filings.toolsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
92K characters. Original on sec.gov · Markdown
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of financial condition and results of operations is provided as a supplement to our consolidated financial statements and accompanying notes to help provide an understanding of our financial condition, the changes in our financial condition and our results of operations. Our discussion is organized as follows:
| • | Overview. This section contains background information on our company and the services and products that we provide, acquisitions and dispositions, our enterprise priorities, and the trends affecting our industry in order to provide context for management’s discussion and analysis of our financial condition and results of operations. |
| • | Critical accounting policies and estimates. This section contains a discussion of the accounting policies that we believe are important to our financial condition and results of operations and that require judgment and estimates on the part of management in their application. In addition, all of our significant accounting policies, including critical accounting policies, are summarized in Note 1 to the accompanying consolidated financial statements. |
| • | Results of operations. This section contains an analysis of our results of operations presented in the accompanying consolidated statements of income by comparing the results for the year ended December 31, 2019 to the results |
for the year ended December 31, 2018 and by comparing the results for the year ended December 31, 2018 to the results for the year ended December 31, 2017.
| • | Liquidity and capital resources. This section provides an analysis of our cash flows and a discussion of our outstanding debt and commitments at December 31, 2019. |
Overview
Company Background
We are a leading global provider of financial services technology. We provide account processing systems; electronic payments processing products and services; internet and mobile banking systems; merchant transaction processing and acquiring, including the Clover® line of payment solutions and related applications; prepaid and payroll services; and check verification. We serve clients around the globe, including banks, credit unions, other financial institutions and merchants.
Our operations are comprised of the First Data segment, the Payments and Industry Products (“Payments”) segment and the Financial Institution Services (“Financial”) segment.
On July 29, 2019, we completed the acquisition of First Data Corporation (“First Data”), a global leader in commerce-enabling technology and solutions for merchants, financial institutions and card issuers. The First Data segment primarily provides merchant acquiring, e-commerce, mobile commerce, and other business solutions at the point-of-sale (“POS”) to businesses of all sizes and types; credit card and loan account processing, commercial payments, customer communications, plastics products and services, customer service, and other products to support issuers; and a range of network solutions and security, risk and fraud management products and services to business and financial institution clients, including U.S. debit card processing, our STAR® network, stored value commerce solutions (both closed-loop and open-loop), and our suite of security and fraud products and services. The businesses in the First Data segment are subject to a modest level of seasonality, with the first quarter experiencing the lowest level of revenue and the fourth quarter experiencing the highest level of revenue.
The Payments segment primarily provides electronic bill payment and presentment services, internet and mobile banking software and services, account-to-account transfers, person-to-person payment services, debit and credit card processing and services, payments infrastructure services, and other electronic payments software and services. Our businesses in this segment also provide card and print personalization services, and fraud and risk management products and services.
The Financial segment primarily provides financial institutions with account processing services, item processing and source capture services, loan origination and servicing products, cash management and consulting services, and other products and services that support numerous types of financial transactions. Our Payments and Financial segment operations are principally located in the U.S. The majority of our revenue within these segments is generated from recurring account- and transaction-based fees under multi-year contracts with high renewal rates. Most of the services we provide within our segments are necessary for our clients to operate their businesses and are, therefore, non-discretionary in nature.
Corporate and Other primarily consists of intercompany eliminations, amortization of acquisition-related intangible assets, unallocated corporate expenses of the combined company and other activities that are not considered when management evaluates segment performance, such as gains on sales of businesses and associated transition services. We expect to realign our business segments in the first quarter of 2020 when our new reporting structure and First Data integration plans are finalized.
On February 21, 2018, our board of directors declared a two-for-one stock split of our common stock and a proportionate increase in the number of our authorized shares of common stock. The additional shares were distributed on March 19, 2018 to shareholders of record at the close of business on March 5, 2018. Our common stock began trading at the split-adjusted price on March 20, 2018. All share and per share amounts are retroactively presented on a split-adjusted basis.
Acquisitions and Dispositions
We frequently review our portfolio to ensure we have the right set of businesses to execute on our strategy. We expect to acquire businesses when we identify: a compelling strategic need, such as a product, service or technology that helps meet client demand; an opportunity to change industry dynamics; a way to achieve business scale; or similar considerations. We expect to divest businesses that are not in line with our market, product or financial strategies.
Acquisitions
On July 29, 2019, we completed the acquisition of First Data Corporation for a total purchase price of $46.5 billion by acquiring 100% of the First Data stock that was issued and outstanding as of the date of acquisition. As a result of the
acquisition, First Data stockholders received 286 million shares of common stock of Fiserv, Inc., at an exchange ratio of 0.303 shares of Fiserv, Inc. for each share of First Data common stock, with cash paid in lieu of fractional shares. We also converted 15 million outstanding First Data equity awards into corresponding equity awards relating to common stock of Fiserv, Inc. in accordance with the exchange ratio. In addition, concurrent with the closing of the acquisition, we made a cash payment of $16.4 billion to repay existing First Data debt. We funded the transaction-related expenses and the repayment of First Data debt through a combination of available cash on-hand, proceeds from the issuance of senior notes and term loan and revolving credit facility borrowings. The acquisition of First Data increases our footprint as a global payments and financial technology provider by expanding the portfolio of services provided to financial institutions, corporate and merchant clients and consumers.
In October 2018, we acquired the debit card processing, ATM Managed Services, and MoneyPass® surcharge-free network of Elan Financial Services, a unit of U.S. Bancorp, for approximately $659 million including post-closing working capital adjustments, estimated contingent consideration related to earn-out provisions and future payments under a transition services agreement in excess of estimated fair value. This acquisition, included within the Payments segment, deepens our presence in debit card processing, broadens our client reach and scale and provides new solutions to enhance the value proposition for our existing debit solution clients.
During 2017, we completed four acquisitions for an aggregate purchase price of $384 million, net of acquired cash, along with earn-out provisions. In January 2017, we completed our acquisition of Online Banking Solutions, Inc. (“OBS”), a provider of cash management and digital business banking solutions that complement and enrich our existing solutions. In July 2017, we acquired the assets of PCLender, LLC (“PCLender”), a leader in internet-based mortgage software and mortgage lending technology solutions. The OBS and PCLender acquisitions are included in the Financial segment as their products are integrated across a number of our account processing solutions and enable our bank and credit union clients to better serve their commercial and mortgage customers. In August 2017, we acquired Dovetail Group Limited (“Dovetail”), a leading provider of bank payments and liquidity management solutions. In September 2017, we completed our acquisition of Monitise plc (“Monitise”), a provider of digital solutions that enables innovative digital banking experiences for leading financial institutions worldwide. The Dovetail and Monitise acquisitions are included in the Payments segment and further enable us to help financial institutions around the world transform their payments infrastructure and to expand our digital leadership, respectively.
Dispositions
On December 4, 2019, we entered into a definitive agreement to sell a 60% controlling interest of our Investment Services business, which is reported within the Payments segment. On February 18, 2020, we completed the sale of the 60% interest of this business to a group of investors for gross proceeds of $591 million, resulting in an estimated pre-tax gain, including the remeasurement of the Company’s retained interest, of approximately $430 million. Our 40% retained interest will be accounted for as an equity method investment.
In connection with the acquisition of First Data, we acquired two businesses which we intended to sell. In October 2019, we completed the sales, at acquired fair value, of these two businesses for aggregate proceeds of $133 million.
In March 2018, we sold a 55% interest of our Lending Solutions business, which was reported within the Financial segment, retaining 45% ownership interests in two joint ventures (the “Lending Joint Ventures”). In conjunction with this transaction, we entered into transition services agreements to provide, at fair value, various administration, business process outsourcing and data center related services for defined periods to the Lending Joint Ventures. We received gross sale proceeds of $419 million from the transactions. In August 2019, the Sagent Auto, LLC joint venture, formerly known as Fiserv Automotive Solutions, LLC, completed a merger with a third-party, resulting in the dilution of our ownership interest to 31% in the new combined entity, defi SOLUTIONS Group, LLC (“defi SOLUTIONS”). In addition, in January 2018, we completed the sale of the retail voucher business acquired in our 2017 acquisition of Monitise for proceeds of £37 million ($50 million), and in May 2017, we sold our Australian item processing business, which was reported within the Financial segment, for approximately $17 million.
During 2017, StoneRiver Group, L.P. (“StoneRiver”), a joint venture in which we own a 49% interest and account for under the equity method, recognized a gain on the sale of a business. Our pre-tax share of the gain was $26 million, with related tax expense of $9 million. In addition, we received cash distributions of $2 million and $45 million in 2018 and 2017, respectively, from StoneRiver, which were funded from sale transactions.
