|
|
|
|
3,187.0
|
|
Global business payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction fees
|
|
|
143.9
|
|
|
|
153.8
|
|
|
|
434.3
|
|
|
|
471.0
|
|
Foreign exchange revenues
|
|
|
27.7
|
|
|
|
8.3
|
|
|
|
83.2
|
|
|
|
9.8
|
|
Other revenues
|
|
|
7.6
|
|
|
|
9.2
|
|
|
|
22.8
|
|
|
|
29.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
179.2
|
|
|
|
171.3
|
|
|
|
540.3
|
|
|
|
509.9
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction fees
|
|
|
11.1
|
|
|
|
10.3
|
|
|
|
31.9
|
|
|
|
30.3
|
|
Commission and other revenues
|
|
|
11.0
|
|
|
|
14.7
|
|
|
|
31.9
|
|
|
|
42.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22.1
|
|
|
|
25.0
|
|
|
|
63.8
|
|
|
|
72.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated revenues
|
|
$
|
1,329.6
|
|
|
$
|
1,314.1
|
|
|
$
|
3,835.7
|
|
|
$
|
3,769.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income/(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer-to-consumer
|
|
$
|
337.4
|
|
|
$
|
308.9
|
|
|
$
|
932.5
|
|
|
$
|
889.2
|
|
Global business payments
|
|
|
27.0
|
|
|
|
41.6
|
|
|
|
98.4
|
|
|
|
136.2
|
|
Other
|
|
|
0.8
|
|
|
|
2.0
|
|
|
|
(4.4
|
)
|
|
|
9.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
|
365.2
|
|
|
|
352.5
|
|
|
|
1,026.5
|
|
|
|
1,035.1
|
|
Restructuring and related expenses (see Note 3)
|
|
|
(14.0
|
)
|
|
|
|
|
|
|
(48.5
|
)
|
|
|
|
|
Agreement and settlement (see Note 7)
|
|
|
|
|
|
|
(71.0
|
)
|
|
|
|
|
|
|
(71.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated operating income
|
|
$
|
351.2
|
|
|
$
|
281.5
|
|
|
$
|
978.0
|
|
|
$
|
964.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
THE
WESTERN UNION COMPANY
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Item 2.
This report on
Form 10-Q
contains certain statements that are forward-looking within the
meaning of the Private Securities Litigation Reform Act of 1995.
These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions that are
difficult to predict. Actual outcomes and results may differ
materially from those expressed in, or implied by, our
forward-looking statements. Words such as expects,
intends, anticipates,
believes, estimates, guides,
provides guidance, provides outlook and
other similar expressions or future or conditional verbs such as
will, should, would and
could are intended to identify such forward-looking
statements. Readers of the
Form 10-Q
of The Western Union Company (the company,
Western Union, we, our or
us) should not rely solely on the forward-looking
statements and should consider all uncertainties and risks
discussed in the Risk Factors section and throughout
the Annual Report on
Form 10-K
for the year ended December 31, 2009. The statements are
only as of the date they are made, and the company undertakes no
obligation to update any forward-looking statement.
Possible events or factors that could cause results or
performance to differ materially from those expressed in our
forward-looking statements include the following: changes in
immigration laws, patterns and other factors related to
migrants; our ability to adapt technology in response to
changing industry and consumer needs or trends; our failure to
develop and introduce new products, services and enhancements,
and gain market acceptance of such products; the failure by us,
our agents or subagents to comply with our business and
technology standards and contract requirements or applicable
laws and regulations, especially laws designed to prevent money
laundering and terrorist financing,
and/or
changing regulatory or enforcement interpretations of those
laws; failure to comply with the settlement agreement with the
State of Arizona; the impact on our business of the Dodd-Frank
Wall Street Reform and Consumer Protection Act and the rules
promulgated there-under; changes in United States or foreign
laws, rules and regulations including the Internal Revenue Code
of 1986, as amended, and governmental or judicial
interpretations thereof; changes in general economic conditions
and economic conditions in the regions and industries in which
we operate; adverse movements and volatility in capital markets
and other events which affect our liquidity, the liquidity of
our agents or clients, or the value of, or our ability to
recover our investments or amounts payable to us; political
conditions and related actions in the United States and abroad
which may adversely affect our businesses and economic
conditions as a whole; interruptions of United States government
relations with countries in which we have or are implementing
material agent contracts; our ability to resolve tax matters
with the Internal Revenue Service and other tax authorities
consistent with our reserves; mergers, acquisitions and
integration of acquired businesses and technologies into our
company, and the realization of anticipated financial benefits
from these acquisitions; changes in, and failure to manage
effectively exposure to, foreign exchange rates, including the
impact of the regulation of foreign exchange spreads on money
transfers and payment transactions; failure to maintain
sufficient amounts or types of regulatory capital to meet the
changing requirements of our regulators worldwide; our ability
to maintain our agent network and business relationships under
terms consistent with or more advantageous to us than those
currently in place; failure to implement agent contracts
according to schedule; deterioration in consumers and
clients confidence in our business, or in money transfer
providers generally; failure to manage credit and fraud risks
presented by our agents, clients and consumers or
non-performance by our banks, lenders, other financial services
providers or insurers; any material breach of security of or
interruptions in any of our systems; adverse rating actions by
credit rating agencies; liabilities and unanticipated
developments resulting from litigation and regulatory
investigations and similar matters, including costs, expenses,
settlements and judgments; failure to compete effectively in the
money transfer industry with respect to global and niche or
corridor money transfer providers, banks and other money
transfer services providers, including telecommunications
providers, card associations, card-based payment providers and
electronic and internet providers; our ability to protect our
brands and our other intellectual property rights; our failure
to manage the potential both for patent protection and patent
liability in the context of a rapidly developing legal framework
for intellectual property protection; cessation of various
services provided to us by third-party vendors; changes in
industry standards affecting our business; changes in accounting
standards, rules and
28
interpretations; our ability to attract and retain qualified
key employees and to manage our workforce successfully;
significantly slower growth or declines in the money transfer
market and other markets in which we operate; adverse
consequences from our spin-off from First Data Corporation
(First Data); decisions to downsize, sell or close
units, or to transition operating activities from one location
to another or to third parties, particularly transitions from
the United States to other countries; decisions to change our
business mix; catastrophic events; and managements ability
to identify and manage these and other risks.
Overview
We are a leading provider of money transfer services, operating
in two business segments:
|
|
|
|
|
Consumer-to-consumer
money transfer services between consumers, primarily through a
global network of third-party agents using our 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. Our
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. We also provide
international
business-to-business
payment services which facilitate cross-border, cross-currency
payment transactions. In September 2009, we acquired
Canada-based Custom House, Ltd. (Custom House), a
provider of international
business-to-business
payment services, which is included in this segment. Custom
House, which has been rebranded Western Union Business
Solutions, facilitates cross-border, cross-currency
payment transactions. While we continue to pursue further
international expansion of our offerings in this segment, the
majority of the segments revenue was generated in the
United States during all periods presented. However, the
international expansion and other key strategic initiatives have
resulted in international revenue continuing to increase in this
segment.
|
Businesses not considered part of the segments described above
are categorized as Other and represented 2% or less
of consolidated revenue for all periods presented.
Significant
Financial and Other Highlights
Significant financial and other highlights for the three and
nine months ended September 30, 2010 included:
|
|
|
|
|
We generated $1,329.6 million and $3,835.7 million,
respectively, in total consolidated revenues compared to
$1,314.1 million and $3,769.6 million, respectively,
for the comparable periods in the prior year, representing an
increase of 1% and 2%, respectively. The acquisition of Custom
House contributed $26.8 million and $80.9 million to
revenue, respectively, and $7.9 million for both the three
and nine months ended September 30, 2009.
|
|
|
|
We incurred $14.0 million and $48.5 million,
respectively, of restructuring and related expenses, as
described within Operating expenses overview, and
estimate we will incur a total of approximately $80 million
of restructuring and related expenses through 2011 related to
the actions announced on May 27, 2010. No restructuring and
related expenses were recognized in the corresponding periods in
2009.
|
|
|
|
We generated $351.2 million and $978.0 million in
consolidated operating income, respectively, compared to
$281.5 million and $964.1 million, respectively, for
the comparable periods in the prior year, representing an
increase of 25% and 1%, respectively. The current year results
include the restructuring and related expenses mentioned above.
The prior year results included an accrual of $71.0 million
resulting from an agreement and settlement which includes the
resolution of all outstanding legal issues and claims with the
State of Arizona and a multi-state agreement to fund a
not-for-profit
organization promoting safety and security along the United
States and Mexico border (the settlement accrual).
|
29
|
|
|
|
|
Our operating income margin was 26% and 25%, respectively,
compared to 21% and 26%, respectively, for the comparable
periods in the prior year. The current year results include the
restructuring and related expenses mentioned above, while the
prior year results included the settlement accrual mentioned
above.
|
|
|
|
Consolidated net income was $238.4 million and
$667.3 million, respectively, representing an increase of
32% and 7%, respectively, over the comparable periods in the
prior year. The current year results include $9.5 million
and $31.9 million, respectively, in restructuring and
related expenses, net of tax. The prior year results included
the settlement accrual of $53.9 million, net of tax, for
both the three and nine months ended September 30, 2009.
|
|
|
|
Our consumers transferred $20 billion and $56 billion
in
consumer-to-consumer
principal, respectively, of which $18 billion and
$51 billion related to cross-border principal, which
represented increases of 5% and 6% in
consumer-to-consumer
principal, respectively, and 4% and 6% in cross-border
principal, respectively, over the comparable periods in the
prior year.
|
|
|
|
Consolidated cash flows provided by operating activities for the
nine months ended September 30, 2010 were
$709.9 million and were impacted by a $250 million
refundable tax deposit we made relating to potential United
States federal tax liabilities, including those arising from our
2003 international restructuring, which have been previously
accrued in our financial statements.
|
|
|
|
We issued $250 million of aggregate principal amount of our
6.200% notes due 2040 (2040 Notes) during the
nine months ended September 30, 2010.
|
|
|
|
We exchanged $303.7 million of aggregate principal amount
of our 5.400% notes due 2011 (2011 Notes) for
$324.9 million aggregate principal amount of 5.253%
(effective rate of 5.7%) notes due 2020 (2020 Notes)
during the nine months ended September 30, 2010.
|
Consolidation
of Variable Interest Entities
On January 1, 2010, we adopted new accounting standards for
the consolidation of variable interest entities. These new
accounting standards amend the evaluation criteria to determine
whether an enterprise has a controlling financial interest in a
variable interest entity. This determination identifies the
primary beneficiary of a variable interest entity as the
enterprise that has both the power to direct the activities of a
variable interest entity that most significantly impacts the
entitys economic performance and the ability to absorb
losses or the right to receive benefits of the entity that could
potentially be significant to the variable interest entity. The
new guidance also requires an ongoing reassessment of the
primary beneficiary. Adoption of these new requirements did not
have an impact on our consolidated financial position, results
of operations or cash flows.
