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TABLE OF CONTENTS
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FIRST DATA CORPORATION INDEX TO FINANCIAL STATEMENTS
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-192767
PROSPECTUS
FIRST DATA CORPORATION
Offers to Exchange (the "Exchange Offers")
$785,000,000 aggregate principal amount of its 11.25% Senior Notes due 2021 (the "11.25% exchange notes"), $815,000,000 aggregate principal amount of its 10.625% Senior Notes due 2021 (the "10.625% exchange notes" and, together with the 11.25% exchange notes, the "senior exchange notes") and $2,475,000,000 aggregate principal amount of its 11.75% Senior Subordinated Notes due 2021 (the "senior subordinated exchange notes" and, together with the senior exchange notes, the "exchange notes"), each of which have been registered under the Securities Act of 1933, as amended (the "Securities Act"), for any and all of its outstanding unregistered 11.25% Senior Notes due 2021 (the "11.25% outstanding notes"), for any and all of its outstanding unregistered 10.625% Senior Notes due 2021 (the "10.625% outstanding notes" and, together with the 11.25% outstanding notes, the "senior outstanding notes") and for any and all of its outstanding unregistered 11.75% Senior Subordinated Notes due 2021 (the "outstanding senior subordinated notes" and, together with the senior outstanding notes, the "outstanding notes"), respectively.
We are conducting the exchange offers in order to provide you with an opportunity to exchange your unregistered outstanding notes for freely tradable notes that have been registered under the Securities Act.
The Exchange Offers
Results of the Exchange Offers
All untendered outstanding notes will continue to be subject to the restrictions on transfer set forth in the outstanding notes and in the applicable indenture. In general, the outstanding notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. Other than in connection with the exchange offers, we do not currently anticipate that we will register the outstanding notes under the Securities Act.
See "Risk Factors" beginning on page 12 for a discussion of certain risks that you should consider before participating in the applicable exchange offer.
Neither the Securities and Exchange Commission (the "SEC") nor any state securities commission has approved or disapproved of the exchange notes to be distributed in the exchange offers or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
The date of this prospectus is February 11, 2014.
You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. The prospectus may be used only for the purposes for which it has been published, and no person has been authorized to give any information not contained herein. If you receive any other information, you should not rely on it. We are not making an offer of these securities in any state where the offer is not permitted.
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A substantial portion of our business is conducted through "alliances" with banks and other institutions. Where we discuss the operations of our Retail and Alliance Services segment, such discussions include our alliances since they generally do not have their own operations (other than certain majority owned and equity method alliances) and are part of our core operations. Our alliance structures take on different forms, including consolidated subsidiaries, equity method investments and revenue sharing arrangements. Under the alliance program, we and a bank or other institution form a venture, either contractually or through a separate legal entity. Merchant contracts may be contributed to the venture by us and/or the bank or institution. The banks or other institutions generally provide card association sponsorship, clearing and settlement services. These institutions typically act as a merchant referral source when the institution has an existing banking or other relationship. We provide transaction processing and related functions. Both owners of these ventures may provide management, sales, marketing and other administrative services. The alliance structure allows us to be the processor for multiple financial institutions, any one of which may be selected by the merchant as their bank partner.
Unless the context requires otherwise, in this prospectus, "First Data," "FDC," the "Company," "we," "us" and "our" refer to First Data Corporation and its consolidated subsidiaries. References to the "notes" refer to the outstanding notes and the exchange notes.
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This summary highlights key aspects of the information contained elsewhere in this prospectus and may not contain all of the information you should consider before investing in the exchange notes. You should read this summary together with the entire prospectus, including the information presented under the heading "Risk Factors" and the information in the historical financial statements and related notes appearing elsewhere in this prospectus. For a more complete description of our business, see the "Business" section in this prospectus.
We are a global technology and payments processing leader, providing electronic commerce and payment solutions for merchants, financial institutions and card issuers worldwide. We process nearly 1,800 transactions every second, and serve approximately 6.2 million merchant locations, thousands of card issuers and millions of consumers in 34 countries. With a leading market position in each of our core businesses, we are well-positioned to capitalize on the continued shift from cash and checks to electronic payment transactions.
We have built long-standing relationships with merchants, financial institutions and card issuers globally through superior industry knowledge, product innovation and high-quality, reliable service. As a result, our revenues are highly diversified across customers, products, geography and distribution channels, with our largest single customer accounting for approximately 3% of our adjusted revenue in 2012. We also enter into alliances with banks and other institutions, increasing our broad geographic coverage and presence in various industries. The contracted and stable nature of our revenue base makes our business highly predictable. Our revenue is recurring in nature, as we typically initially enter into multi-year contracts with our merchant, financial institution and card issuer customers.
Our principal executive offices are located at 5565 Glenridge Connector, N.E., Suite 2000, Atlanta, Georgia 30342. The telephone number of our principal executive offices is (404) 890-2000. Our Internet address is http://www.firstdata.com. Information on our web site does not constitute part of this prospectus.
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On February 13, 2013, First Data issued in a private placement $785,000,000 aggregate principal amount of 11.25% outstanding notes. On April 10, 2013, First Data issued in a private placement $815,000,000 aggregate principal amount of 10.625% outstanding notes. On May 30, 2013, First Data issued in a private placement $750,000,000 aggregate principal amount of outstanding senior subordinated notes. On November 19, 2013 and January 6, 2014, First Data issued in private placements additional $1,000,000,000 aggregate principal amount and $725,000,000 aggregate principal amount, respectively, of outstanding senior subordinated notes. The term "notes" refers collectively to the outstanding notes and the exchange notes.
General |
In connection with the private placements of the outstanding notes, First Data and the guarantors of the outstanding notes entered into registration rights agreements pursuant to which we agreed, under certain circumstances, to use our reasonable best efforts to file a registration statement relating to an offer to exchange the applicable outstanding notes for the exchange notes and have it declared effective by the SEC within 360 days after the date of original issuance of the applicable outstanding notes. You are entitled to exchange in the applicable exchange offer your outstanding notes for the exchange notes which are identical in all material respects to the outstanding notes except: | |
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the exchange notes have been registered under the Securities Act; |
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the exchange notes are not entitled to any registration rights which are applicable to the outstanding notes under the registration rights agreements; and |
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the additional interest provisions of the registration rights agreements are not applicable. |
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The Exchange Offers |
First Data is offering to exchange: |
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$785,000,000 aggregate principal amount of its 11.25% exchange notes which have been registered under the Securities Act for any and all of its 11.25% outstanding notes; |
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$815,000,000 aggregate principal amount of its 10.625% exchange notes which have been registered under the Securities Act for any and all of its 10.625% outstanding notes; and |
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$2,475,000,000 aggregate principal amount of its senior subordinated exchange notes which have been registered under the Securities Act for any and all of its outstanding senior subordinated notes. |
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You may only exchange outstanding notes in minimum denominations of $2,000 and integral multiples of $1,000 in excess of $2,000. |
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Resale |
Based on an interpretation by the staff of the SEC set forth in no-action letters issued to third parties, we believe that the exchange notes issued pursuant to the exchange offers in exchange for the outstanding notes may be offered for resale, resold and otherwise transferred by you (unless you are our "affiliate" within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that: |
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you are acquiring the exchange notes in the ordinary course of your business; and |
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you have not engaged in, do not intend to engage in, and have no arrangement or understanding with any person to participate in, a distribution of the exchange notes. |
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If you are a broker-dealer and receive exchange notes for your own account in exchange for outstanding notes that you acquired as a result of market-making activities or other trading activities, you must acknowledge that you will deliver this prospectus in connection with any resale of the exchange notes. See "Plan of Distribution." |
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Any holder of outstanding notes who: |
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is our affiliate; |
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does not acquire exchange notes in the ordinary course of its business; or |
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tenders its outstanding notes in the exchange offers with the intention to participate, or for the purpose of participating, in a distribution of exchange notes |
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cannot rely on the position of the staff of the SEC enunciated in Morgan Stanley & Co. Incorporated (available June 5, 1991) and Exxon Capital Holdings Corporation (available May 13, 1988), as interpreted in Shearman & Sterling (available July 2, 1993), or similar no-action letters and, in the absence of an exemption therefrom, must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale of the exchange notes. |
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Expiration Date |
The exchange offers will expire at 11:59 p.m., New York City time, on March 11, 2014, unless extended by First Data. First Data currently does not intend to extend the expiration date. |
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Withdrawal |
You may withdraw the tender of your outstanding notes at any time prior to the expiration of the applicable exchange offer. First Data will return to you any of your outstanding notes that are not accepted for any reason for exchange, without expense to you, promptly after the expiration or termination of the applicable exchange offer. |
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Conditions to the Exchange Offers |
Each exchange offer is subject to customary conditions, which First Data may waive. See "The Exchange OffersConditions to the Exchange Offers." |
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Procedures for Tendering Outstanding Notes |
If you wish to participate in the exchange offers, you must complete, sign and date the accompanying letter of transmittal, or a facsimile of such letter of transmittal, according to the instructions contained in this prospectus and the letter of transmittal. You must then mail or otherwise deliver the letter of transmittal, or a facsimile of such letter of transmittal, together with your outstanding notes and any other required documents, to the exchange agent at the address set forth on the cover page of the letter of transmittal. |
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If you hold outstanding notes through The Depository Trust Company ("DTC") and wish to participate in the exchange offers, you must comply with the Automated Tender Offer Program procedures of DTC by which you will agree to be bound by the letter of transmittal. By signing, or agreeing to be bound by, the letter of transmittal, you will represent to us that, among other things: |
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you are not our "affiliate" within the meaning of Rule 405 under the Securities Act; |
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you do not have an arrangement or understanding with any person or entity to participate in the distribution of the exchange notes; |
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you are acquiring the exchange notes in the ordinary course of your business; and |
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if you are a broker-dealer that will receive exchange notes for your own account in exchange for outstanding notes that were acquired as a result of market-making activities, you will deliver a prospectus, as required by law, in connection with any resale of such exchange notes. |
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Special Procedures for Beneficial Owners |
If you are a beneficial owner of outstanding notes that are registered in the name of a broker, dealer, commercial bank, trust company or other nominee, and you wish to tender those outstanding notes in the exchange offer, you should contact the registered holder promptly and instruct the registered holder to tender those outstanding notes on your behalf. If you wish to tender on your own behalf, you must, prior to completing and executing the letter of transmittal and delivering your outstanding notes, either make appropriate arrangements to register ownership of the outstanding notes in your name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time and may not be able to be completed prior to the expiration date. |
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Guaranteed Delivery Procedures |
If you wish to tender your outstanding notes and your outstanding notes are not immediately available, or you cannot deliver your outstanding notes, the letter of transmittal or any other required documents, or you cannot comply with the procedures under DTC's Automated Tender Offer Program for transfer of book-entry interests prior to the expiration date, you must tender your outstanding notes according to the guaranteed delivery procedures set forth in this prospectus under "The Exchange OffersGuaranteed Delivery Procedures." |
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Effect on Holders of Outstanding Notes |
As a result of the making of, and upon acceptance for exchange of, all validly tendered outstanding notes pursuant to the terms of the exchange offers, First Data and the guarantors of the outstanding notes will have fulfilled a covenant under each registration rights agreement. Accordingly, there will be no increase in the interest rate on the outstanding notes under the circumstances described in the registration rights agreements. If you do not tender your outstanding notes in the exchange offers, you will continue to be entitled to all the rights and limitations applicable to the outstanding notes as set forth in the applicable indenture, except First Data and the guarantors of the outstanding notes will not have any further obligation to you to provide for the exchange and registration of untendered outstanding notes under the applicable registration rights agreement. To the extent that outstanding notes are tendered and accepted in the exchange offers, the trading market for outstanding notes that are not so tendered and accepted could be adversely affected. |
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Consequences of Failure to Exchange |
All untendered outstanding notes will continue to be subject to the restrictions on transfer set forth in the outstanding notes and in the applicable indenture. In general, the outstanding notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. Other than in connection with the exchange offers, First Data and the guarantors of the notes do not currently anticipate that we will register the outstanding notes under the Securities Act. |
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Certain United States Federal Income Tax Consequences |
The exchange of outstanding notes for exchange notes in the exchange offers will not constitute taxable events to holders for U.S. federal income tax purposes. See "Certain United States Federal Income Tax Consequences." |
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Use of Proceeds |
We will not receive any cash proceeds from the issuance of the exchange notes in the exchange offers. See "Use of Proceeds." |
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Exchange Agent |
Wells Fargo Bank, National Association, is the exchange agent for the exchange offers. The addresses and telephone numbers of the exchange agent are set forth in the section captioned "The Exchange OffersExchange Agent." |
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The summary below describes the principal terms of the exchange notes. Certain of the terms and conditions described below are subject to important limitations and exceptions. The "Description of 11.25% Exchange Notes," the "Description of 10.625% Exchange Notes" and the "Description of Senior Subordinated Exchange Notes" sections of this prospectus contain more detailed descriptions of the terms and conditions of the outstanding notes and exchange notes. The exchange notes will have terms identical in all material respects to the outstanding notes, except that the exchange notes will not contain terms with respect to transfer restrictions, registration rights and additional interest for failure to observe certain obligations in the applicable registration rights agreement.
Issuer |
First Data Corporation | |
Securities Offered |
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11.25% Exchange Notes |
$785,000,000 aggregate principal amount of 11.25% Senior Notes due 2021. |
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10.625% Exchange Notes |
$815,000,000 aggregate principal amount of 10.625% Senior Notes due 2021. |
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Senior Subordinated Exchange Notes |
$2,475,000,000 aggregate principal amount of 11.75% Senior Subordinated Notes due 2021. |
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Maturity Date |
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11.25% Exchange Notes |
January 15, 2021. |
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10.625% Exchange Notes |
June 15, 2021. |
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Senior Subordinated Exchange Notes |
August 15, 2021. |
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Interest Rate |
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11.25% Exchange Notes |
Interest on the 11.25% exchange notes will be payable in cash and will accrue at a rate of 11.25% per annum. |
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10.625% Exchange Notes |
Interest on the 10.625% exchange notes will be payable in cash and will accrue at a rate of 10.625% per annum. |
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Senior Subordinated Exchange Notes |
Interest on the senior subordinated exchange notes will be payable in cash and will accrue at a rate of 11.75% per annum. |
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Interest Payment Dates |
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11.25% Exchange Notes |
We will pay interest on the 11.25% exchange notes on May 15 and November 15. Interest began to accrue from the issue date of the notes. |
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10.625% Exchange Notes |
We will pay interest on the 10.625% exchange notes on February 15 and August 15. Interest began to accrue from the issue date of the notes. |
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Senior Subordinated Exchange Notes |
We will pay interest on the senior subordinated exchange notes on February 15 and August 15. Interest began to accrue from the issue date of the notes. |
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Optional Redemption |
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11.25% Exchange Notes |
We may redeem the 11.25% exchange notes, in whole or in part, at any time prior to January 15, 2016, at a price equal to 100% of the principal amount of the 11.25% exchange notes redeemed plus accrued and unpaid interest to the redemption date and a "make-whole premium," as described under "Description of 11.25% Exchange NotesOptional Redemption." |
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We may redeem the 11.25% exchange notes, in whole or in part, on or after January 15, 2016, at the redemption prices set forth under "Description of 11.25% Exchange NotesOptional Redemption." |
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Additionally, from time to time on or before January 15, 2016, we may choose to redeem up to 35% of the principal amount of the 11.25% exchange notes with the proceeds from one or more public equity offerings at the redemption prices set forth under "Description of 11.25% Exchange NotesOptional Redemption." |
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10.625% Exchange Notes |
We may redeem the 10.625% exchange notes, in whole or in part, at any time prior to April 15, 2016, at a price equal to 100% of the principal amount of the 10.625% exchange notes redeemed plus accrued and unpaid interest to the redemption date and a "make-whole premium," as described under "Description of 10.625% Exchange NotesOptional Redemption." |
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We may redeem the 10.625% exchange notes, in whole or in part, on or after April 15, 2016, at the redemption prices set forth under "Description of 10.625% Exchange NotesOptional Redemption." |
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Additionally, from time to time on or before April 15, 2016, we may choose to redeem up to 35% of the principal amount of the 10.625% exchange notes with the proceeds from one or more public equity offerings at the redemption prices set forth under "Description of 10.625% Exchange NotesOptional Redemption." |
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Senior Subordinated Exchange Notes |
We may redeem the senior subordinated exchange notes, in whole or in part, at any time prior to May 15, 2016, at a price equal to 100% of the principal amount of the senior subordinated exchange notes redeemed plus accrued and unpaid interest to the redemption date and a "make-whole premium," as described under "Description of Senior Subordinated Exchange NotesOptional Redemption." |
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We may redeem the senior subordinated exchange notes, in whole or in part, on or after May 15, 2016, at the redemption prices set forth under "Description of Senior Subordinated Exchange NotesOptional Redemption." |
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Additionally, from time to time on or before May 15, 2016, we may choose to redeem up to 35% of the principal amount of the senior subordinated exchange notes with the proceeds from one or more public equity offerings at the redemption prices set forth under "Description of Senior Subordinated Exchange NotesOptional Redemption." |
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Change of Control Offer |
Upon the occurrence of a change of control, you will have the right, as holders of the exchange notes, to require us to repurchase some or all of your exchange notes at 101% of their face amount, plus accrued and unpaid interest to the repurchase date. See "Description of 11.25% Exchange NotesRepurchase at the Option of HoldersChange of Control," "Description of 10.625% Exchange NotesRepurchase at the Option of HoldersChange of Control" and "Description of Senior Subordinated Exchange NotesRepurchase at the Option of HoldersChange of Control." |
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Asset Sale Proceeds Offer |
Upon the occurrence of a non-ordinary course asset sale, you may have the right, as holders of the exchange notes, to require us to repurchase some or all of your exchange notes at 100% of their face amount, plus accrued and unpaid interest to the repurchase date. See "Description of 11.25% Exchange NotesRepurchase at the Option of HoldersAsset Sales," "Description of 10.625% Exchange NotesRepurchase at the Option of HoldersAsset Sales" and "Description of Senior Subordinated Exchange NotesRepurchase at the Option of HoldersAsset Sales." |
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Certain Covenants |
The indentures governing the exchange notes contain covenants limiting our ability and the ability of our restricted subsidiaries to: |
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incur additional debt or issue certain preferred shares; |
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pay dividends on or make other distributions in respect of our capital stock or make other restricted payments; |
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make certain investments; |
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sell certain assets; |
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create liens on certain assets to secure debt; |
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consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; |
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enter into certain transactions with our affiliates; and |
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designate our subsidiaries as unrestricted subsidiaries. |
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These covenants are subject to a number of important limitations and exceptions. See "Description of 11.25% Exchange Notes," "Description of 10.625% Exchange Notes" and "Description of Senior Subordinated Exchange Notes." |
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No Prior Market |
The exchange notes will be freely transferable but will be new securities for which there will not initially be a market. Accordingly, we cannot assure you whether a market for the exchange notes will develop or as to the liquidity of any such market that may develop. |
You should consider carefully all of the information set forth in this prospectus prior to exchanging your outstanding notes. In particular, we urge you to consider carefully the factors set forth under the heading "Risk Factors."
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Ratio of Earnings to Fixed Charges
The following table sets forth the historical ratio of earnings to fixed charges for the periods presented:
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Nine months ended September 30, 2013 |
Year ended December 31, | |||||||||||||||||
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(in millions)
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2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||
Ratio of earnings to fixed charges(a)(b) |
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You should carefully consider the risk factors set forth below as well as the other information contained in this prospectus before deciding to tender your outstanding notes in the exchange offers. Any of the following risks could materially and adversely affect our business, financial condition, operating results or cash flow; however, the following risks are not the only risks facing us. Additional risks and uncertainties not currently known to us or those we currently view to be immaterial also may materially and adversely affect our business, financial condition or results of operations. In such a case, the trading price of the exchange notes could decline or we may not be able to make payments of interest and principal on the exchange notes, and you may lose all or part of your original investment.
Risks Related to the Exchange Offers
Your ability to transfer the exchange notes may be limited by the absence of an active trading market, and there is no assurance that any active trading market will develop for the exchange notes.
We do not intend to apply for a listing of the exchange notes on a securities exchange or on any automated dealer quotation system. There is currently no established market for the exchange notes, and we cannot assure you as to the liquidity of markets that may develop for the exchange notes, your ability to sell the exchange notes or the price at which you would be able to sell the exchange notes. If such markets were to exist, the exchange notes could trade at prices that may be lower than their principal amount or purchase price depending on many factors, including prevailing interest rates, the market for similar notes, our financial and operating performance and other factors. We cannot assure you that an active market for the exchange notes will develop or, if developed, that it will continue. Historically, the market for non-investment grade debt has been subject to disruptions that have caused substantial volatility in the prices of securities similar to the notes. The market, if any, for the exchange notes may experience similar disruptions and any such disruptions may adversely affect the prices at which you may sell your exchange notes.
Certain persons who participate in the Exchange Offers must deliver a prospectus in connection with resales of the exchange notes.
Based on interpretations of the staff of the SEC contained in Exxon Capital Holdings Corp., SEC no-action letter (April 13, 1988), Morgan Stanley & Co. Inc., SEC no-action letter (June 5, 1991) and Shearman & Sterling, SEC no-action letter (July 2, 1983), we believe that you may offer for resale, resell or otherwise transfer the exchange notes without compliance with the registration and prospectus delivery requirements of the Securities Act. However, in some instances described in this prospectus under "Plan of Distribution," certain holders of exchange notes will remain obligated to comply with the registration and prospectus delivery requirements of the Securities Act to transfer the exchange notes. If such a holder transfers any exchange notes without delivering a prospectus meeting the requirements of the Securities Act or without an applicable exemption from registration under the Securities Act, such a holder may incur liability under the Securities Act. We do not and will not assume, or indemnify such a holder against, this liability.
Risks Related to Our Indebtedness and Our Business
Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our debt obligations.
We are highly leveraged. As of September 30, 2013, we had $22.8 billion of total debt. Our high degree of leverage could have important consequences, including:
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Our senior secured revolving credit facility has $1,016.2 million in commitments that mature in September 2016. Commitments totaling $499.1 million matured on September 23, 2013. We may not be able to refinance our senior secured credit facilities or our other existing indebtedness because of our high levels of debt, debt incurrence restrictions under our debt agreements or because of adverse conditions in credit markets generally.
Despite our high indebtedness level, we and our subsidiaries still may be able to incur significant additional amounts of debt, which could further exacerbate the risks associated with our substantial indebtedness.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future. Although the credit agreement governing our senior secured credit facilities, the indenture governing the notes offered hereby, our existing senior secured notes, our existing senior unsecured notes, our existing senior subordinated notes and the senior PIK notes of First Data Holdings Inc. ("Holdings") contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and under certain circumstances, the amount of indebtedness that could be incurred in compliance with these restrictions could be substantial. If new debt is added to our and our subsidiaries' existing debt levels, the related risks that we will face would increase.
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The ability to adopt technology to changing industry and customer needs or trends may affect our competitiveness or demand for our products, which may adversely affect our operating results.
Changes in technology may limit the competitiveness of, and demand for, our services. Our businesses operate in industries that are subject to technological advancements, developing industry standards and changing customer needs and preferences. Also, our customers continue to adopt new technology for business and personal uses. We must anticipate and respond to these industry and customer changes in order to remain competitive within our relative markets. For example, the ability to adopt technological advancements surrounding POS technology available to merchants could have an impact on our International and Retail and Alliance Services businesses. Our inability to respond to new competitors and technological advancements could impact all of our businesses.
Material breaches in security of our systems may have a significant effect on our business.
The uninterrupted operation of our information systems and the confidentiality of the customer/consumer information that resides on such systems are critical to the successful operations of our business. We have security, backup and recovery systems in place, as well as a business continuity plan to ensure the system will not be inoperable. We also have what we deem sufficient security around the system to prevent unauthorized access to the system. However, our visibility in the global payments industry may attract hackers to conduct attacks on our systems that could compromise the security of our data. An information breach in the system and loss of confidential information such as credit card numbers and related information could have a longer and more significant impact on the business operations than a hardware failure. The loss of confidential information could result in losing the customers' confidence and thus the loss of their business, as well as imposition of fines and damages.
Global economics, political and other conditions may adversely affect trends in consumer spending, which may adversely impact our revenue and profitability.
The global electronic payments industry depends heavily upon the overall level of consumer, business and government spending. A sustained deterioration in general economic conditions, particularly in the United States or Europe, or increases in interest rates in key countries in which we operate, may adversely affect our financial performance by reducing the number or average purchase amount of transactions involving payment cards. A reduction in the amount of consumer spending could result in a decrease of our revenue and profits.
A weakening in the economy could also force some retailers to close, resulting in exposure to potential credit losses and transaction declines and our earning less on transactions due also to a potential shift to large discount merchants. Additionally, credit card issuers may reduce credit limits and be more selective with regard to whom they issue credit cards. Changes in economic conditions could adversely impact future revenues and our profits and result in a downgrade of our debt ratings, which may lead to termination or modification of certain contracts and make it more difficult for us to obtain new business.
Our debt agreements contain restrictions that limit our flexibility in operating our business.
