UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014
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
(Exact name of registrant as specified in its charter)
www.firstdata.com
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DELAWARE |
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47-0731996 |
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(State or other jurisdiction of |
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(I.R.S. Employer |
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incorporation or organization) |
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Identification No.) |
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5565 GLENRIDGE CONNECTOR, N.E., SUITE 2000, |
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ATLANTA, GEORGIA |
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30342 |
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(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code (404) 890-2000
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 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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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 Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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Class |
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Outstanding at April 30, 2014 |
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Common Stock, $0.01 par value per share |
|
1,000 shares |
FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
Three months ended |
| ||||
|
(in millions) |
|
2014 |
|
2013 |
| ||
|
Revenues: |
|
|
|
|
| ||
|
Transaction and processing service fees: |
|
|
|
|
| ||
|
Merchant related services (a) |
|
$ |
941.9 |
|
$ |
943.1 |
|
|
Check services |
|
66.1 |
|
72.4 |
| ||
|
Card services (a) |
|
437.5 |
|
406.8 |
| ||
|
Other services |
|
116.2 |
|
121.4 |
| ||
|
Product sales and other (a) |
|
203.7 |
|
202.4 |
| ||
|
Reimbursable debit network fees, postage and other |
|
874.9 |
|
844.8 |
| ||
|
|
|
2,640.3 |
|
2,590.9 |
| ||
|
Expenses: |
|
|
|
|
| ||
|
Cost of services (exclusive of items shown below) |
|
645.8 |
|
718.7 |
| ||
|
Cost of products sold |
|
80.1 |
|
82.6 |
| ||
|
Selling, general and administrative |
|
486.2 |
|
463.3 |
| ||
|
Reimbursable debit network fees, postage and other |
|
874.9 |
|
844.8 |
| ||
|
Depreciation and amortization |
|
265.3 |
|
272.2 |
| ||
|
Other operating expenses: |
|
|
|
|
| ||
|
Restructuring, net |
|
3.5 |
|
18.2 |
| ||
|
|
|
2,355.8 |
|
2,399.8 |
| ||
|
Operating profit |
|
284.5 |
|
191.1 |
| ||
|
Interest income |
|
3.0 |
|
2.7 |
| ||
|
Interest expense |
|
(467.1 |
) |
(469.0 |
) | ||
|
Other income |
|
0.9 |
|
0.3 |
| ||
|
|
|
(463.2 |
) |
(466.0 |
) | ||
|
Loss before income taxes and equity earnings in affiliates |
|
(178.7 |
) |
(274.9 |
) | ||
|
Income tax expense |
|
36.6 |
|
61.6 |
| ||
|
Equity earnings in affiliates |
|
50.4 |
|
37.7 |
| ||
|
Net loss |
|
(164.9 |
) |
(298.8 |
) | ||
|
Less: Net income attributable to noncontrolling interests and redeemable noncontrolling interest |
|
35.6 |
|
38.6 |
| ||
|
Net loss attributable to First Data Corporation |
|
$ |
(200.5 |
) |
$ |
(337.4 |
) |
(a) Includes processing fees, administrative service fees and other fees charged to merchant alliances accounted for under the equity method of $43.7 million for the three months ended March 31, 2014, and $40.5 million for the comparable period in 2013.
See Notes to Consolidated Financial Statements.
FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
|
|
|
Three months ended |
| ||||
|
(in millions) |
|
2014 |
|
2013 |
| ||
|
Net loss |
|
$ |
(164.9 |
) |
$ |
(298.8 |
) |
|
Other comprehensive income (loss), net of tax: |
|
|
|
|
| ||
|
Unrealized gains (losses) on securities |
|
0.5 |
|
(0.2 |
) | ||
|
Foreign currency translation adjustment |
|
(18.0 |
) |
(81.6 |
) | ||
|
Pension liability adjustments |
|
0.4 |
|
1.4 |
| ||
|
Total other comprehensive (loss) income, net of tax |
|
(17.1 |
) |
(80.4 |
) | ||
|
Comprehensive loss |
|
(182.0 |
) |
(379.2 |
) | ||
|
Less: Comprehensive income attributable to noncontrolling interests and redeemable noncontrolling interest |
|
36.4 |
|
34.7 |
| ||
|
Comprehensive loss attributable to First Data Corporation |
|
$ |
(218.4 |
) |
$ |
(413.9 |
) |
See Notes to Consolidated Financial Statements.
FIRST DATA CORPORATION
|
(in millions, except common stock share amounts) |
|
As of March 31, |
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As of December 31, |
| ||
|
ASSETS |
|
|
|
|
| ||
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Current assets: |
|
|
|
|
| ||
|
Cash and cash equivalents |
|
$ |
408.5 |
|
$ |
425.3 |
|
|
Accounts receivable, net of allowance for doubtful accounts of $33.0 (2014) and $32.4 (2013) |
|
1,698.3 |
|
1,763.9 |
| ||
|
Settlement assets |
|
9,683.0 |
|
7,541.8 |
| ||
|
Other current assets |
|
348.0 |
|
345.1 |
| ||
|
Total current assets |
|
12,137.8 |
|
10,076.1 |
| ||
|
Property and equipment, net of accumulated depreciation of $1,202.4 (2014) and $1,149.9 (2013) |
|
825.0 |
|
849.4 |
| ||
|
Goodwill |
|
17,244.8 |
|
17,247.8 |
| ||
|
Customer relationships, net of accumulated amortization of $4,520.5 (2014) and $4,418.3 (2013) |
|
3,025.0 |
|
3,162.3 |
| ||
|
Other intangibles, net of accumulated amortization of $1,812.2 (2014) and $1,743.5 (2013) |
|
1,735.5 |
|
1,719.6 |
| ||
|
Investment in affiliates |
|
1,323.8 |
|
1,334.3 |
| ||
|
Long-term settlement assets |
|
21.3 |
|
15.2 |
| ||
|
Other long-term assets |
|
845.0 |
|
835.1 |
| ||
|
Total assets |
|
$ |
37,158.2 |
|
$ |
35,239.8 |
|
|
LIABILITIES AND EQUITY |
|
|
|
|
| ||
|
Current liabilities: |
|
|
|
|
| ||
|
Accounts payable |
|
$ |
260.5 |
|
$ |
287.8 |
|
|
Short-term and current portion of long-term borrowings |
|
474.0 |
|
146.3 |
| ||
|
Settlement obligations |
|
9,700.2 |
|
7,553.4 |
| ||
|
Other current liabilities |
|
1,324.8 |
|
1,630.5 |
| ||
|
Total current liabilities |
|
11,759.5 |
|
9,618.0 |
| ||
|
Long-term borrowings |
|
22,549.1 |
|
22,556.8 |
| ||
|
Long-term deferred tax liabilities |
|
564.9 |
|
553.0 |
| ||
|
Other long-term liabilities |
|
746.3 |
|
750.1 |
| ||
|
Total liabilities |
|
35,619.8 |
|
33,477.9 |
| ||
|
Commitments and contingencies (See Note 7) |
|
|
|
|
| ||
|
Redeemable noncontrolling interest |
|
70.6 |
|
69.1 |
| ||
|
First Data Corporation stockholder’s deficit: |
|
|
|
|
| ||
|
Common stock, $.01 par value; authorized and issued 1,000 shares (2014 and 2013) |
|
— |
|
— |
| ||
|
Additional paid-in capital |
|
7,407.4 |
|
7,384.0 |
| ||
|
Paid-in capital |
|
7,407.4 |
|
7,384.0 |
| ||
|
Accumulated loss |
|
(8,500.7 |
) |
(8,284.9 |
) | ||
|
Accumulated other comprehensive loss |
|
(606.6 |
) |
(588.7 |
) | ||
|
Total First Data Corporation stockholder’s deficit |
|
(1,699.9 |
) |
(1,489.6 |
) | ||
|
Noncontrolling interests |
|
3,167.7 |
|
3,182.4 |
| ||
|
Total equity |
|
1,467.8 |
|
1,692.8 |
| ||
|
Total liabilities and equity |
|
$ |
37,158.2 |
|
$ |
35,239.8 |
|
See Notes to Consolidated Financial Statements.
FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
Three months ended |
| ||||
|
(in millions) |
|
2014 |
|
2013 |
| ||
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
| ||
|
Net loss |
|
$ |
(164.9 |
) |
$ |
(298.8 |
) |
|
Adjustments to reconcile to net cash (used in) provided by operating activities: |
|
|
|
|
| ||
|
Depreciation and amortization (including amortization netted against equity earnings in affiliates and revenues) |
|
292.2 |
|
302.1 |
| ||
|
Charges related to other operating expenses and other income |
|
2.6 |
|
17.9 |
| ||
|
Other non-cash and non-operating items, net |
|
(33.8 |
) |
(42.6 |
) | ||
|
Increase (decrease) in cash, excluding the effects of acquisitions and dispositions, resulting from changes in: |
|
|
|
|
| ||
|
Accounts receivable, current and long-term |
|
55.1 |
|
138.9 |
| ||
|
Other assets, current and long-term |
|
45.4 |
|
35.4 |
| ||
|
Accounts payable and other liabilities, current and long-term |
|
(252.0 |
) |
(128.8 |
) | ||
|
Income tax accounts |
|
11.3 |
|
45.1 |
| ||
|
Net cash (used in) provided by operating activities |
|
(44.1 |
) |
69.2 |
| ||
|
|
|
|
|
|
| ||
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
| ||
|
Proceeds from dispositions, net of expenses paid |
|
2.3 |
|
— |
| ||
|
Proceeds from sale of property and equipment |
|
1.7 |
|
3.6 |
| ||
|
Additions to property and equipment |
|
(54.2 |
) |
(44.6 |
) | ||
|
Payments to secure customer service contracts, including outlays for conversion, and capitalized systems development costs |
|
(62.3 |
) |
(46.0 |
) | ||
|
Other investing activities |
|
— |
|
2.4 |
| ||
|
Net cash used in investing activities |
|
(112.5 |
) |
(84.6 |
) | ||
|
|
|
|
|
|
| ||
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
| ||
|
Short-term borrowings, net |
|
327.1 |
|
(81.0 |
) | ||
|
Accrued interest funded upon issuance of notes |
|
(55.2 |
) |
— |
| ||
|
Debt modification (payments)/proceeds and related financing costs, net |
|
(35.4 |
) |
3.5 |
| ||
|
Principal payments on long-term debt |
|
(19.3 |
) |
(18.9 |
) | ||
|
Distributions and dividends paid to noncontrolling interests and redeemable noncontrolling interest |
|
(51.8 |
) |
(38.9 |
) | ||
|
Redemption of Parent’s redeemable common stock |
|
(3.7 |
) |
(4.8 |
) | ||
|
Cash dividends |
|
(15.3 |
) |
(14.9 |
) | ||
|
Net cash provided by (used in) financing activities |
|
146.4 |
|
(155.0 |
) | ||
|
|
|
|
|
|
| ||
|
Effect of exchange rate changes on cash and cash equivalents |
|
(6.6 |
) |
(3.6 |
) | ||
|
Change in cash and cash equivalents |
|
(16.8 |
) |
(174.0 |
) | ||
|
Cash and cash equivalents at beginning of period |
|
425.3 |
|
608.3 |
| ||
|
Cash and cash equivalents at end of period |
|
$ |
408.5 |
|
$ |
434.3 |
|
See Notes to Consolidated Financial Statements.
FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
|
|
|
|
|
First Data Corporation Shareholder |
|
|
| |||||||||||
|
Three months ended March 31, 2014 |
|
Total |
|
Accumulated |
|
Accumulated |
|
Common |
|
Paid-In |
|
Noncontrolling |
| |||||
|
Balance, December 31, 2013 |
|
$ |
1,692.8 |
|
$ |
(8,284.9 |
) |
$ |
(588.7 |
) |
— |
|
$ |
7,384.0 |
|
$ |
3,182.4 |
|
|
Dividends and distributions paid to noncontrolling interests |
|
(42.4 |
) |
|
|
|
|
|
|
|
|
(42.4 |
) | |||||
|
Net (loss) income (a) |
|
(173.6 |
) |
(200.5 |
) |
|
|
|
|
|
|
26.9 |
| |||||
|
Other comprehensive (loss) income |
|
(17.1 |
) |
|
|
(17.9 |
) |
|
|
|
|
0.8 |
| |||||
|
Adjustment to redemption value of redeemable noncontrolling interest |
|
(2.1 |
) |
|
|
|
|
|
|
(2.1 |
) |
|
| |||||
|
Stock compensation expense and other |
|
25.5 |
|
|
|
|
|
|
|
25.5 |
|
|
| |||||
|
Cash dividends paid by First Data Corporation to Parent |
|
(15.3 |
) |
(15.3 |
) |
|
|
|
|
|
|
|
| |||||
|
Balance, March 31, 2014 |
|
$ |
1,467.8 |
|
$ |
(8,500.7 |
) |
$ |
(606.6 |
) |
— |
|
$ |
7,407.4 |
|
$ |
3,167.7 |
|
|
Three months ended March 31, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
Balance, December 31, 2012 |
|
$ |
2,626.4 |
|
$ |
(7,387.8 |
) |
$ |
(552.2 |
) |
— |
|
$ |
7,341.5 |
|
$ |
3,224.9 |
|
|
Dividends and distributions paid to noncontrolling interests |
|
(30.1 |
) |
|
|
|
|
|
|
|
|
(30.1 |
) | |||||
|
Net (loss) income (a) |
|
(307.4 |
) |
(337.4 |
) |
|
|
|
|
|
|
30.0 |
| |||||
|
Other comprehensive loss |
|
(80.4 |
) |
|
|
(76.5 |
) |
|
|
|
|
(3.9 |
) | |||||
|
Adjustment to redemption value of redeemable noncontrolling interest |
|
(2.0 |
) |
|
|
|
|
|
|
(2.0 |
) |
|
| |||||
|
Stock compensation expense and other |
|
5.8 |
|
|
|
|
|
|
|
5.8 |
|
|
| |||||
|
Cash dividends paid by First Data Corporation to Parent |
|
(14.9 |
) |
(14.9 |
) |
|
|
|
|
|
|
|
| |||||
|
Balance, March 31, 2013 |
|
$ |
2,197.4 |
|
$ |
(7,740.1 |
) |
$ |
(628.7 |
) |
— |
|
$ |
7,345.3 |
|
$ |
3,220.9 |
|
(a) The total net loss presented in the Consolidated Statements of Equity for the three months ended March 31, 2014 and 2013 is $8.7 million and $8.6 million, respectively, greater than the amount presented on the Consolidated Statements of Operations due to the net income attributable to the redeemable noncontrolling interest not included in equity.
See Notes to Consolidated Financial Statements.
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 1: Basis of Presentation
The accompanying Consolidated Financial Statements of First Data Corporation (“FDC” or the “Company”) should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. Significant accounting policies disclosed therein have not changed.
The accompanying Consolidated Financial Statements are unaudited; however, in the opinion of management, they include all normal recurring adjustments necessary for a fair presentation of the consolidated financial position of the Company as of March 31, 2014 and the consolidated results of its operations, comprehensive income (loss), consolidated cash flows and changes in equity for the three months ended March 31, 2014 and 2013. Results of operations reported for interim periods are not necessarily indicative of results for the entire year due in part to the seasonality of certain business units.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Actual results could differ from these estimates.
Presentation
Depreciation and amortization presented as a separate line item on the Company’s Consolidated Statements of Operations does not include amortization of initial payments for new contracts which is recorded as a contra-revenue within “Transaction and processing service fees.” Also not included is amortization related to equity method investments which is netted within the “Equity earnings in affiliates” line. The following table presents the amounts associated with such amortization:
|
|
|
Three months ended |
| ||||
|
(in millions) |
|
2014 |
|
2013 |
| ||
|
Amortization of initial payments for new contracts |
|
$ |
11.0 |
|
$ |
10.2 |
|
|
Amortization related to equity method investments |
|
$ |
15.9 |
|
$ |
19.7 |
|
Revenue Recognition
The Company recognizes revenues from its processing services as such services are performed. Revenue is recorded net of certain costs such as credit and offline debit interchange fees and assessments charged by credit card associations. Debit network fees related to acquired personal identification number based debit (“PIN-debit”) transactions are recognized in the “Reimbursable debit network fees, postage and other” revenue and expense lines of the Consolidated Statements of Operations. The following table presents the amounts associated with processing services revenue:
|
|
|
Three months ended |
| ||||
|
(in millions) |
|
2014 |
|
2013 |
| ||
|
Interchange fees and assessments |
|
$ |
4,721.2 |
|
$ |
4,510.6 |
|
|
Debit network fees |
|
$ |
719.2 |
|
$ |
697.2 |
|
Note 2: Supplemental Financial Information
Supplemental Statement of Operations Information
The following table details the components of “Other income” on the Consolidated Statements of Operations:
|
|
|
Three months ended |
| ||||
|
(in millions) |
|
2014 |
|
2013 |
| ||
|
Investment gains |
|
$ |
— |
|
$ |
1.2 |
|
|
Derivative financial instruments gains |
|
3.3 |
|
3.8 |
| ||
|
Non-operating foreign currency losses |
|
(2.4 |
) |
(4.7 |
) | ||
|
Other income |
|
$ |
0.9 |
|
$ |
0.3 |
|
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Supplemental Cash Flow Information
Significant non-cash transactions. On March 14, 2014, FDC completed an offer to exchange all of its 10.625% senior unsecured notes due 2021, 11.25% senior unsecured notes due 2021, and 11.75% senior notes due 2021 for publicly tradable notes having substantially identical terms and guarantees, except that the exchange notes are freely tradable.
