Form 10-Q
Table of Contents

 

 

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 June 30, 2010

OR

 

¨ 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

 

 

 

DELAWARE   47-0731996

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

5565 GLENRIDGE CONNECTOR, N.E., SUITE 2000,

ATLANTA, GEORGIA

  30342
(Address of principal executive offices)   (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  ¨

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  ¨    No  ¨

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.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at July 31, 2010

Common Stock, $0.01 par value per share

  1,000 shares

 

 

 


Table of Contents

INDEX

 

     PAGE
NUMBER
PART I FINANCIAL INFORMATION   
Item 1    Financial Statements (unaudited):   
   Consolidated Statements of Operations for the three and six months ended June 30, 2010 and 2009    3
   Consolidated Balance Sheets at June 30, 2010 and December 31, 2009    4
   Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009    5
   Consolidated Statements of Equity for the six months ended June 30, 2010 and 2009    6
   Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2010 and 2009    8
   Notes to Consolidated Financial Statements    9
Item 2    Management’s Discussion and Analysis of Financial Condition and Results of Operations    37
Item 3    Quantitative and Qualitative Disclosures About Market Risk    57
Item 4    Controls and Procedures    57
PART II OTHER INFORMATION   
Item 1    Legal Proceedings    58
Item 1A    Risk Factors    58
Item 2    Unregistered Sales of Equity Securities and Use of Proceeds    58
Item 3    Defaults Upon Senior Securities    58
Item 4    Reserved    59
Item 5    Other Information    59
Item 6    Exhibits    59

 

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PART I. FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

FIRST DATA CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in millions)

 

     Three months ended
June  30,
    Six months ended
June  30,
 
     2010     2009     2010     2009  

Revenues:

        

Transaction and processing service fees:

        

Merchant related services (a)

   $ 883.8      $ 709.6      $ 1,676.2      $ 1,331.1   

Check services

     97.8        84.6        188.3        171.1   

Card services (a)

     431.1        454.2        864.3        924.6   

Other services

     144.6        123.1        276.7        251.5   

Product sales and other (a)

     207.5        205.2        402.3        385.0   

Reimbursable debit network fees, postage and other

     849.9        631.9        1,609.0        1,221.5   
                                
     2,614.7        2,208.6        5,016.8        4,284.8   
                                

Expenses:

        

Cost of services (exclusive of items shown below)

     752.8        673.1        1,508.3        1,387.4   

Cost of products sold

     99.7        80.2        175.0        143.7   

Selling, general and administrative

     395.9        331.2        774.6        657.7   

Reimbursable debit network fees, postage and other

     849.9        631.9        1,609.0        1,221.5   

Depreciation and amortization

     347.4        365.6        698.7        695.1   

Other operating expenses:

        

Restructuring, net

     23.9        8.4        36.4        33.5   

Litigation and regulatory settlements

     (1.7     —          (2.0     (2.7
                                
     2,467.9        2,090.4        4,800.0        4,136.2   
                                

Operating profit

     146.8        118.2        216.8        148.6   
                                

Interest income

     1.4        3.1        3.4        6.4   

Interest expense

     (450.9     (449.6     (899.8     (897.8

Other income (expense)

     24.8        (3.6     33.0        19.7   
                                
     (424.7     (450.1     (863.4     (871.7
                                

Loss before income taxes and equity earnings in affiliates

     (277.9     (331.9     (646.6     (723.1

Income tax benefit

     (122.4     (112.8     (260.5     (257.6

Equity earnings in affiliates

     33.3        25.5        55.5        44.0   
                                

Net loss

     (122.2     (193.6     (330.6     (421.5

Less: Net income attributable to noncontrolling interests

     49.0        2.3        80.7        5.7   
                                

Net loss attributable to First Data Corporation

   $ (171.2   $ (195.9   $ (411.3   $ (427.2
                                

 

(a) Includes processing fees, administrative service fees and other fees charged to merchant alliances accounted for under the equity method of $34.6 million and $64.7 million for the three and six months ended June 30, 2010, respectively, and $26.9 million and $52.0 million for the comparable periods in 2009.

See Notes to Consolidated Financial Statements.

 

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FIRST DATA CORPORATION

CONSOLIDATED BALANCE SHEETS

(in millions, except common stock share amounts)

 

     June 30,
2010
(Unaudited)
    December 31,
2009
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 583.7      $ 737.0   

Accounts receivable, net of allowance for doubtful accounts of $17.9 (2010) and $14.9 (2009)

     2,153.3        2,455.5   

Settlement assets

     6,537.2        6,870.3   

Other current assets

     414.0        398.8   
                

Total current assets

     9,688.2        10,461.6   
                

Property and equipment, net of accumulated depreciation of $558.1(2010) and $463.7(2009)

     1,001.6        1,051.4   

Goodwill

     17,236.8        17,475.8   

Customer relationships, net of accumulated amortization of $2,092.2 (2010) and $1,723.8 (2009)

     5,576.1        6,008.8   

Other intangibles, net of accumulated amortization of $866.2 (2010) and $698.3 (2009)

     1,999.4        2,121.1   

Investment in affiliates

     1,256.2        1,291.3   

Long-term settlement assets

     453.9        480.7   

Other long-term assets

     779.3        844.7   
                

Total assets

   $ 37,991.5      $ 39,735.4   
                
LIABILITIES AND EQUITY     

Current liabilities:

    

Accounts payable

   $ 214.8      $ 200.7   

Short-term and current portion of long-term borrowings

     295.8        304.9   

Settlement obligations

     7,025.3        7,394.7   

Other current liabilities

     1,438.0        1,554.9   
                

Total current liabilities

     8,973.9        9,455.2   
                

Long-term borrowings

     22,261.9        22,304.9   

Long-term deferred tax liabilities

     1,129.4        1,346.4   

Other long-term liabilities

     1,174.5        1,301.9   
                

Total liabilities

     33,539.7        34,408.4   
                

Commitments and contingencies (See Note 7)

    

Redeemable noncontrolling interest

     27.1        226.9   

First Data Corporation stockholder’s equity:

    

Common stock, $.01 par value; authorized and issued 1,000 shares (2010 and 2009)

     —          —     

Additional paid-in capital

     7,390.6        7,394.3   
                

Paid-in capital

     7,390.6        7,394.3   

Accumulated loss

     (5,553.5     (5,127.3

Accumulated other comprehensive loss

     (908.7     (681.7
                

Total First Data Corporation stockholder’s equity

     928.4        1,585.3   
                

Noncontrolling interests

     3,496.3        3,514.8   
                

Total equity

     4,424.7        5,100.1   
                

Total liabilities and equity

   $ 37,991.5      $ 39,735.4   
                

See Notes to Consolidated Financial Statements.

 

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FIRST DATA CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in millions)

 

     Six months ended
June 30,
 
     2010     2009  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net loss

   $ (330.6   $ (421.5

Adjustments to reconcile to net cash provided by operating activities:

    

Depreciation and amortization (including amortization netted against equity earnings in affiliates and revenues)

     753.8        741.1   

Charges related to other operating expenses and other income (expense)

     1.4        13.3   

Other non-cash and non-operating items, net

     138.3        131.7   

Increase (decrease) in cash, excluding the effects of acquisitions and dispositions, resulting from changes in:

    

Accounts receivable, current and long-term

     264.8        541.2   

Other assets, current and long-term

     149.6        101.8   

Accounts payable and other liabilities, current and long-term

     (225.8     (293.2

Income tax accounts

     (327.9     (301.4
                

Net cash provided by operating activities

     423.6        513.0   
                

CASH FLOWS FROM INVESTING ACTIVITIES

    

Current period acquisitions, net of cash acquired

     (0.9     (9.9

Payments related to other businesses previously acquired

     (1.3     (13.5

Proceeds from dispositions, net of expenses paid and cash disposed

     21.2        —     

Additions to property and equipment

     (95.4     (89.6

Proceeds from sale of property and equipment

     1.0        15.4  

Payments to secure customer service contracts, including outlays for conversion, and capitalized systems development costs

     (82.0     (73.1

Other investing activities

     17.0        6.0   
                

Net cash used in investing activities

     (140.4     (164.7
                

CASH FLOWS FROM FINANCING ACTIVITIES

    

Short-term borrowings, net

     8.3        (72.8

Principal payments on long-term debt

     (119.5     (98.1

Contributions from noncontrolling interests

     —          193.0   

Distributions and dividends paid to noncontrolling interests and redeemable noncontrolling interests

     (86.7     (6.6

Purchase of noncontrolling interest

     (213.3     —     

Redemption of Parent’s redeemable common stock

     (0.8     —     

Cash dividends

     (14.9     —     
                

Net cash (used in) provided by financing activities

     (426.9     15.5   
                

Effect of exchange rate changes on cash and cash equivalents

     (9.6     (2.1
                

Change in cash and cash equivalents

     (153.3     361.7   
                

Cash and cash equivalents at beginning of period

     737.0        406.3   
                

Cash and cash equivalents at end of period

   $ 583.7      $ 768.0   
                

See Notes to Consolidated Financial Statements.