Enterprise Priorities
We continue to implement a series of strategic initiatives to move money and information in a way that moves the world. These strategic initiatives include active portfolio management of our businesses, enhancing the overall value of our existing client relationships, improving operational effectiveness, being disciplined in our allocation of capital, and differentiating our
products and services through innovation. During 2019, our key enterprise priorities were to (i) deliver integration value from the First Data acquisition; (ii) continue to build high-quality revenue while meeting our earnings goals; (iii) enhance client relationships with an emphasis on digital and payment solutions; and (iv) deliver innovation and integration which enables differentiated value for our clients.
Industry Trends
The global payments landscape continues to evolve, with rapidly advancing technologies and a steady expansion of digital payments, e-commerce and innovation in real-time payments infrastructure. Because of this growth, competition also continues to evolve. Business and consumer expectations continue to rise, with a focus on convenience and security. To meet these expectations, payments companies are focused on modernizing their technology, utilizing data and enhancing the customer experience.
Financial Institutions
The market for products and services offered by financial institutions continues to evolve rapidly. The traditional financial industry and other market entrants regularly introduce and implement new payment, deposit, risk management, lending and investment products, and the distinctions among the products and services traditionally offered by different types of financial institutions continue to narrow as they seek to serve the same customers. At the same time, the evolving global regulatory and cybersecurity landscape has continued to create a challenging operating environment for financial institutions. These conditions are driving heightened interest in solutions that help financial institutions win and retain customers, generate incremental revenue, comply with regulations and enhance operating efficiency. Examples of these solutions include electronic payments and delivery methods such as internet, mobile and tablet banking, sometimes referred to as “digital channels.”
The focus on digital channels by both financial institutions and their customers, as well as the growing volume and types of payment transactions in the marketplace, continues to elevate the data and transaction processing needs of financial institutions. We expect that financial institutions will continue to invest significant capital and human resources to process transactions, manage information, maintain regulatory compliance and offer innovative new services to their customers in this rapidly evolving and competitive environment. We anticipate that we will benefit over the long term from the trend of financial institutions moving from in-house technology to outsourced solutions as they seek to remain current on technology changes in an evolving marketplace. We believe that economies of scale in developing and maintaining the infrastructure, technology, products, services and networks necessary to be competitive in such an environment are essential to justify these investments, and we anticipate that demand for products that facilitate customer interaction with financial institutions, including electronic transactions through digital channels, will continue to increase, which we expect to create revenue opportunities for us.
In addition to the trends described above, the financial institutions marketplace has experienced change in composition as well. During the past 25 years, the number of financial institutions in the United States has declined at a relatively steady rate of approximately 3% per year, primarily as a result of voluntary mergers and acquisitions. Rather than reducing the overall market, these consolidations have transferred accounts among financial institutions. If a client loss occurs due to merger or acquisition, we receive a contract termination fee based on the size of the client and how early in the contract term the contract is terminated. These fees can vary from period to period. Our focus on long-term client relationships and recurring, transaction-oriented products and services has also reduced the impact that consolidation in the financial services industry has had on us. We believe that the integration of our products and services creates a compelling value proposition for our clients by providing, among other things, new sources of revenue and opportunities to reduce their costs. Furthermore, we believe that our sizable and diverse client base, combined with our position as a leading provider of non-discretionary, recurring revenue-based products and services, gives us a solid foundation for growth.
Merchants
The rapid growth in and globalization of mobile and e-commerce, driven by consumers’ desire for simpler, more efficient shopping experiences, has created an opportunity for merchants to reach consumers in high-growth online and mobile settings, which often requires a merchant acquiring provider to enable and optimize the acceptance of payments. Merchants are demanding simpler, integrated and modern POS systems to help manage their everyday business operations. When combined with the ever-increasing ways a consumer can pay for goods and services, merchants have sought modern POS systems to streamline this complexity. Furthermore, merchants can now search, discover, compare, purchase and even install a new POS system through direct, digital-only experiences. This direct, digital-only channel is quickly becoming a source of new merchant acquisition opportunities, especially with respect to smaller merchants.
Additionally, there are numerous software-as-a-service (“SaaS”) solutions in the industry, many of which have chosen to integrate merchant acquiring within their software in a way to further monetize their client relationships. SaaS solutions that
integrate payments are often referred to as Independent Software Vendors, or ISVs, and we believe there are thousands of these potential distribution partnership opportunities available to us.
Critical Accounting Policies and Estimates
Our consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States, which require management to make estimates, judgments and assumptions that affect the reported amount of assets, liabilities, revenue and expenses. We continually evaluate the accounting policies and estimates that we use to prepare our consolidated financial statements, including for recently adopted accounting pronouncements, and base our estimates on historical experience and assumptions that we believe are reasonable in light of current circumstances. Actual amounts and results could differ materially from these estimates.
Acquisitions
From time to time, we make strategic acquisitions that may have a material impact on our consolidated results of operations or financial position. We allocate the purchase price of acquired businesses to the assets acquired and liabilities assumed in the transaction at their estimated fair values. The estimates used to determine the fair value of long-lived assets, such as intangible assets, can be complex and require significant judgments. We use information available to us to make fair value determinations and engage independent valuation specialists, when necessary, to assist in the fair value determination of significant acquired long-lived assets. The determination of fair value requires estimates about discount rates, growth and retention rates, royalty rates, expected future cash flows and other future events that are judgmental in nature. While we use our best estimates and assumptions as a part of the purchase price allocation process, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of income. We are also required to estimate the useful lives of intangible assets to determine the amount of acquisition-related intangible asset amortization expense to record in future periods. We periodically review the estimated useful lives assigned to our intangible assets to determine whether such estimated useful lives continue to be appropriate.
Goodwill and Acquired Intangible Assets
We review the carrying value of goodwill for impairment annually, or more frequently if events or circumstances indicate the carrying value may not be recoverable. Goodwill is tested for impairment at a reporting unit level, determined to be at an operating segment level or one level below. When reviewing goodwill for impairment, we consider the amount of excess fair value over the carrying value of each reporting unit, the period of time since a reporting unit’s last quantitative test, the extent a reorganization or disposition changes the composition of one or more of our reporting units, and other factors to determine whether or not to first perform a qualitative test. When performing a qualitative test, we assess numerous factors to determine whether it is more likely than not that the fair value of our reporting units are less than their respective carrying values. Examples of qualitative factors that we assess include our share price, our financial performance, market and competitive factors in our industry, and other events specific to our reporting units. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we perform a quantitative impairment test.
The quantitative impairment test compares the fair value of the reporting unit to its carrying value, and recognizes an impairment loss for the amount by which a reporting unit’s carrying amount exceeds its fair value, without exceeding the total amount of goodwill allocated to that reporting unit. We determine the fair value of a reporting unit based primarily on the present value of estimated future cash flows. Determining the fair value of a reporting unit involves judgment and the use of significant estimates and assumptions, which include assumptions regarding the revenue growth rates and operating margins used to calculate estimated future cash flows, risk-adjusted discount rates and future economic and market conditions.
Our most recent impairment assessment of our reporting units in the fourth quarter of 2019 determined that our goodwill was not impaired as the estimated fair values of the respective reporting units substantially exceeded the carrying values except for the reporting units related to the acquisition of First Data. An assessment of qualitative factors, including the proximity of the acquisition date to the year end reporting period, did not identify indicators of impairment in relation to the First Data goodwill. Goodwill recorded as a result of our acquisition of First Data is based on preliminary estimates and assumptions using information available at the reporting date, and therefore the potential for measurement period adjustments exists based on our continuing review of matters related to the acquisition. We have no accumulated goodwill impairment through December 31, 2019. See Note 8 for additional information.
We review acquired intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. Recoverability is assessed by comparing the carrying amount of the asset to the undiscounted future cash flows expected to be generated by the asset. Measurement of any impairment loss is based on
estimated fair value. Given the significance of our goodwill and intangible asset balances, an adverse change in fair value could result in an impairment charge, which could be material to our consolidated financial statements.
Revenue Recognition
We generate revenue from the delivery of processing, service and product solutions. Revenue is measured based on consideration specified in a contract with a customer, and excludes any amounts collected on behalf of third parties. We recognize revenue when we satisfy a performance obligation by transferring control over a product or service to a customer which may be at a point in time or over time. As a practical expedient, we do not adjust the transaction price for the effects of a significant financing component if, at contract inception, the period between customer payment and the transfer of goods or services is expected to be one year or less. Contracts with customers are evaluated on a contract-by-contract basis as contracts may include multiple types of goods and services as described below.
