10-Q 1 wu-3312015x10q.htm 10-Q WU-3.31.2015-10Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _______________________________
Form 10-Q
_______________________________
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2015
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                 to              
Commission File Number: 001-32903
_______________________________ 
THE WESTERN UNION COMPANY
(Exact name of registrant as specified in its charter)
 _______________________________
DELAWARE
 
20-4531180
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
12500 EAST BELFORD AVENUE
 
80112
ENGLEWOOD, CO
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant's telephone number, including area code (866) 405-5012
_______________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ  No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  þ
 
Accelerated filer ¨
 
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
 
Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
As of April 24, 2015, 516,311,074 shares of our common stock were outstanding.




THE WESTERN UNION COMPANY
INDEX
 
 
 
PAGE
NUMBER
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.


2


PART I
FINANCIAL INFORMATION
 
Item 1.  Financial Statements

THE WESTERN UNION COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in millions, except per share amounts)
 
 
Three Months Ended
March 31,
 
2015
 
2014
Revenues:
 
 
 
Transaction fees
$
948.6

 
$
987.9

Foreign exchange revenues
338.0

 
329.3

Other revenues
34.3

 
33.6

Total revenues
1,320.9

 
1,350.8

Expenses:
 
 
 
Cost of services
771.8

 
797.2

Selling, general and administrative
276.8

 
281.6

Total expenses
1,048.6

 
1,078.8

Operating income
272.3

 
272.0

Other income/(expense):
 
 
 
Interest income
2.9

 
4.7

Interest expense
(41.8
)
 
(47.6
)
Derivative gains/(losses), net
1.0

 
(0.6
)
Other expense, net
(1.8
)
 
(1.1
)
Total other expense, net
(39.7
)
 
(44.6
)
Income before income taxes
232.6

 
227.4

Provision for income taxes
28.7

 
24.4

Net income
$
203.9

 
$
203.0

Earnings per share:
 
 
 
Basic
$
0.39

 
$
0.37

Diluted
$
0.39

 
$
0.37

Weighted-average shares outstanding:
 
 
 
Basic
521.0

 
545.9

Diluted
525.2

 
549.2

Cash dividends declared per common share
$
0.155

 
$
0.125



See Notes to Condensed Consolidated Financial Statements.

3


THE WESTERN UNION COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in millions)

 
Three Months Ended
March 31,
 
2015
 
2014
Net income
$
203.9

 
$
203.0

Other comprehensive income/(loss), net of tax (Note 7):
 
 
 
Unrealized gains on investment securities
1.0

 
2.8

Unrealized gains on hedging activities
40.6

 
1.6

Foreign currency translation adjustments
(2.6
)
 
(7.0
)
Defined benefit pension plan adjustments
1.8

 
1.6

Total other comprehensive income/(loss)
40.8

 
(1.0
)
Comprehensive income
$
244.7

 
$
202.0
































See Notes to Condensed Consolidated Financial Statements.

4


THE WESTERN UNION COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in millions, except per share amounts)
 
 
March 31,
2015
 
December 31,
2014
Assets
 
 
 
Cash and cash equivalents
$
1,755.3

 
$
1,783.2

Settlement assets
3,472.1

 
3,313.7

Property and equipment, net of accumulated depreciation of $495.0 and $478.5, respectively
202.6

 
206.4

Goodwill
3,168.8

 
3,169.2

Other intangible assets, net of accumulated amortization of $808.7 and $820.0, respectively
772.0

 
748.1

Other assets
982.2

 
669.8

Total assets
$
10,353.0

 
$
9,890.4

Liabilities and Stockholders' Equity
 
 
 
Liabilities:
 
 
 
Accounts payable and accrued liabilities
$
580.4

 
$
600.4

Settlement obligations
3,472.1

 
3,313.7

Income taxes payable
186.1

 
166.3

Deferred tax liability, net
317.4

 
305.0

Borrowings
3,728.6

 
3,720.4

Other liabilities
718.5

 
484.2

Total liabilities
9,003.1

 
8,590.0

 
 
 
 
Commitments and contingencies (Note 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; 517.0 shares and 521.5 shares issued and outstanding as of March 31, 2015 and December 31, 2014, respectively
5.2

 
5.2

Capital surplus
490.9

 
445.4

Retained earnings
931.9

 
968.7

Accumulated other comprehensive loss
(78.1
)
 
(118.9
)
Total stockholders' equity
1,349.9

 
1,300.4

Total liabilities and stockholders' equity
$
10,353.0

 
$
9,890.4






See Notes to Condensed Consolidated Financial Statements.

5


THE WESTERN UNION COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in millions)
 
 
Three Months Ended
March 31,
 
2015
 
2014
Cash flows from operating activities
 
 
 
Net income
$
203.9

 
$
203.0

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
16.5

 
16.3

Amortization
47.4

 
50.9

Other non-cash items, net
16.9

 
(5.3
)
Increase/(decrease) in cash, excluding the effects of acquisitions, resulting from changes in:
 
 
 
Other assets
(56.9
)
 
(12.0
)
Accounts payable and accrued liabilities
(34.1
)
 
(65.1
)
Income taxes payable
20.6

 
10.0

Other liabilities
(2.5
)
 
(1.0
)
Net cash provided by operating activities
211.8

 
196.8

Cash flows from investing activities
 
 
 
Capitalization of contract costs
(17.2
)
 
(16.6
)
Capitalization of purchased and developed software
(12.8
)
 
(10.8
)
Purchases of property and equipment
(14.4
)
 
(18.2
)
Acquisition of business

 
(10.2
)
Proceeds from sale of non-settlement related investments

 
100.2

Net cash provided by/(used in) investing activities
(44.4
)
 
44.4

Cash flows from financing activities
 
 
 
Proceeds from exercise of options
32.3

 
3.0

Cash dividends paid
(80.5
)
 
(67.6
)
Common stock repurchased (Note 7)
(147.1
)
 
(185.7
)
Net proceeds from commercial paper

 
130.0

Principal payments on borrowings

 
(500.0
)
Net cash used in financing activities
(195.3
)
 
(620.3
)
Net change in cash and cash equivalents
(27.9
)
 
(379.1
)
Cash and cash equivalents at beginning of period
1,783.2

 
2,073.1

Cash and cash equivalents at end of period
$
1,755.3

 
$
1,694.0

Supplemental cash flow information:
 
 
 
Interest paid
$
9.6

 
$
14.2

Income taxes paid
$
10.6

 
$
25.9

Unsettled repurchases of common stock
$
13.1

 
$


See Notes to Condensed Consolidated Financial Statements.

6


THE WESTERN UNION COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1.  Business and Basis of Presentation

Business

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, mobile devices and account based money transfers.

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, government agencies and other businesses. 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 the spot rate which enables 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 March 31, 2015, the amount of net assets subject to these limitations totaled approximately $310 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.

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited and were prepared in accordance with the instructions for Form 10-Q and Article 10 of Regulation S-X. In compliance with those instructions, certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") have been condensed or omitted.

7

THE WESTERN UNION COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)



The unaudited condensed consolidated financial statements in this quarterly report are presented on a consolidated basis and include the accounts of the Company and its majority-owned subsidiaries. Results of operations and cash flows for the interim periods are not necessarily indicative of the results that may be expected for the entire year. All significant intercompany transactions and accounts were eliminated as of and for the three months ended March 31, 2015.

In the opinion of management, these condensed consolidated financial statements include all the normal recurring adjustments necessary to fairly present the Company's condensed consolidated results of operations, financial position and cash flows as of March 31, 2015 and for all periods presented. These condensed consolidated financial statements should be read in conjunction with the Company's consolidated financial statements within the Company's Annual Report on Form 10-K for the year ended December 31, 2014.

Consistent with industry practice, the accompanying Condensed 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.

Use of Estimates

The preparation of financial statements in conformity with 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.

New Accounting Pronouncement

In May 2014, the Financial Accounting Standards Board issued a new accounting pronouncement regarding revenue from contracts with customers. This new standard 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. In April 2015, the Financial Accounting Standards Board proposed to defer the effective date of the standard by one year and to permit early adoption of the standard, but not before the original effective date of December 15, 2016. 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.

2.  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 three months ended March 31, 2015 and 2014, there were 8.9 million and 18.4 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.


8

THE WESTERN UNION COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


The following table provides the calculation of diluted weighted-average shares outstanding (in millions):
 
Three Months Ended
March 31,
 
2015
 
2014
Basic weighted-average shares outstanding
521.0

 
545.9

Common stock equivalents
4.2

 
3.3

Diluted weighted-average shares outstanding
525.2

 
549.2

3.  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 the Company's consolidated financial statements within the Company's Annual Report on Form 10-K for the year ended December 31, 2014.

