UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-11073
FIRST DATA CORPORATION
(Exact name of registrant as specified in its charter)
www.firstdata.com
DELAWARE | 47-0731996 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
225 LIBERTY STREET, 29th FLOOR | ||
NEW YORK, NEW YORK | 10281 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code (800) 735-3362 | ||
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 ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | o | |||
Non-accelerated filer | o | (Do not check if a smaller reporting company) | ||||
Smaller reporting company | o | |||||
Emerging growth company | o | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
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, 2017 | |
Class A Common Stock, $0.01 par value per share | 380,065,237 shares | |
Class B Common Stock, $0.01 par value per share | 542,917,072 shares | |
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INDEX
PAGE NUMBER | |||
Unless otherwise indicated or the context otherwise requires, financial data in this Form 10-Q reflects the consolidated business and operations of First Data Corporation and its consolidated subsidiaries. Unless the context otherwise requires, all references herein to “First Data,” “FDC,” the “Company,” “we,” “our,” or “us” refer to First Data Corporation and its consolidated subsidiaries.
Amounts in this Form 10-Q and the unaudited consolidated financial statements included in this Form 10-Q are presented in U.S. Dollars rounded to the nearest million, unless otherwise noted.
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Forward-Looking Statements
Certain matters we discuss in this Form 10-Q and in other public statements may constitute forward-looking statements. You can identify forward-looking statements because they contain words such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “intends,” “plans,” “estimates,” or “anticipates” or similar expressions which concern our strategy, plans, projections or intentions. Examples of forward-looking statements include, but are not limited to, all statements we make relating to revenue, earnings before net interest expense, income taxes, depreciation, and amortization (EBITDA), earnings, margins, growth rates, and other financial results for future periods. By their nature, forward-looking statements speak only as of the date they are made; are not statements of historical fact or guarantees of future performance; and are subject to risks, uncertainties, assumptions or changes in circumstances that are difficult to predict or quantify. Actual results could differ materially and adversely from our forward-looking statements due to a variety of factors, including the following: (1) adverse impacts from global economic, political, and other conditions affecting trends in consumer, business, and government spending; (2) our ability to anticipate and respond to changing industry trends, including technological changes and increasing competition; (3) our ability to successfully renew existing client contracts on favorable terms and obtain new clients; (4) our ability to prevent a material breach of security of any of our systems; (5) our ability to implement and improve processing systems to provide new products, improve functionality, and increase efficiencies; (6) the successful management of our merchant alliance program which involves several alliances not under our sole control and each of which acts independently of the others; (7) our successful management of credit and fraud risks in our business units and merchant alliances, particularly in the context of eCommerce and mobile markets; (8) consolidation among financial institution clients or other client groups that impacts our client relationships; (9) our ability to use our net operating losses without restriction to offset income for US tax purposes; (10) our ability to improve our profitability and maintain flexibility in our capital resources through the implementation of cost savings initiatives; (11) the acquisition or disposition of a material business or assets; (12) our ability to successfully value and integrate acquired businesses; (13) our high degree of leverage; (14) adverse impacts from currency exchange rates or currency controls imposed by any government or otherwise; (15) changes in the interest rate environment that increase interest on our borrowings or the interest rate at which we can refinance our borrowings; (16) the impact of new or changes in current laws, regulations, credit card association rules, or other industry standards; and (17) new lawsuits, investigations, or proceedings, or changes to our potential exposure in connection with pending lawsuits, investigations or proceedings, and various other factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2016, including but not limited to, Item 1 - Business, Item 1A - Risk Factors, and Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations. Except as required by law, we do not intend to revise or update any forward-looking statement as a result of new information, future developments or otherwise.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
(in millions, except per share amounts) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Revenues: | ||||||||||||||||
Transaction and processing service fees(a) | $ | 1,686 | $ | 1,669 | $ | 3,249 | $ | 3,260 | ||||||||
Product sales and other(a) | 349 | 307 | 668 | 586 | ||||||||||||
Total revenues (excluding reimbursable items) | 2,035 | 1,976 | 3,917 | 3,846 | ||||||||||||
Reimbursable debit network fees, postage, and other | 990 | 952 | 1,909 | 1,859 | ||||||||||||
Total revenues | 3,025 | 2,928 | 5,826 | 5,705 | ||||||||||||
Expenses: | ||||||||||||||||
Cost of services (exclusive of items shown below) | 691 | 698 | 1,391 | 1,429 | ||||||||||||
Cost of products sold | 91 | 86 | 171 | 164 | ||||||||||||
Selling, general, and administrative | 518 | 500 | 1,043 | 1,064 | ||||||||||||
Depreciation and amortization | 237 | 238 | 465 | 476 | ||||||||||||
Other operating expenses | 29 | 24 | 51 | 45 | ||||||||||||
Total expenses (excluding reimbursable items) | 1,566 | 1,546 | 3,121 | 3,178 | ||||||||||||
Reimbursable debit network fees, postage, and other | 990 | 952 | 1,909 | 1,859 | ||||||||||||
Total expenses | 2,556 | 2,498 | 5,030 | 5,037 | ||||||||||||
Operating profit | 469 | 430 | 796 | 668 | ||||||||||||
Interest expense, net | (238 | ) | (284 | ) | (472 | ) | (547 | ) | ||||||||
Loss on debt extinguishment | (15 | ) | (9 | ) | (71 | ) | (55 | ) | ||||||||
Other (expense) income | (2 | ) | 38 | (3 | ) | 44 | ||||||||||
Income before income taxes and equity earnings in affiliates | 214 | 175 | 250 | 110 | ||||||||||||
Income tax expense | 28 | 28 | 40 | 33 | ||||||||||||
Equity earnings in affiliates | 57 | 68 | 112 | 132 | ||||||||||||
Net income | 243 | 215 | 322 | 209 | ||||||||||||
Less: Net income attributable to noncontrolling interests and redeemable noncontrolling interest | 58 | 63 | 101 | 113 | ||||||||||||
Net income attributable to First Data Corporation | $ | 185 | $ | 152 | $ | 221 | $ | 96 | ||||||||
Net income attributable to First Data Corporation per share: | ||||||||||||||||
Basic | $ | 0.20 | $ | 0.17 | $ | 0.24 | $ | 0.11 | ||||||||
Diluted | $ | 0.20 | $ | 0.17 | $ | 0.24 | $ | 0.10 | ||||||||
Weighted-average common shares outstanding: | ||||||||||||||||
Basic | 915 | 900 | 913 | 898 | ||||||||||||
Diluted | 938 | 914 | 935 | 916 | ||||||||||||
(a) | Includes processing fees, administrative service fees, and other fees charged to merchant alliances accounted for under the equity method of $54 million and $106 million for the three and six months ended June 30, 2017, respectively, and $45 million and $98 million for the comparable periods in 2016. |
See notes to unaudited consolidated financial statements.