During the three months ended March 31, 2014 and 2013, the Company entered into capital leases, net of trade-ins, totaling approximately $12 million and $6 million, respectively.
Refer to Note 9 of these Consolidated Financial Statements for information concerning the Company’s stock-based compensation plans.
Note 3: Restructuring
Restructuring Charges and Reversal of Restructuring Accruals
The Company recorded restructuring charges during the three months ended March 31, 2014 and 2013, in connection with management’s alignment of the business with strategic objectives and cost savings initiatives as well as refinements of estimates. The Company expects to record additional charges in 2014 associated with the alignment of the business with strategic objectives and cost savings initiatives.
A summary of net pretax benefits (charges), incurred by segment, for each period is as follows:
|
|
|
|
|
Pretax Benefit (Charge) |
| |||||||||||||
|
(in millions) |
|
Approximate |
|
Merchant |
|
Financial |
|
International |
|
All Other and |
|
Totals |
| |||||
|
Three months ended March 31, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
Restructuring charges |
|
290 |
|
$ |
(0.8 |
) |
$ |
(0.4 |
) |
$ |
— |
|
$ |
(2.6 |
) |
$ |
(3.8 |
) |
|
Restructuring accrual reversals |
|
|
|
0.1 |
|
0.2 |
|
— |
|
— |
|
0.3 |
| |||||
|
Total pretax charge, net of reversals |
|
|
|
$ |
(0.7 |
) |
$ |
(0.2 |
) |
$ |
— |
|
$ |
(2.6 |
) |
$ |
(3.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
Three months ended March 31, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
Restructuring charges |
|
10 |
|
$ |
(4.5 |
) |
$ |
(0.4 |
) |
$ |
(0.8 |
) |
$ |
(12.5 |
) |
$ |
(18.2 |
) |
|
Restructuring accrual reversals |
|
|
|
— |
|
— |
|
— |
|
— |
|
— |
| |||||
|
Total pretax charge, net of reversals |
|
|
|
$ |
(4.5 |
) |
$ |
(0.4 |
) |
$ |
(0.8 |
) |
$ |
(12.5 |
) |
$ |
(18.2 |
) |
The following table summarizes the Company’s utilization of restructuring accruals for the three months ended March 31, 2014:
|
(in millions) |
|
Employee |
| |
|
Remaining accrual as of January 1, 2014 |
|
$ |
21.1 |
|
|
Expense provision |
|
3.8 |
| |
|
Cash payments and other |
|
(6.6 |
) | |
|
Changes in estimates |
|
(0.3 |
) | |
|
Remaining accrual as of March 31, 2014 |
|
$ |
18.0 |
|
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 4: Borrowings
Short-Term Borrowings
As of March 31, 2014 and December 31, 2013, FDC had approximately $243 million and $265 million available, respectively, under short-term lines of credit and other arrangements with foreign banks and alliance partners primarily to fund settlement activity. These arrangements are primarily associated with international operations and are in various functional currencies, the most significant of which are the Australian dollar, the Polish zloty and the euro. The total amounts outstanding against short-term lines of credit and other arrangements were $70.3 million and $68.7 million as of March 31, 2014 and December 31, 2013, respectively. Certain of these arrangements are uncommitted but FDC had $43.5 million and $68.6 million of borrowings outstanding against them as of March 31, 2014 and December 31, 2013, respectively.
Senior Secured Credit Facilities
Senior Secured Revolving Credit Facility. As of March 31, 2014, FDC’s senior secured revolving credit facility had commitments from financial institutions to provide $1,016.2 million of credit. Up to $500 million of the senior secured revolving credit facility is available for letters of credit, of which $48.1 million and $46.3 million were issued as of March 31, 2014 and December 31, 2013, respectively. In addition to the outstanding letters of credit, FDC had $325.7 million outstanding against this facility as of March 31, 2014 and no amounts outstanding as of December 31, 2013. At March 31, 2014, $642.4 million remained available under this facility after considering the outstanding borrowings and letters of credit.
Senior Secured Term Loan Facility. On January 30, 2014, FDC amended its senior secured term loan facility. Under the amendment, FDC extended the maturity of approximately $941 million of its existing U.S. dollar denominated term loans and approximately €154 million of its existing euro denominated term loans, in each case, from March 24, 2017 to March 24, 2021 (the “2021 Extended Term Loans”). The interest rate applicable to the 2021 Extended Term Loans is a rate equal to, at the Company’s option, either (a) LIBOR for deposits in the applicable currency plus 400 basis points or (b) solely with respect to term loans denominated in U.S. dollars, a base rate plus 300 basis points.
The Company also incurred an aggregate principal amount of approximately $1,431 million in new U.S. dollar denominated term loans and approximately €25 million in new euro denominated term loans maturing on March 24, 2017 (the “2017 Second New Term Loans”). The interest rate applicable to the 2017 Second New Term Loans is a rate equal to, at the Company’s option, either (a) LIBOR for deposits in the applicable currency plus 350 basis points or (b) solely with respect to term loans denominated in U.S. dollars, a base rate plus 250 basis points. The Company used the proceeds from the incurrence of the 2017 Second New Term Loans to repay an equal amount of its outstanding term loan borrowings maturing on March 24, 2017.
Additionally, the Company incurred an aggregate principal amount of approximately $63 million in new U.S. dollar denominated term loans maturing on March 24, 2021 (the “2021 New Term Loans”). The interest rate applicable to the 2021 New Term Loans is a rate equal to, at the Company’s option, either (a) LIBOR for deposits in U.S. dollars plus 400 basis points or (b) solely with respect to term loans denominated in U.S. dollars, a base rate plus 300 basis points. The Company used the proceeds from the incurrence of the 2021 New Term Loans to repay an equal amount of its outstanding U.S. dollar denominated term loan borrowings maturing on March 24, 2017.
11.75% Senior Unsecured Subordinated Notes Due 2021
On January 6, 2014, the Company issued and sold $725 million aggregate principal amount of additional 11.75% senior subordinated notes due August 15, 2021. The notes were issued at 103.5% of par for a premium of $25.4 million. The additional notes were treated as a single series with the existing 11.75% notes and will have the same terms as those of the existing 11.75% notes. The additional notes and the existing 11.75% notes will vote as one class under the indenture. FDC used the proceeds from the issue and sale of the additional notes, together with cash on hand, to redeem all of its outstanding 11.25% senior subordinated notes due 2016 and to pay related fees and expenses.
Related Financing Costs
In connection with the debt offering and debt repurchase discussed above, the Company incurred lender fees and other expenses of approximately $8.0 million.
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Debt Exchange
On March 14, 2014, FDC completed an offer to exchange all of its 10.625% senior unsecured notes due 2021, 11.25% senior unsecured notes due 2021, and 11.75% senior notes due 2021 for publicly tradable notes having substantially identical terms and guarantees, except that the exchange notes are freely tradable. There was no expenditure, other than professional fees incurred in connection with the Registration Statement itself, or receipt of cash associated with this exchange.
