UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-11073
FIRST DATA CORPORATION
DELAWARE |
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47-0731996 |
(State of incorporation) |
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(I.R.S. Employer Identification No.) |
5565 GLENRIDGE CONNECTOR, N.E., SUITE 2000, ATLANTA, GEORGIA 30342
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code (404) 890-2000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o |
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Accelerated filer o |
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Non-accelerated filer x |
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Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The aggregate market value of the registrants voting stock held by non-affiliates is zero. The registrant is privately held. There were 1,000 shares of the registrants common stock outstanding as of March 1, 2012.
PART I
ITEM 1. BUSINESS
General
First Data Corporation (FDC or the Company) is a provider of electronic commerce and payment solutions for merchants, financial institutions and card issuers globally and has operations in 34 countries, serving approximately 6.2 million merchant locations. FDC was incorporated in Delaware in 1989 and was the subject of an initial public offering in connection with a spin-off from American Express in 1992. On September 24, 2007, the Company was acquired through a merger transaction (the merger) with an entity controlled by affiliates of Kohlberg Kravis Roberts & Co. (KKR). The merger resulted in the equity of FDC becoming privately held.
The Company has acquired multiple domestic and international businesses over the last five years with the most significant acquisition being the formation of the Banc of America Merchant Services, LLC (BAMS) alliance on June 26, 2009. The Company owns 51% of BAMS and Bank of America N.A. owns 49%. Refer to Note 3 to the Companys Consolidated Financial Statements in Item 8 of this Form 10-K for additional information regarding the BAMS alliance.
Operating locations. The Company has domestic and international operations and regional or country offices where sales, customer service and/or administrative personnel are based. The international operations generate revenues from customers located and operating outside of the U.S. Revenues generated from processing transactions at locations within the U.S. (domestic) and outside of the U.S. (international), regardless of the segments to which the associated revenues applied, were 84% and 16% of FDCs consolidated revenues for the year ended December 31, 2011, respectively. Long-lived assets attributable to domestic and international operations as percentages of FDCs total long-lived assets as of December 31, 2011 were 87% and 13%, respectively. No individual foreign country is material to the Companys total revenues or long-lived assets. Further financial information relating to the Companys international and domestic revenues and long-lived assets is set forth in Note 15 to the Companys Consolidated Financial Statements in Item 8 of this Form 10-K.
Products and Services Segment Information
The Company is organized in three segments: Retail and Alliance Services, Financial Services and International.
Financial information relating to each of the Companys segments is set forth in Note 15 to the Companys Consolidated Financial Statements in Item 8 of this Form 10-K. The Retail and Alliance Services segment is reported on a proportionate consolidation basis. Proportionate consolidation reflects the Companys proportionate share of the results of non-wholly owned alliances based on equity ownership, net of a proportionate share of eliminations for amounts charged between the Company and the alliances. The segments profit measure is a form of EBITDA (earnings before net interest expense, income taxes, depreciation and amortization). A discussion of factors potentially affecting the Companys operations is set forth in Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations, of this form 10-K. The Company does not have any significant customers that account for 10% or more of total consolidated revenues. Refer to the following segment discussions, which address significant customer relationships within each segment.
Retail and Alliance Services segment. The Retail and Alliance Services segment is comprised of merchant acquiring and processing services, prepaid services and check verification, settlement and guarantee services.
Retail and Alliance Services segment revenues from external customers, segment EBITDA and assets represent the following percentages of total segment and All Other and Corporate revenues from external customers, total segment and All Other and Corporate EBITDA, and consolidated assets:
|
|
Year ended December 31, |
| ||||
|
|
2011 |
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2010 |
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2009 |
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Segment revenues from external customers |
|
51 |
% |
51 |
% |
49 |
% |
Segment EBITDA |
|
63 |
% |
65 |
% |
56 |
% |
Assets (at December 31) |
|
69 |
% |
66 |
% |
64 |
% |
Description of Retail and Alliance Services segment operations. In the Retail and Alliance Services segment, revenues are derived primarily from providing merchant acquiring and processing services, prepaid services and check verification, settlement and guarantee services. Retail and Alliance Services businesses facilitate the acceptance of consumer transactions at the point of sale (POS), whether it is a transaction at a physical merchant location or over the internet. A brief explanation of the segments service and product offerings is presented below.
Merchant acquiring and processing services. Merchant acquiring services facilitate the merchants ability to accept credit, debit, stored-value and loyalty cards by authorizing, capturing and settling the merchants transactions. Acquiring services also provide POS devices and other equipment necessary to capture merchant transactions. A majority of these services are offered to the
merchants through contractual alliance arrangements primarily with financial institutions, relationships with independent sales organizations and other referral/sales partners. The segments processing services include authorization, transaction capture, settlement, chargeback handling, and internet-based transaction processing. The vast majority of these services pertain to transactions in which consumer payments to merchants are made through a card association (such as Visa or MasterCard), a debit network, or another payment network (such as Discover).
Revenues are generated from, among other things:
· discount fees charged to a merchant, net of credit card interchange and assessment fees charged by the bankcard associations or payment networks (Visa, MasterCard or Discover). The discount fee is typically either a percentage of the credit card transaction or the interchange fee plus a fixed dollar amount;
· processing fees charged to unconsolidated alliances discussed below;
· processing fees charged to merchant acquirers who have outsourced their transaction processing to the Company;
· selling and leasing POS devices; and
· debit network fees.
Most of this segments revenue is derived from regional and local merchants. The items listed above are included in the Companys consolidated revenues and, for equity earnings from unconsolidated alliances, the Equity earnings in affiliates line item in the Consolidated Statements of Operations. The Retail and Alliance Services segment revenue and EBITDA are presented using proportionate consolidation accordingly segment revenue also includes the alliance partners share of processing fees charged to consolidated alliances. In addition, segment revenue excludes debit network fees and other reimbursable items.
Retail and Alliance Services provides merchant acquiring and processing services, prepaid services and check verification, guarantee and settlement services to merchants operating in approximately 4.0 million merchant locations across the U.S. and acquired $1.5 trillion of payment transaction dollar volume on behalf of U.S. merchants in 2011. Retail and Alliance Services provides full service merchant processing primarily on Visa and MasterCard transactions and PIN-debit at the point of sale.
Retail and Alliance Services approaches the market through diversified sales channels including equity alliances, revenue sharing alliances and referral arrangements with over 435 financial institution partners, over 1,170 non-bank referral partners, and over 620 independent sales organization partners, as of December 31, 2011. Growth in the Retail and Alliance Services business is derived from entering into new merchant relationships, new and enhanced product and service offerings, cross selling products and services into existing relationships, the shift of consumer spending to increased usage of electronic forms of payment and the strength of FDCs alliances and relationships with banks and other entities. The Companys alliance structures take on different forms, including consolidated subsidiaries, equity method investments and revenue sharing arrangements. Under the alliance and referral programs, the alliance/referral partners typically act as a merchant referral source. The Company benefits by providing processing services for the alliance/referral partners and their merchant customers. Both the Company and the alliance may provide management, sales, marketing, and other administrative services. The alliance strategy could be affected by further consolidation among financial institutions.
The Companys strategy with banks, independent sales organizations and referral/sales partners provides the Company with broad geographic coverage, regionally and nationally, as well as a presence in various industries. The alliance/referral partner structure allows the Company to be the processor for multiple financial institutions, any one of which may be selected by the merchant as their bank partner. Additionally, bank partners provide brand loyalty and a distribution channel through their branch networks which increases merchant retention.
There are a number of different entities involved in a merchant transaction including the cardholder, card issuer, card association, merchant, merchant acquirer, electronic processor for credit and signature debit transactions, and debit network for PIN-debit transactions. The card issuer is the financial institution that issues credit or debit cards, authorizes transactions after determining whether the cardholder has sufficient available credit or funds for the transaction, and provides funds for the transaction. Some of these functions may be performed by an electronic processor (such as the Companys Financial Services business) on behalf of the issuer. The card associations, Visa or MasterCard, a debit network (such as STAR Network) or another payment network (such as Discover) route transactions between the Company and the card issuer. The merchant is a business from which a product or service is purchased by a cardholder. The acquirer (such as the Company or one of its alliances) contracts with merchants to facilitate their acceptance of cards. A merchant acquirer may do its own processing or, more commonly, may outsource those functions to an electronic processor such as the Retail and Alliance Services segment. The acquirer/processor serves as an intermediary between the merchant and the card issuer by:
(1) obtaining authorization from the card issuer through a card association or debit network;
(2) transmitting the transaction to the card issuer through the applicable card association, payment network or debit network; and
(3) paying the merchant for the transaction. The Company typically receives the funds from the issuer via the card association, payment network or debit network prior to paying the merchant.
A transaction occurs when a cardholder purchases something from a merchant who has contracted with the Company, an alliance partner or a processing customer. When the merchant swipes the card through the POS terminal (which is often sold or leased, and serviced by the Company), the Company obtains authorization for the transaction from the card issuer through the card association, payment network or debit network, verifying that the cardholder has sufficient credit or adequate funds for the transaction. Once the card issuer approves the transaction, the Company or the alliance acquires the transaction from the merchant and then transmits it to the applicable debit network, payment network or card association, which then routes the transaction information to the card issuer. Upon receipt of the transaction, the card issuer delivers funds to the Company via the card association, payment network or debit network. Generally, the Company funds the merchant after receiving the money from the card association, payment network or debit network. Each participant in the transaction receives compensation for processing the transaction. For example, in a transaction using a Visa or MasterCard for $100.00 with an interchange rate of 1.5% (the cap on certain debit transactions has been changed to $0.21), the card issuer will fund the association $98.50 and bill the cardholder $100.00 on its monthly statement. The card association will retain assessment fees of approximately $0.10 and forward $98.40 to the Company. The Company will retain, for example, $0.40 and pay the merchant $98.00. The $1.50 retained by the card issuer is referred to as interchange and it, like assessment fees, is set by the card association. The $0.40 is the merchant discount and is negotiated between the merchant and the merchant acquirer.
The Company and its alliances, as merchant acquirers/processors, have certain contingent liabilities for the transactions acquired from merchants. This contingent liability arises in the event of a billing dispute between the merchant and a cardholder that is ultimately resolved in the cardholders favor. In such a case, the transaction is charged back to the merchant and the disputed amount is credited or otherwise refunded to the cardholder. The Company may, however, collect this amount from the card association if the amount was disputed in error. If the Company or the alliance is unable to collect this amount from the merchant, due to the merchants insolvency or other reasons, the Company or the alliance will bear the loss for the amount of the refund paid to the cardholder. In most cases, this contingent liability situation is unlikely to arise because most products or services are delivered when purchased, and credits are issued on returned items. However, where the product or service is not provided until sometime following the purchase (e.g., airline or cruise ship tickets), the risk is greater. The Company often mitigates its risk by obtaining collateral from merchants considered higher risk because they have a time delay in the delivery of services, operate in industries that experience chargebacks or are less creditworthy.
Prepaid services. First Data Prepaid Services manages prepaid stored-value card issuance and processing services (i.e. gift cards) for retailers and others. The full-service stored-value/gift card program offers transaction processing services, card issuance and customer service for over 200 national brands and several thousand small and mid-tier merchants. The Company also provides program management and processing services for association-branded, bank-issued, open loop, stored-value, reloadable and one time prepaid card products.
Money Network offers prepaid products to address the needs of employers, employees, merchants and unbanked individuals. Money Network provides open loop electronic payroll distribution solutions that reduce or eliminate an employers expense associated with traditional paper paychecks as well as other prepaid retail solutions.
EFS Transportation Services provides payment processing, settlement and specialized reporting services for transportation companies and owns and operates ATMs at truck stops. EFS Transportation Services is a closed loop payment processing system for transportation companies in the U.S. and Canada. Its products offer truck drivers a convenient way to purchase fuel, access cash and pay for repairs while on the road. Transportation companies use the processing system to manage their business daily through the internet or real time via a direct connection to a host. In July 2011, the Company disposed of the ATM component of this business. In November 2011, the Company contributed the remaining transportation business to an alliance in exchange for a 30% interest in that alliance. For further detail on this transaction, refer to Note 18 of the Companys Consolidated Financial Statements in Item 8 of this Form 10-K.
Check verification, settlement and guarantee services. TeleCheck offers check verification, settlement and guarantee services using the Companys proprietary database system to assist merchants in deciding whether accepting checks at the point-of-sale is a reasonable risk, or, further, to guarantee checks presented to merchants if they are approved. These services include risk management services, which utilize software, information and analysis to assist the merchant in the decision process and include identity fraud prevention and reduction. Revenues are earned primarily by charging merchant fees for check verification or guarantee services.
The majority of the Companys services involve providing check guarantee services for checks received by merchants. Under the guarantee service, when a merchant receives a check in payment for goods and services, the transaction is submitted to and analyzed by the Company. The Company either accepts or declines the check for warranty coverage under its guarantee service. If the Company approves the check for warranty coverage and the merchant accepts the check, the merchant will either deposit the check in
its bank account or process it for settlement through the Companys Electronic Check Acceptance service. If the check is returned unpaid by the merchants bank and the returned check meets the requirements for warranty coverage, the Company is required to purchase the check from the merchant at its face value. The Company then owns the purchased check and pursues collection of the check from the check writer. As a result, the Company bears the risk of loss if the Company is unable to collect the returned check from the check writer. The Company earns a fee for each check it guarantees, which generally is determined as a percentage of the check amount.
The Companys Electronic Check Acceptance service, which converts a paper check written at the point of sale into an electronic item, enables funds to be deposited electronically to the merchants account and deducted electronically from the check writers account.
Under the verification service, when a merchant receives a check in payment for goods or services, the transaction is submitted to and analyzed by the Company, which will either recommend the merchant accept or decline the check. If the merchant accepts the check, the merchant will deposit the check in its bank account. If the check is returned unpaid by the merchants bank, the Company is not required to purchase the check from the merchant and the merchant bears all risk of loss on the check. The Company earns a fee for each check submitted for verification, which is generally a fixed amount per check.
Retail and Alliance Services segment competition. The Companys Retail and Alliance Services business competes with several service providers and financial institutions that provide these services to their merchant customers. In many cases, the merchant alliances also compete against each other for the same business. The check guarantee and verification products compete principally with the products of four other national competitors as well as the migration to other non-check products.
The most significant competitive factors relate to price, brand, strength of financial institution partnership, breadth of features and functionality, scalability and servicing capability. The Retail and Alliance Services segment is further impacted by large merchant and large bank consolidation, card association business model expansion, and the expansion of new payment methods and devices.
In both the Retail and Alliance Services and Financial Services segments, the card associations and payment networksVisa, MasterCard and Discoverare increasingly offering products and services that compete with the Companys products and services.
Retail and Alliance Services seasonality. Retail and Alliance Services revenues and earnings are impacted by the volume of consumer usage of credit cards, debit cards, stored value cards and checks written at the point of sale. Retail and Alliance Services generally experiences increased POS activity during the traditional holiday shopping period in the fourth quarter, the back-to-school buying period in the third quarter, and significant holidays.
Retail and Alliance Services geographic mix and revenues. Revenues from external customers for the Retail and Alliance Services segment are substantially all earned in the U.S. Merchant revenues outside of the U.S. are managed and reported by the Companys International segment. Within the U.S., revenues from external customers are spread across the country since Retail and Alliance Services has merchant customers and alliance partners across geographic regions and a large percentage of its transactions occur at national merchants.
Retail and Alliance Services significant customers. The Retail and Alliance Services segment does not have any individually significant customers; however, the Company has two significant merchant alliance relationships with financial institutions.
Financial Services segment. The Financial Services segment is comprised of:
(1) credit and retail card processing services;
(2) debit network and processing services;
(3) output services; and
(4) other services including remittance processing.
Financial Services segment revenues from external customers, segment EBITDA, and assets represent the following percentages of total segment and All Other and Corporate revenues from external customers, total segment and All Other and Corporate EBITDA and consolidated assets:
|
|
Year ended December 31, |
| ||||
|
|
2011 |
|
2010 |
|
2009 |
|
Segment revenues from external customers |
|
20 |
% |
21 |
% |
22 |
% |
Segment EBITDA |
|
26 |
% |
27 |
% |
31 |
% |
Assets (at December 31) |
|
12 |
% |
13 |
% |
13 |
% |
Description of Financial Services segment operations. Financial Services provides issuer card and network solutions for credit, retail and debit card processing, debit network services (including the STAR network), output services to financial institutions and other organizations offering credit, debit and retail cards to consumers and businesses to manage customer accounts. Financial Services also provides personal identification number (PIN) debit network services through the STAR Network which enables PIN-secured debit transaction acceptance at approximately 2.1 million ATM and retail locations in the U.S. as of December 31, 2011. Financial services also offers payment management solutions for recurring bill payment and services to improve customer communications, billing, online banking and consumer bill payment as well as information services. Revenue and profit growth in these businesses is derived from retaining and growing the core business and improving the overall cost structure. Growing the core business comes primarily from an increase in debit and credit card usage, growth from existing clients and sales to new clients and the related account conversions.
As of December 31, 2011, the Financial Services segment had more than 4,000 domestic client relationships. The Company has relationships and many long-term customer contracts with card issuers providing credit and retail card processing, output services for printing and embossing items, debit card processing services and STAR Network services. These contracts generally require a notice period prior to the end of the contract if a client chooses not to renew. Additionally, some contracts may allow for early termination upon the occurrence of certain events such as a change in control. The termination fees paid upon the occurrence of such events are designed primarily to cover balance sheet exposure related to items such as capitalized conversion costs or signing bonuses associated with the contract and, in some cases, may cover a portion of lost future revenue and profit. Although these contracts may be terminated upon certain occurrences, the contracts provide the segment with a steady revenue stream since a vast majority of the contracts are honored through the contracted expiration date.
Credit and retail card issuing and processing services. Credit and retail card issuing and processing services provide outsourcing services to financial institutions and other issuers of cards, such as consumer finance companies and retailers. Financial Services clients include a wide variety of banks, savings and loan associations, group service providers, retailers and credit unions. Services provided include, among other things, account maintenance, transaction authorizing and posting, fraud and risk management services and settlement.
The Company provides services throughout the period of each cards use, starting from a card-issuing client processing an application for a card. Services may include processing the card application, initiating service for the cardholder, processing each card transaction for the issuing retailer or financial institution and accumulating the cards transactions. The Companys fraud management services monitor the unauthorized use of cards which have been reported to be lost, stolen, or which exceed credit limits. The Companys fraud detection systems help identify fraudulent transactions by monitoring each cardholders purchasing patterns and flagging unusual purchases. Other services provided include customized communications to cardholders, information verification associated with granting credit, debt collection, and customer service.
Revenues for credit and retail card issuing and processing services are derived from fees payable under contracts that depend primarily on the number of cardholder accounts on file. More revenue is derived from active accounts (those accounts on file that had a balance or any monetary posting or authorization activity during the period) than inactive accounts.
Debit network and processing services. The Company provides STAR Network access, PIN-debit and signature debit card processing services and ATM processing services, such as transaction routing, authorization, and settlement as well as ATM management and monitoring. The STAR Network represents a telecommunications network which is connected to thousands of financial institutions, merchants, payment processors, ATM processors, and card processors that participate in the network. In the merchant acquiring process flow described above in the Retail and Alliance Services segment discussion, STAR Network represents a debit network. When a merchant acquirer or ATM owner acquires a STAR Network transaction, it sends the transaction to the network switch, which is operated by the Company, which in turn routes the transaction to the appropriate participant for authorization. To be routed through the STAR Network switch, a transaction must be initiated with a card participating in the STAR Network at an ATM or POS terminal also participating in the STAR Network. STAR Networks fees differ from those presented in the example above in the Retail and Alliance Services segment description in that the debit network charges less for PIN-debit transactions than do the card associations for credit and signature debit since there is substantially less risk involved in the PIN-debit transaction because PIN authentication is generally required and transactions are not approved unless there are sufficient funds in the customers bank account.
Revenues related to the STAR Network and debit card and ATM processing services are derived from fees payable under contracts but are driven more by monetary transactions processed than by accounts on file. The Company provides services which are driven by client transactions and are separately priced and negotiated with clients. In a situation in which a PIN-secured debit transaction uses the Companys debit network and the Company is the debit card processor for the financial institution as well as the processor for the merchant, the Company receives: (1) a fee from the card issuing financial institution for running the transaction through the STAR Network switch, recognized in the Financial Services segment; (2) a fee from the card issuer for obtaining the authorization, recognized in the Financial Services segment; (3) a fee from the merchant for acquiring the transaction, which is recognized in the Retail and Alliance Services segment; and (4) a network acquirer fee from the merchant for accessing the STAR Network, which is recognized in the Financial Services segment. There are other possible configurations of transactions that result in the Company receiving multiple fees for a transaction, depending on the role the Company plays.
Output services. Output services consist of statement and letter printing, card embossing and mailing services. Services are provided to organizations that process accounts on the Companys platform as described above and for clients that process accounts on alternative platforms. The Company provides these services primarily through in-house facilities. Revenues for output services are derived primarily on a per piece basis and consist of fees for the production and materials related to finished products. The mailing services drive a majority of the Companys postage revenue.
Other services. Other services consist of the Companys remittance processing and other services. The remittance processing business processes mail-in payments for third-party organizations. Revenues for remittance processing services are derived primarily on a per transaction basis and consist of fees for processing consumer payments. Other services consist primarily of on-line banking and bill payment services as well as information services.
Financial Services pipeline. During 2011, the Company converted approximately 9 million accounts to its system. The pipeline at December 31, 2011 was approximately 58 million accounts, the majority of which are retail accounts that are expected to convert late in the first quarter of 2012.
Financial Services segment competition. The Companys Financial Services segment competes with several other third-party card processors and debit networks in the U.S., as well as financial institutions with in-house operations to manage card issuance and maintenance. The Company also faces significant competition from regional and national operators of debit networks.