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FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
(in millions) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Net income | $ | 243 | $ | 215 | $ | 322 | $ | 209 | ||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||
Foreign currency translation adjustment | 18 | (41 | ) | 108 | (105 | ) | ||||||||||
Pension liability adjustments | 19 | — | 19 | — | ||||||||||||
Derivative instruments | (2 | ) | — | (1 | ) | — | ||||||||||
Total other comprehensive income (loss), net of tax | 35 | (41 | ) | 126 | (105 | ) | ||||||||||
Comprehensive income | 278 | 174 | 448 | 104 | ||||||||||||
Less: Comprehensive income attributable to noncontrolling interests and redeemable noncontrolling interest | 62 | 62 | 108 | 114 | ||||||||||||
Comprehensive income (loss) attributable to First Data Corporation | $ | 216 | $ | 112 | $ | 340 | $ | (10 | ) | |||||||
See notes to unaudited consolidated financial statements.
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FIRST DATA CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in millions) | As of June 30, 2017 | As of December 31, 2016 | ||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 493 | $ | 385 | ||||
Accounts receivable, net of allowance for doubtful accounts of $47 and $74 | 1,791 | 1,877 | ||||||
Settlement assets | 9,976 | 14,795 | ||||||
Prepaid expenses and other current assets | 317 | 360 | ||||||
Total current assets | 12,577 | 17,417 | ||||||
Property and equipment, net of accumulated depreciation of $1,578 and $1,416 | 914 | 883 | ||||||
Goodwill | 16,885 | 16,696 | ||||||
Customer relationships, net of accumulated amortization of $5,862 and $5,660 | 1,593 | 1,739 | ||||||
Other intangibles, net of accumulated amortization of $2,530 and $2,365 | 1,882 | 1,800 | ||||||
Investment in affiliates | 988 | 988 | ||||||
Other long-term assets | 766 | 769 | ||||||
Total assets | $ | 35,605 | $ | 40,292 | ||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities | $ | 1,504 | $ | 1,564 | ||||
Short-term and current portion of long-term borrowings | 274 | 358 | ||||||
Settlement obligations | 9,976 | 14,795 | ||||||
Total current liabilities | 11,754 | 16,717 | ||||||
Long-term borrowings | 18,033 | 18,131 | ||||||
Deferred tax liabilities | 409 | 409 | ||||||
Other long-term liabilities | 809 | 831 | ||||||
Total liabilities | 31,005 | 36,088 | ||||||
Commitments and contingencies (See note 11) | ||||||||
Redeemable noncontrolling interest | 72 | 73 | ||||||
First Data Corporation stockholders' equity: | ||||||||
Class A Common stock, $0.01 par value; 1,600 shares authorized as of June 30, 2017 and December 31, 2016, respectively; 389 shares and 372 shares issued as of June 30, 2017 and December 31, 2016, respectively; and 379 shares and 367 shares outstanding as of June 30, 2017 and December 31, 2016, respectively | 4 | 4 | ||||||
Class B Common stock, $0.01 par value; 625 shares authorized as of June 30, 2017 and December 31, 2016, respectively; 543 shares and 544 shares issued and outstanding as of June 30, 2017 and December 31, 2016 | 5 | 5 | ||||||
Preferred stock, $0.01 par value; 100 shares authorized as of June 30, 2017 and December 31, 2016, respectively; no shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively | — | — | ||||||
Class A Treasury stock, at cost, 10 shares and 5 shares as of June 30, 2017 and December 31, 2016, respectively | (138 | ) | (61 | ) | ||||
Additional paid-in capital | 13,362 | 13,210 | ||||||
Accumulated loss | (10,391 | ) | (10,612 | ) | ||||
Accumulated other comprehensive loss | (1,207 | ) | (1,326 | ) | ||||
Total First Data Corporation stockholders' equity | 1,635 | 1,220 | ||||||
Noncontrolling interests | 2,893 | 2,911 | ||||||
Total equity | 4,528 | 4,131 | ||||||
Total liabilities and equity | $ | 35,605 | $ | 40,292 | ||||
See notes to unaudited consolidated financial statements.
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FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended June 30, | ||||||||
(in millions) | 2017 | 2016 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 322 | $ | 209 | ||||
Adjustments to reconcile to net cash provided by operating activities: | ||||||||
Depreciation and amortization (including amortization netted against equity earnings in affiliates and revenues) | 526 | 528 | ||||||
Charges related to other operating expenses and other income | 54 | 1 | ||||||
Loss on debt extinguishment | 71 | 55 | ||||||
Stock-based compensation expense | 121 | 171 | ||||||
Other non-cash and non-operating items, net | 4 | (5 | ) | |||||
Increase (decrease) in cash, excluding the effects of acquisitions and dispositions, resulting from changes in: | ||||||||
Accounts receivable, current and long-term | 110 | 59 | ||||||
Other assets, current and long-term | (19 | ) | (8 | ) | ||||
Accounts payable and other liabilities, current and long-term | (165 | ) | (77 | ) | ||||
Income tax accounts | (23 | ) | (25 | ) | ||||
Net cash provided by operating activities | 1,001 | 908 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Additions to property and equipment | (123 | ) | (113 | ) | ||||
Payments to secure customer service contracts, including outlays for conversion, and capitalized systems development costs | (133 | ) | (119 | ) | ||||
Acquisitions, net of cash acquired | (85 | ) | (6 | ) | ||||
Proceeds from Visa Europe share sale | — | 27 | ||||||
Proceeds from the maturity of net investment hedges | 90 | — | ||||||
Other investing activities, net | 12 | 1 | ||||||
Net cash used in investing activities | (239 | ) | (210 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Short-term borrowings, net | (160 | ) | 196 | |||||
Proceeds from issuance of long-term debt | 3,548 | 2,377 | ||||||
Payment of call premiums and debt issuance cost | (63 | ) | (52 | ) | ||||
Principal payments on long-term debt | (3,811 | ) | (3,163 | ) | ||||
Payment of taxes related to settlement of equity awards | (83 | ) | (59 | ) | ||||
Distributions and dividends paid to noncontrolling interests and redeemable noncontrolling interest | (126 | ) | (157 | ) | ||||
Other financing activities, net | 33 | 35 | ||||||
Net cash used in financing activities | (662 | ) | (823 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | 8 | (22 | ) | |||||
Change in cash and cash equivalents | 108 | (147 | ) | |||||
Cash and cash equivalents at beginning of period | 385 | 429 | ||||||
Cash and cash equivalents at end of period | $ | 493 | $ | 282 | ||||
NON-CASH TRANSACTIONS | ||||||||
Capital leases, net of trade-ins | $ | 50 | $ | 67 | ||||
Other financing arrangements | $ | 103 | $ | 22 | ||||
See notes to unaudited consolidated financial statements.
