filings.toolsItem 8. Financial Statements and Supplementary Data
230K characters. Original on sec.gov · Markdown
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Fiserv, Inc.
Consolidated Statements of Income
| In millions, except per share data | ||||||||||||
| Year ended December 31, | 2019 | 2018 | 2017 | |||||||||
| Revenue: | ||||||||||||
| Processing and services (1) | $ | 8,573 | $ | 4,975 | $ | 4,833 | ||||||
| Product | 1,614 | 848 | 863 | |||||||||
| Total revenue | 10,187 | 5,823 | 5,696 | |||||||||
| Expenses: | ||||||||||||
| Cost of processing and services | 4,016 | 2,324 | 2,291 | |||||||||
| Cost of product | 1,293 | 745 | 733 | |||||||||
| Selling, general and administrative | 3,284 | 1,228 | 1,150 | |||||||||
| Gain on sale of businesses | (15 | ) | (227 | ) | (10 | ) | ||||||
| Total expenses | 8,578 | 4,070 | 4,164 | |||||||||
| Operating income | 1,609 | 1,753 | 1,532 | |||||||||
| Interest expense, net | (473 | ) | (189 | ) | (175 | ) | ||||||
| Debt financing activities | (47 | ) | (14 | ) | — | |||||||
| Other (expense) income | (6 | ) | 5 | 1 | ||||||||
| Income from continuing operations before income taxes and income from investments in unconsolidated affiliates | 1,083 | 1,555 | 1,358 | |||||||||
| Income tax provision | (198 | ) | (378 | ) | (158 | ) | ||||||
| Income from investments in unconsolidated affiliates | 29 | 10 | 32 | |||||||||
| Income from continuing operations | 914 | 1,187 | 1,232 | |||||||||
| Income from discontinued operations, net of income taxes | — | — | 14 | |||||||||
| Net income | 914 | 1,187 | 1,246 | |||||||||
| Less: Net income attributable to noncontrolling interests and redeemable noncontrolling interests | 21 | — | — | |||||||||
| Net income attributable to Fiserv, Inc. | $ | 893 | $ | 1,187 | $ | 1,246 | ||||||
| Net income attributable to Fiserv, Inc. per share - basic: | ||||||||||||
| Continuing operations | $ | 1.74 | $ | 2.93 | $ | 2.92 | ||||||
| Discontinued operations | — | — | 0.03 | |||||||||
| Total | $ | 1.74 | $ | 2.93 | $ | 2.95 | ||||||
| Net income attributable to Fiserv, Inc. per share - diluted: | ||||||||||||
| Continuing operations | $ | 1.71 | $ | 2.87 | $ | 2.86 | ||||||
| Discontinued operations | — | — | 0.03 | |||||||||
| Total | $ | 1.71 | $ | 2.87 | $ | 2.89 | ||||||
| Shares used in computing net income attributable to Fiserv, Inc. per share: | ||||||||||||
| Basic | 512.3 | 405.5 | 422.3 | |||||||||
| Diluted | 522.6 | 413.7 | 431.3 |
| (1) | Includes processing and other fees charged to related party investments accounted for under the equity method of $112 million, $28 million and $0 million for the years ended December 31, 2019, 2018 and 2017, respectively (see Notes 9 and 20). |
See accompanying notes to consolidated financial statements.
Fiserv, Inc.
Consolidated Statements of Comprehensive Income
| In millions | ||||||||||||
| Year ended December 31, | 2019 | 2018 | 2017 | |||||||||
| Net income | $ | 914 | $ | 1,187 | $ | 1,246 | ||||||
| Other comprehensive (loss) income: | ||||||||||||
| Fair market value adjustment on cash flow hedges, net of income tax (benefit) provision of ($46 million), ($2 million) and $2 million | (134 | ) | (5 | ) | 4 | |||||||
| Reclassification adjustment for net realized gains on cash flow hedges included in cost of processing and services, net of income tax benefit of $0 and $0 | (1 | ) | (1 | ) | — | |||||||
| Reclassification adjustment for net realized losses on cash flow hedges included in net interest expense, net of income tax provision of $3 million, $2 million and $4 million | 10 | 4 | 6 | |||||||||
| Unrealized loss on defined benefit pension plans, net of income tax benefit of $1 million | (4 | ) | — | — | ||||||||
| Foreign currency translation | 8 | (11 | ) | 12 | ||||||||
| Total other comprehensive (loss) income | (121 | ) | (13 | ) | 22 | |||||||
| Comprehensive income | $ | 793 | $ | 1,174 | $ | 1,268 | ||||||
| Less: Net income attributable to noncontrolling interests and redeemable noncontrolling interests | 21 | — | — | |||||||||
| Less: Other comprehensive loss attributable to noncontrolling interests | (8 | ) | — | — | ||||||||
| Comprehensive income attributable to Fiserv, Inc. | $ | 780 | $ | 1,174 | $ | 1,268 |
See accompanying notes to consolidated financial statements.
Fiserv, Inc.
Consolidated Balance Sheets
| In millions | ||||||||
| December 31, | 2019 | 2018 | ||||||
| Assets | ||||||||
| Cash and cash equivalents | $ | 893 | $ | 415 | ||||
| Trade accounts receivable, less allowance for doubtful accounts | 2,782 | 1,049 | ||||||
| Prepaid expenses and other current assets | 1,503 | 274 | ||||||
| Settlement assets | 11,868 | 486 | ||||||
| Total current assets | 17,046 | 2,224 | ||||||
| Property and equipment, net | 1,606 | 398 | ||||||
| Customer relationships, net | 14,042 | 1,348 | ||||||
| Other intangible assets, net | 3,600 | 795 | ||||||
| Goodwill | 36,038 | 5,702 | ||||||
| Contract costs, net | 533 | 419 | ||||||
| Investments in unconsolidated affiliates | 2,720 | 65 | ||||||
| Other long-term assets | 1,954 | 311 | ||||||
| Total assets | $ | 77,539 | $ | 11,262 | ||||
| Liabilities and Equity | ||||||||
| Accounts payable and accrued expenses | $ | 3,080 | $ | 1,146 | ||||
| Short-term and current maturities of long-term debt | 287 | 4 | ||||||
| Contract liabilities | 492 | 380 | ||||||
| Settlement obligations | 11,868 | 480 | ||||||
| Total current liabilities | 15,727 | 2,010 | ||||||
| Long-term debt | 21,612 | 5,955 | ||||||
| Deferred income taxes | 4,247 | 745 | ||||||
| Long-term contract liabilities | 155 | 89 | ||||||
| Other long-term liabilities | 941 | 170 | ||||||
| Total liabilities | 42,682 | 8,969 | ||||||
| Commitments and Contingencies (see Note 19) | ||||||||
| Redeemable Noncontrolling Interests | 262 | — | ||||||
| Fiserv, Inc. Shareholders’ Equity: | ||||||||
| Preferred stock, no par value: 25.0 million shares authorized; none issued | — | — | ||||||
| Common stock, $0.01 par value: 1,800.0 million shares authorized; 791.4 million shares issued | 8 | 8 | ||||||
| Additional paid-in capital | 23,741 | 1,057 | ||||||
| Accumulated other comprehensive loss | (180 | ) | (67 | ) | ||||
| Retained earnings | 12,528 | 11,635 | ||||||
| Treasury stock, at cost, 111.5 million and 398.9 million shares | (3,118 | ) | (10,340 | ) | ||||
| Total Fiserv, Inc. shareholders’ equity | 32,979 | 2,293 | ||||||
| Noncontrolling interests | 1,616 | — | ||||||
| Total equity | 34,595 | 2,293 | ||||||
| Total liabilities and equity | $ | 77,539 | $ | 11,262 |
See accompanying notes to consolidated financial statements.
Fiserv, Inc.
Consolidated Statements of Equity
| Fiserv, Inc. Shareholders’ Equity | ||||||||||||||||||||||||||
| Number of Shares | Amount | |||||||||||||||||||||||||
| In millions | Common Shares | Treasury Shares | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Retained Earnings | Treasury Stock | Noncontrolling Interests | Total Equity | |||||||||||||||||
| Balance at January 1, 2017 | 791 | 360 | $ | 8 | $ | 1,016 | $ | (76 | ) | $ | 8,994 | $ | (7,401 | ) | $ | — | $ | 2,541 | ||||||||
| Net income | 1,246 | 1,246 | ||||||||||||||||||||||||
| Other comprehensive income | 22 | 22 | ||||||||||||||||||||||||
| Share-based compensation | 63 | 63 | ||||||||||||||||||||||||
| Shares issued under stock plans | (4 | ) | (48 | ) | 78 | 30 | ||||||||||||||||||||
| Purchases of treasury stock | 20 | (1,171 | ) | (1,171 | ) | |||||||||||||||||||||
| Balance at December 31, 2017 | 791 | 376 | 8 | 1,031 | (54 | ) | 10,240 | (8,494 | ) | — | 2,731 | |||||||||||||||
| Net income | 1,187 | 1,187 | ||||||||||||||||||||||||
| Other comprehensive loss | (13 | ) | (13 | ) | ||||||||||||||||||||||
| Share-based compensation | 73 | 73 | ||||||||||||||||||||||||
| Shares issued under stock plans | (3 | ) | (47 | ) | 69 | 22 | ||||||||||||||||||||
| Purchases of treasury stock | 26 | (1,915 | ) | (1,915 | ) | |||||||||||||||||||||
| Cumulative-effect adjustment of ASU 2014-09 adoption | 208 | 208 | ||||||||||||||||||||||||
| Cumulative-effect adjustment of ASU 2017-12 adoption | 3 | (3 | ) | — | ||||||||||||||||||||||
| Cumulative-effect adjustment of ASU 2018-02 adoption | (3 | ) | 3 | — | ||||||||||||||||||||||
| Balance at December 31, 2018 | 791 | 399 | 8 | 1,057 | (67 | ) | 11,635 | (10,340 | ) | — | 2,293 | |||||||||||||||
| Net income (1) | 893 | 4 | 897 | |||||||||||||||||||||||
| Shares issued to acquire First Data (see Note 4) | (286 | ) | 22,582 | 7,478 | 1,731 | 31,791 | ||||||||||||||||||||
| Distributions paid to noncontrolling interests (2) | (111 | ) | (111 | ) | ||||||||||||||||||||||
| Other comprehensive loss | (113 | ) | (8 | ) | (121 | ) | ||||||||||||||||||||
| Share-based compensation | 229 | 229 | ||||||||||||||||||||||||
| Shares issued under stock plans | (5 | ) | (127 | ) | 137 | 10 | ||||||||||||||||||||
| Purchases of treasury stock | 4 | (393 | ) | (393 | ) | |||||||||||||||||||||
| Balance at December 31, 2019 | 791 | 112 | $ | 8 | $ | 23,741 | $ | (180 | ) | $ | 12,528 | $ | (3,118 | ) | $ | 1,616 | $ | 34,595 |
| (1) | The total net income presented in the consolidated statement of equity for the year ended December 31, 2019 is different than the amount presented in the consolidated statement of income due to the net income attributable to redeemable noncontrolling interests of $17 million not included in equity. |
| (2) | The total distributions presented in the consolidated statement of equity for the year ended December 31, 2019 excludes $7 million in distributions paid to redeemable noncontrolling interests not included in equity. |
See accompanying notes to consolidated financial statements.
Fiserv, Inc.
Consolidated Statements of Cash Flows
| In millions | ||||||||||||
| Year ended December 31, | 2019 | 2018 | 2017 | |||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | $ | 914 | $ | 1,187 | $ | 1,246 | ||||||
| Adjustment for discontinued operations | — | — | (14 | ) | ||||||||
| Adjustments to reconcile net income to net cash provided by operating activities from continuing operations: | ||||||||||||
| Depreciation and other amortization | 615 | 382 | 270 | |||||||||
| Amortization of acquisition-related intangible assets | 1,036 | 163 | 159 | |||||||||
| Amortization of financing costs, debt discounts and other | 127 | 11 | 15 | |||||||||
| Net foreign currency gain on financing activities | (50 | ) | — | — | ||||||||
| Share-based compensation | 229 | 73 | 63 | |||||||||
| Deferred income taxes | 47 | 133 | (247 | ) | ||||||||
| Gain on sale of businesses | (15 | ) | (227 | ) | (10 | ) | ||||||
| Income from investments in unconsolidated affiliates | (29 | ) | (10 | ) | (32 | ) | ||||||
| Distributions from unconsolidated affiliates | 23 | 2 | 45 | |||||||||
| Settlement of interest rate hedge contracts | (183 | ) | — | — | ||||||||
| Non-cash impairment charges | 48 | 3 | 18 | |||||||||
| Other operating activities | (3 | ) | 4 | (4 | ) | |||||||
| Changes in assets and liabilities, net of effects from acquisitions and dispositions: | ||||||||||||
| Trade accounts receivable | (7 | ) | (108 | ) | (75 | ) | ||||||
| Prepaid expenses and other assets | (82 | ) | (6 | ) | (37 | ) | ||||||
| Contract costs | (212 | ) | (137 | ) | (29 | ) | ||||||
| Accounts payable and other liabilities | 238 | 116 | 54 | |||||||||
| Contract liabilities | 99 | (34 | ) | 61 | ||||||||
| Net cash provided by operating activities from continuing operations | 2,795 | 1,552 | 1,483 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Capital expenditures, including capitalization of software costs | (721 | ) | (360 | ) | (287 | ) | ||||||
| Proceeds from sale of businesses | 51 | 419 | 17 | |||||||||
| Payments for acquisitions of businesses, net of cash acquired | (16,005 | ) | (712 | ) | (384 | ) | ||||||
| Distributions from unconsolidated affiliates | 113 | — | — | |||||||||
| Purchases of investments | (45 | ) | (3 | ) | (10 | ) | ||||||
| Other investing activities | 5 | (7 | ) | 7 | ||||||||
| Net cash used in investing activities from continuing operations | (16,602 | ) | (663 | ) | (657 | ) | ||||||
| Cash flows from financing activities: | ||||||||||||
| Debt proceeds | 20,030 | 5,039 | 2,310 | |||||||||
| Debt repayments | (5,043 | ) | (4,005 | ) | (1,985 | ) | ||||||
| Payments of debt financing, redemption and other costs | (247 | ) | — | — | ||||||||
| Proceeds from issuance of treasury stock | 156 | 75 | 78 | |||||||||
| Purchases of treasury stock, including employee shares withheld for tax obligations | (561 | ) | (1,946 | ) | (1,223 | ) | ||||||
| Distributions paid to noncontrolling interests and redeemable noncontrolling interests | (118 | ) | — | — | ||||||||
| Other financing activities | (26 | ) | (5 | ) | — | |||||||
| Net cash provided by (used in) financing activities from continuing operations | 14,191 | (842 | ) | (820 | ) | |||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | 1 | — | — | |||||||||
| Net change in cash, cash equivalents and restricted cash from continuing operations | 385 | 47 | 6 | |||||||||
| Net cash flows from discontinued operations | 133 | 43 | 19 | |||||||||
| Cash, cash equivalents and restricted cash, beginning balance | 415 | 325 | 300 | |||||||||
| Cash, cash equivalents and restricted cash, ending balance | $ | 933 | $ | 415 | $ | 325 | ||||||
| Discontinued operations cash flow information: | ||||||||||||
| Net cash (used in) provided by operating activities | $ | — | $ | (7 | ) | $ | 19 | |||||
| Net cash provided by investing activities | 133 | 50 | — | |||||||||
| Net change in cash, cash equivalents and restricted cash from discontinued operations | $ | 133 | $ | 43 | $ | 19 |
See accompanying notes to consolidated financial statements.
Fiserv, Inc.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Description of the Business
Fiserv, Inc. and its subsidiaries (collectively, the “Company”) provide financial services technology to clients worldwide. The Company provides account processing systems; electronic payments processing products and services; internet and mobile banking systems; merchant transaction processing and acquiring; prepaid and payroll services; and check verification. The Company serves clients around the globe, including banks, credit unions, other financial institutions and merchants.
On July 29, 2019, the Company completed the acquisition of First Data Corporation (“First Data”) by acquiring 100% of the First Data stock that was issued and outstanding as of the date of acquisition for a total purchase price of $46.5 billion (see Note 4). First Data provides a wide-range of solutions to merchants, including retail point-of-sale merchant transaction processing and acquiring, e-commerce services, mobile payment services and the cloud-based Clover® point-of-sale operating system, as well as technology solutions for bank and non-bank issuers. The consolidated financial statements as of and during the year ended December 31, 2019 include the financial results of First Data from the date of acquisition.
The Company’s operations are comprised of the First Data segment, the Payments and Industry Products (“Payments”) segment and the Financial Institution Services (“Financial”) segment. Additional information regarding the Company’s business segments is included in Note 21.
Principles of Consolidation
The consolidated financial statements include the accounts of Fiserv, Inc. and its subsidiaries in which the Company holds a controlling financial interest. Control is normally established when ownership and voting interests in an entity are greater than 50%. Investments in which the Company has significant influence but not control are accounted for using the equity method of accounting. Significant influence over an affiliate’s operations generally coincides with an ownership interest in an entity of between 20% and 50%. All intercompany transactions and balances have been eliminated in consolidation.
In connection with the acquisition of First Data, the Company acquired majority controlling interests in certain entities, mostly related to consolidated merchant alliances (see Note 20). Noncontrolling interests represent the minority shareholders’ share of the net income or loss and equity in consolidated subsidiaries. The Company’s noncontrolling interests presented in the consolidated statement of income include net income attributable to noncontrolling interests and redeemable noncontrolling interests. Noncontrolling interests are presented as a component of equity in the consolidated balance sheet and reflect the minority shareholders’ share of acquired fair value 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 upon the occurrence of an event that is not solely within the Company’s control are presented outside of equity and are carried at their estimated redemption value if it exceeds the initial carrying value of the redeemable interest (see Note 13).