Processing and Services
Processing and services revenue is generated from account- and transaction-based fees for data processing, transaction processing, merchant acquiring and e-commerce, electronic billing and payment services, electronic funds transfer and debit processing services; consulting and professional services; and software maintenance for ongoing client support.
We recognize processing and services revenues in the period in which the specific service is performed unless they are not deemed distinct from other goods or services in which revenue would then be recognized as control is transferred of the combined goods and services. Our arrangements for processing and services typically consist of an obligation to provide specific services to our customers on a when and if needed basis (a stand-ready obligation) and revenue is recognized from the satisfaction of the performance obligations in the amount billable to the customer. These services are typically provided under a fixed or declining (tier-based) price per unit based on volume of service; however, pricing for services may also be based on minimum monthly usage fees. Fees for our processing and services arrangements are typically billed and paid on a monthly basis.
Product
Product revenue is generated from integrated print and card production sales, as well as software license sales. For software license agreements that are distinct, we recognize software license revenue upon delivery, assuming a contract is deemed to exist. Revenue for arrangements with customers that include significant customization, modification or production of software such that the software is not distinct is typically recognized over time based upon efforts expended, such as labor hours, to measure progress towards completion. For arrangements involving hosted licensed software for the customer, a software element is considered present to the extent the customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty and it is feasible for the customer to either operate the software on their own hardware or contract with another vendor to host the software.
We also sell or lease hardware (POS devices) and other peripherals as part of our contracts with customers. Hardware typically consists of terminals or Clover® devices. We do not manufacture hardware, rather we purchase hardware from third-party vendors and hold such hardware in inventory until purchased by a customer. We account for sales of hardware as a separate performance obligation and recognize the revenue at its standalone selling price when the customer obtains control of the hardware.
Significant Judgments
We use the following methods, inputs, and assumptions in determining amounts of revenue to recognize. For multi-element arrangements, we account for individual goods or services as a separate performance obligation if they are distinct, the good or service is separately identifiable from other items in the arrangement, and if a customer can benefit from it on its own or with other resources that are readily available to the customer. If these criteria are not met, the promised goods or services are accounted for as a combined performance obligation. Determining whether goods or services are distinct performance obligations that should be accounted for separately may require significant judgment.
Technology or service components from third parties are frequently embedded in or combined with our applications or service offerings. Whether we recognize revenue based on the gross amount billed to a customer or the net amount retained involves judgment that depends on the relevant facts and circumstances including the level of contractual responsibilities and obligations for delivering solutions to end customers.
The transaction price is determined based on the consideration to which we will be entitled in exchange for transferring products or services to the customer. We include any fixed charges within our contracts as part of the total transaction price. To the extent that variable consideration is not constrained, we include an estimate of the variable amount, as appropriate, within
the total transaction price and update our assumptions over the duration of the contract. We may constrain the estimated transaction price in the event of a high degree of uncertainty as to the final consideration amount owed because of an extended length of time over which the fees may be adjusted. The transaction price (including any discounts) is allocated between distinct goods and services in a multi-element arrangement based on their relative standalone selling prices. For items that are not sold separately, we estimate the standalone selling prices using available information such as market conditions and internally approved pricing guidelines. Significant judgment may be required to determine standalone selling prices for each performance obligation and whether it depicts the amount we expect to receive in exchange for the related good or service.
Contract modifications occur when we and our customers agree to modify existing customer contracts to change the scope or price (or both) of the contract or when a customer terminates some, or all, of the existing services provided by us. When a contract modification occurs, it requires us to exercise judgment to determine if the modification should be accounted for as (i) a separate contract, (ii) the termination of the original contract and creation of a new contract, or (iii) a cumulative catch up adjustment to the original contract. Further, contract modifications require the identification and evaluation of the performance obligations of the modified contract, including the allocation of revenue to the remaining performance obligations and the period of recognition for each identified performance obligation.
Additional information about our revenue recognition policies is included within Note 3 to the consolidated financial statements.
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, including our increased global footprint. Judgment is also required in assessing the timing and amounts of deductible and taxable items. We establish a liability for known tax exposures relating to deductions, transactions, and other matters involving some uncertainty as to the proper tax treatment of the item. In establishing a liability for known tax exposures, assumptions are made in determining whether, and the extent to which, a tax position will be sustained. A tax position is recognized only when it is more likely than not to be sustained upon examination by the relevant taxing authority, based on its technical merits. The amount of tax benefit recognized reflects the largest benefit that we believe is more likely than not to be realized upon ultimate settlement. As new information becomes available, we evaluate our tax positions and adjust our liability for known tax exposures as appropriate.
We, primarily through our First Data acquisition, maintain net operating loss carryforwards in various taxing jurisdictions, resulting in the establishment of 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; however, we 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 evidence regarding future sources of taxable income and available tax planning strategies. However, there could be a material impact to our effective tax rate if there is a significant change in our judgment. To the extent our judgment changes, the valuation allowances are then adjusted, generally through the provision for income taxes, in the period in which this determination is made.
Results of Operations
Components of Revenue and Expenses
The following summary describes the components of revenue and expenses as presented in our consolidated statements of income.
Processing and Services
Processing and services revenue, which in 2019 represented 84% of our total revenue, is primarily generated from account- and transaction-based fees under multi-year contracts. Processing and services revenue is most reflective of our business performance as a significant amount of our total operating profit is generated by these services. Cost of processing and services includes costs directly associated with providing services to clients and includes the following: personnel; equipment and data communication; infrastructure costs, including costs to maintain software applications; client support; certain depreciation and amortization; and other operating expenses.
Product
Product revenue, which in 2019 represented 16% of our total revenue, is primarily derived from integrated print and card production sales, as well as software license sales and hardware (POS devices) sales. Cost of product includes costs directly associated with the products sold and includes the following: costs of materials and software development; personnel; infrastructure costs; certain depreciation and amortization; and other costs directly associated with product revenue.
Selling, General and Administrative Expenses
Selling, general and administrative expenses primarily consist of: salaries, wages, commissions and related expenses paid to sales personnel, administrative employees and management; advertising and promotional costs; certain depreciation and amortization; and other selling and administrative expenses.
Financial Results
The following table presents certain amounts included in our consolidated statements of income, the relative percentage that those amounts represent to revenue and the change in those amounts from year-to-year. This information should be read together with the consolidated financial statements and accompanying notes. The financial results presented below have been affected by the First Data and other acquisitions, dispositions, transactional gains recorded by our unconsolidated affiliates, debt financing activities, foreign currency fluctuations, and by the Tax Cuts and Jobs Act enacted in December 2017. In addition, effective January 1, 2018, we adopted ASU No. 2014-09, Revenue from Contracts with Customers, and its related amendments using the modified retrospective transition approach applied to all contracts. Under this transition approach, prior period amounts have not been restated.