9

THE WESTERN UNION COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


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
March 31, 2015
Level 1
 
Level 2
 
Level 3
 
Assets:
 
 
 
 
 
 
 
Settlement assets:
 
 
 
 
 
 
 
State and municipal debt securities
$

 
$
1,098.1

 
$

 
$
1,098.1

State and municipal variable rate demand notes

 
649.9

 

 
649.9

Corporate and other debt securities

 
61.5

 

 
61.5

Short-term state and municipal bond mutual fund
47.1

 

 

 
47.1

Other assets:
 
 
 
 
 
 
 
Derivatives

 
676.4

 

 
676.4

Total assets
$
47.1

 
$
2,485.9

 
$

 
$
2,533.0

Liabilities:
 
 
 
 
 
 
 
Notes and other borrowings
$

 
$
3,910.7

 
$

 
$
3,910.7

Derivatives

 
512.4

 

 
512.4

Total liabilities
$

 
$
4,423.1

 
$

 
$
4,423.1

 
 
 
 
 
 
 
 
 
Fair Value Measurement Using
 
Assets/
Liabilities at
Fair
Value
December 31, 2014
Level 1
 
Level 2
 
Level 3
 
Assets:
 
 
 
 
 
 
 
Settlement assets:
 
 
 
 
 
 
 
State and municipal debt securities
$

 
$
1,038.1

 
$

 
$
1,038.1

State and municipal variable rate demand notes

 
316.8

 

 
316.8

Corporate and other debt securities

 
70.5

 

 
70.5

Short-term state and municipal bond mutual fund
47.1

 

 

 
47.1

Other assets:
 
 
 
 
 
 
 
Derivatives

 
423.0

 

 
423.0

Total assets
$
47.1

 
$
1,848.4

 
$

 
$
1,895.5

Liabilities:
 
 
 
 
 
 
 
Notes and other borrowings
$

 
$
3,890.5

 
$

 
$
3,890.5

Derivatives

 
317.1

 

 
317.1

Total liabilities
$

 
$
4,207.6

 
$

 
$
4,207.6


10

THE WESTERN UNION COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


No non-recurring fair value adjustments were recorded during the three months ended March 31, 2015 and 2014.

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 aggregate fair value of the Company's borrowings was based on quotes from multiple banks and excluded the impact of related interest rate swaps. All the assets and liabilities in the above tables were carried at fair value in the Condensed Consolidated Balance Sheets, with the exception of borrowings, which had a carrying value of $3,728.6 million and $3,720.4 million as of March 31, 2015 and December 31, 2014, respectively (see Note 10).

11

THE WESTERN UNION COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


4.  Commitments and Contingencies

Letters of Credit and Bank Guarantees

The Company had approximately $85 million in outstanding letters of credit and bank guarantees as of March 31, 2015. The letters of credit and bank guarantees are primarily held in connection with lease arrangements and certain agent agreements. The letters of credit and bank guarantees have expiration dates through 2020, with the majority 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, or criminal charges. Substantially all of the Company's contingencies are subject to significant uncertainties and, therefore, determining the likelihood of a loss and/or the measurement of any loss can be complex. The Company does not currently believe that any of these matters, individually or in the aggregate, will have a material adverse effect on its financial position. However, litigation is inherently unpredictable and the Company could incur judgments, enter into settlements or revise its expectations regarding the outcome of certain matters, and such developments could have a material adverse effect on its financial position, results of operations or cash flows in the periods in which amounts are accrued or paid. The principal pending matters the Company is a party to are discussed below.
State of Arizona Settlement Agreement

On February 11, 2010, Western Union Financial Services, Inc. ("WUFSI"), a subsidiary of the Company, signed a settlement agreement ("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 Arizona. As part of the Southwest Border Agreement, the Company has made and expects to make certain investments in its compliance programs along the United States and Mexico border and a monitor (the "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 recommendations related to the Company's compliance programs, which the Company is implementing, including programs related to our 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 anti-money laundering ("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 appointed pursuant to the Southwest Border Agreement related to WUFSI’s AML compliance program, 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. Primary recommendations may also be re-classified as secondary recommendations.


12

THE WESTERN UNION COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


The Amendment provides that if WUFSI is unable to implement an effective AML compliance program along the U.S. and Mexico border, as determined by the Monitor and subject to limited judicial review, within the timeframes to implement the Monitor’s primary recommendations, the State may, within 180 days after the Monitor delivers its final report on the primary recommendations on December 31, 2016, and subsequent to any judicial review of the Monitor’s findings, elect one, and only one, of the following remedies: (i) assert a willful and material breach of the Southwest Border Agreement and pursue remedies under the Southwest Border Agreement, which could include initiating civil or criminal actions; or (ii) require WUFSI to pay (a) $50 million plus (b) $1 million per primary recommendation or group of primary recommendations that WUFSI fails to implement successfully. There are currently more than 70 primary recommendations and groups of primary recommendations.

If the Monitor concludes that WUFSI has implemented an effective AML compliance program along the U.S. and Mexico border within the timeframes to implement the Monitor’s primary recommendations, the State cannot pursue either of the remedies above, except that the State may require WUFSI to pay $1 million per primary recommendation or group of primary recommendations that WUFSI fails to implement successfully.

If, at the conclusion of the timeframe to implement the secondary recommendations on December 31, 2017, the Monitor concludes that WUFSI has not implemented an effective AML compliance program along the U.S. and Mexico border, the State cannot assert a willful and material breach of the Southwest Border Agreement but may require WUFSI to pay an additional $25 million. Additionally, if the Monitor determines that WUFSI has implemented an effective AML compliance program along the U.S. and Mexico border but has not implemented some of the Monitor’s secondary recommendations or groups of secondary recommendations that were originally classified as primary recommendations or groups of primary recommendations on the date of the Amendment, the State may require WUFSI to pay $500,000 per such secondary recommendation or group of recommendations. There is no monetary penalty associated with secondary recommendations that are classified as such on the date of the Amendment or any new secondary recommendations that the Monitor makes after the date of the Amendment.

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 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 also participating in the money transfer transaction data analysis center.

The changes in WUFSI’s AML 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. Additionally, if WUFSI is not able to implement a successful AML compliance program along the U.S. and Mexico border or timely implement the Monitor’s recommendations, each as determined by the Monitor, the State may pursue remedies under the Southwest Border Agreement and Amendment, including assessment of fines and civil and criminal actions. Such fines and actions could have a material adverse effect on the Company’s business, financial condition or results of operations.

13

THE WESTERN UNION COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)



United States Department of Justice Investigations

On March 20, 2012, the Company was served with a federal grand jury subpoena issued by the United States Attorney's Office for the Central District of California ("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 is a target of an ongoing investigation into structuring and money laundering. Since March 20, 2012, the Company has 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 AML compliance policies and procedures. The government has interviewed several current and former Western Union employees and has served grand jury subpoenas seeking testimony from several current and former employees. The government's investigation is ongoing and the Company may receive additional requests for information as part of the investigation. The Company has provided and continues to provide information and documents to the government. The Company is unable to predict the outcome of the government's investigation, or the possible loss or range of loss, if any, which could be associated with the resolution of any possible criminal charges or civil claims that may be brought against the Company. Should such charges or claims be brought, the Company could face significant fines, damage awards or regulatory consequences which could have a material adverse effect on the Company's business, financial condition and results of operations.

In March 2012, the Company was served with a federal grand jury subpoena issued by the United States Attorney’s Office for the Eastern District of Pennsylvania (“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. Since March 2012, the Company has received additional subpoenas from the USAO-EDPA seeking additional documents relating to Hong Fai. The government has interviewed several current Western Union employees. The government's investigation is ongoing and the Company may receive additional requests for information as part of the investigation. The Company has provided and continues to provide information and documents to the government. The Company is unable to predict the outcome of the government's investigation, or the possible loss or range of loss, if any, which could be associated with the resolution of any possible criminal charges or civil claims that may be brought against the Company. Should such charges or claims be brought, the Company could face significant fines, damage awards or regulatory consequences which could have a material adverse effect on the Company's business, financial condition and results of operations.

On November 25, 2013, the Company was served with a federal grand jury subpoena issued by the United States Attorney’s Office for the Middle District of Pennsylvania (“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 is the subject of the investigation. Since November 25, 2013, the Company has 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's investigation is ongoing and the Company may receive additional requests for information as part of the investigation. The Company has provided and continues to provide information and documents to the government. The Company is unable to predict the outcome of the government's investigation, or the possible loss or range of loss, if any, which could be associated with the resolution of any possible criminal charges or civil claims that may be brought against the Company. Should such charges or claims be brought, the Company could face significant fines, damage awards or regulatory consequences which could have a material adverse effect on the Company's business, financial condition and results of operations.