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FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
First Data Corporation Stockholders | |||||||||||||||||||||||||||||||||||||||||
Common Stock | Treasury Stock | Additional Paid-In Capital | Accumulated Loss | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interest | Total | |||||||||||||||||||||||||||||||||||
(in millions) | Class A | Class B | Class A | ||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||
Balance, December 31, 2016 | 367 | $ | 4 | 544 | $ | 5 | 5 | $ | (61 | ) | $ | 13,210 | $ | (10,612 | ) | $ | (1,326 | ) | $ | 2,911 | $ | 4,131 | |||||||||||||||||||
Dividends and distributions paid to noncontrolling interests(a) | — | — | — | — | — | — | — | — | — | (110 | ) | (110 | ) | ||||||||||||||||||||||||||||
Net income(b) | — | — | — | — | — | — | — | 221 | — | 85 | 306 | ||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | — | — | — | 119 | 7 | 126 | ||||||||||||||||||||||||||||||
Adjustment to redemption value of redeemable noncontrolling interest | — | — | — | — | — | — | 1 | — | — | — | 1 | ||||||||||||||||||||||||||||||
Stock compensation expense | — | — | — | — | — | — | 121 | — | — | — | 121 | ||||||||||||||||||||||||||||||
Stock activity under stock compensation plans | 12 | — | (1 | ) | — | 5 | (77 | ) | 30 | — | — | — | (47 | ) | |||||||||||||||||||||||||||
Balance, June 30, 2017 | 379 | $ | 4 | 543 | $ | 5 | 10 | $ | (138 | ) | $ | 13,362 | $ | (10,391 | ) | $ | (1,207 | ) | $ | 2,893 | $ | 4,528 | |||||||||||||||||||
First Data Corporation Stockholders | |||||||||||||||||||||||||||||||||||||||||
Common Stock | Treasury Stock | Additional Paid-In Capital | Accumulated Loss | Accumulated Other Comprehensive Loss | Noncontrolling Interest | Total | |||||||||||||||||||||||||||||||||||
(in millions) | Class A | Class B | Class A | ||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||
Balance, December 31, 2015 | 180 | $ | 2 | 719 | $ | 7 | — | $ | — | $ | 12,910 | $ | (11,032 | ) | $ | (1,219 | ) | $ | 2,992 | $ | 3,660 | ||||||||||||||||||||
Dividends and distributions paid to noncontrolling interests(a) | — | — | — | — | — | — | — | — | — | (141 | ) | (141 | ) | ||||||||||||||||||||||||||||
Net income (b) | — | — | — | — | — | — | — | 96 | — | 96 | 192 | ||||||||||||||||||||||||||||||
Other comprehensive (loss) income | — | — | — | — | — | — | — | — | (106 | ) | 1 | (105 | ) | ||||||||||||||||||||||||||||
Adjustment to redemption value of redeemable noncontrolling interest | — | — | — | — | — | — | 4 | — | — | — | 4 | ||||||||||||||||||||||||||||||
Stock compensation expense | — | — | — | — | — | — | 171 | — | — | — | 171 | ||||||||||||||||||||||||||||||
Stock activity under stock compensation plans and other | 162 | 1 | (150 | ) | (1 | ) | 5 | (58 | ) | 22 | — | — | — | (36 | ) | ||||||||||||||||||||||||||
Balance, June 30, 2016 | 342 | $ | 3 | 569 | $ | 6 | 5 | $ | (58 | ) | $ | 13,107 | $ | (10,936 | ) | $ | (1,325 | ) | $ | 2,948 | $ | 3,745 | |||||||||||||||||||
(a) | The total distribution presented in the unaudited consolidated statements of equity for the six months ended June 30, 2017 and 2016 excludes $16 million in distributions paid to redeemable noncontrolling interest not included in equity. |
(b) | The total net income presented in the unaudited consolidated statements of equity for the six months ended June 30, 2017 and 2016 is $16 million and $17 million lower, respectively, than the amounts presented in the unaudited consolidated statements of operations due to the net income attributable to the redeemable noncontrolling interest not included in equity. |
See notes to unaudited consolidated financial statements.
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Note 1: Basis of Presentation and Summary of Significant Accounting Policies
Business Description
First Data Corporation (FDC or the Company) is a global leader in commerce-enabling technology and solutions for merchants, financial institutions, and card issuers. The Company provides merchant transaction processing and acquiring; credit, retail, and debit card issuing and processing; prepaid and payroll services; check verification; settlement and guarantee services; statement printing and remittance services; as well as solutions to help clients grow their businesses including the Company's Clover line of payment solutions and related applications.
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. 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, the consolidated results of the Company's operations, comprehensive income (loss), consolidated cash flows and changes in equity as of and for the periods presented. 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 unaudited consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Presentation
Depreciation and amortization, presented as a separate line item on the Company’s unaudited consolidated statements of operations, does not include amortization of initial payments for new contracts which is recorded as contra-revenue within “Transaction and processing service fees.” Also not included is amortization related to equity method investments which is netted within “Equity earnings in affiliates.” The following table presents the amounts associated with such amortization for the three and six months ended June 30, 2017 and 2016:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
(in millions) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Amortization of initial payments for new contracts | $ | 19 | $ | 16 | $ | 38 | $ | 31 | ||||||||
Amortization related to equity method investments | 12 | 12 | 23 | 21 | ||||||||||||
Revenue Recognition
Interchange fees and assessments charged by issuing bank and credit card associations to the Company’s consolidated subsidiaries and network fees related to PIN-debit and PINless-debit transactions charged by debit networks were as follows for the three and six months ended June 30, 2017 and 2016:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
(in millions) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Interchange fees and assessments | $ | 6,592 | $ | 5,935 | $ | 12,631 | $ | 11,222 | ||||||||
Debit network fees | 819 | 776 | 1,564 | 1,502 | ||||||||||||
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Deferred Revenue
The Company records deferred revenue when it receives payments or invoices in advance of the delivery of products or the performance of services. The deferred revenue is recognized when underlying performance obligations are achieved. As of June 30, 2017 and December 31, 2016, current deferred revenue included within "Accounts payable and accrued liabilities" in the Company's unaudited consolidated balance sheets was $163 million and $149 million, respectively. As of June 30, 2017 and December 31, 2016, noncurrent deferred revenue included within "Other long-term liabilities" in the Company's unaudited consolidated balance sheets was $176 million and $184 million, respectively.
In January 2017, the Company determined that standalone value had been achieved for its Clover terminal devices, principally because a secondary market had been established. The Company accounted for the change on a prospective basis. Beginning January 1, 2017, the Company recognized revenue on sales of Clover terminal devices upon delivery, while Clover terminal devices sold prior to January 1, 2017 continued to be deferred over the term of the respective processing agreement. As of June 30, 2017, approximately $65 million of the Company's deferred revenue represented sales of Clover terminal devices which did not have standalone value prior to the change in accounting.
