FISERV, INC.
Forward-Looking Statements
This quarterly report contains "forward-looking statements" intended to qualify
for the safe harbor from liability established by the Private Securities
Litigation Reform Act of 1995. Forward-looking statements include those that
express a plan, belief, expectation, estimation, anticipation, intent,
contingency, future development or similar expression, and can generally be
identified as forward-looking because they include words such as "believes,"
"anticipates," "expects," "could," "should" or words of similar meaning.
Statements that describe our future plans, objectives or goals are also
forward-looking statements. The forward-looking statements in this report
involve significant risks and uncertainties, and a number of factors, both
foreseen and unforeseen, could cause actual results to differ materially from
our current expectations. The factors that may affect our results include, among
others, the following, many of which are, and will be, amplified by the COVID-19
pandemic: the duration and intensity of the COVID-19 pandemic; governmental and
private sector responses to the COVID-19 pandemic and the impact of such
responses on us; the impact of the COVID-19 pandemic on our employees, clients,
vendors, operations and sales; the possibility that we may be unable to achieve
expected synergies and operating efficiencies from the acquisition of First Data
Corporation ("First Data") within the expected time frames or at all or to
successfully integrate the operations of First Data into our operations; such
integration may be more difficult, time-consuming or costly than expected;
profitability following the transaction may be lower than expected, including
due to unexpected costs, charges or expenses resulting from the transaction;
operating costs, customer loss and business disruption (including, without
limitation, difficulties in maintaining relationships with employees, customers,
clients or suppliers) may be greater than expected following the transaction;
unforeseen risks relating to our liabilities or those of First Data may exist;
our ability to meet expectations regarding the accounting and tax treatments of
the transaction; our ability to compete effectively against new and existing
competitors and to continue to introduce competitive new products and services
on a timely, cost-effective basis; changes in customer demand for our products
and services; the ability of our technology to keep pace with a rapidly evolving
marketplace; the successful management of our merchant alliance program which
involves several alliances not under our sole control; the impact of a security
breach or operational failure on our business including disruptions caused by
other participants in the global financial system; the failure of our vendors
and merchants to satisfy their obligations; the successful management of credit
and fraud risks in our business and merchant alliances; changes in local,
regional, national and international economic or political conditions and the
impact they may have on us and our customers; the effect of proposed and enacted
legislative and regulatory actions affecting us or the financial services
industry as a whole; our ability to comply with government regulations and
applicable card association and network rules; the protection and validity of
intellectual property rights; the outcome of pending and future litigation and
governmental proceedings; our ability to successfully identify, complete and
integrate acquisitions, and to realize the anticipated benefits associated with
the same; the impact of our strategic initiatives; our ability to attract and
retain key personnel; volatility and disruptions in financial markets that may
impact our ability to access preferred sources of financing and the terms on
which we are able to obtain financing or increase our costs of borrowing;
adverse impacts from currency exchange rates or currency controls; and other
factors identified in this Quarterly Report on Form 10-Q for the quarter ended
June 30, 2020 and in our Annual Report on Form 10-K for the year ended December
31, 2019 , and in other documents that we file with the Securities and Exchange
Commission . You should consider these factors carefully in evaluating
forward-looking statements and are cautioned not to place undue reliance on such
statements, which speak only as of the date of this report. We undertake no
obligation to update forward-looking statements to reflect events or
circumstances occurring after the date of this report.
Management's discussion and analysis of financial condition and results of
operations is provided as a supplement to our unaudited consolidated financial
statements and accompanying notes to help provide an understanding of our
financial condition, the changes in our financial condition and our results of
operations. Our discussion is organized as follows:
• Overview. This section contains background information on our company and
the services and products that we provide, acquisitions and dispositions,
and the trends affecting our industry in order to provide context for
management's discussion and analysis of our financial condition and
results of operations.
• Changes in critical accounting policies and estimates. This section
contains a discussion of changes since our Annual Report on Form 10-K for
the year ended
believe are important to our financial condition and results of operations
and that require judgment and estimates on the part of management in their
application.