 

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FIRST DATA CORPORATION

CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

(in millions)

 

                 First Data Corporation Shareholder        

Six months ended June 30, 2010

   Total     Comprehensive
Income (Loss)
    Accumulated
Loss
    Accumulated
Other
Comprehensive
Income (Loss)
    Common
Shares
   Paid-In
Capital
    Noncontrolling
Interests
 

Balance, December 31, 2009

   $ 5,100.1        $ (5,127.3   $ (681.7   0.0    $ 7,394.3      $ 3,514.8   

Dividends and distributions paid to noncontrolling interests

     (74.8                (74.8

Purchase of noncontrolling interest

     —                   (2.5     2.5   

Comprehensive loss:

               

Net (loss) income (a)

     (348.9   $ (348.9     (411.3            62.4   

Other comprehensive loss, net of taxes:

               

Unrealized gains on securities

     6.0        6.0          6.0          

Unrealized gains on hedging activities

     29.6        29.6          29.6          

Foreign currency translation adjustment

     (273.4     (273.4       (264.8          (8.6

Pension liability adjustment

     2.2        2.2          2.2          
                     

Other comprehensive loss

       (235.6           
                     

Comprehensive loss

     $ (584.5           
                     

Adjustment to redemption value of redeemable noncontrolling interests

     (7.0              (7.0  

Stock compensation expense and other

     5.8                 5.8     

Cash dividends paid by First Data Corporation to Parent

     (14.9       (14.9         
                                               

Balance, June 30, 2010

   $ 4,424.7        $ (5,553.5   $ (908.7   0.0    $ 7,390.6      $ 3,496.3   
                                               

 

(a) The total net loss presented in the Consolidated Statements of Equity for the six months ended June 30, 2010 is $18.3 million greater than the amount presented on the Consolidated Statements of Operations due to the net income attributable to the redeemable noncontrolling interests not included in equity.

 

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                 First Data Corporation Shareholder       

Six months ended June 30, 2009

   Total     Comprehensive
Income (Loss)
    Accumulated
Loss
    Accumulated
Other
Comprehensive
Income (Loss)
    Common
Shares
   Paid-In
Capital
   Noncontrolling
Interests
 

Balance, December 31, 2008

   $ 2,402.3        $ (4,068.0   $ (934.9   0.0    $ 7,380.8    $ 24.4   

Adjustment resulting from adoption of new accounting principle

     —            27.1        (27.1        

Acquisitions

     4.3                    4.3   

Contributions

     3,444.2                    3,444.2   

Dividends and distributions paid to noncontrolling interests

     (6.6                 (6.6

Comprehensive loss:

                

Net (loss) income

     (421.5   $ (421.5     (427.2             5.7   

Other comprehensive income (loss), net of taxes:

                

Unrealized gains on securities

     7.4        7.4          7.4           

Unrealized gains on hedging activities

     74.0        74.0          74.0           

Foreign currency translation adjustment

     54.9        54.9          54.0              0.9   
                      

Other comprehensive income

       136.3               
                      

Comprehensive loss

     $ (285.2            
                      

Stock compensation expense and other

     9.2                 9.2   
                                              

Balance, June 30, 2009

   $ 5,568.2        $ (4,468.1   $ (826.6   0.0    $ 7,390.0    $ 3,472.9   
                                              

See Notes to Consolidated Financial Statements.

 

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FIRST DATA CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in millions)

 

     Three months ended
June  30,
    Six months ended
June  30,
 
     2010     2009     2010     2009  

Net loss (a)

   $ (132.0   $ (193.6   $ (348.9   $ (421.5

Other comprehensive income (loss), net of tax:

        

Unrealized gains on securities

     6.1        18.6        6.0        7.4   

Unrealized gains on hedging activities

     19.9        35.1        29.6        74.0   

Foreign currency translation adjustment

     (153.3     205.8        (273.4     54.9   

Pension liability adjustment

     0.1        —          2.2        —     
                                

Total other comprehensive income (loss), net of tax

     (127.2     259.5        (235.6     136.3   
                                

Comprehensive income (loss)

     (259.2     65.9        (584.5     (285.2

Less: Comprehensive income attributable to noncontrolling interests

     36.7        3.6        53.8        6.6   
                                

Comprehensive income (loss) attributable to First Data Corporation

   $ (295.9   $ 62.3      $ (638.3   $ (291.8
                                

 

(a) The net loss presented in the Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2010 is $9.8 million and $18.3 million, respectively, greater than the amounts presented on the Consolidated Statements of Operations due to the net income attributable to the redeemable noncontrolling interests not included in equity.

See Notes to Consolidated Financial Statements.

 

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FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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, 2009. 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 at June 30, 2010, the consolidated results of its operations and comprehensive income (loss) for the three and six months ended June 30, 2010 and 2009, the consolidated cash flows for the six months ended June 30, 2010 and 2009 and the consolidated changes in equity for the six months ended June 30, 2010. 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

Effective January 1, 2010, the Integrated Payment Systems operating segment is being reported within All Other and Corporate. Results for 2009 have been adjusted to reflect the change. Other amounts in 2009 have also been adjusted to conform to current year presentation.

The Company sold a merchant acquiring business in Canada as well as a debit and credit card issuing and acquiring processing business in Austria, both reported within the International segment, in November 2009 and August 2009, respectively. The results of divested businesses are excluded from segment results. The International segment performance measures have been adjusted for 2009 to exclude the results of divested businesses.

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” of $9.1 million and $18.7 million for the three and six months ended June 30, 2010, respectively, and $5.4 million and $10.4 million for the three and six months ended June 30, 2009, respectively. Also not included is amortization related to equity method investments which is netted within the “Equity earnings in affiliates” line of $18.1 million and $36.4 million for the three and six months ended June 30, 2010, respectively, and $18.0 million and $35.6 million for the three and six months ended June 30, 2009, respectively.

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 which totaled $4,465.8 million and $3,013.5 million for the three months ended June 30, 2010 and 2009, respectively, and $8,535.4 million and $5,745.8 million for the comparable six-month periods. 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 debit network fees related to acquired PIN-debit transactions charged by debit networks totaled $708.8 million and $470.8 million for the three months ended June 30, 2010 and 2009, respectively, and $1,313.5 million and $883.4 for the comparable six-month periods. Comparability of the dollar amounts disclosed in this paragraph is impacted by the formation of the Banc of America Merchant Services alliance on June 26, 2009. Information regarding the Banc of America Merchant Services transaction is included in Note 4 to the Consolidated Financial Statements in Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

New Accounting Guidance

In October 2009, the FASB revised its guidance on Revenue Recognition for Multiple-Deliverable Revenue Arrangements. The amendments in this update enable companies to separately account for multiple revenue-generating activities (deliverables) that they perform for their customers. Existing U.S. GAAP requires a company to use vendor-specific objective evidence (“VSOE”) or third-party evidence of selling price to separate deliverables in a multiple-deliverable arrangement. The update does allow for the use of an estimated selling price if neither VSOE nor third-party evidence is available. The update requires additional disclosures of

 

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FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

information about an entity’s multiple-deliverable arrangements. The requirements of the update apply prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, although early adoption is permitted. The Company adopted the new guidance on January 1, 2010 and has no arrangements for which this adoption will have a material impact on its financial position and results of operations.

Note 2: Supplemental Financial Information

Supplemental Statement of Operations Information

The following table details the components of “Other income (expense)” on the Consolidated Statements of Operations:

 

     Three months ended June 30,     Six months ended June 30,  

(in millions)

   2010     2009     2010     2009  

Investment gains and (losses)

     —        $ (0.3   $ 1.8      $ (0.7

Derivative financial instruments losses

   $ (2.1     (13.6     (26.8     (6.9

Divestitures, net

     —          (0.4     20.0        (0.9

Non-operating foreign currency gains

     26.9        5.2        38.0        22.7   

Other

     —          5.5        —          5.5   
                                

Other income (expense)

   $ 24.8      $ (3.6   $ 33.0      $ 19.7   
                                

Supplemental Cash Flow Information

During the six months ended June 30, 2010 and 2009, the principal amount of the Company’s senior PIK (Payment In-Kind) notes increased by $176.6 million and $165.2 million, respectively, resulting from the “payment” of accrued interest expense.

During the six months ended June 30, 2010 and 2009, the Company entered into capital leases totaling approximately $45 million and $85 million, respectively.

On June 26, 2009, the Company entered into an alliance with Bank of America N.A. and Rockmount Investments, LLC (“Rockmount”) as discussed in “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, 2009. The Company’s and Bank of America N.A.’s direct contributions to the alliance consisted of non-cash assets and liabilities.

In March 2009, the remaining balance of the Company’s 9.875% senior unsecured cash-pay term loan bridge loans due 2015 that was not previously exchanged was exchanged for senior notes. There was no expenditure, other than professional fees incurred in connection with the Exchange Offering itself, or receipt of cash associated with this exchange.

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 comprised of severance totaling $27.0 million and $43.4 million for the three and six months ended June 30, 2010, respectively. The Company also recorded charges related to facility closures totaling $0.3 million and $0.5 million for the three and six months ended June 30, 2010, respectively.

A summary of net pretax benefits (charges), incurred by segment, for each period is as follows (in millions):

 

          Pretax Benefit (Charge)  

Three months ended June 30, 2010

   Approximate
Number of
Employees
   Retail  and
Alliance
Services
    Financial
Services
    International     All Other
and
Corporate
    Totals  

Restructuring charges

   580    $ (6.0   $ (1.7   $ (6.3   $ (13.3   $ (27.3

Restructuring accrual reversal

        0.1        0.5        1.9        0.9        3.4   
                                           

Total pretax charge, net of reversals

      $ (5.9   $ (1.2   $ (4.4   $ (12.4   $ (23.9
                                           

 

10


Table of Contents

FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

Six months ended June 30, 2010

   Approximate
Number of
Employees
   Retail  and
Alliance
Services
    Financial
Services
    International     All Other
and
Corporate
    Totals  

Restructuring charges

   720    $ (6.7   $ (7.1   $ (12.7   $ (17.4   $ (43.9

Restructuring accrual reversal

        0.3        0.7        4.2        2.3        7.5   
                                           

Total pretax charge, net of reversals

      $ (6.4   $ (6.4   $ (8.5   $ (15.1   $ (36.4
                                           

The first quarter 2010 restructurings resulted from the Company aligning the business with strategic objectives as well as domestic site consolidations. The second quarter 2010 restructurings resulted from actions similar to the first quarter as well as the termination of certain management positions across the organization including the reorganization of executive officers. The termination of certain management positions will continue into the third quarter and similar initiatives are expected to occur in future periods resulting in additional restructuring charges. Partially offsetting the charges were reversals of excess 2008 and 2009 restructuring accruals.