14

THE WESTERN UNION COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)



On March 6, 2014, the Company was served with a federal grand jury subpoena issued by the United States Attorney’s Office for the Southern District of Florida (“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 calls for Board meeting minutes and organization charts. The period covered by the subpoena is January 1, 2007 to November 27, 2013. The Company has received additional subpoenas from the USAO-SDFL and the Broward County, Florida Sheriff’s Office relating to the investigation, including a federal grand jury subpoena issued by the USAO-SDFL on March 14, 2014, seeking information about 33 agent locations in Costa Rica such as ownership and operating agreements, SARs and AML compliance and BSA filings for the period January 1, 2008 to November 27, 2013. Subsequently, the USAO-SDFL served the Company with seizure warrants requiring the Company to seize all money transfers sent from the United States to two agent locations located in Costa Rica for a 10-day period beginning in late March 2014. On July 8, 2014, the government served a grand jury subpoena calling for records relating to transactions sent from the United States to Nicaragua and Panama between September 1, 2013 and October 31, 2013. The government has also notified the Company that it is a target of the investigation. The investigation is ongoing and the Company may receive additional requests for information or seizure warrants as part of the investigation. The Company has provided and continues to provide information and documents to the government. The Company is unable to predict the outcome of the government's investigation, or the possible loss or range of loss, if any, which could be associated with the resolution of any possible criminal charges or civil claims that may be brought against the Company. Should such charges or claims be brought, the Company could face significant fines, damage awards or regulatory consequences which could have a material adverse effect on the Company's business, financial condition and results of operations.

Shareholder Action and Other Matters

On December 10, 2013, City of Taylor Police and Fire Retirement System filed a purported class action complaint in the United States District Court for the District of Colorado against The Western Union Company, its President and Chief Executive Officer and a former executive officer of the Company, asserting claims under sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Securities and Exchange Commission rule 10b-5 against all defendants. On September 26, 2014, the Court appointed SEB Asset Management S.A. and SEB Investment Management AB as lead plaintiffs. On October 27, 2014, lead plaintiffs filed a consolidated amended class action complaint, which asserts the same claims as the original complaint, except that it brings the claims under section 20(a) of the Exchange Act only against the individual defendants. The consolidated amended complaint also adds as a defendant another former executive officer of the Company. The consolidated amended complaint alleges that, during the purported class period, February 7, 2012 through October 30, 2012, defendants made false or misleading statements or failed to disclose adverse material facts known to them, including those regarding: (1) the competitive advantage the Company derived from its compliance program; (2) the Company’s ability to increase market share, make limited price adjustments and withstand competitive pressures; (3) the effect of compliance measures under the Southwest Border Agreement on agent retention and business in Mexico; and (4) the Company’s progress in implementing an anti-money laundering program for the Southwest Border Area. On December 11, 2014, the defendants filed a motion to dismiss the consolidated amended complaint. On January 5, 2015, plaintiffs filed an opposition to defendants’ motion to dismiss the consolidated amended complaint. On January 23, 2015, defendants filed a reply brief in support of their motion to dismiss the consolidated amended complaint. The Court referred the motion to a Magistrate Judge, who, on April 14, 2015, issued a report and recommendation, which recommends that the defendants’ motion to dismiss be granted and that the consolidated amended complaint be dismissed in full. On April 28, 2015, plaintiffs filed objections to the report and recommendation. 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.

15

THE WESTERN UNION COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)



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 Condensed Consolidated Balance Sheets. 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. The United States Court of Appeals for the Tenth Circuit heard oral arguments on March 18, 2014. The settlement requires Western Union to deposit 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 expressed similar views. Thus, there is reason to believe that these and potentially other jurisdictions may bring actions against the Company seeking reimbursement for amounts equal to the class counsel’s fees, administrative costs and other expenses that are paid from the class settlement fund. If such actions are brought or claims that may otherwise require Western Union to incur additional escheatment-related liabilities are asserted, Western Union would defend itself vigorously.

In August 2013, the Consumer Financial Protection Bureau (the “CFPB”) served Paymap, Inc. (“Paymap”), a subsidiary of the Company which operates solely in the United States, with a civil investigative demand requesting information and documents about Paymap’s Equity Accelerator service, which is designed to help consumers pay off their mortgages more quickly. The CFPB’s investigation sought to determine whether Paymap’s marketing of the Equity Accelerator service violated the Consumer Financial Protection Act’s prohibition against unfair, deceptive and abusive acts and practices (“UDAAP”). The Company cooperated with the investigation. After reviewing information and documents provided by the Company, in August 2014, the CFPB advised the Company of its view that certain aspects of Paymap’s marketing violated UDAAP. The Company has advised the CFPB that it disagrees with the CFPB’s position. The Company is in discussions with the CFPB and is seeking to reach an appropriate resolution of this matter. Due to the nature of the discussions, the Company is unable to predict whether the CFPB will institute an enforcement action to bring any claims against the Company as a result of the investigation, or the possible range of loss, if any, which could be associated with this matter. However, should the CFPB institute an enforcement action against the Company, or if the Company enters into a settlement agreement with the CFPB, the Company could pay significant restitution payments to certain Equity Accelerator consumers and civil money penalties to the CFPB, and there could be regulatory consequences, any of which or combined could have a material adverse effect on the Company’s business, financial condition and results of operations.

16

THE WESTERN UNION COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)



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, subject to the Court's approval, 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 is subject to memorialization in a definitive agreement. The Company has accrued an amount equal to the retention under its insurance policy 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 and results of operations could be adversely impacted.

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 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 11).

5.  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 three months ended March 31, 2015 and 2014 totaled $15.7 million and $15.9 million, respectively.


17

THE WESTERN UNION COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


6.  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 and obligations consisted of the following (in millions):
 
March 31,
2015
 
December 31,
2014
Settlement assets:
 
 
 
Cash and cash equivalents
$
583.3

 
$
834.3

Receivables from selling agents and Business Solutions customers
1,032.2

 
1,006.9

Investment securities
1,856.6

 
1,472.5

 
$
3,472.1

 
$
3,313.7

Settlement obligations:
 
 
 
Money transfer, money order and payment service payables
$
2,537.0

 
$
2,356.7

Payables to agents
935.1

 
957.0

 
$
3,472.1

 
$
3,313.7

Investment securities included in "Settlement assets" in the Company's Condensed Consolidated Balance Sheets consist primarily of highly-rated state and municipal debt securities, including fixed rate term notes, variable rate demand notes, and a short-term bond mutual fund. The short-term bond mutual fund can be redeemed daily and holds fixed income securities with combined average maturities of one year or less. 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 2054. Generally, these securities are used by the Company for short-term liquidity needs and are held for short periods of time, typically less than 30 days. 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 income or loss, net of related deferred taxes. 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. Proceeds from the sale and maturity of available-for-sale securities during the three months ended March 31, 2015 and 2014 were $3.3 billion and $4.6 billion, respectively.

18

THE WESTERN UNION COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


The components of investment securities are as follows (in millions):
March 31, 2015
Amortized
Cost
 
Fair
Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Net
Unrealized
Gains/(Losses)
Settlement assets:
 
 
 
 
 
 
 
 
 
State and municipal debt securities (a)
$
1,082.8

 
$
1,098.1

 
$
16.8

 
$
(1.5
)
 
$
15.3

State and municipal variable rate demand notes
649.9

 
649.9

 

 

 

Corporate and other debt securities
61.2

 
61.5

 
0.3

 

 
0.3

Short-term state and municipal bond mutual fund
47.1

 
47.1

 

 

 

 
$
1,841.0

 
$
1,856.6

 
$
17.1

 
$
(1.5
)
 
$
15.6


December 31, 2014
Amortized
Cost
 
Fair
Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Net
Unrealized
Gains/(Losses)
Settlement assets:
 
 
 
 
 
 
 
 
 
State and municipal debt securities (a)
$
1,024.2

 
$
1,038.1

 
$
15.1

 
$
(1.2
)
 
$
13.9

State and municipal variable rate demand notes
316.8

 
316.8

 

 

 

Corporate and other debt securities
70.5

 
70.5

 
0.1

 
(0.1
)
 

Short-term state and municipal bond mutual fund
47.1

 
47.1

 

 

 

 
$
1,458.6

 
$
1,472.5

 
$
15.2

 
$
(1.3
)
 
$
13.9

____________________ 
(a)
The majority of these securities are fixed-rate instruments.
The following summarizes the contractual maturities of settlement-related debt securities as of March 31, 2015 (in millions):
 
Fair
Value
Due within 1 year
$
182.2

Due after 1 year through 5 years
544.0

Due after 5 years through 10 years
461.8

Due after 10 years
621.5

 
$
1,809.5

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 $41.8 million and $608.1 million, are included in the "Due after 5 years through 10 years" and "Due after 10 years" categories, respectively, in the table above.

19

THE WESTERN UNION COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


7. Stockholders' Equity

Accumulated other comprehensive loss
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 Condensed Consolidated Statements of Income.
 