• Results of operations. This section contains an analysis of our results of
operations presented in the accompanying unaudited consolidated statements
of income by comparing the results for the three and six months ended
June 30, 2020 to the comparable periods in 2019.
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• Liquidity and capital resources. This section provides an analysis of our
cash flows and a discussion of our outstanding debt at
Overview Company Background We are a leading global provider of payments and financial services technology solutions. We provide account processing and digital banking solutions, card issuer processing and network services, payments, e-commerce, merchant acquiring and processing, and the Clover® cloud-based point-of-sale solution. We serve clients around the globe, including banks, credit unions, other financial institutions and merchants. We aspire to move money and information in a way that moves the world by delivering superior value for our clients through leading technology, targeted innovation and excellence in everything we do. We achieve this through active portfolio management of our businesses, enhancing the overall value of our existing client relationships, improving operational effectiveness, being disciplined in our allocation of capital, and differentiating our products and services through innovation. Our long-term priorities are to (i) deliver integration value from the First Data acquisition; (ii) continue to build high-quality revenue while meeting our earnings goals; (iii) enhance client relationships with an emphasis on digital and payment solutions; and (iv) deliver innovation and integration which enables differentiated value for our clients. OnJuly 29, 2019 , we acquired First Data, a global leader in commerce-enabling technology and solutions for merchants, financial institutions and card issuers. Effective in the first quarter of 2020, we realigned our reportable segments to correspond with changes to our operating model to reflect our new management structure and organizational responsibilities ("Segment Realignment") following the acquisition of First Data. Our new reportable segments are: Merchant Acceptance ("Acceptance"), Financial Technology ("Fintech") and Payments and Network ("Payments"). The businesses in our Acceptance segment provide a wide range of products and services to merchants around the world, including point-of-sale ("POS") merchant acquiring and e-commerce services, mobile payment services, security and fraud protection products, and our cloud-based Clover® POS platform, which includes a marketplace for proprietary and third-party business applications. The products and services in the global Acceptance businesses are distributed through a variety of channels, including through direct sales teams, strategic partnerships with indirect non-bank sales forces, independent software vendors, and bank and non-bank partners in the form of joint venture alliances, revenue sharing alliances and referral agreements. Many merchants, financial institutions and distribution partners within the Acceptance segment are also customers of our other segments. The businesses in our Fintech segment provide financial institutions around the world with the technology solutions they need to run their operations, including an institution's general ledger and central information files and products and services that enable financial institutions to process customer deposit and loan accounts. As a complement to the core account processing functionality, the businesses in the global Fintech segment also provide digital banking, financial and risk management, cash management, professional services and consulting, item processing and source capture, and other products and services that support numerous types of financial transactions. In addition, some of the businesses in the Fintech segment provide products or services to corporate clients to facilitate the management of financial processes and transactions. Many of the products and services offered in the Fintech segment are integrated with solutions from our other segments. The businesses in our Payments segment provide financial institutions and corporate clients around the world with the products and services required to process digital payment transactions. This includes card transactions such as debit, credit and prepaid card processing and services, a range of network services, security and fraud protection products, card production and print services. In addition, the Payments segment businesses offer non-card digital payment software and services, including bill payment, account-to-account transfers, person-to-person payments, electronic billing, and security and fraud protection products. Clients of the global Payments segment businesses reflect a wide range of industries, including merchants, distribution partners and financial institution customers in our other segments. Corporate and Other supports the reporting segments above, and consists of amortization of acquisition-related intangible assets, unallocated corporate expenses and other activities that are not considered when we evaluate segment performance, such as gains on sales of businesses, costs associated with acquisition and divestiture activity, and our Output Solutions postage reimbursements. Corporate and Other also includes the historical results of our Investment Services business, of which we sold a 60% controlling interest inFebruary 2020 , as well as transition services revenue associated with various dispositions. 31
