NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business and Basis of Presentation
The Western Union Company ("Western Union" or the "Company") is a leader in global money movement and payment services, providing people and businesses with fast, reliable and convenient ways to send money and make payments around the world. The Western Union
®
brand is globally recognized. The Company's services are primarily available through a network of agent locations in more than
200
countries and territories. Each location in the Company's agent network is capable of providing one or more of the Company's services.
The Western Union business consists of the following segments:
|
|
•
|
Consumer-to-Consumer
- The Consumer-to-Consumer operating segment facilitates money transfers between two consumers, primarily through a network of third-party agents. The Company's multi-currency, real-time money transfer service is viewed by the Company as one interconnected global network where a money transfer can be sent from one location to another, around the world. This service is available for international cross-border transfers - that is, the transfer of funds from one country to another - and, in certain countries, intra-country transfers - that is, money transfers from one location to another in the same country. This segment also includes money transfer transactions that can be initiated through websites and mobile devices.
|
|
|
•
|
Consumer-to-Business
- The Consumer-to-Business operating segment facilitates bill payments from consumers to businesses and other organizations, including utilities, auto finance companies, mortgage servicers, financial service providers and government agencies. The
significant majority
of the segment's revenue was generated in the United States during all periods presented, with the remainder primarily generated in Argentina.
|
|
|
•
|
Business Solutions
- The Business Solutions operating segment facilitates payment and foreign exchange solutions, primarily cross-border, cross-currency transactions, for small and medium size enterprises and other organizations and individuals. The
majority
of the segment's business relates to exchanges of currency at spot rates, which enable customers to make cross-currency payments. In addition, in certain countries, the Company writes foreign currency forward and option contracts for customers to facilitate future payments.
|
All businesses that have not been classified in the above segments are reported as "Other" and include the Company's money order and other services, in addition to costs for the review and closing of acquisitions.
There are legal or regulatory limitations on transferring certain assets of the Company outside of the countries where these assets are located. However, there are generally no limitations on the use of these assets within those countries. Additionally, the Company must meet minimum capital requirements in some countries in order to maintain operating licenses. As of
December 31, 2016
, the amount of these net asset limitations totaled approximately
$320 million
.
Various aspects of the Company's services and businesses are subject to United States federal, state and local regulation, as well as regulation by foreign jurisdictions, including certain banking and other financial services regulations.
Spin-off from First Data
On January 26, 2006, the First Data Corporation ("First Data") Board of Directors announced its intention to pursue the distribution of all of its money transfer and consumer payments businesses and its interest in a Western Union money transfer agent, as well as its related assets, including real estate, through a tax-free distribution to First Data shareholders (the "Spin-off"). Effective on September 29, 2006, First Data completed the separation and the distribution of these businesses by distributing The Western Union Company common stock to First Data shareholders (the "Distribution"). Prior to the Distribution, the Company had been a segment of First Data.
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Basis of Presentation
The financial statements in this Annual Report on Form 10-K are presented on a consolidated basis and include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated.
Consistent with industry practice, the accompanying Consolidated Balance Sheets are unclassified due to the short-term nature of the Company's settlement obligations contrasted with the Company's ability to invest cash awaiting settlement in long-term investment securities.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.
Principles of Consolidation
The Company consolidates financial results when it has a controlling financial interest in a subsidiary via voting rights or when it has both the power to direct the activities of an entity that most significantly impact the entity's economic performance and the ability to absorb losses or the right to receive benefits of the entity that could potentially be significant to the entity. The Company utilizes the equity method of accounting when it is able to exercise significant influence over the entity's operations, which generally occurs when the Company has an ownership interest of between
20%
and
50%
in an entity.
Earnings Per Share
The calculation of basic earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Outstanding options to purchase Western Union stock and unvested shares of restricted stock are excluded from basic shares outstanding. Diluted earnings per share reflects the potential dilution that could occur if outstanding stock options at the presented dates are exercised and shares of restricted stock have vested, using the treasury stock method. The treasury stock method assumes proceeds from the exercise price of stock options, the unamortized compensation expense and assumed tax benefits of options and restricted stock are available to acquire shares at an average market price throughout the period, and therefore, reduce the dilutive effect.
For the years ended
December 31, 2016
,
2015
and
2014
, there were
3.4 million
,
6.0 million
and
15.5 million
, respectively, of outstanding options to purchase shares of Western Union stock excluded from the diluted earnings per share calculation, as their effect was anti-dilutive.
The following table provides the calculation of diluted weighted-average shares outstanding (in millions):
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Basic weighted-average shares outstanding
|
490.2
|
|
|
512.6
|
|
|
533.4
|
|
Common stock equivalents
|
3.3
|
|
|
4.1
|
|
|
3.4
|
|
Diluted weighted-average shares outstanding
|
493.5
|
|
|
516.7
|
|
|
536.8
|
|
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair Value Measurements
The Company determines the fair values of its assets and liabilities that are recognized or disclosed at fair value in accordance with the hierarchy described below. The fair values of the assets and liabilities held in the Company's defined benefit plan trust ("Trust") are recognized or disclosed utilizing the same hierarchy. The following three levels of inputs may be used to measure fair value:
|
|
•
|
Level 1:
Quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2:
Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. For most of these assets, the Company utilizes pricing services that use multiple prices as inputs to determine daily market values. In addition, the Trust has other investments that fall within Level 2 that are valued at net asset value which is not quoted on an active market; however, the unit price is based on underlying investments which are traded on an active market. The individual redemption restrictions of Trust investments measured at net asset value are also considered when determining whether Level 2 classification is appropriate.
|
|
|
•
|
Level 3:
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include items where the determination of fair value requires significant management judgment or estimation. The Company has Level 3 assets that are recognized and disclosed at fair value on a non-recurring basis related to the Company's business combinations, where the values of the intangible assets and goodwill acquired in a purchase are derived utilizing one of the three recognized approaches: the market approach, the income approach or the cost approach.
|
Carrying amounts for many of the Company's financial instruments, including cash and cash equivalents, settlement cash and cash equivalents, and settlement receivables and settlement obligations approximate fair value due to their short maturities. Available-for-sale investment securities and derivative financial instruments are carried at fair value and included in Note 8. Fixed rate notes are carried at their original issuance values as adjusted over time to accrete that value to par, except for portions of notes hedged by interest rate swap agreements as disclosed in Note 14. The fair values of fixed rate notes are disclosed in Note 8 and are based on market quotations. The Company's investments in foreign corporate debt securities are classified as held-to-maturity securities. The fair values of the foreign corporate debt securities are disclosed in Note 8 and are based on market quotations.
The fair values of non-financial assets and liabilities related to the Company's business combinations are disclosed in Note 4. The fair value of the assets in the Trust, which holds the assets for the Company's defined benefit plan, is disclosed in Note 11.
Business Combinations
The Company accounts for all business combinations where control over another entity is obtained using the acquisition method of accounting, which requires that most assets (both tangible and intangible), liabilities (including contingent consideration), and remaining noncontrolling interests be recognized at fair value at the date of acquisition. The excess of the purchase price over the fair value of assets less liabilities and noncontrolling interests is recognized as goodwill. Certain adjustments to the assessed fair values of the assets, liabilities, or noncontrolling interests made subsequent to the acquisition date, but within the measurement period, which is one year or less, are recorded as adjustments to goodwill. Any adjustments subsequent to the measurement period are recorded in income. Any cost or equity method interest that the Company holds in the acquired company prior to the acquisition is remeasured to fair value at acquisition with a resulting gain or loss recognized in income for the difference between fair value and existing book value. Results of operations of the acquired company are included in the Company's results from the date of the acquisition forward and include amortization expense arising from acquired intangible assets. The Company expenses all costs as incurred related to or involved with an acquisition in "Selling, general and administrative" expenses.
Cash and Cash Equivalents
Highly liquid investments (other than those included in settlement assets) with maturities of three months or less at the date of purchase (that are readily convertible to cash) are considered to be cash equivalents and are stated at cost, which approximates fair value.
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company maintains cash and cash equivalent balances, including a portion in money market funds, with a group of globally diversified banks and financial institutions. The Company limits the concentration of its cash and cash equivalents with any one institution and regularly reviews investment concentrations and credit worthiness of these institutions.
Allowance for Doubtful Accounts
The Company records an allowance for doubtful accounts when it is probable that the related receivable balance will not be collected based on its history of collection experience, known collection issues, such as agent suspensions and bankruptcies, consumer chargebacks and insufficient funds, and other matters the Company identifies in its routine collection monitoring. The allowance for doubtful accounts was
$55.4 million
and
$41.1 million
as of
December 31, 2016
and
2015
, respectively, and is recorded in the same Consolidated Balance Sheet caption as the related receivable. During the years ended
December 31, 2016
,
2015
, and
2014
, the provision for doubtful accounts (bad debt expense) reflected in the Consolidated Statements of Income was
$63.9 million
,
$60.3 million
and
$50.7 million
, respectively.
Settlement Assets and Obligations
Settlement assets represent funds received or to be received from agents for unsettled money transfers, money orders and consumer payments. The Company records corresponding settlement obligations relating to amounts payable under money transfers, money orders and consumer payment service arrangements. Settlement assets and obligations also include amounts receivable from, and payable to, customers for the value of their cross-currency payment transactions related to the Business Solutions segment.
Settlement assets consist of cash and cash equivalents, receivables from selling agents and Business Solutions customers, and investment securities. Cash received by Western Union agents generally becomes available to the Company within one week after initial receipt by the agent. Cash equivalents consist of short-term time deposits, commercial paper and other highly liquid investments. Receivables from selling agents represent funds collected by such agents, but in transit to the Company. Western Union has a large and diverse agent base, thereby reducing the credit risk of the Company from any one agent. In addition, the Company performs ongoing credit evaluations of its agents' financial condition and credit worthiness. See Note 7 for information concerning the Company's investment securities.
Receivables from Business Solutions customers arise from cross-currency payment transactions in the Business Solutions segment. Receivables occur when funds have been paid out to a beneficiary but not yet received from the customer. Aside from these receivables, the credit risk associated with spot foreign currency exchange contracts is largely mitigated, as in most cases the Company requires the receipt of funds from customers before releasing the associated cross-currency payment.
Settlement obligations consist of money transfer, money order and payment service payables and payables to agents. Money transfer payables represent amounts to be paid to transferees when they request their funds. Most agents typically settle with transferees first and then obtain reimbursement from the Company. Money order payables represent amounts not yet presented for payment. Payment service payables represent amounts to be paid to utility companies, auto finance companies, mortgage servicers, financial service providers, government agencies and others. Due to the agent funding and settlement process, payables to agents represent amounts due to agents for money transfers that have been settled with transferees.
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Settlement assets and obligations consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Settlement assets:
|
|
|
|
Cash and cash equivalents
|
$
|
1,190.0
|
|
|
$
|
1,075.7
|
|
Receivables from selling agents and Business Solutions customers
|
1,327.3
|
|
|
1,070.4
|
|
Investment securities
|
1,231.8
|
|
|
1,162.6
|
|
|
$
|
3,749.1
|
|
|
$
|
3,308.7
|
|
Settlement obligations:
|
|
|
|
Money transfer, money order and payment service payables
|
$
|
2,598.2
|
|
|
$
|
2,428.5
|
|
Payables to agents
|
1,150.9
|
|
|
880.2
|
|
|
$
|
3,749.1
|
|
|
$
|
3,308.7
|
|
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the lesser of the estimated life of the related assets (generally three to ten years for equipment and furniture and fixtures, and
30
years for buildings) or the lease term. Maintenance and repairs, which do not extend the useful life of the respective assets, are charged to expense as incurred.
Property and equipment consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Equipment
|
$
|
585.5
|
|
|
$
|
529.8
|
|
Buildings
|
88.3
|
|
|
87.3
|
|
Leasehold improvements
|
84.3
|
|
|
83.3
|
|
Furniture and fixtures
|
40.4
|
|
|
39.6
|
|
Land and improvements
|
17.0
|
|
|
17.0
|
|
Projects in process
|
5.0
|
|
|
13.0
|
|
Total property and equipment, gross
|
820.5
|
|
|
770.0
|
|
Less accumulated depreciation
|
(600.0
|
)
|
|
(538.2
|
)
|
Property and equipment, net
|
$
|
220.5
|
|
|
$
|
231.8
|
|
Amounts charged to expense for depreciation of property and equipment were
$74.2 million
,
$67.7 million
and
$66.6 million
during the years ended
December 31, 2016
,
2015
and
2014
, respectively.
Goodwill
Goodwill represents the excess of purchase price over the fair value of tangible and other intangible assets acquired, less liabilities assumed arising from business combinations. The Company's annual impairment assessment did not identify any goodwill impairment during the years ended
December 31, 2016
,
2015
and
2014
.
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other Intangible Assets
Other intangible assets primarily consist of contract costs (primarily amounts paid to agents in connection with establishing and renewing long-term contracts), acquired contracts and software. Other intangible assets are amortized on a straight-line basis over the length of the contract or benefit periods. Included in the Consolidated Statements of Income is amortization expense of
$189.0 million
,
$202.5 million
and
$205.3 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
The Company capitalizes initial payments for new and renewed agent contracts to the extent recoverable through future operations or penalties in the case of early termination. The Company's accounting policy is to limit the amount of capitalized costs for a given contract to the lesser of the estimated future cash flows from the contract or the termination fees the Company would receive in the event of early termination of the contract.
Acquired contracts include customer and contractual relationships and networks of subagents that are recognized in connection with the Company's acquisitions.
The Company purchases and develops software that is used in providing services and in performing administrative functions. Software development costs are capitalized once technological feasibility of the software has been established. Costs incurred prior to establishing technological feasibility are expensed as incurred. Technological feasibility is established when the Company has completed all planning and designing activities that are necessary to determine that a product can be produced to meet its design specifications, including functions, features and technical performance requirements. Capitalization of costs ceases when the product is available for general use. Software development costs and purchased software are generally amortized over a term of
three
to
five
years.
The following table provides the components of other intangible assets (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
|
Weighted-
Average
Amortization
Period
(in years)
|
|
Initial Cost
|
|
Net of
Accumulated
Amortization
|
|
Initial Cost
|
|
Net of
Accumulated
Amortization
|
Acquired contracts
|
|
11.5
|
|
$
|
599.6
|
|
|
$
|
264.4
|
|
|
$
|
624.4
|
|
|
$
|
316.6
|
|
Capitalized contract costs
|
|
6.2
|
|
559.2
|
|
|
294.0
|
|
|
541.2
|
|
|
290.4
|
|
Internal use software
|
|
3.2
|
|
371.3
|
|
|
56.4
|
|
|
338.1
|
|
|
53.8
|
|
Acquired trademarks
|
|
24.5
|
|
34.2
|
|
|
18.5
|
|
|
34.7
|
|
|
20.2
|
|
Projects in process
|
|
3.0
|
|
30.6
|
|
|
30.6
|
|
|
23.5
|
|
|
23.5
|
|
Other intangibles
|
|
4.1
|
|
27.5
|
|
|
0.3
|
|
|
27.5
|
|
|
0.5
|
|
Total other intangible assets
|
|
7.8
|
|
$
|
1,622.4
|
|
|
$
|
664.2
|
|
|
$
|
1,589.4
|
|
|
$
|
705.0
|
|
The estimated future aggregate amortization expense for existing other intangible assets as of
December 31, 2016
is expected to be
$182.4 million
in 2017,
$148.3 million
in 2018,
$110.6 million
in 2019,
$79.4 million
in 2020,
$63.0 million
in 2021 and $
80.5 million
thereafter.
Other intangible assets are reviewed for impairment on an annual basis or whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. In such reviews, estimated undiscounted cash flows associated with these assets or operations are compared with their carrying values to determine if a write-down to fair value (normally measured by the present value technique) is required. The Company recorded immaterial impairments related to other intangible assets during the years ended
December 31, 2016
,
2015
and
2014
.
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenue Recognition
The Company's revenues are primarily derived from transaction fees and foreign exchange revenues paid by consumers to transfer money. These revenues vary by transaction based upon send and receive locations, the principal amount sent, speed of service, whether the transaction involves different send and receive currencies and the difference between the exchange rate set by the Company to the consumer and the rate available in the wholesale foreign exchange market, as applicable. Transaction fees and foreign exchange revenues are recorded as revenue at the time a transaction is initiated. The Company also offers several other payments services, including payments from consumers or businesses to other businesses for which revenue is impacted by these same factors.
Cost of Services
Cost of services primarily consists of agent commissions and expenses for call centers, settlement operations and related information technology costs. Expenses within these functions include personnel, software, equipment, telecommunications, bank fees, depreciation, amortization and other expenses incurred in connection with providing money transfer and other payment services.
Advertising Costs
Advertising costs are charged to operating expenses as incurred. Advertising costs for the years ended
December 31, 2016
,
2015
and
2014
were
$151.1 million
,
$166.3 million
and
$162.7 million
, respectively.
Income Taxes
The Company accounts for income taxes under the liability method, which requires that deferred tax assets and liabilities be determined based on the expected future income tax consequences of events that have been recognized in the consolidated financial statements. Deferred tax assets and liabilities are recognized based on temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the temporary differences are expected to reverse. The Company assesses the realizability of its deferred tax assets. A valuation allowance must be established when, based upon available evidence, it is more likely than not that all or a portion of the deferred tax assets will not be realized.
The Company recognizes the tax benefits from uncertain tax positions only when it is more likely than not, based on the technical merits of the position, the tax position will be sustained upon examination, including the resolution of any related appeals or litigation. The tax benefits recognized in the consolidated financial statements from such a position are measured as the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Foreign Currency Translation
The United States dollar is the functional currency for substantially all of the Company's businesses. Revenues and expenses are translated at average exchange rates prevailing during the period. Foreign currency denominated assets and liabilities for those businesses for which the local currency is the functional currency are translated into United States dollars based on exchange rates at the end of the year. The effects of foreign exchange gains and losses arising from the translation of assets and liabilities of these businesses are included as a component of "Accumulated other comprehensive loss" in the accompanying Consolidated Balance Sheets. Foreign currency denominated monetary assets and liabilities of businesses for which the United States dollar is the functional currency are remeasured based on exchange rates at the end of the period, and the resulting remeasurement gains and losses are recognized in net income. Non-monetary assets and liabilities of these operations are remeasured at historical rates in effect when the asset was recognized or the liability was incurred.
Derivatives
The Company uses derivatives to (a) minimize its exposures related to changes in foreign currency exchange rates and interest rates and (b) facilitate cross-currency Business Solutions payments by writing derivatives to customers. The Company recognizes all derivatives in the "Other assets" and "Other liabilities" captions in the accompanying Consolidated Balance Sheets at their fair value. All cash flows associated with derivatives are included in cash flows from operating activities in the Consolidated Statements of Cash Flows.
|
|
•
|
Cash flow hedges - Changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recorded in "Accumulated other comprehensive loss." Cash flow hedges consist of foreign currency hedging of forecasted revenues, as well as hedges of the forecasted issuance of fixed rate debt. Derivative fair value changes that are captured in "Accumulated other comprehensive loss" are reclassified to earnings in the same period or periods the hedged item affects earnings, to the extent the instrument is effective in offsetting the change in cash flows attributable to the risk being hedged. The portions of the change in fair value that are either considered ineffective or are excluded from the measure of effectiveness are recognized immediately in "
Derivative gains/(losses), net
."
|
|
|
•
|
Fair value hedges - Changes in the fair value of derivatives that are designated as fair value hedges of fixed rate debt are recorded in "Interest expense." The offsetting change in value of the related debt instrument attributable to changes in the benchmark interest rate is also recorded in "Interest expense."
|
|
|
•
|
Undesignated - Derivative contracts entered into to reduce the variability related to (a) money transfer settlement assets and obligations, generally with maturities from a few days up to
one month
, and (b) certain foreign currency denominated cash and other asset and liability positions, typically with maturities of less than
one year
at inception, are not designated as hedges for accounting purposes and changes in their fair value are included in "Selling, general and administrative." The Company is also exposed to risk from derivative contracts written to its customers arising from its cross-currency Business Solutions payments operations. The duration of these derivative contracts at inception is generally less than
one year
. The Company aggregates its Business Solutions payments foreign currency exposures arising from customer contracts, including the derivative contracts described above, and hedges the resulting net currency risks by entering into offsetting contracts with established financial institution counterparties (economic hedge contracts) as part of a broader foreign currency portfolio, including significant spot exchanges of currency in addition to forwards and options. The changes in fair value related to these contracts are recorded in "Foreign exchange revenues."
|
The fair value of the Company's derivatives is derived from standardized models that use market based inputs (e.g., forward prices for foreign currency).
