Western Union 2006 Annual Report Download - page 48

WESTERN UNION 2006 Annual Report 46
Foreign Exchange Effect on
Notes Receivable from First Data, Net
The revaluation to fair market value of notes receivable
from First Data and the related foreign currency
swap arrangements that were denominated in euros
benefited income before income taxes in the year
ended December 31, 2006 by $10.1 million compared
to a reduction to income before income taxes in the
corresponding period in 2005 by $5.9 million. For the year
ended 2005 compared to 2004, these mark-to-market
valuations resulted in decreased income before income
taxes of $13.4 million. Such fluctuations typically correspond
to changes in the value of the euro.
All notes receivable from First Data, net of notes
payable to First Data, and related foreign currency swap
agreements were settled in cash in connection with the
spin-off on September 29, 2006. Accordingly, no such
amounts will be recognized in the future.
Interest Income from First Data, net
Interest income from First Data, net consists of interest
income earned on notes receivable from First Data, partially
offset by interest incurred on notes payable to First
Data. Interest income from First Data increased for all
periods presented through the spin-off from First Data
on September 29, 2006 due to increased average net
borrowings by First Data from Western Union affiliates.
As part of the spin-off, all remaining notes payable and
notes receivable to or from First Data were settled in cash.
As a result, no interest income from First Data will be
recognized in the future, however, we will earn interest
income on our cash balances as described above.
Other Income, Net
The increase in Other income, net during the years ended
December 31, 2006 and 2005 compared to the previous
corresponding years was driven by higher equity earnings
from equity method investments.
Income Taxes
Our effective tax rates on pretax income were 32%, 31%
and 32% for the years ended December 31, 2006, 2005
and 2004, respectively. The effective tax rate over the
three periods remained relatively constant, with 2005
benefiting slightly from certain state tax adjustments. We
estimate our 2007 tax rate will be approximately 32%
based on current facts and circumstances.
We have established contingency reserves for material,
known tax exposures, including potential tax audit
adjustments with respect to our international operations,
which were restructured in 2003. Our reserves reflect
what we believe to be reasonable assumptions as to the
likely 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. Any difference from our position
as recorded in our consolidated financial statements and
the final resolution of a tax issue will be reflected in our
company’s income tax expense in the period during which
the issue is resolved. Such resolution could also affect our
effective tax rate in future periods.
To address certain tax aspects of the 2003 restructuring
of our international operations, discussions were initiated
with the Internal Revenue Service (“IRS”) pursuant to its
Advance Pricing Agreement (“APA”) program. However,
we were notified by the IRS in October 2006 that we will
not be able to conclude an arrangement acceptable to us
through the APA Program. Thus, the tax aspects of the
2003 restructuring will be addressed as part of ongoing
federal income tax audits.
We have benefited from the 2003 restructuring by
having our income from certain foreign-to-foreign money
transfer transactions taxed at relatively low foreign tax
rates rather than the U.S. and state combined statutory
tax rate. The amount of taxes attributable to such rate
differential cumulatively totaled $210.8 million through
December 31, 2006.
Earnings Per Share
During the years ended December 31, 2006, 2005 and
2004, basic earnings per share were $1.20, $1.21 and
$0.98, respectively, and diluted earnings per share were
$1.19, $1.21 and $0.98, respectively. All issued and
outstanding shares of Western Union common stock,
consisting of 100 shares, were held by First Data prior to
September 29, 2006. Accordingly, for all periods presented
prior to the spin-off which occurred on September 29, 2006,
basic and diluted earnings per share were computed using
our basic shares outstanding as of the spin-off date.
Unvested shares of restricted stock are excluded from
basic shares outstanding. Diluted earnings per share
subsequent to September 29, 2006 reflects the potential
dilution that could occur if outstanding stock options on
the presented dates are exercised and shares of restricted
stock have vested. Dilutive shares included in the annual
earnings per share calculation going forward will increase
as such potentially dilutive shares will be outstanding during
the entire periods presented. The repurchase of 0.9 million
shares during the year ended December 31, 2006 had an
anti-dilutive effect on earnings per share. Of the 73.8 million
outstanding options to purchase common shares of our
company, over 60% of those options are held by employees
of First Data.
Diluted earnings per share decreased during the year
ended December 31, 2006 compared to the previous year
due to decreased net income and the increase in diluted
shares outstanding, which was driven by the factors
described in the preceding paragraph and because prior
to the September 29, 2006 spin-off date, there were no
potentially dilutive instruments outstanding. Dilutive earnings
per share increased in 2005 compared to 2004 due to
higher net income.