UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
DELAWARE | 47-0731996 | |
(State of incorporation) | (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
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Class A Common Stock, $0.01 par value per share | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No ý
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x | Accelerated filer o | |
Non-accelerated filer o | 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 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 February 1, 2019 | |
Class A Common Stock, $0.01 par value per share | 568,281,533 | |
Class B Common Stock, $0.01 par value per share | 369,031,763 | |
As of June 30, 2018 (the last business day of the registrant's most recently completed second fiscal quarter), the aggregate market value of the Class A Common Stock held by non-affiliates of the registrant was $10.3 billion (based on the closing price of the registrant's Class A Common Stock on that date as reported on the New York Stock Exchange).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on May 9, 2019 are incorporated by reference in Part III.
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INDEX
PAGE NUMBER | |||
Unless otherwise indicated or the context otherwise requires, financial data in this Form 10-K 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-K and the consolidated financial statements included in this Form 10-K are presented in U.S. Dollars rounded to the nearest million, unless otherwise noted.
Comparability between periods is impacted by the adoption of ASC 606 and ASC 340-40 (collectively, the New Revenue Standard). Amounts for the year ended December 31, 2018 reflect the adoption of the New Revenue Standard. Amounts for 2017 and 2016 were not retrospectively adjusted for the adoption of the New Revenue Standard.
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Forward-Looking Statements
Certain matters we discuss in this Form 10-K 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 discussed throughout this report, 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. Additional factors related to the agreement and plan of merger entered on January 16, 2019 between First Data and Fiserv, Inc. (“Fiserv”) that could cause actual results to differ materially and adversely from our forward-looking statements include (1) the occurrence of any event, change or other circumstances that could give rise to the right of one or both of First Data and Fiserv to terminate the definitive merger agreement between First Data and Fiserv; (2) the outcome of any legal proceedings that may be instituted against First Data, Fiserv or their respective stockholders, shareholders or directors; (3) the ability to obtain regulatory approvals and meet other closing conditions to the merger, including the risk that regulatory approvals required for the merger are not obtained or are obtained subject to conditions that are not anticipated or that are material and adverse to First Data’s or Fiserv’s business; (4) a delay in closing the merger; (5) the ability to obtain approval by First Data stockholders and Fiserv shareholders on the expected terms and schedule; (6) difficulties and delays in integrating the First Data and Fiserv businesses, including with respect to implementing systems to prevent a material security breach of any internal systems or to successfully manage credit and fraud risks in business units; (7) failing to fully realize anticipated cost savings and other anticipated benefits of the merger; (8) business disruptions from the proposed merger that will harm First Data’s or Fiserv’s business, including current plans and operations; (9) potential adverse reactions or changes to business relationships resulting from the announcement or completion of the merger, including as it relates to First Data’s or Fiserv’s ability to successfully renew existing client contracts on favorable terms or at all and obtain new clients; (10) certain restrictions during the pendency of the merger that may impact First Data’s or Fiserv’s ability to pursue certain business opportunities or strategic transactions; (11) the ability of First Data or Fiserv to retain and hire key personnel; (12) uncertainty as to the long-term value of the common stock of Fiserv following the merger; (13) the continued availability of capital and financing following the merger; (14) the business, economic and political conditions in the markets in which First Data and Fiserv operate. 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
ITEM 1. BUSINESS
General
First Data Corporation sits at the center of global electronic commerce. We believe we offer our clients the most complete array of integrated solutions in the industry, covering their needs across next-generation commerce technologies, merchant acquiring, issuing, and network solutions. We serve our clients in over 100 countries, reaching over 6 million business locations and over 3,700 financial institutions. We believe we have the industry’s largest distribution network, to consist of partnerships with over 1,500 distribution partners including many of the world’s leading financial institutions, and our direct sales force. We are the largest merchant acquirer and issuer processor in the world, and operate the third largest independent network services provider in the United States. We enable businesses to accept electronic payments, help financial institutions issue credit, debit and prepaid cards, and route secure transactions between them. In 2018, we processed approximately 100 billion transactions globally, or over 3,000 per second. In our largest market, the United States, we processed approximately $2.3 trillion of payment volume, which represents over 10% of United States gross domestic product (GDP) last year.
We have operations and offices located within the United States (U.S.) (domestic) and outside of the U.S. (international) where sales, customer service and/or administrative personnel are based. Total revenues from domestic and international transactions as a percentage of total revenues and total long lived assets attributable to domestic and international operations as a percentage of total long lived assets, are displayed in the below table.
Year ended December 31, | ||||||||
2018 | 2017 | 2016 | ||||||
Total revenues generated: | ||||||||
Domestic | 79 | % | 85 | % | 85 | % | ||
International | 21 | % | 15 | % | 15 | % | ||
Long-lived assets attributable to operations: | ||||||||
Domestic | 91 | % | 89 | % | 89 | % | ||
International | 9 | % | 11 | % | 11 | % | ||
No country outside the US represents greater than 10% of our total revenues or long-lived assets during any of the years presented in the table. Further financial information relating to our international and domestic revenues and long-lived assets is set forth in note 8 "Segment Information" in our consolidated financial statements in Part II, Item 8 of this Form 10-K.
Our business is characterized by transaction and account related fees, multi-year contracts, and a diverse client base, which allows us to grow alongside our clients. Our multi-year contracts allow us to achieve a high level of recurring revenues with the same clients. While the contracts typically do not specify fixed revenues to be realized thereunder, they do provide a framework for revenues to be generated based on volume of services provided during such contracts' term.
Pending Merger with Fiserv, Inc.
On January 16, 2019, First Data and Fiserv, Inc. (Fiserv), and 300 Holdings, Inc. (Merger Sub), a wholly-owned subsidiary of Fiserv, entered into an agreement and plan of merger (Merger Agreement), pursuant to which we will merge into Merger Sub (the Merger). The terms are subject to the conditions set forth in the Merger Agreement, which states at closing each share of the Company's common stock issued and outstanding will be converted into the right to receive 0.303 (Exchange Ratio) of a share of common stock, par value $0.01 per share, of Fiserv. First Data's equity awards will generally be converted into Fiserv equity awards after giving effect to the Exchange Ratio and appropriate adjustments and be governed by the same terms and conditions as applicable to First Data's corresponding equity awards. Completion of the Merger is subject to customary closing conditions for both parties. We currently anticipate that we will close the merger during the second half of 2019. For additional information see Form 425 filed with the Securities and Exchange Commission dated January 16, 2019 and available through the “Investor Relations” portion of our website at http://investor.firstdata.com.
Products and Services Segments Information
We provide a range of products and solutions to businesses and financial institutions across the value chain of commerce-enabling services and technologies. We deliver our value-added solutions from a suite of proprietary technology products, software, cloud-
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based applications, processing services, security offerings, and customer support programs that we configure to meet our clients' individual needs.
We operate three segments: Global Business Solutions (GBS), Global Financial Solutions (GFS), and Network & Security Solutions (NSS). Our segments are designed to establish lines of businesses that support our global client base and allow us to further globalize our solutions while working seamlessly with our geographic teams across our regions: the United States and Canada (North America); Europe, Middle East, and Africa (EMEA); Latin America (LATAM); and Asia Pacific (APAC) and are supported by a corporate team focused on company-wide issues.
• | Global Business Solutions - GBS provides a wide-range of solutions to merchants. These solutions include retail point-of-sale merchant acquiring and eCommerce services as well as next-generation offerings such as mobile payment services, and our cloud-based Clover point-of-sale operating system, which includes a marketplace for proprietary and third-party business applications. |
• | Global Financial Solutions - GFS provides technology solutions for bank and non-bank issuers. These solutions include general purpose credit, retail private label, commercial card, and loan processing within the United States and international markets, as well as licensed financial software systems, such as our VisionPLUS processing application. GFS also provides financial institutions with a suite of account services including card personalization and embossing, customer communications, professional services, and customer servicing, including call center solutions and back office processing. |
• | Network & Security Solutions - NSS provides a wide range of value-added solutions that we sell to clients in our GBS and GFS segments, smaller financial institutions, and other enterprise clients. These solutions include our EFT network solutions (STAR Network and debit card processing solutions), our Stored Value Network solutions (Money Network and Gift Solutions), and our Security and Fraud solutions (TransArmor and TeleCheck). NSS also supports our other digital strategies, including online and mobile banking, and our business supporting mobile wallets. |
See "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" for a detailed explanation of our operating results. Segment products and services are illustrated below:
The segments’ profit measure is a form of EBITDA (earnings before net interest expense, income taxes, depreciation, and amortization). A discussion of factors potentially affecting our operations is set forth in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K.
We do not have any customer that accounts for 10% or more of total consolidated revenues.
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Global Business Solutions Segment
The following table presents GBS information as a percentage of total segment revenue and segment EBITDA:
Year ended December 31, | |||||||||
2018 | 2017 | 2016 | |||||||
Segment revenue | 64 | % | 61 | % | 60 | % | |||
Segment EBITDA | 61 | % | 59 | % | 60 | % | |||
See note 8 "Segment Information" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for a detail of segment revenue and segment EBITDA results.
Global Business Solutions Operations Our largest segment, GBS, provides businesses of all sizes and types with a wide range of solutions at the point-of-sale (POS), including merchant acquiring, eCommerce, mobile commerce, and other business solutions. We served approximately 3.4 million business locations in the United States and 2.7 million outside the United States. The largest line of business within GBS is merchant acquiring, which facilitates the acceptance of commercial transactions at the POS, whether a retail transaction at a physical business location, a mobile commerce transaction through a mobile or tablet device, or an eCommerce transaction over the internet.
GBS employs a variety of distribution strategies. GBS operates direct sales teams and also distributes its services through partnerships with indirect non-bank sales forces, such as independent sales agents, independent sales organizations (ISOs), independent software vendors (ISVs), value added retailers (VARs), and payment services providers (PSPs) to sell our commerce solutions to Small and Medium Sized Business (SMBs). In addition, GBS leverages the powerful sales capabilities of its numerous bank partners to distribute its products and solutions through various legal structures including joint venture equity alliances, revenue sharing alliances, and referral agreements.
GBS segment revenues are primarily derived from processing credit and debit card transactions for merchants and other business clients and includes fees for providing processing, loyalty and software services, and sales and leases of POS devices. Revenues are generated from a variety of sources, including:
• | Merchant discount fees charged to a merchant, net of credit and debit card interchange and assessment fees charged by the payment networks. The discount fee is typically either a percentage of the purchase amount or an interchange fee plus a fixed monetary amount; |
• | Processing fees charged to merchant acquirers (including our alliance partners) who have outsourced their transaction processing to us; |
• | Sales and leases of POS devices; |
• | Fees for providing reporting and other services; and |
• | Software fees such as security applications and Clover related fees. |
We typically provide these services as part of a broader commerce-enabling solution to our business clients across multiple channels, including:
• | Retail POS - Physical businesses or storefront locations, such as retailers, supermarkets, restaurants, and petroleum stations, with brick and mortar facilities; |
• | Mobile POS - Physical businesses with remote or wireless storefront locations, such as small retailers and service providers that use mobile devices to accept electronic payments; and |
• | Online POS (eCommerce) - Online businesses or website locations, such as retailers, digital content providers, and mobile app developers with Internet-based storefronts that can be accessed through a personal computer or a mobile device. |
Clover Operating System is an open architecture, integrated POS operating system, with a full suite of integrated hardware and software offerings. With Clover, we have designed one of the largest open architecture platforms of commerce-enabling solutions and applications in the world. The family of Clover devices includes the Clover Station, Clover Mini, Clover Go, Clover Flex and Clover Station II; each providing a broad range of next-generation features and software applications designed to help business clients conduct commerce.
Through December 31, 2018, we have shipped over 1 million Clover devices and the current Clover platform processes more than $70 billion in payment volume annually. Within Clover, we also offer a cloud-based Clover App Market for business applications. Our application marketplace is designed specifically to provide merchants with integrated software applications that they can
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download and install quickly and easily on their Clover devices. As of December 31, 2018, the Clover App Market has over 300 active applications. Clover is currently available in seven countries including the United States, the United Kingdom, Ireland, Germany, Austria, Canada, and Argentina; with plans to further scale Clover to more international markets in the near future. Furthermore, we believe Clover improves client retention because it becomes core to our clients' businesses, and positions us as a value-added partner. For example, business owners may use applications in the Clover App Market to manage their employees' work schedules, operate customer loyalty programs, integrate transaction information directly into their accounting software, manage inventory, and provide analytics on their business.
Global Business Solutions Competition GBS competes with merchant acquirers that include Worldpay and Global Payments, in addition to financial institutions that provide acquiring and processing services to businesses on their own, such as Chase Paymentech Solutions, Elavon (a subsidiary of U.S. Bancorp), Total Systems Services, and Barclaycard. In many cases, our alliance and commercial partners compete against each other. Additionally, payment networks such as Visa and MasterCard are increasingly offering products and services that compete with our suite of solutions. Competitors of our next-generation services include PayPal, Braintree (a subsidiary of PayPal), CyberSource (a subsidiary of Visa), Adyen, and Stripe, along with integrated point of sale providers such as Micros, Square, and others.
The primary competitive factors impacting GBS are First Data's brand, global reach, multiple distribution channels, data security, breadth of features and functionality, ease of technological integration, competitive pricing, and servicing capability. Other factors impacting GBS includes consolidation among large businesses and financial institutions, the pace of integrated point of sale solution development, and the creation of new payment methods and related technologies.
Global Business Solutions Seasonality GBS experiences a modest level of seasonality, with the first quarter representing the lowest level of sales and the fourth quarter representing the highest level of sales. Over the past eight quarters, GBS' quarterly revenue as a percentage of GBS' total yearly revenue has ranged between 23% and 26%.
Global Business Solutions Geographic Mix and Revenues GBS generates approximately 78% of its revenues from clients in our North America region, 12% from clients in the EMEA region, 6% from clients in our LATAM region, and 4% from clients in our APAC region. GBS revenues and earnings are impacted by the number of transactions and payment volume, the mix of consumer usage of credit cards, debit cards, and the size of the business.
Global Business Solutions Acquisitions and Dispositions In December 2017, we acquired BluePay Holdings, Inc. (BluePay) for $759 million, net of cash acquired. BluePay is a provider of technology-enabled payment processing for merchants in the U.S. and Canada and was one of our largest distribution partners with a strong focus on software-enabled payments and card-not-present transactions. The transaction is highly complementary to our earlier acquisition of CardConnect and enhanced our suite of innovative partner management tools to improve merchant retention, accelerate our firm-wide ISV initiative and bring immediate capabilities in ERP integrated payment solutions to our customers.
In July 2017, we acquired CardConnect Corp. (CardConnect) for $763 million, net of cash acquired. CardConnect is an innovative provider of payment processing and technology solutions and was one of our largest distribution partners. The transaction enabled us to bring innovative partner management tools to improve merchant retention, accelerate our firm-wide independent software vendor (ISV) initiative and brought immediate capabilities in enterprise resource planning (ERP) integrated payment solutions to our customers.
See note 13 "Acquisitions and Dispositions" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for more details relating to these acquisitions.
Global Financial Solutions Segment
The following table presents GFS information as a percentage of total segment revenue and segment EBITDA:
Year ended December 31, | ||||||||
2018 | 2017 | 2016 | ||||||
Segment revenue | 19 | % | 20 | % | 21 | % | ||
Segment EBITDA | 20 | % | 22 | % | 22 | % | ||
See note 8 "Segment Information" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for a detail of segment revenue and segment EBITDA results.
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Global Financial Solutions Operations GFS provides financial institutions, which include bank and non-bank issuers such as retailers with proprietary card portfolios, with a broad range of technology solutions that enable them to offer financial products and solutions to their customers. GFS serves over 1,300 clients globally and delivers value to clients through a variety of channels, including end-to-end outsourced processing, managed services, and various software delivery models utilizing our proprietary VisionPLUS solution. GFS services include credit card and loan account processing, commercial payments, customer communications, plastics solutions, customer service, and other products to support issuers.
GFS clients include some of the world's largest financial institutions, which we serve in approximately 100 countries. Our largest line of business in GFS is outsourced issuer processing, which helps banks and non-bank issuers provide credit, commercial, and retail card programs to their account holders, as well as loan programs. GFS also provides licensed software solutions for financial processing activities to financial institutions globally. Depending on the market, our solutions are often bundled with related offerings, such as customer communications and personalization of plastic cards, settlement and back office support, outsourced billing, statement printing, and customer service support. As part of these solutions, we also provide professional services, including custom programming and development, to clients.
GFS revenues are primarily derived from outsourced processing services, print, plastics, and VisionPLUS software services provided to financial institutions. GFS' revenues are typically generated on the basis of number of total and active accounts on file, volume of customer communications, volume of plastics issued or license fees.
Outsourced Processing and Licensing provide solutions to financial institutions and other issuers of credit, such as banks, group service providers, retailers, consumer finance companies, and credit unions. These services enable issuers to process transactions on behalf of customers. Depending on the market and our clients' needs, we deliver these solutions through our proprietary outsourced services platforms, software application licenses, or software-as-a-service hosted in the cloud. Services in our proprietary platform include transaction authorization and posting, account maintenance, and settlement. Our VisionPLUS software is used globally as both a processing solution and a licensed software solution that enables clients to process their own transactions, depending on the market. We also enable merchants and financial institutions to offer next generation payment solutions to their clients, such as Apple Pay, Android Pay, and Samsung Pay.
Revenues for outsourced issuer processing services are derived from fees payable under contracts that depend primarily on the number of cardholder accounts on file. More revenue is derived from active accounts (those accounts on file that had a balance or any monetary posting or authorization activity during a specified period) than inactive accounts. Revenues are also derived from licensing fees for our VisionPLUS application, as well as cardholder and data transactions and professional services such as custom programming and development.
Account Support Services along with our outsourced processing and licensing solutions, we provide a variety of supporting services throughout the life cycle of each account. Services include processing a card application, initiating services for the cardholder to enable the cardholder to transact, accumulating the card's transactions into a monthly billing statement, and posting cardholder payments. Other services provided include customized communications to cardholders, plastics personalization and mailing, information verification associated with granting credit, debt collection, statement printing, and customer service on behalf of financial institutions. We also provide programming and customization to enhance and tailor our solutions to clients' needs through professional services.
Global Financial Solutions Competition GFS competes with card issuer processors, such as Total System Services, Worldpay, Fidelity National Information Services, Fiserv, Worldline, and SIX Payment Services, as well as the card issuer processing businesses of the global payment networks such as Visa and Mastercard. In addition, we compete with various software or custom designed solutions that some financial institutions use to perform these services in-house.
The primary competitive factors impacting GFS are system performance and reliability, digital solutions, data security, breadth of features and functionality, disaster recovery capabilities and business continuity preparedness, platform scalability and flexibility, price, and servicing capability. Market events that impact GFS include financial institution consolidation and portfolio transactions between financial institutions.
Global Financial Solutions Seasonality GFS experiences a modest level of seasonality, with the first quarter representing the lowest level of sales and the fourth quarter representing the highest level of sales. Over the past eight quarters, GFS' quarterly revenue as a percentage of GFS' total yearly revenue has ranged between 24% and 26%.
Global Financial Solutions Geographic Mix and Revenues GFS generates 58% of its revenues from clients in our North America region, 27% from clients in our EMEA region, 8% from clients in our LATAM region, and 7% from clients in our APAC region. Globally, revenues are diversified across major financial institutions of various sizes and geographies.
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Global Financial Solutions Acquisitions and Dispositions In September 2018, we divested our card processing business in Central and Southeastern Europe for proceeds of €387 million (the U.S. dollar equivalent is $449 million). The divestiture does not represent a strategic shift that will have a major effect on our operations and financial statements. The total gain on disposition recognized was $174 million.
In August 2018, we divested 100% of our remittance processing business in the U.S. for proceeds of $100 million. The total gain on disposition recognized was $28 million.
In September 2017, we divested all of our businesses in Lithuania, Latvia and Estonia for €73 million (the U.S. dollar equivalent is $85 million). Associated with the transaction, we recognized a $4 million loss on the sale.
See note 13 "Acquisitions and Dispositions" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for more details relating to this disposition.
Network & Security Solutions Segment
The following table presents NSS information as a percentage of total segment revenue and segment EBITDA:
Year ended December 31, | ||||||||
2018 | 2017 | 2016 | ||||||
Segment revenue | 17 | % | 19 | % | 19 | % | ||
Segment EBITDA | 24 | % | 24 | % | 23 | % | ||
See note 8 "Segment Information" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for a detail of segment revenue and segment EBITDA results.
Network & Security Solutions Operations NSS provides a range of network solutions and security, risk and fraud management solutions to business and financial institution clients in our GBS and GFS segments, and independently to financial institutions, businesses, governments, processors and other clients. Our EFT Network Solutions manages U.S. debit card and account processing solutions. Our STAR Network enables clients to encrypt, route, and decrypt PIN debit, PIN-less debit, and ATM transactions, and provide access to demand deposit accounts. Our Stored Value Network Solutions facilitate stored value commerce, such as (1) closed-loop prepaid transactions, which are initiated by various types of prepaid cards issued by enterprises, such as retailers, that issue enterprise-branded cards that can generally be used only at the enterprise issuing the card or account, and (2) open-loop prepaid transactions, which are initiated by various types of prepaid cards issued by a bank and carry a network association brand, such as Visa, MasterCard and STAR, enabling them to be used at multiple merchant locations. NSS also includes our Online and Mobile Banking Solutions, Healthcare Solutions, Security and Fraud, and Government Solutions.
EFT Network Solutions enables our business and financial institution clients to route secure, encrypted data between themselves. Our STAR Network is connected to over 3,000 financial institutions and community banks, approximately 1.4 million POS and ATM locations, and numerous third-party payment processors, ATM processors, and card processors that participate in the network. When a business, a merchant acquirer, or an ATM owner acquires a STAR Network transaction, it sends the transaction data to the network switch, which is operated by us, which in turn routes the encrypted information to the appropriate financial institution for authorization. To be routed through the STAR Network, a transaction must be initiated at an ATM or POS device participating in the STAR Network with a card participating in the STAR Network.
Revenues related to the STAR Network are derived from fees payable under contracts and negotiated rate structures but are driven more by the number of transactions processed than by accounts on file. In a situation in which a debit transaction uses our network and we are the debit card processor for the financial institution as well as the merchant acquirer for the business, we are eligible to receive one or more of the following:
• | a fee from the card issuing financial institution for running the transaction through the STAR Network; |
• | a fee from the card issuer for obtaining the authorization; |
• | a fee from the business for acquiring the transaction, recognized in GBS; and |
• | a network acquirer fee from the business for accessing the STAR Network. |
There are other possible configurations of transactions that result in us receiving multiple fees for a transaction, depending on the role we play.
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Stored Value Network manages prepaid stored-value card issuance and processing services (i.e., gift cards) for retailers and others. The full-service stored-value/gift card program offers transaction processing services, card issuance, and customer service for over 200 national brands and several thousand small and mid-tier merchants. We also provide program management and processing services for association-branded, bank-issued, open loop (a card that can be used at multiple merchants), stored-value, reloadable, and one time prepaid card products. Revenues are generated from a variety of sources including processing fees for transactions processed and fees for card production and shipments.
Our commercial prepaid offerings are primarily sold to businesses and are comprised of:
• | Gift Solutions - Includes ValueLink, Gyft, and Transaction Wireless. |
◦ | ValueLink - Provides card and account issuing, program management, and transaction processing services for a range of prepaid card programs. Our closed-loop prepaid programs include gift, incentive, and rebate cards. We serve over 200 brands globally and several thousand SMBs. Our programs include reloadable and non-reloadable prepaid cards, and may be used with a variety of mobile applications. |
◦ | Gyft - A leading digital platform that enables consumers to buy, send, manage, and redeem virtual closed-loop cards using mobile devices. The Gyft solution, combined with our leadership in prepaid issuing solutions, creates a unique combination to support growth in a rapidly expanding market for virtual cards. |
◦ | Transaction Wireless - A leading digital platform that enables businesses to sell virtual gift cards online, either to consumers through an integration with their eCommerce storefront, or to other businesses through a proprietary business-to-business solution. |
• | Payroll Solutions - Includes Money Network which provides open-loop electronic payroll distribution solutions that reduce or eliminate an employer's expense associated with traditional paper paychecks and helps employees without bank accounts avoid check cashing fees. The solution also provides important employee security as the funds are stored on the account, not as cash that can be lost or stolen. Money Network accounts can be used at any business location that accepts Visa, MasterCard, or STAR branded cards, includes a packet of checks to be used to pay bills and avoid the cost of money orders, and offers a web portal to track account activity. |
Security and Fraud Solutions provides a range of security, risk, and fraud management solutions that help businesses and financial institutions securely run and grow their business by protecting their data, managing risk, and preventing fraud. Our solutions include TransArmor, our encryption, tokenization, and PCI compliance solution for POS data in-transit, Fraud Predictor Plus, our solution to detect fraud at the POS through a machine-learning based predictive model, and TeleCheck, the industry-leading database of check-writers activity. Revenues for our security solutions are earned on a fee per license basis or per transaction.
TeleCheck offers check verification, settlement, and guarantee services using our proprietary database system to assist merchants in deciding whether accepting checks at the POS is a reasonable risk, or, further, to guarantee checks presented to merchants if they are approved. These services include risk management services, which utilize software, information, and analysis to assist the merchant in the decision process and include identity fraud prevention and reduction. Revenues are earned by charging merchant fees for check verification or guarantee services.
Network & Security Solutions Competition NSS competes with networks such as Visa, MasterCard, and Discover for debit network services, and with Fidelity National Information Services for debit network and check verification and guarantee services. We also face competition from regional operators of debit networks. Our portfolio of security and risk management solutions competes with a wide range of providers across multiple disciplines, including Visa, MasterCard, Voltage, Verisk, Equifax, Experian, TransUnion, and Fair Isaac.
The primary competitive factors impacting NSS are system performance and reliability, data security, breadth of features and functionality, platform scalability and flexibility, price, and financial institution consolidation. Other factors impacting NSS include increasingly powerful and affordable technology capacity, improved data management and analytic tools, and emergence of cloud-based delivery models.
Network & Security Solutions Seasonality NSS experiences a modest level of seasonality, with the first quarter representing the lowest level of sales and the fourth quarter representing the highest level of sales. Over the past eight quarters, NSS' quarterly revenue as a percentage of NSS' total yearly revenue has ranged between 23% and 27%.
Network & Security Solutions Geographic Mix and Revenues More than 95% of the NSS business is domestic.
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Network & Security Solutions Acquisitions and Dispositions In October 2017, we formed a digital banking joint venture, named Apiture, combining FDC and Live Oak Bancshares, Inc.'s digital banking platforms, products, and services, delivering innovative technology solutions tailored for financial institutions. Apiture is owned and managed equally between us and Live Oak Bancshares, Inc., as a result, the contributed digital banking business is no longer consolidated into our results after the contribution date.
See note 13 "Acquisitions and Dispositions" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for more details relating to this acquisition and disposition.
Corporate
Corporate operations include corporate-wide governance functions such as our executive management team, tax, treasury, internal audit, corporate strategy, and certain accounting, human resources and legal costs related to supporting the corporate function. Costs incurred by Corporate that are attributable to a segment are allocated to the respective segment.
Global Regions
We currently have operations in 27 countries and serve businesses and financial institutions in over 100 countries around the world as illustrated on the following map:
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We deliver our solutions throughout the world via four regions:
North America
North America (United States and Canada) is our largest region. We are the largest merchant acquirer, issuer processor, and third largest U.S. debit network. The United States is our largest market and accounts for the majority of our activity in the region. In 2018, we processed approximately 84 billion commercial transactions and processed $2.3 trillion of payment volume in the United States, representing over 10% of U.S. GDP.
Europe, Middle East, and Africa (EMEA)
We have operations in 12 countries and serve clients in 65 countries in this region. We are a leading merchant acquirer and issuer processor in EMEA and provide our suite of next-generation commerce-enabling solutions to businesses and financial institutions of all sizes and types.
Latin America (LATAM)
We have operations in 6 countries and serve clients in 32 countries in this region. We are a leading merchant acquirer, issuer processor, and eCommerce processor to businesses and financial institutions of all sizes and types in the region.
Asia Pacific (APAC)
We have operations in 7 countries and serve clients in 19 countries in this region. We are a leading merchant acquirer, issuer processor, and eCommerce processor to businesses and financial institutions of all sizes and types in the region and have begun to introduce other commerce-enabling solutions in selected markets.
Intellectual Property
We own a global portfolio of trademarks, trade names, patents, and other intellectual property that are important to our future success. The First Data trademark and trade name, the STAR trademark and trade name, and the Clover trademark and trade name are intellectual property rights which are individually material to us. These trademarks and trade names are widely recognized and associated with quality and reliable service. The First Data trademark and trade name are associated with quality and reliable electronic commerce and payments solutions. Financial institutions and merchants associate the STAR trademark and trade name with quality and reliable debit network services and processing services. Clover provides quality point-of-sale and software solutions to merchants. Loss of the proprietary use of the First Data, STAR, and Clover trademarks and trade names or a diminution in the perceived quality associated with these names could harm the growth of our businesses.
Employees and Labor
As of December 31, 2018, we had approximately 19,000 employees. The majority of the employees of our subsidiaries outside of the United States are subject to the terms of individual employment agreements. One of our wholly-owned subsidiaries has approximately 1,900 employees in the United Kingdom, a portion of whom are members of the Unite trade union. Employees of our subsidiaries in Vienna, Austria; Frankfurt, Germany; and Nürnberg, Germany are also represented by local work councils. The Vienna workforce and a portion of the Frankfurt workforce are also covered by a union contract. Certain employees of our Korean subsidiary are represented by a Labor-Management council. In Brazil, all employees are unionized and covered by the terms of industry-specific collective agreements. In Argentina, a portion of the employees are unionized and covered by an agreement for the merchants and services industry. Employees in certain other countries are also covered by the terms of industry-specific national collective agreements. None of our employees are otherwise represented by any labor organization in the United States. We believe that our relations with our employees and the labor organizations identified above are in good standing.
Available Information
Our principal executive offices are located at 225 Liberty Street, 29th Floor, New York, NY 10281, telephone (800) 735-3362. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available free of charge to shareholders and other interested parties through the “Investor Relations” portion of our website at http://investor.firstdata.com as soon as reasonably practical after they are filed with the Securities and Exchange Commission (SEC). Information contained on, or that can be accessed through, our website is not incorporated by reference into this document, and you should not consider information on our website to be part of this document. The SEC maintains a website, www.sec.gov, which contains reports and other information filed electronically with the SEC by us. Various corporate governance documents,
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including our Audit Committee Charter, Governance, Compensation and Nominations Committee Charter, and Code of Ethics for Senior Financial Officers are available without charge through the “About Us” “Investor Relations” “Corporate Governance” portion of our investor relations website.
Government Regulations
Various aspects of our service areas are subject to U.S. federal, state, and local regulation, as well as regulation outside the United States. Failure to comply with regulations may result in the suspension or revocation of licenses or registrations, the limitation, suspension or termination of service, and/or the imposition of civil and criminal penalties, including fines. Certain of our services also are subject to rules promulgated by various payment networks and banking authorities as more fully described below.
The Dodd-Frank Act In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) was signed into law in the United States. The Dodd-Frank Act has resulted in significant structural and other changes to the regulation of the financial services industry. Among other things, Title X of the Dodd-Frank Act established a new, independent regulatory agency known as the Consumer Financial Protection Bureau (CFPB) to regulate consumer financial products and services (including some offered by our clients). The CFPB may also have authority over us as a provider of services to regulated financial institutions in connection with consumer financial products. The CFPB released rules amending federal Regulation E and Regulation Z. The rules clarify the regulatory prepaid landscape for consumer access to disclosures, fees and statements, error resolution, limited liability and overdrafts. The rules have an impact to our subsidiary Money Network Financial LLC (Money Network) for disclosure, fees and error resolution processing. Separately, under the Dodd-Frank Act, debit interchange transaction fees that a card issuer receives and are established by a payment card network for an electronic debit transaction are now regulated by the Board of Governors of the Federal Reserve System (Federal Reserve Board), and must be “reasonable and proportional” to the cost incurred by the card issuer in authorizing, clearing, and settling the transaction. Effective October 1, 2011, the Federal Reserve Board capped debit interchange rates for card issuers operating in the United States with assets of $10 billion or more. In addition, the new regulations contain non-exclusivity provisions that ban debit payment card networks from prohibiting an issuer from contracting with any other payment card network that may process an electronic debit transaction involving an issuer’s debit cards and prohibit card issuers and payment networks from inhibiting the ability of merchants to direct the routing of debit card transactions over any network that can process the transaction. Beginning April 1, 2012, all debit card issuers in the United States were required to participate in at least two unaffiliated debit payment card networks. On April 1, 2013, the ban on network exclusivity arrangements became effective for prepaid card and healthcare debit card issuers, with certain exceptions for prepaid cards issued before that date.
Effective July 22, 2010, merchants were allowed to set minimum dollar amounts (not to exceed $10) for the acceptance of a credit card (while federal governmental entities and institutions of higher education may set maximum amounts for the acceptance of credit cards). They were also allowed to provide discounts or incentives to entice consumers to pay with an alternative payment method, such as cash, checks or debit cards. In addition, the Dodd-Frank Act created a new entity, the Financial Stability Oversight Council, and authorized it to require that a nonbank financial company that is deemed to pose a systemic risk to the U.S. financial system become subject to consolidated, prudential supervision by the Federal Reserve Board. At this point it is unclear whether we would be subject to additional systemic risk related oversight.
Association and Network Rules We are subject to rules of MasterCard, Visa, INTERAC, PULSE, and other payment networks. In order to provide processing services, a number of our subsidiaries are registered with Visa and/or MasterCard as service providers for member institutions. A number of subsidiaries outside the U.S. are direct members or associate members of Visa and MasterCard for purposes of conducting merchant acquiring. Various subsidiaries of ours are also processor level members of numerous debit and electronic benefits transaction networks or are otherwise subject to various network rules in connection with processing services and other services we provide. As such, we are subject to applicable card association, network, and national scheme rules that could subject us to fines or penalties. We are also subject to network operating rules promulgated by the National Automated Clearing House Association relating to payment transactions processed by us using the Automated Clearing House Network and to various state and federal laws regarding such operations, including laws pertaining to electronic benefits transaction.
Banking Regulations Because a number of our subsidiary businesses provide data processing services for financial institutions, we are subject to examination by the Federal Financial Institutions Examination Council (FFIEC), which examines large data processors in order to identify and mitigate risks associated with significant service providers.
Under the Payment Services Directive (2007/64/EC) in the European Union (PSD), a number of our subsidiaries in GBS hold either payment institution licenses or electronic money licenses in the European Union member states in which such subsidiaries do business. As payment institutions or electronic money institutions, we are subject to regulation and oversight in the applicable European Union member state, which includes (amongst other obligations) a requirement to maintain specified regulatory capital.
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The PSD was amended by a revised Payment Services Directive (2015/2366/EC), known as PSD2 which was required to be transposed into national law by January 2018.
FDR Limited is authorized and regulated in the United Kingdom by the Financial Conduct Authority, one of the two principal financial markets regulators in the United Kingdom. FDR Limited is authorized by the Financial Conduct Authority to arrange and advise on certain insurance contracts for the purpose of arranging insurance taken out by its issuer clients' cardholders. FDR Limited also has obtained permission from the Financial Conduct Authority in respect of certain consumer credit activities related to its issuer services and merchant terminal leasing businesses. As a firm authorized by the Financial Conduct Authority, FDR Limited is required to comply with certain prudential, conduct of business and reporting requirements.
Our subsidiary in Germany, First Data GmbH, is certified and regulated as a processor for domestic German debit card transactions by the Deutsche Kreditwirtschaft (DK), the German Banking Industry Committee. Failure to comply with the technical requirements set forth by the DK may result in suspension or termination of services.
First Data Trust Company, LLC (FDTC) engages in trust activities previously conducted by the trust department of a former banking subsidiary of ours and is subject to regulation, examination, and oversight by the Division of Banking of the Colorado Department of Regulatory Agencies. Since FDTC is not a “bank” under the Bank Holding Company Act of 1956, as amended (BHCA), our affiliation with FDTC does not cause us to be regulated as a bank holding company or financial holding company under the BHCA.
Further, several subsidiaries provide services such as factoring or settlement that make them subject to regulation by local banking agencies, including the National Bank of Poland, the Reserve Bank of Australia, and the German Federal Financial Supervision Agency.
Privacy and Information Security Regulations We provide services that may be subject to various state, federal, and foreign privacy laws and regulations, including, among others, the Gramm-Leach-Bliley Act, the Health Insurance Portability and Accountability Act, the European Union General Data Protection Regulation, the Australian Privacy Act, the Personal Information Protection and Electronic Documents Act in Canada, the Personal Data (Privacy) Ordinance in Hong Kong, the Malaysian Data Protection Act 2010, the Singapore Data Protection Act 2012, as well as the new California Consumer Privacy Act effective in January 2020 and the Brazilian General Data Protection Law effective in February 2020. These laws and their implementing regulations govern certain collection, processing, storage, use, and disclosure of personal information, can require notice to entities or individuals of privacy incidents, and provide individuals with certain rights relating to the use and disclosure of protected information. These laws also impose requirements for the safeguarding and proper destruction of personal information through the issuance of data security standards or guidelines. Certain federal and state laws impose similar privacy obligations and, in certain circumstances, obligations to notify affected individuals, state officers, the media, and consumer reporting agencies, as well as businesses and governmental agencies that own the information, of security breaches affecting personal information. In addition, there are state laws restricting the ability to collect and utilize certain types of information such as Social Security and driver’s license numbers. In July 2016, the European Parliament adopted additional European Union-wide legislation regarding cyber security in the form of the Network and Information Security Directive (NIS Directive EU 2016/1148). The NIS Directive was required to be transposed into national law by May 2018. The General Data Protection Regulation took effect throughout the European Union on May 25, 2018 and creates a range of new compliance obligations and increases financial penalties for non-compliance and extends the scope of the European Union data protection law to all companies processing data of European Union residents, regardless of the company’s location.
Credit Reporting and Debt Collections Regulations TeleCheck is subject to the Federal Fair Credit Reporting Act and various similar state laws based on TeleCheck’s maintenance of a database containing the check-writing histories of consumers and the use of that information in connection with its check verification and guarantee services.
The collection business within TRS Recovery Services, Inc. (TRS) is subject to the Federal Fair Debt Collection Practices Act and various similar state laws. TRS has licenses in a number of states in order to engage in collection in those states. In the United Kingdom, FDR Limited has a license under the Consumer Credit Act of 1974 (CCA) to enable it to undertake, among other things, credit administration and debt collections activities on behalf of its card issuing clients through calls and correspondence with the cardholders. FDR Limited is also licensed under the CCA to carry on the activity of a consumer hire business for the purpose of leasing point of sale devices to merchants.
TeleCheck and TRS are subject to regulation, supervision, and examination from the CFPB. Further regulations may be imposed in the future as state governments and federal agencies identify and consider supplementary consumer financial protection, including laws regulating activities with respect to current or emerging technology such as automated dialers or pre-recorded messaging or calls to cellular phones, which could impair the collection by TRS of returned checks and those purchased under TeleCheck’s
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guarantee services. Moreover, reducing or eliminating access to and use of information on drivers licenses, requiring blocking of access to credit reports or scores, mandating score or scoring methodology disclosure and proscribing the maintenance or use of consumer databases could reduce the effectiveness of TeleCheck’s risk management tools or otherwise increase its costs of doing business.
In addition, several of our subsidiaries are subject to comparable local laws regarding collection activities and obtaining credit reports.
Unfair Trade Practice Regulations We and our clients are subject to various federal, state, and international laws prohibiting unfair or deceptive trade practices, such as Section 5 of the Federal Trade Commission Act. Various regulatory enforcement agencies, including the Federal Trade Commission (FTC) and state attorneys general, have authority to take action against parties that engage in unfair or deceptive trade practices or violate other laws, rules, and regulations and to the extent we are processing payments for a client that may be in violation of laws, rules, and regulations, we may be subject to enforcement actions and incur losses and liabilities that may impact our business. For example, TeleCheck and TRS are subject to a consent decree with the FTC which, among other items, addresses the timeliness of certain actions that they take.
Anti-Money Laundering, Anti-Bribery, Sanctions, and Counter-Terrorist Regulations We are subject to anti-money laundering laws and regulations, including the Bank Secrecy Act, as amended by the USA PATRIOT Act of 2001 (collectively, BSA). Among other things, the BSA requires money services businesses (such as money transmitters, issuers of money orders and official checks, and providers of prepaid access) to develop and implement risk-based anti-money laundering programs, report large cash transactions and suspicious activity, and to maintain transaction records. Money Network provides prepaid access for various open loop prepaid programs for which it is the program manager and therefore must meet the requirements of the Financial Crimes Enforcement Network (FinCEN), the agency that enforces the BSA. As of May 2018, we are required to comply with FinCEN's rules requiring the collection and verification of beneficial owners holding equal to or greater than 25% equity interest. In the European Union, our GBS businesses are subject to various laws implementing European AML legislation. The Fifth EU Anti-Money Laundering Directive (EU) 2018/843 which entered into force in July 2018, updates current EU AML legislation and is required to be transposed into national law by January 2020.
We are also subject to anti-corruption laws and regulations, including the United States Foreign Corrupt Practices Act (FCPA) and other laws, that prohibit the making or offering of improper payments to foreign government officials and political figures and includes anti-bribery provisions enforced by the Department of Justice and accounting provisions enforced by the Securities and Exchange Commission (SEC). The FCPA has a broad reach and requires maintenance of appropriate records and adequate internal controls to prevent and detect possible FCPA violations. Many other jurisdictions where we conduct business also have similar anticorruption laws and regulations. We have policies, procedures, systems, and controls designed to identify and address potentially impermissible transactions under such laws and regulations.
We are also subject to certain economic and trade sanctions programs that are administered by the Treasury Department’s Office of Foreign Assets Control (OFAC), which prohibit or restrict transactions to or from or dealings with specified countries, their governments, and in certain circumstances, their nationals, and with individuals and entities that are specially-designated nationals of those countries, narcotics traffickers, and terrorists or terrorist organizations. Other group entities may be subject to additional local sanctions requirements in other relevant jurisdictions.
Similar anti-money laundering and counter terrorist financing and proceeds of crime laws apply to movements of currency and payments through electronic transactions and to dealings with persons specified in lists maintained by the country equivalents to OFAC lists in several other countries and require specific data retention obligations to be observed by intermediaries in the payment process. Our businesses in those jurisdictions are subject to those data retention obligations.
Money Transmission and Payment Instrument Licensing and Regulations We are subject to various U.S. federal, state, and foreign laws and regulations governing money transmission and the issuance and sale of payment instruments, including some of our prepaid products.
In the United States, most states license money transmitters and issuers of payment instruments. Many states exercise authority over the operations of our services related to money transmission and payment instruments and, as part of this authority, subject us to periodic examinations. Many states require, among other things, that proceeds from money transmission activity and payment instrument sales be invested in high-quality marketable securities before the settlement of the transactions. Such licensing laws also may cover matters such as regulatory approval of consumer forms, consumer disclosures and the filing of periodic reports by the licensee, and require the licensee to demonstrate and maintain levels of net worth. Many states also require money transmitters, issuers of payment instruments, and their agents to comply with federal and/or state anti-money laundering laws and regulations.
