filings.toolsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of financial condition and results of operations is provided as a supplement to our consolidated financial statements and accompanying notes to help provide an understanding of our financial condition, the changes in our financial condition and our results of operations. Our discussion is organized as follows:
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Overview. This section contains background information on our company and the services and products that we provide, acquisitions and dispositions, our enterprise priorities, and the trends affecting our industry in order to provide context for management’s discussion and analysis of our financial condition and results of operations.
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Critical accounting policies and estimates. This section contains a discussion of the accounting policies that we believe are important to our financial condition and results of operations and that require judgment and estimates on the part of management in their application. In addition, all of our significant accounting policies, including critical accounting policies, are summarized in Note 1 to the accompanying consolidated financial statements.
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Results of operations. This section contains an analysis of our results of operations presented in the accompanying consolidated statements of income by comparing the results for the year ended December 31, 2020 to the results for the year ended December 31, 2019 and by comparing the results for the year ended December 31, 2019 to the results for the year ended December 31, 2018.
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Liquidity and capital resources. This section provides an analysis of our cash flows and a discussion of our outstanding debt and commitments at December 31, 2020.
Overview
Company Background
We are a leading global provider of payments and financial services technology solutions. We provide account processing and digital banking solutions; card issuer processing and network services; payments; e-commerce; merchant acquiring and processing; and the Clover® cloud-based point-of-sale (“POS”) solution. We serve clients around the globe, including banks, credit unions, other financial institutions, corporate clients and merchants.
On July 29, 2019, we acquired First Data Corporation (“First Data”), a global leader in commerce-enabling technology and solutions for merchants, financial institutions and card issuers. Effective in the first quarter of 2020, we realigned our reportable segments to reflect our new management structure and organizational responsibilities (“Segment Realignment”) following the acquisition of First Data.
Our operations are comprised of the Merchant Acceptance (“Acceptance”) segment, the Financial Technology (“Fintech”) segment and the Payments and Network (“Payments”) segment. The consolidated financial statements include the financial results of First Data from the date of acquisition. Segment results for the years ended December 31, 2019 and 2018 have been restated to reflect the Segment Realignment.
The Acceptance segment provides a wide range of commerce-enabling solutions to merchants of all sizes and types around the world. These solutions include POS merchant acquiring and digital commerce services; mobile payment services; security and fraud protection products and services; CaratSM, our omnichannel commerce solution; and our cloud-based Clover POS platform, which includes a marketplace for proprietary and third-party business applications. The businesses in the Acceptance segment are subject to a modest level of seasonality, with the first quarter generally experiencing the lowest level of revenue and the fourth quarter experiencing the highest level of revenue.
The Fintech segment provides financial institutions around the world with technology solutions that enable them to process customer deposit and loan accounts and manage general ledger and central information files, as well as other products and services that support numerous types of financial transactions such as digital banking, financial and risk management, cash management, professional services and consulting, and item processing and source capture services. Our businesses in this segment also provide products and services to corporate clients to facilitate the management of financial processes and transactions.
The Payments segment primarily provides financial institutions and corporate clients with the products and services required to process digital payment transactions, including card transactions such as debit, credit and prepaid card processing and services, a range of network services, security and fraud protection products, card production and print services. In addition, our businesses in this segment offer non-card digital payment software and services, including bill payment, account-to-account transfers, person-to-person payments, electronic billing, and security and fraud protection products.
The majority of our revenue is generated from recurring account- and transaction-based fees under multi-year contracts with high renewal rates. Most of the services we provide within our segments are necessary for our clients to operate their businesses and are, therefore, non-discretionary in nature.
Corporate and Other supports the reportable segments described above, and consists of amortization of acquisition-related intangible assets, unallocated corporate expenses and other activities that are not considered when we evaluate segment performance, such as gains or losses on sales of businesses, costs associated with acquisition and divestiture activity, and our Output Solutions postage reimbursements. Corporate and Other also includes the historical results of our Investment Services business, of which we sold a 60% controlling interest in February 2020, as well as certain transition services revenue associated with various dispositions.
Acquisitions and Dispositions
We frequently review our portfolio to ensure we have the right set of businesses to execute on our strategy. We expect to acquire businesses when we identify: a compelling strategic need, such as a product, service or technology that helps meet client demand; an opportunity to change industry dynamics; a way to achieve business scale; or similar considerations. We expect to divest businesses that are not in line with our market, product or financial strategies.
Acquisitions
On March 2, 2020, we acquired MerchantPro Express LLC (“MerchantPro”), an independent sales organization (“ISO”) that provides processing services, POS equipment and merchant cash advances to businesses across the United States. MerchantPro is included within the Acceptance segment and further expands our merchant services business. On March 18, 2020, we acquired Bypass Mobile, LLC (“Bypass”), an independent software vendor and innovator in enterprise POS systems for sports and entertainment venues, food service management providers and national restaurant chains. Bypass is included within the Acceptance segment and further enhances our omni-commerce capabilities, enabling enterprise businesses to deliver a seamless customer experience that spans physical and digital channels. On May 11, 2020, we acquired Inlet, LLC (“Inlet”), a provider of secure digital delivery solutions for enterprise and middle-market billers’ invoices and statements. Inlet is included within the Payments segment and further enhances our digital bill payment strategy. We acquired these businesses for an aggregate purchase price of $167 million, net of $2 million of acquired cash, and including earn-out provisions estimated at a fair value of $45 million.
On July 29, 2019, we acquired First Data for a total purchase price of $46.5 billion by acquiring 100% of the First Data stock that was issued and outstanding as of the date of acquisition. As a result of the acquisition, First Data stockholders received 286 million shares of common stock of Fiserv, Inc., at an exchange ratio of 0.303 shares of Fiserv, Inc. for each share of First Data common stock, with cash paid in lieu of fractional shares. We also converted 15 million outstanding First Data equity awards into corresponding equity awards relating to common stock of Fiserv, Inc. in accordance with the exchange ratio. In addition, concurrent with the closing of the acquisition, we made a cash payment of $16.4 billion to repay existing First Data debt. We funded the transaction-related expenses and the repayment of First Data debt through a combination of available cash on-hand, proceeds from the issuance of senior notes, and term loan and revolving credit facility borrowings. The acquisition of First Data, included within the Acceptance and Payments segments, increases our footprint as a global payments and financial technology provider by expanding the portfolio of services provided to financial institutions, corporate and merchant clients and consumers.
On October 31, 2018, we acquired the debit card processing, ATM Managed Services, and MoneyPass® surcharge-free network of Elan Financial Services, a unit of U.S. Bancorp, for approximately $659 million including post-closing working capital adjustments, estimated contingent consideration related to earn-out provisions and future payments under a transition services agreement in excess of estimated fair value. This acquisition, included within the Payments segment, deepens our presence in debit card processing, broadens our client reach and scale and provides new solutions to enhance the value proposition for our existing debit solution clients.
On January 22, 2021, we acquired Ondot Systems, Inc., a digital experience platform provider for financial institutions. This acquisition, to be included within the Payments segment, will further expand our digital capabilities, enhancing our suite of integrated solutions spanning card-based payments, digital banking platforms, core banking, and merchant solutions to enable clients of all sizes to deliver frictionless, digital-first and personalized experiences to their customers.
Dispositions
Effective July 1, 2020, we and Bank of America (“BANA”) dissolved the Banc of America Merchant Services joint venture (“BAMS” or the “joint venture”), of which we maintained a 51% controlling ownership interest. Upon dissolution of the joint venture’s operations, the joint venture transferred a proportionate share of value, primarily the client contracts, to each party via
an agreed upon contractual separation. The remaining activities of the joint venture will consist of supporting the transition of the business to each party and an orderly wind down of remaining BAMS assets and liabilities. The revenues and expenses of the BAMS joint venture were consolidated into our financial results though the date of dissolution. The business transferred to us will continue to be operated and managed within our Acceptance segment.
We will continue to provide merchant processing and related services to former BAMS clients allocated to BANA, at BAMS pricing, through June 2023. We will also provide processing and other support services to new BANA merchant clients pursuant to a five-year non-exclusive agreement which, after June 2023, will also apply to the former BAMS clients allocated to BANA. In addition, both companies are entitled to certain transition services, at fair value, from each other through June 2023.
On February 18, 2020, we sold a 60% controlling interest of our Investment Services business, subsequently renamed as Tegra118, LLC (“Tegra118”), which is reported within Corporate and Other following the Segment Realignment. We received pre-tax proceeds of $578 million, net of related expenses, resulting in a pre-tax gain on the sale of $428 million, with a related tax expense of $112 million. Our retained interest is accounted for as an equity method investment. On February 2, 2021, Tegra118 completed a merger with a third party, resulting in a dilution of our ownership interest in the combined new entity, Wealthtech Holdings, LLC.
In connection with the acquisition of First Data, we acquired two businesses which we intended to sell. In October 2019, we completed the sales, at acquired fair value, of these two businesses for aggregate proceeds of $133 million.
On March 29, 2018, we sold a 55% controlling interest of our Lending Solutions business, which was reported within the Fintech segment, retaining 45% ownership interests in two joint ventures (the “Lending Joint Ventures”). In conjunction with this transaction, we entered into transition services agreements to provide, at fair value, various administration, business process outsourcing and data center related services for defined periods to the Lending Joint Ventures. We received gross sale proceeds of $419 million from the transactions. In August 2019, the Sagent Auto, LLC joint venture, formerly known as Fiserv Automotive Solutions, LLC, completed a merger with a third party, resulting in the dilution of our ownership interest to 31% in the combined entity, defi SOLUTIONS Group, LLC. Our remaining ownership interest in the Lending Joint Ventures are accounted for as equity method investments. In addition, in January 2018, we completed the sale of the retail voucher business acquired in our 2017 acquisition of Monitise for proceeds of £37 million ($50 million).
