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 September 30, 2018
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 Website, 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 | Smaller reporting company | o | ||
Non-accelerated filer | o | (Do not check if a smaller reporting company) | 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 September 30, 2018 | |
Class A Common Stock, $0.01 par value per share | 567,013,360 shares | |
Class B Common Stock, $0.01 par value per share | 369,503,473 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, 2017, 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 INCOME
(Unaudited)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(in millions, except per share amounts) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Revenues: | ||||||||||||||||
Revenues excluding reimbursable items(a) | $ | 2,158 | $ | 2,081 | $ | 6,486 | $ | 5,998 | ||||||||
Reimbursable items | 211 | 995 | 613 | 2,904 | ||||||||||||
Total revenues | 2,369 | 3,076 | 7,099 | 8,902 | ||||||||||||
Expenses: | ||||||||||||||||
Cost of revenues (exclusive of items shown below) | 741 | 794 | 2,271 | 2,356 | ||||||||||||
Selling, general, and administrative | 665 | 565 | 1,995 | 1,611 | ||||||||||||
Depreciation and amortization | 248 | 248 | 753 | 713 | ||||||||||||
Other operating expenses, net | 29 | 57 | 106 | 108 | ||||||||||||
Total expenses excluding reimbursable items | 1,683 | 1,664 | 5,125 | 4,788 | ||||||||||||
Reimbursable items | 211 | 995 | 613 | 2,904 | ||||||||||||
Total expenses | 1,894 | 2,659 | 5,738 | 7,692 | ||||||||||||
Operating profit | 475 | 417 | 1,361 | 1,210 | ||||||||||||
Interest expense, net | (231 | ) | (233 | ) | (698 | ) | (702 | ) | ||||||||
Loss on debt extinguishment | (2 | ) | (1 | ) | (3 | ) | (72 | ) | ||||||||
Other income (expense) | 202 | (4 | ) | 201 | (7 | ) | ||||||||||
Income before income taxes and equity earnings in affiliates | 444 | 179 | 861 | 429 | ||||||||||||
Income tax expense (benefit) | 54 | (106 | ) | 44 | (66 | ) | ||||||||||
Equity earnings in affiliates | 58 | 55 | 167 | 167 | ||||||||||||
Net income | 448 | 340 | 984 | 662 | ||||||||||||
Less: Net income attributable to noncontrolling interests and redeemable noncontrolling interest | 47 | 44 | 141 | 145 | ||||||||||||
Net income attributable to First Data Corporation | $ | 401 | $ | 296 | $ | 843 | $ | 517 | ||||||||
Net income attributable to First Data Corporation per share: | ||||||||||||||||
Basic | $ | 0.43 | $ | 0.32 | $ | 0.91 | $ | 0.57 | ||||||||
Diluted | $ | 0.42 | $ | 0.31 | $ | 0.88 | $ | 0.55 | ||||||||
Weighted-average common shares outstanding: | ||||||||||||||||
Basic | 932 | 918 | 928 | 915 | ||||||||||||
Diluted | 965 | 944 | 956 | 938 | ||||||||||||
(a) | Includes processing fees, administrative service fees, and other fees charged to merchant alliances accounted for under the equity method of $56 million and $159 million for the three and nine months ended September 30, 2018, respectively, and $56 million and $162 million for the comparable periods in 2017. |
The 2018 results include the impact of adopting ASC 606 and ASC 340-40 (collectively, the New Revenue Standard). See note 1 "Basis of Presentation and Summary of Significant Accounting Policies" in the Company's unaudited consolidated financial statements included in Part I, Item 1 of this Form 10-Q for more information.
See notes to unaudited consolidated financial statements.
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FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Net income | $ | 448 | $ | 340 | $ | 984 | $ | 662 | ||||||||
Other comprehensive income, net of tax: | ||||||||||||||||
Foreign currency translation adjustment | 18 | 105 | (66 | ) | 213 | |||||||||||
Pension liability adjustments | 2 | — | 2 | 19 | ||||||||||||
Derivative instruments | 4 | 1 | 4 | — | ||||||||||||
Total other comprehensive income (loss), net of tax | 24 | 106 | (60 | ) | 232 | |||||||||||
Comprehensive income | 472 | 446 | 924 | 894 | ||||||||||||
Less: Comprehensive income attributable to noncontrolling interests and redeemable noncontrolling interest | 49 | 50 | 139 | 158 | ||||||||||||
Comprehensive income attributable to First Data Corporation | $ | 423 | $ | 396 | $ | 785 | $ | 736 | ||||||||
See notes to unaudited consolidated financial statements.
