Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements for the three and nine months ended September 30, 2019 and 2018 are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial statements have been included. Such adjustments consisted of normal recurring items. Interim results are not necessarily indicative of results for a full year. The consolidated financial statements and accompanying notes are presented as permitted by Form 10-Q and do not contain certain information included in the annual consolidated financial statements and accompanying notes of Fiserv, Inc. (the “Company”). These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
On January 16, 2019, the Company entered into a definitive merger agreement to acquire First Data Corporation (“First Data”). The Company completed the acquisition on July 29, 2019 by acquiring 100% of the First Data stock that was issued and outstanding as of the date of acquisition. The consolidated financial statements as of and during the three and nine months ended September 30, 2019 include the financial results of First Data from the date of acquisition. The combined company provides technology capabilities that enable a range of payments and financial services, including 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 solution.
Effective January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), and its related amendments using the optional transition method applied to all leases. Prior period amounts have not been restated. Additional information about the Company’s lease policies and the related impact of the adoption is included in Notes 2 and 15 to the consolidated financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of Fiserv, Inc. and its subsidiaries in which the Company holds a controlling financial interest. Control is normally established when ownership and voting interests in an entity is 50% or greater. Investments in less than 50% owned affiliates in which the Company has significant influence but not control are accounted for using the equity method of accounting. Significant influence over an affiliate’s operations generally coincides with an ownership interest in an entity of between 20% and 50%. All intercompany transactions and balances have been eliminated in consolidation.
In connection with the acquisition of First Data, the Company acquired majority controlling interests in certain entities, mostly related to consolidated merchant alliances (see Note 21). Noncontrolling interests represent the minority shareholders’ share of the net income or loss and equity in consolidated subsidiaries. The Company’s noncontrolling interests presented in the consolidated statements of income include net income attributable to noncontrolling interests and redeemable noncontrolling interest. Noncontrolling interests are presented as a component of equity in the consolidated balance sheet and reflect the minority shareholders’ share of acquired fair value in the consolidated subsidiaries, along with their proportionate share of the earnings or losses of the subsidiaries, net of dividends or distributions. Noncontrolling interests that are redeemable at the option of the holder are presented outside of equity and are carried at their estimated redemption value (see Note 22).
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and investments with original maturities of 90 days or less. Cash and cash equivalents are stated at cost in the consolidated balance sheets, which approximates market value. Cash and cash equivalents that were restricted from use due to regulatory or other requirements are included in other long-term assets in the consolidated balance sheet and totaled $42 million as of September 30, 2019.
Reserve for Merchant Credit Losses
With respect to the merchant acquiring business obtained through the acquisition of First Data (see Note 4), the Company’s merchant customers have the legal obligation to refund any charges properly reversed by the cardholder. However, in the event the Company is not able to collect the refunded amounts from the merchants, the Company may be liable for the reversed charges. The Company’s risk in this area primarily relates to situations where the cardholder has purchased goods or services to be delivered in the future. The Company requires cash deposits, guarantees, letters of credit or other types of collateral from
certain merchants to minimize this obligation. Collateral held by the Company is classified within settlement assets and the obligation to repay the collateral is classified within settlement obligations on the Company’s consolidated balance sheet. The Company also utilizes a number of systems and procedures to manage merchant risk. Despite these efforts, the Company experiences some level of losses due to merchant defaults. The aggregate merchant credit losses incurred by the Company was $17 million for the three and nine months ended September 30, 2019, and is included within cost of processing and services in the consolidated statements of income. The amount of collateral held by the Company was $510 million as of September 30, 2019. The Company’s reserve relates to imprecision in its estimates of required collateral, which is recorded based primarily on historical experience of credit losses and other relevant factors such as economic downturns or increases in merchant fraud. The aggregate merchant credit loss reserve recorded was $35 million as of September 30, 2019.
Derivatives
Derivatives are entered into for periods consistent with related underlying exposures and are recorded in the consolidated balance sheets as either an asset or liability measured at fair value. If the derivative is designated as a cash flow hedge, changes in the fair value of the derivative are recorded as a component of accumulated other comprehensive loss and recognized in the consolidated statements of income when the hedged item affects earnings. The Company’s policy is to enter into derivatives with creditworthy institutions and not to enter into such derivatives for speculative purposes.
Leasing Receivables
In connection with the acquisition of First Data, the Company acquired certain leasing receivables associated with the point-of-sale (“POS”) terminal leasing businesses of First Data. Leasing receivables are included in prepaid expenses and other current assets and other long-term assets in the consolidated balance sheet. The Company recognizes interest income on its leasing receivables using the effective interest method. Interest income from leasing receivables is included in product revenue in the consolidated statements of income. Initial direct costs are expensed as incurred if the fair value of the underlying asset is different from its carrying amount at the commencement date of the lease. See Note 15 for additional information.
Pension Plans
In connection with the acquisition of First Data, the Company acquired frozen defined benefit pension plans covering certain employees in Europe and the United States. The funded status of the defined benefit plans is recognized as an asset or a liability within other long-term assets or other long-term liabilities in the consolidated balance sheet. The plan assets are recognized at fair value. The Company recognizes actuarial gains/losses and prior service cost in the consolidated balance sheet and recognizes changes in these amounts during the year in which changes occur through other comprehensive income. The Company uses various assumptions when computing amounts relating to its defined benefit pension plan obligations and their associated expenses (including the discount rate and the expected rate of return on plan assets). See Note 20 for additional information.
Settlement Assets and Obligations
Settlement assets and obligations result from timing differences between collection and fulfillment of payment transactions primarily associated with the Company’s merchant services transactions. Settlement assets represent cash received or amounts receivable from agents, payment networks or directly from consumers. Settlement obligations represent amounts payable to clients and payees. Certain merchant settlement assets that relate to settlement obligations are held by partner banks to which the Company does not have legal ownership but has the right to use the assets to satisfy the related settlement obligations. The Company records corresponding settlement obligations for amounts payable to merchants and for payment instruments not yet presented for settlement.
Net Income Per Share
Net income per share in each period is calculated using actual, unrounded amounts. Basic net income per share is computed by dividing net income attributable to Fiserv, Inc. by the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income attributable to Fiserv, Inc. by the weighted-average number of common shares and common stock equivalents outstanding during the period. Common stock equivalents consist of outstanding stock options, unvested restricted stock units, and unvested restricted stock awards and are computed using the treasury stock method.
Foreign Currency
The U.S. dollar is the functional currency of the Company’s U.S.-based businesses and certain foreign-based businesses. Where the functional currency is the local currency, assets and liabilities are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Revenue and expenses are translated at the average exchange rates during the period. Gains and losses from foreign currency translation are recorded as a separate component of accumulated other comprehensive loss. Gains and losses from foreign currency transactions are included in other (expense) income in the consolidated statements of income. The Company has designated its Euro- and British Pound-denominated senior notes as net investment hedges to hedge a portion of its net investment in certain subsidiaries whose functional currencies are the Euro and the British Pound (see Note 17). Accordingly, foreign currency transaction gains or losses on the qualifying net investment hedge instruments are recorded as foreign currency translation within other comprehensive loss in the consolidated statements of comprehensive income and will remain in accumulated other comprehensive loss on the consolidated balance sheet until the sale or complete liquidation of the underlying foreign subsidiaries.
Interest Expense, Net
Interest expense, net consists of interest expense primarily associated with the Company’s outstanding borrowings and finance lease obligations, as well as interest income primarily associated with the Company’s investment securities. The Company recognized $187 million and $309 million of interest expense and $23 million and $30 million of interest income during the three and nine months ended September 30, 2019, respectively. The Company recognized $47 million and $137 million of interest expense and $2 million and $3 million of interest income during the three and nine months ended September 30, 2018, respectively.
2. Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In June 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which simplifies the accounting for share-based payments granted to nonemployees by largely aligning it with the accounting for share-based payments to employees. For public entities, ASU 2018-07 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Entities must apply the standard, using a modified retrospective transition approach, with a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption for all liability-classified nonemployee awards that have not been settled as of the adoption date and equity-classified nonemployee awards for which a measurement date has not been established. The Company adopted ASU 2018-07 on January 1, 2019, and the adoption did not have any impact on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, which requires lessees to recognize a lease liability and a right-of-use asset for each lease with a term longer than twelve months and adds new presentation and disclosure requirements for both lessees and lessors. The accounting guidance for lessors remains largely unchanged. The recognized liability is measured at the present value of lease payments not yet paid, and the corresponding asset represents the lessee’s right to use the underlying asset over the lease term and is based on the liability, subject to certain adjustments. For income statement and statement of cash flow purposes, the standard retains the dual model with leases classified as either operating or finance. Operating leases result in straight-line expense while finance leases result in a front-loaded expense pattern. The standard prescribes a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. ASU 2016-02 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842; ASU No. 2018-11, Leases (Topic 842) - Targeted Improvements (“ASU 2018-11”); ASU No. 2018-20, Narrow-Scope Improvements for Lessors; and ASU No. 2019-01, Leases (Topic 842) - Codification Improvements. ASU 2018-11 provides an additional transition method allowing entities to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. For public entities, ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018.
The Company adopted the new standard effective January 1, 2019 using the optional transition method in ASU 2018-11. Under this method, the Company has not adjusted its comparative period financial statements for the effects of the new standard or made the new, expanded required disclosures for periods prior to the effective date. The Company elected the package of practical expedients permitted under the transition guidance in ASU 2016-02 to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs. The Company also elected the practical expedient not to separate the non-lease components of a contract from the lease component to which they relate.
The adoption of the new lease standard resulted in the recognition of lease liabilities of $383 million and right-of-use assets of $343 million, which include the impact of existing deferred rents and tenant improvement allowances on the consolidated balance sheet as of January 1, 2019 for real and personal property operating leases. The adoption of ASU 2016-02 did not have a material impact on the Company’s consolidated statements of income or consolidated statements of cash flows.
Recently Issued Accounting Pronouncements
In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”), which aligns the requirements for capitalizing implementation costs incurred in a cloud computing hosting arrangement that is a service contract with the requirements under Accounting Standards Codification (“ASC”) 350 for capitalizing implementation costs incurred to develop or obtain internal-use software. For public entities, ASU 2018-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption permitted. Entities are permitted to apply either a retrospective or prospective transition approach to adopt the guidance. The Company plans to adopt ASU 2018-15 on January 1, 2020 and does not expect the adoption to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which removes, modifies, and adds certain disclosure requirements of ASC Topic 820, Fair Value Measurement. ASU 2018-13 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019, with the additional disclosures required to be applied prospectively and the modified and removed disclosures required to be applied retrospectively to all periods presented. Entities are permitted to early adopt the removed or modified disclosures and delay the adoption of the additional disclosures until the effective date. The Company is currently assessing the impact that the adoption of ASU 2018-13 will have on its disclosures.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) (“ASU 2016-13” or “CECL”), which prescribes an impairment model for most financial instruments based on expected losses rather than incurred losses. Under this model, an estimate of expected credit losses over the contractual life of the instrument is to be recorded as of the end of a reporting period as an allowance to offset the amortized cost basis, resulting in a net presentation of the amount expected to be collected on the financial instrument. For public entities, ASU 2016-13 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019. For most instruments, entities must apply the standard using a cumulative-effect adjustment to beginning retained earnings as of the beginning of the fiscal year of adoption. The Company plans to adopt ASU 2016-13 on its effective date, January 1, 2020.
The Company is currently in the process of evaluating the impacts of adopting this standard, including the development of accounting policies and the assessment of existing credit loss methodologies for necessary enhancements. Additionally, the Company continues to evaluate current processes, systems, data, and controls that will be necessary to estimate credit reserves for impacted areas in accordance with CECL. Financial assets and liabilities held by the Company subject to the “expected credit loss” model prescribed by CECL include trade and other receivables, net investments in leases, settlement assets and other credit exposures such as financial guarantees not accounted for as insurance. While the Company continues to evaluate the expected impact on its consolidated financial statements and related disclosures, it currently expects the adoption of this guidance will result in an acceleration in the timing for recognition of credit losses, and may also result in an increase in the reserve for these credit losses due to the requirement to record expected losses over the remaining contractual lives of its financial instruments.
3. Revenue Recognition
The Company generates revenue from the delivery of processing, service and product solutions. Revenue is measured based on consideration specified in a contract with a customer, and excludes any amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer which may be at a point in time or over time.