Results
of Operations
The following discussion of our consolidated results of
operations and segment results refers to the three and nine
months ended September 30, 2010 compared to the same
periods in 2009. The results of operations should be read in
conjunction with the discussion of our segment results of
operations, which provide more detailed discussions concerning
certain components of the condensed consolidated statements of
income. All significant intercompany accounts and transactions
have been eliminated.
We incurred expenses of $14.0 million and
$48.5 million for the three and nine months ended
September 30, 2010, respectively, for restructuring and
related activities, which have not been allocated to segments.
No restructuring and related expenses were recognized in the
corresponding periods in 2009. While these items are
identifiable to our segments, they are not included in the
measurement of segment operating profit provided to the chief
operating decision maker (CODM) for purposes of
assessing segment performance and decision making with respect
to resource allocation. For additional information on
restructuring and related activities refer to Operating
expenses overview.
During the three and nine months ended September 30, 2009,
we recorded a $71.0 million settlement accrual, which was
not allocated to the segments. While this item was identifiable
to our
consumer-to-consumer
segment, it was not included in the measurement of segment
operating profit provided to the CODM for purposes of assessing
segment performance and decision making with respect to resource
allocation. For additional information on the settlement
accrual, refer to Selling, general and
administrative expenses.
30
Overview
The following table sets forth our results of operations for the
three and nine months ended September 30, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(in millions, except per share amounts)
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction fees
|
|
$
|
1,036.1
|
|
|
$
|
1,040.0
|
|
|
|
|
%
|
|
$
|
2,997.3
|
|
|
$
|
2,998.4
|
|
|
|
|
%
|
Foreign exchange revenues
|
|
|
263.1
|
|
|
|
237.6
|
|
|
|
11
|
%
|
|
|
750.5
|
|
|
|
659.9
|
|
|
|
14
|
%
|
Commission and other revenues
|
|
|
30.4
|
|
|
|
36.5
|
|
|
|
(17
|
)%
|
|
|
87.9
|
|
|
|
111.3
|
|
|
|
(21
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,329.6
|
|
|
|
1,314.1
|
|
|
|
1
|
%
|
|
|
3,835.7
|
|
|
|
3,769.6
|
|
|
|
2
|
%
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
752.6
|
|
|
|
742.6
|
|
|
|
1
|
%
|
|
|
2,194.9
|
|
|
|
2,112.0
|
|
|
|
4
|
%
|
Selling, general and administrative
|
|
|
225.8
|
|
|
|
290.0
|
|
|
|
(22
|
)%
|
|
|
662.8
|
|
|
|
693.5
|
|
|
|
(4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
978.4
|
|
|
|
1,032.6
|
|
|
|
(5
|
)%
|
|
|
2,857.7
|
|
|
|
2,805.5
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
351.2
|
|
|
|
281.5
|
|
|
|
25
|
%
|
|
|
978.0
|
|
|
|
964.1
|
|
|
|
1
|
%
|
Other income/(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
0.5
|
|
|
|
1.9
|
|
|
|
(74
|
)%
|
|
|
1.9
|
|
|
|
8.4
|
|
|
|
(77
|
)%
|
Interest expense
|
|
|
(44.8
|
)
|
|
|
(39.3
|
)
|
|
|
14
|
%
|
|
|
(124.7
|
)
|
|
|
(119.1
|
)
|
|
|
5
|
%
|
Derivative gains/(losses), net
|
|
|
1.0
|
|
|
|
0.4
|
|
|
|
*
|
|
|
|
0.8
|
|
|
|
(2.4
|
)
|
|
|
*
|
|
Other income/(expense), net
|
|
|
0.7
|
|
|
|
2.0
|
|
|
|
*
|
|
|
|
0.9
|
|
|
|
(3.6
|
)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(42.6
|
)
|
|
|
(35.0
|
)
|
|
|
22
|
%
|
|
|
(121.1
|
)
|
|
|
(116.7
|
)
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
308.6
|
|
|
|
246.5
|
|
|
|
25
|
%
|
|
|
856.9
|
|
|
|
847.4
|
|
|
|
1
|
%
|
Provision for income taxes
|
|
|
70.2
|
|
|
|
65.5
|
|
|
|
7
|
%
|
|
|
189.6
|
|
|
|
222.3
|
|
|
|
(15
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
238.4
|
|
|
$
|
181.0
|
|
|
|
32
|
%
|
|
$
|
667.3
|
|
|
$
|
625.1
|
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.36
|
|
|
$
|
0.26
|
|
|
|
38
|
%
|
|
$
|
1.00
|
|
|
$
|
0.89
|
|
|
|
12
|
%
|
Diluted
|
|
$
|
0.36
|
|
|
$
|
0.26
|
|
|
|
38
|
%
|
|
$
|
0.99
|
|
|
$
|
0.89
|
|
|
|
11
|
%
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
659.1
|
|
|
|
698.4
|
|
|
|
|
|
|
|
670.1
|
|
|
|
702.0
|
|
|
|
|
|
Diluted
|
|
|
661.3
|
|
|
|
701.6
|
|
|
|
|
|
|
|
672.4
|
|
|
|
703.9
|
|
|
|
|
|
|
|
|
* |
|
Calculation not meaningful |
Revenues
Overview
The majority of transaction fees and foreign exchange revenues
were contributed by our
consumer-to-consumer
segment, which is discussed in greater detail in Segment
Discussion.
For the three months ended September 30, 2010 compared to
the corresponding period in the prior year, consolidated revenue
increased 1% due to
consumer-to-consumer
transaction growth and the acquisition of Custom House, which
contributed $26.8 million to revenue in 2010 and
$7.9 million in 2009. Offsetting these factors were price
decreases, primarily related to pricing reductions taken in the
domestic business (transactions between and within the United
States and Canada) commencing in the fourth quarter of 2009, the
strengthening of the United States dollar compared to most
other foreign currencies, which negatively impacted revenue
growth by approximately 2%, declines in our United States bill
payments businesses and geographic and product mix,
31
including a higher percentage of revenue earned from
intra-country activity, which has a lower revenue per
transaction.
For the nine months ended September 30, 2010 compared to
the corresponding period in the prior year, consolidated revenue
increased 2% due to
consumer-to-consumer
transaction growth and the acquisition of Custom House, which
contributed $80.9 million to revenue in 2010 and
$7.9 million in 2009. Offsetting these factors were price
decreases, primarily related to pricing reductions taken in the
domestic business commencing in the fourth quarter of 2009,
declines in our United States bill payments businesses and
geographic mix and product mix, including a higher percentage of
revenue earned from intra-country activity.
The Europe, Middle East, Africa and South Asia
(EMEASA) region of our
consumer-to-consumer
segment represented 44% of our total consolidated revenue for
both the three and nine months ended September 30, 2010,
respectively. For the three months ended September 30, 2010
compared to the corresponding period in the prior year, EMEASA
experienced a revenue decline despite transaction growth.
Transaction growth was offset by the strengthening of the United
States dollar in the region compared to most other foreign
currencies, which negatively impacted revenue, and many of the
same factors described above. For the nine months ended
September 30, 2010 compared to the corresponding period in
the prior year, EMEASA revenue grew due to transaction growth,
which was offset by many of the same factors described above.
The Americas region (including North America, Latin America, the
Caribbean and South America) of our
consumer-to-consumer
segment represented 32% of our total consolidated revenue for
both the three and nine months ended September 30, 2010.
For the three months ended September 30, 2010, the Americas
revenue increased due to strong transaction growth, although the
increase was mostly offset by the impact of pricing actions
taken in our domestic business commencing in the fourth quarter
of 2009. For the nine months ended September 30, 2010,
revenue was flat despite transaction growth due to the pricing
actions previously described.
The global business payments segment, which is discussed in
greater detail in Segment Discussion, experienced
revenue growth during the three and nine months ended
September 30, 2010 compared to the corresponding period in
the prior year due to our acquisition of Custom House, which was
mostly offset by continued declines in our United States bill
payments businesses.
Foreign exchange revenues increased for the three and nine
months ended September 30, 2010 over the corresponding
previous periods due to foreign exchange revenues contributed
from our acquisition of Custom House. In addition to the impact
of Custom House, foreign exchange revenues in the
consumer-to-consumer
segment also grew, driven primarily by revenue from the
international business outside of the United States.