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FIRST DATA CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in millions, except par value) | As of September 30, 2018 | As of December 31, 2017 | ||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 601 | $ | 498 | ||||
Accounts receivable, net of allowance for doubtful accounts of $43 and $45 | 2,065 | 2,176 | ||||||
Settlement assets | 20,735 | 20,363 | ||||||
Prepaid expenses and other current assets | 310 | 335 | ||||||
Total current assets | 23,711 | 23,372 | ||||||
Property and equipment, net of accumulated depreciation of $1,592 and $1,588 | 890 | 951 | ||||||
Goodwill | 17,518 | 17,710 | ||||||
Customer relationships, net of accumulated amortization of $5,425 and $5,940 | 1,860 | 2,184 | ||||||
Other intangibles, net of accumulated amortization of $2,277 and $2,665 | 1,906 | 1,935 | ||||||
Investment in affiliates | 1,040 | 1,054 | ||||||
Other long-term assets | 678 | 1,063 | ||||||
Total assets | $ | 47,603 | $ | 48,269 | ||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities | $ | 1,630 | $ | 1,659 | ||||
Short-term and current portion of long-term borrowings | 806 | 1,271 | ||||||
Settlement obligations | 20,735 | 20,363 | ||||||
Total current liabilities | 23,171 | 23,293 | ||||||
Long-term borrowings | 16,949 | 17,927 | ||||||
Deferred tax liabilities | 26 | 77 | ||||||
Other long-term liabilities | 513 | 886 | ||||||
Total liabilities | 40,659 | 42,183 | ||||||
Commitments and contingencies (See note 12) | ||||||||
Redeemable noncontrolling interest | 78 | 72 | ||||||
First Data Corporation stockholders' equity: | ||||||||
Class A Common stock, $0.01 par value; 1,600 shares authorized as of September 30, 2018 and December 31, 2017; 583 shares and 493 shares issued as of September 30, 2018 and December 31, 2017, respectively; and 567 shares and 482 shares outstanding as of September 30, 2018 and December 31, 2017, respectively | 6 | 5 | ||||||
Class B Common stock, $0.01 par value; 523 shares authorized as of September 30, 2018 and December 31, 2017, respectively; 370 and 443 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively | 4 | 4 | ||||||
Preferred stock, $0.01 par value; 100 shares authorized as of September 30, 2018 and December 31, 2017; no shares issued and outstanding as of September 30, 2018 and December 31, 2017 | — | — | ||||||
Class A Treasury stock, at cost, 16 shares and 11 shares as of September 30, 2018 and December 31, 2017, respectively | (243 | ) | (149 | ) | ||||
Additional paid-in capital | 13,722 | 13,495 | ||||||
Accumulated loss | (8,229 | ) | (9,059 | ) | ||||
Accumulated other comprehensive loss | (1,202 | ) | (1,144 | ) | ||||
Total First Data Corporation stockholders' equity | 4,058 | 3,152 | ||||||
Noncontrolling interests | 2,808 | 2,862 | ||||||
Total equity | 6,866 | 6,014 | ||||||
Total liabilities and equity | $ | 47,603 | $ | 48,269 | ||||
See notes to unaudited consolidated financial statements.
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FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended September 30, | ||||||||
(in millions) | 2018 | 2017 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 984 | $ | 662 | ||||
Adjustments to reconcile to net cash provided by operating activities: | ||||||||
Depreciation and amortization (including amortization netted against equity earnings in affiliates and revenues) | 816 | 806 | ||||||
Deferred income taxes | (22 | ) | (130 | ) | ||||
Charges related to other operating expenses, net and other income | (95 | ) | 115 | |||||
Loss on debt extinguishment | 3 | 72 | ||||||
Stock-based compensation expense | 192 | 183 | ||||||
Other non-cash and non-operating items, net | 44 | 36 | ||||||
Increase (decrease) in cash, excluding the effects of acquisitions and dispositions, resulting from changes in: | ||||||||
Accounts receivable, current and long-term | 92 | 60 | ||||||
Other assets, current and long-term | (48 | ) | 8 | |||||
Accounts payable and other liabilities, current and long-term | (163 | ) | (186 | ) | ||||
Income tax accounts | 6 | (44 | ) | |||||
Net cash provided by operating activities | 1,809 | 1,582 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Proceeds from dispositions | 549 | 88 | ||||||
Additions to property and equipment | (226 | ) | (198 | ) | ||||
Payments to obtain customer contracts, including outlays for conversion, and capitalized systems development costs | (226 | ) | (192 | ) | ||||
Acquisitions, net of cash acquired | (17 | ) | (848 | ) | ||||
Proceeds from the maturity of net investment hedges | 26 | 90 | ||||||
Other investing activities, net | (48 | ) | — | |||||
Net cash provided by (used in) investing activities | 58 | (1,060 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Short-term (payments) borrowings, net | (877 | ) | 415 | |||||
Proceeds from issuance of long-term debt | — | 3,548 | ||||||
Payment of call premiums and debt issuance cost | — | (63 | ) | |||||
Principal payments on long-term debt | (619 | ) | (4,063 | ) | ||||
Payment of taxes related to settlement of equity awards | (107 | ) | (87 | ) | ||||
Distributions and dividends paid to noncontrolling interests and redeemable noncontrolling interest | (193 | ) | (203 | ) | ||||
Other financing activities, net | 57 | 43 | ||||||
Net cash used in financing activities | (1,739 | ) | (410 | ) | ||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (24 | ) | 2 | |||||
Change in cash, cash equivalents and restricted cash | 104 | 114 | ||||||
Cash, cash equivalents and restricted cash at beginning of period | 525 | 415 | ||||||
Cash, cash equivalents and restricted cash at end of period | $ | 629 | $ | 529 | ||||
NON-CASH TRANSACTIONS | ||||||||
Capital leases, net of trade-ins | $ | 31 | $ | 57 | ||||
Other financing arrangements | $ | — | $ | 102 | ||||
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, 2017 | 482 | $ | 5 | 443 | $ | 4 | 11 | $ | (149 | ) | $ | 13,495 | $ | (9,059 | ) | $ | (1,144 | ) | $ | 2,862 | $ | 6,014 | |||||||||||||||||||
Adoption of New Revenue Standard | — | — | — | — | — | — | — | (13 | ) | — | — | (13 | ) | ||||||||||||||||||||||||||||
Dividends and distributions paid to noncontrolling interests(a) | — | — | — | — | — | — | — | — | — | (169 | ) | (169 | ) | ||||||||||||||||||||||||||||
Net income(b) | — | — | — | — | — | — | — | 843 | — | 117 | 960 | ||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | — | — | (58 | ) | (2 | ) | (60 | ) | |||||||||||||||||||||||||||
Adjustment to redemption value of redeemable noncontrolling interest | — | — | — | — | — | — | (6 | ) | — | — | — | (6 | ) | ||||||||||||||||||||||||||||
Stock compensation expense | — | — | — | — | — | — | 192 | — | — | — | 192 | ||||||||||||||||||||||||||||||
Stock activity under stock compensation plans and other | 85 | 1 | (73 | ) | — | 5 | (94 | ) | 41 | — | — | — | (52 | ) | |||||||||||||||||||||||||||