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Escheatment Regulations We are subject to unclaimed or abandoned property (escheat) laws both in the United States and abroad that require us to turn over to certain government authorities the property of others held by us that has been unclaimed for a specified period of time such as, in the Integrated Payment Systems (IPS) business, payment instruments that have not been presented for payment or, in GBS, account balances that cannot be returned to a merchant following discontinuation of its relationship with us. A number of our subsidiaries hold property subject to escheat laws and we have an ongoing program to comply with those laws. We are subject to audit by individual U.S. states with regard to our escheatment practices.
Telephone Consumer Protection Act We are subject to the Federal Telephone Consumer Protection Act and various state laws to the extent we place telephone calls and short message service (SMS) messages to clients and consumers. The Telephone Consumer Protection Act regulates certain telephone calls and SMS messages placed using automatic telephone dialing systems or artificial or prerecorded voices. A number of our international subsidiaries are subject to equivalent laws in their jurisdictions.
Indirect Regulatory Requirements A number of our clients are financial institutions that are directly subject to various regulations and compliance obligations issued by the CFPB, the Office of the Comptroller of the Currency and other agencies responsible for regulating financial institutions. While these regulatory requirements and compliance obligations do not apply directly to us, many of these requirements materially affect the services we provide to our clients and us overall. To remain competitive, we expend significant resources to assist our clients in meeting their various compliance obligations, including the cost of updating our systems and services as necessary to allow our clients to comply with applicable laws and regulations, and the cost of dedicating sufficient resources to assist our clients in meeting their new and enhanced oversight and audit requirements established by the CFPB, the Office of the Comptroller of the Currency and others. The banking agencies, including the Office of the Comptroller of the Currency, also have imposed requirements on regulated financial institutions to manage their third-party service providers. Among other things, these requirements include performing appropriate due diligence when selecting third-party service providers; evaluating the risk management, information security, and information management systems of third-party service providers; imposing contractual protections in agreements with third-party service providers (such as performance measures, audit and remediation rights, indemnification, compliance requirements, confidentiality and information security obligations, insurance requirements, and limits on liability); and conducting ongoing monitoring of the performance of third-party service providers. Accommodating these requirements applicable to our clients imposes additional costs and risks in connection with our financial institution relationships. We expect to expend significant resources on an ongoing basis in an effort to assist our clients in meeting their legal requirements.
Other Stored-value services we offer to issuers in the United States and internationally are subject to various federal, state, and foreign laws and regulations, which may include laws and regulations related to consumer and data protection, licensing, escheat, anti-money laundering, banking, trade practices and competition, and wage and employment. These laws and regulations are evolving, unclear, and sometimes inconsistent and subject to judicial and regulatory challenge and interpretation, and therefore the extent to which these laws and rules have application to, and their impact on, us, financial institutions, merchants or others is in flux. At this time we are unable to determine the impact that the clarification of these laws and their future interpretations, as well as new laws, may have on us, financial institutions, merchants or others in a number of jurisdictions. These services may also be subject to the rules and regulations of the various international, domestic and regional schemes, networks, and associations in which we and the card issuers participate.
In addition, the Housing Assistance Tax Act of 2008 included an amendment to the Internal Revenue Code that requires information returns to be made for each calendar year by merchant acquiring entities and third-party settlement organizations with respect to payments made in settlement of payment card transactions and third-party payment network transactions occurring in that calendar year. Reportable transactions are also subject to backup withholding requirements. We could be liable for penalties if we are not in compliance with these rules.
In December 2017, the United States enacted the Tax Cuts and Jobs Act of 2017. The new tax laws decrease the maximum corporate tax rate from 35% to 21% and provide more favorable tax treatment of distribution of foreign earnings to the U.S. The tax law also provides new limitations with respect to the amount of interest that may be deducted in the U.S. We expect the net result of the new tax law to be favorable as the benefit we receive from the reduction in the corporate tax rate is greater than the negative impact of the interest deductibility limit and other aspects of the new law. We also expect that over time the amount of interest that is not deductible will decrease due to our efforts to reduce debt as well as increase our interest deduction limitation.
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ITEM 1A. | RISK FACTORS |
The following are certain risks that could affect our business and our results of operations. The risks identified below are not all encompassing but should be considered in establishing an opinion of our future operations.
Risks Related to the Pending Merger
The pending merger with a subsidiary of Fiserv, Inc. is contingent upon the satisfaction of a number of conditions, may require significant time and attention of our management, and may have a material adverse effect on us if it is not completed.
On January 16, 2019, First Data and Fiserv, Inc. entered into an agreement and plan of merger, under which FDC will merge with a subsidiary of Fiserv. The merger agreement generally requires us to operate our business in the ordinary course pending consummation of the proposed merger and restricts us, without Fiserv’s consent, from taking certain specified actions until the merger is completed. These restrictions may affect our ability to execute our business strategies and attain our financial and other goals and may impact our financial condition, results of operations and cash flows. In addition, the pursuit of the merger and the preparation for the integration of our business with Fiserv may place a significant burden on management and internal resources. The diversion of management’s attention away from day-to-day business concerns could adversely affect our financial results.
We currently anticipate that we will close the merger during the second half of 2019, but we cannot be certain when or if the conditions for the Merger will be satisfied or waived. The merger cannot be completed until the conditions are satisfied or waived, including the receipt of required antitrust and other regulatory approvals and other customary closing conditions. Satisfying the conditions to the closing of the merger may take longer than we expect. In the event that the merger is not completed for any reason, we will remain an independent public company and holders of our common stock will continue to own their shares of our common stock. If the merger is not completed for any reason, the price of our common stock may decline to the extent that the current market price may reflect an assumption that each First Data share will be exchanged for 0.303 shares of Fiserv upon consummation of the merger as specified in the merger agreement. Investor confidence also could decline.
Whether or not we complete the merger, our ongoing businesses may be adversely affected and we may be subject to certain risks and consequences as a result of pursuing the merger, including, among others, the following:
• | execution of the proposed merger will require significant time and attention from management, which may distract them from operating our business and executing on other initiatives that may have been beneficial to us; |
• | we may lose management personnel and other key employees and our employees may be distracted due to uncertainty about their future roles with the new combined company; |
• | parties with which we have business relationship may experience uncertainty as to the future of such relations and may delay or defer certain business decisions, seek alternative relations with others, or change their present business relationship with us; |
• | we could be the subject of litigation related to the proposed merger, which could result in significant costs and expenses; |
• | we will be required to pay significant costs and expenses relating to the merger, such as legal, accounting, and other professional fees, whether or not the merger is completed; |
• | we may have to forgo other opportunities in favor of the merger instead of pursuing such other opportunities that could be beneficial to First Data; and |
• | we may experience negative reactions from the financial markets, particularly if we fail to complete the merger. |
In addition to the foregoing, the ratio for the exchange of First Data stock into Fiserv stock to be received pursuant to the Merger Agreement is fixed. The exchange ratio will not increase because of fluctuations in the market price of Fiserv stock or changes in our business, assets, liabilities, prospects, outlook, financial condition or results of operation or in the event of any change in the market price of, analyst estimates of, or projections relating to, our common stock. Because the conversion ratio is fixed, the market price of First Data stock may be impacted by any changes in the market price of Fiserv stock.
Business and Operational Risks
Global economic, political, and other conditions may adversely affect trends in consumer, business, and government spending, which may adversely impact the demand for our services and our revenue and profitability.
Financial services, payments, and technology industries in which we operate depend heavily upon the overall level of consumer, business, and government spending. A sustained deterioration in the general economic conditions (including distress in financial
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markets, turmoil in specific economies around the world, and additional government intervention), particularly in the United States or Europe, or increases in interest rates in key countries in which we operate may adversely affect our financial performance by reducing the number or average purchase amount of transactions involving payment cards. A reduction in the amount of consumer spending could result in a decrease of our revenue and profits.
Adverse economic trends may accelerate the timing, or increase the impact of, risks to our financial performance. Such trends may include, but are not limited to, the following:
• | Declining economies, foreign currency fluctuations, and the pace of economic recovery can change consumer spending behaviors, such as cross-border travel patterns, on which a significant portion of our revenues are dependent. |
• | Low levels of consumer and business confidence typically associated with recessionary environments and those markets experiencing relatively high unemployment, may cause decreased spending by cardholders. |
• | Budgetary concerns in the United States and other countries around the world could affect the United States and other specific sovereign credit ratings, impact consumer confidence and spending, and increase the risks of operating in those countries. |
• | Emerging market economies tend to be more volatile than the more established markets we serve in the United States and Europe, and adverse economic trends may be more pronounced in such emerging markets. |
• | Financial institutions may restrict credit lines to cardholders or limit the issuance of new cards to mitigate cardholder defaults. |
• | Uncertainty and volatility in the performance of our clients' businesses may make estimates of our revenues, rebates, incentives, and realization of prepaid assets less predictable. |
• | Our clients may decrease spending for value-added services. |
• | Government intervention, including the effect of laws, regulations, and /or government investments in our clients, may have potential negative effects on our business and our relationships with our clients or otherwise alter their strategic direction away from our products. |
A weakening in the economy could also force some retailers to close, resulting in exposure to potential credit losses and declines in transactions, and reduced earnings on transactions due to a potential shift to large discount merchants. Additionally, credit card issuers may reduce credit limits and become more selective in their card issuance practices. Changes in economic conditions could adversely impact our future revenues and profits and result in a downgrade of our debt ratings, which may lead to termination or modification of certain contracts and make it more difficult for us to obtain new business. Any of these developments could have a material adverse impact on our overall business and results of operations.
Our ability to anticipate and respond to changing industry trends and the needs and preferences of our clients and consumers may affect our competitiveness or demand for our products, which may adversely affect our operating results.
Financial services, payments, and technology industries are subject to rapid technological advancements, new products and services, including mobile payment applications, evolving competitive landscape, developing industry standards, and changing client and consumer needs and preferences. We expect that new services and technologies applicable to the financial services, payments, and technology industries will continue to emerge. These changes in technology may limit the competitiveness of and demand for our services. Also, our clients and their customers continue to adopt new technology for business and personal uses. We must anticipate and respond to these changes in order to remain competitive within our relative markets. For example, our ability to provide innovative point-of-sale technology to our merchant clients could have an impact on our Global Business Solutions business.
Failure to develop value-added services that meet the needs and preferences of our clients could have an adverse effect on our ability to compete effectively in our industry. Furthermore, clients' and their customers' potential negative reaction to our products and services can spread quickly through social media and damage our reputation before we have the opportunity to respond. If we are unable to anticipate or respond to technological changes or evolving industry standards on a timely basis, our ability to remain competitive could be materially adversely affected.
Substantial and increasingly intense competition worldwide in the financial services, payments, and technology industries may materially and adversely affect our overall business and operations.
Financial services, payments, and technology industries are highly competitive and our payment solutions compete against all forms of financial services and payment systems, including cash and checks, and electronic, mobile, and eCommerce payment platforms. If we are unable to differentiate ourselves from our competitors, drive value for our clients and/or effectively align our resources with our goals and objectives, we may not be able to compete effectively. Our competitors may introduce their own value-added or other services or solutions more effectively than we do, which could adversely impact our growth. We also compete
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against new entrants that have developed alternative payment systems, eCommerce payment systems, and payment systems for mobile devices. Failure to compete effectively against any of these competitive threats could have a material adverse effect on us. In addition, the highly competitive nature of our industry could lead to increased pricing pressure which could have a material impact on our overall business and results of operations.
Potential changes in the competitive landscape, including disintermediation from other participants in the payments value chain, could harm our business.
We expect that the competitive landscape will continue to change, including:
• | Rapid and significant changes in technology, resulting in new and innovative payment methods and programs that could place us at a competitive disadvantage and that could reduce the use of our products. |
• | Competitors, clients, governments, and other industry participants may develop products that compete with or replace our value-added products and services. |
• | Participants in the financial services, payments, and technology industries may merge, create joint ventures, or form other business combinations that may strengthen their existing business services or create new payment services that compete with our services. |
• | New services and technologies that we develop may be impacted by industry-wide solutions and standards related to migration to EMV chip technology, tokenization, or other safety and security technologies. |
Failure to compete effectively against any of these competitive threats could have a material adverse effect on us.
Our Global Business Solutions business depends, in part, on our merchant relationships and alliances. If we are unable to maintain these relationships and alliances, our business may be adversely affected.
Our alliance structures take on different forms, including consolidated subsidiaries, equity method investments, and revenue sharing arrangements. Under our alliance program, a bank or other institution forms an alliance with us on an exclusive basis, either contractually or through a separate legal entity. Merchant contracts may be contributed to the alliance by us and/or the bank or institution. The banks and other institutions generally provide card association sponsorship, clearing, and settlement services and typically act as a merchant referral source when the institution has an existing banking or other relationship with such merchant. We provide transaction processing and related functions. Both we and our alliance partners may also provide management, sales, marketing, and other administrative services. The alliance structure allows us to be the processor for multiple financial institutions, any one of which may be selected by the merchant as its bank partner. Our Global Business Solutions business is dependent, in part, on our merchant relationships, alliances, and other distribution channels. We are working with our alliance partners to grow their businesses. There can be no guarantee that our efforts will be successful and that we will achieve growth in our merchant relationships, alliances, and other distribution channels. In addition, our contractual arrangements with our merchants and merchant alliance partners are for fixed terms and may also allow for early termination upon the occurrence of certain events. There can be no assurance that we will be able to renew our contractual arrangements with these merchants or merchant alliance partners on similar terms or at all. The loss of merchant relationships or alliance and financial institution partners could negatively impact our business and result in a reduction of our revenue and profit.
A disruptive implementation of the United Kingdom’s exit from the European Union could adversely affect our results of operations.
We are monitoring developments related to the implementation of the United Kingdom’s decision to exit the European Union (referred to as Brexit), which could, among other outcomes, disrupt the free movement of goods, services, data, and people between the U.K. and the E.U., undermine bilateral cooperation in key policy areas, and significantly disrupt trade between the U.K. and the E.U. The effects of Brexit will depend in part on any agreements the U.K. makes to retain access to E.U. markets. These agreements could potentially disrupt the markets we serve and the tax jurisdictions in which we operate and adversely change tax benefits or liabilities in these or other jurisdictions. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replace or replicate. Given the lack of comparable precedent, it is unclear what financial, trade, and legal implications the withdrawal of the U.K. from the E.U. will have and how such withdrawal will affect us.
In addition, Brexit may create additional uncertainty in currency exchange rate fluctuations that may result in the strengthening of the U.S. dollar against foreign currencies in which we conduct business. We translate revenue denominated in foreign currency into U.S. dollars for our financial statements. During periods of a strengthening dollar, our reported international revenue is reduced because foreign currencies translate into fewer U.S. dollars.
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Any of these effects of Brexit, among others, could materially adversely affect our relationships with our existing and future clients and suppliers, which could have an adverse effect on our business, financial results, and business opportunities.
Failure to obtain new clients or renew client contracts on favorable terms could adversely affect results of operations and financial condition.
Most of our sales involve long-term contracts, which generally require a notice period prior to their scheduled expiration if a client chooses not to renew. Some of these contracts may also allow for early termination upon the occurrence of certain events such as a change in control. While a vast majority of our contracts remain in effect through their scheduled expiration, we may face pricing pressure in obtaining and retaining our larger clients. Some of our competitors may offer more attractive fees to our current and prospective clients, or other services that we do not offer. Larger clients may be able to seek lower prices from us when they renew a contract, when a contract is extended, or when the client’s business has significant volume changes. They may also reduce services if they decide to move services in-house. Further, our SMB clients may exert pricing pressure due to pricing competition or other economic needs or pressures such clients experience from their customers. On some occasions, this pricing pressure results in lower revenue from a client than we had anticipated based on our previous agreement with that client. This reduction in revenue could result in an adverse effect on our business, operating results, and financial condition.
For potential clients of our business segments, switching from one vendor of core processing or related software and services (or from an internally-developed system) to a new vendor is a significant undertaking. As a result, potential clients often resist change. We seek to overcome this resistance through strategies such as making investments to enhance the functionality of our software. However, there can be no assurance that our strategies for overcoming potential clients’ reluctance to change vendors will be successful, and this resistance may adversely affect our growth.
Security breaches or cybersecurity attacks on our systems may have a significant effect on our business.
In order to provide our services, we process, store, and transmit sensitive business information and personal consumer information, including, but not limited to, names, bankcard numbers, home or business addresses, social security numbers, driver's license numbers, and bank account numbers. Under the card network rules, various federal, state and international laws, and client contracts, we are responsible for information provided to us by financial institutions, merchants, ISOs, third-party service providers, and others. The confidentiality of such sensitive business information and personal consumer information that resides on our systems is critical to our business. Our systems are subject to cybersecurity attacks and other techniques which are intended to obtain unauthorized access, disable or degrade the service we provide, or sabotage our system. These cybersecurity attacks are often difficult to detect and are constantly evolving. We expect that unauthorized parties will continue to attempt to gain access to our systems or facilities through various means. We cannot be certain that the security measures and procedures we have in place to detect cybersecurity attacks and protect this sensitive data, including protection against unauthorized access and use by our employees, will be successful or sufficient to counter all current and emerging technology threats designed to breach our systems in order to gain access to confidential information. The increasing sophistication of cyber criminals and their continuous attempts to breach our system has increased the risk of a security breach of our systems. A breach of our products or systems processing or storing sensitive business information or personal consumer information could lead to claims against us, reputational damage, lost clients and lost revenue, substantial additional costs (including costs of notification of consumers, credit monitoring, card reissuance, contact centers and forensics), loss of our financial institution sponsorship, loss of clients' and their customers’ confidence, as well as imposition of fines and damages, or potential restrictions imposed by card networks on our ability to process transactions, all of which could have a material adverse effect on our revenues, profitability, financial condition, and future growth. In addition, any cyberattacks or data security breaches affecting our clients, partners, or vendors could have similar negative effects. Furthermore, as security threats and cybersecurity attacks continue to evolve we will be required to invest additional resources to modify the security of our systems. The level of required investment could have a material adverse effect on our results of operations.
We may experience breakdowns in our processing systems that could damage client relations and expose us to liability.
Our core business depends heavily on the reliability of our processing systems. A system outage could have a material adverse effect on our business, financial condition, and results of operations. Not only would we suffer damage to our reputation in the event of a system outage, but we may also be liable to third parties. Many of our contractual agreements with clients require us to pay penalties if our systems do not meet certain operating standards. To successfully operate our business, we must be able to protect our processing and other systems from interruption, including from events that may be beyond our control. Events that could cause system interruptions include, but are not limited to, fire, natural disaster, unauthorized entry, power loss, telecommunications failure, computer viruses, terrorist acts, cyber attacks, and war. Although we have taken steps to protect against data loss and system failures, there is still risk that we may lose critical data or experience system failures. To help protect against these events, we perform the vast majority of disaster recovery operations ourselves, but we also utilize select third parties for
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certain operations, particularly outside of the United States. To the extent we outsource our disaster recovery, we are at risk of the vendor’s unresponsiveness or other failures in the event of breakdowns in our systems. In addition, our property and business interruption insurance may not be adequate to compensate us for all losses or failures that may occur.
Disruptions at other participants in the global financial system could prevent us from delivering our products and services.
The operations and systems of many participants in the global financial system are interconnected. Many of the transactions that involve our products and services rely on multiple participants in the global financial system to accurately move funds and communicate information to the next participant in the transaction chain. A disruption for any reason at one of the participants in the global financial system could impact our ability to obtain or provide information or cause funds to be moved in a manner to successfully deliver our products and services. Although we work with other participants to avoid any disruptions, there is no assurance that such efforts will be effective. Such a disruption could lead to the inability for us to deliver products and services, reputational damage, lost clients and lost revenue, loss of clients' and their customers' confidence, as well as additional costs, all of which could have a material adverse effect on our revenues, profitability, financial condition, and future growth.
We may experience software defects, computer viruses, and development delays, which could damage client relations, our potential profitability and expose us to liability.
Our products are based on sophisticated software and computing systems that often encounter development delays, and the underlying software may contain undetected errors, viruses, or defects. Defects in our software products and errors or delays in our processing of electronic transactions could result in additional development costs, diversion of technical and other resources from our other development efforts, loss of credibility with current or potential clients, harm to our reputation, fines imposed by card networks, or exposure to liability claims. In addition, we rely on technologies supplied to us by third parties that may also contain undetected errors, viruses or defects that could have a material adverse effect on our business, financial condition and results of operations. Although we attempt to limit our potential liability for warranty claims through disclaimers in our software documentation and limitation-of-liability provisions in our license and other agreements with our clients, we cannot assure that these measures will be successful in limiting our liability.
Our merchants may be unable to satisfy obligations for which we may also be liable.
We are subject to the risk of our merchants being unable to satisfy obligations for which we may also be liable. For example, we and our merchants acquiring alliances may be subject to contingent liability for transactions originally acquired by us that are disputed by the cardholder and charged back to the merchants. If we or the alliance is unable to collect this amount from the merchant because of the merchant’s insolvency or other reasons, we or the alliance will bear the loss for the amount of the refund paid to the cardholder. We have an active program to manage our credit risk and often mitigate our risk by obtaining collateral. It is possible, however, that a default on such obligations by one or more of our merchants could have a material adverse effect on our business. See note 1 "Summary of Significant Accounting Policies" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for further information on our merchant credit losses.
Fraud by merchants or others could have a material adverse effect on our business, financial condition, and results of operations.
We may be subject to potential liability for fraudulent electronic payment transactions or credits initiated by merchants or others. Examples of merchant fraud include when a merchant or other party knowingly uses a stolen or counterfeit credit, debit or prepaid card, card number, or other credentials to record a false sales transaction, processes an invalid card, or intentionally fails to deliver the merchandise or services sold in an otherwise valid transaction. Criminals are using increasingly sophisticated methods to engage in illegal activities such as counterfeiting and fraud. It is possible that incidents of fraud could increase in the future. Failure to effectively manage risk and prevent fraud would increase our chargeback liability or other liability. Increases in chargebacks or other liability could have a material adverse effect on our business, financial condition, and results of operations.
Future consolidation of financial institution clients or other client groups may adversely affect our financial condition.
Bank industry consolidation could affect existing and potential clients in our service areas. Our alliance strategy could also be negatively affected by consolidations, especially where the banks involved are committed to their internal merchant processing businesses that compete with us. Bank consolidation has led to an increasingly concentrated client base, resulting in a changing client mix as well as increased price compression. Further consolidation in the bank industry or other client base could have a negative impact on us, including a loss of revenue and price compression.
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We rely on various financial institutions to provide clearing services in connection with our settlement activities. If we are unable to maintain clearing services with these financial institutions and are unable to find a replacement, our business may be adversely affected.
We rely on various financial institutions to provide clearing services in connection with our settlement activities. If such financial institutions should stop providing clearing services or limit our volumes we would need to find other financial institutions to provide those services. If we are unable to find a replacement financial institution we may no longer be able to provide processing services to certain clients, which could negatively impact our revenue and earnings.
Because we rely on third-party vendors to provide products and services, we could be adversely impacted if they fail to fulfill their obligations.
Our business is dependent on third-party vendors to provide us with certain products and services. The failure of these vendors to perform their obligations in a timely manner could adversely affect our operations and profitability. In addition, if we are unable to renew our existing contracts with our most significant vendors, we might not be able to replace the related product or service at the same cost, which would negatively impact our profitability.
Changes in card association and debit network fees or products could increase costs or otherwise limit our operations.
From time to time, card associations and debit networks increase the organization and/or processing fees (known as interchange fees) that they charge. It is possible that competitive pressures will result in us absorbing a portion of such increases in the future, which would increase our operating costs, reduce our profit margin, and adversely affect our business, operating results, and financial condition. In addition, the various card associations and networks prescribe certain capital requirements. Any increase in the capital level required would further limit our use of capital for other purposes.
Our business may be adversely affected by geopolitical and other risks associated with operations outside of the United States and, as we continue to expand internationally, we may incur higher than anticipated costs and may become more susceptible to these risks.
We offer merchant acquiring, processing and issuing services outside of the United States, including in the United Kingdom, Germany, Argentina, India, and Brazil, where our principal non-U.S. operations are located. Our revenues derived from these and other non-U.S. operations are subject to additional risks, including those resulting from social and geopolitical instability and unfavorable political or diplomatic developments, all of which could negatively impact our financial results.
As we expand internationally and grow our non-U.S. client base, we may face challenges due to the presence of more established competitors and our lack of experience in such non-U.S. markets, and we may also incur higher than anticipated costs. If we are unable to successfully manage expenses relating to the international expansion of our business, our financial position and results of operations could be negatively impacted.
Cost savings initiatives may not produce the savings expected and may negatively impact our other initiatives and efforts to grow our business.
In recent years, we have implemented measures aimed at improving our profitability and maintaining flexibility in our capital resources, including restructuring efforts and the introduction of cost savings initiatives. We expect to continue to take measures to improve our profitability and cash flows from operating activities. However, there can be no assurance that the cost control measures will be successful. In addition, these and any future spending reductions, if any, may negatively impact our other initiatives or our efforts to grow our business, which may negatively impact our future results of operations and increase the burden on existing management, systems, and resources.
The ability to recruit, retain and develop qualified personnel is critical to our success and growth.
All of our businesses function at the intersection of rapidly changing technological, social, economic, and regulatory developments that requires a wide range of expertise and intellectual capital. For us to successfully compete and grow, we must retain, recruit, and develop the necessary personnel who can provide the needed expertise across the entire spectrum of our intellectual capital needs. In addition, we must develop our personnel to provide succession plans capable of maintaining continuity in our business. The market for qualified personnel, however, is competitive and we may not succeed in recruiting additional personnel or may fail to effectively replace current personnel who depart with qualified or effective successors. Our effort to retain and develop personnel may also result in significant additional expenses, which could adversely affect our profitability. We cannot assure that key personnel, including executive officers, will continue to be employed or that we will be able to attract and retain qualified
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personnel in the future. Failure to retain or attract key personnel could have a material adverse effect on us.
Acquisitions and integrating such acquisitions create certain risks and may affect our operating results.
We have actively acquired businesses and may continue to make acquisitions of businesses or assets in the future. The acquisition and integration of businesses or assets involves a number of risks. The core risks are valuation (negotiating a fair price for the business), integration (managing the process of integrating the acquired company’s people, products, technology, and other assets to extract the value and synergies projected to be realized in connection with the acquisition), regulation (obtaining necessary regulatory or other government approvals that may be necessary to complete acquisitions), and diligence (identifying undisclosed or unknown liabilities or restrictions that will be assumed in the acquisition).
In addition, acquisitions outside of the United States often involve additional or increased risks including, for example:
• | managing geographically separated organizations, systems and facilities; |
• | integrating personnel with diverse business backgrounds and organizational cultures; |
• | complying with non-U.S. regulatory requirements; |
• | fluctuations in currency exchange rates; |
• | enforcement of intellectual property rights in some non-U.S. countries; |
• | difficulty entering new non-U.S. markets due to, among other things, consumer acceptance and business knowledge of these new markets; and |
• | general economic and political conditions. |
The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of one or more of our combined businesses and the possible loss of key personnel. The diversion of management’s attention and any delays or difficulties encountered in connection with acquisitions and the integration of the two companies’ operations could have an adverse effect on our business, results of operations, financial condition or prospects.
Financial Risks
Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our debt obligations.
We are highly leveraged. As of December 31, 2018, we had $17.6 billion of total debt. Our high degree of leverage could have important consequences, including:
• | increasing our vulnerability to adverse economic, industry or competitive developments; |
• | requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use cash flow to fund our operations, capital expenditures, and future business opportunities; |
• | making it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations of our debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under the agreements governing such indebtedness; |
• | restricting us from making strategic acquisitions or causing us to make non-strategic divestitures; |
• | making it more difficult for us to obtain network sponsorship and clearing services from financial institutions or to obtain or retain other business with financial institutions; |
• | limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions, and general corporate or other purposes; and |
• | limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged and who, therefore, may be able to take advantage of opportunities that our leverage prevents us from exploiting. |
Our financial condition and results of operations are dependent in part upon our ongoing ability to refinance our maturing indebtedness at attractive interest rates.
Successful execution of our business strategy is dependent in part upon our ability to manage our capital structure to minimize interest expense and enhance free cash flow generation. Our senior secured revolving credit facility has $1.25 billion in commitments that are scheduled to mature in October 2023. In addition, approximately $2.5 billion of obligations under our existing long-term borrowings are scheduled to mature prior to December 31, 2022. We may not be able to refinance our senior secured credit facilities
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or our other existing indebtedness at or prior to their maturity at attractive rates of interest because of our high levels of debt, debt incurrence restrictions under our debt agreements or because of adverse conditions in credit markets generally.
An increase in interest rates may negatively impact our operating results and financial condition.
Certain of our borrowings, including borrowings under our senior secured credit facilities, are at variable rates of interest. An increase in interest rates would have a negative impact on our results of operations by causing an increase in interest expense.
As of December 31, 2018, we have $12 billion in variable rate debt, which includes $472 million on our accounts receivable securitization facility, and also includes $250 million drawn on our revolving credit facility. We have $2.8 billion in variable to fixed interest rate collars, which are subject to contractual ceilings and floors, and $7.25 billion in variable to fixed interest rate step-up swaps. The $1.3 billion and $1.5 billion interest rate collars expire in January 2019 and September 2019, respectively, and have a one month LIBOR ceiling of 1.50% and 1.75%, respectively. With respect to our step-up swaps, $4.75 billion of notional exposure step-up swaps, decreases by $750 million semi-annually, commencing in June 2019, and expires in December 2020. The remaining $2.5 billion of step-up swaps cover our exposure through May 2021. Based on outstanding debt balances and interest rates as of December 31, 2018, a 1% increase in variable interest rates would result in a decrease to pretax income of $10 million over the next twelve months. See note 14 "Derivative Financial Instruments" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for the discussion of our interest rate collar contracts.
Uncertainty about the future of the London Interbank Offer Rate (LIBOR) may adversely affect our business and financial results.
In July 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced its intent to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021. It is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR, whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere, and whether other rate or rates may become accepted alternatives to LIBOR. This may cause LIBOR to perform differently than it did in the past and may have other consequences that cannot be predicted. No assurance can be provided that these uncertainties or their resolution will not adversely affect the use, level, and volatility of LIBOR or other interest rates. These uncertainties or their resolution also could negatively impact our borrowing costs, our hedging strategies, and other aspects of our business and financial results.
Our debt agreements contain restrictions that limit our flexibility in operating our business.
The agreements governing our indebtedness contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit our and certain of our subsidiaries' ability to, among other things:
• | incur additional indebtedness or issue certain preferred shares; |
• | pay dividends on, repurchase, or make distributions in respect of, our capital stock or make other restricted payments; |
• | make certain investments; |
• | sell certain assets; |
• | create liens; |
• | consolidate, merge, sell, or otherwise dispose of all or substantially all of our assets; and |
• | enter into certain transactions with our affiliates. |
A breach of any of these covenants could result in a default under one or more of these agreements, including as a result of cross-default provisions and, in the case of our senior secured revolving credit facility, permit the lenders to cease making loans to us. Upon the occurrence of an event of default under these agreements, the holders of our debt could elect to declare all amounts outstanding thereunder to be immediately due and payable and, in the case of our senior secured revolving credit facility, terminate all commitments to extend further credit. Such actions by these holders could cause cross-defaults under our other indebtedness. If we were unable to repay those amounts, the lenders under our senior secured credit facilities or holders of our senior secured notes could proceed against the collateral securing such debt. We have pledged a significant portion of our assets as collateral under our senior secured credit facilities and our senior secured notes. If the holders of our debt accelerate the repayment of borrowings, we may not have sufficient assets to repay our senior secured credit facilities or any other debt that may become due as a result of that acceleration and we could experience a material adverse effect on our financial condition and results of operations.
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Our consolidated balance sheet includes significant amounts of goodwill and intangible assets. The impairment of a significant portion of these assets would negatively affect our financial condition and results of operations.
Our consolidated balance sheet includes goodwill and intangible assets that represent approximately 55% of our total assets as of December 31, 2018. These assets consist primarily of goodwill and client relationship intangible assets associated with our acquisitions. We also expect to engage in additional acquisitions, which may result in our recognition of additional goodwill and intangible assets. Under current accounting standards, we are required to amortize certain intangible assets over the useful life of the asset, while goodwill and certain other intangible assets are not amortized. On a regular basis we assess whether there have been impairments in the carrying value of goodwill and certain intangible assets. If the carrying value of the asset is determined to be impaired, then it is written down to fair value by a charge to operating earnings. An impairment of a significant portion of goodwill or intangible assets could have a material adverse effect on our financial condition and results of operations.
Our results of operations may be adversely affected by changes in foreign currency exchange rates.
We are subject to risks related to the changes in currency rates as a result of our investments in non-U.S. operations and from revenues generated in currencies other than the U.S. dollar. Revenue and profit generated by such non-U.S. operations will increase or decrease compared to prior periods as a result of changes in foreign currency exchange rates. From time to time, we utilize foreign currency forward contracts to mitigate the market value risks associated with foreign currency-denominated transactions. These hedge contracts may not, however, eliminate all of the risks related to foreign currency translation. In addition, we may become subject to exchange control regulations that restrict or prohibit the conversion of our other revenue currencies into U.S. dollars. Any of these factors could decrease the value of revenues and earnings we derive from our non-U.S. operations and have a material adverse impact on our business.
Unfavorable resolution of tax contingencies could adversely affect our results of operations and cash flows from operations.
Our tax returns and positions are subject to review and audit by federal, state, local, and international taxing authorities. An unfavorable outcome to a tax audit could result in higher tax expense, thereby negatively impacting our results of operations as well as our cash flows from operations. We have established contingency reserves for material, known tax exposures relating to deductions, transactions, and other matters involving some uncertainty as to the proper tax treatment of the item. These reserves reflect what we believe to be reasonable assumptions as to the likely final resolution of each issue if raised by a taxing authority. While we believe that the reserves are adequate to cover reasonably expected tax risks, there is no assurance that, in all instances, an issue raised by a tax authority will be finally resolved at a financial cost not in excess of any related reserve. An unfavorable resolution, therefore, could negatively impact our effective tax rate, financial position, results of operations, and cash flows in the current and/or future periods. See note 9 "Income Tax" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for more information.
Changes in tax laws and regulations could adversely affect our results of operations and cash flows from operations.
Our operations are subject to tax by federal, state, local, and international taxing jurisdictions. Changes in tax laws, in our significant tax jurisdictions could materially increase the amount of taxes we owe, thereby negatively impacting our results of operations as well as our cash flows from operations. For example, although we expect to benefit from the recently enacted changes in US tax laws, the limitations on the deductibility of interest expense in the U.S. negatively impact our effective tax rate, results of operations, and cash flows. We are working to reduce our net interest expense and increase our EBITDA in the U.S. However, to the extent we are unable to make enough progress, the negative impact will continue.
Potential tariffs or a global trade war could increase the cost of our products, which could adversely impact the competitiveness of our products and our financial results.
The United States recently imposed tariffs on certain imports from China, including on some of our hardware devices manufactured in China. If the U.S. administration imposes additional tariffs, or if additional tariffs or trade restrictions are implemented by the United States or other countries in connection with a global trade war, our other hardware devices produced in China could also be impacted. While it is too early to predict how the recently enacted tariffs and any future tariffs on items imported from China or elsewhere will impact our business, the cost of our products manufactured in China and imported into the United States or other countries could increase, which in turn could adversely affect the demand for these products and have a material adverse effect on our business and results of operations.
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Regulatory and Legal Risks
Failure to comply with, or changes in, laws, regulations and enforcement activities may adversely affect the products, services, and markets in which we operate.
We and our clients are subject to laws and regulations that affect the electronic payments industry in the many countries in which our services are used. In particular, our clients are subject to numerous laws and regulations applicable to banks, financial institutions, and card issuers in the United States and abroad, and, consequently, we are at times affected by these federal, state, and local laws and regulations. The United States government has increased its scrutiny of a number of credit card and other loan practices, from which some of our clients derive significant revenue. Regulation of the payments industry, including regulations applicable to us and our clients, has increased significantly in recent years. Failure to comply with laws and regulations applicable to our business may result in the suspension or revocation of licenses or registrations, the limitation, suspension or termination of services, and/or the imposition of consent orders or civil and criminal penalties, including fines which could have an adverse effect on our results of operation and financial condition.
We are subject to U.S. and international financial services regulations, a myriad of consumer protection laws, economic sanctions, laws and regulations, and anti-corruption laws, escheat regulations and privacy and information security regulations to name only a few. Changes to legal rules and regulations, or interpretation or enforcement of them, could have a negative financial effect on us. In particular, changing regulations or standards in the area of privacy and data protection could also adversely impact us. For example, the General Data Protection Regulation (GDPR), which became effective in May 2018, extends the scope of the E.U. data protection law to all companies processing data of E.U. residents, regardless of the company’s location. The law requires companies to meet new requirements regarding the handling of personal data. Our efforts to comply with GDPR and other privacy and data protection laws (such as the new California Consumer Privacy Act effective as of January 2020 and the Brazilian General Data Protection Law effective as of February 2020) may entail substantial expenses, may divert resources from other initiatives and projects, and could limit the services we are able to offer. Further, failure to meet GDPR requirements could result in fines, penalties, and reputational damage. The GDPR and other privacy and data protection laws may be interpreted and applied differently from country to country and may create inconsistent or conflicting requirements. Such regulations increase our compliance and administrative burden significantly. In addition, E.U. laws and regulations are typically subject to different and potentially inconsistent interpretations by the countries that are members of the E.U., which can make compliance more costly and operationally difficult to manage. Moreover, the countries that are members of the E.U. may each have different and potentially inconsistent interpretations of regulations implementing the E.U. Payment Services, which could make compliance more costly and operationally difficult to manage. Furthermore, following the passage of the second Payment Services Directive in Europe, several countries, including Australia, Canada, Hong Kong and Mexico are contemplating granting various types of access rights to third party processors, which could have implications for our business as well.
Additionally, the Dodd-Frank Act significantly changed the United States financial regulatory system by, among other things, creating the CFPB to regulate consumer financial products and services (including many offered by our clients), restrict debit card fees paid by merchants to issuer banks and allow merchants to offer discounts for different payment methods. CFPB rules, examinations, and enforcement actions may require us to adjust our activities and may increase our compliance costs. The regulations under the Dodd-Frank Act require all debit card issuing financial institutions to participate in at least two, unaffiliated debit networks (banning exclusivity agreements between one debit network and one debit card issuer) and prohibit card issuers and payment networks from inhibiting the ability of merchants to choose among the enabled debit networks for the routing of each debit card transaction. Changes to the Dodd-Frank Act or regulations could adversely impact our debit network business. In addition, certain of our alliance partners are subject to regulation by federal and state authority and, as a result, could pass through some of those compliance obligations to us.
Failure to comply with the U.S. Foreign Corrupt Practices Act, anti-money laundering, economic and trade sanctions regulations, and similar laws could subject us to penalties and other adverse consequences.
We operate our business around the world, including in certain foreign countries with developing economies, where companies often engage in business practices that are prohibited by U.S. and U.K. regulations, including the FCPA and the U.K. Bribery Act. Such laws prohibit improper payments or offers of payments to foreign governments and their officials and political parties by the U.S. and other business entities for the purpose of obtaining or retaining business. We have implemented policies to discourage such practices; however, there can be no assurance that all of our employees, consultants, and agents, including those that may be based in or from countries where practices that violate U.S. laws may be customary, will not take actions in violation of our policies, for which we may be ultimately responsible.
In addition, we are subject to anti-money laundering laws and regulations, including the Bank Secrecy Act (BSA). Among other things, the BSA requires money services businesses (such as money transmitters and providers of prepaid access) to develop and
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implement risk-based anti-money laundering programs, report large cash transactions and suspicious activity, and maintain transaction records. Our subsidiary Money Network Financial LLC provides prepaid access for various open loop prepaid programs for which it is the program manager and therefore must meet the requirements of the Financial Crimes Enforcement Network, the agency that enforces the BSA.
We are also subject to certain economic and trade sanctions programs that are administered by the OFAC which prohibit or restrict transactions to or from or dealings with specified countries, their governments, and in certain circumstances, their nationals, and with individuals and entities that are specially-designated nationals of those countries, narcotics traffickers, and terrorists or terrorist organizations.
Similar anti-money laundering and counter terrorist financing and proceeds of crime laws apply to movements of currency and payments through electronic transactions and to dealings with persons specified in lists maintained by the country equivalents to OFAC lists in several other countries and require specific data retention obligations to be observed by intermediaries in the payment process. Our businesses in those jurisdictions are subject to those data retention obligations.
Failure to comply with any of these laws and regulations or changes in this regulatory environment, including changing interpretations and the implementation of new or varying regulatory requirements by the government, may result in significant financial penalties, reputational harm, or change the manner in which we currently conduct some aspects of our business, which could significantly affect our results of operations or financial condition.
Changes in credit card association or other network rules or standards could adversely affect our business.
In order to provide our transaction processing services, several of our subsidiaries are registered with Visa and MasterCard and other networks as members or service providers for member institutions. As such, we and many of our clients are subject to card association and network rules that could subject us or our clients to a variety of fines or penalties that may be levied by the card associations or networks for certain acts or omissions by us, acquiring clients, processing clients, and merchants. Visa, MasterCard, and other networks, some of which are our competitors, set the rules and standards with which we must comply. The termination of our member registration or our status as a certified service provider, or any changes in card association or other network rules or standards, including interpretation and implementation of the rules or standards, that increase the cost of doing business or limit our ability to provide transaction processing services to or through our clients, could have an adverse effect on our business, results of operations, and financial condition.
Legislative or regulatory initiatives on cybersecurity and data privacy could adversely impact our business and financial results.
Cybersecurity and data privacy risks have received heightened legislative and regulatory attention. For example, the U.S. banking agencies have proposed enhanced cyber risk management standards that would apply to us and our financial institution clients and that would address cyber risk governance and management, management of internal and external dependencies, and incident response, cyber resilience, and situational awareness. Several states also have adopted or proposed cybersecurity laws targeting these issues. Legislation and regulations on cybersecurity and data privacy may compel us to enhance or modify our systems, invest in new systems, or alter our business practices or our policies on data governance and privacy. If any of these outcomes were to occur, our operational costs could increase significantly.
Failure to protect our intellectual property rights and defend ourselves from potential patent infringement claims may diminish our competitive advantages or restrict us from delivering our services.
Our trademarks, patents, and other intellectual property are important to our future success. The First Data trademark and trade name, the STAR trademark and trade name, and the Clover trademark and trade name are intellectual property rights which are individually material to us. These trademarks and trade names are widely recognized and associated with quality and reliable service. Loss of the proprietary use of the First Data, STAR, and Clover trademarks and trade names or a diminution in the perceived quality associated with them could harm the growth of our businesses. We also rely on proprietary technology. It is possible that others will independently develop the same or similar technology. Further, we use open source architecture in connection with our solutions, in particular our Clover open architecture platform. Companies that incorporate open source platforms into their solutions have, from time to time, faced claims challenging the ownership of such platforms. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software. We cannot guarantee that we can protect our trade secrets, know-how, or other proprietary information. Our patents could be challenged, invalidated or circumvented by others, and may not be of sufficient scope or strength to provide us with any meaningful protection or advantage. If we are unable to maintain the proprietary nature of our technologies, we could lose competitive advantages and be materially adversely affected. Additionally, the laws of certain non-U.S. countries where we do business or contemplate doing business in the future may not recognize intellectual property rights or protect them to the same extent as do the laws of the United States. Adverse determinations
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in judicial or administrative proceedings could prevent us from selling our services or prevent us from preventing others from selling competing services, and thereby may have a material adverse effect on the business and results of operations. Additionally, claims have been made, are currently pending, and other claims may be made in the future, with regard to our technology allegedly infringing on a patent or other intellectual property rights. Unfavorable resolution of these claims could either result in us being restricted from delivering the related product or service or result in a settlement that could be materially adverse to us.
