Western Union 2007 Annual Report Download - page 23

Management’s Discussion and Analysis of Financial Condition and Results of Operations
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|| We continue to face robust competition in both our consumer-
to-consumer and consumer-to-business segments from a
variety of money transfer and consumer payment providers.
We believe the most signifi cant competitive factors in the
consumer-to-consumer segment relate to brand recognition,
distribution network, consumer experience and price and in
the consumer-to-business segment relate to brand recognition,
convenience, speed, variety of payment methods and price.
|| Regulation of the money transfer industry is increasing. The
number and complexity of regulations around the world and
the pace at which regulation is changing are factors that pose
signifi cant challenges to our business. We continue to imple-
ment policies and programs and adapt our business practices
and strategies to help us comply with current legal require-
ments, as well as with new and changing legal requirements
affecting particular services, or the conduct of our business
in general. Our activities include dedicated compliance
personnel, training and monitoring programs, government
relations and regulatory outreach efforts and support and
guidance to the agent network on compliance programs.
These efforts increase our costs of doing business.
||
Our consumer-to-business segment continues to experience
a shift in demand in the United States from cash-based walk-in
payment services to lower margin, higher volume growth
electronic payment services.
Signifi cant Financial and Other Highlights
Signifi cant fi nancial and other highlights for the year ended
December 31, 2007 include:
|| We generated $4,900.2 million in total consolidated revenues
and $1,322.0 million in consolidated operating income,
resulting in year-over-year growth of 10% and 1% in total
consolidated revenues and operating income, respectively.
Our operating income margin was 27% during the year ended
December 31, 2007 compared to 29% during the year ended
December 31, 2006. Operating income and operating income
margin were impacted by the shift in business mix refl ecting
stronger growth in the international business, which carries
a lower margin than the United States originated businesses,
the $22.3 million accelerated non-cash stock compensation
charge taken in connection with the change in control of First
Data as further described in “Results of Operations,” and $59.1
million of incremental independent public company expenses
compared to $25.1 million in 2006.
|| Consolidated net income during 2007 was $857.3 million,
representing a decrease of 6% from 2006. Basic and diluted
earnings per share during 2007 were $1.13 and $1.11, respec-
tively, compared to basic and diluted earnings per share in
2006 of $1.20 and $1.19, respectively. In addition to the factors
described above which have negatively impacted operating
income during 2007, net income also decreased in 2007 due
to higher interest expense in connection with higher outstand-
ing borrowings payable to third parties.
|| We completed 167.7 million consumer-to-consumer transac-
tions worldwide, representing an increase of 14% over 2006,
due primarily to transactions generated outside of the
United States.
|| We completed 404.5 million consumer-to-business transac-
tions, an increase of 62% over 2006. Excluding transactions
attributable to Pago Fácil, which was acquired in December
2006, consumer-to-business transactions increased 1% in
2007 compared to 2006.
||
Consolidated cash fl ow provided by operating activities was
$1,103.5 million. Cash provided by operating activities
remained consistent during the year ended December 31,
2007 compared to the year ended December 31, 2006,
despite decreased net income, as some of the decrease to
net income was from increased non-cash charges which have
not impacted cash fl 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-free distribution to First Data shareholders. Effec-
tive on September 29, 2006, First Data completed the separation
and the distribution of these businesses (the “Distribution”).
Prior to the Distribution, our company had been a segment of
First Data.
In connection with the spin-off, we reported a $4.1 billion
dividend to First Data in our consolidated statements of stock-
holders’ equity/(defi ciency)/net investment in The Western
Union Company, consisting of a promissory note from our
subsidiary, First Financial Management Corporation, or “FFMC,”
in an aggregate principal amount of $2.4 billion, the issuance
of $1.0 billion in Western Union notes and a cash payment to
First Data of $100.0 million. The remaining dividend was com-
prised of cash, consideration for an ownership interest held by
a First Data subsidiary in one of our agents which had already
been refl ected as part of our company, settlement of net inter-
company receivables (exclusive of certain intercompany notes
as described in the following paragraph), and transfers of certain
liabilities, net of assets.
We also settled as part of the spin-off, certain intercompany
notes receivable and payable with First Data along with related
interest and currency swap agreements associated with these
notes. The net settlement of the principal and related swaps
resulted in a net cash infl ow to our cash fl ows from fi nancing
activities of $724.0 million. The net settlement of interest on these
notes receivable and payable of $40.7 million was refl ected in
cash fl ows from operating activities in our consolidated statement
of cash fl ows.