| (In millions) | Percentage of Revenue (1) | Increase (Decrease) | ||||||||||||||||||||||||||||||||
| Year ended December 31, | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 | ||||||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||||||||||
| Processing and services | $ | 8,573 | $ | 4,975 | $ | 4,833 | 84.2 | % | 85.4 | % | 84.8 | % | $ | 3,598 | 72 | % | $ | 142 | 3 | % | ||||||||||||||
| Product | 1,614 | 848 | 863 | 15.8 | % | 14.6 | % | 15.2 | % | 766 | 90 | % | (15 | ) | (2 | )% | ||||||||||||||||||
| Total revenue | 10,187 | 5,823 | 5,696 | 100.0 | % | 100.0 | % | 100.0 | % | 4,364 | 75 | % | 127 | 2 | % | |||||||||||||||||||
| Expenses: | ||||||||||||||||||||||||||||||||||
| Cost of processing and services | 4,016 | 2,324 | 2,291 | 46.8 | % | 46.7 | % | 47.4 | % | 1,692 | 73 | % | 33 | 1 | % | |||||||||||||||||||
| Cost of product | 1,293 | 745 | 733 | 80.1 | % | 87.9 | % | 84.9 | % | 548 | 74 | % | 12 | 2 | % | |||||||||||||||||||
| Sub-total | 5,309 | 3,069 | 3,024 | 52.1 | % | 52.7 | % | 53.1 | % | 2,240 | 73 | % | 45 | 1 | % | |||||||||||||||||||
| Selling, general and administrative | 3,284 | 1,228 | 1,150 | 32.2 | % | 21.1 | % | 20.2 | % | 2,056 | 167 | % | 78 | 7 | % | |||||||||||||||||||
| Gain on sale of businesses | (15 | ) | (227 | ) | (10 | ) | (0.1 | )% | (3.9 | )% | (0.2 | )% | (212 | ) | n/m | 217 | n/m | |||||||||||||||||
| Total expenses | 8,578 | 4,070 | 4,164 | 84.2 | % | 69.9 | % | 73.1 | % | 4,508 | 111 | % | (94 | ) | (2 | )% | ||||||||||||||||||
| Operating income | 1,609 | 1,753 | 1,532 | 15.8 | % | 30.1 | % | 26.9 | % | (144 | ) | (8 | )% | 221 | 14 | % | ||||||||||||||||||
| Interest expense, net | (473 | ) | (189 | ) | (175 | ) | (4.6 | )% | (3.2 | )% | (3.1 | )% | 284 | 150 | % | 14 | 8 | % | ||||||||||||||||
| Debt financing activities | (47 | ) | (14 | ) | — | (0.5 | )% | (0.2 | )% | — | % | 33 | 236 | % | 14 | n/m | ||||||||||||||||||
| Other (expense) income | (6 | ) | 5 | 1 | (0.1 | )% | 0.1 | % | — | % | (11 | ) | n/m | 4 | n/m | |||||||||||||||||||
| Income from continuing operations before income taxes and income from investments in unconsolidated affiliates | 1,083 | 1,555 | 1,358 | 10.6 | % | 26.7 | % | 23.8 | % | (472 | ) | (30 | )% | 197 | 15 | % | ||||||||||||||||||
| Income tax provision | (198 | ) | (378 | ) | (158 | ) | (1.9 | )% | (6.5 | )% | (2.8 | )% | (180 | ) | (48 | )% | 220 | 139 | % | |||||||||||||||
| Income from investments in unconsolidated affiliates | 29 | 10 | 32 | 0.3 | % | 0.2 | % | 0.6 | % | 19 | 190 | % | (22 | ) | (69 | )% | ||||||||||||||||||
| Income from continuing operations | 914 | 1,187 | 1,232 | 9.0 | % | 20.4 | % | 21.6 | % | $ | (273 | ) | (23 | )% | $ | (45 | ) | (4 | )% | |||||||||||||||
| Income from discontinued operations, net of income taxes | — | — | 14 | — | % | — | % | 0.2 | % | — | — | % | (14 | ) | n/m | |||||||||||||||||||
| Net income | 914 | 1,187 | 1,246 | 9.0 | % | 20.4 | % | 21.9 | % | $ | (273 | ) | (23 | )% | $ | (59 | ) | (5 | )% | |||||||||||||||
| Less: Net income attributable to noncontrolling interests | 21 | — | — | 0.2 | % | — | % | — | % | 21 | n/m | — | — | % | ||||||||||||||||||||
| Net income attributable to Fiserv, Inc. | $ | 893 | $ | 1,187 | $ | 1,246 | 8.8 | % | 20.4 | % | 21.9 | % | $ | (294 | ) | (25 | )% | $ | (59 | ) | (5 | )% |
| (1) | Percentage of revenue is calculated as the relevant revenue, expense, income or loss amount divided by total revenue, except for cost of processing and services and cost of product amounts, which are divided by the related component of revenue. |
| (In millions) | ||||||||||||||||||||||||
| Year ended December 31, | First Data | Payments | Financial | Corporate and Other | Total | |||||||||||||||||||
| Total revenue: | ||||||||||||||||||||||||
| 2019 | $ | 4,078 | $ | 3,744 | $ | 2,407 | $ | (42 | ) | $ | 10,187 | |||||||||||||
| 2018 | — | 3,467 | 2,395 | (39 | ) | 5,823 | ||||||||||||||||||
| 2017 | — | 3,234 | 2,530 | (68 | ) | 5,696 | ||||||||||||||||||
| Revenue growth: | ||||||||||||||||||||||||
| 2019 | $ | 4,078 | $ | 277 | $ | 12 | $ | (3 | ) | $ | 4,364 | |||||||||||||
| 2019 percentage | 8 | % | 1 | % | 75 | % | ||||||||||||||||||
| 2018 | $ | — | $ | 233 | $ | (135 | ) | $ | 29 | $ | 127 | |||||||||||||
| 2018 percentage | 7 | % | (5 | )% | 2 | % | ||||||||||||||||||
| Operating income: | ||||||||||||||||||||||||
| 2019 | $ | 1,031 | $ | 1,252 | $ | 805 | $ | (1,479 | ) | $ | 1,609 | |||||||||||||
| 2018 | — | 1,122 | 798 | (167 | ) | 1,753 | ||||||||||||||||||
| 2017 | — | 1,034 | 849 | (351 | ) | 1,532 | ||||||||||||||||||
| Operating income growth: | ||||||||||||||||||||||||
| 2019 | $ | 1,031 | $ | 130 | $ | 7 | $ | (1,312 | ) | $ | (144 | ) | ||||||||||||
| 2019 percentage | 12 | % | 1 | % | (8 | )% | ||||||||||||||||||
| 2018 | $ | — | $ | 88 | $ | (51 | ) | $ | 184 | $ | 221 | |||||||||||||
| 2018 percentage | 9 | % | (6 | )% | 14 | % | ||||||||||||||||||
| Operating margin: | ||||||||||||||||||||||||
| 2019 | 25.3 | % | 33.4 | % | 33.5 | % | 15.8 | % | ||||||||||||||||
| 2018 | — | % | 32.3 | % | 33.3 | % | 30.1 | % | ||||||||||||||||
| 2017 | — | % | 32.0 | % | 33.5 | % | 26.9 | % | ||||||||||||||||
| Operating margin growth: (1) | ||||||||||||||||||||||||
| 2019 | 110 | bps | 20 | bps | (1,430 | ) | bps | |||||||||||||||||
| 2018 | 30 | bps | (20 | ) | bps | 320 | bps |
| (1) | Represents the basis point growth or decline in operating margin. |
Operating margin percentages are calculated using actual, unrounded amounts.
Total Revenue
Total revenue increased $4,364 million, or 75%, in 2019 and increased $127 million, or 2%, in 2018 compared to the prior years. The increase in 2019 was primarily driven by the incremental revenue from the First Data acquisition, which contributed $4,078 million of revenue during the year.
Revenue in our First Data segment was comprised of $2,520 million, $927 million, and $631 million from our Global Business Solutions, Global Financial Solutions, and Network & Security Solutions businesses, respectively, since the date of acquisition.
Revenue in our Payments segment increased $277 million, or 8%, in 2019 and increased $233 million, or 7%, in 2018 compared to the prior years. Revenue from acquired businesses contributed 4% and 2% to Payments segment revenue growth in 2019 and 2018, respectively. The remaining revenue growth in our Payments segment was driven by growth in our recurring revenue businesses, with our card services and electronic payments businesses contributing 2% and 1%, respectively, in each of 2019 and 2018, and our biller solutions business contributing 1% in 2018.
Revenue in our Financial segment increased $12 million, or 1%, in 2019 and decreased $135 million, or 5%, in 2018 compared to the prior years. Financial segment revenue growth in both 2019 and 2018 was driven by growth in our bank solutions business from new business, customer migrations from in-house technology to outsourced solutions and growth with existing customers across a range of products. Dispositions, including the Lending Solutions business, reduced Financial segment revenue growth by 2% and 9% in 2019 and 2018, respectively, compared to the prior years.
Revenue at Corporate and Other was relatively consistent in 2019 and 2018. Revenue at Corporate and Other increased $29 million from 2017 to 2018, primarily due to transition services revenue from the Lending Joint Ventures, which commenced in late March 2018.
Total Expenses
Total expenses increased $4,508 million, or 111%, and decreased $94 million, or 2%, in 2019 and 2018, respectively, compared to the prior years. Total expenses as a percentage of total revenue was 84.2%, 69.9% and 73.1% in 2019, 2018 and 2017, respectively. Total expenses in 2019 include the expenses for First Data since the acquisition date, resulting in the overall significant increase in expenses compared to prior years. Total expenses and total expenses as a percentage of total revenue were reduced by the $227 million gain on sale of a 55% interest of our Lending Solutions business in 2018.
