First Data 2008 Annual Report Download - page 58

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.
Debt repayment gains and losses—The 2008 debt repayment gain related to the early repayment of long-term debt at a discount from the principal
amount.
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 the unamortized portion of associated deferred financing costs and certain transaction fees.
Non-operating foreign currency gains and (losses)—For the year ended December 31, 2008 and the 2007 successor period, the net non-operating
foreign currency exchange losses related to the mark-to-market of the Company's intercompany loans and the euro-denominated debt issued in connection
with the merger. Historically, intercompany loans were deemed to be of a long-term nature for which settlement was not planned or anticipated in the
foreseeable future. Accordingly, the translation adjustments were reported in "Other comprehensive income". Effective in September 2007 and in conjunction
with the merger, the Company made the decision to begin settling intercompany loans which results in a benefit or charge to earnings due to movement in
foreign currency exchange rates.
Income taxes
The Company's effective tax rate on pretax income (loss) from continuing operations was (15.7)%, a tax benefit, in 2008, (36.8)%, a tax benefit, for the
2007 successor period, 21.3%, a tax expense, in the 2007 predecessor period and 19.4%, a tax expense, in 2006. 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 effective tax rate benefit in 2008 is less than the statutory rate due primarily to the non-deductibility of most of the goodwill impairment expense
recorded in the fourth quarter of 2008. Partially offsetting the tax disallowance of the goodwill impairment is the release of the valuation allowance against
foreign tax credits established since consummation of the merger. The Company currently believes its foreign tax credits, both those in existence and those
arising in the future upon repatriation of foreign earnings, will be offset against future expected U.S. income taxes. Prior to the second quarter of 2008, the
Company's tax benefit was increased by the accrual of a dividend received deduction on certain of the equity earnings from the Chase Paymentech Solutions
alliance. It was determined that the alliance would suspend its dividend payments on 2008 earnings in anticipation of the termination of the alliance in
October 2008. Following the suspension of dividend payments, the Company reversed the dividend received tax benefit in the second quarter 2008. Accruals
for unrecognized tax benefits were offset by other items for 2008, none of which were individually significant.
The change from pretax income in predecessor periods to a pretax loss in the 2007 successor period caused 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 2007 successor period caused an increase to the
effective tax rate benefit of almost 8%. State income tax benefits were 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 was the valuation allowance against foreign operating losses in certain
countries and foreign tax credits.
57