Fluctuations in the exchange rate between the United States
dollar and currencies other than the United States dollar have
resulted in a reduction of transaction fees and foreign exchange
revenues for the three and nine months ended September 30,
2010 of $22.2 million and $18.3 million, respectively,
over the same period in the previous year, net of foreign
currency hedges, that would not have occurred had there been
constant currency rates. The weakening of the United States
dollar in the first quarter of 2010 resulted in a benefit to
revenue, resulting in the smaller net reduction for the nine
months ended September 30, 2010. The largest impact was
related to the EMEASA region.
Operating
Expenses Overview
Restructuring
and related expenses
On May 25, 2010, our Board of Directors approved a
restructuring plan (the Restructuring Plan) designed
to reduce our overall headcount and migrate positions from
various facilities, primarily within the United States and
Europe, to regionalized operating centers upon completion of the
Restructuring Plan. In conjunction with this decision, we expect
to incur approximately $80 million, including expenses
related to the Restructuring Plan and the planned departure of
an executive announced in the second quarter of 2010. The
$80 million in expenses consists of approximately
$60 million for severance and employee related benefits,
approximately $10 million for facility closures, including
lease terminations; and approximately $10 million for other
expenses. Included in these estimated expenses are approximately
$2 million of non-cash expenses related to fixed asset and
leasehold improvement write-offs and accelerated depreciation at
impacted facilities. Subject to complying with and
32
undertaking the necessary individual and collective employee
information and consultation obligations as may be required by
local law for potentially affected employees, we expect all of
these activities to be completed by the end of 2011, with the
significant majority of these expenses expected to be incurred
by the end of 2010. We expect the total Restructuring Plan
expenses of approximately $80 million to generate expense
savings of approximately $10 million in 2010, approximately
$30 million to $40 million in 2011, and approximately
$50 million per year beginning in 2012, following
completion of the Restructuring Plan.
For the three and nine months ended September 30, 2010,
restructuring and related expenses of $4.6 million and
$14.0 million, respectively, are classified within
cost of services and $9.4 million and
$34.5 million, respectively, are classified within
selling, general and administrative in the condensed
consolidated statements of income. No restructuring and related
expenses were recognized in the corresponding periods in 2009.
Cost of
services
Cost of services primarily consists of agent commissions, which
represent approximately 70% of total cost of services for both
the three and nine months ended September 30, 2010. Also
included in costs of services are 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. Cost of
services increased for the three and nine months ended
September 30, 2010 compared to the corresponding periods in
the prior year primarily due to incremental costs, including
those related to Custom House and our money order business and
restructuring and related expenses of $4.6 million and
$14.0 million, respectively, as described above, offset by
decreased bad debt expense and operating efficiencies. Cost of
services as a percentage of revenue was 57% for both the three
and nine months ended September 30, 2010, and 57% and 56% for
the three and nine months ended September 30, 2009,
respectively. For the three months ended September 30, 2010
compared to the corresponding period in 2009, costs of services
as a percentage of revenue were flat, as decreased bad debt
expense and operating efficiencies were offset by incremental
operating costs, including costs associated with our money order
business, and restructuring and related expenses. The increase
in cost of services for the nine months ended September 30,
2010 compared to the corresponding period in 2009 was primarily
due to incremental operating costs, including costs associated
with our money order business, and restructuring and related
expenses, which were partially offset by decreased bad debt
expense and operating efficiencies.
Selling,
general and administrative
Selling, general and administrative expenses
(SG&A) decreased for the three and nine months
ended September 30, 2010 compared to the same period in the
prior year due to the settlement accrual that was recorded in
the third quarter of 2009, as described below, lower marketing
expenses and operating efficiencies, offset by incremental costs
associated with Custom House, restructuring and related expenses
of $9.4 million and $34.5 million, respectively, and
higher employee compensation costs.
During the third quarter of 2009, we recorded an accrual of
$71.0 million for an agreement and settlement with the
State of Arizona and other states. On February 11, 2010, we
signed this agreement and settlement, which resolved all
outstanding legal issues and claims with the State and requires
us to fund a multi-state
not-for-profit
organization promoting safety and security along the United
States and Mexico border, in which California, Texas and New
Mexico are participating with Arizona. The accrual includes
amounts for reimbursement to the State of Arizona for its costs
associated with this matter. In addition, as part of the
agreement and settlement, we have made and expect to make
certain investments in our compliance programs along the United
States and Mexico border and have engaged a monitor for those
programs, which are expected to cost up to $23 million over
the period from signing to 2013.
During the three and nine months ended September 30, 2010,
marketing related expenditures, principally classified within
SG&A, were slightly below 4% of revenue. Marketing related
expenditures were slightly below 5% of revenue for both the
three and nine months ended September 30, 2009. Marketing
related expenditures include advertising, events, loyalty
programs and the cost of employees dedicated to marketing
activities. When making decisions with respect to marketing
investments, we review opportunities for advertising and other
marketing related expenditures together with opportunities for
fee adjustments, as discussed in Segment
33
Discussion, for
consumer-to-consumer
revenues and other initiatives in order to best maximize the
return on these investments.
Total
other expense, net
Total other expense, net increased during the three months ended
September 30, 2010 compared to the corresponding period in
2009 primarily due to an increase in interest expense resulting
from our June 21, 2010 issuance of $250.0 million of
aggregate principal amount of unsecured notes. Total other
expense, net increased during the nine months ended
September 30, 2010 compared to the corresponding period in
2009 primarily due to an increase in interest expense resulting
from our note issuance and financing costs incurred in
connection with our note exchange in the first quarter of 2010
and a decrease in interest income due to lower short-term
interest rates and the repayment of a note receivable due from
an agent. The prior year nine month period was also impacted by
a $12 million reserve taken against our receivable from the
Reserve International Liquidity Fund during the second quarter
of 2009, which did not recur in the current year.
Income
taxes
Our effective tax rates on pre-tax income were 22.7% and 26.6%
for the three months ended September 30, 2010 and 2009,
respectively, and 22.1% and 26.2% for the nine months ended
September 30, 2010 and 2009, respectively. During the three
months ended September 30, 2010, we continued to benefit
from an increasing proportion of profits being foreign-derived,
and therefore, taxed at lower rates than our combined federal
and state tax rates in the United States. In addition, during
the third quarter of 2010 we began recognizing cumulative and
ongoing tax planning benefits from certain foreign acquisitions.
On August 10, 2010, the United States enacted the Education
Jobs and Medicaid Assistance Act, which included a number of
international tax law changes. We do not expect the new law to
have a material impact on our effective tax rate as a result of
the mitigating effects of actions we have implemented, and
expect to implement prior to year end, including accelerating
planned repatriations. Other proposed changes to United States
tax laws, if enacted, could potentially adversely affect our
future effective tax rate. We are closely monitoring the
proposed changes, and the potential effect on our future
effective tax rate will depend on the final form of any new laws.
We have established contingency reserves for material, known tax
exposures, including potential tax audit adjustments with
respect to our international operations restructured in 2003,
whereby our income from certain
foreign-to-foreign
money transfer transactions has been taxed at relatively low
foreign tax rates compared to our combined federal and state tax
rates in the United States. As of September 30, 2010, the
total amount of unrecognized tax benefits was
$609.5 million, including accrued interest and penalties.
Our reserves reflect our judgment as to the resolution of the
issues involved if subject to judicial review. While we believe
that our 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 our related reserve. With respect to
these reserves, our income tax expense would include
(i) any changes in tax reserves arising from material
changes during the period in facts and circumstances (i.e. new
information) surrounding a tax issue and (ii) any
difference from our 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 our consolidated financial statements in
future periods and could impact our operating cash flows.
The IRS completed its examination of the United States federal
consolidated income tax returns of First Data for 2003 and 2004,
of which we are a part, and issued a Notice of Deficiency in
December 2008. The Notice of Deficiency alleges significant
additional taxes, interest and penalties owed with respect to a
variety of adjustments involving us and our subsidiaries, and we
generally have responsibility for taxes associated with these
potential Western Union-related adjustments under the tax
allocation agreement with First Data executed at the time of the
spin-off. We agree with a number of the adjustments in the
Notice of Deficiency; however, we do not agree with the Notice
of Deficiency regarding several substantial adjustments
representing total alleged additional tax and penalties due of
approximately $114 million. As of September 30, 2010,
interest on the alleged amounts due for unagreed adjustments
would be approximately $34 million. A substantial part of
the alleged amounts due for these unagreed adjustments relates
to our international restructuring, which took effect in the
fourth quarter 2003, and,
34
accordingly, the alleged amounts due related to such
restructuring largely are attributable to 2004. On
March 20, 2009, we filed a petition in the United States
Tax Court contesting those adjustments with which we do not
agree. In September 2010, IRS Counsel referred the case to the
IRS Appeals Division for possible settlement. We believe our
overall reserves are adequate, including those associated with
adjustments alleged in the Notice of Deficiency. If the
IRS position in the Notice of Deficiency is sustained, our
tax provision related to 2003 and later years would materially
increase, which could materially impact our financial position,
results of operations and cash flows.
In 2010, we made a $250 million refundable tax deposit
relating to potential United States federal tax liabilities,
including those arising from our 2003 international
restructuring, which have been previously accrued in our
financial statements. Making the deposit limits the further
accrual of interest charges with respect to such potential tax
liabilities, to the extent of the deposit.
Earnings
per share
During the three months ended September 30, 2010 and 2009,
basic and diluted earnings per share were $0.36 and $0.26,
respectively. During the nine months ended September 30,
2010 and 2009, basic earnings per share were $1.00 and $0.89,
respectively, and diluted earnings per share were $0.99 and
$0.89, respectively. 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. For the three months
ended September 30, 2010 and 2009, there were
36.0 million and 30.0 million, respectively, of
outstanding options to purchase shares of Western Union stock
excluded from the diluted earnings per share calculation under
the treasury stock method as their effect was anti-dilutive. For
the nine months ended September 30, 2010 and 2009, there
were 36.1 million and 38.1 million, respectively, of
outstanding options to purchase shares of Western Union stock
excluded from the diluted earnings per share calculation under
the treasury stock method as their effect was anti-dilutive.