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Acquisitions and Dispositions We frequently review our portfolio to ensure we have the right set of businesses to execute on our strategy. We expect to acquire businesses when we identify: a compelling strategic need, such as a product, service or technology that helps meet client demand; an opportunity to change industry dynamics; a way to achieve business scale; or similar considerations. We expect to divest businesses that are not in line with our market, product or financial strategies. Acquisitions OnJuly 29, 2019 , we completed the acquisition of First Data for a total purchase price of$46.5 billion by acquiring 100% of the First Data stock that was issued and outstanding as of the date of acquisition. As a result of the acquisition, First Data stockholders received 286 million shares of common stock ofFiserv, Inc. , at an exchange ratio of 0.303 shares ofFiserv, Inc. for each share of First Data common stock, with cash paid in lieu of fractional shares. We also converted 15 million outstanding First Data equity awards into corresponding equity awards relating to common stock ofFiserv, Inc. in accordance with the exchange ratio. In addition, concurrent with the closing of the acquisition, we made a cash payment of$16.4 billion to repay existing First Data debt. We funded the transaction-related expenses and the repayment of First Data debt through a combination of available cash on-hand, proceeds from the issuance of senior notes and term loan and revolving credit facility borrowings. The acquisition of First Data increases our footprint as a global payments and financial technology provider by expanding the portfolio of services provided to financial institutions, corporate and merchant clients and consumers. OnMarch 2, 2020 , we acquiredMerchantPro Express LLC ("MerchantPro"), an independent sales organization that provides processing services, point-of-sale equipment and merchant cash advances to businesses acrossthe United States . MerchantPro is included within the Acceptance segment and further expands our merchant services business. OnMarch 18, 2020 , we acquiredBypass Mobile, LLC ("Bypass"), an independent software vendor and innovator in enterprise point-of-sale systems for sports and entertainment venues, food service management providers and national restaurant chains. Bypass is included within the Acceptance segment and further enhances our omni-commerce capabilities, enabling enterprise businesses to deliver a seamless customer experience that spans physical and digital channels. OnMay 11, 2020 , we acquiredInlet, LLC ("Inlet"), a provider of secure digital delivery solutions for enterprise and middle-market billers' invoices and statements. Inlet is included within the Payments segment and further enhances our digital bill payment strategy. We acquired these businesses for an aggregate purchase price of$161 million , net of$2 million of acquired cash, and including earn-out provisions estimated at a fair value of$42 million . Dispositions OnFebruary 18, 2020 , we completed the sale of a 60% controlling interest of our Investment Services business, which is reported within Corporate and Other following the Segment Realignment. We received pre-tax proceeds of$584 million , net of related expenses, resulting in a pre-tax gain on the sale of$428 million , with a related tax expense of$112 million . Following the transaction, we began accounting for our 40% retained interest of the Investment Services business as an equity method investment. Industry Trends The global payments landscape continues to evolve, with rapidly advancing technologies and a steady expansion of digital payments, e-commerce, and innovation in real-time payments infrastructure. Because of this growth, competition also continues to evolve. Business and consumer expectations continue to rise, with a focus on convenience and security. To meet these expectations, payments companies are focused on modernizing their technology, utilizing data, and enhancing the customer experience. Financial Institutions The market for products and services offered by financial institutions continues to evolve rapidly. The traditional financial industry and other market entrants regularly introduce and implement new payment, deposit, risk management, lending and investment products, and the distinctions among the products and services traditionally offered by different types of financial institutions continue to narrow as they seek to serve the same customers. At the same time, the evolving global regulatory and cybersecurity landscape has continued to create a challenging operating environment for financial institutions. These conditions are driving heightened interest in solutions that help financial institutions win and retain customers, generate incremental revenue, comply with regulations and enhance operating efficiency. Examples of these solutions include electronic payments and delivery methods such as internet, mobile and tablet banking, sometimes referred to as "digital channels". The focus on digital channels by both financial institutions and their customers, as well as the growing volume and types of payment transactions in the marketplace, continues to elevate the data and transaction processing needs of financial institutions. 32