Enterprise Priorities
We aspire to move money and information in a way that moves the world by delivering superior value for our clients through leading technology, targeted innovation and excellence in everything we do. We achieve this through active portfolio management of our business, enhancing the overall value of our existing client relationships, improving operational effectiveness, being disciplined in our allocation of capital, and differentiating our products and services through innovation. Our long-term priorities are to (i) deliver integration value from the First Data acquisition; (ii) continue to build high-quality revenue while meeting our earnings goals; (iii) enhance client relationships with an emphasis on digital and payment solutions; and (iv) deliver innovation and integration which enables differentiated value for our clients.
Industry Trends
The global payments landscape continues to evolve, with rapidly advancing technologies and a steady expansion of digital payments, e-commerce and innovation in real-time payments infrastructure. Because of this growth, competition also continues to evolve. Business and consumer expectations continue to rise, with a focus on convenience and security. To meet these expectations, payments companies are focused on modernizing their technology, expanding the use of data and enhancing the customer experience.
Financial Institutions
The market for products and services offered by financial institutions continues to evolve rapidly. The traditional financial industry and other market entrants regularly introduce and implement new payment, deposit, risk management, lending and investment products, and the distinctions among the products and services traditionally offered by different types of financial institutions continue to narrow as they seek to serve the same customers. At the same time, the evolving global regulatory and cybersecurity landscape has continued to create a challenging operating environment for financial institutions. These conditions are driving heightened interest in solutions that help financial institutions win and retain customers, generate incremental revenue, comply with regulations and enhance operating efficiency. Examples of these solutions include electronic payments and delivery methods such as internet, mobile and tablet banking, sometimes referred to as “digital channels.”
The focus on digital channels by both financial institutions and their customers, as well as the growing volume and types of payment transactions in the marketplace, continues to elevate the data and transaction processing needs of financial institutions. We expect that financial institutions will continue to invest significant capital and human resources to process transactions, manage information, maintain regulatory compliance and offer innovative new services to their customers in this rapidly evolving and competitive environment. We anticipate that we will benefit over the long term from the trend of financial institutions moving from in-house technology to outsourced solutions as they seek to remain current on technology changes in an evolving marketplace. We believe that economies of scale in developing and maintaining the infrastructure, technology, products, services and networks necessary to be competitive in such an environment are essential to justify these investments, and we anticipate that demand for products that facilitate customer interaction with financial institutions, including electronic transactions through digital channels, will continue to increase, which we expect to create revenue opportunities for us.
In addition to the trends described above, the financial institutions marketplace has experienced change in composition as well. During the past 25 years, the number of financial institutions in the United States has declined at a relatively steady rate of approximately 3% per year, primarily as a result of voluntary mergers and acquisitions. Rather than reducing the overall market, these consolidations have transferred accounts among financial institutions. If a client loss occurs due to merger or acquisition, we receive a contract termination fee based on the size of the client and how early in the contract term the contract is terminated. These fees can vary from period to period with the variance depending on the quantum of financial institution merger activity in a given period and whether or not our clients are involved in the activity. Our focus on long-term client relationships and recurring, transaction-oriented products and services has also reduced the impact that consolidation in the financial services industry has had on us. We believe that the integration of our products and services creates a compelling value proposition for our clients by providing, among other things, new sources of revenue and opportunities to reduce their costs. Furthermore, we believe that our sizable and diverse client base, combined with our position as a leading provider of non-discretionary, recurring revenue-based products and services, gives us a solid foundation for growth.
Merchants
The rapid growth in and globalization of mobile and e-commerce, driven by consumers’ desire for simpler, more efficient shopping experiences, has created an opportunity for merchants to reach consumers in high-growth online and mobile settings, which often requires a merchant acquiring provider to enable and optimize the acceptance of payments. Merchants are demanding simpler, integrated and modern POS systems to help manage their everyday business operations. When combined with the ever-increasing ways a consumer can pay for goods and services, merchants have sought modern POS systems to streamline this complexity. Furthermore, merchants can now search, discover, compare, purchase and even install a new POS system through direct, digital-only experiences. This direct, digital-only channel is quickly becoming a source of new merchant acquisition opportunities, especially with respect to smaller merchants.
In addition, there are numerous software-as-a-service (“SaaS”) solutions in the industry, many of which have chosen to integrate merchant acquiring within their software as a way to further monetize their client relationships. SaaS solutions that integrate payments are often referred to as Independent Software Vendors (or “ISVs”), and we believe there are thousands of these potential distribution partnership opportunities available to us.
We believe that our merchant acquiring products and solutions create compelling value propositions for merchant clients of all sizes, from small and mid-sized businesses (or “SMBs”) to medium-sized regional businesses to global enterprise merchants, and across all verticals. Furthermore, we believe that our sizable and diverse client base, combined with valued partnerships with merchant acquiring businesses of small, medium and large financial institutions, and non-financial institutions, gives us a solid foundation for growth.
Recent Market Conditions
In 2019, a novel strain of coronavirus (“COVID-19”) was identified and has since continued to spread. In March 2020, the World Health Organization recognized the COVID-19 outbreak as a pandemic. In response to the COVID-19 pandemic, the governments of many countries, states, cities and other geographic regions have taken actions to prevent the spread of COVID-19, such as imposing travel restrictions and bans, quarantines, social distancing guidelines, shelter-in-place or lock-down orders and other similar limitations, adversely impacting global economic activity and contributing to significant volatility in financial markets. From time to time during the second half of 2020 and into 2021, some jurisdictions have eased restrictions in an effort to reopen their economies. While this has been successful in some places, others have had to reinstate restrictions to curb the spread of the virus.
We have taken several actions since the onset of the pandemic to protect the health, safety and well-being of our employees while maintaining business continuity. These actions include, among others, requiring a majority of our employees to work remotely, eliminating non-essential travel, suspending all non-essential visitors to our facilities, disinfecting facilities and workspaces extensively and frequently, providing personal protective equipment to associates and requiring employees who
must be present at our facilities to adhere to a variety of safety protocols. In addition, we have expanded paid time-off for employees impacted by COVID-19, provided increased pay for certain employees involved in critical infrastructure who could not work remotely, and expanded our Fiserv Cares program to benefit employees in need around the world. We expect to continue such safety measures for the foreseeable future and may take further actions, or adapt these existing policies, as government authorities may require or recommend or as we may determine to be in the best interest of our employees, clients and vendors.
Our operating performance is subject to global economic and market conditions, as well as their impacts on levels of consumer and business spending. As a result of the COVID-19 pandemic and the related decline in global economic activity, we experienced a significant decrease in payments volume and transactions beginning in late March 2020 that negatively impacted our merchant acquiring and payment-related businesses, which earn transaction-based fees, as well as modest declines in other businesses. Merchant acquiring transaction and payment volumes began to partially recover in May 2020 and continued to improve into July 2020; thereafter, the monthly volume growth rate as compared to the prior year stabilized for the balance of the year. While recent business trends demonstrate positive momentum, the uncertainty caused by the pandemic creates an economic environment where our future financial results remain difficult to anticipate. We currently expect payments volume and transactions to continue to improve throughout 2021.
Throughout 2020, we also took several actions to manage discretionary costs including, among others, limiting the hiring of new employees, limiting third-party spending and the temporary suspension of certain employee-related benefits, including company matching contributions to the Fiserv 401(k) Savings Plan as well as the discount on shares purchased under the Fiserv, Inc. Amended and Restated Employee Stock Purchase Plan. Effective January 1, 2021, company matching contributions were re-established to equal 100% on the first 1% contributed and 25% on the next 4% contributed for eligible participants. In addition, we reassessed and deferred certain capital expenditures that were originally planned for 2020. We will continue to monitor and assess developments related to COVID-19 and implement appropriate actions to minimize the risk to our operations of any material adverse developments. Ultimately, the extent of the impact of the COVID-19 pandemic on our future operational and financial performance will depend on, among other matters, the duration and intensity of the COVID-19 pandemic; governmental and private sector responses to the pandemic and the impact of such responses on us; the level of success of global vaccination efforts; and the impact of the pandemic on our employees, clients, vendors, operations and sales, all of which are uncertain and cannot be predicted.
Critical Accounting Policies and Estimates
Our consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States, which require management to make estimates, judgments and assumptions that affect the reported amount of assets, liabilities, revenue and expenses. We continually evaluate the accounting policies and estimates that we use to prepare our consolidated financial statements, including for recently adopted accounting pronouncements, and base our estimates on historical experience and assumptions that we believe are reasonable in light of current circumstances. Actual amounts and results could differ materially from these estimates.
Acquisitions
From time to time, we make strategic acquisitions that may have a material impact on our consolidated results of operations or financial position. We allocate the purchase price of acquired businesses to the assets acquired and liabilities assumed in the transaction at their estimated fair values. The estimates used to determine the fair value of long-lived assets, such as intangible assets, can be complex and require significant judgments. We use information available to us to make fair value determinations and engage independent valuation specialists, when necessary, to assist in the fair value determination of significant acquired long-lived assets. The determination of fair value requires estimates about discount rates, growth and retention rates, royalty rates, expected future cash flows and other future events that are judgmental in nature. While we use our best estimates and assumptions as a part of the purchase price allocation process, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of income. We are also required to estimate the useful lives of intangible assets to determine the amount of acquisition-related intangible asset amortization expense to record in future periods. We periodically review the estimated useful lives assigned to our intangible assets to determine whether such estimated useful lives continue to be appropriate. Additional information regarding our acquisitions is included in Note 4 to the consolidated financial statements.