Stock Split
On February 21, 2018, the Company’s board of directors declared a two-for-one stock split of the Company’s common stock and a proportionate increase in the number of its 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. The Company’s 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. The impact on the consolidated balance sheet of the stock split was an increase of $4 million to common stock and an offsetting reduction in additional paid-in capital.
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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates.
Revenue Recognition
Effective January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, and its related amendments using the modified retrospective transition approach applied to all contracts. Prior period amounts have not been restated; however, certain prior period amounts have been reclassified to conform to current period presentation. Additional information about the Company’s revenue recognition policies and the related impact of the adoption is included in Note 3 to the consolidated financial statements.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and investments with original maturities of 90 days or less. Cash and cash equivalents are stated at cost in the consolidated balance sheets, which approximates market value. Cash and cash equivalents that were restricted from use due to regulatory or other requirements are included in other long-term assets in the consolidated balance sheets and totaled $40 million and $0 million at December 31, 2019 and 2018, respectively.
Allowance for Doubtful Accounts
The Company analyzes the collectability of trade accounts receivable by considering historical bad debts, client creditworthiness, current economic trends, changes in client payment terms and collection trends when evaluating the adequacy of the allowance for doubtful accounts. Any change in the assumptions used in analyzing a specific account receivable may result in an additional allowance for doubtful accounts being recognized in the period in which the change occurs. The allowance for doubtful accounts was $39 million and $18 million at December 31, 2019 and 2018, respectively.
Leases
Effective January 1, 2019, the Company adopted ASU No. 2016-02, Leases (Topic 842)(“ASU 2016-02”), and its related amendments using the optional transition method applied to all leases. Prior period amounts have not been restated. Additional information about the Company’s lease policies and the related impact of the adoption is included in Notes 2 and 11 to the consolidated financial statements.
In connection with the acquisition of First Data, the Company acquired certain leasing receivables associated with the point-of-sale (“POS”) terminal leasing businesses of First Data. Leasing receivables are included in prepaid expenses and other current assets and other long-term assets in the consolidated balance sheet. Interest income on the Company’s leasing receivables is recognized using the effective interest method, and is included within product revenue in the consolidated statement of income. Initial direct costs are expensed as incurred if the fair value of the underlying asset is different from its carrying amount at the commencement date of the lease.
Prepaid Expenses
Prepaid expenses represent advance payments for goods and services to be consumed in the future, such as maintenance, postage and insurance and totaled $348 million and $158 million at December 31, 2019 and 2018, respectively.
Settlement Assets and Obligations
Settlement assets and obligations result from timing differences between collection and fulfillment of payment transactions primarily associated with the Company’s merchant acquiring services. Settlement assets represent cash received or amounts receivable from agents, payment networks, bank partners or directly from consumers. Settlement obligations represent amounts payable to merchants and payees. Certain merchant settlement assets that relate to settlement obligations are held by partner banks to which the Company does not have legal ownership but has the right to use the assets to satisfy the related settlement obligations. The Company records corresponding settlement obligations for amounts payable to merchants and for payment instruments not yet presented for settlement. See Note 6 for additional information.
Reserve for Merchant Credit Losses
With respect to the merchant acquiring business obtained through the acquisition of First Data, the Company’s merchant customers 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 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 is classified within settlement obligations on the Company’s consolidated balance sheet. The Company also utilizes a number of systems and procedures to manage merchant risk. Despite these efforts, the Company
experiences some level of losses due to merchant defaults. The aggregate merchant credit losses incurred by the Company was $40 million for the year ended December 31, 2019, and is included within cost of processing and services in the consolidated statement of income. The amount of collateral held by the Company was $510 million at December 31, 2019. The Company maintains a reserve for merchant credit losses that are expected to exceed the amount of collateral held, which is recorded based primarily on historical experience of credit losses and other relevant factors such as economic downturns or increases in merchant fraud. The aggregate merchant credit loss reserve was $34 million at December 31, 2019 and is included within accounts payable and accrued expenses in the consolidated balance sheet.
Property and Equipment
Property and equipment are reported at cost. Depreciation of property and equipment is computed primarily using the straight-line method over the shorter of the estimated useful life of the asset or the leasehold period, if applicable. Property and equipment consisted of the following at December 31:
| (In millions) | Estimated Useful Lives | 2019 | 2018 | ||||||
| Land | — | $ | 61 | $ | 10 | ||||
| Data processing equipment | 3 to 5 years | 1,483 | 775 | ||||||
| Buildings and leasehold improvements | 5 to 40 years | 540 | 256 | ||||||
| Furniture and equipment | 5 to 8 years | 576 | 186 | ||||||
| 2,660 | 1,227 | ||||||||
| Less: Accumulated depreciation | (1,054 | ) | (829 | ) | |||||
| Total | $ | 1,606 | $ | 398 |
Depreciation expense for all property and equipment totaled $247 million in 2019 and $92 million in each of 2018 and 2017.
Intangible Assets
Customer related intangible assets represent customer contracts and relationships obtained as part of acquired businesses and are amortized using an accelerated amortization method which corresponds with the customer attrition rates used in the initial valuation of the intangibles over their estimated useful lives, generally ten to twenty years. Acquired software and technology represents software and technology intangible assets obtained as part of acquired businesses and is amortized using the straight-line method over their estimated useful lives, generally four to ten years. Trade names are amortized using the straight-line method over their estimated useful lives, generally eight to twenty years.
The Company continually develops, maintains and enhances its products and systems. Product development expenditures represented approximately 8% of the Company’s total revenue in each of 2019, 2018 and 2017. Research and development costs incurred prior to the establishment of technological feasibility are expensed as incurred. Routine maintenance of software products, design costs and other development costs incurred prior to the establishment of a product’s technological feasibility are also expensed as incurred. Costs are capitalized commencing when the technological feasibility of the software has been established.
Capitalized software development costs represent the capitalization of certain costs incurred to develop new software or to enhance existing software which is marketed externally or utilized by the Company to process client transactions. Capitalized software development costs are amortized using the straight-line method over their estimated useful lives, generally five years.
Purchased software represents software licenses purchased from third parties and is amortized using the straight-line method over their estimated useful lives, generally three to five years. See Note 7 for additional information.
Goodwill
Goodwill represents the excess of purchase price over the fair value of identifiable assets acquired and liabilities assumed in a business combination. The Company evaluates goodwill for impairment on an annual basis, or more frequently if circumstances indicate possible impairment. Goodwill is tested for impairment at a reporting unit level, determined to be at an operating segment level or one level below. When assessing goodwill for impairment, the Company considers (i) the amount of excess fair value over the carrying value of each reporting unit, (ii) the period of time since a reporting unit’s last quantitative test, (iii) the extent a reorganization or disposition changes the composition of one or more of the reporting units and (iv) other factors to determine whether or not to first perform a qualitative test. When performing a qualitative test, the Company assesses numerous factors to determine whether it is more likely than not that the fair value of its reporting units are less than their respective carrying values. Examples of qualitative factors that the Company assesses include its share price, its financial
performance, market and competitive factors in its industry and other events specific to its reporting units. If the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company performs a quantitative impairment test by comparing reporting unit carrying values to estimated fair values. The Company’s most recent impairment assessment of its reporting units in the fourth quarter of 2019 determined that its goodwill was not impaired as the estimated fair values 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 the 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 the Company’s continuing review of matters related to the acquisition. There is no accumulated goodwill impairment for the Company through December 31, 2019. See Note 8 for additional information.
Asset Impairment
The Company reviews property and equipment, intangible assets and its investments in unconsolidated affiliates for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The Company reviews capitalized software development costs for impairment at each reporting date. Recoverability of property and equipment, capitalized software development costs and other intangible assets is assessed by comparing the carrying amount of the asset to either the undiscounted future cash flows expected to be generated by the asset or the net realizable value of the asset, depending on the type of asset. The Company’s investments in unconsolidated affiliates are assessed by comparing the carrying amount of the investments to their estimated fair values and are impaired if any decline in fair value is determined to be other than temporary. Measurement of any impairment loss is based on estimated fair value.
Fair Value Measurements
The Company applies fair value accounting for all assets and liabilities that are recognized or disclosed at fair value in its consolidated financial statements on a recurring basis. Fair value represents the amount that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, the Company uses the hierarchy prescribed in Accounting Standards Codification (“ASC”) 820, Fair Value Measurements, and considers the principal or most advantageous market and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability. The three levels in the hierarchy are as follows:
| • | Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets that are accessible as of the |
measurement date.
| • | Level 2 - 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 - Unobservable inputs reflecting management’s judgments about the assumptions that market |
participants would use in pricing the asset or liability, including assumptions about risk.
See Note 10 for additional information.
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following at December 31:
| (In millions) | 2019 | 2018 | ||||||
| Trade accounts payable | $ | 392 | $ | 127 | ||||
| Client deposits | 650 | 564 | ||||||
| Accrued compensation and benefits | 378 | 199 | ||||||
| Accrued taxes | 137 | 18 | ||||||
| Accrued interest | 224 | 35 | ||||||
| Other accrued expenses | 1,299 | 203 | ||||||
| Total | $ | 3,080 | $ | 1,146 |
Foreign Currency
The United States (“U.S.”) dollar is the functional currency of the Company’s U.S.-based businesses and certain foreign-based businesses. Where the functional currency differs from the U.S. dollar, assets and liabilities are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Revenue and expenses are translated at the average exchange rates during the period. Gains and losses from foreign currency translation are recorded as a separate component of accumulated other comprehensive loss. Gains and losses from foreign currency transactions are included in determining net income for the period. The Company has designated its Euro- and British Pound-denominated senior notes as net investment hedges to hedge a portion of its net investment in certain subsidiaries whose functional currencies are the Euro and the British Pound (see Note 14). Accordingly, foreign currency transaction gains or losses on the qualifying net investment hedge instruments are recorded as foreign currency translation within other comprehensive loss in the consolidated statement of comprehensive income and will remain in accumulated other comprehensive loss on the consolidated balance sheet until the sale or complete liquidation of the underlying foreign subsidiaries.
Derivatives
Derivatives are entered into for periods consistent with related underlying exposures and are recorded in the consolidated balance sheets as either an asset or liability measured at fair value. If the derivative is designated as a cash flow hedge, changes in the fair value of the derivative are recorded as a component of accumulated other comprehensive loss and recognized in the consolidated statements of income when the hedged item affects earnings. The Company’s policy is to enter into derivatives with creditworthy institutions and not to enter into such derivatives for speculative purposes.
Employee Benefit Plans
In connection with the acquisition of First Data, the Company acquired frozen defined benefit pension plans covering certain employees in Europe and the United States. The Company recognizes actuarial gains/losses and prior service cost in the consolidated balance sheet and recognizes changes in these amounts during the year in which changes occur through other comprehensive (loss) income. The Company uses various assumptions when computing amounts relating to its defined benefit pension plan obligations and their associated expenses (including the discount rate and the expected rate of return on plan assets). See Note 15 for additional information.
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.
Interest Expense, Net
Interest expense, net consists of interest expense primarily associated with the Company’s outstanding borrowings and finance lease obligations, as well as interest income primarily associated with the Company’s investment securities. The Company recognized $507 million, $193 million and $176 million of interest expense and $34 million, $4 million and $1 million of interest income during the years ended December 31, 2019, 2018 and 2017, respectively.
Income Taxes
Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax basis, and net operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is recorded against deferred tax assets if it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Liabilities are established for unrecognized tax benefits, attributable to differences between a tax position taken or expected to be taken in a tax return and the benefit recognized in the financial statements. In establishing a liability for an unrecognized tax benefit, 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 the Company believes is more likely than not to be realized upon ultimate settlement. As additional information becomes available, the liability for unrecognized tax benefits is reevaluated and adjusted, as appropriate. Tax benefits ultimately realized can differ from amounts previously recognized due to uncertainties, with any such differences generally impacting the provision for income tax.
Net Income Per Share
Net income per share attributable to Fiserv, Inc. in each period is calculated using actual, unrounded amounts. Basic net income per share is computed by dividing net income attributable to Fiserv, Inc. by the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income attributable to Fiserv, Inc. by the weighted-average number of common shares and common stock equivalents outstanding during the period. Common stock equivalents consist of outstanding stock options, unvested restricted stock units and unvested restricted stock awards, and are computed using the treasury stock method. The Company excluded 1.1 million weighted-average shares in both 2019 and 2018 and 1.3 million in 2017 from the calculations of common stock equivalents for anti-dilutive stock options.
The computation of shares used in calculating basic and diluted net income per share is as follows:
| (In millions) | 2019 | 2018 | 2017 | ||||||
| Weighted-average common shares outstanding used for the calculation of net income attributable to Fiserv, Inc. per share - basic | 512.3 | 405.5 | 422.3 | ||||||
| Common stock equivalents | 10.3 | 8.2 | 9.0 | ||||||
| Weighted-average common shares outstanding used for the calculation of net income attributable to Fiserv, Inc. per share - diluted | 522.6 | 413.7 | 431.3 |
Supplemental Cash Flow Information
| (In millions) | 2019 | 2018 | 2017 | |||||||||
| Interest paid | $ | 291 | $ | 165 | $ | 160 | ||||||
| Income taxes paid | 197 | 259 | 409 | |||||||||
| Treasury stock purchases settled after the balance sheet date | 6 | 26 | 5 |
2. Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In June 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which simplifies the accounting for share-based payments granted to nonemployees by largely aligning it with the accounting for share-based payments to employees. For public entities, ASU 2018-07 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Entities must apply the standard using a modified retrospective transition approach, with a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption for all liability-classified nonemployee awards that have not been settled as of the adoption date and equity-classified nonemployee awards for which a measurement date has not been established. The Company adopted ASU 2018-07 on January 1, 2019, and the adoption did not have any impact on its consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”), which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects of the change in the U.S. federal corporate tax rate resulting from the Tax Cuts and Jobs Act (the “Tax Act”) enacted in December 2017. ASU 2018-02 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company early adopted ASU 2018-02 in the first quarter of 2018, and elected to reclassify the Tax Act income tax benefits of $3 million from accumulated other comprehensive loss to retained earnings.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”), which provides guidance designed to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements as well as to simplify the application of the hedge accounting guidance in current U.S. generally accepted accounting principles. For public entities, ASU 2017-12 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted in any interim period or fiscal year. For cash flow and net investment hedges existing at the date of adoption, the standard requires a cumulative-effect adjustment to eliminate the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year of adoption. The amended presentation and
disclosure guidance is required only prospectively. The Company early adopted ASU 2017-12 in the first quarter of 2018, and recorded a cumulative-effect adjustment to accumulated other comprehensive loss of $3 million with a corresponding decrease in the opening balance of retained earnings.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”), which eliminates the current prohibition on immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory, with the intent of reducing complexity and diversity in practice. Under ASU 2016-16, entities must recognize the income tax consequences when the transfer occurs rather than deferring recognition. For public entities, ASU 2016-16 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2017. Entities must apply the guidance on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company adopted ASU 2016-16 in the first quarter of 2018, and the adoption did not have a material impact on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, which requires lessees to recognize a lease liability and a right-of-use asset for each lease with a term longer than twelve months and adds new presentation and disclosure requirements for both lessees and lessors. The accounting guidance for lessors remains largely unchanged. The recognized liability is measured at the present value of lease payments not yet paid, and the corresponding asset represents the lessee’s right to use the underlying asset over the lease term and is based on the liability, subject to certain adjustments. For income statement and statement of cash flow purposes, the standard retains the dual model with leases classified as either operating or finance. Operating leases will result in straight-line expense while finance leases will result in a front-loaded expense pattern. The standard prescribes a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. ASU No. 2016-02 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842; ASU No. 2018-11, Leases (Topic 842) - Targeted Improvements (“ASU 2018-11”); ASU No. 2018-20, Narrow-Scope Improvements for Lessors; and ASU No. 2019-01, Leases (Topic 842) - Codification Improvements. ASU No. 2018-11 provides an additional transition method allowing entities to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. For public entities, ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018.
The Company adopted ASU No. 2016-02 effective January 1, 2019 using the optional transition method in ASU 2018-11. Under this method, the Company has not adjusted its comparative period financial statements for the effects of the new standard or made the new, expanded required disclosures for periods prior to the effective date. The Company elected the package of practical expedients permitted under the transition guidance in ASU 2016-02 to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs. The Company also elected the practical expedient not to separate the non-lease components of a contract from the lease component to which they relate.
The adoption of the new lease standard resulted in the recognition of lease liabilities of $383 million and right-of-use assets of $343 million, which include the impact of existing deferred rents and tenant improvement allowances on the consolidated balance sheet as of January 1, 2019 for real and personal property operating leases. The adoption of ASU 2016-02 did not have a material impact on the Company’s consolidated statements of income or consolidated statements of cash flows.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), to clarify the principles of recognizing revenue and to create common revenue recognition guidance between U.S. generally accepted accounting principles and International Financial Reporting Standards. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific requirements. It also includes guidance on accounting for the incremental costs of obtaining and costs incurred to fulfill a contract with a customer. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This model involves a five-step process for achieving that core principle, along with comprehensive disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. For public entities, the new revenue standard is effective for annual and interim periods beginning after December 15, 2017. Entities have the option of adopting this new guidance using either a full retrospective or a modified approach with the cumulative effect of applying the guidance recognized at the date of initial application.