Disaggregation of Revenue
The tables below present the Company’s revenue disaggregated by major business, including a reconciliation with its reportable segments. Most of the Company’s revenue is earned domestically within these major businesses, with revenue from clients outside the United States comprising approximately 14% and 6% of total revenue for the three months ended September 30, 2019 and 2018, respectively, and approximately 10% and 5% of total revenue for the nine months ended September 30, 2019 and 2018, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Reportable Segments
|
|
Three Months Ended September 30, 2019
|
First Data
|
|
Payments
|
|
Financial
|
|
Corporate
and Other
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Major Business
|
|
|
|
|
|
|
|
|
|
|
Global Business Solutions
|
$
|
992
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
992
|
|
|
Global Financial Solutions
|
375
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
375
|
|
|
Network & Security Solutions
|
247
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
247
|
|
|
Total First Data
|
1,614
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,614
|
|
|
Digital Money Movement
|
—
|
|
|
376
|
|
|
—
|
|
|
—
|
|
|
376
|
|
|
Card and Related Services
|
—
|
|
|
470
|
|
|
—
|
|
|
—
|
|
|
470
|
|
|
Other
|
—
|
|
|
80
|
|
|
—
|
|
|
—
|
|
|
80
|
|
|
Total Payments
|
—
|
|
|
926
|
|
|
—
|
|
|
—
|
|
|
926
|
|
|
Account and Item Processing
|
—
|
|
|
—
|
|
|
533
|
|
|
—
|
|
|
533
|
|
|
Other
|
—
|
|
|
—
|
|
|
63
|
|
|
—
|
|
|
63
|
|
|
Total Financial
|
—
|
|
|
—
|
|
|
596
|
|
|
—
|
|
|
596
|
|
|
Corporate and Other
|
—
|
|
|
—
|
|
|
—
|
|
|
(8
|
)
|
|
(8
|
)
|
|
Total Revenue
|
$
|
1,614
|
|
|
$
|
926
|
|
|
$
|
596
|
|
|
$
|
(8
|
)
|
|
$
|
3,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Reportable Segments
|
|
Three Months Ended September 30, 2018
|
Payments
|
|
Financial
|
|
Corporate
and Other
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Major Business
|
|
|
|
|
|
|
|
|
Digital Money Movement
|
$
|
363
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
363
|
|
|
Card and Related Services
|
401
|
|
|
—
|
|
|
—
|
|
|
401
|
|
|
Other
|
80
|
|
|
—
|
|
|
—
|
|
|
80
|
|
|
Total Payments
|
844
|
|
|
—
|
|
|
—
|
|
|
844
|
|
|
Account and Item Processing
|
—
|
|
|
516
|
|
|
—
|
|
|
516
|
|
|
Other
|
—
|
|
|
58
|
|
|
—
|
|
|
58
|
|
|
Total Financial
|
—
|
|
|
574
|
|
|
—
|
|
|
574
|
|
|
Corporate and Other
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
(6
|
)
|
|
Total Revenue
|
$
|
844
|
|
|
$
|
574
|
|
|
$
|
(6
|
)
|
|
$
|
1,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Reportable Segments
|
|
Nine Months Ended September 30, 2019
|
First Data
|
|
Payments
|
|
Financial
|
|
Corporate
and Other
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Major Business
|
|
|
|
|
|
|
|
|
|
|
Global Business Solutions
|
$
|
992
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
992
|
|
|
Global Financial Solutions
|
375
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
375
|
|
|
Network & Security Solutions
|
247
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
247
|
|
|
Total First Data
|
1,614
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,614
|
|
|
Digital Money Movement
|
—
|
|
|
1,105
|
|
|
—
|
|
|
—
|
|
|
1,105
|
|
|
Card and Related Services
|
—
|
|
|
1,408
|
|
|
—
|
|
|
—
|
|
|
1,408
|
|
|
Other
|
—
|
|
|
244
|
|
|
—
|
|
|
—
|
|
|
244
|
|
|
Total Payments
|
—
|
|
|
2,757
|
|
|
—
|
|
|
—
|
|
|
2,757
|
|
|
Account and Item Processing
|
—
|
|
|
—
|
|
|
1,592
|
|
|
—
|
|
|
1,592
|
|
|
Other
|
—
|
|
|
—
|
|
|
206
|
|
|
—
|
|
|
206
|
|
|
Total Financial
|
—
|
|
|
—
|
|
|
1,798
|
|
|
—
|
|
|
1,798
|
|
|
Corporate and Other
|
—
|
|
|
—
|
|
|
—
|
|
|
(27
|
)
|
|
(27
|
)
|
|
Total Revenue
|
$
|
1,614
|
|
|
$
|
2,757
|
|
|
$
|
1,798
|
|
|
$
|
(27
|
)
|
|
$
|
6,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Reportable Segments
|
|
Nine Months Ended September 30, 2018
|
Payments
|
|
Financial
|
|
Corporate
and Other
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Major Business
|
|
|
|
|
|
|
|
|
Digital Money Movement
|
$
|
1,071
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,071
|
|
|
Card and Related Services
|
1,215
|
|
|
—
|
|
|
—
|
|
|
1,215
|
|
|
Other
|
237
|
|
|
—
|
|
|
—
|
|
|
237
|
|
|
Total Payments
|
2,523
|
|
|
—
|
|
|
—
|
|
|
2,523
|
|
|
Account and Item Processing
|
—
|
|
|
1,552
|
|
|
—
|
|
|
1,552
|
|
|
Lending Solutions
|
—
|
|
|
56
|
|
|
—
|
|
|
56
|
|
|
Other
|
—
|
|
|
172
|
|
|
—
|
|
|
172
|
|
|
Total Financial
|
—
|
|
|
1,780
|
|
|
—
|
|
|
1,780
|
|
|
Corporate and Other
|
—
|
|
|
—
|
|
|
(31
|
)
|
|
(31
|
)
|
|
Total Revenue
|
$
|
2,523
|
|
|
$
|
1,780
|
|
|
$
|
(31
|
)
|
|
$
|
4,272
|
|
Contract Balances
The following table provides information about contract assets and contract liabilities from contracts with customers.
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
September 30, 2019
|
|
December 31, 2018
|
|
Contract assets
|
$
|
361
|
|
|
$
|
171
|
|
|
Contract liabilities
|
541
|
|
|
469
|
|
Contract assets, reported within other long-term assets in the consolidated balance sheets, primarily result from revenue being recognized where payment is contingent upon the transfer of services to a customer over the contractual period. Contract liabilities primarily relate to advance consideration received from customers (deferred revenue) for which transfer of control occurs, and therefore revenue is recognized, as services are provided. Contract balances are reported in a net contract asset or liability position on a contract-by-contract basis at the end of each reporting period.
The Company recognized $327 million of revenue during the nine months ended September 30, 2019 that was included in the contract liability balance at the beginning of the period, which exceeded advance cash receipts for services yet to be provided. See Note 4 for contract liabilities assumed in connection with the acquisition of First Data.
Transaction Price Allocated to Remaining Performance Obligations
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Remainder of:
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
Thereafter
|
|
Processing and services
|
$
|
618
|
|
|
$
|
2,211
|
|
|
$
|
1,787
|
|
|
$
|
1,332
|
|
|
$
|
2,478
|
|
|
Product
|
9
|
|
|
38
|
|
|
24
|
|
|
14
|
|
|
13
|
|
The Company applies the optional exemption in paragraph 606-10-50-14(b) and does not disclose information about remaining performance obligations for account- and transaction-based processing fees that qualify for recognition in accordance with paragraph 606-10-55-18. These multi-year contracts contain variable consideration for stand-ready performance obligations for which the exact quantity and mix of transactions to be processed are contingent upon the customer’s request. The Company also applies the optional exemptions in paragraph 606-10-50-14A and does not disclose information for variable consideration that is a sales-based or usage-based royalty promised in exchange for a license of intellectual property or that is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service in a series. The amounts disclosed above as remaining performance obligations consist primarily of fixed or monthly minimum processing fees and maintenance fees under contracts with an original expected duration of greater than one year.
4. Acquisitions
Acquisition of First Data
On July 29, 2019, the Company completed the acquisition of First Data, a global leader in commerce-enabling technology and solutions for merchants, financial institutions and card issuers, by acquiring 100% of the First Data stock that was issued and outstanding as of the date of acquisition. The acquisition increases the Company’s footprint as a global payments and financial technology provider by expanding the portfolio of services provided to financial institutions, corporate and merchant clients, and consumers.
As a result of the acquisition, First Data stockholders received 286 million shares of Fiserv, Inc.’s common stock, at an exchange ratio of 0.303 Fiserv, Inc. shares for each share of First Data common stock, with cash paid in lieu of fractional shares. The Company also converted approximately 15 million outstanding First Data equity awards into corresponding equity awards relating to Fiserv, Inc. common stock pursuant to an exchange ratio in the merger agreement as described in further detail within Note 7. In addition, concurrent with the closing of the acquisition, the Company made a cash payment of approximately $16.4 billion to repay existing First Data debt. The Company funded the transaction-related expenses and the repayment of First Data debt through a combination of available cash on-hand and proceeds from debt issuances as discussed in Note 14.
The total purchase price paid for First Data is as follows:
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Fair value of stock exchanged for Fiserv, Inc. shares (1)
|
$
|
29,293
|
|
|
Repayment of First Data debt
|
16,414
|
|
|
Fair value of vested portion of First Data stock awards exchanged for Fiserv, Inc. awards (2)
|
768
|
|
|
Total purchase price
|
$
|
46,475
|
|
|
|
|
|
(1)
|
The fair value of the 286 million shares of the Company’s common stock issued as of the acquisition date was determined based on a per share price of $102.30, which was the closing price of the Company’s common stock on July 26, 2019, the last trading day before the acquisition closed the morning of July 29, 2019. This includes a nominal amount of cash paid in lieu of fractional shares.
|
|
|
|
|
(2)
|
Represents the portion of the fair value of the replacement awards related to services provided prior to the acquisition. The remaining portion of the fair value is associated with future service and will be recognized as expense over the future service period. See Note 7 for additional information.
|
The acquisition was accounted for as a business combination using the acquisition method of accounting in accordance with ASC 805, Business Combinations (“ASC 805”). The purchase price was allocated to the assets acquired and liabilities assumed based on the estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired was allocated to goodwill, none of which is expected to be deductible for tax purposes. Goodwill is primarily
attributed to synergies from future expected economic benefits, including enhanced revenue growth from expanded capabilities and geographic presence as well as substantial cost savings from duplicative overhead, streamlined operations and enhanced operational efficiency.
The September 30, 2019 consolidated balance sheet includes the assets and liabilities of First Data, which have been measured at fair value as of the acquisition date. The preliminary allocation of purchase price recorded for First Data was as follows:
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Assets acquired (1)
|
|
|
Cash and cash equivalents
|
$
|
311
|
|
|
Trade accounts receivable
|
1,754
|
|
|
Prepaid expenses and other current assets
|
1,072
|
|
|
Settlement assets
|
10,397
|
|
|
Property and equipment
|
1,233
|
|
|
Customer relationships
|
13,637
|
|
|
Other intangible assets
|
2,391
|
|
|
Goodwill
|
29,955
|
|
|
Investments in unconsolidated affiliates
|
2,637
|
|
|
Other long-term assets
|
1,154
|
|
|
Total assets acquired
|
$
|
64,541
|
|
|
|
|
|
Liabilities assumed (1)
|
|
|
Accounts payable and accrued expenses
|
$
|
1,515
|
|
|
Short-term and current maturities of long-term debt (2)
|
237
|
|
|
Contract liabilities
|
74
|
|
|
Settlement obligations
|
10,397
|
|
|
Deferred income taxes
|
3,388
|
|
|
Long-term contract liabilities
|
16
|
|
|
Long-term debt and other long-term liabilities (3)
|
1,232
|
|
|
Total liabilities assumed
|
$
|
16,859
|
|
|
Net assets acquired
|
$
|
47,682
|
|
|
Redeemable noncontrolling interest
|
88
|
|
|
Noncontrolling interests
|
1,119
|
|
|
Total purchase price
|
$
|
46,475
|
|
|
|
|
|
(1)
|
In connection with the acquisition of First Data, the Company acquired two businesses which it intended to sell. Therefore, such businesses were classified as held for sale and were included within prepaid expenses and other current assets and accounts payable and accrued expenses in the above preliminary allocation of purchase price (see Note 5).
|
|
|
|
|
(2)
|
Includes foreign lines of credit, current portion of finance lease obligations and other financing obligations (see Note 14).
|
|
|
|
|
(3)
|
Includes the receivable securitized loan and the long-term portion of finance lease obligations (see Note 14).
|
The above fair values of assets acquired and liabilities assumed are preliminary and are based on the information that was available as of the reporting date. The fair values of the assets acquired and liabilities assumed were preliminarily determined using the income and cost approaches. In many cases, the determination of the fair values required estimates about discount rates, future expected cash flows and other future events that are judgmental and subject to change. The fair value measurements were primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement of the fair value hierarchy as defined in ASC 820, Fair Value Measurements (“ASC 820”). Intangible assets consisting of customer relationships, technology, and trade names were valued using the multi-period excess earnings method (“MEEM”), or the relief from royalty (“RFR”) method, both are forms of the income approach. A cost and market approach was applied, as appropriate, for property and equipment, including land.
|
|
|
|
•
|
Customer relationship intangible assets were valued using the MEEM method. The significant assumptions used include the estimated annual net cash flows (including appropriate revenue and profit attributable to the asset,
|
retention rate, applicable tax rate, and contributory asset charges, among other factors), the discount rate, reflecting the risks inherent in the future cash flow stream, an assessment of the asset’s life cycle, and the tax amortization benefit, among other factors.
|
|
|
|
•
|
Technology and trade name intangible assets were valued using the RFR method. The significant assumptions used include the estimated annual net cash flows (including appropriate revenue attributable to the asset, applicable tax rate, royalty rate, and other factors such as technology related obsolescence rates), the discount rate, reflecting the risks inherent in the future cash flow stream, and the tax amortization benefit, among other factors.
|
|
|
|
|
•
|
The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used, as appropriate, for property and equipment. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the property, less an allowance for loss in value due to depreciation.
|
|
|
|
|
•
|
The market approach, which estimates value by leveraging comparable land sale data/listings and qualitatively comparing them to the in-scope properties, was used to value the land.
|
|
|
|
|
•
|
An income approach was applied to derive fair value for both consolidated investments with a noncontrolling interest and equity method investments accounted for under the equity method of accounting. The significant assumptions used include the estimated annual cash flows, the discount rate, the long-term growth rate and operating margin, among other factors.
|
The Company believes that the information provides a reasonable basis for estimating the fair values of the acquired assets and assumed liabilities, but the potential for measurement period adjustments exists based on the Company’s continuing review of matters related to the acquisition. The Company expects to complete the purchase price allocation as soon as practicable, but no later than one year from the acquisition date.
The amounts, based on preliminary valuations and subject to final adjustment, allocated to intangible assets are as follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
Gross Carrying Amount(1)
|
Weighted-Average Useful Life
|
|
Customer relationships
|
$
|
13,637
|
|
15 years
|
|
Acquired software and technology
|
1,914
|
|
7 years
|
|
Trade names
|
477
|
|
9 years
|
|
Total
|
$
|
16,028
|
|
14 years
|
|
|
|
|
(1)
|
In connection with the acquisition of First Data, the Company acquired two businesses which it intends to sell. As such, gross carrying amounts exclude amounts held for sale (see Note 5).
|
Since the acquisition date, the results of operations for First Data of $1.6 billion of revenue and $396 million of operating income for the three and nine months ended September 30, 2019, respectively, have been included within the accompanying consolidated statements of income (see Note 19).