Balance, September 30, 2018 | 567 | $ | 6 | 370 | $ | 4 | 16 | $ | (243 | ) | $ | 13,722 | $ | (8,229 | ) | $ | (1,202 | ) | $ | 2,808 | $ | 6,866 | |||||||||||||||||||
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, 2016 | 368 | $ | 4 | 544 | $ | 5 | 5 | $ | (61 | ) | $ | 13,210 | $ | (10,524 | ) | $ | (1,414 | ) | $ | 2,911 | $ | 4,131 | |||||||||||||||||||
Dividends and distributions paid to noncontrolling interests(a) | — | — | — | — | — | — | — | — | — | (179 | ) | (179 | ) | ||||||||||||||||||||||||||||
Net income (b) | — | — | — | — | — | — | — | 517 | — | 121 | 638 | ||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | — | — | — | 219 | 13 | 232 | ||||||||||||||||||||||||||||||
Adjustment to redemption value of redeemable noncontrolling interest | — | — | — | — | — | — | 1 | — | — | — | 1 | ||||||||||||||||||||||||||||||
Stock compensation expense | — | — | — | — | — | — | 183 | — | — | — | 183 | ||||||||||||||||||||||||||||||
Stock activity under stock compensation plans and other | 113 | 1 | (101 | ) | (1 | ) | 5 | (78 | ) | 36 | — | — | — | (42 | ) | ||||||||||||||||||||||||||
Balance, September 30, 2017 | 481 | $ | 5 | 443 | $ | 4 | 10 | $ | (139 | ) | $ | 13,430 | $ | (10,007 | ) | $ | (1,195 | ) | $ | 2,866 | $ | 4,964 | |||||||||||||||||||
(a) | The total distribution presented in the unaudited consolidated statements of equity for the nine months ended September 30, 2018 and 2017 excludes $24 million and $24 million, respectively, 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 nine months ended September 30, 2018 and 2017 is $24 million and $24 million different, respectively, than the amounts presented in the unaudited consolidated statements of income 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
FDC 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 processing; prepaid and payroll services; check verification; settlement and guarantee services; and statement printing 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, 2017 and the Company's Form 8-K filed August 13, 2018. Significant accounting policies disclosed therein have not changed, except for those disclosed below in the recently adopted section.
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, 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 income, does not include amortization of payments for customer contracts which is recorded as contra-revenue within “Revenues excluding reimbursable items.” 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 nine months ended September 30, 2018 and 2017:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Amortization of payments for customer contracts | $ | 14 | $ | 20 | $ | 40 | $ | 58 | ||||||||
Amortization related to equity method investments | 8 | 12 | 23 | 35 | ||||||||||||
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 are Class A common stock.
9
Foreign Currency Translation
There has been a steady devaluation of the Argentine peso relative to the United States dollar in recent years, primarily due to inflation. A highly inflationary economy is defined as an economy with a cumulative inflation rate of approximately 100 percent or more over a three-year period. If a country’s economy is classified as highly inflationary, the financial statements of the foreign entity operating in that country must be remeasured to the functional currency of the reporting entity. As of June 30, 2018, the Argentine economy was designated as highly inflationary for accounting purposes. Accordingly, beginning July 1, 2018 the Company began reporting the financial results of its operations in Argentina at the functional currency of the parent, which is the U.S. dollar. Exchange gains and losses from the remeasurement of monetary assets and liabilities for the three months ended September 30, 2018 are reflected in "Other income (expense)" on the unaudited consolidated statements of income rather than “Accumulated other comprehensive loss” on the unaudited consolidated balance sheet. The Company recognized $3 million in foreign currency exchange losses for the three months ended September 30, 2018 from remeasurement of the operations in Argentina to the parent functional currency.
Reclassifications
Certain amounts for prior years have been reclassified to conform with the current year financial statement presentation.
New Accounting Guidance
Recently Adopted Accounting Guidance
Stock-based Compensation
In May 2017, the FASB issued guidance that clarifies when changes to terms or conditions of a stock-based payment award must be accounted for as a modification. Under the new guidance, companies only apply modification accounting guidance if the fair value, vesting conditions or classification of an award changes. The guidance was adopted prospectively to awards modified on or after the adoption date. The Company adopted the new guidance on January 1, 2018. The impact of adoption on the Company's consolidated financial statements is dependent on future changes to share-based compensation awards.
In June 2018, the FASB issued guidance that simplifies the accounting for share-based payments to nonemployees in exchange for goods and services by aligning with the accounting for share-based payments to employees, with certain exceptions. The standard is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption is permitted. The Company adopted the new guidance on July 1, 2018, using the modified retrospective approach, with an immaterial impact to the Company’s consolidated financial statements.
Statement of Cash Flows
In November 2016, the FASB issued guidance that changes the presentation of restricted cash and restricted cash equivalents on the statement of cash flows. Under the new guidance, companies are 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 are no longer reported as cash flow activities on the statement of cash flows. The guidance was applied using a retrospective transition method to each period presented. The Company adopted the new guidance on January 1, 2018 with no material impact to its statement of cash flows. The Company held $28 million, $27 million, $27 million and $30 million in restricted cash within "Other long-term assets" in the unaudited consolidated balance sheets as of September 30, 2018, December 31, 2017, September 30, 2017, and December 31, 2016, respectively.
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. The Company adopted the new guidance on January 1, 2018, using a retrospective approach. The impact on the Company's consolidated financial statements for the three and nine months ended September 30,
10
2018 was an increase in operating expense and a decrease in "Interest expense, net" of $2 million and $5 million, respectively, and $1 million and $4 million for the comparable periods in 2017.