Cost of processing and services as a percentage of processing and services revenue was 46.8%, 46.7% and 47.4% in 2019, 2018 and 2017, respectively. Cost of processing and services as a percentage of processing and services revenue was favorably impacted by operating leverage in our recurring revenue businesses in both 2019 and 2018. This included improvements of approximately 50 basis points and 80 basis points from scalable revenue growth in our Payments segment in 2019 and 2018, respectively, and approximately 60 basis points in 2018 from our account processing businesses, driven by product mix and expense management. Offsetting this reduction, cost of processing and services as a percentage of processing and services revenue increased in 2019 by approximately 70 basis points from expenses shifting from cost of product to cost of processing as financial institutions continue to move from in-house technology to outsourced solutions, and by approximately 60 basis points from a non-cash impairment charge related to an international core processing platform. Client-focused, incremental investments in 2018 increased cost of processing and services as a percentage of processing and services revenue by approximately 50 basis points compared to 2019 and 2017.
Cost of product as a percentage of product revenue was 80.1%, 87.9% and 84.9% in 2019, 2018 and 2017, respectively. The reduction in cost of product as a percentage of product revenue in 2019 was driven by approximately 700 basis points from the First Data acquisition and by approximately 400 basis points due to expenses shifting from cost of product to cost of processing and services as financial institutions continue to move from in-house technology to outsourced solutions. Cost of product as a percentage of product revenue increased by approximately 300 basis points and 130 basis points in 2019 and 2018, respectively, from a decrease in higher-margin software license revenue. The remaining increase in 2018 compared to 2017 was related to additional expenses associated with product development.
Selling, general and administrative expenses as a percentage of total revenue was 32.2%, 21.1% and 20.2% in 2019, 2018 and 2017, respectively. The increase in selling, general and administrative expenses as a percentage of total revenue in 2019 was due to increased costs, including acquisition, integration and acquired intangible asset amortization, associated with the First Data acquisition. Selling, general and administrative expenses as a percentage of total revenue increased in 2018 compared to the prior year by approximately 50 basis points from the disposition of a 55% interest of our Lending Solutions business and by approximately 30 basis points from increased costs associated with acquisitions.
The gains on sale of businesses of $15 million, $227 million and $10 million in 2019, 2018 and 2017, respectively, primarily resulted from the sale of a 55% interest of our Lending Solutions business, including contingent consideration received in 2019.
Operating Income and Operating Margin
Total operating income decreased $144 million, or 8%, in 2019 and increased $221 million, or 14%, in 2018 compared to the prior years. Operating income in our First Data segment of $1,031 million, at an operating margin of 25.3%, in 2019 was incremental to our results due to the acquisition closing on July 29, 2019. Total operating margin decreased to 15.8% in 2019 from 30.1% in 2018 and 26.9% in 2017.
Operating income in our Payments segment increased $130 million, or 12%, in 2019 and increased $88 million, or 9%, in 2018 compared to the prior years. Operating margin was 33.4%, 32.3% and 32.0% in 2019, 2018 and 2017, respectively, increasing 110 basis points in 2019 and 30 basis points in 2018 compared to the prior years. Scalable revenue growth in our recurring revenue businesses positively impacted Payments segment operating margin by approximately 100 basis points and 120 basis points in 2019 and 2018, respectively. Payments segment operating margin improvement was partially offset by approximately 50 basis points in 2019 and 30 basis points in 2018 as a result of acquisitions, and by approximately 50 basis points in 2018 from client-focused incremental investments.
Operating income in our Financial segment increased $7 million, or 1%, in 2019 and decreased $51 million, or 6%, in 2018 compared to the prior years. Operating margin was 33.5%, 33.3% and 33.5% in 2019, 2018 and 2017, respectively, increasing 20 basis points in 2019 and decreasing 20 basis points in 2018 compared to the prior years. Financial segment operating margin improvement in 2019 was primarily due to expense reduction efforts in our international business of approximately 100 basis
points, largely offset by approximately 80 basis points from a reduction in higher-margin software license revenue. Financial segment operating margin in 2018 was reduced by approximately 130 basis points due to the disposition of a 55% interest of our Lending Solutions business and 20 basis points from client-focused incremental investments, partially offset by contributions of approximately 130 basis points from our account processing businesses related to product mix and expense management.
The operating loss in Corporate and Other increased $1,312 million and decreased $184 million in 2019 and 2018, respectively, compared to the prior years. The increase in Corporate and Other operating loss in 2019 was due to the acquisition of First Data, including amortization of acquired intangible assets of $633 million, acquisition and integration related costs of $242 million, and other First Data related corporate expenses since the date of acquisition. Corporate and Other was favorably impacted by gains of $15 million, $227 million and $10 million from sales of businesses in 2019, 2018 and 2017, respectively, and negatively impacted in 2019 by a $48 million non-cash impairment charge related to an international core processing platform. The remaining operating loss in Corporate and Other in 2018 compared to 2017 was primarily impacted by increased professional services expenses for data center consolidation and acquisition integration activities.
Interest Expense, Net
Interest expense, net increased $284 million, or 150%, in 2019 and increased $14 million, or 8%, in 2018 compared to the prior years due to the June 2019 issuance of $9.0 billion of fixed-rate senior notes, the July 2019 issuance of €1.5 billion and £1.05 billion of fixed-rate senior notes and the $5.0 billion of term loan borrowings that were incurred for the purpose of funding the repayment of certain indebtedness of First Data and its subsidiaries on the closing date of the acquisition, as well as the September 2018 issuance of $2.0 billion of fixed-rate notes. See below under “Indebtedness” for a description of our financing related to the First Data acquisition.
Debt Financing Activities
In connection with the definitive merger agreement entered into on January 16, 2019 to acquire First Data, we entered into a bridge facility commitment letter providing for a 364-day senior unsecured bridge term loan facility in an aggregate principal amount of $17.0 billion for the purpose of refinancing certain indebtedness of First Data on the closing date of the acquisition. We recorded $98 million of expense for the year ended December 31, 2019 associated with the bridge term loan facility and other refinancing and related activities in connection with the acquisition of First Data. In addition, during the year ended December 31, 2019, we recorded $50 million of net foreign currency transaction gains related to our foreign currency-denominated debt. See below under “Indebtedness” for a description of our financing related to the First Data acquisition. In 2018, we completed a cash tender offer for and redemption of our then-outstanding $450 million aggregate principal amount of 4.625% senior notes due October 2020, which resulted in a pre-tax loss on early debt extinguishment of $14 million.
Income Tax Provision
Income tax provision as a percentage of income from continuing operations before income from investments in unconsolidated affiliates was 18.3%, 24.3% and 11.6% in 2019, 2018 and 2017, respectively. The decrease in the effective tax rate in 2019 compared to the prior year is primarily related to equity compensation-related tax benefits, as well as discrete benefits due to a loss from subsidiary restructuring. The effective tax rate in 2018 includes $77 million of income tax expense associated with the $227 million gain on the sale of a 55% interest of our Lending Solutions business. The rate in 2018 was also impacted by the enactment of the Tax Cuts and Jobs Act (the “Tax Act”) which, as further described below, reduced the U.S. federal corporate tax rate from 35 percent to 21 percent.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act. The Tax Act made broad changes to the U.S. tax code, including, but not limited to, (i) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent beginning in 2018; (ii) requiring companies to pay a one-time transition tax on certain un-repatriated earnings of foreign subsidiaries; (iii) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (iv) requiring U.S. federal taxable income to include certain earnings of controlled foreign corporations; and (v) creating a new limitation on deductible interest expense. The provisions of the Tax Act decreased our 2017 effective tax rate by 20.3%, primarily due to the re-evaluation of the net deferred tax liability to reflect the lower federal tax rate of 21 percent.
Income from Investments in Unconsolidated Affiliates
Our share of net income from affiliates accounted for using the equity method of accounting, including the Lending Joint Ventures and affiliates under the merchant bank alliance program from the acquisition of First Data, is reported as income from investments in unconsolidated affiliates and the related tax expense is reported within the income tax provision in the consolidated statements of income. Income from investments in unconsolidated affiliates, including acquired intangible asset
amortization from valuations in purchase accounting, was $29 million, $10 million and $32 million in 2019, 2018 and 2017, respectively. Income from investments in unconsolidated affiliates in 2017 includes our share of a net gain on the sale of a business at StoneRiver Group, L.P., a joint venture in which we own a 49% interest.
Income from Discontinued Operations
Income from discontinued operations in 2017 included a litigation settlement related to a prior disposition of $19 million, net of income tax of $7 million, and earnings related to an acquired business held for sale.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests relates to the ownership interest of our alliance partners in our consolidated results, obtained through the acquisition of First Data. For the year ended December 31, 2019, net income attributable to noncontrolling interests was $21 million.