The following table summarizes the Company’s utilization of restructuring accruals for the period from January 1, 2010 through June 30, 2010 (in millions):

 

     Employee
Severance
    Facility
Closure
 

Remaining accrual at January 1, 2010

   $ 58.5      $ 0.2   

Expense provision

     43.4        0.5   

Cash payments and other

     (50.3     (0.2

Changes in estimates

     (7.4     (0.1
                

Remaining accrual at June 30, 2010

   $ 44.2      $ 0.4   
                

The Company recorded restructuring charges comprised of severance totaling $10.2 million and $40.2 million for the three and six months ended June 30, 2009, respectively. The Company also recorded charges related to facility closures totaling $0.4 million during the first quarter 2009.

A summary of net pretax benefits (charges), incurred by segment, for each period is as follows (in millions):

 

          Pretax Benefit (Charge)  

Three months ended June 30, 2009

   Approximate
Number of
Employees
   Retail  and
Alliance
Services
    Financial
Services
    International     All Other
and
Corporate
    Totals  

Restructuring charges

   200    $ (0.3   $ (2.4   $ (4.9   $ (2.6   $ (10.2

Restructuring accrual reversal

        —          0.2        1.5        0.1        1.8   
                                           

Total pretax charge, net of reversals

      $ (0.3   $ (2.2   $ (3.4   $ (2.5   $ (8.4
                                           

Six months ended June 30, 2009

   Approximate
Number of
Employees
   Retail  and
Alliance
Services
    Financial
Services
    International     All Other
and
Corporate
    Totals  

Restructuring charges

   760    $ (9.8   $ (8.5   $ (15.7   $ (6.6   $ (40.6

Restructuring accrual reversal

        3.8        1.7        1.5        0.1        7.1   
                                           

Total pretax charge, net of reversals

      $ (6.0   $ (6.8   $ (14.2   $ (6.5   $ (33.5
                                           

The restructurings in the first quarter of 2009 resulted from the elimination of a select number of management and other positions as part of the Company’s cost saving initiatives. The second quarter 2009 restructurings resulted from similar actions as in the first quarter in the International segment while domestic restructurings resulted from site consolidations and the elimination of certain information technology positions. The Company incurred additional charges throughout 2009 and in 2010 related to these initiatives. Partially offsetting the charges were reversals of 2009 and 2008 restructuring accruals related to the Company’s change in strategy related to global labor sourcing initiatives as well as refining previously recorded estimates.

 

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Table of Contents

FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

Note 4: Borrowings

Senior secured credit facilities

On August 4, 2010, the Company announced that it intends to seek amendments to its senior secured credit facilities to, among other things:

(i) allow for the Company to incur additional secured indebtedness or additional unsecured indebtedness so long as (a) the net cash proceeds is used to repay existing secured term loans or is offered on a pro rata basis to secured term loan lenders of a particular class or classes in exchange for a like amount of term loans of such class or classes (and the term loans so exchanged are cancelled) or (b) if such indebtedness is secured by a lien junior to the liens securing the obligations under the senior secured credit facilities, the aggregate principal amount shall not exceed $3,500,000,000 at any time and the net cash proceeds of such indebtedness shall be used to redeem or repay senior or senior subordinated notes or other indebtedness;

(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 the obligations under the 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 the Company to agree with individual lenders to extend the maturity of their term loans or revolving commitments, and for the Company to pay increased interest rates or otherwise modify the terms of their loans or revolving commitments in connection with such an extension.

Senior secured revolving credit facility

The Company’s senior secured revolving credit facility currently has commitments from nondefaulting financial institutions to provide $1,769.4 million of credit. Up to $500 million of the senior secured revolving credit facility is available for letters of credit, of which $51.6 million and $39.6 million of letters of credit were issued under the facility as of June 30, 2010 and December 31, 2009, respectively. The Company had no amounts outstanding against this facility as of June 30, 2010 and December 31, 2009. As of June 30, 2010, $1,717.8 million remained available under this facility after considering the letters of credit issued under the facility.

Senior secured term loan facility

The terms of the Company’s senior secured term loan facility require the Company to pay equal quarterly installments in aggregate annual amounts equal to 1% of the original principal amount. During the three and six months ended June 30, 2010, the Company paid $32.0 million and $64.1 million, respectively, of principal payments on the senior secured term loan facility in accordance with this provision ($29.8 million and $59.5 million, respectively, related to the U.S. dollar denominated loan and $2.2 million and $4.6 million, respectively, related to the euro denominated loan for the three and six months ended June 30, 2010). During the three and six months ended June 30, 2009, the Company paid $32.2 million and $64.4 million, respectively, of principal payments on the senior secured term loan facility in accordance with this provision ($29.7 million and $59.5 million, respectively, related to the U.S. dollar denominated loan and $2.5 million and $4.9 million, respectively, related to the euro denominated loan for the three and six months ended June 30, 2009).

Other short-term borrowings

The Company had approximately $516 million and $565 million available under short-term lines of credit and other arrangements with foreign banks and alliance partners primarily to fund settlement activity as of June 30, 2010 and December 31, 2009, respectively. These arrangements are primarily associated with international operations and are in various functional currencies, the most significant of which are the euro, Australian dollar and Polish zloty. Certain of these arrangements are uncommitted (approximately $161 million and $186 million) but the Company had $102.9 million and $100.1 million of borrowings outstanding against them as of June 30, 2010 and December 31, 2009, respectively. The total amounts outstanding against short-term lines of credit and other arrangements were $113.4 million and $109.2 million as of June 30, 2010 and December 31, 2009, respectively.

Senior PIK notes

The terms of the Company’s senior PIK notes require that interest on the notes up to and including September 30, 2011 be paid entirely by increasing the principal amount of the outstanding notes or by issuing senior PIK notes. During the six months ended June 30, 2010 and 2009, the Company increased the principal amount of these notes by $176.6 million and $165.2 million, respectively, in accordance with this provision. The principal amount was not increased during the three months ended June 30, 2010 and 2009.

 

12


Table of Contents

FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

Debt Repurchases

In June 2010, the Company paid off its 4.50% notes due 2010 for $13.1 million.

Note 5: Segment Information

For a detailed discussion of the Company’s principles regarding its operating segments refer to Note 16 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Effective January 1, 2010, the Integrated Payment Systems operating segment is being reported within All Other and Corporate. Results for 2009 have been adjusted to reflect the change. Other amounts in 2009 have been adjusted to conform to current year presentation.

The following tables present the Company’s operating segment results for the three and six months ended June 30, 2010 and 2009:

 

Three months ended June 30, 2010

(in millions)

   Retail and
Alliance
Services
    Financial
Services
    International     All Other
and
Corporate
    Totals  

Revenues:

          

Transaction and processing service fees

   $ 750.2      $ 341.5      $ 297.6      $ 36.1      $ 1,425.4   

Product sales and other

     103.5        9.9        82.5        13.5        209.4   

Equity earnings in affiliates (a)

     —          —          7.0        —          7.0   
                                        

Total segment reporting revenues

   $ 853.7      $ 351.4      $ 387.1      $ 49.6      $ 1,641.8   
                                        

Internal revenue

   $ 4.8      $ 9.5      $ 2.0      $ —        $ 16.3   

External revenue

     848.9        341.9        385.1        49.6        1,625.5   

Depreciation and amortization

     168.8        91.9        68.4        10.2        339.3   

Segment EBITDA

     344.9        134.6        73.0        (39.6     512.9   

Other operating expenses and other income (expense) excluding divestitures

     16.2        0.5        (4.0     (10.1     2.6   

Three months ended June 30, 2009

(in millions)

   Retail and
Alliance
Services
    Financial
Services
    International     All Other
and
Corporate
    Totals  

Revenues:

          

Transaction and processing service fees

   $ 670.6      $ 340.1      $ 291.8      $ 53.5      $ 1,356.0   

Product sales and other

     84.8        37.9        77.4        3.8        203.9   

Equity earnings in affiliates (a)

     —          —          6.8        —          6.8   
                                        

Total segment reporting revenues

   $ 755.4      $ 378.0      $ 376.0      $ 57.3      $ 1,566.7   
                                        

Internal revenue

   $ 4.5      $ 8.1      $ 1.5      $ 0.1      $ 14.2   

External revenue

     750.9        369.9        374.5        57.2        1,552.5   

Depreciation and amortization

     185.9        108.5        67.7        18.6        380.7   

Segment EBITDA

     325.9        186.7        104.9        (28.9     588.6   

Other operating expenses and other income (expense) excluding divestitures

     (0.2     (2.3     2.5        (11.6     (11.6

 

13


Table of Contents

FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

Six months ended June 30, 2010

(in millions)

   Retail and
Alliance
Services
    Financial
Services
    International     All Other
and
Corporate
    Totals  

Revenues:

          

Transaction and processing service fees

   $ 1,401.8      $ 679.8      $ 598.7      $ 75.0      $ 2,755.3   

Product sales and other

     189.1        17.7        166.3        32.8        405.9   

Equity earnings in affiliates (a)

     —          —          13.8        —          13.8   
                                        

Total segment reporting revenues

   $ 1,590.9      $ 697.5      $ 778.8      $ 107.8      $ 3,175.0   
                                        

Internal revenue

   $ 9.0      $ 18.0      $ 4.2      $ —        $ 31.2   

External revenue

     1,581.9        679.5        774.6        107.8        3,143.8   

Depreciation and amortization

     337.2        175.9        142.3        24.9        680.3   

Segment EBITDA

     594.2        267.7        151.1        (75.8     937.2   

Other operating expenses and other income (expense) excluding divestitures

     12.8        (4.4     (8.1     (21.7     (21.4

Six months ended June 30, 2009

(in millions)

   Retail and
Alliance
Services
    Financial
Services
    International     All Other
and
Corporate
    Totals  

Revenues:

          