The most significant competitive factors are price, system performance and reliability, breadth of features and functionality, disaster recovery capabilities and business continuity preparedness, data security, scalability, and flexibility of infrastructure and servicing capability. The Financial Services business is further impacted by financial institution consolidation.
In both the Retail and Alliance Services and Financial Services segments, the card associations and payment networksVisa, MasterCard and Discoverare increasingly offering products and services that compete with the Companys products and services.
Financial Services seasonality. Debit processing and STAR Network revenues and earnings are impacted by the volume of consumer usage of debit cards at the point of sale. Such volumes are generally impacted by increased POS activity during the traditional holiday shopping period in the fourth quarter, the back-to-school buying period in the third quarter, and significant holidays.
Financial Services geographic mix and revenues. Revenues from external customers for the Financial Services segment are substantially all earned in the U.S. Card issuing revenues outside of the U.S. are reported by the Companys International segment. Within the U.S., revenues from external customers are geographically dispersed throughout the country.
Financial Services significant customers. No individual customer makes up more than 10% of the Financial Services segment revenue.
International segment. The International segment is comprised of:
· credit, retail, debit and prepaid card processing;
· merchant acquiring and processing; and
· ATM and POS processing, driving, acquiring and switching services.
International segment revenues from external customers, segment EBITDA and assets represent the following percentages of total segment and All Other and Corporate revenues from external customers, total segment and All Other and Corporate EBITDA and consolidated assets:
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|
Year ended December 31, |
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|
|
2011 |
|
2010 |
|
2009 |
|
Segment revenues from external customers |
|
27 |
% |
25 |
% |
25 |
% |
Segment EBITDA |
|
20 |
% |
16 |
% |
19 |
% |
Assets (at December 31) |
|
13 |
% |
14 |
% |
15 |
% |
The merchant acquiring and card issuing services provided by the International segment are similar in nature to the services described above in the Retail and Alliance Services and Financial Services segments other than they include substantially all the services provided outside of the U.S. International has operations in 34 countries. For a description of the International segments merchant acquiring and card issuing businesses refer to the Retail and Alliance Services and Financial Services segment descriptions provided above.
International pipeline. During 2011 the Company converted approximately 3 million accounts to its systems. The pipeline at December 31, 2011 was approximately 5 million accounts, the majority of which are debit accounts. The Company expects to convert these accounts in 2012.
International segment competition and seasonality. Competition and seasonality within the International segment is similar to that of the Retail and Alliance Services and Financial Services segments for the respective product and service offerings and also includes third-party software providers. A noted difference from the U.S. operations is that generally there are more and smaller competitors because of the International segments global span.
International geographic mix. The following countries accounted for more than 10% of the segments revenues from external customers for the periods presented:
|
|
Year ended December 31, |
| ||||
|
|
2011 |
|
2010 |
|
2009 |
|
United Kingdom |
|
18 |
% |
17 |
% |
19 |
% |
Australia |
|
16 |
% |
15 |
% |
13 |
% |
Germany |
|
13 |
% |
13 |
% |
15 |
% |
No individual foreign country was material to the Companys consolidated revenues.
International significant customers. No individual customer makes up more than 10% of the International segment revenue.
All Other and Corporate. The remainder of the Companys business units are grouped in the All Other and Corporate category, which includes Integrated Payment Systems (IPS), First Data Government Solutions (FDGS) and smaller businesses as well as corporate operations.
The principal IPS business is official check services. Until May 2010, IPS issued official checks, which were sold by agents that were financial institutions. Official checks served as an alternative to a banks own items such as cashiers or bank checks. The Company has gradually exited the official check line of business. The majority of the clients of this business deconverted during 2008 and there was no new official check and money order business beyond May 2010. IPS will continue to use its licenses to offer payment services that fall under state and federal regulations and the business will continue to operate in a much reduced capacity as outstanding official check and money order clearance activity winds down.
FDGS operates payment systems and related technologies in the government sector. For instance, FDGS provides electronic tax payment processing services for the Electronic Federal Tax Payment System.
Corporate operations include administrative and shared service functions such as the executive group, legal, tax, treasury, internal audit, accounting, human resources, information technology and procurement. Costs incurred by corporate that are directly related to a segment are allocated to the respective segment. Administrative and shared service costs are retained by Corporate.
All Other and Corporate competition. The operations within All Other and Corporate have various competitors. No single competitor would have a material impact on the Company.
All Other and Corporate significant customers. During 2011, the Company had a significant relationship with one client whose revenues represented approximately 60% of All Other and Corporate revenue for the year ended December 31, 2011.
Intellectual Property
The Company owns a global portfolio of many trademarks, trade names, patents and other intellectual property that are important to its future success. The only intellectual property rights which are individually material to the Company are the FIRST DATA trademark and trade name and the STAR trademark and trade name. The STAR trademark and trade name are used in the Financial Services segment. The FIRST DATA trademark and trade name are associated with quality and reliable electronic commerce and payments solutions. Financial institutions and merchants associate the STAR trademark and trade name with quality and reliable debit network services and processing services. Loss of the proprietary use of the FIRST DATA or STAR trademarks and trade names or a diminution in the perceived quality associated with these names could harm the growth of the Companys businesses. Also important, but not individually material, are the VisionPLUS and FirstVision trademarks and software. VisionPLUS and FirstVision are recognized globally as a quality software product and card processing system, respectively. The software is important to the Companys global expansion.
The Company uses a combination of technologies (including proprietary technology and technology obtained from third parties) to provide its products and services to its customers, and to remain competitive. The Company has various programs and procedures to protect its patents and other intellectual property rights. The patent protection associated with the Companys systems and software expires at different times over the next one to 20 years.
Employees and Labor
At December 31, 2011, the Company employed approximately 24,000 employees, approximately 97% of which were full-time employees. The majority of the employees of the Companys subsidiaries outside of the U.S. are subject to the terms of individual employment agreements. One of the Companys wholly owned subsidiaries has approximately 1,400 employees in the United Kingdom, about 20% of whom are members of the Unite trade union. Employees of the Companys subsidiaries in Vienna, Austria; Frankfurt, Germany; and Nürnberg, Germany are also represented by local works councils and a portion of the Frankfurt workforce is covered by a union contract. Certain employees of the Companys Korean subsidiary are represented by a Labor-Management council. Employees in certain other countries are also covered by the terms of industry-specific national collective agreements. None of the Companys employees are otherwise represented by any labor organization in the U.S. The Company believes that its relations with its employees and the labor organizations identified above are in good standing.
Available Information
FDCs principal executive offices are located at 5565 Glenridge Connector, N.E, Suite 2000, Atlanta, Georgia 30342, telephone (404) 890-2000. The Companys annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available free of charge to shareholders and other interested parties through the Investor Relations portion of the Companys web site at http://investor.firstdata.com as soon as reasonably practical after they are filed with the Securities and Exchange Commission (SEC). The SEC maintains a web site, www.sec.gov, which contains reports and other information filed electronically with the SEC by the Company. The Companys Audit Committee Charter, Governance, Compensation and Nominations Committee Charter, Technology and Investment Committee Charter, and Code of Ethics for Senior Financial Officers are available without charge through the About First Data, Investor Relations, Corporate Governance portion of the Companys investor relations web site, listed above, or by writing to the attention of Investor Relations at the address listed above.
Executive Officers of the Company
Refer to Item 10 of this Form 10-K.
Government Regulations
Various aspects of the Companys service areas are subject to U.S. federal, state and local regulation, as well as regulation outside the U.S. Failure to comply with regulations may result in the suspension or revocation of licenses or registrations, the limitation, suspension or termination of service, and/or the imposition of civil and criminal penalties, including fines. Certain of the Companys services also are subject to rules promulgated by various payment networks, such as Visa, MasterCard and Discover, as more fully described below.
Dodd-Frank Act. In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) was signed into law in the United States. The Dodd-Frank Act will result in significant structural and other changes to the regulation of the financial services industry. Among other things, the Dodd-Frank Act imposes a new regulatory regime on card issuers by establishing a new executive agency within the Federal Reserve (known as the Consumer Financial Protection Bureau) to regulate consumer financial products and services (including many offered by the Companys customers). Separately, under the Dodd-Frank Act, debit interchange transaction fees that a card issuer or payment card network receives or charges for an electronic debit transaction will now be regulated by the Federal Reserve Board and must be reasonable and proportional to the cost incurred by the card issuer in authorizing, clearing and settling the transaction. On June 29, 2011, the Federal Reserve Board announced the final rules governing debit card interchange fees, and routing and exclusivity restrictions as well as a proposed rule governing the fraud prevention adjustment in response to Section 1075 of the Dodd-Frank Act. Effective October 1, 2011, debit interchange rates for card
issuers with assets of $10 billion or more are capped at the sum of $.21 per transaction and an ad valorem component of 5 basis points to reflect a portion of the issuers fraud losses plus, for qualifying issuers, an additional $.01 per transaction in debit interchange for fraud prevention costs. In addition, the new regulations ban debit payment card networks from prohibiting an issuer from contracting with any other payment card network that may process an electronic debit transaction involving an issuers debit cards and prohibit card issuers and payment networks from inhibiting the ability of merchants to direct the routing of debit card transactions over any network that can process the transaction. On April 1, 2013, the ban on network exclusivity arrangements becomes effective for non-reloadable prepaid card and healthcare prepaid issuers. Additionally, each debit card issuer must participate in 2 unaffiliated networks beginning April 1, 2012 and each debit payment card network must comply with applicable exclusivity requirements by October 1, 2011. The Dodd-Frank Act provides two self-executing statutory provisions that became effective on July 22, 2010. The first provision allows merchants to set minimum dollar amounts (not to exceed $10) for the acceptance of a credit card (while federal governmental entities and institutions of higher education may set maximum amounts for the acceptance of credit cards). The second provision allows merchants to provide discounts or incentives to entice consumers to pay with an alternative payment method, such as cash, checks or debit cards. Finally, the Federal Reserve Board is required to develop regulations for additional oversight of certain systemically important financial institutions and non-bank financial companies. At this point it is unclear whether the Company would be subject to additional oversight. Within the Retail and Alliance Services segment the Company experienced some transitory benefit due mostly to lower debit interchange rates, however, the overall impact on the Company is difficult to estimate as it will take some time for the market to react and adjust to the new regulations.
Association and network rules. A number of the Companys subsidiaries are subject to payment network rules of MasterCard, Visa and other associations. Several of the Companys subsidiaries in the International segment are members of MasterCard and/or Visa in the countries where the subsidiaries do business and are subject to the rules of such associations. First Data Resources, LLC, First Data Merchant Services Corporation, and STAR Network, along with a number of the Companys subsidiaries in the International segment are registered with Visa and/or MasterCard as service providers for member institutions. In those situations where the Company serves as a service provider to member institutions, the Company is not an issuer or an acquirer under Visas and MasterCards rules. In addition, First Data Canada Merchant Solutions ULC is a member of Interac and subject to its rules and First Data Global Services Limited is a subscriber to PULSE and is therefore subject to rules applicable to its members.
Various subsidiaries of the Company are also processor level members of numerous debit and electronic benefits transaction (EBT) networks, such as Star Networks, Inc., Star Processing Inc., First Data Merchant Services Corporation, and Concord Transaction Services, LLC, or are otherwise subject to various network rules in connection with processing services and other services they provide to their customers and a number of the Companys subsidiaries are providing processing and other services related to ATM deployment to customers. As such, the Company is subject to applicable card association, network and national scheme rules, which could subject the Company to a variety of fines or penalties that may be levied by the card associations, banking associations or networks for certain acts and/or omissions by the Company, its sponsorees, acquirer customers, processing customers and/or merchants. The Company mitigates this risk by maintaining an extensive card association and network compliance function. The Company is also subject to network operating rules promulgated by the National Automated Clearing House Association relating to payment transactions processed by the Company using the Automated Clearing House Network and to various state and Federal laws regarding such operations, including laws pertaining to EBT.
Cashcard Australia Limited (Cashcard) is a member of the Australian Consumer Electronic Clearing System (CECS), which is a debit payment system regulated by network operating rules established and administered by Australian Payments Clearing Association Limited and which facilitates the clearing and settlement of ATM payments in Australia and a member of EFTPOS Payments Australia Limited (EPAL), which is a debit payment system regulating Electronic Funds Transfer at Point of Sale (EFTPOS) payments in Australia. Cashcard is also a member of the ATM Access Company Limited and the EFTPOS Access Company Limited which respectively administers reciprocal access and interchange arrangements for ATMs and EFTPOS in Australia. The network operating rules, ATM Access Code and EFTPOS Access Code impose a variety of sanctions, including suspension or termination of membership and fines for non-compliance. Cashcard also operates its own network of members, regulated by rules promulgated by Cashcard, which facilitates access to CECS and EPAL for Cashcards member institutions. To enable Cashcard to settle in CECS direct with banks and financial institutions, Cashcard maintains an Exchange Settlement Account (ESA) which is supervised by the Reserve Bank of Australia through its delegate, the Australian Prudential Regulatory Authority (APRA), and which requires Cashcard to adhere to conditions imposed by APRA, such as maintaining a minimum balance in the ESA.
The Companys subsidiary in Germany, TeleCash GmbH & Co. KG (TeleCash), is certified and regulated as a processor for domestic German debit card transactions by the Deutsche Kreditwirtschaft (DK), the German banking association. Failure to comply with the technical requirements set forth by the DK may result in suspension or termination of services.
Banking regulation. Because a number of the Companys subsidiary businesses, including card issuer processing, merchant processing and STAR Network businesses as well as those subsidiaries engaged in the business of ATM deployment, provide data processing services for financial institutions, they are subject to examination by the Federal Financial Institutions Examination
Council, an interagency body comprised of the federal bank and thrift regulators and the National Credit Union Association and national regulatory bodies.
FDR Limited (FDRL) in the United Kingdom is authorized and regulated by the Financial Services Authority (FSA). The FSA is the single regulatory authority for the full range of financial services in the United Kingdom, including banking, investment, mortgage and insurance mediation services. FDRL is authorized by the FSA to carry on an insurance mediation business for the purpose of arranging insurance to its issuer customers cardholders. As an FSA regulated firm, FDRL is required to meet certain prudential and conduct of business requirements.
In the European Union, Directive 2007/60 EC, the Payment Services Directive, was released by the European Parliament and by the Council on November 13, 2007, setting a framework for future regulation of bodies and corporations such as the national central banks, financial institutions, e-money institutes and payment institutions. The Payment Services Directive was implemented in most EU member states via national legislation effective November 1, 2009. As a result of the implementation of the Payment Services Directive, a number of the Companys subsidiaries in the International segment have applied for and received a Payment Institution License in the countries where such subsidiaries do business. As licensed payment institutions, the relevant entities are subject to regulation and oversight in the applicable member state, which includes amongst other things, the requirement to maintain specified regulatory capital.
First Data Loan Company Canada (FDLCC), through which the Company conducts some of its merchant acquiring activities in Canada, is a Canadian loan company subject to regulation, examination and oversight by the Office of the Superintendent of Financial Institutions and to various provincial registration and licensing requirements. First Data Trust Company, LLC (FDTC), engages in trust activities previously conducted by the trust department of a former banking subsidiary of the Company. FDTC is subject to regulation, examination and oversight by the Division of Banking of the Colorado Department of Regulatory Agencies. These financial institution subsidiaries are also subject to various national and local banking and consumer protection laws and regulations that apply to the activities they conduct. Since FDTC is not a bank under the Bank Holding Company Act of 1956, as amended (BHCA), and FDLCC does not operate any banking offices in the U.S. or do business in the U.S., except such business as may be incidental to its activities outside the U.S., the Companys affiliation with FDTC and FDLCC does not cause it to be regulated as a bank holding company or financial holding company under the BHCA.
TeleCheck Payment Systems Limited in Australia holds an Australian Financial Services License under Chapter 7 of the Corporations Act, which regulates the provision of a broad range of financial services in Australia. The license, issued by the Australian Securities and Investments Commission, entitles the Australian operations of TeleCheck to deal in and provide general financial product advice about its check guarantee and check verification product (which falls within the definition of a risk management product under the legislation). The License and the Act requires that TeleChecks Australian operations issue product documents that comply with specific content requirements and follow prescribed procedures failing which penalties apply.
Further, in the Companys International segment, several subsidiaries provide services such as factoring or settlement that make them subject to regulation by local banking agencies, including the National Bank of Slovakia, the National Bank of Poland and the German Federal Financial Supervision Agency.
Privacy and information security regulations. Each of the Companys segments provides services that may be subject to various state, federal and foreign privacy laws and regulations. Relevant federal privacy laws include the Gramm-Leach-Bliley Act, which applies directly to a broad range of financial institutions and indirectly (or in some instances directly) to companies that provide services to financial institutions. Relevant foreign privacy laws include Directive 95/46 EC of the European Parliament and of the Council of 24 October 1995, as such directive is implemented in each member state of the European Union, however each member state has its own data protection and privacy laws which in some cases may be more restrictive than the Directive and impose additional duties on companies regarding registration/notification requirements and handling/transfer of personal data; the Australian Privacy Act of 1988; and the Personal Information Protection and Electronic Documents Act in Canada. These laws and their implementing regulations restrict the collection, processing, storage, use and disclosure of personal information, requires notice to individuals of privacy practices and provides individuals with certain rights to prevent use and disclosure of protected information. These laws also impose requirements for safeguarding and proper destruction of personal information through the issuance of data security standards or guidelines. In addition, there are state laws restricting the ability to collect and utilize certain types of information such as Social Security and drivers license numbers. Certain state laws impose similar privacy obligations as well as, in certain circumstances, obligations to provide notification to affected individuals, state officers and consumer reporting agencies, as well as businesses and governmental agencies that own data, of security breaches of computer databases that contain personal information.
Credit reporting and debt collections regulations. TeleCheck Services Inc. (TeleCheck) is subject to the Federal Fair Credit Reporting Act (FCRA) and various similar state laws based on TeleChecks maintenance of a database containing the check-writing histories of consumers and the use of that information in connection with its check verification and guarantee services.
The collection business within TRS Recovery Services, Inc. (TRS) is subject to the Fair Debt Collection Practices Act and various similar state laws. TRS has licenses in a number of states in order to engage in collection in those states. In the United
Kingdom, FDRL has a license under the Consumer Credit Act of 1974 (CCA) to enable it to undertake, among other things, credit administration and debt collections activities on behalf of its card issuing customers through calls and correspondence with the cardholders. FDRL is also licensed under the CCA to carry on the activity of a consumer hire business for the purpose of leasing terminals to merchants. The CCA establishes a comprehensive code of regulations for the origination, administration and enforcement of credit and hire agreements.
TeleCheck or TRS may become subject to further regulation in the future as legislatures and government agencies, both federal and state, enact additional legislation or issue regulations aimed at regulating collection activities, the collection, storage and use of data and databases regarding consumers. In particular, laws regulating activities with respect to current or emerging technology such as the use of automated dialers or pre-recorded messaging or calls to cellular phones could impair the collection by TRS of returned checks, including those purchased under TeleChecks guarantee services. Moreover, reducing or eliminating access to and use of information on drivers licenses, requiring blocking of access to credit reports or scores, mandating score or scoring methodology disclosure and proscribing the maintenance or use of consumer databases, including a consumers rights to affect the usable content of databases, could reduce the effectiveness of TeleChecks risk management tools or otherwise increase its costs of doing business. Such legislation could also affect the business of First Data Solutions, Inc., which provides access to non-FCRA data for identity verification and fraud-prevention purposes, by imposing new regulatory requirements or restricting the availability and completeness of consumer data.
In addition, several subsidiaries in the Companys International segment are subject to comparable local laws regarding collection activities and obtaining credit reports.
Anti-money laundering and counter terrorist regulation. Certain of the Companys businesses are subject to regulation by the U.S., including anti-money laundering laws and regulations, including the Bank Secrecy Act, as amended by the USA PATRIOT Act of 2001 (collectively, the BSA). The BSA, among other things, requires money services businesses (such as money transmitters, issuers of money orders and official checks, and providers of prepaid access) to develop and implement risk-based anti-money laundering programs, report large cash transactions and suspicious activity, and to maintain transaction records. Recently, the Financial Crimes Enforcement Network, the agency that enforces the BSA, finalized its rule that defines Stored Value under the BSA, and places requirements on entities that are either the Provider or Seller of Prepaid Access. Money Network, a First Data entity, will be the Provider of Prepaid Access for various open loop prepaid programs for which it is the Program Manager.
The Company is also subject to certain economic and trade sanctions programs that are administered by the Treasury Departments Office of Foreign Assets Control (OFAC) that prohibit or restrict transactions to or from or dealings with specified countries, their governments, and in certain circumstances, their nationals, and with individuals and entities that are specially-designated nationals of those countries, narcotics traffickers, and terrorists or terrorist organizations.
Similar anti-money laundering and counter terrorist financing and proceeds of crime laws apply to movements of currency and payments through electronic transactions and to dealings with persons specified in lists maintained by the country equivalents to the OFAC lists in several other countries and require specific data retention obligations to be observed by intermediaries in the payment process. The Companys businesses in those jurisdictions are subject to those data retention obligations.
The Company has developed and is enhancing global compliance programs to monitor and address legal and regulatory requirements and developments.
Money transmission and payment instrument licensing and regulation. The Company is subject to various U.S. federal, state and foreign laws and regulations governing money transmission and the issuance and sale of payment instruments.
In the U.S., most states license money transmitters and issuers of payment instruments. Many states exercise authority over the operations of the Companys services related to money transmission and payment instruments and, as part of this authority, subject the Company to periodic examinations. Many states require, among other things, that proceeds from money transmission activity and payment instrument sales be invested in high-quality marketable securities prior to the settlement of the transactions. Such licensing laws also may cover matters such as regulatory approval of consumer forms, consumer disclosures and the filing of periodic reports by the licensee, and require the licensee to demonstrate and maintain levels of net worth. Many states also require money transmitters, issuers of payment instruments and their agents to comply with federal and/or state anti-money laundering laws and regulations.