Note 5: Segment Information
For a detailed discussion of the Company’s principles regarding its operating segments refer to Note 15 of the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
During the first quarter of 2014, the Company renamed its Retail and Alliance Services segment to Merchant Solutions to better reflect its transformation from a processer to a solutions and technology provider. For a detailed discussion of the Company’s principles regarding its segments, refer to “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
The following tables present the Company’s operating segment results for the three months ended March 31, 2014 and 2013:
|
|
|
Three months ended March 31, 2014 |
| |||||||||||||
|
(in millions) |
|
Merchant |
|
Financial |
|
International |
|
All Other |
|
Totals |
| |||||
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
| |||||
|
Transaction and processing service fees |
|
$ |
761.4 |
|
$ |
337.8 |
|
$ |
327.3 |
|
$ |
18.2 |
|
$ |
1,444.7 |
|
|
Product sales and other |
|
95.0 |
|
10.9 |
|
86.9 |
|
13.7 |
|
206.5 |
| |||||
|
Equity earnings in affiliates (a) |
|
— |
|
— |
|
7.1 |
|
— |
|
7.1 |
| |||||
|
Total segment reporting revenues |
|
$ |
856.4 |
|
$ |
348.7 |
|
$ |
421.3 |
|
$ |
31.9 |
|
$ |
1,658.3 |
|
|
Internal revenue |
|
$ |
5.7 |
|
$ |
8.7 |
|
$ |
1.8 |
|
$ |
— |
|
$ |
16.2 |
|
|
External revenue |
|
$ |
850.7 |
|
$ |
340.0 |
|
$ |
419.5 |
|
$ |
31.9 |
|
$ |
1,642.1 |
|
|
Depreciation and amortization |
|
$ |
108.1 |
|
$ |
79.6 |
|
$ |
63.1 |
|
$ |
10.9 |
|
$ |
261.7 |
|
|
Segment EBITDA |
|
$ |
369.6 |
|
$ |
173.0 |
|
$ |
128.4 |
|
$ |
(57.5 |
) |
$ |
613.5 |
|
|
Other operating expenses and other income excluding divestitures |
|
$ |
(19.2 |
) |
$ |
(0.2 |
) |
$ |
(6.5 |
) |
$ |
23.3 |
|
$ |
(2.6 |
) |
|
|
|
Three months ended March 31, 2013 |
| |||||||||||||
|
(in millions) |
|
Merchant |
|
Financial |
|
International |
|
All Other |
|
Totals |
| |||||
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
| |||||
|
Transaction and processing service fees |
|
$ |
765.5 |
|
$ |
320.8 |
|
$ |
314.3 |
|
$ |
19.3 |
|
$ |
1,419.9 |
|
|
Product sales and other |
|
95.9 |
|
9.8 |
|
88.2 |
|
10.4 |
|
204.3 |
| |||||
|
Equity earnings in affiliates (a) |
|
— |
|
— |
|
6.1 |
|
— |
|
6.1 |
| |||||
|
Total segment reporting revenues |
|
$ |
861.4 |
|
$ |
330.6 |
|
$ |
408.6 |
|
$ |
29.7 |
|
$ |
1,630.3 |
|
|
Internal revenue |
|
$ |
5.1 |
|
$ |
8.1 |
|
$ |
2.3 |
|
$ |
— |
|
$ |
15.5 |
|
|
External revenue |
|
$ |
856.3 |
|
$ |
322.5 |
|
$ |
406.3 |
|
$ |
29.7 |
|
$ |
1,614.8 |
|
|
Depreciation and amortization |
|
$ |
106.0 |
|
$ |
80.3 |
|
$ |
70.2 |
|
$ |
11.0 |
|
$ |
267.5 |
|
|
Segment EBITDA |
|
$ |
354.2 |
|
$ |
133.1 |
|
$ |
100.4 |
|
$ |
(67.3 |
) |
$ |
520.4 |
|
|
Other operating expenses and other income excluding divestitures and other items |
|
$ |
(6.8 |
) |
$ |
(0.4 |
) |
$ |
(6.5 |
) |
$ |
(4.2 |
) |
$ |
(17.9 |
) |
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
A reconciliation of reportable segment amounts to the Company’s consolidated balances is as follows:
|
|
|
Three months ended |
| ||||
|
(in millions) |
|
2014 |
|
2013 |
| ||
|
Segment Revenues: |
|
|
|
|
| ||
|
Total reported segments |
|
$ |
1,626.4 |
|
$ |
1,600.6 |
|
|
All Other and Corporate |
|
31.9 |
|
29.7 |
| ||
|
Adjustments to reconcile to Adjusted revenue: |
|
|
|
|
| ||
|
Official check and money order revenues (b) |
|
(1.0 |
) |
(1.7 |
) | ||
|
Eliminations of intersegment revenues |
|
(16.2 |
) |
(15.5 |
) | ||
|
Adjusted revenue |
|
1,641.1 |
|
1,613.1 |
| ||
|
Adjustments to reconcile to Consolidated revenues: |
|
|
|
|
| ||
|
Adjustments for non-wholly-owned entities (c) |
|
0.8 |
|
15.5 |
| ||
|
Official check and money order revenues (b) |
|
1.0 |
|
1.7 |
| ||
|
ISO commission expense |
|
122.5 |
|
115.8 |
| ||
|
Reimbursable debit network fees, postage and other |
|
874.9 |
|
844.8 |
| ||
|
Consolidated revenues |
|
$ |
2,640.3 |
|
$ |
2,590.9 |
|
|
Segment EBITDA: |
|
|
|
|
| ||
|
Total reported segments |
|
$ |
671.0 |
|
$ |
587.7 |
|
|
All Other and Corporate |
|
(57.5 |
) |
(67.3 |
) | ||
|
Adjusted EBITDA |
|
613.5 |
|
520.4 |
| ||
|
Adjustments to reconcile to “Net loss attributable to First Data Corporation”: |
|
|
|
|
| ||
|
Adjustments for non-wholly-owned entities (c) |
|
3.7 |
|
3.1 |
| ||
|
Depreciation and amortization |
|
(265.3 |
) |
(272.2 |
) | ||
|
Interest expense |
|
(467.1 |
) |
(469.0 |
) | ||
|
Interest income |
|
3.0 |
|
2.7 |
| ||
|
Other items (d) |
|
(6.8 |
) |
(22.0 |
) | ||
|
Income tax expense |
|
(36.6 |
) |
(61.6 |
) | ||
|
Stock-based compensation |
|
(29.1 |
) |
(9.2 |
) | ||
|
Official check and money order EBITDA (b) |
|
0.6 |
|
1.3 |
| ||
|
Costs of alliance conversions |
|
(6.8 |
) |
(22.6 |
) | ||
|
KKR related items |
|
(6.4 |
) |
(8.1 |
) | ||
|
Debt issuance costs |
|
(3.2 |
) |
(0.2 |
) | ||
|
Net loss attributable to First Data Corporation |
|
$ |
(200.5 |
) |
$ |
(337.4 |
) |
(a) Excludes equity losses that were recorded in expense and the amortization related to the excess of the investment balance over the Company’s proportionate share of the investee’s net book value for the International segment.
(b) Represents an adjustment to exclude the official check and money order businesses from revenue and EBITDA due to the Company’s wind down of these businesses.
(c) Represents the net adjustment to reflect First Data’s proportionate share of alliance revenue and EBITDA within the Merchant Solutions segment, equity earnings in affiliates included in International segment revenue and amortization related to equity method investments not included in segment EBITDA.
(d) Includes restructuring, litigation and regulatory settlements, and impairments as applicable to the periods presented and “Other income” as presented in the Consolidated Statements of Operations.
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Segment assets are as follows:
|
(in millions) |
|
As of March 31, |
|
As of December 31, |
| ||
|
Assets: |
|
|
|
|
| ||
|
Merchant Solutions |
|
$ |
25,799.9 |
|
$ |
23,905.3 |
|
|
Financial Services |
|
4,063.3 |
|
4,176.2 |
| ||
|
International |
|
5,413.8 |
|
5,222.9 |
| ||
|
All Other and Corporate |
|
1,881.2 |
|
1,935.4 |
| ||
|
Consolidated |
|
$ |
37,158.2 |
|
$ |
35,239.8 |
|
A reconciliation of reportable segment depreciation and amortization amounts to the Company’s consolidated balances in the Consolidated Statements of Cash Flows is as follows:
|
|
|
Three months ended |
| ||||
|
(in millions) |
|
2014 |
|
2013 |
| ||
|
Depreciation and amortization: |
|
|
|
|
| ||
|
Total reported segments |
|
$ |
250.8 |
|
$ |
256.5 |
|
|
All Other and Corporate |
|
10.9 |
|
11.0 |
| ||
|
|
|
261.7 |
|
267.5 |
| ||
|
Adjustments to reconcile to consolidated depreciation and amortization: |
|
|
|
|
| ||
|
Adjustments for non-wholly-owned entities |
|
19.5 |
|
24.4 |
| ||
|
Amortization of initial payments for new contracts |
|
11.0 |
|
10.2 |
| ||
|
Total consolidated depreciation and amortization |
|
$ |
292.2 |
|
$ |
302.1 |
|
Note 6: Redeemable Noncontrolling Interest
The following table presents a summary of the redeemable noncontrolling interest activity:
|
(in millions) |
|
2014 |
|
2013 |
| ||
|
Balance as of January 1, |
|
$ |
69.1 |
|
$ |
67.4 |
|
|
Distributions |
|
(9.4 |
) |
(8.8 |
) | ||
|
Share of income |
|
8.7 |
|
8.6 |
| ||
|
Adjustment to redemption value of redeemable noncontrolling interest |
|
2.1 |
|
2.0 |
| ||
|
Other |
|
0.1 |
|
(0.1 |
) | ||
|
Balance as of March 31, |
|
$ |
70.6 |
|
$ |
69.1 |
|
Note 7: Commitments and Contingencies
The Company is involved in various legal proceedings. Accruals have been made with respect to these matters, where appropriate, which are reflected in the Company’s Consolidated Financial Statements. The Company may enter into discussions regarding settlement of these matters, and may enter into settlement agreements, if it believes settlement is in the best interest of the Company. The matters discussed below, if decided adversely to or settled by the Company, individually or in the aggregate, may result in liability material to the Company’s financial condition and/or results of operations.