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The details of each designated hedging relationship are formally documented at the inception of the arrangement, including the risk management objective, hedging strategy, hedged item, specific risks being hedged, the derivative instrument, how effectiveness is being assessed, and how ineffectiveness, if any, will be measured. The derivative must be highly effective in offsetting the changes in cash flows or fair value of the hedged item, and effectiveness is evaluated quarterly on a retrospective and prospective basis.
Legal Contingencies
The Company is a party to certain legal and regulatory proceedings with respect to a variety of matters. The Company records an accrual for these contingencies to the extent that a loss is both probable and reasonably estimable. If some amount within a range of loss appears to be a better estimate than any other amount within the range, that amount is accrued. When no amount within a range of loss appears to be a better estimate than any other amount, the lowest amount in the range is accrued.
Stock-Based Compensation
The Company currently has a stock-based compensation plan that provides for grants of Western Union stock options, restricted stock awards and restricted and unrestricted stock units to employees and non-employee directors of the Company.
All stock-based compensation to employees is required to be measured at fair value and expensed over the requisite service period. The Company recognizes compensation expense on awards on a straight-line basis over the requisite service period for the entire award, with an estimate of forfeitures. Refer to Note 16 for additional discussion regarding details of the Company's stock-based compensation plans.
Severance and Other Related Expenses
The Company records severance-related expenses once they are both probable and estimable in accordance with the provisions of the applicable accounting guidance for severance provided under an ongoing benefit arrangement. One-time, involuntary benefit arrangements and other costs are generally recognized when the liability is incurred. The Company also evaluates impairment issues associated with restructuring and other activities when the carrying amount of the related assets may not be fully recoverable, in accordance with the appropriate accounting guidance.
New Accounting Pronouncements
On January 1, 2016, the Company adopted an accounting pronouncement that requires capitalized debt issuance costs to be presented as a reduction to the carrying value of debt, with adoption retrospective for periods previously presented. The adoption of this standard resulted in a reduction of
$9.7 million
to the "Other assets" and "Borrowings" lines within the Consolidated Balance Sheet as of December 31, 2015.
In May 2014, the Financial Accounting Standards Board issued a new accounting pronouncement regarding revenue from contracts with customers, which the Company is required to adopt on January 1, 2018. This new standard, along with subsequent amendments, provides guidance on recognizing revenue, including a five step model to determine when revenue recognition is appropriate. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Management believes that the adoption of this standard will not have a material impact on the Company's financial position and results of operations and expects to adopt the standard using the modified retrospective approach, with the cumulative effect of adoption included in retained earnings as of January 1, 2018. Management continues to assess the new disclosure requirements of the standard and is enhancing its systems and processes to comply with the new disclosure requirements, but does not expect significant reporting system changes to be required.
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In January 2016, the Financial Accounting Standards Board issued a new accounting pronouncement regarding classification and measurement of financial instruments. This new standard provides guidance on how entities measure certain equity investments and present changes in the fair value. This standard requires that entities measure certain equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income. The Company is required to adopt the new standard on January 1, 2018. Management is currently evaluating the potential impact that the adoption of this standard will have on the Company's financial position, results of operations, and related disclosures.
In February 2016, the Financial Accounting Standards Board issued a new accounting pronouncement regarding the financial reporting of leasing transactions. This new standard requires a lessee to record assets and liabilities on the balance sheet for the rights and obligations arising from leases with terms of more than 12 months. The Company is required to adopt the new standard on January 1, 2019 using a modified retrospective approach. Management is currently evaluating the potential impact that the adoption of this standard will have on the Company’s financial position, results of operations, and related disclosures.
In March 2016, the Financial Accounting Standards Board issued a new accounting pronouncement regarding share-based payments to employees. This new standard requires that all excess tax benefits and tax deficiencies be recognized as income tax expense (benefit) in the income statement and that excess tax benefits be included as an operating activity for the cash flow statement. While this new standard also allows entities to either estimate share-based awards that are expected to vest or account for forfeitures as they occur, the Company intends to continue its current practice of estimating forfeitures when calculating compensation expense. Furthermore, the new standard also changes the tax withholding threshold for awards to qualify for accounting in equity. However, as all of the Company's awards have qualified for equity accounting, such change is not expected to impact the Company’s current practices related to the accounting for share-based payments. The Company is required to adopt the new standard on January 1, 2017. Management believes that the adoption of this standard will not have a material impact on the Company’s financial position, results of operations, cash flows, and related disclosures.
In June 2016, the Financial Accounting Standards Board issued a new accounting pronouncement regarding credit losses for financial instruments. The new standard requires entities to measure expected credit losses for certain financial assets held at the reporting date using a current expected credit loss model, which is based on historical experience, adjusted for current conditions and reasonable and supportable forecasts. The Company is required to adopt the new standard on January 1, 2020. Management is currently evaluating the potential impact that the adoption of this standard will have on the Company's financial position, results of operations, and related disclosures.
In January 2017, the Financial Accounting Standards Board issued a new accounting pronouncement to simplify the method of measuring a goodwill impairment charge in the event a reporting unit’s carrying amount exceeds its fair value. In those circumstances, the new standard requires the Company to recognize an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value. While management cannot predict if or when such an impairment charge may occur, or the amount of any potential impairment, management believes that this standard could result in lower impairment charges for the Company. The Company is required to adopt the new standard on January 1, 2020, with early adoption permitted. Management is currently evaluating the potential impact that the adoption of this standard will have on the Company's financial position and results of operations.
3. Business Transformation and Productivity and Cost-Savings Initiatives Expenses
During the year ended
December 31, 2016
, the Company incurred
$20.3 million
of expenses related to a business transformation initiative, referred to as the WU Way. The significant majority of these expenses relate to consulting service fees. During the year ended
December 31, 2016
, the Company made cash payments of
$7.4 million
related to the business transformation initiative.
During the years ended
December 31, 2015
and
2014
, the Company implemented initiatives to improve productivity and reduce costs. A significant majority of the productivity and cost-savings initiatives costs relate to severance and related expenses, including termination benefits received by certain of the Company's former executives. During the years ended
December 31, 2015
and
2014
, the Company incurred
$11.1 million
, and
$30.3 million
, respectively, of expenses related to productivity and cost-savings initiatives. During the years ended
December 31, 2016
,
2015
and
2014
, the Company made cash payments of
$12.7 million
,
$30.0 million
and
$42.9 million
, respectively, related to productivity and cost-savings initiatives.
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents the above expenses related to business transformation and productivity and cost-savings initiatives as reflected in the Consolidated Statements of Income (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
Business Transformation
|
|
Productivity and Cost-Savings Initiatives
|
Cost of services
|
$
|
2.5
|
|
|
$
|
1.0
|
|
|
$
|
11.6
|
|
Selling, general and administrative
|
17.8
|
|
|
10.1
|
|
|
18.7
|
|
Total expenses, pre-tax
|
$
|
20.3
|
|
|
$
|
11.1
|
|
|
$
|
30.3
|
|
Total expenses, net of tax
|
$
|
12.9
|
|
|
$
|
7.2
|
|
|
$
|
20.2
|
|
Business transformation expenses have not been allocated to the Company's segments disclosed in Note 17. While certain of these items are identifiable to the Company's segments, these expenses have been excluded from the measurement of segment operating income provided to the chief operating decision maker ("CODM") for purposes of assessing segment performance and decision making with respect to resource allocation.
The following table summarizes the productivity and cost-savings expenses incurred by reportable segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer-to-Consumer
|
|
Consumer-to-Business
|
|
Business Solutions
|
|
Other
|
|
Total
|
2015 expenses
|
|
$
|
7.6
|
|
|
$
|
1.5
|
|
|
$
|
1.8
|
|
|
$
|
0.2
|
|
|
$
|
11.1
|
|
2014 expenses
|
|
15.7
|
|
|
6.7
|
|
|
7.3
|
|
|
0.6
|
|
|
30.3
|
|
As of December 31, 2016, amounts remaining to be paid related to the business transformation initiative were
$12.9 million
. As of
December 31, 2016
and
2015
, amounts remaining to be paid related to productivity and cost-savings initiatives were
$2.0 million
and
$14.7 million
, respectively.
4. Acquisitions
During the first quarter of 2014, the Company acquired the Brazilian retail, walk-in foreign exchange operations of Fitta DTVM S.A. and Fitta Turismo Ltda. for total consideration of
$18.5 million
. Of the total consideration,
$15.6 million
was allocated to identifiable intangible assets, the majority of which relates to contractual relationships. The identifiable intangible assets are being amortized over a period of
two
to
twelve
years with a weighted average life of
ten
years. The Company recognized
$2.4 million
of goodwill related to this acquisition. The valuation of assets acquired was derived primarily using unobservable Level 3 inputs, which require significant management judgment and estimation.
The following table presents changes to goodwill for the years ended
December 31, 2016
and
2015
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer-to-Consumer
|
|
Consumer-to-Business
|
|
Business Solutions
|
|
Other
|
|
Total
|
January 1, 2015 balance
|
$
|
1,950.1
|
|
|
$
|
209.7
|
|
|
$
|
996.0
|
|
|
$
|
13.4
|
|
|
$
|
3,169.2
|
|
Currency translation
|
—
|
|
|
(5.2
|
)
|
|
—
|
|
|
(0.2
|
)
|
|
(5.4
|
)
|
December 31, 2015 balance
|
$
|
1,950.1
|
|
|
$
|
204.5
|
|
|
$
|
996.0
|
|
|
$
|
13.2
|
|
|
$
|
3,163.8
|
|
Currency translation
|
—
|
|
|
(1.7
|
)
|
|
—
|
|
|
(0.1
|
)
|
|
(1.8
|
)
|
December 31, 2016 balance
|
$
|
1,950.1
|
|
|
$
|
202.8
|
|
|
$
|
996.0
|
|
|
$
|
13.1
|
|
|
$
|
3,162.0
|
|
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Commitments and Contingencies
Letters of Credit and Bank Guarantees
The Company had approximately
$165 million
in outstanding letters of credit and bank guarantees as of
December 31, 2016
that are primarily held in connection with safeguarding consumer funds, lease arrangements, and certain agent agreements. The letters of credit and bank guarantees have expiration dates through
2021
, with many having a
one
-year renewal option. The Company expects to renew the letters of credit and bank guarantees prior to expiration in most circumstances.
Litigation and Related Contingencies
The Company is subject to certain claims and litigation that could result in losses, including damages, fines and/or civil penalties, which could be significant, and in some cases, criminal charges. The Company regularly evaluates the status of legal matters to assess whether a loss is probable and reasonably estimable in determining whether an accrual is appropriate. Furthermore, in determining whether disclosure is appropriate, the Company evaluates each legal matter to assess if there is at least a reasonable possibility that a loss or additional loss may have been incurred and whether an estimate of possible loss or range of loss can be made. Unless otherwise specified below, the Company believes that there is at least a reasonable possibility that a loss or additional loss may have been incurred for each of the matters described below. For certain of these matters, management is unable to provide a meaningful estimate of the possible loss or range of loss because, among other reasons: (a) the proceedings are in preliminary stages; (b) specific damages have not been sought; (c) damage claims are unsupported and/or unreasonable; (d) there is uncertainty as to the outcome of pending appeals or motions; (e) there are significant factual issues to be resolved; or (f) novel legal issues or unsettled legal theories are being asserted.
United States Department of Justice, Federal Trade Commission, Financial Crimes Enforcement Network, and State Attorneys General Settlements
In late November 2016, the Company entered into discussions with the United States Department of Justice (the “DOJ”), the United States Attorney's Office for the Central District of California ("USAO-CDCA"), the United States Attorney’s Office for the Eastern District of Pennsylvania ("USAO-EDPA"), the United States Attorney’s Office for the Middle District of Pennsylvania ("USAO-MDPA"), and the United States Attorney’s Office for the Southern District of Florida (“USAO-SDFL”) to resolve the investigations by the USAO-CDCA, USAO-EDPA, USAO-MDPA, and USAO-SDFL (collectively, the “USAOs”) (collectively, the “USAO Investigations”). On January 19, 2017, the Company announced that it, or its subsidiary Western Union Financial Services, Inc. (“WUFSI”), had entered into (1) a Deferred Prosecution Agreement (the “DPA”) with the DOJ and the USAOs; (2) a Stipulated Order for Permanent Injunction and Final Judgment (the “Consent Order”) with the United States Federal Trade Commission (“FTC”); and (3) a Consent to the Assessment of Civil Money Penalty with the Financial Crimes Enforcement Network (“FinCEN”) of the United States Department of Treasury (the “FinCEN Agreement”), to resolve the respective investigations of those agencies. The DOJ and FTC investigations are described below. FinCEN provided notice to the Company dated December 16, 2016 of its investigation regarding possible violations of the United States Bank Secrecy Act. On January 31, 2017, the Company entered into an assurance of discontinuance/assurance of voluntary compliance (the “State AG Agreement”) with the attorneys general of
49
U.S. states and the District of Columbia named therein (the “State Attorneys General”) to resolve the State Attorneys General investigations described below. The DPA, Consent Order, FinCEN Agreement, and State AG Agreement are collectively referred to herein as the “Joint Settlement Agreements.”
Pursuant to the DPA, the USAOs filed a
two
-count criminal information in the United States District Court for the Middle District of Pennsylvania, charging the Company with aiding and abetting wire fraud and willfully failing to implement an effective anti-money laundering program. The USAOs agreed that if the Company fully complies with all of its obligations under the DPA, the USAOs will, at the conclusion of the DPA’s term, seek dismissal with prejudice of the criminal information filed against the Company.
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Under the Joint Settlement Agreements, the Company is required, among other things, to (1) pay an aggregate amount of
$586 million
to the DOJ to be used to reimburse consumers who were the victims of third-party fraud conducted through the Company’s money transfer services (the “Compensation Payment”), (2) pay an aggregate amount of
$5 million
to the State Attorneys General to reimburse investigative, enforcement, and other costs, and (3) retain an independent compliance auditor for
three
years to review and assess actions taken by the Company under the Consent Order to further enhance its oversight of agents and protection of consumers. The FinCEN Agreement also sets forth a civil penalty of
$184 million
, the full amount of which is deemed satisfied by the Compensation Payment, without any additional payment or non-monetary obligations. No separate payment to the FTC is required under the Joint Settlement Agreements. The Compensation Payment has been included in "Accounts payable and accrued liabilities" in the Company's Consolidated Balance Sheet as of December 31, 2016 and will be paid within
90
business days following the date of the DPA.
The Joint Settlement Agreements also require the Company to adopt certain new or enhanced practices with respect to its compliance program relating to, among other things, consumer reimbursement, agent due diligence, agent training, monitoring, reporting, and record-keeping by the Company and its agents, consumer fraud disclosures, and agent suspensions and terminations. The changes in the Company’s compliance program required by the Joint Settlement Agreements will have adverse effects on the Company’s business, including additional costs and potential loss of business. The Company could also face actions from other regulators as a result of the Joint Settlement Agreements. In addition, if the Company fails to comply with the Joint Settlement Agreements, it could face criminal prosecution, civil litigation, significant fines, damage awards or other regulatory consequences. Any or all of these outcomes could have a material adverse effect on the Company's business, financial condition, results of operations, and cash flows.
United States Department of Justice Investigations
As described above, the following USAO Investigations were resolved pursuant to the Joint Settlement Agreements.
On March 20, 2012, the Company was served with a federal grand jury subpoena issued by the USAO-CDCA seeking documents relating to Shen Zhou International ("US Shen Zhou"), a former Western Union agent located in Monterey Park, California. The principal of US Shen Zhou was indicted in 2010 and in December 2013, pled guilty to
one
count of structuring international money transfers in violation of United States federal law in U.S. v. Zhi He Wang (SA CR 10-196, C.D. Cal.). Concurrent with the government's service of the subpoena, the government notified the Company that it was a target of an ongoing investigation into structuring and money laundering. After March 20, 2012, the Company received additional subpoenas from the USAO-CDCA seeking additional documents relating to US Shen Zhou, materials relating to certain other former and current agents and other materials relating to the Company's anti-money laundering ("AML") compliance policies and procedures. The government interviewed several current and former Western Union employees and served grand jury subpoenas seeking testimony from several current and former employees.
In March 2012, the Company was served with a federal grand jury subpoena issued by the USAO-EDPA seeking documents relating to Hong Fai General Contractor Corp. (formerly known as Yong General Construction) ("Hong Fai"), a former Western Union agent located in Philadelphia, Pennsylvania. After March 2012, the Company received additional subpoenas from the USAO-EDPA seeking additional documents relating to Hong Fai. The government also interviewed several current and former Western Union employees. In March 2016, the government filed a criminal complaint against the principal of Hong Fai General Contractor Corp. and in June 2016, he pled guilty to
one
count of mail fraud,
two
counts of transporting illegal aliens and
one
count of tax evasion in violation of United States federal law in U.S. v. Yong Quan Zheng (2:16-cr-00212-AB E. D. Pa.).
On November 25, 2013, the Company was served with a federal grand jury subpoena issued by the USAO-MDPA seeking documents relating to complaints made to the Company by consumers anywhere in the world relating to fraud-induced money transfers since January 1, 2008. Concurrent with the government's service of the subpoena, the government notified the Company that it was the subject of the investigation. After November 25, 2013, the Company received additional subpoenas from the USAO-MDPA seeking documents relating to certain Western Union agents and Western Union’s agent suspension and termination policies. The government also interviewed several current and former employees and served grand jury subpoenas seeking testimony from several current and former employees. The government indicated that it believed Western Union failed to timely terminate or suspend certain Western Union agents who allegedly paid or forwarded thousands of fraud-induced transactions sent from the United States to various countries from at least 2008 to 2012.
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On March 6, 2014, the Company was served with a federal grand jury subpoena issued by the USAO-SDFL seeking a variety of AML compliance materials, including documents relating to the Company’s AML, Bank Secrecy Act ("BSA"), Suspicious Activity Report ("SAR") and Currency Transaction Report procedures, transaction monitoring protocols, BSA and AML training programs and publications, AML compliance investigation reports, compliance-related agent termination files, SARs, BSA audits, BSA and AML-related management reports and AML compliance staffing levels. The subpoena also called for Board meeting minutes and organization charts. The period covered by the subpoena was January 1, 2007 to November 27, 2013. After March 6, 2014, the Company received seizure warrants and additional subpoenas from the USAO-SDFL seeking documents relating to certain Western Union agents in, and certain transactions to, specified countries. The government advised the Company that it was investigating concerns the Company was aware there were gaming transactions being sent to Panama, Nicaragua, Haiti, Philippines, Vietnam, the Dominican Republic, Peru, Antigua, the Bahamas, and Costa Rica and that the Company failed to take proper steps to stop the activity. The government also notified the Company that it was a target of the investigation. Further, the government interviewed several current and former Western Union employees.
Federal Trade Commission Investigation
As described above, the following FTC investigation was resolved pursuant to the Joint Settlement Agreements.
On December 12, 2012, the Company received a civil investigative demand from the FTC requesting that the Company produce (i) all documents relating to communications with the monitor (the "Monitor") appointed pursuant to the agreement and settlement (the "Southwest Border Agreement") WUFSI entered into with the State of Arizona on February 11, 2010, as amended, including information the Company provided to the Monitor and any reports prepared by the Monitor; and (ii) all documents relating to complaints made to the Company by consumers anywhere in the world relating to fraud-induced money transfers since January 1, 2011. From 2013 to 2015, the Company received additional civil investigative demands related to consumer fraud and the Company's anti-fraud programs. In the second quarter of 2016, the FTC advised the Company of its view that the Company violated Section 5 of the Federal Trade Commission Act and the Telemarketing Sales rule by failing to take timely, appropriate, and effective measures to mitigate fraud in the processing of money transfers sent by consumers. The Company engaged in discussions with the FTC seeking to reach an appropriate resolution of this matter. During these discussions, the FTC staff advised the Company that it believed that the Company was responsible for principal amounts of what it alleged to be hundreds of millions of dollars in fraud-induced money transfers, or a multiple thereof based on the FTC’s belief that fraud-induced money transfers are underreported by consumers, dating back to 2004. On January 19, 2017, the FTC filed a Complaint for Permanent Injunctive and Other Equitable Relief, alleging claims for unfair acts and practices under the Federal Trade Commission Act and for violations of the FTC Telemarketing Sales Rule. The Consent Order, filed simultaneously and entered by the court on January 20, 2017, resolves those claims.
