Western Union 2008 Annual Report Download - page 24

WESTERN UNION
2008 Annual Report
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INCREMENTAL INDEPENDENT PUBLIC COMPANY EXPENSES—
We recorded recurring incremental independent public
company expenses of $59.1 million and $25.1 million
in 2007 and 2006, respectively, in the consolidated
statements of income. These expenses are those in
excess of amounts allocated to us by First Data prior to
September 29, 2006 or beyond amounts we presume
First Data would have allocated subsequently thereto.
Most of these expenses continue to be incurred in
subsequent periods.
Cost of services
In addition to the restructuring costs described above, cost
of services increased for the year ended December 31,
2008 compared to the corresponding period in 2007
primarily due to agent commissions which increase as rev-
enues increase. Cost of services as a percentage of revenue
was 59%, 57% and 54% for the years ended December 31,
2008, 2007 and 2006, respectively. The majority of the
increase in cost of services as a percentage of revenue
for the year ended December 31, 2008 compared to the
corresponding period in 2007 was primarily due to restruc-
turing and related expenses of $62.8 million as described
above, and the shift in our business mix reflecting stronger
growth from our international consumer-to-consumer
business, which carries higher cost of services compared
to our United States originated businesses. Selected con-
sumer-to- consumer international agent commissions have
been lowered but were partially offset by certain higher
commissions in the United States. In addition, a higher
percentage of our consumer-to-business services were
generated from our United States electronic-based pay-
ments and payments related to Pago Fácil, each of which
had higher cost of services as a percentage of revenue
compared to our United States cash-based payments
business. The increase was partially offset by lower stock
compensation charges for the year ended December 31,
2008 compared to the corresponding period in 2007, as
described above and below, that did not recur in 2008.
The majority of the increase in cost of services as a
percentage of revenue for the year ended December 31,
2007 compared to the corresponding period in 2006 was
attributable to the shift in our business mix reflecting stron-
ger growth from our international business, as described
above. The Pago Fácil business, which carries a lower
margin than our existing consumer-to-business services,
also contributed to the increase in cost of services. The
stock compensation charge resulting from the acquisition
of First Data, as described above, and incremental public
company expenses were additional factors leading to the
increase in cost of services in 2007.
Selling, general and administrative
Selling, general and administrative (“SG&A”) expenses
increased for the year ended December 31, 2008 com-
pared to the same period in the prior year due to higher
employee compensation expenses and restructuring and
related expenses of $20.1 million, offset by better leverage
of our marketing expenses as well as lower stock compen-
sation charges in 2008, as described above.
SG&A expenses increased for the year ended December 31,
2007 compared to the corresponding period in 2006 pri-
marily due to incremental public company expenses and
the stock compensation charge related to KKR’s acquisi-
tion of First Data, as described above. In addition, costs
associated with the inclusion of the Pago Fácil business
contributed to the increase in 2007 from 2006.
During the year ended December 31, 2008, market-
ing related expenditures, principally classified within
SG&A, were approximately 5.0% of revenue due to bet-
ter leveraging of our marketing expenditures. For the
years ended December 31, 2007 and 2006, marketing
related expenditures were approximately 6.0% and 6.5%
of revenue, respectively. Marketing related expenditures
include advertising, events, loyalty programs and the cost
of employees dedicated to marketing activities. When mak-
ing decisions with respect to marketing investments, we
review opportunities for advertising and other marketing
related expenditures together with opportunities for fee
adjustments and other initiatives in order to best maximize
the return on these investments. Such fee decreases and
foreign exchange actions have impacted our annual con-
solidated revenue on average approximately 3% during
2006 and 2007 and approximately 1% in 2008. For further
discussion regarding the impact of pricing decreases
refer to the “Revenues overview” discussion within the
consumer-to-consumer segment section.
Interest income
Interest income decreased during the year ended
December 31, 2008 compared to 2007 due primarily
to lower short-term interest rates, and to a lesser extent,
lower average interest-bearing cash balances. Interest
income increased during the year ended December 31,
2007 compared to 2006 due to higher international cash
balances resulting from the net cash received in connec-
tion with the settlement of intercompany notes with First
Data (net of certain other payments made to First Data)
on the spin-off date, and from cash generated through
our international operations. Also contributing to higher
interest income in 2007 compared to 2006 was interest
income recorded in connection with a $140.0 million loan
made to one of our agents in the first quarter of 2006.
Interest expense
Interest expense decreased for the year ended December 31,
2008 compared to 2007 due to decreases in interest
rates related to our floating rate debt. Interest expense
increased for the year ended December 31, 2007
compared to 2006 due to interest expense on our out-
standing borrowings that arose in connection with the
spin-off on September 29, 2006. Interest expense was
significantly higher in 2007 since the related borrowings
were outstanding for the full year 2007 compared to three
months during 2006.
Derivative (losses)/gains, net
Derivative (losses)/gains, net for the years ended December 31,
2008 and 2007 relate primarily to the portion of the change
in fair value of foreign currency accounting hedges that is
excluded from the measurement of effectiveness, which
includes (a) differences between changes in forward rates
and spot rates, and (b) gains or losses on the contract and any
offsetting positions during periods in which the instrument
is not designated as a hedge. Although the majority
of changes in the value of our hedges are deferred in
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