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On the move
THE WESTERN UNION COMPANY 20072007 Annual Report Annual Report

Table of contents

  • Page 1
    On the move THE WESTERN UNION COMPANY 2007 Annual Report

  • Page 2
    Contents Letter to Shareholders Diverse Services Global Reach India Philippines Executives / Board of Directors Financial Report 1 4 5 6 7 8 11 Financial Highlights In 2007, Western Union grew its network and strengthened its brand, resulting in higher revenue and operating profit then ever before...

  • Page 3
    ... revenue in 2007 was generated from transactions originating outside the United States. We have made significant investments in the top four remittance receive markets - India, China, Mexico and the Philippines - which represent $95 billion in remittances. We more than tripled our number of agent...

  • Page 4
    ... transactions occur with a Gold Card. It speeds up the time at the pointof-sale, and helps us to know our customers better. We continually strive to bring value to our customers. We have developed regionally focused marketing promotions and grassroots events like Africa Cash and Philippines Home...

  • Page 5
    ...financial services that go beyond sending and receiving money. We have partnered with PrimeCredit Limited, a subsidiary of Standard Chartered Bank PLC, and have plans to pilot a micro-lending product in 2008. This involves advancing small value, unsecured loans to customers, for which Western Union...

  • Page 6
    ... the world. Other Western Union provides a variety of prepaid services at participating agent locations or on the Internet for customers who prefer pay-as-you-go wireless or home phone service, Internet access, or debit card services. Western Union is also a trusted source for money orders. 4

  • Page 7
    ... seeking opportunities abroad. There are nearly 200 million migrants around the world, many of whom need a financial services provider that can send money back to their homes quickly and reliably. Nobody does this better than Western Union. In 2007, our over 335,000 agent locations processed nearly...

  • Page 8
    ... the world's second most populous nation and receives more remittances than any other. For these reasons we're excited about our long-term growth prospects in India. And no company is better positioned to seize this opportunity than Western Union. In early 2008, we opened our 50,000th agent location...

  • Page 9
    ...throughout the Philippines. These agent locations have expanded hours so that workers can send or receive cash after a long day of work. And in addition to convenience, we also offer choice. Through our recent deals with Globe Telecom and Smart Communications, we hope to serve a new customer base in...

  • Page 10
    ... Vice President Chief Marketing Officer CHRISTINA A. GOLD Executive Vice President Corporate Affairs SCOTT T. SCHEIRMAN Executive Vice President Latin America /Caribbean GROVER WRAY Executive Vice President and General Manager Western Union Payment Services President and Chief Executive...

  • Page 11
    ...Inc. DENNIS STEVENSON President and Chief Executive Officer The Western Union Company JACK M. GREENBERG Senior Advisor to Oak Hill Capital Partners Chairman of Trinsum Group Chairman HBOS plc Non-executive Chairman The Western Union Company Former Chairman and Chief Executive Officer McDonald...

  • Page 12

  • Page 13
    ... Public Accounting Firm ...45 Consolidated Financial Statements: Consolidated Statements of Income ...47 Consolidated Balance Sheets ...48 Consolidated Statements of Cash Flows ...49 Consolidated Statements of Stockholders' Equity/(Deficiency)/Net Investment in The Western Union Company ...50...

  • Page 14
    ... costs, expenses, settlements and judgments; changes in United States or foreign laws, rules and regulations including the Internal Revenue Code, and governmental or judicial interpretations thereof; our ability to favorably resolve tax matters with the Internal Revenue Service and other tax...

  • Page 15
    ... Report is presented on a consolidated basis and includes the accounts of The Western Union Company ("Western Union" or the "Company") and its majority-owned subsidiaries. The financial information for the periods presented prior to the spin-off by First Data Corporation ("First Data") of its money...

  • Page 16
    ... consumer-to-consumer money transfer services worldwide. Amounts include Vigo Remittance Corp. transactions since the acquisition date of October 21, 2005. (i) Consumer-to-business transactions include Quick Collect, Western Union Convenience Pay, Speedpay, Equity Accelerator, Just in Time EFT and...

  • Page 17
    ... consumer's credit card, debit card or bank account. We process cash payments much as we process consumer-to-consumer transactions. Our consumers use our Quick Collect service to send guaranteed funds, from over 50,000 Western Union agent locations primarily across the United States, using cash and...