The Company incurred transaction expenses of approximately $45 million and $172 million for the three and nine months ended September 30, 2019. Approximately $45 million and $74 million of these expenses were included in selling, general and administrative expenses within the Company’s consolidated statements of income for the three and nine months ended September 30, 2019, respectively, and $98 million in debt financing activities for the nine months ended September 30, 2019.
The following unaudited supplemental pro forma combined financial information presents the Company’s results of operations for the three and nine months ended September 30, 2019 and 2018 as if the acquisition of First Data had occurred on January 1, 2018. The pro forma financial information is presented for comparative purposes only and is not necessarily indicative of the Company’s operating results that may have actually occurred had the acquisition of First Data been completed on January 1, 2018. In addition, the unaudited pro forma financial information does not give effect to any anticipated cost savings, operating efficiencies or other synergies that may be associated with the acquisition, or any estimated costs that have been or will be incurred by the Company to integrate the assets and operations of First Data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(In millions, except for per share data)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Total revenue
|
$
|
3,935
|
|
|
$
|
3,772
|
|
|
$
|
11,730
|
|
|
$
|
11,343
|
|
|
Net income
|
306
|
|
|
434
|
|
|
939
|
|
|
851
|
|
|
Net income attributable to Fiserv, Inc.
|
284
|
|
|
405
|
|
|
847
|
|
|
766
|
|
|
Net income per share attributable to Fiserv, Inc.:
|
|
|
|
|
|
|
|
|
Basic
|
0.42
|
|
|
0.59
|
|
|
1.25
|
|
|
1.10
|
|
|
Diluted
|
0.41
|
|
|
0.57
|
|
|
1.22
|
|
|
1.08
|
|
The unaudited pro forma financial information reflects pro forma adjustments to present the combined pro forma results of operations as if the acquisition had occurred on January 1, 2018 to give effect to certain events the Company believes to be directly attributable to the acquisition. These pro forma adjustments primarily include:
|
|
|
|
•
|
a net increase in amortization expense that would have been recognized due to acquired intangible assets;
|
|
|
|
|
•
|
an adjustment to interest expense to reflect (i) the additional borrowings of the Company in conjunction with the acquisition and (ii) the repayment of First Data’s historical debt in conjunction with the acquisition;
|
|
|
|
|
•
|
a reduction in expenses for the three and nine months ended September 30, 2019 and a corresponding increase in the nine months ended September 30, 2018 for acquisition-related transaction costs and other one-time costs directly attributable to the acquisition;
|
|
|
|
|
•
|
a reduction in operating revenues due to the elimination of deferred revenues assigned no value at the acquisition date;
|
|
|
|
|
•
|
an adjustment to stock compensation expense to reflect the cost of the replacement awards as if they had been issued on January 1, 2018; and
|
|
|
|
|
•
|
the related income tax effects of the adjustments noted above.
|
Acquisition of Elan
On October 31, 2018, the Company acquired the debit card processing, ATM Managed Services, and MoneyPass® surcharge-free network of Elan Financial Services, a unit of U.S. Bancorp (“Elan”), for approximately $659 million. Such purchase price includes an initial cash payment of $691 million, less the receipt of post-closing working capital adjustments of $57 million in 2019, plus contingent consideration related to earn-out provisions estimated at a fair value of $12 million and future payments under a transition services agreement estimated to be in excess of fair value of $13 million. This acquisition, included within the Payments segment, deepens the Company’s presence in debit card processing, broadens its client reach and scale, and provides new solutions to enhance the value proposition for its existing debit solution clients.
During the third quarter of 2019, the Company identified and recorded measurement period adjustments to the preliminary purchase price allocation, which were the result of additional analysis performed and information identified based on facts and circumstances that existed as of the acquisition date. The measurement period adjustments resulted in a decrease in goodwill of $24 million with an offset to intangible assets and prepaid expenses and other current assets. The following allocation of purchase price for Elan was finalized in the third quarter of 2019:
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Trade accounts receivable
|
$
|
20
|
|
|
Prepaid expenses and other current assets
|
98
|
|
|
Property and equipment
|
9
|
|
|
Intangible assets
|
373
|
|
|
Goodwill
|
214
|
|
|
Accounts payable and other current liabilities
|
(55
|
)
|
|
Total purchase price
|
$
|
659
|
|
Goodwill, deductible for tax purposes, is primarily attributed to synergies, including the migration of Elan’s clients to the Company’s debit platform, and the anticipated value created by selling the Company’s products and services outside of card payments to Elan’s existing client base. The values allocated to intangible assets are as follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
Gross Carrying Amount
|
Weighted-Average Useful Life
|
|
Customer relationships
|
$
|
370
|
|
15 years
|
|
Trade name
|
3
|
|
8 years
|
|
Total
|
$
|
373
|
|
15 years
|
In conjunction with the acquisition, the Company entered into a transition services agreement for the provision of certain processing, network, administrative and managed services for a period of two years. The results of operations for Elan consisting of $41 million and $132 million of revenue and $(8) million and $6 million of operating (loss) income, including $17 million and $29 million of acquired intangible asset amortization, for the three and nine months ended September 30, 2019, respectively, have been included within the accompanying consolidated statements of income.
5. Discontinued Operations
On January 10, 2018, the Company completed the sale of the retail voucher business, MyVoucherCodes, acquired as part of its acquisition of Monitise plc in September 2017 for proceeds of £37 million ($50 million). The corresponding proceeds received during the nine months ended September 30, 2018 are presented within discontinued operations in the consolidated statement of cash flows since the business was never considered part of the Company’s ongoing operations. There was no impact to operating income or gain/loss recognized on the sale during the nine months ended September 30, 2018. Cash flows from discontinued operations during the nine months ended September 30, 2018 also included tax payments of $7 million related to income recognized in 2017 from a prior disposition.
In connection with the acquisition of First Data, the Company acquired two businesses which it intended to sell. Therefore, such businesses are classified as held for sale and were included within prepaid expenses and other current assets and accounts payable and accrued expenses in the consolidated balance sheet as of September 30, 2019 since the businesses were never considered part of the Company’s ongoing operations. As of September 30, 2019, the Company recorded, at acquired fair value, $148 million in assets held for sale, included in prepaid expenses and other current assets in the consolidated balance sheet and $25 million in liabilities held for sale, included in accounts payable and accrued expenses in the consolidated balance sheet. In October 2019, the Company completed the sale of these two businesses for proceeds of $133 million.
6. Investments in Unconsolidated Affiliates
On March 29, 2018, the Company completed the sale of a 55% controlling interest of each of Fiserv Automotive Solutions, LLC and Fiserv LS LLC, which were subsidiaries of the Company that owned its Lending Solutions business (collectively, the “Lending Joint Ventures”), to funds affiliated with Warburg Pincus LLC. The Lending Joint Ventures, which were reported within the Financial segment, included all of the Company’s automotive loan origination and servicing products, as well as its LoanServTM mortgage and consumer loan servicing platform. The Company received gross sale proceeds of $419 million from the transactions. During the nine months ended September 30, 2018, the Company recognized a pre-tax gain on the sale of $227 million, with the related tax expense of $77 million recorded through the income tax provision, in the consolidated statements of income. The pre-tax gain included $124 million related to the remeasurement of the Company’s 45% retained interests based upon the estimated enterprise value of the Lending Joint Ventures. During the nine months ended September 30, 2019, the Company recognized a pre-tax gain on the sale of $10 million, with the related tax expense of $2 million recorded through the income tax provision, as contingent special distribution provisions within the transaction agreement were resolved and thereby realized.
Prior to the sale transactions described above, the Lending Joint Ventures entered into variable-rate term loan facilities for an aggregate amount of $350 million in senior unsecured debt and variable-rate revolving credit facilities for an aggregate amount of $35 million with a syndicate of banks, which transferred to the Lending Joint Ventures as part of the sale. The Company has guaranteed this debt of the Lending Joint Ventures and does not anticipate that the Lending Joint Ventures will fail to fulfill their debt obligations. These debt facilities mature in March 2023, and there are no outstanding borrowings on the revolving credit facilities as of September 30, 2019. The Company recorded an initial $34 million liability as a reduction to the gain on sale transactions for the estimated fair value of its obligations to stand ready to perform over the term of the guarantees, which is reported primarily within other long-term liabilities in the consolidated balance sheets. Such guarantees will be amortized in future periods over the contractual term. The Company recognized $2 million and $1 million during the three months ended September 30, 2019 and 2018, respectively, and $5 million and $3 million during the nine months ended September 30, 2019 and 2018, respectively, within other (expense) income in its consolidated statements of income related to its release from risk under the guarantees. The Company has not made any payments under the guarantees, nor has it been called upon to do so. In conjunction with the sale transactions described above, the Company also entered into certain transition services agreements to provide, at fair value, various administration, business process outsourcing, technical and
data center related services for defined periods to the Lending Joint Ventures. Amounts transacted through these agreements approximated $9 million and $27 million during the three and nine months ended September 30, 2019, respectively, and $10 million and $20 million during the three and nine months ended September 30, 2018, respectively, and were primarily recognized as processing and services revenue in the consolidated statements of income.
In August 2019, the Sagent Auto, LLC joint venture formerly known as Fiserv Automotive Solutions, LLC, completed a merger with a third-party, resulting in a dilution of the Company’s ownership interest in the new combined entity. The Company recognized a pre-tax gain of $14 million within income from investments in unconsolidated affiliates in the consolidated statements of income, with related tax expense of $3 million, during the three months ended September 30, 2019, reflecting the Company’s 31% ownership interest in the combined joint venture entity. In connection with the merger, Sagent Auto, LLC borrowed in aggregate an additional $50 million on its variable-rate term loan facility and increased the notional amount of its variable-rate revolving credit facility by $10 million. The Company has guaranteed this incremental debt and does not anticipate that the joint venture will fail to fulfill its debt obligations. The Company recorded a $4 million liability for the estimated fair value of its obligations to stand ready to perform over term of the guarantees. Such guarantees will be amortized in future periods over the contractual term, based upon amounts to be received by the Company for the respective guarantees. The Company has not made any payments under the guarantees, nor has it been called upon to do so.
The Company’s remaining ownership interests in the Lending Joint Ventures are accounted for as equity method investments, with the Company’s share of net (loss) income reported as income from investments in unconsolidated affiliates and the related tax (benefit) expense reported within the income tax provision in the consolidated statements of income. The revenues, expenses and cash flows of the Lending Joint Ventures after the sale transactions described above are not included in the Company’s consolidated financial statements.
On July 29, 2019, the Company acquired unconsolidated investments in connection with the acquisition of First Data (see Note 4). As of September 30, 2019, there were 17 affiliates accounted for as equity method investments, comprised of merchant alliances and strategic investments in companies in related markets. The Company’s share of net (loss) income are reported as income from investments in unconsolidated affiliates and the related tax expense reported within the income tax provision in the consolidated statements of income. The most significant of these affiliates are related to the Company’s merchant bank alliance program. A merchant alliance, as it pertains to investments accounted for under the equity method, is an agreement between the Company and a financial institution that combines the processing capabilities and management expertise of the Company with the visibility and distribution channel of the bank. The alliance acquires credit and debit card transactions from merchants. The Company provides processing and other services to the alliance and charges fees to the alliance primarily based on contractual pricing (see Note 21).
A summary of financial information for the Company’s unconsolidated affiliates accounted for under the equity method of accounting is presented below:
|
|
|
|
|
|
|
|
(In millions)
|
September 30, 2019
|
|
Total current assets
|
$
|
4,103
|
|
|
Total long-term assets
|
1
|
|
|
Total assets
|
$
|
4,104
|
|
|
|
|
|
Total current liabilities
|
$
|
4,063
|
|
|
Total long-term liabilities
|
—
|
|
|
Total liabilities
|
$
|
4,063
|
|
The primary components of assets and liabilities are settlement asset and obligation related accounts similar to those described in Note 1 of these consolidated financial statements.
|
|
|
|
|
|
|
|
(In millions)
|
Nine Months Ended September 30, 2019
|
|
Total revenues
|
$
|
189
|
|
|
Total expenses
|
106
|
|
|
Operating income
|
$
|
83
|
|
|
Net income
|
$
|
81
|
|
|
Income from investments in unconsolidated affiliates(1)
|
$
|
11
|
|
|
|
|
|
(1)
|
Amount reflects the Company’s share of investee’s net income or loss and the amortization basis difference between the estimated fair value and the underlying book value of equity method intangibles.
|
The Company received cash distributions of $91 million from unconsolidated affiliates during the three and nine months ended September 30, 2019, respectively, and were recorded as reductions in the Company’s investments in unconsolidated affiliates. Such distributions primarily represented returns of the Company’s investments and are reported in cash flows from investing activities.
In addition, the Company holds equity securities amounting to $182 million without a readily determinable fair value, which are only adjusted for impairment and changes resulting from observable price changes in orderly transactions for the same or similar equity securities. The equity securities were acquired primarily through the First Data acquisition and were recorded at fair market value at the acquisition date. No adjustments were made during the three and nine months ended September 30, 2019.
7. Share-Based Compensation
The Company recognizes the fair value of share-based compensation awards granted to employees in cost of processing and services, cost of product, and selling, general and administrative expense in its consolidated statements of income.
The Company’s share-based compensation awards are typically granted in the first quarter of the year and primarily consist of the following:
Stock Options – The Company grants stock options to employees and non-employee directors at exercise prices equal to the fair market value of the Company’s stock on the dates of grant. Stock options generally vest over a three-year period beginning on the first anniversary of the grant. All stock options expire ten years from the date of the award. The Company recognizes compensation expense for the fair value of the stock options over the requisite service period of the stock option award.