State Attorneys General Investigations
As described above, the following investigation by the State Attorneys General was resolved pursuant to the Joint Settlement Agreements.
Beginning in 2011, Western Union received several civil investigative demands from the State Attorneys General in connection with an investigation into the adequacy of the Company's consumer protection efforts. The civil investigative demands sought information and documents relating to money transfers sent from the United States to certain countries, consumer fraud complaints that the Company has received and the Company's procedures to help identify and prevent fraudulent transfers. The Company provided information and documents to the State Attorneys General. On January 31, 2017, the attorneys general for
49
U.S. states and the District of Columbia filed the State AG Agreement, in various forms, resolving any claims arising out of the investigation.
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
State of Arizona Settlement Agreement
On February 11, 2010, Western Union Financial Services, Inc. ("WUFSI"), a subsidiary of the Company, signed the Southwest Border Agreement, which resolved all outstanding legal issues and claims with the State of Arizona (the "State") and required the Company to fund a multi-state not-for-profit organization promoting safety and security along the United States and Mexico border, in which California, Texas and New Mexico are participating with the State. As part of the Southwest Border Agreement, the Company has made and expects to make certain investments in its anti-money laundering ("AML") compliance programs along the United States and Mexico border and a Monitor has been engaged for those programs. The Company has incurred, and expects to continue to incur, significant costs in connection with the Southwest Border Agreement. The Monitor has made a number of primary and secondary recommendations related to WUFSI’s AML compliance programs, which WUFSI has implemented or is implementing, including programs related to the Company's Business Solutions segment.
On January 31, 2014, the Southwest Border Agreement was amended to extend its term until December 31, 2017 (the "Amendment"). The Amendment imposes additional obligations on the Company and WUFSI in connection with WUFSI’s AML compliance programs and cooperation with law enforcement. In particular, the Amendment requires WUFSI to continue implementing the primary and secondary recommendations made by the Monitor, and includes, among other things, timeframes for implementing such primary and secondary recommendations. Under the Amendment, the Monitor could make additional primary recommendations until January 1, 2015 and may make additional secondary recommendations until January 31, 2017. After these dates, the Monitor may only make additional primary or secondary recommendations, as applicable, that meet certain requirements as set forth in the Amendment.
WUFSI implemented all of the primary recommendations prior to October 31, 2015. On June 29, 2016, the Monitor notified WUFSI and the State that the Monitor had determined that (i) WUFSI had successfully implemented all of the primary recommendations, and (ii) WUFSI has implemented an effective AML compliance program along the United States and Mexico border. On July 27, 2016, the Monitor delivered its final report for the primary recommendations period and the Superior Court of Arizona in and for Maricopa County accepted the report. Accordingly, the State cannot pursue any remedies under the Southwest Border Agreement with respect to the primary recommendations.
The Amendment also provides until June 30, 2017 for implementation of the secondary recommendations, and provides a deadline of December 31, 2017 for the Monitor to issue a report evaluating implementation of the secondary recommendations. If the Monitor concludes in that report that WUFSI has not implemented an effective AML compliance program along the United States and Mexico border, the State cannot assert a willful and material breach of the Southwest Border Agreement but may require WUFSI to pay
$25 million
(the "Secondary Period Remedy"). There is no monetary penalty associated with secondary recommendations that were classified as such on the date of the Amendment or any new secondary recommendations that the Monitor makes after the date of the Amendment. There are currently
15
such secondary recommendations and groups of secondary recommendations.
The Amendment requires WUFSI to continue funding the Monitor’s reasonable expenses in
$500,000
increments as requested by the Monitor. The Amendment also requires WUFSI to make a one-time payment of
$250,000
, which was paid in March 2014, and thereafter
$150,000
per month for
five
years from the date of the Amendment to fund the activities and expenses of a money transfer transaction data analysis center formed by WUFSI and a Financial Crimes Task Force comprised of federal, state and local law enforcement representatives, including those from the State. In addition, California, Texas, and New Mexico are participating in the money transfer transaction data analysis center.
The changes in WUFSI’s AML compliance program required by the Southwest Border Agreement, including the Amendment, and the Monitor’s recommendations have had, and will continue to have, adverse effects on the Company’s business, including additional costs. The Company is unable at this stage to predict whether the Monitor will conclude at the end of the timeframe for implementing the secondary recommendations that WUFSI has successfully implemented the secondary recommendations and has an effective AML compliance program, and, accordingly, whether the State will pursue the Secondary Period Remedy.
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Shareholder Actions
On January 13, 2014, Natalie Gordon served the Company with a Verified Shareholder Derivative Complaint and Jury Demand that was filed in District Court, Douglas County, Colorado naming the Company’s President and Chief Executive Officer,
one
of its former executive officers,
one
of its former directors, and all but one of its current directors as individual defendants, and the Company as a nominal defendant. The complaint asserts claims for breach of fiduciary duty and gross mismanagement against all of the individual defendants and unjust enrichment against the President and Chief Executive Officer and the former executive officer based on allegations that between February 12, 2012 to October 30, 2012, the individual defendants made or caused the Company to issue false and misleading statements or failed to make adequate disclosures regarding the effects of the Southwest Border Agreement, including regarding the anticipated costs of compliance with the Southwest Border Agreement, potential effects on business operations, and Company projections. Plaintiff also alleges that the individual defendants caused or allowed the Company to lack requisite internal controls, caused or allowed financial statements to be misstated, and caused the Company to be subject to the costs, expenses and liabilities associated with
City of Taylor Police and Fire Retirement System v. The Western Union Company, et al.,
a lawsuit that was subsequently renamed and dismissed. Plaintiff further alleges that the Company’s President and Chief Executive Officer and the former executive officer received excessive compensation based on the allegedly inaccurate financial statements. On March 12, 2014, the Court entered an order granting the parties' joint motion to stay proceedings in the case during the pendency of certain of the shareholder derivative actions described below.
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In 2014, Stanley Lieblein, R. Andre Klein, City of Cambridge Retirement System, Mayar Fund Ltd, Louisiana Municipal Police Employees' Retirement System, MARTA/ATU Local 732 Employees Retirement Plan, and The Police Retirement System of St. Louis filed shareholder derivative complaints in the United States District Court for the District of Colorado (or were removed to the United States District Court for the District of Colorado) naming the Company’s President and Chief Executive Officer and certain current and former directors and a former executive officer as individual defendants, and the Company as a nominal defendant. On January 5, 2015, the court entered an order consolidating the actions and appointing City of Cambridge Retirement System and MARTA/ATU Local 732 Employees Retirement Plan as co-lead plaintiffs. On February 4, 2015, co-lead plaintiffs filed a verified consolidated shareholder derivative complaint naming the Company’s President and Chief Executive Officer,
two
of its former executive officers and all but two of its current directors as individual defendants, and the Company as a nominal defendant. The consolidated complaint asserts separate claims for breach of fiduciary duty against the director defendants and the officer defendants, claims against all of the individual defendants for violations of section 14(a) of the Securities Exchange Act of 1934 ("Exchange Act"), corporate waste and unjust enrichment, and a claim against the former executive officer for breach of fiduciary duties for insider selling and misappropriation of information. The breach of fiduciary duty claim against the director defendants includes allegations that they declined to implement an effective anti-money laundering compliance system after receiving numerous red flags indicating prolonged willful illegality, obstructed the Southwest Border Monitor's efforts to impose effective compliance systems on the Company, failed to take action in response to alleged Western Union management efforts to undermine the Monitor, reappointed the same directors to the Audit Committee and Corporate Governance and Public Policy Committees constituting a majority of those committees between 2006 and 2014, appointed a majority of directors to the Compliance Committee who were directly involved in overseeing the alleged misconduct as members of the Audit Committee and the Corporate Governance and Public Policy Committee, caused the Company to materially breach the Southwest Border Agreement, caused the Company to repurchase its stock at artificially inflated prices, awarded the Company’s senior executives excessive compensation despite their responsibility for the Company’s alleged willful non-compliance with state and federal anti-money laundering laws, and failed to prevent the former executive officer from misappropriating and profiting from nonpublic information when making allegedly unlawful stock sales. The breach of fiduciary duty claim against the officer defendants includes allegations that they caused the Company and allowed its agents to ignore the recording and reporting requirements of the Bank Secrecy Act and parallel anti-money laundering laws and regulations for a prolonged period of time, authorized and implemented anti-money laundering policies and practices that they knew or should have known to be inadequate, caused the Company to fail to comply with the Southwest Border Agreement and refused to implement and maintain adequate internal controls. The claim for violations of section 14(a) of the Exchange Act includes allegations that the individual defendants caused the Company to issue proxy statements in 2012, 2013 and 2014 containing materially incomplete and inaccurate disclosures - in particular, by failing to disclose the extent to which the Company’s financial results depended on the non-compliance with AML requirements, the Board’s awareness of the regulatory and criminal enforcement actions in real time pursuant to the 2003 Consent Agreement with the California Department of Financial Institutions and that the directors were not curing violations and preventing misconduct, the extent to which the Board considered the flood of increasingly severe red flags in their determination to re-nominate certain directors to the Audit Committee between 2006 and 2010, and the extent to which the Board considered ongoing regulatory and criminal investigations in awarding multi-million dollar compensation packages to senior executives. The corporate waste claim includes allegations that the individual defendants paid or approved the payment of undeserved executive and director compensation based on the illegal conduct alleged in the consolidated complaint, which exposed the Company to civil liabilities and fines. The corporate waste claim also includes allegations that the individual defendants made improper statements and omissions, which forced the Company to expend resources in defending itself in
City of Taylor Police and Fire Retirement System v. The Western Union Company, et al.
, a lawsuit that was subsequently renamed and dismissed, authorized the repurchase of over
$1.565 billion
of the Company’s stock at prices they knew or recklessly were aware, were artificially inflated, failed to maintain sufficient internal controls over the Company’s marketing and sales process, failed to consider the interests of the Company and its shareholders, and failed to conduct the proper supervision. The claim for unjust enrichment includes allegations that the individual defendants derived compensation, fees and other benefits from the Company and were otherwise unjustly enriched by their wrongful acts and omissions in managing the Company. The claim for breach of fiduciary duties for insider selling and misappropriation of information includes allegations that the former executive sold Company stock while knowing material, nonpublic information that would have significantly reduced the market price of the stock. On March 16, 2015, the defendants filed a motion to dismiss the consolidated complaint. On March 31, 2016, the Court entered an order granting the defendants’ collective motion to dismiss without prejudice, denying as moot a separate motion to dismiss that was filed by the former executive officer, and staying the order for
30
days, within which plaintiffs may file an amended complaint that cures the defects noted in the order. On May 2, 2016, co-lead plaintiffs filed a verified amended consolidated shareholder derivative complaint naming the Company’s President and Chief Executive Officer,
eight
of its current directors (including the Company’s President and Chief Executive Officer, who also serves as a director) and
one
of its former directors as individual defendants, and the Company as a nominal defendant. The amended complaint, among other things, drops the claims against the former executive officer named in the prior complaint, realleges and narrows the breach of fiduciary duty claims, and drops the remaining claims. On June 15, 2016, defendants filed a motion to dismiss the amended consolidated shareholder derivative complaint. On August 1, 2016, plaintiffs filed an opposition to the motion to dismiss. On September 1,
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2016, defendants filed a reply brief in support of the motion to dismiss. On January 20, 2017, Plaintiffs filed a notice of new case developments with the Court, attaching the DPA, the criminal information filed in the United States District Court for the Middle District of Pennsylvania, and the FTC’s January 19, 2017 Complaint for Permanent Injunctive and Other Equitable Relief and the Consent Order referenced in the
United States Department of Justice, Federal Trade Commission, Financial Crimes Enforcement Network, and State Attorneys General Settlements
section above.
All of the actions described above under "Shareholder Actions" are in a preliminary stage and the Company is unable to predict the outcome, or reasonably estimate the possible loss or range of loss, if any, which could be associated with these actions. The Company and the named individuals intend to vigorously defend themselves in all of these matters.
Other Matters
The Company and one of its subsidiaries are defendants in
two
purported class action lawsuits: James P. Tennille v. The Western Union Company and Robert P. Smet v. The Western Union Company, both of which are pending in the United States District Court for the District of Colorado. The original complaints asserted claims for violation of various consumer protection laws, unjust enrichment, conversion and declaratory relief, based on allegations that the Company waits too long to inform consumers if their money transfers are not redeemed by the recipients and that the Company uses the unredeemed funds to generate income until the funds are escheated to state governments. The Tennille complaint was served on the Company on April 27, 2009. The Smet complaint was served on the Company on April 6, 2010. On September 21, 2009, the Court granted the Company's motion to dismiss the Tennille complaint and gave the plaintiff leave to file an amended complaint. On October 21, 2009, Tennille filed an amended complaint. The Company moved to dismiss the Tennille amended complaint and the Smet complaint. On November 8, 2010, the Court denied the motion to dismiss as to the plaintiffs' unjust enrichment and conversion claims. On February 4, 2011, the Court dismissed the plaintiffs' consumer protection claims. On March 11, 2011, the plaintiffs filed an amended complaint that adds a claim for breach of fiduciary duty, various elements to its declaratory relief claim and WUFSI as a defendant. On April 25, 2011, the Company and WUFSI filed a motion to dismiss the breach of fiduciary duty and declaratory relief claims. WUFSI also moved to compel arbitration of the plaintiffs' claims and to stay the action pending arbitration. On November 21, 2011, the Court denied the motion to compel arbitration and the stay request. Both companies appealed the decision. On January 24, 2012, the United States Court of Appeals for the Tenth Circuit granted the companies' request to stay the District Court proceedings pending their appeal. During the fourth quarter of 2012, the parties executed a settlement agreement, which the Court preliminarily approved on January 3, 2013. On June 25, 2013, the Court entered an order certifying the class and granting final approval to the settlement. Under the approved settlement, a substantial amount of the settlement proceeds, as well as all of the class counsel’s fees, administrative fees and other expenses, would be paid from the class members' unclaimed money transfer funds, which are included within "Settlement obligations" in the Company's Consolidated Balance Sheets. These fees and other expenses are currently estimated to be approximately
$50 million
. During the final approval hearing, the Court overruled objections to the settlement that had been filed by several class members. In July 2013,
two
of those class members filed notices of appeal. On May 1, 2015, the United States Court of Appeals for the Tenth Circuit affirmed the District Court’s decision to overrule the objections filed by the
two
class members who appealed. On January 11, 2016, the United States Supreme Court denied petitions for certiorari that were filed by the
two
class members who appealed. On February 1, 2016, pursuant to the settlement agreement and the Court's June 25, 2013 final approval order, Western Union deposited the class members' unclaimed money transfer funds into a class settlement fund, from which class member claims, administrative fees and class counsel’s fees, as well as other expenses will be paid. On November 6, 2013, the Attorney General of California notified Western Union of the California Controller’s position that Western Union’s deposit of the unclaimed money transfer funds into the class settlement fund pursuant to the settlement “will not satisfy Western Union’s obligations to report and remit funds” under California’s unclaimed property law, and that “Western Union will remain liable to the State of California” for the funds that would have escheated to California in the absence of the settlement. The State of Pennsylvania and District of Columbia have previously expressed similar views. Other states have also recently expressed concerns about the settlement and many have not yet expressed an opinion. Since some states and jurisdictions believe that the Company must escheat its full share of the settlement fund and that the deductions for class counsel's fees, administrative costs, and other expenses that are required under the settlement agreement are not permitted, there is a reasonable possibility a loss could result up to approximately the amount of those fees and other expenses. However, given the number of jurisdictions involved and the fact that no actions have been brought, the Company is unable to provide a more precise estimate of the range of possible loss.
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On March 12, 2014, Jason Douglas filed a purported class action complaint in the United States District Court for the Northern District of Illinois asserting a claim under the Telephone Consumer Protection Act, 47 U.S.C. § 227, et seq., based on allegations that since 2009, the Company has sent text messages to class members’ wireless telephones without their consent. During the first quarter of 2015, the Company's insurance carrier and the plaintiff reached an agreement to create an
$8.5 million
settlement fund that will be used to pay all class member claims, class counsel’s fees and the costs of administering the settlement. The agreement has been signed by the parties and, on November 10, 2015, the Court granted preliminary approval to the settlement. The Company accrued an amount equal to the retention under its insurance policy in previous quarters and believes that any amounts in excess of this accrual will be covered by the insurer. However, if the Company's insurer is unable to or refuses to satisfy its obligations under the policy or the parties are unable to reach a definitive agreement or otherwise agree on a resolution, the Company's financial condition, results of operations, and cash flows could be adversely impacted. As the parties have reached an agreement in this matter, the Company believes that the potential for additional loss in excess of amounts already accrued is remote.
On February 10, 2015, Caryn Pincus filed a purported class action lawsuit in the United States District Court for the Southern District of Florida against Speedpay, Inc. ("Speedpay"), a subsidiary of the Company, asserting claims based on allegations that Speedpay imposed an unlawful surcharge on credit card transactions and that Speedpay engages in money transmission without a license. The complaint requests certification of a class and
two
subclasses generally comprised of consumers in Florida who made a payment through Speedpay’s bill payment services using a credit card and were charged a surcharge for such payment during the
four
-year and
five
-year periods prior to the filing of the complaint through the date of class certification. On April 6, 2015, Speedpay filed a motion to dismiss the complaint. On April 23, 2015, in response to the motion to dismiss, Pincus filed an amended complaint that adds claims (1) under the Florida Civil Remedies for Criminal Practices Act, which authorizes civil remedies for certain criminal conduct; and (2) for violation of the federal Racketeer Influenced and Corrupt Organizations Act ("RICO"). On May 15, 2015, Speedpay filed a motion to dismiss the amended complaint. On October 6, 2015, the Court entered an order denying Speedpay’s motion to dismiss. On October 20, 2015, Speedpay filed an answer to the amended complaint. On December 1, 2015, Pincus filed a second amended complaint that revised her factual allegations, but added no new claims. On December 18, 2015, Speedpay filed an answer to the second amended complaint. On May 20, 2016, Speedpay filed a motion for judgment on the pleadings as to Pincus' Florida Civil Remedies for Criminal Practices Act and federal RICO claims. On June 7, 2016, Pincus filed an opposition to Speedpay's motion for judgment on the pleadings. On June 17, 2016, Speedpay filed a reply brief in support of the motion. On October 28, 2016, Pincus filed a motion seeking class certification. The motion seeks the certification of a class consisting of “All (i) persons in Florida (ii) who paid Speedpay, Inc. a fee for using Speedpay, Inc.’s electronic payment services (iii) during the
five
year period prior to the filing of the complaint in this action through the present.” Pincus also filed a motion to file her motion under seal. On November 4, 2016, the Court denied Pincus’ motion for class certification without prejudice and motion to seal and ordered her to file a new motion that redacts proprietary and private information. Later that day, Pincus filed a redacted version of the motion. On November 7, 2016, Speedpay filed a motion for summary judgment on Pincus’ remaining claims. On December 15, 2016, Speedpay filed an opposition to Pincus’ class certification motion. The same day, Pincus filed an opposition to Speedpay’s summary judgment motion and requested summary judgment on her individual and class claims. On January 12, 2017, Speedpay filed a reply in support of its summary judgment motion and Pincus filed a reply in support of her class certification motion. As this action is in a preliminary stage, the Company is unable to predict the outcome, or the possible loss or range of loss, if any, which could be associated with this action. Speedpay intends to vigorously defend itself in this matter.
On January 26, 2017, Martin Herman filed a purported class action complaint in the United States District Court for the Central District of California against the Company, its President and Chief Executive Officer, its Chief Financial Officer, and a former executive officer of the Company, asserting claims under sections 10(b) of the Exchange Act and Securities and Exchange Commission rule 10b-5 against all defendants and a claim under section 20(a) of the Exchange Act against the individual defendants. The complaint alleges that, during the purported class period, February 24, 2012 through January 19, 2017, defendants made false or misleading statements or failed to disclose adverse material facts known to them, including those regarding: (1) the effectiveness of the Company’s fraud prevention program and the program’s compliance with applicable law and best practices; (2) the development and enhancement of the Company’s global compliance policies and anti-money laundering program; and (3) the Company’s compliance with regulatory requirements. This action is in a preliminary stage and the Company is unable to predict the outcome, or the possible loss or range of loss, if any, which could be associated with this action. The Company and the named individuals intend to vigorously defend themselves in this matter.