  • Page 18
    ... internet or the telephone, using a credit or debit card. Some agent locations accept debit cards to initiate a transaction. We also offer consumers several options to receive a money transfer. While the vast majority of transfers are paid in cash at agent locations, in some places we offer payments...

  • Page 19
    ... the Company operator on the phone and is given a transaction number, which the sender takes to the agent's in-store representative to send the funds. ONLINE MONEY TRANSFER SERVICE. Our internet website, westernunion.com, allows consumers to send funds on-line, using a credit or debit card, for pay...

  • Page 20
    ... internet which we process using the consumer's credit card, debit card or ACH. In order to make a cash payment, the consumer goes to an agent location and makes the payment to the agent. In addition, we generate revenue from upfront enrollment fees received for our Equity Accelerator service, and...

  • Page 21
    ... agent locations. Consumers can also participate in the Western Union Gold Card program when using our Quick Collect service to make cash payments to billers. Other Our remaining business units are grouped in the "Other" category, which includes money orders and prepaid services. We market Western...

  • Page 22
    ... allows consumers to transfer money to a biller. This service is available at many of our Western Union agent locations, primarily in the United States, and through the internet or by telephone. Factors that we believe are important to our long-term success include international growth by expanding...

  • Page 23
    ...charges which have not impacted cash ï¬,ows. || || || The Separation of Western Union from First Data On January 26, 2006, First Data Board of Directors announced its intention to pursue the distribution of 100% of its money transfer and consumer payments businesses related assets, through a tax...

  • Page 24
    ...accounts and transactions between our company's segments have been eliminated. The historical consolidated statements of income include expense allocations for certain corporate functions historically provided to Western Union by First Data, including treasury, tax, accounting and reporting, mergers...

  • Page 25
    ... commissions we receive in connection with the sale of money orders, enrollment fees received when consumers enroll in our Equity Accelerator® program (a recurring mortgage payment service program), revenue recorded for reimbursable costs incurred to operate payment services programs and investment...

  • Page 26
    ... Report The following table sets forth our consolidated results of operations for the years ended December 31, 2007, 2006 and 2005. Year Ended December 31, % Change 2005 2007 vs. 2006 2006 vs. 2005 (in millions, except per share amounts) REVENUES: 2007 2006 Transaction fees Foreign exchange...

  • Page 27
    ...website and on the telephone in the United States during the year ended December 31, 2007. These declines resulted primarily from additional controls implemented beginning in early 2007 by Western Union, card associations and issuing banks in response to credit and debit card fraud. Foreign exchange...

  • Page 28
    WESTERN UNION 2007 Annual Report Cost of services Cost of services is primarily comprised of agent commissions and also includes expenses for personnel, software, equipment, telecommunications, bank fees, depreciation and amortization and other expenses incurred in connection with providing money ...

  • Page 29
    ... 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 December 31, 2007, the total...

  • Page 30
    WESTERN UNION 2007 Annual Report || Segment Discussion hiring senior management positions new to our company, and consulting costs used to develop ongoing processes in connection with completing the spin-off; and expenses incurred in connection with the development of certain new service ...

  • Page 31
    ... implemented beginning in early 2007 by Western Union, card issuing banks and card associations in response to credit and debit card fraud in the United States. These tightened controls have directly impacted our consumers' ability to use their debit and credit cards to send money on our website and...

  • Page 32
    ..., 2006, India and China combined represented approximately 4% of Western Union consolidated revenues. Fluctuations in the exchange rate between the euro and the United States dollar have resulted in a benefit or (reduction) to consumer-to-consumer transaction fee and foreign exchange revenue of $11...

  • Page 33
    ... salaries, benefits, equipment, supplies and other costs incurred in connection with operating as a separate public company. In addition, we recognized an accelerated non-cash stock compensation charge of $22.3 million taken in connection with the change in control of First Data, of which 85% was...

  • Page 34
    ... the segment's electronic-based services businesses, and was offset by incremental public company expenses and the accelerated stock compensation charge taken in connection with the change in control of First Data. Operating income for the period grew at a lower rate than revenues as Pago Fácil and...