Restricted Stock Units and Awards – The Company grants restricted stock units and awards to employees and non-employee directors. The Company recognizes compensation expense for restricted stock units and awards based on the market price of the common stock on the grant date over the period during which the units or awards vest.
Performance Share Units and Awards – The Company grants performance share units and awards to employees. The number of shares issued at the end of the performance period is determined by the level of achievement of pre-determined performance and market goals, including earnings, revenue growth, synergy attainment and shareholder return. The Company recognizes compensation expense on performance share units and awards ratably over the requisite performance period of the award to the extent management views the performance goals as probable of attainment. The Company recognizes compensation expense for the fair value of the shareholder return component over the requisite service period of the award.
Employee Stock Purchase Plan – The Company maintains an employee stock purchase plan that allows eligible employees to purchase a limited number of shares of common stock each quarter through payroll deductions at 85% of the closing price of the Company’s common stock on the last business day of each calendar quarter. The Company recognizes compensation expense related to the 15% discount on the purchase date.
The Company recognized $87 million and $121 million of share-based compensation expense during the three and nine months ended September 30, 2019, respectively, and $18 million and $54 million of share-based compensation expense during the three and nine months ended September 30, 2018, respectively. At September 30, 2019, the total remaining unrecognized compensation cost for unvested stock options, restricted stock units and awards and performance share units, net of estimated forfeitures, of $565 million is expected to be recognized over a weighted-average period of 1.8 years. During the nine months ended September 30, 2019 and 2018, stock options to purchase 3.3 million and 2.2 million shares, respectively, were exercised.
Acquisition of First Data
Upon the completion of the First Data acquisition on July 29, 2019 (see Note 4), First Data’s equity awards, whether vested or unvested, were either settled in shares of the Company’s common stock or converted into equity awards denominated in shares of the Company’s common stock based on a defined exchange ratio of 0.303, as described below.
First Data time-vesting awards that were granted at or prior to the initial public offering of First Data (“First Data IPO”) were accelerated in full in accordance with their terms, except for certain executive officer awards and certain awards held by retirement-eligible employees, which were not accelerated and instead converted into equity awards denominated in shares of
the Company’s common stock. Each such time-vesting, pre-IPO restricted stock and restricted stock unit award was settled in shares of the Company’s common stock based on the exchange ratio. Each time-vesting, pre-IPO stock option award was converted into an option to purchase a number of shares of the Company’s common stock based on the exchange ratio with an exercise price per share equal to the exercise price per share of such stock option award immediately prior to the completion of the acquisition divided by the exchange ratio.
First Data equity awards granted at the time of First Data’s IPO that were subject to vesting solely upon achievement of a $32 price per share of First Data common stock were converted into equity awards denominated in shares of the Company’s common stock and remained eligible to vest upon satisfaction of an adjusted performance condition based on a target price per share of the Company’s common stock equal to the existing First Data target price divided by the exchange ratio. Each restricted stock and restricted stock unit award that was a performance-vesting IPO award was converted into an award denominated in shares of the Company’s common stock based on the exchange ratio, and each stock option award that was a performance-vesting award was converted into an option to purchase a number of shares of the Company’s common stock based on the exchange ratio with an exercise price per share equal to the exercise price per share of such stock option award immediately prior to the completion of the acquisition divided by the exchange ratio. As converted, the performance-vesting awards continued to be governed by the same terms and conditions as were applicable prior to the acquisition and vested during the three months ended September 30, 2019 upon satisfaction of the adjusted performance condition.
The remaining existing First Data equity awards, whether vested or unvested, were converted into equity awards denominated in shares of the Company’s common stock based on the exchange ratio, with an exercise price per share for option awards equal to the exercise price per share of such stock option award immediately prior to the completion of the acquisition divided by the exchange ratio, and will continue to be governed by generally the same terms and conditions as were applicable prior to the acquisition; provided that, subject to compliance with Section 409A of the Internal Revenue Code, such awards will accelerate upon a covered termination as defined in the merger agreement.
The portion of the fair value of the replacement awards related to services provided prior to the acquisition was $768 million and was accounted for as consideration transferred. The remaining portion of the fair value of $467 million is associated with future service and will be recognized as compensation expense, net of estimated forfeitures, over the weighted-average remaining vesting period of 1.2 years. The fair value of options that the Company assumed in connection with the acquisition of First Data were estimated using the Black-Scholes model with the following assumptions:
|
|
|
|
|
|
|
Expected life (in years)
|
2.5
|
|
|
Average risk-free interest rate
|
1.9
|
%
|
|
Expected volatility
|
27.4
|
%
|
|
Expected dividend yield
|
0
|
%
|
Share-Based Compensation Activity
The weighted-average estimated fair value of stock options granted during the nine months ended September 30, 2019 and 2018 was $28.44 and $22.48 per share, respectively. The fair values of stock options granted were estimated on the date of grant using a binomial option-pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Expected life (in years)
|
6.4
|
|
|
6.3
|
|
|
Average risk-free interest rate
|
2.7
|
%
|
|
2.2
|
%
|
|
Expected volatility
|
28.5
|
%
|
|
28.3
|
%
|
|
Expected dividend yield
|
0
|
%
|
|
0
|
%
|
The Company determined the expected life of stock options using historical data adjusted for known factors that could alter historical exercise behavior. The risk-free interest rate is based on the U.S. treasury yield curve in effect as of the grant date. Expected volatility is determined using weighted-average implied market volatility combined with historical volatility. The Company believes that a blend of historical volatility and implied volatility better reflects future market conditions and better indicates expected volatility than purely historical volatility.
A summary of stock option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (In thousands)
|
|
Weighted-Average Exercise Price
|
|
Weighted-Average Remaining Contractual Term (Years)
|
|
Aggregate Intrinsic Value (In millions)
|
|
Stock options outstanding - December 31, 2018
|
12,052
|
|
|
$
|
33.96
|
|
|
|
|
|
|
Converted First Data stock options
|
7,591
|
|
|
62.54
|
|
|
|
|
|
|
Granted
|
1,177
|
|
|
84.77
|
|
|
|
|
|
|
Forfeited
|
(158
|
)
|
|
68.17
|
|
|
|
|
|
|
Exercised
|
(3,265
|
)
|
|
35.94
|
|
|
|
|
|
|
Stock options outstanding - September 30, 2019
|
17,397
|
|
|
$
|
49.19
|
|
|
5.03
|
|
$
|
1,079
|
|
|
Stock options exercisable - September 30, 2019
|
14,531
|
|
|
$
|
45.00
|
|
|
4.37
|
|
$
|
986
|
|
A summary of restricted stock unit and performance share unit activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Performance Share Units
|
|
|
Shares (In thousands)
|
|
Weighted-Average Grant Date Fair Value
|
|
Shares (In thousands)
|
|
Weighted-Average Grant Date Fair Value
|
|
Units - December 31, 2018
|
1,821
|
|
|
$
|
53.22
|
|
|
524
|
|
|
$
|
57.60
|
|
|
Converted First Data units
|
6,025
|
|
|
102.30
|
|
|
1,333
|
|
|
101.96
|
|
|
Granted
|
533
|
|
|
91.35
|
|
|
1,107
|
|
|
96.72
|
|
|
Forfeited
|
(173
|
)
|
|
74.02
|
|
|
(238
|
)
|
|
50.96
|
|
|
Vested
|
(945
|
)
|
|
70.21
|
|
|
(405
|
)
|
|
90.03
|
|
|
Units - September 30, 2019
|
7,261
|
|
|
$
|
93.97
|
|
|
2,321
|
|
|
$
|
99.25
|
|
A summary of restricted stock award and performance share award activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Awards
|
|
Performance Share Awards
|
|
|
Shares (In thousands)
|
|
Weighted-Average Grant Date Fair Value
|
|
Shares (In thousands)
|
|
Weighted-Average Grant Date Fair Value
|
|
Awards - December 31, 2018
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
Converted First Data awards
|
96
|
|
|
102.30
|
|
|
264
|
|
|
87.57
|
|
|
Granted
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Forfeited
|
—
|
|
|
—
|
|
|
(16
|
)
|
|
87.57
|
|
|
Vested
|
—
|
|
|
—
|
|
|
(248
|
)
|
|
87.57
|
|
|
Awards - September 30, 2019
|
96
|
|
|
$
|
102.30
|
|
|
—
|
|
|
$
|
—
|
|
The table below represents additional information related to stock option and restricted stock unit activity:
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
2019
|
|
2018
|
|
Total intrinsic value of stock options exercised
|
$
|
211
|
|
|
$
|
119
|
|
|
Fair value of restricted stock units vested
|
158
|
|
|
36
|
|
|
Income tax benefit from stock options exercised and restricted stock units vested
|
89
|
|
|
36
|
|
|
Cash received from stock options exercised
|
73
|
|
|
25
|
|
As of September 30, 2019, 33.2 million share-based awards were available for grant under the Amended and Restated Fiserv, Inc. 2007 Omnibus Incentive Plan. Under its employee stock purchase plan, the Company issued 0.5 million shares during the first nine months of 2019, and 0.5 million shares during the first nine months of 2018. As of September 30, 2019, there were 24.9 million shares available for issuance under the employee stock purchase plan.
8. Income Taxes
The Company’s income tax provision and effective income tax rate were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
(In millions)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Income tax provision
|
|
$
|
53
|
|
|
$
|
78
|
|
|
$
|
144
|
|
|
$
|
290
|
|
|
Effective income tax rate
|
|
20.7
|
%
|
|
25.7
|
%
|
|
17.9
|
%
|
|
24.5
|
%
|
The income tax provision as a percentage of income before income from investments in unconsolidated affiliates was 20.7% and 25.7% in the three months ended September 30, 2019 and 2018, respectively, and was 17.9% and 24.5% in the nine months ended September 30, 2019 and 2018, respectively. The decrease in the effective tax rate for the three months ended September 30, 2019 compared to the prior year period is primarily related to equity compensation related tax benefits. The effective tax rate in the nine months ended September 30, 2019 includes discrete benefits due to a loss from subsidiary restructuring. The effective tax rate in the nine months ended September 30, 2018 includes $77 million of income tax expense associated with the $227 million gain on the sale of a 55% interest of the Company’s Lending Solutions business (see Note 6).
Deferred tax assets and liabilities reported in the consolidated balance sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
September 30, 2019
|
|
December 31, 2018
|
|
Noncurrent assets
|
$
|
51
|
|
|
$
|
20
|
|
|
Noncurrent liabilities
|
(4,110
|
)
|
|
(745
|
)
|
|
Total
|
$
|
(4,059
|
)
|
|
$
|
(725
|
)
|
In connection with the acquisition of First Data (see Note 4), the Company recorded, on a preliminary basis, $3.4 billion of deferred tax liabilities for the deferred tax effects associated with the fair value of assets acquired and liabilities assumed using the applicable tax rates, with a corresponding adjustment to goodwill.
The tax effects described above, as well as other changes in deferred tax assets and liabilities as a result of the acquisition of First Data, may be adjusted as additional information becomes available during the measurement period.
The Company maintains its assertion that the original investment in its foreign subsidiaries is intended to be indefinitely reinvested. However, undistributed historical and future earnings of its foreign subsidiaries are not considered to be indefinitely reinvested. Should these earnings be distributed in the future in the form of dividends or otherwise, the Company may be subject to foreign withholding taxes. The Company has the ability and intent to limit distributions so as to not make a distribution in excess of the historical investment in those subsidiaries. The Company will continue to monitor its global cash requirements and the need to recognize a deferred tax liability.
The Company’s liability for unrecognized tax benefits before interest and penalties totaled $145 million at September 30, 2019 and $49 million at December 31, 2018. The increase as of September 30, 2019 is attributable to $18 million related to subsidiary restructuring and other items that occurred during the first nine months of 2019, along with $78 million from pre-acquisition uncertain tax positions of First Data assumed by the Company. The Company believes it is reasonably possible that the liability for unrecognized tax benefits may decrease by up to $29 million over the next twelve months as a result of possible closure of federal tax audits, potential settlements with certain states and foreign countries, and the lapse of the statute of limitations in various state and foreign jurisdictions.
As of September 30, 2019, in connection with the acquisition of First Data, the Company is subject to income tax examination by the U.S. federal jurisdiction from 2010 forward. State and local examinations are substantially complete through 2010. Foreign jurisdictions generally remain subject to examination by their respective authorities from 2006 forward, none of which are considered significant jurisdictions.
9. Shares Used in Computing Net Income Per Share Attributable to Fiserv, Inc.
The computation of shares used in calculating basic and diluted net income attributable to Fiserv, Inc. per common share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
(In millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Weighted-average common shares outstanding used for the calculation of net income attributable to Fiserv, Inc. per share – basic
|
584.8
|
|
|
403.8
|
|
|
456.3
|
|
|
408.4
|
|
|
Common stock equivalents
|
12.1
|
|
|
8.2
|
|
|
8.9
|
|
|
8.2
|
|
|
Weighted-average common shares outstanding used for the calculation of net income attributable to Fiserv, Inc. per share – diluted
|
596.9
|
|
|
412.0
|
|
|
465.2
|
|
|
416.6
|
|
For each of the three months ended September 30, 2019 and 2018, stock options for 1.2 million shares were excluded from the calculation of diluted weighted-average outstanding shares because their impact was anti-dilutive. For the nine months ended September 30, 2019 and 2018, stock options for 1.1 million and 1.0 million shares, respectively, were excluded from the calculation of diluted weighted-average outstanding shares because their impact was anti-dilutive. See Notes 4 and 7 for a description of Fiserv, Inc. common stock and equity awards issued in connection with the acquisition of First Data.