Government agencies may impose new or additional rules on money transmission and sales of payment instruments, including regulations which (i) impose additional identification, reporting or recordkeeping requirements; (ii) limit the entities capable of providing the sale of payment instruments; and (iii) require additional consumer disclosures.
Escheat regulations. The Company is subject to unclaimed or abandoned property (escheat) laws in the U.S. and abroad which require the Company to turn over to certain government authorities the property of others held by the Company that has been unclaimed for a specified period of time such as, in the Integrated Payment Systems business, payment instruments that have not been presented for payment or, in the Retail and Alliance Services segment, account balances that cannot be returned to a merchant
following discontinuation of its relationship with the Company. A number of the Companys subsidiaries hold property subject to escheat laws and the Company has an ongoing program to comply with those laws. The Company is subject to audit by individual U.S. states with regard to the Companys escheatment practices.
Other. Stored-value services offered to issuers by First Data Prepaid Services (FDPS) in the U.S., and by First Datas International businesses (First Data International) outside the U.S. are subject to various federal, state and foreign laws and regulations, which may include laws and regulations related to consumer and data protection, licensing, escheat, anti-money laundering, banking, trade practices and competition and wage and employment. For example, the Credit Card Accountability Responsibility and Disclosure Act of 2009 created new requirements applicable to general-use prepaid cards, store gift cards, and electronic gift certificates effective August 22, 2010, and the Federal Reserve Board published on March 23, 2010 final rules to amend Regulation E with respect to such cards and electronic certificates effective August 22, 2010. These laws and regulations are evolving, unclear and sometimes inconsistent and subject to judicial and regulatory challenge and interpretation, and therefore the extent to which these laws and rules have application to, and their impact on, FDPS, First Data International, financial institutions, merchants or others is in flux. At this time the Company is unable to determine the impact that the clarification of these laws and their future interpretations, as well as new laws, may have on FDPS, First Data International, financial institutions, merchants or others in a number of jurisdictions. These services may also be subject to the rules and regulations of the various international, domestic and regional schemes, Networks and Associations in which FDPS, First Data International and the card issuers participate. These schemes, Networks or Associations may, generally in their discretion, modify these rules and regulations and such modifications could also impact FDPS, First Data International, financial institutions, merchants and others.
In addition, the Housing Assistance Tax Act of 2008 included an amendment to the Internal Revenue Code that requires information returns to be made for each calendar year by merchant acquiring entities and third-party settlement organizations with respect to payments made in settlement of payment card transactions and third-party payment network transactions occurring in that calendar year. This requirement to make information returns applies to returns for calendar years beginning after December 31, 2010. Reportable transactions are also subject to backup withholding requirements. The Company could be liable for penalties if it is not in compliance with the new regulations. In addition, these new regulations will require the Company to incur additional costs to modify its systems so that the Company may provide compliant services but may also provide opportunities for the Company to offer additional revenue producing services to its customers.
ITEM 1A. RISK FACTORS
The following are certain risks that could affect the Companys business and its results of operations. The risks identified below are not all encompassing but should be considered in establishing an opinion of the Companys future operations.
The Companys substantial leverage could adversely affect its ability to raise additional capital to fund its operations, limit the Companys ability to react to changes in the economy or its industry, expose the Company to interest rate risk to the extent of its variable rate debt and prevent the Company from meeting its debt obligations.
The Company is highly leveraged. The Companys high degree of leverage could have important consequences, including:
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increasing the Companys vulnerability to adverse economic, industry or competitive developments; |
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requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on the Companys indebtedness, therefore reducing the Companys ability to use its cash flow to fund the Companys operations, capital expenditures and future business opportunities; |
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exposing the Company to the risk of increased interest rates because certain of its borrowings, including and most significantly borrowings under the Companys senior secured credit facilities, are at variable rates of interest; |
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making it more difficult for the Company to satisfy its obligations with respect to its indebtedness, and any failure to comply with the obligations of any of the Companys debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under the indenture governing the notes and the agreements governing such other indebtedness; |
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restricting the Company from making strategic acquisitions or causing the Company to make non-strategic divestitures; |
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making it more difficult for the Company to obtain network sponsorship and clearing services from financial institutions; |
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limiting the Companys ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes; and |
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limiting the Companys flexibility in planning for, or reacting to, changes in the Companys business or market conditions and placing the Company at a competitive disadvantage compared to its competitors who are less highly leveraged and who, therefore, may be able to take advantage of opportunities that the Companys leverage prevents it from exploiting. |
The first significant amount of the Companys term loan indebtedness matures in September 2014 and consists of indebtedness under its senior secured term loan facility. The Companys senior secured revolving credit facility has $499.1 million in commitments that mature in September 2013 and $1,016.2 million in commitments that mature between June 2015 and September 2016, depending upon certain conditions. The Company may not be able to refinance its senior secured credit facilities or its other existing indebtedness because of the Companys high level of debt, debt incurrence restrictions under its debt agreements or because of adverse conditions in credit markets generally.
Despite the Companys high indebtedness level, the Company and its subsidiaries still may be able to incur significant additional amounts of debt, which could further exacerbate the risks associated with the Companys substantial indebtedness.
The Company and its subsidiaries may be able to incur substantial additional indebtedness in the future. Although the indentures governing the Companys senior secured notes, senior second lien notes, senior notes, PIK toggle senior second lien notes, and senior subordinated notes; the indenture governing the senior PIK notes of First Data Holdings Inc.; and the Companys senior secured credit facilities contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and under certain circumstances, the amount of indebtedness that could be incurred in compliance with these restrictions could be substantial. If new debt is added to the Companys and its subsidiaries existing debt levels, the related risks that the Company will face would increase.
Global economics, political and other conditions may adversely affect trends in consumer spending, which may adversely impact the Companys revenue and profitability.
The global electronic payments industry depends heavily upon the overall level of consumer, business and government spending. A sustained deterioration in the general economic conditions, particularly in the United States or Europe, or increases in interest rates in key countries in which the Company operates may adversely affect the Companys financial performance by reducing the number or average purchase amount of transactions involving payment cards. A reduction in the amount of consumer spending could result in a decrease of the Companys revenue and profits.
A weakening in the economy could also force some retailers to close resulting in exposure to potential credit losses and transaction declines and the Company earning less on transactions due also to a potential shift to large discount merchants. Additionally, credit card issuers may reduce credit limits and be more selective with regard to whom they issue credit cards. Changes in economic conditions could adversely impact future revenues and profits of the Company and result in a downgrade of its debt ratings which may lead to termination or modification of certain contracts and make it more difficult for the Company to obtain new business.
Material breaches in security of the Companys systems may have a significant effect on the Companys business.
The uninterrupted operation of the Companys information systems and the confidentiality of the customer/consumer information that resides on such systems are critical to the successful operations of the Companys business. The Company has security, backup and recovery systems in place, as well as a business continuity plan to ensure the system will not be inoperable. The Company also has what it deems sufficient security around the system to prevent unauthorized access to the system. However, the Companys visibility in the global payments industry may attract hackers to conduct attacks on the Companys systems that could compromise the security of the Companys data. An information breach in the system and loss of confidential information such as credit card numbers and related information could have a longer and more significant impact on the business operations than a hardware failure. The loss of confidential information could result in losing the customers confidence and thus the loss of their business, as well as imposition of fines and damages.
The Companys debt agreements contain restrictions that will limit the Companys flexibility in operating its business.
The indentures governing the Companys senior secured notes, senior second lien notes, senior notes, PIK toggle senior second lien notes, and senior subordinated notes; the indenture governing senior PIK notes of First Data Holdings Inc.; and the Companys senior secured credit facilities contain various covenants that limit the Companys ability to engage in specified types of transactions. These covenants limit the Companys and its restricted subsidiaries ability to, among other things:
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incur additional indebtedness or issue certain preferred shares; |
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pay dividends on, repurchase or make distributions in respect of the Companys capital stock or make other restricted payments; |
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make certain investments; |
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sell certain assets; |
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create liens; |
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consolidate, merge, sell or otherwise dispose of all or substantially all of the Companys assets; |
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enter into certain transactions with the Companys affiliates; and |
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designate the Companys subsidiaries as unrestricted subsidiaries. |
A breach of any of these covenants could result in a default under one or more of these agreements, including as a result of cross default provisions and, in the case of the revolving credit facility, permit the lenders to cease making loans to the Company. Upon the occurrence of an event of default under the Companys senior secured credit facilities, the lenders could elect to declare all amounts outstanding under the Companys senior secured credit facilities to be immediately due and payable and terminate all commitments to extend further credit. Such actions by those lenders could cause cross defaults under the Companys other indebtedness. If the Company was unable to repay those amounts, the lenders under the Companys senior secured credit facilities could proceed against the collateral granted to them to secure that indebtedness and the Companys secured and second lien notes. The Company has pledged a significant portion of the Companys assets as collateral under the Companys senior secured credit facilities. If the lenders under the senior secured credit facilities accelerate the repayment of borrowings, the Company may not have sufficient assets to repay the Companys senior secured credit facilities and senior secured notes as well as the Companys second lien notes and unsecured indebtedness.
The ability to adopt technology to changing industry and customer needs or trends may affect the Companys competitiveness or demand for the Companys products, which may adversely affect the Companys operating results.
Changes in technology may limit the competitiveness of and demand for the Companys services. The Companys businesses operate in industries that are subject to technological advancements, developing industry standards and changing customer needs and preferences. Also, the Companys customers continue to adopt new technology for business and personal uses. The Company must anticipate and respond to these industry and customer changes in order to remain competitive within the Companys relative markets. For example, the ability to adopt technological advancements surrounding point-of-sale (POS) technology available to merchants could have an impact on the Companys International and Retail and Alliance Services business. The Companys inability to respond to new competitors and technological advancements could impact all of the Companys businesses.
Changes in card association and debit network fees or products could increase costs or otherwise limit the Companys operations.
From time to time, card associations and debit networks increase the organization and/or processing fees (known as interchange fees) that they charge. It is possible that competitive pressures will result in the Company absorbing a portion of such increases in the future, which would increase its operating costs, reduce its profit margin and adversely affect its business, operating results and financial condition. Furthermore, the rules and regulations of the various card associations and networks prescribe certain capital requirements. Any increase in the capital level required would further limit the Companys use of capital for other purposes.
Changes in laws, regulations and enforcement activities may adversely affect the products, services and markets in which the Company operates.
The Company and its customers are subject to regulations that affect the electronic payments industry in the many countries in which the Companys services are used. In particular, the Companys customers are subject to numerous regulations applicable to banks, financial institutions and card issuers in the United States and abroad, and, consequently, the Company is at times affected by these federal, state and local regulations. The U.S. Congress and governmental agencies have increased their scrutiny of a number of credit card practices, from which some of the Companys customers derive significant revenue. Regulation of the payments industry, including regulations applicable to the Company and its customers, has increased significantly in recent years. Failure to comply with regulations may result in the suspension or revocation of licenses or registrations, the limitation, suspension or termination of services, and/or the imposition of civil and criminal penalties, including fines which could have an adverse effect on the Companys results of operation and financial condition. The Company is subject to U.S. and international financial services regulations, a myriad of consumer protection laws, escheat regulations and privacy and information security regulations to name only a few. Changes to legal rules and regulations, or interpretation or enforcement thereof, could have a negative financial effect on the Company. In particular, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), which was signed into law in July 2010, significantly changes the U.S. financial regulatory system, including creating a new executive agency within the Federal Reserve Board to regulate consumer financial products and services (including many offered by the Companys customers), restricting debit card fees paid by merchants to issuer banks and allowing merchants to offer discounts for different payment methods. On June 29, 2011, the Federal Reserve Board announced the final rules governing debit card interchange fees, and routing and exclusivity restrictions as well as a proposed rule governing the fraud prevention adjustment in response to the Dodd-Frank Act. Within the Retail and Alliance Services segment the Company experienced some transitory benefit due mostly to lower debit interchange rates, however, the overall impact of the Dodd-Frank Act on the Company is difficult to estimate because it will take some time for the market to react and adjust to the new regulations and additional regulations may be developed by the newly created Bureau of Consumer Financial Protection, with respect to consumer financial products and services that impact the Company or its customers. The Federal Reserve Board also needs to develop regulations for approval by the Financial Stability Oversight Council with respect to criteria for, and additional oversight of, certain systemically important financial institutions. At this point it is unclear as to whether the Company would be subject to additional oversight or what such oversight may entail. Each of the proposed regulations may adversely affect the Companys business or operations, directly or indirectly (if, for example, the Companys customers business and operations are adversely affected). In addition, an inadvertent failure by the Company to comply with laws and regulations, as well as rapidly evolving social expectations of corporate fairness, could damage the Companys reputation or brands. Furthermore, the Company is subject to tax laws in each jurisdiction where it does business. Changes in tax laws or their interpretations could decrease the value of revenues the Company receives, the value of tax loss carryforwards and tax credits recorded on the Companys balance sheet and the amount of the Companys cash flow and have a material adverse impact on the Companys business.
The Company depends, in part, on its merchant relationships and alliances to grow the Companys Retail and Alliance Services business. If the Company is unable to maintain these relationships and alliances, the Companys business may be adversely affected.
Growth in the Companys Retail and Alliance Services business is derived primarily from acquiring new merchant relationships, new and enhanced product and service offerings, cross selling products and services into existing relationships, the shift of consumer spending to increased usage of electronic forms of payment and the strength of the Companys alliance partnerships with banks and financial institutions and other third parties. A substantial portion of the Companys business is conducted through alliances with banks and other institutions. The Companys alliance structures take on different forms, including consolidated subsidiaries, equity method investments and revenue sharing arrangements. Under the alliance program, the Company and a bank or other institution form an alliance, either contractually or through a separate legal entity. Merchant contracts may be contributed to the alliance by the Company and/or the bank or institution. The banks and other institutions generally provide card association sponsorship, clearing and settlement services. These institutions typically act as a merchant referral source when the institution has an existing banking or other relationship. The Company provides transaction processing and related functions. Both alliance partners may provide management, sales, marketing, and other administrative services. The alliance structure allows the Company to be the processor for multiple financial institutions, any one of which may be selected by the merchant as their bank partner. The Company relies on the continuing growth of its merchant relationships, alliances and other distribution channels. There can be no guarantee that this growth will continue. The loss of merchant relationships or alliance and financial institution partners could negatively impact the Companys business and result in a reduction of the Companys revenue and profit.
The Company relies on various financial institutions to provide clearing services in connection with its settlement activities. If the Company is unable to maintain clearing services with these financial institutions and is unable to find a replacement, the Companys business may be adversely affected.
The Company relies on various financial institutions to provide clearing services in connection with the settlement activities of the Company. If such financial institutions should stop providing clearing services the Company must find other financial institutions to provide those services. If the Company is unable to find a replacement financial institution the Company may no longer be able to provide processing services to certain customers which could negatively impact the revenue and earnings of the Company.
Acquisitions and integrating such acquisitions create certain risks and may affect the Companys operating results.
The Company has been an active business acquirer both in the United States and internationally, and may continue to be active in the future. The acquisition and integration of businesses involves a number of risks. The core risks are in the areas of valuation (negotiating a fair price for the business based on inherently limited diligence) and integration (managing the complex process of integrating the acquired companys people, products, technology and other assets so as to realize the projected value of the acquired company and the synergies projected to be realized in connection with the acquisition). In June 2009, the Company formed a new alliance, Banc of America Merchant Services, LLC (BAMS), with Bank of America, N.A. Processing, technology and operational synergies of BAMS are dependent upon the successful migration of the Banks legacy platform to the Company. Any failure to migrate the platform or material adverse impact to merchants from potential migration issues could negatively impact the Companys business and result in a reduction of the Companys revenue and profit.
In addition, international acquisitions often involve additional or increased risks including, for example:
· |
managing geographically separated organizations, systems and facilities; |
· |
integrating personnel with diverse business backgrounds and organizational cultures; |
· |
complying with foreign regulatory requirements; |
· |
fluctuations in currency exchange rates; |
· |
enforcement of intellectual property rights in some foreign countries; |
· |
difficulty entering new foreign markets due to, among other things, customer acceptance and business knowledge of these new markets; and |
· |
general economic and political conditions. |
The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of one or more of the Companys combined businesses and the possible loss of key personnel. The diversion of managements attention and any delays or difficulties encountered in connection with acquisitions and the integration of the two companies operations could have an adverse effect on the Companys business, results of operations, financial condition or prospects.
Future consolidation of client financial institutions or other client groups may adversely affect the Companys financial condition.
The Company has experienced the negative impact of the substantial bank industry consolidation in recent years. Bank industry consolidation impacts existing and potential clients in the Companys service areas, primarily in Financial Services and Retail and Alliance Services. The Companys alliance strategy could be negatively impacted as a result of consolidations, especially where the banks involved are committed to their internal merchant processing businesses that compete with the Company. Bank consolidation has led to an increasingly concentrated client base in the industry, resulting in a changing client mix for Financial Services as well as increased price compression. Further consolidation in the bank industry or other client base could have a negative impact on the Company.
The Company is subject to the credit risk that its merchants will be unable to satisfy obligations for which the Company may also be liable.
The Company is subject to the credit risk of its merchants being unable to satisfy obligations for which the Company also may be liable. For example, the Company and its merchant acquiring alliances are contingently liable for transactions originally acquired by the Company that are disputed by the card holder and charged back to the merchants. If the Company or the alliance are unable to collect this amount from the merchant, due to the merchants insolvency or other reasons, the Company or the alliance will bear the loss for the amount of the refund paid to the cardholder. The Company has an active program to manage its credit risk and often mitigates its risk by obtaining collateral. Notwithstanding the Companys program for managing its credit risk, it is possible that a default on such obligations by one or more of the Companys merchants could have a material adverse effect on the Companys business.
Changes in credit card association or other network rules or standards could adversely affect the Companys business.
In order to provide the Companys transaction processing services, several of the Companys subsidiaries are registered with Visa and MasterCard and other networks as members or service providers for member institutions. As such, the Company and many of its customers are subject to card association and network rules that could subject the Company or its customers to a variety of fines or penalties that may be levied by the card associations or networks for certain acts or omissions by the Company, acquirer customers, processing customers and merchants. Visa, MasterCard and other networks, some of which are the Companys competitors, set the standards with respect to which the Company must comply. The termination of the Companys member registration or the Companys status as a certified service provider, or any changes in card association or other network rules or standards, including interpretation and implementation of the rules or standards, that increase the cost of doing business or limit the Companys ability to provide transaction processing services to or through the Companys customers, could have an adverse effect on the Companys business, operating results and financial condition.
The Companys business may be adversely affected by risks associated with foreign operations.
The Company is subject to risks related to the changes in currency rates as a result of its investments in foreign operations and from revenues generated in currencies other than the U.S. dollar. Revenue and profit generated by international operations will increase or decrease compared to prior periods as a result of changes in foreign currency exchange rates. From time to time, the Company utilizes foreign currency forward contracts or other derivative instruments to mitigate the cash flow or market value risks associated with foreign currency denominated transactions. However, these hedge contracts may not eliminate all of the risks related to foreign currency translation. Furthermore, the Company may become subject to exchange control regulations that might restrict or prohibit the conversion of its other revenue currencies into U.S. dollars. The occurrence of any of these factors could decrease the value of revenues the Company receives from its international operations and have a material adverse impact on the Companys business.
Increase in interest rates may negatively impact the Companys operating results and financial condition.
Certain of the Companys borrowings, including borrowings under the Companys senior secured credit facilities to the extent the interest rate is not fixed by an interest rate swap, are at variable rates of interest. An increase in interest rates would have a negative impact on the Companys results of operations by causing an increase in interest expense.
As of December 31, 2011, the Company had $11.22 billion aggregate principal amount of variable rate long-term indebtedness, of which interest rate swaps fix the interest rate on $5 billion in notional amount prior to the impact of $750 million of fixed to floating interest rate swaps. As a result, as of December 31, 2011, the impact of a 100 basis point increase in interest rates would increase the Companys annual interest expense by approximately $70 million. See the discussion of the Companys interest rate swap transactions in Note 6 to the Companys Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.
Unfavorable resolution of tax contingencies could adversely affect the Companys tax expense.
The Companys tax returns and positions are subject to review and audit by federal, state, local and international taxing authorities. An unfavorable outcome to a tax audit could result in higher tax expense, thereby negatively impacting the Companys results of operations. The Company has established contingency reserves for material, known tax exposures relating to deductions, transactions and other matters involving some uncertainty as to the proper tax treatment of the item. These reserves reflect what the Company believes to be reasonable assumptions as to the likely final resolution of each issue if raised by a taxing authority. While the Company believes that the reserves are adequate to cover reasonably expected tax risks, there is no assurance that, in all instances, an issue raised by a tax authority will be finally resolved at a financial cost not in excess of any related reserve. An unfavorable resolution, therefore, could negatively impact the Companys effective tax rate, financial position, results of operations and cash flows in the current and/or future periods.
Failure to protect the Companys intellectual property rights and defend itself from potential patent infringement claims may diminish the Companys competitive advantages or restrict it from delivering the Companys services.