Goodwill and Intangible Assets
We review the carrying value of goodwill for impairment annually, or more frequently if events or circumstances indicate the carrying value may not be recoverable. Goodwill is tested for impairment at a reporting unit level, which is one level below our reportable segments. When reviewing goodwill for impairment, we consider the prior test’s amount of excess fair value over the carrying value of each reporting unit, the period of time since a reporting unit’s last quantitative test, the extent a reorganization or disposition changes the composition of one or more of our reporting units, and other factors to determine whether or not to first perform a qualitative test. When performing a qualitative test, we assess numerous factors to determine whether it is more likely than not that the fair value of our reporting units are less than their respective carrying values. Examples of qualitative factors that we assess include our share price, our financial performance, market and competitive factors in our industry and other events specific to our reporting units. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we perform a quantitative impairment test.
The quantitative impairment test compares the estimated fair value of the reporting unit to its carrying value, and recognizes an impairment loss for the amount by which a reporting unit’s carrying amount exceeds its fair value, without exceeding the total amount of goodwill allocated to that reporting unit. We determine the fair value of a reporting unit using both a discounted cash flow analysis and a market approach. Determining the fair value of a reporting unit involves judgment and the use of significant estimates and assumptions, which include assumptions regarding the revenue growth rates and operating margins used to calculate estimated future cash flows, risk-adjusted discount rates and future economic and market conditions.
In connection with the Segment Realignment, certain of our reporting units changed in composition in which goodwill was allocated to such reporting units using a relative fair value approach. Accordingly, we performed an interim goodwill impairment assessment in the first quarter of 2020 for those reporting units impacted by the Segment Realignment and determined that our goodwill was not impaired based on an assessment of various qualitative factors, as described above. Our most recent annual impairment assessment of our reporting units in the fourth quarter of 2020 determined that our goodwill of $36 billion was not impaired as the estimated fair values of the respective reporting units exceeded the carrying values. However, for four of our reporting units that were acquired as part of the First Data acquisition, with aggregate goodwill of $12 billion, the excess of the respective reporting unit’s fair value over carrying value ranged from 14 to 21 percent. If future operating performance is below our expectations or there are changes to forecasted revenue growth rates, risk-adjusted discount rates, effective income tax rates, or some combination thereof, a decline in the fair value of the reporting units could result in, and we may be required to record, a goodwill impairment charge. It is also reasonably possible that future developments related to the economic impact of the COVID-19 pandemic on certain of our recently acquired (recorded at fair value) First Data businesses, such as an increased duration and intensity of the pandemic and/or government-imposed shutdowns, prolonged economic downturn or recession, or lack of governmental support for recovery, could have a future material impact on one or more of the estimates and assumptions used to evaluate goodwill impairment. We have no accumulated goodwill impairment through December 31, 2020. Additional information regarding our goodwill is included in Note 8 to the consolidated financial statements.
We review intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. We review capitalized software development costs for impairment at each reporting date. Recoverability of 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. Determining future cash flows and net realizable values involves judgment and the use of significant estimates and assumptions regarding future economic and market conditions. Measurement of any impairment loss is based on estimated fair value. Given the significance of our goodwill and intangible asset balances, an adverse change in fair value could result in an impairment charge, which could be material to our consolidated financial statements.
Revenue Recognition
Revenue is measured based on consideration specified in a contract with a customer, and excludes any amounts collected on behalf of third parties. As a practical expedient, we do not adjust the transaction price for the effects of a significant financing component if, at contract inception, the period between customer payment and the transfer of goods or services is expected to be one year or less. Contracts with customers are evaluated on a contract-by-contract basis as contracts may include multiple types of goods and services as described below.
Processing and Services
Processing and services revenue is generated from account- and transaction-based fees for data processing, merchant transaction processing and acquiring, electronic billing and payment services, electronic funds transfer and debit/credit processing services; consulting and professional services; and software maintenance for ongoing client support.
We recognize processing and services revenues in the period in which the specific service is performed unless they are not deemed distinct from other goods or services, in which case revenue would then be recognized as control is transferred of the combined goods and services. Our arrangements for processing and services typically consist of an obligation to provide specific services to our customers on a when- and if-needed basis (a stand-ready obligation) and revenue is recognized from the satisfaction of the performance obligations in the amount billable to the customer. These services are typically provided under a fixed or declining (tier-based) price per unit based on volume of service; however, pricing for services may also be based on minimum monthly usage fees. Fees for our processing and services arrangements are typically billed and paid on a monthly basis.
Product
Product revenue is generated from print and card production sales, as well as software license sales. For software license agreements that are distinct, we recognize software license revenue upon delivery, assuming a contract is deemed to exist. Revenue for arrangements with customers that include significant customization, modification or production of software such that the software is not distinct is typically recognized over time based upon efforts expended, such as labor hours, to measure progress towards completion. For arrangements involving hosted licensed software for the customer, a software element is considered present to the extent the customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty and it is feasible for the customer to either operate the software on their own hardware or contract with another vendor to host the software.
We also sell or lease hardware (POS devices) and other peripherals as part of our contracts with customers. Hardware typically consists of terminals or Clover devices. We do not manufacture hardware, rather we purchase hardware from third-party vendors and hold such hardware in inventory until purchased by a customer. We account for sales of hardware as a separate performance obligation and recognize the revenue at its standalone selling price when the customer obtains control of the hardware.
Significant Judgments
We use the following methods, inputs and assumptions in determining amounts of revenue to recognize. For multi-element arrangements, we account for individual goods or services as a separate performance obligation if they are distinct, the good or service is separately identifiable from other items in the arrangement, and if a customer can benefit from the good or service on its own or with other resources that are readily available to the customer. If these criteria are not met, the promised goods or services are accounted for as a combined performance obligation. Determining whether goods or services are distinct performance obligations that should be accounted for separately may require significant judgment.
Technology or service components from third parties are frequently embedded in or combined with our applications or service offerings. Whether we recognize revenue based on the gross amount billed to a customer or the net amount retained involves judgment that depends on the relevant facts and circumstances including the level of contractual responsibilities and obligations for delivering solutions to end customers.
The transaction price is determined based on the consideration to which we will be entitled in exchange for transferring products or services to the customer. We include any fixed charges within our contracts as part of the total transaction price. To the extent that variable consideration is not constrained, we include an estimate of the variable amount, as appropriate, within the total transaction price and update our assumptions over the duration of the contract. We may constrain the estimated transaction price in the event of a high degree of uncertainty as to the final consideration amount owed because of an extended length of time over which the fees may be adjusted. The transaction price (including any discounts or rebates) is allocated between distinct goods and services in a multi-element arrangement based on their relative standalone selling prices. For items that are not sold separately, we estimate the standalone selling prices using available information such as market conditions and internally approved pricing guidelines. Significant judgment may be required to determine standalone selling prices for each performance obligation and whether it depicts the amount we expect to receive in exchange for the related good or service.
Contract modifications occur when we and our customers agree to modify existing customer contracts to change the scope or price (or both) of the contract or when a customer terminates some, or all, of the existing services provided by us. When a contract modification occurs, it requires us to exercise judgment to determine if the modification should be accounted for as (i) a separate contract, (ii) the termination of the original contract and creation of a new contract, or (iii) a cumulative catch up adjustment to the original contract. Further, contract modifications require the identification and evaluation of the performance obligations of the modified contract, including the allocation of revenue to the remaining performance obligations and the period of recognition for each identified performance obligation.
Additional information regarding our revenue recognition policies is included in Note 3 to the consolidated financial statements.
Income Taxes
The determination of our provision for income taxes requires management’s judgment in the use of estimates and the interpretation and application of complex tax laws, sometimes made more complex by our global footprint. Judgment is also required in assessing the timing and amounts of deductible and taxable items. We establish a liability for known tax exposures relating to deductions, transactions and other matters involving some uncertainty as to the proper tax treatment of the item. In establishing a liability for known tax exposures, assumptions are made in determining whether, and the extent to which, a tax position will be sustained. A tax benefit with respect to 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, considering the facts and circumstances available as of the reporting date. The amount of tax benefit recognized reflects the largest benefit that we believe is more likely than not to be realized on settlement with the relevant taxing authority. As new information becomes available, we evaluate our tax positions and adjust our liability for known tax exposures as appropriate.
We maintain net operating loss carryforwards in various taxing jurisdictions, resulting in the establishment of deferred tax assets. We establish a valuation allowance against our deferred tax assets when, based upon the weight of all available evidence, we believe it is more likely than not that some portion or all of the deferred tax assets will not be realized. In making this determination, we have considered the relative impact of all of the available positive and negative evidence regarding future sources of taxable income and available tax planning strategies. However, there could be a material impact to our effective tax rate if there is a significant change in our judgment. To the extent our judgment changes, the valuation allowances are then adjusted, generally through the provision for income taxes, in the period in which the change in facts and circumstances occurs. Additional information regarding our income taxes is included in Note 18 to the consolidated financial statements.
Results of Operations
Components of Revenue and Expenses
The following summary describes the components of revenue and expenses as presented in our consolidated statements of income.
Processing and Services
Processing and services revenue, which in 2020 represented 82% of our total revenue, is primarily generated from account- and transaction-based fees under multi-year contracts. Processing and services revenue is most reflective of our business performance as a significant amount of our total operating profit is generated by these services. Cost of processing and services includes costs directly associated with providing services to clients and includes the following: personnel; equipment and data communication; infrastructure costs, including costs to maintain software applications; client support; certain depreciation and amortization; and other operating expenses.
Product
Product revenue, which in 2020 represented 18% of our total revenue, is primarily derived from print and card production sales, as well as software license sales and hardware (POS devices) sales. Cost of product includes costs directly associated with the products sold and includes the following: costs of materials and software development; hardware; personnel; infrastructure costs; certain depreciation and amortization; and other costs directly associated with product revenue.
Selling, General and Administrative Expenses
Selling, general and administrative expenses primarily consist of: salaries, wages, commissions and related expenses paid to sales personnel, administrative employees and management; advertising and promotional costs; certain depreciation and amortization; and other selling and administrative expenses.
