First Data 2007 Annual Report Download - page 53

FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Reimbursable debit network fees, postage and other
Debit network fees in the 2007 predecessor and successor periods benefited from continued growth of PIN-debit transaction volumes as well as rate
increases imposed by the debit networks. Debit network fees represent substantially all of the balance within this line item.
The increases in reimbursable debit network fees, postage and other for 2007 on a pro forma basis versus historical 2006 and for 2006 compared to
2005 were due to growth in debit network fees resulting from the continued growth of PIN-debit transaction volumes as noted above as well as rate increases
imposed by the debit networks. The 2006 growth was partially offset by a national merchant routing a portion of its PIN-debit transactions directly to the
network provider.
Operating profit
In addition to the impact of the items noted above, First Data Commercial Services segment operating profit for the 2007 predecessor and successor
periods was impacted negatively by new incentive compensation arrangements implemented in 2007. Also negatively impacting the predecessor segment
operating profit as a result of the merger was the acceleration of restricted stock awards. In the 2007 predecessor period, the Company bought out a revenue
sharing agreement as part of a new, larger relationship with Discover Financial Services LLC ("Discover") resulting in an expense charge in the 2007
predecessor period with most of this charge being recovered through increased processing fees in the predecessor period and the remaining portion in the
successor period. Amortization resulting from contingent payments associated with a merchant alliance also negatively impacted operating profit growth for
the 2007 predecessor period. The 2007 successor period was negatively impacted by purchase accounting of approximately $209 million due most
significantly to amortization expense resulting from the purchase price assigned to intangible assets from the merger.
The segment operating profit decreased in 2007 on a pro forma basis compared to historical 2006 due to the factors discussed above. Increased
amortization resulting from contingent payments noted above negatively impacted the operating profit growth rate by approximately 1 percentage point in
2007 on a pro forma basis, but will not have continuing impact as a result of the merger and the associated affects of purchase accounting. Incentive
compensation negatively impacted 2007 pro forma operating profit by approximately 1 percentage point in comparison to historical 2006. The negative
impacts of the contingent payments and incentive compensation were offset by savings from the restructuring activities described in "2007 activities" above
and increased contract termination fees. The purchase accounting impacts of the annual fees noted in the acquiring revenue discussion above and increased
amortization of identifiable intangible assets, both related to the merger, negatively impacted the operating profit growth rate by 67 percentage points for the
2007 pro forma results.
The segment operating profit and margins increased in 2006 compared to 2005 due to the factors discussed above. Additionally, the reduction of
integration expenses in 2006 versus 2005 benefited 2006 operating profit growth by approximately 11 percentage points and operating margin by
approximately 3 percentage points. Also benefiting 2006 growth was reduced payroll expense due to fourth quarter 2005 restructuring activities. Negatively
affecting operating profit growth in 2006 was higher incentive compensation accruals due to achieving certain financial targets in 2006 in comparison to 2005
and the reduction in relative ownership percentage of the PNC alliance. Increased amortization resulting from contingent payments associated with a merchant
alliance also negatively impacted operating profit growth in 2006 by 1 percentage point.
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