Western Union 2008 Annual Report Download - page 33

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Management’s
Discussion and
Analysis of Financial
Condition and
Results of Operations
despite this situation, we have adequate liquidity to meet
our business needs through our existing cash balances, our
ability to generate cash flows through operations, and the
amounts available to borrow under our commercial paper
program and our revolving credit facility, as described
under “Financing Resources” below.
In many cases, we receive funds from money transfers
and certain other payment services before we settle the
payment of those transactions. These funds, referred to as
“settlement assets” on our consolidated balance sheets,
are not used to support our operations. However, we
earn income from investing these funds. We maintain a
portion of these settlement assets in highly liquid invest-
ments, classified 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 $405.6 million as
of December 31, 2008. Most state regulators in the United
States require us to maintain specific high-quality, invest-
ment grade securities and such investments are intended
to secure relevant outstanding settlement obligations in
accordance with applicable regulations. We do not hold
financial instruments for trading purposes, and all of our
investment securities are classified as available-for-sale
and recorded at fair value.
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, 2008,
the significant majority of our investment securities had
credit ratings of “AA-” or better from a major credit rating
agency. Our investment securities are also actively man-
aged with respect to concentration. As of December 31,
2008, there were no investments with a single issuer or
individual securities representing more than 10% of our
investment securities portfolio.
IPS, our third-party issuer of Western Union money
orders, holds the settlement assets generated from the
sale of money orders, and maintains the responsibility for
investing those funds. Based on the terms of the agree-
ment with IPS, we are provided with a fixed rate of return
on the funds awaiting settlement. In connection with the
July 18, 2008 agreement we entered into with IPS, on
October 1, 2009 we will assume the responsibility for the
settlement of money orders and will have responsibility
for managing the investment portfolio. On the same date,
we will receive an amount of cash sufficient to satisfy all
outstanding money order liabilities, which vary from day
to day but approximate $800 million. In anticipation of our
exposure to fluctuations in interest rates, we have entered
into interest rate swaps on certain of our fixed rate notes.
Through a combination of the revenue generated from
these investment securities and the anticipated interest
expense savings resulting from these interest rate swaps,
we estimate that we should be able to retain subsequent
to the Transition Date, on a pretax income basis through
2011, a comparable rate of return as we are receiving
under our current agreement with IPS.
Cash Flows from Operating Activities
During the years ended December 31, 2008 and 2007,
cash provided by operating activities was $1,253.9 million
and $1,103.5 million, respectively. Cash flows provided by
operating activities increased due to increased net income
and working capital fluctuations in 2008.
During the years ended December 31, 2007 and 2006,
cash provided by operating activities was $1,103.5 million
and $1,108.9 million, respectively. Cash flows provided
by operating activities was consistent between 2007 and
2006, despite decreased net income. The decrease in net
income was, in part, due to increased non-cash charges
which did not decrease cash flows. Cash flows from operat-
ing activities also benefited from favorable working capital
fluctuations in 2007.
Financing Resources
As of December31, 2008 and 2007, we have the following outstanding borrowings (in millions):
2008 2007
DUE IN LESS THAN ONE YEAR:
Commercial paper $ 82.9 $ 338.2
Term loan 500.0 —
Floating rate notes, due November 2008 (a) — 500.0
DUE IN GREATER THAN ONE YEAR:
5.400% notes, net of discount, due 2011 (b) 1,042.8 1,002.8
5.930% notes, net of discount, due 2016 (c) 1,014.4 999.7
6.200% notes, net of discount, due 2036 497.4 497.3
Other borrowings 6.0 —
Total borrowings $3,143.5 $3,338.0
(a) The floating rate notes were redeemed upon maturity on November17, 2008.
(b) At December31, 2008 and 2007, we held interest rate swaps related to the 5.400% notes due 2011 (“2011 Notes”) with an aggregate notional amount of $550 million
and $75 million, respectively. The carrying value of the 2011 Notes has been adjusted for the impact of these hedges. During the fourth quarter of 2008, we terminated
an aggregate notional amount of $195 million of interest rate swaps. We received cash of $10.7 million on the termination of these swaps, the offset of which is reflected
in “Borrowings” and will be reclassified as a reduction to “Interest expense” over the life of the 2011 notes.
(c) At December31, 2008, we held an interest rate swap related to the 5.930% notes due 2016 (“2016 Notes”) with an aggregate notional amount of $110 million. The
carrying value of the 2016 Notes has been adjusted for the impact of these hedges.