The indentures governing our senior secured notes, our senior unsecured notes, our senior subordinated notes, the senior PIK notes of Holdings and the credit agreement governing our senior secured credit facilities contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit our and our restricted subsidiaries' ability to, among other things:
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A breach of any of these covenants could result in a default under one or more of these agreements, including as a result of cross default provisions and, in the case of the revolving credit facilities, permit the lenders to cease making loans to us. Upon the occurrence of an event of default under our senior secured credit facilities, the lenders could elect to declare all amounts outstanding under our senior secured credit facilities to be immediately due and payable and terminate all commitments to extend further credit. Such actions by those lenders could cause cross defaults under our other indebtedness. If we were unable to repay those amounts, the lenders under our senior secured credit facilities could proceed against the collateral securing those facilities. We have pledged a significant portion of our assets as collateral under our senior secured credit facilities. If the lenders under the senior secured credit facilities accelerate the repayment of borrowings, we may not have sufficient assets to repay our senior secured credit facilities, our senior secured notes, our second lien notes, our senior unsecured notes and our senior subordinated notes.
Changes in card association and debit network fees or products could increase costs or otherwise limit our operations.
From time to time, card associations and debit networks increase the organization and/or processing fees (known as interchange fees) that they charge. It is possible that competitive pressures will result in our absorbing a portion of such increases in the future, which would increase our operating costs, reduce our profit margin and adversely affect our business, operating results and financial condition. Furthermore, the rules and regulations of the various card associations and networks prescribe certain capital requirements. Any increase in the capital level required would further limit our use of capital for other purposes.
We depend, in part, on our merchant relationships and alliances to grow our Retail and Alliance Services business. If we are unable to maintain these relationships and alliances, our business may be adversely affected.
Growth in our Retail and Alliance Services business is derived primarily from acquiring new merchant relationships, new and enhanced product and service offerings, cross selling products and services into existing relationships, the shift of consumer spending to increased usage of electronic forms of payment and the strength of our alliance partnerships with banks and financial institutions and other third parties. A substantial portion of our business is conducted through "alliances" with banks and other institutions. Our alliance structures take on different forms, including consolidated subsidiaries, equity method investments and revenue sharing arrangements. Under the alliance program, we and a bank or other institution form an alliance, either contractually or through a separate legal entity. Merchant contracts may be contributed to the alliance by us and/or the bank or institution. The banks and other institutions generally provide card association sponsorship, clearing and settlement services. These institutions typically act as a merchant referral source when the institution has an existing banking or other relationship. We provide transaction processing and related functions. Both alliance partners may provide management, sales, marketing and other administrative services. The alliance structure allows us to be the processor for multiple financial institutions, any one of which may be selected by the merchant as their bank partner. We rely on the continuing growth of our merchant
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relationships, alliances and other distribution channels. There can be no guarantee that this growth will continue. The loss of merchant relationships or alliance and financial institution partners could negatively impact our business and result in a reduction of our revenue and profit.
We may experience breakdowns in our processing systems that could damage customer relations and expose us to liability.
We depend heavily on the reliability of our processing systems in our core businesses. A system outage or data loss could have a material adverse effect on our business, financial condition and results of operations. Not only would we suffer damage to our reputation in the event of a system outage or data loss, but we may also be liable to third parties. Many of our contractual agreements with financial institutions require the payment of penalties if our systems do not meet certain operating standards. To successfully operate our business, we must be able to protect our processing and other systems from interruption, including from events that may be beyond our control. Events that could cause system interruptions include, but are not limited to, fire, natural disaster, unauthorized entry, power loss, telecommunications failure, computer viruses, terrorist acts and war. Although we have taken steps to protect against data loss and system failures, there is still risk that we may lose critical data or experience system failures. We perform the vast majority of disaster recovery operations ourselves, though we utilize select third parties for some aspects of recovery, particularly internationally. To the extent we outsource our disaster recovery, we are at risk of the vendor's unresponsiveness in the event of breakdowns in our systems. Furthermore, our property and business interruption insurance may not be adequate to compensate us for all losses or failures that may occur.
We may experience software defects, computer viruses and development delays, which could damage customer relations, decrease our potential profitability and expose us to liability.
Our products are based on sophisticated software and computing systems that often encounter development delays, and the underlying software may contain undetected errors, viruses or defects. Defects in our software products and errors or delays in our processing of electronic transactions could result in:
In addition, we rely on technologies supplied to us by third parties that may also contain undetected errors, viruses or defects that could have a material adverse effect on our business, financial condition and results of operations. Although we attempt to limit our potential liability for warranty claims through disclaimers in our software documentation and limitation-of-liability provisions in our license and customer agreements, we cannot assure that these measures will be successful in limiting our liability.
Acquisitions and integrating such acquisitions create certain risks and may affect our operating results.
We have been an active business acquirer both in the United States and internationally, and may continue to be active in the future. The acquisition and integration of businesses involves a number of risks. The core risks are in the areas of valuation (negotiating a fair price for the business based on inherently limited diligence) and integration (managing the complex process of integrating the acquired
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company's people, products, technology and other assets so as to realize the projected value of the acquired company and the synergies projected to be realized in connection with the acquisition).
In addition, international acquisitions often involve additional or increased risks including, for example:
The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of one or more of our combined businesses and the possible loss of key personnel. The diversion of management's attention and any delays or difficulties encountered in connection with acquisitions and the integration of the two companies' operations could have an adverse effect on our business, results of operations, financial condition or prospects.
We rely on various financial institutions to provide clearing services in connection with our settlement activities. If we are unable to maintain clearing services with these financial institutions and are unable to find a replacement, our business may be adversely affected.
We rely on various financial institutions to provide clearing services in connection with our settlement activities. If such financial institutions should stop providing clearing services, we must find other financial institutions to provide those services. If we are unable to find a replacement financial institution, we may no longer be able to provide processing services to certain customers, which could negatively impact our revenue and earnings.
Changes in laws, regulations and enforcement activities may adversely affect the products, services and markets in which we operate.
We and our customers are subject to laws and regulations that affect the electronic payments industry in the many countries in which our services are used. In particular, our customers are subject to numerous laws and regulations applicable to banks, financial institutions and card issuers in the United States and abroad, and, consequently, we are at times affected by these federal, state and local laws and regulations. The U.S. Congress and governmental agencies have increased their scrutiny of a number of credit card practices, from which some of our customers derive significant revenue. Regulation of the payments industry, including regulations applicable to us and our customers, has increased significantly in recent years. Our failure to comply with laws and regulations applicable to our business may result in the suspension or revocation of our licenses or registrations, the limitation, suspension or termination of our services, and/or the imposition of consent orders or civil and criminal penalties, including fines which could have an adverse effect on our results of operation and financial condition. We are subject to U.S. and international financial services regulations, a myriad of consumer protection laws, economic sanctions laws and regulations and anti-corruption laws, escheat regulations and privacy and information security regulations to name only a few. Changes to legal rules and regulations, or interpretation or enforcement thereof, could have a negative financial effect on us. In particular, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the
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"Dodd-Frank Act"), which was signed into law in July 2010, significantly changes the U.S. financial regulatory system, including creating a new independent agency funded by the Federal Reserve Board, the Consumer Financial Protection Bureau ("CFPB"), to regulate consumer financial products and services (including many offered by our customers), restricting debit card fees paid by merchants to issuer banks and allowing merchants to offer discounts for different payment methods. On June 29, 2011, the Federal Reserve Board (the "FRB") announced final rules governing debit card interchange fees, and routing and exclusivity restrictions as well as a proposed rule governing the fraud prevention adjustment in response to the Dodd Frank Act. On July 31, 2013, the United States District Court for the District of Columbia instructed the FRB to vacate the interchange fee and network exclusivity restrictions and develop new rules in compliance with the Dodd Frank Act. The FRB has appealed that decision, the district court has stayed its ruling pending appeal, and the rules remain in effect pending appeal. Within our Retail and Alliance Services segment, we experienced some transitory benefit under the original rules due mostly to lower debit interchange rates, however, the overall impact of the Dodd Frank Act on us is difficult to estimate until the interchange fee and network exclusivity restrictions are settled through the federal appeals process and the market and regulators have time to react and adjust to any potential new regulations that could be required as an outcome of the judicial process. Separately, additional regulations have been proposed and developed by the newly created CFPB, with respect to consumer financial products and services that impact us and our customers. Pursuant to final rules published by the CFPB in the areas of check verification and consumer debt collection, two of the Company's subsidiaries, TeleCheck Services Inc. and TRS Recovery Services, Inc., are subject to CFPB oversight, supervision and examination. As a result of the Dodd Frank Act, the CFPB was given jurisdictional authority to regulate, supervise, and examine consumer prepaid products and services. We have a business focused on the development and delivery of prepaid solutions for customers, but it is unclear how or whether the CFPB will develop a regulatory regime that impacts these solutions. Each of the proposed or potential regulations may adversely affect our business or operations, directly or indirectly (if, for example, our customers' business and operations are adversely affected). In addition, an inadvertent failure by us to comply with laws and regulations, as well as rapidly evolving social expectations of corporate fairness, could damage our reputation or brands. Furthermore, we are subject to tax laws in each jurisdiction where we do business. Changes in tax laws or their interpretations could decrease the value of revenues we receive, the value of tax loss carryforwards and tax credits recorded on our balance sheet and the amount of our cash flow and have a material adverse impact on our business.
Future consolidation of client financial institutions or other client groups may adversely affect our financial condition.
We have experienced the negative impact of the substantial bank industry consolidation in recent years. Bank industry consolidation impacts existing and potential clients in our service areas, primarily in Financial Services and Retail and Alliance Services. Our alliance strategy could be negatively impacted as a result of consolidations, especially where the banks involved are committed to their internal merchant processing businesses that compete with us. Bank consolidation has led to an increasingly concentrated client base in the industry, resulting in a changing client mix for Financial Services as well as increased price compression. Further consolidation in the bank industry or other client base could have a negative impact on us.
We are subject to the credit risk that our merchants will be unable to satisfy obligations for which we may also be liable.
We are subject to the credit risk of our merchants being unable to satisfy obligations for which we also may be liable. For example, we and our merchant acquiring alliances are contingently liable for transactions originally acquired by us that are disputed by the cardholder and charged back to the merchants. If we or the alliance are unable to collect this amount from the merchant, due to the
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merchant's insolvency or other reasons, we or the alliance will bear the loss for the amount of the refund paid to the cardholder. We have an active program to manage our credit risk and often mitigate our risk by obtaining collateral. Notwithstanding our program for managing our credit risk, it is possible that a default on such obligations by one or more of our merchants could have a material adverse effect on our business.
Changes in credit card association or other network rules or standards could adversely affect our business.
In order to provide our transaction processing services, several of our subsidiaries are registered with Visa and MasterCard and other networks as members or service providers for member institutions. As such, we and many of our customers are subject to card association and network rules that could subject us or our customers to a variety of fines or penalties that may be levied by the card associations or networks for certain acts or omissions by us, acquirer customers, processing customers and merchants. Visa, MasterCard and other networks, some of which are our competitors, set the standards with respect to which we must comply. The termination of our member registration or our status as a certified service provider, or any changes in card association or other network rules or standards, including interpretation and implementation of the rules or standards, that increase the cost of doing business or limit our ability to provide transaction processing services to or through our customers, could have an adverse effect on our business, results of operations and financial condition.
Our business may be adversely affected by risks associated with foreign operations.
We are subject to risks related to the changes in currency rates as a result of our investments in foreign operations and from revenues generated in currencies other than the U.S. dollar. Revenue and profit generated by international operations will increase or decrease compared to prior periods as a result of changes in foreign currency exchange rates. From time to time, we utilize foreign currency forward contracts or other derivative instruments to mitigate the cash flow or market value risks associated with foreign currency denominated transactions. However, these hedge contracts may not eliminate all of the risks related to foreign currency translation. Furthermore, we are subject to exchange control regulations that restrict the conversion of our revenue and assets denominated in Argentine pesos into U.S. dollars. Those regulations may become more restrictive in the future. Similar regulations also may be adopted in other jurisdictions that restrict or prohibit the conversion of the Company's other foreign currencies into U.S. dollars. The occurrence of any of these factors could decrease the value of revenues and earnings we derive from our international operations and have a material adverse impact on our business.
Increases in interest rates may negatively impact our operating results and financial condition.
Certain of our borrowings, including borrowings under our senior secured credit facilities, to the extent the interest rate is not fixed by an interest rate swap, are at variable rates of interest. An increase in interest rates would have a negative impact on our results of operations by causing an increase in interest expense.
As of September 30, 2013, we had $8.3 billion aggregate principal amount of variable rate long-term indebtedness, of which interest rate swaps fix the interest rate on $5.0 billion in notional amount. We also had a $750.0 million fixed to floating swap to preserve the ratio of fixed and floating rate debt that we had prior to the April 2011 debt modification and amendment. As a result, as of September 30, 2013, the impact of a 100 basis point increase in interest rates would increase our annual interest expense by approximately $41 million. See the discussion of our interest rate swap transactions in Notes 6 and 11 to our Audited and Unaudited Consolidated Financial Statements, included elsewhere in this prospectus.
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Failure to protect our intellectual property rights and defend ourselves from potential patent infringement claims may diminish our competitive advantages or restrict us from delivering our services.
Our trademarks, patents and other intellectual property are important to our future success. The FIRST DATA trademark and trade name and the STAR trademark and trade name are intellectual property rights which are individually material to us. These trademarks and trade names are widely recognized and associated with quality and reliable service. Loss of the proprietary use of the FIRST DATA or STAR trademarks and trade names or a diminution in the perceived quality associated with them could harm the growth of our businesses. We also rely on proprietary technology. It is possible that others will independently develop the same or similar technology. Assurance of protecting our trade secrets, know-how or other proprietary information cannot be guaranteed. Our patents could be challenged, invalidated or circumvented by others and may not be of sufficient scope or strength to provide us with any meaningful protection or advantage. If we were unable to maintain the proprietary nature of our technologies, we could lose competitive advantages and be materially adversely affected. The laws of certain foreign countries in which we do business or contemplate doing business in the future do not recognize intellectual property rights or protect them to the same extent as do the laws of the United States. Adverse determinations in judicial or administrative proceedings could prevent us from selling our services or prevent us from preventing others from selling competing services, and thereby may have a material adverse effect on our business and results of operations. Additionally, claims have been made, are currently pending, and other claims may be made in the future, with regard to our technology allegedly infringing on a patent or other intellectual property rights. Unfavorable resolution of these claims could either result in our being restricted from delivering the related product or service or result in a settlement that could be materially adverse to us.
We are the subject of various legal proceedings which could have a material adverse effect on our revenue and profitability.
We are involved in various litigation matters. We are also involved in or are the subject of governmental or regulatory agency inquiries or investigations and make voluntary self disclosures to government or regulatory agencies from time to time. If we are unsuccessful in our defense of those litigation matters or any other legal proceeding, we may be forced to pay damages or fines, enter into consent decrees and/or change our business practices, any of which could have a material adverse effect on our revenue and profitability.
The ability to recruit, retain and develop qualified personnel is critical to our success and growth.
All of our businesses function at the intersection of rapidly changing technological, social, economic and regulatory developments that require a wide ranging set of expertise and intellectual capital. For us to successfully compete and grow, we must retain, recruit and develop the necessary personnel who can provide the needed expertise across the entire spectrum of our intellectual capital needs. In addition, we must develop our personnel to provide succession plans capable of maintaining continuity in the midst of the inevitable unpredictability of human capital. However, the market for qualified personnel is competitive and we may not succeed in recruiting additional personnel or may fail to effectively replace current personnel who depart with qualified or effective successors. Our effort to retain and develop personnel may also result in significant additional expenses, which could adversely affect our profitability. We cannot assure you that key personnel, including executive officers, will continue to be employed or that we will be able to attract and retain qualified personnel in the future. Failure to retain or attract key personnel could have a material adverse effect on us.
Failure to comply with state and federal antitrust requirements could adversely affect our business.
Through our merchant alliances, we hold an ownership interest in several competing merchant acquiring businesses while serving as the electronic processor for those businesses. In order to satisfy
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state and federal antitrust requirements, we actively maintain an antitrust compliance program. Notwithstanding our compliance program, it is possible that perceived or actual violation of state or federal antitrust requirements could give rise to regulatory enforcement investigations or actions. Regulatory scrutiny of, or regulatory enforcement action in connection with, compliance with state and federal antitrust requirements could have a material adverse effect on our reputation and business.
The market for our electronic commerce services is evolving and may not continue to develop or grow rapidly enough for us to maintain and increase our profitability.
If the number of electronic commerce transactions does not continue to grow or if consumers or businesses do not continue to adopt our services, it could have a material adverse effect on the profitability of our business, results of operations and financial condition. We believe future growth in the electronic commerce market will be driven by the cost, ease-of-use and quality of products and services offered to consumers and businesses. In order to consistently increase and maintain our profitability, consumers and businesses must continue to adopt our services.
Unfavorable resolution of tax contingencies could adversely affect our tax expense.
Our tax returns and positions are subject to review and audit by federal, state, local and international taxing authorities. An unfavorable outcome to a tax audit could result in higher tax expense, thereby negatively impacting our results of operations. We have established contingency reserves for material, known tax exposures relating to deductions, transactions and other matters involving some uncertainty as to the proper tax treatment of the item. These reserves reflect what we believe to be reasonable assumptions as to the likely final resolution of each issue if raised by a taxing authority. While we believe that the reserves are adequate to cover reasonably expected tax risks, there is no assurance that, in all instances, an issue raised by a tax authority will be finally resolved at a financial cost not in excess of any related reserve. An unfavorable resolution, therefore, could negatively impact our effective tax rate, financial position, results of operations and cash flows in the current and/or future periods.
The periodic reporting requirements of the SEC will automatically terminate after the year in which any registration statement we file with the SEC is declared effective if we continue to have less than 300 shareholders. We may continue filing with the SEC as a voluntary filer but the information provided in our periodic reports will be subject to limited regulatory oversight which may adversely impact our ability to provide accurate and complete financial reports. In addition, we could discontinue filing with the SEC.
Even if we file a registration statement that is declared effective during the year and we become subject to the periodic reporting requirements of the SEC, any of our periodic reporting responsibilities will automatically terminate in the event that we have less than 300 shareholders after the year in which any registration statement that we file with the SEC becomes effective. We would still be required to provide certain information, including financial information, about our company to holders of our indebtedness pursuant to the agreements governing such indebtedness but could discontinue filing periodic reports with the SEC or continue as a voluntary filer with the SEC. If we discontinued filing with the SEC or continued as a voluntary filer, our periodic reports will be subject to less oversight and regulatory scrutiny than those subject to the periodic reporting requirements of the SEC which may adversely impact our ability to provide accurate and complete financial reports.
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Risks Related to the Exchange Notes
We may not be able to generate sufficient cash to service all of our indebtedness, including the notes, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness, including the notes.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness, including the notes. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments and the indenture governing the notes may restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.
Your right to receive payments on the senior subordinated exchange notes will be junior to the rights of the lenders under our senior secured credit facilities and all of our other senior debt (including the existing senior notes and the senior exchange notes) and any of our future senior indebtedness.
The senior subordinated exchange notes will be general unsecured senior subordinated obligations that will rank junior in right or payment to all of our existing and future senior indebtedness. We may not pay principal, premium, if any, interest or other amounts on account of the senior subordinated exchange notes in the event of a payment default or certain other defaults in respect of certain of our senior indebtedness, including the existing senior notes and the senior exchange notes and borrowings under our senior secured credit facilities, unless the senior indebtedness has been paid in full or the default has been cured or waived. In addition, in the event of certain other defaults with respect to certain of our senior indebtedness, we may not be permitted to pay any amount on account of the senior subordinated exchange notes for a designated period of time.
Because of the subordination provisions in the indenture governing the senior subordinated exchange notes, in the event of our bankruptcy, liquidation or dissolution, our assets will not be available to pay obligations under the senior subordinated exchange notes until we have made all payments in cash on our senior indebtedness. See "Description of Senior Subordinated Exchange Notes." Sufficient assets may not remain after all these payments have been made to make any payments on the senior subordinated exchange notes, including payments of principal or interest when due. See "Description of Other Indebtedness" for a description of the outstanding indebtedness that will rank senior to the senior subordinated exchange notes.
Claims of holders will be structurally subordinated to claims of creditors of our subsidiaries that do not guarantee the notes.
The notes will not be guaranteed by any of our foreign subsidiaries or certain other subsidiaries, including Integrated Payment Systems Inc. Accordingly, claims of holders of the notes will be structurally subordinated to the claims of creditors of these non-guarantor subsidiaries, including trade creditors. All obligations of these subsidiaries will have to be satisfied before any of the assets of such
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subsidiaries would be available for distribution, upon a liquidation or otherwise, to us or creditors of us, including the holders of the notes.
Repayment of our debt, including the notes, is dependent on cash flow generated by our subsidiaries.
Our subsidiaries own a significant portion of our assets and conduct a significant portion of our operations. Accordingly, repayment of our indebtedness, including the notes, is dependent, to a significant extent, on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Unless they are subsidiary guarantors of the notes, our subsidiaries do not have any obligation to pay amounts due on the notes or to make funds available for that purpose. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness, including the notes offered hereby. Each subsidiary is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. While the indenture governing the notes offered hereby will limit the ability of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make other intercompany payments to us, these limitations are subject to certain qualifications and exceptions. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness, including the notes offered hereby.
If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the notes.
Any default under the agreements governing our indebtedness, including a default under the credit agreement governing our senior secured credit facilities or the indentures governing our existing senior secured notes, our existing senior unsecured notes and our existing senior subordinated notes, that is not waived by the required holders of such indebtedness, and the remedies sought by the holders of such indebtedness, could prevent us from paying principal, premium, if any, and interest on the notes and substantially decrease the market value of the notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default,
If our operating performance declines, we may in the future need to obtain waivers from the required lenders under our senior secured credit facilities to avoid being in default. If we breach our covenants under our senior secured credit facilities and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under our senior secured credit facilities or the agreements governing our new unsecured debt, the lenders could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation.
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We may not be able to repurchase the notes upon a change of control.
Upon the occurrence of specific kinds of change of control events, we will be required to offer to repurchase all outstanding notes at 101% of their principal amount plus accrued and unpaid interest. The source of funds for any such purchase of the notes will be our available cash or cash generated from our subsidiaries' operations or other sources, including borrowings, sales of assets or sales of equity. We may not be able to repurchase the notes upon a change of control because we may not have sufficient financial resources to purchase all of the notes that are tendered upon a change of control. Further, we will be contractually restricted under the terms of our senior secured credit facilities from repurchasing all of the notes tendered by holders upon a change of control. Accordingly, we may not be able to satisfy our obligations to purchase the notes unless we are able to refinance or obtain waivers under our senior secured credit facilities. Our failure to repurchase the notes upon a change of control would cause a default under the indenture governing the notes offered hereby and a cross default under the credit agreement governing our senior secured credit facilities and, if any such debt becomes due and payable as a result of such default, under the indentures governing our existing senior secured notes, our existing senior unsecured notes and our existing senior subordinated notes. The credit agreement governing our senior secured credit facilities also provide that a change of control will be a default that permits lenders to accelerate the maturity of borrowings thereunder. The indentures governing our existing senior secured notes, our existing senior unsecured notes and our existing senior subordinated notes also require us to offer to repurchase those notes upon certain kinds of change of control events. Any of our future debt agreements may contain similar provisions.
We may enter into transactions that would not constitute a change of control that could affect our ability to satisfy our obligations under the notes.
Legal uncertainty regarding what constitutes a change of control and the provisions of the indenture governing the notes offered hereby may allow us to enter into transactions, such as acquisitions, refinancing or recapitalizations, that would not constitute a change of control but may increase our outstanding indebtedness or otherwise affect our ability to satisfy our obligations under the notes. The definition of change of control for purposes of the notes includes a phrase relating to the transfer of "all or substantially all" of our assets taken as a whole. Although there is a limited body of case law interpreting the phrase "substantially all," there is no precise established definition of the phrase under applicable law. Accordingly, your ability to require the Issuer to repurchase the notes as a result of a transfer of less than all of our assets to another person may be uncertain.
Federal and state fraudulent transfer laws may permit a court to void the notes and the guarantees in respect thereof, subordinate claims in respect of the notes and the guarantees in respect thereof and require holders to return payments received and, if that occurs, you may not receive any payments on the notes.
Federal and state fraudulent transfer and conveyance statutes may apply to the issuance of the notes and the incurrence of any guarantees of the notes, including the guarantee by the guarantors entered into upon issuance of the notes and subsidiary guarantees (if any) that may be entered into thereafter under the terms of the indenture governing the notes. Under federal bankruptcy law and comparable provisions of state fraudulent transfer or conveyance laws, which may vary from state to state, the notes or guarantees could be voided as a fraudulent transfer or conveyance if (1) we or any of the guarantors, as applicable, issued the notes or incurred the guarantees with the intent of hindering, delaying or defrauding creditors or (2) we or any of the guarantors, as applicable, received less than reasonably equivalent value or fair consideration in return for either issuing the notes or incurring the guarantees and, in the case of (2) only, one of the following is also true at the time thereof:
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A court would likely find that we or a guarantor did not receive reasonably equivalent value or fair consideration for the notes or such guarantee if we or such guarantor did not substantially benefit directly or indirectly from the issuance of the notes or the applicable guarantee. As a general matter, value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or an antecedent debt is secured or satisfied. A debtor will generally not be considered to have received value in connection with a debt offering if the debtor uses the proceeds of that offering to make a dividend payment or otherwise retire or redeem equity securities issued by the debtor.