Failure to comply with state and federal antitrust requirements could adversely affect our business.
Through our merchant alliances, we hold an ownership interest in several competing merchant acquiring businesses while serving as an electronic processor for those businesses. In order to satisfy state and federal antitrust requirements, we actively maintain an antitrust compliance program. Notwithstanding our compliance program, it is possible that perceived or actual violations of state or federal antitrust requirements could give rise to regulatory enforcement investigations or actions. Regulatory scrutiny of, or regulatory enforcement action in connection with, compliance with state and federal antitrust requirements could have a material adverse effect on our reputation and business.
We are the subject of various legal proceedings which could have a material adverse effect on our revenue and profitability.
We are involved in various litigation matters. We are also involved in or are the subject of governmental or regulatory agency inquiries or investigations and make voluntary self-disclosures to government or regulatory agencies from time to time. Our insurance or indemnities may not cover all claims that may be asserted against us, and any claims asserted against us, regardless of merit or eventual outcome, may harm our reputation. If we are unsuccessful in our defense in these litigation matters, or any other legal proceeding, we may be forced to pay damages or fines, enter into consent decrees, and/or change our business practices, any of which could have a material adverse effect on our revenue and profitability.
Our ability to utilize net operating loss carryforwards could be limited if we were to experience an ownership change as defined in the Internal Revenue Code.
Section 382 of the Internal Revenue Code of 1986, as amended (Code), contains rules that impose an annual limitation on the ability of a company with net operating loss carryforwards that undergoes an ownership change, which is generally any change in ownership of more than 50% of its stock (by value) over a three-year period, to utilize its net operating loss carryforwards in years after the ownership change. These rules generally operate by focusing on ownership changes among holders owning directly or indirectly 5% or more of the shares of stock of a company or any change in ownership arising from a new issuance of shares of stock by such company. If a company’s income in any year is less than the annual limitation prescribed by Section 382 of the Code, the unused portion of such limitation amount may be carried forward to increase the limitation (and net operating loss carryforward utilization) in subsequent tax years.
Our initial public offering in October 2015 and the subsequent follow-on secondary offerings in September 2017 and August 2018 did not result in an ownership change within a three-year period for purposes of Section 382 of the Code. If, however, we were to undergo an ownership change as a result of future transactions involving our common stock, including the closing of the recently announced Agreement and Plan of Merger between First Data and Fiserv, Inc., our ability to use our net operating loss carryforwards would be subject to the limitations of Section 382 of the Code. It is possible that a portion of our net operating loss carryforwards may expire before we would be able to use them. In the event we are unable to utilize our net operating loss carryforwards, there may be a negative impact on our financial position and results of operations.
In addition to the aforementioned federal income tax implications pursuant to Section 382 of the Code, most states follow the general provisions of Section 382 of the Code, either explicitly or implicitly resulting in separate state net operating loss limitations.
Risks Related to Ownership Structure
Kohlberg Kravis Roberts & Co. L.P. (KKR) controls us and its interests may conflict with ours or yours in the future.
KKR controls a majority of the combined voting power of our common stock. As a result, KKR has the ability to elect all of the members of our Board and thereby control our policies and operations, including the appointment of management, future issuances of our Class A common stock or other securities, the payment of dividends, if any, on our Class A common stock, the incurrence of debt by us, amendments to our amended and restated certificate of incorporation and amended and restated bylaws, and the entering into of extraordinary transactions and the interests of KKR may not in all cases be aligned with your interests.
In addition, KKR may have an interest in pursuing acquisitions, divestitures and other transactions that, in its judgment, could enhance its investment, even though such transactions might involve risks to you. For example, KKR could cause us to make
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acquisitions that increase our indebtedness or cause us to sell revenue-generating assets. KKR is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. Our amended and restated certificate of incorporation provides that none of KKR or any director who is not employed by us (including any nonemployee director who serves as one of our officers in both his or her director and officer capacities) or his or her affiliates will have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate. KKR also may pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us.
So long as a KKR affiliate continues to beneficially own a sufficient number of shares of Class B common stock, even if it beneficially owns significantly less than 50% of the shares of our outstanding common stock, it will continue to be able to effectively control our decisions. For example, if our Class B common stock amounted to 15% of our outstanding common stock, beneficial owners of our Class B common stock (including KKR), would collectively control 64% of the voting power of our common stock. The shares of our Class B common stock beneficially owned by a KKR affiliate may be transferred to an unrelated third party if the holders of a majority of the shares of Class B common stock have consented to such transfer in writing in advance.
In addition, KKR will be able to determine the outcome of all matters requiring stockholder approval and will be able to cause or prevent a change of control of our Company or a change in the composition of our Board and could preclude any acquisition of our Company. This concentration of voting control could deprive you of an opportunity to receive a premium for your shares of Class A common stock as part of a sale of our Company and ultimately might affect the market price of our Class A common stock.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
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ITEM 2. | PROPERTIES |
As of December 31, 2018, we and our subsidiaries owned or leased 77 domestic properties and 62 international properties. These facilities are used for operational, sales and administrative purposes, and are substantially all utilized.
Leased Facilities | Owned Facilities | ||||||||||
No. | Sq. Ft. | No. | Sq. Ft. | ||||||||
Facilities in the United States | 67 | 2,310,813 | 10 | 1,509,578 | |||||||
International Facilities | 58 | 938,960 | 4 | 186,258 | |||||||
• | Global Business Solutions’ principal operations are conducted in Atlanta, Georgia; New York, New York; Coral Springs, Florida; Hagerstown, Maryland; King of Prussia, Pennsylvania; Chicago, Illinois; Marietta, Georgia; London, United Kingdom; Frankfurt, Germany; São Paulo, Brazil; Singapore, Singapore; Warsaw, Poland; and Buenos Aires, Argentina. |
• | Global Financial Solutions' principal operations are located in New York, New York; Omaha, Nebraska; Chesapeake, Virginia; London, United Kingdom; Warsaw, Poland; Buenos Aires, Argentina; and Frankfurt, Germany. |
• | Network & Security Solutions' principal operations are located in Atlanta, Georgia; Omaha, Nebraska; Wilmington, Delaware; and Coral Springs, Florida. |
• | Our Corporate facilities include New York, New York and Atlanta, Georgia. |
We believe that our facilities are suitable and adequate for our current business; however, we periodically review our space requirements and may acquire new space to meet the needs of our businesses or consolidate and dispose of or sublet facilities which are no longer required.
ITEM 3. | LEGAL PROCEEDINGS |
From time to time, we are involved in various litigation matters arising in the ordinary course of our business. None of these matters, individually or in the aggregate, currently is material to us. See note 15 "Commitments and Contingencies" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for information with respect to this item.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
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PART II
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our Class A common stock has traded on the New York Stock Exchange under the symbol "FDC" since October 15, 2015. Prior to that date, there was no public trading market for our common stock.
There were 29 holders of record of our Class A common stock and 19 holders of record of our Class B common stock as of December 31, 2018. The number of beneficial owners of our Class A common stock is substantially greater than the number of record holders, because a large portion of our Class A common stock is held in "street name" by banks and brokers.
Share Buy Back
In connection with the vesting of restricted stock awards, shares of Class A common stock are delivered to the Company by employees to satisfy tax withholding obligations. The following table summarizes such purchases of Class A common stock in the three months ended December 31, 2018:
Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased Under Announced Program | Approximate Dollar Value of Shares That May Yet Be Purchased Under Announced Programs | ||||||||||
October 1, 2018 through October 31, 2018 | — | — | — | — | |||||||||
November 1, 2018 through November 30, 2018 | — | — | — | — | |||||||||
December 1, 2018 through December 31, 2018 | 267,626 | (a) | $ | 16.91 | — | — | |||||||
(a) | Shares surrendered to us to satisfy tax withholding obligations in connection with the vesting of restricted stock awards issued to employees. |
ITEM 6. | SELECTED FINANCIAL DATA |
The following table sets forth our selected consolidated financial data as of the dates and for the periods indicated. The selected financial data as of December 31, 2018 and 2017 and for the years ended December 31, 2018, 2017, and 2016 have been derived from our audited consolidated financial statements and related notes appearing in Part II, Item 8 of this Form 10-K. The selected consolidated financial data as of December 31, 2016, 2015, and 2014 and for the years ended December 31, 2015 and 2014 have been derived from our audited consolidated financial statements and related notes thereto not included in this Form 10-K.
The results of operations for any period are not necessarily indicative of the results to be expected for any future period. The selected consolidated financial data set forth below should be read in conjunction with, and are qualified by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes thereto included in Part II, Item 8 of this Form 10-K.
The notes to our consolidated financial statements in Part II, Item 8 of this Form 10-K contain additional information about various acquisitions, dispositions, and certain charges and benefits resulting from other operating expenses, and other income (expense) which affect the comparability of information presented. Comparability between periods is also impacted by the adoption of the New Revenue Standard on January 1, 2018. Amounts below include acquisitions since the date acquired and exclude dispositions since the date disposed.
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December 31, | ||||||||||||||||||||
(in millions, except per share amounts) | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
Statement of operations data (Year-ended): | ||||||||||||||||||||
Revenues | $ | 9,498 | $ | 12,052 | $ | 11,584 | $ | 11,451 | $ | 11,152 | ||||||||||
Total revenues (excluding reimbursables) | 8,679 | 8,129 | 7,839 | 7,764 | 7,548 | |||||||||||||||
Operating expenses(a) | 7,484 | 10,201 | 9,921 | 10,231 | 9,708 | |||||||||||||||
Other operating expenses, net(b) | 119 | 143 | 51 | 53 | 13 | |||||||||||||||
Total expenses (excluding reimbursables) | 6,784 | 6,421 | 6,227 | 6,597 | 6,117 | |||||||||||||||
Interest expense, net | (917 | ) | (931 | ) | (1,078 | ) | (1,534 | ) | (1,721 | ) | ||||||||||
Net income (loss) | 1,198 | 1,664 | 660 | (1,268 | ) | (265 | ) | |||||||||||||
Net income (loss) attributable to First Data Corporation | 1,005 | 1,465 | 420 | (1,481 | ) | (458 | ) | |||||||||||||
Depreciation and amortization(c) | 1,090 | 1,073 | 1,061 | 1,133 | 1,163 | |||||||||||||||
Net income (loss) per share(d): | ||||||||||||||||||||
Basic | $ | 1.08 | $ | 1.60 | $ | 0.47 | $ | (7.70 | ) | $ | (458,000 | ) | ||||||||
Diluted | 1.05 | 1.56 | 0.46 | (7.70 | ) | (458,000 | ) | |||||||||||||
Weighted-average common shares outstanding(d): | ||||||||||||||||||||
Basic(e) | 929 | 916 | 902 | 192 | — | |||||||||||||||
Diluted(e) | 957 | 940 | 921 | 192 | — | |||||||||||||||
Balance sheet data (As of year-end): | ||||||||||||||||||||
Total assets | $ | 38,327 | $ | 48,269 | $ | 40,292 | $ | 34,362 | $ | 34,034 | ||||||||||
Settlement assets | 11,423 | 20,363 | 14,795 | 8,150 | 7,557 | |||||||||||||||
Total liabilities | 31,283 | 42,183 | 36,088 | 30,625 | 31,434 | |||||||||||||||
Settlement obligations | 11,423 | 20,363 | 14,795 | 8,150 | 7,557 | |||||||||||||||
Long-term borrowings | 16,429 | 17,927 | 18,131 | 18,737 | 20,697 | |||||||||||||||
Other long-term liabilities(f) | 625 | 963 | 1,240 | 1,243 | 1,223 | |||||||||||||||
Redeemable noncontrolling interest | 77 | 72 | 73 | 77 | 70 | |||||||||||||||
Total equity | 6,967 | 6,014 | 4,131 | 3,660 | 2,530 | |||||||||||||||
Cash flow data (Year-ended): | ||||||||||||||||||||
Net cash provided by operating activities | $ | 2,307 | $ | 2,047 | $ | 2,111 | $ | 795 | $ | 1,035 | ||||||||||
Net cash used in investing activities | (99 | ) | (1,952 | ) | (361 | ) | (685 | ) | (330 | ) | ||||||||||
Net cash (used in) provided by financing activities | (2,124 | ) | 9 | (1,734 | ) | (16 | ) | (743 | ) | |||||||||||
(a) | Operating expenses include Cost of revenues; Selling, general, and administrative; Depreciation and amortization; and Reimbursable items. |
(b) | Other operating expenses, net includes restructuring, net; impairments; litigation and regulatory settlements; integration cost and other as applicable to the periods presented. See note 11 "Other Operating Expenses, Net" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for details. |
(c) | Includes amortization of initial payments for new contracts, which is recorded as a contra-revenue within “Revenues excluding reimbursable items” and amortization related to equity method investments, which is netted within “Equity earnings in affiliates” in our consolidated statements of operations. |
(d) | As a result of the merger between First Data Holdings Inc. (FDH) and FDC (HoldCo Merger), all outstanding shares of FDH were converted into Class B common stock, which are entitled to ten votes per share. All of FDC's outstanding common stock was eliminated upon the merger. We accounted for the HoldCo Merger as a transfer of assets between entities under common control and have reflected the transactions impact on net loss per share and weighted-average shares on a prospective basis. |
(e) Prior to our Initial Public Offering in 2015, we had 1,000 shares of common stock that was eliminated upon the merger with First Data Holdings.
(f) | Other long-term liabilities include deferred tax liabilities. |
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following contains management’s discussion and analysis of our financial condition and results of operations and should be read together with “Selected Financial Data,” included in Part II, Item 6 of this Form 10-K and our consolidated financial statements and related notes thereto included in Part II, Item 8 of this Form 10-K. This discussion contains forward-looking statements and involves numerous risks and uncertainties. Our actual results may differ materially from those anticipated in any forward-looking statements as a result of many factors, including those set forth under “Forward-Looking Statements,” “Risk Factors,” and elsewhere in this Form 10-K.
Year over year percent changes are calculated on whole-dollar values as management views this as a more accurate representation of our performance. As such, the values herein may not recalculate due to rounding. Not meaningful percentage changes are indicated with NM.
Executive Overview
First Data Corporation sits at the center of global electronic commerce. We believe we offer our clients the most complete array of integrated solutions in the industry, covering their needs across next-generation commerce technologies, merchant acquiring, issuing, and network solutions. We serve our clients in over 100 countries, reaching over 6 million business locations and over 3,700 financial institutions. We believe we have the industry’s largest distribution network, to consist of partnerships with over 1,500 distribution partners including many of the world’s leading financial institutions, and our direct sales force. We are the largest merchant acquirer and issuer processor in the world, and operate the third largest independent network services provider in the United States. We enable businesses to accept electronic payments, help financial institutions issue credit, debit and prepaid cards, and route secure transactions between them. In 2018, we processed approximately 100 billion transactions globally, or over 3,000 per second. In our largest market, the United States, we processed approximately $2.3 trillion of payment volume, which represents over 10% of United States gross domestic product (GDP) last year.
Our business is characterized by transaction related fees, multi-year contracts, and a diverse client base, which allows us to grow alongside our clients. Our multi-year contracts allow us to achieve a high level of recurring revenues with the same clients. While the contracts typically do not specify fixed revenues to be realized thereunder, they do provide a framework for revenues to be generated based on volume of services provided during such contracts' terms.
Pending Merger with Fiserv, Inc.
On January 16, 2019, First Data and Fiserv, Inc. (Fiserv), and 300 Holdings, Inc. (Merger Sub), a wholly-owned subsidiary of Fiserv, entered into an agreement and plan of merger (Merger Agreement), pursuant to which we will merge into Merger Sub (the Merger). The terms are subject to the conditions set forth in the Merger Agreement, which states at closing each share of the Company's common stock issued and outstanding will be converted into the right to receive 0.303 (Exchange Ratio) of a share of common stock, par value $0.01 per share, of Fiserv. First Data's equity awards will generally be converted into Fiserv equity awards after giving effect to the Exchange Ratio and appropriate adjustments and be governed by the same terms and conditions as applicable to First Data's corresponding equity awards. Completion of the Merger is subject to customary closing conditions for both parties. We currently anticipate that we will close the merger during the second half of 2019. For additional information see Form 425 filed with the Securities and Exchange Commission dated January 16, 2019 and available through the “Investor Relations” portion of our website at http://investor.firstdata.com.
Our Strategy
Our ability to grow our business is influenced by global expenditure growth, increasing our share in electronic payments and providing value-added products and services to both merchants and financial institutions around the world. We grow our business through diversification of product offerings such as credit, debit, prepaid, Clover, and our suite of security products. We believe we offer our clients the most complete array of integrated solutions in our industry, covering their needs across next-generation commerce technology, merchant acquiring, issuing, and network solutions. We believe this differentiates us from our competition and will continue to drive our growth in the future.
We work with a variety of partners to deliver our merchant solutions, including large and small financial institutions, Independent Sales Organizations (ISOs), agents, Independent Software Vendors (ISVs), and others. Amongst other services, we help merchants by delivering data-driven insights and other services to help them grow and create better and more secure purchase experiences for consumers across all commerce platforms and assist them in day-to-day operations of their business via our Clover line of products which enables merchants to more efficiently run their businesses, build customer loyalty, and gain valuable insights that
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help grow their businesses. We provide financial institutions with solutions to help them grow their revenues, enhance customer satisfaction, and deliver their products more timely and efficiently.
We continue to execute on key growth initiatives including:
◦ | Innovate for tomorrow's client needs |
◦ | Accelerate top line revenue growth |
◦ | Maintain positive operating leverage |
◦ | Generate significant free cash flow |
Components of Revenue
We generate revenue by providing commerce-enabling solutions. Set forth below is a description of our revenues by segment and factors impacting total revenues.
Global Business Solutions
Global Business Solutions (GBS) segment revenues are primarily derived from processing credit and debit card transactions for merchants and other business clients and includes fees for providing processing, loyalty and software services, and sales and leases of POS devices. Revenues are generated from a variety of sources, including:
• | Merchant discount fees charged to a merchant, net of credit and debit card interchange and assessment fees charged by the payment networks. The discount fee is typically either a percentage of the purchase amount or an interchange fee plus a fixed dollar amount; |
• | Processing fees charged to merchant acquirers (including our alliance partners) who have outsourced their transaction processing to us; |
• | Sales and leases of POS devices; |
• | Fees for providing reporting and other services; and |
• | Software fees such as security applications and Clover related fees. |
A substantial portion of our business within GBS is conducted through merchant alliances between us and financial institutions. If we have management control over an alliance, then the alliance's financial statements are consolidated with ours and the related processing fees are treated as an intercompany transaction and eliminated upon consolidation. If we do not have management control over an alliance, we use the equity method of accounting. As a result, our consolidated revenues include processing fees charged to alliances accounted for under the equity method.
A large portion of GBS' revenue is derived from transaction and processing related services. This business is dependent on macroeconomic consumer trends and global economic conditions that affect the volume of consumer spending and the use of electronic payments and changes in these factors have in the past, impacted, and may in the future impact, our ability to grow this portion of the business. We implemented initiatives, such as the introduction of several new products and expansion of our sales force, expanding through ISV partnerships, and expansion into new international markets, in an effort to grow this business versus prior periods. We also completed acquisitions which have strengthened our presence in ISV and enterprise resource planning (ERP) integrated payment solutions.
Global Financial Solutions
Global Financial Solutions (GFS) revenues are primarily derived from outsourced processing services, print, plastics, and VisionPLUS software services provided to financial institutions. GFS' revenues are typically generated on the basis of number of total and active accounts on file, volume of customer communications, volume of plastics issued or license fees.
Network & Security Solutions
Network & Security Solutions (NSS) revenues are primarily derived from network services such as Electronic Funds Transfer (EFT) Network Solutions, Stored Value Network Solutions, Security and Fraud Management Solutions, and Government Solutions or Other.
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Factors Affecting the Comparability of Our Results of Operations
As a result of a number of factors, our historical results of operations are not comparable from period to period and may not be comparable to our financial results of operations in future periods. Key factors affecting the comparability of our results of operations are summarized below.
Accounting Guidance
On January 1, 2018, we adopted Accounting Standards Codification (ASC) 606 and ASC 340-40 (collectively, the New Revenue Standard) which affected how we recognize revenue. The New Revenue Standard was adopted using the modified retrospective application beginning January 1, 2018. See note 1 "Summary of Significant Accounting Policies" and note 3 "Revenue Recognition" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information related to the adoption of the New Revenue Standard.
Currency Impact
Although the majority of our revenue is earned in U.S. dollars, a portion of our revenues and expenses are in foreign currencies. As a result, changes in foreign currencies against the U.S. dollar can impact our results of operations. Additionally, we have intercompany debts in foreign currencies which impact our results of operations. In recent periods, the U.S. dollar has fluctuated versus most foreign currencies, which has impacted our operating results generated in foreign currencies as presented in U.S. dollars in our consolidated financial statements. We believe the presentation of constant currency provides relevant information and we use this non-GAAP financial measure to, among other things, evaluate our ongoing operations by excluding the impact to foreign currency fluctuations. The presentation of non-GAAP financial measures should not be considered in isolation or as a substitute for our related financial results prepared in accordance with Generally Accepted Accounting Principles (GAAP). For additional information on our constant currency calculation, see “Segment Results” within this Form 10-K.
Acquisitions and Divestitures
Acquisitions and divestitures over the past two years have impacted the comparability of our financial results. The largest acquisitions in 2017, CardConnect and BluePay, were integrated into our Global Business Solutions segment and the results for the current period are reflected within segment results. The disposition of the remittance processing business in the U.S. is reflected in Global Financial Solutions segment results through the disposition date of August 15, 2018. The disposition of the card processing business in Central and Southeastern Europe is reflected in our Global Financial Solutions segment results through the disposition date of September 28, 2018. See note 13 "Acquisitions and Dispositions" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information.
Restructuring and Cost Management Initiatives
We continually evaluate our cost base and over the past three years have executed a number of restructuring initiatives which have allowed us to streamline management, eliminate excess facilities, and work with our suppliers to lower costs. In connection with these initiatives, we have incurred restructuring charges of $85 million, $83 million, and $49 million for the years ended December 31, 2018, 2017, and 2016, respectively. These Restructuring and Cost Management Initiatives have contributed to our 220 basis points EBITDA margin expansion over the past three years. We have ongoing expense management initiatives, which are expected to result in approximately $20 million in additional restructuring costs over the next twelve months. In connection with our focus on maintaining positive operating leverage, we will likely incur additional restructuring costs in the future. See note 11 "Other Operating Expenses, Net" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information about our restructuring and cost savings initiatives.
Interest Expense and Debt Extinguishment Costs
As a result of our capital market activities we have lowered the weighted-average interest rate of our outstanding debt from 4.8% as of December 31, 2017 to 4.5% as of December 31, 2018. Using excess cash generated by the business, divestiture proceeds, and existing cash on the consolidated balance sheet we decreased our outstanding borrowings balance from $19.2 billion as of December 31, 2017 to $17.6 billion as of December 31, 2018. For the year ended December 31, 2017, we incurred $10.0 million in fees to modify existing long-term debt which is recorded within "Interest expense, net" in the consolidated statements of income.
We incurred $153 million, $80 million, and $70 million of losses on debt extinguishment during the years ended December 31, 2018, 2017, and 2016, respectively.
35
Overview
The table below reconciles Net income attributable to First Data Corporation for the year ended December 31, 2018 to December 31, 2017 and the year ended December 31, 2017 to December 31, 2016:
(in millions) | Year ended December 31, 2018 | Year ended December 31, 2017 | ||||||
Net income attributable to First Data Corporation, previous period | $ | 1,465 | $ | 420 | ||||
Better (worse): | ||||||||
Revenues excluding reimbursable items(a) | 447 | 290 | ||||||
Cost of revenues(a) | 51 | 64 | ||||||
Selling, general, and administrative(a) | (303 | ) | (143 | ) | ||||
Depreciation and amortization(a) | (29 | ) | (23 | ) | ||||
Other operating expenses, net | 24 | (92 | ) | |||||
Loss on debt extinguishment | (73 | ) | (10 | ) | ||||
Net income attributable to noncontrolling interests and redeemable noncontrolling interest | 6 | 41 | ||||||
New revenue standard | (3 | ) | — | |||||
Interest expense, net | 14 | 147 | ||||||
Income tax | (778 | ) | 810 | |||||
Equity earnings in affiliates | (1 | ) | (38 | ) | ||||
Other income | 185 | (1 | ) | |||||
Net income attributable to First Data Corporation, period ended | $ | 1,005 | $ | 1,465 | ||||
(a) The year ended December 31, 2018 is exclusive of New Revenue Standard.
Segment Results
We operate three reportable segments: Global Business Solutions (GBS), Global Financial Solutions (GFS), and Network & Security Solutions (NSS). Our segments are designed to establish global lines of businesses that work seamlessly with our teams in our regions of North America (United States and Canada), EMEA (Europe, Middle East, and Africa), LATAM (Latin America and Caribbean region), and APAC (Asia Pacific).
The business segment measurements provided to and evaluated by the chief operating decision maker are computed in accordance with the principles listed below:
• | The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. |
• | Intersegment revenues are eliminated in the segment that sells directly to the end market. |
• | Segment revenue excludes reimbursable items. |
• | Segment EBITDA includes equity earnings in affiliates and excludes depreciation and amortization expense, net income attributable to noncontrolling interests, other operating expenses, net, other income (expense), and stock-based compensation. |
• | For significant affiliates, segment revenue and segment EBITDA are reflected based on our proportionate share of the results of our investments in businesses accounted for under the equity method and consolidated subsidiaries with noncontrolling ownership interests. For other affiliates, we include equity earnings in affiliates, excluding amortization expense, in segment revenue and segment EBITDA. |
• | Corporate operations include corporate-wide governance functions such as our executive management team, tax, treasury, internal audit, corporate strategy, and certain accounting, human resources and legal costs related to supporting the corporate function. Costs incurred by Corporate that are attributable to a segment are allocated to the respective segment. |
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• | Certain measures exclude the estimated impact of foreign currency changes. To present this information, monthly results during the periods presented for entities with functional currencies other than U.S. dollars are translated into U.S. dollars at the average exchange rates in effect during the corresponding month of the prior fiscal year, rather than the actual average exchange rates in effect during the current fiscal year. Once translated, each month during the periods presented is added together to calculate the constant currency results for the periods presented. |
Operating revenues overview
Year ended December 31, | Percent Change | Organic Constant Currency Percent Change(a) | ||||||||||||||||||||||
(in millions) | 2018 | 2017 | 2016 | 2018 vs. 2017 | 2017 vs. 2016 | 2018 vs. 2017 | 2017 vs. 2016 | |||||||||||||||||
Consolidated revenues | $ | 9,498 | $ | 12,052 | $ | 11,584 | (21 | )% | 4 | % | ||||||||||||||
Adjustments: | ||||||||||||||||||||||||
Non wholly-owned entities | (22 | ) | (64 | ) | (80 | ) | (66 | )% | (20 | )% | ||||||||||||||
Reimbursable items | (819 | ) | (3,923 | ) | (3,745 | ) | (79 | )% | 5 | % | ||||||||||||||
Total segment revenues | $ | 8,657 | $ | 8,065 | $ | 7,759 | 7 | % | 4 | % | 6 | % | 3 | % | ||||||||||
Year ended December 31, | Percent Change | Organic Constant Currency Percent Change(a) | ||||||||||||||||||||||
(in millions) | 2018 | 2017 | 2016 | 2018 vs. 2017 | 2017 vs. 2016 | 2018 vs. 2017 | 2017 vs. 2016 | |||||||||||||||||
Segment revenues: | ||||||||||||||||||||||||
Global Business Solutions | $ | 5,572 | $ | 4,899 | $ | 4,681 | 14 | % | 5 | % | 7 | % | 3 | % | ||||||||||
Global Financial Solutions | 1,596 | 1,623 | 1,593 | (2 | )% | 2 | % | 4 | % | 3 | % | |||||||||||||
Network & Security Solutions | 1,489 | 1,543 | 1,485 | (3 | )% | 4 | % | 2 | % | 4 | % | |||||||||||||
Total segment revenues | $ | 8,657 | $ | 8,065 | $ | 7,759 | 7 | % | 4 | % | 6 | % | 3 | % | ||||||||||
(a) | Organic constant currency growth is defined as reported growth adjusted for the following: (1) excludes the impacts of year-over-year currency rate changes in the current period; (2) excludes the results of significant divestitures in the prior year period; (3) includes the results of significant acquisitions in the prior year period; (4) for the year ended December 31, 2018, the prior year period is adjusted to retrospectively apply the New Revenue Standard; and (5) for the year ended December 31, 2017, the prior year period includes the impact of the Clover accounting change. |
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Global Business Solutions segment results
The following table displays total segment revenue by region:
Year ended December 31, 2017 | Organic Constant Currency Percent Change(d) | |||||||||||||||||||||||||||||||||||||
As Reported | New Revenue Standard Adjustments(a) | As Adjusted | Acquisitions/Dispositions(b) | Core Growth (Decline) | Currency Impact(c) | Accounting Change | Year ended December 31, 2018 | Reported Percent Change | ||||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||||||
North America | $ | 3,814 | $ | 131 | $ | 3,945 | $ | 203 | $ | 181 | $ | — | $ | — | $ | 4,329 | 14 | % | 4 | % | ||||||||||||||||||
EMEA | 639 | 5 | 644 | (1 | ) | 37 | 26 | — | 706 | 10 | % | 6 | % | |||||||||||||||||||||||||
LATAM | 273 | 27 | 300 | — | 134 | (98 | ) | — | 336 | 23 | % | 45 | % | |||||||||||||||||||||||||
APAC | 173 | 2 | 175 | — | 27 | (1 | ) | — | 201 | 16 | % | 16 | % | |||||||||||||||||||||||||
Total segment revenue | $ | 4,899 | $ | 165 | $ | 5,064 | $ | 202 | $ | 379 | $ | (73 | ) | $ | — | $ | 5,572 | 14 | % | 7 | % | |||||||||||||||||
(a) | Effective January 1, 2018, we adopted the New Revenue Standard using a modified retrospective basis. See Revenue Recognition in note 1 "Summary of Significant Accounting Policies" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information. |
(b) | Business acquisitions of CardConnect in July 2017 and BluePay in December 2017. See note 13 "Acquisitions and Dispositions" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information. |
(c) | Currency impact is the difference between the current year's actual results and those results converted with the prior year's foreign exchange rate. |
(d) | Organic constant currency growth is defined as reported growth adjusted for the following: (1) excludes the impacts of year-over-year currency rate changes in the current period; (2) excludes the results of significant divestitures in the prior year period; (3) includes the results of significant acquisitions in the prior year period; and (4) is adjusted to retrospectively apply the New Revenue Standard to the prior year period. |
Year ended December 31, 2016 | Organic Constant Currency Percent Change(d) | |||||||||||||||||||||||||||||||||||||
As Reported | New Revenue Standard Adjustments | As Adjusted | Acquisitions/ Dispositions(a) | Core Growth (Decline) | Currency Impact(b) | Accounting Change(c) | Year ended December 31, 2017 | Reported Percent Change | ||||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||||||
North America | $ | 3,690 | $ | — | $ | 3,690 | $ | 84 | $ | (23 | ) | $ | 1 | $ | 62 | $ | 3,814 | 3 | % | (1 | )% | |||||||||||||||||
EMEA | 611 | — | 611 | — | 28 | — | — | 639 | 5 | % | 5 | % | ||||||||||||||||||||||||||
LATAM | 178 | — | 178 | — | 101 | (6 | ) | — | 273 | 53 | % | 57 | % | |||||||||||||||||||||||||
APAC | 202 | — | 202 | (48 | ) | 16 | 3 | — | 173 | (14 | )% | 10 | % | |||||||||||||||||||||||||
Total segment revenue | $ | 4,681 | $ | — | $ | 4,681 | $ | 36 | $ | 122 | $ | (2 | ) | $ | 62 | $ | 4,899 | 5 | % | 3 | % | |||||||||||||||||
(a) | North America revenue was impacted by acquisitions of CardConnect in July 2017 and BluePay in December 2017. The Acquisitions/Dispositions column includes July 2016 to December 2016 and December 2016 revenues for CardConnect and BluePay, respectively, and current period growth for CardConnect and BluePay is included in Core Growth (Decline). APAC balance represents revenue associated with the disposition of the Australian ATM business in September 2016. See note 13 "Acquisitions and Dispositions" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information. |
(b) | Currency impact is the difference between the current year's actual results and those results converted with the prior year's foreign exchange rate. |
(c) | Effective January 2017, we changed our accounting for Clover hardware sales to recognize revenue upon shipment as opposed to deferring such revenue and recognizing over an established period, typically three years. Previously deferred revenue on hardware shipped in prior years continued to be amortized over the established period until the adoption of the New Revenue Standard. See Deferred Revenue in note 1 "Summary of Significant Accounting Policies" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information. |
(d) | Organic constant currency growth is defined as reported growth adjusted for the following: (1) excludes the impacts of year-over-year currency rate changes in the current period; (2) excludes the results of significant divestitures in the prior year period; (3) includes the results of significant acquisitions in the prior year period; and (4) includes the impact of the Clover accounting change in the prior year period. |
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Global Financial Solutions segment results
The following table displays total segment revenue by region:
Year ended December 31, 2017 | Organic Constant Currency Percent Change(d) | |||||||||||||||||||||||||||||||||
As Reported | New Revenue Standard Adjustments(a) | As Adjusted | Dispositions(b) | Core Growth (Decline) | Currency Impact(c) | Year ended December 31, 2018 | Reported Percent Change | |||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||
North America | $ | 949 | $ | (2 | ) | $ | 947 | $ | (31 | ) | $ | 4 | $ | — | $ | 920 | (3 | )% | 1 | % | ||||||||||||||
EMEA | 444 | (2 | ) | 442 | (46 | ) | 18 | 16 | 430 | (3 | )% | 5 | % | |||||||||||||||||||||
LATAM | 132 | 6 | 138 | — | 16 | (21 | ) | 133 | 1 | % | 12 | % | ||||||||||||||||||||||
APAC | 98 | (9 | ) | 89 | — | 26 | (2 | ) | 113 | 15 | % | 30 | % | |||||||||||||||||||||
Total segment revenue | $ | 1,623 | $ | (7 | ) | $ | 1,616 | $ | (77 | ) | $ | 64 | $ | (7 | ) | $ | 1,596 | (2 | )% | 4 | % | |||||||||||||
(a) | Effective January 1, 2018, we adopted the New Revenue Standard using a modified retrospective basis. See Revenue Recognition in note 1 "Summary of Significant Accounting Policies" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information. |
(b) | Business disposition of Lithuania, Latvia and Estonia (the Baltics) in September 2017, remittance processing business in August 2018, and card processing business in Central and Southeastern Europe in September 2018. See note 13 "Acquisitions and Dispositions" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information. |
(c) | Currency impact is the difference between the current year's actual results and those results converted with the prior year's foreign exchange rate. |
(d) | Organic constant currency growth is defined as reported growth adjusted for the following: (1) excludes the impacts of year-over-year currency rate changes in the current period; (2) excludes the results of significant divestitures in the prior year period; (3) includes the results of significant acquisitions in the prior year period; and (4) is adjusted to retrospectively apply the New Revenue Standard to the prior year period. |
Year ended December 31, 2016 | Organic Constant Currency Percent Change(c) | |||||||||||||||||||||||||||||||||
As Reported | New Revenue Standard Adjustments | As Adjusted | Dispositions(a) | Core Growth (Decline) | Currency Impact(b) | Year ended December 31, 2017 | Reported Percent Change | |||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||
North America | $ | 956 | $ | — | $ | 956 | $ | — | $ | (7 | ) | $ | — | $ | 949 | (1 | )% | (1 | )% | |||||||||||||||
EMEA | 433 | — | 433 | (6 | ) | 30 | (13 | ) | 444 | 3 | % | 7 | % | |||||||||||||||||||||
LATAM | 122 | — | 122 | — | 13 | (3 | ) | 132 | 9 | % | 11 | % | ||||||||||||||||||||||
APAC | 82 | — | 82 | — | 13 | 3 | 98 | 19 | % | 16 | % | |||||||||||||||||||||||
Total segment revenue | $ | 1,593 | $ | — | $ | 1,593 | $ | (6 | ) | $ | 49 | $ | (13 | ) | $ | 1,623 | 2 | % | 3 | % | ||||||||||||||
(a) | Business disposition of Lithuania, Latvia and Estonia (i.e. the Baltics) in September 2017. See note 13 "Acquisitions and Dispositions" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information. |
(b) | Currency impact is the difference between the current year's actual results and those results converted with the prior year's foreign exchange rate. |
(c) | Organic constant currency growth is defined as reported growth adjusted for the following: (1) excludes the impacts of year-over-year currency rate changes in the current period; (2) excludes the results of significant divestitures in the prior year period; and (3) includes the results of significant acquisitions in the prior year period. |
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Network & Security Solutions segment results
Our Network & Security Solutions segment is comprised of more than 95% domestic businesses with no material foreign exchange impact on reported results. The following table displays total revenue by product:
Year ended December 31, 2017 | Organic Constant Currency Percent Change(c) | |||||||||||||||||||||||||||||
As Reported | New Revenue Standard Adjustments(a) | As Adjusted | Dispositions(b) | Core Growth (Decline) | Year ended December 31, 2018 | Reported Percent Change | ||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||
EFT Network | $ | 487 | $ | 1 | $ | 488 | $ | — | $ | 17 | $ | 505 | 4 | % | 4 | % | ||||||||||||||
Security and Fraud | 449 | 6 | 455 | — | (1 | ) | 454 | 1 | % | — | % | |||||||||||||||||||
Stored Value Network | 405 | (62 | ) | 343 | — | 6 | 349 | (14 | )% | 2 | % | |||||||||||||||||||
Other | 202 | — | 202 | (21 | ) | — | 181 | (10 | )% | — | % | |||||||||||||||||||
Total segment revenue | $ | 1,543 | $ | (55 | ) | $ | 1,488 | $ | (21 | ) | $ | 22 | $ | 1,489 | (3 | )% | 2 | % | ||||||||||||
(a) | Effective January 1, 2018, we adopted the New Revenue Standard using a modified retrospective basis. See Revenue Recognition in note 1 "Summary of Significant Accounting Policies" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information. |
(b) | Represents adjustment to exclude net revenue associated with business that was contributed to our digital banking joint venture with Live Oak on October 2, 2017 offset by our 50% of the joint venture's revenue. See note 13 "Acquisitions and Dispositions" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information. |
(c) | Organic constant currency growth is defined as reported growth adjusted for the following: (1) excludes the results of significant divestitures in the prior year period and (2) is adjusted to retrospectively apply the New Revenue Standard to the prior year period. |
Year ended December 31, 2016 | Organic Constant Currency Percent Change(b) | |||||||||||||||||||||||||||||
As Reported | New Revenue Standard Adjustments | As Adjusted | Dispositions(a) | Core Growth (Decline) | Year ended December 31, 2017 | Reported Percent Change | ||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||
EFT Network | $ | 491 | $ | — | $ | 491 | $ | — | $ | (4 | ) | $ | 487 | (1 | )% | (1 | )% | |||||||||||||
Security and Fraud | 434 | — | 434 | — | 15 | 449 | 3 | % | 3 | % | ||||||||||||||||||||
Stored Value Network | 358 | — | 358 | — | 47 | 405 | 13 | % | 13 | % | ||||||||||||||||||||
Other | 202 | — | 202 | (7 | ) | 7 | 202 | — | % | 4 | % | |||||||||||||||||||
Total segment revenue | $ | 1,485 | $ | — | $ | 1,485 | $ | (7 | ) | $ | 65 | $ | 1,543 | 4 | % | 4 | % | |||||||||||||
(a) | Other revenue adjusted to exclude net revenue associated with business that was contributed to our digital banking joint venture with Live Oak on October 2, 2017 offset by our 50% of the joint ventures revenue. See note 13 "Acquisitions and Dispositions" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information. |
(b) | Organic constant currency growth is defined as reported growth adjusted to exclude the results of significant divestitures in the prior year period. |
Operating expenses overview
Year ended December 31, | Percent Change | Constant Currency Percent Change | ||||||||||||||||||||||
(in millions) | 2018 | 2017 | 2016 | 2018 vs. 2017 | 2017 vs. 2016 | 2018 vs. 2017 | 2017 vs. 2016 | |||||||||||||||||
Cost of revenues (exclusive of items shown below) | $ | 3,005 | $ | 3,128 | $ | 3,192 | (4 | )% | (2 | )% | (3 | )% | (4 | )% | ||||||||||
Selling, general, and administrative | 2,651 | 2,178 | 2,035 | 22 | % | 7 | % | 22 | % | 7 | % | |||||||||||||
Cost of revenues and selling, general, and administrative expenses | 5,656 | 5,306 | 5,227 | 7 | % | 2 | % | 7 | % | 3 | % | |||||||||||||
Depreciation and amortization | 1,009 | 972 | 949 | 4 | % | 2 | % | 6 | % | 2 | % | |||||||||||||
Other operating expenses, net | 119 | 143 | 51 | (17 | )% | 180 | % | (15 | )% | 180 | % | |||||||||||||
Total expenses (excluding reimbursable items) | 6,784 | 6,421 | 6,227 | 6 | % | 3 | % | 6 | % | 3 | % | |||||||||||||
Reimbursable items | 819 | 3,923 | 3,745 | (79 | )% | 5 | % | (79 | )% | 5 | % | |||||||||||||
Total expenses | $ | 7,603 | $ | 10,344 | $ | 9,972 | (26 | )% | 4 | % | (26 | )% | 4 | % | ||||||||||
40
Cost of revenues and Selling, general, and administrative expenses
(in millions) | Year ended December 31, 2017 | New Revenue Standard Adjustments(a) | Acquisitions/Dispositions(b) | Core Growth (Decline) | Year ended December 31, 2018 | Percent Change | Constant Currency Percent Change | |||||||||||||||||||
Sales and distribution incentives | $ | 921 | $ | 192 | $ | 73 | $ | 146 | (c) | $ | 1,332 | |||||||||||||||
Salaries, wages, bonus, and outside professional fees | 2,473 | (79 | ) | 12 | 7 | (d) | 2,413 | |||||||||||||||||||
Stock-based compensation | 245 | — | — | 3 | 248 | |||||||||||||||||||||
Cost of products sold | 359 | (44 | ) | (3 | ) | 20 | 332 | |||||||||||||||||||
Software, telecommunication infrastructure, and repairs | 387 | — | (3 | ) | (13 | ) | 371 | |||||||||||||||||||
Other | 921 | 29 | (25 | ) | 35 | 960 | ||||||||||||||||||||
Cost of revenues and Selling, general, and administrative expenses | $ | 5,306 | $ | 98 | $ | 54 | $ | 198 | $ | 5,656 | 7 | % | 7 | % | ||||||||||||
(a) | Effective January 1, 2018, we adopted the New Revenue Standard using a modified retrospective basis. See Revenue Recognition in note 1 "Summary of Significant Accounting Policies" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information. |
(b) | Expenses were impacted by the acquisitions of CardConnect in July 2017 and BluePay in December 2017, and disposition of Lithuania, Latvia and Estonia (the Baltics) in September 2017, the formation of a digital banking joint venture with Live Oak Bank in October 2017, the dispositions of our remittance processing business in August 2018 and card processing business in Central and Southeastern Europe in September 2018. See note 13 "Acquisitions and Dispositions" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information. |
(c) | Increase related to growth in our merchant acquiring business. |
(d) | Increase due to outside professional fees and annual compensation increases of approximately $175 million, offset by cost savings initiatives, lower incentive compensation, and lower fringe. |
(in millions) | Year ended December 31, 2016 | New Revenue Standard Adjustments | Acquisitions/Dispositions(a) | Core Growth (Decline) | Year ended December 31, 2017 | Percent Change | Constant Currency Percent Change | |||||||||||||||||||
Sales and distribution incentives | $ | 755 | $ | — | $ | 72 | $ | 94 | (b) | $ | 921 | |||||||||||||||
Salaries, wages, bonus, and outside professional fees | 2,579 | — | 17 | (123 | ) | (c) | 2,473 | |||||||||||||||||||
Stock-based compensation | 263 | — | (1 | ) | (17 | ) | (d) | 245 | ||||||||||||||||||
Cost of products sold | 337 | — | — | 22 | (e) | 359 | ||||||||||||||||||||
Software, telecommunication infrastructure, and repairs | 396 | — | (1 | ) | (8 | ) | 387 | |||||||||||||||||||
Other | 897 | — | 8 | 16 | 921 | |||||||||||||||||||||
Cost of revenues and Selling, general, and administrative expenses | $ | 5,227 | $ | — | $ | 95 | $ | (16 | ) | $ | 5,306 | 2 | % | 3 | % | |||||||||||
(a) | Expenses were impacted by the acquisition of CardConnect in July 2017 and BluePay in December 2017, and disposition of Lithuania, Latvia and Estonia (the Baltics) in September 2017, the formation of a digital banking joint venture with Live Oak in October 2017, and the disposition of our Australian ATM business in September 2016. See note 13 "Acquisitions and Dispositions" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information. |
(b) | Increase related to growth in our merchant acquiring business. |
(c) | Expense decreased in 2017 compared to 2016 due to a $31 million decline in salaries and wages related to previously announced cost management initiatives, and decrease in outside professional fees. |
(d) | The decline in stock based compensation resulted from a $52 million decline in one-time expense related to our initial public offering in 2015, offset by an increase of $34 million in recurring stock-based compensation incurred over the vesting life of normal service-based stock awards. |
(e) | Cost of products sold increased in 2017 compared to 2016 due to hardware expenses, impacted by a $47 million change in accounting relating to our Clover terminals effective as of January 1, 2017. |
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Depreciation and amortization
Year ended December 31, | Percent Change | Constant Currency Percent Change | ||||||||||||||||||||||
(in millions) | 2018 | 2017 | 2016 | 2018 vs. 2017 | 2017 vs. 2016 | 2018 vs. 2017 | 2017 vs. 2016 | |||||||||||||||||
Depreciation expense | $ | 320 | $ | 321 | $ | 300 | — | % | 7 | % | ||||||||||||||
Amortization expense | 689 | 651 | 649 | 6 | % | — | % | |||||||||||||||||
Depreciation and amortization(a) | $ | 1,009 | $ | 972 | $ | 949 | 4 | % | 2 | % | 6 | % | 2 | % | ||||||||||
(a) | Amortization expense increased in 2017 and 2018 attributed to the CardConnect and BluePay acquisitions, offset partially by reduction in amortization expense on acquisition intangibles that have been fully amortized. |
Other operating expenses, net
Year ended December 31, | Percent Change | Constant Currency Percent Change | ||||||||||||||||||||||
(in millions) | 2018 | 2017 | 2016 | 2018 vs. 2017 | 2017 vs. 2016 | 2018 vs. 2017 | 2017 vs. 2016 | |||||||||||||||||
Restructuring, net | $ | 85 | $ | 83 | $ | 49 | ||||||||||||||||||
Deal and deal integration costs | 3 | 27 | — | |||||||||||||||||||||
Asset impairment | — | 13 | — | |||||||||||||||||||||
Merchant matters | 20 | 10 | — | |||||||||||||||||||||
Other | 11 | 10 | 2 | |||||||||||||||||||||
Other operating expenses, net(a) | $ | 119 | $ | 143 | $ | 51 | (17 | )% | 180 | % | (15 | )% | 180 | % | ||||||||||
(a) | See note 11 "Other Operating Expenses, Net" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for details regarding other operating expenses. |
Interest expense, net
Year ended December 31, | Percent Change | Constant Currency Percent Change | ||||||||||||||||||||||
(in millions) | 2018 | 2017 | 2016 | 2018 vs. 2017 | 2017 vs. 2016 | 2018 vs. 2017 | 2017 vs. 2016 | |||||||||||||||||
Interest expense, net(a) | $ | (917 | ) | $ | (931 | ) | $ | (1,078 | ) | (2 | )% | (14 | )% | (2 | )% | (12 | )% | |||||||
(a) | See note 2 "Borrowings" in our consolidated financial statements in Part II, Item 8 of this Form 10-K. |
Loss on debt extinguishment
Year ended December 31, | Percent Change | Constant Currency Percent Change | ||||||||||||||||||||||
(in millions) | 2018 | 2017 | 2016 | 2018 vs. 2017 | 2017 vs. 2016 | 2018 vs. 2017 | 2017 vs. 2016 | |||||||||||||||||
Loss on debt extinguishment(a) | $ | (153 | ) | $ | (80 | ) | $ | (70 | ) | 91 | % | 14 | % | 91 | % | 14 | % | |||||||
(a) | See note 2 "Borrowings" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information. |
Other income
Year ended December 31, | Percent Change | Constant Currency Percent Change | ||||||||||||||||||||
(in millions) | 2018 | 2017 | 2016 | 2018 vs. 2017 | 2017 vs. 2016 | 2018 vs. 2017 | 2017 vs. 2016 | |||||||||||||||
Investment gains | $ | 3 | $ | 1 | $ | 35 | (c) | |||||||||||||||
Divestitures, net gain (loss)(a) | 197 | 18 | (34 | ) | ||||||||||||||||||
Non-operating foreign currency gains (losses)(b) | 6 | (1 | ) | 19 | ||||||||||||||||||
Other miscellaneous expense | (5 | ) | (2 | ) | (3 | ) | ||||||||||||||||
Other income | $ | 201 | $ | 16 | $ | 17 | NM | (6 | )% | NM | (6 | )% | ||||||||||
(a) | See note 13 "Acquisitions and Dispositions" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information on our significant divestitures. |
(b) | Non-operating foreign currency (loss) gain represents net gains and losses related to currency translations on our intercompany loans in all years. |
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(c) | Investment gains in 2016 represent the sale of our share in Visa Europe (VE). Additionally in 2016, we sold our 49% minority interest in an international joint venture which resulted in a pretax gain of $7 million. |
Income taxes
Year ended December 31, | ||||||||||||
(in millions) | 2018 | 2017 | 2016 | |||||||||
Income tax expense (benefit) | $ | 49 | $ | (729 | ) | $ | 81 | |||||
Effective income tax rate | 4 | % | (78 | )% | 11 | % | ||||||
Year over year, our global effective tax rate differs from the statutory tax rates of the jurisdictions in which we operate as a result of a variety of factors, including the impact of U.S. state and local taxes, establishment or release of valuation allowances against certain deferred tax assets, tax effects of nonrecurring events and transactions, tax effects of tax law changes, and the tax impacts of equity compensation.