On February 22, 2017, Lawrence Henry Smallen and Laura Anne Smallen Revocable Living Trust filed a purported class action complaint in the United States District Court for the District of Colorado. The defendants, class period, claims and bases are the same as those in the purported class action complaint filed by Martin Herman described above. This action is in a preliminary stage and the Company is unable to predict the outcome, or the possible loss or range of loss, if any, which could be associated with this action. The Company and the named individuals intend to vigorously defend themselves in this matter.
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On February 13, 2017, the Company’s subsidiary, Western Union Payment Services Ireland Limited (“WUPSIL”), was served with a writ of accusation from the National Court of Spain. The writ charges
98
former Western Union money transfer agents or agent representatives with fraud and money laundering in connection with consumer fraud scams they allegedly perpetrated using Western Union money transfer transactions. The writ also names WUPSIL as a civil defendant, allegedly responsible under Spanish law to pay any portion of the alleged
€17.5 million
(
$18.4 million
based on the December 31, 2016 exchange rate) in victim losses that cannot be repaid by any of the criminal defendants who are convicted. The Company expects that WUPSIL will be required to guarantee or provide security for up to approximately
€23.5 million
(
$24.7 million
) to cover the alleged victim losses plus potential interest and other costs. Due to the preliminary stage of this matter, the Company is unable to predict the outcome, or the amount of loss, if any, associated with this matter. However, based on the amounts alleged, the range of loss could be up to approximately
€23.5 million
(
$24.7 million
).
In addition to the principal matters described above, the Company is a party to a variety of other legal matters that arise in the normal course of the Company's business. While the results of these other legal matters cannot be predicted with certainty, management believes that the final outcome of these matters will not have a material adverse effect either individually or in the aggregate on the Company's financial condition, results of operations, or cash flows.
On January 26, 2006, the First Data Corporation ("First Data") Board of Directors announced its intention to pursue the distribution of all of its money transfer and consumer payments business and its interest in a Western Union money transfer agent, as well as its related assets, including real estate, through a tax-free distribution to First Data shareholders (the "Spin-off"). The Spin-off resulted in the formation of the Company and these assets and businesses no longer being part of First Data. Pursuant to the separation and distribution agreement with First Data in connection with the Spin-off, First Data and the Company are each liable for, and agreed to perform, all liabilities with respect to their respective businesses. In addition, the separation and distribution agreement also provides for cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of the Company's business with the Company and financial responsibility for the obligations and liabilities of First Data's retained businesses with First Data. The Company also entered into a tax allocation agreement ("Tax Allocation Agreement") that sets forth the rights and obligations of First Data and the Company with respect to taxes imposed on their respective businesses both prior to and after the Spin-off as well as potential tax obligations for which the Company may be liable in conjunction with the Spin-off (see Note 10).
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Related Party Transactions
The Company has ownership interests in certain of its agents accounted for under the equity method of accounting. The Company pays these agents commissions for money transfer and other services provided on the Company's behalf. Commission expense recognized for these agents for the years ended
December 31, 2016
,
2015
and
2014
totaled
$68.0 million
,
$65.5 million
and
$70.2 million
, respectively.
7. Investment Securities
Investment securities included in "Settlement assets" in the Company's Consolidated Balance Sheets consist primarily of highly-rated state and municipal debt securities, including fixed rate term notes and variable rate demand notes. Variable rate demand note securities can be put (sold at par) typically on a daily basis with settlement periods ranging from the same day to one week, but have varying maturities through
2050
. These securities may be used by the Company for short-term liquidity needs and held for short periods of time. The Company is required to hold highly-rated, investment grade securities and such investments are restricted to satisfy outstanding settlement obligations in accordance with applicable state and foreign country requirements.
The substantial majority of the Company's 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. Western Union regularly monitors credit risk and attempts to mitigate its exposure by investing in highly-rated securities and through investment diversification.
Unrealized gains and losses on available-for-sale securities are excluded from earnings and presented as a component of accumulated other comprehensive loss, net of related deferred taxes. Proceeds from the sale and maturity of available-for-sale securities during the years ended
December 31, 2016
,
2015
and
2014
were
$4.4 billion
,
$8.7 billion
and
$17.7 billion
, respectively. The decline in proceeds from the sale and maturity of available-for-sale securities for the year ended
December 31, 2016
compared to the prior periods was primarily due to reduced sales of variable rate demand note securities.
Gains and losses on investments are calculated using the specific-identification method and are recognized during the period in which the investment is sold or when an investment experiences an other-than-temporary decline in value. Factors that could indicate an impairment exists include, but are not limited to: earnings performance, changes in credit rating or adverse changes in the regulatory or economic environment of the asset. If potential impairment exists, the Company assesses whether it has the intent to sell the debt security, more likely than not will be required to sell the debt security before its anticipated recovery or expects that some of the contractual cash flows will not be received. The Company had no material other-than-temporary impairments during the periods presented.
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of investment securities are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
Amortized
Cost
|
|
Fair
Value
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Net
Unrealized
Gains/ (Losses)
|
Settlement assets:
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
State and municipal debt securities (a)
|
$
|
1,008.5
|
|
|
$
|
1,002.4
|
|
|
$
|
5.0
|
|
|
$
|
(11.1
|
)
|
|
$
|
(6.1
|
)
|
State and municipal variable rate demand notes
|
203.4
|
|
|
203.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Corporate and other debt securities
|
26.0
|
|
|
26.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,237.9
|
|
|
1,231.8
|
|
|
5.0
|
|
|
(11.1
|
)
|
|
(6.1
|
)
|
Other assets:
|
|
|
|
|
|
|
|
|
|
Held-to-maturity securities:
|
|
|
|
|
|
|
|
|
|
Foreign corporate debt securities
|
36.2
|
|
|
36.2
|
|
|
0.1
|
|
|
(0.1
|
)
|
|
—
|
|
|
$
|
1,274.1
|
|
|
$
|
1,268.0
|
|
|
$
|
5.1
|
|
|
$
|
(11.2
|
)
|
|
$
|
(6.1
|
)
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
Amortized
Cost
|
|
Fair
Value
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Net
Unrealized
Gains/ (Losses)
|
Settlement assets:
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
State and municipal debt securities (a)
|
$
|
1,040.3
|
|
|
$
|
1,052.5
|
|
|
$
|
14.2
|
|
|
$
|
(2.0
|
)
|
|
$
|
12.2
|
|
State and municipal variable rate demand notes
|
42.9
|
|
|
42.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Corporate and other debt securities
|
67.3
|
|
|
67.2
|
|
|
—
|
|
|
(0.1
|
)
|
|
(0.1
|
)
|
|
1,150.5
|
|
|
1,162.6
|
|
|
14.2
|
|
|
(2.1
|
)
|
|
12.1
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
Held-to-maturity securities:
|
|
|
|
|
|
|
|
|
|
Foreign corporate debt securities
|
9.3
|
|
|
9.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
1,159.8
|
|
|
$
|
1,171.9
|
|
|
$
|
14.2
|
|
|
$
|
(2.1
|
)
|
|
$
|
12.1
|
|
____________
(a) The majority of these securities are fixed rate instruments.
There were
no
investments with a single issuer or individual securities representing greater than 10% of total investment securities as of
December 31, 2016
and
2015
.
The following summarizes the contractual maturities of settlement-related debt securities as of
December 31, 2016
(in millions):
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Fair
Value
|
Due within 1 year
|
$
|
118.9
|
|
|
$
|
119.1
|
|
Due after 1 year through 5 years
|
502.6
|
|
|
502.0
|
|
Due after 5 years through 10 years
|
286.7
|
|
|
285.8
|
|
Due after 10 years
|
329.7
|
|
|
324.9
|
|
|
$
|
1,237.9
|
|
|
$
|
1,231.8
|
|
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay the obligations or the Company may have the right to put the obligation prior to its contractual maturity, as with variable rate demand notes. Variable rate demand notes, having a fair value of
$203.4 million
are included in the "Due after 10 years" category, in the table above. The significant majority of the held-to-maturity foreign corporate debt securities are due within 1 year.
8. Fair Value Measurements
Fair value, as defined by the relevant accounting standards, represents the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. For additional information on how the Company measures fair value, refer to Note 2.
The following tables reflect assets and liabilities that were measured at fair value on a recurring basis (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement Using
|
|
Assets/
Liabilities at
Fair
Value
|
December 31, 2016
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
Settlement assets:
|
|
|
|
|
|
|
|
State and municipal debt securities
|
$
|
—
|
|
|
$
|
1,002.4
|
|
|
$
|
—
|
|
|
$
|
1,002.4
|
|
State and municipal variable rate demand notes
|
—
|
|
|
203.4
|
|
|
—
|
|
|
203.4
|
|
Corporate and other debt securities
|
—
|
|
|
26.0
|
|
|
—
|
|
|
26.0
|
|
Other assets:
|
|
|
|
|
|
|
|
Derivatives
|
—
|
|
|
365.6
|
|
|
—
|
|
|
365.6
|
|
Total assets
|
$
|
—
|
|
|
$
|
1,597.4
|
|
|
$
|
—
|
|
|
$
|
1,597.4
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivatives
|
$
|
—
|
|
|
$
|
262.3
|
|
|
$
|
—
|
|
|
$
|
262.3
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
262.3
|
|
|
$
|
—
|
|
|
$
|
262.3
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement Using
|
|
Assets/
Liabilities at
Fair
Value
|
December 31, 2015
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
Settlement assets:
|
|
|
|
|
|
|
|
State and municipal debt securities
|
$
|
—
|
|
|
$
|
1,052.5
|
|
|
$
|
—
|
|
|
$
|
1,052.5
|
|
State and municipal variable rate demand notes
|
—
|
|
|
42.9
|
|
|
—
|
|
|
42.9
|
|
Corporate and other debt securities
|
—
|
|
|
67.2
|
|
|
—
|
|
|
67.2
|
|
Other assets:
|
|
|
|
|
|
|
|
Derivatives
|
—
|
|
|
396.3
|
|
|
—
|
|
|
396.3
|
|
Total assets
|
$
|
—
|
|
|
$
|
1,558.9
|
|
|
$
|
—
|
|
|
$
|
1,558.9
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivatives
|
$
|
—
|
|
|
$
|
283.7
|
|
|
$
|
—
|
|
|
$
|
283.7
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
283.7
|
|
|
$
|
—
|
|
|
$
|
283.7
|
|
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
No non-recurring fair value adjustments were recorded during the years ended
December 31, 2016
and
2015
.
Other Fair Value Measurements
The carrying amounts for many of the Company's financial instruments, including cash and cash equivalents, settlement cash and cash equivalents, and settlement receivables and settlement obligations approximate fair value due to their short maturities. The Company's borrowings are classified as Level 2 of the valuation hierarchy, and the aggregate fair value of these borrowings was based on quotes from multiple banks and excluded the impact of related interest rate swaps. Fixed rate notes are carried in the Company's Consolidated Balance Sheets at their original issuance values as adjusted over time to accrete that value to par, except for portions of notes hedged by these interest rate swaps, as disclosed in Note 14. As of
December 31, 2016
, the carrying value and fair value of the Company's borrowings was
$2,786.1 million
and
$2,888.7 million
, respectively (see Note 15). As of
December 31, 2015
, the carrying value and fair value of the Company's borrowings was
$3,215.9 million
and
$3,279.6 million
, respectively.
The Company's investments in foreign corporate debt securities are classified as held-to-maturity securities within Level 2 of the valuation hierarchy and are recorded at amortized cost in "Other Assets" in the Company's Consolidated Balance Sheets. As of
December 31, 2016
, the carrying value and fair value of the Company's foreign corporate debt securities was
$36.2 million
. As of
December 31, 2015
, the carrying value and fair value of the Company's foreign corporate debt securities was
$9.3 million
.
9. Other Assets and Other Liabilities
The following table summarizes the components of other assets and other liabilities (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Other assets:
|
|
|
|
Derivatives
|
$
|
365.6
|
|
|
$
|
396.3
|
|
Prepaid expenses
|
126.9
|
|
|
83.4
|
|
Amounts advanced to agents, net of discounts
|
58.0
|
|
|
57.1
|
|
Equity method investments
|
40.1
|
|
|
43.3
|
|
Other
|
155.7
|
|
|
143.9
|
|
Total other assets
|
$
|
746.3
|
|
|
$
|
724.0
|
|
Other liabilities:
|
|
|
|
Derivatives
|
$
|
262.3
|
|
|
$
|
283.7
|
|
Pension obligations
|
26.4
|
|
|
69.3
|
|
Other
|
70.7
|
|
|
76.0
|
|
Total other liabilities
|
$
|
359.4
|
|
|
$
|
429.0
|
|
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Income Taxes
The components of pre-tax income, generally based on the jurisdiction of the legal entity, were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Domestic
|
$
|
(546.4
|
)
|
|
$
|
(27.0
|
)
|
|
$
|
34.7
|
|
Foreign
|
888.1
|
|
|
968.8
|
|
|
933.5
|
|
|
$
|
341.7
|
|
|
$
|
941.8
|
|
|
$
|
968.2
|
|
For the years ended
December 31, 2016
,
2015
and
2014
,
260%
,
103%
and
96%
of the Company's pre-tax income was derived from foreign sources, respectively. The decrease in domestic pre-tax income for the year ended
December 31, 2016
compared to
2015
was primarily due to
$601 million
of expenses as a result of the Joint Settlement Agreements, described further in Note 5.
The provision for income taxes was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Federal
|
$
|
43.5
|
|
|
$
|
33.2
|
|
|
$
|
57.0
|
|
State and local
|
2.9
|
|
|
(1.0
|
)
|
|
4.9
|
|
Foreign
|
42.1
|
|
|
71.8
|
|
|
53.9
|
|
|
$
|
88.5
|
|
|
$
|
104.0
|
|
|
$
|
115.8
|
|
No tax benefit was recorded in 2016 for the
$586 million
Compensation Payment resulting from the Joint Settlement Agreements. Domestic taxes have been incurred on certain pre-tax income amounts that were generated by the Company's foreign operations. Accordingly, the percentage obtained by dividing the total federal, state and local tax provision by the domestic pre-tax income, all as shown in the preceding tables, may be higher than the statutory tax rates in the United States.
The Company's effective tax rates differed from statutory rates as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Federal statutory rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes, net of federal income tax benefits
|
1.2
|
%
|
|
0.4
|
%
|
|
0.6
|
%
|
Foreign rate differential, net of United States tax paid on foreign earnings (24.8%, 3.4% and 4.3%, respectively)
|
(50.8
|
)%
|
|
(24.6
|
)%
|
|
(24.0
|
)%
|
Joint Settlement Agreements impact
|
62.1
|
%
|
|
—
|
%
|
|
—
|
%
|
Lapse of statute of limitations
|
(11.3
|
)%
|
|
(0.8
|
)%
|
|
(0.9
|
)%
|
Valuation allowances
|
(2.8
|
)%
|
|
(0.9
|
)%
|
|
2.5
|
%
|
Other
|
(7.5
|
)%
|
|
1.9
|
%
|
|
(1.2
|
)%
|
Effective tax rate
|
25.9
|
%
|
|
11.0
|
%
|
|
12.0
|
%
|
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The increase in the Company's effective tax rate for the year ended
December 31, 2016
compared to
2015
was primarily due to the tax-related effects of the Joint Settlement Agreements, and an increase in higher-taxed earnings (excluding the Joint Settlement Agreements) compared to lower-taxed foreign earnings, partially offset by the combined effects of various discrete items, including changes in tax contingency reserves. The decrease in the Company's effective tax rate for the year ended
December 31, 2015
compared to
2014
is primarily due to various tax planning benefits, some of which are non-recurring, partially offset by changes in the composition of foreign earnings between higher taxed and lower taxed and the combined effects of various discrete items. The Company continues to benefit from a significant proportion of its profits being foreign-derived and generally taxed at lower rates than its combined federal and state tax rates in the United States. Certain portions of the Company's foreign source income are subject to United States federal and state income tax as earned due to the nature of the income, and dividend repatriations of the Company's foreign source income are generally subject to United States federal and state income tax.
The Company's provision for income taxes consisted of the following components (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Current:
|
|
|
|
|
|
Federal
|
$
|
186.2
|
|
|
$
|
59.6
|
|
|
$
|
76.1
|
|
State and local
|
13.1
|
|
|
5.4
|
|
|
4.7
|
|
Foreign
|
63.4
|
|
|
78.9
|
|
|
61.8
|
|
Total current taxes
|
262.7
|
|
|
143.9
|
|
|
142.6
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(142.7
|
)
|
|
(26.4
|
)
|
|
(19.1
|
)
|
State and local
|
(10.2
|
)
|
|
(6.4
|
)
|
|
0.2
|
|
Foreign
|
(21.3
|
)
|
|
(7.1
|
)
|
|
(7.9
|
)
|
Total deferred taxes
|
(174.2
|
)
|
|
(39.9
|
)
|
|
(26.8
|
)
|
|
$
|
88.5
|
|
|
$
|
104.0
|
|
|
$
|
115.8
|
|
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the book and tax bases of the Company's assets and liabilities. The following table outlines the principal components of deferred tax items (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Deferred tax assets related to:
|
|
|
|
Reserves, accrued expenses and employee-related items
|
$
|
279.8
|
|
|
$
|
87.1
|
|
Tax attribute carryovers
|
39.1
|
|
|
60.2
|
|
Pension obligations
|
11.1
|
|
|
26.5
|
|
Intangibles, property and equipment
|
9.7
|
|
|
7.9
|
|
Other
|
14.8
|
|
|
10.2
|
|
Valuation allowance
|
(22.0
|
)
|
|
(33.2
|
)
|
Total deferred tax assets
|
332.5
|
|
|
158.7
|
|
Deferred tax liabilities related to:
|
|
|
|
Intangibles, property and equipment
|
394.4
|
|
|
410.9
|
|
Other
|
14.3
|
|
|
12.5
|
|
Total deferred tax liabilities
|
408.7
|
|
|
423.4
|
|
Net deferred tax liability (a)
|
$
|
76.2
|
|
|
$
|
264.7
|
|
____________
|
|
(a)
|
As of
December 31, 2016
and 2015, deferred tax assets that cannot be fully offset by deferred tax liabilities in the respective tax jurisdictions of
$9.7 million
and
$7.9 million
, respectively, are reflected in "Other assets" in the Consolidated Balance Sheets.
|
The valuation allowances are primarily the result of uncertainties regarding the Company's ability to recognize tax benefits associated with certain United States foreign tax credit carryforwards, certain foreign net operating losses, and certain foreign undistributed earnings. Such uncertainties include generating sufficient income, generating sufficient United States foreign tax credit limitation related to passive income, and demonstrating the ability to distribute certain foreign earnings. Changes in circumstances, or the identification and implementation of relevant tax planning strategies, could make it foreseeable that the Company will recover these deferred tax assets in the future, which could lead to a reversal of these valuation allowances and a reduction in income tax expense.
Uncertain Tax Positions
The Company has established contingency reserves for a variety of material, known tax exposures. As of
December 31, 2016
, the total amount of tax contingency reserves was
$365.1 million
, including accrued interest and penalties, net of related items. The Company's tax reserves reflect management's judgment as to the resolution of the issues involved if subject to judicial review or other settlement. While the Company believes its reserves are adequate to cover reasonably expected tax risks, there can be no assurance that, in all instances, an issue raised by a tax authority will be resolved at a financial cost that does not exceed its related reserve. With respect to these reserves, the Company's income tax expense would include (i) any changes in tax reserves arising from material changes during the period in the facts and circumstances (i.e., new information) surrounding a tax issue and (ii) any difference from the Company's tax position as recorded in the financial statements and the final resolution of a tax issue during the period. Such resolution could materially increase or decrease income tax expense in the Company's consolidated financial statements in future periods and could impact operating cash flows.