Earnings per share increased for the three and nine months ended
September 30, 2010, respectively, compared to the same
periods in the prior year as a result of the previously
described factors impacting net income and lower
weighted-average shares outstanding. The lower number of shares
outstanding was due to stock repurchases exceeding stock option
exercises from January 1, 2009 through September 30,
2010.
Segment
Discussion
We manage our business around the consumers and businesses we
serve and the types of services we offer. Each of our two
segments addresses a different combination of consumer groups,
distribution networks and services offered. Our segments are
consumer-to-consumer
and global business payments. Businesses not considered part of
these segments are categorized as Other.
We incurred expenses of $14.0 million and
$48.5 million for restructuring and related activities
during the three and nine months ended September 30, 2010,
respectively, which were not allocated to segments. No
restructuring and related expenses were recognized in the
corresponding periods in 2009. While these items were
identifiable to our segments, they were not included in the
measurement of segment operating profit provided to the CODM for
purposes of assessing segment performance and decision making
with respect to resource allocation. For additional information
on restructuring and related activities refer to Operating
expenses overview.
During the three and nine months ended September 30, 2009,
we recorded an accrual of $71.0 million resulting from the
multi-state agreement and settlement, which was not allocated to
the segments. While this item was identifiable to our
consumer-to-consumer
segment, it was not included in the measurement of segment
operating profit provided to the CODM for purposes of assessing
segment performance and decision making with respect to resource
allocation. For additional information on the settlement
accrual, refer to Selling, general and
administrative expenses.
35
The following table sets forth the components of segment
revenues as a percentage of the consolidated totals for the
three and nine months ended September 30, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Consumer-to-consumer(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEASA
|
|
|
44
|
%
|
|
|
46
|
%
|
|
|
44
|
%
|
|
|
45
|
%
|
Americas
|
|
|
32
|
%
|
|
|
31
|
%
|
|
|
32
|
%
|
|
|
32
|
%
|
APAC
|
|
|
9
|
%
|
|
|
8
|
%
|
|
|
8
|
%
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consumer-to-consumer
|
|
|
85
|
%
|
|
|
85
|
%
|
|
|
84
|
%
|
|
|
85
|
%
|
Global business payments
|
|
|
13
|
%
|
|
|
13
|
%
|
|
|
14
|
%
|
|
|
13
|
%
|
Other
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The geographic split is determined based upon the region where
the money transfer is initiated and the region where the money
transfer is paid. For transactions originated and paid in
different regions, we split the revenue between the two regions,
with each region receiving 50%. For money transfers initiated
and paid in the same region, 100% of the revenue is attributed
to that region. |
Consumer-to-Consumer
Segment
The following table sets forth our
consumer-to-consumer
segment results of operations for the three and nine months
ended September 30, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(dollars and transactions in millions)
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction fees
|
|
$
|
881.1
|
|
|
$
|
875.9
|
|
|
|
1
|
%
|
|
$
|
2,531.1
|
|
|
$
|
2,497.1
|
|
|
|
1
|
%
|
Foreign exchange revenues
|
|
|
235.4
|
|
|
|
229.3
|
|
|
|
3
|
%
|
|
|
667.3
|
|
|
|
650.1
|
|
|
|
3
|
%
|
Other revenues
|
|
|
11.8
|
|
|
|
12.6
|
|
|
|
(6
|
)%
|
|
|
33.2
|
|
|
|
39.8
|
|
|
|
(17
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
1,128.3
|
|
|
$
|
1,117.8
|
|
|
|
1
|
%
|
|
$
|
3,231.6
|
|
|
$
|
3,187.0
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
337.4
|
|
|
$
|
308.9
|
|
|
|
9
|
%
|
|
$
|
932.5
|
|
|
$
|
889.2
|
|
|
|
5
|
%
|
Operating income margin
|
|
|
30
|
%
|
|
|
28
|
%
|
|
|
|
|
|
|
29
|
%
|
|
|
28
|
%
|
|
|
|
|
Key indicator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer-to-consumer
transactions
|
|
|
54.9
|
|
|
|
50.1
|
|
|
|
10
|
%
|
|
|
157.6
|
|
|
|
144.7
|
|
|
|
9
|
%
|
The table below sets forth transaction and revenue
growth/(decline) rates by region for the three and nine months
ended September 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30, 2010
|
|
September 30, 2010
|
|
Consumer-to-consumer
transaction growth (a)
|
|
|
|
|
|
|
|
|
EMEASA
|
|
|
5
|
%
|
|
|
5
|
%
|
Americas
|
|
|
13
|
%
|
|
|
11
|
%
|
APAC
|
|
|
15
|
%
|
|
|
15
|
%
|
Consumer-to-consumer
revenue growth/(decline) (a)
|
|
|
|
|
|
|
|
|
EMEASA
|
|
|
(2
|
)%
|
|
|
1
|
%
|
Americas
|
|
|
2
|
%
|
|
|
|
%
|
APAC
|
|
|
12
|
%
|
|
|
12
|
%
|
|
|
|
(a) |
|
In determining the revenue and transaction growth rates under
the regional view in the above table, the geographic split is
determined based upon the region where the money transfer is
initiated and the region where |
36
|
|
|
|
|
the money transfer is paid. For transactions originated and paid
in different regions, we split the transaction count and revenue
between the two regions, with each region receiving 50%. For
money transfers initiated and paid in the same region, 100% of
the revenue and transactions are attributed to that region. |
When referring to revenue and transaction growth rates for
individual countries in the following discussion, all
transactions to, from and within those countries, and 100% of
the revenue associated with each transaction to, from and within
those countries are included. The countries of India and China
combined represented approximately 7% of consolidated Western
Union revenues during both the three and nine months ended
September 30, 2010 and 2009. No individual country, other
than the United States, represented more than approximately 6%
of our consolidated revenues during both of the three and nine
month periods ended September 30, 2010 and 2009.
Transaction
fees and foreign exchange revenues
For the three months ended September 30, 2010 compared to
the corresponding period in the prior year,
consumer-to-consumer
money transfer revenue grew 1% on transaction growth of 10%.
Transaction growth was offset by price decreases, primarily
related to pricing reductions taken in the domestic business in
the fourth quarter of 2009, the strengthening of the United
States dollar compared to most other foreign currencies, which
negatively impacted revenue growth by approximately 2%, and
geographic mix and product mix, including a higher percentage of
revenue earned from intra-country activity, which has a lower
revenue per transaction.
For the nine months ended September 30, 2010 compared to
the corresponding period in the prior year,
consumer-to-consumer
money transfer revenue grew 1% primarily due to transaction
growth of 9%. Transaction growth was offset by price decreases,
primarily related to pricing reductions taken in the domestic
business in the fourth quarter of 2009 and geographic mix and
product mix, including a higher percentage of revenue earned
from intra-country activity. Our international
consumer-to-consumer
business experienced revenue growth of 2% and 3%, respectively,
on transaction growth of 7% and 8% for the three and nine months
ended September 30, 2010, respectively. Our international
business represents all transactions other than transactions
between and within the United States and Canada and transactions
to and from Mexico. Our international
consumer-to-consumer
business outside of the United States also experienced revenue
growth on transaction increases for the three and nine months
ended September 30, 2010.
Revenue in our EMEASA region decreased 2% during the three
months ended September 30, 2010 compared to the
corresponding period in the prior year despite transaction
growth of 5%. Transaction growth was offset by the strengthening
of the United States dollar compared to most other foreign
currencies in the region and many of the same factors described
above. For the nine months ended September 30, 2010
compared to the corresponding period in the prior year, EMEASA
revenue increased 1% on transaction growth of 5%, which was
offset by many of the same factors described above.
During the three and nine months ended September 30, 2010,
revenue and transactions in the Gulf States declined compared to
the same periods in 2009. The rate of growth in our money
transfer business to India has continued to slow with revenue
and transaction growth of 2% for the three months ended
September 30, 2010, and revenue growth of 4% and
transaction growth of 3% for the nine months ended
September 30, 2010 versus the same periods in 2009, due
primarily to fewer send transactions from the Gulf States.
Americas revenue increased 2% due to transaction growth of 13%
for the three months ended September 30, 2010 compared to
the same period in 2009, but transaction growth was offset by
pricing actions taken in the domestic business commencing in the
fourth quarter of 2009. For the nine months ended
September 30, 2010 compared to the same period in 2009,
revenue remained flat despite transaction growth of 11%, also
due to the pricing actions taken in the fourth quarter of 2009.
Our domestic business experienced revenue declines of 6% and 10%
on transaction growth of 35% and 27% for the three and nine
months ended September 30, 2010, respectively, due to the
same factors. Our United States outbound business experienced
both transaction and revenue growth in the three and nine months
ended September 30, 2010. Our Mexico business negatively
impacted revenue growth in
37
the Americas region during the three and nine months ended
September 30, 2010 with revenue declines of 1% for both
periods and transaction growth of 2% and 1%, respectively.
APAC revenue increased 12% for both the three and nine months
ended September 30, 2010 compared to the same periods in
2009 due to transaction growth of 15% in both periods.
Chinas revenue increased 6% and 12% on transaction growth
of 6% and 7% for the three and nine months ended
September 30, 2010, respectively.
Foreign exchange revenues for the three and nine months ended
September 30, 2010 grew compared to the same periods in
2009, primarily driven by revenue from our international
consumer-to-consumer
business outside of the United States.