10. Fair Value Measurements
The Company applies fair value accounting for all assets and liabilities that are recognized or disclosed at fair value in its consolidated financial statements on a recurring basis. Fair value represents the amount that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, the Company uses the hierarchy prescribed in ASC 820, Fair Value Measurements, considering the principal or most advantageous market and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability. The three levels in the hierarchy are as follows:
|
|
|
|
•
|
Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets that are accessible as of the measurement date.
|
|
|
|
|
•
|
Level 2 - Inputs other than quoted prices within Level 1 that are observable either directly or indirectly, including but not limited to quoted prices in markets that are not active, quoted prices in active markets for similar assets or liabilities and observable inputs other than quoted prices such as interest rates or yield curves.
|
|
|
|
|
•
|
Level 3 - Unobservable inputs reflecting the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk.
|
The fair values of cash equivalents, trade accounts receivable, settlement assets and obligations, accounts payable, and client deposits approximate their respective carrying values due to the short period of time to maturity. The Company’s derivative instruments are measured on a recurring basis based on foreign currency spot rates and forwards quoted by banks and foreign currency dealers and are marked-to-market each period (see Note 17). The estimated fair value of the contingent consideration liability related to the acquisition of Elan (see Note 4) was based on the present value of a probability-weighted assessment approach derived from the likelihood of achieving the earn-out criteria. This estimated fair value has not changed since the acquisition date.
Assets and liabilities measured at fair value on a recurring basis consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
(In millions)
|
Classification
|
Fair Value Hierarchy
|
|
September 30, 2019
|
|
December 30, 2018
|
|
Assets
|
|
|
|
|
|
|
|
Cash flow hedges
|
Prepaid expenses and other current assets
|
Level 1
|
|
$
|
4
|
|
|
$
|
—
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Contingent consideration
|
Other long-term liabilities
|
Level 3
|
|
$
|
12
|
|
|
$
|
12
|
|
The Company’s senior notes and debt guarantee arrangements are recorded at amortized cost, but measured at fair value for disclosure purposes. The estimated fair value of senior notes was based on matrix pricing which considers readily observable inputs of comparable securities (Level 2 of the fair value hierarchy). The aggregate carrying value of the Company’s debt guarantee arrangements of $28 million and $29 million approximate the fair values at September 30, 2019 and December 31,
2018, respectively (Level 3 of the fair value hierarchy). The carrying value of the Company’s term loan credit agreement, revolving credit facility borrowings and debt associated with the receivables securitization agreement approximates fair value as these instruments have variable interest rates and the Company has not experienced any change to its credit ratings (Level 2 of the fair value hierarchy). The estimated fair value of total debt, excluding finance leases and other financing obligations, was $23.3 billion and $6.0 billion as of September 30, 2019 and December 31, 2018, respectively, and the carrying value was $22.2 billion and $6.0 billion as of September 30, 2019 and December 31, 2018, respectively. See Note 14 for a description of debt financing activities in connection with the Company’s acquisition of First Data. See Note 6 for a description of the Company’s debt guarantee arrangements with the Lending Joint Ventures.
11. Intangible Assets
Identifiable intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
|
September 30, 2019
|
|
|
|
Customer relationships
|
$
|
16,220
|
|
|
$
|
1,680
|
|
|
$
|
14,540
|
|
|
Acquired software and technology
|
2,227
|
|
|
556
|
|
|
1,671
|
|
|
Trade names
|
586
|
|
|
75
|
|
|
511
|
|
|
Capitalized software development costs
|
950
|
|
|
355
|
|
|
595
|
|
|
Purchased software
|
557
|
|
|
137
|
|
|
420
|
|
|
Total
|
$
|
20,540
|
|
|
$
|
2,803
|
|
|
$
|
17,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
|
December 31, 2018
|
|
|
|
Customer relationships
|
$
|
2,642
|
|
|
$
|
1,294
|
|
|
$
|
1,348
|
|
|
Acquired software and technology
|
591
|
|
|
490
|
|
|
101
|
|
|
Trade names
|
120
|
|
|
71
|
|
|
49
|
|
|
Capitalized software development costs
|
810
|
|
|
314
|
|
|
496
|
|
|
Purchased software
|
261
|
|
|
112
|
|
|
149
|
|
|
Total
|
$
|
4,424
|
|
|
$
|
2,281
|
|
|
$
|
2,143
|
|
The Company estimates that annual amortization expense with respect to acquired intangible assets recorded at September 30, 2019, which include customer relationships, acquired software and technology, and trade names, will be approximately $1.0 billion in 2019, $2.1 billion in 2020, $2.1 billion in 2021, $1.9 billion in 2022, and $1.8 billion in 2023. Amortization expense with respect to capitalized and purchased software recorded at September 30, 2019 is estimated to approximate $270 million in 2019.
12. Goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired and liabilities assumed in a business combination. Changes in the carrying amount of goodwill for the nine months ended September 30, 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Segments
|
|
(In millions)
|
First Data
|
|
Payments
|
|
Financial
|
|
Total
|
|
Goodwill at December 31, 2018
|
$
|
—
|
|
|
$
|
3,996
|
|
|
$
|
1,706
|
|
|
$
|
5,702
|
|
|
Acquisitions and valuation adjustments (see Note 4)
|
29,955
|
|
|
(27
|
)
|
|
2
|
|
|
29,930
|
|
|
Foreign currency translation
|
(114
|
)
|
|
(2
|
)
|
|
1
|
|
|
(115
|
)
|
|
Goodwill at September 30, 2019
|
$
|
29,841
|
|
|
$
|
3,967
|
|
|
$
|
1,709
|
|
|
$
|
35,517
|
|
13. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following at:
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
September 30, 2019
|
|
December 31, 2018
|
|
Trade accounts payable
|
$
|
402
|
|
|
$
|
127
|
|
|
Client deposits
|
625
|
|
|
564
|
|
|
Accrued compensation and benefits
|
310
|
|
|
199
|
|
|
Other accrued expenses
|
1,564
|
|
|
256
|
|
|
Total
|
$
|
2,901
|
|
|
$
|
1,146
|
|
14. Debt
The Company’s debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
September 30, 2019
|
|
December 31, 2018
|
|
Short-term debt and current maturities of long-term debt:
|
|
|
|
|
Lines of credit
|
$
|
248
|
|
|
$
|
—
|
|
|
Finance lease and other financing obligations
|
120
|
|
|
4
|
|
|
Total short-term and current maturities of long-term debt
|
$
|
368
|
|
|
$
|
4
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
2.7% senior notes due 2020
|
$
|
850
|
|
|
$
|
850
|
|
|
4.75% senior notes due 2021
|
400
|
|
|
400
|
|
|
3.5% senior notes due 2022
|
700
|
|
|
700
|
|
|
3.8% senior notes due 2023
|
1,000
|
|
|
1,000
|
|
|
0.375% senior notes due 2023
|
547
|
|
|
—
|
|
|
2.75% senior notes due 2024
|
2,000
|
|
|
—
|
|
|
3.85% senior notes due 2025
|
900
|
|
|
900
|
|
|
2.25% senior notes due 2025
|
645
|
|
|
—
|
|
|
3.2% senior notes due 2026
|
2,000
|
|
|
—
|
|
|
1.125% senior notes due 2027
|
547
|
|
|
—
|
|
|
4.2% senior notes due 2028
|
1,000
|
|
|
1,000
|
|
|
3.5% senior notes due 2029
|
3,000
|
|
|
—
|
|
|
1.625% senior notes due 2030
|
547
|
|
|
—
|
|
|
3.0% senior notes due 2031
|
645
|
|
|
—
|
|
|
4.4% senior notes due 2049
|
2,000
|
|
|
—
|
|
|
Receivable securitized loan
|
500
|
|
|
—
|
|
|
Term loan facility
|
4,400
|
|
|
—
|
|
|
Unamortized discount and unamortized deferred financing costs
|
(167
|
)
|
|
(29
|
)
|
|
Revolving credit facility
|
406
|
|
|
1,129
|
|
|
Finance lease and other financing obligations
|
203
|
|
|
5
|
|
|
Total long-term debt
|
$
|
22,123
|
|
|
$
|
5,955
|
|
On January 16, 2019, in connection with the definitive merger agreement to acquire First Data (see Note 4), the Company entered into a bridge facility commitment letter pursuant to which a group of financial institutions committed to provide a 364-day senior unsecured bridge term loan facility in an aggregate principal amount of $17.0 billion for the purpose of funding the repayment of certain indebtedness of First Data and its subsidiaries on the closing date of the merger, making cash payments in lieu of fractional shares as part of the merger consideration, and paying fees and expenses related to the merger, the refinancing and the related transactions. The Company recorded $2 million and $98 million of expenses, reported within debt financing activities in the consolidated statements of income, related to the bridge term loan facility during the three and nine months ended September 30, 2019, respectively. The aggregate commitments of $17.0 billion under the bridge facility commitment letter were replaced with a corresponding amount of permanent financing through the term loan credit agreement and issuance of senior notes, as described below, resulting in the termination of the bridge term loan facility effective July 1, 2019.
On February 6, 2019, the Company entered into an amendment to its amended and restated revolving credit facility to (i) amend the maximum leverage ratio covenant to permit it to elect to increase the permitted maximum leverage ratio from three and one-half times the Company’s consolidated net earnings before interest, taxes, depreciation, amortization, non-cash charges and expenses and certain other adjustments (“EBITDA”) to either four times or four and one-half times the Company’s EBITDA for a specified period following certain acquisitions and (ii) permit it to make drawings under the revolving credit facility on the closing date of its acquisition of First Data subject to only limited conditions. In addition, on February 15, 2019, the Company entered into a second amendment to its existing revolving credit agreement in order to increase the aggregate commitments available thereunder by $1.5 billion to $3.5 billion of total capacity, and to make certain additional amendments to facilitate the operation of the combined business following the acquisition of First Data. Further on July 26, 2019, the Company entered into a third amendment to its existing revolving credit agreement to (i) remove as a condition precedent to borrowings on the closing date of the acquisition of First Data the requirement that amounts under the Receivables Financing Agreement, as defined below, be repaid, and (ii) amend the debt and liens covenants to increase the Company’s flexibility to enter into receivables financing arrangements in the future. The increased commitments and amendments contemplated by the second and third amendments to the revolving credit facility became effective upon the closing of the acquisition of First Data. Borrowings under the amended and restated revolving credit facility continue to bear interest at a variable rate based on LIBOR or on a base rate, plus in each case a specified margin based on the Company’s long-term debt rating in effect from time to time. The variable interest rate on the revolving credit facility borrowings was 2.92% at September 30, 2019.
On February 15, 2019, the Company entered into a new term loan credit agreement with a syndicate of financial institutions pursuant to which such financial institutions committed to provide the Company with a senior unsecured term loan facility in an aggregate principal amount of $5.0 billion, consisting of $1.5 billion in commitments to provide loans with a three-year maturity and $3.5 billion in commitments to provide loans with a five-year maturity. On July 26, 2019, the Company entered into an amendment to its term loan credit facility to (i) remove as a condition precedent to borrowings on the closing date of the acquisition of First Data the requirement that amounts under the Receivables Financing Agreement, as defined below, be repaid and the related liens and guarantees be terminated in order to allow First Data’s accounts receivable securitization program, as described below, to remain in place following consummation of the acquisition and (ii) amend the debt and liens covenants to increase the Company’s flexibility to enter into receivables financing arrangements in the future. On July 29, 2019, concurrent with the closing of the acquisition of First Data, the term loan credit agreement was funded. Loans drawn under the term loan facility are subject to amortization at a quarterly rate of 1.25% for the first eight quarters and 1.875% each quarter thereafter (with loans outstanding under the five-year tranche subject to amortization at a quarterly rate of 2.5% after the fourth anniversary of the commencement of amortization), with accrued and unpaid amortization amounts required to be paid on the last business day in December of each year. Borrowings under the term loan facility bear interest at variable rates based on LIBOR or on a base rate, plus in each case, a specified margin based on the Company’s long-term debt rating in effect from time to time. The variable interest rate on the term loan facility borrowings was 3.30% at September 30, 2019. The Company was also required to pay a ticking fee that accrued on the aggregate undrawn commitments under the term loan facility at a per annum rate based upon the Company’s long-term debt rating in effect from time to time. The term loan credit agreement contains affirmative, negative and financial covenants, and events of default, that are substantially the same as those set forth in the Company’s existing revolving credit facility, as amended as described above.
On June 24, 2019, the Company completed an offering of $9.0 billion aggregate principal amount of senior notes comprised of $2.0 billion aggregate principal amount of 2.75% senior notes due in July 2024, $2.0 billion aggregate principal amount of 3.2% senior notes due in July 2026, $3.0 billion aggregate principal amount of 3.5% senior notes due in July 2029 and $2.0 billion aggregate principal amount of 4.4% senior notes due in July 2049. The senior notes pay interest semi-annually on January 1 and July 1, commencing on January 1, 2020. The indentures governing the senior notes contain covenants that, among other matters, limit (i) the Company’s ability to consolidate or merge with or into, or convey, transfer or lease all or substantially all of its properties and assets to another person, (ii) the Company’s and certain of its subsidiaries’ ability to create or assume liens, and (iii) the Company’s and certain of its subsidiaries’ ability to engage in sale and leaseback transactions. The Company may, at its option, redeem the senior notes, in whole or in part, at any time prior to the applicable par call date.
On July 1, 2019, the Company completed an offering of €1.5 billion aggregate principal amount and £1.05 billion aggregate principal amount of senior notes comprised of €500 million aggregate principal amount of 0.375% senior notes due in July 2023, €500 million aggregate principal amount of 1.125% senior notes due in July 2027, €500 million aggregate principal amount of 1.625% senior notes due in July 2030, £525 million aggregate principal amount of 2.25% senior notes due in July 2025, and £525 million aggregate principal amount of 3.0% senior notes due in July 2031. The senior notes pay interest annually on July 1, commencing on July 1, 2020. The indentures governing the senior notes contain covenants that are substantially the same as those set forth in the Company’s $9.0 billion aggregate principal amount senior notes described above.