The Company adopted the new standard effective January 1, 2018 using the modified retrospective transition approach applied to all contracts, which resulted in a cumulative-effect increase in the opening balance of retained earnings of $208 million, primarily related to the deferral of incremental sales commissions incurred in obtaining contracts in prior periods. Under this transition approach, the Company has not restated the prior period consolidated financial statements presented; however, it has
provided additional disclosures related to the amount by which each relevant 2018 financial statement line item was affected by adoption of the new standard and explanations for significant changes (see Note 3).
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which introduces a number of amendments that are designed to simplify the application of accounting for income taxes. Such amendments include removing certain exceptions for intraperiod tax allocation, interim reporting when a year-to-date loss exceeds the anticipated loss, reflecting the effect of an enacted change in tax laws or rates in the annual effective tax rate and recognition of deferred taxes related to outside basis differences for ownership changes in investments. ASU 2019-12 also provides clarification related to when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction. In addition, ASU 2019-12 provides guidance on the recognition of a franchise tax (or similar tax) that is partially based on income as an income-based tax and accounting for any incremental amount incurred as a non-income-based tax. For public entities, ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently assessing the impact that the adoption of ASU 2019-12 will have on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”), which aligns the requirements for capitalizing implementation costs incurred in a cloud computing hosting arrangement that is a service contract with the requirements under ASC 350 for capitalizing implementation costs incurred to develop or obtain internal-use software. For public entities, ASU 2018-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Entities are permitted to apply either a retrospective or prospective transition approach to adopt the guidance. The adoption of ASU 2018-15 will not have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU 2018-14”), which removes, clarifies and adds certain disclosure requirements of ASC Topic 715, Compensation - Retirement Benefits. ASU 2018-14 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. Entities must apply the disclosure updates retrospectively. The Company is currently assessing the impact that the adoption of ASU 2018-14 will have on its disclosures.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which removes, modifies and adds certain disclosure requirements of ASC Topic 820, Fair Value Measurement. ASU 2018-13 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019, with the additional disclosures required to be applied prospectively and the modified and removed disclosures required to be applied retrospectively to all periods presented. The adoption of ASU 2018-13 will not have a material impact on the Company’s disclosures.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) (“ASU 2016-13” or “CECL”), which prescribes an impairment model for most financial instruments based on expected losses rather than incurred losses. Under this model, an estimate of expected credit losses over the contractual life of the instrument is to be recorded as of the end of a reporting period as an allowance to offset the amortized cost basis, resulting in a net presentation of the amount expected to be collected on the financial instrument. For public entities, ASU 2016-13 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019. For most instruments, entities must apply the standard using a cumulative-effect adjustment to beginning retained earnings as of the beginning of the fiscal year of adoption.
The Company adopted ASU 2016-13 effective January 1, 2020 and has identified appropriate changes related to controls, processes and accounting policies and disclosures. Financial assets and liabilities held by the Company subject to the “expected credit loss” model prescribed by CECL include trade and other receivables, net investments in leases, settlement assets and other credit exposures such as financial guarantees not accounted for as insurance. The adoption of this guidance, including an acceleration in the timing for recognition of credit losses due to the requirement to estimate expected losses associated with the remaining contractual lives of financial instruments as of January 1, 2020, will not have a material impact on the Company’s consolidated financial statements.
3**. Revenue Recognition**
Revenue Recognition During the Years Ended December 31, 2019 and 2018
The Company adopted ASU 2014-09, Revenue from Contracts with Customers, and its related amendments (collectively known as “ASC 606”), effective January 1, 2018 using the modified retrospective transition approach applied to all contracts. Therefore, the reported results for the years ended December 31, 2019 and 2018 reflect the application of ASC 606 while the reported results for the year ended December 31, 2017 were not adjusted and continue to be reported under the accounting guidance, ASC 605, Revenue Recognition (“ASC 605”), in effect for that period. The cumulative impact of adopting ASC 606 was an increase in the opening balance of retained earnings of $208 million, primarily related to the deferral of incremental sales commissions incurred in obtaining contracts in prior periods.
Significant Accounting Policy
ASC 606 outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers. The core principle, involving a five-step process, of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The Company generates 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. The Company recognizes revenue when it satisfies 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.
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. Shipping and handling activities associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment activity and recognized as revenue at the point in time at which control of the goods transfers to the customer. As a practical expedient, the Company does 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.
Nature of Goods and Services
The Company’s operations are comprised of the First Data segment, the Payments segment and the Financial segment. Additional information regarding the Company’s business segments is included in Note 21. The following is a description of principal activities from which the Company generates its revenue. 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, merchant transaction processing and acquiring, electronic billing and payment services, electronic funds transfer and debit processing services; consulting and professional services; and software maintenance for ongoing client support.
The Company recognizes 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. The Company’s arrangements for processing and services typically consist of an obligation to provide specific services to its 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 the Company’s 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, the Company recognizes 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. In certain instances, the Company may offer extended payment terms beyond one year on its software license sales. To the extent a significant financing component exists, it is calculated as the difference between the promised consideration and the present value of the software license fees utilizing a discount rate reflective of a separate financing transaction, and is recognized as interest income over the extended payment period. The cash selling price of the software license fee is recognized as revenue at the point in time when the software is transferred to the customer.
The Company also sells or leases hardware (POS devices) and other peripherals as part of its contracts with customers. Hardware typically consists of terminals or Clover® devices. The Company does not manufacture hardware, rather it purchases hardware from third-party vendors and holds such 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.
Significant Judgments in Application of the Guidance
The Company uses the following methods, inputs and assumptions in determining amounts of revenue to recognize:
Identification of Performance Obligations
To identify its performance obligations, the Company considers all of the goods or services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices. For multi-element arrangements, the Company accounts 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 the Company’s applications or service offerings. Whether the Company recognizes 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.
Determination of Transaction Price
The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring products or services to the customer. The Company includes any fixed charges within its contracts as part of the total transaction price. To the extent that variable consideration is not constrained, the Company includes an estimate of the variable amount, as appropriate, within the total transaction price and updates its assumptions over the duration of the contract.
Assessment of Estimates of Variable Consideration
Many of the Company’s contracts with customers contain some component of variable consideration; however, the constraint will generally not result in a reduction in the estimated transaction price for most forms of variable consideration. The Company 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.
Allocation of Transaction Price
The transaction price (including any discounts) is allocated between separate goods and services in a multi-element arrangement based on their relative standalone selling prices. The standalone selling prices are determined based on the prices at which the Company separately sells each good or service. For items that are not sold separately, the Company estimates the standalone selling prices using available information such as market conditions and internally approved pricing guidelines. In instances where there are observable selling prices for professional services and support and maintenance, the Company may apply the residual approach to estimate the standalone selling price of software licenses. Significant judgment may be required to determine standalone selling prices for each performance obligation and whether it depicts the amount the Company expects to receive in exchange for the related good or service.
Contract Modifications
Contract modifications occur when the Company and its 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 the Company. When a contract modification occurs, it requires the Company 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.
Revenue Recognition During the Year Ended December 31, 2017
The Company generates revenue from the delivery of processing, service and product solutions. Revenue is recognized when written contracts are signed, delivery has occurred, the fees are fixed or determinable and collectibility is reasonably assured.
Processing and services revenue is recognized as services are provided and is primarily derived from contracts that generate account- and transaction-based fees for data processing, transaction processing, electronic billing and payment services, electronic funds transfer and debit processing services. In addition, processing and services revenue is derived from the fulfillment of professional services, including consulting activities. Certain of the Company’s revenue is generated from multiple element arrangements involving various combinations of product and service deliverables. The deliverables within these arrangements are evaluated at contract inception to determine whether they represent separate units of accounting, and if so, contract consideration is allocated to each deliverable based on relative selling price. The relative selling price is determined using vendor specific objective evidence of fair value, third-party evidence or best estimate of selling price. Revenue is then recognized in accordance with the appropriate revenue recognition guidance applicable to the respective elements. Also included in processing and services revenue is software maintenance fee revenue for ongoing client support, which is recognized ratably over the term of the applicable support period, generally 12 months. Contract liabilities consist primarily of advance cash receipts for services (deferred revenue) and are recognized as revenue when the services are provided.
Product revenue is primarily derived from integrated print and card production sales, as well as software license sales which represented less than 4% of consolidated revenue in 2017. For software license agreements that do not require significant customization or modification, the Company recognizes software license revenue upon delivery, assuming persuasive evidence of an arrangement exists, the license fee is fixed or determinable, and collection is reasonably assured. Arrangements with customers that include significant customization, modification or production of software are accounted for under contract accounting, with revenue recognized using the percentage-of-completion method based upon efforts expended, such as labor hours, to measure progress towards completion. Changes in estimates for revenues, costs and profits are recognized in the period in which they are determinable and were not material for the period presented.
The Company includes reimbursements from clients, such as postage and telecommunication costs, in processing and services revenue and product revenue, while the related costs are included in cost of processing and services and cost of product.
Disaggregation of Revenue
The tables below present the Company’s revenue disaggregated by major business, including a reconciliation with its reportable segments. The majority of the Company’s revenue is earned domestically within these major businesses, with revenue generated outside the United States comprising approximately 12%, 6% and 5% of total revenue in 2019, 2018 and 2017, respectively.
| (In millions) | Reportable Segments | ||||||||||||||||||
| Year Ended December 31, 2019 | First Data | Payments | Financial | Corporate and Other | Total | ||||||||||||||
| Major Business | |||||||||||||||||||
| Global Business Solutions | $ | 2,520 | $ | — | $ | — | $ | — | $ | 2,520 | |||||||||
| Global Financial Solutions | 927 | — | — | — | 927 | ||||||||||||||
| Network & Security Solutions | 631 | — | — | — | 631 | ||||||||||||||
| Total First Data | 4,078 | — | — | — | 4,078 | ||||||||||||||
| Digital Money Movement | — | 1,483 | — | — | 1,483 | ||||||||||||||
| Card and Related Services | — | 1,934 | — | — | 1,934 | ||||||||||||||
| Other | — | 327 | — | — | 327 | ||||||||||||||
| Total Payments | — | 3,744 | — | — | 3,744 | ||||||||||||||
| Account and Item Processing | — | — | 2,125 | — | 2,125 | ||||||||||||||
| Other | — | — | 282 | — | 282 | ||||||||||||||
| Total Financial | — | — | 2,407 | — | 2,407 | ||||||||||||||
| Corporate and Other | — | — | — | (42 | ) | (42 | ) | ||||||||||||
| Total Revenue | $ | 4,078 | $ | 3,744 | $ | 2,407 | $ | (42 | ) | $ | 10,187 |
| (In millions) | Reportable Segments | ||||||||||||||
| Year Ended December 31, 2018 | Payments | Financial | Corporate and Other | Total | |||||||||||
| Major Business | |||||||||||||||
| Digital Money Movement | $ | 1,460 | $ | — | $ | — | $ | 1,460 | |||||||
| Card and Related Services | 1,682 | — | — | 1,682 | |||||||||||
| Other | 325 | — | — | 325 | |||||||||||
| Total Payments | 3,467 | — | — | 3,467 | |||||||||||
| Account and Item Processing | — | 2,094 | — | 2,094 | |||||||||||
| Lending Solutions | — | 54 | — | 54 | |||||||||||
| Other | — | 247 | — | 247 | |||||||||||
| Total Financial | — | 2,395 | — | 2,395 | |||||||||||
| Corporate and Other | — | — | (39 | ) | (39 | ) | |||||||||
| Total Revenue | $ | 3,467 | $ | 2,395 | $ | (39 | ) | $ | 5,823 |
Contract Balances
The following table provides information about contract assets and contract liabilities from contracts with customers.
| (In millions) | December 31, 2019 | December 31, 2018 | January 1, 2018 | ||||||||
| Contract assets | $ | 382 | $ | 171 | $ | 158 | |||||
| Contract liabilities | 647 | 469 | 520 |
Contract assets, reported within other long-term assets in the consolidated balance sheets, primarily result from revenue being recognized where payment is contingent upon the transfer of services to a customer over the contractual period. Contract liabilities primarily relate to advance consideration received from customers (deferred revenue) for which transfer of control occurs, and therefore revenue is recognized, as services are provided. Contract balances are reported in a net contract asset or liability position on a contract-by-contract basis at the end of each reporting period.
During the year ended December 31, 2019, contract assets and contract liabilities increased $153 million and $117 million, respectively, due to the acquisition of First Data. The Company recognized $380 million of revenue during the year ended December 31, 2019 that was included in the contract liability balance at the beginning of the period.
During the year ended December 31, 2018, contract liabilities decreased primarily due to the recognition of deferred termination fee revenue. The Company recognized $450 million of revenue during the year ended December 31, 2018 that was included in the contract liability balance at the beginning of the period, which exceeded advance cash receipts for services yet to be provided.
Transaction Price Allocated to Remaining Performance Obligations
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period.
| (In millions) | |||||||||||||||||||
| December 31, 2019 | 2020 | 2021 | 2022 | 2023 | Thereafter | ||||||||||||||
| Processing and services | $ | 1,869 | $ | 1,540 | $ | 1,190 | $ | 886 | $ | 1,743 | |||||||||
| Product | 40 | 27 | 16 | 11 | 6 |
The Company applies the optional exemption under ASC 606 and does not disclose information about remaining performance obligations for account- and transaction-based processing fees that qualify for recognition under the as-invoiced practical expedient. These multi-year contracts contain variable consideration for stand-ready performance obligations for which the exact quantity and mix of transactions to be processed are contingent upon the customer’s request. The Company also applies the optional exemptions under ASC 606 and does not disclose information for variable consideration that is a sales-based or usage-based royalty promised in exchange for a license of intellectual property or that is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service in a series. The amounts disclosed above as remaining performance obligations consist primarily of fixed or monthly minimum processing fees and maintenance fees under contracts with an original expected duration of greater than one year.
Contract Costs
The Company incurs incremental costs to obtain a contract as well as costs to fulfill contracts with customers that are expected to be recovered. These costs consist primarily of sales commissions incurred only if a contract is obtained, and customer conversion or implementation related costs. Capitalized sales commissions and conversion or implementation costs totaled $357 million and $176 million, respectively, at December 31, 2019 and $322 million and $97 million, respectively, at December 31, 2018.
Capitalized contract costs are amortized based on the transfer of goods or services to which the asset relates. The amortization period also considers expected customer lives and whether the asset relates to goods or services transferred under a specific anticipated contract. These costs are primarily included in selling, general and administrative expenses and totaled $105 million and $106 million during the years ended December 31, 2019 and 2018, respectively. Impairment losses recognized during the years ended December 31, 2019 and 2018 related to capitalized contract costs were not significant.
Change in Accounting Policy
Except for the changes below, the Company has consistently applied the accounting policies to all periods presented in its consolidated financial statements. The details of the significant changes and quantitative impact of the changes are disclosed below.
Sales Commissions
Under ASC 605, the Company recognized sales commission fees related to contracts with customers as selling expenses when incurred. Under ASC 606, the Company capitalizes incremental sales commission fees as costs of obtaining a contract and, if expected to be recovered, amortizes such costs using a portfolio approach consistent with the pattern of transfer of the good or service to which the asset relates.
Termination Fees
Under ASC 605, the Company recognized customer contract termination fees at a point in time upon deconversion or receipt of a non-refundable cash payment. Under ASC 606, a contract termination is considered a contract modification and therefore the Company recognizes contract termination fees under ASU 2014-09 over the remaining modified contract term.
Contract Assets and Liabilities
Under ASC 605, the Company presented customer incentives and deferred revenue on a gross basis within its consolidated balance sheet. Under ASC 606, the Company reports net contract asset or liability positions on a contract-by-contract basis at the end of each reporting period.
4**. Acquisitions and Dispositions**
Acquisition of First Data
On July 29, 2019, the Company completed the acquisition of First Data, a global leader in commerce-enabling technology and solutions for merchants, financial institutions and card issuers, by acquiring 100% of the First Data stock that was issued and outstanding as of the date of acquisition. The acquisition increases the Company’s 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.
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. The Company 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 as described in further detail within Note 16. In addition, concurrent with the closing of the acquisition, the Company made a cash payment of $16.4 billion to repay existing First Data debt. The Company funded the transaction-related expenses and the repayment of First Data debt through a combination of available cash on-hand and proceeds from debt issuances as discussed in Note 12.
The total purchase price paid for First Data is as follows:
| (In millions) | |||
| Fair value of stock exchanged for shares of Fiserv, Inc. (1) | $ | 29,293 | |
| Repayment of First Data debt | 16,414 | ||
| Fair value of vested portion of First Data stock awards exchanged for Fiserv, Inc. awards (2) | 768 | ||
| Total purchase price | $ | 46,475 |
| (1) | The fair value of the 286 million shares of the Company’s common stock issued as of the acquisition date was determined based on a per share price of $102.30, which was the closing price of the Company’s common stock on July 26, 2019, the last trading day before the acquisition closed the morning of July 29, 2019. This includes a nominal amount of cash paid in lieu of fractional shares. |
| (2) | Represents the portion of the fair value of the replacement awards related to services provided prior to the acquisition. The remaining portion of the fair value is associated with future service and will be recognized as expense over the future service period. See Note 16 for additional information. |
The acquisition was accounted for as a business combination using the acquisition method of accounting in accordance with ASC 805, Business Combinations (“ASC 805”). The purchase price was allocated to the assets acquired and liabilities assumed based on the estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired was allocated to goodwill, none of which is expected to be deductible for tax purposes. Goodwill is primarily attributed to synergies from future expected economic benefits, including enhanced revenue growth from expanded capabilities and geographic presence as well as substantial cost savings from duplicative overhead, streamlined operations and enhanced operational efficiency.