Synergies from the First Data Acquisition
Following the acquisition of First Data, we continue to implement our post-merger integration plans to achieve 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. At December 31, 2020, we have achieved a significant portion of revenue and cost synergies and expect to meet or exceed our previously announced targets.
Financial Results
The following table presents certain amounts included in our consolidated statements of income, the relative percentage that those amounts represent to revenue and the change in those amounts from year-to-year. This information should be read together with the consolidated financial statements and accompanying notes. The financial results presented below have been affected by the acquisition of First Data and other acquisitions, dispositions, debt financing activities, and foreign currency fluctuations. The amounts from the acquired First Data businesses were included in our results for the full year in 2020 and for the five months, since the July 29,2019 acquisition date, in 2019.
| (In millions) | Percentage of Revenue (1) | Increase (Decrease) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Year Ended December 31, | 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | 2020 vs. 2019 | 2019 vs. 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Processing and services | $ | 12,215 | $ | 8,573 | $ | 4,975 | 82.2 | % | 84.2 | % | 85.4 | % | $ | 3,642 | 42 | % | $ | 3,598 | 72 | % | |||||||||||||||||||||||||||||||||||||||
| Product | 2,637 | 1,614 | 848 | 17.8 | % | 15.8 | % | 14.6 | % | 1,023 | 63 | % | 766 | 90 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Total revenue | 14,852 | 10,187 | 5,823 | 100.0 | % | 100.0 | % | 100.0 | % | 4,665 | 46 | % | 4,364 | 75 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Expenses: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of processing and services | 5,841 | 4,016 | 2,324 | 47.8 | % | 46.8 | % | 46.7 | % | 1,825 | 45 | % | 1,692 | 73 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Cost of product | 1,971 | 1,293 | 745 | 74.7 | % | 80.1 | % | 87.9 | % | 678 | 52 | % | 548 | 74 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Sub-total | 7,812 | 5,309 | 3,069 | 52.6 | % | 52.1 | % | 52.7 | % | 2,503 | 47 | % | 2,240 | 73 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative | 5,652 | 3,284 | 1,228 | 38.1 | % | 32.2 | % | 21.1 | % | 2,368 | 72 | % | 2,056 | 167 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Gain on sale of businesses | (464) | (15) | (227) | (3.1) | % | (0.1) | % | (3.9) | % | 449 | n/m | (212) | n/m | ||||||||||||||||||||||||||||||||||||||||||||||
| Total expenses | 13,000 | 8,578 | 4,070 | 87.5 | % | 84.2 | % | 69.9 | % | 4,422 | 52 | % | 4,508 | 111 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Operating income | 1,852 | 1,609 | 1,753 | 12.5 | % | 15.8 | % | 30.1 | % | 243 | 15 | % | (144) | (8) | % | ||||||||||||||||||||||||||||||||||||||||||||
| Interest expense, net | (709) | (473) | (189) | (4.8) | % | (4.6) | % | (3.2) | % | 236 | 50 | % | 284 | 150 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Debt financing activities | — | (47) | (14) | — | % | (0.5) | % | (0.2) | % | (47) | (100) | % | 33 | 236 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Other income (expense) | 28 | (6) | 5 | 0.2 | % | (0.1) | % | 0.1 | % | 34 | n/m | (11) | n/m | ||||||||||||||||||||||||||||||||||||||||||||||
| Income before income taxes and income from investments in unconsolidated affiliates | 1,171 | 1,083 | 1,555 | 7.9 | % | 10.6 | % | 26.7 | % | 88 | 8 | % | (472) | (30) | % | ||||||||||||||||||||||||||||||||||||||||||||
| Income tax provision | (196) | (198) | (378) | (1.3) | % | (1.9) | % | (6.5) | % | (2) | (1) | % | (180) | (48) | % | ||||||||||||||||||||||||||||||||||||||||||||
| Income from investments in unconsolidated affiliates | — | 29 | 10 | — | % | 0.3 | % | 0.2 | % | (29) | (100) | % | 19 | 190 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | 975 | 914 | 1,187 | 6.6 | % | 9.0 | % | 20.4 | % | 61 | 7 | % | (273) | (23) | % | ||||||||||||||||||||||||||||||||||||||||||||
| Less: net income attributable to noncontrolling interests and redeemable noncontrolling interests | 17 | 21 | — | 0.1 | % | 0.2 | % | — | % | (4) | (19) | % | 21 | n/m | |||||||||||||||||||||||||||||||||||||||||||||
| Net income attributable to Fiserv, Inc. | $ | 958 | $ | 893 | $ | 1,187 | 6.5 | % | 8.8 | % | 20.4 | % | $ | 65 | 7 | % | $ | (294) | (25) | % | |||||||||||||||||||||||||||||||||||||||
(1)Percentage of revenue is calculated as the relevant revenue, expense, income or loss amount divided by total revenue, except for cost of processing and services and cost of product amounts, which are divided by the related component of revenue.
| (In millions) | ||||||||||||||||||||||||||||||||||||||||||||
| Year Ended December 31, | Acceptance | Fintech | Payments | Corporate and Other | Total | |||||||||||||||||||||||||||||||||||||||
| Total revenue: | ||||||||||||||||||||||||||||||||||||||||||||
| 2020 | $ | 5,522 | $ | 2,901 | $ | 5,504 | $ | 925 | $ | 14,852 | ||||||||||||||||||||||||||||||||||
| 2019 | 2,571 | 2,942 | 3,909 | 765 | 10,187 | |||||||||||||||||||||||||||||||||||||||
| 2018 | — | 2,917 | 2,408 | 498 | 5,823 | |||||||||||||||||||||||||||||||||||||||
| Revenue growth: | ||||||||||||||||||||||||||||||||||||||||||||
| 2020 | $ | 2,951 | $ | (41) | $ | 1,595 | $ | 160 | $ | 4,665 | ||||||||||||||||||||||||||||||||||
| 2020 percentage | 115 | % | (1) | % | 41 | % | 46 | % | ||||||||||||||||||||||||||||||||||||
| 2019 | $ | 2,571 | $ | 25 | $ | 1,501 | $ | 267 | $ | 4,364 | ||||||||||||||||||||||||||||||||||
| 2019 percentage | 1 | % | 62 | % | 75 | % | ||||||||||||||||||||||||||||||||||||||
| Operating income: | ||||||||||||||||||||||||||||||||||||||||||||
| 2020 | $ | 1,427 | $ | 992 | $ | 2,361 | $ | (2,928) | $ | 1,852 | ||||||||||||||||||||||||||||||||||
| 2019 | 764 | 885 | 1,658 | (1,698) | 1,609 | |||||||||||||||||||||||||||||||||||||||
| 2018 | — | 851 | 1,081 | (179) | 1,753 | |||||||||||||||||||||||||||||||||||||||
| Operating income growth: | ||||||||||||||||||||||||||||||||||||||||||||
| 2020 | $ | 663 | $ | 107 | $ | 703 | $ | (1,230) | $ | 243 | ||||||||||||||||||||||||||||||||||
| 2020 percentage | 87 | % | 12 | % | 42 | % | 15 | % | ||||||||||||||||||||||||||||||||||||
| 2019 | $ | 764 | $ | 34 | $ | 577 | $ | (1,519) | $ | (144) | ||||||||||||||||||||||||||||||||||
| 2019 percentage | 4 | % | 53 | % | (8) | % | ||||||||||||||||||||||||||||||||||||||
| Operating margin: | ||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 25.9 | % | 34.2 | % | 42.9 | % | 12.5 | % | ||||||||||||||||||||||||||||||||||||
| 2019 | 29.7 | % | 30.1 | % | 42.4 | % | 15.8 | % | ||||||||||||||||||||||||||||||||||||
| 2018 | — | % | 29.2 | % | 44.9 | % | 30.1 | % | ||||||||||||||||||||||||||||||||||||
| Operating margin growth: (1) | ||||||||||||||||||||||||||||||||||||||||||||
| 2020 | (380) | bps | 410 | bps | 50 | bps | (330) | bps | ||||||||||||||||||||||||||||||||||||
| 2019 | 90 | bps | (250) | bps | (1,430) | bps | ||||||||||||||||||||||||||||||||||||||
(1)Represents the basis point growth or decline in operating margin.
Operating margin percentages are calculated using actual, unrounded amounts.
Total Revenue
Total revenue increased $4,665 million, or 46%, in 2020 and increased $4,364 million, or 75%, in 2019 compared to the prior years, primarily driven by the incremental revenue from the First Data acquisition. The First Data acquisition, which was completed on July 29, 2019, contributed $5,067 million and $4,078 million of incremental revenue during 2020 and 2019, respectively, with $3,114 million and $2,571 million to the Acceptance segment, $1,616 million and $1,230 million to the Payments segment, and $337 million and $277 million to Corporate and Other, during 2020 and 2019, respectively. Conversely, dispositions reduced revenue by $348 million and $54 million in 2020 and 2019, respectively, compared to the prior years.
Revenue in our Acceptance segment increased $2,951 million, or 115%, in 2020, driven by the acquisition of First Data on July 29, 2019, which contributed incremental revenue of $3,114 million during the first seven months of 2020 and the entire $2,571 million of Acceptance segment revenue in 2019. The dissolution of the BAMS joint venture on July 1, 2020 reduced Acceptance segment revenue growth in 2020 by 6% compared to 2019. In addition, revenue in our Acceptance segment, which earns transaction-based fees, was adversely affected by the economic impact of the COVID-19 pandemic in the last two weeks of March 2020 and throughout the remainder of the year. Merchant acquiring transaction and payment volumes began to partially recover in May 2020 and continued to improve into July 2020; thereafter, the monthly volume growth rate as compared to the prior year stabilized for the balance of the year.