Legal
On July 2, 2004, a class action complaint was filed against the Company, its subsidiary Concord EFS, Inc., and various financial institutions. 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. Similar suits were filed and served in July, August and October 2004 (referred to collectively as the “ATM Fee Antitrust Litigation”). 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. On July 12, 2012, the United States Court of Appeals for the Ninth Circuit affirmed the Northern District Court of California’s dismissal of all the claims against the defendants. On July 26, 2012, the plaintiffs petitioned the Ninth
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Circuit for rehearing en banc and on March 13, 2013 the United States Court of Appeals for the Ninth Circuit issued an order denying the plaintiffs’ petition for rehearing. On July 11, 2013 the plaintiffs filed a petition for a writ of certiorari with the United States Supreme Court and on October 7, 2013, the United States Supreme Court denied such writ of certiorari.
There are asserted claims against the Company where an unfavorable outcome is considered to be reasonably possible. These claims can generally be categorized in the following areas: (1) patent infringement which results from claims that the Company is using technology that has been patented by another party; (2) merchant customer matters often associated with alleged processing errors or disclosure issues and claims that one of the subsidiaries of the Company has violated a federal or state requirement regarding credit reporting or collection in connection with its check verification guarantee, and collection activities; and (3) other matters which may include issues such as employment. The Company’s estimates of the possible ranges of losses in excess of any amounts accrued are $0 to $30 million for patent infringement, $0 to $20 million for merchant customer matters and $0 to $5 million for other matters, resulting in a total estimated range of possible losses of $0 to $55 million for all of the matters described above.
The estimated range of reasonably possible losses is based on currently available information and involves elements of judgment and significant uncertainties. As additional information becomes available and the resolution of the uncertainties becomes more apparent, it is possible that actual losses may exceed even the high end of the estimated range.
Other
In the normal course of business, the Company is subject to claims and litigation, including indemnification obligations to purchasers of former subsidiaries. Management of the Company believes that such matters will not have a material adverse effect on the Company’s results of operations, liquidity or financial condition.
Note 8: Employee Benefit Plans
The following table provides the components of net periodic benefit expense for the Company’s defined benefit pension plans:
|
|
|
Three months ended |
| ||||
|
(in millions) |
|
2014 |
|
2013 |
| ||
|
Service costs |
|
$ |
1.1 |
|
$ |
0.6 |
|
|
Interest costs |
|
10.3 |
|
9.4 |
| ||
|
Expected return on plan assets |
|
(12.6 |
) |
(11.0 |
) | ||
|
Amortization |
|
0.4 |
|
0.9 |
| ||
|
Net periodic benefit income |
|
$ |
(0.8 |
) |
$ |
(0.1 |
) |
The Company estimates pension plan contributions for 2014 to be approximately $15 million. During the three months ended March 31, 2014, approximately $8 million was contributed to the United Kingdom plan and no contributions were made to the U.S. plan.
Note 9: Stock Compensation Plans
The Company defers recognition of substantially all of the stock-based compensation expense related to stock options and non-vested restricted stock awards and units. Due to the nature of call rights associated with stock options, the Company will recognize expense related to most options only upon certain liquidity or employment termination events. The nature of the call rights associated with stock options creates a performance condition that is not considered probable until the occurrence of one of the events described above. The call rights create a performance condition as they allow the Company to repurchase options at the lesser of the fair value or the exercise price upon an option holder’s voluntary termination.
Stock-based compensation expense will be recognized related to certain restricted stock awards and units only upon a liquidity or employment termination event which triggers vesting. For the remaining awards that vest based solely on service conditions, expense is recognized over the requisite service period.
Under certain circumstances, the Company redeems common stock held by its employees on behalf of its Parent Company First Data Holding Inc. (“Holdings”).
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Total stock-based compensation expense recognized in the “Selling, general and administrative” line item of the Consolidated Statements of Operations was as follows:
|
|
|
Three months ended |
| ||||
|
(in millions) |
|
2014 |
|
2013 |
| ||
|
Total stock-based compensation expense (pretax) |
|
$ |
29.1 |
|
$ |
10.2 |
|
During the three months ended March 31, 2014, approximately $23 million of stock-based compensation expense was recognized as a result of the departure of certain executive officers.
Stock Options
During the three months ended March 31, 2014 time-based options were granted under the stock plan. The time-based options granted generally vest equally over a three to five year period.
As of March 31, 2014 there was approximately $137 million of total unrecognized compensation expense related to non-vested stock options. Approximately $8 million will be recognized over a period of approximately one year while approximately $129 million will only be recognized upon the occurrence of certain liquidity or employment termination events.
The fair value of First Data Holdings Inc. (“Holdings”) stock options granted for the three months ended March 31, 2014 were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
|
|
|
Three months ended |
| |
|
Risk-free interest rate |
|
2.25 |
% | |
|
Dividend yield |
|
— |
| |
|
Volatility |
|
51.59 |
% | |
|
Expected term (in years) |
|
7 |
| |
|
Fair value of stock (a) |
|
$ |
4.00 |
|
|
Fair value of options |
|
$ |
2.18 |
|
(a) Effective December 31, 2013, the fair value of the stock increased from $3.50 to $4.00. This change will impact stock compensation expense for grants issued subsequent to December 31, 2013.
A summary of Holdings stock option activity for the three months ended March 31, 2014 is as follows:
|
(options in millions) |
|
Options |
|
Weighted-Average |
| |
|
Outstanding at January 1, 2014 |
|
90.9 |
|
$ |
3.28 |
|
|
Granted |
|
3.8 |
|
$ |
4.00 |
|
|
Exercised |
|
(0.9 |
) |
$ |
3.02 |
|
|
Cancelled / Forfeited |
|
(0.6 |
) |
$ |
3.20 |
|
|
Outstanding at March 31, 2014 |
|
93.2 |
|
$ |
3.31 |
|
|
Options exercisable as of March 31, 2014 |
|
35.1 |
|
$ |
3.05 |
|
Restricted Stock Awards and Restricted Stock Units
In the first quarter of 2014, Holdings expanded participation in the plan by granting restricted stock awards to substantially all of the Company’s employees. The restrictions on a majority of these awards will lapse upon the later of three years or following an initial public offering or upon certain employment termination events. For the remainder of these awards, the restrictions will lapse following an initial public offering or upon certain employment termination events.
As of March 31, 2014, there was approximately $166 million of total unrecognized compensation expense related to restricted stock. Approximately $6
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
million will be recognized over a period of approximately two years while approximately $160 million will only be recognized upon the occurrence of certain liquidity or employment termination events.
A summary of Holdings restricted stock award and restricted stock unit activity for the three months ended March 31, 2014 is as follows:
|
(awards/units in millions) |
|
Awards/Units |
|
Weighted-Average |
| |
|
Non-vested at January 1, 2014 |
|
16.9 |
|
$ |
3.18 |
|
|
Granted |
|
31.1 |
|
$ |
4.00 |
|
|
Vested |
|
(0.7 |
) |
$ |
3.11 |
|
|
Cancelled / Forfeited |
|
(0.8 |
) |
$ |
3.53 |
|
|
Non-vested at March 31, 2014 |
|
46.5 |
|
$ |
3.73 |
|
Note 10: Investment Securities
The majority of the Company’s investment securities are a component of settlement assets and represent the investment of funds received by the Company from prior sales of payment instruments (official checks and financial institution money orders) by authorized agents. The Company’s investment securities, excluding those classified as cash equivalents, within current settlement assets primarily consisted of municipal obligations as of March 31, 2014 and December 31, 2013. The Company’s long-term settlement assets were primarily comprised of municipal obligations, student loan auction rate securities (“SLARS”) and preferred stock as of March 31, 2014 and SLARS as of December 31, 2013. Realized gains and losses and other-than-temporary impairments (“OTTI”) on investments classified as settlement assets are recorded in the “Product sales and other” line item of the Consolidated Statements of Operations. The Company carried other investments, primarily cost method investments, which are included in the “Other current assets” and “Other long-term assets” line items of the Consolidated Balance Sheets and are discussed further below. Realized gains and losses on these investments are recorded in the “Other income” line item of the Consolidated Statements of Operations described in Note 2 of these Consolidated Financial Statements.