The December 31, 2019 consolidated balance sheet includes the assets and liabilities of First Data, which have been measured at estimated fair value as of the acquisition date. During the fourth quarter of 2019, the Company identified and recorded measurement period adjustments to the preliminary purchase price allocation, which were the result of additional analysis performed and information identified based on facts and circumstances that existed as of the acquisition date. These measurement period adjustments resulted in an increase to goodwill of $552 million. The offsetting amounts to the change in goodwill were primarily related to intangible assets, noncontrolling interests and deferred income taxes. The Company recorded a measurement period adjustment of $396 million to the fair value of intangible assets as a result of refinements to estimated future cash flows, royalty rates, technology related obsolescence and attrition rates. A measurement period adjustment of $776 million was recorded to the fair value of noncontrolling interests as a result of updates to the Company’s discounted cash flow analysis and the incorporation of additional facts and circumstances that existed as of the acquisition date. The Company recorded a measurement period adjustment of $147 million to the fair value of recognized deferred tax liabilities as a result of adjustments to the estimated fair value of assets acquired. Such measurement period adjustments did not have a material impact on the consolidated statement of income. The allocation of the purchase price shown below remains
preliminary and subject to further adjustment, pending additional refinement and final completion of valuations, including but not limited to valuations of property and equipment, customer relationships and other intangible assets, noncontrolling interests and deferred tax liabilities. Adjustments to the valuation of assets acquired and liabilities assumed will result in a corresponding adjustment to goodwill. The updated preliminary allocation of purchase price recorded for First Data was as follows:
| (In millions) | |||
| Assets acquired (1) | |||
| Cash and cash equivalents | $ | 310 | |
| Trade accounts receivable | 1,747 | ||
| Prepaid expenses and other current assets | 1,046 | ||
| Settlement assets | 10,398 | ||
| Property and equipment | 1,181 | ||
| Customer relationships | 13,613 | ||
| Other intangible assets | 2,811 | ||
| Goodwill | 30,507 | ||
| Investments in unconsolidated affiliates | 2,699 | ||
| Other long-term assets | 1,228 | ||
| Total assets acquired | $ | 65,540 | |
| Liabilities assumed (1) | |||
| Accounts payable and accrued expenses | $ | 1,576 | |
| Short-term and current maturities of long-term debt (2) | 243 | ||
| Contract liabilities | 74 | ||
| Settlement obligations | 10,398 | ||
| Deferred income taxes | 3,535 | ||
| Long-term contract liabilities | 16 | ||
| Long-term debt and other long-term liabilities (3) | 1,240 | ||
| Total liabilities assumed | $ | 17,082 | |
| Net assets acquired | $ | 48,458 | |
| Redeemable noncontrolling interests | 252 | ||
| Noncontrolling interests | 1,731 | ||
| Total purchase price | $ | 46,475 |
| (1) | In connection with the acquisition of First Data, the Company acquired two businesses, which it intended to and subsequently did sell in October 2019. Therefore, such businesses were classified as held for sale and were included within prepaid expenses and other current assets and accounts payable and accrued expenses in the above preliminary allocation of purchase price (see Note 5). |
| (2) | Includes foreign lines of credit, current portion of finance lease obligations and other financing obligations (see Note 12). |
| (3) | Includes the receivable securitized loan and the long-term portion of finance lease obligations (see Note 12). |
The preliminary estimated fair values of the assets acquired and liabilities assumed were determined using the income and cost approaches. In many cases, the determination of the fair values required estimates about discount rates, growth and attrition rates, future expected cash flows and other future events that are judgmental and subject to change. The fair value measurements were primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement of the fair value hierarchy as defined in ASC 820, Fair Value Measurements. Intangible assets consisting of customer relationships, technology and trade names were valued using the multi-period excess earnings method (“MEEM”), or the relief from royalty (“RFR”) method, both are forms of the income approach. A cost and market approach was applied, as appropriate, for property and equipment, including land.
| • | Customer relationship intangible assets were valued using the MEEM method. The significant assumptions used include the estimated annual net cash flows (including appropriate revenue and profit attributable to the asset, retention rate, applicable tax rate, and contributory asset charges, among other factors), the discount rate, reflecting the |
risks inherent in the future cash flow stream, an assessment of the asset’s life cycle and the tax amortization benefit, among other factors.
| • | Technology and trade name intangible assets were valued using the RFR method. The significant assumptions used include the estimated annual net cash flows (including appropriate revenue attributable to the asset, applicable tax rate, royalty rate and other factors such as technology related obsolescence rates), the discount rate, reflecting the risks inherent in the future cash flow stream and the tax amortization benefit, among other factors. |
| • | The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used, as appropriate, for property and equipment. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the property, less an allowance for loss in value due to depreciation. |
| • | The market approach, which estimates value by leveraging comparable land sale data/listings and qualitatively comparing them to the in-scope properties, was used to value the land. |
| • | An income approach was applied to derive fair value for both consolidated investments with a noncontrolling interest and equity method investments accounted for under the equity method of accounting. The significant assumptions used include the estimated annual cash flows, the discount rate, the long-term growth rate and operating margin, among other factors. |
The Company believes that the information provides a reasonable basis for estimating the fair values of the acquired assets and assumed liabilities, but the potential for additional measurement period adjustments exists based on the Company’s continuing review of matters related to the acquisition. The Company expects to complete the purchase price allocation as soon as practicable, but no later than one year from the acquisition date.
The amounts, based on preliminary valuations and subject to final adjustment, allocated to intangible assets are as follows:
| (In millions) | Gross Carrying Amount | Weighted-Average Useful Life | |||
| Customer relationships | $ | 13,613 | 15 years | ||
| Acquired software and technology | 2,321 | 7 years | |||
| Trade names | 490 | 9 years | |||
| Total | $ | 16,424 | 14 years |
Since the acquisition date, the results of operations for First Data of $4.1 billion of revenue and $1.0 billion of operating income have been included within the accompanying consolidated statement of income for the year ended December 31, 2019 (see Note 21).
The Company incurred transaction expenses of approximately $175 million for the year ended December 31, 2019. Approximately $77 million of these expenses were included in selling, general and administrative expenses and $98 million were included in debt financing activities within the Company’s consolidated statement of income for the year ended December 31, 2019.
The following unaudited supplemental pro forma combined financial information presents the Company’s results of operations for the years ended December 31, 2019 and 2018 as if the acquisition of First Data had occurred on January 1, 2018. The pro forma financial information is presented for comparative purposes only and is not necessarily indicative of the Company’s operating results that may have actually occurred had the acquisition of First Data been completed on January 1, 2018. In addition, the unaudited pro forma financial information does not give effect to any anticipated cost savings, operating efficiencies or other synergies that may be associated with the acquisition, or any estimated costs that have been or will be incurred by the Company to integrate the assets and operations of First Data.
| (In millions, except for per share data) | 2019 | 2018 | |||||
| Total revenue | $ | 15,775 | $ | 15,284 | |||
| Net income | 1,520 | 1,125 | |||||
| Net income attributable to Fiserv, Inc. | 1,457 | 1,040 | |||||
| Net income per share attributable to Fiserv, Inc.: | |||||||
| Basic | $ | 2.14 | $ | 1.50 | |||
| Diluted | $ | 2.10 | $ | 1.47 |
The unaudited pro forma financial information reflects pro forma adjustments to present the combined pro forma results of operations as if the acquisition had occurred on January 1, 2018 to give effect to certain events the Company believes to be directly attributable to the acquisition. These pro forma adjustments primarily include:
| • | a net increase in amortization expense that would have been recognized due to acquired intangible assets; |
| • | an adjustment to interest expense to reflect (i) the additional borrowings of the Company in conjunction with the acquisition and (ii) the repayment of First Data’s historical debt in conjunction with the acquisition; |
| • | a reduction in expenses for the year ended December 31, 2019 and a corresponding increase in the year ended December 31, 2018 for acquisition-related transaction costs and other one-time costs directly attributable to the acquisition; |
| • | a reduction in operating revenues due to the elimination of deferred revenues assigned no value at the acquisition date; |
| • | an adjustment to stock compensation expense to reflect the cost of the replacement awards as if they had been issued on January 1, 2018; and |
| • | the related income tax effects of the adjustments noted above. |
Acquisition of Elan
On October 31, 2018, the Company acquired the debit card processing, ATM Managed Services, and MoneyPass® surcharge-free network of Elan Financial Services, a unit of U.S. Bancorp (“Elan”), for approximately $659 million. Such purchase price includes an initial cash payment of $691 million, less post-closing working capital adjustments of $57 million, plus contingent consideration related to earn-out provisions estimated at a fair value of $12 million and future payments under a transition services agreement estimated to be in excess of fair value of $13 million. This acquisition, included within the Payments segment, deepens the Company’s presence in debit card processing, broadens its client reach and scale and provides new solutions to enhance the value proposition for its existing debit solution clients.
During the third quarter of 2019, the Company identified and recorded measurement period adjustments to the preliminary purchase price allocation, which were the result of additional analysis performed and information identified based on facts and circumstances that existed as of the acquisition date. The measurement period adjustments resulted in a decrease in goodwill of $24 million with an offset to intangible assets and prepaid expenses and other current assets. The following allocation of purchase price for Elan was finalized in the third quarter of 2019:
| (In millions) | |||
| Trade accounts receivable | $ | 20 | |
| Prepaid expenses and other current assets | 98 | ||
| Property and equipment | 9 | ||
| Intangible assets | 373 | ||
| Goodwill | 214 | ||
| Accounts payable and other current liabilities | (55 | ) | |
| Total purchase price | $ | 659 |
Goodwill, deductible for tax purposes, is primarily attributed to synergies, including the migration of Elan’s clients to the Company’s debit platform, and the anticipated value created by selling the Company’s products and services outside of card payments to Elan’s existing client base. The values allocated to intangible assets are as follows:
| (In millions) | Gross Carrying Amount | Weighted-Average Useful Life | |||
| Customer relationships | $ | 370 | 15 years | ||
| Trade name | 3 | 8 years | |||
| Total | $ | 373 | 15 years |
In conjunction with the acquisition, the Company entered into a transition services agreement for the provision of certain processing, network, administrative and managed services for a period of two years. The results of operations for Elan, consisting of $176 million and $29 million of revenue and $8 million and $6 million of operating income, including $37 million and $4 million of acquired intangible asset amortization, for the years ended December 31, 2019 and 2018, respectively, have been included within the accompanying consolidated statements of income.
Other Acquisitions
On January 17, 2017, the Company completed its acquisition of Online Banking Solutions, Inc. (“OBS”), a provider of cash management and digital business banking solutions that complement and enrich the Company’s existing solutions. On July 31, 2017, the Company 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 the Company’s account processing solutions and enable the Company’s bank and credit union clients to better serve their commercial and mortgage customers. On August 18, 2017, the Company acquired Dovetail Group Limited (“Dovetail”), a leading provider of bank payments and liquidity management solutions. On September 1, 2017, the Company completed its 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 the Company to help financial institutions around the world transform their payments infrastructure and to expand its digital leadership, respectively.
The Company acquired these four businesses for an aggregate purchase price of $384 million, net of $33 million of acquired cash, along with earn-out provisions estimated at a fair value of $15 million (see Note 10). The purchase price allocations for these acquisitions resulted in acquired software and technology and customer related intangible assets totaling $163 million and goodwill of $217 million. The other net assets of $19 million include $50 million of assets held for sale and approximately $20 million of deferred tax liabilities. The purchase price allocations were finalized for the OBS and PCLender acquisitions in 2017 and for the Dovetail and Monitise acquisitions in the first quarter of 2018, and did not materially change from the preliminary allocations. The goodwill from these acquisitions is primarily attributed to synergies and the anticipated value created by selling the products and services that these businesses provide into the Company’s existing client base. Approximately $70 million of the goodwill is deductible for tax purposes. The values allocated to intangible assets were as follows:
| (In millions) | Gross Carrying Amount | Weighted-Average Useful Life | |||
| Customer relationships | $ | 92 | 15 years | ||
| Acquired software and technology | 71 | 7 years | |||
| Total | $ | 163 | 12 years |
Dispositions
On December 4, 2019, the Company entered into a definitive agreement to sell a 60% controlling interest of its Investment Services business, which is reported within the Payments segment. The Company completed the sale of the 60% interest of the Investment Services business on February 18, 2020 for gross proceeds of $591 million, resulting in an estimated pre-tax gain, including the remeasurement of the Company’s 40% retained interest, of approximately $430 million during the first quarter of 2020. Accordingly, the assets and liabilities of the Investment Services business were classified as held for sale in the Company’s consolidated balance sheet at December 31, 2019. The corresponding assets of $360 million, consisting primarily of goodwill, intangible assets, and trade accounts receivable, are presented within prepaid expenses and other current assets and the corresponding liabilities of $43 million, consisting primarily of accrued expenses and deferred income tax liabilities, are presented within accounts payable and accrued expenses in the Company’s consolidated balance sheet at December 31, 2019. The Company will account for its 40% retained interest of the Investment Services business as an equity method investment.
On May 11, 2017, the Company sold its Australian item processing business, which was reported within the Financial segment, for approximately $17 million. The Company recognized a gain on the sale of $10 million, with the related tax expense of $5 million recorded through the income tax provision, in the consolidated statements of income.
5. 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 as described below.
On January 10, 2018, the Company completed the sale of the retail voucher business, MyVoucherCodes, acquired as part of its acquisition of Monitise in September 2017 for proceeds of £37 million ($50 million). The corresponding proceeds received in 2018 are presented within discontinued operations since the business was never considered part of the Company’s ongoing operations. There was no impact to operating income or gain/loss recognized on the sale in 2018. Cash flows from discontinued operations in 2018 also included tax payments of $7 million related to income recognized in 2017 from the litigation settlement described above.
In connection with the acquisition of First Data, the Company acquired two businesses, which it intended to sell. In October 2019, the Company completed the sales, at acquired fair value, of these two businesses for aggregate proceeds of $133 million. The sale proceeds are presented within discontinued operations in the consolidated statement of cash flows since the businesses were never considered part of the Company’s ongoing operations. The financial results of these businesses from the date of acquisition were not significant.
6. Settlement Assets and Obligations
Settlement assets and obligations represent intermediary balances arising from the settlement process which involves the transferring of funds between card issuers, payment networks, merchants and consumers. The Company records settlement assets and obligations upon processing a payment transaction. Settlement assets represent amounts receivable from agents and from payment networks for submitted merchant transactions, and funds received by the Company in advance of paying to the merchant or payee. Settlement obligations represent the unpaid amounts that are due to merchants or payees for their payment transactions.
The principal components of the Company’s settlement assets and obligations were as follows at December 31:
| (In millions) | 2019 | 2018 | |||||
| Settlement assets | |||||||
| Cash and cash equivalents | $ | 1,656 | $ | 141 | |||
| Receivables | 10,212 | 345 | |||||
| Total settlement assets | $ | 11,868 | $ | 486 | |||
| Settlement obligations | |||||||
| Payment instruments outstanding | $ | 345 | $ | 480 | |||
| Card settlements due to merchants | 11,523 | — | |||||
| Total settlement obligations | $ | 11,868 | $ | 480 |
The changes in settlement assets and obligations are presented on a net basis within operating activities in the consolidated statements of cash flows.
7. Intangible Assets
Identifiable intangible assets consisted of the following at December 31:
| (In millions) | Gross Carrying Amount | Accumulated Amortization | Net Book Value | |||||||||
| 2019 | ||||||||||||
| Customer relationships | $ | 16,187 | $ | 2,145 | $ | 14,042 | ||||||
| Acquired software and technology | 2,607 | 639 | 1,968 | |||||||||
| Trade names | 620 | 105 | 515 | |||||||||
| Capitalized software development costs | 942 | 332 | 610 | |||||||||
| Purchased software | 680 | 173 | 507 | |||||||||
| Total | $ | 21,036 | $ | 3,394 | $ | 17,642 | ||||||
| (In millions) | Gross Carrying Amount | Accumulated Amortization | Net Book Value | |||||||||
| 2018 | ||||||||||||
| Customer relationships | $ | 2,642 | $ | 1,294 | $ | 1,348 | ||||||
| Acquired software and technology | 591 | 490 | 101 | |||||||||
| Trade names | 120 | 71 | 49 | |||||||||
| Capitalized software development costs | 810 | 314 | 496 | |||||||||
| Purchased software | 261 | 112 | 149 | |||||||||
| Total | $ | 4,424 | $ | 2,281 | $ | 2,143 |
Gross software development costs capitalized for new products and enhancements to existing products totaled $339 million, $193 million and $159 million in 2019, 2018 and 2017, respectively.