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unrecognized tax benefits represent the aggregate tax effect of differences between tax return positions and the amounts otherwise recognized in the Company's consolidated financial statements, and are reflected in "Income taxes payable" in the Consolidated Balance Sheets. A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Balance as of January 1,
|
$
|
105.6
|
|
|
$
|
93.4
|
|
Increase related to current period tax positions (a)
|
223.6
|
|
|
17.1
|
|
Increase related to prior period tax positions
|
71.7
|
|
|
7.7
|
|
Decrease related to prior period tax positions
|
(14.9
|
)
|
|
(5.4
|
)
|
Decrease due to lapse of applicable statute of limitations
|
(33.1
|
)
|
|
(5.6
|
)
|
Decrease due to effects of foreign currency exchange rates
|
(0.9
|
)
|
|
(1.6
|
)
|
Balance as of December 31,
|
$
|
352.0
|
|
|
$
|
105.6
|
|
____________
|
|
(a)
|
Includes recurring accruals for issues which initially arose in previous periods.
|
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was
$343.3 million
and
$96.8 million
as of
December 31, 2016
and
2015
, respectively, excluding interest and penalties.
The Company recognizes interest and penalties with respect to unrecognized tax benefits in "Provision for income taxes" in its Consolidated Statements of Income, and records the associated liability in "Income taxes payable" in its Consolidated Balance Sheets. The Company recognized
$(2.9) million
,
$1.9 million
and
$1.5 million
in interest and penalties during the years ended
December 31, 2016
,
2015
and
2014
, respectively. The Company has accrued
$22.5 million
and
$17.0 million
for the payment of interest and penalties as of
December 31, 2016
and
2015
, respectively.
The unrecognized tax benefits accrual as of
December 31, 2016
consists of federal, state and foreign tax matters. It is reasonably possible that the Company's total unrecognized tax benefits will decrease by approximately
$34 million
during the next 12 months in connection with various matters which may be resolved.
The Company and its subsidiaries file tax returns for the United States, for multiple states and localities, and for various non-United States jurisdictions, and the Company has identified the United States as its major tax jurisdiction, as the income tax imposed by any one foreign country is not material to the Company. The United States federal income tax returns of First Data, which include the Company, are eligible to be examined for 2005 and 2006. The Company's United States federal income tax returns since the Spin-off (other than 2010-2012) are also eligible to be examined.
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The United States Internal Revenue Service ("IRS") completed its examination of the United States federal consolidated income tax returns of First Data for 2003 and 2004, which included the Company, and issued a Notice of Deficiency in December 2008. In December 2011, the Company reached an agreement with the IRS resolving substantially all of the issues related to the Company's restructuring of its international operations in 2003 ("IRS Agreement"). As a result of the IRS Agreement, the Company expects to make cash payments of approximately
$190 million
, plus additional accrued interest, of which
$94.1 million
has been paid as of
December 31, 2016
. A substantial majority of these payments were made in the year ended December 31, 2012. The Company expects to pay the remaining amount in 2017. The IRS completed its examination of the United States federal consolidated income tax returns of First Data, which include the Company's 2005 and pre-Spin-off 2006 taxable periods and issued its report on October 31, 2012 ("FDC 30-Day Letter"). Furthermore, the IRS completed its examination of the Company's United States federal consolidated income tax returns for the 2006 post-Spin-off period through 2009 and issued its report also on October 31, 2012 ("WU 30-Day Letter"). Both the FDC 30-Day Letter and the WU 30-Day Letter propose tax adjustments affecting the Company, some of which are agreed and some of which are unagreed. Both First Data and the Company filed their respective protests with the IRS Appeals Division on November 28, 2012 related to the unagreed proposed adjustments. Discussions with the IRS concerning these adjustments are ongoing. The Company believes its reserves are adequate with respect to both the agreed and unagreed adjustments. During the year ended
December 31, 2016
, the Company reached an agreement in principle with the IRS concerning its unagreed adjustments and adjusted its reserves accordingly.
As of
December 31, 2016
,
no
provision has been made for United States federal and state income taxes on certain of the Company's outside tax basis differences, which primarily relate to accumulated foreign earnings of approximately
$6.7 billion
, which have been reinvested and are expected to continue to be reinvested outside the United States indefinitely. Over the last several years, such earnings have been used to pay for the Company's international acquisitions and operations and provide initial Company funding of global principal payouts for Consumer-to-Consumer and Business Solutions transactions. Upon distribution of those earnings to the United States in the form of actual or constructive dividends, the Company would be subject to United States income taxes (subject to an adjustment for foreign tax credits), state income taxes and possible withholding taxes payable to various foreign countries. Such taxes could be significant. Determination of this amount of unrecognized United States deferred tax liability is not practicable because of the complexities associated with its hypothetical calculation.
Tax Allocation Agreement with First Data
The Company and First Data each are liable for taxes imposed on their respective businesses both prior to and after the Spin-off. If such taxes have not been appropriately apportioned between First Data and the Company, subsequent adjustments may occur that may impact the Company's financial condition or results of operations.
Also under the tax allocation agreement, with respect to taxes and other liabilities that result from a final determination that is inconsistent with the anticipated tax consequences of the Spin-off (as set forth in the private letter ruling and relevant tax opinion) ("Spin-off Related Taxes"), the Company will be liable to First Data for any such Spin-off Related Taxes attributable solely to actions taken by or with respect to the Company. In addition, the Company will also be liable for half of any Spin-off Related Taxes (i) that would not have been imposed but for the existence of both an action by the Company and an action by First Data or (ii) where the Company and First Data each take actions that, standing alone, would have resulted in the imposition of such Spin-off Related Taxes. The Company may be similarly liable if it breaches certain representations or covenants set forth in the tax allocation agreement. If the Company is required to indemnify First Data for taxes incurred as a result of the Spin-off being taxable to First Data, it likely would have a material adverse effect on the Company's business, financial condition and results of operations. First Data generally will be liable for all Spin-off Related Taxes, other than those described above.
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Employee Benefit Plans
Defined Contribution Plans
The Company administers several defined contribution plans in various countries globally, including The Western Union Company Incentive Savings Plan (the "401(k)"), which covers eligible employees on the United States payroll. Such plans have vesting and employer contribution provisions that vary by country. In addition, the Company sponsors a non-qualified deferred compensation plan for a select group of highly compensated United States employees. The plan provides tax-deferred contributions and the restoration of Company matching contributions otherwise limited under the 401(k). The aggregate amount charged to expense in connection with all of the above plans was
$17.8 million
,
$18.0 million
, and
$17.4 million
during the years ended
December 31, 2016
,
2015
and
2014
, respectively.
Defined Benefit Plan
The Company has a frozen defined benefit pension plan (the "Plan") and recognizes its funded status, measured as the difference between the fair value of the plan assets and the projected benefit obligation, in "Other liabilities" in the Consolidated Balance Sheets. Plan assets, which are managed in a third-party trust, primarily consist of a diversified blend of approximately
60%
debt securities,
20%
equity investments, and
20%
alternative investments (e.g., hedge funds, royalty rights and private equity funds) and had a total fair value of
$280.0 million
and
$276.7 million
as of
December 31, 2016
and
2015
, respectively. The significant majority of plan assets fall within either Level 1 or Level 2 of the fair value hierarchy. The benefit obligation associated with the Plan will vary over time only as a result of changes in market interest rates, the life expectancy of the plan participants, and benefit payments, since the accrual of benefits was suspended when the Plan was frozen in 1988. The benefit obligation was
$306.4 million
and
$346.0 million
and the discount rate assumption used in the measurement of this obligation was
3.40%
and
3.52%
as of
December 31, 2016
and
2015
, respectively. The Company’s unfunded pension obligation was
$26.4 million
and
$69.3 million
as of
December 31, 2016
and
2015
, respectively.
The net periodic benefit cost associated with the Plan was
$3.3 million
,
$2.8 million
, and
$3.8 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. The expected long-term return on plan assets assumption is
6.75%
for
2017
. The Company made contributions of
$38.1 million
and
$6.7 million
to the Plan in the years ended
December 31, 2016
and
2015
, respectively.
No
funding to the Plan will be required for
2017
. The estimated undiscounted future benefit payments are expected to be
$33.2 million
in 2017,
$31.5 million
in 2018,
$29.8 million
in 2019,
$28.1 million
in 2020,
$26.3 million
in 2021, and
$106.6 million
in 2022 through 2026.
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Operating Lease Commitments
The Company leases certain real properties for use as customer service centers and administrative and sales offices. The Company also leases automobiles and office equipment. Certain of these leases contain renewal options and escalation provisions. Total rent expense under operating leases, net of sublease income, was
$46.2 million
,
$46.9 million
and
$54.0 million
during the years ended
December 31, 2016
,
2015
and
2014
, respectively.
As of
December 31, 2016
, the minimum aggregate rental commitments under all non-cancelable operating leases were as follows (in millions):
|
|
|
|
|
Year Ending December 31,
|
|
2017
|
$
|
40.8
|
|
2018
|
31.2
|
|
2019
|
19.1
|
|
2020
|
10.6
|
|
2021
|
6.1
|
|
Thereafter
|
12.5
|
|
Total future minimum lease payments
|
$
|
120.3
|
|
13. Stockholders' Equity
Accumulated other comprehensive loss
Accumulated other comprehensive loss includes all changes in equity during a period that have yet to be recognized in income, except those resulting from transactions with shareholders. The major components include unrealized gains and losses on investment securities, unrealized gains and losses from cash flow hedging activities, foreign currency translation adjustments and defined benefit pension plan adjustments.
Unrealized gains and losses on investment securities that are available for sale, primarily state and municipal debt securities, are included in "Accumulated other comprehensive loss" until the investment is either sold or deemed other-than-temporarily impaired. See Note 7 for further discussion.
The effective portion of the change in fair value of derivatives that qualify as cash flow hedges are recorded in "Accumulated other comprehensive loss." Generally, amounts are recognized in income when the related forecasted transaction affects earnings. See Note 14 for further discussion.
The assets and liabilities of foreign subsidiaries whose functional currency is not the United States dollar are translated using the appropriate exchange rate as of the end of the year. Foreign currency translation adjustments represent unrealized gains and losses on assets and liabilities arising from the difference in the foreign country currency compared to the United States dollar. These gains and losses are accumulated in other comprehensive income. When a foreign subsidiary is substantially liquidated, the cumulative translation gain or loss is removed from "Accumulated other comprehensive loss" and is recognized as a component of the gain or loss on the sale of the subsidiary.
The defined benefit pension plan adjustment is recognized for the difference between estimated assumptions (e.g., asset returns, discount rates, mortality) and actual results. The amount in "Accumulated other comprehensive loss" is amortized to income over the remaining life expectancy of the plan participants. Details of the pension plan's assets and obligations are explained further in Note 11.
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the components of accumulated other comprehensive loss, net of tax (in millions). All amounts reclassified from accumulated other comprehensive loss affect the line items as indicated below within the Consolidated Statements of Income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Unrealized gains on investment securities, beginning of period
|
$
|
7.8
|
|
|
$
|
8.9
|
|
|
$
|
4.1
|
|
Unrealized gains/(losses)
|
(14.9
|
)
|
|
0.4
|
|
|
15.5
|
|
Tax (expense)/benefit
|
5.4
|
|
|
(0.1
|
)
|
|
(5.7
|
)
|
Reclassification of gains into "Other revenues"
|
(3.3
|
)
|
|
(2.2
|
)
|
|
(7.8
|
)
|
Reclassification of gains into "Interest income"
|
—
|
|
|
—
|
|
|
(0.2
|
)
|
Tax expense related to reclassifications
|
1.2
|
|
|
0.8
|
|
|
3.0
|
|
Net unrealized gains/(losses) on investment securities
|
(11.6
|
)
|
|
(1.1
|
)
|
|
4.8
|
|
Unrealized gains/(losses) on investment securities, end of period
|
$
|
(3.8
|
)
|
|
$
|
7.8
|
|
|
$
|
8.9
|
|
|
|
|
|
|
|
|
|
Unrealized gains/(losses) on hedging activities, beginning of period
|
$
|
41.4
|
|
|
$
|
48.6
|
|
|
$
|
(33.0
|
)
|
Unrealized gains
|
34.3
|
|
|
70.8
|
|
|
84.0
|
|
Tax (expense)/benefit
|
1.0
|
|
|
(7.0
|
)
|
|
(3.7
|
)
|
Reclassification of gains into "Transaction fees"
|
(33.3
|
)
|
|
(55.3
|
)
|
|
(1.2
|
)
|
Reclassification of gains into "Foreign exchange revenues"
|
(14.7
|
)
|
|
(22.5
|
)
|
|
(0.4
|
)
|
Reclassification of losses into "Interest expense"
|
3.6
|
|
|
3.6
|
|
|
3.6
|
|
Tax expense/(benefit) related to reclassifications
|
1.5
|
|
|
3.2
|
|
|
(0.7
|
)
|
Net unrealized gains/(losses) on hedging activities
|
(7.6
|
)
|
|
(7.2
|
)
|
|
81.6
|
|
Unrealized gains on hedging activities, end of period
|
$
|
33.8
|
|
|
$
|
41.4
|
|
|
$
|
48.6
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments, beginning of period
|
$
|
(66.0
|
)
|
|
$
|
(49.2
|
)
|
|
$
|
(21.6
|
)
|
Foreign currency translation adjustments
|
(5.4
|
)
|
|
(20.3
|
)
|
|
(14.8
|
)
|
Tax (expense)/benefit
|
0.7
|
|
|
3.5
|
|
|
(12.8
|
)
|
Net foreign currency translation adjustments
|
(4.7
|
)
|
|
(16.8
|
)
|
|
(27.6
|
)
|
Foreign currency translation adjustments, end of period
|
$
|
(70.7
|
)
|
|
$
|
(66.0
|
)
|
|
$
|
(49.2
|
)
|
|
|
|
|
|
|
|
Defined benefit pension plan adjustments, beginning of period
|
$
|
(127.1
|
)
|
|
$
|
(127.2
|
)
|
|
$
|
(118.5
|
)
|
Unrealized losses
|
(2.9
|
)
|
|
(9.7
|
)
|
|
(24.3
|
)
|
Tax benefit
|
1.1
|
|
|
2.5
|
|
|
9.0
|
|
Reclassification of losses into "Cost of services"
|
10.7
|
|
|
11.4
|
|
|
10.4
|
|
Tax benefit related to reclassifications and other
|
(3.9
|
)
|
|
(4.1
|
)
|
|
(3.8
|
)
|
Net defined benefit pension plan adjustments
|
5.0
|
|
|
0.1
|
|
|
(8.7
|
)
|
Defined benefit pension plan adjustments, end of period
|
$
|
(122.1
|
)
|
|
$
|
(127.1
|
)
|
|
$
|
(127.2
|
)
|
Accumulated other comprehensive loss, end of period
|
$
|
(162.8
|
)
|
|
$
|
(143.9
|
)
|
|
$
|
(118.9
|
)
|
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash Dividends Paid
Cash dividends paid for the years ended
December 31, 2016
,
2015
and
2014
were
$312.2 million
,
$316.5 million
and
$265.2 million
, respectively. Dividends per share declared quarterly by the Company's Board of Directors during the years ended
2016
,
2015
and
2014
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
2016
|
|
$
|
0.16
|
|
|
$
|
0.16
|
|
|
$
|
0.16
|
|
|
$
|
0.16
|
|
2015
|
|
$
|
0.155
|
|
|
$
|
0.155
|
|
|
$
|
0.155
|
|
|
$
|
0.155
|
|
2014
|
|
$
|
0.125
|
|
|
$
|
0.125
|
|
|
$
|
0.125
|
|
|
$
|
0.125
|
|
On
February 9, 2017
, the Company's Board of Directors declared a quarterly cash dividend of
$0.175
per common share payable on
March 31, 2017
.
Share Repurchases
During the years ended
December 31, 2016
,
2015
and
2014
,
24.8 million
,
25.1 million
and
29.3 million
shares, respectively, have been repurchased for
$481.3 million
,
$500.0 million
and
$488.1 million
, respectively, excluding commissions, at an average cost of
$19.41
,
$19.96
and
$16.63
per share, respectively. These amounts represent shares authorized by the Board of Directors for repurchase under the publicly announced authorizations. As of
December 31, 2016
,
$230.5 million
remained available under the share repurchase authorization approved by the Company's Board of Directors through December 31, 2017. The amounts included in the "Common stock repurchased" line in the Company's Consolidated Statements of Cash Flows represent both shares authorized by the Board of Directors for repurchase under the publicly announced authorization, described earlier, as well as shares withheld from employees to cover tax withholding obligations on restricted stock units that have vested.
On February 9, 2017, the Board of Directors authorized
$1.2 billion
of common stock repurchases through December 31, 2019.
14. Derivatives
The Company is exposed to foreign currency exchange risk resulting from fluctuations in exchange rates, primarily the euro, and to a lesser degree the British pound, Canadian dollar, Australian dollar, Swiss franc, and other currencies, related to forecasted revenues and on settlement assets and obligations as well as on certain foreign currency denominated cash and other asset and liability positions. The Company is also exposed to risk from derivative contracts written to its customers arising from its cross-currency Business Solutions payments operations. Additionally, the Company is exposed to interest rate risk related to changes in market rates both prior to and subsequent to the issuance of debt. The Company uses derivatives to (a) minimize its exposures related to changes in foreign currency exchange rates and interest rates and (b) facilitate cross-currency Business Solutions payments by writing derivatives to customers.
The Company executes derivatives with established financial institutions, with the substantial majority of these financial institutions having credit ratings of "A-" or better from a major credit rating agency. The Company also writes Business Solutions derivatives mostly with small and medium size enterprises. The primary credit risk inherent in derivative agreements represents the possibility that a loss may occur from the nonperformance of a counterparty to the agreements. The Company performs a review of the credit risk of these counterparties at the inception of the contract and on an ongoing basis. The Company also monitors the concentration of its contracts with any individual counterparty. The Company anticipates that the counterparties will be able to fully satisfy their obligations under the agreements, but takes action when doubt arises about the counterparties' ability to perform. These actions may include requiring Business Solutions customers to post or increase collateral, and for all counterparties, the possible termination of the related contracts. The Company's hedged foreign currency exposures are in liquid currencies; consequently, there is minimal risk that appropriate derivatives to maintain the hedging program would not be available in the future.
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Foreign Currency Derivatives
The Company's policy is to use longer-term foreign currency forward contracts, with maturities of up to
36 months
at inception and a targeted weighted-average maturity of approximately
one year
, to help mitigate some of the risk that changes in foreign currency exchange rates compared to the United States dollar could have on forecasted revenues denominated in other currencies related to its business. As of
December 31, 2016
, the Company's longer-term foreign currency forward contracts had maturities of a maximum of
24 months
with a weighted-average maturity of approximately
one year
. These contracts are accounted for as cash flow hedges of forecasted revenue, with effectiveness assessed based on changes in the spot rate of the affected currencies during the period of designation. Accordingly, all changes in the fair value of the hedges not considered effective or portions of the hedge that are excluded from the measure of effectiveness are recognized immediately in "
Derivative gains/(losses), net
" within the Company's Consolidated Statements of Income.
The Company also uses short duration foreign currency forward contracts, generally with maturities from a few days up to
one month
, to offset foreign exchange rate fluctuations on settlement assets and obligations between initiation and settlement. In addition, forward contracts, typically with maturities of less than
one year
at inception, are utilized to offset foreign exchange rate fluctuations on certain foreign currency denominated cash and other asset and liability positions. None of these contracts are designated as accounting hedges.
The aggregate equivalent United States dollar notional amounts of foreign currency forward contracts as of
December 31, 2016
were as follows (in millions):
|
|
|
|
|
Contracts designated as hedges:
|
|
Euro
|
$
|
383.2
|
|
British pound
|
133.4
|
|
Canadian dollar
|
92.8
|
|
Australian dollar
|
46.3
|
|
Swiss franc
|
40.9
|
|
Other
|
84.1
|
|
Contracts not designated as hedges:
|
|
Euro
|
$
|
248.8
|
|
British pound
|
55.4
|
|
Australian dollar
|
47.1
|
|
Mexican peso
|
40.8
|
|
Canadian dollar
|
40.5
|
|
Indian rupee
|
29.5
|
|
Other (a)
|
166.2
|
|
____________________
|
|
(a)
|
Comprised of exposures to
20
different currencies. None of these individual currency exposures is greater than
$25 million
.
|
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Business Solutions Operations
The Company writes derivatives, primarily foreign currency forward contracts and option contracts, mostly with small and medium size enterprises and derives a currency spread from this activity as part of its Business Solutions operations. The Company aggregates its Business Solutions foreign currency exposures arising from customer contracts, including the derivative contracts described above, and hedges the resulting net currency risks by entering into offsetting contracts with established financial institution counterparties (economic hedge contracts). The derivatives written are part of the broader portfolio of foreign currency positions arising from the Company's cross-currency payments operations, which primarily include spot exchanges of currency in addition to forwards and options. The resulting foreign exchange revenues from the total portfolio of positions comprise Business Solutions foreign exchange revenues. None of the derivative contracts used in Business Solutions operations are designated as accounting hedges. The duration of these derivative contracts at inception is generally less than
one year
.
