Western Union 2007 Annual Report Download - page 35

Management’s Discussion and Analysis of Financial Condition and Results of Operations
33
Operating Income
For the year ended December 31, 2007, the increase in operating
income was driven by modest growth from our prepaid services.
For the year ended December 31, 2006, the increase in operating
income was driven by the money order business and the elimina-
tion of operating losses of the businesses shut down or disposed
of primarily in 2006, partially offset by recruiting and relocation
expenses associated with hiring senior management positions
new to our company and consulting costs used to develop ongo-
ing processes, all in connection with the spin-off from First Data.
Aggregate operating income related to the shut-down or disposed
of businesses, including a gain on the sale of assets related to
our internet auction payments business, for the year ended
December 31, 2006 was $0.1 million. The aggregate operating
loss associated with such businesses in the year ended December
31, 2005 was $(16.2) million.
Further fi nancial information relating to each of our segments’
external revenue, operating profi t measures and total assets is
set forth in Note 15 to our consolidated fi nancial statements.
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Capital Resources and Liquidity
Our primary source of liquidity has been cash generated from
our operating activities, driven primarily from net income, and
also impacted by fl uctuations in working capital. Our working
capital is affected by the timing of interest payments on our
outstanding borrowings, timing of income tax payments, and
collections on receivables, among other items. The majority of
our interest payments are due in the second and fourth quarter
which results in a decrease in the amount of cash provided by
operating activities in those quarters, and a corresponding
increase to the fi rst and third quarter.
Our future cash fl ows generated from operating activities
could be impacted by a variety of factors, some of which are out
of our control, including changes in economic conditions, espe-
cially those impacting the migrant population, and changes in
income tax laws or the status of income tax audits.
A signifi cant portion of our cash fl ows from operating activi-
ties has been generated from subsidiaries, some of which are
regulated entities. These subsidiaries may transfer all excess cash
fl 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 expect to reinvest these earnings outside of the
United States indefi nitely; (b) assets located in countries outside
of the United States containing legal or regulatory restrictions
from being transferred outside of those countries; and (c) cash
and investment balances that are maintained by regulated sub-
sidiaries to secure certain money transfer obligations initiated
in the United States in accordance with applicable state regula-
tions in the United States. Signifi cant changes in the regulatory
environment for money transmitters could impact our primary
source of liquidity.
As of December 31, 2007, we have cash and cash equivalents
of $1,793.1 million. We also have a $1.5 billion revolving credit
facility available to meet additional short-term liquidity needs
that might arise, and available to support borrowings under our
commercial paper program.
Taking into account our projected share repurchases, divi-
dends, capital expenditures, and debt service during 2008, we
believe our cash fl ows generated from operating activities and
available fi nancing sources will provide us with an adequate
source of liquidity to meet the needs of our business.
Cash and Investment Securities
Our foreign entities held $1,121.7 million and $942.1 million of
our cash and cash equivalents on hand at December 31, 2007
and 2006, respectively. We currently plan to invest the majority
of these funds through these foreign entities. Repatriating these
funds to the United States would, in many cases, result in signifi -
cant 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
these funds in expanding our international operations and acquir-
ing businesses overseas.
We expect to receive and hold funds from money transfers
and certain other payment services before we settle with payment
recipients. These funds, referred to as “settlement assets” on our
consolidated balance sheets, are not used to support our opera-
tions. However, we earn income from investing these funds. We
maintain a portion of these settlement assets in highly liquid
investments, classifi ed as “cash and cash equivalents” within
“settlement assets,” to fund settlement obligations.
A portion of our settlement assets are held in investment
securities, substantially all of which are highly rated state and
municipal debt instruments, totaling $193.8 million and $154.2
million as of December 31, 2007 and 2006, respectively. Most
state regulators in the United States require us to maintain specifi c
high-quality, investment grade securities and such investments
are intended to secure relevant outstanding settlement obliga-
tions in accordance with applicable regulations. We do not hold
fi nancial instruments for trading purposes, and all of our invest-
ment securities are classifi ed as available-for-sale and recorded
at fair value, which is based primarily on market quotations.
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. As of December 31, 2007, substantially all
of our investment securities had credit ratings of “AA-” or better
from a major credit rating agency. The credit quality of the
majority of our investment portfolio was “AAA”. Our investment
securities are also actively managed with respect to concentration.
As of December 31, 2007, no individual security represented
more than 10% of our investment securities portfolio.
The third-party issuer of Western Union branded money
orders holds the settlement assets generated from the sale of
Western Union money orders, and maintains the responsibility
for investing those funds. Based on the terms of the contract with
the issuer, we are provided with a fi xed rate of return on the funds
awaiting settlement.