Derivatives and Hedging
In August 2017, the FASB issued guidance to simplify the current application of hedge accounting. This standard is intended to better align a company’s risk management strategies and financial reporting for hedging relationships through changes to both designation and measurement for qualifying hedging relationships and more accurately presenting the economic effects in the financial statements. In addition, the new guidance establishes flexibility in the requirements to qualify and maintain hedge accounting. The Company adopted the new guidance on January 1, 2018 with no material impact to the Company’s consolidated financial statements.
Revenue Recognition
In May 2014, the FASB issued ASC 606 and ASC 340-40 (collectively, the New Revenue Standard) 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 New Revenue Standard, including clarification on accounting for licenses, identifying performance obligations, and principal versus agent consideration (reporting revenue gross vs. net).
The Company adopted the New Revenue Standard using a modified retrospective basis on January 1, 2018 to all contracts that were not completed. The adoption resulted in an increase to accumulated loss of $13 million for the cumulative effect of applying the New Revenue Standard. This impact was principally driven by certain software arrangements being recognized sooner; changes related to costs to obtain customers, including the related amortization period; and the release of deferred revenue associated with Clover terminals that had previously lacked standalone value. Under the modified retrospective basis, the Company did not restate its comparative consolidated financial statements for these effects.
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The following tables present the impact of adopting the New Revenue Standard on the Company’s unaudited consolidated financial statements for the three and nine months ended September 30, 2018:
Three months ended September 30, 2018 | ||||||||||||
(in millions, except per share amounts) | As Reported | Adjustments | Amounts Without Adoption of ASC 606 | |||||||||
Revenues: | ||||||||||||
Revenues excluding reimbursable items | $ | 2,158 | $ | (34 | ) | $ | 2,124 | |||||
Reimbursable items | 211 | 919 | 1,130 | |||||||||
Total revenues | 2,369 | 885 | 3,254 | |||||||||
Expenses: | ||||||||||||
Total expenses excluding reimbursable items | 1,683 | (33 | ) | 1,650 | ||||||||
Reimbursable items | 211 | 919 | 1,130 | |||||||||
Total expenses | 1,894 | 886 | 2,780 | |||||||||
Operating profit | 475 | (1 | ) | 474 | ||||||||
Interest expense, net | (231 | ) | — | (231 | ) | |||||||
Loss on debt extinguishment | (2 | ) | — | (2 | ) | |||||||
Other income | 202 | — | 202 | |||||||||
Income before income taxes and equity earnings in affiliates | 444 | (1 | ) | 443 | ||||||||
Income tax expense | 54 | — | 54 | |||||||||
Equity earnings in affiliates | 58 | — | 58 | |||||||||
Net income | 448 | (1 | ) | 447 | ||||||||
Less: Net income attributable to noncontrolling interests and redeemable noncontrolling interest | 47 | — | 47 | |||||||||
Net income attributable to First Data Corporation | $ | 401 | $ | (1 | ) | $ | 400 | |||||
Net income attributable to First Data Corporation per share: | ||||||||||||
Basic | $ | 0.43 | $ | — | $ | 0.43 | ||||||
Diluted | $ | 0.42 | $ | — | $ | 0.42 | ||||||
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Nine months ended September 30, 2018 | ||||||||||||
(in millions, except per share amounts) | As Reported | Adjustments | Amounts Without Adoption of ASC 606 | |||||||||
Revenues: | ||||||||||||
Revenues excluding reimbursable items | $ | 6,486 | $ | (119 | ) | $ | 6,367 | |||||
Reimbursable items | 613 | 2,640 | 3,253 | |||||||||
Total revenues | 7,099 | 2,521 | 9,620 | |||||||||
Expenses: | ||||||||||||
Total expenses excluding reimbursable items | 5,125 | (94 | ) | 5,031 | ||||||||
Reimbursable items | 613 | 2,640 | 3,253 | |||||||||
Total expenses | 5,738 | 2,546 | 8,284 | |||||||||
Operating profit | 1,361 | (25 | ) | 1,336 | ||||||||
Interest expense, net | (698 | ) | — | (698 | ) | |||||||
Loss on debt extinguishment | (3 | ) | — | (3 | ) | |||||||
Other income | 201 | — | 201 | |||||||||
Income before income taxes and equity earnings in affiliates | 861 | (25 | ) | 836 | ||||||||
Income tax expense | 44 | (6 | ) | 38 | ||||||||
Equity earnings in affiliates | 167 | — | 167 | |||||||||
Net income | 984 | (19 | ) | 965 | ||||||||
Less: Net income attributable to noncontrolling interests and redeemable noncontrolling interest | 141 | — | 141 | |||||||||
Net income attributable to First Data Corporation | $ | 843 | $ | (19 | ) | $ | 824 | |||||
Net income attributable to First Data Corporation per share: | ||||||||||||
Basic | $ | 0.91 | $ | (0.02 | ) | $ | 0.89 | |||||
Diluted | $ | 0.88 | $ | (0.02 | ) | $ | 0.86 | |||||
The adoption of the New Revenue Standard had an immaterial impact on the Company’s unaudited consolidated balance sheet and unaudited consolidated statement of cash flows as of and for the three and nine months ended September 30, 2018. See note 3 "Revenue Recognition" for more information.
Recently Issued Accounting Guidance
Leases
In February 2016, the FASB issued guidance which requires lessees to recognize 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. The Company will adopt the new standard on January 1, 2019. While the Company continues to assess all of the effects of the adoption of the guidance, the Company does not believe that the adoption of the new standard will have a material impact on its consolidated financial statements.
Credit Losses
In June 2016, the FASB issued guidance that will change the accounting for credit loss 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.
