eTrade 2011 Annual Report Download - page 42

Other Operating Expenses
Other operating expenses increased 48% to $154.3 million for the year ended December 31, 2011 compared
to 2010. The increase was driven by a reserve of $48 million related to an offer to purchase auction rate securities
held by customers of E*TRADE Securities LLC, as well as former customers who purchased auction rate
securities through E*TRADE Securities LLC. This reserve relates primarily to our estimate of the securities’
current fair value relative to their par value and includes penalties and other estimated settlement costs. We also
entered into a memorandum of understanding to settle the Freudenberg Action, which resulted in the recording of
a net reserve of $10.8 million for the year ended December 31, 2011.
Other Income (Expense)
Other income (expense) increased 11% to $175.8 million for the year ended December 31, 2011 compared
to 2010 as shown in the following table (dollars in millions):
Year Ended Variance
December 31, 2011 vs. 2010
2011 2010 Amount %
Corporate interest income $ 0.7 $ 6.2 $ (5.5) (89)%
Corporate interest expense (177.8) (167.1) (10.7) 6%
Gains on sales of investments, net — 2.7 (2.7) *
Gains on early extinguishment of debt 3.1 — 3.1 *
Equity in loss of investments and venture funds (1.8) (0.8) (1.0) *
Total other income (expense) $(175.8) $(159.0) $(16.8) 11%
* Percentage not meaningful.
Total other income (expense) primarily consisted of corporate interest expense on interest-bearing corporate
debt for the year ended December 31, 2011. Corporate interest expense increased 6% to $177.8 million for the
year ended December 31, 2011 compared to 2010. In addition to the stated interest on corporate debt, the
corporate interest expense line item included the benefit of discontinued fair value hedges on corporate debt,
which decreased $7.8 million for the year ended December 31, 2011 compared to 2010. Offsetting interest
expense for the year ended December 31, 2011 was a $3.1 million gain on early extinguishment of debt related to
the call of the 2013 Notes in the second quarter of 2011. Offsetting corporate interest expense for the year ended
December 31, 2010 was a benefit of $6.0 million related to a legal settlement.
Income Tax Expense (Benefit)
Income tax expense was $28.6 million for the year ended December 31, 2011 compared to $25.3 million in
2010. The effective tax rate was 15.4% for the year ended December 31, 2011 compared to 806.3% in 2010.
During the third quarter of 2011, we recorded an income tax benefit of $61.7 million related to the taxable
liquidation of a European subsidiary. The subsidiary was liquidated for U.S. tax purposes in connection with our
international restructuring activities. This liquidation resulted in the taxable recognition of certain losses,
including historical acquisition premiums that we incurred internationally. This tax benefit resulted in a
corresponding increase to the deferred tax assets, which were $1.6 billion as of December 31, 2011. For the year
ended December 31, 2010, our reported pre-tax loss was relatively close to breakeven, which resulted in an
unusually high effective tax rate.
Valuation Allowance
We are required to establish a valuation allowance for deferred tax assets and record a charge to income if
we determine, based on available evidence at the time the determination is made, that it is more likely than not
that some portion or all of the deferred tax assets will not be realized. If we did conclude that a valuation
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