  • Page 35
    ...subsidiaries may transfer all excess cash ï¬,ows generated to the parent company for general corporate use, except for (a) cash balances related to foreign earnings which have been taxed at a more favorable income tax rate than the combined United States federal and state income tax rates because we...

  • Page 36
    ...is used to provide general liquidity for the Company and to support our commercial paper program, which we believe enhances our short term credit rating. If the amount available to borrow under the revolving credit facility decreased, or if the revolving credit facility were eliminated, the cost and...

  • Page 37
    ..., we may convert a portion of our commercial paper program into longer term borrowings in 2008. Based on market conditions at the time such re-financings occur, we may not be able to obtain new financings under similar conditions as historically reported. As discussed in "Cash and Investment...

  • Page 38
    .... Such contract costs will vary depending on the terms of existing contracts as well as the timing of when new contracts are signed or renewed. Other capital expenditures during 2007 included purchased and developed software costs and purchases of property and equipment representing investments in...

  • Page 39
    ... for termination of our contractual obligations. (c) Represents the liability position of our foreign currency forward contracts as of December 31, 2007, which will ï¬,uctuate based on market conditions. (d) The timing of cash payments on unrecognized tax benefits, including accrued interest and...

  • Page 40
    ...toforeign 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. The Internal Revenue Service ("IRS") is conducting audits of the United States federal consolidated income tax returns of First Data for...

  • Page 41
    ...continue to meet the conditions for hedge accounting, if hedges do not qualify for hedge accounting, the changes in the fair value of the derivatives used as hedges would be reï¬,ected in earnings which could have a significant impact on our reported earnings. As of December 31, 2007, the cumulative...

  • Page 42
    WESTERN UNION 2007 Annual Report DESCRIPTION JUDGMENTS AND UNCERTAINTIES EFFECT IF ACTUAL RESULTS DIFFER FROM ASSUMPTIONS Capitalized Costs We capitalize certain initial payments for new and renewed agent contracts. These capitalized costs are classified in our consolidated balance sheets as "...

  • Page 43
    ... forward contracts, typically with terms of less than one year at inception, to offset foreign exchange rate ï¬,uctuations on certain foreign currency denominated cash positions. In certain consumer money transfer transactions involving different send and receive currencies, we generate revenue...

  • Page 44
    ... made from cash received from our money transfer business and other related payment services awaiting redemption classified within "settlement assets" in the consolidated balance sheets. As interest rates rise, the fair market value of these fixed rate interest-bearing securities will decrease...

  • Page 45
    ..., training and monitoring programs, suspicious activity reporting, and support and guidance to our agent network on regulatory compliance. Credit Risk The Company's interest earning assets include money market fund investments, which are classified in "cash and cash equivalents," and investment...

  • Page 46
    ... become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of Western Union's internal control over financial reporting as of December 31, 2007, utilizing the criteria set forth by the...

  • Page 47
    ... Company Accounting Oversight Board (United States), the consolidated balance sheets of The Western Union Company as of December 31, 2007 and 2006, and the related consolidated statements of income, cash ï¬,ows, and stockholders' equity/ (deficiency)/net investment in The Western Union Company...

  • Page 48
    WESTERN UNION 2007 Annual Report || Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders of The Western Union Company We have audited the accompanying consolidated balance sheets of The Western Union Company as of December 31, 2007 and 2006, and the ...

  • Page 49
    ...: 2007 2006 2005 Transaction fees Foreign exchange revenue Commission and other revenues Total revenues EXPENSES: $3,989.8 771.3 139.1 4,900.2 $3,696.6 653.9 119.7 4,470.2 $3,354.8 531.0 102.1 3,987.9 Cost of services Selling, general and administrative Total expenses* Operating income OTHER...

  • Page 50
    WESTERN UNION 2007 Annual Report || Consolidated Balance Sheets December 31, (in millions, except per share amounts) ASSETS 2007 2006 Cash and cash equivalents Settlement assets Property and equipment, net of accumulated depreciation of $251.5 and $213.1, respectively Goodwill Other ...

  • Page 51
    ...and equipment Notes receivable issued to agents Repayments of notes receivable issued to agents Acquisition of businesses, net of cash acquired and contingent purchase consideration paid Cash received/(paid) on maturity of foreign currency forwards Purchase of equity method investments Net cash used...