Fluctuations in the exchange rate between the United States
dollar and currencies other than the United States dollar have
resulted in a reduction to transaction fees and foreign exchange
revenues for the three and nine months ended September 30,
2010 of $21.2 million and $14.3 million, respectively,
over the same period in the previous year, net of foreign
currency hedges, that would not have occurred had there been
constant currency rates. The overall weakening of the United
States dollar in the first quarter of 2010 resulted in a benefit
to revenue, resulting in the smaller net reduction for the nine
months ended September 30, 2010. The largest impact was
related to the EMEASA region.
We have historically implemented and will likely implement
future strategic fee reductions and actions to reduce foreign
exchange spreads, where appropriate, taking into account a
variety of factors. Fee decreases and foreign exchange actions
generally reduce margins, but are done in anticipation that they
will result in increased transaction volumes and increased
revenues over time. We anticipate that fee decreases and foreign
exchange actions will be approximately 4% of total Western Union
revenue for the full year 2010 compared to approximately 2% for
the full year 2009. For the full year 2010, approximately
two-thirds of these actions relate to pricing reductions taken
in the domestic business.
The majority of transaction growth is derived from more mature
agent locations; new agent locations typically contribute only
marginally to growth in the first few years of their operation.
Increased productivity, measured by transactions per location,
is often experienced as locations mature. We believe that new
agent locations will help our growth by increasing the number of
locations available to send and receive money. We generally
refer to locations with more than 50% of transactions being
initiated (versus paid) as send locations and to the
balance of locations as receive locations. Send
locations are the engine that drives
consumer-to-consumer
revenue. They contribute more transactions per location than
receive locations. However, a wide network of receive locations
is necessary to build each corridor and to help ensure global
distribution and convenience for consumers. The number of send
and receive transactions at an agent location can vary
significantly due to such factors as customer demographics
around the location, migration patterns, the locations
class of trade, hours of operation, length of time the location
has been offering our services, regulatory limitations and
competition. Each of the approximately 435,000 agent locations
in our agent network is capable of providing one or more of our
services; however, not every location completes a transaction in
a given period. For example, as of September 30, 2010, more
than 85% of agent locations in the United States, Canada and
Western Europe (representing at least one of our three money
transfer brands: Western
Union®,
Orlandi
Valuta®
and
Vigo(sm))
experienced money transfer activity in the previous
12 months. In the developing regions of Asia and other
areas where there are primarily receive locations, approximately
70% of locations experienced money transfer activity in the
previous 12 months. We periodically review locations to
determine whether they remain enabled to perform money transfer
transactions.
Operating
income
Consumer-to-consumer
operating income increased 9% and 5% during the three and nine
months ended September 30, 2010, respectively, compared to
the same periods in 2009 due to lower marketing expenses,
decreased bad debt expense and operating efficiencies, offset by
higher employee compensation costs. Also favorably impacting the
three months ended September 30, 2010 were currency
impacts, including the effect of foreign currency hedges. The
change in operating income margin for the three and nine months
ended September 30, 2010 compared to the same periods in
the prior year resulted from these same factors.
38
Global
Business Payments Segment
The following table sets forth our global business payments
segment results of operations for the three and nine months
ended September 30, 2010 and 2009.
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(dollars and transactions in millions)
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction fees
|
|
$
|
143.9
|
|
|
$
|
153.8
|
|
|
|
(6
|
)%
|
|
$
|
434.3
|
|
|
$
|
471.0
|
|
|
|
(8
|
)%
|
Foreign exchange revenues
|
|
|
27.7
|
|
|
|
8.3
|
|
|
|
*
|
|
|
|
83.2
|
|
|
|
9.8
|
|
|
|
*
|
|
Other revenues
|
|
|
7.6
|
|
|
|
9.2
|
|
|
|
(17
|
)%
|
|
|
22.8
|
|
|
|
29.1
|
|
|
|
(22
|
)%
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
179.2
|
|
|
$
|
171.3
|
|
|
|
5
|
%
|
|
$
|
540.3
|
|
|
$
|
509.9
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
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|
$
|
27.0
|
|
|
$
|
41.6
|
|
|
|
(35
|
)%
|
|
$
|
98.4
|
|
|
$
|
136.2
|
|
|
|
(28
|
)%
|
Operating income margin
|
|
|
15
|
%
|
|
|
24
|
%
|
|
|
|
|
|
|
18
|
%
|
|
|
27
|
%
|
|
|
|
|
Key indicator:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global business payments transactions
|
|
|
103.4
|
|
|
|
105.0
|
|
|
|
(2
|
)%
|
|
|
299.6
|
|
|
|
315.5
|
|
|
|
(5
|
)%
|
|
|
|
* |
|
Calculation not meaningful |
Revenues
During the three and nine months ended September 30, 2010,
global business payments segment revenue was positively impacted
by our acquisition of Custom House, which contributed
$26.8 million and $80.9 million of revenue,
respectively versus $7.9 million in both the three and nine
months ended September 30, 2009, and growth in the Pago
Fácil business. Partially offsetting these increases were
revenue declines in our United States bill payments businesses
as many United States consumers who would use our services
continue to have difficulty paying their bills and continue to
be unable to obtain credit in any form, resulting in us handling
fewer bill payments. The ongoing trend away from cash based bill
payments in the United States and competitive pressures, which
resulted in lower volumes and a shift to lower revenue per
transaction products, also contributed to the revenue declines.
Due to these factors, we expect to see revenue declines in our
United States
consumer-to-business
service offerings throughout the remainder of 2010.
The significant majority of Custom Houses revenue, which
is primarily included in foreign exchange revenues, is from
exchanges of currency at the spot rate enabling customers to
make cross-currency payments. Although the majority of the
segments revenues were generated in the United States for
the three and nine months ended September 30, 2010, we
expect the proportion of international revenue, specifically
foreign exchange revenue, will grow in future periods as a
percentage of total revenue due to our acquisition of Custom
House and the continuing declines in the United States
businesses.
The transaction declines during the three and nine months ended
September 30, 2010 compared to the same periods in 2009
were due to declines in our United States bill payments
businesses.
Operating
income
For the three and nine months ended September 30, 2010,
operating income decreased compared to the same periods in the
prior year primarily due to declines related to the United
States-based bill payments business, and investing and operating
costs, including amortization expense, associated with Custom
House.
The decline in operating income margin in the segment is
primarily due to the increased costs associated with the
acquisition of Custom House and declines in our United States
bill payments businesses.
39
Other
The following table sets forth other results for the three and
nine months ended September 30, 2010 and 2009.
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|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(dollars in millions)
|
|
2010
|
|
2009
|
|
% Change
|
|
2010
|
|
2009
|
|
% Change
|
|
Revenues
|
|
$
|
22.1
|
|
|
$
|
25.0
|
|
|
|
(12
|
)%
|
|
$
|
63.8
|
|
|
$
|
72.7
|
|
|
|
(12
|
)%
|
Operating income
|
|
$
|
0.8
|
|
|
$
|
2.0
|
|
|
|
(60
|
)%
|
|
$
|
(4.4
|
)
|
|
$
|
9.7
|
|
|
|
*
|
|
Operating income margin
|
|
|
4
|
%
|
|
|
8
|
%
|
|
|
|
|
|
|
*
|
|
|
|
13
|
%
|
|
|
|
|
|
|
|
* |
|
Calculation not meaningful |
Revenues
Revenue, generated primarily from our money order services
business, declined for the three and nine months ended
September 30, 2010 compared to the same periods in the
prior year. We experienced a decrease in the amount of revenue
recognized related to our money order services business as we no
longer receive a fixed return of 5.5% from Integrated Payment
Systems Inc. (IPS), a subsidiary of First Data, on
outstanding money order balances as we did for the first three
quarters of 2009. We now derive investment income from actual
interest generated on our money order settlement assets, which
are primarily held in United States tax exempt state and
municipal debt securities, which generally have a lower rate of
return than we were receiving under our previous agreement with
IPS. In 2008, we entered into interest rate swaps on certain of
our fixed rate notes to reduce our exposure to fluctuations in
interest rates. Through a combination of the revenue generated
from the new investment securities and the anticipated interest
expense savings resulting from the interest rate swaps, we
estimate that we should be able to retain, a materially
comparable after-tax rate of return through 2011 as we had been
receiving under the agreement with IPS.
Operating
income
During the three and nine months ended September 30, 2010,
the decrease in operating income was due to the decrease in
revenue from our money order services business as described
above. Promotional marketing activities related to our prepaid
business in the United States negatively impacted operating
income for the nine months ended September 30, 2010, but
was offset by the elimination of costs incurred in 2009
associated with evaluating and closing acquisitions, which did
not recur in 2010.
Capital
Resources and Liquidity
Our primary source of liquidity has been cash generated from our
operating activities, primarily from net income and fluctuations
in working capital. Our working capital is affected by the
timing of interest payments on our outstanding borrowings,
timing of income tax payments, including our refundable tax
deposit described further in Cash Flows from Operating
Activities and collections on receivables, among other
items. The majority of our interest payments are due in the
second and fourth quarters which results in a decrease in the
amount of cash provided by operating activities in those
quarters, and a corresponding increase to the first and third
quarters.
Our future cash flows could be impacted by a variety of factors,
some of which are out of our control, including changes in
economic conditions, especially those impacting the migrant
population, and changes in income tax laws or the status of
income tax audits, including the resolution of outstanding tax
matters.
A significant portion of our cash flows from operating
activities has been generated from subsidiaries, some of which
are regulated entities. These subsidiaries may transfer all
excess cash to the parent company for general corporate use,
except for assets subject to legal or regulatory restrictions.
The assets subject to legal or regulatory restrictions include
those located in countries outside of the United States
containing restrictions from being transferred outside of those
countries and cash and investment balances that are maintained
by a regulated subsidiary to secure certain money transfer
obligations initiated in the United States in accordance with
applicable
40
state regulations. Significant changes in the regulatory
environment for money transmitters could impact our primary
source of liquidity.
