First Data 2007 Annual Report Download - page 47

FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Interest expense increased in 2006 compared to 2005 as a result of higher interest rates, increased commercial paper balances issued in connection with
the spin-off, and, less significantly, higher average debt balances during the first four months of the year related to the issuance of $1 billion in debt in May
2005. Partially offsetting the increase was the extinguishment and repurchase of commercial paper in the fourth quarter 2006, the repurchase of $1.7 billion in
aggregate principal amount of outstanding notes associated with a tender offer and private arrangement in December 2006 and the exchange of $1 billion of
commercial paper in September 2006.
Other income (expense)
Successor Predecessor
Period from
September 25
through
December 31,
2007
Period from
January 1
through
September 24,
2007
Year Ended
December 31,
2006
Year Ended
December 31,
2005
(in millions)
Investment gains and (losses) $ 0.9 $ (2.0) $ 11.6 $ 22.3
Derivative financial instruments gains and (losses) (33.3) (0.6) 33.8 62.4
Divestitures, net 0.2 6.1 8.0 61.1
Debt repayment gains and (losses) (17.2) 1.4 (30.8) —
Non-operating foreign currency gains and losses (24.6) — — —
Other income (expense) $ (74.0) $ 4.9 $ 22.6 $ 145.8
Investment gains and losses
The 2007 predecessor and successor investment gains and losses related to a variety of small gains and losses on the sale of investments none being
significant on an individual basis.
The 2006 investment gain resulted from the recognition of a gain of $10.5 million on the redemption of MasterCard stock, and additionally, recognized
gains on other strategic investments.
During 2005, the Company recognized pretax gains of $21.4 million on the sale of CheckFree Corporation common stock.
Derivative financial instruments
The derivative loss in the 2007 successor period related most significantly to a $12.2 million mark-to-market loss on collars entered into to
economically hedge, although not designated as an accounting hedge, MasterCard stock held by the Company and a loss of approximately $19 million due to
decreases in the fair value of the Holdings forward starting contingent interest rate swaps prior to the merger and prior to their designation as accounting
hedges. The above noted collars were terminated in January 2008 in connection with the sale of the hedged MasterCard stock.
The 2006 and 2005 derivative gains were associated with the mark-to-market of and net settlements with derivative counterparties on the interest rate
swaps not qualifying for hedge accounting that were formally related to the official check business. The majority of the change between periods was driven by
varying interest rates which impacted the value of derivatives as well as net settlements with derivative counterparties.
Non-operating foreign currency gains and losses
In the 2007 successor period, the foreign currency exchange loss related to the mark-to-market of the Company's existing intercompany loans and the
euro-denominated debt issued in connection with the merger of approximately $25 million. Historically, intercompany loans were deemed to be of a long-
term nature for which settlement was not planned or anticipated in the foreseeable future. Therefore, the translation adjustments were reported in other
comprehensive income. Effective in September 2007, the Company now plans to settle the intercompany loans which results in a benefit or charge to earnings
due to movement in foreign currency exchange rates.
Divestitures, net
During the 2007 predecessor period, the Company recognized benefits resulting from the release of excess divestiture accruals due to the expiration of
certain contingencies.
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