Transaction and processing service fees

   $ 1,281.4      $ 705.1      $ 558.2      $ 106.1      $ 2,650.8   

Product sales and other

     165.2        45.5        145.6        22.5        378.8   

Equity earnings in affiliates (a)

     —          —          12.4        —          12.4   
                                        

Total segment reporting revenues

   $ 1,446.6      $ 750.6      $ 716.2      $ 128.6      $ 3,042.0   
                                        

Internal revenue

   $ 8.5      $ 16.9      $ 2.7      $ 0.4      $ 28.5   

External revenue

     1,438.1        733.7        713.5        128.2        3,013.5   

Depreciation and amortization

     373.3        188.9        129.4        33.5        725.1   

Segment EBITDA

     590.8        349.1        177.2        (57.0     1,060.1   

Other operating expenses and other income (expense) excluding divestitures

     (6.1     (6.8     (9.2     12.0        (10.1

A reconciliation of reportable segment amounts to the Company’s consolidated balances is as follows (in millions):

 

     Three months ended
June 30,
    Six months ended
June 30,
 

(in millions)

   2010     2009     2010     2009  

Revenues:

        

Total reported segments

   $ 1,592.2      $ 1,509.4      $ 3,067.2      $ 2,913.4   

All Other and Corporate

     49.6        57.3        107.8        128.6   

Adjustment to reconcile to Adjusted revenue:

        

Official check and money order revenues (b)

     (4.7     2.7        (14.6     (0.6

Eliminations (c)

     (16.3     (14.2     (31.2     (28.5
                                

Adjusted Revenue

     1,620.8        1,555.2        3,129.2        3,012.9   
                                

Adjustment to reconcile to Consolidated revenues:

        

Divested businesses

     —          23.4        —          47.2   

Adjustments for non-wholly-owned entities (d)

     57.7        (59.6     110.1        (110.4

Official check and money order revenues (b)

     4.7        (2.7     14.6        0.6   

Independent Sales Organization commission expense

     81.6        60.4        153.9        113.0   

Reimbursable debit network fees, postage and other

     849.9        631.9        1,609.0        1,221.5   
                                

Consolidated revenues

   $ 2,614.7      $ 2,208.6      $ 5,016.8      $ 4,284.8   
                                

 

14


Table of Contents

FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

      Three months ended
June  30,
    Six months ended
June  30,
 

(in millions)

   2010     2009     2010     2009  

Segment EBITDA:

        

Total reported segments

   $ 552.5      $ 617.5      $ 1,013.0      $ 1,117.1   

All Other and Corporate

     (39.6     (28.9     (75.8     (57.0
                                

Adjusted EBITDA

     512.9        588.6        937.2        1,060.1   
                                

Adjustments to reconcile to “Loss before income taxes and equity earnings in affiliates”:

        

Divested businesses

     1.4        8.8        1.4        23.3   

Adjustments for non-wholly-owned entities (d)

     23.5        (41.3     43.2        (74.3

Depreciation and amortization

     (347.4     (365.6     (698.7     (695.1

Interest expense

     (450.9     (449.6     (899.8     (897.8

Interest income

     1.4        3.1        3.4        6.4   

Other items (e)

     2.6        (12.0     (1.4     (11.1

Stock based compensation

     (1.2     (4.6     (6.5     (9.1

Official check and money order EBITDA

     1.2        (8.2     7.6        (10.6

Cost of data center, technology and savings initiatives

     (13.7     (43.8     (19.5     (101.2

KKR merger related items

     (7.7     (7.3     (13.5     (13.5

Eliminations

     —          —          —          (0.2
                                

Loss before income taxes and equity earnings in affiliates

   $ (277.9   $ (331.9   $ (646.6   $ (723.1
                                

 

(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 adjustments for the official check and money order businesses which are excluded from Adjusted revenue and Adjusted EBITDA due to the Company’s wind down of these businesses.
(c) Represents elimination of intersegment revenue.
(d) Represent the reversal of the proportionate consolidation adjustments made to the Retail and Alliance Services segment revenue or segment EBITDA and equity earnings included in the International segment revenue or segment EBITDA. Also includes the add back of net income attributable to noncontrolling interests excluded from International segment EBITDA.
(e) Includes “Other operating expenses” and “Other income (expense)” as presented on the Consolidated Statements of Operations.

Segment assets are as follows (in millions):

 

     June 30,
2010
   December 31,
2009

Assets:

     

Retail and Alliance Services

   $ 24,623.3    $ 25,377.3

Financial Services

     5,116.7      5,238.8

International

     5,217.1      5,841.5

All Other and Corporate

     3,034.4      3,277.8
             

Consolidated

   $ 37,991.5    $ 39,735.4
             

 

15


Table of Contents

FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

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 (in millions):

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2010    2009     2010    2009  

Depreciation and Amortization:

          

Total reported segments

   $ 329.1    $ 362.1      $ 655.4    $ 691.6   

All Other and Corporate

     10.2      18.6        24.9      33.5   
                              
     339.3      380.7        680.3      725.1   
                              

Adjustments to reconcile to consolidated depreciation and amortization:

          

Divested businesses

     —        3.2        —        6.2   

Adjustments for non-wholly-owned entities

     26.2      (0.3     54.8      (0.6

Amortization of initial payments for new contracts

     9.1      5.4        18.7      10.4   
                              

Total consolidated depreciation and amortization

   $ 374.6    $ 389.0      $ 753.8    $ 741.1   
                              

Note 6: Redeemable Noncontrolling Interests

For a detailed discussion of the Banc of America Merchant Services, LLC (“BAMS”) transaction as well as the Company’s redeemable noncontrolling interests, refer to Notes 4 and 13 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Rockmount owned a 5% non-voting interest in BAMS. The Company owned a 40% noncontrolling interest in Rockmount. In May 2010, the third party owning a controlling interest in Rockmount exercised a put right on Rockmount’s beneficial interest in BAMS requiring net cash payments from FDC of $213 million. The redemption amount was based on Rockmount’s capital account balance in BAMS immediately prior to the redemption with an additional adjustment paid by the Company and Bank of America N.A. based on the level of BAMS revenues for the trailing 12 month period ended March 31, 2010. After redemption by Rockmount, the Company owns 51% of BAMS and Bank of America N.A. owns 49%.

The following table presents a summary of the redeemable noncontrolling interests activity for the six months ended June 30, 2010 (in millions):

 

Balance at December 31, 2009

   $ 226.9   

Distributions

     (11.9

Share of income

     18.3   

Purchase of noncontrolling interests

     (213.3

Adjustment to redemption value of redeemable noncontrolling interest

     7.0   

Other

     0.1   
        

Balance at June 30, 2010

   $ 27.1   
        

The following table presents the effects of changes in FDC’s ownership interest in its BAMS alliance on FDC’s equity (in millions):

 

     Six months ended
June 30, 2010
 

Net loss attributable to FDC

   $ (411.3

Transfers from noncontrolling interest:

  

Decrease in FDC’s paid-in capital for loss recognized from purchase of noncontrolling interest

     (2.5
        

Transfers from noncontrolling interest

     (2.5
        

Change in net loss attributable to FDC and transfers from noncontrolling interest

   $ (413.8
        

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.

 

16


Table of Contents

FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

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. Five similar suits were filed and served in July, August and October 2004 (referred to collectively as the “ATM Fee Antitrust Litigation”).

On August 3, 2007, Concord EFS, Inc. filed a motion for summary judgment seeking to dismiss plaintiffs’ per se claims, arguing that there are procompetitive justifications for the ATM interchange. On March 24, 2008, the Court entered an order granting the defendants’ motions for partial summary judgment, finding that the claims raised in this case would need to be addressed under a “Rule of Reason” analysis. On February 2, 2009, the Plaintiffs filed a Second Amended Complaint, which was dismissed by the Court on September 4, 2009. On October 16, 2009, the Plaintiffs filed a Third Amended Complaint. On June 21, 2010, the Court granted dismissal of such complaint as to the single-brand aftermarket derivative theory and ordered the parties to brief a summary judgment regarding Plaintiffs’ alternative all ATM networks relevant market theory claim.

The Company believes the complaints are without merit and intends to vigorously defend them.

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 June 30,     Six months ended June 30,  

(in millions)

   2010     2009     2010     2009  

Service costs

   $ 0.8      $ 1.9      $ 1.6      $ 3.8   

Interest costs

     9.7        9.1        19.8        17.7   

Expected return on plan assets

     (9.8     (8.5     (20.0     (16.5

Amortization

     0.5        0.9        1.1        1.7   
                                

Net periodic benefit expense

   $ 1.2      $ 3.4      $ 2.5      $ 6.7   
                                

The Company estimates pension plan contributions for 2010 to be approximately $33 million. During the six months ended June 30, 2010, approximately $14 million was contributed to the United Kingdom plan and no contributions were made to the U.S. plan.

Note 9: Stock Compensation Plans

Total stock-based compensation expense recognized in the Consolidated Statements of Operations resulting from stock options, non-vested restricted stock awards and non-vested restricted stock units was $1.2 million and $6.5 million and $4.6 million and $9.1 million pretax for the three and six months ended June 30, 2010 and 2009, respectively. A forfeiture rate adjustment based on actual experience decreased the amount of stock-based compensation expense recognized in the three months ended June 30, 2010. Stock-based compensation expense is recognized in the “Selling, general and administrative” line item of the Consolidated Statements of Operations.