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The principal components of the Company’s investment securities are as follows:
|
(in millions) |
|
Cost (a) |
|
Gross |
|
Gross |
|
OTTI Recognized |
|
Fair |
| |||||
|
As of March 31, 2014 |
|
|
|
|
|
|
|
|
|
|
| |||||
|
Student loan auction rate securities |
|
$ |
4.3 |
|
$ |
0.3 |
|
$ |
— |
|
$ |
— |
|
$ |
4.6 |
|
|
Commercial paper |
|
9.0 |
|
— |
|
— |
|
— |
|
9.0 |
| |||||
|
Corporate bonds |
|
0.6 |
|
— |
|
— |
|
— |
|
0.6 |
| |||||
|
State and municipal obligations |
|
53.6 |
|
— |
|
— |
|
— |
|
53.6 |
| |||||
|
Preferred stock |
|
0.1 |
|
3.7 |
|
— |
|
— |
|
3.8 |
| |||||
|
Total available-for-sale securities |
|
67.6 |
|
4.0 |
|
— |
|
— |
|
71.6 |
| |||||
|
Cost method investments |
|
8.7 |
|
— |
|
— |
|
— |
|
8.7 |
| |||||
|
Totals |
|
$ |
76.3 |
|
$ |
4.0 |
|
$ |
— |
|
$ |
— |
|
$ |
80.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
As of December 31, 2013 |
|
|
|
|
|
|
|
|
|
|
| |||||
|
Student loan auction rate securities |
|
$ |
8.5 |
|
$ |
0.7 |
|
$ |
— |
|
$ |
— |
|
$ |
9.2 |
|
|
State and municipal obligations |
|
74.8 |
|
— |
|
— |
|
— |
|
74.8 |
| |||||
|
Preferred stock |
|
0.1 |
|
2.9 |
|
— |
|
— |
|
3.0 |
| |||||
|
Total available-for-sale securities |
|
83.4 |
|
3.6 |
|
— |
|
— |
|
87.0 |
| |||||
|
Cost method investments |
|
8.9 |
|
— |
|
— |
|
— |
|
8.9 |
| |||||
|
Totals |
|
$ |
92.3 |
|
$ |
3.6 |
|
$ |
— |
|
$ |
— |
|
$ |
95.9 |
|
(a) Represents amortized cost for debt securities.
(b) “OTTI” refers to other-than-temporary impairments.
(c) For debt securities, represents the fair value adjustment excluding that attributable to credit losses.
(d) Represents cost for cost method investments.
All of the above investments, with the exception of cost method investments, were classified as available-for-sale. The Company uses specific identification to determine the cost of a security sold and the amount of gains and losses reclassified out of other comprehensive income (“OCI”) into the Consolidated Statements of Operations. Unrealized gains and losses on investments carried at fair value are included as a separate component of OCI, net of any related tax effects.
The following table presents additional information regarding available-for-sale securities:
|
|
|
Three months |
| ||||
|
(in millions) |
|
2014 |
|
2013 |
| ||
|
Proceeds from sales (a) |
|
$ |
53.7 |
|
$ |
21.5 |
|
|
Purchases |
|
32.7 |
|
82.7 |
| ||
|
Gross realized gains included in earnings as a result of sales (a) |
|
0.6 |
|
1.0 |
| ||
|
Net unrealized gains included in OCI, net of tax |
|
1.1 |
|
0.8 |
| ||
|
Net gains reclassified out of OCI into earnings, net of tax |
|
0.6 |
|
1.0 |
| ||
(a) Includes activity resulting from sales and maturities.
The following table presents maturity information for the Company’s investments in debt securities as of March 31, 2014:
|
(in millions) |
|
Fair Value |
| |
|
Due within one year |
|
$ |
49.7 |
|
|
Due after one year through five years |
|
13.3 |
| |
|
Due after 10 years |
|
4.8 |
| |
|
Total debt securities |
|
$ |
67.8 |
|
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The Company also maintained investments in non-marketable securities, held for strategic purposes (collectively referred to as “cost method investments”) which are carried at cost and included in “Other long-term assets” in the Company’s Consolidated Balance Sheets. These investments are evaluated for impairment upon an indicator of impairment such as an event or change in circumstances that may have a significant adverse effect on the fair value of the investment. As of March 31, 2014, there were no indicators of impairment. Where there are no indicators of impairment present, the Company estimates the fair value for the cost method investments only if it is practicable to do so. As of March 31, 2014, it was deemed impracticable to estimate the fair value on $3.4 million of cost method assets due to the lack of sufficient data upon which to develop a valuation model and the costs of obtaining an independent valuation in relation to the size of the investments.
Note 11: Derivative Financial Instruments
Risk Management Objectives and Strategies
The Company is exposed to various financial and market risks, including those related to changes in interest rates and foreign currency exchange rates, that exist as part of its ongoing business operations. The Company utilizes certain derivative financial instruments to enhance its ability to manage these risks.
The Company uses derivative instruments (i) to mitigate cash flow risks with respect to changes in interest rates (forecasted interest payments on variable rate debt), (ii) to maintain a desired ratio of fixed rate and floating rate debt, and (iii) to protect the net investment in certain foreign subsidiaries and/or affiliates and intercompany loans with respect to changes in foreign currency exchange rates.
Derivative instruments are entered into for periods consistent with related underlying exposures and do not constitute positions independent of those exposures. The Company applies strict policies to manage each of these risks, including prohibition against derivatives trading, derivatives market-making or any other speculative activities. Although most of the Company’s derivatives do not qualify for hedge accounting, they are maintained for economic hedge purposes and are not considered speculative.
The Company’s policy is to manage its cash flow and net investment exposures related to adverse changes in interest rates and foreign currency exchange rates. The Company’s objective is to engage in risk management strategies that provide adequate downside protection.
Accounting for Derivative Instruments and Hedging Activities
With respect to derivative instruments that are afforded hedge accounting, the effective portion of changes in the fair value of a derivative that is designated as a cash flow hedge is recorded in OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Changes in the fair value of a net investment hedge that qualifies for hedge accounting are recorded as part of the cumulative translation adjustment in OCI to the extent the hedge is effective. Any ineffectiveness associated with designated cash flow hedges, as well as any change in the fair value of a derivative that is not designated as a hedge, is recorded immediately in “Other income” in the Consolidated Statements of Operations.
The Company formally documents all relationships between hedging instruments and the underlying hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that have been designated as cash flow hedges to forecasted transactions and net investment hedges to the underlying investment in a foreign subsidiary or affiliate. The Company formally assesses, both at inception of the hedge and on an ongoing basis, whether the hedge is highly effective in offsetting changes in cash flows or foreign currency exposure of the underlying hedged items. The Company also performs an assessment of the probability of the forecasted transactions on a periodic basis. If it is determined that a derivative ceases to be highly effective during the term of the hedge or if the forecasted transaction is no longer probable, the Company discontinues hedge accounting prospectively for such derivative.
Credit Risk
The Company monitors the financial stability of its derivative counterparties and all counterparties remain highly-rated (in the “A” category or higher). The credit risk inherent in these agreements represents the possibility that a loss may occur from the nonperformance of a counterparty to the agreements. The Company performs a review at inception of the hedge, as circumstances warrant, and at least on a quarterly basis of the credit risk of these counterparties. The Company also monitors the concentration of its contracts with individual counterparties. The Company’s exposures are in liquid currencies (primarily in U.S. dollars, euros and
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Australian dollars, British pounds and Canadian dollars), so there is minimal risk that appropriate derivatives to maintain the hedging program would not be available in the future.