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Internal-Use Software
In August 2018, the FASB issued guidance to align the requirements for capitalizing certain implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The guidance provides flexibility in adoption, allowing for either retrospective adjustment or prospective adjustment for all implementation costs incurred after the date of adoption. The Company is currently reviewing the new guidance to assess the impact to the consolidated financial statements.
Fair Value Measurements
In August 2018, the FASB issued guidance that modified the disclosures on fair value measurements by removing the requirement to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and the policy for timing of such transfers. The new guidance also expands disclosure requirements for Level 3 fair value measurements, primarily focused on changes in unrealized gains and losses included in other comprehensive income. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is in the process of evaluating the impact of the guidance on its consolidated financial statements.
SEC Disclosure Requirements
In August 2018, the SEC issued a final rule that amends certain disclosure requirements that were duplicative, outdated or superseded. In addition, the final rule expanded the financial reporting requirements for changes in stockholders’ equity for interim reporting periods. The Company will adopt this new rule beginning with its financing reporting for the quarter ended March 31, 2019. The Company is currently evaluating the impact of the final rule on its consolidated financial statements.
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Note 2: Borrowings
(in millions) | As of September 30, 2018 | As of December 31, 2017 | ||||||
Short-term borrowings: | ||||||||
Foreign lines of credit and other arrangements | $ | 76 | $ | 205 | ||||
Senior secured revolving credit facility due 2020 at LIBOR plus 3.50% or a base rate plus 2.50% | — | 272 | ||||||
Receivable securitized loan at LIBOR plus 1.15% 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% | 124 | 600 | ||||||
Unamortized deferred financing costs(a) | (3 | ) | (3 | ) | ||||
Total short-term borrowings | 197 | 1,074 | ||||||
Current portion of long-term borrowings: | ||||||||
Senior secured term loan facility due 2020 at LIBOR plus 1.75% or a base rate plus 0.75% | 500 | 78 | ||||||
Other arrangements and capital lease obligations | 109 | 119 | ||||||
Total current portion of long-term borrowings(b) | 609 | 197 | ||||||
Total short-term and current portion of long-term borrowings | 806 | 1,271 | ||||||
Long-term borrowings: | ||||||||
Senior secured term loan facility due 2024 at LIBOR plus 2.0% or a base rate plus 1.0% | 3,892 | 3,892 | ||||||
Senior secured term loan facility due 2022 at LIBOR plus 2.0% or a base rate plus 1.0% | 3,293 | 3,758 | ||||||
Senior secured term loan facility due 2020 at LIBOR plus 1.75% or a base rate plus 0.75% | 923 | 1,404 | ||||||
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) | (102 | ) | (123 | ) | ||||
Other arrangements and capital lease obligations | 233 | 286 | ||||||
Total long-term borrowings(b) | 16,949 | 17,927 | ||||||
Total borrowings(c) | $ | 17,755 | $ | 19,198 | ||||
(a) | Unamortized deferred financing costs and certain lenders' fees associated with debt transactions were capitalized as discounts and are amortized on a straight-line basis, which approximates the effective interest method, over the remaining term of the respective debt. |
(b) | As of September 30, 2018 and December 31, 2017, the fair value of the Company's long-term borrowings, excluding other arrangements and capital lease obligations, was $17.5 billion and $18.2 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. |
Foreign Lines of Credit and Other Arrangements
As of September 30, 2018 and December 31, 2017, the Company had $368 million and $546 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 September 30, 2018 and December 31, 2017, 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 September 30, 2018 and December 31, 2017, $0 million and $15 million, respectively, were uncommitted. As of September 30, 2018 and December 31, 2017, the weighted average interest rate associated with foreign lines of credit and other arrangements was 2.7% and 2.9%, respectively.
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Senior Secured Revolving Credit Facility
The Company has a $1.25 billion senior secured revolving credit facility maturing on June 2, 2020. Up to $250 million of the senior secured revolving credit facility is available for letters of credit, of which $4 million and $29 million of letters of credit were issued under the facilities as of September 30, 2018 and December 31, 2017, respectively. As of September 30, 2018, $1.25 billion remained available.
Senior Unsecured Revolving Credit Facility
The Company has a $33 million senior unsecured revolving credit facility maturing December 20, 2019, available for letters of credit. As of September 30, 2018 and December 31, 2017, the Company had $31 million and $0 million of outstanding letters of credit with an interest rate of 1.85%.
Receivable Securitization Agreement
The Company has a consolidated 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. As of September 30, 2018, the maximum borrowing capacity, subject to collateral availability, under the agreement is $600 million. The term of the receivables securitization agreement is through July 2021. The receivables held by FDR are recorded within "Accounts receivable, net" in the Company's unaudited consolidated balance sheets.
In July 2018, the Company amended its Receivable Securitization Program (“Securitization”) to extend the maturity from June 2020 to July 2021. In addition, under the amended terms, loans under the Securitization will accrue interest at a rate that is 1.15% higher than either LIBOR, down from LIBOR plus 1.5% under the previous agreement, base rate equal to the highest of (i) the applicable lender's "reference" or "prime" rate, or (ii) the federal funds rate plus 0.50%. The Securitization also includes an unused fee at a rate that ranges from 45 to 90 basis points depending on the level of utilization under securitization.
Note 3: Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to the Company's customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. To achieve this core principle, the Company applies the following five steps:
1. | Identify the contract with a customer |
2. | Identify the performance obligations in the contract |
3. | Determine the transaction price |
4. | Allocate the transaction price to the performance obligations in the contract |
5. | Recognize revenue when or as the entity satisfies a performance obligation |
Revenue is recognized net of taxes collected from customers, which are subsequently remitted to governmental authorities. The Company has elected to present shipping and handling costs associated with its products as a cost of fulfilling the Company's promise to transfer its products and services.