Stock Options

In May 2010, the Company modified the terms of time based options and performance based options outstanding under the stock incentive plan established by First Data Holdings, Inc. (“Holdings”), which owns 100% of FDC’s equity interests, for management employees of FDC (“stock plan”). The modifications only affected active employees as of the modification date. The exercise price on previously granted time based options was reduced from $5 to $3. The Company is continuing to recognize expense

 

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FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

on these options based on the original grant date fair value amortized over the remaining original vesting schedule. Due to the nature of the call rights associated with the time based options, subsequent to the modification, which expire 180 days after certain employment termination events or the latter of September 24, 2012 or a qualified public offering, the incremental stock option fair value from the change in exercise price will only be recognized upon such events. Prior to the modifications, the call rights expired 180 days after certain employment termination events or the earlier of September 24, 2012 or a change in control. In addition, outstanding performance based options were cancelled and reissued. The reissued performance based options have an exercise price of $3 and a tiered vesting schedule that provides for vesting of 25%, 75% or 100% of the options if the Company achieves certain EBITDA targets in any fiscal year between January 1, 2010 and December 31, 2013. The performance based options have call rights similar to the time based options described above. Due to the call rights, the Company will only recognize expense on the performance based options upon a qualified public offering or certain employment termination events. In conjunction with the above noted modifications, stock plan participants also received a cash bonus payment in the second quarter of 2010 totaling $7.8 million.

During the six months ended June 30, 2010 additional time based and performance based options were granted under the stock plan. The time based options granted vest equally over a three to five year period and performance based options vest based upon the Company achieving the EBITDA targets discussed above. The options granted have call rights similar to those described above and, as a result, the Company will only recognize expense on these options upon a qualified public offering or certain employment termination events.

As of June 30, 2010 there was approximately $115 million of total unrecognized compensation expense, net of estimated forfeitures, related to non-vested stock options. Approximately $39 million will be recognized over a weighted-average period of approximately 3.4 years while approximately $76 million will only be recognized upon a qualified public offering or certain termination events.

The fair value of Holdings stock options granted for the six months ended June 30, 2010 were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions (excluding the effect of stock plan modifications):

 

     Six months ended
June 30, 2010
 

Risk-free interest rate

     3.22

Dividend yield

     —     

Volatility

     51.67

Expected term (in years)

     7   

Fair value of stock

   $ 3   

Fair value of options

   $ 2   

A summary of Holdings stock option activity for the six months ended June 30, 2010 is as follows (options in millions):

 

     2010
     Options     Weighted-Average
Exercise  Price

Outstanding at January 1

   67.1      $ 5

Granted (a)

   42.5      $ 3

Cancelled / Forfeited (a)

   (39.1   $ 5
        

Outstanding at June 30

   70.5      $ 3
        

 

(a) The number of options granted and cancelled/forfeited includes performance based options cancelled and reissued in connection with the stock plan modifications discussed above.

Restricted Stock Awards and Restricted Stock Units

Restricted stock awards were granted under the stock plan during the three months ended June 30, 2010. The restrictions on the awards granted in May 2010 will lapse upon a qualified public offering, a change in control or certain employment termination or liquidity events. As such, the Company is not recognizing expense on awards granted during the three months ended June 30, 2010. The Company is continuing to recognize expense on the restricted stock awards granted prior to May 2010 based on the original grant

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

date fair value amortized over the remaining original vesting schedule. As of June 30, 2010 there was approximately $27 million of total unrecognized compensation expense, net of estimated forfeitures, related to restricted stock. Approximately $3 million will be recognized over a weighted-average period of approximately 2.9 years while approximately $24 million will only be recognized upon a qualified public offering or certain termination events. A summary of Holdings restricted stock award and restricted stock unit activity for the six months ended June 30, 2010 is as follows (awards/units in millions):

 

     2010
Awards/Units
    Weighted-Average
Grant-Date  Fair
Value

Non-vested at January 1

   1.5      $ 5

Granted

   7.8      $ 3

Cancelled / Forfeited

   (0.5   $ 5
        

Non-vested at June 30

   8.8      $ 3
        

Note 10: Investment Securities

Investment securities are a component of the Company’s settlement assets and represent the investment of funds received by FDC from the sale of payment instruments (official checks and financial institution money orders) by authorized agents. The Company’s investment securities included in current settlement assets include primarily discounted commercial paper, time deposits and corporate bonds. The Company’s long-term settlement assets are comprised primarily of student loan auction rate securities (“SLARS”). Realized gains and losses 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 including equity securities and shares of a money market fund which are carried at fair value and included in the “Other current assets” and “Other long-term assets” line items of the Consolidated Balance Sheets. Realized gains and losses on these investments are recorded in the “Other income (expense)” line item of the Consolidated Statements of Operations described in Note 2.

The principal components of the Company’s investment securities are as follows (in millions):

 

     Cost (a)    Gross
Unrealized
Gain
   Gross
Unrealized
(Loss) excluding
OTTI (b)
    OTTI Recognized  in
OCI (b)(c)
    Fair
Value  (d)

June 30, 2010

            

Student loan auction rate securities

   $ 488.0      —      $ (31.5   $ (2.7   $ 453.8

Corporate bonds

     40.1      —        (0.1     —          40.0

Time deposits

     30.0      —        —          —          30.0

Discounted commercial paper

     20.0      —        —          —          20.0

Other securities:

            

Cost method investments

     24.9      —        —          —          24.9

Other

     0.5    $ 0.1      —          —          0.6
                                    

Total other

     25.4      0.1      —          —          25.5
                                    

Totals

   $ 603.5    $ 0.1    $ (31.6   $ (2.7   $ 569.3
                                    

December 31, 2009

            

Student loan auction rate securities

   $ 494.4      —      $ (29.8   $ (14.9   $ 449.7

Corporate bonds

     270.7    $ 0.7      —          —          271.4

Other securities:

            

Cost method investments

     25.1      —        —          —          25.1

Other

     15.8      0.2      —          —          16.0
                                    

Total other

     40.9      0.2      —          —          41.1
                                    

Totals

   $ 806.0    $ 0.9    $ (29.8   $ (14.9   $ 762.2
                                    

 

(a) Represents amortized cost for debt securities.
(b) “OTTI” refers to other-than-temporary impairments.
(c) Represents the fair value adjustment for debt securities excluding that attributable to credit losses.
(d) Represents cost for cost method investments.

 

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FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

The following table presents the gross unrealized losses and fair value of the Company’s investments with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in millions):

 

June 30, 2010

   Less than 12 months     More than 12 months     Total
Fair Value
   Total
Unrealized
Losses
 
   Fair
Value
   Unrealized
Losses
    Fair
Value
   Unrealized
Losses
      

Student loan auction rate securities

     —        —        $ 453.8    $ (34.2   $ 453.8    $ (34.2

Corporate bonds

   $ 13.2    $ (0.1     —        —          13.2      (0.1

Discounted commercial paper (a)

     20.0      —          —        —          20.0      —     

State and municipal obligations (a)

     —        —          0.1      —          0.1      —     
     Less than 12 months     More than 12 months     Total
Fair Value
   Total
Unrealized
Losses
 

December 31, 2009

   Fair
Value
   Unrealized
Losses
    Fair
Value
   Unrealized
Losses
      

Student loan auction rate securities

     —        —        $ 449.7    $ (44.7   $ 449.7    $ (44.7

 

(a) Unrealized losses less than 12 months are less than $50,000.

As of June 30, 2010, the Company’s unrealized losses related to the following:

Student loan auction rate securities - The unrealized losses resulted from securities that have decreased in fair value to below their amortized cost primarily due to the current inability to redeem at par value resulting from the failure of the auction mechanisms. The Company believes that the SLARS currently held, with the exception of securities issued by NextStudent, will recover all of their principal value by their maturity date due to the following:

 

   

the securities are comprised primarily of senior tranches;

 

   

the securities are predominantly backed by collateral that is 97%-98% guaranteed by Federal Family Education Loan Program (“FFELP”) with subordinated tranches covering the non-guaranteed portion;

 

   

the securities have loan to collateral value ratios of 100% or greater for all securities;

 

   

the securities have above investment grade credit ratings with the majority of securities rated at “A3” and “A-”or higher by Moody’s and Standard and Poor’s, respectively, with the exception of NextStudent securities which are rated “Caa1” and “BBB” by Moody’s and Fitch, respectively.

The Company does not currently intend to sell the SLARS, with the exception of NextStudent as discussed below, and does not consider it more likely than not that it will be required to sell the SLARS before the recovery of their amortized cost basis and accordingly no credit losses have been recorded. This determination was based on management’s expectation as to when certain related settlement liabilities will need to be funded and the Company’s ability to use its revolving credit facility in the event the settlement liabilities need to be funded before the SLARS are liquid.

In 2009, based on the Company’s qualitative assessment that the NextStudent SLARS might not recover all of their principal value by their maturity date and that the Company might incur a credit loss on them at least equal to the non-guaranteed portion of the underlying collateral, management concluded that a credit loss should be recognized for the securities issued by NextStudent. During the first quarter of 2010, the Company made the decision to sell a portion of the NextStudent securities and recognized an additional other-than-temporary impairment of $0.3 million. During the second quarter of 2010, the Company was informed that the NextStudent Trust was directed to liquidate through public sale the underlying collateral of the securities and to apply the majority of the proceeds of the sale to the settlement of all of the outstanding NextStudent securities, including the Company’s holdings.

Corporate bonds - The unrealized losses on the Company’s investments in corporate bonds resulted from temporary interest rate fluctuations that occurred during the first six months of 2010. The unrealized losses were deemed to be not other-than-temporary because the Company does not consider it more likely than not that it will be required to sell the corporate bonds before the recovery of their amortized cost basis. Maturities will occur during the first quarter of 2011.

Discounted commercial paper - The unrealized losses on the Company’s investments in discounted commercial paper resulted from temporary interest rate fluctuations that occurred during the second quarter of 2010. The unrealized losses were deemed to be not other-than-temporary because the Company does not consider it more likely than not that it will be required to sell the discounted commercial paper before the recovery of their amortized cost basis. Maturities will occur during the third quarter of 2010.

 

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FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

All of the above investments, with the exception of cost method investments, are 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 were included as a separate component of OCI, net of any related tax effects.