In connection with the anticipated issuance of the foreign currency-denominated senior notes described above, the Company entered into foreign exchange forward contracts in June 2019 to minimize foreign currency exposure to the Euro and British Pound upon settlement of the proceeds from the foreign currency-denominated senior notes. The foreign exchange forward contracts matured on July 1, 2019, concurrent with the closing of the offering of the foreign currency-denominated senior notes. The Company realized foreign currency transaction gains of $1 million and $3 million, recorded within debt financing activities in the consolidated statements of income, during the three and nine months ended September 30, 2019, respectively, from these foreign exchange forward contracts. Further, upon completion of the acquisition of First Data, the Company designated its Euro- and British Pound-denominated senior notes as net investment hedges to hedge a portion of its net investment in certain Euro- and British Pound-denominated subsidiaries (see Note 17). Prior to designating the foreign currency-denominated senior notes as net investment hedges, the Company realized foreign currency transaction gains of $69 million, recorded within debt financing activities in the consolidated statements of income, during the three and nine months ended September 30, 2019, respectively, as a result of changes in the U.S. dollar equivalent of the Euro- and British Pound-denominated senior notes due to fluctuations in foreign currency exchange rates. In addition, the Company held a portion of the proceeds from the issuance of these foreign currency-denominated senior notes in Euro- and British Pound-denominated cash and cash equivalents. The Company realized foreign currency transaction losses of $19 million, recorded within debt financing activities in the consolidated statements of income, during the three and nine months ended September 30, 2019, respectively, as a result of changes in the U.S. dollar equivalent of the Euro- and British Pound-denominated cash due to fluctuations in foreign currency exchange rates.
A portion of the net proceeds from the senior note offerings described above was used in June 2019 to repay outstanding borrowings totaling $790 million under the Company’s amended and restated revolving credit facility. On July 29, 2019, concurrent with the acquisition of First Data, the Company used the remaining net proceeds from the senior notes offerings described above, as well as the net proceeds of the term loan facility described above and a drawing on its revolving credit facility described above, to repay approximately $16.4 billion of existing First Data debt and to pay fees and its expenses related to such repayment, the First Data acquisition and related transactions.
Foreign Lines of Credit and Other Arrangements
In connection with the acquisition of First Data, the Company assumed certain short-term lines of credit with foreign banks and alliance partners primarily to fund settlement activity. These arrangements are primarily associated with international operations and are in various functional currencies, the most significant of which are the Australian dollar, Polish zloty, Euro and Argentine peso. The Company had amounts outstanding on these lines of credit totaling $248 million as of September 30, 2019. As of September 30, 2019, the weighted average interest rate associated with foreign lines of credit was 17.0%.
Receivable Securitization Agreement
In connection with the acquisition of First Data, the Company acquired a consolidated wholly-owned subsidiary, First Data Receivables, LLC (“FDR”). FDR is a party to certain receivables financing arrangements, including an agreement (“Receivables Financing Agreement”) with certain financial institutions and other persons from time to time party thereto as lenders and group agents, pursuant to which certain wholly-owned subsidiaries of the Company have agreed to transfer and contribute receivables to FDR, and FDR in turn may obtain borrowings from the financial institutions and other lender parties to the Receivables Financing Agreement secured by liens on those receivables. FDR’s assets are not available to satisfy the obligations of any other entities or affiliates of the Company, and FDR’s creditors would be entitled, upon its liquidation, to be satisfied out of FDR’s assets prior to any assets or value in FDR becoming available to the Company. The receivables held by FDR are recorded within trade accounts receivable, net in the Company’s consolidated balance sheet. As of September 30, 2019, FDR held $757 million in receivables as part of the securitization program. The maximum borrowing capacity, subject to collateral availability, under the Receivables Financing Agreement at September 30, 2019 was $500 million. FDR utilized the receivables as collateral in borrowings of $500 million, at an average interest rate of 2.87%, as of September 30, 2019. The term of the Receivables Financing Agreement is through July 2022.
15. Leases
The Company adopted ASU 2016-02 and its related amendments (collectively known as “ASC 842”) effective January 1, 2019 using the optional transition method in ASU 2018-11. Therefore, the reported results for the three and nine months ended September 30, 2019 and the financial position as of September 30, 2019 reflect the application of ASC 842 while the reported results for the three and nine months ended September 30, 2018 and the financial position as of December 31, 2018 were not adjusted and continue to be reported under the accounting guidance, ASC 840, Leases (“ASC 840”), in effect for the prior periods.
Company as Lessee
The Company primarily leases certain office space, land, data centers and equipment from third parties. The Company determines if a contract is a lease at inception. A contract contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The lease term begins on the commencement date, which is the date the Company takes possession of the asset, and may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. Many of the Company’s leases contain renewal options for varying periods, which can be exercised at the Company’s sole discretion. Leases are classified as operating or finance leases based on factors such as the lease term, lease payments, and the economic life, fair value and estimated residual value of the asset. Certain leases include options to purchase the leased asset at the end of the lease term, which is assessed as a part of the Company’s lease classification determination. The Company elected the package of practical expedients permitted under the transition guidance within ASU 2016-02 to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs. The Company’s leases have remaining lease terms ranging from one to 18 years.
The Company uses the right-of-use (“ROU”) model to account for its leases. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized on the commencement date based on the present value of lease payments over the lease term. ROU assets are based on the lease liability and are increased by prepaid lease payments and decreased by lease incentives received. For leases where the Company is reasonably certain to exercise a renewal option, such option periods have been included in the determination of the Company’s ROU assets and lease liabilities. Certain leases require the Company to pay taxes, insurance, maintenance, and other operating expenses associated with the leased asset. Such amounts are not included in the measurement of the ROU assets and lease liabilities to the extent they are variable in nature. These variable lease costs are recognized as a variable lease expense when incurred. As a practical expedient, lease agreements with lease and non-lease components are accounted for as a single lease component for all asset classes. The Company estimates contingent lease incentives when it is probable that the Company is entitled to the incentive at lease commencement. The Company elected the short-term lease recognition exemption for all leases that qualify. Therefore, leases with an initial term of 12 months or less are not recorded on the balance sheet; instead, lease payments are recognized as lease expense on a straight-line basis over the lease term. The depreciable life of the ROU assets and leasehold improvements are limited by the expected lease term unless the Company is reasonably certain of a transfer of title or purchase option. The Company uses its incremental borrowing rate to discount future lease payments in the calculation of the lease liability and ROU asset based on the information available on the commencement date for each lease. The Company’s leases typically do not provide an implicit rate. The determination of the incremental borrowing rate requires judgment and is determined using the Company’s current unsecured borrowing rate, adjusted for various factors such as collateralization, currency and term to align with the terms of the lease.
Lease Balances
|
|
|
|
|
|
|
|
|
(In millions)
|
|
September 30, 2019
|
|
Assets
|
|
|
|
Operating lease assets (1)
|
|
$
|
675
|
|
|
Finance lease assets (2)
|
|
271
|
|
|
Total lease assets
|
|
$
|
946
|
|
|
|
|
|
|
Liabilities
|
|
|
|
Current
|
|
|
|
Operating lease liabilities (1)
|
|
$
|
138
|
|
|
Finance lease liabilities (2)
|
|
73
|
|
|
Noncurrent
|
|
|
|
Operating lease liabilities (1)
|
|
585
|
|
|
Finance lease liabilities (2)
|
|
158
|
|
|
Total lease liabilities
|
|
$
|
954
|
|
|
|
|
|
(1)
|
Operating lease assets are included within other long-term assets, and operating lease liabilities are included within accounts payable and accrued expenses (current portion) and other long-term liabilities (noncurrent portion) in the Company’s consolidated balance sheet.
|
|
|
|
|
(2)
|
Finance lease assets are included within property and equipment, net and finance lease liabilities are included within short-term and current maturities of long-term debt (current portion) and long-term debt (noncurrent portion) in the Company’s consolidated balance sheets.
|
Components of Lease Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Three Months Ended September 30, 2019
|
|
Nine Months Ended September 30, 2019
|
|
Operating lease cost (1)
|
|
$
|
64
|
|
|
$
|
141
|
|
|
Finance lease cost (2)
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
16
|
|
|
18
|
|
|
Interest on lease liabilities
|
|
3
|
|
|
3
|
|
|
Total lease cost
|
|
$
|
83
|
|
|
$
|
162
|
|
|
|
|
|
(1)
|
Operating lease expense is included within cost of processing and services, cost of product and selling, general and administrative expense, dependent upon the nature and use of the ROU asset, in the Company’s consolidated statements of income. Operating lease cost includes approximately $14 million and $42 million of variable lease costs for the three and nine months ended September 30, 2019, respectively.
|
|
|
|
|
(2)
|
Finance lease expense is recorded as depreciation and amortization expense within cost of processing and services, cost of product and selling, general and administrative expense, dependent upon the nature and use of the ROU asset, and interest expense, net in the Company’s consolidated statements of income.
|
Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Nine Months Ended September 30, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
94
|
|
|
Operating cash flows from finance leases
|
|
3
|
|
|
Financing cash flows from finance leases
|
|
17
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease liabilities
|
|
|
|
Operating leases
|
|
$
|
459
|
|
|
Finance leases
|
|
288
|
|
Lease Term and Discount Rate
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
Weighted-average remaining lease term
|
|
|
|
Operating leases
|
|
6 years
|
|
|
Finance leases
|
|
3 years
|
|
|
Weighted-average discount rate
|
|
|
|
Operating leases
|
|
3.0
|
%
|
|
Finance leases
|
|
3.5
|
%
|
Maturity of Lease Liabilities under ASC 842
Future minimum rental payments on leases with initial non-cancellable lease terms in excess of one year were due as follows at September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
Year ending December 31,
|
Operating Leases(1)
|
|
Finance Leases
|
|
Remainder of 2019
|
$
|
48
|
|
|
$
|
16
|
|
|
2020
|
146
|
|
|
82
|
|
|
2021
|
129
|
|
|
70
|
|
|
2022
|
110
|
|
|
58
|
|
|
2023
|
95
|
|
|
7
|
|
|
Thereafter
|
254
|
|
|
6
|
|
|
Total lease payments
|
782
|
|
|
239
|
|
|
Less: Interest
|
(59
|
)
|
|
(8
|
)
|
|
Present value of lease liabilities
|
$
|
723
|
|
|
$
|
231
|
|
|
|
|
|
(1)
|
Operating lease payments include $55 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $6 million of legally binding minimum lease payments for leases signed but not yet commenced. Operating leases that have been signed but not yet commenced are for real estate and equipment and will commence in 2019 and 2020 with lease terms of one to 10 years.
|
Maturity of Lease Liabilities under ASC 840
Future minimum rental payments on operating leases with initial non-cancellable lease terms in excess of one year were due as follows at December 31, 2018:
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Year ending December 31,
|
|
|
2019
|
$
|
94
|
|
|
2020
|
75
|
|
|
2021
|
62
|
|
|
2022
|
51
|
|
|
2023
|
40
|
|
|
Thereafter
|
108
|
|
|
Total
|
$
|
430
|
|
Rent expense for all operating leases was $118 million and $126 million during the years ended December 31, 2018 and 2017, respectively.
Company as Lessor
The Company owns certain POS terminal equipment which it leases to third party merchants. Leases are classified as operating or sales-type leases based on factors such as the lease term, lease payments, and the economic life, fair value and estimated residual value of the asset. The terms of the leases typically range from two to five years. For operating leases, the minimum lease payments received are recognized as lease income on a straight-line basis over the lease term and the leased asset is
included in property and equipment, net in the consolidated balance sheet and depreciated to its estimated residual value over the lease term. For sales-type leases, selling profit is recognized at the commencement date of the lease to the extent the fair value of the underlying asset is different from its carrying amount. Selling profit is directly impacted by the Company’s estimate of the amount to be derived from the residual value of the asset at the end of the lease term. The residual value of the asset is computed using various assumptions, including the expected fair value of the underlying asset at the end of the lease term. Unearned income is recognized as interest income over the lease term. For sales-type leases, the Company derecognizes the carrying amount of the underlying leased asset and recognizes a net investment in the leased asset in the consolidated balance sheet. The net investment in a leased asset is computed based on the present value of the minimum lease payments not yet received and the present value of the residual value of the asset.