The Companys trademarks, patents and other intellectual property are important to its future success. The FIRST DATA trademark and trade name and the STAR trademark and trade name are intellectual property rights which are individually material to the Company. These trademarks and trade names are widely recognized and associated with quality and reliable service. Loss of the proprietary use of the FIRST DATA or STAR trademarks and trade names or a diminution in the perceived quality associated with them could harm the growth of the Companys businesses. The Company also relies on proprietary technology. It is possible that others will independently develop the same or similar technology. Assurance of protecting its trade secrets, know-how or other proprietary information cannot be guaranteed. The Companys patents could be challenged, invalidated or circumvented by others and may not be of sufficient scope or strength to provide the Company with any meaningful protection or advantage. If the Company was unable to maintain the proprietary nature of its technologies, the Company could lose competitive advantages and be materially adversely affected. The laws of certain foreign countries in which the Company does business or contemplates doing business in the future do not recognize intellectual property rights or protect them to the same extent as do the laws of the United States. Adverse determinations in judicial or administrative proceedings could prevent the Company from selling the Companys services or prevent the Company from preventing others from selling competing services, and thereby may have a material adverse affect on the business and results of operations. Additionally, claims have been made, are currently pending, and other claims may be made in the future, with regards to the Companys technology infringing on a patent or other intellectual property rights. Unfavorable resolution of these claims could either result in the Company being restricted from delivering the related service or result in a settlement that could be material to the Company.
The Company is the subject of various legal proceedings which could have a material adverse effect on the Companys revenue and profitability.
The Company is involved in various litigation matters. The Company is also involved in or is the subject of governmental or regulatory agency inquiries or investigations from time to time. If the Company is unsuccessful in its defense in the litigation matters, or any other legal proceeding, it may be forced to pay damages or fines and/or change its business practices, any of which could have a material adverse effect on the Companys revenue and profitability. For more information about the Companys legal proceedings, see Item 3: Legal Proceedings herein.
The ability to recruit, retain and develop qualified personnel is critical to the Companys success and growth.
All of the Companys businesses function at the intersection of rapidly changing technological, social, economic and regulatory developments that requires a wide ranging set of expertise and intellectual capital. For the Company to successfully compete and grow, it must retain, recruit and develop the necessary personnel who can provide the needed expertise across the entire spectrum of its intellectual capital needs. In addition, the Company must develop its personnel to provide succession plans capable of maintaining continuity in the midst of the inevitable unpredictability of human capital. However, the market for qualified personnel is competitive and the Company may not succeed in recruiting additional personnel or may fail to effectively replace current personnel who depart with qualified or effective successors. The Companys effort to retain and develop personnel may also result in significant additional expenses, which could adversely affect the Companys profitability. The Company cannot assure that key personnel, including executive officers, will continue to be employed or that it will be able to attract and retain qualified personnel in the future. Failure to retain or attract key personnel could have a material adverse effect on the Company.
Failure to comply with state and federal antitrust requirements could adversely affect the Companys business.
Through the Companys merchant alliances, it holds an ownership interest in several competing merchant acquiring businesses while serving as the electronic processor for those businesses. In order to satisfy state and federal antitrust requirements, the Company actively maintains an antitrust compliance program. Notwithstanding the Companys compliance program, it is possible that perceived or actual violation of state or federal antitrust requirements could give rise to regulatory enforcement investigations or actions. Regulatory scrutiny of, or regulatory enforcement action in connection with, compliance with state and federal antitrust requirements could have a material adverse effect on the Companys reputation and business.
The market for the Companys electronic commerce services is evolving and may not continue to develop or grow rapidly enough for the Company to maintain and increase its profitability.
If the number of electronic commerce transactions does not continue to grow or if consumers or businesses do not continue to adopt the Companys services, it could have a material adverse effect on the profitability of the Companys business, financial condition and results of operations. The Company believes future growth in the electronic commerce market will be driven by the cost, ease-of-use, and quality of products and services offered to consumers and businesses. In order to consistently increase and maintain the Companys profitability, consumers and businesses must continue to adopt the Companys services.
The Company may experience breakdowns in its processing systems that could damage customer relations and expose it to liability.
The Company depends heavily on the reliability of its processing systems in the Companys core businesses. A system outage or data loss could have a material adverse effect on the Companys business, financial condition and results of operations. Not only would the Company suffer damage to its reputation in the event of a system outage or data loss, but the Company may also be liable to third parties. Many of the Companys contractual agreements with financial institutions require the payment of penalties if the Companys systems do not meet certain operating standards. To successfully operate the Companys business, the Company must be able to protect its processing and other systems from interruption, including from events that may be beyond the Companys control. Events that could cause system interruptions include, but are not limited to, fire, natural disaster, unauthorized entry, power loss, telecommunications failure, computer viruses, terrorist acts and war. Although the Company has taken steps to protect against data loss and system failures, there is still risk that it may lose critical data or experience system failures. The Company performs the vast majority of disaster recovery operations itself, though it utilizes select third parties for some aspects of recovery, particularly internationally. To the extent the Company outsources its disaster recovery, it is at risk of the vendors unresponsiveness in the event of breakdowns in the Companys systems. Furthermore, the Companys property and business interruption insurance may not be adequate to compensate it for all losses or failures that may occur.
The Company may experience software defects, computer viruses and development delays, which could damage customer relations, decrease the Companys potential profitability and expose it to liability.
The Companys products are based on sophisticated software and computing systems that often encounter development delays, and the underlying software may contain undetected errors, viruses or defects. Defects in the Companys software products and errors or delays in the Companys processing of electronic transactions could result in:
· |
additional development costs; |
· |
diversion of technical and other resources from the Companys other development efforts; |
· |
loss of credibility with current or potential customers; |
· |
harm to the Companys reputation; or |
· |
exposure to liability claims. |
In addition, the Company relies on technologies supplied to it by third parties that may also contain undetected errors, viruses or defects that could have a material adverse effect on the Companys business, financial condition and results of operations. Although the Company attempts to limit its potential liability for warranty claims through disclaimers in the Companys software documentation and limitation-of-liability provisions in the Companys license and customer agreements, the Company cannot assure that these measures will be successful in limiting the Companys liability.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES
As of December 31, 2011, the Company and its subsidiaries owned or leased approximately 72 domestic properties and approximately 87 international properties. These facilities are used for operational, sales and administrative purposes, and are substantially all currently being utilized.
|
|
Leased Facilities |
|
Owned Facilities |
| ||||
|
|
No. |
|
Sq. Ft. |
|
No. |
|
Sq. Ft. |
|
Facilities in the United States |
|
|
|
|
|
|
|
|
|
Retail and Alliance Services |
|
28 |
|
981,154 |
|
8 |
|
935,310 |
|
Financial Services |
|
20 |
|
675,795 |
|
7 |
|
1,261,987 |
|
All Other and Corporate |
|
5 |
|
586,054 |
|
4 |
|
322,502 |
|
|
|
|
|
|
|
|
|
|
|
International Facilities |
|
74 |
|
1,036,586 |
|
13 |
|
427,241 |
|
Retail and Alliance Services principal operations are conducted in Melville, New York; Hagerstown, Maryland; Marietta, Georgia; Coral Springs, Florida; and Houston, Texas. The principal operations for Financial Services are located in Omaha, Nebraska; Wilmington, Delaware; Maitland, Florida; and Chesapeake, Virginia. The principal operations for International are located in Basildon, United Kingdom; Frankfurt, Germany; Athens (Kryoneri), Greece; Sydney, Australia; and Buenos Aires, Argentina. The Companys All Other and Corporate facilities include the Companys corporate offices in Atlanta, Georgia and Greenwood Village, Colorado.
The Company believes that its facilities are suitable and adequate for its current business; however, the Company periodically reviews its space requirements and may acquire new space to meet the needs of its businesses or consolidate and dispose of or sublet facilities which are no longer required.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in various litigation matters arising in the ordinary course of its business. None of these matters, either individually or in the aggregate, currently is material to the Company except the matter reported below.
ATM Fee Antitrust Litigation
On July 2, 2004, Pamela Brennan, Terry Crayton, and Darla Martinez filed a class action complaint on behalf of themselves and all others similarly situated in the United States District Court for the Northern District of California against the Company, its subsidiary Concord EFS, Inc., and various financial institutions (Brennan). Plaintiffs claim that the defendants violated antitrust laws by conspiring to artificially inflate foreign ATM fees that were ultimately charged to ATM cardholders. Plaintiffs seek a declaratory judgment, injunctive relief, compensatory damages, attorneys fees, costs and such other relief as the nature of the case may require or as may seem just and proper to the court. Five similar suits were filed and served in July, August and October 2004, two in the Central District of California (Los Angeles), two in the Southern District of New York, and one in the Western District of Washington (Seattle). All cases were transferred to the Northern District Court of California and the Court consolidated all of the ATM interchange cases pending against the defendants in Brennan (referred to collectively as the ATM Fee Antitrust Litigation).
On August 3, 2007, Concord filed a motion for summary judgment seeking to dismiss plaintiffs per se claims. On March 24, 2008, the Court entered an order granting the defendants motions for partial summary judgment. On February 2, 2009, the plaintiffs filed a Second Amended Complaint and on April 6, 2009, the defendants filed a Motion to Dismiss the Second Amended Complaint. On September 4, 2009, the Court entered an order dismissing the Second Amended Complaint and, on October 16, 2009, the plaintiffs filed a Third Amended Complaint. The defendants filed a motion to dismiss the Third Amended Complaint on November 13, 2009. On June 21, 2010, the Court partially dismissed plaintiffs Third Amended Complaint and ordered the parties to brief a summary judgment on an alternative claim by plaintiffs. On September 16, 2010, the Court entered an order granting defendants motion for summary judgment, dismissing all of the claims against the defendants except for the claims for equitable relief. The Court granted judgment in favor of the defendants, dismissing the case on September 17, 2010. On October 14, 2010, the plaintiffs appealed the summary judgment.
The Company believes the complaints are without merit and intends to vigorously defend them.
ITEM 4. MINING SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
There is no established public trading market for the Companys common stock. The Company had one record holder of common stock on March 1, 2012, and no equity securities of the Company are authorized for issuance under any equity compensation plan.
In 2011, the Company paid one dividend in the amount of $0.2 million. In 2010, the Company paid five dividends that totaled $14.9 million. The senior secured revolving credit facility, senior secured term loan facility, and the indentures for the senior secured notes, senior second lien notes, PIK toggle senior second lien notes, senior PIK notes and senior subordinated notes limit the Companys ability to pay dividends. See Managements Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources and Note 12 to the accompanying financial statements included in Item 8 of this Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA
The following data should be read in conjunction with the Consolidated Financial Statements and related notes thereto and Managements Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this annual report.
The Notes to the Consolidated Financial Statements contain additional information about various acquisitions, dispositions, and certain charges and benefits resulting from other operating expenses, and other income (expense) which affect the comparability of information presented. Certain prior years amounts have been reclassified to conform to the current year presentation.
On September 24, 2007, the Company was acquired through a merger transaction (the merger) with an entity controlled by affiliates of Kohlberg Kravis Roberts & Co. The merger resulted in the equity of First Data Corporation becoming privately held. As a result of the merger, amounts below are presented for two periods: predecessor and successor, which primarily relate to the periods preceding the merger and the periods succeeding the merger, respectively.
Amounts below include acquisitions since the date acquired.
In 2008, the Company changed to a classified balance sheet presentation. Balance sheet data for 2007 has been adjusted to conform to this presentation.
|
|
Successor |
|
Predecessor |
| ||||||||||||||
|
|
Year ended December 31, |
|
Period from |
|
Period from |
| ||||||||||||
(in millions) |
|
2011 |
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
2007 |
| ||||||
Statement of operations data: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Revenues |
|
$ |
10,713.6 |
|
$ |
10,380.4 |
|
$ |
9,313.8 |
|
$ |
8,811.3 |
|
$ |
2,278.5 |
|
$ |
5,772.9 |
|
Operating expenses (a) |
|
9,728.2 |
|
9,782.2 |
|
8,869.3 |
|
8,032.6 |
|
2,123.7 |
|
5,209.2 |
| ||||||
Other operating expenses (b)(c) |
|
43.9 |
|
81.5 |
|
289.7 |
|
3,255.6 |
|
(0.2 |
) |
23.3 |
| ||||||
Interest expense |
|
(1,833.1 |
) |
(1,796.6 |
) |
(1,796.4 |
) |
(1,964.9 |
) |
(584.7 |
) |
(103.6 |
) | ||||||
Net (loss) income from continuing operations (c) |
|
(336.1 |
) |
(846.9 |
) |
(1,014.6 |
) |
(3,608.0 |
) |
(262.9 |
) |
569.7 |
| ||||||
Net (loss) income attributable to First Data Corporation |
|
(516.1 |
) |
(1,021.8 |
) |
(1,086.4 |
) |
(3,764.3 |
) |
(301.9 |
) |
460.8 |
| ||||||
Depreciation and amortization (d) |
|
1,344.2 |
|
1,526.0 |
|
1,553.8 |
|
1,559.6 |
|
427.2 |
|
540.2 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance sheet data (at year-end): |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total assets |
|
$ |
40,276.3 |
|
$ |
37,544.1 |
|
$ |
39,735.4 |
|
$ |
38,176.1 |
|
$ |
52,509.3 |
|
|
| |
Total current and long-term settlement assets |
|
10,839.3 |
|
7,059.1 |
|
7,351.0 |
|
8,662.9 |
|
18,228.4 |
|
|
| ||||||
Total liabilities |
|
36,800.9 |
|
33,456.1 |
|
34,408.4 |
|
35,773.8 |
|
45,609.2 |
|
|
| ||||||
Settlement obligations |
|
10,837.8 |
|
7,058.9 |
|
7,394.7 |
|
8,680.6 |
|
18,228.4 |
|
|
| ||||||
Long-term borrowings |
|
22,521.7 |
|
22,438.8 |
|
22,304.9 |
|
22,075.2 |
|
21,953.5 |
|
|
| ||||||
Other long-term liabilities (e) |
|
1,459.0 |
|
2,153.3 |
|
2,648.3 |
|
2,920.6 |
|
3,306.2 |
|
|
| ||||||
Redeemable noncontrolling interests |
|
67.4 |
|
28.1 |
|
226.9 |
|
|
|
|
|
|
| ||||||
Total equity |
|
3,408.0 |
|
4,059.9 |
|
5,100.1 |
|
2,402.3 |
|
6,900.1 |
|
|
| ||||||
(a) Operating expenses include Cost of services; Cost of products sold; Selling, general and administrative; Reimbursable debit network fees, postage and other; and Depreciation and amortization.
(b) Other operating expenses include Restructuring, net; Impairments; Litigation and regulatory settlements; and Other charges.
(c) Includes a goodwill impairment charge in 2008 of $3.2 billion (pretax).
(d) Includes amortization of initial payments for new contracts, which is recorded as a contra-revenue within Transaction and processing service fees and amortization related to equity method investments, which is netted within Equity earnings in affiliates in the Consolidated Statements of Operations.
(e) Other long-term liabilities includes Long-term deferred tax liabilities.
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
First Data Corporation (FDC or the Company), with global headquarters and principal executive offices in Atlanta, Georgia, operates electronic commerce businesses providing services that include merchant transaction processing and acquiring services; credit, retail and debit card issuing and processing services; prepaid card services; and check verification, settlement and guarantee services.
Regulatory reform. On June 29, 2011, the Federal Reserve Board announced the final rules governing debit card interchange fees, and routing and exclusivity restrictions as well as a proposed rule governing the fraud prevention adjustment in response to Section 1075 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Effective October 1, 2011, debit interchange rates for card issuers with more than $10 billion of assets are capped at $.21 per transaction with an ad valorem component of 5 basis points to reflect a portion of the issuers fraud losses plus, for qualifying issuers, an additional $.01 per transaction in debit interchange for fraud prevention costs. In addition, the new regulations ban debit payment card networks from prohibiting an issuer from contracting with any other payment card network that may process an electronic debit transaction involving an issuers debit cards and prohibit card issuers and payment networks from inhibiting the ability of merchants to direct the routing of debit card transactions over any network that can process the transaction. On April 1, 2013, the ban on network exclusivity arrangements becomes effective for non-reloadable prepaid card and healthcare prepaid issuers. Additionally, each debit card issuer must participate in 2 unaffiliated networks beginning April 1, 2012 and each debit payment card network must comply with applicable exclusivity requirements by October 1, 2011. These regulatory changes create both opportunities and challenges for the Company. Increased regulation may increase the complexity of operating, both domestically and internationally, creating an opportunity for larger competitors to differentiate themselves both in product capabilities and service delivery. The ban on network exclusivity also will enhance competition to allow the Company to compete for additional business. At the same time, these regulatory changes may cause operating costs to increase as the Company adjusts its activities in light of compliance costs and customer requirements. Within the Retail and Alliance Services segment the Company experienced some transitory benefit due mostly to lower debit interchange rates, however, the overall impact on the Company is difficult to estimate as it will take some time for the market to react and adjust to the new regulations.
Banc of America Merchant Services, LLC (BAMS). On June 26, 2009, Bank of America N.A. (BofA) and the Company, together with Rockmount Investments, LLC (Rockmount), an investment vehicle controlled by a third-party investor, formed a new company, BAMS. BAMS provides clients with a comprehensive suite of acquiring and processing payment products for credit and debit cards as well as merchant loyalty, prepaid, check and e-commerce solutions. The Company owns 51% of BAMS. For details surrounding the formation of BAMS refer to Note 3 to the Companys Consolidated Financial Statements in Item 8 of this Form 10-K.
When the BAMS alliance was formed, the intent was to shift processing for merchants contributed to the alliance by BofA from three existing bank platforms to FDC. After evaluating the conversion strategy, the Company and BofA jointly decided to have FDC operate BofAs legacy settlement platform and provide the necessary operational support for legacy BofA merchants. The transfer of ownership was effective October 1, 2011. The Company believes this operating structure simplifies and accelerates the conversion.
The Company anticipates the shift of processing to FDC as described above will increase the Retail and Alliance Services segment revenue and, to a lesser extent, segment EBITDA for the first three quarters of 2012 compared to 2011. This benefit will not impact consolidated revenues because the BAMS alliance is consolidated by the Company. Consolidated expenses are expected to increase, most significantly in 2012 and 2013, as a result of costs incurred to transfer the platform and associated operational support as well as ongoing costs to operate the platform. Beginning October 1, 2011, these costs are being billed to the BAMS alliance resulting in a portion of the costs being attributed to the BofA noncontrolling interest.
Segment Discussion
Retail and Alliance Services segment. The Retail and Alliance Services segment is comprised of businesses that provide services which facilitate the merchants ability to accept credit, debit, stored-value and loyalty cards and checks. The segments merchant processing and acquiring services include authorization, transaction capture, settlement, chargeback handling and internet-based transaction processing and are the largest component of the segments revenue. A majority of these services pertain to transactions in which consumer payments to merchants are made through a card association (such as Visa or MasterCard), a debit network (such as STAR or Interlink), or another payment network (such as Discover). Many of the segments services are offered through alliance arrangements. Financial results of the merchant alliance strategy appear both in the Transaction and processing service fees revenue and Equity earnings in affiliates line items of the Consolidated Statements of Operations. The Company evaluates the Retail and Alliance Services segment based on the Companys proportionate share of the results of these alliances. Refer to Segment Results below for a more detailed discussion.
Merchant processing and acquiring revenues are driven most significantly by the number of transactions, dollar volumes of those transactions and trends in consumer spending between national, regional and local merchants. Consumers continue to increase the use of credit, debit and stored-value cards in place of cash and paper checks. Internet payments continue to grow but account for a small portion of the segments transactions. While transactions over the internet may involve increased risk, these transactions typically generate higher profits for the Company. The Company continues to enhance its fraud detection and other systems to address such risks.
In addition, Retail and Alliance Services provides check verification, settlement and guarantee services. The Company continues to see a decrease in the use of checks which negatively affects the Companys check verification, settlement and guarantee business. The segment also manages prepaid stored-value card issuance and processing services (i.e. gift cards) for retailers and others.
Financial Services segment. The Financial Services segment provides issuer card and network solutions and payment management solutions for recurring bill payments. Financial Services also offers services to improve customer communications, billing, online banking and consumer bill payment. Issuer card and network solutions includes credit, retail and debit card processing, debit network services (including the STAR Network), and output services for financial institutions and other organizations offering credit cards, debit cards and retail private label cards to consumers and businesses to manage customer accounts. Output services include statement and letter printing, embossing and mailing services. The segment also provides remittance processing services, information services and other payment services such as remote deposit, clearing services and processing for payments which occur in such forms as checks, ACH, wire transfer and stored-value cards. The segments largest components of revenue consist of fees for account management, transaction authorization and posting and network switching.
Credit and retail based revenue is derived primarily from the card processing services offered to financial institutions and other issuers of cards. Revenue from these markets is driven primarily by accounts on file, with active accounts having a larger impact on revenue than inactive accounts. Retail account portfolios typically have a lower proportionate share of active accounts than credit account portfolios and product usage is different between the card types resulting in lower revenue per active retail account. In addition, contract pricing at the customer level is dependent upon the volume of accounts, mix of account types (e.g. retail, credit, co-branded credit and debit) and product usage.
Debit processing revenue is derived mostly from the processing of transactions where the Company could receive multiple fees for a transaction, depending on the role of the Company. Within the Financial Services segment, domestic debit issuer transactions have been growing as the Company continues to see a shift to the use of debit cards from checks and cash, with the decrease in use of checks negatively affecting the Companys remittance processing business.
The underlying economic drivers of card issuance are population demographics and employment. Strengthening in the economy typically results in an improved credit risk profile, allowing card issuers to be more aggressive in their marketing campaigns to issue cards. Conversely, a weakening in the economy typically results in a tightening of the credit market with fewer consumers qualifying for credit.
International segment. The International segment businesses provide the following services outside of the U.S.: credit, retail, debit and prepaid card processing, merchant acquiring and processing; ATM and point-of-sale (POS) processing, driving, acquiring and switching services; and card processing software. The primary service offerings of the International segment are substantially the same as those provided in the Retail and Alliance Services and Financial Services segments. The largest components of the segments revenue are fees for facilitating the merchants ability to accept credit, retail and debit cards by authorizing, capturing, and settling merchants credit, retail, debit, stored-value and loyalty card transactions as well as for transaction authorization and posting, network switching and account management.