Treasury Stock
In connection with the vesting of restricted stock awards or exercise of stock options, shares of Class A and Class B common stock are delivered to the Company by employees to satisfy tax withholding obligations. The Company accounts for treasury stock activities under the cost method whereby the cost of the acquired stock is recorded as treasury stock. Because Class B common stock converts automatically to Class A common stock upon any transfer, whether or not for value, except for certain transactions described in the Company's amended and restated certificate of incorporation, all shares of treasury stock reside as Class A.
Reclassifications
Certain amounts for prior years have been reclassified to conform with the current year financial statement presentation.
New Accounting Guidance
Revenue Recognition
In May 2014, the Financial Accounting Standards Board (FASB) issued guidance that requires companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the Company expects to be entitled in an exchange for those goods or services. It also requires enhanced disclosures about revenue, provides guidance for transactions that were not previously addressed comprehensively, and improves guidance for multiple-element arrangements. The FASB has subsequently issued several amendments to the standard, including clarification on accounting for licenses, identifying performance obligations, and principal versus agent consideration (reporting revenue gross vs. net).
Since the issuance of ASC 606 and ASC 340-40 (collectively, the New Revenue Standard) in May 2014, the Company has been preparing for the adoption of the New Revenue Standard. The Company has been monitoring the activity of the FASB and the Transition Resource Group as it relates to specific industry interpretive guidance and further overall interpretations and clarifications.
Beginning in the second half of 2016, the Company began Phase I of its three-phase plan to complete its adoption of the New Revenue Standard:
• | Phase I entailed activities such as completion of an accounting guidance gap analysis, reviewing significant revenue streams (and related costs) and representative contracts to determine the potential changes to its existing accounting policies. The Company has completed Phase I. |
• | Phase II will further determine the impact of the adoption of the New Revenue Standard and will include activities such as validating and concluding on potential accounting guidance gaps from Phase I, quantifying the effects the New Revenue Standard will have on its consolidated financial statements, identifying and documenting changes to its accounting policies, assessing disclosures as required by the New Revenue Standard, and identifying and addressing the impact the New Revenue Standard will have on business processes, systems and internal controls to support the recognition and disclosure requirements. The Company is continuing its efforts as part of Phase II. |
10
• | Phase III will complete the Company’s adoption and implementation of the New Revenue Standard and will include activities such as running parallel reporting for impacted areas under the New and Current Revenue Standard (ASC 605), recording the accounting adjustments that were identified in Phase II, evaluating and testing modified and newly implemented internal controls over the New Revenue Standard, and revising the Company’s financial statement disclosures. |
While the Company is finalizing its evaluation of the full impact of the New Revenue Standard and related amendments on its consolidated financial statements and related disclosures, the Company has assessed certain changes which are not expected to have a material impact on its consolidated financial statements upon adoption of the New Revenue Standard such as:
• | The capitalization of certain costs that are part of setting up a customer on the Company’s platforms and certain customer |
acquisition costs that meet the definition of incremental costs of obtaining a contract, both of which are currently recognized
as an expense when incurred;
• | Certain software license arrangements that are currently recognized over the term of the software arrangement may be |
recognized earlier; and
• | Certain services revenue associated with programming activities that currently have standalone value and are recognized as work is performed may need to be deferred and recognized over the contract period. |
The Company is also continuing to validate and quantify potential changes, which may be significant to the consolidated financial statements, such as:
• | Certain customer contractual arrangements with volume-based discounts which could result in a potential deferral of |
revenue; and
• | Principal versus agent considerations (reporting revenue gross vs. net), including interchange fees and assessments charged |
by credit card associations, network fees related to PIN-debit and PINless debit transactions and revenue-based commission
payments to Independent Sales Organizations (ISOs) and sales channels.
The Company plans to adopt the New Revenue Standard, as well as other clarifications and technical guidance issued by the FASB related to this New Revenue Standard, on January 1, 2018, and the Company will apply the modified retrospective transition method. This will result in an adjustment to retained earnings for the cumulative effect, if any, of applying the New Revenue Standard to contracts in process as of the adoption date. Under this method, the Company would not restate the prior consolidated financial statements presented. However, the Company will include additional disclosures of the amount by which each financial statement line item is affected in the current reporting period during 2018, as compared to the guidance that was in effect before the change, and an explanation of the reasons for significant changes, if any.
Leases
In February 2016, the FASB issued guidance which requires lessees to put most leases on their balance sheets. The guidance also modifies the classification criteria and the accounting for sales-type and direct financing leases for lessors and provides new presentation and disclosure requirements for both lessees and lessors. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted in any interim or annual period subsequent to adoption of the preceding revenue recognition guidance. The Company is currently evaluating the impact of adoption of the new guidance on its consolidated financial statements.
Stock-based Compensation
In March 2016, the FASB issued guidance that will change some aspects of the accounting for stock-based payments to employees. Under the new guidance, companies will be required to record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement and to present excess tax benefits as an operating activity on the statement of cash flows. The guidance may also change how companies account for forfeitures and an employee’s use of shares to satisfy the employer’s statutory income tax withholding obligation. The Company adopted the various amendments in its consolidated financial statements for the quarterly period ending March 31, 2017 with an effective date of January 1, 2017. The Company has elected to continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period. The adoption of these amendments did not have a material effect on its consolidated financial statements while the Company still has income tax valuation allowances within the U.S. When these income tax valuation allowances in the U.S. are fully or partially released, the Company could experience volatility in its income tax expense.
11
In May 2017, the FASB issued guidance that will clarify when changes to terms or conditions of a stock-based payment award must be accounted for as a modification. Under the new guidance, companies will only apply modification accounting guidance if the value, vesting conditions or classification of an award changes. This new guidance will be effective for fiscal years beginning after December 15, 2017 for all entities, including interim periods within those fiscal years with early adoption permitted. The guidance should be adopted prospectively to awards modified on or after the adoption date. The Company is currently evaluating the impact of adoption of the new guidance on its consolidated financial statements.