We cannot be certain as to the standards a court would use to determine whether or not we or the guarantors were solvent at the relevant time or, regardless of the standard that a court uses, that the issuance of the guarantees would not be further subordinated to our or any of our guarantors' other debt. Generally, however, an entity would be considered insolvent if, at the time it incurred indebtedness:
If a court were to find that the issuance of the notes or the incurrence of the guarantee was a fraudulent transfer or conveyance, the court could void the payment obligations under the notes or such guarantee or further subordinate the notes or such guarantee to presently existing and future indebtedness of ours or of the related guarantor, or require the holders of the notes to repay any amounts received with respect to such guarantee. In the event of a finding that a fraudulent transfer or conveyance occurred, you may not receive any repayment on the notes. Further, the voidance of the notes could result in an event of default with respect to our and our subsidiaries' other debt that could result in acceleration of such debt.
Although each guarantee entered into by a subsidiary will contain a provision intended to limit that guarantor's liability to the maximum amount that it could incur without causing the incurrence of obligations under its guarantee to be a fraudulent transfer, this provision may not be effective to protect those guarantees from being voided under fraudulent transfer law, or may reduce that guarantor's obligation to an amount that effectively makes its guarantee worthless.
The interests of our controlling stockholders may differ from the interests of the holders of the notes.
Affiliates of Kohlberg Kravis and Roberts & Co. ("KKR") are our largest equity holder and indirectly control substantially all of our voting capital stock. Affiliates of KKR are entitled to elect all of our directors, to appoint new management and to approve actions requiring the approval of the holders of our capital stock, including adopting amendments to our certificate of incorporation and approving mergers or sales of substantially all of our assets.
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The interests of these persons may differ from yours in material respects. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, KKR and its affiliates, as equity holders, may also have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investments, even though such transactions might involve risks to you as a note holder. Additionally, the indentures governing the notes permit us to pay advisory fees, dividends or make other restricted payments under certain circumstances, and KKR may have an interest in our doing so.
Additionally, KKR is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly and indirectly with us. KKR may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. You should consider that the interests of these holders may differ from yours in material respects. See "Certain Relationships and Related Party Transactions and Director Independence."
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Certain matters we discuss in this prospectus and in other public statements may constitute forward-looking statements. You can identify forward-looking statements because they contain words such as "believes," "expects," "may," "will," "should," "seeks," "intends," "plans," "estimates," or "anticipates" or similar expressions which concern our strategy, plans, projections or intentions. Examples of forward-looking statements include, but are not limited to, all statements we make relating to revenue, EBITDA, earnings, margins, growth rates and other financial results for future periods. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements, which are neither statements of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include:
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Variations from these assumptions or failure to achieve these objectives could cause actual results to differ from those projected in the forward-looking statements. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. Any forward-looking statement made by us speaks only as of the date on which it was made. We assume no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, or changes to projections over time, except as may be required by law. Due to the uncertainties inherent in forward-looking statements, readers are urged not to place undue reliance on these statements.
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We will not receive any cash proceeds from the issuance of the exchange notes pursuant to the exchange offers. In consideration for issuing the exchange notes as contemplated in this prospectus, we will receive in exchange a like principal amount of outstanding notes, the terms of which are identical in all material respects to the exchange notes, except that the exchange notes will not contain terms with respect to transfer restrictions, registration rights and additional interest for failure to observe certain obligations in the applicable registration rights agreement. The outstanding notes surrendered in exchange for the exchange notes will be retired and cancelled and cannot be reissued. Accordingly, the issuance of the exchange notes will not result in any change in our capitalization.
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RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the historical ratio of earnings to fixed charges for the periods presented:
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Nine months ended September 30, 2013 |
Year ended December 31, | |||||||||||||||||
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(in millions)
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2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||
Ratio of earnings to fixed charges(a)(b) |
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected historical consolidated financial data as of the dates and for the periods indicated. The selected historical consolidated financial data as of December 31, 2011 and 2012 and for the years ended December 31, 2010, 2011 and 2012 have been derived from our audited consolidated financial statements and related notes appearing elsewhere in this prospectus. The selected historical consolidated financial data for the nine month periods ended September 30, 2012 and September 30, 2013 and as of September 30, 2013 have been derived from our unaudited consolidated financial statements and related notes appearing elsewhere in this prospectus, which have been prepared on a basis consistent with our annual audited consolidated financial statements. The selected historical consolidated financial data as of December 31, 2008, 2009 and 2010 and for the years ended December 31, 2008 and 2009 have been derived from our audited consolidated financial statements and related notes thereto not included in this prospectus. The selected historical consolidated financial data as of September 30, 2012 have been derived from our unaudited consolidated financial statements and related notes thereto not included in this prospectus.
The results of operations for any period are not necessarily indicative of the results to be expected for any future period. The selected historical consolidated financial data set forth below should be read in conjunction with, and are qualified by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes thereto appearing elsewhere in this prospectus. All results are in millions, or as otherwise noted.
|
Year Ended December 31, | Nine Months Ended September 30, |
||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2009 | 2010 | 2011 | 2012 | 2012 | 2013 | |||||||||||||||
Statement of operations data: |
||||||||||||||||||||||
Revenues |
$ | 8,811.3 | $ | 9,313.8 | $ | 10,380.4 | $ | 10,713.6 | $ | 10,680.3 | $ | 7,923.5 | $ | 8,011.8 | ||||||||
Operating expenses(a) |
8,032.6 | 8,869.3 | 9,782.2 | 9,728.2 | 9,578.3 | 7,157.5 | 7,200.9 | |||||||||||||||
Other operating expenses(b)(c) |
3,255.6 | 289.7 | 81.5 | 43.9 | 28.2 | 29.2 | 46.0 | |||||||||||||||
Interest expense |
(1,964.9 | ) | (1,796.4 | ) | (1,796.6 | ) | (1,833.1 | ) | (1,897.8 | ) | (1,430.4 | ) | (1,410.2 | ) | ||||||||
Net loss(c) |
(3,608.0 | ) | (1,014.6 | ) | (846.9 | ) | (336.1 | ) | (527.3 | ) | (403.3 | ) | (623.9 | ) | ||||||||
Net loss attributable to First Data Corporation |
(3,764.3 | ) | (1,086.4 | ) | (1,021.8 | ) | (516.1 | ) | (700.9 | ) | (521.9 | ) | (746.0 | ) | ||||||||
Depreciation and amortization(d) |
1,559.6 | 1,553.8 | 1,526.0 | 1,344.2 | 1,330.9 | 1,004.1 | 908.1 | |||||||||||||||
Balance sheet data (at year-end): |
||||||||||||||||||||||
Total assets |
$ | 38,176.1 | $ | 39,735.4 | $ | 37,544.1 | $ | 40,276.3 | $ | 37,899.0 | $ | 43,903.5 | $ | 36,843.7 | ||||||||
Total current and long-term settlement assets |
8,662.9 | 7,351.0 | 7,059.1 | 10,839.3 | 9,228.1 | 15,211.4 | 9,200.3 | |||||||||||||||
Total liabilities |
35,773.8 | 34,408.4 | 33,456.1 | 36,800.9 | 35,205.2 | 40,995.1 | 34,975.9 | |||||||||||||||
Settlement obligations |
8,680.6 | 7,394.7 | 7,058.9 | 10,837.8 | 9,226.3 | 15,210.2 | 9,197.6 | |||||||||||||||
Long-term borrowings |
22,075.2 | 22,304.9 | 22,438.8 | 22,521.7 | 22,528.9 | 22,519.1 | 22,565.1 | |||||||||||||||
Other long-term liabilities(e) |
2,920.6 | 2,648.3 | 2,153.3 | 1,459.0 | 1,331.4 | 1,348.4 | 1,339.2 | |||||||||||||||
Redeemable noncontrolling interests |
| 226.9 | 28.1 | 67.4 | 67.4 | 66.6 | 67.9 | |||||||||||||||
Total equity |
2,402.3 | 5,100.1 | 4,059.9 | 3,408.0 | 2,626.4 | 2,841.8 | 1,799.9 |
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion of our results of operations and financial condition with the "Selected Historical Consolidated Financial Data" and the audited and unaudited historical consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the "Risk Factors" section of this prospectus. Actual results may differ materially from those contained in any forward-looking statements.
You should also read the following discussions of our results of operations and financial condition with "Business" for a discussion of certain of our important financial policies and objectives; performance measures and operational factors we use to evaluate our financial condition and operating performance; and our business segments.
Overview
First Data Corporation, with global headquarters and principal executive offices in Atlanta, Georgia, operates electronic commerce businesses providing services that include merchant transaction processing and acquiring services; credit, retail and debit card issuing and processing services; prepaid card services; and check verification, settlement and guarantee services.
Regulatory reform. On June 29, 2011, the FRB announced final rules governing debit card interchange fees and routing and exclusivity restrictions as well as a proposed rule governing the fraud prevention adjustment in response to Section 1075 of the Dodd-Frank Act. Effective October 1, 2011, debit interchange rates for card issuers with more than $10 billion of assets are capped at $.21 per transaction with an ad valorem component of 5 basis points to reflect a portion of the issuer's fraud losses plus, for qualifying issuers, an additional $.01 per transaction in debit interchange for fraud prevention costs. In addition, the new regulations ban debit payment card networks from prohibiting an issuer from contracting with any other payment card network that may process an electronic debit transaction involving an issuer's debit cards and prohibit card issuers and payment networks from inhibiting the ability of merchants to direct the routing of debit card transactions over any network that can process the transaction. On April 1, 2013, the ban on network exclusivity arrangements becomes effective for non-reloadable prepaid card and healthcare prepaid issuers. Additionally, each debit card issuer must participate in two unaffiliated networks beginning April 1, 2012 and each debit payment card network must comply with applicable exclusivity requirements by October 1, 2011. On July 31, 2013, the United States District Court for the District of Columbia instructed the FRB to vacate the interchange fee and network exclusivity restrictions and develop new rules in compliance with the Dodd-Frank Act. The FRB has appealed that decision, the district court has stayed its ruling pending appeal, and the rules remain in effect pending appeal.
Our consolidated and segment results benefited from the impact of the Dodd-Frank Act as discussed in the "Consolidated results" and "Segment results" sections below. Within the Retail and Alliance Services segment, we experienced some transitory benefit under the original rules due mostly to lower debit interchange rates as discussed in the Retail and Alliance Services segment results section below. Within the Financial Services segment, the implementation of the Dodd-Frank Act resulted in a net increase in debit issuer transactions in 2012 compared to 2011 with minimal impact to revenue as discussed in the Financial Services segment results section below.
Banc of America Merchant Services, LLC ("BAMS"). In 2009, we and Bank of America N.A. ("BofA") formed the BAMS alliance. When the alliance was formed, the intent was to shift processing for merchants contributed to the alliance by BofA from three existing bank platforms to us. After evaluating the conversion strategy, we and BofA jointly decided to have us operate BofA's legacy
32
settlement platform and provide the necessary operational support for legacy BofA merchants. The transfer of ownership was effective October 1, 2011.
The shift of processing to us as described above increased the Retail and Alliance Services segment revenue and segment EBITDA for 2012 compared to 2011. This benefit did not impact consolidated revenues because the BAMS alliance is consolidated by us. Consolidated expenses decreased in 2012 as a result of cost efficiencies resulting from the shift of processing to us. Beginning October 1, 2011, costs incurred related to the transfer and operation of the platform were billed to the BAMS alliance resulting in a portion of the costs being attributed to the BofA noncontrolling interest.
Segment Discussion
Retail and Alliance Services segment. The Retail and Alliance Services segment is comprised of businesses that provide services which facilitate the merchants' ability to accept credit, debit, stored-value and loyalty cards and checks. The segment's merchant processing and acquiring services include authorization, transaction capture, settlement, chargeback handling and internet-based transaction processing and are the largest component of the segment's revenue. A majority of these services pertain to transactions in which consumer payments to merchants are made through a card association (such as Visa or MasterCard), a debit network (such as STAR or Interlink), or another payment network (such as Discover or American Express). Many of the segment's services are offered through alliance arrangements. Financial results of the merchant alliance strategy appear both in the "Transaction and processing service fees revenue" and "Equity earnings in affiliates" line items of the Consolidated Statements of Operations. We evaluate the Retail and Alliance Services segment based on our proportionate share of the results of these alliances. Refer to "Segment Results" below for a more detailed discussion.
Merchant processing and acquiring revenues are driven most significantly by the number of transactions, dollar volumes of those transactions and trends in consumer spending between national, regional and local merchants. Consumers continue to increase the use of credit, debit and stored-value cards in place of cash and paper checks. Internet payments continue to grow but account for a small portion of the segment's transactions. While transactions over the internet may involve increased risk, these transactions typically generate higher profits for us. We continue to enhance our fraud detection and other systems to address such risks.
In addition, Retail and Alliance Services provides check verification, settlement and guarantee services. We continue to see a decrease in the use of checks which negatively affects our check verification, settlement and guarantee business. The segment also manages prepaid stored-value card issuance and processing services (i.e. gift cards) for retailers and others.
Financial Services segment. The Financial Services segment provides issuer card and network solutions and payment management solutions for recurring bill payments. Financial Services also offers services to improve customer communications, billing, online banking and consumer bill payment. Issuer card and network solutions includes credit, retail and debit card processing, debit network services (including the STAR Network), and output services for financial institutions and other organizations offering credit cards, debit cards and retail private label cards to consumers and businesses to manage customer accounts. Output services include statement and letter printing, embossing and mailing services. The segment also provides remittance processing services, information services and other payment services such as remote deposit, clearing services and processing for payments which occur in such forms as checks, ACH, wire transfer and stored-value cards. A substantial portion of the information services as well as the check clearing services businesses had been divested as of December 31, 2012. The segment's largest components of revenue consist of fees for account management, transaction authorization and posting and network switching.
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Credit and retail based revenue is derived primarily from the card processing services offered to financial institutions and other issuers of cards. Revenue from these markets is driven primarily by accounts on file, with active accounts having a larger impact on revenue than inactive accounts. Retail account portfolios typically have a lower proportionate share of active accounts than credit account portfolios and product usage is different between the card types resulting in lower revenue per active retail account. In addition, contract pricing at the customer level is dependent upon the volume of accounts, mix of account types (e.g. retail, credit, co-branded credit and debit) and product usage.
Debit processing revenue is derived mostly from the processing of transactions where we could receive multiple fees for a transaction, depending on our role. We continue to see a shift to the use of debit cards from checks and cash, a decrease that negatively affects our remittance processing business.
The underlying economic drivers of card issuance are population demographics and employment. Strengthening in the economy typically results in an improved credit risk profile, allowing card issuers to be more aggressive in their marketing campaigns to issue cards. Conversely, a weakening in the economy typically results in a tightening of the credit market with fewer consumers qualifying for credit.
International segment. The International segment businesses provide the following services outside of the U.S.: credit, retail, debit and prepaid card processing: merchant acquiring and processing; ATM and point-of-sale ("POS") processing, driving, acquiring and switching services; and card processing software. The primary service offerings of the International segment are substantially the same as those provided in the Retail and Alliance Services and Financial Services segments. The largest components of the segment's revenue are fees for facilitating the merchant's ability to accept credit, retail and debit cards by authorizing, capturing, and settling merchants' credit, retail, debit, stored-value and loyalty card transactions as well as for transaction authorization and posting, network switching and account management.
All Other and Corporate. All Other and Corporate is comprised of our business units not included in the segments noted above, primarily our government services business and our official check business that is winding down, as well as our headquarter functions.
Components of Revenue and Expenses
The following briefly describes the components of operating revenues and expenses as presented in our Consolidated Statements of Operations. Descriptions of the revenue recognition policies are included in Note 1 to our Audited Consolidated Financial Statements included elsewhere in this prospectus.
Transaction and processing service fees. Transaction and processing service fee revenue is comprised of fees related to merchant acquiring; check processing; credit, retail and debit card processing; output and remittance processing; and payment management services. Revenues are based on a per transaction fee, a percentage of dollar volume processed, accounts on file or some combination thereof. These revenues represent approximately 60% of our 2012 revenue and are most reflective of our core business performance. "Merchant related services" revenue is comprised primarily of fees charged to merchants and processing fees charged to alliances accounted for under the equity method. For segment reporting purposes, the proportionate consolidation presentation results in revenue including the alliance partners' share of processing fees charged to both consolidated and unconsolidated alliances. Merchant discount revenue from credit card and signature debit card transactions acquired from merchants is recorded net of interchange and assessments charged by the credit card associations. "Check services" revenues include check verification, settlement and guarantee fees which are charged on a per transaction basis or as a percentage of the face value of the check. "Card services" revenue related to credit and retail card processing is comprised primarily of fees
34
charged to the client based on cardholder accounts on file, both active and inactive. "Card services" revenue for output services consists of fees for printing statements and letters and embossing plastics. Debit processing and network service fees included in "Card services" revenues are typically based on transaction volumes processed. "Other services" revenue includes all other types of transactional revenue not specifically related to the classifications noted above.
Product sales and other. Sales and leasing of POS devices in the Retail and Alliance Services and International segments are the primary drivers of this revenue component, providing a recurring revenue stream. This component also includes contract termination fees, royalty income and gain/loss from the sale of merchant portfolios, all of which occur less frequently but are considered a part of ongoing operations. Also included within this line item is revenue recognized from custom programming and system consulting services, software licensing and maintenance revenue generated primarily from the Vision PLUS software in the International segment and investment income generated by invested settlement assets, realized net gains and losses and, if applicable, impairment losses from such assets within the Retail and Alliance Services, Financial Services and International segments and All Other and Corporate.
Reimbursable debit network fees, postage and other. Debit network fees from personal identification number ("PIN")-debit card transactions acquired from merchants are recorded gross with the associated network fee recorded in the corresponding expense caption, principally within the Retail and Alliance Services segment. In addition, the reimbursable component and the offsetting expense caption include postage, telecommunications and similar costs that are passed through to customers principally within the Financial Services segment. Reimbursable debit network fees, postage and other revenue and the corresponding expense are not included in segment results.
Cost of services. This caption includes the costs directly associated with providing services to customers and includes the following: telecommunications costs, personnel and infrastructure costs to develop and maintain applications, operate computer networks and provide associated customer support, losses on check guarantee services and merchant chargebacks, and other operating expenses.
Cost of products sold. These costs include those directly associated with product and software sales such as cost of POS devices, merchant terminal leasing costs and software licensing and maintenance costs.
Selling, general and administrative. This caption primarily consists of salaries, wages and related expenses paid to sales personnel, administrative employees and management as well as advertising and promotional costs and other selling expenses.
Depreciation and amortization. This caption consists of our depreciation and amortization expense. Excluded from this caption is the amortization of initial payments for contracts which is recorded as a contra-revenue within the "Transaction and processing services fees" line as well as amortization related to equity method investments which is netted within the "Equity earnings in affiliates" line.
Results of Operations
Consolidated results should be read in conjunction with segment results, which provide more detailed discussions concerning certain components of the Consolidated Statements of Operations. All significant intercompany accounts and transactions have been eliminated.
35
Consolidated Results for the Three and Nine Months Ended September 30, 2013 and 2012.
|
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions)
|
2013 | 2012 | % | 2013 | 2012 | % | |||||||||||||
Revenues: |
|||||||||||||||||||
Transaction and processing service fees |
$ | 1,620.2 | $ | 1,612.1 | 1 | % | $ | 4,792.5 | $ | 4,787.6 | 0 | % | |||||||
Product sales and other |
215.5 | 217.5 | (1 | )% | 622.8 | 637.9 | (2 | )% | |||||||||||
Reimbursable debit network fees, postage and other |
876.4 | 844.4 | 4 | % | 2,596.5 | 2,498.0 | 4 | % | |||||||||||
|
2,712.1 | 2,674.0 | 1 | % | 8,011.8 | 7,923.5 | 1 | % | |||||||||||
Expenses: |
|||||||||||||||||||
Cost of services (exclusive of items shown below) |
708.6 | 729.0 | (3 | )% | 2,119.2 | 2,137.8 | (1 | )% | |||||||||||
Cost of products sold |
80.9 | 80.1 | 1 | % | 246.9 | 251.3 | (2 | )% | |||||||||||
Selling, general and administrative |
463.6 | 467.9 | (1 | )% | 1,420.1 | 1,373.3 | 3 | % | |||||||||||
Reimbursable debit network fees, postage and other |
876.4 | 844.4 | 4 | % | 2,596.5 | 2,498.0 | 4 | % | |||||||||||
Depreciation and amortization |
271.3 | 293.5 | (8 | )% | 818.2 | 897.1 | (9 | )% | |||||||||||
Other operating expenses, net(a) |
7.8 | 7.2 | * | 46.0 | 29.2 | * | |||||||||||||
|
2,408.6 | 2,422.1 | (1 | )% | 7,246.9 | 7,186.7 | 1 | % | |||||||||||
Operating profit |
303.5 | 251.9 | 20 | % | 764.9 | 736.8 | 4 | % | |||||||||||
Interest income |
2.7 | 2.1 | 29 | % | 8.0 | 6.3 | 27 | % | |||||||||||
Interest expense |
(469.0 | ) | (488.6 | ) | (4 | )% | (1,410.2 | ) | (1,430.4 | ) | (1 | )% | |||||||
Other income (expense)(b) |
(36.2 | ) | (52.0 | ) | * | (20.9 | ) | (82.8 | ) | * | |||||||||
|
(502.5 | ) | (538.5 | ) | (7 | )% | (1,423.1 | ) | (1,506.9 | ) | (6 | )% | |||||||
Loss before income taxes and equity earnings in affiliates |
(199.0 | ) | (286.6 | ) | (31 | )% | (658.2 | ) | (770.1 | ) | (15 | )% | |||||||
Income tax expense (benefit) |
28.6 | (69.4 | ) | * | 101.7 | (252.3 | ) | * | |||||||||||
Equity earnings in affiliates |
47.3 | 43.0 | 10 | % | 136.0 | 114.5 | 19 | % | |||||||||||
Net loss |
(180.3 | ) | (174.2 | ) | 4 | % | (623.9 | ) | (403.3 | ) | 55 | % | |||||||
Less: Net income attributable to noncontrolling interests and redeemable noncontrolling interest |
39.2 | 37.8 | 4 | % | 122.1 | 118.6 | 3 | % | |||||||||||
Net loss attributable to First Data Corporation |
$ | (219.5 | ) | $ | (212.0 | ) | 4 | % | $ | (746.0 | ) | $ | (521.9 | ) | 43 | % | |||
The following provides highlights of revenue and expense growth while a more detailed discussion is included in the "Segment results" section below.
Operating revenues overview.
Transaction and processing service fees. Revenue increased for the three months and was flat for the nine months ended September 30, 2013 compared to the same periods in 2012 due primarily to
36
increases in merchant related services revenue offset by decreases in card services and check services. The net increases in merchant related services revenue resulted from increases in both domestic and international merchant transactions and dollar volumes in addition to new sales, pricing increases and network routing incentives. These increases were partially offset by decreases resulting from the impact of merchant mix on transactions and dollar volumes, the effects of shifts in pricing mix, merchant attrition and price compression. The decreases in card services revenue resulted primarily from net lost business both domestically and internationally. We experienced decreases in check processing revenue primarily as a result of lower overall check volumes and merchant attrition.
Product sales and other. Revenue decreased for the three and nine months ended September 30, 2013 compared to the same periods in 2012 due to a decline in domestic terminal sales, including lower bulk sales, a decrease in international software license sales and foreign currency exchange rates partially offset by growth in professional services revenue resulting from new projects. Foreign currency exchange rate movements adversely impacted the product sales and other growth rates for the three and nine months ended September 30, 2013 compared to the same periods in 2012 by approximately 2 percentage points for both periods.
Reimbursable debit network fees, postage and other. Revenue and expense increased for the three and nine months ended September 30, 2013 compared to the same periods in 2012 due to transaction and volume growth related to debit network fees partially offset by rate decreases.
Operating expenses overview.
Cost of services. Expenses decreased for the three and nine months ended September 30, 2013 compared to the same periods in 2012 due most significantly to decreases in expenses resulting mostly from cost reduction initiatives offset by increases in product development costs.
Cost of products sold. Expenses increased for the three months and decreased for the nine months ended September 30, 2013 compared to the same periods in 2012. Decreases for the nine-month period were due most significantly to lower domestic terminal sales partially offset by a settlement of a dispute with a vendor during 2012 resulting in a reduction of cost of products sold in the prior year.
Selling, general and administrative. Expenses decreased for the three months and increased for the nine months ended September 30, 2013 compared to the same periods in 2012. Decreases for the three-month period were driven by decreases in legal fees, primarily those related to debt refinancing. Increases for the nine-month period were due most significantly to increases in stock compensation related to executive management and net increases in various expense items that were not individually significant.
Depreciation and amortization. Expenses decreased for the three and nine months ended September 30, 2013 compared to the same periods in 2012 due to a decrease in the amortization of certain intangible assets that are being amortized on an accelerated basis resulting in higher amortization in the prior periods and certain other assets that have become fully amortized partially offset by amortization of new assets.