Net Income Per Share - Diluted from Continuing Operations
Net income attributable to Fiserv, Inc. per share-diluted from continuing operations was $1.71, $2.87 and $2.86 in 2019, 2018 and 2017, respectively. Net income attributable to Fiserv, Inc. per share-diluted from continuing operations in 2019 included the results of operations of First Data from the date of the acquisition, along with transaction costs associated with the acquisition and acquired intangible asset amortization from the application of purchase accounting. Net income attributable to Fiserv, Inc. per share-diluted from continuing operations was favorably impacted in 2018 by a gain of $0.37 per share on the sale of a 55% interest of our Lending Solutions business. Net income attributable to Fiserv, Inc. per share-diluted from continuing operations was favorably impacted in 2017 by discrete income tax benefits associated with the Tax Act of $0.64 per share.
Liquidity and Capital Resources
General
Our primary liquidity needs in the ordinary course of business are to (i) fund normal operating expenses; (ii) meet the interest and principal requirements of our outstanding indebtedness; and (iii) fund capital expenditures and operating lease payments. We believe these needs will be satisfied using cash flow generated by our operations, along with our cash and cash equivalents of $893 million and available borrowings under our revolving credit facility of $3.3 billion at December 31, 2019. The following table summarizes our operating cash flow and capital expenditure amounts for the years ended December 31, 2019 and 2018, respectively.
| Year Ended December 31, | Increase (Decrease) | |||||||||||||
| (In millions) | 2019 | 2018 | $ | % | ||||||||||
| Net income | $ | 914 | $ | 1,187 | $ | (273 | ) | |||||||
| Depreciation and amortization | 1,778 | 556 | 1,222 | |||||||||||
| Net foreign currency gain on financing activities | (50 | ) | — | (50 | ) | |||||||||
| Share-based compensation | 229 | 73 | 156 | |||||||||||
| Deferred income taxes | 47 | 133 | (86 | ) | ||||||||||
| Gain on sale of businesses | (15 | ) | (227 | ) | 212 | |||||||||
| Income from investments in unconsolidated affiliates | (29 | ) | (10 | ) | (19 | ) | ||||||||
| Distributions from unconsolidated affiliates | 23 | 2 | 21 | |||||||||||
| Settlement of interest rate hedge contracts | (183 | ) | — | (183 | ) | |||||||||
| Non-cash impairment charges | 48 | 3 | 45 | |||||||||||
| Net changes in working capital and other | 33 | (165 | ) | 198 | ||||||||||
| Operating cash flow | $ | 2,795 | $ | 1,552 | $ | 1,243 | 80 | % | ||||||
| Capital expenditures | $ | 721 | $ | 360 | $ | 361 | 100 | % |
Our net cash provided by operating activities, or operating cash flow, was $2.80 billion in 2019, an increase of 80% compared with $1.55 billion in 2018. This increase was primarily attributable to improved operating results, the acquisition of First Data and favorable working capital fluctuations, including timing of interest payments and receivable collections. Net cash provided
by operating activities in 2019 also included a payment of $183 million associated with the settlement of treasury lock agreements related to First Data financing activities.
Our current policy is to use our operating cash flow primarily to fund capital expenditures, share repurchases, acquisitions and to repay debt rather than to pay dividends. Our capital expenditures were approximately 7% and 6% of our total revenue in 2019 and 2018, respectively.
Share Repurchases
We purchased $394 million and $1.91 billion of our common stock in 2019 and 2018, respectively. At December 31, 2019, we had approximately 21.8 million shares remaining under our current repurchase authorizations. Shares repurchased are generally held for issuance in connection with our equity plans.
Acquisitions and Dispositions
Acquisitions
On July 29, 2019, we completed the acquisition of First Data for a total purchase price of $46.5 billion by acquiring 100% of the First Data stock that was issued and outstanding as of the date of acquisition. As a result of the acquisition, First Data stockholders received 286 million shares of common stock of Fiserv, Inc., at an exchange ratio of 0.303 shares of Fiserv, Inc. for each share of First Data common stock, with cash paid in lieu of fractional shares. We also converted 15 million outstanding First Data equity awards into corresponding equity awards relating to common stock of Fiserv, Inc. in accordance with the exchange ratio. In addition, concurrent with the closing of the acquisition, we made a cash payment of $16.4 billion to repay existing First Data debt. We funded the transaction-related expenses and the repayment of First Data debt through a combination of available cash on-hand, proceeds from the issuance of senior notes and term loan and revolving credit facility borrowings.
In October 2018, we acquired the debit card processing, ATM Managed Services, and MoneyPass® surcharge-free network of Elan Financial Services, a unit of U.S. Bancorp, for approximately $659 million including post-closing working capital adjustments, estimated contingent consideration related to earn-out provisions and future payments under a transition services agreement in excess of estimated fair value. We funded this acquisition by utilizing existing availability under our revolving credit facility.
We completed four acquisitions in 2017 for an aggregate purchase price of $384 million, net of cash acquired, along with earn-out provisions. We funded these acquisitions by utilizing a combination of available cash and existing availability under our revolving credit facility.
Dispositions
On February 18, 2020, we completed the sale of a 60% controlling interest of our Investment Services business to a group of investors for gross proceeds of $591 million, resulting in an estimated pre-tax gain, including the remeasurement of the Company’s retained interest, of approximately $430 million. In connection with the acquisition of First Data, we acquired two businesses which we intended to sell. In October 2019, we completed the sales of these two businesses for aggregate proceeds of $133 million.
In March 2018, we sold a 55% interest of our Lending Solutions business, retaining 45% ownership interests in two joint ventures. We received gross sale proceeds of $419 million from the transactions. In August 2019, the Sagent Auto, LLC joint venture, formerly known as Fiserv Automotive Solutions, LLC, completed a merger with a third-party, resulting in a dilution of our ownership interest to 31% in the new combined entity, defi SOLUTIONS Group, LLC. In connection with the merger, Sagent Auto, LLC borrowed, in the aggregate, an additional $50 million on its variable-rate term loan facility and increased the notional amount of its variable-rate revolving credit facility by $10 million. We have guaranteed this incremental debt and do not anticipate that the joint venture will fail to fulfill its debt obligations. We recorded a $4 million liability for the estimated fair value of our obligations to stand ready to perform over term of the guarantees. Such guarantees will be amortized in future periods over the contractual term, based upon amounts to be received by us for the respective guarantees. We have guaranteed a total of $400 million and $45 million on the joint venture’s variable-rate term loan and revolving credit facilities, respectively. We have not made any payments under the guarantees, nor have we been called upon to do so.
In January 2018, we completed the sale of the retail voucher business acquired in our 2017 acquisition of Monitise for proceeds of £37 million ($50 million).
Indebtedness
Our debt consisted of the following at December 31:
| (In millions) | 2019 | 2018 | ||||||
| Short-term and current maturities of long-term debt: | ||||||||
| Lines of credit | $ | 150 | $ | — | ||||
| Finance lease and other financing obligations | 137 | 4 | ||||||
| Total short-term and current maturities of long-term debt | $ | 287 | $ | 4 | ||||
| Long-term debt: | ||||||||
| 2.7% senior notes due 2020 | $ | 850 | $ | 850 | ||||
| 4.75% senior notes due 2021 | 400 | 400 | ||||||
| 3.5% senior notes due 2022 | 700 | 700 | ||||||
| 3.8% senior notes due 2023 | 1,000 | 1,000 | ||||||
| 0.375% senior notes due 2023 | 559 | — | ||||||
| 2.75% senior notes due 2024 | 2,000 | — | ||||||
| 3.85% senior notes due 2025 | 900 | 900 | ||||||
| 2.25% senior notes due 2025 | 687 | — | ||||||
| 3.2% senior notes due 2026 | 2,000 | — | ||||||
| 1.125% senior notes due 2027 | 559 | — | ||||||
| 4.2% senior notes due 2028 | 1,000 | 1,000 | ||||||
| 3.5% senior notes due 2029 | 3,000 | — | ||||||
| 1.625% senior notes due 2030 | 559 | — | ||||||
| 3.0% senior notes due 2031 | 687 | — | ||||||
| 4.4% senior notes due 2049 | 2,000 | — | ||||||
| Receivable securitized loan | 500 | — | ||||||
| Term loan facility | 3,950 | — | ||||||
| Unamortized discount and deferred financing costs | (160 | ) | (29 | ) | ||||
| Revolving credit facility | 174 | 1,129 | ||||||
| Finance lease and other financing obligations | 247 | 5 | ||||||
| Total long-term debt | $ | 21,612 | $ | 5,955 |
At December 31, 2019, our debt consisted primarily of $16.9 billion of fixed rate senior notes and $4.0 billion of variable rate term loans. Interest on our U.S. dollar-denominated senior notes is paid semi-annually, while interest on our foreign currency-denominated senior notes is paid annually. Interest on our term loans is paid monthly. We were in compliance with all financial debt covenants during 2019. Additional information about our debt structure and associated instruments is included in Note 12 to the consolidated financial statements.