  • Page 52
    ...benefits from employee stock option plans Unrealized losses on investment securities, net of tax Unrealized losses on hedging activities, net of tax Foreign currency translation adjustment, net of tax Pension liability adjustment, net of tax Comprehensive income Balance, December 31, 2007 See Notes...

  • Page 53
    ... Statements Treasury Stock Shares Amount Net Investment in The Western Union Company Capital Deficiency Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders' Equity/(Deficiency) Net Investment in The Western Union Company Comprehensive Income (Loss) $ $ $1,994...

  • Page 54
    ... of third-party agents using the Company's multi-currency, real-time money transfer processing systems. This service is available for both international transfers - that is, the transfer of funds from one country to another and intra-country transfers - that is, money transfers from one location to...

  • Page 55
    ... 100% owned by First Data. The historical Consolidated Statements of Income include expense allocations for certain corporate functions historically provided to Western Union by First Data, including treasury, tax, accounting and reporting, mergers and acquisitions, risk management, legal, internal...

  • Page 56
    ...Cash received by Western Union agents generally becomes available to Western Union within one week after initial receipt by the agent. Cash equivalents consist of short-term time deposits, commercial paper and other highly liquid investments. Receivables from selling agents represent funds collected...

  • Page 57
    ... the years ended December 31, 2007, 2006 and 2005, respectively. Deferred Customer Set Up Costs The Company capitalizes direct incremental costs not to exceed related deferred revenues associated with the enrollment of customers in the Equity Accelerator program, a service that allows consumers to...

  • Page 58
    ... rate set by Western Union to the consumer and the rate at which Western Union or its agents are able to acquire currency. This foreign exchange revenue is recorded at the time the related transaction fee revenue is recognized. The Company also offers several consumer-to-business payment services...

  • Page 59
    ... at the time of sale. Most agents outside the U.S. also receive additional commissions based on a portion of the foreign exchange revenue associated with money transfer transactions. Other costs included in costs of services include personnel, software, equipment, telecommunications, bank fees...

  • Page 60
    ... standardized models that use market based inputs (e.g., forward prices for foreign currency). Stock-Based Compensation The Company currently has a stock-based compensation plan that grants Western Union stock options, restricted stock awards and restricted stock units to employees and other key...

  • Page 61
    ... equity method of accounting. In December 2006, the Company acquired SEPSA, which operates under the brand name Pago FácilSM, for a total purchase price of $69.8 million, less cash acquired of $3.0 million. Pago Fácil provides consumer-to-business payments and prepaid mobile phone top-up services...

  • Page 62
    ... paid subsequent to the investment date have been reï¬,ected as a related party transaction. Related Party Transactions with First Data The Consolidated Statements of Income prior to the Spin-off include expense allocations for certain corporate functions historically provided to Western Union...

  • Page 63
    ... letters of credit and bank guarantees at December 31, 2007 with expiration dates through 2015, certain of which contain a one-year renewal option. The letters of credit and bank guarantees are primarily held in connection with lease arrangements and certain agent agreements. The Company expects to...

  • Page 64
    ...liabilities (in millions): December 31, 2007 2006 Other assets: Equity method investments Amounts advanced to agents, net of discounts Deferred customer set up costs Prepaid commissions Accounts receivable, net Prepaid expenses Debt issue costs Derivative financial instruments Other Total other...

  • Page 65
    ... credits Other Effective tax rate 35.0% 1.7% (7.7)% -% 0.9% 29.9% 35.0% 2.0% (6.3)% (0.3)% 1.1% 31.5% 35.0% 2.0% (5.8)% (0.4)% 0.2% 31.0% Western Union's provision for income taxes consists of the following components (in millions): Year Ended December 31, 2007 2006 2005 Current: Federal State...

  • Page 66
    ...ts relate to the 2003 restructuring of the Company's international operations whereby the Company's income from certain foreignto-foreign money transfer transactions has been taxed at relatively low foreign tax rates compared to the Company's combined federal and state tax rates in the United States...

  • Page 67
    ... major tax jurisdictions. The United States federal income tax returns which include the Company are eligible to be examined for the years 2002 and forward. The Internal Revenue Service ("IRS") currently is conducting audits of the United States federal consolidated income tax returns of First Data...