Credit Losses
In June 2016, the FASB issued guidance that will change the accounting for credit impairment. Under the new guidance, companies are required to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. This new guidance will be effective for public companies for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
Statement of Cash Flows
In November 2016, the FASB issued guidance that will change the presentation of restricted cash and restricted cash equivalents on the statement of cash flows. Under the new guidance, companies will be required to include restricted cash and restricted cash equivalents with the cash and cash equivalents line item when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Given this change, transfers between cash, cash equivalents, and restricted cash and cash equivalents will not be reported as cash flow activities on the statement of cash flows. In addition, the guidance requires entities to disclose information about the nature of restrictions on its cash and cash equivalents, including restricted cash and cash equivalents. This new guidance will be effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years with early adoption permitted, including adoption in an interim period. The guidance should be applied using a retrospective transition method to each period presented. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
Goodwill
In January 2017, the FASB issued guidance simplifying the test for goodwill impairment. This standard eliminates Step 2 from the goodwill impairment test, instead requiring an entity to recognize a goodwill impairment charge for the amount by which the goodwill carrying amount exceeds the reporting unit’s fair value. This guidance is effective for interim and annual goodwill impairment tests in fiscal years beginning after December 15, 2019, and early adoption is permitted. This guidance must be applied on a prospective basis. The Company does not expect the adoption of this guidance to have a material impact on the Company's financial position, results of operations or cash flows.
Pension Costs
In March 2017, the FASB issued guidance that requires employers that sponsor defined benefit plans for pensions and/or other post-retirement benefits to present the service cost component of net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. Only the service cost component will be eligible for capitalization in assets. Employers will present the other components of the net periodic benefit cost separately from the line item that includes the service cost and outside of any subtotal of operating income, if one is presented. These components will not be eligible for capitalization in assets. This new guidance will be effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years with early adoption permitted, including adoption in an interim period. The Company plans to adopt the guidance on January 1, 2018. This guidance must be applied on a prospective basis. The Company does not expect the adoption of this guidance to have a material impact on the Company's financial position, results of operations or cash flows.
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Note 2: Borrowings
(in millions) | As of June 30, 2017 | As of December 31, 2016 | ||||||
Short-term borrowings: | ||||||||
Foreign lines of credit and other arrangements | $ | 89 | $ | 84 | ||||
Receivable securitized loan at LIBOR plus 150 basis points or a base rate equal to the highest of (i) the applicable lender's prime rate, or (ii) the federal funds rate plus 0.50% | — | 160 | ||||||
Unamortized deferred financing costs(a) | (4 | ) | (2 | ) | ||||
Total short-term borrowings | 85 | 242 | ||||||
Current portion of long-term borrowings: | ||||||||
Senior secured term loan facility due June 2020 at LIBOR plus 2.0% or a base rate plus 1.0% | 65 | — | ||||||
Other arrangements and capital lease obligations | 124 | 116 | ||||||
Total current portion of long-term borrowings | 189 | 116 | ||||||
Total short-term and current portion of long-term borrowings | 274 | 358 | ||||||
Long-term borrowings: | ||||||||
Senior secured term loan facility due March 2021 at LIBOR and euro LIBOR plus 3.0% or, solely with respect to U.S. dollar-denominated term loans, a base rate plus 2.0% (d), (e) | — | 4,379 | ||||||
Senior secured term loan facility due July 2022 at LIBOR plus 3.0% or a base rate plus 2.0%, or solely with respect to euro-denominated term loans, euro LIBOR plus 3.25% (e) | — | 3,583 | ||||||
Senior secured term loan facility due April 2024 at LIBOR plus 2.5% or a base rate plus 1.5% | 4,217 | — | ||||||
Senior secured term loan facility due July 2022 at LIBOR plus 2.25% or a base rate plus 1.25% | 3,758 | — | ||||||
Senior secured term loan facility due June 2020 at LIBOR plus 2.0% or a base rate plus 1.0% | 1,203 | — | ||||||
6.75% Senior secured first lien notes due 2020 | — | 1,398 | ||||||
5.375% Senior secured first lien notes due 2023 | 1,210 | 1,210 | ||||||
5.0% Senior secured first lien notes due 2024 | 1,900 | 1,900 | ||||||
5.75% Senior secured second lien notes due 2024 | 2,200 | 2,200 | ||||||
7.0% Senior unsecured notes due 2023 | 3,400 | 3,400 | ||||||
Unamortized discount and unamortized deferred financing costs(a) | (143 | ) | (154 | ) | ||||
Other arrangements and capital lease obligations | 288 | 215 | ||||||
Total long-term borrowings(b) | 18,033 | 18,131 | ||||||
Total borrowings(c) | $ | 18,307 | $ | 18,489 | ||||
(a) | Unamortized deferred financing costs are amortized on a straight-line basis, which approximates the interest method, over the remaining term of the respective debt. In addition, certain lenders' fees associated with debt transactions were capitalized as discounts and are similarly being amortized on a straight-line basis, which approximates the effective interest method, over the remaining term of the respective debt. |
(b) | As of June 30, 2017 and December 31, 2016, the fair value of the Company's long-term borrowings was $18.6 billion and $18.8 billion, respectively. The estimated fair value of the Company's long-term borrowings was primarily based on market trading prices and is considered to be a Level 2 measurement. |
(c) | The effective interest rate is not substantially different than the coupon rate on any of the Company's debt tranches. |
(d) | The U.S. dollar denominated portion of the Senior secured term loan facility maturing March 2021was refinanced on April 26, 2017. |
(e) | The U.S. dollar denominated portion of the Senior secured term loan facility maturing July 2022 was refinanced on June 14, 2017. Additionally, the March 2021 and July 2022 Euro term loans were both paid off on June 14, 2017 with the proceeds from the $1.0 billion upsize of the July 2022 term loan facility. |
13
Foreign Lines of Credit and Other Arrangements
As of June 30, 2017 and December 31, 2016, the Company had $317 million and $489 million, respectively, 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, 2017 and December 31, 2016, this includes a $165 million and $355 million, respectively, committed line of credit for one of the Company's consolidated alliances. The remainder of these arrangements are primarily associated with international operations and are in various functional currencies, the most significant of which are the Australian dollar, the Polish zloty, and the euro. Of the amounts outstanding as of June 30, 2017 and December 31, 2016, $20 million and $10 million, respectively, were uncommitted. As of June 30, 2017 and December 31, 2016, the weighted average interest rate associated with foreign lines of credit and other arrangements was 2.6%.
Senior Secured Revolving Credit Facility
The Company has a $1.25 billion senior secured revolving credit facility maturing on June 2, 2020 subject to certain earlier springing maturity provisions in certain circumstances. Up to $250 million of the senior secured revolving credit facility is available for letters of credit, of which $44 million and $41 million of letters of credit were issued under the facilities as of June 30, 2017 and December 31, 2016, respectively. As of June 30, 2017, $1.2 billion remained available.
Receivable Securitization Agreement
The Company has a fully consolidated and wholly owned subsidiary, First Data Receivables, LLC (FDR). FDR and FDC entered into an agreement where certain wholly owned subsidiaries of FDC agreed to transfer and contribute receivables to FDR. FDR’s assets are not available to satisfy obligations of any other entities or affiliates of FDC. FDR's creditors will be entitled, upon its liquidation, to be satisfied out of FDR’s assets prior to any assets or value in FDR becoming available to FDR’s equity holders. The Company did not have an outstanding balance on its securitization facility as of June 30, 2017. As of December 31, 2016, the Company transferred $312 million in receivables to FDR as part of the securitization program and FDR utilized the receivables as collateral for borrowings of $160 million. The maximum borrowing capacity under the agreement has increased to $600 million as of June 30, 2017. The term of the Company's receivables securitization agreement has been extended through June 2020.The receivables held by FDR are recorded within "Accounts receivable, net" in the Company's unaudited consolidated balance sheets.