Bridge Term Loan Facility
On January 16, 2019, in connection with the definitive merger agreement to acquire First Data, we entered into a bridge facility commitment letter pursuant to which a group of financial institutions committed to provide a 364-day senior unsecured bridge term loan facility in an aggregate principal amount of $17.0 billion for the purpose of funding the repayment of certain indebtedness of First Data and its subsidiaries on the closing date of the acquisition of First Data, making cash payments in lieu of fractional shares as part of the acquisition consideration and paying fees and expenses related to the acquisition, the refinancing and the related transactions. We recorded $98 million of expenses, reported within debt financing activities in the consolidated statements of income, related to the bridge term loan facility during the year ended December 31, 2019. The aggregate commitments of $17.0 billion under the bridge facility commitment letter were replaced with a corresponding amount of permanent financing through the term loan credit agreement and issuance of senior notes, as described below, resulting in the termination of the bridge term loan facility effective July 1, 2019.
Senior Notes
On June 24, 2019, we completed an offering of $9.0 billion aggregate principal amount of senior notes comprised of $2.0 billion aggregate principal amount of 2.75% senior notes due in July 2024, $2.0 billion aggregate principal amount of 3.2%
senior notes due in July 2026, $3.0 billion aggregate principal amount of 3.5% senior notes due in July 2029 and $2.0 billion aggregate principal amount of 4.4% senior notes due in July 2049. The senior notes pay interest semi-annually on January 1 and July 1, commencing on January 1, 2020. The indentures governing the senior notes contain covenants that, among other matters, limit (i) our ability to consolidate or merge with or into, or convey, transfer or lease all or substantially all of our properties and assets to another person, (ii) our and certain of our subsidiaries’ ability to create or assume liens, and (iii) our and certain of our subsidiaries’ ability to engage in sale and leaseback transactions. We may, at our option, redeem the senior notes, in whole or in part, at any time prior to the applicable par call date.
In March 2019, we entered into treasury lock agreements (“Treasury Locks”), designated as cash flow hedges, in the aggregate notional amount of $5.0 billion to manage exposure to fluctuations in benchmark interest rates in anticipation of the issuance of fixed rate debt in connection with the refinancing of certain indebtedness of First Data and its subsidiaries. On June 24, 2019, concurrent with the issuance of the U.S. dollar-denominated senior notes described above, the Treasury Locks were settled resulting in a payment of $183 million that will be amortized to earnings over the terms of the originally forecasted interest payments.
On July 1, 2019, we completed an offering of €1.5 billion aggregate principal amount and £1.05 billion aggregate principal amount of senior notes comprised of €500 million aggregate principal amount of 0.375% senior notes due in July 2023, €500 million aggregate principal amount of 1.125% senior notes due in July 2027, €500 million aggregate principal amount of 1.625% senior notes due in July 2030, £525 million aggregate principal amount of 2.25% senior notes due in July 2025, and £525 million aggregate principal amount of 3.0% senior notes due in July 2031. The senior notes pay interest annually on July 1, commencing on July 1, 2020. The indentures governing the senior notes contain covenants that are substantially the same as those set forth in our U.S. dollar-denominated senior notes described above.
In connection with the anticipated issuance of the foreign currency-denominated senior notes described above, we entered into foreign exchange forward contracts in June 2019 to minimize foreign currency exposure to the Euro and British Pound upon settlement of the proceeds from the foreign currency-denominated senior notes. The foreign exchange forward contracts matured on July 1, 2019, concurrent with the closing of the offering of the foreign currency-denominated senior notes. We realized foreign currency transaction gains of $3 million, reported within debt financing activities in the consolidated statements of income during the year ended December 31, 2019, from these foreign exchange forward contracts. In addition, we held a portion of the proceeds from the issuance of these foreign currency-denominated senior notes in Euro- and British Pound-denominated cash and cash equivalents. We realized foreign currency transaction losses of $19 million, reported within debt financing activities in the consolidated statements of income during the year ended December 31, 2019, as a result of changes in the U.S. dollar equivalent of the Euro- and British Pound-denominated cash due to fluctuations in foreign currency exchange rates.
A portion of the net proceeds from the senior note offerings described above was used in June 2019 to repay outstanding borrowings totaling $790 million under our amended and restated revolving credit facility. On July 29, 2019, concurrent with the acquisition of First Data, we used the remaining net proceeds from the senior notes offerings described above, as well as the net proceeds of the term loan facility described below and a drawing on our revolving credit facility described below, to repay $16.4 billion of existing First Data debt and to pay fees and our expenses related to such repayment, the First Data acquisition and related transactions.
In September 2018, we completed an offering of $2.0 billion of senior notes comprised of $1.0 billion aggregate principal amount of 3.8% senior notes due in October 2023 and $1.0 billion aggregate principal amount of 4.2% senior notes due in October 2028. We used the net proceeds from such offering to repay the outstanding principal balance of $540 million under our then-existing term loan and the then-outstanding borrowings under our amended and restated revolving credit facility totaling $1.1 billion. In addition, we commenced a cash tender offer in September 2018 for any and all of our then-outstanding $450 million aggregate principal amount of 4.625% senior notes due October 2020. Upon expiration of the tender offer on September 26, 2018, $246 million was tendered. In October 2018, we retired the remaining outstanding $204 million aggregate principal amount of 4.625% senior notes. We recorded a pre-tax loss, reported within debt financing activities in the consolidated statements of income, on early debt extinguishment of $14 million during the year ended December 31, 2018 related to these activities.
Our 3.8% senior notes due in October 2023 and 4.2% senior notes due in October 2028 described above pay interest semi-annually on April 1 and October 1, commencing on April 1, 2019. In addition, we have outstanding 2.7% senior notes due in June 2020, 3.85% senior notes due in June 2025, 4.75% senior notes due in June 2021 and 3.5% senior notes due in October 2022. Our 2.7% senior notes due in June 2020 and 3.85% senior notes due in June 2025 pay interest at the stated rates semi-annually on June 1 and December 1 of each year. Our 4.75% senior notes due in June 2021 pay interest at the stated rate on June 15 and December 15 of each year. Our 3.5% senior notes due in October 2022 pay interest at the stated rate on April 1 and October 1 of each year. The interest rate applicable to the senior notes described in this paragraph is subject to an increase of up
to two percent in the event that the credit rating assigned to such notes is downgraded below investment grade. The indentures governing the senior notes described in this paragraph contain covenants that, among other matters, limit (i) our ability to consolidate or merge with or into, or convey, transfer or lease all or substantially all of our properties and assets to, another person, (ii) our and certain of our subsidiaries’ ability to create or assume liens, and (iii) our and certain of our subsidiaries’ ability to engage in sale and leaseback transactions. At December 31, 2019, the 2.7% notes due in June 2020 were classified in the consolidated balance sheet as long-term as we have the intent to refinance this debt on a long-term basis and the ability to do so under our revolving credit facility.
Term Loan Facility
On February 15, 2019, we entered into a new term loan credit agreement with a syndicate of financial institutions pursuant to which such financial institutions committed to provide us with a senior unsecured term loan facility in an aggregate principal amount of $5.0 billion, consisting of $1.5 billion in commitments to provide loans with a three-year maturity and $3.5 billion in commitments to provide loans with a five-year maturity. On July 26, 2019, we entered into an amendment to our term loan credit facility to (i) remove as a condition precedent to borrowings on the closing date of the acquisition of First Data the requirement that amounts under the Receivables Financing Agreement, as defined below, be repaid and the related liens and guarantees be terminated in order to allow First Data’s accounts receivable securitization program, as described below, to remain in place following consummation of the acquisition and (ii) amend the debt and liens covenants to increase our flexibility to enter into receivables financing arrangements in the future. On July 29, 2019, concurrent with the closing of the acquisition of First Data, the term loan credit agreement was funded. Loans drawn under the term loan facility are subject to amortization at a quarterly rate of 1.25% for the first eight quarters and 1.875% each quarter thereafter (with loans outstanding under the five-year tranche subject to amortization at a quarterly rate of 2.5% after the fourth anniversary of the commencement of amortization), with accrued and unpaid amortization amounts required to be paid on the last business day in December of each year. Borrowings under the term loan facility bear interest at variable rates based on LIBOR or on a base rate, plus in each case, a specified margin based on our long-term debt rating in effect from time to time. The variable interest rate on the term loan facility borrowings was 3.0% at December 31, 2019. We were also required to pay a ticking fee that accrued on the aggregate undrawn commitments under the term loan facility at a per annum rate based upon our long-term debt rating in effect from time to time. The term loan credit agreement contains affirmative, negative and financial covenants, and events of default, that are substantially the same as those set forth in our existing amended revolving credit facility, as described below.