Nature of Products and Services
Transaction and Processing Services
The vast majority of the Company’s revenues are comprised of: 1) fees calculated based on a percentage of the monetary value of transactions processed; 2) fees calculated based on number of transactions processed; 3) fees calculated based on number of accounts on file during a period; or 4) some combination thereof that are associated with transaction and processing services.
The Company typically contracts with financial institutions, merchants, or affiliates of those parties. Contracts stipulate the types of processing services and articulate how fees will be incurred and calculated.
The Company's performance obligations are to stand ready to provide holistic electronic payment processing services consisting of a series of distinct elements that are substantially the same and have the same pattern of transfer over time. The Company’s
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promise to its customers is to perform an unknown or unspecified quantity of tasks and the consideration received is contingent upon the customers’ use (i.e., number of payment transactions processed, number of cards on file, etc.); as such, the total transaction price is variable. The Company allocates the variable fees charged to the day in which it has the contractual right to bill under the contract.
Revenue is comprised of fees charged to the Company's customers, net of interchange fees and assessments charged by the credit card associations and debit networks, which are pass-through charges collected on behalf of the card issuers and payment networks. Interchange fees and assessments charged by credit card and debit networks to the Company’s consolidated subsidiaries were as follows for the three and nine months ended September 30, 2018 and 2017.
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Interchange fees and assessments | $ | 7,113 | $ | 6,598 | $ | 20,753 | $ | 19,229 | ||||||||
Debit network fees(a) | 919 | 820 | 2,640 | 2,384 | ||||||||||||
(a) Prior to the adoption of the New Revenue Standard, debit network fees were reported on a gross basis in revenues and expenses.
Hardware Revenues
The Company may sell or lease hardware (POS devices) and other peripherals as part of its contract with customers. Hardware typically consists of terminals or Clover devices. The Company does not manufacture hardware, but purchases hardware from third-party vendors and holds the hardware in inventory until purchased by a customer. The Company accounts for sales of hardware as a separate performance obligation and recognizes the revenue at its standalone selling price when the customer obtains control of the hardware.
Professional Services Revenues
The Company’s professional services generally consist of professional services sold as part of a new or existing agreement or sold as a separate service. The Company’s professional services may or may not be considered distinct based on the nature of the services being provided. Professional services are recognized over time as control is transferred to the customer, either as the professional services are performed or as the services from a combined performance obligation are transferred to the customer (over the term of the related transaction and processing agreement).
Other
Other revenues principally include software licensing (fixed and usage based) and maintenance. The Company's software licensing and maintenance are considered distinct and are generally recognized at their standalone selling prices when the software code is delivered to the client and over the maintenance period, respectively.
Contracts with Multiple Performance Obligations
The Company’s contracts with its customers can consist of multiple performance obligations, for example in the case of hardware sold with transaction and processing services. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The Company determines the standalone selling prices based on its overall pricing objectives, taking into consideration market conditions and other factors, including the customer class.
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Disaggregation of Revenue
The following tables present revenues disaggregated by primary geographical regions and product types for the three and nine months ended September 30, 2018:
Three months ended September 30, 2018 | ||||||||||||||||
(in millions) | Global Business Solutions | Global Financial Solutions | Network & Security Solutions | Total | ||||||||||||
North America | $ | 1,094 | $ | 440 | $ | 355 | $ | 1,889 | ||||||||
EMEA | 173 | 116 | 3 | 292 | ||||||||||||
LATAM | 76 | 33 | — | 109 | ||||||||||||
APAC | 49 | 28 | 2 | 79 | ||||||||||||
Total Revenue(a)(b) | $ | 1,392 | $ | 617 | $ | 360 | $ | 2,369 | ||||||||
Nine months ended September 30, 2018 | ||||||||||||||||
(in millions) | Global Business Solutions | Global Financial Solutions | Network & Security Solutions | Total | ||||||||||||
North America | $ | 3,288 | $ | 1,295 | $ | 1,065 | $ | 5,648 | ||||||||
EMEA | 507 | 349 | 10 | 866 | ||||||||||||
LATAM | 247 | 101 | 1 | 349 | ||||||||||||
APAC | 147 | 84 | 5 | 236 | ||||||||||||
Total Revenue(a)(b) | $ | 4,189 | $ | 1,829 | $ | 1,081 | $ | 7,099 | ||||||||
Three months ended September 30, 2018 | Nine months ended September 30, 2018 | |||||||
(in millions) | Total | Total | ||||||
Transaction and processing services | $ | 2,106 | $ | 6,277 | ||||
Hardware, Professional Services, and Other | 263 | 822 | ||||||
Total Revenue(a) | $ | 2,369 | $ | 7,099 | ||||
(b) Global Business Solutions includes non wholly-owned entities and Global Financial Solutions includes reimbursable items, which includes postage and customized orders.
Contract Balances
Accounts Receivable and Leasing Receivables
Accounts receivable balances are stated net of allowance for doubtful accounts. The Company records allowances for doubtful accounts when it is probable that the accounts receivable balance will not be collected. Long-term accounts receivable balances are included in “Other long-term assets” in the unaudited consolidated balance sheets.
The Company has receivables associated with its POS terminal leasing businesses. Leasing receivables are included in “Accounts receivable” and “Other long-term assets” in the unaudited consolidated balance sheets. The Company recognizes interest income on its leasing receivables using the effective interest method. For direct financing leases, the interest rate used incorporates initial direct costs included in the net investment in the lease. For sales type leases, initial direct costs are expensed as incurred.
As of September 30, 2018 and December 31, 2017, long-term accounts receivable, net of allowance for doubtful accounts, included within “Other long-term assets” in the unaudited consolidated balance sheets was $250 million and $272 million, respectively.