Revenue in our Fintech segment decreased $41 million, or 1%, in 2020 and increased $25 million, or 1%, in 2019 compared to the prior years. Dispositions, including our remittance solutions business in December 2019 and Lending Solutions business in March 2018, reduced Fintech segment revenue growth by 1% and 2% in 2020 and 2019, respectively, compared to the prior years. Recurring revenue growth from higher processing volumes in 2020 was offset by a reduction of 2% from a decline in termination fee revenue. Fintech segment revenue growth in 2019 was driven by growth in our bank solutions business from new business, customer migrations from in-house technology to outsourced solutions and growth with existing customers across a range of products.
Revenue in our Payments segment increased $1,595 million, or 41%, in 2020 and increased $1,501 million, or 62%, in 2019 compared to the prior years. Revenue from acquired businesses, including First Data, contributed 41% and 57% to Payments segment revenue growth in 2020 and 2019, respectively. Payments segment revenue in 2020 was adversely affected by the COVID-19 pandemic while the remaining growth in 2019 was driven by expansion in our recurring revenue businesses, with our card services and electronic payments businesses contributing 4% and 1%, respectively.
Revenue at Corporate and Other increased $160 million, or 21%, in 2020 and increased $267 million, or 54%, in 2019 compared to the prior years. Postage revenue from the First Data acquisition contributed 44% and 56% to the Corporate and Other growth in 2020 and 2019, respectively, while the disposition of a 60% controlling interest of our Investment Services business reduced revenue growth by 19% in 2020.
Total Expenses
Total expenses increased $4,422 million, or 52%, in 2020 and increased $4,508 million, or 111%, in 2019 compared to the prior years. Total expenses as a percentage of total revenue was 87.5%, 84.2% and 69.9% in 2020, 2019 and 2018, respectively. Total expenses in 2020 and 2019 contain the incremental expenses, including acquired intangible asset amortization, of First Data from the date of acquisition, resulting in the overall significant increase in expenses compared to the prior years. The incremental expenses during 2020 from the First Data acquisition were primarily due to 2020 containing seven more months of expenses from First Data as compared to 2019. Total expenses were reduced by a $428 million gain on sale of a 60% interest of our Investment Services business and a $36 million gain on the dissolution of the BAMS joint venture in 2020, and a $227 million gain on sale of a 55% interest of our Lending Solutions business in 2018.
Cost of processing and services as a percentage of processing and services revenue was 47.8%, 46.8% and 46.7% in 2020, 2019 and 2018, respectively. Expense management in our recurring revenue businesses favorably impacted cost of processing and services as a percentage of processing and services revenue in both 2020 and 2019 compared to the prior years. Conversely, cost of processing and services as a percentage of processing and services revenue increased in 2020 by approximately 200 basis points, from integration-related expenses associated with the First Data acquisition, including $118 million of accelerated depreciation and amortization associated with the termination of certain vendor contracts, and by approximately 100 basis points from incremental First Data acquisition intangible amortization. Cost of processing and services as a percentage of processing and services revenue increased in 2019 by approximately 70 basis points from expenses shifting from cost of product to cost of processing as financial institutions continue to move from in-house technology to outsourced solutions, and by approximately 60 basis points from a non-cash impairment charge related to an international core processing platform. Client-focused incremental investments increased cost of processing and services as a percentage of processing and services revenue in 2018 by approximately 50 basis points.
Cost of product as a percentage of product revenue was 74.7%, 80.1% and 87.9% in 2020, 2019 and 2018, respectively. The reduction in cost of product as a percentage of product revenue in 2020 and 2019 was driven by the First Data acquisition. In addition, cost of product as a percentage of product revenue in 2019 decreased by approximately 400 basis points due to expenses shifting from cost of product to cost of processing and services as financial institutions continue to move from in-house technology to outsourced solutions, and increased by approximately 300 basis points from a decrease in higher-margin software license revenue as compared to 2018.
Selling, general and administrative expenses as a percentage of total revenue was 38.1%, 32.2% and 21.1% in 2020, 2019 and 2018, respectively. Incremental acquired intangible asset amortization from the First Data acquisition increased selling, general and administrative expenses as a percentage of total revenue by approximately 600 basis points in each of 2020 and 2019. Selling, general and administrative expenses as a percentage of total revenue in 2020 increased by approximately 120 basis points from higher integration-related expenses, which was largely offset by synergy related cost reductions. The remaining increase in 2019 was due to increased costs associated with the First Data acquisition, including integration-related expenses.
The gains on sale of businesses of $464 million, $15 million and $227 million in 2020, 2019 and 2018, respectively, primarily resulted from the sale of a 60% interest of our Investment Services business in February 2020, the dissolution of the BAMS joint venture in July 2020, and the sale of a 55% interest of our Lending Solutions business in March 2018, including contingent consideration received in 2019.
Operating Income and Operating Margin
Total operating income increased $243 million, or 15%, in 2020 and decreased $144 million, or 8%, in 2019 compared to the prior years. Total operating margin decreased to 12.5% in 2020 from 15.8% in 2019 and 30.1% in 2018.
Operating income in our Acceptance segment was $764 million in 2019 and increased $663 million, or 87%, in 2020, driven by the acquisition of First Data. Operating margin was 25.9% and 29.7% in 2020 and 2019, respectively, decreasing 380 basis points in 2020 compared to the prior year. Operating income and margin in our Acceptance segment, which earns transaction-based fees, was adversely affected in the last two weeks of March and throughout the remainder of 2020 due to the economic impact of the COVID-19 pandemic. Merchant acquiring transaction and payment volumes and related operating income began to partially recover in May 2020 and continued to improve into July 2020; thereafter, the monthly volume growth rate as compared to the prior year stabilized for the balance of the year.
Operating income in our Fintech segment increased $107 million, or 12%, in 2020 and increased $34 million, or 4%, in 2019 compared to the prior years. Operating margin was 34.2%, 30.1% and 29.2% in 2020, 2019 and 2018, respectively, increasing 410 basis points in 2020 and increasing 90 basis points in 2019 compared to the prior years. Fintech segment operating margin improvement in 2020 compared to 2019 was driven by expense management across the segment, including technology and vendor synergy savings of approximately 330 basis points and additional expense reductions attributable to the COVID-19 pandemic of approximately 120 basis points, partially offset by approximately 100 basis points from a reduction in contract termination fee revenue. Fintech segment operating margin improvement in 2019 compared to 2018 was driven by expense management efforts in our Fintech international businesses of approximately 100 basis points, partially offset by approximately 70 basis points from a reduction in higher-margin software license revenue. Client-focused incremental investments reduced Fintech segment operating margin in 2018 by approximately 40 basis points.
Operating income in our Payments segment increased $703 million, or 42%, in 2020 and increased $577 million, or 53%, in 2019 compared to the prior years. Operating margin was 42.9%, 42.4% and 44.9% in 2020, 2019 and 2018, respectively, increasing 50 basis points in 2020 and decreasing 250 basis points in 2019 compared to the prior years. The reduction in Payments segment operating margin in 2019 was primarily attributable to the acquisition of First Data, while the impact of cost synergies drove the margin expansion in 2020.
The operating loss in Corporate and Other increased $1,230 million in 2020 and increased $1,519 million in 2019 compared to the prior years. The increase in Corporate and Other operating loss was primarily due to the acquisition of First Data, including incremental amortization of acquired intangible assets of $1,035 million and $799 million in 2020 and 2019, respectively, incremental acquisition and integration-related costs of $441 million and $275 million in 2020 and 2019, respectively, and other First Data related corporate expenses since the date of acquisition. Corporate and Other was favorably impacted by gains from sales of businesses of $464 million, $15 million and $227 million in 2020, 2019 and 2018, respectively, and negatively impacted in 2019 by a $48 million non-cash impairment charge related to an international core processing platform.
Interest Expense, Net
Interest expense, net increased $236 million, or 50%, in 2020 and increased $284 million, or 150%, in 2019 compared to prior years, primarily due to the June 2019 issuance of $9.0 billion of fixed-rate senior notes, the July 2019 issuance of €1.5 billion and £1.05 billion of fixed-rate senior notes and the term loan borrowings that were incurred for the purpose of funding the repayment of certain indebtedness of First Data and its subsidiaries on the closing date of the acquisition, as well as the September 2018 issuance of $2.0 billion of fixed-rate notes.
Debt Financing Activities
In connection with the merger agreement entered into on January 16, 2019 to acquire First Data, we entered into a bridge facility commitment letter providing for a 364-day senior unsecured bridge term loan facility in an aggregate principal amount of $17.0 billion for the purpose of refinancing certain indebtedness of First Data on the closing date of the acquisition. We recorded $98 million of expense in 2019 associated with the bridge term loan facility and other refinancing and related activities in connection with the acquisition of First Data. In addition, in 2019 we recorded $50 million of net foreign currency transaction gains related to our foreign currency-denominated debt. In 2018, we completed a cash tender offer for and redemption of our then-outstanding $450 million aggregate principal amount of 4.625% senior notes due 2020, which resulted in a pre-tax loss on early debt extinguishment of $14 million.
Other Income (Expense)
Other income (expense) increased $34 million in 2020 and decreased $11 million in 2019 compared to prior years. Other income (expense) includes net foreign currency transaction gains and losses, gains or losses from a change in fair value of investments in certain equity securities, and amounts related to the release of risk under our non-contingent guarantee arrangements and changes in the provision of estimated credit losses associated with certain indebtedness of the Lending Joint Ventures. In addition, other income includes $19 million in 2020 related to a pre-tax gain on the sale of certain lease receivables.
Income Tax Provision
Income tax provision as a percentage of income before income from investments in unconsolidated affiliates was 16.7%, 18.3% and 24.3% in 2020, 2019 and 2018, respectively. The decrease in the effective tax rate in 2020 compared to 2019 was primarily the result of foreign income tax benefits from a subsidiary restructuring, partially offset by the impact of an increase in the United Kingdom corporate income tax rate from 17% to 19% in 2020. The decrease in the effective tax rate in 2019 compared to the prior year is primarily related to equity compensation-related tax benefits, as well as discrete benefits due to a loss from subsidiary restructuring.