In 2018, the tax rate was positively impacted by the release of valuation allowances connected to certain U.S. state and local deferred tax assets as well as the release of income tax reserves associated with tax audits that were concluded during the year, principally the closure of the 2005 through 2007 tax years. Further, the tax rate was positively impacted by nonrecurring impacts of the disposal of certain foreign subsidiaries.
In 2017, the tax rate was positively impacted by a significant release of valuation allowances in the U.S., partially offset by a negative impact of the reduction to our net deferred tax assets as a result of the enactment of the Tax Cuts and Jobs Act. Following the establishment of significant valuation allowances against deferred tax assets in 2012, we regularly experienced substantial volatility in our effective tax rate in interim periods and across years through 2017. This was a result of deferred income tax benefits not being recognized in several jurisdictions, most notably in the United States. During 2017, significant amounts of federal and state valuation allowances were released, creating a large effective tax rate benefit. Additional state valuation allowances were released in 2018. This release of the valuation allowance should reduce volatility of the effective tax rate in future periods.
Pre-tax income generated and the effective income tax rate in domestic and foreign jurisdictions for the years ended December 31, 2018, 2017, and 2016 are as follows:
Year ended December 31, | ||||||||||||||||||||||||||||||||||||
2018 | 2017 | 2016 | ||||||||||||||||||||||||||||||||||
(in millions) | Domestic | Foreign | Total | Domestic | Foreign | Total | Domestic | Foreign | Total | |||||||||||||||||||||||||||
Pre-tax income | $ | 535 | $ | 712 | $ | 1,247 | $ | 484 | $ | 451 | $ | 935 | $ | 492 | $ | 249 | $ | 741 | ||||||||||||||||||
Income tax (benefit) expense | (48 | ) | 97 | 49 | (827 | ) | 98 | (729 | ) | 40 | 41 | 81 | ||||||||||||||||||||||||
Effective income tax rate | (9 | )% | 14 | % | 4 | % | (171 | )% | 22 | % | (78 | )% | 8 | % | 16 | % | 11 | % | ||||||||||||||||||
The significant jurisdictions comprising our foreign income tax expense are Argentina, Brazil, Ireland, and the UK.
From 2007 through 2015, we were in a net operating loss position in the U.S. federal and combined state jurisdictions. From 2016 through 2018, we generated profits in the U.S., causing significant portions of these net operating losses to be utilized. As a result of improved profitability, expected future performance, and the length of time remaining before the net operating losses will expire, we determined that it was more likely than not that all of our federal and certain of our state net deferred tax assets in the U.S. would be realized. Accordingly, in 2017, we released our federal and certain state valuation allowances. In 2018, we released additional state valuation allowances as a result of continued profitability.
On December 22, 2017, the Tax Cuts and Jobs Act (tax reform bill) was signed into law in the U.S. The provisions of the tax reform bill with the most significant implications to us were the reduction of the federal tax rate from 35% to 21%, the creation of a 100% participation exemption for foreign dividends, the enactment of a one-time transition tax on existing foreign earnings, limitations on the deductibility of interest expense, and the establishment of global intangible low-taxed income (GILTI) rules. The first three provisions impacted the year-ended December 31, 2017. Because our deferred tax assets exceed our deferred tax liabilities in the U.S., the reduction of the tax rate provided by the tax reform bill resulted in a negative impact to the tax rate of $194 million in 2017. The one-time transition tax coupled with the 100% participation exemption had an immaterial impact on the tax rate. Because we have historically repatriated our foreign earnings, our cumulative foreign deficits exceed our cumulative foreign profits, causing our one-time taxable inclusion under the transition tax rules to be zero.
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As permitted by Staff Accounting Bulletin No. 118, provisional amounts estimated based on information available as of December 31, 2017 were made for the adjustments to deferred tax assets and liabilities, the calculation of the transition tax, and certain valuation allowance assessments. These amounts were subject to change in 2018 as we obtained information necessary to complete the calculations. Such calculations were completed in 2018 and no material adjustments were made to the amounts originally recorded in 2017.
We, or one or more of our subsidiaries, file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. As of December 31, 2018, we were no longer subject to income tax examination by the U.S. federal jurisdiction for years before 2008. State and local examinations are substantially complete through 2010. Foreign jurisdictions generally remain subject to examination by their respective authorities from 2007 forward, none of which are considered major jurisdictions. See note 9 "Income Tax" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information.
Equity earnings in affiliates
Year ended December 31, | Percent Change | Constant Currency Percent Change | ||||||||||||||||||||||
(in millions) | 2018 | 2017 | 2016 | 2018 vs. 2017 | 2017 vs. 2016 | 2018 vs. 2017 | 2017 vs. 2016 | |||||||||||||||||
Equity earnings in affiliates(a) | $ | 221 | $ | 222 | $ | 260 | — | % | (15 | )% | — | % | (15 | )% | ||||||||||
(a) | Equity earnings in affiliates is related to the earnings of our unconsolidated merchant alliance partnerships which decreased in 2017 compared to 2016 due to a decline in the results of our North American joint ventures driven by a significant decline in lead flow. |
Net income attributable to noncontrolling interests and redeemable noncontrolling interest
Year ended December 31, | Percent Change | Constant Currency Percent Change | ||||||||||||||||||||||
(in millions) | 2018 | 2017 | 2016 | 2018 vs. 2017 | 2017 vs. 2016 | 2018 vs. 2017 | 2017 vs. 2016 | |||||||||||||||||
Net income attributable to noncontrolling interests and redeemable noncontrolling interest(a) | $ | 193 | $ | 199 | $ | 240 | (3 | )% | (17 | )% | (4 | )% | (17 | )% | ||||||||||
(a) | Net income attributable to noncontrolling interests and redeemable noncontrolling interest relates to the ownership interest of our alliance partners in our consolidated results. Net income attributable to noncontrolling interests and redeemable noncontrolling interest decreased in 2017 compared to 2016 due to a decline in the results of our North American joint ventures mainly due to significant decline in lead flow. See note 6 "Stockholders' Equity and Redeemable Noncontrolling Interest" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information. |
Segment EBITDA Overview
The following table displays total segment EBITDA by segment and illustrates, on a percentage basis, the impact of foreign currency fluctuations on revenue growth for the periods presented:
Year ended December 31, 2017 | Organic Constant Currency Percent Change(d) | |||||||||||||||||||||||||||||||||
(in millions) | As Reported | New Revenue Standard Adjustments(a) | As Adjusted | Acquisitions\Dispositions(b) | Core Growth (Decline) | Currency Impact(c) | Year ended December 31, 2018 | Reported Percent Change | ||||||||||||||||||||||||||
Segment EBITDA: | ||||||||||||||||||||||||||||||||||
Global Business Solutions | $ | 1,824 | $ | (14 | ) | $ | 1,810 | $ | 59 | $ | 174 | $ | (48 | ) | $ | 1,995 | 9 | % | 9 | % | ||||||||||||||
Global Financial Solutions | 680 | (1 | ) | 679 | (23 | ) | 19 | (13 | ) | 662 | (3 | )% | 3 | % | ||||||||||||||||||||
Network & Security Solutions | 729 | — | 729 | — | 49 | — | 778 | 7 | % | 7 | % | |||||||||||||||||||||||
Corporate | (167 | ) | — | (167 | ) | — | (4 | ) | — | (171 | ) | (2 | )% | (2 | )% | |||||||||||||||||||
Total Segment EBITDA (non-GAAP) | $ | 3,066 | $ | (15 | ) | $ | 3,051 | $ | 36 | $ | 238 | $ | (61 | ) | $ | 3,264 | 6 | % | 8 | % | ||||||||||||||
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Year ended December 31, 2016 | Organic Constant Currency Percent Change(d) | |||||||||||||||||||||||||||||||||
(in millions) | As Reported | New Revenue Standard Adjustments(a) | As Adjusted | Acquisitions\Dispositions(b) | Core Growth (Decline) | Currency Impact(c) | Year ended December 31, 2017 | Reported Percent Change | ||||||||||||||||||||||||||
Segment EBITDA: | ||||||||||||||||||||||||||||||||||
Global Business Solutions | $ | 1,725 | $ | — | $ | 1,725 | $ | 20 | $ | 85 | $ | (6 | ) | $ | 1,824 | 6 | % | 5 | % | |||||||||||||||
Global Financial Solutions | 646 | — | 646 | (2 | ) | 43 | (7 | ) | 680 | 5 | % | 6 | % | |||||||||||||||||||||
Network & Security Solutions | 666 | — | 666 | — | 63 | — | 729 | 9 | % | 9 | % | |||||||||||||||||||||||
Corporate | (145 | ) | — | (145 | ) | — | (22 | ) | — | (167 | ) | (15 | )% | (15 | )% | |||||||||||||||||||
Total Segment EBITDA (non-GAAP) | $ | 2,892 | $ | — | $ | 2,892 | $ | 18 | $ | 169 | $ | (13 | ) | $ | 3,066 | 6 | % | 6 | % | |||||||||||||||
(a) | Effective January 1, 2018, we adopted the New Revenue Standard using a modified retrospective basis. See Revenue Recognition in note 1 "Basis of Presentation and Summary of Significant Accounting Policies" to our consolidated financial statements in Part I of this Form 10-K for additional information. |
(b) | EBITDA was impacted by acquisitions and dispositions. See acquisitions and dispositions previously discussed. |
(c) | Currency impact is the difference between the current year's actual results and the same year's results converted with the prior year's foreign exchange rate. |
(d) | Organic constant currency growth is defined as reported growth adjusted for the following: (1) excludes the impacts of year-over-year currency rate changes in the current period; (2) excludes the results of significant divestitures in the prior year period; (3) includes the results of significant acquisitions in the prior year period; and (4) is adjusted to retrospectively apply new reporting standards to the prior year period. |
The following table displays Segment EBITDA margin by segment for the periods presented:
Year ended December 31, | Change | |||||||||||||
2018 | 2017 | 2016 | 2018 vs. 2017 | 2017 vs. 2016 | ||||||||||
Segment EBITDA Margin: | ||||||||||||||
Global Business Solutions | 35.8 | % | 37.2 | % | 36.9 | % | (140 | ) bps | 30 | |||||
Global Financial Solutions | 41.5 | % | 41.9 | % | 40.6 | % | (40 | ) bps | 130 | |||||
Network & Security Solutions | 52.2 | % | 47.2 | % | 44.8 | % | 500 | bps | 240 | |||||
Total Segment EBITDA Margin | 37.7 | % | 38.0 | % | 37.3 | % | (30 | ) bps | 70 | |||||
Global Business Solutions
Global Business Solutions Segment EBITDA increased 9% in 2018 compared to 2017 due to the impact of the revenue items noted previously within "Global Business Solutions segment results" and the acquisition of CardConnect and BluePay. Currency translation negatively impacted segment EBITDA by $48 million compared to the prior year.
Global Business Solutions Segment EBITDA increased 6% in 2017 compared to 2016 due to the impact of the revenue items noted previously within "Global Business Solutions segment results", the acquisition of CardConnect and BluePay, along with expense declines driven by expense management initiatives.
Global Financial Solutions
Global Financial Solutions Segment EBITDA decreased (3)% in 2018 compared to 2017 due to the impact of the revenue items noted within "Global Financial Solutions segment results", as well as additional costs related to a new student loan processing agreement entered into in the second half of 2018, and technology investments in the international regions. Currency translation negatively impacted segment EBITDA by $13 million compared to the prior period.
Global Financial Solutions Segment EBITDA increased 5% in 2017 compared to 2016 due to the impact of the revenue items noted within "Global Financial Solutions segment results" and lower expenses driven by $25 million of operational efficiencies and lower plastics volumes in North America partially offset by increased investment in the international regions. Currency translation negatively impacted segment EBITDA by approximately $7 million compared to the prior period.
Network & Security Solutions
Network & Security Solutions Segment EBITDA increased 7% in 2018 compared to 2017 due to the revenue items noted within "Network & Security Solutions segment results". In addition to the changes in revenue, expenses declined due to expense management initiatives in 2018.
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Network & Security Solutions Segment EBITDA increased 9% in 2017 compared to 2016 due to the revenue items noted within "Network & Security Solutions segment results". In addition to revenue growth, expenses declined due to expense management initiatives in 2017.
Corporate
Corporate Segment EBITDA loss increased modestly in 2018 compared to 2017 due to higher outside professional fees offset by lower incentive compensation and fringe.
Corporate Segment EBITDA loss increased modestly in 2017 compared to 2016 due to higher legal and incentive compensation related expenses.
Adjusted Net Income
Adjusted net income is a non-GAAP financial measure used by management that provides additional insight on performance. Adjusted net income excludes amortization of acquisition-related intangibles, stock-based compensation, restructuring costs, certain discrete tax items, and other items affecting comparability and, therefore, provides a more complete understanding of continuing operating performance. Management believes that the presentation of adjusted net income provides users of our financial statements greater transparency into ongoing results of operations allowing them to better compare our results from period to period. This non-GAAP measure is not in accordance with, or an alternative to, measures prepared in accordance with GAAP and may be different from non-GAAP measures used by other companies. In addition, adjusted net income is not based on any comprehensive set of accounting rules or principles. Non-GAAP measures have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP. These measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures.
The following table reconciles the reported Net income attributable to First Data Corporation presented in accordance with GAAP to the non-GAAP financial measure of adjusted net income for the years ended December 31, 2018, 2017, and 2016:
Year ended December 31, | Percent Change | ||||||||||||||||
(in millions) | 2018 | 2017 | 2016 | 2018 vs. 2017 | 2017 vs. 2016 | ||||||||||||
Net income attributable to First Data Corporation | $ | 1,005 | $ | 1,465 | $ | 420 | (31 | )% | NM | ||||||||
Adjustments: | |||||||||||||||||
Stock-based compensation | 248 | 245 | 263 | 1 | % | (7 | )% | ||||||||||
Loss on debt extinguishment | 153 | 80 | 70 | 91 | % | 14 | % | ||||||||||
Amortization of acquisition intangibles and deferred financing costs(a) | 413 | 403 | 422 | 2 | % | (5 | )% | ||||||||||
Other operating expenses, net and Other income | (82 | ) | 127 | 34 | NM | NM | |||||||||||
Other(b) | (8 | ) | — | 46 | NM | NM | |||||||||||
Discrete tax items(c) | (160 | ) | (891 | ) | (24 | ) | (82 | )% | NM | ||||||||
Income tax on above items(d) | (215 | ) | (4 | ) | (11 | ) | NM | NM | |||||||||
Adjusted net income attributable to First Data Corporation | $ | 1,354 | $ | 1,425 | $ | 1,220 | (5 | )% | 17 | % | |||||||
(a) | Represents amortization of intangibles established in connection with the 2007 merger, and acquisitions we have made since 2007, excluding the percentage of our consolidated amortization of acquisition intangibles related to non-wholly owned consolidated alliances equal to the portion of such alliances owned by our alliance partners. Also, includes amortization related to deferred financing costs of $17 million, $10 million, and $29 million for the years ended December 31, 2018, 2017, and 2016, respectively. |
(b) | The 2018 balance represents adjustments for non wholly-owned entities. The 2016 balance represents fees paid on debt modifications, employer taxes on vested equity awards related to the IPO, and loss attributed to pension distributions. |
(c) | We exclude from "Adjusted net income attributable to First Data Corporation" certain discrete tax items, such as tax law changes, tax impact of mergers and acquisitions, valuation allowance releases, and tax reserves related to issues that arose before KKR acquired us. |
(d) | The tax effect of the adjustments between our GAAP and adjusted results takes into account the tax treatment and related tax rate(s) that apply to each adjustment in the applicable tax jurisdiction(s). Generally, this results in a tax impact at the U.S. effective tax rate for certain adjustments, including the majority of amortization of intangible assets, deferred financing costs, stock compensation, and loss on debt extinguishment; whereas the tax impact of other adjustments, including restructuring expense, depends on whether the amounts are deductible in the respective tax jurisdictions and the applicable effective tax rate(s) in those jurisdictions. |
Adjusted net income for the year ended December 31, 2018 decreased due to normalized tax rate applied in 2018 driven by the release of the tax valuation allowance in 2017, offset by better operating performance in 2018.
Adjusted net income for the year ended December 31, 2017 improved due to better operating performance and lower interest expense. Growth in depreciation partially offset adjusted net income for the year ended December 31, 2017.
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Liquidity and Capital Resources
Our source of liquidity is principally cash generated from operating activities supplemented by our receivable securitization facility and, as necessary, on a short-term basis by borrowings against our senior secured revolving credit facility. We believe our current level of cash and short-term financing capabilities along with future cash flows from operations are sufficient to meet the ongoing needs of the business. To the extent future cash flows exceed the ongoing needs of the business, we may use all or a portion of the excess cash to reduce our debt balances.
Total borrowings and net debt
For the year ended December 31, 2018, we used excess cash generated by the business, divestiture proceeds, and existing cash on the consolidated balance sheet to pay down outstanding borrowings. The table below shows the net debt balances as of December 31, 2018 and 2017. Net debt is a non-GAAP measure defined as total long-term borrowings plus short-term and current portion of long-term borrowings at par value excluding lines of credit used for settlement purposes less cash and cash equivalents. We believe that net debt provides additional insight on the level and management of leverage. Net debt is not, and should not be viewed as, a substitute for total outstanding borrowings under GAAP.
As of December 31, | ||||||||
(in millions) | 2018 | 2017 | ||||||
Total long-term borrowings | $ | 16,429 | $ | 17,927 | ||||
Total short-term and current portion of long-term borrowings | 1,170 | 1,271 | ||||||
Total borrowings | 17,599 | 19,198 | ||||||
Unamortized discount and unamortized deferred financing costs | 94 | 126 | ||||||
Total borrowings at par | 17,693 | 19,324 | ||||||
Less: settlement lines of credit and other arrangements | 224 | 205 | ||||||
Gross debt excluding settlement lines of credit and other arrangements | 17,469 | 19,119 | ||||||
Less: cash and cash equivalents | 555 | 498 | ||||||
Net debt | $ | 16,914 | $ | 18,621 | ||||
Our current level of debt may limit our ability to get additional funding at our current funding rate beyond our senior secured revolving credit facility and receivable securitization facility, if needed. See note 2 "Borrowings" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for details regarding our debt structure.
On October 26, 2018, we refinanced our senior secured revolving credit facility and senior secured term loan facility with a $6 billion senior secured credit facility. See note 2 "Borrowings" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for additional details.
Credit ratings
As of February 26, 2019, our long-term corporate family rating from Moody’s was Ba3 (outlook positive). We were upgraded by Moody's during the second quarter of 2018 which resulted in a 25 basis point reduction in interest rates on our term loans maturing in 2022 and 2024. During the third quarter of 2018 our long-term local issuer credit rating from Standard and Poor’s was upgraded to BB- (outlook stable) and the long-term issuer default rating from Fitch was upgraded to BB- (outlook positive). A decrease in our credit ratings could affect our ability to access future financing at current funding rates, which could result in increased interest expense in the future.
As a result of the planned merger with Fiserv Inc. (Fiserv) as disclosed in note 20 "Subsequent Events" in our consolidated financial statements in Part II, Item 8 of this Form 10-K, all three credit agencies have put us on the watch list for upgrade.
Cash and cash equivalents
Investments (other than those included in settlement assets) with original maturities of three months or less (that are readily convertible to cash) are considered to be cash equivalents and are stated at cost, which approximates market value. As of December 31, 2018 and 2017, we held $555 million and $498 million in cash and cash equivalents, respectively.
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The table below details the cash and cash equivalents as of December 31, 2018 and 2017:
As of December 31, 2018 | As of December 31, 2017 | ||||||||||||||||||||||
(in millions) | Available | Unavailable | Total | Available | Unavailable | Total | |||||||||||||||||
Domestic | $ | 28 | $ | 156 | (a) | $ | 184 | $ | 50 | $ | 101 | (a) | $ | 151 | |||||||||
International | 200 | 171 | (b) | 371 | 174 | 173 | (b) | 347 | |||||||||||||||
Total | $ | 228 | $ | 327 | $ | 555 | $ | 224 | $ | 274 | $ | 498 | |||||||||||
(a) | Represents cash held by two of our domestic entities that are not available to fund operations outside of these entities unless the Board of Directors of these respective entities declare a dividend. Also, one of these entities is subject to regulatory capital requirements that must be satisfied before a dividend may be declared. |
(b) | Consolidated foreign joint ventures held $169 million and $163 million in cash and cash equivalents as of December 31, 2018 and 2017, respectively. Distributions of these funds are subject to the joint ventures' Board of Directors authorization. In addition, $2 million and $10 million of the remaining unavailable cash and cash equivalents in our international subsidiaries is held in countries that have currency controls as of December 31, 2018 and 2017, respectively. |
Cash flows
The table below summarizes cash flows for the years ended December 31, 2018, 2017, and 2016:
Year ended December 31, | ||||||||||||
Source/(use) (in millions) | 2018 | 2017 | 2016 | |||||||||
Net cash provided by operating activities | $ | 2,307 | $ | 2,047 | $ | 2,111 | ||||||
Net cash used in investing activities | (99 | ) | (1,952 | ) | (361 | ) | ||||||
Net cash (used in) provided by financing activities | (2,124 | ) | 9 | (1,734 | ) | |||||||
Cash flows from operating activities
The table below reconciles the change in operating cash flows for the years ended December 31, 2017 to December 31, 2018 and December 31, 2016 to December 31, 2017:
Year ended December 31, | ||||||||
Source/(use) (in millions) | 2018 | 2017 | ||||||
Net cash provided by operating activities, previous period | $ | 2,047 | $ | 2,111 | ||||
Increases (decreases) in: | ||||||||
Net income, excluding other operating expenses and other income(a) | 366 | 270 | ||||||
Depreciation and amortization | 17 | 12 | ||||||
Working capital(b) | (123 | ) | (346 | ) | ||||
Net cash provided by operating activities, end of period | $ | 2,307 | $ | 2,047 | ||||
(a) | Excludes loss on debt extinguishment, stock-based compensation expense and other non-cash items. |
(b) | Change driven by timing of receipts and payments. |
Our operating cash flow is impacted by our level of debt. Approximately $0.9 billion, $0.9 billion, and $1.0 billion in cash interest, net of interest rate swap settlements, was paid during 2018, 2017, and 2016, respectively.
See "Item 7A. Quantitative and Qualitative Disclosures about Market Risk" for a detailed discussion on how a 100 basis point increase in the applicable London Interbank Offered Rate (LIBOR) index on an annualized basis would impact our annual interest expense.
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Cash flows from investing activities
The table below summarizes the changes in investing activities for the years ended December 31, 2018 and 2017:
Year ended December 31, | |||||||||||
Source/(use) (in millions) | 2018 | 2017 | Change | ||||||||
Acquisitions(a) | $ | (17 | ) | $ | (1,607 | ) | $ | 1,590 | |||
Dispositions(b) | 549 | 88 | 461 | ||||||||
Capital expenditures(c) | (604 | ) | (518 | ) | (86 | ) | |||||
Other(d) | (27 | ) | 85 | (112 | ) | ||||||
Net cash used in investing activities | $ | (99 | ) | $ | (1,952 | ) | $ | 1,853 | |||
(a) | Change is related to acquisition of Acculynk, CardConnect and BluePay during 2017. See note 13 "Acquisitions and Dispositions" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for additional detail about these acquisitions. |
(b) | Change driven by proceeds from the disposition of our remittance processing business and our card processing business in Central and Southeastern Europe during 2018 offset by 2017 sale of the Baltics. See note 13 "Acquisitions and Dispositions" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for additional details about these dispositions. |
(c) | Change in capital expenditures is related to an increase in cash outlays for software, technology and building improvements. |
(d) | Other represents proceeds from maturity of net investment hedge, proceeds from sale of property and equipment, purchase of equity method investments, and other investing activities. |
The table below summarizes the changes in investing activities for the years ended December 31, 2017 and 2016:
Year ended December 31, | |||||||||||
Source/(use) (in millions) | 2017 | 2016 | Change | ||||||||
Acquisitions(a) | $ | (1,607 | ) | $ | (6 | ) | $ | (1,601 | ) | ||
Dispositions(b) | 88 | 38 | 50 | ||||||||
Capital expenditures | (518 | ) | (477 | ) | (41 | ) | |||||
Other(c) | 85 | 84 | 1 | ||||||||
Net cash used in investing activities | $ | (1,952 | ) | $ | (361 | ) | $ | (1,591 | ) | ||
(a) | Change is related to acquisition of Acculynk, CardConnect and BluePay during 2017. See note 13 "Acquisitions and Dispositions" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for additional detail about these acquisitions. |
(b) | Change driven by proceeds from our 2017 Baltics disposition offset by 2016 sale of the Australian ATM business. See note 13 "Acquisitions and Dispositions" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for additional details about these dispositions. |
(c) | Other represents proceeds from maturity of net investment hedge, proceeds from sale of property and equipment, purchase of equity method investments, and other investing activities. |
Cash flows from financing activities
The table below summarizes the changes in financing activities for the years ended December 31, 2018 and 2017:
Year ended December 31, | |||||||||||
Source/(use) (in millions) | 2018 | 2017 | Change | ||||||||
Net debt transactions(a) | $ | (1,681 | ) | $ | 382 | $ | (2,063 | ) | |||
Other(b) | (443 | ) | (373 | ) | (70 | ) | |||||
Net cash (used in) provided by financing activities | $ | (2,124 | ) | $ | 9 | $ | (2,133 | ) | |||
(a) | Details regarding our debt structure are provided in note 2 "Borrowings" in our consolidated financial statements in Part II, Item 8 of this Form 10-K. |
(b) | Other represents payment of call premiums and debt issuance cost, payment of taxes related to net settlement of equity awards, distributions and dividends paid to noncontrolling interests and redeemable noncontrolling interest and other financing activities. Change is related to an increase in debt extinguishment payments. |
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The table below summarizes the changes in financing activities for the years ended December 31, 2017 and 2016:
Year ended December 31, | |||||||||||
Source/(use) (in millions) | 2017 | 2016 | Change | ||||||||
Net debt transactions(a) | $ | 382 | $ | (1,335 | ) | $ | 1,717 | ||||
Other(b) | (373 | ) | (399 | ) | 26 | ||||||
Net cash provided by (used in) financing activities | $ | 9 | $ | (1,734 | ) | $ | 1,743 | ||||
(a) | Details regarding our debt structure are provided in note 2 "Borrowings" in our consolidated financial statements in Part II, Item 8 of this Form 10-K. |
(b) | Other represents payment of call premiums and debt issuance cost, payment of taxes related to net settlement of equity awards, distributions and dividends paid to noncontrolling interests and redeemable noncontrolling interest and other financing activities. |
Free Cash Flow
Free cash flow is a non-GAAP measure defined as cash flow provided by operating activities less capital expenditures and distributions to minority interests and other. We consider free cash flow to be a liquidity measure that provides useful information to management and users of our financial statements about the amount of cash generated by the business which can then be used to, among other things, reduce outstanding debt and/or complete strategic acquisitions. Free cash flow is not, and should not be viewed as, a substitute for GAAP reported financial information.
The table below reconciles cash flow from operations to free cash flow for the years ended December 31, 2018 and 2017:
Year ended December 31, | ||||||||||||
Source/(use) (in millions) | 2018 | 2017 | Change | |||||||||
Net cash provided by operating activities(a) | $ | 2,307 | $ | 2,047 | $ | 260 | ||||||
Capital expenditures(b) | (604 | ) | (518 | ) | (86 | ) | ||||||
Distributions and dividends paid to noncontrolling interests, redeemable noncontrolling interest, and other | (255 | ) | (260 | ) | 5 | |||||||
Net investment hedge | 26 | 90 | (64 | ) | ||||||||
Free cash flow | $ | 1,474 | $ | 1,359 | $ | 115 | ||||||
(a) | Net cash provided by operating activities increased due to the items noted previously in the "Cash flows from operating activities". |
(b) | Change in capital expenditures is related to an increase in cash outlays for software, technology and building improvements. |
The table below reconciles cash flow from operations to free cash flow for the years ended December 31, 2017 and 2016:
Year ended December 31, | ||||||||||||
Source/(use) (in millions) | 2017 | 2016 | Change | |||||||||
Net cash provided by operating activities(a) | $ | 2,047 | $ | 2,111 | $ | (64 | ) | |||||
Capital expenditures | (518 | ) | (477 | ) | (41 | ) | ||||||
Distributions and dividends paid to noncontrolling interests, redeemable noncontrolling interest, and other(b) | (260 | ) | (418 | ) | 158 | |||||||
Net investment hedge(c) | 90 | — | 90 | |||||||||
Free cash flow | $ | 1,359 | $ | 1,216 | $ | 143 | ||||||
(a) | Net cash provided by operating activities decreased due to the items noted previously in the "Cash flows from operating activities". |
(b) | Distributions and dividends paid to noncontrolling interests and redeemable noncontrolling interest and other decreased due to lower noncontrolling interest earnings and the timing of distributions totaling $53 million. The December 31, 2016 balance includes a $102 million reclassification related to settlement activities to conform certain domestic and international businesses to our global policies, which increased "Cash and cash equivalents" and decreased "Accounts receivable, net" in our consolidated balance sheet. Free cash flow excludes the impact of reclassification. |
(c) | Change in net investment hedge is due to $90 million received from the maturity of three net investment hedges in 2017. |
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Letters, lines of credit, and other
Total Available(a) | Total Outstanding | |||||||||||||||
As of December 31, | As of December 31, | |||||||||||||||
(in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Letters of credit(b) | $ | 283 | $ | 283 | $ | 35 | $ | 29 | ||||||||
Lines of credit and other | 516 | 546 | 224 | 205 | ||||||||||||
(a) | Total available without giving effect to amounts outstanding. |
(b) | See note 2 "Borrowings" in our consolidated financial statements in Part II, Item 8 of this Form 10-K. |
In the event one or more of the aforementioned lines of credit becomes unavailable, we will utilize our existing cash, cash flows from operating activities or our senior secured revolving credit facility to meet our liquidity needs.
Guarantees and covenants All obligations under the senior secured revolving credit facility and our senior secured term loan facilities are unconditionally guaranteed by most of our existing and future, direct and indirect, wholly-owned, material domestic subsidiaries. The senior secured facilities contain a number of covenants that, among other things, restrict our ability to incur additional indebtedness; create liens; enter into sale-leaseback transactions; engage in mergers or consolidations; sell or transfer assets; pay dividends and distributions or repurchase our capital stock; make investments, loans or advances; prepay certain indebtedness; make certain acquisitions; engage in certain transactions with affiliates; amend material agreements governing certain indebtedness; and change our lines of business. The senior secured facilities also require us to not exceed a maximum senior secured leverage ratio and contain certain customary affirmative covenants and events of default, including a change of control. The senior secured term loan facility also requires mandatory prepayments based on a percentage of excess cash flow generated by us if we exceed a certain leverage ratio.
All obligations under the senior secured notes have similarly guaranteed in accordance with their terms by each of our domestic subsidiaries that guarantee obligations under our senior secured term loan facility described above. These notes and facilities also contain a number of covenants similar to those described for the senior secured obligations noted above.
Although all of the described instruments of indebtedness contain restrictions on our ability to incur additional indebtedness, these restrictions are subject to numerous qualifications and exceptions, including the ability to incur indebtedness in connection with our settlement operations. We believe that the indebtedness that can be incurred under these exceptions as well as additional credit under the existing senior secured revolving credit facility are sufficient to satisfy our needs for the foreseeable future.
Covenant Compliance
Under the senior secured revolving credit and term loan facilities, certain limitations, restrictions, and defaults could occur if we are not able to satisfy and remain in compliance with specified financial ratios. We have agreed that we will not permit the Consolidated Senior Secured Debt to Covenant EBITDA (both as defined in the agreement) Ratio for any 12 month period (last four fiscal quarters) to be greater than 6.00 to 1.00.
The breach of this covenant could result in a default under the senior secured revolving credit facility and the senior secured term loan credit facility and the lenders could elect to declare all amounts borrowed due and payable. Any such acceleration could also result in a default under the indentures for the senior secured notes. As of December 31, 2018, we were in compliance with all applicable covenants, including our sole financial covenant with Consolidated Senior Secured Debt of $14.2 billion, Covenant EBITDA of $3.6 billion and a Ratio of 3.91 to 1.00.
Covenant EBITDA is calculated by adjusting EBITDA to exclude unusual items as permitted in calculating covenant compliance under the credit facilities. Covenant EBITDA is further adjusted to include net income attributable to noncontrolling interests and redeemable noncontrolling interest of certain non wholly-owned subsidiaries and to exclude other miscellaneous adjustments that are used in calculating covenant compliance under the agreements governing our senior secured credit facilities. Because not all companies use identical calculations, this presentation of Covenant EBITDA may not be comparable to similarly titled measures of other companies.
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The calculation of Covenant EBITDA under our senior secured facilities was as follows:
(in millions) | Year ended December 31, 2018 | ||
Net income attributable to First Data Corporation | $ | 1,005 | |
Interest expense, net | 917 | ||
Income tax expense | 49 | ||
Depreciation and amortization | 1,090 | ||
EBITDA | 3,061 | ||
Loss on debt extinguishment | 153 | ||
Stock-based compensation | 248 | ||
Net income attributable to noncontrolling interests and redeemable noncontrolling interest | 193 | ||
Projected near-term cost savings and revenue enhancements(a) | 70 | ||
Restructuring, net | 85 | ||
Non-operating foreign currency (gains) and losses | (6 | ) | |
Equity entities taxes, depreciation and amortization(b) | 17 | ||
Divestitures, net | (197 | ) | |
Other(c) | 6 | ||
Covenant EBITDA | $ | 3,630 | |
(a) | Reflects cost savings and revenue enhancements projected to be realized as a result of specific actions as if they were achieved on the first day of the period. Includes cost savings initiatives associated with the business optimization projects and other technology initiatives. We may not realize the anticipated cost savings pursuant to our anticipated timetable or at all. |
(b) | Represents our proportional share of income taxes, depreciation, and amortization on equity method investments. |
(c) | Includes items such as pension losses, litigation and regulatory settlements, impairments, deal and deal integration costs, acquisitions and dispositions, and other as applicable to the period presented. |
Off-Balance Sheet Arrangements
During 2018, 2017, and 2016, we did not engage in any off-balance sheet financing activities other than those included in the “Contractual Obligations” discussion below and those reflected in note 15 "Commitments and Contingencies" in our consolidated financial statements in Part II, Item 8 of this Form 10-K.
Contractual Obligations
Our contractual obligations as of December 31, 2018 were as follows:
Payments Due by Period | ||||||||||||||||||||
(in millions) | Total | Less than 1 year | 1-3 years | 3-5 years | After 5 years | |||||||||||||||
Borrowings(a) | $ | 20,107 | $ | 920 | $ | 2,000 | $ | 9,170 | $ | 8,017 | ||||||||||
Capital lease obligations(b) | 248 | 81 | 118 | 45 | 4 | |||||||||||||||
Operating leases | 326 | 59 | 99 | 77 | 91 | |||||||||||||||
Purchase obligations(c): | ||||||||||||||||||||
Technology and telecommunications(d) | 963 | 415 | 428 | 120 | — | |||||||||||||||
All other(e) | 52 | 17 | 20 | 12 | 3 | |||||||||||||||
Total(f)(g) | $ | 21,696 | $ | 1,492 | $ | 2,665 | $ | 9,424 | $ | 8,115 | ||||||||||
(a) | Includes future principal and cash interest payments on long-term borrowings through scheduled maturity dates. Includes $11.9 billion of variable rate debt, $2.8 billion in variable to fixed interest rate collars and $7.25 billion in interest rate step-up swaps, which mitigate exposure to interest rate fluctuations. Borrowings are discussed in note 2 "Borrowings" in our consolidated financial statements in Part II, Item 8 of this Form 10-K. Interest rate swaps and interest rate collars are discussed note 14 "Derivative Financial Instruments" in our consolidated financial statements in Part II, Item 8 of this Form 10-K. Interest payments for the variable rate debt and the associated interest rate swaps were calculated using interest rates as of December 31, 2018. |
(b) | Represents future payments on existing capital leases, including interest expense, through scheduled expiration dates. |
(c) | Many of our contracts contain clauses that allow us to terminate the contract with notice, and with or without a termination penalty. Termination penalties are generally an amount less than the original obligation. Certain contracts also have an automatic renewal clause if we do not provide written notification |
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of our intent to terminate the contract. Obligations under certain contracts are usage-based and are, therefore, estimated in the above amount. Historically, we have not had any significant defaults of our contractual obligations or incurred significant penalties for termination of our contractual obligations.