The aggregate equivalent United States dollar notional amount of foreign currency derivative customer contracts held by the Company in its Business Solutions operations as of
December 31, 2016
was approximately
$5.5 billion
. The significant majority of customer contracts are written in major currencies such as the Australian dollar, British pound, Canadian dollar, and euro.
Interest Rate Hedging
The Company utilizes interest rate swaps to effectively change the interest rate payments on a portion of its notes from fixed-rate payments to short-term LIBOR-based variable rate payments in order to manage its overall exposure to interest rates. The Company designates these derivatives as fair value hedges. The change in fair value of the interest rate swaps is offset by a change in the carrying value of the debt being hedged within "Borrowings" in the Consolidated Balance Sheets and "Interest expense" in the Consolidated Statements of Income has been adjusted to include the effects of interest accrued on the swaps.
The Company, at times, utilizes derivatives to hedge the forecasted issuance of fixed-rate debt. These derivatives are designated as cash flow hedges of the variability in the fixed-rate coupon of the debt expected to be issued. The effective portion of the change in fair value of the derivatives is recorded in "Accumulated other comprehensive loss" in the Consolidated Balance Sheets.
The Company held interest rate swaps in an aggregate notional amount of
$975.0 million
as of
December 31, 2016
and
2015
. Of this aggregate notional amount held at
December 31, 2016
,
$500.0 million
related to notes due in 2017,
$300.0 million
related to notes due in 2018, and
$175.0 million
related to notes due in 2020.
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Balance Sheet
The following table summarizes the fair value of derivatives reported in the Consolidated Balance Sheets as of
December 31, 2016
and
December 31, 2015
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
|
|
Fair Value
|
|
|
|
Fair Value
|
|
Balance Sheet
Location
|
|
December 31,
2016
|
|
December 31,
2015
|
|
Balance Sheet
Location
|
|
December 31,
2016
|
|
December 31,
2015
|
Derivatives — hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate fair value hedges
|
Other assets
|
|
$
|
6.7
|
|
|
$
|
7.6
|
|
|
Other liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign currency cash flow hedges
|
Other assets
|
|
48.4
|
|
|
59.7
|
|
|
Other liabilities
|
|
1.2
|
|
|
2.4
|
|
Total
|
|
|
$
|
55.1
|
|
|
$
|
67.3
|
|
|
|
|
$
|
1.2
|
|
|
$
|
2.4
|
|
Derivatives — undesignated:
|
|
|
|
|
|
|
|
|
|
|
|
Business Solutions operations — foreign currency (a)
|
Other assets
|
|
$
|
307.2
|
|
|
$
|
326.1
|
|
|
Other liabilities
|
|
$
|
258.3
|
|
|
$
|
277.1
|
|
Foreign currency
|
Other assets
|
|
3.3
|
|
|
2.9
|
|
|
Other liabilities
|
|
2.8
|
|
|
4.2
|
|
Total
|
|
|
$
|
310.5
|
|
|
$
|
329.0
|
|
|
|
|
$
|
261.1
|
|
|
$
|
281.3
|
|
Total derivatives
|
|
|
$
|
365.6
|
|
|
$
|
396.3
|
|
|
|
|
$
|
262.3
|
|
|
$
|
283.7
|
|
____________________
|
|
(a)
|
In many circumstances, the Company allows its Business Solutions customers to settle part or all of their derivative contracts prior to maturity. However, the offsetting positions originally entered into with financial institution counterparties do not allow for similar settlement. To mitigate this, additional foreign currency contracts are entered into with financial institution counterparties to offset the original economic hedge contracts. This frequently results in increases in the Company's derivative assets and liabilities that may exceed the growth in the underlying derivatives business.
|
The fair values of derivative assets and liabilities associated with contracts that include netting language that the Company believes to be enforceable have been netted in the following tables to present the Company's net exposure with these counterparties. The Company's rights under these agreements generally allow for transactions to be settled on a net basis, including upon early termination, which could occur upon the counterparty's default, a change in control, or other conditions.
In addition, certain of the Company's other agreements include netting provisions, the enforceability of which may vary from jurisdiction to jurisdiction and depending on the circumstances. Due to the uncertainty related to the enforceability of these provisions, the derivative balances associated with these agreements are included within "Derivatives that are not or may not be subject to master netting arrangement or similar agreement" in the following tables. In certain circumstances, the Company may require its Business Solutions customers to maintain collateral balances which may mitigate the risk associated with potential customer defaults.
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables summarize the gross and net fair value of derivative assets and liabilities as of
December 31, 2016
and
December 31, 2015
(in millions):
Offsetting of Derivative Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Gross Amounts of Recognized Assets
|
|
Gross Amounts Offset in the Consolidated Balance Sheets
|
|
Net Amounts Presented
in the Consolidated Balance Sheets
|
|
Derivatives Not Offset
in the Consolidated Balance Sheets
|
|
Net Amounts
|
Derivatives subject to a master netting arrangement or similar agreement
|
|
$
|
256.3
|
|
|
$
|
—
|
|
|
$
|
256.3
|
|
|
$
|
(146.4
|
)
|
|
$
|
109.9
|
|
Derivatives that are not or may not be subject to master netting arrangement or similar agreement
|
|
109.3
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
365.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
Derivatives subject to a master netting arrangement or similar agreement
|
|
$
|
224.3
|
|
|
$
|
—
|
|
|
$
|
224.3
|
|
|
$
|
(119.2
|
)
|
|
$
|
105.1
|
|
Derivatives that are not or may not be subject to master netting arrangement or similar agreement
|
|
172.0
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
396.3
|
|
|
|
|
|
|
|
|
|
Offsetting of Derivative Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Gross Amounts of Recognized Liabilities
|
|
Gross Amounts Offset in the Consolidated Balance Sheets
|
|
Net Amounts Presented
in the Consolidated Balance Sheets
|
|
Derivatives Not Offset
in the Consolidated Balance Sheets
|
|
Net Amounts
|
Derivatives subject to a master netting arrangement or similar agreement
|
|
$
|
152.6
|
|
|
$
|
—
|
|
|
$
|
152.6
|
|
|
$
|
(146.4
|
)
|
|
$
|
6.2
|
|
Derivatives that are not or may not be subject to master netting arrangement or similar agreement
|
|
109.7
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
262.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
Derivatives subject to a master netting arrangement or similar agreement
|
|
$
|
169.6
|
|
|
$
|
—
|
|
|
$
|
169.6
|
|
|
$
|
(119.2
|
)
|
|
$
|
50.4
|
|
Derivatives that are not or may not be subject to master netting arrangement or similar agreement
|
|
114.1
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
283.7
|
|
|
|
|
|
|
|
|
|
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income Statement
The following tables summarize the location and amount of gains and losses of derivatives in the Consolidated Statements of Income segregated by designated, qualifying hedging instruments and those that are not, for the years ended
December 31, 2016
,
2015
, and
2014
(in millions):
Fair Value Hedges
The following table presents the location and amount of gains/(losses) from fair value hedges for the years ended
December 31, 2016
,
2015
, and
2014
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain/(Loss) Recognized in Income on
Derivatives
|
|
|
|
Gain/(Loss) Recognized in Income on
Related Hedged Item (a)
|
|
Gain/(Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)
|
|
|
Income
Statement
Location
|
|
Amount
|
|
|
|
Income
Statement
Location
|
|
Amount
|
|
Income
Statement
Location
|
|
Amount
|
Derivatives
|
|
|
2016
|
|
2015
|
|
2014
|
|
Hedged
Item
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
2016
|
|
2015
|
|
2014
|
Interest rate contracts
|
|
Interest expense
|
|
$
|
6.2
|
|
|
$
|
15.2
|
|
|
$
|
17.5
|
|
|
Fixed-rate debt
|
|
Interest expense
|
|
$
|
3.2
|
|
|
$
|
(2.3
|
)
|
|
$
|
(4.4
|
)
|
|
Interest expense
|
|
$
|
—
|
|
|
$
|
0.8
|
|
|
$
|
(0.7
|
)
|
Total gain/(loss)
|
|
|
|
$
|
6.2
|
|
|
$
|
15.2
|
|
|
$
|
17.5
|
|
|
|
|
|
|
$
|
3.2
|
|
|
$
|
(2.3
|
)
|
|
$
|
(4.4
|
)
|
|
|
|
$
|
—
|
|
|
$
|
0.8
|
|
|
$
|
(0.7
|
)
|
Cash Flow Hedges
The following table presents the location and amount of gains/(losses) from cash flow hedges for the years ended
December 31, 2016
,
2015
, and
2014
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain/(Loss) Recognized
|
|
Gain/(Loss) Reclassified
|
|
Gain/(Loss) Recognized in Income on
|
|
|
in OCI on Derivatives
|
|
from Accumulated OCI into Income
|
|
Derivatives (Ineffective Portion and Amount
|
|
|
(Effective Portion)
|
|
(Effective Portion)
|
|
Excluded from Effectiveness Testing) (b)
|
|
|
Amount
|
|
Income
Statement Location
|
|
Amount
|
|
Income
Statement Location
|
|
Amount
|
Derivatives
|
|
2016
|
|
2015
|
|
2014
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
2016
|
|
2015
|
|
2014
|
Foreign currency contracts
|
|
$
|
34.3
|
|
|
$
|
70.8
|
|
|
$
|
84.0
|
|
|
Revenue
|
|
$
|
48.0
|
|
|
$
|
77.8
|
|
|
$
|
1.6
|
|
|
Derivative gains/(losses), net
|
|
$
|
3.7
|
|
|
$
|
(0.1
|
)
|
|
$
|
(4.4
|
)
|
Interest rate contracts (c)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Interest expense
|
|
(3.6
|
)
|
|
(3.6
|
)
|
|
(3.6
|
)
|
|
Interest expense
|
|
—
|
|
|
—
|
|
|
—
|
|
Total gain/(loss)
|
|
$
|
34.3
|
|
|
$
|
70.8
|
|
|
$
|
84.0
|
|
|
|
|
$
|
44.4
|
|
|
$
|
74.2
|
|
|
$
|
(2.0
|
)
|
|
|
|
$
|
3.7
|
|
|
$
|
(0.1
|
)
|
|
$
|
(4.4
|
)
|
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Undesignated Hedges
The following table presents the location and amount of net gains/(losses) from undesignated hedges for the years ended
December 31, 2016
,
2015
, and
2014
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain/(Loss) Recognized in Income on Derivatives (d)
|
|
|
Income Statement Location
|
|
Amount
|
Derivatives
|
|
|
|
2016
|
|
2015
|
|
2014
|
Foreign currency contracts (e)
|
Selling, general and administrative
|
|
$
|
13.2
|
|
|
$
|
35.9
|
|
|
$
|
46.5
|
|
Foreign currency contracts (f)
|
Derivative gains/(losses), net
|
|
0.8
|
|
|
1.3
|
|
|
2.2
|
|
Total gain/(loss)
|
|
|
$
|
14.0
|
|
|
$
|
37.2
|
|
|
$
|
48.7
|
|
____________________
|
|
(a)
|
The
2016
gain of
$3.2 million
was comprised of a loss in value on the debt of
$6.2 million
and amortization of hedge accounting adjustments of
$9.4 million
. The
2015
loss of
$2.3 million
was comprised of a loss in value on the debt of
$16.0 million
and amortization of hedge accounting adjustments of
$13.7 million
. The
2014
loss of
$4.4 million
was comprised of a loss in value on the debt of
$16.8 million
and amortization of hedge accounting adjustments of
$12.4 million
.
|
|
|
(b)
|
The portion of the change in fair value of a derivative excluded from the effectiveness assessment for foreign currency forward contracts designated as cash flow hedges represents the difference between changes in forward rates and spot rates.
|
|
|
(c)
|
The Company uses derivatives to hedge the forecasted issuance of fixed-rate debt and records the effective portion of the derivative's fair value in "Accumulated other comprehensive loss" in the Consolidated Balance Sheets. These amounts are reclassified to "Interest expense" in the Consolidated Statements of Income over the life of the related notes.
|
|
|
(d)
|
The Company uses foreign currency forward and option contracts as part of its Business Solutions payments operations. These derivative contracts are excluded from this table as they are managed as part of a broader currency portfolio that includes non-derivative currency exposures. The gains and losses on these derivatives are included as part of the broader disclosure of portfolio revenue for this business discussed above.
|
|
|
(e)
|
The Company uses foreign currency forward contracts to offset foreign exchange rate fluctuations on settlement assets and obligations as well as certain foreign currency denominated positions. Foreign exchange losses on settlement assets and obligations, cash balances, and other assets and liabilities, not including amounts related to derivatives activity as displayed above and included in "Selling, general, and administrative" in the Consolidated Statements of Income were
$21.4 million
,
$36.1 million
, and
$51.8 million
for the years ended
2016
,
2015
, and
2014
, respectively.
|
|
|
(f)
|
The derivative contracts used in the Company's revenue hedging program are not designated as hedges in the final month of the contract.
|
An accumulated other comprehensive pre-tax gain of
$32.9 million
related to the foreign currency forward contracts is expected to be reclassified into revenue within the next
12
months as of
December 31, 2016
. Approximately
$3.3 million
of net losses on the forecasted debt issuance hedges are expected to be recognized in "Interest expense" in the Consolidated Statements of Income within the next
12
months as of
December 31, 2016
.
No
amounts have been reclassified into earnings as a result of the underlying transaction being considered probable of not occurring within the specified time period.
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Borrowings
The Company’s outstanding borrowings consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
Notes:
|
|
|
|
5.930% notes due 2016 (a) (b)
|
$
|
—
|
|
|
$
|
1,000.0
|
|
2.875% notes due 2017 (a)
|
500.0
|
|
|
500.0
|
|
3.650% notes (effective rate of 4.4%) due 2018
|
400.0
|
|
|
400.0
|
|
3.350% notes due 2019 (a)
|
250.0
|
|
|
250.0
|
|
5.253% notes due 2020 (a)
|
324.9
|
|
|
324.9
|
|
6.200% notes due 2036 (a)
|
500.0
|
|
|
500.0
|
|
6.200% notes due 2040 (a)
|
250.0
|
|
|
250.0
|
|
Term Loan Facility borrowings (effective rate of 2.2%) (b)
|
575.0
|
|
|
—
|
|
Other borrowings
|
—
|
|
|
5.5
|
|
Total borrowings at par value
|
2,799.9
|
|
|
3,230.4
|
|
Fair value hedge accounting adjustments, net (c)
|
4.4
|
|
|
7.6
|
|
Unamortized discount and debt issuance costs (d)
|
(18.2
|
)
|
|
(22.1
|
)
|
Total borrowings at carrying value (e)
|
$
|
2,786.1
|
|
|
$
|
3,215.9
|
|
____________________
|
|
(a)
|
The difference between the stated interest rate and the effective interest rate is not significant.
|
|
|
(b)
|
Proceeds from the Company's delayed draw term loan facility, cash, including cash generated from operations, and proceeds from commercial paper borrowings were used to fund the October 2016 maturity of
$1.0 billion
of aggregate principal amount unsecured notes as discussed further below.
|
|
|
(c)
|
The Company utilizes interest rate swaps designated as fair value hedges to effectively change the interest rate payments on a portion of its notes from fixed-rate payments to short-term LIBOR-based variable rate payments in order to manage its overall exposure to interest rates. The changes in fair value of these interest rate swaps result in an offsetting hedge accounting adjustment recorded to the carrying value of the related note. These hedge accounting adjustments will be reclassified as reductions to or increases in "Interest expense" in the Consolidated Statements of Income over the life of the related notes, and cause the effective rate of i
nterest to differ from the notes’ stated rate.
|
|
|
(d)
|
On January 1, 2016, the Company adopted an accounting pronouncement that requires capitalized debt issuance costs to be presented as a reduction to the carrying value of debt, with adoption retrospective for periods previously presented. The adoption of this standard resulted in a reduction of
$9.7 million
to the carrying value of borrowings as of December 31, 2015.
|
|
|
(e)
|
As of
December 31, 2016
, the Company’s weighted-average effective rate on total borrowings was approximately
4.2%
.
|
The following summarizes the Company's maturities of borrowings at par value as of
December 31, 2016
(in millions):
|
|
|
|
|
Due within 1 year
|
$
|
500.0
|
|
Due after 1 year through 2 years
|
414.4
|
|
Due after 2 years through 3 years
|
278.8
|
|
Due after 3 years through 4 years
|
368.0
|
|
Due after 4 years through 5 years
|
488.7
|
|
Due after 5 years
|
750.0
|
|
The Company’s obligations with respect to its outstanding notes, as described below, rank equally.
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Commercial Paper Program
Pursuant to the Company’s commercial paper program, the Company may issue unsecured commercial paper notes in an amount not to exceed
$1.5 billion
outstanding at any time, reduced to the extent of borrowings outstanding on the Company’s Revolving Credit Facility in excess of
$150 million
. The commercial paper notes may have maturities of up to
397
days from date of issuance. The Company had
no
commercial paper borrowings outstanding as of December 31,
2016
and
2015
.
Term Loan Facility
On April 11, 2016, the Company entered into a term loan agreement, which matures in April 2021, providing for an unsecured delayed draw term loan facility in an aggregate amount of
$575 million
(the "Term Loan Facility"). In October 2016, the Company borrowed
$575 million
under the Term Loan Facility and used the proceeds, in addition to cash, including cash generated from operations, and proceeds from commercial paper borrowings in October 2016 to repay the Company's notes due in October 2016.
The Term Loan Facility contains covenants, subject to certain exceptions, that, among other things, limit or restrict the Company's ability to sell or transfer assets or merge or consolidate with another company, grant certain types of security interests, incur certain types of liens, impose restrictions on subsidiary dividends, enter into sale and leaseback transactions, incur certain subsidiary level indebtedness, or use proceeds in violation of anti-corruption or anti-money laundering laws. The Term Loan Facility requires the Company to maintain a consolidated adjusted EBITDA interest coverage ratio of greater than
3
:1 for each period of four consecutive fiscal quarters. The Term Loan Facility also contains customary representations, warranties and events of default.
Generally, interest under the Term Loan Facility is calculated using a selected LIBOR rate plus an interest rate margin of
150
basis points. The interest rate margin percentage is based on certain of the Company's credit ratings, and will increase or decrease in the event of certain upgrades or downgrades in the Company's credit ratings.
In addition to the payment of interest, the Company is required to make certain periodic amortization payments with respect to the outstanding principal of the term loans commencing after the second anniversary of the closing of the Term Loan Facility. The final maturity date of the Term Loan Facility is April 11, 2021.
Revolving Credit Facility
On September 29, 2015, the Company entered into a credit agreement which expires in September 2020 providing for unsecured financing facilities in an aggregate amount of
$1.65 billion
, including a
$250.0 million
letter of credit sub-facility ("Revolving Credit Facility"). The Revolving Credit Facility contains certain covenants that, among other things, limit or restrict the Company's ability to sell or transfer assets or merge or consolidate with another company, grant certain types of security interests, incur certain types of liens, impose restrictions on subsidiary dividends, enter into sale and leaseback transactions, incur certain subsidiary level indebtedness, subject to certain exceptions, or use proceeds in violation of applicable anti-corruption or AML laws. Also, consistent with the prior facility, the Company is required to maintain compliance with a consolidated interest coverage ratio covenant. The Revolving Credit Facility supports borrowings under the Company’s
$1.5 billion
commercial paper program.
Interest due under the Revolving Credit Facility is fixed for the term of each borrowing and is payable according to the terms of that borrowing. Generally, interest is calculated using a selected LIBOR rate plus an interest rate margin of
110
basis points. A facility fee of
15
basis points is also payable quarterly on the total facility, regardless of usage. Both the interest rate margin and facility fee percentage are based on certain of the Company’s credit ratings.
As of
December 31, 2016
and
2015
, the Company had
no
outstanding borrowings under the Revolving Credit Facility.