All Other and Corporate. All Other and Corporate is comprised of the Companys business units not included in the segments noted above, primarily its government services business and its official check business that is winding down, as well as the Companys headquarter functions.
Components of Revenue and Expenses
The following briefly describes the components of operating revenues and expenses as presented in the Consolidated Statements of Operations. Descriptions of the revenue recognition policies are included in Note 1 to the Companys Consolidated Financial Statements in Item 8 of this Form 10-K.
Transaction and processing service fees. Transaction and processing service fee revenue is comprised of fees related to merchant acquiring; check processing; credit, retail and debit card processing; output and remittance processing; and payment management services. Revenues are based on a per transaction fee, a percentage of dollar volume processed, accounts on file or some combination thereof. These revenues represent approximately 59% of FDCs 2011 revenue and are most reflective of the Companys core business performance. Merchant related services revenue is comprised primarily of fees charged to merchants and processing fees charged to alliances accounted for under the equity method. For segment reporting purposes, the proportionate consolidation presentation results in revenue including the alliance partners share of processing fees charged to both consolidated and unconsolidated alliances. Merchant discount revenue from credit card and signature debit card transactions acquired from merchants is recorded net of interchange and assessments charged by the credit card associations. Check services revenues include check verification, settlement and guarantee fees which are charged on a per transaction basis or as a percentage of the face value of the check. Card services revenue related to credit and retail card processing is comprised primarily of fees charged to the client based on cardholder accounts on file, both active and inactive. Card services revenue for output services consists of fees for printing statements and letters and embossing plastics. Debit processing and network service fees included in Card services revenues are typically based on transaction volumes processed. Other services revenue includes all other types of transactional revenue not specifically related to the classifications noted above.
Product sales and other. Sales and leasing of POS devices in the Retail and Alliance Services and International segments are the primary drivers of this revenue component, providing a recurring revenue stream. This component also includes contract termination fees, royalty income and gain/loss from the sale of merchant portfolios, all of which occur less frequently but are considered a part of ongoing operations. Also included within this line item is revenue recognized from custom programming and system consulting services, software licensing and maintenance revenue generated primarily from the VisionPLUS software in the International segment and investment income generated by invested settlement assets, realized net gains and losses and, if applicable, impairment losses from such assets within the Retail and Alliance Services, Financial Services and International segments and All Other and Corporate. This revenue is recorded net of official check agents commissions.
Reimbursable debit network fees, postage and other. Debit network fees from PIN-debit card transactions acquired from merchants are recorded gross with the associated network fee recorded in the corresponding expense caption, principally within the Retail and Alliance Services segment. In addition, the reimbursable component and the offsetting expense caption include postage, telecommunications and similar costs that are passed through to customers principally within the Financial Services segment. Reimbursable debit network fees, postage and other revenue and the corresponding expense are not included in segment results.
Cost of services. This caption includes the costs directly associated with providing services to customers and includes the following: telecommunications costs, personnel and infrastructure costs to develop and maintain applications, operate computer networks and provide associated customer support, losses on check guarantee services and merchant chargebacks, and other operating expenses.
Cost of products sold. These costs include those directly associated with product and software sales such as cost of POS devices, merchant terminal leasing costs and software licensing and maintenance costs.
Selling, general and administrative. This caption primarily consists of salaries, wages and related expenses paid to sales personnel, administrative employees and management as well as advertising and promotional costs and other selling expenses.
Depreciation and amortization. This caption consists of the Companys depreciation and amortization expense. Excluded from this caption is the amortization of initial payments for contracts which is recorded as a contra-revenue within the Transaction and processing services fees line as well as amortization related to equity method investments which is netted within the Equity earnings in affiliates line.
Results of Operations
The following discussion for both consolidated results and segment results are for the year ended December 31, 2011 compared to the year ended December 31, 2010 as well as for the year ended December 31, 2010 compared to the year ended December 31, 2009. Consolidated results should be read in conjunction with segment results, which provide more detailed discussions concerning certain components of the Consolidated Statements of Operations. All significant intercompany accounts and transactions have been eliminated.
Consolidated results.
|
|
Year ended December 31, |
|
Percent Change |
| |||||||||
|
|
2011 |
|
2010 |
|
2009 |
|
2011 vs. 2010 |
|
2010 vs. 2009 |
| |||
Revenues: |
|
|
|
|
|
|
|
|
|
|
| |||
Transaction and processing service fees |
|
$ |
6,330.0 |
|
$ |
6,181.5 |
|
$ |
5,788.9 |
|
2 |
% |
7 |
% |
Product sales and other |
|
852.1 |
|
809.3 |
|
796.7 |
|
5 |
% |
2 |
% | |||
Reimbursable debit network fees, postage and other |
|
3,531.5 |
|
3,389.6 |
|
2,728.2 |
|
4 |
% |
24 |
% | |||
|
|
10,713.6 |
|
10,380.4 |
|
9,313.8 |
|
3 |
% |
11 |
% | |||
|
|
|
|
|
|
|
|
|
|
|
| |||
Expenses: |
|
|
|
|
|
|
|
|
|
|
| |||
Cost of services (exclusive of items shown below) |
|
2,888.4 |
|
3,023.3 |
|
2,945.1 |
|
(4 |
)% |
3 |
% | |||
Cost of products sold |
|
369.6 |
|
375.2 |
|
305.5 |
|
(1 |
)% |
23 |
% | |||
Selling, general and administrative |
|
1,693.7 |
|
1,579.7 |
|
1,438.2 |
|
7 |
% |
10 |
% | |||
Reimbursable debit network fees, postage and other |
|
3,531.5 |
|
3,389.6 |
|
2,728.2 |
|
4 |
% |
24 |
% | |||
Depreciation and amortization |
|
1,245.0 |
|
1,414.4 |
|
1,452.3 |
|
(12 |
)% |
(3 |
)% | |||
Other operating expenses, net (a) |
|
43.9 |
|
81.5 |
|
289.7 |
|
* |
|
* |
| |||
|
|
9,772.1 |
|
9,863.7 |
|
9,159.0 |
|
(1 |
)% |
8 |
% | |||
|
|
|
|
|
|
|
|
|
|
|
| |||
Interest income |
|
7.9 |
|
7.8 |
|
11.7 |
|
1 |
% |
(33 |
)% | |||
Interest expense |
|
(1,833.1 |
) |
(1,796.6 |
) |
(1,796.4 |
) |
2 |
% |
0 |
% | |||
Other income (expense) (b) |
|
124.1 |
|
(15.9 |
) |
(61.3 |
) |
* |
|
* |
| |||
Income tax benefit |
|
(270.1 |
) |
(323.8 |
) |
(578.8 |
) |
(17 |
)% |
(44 |
)% | |||
Equity earnings in affiliates |
|
153.4 |
|
117.3 |
|
97.8 |
|
31 |
% |
20 |
% | |||
Net loss |
|
(336.1 |
) |
(846.9 |
) |
(1,014.6 |
) |
(60 |
)% |
(17 |
)% | |||
Less: Net income attributable to noncontrolling interests |
|
180.0 |
|
174.9 |
|
71.8 |
|
3 |
% |
* |
| |||
Net loss attributable to First Data Corporation |
|
$ |
(516.1 |
) |
$ |
(1,021.8 |
) |
$ |
(1,086.4 |
) |
(49 |
)% |
(6 |
)% |
* Calculation not meaningful.
(a) Other operating expenses, net includes restructuring, net, impairments and litigation and regulatory settlements as applicable to the periods presented.
(b) Other income (expense) includes investment gains and losses, derivative financial instruments gains and losses, divestitures, net, and non-operating foreign currency exchange gains and losses as applicable to the periods presented.
The following provides highlights of revenue and expense growth on a consolidated basis while a more detailed discussion is included in the Segment Results section below.
Operating revenues overview.
Transaction and processing service fees. Revenue increased in 2011 compared to 2010 due to growth in merchant transactions and dollar volumes both domestically and internationally, growth in debit issuer transactions, new business, lower debit interchange rates as a result of the Dodd-Frank Act described in the Regulatory Reform section above, and foreign currency exchange rate movements. Partially offsetting these increases were decreases due to price compression, changes in merchant and pricing mix, lower overall check volumes and lost business. Foreign currency exchange rate movements positively impacted the transaction and processing service fees growth rate by approximately 1 percentage point.
Revenue increased in 2010 compared to 2009 due to the incremental impact of the BAMS alliance, new sales, growth from existing clients and a card association fee increase that benefited 2010. The incremental impact of the BAMS alliance benefited the transaction and processing service fees growth rate in 2010 compared to 2009 by 5 percentage points. Prepaid revenue also
contributed to the increase due most significantly to higher transaction volumes within the payroll distribution program as well as an increase in card shipments to existing clients. Partially offsetting these increases were decreases due to price compression and lost business. The termination of services by Washington Mutual beginning in March 2009 negatively impacted the transaction and processing service fee growth rate in 2010 compared to 2009 by 1 percentage point.
Product sales and other. Revenue increased in 2011 compared to 2010 mainly resulting from an increase in equipment sales internationally due in part to new regulations and new business, increases in the leasing business domestically and internationally resulting from new lease originations as well as fees associated with lease renewals and an increase in investment income due to a lesser impairment of Student Loan Auction Rate Securities (SLARS) recognized in 2011 compared to 2010 as discussed below. In addition, foreign currency exchange rate movements positively impacted the product sales and other growth rate in 2011 compared to 2010 by approximately 1 percentage point. Partially offsetting these increases were decreased contract termination fees mostly related to Financial Services and a decrease in professional services revenue due to the completion of prior year projects in Financial Services and All Other and Corporate
Revenue increased in 2010 compared to 2009 as a result of increased volumes due in part to increased terminal demand as a result of new regulations, increased sales to existing clients, new business and the incremental impact of the BAMS alliance. Partially offsetting these increases were decreases due to fewer contract termination fees recognized in 2010, lower investment income, lower royalty income and the divestiture of an international business. The contract termination fees received in 2009 and 2010 related most significantly to the termination of services by Washington Mutual Bank in the Financial Services segment and negatively impacted the product sales and other revenue growth rate by 3 percentage points in 2010 compared to 2009. The decrease in investment income is due to a $27.9 million impairment recognized in All Other and Corporate related to SLARS and a decrease in settlement portfolio balances caused by the wind down of the official check business partially offset by decreased commission payments related to the retail money order business as a result of its transfer to The Western Union Company (Western Union) in October 2009.
Reimbursable debit network fees, postage and other. Revenue and expense increased in 2011 compared to 2010 due to growth of personal identification number (PIN)-debit transaction volumes as well as an increase in debit network fees resulting from rate increases imposed by the debit networks. Partially offsetting these increases was a decrease due to the cap on debit interchange rates imposed by the Dodd-Frank Act described above which impacted the reimbursable debit network fees, postage and other growth rate by approximately 5%.
Revenue and expense increased in 2010 compared to 2009 due to an increase in debit network fees as a result of growth of PIN-debit transaction volumes as well as rate increases imposed by the debit networks. Also contributing to the increase in revenue and expense for 2010 compared to 2009 is the incremental impact of the BAMS alliance which benefited the reimbursable debit network fees, postage and other growth rate by 9 percentage points. Partially offsetting these increases was a decrease in postage due to a decrease in print and plastic volumes as a result of the termination of services discussed above. The termination of services impacted the reimbursable debit network fees, postage and other revenue growth rate by 2 percentage points.
Operating expenses overview.
Cost of services. Expenses decreased in 2011 compared to 2010 due most significantly to decreases in certain costs associated with the BAMS alliance and net check warranty expense. Certain costs associated with the BAMS alliance decreased due to lower technology costs and improved expense management. Net check warranty expense decreased due to lower check volumes and better risk assessment data. Expenses associated with outside professional services and lower merchant credit losses also contributed to the decrease. Partially offsetting these decreases was the 2011 correction of cumulative errors in the amortization of initial payments for new contracts related to purchase accounting associated with the Companys 2007 merger with an affiliate of Kohlberg Kravis and Roberts & Co. (KKR) which totaled a $10.2 million expense in Cost of services (the correction of related errors totaled a $58.5 million benefit in aggregate) and occurred over a four year period. Foreign currency exchange rate movements also partially offset the aforementioned decreases by approximately 1 percentage point.
The increase in expenses in 2010 compared to 2009 was due most significantly to the incremental third-party processing fees related to the BAMS alliance and higher incentive compensation expense. The increase in incentive compensation expense for 2010 compared to 2009 impacted the cost of services growth rate by 1 percentage point. Partially offsetting the increases was a decrease in employee related expenses as a result of reduced headcount.
Cost of products sold. Expenses decreased in 2011 compared to 2010 resulting mostly from the write-off of international terminal inventory and leasing receivables in 2010 as well as exiting low margin businesses in 2011. These decreases are partially offset by the write-off of capitalized commissions related to the international leasing business in 2011, growth in the leasing business both domestically and internationally and foreign currency exchange rate movements. The net impact of the 2010 and 2011 write-offs
benefited the cost of products sold growth rate by 4 percentage points while foreign currency exchange rate movements had an approximate 1 percentage point offsetting impact.
Expenses increased in 2010 compared to 2009 due to an increase in terminal sales partly due to new regulations, new sales and increased sales to existing customers as well as a write-off of international leasing receivables incorrectly recognized in prior years and the write-off of international terminal inventory.
Selling, general and administrative. Expenses increased in 2011 compared to 2010 due to growth in payments made to independent sales organizations (ISOs) as a result of the Company increasing its number of ISO partners as well as an increase in ISO transaction volumes, higher incentive compensation expense and net increases in various expense items that were not individually significant. The payments to ISOs impacted the selling, general and administrative growth rate by approximately 5%. Foreign currency exchange rate movements also contributed to the increase in expenses by approximately 1 percentage point.
The increase in selling, general and administrative expenses in 2010 compared to 2009 was due to higher incentive compensation expense and an increase in payments made to ISOs resulting from the same items described above. The increase in payments made to ISOs impacted the selling, general and administrative expenses growth rate by 6 percentage points. Higher incentive compensation expenses impacted the selling, general and administrative expenses growth rate by 2 percentage points when comparing 2010 to 2009. Higher employee related expenses (part of which resulted from employees assumed as part of the BAMS alliance transaction) also impacted the growth rate by 2 percentage points.
Depreciation and Amortization. Expenses decreased in 2011 compared to 2010 due most significantly to the 2011 correction of cumulative depreciation and amortization errors related to purchase accounting associated with the Companys 2007 merger with an affiliate of KKR and certain assets becoming fully amortized. The errors and the cumulative correction, which totaled a $57.7 million benefit in Depreciation and amortization (the correction of total depreciation and amortization errors was a $58.5 million benefit in aggregate) and occurred over a four year period, were deemed immaterial to prior years and the current year, respectively. In addition, depreciation and amortization declined due to a decrease in the amortization of certain intangible assets that are being amortized on an accelerated basis resulting in higher amortization in the prior period. These decreases were partially offset by increases due to newly capitalized assets and foreign currency exchange rate movements. The error corrections benefited the depreciation and amortization growth rate by 4 percentage points in 2011 compared to 2010.
Expense decreased in 2010 compared to 2009 due to amortization of certain intangible assets that are being amortized on an accelerated basis resulting in higher amortization in prior periods. Also contributing to the decrease was accelerated amortization recorded in 2009 related to intangible assets associated with the termination of services noted above. These decreases were partially offset by increases due to newly capitalized assets and assets associated with the BAMS alliance.
Other operating expenses, net.
2011 Activities
|
|
Pretax Benefit (Charge) |
| |||||||||||||
(in millions) |
|
Retail and |
|
Financial |
|
International |
|
All Other |
|
Totals |
| |||||
Year ended December 31, 2011 |
|
|
|
|
|
|
|
|
|
|
| |||||
Restructuring charges |
|
$ |
(2.8 |
) |
$ |
(10.5 |
) |
$ |
(34.2 |
) |
$ |
(3.8 |
) |
$ |
(51.3 |
) |
Restructuring accrual reversals |
|
1.1 |
|
|
|
2.5 |
|
1.3 |
|
4.9 |
| |||||
Litigation and regulatory settlements |
|
|
|
|
|
|
|
2.5 |
|
2.5 |
| |||||
Total pretax charge, net of reversals |
|
$ |
(1.7 |
) |
$ |
(10.5 |
) |
$ |
(31.7 |
) |
$ |
|
|
$ |
(43.9 |
) |
The 2011 restructurings resulted from the elimination of management and other positions, approximately 750 employees, as part of the Company aligning the business with strategic objectives. Similar initiatives are expected to occur in future periods resulting in additional restructuring charges. Partially offsetting the charges were reversals of excess 2009 and 2010 restructuring accruals as well as reversals resulting from the refinement of 2011 estimates. The Company estimates cost savings resulting from the 2011 restructuring activities to be approximately $49 million on an annual basis.
The following table summarizes the Companys utilization of restructuring accruals for the years ended December 31, 2010 and 2011 (in millions):
|
|
Employee |
|
Facility |
| ||
Remaining accrual as of January 1, 2010 |
|
$ |
58.5 |
|
$ |
0.2 |
|
Expense provision |
|
86.7 |
|
0.6 |
| ||
Cash payments and other |
|
(91.2 |
) |
(0.4 |
) | ||
Changes in estimates |
|
(15.3 |
) |
(0.2 |
) | ||
|
|
|
|
|
| ||
Remaining accrual as of December 31, 2010 |
|
38.7 |
|
0.2 |
| ||
Expense provision |
|
45.0 |
|
6.3 |
| ||
Cash payments and other |
|
(60.9 |
) |
(5.5 |
) | ||
Changes in estimates |
|
(4.8 |
) |
(0.1 |
) | ||
Remaining accrual as of December 31, 2011 |
|
$ |
18.0 |
|
$ |
0.9 |
|
2010 Activities.
|
|
Pretax Benefit (Charge) |
| |||||||||||||
Year ended December 31, 2010 |
|
Retail and |
|
Financial |
|
International |
|
All Other |
|
Totals |
| |||||
Restructuring charges |
|
$ |
(20.3 |
) |
$ |
(11.3 |
) |
$ |
(28.2 |
) |
$ |
(27.7 |
) |
$ |
(87.5 |
) |
Restructuring accrual reversals |
|
0.7 |
|
0.8 |
|
10.9 |
|
3.1 |
|
15.5 |
| |||||
Impairments |
|
(1.6 |
) |
|
|
(9.9 |
) |
|
|
(11.5 |
) | |||||
Litigation and regulatory settlements |
|
|
|
2.0 |
|
|
|
|
|
2.0 |
| |||||
Total pretax charge, net of reversals |
|
$ |
(21.2 |
) |
$ |
(8.5 |
) |
$ |
(27.2 |
) |
$ |
(24.6 |
) |
$ |
(81.5 |
) |
The 2010 restructurings resulted from the elimination of management and other positions, approximately 1,200 employees, as part of the Company aligning the business with strategic objectives as well as domestic site consolidations and the reorganization of executive officers. Partially offsetting the charges were reversals of excess 2008 and 2009 restructuring accruals as well as reversals resulting from the refinement of 2010 estimates.
In the fourth quarter of 2010, within Retail and Alliance Services, the Company recorded approximately $1.6 million in impairment charges related to other intangibles. Also during the fourth quarter of 2010, the Company recorded approximately $9.9 million in asset impairment charges related to the International segment. Approximately $6.2 million of the total impairment occurred because the Company did not complete a software project and determined that there were no likely alternative uses for the software. The remaining $3.7 million of impairment charges resulted from the write off of assets the Company determined have no future use or value.
2009 Activities.
|
|
Pretax Benefit (Charge) |
| ||||||||||||||||
Year ended December 31, 2009 |
|
Retail and |
|
Financial |
|
International |
|
All Other |
|
Divested |
|
Totals |
| ||||||
Restructuring charges |
|
$ |
(15.9 |
) |
$ |
(14.5 |
) |
$ |
(49.2 |
) |
$ |
(22.0 |
) |
$ |
(0.5 |
) |
$ |
(102.1 |
) |
Restructuring accrual reversals |
|
4.2 |
|
1.7 |
|
2.9 |
|
0.5 |
|
|
|
9.3 |
| ||||||
Impairments |
|
|
|
|
|
(131.9 |
) |
(53.2 |
) |
|
|
(185.1 |
) | ||||||
Litigation and regulatory settlements |
|
|
|
(14.5 |
) |
|
|
2.7 |
|
|
|
(11.8 |
) | ||||||
Total pretax charge, net of reversals |
|
$ |
(11.7 |
) |
$ |
(27.3 |
) |
$ |
(178.2 |
) |
$ |
(72.0 |
) |
$ |
(0.5 |
) |
$ |
(289.7 |
) |
The 2009 restructurings resulted from the elimination of management and other positions, approximately 1,700 employees, as part of the Companys cost saving initiatives as well as domestic site consolidations and the elimination of certain information technology positions. Partially offsetting the charges are reversals of 2009 and 2008 restructuring accruals related to the Companys change in strategy related to global labor sourcing initiatives as well as refining previously recorded estimates.
In the fourth quarter of 2009, domestically, the Company recorded a $33 million impairment charge related to customer contracts, a $17 million goodwill impairment charge and a $3 million software impairment charge related to the Information Services reporting unit. The significant factor that drove most of the impairment was lower projections of financial results as compared to those used in the 2008 impairment testing.
In the fourth quarter of 2009, the Company recorded $124 million in asset impairment charges related to the International reporting unit and segment. Approximately $64 million of the total impairment charge related to the Companys 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 the Companys 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. The remaining $13 million of impairment charges related to a trade name in Canada, customer contracts in Brazil and Ireland and software.
During the third quarter of 2009, the Company recorded a charge of $7.7 million related to an intangible asset impairment within the International segment resulting from continuing and projected losses combined with a change in business strategy related to an existing business.
