First Data 2009 Annual Report Download - page 36

FIRST DATA CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
impairment charge related to the Company’s business in Germany and was allocated to impair the value of
customer contracts and real property by approximately $58 million and $6 million, respectively. The impairment
occurred because of the deterioration of profitability on existing business, higher risk of revenue attrition in
future years and lower projections of financial results compared to those used in prior periods. Approximately
$47 million of the total impairment charge related to impairment of customer contracts associated with
Company’s card-issuing business in the United Kingdom. The impairment occurred because of negative cash
flow in the existing business and lower projections of financial results compared to those used in prior periods.
Approximately $2 million of the total impairment charge related to trade name impairment and was a result of
the Company’s decision to discontinue the use of a certain trade name in the Canadian market during the fourth
quarter of 2009 and instead continue the business under the First Data brand. The remaining approximate
$11 million of the total impairment charge related to the Company’s businesses in Ireland and Brazil and was
comprised of a $7 million impairment of customer contracts and $4 million impairment of software. The
impairment occurred because of cash flow losses in the existing businesses and lower projections of financial
results compared to those used in prior periods. The Company followed a discounted cash flow approach in
estimating the fair value of the affected asset groups and individual intangible assets within those groups
consistent with the approach used to allocate the purchase price of the merger. The Company obtained an
appraisal from a third party brokerage firm to assist in estimating the value of real property in Germany. All key
assumptions and valuations were determined by and are the responsibility of management.
In the fourth quarter of 2008, the Company recorded a $3.2 billion goodwill impairment charge. Every
reporting unit had an impairment charge representing a percentage of goodwill ranging from a small charge for
one reporting unit to all of the goodwill at two small reporting units. During the fourth quarter and in connection
with the deterioration in general global economic conditions, the Company experienced a decrease in its
operating results. These operating results caused the Company to reassess its near and long-term projections as
part of its annual budgeting process. The Company followed a discounted cash flow approach in estimating the
fair value of the reporting units and intangible assets consistent with the approach used to allocate the purchase
price of the merger. The significant factors that drove most of the impairment were higher discount rates and
revised projections of financial results as compared to those used to allocate the purchase price of the merger.
Economic Conditions
General economic conditions in the U.S. and other areas of the world dramatically weakened in the second
half of 2008 and most of 2009 but showed improvement towards the end of 2009. Many of FDC’s businesses are
correlated to changes in macro economic conditions and revenue is derived in part on the number and size of
consumer transactions. While the Company is partially insulated from specific industry trends through its diverse
market presence, broad changes in consumer spending patterns could have a material impact on the Company’s
results. During the fourth quarter of 2008 and during 2009, a shift in transactions from smaller, more profitable
merchants to national discounters and wholesalers impacted the Company’s revenue growth. Additionally, the
Company experienced increased credit losses during 2009 due to a higher level of merchant failures and
bankruptcy filings.
2008 Overview
Chase Paymentech Solutions and Wells Fargo Merchant Services
On November 1, 2008, the Company and JPMorgan Chase terminated their merchant alliance relationship,
CPS, which was the Company’s largest merchant alliance. The Company received its proportionate 49% share of
the assets of the alliance. The new domestic owned and managed business was operated as part of the Company’s
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