The following table presents additional information on available-for-sale securities (in millions):

 

     For the three  months
ended June 30,
   For the six months
ended June 30,
 
     2010    2009    2010     2009  

Proceeds from sale

     —      $ 4.0    $ 0.3      $ 17.6   

Gross realized gain included in earnings as a result of sales

     —        —        0.2        0.1   

Gross realized (loss) included in earnings as a result of sales

     —        —        —          (0.1

Net unrealized gain or (loss) included in OCI, net of tax

   $ 6.1      18.6      5.8        7.4   

Net (losses) reclassified out of OCI into earnings

     —        —        (0.2     —     

The Company recognized a gain of $3.3 million in “Product sales and other” and a gain of $1.7 million in “Other income (expense)” during the three months ended March 31, 2010 on the redemption of investments previously impaired.

The following table presents maturity information for the Company’s investments in debt securities at June 30, 2010 (in millions):

 

     Fair Value

Due within one year

   $ 60.4

Due after one year through five years

     —  

Due after five years through 10 years

     28.9

Due after 10 years

     425.0
      

Total debt securities

   $ 514.3
      

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 events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. As of June 30, 2010 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 June 30, 2010 it was deemed impracticable to estimate the fair value on $19.6 million of cost method assets due to the lack of sufficient data upon which to develop a valuation model and the excessive costs of obtaining an independent valuation in relation to the size of the investments. Realized pretax gains and losses associated with these investments are recognized in the “Other income (expense)” line item of the Consolidated Statements of Operations described in Note 2.

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.

As of June 30, 2010, the Company uses derivative instruments to mitigate (i) cash flow risks with respect to changes in interest rates (forecasted interest payments on variable rate debt), (ii) to protect the initial net investment in certain foreign subsidiaries and/or affiliates with respect to changes in foreign currency exchange rates and (iii) to protect the Company from foreign currency exposure related to an outsourcing contract with a foreign vendor.

 

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FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

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 certain 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 minimize 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

The Company recognizes all derivatives in the “Other long-term assets”, “Other current liabilities” and “Other long-term liabilities” captions in the Consolidated Balance Sheets at their fair values. The Company has designated certain of its interest rate swaps as cash flow hedges of forecasted interest rate payments related to its variable rate debt and certain of its cross currency swaps as a foreign currency hedge of its net investment in a foreign subsidiary. Other interest rate swaps, cross currency swaps and forward contracts on various foreign currencies no longer qualify or have not been designated as accounting hedges and do not receive hedge accounting treatment.

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 and qualifies 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. Any ineffectiveness associated with the aforementioned cash flow hedges is recorded immediately 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 are 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 will discontinue hedge accounting prospectively for such derivative.

Credit Risk

The Company is monitoring the financial stability of its derivative counterparties. Certain of these counterparties received support from the federal government in the recent past due to difficult financial conditions. Although these counterparties remain highly-rated (in the “A” category or higher), their ability to satisfy their commitments may be dependent on receiving continued support from the federal government. 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 Australian dollars), so there is minimal risk that appropriate derivatives to maintain the hedging program would not be available in the future.

DERIVATIVES NOT QUALIFYING FOR HEDGE ACCOUNTING

At June 30, 2010, the Company had certain derivative instruments that functioned as economic hedges but no longer qualify or were not designated to qualify for hedge accounting. Such instruments included a cross-currency swap to hedge foreign currency exposure from an intercompany loan, cross-currency swaps to hedge an investment in a foreign subsidiary from fluctuations in foreign currency exchange rates, a foreign exchange rate collar to hedge foreign currency exposure related to an outsourcing contract with a foreign vendor, and interest rate swaps to hedge the interest payments on variable rate debt from fluctuations in interest rates.

During the first quarter of 2009, one of the cash flow hedges of interest payments on the Company’s variable rate debt previously designated to qualify for hedge accounting ceased to be highly effective. As such, the Company did not apply hedge accounting to the discontinued hedge during the first quarter of 2009 and discontinued prospective hedge accounting for the affected derivatives with a notional balance of $1.5 billion. During the second quarter of 2009, the Company made an election with respect to the duration of the variable LIBOR interest rate payments it was hedging which was inconsistent with the original hedge strategy documented in the accounting designation. Accordingly, the Company had to de-designate the affected interest rate swaps, with $2.0 billion notional amount, from receiving hedge accounting. The Company was able to re-designate prospectively an interest rate swap

 

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FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

with a notional amount of $500 million to continue to receive hedge accounting treatment; however, the other interest rate swaps with $1.5 billion notional amount no longer met the criteria to qualify for hedge accounting primarily due to the significant “off-market” value of the swaps and will not be receiving hedge accounting treatment prospectively.

During the second quarter of 2010, two interest rate swaps with a total notional balance of $1.0 billion and one basis rate swap with a notional balance of $1.0 billion ceased to be highly effective. As such, the Company did not apply hedge accounting to the discontinued hedges during the second quarter of 2010 and discontinued prospective hedge accounting for the affected derivatives. The amount reclassed in the second quarter of 2010 from OCI to the “Other income (expense)” line of the Consolidated Statements of Operations as a result of the hedges becoming ineffective was $4.6 million.

While the derivatives noted above no longer qualify for hedge accounting, they continue to be effective economically in eliminating the variability in interest rate payments on the corresponding portion of the Company’s variable rate debt. The notional amount of all interest rate swaps and basis rate swaps that no longer qualify for hedge accounting is $4.0 billion and $1.0 billion, respectively.

As of June 30, 2010, the notional amount of the foreign exchange rate collar was approximately 88.3 million Philippine pesos ($1.9 million). The notional amount of the cross-currency swaps was 91.1 million euro (approximately $112.7 million).

The periodic change in the mark-to-market of the derivative instruments not designated as accounting hedges is recorded immediately in the Consolidated Statements of Operations. For information on the location and amounts of derivative fair values in the Consolidated Balance Sheets and derivative gains and losses in the Consolidated Statements of Operations, see the tabular information presented below.

DERIVATIVES THAT QUALIFY FOR HEDGE ACCOUNTING

Hedge of a Net Investment in a Foreign Operation

As of June 30, 2010, the Company had a cross currency swap that was designated as a hedge of net investments in foreign operations with an aggregate notional amount of 115.0 million Australian dollars (approximately $100.5 million).

For information on the location and amounts of derivative fair values in the Consolidated Balance Sheets and derivative gains and losses in the Consolidated Statements of Operations, see the tabular information presented below.

Cash Flow Hedges

As of June 30, 2010, the Company had interest rate swaps which were designated as cash flow hedges of the variability in the interest payments on $3.5 billion of the approximate $12.4 billion variable rate senior secured term loan. The Company also had basis rate swaps that modify the variable rates on $3 billion of the $3.5 billion interest rate swaps and that lower the fixed interest rates on those interest rate swaps. The basis swaps pay interest at rates equal to three-month-LIBOR and receive interest at rates equal to one-month-LIBOR plus a fixed spread. The basis swaps expire on September 24, 2010. The Company pays interest on its senior secured term loan facility based on the one-month-LIBOR interest rate index to match the terms of the basis swaps. Ineffectiveness associated with these hedges is recognized immediately in the Consolidated Statements of Operations. As discussed above, the Company had additional interest rate swaps and basis swaps with notional amounts totaling $5.0 billion that do not qualify for hedge accounting.

At June 30, 2010, the maximum length of time over which the Company is hedging its exposure is approximately 2.2 years. The Company follows the hypothetical derivative method to measure hedge ineffectiveness which resulted mostly from the hedges being off-market at the time of designation. The amount of losses in OCI related to the hedged transactions as of June 30, 2010 that is expected to be reclassified into the Consolidated Statements of Operations within the next 12 months is approximately $100 million.

For information on the location and amounts of derivative fair values in the Consolidated Balance Sheets and derivative gains and losses in the Consolidated Balance Sheets or in the Consolidated Statements of Operations, see the tabular information presented below.

 

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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 June 30, 2010  

(in millions)

   Assets(a)    Liabilities(b)  
     

Derivatives designated as hedging instruments

     

Interest rate contracts

     —      $ (288.7

Foreign exchange contracts

     —        (3.9
               

Total derivatives designated as hedging instruments

     —        (292.6
               

Derivatives not designated as hedging instruments

     

Interest rate contracts

     —        (143.4

Foreign exchange contracts

   $ 16.7      (0.2
               

Total derivatives not designated as hedging instruments

     16.7      (143.6
               

Total derivatives

   $ 16.7    $ (436.2
               

 

(in millions)

   As of December 31, 2009  
   Assets(a)    Liabilities(b)  

Derivatives designated as hedging instruments

     

Interest rate contracts

     —      $ (304.4

Foreign exchange contracts

     —        (10.0
               

Total derivatives designated as hedging instruments

     —        (314.4
               

Derivatives not designated as hedging instruments

     

Interest rate contracts

     —        (153.5

Foreign exchange contracts

   $ 1.2      (3.6
               

Total derivatives not designated as hedging instruments

     1.2      (157.1
               

Total derivatives

   $ 1.2    $ (471.5
               
(a) Derivative assets are included in the “Other long-term assets” line 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.

The Effect of Derivative Instruments on the Consolidated Statements of Operations

 

     For the three months  ended
June 30, 2010
   For the three months  ended
June 30, 2009
 

(in millions, pretax)

   Interest Rate
Contracts
    Foreign
Exchange
Contracts
   Interest Rate
Contracts
    Foreign
Exchange
Contracts
 

Derivatives in cash flow hedging relationships:

         

Amount of gain or (loss) recognized in OCI (effective portion)

   $ (12.3     —      $ 28.4        —     

Amount of gain or (loss) reclassified from accumulated OCI into income (a)

   $ (44.1     —      $ (27.4     —     

Amount of gain or (loss) recognized in income (ineffective portion) (b)

   $ (1.3     —      $ (2.0     —     

Derivatives in net investment hedging relationships:

         

Amount of gain or (loss) recognized in OCI (effective portion)

     $ 4.1      $ (14.7

Amount of gain or (loss) recognized in income (ineffective portion) (b)

     $ 3.3        —     

Derivatives not designated as hedging instruments

         

Amount of gain or (loss) recognized in income (b)

   $ (16.0   $ 11.9    $ (4.8   $ (6.8

 

(a) Gain (loss) is recognized in the “Interest expense” line of the Statements of Operations.
(b) Gain (loss) is recognized in the “Other income (expense)” line of the Statements of Operations.