(d) | Technology and telecommunications represents obligations related to hardware purchases, including purchases of ATMs and terminals, as well as software licenses, hardware and software maintenance and support, technical consulting services, and telecommunications services. |
(e) | All other includes obligations related to materials, data, non-technical contract services, facility security, maintenance, and marketing promotions. |
(f) | We evaluate the need to make contributions to our pension plans after considering the funded status of the pension plans, movements in the discount rates, performance of the plan assets and related tax consequences. Expected contributions to our pension plan have not been included in the table as such amounts are dependent upon the considerations discussed above, and may result in a wide range of amounts. See note 16 "Employee Benefit Plans" in our consolidated financial statements in Part II, Item 8 of this Form 10-K. |
(g) | As of December 31, 2018, we had approximately $102 million of tax contingencies comprised of approximately $55 million reported in long-term income taxes payable in the “Other long-term liabilities” line of our consolidated balance sheet and approximately $47 million recorded as a decrease to our deferred tax assets. These amounts have been excluded from the table because the settlement period cannot be reasonably estimated. The timing of these payments will ultimately depend on the progress of tax examinations with the various tax authorities. |
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which often require management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate our critical estimates giving consideration to a combination of factors, including historical experience, current conditions, and various other assumptions considered to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The accounting policies we consider most critical to understanding our financial results and condition and that require complex and subjective management judgments are discussed below.
Goodwill: Goodwill represents the excess of cost over the fair value of net assets acquired, including identifiable intangible assets, and has been allocated to reporting units. Our reporting units are businesses at the operating segment level or one level below the operating segment level for which discrete financial information is prepared and regularly reviewed by management.
We test goodwill annually for impairment, as well as upon an indicator of impairment, by first performing a qualitative assessment at the reporting unit level for all reporting units with the exception of the GBS reporting unit for which we begin with a quantitative assessment. The qualitative assessment evaluates company, industry, and macroeconomic events and circumstances to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying value. If it is determined through the qualitative assessment that it is more likely than not that the fair value is less than the carrying value, we proceed to a quantitative assessment.
For reporting units tested using a quantitative assessment, fair value is based on a discounted cash flow model involving several assumptions. When appropriate we consider assumptions that we believe a hypothetical marketplace participant would use in estimating future cash flows. The key assumptions include segment EBITDA growth and weighted-average cost of capital (discount rate). We determined segment EBITDA growth based on management estimates and business plans. Discount rate assumptions are based on an assessment of the risk inherent in future cash flows of the respective reporting unit as well as cost of debt and equity. If it is determined through quantitative assessment that the fair value is less than the carrying value, the amount by which the carrying value exceeds the fair value, limited to the amount of goodwill recorded and taking into consideration the effect of any tax deductible goodwill, is recorded as an impairment of goodwill.
An impairment charge of a reporting unit’s goodwill could have a material adverse effect on our financial results. An impairment charge may be caused by changes in the underlying business and economic conditions, the most relevant of which would be a deterioration in global economic conditions. Deterioration in global economic conditions could cause us to experience a decrease in our segment EBITDA. Furthermore, volatility in the debt markets which impact our debt yields, could affect these estimates used in the analysis discussed, which in turn could affect the fair value of the reporting unit. Thus, it is possible for reporting units that record impairments to record additional impairments in the future. All key assumptions and valuations are determined by and are the responsibility of management. The factors used in the impairment analysis are inherently subject to uncertainty. We believe that we have made reasonable estimates and assumptions to determine the fair value of our reporting units, if actual results are not consistent with these estimates and assumptions, goodwill and other intangible assets may be overstated which could trigger an impairment charge.
As of December 31, 2018, the carrying value of goodwill was $17.5 billion of which $15.1 billion related to our GBS reporting unit. As of October 1, 2018, the most recent impairment analysis date, our GBS reporting unit's fair value exceeded its carrying value by 50% and all other reporting units passed their respective qualitative assessments. Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair value of our reporting units may include such items as the following:
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• | Global economic, political, and other conditions may adversely affect trends in consumer, business, and government spending, which may adversely impact the demand for our services and our revenue and profitability; |
• | Our ability to anticipate and respond to changing industry trends and the needs and preferences of our clients and consumers may affect our competitiveness or demand for our products, which may adversely affect our operating results; |
• | Substantial and increasingly intense competition worldwide in the financial services, payments, and technology industries may materially and adversely affect our overall business and operations; |
• | Potential changes in the competitive landscape, including disintermediation from other participants in the payments value chain, could harm our business; |
• | The market for our electronic commerce services is evolving and may not continue to develop or grow rapidly enough for us to maintain and increase our profitability; |
• | If we are unable to maintain merchant relationships and alliances, our business may be adversely affected; |
• | Failure to obtain new clients or renew client contracts on favorable terms could adversely affect results of operations and financial condition; and |
• | Cost savings initiatives may not produce the savings expected and may negatively impact our other initiatives and efforts to grow our business. |
See "Risk Factors" in Part I, Item 1A of this Form 10-K for further discussions of risks that could affect our business.
An additional analysis was performed for our GBS reporting unit, which sensitized the base discount rate by an additional 50 basis points. GBS passed by a margin of 39%. See note 1 "Summary of Significant Accounting Policies" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information regarding goodwill.
Reserve for merchant credit losses: Our merchant clients (or those of our unconsolidated alliances) have the liability for any charges properly reversed by the cardholder. In the event, however, that we are not able to collect such amounts from the merchants due to merchant fraud, insolvency, bankruptcy or another reason, we may be liable for any such reversed charges. Our risk in this area primarily relates to situations where the cardholder has purchased goods or services to be delivered in the future and which have yet to be delivered.
Our obligation to stand ready to perform is minimal in relation to the total dollar volume processed. We require cash deposits, guarantees, letters of credit or other types of collateral from certain merchants to minimize this obligation. Cash and cash equivalent collateral is included within "Settlement assets" on the consolidated balance sheet. The amounts of collateral held by us and our unconsolidated alliances are as follows:
As of December 31, | ||||||||
(in millions) | 2018 | 2017 | ||||||
Cash and cash equivalents collateral | $ | 500 | $ | 499 | ||||
Collateral in the form of letters of credit | 96 | 133 | ||||||
Total collateral | $ | 596 | $ | 632 | ||||
We also utilize a number of systems and procedures to manage merchant risk. Despite these efforts, we historically have experienced some level of losses due to merchant defaults.
Our contingent obligation relates to imprecision in our estimates of required collateral. A provision for this obligation is recorded based primarily on historical experience of credit losses and other relevant factors such as economic downturns or increases in merchant fraud. The following table presents the aggregate merchant credit losses incurred compared to total dollar volumes processed:
Year ended December 31, | ||||||||||||
(in millions) | 2018 | 2017 | 2016 | |||||||||
First Data and consolidated and unconsolidated alliances credit losses | $ | 95 | $ | 98 | $ | 93 | ||||||
First Data and consolidated alliances credit losses | 86 | 89 | 83 | |||||||||
Total dollar volume processed (in billions) | 2,631 | 2,401 | 2,153 | |||||||||
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The reserve recorded on our consolidated balance sheets relates to the business conducted by our consolidated subsidiaries. The reserve for unconsolidated alliances is recorded only in the alliances’ respective financial statements. We have not recorded any reserve for estimated losses in excess of reserves recorded by the unconsolidated alliances nor have we identified needs to do so. The following table presents the aggregate merchant credit loss reserves:
As of December 31, | ||||||||
(in millions) | 2018 | 2017 | ||||||
First Data and consolidated and unconsolidated alliances merchant credit loss reserves | $ | 32 | $ | 33 | ||||
First Data and consolidated alliances merchant credit loss reserves | 28 | 29 | ||||||
The credit loss reserves, both for us and our unconsolidated alliances, are comprised of amounts for known losses and a provision for losses incurred but not reported (IBNR). These reserves primarily are determined by performing a historical analysis of chargeback loss experience. Other factors are considered that could affect that experience in the future. Such items include the general economy and economic challenges in a specific industry or those affecting certain types of clients. Once these factors are considered, we or the unconsolidated alliance establishes a rate (percentage) that is calculated by dividing the expected chargeback (credit) losses by dollar volume processed. This rate is then applied against the dollar volume processed each month and charged against earnings. The resulting reserve balance is then compared to requirements for known losses and estimates for incurred but not reported items. Historically, this estimation process has proved to be materially accurate and we believe the recorded reserve approximates the fair value of the contingent obligation.
Income taxes: The determination of our provision for income taxes requires management’s judgment in the use of estimates and the interpretation and application of complex tax laws. Judgment is also required in assessing the timing and amounts of deductible and taxable items. We establish contingency reserves for material, known tax exposures relating to deductions, transactions, and other matters involving some uncertainty as to the proper tax treatment of the item. Our reserves reflect our judgment as to the resolution of the issues involved if subject to judicial review. Several years may elapse before a particular matter, for which we have established a reserve, is audited and finally resolved or clarified. While we believe that our reserves are adequate to cover reasonably expected tax risks, issues raised by a tax authority may be finally resolved at an amount different than the related reserve. Such differences could materially increase or decrease our income tax provision in the current and/or future periods. When facts and circumstances change (including a resolution of an issue or statute of limitations expiration), these reserves are adjusted through the provision for income taxes in the period of change.
In the U.S. we have historically generated tax net operating loss carry forwards, largely as the result of the significant interest expense we have incurred. Judgment is required to determine whether some portion or all of the resulting deferred tax assets will not be realized. To the extent we determine that we will not realize the benefit of some or all of our deferred tax assets, then these assets are adjusted through our provision for income taxes in the period in which this determination is made.
We currently have tax net operating loss carry forwards in several jurisdictions in which we operate, including the United States, resulting in significant deferred tax assets. We establish a valuation allowance against our deferred tax assets when, based upon the weight of all available evidence, we believe it is more likely than not that some portion or all of the deferred tax assets will not be realized. We believe that a significant portion of the deferred tax assets will be realized because of the existence of sufficient taxable income within the carryforward period available under the tax law, but have established valuation allowances for those deferred tax assets that in our judgment will not be realized. In making this determination, we have considered the relative impact of all of the available positive and negative evidences regarding future sources of taxable income and tax planning strategies. However, there could be material impact to our effective tax rate if there is a significant change in our judgment. If and when our judgment changes, then the valuation allowances are adjusted through the provision for income taxes in the period in which this determination is made. See note 9 "Income Tax" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information regarding our income tax provision.
New Accounting Guidance
See note 1 "Summary of Significant Accounting Policies" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for new accounting guidance.
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to market risk from changes in interest rates. Our interest rate-sensitive assets include cash equivalents as well as both fixed and floating rate interest-bearing securities. These investments arise primarily from settlement funds held by us pending
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settlement. Our interest rate-sensitive liabilities include our senior secured credit facilities which are subject to variable interest rates. We use a combination of interest rate collars and swaps to mitigate our exposure to interest rate fluctuations.
As of December 31, 2018, we have $12 billion in variable rate debt, which includes $472 million on our accounts receivable securitization facility, and also includes $250 million drawn on our revolving credit facility. We have $2.8 billion in variable to fixed interest rate collars, which are subject to contractual ceilings and floors, and $7.25 billion in variable to fixed interest rate step-up swaps. The $1.3 billion and $1.5 billion interest rate collars expire in January 2019 and September 2019, respectively, and have a one month LIBOR ceiling of 1.50% and 1.75%, respectively. With respect to our step-up swaps, the $4.75 billion of notional exposure step-up swaps, decreases by $750 million semi-annually, commencing in June 2019, and expires in December 2020. The remaining $2.5 billion of step-up swaps cover our exposure through May 2021.
Based on outstanding debt balances and interest rates as of December 31, 2018, a 1% increase in variable interest rates would result in a decrease to pretax income of $10 million over the next twelve months. This decrease is due to a $39 million increase in interest expense related to our balance of variable interest rate debt, net of interest rate collars and step-up swaps, partially offset by a $29 million increase in interest income, primarily on settlement assets. A decrease in interest rates would result in an increase to pretax income. Actual interest rates could change significantly more than 1%. There are inherent limitations in the sensitivity analysis presented and as a result, the analysis is unable to reflect the potential effects of more complex market changes that could arise, which may positively or negatively affect income.
Foreign Currency Risk
We are exposed to changes in currency rates as a result of our investments in foreign operations and revenues and expenses generated in currencies other than the U.S. dollar. Revenue and profit generated by international operations will increase or decrease compared to prior periods as a result of changes in foreign currency exchange rates. See note 14 "Derivative Financial Instruments" in our consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information regarding the changes in foreign currency exchange rates.
A hypothetical 10% weakening/strengthening in the value of the U.S. dollar relative to all the currencies in which our revenues and profits are denominated would result in an increase/decrease to pretax income of approximately $57 million. This increase/decrease results from a $55 million increase/decrease related to foreign exchange on foreign currency earnings and a $2 million increase/decrease related to foreign exchange on intercompany loans. There are inherent limitations in the sensitivity analysis presented and as a result, the analysis is unable to reflect the potential effects of more complex market changes that could arise, which may positively or negatively affect income.
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ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
FIRST DATA CORPORATION
INDEX TO FINANCIAL STATEMENTS
COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
First Data Corporation and Subsidiaries: | |
Consolidated Financial Statements: | |
Schedules: | |
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of First Data Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of First Data Corporation (the Company) as of December 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income, cash flows and equity for each of the three years in the period ended December 31, 2018, and the related notes and the financial statement schedule of valuation and qualifying accounts (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2018 and 2017, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 26, 2019 expressed an unqualified opinion thereon.
Adoption of New Accounting Standard
As discussed in Note 1 to the financial statements, the Company changed its method of accounting for revenue as a result of the adoption of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), and the amendments in ASUs 2015-14, 2016-08, 2016-10 and 2016-12 effective January 1, 2018.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP | |
EY or one of its predecessors began serving consecutively as the Company’s (or one of its predecessors) auditor in 1980. | |
Atlanta, Georgia | |
February 26, 2019 | |
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FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31, | ||||||||||||
(in millions, except per share amounts) | 2018 | 2017 | 2016 | |||||||||
Revenues: | ||||||||||||
Revenues excluding reimbursable items(a) | $ | 8,679 | $ | 8,129 | $ | 7,839 | ||||||
Reimbursable items | 819 | 3,923 | 3,745 | |||||||||
Total revenues | 9,498 | 12,052 | 11,584 | |||||||||
Expenses: | ||||||||||||
Cost of revenues (exclusive of items shown below) | 3,005 | 3,128 | 3,192 | |||||||||
Selling, general, and administrative | 2,651 | 2,178 | 2,035 | |||||||||
Depreciation and amortization | 1,009 | 972 | 949 | |||||||||
Other operating expenses, net | 119 | 143 | 51 | |||||||||
Total expenses excluding reimbursable items | 6,784 | 6,421 | 6,227 | |||||||||
Reimbursable items | 819 | 3,923 | 3,745 | |||||||||
Total expenses | 7,603 | 10,344 | 9,972 | |||||||||
Operating profit | 1,895 | 1,708 | 1,612 | |||||||||
Interest expense, net | (917 | ) | (931 | ) | (1,078 | ) | ||||||
Loss on debt extinguishment | (153 | ) | (80 | ) | (70 | ) | ||||||
Other income | 201 | 16 | 17 | |||||||||
Income before income taxes and equity earnings in affiliates | 1,026 | 713 | 481 | |||||||||
Income tax expense (benefit) | 49 | (729 | ) | 81 | ||||||||
Equity earnings in affiliates | 221 | 222 | 260 | |||||||||
Net income | 1,198 | 1,664 | 660 | |||||||||
Less: Net income attributable to noncontrolling interests and redeemable noncontrolling interest | 193 | 199 | 240 | |||||||||
Net income attributable to First Data Corporation | $ | 1,005 | $ | 1,465 | $ | 420 | ||||||
Net income attributable to First Data Corporation per share: | ||||||||||||
Basic | $ | 1.08 | $ | 1.60 | $ | 0.47 | ||||||
Diluted | $ | 1.05 | $ | 1.56 | $ | 0.46 | ||||||
Weighted-average common shares outstanding: | ||||||||||||
Basic | 929 | 916 | 902 | |||||||||
Diluted | 957 | 940 | 921 | |||||||||
(a) | Includes processing fees, administrative service fees, and other fees charged to merchant alliances accounted for under the equity method of $203 million, $215 million, and $198 million for the years ended December 31, 2018, 2017, and 2016, respectively. |
The 2018 results include the impact of adopting Accounting Standards Codification (ASC) 606 and ASC 340-40 (collectively, the New Revenue Standard). See note 1 "Summary of Significant Accounting Policies" for more information.
See notes to consolidated financial statements.
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FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended December 31, | ||||||||||||
(in millions) | 2018 | 2017 | 2016 | |||||||||
Net income | $ | 1,198 | $ | 1,664 | $ | 660 | ||||||
Other comprehensive (loss) income, net of tax: | ||||||||||||
Foreign currency translation adjustment | (127 | ) | 201 | (153 | ) | |||||||
Pension liability adjustments | (2 | ) | 72 | 38 | ||||||||
Derivative instruments | (46 | ) | 9 | 3 | ||||||||
Other | 2 | — | — | |||||||||
Total other comprehensive (loss) income, net of tax | (173 | ) | 282 | (112 | ) | |||||||
Comprehensive income | 1,025 | 1,946 | 548 | |||||||||
Less: Comprehensive income attributable to noncontrolling interests and redeemable noncontrolling interest | 186 | 211 | 235 | |||||||||
Comprehensive income attributable to First Data Corporation | $ | 839 | $ | 1,735 | $ | 313 | ||||||
See notes to consolidated financial statements.
60
FIRST DATA CORPORATION
CONSOLIDATED BALANCE SHEETS
As of December 31, | ||||||||
(in millions, except par value) | 2018 | 2017 | ||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 555 | $ | 498 | ||||
Accounts receivable, net of allowance for doubtful accounts of $46 and $45 | 2,217 | 2,176 | ||||||
Settlement assets | 11,423 | 20,363 | ||||||
Prepaid expenses and other current assets | 319 | 335 | ||||||
Total current assets | 14,514 | 23,372 | ||||||
Property and equipment, net of accumulated depreciation of $1,647 and $1,588 | 905 | 951 | ||||||
Goodwill | 17,460 | 17,710 | ||||||
Customer relationships, net of accumulated amortization of $5,509 and $5,940 | 1,763 | 2,184 | ||||||
Other intangibles, net of accumulated amortization of $2,271 and $2,665 | 1,893 | 1,935 | ||||||
Investment in affiliates | 1,055 | 1,054 | ||||||
Other long-term assets | 737 | 1,063 | ||||||
Total assets | $ | 38,327 | $ | 48,269 | ||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities | $ | 1,636 | $ | 1,659 | ||||
Short-term and current portion of long-term borrowings | 1,170 | 1,271 | ||||||
Settlement obligations | 11,423 | 20,363 | ||||||
Total current liabilities | 14,229 | 23,293 | ||||||
Long-term borrowings | 16,429 | 17,927 | ||||||
Deferred tax liabilities | 97 | 77 | ||||||
Other long-term liabilities | 528 | 886 | ||||||
Total liabilities | 31,283 | 42,183 | ||||||
Commitments and contingencies (See note 15) | ||||||||
Redeemable noncontrolling interest | 77 | 72 | ||||||
First Data Corporation stockholders' equity: | ||||||||
Class A Common stock, $0.01 par value; 1,600 shares authorized as of December 31, 2018 and December 31, 2017, 584 shares and 492 shares issued as of December 31, 2018 and December 31, 2017, respectively; and 568 shares and 482 shares outstanding as of December 31, 2018 and December 31, 2017, respectively | 6 | 5 | ||||||
Class B Common stock, $0.01 par value; 448 and 523 shares authorized as of December 31, 2018 and December 31, 2017, respectively; 369 shares and 443 shares issued and outstanding as of December 31, 2018 and December 31, 2017, respectively | 4 | 4 | ||||||
Preferred Stock, $0.01 par value; 100 shares authorized as of December 31, 2018 and December 31, 2017; no shares issued and outstanding as of December 31, 2018 and December 31, 2017 | — | — | ||||||
Class A Treasury stock, at cost, 16 shares and 11 shares as of December 31, 2018 and December 31, 2017, respectively | (251 | ) | (149 | ) | ||||
Additional paid-in capital | 13,791 | 13,495 | ||||||
Accumulated loss | (8,067 | ) | (9,059 | ) | ||||
Accumulated other comprehensive loss | (1,310 | ) | (1,144 | ) | ||||
Total First Data Corporation stockholders' equity | 4,173 | 3,152 | ||||||
Noncontrolling interests | 2,794 | 2,862 | ||||||
Total equity | 6,967 | 6,014 | ||||||
Total liabilities and equity | $ | 38,327 | $ | 48,269 | ||||
See notes to consolidated financial statements.
61
FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, | ||||||||||||
(in millions) | 2018 | 2017 | 2016 | |||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
Net income | $ | 1,198 | $ | 1,664 | $ | 660 | ||||||
Adjustments to reconcile to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization (including amortization netted against equity earnings in affiliates and revenues) | 1,090 | 1,073 | 1,061 | |||||||||
Deferred income taxes | 107 | (853 | ) | (38 | ) | |||||||
Charges related to other operating expenses, net and other income | (82 | ) | 127 | 34 | ||||||||
Loss on debt extinguishment | 153 | 80 | 70 | |||||||||
Stock-based compensation expense | 248 | 245 | 263 | |||||||||
Other non-cash and non-operating items, net | 46 | 41 | 45 | |||||||||
(Decrease) increase in cash, excluding the effects of acquisitions and dispositions, resulting from changes in: | ||||||||||||
Accounts receivable, current and long term | (156 | ) | (196 | ) | (81 | ) | ||||||
Other assets, current and long term | 4 | (36 | ) | 61 | ||||||||
Accounts payable and other liabilities, current and long term | (284 | ) | (82 | ) | 35 | |||||||
Income tax accounts | (17 | ) | (16 | ) | 1 | |||||||
Net cash provided by operating activities | 2,307 | 2,047 | 2,111 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||
Additions to property and equipment | (310 | ) | (271 | ) | (232 | ) | ||||||
Payments to secure customer service contracts, including outlays for conversion, and capitalized systems development costs | (294 | ) | (247 | ) | (245 | ) | ||||||
Acquisitions, net of cash acquired | (17 | ) | (1,607 | ) | (6 | ) | ||||||
Proceeds from dispositions | 549 | 88 | 38 | |||||||||
Proceeds from the maturity of net investment hedges | 26 | 90 | — | |||||||||
Proceeds from sale of property and equipment | 1 | — | 38 | |||||||||
Other investing activities, net | (54 | ) | (5 | ) | 46 | |||||||
Net cash used in investing activities | (99 | ) | (1,952 | ) | (361 | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||
Short-term borrowings, net | (130 | ) | 823 | 205 | ||||||||
Proceeds from issuance of long-term debt | 4,750 | 4,968 | 3,533 | |||||||||
Payment of call premiums and debt issuance cost | (141 | ) | (63 | ) | (53 | ) | ||||||
Principal payments on long-term debt | (6,301 | ) | (5,409 | ) | (5,073 | ) | ||||||
Payment of taxes related to net settlement of equity awards | (115 | ) | (94 | ) | (61 | ) | ||||||
Proceeds from issuance of common stock | 68 | 50 | 23 | |||||||||
Distributions and dividends paid to noncontrolling interests and redeemable noncontrolling interest | (255 | ) | (260 | ) | (316 | ) | ||||||
Other financing activities, net | — | (6 | ) | 8 | ||||||||
Net cash (used in) provided by provided by financing activities | (2,124 | ) | 9 | (1,734 | ) | |||||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (26 | ) | 7 | (34 | ) | |||||||
Change in cash, cash equivalents and restricted cash | 58 | 111 | (18 | ) | ||||||||
Cash, cash equivalents and restricted cash at beginning of period | 525 | 414 | 432 | |||||||||
Cash, cash equivalents and restricted cash at end of period | $ | 583 | $ | 525 | $ | 414 | ||||||
SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||||||
Income tax payments, net of refunds received | $ | 156 | $ | 142 | $ | 118 | ||||||
Interest paid | 917 | 916 | 1,032 | |||||||||
Distributions received from equity method investments | 255 | 266 | 304 | |||||||||
NON-CASH TRANSACTIONS: | ||||||||||||
Capital leases, net of trade-ins | $ | 37 | $ | 112 | $ | 136 | ||||||
Other financing arrangements | — | 102 | 79 | |||||||||
See notes to consolidated financial statements.
62
FIRST DATA CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
First Data Corporation Stockholders' | |||||||||||||||||||||||||||||||||||||||||
Common Stock | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | |||||||||||||||||||||||||||||||||||||||
(in millions) | Class A | Class B | Class A | Additional Paid-In Capital | Accumulated Loss | Noncontrolling Interest | |||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Total | |||||||||||||||||||||||||||||||||||
Balance, December 31, 2015 | 180 | $ | 2 | 719 | $ | 7 | — | $ | — | $ | 12,910 | $ | (10,944 | ) | $ | (1,307 | ) | $ | 2,992 | $ | 3,660 | ||||||||||||||||||||
Dividends and distributions paid to noncontrolling interests(a) | — | — | — | — | — | — | — | — | — | (283 | ) | (283 | ) | ||||||||||||||||||||||||||||
Net income(b) | — | — | — | — | — | — | — | 420 | — | 207 | 627 | ||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | — | — | (107 | ) | (5 | ) | (112 | ) | |||||||||||||||||||||||||||
Adjustments to redemption value of redeemable noncontrolling interest | — | — | — | — | — | — | 4 | — | — | — | 4 | ||||||||||||||||||||||||||||||
Stock compensation expense | — | — | — | — | — | — | 263 | — | — | — | 263 | ||||||||||||||||||||||||||||||
Stock activity under stock compensation plans and other | 188 | 2 | (175 | ) | (2 | ) | 5 | (61 | ) | 33 | — | — | — | (28 | ) | ||||||||||||||||||||||||||
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) | — | — | — | — | — | — | — | — | — | (229 | ) | (229 | ) | ||||||||||||||||||||||||||||
Net income(b) | — | — | — | — | — | — | — | 1,465 | — | 168 | 1,633 | ||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | — | — | — | 270 | 12 | 282 | ||||||||||||||||||||||||||||||
Adjustments to redemption value of redeemable noncontrolling interest | — | — | — | — | — | — | 1 | — | — | — | 1 | ||||||||||||||||||||||||||||||
Stock compensation expense | — | — | — | — | — | — | 245 | — | — | — | 245 | ||||||||||||||||||||||||||||||
Stock activity under stock compensation plans and other | 114 | 1 | (101 | ) | (1 | ) | 6 | (88 | ) | 39 | — | — | — | (49 | ) | ||||||||||||||||||||||||||
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) | — | — | — | — | — | — | — | — | — | (223 | ) | (223 | ) | ||||||||||||||||||||||||||||
Net income(b) | — | — | — | — | — | — | — | 1,005 | — | 162 | 1,167 | ||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | — | — | (166 | ) | (7 | ) | (173 | ) | |||||||||||||||||||||||||||
Adjustments to redemption value of redeemable noncontrolling interest | — | — | — | — | — | — | (6 | ) | — | — | — | (6 | ) | ||||||||||||||||||||||||||||
Stock compensation expense | — | — | — | — | — | — | 248 | — | — | — | 248 | ||||||||||||||||||||||||||||||
Stock activity under stock compensation plans and other | 86 | 1 | (74 | ) | — | 5 | (102 | ) | 54 | — | — | — | (47 | ) | |||||||||||||||||||||||||||
Balance, December 31, 2018 | 568 | $ | 6 | 369 | $ | 4 | 16 | $ | (251 | ) | $ | 13,791 | $ | (8,067 | ) | $ | (1,310 | ) | $ | 2,794 | $ | 6,967 | |||||||||||||||||||
(a) | The total distribution presented in the consolidated statements of equity for the years ended December 31, 2018, 2017, and 2016 excludes $32 million, $31 million, and $33 million, respectively, in distributions paid to redeemable noncontrolling interest not included in equity. |
(b) | The total net income presented in the consolidated statements of equity for the years ended December 31, 2018, 2017, and 2016 is $31 million different, $31 million different, and $33 million different, respectively, than the amounts presented in the consolidated statements of income due to the net income attributable to the redeemable noncontrolling interest not included in equity. |
See notes to consolidated financial statements.
63
FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1: 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 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.
Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated. Investments in unconsolidated affiliated companies are accounted for under the equity method and are included in “Investment in affiliates” in the accompanying consolidated balance sheets. The Company utilizes the equity method of accounting when the Company is able to exercise significant influence over the investee’s operations, which generally coincides with an ownership interest of between 20% and 50% in an entity.
The Company consolidates an entity’s financial statements when the Company has a controlling financial interest in the entity. Control is normally established when ownership interests exceed 50% in an entity; however, when the Company does not exercise control over a majority-owned entity as a result of other investors having rights over the management and operations of the entity, the Company accounts for the entity under the equity method.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Presentation
Depreciation and amortization, presented as a separate line item on the Company’s 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 periods presented:
Year ended December 31, | ||||||||||||
(in millions) | 2018 | 2017 | 2016 | |||||||||
Amortization of payments for customers contracts | $ | 51 | $ | 56 | $ | 65 | ||||||
Amortization related to equity method investments | 30 | 45 | 47 | |||||||||
Revenue Recognition
Effective January 1, 2018, 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 Company satisfies a performance obligation
64
FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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 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 years ended December 31, 2018, 2017, and 2016.
Year ended December 31, | ||||||||||||
(in millions) | 2018 | 2017 | 2016 | |||||||||
Interchange fees and assessments | $ | 27,845 | $ | 26,069 | $ | 23,810 | ||||||
Debit network fees | 3,568 | 3,227 | 3,121 | |||||||||
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.
The Company charges processing fees to its alliances. In situations where an alliance is accounted for under the equity method, the Company’s consolidated revenues include the processing fees charged to the alliance, as presented in the consolidated statements of income within "Revenues excluding reimbursable items".
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
65
FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
See note 3 "Revenue Recognition" of these consolidated financial statements for additional discussion.
Deferred Revenue
The Company records deferred revenue when it receives payments or issues invoices in advance of transferring control of promised goods or services to a customer. 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 value 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 deferred revenue is recognized when underlying performance obligations are achieved. As of December 31, 2018 and 2017, current deferred revenue included within "Accounts payable and accrued liabilities" in the Company's consolidated balance sheets was $134 million and $167 million, respectively. As of December 31, 2018 and 2017, noncurrent deferred revenue included within "Other long-term liabilities" in the Company's consolidated balance sheets was $164 million and $177 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 December 31, 2017, $36 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. In connection with the adoption of the New Revenue Standard on January 1, 2018, the Company recorded the deferred revenue associated with the Clover terminals that had previously lacked standalone value to "Accumulated loss" in the consolidated balance sheet.
Stock-Based Compensation
Stock-based compensation to employees is measured at the grant date fair values of the respective stock options and restricted stock awards. An estimate of forfeitures is applied when calculating compensation expense. To calculate the estimated forfeiture rate, the Company performed an analysis of all forfeitures over a five year period and continues to evaluate the actual forfeiture rate compared to its estimate. The estimated forfeiture rate will be adjusted as actual forfeitures vary from the estimate, resulting in the recognition of compensation cost only for awards that vest. Any effect of a change in estimated forfeitures will be recognized through a cumulative catch-up adjustment. The Company recognizes compensation cost on service based awards with graded vesting on a straight-line basis over the requisite service period for the entire award. The Company recognizes compensation cost on performance-based restricted stock grants on a grant basis graded schedule. See note 5 "Stock Compensation Plans" of these consolidated financial statements for details regarding the Company’s stock-based compensation plan.
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.
Foreign Currency Translation
The U.S. dollar is the functional currency of the Company’s U.S.-based businesses and certain foreign-based businesses. Significant operations with a local currency as their functional currency include operations in the United Kingdom, Australia, Germany, Ireland, and Brazil. Foreign currency-denominated assets and liabilities for these units and other less significant operations are translated into U.S. dollars based on exchange rates prevailing at the end of the period, and revenues and expenses are translated at average exchange rates during each monthly period. The effects of foreign exchange gains and losses arising from the translation of assets and liabilities of those entities where the functional currency is not the U.S. dollar are included as a component of Other Comprehensive Income (OCI). Intercompany loans are generally not considered invested on a long-term basis and such foreign currency gains and losses are included in "Other income" on the consolidated statements of income. Transaction gains and losses related to operating assets and liabilities are included in “Cost of revenues” and “Selling, general, and administrative” in the
66
FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
consolidated statements of income and were immaterial for all periods presented. Non-operating transaction gains and losses derived from non-operating assets and liabilities are included in “Other income” on the consolidated statements of income and are separately disclosed in note 17 "Supplemental Financial Information" of these consolidated financial statements.
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 six months ended December 31, 2018 are reflected in "Other income" on the consolidated statements of income rather than “Accumulated other comprehensive loss” on the consolidated balance sheet. The Company recognized $2 million in foreign currency exchange losses for the six months ended December 31, 2018 from remeasurement of the operations in Argentina to the parent functional currency.
Derivative Financial Instruments
The Company is exposed to various financial and market risks, including those related to changes in interest rates and foreign currency exchange rates that exist as part of its ongoing business operations. The Company uses derivative instruments (i) to mitigate cash flow risks with respect to changes in interest rates (forecasted interest payments on variable rate debt), (ii) to maintain a desired ratio of fixed rate and floating rate debt, and (iii) to protect the net investment in certain foreign subsidiaries and/or affiliates with respect to changes in foreign currency exchange rates. The Company’s objective is to engage in risk management strategies that provide adequate downside protection.
Derivative instruments are entered into for periods consistent with related underlying exposures. The Company applies strict policies to manage each of these risks, including prohibition against derivatives trading, derivatives market-making or any other speculative activities.
The Company formally documents all relationships between hedging instruments and the underlying hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that have been designated as cash flow hedges to forecasted transactions and net investment hedges to the underlying investment in a foreign subsidiary or affiliate. For designated hedges, the Company formally assesses, both at inception of the hedge and on an ongoing basis, whether the hedge is highly effective in offsetting changes in cash flows or foreign currency exposure of the underlying hedged items. The Company also performs an assessment of the probability of the forecasted transactions on a periodic basis. If it is determined that a derivative ceases to be highly effective during the term of the hedge or if the forecasted transaction is no longer probable, the Company discontinues hedge accounting prospectively for such derivative.
The Company monitors the financial stability of its derivative counterparties and all counterparties are investment grade. The credit risk inherent in these agreements represents the possibility that a loss may occur from the nonperformance of a counterparty to the agreements. The Company performs a review at inception of the hedge, as circumstances warrant, and at least on a quarterly basis, of the credit risk of these counterparties. The Company also monitors the concentration of its contracts with individual counterparties. The Company’s exposures are in liquid currencies (primarily in U.S. dollars, euros, Australian dollars, British pounds, and Canadian dollars), so there is minimal risk that appropriate derivatives to maintain the hedging program would not be available in the future.
The Company recognizes all derivative financial instruments in the consolidated balance sheets as assets or liabilities at fair value. Such amounts are recorded in “Other current assets”, “Other long-term assets”, “Accounts payable and accrued liabilities” or “Other long-term liabilities” in the consolidated balance sheets. The Company’s policy is to present all derivative balances on a gross basis, without regard to counterparty master netting agreements or similar arrangements. Changes in fair value of derivative instruments are recognized immediately in "Other income" on the consolidated statements of income unless the derivative is designated and qualifies for hedge accounting. For derivatives that qualify as hedges of future cash flows, the effective portion of changes in fair value is recorded temporarily in equity as a component of OCI and then recognized in "Interest expense, net" in the consolidated statements of income in the same period or periods during which the hedged item affects earnings. For derivatives that qualify as a hedge of a net investment in a foreign operation, the gain or loss is reported in OCI as part of the cumulative translation adjustment to the extent the hedge is effective. Any ineffective portions of cash flow hedges and net investment hedges are recognized in “Other income” in the consolidated statements of income during the period of change. Additional discussion of derivative instruments is provided in note 14 "Derivative Financial Instruments" of these consolidated financial statements.
67
FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Noncontrolling and Redeemable Noncontrolling Interests
Noncontrolling interests represent the minority shareholders’ share of the net income or loss and equity in consolidated subsidiaries. The Company’s noncontrolling interests are presented pretax in the consolidated statements of income as “Net income attributable to noncontrolling interests and redeemable noncontrolling interest” because the majority of the Company’s non wholly-owned consolidated subsidiaries are flow through entities for tax purposes. Noncontrolling interests are presented as a component of equity in the consolidated balance sheets and reflect the original investments by these noncontrolling shareholders in the consolidated subsidiaries, along with their proportionate share of the earnings or losses of the subsidiaries, net of dividends or distributions. Noncontrolling interests that are redeemable at the option of the holder are presented outside of equity and are carried at their estimated redemption value. See note 6 "Stockholders' Equity and Redeemable Noncontrolling Interest" of these consolidated financial statements for more information. A noncontrolling interest is recorded on the date of acquisition based on the total fair value of the acquired entity and the noncontrolling interest’s share of that value.
Reserve for Merchant Credit Losses
With respect to the merchant acquiring business, the Company’s merchant customers (or those of its unconsolidated alliances) have the legal obligation to refund any charges properly reversed by the cardholder. However, in the event the Company is not able to collect the refunded amounts from the merchants, the Company may be liable for the reversed charges. The Company’s risk in this area primarily relates to situations where the cardholder has purchased goods or services to be delivered in the future.
The Company’s obligation to perform is minimal in relation to the total dollar volume processed. The Company requires cash deposits, guarantees, letters of credit or other types of collateral from certain merchants to minimize this obligation. Collateral held by the Company is classified within “Settlement assets” and the obligation to repay the collateral if it is not needed is classified within “Settlement obligations” on the Company’s consolidated balance sheets. The Company also utilizes a number of systems and procedures to manage merchant risk. Despite these efforts, the Company historically has experienced some level of losses due to merchant defaults. The amount of collateral held by the Company was $596 million and $632 million as of December 31, 2018 and 2017, respectively.
The Company’s contingent obligation relates to imprecision in its estimates of required collateral. A provision for this obligation is recorded based primarily on historical experience of credit losses and other relevant factors such as economic downturns or increases in merchant fraud. Merchant credit losses are included in “Cost of revenues” in the Company’s consolidated statements of income. The amount of the reserves attributable to entities consolidated by the Company was $28 million and $29 million as of December 31, 2018 and 2017, respectively.
Income Taxes
The Company and its domestic subsidiaries file a consolidated U.S. income tax return. The Company’s foreign operations file income tax returns in their local jurisdictions. Income taxes reflect the net tax effects of temporary differences between the financial reporting carrying amounts of assets and liabilities and the corresponding income tax amounts. The Company has deferred tax assets and liabilities and maintains valuation allowances where it is more likely than not that all or a portion of deferred tax assets will not be realized. To the extent the Company determines that it will not realize the benefit of some or all of its deferred tax assets, these deferred tax assets will be adjusted through the Company’s provision for income taxes in the period in which this determination is made.
The Company recognizes the tax benefits from uncertain tax positions only when it is more likely than not, based on the technical merits of the position, that the tax position will be sustained upon examination, including the resolution of any related appeals or litigation. The tax benefits recognized in the consolidated financial statements from such a position are measured as the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.
Research and Development
The Company accounts for research and development costs in accordance with Accounting Standards Codification subtopic 730-10, Research and Development (ASC 730-10). Under ASC 730-10, all research and development costs must be charged to expense as incurred. Company-sponsored research and development costs related to both present and future products are expensed in the period incurred. The Company incurred research and development expenses of $143 million and $150 million during the years ended December 31, 2018 and 2017, respectively.
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FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash and Cash Equivalents
Investments (other than those included in settlement assets) with original maturities of three months or less (that are readily convertible to cash) are considered to be cash equivalents and are stated at cost, which approximates market value. Cash and cash equivalents that were restricted from use due to regulatory requirements are included in “Other long-term assets” in the consolidated balance sheets and was $28 million, $27 million, and $30 million as of December 31, 2018, 2017, and 2016 respectively.
Accounts and Leasing Receivables
Accounts receivable balances are stated at amounts due from customers, 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 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 consolidated balance sheets. The Company recognizes interest income on its leasing receivables using the effective interest method. Interest income from leasing receivables is included in “Revenues excluding reimbursable items” in the consolidated statements of income. 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.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation expense is computed using the straight-line method over the lesser of the estimated useful life of the related assets (generally three years to 10 years for equipment, furniture, and leasehold improvements, and 30 years for buildings) or the lease term. Maintenance and repairs which do not extend the useful life of the respective assets are expensed as incurred.
The following table presents depreciation expense related to property and equipment, including equipment under capital lease:
Year ended December 31, | ||||
(in millions) | Amount | |||
2018 | $ | 320 | ||
2017 | 321 | |||
2016 | 300 | |||
Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price over tangible and intangible assets acquired less liabilities assumed arising from business combinations. Goodwill is generally allocated to reporting units based upon relative fair value (taking into consideration other factors such as synergies) when an acquired business is integrated into multiple reporting units. The Company’s reporting units are at the operating segment level or one level below the operating segment level for which discrete financial information is prepared and regularly reviewed by management. When a business within a reporting unit is disposed of, goodwill is allocated to the disposed business using the relative fair value method. Fair value is estimated using a discounted cash flow analysis.
The Company tests goodwill annually for impairment, as well as upon an indicator of impairment, at the reporting unit level. The Company performed its annual goodwill impairment test in the fourth quarters of 2018, 2017, and 2016. As of October 1, 2018, the most recent impairment analysis date, the fair value of each reporting unit exceeded its carrying value. The Company did not record any goodwill impairment charges in 2018, 2017, and 2016.
Customer relationships represent the estimated value of the Company’s relationships with customers, primarily merchants and financial institutions, to which it provides services. Customer relationships are amortized based on the pattern of undiscounted cash flows for the period as a percentage of total projected undiscounted cash flows. The Company selected this amortization method for these customer relationships based on a conclusion that the projected undiscounted cash flows could be reliably determined.
The Company capitalizes initial payments for new contracts and contract renewals. The initial payments for new contracts and contract renewals are amortized 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.
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FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company capitalizes conversion related costs associated with enabling customers to receive its processing services. These costs are amortized on a straight-line basis over the expected benefit period of seven years based on the related services being provided and are recorded as an expense in “Depreciation and amortization” in the consolidated statements of income.
The Company develops software that is used in providing processing services to customers. To a lesser extent, the Company also develops software to be sold or licensed to customers. Costs incurred during the preliminary project stage are expensed as incurred. Capitalization of costs begins when the preliminary project stage is completed and management, with the relevant authority, authorizes and commits to funding the project and it is probable that the project will be completed and the software will be used to perform the function intended. Capitalization of costs ceases when the software is substantially complete and ready for its intended use. Software development costs are amortized on a straight-line basis over the estimated useful life of the software, which is generally five years. Software acquired in connection with business combinations is amortized on a straight-line basis over the estimated useful life of the software which generally ranges from three years to 10 years.