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We expect that financial institutions will continue to invest significant capital and human resources to process transactions, manage information, maintain regulatory compliance and offer innovative new services to their customers in this rapidly evolving and competitive environment. We anticipate that we will benefit over the long term from the trend of financial institutions moving from in-house technology to outsourced solutions as they seek to remain current on technology changes in an evolving marketplace. We believe that economies of scale in developing and maintaining the infrastructure, technology, products, services and networks necessary to be competitive in such an environment are essential to justify these investments, and we anticipate that demand for products that facilitate customer interaction with financial institutions, including electronic transactions through digital channels, will continue to increase, which we expect to create revenue opportunities for us. In addition to the trends described above, the financial institutions marketplace has experienced change in composition as well. During the past 25 years, the number of financial institutions inthe United States has declined at a relatively steady rate of approximately 3% per year, primarily as a result of voluntary mergers and acquisitions. Rather than reducing the overall market, these consolidations have transferred accounts among financial institutions. If a client loss occurs due to merger or acquisition, we receive a contract termination fee based on the size of the client and how early in the contract term the contract is terminated. These fees can vary from period to period. Our focus on long-term client relationships and recurring, transaction-oriented products and services has also reduced the impact that consolidation in the financial services industry has had on us. We believe that the integration of our products and services creates a compelling value proposition for our clients by providing, among other things, new sources of revenue and opportunities to reduce their costs. Furthermore, we believe that our sizable and diverse client base, combined with our position as a leading provider of non-discretionary, recurring revenue-based products and services, gives us a solid foundation for growth. Merchants The rapid growth in and globalization of mobile and e-commerce, driven by consumers' desire for more simple and efficient shopping experiences, has created an opportunity for merchants to reach consumers in high-growth online and mobile settings, which often requires a merchant acquiring provider to enable and optimize the acceptance of payments. Merchants are demanding simpler, integrated, and modern POS systems to help manage their everyday business operations. When combined with the ever-increasing ways a consumer can pay for goods and services, merchants have sought modern POS systems to streamline this complexity. Furthermore, merchants can now search, discover, compare, purchase and even install a new POS system through direct, digital-only experiences. This direct, digital-only channel is quickly becoming a source of new merchant acquisition opportunities, especially with respect to smaller merchants. We believe that our digital merchant acquisition solution is designed to meet this need. Additionally, there are numerous software-as-a-service ("SaaS") solutions in the industry, many of which have chosen to integrate merchant acquiring within their software in a way to further monetize their client relationships. SaaS solutions that integrate payments are often referred to as Independent Software Vendors, or ISVs, and we believe there are thousands of these potential distribution partnership opportunities available to us. Recent Market Conditions InDecember 2019 , a novel strain of coronavirus ("COVID-19") was identified and has since continued to spread and negatively impact the economy ofthe United States and other countries around the world. InMarch 2020 , theWorld Health Organization recognized the COVID-19 outbreak as a pandemic. In response to the COVID-19 pandemic, the governments of many countries, states, cities and other geographic regions have taken actions to prevent the spread of COVID-19, such as imposing travel restrictions and bans, quarantines, social distancing guidelines, shelter-in-place or lock-down orders and other similar limitations. Accordingly, the COVID-19 pandemic has adversely impacted global economic activity and has contributed to significant volatility in financial markets during 2020. Our operating performance is subject to global economic and market conditions, as well as their impacts on levels of consumer spending. As a result of the COVID-19 pandemic and the related decline in global economic activity, we experienced a significant decrease in payments volume and transactions during the last two weeks of March and throughout the second quarter that negatively impacted our merchant acquiring and payment-related businesses, which earn transaction-based fees, as well as modest declines in other businesses. Merchant acquiring and payment volumes began to recover inMay 2020 and continued to improve throughout June andJuly 2020 as economic activity renewed. While such recent business trends demonstrated positive momentum, the uncertainty caused by the ongoing COVID-19 pandemic creates an economic environment where our future financial results remain difficult to anticipate. 33