Three Months Ended
March 31,
 
2015
 
2014
Unrealized gains on investment securities, beginning of period
$
8.9

 
$
4.1

Unrealized gains
2.3

 
7.1

Tax expense
(0.9
)
 
(2.6
)
Reclassification of gains into "Other revenues"
(0.6
)
 
(2.4
)
Reclassification of gains into "Interest income"

 
(0.2
)
Tax expense related to reclassifications
0.2

 
0.9

Net unrealized gains on investment securities
1.0

 
2.8

Unrealized gains on investment securities, end of period
$
9.9

 
$
6.9

 
 
 
 
Unrealized gains/(losses) on hedging activities, beginning of period
$
48.6

 
$
(33.0
)
Unrealized gains
58.2

 
2.3

Tax expense
(3.1
)
 
(1.9
)
Reclassification of (gains)/losses into "Transaction fees"
(11.3
)
 
0.1

Reclassification of gains into "Foreign exchange revenues"
(4.4
)
 

Reclassification of losses into "Interest expense"
0.9

 
0.9

Tax expense related to reclassifications
0.3

 
0.2

Net unrealized gains on hedging activities
40.6

 
1.6

Unrealized gains/(losses) on hedging activities, end of period
$
89.2

 
$
(31.4
)
 
 
 
 
Foreign currency translation adjustments, beginning of period
$
(49.2
)
 
$
(21.6
)
Foreign currency translation adjustments
(2.6
)
 
(10.8
)
Tax benefit

 
3.8

Net foreign currency translation adjustments
(2.6
)
 
(7.0
)
Foreign currency translation adjustments, end of period
$
(51.8
)
 
$
(28.6
)
 
 
 
 
Defined benefit pension plan adjustments, beginning of period
$
(127.2
)
 
$
(118.5
)
Reclassification of losses into "Cost of services"
2.9

 
2.6

Tax benefit related to reclassifications and other
(1.1
)
 
(1.0
)
Net defined benefit pension plan adjustments
1.8

 
1.6

Defined benefit pension plan adjustments, end of period
$
(125.4
)
 
$
(116.9
)
Accumulated other comprehensive loss, end of period
$
(78.1
)
 
$
(170.0
)

20

THE WESTERN UNION COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)



Cash Dividends Paid
During the first quarter of 2015 and 2014, the Company's Board of Directors declared quarterly cash dividends of $0.155 and $0.125 per common share, respectively, representing $80.5 million and $67.6 million in total dividends which were paid on March 31, 2015 and 2014, respectively.
Share Repurchases
During the three months ended March 31, 2015 and 2014, 7.7 million and 10.9 million shares were repurchased for $150.0 million and $179.6 million, respectively, excluding commissions, at an average cost of $19.50 and $16.44 per share, respectively. These amounts represent shares authorized by the Board of Directors for repurchase under the publicly announced authorizations. As of March 31, 2015, $1,061.9 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 Condensed Consolidated Statements of Cash Flows represent both shares authorized by the Board of Directors for repurchase under the publicly announced authorizations as well as shares withheld from employees to cover tax withholding obligations on restricted stock units that have vested.


21

THE WESTERN UNION COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


8. Employee Benefit Plan
The Company has a frozen defined benefit pension plan (the "Plan") for which it had a recorded unfunded pension obligation of $69.7 million and $74.9 million as of March 31, 2015 and December 31, 2014, respectively, included in "Other liabilities" in the Condensed Consolidated Balance Sheets.
The following table provides the components of net periodic benefit cost for the Plan (in millions):
 
Three Months Ended
March 31,
 
2015
 
2014
Interest cost
$
2.9

 
$
3.4

Expected return on plan assets
(5.1
)
 
(5.1
)
Amortization of actuarial loss
2.9

 
2.6

Net periodic benefit cost
$
0.7

 
$
0.9


9.  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 Canadian dollar, British pound, Australian dollar, Swiss franc, and other currencies, related to forecasted money transfer revenues and on money transfer settlement assets and obligations. 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.


22

THE WESTERN UNION COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


Foreign Currency — Consumer-to-Consumer
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 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 March 31, 2015, 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 Condensed 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 March 31, 2015 were as follows (in millions):
Contracts designated as hedges:
 
Euro
$
382.3

Canadian dollar
112.2

British pound
82.6

Australian dollar
51.4

Swiss franc
43.3

Other
93.4

Contracts not designated as hedges:
 
Euro
$
201.3

British pound
67.2

Canadian dollar
61.8

Australian dollar
30.6

Other (a)
162.6

____________________
(a)
Comprised of exposures to 20 different currencies. None of these individual currency exposures is greater than $25 million.


23

THE WESTERN UNION COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


Foreign Currency — Business Solutions
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 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). The derivatives written are part of the broader portfolio of foreign currency positions arising from its 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 amounts of foreign currency derivative customer contracts held by the Company in its Business Solutions operations as of March 31, 2015 were 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 — Corporate
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 Condensed Consolidated Balance Sheets and "Interest expense" in the Condensed 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 Condensed Consolidated Balance Sheets.
The Company held interest rate swaps in an aggregate notional amount of $975.0 million as of March 31, 2015 and December 31, 2014. Of this aggregate notional amount held at March 31, 2015, $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.

24

THE WESTERN UNION COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


Balance Sheet
The following table summarizes the fair value of derivatives reported in the Condensed Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014 (in millions):
 
Derivative Assets
 
Derivative Liabilities
 
 
 
Fair Value
 
 
 
Fair Value
 
Balance Sheet
Location
 
March 31,
2015
 
December 31,
2014
 
Balance Sheet
Location
 
March 31,
2015
 
December 31,
2014
Derivatives — hedges:
 
 
 
 
 
 
 
 
 
 
 
Interest rate fair value hedges — Corporate
Other assets
 
$
14.6

 
$
3.5

 
Other liabilities
 
$
0.8

 
$
1.9

Foreign currency cash flow hedges — Consumer-to-Consumer
Other assets
 
108.5

 
66.1

 
Other liabilities
 
3.7

 
3.5

Total
 
 
$
123.1

 
$
69.6

 
 
 
$
4.5

 
$
5.4

Derivatives — undesignated:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency — Business Solutions
Other assets
 
$
549.6

 
$
349.4

 
Other liabilities
 
$
505.7

 
$
310.2

Foreign currency — Consumer-to-Consumer
Other assets
 
3.7

 
4.0

 
Other liabilities
 
2.2

 
1.5

Total
 
 
$
553.3

 
$
353.4

 
 
 
$
507.9

 
$
311.7

Total derivatives
 
 
$
676.4

 
$
423.0

 
 
 
$
512.4

 
$
317.1

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.

25

THE WESTERN UNION COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


The following tables summarize the gross and net fair value of derivative assets and liabilities as of March 31, 2015 and December 31, 2014 (in millions):
Offsetting of Derivative Assets
March 31, 2015
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheets
 
Net Amounts Presented in the Condensed Consolidated Balance Sheets
 
Derivatives Not Offset in the Condensed Consolidated Balance Sheets
 
Net Amounts
Derivatives subject to a master netting arrangement or similar agreement
 
$
411.8

 
$

 
$
411.8

 
$
(218.5
)
 
$
193.3

Derivatives that are not or may not be subject to master netting arrangement or similar agreement
 
264.6

 
 
 
 
 
 
 
 
Total
 
$
676.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
Derivatives subject to a master netting arrangement or similar agreement
 
$
255.1

 
$

 
$
255.1

 
$
(134.8
)
 
$
120.3

Derivatives that are not or may not be subject to master netting arrangement or similar agreement
 
167.9

 
 
 
 
 
 
 
 
Total
 
$
423.0

 
 
 
 
 
 
 
 
Offsetting of Derivative Liabilities
March 31, 2015
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheets
 
Net Amounts Presented in the Condensed Consolidated Balance Sheets
 
Derivatives Not Offset in the Condensed Consolidated Balance Sheets
 
Net Amounts
Derivatives subject to a master netting arrangement or similar agreement
 
$
295.3

 
$

 
$
295.3

 
$
(218.5
)
 
$
76.8

Derivatives that are not or may not be subject to master netting arrangement or similar agreement
 
217.1

 
 
 
 
 
 
 
 
Total
 
$
512.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
Derivatives subject to a master netting arrangement or similar agreement
 
$
169.3

 
$

 
$
169.3

 
$
(134.8
)
 
$
34.5

Derivatives that are not or may not be subject to master netting arrangement or similar agreement
 
147.8

 
 
 
 
 
 
 
 
Total
 
$
317.1

 
 
 
 
 
 
 
 

26

THE WESTERN UNION COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


Income Statement
The following tables summarize the location and amount of gains and losses of derivatives in the Condensed Consolidated Statements of Income segregated by designated, qualifying hedging instruments and those that are not, for the three months ended March 31, 2015 and 2014:
Fair Value Hedges
The following table presents the location and amount of gains/(losses) from fair value hedges for the three months ended March 31, 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
 