Income from Investments in Unconsolidated Affiliates
Our share of net income or loss from affiliates accounted for using the equity method of accounting, including merchant bank alliance affiliates from the acquisition of First Data, is reported as income from investments in unconsolidated affiliates and the related tax expense or benefit is reported within the income tax provision in the consolidated statements of income. Income from investments in unconsolidated affiliates, including acquired intangible asset amortization from valuations in purchase accounting, was $0 million, $29 million and $10 million in 2020, 2019 and 2018, respectively.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests and redeemable noncontrolling interests relates to the ownership interest of our alliance partners in our consolidated results, obtained through the acquisition of First Data. Net income attributable to noncontrolling interests, including acquired intangible asset amortization from valuations in purchase accounting, was $17 million and $21 million in 2020 and 2019, respectively.
Net Income Per Share - Diluted
Net income attributable to Fiserv, Inc. per share-diluted was $1.40, $1.71 and $2.87 in 2020, 2019 and 2018, respectively. Net income attributable to Fiserv, Inc. per share-diluted in 2020 included integration costs and acquired intangible asset amortization from the application of purchase accounting associated with the acquisition of First Data, as well as gains from the sale of a 60% interest of our Investment Services business in February 2020 and the dissolution of the BAMS joint venture in July 2020. Net income attributable to Fiserv, Inc. per share-diluted in 2019 included transaction costs and financing activities associated with the acquisition of First Data, as well as integration costs and acquired asset amortization after the date of acquisition. Net income attributable to Fiserv, Inc. per share-diluted was favorably impacted in 2018 by a gain on the sale of a 55% interest of our Lending Solutions business.
Liquidity and Capital Resources
General
Our primary liquidity needs in the ordinary course of business are to: (i) fund normal operating expenses; (ii) meet the interest and principal requirements of our outstanding indebtedness, including finance leases; and (iii) fund capital expenditures and operating lease payments. We believe these needs will be satisfied using cash flow generated by our operations, along with our cash and cash equivalents of $906 million and available borrowings under our revolving credit facility of $3.4 billion at December 31, 2020. The following table summarizes our operating cash flow and capital expenditure amounts for the years ended December 31, 2020 and 2019, respectively.
| Year Ended December 31, | Increase (Decrease) | ||||||||||||||||||||||
| (In millions) | 2020 | 2019 | $ | % | |||||||||||||||||||
| Net income | $ | 975 | $ | 914 | $ | 61 | |||||||||||||||||
| Depreciation and amortization | 3,257 | 1,778 | 1,479 | ||||||||||||||||||||
| Net foreign currency gain on financing activities | — | (50) | 50 | ||||||||||||||||||||
| Share-based compensation | 369 | 229 | 140 | ||||||||||||||||||||
| Deferred income taxes | 71 | 47 | 24 | ||||||||||||||||||||
| Gain on sale of businesses | (464) | (15) | (449) | ||||||||||||||||||||
| Income from investments in unconsolidated affiliates | — | (29) | 29 | ||||||||||||||||||||
| Distributions from unconsolidated affiliates | 42 | 23 | 19 | ||||||||||||||||||||
| Settlement of interest rate hedge contracts | — | (183) | 183 | ||||||||||||||||||||
| Non-cash impairment charges | 124 | 48 | 76 | ||||||||||||||||||||
| Net changes in working capital and other | (227) | 33 | (260) | ||||||||||||||||||||
| Operating cash flow | $ | 4,147 | $ | 2,795 | $ | 1,352 | 48 | % | |||||||||||||||
| Capital expenditures, including capitalized software and other intangibles | $ | 900 | $ | 721 | $ | 179 | 25 | % | |||||||||||||||
Our net cash provided by operating activities, or operating cash flow, was $4.1 billion in 2020, an increase of 48% compared with $2.8 billion in 2019. This increase was primarily attributable to the acquisition of First Data. Net cash provided by operating activities in 2019 included a payment of $183 million associated with the settlement of treasury lock agreements related to refinancing certain indebtedness assumed as part of the First Data acquisition.
Our current policy is to use our operating cash flow primarily to fund capital expenditures, share repurchases and acquisitions and to repay debt rather than to pay dividends. Our capital expenditures were approximately 6% and 7% of our total revenue in 2020 and 2019, respectively.
Share Repurchases
In December 2020, New Omaha Holdings L.P. ("New Omaha"), a shareholder of ours, completed an underwritten secondary public offering of 20.1 million shares of our common stock (the “offering”). We repurchased from the underwriters 1.8 million shares of our common stock that were subject to the offering. The share repurchase totaled $200 million and was funded with cash on hand. The repurchased shares were cancelled and no longer outstanding following the completion of the share repurchase. In 2019, we deferred share repurchases as of January 16, 2019 until the close of the First Data acquisition. We purchased a total of $1.6 billion and $394 million of our common stock in 2020 and 2019, respectively.
On November 19, 2020, our board of directors authorized the purchase of up to 60.0 million shares of our common stock. At December 31, 2020, we had approximately 65.7 million shares remaining under our current repurchase authorizations. Shares repurchased are generally held for issuance in connection with our equity plans.
Acquisitions and Dispositions
Acquisitions
On March 2, 2020, we acquired MerchantPro, an ISO that provides processing services, POS equipment and merchant cash advances to businesses across the United States. MerchantPro is included within the Acceptance segment and further expands our merchant services business. On March 18, 2020, we acquired Bypass, an ISO and innovator in enterprise POS systems for sports and entertainment venues, food service management providers and national restaurant chains. Bypass is included within the Acceptance segment and further enhances our omni-commerce capabilities, enabling enterprise businesses to deliver a seamless customer experience that spans physical and digital channels. On May 11, 2020, we acquired Inlet, a provider of secure digital delivery solutions for enterprise and middle-market billers’ invoices and statements. Inlet is included within the Payments segment and further enhances our digital bill payment strategy. We acquired these businesses for an aggregate purchase price of $167 million, net of $2 million of acquired cash, and including earn-out provisions estimated at a fair value of $45 million. We funded these acquisitions by utilizing a combination of available cash and existing availability under our revolving credit facility.
On July 29, 2019, we acquired First Data for a total purchase price of $46.5 billion by acquiring 100% of the First Data stock that was issued and outstanding as of the date of acquisition. As a result of the acquisition, First Data stockholders received 286 million shares of common stock of Fiserv, Inc., at an exchange ratio of 0.303 shares of Fiserv, Inc. for each share of First Data common stock, with cash paid in lieu of fractional shares. We also converted 15 million outstanding First Data equity awards into corresponding equity awards relating to common stock of Fiserv, Inc. in accordance with the exchange ratio. In addition, concurrent with the closing of the acquisition, we made a cash payment of $16.4 billion to repay existing First Data debt. We funded the transaction-related expenses and the repayment of First Data debt through a combination of available cash on-hand, proceeds from the issuance of senior notes, and term loan and revolving credit facility borrowings. The acquisition of First Data, included within the Acceptance and Payments segments, increases our footprint as a global payments and financial technology provider by expanding the portfolio of services provided to financial institutions, corporate and merchant clients and consumers.
On October 31, 2018, we acquired the debit card processing, ATM Managed Services, and MoneyPass® surcharge-free network of Elan Financial Services, a unit of U.S. Bancorp, for approximately $659 million including post-closing working capital adjustments, estimated contingent consideration related to earn-out provisions and future payments under a transition services agreement in excess of estimated fair value. This acquisition, included within the Payments segment, deepens our presence in debit card processing, broadens our client reach and scale and provides new solutions to enhance the value proposition for our existing debit solution clients.
On January 22, 2021, we acquired Ondot Systems, Inc., a digital experience platform provider for financial institutions. This acquisition, to be included within the Payments segment, will further expand our digital capabilities, enhancing our suite of integrated solutions spanning card-based payments, digital banking platforms, core banking, and merchant solutions to enable clients of all sizes to deliver frictionless, digital-first and personalized experiences to their customers.
Dispositions
Effective July 1, 2020, we and BANA dissolved the BAMS joint venture, of which we maintained a 51% controlling ownership interest. Upon dissolution of the joint venture’s operations, the joint venture transferred a proportionate share of value, primarily the client contracts, to each party via an agreed upon contractual separation. The remaining activities of the joint venture will consist of supporting the transition of the business to each party and an orderly wind down of remaining BAMS assets and liabilities. The revenues and expenses of the BAMS joint venture were consolidated into our financial results through the date of dissolution. The business transferred to us will continue to be operated and managed within our Acceptance segment.
We will continue to provide merchant processing and related services to former BAMS clients allocated to BANA, at BAMS pricing, through June 2023. We will also provide processing and other support services to new BANA merchant clients pursuant to a five-year non-exclusive agreement which, after June 2023, will also apply to the former BAMS clients allocated to BANA. In addition, both companies are entitled to certain transition services, at fair value, from each other through June 2023.
On February 18, 2020, we sold a 60% controlling interest of our Investment Services business, subsequently renamed as Tegra118, LLC. We received pre-tax proceeds of $578 million, net of related expenses, resulting in a pre-tax gain on the sale of $428 million, with a related tax expense of $112 million. The net proceeds from the sale were primarily used to repurchase shares of our common stock. On February 2, 2021, Tegra118 completed a merger with a third party, resulting in a dilution of our ownership interest in the combined new entity, Wealthtech Holdings, LLC.
In connection with the acquisition of First Data, we acquired two businesses which we intended to sell. In October 2019, we completed the sales, at acquired fair value, of these two businesses for aggregate proceeds of $133 million.