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Other operating expenses, net. A summary of net pretax benefits (charges), incurred by segment, for each period is as follows:
|
|
Pretax Benefit (Charge) | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions)
|
Approximate Number of Employees |
Retail and Alliance Services |
Financial Services |
International | All Other and Corporate |
Totals | |||||||||||||
Three months ended September 30, 2013 |
|||||||||||||||||||
Restructuring charges |
100 | $ | (1.8 | ) | $ | (3.6 | ) | $ | (0.6 | ) | $ | (4.1 | ) | $ | (10.1 | ) | |||
Restructuring accrual reversals |
1.2 | 0.2 | 0.6 | 0.3 | 2.3 | ||||||||||||||
Total pretax charge, net of reversals |
$ | (0.6 | ) | $ | (3.4 | ) | $ | | $ | (3.8 | ) | $ | (7.8 | ) | |||||
Nine months ended September 30, 2013 |
|||||||||||||||||||
Restructuring charges |
460 | $ | (16.9 | ) | $ | (8.5 | ) | $ | (1.4 | ) | $ | (22.4 | ) | $ | (49.2 | ) | |||
Restructuring accrual reversals |
1.9 | 0.2 | 0.6 | 0.5 | 3.2 | ||||||||||||||
Total pretax charge, net of reversals |
$ | (15.0 | ) | $ | (8.3 | ) | $ | (0.8 | ) | $ | (21.9 | ) | $ | (46.0 | ) | ||||
Three months ended September 30, 2012 |
|||||||||||||||||||
Restructuring charges |
10 | $ | (4.4 | ) | $ | | $ | (1.7 | ) | $ | (1.2 | ) | $ | (7.3 | ) | ||||
Restructuring accrual reversals |
| | 0.1 | | 0.1 | ||||||||||||||
Total pretax charge, net of reversals |
$ | (4.4 | ) | $ | | $ | (1.6 | ) | $ | (1.2 | ) | $ | (7.2 | ) | |||||
Nine months ended September 30, 2012 |
|||||||||||||||||||
Restructuring charges |
580 | $ | (7.4 | ) | $ | | $ | (17.8 | ) | $ | (2.0 | ) | $ | (27.2 | ) | ||||
Restructuring accrual reversals |
1.0 | | 0.8 | 1.3 | 3.1 | ||||||||||||||
Total pretax charge, net of reversals |
$ | (6.4 | ) | $ | | $ | (17.0 | ) | $ | (0.7 | ) | $ | (24.1 | ) | |||||
We recorded restructuring charges during the three and nine months ended September 30, 2013 in connection with management's alignment of the business with strategic objectives and cost reduction initiatives as well as refinements of estimates. During the nine months ended September 30, 2013, we also recorded restructuring charges in connection with the departure of executive officers. We expect to record additional charges in 2013 associated with the alignment of the business with strategic objectives and cost savings initiatives.
We estimate cost savings resulting from the restructuring activities recorded during the nine months ended September 30, 2013 of approximately $15 million in 2013 and approximately $52 million on an annual basis.
We recorded restructuring charges during the three and nine months ended September 30, 2012 related primarily to employee reduction and certain employee relocation efforts in Germany. Additional restructuring charges were recorded in 2012 in connection with management's alignment of the business with strategic objectives as well as refinements of estimates.
The following table summarizes our utilization of restructuring accruals for the nine months ended September 30, 2013:
(in millions)
|
Employee Severance |
|||
---|---|---|---|---|
Remaining accrual as of January 1, 2013 |
$ | 13.1 | ||
Expense provision |
49.2 | |||
Cash payments and other |
(30.3 | ) | ||
Changes in estimates |
(3.2 | ) | ||
Remaining accrual as of September 30, 2013 |
$ | 28.8 | ||
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Interest expense. Interest expense decreased for the three and nine months ended September 30, 2013 compared to the same periods in 2012 due to the de-designation of cash flow hedges which resulted in the reclassification of accumulated losses from other comprehensive income ("OCI") into Interest expense during the first three quarters of 2012. The amount reclassified for the three and nine months ended September 30, 2012 was $37.9 million and $114.8 million, respectively. This was partially offset by increased interest expense related to higher interest rates resulting from debt modifications and amendments.
We utilize interest rate swaps to hedge our interest payments on a portion of our variable rate debt from fluctuations in interest rates. While these swaps are not designated as hedges for accounting purposes, they continue to be effective economically in eliminating variability in interest rate payments. Additionally, we utilize a fixed to floating interest rate swap, which does not qualify for hedge accounting, to maintain a desired ratio of fixed rate and floating rate debt. The fair value adjustments for interest rate swaps that do not qualify for hedge accounting are recorded in the "Other income (expense)" line item of the Consolidated Statements of Operations and totaled charges of $24.3 million and $10.1 million for the three and nine months ended September 30, 2013, respectively, and charges of $41.2 million and $88.4 million for the three and nine months ended September 30, 2012, respectively.
Other income (expense).
|
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions)
|
2013 | 2012 | 2013 | 2012 | |||||||||
Investment (losses) and gains |
$ | | $ | (8.1 | ) | $ | 2.3 | $ | (7.8 | ) | |||
Derivative financial instruments losses |
(25.5 | ) | (43.0 | ) | (11.3 | ) | (86.8 | ) | |||||
Divestitures, net |
2.3 | | 2.3 | | |||||||||
Non-operating foreign currency gains and (losses) |
(13.0 | ) | (0.9 | ) | (14.2 | ) | 11.8 | ||||||
Other income (expense) |
$ | (36.2 | ) | $ | (52.0 | ) | $ | (20.9 | ) | $ | (82.8 | ) | |
Derivative financial instruments losses. The net losses for the three and nine months ended September 30, 2013 and 2012 were due to the fair value adjustments for interest rate swaps and cross currency swaps that are not designated as accounting hedges.
Non-operating foreign currency gains and (losses). The net gains and losses related to currency translations on certain of our intercompany loans and our euro-denominated debt.
Income taxes. Our effective tax rates on pretax loss were expenses of 18.9% and 19.5% for the three and nine months ended September 30, 2013 and benefits of 28.5% and 38.5% for the same periods in 2012. The effective tax rates for the three and nine months ended September 30, 2013 were lower than the statutory rate primarily due to valuation allowances being recorded in certain tax jurisdictions, where deferred tax benefits are not recognized on pre-tax losses, while tax expense is recognized in jurisdictions with pre-tax earnings. Also negatively impacting the rate was an increase in our liability for unrecognized tax benefits. These negative adjustments were partially offset by state tax benefits, net income attributable to noncontrolling interests from pass-through entities for which there was no tax expense provided, certain immaterial prior period adjustments and foreign income taxed at lower effective rates. As a result of our pre-tax losses in each of the periods, favorable and unfavorable tax impacts have the opposite effect on the effective tax rate.
The effective tax rates for the three and nine months ended September 30, 2012 were each favorably impacted by state tax benefits, net income attributable to noncontrolling interests for which there was no tax expense provided and foreign income taxed at lower effective rates, and unfavorably
39
impacted by increases in our valuation allowance against foreign tax credits. In addition to the above factors, the three-month period was unfavorably impacted by certain immaterial prior period adjustments, while the nine-month period was favorably impacted by a decrease in our liability for unrecognized tax benefits.
We project that our deferred tax assets will exceed our deferred tax liabilities as of December 31, 2013. As a result, we determined that it is not more likely than not that we would be able to realize the value of our federal and combined state net operating loss carryforwards and has recorded a valuation allowance against a portion of these carryforwards. This valuation allowance is expected to increase over time as our deferred tax liabilities continue to decrease and will have a continuing adverse impact on our effective tax rate in the future.
The balance of our liability for unrecognized tax benefits was approximately $288 million as of September 30, 2013. We anticipate it is reasonably possible that our liability for unrecognized tax benefits may decrease by approximately $138 million within the next twelve months as the result of the possible closure of federal tax audits, potential settlements with certain states and foreign countries and the lapse of the statute of limitations in various state and foreign jurisdictions.
Equity earnings in affiliates. Equity earnings in affiliates increased for the three and nine months ended September 30, 2013 compared to the same periods in 2012 due mostly to transaction and dollar volume growth as well as pricing increases and a decrease in amortization that resulted from a correction of the amortization period of a referral payment to one of our merchant alliance partners. The change in amortization period benefitted the growth rate for the nine-month period by approximately 6 percentage points.
Net income attributable to noncontrolling interests and redeemable noncontrolling interest. Most of the net income attributable to noncontrolling interests and redeemable noncontrolling interest relates to our consolidated merchant alliances. Net income attributable to noncontrolling interests and redeemable noncontrolling interest increased for the three and nine months ended September 30, 2013 compared to the same periods in 2012 due most significantly to increased profit by one of our merchant alliances driven by increased volumes and network routing incentives.
Subsequent Events. During December 2013 We identified certain prior year income tax accounting errors aggregating to an $80 million understatement of previously recorded income tax expense that will be corrected during the three-month period ended December 31, 2013. Such errors are primarily attributable to the year ended December 31, 2009. The impact of this error correction on our income tax expense for the three-month period ended December 31, 2013 will be more than offset by the impact of correcting out-of-quarter income tax items such that we will record an income tax benefit of approximately $15 million for the three-month period ended December 31, 2013.
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Consolidated Results for the Years Ended December 31, 2012, 2011 and 2010.
The following discussion for both consolidated results and segment results are for the year ended December 31, 2012 compared to the year ended December 31, 2011 as well as for the year ended December 31, 2011 compared to the year ended December 31, 2010. Consolidated results should be read in conjunction with segment results, which provide more detailed discussions concerning certain components of our Consolidated Statements of Operations. All significant intercompany accounts and transactions have been eliminated.
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|
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|
Percent Change | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Year Ended December 31, | |||||||||||||||
|
2012 vs. 2011 | 2011 vs. 2010 | ||||||||||||||
(in millions)
|
2012 | 2011 | 2010 | |||||||||||||
Revenues: |
||||||||||||||||
Transaction and processing service fees |
$ | 6,452.1 | $ | 6,330.0 | $ | 6,181.5 | 2 | % | 2 | % | ||||||
Product sales and other |
866.7 | 852.1 | 809.3 | 2 | % | 5 | % | |||||||||
Reimbursable debit network fees, postage and other |
3,361.5 | 3,531.5 | 3,389.6 | (5 | )% | 4 | % | |||||||||
|
10,680.3 | 10,713.6 | 10,380.4 | 0 | % | 3 | % | |||||||||
Expenses: |
||||||||||||||||
Cost of services (exclusive of items shown below) |
2,863.5 | 2,888.4 | 3,023.3 | (1 | )% | (4 | )% | |||||||||
Cost of products sold |
336.3 | 369.6 | 375.2 | (9 | )% | (1 | )% | |||||||||
Selling, general and administrative |
1,825.4 | 1,693.7 | 1,579.7 | 8 | % | 7 | % | |||||||||
Reimbursable debit network fees, postage and other |
3,361.5 | 3,531.5 | 3,389.6 | (5 | )% | 4 | % | |||||||||
Depreciation and amortization |
1,191.6 | 1,245.0 | 1,414.4 | (4 | )% | (12 | )% | |||||||||
Other operating expenses, net(a) |
28.2 | 43.9 | 81.5 | * | * | |||||||||||
|
9,606.5 | 9,772.1 | 9,863.7 | (2 | )% | (1 | )% | |||||||||
Operating profit |
1,073.8 | 941.5 | 516.7 | 14 | % | 82 | % | |||||||||
Interest income |
8.8 | 7.9 | 7.8 | 11 | % | 1 | % | |||||||||
Interest expense |
(1,897.8 | ) | (1,833.1 | ) | (1,796.6 | ) | 4 | % | 2 | % | ||||||
Other income (expense)(b) |
(94.3 | ) | 124.1 | (15.9 | ) | * | * | |||||||||
|
(1,983.3 | ) | (1,701.1 | ) | (1,804.7 | ) | 17 | % | (6 | )% | ||||||
Loss before income taxes and equity earnings in affiliates |
(909.5 | ) | (759.6 | ) | (1,288.0 | ) | 20 | % | (41 | )% | ||||||
Income tax benefit |
(224.0 | ) | (270.1 | ) | (323.8 | ) | (17 | )% | (17 | )% | ||||||
Equity earnings in affiliates |
158.2 | 153.4 | 117.3 | 3 | % | 31 | % | |||||||||
Net loss |
(527.3 | ) | (336.1 | ) | (846.9 | ) | 57 | % | (60 | )% | ||||||
Less: Net income attributable to noncontrolling interests and redeemable noncontrolling interests |
173.6 | 180.0 | 174.9 | (4 | )% | 3 | % | |||||||||
Net loss attributable to First Data Corporation |
$ | (700.9 | ) | $ | (516.1 | ) | $ | (1,021.8 | ) | 36 | % | (49 | )% | |||
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The following provides highlights of revenue and expense growth on a consolidated basis while a more detailed discussion is included in the "Segment Results" section below.
Operating revenues overview.
Transaction and processing service fees. Revenue increased in 2012 compared to 2011 due to new business, growth in merchant transactions and dollar volumes both domestically and internationally and lower debit interchange rates as a result of the Dodd-Frank Act. Lower debit interchange rates positively impacted the transaction and processing service fees growth rate by approximately 1 percentage point. Partially offsetting these increases were decreases due to lost business, price compression, changes in merchant and pricing mix and foreign currency exchange rate movements. Foreign currency exchange rate movements negatively impacted the transaction and processing service fees growth rate in 2012 compared to 2011 by approximately 1 percentage point.
Revenue increased in 2011 compared to 2010 due to growth in merchant transactions and dollar volumes both domestically and internationally, growth in debit issuer transactions, new business, lower debit interchange rates as a result of the Dodd-Frank Act described in the "Regulatory Reform" section above, and foreign currency exchange rate movements. Partially offsetting these increases were decreases due to price compression, changes in merchant and pricing mix, lower overall check volumes and lost business. Foreign currency exchange rate movements positively impacted the transaction and processing service fees growth rate by approximately 1 percentage point.
Product sales and other. Revenue increased in 2012 compared to 2011 due to increases in software licensing and maintenance revenue, primarily internationally, as well as professional services revenue. These increases were partially offset by decreases in terminal sales both domestically and internationally and foreign currency exchange rate movements. Foreign currency exchange rate movements adversely impacted the product sales and other growth rate in 2012 compared to 2011 by approximately 2 percentage points.
Revenue increased in 2011 compared to 2010 mainly resulting from an increase in equipment sales internationally due in part to new regulations and new business, increases in the leasing business domestically and internationally resulting from new lease originations as well as fees associated with lease renewals and an increase in investment income due to a lesser impairment of Student Loan Auction Rate Securities ("SLARS") recognized in 2011 compared to 2010 as discussed below. In addition, foreign currency exchange rate movements positively impacted the product sales and other growth rate in 2011 compared to 2010 by approximately 1 percentage point. Partially offsetting these increases were decreased contract termination fees mostly related to Financial Services and a decrease in professional services revenue due to the completion of prior year projects in Financial Services and All Other and Corporate.
Reimbursable debit network fees, postage and other. Revenue and expense decreased in 2012 compared to 2011 due to the cap on debit interchange rates imposed by the Dodd-Frank Act in October 2011 partially offset by growth of PIN debit transaction and dollar volumes. The cap on debit interchange rates imposed by the Dodd-Frank Act impacted the reimbursable debit network fees, postage and other growth rate in 2012 compared to 2011 by approximately 13 percentage points.
Revenue and expense increased in 2011 compared to 2010 due to growth of PIN-debit transaction volumes as well as an increase in debit network fees resulting from rate increases imposed by the debit networks. Partially offsetting these increases was a decrease due to the cap on debit interchange rates
42
imposed by the Dodd-Frank Act described above which impacted the reimbursable debit network fees, postage and other growth rate by approximately 5%.
Operating expenses overview.
Cost of services. Expenses decreased slightly in 2012 compared to 2011 due most significantly to cost efficiencies as a result of the shift in processing from the alliance partner to us related to the BAMS alliance beginning in October 2011 and the impact of foreign currency exchange rate movements. In addition, the expense growth rate in 2012 benefited from the 2011 error correction described below. Partially offsetting these decreases were increases in outside professional services expenses. Foreign currency exchange rate movements benefited the "Cost of services" expense growth rate in 2012 compared to 2011 by 1 percentage point.
Expenses decreased in 2011 compared to 2010 due most significantly to decreases in certain costs associated with the BAMS alliance and net check warranty expense. Certain costs associated with the BAMS alliance decreased due to lower technology costs and improved expense management. Net check warranty expense decreased due to lower check volumes and better risk assessment data. Expenses associated with outside professional services and lower merchant credit losses also contributed to the decrease. Partially offsetting these decreases was the 2011 correction of cumulative errors in the amortization of initial payments for new contracts related to purchase accounting associated with our 2007 merger with an affiliate of KKR which totaled a $10.2 million expense in "Cost of services" (the correction of related errors totaled a $58.5 million benefit in aggregate) and occurred over a four year period. Foreign currency exchange rate movements also partially offset the aforementioned decreases by approximately 1 percentage point.
Cost of products sold. Expenses decreased in 2012 compared to 2011 driven by the International segment due most significantly to lower terminal sales, lower cost terminal replacements, the write-off of capitalized commissions in 2011 relating to the international leasing business and foreign currency exchange rate movements. Foreign currency exchange rate movements positively impacted the growth rate in 2012 compared to 2011 by approximately 2 percentage points. The impact of the write-off benefited the growth rate by approximately 2 percentage points.
Expenses decreased in 2011 compared to 2010 resulting mostly from the write-off of international terminal inventory and leasing receivables in 2010 as well as exiting low margin businesses in 2011. These decreases are partially offset by the write-off of capitalized commissions related to the international leasing business in 2011, growth in the leasing business both domestically and internationally and foreign currency exchange rate movements. The net impact of the 2010 and 2011 write-offs benefited the cost of products sold growth rate by 4 percentage points while foreign currency exchange rate movements had an approximate 1 percentage point offsetting impact.
Selling, general and administrative. Expenses increased in 2012 compared to 2011 due most significantly to growth in outside commissions, primarily payments made to ISOs. Growth in outside commissions resulted mostly from us increasing the number of ISO's and an increase in ISO transaction volumes which negatively impacted the selling, general and administrative growth rate for 2012 versus 2011 by approximately 4 percentage points. Additionally, expenses increased due to legal fees related primarily to the debt restructurings that occurred during the third quarter of 2012 as well as increased employee related expenses. Partially offsetting these increases was a decrease resulting from the impact of foreign currency exchange rate movements which benefited the growth rate in 2012 compared to 2011 by 1 percentage point.
Expenses increased in 2011 compared to 2010 due to growth in payments made to ISO's as a result of us increasing our number of ISO partners as well as an increase in ISO transaction volumes, higher incentive compensation expense and net increases in various expense items that were not individually significant. The payments to ISO's impacted the selling, general and administrative growth
43
rate by approximately 5 percentage points. Foreign currency exchange rate movements also contributed to the increase in expenses by approximately 1 percentage point.
Depreciation and amortization. Expenses decreased in 2012 compared to 2011 due to decreases in amortization of certain intangible assets that are being amortized on an accelerated basis resulting in higher amortization in the prior periods, certain other intangible assets that have been fully amortized and decreases resulting from foreign currency exchange rate movements. These decreases were partially offset by an increase driven by the benefit recorded in 2011 related to the correction of errors described below. The error corrections adversely impacted the depreciation and amortization growth rate in 2012 versus 2011 by 5 percentage points.
Expenses decreased in 2011 compared to 2010 due most significantly to the 2011 correction of cumulative depreciation and amortization errors related to purchase accounting associated with our 2007 merger with an affiliate of KKR and certain assets becoming fully amortized. The errors and the cumulative correction, which totaled a $57.7 million benefit in "Depreciation and amortization" (the correction of total depreciation and amortization errors was a $58.5 million benefit in aggregate) and occurred over a four year period, were deemed immaterial to prior years and the current year, respectively. In addition, depreciation and amortization declined due to a decrease in the amortization of certain intangible assets that are being amortized on an accelerated basis resulting in higher amortization in the prior period. These decreases were partially offset by increases due to newly capitalized assets and foreign currency exchange rate movements. The error corrections benefited the depreciation and amortization growth rate by 4 percentage points in 2011 compared to 2010.
Other operating expenses, net.
2012 Activities
|
Pretax Benefit (Charge) | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Year Ended December 31, 2012 (in millions) |
Retail and Alliance Services |
Financial Services |
International | All Other and Corporate |
Totals | |||||||||||
Restructuring charges |
$ | (7.5 | ) | $ | | $ | (18.5 | ) | $ | (2.2 | ) | $ | (28.2 | ) | ||
Restructuring accrual reversals |
1.0 | | 2.8 | 1.3 | 5.1 | |||||||||||
Impairments |
| (5.1 | ) | | | (5.1 | ) | |||||||||
Total pretax charge, net of reversals |
$ | (6.5 | ) | $ | (5.1 | ) | $ | (15.7 | ) | $ | (0.9 | ) | $ | (28.2 | ) | |
We recorded restructuring charges during 2012 primarily related to employee reduction and certain employee relocation efforts in Germany. We expect to record approximately $2 million of additional restructuring charges in 2013 in connection with the restructuring event in Germany. Additional restructuring charges were recorded in 2012 in connection with management's alignment of the business with strategic objectives as well as refinements of estimates. Approximately 650 employees were impacted by the 2012 restructurings. We expect to record additional restructuring charges in 2013 associated with similar events and the departure of executive officers.
We estimate cost savings resulting from restructuring activities recorded during 2012 of approximately $11 million in 2012 and approximately $31 million on an annual basis.
During 2012, within Financial Services, we recorded approximately $5.1 million in impairment charges related to an adjustment to fair value of an investment.
44
The following table summarizes our utilization of restructuring accruals for the years ended December 31, 2011 and 2012 (in millions):
|
Employee Severance |
Facility Closure |
|||||
---|---|---|---|---|---|---|---|
Remaining accrual as of January 1, 2011 |
$ | 38.7 | $ | 0.2 | |||
Expense provision |
45.0 | 6.3 | |||||
Cash payments and other |
(62.2 | ) | (5.5 | ) | |||
Changes in estimates |
(4.8 | ) | (0.1 | ) | |||
|
16.7 | 0.9 | |||||
Remaining accrual as of December 31, 2011 |
|||||||
Expense provision |
28.2 | | |||||
Cash payments and other |
(26.8 | ) | (0.8 | ) | |||
Changes in estimates |
(5.0 | ) | (0.1 | ) | |||
Remaining accrual as of December 31, 2012 |
$ | 13.1 | $ | | |||
2011 Activities
|
Pretax Benefit (Charge) | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Year Ended December 31, 2011 (in millions) |
Retail and Alliance Services |
Financial Services |
International | All Other and Corporate |
Totals | |||||||||||
Restructuring charges |
$ | (2.8 | ) | $ | (10.5 | ) | $ | (34.2 | ) | $ | (3.8 | ) | $ | (51.3 | ) | |
Restructuring accrual reversals |
1.1 | | 2.5 | 1.3 | 4.9 | |||||||||||
Litigation and regulatory settlements |
| | | 2.5 | 2.5 | |||||||||||
Total pretax charge, net of reversals |
$ | (1.7 | ) | $ | (10.5 | ) | $ | (31.7 | ) | $ | | $ | (43.9 | ) | ||
The 2011 restructurings resulted from the elimination of management and other positions, approximately 750 employees, as part of us aligning the business with strategic objectives. Partially offsetting the charges were reversals of excess 2009 and 2010 restructuring accruals as well as reversals resulting from the refinement of 2011 estimates.
2010 Activities
|
Pretax Benefit (Charge) | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Year Ended December 31, 2010 (in millions) |
Retail and Alliance Services |
Financial Services |
International | All Other and Corporate |
Totals | |||||||||||
Restructuring charges |
$ | (20.3 | ) | $ | (11.3 | ) | $ | (28.2 | ) | $ | (27.7 | ) | $ | (87.5 | ) | |
Restructuring accrual reversals |
0.7 | 0.8 | 10.9 | 3.1 | 15.5 | |||||||||||
Impairments |
(1.6 | ) | | (9.9 | ) | | (11.5 | ) | ||||||||
Litigation and regulatory settlements |
| 2.0 | | | 2.0 | |||||||||||
Total pretax charge, net of reversals |
$ | (21.2 | ) | $ | (8.5 | ) | $ | (27.2 | ) | $ | (24.6 | ) | $ | (81.5 | ) | |
The 2010 restructurings resulted from the elimination of management and other positions, approximately 1,200 employees, as part of us aligning the business with strategic objectives as well as domestic site consolidations and the reorganization of executive officers. Partially offsetting the charges were reversals of excess 2008 and 2009 restructuring accruals as well as reversals resulting from the refinement of 2010 estimates.
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In the fourth quarter of 2010, within Retail and Alliance Services, we recorded approximately $1.6 million in impairment charges related to other intangibles. Also during the fourth quarter of 2010, we recorded approximately $9.9 million in asset impairment charges related to the International segment. Approximately $6.2 million of the total impairment occurred because we did not complete a software project and determined that there were no likely alternative uses for the software. The remaining $3.7 million of impairment charges resulted from the write off of assets we determined have no future use or value.
Interest expense. Interest expense increased in 2012 compared to 2011 due to higher average interest rates resulting primarily from the March 2012, August 2012 and April 2011 debt modifications and amendments partially offset by a decrease due to the expiration of certain interest rate swaps which were replaced by swaps with lower fixed interest rates.
Interest expense increased in 2011 compared to 2010 due to higher average interest rates resulting primarily from the August 2010 and April 2011 debt modifications and amendments as well as the December 2010 debt exchange and higher debt balances due to payment-in-kind ("PIK") interest accretion. Partially offsetting these increases was a decrease resulting from the expiration of interest rate swaps with a notional balance of $2.5 billion.
We utilize interest rate swaps to hedge our interest payments on a portion of our variable rate debt from fluctuations in interest rates. While these swaps do not qualify for hedge accounting, they continue to be effective economically in eliminating variability in interest rate payments. Additionally, we utilize a fixed to floating interest rate swap, which does not qualify for hedge accounting, to maintain a desired ratio of fixed rate and floating rate debt. The fair value adjustments for interest rate swaps that do not qualify for hedge accounting as well as interest rate swap ineffectiveness are recorded in the "Other income (expense)" line item of our Consolidated Statements of Operations and totaled charges of $89.9 million, benefits of $55.7 million and charges of $67.9 million for the years ended December 31, 2012, 2011 and 2010, respectively.