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Contract Liabilities
The Company records deferred revenue when it receives payments or invoices in advance of delivery of products or the performance of services. A significant portion of this balance relates to service contracts where the Company received payments from customers for upfront conversions/implementation type activities which do not transfer a service to the customer but rather are used in fulfilling the related performance obligations that transfer over time. The advance consideration received from customers is deferred over the contract term or a longer period if it provides the customer with a material right.
The following table presents the changes in deferred revenue for the nine months ended September 30, 2018:
(in millions) | Nine months ended September 30, 2018 | |||
Balance, beginning of the period | $ | 344 | ||
New Revenue Standard adjustments | (39 | ) | ||
Deferral of revenue | 169 | |||
Recognition of unearned revenue | (159 | ) | ||
Other (primarily foreign currency translation) | (11 | ) | ||
Balance, end of period | $ | 304 | ||
Remaining Performance Obligation
Over 95% of the Company’s performance obligations relate to transaction and processing services or hardware that are subject to a practical expedient (e.g., variable consideration) or point in time recognition, respectively. The Company's contracts with customers typically do not specify fixed revenues to be realized. Certain customer contracts contain fixed minimums and non-refundable up-front fees (fixed price guarantees). However, the amounts which are considered fixed price guarantees are not material to total consolidated revenue. The Company's contracts with Small Medium Business (SMB) merchants within the Global Business Solutions segment typically have a contractual duration of less than one year. Larger contracts in the Global Business Solutions, Global Financial Solutions, and Network & Security Solutions segments typically have contractual terms ranging from one to fifteen years with variability being resolved on a daily basis.
Costs to Obtain and Fulfill a Contract
The Company capitalizes incremental costs to obtain new contracts and contract renewals and amortizes these costs on a straight-line basis as a reduction of revenue over the benefit period, which is generally the contract term, unless a commensurate payment is not expected at renewal. As of September 30, 2018 and December 31, 2017, the Company had $155 million and $145 million, respectively, of capitalized contract costs included within "Other intangibles, net" on the unaudited consolidated balance sheets. For the three and nine months ended September 30, 2018, the Company had $14 million and $40 million, respectively, of contra-revenue related to these costs and $20 million and $58 million for the comparable periods in 2017.
The Company expenses sales commissions as incurred for the Company's sales commission plans that are paid on recurring monthly revenues, portfolios of existing customers, or have a substantive stay requirement prior to payment.
The Company capitalizes conversion related costs associated with enabling customers to receive its processing services. These costs are amortized straight-line over the expected benefit period of seven years based on the related services being provided, and are reflected within “Depreciation and amortization” in the Company's unaudited consolidated statement of income. As of September 30, 2018 and December 31, 2017, the Company had $173 million and $160 million, respectively, of capitalized conversion costs, net of amortization, included within "Other intangibles, net" on the unaudited consolidated balance sheets. For the three and nine months ended September 30, 2018, the Company had $10 million and $30 million, respectively, of amortization expense related to these costs and $7 million and $21 million for the comparable periods in 2017.
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Note 4: Stock Compensation Plans
The Company provides stock-based compensation awards to its employees. Total stock-based compensation expense recognized in the "Cost of revenues" and “Selling, general, and administrative” line items of the unaudited consolidated statements of income resulting from stock options, non-vested restricted stock awards, and non-vested restricted stock units was as follows for the three and nine months ended September 30, 2018 and 2017:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Cost of revenues | $ | 9 | $ | 19 | $ | 36 | $ | 54 | ||||||||
Selling, general, and administrative | 50 | 43 | 156 | 129 | ||||||||||||
Total stock-based compensation expense | $ | 59 | $ | 62 | $ | 192 | $ | 183 | ||||||||
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 nine months ended September 30, 2018, 11 million restricted stock awards and units were granted at a weighted average price per share of $16.34. For the nine months ended September 30, 2017, 21 million restricted stock awards and units were granted at a weighted average price per share of $16.98.
As of September 30, 2018, there was $29 million and $305 million of total unrecognized compensation expense related to non-vested stock options and restricted stock awards and units, respectively.
The Company paid approximately $28 million and $4 million for the three months ending September 30, 2018 and 2017 and $107 million and $87 million for the nine months ended September 30, 2018 and 2017, respectively; for taxes related to the settlement of vested stock-based awards.
For additional information on the Company’s stock compensation plans, see 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, 2017.
Note 5: Net Income Per Share Attributable to First Data Corporation
Basic net income 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 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 per share by application of the treasury stock method. Under the treasury stock method, an increase in the fair value of the Company’s common stock can result in a greater dilutive effect from potentially dilutive securities. Both Class A and B common stock are included in the net income per share attributable to First Data Corporation calculation because they have the same rights other than voting.
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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 nine months ended September 30, 2018 and 2017:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(in millions, except per share amounts) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Numerator: | ||||||||||||||||
Net income attributable to First Data Corporation | $ | 401 | $ | 296 | $ | 843 | $ | 517 | ||||||||
Denominator: | ||||||||||||||||
Weighted average shares used in computing net income per share, basic | 932 | 918 | 928 | 915 | ||||||||||||
Effect of dilutive securities | 33 | 26 | 28 | 23 | ||||||||||||
Total dilutive securities | 965 | 944 | 956 | 938 | ||||||||||||
Net income attributable to First Data Corporation per share: | ||||||||||||||||
Basic | $ | 0.43 | $ | 0.32 | $ | 0.91 | $ | 0.57 | ||||||||
Diluted | $ | 0.42 | $ | 0.31 | $ | 0.88 | $ | 0.55 | ||||||||
Anti-dilutive shares excluded from diluted net income per share(a) | — | 8 | 6 | 13 | ||||||||||||
(a) | Potentially dilutive securities whose effect would have been anti-dilutive are excluded from the computation of diluted earnings per share for all periods presented. |
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Note 6: Segment Information
For a detailed discussion of the Company’s accounting principles and its reportable segments see 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, 2017 and the Company's Form 8-K filed August 13, 2018.