We believe we have adequate liquidity to meet our business
needs, including dividends and share repurchases, through our
existing cash balances and our ability to generate cash flows
through operations. In addition, we have capacity to borrow up
to $1.5 billion in the aggregate under our commercial paper
program and revolving credit facility, which were not drawn on
at September 30, 2010. The revolving credit facility
expires in September 2012.
Cash
and Investment Securities
As of September 30, 2010, we had cash and cash equivalents
of $2.0 billion, of which $897 million was held by our
foreign entities. Our ongoing cash management strategies to fund
our business needs could cause United States and foreign cash
balances to fluctuate.
Repatriating foreign funds to the United States would, in many
cases, result in significant tax obligations because most of
these funds have been taxed at relatively low foreign tax rates
compared to our combined federal and state tax rate in the
United States. We expect to use foreign funds to expand and fund
our international operations and to acquire businesses
internationally.
In 2008, we requested redemption of our shares in the Reserve
International Liquidity Fund, Ltd. (the Fund), a
money market fund, totaling $298.1 million. In 2009, we
received partial distributions totaling $255.5 million from
the Fund, of which $234.9 million was received in the first
nine months of 2009. For further information regarding this
redemption receivable, see Credit Risk in the
Risk Management section below.
In many cases, we receive funds from money transfers and certain
other payment services before we settle the payment of those
transactions. These funds, referred to as settlement
assets on our condensed consolidated balance sheets, are
not used to support our operations. However, we earn income from
investing these funds. We maintain a portion of these settlement
assets in highly liquid investments, classified as cash
and cash equivalents within settlement assets,
to fund settlement obligations.
Investment securities, included in settlement assets, were
$1.2 billion as of September 30, 2010. Substantially
all of these investments are state and municipal debt
instruments. Most state regulators in the United States require
us to maintain specific high-quality, investment grade
securities and such investments are intended to secure relevant
outstanding settlement obligations in accordance with applicable
regulations. We do not hold investment securities for trading
purposes, and all of our investment securities are classified as
available-for-sale
and recorded at fair value. Under the Payment Services Directive
in the European Union, we expect to have a similar portfolio of
investment securities, which we will manage in a similar manner
and under similar guidelines as our current portfolio.
Investment securities are exposed to market risk due to changes
in interest rates and credit risk. We regularly monitor credit
risk and attempt to mitigate our exposure by making high-quality
investments, including diversifying our investment portfolio. As
of September 30, 2010, the majority of our investment
securities had credit ratings of AA- or better from
a major credit rating agency. Our investment securities are also
actively managed with respect to concentration. As of
September 30, 2010, there were no investments with a single
issuer or individual securities representing more than 10% of
our investment securities portfolio.
Cash
Flows from Operating Activities
Cash provided by operating activities decreased to
$709.9 million during the nine months ended
September 30, 2010, from $958.0 million in the
comparable period in the prior year, primarily due to a
$250.0 million refundable tax deposit made relating to
potential United States federal tax liabilities, including those
arising from our 2003 international restructuring, which have
been previously accrued in our financial statements. Making the
deposit limits the further accrual of interest charges with
respect to such potential tax liabilities, to the extent of the
deposit.
41
Financing
Resources
On June 21, 2010, we issued $250.0 million of
aggregate principal amount of unsecured notes due June 21,
2040. Interest with respect to the 2040 Notes is payable
semiannually on June 21 and December 21 each year based on the
fixed per annum interest rate of 6.200%. The 2040 Notes contain
covenants that, among other things, limit or restrict our
ability and certain of our subsidiaries to grant certain types
of security interests or enter into sale and leaseback
transactions. We may redeem the 2040 Notes at any time prior to
maturity at the greater of par or a price based on the
applicable treasury rate plus 30 basis points.
On March 30, 2010, we exchanged $303.7 million of
aggregate principal amount of our 2011 Notes for unsecured notes
due April 1, 2020. Interest with respect to the 2020 Notes
is payable semiannually on April 1 and October 1 each year based
on the fixed per annum interest rate of 5.253%. In connection
with the exchange, note holders were given a 7% premium
($21.2 million), which approximated market value at the
exchange date, as additional principal. As this transaction was
accounted for as a debt modification, this premium was not
charged to expense. Rather, the premium, along with the
offsetting hedge accounting adjustments, will be accreted into
interest expense over the life of the notes. The 2020 Notes
contain covenants that, among other things, limit or restrict
the ability of certain of our subsidiaries to incur certain
indebtedness, and limit or restrict our ability and certain of
our subsidiaries to grant certain types of security interests or
enter into sale and leaseback transactions. We may redeem the
2020 Notes at any time prior to maturity at the greater of par
or a price based on the applicable treasury rate plus
15 basis points.
At September 30, 2010, we have outstanding borrowings at
par value of $3,277.1 million. The substantial majority of
these outstanding borrowings consist of unsecured fixed rate
notes with maturities ranging from 2011 to 2040, including our
2040 Notes issued to provide liquidity for general corporate
purposes, which may include the repayment of indebtedness, and
our 2020 Notes which were issued in March 2010 and exchanged for
a portion of our 2011 Notes, as discussed above. Our revolving
credit facility expires in September 2012 and includes a
$1.5 billion revolving credit facility, a
$250.0 million letter of credit
sub-facility
and a $150.0 million swing line
sub-facility
(the Revolving Credit Facility). The Revolving
Credit Facility, which is diversified through a group of 15
participating institutions, is used to provide general liquidity
for us and to support borrowings under our commercial paper
program, which we believe enhances our short term credit rating.
The largest commitment from any single financial institution
within the total committed balance of $1.5 billion was
approximately 20%. The substantial majority of the banks within
this group had credit ratings of A− or better
from a major credit rating agency as of September 30, 2010.
As of September 30, 2010, there were no borrowings
outstanding under the revolving credit facility.
Pursuant to our commercial paper program, we may issue unsecured
commercial paper notes in an amount not to exceed
$1.5 billion outstanding at any time, reduced to the extent
of borrowings outstanding on our revolving credit facility. Our
commercial paper borrowings may have maturities of up to
397 days from date of issuance. Interest rates for
borrowings are based on market rates at the time of issuance. We
had no commercial paper borrowings outstanding at
September 30, 2010.
Cash
Priorities
Liquidity
Our objective is to maintain strong liquidity and a capital
structure consistent with our current credit ratings. We have
existing cash balances, cash flows from operating activities,
access to the commercial paper markets and our $1.5 billion
revolving credit facility available to support the needs of our
business.
Capital
Expenditures
The total aggregate amount paid for contract costs, purchases of
property and equipment and purchased and developed software was
$87.8 million and $66.9 million for the nine months
ended September 30, 2010 and 2009, respectively. Amounts
paid for new and renewed agent contracts vary depending on the
terms of existing contracts as well as the timing of new and
renewed contract signings. Other capital expenditures during
these periods included investments in our information technology
infrastructure and purchased and developed software.
42
Acquisition
of Businesses
On September 1, 2009, we acquired Canada-based Custom
House, a provider of international
business-to-business
payment services, for cash consideration of $371.0 million
for all of the common shares of this business and acquired cash
of $2.5 million.
On February 24, 2009, we acquired the money transfer
business of European-based FEXCO Group Holdings (FEXCO
Group) one of our largest agents providing services in a
number of European countries, primarily the United Kingdom,
Spain, Sweden and Ireland. We surrendered our 24.65% interest in
FEXCO Group and paid 123.1 million
($157.4 million) as consideration for all of the common
shares of the money transfer business and acquired cash of
$11.8 million.
Share
Repurchases and Dividends
During the nine months ended September 30, 2010 and 2009,
31.7 million and 15.6 million of shares were
repurchased for $514.4 million and $225.0 million,
excluding commissions, at an average cost of $16.23 and $14.38
per share, respectively. At September 30, 2010,
$485.6 million remains available under share repurchase
authorizations approved by our Board of Directors.
During the nine months ended September 30, 2010, our Board
of Directors declared quarterly cash dividends of $0.06 per
common share representing $119.5 million in total
dividends. Of this amount, $40.5 million was paid on
March 31, 2010, $39.6 million was paid on
June 30, 2010 and $39.4 million was paid on
October 14, 2010. During the nine months ended
September 30, 2009, no dividend was declared or paid.
Off-Balance
Sheet Arrangements
Other than facility and equipment leasing arrangements, we have
no material off-balance sheet arrangements that have or are
reasonably likely to have a material current or future effect on
our financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.
Pension
Plans
We have two frozen defined benefit pension plans for which we
have a recorded unfunded pension obligation of
$101.7 million as of September 30, 2010. Through
September 2010, we have made contributions totaling
approximately $22 million to the plans, including a
discretionary contribution of $10 million.
Other
Commercial Commitments
We had approximately $85 million in outstanding letters of
credit and bank guarantees at September 30, 2010, with
expiration dates through 2015, the majority of which contain a
one-year renewal option. The letters of credit and bank
guarantees are primarily held in connection with lease
arrangements and certain agent agreements. We expect to renew
the letters of credit and bank guarantees prior to expiration in
most circumstances.
As of September 30, 2010, our total amount of unrecognized
income tax benefits was $609.5 million, including
associated interest and penalties. The timing of related cash
payments for substantially all of these liabilities is
inherently uncertain because the ultimate amount and timing of
such liabilities is affected by factors which are variable and
outside our control.
Critical
Accounting Policies and Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the amounts and disclosures in the financial statements
and accompanying notes. Actual results could differ from those
estimates. Our Critical Accounting Policies and Estimates
disclosed in Managements Discussion and Analysis of
Financial Condition and Results of Operations
Critical Accounting Policies and Estimates in our 2009
Annual Report on
Form 10-K,
for which there were no material changes, included:
|
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|
|
|
Income taxes
|
|
|
|
Derivative financial instruments
|
43
|
|
|
|
|
Other intangible assets
|
|
|
|
Goodwill impairment testing
|
|
|
|
Acquisitions purchase price allocation
|
In addition to the above Critical Accounting Policies, during
the nine months ended September 30, 2010 we incurred
expenses in connection with restructuring and related expenses
and expect to incur additional expenses through December 2011.