Other income (expense).
|
Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
(in millions)
|
2012 | 2011 | 2010 | |||||||
Investment gains (losses) |
$ | (7.7 | ) | $ | | $ | 2.5 | |||
Derivative financial instruments gains (losses) |
(91.4 | ) | 58.2 | (58.3 | ) | |||||
Divestitures, net |
| 57.4 | 18.7 | |||||||
Non-operating foreign currency gains |
4.8 | 5.3 | 21.2 | |||||||
Other |
| 3.2 | | |||||||
Other income (expense) |
$ | (94.3 | ) | $ | 124.1 | $ | (15.9 | ) | ||
Investment losses. The net investment losses in 2012 relate primarily to the impairment of a strategic investment.
Derivative financial instruments gains and (losses). The net gains and losses for the periods presented were due most significantly to the fair value adjustments for cross currency swaps and interest rate swaps that are not designated as accounting hedges. The loss in 2012 compared to the gain in 2011 was primarily driven by fair value adjustments related to new interest rate swaps entered into during 2012 and 2011. The gain in 2011 compared to the loss in 2010 was mostly driven by a new interest rate swap entered into in conjunction with the April 2011 debt modifications and amendments as well as the expiration of interest rate swaps noted above in the "Interest expense" discussion.
46
Divestitures, net. The gain recognized in 2011 resulted most significantly from the contribution of our transportation business to an alliance in exchange for a 30% interest in that alliance. The 2010 gain related most significantly to a contingent payment received in connection with our November 2009 sale of a merchant acquiring business in Canada.
Non-operating foreign currency gains and (losses). Amounts represent net gains and losses related to currency translations on our intercompany loans and our euro-denominated debt.
Income taxes. Our effective tax rates on pretax loss from continuing operations were tax benefits of 29.8% in 2012, 44.6% in 2011, and 27.7% in 2010. The calculation of the effective tax rate includes most of the equity earnings in affiliates in pretax income because this item relates principally to entities that are considered pass-through entities for income tax purposes.
The effective tax rate benefit in 2012 was less than the statutory rate primarily due to an increase in our valuation allowance against foreign tax credits, foreign and state net operating losses and capital losses. The negative adjustment was partially offset by net income attributable to noncontrolling interests from pass through entities for which there was no tax expense provided, lower tax earnings and profits than book income for foreign entities, a decrease in our liability for unrecognized tax benefits, discussed below, and state tax benefits. The 2012 effective income tax rate was negatively impacted by approximately 9 percentage points due to the current year cumulative correction of immaterial prior year errors.
The effective tax rate benefit in 2011 was greater than the statutory rate due primarily to net income attributable to noncontrolling interests from pass through entities for which there was no tax expense provided, state tax benefits, lower tax earnings and profits than book income for foreign entities, a decrease in our liability for unrecognized tax benefits, a net benefit relating to tax effects of foreign exchange gains and losses on intercompany notes and prior year income tax return true-ups. These positive adjustments were partially offset by an increase in our valuation allowance against foreign tax credits and the tax impact of a contribution of our transportation business in exchange for a 30% interest in an alliance.
The effective tax rate benefit in 2010 was less than the statutory rate primarily due to an increase in our valuation allowance against foreign tax credits. This negative adjustment was partially offset by state tax benefits, net income attributable to noncontrolling interests for which there was no tax expense provided and a decrease in our liability for unrecognized tax benefits.
As a result of us recording pretax losses in each of the periods, the favorable impacts caused increases to the effective tax rate, while the unfavorable impacts caused decreases to the effective tax rate.
Subsequent to the merger and as part of Holdings consolidated federal group and consolidated, combined or unitary state groups for income tax purposes, we have been and continue to be in a tax net operating loss position. We currently anticipate being able to utilize in the future most of our existing federal net operating loss carryforwards due to the existence of significant deferred tax liabilities established in connection with purchase accounting for the merger and our consideration of a tax planning strategy related to our investments in affiliates. Implementation of this tax planning strategy would result in the immediate reversal of temporary differences associated with the excess of book basis over tax basis in the investments. Accordingly, we have not established valuation allowances against these loss carryforwards. We, however, may not be able to realize a benefit related to losses in most states and certain foreign countries, requiring the establishment of valuation allowances. We currently anticipate that we will be required to establish a valuation allowance against our federal net operating loss carryforwards in 2013.
Despite the net operating loss position discussed above, we continue to incur income taxes in states for which we file returns on a separate entity basis and in certain foreign countries. Generally,
47
these foreign income taxes would result in a foreign tax credit in the U.S. to the extent of any U.S. income taxes on the income upon repatriation. However, we do not generate sufficient foreign source income to be able to fully utilize our foreign tax credits. As a result, we have established valuation allowances, including $182 million in 2010 upon enactment of federal legislation which changed tax law, against that portion of the credits for which it is likely that no benefit will be realized in the future.
During the year ended December 31, 2012, our liability for unrecognized tax benefits was reduced by $52 million upon closure of the 2003 and 2004 federal tax years and the resolution of certain state audit issues. As of December 31, 2012, we anticipate it is reasonably possible that our liability for unrecognized tax benefits may decrease by approximately $126 million within the next twelve months as the result of the possible closure of its 2005 through 2007 federal tax years, potential settlements with certain states and foreign countries and the lapse of the statute of limitations in various state and foreign jurisdictions. The potential decrease relates to various federal, state and foreign tax benefits including research and experimentation credits, transfer pricing adjustments and certain amortization and loss deductions.
We or one or more of our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. As of December 31, 2012, we were no longer subject to income tax examination by the U.S. federal jurisdiction for years before 2005. State and local examinations are substantially complete through 2002. Foreign jurisdictions generally remain subject to examination by their respective authorities from 2005 forward, none of which are considered major jurisdictions.
Under the Tax Allocation Agreement executed at the time of the spin-off of The Western Union Company ("Western Union") on September 29, 2006, Western Union is responsible for and must indemnify us against all taxes, interest and penalties that relate to Western Union for periods prior to the spin-off date. If Western Union were to agree to or be finally determined to owe any amounts for such periods but were to default in its indemnification obligation under the Tax Allocation Agreement, we as parent of the tax group during such periods generally would be required to pay the amounts to the relevant tax authority, resulting in a potentially material adverse effect on our financial position and results of operations. As of December 31, 2012, we had approximately $110 million of income taxes payable, including approximately $4 million of uncertain income tax liabilities, recorded related to Western Union for periods prior to the spin-off date. We have recorded a corresponding account receivable of equal amount from Western Union, which is included as a long-term account receivable in the "Other long-term assets" line of our Consolidated Balance Sheets, reflecting the indemnification obligation. During the year ended December 31, 2012, the uncertain income tax liabilities related to Western Union decreased by approximately $14 million as a result of the closure of the 2003-2004 federal tax years. As of December 31, 2012, we anticipate it is reasonably possible that the uncertain tax liabilities related to Western Union may decrease by approximately $4 million within the next twelve months as the result of the possible closure of its 2005 and 2006 federal tax years. The uncertain income tax liabilities and corresponding receivable are based on information provided by Western Union regarding its tax contingency reserves for periods prior to the spin-off date. There is no assurance that a Western Union-related issue raised by the Internal Revenue Service ("IRS") or other tax authority will be finally resolved at a cost not in excess of the amount reserved and reflected in our uncertain income tax liabilities and corresponding receivable from Western Union. The Western Union contingent liability is in addition to our liability for unrecognized tax benefits discussed above.
The IRS completed its examination of our U.S. federal consolidated income tax returns for 2005 through 2007 and issued a 30-Day letter on October 31, 2012. The 30-Day letter claims that we and our subsidiaries, which included Western Union during some of the years at issue, owe additional taxes with respect to a variety of adjustments. We and Western Union agree with several of the adjustments in the 30-Day letter, such adjustments representing tax due of approximately $40 million. This undisputed tax and associated interest due (pretax) of approximately $16 million through December 31, 2012, have been fully reserved. The undisputed tax for which Western Union would be required to indemnify us is
48
greater than the total tax due, such that settlement of the undisputed tax would result in a net refund to us. As to the adjustments that are disputed, such issues represent total taxes allegedly due of approximately $59 million, of which $40 million relates to us and $19 million relates to Western Union. We estimate that total interest due (pretax) on the disputed amounts is approximately $16 million through December 31, 2012, of which $9 million relates to us and $7 million relates to Western Union. As to the disputed issues, we and Western Union have contested the adjustments by filing a protest with the IRS. The IRS has prepared a rebuttal to the protest and has forwarded the case to Appeals. We believe that we have adequately reserved for the disputed issues in our liability for unrecognized tax benefits described above and that final resolution of those issues will not have a material adverse effect on our financial position or results of operations.
Equity earnings in affiliates. Equity earnings in affiliates increased in 2012 compared to 2011 due mostly to transaction growth, dollar volume growth, pricing increases and the positive impact of lower debit interchange rates as a result of the Dodd-Frank Act. These increases were partially offset by a decrease resulting from the 2011 error correction described below which adversely impacted the equity earnings in affiliates growth rate for 2012 compared to 2011 by 7 percentage points.
Equity earnings in affiliates increased in 2011 compared to 2010 mostly due to the 2011 correction of cumulative depreciation and amortization errors related to purchase accounting associated with our 2007 merger with an affiliate of KKR. The error corrections, which totaled an $11 million benefit in "Equity earnings in affiliates" (a $58.5 million benefit in aggregate) and occurred over a four year period, benefited the equity earnings in affiliates growth rate in 2011 compared to 2010 by 9 percentage points.
Net income attributable to noncontrolling interests and redeemable noncontrolling interests. Most of the net income attributable to noncontrolling interests and redeemable noncontrolling interests relates to our consolidated merchant alliances. Net income attributable to noncontrolling interests and redeemable noncontrolling interests decreased in 2012 compared to 2011 due to increased processing expense in the BAMS alliance resulting from a shift in processing from the alliance partner to us partially offset by the impact of lower debit interchange rates as a result of the Dodd-Frank Act, transaction and dollar volume growth and pricing increases.
Segment results. We classify our businesses into three segments: Retail and Alliance Services, Financial Services and International. All Other and Corporate is not discussed separately as its results that had a significant impact on operating results are discussed in the "Consolidated Results" discussion above.
The business segment measurements provided to and evaluated by the chief operating decision maker are computed in accordance with the principles listed below.
49
calculating our compliance with debt covenants. The additional items that are adjusted to determine segment EBITDA are:
50
Segment Results for the Three and Nine Months Ended September 30, 2013 and 2012.
Retail and Alliance Services segment results.
|
Three months ended September 30, |
Change | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
(in millions)
|
2013 | 2012 | % | |||||||
Revenues: |
||||||||||
Transaction and processing service fees |
$ | 819.8 | $ | 807.6 | 2 | % | ||||
Product sales and other |
96.9 | 102.6 | (6 | )% | ||||||
Segment revenue |
$ | 916.7 | $ | 910.2 | 1 | % | ||||
Segment EBITDA |
$ | 410.3 | $ | 409.4 | 0 | % | ||||
Segment margin |
45 | % | 45 | % | 0pts | |||||
Key indicators: |
||||||||||
Domestic merchant transactions(a) |
9,822.6 | 9,330.8 | 5 | % |
|
Nine months ended September 30, |
Change | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
(in millions)
|
2013 | 2012 | % | |||||||
Revenues: |
||||||||||
Transaction and processing service fees |
$ | 2,414.6 | $ | 2,363.4 | 2 | % | ||||
Product sales and other |
291.7 | 308.0 | (5 | )% | ||||||
Segment revenue |
$ | 2,706.3 | $ | 2,671.4 | 1 | % | ||||
Segment EBITDA |
$ | 1,193.8 | $ | 1,176.6 | 1 | % | ||||
Segment margin |
44 | % | 44 | % | 0pts | |||||
Key indicators: |
||||||||||
Domestic merchant transactions(a) |
28,520.0 | 27,285.1 | 5 | % |
51
Transaction and processing service fees revenue.
Components of transaction and processing service fees revenue.
|
Three months ended September 30, |
Change | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
(in millions)
|
2013 | 2012 | % | |||||||
Acquiring revenue |
$ | 604.6 | $ | 596.3 | 1 | % | ||||
Check processing revenue |
68.0 | 75.4 | (10 | )% | ||||||
Prepaid revenue |
90.1 | 79.1 | 14 | % | ||||||
Processing fees and other revenue from alliance partners |
57.1 | 56.8 | 1 | % | ||||||
Total transaction and processing service fees revenue |
$ | 819.8 | $ | 807.6 | 2 | % | ||||
|
Nine months ended September 30, |
Change | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
(in millions)
|
2013 | 2012 | % | |||||||
Acquiring revenue |
$ | 1,798.3 | $ | 1,759.1 | 2 | % | ||||
Check processing revenue |
205.8 | 228.1 | (10 | )% | ||||||
Prepaid revenue |
244.7 | 213.4 | 15 | % | ||||||
Processing fees and other revenue from alliance partners |
165.8 | 162.8 | 2 | % | ||||||
Total transaction and processing service fees revenue |
$ | 2,414.6 | $ | 2,363.4 | 2 | % | ||||
Acquiring revenue. Acquiring revenue increased in the three and nine months ended September 30, 2013 compared to the same periods in 2012 mainly from increases in merchant transactions and dollar volumes, new sales and pricing increases for some regional merchants. In addition, acquiring revenue was positively impacted by network routing incentives in the three and nine months ended September 30, 2013 versus the comparable periods in 2012. These increases were partially offset by decreases resulting from the impact of merchant mix on transactions and dollar volumes, the effect of shifts in pricing mix, merchant attrition and price compression.
Transaction growth outpaced revenue growth for the three and nine months ended September 30, 2013 compared to the same periods in 2012 driven by the factors noted above, particularly merchant mix, pricing mix and price compression. A greater proportion of transaction growth was driven by our national merchants which contributed to lower revenue per transaction. The average ticket size of regional signature based transactions increased in the third quarter of 2013 as compared to the same period in 2012.
Check processing revenue. Check processing revenue decreased in the three and nine months ended September 30, 2013 versus the comparable periods in 2012 due mainly to lower overall check volumes from check writer attrition and merchant attrition in the regional market.
Prepaid revenue. Prepaid revenue increased in the three and nine months ended September 30, 2013 compared to the same periods in 2012 due to higher transaction volumes within the open loop payroll distribution program, new business, higher closed loop transaction volumes as well as higher card shipments. In addition, prepaid revenue increased in the three and nine months ended September 30, 2013 versus the comparable periods in 2012 by approximately 6 percentage points from growth in one of our alliances, accounted for under the equity method, resulting from the acquisition of a payment solutions business occurring in the fourth quarter of 2012.
52
Processing fees and other revenue from alliance partners. The increase in processing fees and other revenue from alliance partners in the three and nine months ended September 30, 2013 compared to the same periods in 2012 resulted from increased volumes within our merchant alliances.
Product sales and other revenue. Product sales and other revenue decreased in the three and nine months ended September 30, 2013 versus the comparable periods in 2012 primarily due to a decline in terminal sales including lower bulk sales.
Segment EBITDA. Retail and Alliance Services segment EBITDA remained flat for the three months ended September 30, 2013 compared to the same period in 2012 which included a $5 million provision for an uncollectible receivable recorded in the third quarter of 2013 which offset the benefit of the revenue items noted above. Retail and Alliance Services segment EBITDA increased slightly in the nine months ended September 30, 2013 compared to the same period in 2012 from the impact of the revenue items noted above partially offset by increased expenses, primarily $10 million in provisions for uncollectible receivables recorded in the first and third quarters of 2013 as well as increased technology and operations costs. The increase in expenses negatively impacted the segment EBITDA growth rate for the nine months ended September 30, 2013 versus the comparable period in 2012 by approximately 1 percentage point.
Financial Services segment results.
|
Three months ended September 30, |
Change | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
(in millions)
|
2013 | 2012 | % | |||||||
Revenues: |
||||||||||
Transaction and processing service fees |
$ | 331.1 | $ | 334.5 | (1 | )% | ||||
Product sales and other |
15.3 | 12.6 | 21 | % | ||||||
Segment revenue |
$ | 346.4 | $ | 347.1 | 0 | % | ||||
Segment EBITDA |
$ | 162.7 | $ | 149.5 | 9 | % | ||||
Segment margin |
47 | % | 43 | % | 4pts | |||||
Key indicators: |
||||||||||
Domestic debit issuer transactions(a) |
2,879.0 | 2,986.5 | (4 | )% | ||||||
Domestic active card accounts on file (average for the period)(b) |
148.4 | 134.3 | 10 | % |
53
|
Nine months ended September 30, |
Change | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
(in millions)
|
2013 | 2012 | % | |||||||
Revenues: |
||||||||||
Transaction and processing service fees |
$ | 979.5 | $ | 1,011.4 | (3 | )% | ||||
Product sales and other |
34.7 | 30.0 | 16 | % | ||||||
Segment revenue |
$ | 1,014.2 | $ | 1,041.4 | (3 | )% | ||||
Segment EBITDA |
$ | 446.5 | $ | 457.2 | (2 | )% | ||||
Segment margin |
44 | % | 44 | % | 0pts | |||||
Key indicators: |
||||||||||
Domestic debit issuer transactions(a) |
8,442.2 | 9,242.5 | (9 | )% | ||||||
Domestic active card accounts on file (average for the period)(b) |
142.8 | 130.0 | 10 | % | ||||||
Domestic card accounts on file (end of period)(c) |
735.1 | 721.8 | 2 | % |
Transaction and processing service fees revenue.
Components of transaction and processing service fees revenue.
|
Three months ended September 30, |
Change | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
(in millions)
|
2013 | 2012 | % | |||||||
Credit card, retail card and debit processing |
$ | 221.3 | $ | 225.2 | (2 | )% | ||||
Output services |
62.0 | 57.5 | 8 | % | ||||||
Other revenue |
47.8 | 51.8 | (8 | )% | ||||||
Total transaction and processing service fees revenue |
$ | 331.1 | $ | 334.5 | (1 | )% | ||||
|
Nine months ended September 30, |
Change | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
(in millions)
|
2013 | 2012 | % | |||||||
Credit card, retail card and debit processing |
$ | 655.9 | $ | 682.4 | (4 | )% | ||||
Output services |
181.3 | 169.4 | 7 | % | ||||||
Other revenue |
142.3 | 159.6 | (11 | )% | ||||||
Total transaction and processing service fees revenue |
$ | 979.5 | $ | 1,011.4 | (3 | )% | ||||
Credit card, retail card and debit processing revenue. Credit card and retail card processing revenue increased for the three and nine months ended September 30, 2013 versus the comparable periods in 2012 due primarily to growth from existing customers and net new business partially offset by price
54
compression on contract renewals as well as volume based pricing incentives. Domestic active card accounts on file benefited primarily from new account conversions and growth from existing customers.
Debit processing revenue decreased for the three and nine months ended September 30, 2013 versus the comparable periods in 2012 due primarily to net lost business and price compression on contract renewals. In addition, the nine month period was impacted by the loss of a large financial institution that completed its final deconversion in the third quarter of 2012.
Debit issuer transactions decreased in the three months ended September 30, 2013 compared to the same period in 2012 primarily due to a decline in gateway transactions switched on behalf of other networks, which did not have a significant impact on debit processing revenue, as well as net lost business partially offset by growth from existing customers. Debit issuer transactions decreased in the nine months ended September 30, 2013 compared to the same period in 2012 primarily due to net lost business, including the loss of a large financial institution mentioned above as well as a decline in gateway transactions partially offset by growth from existing customers.
Output services revenue. Output services revenue increased for the three and nine months ended September 30, 2013 versus the comparable periods in 2012 due to net new plastics business and growth from existing print customers.
Other revenue. Other revenue consists mostly of revenue from remittance processing, information services, online banking and bill payment services as well as voice services. Other revenue for the three and nine months ended September 30, 2013 decreased compared to the same periods in 2012 due to decreases in information services, check clearing and voice services driven by lost or disposed business partially offset by increases in remittance processing driven by net new business. The disposed businesses impacted the other transaction and processing service fees revenue growth rates for the three- and nine-month periods ended September 30, 2013 versus the comparable periods in 2012 by approximately 10 and 13 percentage points, respectively.
Product sales and other revenue. Product sales and other revenue increased in the three and nine months ended September 30, 2013 versus the comparable periods in 2012 primarily due to a software license sale as well as increased programming revenue due to higher volumes for several financial institutions.
Segment EBITDA. Financial Services segment EBITDA increased for the three months ended September 30, 2013 compared to the same period in 2012 due mostly to decreased operating expenses. The decrease in operating expenses resulted primarily from cost reduction initiatives which impacted both the three- and nine-month periods ended September 30, 2013 compared to the same periods in 2012. The decrease in operating expenses positively impacted the segment EBITDA growth rate for the three- and nine-month periods ended September 30, 2013 versus the comparable periods in 2012 by approximately 9 and 4 percentage points, respectively. Financial Services segment EBITDA decreased for the nine-month period ended September 30, 2013 compared to the same period in 2012 due most significantly to the impact of the revenue items noted above partially offset by decreased operating expenses.
55
International segment results.
|
Three months ended September 30, |
Change | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
(in millions)
|
2013 | 2012 | % | |||||||
Revenues: |
||||||||||
Transaction and processing service fees |
$ | 331.4 | $ | 321.9 | 3 | % | ||||
Product sales and other |
92.8 | 95.8 | (3 | )% | ||||||
Equity earnings in affiliates |
7.4 | 9.3 | (20 | )% | ||||||
Segment revenue |
$ | 431.6 | $ | 427.0 | 1 | % | ||||
Segment EBITDA |
$ | 126.0 | $ | 119.5 | 5 | % | ||||
Segment margin |
29 | % | 28 | % | 1pt | |||||
Key indicators: |
||||||||||
International transactions(a) |
2,414.1 | 2,188.2 | 10 | % |
|
Nine months ended September 30, |
Change | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
(in millions)
|
2013 | 2012 | % | |||||||
Revenues: |
||||||||||
Transaction and processing service fees |
$ | 973.0 | $ | 952.6 | 2 | % | ||||
Product sales and other |
269.5 | 276.0 | (2 | )% | ||||||
Equity earnings in affiliates |
22.6 | 27.9 | (19 | )% | ||||||
Segment revenue |
$ | 1,265.1 | $ | 1,256.5 | 1 | % | ||||
Segment EBITDA |
$ | 341.6 | $ | 332.4 | 3 | % | ||||
Segment margin |
27 | % | 26 | % | 1pt | |||||
Key indicators: |
||||||||||
International transactions(a) |
6,891.6 | 6,227.1 | 11 | % | ||||||
International card accounts on file (end of period)(b) |
77.8 | 72.8 | 7 | % |
Summary. Segment revenue in the three and nine months ended September 30, 2013 versus the comparable periods in 2012 was impacted by the items discussed below as well as by foreign currency exchange rate movements. Foreign currency exchange rate movements negatively impacted the total segment revenue growth rates in the three and nine months ended September 30, 2013 by 2 percentage points compared to the same periods in 2012.
Transaction and processing service fees revenue. Transaction and processing service fees revenue includes merchant related services and card services revenue. Merchant related services revenue encompasses merchant acquiring and processing revenue, debit transaction revenue, POS/ATM transaction revenue and fees from switching services. Card services revenue represents monthly managed service fees for issued cards. Merchant related services transaction and processing service fee revenue represented approximately 60% and card services revenue represented approximately 40% of total transaction and processing service fees revenue for the periods presented.
56
Transaction and processing service fees revenue increased in the three and nine months ended September 30, 2013 compared to the same periods in 2012 primarily due to volume growth and pricing in the merchant acquiring businesses and card issuing businesses partially offset for the nine-month period by net lost business in the card issuing businesses. The majority of increases in the merchant acquiring businesses resulted from volume growth in the merchant acquiring alliances and direct sales channels primarily in Ireland, United Kingdom and Poland. Revenue in the card issuing businesses declined for the nine-month period mainly due to lost business in Australia and Germany partially offset by volume growth from existing customers in Argentina and the United Kingdom. Foreign currency exchange rate movements negatively impacted the transaction and processing service fees revenue growth rates for the three and nine months ended September 30, 2013 compared to the same periods in 2012 by approximately 2 and 1 percentage points, respectively.
Transaction and processing service fees revenue is driven by accounts on file and transactions. The spread between growth in these two indicators and revenue growth was driven mostly by the mix of transaction types, price compression and the impact of foreign currency exchange rate movements. International card accounts on file as of September 30, 2013 as compared to the same period in 2012 increased primarily due to new accounts in India and the United Kingdom partially offset by the removal of inactive accounts in Canada.
Product sales and other revenue. Product sales and other revenue decreased for the three and nine months ended September 30, 2013 versus the same periods in 2012 due to a decrease in software license sales, lower bulk terminal sales in Canada due to exiting this line of business and a decrease in terminal leasing income in the United Kingdom. Foreign currency exchange rate movements negatively impacted the growth rate for product sales and other revenue for the three and nine months ended September 30, 2013 compared to the same periods in 2012 by 4 and 3 percentage points, respectively.
