First Data 2007 Annual Report Download - page 44

FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Cost of products sold – The 2007 predecessor and successor periods had higher costs than the respective periods in 2006 due to costs associated with the sale
and leasing of terminals in international operations offset partially by a decrease in costs associated with the domestic sale and leasing of terminals. Cost of
products sold increased in 2006 in comparison to 2005 as the result of increases in costs associated with the sale and leasing of terminals and the inclusion of
the 2005 acquisitions partially offset by lower conversion costs written off due to contract terminations recognized in 2006 versus 2005.
Selling, general and administrative –The 2007 predecessor period was impacted by merger related costs including legal, accounting, other advisory fees and
accelerated vesting of stock options and restricted stock awards and units upon the change of control. The impact from the accelerated vesting of stock
options, restricted stock awards and restricted stock units was approximately $90 million (including payroll tax impacts of all accelerations). Consulting, legal
and professional service fees related to the merger were approximately $73 million, all but approximately $3 million of which was incurred in the predecessor
period. The majority of the acceleration of stock options, restricted stock awards and restricted stock units as well as the fees related to the merger were
recorded in All Other and Corporate.
Also contributing to increased costs in the 2007 predecessor and successor periods were platform consolidation expenses related to the First Data
International segment, data center consolidation costs in the U.S., and to a lesser extent, an increase in other employee related expenses. The 2007 periods did
not have costs that were incurred in 2006 in connection with re-aligning the operating structure of the Company after the spin-off of Western Union. Selling,
general and administrative expenses, as a percentage of transaction and processing service fee revenue increased for the 2007 predecessor and successor
periods compared to 2006 as a result of the items noted above.
Selling, general and administrative expenses increased for 2006 compared to 2005 due to the results of 2006 and 2005 acquisitions, expenses related to
stock options and the ESPP, and increases in other employee-related expenses. The Company also recorded higher incentive compensation accruals in 2006 in
comparison to 2005 as noted above. Partially offsetting the increase was a decrease in legal expenses.
Other operating expenses, net
Other operating expenses related to restructuring, impairments, litigation and regulatory settlements and other totaled $23.3 million in the predecessor
period from January 1, 2007 through September 24, 2007, and totaled a net benefit of $0.2 million in the successor period from September 25, 2007 through
December 31, 2007. These items are presented on the Consolidated Statements of Income under those respective descriptions.
2007 Activities
Pretax Benefit (Charge)
Predecessor
Period from January 1 through
September 24, 2007
First Data
Commercial
Services
First Data
Financial
Institution
Services
First Data
International
Integrated
Payment
Systems
All Other and
Corporate Total
(in millions)
Restructuring charges $ (2.8) — $ (7.4) — — $ (10.2)
Restructuring accrual reversals 0.5 $ 0.1 1.0 — $ 0.7 2.3
Impairments — — — $ (16.3) (4.3) (20.6)
Litigation and regulatory settlements — — — — (2.5) (2.5)
Other 2.1 — (0.4) 2.2 3.8 7.7
Total pretax benefit (charge), net of reversals $ (0.2) $ 0.1 $ (6.8) $ (14.1) $ (2.3) $ (23.3)
A portion of the restructuring charges in the predecessor period resulted from efforts to improve the overall efficiency and effectiveness of the sales and
sales support teams within the Commercial Services segment. This action resulted in the termination of approximately 230 sales related employees comprising
approximately 10% of the segment's regional sales, cross-sale and sales support organizations. The other restructuring in the predecessor period resulted from
the termination of approximately 140 employees within the First Data International segment. The terminations were associated with the data center
consolidation and global sourcing initiatives. Similar actions will occur in future periods and are expected to continue into 2009 with certain of these actions
being accrued in purchase accounting and the remainder being recognized through income. The Company estimates cost savings resulting from 2007
restructuring activities was approximately $7 million in the 2007 predecessor period, $5 million in the successor period of 2007 and will be approximately
$21 million on an annual basis. Partially offsetting the charges are reversals of prior period restructuring accruals of $2.3 million for the 2007 predecessor
period and $0.2 million for the 2007 successor period.
43