Recent Events
On January 23, 2017, the Company incurred an aggregate principal amount of $1.3 billion in new U.S. dollar denominated term loans maturing on June 2, 2020. The interest rate applicable to the new term loans is either LIBOR plus 2.0% or a base rate plus 1.0%. The Company is required to make quarterly principal payments of 1.25% on the new term loans. The new term loans were utilized to pay down all of the existing 6.75% senior secured first lien notes. In connection with this transaction, the Company expensed $56 million in loss on debt extinguishment.
On April 26, 2017, the Company refinanced $4.2 billion of U.S. dollar-denominated senior secured term loans due March 2021 through new and existing lenders to provide approximately $4.2 billion of U.S. dollar-denominated senior secured term loans due April 2024. The senior secured term loan due April 2024 bears interest at a rate of LIBOR plus 250 basis points or a base rate plus 150 basis points. In connection with this transaction, the Company expensed $6 million in loss on debt extinguishment and $5 million in debt issuance costs.
On June 14, 2017, the Company refinanced approximately $2.7 billion of U.S. dollar-denominated senior secured term loans due July 2022 and paid off approximately $1.1 billion of euro-denominated senior secured term loans due March 2021 and July 2022. The U.S. dollar-denominated July 2022 term loan facility was upsized by $1.0 billion, to pay off the euro-denominated term loans. Post transaction, the U.S. dollar-denominated July 2022 term loan facility approximates $3.8 billion of U.S. dollar-denominated term loans maturing July 2022 at an interest rate of LIBOR plus 225 basis points or a base rate plus 125 basis points. In connection with this transaction, the Company expensed $9 million in loss on debt extinguishment and $4 million in debt issuance costs.
Note 3: Stock Compensation Plans
The Company provides stock-based compensation awards to its employees under the 2015 Omnibus Incentive Plan (stock plan), which the Company adopted in conjunction with its initial public offering (IPO) on October 15, 2015.
Total stock-based compensation expense recognized in the "Cost of services" and “Selling, general, and administrative” line items of the unaudited consolidated statements of operations resulting from stock options, non-vested restricted stock awards, and non-vested restricted stock units was as follows for the three and six months ended June 30, 2017 and 2016:
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Three months ended June 30, | Six months ended June 30, | |||||||||||||||
(in millions) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Cost of services | $ | 16 | $ | 23 | $ | 35 | $ | 72 | ||||||||
Selling, general, and administrative | 40 | 33 | 86 | 99 | ||||||||||||
Total | $ | 56 | $ | 56 | $ | 121 | $ | 171 | ||||||||
Substantially all of the Company's employees are granted restricted stock awards or units on an annual basis, which generally vest 20% on the first anniversary, 40% on the second anniversary, and the remaining 40% on the third anniversary. For the six months ended June 30, 2017, 12 million restricted stock awards and units were granted at a weighted average price per share of $15.83. For the six months ended June 30, 2016, 18 million restricted stock awards and units were granted at a weighted average price per share of $12.51.
As of June 30, 2017, there was $64 million and $265 million of total unrecognized compensation expense related to non-vested stock options and restricted stock awards and units, respectively.
The Company paid approximately $23 million and $20 million for the three months ended June 30, 2017 and 2016, respectively, and $83 million and $59 million for the six months ended June 30, 2017 and 2016, respectively, of taxes related to the settlement of vested stock-based awards.
For additional information on the Company’s stock compensation plans, refer to note 4 “Stock Compensation Plans” in “Item 8. Financial Statements and Supplementary Data” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Note 4: Net Income Attributable to First Data Corporation Per Share
Basic net income attributable to FDC per share is calculated by dividing "Net income attributable to FDC" by the weighted-average shares outstanding during the period, without consideration for any potential dilutive shares. Diluted net income attributable to FDC per share has been computed to give effect to the impact, if any, of shares issuable upon the assumed exercise of the Company’s common stock equivalents, which consist of outstanding stock options and unvested restricted stock. The dilutive effect of potentially dilutive securities is reflected in net income attributable to FDC per share by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Company's common stock can result in a greater dilutive effect from potentially dilutive securities.
Other than voting rights, the Company's Class A Common Stock and Class B Common Stock have the same rights and therefore both are treated as the same class of stock for purposes of the net income attributable to FDC per share calculation.
15
The following table sets forth the computation of the Company's basic and diluted net income attributable to First Data Corporation per share for the three and six months ended June 30, 2017 and 2016:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
(in millions, except per share amounts) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Numerator: | ||||||||||||||||
Net income attributable to First Data Corporation | $ | 185 | $ | 152 | $ | 221 | $ | 96 | ||||||||
Denominator: | ||||||||||||||||
Weighted average shares used in computing net income per share, basic | 915 | 900 | 913 | 898 | ||||||||||||
Effect of dilutive securities | 23 | 14 | 22 | 18 | ||||||||||||
Total dilutive securities | 938 | 914 | 935 | 916 | ||||||||||||
Net income attributable to First Data Corporation per share: | ||||||||||||||||
Basic | $ | 0.20 | $ | 0.17 | $ | 0.24 | $ | 0.11 | ||||||||
Diluted | $ | 0.20 | $ | 0.17 | $ | 0.24 | $ | 0.10 | ||||||||
Anti-dilutive shares excluded from diluted net income per share(a) | 13 | 30 | 13 | 28 | ||||||||||||
(a) | Potentially dilutive securities whose effect would have been anti-dilutive are excluded from the computation of diluted earnings per share for the three and six months ended June 30, 2017 and 2016. |
Note 5: Segment Information
For a detailed discussion of the Company’s accounting principles and its reportable segments refer to note 7 “Segment Information” in the Company’s consolidated financial statements in “Item 8. Financial Statements and Supplementary Data” and “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, 2016.