Amortization expense associated with the above identifiable intangible assets was as follows for the years ended December 31:
| (In millions) | 2019 | 2018 | 2017 | |||||||||
| Amortization expense | $ | 1,299 | $ | 347 | $ | 326 |
The Company estimates that annual amortization expense with respect to intangible assets recorded at December 31, 2019 will be as follows:
| (In millions) | ||||
| Year ending December 31, | ||||
| 2020 | $ | 2,490 | ||
| 2021 | 2,400 | |||
| 2022 | 2,168 | |||
| 2023 | 1,891 | |||
| 2024 | 1,572 | |||
| Thereafter | 7,121 | |||
| Total | $ | 17,642 |
8. Goodwill
The changes in goodwill during 2019 and 2018 were as follows:
| Reportable Segments | ||||||||||||||||
| (In millions) | First Data | Payments | Financial | Total | ||||||||||||
| Goodwill - December 31, 2017 | $ | — | $ | 3,757 | $ | 1,833 | $ | 5,590 | ||||||||
| Acquisitions and valuation adjustments | — | 240 | 7 | 247 | ||||||||||||
| Dispositions | — | — | (131 | ) | (131 | ) | ||||||||||
| Foreign currency translation | — | (1 | ) | (3 | ) | (4 | ) | |||||||||
| Goodwill - December 31, 2018 | — | 3,996 | 1,706 | 5,702 | ||||||||||||
| Acquisitions and valuation adjustments | 30,507 | (27 | ) | 2 | 30,482 | |||||||||||
| Dispositions | — | — | (2 | ) | (2 | ) | ||||||||||
| Goodwill reclassified to assets held for sale (1) | — | (220 | ) | — | (220 | ) | ||||||||||
| Foreign currency translation | 74 | — | 2 | 76 | ||||||||||||
| Goodwill - December 31, 2019 | $ | 30,581 | $ | 3,749 | $ | 1,708 | $ | 36,038 |
| (1) | In December 2019, the Company entered into a definitive agreement to sell a 60% controlling interest of its Investment Services business (see Note 4). As a result, the corresponding assets of the Investment Services business, including $220 million of goodwill, were classified as held for sale within prepaid expenses and other current assets in the Company’s consolidated balance sheet at December 31, 2019. |
9. Investments in Unconsolidated Affiliates
Lending Joint Ventures
On March 29, 2018, the Company completed the sale of a 55% controlling interest of each of Fiserv Automotive Solutions, LLC and Fiserv LS LLC, which were subsidiaries of the Company that owned its Lending Solutions business (collectively, the “Lending Joint Ventures”). The Lending Joint Ventures, which were reported within the Financial segment, included all of the Company’s automotive loan origination and servicing products, as well as its LoanServ™ mortgage and consumer loan servicing platform. The Company received gross sale proceeds of $419 million from the transactions. In 2018, the Company recognized a pre-tax gain on the sale of $227 million, with the related tax expense of $77 million recorded through the income tax provision, in the consolidated statement of income. The pre-tax gain included $124 million related to the remeasurement of the Company’s 45% retained interests based upon the estimated enterprise value of the Lending Joint Ventures. In 2019, the Company recognized a pre-tax gain on the sale of $10 million, with the related tax expense of $2 million recorded through the income tax provision, as contingent special distribution provisions within the transaction agreement were resolved and thereby realized.
Prior to the sale transactions described above, the Lending Joint Ventures entered into variable-rate term loan facilities for an aggregate amount of $350 million in senior unsecured debt and variable-rate revolving credit facilities for an aggregate amount of $35 million with a syndicate of banks, which transferred to the Lending Joint Ventures as part of the sale. The Company has guaranteed this debt of the Lending Joint Ventures and does not anticipate that the Lending Joint Ventures will fail to fulfill their debt obligations. These debt facilities mature in March 2023, and there were no outstanding borrowings on the revolving credit facilities at December 31, 2019 and 2018. The Company recorded an initial $34 million liability as a reduction to the gain on sale transactions for the estimated fair value of its obligations to stand ready to perform over the term of the guarantees, which is reported primarily within other long-term liabilities in the consolidated balance sheets. Such guarantees will be amortized in future periods over the contractual term. The Company recognized $7 million and $5 million in 2019 and 2018, respectively, within other (expense) income in its consolidated statements of income related to its release from risk under the guarantees. The Company has not made any payments under the guarantees, nor has it been called upon to do so. In conjunction with the sale transactions described above, the Company also entered into certain transition services agreements to provide, at fair value, various administration, business process outsourcing, technical and data center related services for defined periods to the Lending Joint Ventures. Amounts transacted through these agreements approximated $36 million and $30 million in 2019 and 2018, respectively, and were primarily recognized as processing and services revenue in the consolidated statements of income.
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 the Company’s ownership interest in the new combined entity, defi SOLUTIONS Group, LLC (“defi SOLUTIONS”). The Company recognized a pre-tax gain of $14 million within income from investments in
unconsolidated affiliates in the consolidated statement of income, with related tax expense of $3 million, in 2019, reflecting the Company’s 31% ownership interest in defi SOLUTIONS. In connection with the merger, Sagent Auto, LLC borrowed in 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. The Company has guaranteed this incremental debt and does not anticipate that the joint venture will fail to fulfill its debt obligations. The Company recorded a $4 million liability for the estimated fair value of its obligations to stand ready to perform over the term of the guarantees. Such guarantees will be amortized in future periods over the contractual term, based upon amounts to be received by the Company for the respective guarantees. The Company has not made any payments under the guarantees, nor has it been called upon to do so.
The Company’s remaining ownership interests in the Lending Joint Ventures are accounted for as equity method investments, with the Company’s share of net income (loss) reported as income from investments in unconsolidated affiliates and the related tax (benefit) expense reported within the income tax provision in the consolidated statements of income. The revenues, expenses and cash flows of the Lending Joint Ventures after the sale transactions described above are not included in the Company’s consolidated financial statements.
Acquisition of First Data
On July 29, 2019, the Company acquired unconsolidated investments in connection with the acquisition of First Data (see Note 4). At December 31, 2019, there were 18 affiliates accounted for as equity method investments, comprised of merchant alliances and strategic investments in companies in related markets. The Company’s share of net income is reported as income from investments in unconsolidated affiliates and the related tax expense reported within the income tax provision in the consolidated statements of income. 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 (see Note 20).
StoneRiver Group, L.P.
The Company owns a 49% interest in StoneRiver Group, L.P. (“StoneRiver”), which is accounted for as an equity method investment. The Company reports its share of StoneRiver’s net income as income from investment in unconsolidated affiliates, with the related tax expense reported within the income tax provision, in the consolidated statements of income. In 2019, 2018 and 2017, the Company received cash distributions from StoneRiver of $0 million, $2 million and $45 million, respectively. The distributions, in their entirety, represented returns on the Company’s investment and are reported in cash flows from operating activities.
During 2017, StoneRiver recognized a gain on the sale of a business. The Company’s pre-tax share of the gain was $26 million, with related tax expense of $9 million. During 2017, the Company received cash distributions of $45 million from StoneRiver, which were funded from sale transactions and recorded as reductions in the Company’s investment in StoneRiver. These distributions exceeded the Company’s investment carrying amount, resulting in the reduction of its investment balance to zero, with the excess cash distribution of $6 million recorded as income, and related tax expense of $2 million, in 2017.
Summary of Financial Information
A summary of financial information for the Company’s unconsolidated affiliates accounted for under the equity method of accounting is presented below:
| (In millions) | |||
| December 31, | 2019 | ||
| Total current assets | $ | 4,288 | |
| Total long-term assets | 1 | ||
| Total assets | $ | 4,289 | |
| Total current liabilities | $ | 4,243 | |
| Total long-term liabilities | — | ||
| Total liabilities | $ | 4,243 |
The primary components of assets and liabilities are settlement asset and obligation related accounts similar to those described in Note 6 of these consolidated financial statements.
| (In millions) | |||
| Year ended December 31, | 2019 | ||
| Total revenue | $ | 467 | |
| Total expenses | 249 | ||
| Operating income | $ | 218 | |
| Net income | $ | 215 | |
| Income from investments in unconsolidated affiliates (1) | $ | 27 |
| (1) | Amount reflects the Company’s share of investee’s net income or loss and the amortization basis difference between the estimated fair value and the underlying book value of equity method intangibles. |
In 2019, 2018 and 2017, the Company received cash distributions from unconsolidated affiliates of $136 million, $2 million and $45 million, respectively, which were recorded as reductions in the Company’s investments in unconsolidated affiliates.
In addition, the Company holds equity securities without a readily determinable fair value, which are only adjusted for observable price changes in orderly transactions for the same or similar equity securities or any impairment, totaling $167 million at December 31, 2019, and are included within other long-term assets in the Company’s consolidated balance sheet. The equity securities were acquired primarily through the First Data acquisition and were recorded at fair market value at the acquisition date and no adjustments were made during the year ended December 31, 2019.
10. Fair Value Measurements
The fair values of cash equivalents, trade accounts receivable, settlement assets and obligations, accounts payable and client deposits approximate their respective carrying values due to the short period of time to maturity. The Company’s derivative instruments are measured on a recurring basis based on foreign currency spot rates and forwards quoted by banks and foreign currency dealers and are marked-to-market each period (see Note 14). The Company’s net contingent consideration liability relating to the acquisition of Elan (see Note 4) was estimated at a fair value of $1 million and $12 million at December 31, 2019 and 2018, respectively, based on the present value of a probability-weighted assessment approach derived from the likelihood of achieving the earn-out criteria. During 2019, the Company made a cash payment of $13 million, included in cash flows from financing activities in the consolidated statement of cash flows, as a result of the achievement of various earn-out criteria, and also adjusted the contingent consideration liability by $2 million as a result of an increased likelihood of achieving the remaining earn-out criteria.
Assets and liabilities measured at fair value on a recurring basis consisted of the following at December 31:
| Fair Value | ||||||||||
| (In millions) | Classification | Fair Value Hierarchy | 2019 | 2018 | ||||||
| Assets | ||||||||||
| Cash flow hedges | Prepaid expenses and other current assets | Level 2 | $ | 4 | $ | — | ||||
| Liabilities | ||||||||||
| Contingent consideration | Other long-term liabilities | Level 3 | $ | 1 | $ | 12 |
The Company’s senior notes are recorded at amortized cost, but measured at fair value for disclosure purposes. The estimated fair value of senior notes was based on matrix pricing which considers readily observable inputs of comparable securities (Level 2 of the fair value hierarchy). The carrying value of the Company’s term loan credit agreement, revolving credit facility borrowings and debt associated with the receivables securitization agreement approximates fair value as these instruments have variable interest rates and the Company has not experienced any change to its credit ratings (Level 2 of the fair value hierarchy). The estimated fair value of total debt, excluding finance leases and other financing obligations, was $22.6 billion and $6.0 billion at December 31, 2019 and 2018, respectively, and the carrying value was $21.5 billion and $6.0 billion at December 31, 2019 and 2018, respectively. See Note 12 for a description of debt financing activities in connection with the Company’s acquisition of First Data.
The Company’s debt guarantee arrangements are recorded at amortized cost, but measured at fair value for disclosure purposes. The aggregate carrying value of the Company’s debt guarantee arrangements of $26 million and $29 million approximate the
fair values at December 31, 2019 and 2018, respectively (Level 3 of the fair value hierarchy). See Note 9 for a description of the Company’s debt guarantee arrangements with the Lending Joint Ventures.
11. Leases
The Company adopted ASU 2016-02 and its related amendments (collectively known as “ASC 842”) effective January 1, 2019 using the optional transition method in ASU 2018-11. Therefore, the reported results for the year ended December 31, 2019 and the financial position as of December 31, 2019 reflect the application of ASC 842 while the reported results for the years ended December 31, 2018 and 2017 and the financial position as of December 31, 2018 were not adjusted and continue to be reported under the accounting guidance, ASC 840, Leases (“ASC 840”), in effect for the prior periods.
Company as Lessee
The Company primarily leases office space, land, data centers and equipment from third parties. The Company determines if a contract is a lease at inception. A contract contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The lease term begins on the commencement date, which is the date the Company takes possession of the asset, and may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. Many of the Company’s leases contain renewal options for varying periods, which can be exercised at the Company’s sole discretion. Leases are classified as operating or finance leases based on factors such as the lease term, lease payments, and the economic life, fair value and estimated residual value of the asset. Certain leases include options to purchase the leased asset at the end of the lease term, which is assessed as a part of the Company’s lease classification determination. The Company elected the package of practical expedients permitted under the transition guidance within ASU 2016-02 to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs. The Company’s leases have remaining lease terms ranging from one to 18 years.
The Company uses the right-of-use (“ROU”) model to account for its leases. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized on the commencement date based on the present value of lease payments over the lease term. ROU assets are based on the lease liability and are increased by prepaid lease payments and decreased by lease incentives received. For leases where the Company is reasonably certain to exercise a renewal option, such option periods have been included in the determination of the Company’s ROU assets and lease liabilities. Certain leases require the Company to pay taxes, insurance, maintenance and other operating expenses associated with the leased asset. Such amounts are not included in the measurement of the ROU assets and lease liabilities to the extent they are variable in nature. These variable lease costs are recognized as a variable lease expense when incurred. As a practical expedient, lease agreements with lease and non-lease components are accounted for as a single lease component for all asset classes. The Company estimates contingent lease incentives when it is probable that the Company is entitled to the incentive at lease commencement. The Company elected the short-term lease recognition exemption for all leases that qualify. Therefore, leases with an initial term of 12 months or less are not recorded on the balance sheet; instead, lease payments are recognized as lease expense on a straight-line basis over the lease term. The depreciable life of the ROU assets and leasehold improvements are limited by the expected lease term unless the Company is reasonably certain of a transfer of title or purchase option. The Company uses its incremental borrowing rate to discount future lease payments in the calculation of the lease liability and ROU asset based on the information available on the commencement date for each lease. The Company’s leases typically do not provide an implicit rate. The determination of the incremental borrowing rate requires judgment and is determined using the Company’s current unsecured borrowing rate, adjusted for various factors such as collateralization, currency and term to align with the terms of the lease.
Lease Balances
| (In millions) | ||||
| December 31, | 2019 | |||
| Assets | ||||
| Operating lease assets (1) | $ | 684 | ||
| Finance lease assets (2) | 235 | |||
| Total lease assets | $ | 919 | ||
| Liabilities | ||||
| Current | ||||
| Operating lease liabilities (1) | $ | 140 | ||
| Finance lease liabilities (2) | 78 | |||
| Noncurrent | ||||
| Operating lease liabilities (1) | 603 | |||
| Finance lease liabilities (2) | 144 | |||
| Total lease liabilities | $ | 965 |
| (1) | Operating lease assets are included within other long-term assets, and operating lease liabilities are included within accounts payable and accrued expenses (current portion) and other long-term liabilities (noncurrent portion) in the Company’s consolidated balance sheet. |
| (2) | Finance lease assets are included within property and equipment, net and finance lease liabilities are included within short-term and current maturities of long-term debt (current portion) and long-term debt (noncurrent portion) in the Company’s consolidated balance sheets. |
Components of Lease Cost
| (In millions) | |||
| Year ended December 31, | 2019 | ||
| Operating lease cost (1) | $ | 207 | |
| Finance lease cost (2) | |||
| Amortization of right-of-use assets | 40 | ||
| Interest on lease liabilities | 8 | ||
| Total lease cost | $ | 255 |
| (1) | Operating lease expense is included within cost of processing and services, cost of product and selling, general and administrative expense, dependent upon the nature and use of the ROU asset, in the Company’s consolidated statements of income. Operating lease cost includes approximately $56 million of variable lease costs for the year ended December 31, 2019. |
| (2) | Finance lease expense is recorded as depreciation and amortization expense within cost of processing and services, cost of product and selling, general and administrative expense, dependent upon the nature and use of the ROU asset, and interest expense, net in the Company’s consolidated statements of income. |
Supplemental Cash Flow Information
| (In millions) | ||||
| Year ended December 31, | 2019 | |||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||
| Operating cash flows from operating leases | $ | 139 | ||
| Operating cash flows from finance leases | 8 | |||
| Financing cash flows from finance leases | 37 | |||
| Right-of-use assets obtained in exchange for lease liabilities: (1) | ||||
| Operating leases | $ | 441 | ||
| Finance leases | 288 |
| (1) | Includes right-of-use assets and lease liabilities obtained through the acquisition of First Data |
Lease Term and Discount Rate
| December 31, | 2019 | ||
| Weighted-average remaining lease term: | |||
| Operating leases | 7 years | ||
| Finance leases | 3 years | ||
| Weighted-average discount rate: | |||
| Operating leases | 3.0 | % | |
| Finance leases | 3.5 | % |
Maturity of Lease Liabilities under ASC 842
Future minimum rental payments on leases with initial non-cancellable lease terms in excess of one year were due as follows at December 31, 2019:
| (In millions) | |||||||
| Year ending December 31, | Operating Leases (1) | Finance Leases (2) | |||||
| 2020 | $ | 153 | $ | 83 | |||
| 2021 | 139 | 73 | |||||
| 2022 | 123 | 64 | |||||
| 2023 | 104 | 10 | |||||
| 2024 | 86 | 3 | |||||
| Thereafter | 212 | 5 | |||||
| Total lease payments | 817 | 238 | |||||
| Less: Interest | (74 | ) | (16 | ) | |||
| Present value of lease liabilities | $ | 743 | $ | 222 |
| (1) | Operating lease payments include $47 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $4 million of legally binding minimum lease payments for leases signed but not yet commenced. Operating leases that have been signed but not yet commenced are for real estate and will commence in 2020 with lease terms of 5 years. |
| (2) | Finance lease payments exclude $302 million of legally binding minimum lease payments for leases signed but not yet commenced. Finance leases that have been signed but not yet commenced are for equipment and will commence in 2020 with lease terms of 5 years. |
Maturity of Lease Liabilities under ASC 840
Future minimum rental payments on operating leases with initial non-cancellable lease terms in excess of one year were due as follows at December 31, 2018:
| (In millions) | |||
| Year ending December 31, | |||
| 2019 | $ | 94 | |
| 2020 | 75 | ||
| 2021 | 62 | ||
| 2022 | 51 | ||
| 2023 | 40 | ||
| Thereafter | 108 | ||
| Total | $ | 430 |
Rent expense for all operating leases was $118 million and $126 million during the years ended December 31, 2018 and 2017, respectively.