Revolving Credit Facility
In September 2018, we entered into an amended and restated revolving credit agreement that restated our then-existing revolving credit agreement with a syndicate of banks and extended its maturity from April 2020 to September 2023. There are no significant commitment fees and no compensating balance requirements. The amended and restated revolving credit facility contained various restrictions and covenants that required us, among other things, to (i) limit our consolidated indebtedness as of the end of each fiscal quarter to no more than three and one-half times our consolidated net earnings before interest, taxes, depreciation, amortization, non-cash charges and expenses and certain other adjustments (“EBITDA”) during the period of four fiscal quarters then ended, subject to certain exceptions, and (ii) maintain consolidated EBITDA of at least three times our consolidated interest expense as of the end of each fiscal quarter for the period of four fiscal quarters then ended.
On February 6, 2019, we entered into an amendment to our amended and restated revolving credit facility to (i) amend the maximum leverage ratio covenant to permit us to elect to increase the permitted maximum leverage ratio from three and one-half times our consolidated EBITDA to either four times or four and one-half times our consolidated EBITDA for a specified period following certain acquisitions and (ii) permit us to make drawings under the revolving credit facility on the closing date of our acquisition of First Data subject to only limited conditions. In November 2019, we elected to increase the permitted maximum leverage ratio to four times our consolidated EBITDA pursuant to the terms of the amendment described above. In addition, on February 15, 2019, we entered into a second amendment to our existing revolving credit agreement in order to increase the aggregate commitments available thereunder by $1.5 billion to $3.5 billion of total capacity, and to make certain additional amendments to facilitate the operation of the combined business following the acquisition of First Data. Further on July 26, 2019, we entered into a third amendment to our existing revolving credit agreement to (i) remove as a condition precedent to borrowings on the closing date of the acquisition of First Data the requirement that amounts under the Receivables Financing Agreement, as defined below, be repaid, and (ii) amend the debt and liens covenants to increase our flexibility to enter into receivables financing arrangements in the future. The increased commitments and amendments contemplated by the second and third amendments to the revolving credit facility became effective upon the closing of the acquisition of First Data. Borrowings under the amended and restated revolving credit facility continue to bear interest at a variable rate based on LIBOR or on a base rate, plus in each case a specified margin based on our long-term debt rating in effect from time to time. The variable interest rate on the revolving credit facility borrowings was 2.68% at December 31, 2019.
Foreign Lines of Credit and Other Arrangements
In connection with the acquisition of First Data, we assumed certain short-term lines of credit with foreign banks and alliance partners primarily to fund settlement activity. These arrangements are primarily associated with international operations and are in various functional currencies, the most significant of which are the Australian dollar, Polish zloty, Euro and Argentine peso. We had amounts outstanding on these lines of credit totaling $150 million at a weighted-average interest rate of 13.4% at December 31, 2019.
Receivable Securitized Loan
In connection with the acquisition of First Data, we acquired a consolidated wholly-owned subsidiary, First Data Receivables, LLC (“FDR”). FDR is a party to certain receivables financing arrangements, including an agreement (“Receivables Financing Agreement”) with certain financial institutions and other persons from time to time party thereto as lenders and group agents, pursuant to which certain of our wholly-owned subsidiaries have agreed to transfer and contribute receivables to FDR, and FDR in turn may obtain borrowings from the financial institutions and other lender parties to the Receivables Financing Agreement secured by liens on those receivables. FDR’s assets are not available to satisfy the obligations of any other of our entities or affiliates, and FDR’s creditors would be entitled, upon its liquidation, to be satisfied out of FDR’s assets prior to any assets or value in FDR becoming available to us. The receivables held by FDR are recorded within trade accounts receivable, net in our consolidated balance sheet. At December 31, 2019, FDR held $773 million in receivables as part of the securitization program. The maximum borrowing capacity, subject to collateral availability, under the Receivables Financing Agreement at December 31, 2019 was $500 million. FDR utilized the receivables as collateral in borrowings of $500 million, at an average interest rate of 2.61%, at December 31, 2019. The term of the Receivables Financing Agreement is through July 2022.
Other
Access to capital markets impacts our cost of capital, our ability to refinance maturing debt and our ability to fund future acquisitions. Our ability to access capital on favorable terms depends on a number of factors, including general market conditions, interest rates, credit ratings on our debt securities, perception of our potential future earnings and the market price of our common stock. As of December 31, 2019, we had a corporate credit rating of Baa2 with a stable outlook from Moody’s Investors Service, Inc. (“Moody’s”) and BBB with a stable outlook from Standard & Poor’s Ratings Services (“S&P”) on our senior unsecured debt securities.
The interest rates payable on certain of our senior notes, our term loans and our revolving credit facility are subject to adjustment from time to time if Moody’s or S&P changes the debt rating applicable to the notes. If the ratings from Moody’s or S&P decrease below investment grade, the per annum interest rates on the senior notes are subject to increase by up to two percent. In no event will the total increase in the per annum interest rates exceed two percent above the original interest rates, nor will the per annum interest rate be reduced below the original interest rate applicable to the senior notes.
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. At December 31, 2019 and 2018, we held $893 million and $415 million in cash and cash equivalents, respectively.
The table below details the cash and cash equivalents at December 31:
| 2019 | 2018 | ||||||||||||||||||||||
| (In millions) | Domestic | International | Total | Domestic | International | Total | |||||||||||||||||
| Available | $ | 383 | $ | 208 | $ | 591 | $ | 356 | $ | 59 | $ | 415 | |||||||||||
| Unavailable | 130 | (1) | 172 | (2) | 302 | — | — | — | |||||||||||||||
| Total | $ | 513 | $ | 380 | $ | 893 | $ | 356 | $ | 59 | $ | 415 |
| (1) | Represents cash held by certain domestic entities that is not available to fund operations outside of these entities unless the Board of Directors for said entities declares a dividend. In addition, one of these entities is subject to regulatory capital requirements that must be satisfied before a dividend may be declared. |
| (2) | Distributions of these funds are subject to certain of our joint ventures’ Board of Directors authorization. |
Restructuring Costs
In connection with the acquisition of First Data, we have begun implementing certain integration plans focused on reducing our overall cost structure, including vendor spend and the elimination of duplicate costs. We recorded restructuring charges related to certain of these integration activities of $56 million, primarily reported in cost of processing and service and selling, general and administrative expenses within the consolidated statements of income, based upon committed actions during the year ended December 31, 2019. We continue to evaluate operating efficiencies and anticipate incurring additional costs in the next few years in connection with these activities, but are unable to estimate those amounts at this time as such plans are not yet finalized.
Off-Balance Sheet Arrangements and Contractual Obligations
We do not participate in, nor have we created, any off-balance sheet variable interest entities or other off-balance sheet financing. The following table details our contractual obligations at December 31, 2019:
| (In millions) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
| Long-term debt including interest (1) (2) | $ | 27,989 | $ | 915 | $ | 4,249 | $ | 8,329 | $ | 14,496 | ||||||||||
| Minimum finance lease payments (1) (3) | 238 | 83 | 137 | 13 | 5 | |||||||||||||||
| Minimum operating lease payments (1) (3) | 817 | 153 | 262 | 190 | 212 | |||||||||||||||
| Purchase obligations (1) | 1,365 | 542 | 430 | 243 | 150 | |||||||||||||||
| Income tax obligations | 145 | 32 | 68 | 32 | 13 | |||||||||||||||
| Total | $ | 30,554 | $ | 1,725 | $ | 5,146 | $ | 8,807 | $ | 14,876 |
| (1) | Interest, finance lease, operating lease and purchase obligations are reported on a pre-tax basis. |
| (2) | The calculations assume that only mandatory debt repayments are made, no additional refinancing or lending occurs, except for our 2.7% senior notes due in June 2020 as we have the intent to refinance this debt on a long-term basis and the ability to do so under our revolving credit facility maturing in September 2023, and the variable rate on the revolving credit facility and term loans are priced at the rate in effect at December 31, 2019. |
| (3) | Excludes $302 million of legally binding minimum lease payments for finance leases and $4 million of legally binding minimum lease payments for operating leases that have been signed but not yet commenced. |
Previous: Item 6. Selected Financial Data · Next: Item 7A. Quantitative and Qualitative Disclosures About Market Risk