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. Discount rates were determined on a market participant basis. In certain situations, the Company relied in part on a third-party valuation firm in determining the appropriate discount rates. A relatively small change in these inputs would have had an immaterial impact on the impairments. 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 2009, the Company recorded anticipated settlements of several matters within the Financial Services segment. In the first and second quarters of 2010, the Company released $2.0 million related to these settlements.
Interest expense. Interest expense increased in 2011 compared to 2010 due to higher average interest rates resulting primarily from the August 2010 and April 2011 debt modifications and amendments as well as the December 2010 debt exchange and higher debt balances due to payment-in-kind (PIK) interest accretion. Partially offsetting these increases was a decrease resulting from the expiration of interest rate swaps with a notional balance of $2.5 billion. Interest expense remained flat in 2010 compared to 2009.
The Company utilizes interest rate swaps to hedge its interest payments on a portion of its variable rate debt from fluctuations in interest rates. While certain of these swaps do not qualify for hedge accounting, they continue to be effective economically in eliminating variability in interest rate payments. Additionally, the Company utilizes a fixed to floating interest rate swap, which does not qualify for hedge accounting, to preserve the ratio of fixed rate and floating rate debt that the Company held prior to the debt modifications and amendments discussed below in Capital Resources and Liquidity. The fair value adjustments for interest rate swaps that do not qualify for hedge accounting as well as interest rate swap ineffectiveness are recorded in the Other income (expense) line item of the Consolidated Statements of Operations and totaled benefits of $55.7 million, charges of $67.9 million and charges of $64.3 million for the years ended December 31, 2011, 2010 and 2009, respectively.
Other income (expense).
|
|
Year ended December 31, |
| |||||||
(in millions) |
|
2011 |
|
2010 |
|
2009 |
| |||
Investment gains |
|
$ |
|
|
$ |
2.5 |
|
$ |
3.0 |
|
Derivative financial instruments gains (losses) |
|
58.2 |
|
(58.3 |
) |
(67.4 |
) | |||
Divestitures, net |
|
57.4 |
|
18.7 |
|
(12.9 |
) | |||
Non-operating foreign currency gains and (losses) |
|
5.3 |
|
21.2 |
|
10.5 |
| |||
Other |
|
3.2 |
|
|
|
5.5 |
| |||
Other income (expense) |
|
$ |
124.1 |
|
$ |
(15.9 |
) |
$ |
(61.3 |
) |
Derivative financial instruments gains and (losses). The net gains and losses for 2011, 2010 and 2009 were due most significantly to the fair value adjustments for cross currency swaps and interest rate swaps that are not designated as accounting hedges. The gain in 2011 compared to losses in 2010 and 2009 was mostly driven by a new interest rate swap entered into in conjunction with the April 2011 debt modifications and amendments as well as the expiration of interest rate swaps noted above in the Interest expense discussion.
Divestitures, net. The gain recognized in 2011 resulted most significantly from the contribution of the Companys transportation business to an alliance in exchange for a 30% interest in that alliance. The 2010 gain related most significantly to a contingent payment received in connection with the Companys November 2009 sale of a merchant acquiring business in Canada. The loss in 2009 resulted from the Company selling its debit and credit card issuing and acquiring processing business in Austria in August 2009 partially offset by a gain related to the sale of a merchant acquiring business in Canada in November 2009.
Non-operating foreign currency gains and (losses). The net gains and losses related to currency translations on the Companys intercompany loans and its euro-denominated debt.
Income taxes. The Companys effective tax rates on pretax loss were tax benefits of 44.6% in 2011, 27.7% in 2010, and 36.3% in 2009. 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 2011 was greater than the statutory rate due primarily to net income attributable to noncontrolling interests from pass through entities for which there was no tax expense provided, state tax benefits, lower tax earnings and profits than book income for foreign entities, a decrease in the Companys liability for unrecognized tax benefits, a net benefit relating to tax effects of foreign exchange gains and losses on intercompany notes and prior year income tax return true-ups. These positive adjustments were partially offset by an increase in the Companys valuation allowance against foreign tax credits and the tax impact of a contribution of the Companys transportation business in exchange for a 30% interest in an alliance.
The effective tax rate benefit in 2010 was less than the statutory rate primarily due to an increase in the Companys valuation allowance against foreign tax credits (discussed below). This negative adjustment was partially offset by state tax benefits, net income attributable to noncontrolling interests for which there was no tax expense provided and a decrease in the Companys liability for unrecognized tax benefits.
The effective tax rate benefit in 2009 was greater than the statutory rate due primarily to state tax benefits, lower tax earnings and profits than book income for foreign entities 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 Companys liability for unrecognized tax benefits and an increase in the valuation allowance established against certain state and foreign net operating losses.
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 continues to be in a tax net operating loss position. The Company currently anticipates being able to utilize in the future most of its existing federal and state net operating loss carryforwards due to the existence of significant deferred tax liabilities established in connection with purchase accounting for the merger. Accordingly, the Company has not established valuation allowances against most of such loss carryforwards. The Company, however, may not be able to record a benefit related to losses in certain states and foreign countries, requiring the establishment of valuation allowances.
Despite the net operating loss position discussed above, the Company continues to incur income taxes in states for which it files returns on a separate entity basis and in certain foreign countries. Generally, these foreign income taxes would result in a foreign tax credit in the U.S. to the extent of any U.S. income taxes on the income upon repatriation. However, the Company does not generate sufficient foreign source income to be able to fully utilize its foreign tax credits. As a result, the Company has established valuation allowances, including $182 million in 2010 upon enactment of federal legislation which changed tax law, against that portion of the credits for which it is likely that no benefit will be realized in the future.
During the year ended December 31, 2011, the Companys liability for unrecognized tax benefits was reduced by $25 million after negotiating settlements with the IRS regarding specific contested issues in the 2003-2006 federal tax years. The reduction in liabilities was recorded through a decrease to tax expense. As of December 31, 2011, the Company anticipates it is reasonably possible that its liability for unrecognized tax benefits may decrease by approximately $163 million within the next twelve months as the result of the possible closure of its 2003-2007 federal tax years, potential settlements with certain states and foreign countries and the lapse of the statute of limitations in various state and foreign jurisdictions. The potential decrease relates to various federal, state and foreign tax benefits including research and experimentation credits, transfer pricing adjustments and certain amortization and loss deductions.
Under the Tax Allocation Agreement executed at the time of the spin-off of The Western Union Company (Western Union) on September 29, 2006, Western Union is responsible for and must indemnify the Company against all taxes, interest and penalties that relate to Western Union for periods prior to the spin-off date. If Western Union were to agree to or be finally determined to owe any amounts for such periods but were to default in its indemnification obligation under the Tax Allocation Agreement, the Company as parent of the tax group during such periods generally would be required to pay the amounts to the relevant tax authority, resulting in a potentially material adverse effect on the Companys financial position and results of operations. As of December 31, 2011, the Company had approximately $18 million of uncertain income tax liabilities recorded related to Western Union for periods prior to the spin-off date. The Company has recorded a corresponding account receivable of equal amount from Western Union, which is included as a long-term account receivable in the Other long-term assets line of the Companys Consolidated Balance Sheets, reflecting the indemnification obligation. During the year ended December 31, 2011 the uncertain income tax liabilities related to Western Union decreased by approximately $112 million as a result of agreements reached with the IRS regarding specific contested issues in the 2003-2006 federal tax years. As of December 31, 2011, the Company anticipates it is reasonably possible that the uncertain tax liabilities related to Western Union may decrease by approximately $18 million within the next twelve months as the result of the possible closure of its 2003-2007 federal tax years. The uncertain income tax liabilities and corresponding receivable are based on information provided by Western Union regarding its tax contingency reserves for periods prior to the spin-off date. There is no assurance that a Western Union-related issue raised by the IRS or other tax authority will be finally resolved at a cost not in excess of the amount reserved and reflected in the Companys uncertain income tax liabilities and corresponding receivable from Western Union. The Western Union contingent liability is in addition to the Companys liability for unrecognized tax benefits discussed above.
The IRS completed its examination of the United States federal consolidated income tax returns of the Company for 2003 and 2004 and issued a Notice of Deficiency (the Notice) in December 2008. The Notice claims that the Company and its subsidiaries, which included Western Union during the years at issue, owe significant additional taxes, interest and penalties with respect to a variety of adjustments. The Company and Western Union agreed with several of the adjustments in the Notice, and during 2010, the IRS conceded certain of the adjustments. During the fourth quarter of 2011, the Company and Western Union reached agreements with the IRS resolving all remaining disputed adjustments in the Notice. As a result, the Companys liability for unrecognized tax benefits and the uncertain income tax liabilities related to Western Union on these previously disputed items were reduced to zero and an income taxes payable of $114 million was recorded, reflecting the agreements reached with the IRS related to the Western Union issues in the 2003 through 2006 federal tax years. The Company also recorded a corresponding account receivable from Western Union, reflecting its indemnification obligation with respect to these adjustments.
Equity earnings in affiliates. Equity earnings in affiliates increased in 2011 compared to 2010 due mostly to the 2011 correction of cumulative depreciation and amortization errors related to purchase accounting associated with the Companys 2007 merger with an affiliate of KKR as well as volume growth associated with the Companys merchant alliances. The error corrections, which totaled a $11.0 million benefit in Equity earnings in affiliates (the correction of such errors totaled a $58.5 million benefit in aggregate) and occurred over a four year period, benefited the equity earnings in affiliates growth rate compared to the prior year by 9 percentage points. Equity earnings in affiliates increased in 2010 compared to 2009 due to volume growth associated with the Companys merchant alliances.
Net income attributable to noncontrolling interests. Most of the net income attributable to noncontrolling interests relates to the Companys consolidated merchant alliances. Net income attributable to noncontrolling interests increased in 2010 compared to 2009 due to the formation of the BAMS alliance in June 2009.
Segment results. FDC classifies its businesses into three segments: Retail and Alliance Services, Financial Services and International. All Other and Corporate is not discussed separately as its results that had a significant impact on operating results are discussed in the Consolidated Results discussion above.
The results of divested businesses are excluded from segment results. The Company sold a merchant acquiring business in Canada, a debit and credit card issuing and acquiring processing business in Austria and Active Business Services, Ltd, all reported within the International segment, in November 2009 and August 2009. The International performance measures have been adjusted for 2009 to exclude the results of divested businesses.
The business segment measurements provided to and evaluated by the chief operating decision maker are computed in accordance with the principles listed below.
· The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies.
· Segment revenue includes equity earnings in affiliates (excluding amortization expense) and intersegment revenue. Retail and Alliance Services segment revenue does not include equity earnings because it is reported using proportionate consolidation as described below.
· Segment revenue excludes reimbursable debit network fees, postage and other revenue.
· Segment earnings before net interest expense, income taxes, depreciation and amortization (EBITDA) includes equity earnings in affiliates and excludes depreciation and amortization expense, net income attributable to noncontrolling interests, other operating expenses and other income (expense). Retail and Alliance Services segment EBITDA does not include equity earnings because it is reported using proportionate consolidation as described below. Additionally, segment EBITDA is adjusted for items similar to certain of those used in calculating the Companys compliance with debt covenants. The additional items that are adjusted to determine segment EBITDA are:
· stock based compensation and related expense is excluded;
· official check and money order businesses EBITDA are excluded;
· cost of data center technology and savings initiatives are excluded and represent implementation costs associated with initiatives to reduce operating expenses including items such as platform and data center consolidation initiatives in the International segment, expenses related to the reorganization of global application development resources (applicable to 2010 and 2009), expenses associated with domestic data center consolidation initiatives and planned workforce reduction expenses (applicable to 2010 and 2009), certain platform development and other costs directly associated with the termination of the Chase Paymentech Solutions alliance, and expenses related to the conversion of certain BAMS alliance merchant clients onto the Companys platforms in 2011, 2010 and 2009 all of which are considered nonrecurring projects (excludes costs accrued in purchase accounting). Effective October 1, 2011, First Data and Bank of America N.A. (the Bank) jointly decided to have First Data operate the Banks legacy settlement platform. Transition costs associated with the revised strategy are also excluded from segment EBITDA.
· debt issuance costs are excluded and represent costs associated with issuing debt and modifying the Companys debt structure;
· KKR related items include annual sponsor and other fees for management, consulting, financial and other advisory services.
· Retail and Alliance Services segment revenue and EBITDA are reflected based on the Companys proportionate share of the results of its investments in businesses accounted for under the equity method and consolidated subsidiaries with noncontrolling ownership interests. In addition, Retail and Alliance Services segment measures reflect commission payments to certain ISOs, which are treated as an expense in the Consolidated Statements of Operations, as contra revenue to be consistent with revenue share arrangements with other ISOs that are recorded as contra revenue.
· Corporate operations include administrative and shared service functions such as the executive group, legal, tax, treasury, internal audit, accounting, human resources, information technology and procurement. Costs incurred by Corporate that are directly attributable to a segment are allocated to the respective segment. Administrative, shared service and certain information technology costs are retained by Corporate.
Retail and Alliance Services segment results.
|
|
Year ended December 31, |
|
Percent Change |
| |||||||||
(in millions) |
|
2011 |
|
2010 |
|
2009 |
|
2011 vs. 2010 |
|
2010 vs. 2009 |
| |||
Revenues: |
|
|
|
|
|
|
|
|
|
|
| |||
Transaction and processing service fees |
|
$ |
2,974.5 |
|
$ |
2,923.9 |
|
$ |
2,720.1 |
|
2 |
% |
7 |
% |
Product sales and other |
|
407.5 |
|
390.9 |
|
342.7 |
|
4 |
% |
14 |
% | |||
Segment revenue |
|
$ |
3,382.0 |
|
$ |
3,314.8 |
|
$ |
3,062.8 |
|
2 |
% |
8 |
% |
Segment EBITDA |
|
$ |
1,407.5 |
|
$ |
1,322.3 |
|
$ |
1,193.5 |
|
6 |
% |
11 |
% |
Segment margin |
|
42 |
% |
40 |
% |
39 |
% |
2 |
pts |
1 |
pt | |||
|
|
|
|
|
|
|
|
|
|
|
| |||
Key indicators: |
|
|
|
|
|
|
|
|
|
|
| |||
Domestic merchant transactions (a) |
|
35,619.8 |
|
33,543.8 |
|
27,388.3 |
|
6 |
% |
22 |
% |
(a) Domestic merchant transactions include acquired VISA and MasterCard credit and signature debit PIN-debit, electronic benefits transactions, and processed-only or gateway customer transactions at the POS. Domestic merchant transactions reflect 100% of alliance transactions and include all of the transactions related to merchants contributed by BofA to the BAMS alliance since the formation of the alliance on June 26, 2009. Domestic merchant transactions include activity for JPMorgan Chase merchants that continue to process on the Companys platforms. Transactions in prior years have been adjusted to conform to current year presentation.
Transaction and processing service fees revenue.
|
|
Year ended December 31, |
|
Percent Change |
| |||||||||
(in millions) |
|
2011 |
|
2010 |
|
2009 |
|
2011 vs. 2010 |
|
2010 vs. 2009 |
| |||
Acquiring revenue |
|
$ |
2,204.4 |
|
$ |
2,169.7 |
|
$ |
2,075.2 |
|
2 |
% |
5 |
% |
Check processing revenue |
|
330.1 |
|
370.7 |
|
358.3 |
|
(11 |
)% |
3 |
% | |||
Prepaid revenue |
|
291.1 |
|
263.2 |
|
214.4 |
|
11 |
% |
23 |
% | |||
Processing fees and other revenue from alliance partners |
|
148.9 |
|
120.3 |
|
72.2 |
|
24 |
% |
67 |
% | |||
Total transaction and processing service fees revenue |
|
$ |
2,974.5 |
|
$ |
2,923.9 |
|
$ |
2,720.1 |
|
2 |
% |
7 |
% |
Acquiring revenue. Acquiring revenue increased in 2011 compared to 2010 due mostly to lower debit interchange rates as a result of the Dodd-Frank Act described in the Regulatory Reform section above which benefited the growth rate for acquiring revenue in 2011 compared to 2010 by approximately $26 million or 1 percentage point. Acquiring revenue also benefited from increases in merchant transactions and dollar volumes, new sales and pricing increases for regional merchants. These increases were partially offset by decreases resulting from the impact of merchant mix on transactions and dollar volumes (discussed below), the affect of shifts in pricing mix, merchant attrition and price compression largely related to national merchants and ISO portfolios. In addition, acquiring revenue was adversely impacted by a card association fee increase which only benefited the third quarter of 2010 and impacted the acquiring revenue growth rate in 2011 compared to 2010 by 1 percentage point.
Transaction growth outpaced revenue growth in 2011 compared to 2010 driven by the factors noted above, particularly merchant mix, pricing mix and price compression. A greater proportion of transaction growth was driven by the Companys national merchants which contributed to lower revenue per transaction. The average ticket size of signature based transactions was flat in 2011 as compared to 2010. Transactions in 2010 are not comparable to 2009 due to the items noted in (a) above.
Acquiring revenue increased in 2010 compared to 2009 due to increases in merchant transaction and dollar volumes, new sales and the card association fee increase noted above. Partially offsetting these increases were merchant attrition and price compression. The card association fee increase benefited the acquiring revenue growth rate in 2010 versus 2009 by 1 percentage point.
Check processing revenue. Check processing revenue decreased in 2011 versus 2010 due most significantly to lower overall check volumes from check writer and merchant attrition and the impact of merchant mix resulting from a shift in regional to national merchants.
Check processing revenue increased in 2010 versus 2009 due most significantly to new business in 2010, mostly national merchants. Partially offsetting the increase were lower overall check volumes from existing customers and merchant attrition, primarily regional merchants.
Prepaid revenue. Prepaid revenue increased in 2011 compared to 2010 due mostly to higher transaction volumes within the open loop payroll distribution program related to new and existing customers. In addition, sales of gift cards increased in 2011 compared to the prior year related to a large sale to a national retailer associated with an incentive program as well as volume growth from existing clients and new clients. These increases were partially offset by sales of promotional gift cards in 2010 driven by a specific direct marketing campaign. Additionally, 2011 was impacted by a change in merchant mix resulting from increased card shipments to merchants that generate less revenue per card.
Prepaid revenue increased in 2010 compared to 2009 most significantly due to higher transaction volumes within the payroll distribution program as well as an increase in card shipments to existing clients.
Processing fees and other revenue from alliance partners. The increase in processing fees and other revenue from alliance partners in 2011 compared to 2010 resulted from increased fees from the BAMS alliance due to the shift of processing as discussed above in the Banc of America Merchant Services, LLC section as well as increased volumes within the Companys merchant alliances. The impact of the shift in processing benefited the 2011 growth rate by approximately $18 million or 15 percentage points.
The increase in processing fees and other revenue from alliance partners in 2010 compared to 2009 resulted most significantly from the processing fees related to the BAMS alliance as well as increased transactions and rate increases.
Product sales and other revenue. Product sales and other revenue increased in 2011 compared to 2010 primarily due to increases in the leasing business resulting from new clients as well as increased fees from lease renewals. Equipment sales decreased slightly in 2011 compared to 2010 resulting from higher terminal demand in the prior year due to new regulations and a shift in the mix of terminals in 2011 to lower cost, proprietary models.
Product sales and other revenue increased in 2010 versus 2009 mainly resulting from increased volumes due in part to increased demand for terminals as a result of new regulations, increased sales to existing clients and new business.
Segment EBITDA. The impact of the revenue items noted above contributed to the increase in Retail and Alliance Services segment EBITDA in 2011 compared to 2010. The decrease in debit interchange rates positively impacted the segment EBITDA growth rate in 2011 compared to 2010 by approximately $24 million or 2 percentage points. Expense reductions also benefited Retail and Alliance Services segment EBITDA in 2011 compared to the prior year. Also contributing to the increase in segment EBITDA for 2011 compared to 2010 were decreased credit losses due to a lower level of merchant delinquencies which benefited the segment EBITDA growth rate by 1 percentage point. The card association fee noted above negatively impacted the segment EBITDA growth rate in 2011 compared to 2010 by 2 percentage points.
Retail and Alliance Services segment EBITDA in 2010 compared to 2009 was positively impacted by the revenue items noted above in the revenue discussion. The card association fee increase discussed above benefited the segment EBITDA growth rate in 2010 versus 2009 by 2 percentage points. Also contributing to the increase in segment EBITDA in 2010 compared to 2009 were decreased credit losses due to a lower level of merchant delinquencies as well as a decrease in net check warranty expense driven by improvements in collection rates. Partially offsetting the increases were decreases due to higher operational and technology costs, higher incentive compensation accruals and fees paid for processing transactions associated with merchants contributed to BAMS by BofA. Higher incentive compensation impacted the segment EBITDA growth rate in 2010 by 1 percentage point.