Company as Lessor
The Company owns certain POS terminal equipment which it leases to merchants. Leases are classified as operating or sales-type leases based on factors such as the lease term, lease payments, and the economic life, fair value and estimated residual value of the asset. The terms of the leases typically range from two to five years. For operating leases, the minimum lease payments received are recognized as lease income on a straight-line basis over the lease term and the leased asset is included in property and equipment, net in the consolidated balance sheet and depreciated to its estimated residual value over the lease term. For sales-type leases, selling profit is recognized at the commencement date of the lease to the extent the fair value of the underlying asset is different from its carrying amount. Selling profit is directly impacted by the Company’s estimate of the amount to be derived from the residual value of the asset at the end of the lease term. The residual value of the asset is computed using various assumptions, including the expected fair value of the underlying asset at the end of the lease term. Unearned income is recognized as interest income over the lease term. For sales-type leases, the Company derecognizes the carrying amount of the underlying leased asset and recognizes a net investment in the leased asset in the consolidated balance sheet. The net investment in a leased asset is computed based on the present value of the minimum lease payments not yet received and the present value of the residual value of the asset.
Components of Lease Income
| (In millions) | |||
| Year ended December 31, | 2019 | ||
| Sales-type leases: | |||
| Selling profit (1) | $ | 20 | |
| Interest income (1) | 33 | ||
| Operating lease income (2) | 36 |
| (1) | Selling profit includes $48 million recorded within product revenue with a corresponding charge of $28 million recorded in cost of product in the consolidated statement of income for the year ended December 31, 2019. Interest income is included within product revenue in the consolidated statement of income. |
| (2) | Operating lease income includes a nominal amount of variable lease income and is included within product revenue in the Company’s consolidated statement of income for the year ended December 31, 2019. |
Components of Net Investment in Sales-Type Leases
| (In millions) | |||
| December 31, | 2019 | ||
| Minimum lease payments | $ | 376 | |
| Residual values | 34 | ||
| Less: Unearned interest income | (160 | ) | |
| Net investment in leases (1) | $ | 250 |
| (1) | Net investments in leased assets are included within prepaid expenses and other current assets (current portion) and other long-term assets (noncurrent portion) in the consolidated balance sheet. |
Maturities of Future Minimum Lease Payment Receivables
Future minimum lease payments receivable on sales-type leases were as follows at December 31, 2019:
| (In millions) | |||
| Year ending December 31, | Sales-Type Leases | ||
| 2020 | $ | 161 | |
| 2021 | 120 | ||
| 2022 | 70 | ||
| 2023 | 23 | ||
| 2024 | 2 | ||
| Thereafter | — | ||
| Total minimum lease payments | $ | 376 |
12. Debt
The Company’s 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 |
The Company was in compliance with all financial debt covenants during 2019. Annual maturities of the Company’s total debt were as follows at December 31, 2019:
| (In millions) | |||
| Year ending December 31, | |||
| 2020 | $ | 287 | |
| 2021 | 520 | ||
| 2022 | 2,546 | ||
| 2023 | 2,608 | ||
| 2024 | 4,702 | ||
| Thereafter | 11,396 | ||
| Total principal payments | 22,059 | ||
| Unamortized discount and deferred financing costs | (160 | ) | |
| Total debt | $ | 21,899 |
Bridge Term Loan Facility
On January 16, 2019, in connection with the definitive merger agreement to acquire First Data (see Note 4), the Company 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. The Company 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, the Company 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) the Company’s ability to consolidate or merge with or into, or convey, transfer or lease all or substantially all of its properties and assets to another person, (ii) the Company’s and certain of its subsidiaries’ ability to create or assume liens, and (iii) the Company’s and certain of its subsidiaries’ ability to engage in sale and leaseback transactions. The Company may, at its option, redeem the senior notes, in whole or in part, at any time prior to the applicable par call date.
On July 1, 2019, the Company 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 the Company’s U.S. dollar-denominated senior notes described above.
In connection with the anticipated issuance of the foreign currency-denominated senior notes described above, the Company 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. The Company 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. Further, upon completion of the acquisition of First Data, the Company designated its Euro- and British Pound-denominated senior notes as net investment hedges to hedge a portion of its net investment in certain Euro- and British Pound-denominated subsidiaries (see Note 14). Prior to designating the foreign currency-denominated senior notes as net investment hedges, the Company realized foreign currency transaction gains of $69 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 senior notes due to fluctuations in foreign currency exchange rates. In addition, the Company 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. The Company 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 the Company’s amended and restated revolving credit facility. On July 29, 2019, concurrent with the acquisition of First Data, the Company 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 its revolving credit facility described below, to repay $16.4 billion of existing First Data debt and to pay fees and expenses related to such repayment, the First Data acquisition and related transactions.
In September 2018, the Company 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. The Company used the net proceeds from such offering to repay the outstanding principal balance of $540 million under its then-existing term loan and the then-outstanding borrowings under its amended and restated revolving credit facility totaling $1.1 billion. In addition, the Company commenced a cash tender offer in September 2018 for any and all of its 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, the Company retired the remaining outstanding $204 million aggregate principal amount of 4.625% senior notes. The Company 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.
The Company’s 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, the Company has 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. The Company’s 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. The Company’s 4.75% senior notes due in June 2021 pay interest at the stated rate on June 15 and December 15 of each year. The Company’s 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) the Company’s ability to consolidate or merge with or into, or convey, transfer or lease all or substantially all of its properties and assets to, another person, (ii) the Company’s and certain of its subsidiaries’ ability to create or assume liens, and (iii) the Company’s and certain of its subsidiaries’ ability to engage in sale and leaseback transactions. At December 31, 2019, the 2.7% senior notes due in June 2020 were classified in the consolidated balance sheet as long-term and within the debt maturity schedule above as maturing in September 2023, the date that the Company’s revolving credit facility expires, as the Company has the intent to refinance this debt on a long-term basis and the ability to do so under its revolving credit facility.
Term Loan Facility
On February 15, 2019, the Company entered into a new term loan credit agreement with a syndicate of financial institutions pursuant to which such financial institutions committed to provide the Company 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, the Company entered into an amendment to its 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 the Company’s 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 the Company’s 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. The Company was 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 the Company’s 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 the Company’s existing amended revolving credit facility, as described below.
Revolving Credit Facility
In September 2018, the Company entered into an amended and restated revolving credit agreement that restated its 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 the Company, among other things, to (i) limit its consolidated indebtedness as of the end of each fiscal quarter to no more than three and one-half times the Company’s 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 EBITDA of at least three times its consolidated interest expense as of the end of each fiscal quarter for the period of four fiscal quarters then ended.
On February 6, 2019, the Company entered into an amendment to its amended and restated revolving credit facility to (i) amend the maximum leverage ratio covenant to permit it to elect to increase the permitted maximum leverage ratio from three and one-half times the EBITDA to either four times or four and one-half times the Company’s EBITDA for a specified period following certain acquisitions and (ii) permit it to make drawings under the revolving credit facility on the closing date of its acquisition of First Data subject to only limited conditions. In November 2019, the Company elected to increase the
permitted maximum leverage ratio to four times the Company’s consolidated EBITDA pursuant to the terms of the amendment described above. In addition, on February 15, 2019, the Company entered into a second amendment to its 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, the Company entered into a third amendment to its 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 the Company’s 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 the Company’s 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, the Company 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. The Company 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, the Company 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 wholly-owned subsidiaries of the Company 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 entities or affiliates of the Company, 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 the Company. The receivables held by FDR are recorded within trade accounts receivable, net in the Company’s 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.
Deferred Financing Costs
Deferred financing costs are amortized as a component of interest expense, net over the term of the underlying debt using the effective interest method. Deferred financing costs related to the Company’s senior notes, term loan and receivable securitized loan totaled $120 million and $25 million at December 31, 2019 and 2018, respectively, and are reported as a direct reduction of the related debt instrument in the consolidated balance sheets. Deferred financing costs related to the Company’s revolving credit facility are reported in other long-term assets in the consolidated balance sheets and totaled $7 million and $5 million at December 31, 2019 and 2018, respectively.
13. Redeemable Noncontrolling Interests
The Company assumed two redeemable noncontrolling interests through the acquisition of First Data (see Note 4) which are presented outside of equity and carried at their estimated redemption values. Each minority partner owns 1% of the equity in the joint venture; in addition, each minority partner is entitled to a contractually determined share of the entity’s income. The agreements contain redemption features whereby interests held by the minority partner are redeemable either (i) at the option of the holder or (ii) upon the occurrence of an event that is not solely within the Company’s control. The minority interests have a total estimated redemption value of $252 million, which may be terminated by either party for convenience any time after September 1, 2021 and December 31, 2024, respectively. In the event of termination for cause, as a result of a change in control, or for convenience after the predetermined date, the Company may be required to purchase the minority partner membership interests at a price equal to the fair market value of the minority interest.
The following table presents a summary of the redeemable noncontrolling interests activity during the year ended December 31, 2019:
| (In millions) | |||
| Balance at December 31, 2018 | $ | — | |
| Acquired | 252 | ||
| Distributions paid to redeemable noncontrolling interests | (7 | ) | |
| Share of income | 17 | ||
| Balance at December 31, 2019 | $ | 262 |
14. Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss by component, net of income taxes, consisted of the following:
| Year ended December 31, 2019 | ||||||||||||||||
| (In millions) | Cash Flow Hedges | Foreign Currency Translation | Pension Plans | Total | ||||||||||||
| Balance at December 31, 2018 | $ | (16 | ) | $ | (49 | ) | $ | (2 | ) | $ | (67 | ) | ||||
| Other comprehensive (loss) income before reclassifications | (134 | ) | 16 | (4 | ) | (122 | ) | |||||||||
| Amounts reclassified from accumulated other comprehensive loss | 9 | — | — | 9 | ||||||||||||
| Net current-period other comprehensive (loss) income | (125 | ) | 16 | (4 | ) | (113 | ) | |||||||||
| Balance at December 31, 2019 | $ | (141 | ) | $ | (33 | ) | $ | (6 | ) | $ | (180 | ) |
| Year ended December 31, 2018 | ||||||||||||||||
| (In millions) | Cash Flow Hedges | Foreign Currency Translation | Pension Plans | Total | ||||||||||||
| Balance at December 31, 2017 | $ | (14 | ) | $ | (38 | ) | $ | (2 | ) | $ | (54 | ) | ||||
| Other comprehensive loss before reclassifications | (5 | ) | (11 | ) | — | (16 | ) | |||||||||
| Amounts reclassified from accumulated other comprehensive loss | 3 | — | — | 3 | ||||||||||||
| Net current-period other comprehensive loss | (2 | ) | (11 | ) | — | (13 | ) | |||||||||
| Cumulative-effect adjustment of ASU 2017-12 adoption from retained earnings | 3 | — | — | 3 | ||||||||||||
| Cumulative-effect adjustment of ASU 2018-02 adoption to retained earnings | (3 | ) | — | — | (3 | ) | ||||||||||
| Balance at December 31, 2018 | $ | (16 | ) | $ | (49 | ) | $ | (2 | ) | $ | (67 | ) |
The Company has entered into forward exchange contracts, which have been designated as cash flow hedges, to hedge foreign currency exposure to the Indian Rupee. At December 31, 2019, the notional amount of these derivatives was $178 million, and the fair value totaling $4 million is reported in prepaid expenses and other current assets in the consolidated balance sheet. At December 31, 2018, the notional amount of these derivatives was $202 million, and the fair value was nominal. Based on the amounts recorded in accumulated other comprehensive loss at December 31, 2019, the Company estimates that it will recognize gains of approximately $3 million in cost of processing and services during the next twelve months as foreign exchange forward contracts settle.
In March 2019, the Company 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 U.S dollar-denominated senior notes (see Note 12), the Treasury Locks were settled resulting in a payment, included in cash flows from operating activities, of $183 million recorded in accumulated other
comprehensive loss, net of income taxes, that will be amortized to earnings over the terms of the originally forecasted interest payments. Based on the amounts recorded in accumulated other comprehensive loss at December 31, 2019, the Company estimates that it will recognize approximately $21 million in interest expense, net during the next twelve months related to settled interest rate hedge contracts.
To reduce exposure to changes in the value of the Company’s net investments in certain of its foreign currency-denominated subsidiaries due to changes in foreign currency exchange rates, the Company uses its foreign currency-denominated debt as an economic hedge of its net investments in such foreign currency-denominated subsidiaries. In conjunction with the acquisition of First Data (see Note 4), the Company designated its Euro- and British Pound-denominated senior notes (see Note 12) as net investment hedges to hedge a portion of its net investment in certain subsidiaries whose functional currencies are the Euro and the British Pound. Accordingly, foreign currency transaction gains or losses on the qualifying net investment hedge instruments are recorded as foreign currency translation within other comprehensive loss in the consolidated statement of comprehensive income and will remain in accumulated other comprehensive loss on the consolidated balance sheet until the sale or complete liquidation of the underlying foreign subsidiaries. The Company recorded a foreign currency translation loss, net of tax, of $62 million in accumulated other comprehensive loss during the year ended December 31, 2019 from the Euro- and British Pound-denominated senior notes.
15. Employee Benefit Plans
Defined Contribution Plans
The Company and its subsidiaries maintain defined contribution savings plans covering substantially all employees. Under the plans, eligible participants may elect to contribute a specified percentage of their salaries and the Company makes matching contributions, each subject to certain limitations. In connection with the acquisition of First Data (see Note 4), the Company assumed defined contribution savings plans and defined contribution pension plans covering substantially all employees of the former First Data. The Plans provide tax-deferred amounts for each participant, consisting of employee elective contributions, company matching and discretionary company contributions. Expenses for company contributions under these plans totaled $65 million in 2019 and $44 million in each of 2018 and 2017.
Defined Benefit Plans
In connection with the acquisition of First Data, the Company assumed noncontributory defined benefit pension plans covering a portion of the employees in the United Kingdom (“U.K.”), the U.S., Germany and Austria. The majority of these plans are frozen and provide benefits to eligible employees based on an employee’s average final compensation and years of service.
The following table provides a reconciliation of benefit obligations, plan assets and the funded status of these defined benefit plans:
| (In millions) | U.K. plan | U.S. and other plans | |||||
| Change in projected benefit obligations: | |||||||
| Balance at December 31, 2018 | $ | — | $ | — | |||
| Acquired | (687 | ) | (219 | ) | |||
| Interest cost | (6 | ) | (3 | ) | |||
| Actuarial gain (loss) | 28 | (15 | ) | ||||
| Benefits paid | 12 | 12 | |||||
| Foreign currency translation | (19 | ) | — | ||||
| Balance at December 31, 2019 | $ | (672 | ) | $ | (225 | ) | |
| Change in fair value of plan assets: | |||||||
| Balance at December 31, 2018 | $ | — | $ | — | |||
| Acquired | 866 | 160 | |||||
| Actual return on plan assets | (19 | ) | 19 | ||||
| Benefits paid | (12 | ) | (12 | ) | |||
| Foreign currency translation | 25 | — | |||||
| Balance at December 31, 2019 | $ | 860 | $ | 167 | |||
| Funded status of the plans | $ | 188 | $ | (58 | ) |
The funded status of the defined benefit plans is recognized as an asset or a liability within other long-term assets or within other long-term liabilities in the consolidated balance sheet.
Projected Benefit Obligations
The Company records amounts relating to its defined benefit pension plan obligations and their associated expenses based on calculations which include actuarial assumptions, including the discount rate and the expected rate of return on plan assets. Changes in any of the assumptions and the amortization of differences between the assumptions and actual experience will affect the amount of pension expense in future periods. The Company reviews its actuarial assumptions at least annually and modifies the assumptions based on current rates and trends, as appropriate. The effects of modifications are recognized immediately within the consolidated balance sheet, and are generally amortized to operating income over future periods, with the deferred amount recorded in accumulated other comprehensive loss within the consolidated balance sheet. The Company’s funding policy is to contribute quarterly an amount as recommended by the plans’ independent actuaries. Company contributions under these plans were nominal in 2019 and are also expected to be nominal in 2020. The Company employs a building block approach in determining the expected long-term rate of return for plan assets with proper consideration of diversification and re-balancing. Historical markets are studied and long-term historical relationships between equities and fixed-income securities are preserved consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. Current market factors such as inflation and interest rates are evaluated before long-term capital market assumptions are determined. Peer data and historical returns are reviewed to check for reasonableness and appropriateness.
The weighted-average rate assumptions used in the measurement of the Company’s projected benefit obligations at December 31, 2019 and net periodic benefit expense during the year ended December 31, 2019 were as follows:
| Projected Benefit Obligations | Net Periodic Benefit Expense | ||||
| Discount rate | 2.28 | % | 2.16 | % | |
| Expected long-term return on plan assets | n/a | 2.83 | % |
The estimated future benefit payments are expected to be as follows:
| (In millions) | ||||
| Year ending December 31, | ||||
| 2020 | $ | 30 | ||
| 2021 | 31 | |||
| 2022 | 32 | |||
| 2023 | 35 | |||
| 2024 | 35 | |||
| 2025-2029 | 191 |
Plan Assets
The Company’s investment strategy for the U.K. plan is to allocate the assets into two pools: (i) off-risk assets whereby the focus is risk management, protection and insurance relative to the liability target invested in, but not limited to, debt, U.K. government bonds and U.K. government index-linked bonds; and (ii) on-risk assets whereby the focus is on return generation and taking risk in a controlled manner. Such assets could include equities, government bonds, high-yield bonds, property, commodities or hedge funds. The Company’s target allocation for the U.K. plan is 45% on-risk assets and 55% off-risk assets. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements, and periodic asset and liability studies. The Company’s investment strategy for the U.S. plan employs a total return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. The investment portfolio contains a diversified blend of equity and fixed-income investments. The Company sets an allocation mix necessary to support the underlying plan liabilities as influenced significantly by the demographics of the participants and the frozen nature of the plan. The Company’s target allocation for the U.S. plan based on the investment policy at December 31, 2019 was 50% on-risk assets and 50% off-risk assets.
