Western Union 2008 Annual Report Download - page 23

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to overall earnings per share. Transactions in the euro,
which represent the majority of the Company’s foreign
currency denominated business, benefited revenue by
$82 million and operating income by $19 million during
the year. The benefit in the first three quarters of 2008
was slightly offset by the negative impact to consumer-to-
consumer transaction fee and foreign exchange revenue
in the fourth quarter of 2008 due to the strengthening of
the United States dollar relative to certain other currencies,
including the euro. However, the impact to our operating
income was positive to the fourth quarter of 2008 due
to our derivative hedges. If exchange rates between the
United States dollar and other currencies remain constant
with those experienced at the end of 2008, or if other cur-
rencies continue to weaken against the United States dol-
lar, we expect a negative impact on our revenue in 2009.
However, the impact to earnings per share is expected to
be less due to the impact of translation on our expenses
and our hedging program.
The fluctuation in the exchange rate between the
euro and the United States dollar (which contributed to
the majority of the impact of translating foreign currency
denominated revenues and expenses into United States
dollars) for the year ended December 31, 2007 resulted
in a benefit to consumer-to-consumer transaction fee and
foreign exchange revenue of $79 million, over the previous
year, net of foreign currency hedges, that would not have
occurred had there been a constant exchange rate. For
the year ended December 31, 2007 the related benefit
to operating income was $12 million.
Our Asia Pacific (“APAC”) region also experienced
strong transaction and revenue growth during the years
ended December 31, 2008 and 2007 compared to the cor-
responding previous periods, including growth contributed
by the inbound market of the Philippines. Revenue growth
slowed in APAC during the fourth quarter 2008 compared
to the same period in 2007, in part due to the weakening
global economy described previously and the decline in
high revenue transactions from small entrepreneurs that
typically make purchases in China.
Within our Americas region (which includes North
America, Latin America, the Caribbean, and South
America), our United States to Mexico, United States out-
bound and transactions in our domestic (between and
within the United States and Canada) businesses continued
to be impacted by the overall weakening in the United
States economy. The immigration debate and market
softness, in part due to the slowdown in the construction
industry, began adversely impacting the United States
businesses in the second quarter of 2006. We responded
to these factors by launching distribution, pricing, advertis-
ing, promotion and community outreach initiatives in 2006
and 2007. Although the United States businesses revenue
decline experienced in 2008 moderated compared with
2007, we experienced increased revenue declines in the
fourth quarter of 2008 compared to the third quarter of
2008, due to the weakening in the United States economy.
Foreign exchange revenue increased for the years
ended December 31, 2008 and 2007 over the correspond-
ing previous periods, due to an increase in cross-currency
transactions primarily as a result of growth in international
consumer-to-consumer transactions. As described above,
foreign exchange revenue also benefited during the year
ended December 31, 2008 compared to 2007 from the
strengthening of other currencies most notably the euro,
against the United States dollar.
We have historically implemented and will likely imple-
ment future strategic fee reductions and actions to reduce
foreign exchange spreads, where appropriate, taking into
account growth opportunities and competitive factors.
Fee decreases and foreign exchange actions generally
reduce margins, but are done in anticipation that they will
result in increased transaction volumes and increased rev-
enues over time. Such fee decreases and foreign exchange
actions have impacted our annual consolidated revenue
on average approximately 3% during 2006 and 2007 and
approximately 1% in 2008.
Pago Fácil, which was acquired in December 2006, con-
tributed $67.7 million and $3.6 million of revenue for the
years ended December 31, 2007 and 2006, respectively,
and also contributed to consolidated revenue growth in
2007 compared to 2006.
Operating expenses overview
The following factors impacted both cost of services and
selling, general and administrative expenses during the
periods presented:
º
RESTRUCTURING AND REL ATED ACTIVITIES—In 2008, we
incurred restructuring and related expenses in conjunc-
tion with the decision to close our facilities in Missouri
and Texas, including the elimination of approximately
650 positions held by union employees and certain
management positions in these same facilities, as well
as other reorganizations. The $82.9 million of expenses
incurred in 2008 were offset by operating expense
savings of approximately $10 million in 2008 and are
expected to be offset by approximately $40 million
annually beginning in 2009.
º
2007 STOCK COMPENSATION CHARGE— At the time of the
spin-off, First Data converted stock options, restricted
stock awards, and restricted stock units (collectively,
“stock-based awards”) of First Data stock held by
Western Union and First Data employees. Both Western
Union and First Data employees received converted
Western Union stock-based awards. All converted
stock-based awards, which had not vested prior to
September 24, 2007, were subject to the terms and
conditions applicable to the original First Data stock-
based awards, including change of control provisions
which require full vesting upon a change of control of
First Data. Accordingly, upon the completion of the
acquisition of First Data on September 24, 2007 by
an affiliate of KKR, all of these remaining converted
unvested Western Union stock-based awards vested.
In connection with this accelerated vesting, we incurred
a non-cash pretax charge of $22.3 million during the
third quarter of 2007. Approximately one-third of this
charge was recorded within “cost of services” and
two-thirds was recorded within “selling, general and
administrative expenses” in the consolidated state-
ments of income.
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Management’s
Discussion and
Analysis of Financial
Condition and
Results of Operations