Summary of Derivative Instruments
The Company’s derivative instruments portfolio was comprised of the following:
|
Notional value (in millions) |
|
As of March 31, |
|
As of December 31, |
| ||
|
Interest rate contracts |
|
USD |
5,750.0 |
|
USD |
5,750.0 |
|
|
Foreign exchange contracts |
|
EUR |
221.5 |
|
EUR |
221.5 |
|
|
Foreign exchange contracts |
|
AUD |
215.0 |
|
AUD |
215.0 |
|
|
Foreign exchange contracts |
|
GBP |
100.0 |
|
GBP |
100.0 |
|
|
Foreign exchange contracts |
|
CAD |
75.0 |
|
CAD |
75.0 |
|
Derivatives Not Qualifying for Hedge Accounting
During the three months ended March 31, 2014 and 2013, the Company held certain derivative instruments that functioned as economic hedges but no longer qualified or were not designated to qualify for hedge accounting. Such instruments included cross-currency swaps held in order to mitigate foreign currency exposure on intercompany loans and a portion of the Company’s net investment in its European operations, interest rate swaps held in order to mitigate the exposure to interest rate fluctuations on interest payments related to variable rate debt and a fixed to floating interest rate swap held to maintain a desired ratio of fixed and variable rate debt.
The Company holds interest rate swaps with a combined notional value of $5.0 billion. The interest rate swaps are intended to mitigate exposure to fluctuations in interest rates and will expire in September 2016. The Company did not designate the swaps as hedges for accounting purposes. The Company also holds a fixed to floating interest rate swap in order to preserve the ratio of fixed to floating debt. The swap has a notional value of $750 million and expires on June 15, 2019, but is subject to a mandatory put that will result in cash settlement on June 15, 2015.
During the three months ended March 31, 2014 and 2013, the Company held cross-currency swaps not qualifying for hedge accounting with a total notional value of 21.5 million euro (approximately $29.6 million at March 31, 2014).
As of March 31, 2014, there are no losses carried in OCI related to interest rate swaps that are expected to be reclassified into the Consolidated Statements of Operations.
For information on the location and amounts of derivative fair values in the Consolidated Balance Sheets, derivative gains and losses in the Consolidated Statements of Operations and accumulated derivative gains and losses in OCI, refer to the tables presented below.
Derivatives that Qualify for Hedge Accounting
Hedges of net investments in foreign operations. During 2013, the Company entered into cross-currency swaps with aggregate notional values of 100.0 million Australian dollars expiring in January 2018, 200.0 million euro expiring in January 2016, 100.0 million British pounds expiring in August 2016 and 75.0 million Canadian dollars expiring in August 2016 that were designated as hedges of net investments in foreign operations.
Cash flow hedges. As of March 31, 2014 and 2013, the Company did not have any interest rate swaps that were designated as cash flow hedges of the variability in the interest payments on its debt.
For information on the location and amounts of derivative fair values in the Consolidated Balance Sheets, derivative gains and losses in the Consolidated Statements of Operations and accumulated derivative gains and losses in OCI, refer to the tables presented below.
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Fair Value of Derivative Instruments
Fair Value of Derivative Instruments in the Consolidated Balance Sheets
|
|
|
As of March 31, 2014 |
| ||||
|
(in millions) |
|
Assets (a)(c) |
|
Liabilities (b)(c) |
| ||
|
Derivatives designated as hedging instruments |
|
|
|
|
| ||
|
Foreign exchange contracts |
|
$ |
16.1 |
|
$ |
(36.0 |
) |
|
Derivatives not designated as hedging instruments |
|
|
|
|
| ||
|
Interest rate contracts |
|
54.1 |
|
(115.8 |
) | ||
|
Foreign exchange contracts |
|
— |
|
(2.9 |
) | ||
|
Total derivatives not designated as hedging instruments |
|
54.1 |
|
(118.7 |
) | ||
|
Total derivatives |
|
$ |
70.2 |
|
$ |
(154.7 |
) |
|
|
|
As of December 31, 2013 |
| ||||
|
(in millions) |
|
Assets (a)(c) |
|
Liabilities (b)(c) |
| ||
|
Derivative designated as hedging instrument |
|
|
|
|
| ||
|
Foreign exchange contract |
|
$ |
16.9 |
|
$ |
(30.3 |
) |
|
Derivatives not designated as hedging instruments |
|
|
|
|
| ||
|
Interest rate contracts |
|
47.2 |
|
(119.8 |
) | ||
|
Foreign exchange contracts |
|
— |
|
(2.9 |
) | ||
|
Total derivatives not designated as hedging instruments |
|
47.2 |
|
(122.7 |
) | ||
|
Total derivatives |
|
$ |
64.1 |
|
$ |
(153.0 |
) |
(a) Derivative assets are included in the “Other current assets” and “Other long-term assets” lines of the Consolidated Balance Sheets.
(b) Derivative liabilities are included in the “Other current liabilities” and “Other long-term liabilities” lines of the Consolidated Balance Sheets.
(c) The Company presents all derivative balances on a gross basis, without regard to counterparty master netting agreements or similar arrangements. Of the balances included in the table above, $70.2 million of assets and $121.9 million of liabilities, as of March 31, 2014 and $64.1 million of assets and $124.7 million of liabilities, as of December 31, 2013 are subject to master netting agreements with the counterparties. The terms of those agreements require that the Company net settle the outstanding positions at the option of the counterparty upon certain events of default.
The Effect of Derivative Instruments on the Consolidated Statements of Operations
|
|
|
Three months ended March 31, |
| ||||||||||
|
|
|
2014 |
|
2013 |
| ||||||||
|
(in millions, pretax) |
|
Interest |
|
Foreign |
|
Interest |
|
Foreign |
| ||||
|
Derivatives in cash flow hedging relationships: |
|
|
|
|
|
|
|
|
| ||||
|
Amount of gain or (loss) reclassified from accumulated OCI into income (a) |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
|
Derivative in net investment hedging relationships: |
|
|
|
|
|
|
|
|
| ||||
|
Amount of gain or (loss) recognized in OCI (effective portion) |
|
$ |
— |
|
$ |
(7.2 |
) |
$ |
— |
|
$ |
10.3 |
|
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
| ||||
|
Amount of gain or (loss) recognized in income (b) |
|
$ |
3.3 |
|
$ |
— |
|
$ |
3.3 |
|
$ |
0.5 |
|
(a) Gain (loss) is recognized in the “Interest expense” line of the Consolidated Statements of Operations, as applicable.
(b) Gain (loss) is recognized in the “Other income” line of the Consolidated Statements of Operations, as applicable.
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Accumulated Derivatives Gains and Losses
The following table summarizes activity in other comprehensive income for the three months ended March 31, 2014 related to derivative instruments classified as net investment hedges held by the Company:
|
(in millions, after tax) |
|
Three months ended |
| |
|
Accumulated loss included in other comprehensive income (loss) at beginning of the period |
|
$ |
(12.3 |
) |
|
Decrease in fair value of derivative that qualifies for hedge accounting (a) |
|
(4.5 |
) | |
|
Accumulated loss included in other comprehensive income (loss) at end of the period |
|
$ |
(16.8 |
) |
(a) Gains and losses are included in “Foreign currency translation adjustment” on the Consolidated Statements of Comprehensive Income (Loss).
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 12: Fair Value Measurement
Fair Value of Financial Instruments
Carrying amounts for certain of the Company’s financial instruments (cash and cash equivalents and short-term borrowings) approximate fair value due to their short maturities. Accordingly, these instruments are not presented in the following table. The following table provides the estimated fair values of the remaining financial instruments:
|
|
|
As of March 31, 2014 |
| ||||
|
(in millions) |
|
Carrying |
|
Fair Value (a) |
| ||
|
Financial instruments: |
|
|
|
|
| ||
|
Settlement assets: |
|
|
|
|
| ||
|
Short-term investment securities |
|
$ |
49.7 |
|
$ |
49.7 |
|
|
Long-term investment securities |
|
$ |
21.3 |
|
$ |
21.3 |
|
|
Other current assets: |
|
|
|
|
| ||
|
Derivative financial instruments |
|
$ |
6.8 |
|
$ |
6.8 |
|
|
Other long-term assets: |
|
|
|
|
| ||
|
Long-term investment securities |
|
$ |
0.6 |
|
$ |
0.6 |
|
|
Cost method investments |
|
$ |
8.7 |
|
$ |
8.7 |
|
|
Derivative financial instruments |
|
$ |
63.4 |
|
$ |
63.4 |
|
|
Other current liabilities: |
|
|
|
|
| ||
|
Derivative financial instruments |
|
$ |
21.2 |
|
$ |
21.2 |
|
|
Long-term borrowings: |
|
|
|
|
| ||
|
Long-term borrowings |
|
$ |
22,549.1 |
|
$ |
24,297.6 |
|
|
Other long-term liabilities: |
|
|
|
|
| ||
|
Derivative financial instruments |
|
$ |
133.5 |
|
$ |
133.5 |
|
(a) Represents cost for cost method investments. Refer to Note 10 of these Consolidated Financial Statements for a more detailed discussion of cost method investments.
