Freeport-McMoRan 2008 Annual Report Download - page 30

Management’s Discussion and Analysis
Goodwill Impairment
Goodwill is required to be evaluated for impairment at least
annually and at any other time if events or circumstances indicate
that the fair value of a reporting unit is below its carrying
amount. We completed our annual impairment test of goodwill at
December 31, 2008, which resulted in the recognition of goodwill
impairment charges totaling $6.0 billion ($6.0 billion to net loss or
$15.69 per share). Refer to Note 7 and “Critical Accounting
Estimates – Asset Impairments” for further discussion.
Long-Lived Asset Impairments and Other Charges
During fourth-quarter 2008, we concluded that the declines in
copper and molybdenum prices and the deterioration of the
current economic environment represented significant adverse
changes in the business, and therefore evaluated our long-lived
assets for impairment as of December 31, 2008. Our evaluation
of our long-lived assets resulted in the recognition of asset
impairment charges totaling $10.9 billion ($6.6 billion to net loss
or $17.34 per share). Refer to Note 2 and “Critical Accounting
Estimates – Asset Impairments” for further discussion.
Other charges of $111 million ($67 million to net loss or $0.18 per
share) recognized in 2008 include restructuring charges and pension
and postretirement charges for special retirement benefits and
curtailments. Refer to Note 2 for further discussion of these charges.
Interest Expense, Net
2008 Compared with 2007
Consolidated interest expense (before capitalization) totaled $706
million in 2008 compared with $660 million in 2007. Higher
interest expense in 2008 primarily reflected net purchase
accounting impacts of $101 million recorded in 2008 principally
associated with accretion of the fair values of environmental
obligations (determined on a discounted cash flow basis)
assumed in the acquisition of Phelps Dodge. This increase was
partly offset by lower interest expense in 2008 associated with
net repayments of debt during 2007 (refer to “Capital Resources
and Liquidity – Financing Activities” for discussion of 2007
repayments of debt).
Capitalized interest totaled $122 million in 2008 compared with
$147 million in 2007. Capitalized interest is primarily related to
our development projects (refer to “Development Projects” for
further discussion), which included Tenke Fungurume during
2008 and 2007, and also included Safford in 2007.
2007 Compared with 2006
Total consolidated interest expense (before capitalization) totaled
$660 million in 2007 compared with $87 million in 2006. The
increase in interest expense in 2007 primarily related to the debt
incurred in connection with the acquisition of Phelps Dodge.
Capitalized interest totaled $147 million in 2007 and $11 million
in 2006. The increase in capitalized interest in 2007 primarily relates
to the development projects at Safford and Tenke Fungurume.
Losses on Early Extinguishment and Conversion of Debt, Net
During 2008, we recorded net charges totaling $6 million ($5 million
to net loss or $0.01 per share) for early extinguishment of debt
associated with an open-market purchase of $33 million of our
9½% Senior Notes.
During 2007, we recorded net charges totaling $173 million
($132 million to net income or $0.33 per share) for early
extinguishment of debt primarily related to the accelerated
recognition of deferred financing costs associated with early
repayment of amounts under the $11.5 billion senior credit
facility, including the refinancing of the Tranche B term loan. Also
included was $17 million ($10 million to net income or $0.02 per
share) related to premiums paid and the accelerated recognition
of deferred financing costs associated with the May 2007
redemption of our 101/8% Senior Notes.
During 2006, we recorded net charges totaling $32 million ($30
million to net income or $0.14 per share) for early extinguishment
and conversion of debt primarily associated with the completion
of a tender offer and privately negotiated transactions to induce
conversion of our 7% Convertible Senior Notes into FCX common
stock, and also included charges associated with open-market
purchases of our 101/8% Senior Notes.
Gains on Sales of Assets
Gains on sales of assets totaled $13 million ($8 million to net loss
or $0.02 per share) in 2008, $85 million ($52 million to net income
or $0.13 per share) in 2007 primarily associated with sales of
marketable securities, and $31 million ($30 million to net income
or $0.13 per share) in 2006 primarily associated with the
disposition of land and certain royalty rights at Atlantic Copper.
Other (Expense) Income, Net
Other (expense) income, net, totaled $(22) million in 2008, $157
million in 2007 and $28 million in 2006. The decrease in 2008,
compared with 2007, primarily related to lower interest income
($82 million) and higher foreign currency exchange losses ($64
million) mostly associated with estimated Chilean tax payments.
The increase in 2007, compared with 2006, primarily related to
higher interest income ($110 million).
Benefit from (Provision for) Income Taxes
The benefit from income taxes in 2008 resulted from U.S.
operations ($3.4 billion), partly offset by taxes on international
operations ($604 million). Our effective tax rate changed from a
39 percent provision in 2007 to a 21 percent benefit in 2008. The
difference between our consolidated effective income tax rate in
2008 and the U.S. federal statutory rate of 35 percent primarily
was attributable to goodwill impairment charges, which
were non-deductible for tax purposes, and the recognition of
a valuation allowance against U.S. federal alternative minimum
tax credits, partly offset by benefits for percentage depletion
and U.S. state income taxes.
28 FREEPORT-McMoRan COPPER & GOLD INC. 2008 Annual Report