In addition to capitalized contract and software development costs, other intangibles include copyrights, patents, purchased software, and trademarks acquired in business combinations. Other intangible assets, except for the First Data trade name discussed in note 4 "Goodwill and Other Intangibles" of these consolidated financial statements, are amortized on a straight-line basis over the length of the contract or benefit period, which generally ranges from three years to 25 years.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Fair value is defined by accounting guidance as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses the hierarchy prescribed in the accounting guidance for fair value measurements, based upon the available inputs to the valuation and the degree to which they are observable or not observable in the market. The Company maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs. The three levels in the hierarchy are as follows:
• | Level 1 Inputs—Quoted prices (unadjusted) for identical assets or liabilities in active markets that are accessible as of the measurement date. |
• | Level 2 Inputs—Inputs other than quoted prices within Level 1 that are observable either directly or indirectly, including but not limited to quoted prices in markets that are not active, quoted prices in active markets for similar assets or liabilities, and observable inputs other than quoted prices such as interest rates or yield curves. |
• | Level 3 Inputs—Unobservable inputs reflecting the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. |
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
During the years ended December 31, 2018, 2017, and 2016 the Company did not record any adjustments over $5 million to the carrying value of existing assets based on non-recurring fair value measurements, other than as discussed in note 11 "Other Operating Expenses, Net" .
Net Income Per Share
Basic net income per share is calculated by dividing Net income attributable to First Data Corporation by the weighted-average shares outstanding during the period, without consideration for any potential dilutive shares. Diluted net income per share is computed by dividing Net income attributable to First Data Corporation by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options, unvested restricted stock, and unvested restricted stock awards. The dilutive effect of potentially dilutive securities is reflected in diluted net income 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.
Reclassifications
Certain amounts for prior years have been reclassified to conform with the current year financial statement presentation.
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FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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 years ended December 31, 2018, 2017, and 2016 was an increase (decrease) in operating expense and a decrease (increase) in "Interest expense, net" of $9 million, $6 million, and $(10) million, respectively.
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 Accounting Standards Codification (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).
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FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 the January 1, 2018 balance of 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.
The following tables present the impact of adopting the New Revenue Standard on the Company’s consolidated financial statements for the year ended December 31, 2018:
Year ended December 31, 2018 | ||||||||||||
(in millions, except per share amounts) | As Reported | Adjustments | Amounts Without Adoption of ASC 606 | |||||||||
Revenues: | ||||||||||||
Revenues excluding reimbursable items | $ | 8,679 | $ | (157 | ) | $ | 8,522 | |||||
Reimbursable items | 819 | 3,568 | 4,387 | |||||||||
Total revenues | 9,498 | 3,411 | 12,909 | |||||||||
Expenses: | ||||||||||||
Total expenses excluding reimbursable items | 6,784 | (129 | ) | 6,655 | ||||||||
Reimbursable items | 819 | 3,568 | 4,387 | |||||||||
Total expenses | 7,603 | 3,439 | 11,042 | |||||||||
Operating profit | 1,895 | (28 | ) | 1,867 | ||||||||
Interest expense, net | (917 | ) | — | (917 | ) | |||||||
Loss on debt extinguishment | (153 | ) | — | (153 | ) | |||||||
Other income | 201 | — | 201 | |||||||||
Income before income taxes and equity earnings in affiliates | 1,026 | (28 | ) | 998 | ||||||||
Income tax expense | 49 | (7 | ) | 42 | ||||||||
Equity earnings in affiliates | 221 | — | 221 | |||||||||
Net income | 1,198 | (21 | ) | 1,177 | ||||||||
Less: Net income attributable to noncontrolling interests and redeemable noncontrolling interest | 193 | — | 193 | |||||||||
Net income attributable to First Data Corporation | $ | 1,005 | $ | (21 | ) | $ | 984 | |||||
Net income attributable to First Data Corporation per share: | ||||||||||||
Basic | $ | 1.08 | $ | (0.02 | ) | $ | 1.06 | |||||
Diluted | $ | 1.05 | $ | (0.02 | ) | $ | 1.03 | |||||
The adoption of the New Revenue Standard had an immaterial impact on the Company’s consolidated balance sheet and consolidated statement of cash flows as of and for the year ended December 31, 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 but recognize expenses in the income statement in a manner similar to today’s accounting and adds new presentation and disclosure requirements for both lessees and lessors. The accounting guidance for lessors remains largely unchanged. The Company expects the adoption to result in gross up on its consolidated balance sheets from the recognition of assets and liabilities arising out of operating leases. The Company will recognize assets for the right to use the underlying leased property during the lease term and will recognize liabilities for the corresponding financial obligation to make lease payments to the lessor.
The Company will adopt the new standard on January 1, 2019 using a modified retrospective approach that permits an entity to use the effective date as the date of initial application through the recognition of a cumulative effect adjustment to the opening balance of retained earnings upon adoption. The Company plans to elect the transition package of practical expedients permitted
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FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
within the standard, which eliminates the requirements to reassess prior conclusions about lease identification, lease classification, and initial direct costs. Further, the Company plans to elect a short-term lease exception policy, permitting the Company to not apply the recognition requirements of this standard to leases with terms of 12 months or less, and to elect an accounting policy to account for lease and non-lease components as a single component for certain classes of assets. The Company is substantially complete with the evaluation of the impact on the consolidated financial statements of adopting the new lease standard and does not anticipate a material impact on the consolidated balance sheets or to retained earnings. Additionally, the Company does not anticipate the adoption of the standard will impact any debt covenants or result in significant changes to the internal processes, including the internal control over financial reporting.
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.
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 adopted the new guidance on a prospective basis on January 1, 2019 with no material 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.
Securities and Exchange Commission Disclosure Requirements
In August 2018, the Securities and Exchange Commission (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 update its disclosure for this new rule beginning with the quarter ended March 31, 2019.
Derivatives and Hedging
In October 2018, the FASB issued guidance which expands the list of U.S. benchmark interest rates permitted in the application of hedge accounting. The amendments permit the use of the overnight index swap rate based on the Secured Overnight Financing Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815. The new guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years and should be applied prospectively for qualifying new or redesignated hedging relationships entered into after January 1, 2019. The Company will adopt the guidance on January 1, 2019, and does not expect any material impact.
Comprehensive Income
In February 2018, the FASB issued guidance that permits a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The amendments also require certain disclosures
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FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
about stranded tax effects. The Company adopted the guidance on January 1, 2019, which did not have a significant impact on the Company's consolidated financial statements.
Consolidation
In October 2018, the FASB issued new guidance on consolidation. The new guidance provides that indirect interests held through related parties in common control arrangements should be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. The new guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years and should be applied retrospectively with a cumulative effect adjustment to retained earnings at the beginning of the earliest period presented. Early adoption is permitted. The Company is in the process of evaluating the impact of the guidance on its consolidated financial statements.
Note 2: Borrowings
The following table presents the borrowings for the years ended December 31, 2018 and 2017.
As of December 31, | ||||||||
(in millions) | 2018 | 2017 | ||||||
Short-term borrowings: | ||||||||
Foreign lines of credit and other arrangements | $ | 224 | $ | 205 | ||||
Senior Secured Revolving Credit Facility | 250 | 272 | ||||||
Receivable securitized loan | 472 | 600 | ||||||
Unamortized deferred financing costs(a) | (3 | ) | (3 | ) | ||||
Total short-term borrowings | 943 | 1,074 | ||||||
Current portion of long-term borrowings: | ||||||||
Senior secured term loan facility due 2020 | — | 78 | ||||||
Senior secured term loan facility due 2023 | 119 | — | ||||||
Other arrangements and capital lease obligations | 108 | 119 | ||||||
Total current portion of long-term borrowings | 227 | 197 | ||||||
Total short-term and current portion of long-term borrowings | 1,170 | 1,271 | ||||||
Long-term borrowings: | ||||||||
Senior secured term loan facility due 2020 | — | 1,404 | ||||||
Senior secured term loan facility due 2022 | 2,518 | 3,758 | ||||||
Senior secured term loan facility due 2023 | 4,631 | — | ||||||
Senior secured term loan facility due 2024 | 3,892 | 3,892 | ||||||
5.375% Senior secured first lien notes due 2023 | 1,210 | 1,210 | ||||||
5.0% Senior secured first lien notes due 2024 | 1,883 | 1,900 | ||||||
5.75% Senior secured second lien notes due 2024 | 2,176 | 2,200 | ||||||
7.0% Senior unsecured notes due 2023 | — | 3,400 | ||||||
Unamortized discount and unamortized deferred financing costs(a) | (91 | ) | (123 | ) | ||||
Other arrangements and capital lease obligations | 210 | 286 | ||||||
Total long-term borrowings(b) | 16,429 | 17,927 | ||||||
Total borrowings | $ | 17,599 | $ | 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 December 31, 2018 and 2017, the fair value of the Company's long-term borrowings, excluding other arrangements and capital lease obligations, was $15.7 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. |
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FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Foreign Lines of Credit and Other Arrangements
As of December 31, 2018 and 2017, the Company had $516 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 December 31, 2018 and 2017, this included a $290 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 December 31, 2018 and 2017, $13 million and $15 million, respectively, were uncommitted. The weighted-average interest rate associated with foreign lines of credit was 2.6% and 2.9% for the years ended December 31, 2018 and 2017, respectively.
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 FDC. As of December 31, 2018 and 2017, the Company transferred $726 million and $748 million, respectively, in receivables to FDR as part of the securitization program. As of December 31, 2018, the maximum borrowing capacity, subject to collateral availability, under the agreement is $581 million. FDR utilized the receivables as collateral in borrowings of $472 million and $600 million as of December 31, 2018 and 2017, respectively. As of December 31, 2018 and 2017, the receivables held by FDR are recorded within “Accounts receivable, net” in the Company’s consolidated balance sheets. The weighted average interest rate on the securitization facility borrowings was 3.65% and 2.8% as of December 31, 2018 and 2017, respectively.
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 LIBOR, down from LIBOR plus 1.5% under the previous agreement, or a 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.
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. The interest rate associated with the credit facility is 1.85%. As of December 31, 2018 and December 31, 2017, the Company had $30 million and $0 million of outstanding letters of credit.
Senior Secured Credit Facility
On October 26, 2018, the Company refinanced its senior secured term loan facility due 2020 with a $6 billion senior secured credit facility due 2023 which consists of a $1.25 billion five year revolver and a $4.75 billion senior secured term loan facility. See "Senior Secured Revolving Credit Facility Due October 2023" and "Senior Secured Term Loan Facility Due October 2023" sections within this note. In addition, the applicable interest rates on the Company's existing Senior Secured Term Loan Facilities were refinanced, see "Senior Secured Term Loan Facility Due June 2020", "Senior Secured Term Loan Facility Due July 2022", and "Senior Secured Term Loan Facility Due April 2024" sections within this note.
The senior secured term loan facilities also require mandatory prepayments based on a percentage of excess cash flow generated by the Company if the Company does not satisfy the leverage ratio. All obligations under the senior secured term loan facilities are fully and unconditionally guaranteed by most of the domestic, wholly-owned material subsidiaries of the Company, subject to certain exceptions.
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FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Senior Secured Revolving Credit Facility Due October 2023
On October 26, 2018, the Company refinanced its $1.25 billion senior secured revolving credit facility maturing on June 2, 2020 extending the maturity to October 26, 2023. Up to $250 million of the senior secured revolving credit facility is available for letters of credit, of which $5 million and $29 million of letters of credit were issued under the facilities as of December 31, 2018 and 2017, respectively. All letters of credit expire on or prior to January 1, 2020 with a one-year renewal option. As of December 31, 2018, $995 million remained available. Interest on the senior secured revolving credit facility refinanced in 2018 is payable at a rate equal to either (a) LIBOR for deposits in the applicable currency plus 1.50% or (b) solely with respect to revolving loans denominated in U.S. dollars, a base rate plus 0.50%. Interest on the senior secured revolving credit facility outstanding in 2017 was payable at a rate equal to either (a) LIBOR for deposits in the applicable currency plus 3.50% or (b) solely with respect to revolving loans denominated in U.S. dollars, a base rate plus 2.50%. The weighted-average interest rate on these facilities was 3.85% and 5.74% for the years ended December 31, 2018 and 2017, respectively. The new commitment fee rate for the unused portion of the facility is 0.375% per year. Previously, the commitment fee rate for the unused portion of the facility was 0.50% per year. The applicable interest rate and commitment fee may be reduced based on the Company’s leverage ratio.
Senior Secured Term Loan Facility Due June 2020
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 this term loan facility was either LIBOR plus 1.75% or a base rate plus 0.75%. The Company is required to make quarterly principal payments of 1.25% on this term loan facility. The term loan facility was utilized to pay down a portion of the existing 6.75% senior secured first lien notes. In connection with this transaction, the Company recorded $56 million in loss on debt extinguishment for the year ended December 31, 2017.
In November 2017, the Company incurred additional debt of $250 million against this term loan facility to partially fund the purchase of BluePay. The Company made principal payments of $57 million and $70 million in 2018 and 2017, respectively.
On October 5, 2018, the Company made a prepayment of $500 million utilizing $344 million of cash from operations and $156 million of borrowings from the receivable securitization facility. On October 26, 2018, the Company repaid the remaining outstanding balance of $923 million from the proceeds of the new senior secured term loan due October 2023. In connection with these transactions, the Company recorded $4 million in loss on debt extinguishment for the year ended December 31, 2018.
Senior Secured Term Loan Facility Due July 2022
On June 14, 2017, the Company refinanced $2.7 billion of U.S. dollar-denominated senior secured term loans maturing on July 2022 and paid off $1.0 billion of euro-denominated senior secured term loans maturing on 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. In connection with this transaction, the Company recorded $9 million in loss on debt extinguishment and $4 million in debt issuance costs for the year ended December 31, 2017. The interest rate applicable to this term loan facility is either LIBOR plus 2.00% or a base rate plus 1.00% as of December 31, 2018 and either LIBOR plus 2.25% or a base rate plus 1.25 as of December 31, 2017.
In December 2018, the Company repaid $775 million under the senior secured term loan facility due July 2022. In connection with this transaction, the Company recorded $7 million in loss on debt extinguishment for the year ended December 31, 2018. The Company made additional payments of $465 million throughout the year ended December 31, 2018 on the senior secured term loan facility due July 2022.
Senior Secured Term Loan Facility Due October 2023
On October 26, 2018, the Company issued $4.75 billion of U.S. dollar-denominated senior secured term loans maturing October 2023. The interest rate applicable to the term loan facility is either LIBOR plus 1.50% or a base rate plus 0.50% as of December 31, 2018. The Company is required to make quarterly principal payments of 0.625% on this term loan facility in the initial year and 1.25% thereafter. In October 2018, the Company drew down $975 million and repaid the remaining balance of the senior secured term loan facility due June 2020 of $923 million. In December 2018, the Company drew down $3.775 billion and repaid in full the 7.0% senior unsecured notes due 2023 and amounts outstanding under the senior secured term loan facility due July 2022.
76
FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Senior Secured Term Loan Facility Due April 2024
On November 15, 2017, the Company refinanced $3.9 billion of U.S. dollar-denominated senior secured term loans maturing on April 2024. The proceeds were utilized to pay down the existing March 2021 term loan facility. In connection with this transaction, the Company recorded $9 million in loss on debt extinguishment for the year ended December 31, 2017.The interest rate applicable to this term loan facility is either LIBOR plus 2.00% or a base rate plus 1.00% as of December 31, 2018 and either LIBOR plus 2.25% or a base rate plus 1.25% as of December 31, 2017.
5.375% Senior Secured First Lien Notes Due August 2023
On August 11, 2015, the Company issued $1.2 billion aggregate principal amount of 5.375% senior secured first lien notes due August 15, 2023. Interest on the notes will be payable semi-annually in cash each year, commencing on February 15, 2016. The Company may redeem the notes, in whole or in part, prior to August 15, 2020 at established redemption prices plus accrued and unpaid interest to the redemption date. Thereafter, the Company may redeem the notes at par.
5.0% Senior Secured First Lien Notes Due January 2024
On March 29, 2016, the Company issued additional $900 million aggregate principal amount to the existing $1.0 billion principal amount issued November 25, 2015 of 5.0% senior secured first lien notes due January 2024. The Company may redeem the notes, in whole or in part, prior to January 15, 2019 at a price equal to 100% of the notes redeemed plus accrued and unpaid interest to the redemption date and a "make-whole premium". Thereafter, the Company may redeem the notes, in whole or in part, at established redemption prices.
5.75% Senior Secured Second Lien Notes Due January 2024
On November 25, 2015, the Company issued $2.2 billion aggregate principal amount of 5.75% senior secured second lien notes due January 15, 2024. Interest on the notes is payable semi-annually in cash on January 15 and July 15 of each year. The Company may redeem the notes, in whole or in part, prior to January 15, 2019 at a price equal to 100% of the notes redeemed plus accrued and unpaid interest to the redemption date and a "make-whole premium". Thereafter, the Company may redeem the notes, in whole or in part, at established redemption prices.
7.0% Senior Unsecured Notes Due December 2023
On November 18, 2015, the Company issued $3.4 billion aggregate principal amount of 7.0% senior unsecured notes due December 1, 2023. Interest on the notes is payable semi-annually in cash on June 1 and December 1 of each year. In December 2018, the Company repaid in full the 7% senior unsecured notes due 2023. In connection with this transaction, the Company recorded $142 million in loss on debt extinguishment.
Maturities
The following table presents the future aggregate annual maturities of the Company’s capital leases and long-term debt excluding unamortized discounts and deferred financing cost:
Year ended December 31, (in millions) | Par Amount | |||
2019 | $ | 227 | ||
2020 | 292 | |||
2021 | 311 | |||
2022 | 2,800 | |||
2023 | 5,161 | |||
Thereafter | 7,956 | |||
Total | $ | 16,747 | ||
77
FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Guarantees and Covenants
All obligations under the senior secured revolving credit facility and senior secured term loan facilities are unconditionally guaranteed by most of the existing and future, direct and indirect, wholly-owned, material domestic subsidiaries of the Company. The senior secured facilities contain a number of covenants that, among other things, restrict the Company’s ability to incur additional indebtedness; create liens; enter into sale and leaseback transactions; engage in mergers or consolidations; sell or transfer assets; pay dividends and distributions or repurchase the Company’s capital stock; make investments, loans or advances; prepay certain indebtedness; make certain acquisitions; engage in certain transactions with affiliates; amend material agreements governing certain indebtedness; and change its lines of business. The senior secured facilities also require the Company to not exceed a maximum senior secured leverage ratio and contain certain customary affirmative covenants and events of default, including a change of control. The senior secured term loan facilities also require mandatory prepayments based on a percentage of excess cash flow generated by the Company. The Company is in compliance with all applicable covenants.
All senior secured notes are guaranteed on a senior secured basis by each of the Company’s existing and future direct and indirect wholly-owned domestic subsidiaries that guarantees the Company’s senior secured credit facilities. Each of the guarantees of the notes is a general senior obligation of each guarantor and rank senior in right of payment to all existing and future subordinated indebtedness of the guarantor subsidiary. The notes rank equal in right of payment with all existing and future senior indebtedness of the guarantor subsidiary but are effectively senior to the guarantees of the Company’s existing senior unsecured notes and the Company’s existing senior secured second lien notes to the extent of the Company’s and the guarantor subsidiary’s value of the collateral securing the notes. The 5.375% senior secured first lien notes and 5.0% senior secured first lien notes are effectively equal in right of payment with each other and the guarantees of the Company’s senior secured credit facilities. Each series of notes are effectively subordinated to any obligations secured by liens permitted under the indenture for the particular series of notes and structurally subordinated to any existing and future indebtedness and other liabilities of any subsidiary of a guarantor that is not also a guarantor of the notes.
All obligations under the senior secured first lien notes and senior secured second lien notes also contain a number of covenants similar to those described for the senior secured obligations. The Company is in compliance with all applicable covenants.
Note 3: Revenue Recognition
Disaggregation of Revenue
The following tables present revenues disaggregated by primary geographical regions and product types for year ended December 31, 2018:
Year ended December 31, 2018 | ||||||||||||||||
(in millions) | Global Business Solutions | Global Financial Solutions | Network & Security Solutions | Total | ||||||||||||
North America | $ | 4,414 | $ | 1,721 | $ | 1,441 | $ | 7,576 | ||||||||
EMEA | 679 | 439 | 14 | 1,132 | ||||||||||||
LATAM | 333 | 133 | 1 | 467 | ||||||||||||
APAC | 201 | 115 | 7 | 323 | ||||||||||||
Total Revenue(a)(b) | $ | 5,627 | $ | 2,408 | $ | 1,463 | $ | 9,498 | ||||||||
(a) See note 8 "Segment Information" for the reconciliation to segment revenues.
(b) Global Business Solutions includes non wholly-owned entities and Global Financial Solutions includes reimbursable items, which includes postage and customized orders.
Year ended December 31, 2018 | ||||
(in millions) | Total | |||
Transaction and processing services | $ | 8,421 | ||
Hardware, Professional Services, and Other | 1,077 | |||
Total Revenue(a) | $ | 9,498 | ||
78
FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Contract Balances
Accounts Receivable
As of December 31, 2018 and 2017, long-term accounts receivable, net of allowance for doubtful accounts, included within “Other long-term assets” in the consolidated balance sheets was $220 million and $272 million, respectively.
Contract Liabilities
The following table presents the changes in deferred revenue for year ended December 31, 2018:
(in millions) | Year ended December 31, 2018 | |||
Balance, beginning of the period | $ | 344 | ||
New Revenue Standard adjustments | (39 | ) | ||
Deferral of revenue | 258 | |||
Recognition of unearned revenue | (223 | ) | ||
Other (primarily foreign currency translation) | (42 | ) | ||
Balance, end of period | $ | 298 | ||
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 December 31, 2018 and 2017, the Company had $152 million and $145 million, respectively, of capitalized contract costs included within "Other intangibles, net" on the consolidated balance sheets. For the years ended December 31, 2018, 2017, and 2016 the Company had $51 million, $56 million, and $65 million respectively, of contra-revenue related to these costs.
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 on a straight-line basis 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 consolidated statement of income. As of December 31, 2018 and 2017, the Company had $172 million and $160 million, respectively, of capitalized conversion costs, net of amortization, included within "Other intangibles, net" on the consolidated balance sheets. For the years ended December 31, 2018, 2017, and 2016, the Company had $41 million, $30 million, and $29 million, respectively, of amortization expense related to these costs.
79
FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4: Goodwill and Other Intangibles
The following table presents changes to goodwill for the years ended December 31, 2017 and 2018:
(in millions) | Global Business Solutions | Global Financial Solutions | Network & Security Solutions | Totals | ||||||||||||
Balance as of January 1, 2017 | ||||||||||||||||
Goodwill | $ | 15,505 | $ | 1,966 | $ | 2,284 | $ | 19,755 | ||||||||
Accumulated impairment losses | (1,363 | ) | (683 | ) | (1,013 | ) | (3,059 | ) | ||||||||
14,142 | 1,283 | 1,271 | 16,696 | |||||||||||||
Acquisitions | 875 | — | — | 875 | ||||||||||||
Dispositions | — | (17 | ) | (48 | ) | (65 | ) | |||||||||
Other adjustments (primarily foreign currency) | 104 | 100 | — | 204 | ||||||||||||
Balance as of December 31, 2017 | ||||||||||||||||
Goodwill | 16,484 | 2,049 | 2,236 | 20,769 | ||||||||||||
Accumulated impairment losses | (1,363 | ) | (683 | ) | (1,013 | ) | (3,059 | ) | ||||||||
15,121 | 1,366 | 1,223 | 17,710 | |||||||||||||
Acquisitions | 6 | — | — | 6 | ||||||||||||
Dispositions | — | (141 | ) | — | (141 | ) | ||||||||||
Other adjustments (primarily foreign currency) | (65 | ) | (49 | ) | (1 | ) | (115 | ) | ||||||||
Balance as of December 31, 2018 | ||||||||||||||||
Goodwill | 16,425 | 1,859 | 2,235 | 20,519 | ||||||||||||
Accumulated impairment losses | (1,363 | ) | (683 | ) | (1,013 | ) | (3,059 | ) | ||||||||
$ | 15,062 | $ | 1,176 | $ | 1,222 | $ | 17,460 | |||||||||
The intangible amortization expense associated with customer relationships and other intangibles, including amortization associated with investments in affiliates, was as follows for the periods indicated:
Year ended December 31, | ||||
(in millions) | Amount | |||
2018 | $ | 770 | ||
2017 | 752 | |||
2016 | 761 | |||
The carrying value of the First Data trade name is $604 million for both the years ended December 31, 2018 and 2017. Upon consideration of many factors, including the determination that there are no legal, regulatory or contractual provisions that limit the useful life of the First Data trade name, the Company determined that the First Data trade name had an indefinite useful life. The Company also considered the effects of obsolescence, demand, competition, other economic factors, and its ability to maintain and protect the trade name without significant expenditures. The First Data trade name is expected to contribute directly or indirectly to the future cash flows of the Company for an indefinite period. As an indefinite lived asset, the First Data trade name is not amortized but is reviewed annually for impairment until such time as it is determined to have a finite life. The First Data trade name was not impaired as of December 31, 2018 or 2017.
80
FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table provides the components of other intangibles:
As of December 31, | ||||||||||||||||||||||||
2018 | 2017 | |||||||||||||||||||||||
(in millions) | Cost | Accumulated Amortization | Net of Accumulated Amortization | Cost | Accumulated Amortization | Net of Accumulated Amortization | ||||||||||||||||||
Customer relationships | $ | 7,272 | $ | (5,509 | ) | $ | 1,763 | $ | 8,124 | $ | (5,940 | ) | $ | 2,184 | ||||||||||
Other intangibles: | ||||||||||||||||||||||||
Conversion costs | $ | 271 | $ | (99 | ) | $ | 172 | $ | 302 | $ | (142 | ) | $ | 160 | ||||||||||
Contract costs | 317 | (165 | ) | 152 | 324 | (179 | ) | 145 | ||||||||||||||||
Software | 2,262 | (1,646 | ) | 616 | 2,552 | (1,920 | ) | 632 | ||||||||||||||||
Other, including trade names | 1,314 | (361 | ) | 953 | 1,422 | (424 | ) | 998 | ||||||||||||||||
Total other intangibles | $ | 4,164 | $ | (2,271 | ) | $ | 1,893 | $ | 4,600 | $ | (2,665 | ) | $ | 1,935 | ||||||||||
The estimated future aggregate amortization expense for the next five years is as follows:
Year ended December 31, | ||||
(in millions) | Amount(a) | |||
2019 | $ | 643 | ||
2020 | 581 | |||
2021 | 442 | |||
2022 | 356 | |||
2023 | 245 | |||
(a) Actual amortization expense will be higher due to future activity that generates new intangible assets.
The Company evaluates contract costs, conversion costs, and all other long lived assets for impairment on an annual basis or whenever events of changes in circumstances indicate that the carrying amounts may not be recoverable. Any assets that are determined to be unrecoverable are written down to their fair value.
Note 5: Stock Compensation Plans
The Company provides stock-based compensation awards to its employees under the 2015 Omnibus Incentive Plan (stock plan). The total number of shares of Class A common stock that may be issued under the stock plan is 71 million, plus any shares of Class B common stock subject to outstanding awards granted under the Company's 2007 Equity Plan that are forfeited, terminated, canceled, expired unexercised, withheld in payment of the exercise price, or withheld to satisfy tax withholding obligations which automatically converted on a one-for-one basis into shares of Class A common stock. The stock plan allows for the Company to award an equity interest in the Company or an award that can be settled in cash measured by reference to the value of the Company's Class A common stock.
Total stock-based compensation expense recognized in the "Cost of revenues" and “Selling, general, and administrative” line items of the consolidated statements of income resulting from stock options, non-vested restricted stock awards, and non-vested restricted stock units was as follows for the years ended December 31, 2018, 2017, and 2016:
Year ended December 31, (in millions) | Cost of revenues | Selling, general, and administrative | Total | ||||||||||
2018 | $ | 44 | $ | 204 | $ | 248 | |||||||
2017 | 72 | 173 | 245 | ||||||||||
2016(a) | 112 | 151 | 263 | ||||||||||
(a) | Directly associated with the Company's initial public offering, the Company incurred $52 million in stock-based compensation expense during 2016. |
81
FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Employee Stock Purchase Plan
The Company has an employee stock purchase plan under which the sale of 6.3 million shares of the Company's common stock is authorized. The price for shares purchased under the plan is 95% of the market value on the last day of each calendar quarter. For the years ended December 31, 2018, 2017, and 2016 the amount of shares issued under the plan were not material.
Stock Options
During the years ended December 31, 2018, 2017, and 2016, time-based options were granted under the stock plan. The time-based options have a contractual term of 10 years. Time-based options vest equally over a three to five year period from the date of issuance.
As of December 31, 2018, there was approximately $25 million of total unrecognized compensation expense related to stock options to be recognized over a weighted-average period of approximately two years.
The fair value of stock options granted for the years ended December 31, 2018, 2017, and 2016 were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
Year ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
Risk-free interest rate | 2.88 | % | 2.28 | % | 2.08 | % | ||||||
Dividend yield | — | — | — | |||||||||
Expected volatility | 29.59 | % | 38.97 | % | 41.33 | % | ||||||
Expected term (in years) | 7 | 7 | 7 | |||||||||
Fair value of options | $ | 8.12 | $ | 7.52 | $ | 5.33 | ||||||
Risk-free interest rate—The risk-free rate for stock options granted during the period was determined by using a zero-coupon U.S. Treasury rate for the periods that coincided with the expected terms listed above.
Expected dividend yield—No routine dividends are currently being paid, or are expected to be paid in future periods.
Expected volatility—As the Company does not have sufficient historical data due to its relatively short history of being publicly traded, the expected volatility is based on the historical volatilities of a group of guideline companies.
Expected term—The Company estimated the expected term by utilizing the “simplified method” as allowed by the SEC.
Fair value of options—The Company determined the fair value based on discounted cash flows and comparison to a group of guideline companies prior to being publicly traded on October 15, 2015 and the Company's closing stock price thereafter.
82
FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of stock option activity for the years ended December 31, 2018 and 2017 was as follows:
(options in millions) | Options | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term | Aggregate Intrinsic Value (in millions) | |||||||||
Outstanding as of December 31, 2016 | 39 | $ | 12.00 | ||||||||||
Granted | — | — | |||||||||||
Exercised | (5 | ) | 9.94 | ||||||||||
Canceled / Forfeited | — | — | |||||||||||
Outstanding as of December 31, 2017 | 34 | 12.27 | 6 years | $ | 150 | ||||||||
Granted | 1 | 19.36 | |||||||||||
Exercised | (5 | ) | 10.38 | ||||||||||
Canceled / Forfeited | — | — | |||||||||||
Outstanding as of December 31, 2018 | 30 | 12.70 | 5 years | $ | 124 | ||||||||
Options exercisable as of December 31, 2018 | 24 | 11.98 | 5 years | $ | 117 | ||||||||
The total intrinsic value related to stock options exercised for the years ended December 31, 2018, 2017, and 2016 was $50 million, $32 million, and $6 million, respectively.
Restricted Stock Awards and Restricted Stock Units
The grant date fair value of each award is based on the closing stock price at the date of grant. Grants were made as incentive awards, which generally vest 20% on the first anniversary, 40% on the second anniversary, and the remaining 40% on the third anniversary. As of December 31, 2018, there was approximately $259 million of total unrecognized compensation expense related to restricted stock that will be recognized over the respective service period of approximately one year. During 2018, 2017, and 2016, the Company did not pay any significant cash amounts to repurchase stock awards from employees that terminated employment with the Company.
A summary of restricted stock award and restricted stock unit activity for the years ended December 31, 2018 and 2017 is as follows:
(awards/units in millions) | Awards/Units | Weighted-Average Grant-Date Fair Value | |||||
Non-vested as of December 31, 2016 | 34 | $ | 13.59 | ||||
Granted | 23 | 16.94 | |||||
Vested | (15 | ) | 13.86 | ||||
Canceled / Forfeited | (4 | ) | 14.11 | ||||
Non-vested as of December 31, 2017 | 38 | 15.47 | |||||
Granted | 12 | 16.80 | |||||
Vested | (14 | ) | 14.79 | ||||
Canceled / Forfeited | (4 | ) | 15.82 | ||||
Non-vested as of December 31, 2018 | 32 | 16.24 | |||||
The total fair value of shares vested (measured as of the date of vesting) for the years ended December 31, 2018, 2017, and 2016 was $215 million, $204 million, and $137 million, respectively.
83
FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 6: Stockholders' Equity and Redeemable Noncontrolling Interest
Dividends
The Company’s senior secured revolving credit facility, senior secured term loan facility, and the indentures governing the senior secured notes limit the Company's ability to pay dividends. The restrictions are subject to numerous qualifications and exceptions, including an exception that allows the Company to pay a dividend to repurchase, under certain circumstances, stock held by employees, officers and directors that were obtained in connection with the stock compensation plan. The Company has not paid any cash dividends since the IPO.
Other Comprehensive Income
The income tax effects allocated to and the cumulative balance of each component of OCI are as follows:
(in millions) | Beginning Balance | Pretax Gain (Loss) Amount | Tax (Benefit) Expense | Net-of- Tax Amount | Ending Balance | |||||||||||||||
As of December 31, 2018 | ||||||||||||||||||||
Foreign currency translation adjustment(a) | $ | (1,128 | ) | $ | (124 | ) | $ | (4 | ) | $ | (120 | ) | $ | (1,248 | ) | |||||
Pension liability adjustments | (26 | ) | (5 | ) | (3 | ) | (2 | ) | (28 | ) | ||||||||||
Derivative instruments | 12 | (46 | ) | — | (46 | ) | (34 | ) | ||||||||||||
Other | (2 | ) | — | (2 | ) | 2 | — | |||||||||||||
$ | (1,144 | ) | $ | (175 | ) | $ | (9 | ) | $ | (166 | ) | $ | (1,310 | ) | ||||||
As of December 31, 2017 | ||||||||||||||||||||
Foreign currency translation adjustment(a) | $ | (1,317 | ) | $ | 165 | $ | (24 | ) | $ | 189 | $ | (1,128 | ) | |||||||
Pension liability adjustments | (98 | ) | 93 | 21 | 72 | (26 | ) | |||||||||||||
Derivative instruments | 3 | 9 | — | 9 | 12 | |||||||||||||||
Other | (2 | ) | — | — | — | (2 | ) | |||||||||||||
$ | (1,414 | ) | $ | 267 | $ | (3 | ) | $ | 270 | $ | (1,144 | ) | ||||||||
As of December 31, 2016 | ||||||||||||||||||||
Foreign currency translation adjustment(a) | $ | (1,169 | ) | $ | (149 | ) | $ | (1 | ) | $ | (148 | ) | $ | (1,317 | ) | |||||
Pension liability adjustments(b) | (136 | ) | 34 | (4 | ) | 38 | (98 | ) | ||||||||||||
Derivative instruments | — | 3 | — | 3 | 3 | |||||||||||||||
Other | (2 | ) | — | — | — | (2 | ) | |||||||||||||
$ | (1,307 | ) | $ | (112 | ) | $ | (5 | ) | $ | (107 | ) | $ | (1,414 | ) | ||||||
(a) | Net-of-tax Foreign currency translation adjustment for the years ended December 31, 2018, 2017, and 2016 is different than the amount presented on the consolidated statements of comprehensive income by $(7) million, $12 million, and $(5) million, respectively, due to the foreign currency translation adjustment related to noncontrolling interests not included above. |
(b) | 2016 pretax benefit includes an approximate $10 million reclassification out of OCI to "Interest expense, net" in the consolidated statements of income related to the lump sum cash payout of certain U.S. based pension liabilities. |
84
FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Redeemable Noncontrolling Interest
The following table presents a summary of the redeemable noncontrolling interest activity:
(in millions) | Redeemable Noncontrolling Interest | |||
Balance as of January 1, 2016 | $ | 77 | ||
Distributions | (33 | ) | ||
Share of income | 33 | |||
Adjustment to redemption value of redeemable noncontrolling interest | (4 | ) | ||
Balance as of December 31, 2016 | 73 | |||
Distributions | (31 | ) | ||
Share of income | 31 | |||
Adjustment to redemption value of redeemable noncontrolling interest | (1 | ) | ||
Balance as of December 31, 2017 | 72 | |||
Distributions | (32 | ) | ||
Share of income | 31 | |||
Adjustment to redemption value of redeemable noncontrolling interest | 6 | |||
Balance as of December 31, 2018 | $ | 77 | ||
Note 7: 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.
85
FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 years ended December 31, 2018, 2017, and 2016:
Year ended December 31, | ||||||||||||
(in millions, except per share amounts) | 2018 | 2017 | 2016 | |||||||||
Numerator: | ||||||||||||
Net income attributable to First Data Corporation | $ | 1,005 | $ | 1,465 | $ | 420 | ||||||
Denominator: | ||||||||||||
Weighted-average shares used in computing net income per share, basic | 929 | 916 | 902 | |||||||||
Effect of dilutive securities | 28 | 24 | 19 | |||||||||
Total dilutive securities | 957 | 940 | 921 | |||||||||
Net income attributable to First Data Corporation per share: | ||||||||||||
Basic | $ | 1.08 | $ | 1.60 | $ | 0.47 | ||||||
Diluted(a) | 1.05 | 1.56 | 0.46 | |||||||||
Anti-dilutive shares excluded from diluted net income per share | 5 | 12 | 21 | |||||||||
(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. |
Note 8: Segment Information
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by a company’s chief operating decision maker (CODM), or decision-making group, in deciding how to allocate resources and in assessing performance. The Company's CODM is its Chief Executive Officer. The Company is organized into three segments: Global Business Solutions, Global Financial Solutions, and Network & Security Solutions.
The business segment measurements provided to and evaluated by the CODM are computed in accordance with the principles listed below:
• | The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. |
• | Intersegment revenues are eliminated in the segment that sells directly to the end market. |
• | Segment revenue excludes reimbursable items. |
• | Segment EBITDA (earnings before net interest expense, income taxes, depreciation, and amortization) includes equity earnings in affiliates and excludes depreciation and amortization expense, net income attributable to noncontrolling interests, other operating expenses, net, other income, and stock-based compensation. |
• | For significant affiliates, segment revenue and segment EBITDA are 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 and segment EBITDA. |
• | Corporate operations include corporate-wide governance functions such as the Company's executive management team, tax, treasury, internal audit, corporate strategy, and certain accounting, human resources and legal costs related to supporting the corporate function. Costs incurred by Corporate that are attributable to a segment are allocated to the respective segment. |
86
FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables present the Company’s reportable segment results for the years ended December 31, 2018, 2017, and 2016:
Year ended December 31, 2018 | ||||||||||||||||||||
(in millions) | Global Business Solutions | Global Financial Solutions | Network & Security Solutions | Corporate | Totals | |||||||||||||||
Revenues: | ||||||||||||||||||||
Total revenues | $ | 5,537 | $ | 1,596 | $ | 1,489 | $ | — | $ | 8,622 | ||||||||||
Equity earnings in affiliates | 35 | — | — | — | 35 | |||||||||||||||
Total segment revenues | $ | 5,572 | $ | 1,596 | $ | 1,489 | $ | — | $ | 8,657 | ||||||||||
Depreciation and amortization | $ | 510 | $ | 339 | $ | 120 | $ | 7 | $ | 976 | ||||||||||
Segment EBITDA | 1,995 | 662 | 778 | (171 | ) | 3,264 | ||||||||||||||
Year ended December 31, 2017 | ||||||||||||||||||||
(in millions) | Global Business Solutions | Global Financial Solutions | Network & Security Solutions | Corporate | Totals | |||||||||||||||
Revenues: | ||||||||||||||||||||
Total revenues | $ | 4,869 | $ | 1,623 | $ | 1,543 | $ | — | $ | 8,035 | ||||||||||
Equity earnings in affiliates | 30 | — | — | — | 30 | |||||||||||||||
Total segment revenues | $ | 4,899 | $ | 1,623 | $ | 1,543 | $ | — | $ | 8,065 | ||||||||||
Depreciation and amortization | $ | 457 | $ | 352 | $ | 126 | $ | 12 | $ | 947 | ||||||||||
Segment EBITDA | 1,824 | 680 | 729 | (167 | ) | 3,066 | ||||||||||||||
Year ended December 31, 2016 | ||||||||||||||||||||
(in millions) | Global Business Solutions | Global Financial Solutions | Network & Security Solutions | Corporate | Totals | |||||||||||||||
Revenues: | ||||||||||||||||||||
Total revenues | $ | 4,645 | $ | 1,593 | $ | 1,485 | $ | — | $ | 7,723 | ||||||||||
Equity earnings in affiliates | 36 | — | — | — | 36 | |||||||||||||||
Total segment revenues | $ | 4,681 | $ | 1,593 | $ | 1,485 | $ | — | $ | 7,759 | ||||||||||
Depreciation and amortization | $ | 435 | $ | 357 | $ | 115 | $ | 14 | $ | 921 | ||||||||||
Segment EBITDA | 1,725 | 646 | 666 | (145 | ) | 2,892 | ||||||||||||||
87
FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents a reconciliation of reportable segment amounts to the Company’s consolidated balances for the years ended December 31, 2018, 2017, and 2016:
Year ended December 31, | ||||||||||||
(in millions) | 2018 | 2017 | 2016 | |||||||||
Total segment revenues | $ | 8,657 | $ | 8,065 | $ | 7,759 | ||||||
Adjustments: | ||||||||||||
Non wholly-owned entities(a) | 22 | 64 | 80 | |||||||||
Reimbursable items(b) | 819 | 3,923 | 3,745 | |||||||||
Consolidated revenues | $ | 9,498 | $ | 12,052 | $ | 11,584 | ||||||
Total segment EBITDA | $ | 3,264 | $ | 3,066 | $ | 2,892 | ||||||
Adjustments: | ||||||||||||
Non wholly-owned entities(a) | 35 | 30 | 30 | |||||||||
Depreciation and amortization | (1,009 | ) | (972 | ) | (949 | ) | ||||||
Interest expense, net | (917 | ) | (931 | ) | (1,078 | ) | ||||||
Loss on debt extinguishment | (153 | ) | (80 | ) | (70 | ) | ||||||
Other items(c) | 82 | (132 | ) | (61 | ) | |||||||
Income tax (expense) benefit | (49 | ) | 729 | (81 | ) | |||||||
Stock-based compensation | (248 | ) | (245 | ) | (263 | ) | ||||||
Net income attributable to First Data Corporation | $ | 1,005 | $ | 1,465 | $ | 420 | ||||||
(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) | Reimbursable items for the year ended December 31, 2018 reflect adoption of the New Revenue Standard. |
(c) | See "Other operating expenses, net" and "Other income" in the Company's consolidated statements of income. |
Total segment assets, capital expenditures, and investment in unconsolidated affiliates are not disclosed, as the Company's CODM does not utilize such information when allocating resources to the segment or when assessing the segments' performance.