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Notes
On November 22, 2013, the Company issued
$250.0 million
of aggregate principal amount of unsecured notes due May 22, 2019 ("2019 Notes"). Interest with respect to the 2019 Notes is payable semi-annually in arrears on May 22 and November 22 of each year, beginning on May 22, 2014, based on the fixed per annum rate of
3.350%
. The interest rate payable on the 2019 Notes will be increased if the debt rating assigned to the note is downgraded by an applicable credit rating agency, beginning at a downgrade below investment grade. However, in no event will the interest rate on the 2019 Notes be increased by more than
2.00%
above
3.350%
per annum. The interest rate payable on the 2019 Notes may also be adjusted downward for debt rating upgrades subsequent to any debt rating downgrades but may not be adjusted below
3.350%
per annum. The 2019 Notes are subject to covenants that, among other things, limit or restrict the ability of the Company to sell or transfer assets or merge or consolidate with another company, and limit or restrict the Company's and certain of its subsidiaries' ability to incur certain types of security interests, or enter into sale and leaseback transactions. The Company may redeem the 2019 Notes at any time prior to maturity at the greater of par or a price based on the applicable treasury rate plus
30
basis points.
On August 22, 2013, the Company issued
$250.0 million
of aggregate principal amount of unsecured floating rate notes due August 21, 2015 ("2015 Floating Rate Notes"). Interest with respect to the 2015 Floating Rate Notes was payable quarterly in arrears on each February 21, May 21, August 21 and November 21, beginning November 21, 2013, at a per annum rate equal to the three-month LIBOR plus
1.0%
(reset quarterly). The 2015 Floating Rate Notes matured and were repaid from the Company's cash balances in August 2015.
On December 10, 2012, the Company issued
$250.0 million
and
$500.0 million
of aggregate principal amounts of unsecured notes due December 10, 2015 ("2015 Fixed Rate Notes") and December 10, 2017 ("2017 Notes"), respectively. The 2015 Fixed Rate Notes matured and were repaid from the Company's cash balances in December 2015. Interest with respect to the 2017 Notes is payable semi-annually in arrears on June 10 and December 10 of each year, currently based on the per annum rate of
2.875%
. The interest rate payable on the 2017 Notes will be increased if the debt rating assigned to such notes is downgraded by an applicable credit rating agency, beginning at a downgrade below investment grade. However, in no event will the interest rate on the 2017 Notes be increased by more than
2.00%
above
2.875%
per annum. The interest rate on the 2017 Notes may also be adjusted downward for debt rating upgrades subsequent to any debt rating downgrades but may not be adjusted below
2.875%
per annum.
The 2017 Notes are subject to covenants that, among other things, limit or restrict the ability of the Company to sell or transfer assets or merge or consolidate with another company, and limit or restrict the Company’s and certain of its subsidiaries’ ability to incur certain types of security interests, or enter into sale and leaseback transactions. The Company may redeem the 2017 Notes at any time prior to maturity at the greater of par or a price based on the applicable treasury rate plus
40
basis points.
On August 22, 2011, the Company issued
$400.0 million
of aggregate principal amount of unsecured notes due August 22, 2018 ("2018 Notes"). Interest with respect to the 2018 Notes is payable semi-annually in arrears on February 22 and August 22 of each year, based on the fixed per annum rate of
3.650%
. The 2018 Notes are subject to covenants that, among other things, limit or restrict the ability of the Company to sell or transfer assets or merge or consolidate with another company, and limit or restrict the Company’s and certain of its subsidiaries’ ability to incur certain types of security interests, or enter into certain sale and leaseback transactions. The Company may redeem the 2018 Notes at any time prior to maturity at the greater of par or a price based on the applicable treasury rate plus
35
basis points.
On June 21, 2010, the Company issued
$250.0 million
of aggregate principal amount of unsecured notes due June 21, 2040 ("2040 Notes"). Interest with respect to the 2040 Notes is payable semi-annually on June 21 and December 21 each year based on the fixed per annum rate of
6.200%
. The 2040 Notes are subject to covenants that, among other things, limit or restrict the Company’s and certain of its subsidiaries’ ability to grant certain types of security interests or enter into sale and leaseback transactions. The Company may redeem the 2040 Notes at any time prior to maturity at the greater of par or a price based on the applicable treasury rate plus
30
basis points.
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On March 30, 2010, the Company exchanged
$303.7 million
of aggregate principal amount of unsecured notes due November 17, 2011 for unsecured notes due April 1, 2020 ("2020 Notes"). Interest with respect to the 2020 Notes is payable semi-annually on April 1 and October 1 each year based on the fixed per annum rate of
5.253%
. In connection with the exchange, note holders were given a
7% premium
(
$21.2 million
), which approximated market value at the exchange date, as additional principal. As this transaction was accounted for as a debt modification, this premium was not charged to expense. Rather, the premium, along with the offsetting hedge accounting adjustments, will be accreted into "Interest expense" over the life of the notes. The 2020 Notes are subject to covenants that, among other things, limit or restrict the Company’s and certain of its subsidiaries’ ability to grant certain types of security interests, incur debt (in the case of significant subsidiaries), or enter into sale and leaseback transactions. The Company may redeem the 2020 Notes at any time prior to maturity at the greater of par or a price based on the applicable treasury rate plus
15
basis points.
The 2020 Notes were originally issued in reliance on exemptions from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"). On October 8, 2010, the Company exchanged the 2020 Notes for notes registered under the Securities Act, pursuant to the terms of a Registration Rights Agreement.
On November 17, 2006, the Company issued
$500.0 million
of aggregate principal amount of unsecured notes due November 17, 2036 ("2036 Notes"). Interest with respect to the 2036 Notes is payable semi-annually on May 17 and November 17 each year based on the fixed per annum rate of
6.200%
. The 2036 Notes are subject to covenants that, among other things, limit or restrict the Company’s and certain of its subsidiaries’ ability to grant certain types of security interests, incur debt (in the case of significant subsidiaries), or enter into sale and leaseback transactions. The Company may redeem the 2036 Notes at any time prior to maturity at the greater of par or a price based on the applicable treasury rate plus
25
basis points.
On September 29, 2006, the Company issued
$1.0 billion
of aggregate principal amount of unsecured notes maturing on October 1, 2016 ("2016 Notes"). Interest on the 2016 Notes was payable semi-annually on April 1 and October 1 each year based on the fixed per annum rate of
5.930%
. In October 2016, proceeds from the Term Loan Facility, proceeds from commercial paper borrowings, and cash, including cash generated from operations, were used to repay the 2016 Notes.
Certain of the Company’s notes (the 2019 Notes, 2017 Notes, and 2018 Notes) include a change of control triggering event provision, as defined in the terms of the notes. If a change of control triggering event occurs, holders of the notes may require the Company to repurchase some or all of their notes at a price equal to
101%
of the principal amount of their notes, plus any accrued and unpaid interest. A change of control triggering event will occur when there is a change of control involving the Company and among other things, within a specified period in relation to the change of control, the notes are downgraded from an investment grade rating to below an investment grade rating by all three major credit rating agencies.
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Stock Compensation Plans
Stock Compensation Plans
The Western Union Company 2006 Long-Term Incentive Plan and 2015 Long-Term Incentive Plan
The Western Union Company 2015 Long-Term Incentive Plan ("2015 LTIP"), approved on May 15, 2015, provides for the granting of stock options, restricted stock awards and units, unrestricted stock awards and units, and other equity-based awards to employees and non-employee directors of the Company. Prior to this, equity-based awards were granted out of the 2006 Long-Term Incentive Plan ("2006 LTIP"). Shares available for grant under the 2015 LTIP were
30.5 million
as of
December 31, 2016
.
Options granted under the 2015 LTIP and the 2006 LTIP are issued with exercise prices equal to the fair market value of Western Union common stock on the grant date, have
10
-year terms, and typically vest over
four
equal annual increments beginning 12 months after the date of grant, with the exception of options granted to retirement eligible employees, which generally will vest on a prorated basis, upon termination. Compensation expense related to stock options is recognized over the requisite service period, which is the same as the vesting period.
Restricted stock unit grants typically vest over
four
equal annual increments beginning 12 months after the date of grant. Restricted stock units granted to retirement eligible employees generally vest on a prorated basis upon termination. The fair value of the awards granted is measured based on the fair value of the shares on the date of grant. The majority of stock unit grants do not provide for the payment of dividend equivalents. For those grants, the value of the grants is reduced by the net present value of the foregone dividend equivalent payments. The related compensation expense is recognized over the requisite service period, which is the same as the vesting period.
The compensation committee of the Company's Board of Directors has granted the Company's executives and certain other key employees, excluding the Chief Executive Officer ("CEO"), long-term incentive awards under the 2015 LTIP and 2006 LTIP, which in
2016
consisted of
80%
performance-based restricted stock unit awards and
20%
restricted stock unit awards. The CEO received long-term incentive awards under the 2015 LTIP and 2006 LTIP, which in
2016
consisted of
80%
performance-based restricted stock unit awards and
20%
stock option awards. In
2015
, the compensation committee of the Company's Board of Directors granted the Company's executives, including the CEO and certain other key employees long-term incentive awards under the 2015 LTIP and 2006 LTIP, which consisted of
80%
performance-based restricted stock unit awards and
20%
option awards. The compensation committee granted the remaining non-executive employees of the Company participating in the 2015 LTIP and 2006 LTIP (other than those non-executive employees receiving the performance-based restricted stock units described above) annual equity grants consisting solely of restricted stock unit awards for
2016
and
2015
.
The performance-based restricted stock units granted in
2016
are restricted stock units, primarily granted to the Company's executives and consist of two separate awards. The first award consists of performance-based restricted stock units, which require the Company to meet certain financial objectives during 2016, 2017 and 2018. The second award consists of performance-based restricted stock units with a market condition tied to the Company's total shareholder return in relation to the S&P 500 Index as calculated over a
three
-year performance period (2016 through 2018). Both of these awards will vest 100% on the third anniversary of the grant date, contingent upon threshold market and financial performance metrics being met. The actual number of performance-based restricted stock units that the recipients will receive for both
2016
awards will range from
0%
up to
150%
of the target number of stock units granted based on actual financial and total shareholder return performance results. The performance-based restricted stock units granted in 2015 were designed similar to the 2016 awards described above. The grant date fair value of the performance-based restricted stock units is fixed and the amount of restricted stock units that will ultimately vest depends upon the level of achievement of the performance and market conditions over the performance period. The fair value of the performance-based restricted stock units that are tied solely to performance conditions is measured similar to the restricted stock units discussed above, while the fair value of the performance-based restricted stock units that are tied to a market condition is determined using the Monte-Carlo simulation model. Unlike the performance-based awards that are tied solely to performance conditions, compensation costs related to awards with market conditions are recognized regardless of whether the market condition is satisfied, provided that the requisite service period has been completed.
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company has also granted bonus/deferred stock units out of the 2015 LTIP and 2006 LTIP to the non-employee directors of the Company. Since bonus/deferred stock units vest immediately, compensation expense is recognized on the date of grant based on the fair value of the awards when granted. These awards may be settled immediately unless the participant elects to defer the receipt of common shares under the applicable plan rules.
Stock Option Activity
A summary of stock option activity for the year ended
December 31, 2016
was as follows (options and aggregate intrinsic value in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
Options
|
|
Weighted-Average
Exercise Price
|
|
Weighted-Average Remaining
Contractual Term
(Years)
|
|
Aggregate
Intrinsic
Value
|
Outstanding as of January 1
|
11.8
|
|
|
$
|
18.01
|
|
|
|
|
|
Granted
|
0.6
|
|
|
$
|
18.19
|
|
|
|
|
|
Exercised
|
(1.8
|
)
|
|
$
|
17.69
|
|
|
|
|
|
Cancelled/forfeited
|
(2.5
|
)
|
|
$
|
20.07
|
|
|
|
|
|
Outstanding as of December 31
|
8.1
|
|
|
$
|
17.46
|
|
|
5.3
|
|
$
|
34.5
|
|
Options exercisable as of December 31
|
6.1
|
|
|
$
|
17.65
|
|
|
4.6
|
|
$
|
24.9
|
|
The Company received
$32.5 million
,
$80.1 million
and
$14.2 million
in cash proceeds related to the exercise of stock options during the years ended
December 31, 2016
,
2015
and
2014
, respectively. Upon the exercise of stock options, shares of common stock are issued from authorized common shares.
The Company realized total tax benefits during the years ended
December 31, 2016
,
2015
and
2014
from stock option exercises of
$1.6 million
,
$4.3 million
and
$0.9 million
, respectively.
The total intrinsic value of stock options exercised during the years ended
December 31, 2016
,
2015
and
2014
was
$5.3 million
,
$15.0 million
and
$3.5 million
, respectively.
Restricted Stock Activity
A summary of activity for restricted stock units and performance-based restricted stock units for the year ended
December 31, 2016
is listed below (units in millions):
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
Number
Outstanding
|
|
Weighted-Average
Grant-Date Fair Value
|
Non-vested as of January 1
|
7.6
|
|
$
|
15.47
|
|
Granted
|
3.7
|
|
$
|
17.05
|
|
Vested
|
(3.0)
|
|
$
|
14.33
|
|
Forfeited
|
(0.9)
|
|
$
|
15.80
|
|
Non-vested as of December 31
|
7.4
|
|
$
|
16.68
|
|
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock-Based Compensation
The following table sets forth the total impact on earnings for stock-based compensation expense recognized in the Consolidated Statements of Income resulting from stock options, restricted stock units, performance-based restricted stock units and bonus/deferred stock units for the years ended
December 31, 2016
,
2015
and
2014
(in millions, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Stock-based compensation expense
|
$
|
(41.8
|
)
|
|
$
|
(42.2
|
)
|
|
$
|
(39.7
|
)
|
Income tax benefit from stock-based compensation expense
|
12.3
|
|
|
12.3
|
|
|
11.5
|
|
Net income impact
|
$
|
(29.5
|
)
|
|
$
|
(29.9
|
)
|
|
$
|
(28.2
|
)
|
Earnings per share:
|
|
|
|
|
|
Basic and Diluted
|
$
|
(0.06
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
As of
December 31, 2016
, there was
$2.3 million
of total unrecognized compensation cost, net of assumed forfeitures, related to non-vested stock options which is expected to be recognized over a weighted-average period of
2.1
years, and there was
$64.4 million
of total unrecognized compensation cost, net of assumed forfeitures, related to non-vested restricted stock units and performance-based restricted stock units which is expected to be recognized over a weighted-average period of
2.2
years.
Fair Value Assumptions
The Company used the following assumptions for the Black-Scholes option pricing model to determine the value of Western Union options granted.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Stock options granted:
|
|
|
|
|
|
Weighted-average risk-free interest rate
|
1.4
|
%
|
|
1.7
|
%
|
|
1.9
|
%
|
Weighted-average dividend yield
|
3.3
|
%
|
|
3.6
|
%
|
|
3.1
|
%
|
Volatility
|
27.9
|
%
|
|
28.2
|
%
|
|
33.8
|
%
|
Expected term (in years)
|
6.32
|
|
|
6.00
|
|
|
6.09
|
|
Weighted-average grant date fair value
|
$
|
3.44
|
|
|
$
|
3.58
|
|
|
$
|
3.95
|
|
Risk-free interest rate
- The risk-free rate for stock options granted during the period is determined by using a United States Treasury rate for the period that coincided with the expected terms listed above.
Expected dividend yield
- The Company's expected annual dividend yield is the calculation of the annualized Western Union dividend divided by an average Western Union stock price on each respective grant date.
Expected volatility
- For the Company's executives and non-employee directors, the expected volatility for the
2016
,
2015
and
2014
grants was
27.9%
,
28.2%
and
33.8%
, respectively. There were
no
options granted to non-executive employees in
2016
,
2015
or
2014
. The Company used a blend of implied and historical volatility. Volatility was calculated using the market price of traded options on Western Union's common stock and the historical volatility of Western Union stock data.
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Expected term
- For
2016
, Western Union's expected term for the CEO grant was 6 years and approximately 7 years for the non-employee director grants. For
2015
and
2014
, Western Union's expected term for all grants was approximately 6 years. The Company's expected term for options was based upon, among other things, historical exercises, the vesting term of the Company's options and the options' contractual term of
ten
years.
The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and the Company's historical experience and future expectations. The calculated fair value is recognized as compensation cost in the Company's consolidated financial statements over the requisite service period of the entire award. Compensation cost is recognized only for those options expected to vest, with forfeitures estimated at the date of grant and evaluated and adjusted periodically to reflect the Company's historical experience and future expectations. Any change in the forfeiture assumption is accounted for as a change in estimate, with the cumulative effect of the change on periods previously reported being reflected in the consolidated financial statements of the period in which the change is made.
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Segments
As previously described in Note 1, the Company classifies its businesses into
three
segments: Consumer-to-Consumer, Consumer-to-Business and Business Solutions. Operating segments are defined as components of an enterprise that engage in business activities, about which separate financial information is available that is evaluated regularly by the Company's CODM in deciding where to allocate resources and in assessing performance.
The Consumer-to-Consumer operating segment facilitates money transfers between two consumers. The Company's money transfer service is viewed by the Company as one interconnected global network where a money transfer can be sent from one location to another, around the world. The segment includes
five
geographic regions whose functions are limited to generating, managing and maintaining agent relationships and localized marketing activities. The Company includes its online money transfer services initiated through Western Union branded websites ("westernunion.com") in its regions. By means of common processes and systems, these regions, including westernunion.com, create an interconnected network for consumer transactions, thereby constituting one global Consumer-to-Consumer money transfer business and one operating segment.
The Consumer-to-Business operating segment facilitates bill payments from consumers to businesses and other organizations, including utilities, auto finance companies, mortgage servicers, financial service providers and government agencies.
The Business Solutions operating segment facilitates payment and foreign exchange solutions, primarily cross-border, cross-currency transactions, for small and medium size enterprises and other organizations and individuals.
All businesses that have not been classified in the above segments are reported as "Other" and include the Company's money order and other services.