Financial Services segment results.
|
|
Year ended December 31, |
|
Percent Change |
| |||||||||
(in millions) |
|
2011 |
|
2010 |
|
2009 |
|
2011 vs. 2010 |
|
2010 vs. 2009 |
| |||
Revenues: |
|
|
|
|
|
|
|
|
|
|
| |||
Transaction and processing service fees |
|
$ |
1,350.0 |
|
$ |
1,362.2 |
|
$ |
1,379.8 |
|
(1 |
)% |
(1 |
)% |
Product sales and other |
|
29.5 |
|
46.8 |
|
63.0 |
|
(37 |
)% |
(26 |
)% | |||
Segment revenue |
|
$ |
1,379.5 |
|
$ |
1,409.0 |
|
$ |
1,442.8 |
|
(2 |
)% |
(2 |
)% |
Segment EBITDA |
|
$ |
593.5 |
|
$ |
553.0 |
|
$ |
645.3 |
|
7 |
% |
(14 |
)% |
Segment margin |
|
43 |
% |
39 |
% |
45 |
% |
4 |
pts |
(6 |
)pts | |||
|
|
|
|
|
|
|
|
|
|
|
| |||
Key indicators: |
|
|
|
|
|
|
|
|
|
|
| |||
Domestic debit issuer transactions (a) |
|
13,042.6 |
|
12,201.2 |
|
12,222.5 |
|
7 |
% |
0 |
% | |||
Domestic active card accounts on file (end of period) (b) |
|
|
|
|
|
|
|
|
|
|
| |||
Bankcard |
|
50.5 |
|
47.8 |
|
48.3 |
|
6 |
% |
(1 |
)% | |||
Retail |
|
72.6 |
|
70.7 |
|
72.6 |
|
3 |
% |
(3 |
)% | |||
Total |
|
123.1 |
|
118.5 |
|
120.9 |
|
4 |
% |
(2 |
)% | |||
|
|
|
|
|
|
|
|
|
|
|
| |||
Domestic card accounts on file (end of period) (c) |
|
|
|
|
|
|
|
|
|
|
| |||
Bankcard |
|
137.2 |
|
127.3 |
|
123.2 |
|
8 |
% |
3 |
% | |||
Retail |
|
423.0 |
|
398.4 |
|
385.3 |
|
6 |
% |
3 |
% | |||
Debit |
|
146.5 |
|
129.9 |
|
153.3 |
|
13 |
% |
(15 |
)% | |||
Total |
|
706.7 |
|
655.6 |
|
661.8 |
|
8 |
% |
(1 |
)% |
(a) Domestic debit issuer transactions include VISA and MasterCard signature debit, STAR ATM, STAR PIN-debit POS and ATM and PIN-debit POS gateway transactions.
(b) Domestic active card accounts on file include bankcard and retail accounts that had a balance or any monetary posting or authorization activity during the last month of the quarter.
(c) Domestic card accounts on file include credit, retail and debit card accounts as of the last day of the last month of the period.
Transaction and processing service fees revenue.
Components of transaction and processing service fees revenue.
|
|
Year ended December 31, |
|
Percent Change |
| |||||||||
(in millions) |
|
2011 |
|
2010 |
|
2009 |
|
2011 vs. 2010 |
|
2010 vs. 2009 |
| |||
Credit card, retail card and debit processing |
|
$ |
907.2 |
|
$ |
924.7 |
|
$ |
972.0 |
|
(2 |
)% |
(5 |
)% |
Output services |
|
225.3 |
|
219.5 |
|
242.5 |
|
3 |
% |
(9 |
)% | |||
Other revenue |
|
217.5 |
|
218.0 |
|
165.3 |
|
0 |
% |
32 |
% | |||
Total |
|
$ |
1,350.0 |
|
$ |
1,362.2 |
|
$ |
1,379.8 |
|
(1 |
)% |
(1 |
)% |
Credit card, retail card and debit processing revenue. Credit card and retail card processing revenue declined in 2011 versus 2010 with net new account conversions more than offset by price compression, declines in revenue from existing customers and the loss of call center business not driven by active accounts on file. Growth in domestic active card accounts on file benefited primarily from net new account conversions. Credit card and retail processing revenue decreased in 2010 versus 2009 due to the decline in active accounts from existing customers and price compression partially offset by net new business.
Debit processing revenue increased slightly in 2011 compared to 2010 due to debit issuer transaction growth from existing customers substantially offset by net lost business and price compression. Debit processing revenue decreased in 2010 versus 2009 due to lost business, including the deconversion of Washington Mutual Bank, and price compression partially offset by debit
transaction growth from existing customers and new business. The Financial Services segment Credit card, retail card and debit processing revenue growth rate was negatively impacted by 3 percentage points in 2010 compared to 2009 as a result of the termination of services provided to Washington Mutual Bank.
Debit issuer transaction growth in 2011 compared to 2010 resulted from growth of existing clients due in part to the shift to debit cards from cash and checks, and new business partially offset by lost business. Growth in debit issuer transactions in 2010 compared to 2009 was primarily offset by transactions lost as a result of the Washington Mutual deconversion. Debit issuer transactions excluding the impact of the Washington Mutual Bank deconversion grew in 2010 versus 2009 compared to the prior years due in part to the shift to debit cards from cash and checks.
During 2010, the Company received notification from a large financial institution that it will not renew its debit processing agreement at the end of the contract term. However, the client subsequently extended its processing contract through the deconversion period. Deconversion began in late 2011 and will continue into 2012. The Company has also received notification of termination from various other financial institutions that are less significant individually, which are scheduled to deconvert throughout 2012. Including the large financial institution, these agreements represented approximately 7% of segment revenue for 2011. At December 31, 2011, the Company had approximately 58 million accounts in the pipeline for conversion, the majority of which are retail accounts that are expected to convert late in the first quarter of 2012 that will partially offset the impact of the deconversions noted above.
Output services revenue. Output services revenue increased in 2011 compared to 2010 due to net new plastic and print business and growth in plastics volumes from existing customers partially offset by lower print volumes from existing customers and price compression.
Output services revenue decreased in 2010 versus 2009 due most significantly to net lost business, decreases in print mail and plastics volumes from existing customers as a result of credit card issuers being more selective in issuing credit and price compression. Most of the lost business related to Washington Mutual Bank which negatively impacted the output services revenue growth rate by 8 percentage points for the year ended December 31, 2010 compared to the same period in 2009.
Other revenue. Other revenue consists mostly of revenue from remittance processing, online banking and bill payment services, information services and voice services.
Other revenue was flat in 2011 compared to 2010 due to a decrease in volumes related to remittance processing and information services mostly offset by an increase in online banking and bill payment services volumes as well as net new business primarily in remittance processing.
Other revenue increased in 2010 compared to 2009 due most significantly to the inclusion of the information services businesses in the Financial Services segment prospectively beginning January 1, 2010 which impacted the other revenue growth rate in 2010 versus 2009 by 23 percentage points. Other revenue also increased due to new business in remittance processing and online banking and bill payment services. Partially offsetting these increases were decreases due to lower remittance and check processing volumes resulting from the shift from paper to electronic forms of payment, lost business and the wind down of an existing product.
Product sales and other revenue. Product sales and other revenue decreased in 2011 compared to 2010 due most significantly to higher contract termination fees recognized in 2010 as well as a decline in professional services revenue resulting from projects that were completed in 2010.
Product sales and other revenue decreased in 2010 versus 2009 due most significantly to the recognition of termination fees related to the termination of services with Washington Mutual Bank, the most significant of which were recognized in the second quarter of 2009.
Segment EBITDA. Financial Services segment EBITDA increased in 2011 compared to 2010 due most significantly to decreased technology and operations costs resulting from reduced headcount and operational efficiencies, and a sales tax recovery. In addition, 2011 also benefited compared to 2010 from higher expenses in the prior year due to a billing adjustment recorded in the second quarter of 2010. These increases were partially offset by the adverse impact of the items noted in the revenue discussion above. The decrease in technology and operations costs, the sales tax recovery and the prior year billing adjustment benefited the segment EBITDA growth rate in 2011 versus 2010 by 11, 2 and 1 percentage points, respectively.
Financial Services segment EBITDA decreased in 2010 compared to 2009 due to the impact of the items noted in the revenue discussion above as well as higher incentive compensation, higher operational and technology costs and a billing adjustment. Higher incentive compensation negatively impacted the segment EBITDA growth rate in 2010 versus 2009 by 1 percentage point. The billing adjustment negatively impacted the segment EBITDA growth rate for the same period by 1 percentage point.
International segment results.
|
|
Year ended December 31, |
|
Percent Change |
| |||||||||
(in millions) |
|
2011 |
|
2010 |
|
2009 |
|
2011 vs. 2010 |
|
2010 vs. 2009 |
| |||
Revenues: |
|
|
|
|
|
|
|
|
|
|
| |||
Transaction and processing service fees |
|
$ |
1,337.9 |
|
$ |
1,237.5 |
|
$ |
1,197.1 |
|
8 |
% |
3 |
% |
Product sales and other |
|
388.8 |
|
353.9 |
|
344.9 |
|
10 |
% |
3 |
% | |||
Equity earnings in affiliates |
|
34.6 |
|
29.4 |
|
30.1 |
|
18 |
% |
(2 |
)% | |||
Segment revenue |
|
$ |
1,761.3 |
|
$ |
1,620.8 |
|
$ |
1,572.1 |
|
9 |
% |
3 |
% |
Segment EBITDA |
|
$ |
454.3 |
|
$ |
329.8 |
|
$ |
398.7 |
|
38 |
% |
(17 |
)% |
Segment margin |
|
26 |
% |
20 |
% |
25 |
% |
6 |
pts |
(5 |
)pts | |||
|
|
|
|
|
|
|
|
|
|
|
| |||
Key indicators: |
|
|
|
|
|
|
|
|
|
|
| |||
International transactions (a) |
|
7,452.8 |
|
6,724.1 |
|
5,826.8 |
|
11 |
% |
15 |
% | |||
International card accounts on file (end of period) (b) |
|
75.0 |
|
88.8 |
|
80.9 |
|
(16 |
)% |
10 |
% |
(a) International transactions include VISA, MasterCard and other card association merchant acquiring and switching, and debit issuer transactions for clients outside the U.S. Transactions include credit, signature debit and PIN-debit POS, POS gateway and ATM transactions.
(b) International card accounts on file include bankcard and retail.
Summary. Segment revenue benefited due to the items discussed below as well as the impact of foreign currency exchange rate movements. Foreign currency exchange rate movements benefited the total segment revenue growth rate in 2011 compared to 2010 and 2010 versus 2009 by 4 and 1 percentage points, respectively.
Transaction and processing service fee revenue. Transaction and processing service fees revenue includes merchant related services and card services revenue. Merchant related services revenue encompasses merchant acquiring and processing revenue, debit transaction revenue, POS/ATM transaction revenue and fees from switching services. Card services revenue represents monthly managed service fees for issued cards. Merchant related services transaction and processing service fees revenue represented approximately 59%, 57% and 53% and card services revenue represented approximately 41%, 43% and 47% of total transaction and processing service fees revenue for 2011, 2010 and 2009, respectively.
Transaction and processing service fees revenue increased in 2011 compared to 2010 due to growth in the merchant acquiring businesses resulting from growth from existing clients in the merchant acquiring alliances and the direct sales channel in the United Kingdom. The card issuing businesses grew due to new business primarily in the United Kingdom as well as transaction growth in Argentina and pricing in Australia. Partially offsetting these increases were lost business and lower revenue in Greece driven by the economic recession and a strategic decision to exit low-margin businesses. Foreign currency exchange rate movements benefited the transaction and processing service fees growth rates in 2011 versus 2010 by 5 percentage points.
Transaction and processing service fees revenue increased in 2010 compared to 2009 due to growth in the merchant acquiring businesses partially offset by declines in the card issuing businesses. Revenue increased due to growth from existing clients primarily in the card issuing businesses in Argentina as well as the merchant acquiring alliances in the United Kingdom, new card issuing business mostly in the United Kingdom, an acquisition in India and foreign currency exchange rate movements. Partially offsetting these increases were decreases due to lost business and price compression primarily in the card issuing businesses. The lost business most significantly impacted the card issuing businesses in the United Kingdom, Australia and Canada. Foreign currency exchange rate movements benefited the transaction and processing service fee growth rate in 2010 versus 2009 by 1 percentage point. The Company formed a merchant acquiring alliance with ICICI Bank, ICICI Merchant Services, in December 2009 which positively impacted the transaction and processing service fees growth rate in 2010 versus 2009 by 1 percentage point.
Transaction and processing service fees revenue is driven by accounts on file and transactions. The spread between growth in these two indicators and revenue growth was driven mostly by the impact of foreign currency exchange rate movements, the mix of transaction types and price compression. Transaction growth in 2011 versus 2010 was adversely impacted by a deconversion that did not materially impact revenue. International card accounts on file in 2011 decreased primarily due to lost business in China that deconverted in December 2011. The deconversion did not materially impact revenue in 2011 and the impact to future periods will not be material.
Product sales and other revenue. Product sales and other revenue increased in 2011 compared to 2010 due to growth in terminal sales and leasing revenue as a result of new clients and growth from existing clients in Argentina and the United Kingdom as well as new terminal requirements and lease renewals in the United Kingdom.
Product sales and other revenue increased in 2010 versus 2009 due to growth in terminal sales and leasing revenue as a result of new clients and growth from existing clients in Argentina and Canada. Partially offsetting this increase was a decrease in professional services revenue resulting from completion of projects and net lost business.
Segment EBITDA. Segment EBITDA increased in 2011 compared to 2010 due to the impact of the revenue items noted above, decreased operating expenses driven by cost reduction initiatives, a benefit resulting from the write-off of leasing receivables and terminal inventory in 2010 and the impact of foreign currency exchange rate movements. The 2010 write-off of leasing receivables and terminal inventory benefited the segment EBITDA growth rate in 2011 compared to 2010 by 6 percentage points. Segment EBITDA growth also benefited 5 percentage points in 2011 compared to 2010 from the impact of foreign currency exchange rate movements. Partially offsetting the increases described above was a decrease resulting from the correction of cumulative errors in the amortization of initial payments for new contracts related to purchase accounting associated with the KKR merger and the write-off of capitalized commissions related to terminal leases which, together, adversely impacted International segment EBITDA by $14.3 million and the growth rate for 2011 compared to 2010 by 4 percentage points.
Segment EBITDA decreased in 2010 compared to 2009 due to the write-off of leasing receivables in the second and third quarters of 2010, the write-off of terminal inventory in the third quarter of 2010, higher operational and technology costs, price compression and higher incentive compensation. The write-off of leasing receivables incorrectly recognized in prior years and the write-off of terminal inventory negatively impacted the segment EBITDA growth rate in 2010 versus 2009 by 5 percentage points. In addition, segment EBITDA growth benefited 2 percentage points in 2010 compared to 2009 from the impact of foreign currency exchange rate movements.
Capital Resources and Liquidity
FDCs source of liquidity is principally cash generated from operating activities supplemented as necessary on a short-term basis by borrowings against its revolving credit facility. The Company believes its current level of cash and short-term financing capabilities along with future cash flows from operations are sufficient to meet the needs of the business. The following discussion highlights changes in the Companys debt structure as well as the Companys cash flow activities and the sources and uses of funding during the years ended December 31, 2011, 2010 and 2009. Refer to Note 8 to the Companys Consolidated Financial Statements in Item 8 of this Form 10-K for additional information regarding the Companys debt structure.
Debt modifications and amendments. On March 24, 2011, FDC executed a 2011 Extension Amendment (the Amendment Agreement) relating to its credit agreement, dated as of September 24, 2007, as amended and restated as of September 28, 2007, as further amended as of August 10, 2010, among FDC, the several lenders from time to time parties thereto and Credit Suisse AG as administrative agent (the Credit Agreement). The Credit Agreement, as amended pursuant to the Amendment Agreement, is referred to herein as the Amended Credit Agreement.
The Amendment Agreement, which became effective on April 13, 2011, among other things:
(i) resulted in the extension of the maturity date of $1.0 billion, after giving effect to the reduction discussed below, of FDCs revolving credit commitments (the Revolver Extension) under the Amended Credit Agreement to the earliest of: (x) June 24, 2015, if on such date the aggregate outstanding principal amount of FDCs 9.875% senior notes due 2015 and 10.55% senior notes due 2015 exceeds $750.0 million, (y) December 31, 2015, if on such date the aggregate outstanding principal amount of FDCs 11.25% senior subordinated notes due 2016 exceeds $750.0 million and (z) September 24, 2016;
(ii) resulted in the extension of the maturity date of approximately $5.0 billion of term loans (consisting of approximately $4.5 billion of dollar denominated term loans and an amount of euro denominated term loans the dollar equivalent of which was approximately $0.5 billion (the Term Loan Extension)) under the Amended Credit Agreement to March 24, 2018;
(iii) provided for an increase in the interest rate applicable to the revolving credit loans subject to the Revolver Extension and the term loans subject to the Term Loan Extension to a rate equal to, at FDCs option, either (x) LIBOR for deposits in the applicable currency plus 400 basis points or (y) with regard to dollar denominated borrowings, a base rate plus 300 basis points;
(iv) provided for an increase in the commitment fee payable on the undrawn portion of the revolving credit commitments subject to the Revolver Extension to 75 basis points; and
(v) provided FDC with the ability to reduce the revolving credit commitments subject to the Revolver Extension while maintaining the revolving credit commitments not subject to the Revolver Extension in their original amount.
Immediately after the effectiveness of such amendments, FDC effected a permanent reduction of the revolving credit commitments that were subject to the Revolver Extension in an amount equal to $254.1 million.
On April 13, 2011, FDC issued and sold $750 million aggregate principal amount of 7.375% senior secured notes due June 15, 2019. In accordance with the terms of FDCs Amended Credit Agreement, FDC used the net proceeds from the offering to repay approximately $735 million of its outstanding senior secured term loans, including $0.3 billion of the $5.0 billion that was extended until 2018 under the Amendment Agreement discussed above.
On August 10, 2010, FDC amended its senior secured credit facilities to, among other things:
(i) allow for FDC to incur additional secured indebtedness or additional unsecured indebtedness so long as certain restrictions are met pertaining to repayment of existing debt, issuance limits and ranking;
(ii) exclude from the calculation of consolidated senior secured debt (and hence from the maintenance covenant) certain indebtedness secured by a lien ranking junior to the liens securing FDCs obligations under its senior secured credit facilities; and
(iii) subject to the requirement to make such offers on a pro rata basis to all lenders within a particular class of loans, allow FDC to agree with individual lenders to extend the maturity of their term loans or revolving commitments, and for FDC to pay increased interest rates or otherwise modify the terms of their loans or revolving commitments in connection with such an extension.
The August 2010 amendment became effective on August 20, 2010 following FDCs issuance of $510.0 million of 8.875% senior secured notes and using net cash proceeds of $489.7 million therefrom to prepay a like amount of FDCs secured term loans.
Debt exchange. On December 17, 2010, FDC completed a private exchange offer ( Debt Exchange). The following table presents the results of the debt exchange.
Debt Exchange |
|
Amounts |
| |
Notes exchanged |
|
|
| |
9.875% Senior notes due 2015 |
|
$ |
2,966.5 |
|
10.55% Senior PIK notes due 2015 |
|
3,035.1 |
| |
Total amount exchanged (a) |
|
$ |
6,001.6 |
|
|
|
|
| |
Notes issued |
|
|
| |
8.25% Senior second lien notes due 2021 |
|
$ |
1,999.7 |
|
8.75%/10.00% PIK toggle senior second lien notes due 2022 |
|
1,000.0 |
| |
12.625% Senior notes due 2021 |
|
3,000.0 |
| |
Total amount issued (a) |
|
$ |
5,999.7 |
|
(a) The difference between the total amount exchanged and the total amount issued relates primarily to a discount of the notes issued for exchanges subsequent to the early tender date.
The Company has taken a number of steps to extend its debt maturities and intends to extend additional maturity dates as opportunities allow.
In February 2012, FDC announced its intention to seek amendments to its senior secured credit facilities to, among other things, (i) convert all or a portion of the Companys existing term loans maturing September 2014 under its senior secured term loan facility into new dollar- and euro-denominated extended tranches of term loans, maturing March 2017, (ii) provide for certain increases in the Companys ability to incur indebtedness pursuant to the incremental facility option under its senior secured credit facilities and (iii) effect certain other changes as provided for in the definitive documentation for the amendments. The effectiveness of the amendments is subject to certain conditions, including, among other things, the Company issuing senior secured notes in an amount to be determined within 90 days of the date of the initial effectiveness of the amendment agreement. The net cash proceeds from the issuance of the notes will be used to prepay a portion of eligible 2017 term loans. As of March 2, 2012, FDC has obtained amendment approvals from lenders holding more than 50.1% of the commitments and loans under the senior secured credit facilities.
Cash and cash equivalents. Investments (other than those included in settlement assets) with original maturities of three months or less (that are readily convertible to cash) are considered to be cash equivalents and are stated at cost, which approximates
market value. At December 31, 2011 and 2010, the Company held $485.7 million and $509.5 million in cash and cash equivalents, respectively.
Included in cash and cash equivalents are amounts held by Integrated Payment Systems Inc. (IPS) that are not available to fund operations outside of the IPS business. In addition, cash and cash equivalents also includes amounts held by the BAMS alliance, which is consolidated by the Company, that are not available to fund operations outside of the alliance. At December 31, 2011 and 2010, the cash and cash equivalents held by IPS and the BAMS alliance totaled $75.2 million and $127.0 million, respectively. All other domestic cash balances, to the extent available, are used to fund the Companys short-term liquidity needs.
Cash and cash equivalents also includes amounts held outside of the U.S. at December 31, 2011 and 2010 totaling $216.0 million and $200.6 million, respectively. As of December 31, 2011, there was approximately $60 million of cash and cash equivalents held outside of the U.S. that could be used for general corporate purposes. FDC plans to fund any cash needs in 2012 within the International segment with cash held by the segment, but if necessary, could fund such needs using cash from the U.S., subject to satisfying debt covenant restrictions.