 
March 31,
2015
 
March 31,
2014
 
Hedged  Item
 
 
March 31,
2015
 
March 31,
2014
 
 
March 31, 2015
 
March 31, 2014
Interest rate contracts
 
Interest  expense
 
$
10.9

 
$
3.8

 
Fixed-rate debt
 
Interest expense
 
$
(7.5
)
 
$
(0.3
)
 
Interest  expense
 
$
0.7

 
$
(0.2
)
Total gain/ (loss)
 
 
 
$
10.9

 
$
3.8

 
 
 
 
 
$
(7.5
)
 
$
(0.3
)
 
 
 
$
0.7

 
$
(0.2
)
Cash Flow Hedges
The following table presents the location and amount of gains/(losses) from cash flow hedges for the three months ended March 31, 2015 and 2014 (in millions):
 
 
Gain/(Loss) Recognized
in OCI on Derivatives
(Effective Portion)
 
Gain/(Loss) Reclassified from
Accumulated OCI into Income
(Effective Portion)
 
Gain/(Loss) Recognized in Income on
Derivatives (Ineffective Portion and Amount
Excluded from Effectiveness Testing) (b)
 
 
Amount
 
Income
Statement Location
 
Amount
 
Income
Statement Location
 
Amount
Derivatives
 
March 31, 2015
 
March 31, 2014
 
 
March 31, 2015
 
March 31, 2014
 
 
March 31, 2015
 
March 31, 2014
Foreign currency contracts
 
$
58.2

 
$
2.3

 
Revenue
 
$
15.7

 
$
(0.1
)
 
Derivative gains/(losses), net
 
$
(0.8
)
 
$
(0.6
)
Interest rate contracts (c)
 

 

 
Interest expense
 
(0.9
)
 
(0.9
)
 
Interest  expense
 

 

Total gain/(loss)
 
$
58.2

 
$
2.3

 
 
 
$
14.8

 
$
(1.0
)
 
 
 
$
(0.8
)
 
$
(0.6
)

27

THE WESTERN UNION COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


Undesignated Hedges
The following table presents the location and amount of net gains/(losses) from undesignated hedges for the three months ended March 31, 2015 and 2014 (in millions):
 
Gain/(Loss) Recognized in Income on Derivatives (d)
 
Income Statement Location
 
Amount
 
 
 
Three Months Ended
March 31,
 
Derivatives
 
 
2015
 
2014
 
Foreign currency contracts (e)
Selling, general and administrative
 
$
27.3

 
$
(1.6
)
 
Foreign currency contracts (f)
Derivative gains/(losses), net
 
1.8

 

 
Total gain/(loss)
 
 
$
29.1

 
$
(1.6
)
 
 ____________________
(a)
The loss of $7.5 million and $0.3 million in the three months ended March 31, 2015 and 2014, respectively, consisted of a loss in value on the debt of $11.6 million and $3.6 million, respectively, and amortization of hedge accounting adjustments of $4.1 million and $3.3 million, respectively.
(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 Condensed Consolidated Balance Sheets. These amounts are reclassified to "Interest expense" in the Condensed 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 and cash balances, not including amounts related to derivatives activity as displayed above and included in "Selling, general, and administrative" in the Condensed Consolidated Statements of Income, were $29.5 million and $0.8 million for the three months ended March 31, 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 $78.5 million related to the foreign currency forward contracts is expected to be reclassified into revenue within the next 12 months as of March 31, 2015. Approximately $3.6 million of net losses on the forecasted debt issuance hedges are expected to be recognized in "Interest expense" in the Condensed Consolidated Statements of Income within the next 12 months as of March 31, 2015. 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.

28

THE WESTERN UNION COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


10.  Borrowings
The Company's outstanding borrowings consisted of the following (in millions):
Notes:
March 31, 2015
 
December 31, 2014
Floating rate notes (effective rate of 1.3%) due 2015
$
250.0

 
$
250.0

2.375% notes due 2015 (a)
250.0

 
250.0

5.930% notes due 2016 (a)
1,000.0

 
1,000.0

2.875% notes (effective rate of 2.0%) due 2017
500.0

 
500.0

3.650% notes due 2018 (a)
400.0

 
400.0

3.350% notes due 2019 (a)
250.0

 
250.0

5.253% notes (effective rate of 4.6%) due 2020
324.9

 
324.9

6.200% notes due 2036 (a)
500.0

 
500.0

6.200% notes due 2040 (a)
250.0

 
250.0

Other borrowings
5.6

 
5.6

Total borrowings at par value
3,730.5

 
3,730.5

Fair value hedge accounting adjustments, net (b)
12.8

 
5.3

Unamortized discount, net
(14.7
)
 
(15.4
)
Total borrowings at carrying value (c)
$
3,728.6

 
$
3,720.4

____________________ 
(a)
The difference between the stated interest rate and the effective interest rate is not significant.
(b)
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 Condensed Consolidated Statements of Income over the life of the related notes, and cause the effective rate of interest to differ from the notes' stated rate.
(c)
As of March 31, 2015, the Company's weighted-average effective rate on total borrowings was approximately 4.4%.
The following summarizes the Company's maturities of borrowings at par value as of March 31, 2015 (in millions):
Due within 1 year
$
500.0

Due after 1 year through 2 years
1,005.6

Due after 2 years through 3 years
500.0

Due after 3 years through 4 years
400.0

Due after 4 years through 5 years
250.0

Due after 5 years
1,074.9

The Company's obligations with respect to its outstanding Notes, as described above, rank equally.

29

THE WESTERN UNION COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


11.  Income Taxes
The Company's effective tax rates on pre-tax income for the three months ended March 31, 2015 and 2014 were 12.3% and 10.7%, respectively. The increase in the Company's effective tax rate for the three months ended March 31, 2015 is primarily due to the combined effect of discrete items, including those related to foreign currency fluctuations on certain income tax attributes which lowered the Company's effective tax rate in 2014, partially offset by various tax planning benefits affecting 2015. For the year ended December 31, 2014, 96% of the Company's pre-tax income was derived from foreign sources, and the Company currently expects that approximately 98% of the Company's pre-tax income will be derived from foreign sources for the year ending December 31, 2015. 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.
Uncertain Tax Positions
The Company has established contingency reserves for a variety of material, known tax exposures. 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.
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 Condensed Consolidated Balance Sheets. The total amount of unrecognized tax benefits as of March 31, 2015 and December 31, 2014 was $99.1 million and $93.4 million, respectively, excluding interest and penalties. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $86.0 million and $82.4 million as of March 31, 2015 and December 31, 2014, respectively, excluding interest and penalties.
The Company recognizes interest and penalties with respect to unrecognized tax benefits in "Provision for income taxes" in its Condensed Consolidated Statements of Income, and records the associated liability in "Income taxes payable" in its Condensed Consolidated Balance Sheets. The Company recognized immaterial amounts of interest and penalties during the three months ended March 31, 2015 and 2014. The Company has accrued $15.2 million and $15.1 million for the payment of interest and penalties as of March 31, 2015 and December 31, 2014, respectively.
The unrecognized tax benefits accrual as of March 31, 2015 consists of federal, state and foreign tax matters. It is reasonably possible that the Company's total unrecognized tax benefits will decrease by approximately $27 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 are also eligible to be examined.

30

THE WESTERN UNION COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


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 March 31, 2015. The Company expects to pay the remaining amount in 2015 and beyond. 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.
As of March 31, 2015, 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 $5.7 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.


31

THE WESTERN UNION COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


12.  Stock Compensation Plans
For the three months ended March 31, 2015 and 2014, the Company recognized stock-based compensation expense of $11.7 million and $11.3 million, respectively, resulting from stock options, restricted stock units, performance-based restricted stock units and bonus stock units in the Condensed Consolidated Statements of Income. During the three months ended March 31, 2015, the Company granted 1.0 million options at a weighted-average exercise price of $19.29, 2.0 million restricted stock units at a weighted-average grant date fair value of $17.85, and 0.6 million performance-based restricted stock units (based on targeted performance) at a weighted-average grant date fair value of $17.66. The majority of share 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. As of March 31, 2015, the Company had 15.0 million outstanding options at a weighted-average exercise price of $18.11 and 11.7 million options exercisable at a weighted-average exercise price of $18.62. The Company had 8.0 million non-vested restricted stock units at a weighted-average grant date fair value of $15.35 as of March 31, 2015.
The restricted stock units typically vest over four equal annual increments beginning 12 months after the date of grant. Restricted stock units granted prior to 2014 typically become 100% vested on the three year anniversary of the grant date. 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 performance-based restricted stock units granted in 2015 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 2015, 2016 and 2017. 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 (2015 through 2017). The actual number of performance-based restricted stock units that the recipients will receive for both 2015 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 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.
Options granted in 2015, primarily to the Company's executives, were 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. The Company used the Black-Scholes option pricing model to determine the fair value of the options granted during the three months ended March 31, 2015 using assumptions materially consistent with those disclosed in the Company's consolidated financial statements within the Company's Annual Report on Form 10-K for the year ended December 31, 2014.