On March 29, 2018, we sold a 55% controlling interest of our Lending Solutions business, retaining 45% ownership interests in two joint ventures. We received gross sale proceeds of $419 million from the transactions. In August 2019, the Sagent Auto, LLC joint venture, formerly known as Fiserv Automotive Solutions, LLC, completed a merger with a third party, resulting in the dilution of our ownership interest to 31% in the combined entity, defi SOLUTIONS Group, LLC. The Lending Joint Ventures maintain variable-rate term loan facilities with aggregate outstanding borrowings of $385 million in senior unsecured debt and variable-rate revolving credit facilities with an aggregate borrowing capacity of $45 million with a syndicate of banks, which mature in March 2023. Outstanding borrowings on the revolving credit facilities at December 31, 2020 were $13 million. We have guaranteed this debt of the Lending Joint Ventures and do not anticipate that the Lending Joint Ventures will fail to fulfill their debt obligations. We maintain a liability for the estimated fair value of our non-contingent obligations to stand ready to perform over the term of the guarantee arrangements with the Lending Joint Ventures. Such guarantees will be amortized in future periods over the contractual term, based upon amounts to be received by us for the respective guarantees. In addition, we
maintain a contingent liability representing the current expected credit losses to which we are exposed. This contingent liability is estimated based on certain financial metrics of the Lending Joint Ventures and historical industry data, which is used to develop assumptions of the likelihood the guaranteed parties will default and the level of credit losses in the event a default occurs. We have not made any payments under the guarantees, nor have we been called upon to do so. In addition, in January 2018, we completed the sale of the retail voucher business acquired in our 2017 acquisition of Monitise for proceeds of £37 million ($50 million).
Indebtedness
Our debt consisted of the following at December 31:
| (In millions) | 2020 | 2019 | ||||||||||||
| Short-term and current maturities of long-term debt: | ||||||||||||||
| Lines of credit | $ | 144 | $ | 150 | ||||||||||
| Finance lease and other financing obligations | 240 | 137 | ||||||||||||
| Total short-term and current maturities of long-term debt | $ | 384 | $ | 287 | ||||||||||
| Long-term debt: | ||||||||||||||
| 2.700% senior notes due June 2020 | $ | — | $ | 850 | ||||||||||
| 4.750% senior notes due June 2021 | 400 | 400 | ||||||||||||
| 3.500% senior notes due October 2022 | 700 | 700 | ||||||||||||
| 3.800% senior notes due October 2023 | 1,000 | 1,000 | ||||||||||||
| 0.375% senior notes due July 2023 (Euro-denominated) | 612 | 559 | ||||||||||||
| 2.750% senior notes due July 2024 | 2,000 | 2,000 | ||||||||||||
| 3.850% senior notes due June 2025 | 900 | 900 | ||||||||||||
| 2.250% senior notes due July 2025 (British Pound-denominated) | 709 | 687 | ||||||||||||
| 3.200% senior notes due July 2026 | 2,000 | 2,000 | ||||||||||||
| 2.250% senior notes due June 2027 | 1,000 | — | ||||||||||||
| 1.125% senior notes due July 2027 (Euro-denominated) | 612 | 559 | ||||||||||||
| 4.200% senior notes due October 2028 | 1,000 | 1,000 | ||||||||||||
| 3.500% senior notes due July 2029 | 3,000 | 3,000 | ||||||||||||
| 2.650% senior notes due June 2030 | 1,000 | — | ||||||||||||
| 1.625% senior notes due July 2030 (Euro-denominated) | 612 | 559 | ||||||||||||
| 3.000% senior notes due July 2031 (British Pound-denominated) | 709 | 687 | ||||||||||||
| 4.400% senior notes due July 2049 | 2,000 | 2,000 | ||||||||||||
| Receivable securitized loan | 425 | 500 | ||||||||||||
| Term loan facility | 1,250 | 3,950 | ||||||||||||
| Unamortized discount and deferred financing costs | (155) | (160) | ||||||||||||
| Revolving credit facility | 22 | 174 | ||||||||||||
| Finance lease and other financing obligations | 504 | 247 | ||||||||||||
| Total long-term debt | $ | 20,300 | $ | 21,612 | ||||||||||
At December 31, 2020, our debt consisted primarily of $18.3 billion of fixed rate senior notes and $1.3 billion of variable rate term loan. Interest on our U.S. dollar-denominated senior notes is paid semi-annually, while interest on our Euro- and British Pound-denominated senior notes is paid annually. Interest on our revolving credit facility is paid weekly, or more frequently on occasion, and interest on our term loans is paid monthly. Our 4.75% senior notes due in June 2021 were classified in the consolidated balance sheet as long-term, as we have the intent to refinance this debt on a long-term basis and the ability to do so under our revolving credit facility, which expires in September 2023.
We were in compliance with all financial debt covenants during 2020. Our ability to meet future debt covenant requirements will depend on our continued ability to generate earnings and cash flows. As described below, the COVID-19 pandemic has created significant uncertainty as to general economic and market conditions. We expect to remain in compliance with all terms and conditions associated with our outstanding debt, including financial debt covenants.
Senior Notes
We have outstanding $18.3 billion of various fixed-rate senior notes, as described above. The indentures governing our senior notes contain covenants that, among other matters, limit (i) our ability to consolidate or merge with or into, or convey, transfer or lease all or substantially all of our properties and assets to, another person, (ii) our and certain of our subsidiaries’ ability to create or assume liens, and (iii) our and certain of our subsidiaries’ ability to engage in sale and leaseback transactions. We may, at our option, redeem the senior notes, in whole or from time to time in part, at any time prior to the applicable maturity date. The interest rate applicable to certain of the senior notes 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.
On May 13, 2020, we completed an offering of $2.0 billion of senior notes comprised of $1.0 billion aggregate principal amount of 2.25% senior notes due in June 2027 and $1.0 billion aggregate principal amount of 2.65% senior notes due in June 2030. The indentures governing the senior notes contain covenants that are substantially the same as those set forth in our senior notes described above. We used the net proceeds from these senior notes offerings to repay the outstanding principal balance of $850 million under our 2.7% senior notes due in June 2020 and outstanding borrowings under our amended and restated revolving credit facility totaling $1.1 billion.
On June 24, 2019 and July 1, 2019, we completed various offerings of senior notes for the purpose of funding the repayment of certain indebtedness of First Data and its subsidiaries on the closing date of the acquisition. Such offerings consisted of the following:
| (In millions) | Interest Rates | Maturities | Aggregate Principal Amount | ||||||||||||||
| U.S. dollar denominated senior notes | 2.750% - 4.400% | July 2024 - 2049 | $ | 9,000 | |||||||||||||
| Euro denominated senior notes | 0.375% - 1.625% | July 2023 - 2030 | € | 1,500 | |||||||||||||
| British Pound denominated senior notes | 2.250% - 3.000% | July 2025 - 2031 | £ | 1,050 | |||||||||||||
We used a portion of the net proceeds from the senior note offerings described above in June 2019 to repay outstanding borrowings totaling $790 million under our amended and restated revolving credit facility. On July 29, 2019, concurrent with the acquisition of First Data, we used the remaining net proceeds from the 2019 senior notes offerings described above, as well as the net proceeds of the term loan facility and a drawing on our revolving credit facility described below, to repay $16.4 billion of existing First Data debt and to pay fees and our expenses related to such repayment, the First Data acquisition and related transactions.
In March 2019, we entered into treasury lock agreements (“Treasury Locks”), designated as cash flow hedges, in the aggregate notional amount of $5.0 billion to manage exposure to fluctuations in benchmark interest rates. On June 24, 2019, concurrent with the issuance of the U.S. dollar-denominated senior notes described above, the Treasury Locks were settled resulting in a payment of $183 million that will be amortized to earnings over the terms of the originally forecasted interest payments.
In June 2019, we entered into foreign exchange forward contracts to minimize foreign currency exposure to the Euro and British Pound upon settlement of the proceeds from the foreign currency-denominated senior notes, as described above. The foreign exchange forward contracts matured on July 1, 2019, concurrent with the closing of the offering of the foreign currency-denominated senior notes. We realized foreign currency transaction gains of $3 million from these foreign exchange forward contracts. In addition, we held a portion of the proceeds from the issuance of these foreign currency-denominated senior notes in Euro- and British Pound-denominated cash and cash equivalents. We realized foreign currency transaction losses of $19 million 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.
In September 2018, we completed an offering of $2.0 billion of senior notes comprised of $1.0 billion aggregate principal amount of 3.8% senior notes due in October 2023 and $1.0 billion aggregate principal amount of 4.2% senior notes due in October 2028. We used the net proceeds from such offering to repay the outstanding principal balance of $540 million under our then-existing term loan and the then-outstanding borrowings under our amended and restated revolving credit facility totaling $1.1 billion. In addition, we commenced a cash tender offer in September 2018 for any and all of our then-outstanding $450 million aggregate principal amount of 4.625% senior notes due October 2020. Upon expiration of the tender offer on September 26, 2018, $246 million was tendered. In October 2018, we retired the remaining outstanding $204 million aggregate principal amount of 4.625% senior notes. We recorded a pre-tax loss on early debt extinguishment of $14 million during the year ended December 31, 2018 related to these activities.
Term Loan Facility
On February 15, 2019, we entered into a term loan credit agreement with a syndicate of financial institutions pursuant to which such financial institutions committed to provide us with a senior unsecured term loan facility in an aggregate amount of $5.0 billion, consisting of $1.5 billion in commitments to provide loans with a term of three years and $3.5 billion in commitments to provide loans with a term of five years. On July 29, 2019, concurrent with the closing of the acquisition of First Data, the term loan credit agreement was funded. Loans drawn under the term loan facility are subject to amortization at a quarterly rate of 1.25% for the first eight quarters and 1.875% each quarter thereafter (with loans outstanding under the five-year tranche subject to amortization at a quarterly rate of 2.5% after the fourth anniversary of the commencement of amortization), with accrued and unpaid amortization amounts required to be paid on the last business day in December of each year. Borrowings under the term loan facility bear interest at variable rates based on LIBOR or on a base rate, plus in each case, a specified margin based on our long-term debt rating in effect from time to time. The variable interest rate on the term loan facility borrowings was 1.41% at December 31, 2020. The term loan credit facility contains affirmative, negative and financial covenants, and events of default, that are substantially the same as those set forth in our existing amended revolving credit facility, as described below.