The following table presents a reconciliation of reportable segment depreciation and amortization expense to the amounts in the consolidated balances in the consolidated statements of cash flows and consolidated statements of income for the years ended December 31, 2018, 2017, and 2016:
Year ended December 31, | ||||||||||||
(in millions) | 2018 | 2017 | 2016 | |||||||||
Segment depreciation and amortization | $ | 976 | $ | 947 | $ | 921 | ||||||
Adjustments for non-wholly-owned entities | 63 | 70 | 75 | |||||||||
Amortization of payments for customer contracts(a) | 51 | 56 | 65 | |||||||||
Total consolidated depreciation and amortization per consolidated statements of cash flows | 1,090 | 1,073 | 1,061 | |||||||||
Amortization of equity method investment(b) | (30 | ) | (45 | ) | (47 | ) | ||||||
Amortization of payments for customer contracts(a) | (51 | ) | (56 | ) | (65 | ) | ||||||
Total consolidated depreciation and amortization per consolidated statements of income | $ | 1,009 | $ | 972 | $ | 949 | ||||||
(a) | Included in "Revenues excluding reimbursable items" as contra-revenue in the Company's consolidated statements of income. |
(b) | Included in "Equity earnings in affiliates" in the Company's consolidated statements of income. |
88
FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables presents revenues and long-lived assets by principal geographic area for the years ended December 31, 2018, 2017, and 2016:
(in millions) | United States | International | Total | |||||||||
Revenues: | ||||||||||||
2018 | $ | 7,463 | $ | 2,035 | $ | 9,498 | ||||||
2017 | 10,201 | 1,851 | 12,052 | |||||||||
2016 | 9,890 | 1,694 | 11,584 | |||||||||
Long-Lived Assets: | ||||||||||||
2018 | $ | 20,118 | $ | 1,903 | $ | 22,021 | ||||||
2017 | 20,324 | 2,456 | 22,780 | |||||||||
2016 | 18,846 | 2,272 | 21,118 | |||||||||
Note 9: Income Tax
The components of pretax income and provision for income taxes for the years ended December 31, 2018, 2017, and 2016, consisted of the following:
Year ended December 31, | ||||||||||||
(in millions) | 2018 | 2017 | 2016 | |||||||||
Components of pretax income: | ||||||||||||
Domestic | $ | 535 | $ | 484 | $ | 492 | ||||||
Foreign | 712 | 451 | 249 | |||||||||
Pretax income | $ | 1,247 | $ | 935 | $ | 741 | ||||||
Provision for income taxes: | ||||||||||||
Federal | $ | 18 | $ | (795 | ) | $ | 20 | |||||
State and local | (66 | ) | (32 | ) | 20 | |||||||
Foreign | 97 | 98 | 41 | |||||||||
Income tax expense (benefit) | $ | 49 | $ | (729 | ) | $ | 81 | |||||
Effective income tax rate | 4 | % | (78 | )% | 11 | % | ||||||
89
FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company’s effective tax rates differ from statutory rates as follows:
Year ended December 31, | |||||||||
2018 | 2017 | 2016 | |||||||
Federal statutory rate | 21 | % | 35 | % | 35 | % | |||
State income taxes, net of federal income tax benefit | 1 | 2 | 2 | ||||||
Nontaxable income from noncontrolling interests | (3 | ) | (7 | ) | (11 | ) | |||
Impact of foreign operations(a) | 5 | (1 | ) | 13 | |||||
Valuation allowances | (4 | ) | (147 | ) | (35 | ) | |||
Liability for unrecognized tax benefits | (11 | ) | 2 | — | |||||
Prior year adjustments(b) | 1 | (10 | ) | 3 | |||||
Enacted tax rate changes | — | 27 | (1 | ) | |||||
Other tax reform bill impact for foreign related items | — | 17 | — | ||||||
Equity compensation | (1 | ) | — | 5 | |||||
Impact of divestitures | (4 | ) | 2 | — | |||||
Research and development tax credits | (2 | ) | — | — | |||||
Other | 1 | 2 | — | ||||||
Effective tax rate | 4 | % | (78 | )% | 11 | % | |||
(a) | The impact of foreign operations includes the U.S. tax consequences of foreign operations. |
(b) | Includes primarily prior year changes in estimates and true-ups for certain foreign and state net operating loss carryforwards as a result of tax rate and restructuring changes. |
The Company’s income tax provision (benefit) consisted of the following components:
Year ended December 31, | ||||||||||||
(in millions) | 2018 | 2017 | 2016 | |||||||||
Current: | ||||||||||||
Federal | $ | (121 | ) | $ | 8 | $ | 22 | |||||
State and local | (24 | ) | 23 | 24 | ||||||||
Foreign | 87 | 93 | 73 | |||||||||
(58 | ) | 124 | 119 | |||||||||
Deferred: | ||||||||||||
Federal | 139 | (803 | ) | (2 | ) | |||||||
State and local | (42 | ) | (55 | ) | (4 | ) | ||||||
Foreign | 10 | 5 | (32 | ) | ||||||||
107 | (853 | ) | (38 | ) | ||||||||
Income tax expense (benefit) | $ | 49 | $ | (729 | ) | $ | 81 | |||||
Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the book and tax bases of the Company’s assets and liabilities. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Deferred tax assets are included in "Other long-term assets" and deferred tax liabilities are included in "Deferred tax liabilities" on the Company’s consolidated balance sheets.
90
FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table outlines the principal components of deferred tax items:
As of December 31, | ||||||||
(in millions) | 2018 | 2017 | ||||||
Deferred tax assets related to: | ||||||||
Reserves and other accrued expenses | $ | 139 | $ | 66 | ||||
Employee related liabilities | 112 | 121 | ||||||
Deferred revenues | 16 | 30 | ||||||
Net operating losses and tax credit carryforwards | 1,693 | 2,281 | ||||||
U.S. foreign tax credits on undistributed earnings | 48 | 39 | ||||||
Foreign exchange loss | 2 | — | ||||||
Total deferred tax assets | 2,010 | 2,537 | ||||||
Valuation allowance | (949 | ) | (1,214 | ) | ||||
Realizable deferred tax assets | 1,061 | 1,323 | ||||||
Deferred tax liabilities related to: | ||||||||
Property, equipment, and intangibles | (686 | ) | (772 | ) | ||||
Pension obligations | (65 | ) | (67 | ) | ||||
Investment in affiliates and other | (221 | ) | (209 | ) | ||||
Tax on foreign undistributed earnings | (14 | ) | (12 | ) | ||||
Foreign exchange gain | — | (35 | ) | |||||
Total deferred tax liabilities | (986 | ) | (1,095 | ) | ||||
Net deferred tax asset | $ | 75 | $ | 228 | ||||
The Company’s deferred tax assets and liabilities included in the consolidated balance sheets were as follows:
As of December 31, | ||||||||
(in millions) | 2018 | 2017 | ||||||
Deferred tax assets | $ | 172 | $ | 305 | ||||
Deferred tax liabilities | (97 | ) | (77 | ) | ||||
Net deferred tax asset | $ | 75 | $ | 228 | ||||
As of December 31, 2018 and 2017, the Company had recorded valuation allowances of $0.9 billion and $1.2 billion, respectively, against its net deferred tax assets. The decrease to the valuation allowance of $0.3 billion in 2018 was primarily due to gain recapture in Luxembourg, which resulted in a corresponding reduction to the deferred tax asset related to net operating losses.
The following table presents the amounts of federal, state, and foreign net operating loss carryforwards, general business credit, and minimum tax credit carryforwards:
(in millions) | Year ended December 31, 2018 | |||
Federal net operating loss carryforwards(a) | $ | 3,105 | ||
State net operating loss carryforwards(b) | 4,835 | |||
Foreign net operating loss carryforwards(c) | 2,622 | |||
General business credit carryforwards(d) | 33 | |||
Minimum tax credit carryforwards(e) | 15 | |||
(a) | If not utilized, these carryforwards will expire by year 2037. |
(b) | Will expire if not utilized, for the years 2019, 2020, and 2021 of $244 million, $193 million, and $68 million, respectively, and the remaining through 2038. |
(c) | Foreign net operating loss carryforwards of $49 million, if not utilized, will expire in years 2019 through 2038. The remaining foreign net operating loss carryforwards of $2.6 billion have an indefinite life. |
(d) | If not utilized, these carryforwards will expire in years 2027 through 2038. |
(e) | These carryforwards are refundable credits and will be utilized or refunded between 2019 and 2021. |
91
FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company intends to indefinitely invest its net equity in its foreign operations, with the exception of any undistributed foreign earnings in those jurisdictions with positive earnings. Under the U.S. tax reform law changes enacted during 2017, all existing positive earnings were deemed to be distributed, and future foreign earnings generally will not be taxed in the U.S upon distribution. Accordingly, as of December 31, 2018, no provision had been made for U.S. federal and state income taxes on the cumulative amount of temporary differences related to investments in foreign subsidiaries. Upon sale or liquidation of these investments, the Company would potentially be subject to U.S., state, and foreign income taxes and withholding taxes payable to the various foreign countries. However, it is not practicable to determine the amount of any potential additional tax that may be payable in the event of a sale or liquidation of these investments.
On December 22, 2017, the Tax Cuts and Jobs Act (tax reform bill) was signed into law in the U.S. The provisions of the tax reform bill with the most significant implications to the Company were the reduction of the federal tax rate from 35% to 21%, the creation of a 100% participation exemption for foreign dividends, the enactment of a one-time transition tax on existing foreign earnings, limitations on the deductibility of interest expense, and the establishment of global intangible low-taxed income (GILTI) rules. The first three provisions impacted the year-ended December 31, 2017. At December 31, 2017, the Company made a reasonable estimate of the effects on its existing deferred tax balances, valuation allowance assessment for certain tax assets and the one-time transition tax. The Company recognized a provisional net tax expense of $353 million in the year ended December 31, 2017 related to the tax reform bill, which is included as a component of income tax expense from continuing operations. At December 31, 2018, the Company finalized its 2017 calculation under SAB 118 and did not materially change the net tax expense of $353 million related to the tax reform bill provisionally recorded in 2017.
The tax reform bill subjects a U.S. shareholder to current tax on GILTI earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740 No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. The Company has elected to recognize the tax on GILTI as a period expense in the period the tax is incurred.
In addition, given the mechanics of the GILTI calculation, the FASB provides two methods to consider the realizability of net operating loss carryforwards in the valuation allowance assessment: (i) consider the realizable benefit of a net operating loss deferred tax asset by comparing the incremental cash taxes in the calculation of GILTI with and without the net operating loss (the incremental cash tax savings approach) or (ii) consider the tax law ordering to determine whether the net operating loss deferred tax asset is expected to be realized (the tax-law ordering approach). As of December 31, 2018, the Company has finalized its policy election to use the tax law ordering approach in its consideration of the realizability of net operating loss deferred tax assets in its valuation allowance assessment.
92
FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of the unrecognized tax benefits was as follows:
(in millions) | Unrecognized Tax Benefits | |||
Balance as of January 1, 2016 | $ | 249 | ||
Increases for tax positions of prior years | 2 | |||
Decreases for tax positions of prior years | (1 | ) | ||
Decreases for cash settlements with taxing authorities | (1 | ) | ||
Decreases due to the lapse of the applicable statute of limitations | (9 | ) | ||
Balance as of December 31, 2016 | 240 | |||
Increases for tax positions of prior years | 14 | |||
Decreases for tax positions of prior years | (10 | ) | ||
Decreases for tax positions related to the current period | (3 | ) | ||
Decreases for cash settlements with taxing authorities | (1 | ) | ||
Decreases due to the lapse of the applicable statute of limitations | (7 | ) | ||
Decreases due to change in tax rates | (13 | ) | ||
Balance as of December 31, 2017 | 220 | |||
Increases for tax positions of prior years | 11 | |||
Decreases for tax positions of prior years | (122 | ) | ||
Increases for tax positions related to the current period | 1 | |||
Decreases due to the lapse of the applicable statute of limitations | (15 | ) | ||
Balance as of December 31, 2018 | $ | 95 | ||
Most of the unrecognized tax benefits are included in “Other long-term liabilities” on the consolidated balance sheets, net of the federal benefit on state income taxes (approximately $5 million as of December 31, 2018). However, those unrecognized tax benefits that affect the federal consolidated tax years ending December 31, 2008 through December 31, 2018 are included in “Other long-term assets” on the consolidated balance sheets, as these items reduce the Company’s net operating loss and credit carryforwards from those periods. The unrecognized tax benefits as of December 31, 2018, 2017, and 2016 included approximately $70 million, $130 million, and $133 million, respectively, of tax positions that, if recognized, would affect the effective tax rate.
The Company recognizes interest and penalties related to unrecognized tax benefits in “Income tax expense (benefit)” in the consolidated statements of income. Cumulative accrued interest and penalties (net of related tax benefits) are not included in the ending balances of unrecognized tax benefits. Cumulative accrued interest and penalties are included in “Other long-term liabilities” on the consolidated balance sheets while the related tax benefits are included in “Other long-term assets” on the consolidated balance sheets. The following table presents the approximate amounts associated with accrued interest expense and the cumulative accrued interest and penalties:
Year ended December 31, | ||||||||||||
(in millions) | 2018 | 2017 | 2016 | |||||||||
Current year accrued interest expense (net of related tax benefits) | $ | 4 | $ | 6 | $ | 5 | ||||||
Cumulative accrued interest and penalties (net of related tax benefits) | 13 | 60 | 48 | |||||||||
As of December 31, 2018, the Company anticipates it is reasonably possible that its liability for unrecognized tax benefits may decrease by approximately $17 million within the next 12 months 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.
The Company or one or more of its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. As of December 31, 2018, the Company was no longer subject to income tax examination by the U.S. federal jurisdiction for years before 2008. State and local examinations are substantially complete through 2010. Foreign jurisdictions generally remain subject to examination by their respective authorities from 2007 forward, none of which are considered major jurisdictions.
93
FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Pursuant to the Tax Allocation Agreement executed at the time of the spin-off of The Western Union Company (Western Union) on September 29, 2006, Western Union was responsible for and required to indemnify the Company against all taxes, interest, and penalties that relate to Western Union for periods prior to the spin-off date. During 2018, a pre-spin-off audit cycle was settled for which Western Union indemnified the Company for tax positions covered under the Tax Allocation Agreement. There was no impact to 2018 earnings as a result of this indemnification.
Note 10: Related Party Transactions
Merchant Alliances
A substantial portion of the Company’s business within the Global Business Solutions segment is conducted through merchant alliances. Merchant alliances are alliances between the Company and financial institutions. If the Company has control over an alliance, then the alliance’s financial statements are consolidated with those of the Company and the related processing fees are treated as an intercompany transaction and eliminated upon consolidation. If the Company does not control the alliance, the Company uses the equity method of accounting to account for its investment in the alliance. As a result, the Company’s consolidated revenues include processing fees charged to alliances accounted for under the equity method. No directors or officers of the Company have ownership interests in any of the alliances. The formation of each of these alliances generally involves the Company and the bank contributing contractual merchant relationships to the alliance and a cash payment from one owner to the other to achieve the desired ownership percentage for each. The Company and the bank enter into a long-term processing service agreement as part of the negotiation process. This agreement governs the Company’s provision of transaction processing services to the alliance. As of December 31, 2018 and 2017, the Company had $32 million and $35 million, respectively, of amounts due from unconsolidated merchant alliances included within "Accounts receivable, net" in the Company's consolidated balance sheets. As of December 31, 2018 and 2017, the Company had $4 million and $6 million, respectively, of amounts due to unconsolidated merchant alliances included within "Accounts payable and accrued liabilities" in the Company's consolidated balance sheets.
Relationship with KKR Capital Markets
For the years ended December 31, 2018, 2017, and 2016, KKR Capital Markets LLC, an affiliate of KKR, acted as an arranger and bookrunner for various financing transactions under the existing credit agreements, and as an initial purchaser of certain existing notes issued by the Company. KKR Capital Markets LLC, did not receive any fees for the year ended December 31, 2018, but did receive underwriter and transactions fees totaling $2 million and $17 million for the years ended December 31, 2017 and 2016, respectively.
Indemnifications
In the third quarter of 2018, the Company agreed to indemnify the co-founders of KKR if their personal information is misused due to sharing their information under the EU’s 4th Money Laundering Directive for registering the Ultimate Beneficial Owners. The maximum potential amount of future payments the Company could be required to make under this indemnification agreement is unlimited. Management of the Company believes that such matters will not have a material adverse effect on the Company’s results of operations, liquidity or financial condition.
Note 11: Other Operating Expenses, Net
The following table details the components of “Other operating expenses, net" in the consolidated statements of income:
Year ended December 31, | ||||||||||||
(in millions) | 2018 | 2017 | 2016 | |||||||||
Restructuring, net | $ | 85 | $ | 83 | $ | 49 | ||||||
Deal and deal integration costs | 3 | 27 | — | |||||||||
Asset impairment | — | 13 | — | |||||||||
Merchant matters | 20 | 10 | — | |||||||||
Other | 11 | 10 | 2 | |||||||||
Other operating expenses, net | $ | 119 | $ | 143 | $ | 51 | ||||||
94
FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Restructuring
During the years ended December 31, 2018, 2017, and 2016, the Company recorded restructuring charges in connection with ongoing expense management initiatives. The Company has ongoing initiatives, which are expected to result in approximately $20 million over the next twelve months. The Company continues to evaluate operating efficiencies and could incur further restructuring costs beyond these initiatives.
A summary of net pretax charges incurred by segment was as follows for the years ended December 31, 2018, 2017, and 2016:
Year ended December 31, | ||||||||||||
(in millions) | 2018 | 2017 | 2016 | |||||||||
Global Business Solutions | $ | 22 | $ | 36 | $ | 9 | ||||||
Global Financial Solutions | 13 | 17 | 10 | |||||||||
Network & Security Solutions | 25 | 8 | 3 | |||||||||
Corporate | 25 | 22 | 27 | |||||||||
Restructuring, net | $ | 85 | $ | 83 | $ | 49 | ||||||
The following table summarizes the Company’s utilization of restructuring accruals for the years ended December 31, 2017 and 2018:
(in millions) | Employee Severance | Other | Total | |||||||||
Remaining accrual as of January 1, 2017 | $ | 9 | $ | — | $ | 9 | ||||||
Employee expense | 83 | — | 83 | |||||||||
Cash payments and other | (71 | ) | — | (71 | ) | |||||||
Remaining accrual as of December 31, 2017 | 21 | — | 21 | |||||||||
Employee expense | 67 | — | 67 | |||||||||
Exit costs | — | 18 | 18 | |||||||||
Cash payments and other | (79 | ) | (11 | ) | (90 | ) | ||||||
Remaining accrual as of December 31, 2018 | $ | 9 | $ | 7 | $ | 16 | ||||||
Deal and Deal Integration Costs
During 2017, the Company completed three acquisitions, the two largest were CardConnect and BluePay. In connection with these acquisitions, the Company incurred $27 million in deal and deal integration costs for the year ended December 31, 2017. Deal and deal integration costs include asset impairment of $9 million, banker fees and other costs to close the transaction of $7 million, and other integration costs. See note 13 "Acquisitions and Dispositions" of these consolidated financial statements for details regarding the Company's acquisitions.
Asset Impairment
For the year ended December 31, 2017, the Company incurred $6 million loss on a prepaid asset related to an early contract terminated and a loss of $7 million related to write down of abandoned technology and property.
Merchant Matters
During the years ended December 31, 2018 and 2017 the Company incurred $20 million and $10 million, respectively, in costs related to customer matters.
Other
For the year ended December 31, 2018, the Company incurred $8 million in costs related to the transition of its card processing business in Central and South Eastern Europe. For the year ended December 31, 2017, the $10 million in costs is related to earnout expense associated with a previous acquisition.
95
FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 12: Settlement Assets and Obligations
Settlement assets and obligations result from the Company’s processing services and associated settlement activities, including settlement of payment transactions. Settlement assets are generated principally from merchant services transactions. Certain merchant settlement assets that relate to settlement obligations accrued by the Company are held by partner banks to which the Company does not have legal ownership but has the right to use to satisfy the related settlement obligation. The Company records corresponding settlement obligations for amounts payable to merchants and for payment instruments not yet presented for settlement.
The principal components of the Company’s settlement assets and obligations were as follows:
As of December 31, | ||||||||
(in millions) | 2018 | 2017 | ||||||
Settlement assets: | ||||||||
Cash and cash equivalents | $ | 3,191 | $ | 1,738 | ||||
Due from card associations, bank partners, and merchants | 8,232 | 18,625 | ||||||
Total settlement assets | $ | 11,423 | $ | 20,363 | ||||
Settlement obligations: | ||||||||
Payment instruments outstanding | $ | 12 | $ | 11 | ||||
Card settlements due to merchants | 11,411 | 20,352 | ||||||
Total settlement obligations | $ | 11,423 | $ | 20,363 | ||||
The changes in settlement assets and obligations are presented on a net basis within operating activities in the consolidated statements of cash flows. However, because the changes in the settlement assets balance exactly offset changes in settlement obligations, the activity nets to zero.
Note 13: Acquisitions and Dispositions
2018 Acquisitions
In January 2018, the Company acquired 100% of GreekBill, a web-based billing and financial management company catering exclusively to fraternities and sororities. The purchase price was $17 million and GreekBill is reported as part of the Company's Global Business Solutions segment. The acquisition of GreekBill had an immaterial impact on revenue and operating income.
2017 Acquisitions
In May 2017, the Company acquired 100% of Accullink Inc. (Acculynk), a leading technology company that delivers eCommerce solutions for debit card acceptance. The acquisition included Acculynk's PaySecure debit routing technology and its range of other services. The purchase price was $85 million and Acculynk is reported as part of the Company's Global Business Solutions segment.
In July 2017, the Company acquired 100% of CardConnect Corp. (CardConnect) for $763 million in cash, net of cash acquired. CardConnect is an innovative provider of payment processing and technology solutions and was one of the Company's largest distribution partners. The transaction is expected to enable the Company to bring innovative partner management tools to improve merchant retention, accelerate the Company's firm-wide independent software vendor (ISV) initiative and bring immediate capabilities in enterprise resource planning (ERP) integrated payment solutions to its customers. CardConnect operations are reported as part of the Company's Global Business Solutions segment. The acquisition was accounted for as a business combination and the accounting is complete.
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FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the fair values of the assets acquired and liabilities assumed on the acquisition date. The excess of the purchase price over the net tangible and identifiable intangible assets' fair value was recorded as goodwill within the Company’s Global Business Solutions segment. The goodwill recognized was attributable to increased synergies that are expected to be achieved from the integration of CardConnect as well as potential revenue enhancements to the Company.
The Company accounted for the business combination as follows:
(in millions) | Amount | |||
Other current assets | $ | 58 | ||
Property and equipment | 7 | |||
Intangible assets | 463 | |||
Goodwill | 432 | |||
Current liabilities | (58 | ) | ||
Deferred tax liabilities | (139 | ) | ||
The following table sets forth the components of the intangible assets:
(in millions) | Acquisition-Date Fair Value | Useful Life (Years) | ||||
Agent relationships | $ | 296 | 18 | |||
Merchant relationships | 84 | 7 | ||||
Software systems | 39 | 5 | ||||
Residual buyouts | 23 | 4 | ||||
Trade name | 21 | 9 | ||||
$ | 463 | |||||
In connection with the closing of the acquisition, the Company incurred $6 million of transactions costs, which has been included as deal and deal integration costs within "Other operating expenses, net" in the consolidated statement of income for the year ended December 31, 2017.
The revenue and earnings of CardConnect have been included in the Company’s results since the acquisition date and are not material to the Company’s consolidated financial results. Supplemental pro forma results of income of the combined entities have not been presented as the financial impact to the Company’s consolidated financial statements would be immaterial.
In December 2017, the Company acquired 100% of BluePay Holdings, Inc. (BluePay) for $759 million in cash, net of cash acquired. BluePay is a provider of technology-enabled payment processing for merchants in the U.S. and Canada and was one of the Company's largest distribution partners with a strong focus on software-enabled payments and card-not-present transactions. The transaction is expected to be highly complementary to the Company's earlier acquisition of CardConnect and enhance the Company's suite of innovative partner management tools to improve merchant retention, accelerate the Company's firm-wide ISV initiative and bring immediate capabilities in ERP integrated payment solutions to its customers. BluePay operations are reported as part of the Company's Global Business Solutions segment. The acquisition was accounted for as a business combination and the accounting is complete.
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FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the fair values of the assets acquired and liabilities assumed on the acquisition date. The excess of the purchase price over the net tangible and identifiable intangible assets' fair value was recorded as goodwill within the Company’s Global Business Solutions segment. The goodwill recognized was attributable to increased synergies that are expected to be achieved from the integration of BluePay as well as potential revenue enhancements to the Company.
The Company accounted for the business combination as follows:
(in millions) | Amount | |||
Other current assets | $ | 27 | ||
Property and equipment | 3 | |||
Intangible assets | 450 | |||
Goodwill | 389 | |||
Current liabilities | (25 | ) | ||
Deferred tax liabilities | (85 | ) | ||
The following table sets forth the components of the intangible assets:
(in millions) | Acquisition-Date Fair Value | Useful Life (Years) | ||||
Agent relationships | $ | 195 | 18 | |||
Merchant relationships | 216 | 10 | ||||
Software systems | 27 | 5 | ||||
Trade name | 12 | 5 | ||||
$ | 450 | |||||
In connection with the closing of the acquisition, the Company incurred $1 million of transactions costs, which has been included as deal and deal integration costs within "Other operating expenses, net" in the consolidated statement of income for the year ended December 31, 2017.
The revenue and earnings of BluePay have been included in the Company’s results since the acquisition date and are not material to the Company’s consolidated financial results. Supplemental pro forma results of income of the combined entities have not been presented as the financial impact to the Company’s consolidated financial statements would be immaterial.
In October 2017, the Company formed a digital banking joint venture, named Apiture, which combines FDC and Live Oak Bancshares, Inc. digital banking platforms, products, and services, delivering innovative technology solutions tailored for financial institutions. The joint venture will be accounted for as an equity method investment, as Apiture is owned and managed equally between the Company and Live Oak Bancshares, Inc. As a result, the contributed digital banking business is no longer consolidated into the Company’s results. During the year ended December 31, 2016, the Company’s digital banking business had revenue and operating income of $57 million and $11 million, respectively. Associated with the transaction, the Company recognized an $18 million gain on the formation of the joint venture, included within "Other income" in the consolidated statement of income as of December 31, 2017. The gain recognized represents the excess investment value over assets contributed.
2018 Dispositions
In September 2018, the Company divested its card processing business in Central and Southeastern Europe for proceeds of €387 million (the U.S. dollar equivalent is $449 million), subject to closing adjustments. The divestiture does not represent a strategic shift that will have a major effect on the Company’s operations and financial statements. The card processing business in Central and Southeastern Europe was reported within the Global Financial Solutions segment and had revenue and operating income of $79 million and $15 million, respectively, for 2018 through the disposition date. The total gain on disposition recognized was $174 million, which is included in "Other income" in the consolidated statement of income as of December 31, 2018.
In August 2018, the Company divested 100% of its remittance processing business in the U.S. for proceeds of $100 million, subject to closing adjustments. The remittance processing business is reported within the Global Financial Solutions segment and had revenue and operating loss of $50 million and $1 million, respectively, for 2018 through the disposition date. The total gain on disposition recognized was $28 million, which is included in "Other income" in the consolidated statement of income as of December 31, 2018.
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FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2017 Dispositions
In September 2017, the Company divested all of its businesses in Lithuania, Latvia and Estonia for €73 million (the U.S. dollar equivalent is $85 million). The businesses were reported within the Global Financial Solutions segment. Associated with the transaction, the Company recognized a $4 million loss on the sale which is included in "Other income" in the consolidated statement of income as of December 31, 2017.
2016 Dispositions
In September 2016, the Company completed the sale of its Australian ATM business, which was reported as part of the Company's Global Business Solutions segment. Associated with the transaction, the Company recognized a $34 million loss on the sale, included within "Other income" in the consolidated statement of income as of December 31, 2016. The loss is comprised of investments of $72 million reduced by cash proceeds of $38 million. The cash proceeds are reflected within "Proceeds from dispositions" within the consolidated statement of cash flows as of December 31, 2016.
Note 14: Derivative Financial Instruments
The Company enters into the following types of derivatives:
• | Interest rate contracts: The Company uses a combination of floating to fixed interest rate swaps and collars to mitigate its exposure to interest rate fluctuations on interest payments related to variable rate debt. For interest rate swaps, floating rate payments are received in exchange for fixed-rate payments. For interest rate collar contracts, no payments or receipts are exchanged 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 qualifying hedging relationships. |
The Company held the following derivative instruments as of December 31, 2018 and 2017:
As of December 31, | ||||||||||||||||||||||||||
2018 | 2017 | |||||||||||||||||||||||||
(in millions) | Notional Currency | Notional Value | Assets (a) | Liabilities (a) | Notional Currency | Notional Value | Assets (a) | Liabilities (a) | ||||||||||||||||||
Derivatives designated as hedges of net investments in foreign operations: | ||||||||||||||||||||||||||
Foreign exchange contracts(b) | AUD | — | $ | — | $ | — | AUD | 100 | $ | 28 | $ | — | ||||||||||||||
Foreign exchange contracts | EUR | 915 | — | 19 | EUR | 915 | — | 76 | ||||||||||||||||||
Foreign exchange contracts | GBP | 150 | 6 | — | GBP | 150 | — | 6 | ||||||||||||||||||
Foreign exchange contracts | CAD | 95 | 5 | — | CAD | 95 | — | 2 | ||||||||||||||||||
11 | 19 | 28 | 84 | |||||||||||||||||||||||
Derivatives designated as cash flow hedges: | ||||||||||||||||||||||||||
Interest rate collar contracts(c) | USD | 2,800 | 10 | — | USD | 4,300 | 12 | — | ||||||||||||||||||
Interest rate swap contracts(d) | USD | 7,250 | — | 44 | — | — | ||||||||||||||||||||
10 | 44 | 12 | — | |||||||||||||||||||||||
$ | 21 | $ | 63 | $ | 40 | $ | 84 | |||||||||||||||||||
(a) | The Company's derivatives are subject to master netting agreements to the extent that the swaps are with the same counterparty. The terms of those agreements require that the Company net settle the outstanding positions at the option of the counterparty upon certain events of default. |
(b) | Foreign exchange contract expired January 2018. |
(c) The interest rate collar with a notional value of $1.5 billion matured in September 2018. The remaining interest rate collars with a notional value of $1.3 billion and $1.5 billion will mature in January 2019 and September 2019, respectively.
(d) The Company entered into new interest rate swaps with a notional value of $2.5 billion in May 2018 which expires in May 2021. The Company entered into new interest rate swap contracts with a notional value of $4.75 billion in December 2018 which expires in December 2020.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The maximum length of time over which the Company is hedging its currency exposure of net investments in foreign operations, through utilization of foreign exchange contracts, is through June 2020.
The maximum length of time over which the Company is hedging its exposure to the variability in future cash flows for forecasted transactions related to the payment of variable interest on existing financial instruments is through May 2021.
As of December 31, 2018, the Company has not posted any collateral related to any of its derivative financial instruments.
Fair Value Measurement
The carrying amounts for the Company's derivative financial instruments are the estimated fair value of the financial instruments. The Company’s derivatives are not exchange listed and therefore the fair value is estimated under an income approach using Bloomberg analytics models that are based on readily observable market inputs. These models reflect the contractual terms of the derivatives, such as notional value and expiration date, as well as market-based observables including interest and foreign currency exchange rates, yield curves, and the credit quality of the counterparties. The models also incorporate the Company’s creditworthiness in order to appropriately reflect non-performance risk. Inputs to the derivative pricing models are generally observable and do not contain a high level of subjectivity and, accordingly, the Company’s derivatives were classified within Level 2 of the fair value hierarchy. While the Company believes its estimates result in a reasonable reflection of the fair value of these instruments, the estimated values may not be representative of actual values that could have been realized or that will be realized in the future.
Effect of Derivative Instruments on the Consolidated Financial Statements
Derivative gains and (losses) were as follows for the years ended December 31, 2018, 2017, and 2016:
Year ended December 31, | ||||||||||||||||||||||||
2018 | 2017 | 2016 | ||||||||||||||||||||||
(in millions, pretax) | Interest Rate Contracts | Foreign Exchange Contracts | Interest Rate Contracts | Foreign Exchange Contracts | Interest Rate Contracts | Foreign Exchange Contracts | ||||||||||||||||||
Derivatives designated as hedging instruments: | ||||||||||||||||||||||||
Gain (loss) recognized in "Foreign currency translation adjustment" in the consolidated statements of comprehensive income (effective portion) | $ | — | $ | 104 | $ | — | $ | (98 | ) | $ | — | $ | 58 | |||||||||||
(Loss) gain recognized in "Derivative instruments" in the consolidated statements of comprehensive income (effective portion) | (46 | ) | — | 9 | — | 3 | — | |||||||||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||||||||||||
Loss recognized in "Other income" in the consolidated statements of income | $ | — | $ | — | $ | — | $ | — | $ | (5 | ) | $ | — | |||||||||||
Accumulated Derivative Gains and Losses
The following table summarizes activity in other comprehensive income for the years ended December 31, 2018, 2017, and 2016 related to derivative instruments classified as cash flow hedges and net investment hedges held by the Company:
Year ended December 31, | ||||||||||||
(in millions, after tax) | 2018 | 2017 | 2016 | |||||||||
Accumulated gain included in other comprehensive income at beginning of the period | $ | 121 | $ | 177 | $ | 116 | ||||||
Increase (decrease) in fair value of derivatives that qualify for hedge accounting, net of tax(a)(b) | 44 | (56 | ) | 61 | ||||||||
Accumulated gain included in other comprehensive income at end of the period | $ | 165 | $ | 121 | $ | 177 | ||||||
(a) | Gains are included in "Derivative instruments" and “Foreign currency translation adjustment” on the consolidated statements of comprehensive income. |
(b) | Net of $(14) million, $33 million, and $0 million tax (expense) benefit for the years ended December 31, 2018, 2017, and 2016, respectively. |
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 15: Commitments and Contingencies
Operating Leases
The Company leases certain of its facilities and equipment under operating lease agreements, substantially all of which contain renewal options and escalation provisions. The Company incurred total rent expense of $83 million, $80 million, and $79 million for the years ended December 31, 2018, 2017, and 2016, respectively. Future minimum aggregate rental commitments as of December 31, 2018 under all noncancelable operating leases, net of sublease income are due in the following years:
Year ended December 31, (in millions) | Amount | |||
2019 | $ | 59 | ||
2020 | 52 | |||
2021 | 47 | |||
2022 | 41 | |||
2023 | 36 | |||
Thereafter | 91 | |||
Total | $ | 326 | ||
The Company has certain guarantees embedded in leases and other agreements wherein the Company is required to relieve the counterparty in the event of changes in the tax code or rates. The Company believes the fair value of such guarantees is insignificant due to the likelihood and extent of the potential changes.
Letters of Credit
The Company has $35 million in outstanding letters of credit as of December 31, 2018, of which $5 million and $30 million were issued under the Company’s senior secured and unsecured revolving credit facilities, respectively. See "Senior Secured Revolving Credit Facility" and "Senior Unsecured Revolving Credit Facility" provided in note 2 "Borrowings" of these consolidated financial statements for more information. The letters of credit are held in connection with lease arrangements, bankcard association agreements, and other security agreements. The Company expects to renew most of the letters of credit prior to expiration.
Legal
The Company is involved in various legal proceedings. Accruals have been made with respect to these matters, where appropriate, which are reflected in the Company’s consolidated financial statements. The Company may enter into discussions regarding settlement of these matters, and may enter into settlement agreements, if it believes settlement is in the best interest of the Company. The matters discussed below, if decided adversely to or settled by the Company, individually or in the aggregate, may result in liability material to the Company’s financial condition and/or results of income.
There are asserted claims against the Company where an unfavorable outcome is considered to be reasonably possible. These claims can generally be categorized in the following areas: (1) patent infringement which results from claims that the Company is using technology that has been patented by another party; (2) merchant matters often associated with alleged processing errors or disclosure issues and claims that one of the subsidiaries of the Company has violated a federal or state requirement regarding credit reporting or collection in connection with its check verification guarantee, and collection activities or other claims arising from its merchant business; and (3) other matters which may include issues such as employment and indemnification obligations to purchasers of former subsidiaries. The Company's estimates of the possible ranges of losses in excess of any amounts accrued are $0 to $5 million for patent infringement, $0 to $93 million for merchant matters, and $0 to $5 million for other matters, resulting in a total estimated range of possible losses of $0 to $103 million for all of the matters described above.
The estimated range of reasonably possible losses is based on information currently available and involves elements of judgment and significant uncertainties. As additional information becomes available and the resolution of the uncertainties becomes more apparent, it is possible that actual losses may exceed the high end of the estimated range.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other
In the normal course of business, the Company is subject to claims and litigation, including indemnification obligations to purchasers of former subsidiaries. Management of the Company believes that such matters will not have a material adverse effect on the Company’s results of operations, liquidity or financial condition.
Note 16: Employee Benefit Plans
Defined Contribution Plans
The Company maintains defined contribution benefit plans covering virtually all of the Company’s U.S. employees and defined contribution pension plans for international employees primarily in the United Kingdom and Australia. The plans provide tax-deferred amounts for each participant, consisting of employee elective contributions, Company matching and discretionary Company contributions. Effective January 1, 2014, the Company suspended matching contributions for all U.S. participants. As a result, the U.S. Plan is no longer a safe harbor plan. The Company plans to reinstate a matching contributions plan for U.S. participants on January 1, 2019.
The following table presents the aggregate amounts charged to expense in connection with these plans:
Year ended December 31, (in millions) | Amount | |||
2018 | $ | 13 | ||
2017 | 10 | |||
2016 | 11 | |||
Defined Benefit Plans
The Company has defined benefit pension plans which are frozen and covers certain full-time employees in the United Kingdom and the U.S. The Company also has separate plans covering certain employees located primarily in Germany and Austria.
The Company contributed cash in the amount of $0 million, $19 million, and $19 million to defined benefit plans for the years ended December 31, 2018, 2017, and 2016, respectively.
The Company recognizes the funded status of its defined benefit pension plans, measured as the difference between the fair value of the plan assets and the projected benefit obligation, in the consolidated balance sheets, as follows:
As of December 31, | ||||||||
(in millions) | 2018 | 2017 | ||||||
U.K. plan: | ||||||||
Plan benefit obligations | $ | (597 | ) | $ | (686 | ) | ||
Fair value of plan assets | 786 | 891 | ||||||
Net pension assets(a) | 189 | 205 | ||||||
U.S. and other foreign plans: | ||||||||
Plan benefit obligations | (205 | ) | (234 | ) | ||||
Fair value of plan assets | 143 | 166 | ||||||
Net pension liabilities(b) | (62 | ) | (68 | ) | ||||
Funded status of the plans | $ | 127 | $ | 137 | ||||
(a) | Pension assets are included in “Other long-term assets” of the consolidated balance sheets. |
(b) | Pension liabilities are included in “Other long-term liabilities” of the consolidated balance sheets. |
The accumulated benefit obligation for all defined benefit pension plans was $802 million and $920 million as of December 31, 2018 and 2017, respectively.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Based on the valuation techniques described in note 1 "Summary of Significant Accounting Policies", as of December 31, 2018, Plan assets are comprised of approximately 15% of Level 1 securities, 85% of Level 2 securities, and an immaterial amount of Level 3 securities.
The Plan paid benefits in the amount of $56 million, $59 million, and $39 million for the periods ended December 31, 2018, 2017, and 2016, respectively. The estimated future benefit payments, which reflect expected future service, are expected to be as follows:
Year ended December 31, (in millions) | Amount | |||
2019 | $ | 29 | ||
2020 | 30 | |||
2021 | 33 | |||
2022 | 34 | |||
2023 | 37 | |||
2024-2028 | 197 | |||
The Company's post-retirement health care and other insurance benefits for retired employees are limited and not material.
Note 17: Supplemental Financial Information
Supplemental Consolidated Statements of Income Information
The following table details the components of “Other income” on the consolidated statements of income:
Year ended December 31, | ||||||||||||
(in millions) | 2018 | 2017 | 2016 | |||||||||
Investment gains | $ | 3 | $ | 1 | $ | 35 | ||||||
Divestitures | 197 | 18 | (34 | ) | ||||||||
Non-operating foreign currency gains (loss) | 6 | (1 | ) | 19 | ||||||||
Other miscellaneous expense | (5 | ) | (2 | ) | (3 | ) | ||||||
Other income | $ | 201 | $ | 16 | $ | 17 | ||||||
Investment gains
On June 21, 2016, Visa Inc. (Visa) acquired Visa Europe (VE), of which the Company was a member and shareholder through certain subsidiaries. On June 21, 2016, the Company received cash of €24.2 million ($27 million equivalent at June 21, 2016) and Visa preferred stock which is convertible into Visa common shares. The Company will also receive a deferred payment three years after the closing date of the acquisition, valued at approximately €2.3 million ($2.6 million equivalent at June 21, 2016). As of June 21, 2016, the Class A common stock equivalent of the preferred stock was approximately $19 million. However, the preferred shares have been assigned a value of zero based on transfer restrictions and Visa's ability to adjust the conversion ratio dependent on the outcome of existing and potential litigations in the Visa Europe territory over the next 10 years. The Company did not identify any relevant transactions in Visa preferred stock on or before December 31, 2018, with observable price changes, and thus the Company continues to carry these shares at zero value.
Divestitures
See note 13 "Acquisitions and Dispositions" of these consolidated financial statements for more information on the Company's significant divestitures.
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FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Supplemental Consolidated Balance Sheet Information
As of December 31, | ||||||||
(in millions) | 2018 | 2017 | ||||||
Prepaid expenses and other current assets: | ||||||||
Prepaid expenses | $ | 133 | $ | 156 | ||||
Inventory | 116 | 98 | ||||||
Other | 70 | 81 | ||||||
Total Prepaid expenses and other current assets | $ | 319 | $ | 335 | ||||
Property and equipment: | ||||||||
Land | $ | 50 | $ | 58 | ||||
Buildings | 235 | 270 | ||||||
Leasehold improvements | 117 | 96 | ||||||
Equipment and furniture | 1,603 | 1,508 | ||||||
Equipment under capital lease | 547 | 607 | ||||||
Property and equipment | 2,552 | 2,539 | ||||||
Less: Accumulated depreciation | (1,647 | ) | (1,588 | ) | ||||
Total Property and equipment, net of accumulated depreciation | $ | 905 | $ | 951 | ||||
Accounts payable and accrued liabilities: | ||||||||
Accounts payable | $ | 276 | $ | 247 | ||||
Accrued interest expense | 147 | 154 | ||||||
Other accrued expenses | 724 | 712 | ||||||
Other | 489 | 546 | ||||||
Total Accounts payable and accrued liabilities | $ | 1,636 | $ | 1,659 | ||||
Note 18: Investment in Affiliates
Segment results include the Company’s proportionate share of income from affiliates, which consist of unconsolidated investments accounted for under the equity method of accounting. The most significant of these affiliates are related to the Company’s merchant bank alliance program.
A merchant alliance, as it pertains to investments accounted for under the equity method, is an agreement between the Company and a financial institution that combines the processing capabilities and management expertise of the Company with the visibility and distribution channel of the bank. The alliance acquires credit and debit card transactions from merchants. The Company provides processing and other services to the alliance and charges fees to the alliance primarily based on contractual pricing. These fees have been separately identified on the face of the consolidated statements of income.
As of December 31, 2018, there were twenty-one affiliates accounted for under the equity method of accounting, comprised of seven merchant alliances and fourteen strategic investments in companies in related markets.
As of December 31, 2018, the Company had no unconsolidated significant subsidiaries that were not required to be consolidated, but represented more than 20% of the Company’s pretax income. For the year ended December 31, 2017, the Wells Fargo alliance did meet the Significant Subsidiary test provided in Regulations S-X Rule 1-02 (w) in that the Company's equity earnings of this alliance exceeded 20% of the Company's consolidated income from continuing operations before income taxes.
