Western Union 2007 Annual Report Download - page 39

Management’s Discussion and Analysis of Financial Condition and Results of Operations
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The measurement date for our pension plans is September
30. Thus, during the third quarter of each year, management
reviews and, if necessary, adjusts the assumptions associated
with its pension plans. During 2008, in connection with the adop-
tion of SFAS No. 158, “Employers Accounting for Defi ned Benefi t
Pension and Other Postretirement Plans, An Amendment of SFAS
No. 87, 88, 106 and 132(R)” (“SFAS No. 158”), the measurement
dates for our pension plans will be changed to December 31.
The calculation of the funded status and net periodic benefi t
income is dependent upon two primary assumptions: 1) expected
long-term return on plan assets; and 2) discount rate. Our expected
long-term return on plan assets was 7.50% for 2007 and 2006.
If actual asset returns exceed the expected return on plan assets
by 100 basis points, the plans’ funded status would improve by
$4 million. The discount rate assumption for the company’s
benefi t obligation was 6.02% and 5.61% for 2007 and 2006,
respectively. A 100 basis point change in the discount rate would
change the funded status by $33 million. Due to the frozen status
of our plans, a 100 basis point change in these assumptions
would not be signifi cant to the net periodic benefi t income or
expense of our plans.
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Contractual Obligations
The following table summarizes our contractual obligations to third parties as of December 31, 2007 and the effect such obligations
are expected to have on our liquidity and cash fl ows in future periods (in millions).
Payments Due by Period
Total Less than 1 Year 1-3 Years 3-5 Years After 5 Years
Borrowings, including interest(a) $4,986.3 $1,010.4 $286.1 $1,230.2 $2,459.6
Purchase obligations(b) 126.1 50.2 42.9 33.0 —
Foreign currency forward contracts(c) 37.2 28.8 8.4 — —
Operating leases 85.1 22.7 26.8 16.1 19.5
Unrecognized tax benefi ts(d) 276.2 — — — —
Capitalized contract costs(e) 14.3 14.1 0.2 — —
Estimated pension funding(f) 27.6 — 15.0 12.6 —
$5,552.8 $1,126.2 $379.4 $1,291.9 $2,479.1
(a) We have estimated our interest payments based on i) projected LIBOR rates in calculating interest on commercial paper borrowings and Floating Rate Notes, ii) projected commercial
paper borrowings outstanding throughout 2008, and the assumption that no such amounts will be outstanding on or after December 31, 2008, and iii) the assumption that no debt
issuances or renewals will occur upon the maturity dates of our fi xed and fl oating rate notes. Our fl oating rate notes mature in November 2008 and we plan to refi nance these notes
in 2008 with new fi nancing sources.
(b) Many of our contracts contain clauses that allow us to terminate the contract with notice, and with or without a termination penalty. Termination penalties are generally an amount
less than the original obligation. Certain contracts also have an automatic renewal clause if we do not provide written notifi cation of our intent to terminate the contract. Obligations
under certain contracts are usage-based and are, therefore, estimated in the above amounts. Historically, we have not had any signifi cant defaults of our contractual obligations or
incurred signifi cant penalties for termination of our contractual obligations.
(c) Represents the liability position of our foreign currency forward contracts as of December 31, 2007, which will fl uctuate based on market conditions.
(d) The timing of cash payments on unrecognized tax benefi ts, including accrued interest and penalties, is inherently uncertain because the ultimate amount and timing of such liabilities
is affected by factors which are variable and outside our control.
(e) Represents accrued and unpaid initial payments for new and renewed agent contracts as of December 31, 2007.
(f) We have estimated our pension plan funding requirements using assumptions that are consistent with pension legislation enacted during 2006. The actual minimum required
amounts each year will vary based on the actual discount rate and asset returns when the funding requirement is calculated.
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Other Commercial Commitments
We had $62.0 million in outstanding 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 held primarily in con-
nection with lease arrangements and certain agent agreements.
We expect to renew the letters of credit and bank guarantees
prior to their expiration in most circumstances.
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Critical Accounting Policies
Management’s discussion and analysis of results of operations
and fi nancial condition is based on our fi nancial statements that
have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of
these fi nancial statements requires that management make
estimates and assumptions that affect the amounts reported for
revenues, expenses, assets, liabilities and other related disclosures.
Actual results may or may not differ from these estimates. Our
signifi cant accounting policies are discussed in Note 2, Summary
of Signifi cant Accounting Policies, of the notes to consolidated
financial statements, included in, Financial Statements and
Supplementary Data.
Our critical accounting policies, described below, are very
important to the portrayal of our fi nancial position and our results
of operations and applying them requires our management to
make diffi cult, subjective and complex judgments. We believe
that the understanding of these key accounting policies and
estimates are essential in achieving more insight into our operat-
ing results and fi nancial condition.