Revolving Credit Facility
We maintain an amended and restated revolving credit facility, which matures in September 2023, with aggregate commitments available for $3.5 billion of total capacity. Borrowings under the amended and restated revolving credit facility bear interest at a variable rate based on LIBOR or a base rate, plus in each case a specified margin based on our long-term debt rating in effect from time to time. The variable interest rate on the revolving credit facility borrowings was 1.18% at December 31, 2020. There are no significant commitment fees and no compensating balance requirements. The amended and restated revolving credit facility contains various restrictions and covenants that require us, among other things, to (i) limit our consolidated indebtedness as of the end of each fiscal quarter to no more than three and one-half times our consolidated net earnings before interest, taxes, depreciation, amortization, non-cash charges and expenses and certain other adjustments (“EBITDA”) during the period of four fiscal quarters then ended, subject to certain exceptions, and (ii) maintain EBITDA of at least three times our consolidated interest expense as of the end of each fiscal quarter for the period of four fiscal quarters then ended.
On February 6, 2019, we entered into an amendment to our amended and restated revolving credit facility to (i) amend the maximum leverage ratio covenant to permit us to elect to increase the permitted maximum leverage ratio from three and one-half times our consolidated EBITDA to either four times or four and one-half times our consolidated EBITDA for a specified period following certain acquisitions and (ii) permit us to make drawings under the revolving credit facility on the closing date of our acquisition of First Data subject to only limited conditions. In November 2019, we elected to increase the permitted maximum leverage ratio to four times our consolidated EBITDA pursuant to the terms of the amendment described above.
Foreign Lines of Credit and Other Arrangements
We maintain certain short-term lines of credit with foreign banks and alliance partners primarily to fund settlement activity. These arrangements are primarily associated with international operations and are in various functional currencies, the most significant of which are the Australian dollar, Polish zloty, Euro and Argentine peso. We had amounts outstanding on these lines of credit totaling $144 million and $150 million at a weighted-average interest rate of 21.98% and 13.42% at December 31, 2020 and 2019, respectively.
Receivable Securitized Loan
We maintain a consolidated wholly-owned subsidiary, First Data Receivables, LLC (“FDR”). FDR is a party to certain receivables financing arrangements, including an agreement (“Receivables Financing Agreement”) with certain financial institutions and other persons from time to time party thereto as lenders and group agents, pursuant to which certain of our wholly-owned subsidiaries have agreed to transfer and contribute receivables to FDR, and FDR in turn may obtain borrowings from the financial institutions and other lender parties to the Receivables Financing Agreement secured by liens on those receivables. FDR’s assets are not available to satisfy the obligations of any other of our entities or affiliates, and FDR’s creditors would be entitled, upon its liquidation, to be satisfied out of FDR’s assets prior to any assets or value in FDR becoming available to us. FDR held $811 million and $773 million in receivables as part of the securitization program at December 31, 2020 and 2019, respectively. FDR utilized the receivables as collateral in borrowings of $425 million and $500 million as of December 31, 2020 and 2019, at an average interest rate of 1.00% and 2.61%, respectively. At December 31, 2020, the collateral capacity under the Receivables Financing Agreement was $625 million, and the maximum borrowing capacity was $500 million. The term of the Receivables Financing Agreement is through July 2022.
Other
Access to capital markets impacts our cost of capital, our ability to refinance maturing debt and our ability to fund future acquisitions. Our ability to access capital on favorable terms depends on a number of factors, including general market conditions, interest rates, credit ratings on our debt securities, perception of our potential future earnings and the market price of our common stock. As of December 31, 2020, we had a corporate credit rating of Baa2 with a stable outlook from Moody’s Investors Service, Inc. (“Moody’s”) and BBB with a stable outlook from Standard & Poor’s Ratings Services (“S&P”) on our senior unsecured debt securities.
The interest rates payable on certain of our senior notes, our term loans and our revolving credit facility are subject to adjustment from time to time if Moody’s or S&P changes the debt rating applicable to the notes. If the ratings from Moody’s or S&P decrease below investment grade, the per annum interest rates on the senior notes are subject to increase by up to two percent. In no event will the total increase in the per annum interest rates exceed two percent above the original interest rates, nor will the per annum interest rate be reduced below the original interest rate applicable to the senior notes.
Cash and Cash Equivalents
Investments (other than those included in settlement assets) with original maturities of three months or less that are readily convertible to cash are considered to be cash equivalents. At December 31, 2020 and 2019, we held $906 million and $893 million in cash and cash equivalents, respectively.
The table below details the cash and cash equivalents at December 31:
| 2020 | 2019 | ||||||||||||||||||||||||||||||||||
| (In millions) | Domestic | International | Total | Domestic | International | Total | |||||||||||||||||||||||||||||
| Available | $ | 337 | $ | 177 | $ | 514 | $ | 383 | $ | 208 | $ | 591 | |||||||||||||||||||||||
| Unavailable (1) | 57 | 335 | 392 | 130 | 172 | 302 | |||||||||||||||||||||||||||||
| Total | $ | 394 | $ | 512 | $ | 906 | $ | 513 | $ | 380 | $ | 893 | |||||||||||||||||||||||
(1)Represents cash held primarily by our joint ventures that is not available to fund operations outside of those entities unless the board of directors for said entities declares a dividend, as well as cash held by certain other entities that are subject to foreign exchange controls in certain countries or regulatory capital requirements.
Employee Termination Costs
In connection with the acquisition of First Data, we continue to implement integration plans focused on reducing our overall cost structure, including eliminating duplicate costs. We recorded $131 million and $32 million of employee termination costs related to severance and other separation costs for terminated employees in connection with the acquisition of First Data during the years ended December 31, 2020 and 2019, respectively. Accrued employee severance and other separation costs of $27 million at December 31, 2020 are expected to be paid within the next twelve months. We continue to evaluate operating efficiencies and anticipate incurring additional costs in connection with these activities, but are unable to estimate those amounts at this time as such plans are not yet finalized.
Impact of COVID-19 Pandemic
The COVID-19 pandemic has created significant uncertainty as to general global economic and market conditions. We believe we have adequate capital resources and sufficient access to external financing sources to satisfy our current and reasonably anticipated requirements for funds to conduct our operations and meet other needs in the ordinary course of our business. However, as the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our liquidity needs. The ability to continue to service debt and meet lease and other obligations as they come due is dependent on our continued ability to generate earnings and cash flows. A lack of continued recovery or further deterioration in economic and market conditions could materially affect our future access to our sources of liquidity, particularly our cash flows from operations.
We engage in regular communication with the banks that participate in our revolving credit facility. During these communications, none of the banks have indicated that they may be unable to perform on their commitments. We periodically review our banking and financing relationships, considering the stability of the institutions, pricing we receive on services and other aspects of the relationships. Based on these communications and our monitoring activities, we believe the likelihood of one of our banks not performing on its commitment is remote. As evidenced by our May 2020 senior notes offering described above, the long-term debt markets have historically provided us with a source of liquidity. Although we do not currently
anticipate an inability to obtain financing from long-term debt markets in the future, effects of the COVID-19 pandemic could make financing more difficult and/or expensive to obtain. Our ability to access the long-term debt markets on favorable interest rate and other terms also depends on the ratings assigned by the credit rating agencies to our indebtedness. As of December 31, 2020, we had a corporate credit rating of Baa2 with a stable outlook from Moody’s Investors Service, Inc. and BBB with a stable outlook from Standard & Poor’s Rating Services. In the event that the ratings of our outstanding long-term debt securities were substantially lowered or withdrawn for any reason, or if the ratings assigned to any new issue of long-term debt securities were significantly lower than those noted above, particularly if we no longer had investment grade ratings, our ability to access the debt markets could be adversely affected and our interest expense could increase under the terms of certain of our long-term debt securities.
Off-Balance Sheet Arrangements and Contractual Obligations
We do not participate in, nor have we created, any off-balance sheet variable interest entities or other off-balance sheet financing. The following table details our contractual obligations at December 31, 2020:
| (In millions) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||||||||||||||
| Long-term debt including interest (1) (2) | $ | 25,957 | $ | 899 | $ | 4,470 | $ | 5,770 | $ | 14,818 | ||||||||||||||||||||||
| Minimum finance lease payments (1) | 410 | 107 | 201 | 99 | 3 | |||||||||||||||||||||||||||
| Minimum operating lease payments (1) (3) | 657 | 136 | 223 | 152 | 146 | |||||||||||||||||||||||||||
| Purchase obligations (1) | 1,889 | 608 | 787 | 328 | 166 | |||||||||||||||||||||||||||
| Income tax obligations | 171 | 61 | 46 | 29 | 35 | |||||||||||||||||||||||||||
| Total | $ | 29,084 | $ | 1,811 | $ | 5,727 | $ | 6,378 | $ | 15,168 | ||||||||||||||||||||||
(1)Interest, finance lease, operating lease and purchase obligations are reported on a pre-tax basis.
(2)The calculations assume that only mandatory debt repayments are made, no additional refinancing or lending occurs, except for our 4.75% notes due in June 2021 as we have the intent to refinance this debt on a long-term basis and the ability to do so under our revolving credit facility maturing in September 2023, and the variable rate on the revolving credit facility and term loans are priced at the rate in effect at December 31, 2020.
(3)Excludes $30 million of legally binding minimum lease payments for finance leases that have been signed but not yet commenced.
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