Segment EBITDA. Segment EBITDA increased in the three and nine months ended September 30, 2013 compared to the same periods in 2012 primarily due to the revenue items noted above as well as decreased operating expenses driven by cost savings initiatives. The segment EBITDA growth rates for the three and nine months ended September 30, 2013 versus the comparable periods in 2012 benefited from cost savings initiatives by approximately 5 percentage points for the periods presented. These increases were partially offset by increased costs related to the expansion of our merchant acquiring business and the impact of foreign currency exchange rate movements. The expansion costs as well as the impact from foreign currency exchange rate movements negatively impacted the segment EBITDA growth rates for the three and nine months ended September 30, 2013 compared to the same periods in 2012 by approximately 7 and 6 percentage points, respectively, from increased expansion costs and approximately 3 percentage points for the periods presented from foreign currency exchange rate movements.
57
Segment Results for the Years Ended December 31, 2012, 2011 and 2010
Retail and Alliance Services segment results.
|
|
|
|
Percent Change | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Year Ended December 31, | |||||||||||||||
|
2012 vs. 2011 | 2011 vs. 2010 | ||||||||||||||
(in millions)
|
2012 | 2011 | 2010 | |||||||||||||
Revenues: |
||||||||||||||||
Transaction and processing service fees |
$ | 3,198.8 | $ | 2,974.5 | $ | 2,923.9 | 8 | % | 2 | % | ||||||
Product sales and other |
404.0 | 407.5 | 390.9 | (1 | )% | 4 | % | |||||||||
Segment revenue |
$ | 3,602.8 | $ | 3,382.0 | $ | 3,314.8 | 7 | % | 2 | % | ||||||
Segment EBITDA |
$ | 1,594.8 | $ | 1,407.5 | $ | 1,322.3 | 13 | % | 6 | % | ||||||
Segment margin |
44 | % | 42 | % | 40 | % | 2pts | 2pts | ||||||||
Key indicators: |
||||||||||||||||
Domestic merchant transactions(a) |
37,362.6 | 35,619.8 | 33,543.8 | 5 | % | 6 | % |
Transaction and processing service fees revenue.
|
|
|
|
Percent Change | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Year Ended December 31, | |||||||||||||||
|
2012 vs. 2011 | 2011 vs. 2010 | ||||||||||||||
(in millions)
|
2012 | 2011 | 2010 | |||||||||||||
Acquiring revenue |
$ | 2,368.7 | $ | 2,204.4 | $ | 2,169.7 | 7 | % | 2 | % | ||||||
Check processing revenue |
306.1 | 330.1 | 370.7 | (7 | )% | (11 | )% | |||||||||
Prepaid revenue |
306.5 | 291.1 | 263.2 | 5 | % | 11 | % | |||||||||
Processing fees and other revenue from alliance partners |
217.5 | 148.9 | 120.3 | 46 | % | 24 | % | |||||||||
Total transaction and processing service fees revenue |
$ | 3,198.8 | $ | 2,974.5 | $ | 2,923.9 | 8 | % | 2 | % | ||||||
Acquiring revenue. Acquiring revenue increased in 2012 compared to 2011 and 2011 compared to 2010 mainly from lower debit interchange rates as a result of the Dodd-Frank Act described in the "Regulatory Reform" section above which benefited growth for acquiring revenue by an estimated $75 million or 3 percentage points and $26 million or 1 percentage point, respectively. Acquiring revenue also benefited from increases in merchant transactions and dollar volumes, new sales and pricing increases for a certain segment of merchants. These increases were partially offset by decreases resulting from the impact of merchant mix on transactions and dollar volumes, the effect of shifts in pricing mix, merchant attrition and price compression. In addition, acquiring revenue in 2011 was adversely impacted compared to 2010 by a card association fee increase which only benefited the third quarter of 2010 and impacted the acquiring revenue growth rate in 2011 compared to 2010 by 1 percentage point.
Revenue growth outpaced transaction growth in 2012 compared to 2011 driven most significantly by the impact of lower debit interchange rates discussed above partially offset by merchant mix, pricing mix and price compression. Revenue per transaction increased 4% for 2012 compared to 2011 driven by the items impacting acquiring revenue discussed above as well as the shift in processing described in the "Processing fees and other revenue from alliance partners" section below.
58
Transaction growth outpaced revenue growth in 2011 compared to 2010 driven by the factors noted above, particularly merchant mix, pricing mix and price compression. A greater proportion of transaction growth was driven by our national merchants which contributed to lower revenue per transaction. The average ticket size of signature based transactions decreased slightly in 2012 as compared to 2011. The average ticket size of signature based transactions was flat in 2011 as compared to 2010.
Check processing revenue. Check processing revenue decreased in 2012 versus 2011 and in 2011 versus 2010 due most significantly to lower overall check volumes from check writer and merchant attrition and the impact of merchant mix resulting from a shift in regional to national merchants.
Prepaid revenue. Prepaid revenue increased in 2012 compared to 2011 due most significantly to higher transaction volumes within the open loop payroll distribution program related to existing customers and new business.
Prepaid revenue increased in 2011 compared to 2010 due mostly to higher transaction volumes within the open loop payroll distribution program related to new and existing customers. In addition, sales of gift cards increased in 2011 compared to the prior year related to a large sale to a national retailer associated with an incentive program as well as volume growth from existing clients and new clients. These increases were partially offset by sales of promotional gift cards in 2010 driven by a specific direct marketing campaign. Additionally, 2011 was impacted by a change in merchant mix resulting from increased card shipments to merchants that generate less revenue per card.
Processing fees and other revenue from alliance partners. The increases in processing fees and other revenue from alliance partners in 2012 compared to 2011 and in 2011 compared to 2010 resulted from increased fees from the BAMS alliance due to a shift of processing from the alliance partner to us beginning in October 2011, as well as increased transaction and dollar volumes within our merchant alliances. The impact of the shift in processing benefited the 2012 and 2011 revenue and growth rates by approximately $55 million or 37 percentage points and approximately $18 million or 15 percentage points, respectively.
Product sales and other revenue. Product sales and other revenue decreased in 2012 compared to 2011 primarily due to a decline in equipment sales including lower bulk sales and a gain on the sale of a portfolio in 2011 partially offset by growth in leasing revenue resulting from increased lease originations and lease renewals.
Product sales and other revenue increased in 2011 compared to 2010 primarily due to increases in the leasing business resulting from new clients as well as increased fees from lease renewals. Equipment sales decreased slightly in 2011 compared to 2010 resulting from higher terminal demand in the prior year due to new regulations and a shift in the mix of terminals in 2011 to lower cost, proprietary models.
Segment EBITDA. The impact of the revenue items noted above primarily contributed to the increase in Retail and Alliance Services segment EBITDA in 2012 compared 2011. The Dodd-Frank Act benefited the segment EBITDA growth rate in 2012 compared to the prior year by an estimated $70 million or 5 percentage points. The impact from the shift in processing related to the BAMS alliance positively impacted the segment EBITDA growth rate for 2012 compared to 2011 by approximately $44 million or 3 percentage points.
Retail and Alliance Services segment EBITDA in 2011 compared to 2010 was positively impacted by the revenue items noted above in the revenue discussion. The decrease in debit interchange rates positively impacted the segment EBITDA growth rate in 2011 compared to 2010 by approximately $24 million or 2 percentage points. Expense reductions also benefited Retail and Alliance Services segment EBITDA in 2011 compared to the prior year. Also contributing to the increase in segment
59
EBITDA for 2011 compared to 2010 was decreased credit losses due to a lower level of merchant delinquencies which benefited the segment EBITDA growth rate by 1 percentage point. The card association fee noted above negatively impacted the segment EBITDA growth rate in 2011 compared to 2010 by 2 percentage points.
Financial Services segment results.
|
|
|
|
Percent Change | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Year Ended December 31, | |||||||||||||||
|
2012 vs. 2011 | 2011 vs. 2010 | ||||||||||||||
(in millions)
|
2012 | 2011 | 2010 | |||||||||||||
Revenues: |
||||||||||||||||
Transaction and processing service fees |
$ | 1,350.0 | $ | 1,350.0 | $ | 1,362.2 | 0 | % | (1 | )% | ||||||
Product sales and other |
40.1 | 29.5 | 46.8 | 36 | % | (37 | )% | |||||||||
Segment revenue |
$ | 1,390.1 | $ | 1,379.5 | $ | 1,409.0 | 1 | % | (2 | )% | ||||||
Segment EBITDA |
$ | 603.1 | $ | 593.5 | $ | 553.0 | 2 | % | 7 | % | ||||||
Segment margin |
43 | % | 43 | % | 39 | % | 0pts | 4pts | ||||||||
Key indicators: |
||||||||||||||||
Domestic debit issuer transactions(a) |
12,113.8 | 13,042.6 | 12,201.2 | (7 | )% | 7 | % | |||||||||
Domestic active card accounts on file (end of period)(b) |
||||||||||||||||
Bankcard |
55.4 | 50.5 | 47.8 | 10 | % | 6 | % | |||||||||
Retail |
89.3 | 72.6 | 70.7 | 23 | % | 3 | % | |||||||||
Total |
144.7 | 123.1 | 118.5 | 18 | % | 4 | % | |||||||||
Domestic card accounts on file (end of period)(c) |
||||||||||||||||
Bankcard |
152.2 | 137.2 | 127.3 | 11 | % | 8 | % | |||||||||
Retail |
492.2 | 423.0 | 398.4 | 16 | % | 6 | % | |||||||||
Debit |
93.7 | 146.5 | 129.9 | (36 | )% | 13 | % | |||||||||
Total |
738.1 | 706.7 | 655.6 | 4 | % | 8 | % | |||||||||
Transaction and processing service fees revenue.
Components of transaction and processing service fees revenue.
|
|
|
|
Percent Change | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Year Ended December 31, | |||||||||||||||
|
2012 vs. 2011 | 2011 vs. 2010 | ||||||||||||||
(in millions)
|
2012 | 2011 | 2010 | |||||||||||||
Credit card, retail card and debit processing |
$ | 911.5 | $ | 907.2 | $ | 924.7 | 0 | % | (2 | )% | ||||||
Output services |
229.8 | 225.3 | 219.5 | 2 | % | 3 | % | |||||||||
Other revenue |
208.7 | 217.5 | 218.0 | (4 | )% | 0 | % | |||||||||
Total transaction and processing service fees revenue |
$ | 1,350.0 | $ | 1,350.0 | $ | 1,362.2 | 0 | % | (1 | )% | ||||||
60
Credit card, retail card and debit processing revenue. Credit card and retail card processing revenue increased for 2012 compared to 2011 due to net new business and volume growth from existing customers mostly offset by price compression on contract renewals as well as volume based pricing incentives. Growth in domestic active card accounts on file in 2012 versus 2011 benefited primarily from net new account conversions, mostly retail accounts; the substantial majority of which were converted in March 2012. Credit card and retail card processing revenue declined in 2011 versus 2010 with net new account conversions more than offset by price compression, declines in revenue from existing customers and the loss of call center business not driven by active accounts on file. Growth in domestic active card accounts on file in 2011 compared to 2010 benefited primarily from net new account conversions.
Debit processing revenue decreased for 2012 compared to 2011 due primarily to net lost business and price compression on contract renewals as well as other net contractual pricing incentives partially offset by new fees implemented in 2011, primarily regulatory compliance fees and volume growth from existing customers. Debit processing revenue increased slightly in 2011 compared to 2010 due to debit issuer transaction growth from existing customers substantially offset by net lost business and price compression.
Debit issuer transactions in 2012 decreased compared to 2011 due to lost business, including the loss of a large financial institution that completed its deconversion in the third quarter of 2012. This decrease was partially offset by net impacts from the implementation of the Dodd-Frank Act discussed below and growth of existing clients due in part to the shift to debit cards from cash and checks. The deconversion noted above also impacted domestic card accounts on file in 2012 versus 2011. Debit issuer transactions grew in 2011 compared to 2010 resulted from growth of existing clients due in part to the shift to debit cards from cash and checks, and new business partially offset by lost business.
The implementation of the Dodd-Frank Act described in the "Regulatory Reform" section above resulted in a net increase in debit issuer transactions in 2012 compared to 2011. Growth benefited from new contracts with financial institutions and transactions routed on behalf of other networks through our gateway. This growth was partially offset by losses in the existing customer base from merchant routing decisions. The net revenue impact in 2012 from the implementation of the Dodd-Frank Act was minimal because of lower rates on new transactions from regulated financial institutions and gateway transactions compared to rates on transactions lost due to routing decisions.
Output services revenue. Output services revenue increased in 2012 compared to 2011 due to growth from existing customers and net new business which was partially offset by price compression on contract renewals as well as volume based pricing incentives.
Output services revenue increased in 2011 compared to 2010 due to net new plastic and print business and growth in plastics volumes from existing customers partially offset by lower print volumes from existing customers and price compression.
Other revenue. Other revenue consists mostly of revenue from remittance processing, online banking and bill payment services, voice services as well as information services. Other revenue for 2012 decreased compared to 2011 due to decreases in information services, voice services and check clearing driven by lost or disposed business and decreases in volumes from existing customers partially offset by increases in online banking and bill payment services driven by new business and growth from existing customers. A substantial portion of the information services as well as the check clearing services businesses had been divested as of December 31, 2012.
Other revenue was flat in 2011 compared to 2010 due to a decrease in volumes related to remittance processing and information services mostly offset by an increase in online banking and bill payment services volumes as well as net new business primarily in remittance processing.
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Product sales and other revenue. Product sales and other revenue increased in 2012 compared to 2011 primarily due to new software license sales and professional services for programming.
Product sales and other revenue decreased in 2011 compared to 2010 due most significantly to higher contract termination fees recognized in 2010 as well as a decline in professional services revenue resulting from projects that were completed in 2010.
Segment EBITDA. Financial Services segment EBITDA increased in 2012 compared to 2011 due most significantly to the revenue items noted above partially offset by a sales tax recovery recorded in 2011.
Financial Services segment EBITDA increased in 2011 compared to 2010 due most significantly to decreased technology and operations costs resulting from reduced headcount and operational efficiencies, and a sales tax recovery. In addition, 2011 also benefited compared to 2010 from higher expenses in the prior year due to a billing adjustment recorded in the second quarter of 2010. These increases were partially offset by the adverse impact of the items noted in the revenue discussion above. The decrease in technology and operations costs, the sales tax recovery and the prior year billing adjustment benefited the segment EBITDA growth rate in 2011 versus 2010 by 11, 2 and 1 percentage points, respectively.
International segment results.
|
|
|
|
Percent Change | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Year Ended December 31, | |||||||||||||||
|
2012 vs. 2011 | 2011 vs. 2010 | ||||||||||||||
(in millions)
|
2012 | 2011 | 2010 | |||||||||||||
Revenues: |
||||||||||||||||
Transaction and processing service fees |
$ | 1,291.2 | $ | 1,337.9 | $ | 1,237.5 | (3 | )% | 8 | % | ||||||
Product sales and other |
391.0 | 388.8 | 353.9 | 1 | % | 10 | % | |||||||||
Equity earnings in affiliates |
36.2 | 34.6 | 29.4 | 5 | % | 18 | % | |||||||||
Segment revenue |
$ | 1,718.4 | $ | 1,761.3 | $ | 1,620.8 | 2 | % | 9 | % | ||||||
Segment EBITDA |
$ | 483.8 | $ | 454.3 | $ | 329.8 | 6 | % | 38 | % | ||||||
Segment margin |
28 | % | 26 | % | 20 | % | 2pts | 6pts | ||||||||
Key indicators: |
||||||||||||||||
International transactions(a) |
8,458.4 | 7,637.9 | 6,777.8 | 11 | % | 13 | % | |||||||||
International card accounts on file (end of period)(b) |
73.6 | 75.0 | 88.8 | (2 | )% | (16 | )% |
Summary. Segment revenue in 2012 compared to 2011 was impacted by the items discussed below as well as foreign currency exchange rate movements. Foreign currency exchange rate movements negatively impacted the total segment revenue growth rate in 2012 by 4 percentage points compared to 2011 and benefited the total segment revenue growth rate in 2011 by 4 percentage points compared to 2010.
Transaction and processing service fee revenue. Transaction and processing service fees revenue includes merchant related services and card services revenue. Merchant related services revenue
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encompasses merchant acquiring and processing revenue, debit transaction revenue, POS/ATM transaction revenue and fees from switching services. Card services revenue represents monthly managed service fees for issued cards. Merchant related services transaction and processing service fees revenue represented approximately 60% for the periods presented and card services revenue represented approximately 40% of total transaction and processing service fees revenue for the periods presented.
Transaction and processing service fees revenue decreased in 2012 compared to 2011 due to the impact of foreign currency exchange rate movements. In addition, declines in the card issuing businesses were partially offset by growth in the merchant acquiring businesses. Revenue in the card issuing businesses declined primarily due to lost business in Germany, Australia, the United Kingdom and China as well as lower revenue in Greece driven by the economic recession and a strategic decision to exit low-margin businesses. Partially offsetting these decreases were increased transaction volumes in the card issuing business primarily in Argentina and new business in Canada. Increases in the merchant acquiring businesses resulted from growth in the merchant acquiring alliances and direct sales channels primarily in the United Kingdom and Canada. Foreign currency exchange rate movements negatively impacted the transaction and processing service fees revenue growth rate in 2012 versus 2011 by 4 percentage points.
Transaction and processing service fees revenue increased in 2011 compared to 2010 due to growth in the merchant acquiring businesses resulting from growth from existing clients in the merchant acquiring alliances and the direct sales channel in the United Kingdom. The card issuing businesses grew due to new business primarily in the United Kingdom as well as transaction growth in Argentina and pricing in Australia. Partially offsetting these increases were lost business and lower revenue in Greece driven by the economic recession and a strategic decision to exit low-margin businesses. Foreign currency exchange rate movements benefited the transaction and processing service fees growth rate in 2011 versus 2010 by 5 percentage points.
Transaction and processing service fees revenue is driven by accounts on file and transactions. The spread between growth in these two indicators and revenue growth was impacted by foreign currency exchange rate movements, the mix of transaction types and price compression. International card accounts on file decreased in 2011 compared to the 2010 primarily due to lost business in China and the United Kingdom that deconverted in the fourth quarter of 2011.
Product sales and other revenue. Product sales and other revenue increased in 2012 compared to 2011 due to new software license fees and new sales, price increases and higher terminal installations in Argentina. Partially offsetting these increases are declines in terminal sales and lease originations in Germany, a decrease resulting from contract termination fees recognized in 2011 as well as a decrease resulting from the strategic decision to exit a line of business in Greece. Foreign currency exchange rate movements negatively impacted the growth rate for product sales and other revenue in 2012 compared to 2011 by 5 percentage points.
Product sales and other revenue increased in 2011 compared to 2010 due to growth in terminal sales and leasing revenue as a result of new clients and growth from existing clients in Argentina and the United Kingdom as well as new terminal requirements and lease renewals in the United Kingdom.
Segment EBITDA. Segment EBITDA increased in 2012 compared to 2011 due primarily to the revenue items noted above. In addition, International segment EBITDA benefited in 2012 from the 2011 correction of cumulative errors in the amortization of initial payments for new contracts related to purchase accounting associated with the KKR merger and the write-off of capitalized commissions related to terminal leases which adversely impacted 2011 results by $14.3 million and benefited the growth rate for 2012 compared to 2011 by 3 percentage points. Segment EBITDA also benefited from decreased expenses, principally operations and technology costs, driven by cost savings initiatives. The segment EBITDA growth rate for 2012 compared to 2011 benefited from decreased operations and
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technology costs by 4 percentage points. The increases in segment EBITDA for 2012 compared to 2011 were partially offset by foreign currency exchange rate movements which adversely impacted the segment EBITDA growth rate by 4 percentage points.
Segment EBITDA increased in 2011 compared to 2010 due to the impact of the revenue items noted above, decreased operating expenses driven by cost reduction initiatives, a benefit resulting from the write-off of leasing receivables and terminal inventory in 2010 and the impact of foreign currency exchange rate movements. The 2010 write-off of leasing receivables and terminal inventory benefited the segment EBITDA growth rate in 2011 compared to 2010 by 6 percentage points. Segment EBITDA growth also benefited 5 percentage points in 2011 compared to 2010 from the impact of foreign currency exchange rate movements. Partially offsetting the increases described above was a decrease resulting from the correction of cumulative errors in the amortization of initial payments for new contracts related to purchase accounting associated with the KKR merger and the write-off of capitalized commissions related to terminal leases which, together, adversely impacted International segment EBITDA by $14.3 million and the growth rate for 2011 compared to 2010 by 4 percentage points.
Capital Resources and Liquidity
For the Nine Months Ended September 30, 2013 and 2012.
Our source of liquidity is principally cash generated from operating activities supplemented as necessary on a short-term basis by borrowings against our revolving credit facility. We believe our current level of cash and short-term financing capabilities along with future cash flows from operations are sufficient to meet the needs of the business. The following discussion highlights changes in our debt structure as well as our cash flow activities and the sources and uses of funding during the nine months ended September 30, 2013 and 2012.
During the nine months ended September 30, 2013 and 2012, we completed various amendments and modifications to certain of our debt agreements and several debt offerings in an effort to extend our debt maturities.
Details regarding our debt structure are provided in Note 4 to our Unaudited Consolidated Financial Statements included elsewhere in this prospectus. We intend to extend additional debt maturity dates as opportunities allow.
Cash and cash equivalents. Investments (other than those included in settlement assets) with original maturities of three months or less (that are readily convertible to cash) are considered to be cash equivalents and are stated at cost, which approximates market value. At September 30, 2013 and December 31, 2012, we held $358.6 million and $608.3 million in cash and cash equivalents, respectively.
Included in cash and cash equivalents are amounts held by Integrated Payment Systems Inc. ("IPS") and the BAMS alliance, that are not available to fund operations outside of those businesses. At September 30, 2013 and December 31, 2012, the cash and cash equivalents held by IPS and the BAMS alliance totaled $116.6 million and $85.8 million, respectively. All other domestic cash balances, to the extent available, are used to fund our short-term liquidity needs.
Cash and cash equivalents also includes amounts held outside of the U.S. at September 30, 2013 and December 31, 2012 totaling $211.3 million and $268.4 million, respectively. As of September 30, 2013, there was approximately $60 million of cash and cash equivalents held outside of the U.S. that could be used for general corporate purposes. We plan to fund any cash needs throughout the remainder of 2013 within the International segment with cash held by the segment, but if necessary, could fund such needs using cash from the U.S., subject to satisfying debt covenant restrictions.
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Cash flows from operating activities.
|
Nine months ended September 30, |
||||||
---|---|---|---|---|---|---|---|
Source/(use) (in millions)
|
2013 | 2012 | |||||
Net loss |
$ | (623.9 | ) | $ | (403.3 | ) | |
Depreciation and amortization (including amortization netted against equity earnings in affiliates and revenues) |
908.1 | 1,004.1 | |||||
Charges related to other operating expenses and other income (expense) |
66.9 | 112.1 | |||||
Other non-cash and non-operating items, net |
(5.1 | ) | (37.8 | ) | |||
Increase (decrease) in cash, excluding the effects of acquisitions and dispositions, resulting from changes in: |
|||||||
Accounts receivable, current and long-term |
193.5 | 39.9 | |||||
Other assets, current and long-term |
3.8 | 220.6 | |||||
Accounts payable and other liabilities, current and long-term |
(243.8 | ) | (92.7 | ) | |||
Income tax accounts |
32.5 | (304.7 | ) | ||||
Net cash provided by operating activities |
$ | 332.0 | $ | 538.2 | |||
Cash flows provided by operating activities for the periods presented resulted from normal operating activities and reflect the timing of our working capital requirements.
Our operating cash flow is significantly impacted by our level of debt. Approximately $1,480 million and $1,410 million in cash interest was paid during the nine months ended September 30, 2013 and 2012, respectively. The increase in cash interest payments from 2012 is primarily due to changes in the timing of payments as well as an increase in interest rates resulting from our debt modifications during the last two years. Partially offsetting the increase is a decrease in interest payments due to the expiration of interest rate swaps in the third quarter of 2012 that were replaced with interest rate swaps with a lower fixed rate.
Cash flows from operating activities decreased for the nine months ended September 30, 2013 compared to the same period in 2012 primarily due to timing of various payments. The decrease was partially offset by sources of cash related to lower prefunding of settlement arrangements.
We anticipate funding operations throughout the remainder of 2013 primarily with cash flows from operating activities and by closely managing discretionary capital and other spending; however, any shortfalls would be supplemented as necessary by borrowings against our revolving credit facility.
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Cash flows from investing activities.
|
Nine months ended September 30, |
||||||
---|---|---|---|---|---|---|---|
Source/(use) (in millions)
|
2013 | 2012 | |||||
Current period acquisitions |
$ | | $ | (1.9 | ) | ||
Contributions to equity method investments |
| (7.9 | ) | ||||
Payments related to other businesses previously acquired |
0.2 | (3.2 | ) | ||||
Proceeds from dispositions, net of expenses paid and cash disposed |
14.5 | | |||||
Proceeds from sale of property and equipment |
4.2 | 7.8 | |||||
Additions to property and equipment |
(132.3 | ) | (136.3 | ) | |||
Payments to secure customer service contracts, including outlays for conversion, and capitalized systems development costs |
(128.0 | ) | (141.2 | ) | |||
Other investing activities |
7.2 | 7.3 | |||||
Net cash used in investing activities |
$ | (234.2 | ) | $ | (275.4 | ) | |
Acquisitions and dispositions. We may finance acquisitions through a combination of internally generated funds, reinvestment of proceeds from asset sales, short-term borrowings and equity of our parent company. We may also consider using long-term borrowings subject to restrictions in our debt agreements. Although we consider potential acquisitions from time to time, our plan for the remainder of 2013 does not include funding of material acquisitions.
We continue to manage our portfolio of businesses and evaluate the possible divestiture of businesses that do not match our long-term growth objectives.