  • Page 68
    WESTERN UNION 2007 Annual Report On December 31, 2006, the Company adopted the recognition and disclosure provisions of SFAS No. 158, which requires the Company to recognize the funded status of its pension plans in its Consolidated Balance Sheets as of December 31, 2006 with a corresponding ...

  • Page 69
    ... AA bonds of varying maturities. Western Union employs a building block approach in determining the long-term rate of return for plan assets. Historical markets are studied and long-term historical relationships between equities and fixed-income securities are preserved consistent with the widely...

  • Page 70
    ... plans are managed in a third party master trust. The investment policy and allocation of the assets in the master trust are overseen by the Company's Investment Council. Western Union employs a total return investment approach whereby a mix of equities and fixed income investments are used in an...

  • Page 71
    ... activities. The Company uses longer-term foreign currency forward contracts, generally with maturities of three years or less, to mitigate some of the risk related to changes in the exchange rate between forecasted revenues denominated in other currencies and the United States dollar. Short-term...

  • Page 72
    .... 133. The aggregate United States dollar equivalent notional amount of foreign currency forward contracts held by the Company with external third parties as of the balance sheet dates are as follows (in millions): December 31, 2007 2006 Contracts not designated as hedges: Euro British pound Other...

  • Page 73
    ... in the fair value of undesignated foreign currency forward contracts are recognized in "Cost of services." Prior to September 29, 2006, the Company did not have derivatives that qualified for hedge accounting in accordance with SFAS No. 133. As such, the effect of the changes in the fair value of...

  • Page 74
    WESTERN UNION 2007 Annual Report The following table summarizes the fair value of derivatives held at December 31, 2007 and their expected maturities (in millions): Total 2008 2009 2010 2011 Foreign currency hedges - cash ï¬,ow Foreign currency hedges - undesignated Interest rate hedges Total $(...

  • Page 75
    ... of Western Union common stock on the grant date, have 10-year terms, and vest over four equal annual increments beginning 12 months after the date of grant. Compensation expense related to stock options is recognized over the requisite service period. The requisite service period for stock options...

  • Page 76
    ...this accelerated vesting, the Company incurred a non-cash pre-tax charge of $22.3 million during the year ended December 31, 2007 for such awards held by Western Union employees. Approximately one-third of this charge was recorded within "Cost of services" and two-thirds was recorded within "Selling...

  • Page 77
    ... Stock Units A summary of Western Union activity for restricted stock awards and units relating to Western Union and First Data employees for the year ended December 31, 2007 is listed below (awards/units in millions): Year Ended December 31, 2007 Number Outstanding Weighted-Average Grant-Date...

  • Page 78
    ... options, restricted stock awards and ESPP rights for Western Union employees recognized over their vesting periods, is as follows (in millions): Year Ended December 31, 2005 Reported net income Restricted stock expense and effect of accelerated vesting included in reported net income, net of tax...

  • Page 79
    ... of traded options, the market price of First Data stock, the exercise price and remaining term of the traded options, the expected dividends and the risk-free rate. EXPECTED DIVIDEND YIELD - The Company's expected annual dividend yield is calculated based on Western Union's average stock price on...

  • Page 80
    WESTERN UNION 2007 Annual Report The assumptions used to calculate the fair value of options granted will be evaluated and revised, as necessary, to reï¬,ect market conditions and the Company's historical experience and future expectations. The calculated fair value is recognized as compensation ...

  • Page 81
    ... the Company's reportable segment results for the years ended December 31, 2007, 2006 and 2005, respectively (in millions): Year Ended December 31, 2007 2006 2005 Revenues: Consumer-to-Consumer: Transaction fees Foreign exchange revenue Other revenues Consumer-to-Business: Transaction fees Foreign...

  • Page 82
    ... States location. Based on the method used to attribute revenue between countries described in the paragraph above, no individual country outside the United States accounted for more than 10% of segment revenue for the years ended December 31, 2007, 2006 and 2005. In addition, no individual agent...

  • Page 83
    ... sends out annual stockholder reports and press releases. To receive this information please write the company at 12500 East Belford Avenue, Englewood, CO 80112, call +1-866-405-5012 or visit the "Investor Relations" section of our website at www.westernunion.com. A copy of the Western Union 2007...

  • Page 84
    WESTERN UNION 12500 E AST BELFORD AVENUE ENGLEWOOD, CO 80112, USA