First Data 2007 Annual Report Download - page 48

FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
During 2006, the Company recognized gains on the sale of land, corporate aircraft and other assets.
During 2005, the Company recognized a pretax gain upon the divestiture of certain interests including the following: $36.3 million for the sale of a
portion of the PNC alliance, $9.0 million for the sale of its investment in Link2Gov, and $8.3 million for the sale of its remaining interest in International
Banking Technologies. The Company also recognized a gain on the sale of a small business and reversed $4.3 million of divestiture accruals due to the
expiration of certain contingencies.
Debt repayment gains and losses
In the 2007 predecessor period, the debt repayment gain related to the early repayment of long-term debt at a discount from the principal amount. In the
2007 successor period, the debt repayment losses related to costs of tendering debt at the time of the merger and the premium paid for obtaining a consent
from holders to modify terms of the Company's debt they held.
The 2006 debt repayment loss consisted of net losses on the early repayment of debt, expenses associated with the interest rate swaps associated with
the repurchased debt, write-off of unamortized portion of associated deferred financing costs and certain transaction fees.
Income taxes
FDC's effective tax rate on pretax income (loss) from continuing operations was 21.3% in the 2007 predecessor period and (36.8)% for the 2007
successor period compared to 19.4% and 18.9% in 2006 and 2005, respectively. The calculation of the effective tax rate includes most of the equity earnings
in affiliates and minority interest in pretax income because these items relate principally to entities that are considered pass-through entities for income tax
purposes.
The change from pretax income in predecessor periods to a pretax loss in the successor period causes a general shift from an overall tax expense to an
overall tax benefit. The non-taxable interest income from the IPS municipal bond portfolio in the successor period causes an increase to the effective tax rate
benefit of almost 8%. State income tax benefits are reduced in the successor loss period for separate company income and franchise tax liabilities. Also
reducing the tax benefit of the pretax loss in the successor period is the valuation allowance against foreign operating losses in certain countries and foreign
tax credits which may not be available to offset the Company's US income taxes upon repatriation of the earnings of its foreign subsidiaries.
The non-taxable interest income from the IPS municipal bond portfolio significantly impacted the effective tax rate from continuing operations in the
predecessor periods, reducing the statutory rate by approximately 19 percentage points in the 2007 predecessor period compared to 15 percentage points for
both prior years 2006 and 2005. The increase in the effective tax rate for the 2007 predecessor period compared to 2006 and 2005 resulted most significantly
from: (a) non-deductible expenses associated with the merger; (b) a net tax expense associated with the income tax return to provision true-ups for 2006; and
(c) an adjustment to the income taxes payable account pertaining to an under accrual of taxes in prior years. Offsetting most of the increase is the above noted
non-taxable interest income being a larger portion of pretax income in the 2007 predecessor period.
The increase in the effective tax rate in 2006 compared to 2005 resulted most significantly from recording a valuation allowance mostly against the
deferred tax asset for foreign tax credits, as well as the impact of other less significant items partially offset by a larger foreign tax rate differential.
The IPS municipal bond portfolio was converted into taxable investments in January 2008 and therefore will not have an impact on the Company's
effective tax rate in the future.
As a subsidiary of Holdings subsequent to the merger and a member of a new U.S. consolidated group for income tax purposes, the Company expects
to be in a net operating loss position in the near term future. The Company anticipates being able to record an income tax benefit related to future operating
losses due to the existence of significant deferred tax liabilities established in connection with purchase accounting. However, the Company may not be able
to record a benefit related to losses in certain countries, requiring the establishment of valuation allowances. Additionally, the Company and its subsidiaries
will continue to incur income taxes in foreign jurisdictions. Generally, these foreign income taxes result in a foreign tax credit in the U.S. to the extent of any
U.S. income taxes on the income upon repatriation. However, due to the Company's anticipated net operating loss position and the requirement to allocate
certain expenses against its foreign source income for U.S. income tax purposes, the Company may not be able to provide a benefit for its potential foreign tax
credits which would increase its effective tax rate. The Company also will continue to incur income taxes in states for which it files returns on a separate
entity basis.
The additional taxes recognized as part of discontinued operations in 2007 related to 2006 income tax return to provision true-ups and other tax items
associated with operations discontinued in 2006.
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