The estimated fair values of investment securities and derivative financial instruments are described below. Refer to Notes 10 and 11 of these Consolidated Financial Statements for additional information regarding the Company’s investment securities and derivative financial instruments, respectively.
The estimated fair market value of FDC’s long-term borrowings was primarily based on market trading prices and is considered to be a Level 2 measurement. For additional information regarding the Company’s borrowings, refer to Note 4 of these Consolidated Financial Statements as well as to Note 8 of the Company’s Consolidated Financial Statements in Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
Concentration of Credit Risk
The Company’s investment securities are diversified across multiple issuers and financial institutions within its investment portfolio (investment securities plus cash and cash equivalents). In addition to investment securities, the Company maintains other financial instruments with various financial institutions. The Company’s largest single issuer or financial institution represents approximately 30% of the total carrying value of the investment portfolio and the Company limits its derivative financial instruments credit risk by maintaining contracts with highly rated (in the “A” category or higher) counterparties. The Company periodically reviews the credit standings of these institutions.
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Financial instruments carried and measured at fair value on a recurring basis are classified in the table below according to the fair value hierarchy:
|
|
|
As of March 31, 2014 |
| ||||||||||
|
|
|
Fair Value Measurement Using |
| ||||||||||
|
(in millions) |
|
Quoted prices in |
|
Significant other |
|
Significant |
|
Total |
| ||||
|
Assets: |
|
|
|
|
|
|
|
|
| ||||
|
Settlement assets: |
|
|
|
|
|
|
|
|
| ||||
|
Student loan auction rate securities |
|
$ |
— |
|
$ |
— |
|
$ |
4.6 |
|
$ |
4.6 |
|
|
Commercial paper |
|
— |
|
9.0 |
|
— |
|
9.0 |
| ||||
|
Corporate bonds |
|
— |
|
0.6 |
|
— |
|
0.6 |
| ||||
|
State and municipal obligations |
|
— |
|
53.0 |
|
— |
|
53.0 |
| ||||
|
Preferred stock |
|
3.8 |
|
— |
|
— |
|
3.8 |
| ||||
|
Total settlement assets |
|
3.8 |
|
62.6 |
|
4.6 |
|
71.0 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Other current assets: |
|
|
|
|
|
|
|
|
| ||||
|
Interest rate swap contracts |
|
— |
|
6.8 |
|
— |
|
6.8 |
| ||||
|
Other long-term assets: |
|
|
|
|
|
|
|
|
| ||||
|
Available-for-sale securities |
|
— |
|
0.6 |
|
— |
|
0.6 |
| ||||
|
Foreign currency derivative contracts |
|
— |
|
16.1 |
|
— |
|
16.1 |
| ||||
|
Interest rate swap contracts |
|
— |
|
47.3 |
|
— |
|
47.3 |
| ||||
|
Total assets at fair value |
|
$ |
3.8 |
|
$ |
133.4 |
|
$ |
4.6 |
|
$ |
141.8 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
Liabilities: |
|
|
|
|
|
|
|
|
| ||||
|
Other current liabilities: |
|
|
|
|
|
|
|
|
| ||||
|
Foreign currency derivative contracts |
|
$ |
— |
|
$ |
20.4 |
|
$ |
— |
|
$ |
20.4 |
|
|
Interest rate swap contracts |
|
— |
|
0.8 |
|
— |
|
0.8 |
| ||||
|
Other long-term liabilities: |
|
|
|
|
|
|
|
|
| ||||
|
Foreign currency derivative contracts |
|
— |
|
18.5 |
|
— |
|
18.5 |
| ||||
|
Interest rate swap contracts |
|
— |
|
115.0 |
|
— |
|
115.0 |
| ||||
|
Contingent consideration |
|
— |
|
— |
|
26.3 |
|
26.3 |
| ||||
|
Total liabilities at fair value |
|
$ |
— |
|
$ |
154.7 |
|
$ |
26.3 |
|
$ |
181.0 |
|
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
|
|
As of December 31, 2013 |
| ||||||||||
|
|
|
Fair Value Measurement Using |
| ||||||||||
|
(in millions) |
|
Quoted prices in |
|
Significant other |
|
Significant |
|
Total |
| ||||
|
Assets: |
|
|
|
|
|
|
|
|
| ||||
|
Settlement assets: |
|
|
|
|
|
|
|
|
| ||||
|
Student loan auction rate securities |
|
$ |
— |
|
$ |
— |
|
$ |
9.2 |
|
$ |
9.2 |
|
|
State and municipal obligations |
|
— |
|
74.2 |
|
— |
|
74.2 |
| ||||
|
Preferred stock |
|
3.0 |
|
— |
|
— |
|
3.0 |
| ||||
|
Total settlement assets |
|
3.0 |
|
74.2 |
|
9.2 |
|
86.4 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Other current assets: |
|
|
|
|
|
|
|
|
| ||||
|
Interest rate swap contracts |
|
— |
|
0.9 |
|
— |
|
0.9 |
| ||||
|
Other long-term assets: |
|
|
|
|
|
|
|
|
| ||||
|
Available-for-sale securities |
|
— |
|
0.6 |
|
— |
|
0.6 |
| ||||
|
Foreign currency derivative contracts |
|
— |
|
16.9 |
|
— |
|
16.9 |
| ||||
|
Interest rate swap contracts |
|
— |
|
46.3 |
|
— |
|
46.3 |
| ||||
|
Total assets at fair value |
|
$ |
3.0 |
|
$ |
138.9 |
|
$ |
9.2 |
|
$ |
151.1 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
Liabilities: |
|
|
|
|
|
|
|
|
| ||||
|
Other current liabilities: |
|
|
|
|
|
|
|
|
| ||||
|
Interest rate swap contracts |
|
$ |
— |
|
$ |
0.6 |
|
$ |
— |
|
$ |
0.6 |
|
|
Foreign currency derivative contracts |
|
— |
|
15.7 |
|
— |
|
15.7 |
| ||||
|
Other long-term liabilities: |
|
|
|
|
|
|
|
|
| ||||
|
Foreign currency derivative contracts |
|
— |
|
17.5 |
|
— |
|
17.5 |
| ||||
|
Interest rate swap contracts |
|
— |
|
119.2 |
|
— |
|
119.2 |
| ||||
|
Contingent consideration |
|
— |
|
— |
|
26.3 |
|
26.3 |
| ||||
|
Total liabilities at fair value |
|
$ |
— |
|
$ |
153.0 |
|
$ |
26.3 |
|
$ |
179.3 |
|
Settlement assets - student loan auction rate securities
Due to the lack of observable market activity for the SLARS held by the Company as of March 31, 2014, the Company, with the assistance of a third-party valuation firm upon which the Company in part relied, made certain assumptions, primarily relating to estimating both the weighted-average life for the securities held by the Company and the impact on the fair value of the current inability to redeem the securities at par value. All key assumptions and valuations were determined by and are the responsibility of management. The securities were valued using an income approach based on a probability-weighted discounted cash flow analysis. The Company considered each security’s key terms including date of issuance, date of maturity, auction intervals, scheduled auction dates, maximum auction rates, as well as underlying collateral, ratings, and guarantees or insurance. Due to the use of unobservable inputs, these instruments are classified as Level 3 within the fair value hierarchy. For additional information regarding SLARS, refer to Note 10 of these Consolidated Financial Statements.
|
(in millions) |
|
Fair Value Measurement |
| |
|
Beginning balance as of January 1, 2014 |
|
$ |
9.2 |
|
|
Total realized gains included in product sales and other |
|
0.6 |
| |
|
Total unrealized losses included in other comprehensive income |
|
(0.3 |
) | |
|
Sales |
|
(4.9 |
) | |
|
Ending balance as of March 31, 2014 |
|
$ |
4.6 |
|
Settlement assets - other available-for-sale securities
Prices for the municipal and corporate securities are not quoted on active exchanges but are priced through an independent third-party pricing service based on quotations from market-makers in the specific instruments or, where appropriate, from other market inputs. Bonds were valued under a market approach using observable inputs including reported trades, benchmark yields, broker/dealer quotes, issuer spreads and other standard inputs. Commercial and municipal paper were valued under a market approach using observable inputs including maturity date, issue date, credit rating, current commercial paper rates and settlement date.
FIRST DATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The Company’s experience with these types of investments and the expectations of the current investments held is that they will be satisfied at the current carrying amount. These securities were classified as Level 2.
Derivative financial instruments