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FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of financial information for the merchant alliances and other affiliates accounted for under the equity method of accounting is presented below:
As of December 31, | ||||||||
(in millions) | 2018 | 2017 | ||||||
Total current assets | $ | 3,764 | $ | 5,427 | ||||
Total long-term assets | 187 | 239 | ||||||
Total assets | $ | 3,951 | $ | 5,666 | ||||
Total current liabilities | $ | 3,669 | $ | 5,347 | ||||
Total long-term liabilities | 3 | 8 | ||||||
Total liabilities | $ | 3,672 | $ | 5,355 | ||||
The primary components of assets and liabilities are settlement-related accounts similar to those described in note 12 "Settlement Assets and Obligations" of these consolidated financial statements.
Year ended December 31, | ||||||||||||
(in millions) | 2018 | 2017 | 2016 | |||||||||
Net operating revenues | $ | 1,372 | $ | 1,374 | $ | 1,434 | ||||||
Operating expenses | 745 | 712 | 666 | |||||||||
Operating income | $ | 627 | $ | 662 | $ | 768 | ||||||
Net income | $ | 615 | $ | 646 | $ | 749 | ||||||
FDC equity earnings | 221 | 222 | 260 | |||||||||
The formation of a merchant alliance accounted for under the equity method of accounting generally involves the Company and/or a financial institution contributing merchant contracts to the alliance and a cash payment from one owner to the other to achieve the desired ownership percentages. The asset amounts reflected above are owned by the alliances and other equity method investees and do not include any of such payments made by the Company. The amount by which the total of the Company’s investments in affiliates exceeded its proportionate share of the investees’ net assets was approximately $0.9 billion and $0.9 billion as of December 31, 2018 and 2017, respectively.
The non-goodwill portion of this amount is considered an identifiable intangible asset that is amortized. The estimated future amortization expense for these intangible assets as of December 31, 2018 is as follows:
Year ended December 31, (in millions) | Amount | |||
2019 | $ | 4 | ||
These amounts assume that these alliances continue as they currently exist. Much of the difference between the Company's proportionate share of the investees’ net income and the Company's equity earnings relate to this amortization.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 19: Selected Quarterly Financial Results (Unaudited)
The following tables show a summary of the Company’s quarterly financial information for each of the four quarters of 2018 and 2017:
2018 | ||||||||||||||||
(in millions, except per share amounts) | First | Second | Third | Fourth | ||||||||||||
Revenues | $ | 2,282 | $ | 2,448 | $ | 2,369 | $ | 2,399 | ||||||||
Expenses | 1,934 | 1,910 | 1,894 | 1,865 | ||||||||||||
Operating profit | $ | 348 | $ | 538 | $ | 475 | $ | 534 | ||||||||
Net income | $ | 134 | $ | 402 | $ | 448 | $ | 214 | ||||||||
Net income attributable to First Data Corporation | 101 | 341 | 401 | 162 | ||||||||||||
Net income per share: | ||||||||||||||||
Basic | 0.11 | 0.37 | 0.43 | 0.17 | ||||||||||||
Diluted | 0.11 | 0.36 | 0.42 | 0.17 | ||||||||||||
2017 | ||||||||||||||||
(in millions, except per share amounts) | First | Second | Third | Fourth | ||||||||||||
Revenues | $ | 2,801 | $ | 3,025 | $ | 3,076 | $ | 3,150 | ||||||||
Expenses | 2,475 | 2,558 | 2,659 | 2,652 | ||||||||||||
Operating profit | $ | 326 | $ | 467 | $ | 417 | $ | 498 | ||||||||
Net income | $ | 79 | $ | 243 | $ | 340 | $ | 1,002 | ||||||||
Net income attributable to First Data Corporation | 36 | 185 | 296 | 948 | ||||||||||||
Net income per share: | ||||||||||||||||
Basic | 0.04 | 0.20 | 0.32 | 1.03 | ||||||||||||
Diluted | 0.04 | 0.20 | 0.31 | 1.00 | ||||||||||||
The 2018 results include the impact of adopting the New Revenue Standard. See note 1 "Summary of Significant Accounting Policies" for more information.
The change in net income during the fourth quarter of 2017 was primarily driven by the release of a valuation allowances associated with the Company's deferred tax assets.
Note 20: Subsequent Events
On January 16, 2019, the Company and Fiserv, Inc. (Fiserv), and 300 Holdings, Inc. (Merger Sub), a wholly-owned subsidiary of Fiserv, entered into an agreement and plan of merger (Merger Agreement), pursuant to which the Company will merge into Merger Sub (the Merger). The terms are subject to the conditions set forth in the Merger Agreement, which states at closing each share of the Company's common stock issued and outstanding will be converted into the right to receive 0.303 (Exchange Ratio) of a share of common stock, par value $0.01 per share, of Fiserv. The Company's equity awards will generally be converted into Fiserv equity awards after giving effect to the Exchange Ratio and appropriate adjustments and be governed by the same terms and conditions as applicable to the Company's corresponding equity awards. Completion of the Merger is subject to customary closing conditions for both parties. The Company currently anticipate that it will close the merger during the second half of 2019. For additional information see Form 425 filed with the Securities and Exchange Commission dated January 16, 2019 and available through the “Investor Relations” portion of our website at http://investor.firstdata.com.
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SCHEDULE II—Valuation and Qualifying Accounts
Additions | Deductions | ||||||||||||||||||||
Description (in millions) | Balance at Beginning of Period | Charged to Costs and Expenses | Reclassifications from Other Accounts(a) | Write-offs Against Assets | Balance at End of Period | ||||||||||||||||
Year ended December 31, 2018 deducted from receivables | $ | 54 | $ | 82 | $ | — | $ | 84 | $ | 52 | |||||||||||
Year ended December 31, 2017 deducted from receivables | 87 | 82 | 1 | 116 | 54 | ||||||||||||||||
Year ended December 31, 2016 deducted from receivables | 83 | 85 | 1 | 82 | 87 | ||||||||||||||||
(a) | Amounts related to reclassifications from "Accounts payable and accrued liabilities" to "Allowance for doubtful accounts" in the Company's consolidated balance sheets. |
107
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
We have evaluated, under the supervision of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of disclosure controls and procedures as of December 31, 2018. This is done in order to ensure that information we are required to disclose in reports that are filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms.
Management’s Report on Internal Control over Financial Reporting
Report of Management
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Internal Control over Financial Reporting
Management is also responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. Management recognizes that there are inherent limitations in the effectiveness of any internal control over financial reporting, including the possibility of human error and the circumvention or overriding of internal control. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.
In order to ensure that the Company’s internal control over financial reporting is effective, management regularly assesses such controls and did so most recently as of December 31, 2018. This assessment was based on criteria for effective internal control over financial reporting described in Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on this assessment, management believes the Company maintained effective internal control over financial reporting as of December 31, 2018.
Changes in Internal Control over Financial Reporting
As a part our ongoing expense management initiatives, we continue to migrate and reorganize certain operations and functions within the Company. These efforts continue to present transitional risks to maintaining adequate internal controls over financial reporting. Additionally, due to the recently adopted New Revenue Standard, we have implemented changes to our internal controls over revenue recognition and related disclosures. Other than with respect to these items, there were no changes in our internal control over financial reporting during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.
108
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of First Data Corporation
Opinion on Internal Control over Financial Reporting
We have audited First Data Corporation’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, First Data Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the accompanying consolidated balance sheets of First Data Corporation as of December 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income, cash flows and equity for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the "financial statements") of the Company and our report dated February 26, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP | |
Atlanta, Georgia | |
February 26, 2019 | |
109
ITEM 9B. | OTHER INFORMATION |
None.
PART III
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE |
All information required by this Item is incorporated by reference to our Proxy Statement for the 2019 Annual Meeting of Shareholders to be filed with the U.S. Securities and Exchange Commission (SEC) within 120 days after December 31, 2018 and is incorporated herein by reference.
ITEM 11. | EXECUTIVE COMPENSATION |
The information required by this Item is incorporated by reference to our Proxy Statement for the 2019 Annual Meeting of Shareholders to be filed with the SEC within 120 days after December 31, 2018 and is incorporated herein by reference.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this Item is incorporated by reference to our Proxy Statement for the 2019 Annual Meeting of Shareholders to be filed with the SEC within 120 days after December 31, 2018 and is incorporated herein by reference.
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this Item is incorporated by reference to our Proxy Statement for the 2019 Annual Meeting of Shareholders to be filed with the SEC within 120 days after December 31, 2018 and is incorporated herein by reference.
ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this Item is incorporated by reference to our Proxy Statement for the 2019 Annual Meeting of Shareholders to be filed with the SEC within 120 days after December 31, 2018 and is incorporated herein by reference.
110
PART IV
ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(a) | The following documents are filed as part of this report: |
(1) | Financial Statements |
(2) | Financial Statement Schedules |
(3) Those exhibits required by Item 601 of Regulation S-K and by paragraph (b) below.
(b) | The following exhibits are filed as part of this Annual Report or, where indicated, were filed and are incorporated by reference: |
Incorporated by Reference | ||||||||||
Exhibit Number | Exhibit Description | Form | File Number | Exhibit Number | Filing Date | |||||
8-K | 1-11073 | 2.1 | 1/18/2019 | |||||||
8-K | 1-11073 | 3.1 | 10/19/2015 | |||||||
8-K | 1-11073 | 3.1 | 12/27/2016 | |||||||
8-K | 1-11073 | 3.1 | 12/21/2017 | |||||||
8-K | 1-11073 | 3.1 | 12/12/2018 | |||||||
10-K | 1-11073 | 3.2 | 2/21/2018 | |||||||
8-K | 1-11073 | 4.1 | 8/13/2015 | |||||||
8-K | 1-11073 | 4.1 | 11/20/2015 | |||||||
8-K | 1-11073 | 4.1 | 12/1/2015 | |||||||
111
8-K | 1-11073 | 4.4 | 12/1/2015 | |||||||
8-K | 1-11073 | 4.2 | 3/29/2016 | |||||||
10-K | 1-11073 | 10.1 | 3/13/2008 | |||||||
10-Q | 1-11073 | 10.11 | 11/14/2007 | |||||||
10-Q | 1-11073 | 10.12 | 11/14/2007 | |||||||
10-Q | 1-11073 | 10.13 | 11/14/2007 | |||||||
8-K | 1-11073 | 4.3 | 8/13/2015 | |||||||
8-K | 1-11073 | 4.2 | 8/13/2015 | |||||||
8-K | 1-11073 | 4.6 | 12/1/2015 | |||||||
8-K | 1-11073 | 4.5 | 12/1/2015 | |||||||
112
8-K | 1-11073 | 4.1 | 1/24/2017 | |||||||
8-K | 1-11073 | 4.1 | 6/14/2017 | |||||||
8-K | 1-11073 | 4.1 | 11/16/2017 | |||||||
8-K | 1-11073 | 4.1 | 11/30/2017 | |||||||
8-K | 1-11073 | 4.1 | 10/31/2018 | |||||||
S-1/A | 1-11073 | 4.22 | 8/25/2015 | |||||||
10-Q | 1-11073 | 10.8 | 11/14/2007 | |||||||
10-K | 1-11073 | 10.16 | 3/19/2013 | |||||||
S-1 | 1-11073 | 10.18 | 7/20/2015 | |||||||
10-K | 1-11073 | 10.21 | 3/10/2014 | |||||||
10-K | 1-11073 | 10.10 | 2/27/2015 | |||||||
10-Q | 1-11073 | 10.6 | 11/14/2007 | |||||||
S-1 | 1-11073 | 10.16 | 7/20/2015 | |||||||
113
S-1 | 1-11073 | 10.17 | 7/20/2015 | |||||||
8-K | 1-11073 | 10.1 | 10/19/2015 | |||||||
S-1/A | 1-11073 | 10.21 | 10/1/2015 | |||||||
S-1/A | 1-11073 | 10.22 | 10/1/2015 | |||||||
10-K | 1-11073 | 10.16 | 2/25/2016 | |||||||
10-K | 1-11073 | 10.17 | 2/25/2016 | |||||||
10-Q | 1-11073 | 10.2 | 5/8/2017 | |||||||
10-Q | 1-11073 | 10.1 | 11/9/2016 | |||||||
10-Q | 1-11073 | 10.2 | 11/9/2016 | |||||||
10-Q | 1-11073 | 10.3 | 11/9/2016 | |||||||
10-Q | 1-11073 | 10.1 | 5/11/2016 | |||||||
S-1/A | 1-11073 | 10.23 | 10/1/2015 | |||||||
10-K | 1-11073 | 10.11 | 2/27/2015 | |||||||
8-K | 1-11073 | 10.1 | 7/24/2017 | |||||||
S-4 | 1-11073 | 10.25 | 8/13/2008 | |||||||
8-K | 1-11073 | 10.1 | 9/24/2015 | |||||||
8-K | 1-11073 | 10.1 | 1/7/2016 | |||||||
8-K | 1-11073 | 10.1 | 7/6/2017 | |||||||
114
8-K | 1-11073 | 10.1 | 7/26/2018 | |||||||
8-K | 1-11073 | 10.2 | 1/7/2016 | |||||||
10-K | 1-11073 | 10.28 | 2/24/2017 | |||||||
8-K | 1-11073 | 10.2 | 7/6/2017 | |||||||
8-K | 1-11073 | 10.2 | 7/26/2018 | |||||||
115
21 (1) | ||||||||||
23.1 (1) | ||||||||||
23.2 (1) | ||||||||||
31.1 (1) | ||||||||||
31.2 (1) | ||||||||||
32.1 (1) | ||||||||||
32.2 (1) | ||||||||||
101.INS (1) | XBRL Instance Document | |||||||||
101.SCH (1) | XBRL Taxonomy Extension Schema Document | |||||||||
101.CAL (1) | XBRL Taxonomy Extension Calculation Linkbase Document | |||||||||
101.DEF (1) | XBRL Taxonomy Extension Definitions Linkbase Document | |||||||||
101.LAB (1) | XBRL Taxonomy Extension Label Linkbase Document | |||||||||
101.PRE (1) | XBRL Taxonomy Extension Presentation Linkbase Document | |||||||||
(1) | Filed herewith |
* | Management contracts and compensatory plans and arrangements required to be filed as exhibits pursuant to Item 15(b) of this report. |
(c) | The following financial statements are included in this annual report pursuant to Regulations S-X Rule 3-09: |
(1) | Wells Fargo Merchant Services, LLC |
(A Joint Venture)
Financial Statements
December 31, 2018, 2017 and 2016
(With Independent Auditors’ Report Thereon)
116
WELLS FARGO MERCHANT SERVICES, LLC |
(A Joint Venture) |
Financial Statements |
For the years ended December 31, 2018 and 2017 |
(With Independent Auditors’ Report Thereon) |
117
WELLS FARGO MERCHANT SERVICES, LLC
(A Joint Venture)
Financial Statements
December 31, 2018, 2017 and 2016
Table of Contents
Page | ||
Independent Auditors’ Report | 119 | |
Balance Sheets | 121 | |
Statement of Revenues and Expenses | 122 | |
Statement of Members’ Equity | 123 | |
Statement of Cash Flows | 124 | |
Notes to Financial Statements | 125 | |
118
KPMG LLP
Suite 1400
55 Second Street
San Francisco, CA 94105
Independent Auditors’ Report
The Executive Sponsors
Wells Fargo Merchant Services, LLC:
We have audited the accompanying financial statements of Wells Fargo Merchant Services, LLC (the Company), which comprise the balance sheets as of December 31, 2018 and 2017, and the related statements of revenue and expenses, members’ equity, and cash flows for the years in the three-year period ended December 31, 2018, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
119
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Wells Fargo Merchant Services, LLC as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018 in accordance with U.S. generally accepted accounting principles.
San Francisco, California February 15, 2019
KPMG LLP is a Delaware limited liability partnership and the U.S. member
firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity.
120
WELLS FARGO MERCHANT SERVICES, LLC
(A Joint Venture)
Balance Sheets
December 31, 2018 and 2017
(Dollars in thousands)
Assets | 2018 | 2017 | |||||
Cash and cash equivalents | $ | 34,700 | $ | 41,455 | |||
Restricted cash | 70,307 | 78,011 | |||||
Settlement assets | 1,751,911 | 3,560,362 | |||||
Accounts receivable, net of reserve for merchant credit and fee losses | 640,585 | 569,143 | |||||
$4.4 million in 2018 and $5.4 million 2017 | |||||||
Intangibles | 488 | 751 | |||||
Other assets | 275 | 614 | |||||
Total assets | $ | 2,498,266 | $ | 4,250,336 | |||
Liabilities and Members’ Equity | |||||||
Settlement liabilities | $ | 1,701,614 | $ | 3,576,837 | |||
Accounts payable and accrued expenses | 86,406 | 71,376 | |||||
Interchange payable to Wells Fargo Bank, N.A. | 589,124 | 478,819 | |||||
Related party payable to First Data Merchant Services Corporation | 16,021 | 7,973 | |||||
Distribution payable to Wells Fargo Bank, N.A. | 60,305 | 66,444 | |||||
Distribution payable to First Data Merchant Services Corporation | 40,205 | 44,296 | |||||
Total liabilities | 2,493,675 | 4,245,745 | |||||
Members’ equity | 4,591 | 4,591 | |||||
Total liabilities and members’ equity | $ | 2,498,266 | $ | 4,250,336 | |||
See accompanying notes to the financial statements.
121
WELLS FARGO MERCHANT SERVICES, LLC
(A Joint Venture)
Statements of Revenues and Expenses
December 31, 2018, 2017 and 2016
(Dollars in thousands)
2018 | 2017 | 2016 | |||||||||
Revenues: | |||||||||||
Card services revenue, net of $8.2, $6.8 and $5.5 billion in interchange and assessments in 2018, 2017 and 2016, respectively | $ | 702,870 | $ | 731,843 | $ | 786,803 | |||||
Product sales revenue | 23,794 | 29,032 | 50,359 | ||||||||
Other revenue | 87,771 | 84,951 | 69,030 | ||||||||
Net revenue | 814,435 | 845,826 | 906,192 | ||||||||
Expenses: | |||||||||||
Cost of card services | 248,088 | 249,362 | 222,790 | ||||||||
Cost of product sold | 10,299 | 12,016 | 15,536 | ||||||||
Selling, general and administrative | 136,457 | 135,964 | 135,546 | ||||||||
Other expenses | 15,022 | 11,819 | 9,721 | ||||||||
Total expenses | 409,866 | 409,161 | 383,593 | ||||||||
Net operating income | 404,569 | 436,665 | 522,599 | ||||||||
Interest income | 4,787 | 1,528 | 788 | ||||||||
Net income | $ | 409,356 | $ | 438,193 | $ | 523,387 | |||||
See accompanying notes to the financial statements.
122
WELLS FARGO MERCHANT SERVICES, LLC
(A Joint Venture)
Statement of Members' Equity
December 31, 2018, 2017 and 2016
(Dollars in thousands)
Wells Fargo Bank, N.A. | First Data Merchant Services Corporation | Total | |||||||||
Members’ equity at December 31, 2015 | $ | 2,755 | $ | 1,836 | $ | 4,591 | |||||
Net income | 314,032 | 209,355 | 523,387 | ||||||||
Distributions to members | (314,032 | ) | (209,355 | ) | (523,387 | ) | |||||
Members’ equity at December 31, 2016 | 2,755 | 1,836 | 4,591 | ||||||||
Net income | 262,916 | 175,277 | 438,193 | ||||||||
Distributions to members | (262,916 | ) | (175,277 | ) | (438,193 | ) | |||||
Members’ equity at December 31, 2017 | 2,755 | 1,836 | 4,591 | ||||||||
Net income | 245,614 | 163,741 | 409,356 | ||||||||
Distributions to members | (245,614 | ) | (163,741 | ) | (409,356 | ) | |||||
Members’ equity at December 31, 2018 | $ | 2,755 | $ | 1,836 | $ | 4,591 | |||||
See accompanying notes to the financial statements.
123
WELLS FARGO MERCHANT SERVICES, LLC
(A Joint Venture)
Statement of Cash Flows
December 31, 2018, 2017 and 2016
(Dollars in thousands)
2018 | 2017 | 2016 | |||||||||
Cash flows from operating activities: | |||||||||||
Net income | $ | 409,356 | $ | 438,193 | $ | 523,387 | |||||
Adjustments to reconcile net income to net cash provided | |||||||||||
by operating activities: | |||||||||||
Amortization of intangibles | 406 | 398 | 322 | ||||||||
Provisions for credit and fee losses | 7,971 | 12,361 | 12,220 | ||||||||
Changes in operating assets and liabilities: | |||||||||||
Settlement assets | 1,808,451 | (1,268,387 | ) | (1,143,147 | ) | ||||||
Accounts receivable, net of reserve for merchant credit and fee losses | (79,413 | ) | (90,838 | ) | (102,059 | ) | |||||
Other assets | 339 | 424 | (895 | ) | |||||||
Settlement liabilities | (1,875,223 | ) | 1,248,632 | 1,156,390 | |||||||
Accounts payable and accrued expenses | 15,030 | 8,985 | 18,439 | ||||||||
Interchange Payable to Wells Fargo Bank, N.A. | 110,305 | 64,697 | 73,685 | ||||||||
Related Party Payable to First Data Merchant Services Corporation | 8,048 | (322 | ) | (14,905 | ) | ||||||
Net cash provided by operating activities | 405,270 | 414,143 | 523,437 | ||||||||
Cash flows from investing activities: | |||||||||||
Signing bonus on executed contract | (143 | ) | (352 | ) | (662 | ) | |||||
Net cash used in investing activities | (143 | ) | (352 | ) | (662 | ) | |||||
Cash flows from financing activities: | |||||||||||
Distributions to members | (419,586 | ) | (453,951 | ) | (524,442 | ) | |||||
Net cash used in financing activities | (419,586 | ) | (453,951 | ) | (524,442 | ) | |||||
Increase/(Decrease) in cash and cash equivalents | (14,459 | ) | (40,160 | ) | (1,667 | ) | |||||
Cash, cash equivalents, and restricted cash at beginning of year | 119,466 | 159,626 | 161,293 | ||||||||
Cash, cash equivalents, and restricted cash at end of year | $ | 105,007 | $ | 119,466 | $ | 159,626 | |||||
See accompanying notes to the financial statements.
124
WELLS FARGO MERCHANT SERVICES, LLC
(A Joint Venture)
Notes to the Financial Statements
December 31, 2018, 2017 and 2016
(Dollars in thousands, unless otherwise noted)
(1) | Business Description |
Wells Fargo Merchant Services, LLC (the "Company"), a limited liability company, is a joint venture between First Data Merchant Services Corporation ("FDMS") and Wells Fargo Bank, N.A. ("Wells Fargo"), with a forty percent and sixty percent equity ownership, respectively. FDMS is a fully owned subsidiary of First Data Corporation. The Company is established pursuant to the terms of amended and restated alliance agreements (the "Membership Agreement") dated as of December 31, 2008, as amended. The Membership Agreement will terminate on December 31, 2024. FDMS and Wells Fargo are here-in-after referred to, individually, as a "Member" or, collectively, as "Members".
The Company is engaged in processing and funds transfer services related to the authorization, processing, and settlement of credit and debit card transactions for merchants. A majority of its revenue is based on the dollar amount of transactions processed. The Company primarily provides services to merchant customers within all 50 states, with a significant concentration in California. The Company is operationally dependent on both FDMS and Wells Fargo. The Company’s primary operations are conducted through FDMS. The Company’s funding and settlement are primarily conducted through Wells Fargo. The majority of the bank accounts used for daily operations are with Wells Fargo.
(2) | Summary of Significant Accounting Policies |
(a) | Use of Estimates |
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates. Items subject to such estimates and assumptions include the reserve for merchant credit and fee losses.
(b) | Settlement Assets and Liabilities |
The Company has a fiduciary responsibility to its merchant customers as it relates to the transfer of funds from a cardholder’s issuing bank, via the VISA, MasterCard, American Express or Discover card companies (the “Card Networks”) and the Accel, AFFN, ATH, CULIANCE, Interlink, Jeanie, Maestro, NYCE, Pulse, NETS, Shazam, and Star Debit Networks (the “Debit Networks”). The Company records such amounts due from the issuing banks, Card Networks and Debit Networks within the balance sheet caption settlement assets while the related liability, settlement liabilities, represents amounts due to merchants. Pursuant to the Card Networks’ and Debit Networks’ rules, such fiduciary funds are not available to support the operations of the Company.
When a cardholder or a credit issuing institution disputes a transaction, within the Card Network guidelines, the Company’s merchant customers have a liability for the disputed charges. However, in the case of merchant fraud, insolvency or bankruptcy, the Company may also be liable. Fee receivables that are ultimately deemed as uncollectable are charged-off against the merchant credit and fee loss reserve. The Company’s determination of the level of the reserve is calculated based on the level of sales volumes multiplied by loss factors taking into consideration charge-offs, recoveries and merchant collateral and rests upon various judgments and assumptions, including the review of historical data and a specific analysis of receivables due from merchants. Our charge-off policy is to fully charge down the balance when the receivable is 60 days past due. The reserve for merchant credit and fee losses is a valuation allowance for probable losses inherent as of the balance sheet date. The Company considers the reserve for merchant credit and fee losses adequate to cover losses inherent in the portfolio as of December 31, 2018 and 2017. Merchant collateral is categorized as Restricted cash on the Balance Sheet.
125
WELLS FARGO MERCHANT SERVICES, LLC
(A Joint Venture)
Notes to the Financial Statements
December 31, 2018, 2017 and 2016
(Dollars in thousands, unless otherwise noted)
(c) | Cash and Cash Equivalents |
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. At December 31, 2018 and 2017, the majority of the Company’s cash and cash equivalents were held in Wells Fargo accounts.
(d) | Restricted Cash |
The Company requires cash deposits, guarantees, letters of credit or other types of collateral by certain merchants to minimize its credit risk. Included in the Balance Sheet’s Restricted cash is $70.3 million and $78.0 million in Merchant collateral, as of December 31, 2018 and 2017, respectively. Merchant collateral represents restricted cash held by the Company in a Wells Fargo bank account.
(e) | Accounts Receivable |
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.
(f) | Intangibles |
The Company capitalizes initial payments for new contracts, contract renewals and conversion costs associated with customer processing relationships to the extent recoverable through future operations, contractual minimums and/or penalties in the case of early termination. The Company’s accounting policy is to limit the amount of capitalized costs for a given contract to the lesser of the estimated ongoing future cash flows from the contract or the termination fees the Company would receive in the event of early termination of the contract by the customer. The company amortizes intangibles over the period of the contract.
(g) | Accounts Payable and Accrued Expenses |
The Company accrues for certain expenses that have been incurred. These estimates are classified within accounts payable and accrued expenses in the balance sheet.
126
WELLS FARGO MERCHANT SERVICES, LLC
(A Joint Venture)
Notes to the Financial Statements
December 31, 2018, 2017 and 2016
(Dollars in thousands, unless otherwise noted)
(h) | Income Taxes |
No provision is made in the accounts of the Company for federal or state income taxes because all items of income and expense and other items affecting taxable income are allocated to the Members for inclusion in their income tax returns.
In accounting for income taxes, the Company follows the guidance in FASB ASC 740 (formerly FASB Interpretation No. 48), as amended by ASU 2009-06, Accounting for Uncertainty in Income Taxes. ASC 740 requires the Company to determine whether a tax position of the Company is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or ligation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement which could result in the Company recording a tax liability that would reduce net assets. ASC 740 also provides guidance on thresholds, measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition that is intended to provide better financial statement comparability among different entities. As an LLC and pass-through entity, the Company does not incur tax expense and is not required to record a tax provision related to uncertain tax positions, in accordance with the recognition, measurement, classification, and disclosure requirements of ASC 740-10. The U.S. is the major tax jurisdiction for the Company. The tax returns of the Company can be examined by the relevant taxing authorities until the applicable statute of limitations has expired, which is generally three to four years from the date the return is initially filed, depending on the specific jurisdiction. Based on analysis by the Company, there were no material positions identified which did not meet the “more likely than not” standard as of and for the years ended December 31, 2018 and 2017.
(i) | Members’ Equity |
An equity account is maintained for each Member. In certain instances, the Members may be required to make additional contributions to the Company. Such contributions will be determined on a pro-rata basis in accordance with each Member’s membership interest at the time of the request and will be added to the Member’s equity account. Membership interest is defined as the ownership percentage of the Company by each member.
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WELLS FARGO MERCHANT SERVICES, LLC
(A Joint Venture)
Notes to the Financial Statements
December 31, 2018, 2017 and 2016
(Dollars in thousands, unless otherwise noted)
(j) | Revenue Recognition |
The Company recognizes card services revenues primarily from its transaction processing and authorization services as such services are performed. The revenues from transaction processing and authorization services are included in card services revenue in the statement of revenue and expenses. The Company recognizes revenue when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed and collectability of the resulting receivable is reasonably assured. Certain revenues are recorded net of certain costs not controlled by the Company, including interchange and assessment fees charged by the Card Networks. These revenues totaled $8.7 billion, $7.1 billion, and $6.0 billion for the years ended December 31, 2018, 2017, and 2016 and associated costs totaled $8.2 billion, $6.8 billion, and $5.5 billion, respectively.
Debit revenues are recorded gross and are included within card services revenue in the statement of revenues and expenses. Debit network fees are recorded within cost of card services in the statement of revenues and expenses. Debit revenues are recognized as such services are performed. Debit network fees totaled $127.0 million, $121.9 million, and $110.1 million for the years ended December 31, 2018, 2017, and 2016 and associated revenues totaled $159.1 million, $153.8 million, and $139.5 million, respectively. The Company recognizes product revenue from merchant referred leases, rentals and sales as such services are performed. These revenues totaled $23.8 million, $29.0 million, and $50.4 million for the years ended December 31, 2018, 2017, and 2016 and are classified within product revenue. The Company records expense associated with the corresponding charge from affiliates of FDMS. These expenses totaled $10.3 million, $12.0 million, and $15.5 million for the years ended December 31, 2018, 2017, and 2016 and are classified within Cost of product sold.
In addition to the above, the Company recognizes other fees for services as such services are performed. These revenues totaled $87.8 million, $85.0 million, and $69.0 million for the years ended December 31, 2018, 2017, and 2016 and are classified within Other revenue. The other revenue caption on the statement of revenues and expenses includes relevant items such as monthly fees, new account fees, income from cash advances, chargeback fees and early termination fees.
(k) | Comprehensive Income |
For the year ended December 31, 2018, 2017, and 2016 net income equals comprehensive income.
(l) | New Accounting Pronouncements |
Revenue Recognition
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (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 standard, including clarification on accounting for licenses, identifying performance obligations, and principal versus agent consideration (reporting revenue gross vs. net).
The Company will adopt the New Revenue Standard using a modified retrospective basis on January 1, 2019. The Company does not expect the adoption of the New Revenue Standard to result in a material or significant cumulative-effect adjustment to retained earnings. The Company’s accounting policies did not change materially since the principles of revenue recognition from the New Revenue Standard are largely consistent with the prior guidance and practices applied by our business. Accordingly, the Company does not have material changes to the timing or amount
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WELLS FARGO MERCHANT SERVICES, LLC
(A Joint Venture)
Notes to the Financial Statements
December 31, 2018, 2017 and 2016
(Dollars in thousands, unless otherwise noted)
of revenue recognition. Under the modified retrospective basis, the Company will not restate the prior consolidated financial statements presented for these effects.
The Company currently expects the most significant ongoing impact of adopting the New Revenue Standard in 2019 to be driven by changes in principal versus agent considerations, with the majority of the change overall in total revenues attributable to WFMS reflecting our debit transactions on a net basis prospectively, as opposed to our gross presentation of debit network fees of $127.0 million and associated revenues of $159.1 million as included in the current financial statements. The Company does not expect the adoption of the New Revenue Standard to have a material impact on net income.
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. The Company will adopt the New Leasing Standard on January 1, 2019, however, the Company has evaluated the impact of the new guidance on its consolidated financial statements and determined that there will not be a material impact.
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 business entities 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.
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. The new guidance will be effective for public business entities for fiscal years beginning after December 15, 2017. This change was implemented in 2018 and Merchant Collateral is presented on the Balance Sheet as Restricted cash and presented on the Statement of Cash Flows.
(m) | Reclassifications |
The company has reclassified certain amounts relating to its prior period results to conform to its current period presentation. These reclassification have no changed the results of operations of prior periods.
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WELLS FARGO MERCHANT SERVICES, LLC
(A Joint Venture)
Notes to the Financial Statements
December 31, 2018, 2017 and 2016
(Dollars in thousands, unless otherwise noted)
(3) | Intangibles |
Following is a summary of the Company’s intangibles for the years ended December 31, 2018, 2017 and 2016:
Intangible Assets, Gross of Accumulated Amortization | Accumulated Amortization | Intangible Assets, Net of Accumulated Amortization | ||||||
Beginning balance as of January 1, 2018 | $ | 2,896 | $ | (2,145) | $ | 751 | ||
Additions | 143 | — | 143 | |||||
Retirements | (532) | 532 | — | |||||
Amortization | — | (406) | (406) | |||||
Ending balance as of December 31, 2018 | $ | 2,507 | $ | (2,019) | $ | 488 | ||
Beginning balance as of January 1, 2017 | $ | 2,544 | $ | (1,747) | $ | 797 | ||
Additions | 352 | — | 352 | |||||
Retirements | — | — | — | |||||
Amortization | — | (398) | (398) | |||||
Ending balance as of December 31, 2017 | $ | 2,896 | $ | (2,145) | $ | 751 | ||
Beginning balance as of January 1, 2016 | $ | 2,266 | $ | (1,809) | $ | 457 | ||
Additions | 662 | — | 662 | |||||
Retirements | (384) | 384 | — | |||||
Amortization | — | (322) | (322) | |||||
Ending balance as of December 31, 2016 | $ | 2,544 | $ | (1,747) | $ | 797 | ||
For the years ended December 31, 2018, 2017 and 2016, amortization expense of $406, $398, and $322, respectively, is included in other expenses in the statement of revenues and expenses.
(4) | Related Party Transactions |
The Company’s primary operations are conducted through FDMS. FDMS charges the Company fees for services provided pursuant to an operating agreement (the “Operating Agreement”) dated January 31, 2000, as amended and restated. The Members also agreed to perform certain additional management functions (the “Additional Services”) of the Company, for which they will be reimbursed by the Company. These fees are included in cost of card services, cost of product sold (including expenses associated with merchant referred leases, rentals and sales from affiliates of FDMS) and selling, general and administrative expenses within the statement of revenue and expense for both Members. The financial statements may not necessarily be indicative of the financial position that would have existed, or the results of operations or cash flows that would have occurred had the Company operated as an independent enterprise. During the years ended December 31, 2018, 2017, and 2016, the Company reimbursed FDMS and Wells Fargo for performing the additional services as follows:
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WELLS FARGO MERCHANT SERVICES, LLC
(A Joint Venture)
Notes to the Financial Statements
December 31, 2018, 2017 and 2016
(Dollars in thousands, unless otherwise noted)
2018 | |||||
First Data Merchant Services, Corporation | Wells Fargo Bank, NA | ||||
Cost of card services | $ | 106,784 | $ | — | |
Cost of product sold | 10,299 | — | |||
Selling, general and administrative | 7,983 | 128,474 | |||
Total | $ | 125,066 | $ | 128,474 | |
2017 | |||||
First Data Merchant Services, Corporation | Wells Fargo Bank, NA | ||||
Cost of card services | $ | 107,971 | $ | — | |
Cost of product sold | 12,016 | — | |||
Selling, general and administrative | 7,997 | 127,967 | |||
Total | $ | 127,984 | $ | 127,967 | |
2016 | |||||
First Data Merchant Services, Corporation | Wells Fargo Bank, NA | ||||
Cost of card services | $ | 92,161 | $ | — | |
Cost of product sold | 15,536 | — | |||
Selling, general and administrative | 11,766 | 123,780 | |||
Total | $ | 119,463 | $ | 123,780 | |
Included in the balance sheets at December 31, 2018 and 2017 is a payable to FDMS of $16,021 and $7,973, respectively. These balances primarily consist of selling, general and administrative costs, cost of card services, and cost of product sold owed to FDMS which are partially offset by net revenue owed to WFMS for the contributed portfolio. These balances are settled monthly, one month in arrears.
Included in the balance sheets at December 31, 2018 and 2017 is a payable to Wells Fargo of $589,124 and $478,819, respectively, which is primarily attributable to non-interest bearing advances, made by Wells Fargo to the Company, to fund interchange settlements with Card Networks. These payable amounts are settled monthly, one month in arrears.
(5) | Allocation and Distribution of Income to Members |
Profits and losses of the Company are allocated in accordance with each Member’s Interest. Distributions of allocated income to the Members are made on a quarterly basis, subject to consent of the Members. Income distributed shall equal 100% of the distributable funds, as defined in the Membership Agreement, unless a smaller percentage is agreed to by the Members.
131
WELLS FARGO MERCHANT SERVICES, LLC
(A Joint Venture)
Notes to the Financial Statements
December 31, 2018, 2017 and 2016
(Dollars in thousands, unless otherwise noted)
(6) | Termination of Company |
The Company can be terminated in the event of certain termination events, set forth in the Membership Agreement. These include certain mergers or acquisitions of either of the Members, and various other identified performance criteria.
(7) | Limited Liability of Members |
The Members of a Delaware limited liability company are generally not liable for the acts and omissions of the Company, much in the same manner as the shareholders, officers and directors of a corporation are generally not liable for the acts and omissions of the corporation. Such liability is generally limited by the provisions of the Delaware Limited Liability Company Act and by applicable case law.
(8) | Fair Value of Financial Instruments |
FASB ASC 825, Financial Instruments, requires the disclosure of the fair value of financial instruments, including assets and liabilities recognized in the balance sheets. Management estimates that the aggregate fair value of financial instruments recognized in the balance sheets (including receivables, payables and merchant collateral) approximates their carrying value as such financial instruments are short-term in nature or carry floating rates of interest.
(9) | Guarantees and Reserve for Merchant Credit and Fee Losses |
Under the card companies’ rules, when a merchant processor acquires card transactions, it has certain liabilities for the transactions. This liability arises from disputes between cardholders and merchants due to the cardholders’ dissatisfaction with merchandise quality or the merchants’ service, which are not resolved with the merchant. In such cases, the transactions are “charged back” to the respective merchants and the related purchase amounts are refunded to the cardholders by the card issuer. If the merchant does not fund the refund due to insolvency, bankruptcy or other extraneous reasons, the Company, in certain circumstances is liable for the full amount of the transaction. This liability is considered a guarantee under FASB ASC 460, Guarantees.
The Company’s legal obligation under these rules is to settle any individual chargeback for which an individual merchant fails to fulfill as noted above. Contractually, the maximum exposure for this obligation is the total amount of transactions processed for the preceding four month period for all merchants, which in the case of the Company is in the billions of dollars. It should be noted that the Company has not experienced material chargeback loss activity as a result of merchant processing activities and advises that caution should be used when assessing the maximum exposure described above. The Company records a provision for this estimated obligation based upon a number of factors which include historical losses, credit risk of specific customers and other relevant factors. As shown below, for the years ended December 2018, 2017, and 2016, the Company incurred aggregate merchant credit and fee losses of $8,990, $12,367, and $11,982, net of recoveries, on total processed volumes. The Company calculates its provision and evaluates the appropriateness of its reserves on a monthly basis.
132
WELLS FARGO MERCHANT SERVICES, LLC
(A Joint Venture)
Notes to the Financial Statements
December 31, 2018, 2017 and 2016
(Dollars in thousands, unless otherwise noted)
The following is the activity related to the reserve for merchant credit and fee losses for the years ended December 31, 2018, 2017, and 2016:
Beginning balance as of January 1, 2018 | $ | 5,417 | |
Provisions for credit and fee loss | 7,971 | ||
Charge-offs, net of recoveries of $892 | (8,990 | ) | |
Ending balance as of December 31, 2018 | $ | 4,398 | |
Beginning balance as of January 1, 2017 | $ | 5,423 | |
Provisions for credit and fee loss | 12,361 | ||
Charge-offs, net of recoveries of $840 | (12,367 | ) | |
Ending balance as of December 31, 2017 | $ | 5,417 | |
Beginning balance as of January 1, 2016 | $ | 5,185 | |
Provisions for credit and fee loss | 12,220 | ||
Charge-offs, net of recoveries of $797 | (11,982 | ) | |
Ending balance as of December 31, 2016 | $ | 5,423 | |
(10) | Commitments and Contingencies |
The Company is involved in various legal proceedings. Accruals have been made with respect to these matters, where appropriate, which are reflected in the Company’s financial statements. The Company may enter into discussions regarding settlement of these matters and may enter into settlement agreements, if it believes settlement is in the best interest of the Company. The matters discussed below, if decided adversely to or settled by the Company, individually or in the aggregate, may result in a liability material to the Company’s financial condition and/or results of operations. There are asserted claims against the Company where an unfavorable outcome is considered to be reasonably possible. These claims can generally be categorized as matters related to our merchant business.
The Company’s estimates of the possible ranges of losses in excess of any amounts accrued are $0 to $20 million for merchant and other matters. The estimated range of reasonably possible losses was based on information currently available and involves elements of judgment and significant uncertainties. As additional information becomes available and the resolution of the uncertainties becomes more apparent, it is possible that actual losses may exceed the high end of the estimated range.
(11) | Subsequent Events |
The Company has evaluated the subsequent events from the balance sheet date through February 15, 2019, the date at which the financial statements were available to be issued. On January 16, 2019, First Data Corporation (“FDC”), the parent company of FDMS, and Fiserv, Inc. (“Fiserv”), entered into an agreement and plan of merger, under which FDC will merge (the “Merger”) with a subsidiary of Fiserv.
133
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST DATA CORPORATION | ||
(Registrant) | ||
By: | /S/ FRANK BISIGNANO | |
Frank Bisignano | ||
Chief Executive Officer | ||
Date: | February 26, 2019 | |
134
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Name | Title | Date | ||
/S/ FRANK BISIGNANO | Chief Executive Officer and Director | February 26, 2019 | ||
Frank Bisignano | (principal executive officer) | |||
/S/ HIMANSHU A. PATEL | Executive Vice President, Chief Financial Officer | February 26, 2019 | ||
Himanshu A. Patel | (principal financial officer) | |||
/S/ MICHAEL K. NEBORAK | Executive Vice President, Corporate Controller and Chief Accounting Officer | February 26, 2019 | ||
Michael K. Neborak | (principal accounting officer) | |||
/S/ HENRIQUE DE CASTRO | Director | February 26, 2019 | ||
Henrique De Castro | ||||
/S/ HENRY R. KRAVIS | Director | February 26, 2019 | ||
Henry R. Kravis | ||||
/S/ HEIDI G. MILLER | Director | February 26, 2019 | ||
Heidi G. Miller | ||||
/S/ JAMES E. NEVELS | Director | February 26, 2019 | ||
James E. Nevels | ||||
/S/ SCOTT C. NUTTALL | Director | February 26, 2019 | ||
Scott C. Nuttall | ||||
/S/ TAGAR C. OLSON | Director | February 26, 2019 | ||
Tagar C. Olson | ||||
/S/ JOSEPH J. PLUMERI | Director | February 26, 2019 | ||
Joseph J. Plumeri | ||||
/S/ BARBARA A. YASTINE | Director | February 26, 2019 | ||
Barbara A. Yastine | ||||
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