 

24


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FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

     For the six months  ended
June 30, 2010
   For the six months  ended
June 30, 2009
 

(in millions, pretax)

   Interest
Rate
Contracts
    Foreign
Exchange
Contracts
   Interest
Rate
Contracts
    Foreign
Exchange
Contracts
 

Derivatives in cash flow hedging relationships:

         

Amount of gain or (loss) recognized in OCI (effective portion)

   $ (36.2     —      $ 65.6        —     

Amount of gain or (loss) reclassified from accumulated OCI into income (a)

   $ (83.6     —      $ (52.4     —     

Amount of gain or (loss) recognized in income (ineffective portion) (b)

   $ (3.5     —      $ (3.8     —     

Derivatives in net investment hedging relationships:

         

Amount of gain or (loss) recognized in OCI (effective portion)

     $ 4.1      $ (12.3

Amount of gain or (loss) recognized in income (ineffective portion) (b)

     $ 0.5      $ (0.1

Derivatives not designated as hedging instruments

         

Amount of gain or (loss) recognized in income (b)

   $ (42.8   $ 19.0    $ (1.9   $ (1.1

 

(a) Gain (loss) is recognized in the “Interest expense” line of the Statements of Operations.
(b) Gain (loss) is recognized in the “Other income (expense)” line of the Statements of Operations.

ACCUMULATED DERIVATIVE GAINS AND LOSSES

The following table summarizes activity in other comprehensive income for the six months ended June 30, 2010 related to derivative instruments classified as cash flow hedges and net investment hedges held by the Company (in millions, after tax):

 

     Six months ended
June 30, 2010
 

Accumulated loss included in other comprehensive income (loss) at beginning of the period

   $ (242.3

Less: Reclassifications into earnings from other comprehensive income (loss)

     52.4   
        
     (189.9

Net losses in fair value of derivatives (a)

     (20.3
        

Accumulated loss included in other comprehensive income (loss) at end of the period

   $ (210.2
        

 

(a) Gains and losses are included in unrealized (losses) gains on hedging activities and in foreign currency translation adjustment on the Consolidated Statements of Equity.

 

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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 FDC’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 (in millions):

 

June 30, 2010

   Carrying
Value
   Fair Value  (a)

Financial instruments:

     

Settlement assets:

     

Short-term investment securities

   $ 90.0    $ 90.0

Long-term investment securities

   $ 453.9    $ 453.9

Other long-term assets:

     

Long-term investment securities

   $ 0.5    $ 0.5

Derivative financial instruments

   $ 16.7    $ 16.7

Cost method investments

   $ 24.9    $ 24.9

Other current liabilities:

     

Derivative financial instruments

   $ 6.2    $ 6.2

Long-term borrowings:

     

Long-term borrowings

   $ 22,261.9    $ 17,619.6

Other long-term liabilities:

     

Derivative financial instruments

   $ 430.0    $ 430.0

 

(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 long-term borrowings were primarily based on market trading prices. For additional information regarding the Company’s borrowings, refer to Note 4 of these Consolidated Financial Statements as well as to Note 9 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, 2009.

Concentration of credit risk

The Company’s investment securities are diversified across multiple issuers 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 has no single issuer representing more than 15% of the total carrying value of the investment portfolio and limits its derivative financial instruments credit risk by maintaining contracts with counterparties rating “A” or higher. The Company periodically reviews the credit standings of these institutions.

 

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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:

 

     Fair Value Measurement Using

As of June 30, 2010

(in millions)

   Quoted prices in
active markets
for identical assets
(Level 1)
   Significant other
observable
inputs
(Level 2)
   Significant
unobservable
inputs
(Level 3)
   Total

Assets:

           

Settlement assets:

           

Student loan auction rate securities

   $ —      $ —      $ 453.8    $ 453.8

Other available-for-sale securities:

           

Corporate bonds

     —        40.0      —        40.0

Time deposits

     —        30.0      —        30.0

Discounted commercial paper

     —        20.0      —        20.0

Preferred stock

     0.1      —        —        0.1
                           

Total other available-for-sale securities

     0.1      90.0      453.8      543.9
                           

Other long-term assets:

           

Available-for-sale securities

     —        0.5      —        0.5

Foreign currency derivative contracts

     —        16.7      —        16.7
                           

Total other long-term assets

     —        17.2      —        17.2
                           

Total assets at fair value

   $ 0.1    $ 107.2    $ 453.8    $ 561.1
                           

Liabilities:

           

Other current liabilities:

           

Interest rate swap contracts

   $ —      $ 6.2    $ —      $ 6.2

Other long-term liabilities:

           

Interest rate swap contracts

     —        425.9      —        425.9

Foreign currency derivative contracts

     —        4.1      —        4.1
                           

Total liabilities at fair value

   $ —      $ 436.2    $ —      $ 436.2
                           

Settlement assets-Student loan auction rate securities

The Company holds SLARS which are long-term debt instruments, issued by student loan trusts, with variable interest rates that historically reset through a periodic Dutch auction process but do not include a put-back option. Due to the collapse of the auction market in 2008, the Company will not be able to readily redeem the SLARS at par value until the auction market successfully resumes, a secondary market is established for long-term investors, or issuers redeem the securities. A failed auction does not represent a default by the issuer of the underlying security. As a result of the failed auctions, the trusts are required and continue to pay maximum interest rates as defined in the security offering documents which are typically based on either LIBOR or Treasury rates plus a spread.

Due to the lack of observable market activity for the SLARS held by the Company, 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-weighed 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 rate, as well as underlying collateral, ratings, and guarantees or insurance. The impact of the Company’s judgment in the valuation was significant and, accordingly, the resulting fair value was classified as Level 3 within the fair value hierarchy. A 100 basis point change in liquidity risk premium, as well as other factors including default probability and default recovery rate assumptions, would impact the value of the SLARS by approximately $14 million.

 

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FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

(in millions)

   Fair Value Measurement
Using Significant
Unobservable Inputs
(Level 3)
Student loan auction rate
securities
 

Beginning balance January 1, 2010

   $ 449.7   

Total gains or losses (realized or unrealized):

  

Included in other comprehensive income

     10.5   

Included in product sales and other

     (0.3

Settlements

     (6.1

Transfers in (out) of Level 3

     —     
        

Ending balance June 30, 2010

   $ 453.8   
        

Settlement assets-Other available-for-sale securities

Prices for these 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, other market inputs as noted below for each type of instrument.

 

   

Corporate bonds – market approach using observable inputs including reported trades, benchmark yields, broker/dealer quotes, issuer spreads and other standard inputs

 

   

Time deposits – typically valued at par

 

   

Discounted commercial paper – market approach using observable inputs including maturity dates, issue dates, credit ratings, current commercial paper rates and settlement dates

The Company’s experience with these types of investments and expectations of the current investments held is that they will be satisfied at the current carrying amount. These securities were classified as Level 2.

Other long-term assets-Available-for-sale securities

The Company held certain other investments that were classified as available-for-sale and were classified as Level 2.

Derivative financial instruments

The Company uses derivative instruments to mitigate certain risks. The Company’s derivatives are not exchange listed and therefore the fair value is estimated under an income approach using Bloomberg analytics models that are based on readily observable market inputs. These models reflect the contractual terms of the derivatives, such as notional value and expiration date, as well as market-based observables including interest and foreign currency exchange rates, yield curves and the credit quality of the counterparties. The models also incorporate the Company’s creditworthiness in order to appropriately reflect non-performance risk. Inputs to the derivative pricing models are generally observable and do not contain a high level of subjectivity and, accordingly, the Company’s derivatives were classified within Level 2 of the fair value hierarchy. While the Company believes its estimates result in a reasonable reflection of the fair value of these instruments, the estimated values may not be representative of actual values that could have been realized or that will be realized in the near future. Refer to Note 11 of these Consolidated Financial Statements for additional information regarding the Company’s derivative financial instruments.

Assets and liabilities measured at fair value on a non-recurring basis

The Company did not have any assets or liabilities measured at fair value on a non-recurring basis.

Note 13: Supplemental Guarantor Condensed Consolidating Financial Statements

As described in Note 9 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, the Company’s 9.875% senior notes, 10.55% senior PIK notes and 11.25% senior subordinated notes are unconditionally guaranteed by substantially all existing and future, direct and indirect, wholly-owned, domestic subsidiaries of FDC other than Integrated Payment Systems Inc. (“Guarantors”). None of the other subsidiaries of FDC, either direct or indirect, guarantee the notes (“Non-Guarantors”). The Guarantors also unconditionally guarantee the senior secured revolving credit facility

 

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FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

and senior secured term loan facility. The 9.875% senior note, 10.55% senior PIK note and 11.25% senior subordinated note guarantees are unsecured and rank senior in right of payment to all existing and future subordinated indebtedness of FDC’s guarantor subsidiaries. The 9.875% senior note, 10.55% senior PIK note and 11.25% senior subordinated note guarantees rank equally in right of payment with all existing and future senior indebtedness of the guarantor subsidiaries.

The following tables present the results of operations, financial position and cash flows of FDC (“FDC Parent Company”), the Guarantor subsidiaries, the Non-Guarantor subsidiaries and consolidation adjustments for the three and six months ended June 30, 2010 and 2009, and as of June 30, 2010 and December 31, 2009 to arrive at the information for FDC on a consolidated basis.