Prior to January 1, 2018, the Company presented segment revenues net of certain items including revenue-based commission payments to Independent Sales Organizations (ISOs) and sales channels. The Company is no longer deducting ISO commissions from segment revenue as this change enhances the consistency of accounting methodologies among the Company's various distribution channels within the Global Business Solutions segment. This change in segment reporting has been applied retrospectively. Under the retrospective approach, the Company adjusted the prior period results presented in these unaudited consolidated financial statements.
The following tables present the Company’s reportable segment results for the three and nine months ended September 30, 2018 and 2017:
Three months ended September 30, 2018 | ||||||||||||||||||||
(in millions) | Global Business Solutions | Global Financial Solutions | Network & Security Solutions | Corporate | Total | |||||||||||||||
Revenues: | ||||||||||||||||||||
Total revenues | $ | 1,376 | $ | 407 | $ | 366 | $ | — | $ | 2,149 | ||||||||||
Equity earnings in affiliates | 8 | — | 1 | — | 9 | |||||||||||||||
Total segment revenues | $ | 1,384 | $ | 407 | $ | 367 | $ | — | $ | 2,158 | ||||||||||
Depreciation and amortization | $ | 127 | $ | 81 | $ | 30 | $ | 2 | $ | 240 | ||||||||||
Segment EBITDA | 503 | 161 | 195 | (44 | ) | 815 | ||||||||||||||
Three months ended September 30, 2017 | ||||||||||||||||||||
(in millions) | Global Business Solutions | Global Financial Solutions | Network & Security Solutions | Corporate | Total | |||||||||||||||
Revenues: | ||||||||||||||||||||
Total revenues | $ | 1,247 | $ | 416 | $ | 395 | $ | — | $ | 2,058 | ||||||||||
Equity earnings in affiliates | 9 | — | — | — | 9 | |||||||||||||||
Total segment revenues | $ | 1,256 | $ | 416 | $ | 395 | $ | — | $ | 2,067 | ||||||||||
Depreciation and amortization | $ | 122 | $ | 89 | $ | 34 | $ | — | $ | 245 | ||||||||||
Segment EBITDA | 465 | 179 | 184 | (42 | ) | 786 | ||||||||||||||
Nine months ended September 30, 2018 | ||||||||||||||||||||
(in millions) | Global Business Solutions | Global Financial Solutions | Network & Security Solutions | Corporate | Total | |||||||||||||||
Revenues: | ||||||||||||||||||||
Total revenues | $ | 4,125 | $ | 1,221 | $ | 1,099 | $ | — | $ | 6,445 | ||||||||||
Equity earnings in affiliates | 26 | — | 1 | — | 27 | |||||||||||||||
Total segment revenues | $ | 4,151 | $ | 1,221 | $ | 1,100 | $ | — | $ | 6,472 | ||||||||||
Depreciation and amortization | $ | 377 | $ | 257 | $ | 89 | $ | 5 | $ | 728 | ||||||||||
Segment EBITDA | 1,481 | 503 | 563 | (138 | ) | 2,409 | ||||||||||||||
22
Nine months ended September 30, 2017 | ||||||||||||||||||||
(in millions) | Global Business Solutions | Global Financial Solutions | Network & Security Solutions | Corporate | Total | |||||||||||||||
Revenues: | ||||||||||||||||||||
Total revenues | $ | 3,575 | $ | 1,211 | $ | 1,137 | $ | — | $ | 5,923 | ||||||||||
Equity earnings in affiliates | 26 | — | — | — | 26 | |||||||||||||||
Total segment revenues | $ | 3,601 | $ | 1,211 | $ | 1,137 | $ | — | $ | 5,949 | ||||||||||
Depreciation and amortization | $ | 334 | $ | 264 | $ | 95 | $ | 5 | $ | 698 | ||||||||||
Segment EBITDA | 1,330 | 498 | 520 | (128 | ) | 2,220 | ||||||||||||||
The following table presents a reconciliation of reportable segment amounts to the Company’s consolidated balances for the three and nine months ended September 30, 2018 and 2017:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Total segment revenues | $ | 2,158 | $ | 2,067 | $ | 6,472 | $ | 5,949 | ||||||||
Adjustments: | ||||||||||||||||
Non wholly-owned entities(a) | — | 14 | 14 | 49 | ||||||||||||
Reimbursable items(b) | 211 | 995 | 613 | 2,904 | ||||||||||||
Consolidated revenues | $ | 2,369 | $ | 3,076 | $ | 7,099 | $ | 8,902 | ||||||||
Total segment EBITDA | $ | 815 | $ | 786 | $ | 2,409 | $ | 2,220 | ||||||||
Adjustments: | ||||||||||||||||
Non wholly-owned entities(a) | 7 | 9 | 29 | 21 | ||||||||||||
Depreciation and amortization | (248 | ) | (248 | ) | (753 | ) | (713 | ) | ||||||||
Interest expense, net | (231 | ) | (233 | ) | (698 | ) | (702 | ) | ||||||||
Loss on debt extinguishment | (2 | ) | (1 | ) | (3 | ) | (72 | ) | ||||||||
Other items (c) | 173 | (61 | ) | 95 | (120 | ) | ||||||||||
Stock-based compensation | (59 | ) | (62 | ) | (192 | ) | (183 | ) | ||||||||
Income tax expense | (54 | ) | 106 | (44 | ) | 66 | ||||||||||
Net income attributable to First Data Corporation | $ | 401 | $ | 296 | $ | 843 | $ | |||||||||