32

THE WESTERN UNION COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


13.  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 chief operating decision maker 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, and also includes the Company's online money transfer service conducted through Western Union branded websites ("westernunion.com"). By means of common processes and systems, these regions and 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, government agencies and other businesses.
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.


33

THE WESTERN UNION COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


The following table presents the Company's reportable segment results for the three months ended March 31, 2015 and 2014 (in millions):
 
Three Months Ended
March 31,
 
2015
 
2014
Revenues:
 
 
 
Consumer-to-Consumer:
 
 
 
Transaction fees
$
776.2

 
$
825.6

Foreign exchange revenues
244.1

 
236.0

Other revenues
18.0

 
15.9

 
1,038.3

 
1,077.5

Consumer-to-Business:
 
 
 
Transaction fees
151.4

 
140.7

Foreign exchange and other revenues
6.4

 
6.5

 
157.8

 
147.2

Business Solutions:
 
 
 
Foreign exchange revenues
87.9

 
90.4

Transaction fees and other revenues
10.1

 
9.0

 
98.0

 
99.4

Other:
 
 
 
Total revenues
26.8

 
26.7

Total consolidated revenues
$
1,320.9

 
$
1,350.8

Operating income/(loss):
 
 
 
Consumer-to-Consumer
$
240.2

 
$
247.0

Consumer-to-Business
29.5

 
29.8

Business Solutions
2.1

 
(3.6
)
Other
0.5

 
(1.2
)
Total consolidated operating income
$
272.3

 
$
272.0




34


THE WESTERN UNION COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Item 2.
This report on Form 10-Q contains certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from those expressed in, or implied by, our forward-looking statements. Words such as "expects," "intends," "anticipates," "believes," "estimates," "guides," "provides guidance," "provides outlook" and other similar expressions or future or conditional verbs such as "may," "will," "should," "would," "could," and "might" are intended to identify such forward-looking statements. Readers of the Form 10-Q of The Western Union Company (the "Company," "Western Union," "we," "our" or "us") should not rely solely on the forward-looking statements and should consider all uncertainties and risks discussed in the "Risk Factors" section and throughout the Annual Report on Form 10-K for the year ended December 31, 2014. The statements are only as of the date they are made, and the Company undertakes no obligation to update any forward-looking statement.
Possible events or factors that could cause results or performance to differ materially from those expressed in our forward-looking statements include the following: (i) events related to our business and industry, such as: changes in general economic conditions and economic conditions in the regions and industries in which we operate, including global economic and trade downturns, or significantly slower growth or declines in the money transfer, payment service, and other markets in which we operate, including downturns or declines related to interruptions in migration patterns, or non-performance by our banks, lenders, insurers, or other financial services providers; failure to compete effectively in the money transfer and payment service industry, including among other things, with respect to price, with global and niche or corridor money transfer providers, banks and other money transfer and payment service providers, including card associations, card-based payment providers, electronic, mobile and Internet-based services, digital currencies and related protocols, and other innovations in technology and business models; deterioration in customer confidence in our business, or in money transfer and payment service providers generally; our ability to adopt new technology and develop and gain market acceptance of new and enhanced services in response to changing industry and consumer needs or trends; changes in, and failure to manage effectively, exposure to foreign exchange rates, including the impact of the regulation of foreign exchange spreads on money transfers and payment transactions; political conditions and related actions in the United States and abroad which may adversely affect our business and economic conditions as a whole including interruptions of United States or other government relations with countries in which we have or are implementing significant business relationships with agents or clients; any material breach of security, including cybersecurity, or safeguards of or interruptions in any of our systems or those of our vendors or other third parties; mergers, acquisitions and integration of acquired businesses and technologies into our Company, and the failure to realize anticipated financial benefits from these acquisitions, and events requiring us to write down our goodwill; failure to manage credit and fraud risks presented by our agents, clients and consumers; failure to maintain our agent network and business relationships under terms consistent with or more advantageous to us than those currently in place, including due to increased costs or loss of business as a result of increased compliance requirements or difficulty for us, our agents or their subagents in establishing or maintaining relationships with banks needed to conduct our services; decisions to change our business mix; adverse rating actions by credit rating agencies; cessation of or defects in various services provided to us by third-party vendors; our ability to realize the anticipated benefits from productivity and cost-savings and other related initiatives, which may include decisions to downsize or to transition operating activities from one location to another, and to minimize any disruptions in our workforce that may result from those initiatives; our ability to protect our brands and our other intellectual property rights and to defend ourselves against potential intellectual property infringement claims; changes in tax laws and unfavorable resolution of tax contingencies; our ability to attract and retain qualified key employees and to manage our workforce successfully; material changes in the market value or liquidity of securities that we hold; restrictions imposed by our debt obligations (ii) events related to our regulatory and litigation environment, such as: liabilities or loss of business resulting from a failure by us, our agents or their subagents to comply with laws and regulations and regulatory or judicial interpretations thereof, including laws and regulations designed to detect and prevent money laundering, terrorist financing, fraud and other illicit activity; increased costs or loss of business due to regulatory initiatives and changes in laws, regulations and industry practices and standards, including changes in interpretations in the United States and globally, affecting us, our agents or their subagents, or the banks with which we or our agents maintain bank accounts needed to provide our services,

35


including related to anti-money laundering regulations, anti-fraud measures, customer due diligence, or agent and subagent due diligence, registration, and monitoring requirements; liabilities or loss of business and unanticipated developments resulting from governmental investigations and consent agreements with or enforcement actions by regulators, including those associated with compliance with or failure to comply with the settlement agreement with the State of Arizona, as amended; the potential impact on our business from the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as regulations issued pursuant to it and the actions of the Consumer Financial Protection Bureau and similar legislation and regulations enacted by other governmental authorities related to consumer protection; liabilities resulting from litigation, including class-action lawsuits and similar matters, including costs, expenses, settlements and judgments; failure to comply with regulations and changes in expectations regarding consumer privacy and data use and security; effects of unclaimed property laws; failure to maintain sufficient amounts or types of regulatory capital or other restrictions on the use of our working capital to meet the changing requirements of our regulators worldwide; changes in accounting standards, rules and interpretations or industry standards affecting our business; and (iii) other events, such as: adverse tax consequences from our spin-off from First Data Corporation; catastrophic events; and management's ability to identify and manage these and other risks.
Overview
We are a leading provider of money movement and payment services, operating in three business segments:
Consumer-to-Consumer - The Consumer-to-Consumer operating segment facilitates money transfers between two consumers, primarily through a network of third-party agents. Our multi-currency, real-time money transfer service is viewed by us as one interconnected global network where a money transfer can be sent from one location to another, around the world. Our money transfer services are 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, mobile devices, and account based money transfers.
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, government agencies and other businesses. 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 the spot rate which enables customers to make cross-currency payments. In addition, in certain countries, we write 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 our money order and other businesses and services, in addition to costs for the review and closing of acquisitions.



36


Results of Operations
The following discussion of our consolidated results of operations and segment results refers to the three months ended March 31, 2015 compared to the same period in 2014. The results of operations should be read in conjunction with the discussion of our segment results of operations, which provide more detailed discussions concerning certain components of the Condensed Consolidated Statements of Income. All significant intercompany accounts and transactions between our segments have been eliminated and the below information has been prepared in conformity with generally accepted accounting principles in the United States of America ("GAAP") for the three months ended March 31, 2015.
The following table sets forth our results of operations for the three months ended March 31, 2015 and 2014.
 