Components of Lease Income
|
|
|
|
|
|
|
|
(In millions)
|
Three and Nine Months Ended September 30, 2019
|
|
Sales-type and direct financing leases
|
|
|
Selling profit (1)
|
$
|
8
|
|
|
Interest income (1)
|
15
|
|
|
Operating lease income (2)
|
14
|
|
|
|
|
|
(1)
|
Selling profit includes $21 million recorded within product revenue with a corresponding charge of $13 million recorded in cost of product in the consolidated statements of income for the three and nine months ended September 30, 2019. Interest income is included within product revenue in the consolidated statements of income.
|
|
|
|
|
(2)
|
Operating lease income includes an immaterial amount of variable lease income and is included within product revenue in the Company’s consolidated statements of income for the three and nine months ended September 30, 2019.
|
Components of Net Investment in Sales-Type and Direct Financing Leases
|
|
|
|
|
|
|
|
(In millions)
|
September 30, 2019
|
|
Minimum lease payments
|
$
|
374
|
|
|
Residual values
|
37
|
|
|
Less: Unearned interest income
|
(160
|
)
|
|
Net investment in leases (1)
|
$
|
251
|
|
|
|
|
|
(1)
|
Net investments in leased assets are included within prepaid expenses and other current assets (current portion) and other long-term assets (noncurrent portion) in the consolidated balance sheet.
|
Maturities of Future Minimum Lease Payment Receivables
Future minimum lease payments receivable on sales-type leases were as follows at September 30, 2019:
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Year ending December 31,
|
Sales-Type Leases
|
|
2019
|
$
|
45
|
|
|
2020
|
149
|
|
|
2021
|
107
|
|
|
2022
|
56
|
|
|
2023
|
16
|
|
|
Thereafter
|
1
|
|
|
Total minimum lease payments
|
$
|
374
|
|
16. Shareholders’ Equity
The following tables provide changes in shareholders’ equity during the three and nine months ended September 30, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiserv, Inc. Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2019
|
Number of Shares
|
|
Amount
|
|
|
(In millions)
|
Common Shares
|
Treasury Shares
|
|
Common Stock
|
Additional
Paid-In
Capital
|
Accumulated
Other
Comprehensive
Loss
|
Retained
Earnings
|
Treasury Stock
|
Noncontrolling Interests
|
Total Equity
|
|
|
|
|
Balance at June 30, 2019
|
791
|
|
399
|
|
|
$
|
8
|
|
$
|
1,056
|
|
$
|
(193
|
)
|
$
|
12,083
|
|
$
|
(10,408
|
)
|
$
|
—
|
|
$
|
2,546
|
|
|
|
Shares issued to acquire First Data (see Note 4)
|
|
(286
|
)
|
|
|
22,582
|
|
|
|
7,478
|
|
1,119
|
|
31,179
|
|
|
|
Distributions paid to noncontrolling interests
|
|
|
|
|
|
|
|
|
(51
|
)
|
(51
|
)
|
|
|
Net income (1)
|
|
|
|
|
|
|
198
|
|
|
23
|
|
221
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
(186
|
)
|
|
|
|
(186
|
)
|
|
|
Share-based compensation
|
|
|
|
|
87
|
|
|
|
|
|
87
|
|
|
|
Shares issued under stock plans
|
|
(2
|
)
|
|
|
(57
|
)
|
|
|
57
|
|
|
—
|
|
|
|
Purchases of treasury stock
|
|
—
|
|
|
|
|
|
|
(36
|
)
|
|
(36
|
)
|
|
|
Balance at September 30, 2019
|
791
|
|
111
|
|
|
$
|
8
|
|
$
|
23,668
|
|
$
|
(379
|
)
|
$
|
12,281
|
|
$
|
(2,909
|
)
|
$
|
1,091
|
|
$
|
33,760
|
|
|
|
|
|
(1)
|
The total net income presented in shareholders’ equity for the three months ended September 30, 2019 is different than the amounts presented in the unaudited consolidated statement of income due to the net income attributable to the redeemable noncontrolling interest of $4 million not included in equity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiserv, Inc. Shareholders’ Equity
|
|
|
Three Months Ended
September 30, 2018
|
Number of Shares
|
|
Amount
|
|
|
(In millions)
|
Common Shares
|
Treasury Shares
|
|
Common Stock
|
Additional
Paid-In
Capital
|
Accumulated
Other
Comprehensive
Loss
|
Retained
Earnings
|
Treasury Stock
|
Total Equity
|
|
|
|
|
Balance at June 30, 2018
|
791
|
|
385
|
|
|
$
|
8
|
|
$
|
1,023
|
|
$
|
(66
|
)
|
$
|
11,122
|
|
$
|
(9,237
|
)
|
$
|
2,850
|
|
|
|
Net income
|
|
|
|
|
|
|
227
|
|
|
227
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
(13
|
)
|
|
|
(13
|
)
|
|
|
Share-based compensation
|
|
|
|
|
18
|
|
|
|
|
18
|
|
|
|
Shares issued under stock plans
|
|
(1
|
)
|
|
|
4
|
|
|
|
12
|
|
16
|
|
|
|
Purchases of treasury stock
|
|
6
|
|
|
|
|
|
|
(437
|
)
|
(437
|
)
|
|
|
Balance at September 30, 2018
|
791
|
|
390
|
|
|
$
|
8
|
|
$
|
1,045
|
|
$
|
(79
|
)
|
$
|
11,349
|
|
$
|
(9,662
|
)
|
$
|
2,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiserv, Inc. Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, 2019
|
Number of Shares
|
|
Amount
|
|
|
(In millions)
|
Common Shares
|
Treasury Shares
|
|
Common Stock
|
Additional
Paid-In
Capital
|
Accumulated
Other
Comprehensive
Loss
|
Retained
Earnings
|
Treasury Stock
|
Noncontrolling Interests
|
Total Equity
|
|
|
|
|
Balance at December 31, 2018
|
791
|
|
399
|
|
|
$
|
8
|
|
$
|
1,057
|
|
$
|
(67
|
)
|
$
|
11,635
|
|
$
|
(10,340
|
)
|
$
|
—
|
|
$
|
2,293
|
|
|
|
Shares issued to acquire First Data (see Note 4)
|
|
(286
|
)
|
|
|
22,582
|
|
|
|
7,478
|
|
1,119
|
|
31,179
|
|
|
|
Distributions paid to noncontrolling interests
|
|
|
|
|
|
|
|
|
(51
|
)
|
(51
|
)
|
|
|
Net income (1)
|
|
|
|
|
|
|
646
|
|
|
23
|
|
669
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
(312
|
)
|
|
|
|
(312
|
)
|
|
|
Share-based compensation
|
|
|
|
|
121
|
|
|
|
|
|
121
|
|
|
|
Shares issued under stock plans
|
|
(4
|
)
|
|
|
(92
|
)
|
|
|
109
|
|
|
17
|
|
|
|
Purchases of treasury stock
|
|
2
|
|
|
|
|
|
|
(156
|
)
|
|
(156
|
)
|
|
|
Balance at September 30, 2019
|
791
|
|
111
|
|
|
$
|
8
|
|
$
|
23,668
|
|
$
|
(379
|
)
|
$
|
12,281
|
|
$
|
(2,909
|
)
|
$
|
1,091
|
|
$
|
33,760
|
|
|
|
|
|
(1)
|
The total net income presented in shareholders’ equity for the nine months ended September 30, 2019 is different than the amounts presented in the unaudited consolidated statement of income due to the net income attributable to the redeemable noncontrolling interest of $4 million not included in equity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiserv, Inc. Shareholders’ Equity
|
|
|
Nine Months Ended
September 30, 2018
|
Number of Shares
|
|
Amount
|
|
|
(In millions)
|
Common Shares
|
Treasury Shares
|
|
Common Stock
|
Additional
Paid-In
Capital
|
Accumulated
Other
Comprehensive
Loss
|
Retained
Earnings
|
Treasury Stock
|
Total Equity
|
|
|
|
|
Balance at December 31, 2017
|
791
|
|
376
|
|
|
$
|
8
|
|
$
|
1,031
|
|
$
|
(54
|
)
|
$
|
10,240
|
|
$
|
(8,494
|
)
|
$
|
2,731
|
|
|
|
Net income
|
|
|
|
|
|
|
901
|
|
|
901
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
(25
|
)
|
|
|
(25
|
)
|
|
|
Share-based compensation
|
|
|
|
|
54
|
|
|
|
|
54
|
|
|
|
Shares issued under stock plans
|
|
(3
|
)
|
|
|
(40
|
)
|
|
|
58
|
|
18
|
|
|
|
Purchases of treasury stock
|
|
17
|
|
|
|
|
|
|
(1,226
|
)
|
(1,226
|
)
|
|
|
Cumulative-effect adjustment of ASU 2014-09 adoption
|
|
|
|
|
|
|
208
|
|
|
208
|
|
|
|
Cumulative-effect adjustment of ASU 2017-12 adoption
|
|
|
|
|
|
3
|
|
(3
|
)
|
|
—
|
|
|
|
Cumulative-effect adjustment of ASU 2018-02 adoption
|
|
|
|
|
|
(3
|
)
|
3
|
|
|
—
|
|
|
|
Balance at September 30, 2018
|
791
|
|
390
|
|
|
$
|
8
|
|
$
|
1,045
|
|
$
|
(79
|
)
|
$
|
11,349
|
|
$
|
(9,662
|
)
|
$
|
2,661
|
|
17. Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss by component, net of income taxes, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
(In millions)
|
Cash Flow
Hedges
|
|
Foreign
Currency
Translation
|
|
Other
|
|
Total
|
|
Balance at June 30, 2019
|
$
|
(144
|
)
|
|
$
|
(47
|
)
|
|
$
|
(2
|
)
|
|
$
|
(193
|
)
|
|
Other comprehensive loss before reclassifications
|
(4
|
)
|
|
(186
|
)
|
|
—
|
|
|
(190
|
)
|
|
Amounts reclassified from accumulated other comprehensive loss
|
4
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
Net current-period other comprehensive loss
|
—
|
|
|
(186
|
)
|
|
—
|
|
|
(186
|
)
|
|
Balance at September 30, 2019
|
$
|
(144
|
)
|
|
$
|
(233
|
)
|
|
$
|
(2
|
)
|
|
$
|
(379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
(In millions)
|
Cash Flow
Hedges
|
|
Foreign
Currency
Translation
|
|
Other
|
|
Total
|
|
Balance at June 30, 2018
|
$
|
(20
|
)
|
|
$
|
(44
|
)
|
|
$
|
(2
|
)
|
|
$
|
(66
|
)
|
|
Other comprehensive loss before reclassifications
|
(6
|
)
|
|
(8
|
)
|
|
—
|
|
|
(14
|
)
|
|
Amounts reclassified from accumulated other comprehensive loss
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
Net current-period other comprehensive loss
|
(5
|
)
|
|
(8
|
)
|
|
—
|
|
|
(13
|
)
|
|
Balance at September 30, 2018
|
$
|
(25
|
)
|
|
$
|
(52
|
)
|
|
$
|
(2
|
)
|
|
$
|
(79
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
|
(In millions)
|
Cash Flow
Hedges
|
|
Foreign
Currency
Translation
|
|
Other
|
|
Total
|
|
Balance at December 31, 2018
|
$
|
(16
|
)
|
|
$
|
(49
|
)
|
|
$
|
(2
|
)
|
|
$
|
(67
|
)
|
|
Other comprehensive loss before reclassifications
|
(134
|
)
|
|
(184
|
)
|
|
—
|
|
|
(318
|
)
|
|
Amounts reclassified from accumulated other comprehensive loss
|
6
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
Net current-period other comprehensive loss
|
(128
|
)
|
|
(184
|
)
|
|
—
|
|
|
(312
|
)
|
|
Balance at September 30, 2019
|
$
|
(144
|
)
|
|
$
|
(233
|
)
|
|
$
|
(2
|
)
|
|
$
|
(379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
(In millions)
|
Cash Flow
Hedges
|
|
Foreign
Currency
Translation
|
|
Other
|
|
Total
|
|
Balance at December 31, 2017
|
$
|
(14
|
)
|
|
$
|
(38
|
)
|
|
$
|
(2
|
)
|
|
$
|
(54
|
)
|
|
Net current-period other comprehensive loss
|
(11
|
)
|
|
(14
|
)
|
|
—
|
|
|
(25
|
)
|
|
Cumulative-effect adjustment of ASU 2017-12 adoption from retained earnings
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
Cumulative-effect adjustment of ASU 2018-02 adoption to retained earnings
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
Balance at September 30, 2018
|
$
|
(25
|
)
|
|
$
|
(52
|
)
|
|
$
|
(2
|
)
|
|
$
|
(79
|
)
|
The Company has entered into foreign exchange forward contracts, which have been designated as cash flow hedges, to hedge foreign currency exposure to the Indian Rupee. As of September 30, 2019, the notional amount of these derivatives was $216 million, and the fair value totaling $4 million is reported in prepaid expenses and other current assets in the consolidated balance sheet. As of December 31, 2018, the notional amount of these derivatives was $202 million, and the fair value was nominal. Based on the amounts recorded in accumulated other comprehensive loss at September 30, 2019, the Company
estimates that it will recognize gains of approximately $3 million in cost of processing and services during the next twelve months as foreign exchange forward contracts settle.
In March 2019, the Company entered into treasury lock agreements (“Treasury Locks”), designated as cash flow hedges, in the aggregate notional amount of $5 billion to manage exposure to fluctuations in benchmark interest rates in anticipation of the issuance of fixed rate debt in connection with the refinancing of certain indebtedness of First Data and its subsidiaries. On June 24, 2019, concurrent with the issuance of U.S dollar-denominated senior notes (see Note 14), the Treasury Locks were settled resulting in a payment, included in cash flows from operating activities, of $183 million recorded in accumulated other comprehensive loss, net of income taxes, that will be amortized to earnings over the terms of the originally forecasted interest payments. Based on the amounts recorded in accumulated other comprehensive loss at September 30, 2019, the Company estimates that it will recognize approximately $21 million in interest expense, net during the next twelve months related to settled interest rate hedge contracts.
To reduce exposure to changes in the value of the Company’s net investments in certain of its foreign currency-denominated subsidiaries due to changes in foreign currency exchange rates, the Company uses its foreign currency-denominated debt as an economic hedge of its net investments in such foreign currency-denominated subsidiaries. In conjunction with the acquisition of First Data (see Note 4), the Company designated its Euro- and British Pound-denominated senior notes (see Note 14) as net investment hedges to hedge a portion of its net investment in certain subsidiaries whose functional currencies are the Euro and the British Pound. Accordingly, foreign currency transaction gains or losses on the qualifying net investment hedge instruments are recorded as foreign currency translation within other comprehensive loss in the consolidated statements of comprehensive income and will remain in accumulated other comprehensive loss on the consolidated balance sheet until the sale or complete liquidation of the underlying foreign subsidiaries. The Company recorded a foreign currency translation adjustment, net of tax, of $28 million during the three and nine months ended September 30, 2019 from the Euro- and British Pound-denominated senior notes.