Accordingly, we now consider our restructuring policy as a
Critical Accounting Policy as follows:
We record 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. We also evaluate 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 our IT infrastructure;
and other expenses related to the relocation of various
operations to new or existing company facilities and third-party
providers, including hiring, training, relocation, travel and
professional fees. Also included in the facility closure
expenses are non-cash expenses related to fixed asset and
leasehold improvement write-offs and the acceleration of
depreciation.
Risk
Management
We are exposed to market risks arising from changes in market
rates and prices, including changes in foreign currency exchange
rates and interest rates and credit risk related to our agents
and customers. A risk management program is in place to manage
these risks.
Foreign
Currency Exchange Rates
We provide
consumer-to-consumer
money transfer services in more than 200 countries and
territories. We manage foreign exchange risk through the
structure of the business and an active risk management process.
We settle with the vast majority of our agents in United States
dollars or euros. However, in certain circumstances, we settle
in other currencies. We typically require the agent to obtain
local currency to pay recipients; thus, we generally are not
reliant on international currency markets to obtain and pay
illiquid currencies. The foreign currency exposure that does
exist is limited by the fact that the majority of transactions
are paid within 24 hours after they are initiated. To
mitigate this risk further, we enter into short-term foreign
currency forward contracts, generally with maturities from a few
days up to one month, to offset foreign exchange rate
fluctuations between transaction initiation and settlement. We
also utilize foreign currency forward contracts, typically with
terms of less than one year at inception, to offset foreign
exchange rate fluctuations on certain foreign currency
denominated cash positions and intercompany loans. In certain
consumer money transfer and global business payments
transactions involving different send and receive currencies, we
generate revenue based on the difference between the exchange
rate set by us to the customer and the rate at which we or our
agents are able to acquire currency, helping to provide
protection against currency fluctuations. We promptly buy and
sell foreign currencies as necessary to cover our net payables
and receivables which are denominated in foreign currencies.
We use longer-term foreign currency forward contracts to
mitigate risks associated with changes in foreign currency
exchange rates on
consumer-to-consumer
revenues denominated primarily in the euro, and to a lesser
degree the British pound, Canadian dollar and other currencies.
We use contracts with maturities of up to 36 months at
inception to mitigate some of the risk that changes in foreign
currency exchange rates could have on forecasted revenues, with
a targeted weighted-average maturity of approximately one year.
We believe the use of longer-term foreign currency forward
contracts provides predictability of future cash flows from our
international
consumer-to-consumer
operations.
44
With the acquisition of Custom House in the third quarter of
2009, our foreign exchange risk and associated foreign exchange
risk management has increased due to the nature of this
business. The significant majority of Custom Houses
revenue is from exchanges of currency at the spot rate enabling
customers to make cross-currency payments. This business also
writes foreign currency forward and option contracts for our
customers to facilitate future payments. The duration of these
derivatives contracts is generally nine months or less. Custom
House aggregates its foreign exchange 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. The foreign exchange risk is actively managed.
At December 31, 2009, a hypothetical uniform 10%
strengthening or weakening in the value of the United States
dollar relative to all other currencies in which our profits are
generated would have resulted in a decrease/increase to pre-tax
annual income of approximately $27 million based on our
2010 forecast of
consumer-to-consumer
unhedged exposure to foreign currency. The exposure as of
September 30, 2010 is not materially different based on our
forecast of unhedged exposure to foreign currency through
September 30, 2011. There are inherent limitations in this
sensitivity analysis, primarily due to the assumption that
foreign exchange rate movements are linear and instantaneous,
that the unhedged exposure is static, and that we would not
hedge any additional exposure. As a result, the analysis is
unable to reflect the potential effects of more complex market
changes that could arise, which may positively or negatively
affect income.
Interest
Rates
We invest in several types of interest bearing assets, with a
total value at September 30, 2010 of $3.0 billion.
Approximately $2.2 billion of these assets bear interest at
floating rates and are therefore sensitive to changes in
interest rates. These assets primarily include money market
funds and state and municipal variable rate securities and are
included in our condensed consolidated balance sheets within
cash and cash equivalents and settlement
assets. To the extent these assets are held in connection
with money transfers and other related payment services awaiting
redemption, they are classified as settlement
assets. Earnings on these investments will increase and
decrease with changes in the underlying short-term interest
rates.
Substantially all of the remainder of our interest bearing
assets consist of highly rated state and municipal debt
securities, the majority of which are fixed rate instruments.
These investments may include investments made from cash
received from our money transfer business and other related
payment services awaiting redemption classified within
settlement assets in the condensed consolidated
balance sheets. As interest rates rise, the fair value of these
fixed rate interest-bearing securities will decrease;
conversely, a decrease to interest rates would result in an
increase to the fair values of the securities. We have
classified these investments as
available-for-sale
within settlement assets in the condensed
consolidated balance sheets, and accordingly, recorded these
instruments at their fair value with the net unrealized gains
and losses, net of the applicable deferred income tax effect,
being added to or deducted from our total
stockholders equity on our condensed consolidated
balance sheets.
As of September 30, 2010, $750 million of our total
$3.3 billion of borrowings at par value was effectively
floating rate debt through interest rate swap agreements,
changing our fixed-rate debt to LIBOR-based floating rate debt,
with weighted-average spreads of approximately 400 basis
points above LIBOR. Borrowings under our commercial paper
program mature in such a short period that the financing is
effectively floating rate. No commercial paper borrowings were
outstanding as of September 30, 2010.
We review our overall exposure to floating and fixed rates by
evaluating our net asset or liability position in each, also
considering the duration of the individual positions. We manage
this mix of fixed versus floating exposure in an attempt to
minimize risk, reduce costs and improve returns. Our exposure to
interest rates can be modified by changing the mix of our
interest bearing assets, as well as adjusting the mix of fixed
versus floating rate debt. The latter is accomplished primarily
through the use of interest rate swaps and the decision
regarding terms of any new debt issuances (i.e., fixed versus
floating). We use interest rate swaps designated as hedges to
increase the percentage of floating rate debt, subject to market
conditions. At September 30, 2010, our weighted average
effective rate was approximately 5.3%.
A hypothetical 100 basis point increase/decrease in
interest rates would result in a decrease/increase to pre-tax
income of approximately $8 million annually based on
borrowings on September 30, 2010 that are sensitive to
45
interest rate fluctuations. The same 100 basis point
increase/decrease in interest rates, if applied to our cash and
investment balances on September 30, 2010 that are
sensitive to interest rate fluctuations, would result in an
offsetting benefit/reduction to pre-tax income of approximately
$22 million annually. There are inherent limitations in the
sensitivity analysis presented, primarily due to the assumption
that interest rate changes would be instantaneous. As a result,
the analysis is unable to reflect the potential effects of more
complex market changes that could arise, including changes in
credit risk regarding our investments, which may positively or
negatively affect income. In addition, the current mix of fixed
versus floating rate debt and investments and the level of
assets and liabilities will change over time.
Credit
Risk
Our interest earning assets include investment securities,
substantially all of which are state and municipal debt
securities, which are classified in settlement
assets and accounted for as
available-for-sale
securities, and money market fund investments, which are
classified in cash and cash equivalents. The
majority of our investment securities had credit ratings of
AA- or better from a major credit rating agency.
On September 15, 2008, we requested redemption of our
shares in the Reserve International Liquidity Fund, Ltd. (the
Fund), a money market fund, totaling
$298.1 million. In 2009, we received partial distributions
totaling $255.5 million from the Fund. We continue to
vigorously pursue collection of the remaining balance. However,
given the increased uncertainty surrounding the numerous
third-party legal claims associated with the Fund, we reserved
$12 million representing the estimated impact of pro-rata
distribution of the Fund during 2009. As of September 30,
2010, we had a remaining receivable balance of
$30.6 million, net of the related reserve, which is
included in other assets in the condensed
consolidated balance sheets. We anticipate receiving a
distribution upon the resolution of the legal matters
surrounding the Fund. If the Fund incurs significant legal,
administrative or other costs during the distribution process,
we may record additional reserves related to the remaining
receivable balance, although such amounts are not expected to be
significant.
To manage our exposures to credit risk with respect to
investment securities, money market investments, derivatives and
other credit risk exposures resulting from our relationships
with banks and financial institutions, we regularly review
investment concentrations, trading levels, credit spreads and
credit ratings, and we attempt to diversify our investments
among global financial institutions. Since January 1, 2009,
we also limit our investment level to no more than
$100 million with respect to individual money market funds.
We are also exposed to credit risk related to receivable
balances from agents in the money transfer, walk-in bill payment
and money order settlement process. In addition, we are exposed
to credit risk directly from consumer transactions particularly
through our internet services and electronic channels, where
transactions are originated through means other than cash, and
therefore are subject to chargebacks, insufficient
funds or other collection impediments, such as fraud. We perform
a credit review before each agent signing and conduct periodic
analyses. Historically, and for the three and nine months ended
September 30, 2010, our losses associated with agent and
consumer bad debts have been less than 1% of our revenues. We
continue to monitor the credit worthiness of our agents, and due
to the challenging economy, we closed agents at higher rates in
2009 than in prior years, primarily small retailers in the
United States. Closing agents may impact transactions and
revenues.