Three Months Ended
March 31,
(in millions, except per share amounts)
2015
 
2014
 
% Change
Revenues:
 
 
 
 
 
Transaction fees
$
948.6

 
$
987.9

 
(4
)%
Foreign exchange revenues
338.0

 
329.3

 
3
 %
Other revenues
34.3

 
33.6

 
2
 %
Total revenues
1,320.9

 
1,350.8

 
(2
)%
Expenses:
 
 
 
 
 
Cost of services
771.8

 
797.2

 
(3
)%
Selling, general and administrative
276.8

 
281.6

 
(2
)%
Total expenses
1,048.6

 
1,078.8

 
(3
)%
Operating income
272.3

 
272.0

 
0
 %
Other income/(expense):
 
 
 
 
 
Interest income
2.9

 
4.7

 
(38
)%
Interest expense
(41.8
)
 
(47.6
)
 
(12
)%
Derivative gains/(losses), net
1.0

 
(0.6
)
 
*

Other expense, net
(1.8
)
 
(1.1
)
 
*

Total other expense, net
(39.7
)
 
(44.6
)
 
(11
)%
Income before income taxes
232.6

 
227.4

 
2
 %
Provision for income taxes
28.7

 
24.4

 
18
 %
Net income
$
203.9

 
$
203.0

 
0
 %
Earnings per share:
 
 
 
 
 
Basic
$
0.39

 
$
0.37

 
5
 %
Diluted
$
0.39

 
$
0.37

 
5
 %
Weighted-average shares outstanding:
 
 
 
 
 
Basic
521.0

 
545.9

 
 
Diluted
525.2

 
549.2

 
 
____________________
*
Calculation not meaningful


37


Revenues overview
For the three months ended March 31, 2015, consolidated revenue decreased 2% compared to the corresponding period in the prior year. The decline was primarily due to the strengthening of the United States dollar compared to foreign currencies, net of the impact of foreign currency hedges, which negatively impacted consolidated revenue by approximately 6%. This decrease was partially offset by transaction growth of 3% in our Consumer-to-Consumer segment.
For the three months ended March 31, 2015 compared to the same period in the prior year, foreign exchange revenues increased due to increases in foreign exchange spreads which were largely offset by corresponding reductions in transaction fees in certain corridors of our Consumer-to-Consumer segment.
Fluctuations in the exchange rate between the United States dollar and other currencies, net of a benefit from foreign currency hedges of $15.7 million, resulted in a reduction to revenues for the three months ended March 31, 2015 of $78.6 million relative to the same period in the previous year. We use foreign currency forwards to hedge certain foreign exchange impacts on our forecasted revenues. To the extent these derivatives are effective in managing our foreign exchange risk, we will reflect the hedge impact in revenues in the period the hedged revenues are recorded.
Operating expenses overview

Enhanced regulatory compliance

The financial services industry, including money services businesses, continues to be subject to increasingly strict legal and regulatory requirements, and we regularly review our compliance programs. In connection with these reviews, and in light of growing and rapidly evolving regulatory complexity and heightened attention of, and increased dialogue with, governmental and regulatory authorities related to our compliance activities, we have made, and continue to make enhancements to our processes and systems designed to detect and prevent money laundering, terrorist financing, and fraud and other illicit activity, along with enhancements to improve consumer protection related to the Dodd-Frank Wall Street Reform and Consumer Protection Act and similar regulations outside the United States, and other matters. In coming periods we expect these enhancements will continue to result in changes to certain of our business practices and increased costs. Some of these changes have had, and we believe will continue to have, an adverse effect on our business, financial condition and results of operations.
Cost of services
Cost of services primarily consists of agent commissions, which represented more than 60% of total cost of services for the three months ended March 31, 2015. Cost of services decreased for the three months ended March 31, 2015 compared to the same period in the prior year primarily due to a decrease in agent commissions in our Consumer-to-Consumer segment, which fluctuate with our Consumer-to-Consumer revenues, and the positive impact of productivity and cost-savings initiatives that were implemented in prior years.
Selling, general and administrative
For the three months ended March 31, 2015 compared to the corresponding period in the prior year, selling, general and administrative expenses decreased due to the positive impact of productivity and cost-savings initiatives that were implemented in prior years, partially offset by increased compliance program costs (see "Enhanced Regulatory Compliance" described above). Additionally, selling, general and administrative expenses decreased as a result of foreign currency translation, as the strengthening of the United States dollar compared to foreign currencies resulted in lower reported expenses.

38


Total other expense, net
Total other expense, net decreased during the three months ended March 31, 2015 compared to the corresponding period in the prior year due to decreased interest expense primarily related to lower average debt balances outstanding. Average debt balances outstanding were $3,727.8 million and $4,048.9 million for the three months ended March 31, 2015 and 2014, respectively. The decrease in average debt balances outstanding during the three months ended March 31, 2015 compared to the corresponding period in the prior year was due to the repayment of $500 million of our notes in February 2014.
Income taxes
Our effective tax rates on pre-tax income were 12.3% and 10.7% for the three months ended March 31, 2015 and 2014, respectively. The increase in our effective tax rate for the three months ended March 31, 2015 is primarily due to the combined effect of discrete items, including those related to foreign currency fluctuations on certain income tax attributes which lowered our effective tax rate in 2014, partially offset by various tax planning benefits affecting 2015. We continue to benefit from a significant proportion of profits being foreign-derived, and generally taxed at lower rates than our combined federal and state tax rates in the United States. For the year ended December 31, 2014, 96% of our pre-tax income was derived from foreign sources, and we currently expect that approximately 98% of our pre-tax income will be derived from foreign sources for the year ending December 31, 2015. Our foreign pre-tax income is subject to tax in multiple foreign jurisdictions, virtually all of which have statutory income tax rates lower than the United States. While the income tax imposed by any one foreign country is not material to us, our overall effective tax rate could be adversely affected by changes in tax laws, both foreign and domestic. Certain portions of our 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 our foreign source income are generally subject to United States federal and state income tax.
We have established contingency reserves for a variety of material, known tax exposures. As of March 31, 2015, the total amount of tax contingency reserves was $100.5 million, including accrued interest and penalties, net of related items. Our tax reserves reflect our judgment as to the resolution of the issues involved if subject to judicial review or other settlement. While we believe that our 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 our related reserve. With respect to these reserves, our income tax expense would include (i) any changes in tax reserves arising from material changes during the period in facts and circumstances (i.e., new information) surrounding a tax issue and (ii) any difference from our 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 our consolidated financial statements in future periods and could impact our operating cash flows.
Earnings per share
During the three months ended March 31, 2015 and 2014, basic and diluted earnings per share were $0.39 and $0.37, respectively. 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. For the three months ended March 31, 2015 and 2014, there were 8.9 million and 18.4 million, respectively, of outstanding options to purchase shares of Western Union stock excluded from the diluted earnings per share calculation under the treasury stock method as their effect was anti-dilutive.
Earnings per share increased for the three months ended March 31, 2015 compared to the same period in the prior year, as a result of lower weighted-average shares outstanding. The lower number of shares outstanding was due to stock repurchases exceeding stock issuances related to the Company's stock compensation programs.

39


Segment Discussion

We manage our business around the consumers and businesses we serve and the types of services we offer. Each of our three segments addresses a different combination of consumer groups, distribution networks and services offered. Our segments are Consumer-to-Consumer, Consumer-to-Business, and Business Solutions. Businesses and services not considered part of these segments are categorized as "Other."
The following table sets forth the components of segment revenues as a percentage of the consolidated totals for the three months ended March 31, 2015 and 2014.
 
Three Months Ended
March 31,
 
2015
 
2014
Consumer-to-Consumer
79
%
 
80
%
Consumer-to-Business
12
%
 
11
%
Business Solutions
7
%
 
7
%
Other
2
%
 
2
%
 
100
%
 
100
%
Consumer-to-Consumer Segment
The following table sets forth our Consumer-to-Consumer segment results of operations for the three months ended March 31, 2015 and 2014.
 
Three Months Ended
March 31,
(dollars and transactions in millions)
2015
 
2014
 
% Change
Revenues:
 
 
 
 
 
Transaction fees
$
776.2

 
$
825.6

 
(6
)%
Foreign exchange revenues
244.1

 
236.0

 
3
 %
Other revenues
18.0

 
15.9

 
13
 %
Total revenues
$
1,038.3

 
$
1,077.5

 
(4
)%
Operating income
$
240.2

 
$
247.0

 
(3
)%
Operating income margin
23
%
 
23
%
 
 
Key indicator:
 
 
 
 
 
Consumer-to-Consumer transactions
61.75

 
60.24

 
3
 %

We view our Consumer-to-Consumer money transfer service 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 and also includes our online money transfer service conducted through Western Union branded websites ("westernunion.com"). By means of common processes and systems, these regions and westernunion.com create an interconnected network for consumer transactions, thereby constituting one global Consumer-to-Consumer money transfer business and one operating segment.

Significant allocations are made in determining the transaction and revenue changes under the regional view in the tables that follow. The geographic split for transactions and revenue is determined based upon the region where the money transfer is initiated and the region where the money transfer is paid. For transactions originated and paid in different regions, we split the transaction count and revenue between the two regions, with each region receiving 50%. For money transfers initiated and paid in the same region, 100% of the revenue and transactions are attributed to that region. For money transfers initiated through our websites, 100% of the revenue and transactions are attributed to westernunion.com.


40


Due to the significance of our Consumer-to-Consumer segment to our overall results and the effect that foreign exchange fluctuations against the United States dollar can have on our reported revenues, constant currency results have been provided in the table below. Constant currency is a non-GAAP financial measure and is provided so that revenue can be viewed without the effect of fluctuations in foreign currency exchange rates, which is consistent with how management evaluates our revenue results and trends. This constant currency disclosure is provided in addition to, and not as a substitute for, the quarter-over-quarter percentage change in revenue on a GAAP basis. Other companies may calculate and define similarly labeled items differently, which may limit the usefulness of this measure for comparative purposes.
 