Capital expenditures. Capital expenditures are anticipated to total approximately $375 to $425 million in 2013 and are expected to be funded by cash flows from operations and reinvestment of proceeds from asset sales. If, however, those sources are insufficient, we will decrease our discretionary capital expenditures or utilize our revolving credit facility.
Cash flows from financing activities.
|
Nine months ended September 30, |
||||||
---|---|---|---|---|---|---|---|
Source/(use) (in millions)
|
2013 | 2012 | |||||
Short-term borrowings, net |
$ | (3.1 | ) | $ | (22.0 | ) | |
Accrued interest funded upon issuance of notes |
(6.5 | ) | 6.5 | ||||
Debt modification (payments) proceeds and related financing costs, net |
(49.0 | ) | 10.8 | ||||
Principal payments on long-term debt |
(72.4 | ) | (60.2 | ) | |||
Proceeds from sale-leaseback transactions |
| 13.8 | |||||
Distributions and dividends paid to noncontrolling interests and redeemable noncontrolling interest |
(156.5 | ) | (199.0 | ) | |||
Purchase of noncontrolling interest |
(23.7 | ) | (25.1 | ) | |||
Redemption of Parent's redeemable common stock |
(7.5 | ) | (0.5 | ) | |||
Cash dividends |
(21.5 | ) | (5.1 | ) | |||
Net cash used in financing activities |
$ | (340.2 | ) | $ | (280.8 | ) | |
Short-term borrowings, net. The cash activity related to short-term borrowings in 2013 resulted primarily from net paydowns on our credit lines used principally to prefund settlement activity, partially
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offset by net borrowings on our senior secured revolving credit facility. The cash activity related to short-term borrowings in 2012 resulted primarily from net paydowns on our credit lines used principally to prefund settlement activity.
As of September 30, 2013, our senior secured revolving credit facility had commitments from financial institutions to provide $1,016.2 million of credit and matures on December 31, 2015 or September 24, 2016 subject to certain conditions. Besides the letters of credit discussed below, we had $95.0 million outstanding against this facility as of September 30, 2013 and no amount outstanding as of December 31, 2012. Therefore, as of September 30, 2013, $873.1 million remained available under this facility. Excluding the letters of credit, the maximum amount outstanding against this facility during both the three and nine months ended September 30, 2013 was approximately $351.5 million, while the average amount outstanding during the three and nine months ended September 30, 2013 was approximately $113.9 million and $59.1 million, respectively.
We utilize our revolving credit facility on a short-term basis to fund investing or operating activities when cash flows from operating activities are not sufficient. We believe the capacity under our senior secured revolving credit facility will be sufficient to meet our short-term liquidity needs. Our senior secured revolving credit facility can be used for working capital and general corporate purposes.
There are multiple institutions that have commitments under this facility with none representing more than approximately 21% of the capacity.
Debt modification (payments) proceeds and related financing costs. Our debt modifications and amendments noted above were accounted for as modifications resulting in only the net effect of the transactions, including payment of capitalized fees, being reflected as a source or use of cash excluding certain fees included in our results of operations.
Principal payments on long-term debt. During the nine months ended September 30, 2013, we paid notes that came due totaling $15.1 million.
Payments for capital leases totaled $57.3 million and $60.2 million for the nine months ended September 30, 2013 and 2012, respectively.
As of November 12, 2013, our long-term corporate family rating from Moody's was B3 (stable). The long-term local issuer credit rating from Standard and Poor's was B (stable). The long-term issuer default rating from Fitch was B (stable). Our current level of debt may impair our ability to get additional funding beyond our revolving credit facility if needed.
Proceeds from sale-leaseback transactions. We may, from time to time, enter into sale-leaseback transactions as a means of financing previously or recently acquired fixed assets, primarily equipment.
Distributions and dividends paid to noncontrolling interests and redeemable noncontrolling interest. Distributions and dividends paid to noncontrolling interests and redeemable noncontrolling interest primarily represent distributions of earnings.
Purchase of noncontrolling interest. In April 2012, we acquired the remaining approximately 30 percent noncontrolling interest in Omnipay, a provider of card and electronic payment processing services to merchant acquiring banks, for approximately 37.1 million euro, of which 19.0 million euro ($25.1 million) was paid in April 2012 and the remaining 18.1 million euro ($23.7 million) was paid in April 2013.
Cash dividends. We paid cash dividends to our parent company, First Data Holdings Inc., in the periods presented.
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Letters, lines of credit and other.
|
Total Available(a) | Total Outstanding | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions)
|
As of September 30, 2013 |
As of December 31, 2012 |
As of September 30, 2013 |
As of December 31, 2012 |
|||||||||
Letters of credit(b) |
$ | 500.0 | $ | 500.0 | $ | 48.1 | $ | 45.1 | |||||
Lines of credit and other(c) |
$ | 231.2 | $ | 346.3 | $ | 79.6 | $ | 177.2 |
In the event one or more of the aforementioned lines of credit becomes unavailable, we will utilize our existing cash, cash flows from operating activities or our revolving credit facility to meet our liquidity needs.
Significant non-cash transactions. During the nine months ended September 30, 2013 and 2012, we entered into capital leases, net of trade-ins, totaling approximately $109 million and $49 million, respectively.
Guarantees and covenants. For a description of guarantees and covenants and covenant compliance refer to the "Guarantees and covenants" and "Covenant compliance" sections in "Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2012. As of September 30, 2013, we were in compliance with all applicable covenants, including our sole financial covenant with Consolidated Senior Secured Debt of $12,387.4 million, Consolidated EBITDA of $2,926.5 million and a Ratio of 4.23 to 1.00 compared to the maximum ratio allowed by the covenant of 6.25 to 1.00. On October 1, 2013, the maximum ratio allowed by the covenant decreased to 6.00 to 1.00.
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The calculation of Consolidated EBITDA under the senior secured term loan facility is as follows:
(in millions)
|
Last twelve months ended September 30, 2013 |
|||
---|---|---|---|---|
Net loss attributable to First Data Corporation |
$ | (925.0 | ) | |
Interest expense, net(1) |
1,867.1 | |||
Income tax benefit |
130.0 | |||
Depreciation and amortization(2) |
1,234.9 | |||
EBITDA(14) |
2,307.0 | |||
Stock based compensation(3) |
37.5 | |||
Restructuring, net(4) |
64.4 | |||
Non-operating foreign currency (gains) and losses(5) |
21.2 | |||
Official check and money order EBITDA(6) |
(2.1 | ) | ||
Cost of alliance conversions and other technology initiatives(7) |
80.3 | |||
KKR related items(8) |
20.6 | |||
Debt issuance costs(9) |
2.9 | |||
Projected near-term cost savings and revenue enhancements(10) |
183.7 | |||
Net income attributable to noncontrolling interests and redeemable noncontrolling interest(11) |
177.1 | |||
Equity entities taxes, depreciation and amortization(12) |
11.7 | |||
Other(13) |
22.2 | |||
Consolidated EBITDA(14) |
$ | 2,926.5 | ||
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Consolidated EBITDA (or debt covenant EBITDA) is defined as EBITDA adjusted to exclude certain non-cash items, non-recurring items that we do not expect to continue at the same level in the future and certain items management believes will impact future operating results and adjusted to include near-term cost savings projected to be achieved within twelve months on an annualized basis (see Note 10 above). Consolidated EBITDA is further adjusted to add net income attributable to noncontrolling interests and redeemable noncontrolling interest of certain non-wholly-owned subsidiaries and exclude other miscellaneous adjustments that are used in calculating covenant compliance under the agreements governing our senior unsecured debt and/or senior secured credit facilities. We believe that the inclusion of supplementary adjustments to EBITDA are appropriate to provide additional information to investors about items that will impact the calculation of EBITDA that is used to determine covenant compliance under the agreements governing our senior unsecured debt and/or senior secured credit facilities. Since not all companies use identical calculations, this presentation of Consolidated EBITDA may not be comparable to other similarly titled measures of other companies.
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Off-Balance Sheet Arrangements
During the nine months ended September 30, 2013 and 2012, we did not engage in any off-balance sheet financing activities other than those discussed in "Off-Balance Sheet Arrangements" in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2012.
Contractual Obligations
During the nine months ended September 30, 2013, there were no material changes outside the ordinary course of business in our contractual obligations and commercial commitments from those reported at December 31, 2012 in our Annual Report on Form 10-K.
In February 2013, as discussed in Note 4 to our Consolidated Financial Statements included elsewhere in this prospectus, we issued $785 million aggregate principal amount of 11.25% senior unsecured notes due January 15, 2021. The proceeds from the offering were used to repurchase our outstanding 10.55% senior unsecured notes and pay related fees and expenses. On April 10, 2013, we issued $815 million aggregate principal amount of 10.625% senior unsecured notes due June 15, 2021. The proceeds from those notes were used to pay our 9.875% senior unsecured notes due 2015 and to pay related fees and expenses. Additionally, in February 2013, we entered into a Joinder Agreement relating to our credit agreement, pursuant to which we incurred $258 million in new term loans maturing on September 24, 2018. The net cash proceeds from the new term loans were used to repay all of our outstanding term loan borrowings maturing in 2014 and to pay related fees and expenses.
On April 10, 2013, our senior secured term loan facility was amended to create a senior secured replacement term loan facility in an aggregate principal amount equal to the aggregate outstanding principal amount of term loans due in 2017. As of April 10, 2013, all of the previously outstanding 2017 term loans were exchanged with loans under the new facility.
On April 15, 2013, we further amended our senior secured term loan facility to create a senior secured replacement term loan facility in an aggregate principal amount equal to the aggregate outstanding principal amount of the term loans due in 2018. All of the previously outstanding 2018 term loans were exchanged for loans under the new facility.
On May 30, 2013, we issued $750 million aggregate principal amount of 11.75% senior unsecured subordinated notes due August 15, 2021. The proceeds of those notes, together with cash on hand, were used to redeem $520 million aggregate principal amount of our outstanding 11.25% senior unsecured subordinated notes due 2016, repurchase $230 million aggregate principal amount of our outstanding 11.25% senior unsecured subordinated notes due 2016 in a privately negotiated transaction with an existing holder of such notes, and to pay related fees and expenses.
On November 19, 2013, we issued $1,000 million aggregate principal amount of 11.75% senior subordinated notes due 2021. The proceeds of those notes, together with cash on hand, were used to redeem $1,000 million aggregate principal amount of our outstanding 11.25% senior subordinated notes due 2016 and to pay related fees and expenses. We used cash on hand to pay lender and underwriting fees and other expenses of approximately $11 million in connection with the transaction.
The combined effect of these events did not materially impact the total amount of our outstanding obligations but decreased future interest payments and extended the maturity of $0.3 billion of obligations from 2014 to 2018, $1.6 billion of obligations from 2015 to 2021 and $1.8 billion of obligations from 2016 to 2021.
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Critical Accounting Policies
Our critical accounting policies have not changed from those reported in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2012.
New Accounting Guidance
In March 2013, the Financial Accounting Standards Board issued guidance that resolves diversity in practice as to when to release the cumulative translation adjustment into net income when a parent ceases to have a controlling interest in a subsidiary within a foreign entity or sells a part or all of its investment in a foreign entity. The guidance also resolves diversity in the accounting for the cumulative translation adjustment in a business combination achieved in stages involving a foreign entity. We adopted the guidance as of January 1, 2013. Adoption did not have an impact on our financial position or results of operations.
For the Years Ended December 31, 2012, 2011 and 2010.
Our source of liquidity is principally cash generated from operating activities supplemented as necessary on a short-term basis by borrowings against our revolving credit facility. We believe our current level of cash and short-term financing capabilities along with future cash flows from operations are sufficient to meet the needs of the business. The following discussion highlights changes in our debt structure as well as our cash flow activities and the sources and uses of funding during the years ended December 31, 2012, 2011 and 2010.
During 2012, 2011 and 2010, we completed various amendments and modifications to certain of our debt agreements, several debt offerings and a debt exchange in an effort to extend our debt maturities. Additionally, in February 2013, we issued $785 million aggregate principal amount of 11.25% senior unsecured notes due January 15, 2021. The proceeds from the offering were used to repurchase our outstanding 10.55% senior unsecured notes and to pay related fees and expenses. Also in February 2013, we entered into a Joinder Agreement relating to our credit agreement, pursuant to which we incurred $258 million in new term loans maturing on September 24, 2018. The net cash proceeds from the new term loans were used to repay all of our outstanding term loan borrowings maturing in 2014 and to pay related fees and expenses.
Details regarding our debt structure are provided in Note 8 to our Audited Consolidated Financial Statements included elsewhere in this prospectus. We intend to extend additional debt maturity dates as opportunities allow.
Cash and cash equivalents. Investments (other than those included in settlement assets) with original maturities of three months or less (that are readily convertible to cash) are considered to be cash equivalents and are stated at cost, which approximates market value. At December 31, 2012 and 2011, we held $608.3 million and $485.7 million in cash and cash equivalents, respectively.
Included in cash and cash equivalents are amounts held by IPS and the BAMS alliance, that are not available to fund operations outside of those businesses. At December 31, 2012 and 2011, the cash and cash equivalents held by IPS and the BAMS alliance totaled $85.8 million and $75.2 million, respectively. All other domestic cash balances, to the extent available, are used to fund our short-term liquidity needs.
Cash and cash equivalents also includes amounts held outside of the U.S. at December 31, 2012 and 2011 totaling $268.4 million and $216.0 million, respectively. As of December 31, 2012, there was approximately $70 million of cash and cash equivalents held outside of the U.S. that could be used for general corporate purposes. We plan to fund any cash needs in 2013 within the International segment
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with cash held by the segment, but if necessary, could fund such needs using cash from the U.S., subject to satisfying debt covenant restrictions.
Cash flows from operating activities.
|
Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Source/(use) (in millions)
|
2012 | 2011 | 2010 | |||||||
Net loss |
$ | (527.3 | ) | $ | (336.1 | ) | $ | (846.9 | ) | |
Depreciation and amortization (including amortization netted against equity earnings in affiliates and revenues) |
1,330.9 | 1,344.2 | 1,526.0 | |||||||
Charges (gains) related to other operating expenses and other income (expense) |
122.5 | (77.7 | ) | 97.4 | ||||||
Other non-cash and non-operating items, net |
(40.2 | ) | 27.7 | 265.6 | ||||||
Increase (decrease) in cash, excluding the effects of acquisitions and dispositions, resulting from changes in: |
||||||||||
Accounts receivable, current and long-term |
(49.8 | ) | 256.7 | 224.7 | ||||||
Other assets, current and long-term |
260.0 | 239.3 | 298.3 | |||||||
Accounts payable and other liabilities, current and long-term |
(34.6 | ) | (1.2 | ) | (386.1 | ) | ||||
Income tax accounts |
(294.1 | ) | (337.3 | ) | (424.3 | ) | ||||
Net cash provided by operating activities |
$ | 767.4 | $ | 1,115.6 | $ | 754.7 | ||||
Cash flows provided by operating activities for the periods presented resulted from normal operating activities and reflect the timing of our working capital requirements.
Our operating cash flow is significantly impacted by our level of debt. Approximately $1,793.9 million, $1,458.2 million and $1,494.9 million in cash interest, including interest on lines of credit and capital leases, was paid during 2012, 2011 and 2010, respectively. The increase in cash interest in 2012 compared to 2011 is due primarily to the debt exchanges referred to above resulting in seven months of interest payments in 2011 compared to twelve months of interest payments in 2012 for the notes issued in the exchange as well as an increase in the interest coupon rate.
The timing of quarterly interest payments in 2013 will be impacted by when payment dates occur, shifting payments normally included in the first quarter to the second quarter. We estimate that our 2013 quarterly cash interest payments, excluding interest on lines of credit and capital leases, will be as follows:
Three Months Ended
|
Estimated Cash Interest Payments on Long-term Debt(a) (Unaudited) |
|||
---|---|---|---|---|
March 31, 2013 |
$ | 440 | ||
June 30, 2013 |
465 | |||
September 30, 2013 |
665 | |||
December 31, 2013 |
225 | |||
|
$ | 1,795 | ||
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Using December 31, 2012 balances for variable rate debt and applicable interest rate swaps, a 10 percent increase in the applicable LIBOR index on an annualized basis would increase interest expense by approximately $1.1 million.
Our operating cash flows are impacted by fluctuations in working capital. Cash flows from operating activities in 2012 decreased compared to 2011 primarily due to the increase in cash interest payments as well as an increase in prefunding settlement volumes and timing partially offset by increased operating income. Cash flows from operating activities increased in 2011 compared to 2010 due to the flow through of operating activity which included higher revenues and lower expenses. Additionally, the increase was partially due to sources of cash related to lower prefunding of settlement arrangements.
We anticipate funding operations throughout 2013 primarily with cash flows from operating activities and by closely managing discretionary capital and other spending; however, any shortfalls would be supplemented as necessary by borrowings against our revolving credit facility.
Cash flows from investing activities.
|
Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Source/(use) (in millions)
|
2012 | 2011 | 2010 | |||||||
Current year acquisitions, net of cash acquired |
$ | (32.9 | ) | $ | (19.2 | ) | $ | (1.8 | ) | |
Contributions to equity method investments |
(7.9 | ) | (161.5 | ) | (1.4 | ) | ||||
Payments related to other businesses previously acquired |
(4.4 | ) | 3.2 | (1.4 | ) | |||||
Proceeds from dispositions, net of expenses paid and cash disposed |
| 1.7 | 21.2 | |||||||
Proceeds from sale of property and equipment |
8.0 | 17.1 | 5.5 | |||||||
Additions to property and equipment |
(193.1 | ) | (202.9 | ) | (210.1 | ) | ||||
Payments to secure customer service contracts, including outlays for conversion, and capitalized systems development costs |
(177.2 | ) | (201.9 | ) | (159.6 | ) | ||||
Other investing activities |
10.4 | 4.9 | 18.4 | |||||||
Net cash used in investing activities |
$ | (397.1 | ) | $ | (558.6 | ) | $ | (329.2 | ) | |
Acquisitions and dispositions. We may finance acquisitions through a combination of internally generated funds, reinvestment of proceeds from asset sales, short-term borrowings and equity of our parent company. We may also consider using long-term borrowings subject to restrictions in our debt agreements. All acquisitions during the periods presented were funded from cash flows from operating activities or from the reinvestment of cash proceeds from the sale of other assets. Purchases of noncontrolling interests are classified as financing activities as noted below. Although we consider potential acquisitions from time to time, our plan for 2013 does not include funding of material acquisitions.
In December 2012, we acquired 100% of Clover Network, Inc., a provider of payment network services for total consideration of $56.1 million. The transaction called for cash consideration of $36.1 million as well as a series of contingent payments based on the achievement of specified sales targets. These contingent payments are classified as purchase consideration if made to outside investors and compensation if made to current and future employees. As part of the purchase price we recorded a $20 million liability for the contingent consideration due to outside investors based upon the net present value of our estimate of the future payments.
In the fourth quarter of 2011, we funded $160 million to one of our merchant alliance partners for referrals from bank branches contributed to the alliance as called for by the agreement that extended the term of the alliance in 2008.
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During 2010, proceeds from dispositions related most significantly to the receipt of a contingent payment associated with our sale of a merchant acquiring business in Canada in the fourth quarter of 2009.
We continue to manage our portfolio of businesses and evaluate the possible divestiture of businesses that do not match our long-term growth objectives. For a more detailed discussion on acquisitions and dispositions in 2012, 2011 and 2010 refer to Note 3 to our Audited Consolidated Financial Statements included elsewhere in this prospectus.
Capital expenditures. Capital expenditures are estimated to be approximately $425 to $475 million in 2013 and are expected to be funded by cash flows from operations. If, however, cash flows from operating activities are insufficient, we will decrease our discretionary capital expenditures or utilize our revolving credit facility.
During the periods presented, net proceeds were received for the sale of certain assets, including buildings and equipment in 2011.
Other investing activities. The source of cash in 2010 related to a decrease in regulatory, restricted and escrow cash balances.
Cash flows from financing activities.
|
Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Source/(use) (in millions)
|
2012 | 2011 | 2010 | |||||||
Short-term borrowings, net |
$ | 99.1 | $ | (107.3 | ) | $ | 75.1 | |||
Accrued interest funded upon issuance of notes |
6.5 | | | |||||||
Debt modification proceeds (payments) and related financing costs |
10.8 | (39.7 | ) | (61.2 | ) | |||||
Principal payments on long-term debt |
(83.3 | ) | (104.5 | ) | (220.4 | ) | ||||
Proceeds from sale-leaseback transactions |
13.8 | 14.2 | | |||||||
Distributions and dividends paid to noncontrolling interests and redeemable noncontrolling interests |
(261.9 | ) | (327.3 | ) | (216.1 | ) | ||||
Contributions from noncontrolling interests |
| 0.8 | | |||||||
Purchase of noncontrolling interests |
(25.1 | ) | | (213.3 | ) | |||||
Redemption of Parent's redeemable common stock |
(1.7 | ) | (0.5 | ) | (2.5 | ) | ||||
Cash dividends |
(6.7 | ) | (0.2 | ) | (14.9 | ) | ||||
Net cash used in financing activities |
$ | (248.5 | ) | $ | (564.5 | ) | $ | (653.3 | ) | |
Short-term borrowings, net. The cash activity related to short-term borrowings in 2012 and 2011 resulted primarily from net borrowings and paydowns on our international credit lines used principally to prefund settlement activity. In 2010, the cash activity related to short-term borrowings resulted primarily from net borrowings on our senior secured revolving credit facility.
As of December 31, 2012, our senior secured revolving credit facility had commitments from financial institutions to provide $1,515.3 million of credit, $499.1 million of which is due to expire on September 24, 2013 with the remainder due to expire between June 24, 2015 and September 24, 2016. Besides the letters of credit discussed below, we had no amount outstanding against this facility as of December 31, 2012 and 2011. Therefore, as of December 31, 2012, $1,470.2 million remained available under this facility. Excluding the letters of credit, the maximum amount outstanding against this facility during 2012 was approximately $295 million while the average amount outstanding during 2012 was approximately $27 million.
We utilize our revolving credit facility on a short-term basis to fund investing or operating activities when cash flows from operating activities are not sufficient. We believe the capacity under our senior
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secured revolving credit facility, both before and after the expiration of the commitments due to expire in 2013, will be sufficient to meet our short-term liquidity needs. Our senior secured revolving credit facility can be used for working capital and general corporate purposes.
There are multiple institutions that have commitments under this facility with none representing more than approximately 14% of the remaining capacity.
Debt modification proceeds (payments) and related financing costs. Our debt modifications and amendments noted above were accounted for as modifications resulting in only the net effect of the transactions being reflected as a source or use of cash excluding certain fees included in our results of operations.
During 2012, we received net cash proceeds of $10.8 million related to the 2012 debt modifications and offerings referred to above, a substantial portion of which were used to pay related expenses that were included in our results of operations.
During the year ended December 31, 2011, we paid $18.6 million in fees related to the December 2010 debt exchange and $21.1 million in fees related to the April 2011 debt modification and amendments.
We paid a net amount of $24.1 million in fees related to the August 2010 debt modification. We also paid a net amount of $37.1 million for costs incurred during the fourth quarter of 2010 related to the December 2010 debt exchange.
Principal payments on long-term debt. In conjunction with the debt modifications and amendments discussed above, proceeds from the issuance of new notes were used to prepay portions of the principal balances of our senior secured term loans which satisfied the future quarterly principal payments until September 2018. Prior to the modifications, during 2010, we made principal payments of $96.2 million related to our senior secured term loan facility.
During 2011 and 2010, we paid notes that came due totaling $32.6 million and $13.1 million, respectively. In addition, we paid $34.1 million in debt restructuring fees in 2010.
Payments for capital leases totaled $80.2 million, $71.9 million and $76.9 million for 2012, 2011 and 2010, respectively.
As of March 19, 2013, our long-term corporate family rating from Moody's was B3 (stable). The long-term local issuer credit rating from Standard and Poor's was B (stable). The long-term issuer default rating from Fitch was B (stable). Our current level of debt may impair our ability to get additional funding beyond our revolving credit facility if needed.
Proceeds from sale-leaseback transactions. We may, from time to time, enter into sale-leaseback transactions as a means of financing previously or recently acquired fixed assets, primarily equipment.
Distributions and dividends paid to noncontrolling interests and redeemable noncontrolling interests. Distributions and dividends paid to noncontrolling interests and redeemable noncontrolling interests primarily represent distributions of earnings. The activity in all periods presented was primarily the result of distributions associated with the BAMS alliance including an incremental distribution in 2011 of approximately $64 million related to both working capital initiatives and an extra quarterly distribution due to a change in the timing of such distributions.
Purchase of noncontrolling interest. In April 2012, we acquired the remaining approximately 30 percent noncontrolling interest in Omnipay, a provider of card and electronic payment processing services to merchant acquiring banks, for approximately 37.1 million euro, of which 19.0 million euro ($25.1 million) was paid in April 2012 with the remainder to be paid in April 2013. The use of cash in 2010 relates to the redemption amount paid to the third-party investor to redeem our interest in the BAMS alliance.
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Cash dividends. We paid cash dividends to First Data Holdings Inc. in the periods presented.
Letters, lines of credit and other.
|
Total Available(a) | Total Outstanding | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
As of December 31, | As of December 31, | |||||||||||
(in millions)
|
2012 | 2011 | 2012 | 2011 | |||||||||
Letters of credit(b) |
$ | 500.0 | $ | 500.0 | $ | 45.1 | $ | 45.0 | |||||
Lines of credit and other(c) |
$ | 346.0 | $ | 341.2 | $ | 177.2 | $ | 76.4 |
In the event one or more of the aforementioned lines of credit becomes unavailable, we will utilize our existing cash, cash flows from operating activities or our revolving credit facility to meet our liquidity needs.