The following table sets forth the Company’s plan assets carried and measured at fair value on a recurring basis at December 31, 2019:
| (In millions) | Level 1 | Level 2 | Level 3 | ||||||||
| Cash and cash equivalents | $ | 17 | $ | — | $ | — | |||||
| Equity securities (1) | 134 | 123 | — | ||||||||
| Fixed income securities (2) | 188 | 214 | — | ||||||||
| Other investments (3) | 315 | (22 | ) | 10 | |||||||
| Total investments at fair value | $ | 654 | $ | 315 | $ | 10 |
| (1) | Equity securities primarily consist of domestic, international and global equity pooled funds. |
| (2) | Fixed income securities primarily consist of debt securities issued by U.S. and foreign government agencies and debt obligations issued by a variety of private and public corporations. |
| (3) | Other investments primarily consist of index linked government bonds, derivatives and other investments. |
In addition to the investments presented within the fair value hierarchy table above, the Company’s plan assets include investments in various hedge funds that are measured at fair value using the net asset value per share (or its equivalent) practical expedient. Such investments totaled $48 million at December 31, 2019.
Net Periodic Benefit Cost
The components of net periodic benefit expense were as follows for the year ended December 31:
| (In millions) | 2019 | ||
| Interest cost | $ | 9 | |
| Expected return on plan assets | (10 | ) | |
| Net periodic benefit income | $ | (1 | ) |
16. Share-Based Compensation
The Company recognizes the fair value of share-based compensation awards granted to employees in cost of processing and services, cost of product, and selling, general and administrative expense in its consolidated statements of income.
The Company’s share-based compensation awards are typically granted in the first quarter of the year and primarily consist of the following:
Stock Options – The Company grants stock options to employees and non-employee directors at exercise prices equal to the fair market value of the Company’s stock on the dates of grant. Stock options generally vest over a three-year period beginning on the first anniversary of the grant. All stock options expire ten years from the date of the award. The Company recognizes compensation expense for the fair value of the stock options over the requisite service period of the stock option award.
Restricted Stock Units and Awards – The Company grants restricted stock units and awards to employees and non-employee directors. The Company recognizes compensation expense for restricted stock units and awards based on the market price of the common stock on the grant date over the period during which the units and awards vest.
Performance Share Units and Awards – The Company grants performance share units and awards to employees. The number of shares issued at the end of the performance period is determined by the level of achievement of pre-determined performance and market goals, including earnings, revenue growth, synergy attainment and shareholder return. The Company recognizes compensation expense on performance share units and awards ratably over the requisite performance period of the award to the extent management views the performance goals as probable of attainment. The Company recognizes compensation expense for the fair value of the shareholder return component over the requisite service period of the award.
Employee Stock Purchase Plan – The Company maintains an employee stock purchase plan that allows eligible employees to purchase a limited number of shares of common stock each quarter through payroll deductions at 85% of the closing price of the Company’s common stock on the last business day of each calendar quarter. The Company recognizes compensation expense related to the 15% discount on the purchase date. Effective January 1, 2020, the employee discount under the employee stock purchase plan was modified to 10%.
The Company recognized $229 million, $73 million and $63 million of share-based compensation expense during the years ended December 31, 2019, 2018 and 2017, respectively. At December 31, 2019, the total remaining unrecognized compensation cost for unvested stock options, restricted stock units and awards and performance share units and awards, net of estimated forfeitures, of $496 million is expected to be recognized over a weighted-average period of 1.7 years. During the years ended December 31, 2019, 2018 and 2017, stock options to purchase 4.7 million, 2.7 million and 2.9 million shares, respectively, were exercised.
Acquisition of First Data
Upon the completion of the First Data acquisition on July 29, 2019 (see Note 4), First Data’s equity awards, whether vested or unvested, were either settled in shares of the Company’s common stock or converted into equity awards denominated in shares of the Company’s common stock based on a defined exchange ratio of 0.303, as described below.
First Data time-vesting awards that were granted at or prior to the initial public offering of First Data (the “First Data IPO”) were accelerated in full in accordance with their terms, except for certain executive officer awards and certain awards held by retirement-eligible employees, which were not accelerated and instead converted into equity awards denominated in shares of the Company’s common stock. Each such time-vesting, pre-IPO restricted stock and restricted stock unit award was settled in shares of the Company’s common stock based on the exchange ratio. Each time-vesting, pre-IPO stock option award was converted into an option to purchase a number of shares of the Company’s common stock based on the exchange ratio with an exercise price per share equal to the exercise price per share of such stock option award immediately prior to the completion of the acquisition divided by the exchange ratio.
First Data equity awards granted at the time of the First Data IPO that were subject to vesting solely upon achievement of a $32 price per share of First Data common stock were converted into equity awards denominated in shares of the Company’s common stock and remained eligible to vest upon satisfaction of an adjusted target price per share of the Company’s common stock equal to the existing First Data target price divided by the exchange ratio. Such awards vested during the third quarter of 2019. Each restricted stock and restricted stock unit award that was a performance-vesting IPO award was converted into an award denominated in shares of the Company’s common stock based on the exchange ratio, and each stock option award that was a performance-vesting award was converted into an option to purchase a number of shares of the Company’s common
stock based on the exchange ratio with an exercise price per share equal to the exercise price per share of such stock option award immediately prior to the completion of the acquisition divided by the exchange ratio. As converted, the performance-vesting awards continued to be governed by the same terms and conditions as were applicable prior to the acquisition and vested during the year ended December 31, 2019 upon satisfaction of the adjusted performance condition.
The remaining existing First Data equity awards, whether vested or unvested, were converted into equity awards denominated in shares of the Company’s common stock based on the exchange ratio, with an exercise price per share for option awards equal to the exercise price per share of such stock option award immediately prior to the completion of the acquisition divided by the exchange ratio, and will continue to be governed by generally the same terms and conditions as were applicable prior to the acquisition; provided that, subject to compliance with Section 409A of the Internal Revenue Code, such awards will accelerate upon a covered termination as defined in the merger agreement.
The portion of the fair value of the replacement awards related to services provided prior to the acquisition was $768 million and was accounted for as consideration transferred. The remaining portion of the fair value of $467 million is associated with future service and is recognized as compensation expense, net of estimated forfeitures, over the weighted-average remaining vesting period of 1.2 years. The fair value of options that the Company assumed in connection with the acquisition of First Data were estimated using the Black-Scholes model with the following assumptions:
| Expected life (in years) | 2.5 | |
| Average risk-free interest rate | 1.9 | % |
| Expected volatility | 27.4 | % |
| Expected dividend yield | 0 | % |
The Company determined the expected life of stock options using a midpoint approach considering the vesting schedule, contractual terms and current option life-to-date. The risk-free interest rate was based on the U.S. treasury yield curve in effect as of the acquisition date. Expected volatility was determined using a weighted-average of the implied volatility and the mean reversion volatility of the Company’s stock at the time of conversion.
Share-Based Compensation Activity
The weighted-average estimated fair value of stock options granted during 2019, 2018 and 2017 was $28.52, $22.48 and $18.76 per share, respectively. The fair values of stock options granted were estimated on the date of grant using a binomial option-pricing model with the following assumptions:
| 2019 | 2018 | 2017 | ||||||
| Expected life (in years) | 6.4 | 6.3 | 6.3 | |||||
| Average risk-free interest rate | 2.7 | % | 2.2 | % | 2.2 | % | ||
| Expected volatility | 28.5 | % | 28.3 | % | 28.9 | % | ||
| Expected dividend yield | 0 | % | 0 | % | 0 | % |
The Company determined the expected life of stock options using historical data adjusted for known factors that could alter historical exercise behavior. The risk-free interest rate was based on the U.S. treasury yield curve in effect as of the grant date. Expected volatility was determined using weighted-average implied market volatility combined with historical volatility. The Company believes that a blend of historical volatility and implied volatility better reflects future market conditions and better indicates expected volatility than purely historical volatility.
A summary of stock option activity is as follows:
| Shares (In thousands) | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value (In millions) | |||||||||
| Stock options outstanding - December 31, 2018 | 12,052 | $ | 33.96 | |||||||||
| Converted First Data stock options | 7,591 | 42.13 | ||||||||||
| Granted | 1,188 | 84.95 | ||||||||||
| Forfeited | (183 | ) | 69.38 | |||||||||
| Exercised | (4,659 | ) | 28.43 | |||||||||
| Stock options outstanding - December 31, 2019 | 15,989 | $ | 42.83 | 4.97 | $ | 1,164 | ||||||
| Stock options exercisable - December 31, 2019 | 13,370 | $ | 37.02 | 4.32 | $ | 1,051 |
A summary of restricted stock unit and performance share unit activity is as follows:
| Restricted Stock Units | Performance Share Units | |||||||||||||
| Shares (In thousands) | Weighted- Average Grant Date Fair Value | Shares (In thousands) | Weighted- Average Grant Date Fair Value | |||||||||||
| Units - December 31, 2018 | 1,821 | $ | 53.22 | 524 | $ | 57.60 | ||||||||
| Converted First Data units | 6,025 | 102.30 | 1,333 | 101.96 | ||||||||||
| Granted | 564 | 92.24 | 1,114 | 92.95 | ||||||||||
| Forfeited | (292 | ) | 83.23 | (238 | ) | 50.96 | ||||||||
| Vested | (1,249 | ) | 76.95 | (405 | ) | 90.03 | ||||||||
| Units - December 31, 2019 | 6,869 | $ | 93.80 | 2,328 | $ | 94.61 |
A summary of restricted stock award and performance share award activity is as follows:
| Restricted Stock Awards | Performance Share Awards | ||||||||||||
| Shares (In thousands) | Weighted-Average Grant Date Fair Value | Shares (In thousands) | Weighted-Average Grant Date Fair Value | ||||||||||
| Awards - December 31, 2018 | — | $ | — | — | $ | — | |||||||
| Converted First Data awards | 96 | 102.30 | 264 | 87.57 | |||||||||
| Granted | — | — | — | — | |||||||||
| Forfeited | — | — | (16 | ) | 87.57 | ||||||||
| Vested | (48 | ) | 102.30 | (248 | ) | 87.57 | |||||||
| Awards - December 31, 2019 | 48 | $ | 102.30 | — | $ | — |
The table below presents additional information related to stock option and restricted stock unit activity:
| (In millions) | 2019 | 2018 | 2017 | |||||||||
| Total intrinsic value of stock options exercised | $ | 331 | $ | 147 | $ | 116 | ||||||
| Fair value of restricted stock units vested | 198 | 37 | 61 | |||||||||
| Income tax benefit from stock options exercised and restricted stock units vested | 126 | 43 | 66 | |||||||||
| Cash received from stock options exercised | 104 | 29 | 36 |
At December 31, 2019, 33.2 million share-based awards were available for grant under the Amended and Restated Fiserv, Inc. 2007 Omnibus Incentive Plan. Under its employee stock purchase plan, the Company issued 0.6 million shares in 2019, 0.7 million shares in 2018 and 0.8 million shares in 2017. At December 31, 2019, there were 24.7 million shares available for issuance under the employee stock purchase plan.
17. Restructuring and Other Charges
In connection with the acquisition of First Data, the Company has begun implementing certain integration plans focused on reducing the Company’s overall cost structure, including vendor spend and the elimination of duplicate costs. The Company 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. The Company continues to evaluate operating efficiencies and anticipates incurring additional costs in the next few years in connection with these activities, but is unable to estimate those amounts at this time as such plans are not yet finalized.
Employee Termination Costs
During 2019, the Company recorded $32 million of employee termination costs related to severance and other separation costs for terminated employees in connection with the acquisition of First Data. The following table summarizes the changes in the reserve related to the Company’s employee severance and other separation costs for the year ended December 31, 2019:
| (In millions) | ||||
| Balance at December 31, 2018 | $ | — | ||
| Severance and other separation costs | 32 | |||
| Cash payments | (18 | ) | ||
| Balance at December 31, 2019 | $ | 14 |
The employee severance and other separation costs accrual balance at December 31, 2019 of $14 million is expected to be paid in 2020. In addition, the Company recorded share-based compensation costs totaled $23 million in 2019 related to the accelerated vesting of previously issued equity awards for terminated employees. The Company expects to incur additional employee termination costs as a result of finalizing and executing further integration activities in 2020.
Facility Exit Costs
During 2019, the Company identified certain leased facilities that have been or will be exited in the future as part of the Company’s efforts to reduce facility carrying costs. The Company recorded $1 million in facility exit and related costs during 2019, primarily related to relocation costs and lease exit or termination fees, as well as ongoing operating expenses of certain vacated facilities. The Company anticipates exiting additional facilities as current lease agreements approach expiration.
Asset Impairment Charges
The Company recorded a $48 million non-cash impairment charge, reported primarily in cost of processing and services within the consolidated statements of income, associated with an international core account processing platform. Such impairment charge primarily related to the write-off of certain of the Financial segment’s purchased and capitalized software development costs; however, are presented within Corporate and Other as such charge was excluded from the Company’s measure of the Financial segment’s operating performance.
18. Income Taxes
Substantially all of the Company’s pre-tax earnings are derived from domestic operations in all periods presented. The income tax provision (benefit) for continuing operations was as follows for the years ended December 31:
| (In millions) | 2019 | 2018 | 2017 | ||||||||
| Components of income tax provision (benefit): | |||||||||||
| Current: | |||||||||||
| Federal | $ | 25 | $ | 189 | $ | 342 | |||||
| State | 69 | 39 | 44 | ||||||||
| Foreign | 57 | 17 | 19 | ||||||||
| 151 | 245 | 405 | |||||||||
| Deferred: | |||||||||||
| Federal | 118 | 110 | (250 | ) | |||||||
| State | (18 | ) | 24 | 3 | |||||||
| Foreign | (53 | ) | (1 | ) | — | ||||||
| 47 | 133 | (247 | ) | ||||||||
| Income tax provision (benefit) | $ | 198 | $ | 378 | $ | 158 |
A reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate for continuing operations is as follows for the years ended December 31:
| 2019 | 2018 | 2017 | ||||||
| Statutory federal income tax rate | 21.0 | % | 21.0 | % | 35.0 | % | ||
| State income taxes, net of federal effect | 3.7 | % | 3.2 | % | 2.3 | % | ||
| Unconsolidated affiliates tax | 0.6 | % | 0.1 | % | 0.9 | % | ||
| Tax expense (benefit) due to federal tax reform | — | % | 1.2 | % | (20.3 | )% | ||
| Excess tax benefit from share-based awards | (5.1 | )% | (2.2 | )% | (3.6 | )% | ||
| Sale of businesses | (2.6 | )% | 1.3 | % | — | % | ||
| Domestic production activities deduction | — | % | — | % | (2.0 | )% | ||
| Other, net | 0.7 | % | (0.3 | )% | (0.7 | )% | ||
| Effective income tax rate | 18.3 | % | 24.3 | % | 11.6 | % |
Significant components of deferred tax assets and liabilities consisted of the following at December 31:
| (In millions) | 2019 | 2018 | |||||
| Accrued expenses | $ | 303 | $ | 74 | |||
| Interest rate hedge contracts | 34 | 5 | |||||
| Share-based compensation | 216 | 43 | |||||
| Net operating loss and credit carry-forwards | 1,444 | 131 | |||||
| Foreign tax credits on undistributed earnings | 289 | — | |||||
| Leasing liabilities | 219 | — | |||||
| Other | 31 | 25 | |||||
| Subtotal | 2,536 | 278 | |||||
| Valuation allowance | (1,145 | ) | (101 | ) | |||
| Total deferred tax assets | 1,391 | 177 | |||||
| Capitalized software development costs | (622 | ) | (129 | ) | |||
| Intangible assets | (3,297 | ) | (437 | ) | |||
| Property and equipment | (143 | ) | (66 | ) | |||
| Capitalized commissions | (86 | ) | (80 | ) | |||
| Investments in joint ventures | (841 | ) | (78 | ) | |||
| Leasing right-of-use assets | (205 | ) | — | ||||
| Other | (332 | ) | (112 | ) | |||
| Total deferred tax liabilities | (5,526 | ) | (902 | ) | |||
| Total | $ | (4,135 | ) | $ | (725 | ) |
In connection with the acquisition of First Data (see Note 4), the Company recorded, on a preliminary basis, $3.5 billion of deferred tax liabilities for the deferred tax effects associated with the fair value of assets acquired and liabilities assumed using the applicable tax rates, with a corresponding adjustment to goodwill.
The Company recorded a valuation allowance of $1.1 billion and $101 million at December 31, 2019 and 2018, respectively, against its deferred tax assets. The increase in the valuation allowance in 2019 is primarily a result of the Company's acquisition of First Data. Substantially all of the acquired First Data valuation allowance relates to certain foreign and state net operating loss carryforwards.
Deferred tax assets and liabilities are reported in the consolidated balance sheets as follows at December 31:
| (In millions) | 2019 | 2018 | |||||
| Noncurrent assets | $ | 112 | $ | 20 | |||
| Noncurrent liabilities | (4,247 | ) | (745 | ) | |||
| Total | $ | (4,135 | ) | $ | (725 | ) |
Noncurrent deferred tax assets are included in other long-term assets at December 31, 2019 and 2018.
The tax effects described above, as well as other changes in deferred tax assets and liabilities as a result of the acquisition of First Data, may be adjusted as additional information becomes available during the measurement period.