Three Months Ended March 31,
 
As Reported
 
Foreign Exchange Translation Impact
 
Constant Currency Growth/(Decline) (a)
 
2015
 
2015
 
2015
Consumer-to-Consumer revenue growth/(decline):
 
 
 
 
 
Europe and CIS
(9
)%
 
(11
)%
 
2
 %
North America
(2
)%
 
(2
)%
 
0
 %
Middle East and Africa
(6
)%
 
(5
)%
 
(1
)%
Asia Pacific ("APAC")
(6
)%
 
(4
)%
 
(2
)%
Latin America and the Caribbean ("LACA") (b)
4
 %
 
(6
)%
 
10
 %
westernunion.com
17
 %
 
(6
)%
 
23
 %
Total Consumer-to-Consumer revenue growth/(decline):
(4
)%
 
(6
)%
 
2
 %
__________________
(a)
Constant currency revenue growth assumes that revenues denominated in foreign currencies are translated to the U.S. dollar, net of the effect of foreign currency hedges, at rates consistent with those in the prior year.
(b)
For the three months ended March 31, 2015 compared to the same period in the prior year, the foreign exchange translation impact is primarily the result of fluctuations in the exchange rate between the United States dollar and the Argentine peso and other South American currencies.
 
Three Months Ended
March 31, 2015
Consumer-to-Consumer transaction growth/(decline):
 
Europe and CIS
4
 %
North America
3
 %
Middle East and Africa
(3
)%
APAC
(4
)%
LACA
6
 %
westernunion.com
25
 %
 
 
Consumer-to-Consumer revenue as a percentage of consolidated revenue:
 
Europe and CIS
20
 %
North America
19
 %
Middle East and Africa
16
 %
APAC
11
 %
LACA
8
 %
westernunion.com
5
 %


41


We provide domestic money transfer services (transactions between and within the United States and Canada), which are included in North America and westernunion.com in the tables above. These services represented approximately 8% of our consolidated revenue for both the three months ended March 31, 2015 and 2014.

Our consumers transferred $19.5 billion and $20.3 billion in Consumer-to-Consumer principal for the three months ended March 31, 2015 and 2014, respectively, of which $17.5 billion and $18.3 billion related to cross-border principal for the same corresponding periods described above.
Transaction fees and foreign exchange revenues
All comparisons in the discussion below are for the three months ended March 31, 2015 compared to the corresponding period in the prior year.
Consumer-to-Consumer money transfer revenue decreased 4%. The strengthening of the United States dollar compared to foreign currencies, net of the impact of foreign currency hedges, negatively impacted revenue by 6% for the three months ended March 31, 2015. This decline was partially offset by transaction growth of 3%.
Our Europe and CIS region experienced decreased revenue of 9% and transaction growth of 4%. Fluctuations in the exchange rate between the United States dollar and the euro and other currencies, net of the impact of foreign currency hedges, negatively impacted revenue by 11%. The decrease in revenue was also due to continued declines in Russia.
Our North America region experienced decreased revenue of 2% and transaction growth of 3%. The decrease in revenue was primarily due to fluctuations in the exchange rate between the United States dollar and other currencies, net of the impact of foreign currency hedges, which negatively impacted revenue by 2%, and declines in our domestic money transfer services in the United States. Our domestic money transfer services were negatively impacted by declines in higher principal band transactions, which generate higher revenue per transaction, primarily due to pricing actions taken by competitors in the retail money transfer market. We expect these competitive price pressures will continue to affect our domestic money transfer services adversely throughout 2015 and plan to respond with pricing reductions of our own related to our retail domestic money transfer services, beginning in the second quarter of 2015. These declines were partially offset by transaction growth in our United States outbound services, including our United States to Mexico and Latin America corridors.
Our Middle East and Africa region experienced decreased revenue of 6% on decreased transactions of 3%. The decrease in revenue was due to declines in several African countries, partially offset by strength in the United Arab Emirates, Nigeria, and Saudi Arabia. Fluctuations in the exchange rate between the United States dollar and other currencies negatively impacted revenue by 5%.
Our APAC region experienced decreased revenue of 6% on decreased transactions of 4%. The decrease in revenue was due to declines in the Philippines and other Asian inbound markets, partially offset by growth in Japan. Fluctuations in the exchange rate between the United States dollar and other currencies, net of the impact of foreign currency hedges, negatively impacted revenue by 4%.
Our LACA region experienced revenue growth of 4% on transaction growth of 6%, primarily due to increased revenues in Argentina. Fluctuations in the exchange rate between the United States dollar and other currencies negatively impacted revenue by 6%, partially offset by geographic and product mix.
Westernunion.com experienced revenue growth of 17% on transaction growth of 25%. Fluctuations in the exchange rate between the United States dollar and other currencies negatively impacted revenue by 6%.
Foreign exchange revenues increased 3% for the three months ended March 2015 compared to the corresponding period in the prior year primarily due to increases in foreign exchange spreads which were largely offset by corresponding reductions in transaction fees in certain corridors.
Fluctuations in the exchange rate between the United States dollar and other currencies, net of a benefit from foreign currency hedges of $15.7 million, resulted in a reduction to revenues for the three months ended March 31, 2015 of $63.0 million relative to the same period in the previous year. We use foreign currency forwards to hedge certain foreign exchange impacts on our forecasted revenues. To the extent these derivatives are effective in managing our foreign exchange risk, we will reflect the hedge impact in revenues in the period the hedged revenues are recorded.

42


We have historically implemented and will likely continue to implement price reductions from time to time in response to competition and other factors. Price reductions generally reduce margins and adversely affect financial results in the short term and may also adversely affect financial results in the long term if transaction volumes do not increase sufficiently. Consumer-to-Consumer net pricing changes had a minimal impact on our revenue for the three months ended March 31, 2015.
Operating income
Consumer-to-Consumer operating income declined 3% during the three months ended March 31, 2015 compared to the same period in 2014. Results for the three months ended March 31, 2015 were impacted by the revenue decreases described above and increased compliance program costs, partially offset by the positive impact of productivity and cost-savings initiatives that were implemented in prior years. The change in operating margins in the segment was also impacted by these same factors.
Consumer-to-Business Segment
The following table sets forth our Consumer-to-Business segment results of operations for the three months ended March 31, 2015 and 2014.
 
Three Months Ended
March 31,
(dollars in millions)
2015
 
2014
 
% Change
Revenues:
 
 
 
 
 
Transaction fees
$
151.4

 
$
140.7

 
8
 %
Foreign exchange and other revenues
6.4

 
6.5

 
(2
)%
Total revenues
$
157.8

 
$
147.2

 
7
 %
Operating income
$
29.5

 
$
29.8

 
(1
)%
Operating income margin
19
%
 
20
%
 
 
Revenues
For the three months ended March 31, 2015 compared to the corresponding period in the prior year, Consumer-to-Business revenue increased 7% primarily due to increases in our United States electronic bill payments and international bill payments in Argentina, partially offset by continued declines in our United States cash-based bill payments. In addition, the strengthening of the United States dollar against the Argentine peso negatively impacted our Consumer-to-Business revenue growth by 4%.
Operating income
Operating income was materially consistent for the three months ended March 31, 2015 compared to the corresponding period in the prior year.

43


Business Solutions
The following table sets forth our Business Solutions segment results of operations for the three months ended March 31, 2015 and 2014.
 
Three Months Ended
March 31,
(dollars in millions)
2015
 
2014
 
% Change
Revenues:
 
 
 
 
 
Foreign exchange revenues
$
87.9

 
$
90.4

 
(3
)%
Transaction fees and other revenues
10.1

 
9.0

 
12
 %
Total revenues
$
98.0

 
$
99.4

 
(1
)%
Operating income/(loss)
$
2.1

 
$
(3.6
)
 
*

Operating income/(loss) margin
2
%
 
(4
)%
 
 
____________________
*
Calculation not meaningful
Revenues
For the three months ended March 31, 2015 compared to the corresponding period in the prior year, Business Solutions revenue decreased 1%. Fluctuations in the exchange rate between the United States dollar and other currencies negatively impacted revenue growth by 8%. European revenue increased, including revenue from sales of our hedging products.
Operating income/(loss)
For the three months ended March 31, 2015, we generated operating income compared to the loss generated in the same period in the prior year due to the positive impact of productivity and cost-savings initiatives that were implemented in prior years and decreased amortization expenses. The changes in operating margins in the segment were due to these same factors.
Other
The following table sets forth Other results for the three months ended March 31, 2015 and 2014.
 
Three Months Ended
March 31,
(dollars in millions)
2015
 
2014
 
% Change
Revenues
$
26.8

 
$
26.7

 
0
%
Operating income/(loss)
$
0.5

 
$
(1.2
)
 
*

____________________
*
Calculation not meaningful