Cash flows from operating activities.
|
|
Year ended December 31, |
| |||||||
Source/(use) (in millions) |
|
2011 |
|
2010 |
|
2009 |
| |||
Net loss |
|
$ |
(336.1 |
) |
$ |
(846.9 |
) |
$ |
(1,014.6 |
) |
Depreciation and amortization (including amortization netted against equity earnings in affiliates and revenues) |
|
1,344.2 |
|
1,526.0 |
|
1,553.8 |
| |||
Charges related to other operating expenses and other income (expense) |
|
(77.7 |
) |
97.4 |
|
350.5 |
| |||
Other non-cash and non-operating items, net |
|
27.7 |
|
265.6 |
|
306.2 |
| |||
Increase (decrease) in cash, excluding the effects of acquisitions and dispositions, resulting from changes in: |
|
|
|
|
|
|
| |||
Accounts receivable, current and long-term |
|
256.7 |
|
224.7 |
|
288.8 |
| |||
Other assets, current and long-term |
|
239.3 |
|
298.3 |
|
215.6 |
| |||
Accounts payable and other liabilities, current and long-term |
|
(1.2 |
) |
(386.1 |
) |
(42.8 |
) | |||
Income tax accounts |
|
(337.3 |
) |
(424.3 |
) |
(657.9 |
) | |||
Net cash provided by operating activities |
|
$ |
1,115.6 |
|
$ |
754.7 |
|
$ |
999.6 |
|
Cash flows provided by operating activities for the periods presented resulted from normal operating activities and also reflect the timing of the Companys working capital requirements.
FDCs operating cash flow is significantly impacted by its level of debt. Approximately $1,458.2 million, $1,494.9 million and $1,412.2 million in cash interest, including interest on lines of credit and capital leases, was paid during 2011, 2010 and 2009, respectively. Excluding interest on lines of credit and capital leases, cash interest payments on long-term debt obligations in 2012 are expected to increase to approximately $1,735 million, due primarily to the debt exchange discussed above resulting in seven months of interest payments in 2011 compared to twelve months of interest payments in 2012 for the notes issued in the exchange. The timing of quarterly interest payments in 2012 will be impacted by when payment dates occur, shifting payments normally included in the first and third quarters to the second and fourth quarters. The Company estimates that its 2012 quarterly cash interest payments, excluding interest on lines of credit and capital leases, will be as follows:
Three months ended |
|
Estimated cash interest |
| |
March 31, 2012 |
|
$ |
495 |
|
June 30, 2012 |
|
395 |
| |
September 30, 2012 |
|
500 |
| |
December 31, 2012 |
|
345 |
| |
|
|
$ |
1,735 |
|
(a) The Company has an option to pay certain portions of its interest obligations in kind as an increase in principal rather than in cash. These amounts represent the amount of cash projected to be paid if the Company opts to pay its entire interest obligation for 2012 in cash.
Using December 31, 2011 balances for variable rate debt and applicable interest rate swaps, a 10 percent increase in the applicable LIBOR index on an annualized basis would increase interest expense by approximately $4.6 million.
During 2011, sources of cash resulted from payments received from customers, distributions of earnings received from alliances and the prefunding of certain settlement arrangements resulting from timing differences as well as changes in how the Company funds the arrangements including utilizing settlement assets to prefund some amounts. Such sources were offset by uses of cash associated with payments for various liabilities including the semi-annual payments of interest on FDCs long-term debt discussed above and incentive compensation earned in 2010.
The Companys operating cash flows are impacted by fluctuations in working capital. Cash flows from operating activities increased in 2011 compared to 2010 due to the flow through of operating activity which included higher revenues and lower expenses. Additionally, the increase was partially due to sources of cash related to lower prefunding of settlement arrangements.
During 2010, sources of cash related to the utilization of settlement assets to prefund certain settlement arrangements, payments received from customers and distributions of earnings received from alliances. Such sources were offset by uses associated with the timing of prefunding certain settlement arrangements and timing of payments for various liabilities including tax payments, severance payments and incentive compensation earned in 2009.
Cash flows from operating activities decreased in 2010 compared to 2009 due most significantly to the $246 million out of period collection in 2009 described below, the timing of payments on liabilities and collections of receivables as well as the timing of prefunding described above partially offset by a source in 2010 resulting from the utilization of settlement assets for prefunding also described above.
During 2009, sources of cash were associated with the timing of prefunding certain settlement arrangements, collection of receivables and distributions of earnings received from alliances. Such sources were offset by uses associated with timing of payments for various liabilities including incentive compensation earned in 2008. The formation of BAMS negatively impacted working capital in 2009 due most significantly to the prefunding of associated settlement arrangements and timing of collections of receivables offset by sources from other prefunding arrangements and the timing of payments on various expenses incurred by the alliance. Cash flows from operating activities for the year ended December 31, 2009 included a source of cash of $246 million which resulted from funding of domestic settlement obligations which should have been received from a card association on December 31, 2008 but was not received until the first business day of 2009 due to a file transfer delay.
Operating cash flows for all years were impacted by the Company being in a net operating loss carryforward position for U.S. federal income tax purposes. As a result, the Company has not received cash for any of the income tax benefit recorded in the respective years related to U.S. federal income taxes.
FDC anticipates funding operations throughout 2012 primarily with cash flows from operating activities and by closely managing discretionary capital and other spending; however, any shortfalls would be supplemented as necessary by borrowings against its revolving credit facility.
Cash flows from investing activities.
|
|
Year ended December 31, |
| |||||||
Source/(use) (in millions) |
|
2011 |
|
2010 |
|
2009 |
| |||
Current year acquisitions, net of cash acquired |
|
$ |
(19.2 |
) |
$ |
(1.8 |
) |
$ |
(84.8 |
) |
Contributions to equity method investments |
|
(161.5 |
) |
(1.4 |
) |
(29.7 |
) | |||
Payments related to other businesses previously acquired |
|
3.2 |
|
(1.4 |
) |
(14.7 |
) | |||
Proceeds from dispositions, net of expenses paid and cash disposed |
|
1.7 |
|
21.2 |
|
88.1 |
| |||
Proceeds from sale of property and equipment |
|
17.1 |
|
5.5 |
|
7.6 |
| |||
Additions to property and equipment |
|
(202.9 |
) |
(210.1 |
) |
(199.1 |
) | |||
Payments to secure customer service contracts, including outlays for conversion, and capitalized systems development costs |
|
(201.9 |
) |
(159.6 |
) |
(180.0 |
) | |||
Other investing activities |
|
4.9 |
|
18.4 |
|
(16.8 |
) | |||
Net cash used in investing activities |
|
$ |
(558.6 |
) |
$ |
(329.2 |
) |
$ |
(429.4 |
) |
Acquisitions and dispositions. The Company may finance acquisitions through a combination of internally generated funds, short-term borrowings and equity of its parent company. The Company may also consider using long-term borrowings subject to
restrictions in its debt agreements. All acquisitions during the periods presented were funded from cash flows from operating activities or from the reinvestment of cash proceeds from the sale of other assets other than the 2009 acquisition of the Companys proportionate share of the BAMS alliance discussed in significant non-cash transactions below. Purchases of noncontrolling interests are classified as financing activities as noted below. Although the Company considers potential acquisitions from time to time, the Companys plan for 2012 does not include funding of material acquisitions.
In the fourth quarter of 2011, the Company funded $160 million to one of its merchant alliance partners for referrals from bank branches contributed to the alliance as called for by the agreement that extended the term of the alliance in 2008. In 2009, the Company contributed $28.0 million to the PNC alliance.
For 2009, payments related to other businesses previously acquired related mostly to contingent consideration associated with a merchant alliance for which there have been no additional payments. The Company does not anticipate significant payments associated with other businesses.
During 2010, proceeds from dispositions related most significantly to the receipt of a contingent payment associated with the Companys sale of a merchant acquiring business in Canada in the fourth quarter of 2009. The source of cash in proceeds from dispositions in 2009 resulted from the Company selling the merchant acquiring business mentioned above and selling its debit and credit card issuing and acquiring processing business in Austria.
The Company continues to manage its portfolio of businesses and evaluate the possible divestiture of businesses that do not match its long-term growth objectives. For a more detailed discussion on acquisitions and dispositions in 2011, 2010 and 2009 refer to Note 3 to the Consolidated Financial Statements included in Item 8 of this Form 10-K.
Capital expenditures. Capital expenditures are estimated to be approximately $425 to $475 million in 2012 and are expected to be funded by cash flows from operations. If, however, cash flows from operating activities are insufficient, the Company will decrease its discretionary capital expenditures or utilize its revolving credit facility.
Other investing activities. The source of cash in 2010 related to a decrease in regulatory, restricted and escrow cash balances. The use of cash in 2009 related primarily to a $21.0 million increase in regulatory and restricted cash balances.
Cash flows from financing activities.
|
|
Year ended December 31, |
| |||||||
Source/(use) (in millions) |
|
2011 |
|
2010 |
|
2009 |
| |||
Short-term borrowings, net |
|
$ |
(107.3 |
) |
$ |
75.1 |
|
$ |
(206.1 |
) |
Debt modification and related financing costs |
|
(39.7 |
) |
(61.2 |
) |
|
| |||
Principal payments on long-term debt |
|
(104.5 |
) |
(220.4 |
) |
(243.1 |
) | |||
Proceeds from sale-leaseback transactions |
|
14.2 |
|
|
|
21.8 |
| |||
Distributions and dividends paid to noncontrolling interests and redeemable noncontrolling interests |
|
(327.3 |
) |
(216.1 |
) |
(10.0 |
) | |||
Contributions from noncontrolling interests |
|
0.8 |
|
|
|
193.0 |
| |||
Purchase of noncontrolling interest |
|
|
|
(213.3 |
) |
|
| |||
Redemption of Parents redeemable common stock |
|
(0.5 |
) |
(2.5 |
) |
|
| |||
Cash dividends |
|
(0.2 |
) |
(14.9 |
) |
|
| |||
Net cash used in financing activities |
|
$ |
(564.5 |
) |
$ |
(653.3 |
) |
$ |
(244.4 |
) |
Short-term borrowings, net. The cash activity related to short-term borrowings in 2011 resulted primarily from net paydowns on FDCs credit lines used principally to prefund settlement activity. In 2010, the cash activity related to short-term borrowings resulted primarily from net borrowings on FDCs senior secured revolving credit facility. The use of cash related to short-term borrowings in 2009 resulted from a net $18.0 million payment on the senior secured revolving credit facility as well as the timing of draws and payments on credit lines associated with settlement activity.
FDC utilizes its revolving credit facility on a short-term basis to fund investing or operating activities when cash flows from operating activities are not sufficient. The Company believes the capacity under its senior secured revolving credit facility is sufficient to meet its short-term liquidity needs. FDCs senior secured revolving credit facility can be used for working capital and general corporate purposes.
As of December 31, 2011, FDCs $2.0 billion senior secured revolving credit facility had commitments from financial institutions to provide $1,515.3 million of credit after being reduced by the $254.1 million permanent reduction discussed in Debt modifications and amendments above and the $230.6 million terminated commitment discussed below. FDC had no amount outstanding against this facility as of December 31, 2011 and 2010, other than the letters of credit discussed below. Therefore, as of December 31, 2011, $1,470.3 million remained available under this facility. Excluding the letters of credit, the maximum amount outstanding against this facility during 2011 was approximately $130 million while the average amount outstanding during 2011 was approximately $4 million.
There are multiple institutions that have commitments under this facility with none representing more than approximately 18% of the remaining capacity. An affiliate of Lehman Brothers Holdings Inc. provided a $230.6 million commitment until it was terminated in June 2011.
Debt modification and related financing costs. During the year ended December 31, 2011, FDC paid $18.6 million and $21.1 million in fees related to the December 2010 debt exchange and April 2011 debt modification and amendments, respectively.
The issuance of the 8.875% senior secured notes in August 2010 was accounted for as a modification resulting in only the net effect of the issuance being reflected as a use of cash. The Company paid a net amount of $24.1 million in fees related to the modification. The Company also paid a net amount of $37.1 million for costs incurred during the fourth quarter of 2010 related to the debt exchange described above which was accounted for as a modification.
Principal payments on long-term debt. In conjunction with the debt modifications and amendments discussed above, proceeds from the issuance of new notes were used to prepay portions of the principal balances of FDCs senior secured term loans which satisfied the future quarterly principal payments until March 2018. Prior to the modifications, during 2010 and 2009, the Company made principal payments of $96.2 million and $129.0 million related to its senior secured term loan facility, respectively. During 2011, 2010 and 2009, the Company paid notes that came due totaling $32.6 million, $13.1 million and $10.7 million, respectively. In addition, the Company paid $34.1 million in debt restructuring fees in each of 2010 and 2009.
Payments for capital leases totaled $71.9 million, $76.9 million and $68.2 million for 2011, 2010 and 2009, respectively.
As of March 5, 2012, FDCs long-term corporate family rating from Moodys was B3 (stable). The long-term local issuer credit rating from Standard and Poors was B (stable). The long-term issuer default rating from Fitch was B (negative outlook). The Companys current level of debt may impair its ability to get additional funding beyond its revolving credit facility if needed.
Proceeds from sale-leaseback transactions. The Company may, from time to time, enter into sale-leaseback transactions as a means of financing previously or recently acquired fixed assets, primarily equipment.
Distributions and dividends paid to noncontrolling interests and redeemable noncontrolling interests. Distributions and dividends paid to noncontrolling interests and redeemable noncontrolling interests primarily represent distributions of earnings. The increases in 2011 from 2010 and in 2010 from 2009 were primarily the result of distributions associated with the BAMS alliance including an incremental distribution in 2011 of approximately $64 million related to both working capital initiatives and an extra quarterly distribution due to a change in the timing of such distributions.
Contributions from noncontrolling interest. Activity in 2009 represents the cash contributed by a third-party investor in the BAMS alliance.
Purchase of noncontrolling interest. The use of cash in 2010 relates to the redemption amount paid to the third-party investor to redeem its interest in the BAMS alliance.
Cash dividends. The Company paid cash dividends to First Data Holdings Inc. in 2011 and 2010.
Letters, lines of credit and other.
|
|
Total Available (a) |
|
Total Outstanding |
| ||||||||
|
|
As of December 31, |
|
As of December 31, |
| ||||||||
(in millions) |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
| ||||
Letters of credit (b) |
|
$ |
500.0 |
|
$ |
500.0 |
|
$ |
45.0 |
|
$ |
51.9 |
|
Lines of credit and other (c) |
|
341.2 |
|
428.3 |
|
76.4 |
|
180.3 |
| ||||
(a) Total available without giving effect to amounts outstanding.
(b) Up to $500 million of the Companys senior secured revolving credit facility is available for letters of credit. Outstanding letters of credit are held in connection with lease arrangements, bankcard association agreements and other security agreements. The maximum amount of letters of credit outstanding during 2011 was approximately $52 million. All letters of credit expire prior to December 10, 2012 with a one-year renewal option. FDC expects to renew most of the letters of credit prior to expiration.
(c) As of December 31, 2011, represents $267.2 million of committed lines of credit as well as certain uncommitted lines of credit and other agreements that are available in various currencies to fund settlement and other activity for the Companys international operations. FDC cannot use these lines of credit for general corporate purposes. Certain of these arrangements are uncommitted but, as of the dates presented, FDC had borrowings outstanding against them.
In the event one or more of the aforementioned lines of credit becomes unavailable, FDC will utilize its existing cash, cash flows from operating activities or its revolving credit facility to meet its liquidity needs.
Significant non-cash transactions. During 2011, 2010 and 2009, the principal amount of FDCs senior notes due 2015 increased by $73.1 million, $362.5 million and $333.0 million, respectively, resulting from the payment of accrued interest expense. The decrease in the amount of interest expense accrued during 2011 is due to the December 2010 exchange of notes discussed below. Beginning October 1, 2011, the interest on FDCs senior notes due 2015 is required to be paid in cash and the first such payment will be paid in April 2012.
During 2011, 2010 and 2009, the Company entered into capital leases totaling approximately $137 million, $65 million and $105 million, respectively.
The following summary details the Companys exchange offerings during 2009, 2010 and 2011.
· March 2009 Exchanged the remaining balance of the Companys 9.875% senior unsecured cash-pay term loan bridge loans due 2015 that was not previously exchanged for senior notes having substantially identical terms and guarantees with the exception of interest payments being due semi-annually on March 31 and September 30 of each year instead of quarterly.
· September 2009 - Exchanged aggregate principal amounts of $3.2 billion of its 10.55% senior PIK notes, $2.5 billion of its 11.25% senior subordinated notes and $1.6 billion of its 9.875% senior notes (which constituted all such notes outstanding at that date) for publicly tradable notes having substantially identical terms and guarantees, except that the exchange notes are freely tradable. Substantially all of the notes were exchanged effective September 9, 2009.
· December 2010 - Exchanged $3.0 billion of its 9.875% senior notes due 2015 and $3.0 billion of its 10.550% senior PIK notes due 2015 for $2.0 billion of 8.25% senior second lien notes due 2021, $1.0 billion of 8.75%/10.00% PIK toggle senior second lien notes due 2022 and $3.0 billion of 12.625% senior notes due 2021.
· December 2011 Exchanged substantially all of its aggregate principal amounts of $3 billion of its 12.625% senior notes due 2021 for publicly tradable notes having substantially identical terms and guarantees, except that the exchange notes will be freely tradable.
There were no expenditures, other than professional fees, or receipts of cash associated with the registration statements or exchange offers described above.
In November 2011, the Company contributed the assets of its transportation business to the alliance in exchange for a 30% interest in the alliance. Refer to Note 18 to the Companys Consolidated Financial Statements in Item 8 of this Form 10-K for additional information.
On June 26, 2009, the Company entered into the BAMS alliance. The Companys and BofAs direct contributions to the alliance consisted of non-cash assets and liabilities.
Guarantees and covenants. All obligations under the senior secured revolving credit facility and senior secured term loan facility are unconditionally guaranteed by substantially all existing and future, direct and indirect, wholly owned, material domestic subsidiaries of the Company other than IPS. The senior secured facilities contain a number of covenants that, among other things, restrict the Companys ability to incur additional indebtedness; create liens; enter into sale-leaseback transactions; engage in mergers or consolidations; sell or transfer assets; pay dividends and distributions or repurchase the Companys or its parent companys capital stock; make investments, loans or advances; prepay certain indebtedness; make certain acquisitions; engage in certain transactions
with affiliates; amend material agreements governing certain indebtedness; and change its lines of business. The senior secured facilities also require the Company to not exceed a maximum senior secured leverage ratio and contain certain customary affirmative covenants and events of default, including a change of control. The senior secured term loan facility also requires mandatory prepayments based on a percentage of excess cash flow generated by the Company.
All obligations under the senior secured notes, senior second lien notes, PIK toggle senior second lien notes, senior notes and senior subordinated notes are similarly guaranteed in accordance with their terms by each of the Companys domestic subsidiaries that guarantee obligations under the Companys senior secured term loan facility described above. These notes and facilities also contain a number of covenants similar to those described for the senior secured obligations noted above. The Company is in compliance with all applicable covenants as of December 31, 2011 and anticipates it will remain in compliance in future periods.
Although all of the above described indebtedness contain restrictions on the Companys ability to incur additional indebtedness, these restrictions are subject to numerous qualifications and exceptions, including the ability to incur indebtedness in connection with the Companys settlement operations. The Company believes that the indebtedness that can be incurred under these exceptions as well as additional credit under the existing senior secured revolving credit facility are sufficient to satisfy the Companys intermediate and long-term needs.
Covenant compliance. Under the senior secured revolving credit and term loan facilities, certain limitations, restrictions and defaults could occur if the Company is not able to satisfy and remain in compliance with specified financial ratios. The Company has agreed that it will not permit the Consolidated Senior Secured Debt to Consolidated EBITDA (both as defined in the agreement) Ratio for any 12 month period (last four fiscal quarters) ending during a period set forth below to be greater than the ratio set forth below opposite such period:
Period |
|
Ratio |
|
October 1, 2011 to September 30, 2012 |
|
6.50 to 1.00 |
|
October 1, 2012 to September 30, 2013 |
|
6.25 to 1.00 |
|
Thereafter |
|
6.00 to 1.00 |
|
The breach of this covenant could result in a default under the senior secured revolving credit facility and the senior secured term loan credit facility and the lenders could elect to declare all amounts borrowed due and payable. Any such acceleration could also result in a default under the indentures for the senior secured notes, senior second lien notes, PIK toggle senior second lien notes, senior PIK notes and senior subordinated notes. As of December 31, 2011, the Company is in compliance with this covenant with Consolidated Senior Secured Debt of $12,084.0 million, Consolidated EBITDA of $2,794.1 million and a Ratio of 4.32 to 1.00.
In determining Consolidated EBITDA, EBITDA is calculated by reference to net income (loss) from continuing operations plus interest and other financing costs, net, provision for income taxes, and depreciation and amortization. Consolidated EBITDA as defined in the agreements (also referred to as debt covenant EBITDA) is calculated by adjusting EBITDA to exclude unusual items and other adjustments permitted in calculating covenant compliance under the indentures and the credit facilities. The Company believes that the inclusion of supplementary adjustments to EBITDA applied in presenting Consolidated EBITDA are appropriate to provide additional information to investors to demonstrate the Companys ability to comply with its financing covenants.
The calculation of Consolidated EBITDA under FDCs senior secured term loan facility is as follows:
(in millions) |
|
Last twelve |
| |
Net loss attributable to First Data Corporation |
|
$ |
(516.1 |
) |
Interest expense, net (1) |
|
1,825.2 |
| |
Income tax benefit |
|
(270.1 |
) | |
Depreciation and amortization (2) |
|
1,344.2 |
| |
|
|
|
| |
EBITDA (15) |
|
2,383.2 |
| |
Stock based compensation (3) |
|
16.9 |
| |
Restructuring, net (4) |
|
46.4 |
| |
Divestitures, net (5) |
|
(57.4 |
) | |
Derivative financial instruments (gains) and losses (6) |
|
(58.2 |
) | |
Official check and money order EBITDA (7) |
|
0.5 |
| |
Cost of alliance conversions and other technology initiatives (8) |
|
41.3 |
| |
KKR related items (9) |
|
37.4 |
| |
Debt issuance costs (10) |
|
3.2 |
| |
Projected near-term cost savings and revenue enhancements (11) |
|
177.0 |
| |
Net income attributable to noncontrolling interests (12) |
|
180.0 |
|