As a result of our acquisition of Custom House, we are now
exposed to credit risk relating to derivative financial
instruments written by us to our customers. The duration of
these derivative contracts is generally nine months or less. The
credit risk associated with our derivative contracts increases
when foreign currency exchange rates move against our customers,
possibly impacting their ability to honor their obligations to
deliver currency to us or to maintain appropriate collateral
with us. To mitigate this risk, we perform credit reviews of the
customer on an ongoing basis and we may require certain
customers to post collateral or increase collateral based on the
fluctuating market value of the customers contract and
their risk profile. The credit risk arising from our spot
foreign currency exchange contracts is largely mitigated, as in
most cases we require the receipt of funds from our customers
before releasing the associated cross-currency payment.
46
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
The information under the caption Risk Management in
Managements Discussion and Analysis of Financial
Condition and Results of Operations in Item 2 of
Part I of this report is incorporated herein by reference.
|
|
Item 4.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
Our management, under the supervision and with the participation
of the Principal Executive Officer and Principal Financial
Officer, have evaluated the effectiveness of our controls and
procedures related to our reporting and disclosure obligations
as of September 30, 2010, which is the end of the period
covered by this Quarterly Report on
Form 10-Q.
Based on that evaluation, the Principal Executive Officer and
Principal Financial Officer have concluded that, as of
September 30, 2010, the disclosure controls and procedures
were effective to ensure that information required to be
disclosed by us, including our consolidated subsidiaries, in the
reports we file or submit under the Exchange Act, is recorded,
processed, summarized and reported, as applicable, within the
time periods specified in the rules and forms of the Securities
and Exchange Commission, and are designed to ensure that
information required to be disclosed by us in the reports that
we file or submit are accumulated and communicated to our
management, including our Principal Executive Officer and
Principal Financial Officer, to allow timely decisions regarding
required disclosure.
Changes
in Internal Control over Financial Reporting
On May 25, 2010, our Board of Directors approved a
restructuring plan including the elimination and relocation of
employees who, among other functions, staffed certain of our
operational accounting, IT and other functions. Accordingly, we
will experience significant turnover in these areas during the
transition of these operations to new or existing Company
facilities and third-party providers. Management believes it is
taking the necessary steps to monitor and maintain appropriate
internal controls during this period of change.
There were no additional changes that occurred during the fiscal
quarter covered by this Quarterly Report on
Form 10-Q
that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial
reporting.
47
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of The Western Union
Company
We have reviewed the condensed consolidated balance sheet of The
Western Union Company (the Company) as of September 30,
2010, and the related condensed consolidated statements of
income for the three-month and nine-month periods ended
September 30, 2010 and 2009, and the condensed consolidated
statements of cash flows for the nine-month periods ended
September 30, 2010 and 2009. These financial statements are
the responsibility of the Companys management.
We conducted our review in accordance with the standards of the
Public Company Accounting Oversight Board (United States). A
review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons
responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting
Oversight Board, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the condensed consolidated
financial statements referred to above for them to be in
conformity with U.S. generally accepted accounting
principles.
We have previously audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United States),
the consolidated balance sheet of The Western Union Company as
of December 31, 2009, and the related consolidated
statements of income, cash flows, and stockholders
equity/(deficiency) for the year then ended (not presented
herein) and in our report dated February 26, 2010, we
expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of
December 31, 2009, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from
which it has been derived.
Denver, Colorado
November 5, 2010
48
PART II
OTHER INFORMATION
|
|
Item 1.
|
Legal
Proceedings
|
On July 26, 2010, U.F.C.W. Local 1776 & Participating
Employers Pension Fund filed a Verified Shareholder Double
Derivative Complaint and Jury Demand in federal district court
in Colorado naming all members of the Companys Board of
Directors as individual defendants and the Company and its
subsidiary Western Union Financial Services, Inc. as nominal
defendants. The complaint seeks damages from the individual
defendants for breach of fiduciary duty and waste of corporate
assets, seeks an order to implement unspecified corrective
measures, and alleges failure by the individual defendants to
appropriately oversee the Companys compliance program,
particularly the alleged deficiencies which resulted in the
Companys agreement and settlement with the State of
Arizona in early 2010. On September 10, 2010, the federal
district court in Colorado dismissed the complaint for lack of
subject matter jurisdiction. On September 23, 2010, the
plaintiff re-filed the complaint in Maricopa County Superior
Court in Arizona. The Company is in the process of preparing its
response to the complaint.
In the normal course of business, Western Union is subject to
other claims and litigation. Western Unions Management
believes that such matters involving a reasonably possible
chance of loss will not, individually or in the aggregate,
result in a materially adverse effect on Western Unions
financial position, results of operations or cash flows. Western
Union accrues for loss contingencies as they become probable and
estimable.
There have been no material changes to the risk factors
described in our 2009 Annual Report on
Form 10-K,
except as described below.
Recently
enacted financial reform legislation in the United States may
adversely affect our business.
Our business may be adversely impacted by the Dodd-Frank Wall
Street Reform and Consumer Protection Act (the Financial
Reform Act or Act) which was signed into law
on July 21, 2010 by the President of the United States. At
this time, we are unable to predict the impact on our business
because many of the provisions of the Act that could affect us
require the adoption of rules or mandate studies, which could
result in additional legislative or regulatory requirements. For
example, the Financial Reform Act creates a new Bureau of
Consumer Financial Protection (the Consumer Protection
Bureau) whose purpose will be to issue and enforce
consumer protection initiatives governing financial products and
services, including money transfer services in the United
States, which will require us to provide enhanced disclosures to
our money transfer customers. Depending upon the final rules to
be issued by the Consumer Protection Bureau, we may need to
modify our systems to provide these additional disclosures or we
may be liable for the failure of our money transfer agents to
comply with the Act, the extent of which liability will be
determined by rules not yet enacted. In addition, rules adopted
under the Act by other governmental agencies may subject our
corporate interest rate and foreign exchange hedging
transactions to centralized clearing and collateral posting
requirements. Also, our Custom House business in the United
States may be subjected to increased regulatory oversight and
licensing requirements relating to the foreign exchange
derivative products offered to certain of its customers.
49
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
The following table provides information about the
Companys repurchases of shares of the Companys
common stock during the third quarter of 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining Dollar
|
|
|
|
|
|
|
|
|
|
Total Number of Shares
|
|
|
Value of Shares that
|
|
|
|
|
|
|
|
|
|
Repurchased as Part of
|
|
|
May Yet Be Repurchased
|
|
|
|
Total Number of
|
|
|
Average Price
|
|
|
Publicly Announced
|
|
|
Under the Plans or
|
|
|
|
Shares Repurchased*
|
|
|
Paid per Share
|
|
|
Plans or Programs**
|
|
|
Programs (in millions)
|
|
|
July 1 - 31
|
|
|
1,625,431
|
|
|
$
|
15.48
|
|
|
|
1,614,920
|
|
|
$
|
558.2
|
|
August 1 - 31
|
|
|
2,215,439
|
|
|
$
|
16.02
|
|
|
|
2,209,800
|
|
|
$
|
522.8
|
|
September 1 - 30
|
|
|
2,277,856
|
|
|
$
|
16.74
|
|
|
|
2,219,400
|
|
|
$
|
485.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,118,726
|
|
|
$
|
16.14
|
|
|
|
6,044,120
|
|
|
|
|
|
|
|
|
* |
|
These amounts represent both shares authorized by the Board of
Directors for repurchase under a publicly announced plan, as
described below, as well as shares withheld from employees to
cover tax withholding obligations on restricted stock awards and
units that have vested. |
|
** |
|
At September 30, 2010, $485.6 million remains
available under share repurchase authorizations approved by the
Companys Board of Directors. Management has and may
continue to establish prearranged written plans pursuant to
Rule 10b5-1.
A
Rule 10b5-1
plan permits the Company to repurchase shares at times when the
Company may otherwise be prevented from doing so, provided the
plan is adopted when the Company is not aware of material
non-public information. |
|
|
Item 3.
|
Defaults
Upon Senior Securities
|
None.
|
|
Item 4.
|
(Removed
and Reserved)
|
|
|
Item 5.
|
Other
Information
|
None.
See Exhibit Index for documents filed herewith
and incorporated herein by reference.
50
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
The Western Union Company
(Registrant)
|
|
Date: November 5,
2010 By: |
/s/ Hikmet
Ersek
|
Hikmet Ersek
President and Chief Executive Officer
(Principal Executive Officer)
|
|
Date: November 5,
2010 By: |
/s/ Scott
T. Scheirman
|
Scott T. Scheirman
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
|
|
Date: November 5,
2010 By: |
/s/ Amintore
T.X. Schenkel
|
Amintore T.X. Schenkel
Senior Vice President, Chief Accounting Officer,
and Controller (Principal Accounting Officer)
51
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
|
|
First Amendment to Employment Contract and Expatriate Letter
Agreement, dated as of October 7, 2010, between Western
Union Financial Services GmbH, The Western Union Company and
Hikmet Ersek*
|
|
12
|
|
|
Computation of Ratio of Earnings to Fixed Charges
|
|
15
|
|
|
Letter from Ernst & Young LLP Regarding Unaudited
Interim Financial Information
|
|
31
|
.1
|
|
Certification of Principal Executive Officer of The Western
Union Company Pursuant to
Rule 13a-14(a)
under the Securities Exchange Act of 1934
|
|
31
|
.2
|
|
Certification of Principal Financial Officer of The Western
Union Company Pursuant to
Rule 13a-14(a)
under the Securities Exchange Act of 1934
|
|
32
|
|
|
Certification of Principal Executive Officer and Principal
Financial Officer Pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States Code
|
|
101
|
.INS
|
|
XBRL Instance Document
|
|
101
|
.SCH
|
|
XBRL Taxonomy Extension Schema Document
|
|
101
|
.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
101
|
.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
101
|
.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
101
|
.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
|
|
* |
|
Management contract and compensatory plan and arrangement
required to be filed as an exhibit pursuant to Item 6 of
this report. |
52