The following tables present the Company’s reportable segment results for the three and six months ended June 30, 2017 and 2016:
Three months ended June 30, 2017 | ||||||||||||||||||||
(in millions) | Global Business Solutions | Global Financial Solutions | Network & Security Solutions | Corporate | Total | |||||||||||||||
Revenues: | ||||||||||||||||||||
Transaction and processing service fees | $ | 823 | $ | 347 | $ | 330 | $ | — | $ | 1,500 | ||||||||||
Product sales and other | 235 | 55 | 51 | — | 341 | |||||||||||||||
Equity earnings in affiliates | 8 | — | — | — | 8 | |||||||||||||||
Total segment revenues | $ | 1,066 | $ | 402 | $ | 381 | $ | — | $ | 1,849 | ||||||||||
Depreciation and amortization | $ | 106 | $ | 90 | $ | 31 | $ | 4 | $ | 231 | ||||||||||
Segment EBITDA | 483 | 167 | 180 | (44 | ) | 786 | ||||||||||||||
Other operating expenses and other income (expense) excluding divestitures | (11 | ) | (5 | ) | (1 | ) | (14 | ) | (31 | ) | ||||||||||
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Three months ended June 30, 2016 | ||||||||||||||||||||
(in millions) | Global Business Solutions | Global Financial Solutions | Network & Security Solutions | Corporate | Total | |||||||||||||||
Revenues: | ||||||||||||||||||||
Transaction and processing service fees | $ | 819 | $ | 341 | $ | 321 | $ | — | $ | 1,481 | ||||||||||
Product sales and other | 209 | 54 | 45 | — | 308 | |||||||||||||||
Equity earnings in affiliates | 9 | — | — | — | 9 | |||||||||||||||
Total segment revenues | $ | 1,037 | $ | 395 | $ | 366 | $ | — | $ | 1,798 | ||||||||||
Depreciation and amortization | $ | 110 | $ | 88 | $ | 30 | $ | 3 | $ | 231 | ||||||||||
Segment EBITDA | 448 | 160 | 166 | (28 | ) | 746 | ||||||||||||||
Other operating expenses and other income (expense) excluding divestitures | 39 | — | — | (26 | ) | 13 | ||||||||||||||
Six months ended June 30, 2017 | ||||||||||||||||||||
(in millions) | Global Business Solutions | Global Financial Solutions | Network & Security Solutions | Corporate | Total | |||||||||||||||
Revenues: | ||||||||||||||||||||
Transaction and processing service fees | $ | 1,566 | $ | 694 | $ | 646 | $ | — | $ | 2,906 | ||||||||||
Product sales and other | 454 | 101 | 96 | — | 651 | |||||||||||||||
Equity earnings in affiliates | 17 | — | — | — | 17 | |||||||||||||||
Total segment revenues | $ | 2,037 | $ | 795 | $ | 742 | $ | — | $ | 3,574 | ||||||||||
Depreciation and amortization | $ | 212 | $ | 175 | $ | 61 | $ | 5 | $ | 453 | ||||||||||
Segment EBITDA | 865 | 322 | 336 | (86 | ) | 1,437 | ||||||||||||||
Other operating expenses and other income (expense) excluding divestitures | (21 | ) | (7 | ) | (2 | ) | (24 | ) | (54 | ) | ||||||||||
Six months ended June 30, 2016 | ||||||||||||||||||||
(in millions) | Global Business Solutions | Global Financial Solutions | Network & Security Solutions | Corporate | Total | |||||||||||||||
Revenues: | ||||||||||||||||||||
Transaction and processing service fees | $ | 1,574 | $ | 678 | $ | 634 | $ | — | $ | 2,886 | ||||||||||
Product sales and other | 398 | 103 | 84 | — | 585 | |||||||||||||||
Equity earnings in affiliates | 20 | — | — | — | 20 | |||||||||||||||
Total segment revenues | $ | 1,992 | $ | 781 | $ | 718 | $ | — | $ | 3,491 | ||||||||||
Depreciation and amortization | $ | 213 | $ | 182 | $ | 57 | $ | 7 | $ | 459 | ||||||||||
Segment EBITDA | 824 | 315 | 317 | (74 | ) | 1,382 | ||||||||||||||
Other operating expenses and other income (expense) excluding divestitures | 22 | 4 | (2 | ) | (26 | ) | (2 | ) | ||||||||||||
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The following table presents a reconciliation of reportable segment amounts to the Company’s consolidated balances for the three and six months ended June 30, 2017 and 2016:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
(in millions) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Total segment revenues | $ | 1,849 | $ | 1,798 | $ | 3,574 | $ | 3,491 | ||||||||
Adjustments: | ||||||||||||||||
Non-wholly owned entities(a) | 25 | 20 | 35 | 34 | ||||||||||||
Independent sales organizations (ISOs) commission expense(b) | 161 | 158 | 308 | 321 | ||||||||||||
Reimbursable debit network fees, postage, and other | 990 | 952 | 1,909 | 1,859 | ||||||||||||
Consolidated revenues | $ | 3,025 | $ | 2,928 | $ | 5,826 | $ | 5,705 | ||||||||
Total segment EBITDA | $ | 786 | $ | 746 | $ | 1,437 | $ | 1,382 | ||||||||
Adjustments: | ||||||||||||||||
Non-wholly owned entities(a) | 6 | 7 | 12 | 17 | ||||||||||||
Depreciation and amortization | (237 | ) | (238 | ) | (465 | ) | (476 | ) | ||||||||
Interest expense, net | (238 | ) | (284 | ) | (472 | ) | (547 | ) | ||||||||
Loss on debt extinguishment | (15 | ) | (9 | ) | (71 | ) | (55 | ) | ||||||||
Other items(c) | (33 | ) | 14 | (59 | ) | (21 | ) | |||||||||
Income tax expense | (28 | ) | (28 | ) | (40 | ) | (33 | ) | ||||||||
Stock-based compensation | (56 | ) | (56 | ) | (121 | ) | (171 | ) | ||||||||
Net income attributable to First Data Corporation | $ | 185 | $ | 152 | $ | 221 | $ | 96 | ||||||||
(a) | Net adjustment to reflect the Company's proportionate share of the results of the Company's investments in businesses accounted for under the equity method and consolidated subsidiaries with noncontrolling ownership interests. Segment revenue for the Company's significant affiliates is reflected based on the Company's proportionate share of the results of the Company's investments in businesses accounted for under the equity method and consolidated subsidiaries with noncontrolling ownership interests. For other affiliates, the Company includes equity earnings in affiliates, excluding amortization expense, in segment revenue. |
(b) | Reported within "Selling, general, and administrative expense" in the unaudited consolidated statements of operations. |
(c) | Includes restructuring, non-normal course litigation and regulatory settlements, debt issuance expenses and “Other income (expense)" as presented in the unaudited consolidated statements of operations, which includes divestitures, derivative gains (losses), non-operating foreign currency gains (losses), and other, as applicable to the periods presented. |
The following table presents a reconciliation of reportable segment depreciation and amortization expense to the Company’s consolidated balances in the unaudited consolidated statements of cash flows for the three and six months ended June 30, 2017 and 2016:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
(in millions) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Segment depreciation and amortization | $ | 231 | $ | 231 | $ | 453 | $ | 459 | ||||||||
Adjustments for non-wholly owned entities | 18 | 19 | 35 | 38 | ||||||||||||
Amortization of initial payments for new contracts(a) | 19 | 16 | 38 | 31 | ||||||||||||
Total consolidated depreciation and amortization per unaudited consolidated statements of cash flows | 268 | 266 | 526 | 528 | ||||||||||||
Amortization of equity method investments(b) | (12 | ) | (12 | ) | (23 | ) | (21 | ) | ||||||||
Amortization of initial payments for new contracts(a) | (19 | ) | (16 | ) | (38 | ) | (31 | ) | ||||||||
Total consolidated depreciation and amortization per unaudited consolidated statements of operations | $ | 237 | $ | 238 | $ | 465 | $ | 476 | ||||||||
(a) | Included in "Transaction and processing service fees" as contra-revenue in the Company's unaudited consolidated statements of operations. |
(b) | Included in "Equity earnings in affiliates" in the Company's unaudited consolidated statements of operations. |
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Note 6: Income Taxes
The following table presents the Company's income tax expense and effective income tax rate for the three and six months ended June 30, 2017 and 2016:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
(in millions) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Income tax expense | $ | 28 | $ | 28 | $ | 40 | $ | 33 | ||||||||
Effective income tax rate | 10 | % | 12 | % | 11 | % | 14 | % | ||||||||
The effective tax rates for the three and six months ended June 30, 2017 and 2016 were different from the statutory tax rate as a result of the Company recording tax expense on its foreign earnings, but not on its domestic earnings, as a result of the valuation allowance recorded in the U.S. The Company’s tax expense in all periods was also impacted by the Company not recording tax expense on noncontrolling interests from pass through entities. In addition, the three and six months ended June 30, 2017 included a $10 million benefit associated with the release of a valuation allowance as a result of the deferred tax liabilities recorded with the purchase of Acculynk.