The Company's reportable segments are reviewed separately below because each reportable segment represents a strategic business unit that offers different products and serves different markets. The business segment measurements provided to, and evaluated by, the Company's CODM are computed in accordance with the following principles:
|
|
•
|
The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.
|
|
|
•
|
Corporate costs, including stock-based compensation and other overhead, are allocated to the segments primarily based on a percentage of the segments' revenue compared to total revenue.
|
|
|
•
|
Expenses of
$601.0 million
related to the Joint Settlement Agreements for the year ended December 31, 2016 were not allocated to the segments. While these items were identifiable to the Company's Consumer-to-Consumer segment, they were not included in the measurement of segment operating income provided to the CODM for purposes of assessing segment performance and decision making with respect to resource allocation. For additional information on the Joint Settlement Agreements, see Note 5.
|
|
|
•
|
Business transformation expenses of
$20.3 million
for the year ended December 31, 2016, were not allocated to the segments. While certain of these items were identifiable to the Company's segments, they were not included in the measurement of segment operating income provided to the CODM for purposes of assessing segment performance and decision making with respect to resource allocation. For additional information on business transformation related activities, see Note 3.
|
|
|
•
|
Costs incurred for the review and closing of acquisitions are included in "Other."
|
|
|
•
|
All items not included in operating income are excluded from the segments.
|
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables present the Company's reportable segment results for the years ended
December 31, 2016
,
2015
and
2014
, respectively (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Revenues:
|
|
|
|
|
|
Consumer-to-Consumer:
|
|
|
|
|
|
Transaction fees
|
$
|
3,123.8
|
|
|
$
|
3,221.0
|
|
|
$
|
3,421.8
|
|
Foreign exchange revenues
|
1,116.0
|
|
|
1,057.1
|
|
|
998.9
|
|
Other revenues
|
64.8
|
|
|
65.8
|
|
|
65.1
|
|
|
4,304.6
|
|
|
4,343.9
|
|
|
4,485.8
|
|
Consumer-to-Business:
|
|
|
|
|
|
Transaction fees
|
596.7
|
|
|
612.7
|
|
|
572.7
|
|
Foreign exchange and other revenues
|
24.5
|
|
|
25.0
|
|
|
26.1
|
|
|
621.2
|
|
|
637.7
|
|
|
598.8
|
|
Business Solutions:
|
|
|
|
|
|
Foreign exchange revenues
|
352.6
|
|
|
357.2
|
|
|
363.1
|
|
Transaction fees and other revenues
|
43.4
|
|
|
41.5
|
|
|
41.5
|
|
|
396.0
|
|
|
398.7
|
|
|
404.6
|
|
Other:
|
|
|
|
|
|
Total revenues
|
101.1
|
|
|
103.4
|
|
|
118.0
|
|
Total consolidated revenues
|
$
|
5,422.9
|
|
|
$
|
5,483.7
|
|
|
$
|
5,607.2
|
|
Operating income/(loss):
|
|
|
|
|
|
Consumer-to-Consumer
|
$
|
1,008.7
|
|
|
$
|
1,042.0
|
|
|
1,050.4
|
|
Consumer-to-Business (a)
|
64.4
|
|
|
68.6
|
|
|
98.7
|
|
Business Solutions
|
21.1
|
|
|
2.8
|
|
|
(12.1
|
)
|
Other
|
10.8
|
|
|
(4.0
|
)
|
|
3.5
|
|
Total segment operating income
|
1,105.0
|
|
|
1,109.4
|
|
|
1,140.5
|
|
Joint Settlement Agreements (Note 5)
|
(601.0
|
)
|
|
—
|
|
|
—
|
|
Business transformation expenses (Note 3)
|
(20.3
|
)
|
|
—
|
|
|
—
|
|
Total consolidated operating income
|
$
|
483.7
|
|
|
$
|
1,109.4
|
|
|
$
|
1,140.5
|
|
|
|
|
|
|
|
____________________
|
|
(a)
|
During the year ended December 31, 2015, Consumer-to-Business operating income included
$35.3 million
of expenses related to a settlement agreement between the Consumer Financial Protection Bureau and one of the Company's subsidiaries, Paymap, Inc.
|
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Assets:
|
|
|
|
|
|
Consumer-to-Consumer
|
$
|
4,467.7
|
|
|
$
|
4,738.7
|
|
|
$
|
5,049.7
|
|
Consumer-to-Business
|
1,161.9
|
|
|
1,010.1
|
|
|
1,060.2
|
|
Business Solutions
|
2,370.8
|
|
|
2,384.4
|
|
|
2,430.7
|
|
Other (a)
|
1,419.2
|
|
|
1,316.0
|
|
|
1,336.9
|
|
Total assets
|
$
|
9,419.6
|
|
|
$
|
9,449.2
|
|
|
$
|
9,877.5
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
Consumer-to-Consumer
|
$
|
183.5
|
|
|
$
|
183.4
|
|
|
$
|
191.5
|
|
Consumer-to-Business
|
21.7
|
|
|
21.7
|
|
|
17.3
|
|
Business Solutions
|
50.8
|
|
|
57.4
|
|
|
56.1
|
|
Other
|
7.2
|
|
|
7.7
|
|
|
7.0
|
|
Total consolidated depreciation and amortization
|
$
|
263.2
|
|
|
$
|
270.2
|
|
|
$
|
271.9
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
Consumer-to-Consumer
|
$
|
167.7
|
|
|
$
|
191.0
|
|
|
$
|
132.1
|
|
Consumer-to-Business
|
42.5
|
|
|
46.1
|
|
|
27.3
|
|
Business Solutions
|
11.4
|
|
|
19.2
|
|
|
13.0
|
|
Other
|
8.2
|
|
|
10.2
|
|
|
6.6
|
|
Total capital expenditures
|
$
|
229.8
|
|
|
$
|
266.5
|
|
|
$
|
179.0
|
|
____________________
|
|
(a)
|
On January 1, 2016, the Company adopted an accounting pronouncement that requires capitalized debt issuance costs to be presented as a reduction to the carrying value of debt, with adoption retrospective for periods previously presented. The adoption of this standard resulted in a reduction of
$9.7 million
and
$12.9 million
to Other as of December 31, 2015 and 2014, respectively.
|
Information concerning principal geographic areas was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Revenue:
|
|
|
|
|
|
United States
|
$
|
1,672.9
|
|
|
$
|
1,584.7
|
|
|
$
|
1,564.6
|
|
International
|
3,750.0
|
|
|
3,899.0
|
|
|
4,042.6
|
|
Total
|
$
|
5,422.9
|
|
|
$
|
5,483.7
|
|
|
$
|
5,607.2
|
|
Long-lived assets:
|
|
|
|
|
|
United States
|
$
|
174.0
|
|
|
$
|
182.9
|
|
|
$
|
158.1
|
|
International
|
46.5
|
|
|
48.9
|
|
|
48.3
|
|
Total
|
$
|
220.5
|
|
|
$
|
231.8
|
|
|
$
|
206.4
|
|
The Consumer-to-Consumer geographic split is determined based upon the region where the money transfer is initiated and the region where the money transfer is paid, including westernunion.com transactions. For transactions originated and paid in different regions, the Company splits the revenue between the
two
regions, with each region receiving
50%
. For money transfers initiated and paid in the same region,
100%
of the revenue is attributed to that region. The geographic split of revenue above for the Consumer-to-Business and Business Solutions segments is based upon the country where the transaction is initiated with
100%
of the revenue allocated to that country. Long-lived assets, consisting of "Property and equipment, net," are presented based upon the location of the assets.
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Based on the method used to attribute revenue between countries described in the paragraph above, each individual country outside the United States accounted for less than 10% of consolidated revenue for the years ended
December 31, 2016
,
2015
and
2014
, respectively. In addition, each individual agent, Consumer-to-Business, or Business Solutions customer accounted for less than 10% of consolidated revenue during these periods.
THE WESTERN UNION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Quarterly Financial Information (Unaudited)
Summarized quarterly results for the years ended
December 31, 2016
and
2015
were as follows (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 by Quarter:
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
Year Ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,297.7
|
|
|
$
|
1,375.7
|
|
|
$
|
1,377.8
|
|
|
$
|
1,371.7
|
|
|
$
|
5,422.9
|
|
Expenses (a) (b)
|
1,039.1
|
|
|
1,115.4
|
|
|
1,099.5
|
|
|
1,685.2
|
|
|
4,939.2
|
|
Operating income/(loss)
|
258.6
|
|
|
260.3
|
|
|
278.3
|
|
|
(313.5
|
)
|
|
483.7
|
|
Other expense, net
|
41.1
|
|
|
37.8
|
|
|
38.3
|
|
|
24.8
|
|
|
142.0
|
|
Income/(loss) before income taxes
|
217.5
|
|
|
222.5
|
|
|
240.0
|
|
|
(338.3
|
)
|
|
341.7
|
|
Provision for income taxes
|
31.8
|
|
|
16.9
|
|
|
23.1
|
|
|
16.7
|
|
|
88.5
|
|
Net income/(loss)
|
$
|
185.7
|
|
|
$
|
205.6
|
|
|
$
|
216.9
|
|
|
$
|
(355.0
|
)
|
|
$
|
253.2
|
|
Earnings/(loss) per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.37
|
|
|
$
|
0.42
|
|
|
$
|
0.45
|
|
|
$
|
(0.73
|
)
|
|
$
|
0.52
|
|
Diluted
|
$
|
0.37
|
|
|
$
|
0.42
|
|
|
$
|
0.44
|
|
|
$
|
(0.73
|
)
|
|
$
|
0.51
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
500.0
|
|
|
490.3
|
|
|
487.0
|
|
|
483.6
|
|
|
490.2
|
|
Diluted
|
503.2
|
|
|
493.0
|
|
|
490.3
|
|
|
483.6
|
|
|
493.5
|
|
|
|
(a)
|
Includes
$15 million
of accruals in each of the second and third quarters and
$571 million
of additional expenses in the fourth quarter as a result of the Joint Settlement Agreements, as described further in Note 5.
|
|
|
(b)
|
Includes
$2.1 million
,
$5.0 million
, and
$13.2 million
in the second, third, and fourth quarters, respectively, of expenses related to business transformation. For more information, see Note 3.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 by Quarter:
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
Year Ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,320.9
|
|
|
$
|
1,383.6
|
|
|
$
|
1,399.2
|
|
|
$
|
1,380.0
|
|
|
$
|
5,483.7
|
|
Expenses (c) (d)
|
1,048.6
|
|
|
1,132.8
|
|
|
1,094.7
|
|
|
1,098.2
|
|
|
4,374.3
|
|
Operating income
|
272.3
|
|
|
250.8
|
|
|
304.5
|
|
|
281.8
|
|
|
1,109.4
|
|
Other expense, net
|
39.7
|
|
|
43.9
|
|
|
39.1
|
|
|
44.9
|
|
|
167.6
|
|
Income before income taxes
|
232.6
|
|
|
206.9
|
|
|
265.4
|
|
|
236.9
|
|
|
941.8
|
|
Provision for income taxes
|
28.7
|
|
|
17.6
|
|
|
33.1
|
|
|
24.6
|
|
|
104.0
|
|
Net income
|
$
|
203.9
|
|
|
$
|
189.3
|
|
|
$
|
232.3
|
|
|
$
|
212.3
|
|
|
$
|
837.8
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.39
|
|
|
$
|
0.37
|
|
|
$
|
0.46
|
|
|
$
|
0.42
|
|
|
$
|
1.63
|
|
Diluted
|
$
|
0.39
|
|
|
$
|
0.36
|
|
|
$
|
0.45
|
|
|
$
|
0.42
|
|
|
$
|
1.62
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
521.0
|
|
|
515.2
|
|
|
509.6
|
|
|
504.5
|
|
|
512.6
|
|
Diluted
|
525.2
|
|
|
519.8
|
|
|
513.2
|
|
|
508.6
|
|
|
516.7
|
|
____________
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
Includes
$35.3 million
in the second quarter of expenses related to a settlement agreement reached with the Consumer Financial Protection Bureau regarding the Equity Accelerator sevice of Paymap, Inc., one of the Company's subsidiaries.
|
|
|
(d)
|
Includes
$11.1 million
in the fourth quarter of expenses related to productivity and cost-savings initiatives. For more information, see Note 3.
|
THE WESTERN UNION COMPANY
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
The following lists the condensed financial information for the parent company as of
December 31, 2016
and
2015
and statements of income and comprehensive income and cash flows for each of the three years in the period ended
December 31, 2016
.
THE WESTERN UNION COMPANY
CONDENSED BALANCE SHEETS
(PARENT COMPANY ONLY)
(in millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Assets
|
|
|
|
Cash and cash equivalents
|
$
|
0.3
|
|
|
$
|
1.3
|
|
Property and equipment, net of accumulated depreciation of $26.6 and $23.5, respectively
|
34.7
|
|
|
36.7
|
|
Other assets
|
39.4
|
|
|
38.1
|
|
Investment in subsidiaries
|
7,291.7
|
|
|
6,652.2
|
|
Total assets
|
$
|
7,366.1
|
|
|
$
|
6,728.3
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
Liabilities:
|
|
|
|
Accounts payable and accrued liabilities
|
$
|
645.5
|
|
|
$
|
57.9
|
|
Income taxes payable
|
20.9
|
|
|
81.4
|
|
Payable to subsidiaries, net
|
3,010.6
|
|
|
1,973.0
|
|
Borrowings
|
2,786.1
|
|
|
3,210.4
|
|
Other liabilities
|
0.8
|
|
|
0.7
|
|
Total liabilities
|
6,463.9
|
|
|
5,323.4
|
|
Stockholders’ equity:
|
|
|
|
Preferred stock, $1.00 par value; 10 shares authorized; no shares issued
|
—
|
|
|
—
|
|
Common stock, $0.01 par value; 2,000 shares authorized; 481.5 shares and 502.4 shares issued and outstanding as of December 31, 2016 and 2015, respectively
|
4.8
|
|
|
5.0
|
|
Capital surplus
|
640.9
|
|
|
566.5
|
|
Retained earnings
|
419.3
|
|
|
977.3
|
|
Accumulated other comprehensive loss
|
(162.8
|
)
|
|
(143.9
|
)
|
Total stockholders’ equity
|
902.2
|
|
|
1,404.9
|
|
Total liabilities and stockholders’ equity
|
$
|
7,366.1
|
|
|
$
|
6,728.3
|
|
See Notes to Condensed Financial Statements.
THE WESTERN UNION COMPANY
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(PARENT COMPANY ONLY)
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Revenues
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Expenses
|
—
|
|
|
—
|
|
|
—
|
|
Operating income
|
—
|
|
|
—
|
|
|
—
|
|
Interest income
|
—
|
|
|
0.2
|
|
|
0.6
|
|
Interest expense
|
(168.1
|
)
|
|
(171.2
|
)
|
|
(176.5
|
)
|
Loss before equity in earnings of affiliates and income taxes
|
(168.1
|
)
|
|
(171.0
|
)
|
|
(175.9
|
)
|
Equity in earnings of affiliates, net of tax
|
357.1
|
|
|
943.3
|
|
|
960.8
|
|
Income tax benefit
|
64.2
|
|
|
65.5
|
|
|
67.5
|
|
Net income
|
253.2
|
|
|
837.8
|
|
|
852.4
|
|
Other comprehensive income, net of tax
|
2.3
|
|
|
2.2
|
|
|
2.2
|
|
Other comprehensive income/(loss) of affiliates, net of tax
|
(21.2
|
)
|
|
(27.2
|
)
|
|
47.9
|
|
Comprehensive income
|
$
|
234.3
|
|
|
$
|
812.8
|
|
|
$
|
902.5
|
|
See Notes to Condensed Financial Statements.
THE WESTERN UNION COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(PARENT COMPANY ONLY)
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Cash flows from operating activities
|
|
|
|
|
|
Net cash provided by operating activities
|
$
|
192.0
|
|
|
$
|
327.1
|
|
|
$
|
380.8
|
|
Cash flows from investing activities
|
|
|
|
|
|
Purchases of property and equipment and other
|
(5.9
|
)
|
|
(0.1
|
)
|
|
(5.7
|
)
|
Capital contributed to subsidiaries
|
(7.3
|
)
|
|
(17.9
|
)
|
|
(4.2
|
)
|
Proceeds from sale of available-for-sale non-settlement related investments
|
—
|
|
|
—
|
|
|
100.2
|
|
Net cash provided by/(used in) investing activities
|
(13.2
|
)
|
|
(18.0
|
)
|
|
90.3
|
|
Cash flows from financing activities
|
|
|
|
|
|
Advances from subsidiaries, net
|
1,024.0
|
|
|
796.1
|
|
|
768.1
|
|
Proceeds from issuance of borrowings
|
575.0
|
|
|
—
|
|
|
—
|
|
Principal payments on borrowings
|
(1,000.0
|
)
|
|
(500.0
|
)
|
|
(500.0
|
)
|
Proceeds from exercise of options and other
|
35.0
|
|
|
79.7
|
|
|
14.2
|
|
Cash dividends paid
|
(312.2
|
)
|
|
(316.5
|
)
|
|
(265.2
|
)
|
Common stock repurchased
|
(501.6
|
)
|
|
(511.3
|
)
|
|
(495.4
|
)
|
Net cash used in financing activities
|
(179.8
|
)
|
|
(452.0
|
)
|
|
(478.3
|
)
|
Net change in cash and cash equivalents
|
(1.0
|
)
|
|
(142.9
|
)
|
|
(7.2
|
)
|
Cash and cash equivalents at beginning of year
|
1.3
|
|
|
144.2
|
|
|
151.4
|
|
Cash and cash equivalents at end of year
|
$
|
0.3
|
|
|
$
|
1.3
|
|
|
$
|
144.2
|
|
Supplemental cash flow information:
|
|
|
|
|
|
Non-cash investing activity, capital contribution to subsidiary (Note 3)
|
$
|
591.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
See Notes to Condensed Financial Statements.
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
THE WESTERN UNION COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The Western Union Company (the "Parent") is a holding company that conducts substantially all of its business operations through its subsidiaries. Under a parent company only presentation, the Parent's investments in its consolidated subsidiaries are presented under the equity method of accounting, and the condensed financial statements do not present the financial statements of the Parent and its subsidiaries on a consolidated basis. These financial statements should be read in conjunction with The Western Union Company's consolidated financial statements.
2. Restricted Net Assets
Certain assets of the Parent's subsidiaries totaling approximately
$320 million
constitute restricted net assets, as there are legal or regulatory limitations on transferring such assets outside of the countries where the respective assets are located. Additionally, certain of the Parent's subsidiaries must meet minimum capital requirements in some countries in order to maintain operating licenses.
3. Related Party Transactions
All transactions described below are with subsidiaries of the Parent. The Parent has issued multiple promissory notes payable to its 100% owned subsidiary First Financial Management Corporation ("FFMC") in exchange for funds distributed to the Parent. All notes pay interest at a fixed rate, may be repaid at any time without penalty and are included within "Payable to subsidiaries, net" in the Condensed Balance Sheets. These promissory notes are as follows:
|
|
|
|
|
|
|
|
|
|
|
Date Issued
|
|
Amount (in millions)
|
|
Due Date
|
|
Interest Rate (per annum)
|
June 1, 2014
|
|
$
|
65.0
|
|
|
February 28, 2017
|
|
0.33
|
%
|
March 1, 2015
|
|
$
|
79.5
|
|
|
November 30, 2017
|
|
0.40
|
%
|
June 1, 2015
|
|
$
|
87.5
|
|
|
February 28, 2018
|
|
0.43
|
%
|
July 1, 2015 (a)
|
|
$
|
268.2
|
|
|
March 31, 2018
|
|
0.43
|
%
|
September 1, 2015
|
|
$
|
226.2
|
|
|
May 31, 2018
|
|
0.54
|
%
|
____________
(a) The July 1, 2015 note refinanced a note originally issued on October 1, 2012.
On
January 1, 2017
, the Parent issued a note payable to FFMC for
$158.8 million
due on
September 30, 2019
. The note bears interest at the rate of
0.96%
per annum.
On
August 2, 2014
, the Parent entered into a credit agreement (the "Facility") with its 100% owned subsidiary Custom House Holdings (USA), Ltd., which expires
August 2, 2034
, providing for unsecured financing facilities in an aggregate amount of
$700.0 million
. As of
December 31, 2016
and
2015
, borrowings outstanding under the Facility were
$382.2 million
and
$436.3 million
, respectively. The interest rate applicable for outstanding borrowings under the Facility is the six-month LIBOR rate set on the first day of the calendar year, which was
0.84%
and
0.36%
for the years ended
December 31, 2016
and
2015
, respectively. Outstanding borrowings under the Facility are included within "Payable to subsidiaries, net" in the Condensed Balance Sheets as of
December 31, 2016
and
2015
.
On November 8, 2015, the Parent entered into a Revolving Credit Facility agreement (the “Revolver”) with its 100% owned subsidiary RII Holdings, Inc, which expires on November 8, 2035, providing for unsecured financing facilities in an aggregate amount of
$3.0 billion
. As of
December 31, 2016
and
2015
, borrowings outstanding under the Revolver were
$1.5 billion
and
$841.7 million
, respectively. The interest rate applicable for outstanding borrowings under the Revolver is the six-month LIBOR rate set on the first day of the calendar year, which was
0.84%
and
0.36%
for the years ended
December 31, 2016
and
2015
, respectively. Outstanding borrowings under the Revolver are included within "Payable to subsidiaries, net" in the Condensed Balance Sheets as of
December 31, 2016
and
2015
.
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
THE WESTERN UNION COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
The Parent agreed to fund certain payments related to the Joint Settlement Agreements on behalf of its subsidiaries. As of December 31, 2016, these amounts have increased the Parent's investment in its subsidiaries, are included within "Accounts payable and accrued liabilities" in the Condensed Balance Sheets, and are reflected as a non-cash investing activity in the Condensed Statements of Cash Flows, as such payments will be made in 2017.
Excess cash generated from operations of the Parent's subsidiaries that is not required to meet certain regulatory requirements is paid periodically to the Parent and is also included within "Payable to subsidiaries, net" in the Condensed Balance Sheets as of
December 31, 2016
and
2015
. The Parent's subsidiaries also periodically distribute excess cash balances to the Parent in the form of a dividend, although the amounts of such dividends may vary from year to year.
The Parent files a consolidated United States federal income tax return, and also a number of consolidated state income tax returns on behalf of its subsidiaries. In these circumstances, the Parent is responsible for remitting income tax payments on behalf of the consolidated group. The Parent's provision for income taxes has been computed as if it were a separate tax-paying entity.
4. Commitments and Contingencies
The Parent had
$42.8 million
in outstanding letters of credit and bank guarantees as of
December 31, 2016
with expiration dates through
2020
. The letters of credit and bank guarantees are primarily held in connection with certain agent agreements. The Company expects to renew the letters of credit and bank guarantees prior to expiration in most circumstances.