The following table presents the amounts of federal, state and foreign net operating loss carryforwards and general business credit carryforwards at December 31:
| (In millions) | 2019 | 2018 | |||||
| Net operating loss carryforwards: (1) | |||||||
| Federal | $ | 1,674 | $ | 27 | |||
| State | 4,636 | 479 | |||||
| Foreign | 3,201 | 465 | |||||
| General business credit carryforwards (2) | 57 | — |
| (1) | At December 31, 2019, the Company had federal net operating loss carryforwards of $1.7 billion, which expire in 2020 through 2037, state net operating loss carryforwards of $4.6 billion, which expire in 2021 through 2039, and foreign net operating loss carryforwards of $3.2 billion, of which $209 million expire in 2020 through 2039, and the remainder of which do not expire. |
| (2) | At December 31, 2019, the Company had general business credit carryforwards of $57 million which expire in 2027 through 2039. |
The Company asserts that its investment in its foreign subsidiaries is intended to be indefinitely reinvested with limited exceptions for select foreign subsidiaries. In addition, undistributed historical and future earnings of its foreign subsidiaries are not considered to be indefinitely reinvested. Should these earnings be distributed in the future in the form of dividends or otherwise, the Company may be subject to foreign taxes. The Company has the ability and intent to limit distributions so as to not make a distribution in excess of its investment in those subsidiaries. The Company will continue to monitor its global cash requirements and the need to recognize a deferred tax liability.
Unrecognized tax benefits were as follows at December 31:
| (In millions) | 2019 | 2018 | 2017 | ||||||||
| Unrecognized tax benefits - Beginning of year | $ | 49 | $ | 42 | $ | 45 | |||||
| Increases for assumed tax positions related to First Data | 82 | — | — | ||||||||
| Increases for tax positions taken during the current year | 8 | 3 | 11 | ||||||||
| Increases for tax positions taken in prior years | 16 | 20 | 2 | ||||||||
| Decreases for tax positions taken in prior years | (2 | ) | (8 | ) | (15 | ) | |||||
| Decreases for settlements | (1 | ) | — | (1 | ) | ||||||
| Lapse of the statute of limitations | (7 | ) | (8 | ) | — | ||||||
| Unrecognized tax benefits - End of year | $ | 145 | $ | 49 | $ | 42 |
At December 31, 2019, unrecognized tax benefits of $113 million, net of federal and state benefits, would affect the effective income tax rate from continuing operations if recognized. The Company believes it is reasonably possible that the liability for unrecognized tax benefits may decrease by up to $32 million over the next twelve months as a result of 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 classifies interest expense and penalties related to income taxes as components of its income tax provision. The income tax provision included interest expense and penalties on unrecognized tax benefits of $2 million in 2019, $1 million in 2018 and less than $1 million in 2017. Accrued interest expense and penalties related to unrecognized tax benefits totaled $19 million and $4 million at December 31, 2019 and 2018, respectively.
The Company’s U.S. federal income tax returns for 2016 through 2019, and tax returns in certain states and foreign jurisdictions for 2005 through 2019 remain subject to examination by taxing authorities. In connection with the acquisition of First Data, the Company is subject to income tax examination from 2010 through 2015, 2018 and forward in relation to First Data’s U.S. federal income tax return. State and local examinations are substantially complete through 2010 in relation to First Data’s state and local tax filings. Foreign jurisdictions generally remain subject to examination by their respective authorities from 2006 forward, none of which are considered significant jurisdictions.
The Company accounts for research and development costs in accordance with ASC 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. In September 2017, the Internal Revenue Service issued Directive LB&I-04-0917-005 pertaining to the allowance of
the credit for increasing research activities under Internal Revenue Code section 41 allowing a safe harbor for LB&I taxpayers reporting research and development costs under ASC 730-10. During the year ended December 31, 2019, the Company incurred $63 million of research and development costs related to First Data since the date of acquisition.
19. Commitments and Contingencies
Litigation
In the normal course of business, the Company or its subsidiaries are named as defendants in lawsuits in which claims are asserted against the Company. In addition, the Company assumed certain legal proceedings in connection with the acquisition of First Data primarily associated with its merchant business including claims associated with alleged processing errors and a tax matter. The Company has $43 million accrued at December 31, 2019 related to its various legal proceedings, primarily associated with the Company’s merchant business as described above. The Company’s estimate of the possible range of exposure for various litigation matters in excess of amounts accrued is $0 million to approximately $50 million. In the opinion of management, the liabilities, if any, which may ultimately result from such lawsuits are not expected to have a material adverse effect on the Company’s consolidated financial statements.
Electronic Payments Transactions
In connection with the Company’s processing of electronic payments transactions, funds received from subscribers are invested from the time the Company collects the funds until payments are made to the applicable recipients. These subscriber funds are invested in short-term, highly liquid investments. Subscriber funds, which are not included in the Company’s consolidated balance sheets, can fluctuate significantly based on consumer bill payment and debit card activity and totaled approximately $2.0 billion at December 31, 2019.
Indemnifications and Warranties
The Company may indemnify its clients from certain costs resulting from claims of patent, copyright or trademark infringement associated with its clients’ use of the Company’s products or services. The Company may also warrant to clients that its products and services will operate substantially in accordance with identified specifications. From time to time, in connection with sales of businesses, the Company agrees to indemnify the buyers of such businesses for liabilities associated with the businesses that are sold. Payments, net of recoveries, under such indemnification or warranty provisions were not material to the Company’s consolidated results of operations or financial position.
20. Related Party Transactions
Merchant Alliances
A significant portion of the Company’s business within the First Data segment is conducted through merchant alliances between the Company and financial institutions. To the extent the Company maintains a controlling financial interest in an alliance, 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 in consolidation. To the extent the Company has significant influence but not control in an 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, administrative service fees, and other fees charged to alliances accounted for under the equity method. Such fees totaled $76 million for the year ended December 31, 2019. 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. At December 31, 2019, the Company had approximately $35 million of amounts due from unconsolidated merchant alliances included within trade accounts receivable, net in the Company’s consolidated balance sheet.
In July 2019, the Company and Bank of America jointly announced the dissolution of the Banc of America Merchant Services joint venture (“BAMS”), to be effective June 2020. The Company owns 51% of BAMS and BAMS’ financial results are consolidated into the Company’s financial statements. Upon dissolution of the joint venture, the Company is entitled to receive a 51% share of the joint venture’s value via an agreed upon contractual separation process. In addition, Bank of America has the right to require the Company to continue providing merchant processing and related services to the joint venture clients allocated to Bank of America in the dissolution of the joint venture through June 2023 at current pricing. The Company anticipates an ongoing relationship with Bank of America to provide processing and other support services to other Bank of America merchant clients following the joint venture’s dissolution.
21. Business Segment Information
The Company’s operations are comprised of the First Data segment, the Payments segment and the Financial segment. Since the Company’s acquisition of First Data on July 29, 2019 (see Note 4), the chief operating decision maker of the Company has managed the operations of First Data as a separate business segment while evaluating its organizational structure and related integration plans, including the allocation of resources and the assessment of performance. The Company expects that it will realign its business segments in the first quarter of 2020 when its new reporting structure and First Data integration plans are finalized.
The First Data segment provides a wide-range of solutions to merchants, including retail point-of-sale merchant transaction processing and acquiring, e-commerce services, mobile payment services and the cloud-based Clover® point-of-sale operating system. The businesses in this segment also provide technology solutions for bank and non-bank issuers and a wide range of value-added solutions complementing the merchant and issuer technology solutions.
The Payments segment 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. The businesses in this segment also provide card and print personalization services, investment account processing services for separately managed accounts and fraud and risk management products and services.
The Financial segment 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.
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.
Operating results for each segment are presented below. The Company does not evaluate performance or allocate resources based on segment asset data, and therefore such information is not presented.
| (In millions) | First Data (1) | Payments | Financial | Corporate and Other | Total | ||||||||||||||
| 2019 | |||||||||||||||||||
| Processing and services revenue | $ | 3,291 | $ | 2,993 | $ | 2,240 | $ | 49 | $ | 8,573 | |||||||||
| Product revenue | 787 | 751 | 167 | (91 | ) | 1,614 | |||||||||||||
| Total revenue | 4,078 | 3,744 | 2,407 | (42 | ) | 10,187 | |||||||||||||
| Operating income | 1,031 | 1,252 | 805 | (1,479 | ) | 1,609 | |||||||||||||
| Capital expenditures | 250 | 265 | 131 | 75 | 721 | ||||||||||||||
| Depreciation and amortization expense | 421 | 253 | 149 | 955 | 1,778 | ||||||||||||||
| 2018 | |||||||||||||||||||
| Processing and services revenue | $ | — | $ | 2,728 | $ | 2,204 | $ | 43 | $ | 4,975 | |||||||||
| Product revenue | — | 739 | 191 | (82 | ) | 848 | |||||||||||||
| Total revenue | — | 3,467 | 2,395 | (39 | ) | 5,823 | |||||||||||||
| Operating income (2) | — | 1,122 | 798 | (167 | ) | 1,753 | |||||||||||||
| Capital expenditures | — | 239 | 115 | 6 | 360 | ||||||||||||||
| Depreciation and amortization expense | — | 225 | 145 | 186 | 556 | ||||||||||||||
| 2017 | |||||||||||||||||||
| Processing and services revenue | $ | — | $ | 2,476 | $ | 2,347 | $ | 10 | $ | 4,833 | |||||||||
| Product revenue | — | 758 | 183 | (78 | ) | 863 | |||||||||||||
| Total revenue | — | 3,234 | 2,530 | (68 | ) | 5,696 | |||||||||||||
| Operating income | — | 1,034 | 849 | (351 | ) | 1,532 | |||||||||||||
| Capital expenditures | — | 182 | 95 | 10 | 287 | ||||||||||||||
| Depreciation and amortization expense | — | 169 | 92 | 183 | 444 |
| (1) | Includes the results of First Data from July 29, 2019, the date of acquisition. |
| (2) | A gain of $227 million from the sale of a 55% interest of the Company’s Lending Solutions business is included within Corporate and Other. |
Revenue generated outside the United States comprised approximately 12%, 6% and 5% of total revenue in 2019, 2018 and 2017, respectively.
22. Quarterly Financial Data (unaudited)
Quarterly financial data for 2019 and 2018 was as follows:
| (In millions, except per share data) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Full Year | ||||||||||||||
| 2019 (1) | |||||||||||||||||||
| Total revenue | $ | 1,502 | $ | 1,512 | $ | 3,128 | $ | 4,045 | $ | 10,187 | |||||||||
| Cost of processing and services | 624 | 617 | 1,204 | 1,571 | 4,016 | ||||||||||||||
| Cost of product | 174 | 168 | 413 | 538 | 1,293 | ||||||||||||||
| Selling, general and administrative expenses | 341 | 343 | 1,137 | 1,463 | 3,284 | ||||||||||||||
| Gain on sale of businesses | (10 | ) | — | — | (5 | ) | (15 | ) | |||||||||||
| Total expenses | 1,129 | 1,128 | 2,754 | 3,567 | 8,578 | ||||||||||||||
| Operating income | 373 | 384 | 374 | 478 | 1,609 | ||||||||||||||
| Income from continuing operations | 225 | 223 | 225 | 241 | 914 | ||||||||||||||
| Net income attributable to Fiserv, Inc. | 225 | 223 | 198 | 247 | 893 | ||||||||||||||
| Comprehensive income attributable to Fiserv, Inc. | 207 | 115 | 12 | 446 | 780 | ||||||||||||||
| Net income attributable to Fiserv, Inc. per share - continuing operations: (2) | |||||||||||||||||||
| Basic | $ | 0.58 | $ | 0.57 | $ | 0.34 | $ | 0.36 | $ | 1.74 | |||||||||
| Diluted | $ | 0.56 | $ | 0.56 | $ | 0.33 | $ | 0.36 | $ | 1.71 | |||||||||
| 2018 | |||||||||||||||||||
| Total revenue | $ | 1,440 | $ | 1,420 | $ | 1,412 | $ | 1,551 | $ | 5,823 | |||||||||
| Cost of processing and services | 568 | 560 | 568 | 628 | 2,324 | ||||||||||||||
| Cost of product | 191 | 179 | 181 | 194 | 745 | ||||||||||||||
| Selling, general and administrative expenses | 305 | 320 | 305 | 298 | 1,228 | ||||||||||||||
| (Gain) loss on sale of businesses | (232 | ) | 3 | 2 | — | (227 | ) | ||||||||||||
| Total expenses | 832 | 1,062 | 1,056 | 1,120 | 4,070 | ||||||||||||||
| Operating income | 608 | 358 | 356 | 431 | 1,753 | ||||||||||||||
| Income from continuing operations | 423 | 251 | 227 | 286 | 1,187 | ||||||||||||||
| Net income attributable to Fiserv, Inc. | 423 | 251 | 227 | 286 | 1,187 | ||||||||||||||
| Comprehensive income attributable to Fiserv, Inc. | 421 | 241 | 214 | 298 | 1,174 | ||||||||||||||
| Net income attributable to Fiserv, Inc. per share - continuing operations: (2) | |||||||||||||||||||
| Basic | $ | 1.02 | $ | 0.61 | $ | 0.56 | $ | 0.72 | $ | 2.93 | |||||||||
| Diluted | $ | 1.00 | $ | 0.60 | $ | 0.55 | $ | 0.71 | $ | 2.87 |
| (1) | Includes the results of First Data from July 29, 2019, the date of acquisition. |
| (2) | Net income attributable to Fiserv, Inc. per share - continuing operations in each period is calculated using actual, unrounded amounts. |
Fiserv, Inc.
Schedule II — Valuation and Qualifying Accounts
(In millions)
| Additions | |||||||||||||||||
| Description | Balance at Beginning of Period | Charged to Costs and Expenses | Charged to Other Accounts | Deductions | Balance at End of Period | ||||||||||||
| Year ended December 31, 2019 | |||||||||||||||||
| Deferred tax asset valuation allowance (1) | $ | 101 | 8 | 1,036 | — | $ | 1,145 | ||||||||||
| Year ended December 31, 2018 | |||||||||||||||||
| Deferred tax asset valuation allowance | $ | 103 | 1 | (3 | ) | — | $ | 101 | |||||||||
| Year ended December 31, 2017 | |||||||||||||||||
| Deferred tax asset valuation allowance (2) | $ | 35 | 14 | 54 | — | $ | 103 |
| (1) | Includes the valuation allowance adjustment associated with the acquisition of First Data. |
| (2) | Includes the valuation allowance adjustment associated with the acquisition of Monitise. |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Fiserv, Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Fiserv, Inc. and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, equity, and cash flows, for each of the three years in the period ended December 31, 2019, and the related notes and the schedule listed in Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We have also 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, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2020 expressed an unqualified opinion on the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Update No. 2016-02, Leases (Topic 842) using the modified retrospective method.
As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for revenue as of January 1, 2018 due to the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) using the modified retrospective method.
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.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue – Contract Modifications – Refer to Note 3 to the financial statements
Critical Audit Matter Description
The Company generates revenue from the delivery of processing, service and product solutions. Revenue is measured based on consideration specified in a contract with a customer, and the Company recognizes revenue when it satisfies 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. Contract modifications occur when the Company and its customers agree to modify existing customer contracts to change the scope or price (or both) of the contract. Contract modifications also occur when a customer terminates some, or all, of the existing services provided by the Company, which typically results in the customer paying a termination fee to the Company based upon the terms in the initial contract. When a contract modification occurs, it requires the Company 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.
We identified the determination of revenue recognition for customer contract modifications as a critical audit matter because of the management judgments necessary to determine the appropriate accounting. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate whether contract modifications were recognized appropriately.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the revenue recognition associated with contract modifications included the following, among others:
| • | We evaluated management’s significant accounting policies related to these customer contract modifications for reasonableness. |
| • | We selected a sample of significant customer contract modifications and performed the following procedures: |
| ◦ | Obtained and read the customer contracts. |
| ◦ | Evaluated whether the contract represented a new contract or a contract modification and, if applicable, assessed the treatment of any change in scope or price. |
| ◦ | Tested management’s identification of remaining performance obligations. |
| ◦ | Recalculated the transaction price and assessed the appropriateness of the allocation of transaction price to each performance obligation. |
| ◦ | Assessed the pattern of delivery for each distinct performance obligation. |
| • | We tested the effectiveness of internal controls over revenue recognition related to the Company’s accounting for contract modifications. |
Acquisition of First Data Corporation – Valuation of Intangible Assets – Refer to Note 4 to the financial statements
Critical Audit Matter Description
The Company completed the acquisition of First Data Corporation on July 29, 2019 by acquiring 100% of the First Data stock that was issued and outstanding as of the date of acquisition for a purchase price of $46.5 billion. The Company accounted for the acquisition under the acquisition method of accounting for business combinations. Accordingly, the purchase price was preliminarily allocated to the assets acquired and liabilities assumed based on their respective fair values, including identifiable intangible assets of $16.4 billion. In determining the fair value of these intangible assets, the Company, with assistance from a third-party valuation specialist, used various valuation methodologies, including discounted cash flow analyses, the multi-period excess earnings method, and the relief from royalty method. These methodologies required the Company to make significant judgments and assumptions related to the expected future cash flows, retention rates, discount rates, and royalty rates.
We identified the fair value determination of intangible assets related to the First Data acquisition as a critical audit matter because of the significant estimates and assumptions made by the Company. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of the Company’s expected future cash flows, utilized valuation methodologies, retention rates, discount rates, and royalty rates.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the expected future cash flows, retention rates, discount rates, and royalty rates for the preliminary purchase price allocation of the First Data acquisition included the following, among others:
| • | We evaluated the reasonableness of management’s expected future cash flows by comparing the projections to First Data’s historical results, industry data and other publicly available data. |
| • | With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodologies and (2) the retention rates, discount rates, and royalty rates by: |
| ◦ | Assessing the appropriateness of the valuation methodologies. |
| ◦ | Developing independent estimates for the retention rates, discount rates, and royalty rates and comparing those to the estimates selected by management. |
| • | We tested the effectiveness of internal controls over the valuation of the intangible assets, including the Company’s controls over expected future cash flows, retention rates, discount rates, and royalty rates. |
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
February 27, 2020
We have served as the Company’s auditor since 1985.
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