Significant non-cash transactions. During 2011 and 2010, the principal amount of our senior notes due 2015 increased by $73.1 million and $362.5 million, respectively, resulting from the "payment" of accrued interest expense. The decrease in the amount of interest expense accrued during 2011 is due to the December 2010 exchange of notes discussed below. The terms of our senior unsecured notes due 2015 require interest to be paid in cash for all periods after October 1, 2011.
In December 2011, we exchanged substantially all of our aggregate principal amounts of $3.0 billion of our 12.625% senior notes due 2021 for publicly tradable notes having substantially identical terms and guarantees, except that the exchange notes will be freely tradable.
In December 2010, we exchanged $3.0 billion of our 9.875% senior notes due 2015 and $3.0 billion of our 10.550% senior PIK notes due 2015 for $2.0 billion of 8.25% senior second lien notes due 2021, $1.0 billion of 8.75%/10.00% PIK toggle senior second lien notes due 2022 and $3.0 billion of 12.625% senior notes due 2021.
There were no expenditures, other than professional fees, or receipts of cash associated with the registration statement or exchange offer described above.
During 2012, 2011 and 2010, we entered into capital leases, net of trade-ins, totaling approximately $55 million, $106 million and $65 million, respectively.
As discussed above, we acquired 100% of Clover Network, Inc. and recorded a $20 million liability for the contingent consideration due to outside investors based upon the net present value of our estimate of the future payments.
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Also discussed above, we acquired the remaining approximately 30 percent noncontrolling interest in Omnipay for approximately 37.1 million euro, of which 19.0 million euro ($25.1 million) was paid in April 2012 with the remainder to be paid in April 2013.
In November 2011, we contributed the assets of our transportation business to an alliance in exchange for a 30% noncontrolling interest in the alliance. Refer to Note 18 to our Audited Consolidated Financial Statements included elsewhere in this prospectus.
Guarantees and covenants. All obligations under the senior secured revolving credit facility and senior secured term loan facility are unconditionally guaranteed by substantially all of our existing and future, direct and indirect, wholly owned, material domestic subsidiaries other than IPS. The senior secured facilities contain a number of covenants that, among other things, restrict our ability to incur additional indebtedness; create liens; enter into sale-leaseback transactions; engage in mergers or consolidations; sell or transfer assets; pay dividends and distributions or repurchase our or our parent company's capital stock; make investments, loans or advances; prepay certain indebtedness; make certain acquisitions; engage in certain transactions with affiliates; amend material agreements governing certain indebtedness; and change our lines of business. The senior secured facilities also require us to not exceed a maximum senior secured leverage ratio and contain certain customary affirmative covenants and events of default, including a change of control. The senior secured term loan facility also requires mandatory prepayments based on a percentage of excess cash flow we generated.
All obligations under the senior secured notes, senior second lien notes, PIK toggle senior second lien notes, senior notes and senior subordinated notes are similarly guaranteed in accordance with their terms by each of our domestic subsidiaries that guarantee obligations under our senior secured term loan facility described above. These notes and facilities also contain a number of covenants similar to those described for the senior secured obligations noted above. We are in compliance with all applicable covenants as of December 31, 2012 and anticipate we will remain in compliance in future periods.
Although all of the above described indebtedness contain restrictions on our ability to incur additional indebtedness, these restrictions are subject to numerous qualifications and exceptions, including the ability to incur indebtedness in connection with our settlement operations. We believe that the indebtedness that can be incurred under these exceptions as well as additional credit under the existing senior secured revolving credit facility are sufficient to satisfy our intermediate and long-term needs.
Covenant compliance. Under the senior secured revolving credit and term loan facilities, certain limitations, restrictions and defaults could occur if we are not able to satisfy and remain in compliance with specified financial ratios. We have agreed that we will not permit the Consolidated Senior Secured Debt to Consolidated EBITDA (both as defined in the agreement) Ratio for any 12 month period (last four fiscal quarters) ending during a period set forth below to be greater than the ratio set forth below opposite such period:
Period
|
Ratio | |||
---|---|---|---|---|
October 1, 2012 to September 30, 2013 |
6.25 to 1.00 | |||
Thereafter |
6.00 to 1.00 |
The breach of this covenant could result in a default under the senior secured revolving credit facility and the senior secured term loan credit facility and the lenders could elect to declare all amounts borrowed due and payable. Any such acceleration could also result in a default under the indentures for the senior secured notes, senior second lien notes, PIK toggle senior second lien notes, senior notes and senior subordinated notes. As of December 31, 2012, we were in compliance with this
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covenant with Consolidated Senior Secured Debt of $11,985.1 million, Consolidated EBITDA of $2,913.8 million and a Ratio of 4.11 to 1.00.
In determining Consolidated EBITDA, EBITDA is calculated by reference to net income (loss) from continuing operations plus interest and other financing costs, net, provision for income taxes, and depreciation and amortization. Consolidated EBITDA as defined in the agreements (also referred to as debt covenant EBITDA) is calculated by adjusting EBITDA to exclude unusual items and other adjustments permitted in calculating covenant compliance under the indentures and the credit facilities. We believe that the inclusion of supplementary adjustments to EBITDA applied in presenting Consolidated EBITDA are appropriate to provide additional information to investors to demonstrate our ability to comply with its financing covenants.
The calculation of Consolidated EBITDA under our senior secured term loan facility is as follows:
(in millions)
|
Last Twelve Months Ended December 31, 2012 |
|||
---|---|---|---|---|
Net loss attributable to First Data Corporation |
$ | (700.9 | ) | |
Interest expense, net(1) |
1,889.0 | |||
Income tax benefit |
(224.0 | ) | ||
Depreciation and amortization(2) |
1,330.9 | |||
EBITDA(15) |
2,295.0 | |||
Stock based compensation(3) |
11.8 |
|||
Restructuring, net(4) |
37.7 | |||
Derivative financial instruments (gains) and losses(5) |
91.3 | |||
Official check and money order EBITDA(6) |
(6.4 | ) | ||
Cost of alliance conversions and other technology initiatives(7) |
79.9 | |||
KKR related items(8) |
21.3 | |||
Debt issuance costs(9) |
13.7 | |||
Projected near-term cost savings and revenue enhancements(10) |
151.0 | |||
Net income attributable to noncontrolling interests and redeemable noncontrolling interests(11) |
173.6 | |||
Equity entities taxes, depreciation and amortization(12) |
15.0 | |||
Impairments(13) |
22.1 | |||
Other(14) |
7.8 | |||
Consolidated EBITDA(15) |
$ | 2,913.8 | ||
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Consolidated EBITDA (or debt covenant EBITDA) is defined as EBITDA adjusted to exclude certain non-cash items, non-recurring items that we do not expect to continue at the same level in the future and certain items management believes will impact future operating results and adjusted to include near-term cost savings projected to be achieved within twelve months on an annualized basis (see Note 10 above). Consolidated EBITDA
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is further adjusted to add net income attributable to noncontrolling interests and redeemable noncontrolling interests of certain non-wholly-owned subsidiaries and exclude other miscellaneous adjustments that are used in calculating covenant compliance under the agreements governing our senior unsecured debt and/or senior secured credit facilities. We believe that the inclusion of supplementary adjustments to EBITDA are appropriate to provide additional information to investors about items that will impact the calculation of EBITDA that is used to determine covenant compliance under the agreements governing our senior unsecured debt and/or senior secured credit facilities. Since not all companies use identical calculations, this presentation of Consolidated EBITDA may not be comparable to other similarly titled measures of other companies.
Off-balance sheet arrangements
During 2012, 2011 and 2010, we did not engage in any off-balance sheet financing activities other than those included in the "Contractual obligations" discussion below and those reflected in Note 11 to our Audited Consolidated Financial Statements included elsewhere in this prospectus.
Contractual obligations
Our contractual obligations as of December 31, 2012 are as follows:
|
Payments Due by Period | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions)
|
Total | Less than 1 year |
1 - 3 years | 4 - 5 years | After 5 years |
|||||||||||
Borrowings(a) |
$ | 34,012.8 | $ | 1,982.5 | $ | 5,362.9 | $ | 7,878.2 | $ | 18,789.2 | ||||||
Capital lease obligations(b) |
145.2 | 71.7 | 65.9 | 7.6 | | |||||||||||
Operating leases |
293.3 | 57.3 | 84.9 | 61.2 | 89.9 | |||||||||||
Pension plan contributions(c) |
147.3 | 42.4 | 64.6 | 40.3 | | |||||||||||
Purchase obligations(d): |
||||||||||||||||
Technology and telecommunications(e) |
1,496.2 | 768.1 | 411.8 | 116.8 | 199.5 | |||||||||||
All other(f) |
521.5 | 119.2 | 128.7 | 119.2 | 154.4 | |||||||||||
Other long-term liabilities |
131.4 | 10.8 | 42.1 | 75.6 | 2.9 | |||||||||||
|
$ | 36,747.7 | $ | 3,052.0 | $ | 6,160.9 | $ | 8,298.9 | $ | 19,235.9 | ||||||
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written notification of our intent to terminate the contract. Obligations under certain contracts are usage-based and are, therefore, estimated in the above amounts. Historically, we have not had any significant defaults of our contractual obligations or incurred significant penalties for termination of our contractual obligations.
As of December 31, 2012, we had approximately $317 million of tax contingencies comprised of approximately $279 million reported in long-term income taxes payable in the "Other long-term liabilities" line of the Consolidated Balance Sheets, including approximately $4 million of income tax liabilities for which Western Union is required to indemnify us, and approximately $38 million recorded as an increase of our deferred tax liability. Timing of tax payments is dependent upon various factors which cannot be reasonably estimated at this time.
In February 2013, as discussed in Note 8 to our Audited Consolidated Financial Statements included elsewhere in this prospectus, we issued $785 million aggregate principal amount of 11.25% senior unsecured notes due January 15, 2021. The proceeds from the offering were used to repurchase our outstanding 10.55% senior unsecured notes and pay related fees and expenses. Additionally, in February 2013, we entered into a Joinder Agreement relating to our credit agreement, pursuant to which we incurred $258 million in new term loans maturing on September 24, 2018. The net cash proceeds from the new term loans were used to repay all of our outstanding term loan borrowings maturing in 2014 and to pay related fees and expenses.
The combined effect of these events did not materially impact the total amount of our outstanding obligations but increased future interest payments and extended the maturity of $0.3 billion of obligations from 2014 to 2018 and $0.8 billion of obligations from 2015 to 2021.
Critical Accounting Policies
Stock-based compensation. We have a stock incentive plan for certain of our and our affiliates' management employees ("stock plan"). This stock plan is at the Holdings level which owns 100% of our equity interests. The stock plan provides the opportunity for certain management employees to purchase shares in Holdings and then receive a number of stock options or restricted stock based on a multiple of their investment in such shares. The plan also allows us to award shares and options to certain management employees. We record the expense associated with this plan. We use the Black-Scholes option pricing model to measure the fair value of stock option awards. We chose the Black-Scholes model based on our experience with the model and the determination that the model could be used to provide a reasonable estimate of the fair value of awards with terms such as those issued by Holdings. Option-pricing models require estimates of a number of key valuation inputs including expected volatility, expected dividend yield, expected term and risk-free interest rate. Certain of these inputs are more subjective due to Holdings being privately held and thus not having objective historical or public information. The most subjective inputs are the expected term, expected volatility and determination of share value. The expected term is determined using probability weighted expectations and expected volatility is determined using a selected group of guideline companies as surrogates for Holdings.
On a quarterly basis, we estimate the fair value of Holdings common stock. Periodically, a third-party valuation firm provides assistance with certain key assumptions and performs calculations using the valuation methods discussed below. All key assumptions and valuations were determined by and are
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the responsibility of management. We rely on the results of a discounted cash flow analysis but also consider the results of a market approach. The discounted cash flow analysis is dependent on a number of significant management assumptions regarding our and Holdings' expected future financial results as well as upon estimates of an appropriate cost of capital. A sensitivity analysis is performed in order to establish a narrow range of estimated fair values for the shares of Holdings common stock. The market approach consists of identifying a set of guideline public companies.
Multiples of historical and projected EBITDA determined based on the guideline companies is applied to Holdings' EBITDA in order to establish a range of estimated fair value for the shares of Holdings common stock. We consider the results of both of these approaches, placing primary reliance on the discounted cash flow analysis. The concluded range of fair values is also compared to the value determined by the Board of Directors for use in transactions, including stock sales and repurchases. After considering all of these estimates of fair value, we then determine a single estimated fair value of the stock to be used in accounting for stock-based compensation.
During the years ended December 31, 2012, 2011 and 2010, time-based options were granted under the stock plan and during the years ended December 31, 2011 and 2010, performance-based options were granted under the stock plan. The time options and performance options have a contractual term of 10 years. Time options vest equally over a three to five year period from the date of issuance and performance options vest based upon us achieving certain EBITDA targets. The options also have certain accelerated vesting provisions upon a change in control, a qualified public offering, or certain termination events.
The assumptions used in estimating the fair value of share-based payment awards represent management's best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, stock-based compensation expense could be different in the future.
Refer to Note 13 to the Audited Consolidated Financial Statements included elsewhere in this prospectus for details regarding our stock-based compensation plan.
Reserve for merchant credit losses and check guarantees. With respect to the merchant acquiring business, our merchant customers (or those of our unconsolidated alliances) have the liability for any charges properly reversed by the cardholder. In the event, however, that we are not able to collect such amounts from the merchants due to merchant fraud, insolvency, bankruptcy or another reason, we may be liable for any such reversed charges. Our risk in this area primarily relates to situations where the cardholder has purchased goods or services to be delivered in the future such as airline tickets.
Our obligation to stand ready to perform is minimal in relation to the total dollar volume processed. We require cash deposits, guarantees, letters of credit or other types of collateral from certain merchants to minimize this obligation. Collateral held by us is classified within "Settlement assets" and the obligation to repay the collateral if it is not needed is classified within "Settlement obligations" on our Consolidated Balance Sheets. The amounts of collateral held by us and our unconsolidated alliances are as follows:
|
As of December 31, |
||||||
---|---|---|---|---|---|---|---|
(in millions)
|
2012 | 2011 | |||||
Cash and cash equivalents collateral |
$ | 470.0 | $ | 473.2 | |||
Collateral in the form of letters of credit |
120.9 | 112.5 | |||||
Total collateral |
$ | 590.9 | $ | 585.7 | |||
We also utilize a number of systems and procedures to manage merchant risk. Despite these efforts, we historically have experienced some level of losses due to merchant defaults.
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Our contingent obligation relates to imprecision in our estimates of required collateral. A provision for this obligation is recorded based primarily on historical experience of credit losses and other relevant factors such as economic downturns or increases in merchant fraud. Merchant credit losses are included in "Cost of services" in our Consolidated Statements of Operations. The following table presents the aggregate merchant credit losses incurred compared to total dollar volumes processed:
|
Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2012 | 2011 | 2010 | |||||||
FDC and consolidated and unconsolidated alliances credit losses (in millions) |
$ | 50.0 | $ | 63.6 | $ | 78.2 | ||||
FDC and consolidated alliances credit losses (in millions) |
$ | 43.3 | $ | 54.3 | $ | 71.3 | ||||
Total dollar volume acquired (in billions) |
$ | 1,725.4 | $ | 1,643.2 | $ | 1,520.4 |
The reserve recorded on our Consolidated Balance Sheets only relates to the business conducted by our consolidated subsidiaries. The reserve for unconsolidated alliances is recorded only in the alliances' respective financial statements. We have not recorded any reserve for estimated losses in excess of reserves recorded by the unconsolidated alliances nor have we identified needs to do so. The following table presents the aggregate merchant credit loss reserves:
|
As of December 31, |
||||||
---|---|---|---|---|---|---|---|
(in millions)
|
2012 | 2011 | |||||
FDC and consolidated and unconsolidated alliances merchant credit loss reserves |
$ | 26.1 | $ | 35.5 | |||
FDC and consolidated alliances merchant credit loss reserves |
$ | 23.4 | $ | 31.6 |
The credit loss reserves, both for the unconsolidated alliances and us, are comprised of amounts for known losses and a provision for losses incurred but not reported ("IBNR"). These reserves primarily are determined by performing a historical analysis of chargeback loss experience. Other factors are considered that could affect that experience in the future. Such items include the general economy and economic challenges in a specific industry or those affecting certain types of clients. Once these factors are considered, we or the unconsolidated alliance establishes a rate (percentage) that is calculated by dividing the expected chargeback (credit) losses by dollar volume processed. This rate is then applied against the dollar volume processed each month and charged against earnings. The resulting reserve balance is then compared to requirements for known losses and estimates for IBNR items. Historically, this estimation process has proven to be materially accurate and we believe the recorded reserve approximates the fair value of the contingent obligation.
The majority of the TeleCheck Services, Inc. ("TeleCheck") business involves the guarantee of checks received by merchants. If the check is returned, TeleCheck is required to purchase the check from the merchant at its face value and pursue collection from the check writer. A provision for estimated check returns, net of anticipated recoveries, is recorded at the transaction inception based on recent history. The following table presents the accrued warranty and recovery balances:
|
As of December 31, |
||||||
---|---|---|---|---|---|---|---|
(in millions)
|
2012 | 2011 | |||||
Accrued warranty balances |
$ | 10.9 | $ | 11.4 | |||
Accrued recovery balances |
$ | 24.8 | $ | 26.8 |
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Accrued warranties are included in "Other current liabilities" and accrued recoveries are included in "Accounts receivable" in the Consolidated Balance Sheets.
We established an incremental liability (and deferred revenue) for the fair value of the check guarantee. The liability is relieved and revenue is recognized when the check clears, is presented to TeleCheck, or the guarantee period expires. The majority of the guarantees are settled within 30 days. The incremental liability was approximately $1.1 million and $1.3 million as of December 31, 2012 and 2011, respectively. The following table details the check guarantees of TeleCheck.
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Year Ended December 31, | |||||||||
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2012 | 2011 | 2010 | |||||||
Aggregate face value of guaranteed checks (in billions) |
$ | 42.9 | $ | 45.6 | $ | 47.6 | ||||
Aggregate amount of checks presented for warranty (in millions) |
$ | 318.8 | $ | 351.8 | $ | 405.3 | ||||
Warranty losses net of recoveries (in millions) |
$ | 75.9 | $ | 85.1 | $ | 110.8 |
The maximum potential future payments under the guarantees were estimated by us to be approximately $1.3 billion as of December 31, 2012 which represented an estimate of the total uncleared checks at that time.
Income taxes. The determination of our provision for income taxes requires management's judgment in the use of estimates and the interpretation and application of complex tax laws. Judgment is also required in assessing the timing and amounts of deductible and taxable items. We established contingency reserves for material, known tax exposures relating to deductions, transactions and other matters involving some uncertainty as to the proper tax treatment of the item. Our reserves reflect our judgment as to the resolution of the issues involved if subject to judicial review. Several years may elapse before a particular matter, for which we have established a reserve, is audited and finally resolved or clarified. While we believe that our reserves are adequate to cover reasonably expected tax risks, issues raised by a tax authority may be finally resolved at an amount different than the related reserve. Such differences could materially increase or decrease our income tax provision in the current and/or future periods. When facts and circumstances change (including a resolution of an issue or statute of limitations expiration), these reserves are adjusted through the provision for income taxes in the period of change. As the result of interest and amortization expenses that we incur, we are currently in a tax net operating loss position. Judgment is required to determine whether some portion or all of the deferred tax assets will not be realized. To the extent we determine that we will not realize the benefit of some or all of our deferred tax assets, then these assets will be adjusted through our provision for income taxes in the period in which this determination is made. Refer to Note 17 to our Audited Consolidated Financial Statements included elsewhere in this prospectus for additional information regarding our income tax provision.
Estimating fair value. We have investment securities and derivative financial instruments that are carried at fair value.
Fair value is defined by accounting guidance as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Our approach to estimating the fair value of our financial instruments varies depending upon the nature of the instrument. In estimating fair values for investment securities and derivative financial instruments, we believe that third-party market prices are the best evidence of exit price and where available, base our estimates on such prices. If such prices are unavailable for the instruments we hold, fair values are estimated using market prices of similar instruments, third-party broker quotes or a probability weighted discounted cash flow analysis. Where observable market data is unavailable or impracticable to obtain, the valuation involves substantial judgment by us. All key assumptions and valuations are the responsibility of management. Refer to Note 7 to our Audited Consolidated
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Financial Statements included elsewhere in this prospectus for additional information regarding our Fair Value Measurements.
Investment securities. Due to the lack of observable market activity for the SLARS we held, the valuation of the SLARS is highly judgmental. We, with the assistance of a third-party valuation firm, made certain assumptions, primarily relating to estimating probabilities of certain outcomes for the securities we held and assessing the risk factors inherent in each. All key assumptions and valuations were determined by and are the responsibility of management. The securities were valued using an income approach based on a probability weighted discounted cash flow. We considered each security's key terms including date of issuance, date of maturity, auction intervals, scheduled auction dates, maximum auction rates, as well as underlying collateral, ratings, and guarantees or insurance. Substantially all SLARS we held have collateral backed by the Federal Family Education Loan Program ("FFELP"). The probabilities of a successful auction or repurchase at par, or default by the issuer for each future period were forecasted. Default recovery rates were forecasted. We assumed that the issuers will continue to pay maximum interest rates on the securities until the event of either a successful auction or repurchase by the issuer, at par. To determine the fair value of each security, the weighted average cash flows for each period were discounted back to present value at the determined discount rate for each security. The discount rates used in the valuation were a combination of the liquidity risk premium assigned to the security (which ranged from 3.5% to 4.5%) plus the treasury strip yield (zero coupon treasury bond) for the individual period for which a cash flow was being discounted. The liquidity risk premiums on the SLARS have decreased by 50 basis points from December 31, 2011 due to decreasing spreads on asset backed and municipal securities and successful auction rate security transactions. A 50 basis point change in liquidity risk premium, as well as slight changes in other unobservable inputs including default probability and default recovery rate assumptions and the probability of an issuer call prior to maturity, would impact the value of the SLARS by approximately $1 million.
As of December 31, 2012 and 2011, we also held investments in short-term debt securities. Many of these securities are considered cash equivalents. Prices for these securities are not quoted on active exchanges but are priced through an independent third-party pricing service based on quotations from market-makers in the specific instruments or, where appropriate, other market inputs including interest rates, benchmark yields, reported trades, issuer spreads, two sided markets, benchmark securities, bids, offers, and reference data. In certain instances, amortized cost is considered an appropriate approximation of market value. Other investments are valued based upon either quoted prices from active exchanges or available third-party broker quotes.
Changes in fair value of investment securities are recorded through OCI component of equity with the exception of investment partnerships which are recorded through "Investment income" in the Consolidated Statements of Operations. Regardless of investment type, declines in the fair value of the investments are reviewed to determine whether they are other than temporary in nature. Absent any other indications of a decline in value being temporary in nature, our policy is to treat a decline in an equity investment's quoted market price that has lasted for more than six months as an other-than-temporary decline in value. For equity securities, declines in value that are judged to be other than temporary in nature are recognized in the Consolidated Statements of Operations. For debt securities, when we intend to sell an impaired debt security or it is more likely than not it will be required to sell prior to recovery of its amortized cost basis, an other-than-temporary-impairment ("OTTI") has occurred. The impairment is recognized in earnings equal to the entire difference between the debt security's amortized cost basis and its fair value. When we do not intend to sell an impaired debt security and it is not more likely than not it will be required to sell prior to recovery of its amortized cost basis, we assess whether we will recover our amortized cost basis. If the entire amortized cost will not be recovered, a credit loss exists resulting in the credit loss portion of the OTTI being recognized in earnings and the amount related to all other factors recognized in OCI. Refer to
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Note 7 to our Audited Consolidated Financial Statements included elsewhere in this prospectus for additional information regarding our Fair Value Measurements.
Derivative financial instruments. We use derivative financial instruments to enhance our ability to manage our exposure to certain financial and market risks, primarily those related to changes in interest rates and foreign currency exchange rates. Interest rate swaps are entered into to manage interest rate risk associated with our variable-rate borrowings. Cross-currency swaps for various foreign currencies are entered into to manage foreign currency exchange risk associated with our initial investments in certain foreign subsidiaries or certain intercompany loans to foreign subsidiaries. Forward contracts on various foreign currencies are entered into to manage foreign currency exchange risk associated with our forecasted foreign currency denominated sales or purchases. Our policy is to minimize our cash flow and net investment exposures related to adverse changes in interest rates and foreign currency exchange rates. Our objective is to engage in risk management strategies that provide adequate downside protection.
Derivative financial instruments are entered into for periods consistent with related underlying exposures and do not constitute positions independent of those exposures. We apply strict policies to manage each of these risks, including prohibition against derivatives trading, derivatives market-making or any other speculative activities. Although certain derivatives do not qualify for hedge accounting, they are entered into for economic hedge purposes and are not considered speculative. We are monitoring the financial stability of our derivative counterparties.
We designated interest rate swaps as cash flow hedges of forecasted interest rate payments related to our variable rate borrowings and certain of the cross-currency swaps as foreign currency hedges of our net investment in a foreign subsidiary. During 2012, 2011 and 2010, certain of our interest rate swaps previously designated as hedges for accounting purposes ceased to be highly effective and we discontinued hedge accounting for the affected derivatives. Additionally, certain other interest rate swaps, cro