 

(in millions)

   Three months ended June 30, 2010  
   FDC Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidation
Adjustments
    Consolidated  

Revenues:

          

Transaction and processing service fees

   $ —        $ 1,011.0      $ 582.8      $ (36.5   $ 1,557.3   

Product sales and other

     —          140.3        80.3        (13.1     207.5   

Reimbursable debit network fees, postage and other

     —          579.5        288.7        (18.3     849.9   
                                        
     —          1,730.8        951.8        (67.9     2,614.7   
                                        

Expenses:

          

Cost of services (exclusive of items shown below)

     —          484.3        305.0        (36.5     752.8   

Cost of products sold

     —          65.2        47.6        (13.1     99.7   

Selling, general and administrative

     66.5        219.5        109.9        —          395.9   

Reimbursable debit network fees, postage and other

     —          579.5        288.7        (18.3     849.9   

Depreciation and amortization

     2.2        231.9        113.3        —          347.4   

Other operating expenses:

          

Restructuring, net

     10.6        8.6        4.7        —          23.9   

Litigation and regulatory settlements

     —          (1.7     —          —          (1.7
                                        
     79.3        1,587.3        869.2        (67.9     2,467.9   
                                        

Operating (loss) profit

     (79.3     143.5        82.6        —          146.8   
                                        

Interest income

     0.2        (0.2     1.4        —          1.4   

Interest expense

     (446.9     (1.7     (2.3     —          (450.9

Interest income (expense) from intercompany notes

     41.0        (49.3     8.3        —          —     

Other income (expense)

     56.8        42.2        (48.2     (26.0     24.8   

Equity earnings from consolidated subsidiaries

     95.1        29.7        —          (124.8     —     
                                        
     (253.8     20.7        (40.8     (150.8     (424.7
                                        

(Loss) income before income taxes and equity earnings in affiliates

     (333.1     164.2        41.8        (150.8     (277.9

Income tax (benefit) expense

     (161.9     40.1        (0.6     —          (122.4

Equity earnings in affiliates

     —          34.0        0.4        (1.1     33.3   
                                        

Net (loss) income

     (171.2     158.1        42.8        (151.9     (122.2

Less: Net income attributable to noncontrolling interests

     —          —          11.8        37.2        49.0   
                                        

Net (loss) income attributable to First Data Corporation

   $ (171.2   $ 158.1      $ 31.0      $ (189.1   $ (171.2
                                        

 

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FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

     Six months ended June 30, 2010  

(in millions)

   FDC Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidation
Adjustments
    Consolidated  

Revenues:

          

Transaction and processing service fees

   $ —        $ 1,947.7      $ 1,127.7      $ (69.9   $ 3,005.5   

Product sales and other

     —          259.5        167.9        (25.1     402.3   

Reimbursable debit network fees, postage and other

     —          1,112.0        532.1        (35.1     1,609.0   
                                        
     —          3,319.2        1,827.7        (130.1     5,016.8   
                                        

Expenses:

          

Cost of services (exclusive of items shown below)

     —          909.3        668.9        (69.9     1,508.3   

Cost of products sold

     —          125.2        74.9        (25.1     175.0   

Selling, general and administrative

     127.4        428.8        218.4        —          774.6   

Reimbursable debit network fees, postage and other

     —          1,112.0        532.1        (35.1     1,609.0   

Depreciation and amortization

     4.0        463.7        231.0        —          698.7   

Other operating expenses:

          

Restructuring, net

     9.9        18.1        8.4        —          36.4   

Litigation and regulatory settlements

     —          (2.0     —          —          (2.0
                                        
     141.3        3,055.1        1,733.7        (130.1     4,800.0   
                                        

Operating (loss) profit

     (141.3     264.1        94.0        —          216.8   
                                        

Interest income

     0.5        0.2        2.7        —          3.4   

Interest expense

     (888.4     (3.6     (7.8     —          (899.8

Interest income (expense) from intercompany notes

     67.4        (84.1     16.7        —          —     

Other income (expense)

     91.8        43.9        (76.7     (26.0     33.0   

Equity earnings from consolidated subsidiaries

     138.4        55.7        —          (194.1     —     
                                        
     (590.3     12.1        (65.1     (220.1     (863.4
                                        

(Loss) income before income taxes and equity earnings in affiliates

     (731.6     276.2        28.9        (220.1     (646.6

Income tax (benefit) expense

     (320.3     48.8        11.0        —          (260.5

Equity earnings in affiliates

     —          57.0        0.4        (1.9     55.5   
                                        

Net (loss) income

     (411.3     284.4        18.3        (222.0     (330.6

Less: Net (loss) income attributable to noncontrolling interests

     —          (0.2     23.3        57.6        80.7   
                                        

Net (loss) income attributable to First Data Corporation

   $ (411.3   $ 284.6      $ (5.0   $ (279.6   $ (411.3
                                        

 

30


Table of Contents

FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

     Three months ended June 30, 2009  

(in millions)

   FDC  Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidation
Adjustments
    Consolidated  

Revenues:

          

Transaction and processing service fees

   $ —        $ 1,072.9      $ 299.8      $ (1.2   $ 1,371.5   

Product sales and other

     —          143.3        65.4        (3.5     205.2   

Reimbursable debit network fees, postage and other

     —          619.9        12.0        —          631.9   
                                        
     —          1,836.1        377.2        (4.7     2,208.6   
                                        

Expenses:

          

Cost of services (exclusive of items shown below)

     —          525.1        149.2        (1.2     673.1   

Cost of products sold

     —          60.9        22.8        (3.5     80.2   

Selling, general and administrative

     53.4        197.3        80.5        —          331.2   

Reimbursable debit network fees, postage and other

     —          619.9        12.0        —          631.9   

Depreciation and amortization

     1.5        299.9        64.2        —          365.6   

Other operating expenses:

          

Restructuring, net

     (0.2     8.0        0.6        —          8.4   
                                        
     54.7        1,711.1        329.3        (4.7     2,090.4   
                                        

Operating (loss) profit

     (54.7     125.0        47.9        —          118.2   
                                        

Interest income

     1.3        0.2        1.6        —          3.1   

Interest expense

     (443.4     (2.1     (4.1     —          (449.6

Interest (expense) income from intercompany notes

     (34.0     24.5        9.5        —          —     

Other income (expense)

     (42.1     1.7        36.8        —          (3.6

Equity earnings (loss) from consolidated subsidiaries

     158.0        (3.8     —          (154.2     —     
                                        
     (360.2     20.5        43.8        (154.2     (450.1
                                        

(Loss) income before income taxes and equity earnings in affiliates

     (414.9     145.5        91.7        (154.2     (331.9

Income tax (benefit) expense

     (219.0     67.7        38.5        —          (112.8

Equity earnings (loss) in affiliates

     —          25.8        (0.3     —          25.5   
                                        

Net (loss) income

     (195.9     103.6        52.9        (154.2     (193.6

Less: Net (loss) income attributable to noncontrolling interests

     —          (0.3     2.6        —          2.3   
                                        

Net (loss) income attributable to First Data Corporation

   $ (195.9   $ 103.9      $ 50.3      $ (154.2   $ (195.9
                                        

 

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Table of Contents
     Six months ended June 30, 2009  

(in millions)

   FDC Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidation
Adjustments
    Consolidated  

Revenues:

          

Transaction and processing service fees

   $ —        $ 2,106.4      $ 574.1      $ (2.2   $ 2,678.3   

Product sales and other

     —          259.1        132.2        (6.3     385.0   

Reimbursable debit network fees, postage and other

     —          1,197.3        24.2        —          1,221.5   
                                        
     —          3,562.8        730.5        (8.5     4,284.8   
                                        

Expenses:

          

Cost of services (exclusive of items shown below)

     —          1,064.4        325.2        (2.2     1,387.4   

Cost of products sold

     —          109.6        40.4        (6.3     143.7   

Selling, general and administrative

     106.5        392.7        158.5        —          657.7   

Reimbursable debit network fees, postage and other

     —          1,197.3        24.2        —          1,221.5   

Depreciation and amortization

     2.6        564.6        127.9        —          695.1   

Other operating expenses:

          

Restructuring, net

     0.9        25.7        6.9        —          33.5   

Litigation and regulatory settlements

     (2.7     —          —          —          (2.7
                                        
     107.3        3,354.3        683.1        (8.5     4,136.2   
                                        

Operating (loss) profit

     (107.3     208.5        47.4        —          148.6   
                                        

Interest income

     2.8        0.3        3.3        —          6.4   

Interest expense

     (885.1     (4.1     (8.6     —          (897.8

Interest (expense) income from intercompany notes

     (69.2     50.6        18.6        —          —     

Other income (expense)

     7.8        3.0        8.9        —          19.7   

Equity earnings (loss) from consolidated subsidiaries

     220.0        (20.4     —          (199.6     —     
                                        
     (723.7     29.4        22.2        (199.6     (871.7
                                        

(Loss) income before income taxes and equity earnings in affiliates

     (831.0     237.9        69.6        (199.6     (723.1

Income tax (benefit) expense

     (403.8     112.4        33.8        —          (257.6

Equity earnings (loss) in affiliates

     —          45.1        (1.1     —          44.0   
                                        

Net (loss) income

     (427.2     170.6        34.7        (199.6     (421.5

Less: Net (loss) income attributable to noncontrolling interests

     —          (0.1     5.8        —          5.7   
                                        

Net (loss) income attributable to First Data Corporation

   $ (427.2   $ 170.7      $ 28.9      $ (199.6   $ (427.2
                                        

 

32


Table of Contents

FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

(in millions)

   June 30, 2010
   FDC Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidation
Adjustments
    Consolidated
ASSETS           

Current assets:

          

Cash and cash equivalents

   $ 169.3      $ 21.8      $ 392.6        —        $ 583.7

Accounts receivable, net of allowance for doubtful accounts

     17.8        1,131.8        1,003.7        —          2,153.3

Settlement assets (a)

     —          3,203.5        3,333.7        —          6,537.2

Other current assets

     86.9        242.9        84.2        —          414.0
                                      

Total current assets

     274.0        4,600.0        4,814.2        — &