First Data 2009 Annual Report Download - page 51

FIRST DATA CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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 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.
Non-operating foreign currency gains and (losses)—For the years ended December 31, 2009, 2008 and the
2007 successor period, the net non-operating foreign currency exchange gains and 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 36.3%, a tax
benefit, in 2009, 16.2%, a tax benefit, in 2008, 40.1%, a tax benefit, for the 2007 successor period, and 18.1%, a
tax expense, in the 2007 predecessor period. The calculation of the effective tax rate includes most of the equity
earnings in affiliates in pretax income because this item relates principally to entities that are considered pass-
through entities for income tax purposes.
The effective tax rate benefit in 2009 is greater than the statutory rate due primarily to state tax benefits,
foreign income taxed at lower effective rates and net income attributable to noncontrolling interests for pass
through entities for which there was no tax expense provided. These positive adjustments were partially offset by
an increase in the Company’s liability for unrecognized tax benefits and an increase in the valuation allowance
established against certain state and foreign net operating losses.
The effective tax rate benefit in 2008 was 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 was the release of a valuation allowance against foreign tax credits
established since consummation of the merger.
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
approximately 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.
The non-taxable interest income from the IPS municipal bond portfolio significantly impacted the effective
tax rate from continuing operations in the predecessor period, reducing the statutory rate by approximately 16
percentage points in the 2007 predecessor period. Most of the IPS municipal bond portfolio was converted into
taxable investments in January 2008 and therefore did not have a significant impact on the Company’s effective
tax rate in 2008 or 2009.
Subsequent to the merger and as part of the First Data Holdings, Inc. (“Holdings”) consolidated federal
group and consolidated, combined or unitary state groups for income tax purposes, the Company has been and
51