18. Cash Flow Information
Supplemental cash flow information consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
(In millions)
|
2019
|
|
2018
|
|
Interest paid
|
$
|
149
|
|
|
$
|
98
|
|
|
Income taxes paid
|
155
|
|
|
203
|
|
|
Treasury stock purchases settled after the balance sheet date
|
10
|
|
|
20
|
|
19. Business Segment Information
The Company’s operations are comprised of the First Data segment, the Payments segment, and the Financial segment. Since the Company’s acquisition of First Data on July 29, 2019 (see Note 4), the chief operating decision maker of the Company has managed the operations of First Data as a separate business segment while evaluating its organizational structure and related integration plans, including the allocation of resources and the assessment of performance. The Company expects that it will realign its business segments in early 2020 when its new reporting structure and First Data integration plans are finalized.
The First Data segment provides a wide-range of solutions to merchants, including retail point-of-sale merchant transaction processing and acquiring, e-commerce services, mobile payment services, and the cloud-based CloverTM point-of-sale operating system. The businesses in this segment also provide technology solutions for bank and non-bank issuers and a wide range of value-added solutions complementing the merchant and issuer technology solutions.
The Payments segment primarily provides electronic bill payment and presentment services, internet and mobile banking software and services, account-to-account transfers, person-to-person payment services, debit and credit card processing and services, payments infrastructure services, and other electronic payments software and services. The businesses in this segment also provide card and print personalization services, investment account processing services for separately managed accounts, and fraud and risk management products and services.
The Financial segment provides financial institutions with account processing services, item processing and source capture services, loan origination and servicing products, cash management and consulting services, and other products and services that support numerous types of financial transactions.
Corporate and Other primarily consists of intercompany eliminations, amortization of acquisition-related intangible assets, unallocated corporate expenses of the combined company and other activities that are not considered when management evaluates segment performance, such as gains on sales of businesses and associated transition services.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
First Data
|
|
Payments
|
|
Financial
|
|
Corporate
and Other
|
|
Total
|
|
Three Months Ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
Processing and services revenue
|
$
|
1,279
|
|
|
$
|
754
|
|
|
$
|
562
|
|
|
$
|
13
|
|
|
$
|
2,608
|
|
|
Product revenue
|
335
|
|
|
172
|
|
|
34
|
|
|
(21
|
)
|
|
520
|
|
|
Total revenue
|
$
|
1,614
|
|
|
$
|
926
|
|
|
$
|
596
|
|
|
$
|
(8
|
)
|
|
$
|
3,128
|
|
|
Operating income
|
$
|
396
|
|
|
$
|
309
|
|
|
$
|
196
|
|
|
$
|
(527
|
)
|
|
$
|
374
|
|
|
Three Months Ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
Processing and services revenue
|
$
|
—
|
|
|
$
|
674
|
|
|
$
|
535
|
|
|
$
|
14
|
|
|
$
|
1,223
|
|
|
Product revenue
|
—
|
|
|
170
|
|
|
39
|
|
|
(20
|
)
|
|
189
|
|
|
Total revenue
|
$
|
—
|
|
|
$
|
844
|
|
|
$
|
574
|
|
|
$
|
(6
|
)
|
|
$
|
1,412
|
|
|
Operating income
|
$
|
—
|
|
|
$
|
267
|
|
|
$
|
187
|
|
|
$
|
(98
|
)
|
|
$
|
356
|
|
|
Nine Months Ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
Processing and services revenue
|
$
|
1,279
|
|
|
$
|
2,224
|
|
|
$
|
1,686
|
|
|
$
|
40
|
|
|
$
|
5,229
|
|
|
Product revenue
|
335
|
|
|
533
|
|
|
112
|
|
|
(67
|
)
|
|
913
|
|
|
Total revenue
|
$
|
1,614
|
|
|
$
|
2,757
|
|
|
$
|
1,798
|
|
|
$
|
(27
|
)
|
|
$
|
6,142
|
|
|
Operating income
|
$
|
396
|
|
|
$
|
899
|
|
|
$
|
598
|
|
|
$
|
(762
|
)
|
|
$
|
1,131
|
|
|
Nine Months Ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
Processing and services revenue
|
$
|
—
|
|
|
$
|
1,992
|
|
|
$
|
1,646
|
|
|
$
|
30
|
|
|
$
|
3,668
|
|
|
Product revenue
|
—
|
|
|
531
|
|
|
134
|
|
|
(61
|
)
|
|
604
|
|
|
Total revenue
|
$
|
—
|
|
|
$
|
2,523
|
|
|
$
|
1,780
|
|
|
$
|
(31
|
)
|
|
$
|
4,272
|
|
|
Operating income
|
$
|
—
|
|
|
$
|
807
|
|
|
$
|
590
|
|
|
$
|
(75
|
)
|
|
$
|
1,322
|
|
20. Employee Benefit Plans
Defined Contribution Plans
The Company and its subsidiaries maintain defined contribution savings plans covering substantially all employees. Under the plans, eligible participants may elect to contribute a specified percentage of their salaries and the Company makes matching contributions, each subject to certain limitations. In connection with the acquisition of First Data (see Note 4), the Company assumed defined contribution savings plans and defined contribution pension plans covering substantially all employees of the former First Data. The Plans provide tax-deferred amounts for each participant, consisting of employee elective contributions, company matching and discretionary company contributions. Contributions to the plans are expected to be approximately $66 million in 2019.
Defined Benefit Plans
In connection with the acquisition of First Data, the Company assumed noncontributory defined benefit pension plans covering a portion of the employees in the United Kingdom (U.K.), United States (U.S.), Germany and Austria. These frozen plans provide benefits to eligible employees based on an employee’s average final compensation and years of service.
Upon acquisition, the Company recognized the funded status of the assumed defined benefit pension plans, measured as the difference between the fair value of the plan assets and the projected benefit obligation, in the consolidated balance sheet as follows:
|
|
|
|
|
|
|
|
(In millions)
|
July 29, 2019
|
|
U.K. plan
|
|
|
Plan benefit obligations
|
$
|
(674
|
)
|
|
Fair value of plan assets
|
850
|
|
|
Net pension assets (1)
|
$
|
176
|
|
|
U.S. and other plans
|
|
|
Plan benefit obligations
|
$
|
(217
|
)
|
|
Fair value of plan assets
|
161
|
|
|
Net pension liabilities (2)
|
$
|
(56
|
)
|
|
Funded status of the plans
|
$
|
120
|
|
|
|
|
|
(1)
|
Pension assets are included in other long-term assets in the consolidated balance sheet
|
|
|
|
|
(2)
|
Pension liabilities are included in other long-term liabilities in the consolidated balance sheet
|
Plan Assets
The Company’s investment strategy for the U.S. plan employs a total return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. The investment portfolio contains a diversified blend of equity and fixed-income investments. The Company sets an allocation mix necessary to support the underlying plan liabilities as influenced significantly by the demographics of the participants and the frozen nature of the plan. The Company’s target allocation for the U.S. plan based on the investment policy as of September 30, 2019 was 50% equity securities and 50% debt securities. The Company’s investment strategy for the U.K. plan is to allocate the assets into two pools: (i) off-risk assets whereby the focus is risk management, protection, and insurance relative to the liability target invested in, but not limited to, debt, U.K. government bonds, and U.K. government index-linked bonds; and (ii) on-risk assets whereby the focus is on return generation and taking risk in a controlled manner. Such assets could include equities, government bonds, high-yield bonds, property, commodities, or hedge funds. The Company’s target allocation for the U.K. plan is 60% off-risk assets and 40% on-risk assets. As of July 29, 2019, total plan assets were comprised of approximately 15% of Level 1 securities, 85% of Level 2 securities, and a nominal amount of Level 3 securities. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements, and periodic asset and liability studies.
Projected Benefit Obligations
The Company records amounts relating to its defined benefit pension plan obligations and their associated expenses based on calculations which include actuarial assumptions, including the discount rate and the expected rate of return on plan assets. Changes in any of the assumptions and the amortization of differences between the assumptions and actual experience will affect the amount of pension expense in future periods. The Company reviews its actuarial assumptions at least annually and modifies the assumptions based on current rates and trends, as appropriate. The effects of modifications are recognized immediately on the consolidated balance sheet, and are generally amortized to operating income over future periods, with the deferred amount recorded in accumulated other comprehensive loss on the consolidated balance sheet. The Company’s funding policy is to contribute quarterly an amount as recommended by the plans’ independent actuaries. Contributions to the plans are expected to be approximately $1 million in 2019. The Company employs a building block approach in determining the expected long-term rate of return for plan assets with proper consideration of diversification and re-balancing. Historical markets are studied and long-term historical relationships between equities and fixed-income securities are preserved consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. Current market factors such as inflation and interest rates are evaluated before long-term capital market assumptions are determined. Peer data and historical returns are reviewed to check for reasonableness and appropriateness.
The weighted-average rate assumptions used in the measurement of the Company’s projected benefit obligations as of July 29, 2019 and net periodic benefit expense during the three and nine months ended September 30, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Projected Benefit Obligation
|
|
Net Periodic Benefit Expense
|
|
Discount rate
|
2.35
|
%
|
|
2.74
|
%
|
|
Expected long-term return on plan assets
|
n/a
|
|
|
2.79
|
%
|
The estimated future benefit payments are expected to be as follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
Year ended December 31,
|
|
|
|
2019
|
|
$
|
28
|
|
|
2020
|
|
30
|
|
|
2021
|
|
32
|
|
|
2022
|
|
34
|
|
|
2023
|
|
36
|
|
|
Thereafter
|
|
194
|
|
|
Total
|
|
$
|
354
|
|
The components of net periodic benefit expense were as follows:
|
|
|
|
|
|
|
|
(In millions)
|
Three and Nine Months Ended September 30, 2019
|
|
Service costs
|
$
|
1
|
|
|
Interest costs
|
3
|
|
|
Expected return on plan assets
|
(5
|
)
|
|
Net periodic benefit expense
|
$
|
(1
|
)
|
21. Related Party Transactions
Merchant Alliances
A significant portion of the Company’s business within the First Data segment is conducted through merchant alliances between the Company and financial institutions. To the extent the Company maintains a controlling financial interest in an alliance, the alliance’s financial statements are consolidated with those of the Company and the related processing fees are treated as an intercompany transaction and eliminated in consolidation. To the extent the Company has significant influence but not control in an alliance, the Company uses the equity method of accounting to account for its investment in the alliance. As a result, the Company’s consolidated revenues include processing fees, administrative service fees, and other fees charged to alliances accounted for under the equity method. Such fees totaled $31 million for both the three and nine months ended September 30, 2019. No directors or officers of the Company have ownership interests in any of the alliances. The formation of each of these alliances generally involves the Company and the bank contributing contractual merchant relationships to the alliance and a cash payment from one owner to the other to achieve the desired ownership percentage for each. The Company and the bank enter into a long-term processing service agreement as part of the negotiation process. This agreement governs the Company’s provision of transaction processing services to the alliance. As of September 30, 2019, the Company had approximately $35 million of amounts due from unconsolidated merchant alliances included within trade accounts receivable, net in the Company’s consolidated balance sheet.
In July 2019, the Company and Bank of America jointly announced the dissolution of the Banc of America Merchant Services joint venture (“BAMS”), to be effective June 2020. The Company owns 51% of BAMS and BAMS’ financial results are consolidated into the Company’s financial statements. Upon dissolution of the joint venture, the Company is entitled to receive a 51% share of the joint venture’s value via an agreed upon contractual process. In addition, Bank of America has the right to require the Company to continue providing merchant processing and related services to the joint venture clients allocated to Bank of America in the dissolution of the joint venture through June 2023 at current pricing. The Company anticipates an ongoing relationship with Bank of America to provide processing and other support services to other Bank of America merchant clients following the joint venture’s dissolution.
22. Redeemable Noncontrolling Interest
One of the Company’s noncontrolling interests assumed through the acquisition of First Data (see Note 4) is presented outside of equity and carried at its estimated redemption value as the agreement with the minority partner that owns 1% of the joint venture contains redemption features whereby interests held by the minority partner are redeemable either (i) at the option of the holder or (ii) upon the occurrence of an event that is not solely within the Company’s control. Specifically, under the terms of the agreement, either party may terminate for convenience any time after September 1, 2021 upon six months prior notice. In the event of termination for cause, as a result of a change in control, or for convenience after September 1, 2021, the Company must purchase the minority partner membership interests at a price equal to the fair market value of the minority interest’s portfolio multiplied by a percentage that varies between 28.5% and 30% depending upon the date of termination.
The following table presents a summary of the redeemable noncontrolling interest activity during the nine months ended September 30, 2019:
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Balance as of December 31, 2018
|
$
|
—
|
|
|
Acquired
|
88
|
|
|
Share of income
|
4
|
|
|
Balance as of September 30, 2019
|
$
|
92
|
|
23. Commitments and Contingencies
Litigation
In the normal course of business, the Company or its subsidiaries are named as defendants in lawsuits in which claims are asserted against the Company. In connection with the acquisition of First Data, the Company assumed certain legal proceedings, including without limitation merchant matters associated with alleged processing errors or disclosure issues and claims that one of the subsidiaries of First Data has violated a federal or state requirement regarding credit reporting or collection in connection with its check verification guarantee and collection activities or other claims arising from its merchant business. The various matters are not expected to be material to the financial statements.
Electronic Payments Transactions
In connection with the Company’s processing of electronic payments transactions, funds received from subscribers are invested from the time the Company collects the funds until payments are made to the applicable recipients. These subscriber funds are invested in short-term, highly liquid investments. Subscriber funds, which are not included in the Company’s consolidated balance sheets, can fluctuate significantly based on consumer bill payment and debit card activity and totaled approximately $1.2 billion at September 30, 2019.
Indemnifications and Warranties
Subject to limitations and exclusions, the Company may indemnify its clients from certain costs resulting from claims of patent, copyright or trademark infringement associated with its clients’ use of the Company’s products or services. The Company may also warrant to clients that its products and services will operate substantially in accordance with identified specifications. From time to time, in connection with sales of businesses, the Company agrees to indemnify the buyers of businesses for liabilities associated with the businesses that are sold. Payments, net of recoveries, under such indemnification or warranty provisions were not material to the Company’s consolidated results of operations or financial position.