The Company's liability for unrecognized tax benefits was approximately $241 million as of June 30, 2017. The Company anticipates it is reasonably possible that the liability for unrecognized tax benefits may decrease by up to $122 million over the next twelve months beginning June 30, 2017 as a result of the possible closure of federal tax audits, potential settlements with certain states and foreign countries and the lapse of the statute of limitations in various state and foreign jurisdictions.
Note 7: Redeemable Noncontrolling Interest
One of the Company's noncontrolling interests is redeemable at the option of the holder and is presented outside of equity and carried at its estimated redemption value.
The following table presents a summary of the redeemable noncontrolling interest activity during the six months ended June 30, 2017 and 2016:
(in millions) | 2017 | 2016 | ||||||
Balance as of January 1, | $ | 73 | $ | 77 | ||||
Distributions | (16 | ) | (16 | ) | ||||
Share of income | 16 | 17 | ||||||
Adjustment to redemption value of redeemable noncontrolling interest | (1 | ) | (4 | ) | ||||
Balance as of June 30, | $ | 72 | $ | 74 | ||||
Note 8: Other Operating Expenses
The following table details the components of "Other operating expenses" in the unaudited consolidated statements of operations for the three and six months ended June 30, 2017 and 2016:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
(in millions) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Restructuring, net | $ | 16 | $ | 24 | $ | 39 | $ | 45 | ||||||||
Asset impairment | 6 | — | 6 | — | ||||||||||||
Deal integration costs | 5 | — | 5 | — | ||||||||||||
Other | 2 | — | 1 | — | ||||||||||||
Other operating expenses | $ | 29 | $ | 24 | $ | 51 | $ | 45 | ||||||||
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Restructuring
During the three and six months ended June 30, 2017 and 2016, the Company recorded restructuring charges in connection with management’s alignment of the business with strategic objectives, cost savings initiatives, and the departure of certain executive officers. The $16 million incurred during the second quarter of 2017 was driven by a workforce productivity initiative. The Company expects to incur additional costs in restructuring as this initiative will continue throughout 2017. The Company continues to evaluate operating efficiencies and could incur further restructuring costs beyond this initiative.
A summary of net pretax charges incurred by segment was as follows for the three and six months ended June 30, 2017 and 2016:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
(in millions) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Global Business Solutions | $ | 6 | $ | 2 | $ | 15 | $ | 5 | ||||||||
Global Financial Solutions | 4 | 1 | 8 | 2 | ||||||||||||
Network & Security Solutions | 1 | — | 3 | 2 | ||||||||||||
Corporate | 5 | 21 | 13 | 36 | ||||||||||||
Restructuring, net | $ | 16 | $ | 24 | $ | 39 | $ | 45 | ||||||||
The following table summarizes the Company’s utilization of restructuring accruals for the six months ended June 30, 2017:
(in millions) | Employee Severance | |||
Remaining accrual as of January 1, 2017 | $ | 9 | ||
Restructuring, net | 39 | |||
Cash payments and other | (37 | ) | ||
Remaining accrual as of June 30, 2017 | $ | 11 | ||
Note 9: Acquisitions and Dispositions
Acculynk Acquisition
On May 1, 2017, the Company acquired Acculynk, a leading technology company that delivers eCommerce solutions for debit card acceptance. The acquisition provides access to Acculynk's PaySecure debit routing technology and its range of other services. The purchase price was approximately $85 million and Acculynk is reported as part of the Company's Global Business Solutions segment.
Note 10: Derivative Financial Instruments
The Company enters into the following types of derivatives:
• | Floating to fixed interest rate collar contracts: The Company uses interest rate collar contracts to mitigate its exposure to interest rate fluctuations on interest payments related to variable rate debt. No payments or receipts are exchanged on interest rate collar contracts unless interest rates rise or fall in excess of a predetermined ceiling or floor rate. The Company uses these contracts in a qualifying hedging relationship. |
• | Foreign exchange contracts: The Company uses cross-currency swaps to protect the net investment in certain foreign subsidiaries and/or affiliates with respect to changes in foreign currency exchange rates. The Company uses these contracts in both qualifying and non-qualifying hedging relationships. |
20
The Company held the following derivative instruments as of June 30, 2017 and December 31, 2016:
As of June 30, 2017 | As of December 31, 2016 | |||||||||||||||||||||||
(in millions) | Notional Currency | Notional Value | Assets(a) | Liabilities | Notional Value | Assets(a) | Liabilities | |||||||||||||||||
Derivatives designated as hedges of net investments in foreign operations: | ||||||||||||||||||||||||
Foreign exchange contracts | AUD | 100 | $ | 29 | $ | — | 211 | $ | 57 | $ | — | |||||||||||||
Foreign exchange contracts(b) | EUR | 915 | — | (22 | ) | — | — | — | ||||||||||||||||
Foreign exchange contracts | GBP | 150 | 1 | — | 300 | 78 | — | |||||||||||||||||
Foreign exchange contracts | CAD | 95 | 1 | — | 130 | 9 | — | |||||||||||||||||
31 | ||||||||||||||||||||||||