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In response to the COVID-19 pandemic, we have taken several actions since the onset of the pandemic to protect the health, safety and well-being of our employees while maintaining business continuity. These actions include, among others, requiring a majority of our employees to work remotely, limiting or suspending non-essential travel, suspending all non-essential visitors to our facilities, disinfecting facilities and workspaces extensively and frequently, providing personal protective equipment to associates and requiring employeeswho must be present at our facilities to adhere to a variety of safety protocols. In addition, we have expanded paid time-off for employees impacted by COVID-19, provided supplemental pay for certain employees involved in critical infrastructurewho could not work remotely, and expanded our Fiserv Cares program to benefit employees in need around the world. We expect to continue such safety measures for the foreseeable future and may take further actions, or adapt these existing policies, as government authorities may require or recommend or as we may determine to be in the best interest of our employees, clients and vendors. We have also taken several actions to manage discretionary costs including, among others, limiting third-party spending and the temporary suspension of certain employee-related benefits, including company matching contributions to theFiserv 401(k) Savings Plan as well as the discount on shares purchased under theFiserv, Inc. Amended and Restated Employee Stock Purchase Plan. In addition, we are reassessing and deferring certain capital expenditures that were originally planned for 2020. We will continue to monitor and assess developments related to COVID-19 and implement appropriate actions to minimize the risk to our operations of any material adverse developments. Ultimately, the extent of the impact of the COVID-19 pandemic on our future operational and financial performance will depend on, among other matters, the duration and intensity of the COVID-19 pandemic; governmental and private sector responses to the pandemic and the impact of such responses on us; and the impact of the pandemic on our employees, clients, vendors, operations and sales, all of which are uncertain and cannot be predicted. Changes in Critical Accounting Policies and Estimates Our consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted inthe United States , which require management to make estimates, judgments and assumptions that affect the reported amount of assets, liabilities, revenue and expenses. In our Annual Report on Form 10-K for the year endedDecember 31, 2019 , we identified our critical accounting policies and estimates. We continually evaluate the accounting policies and estimates that we use to prepare our consolidated financial statements, including for recently adopted accounting pronouncements, and base our estimates on historical experience and assumptions that we believe are reasonable in light of current circumstances. Actual amounts and results could differ materially from these estimates. There have been no material changes to our critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Results of Operations The following table presents certain amounts included in our consolidated statements of income, the relative percentage that those amounts represent to revenue and the change in those amounts from year-to-year. This information should be read together with the unaudited consolidated financial statements and accompanying notes. The financial results presented below have been affected by the First Data and other acquisitions, dispositions, debt financing activities and foreign currency fluctuations. 34
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Three Months Ended June 30,
Percentage of
Revenue (1) Increase (Decrease)
(In millions) 2020 2019 2020 2019 $ %
Revenue:
Processing and services $ 2,890 $ 1,328 83.4 % 87.8 % $ 1,562 118 %
Product 575 184 16.6 % 12.2 % 391 213 %
Total revenue 3,465 1,512 100.0 % 100.0 % 1,953 129 %
Expenses:
Cost of processing and services 1,466 617 50.7 % 46.5 % 849 138 %
Cost of product 454 168 79.0 % 91.3 % 286 170 %
Sub-total 1,920 785 55.4 % 51.9 % 1,135 145 %
Selling, general and
administrative 1,377 343 39.7 % 22.7 % 1,034 301 %
Loss on sale of business 3 - 0.1 % - % 3 n/m
Total expenses 3,300 1,128 95.2 % 74.6 % 2,172 193 %
Operating income 165 384 4.7 % 25.4 % (219 ) (57 )%
Interest expense, net (174 ) (58 ) (5.0 )% (3.8 )% (116 ) (200 )%Debt financing activities - (37 ) - % (2.4 )% 37 n/m Other income 1 2 - % 0.1 % (1 ) n/m (Loss) income before income taxes and loss from investments in unconsolidated affiliates (8 ) 291 (0.2 )% 19.2
% (299 ) (103 )% Income tax (provision) benefit 27 (60 ) 0.8 % (4.0 )%
87 145 %
Loss from investments in
unconsolidated affiliates (10 ) (8 ) (0.3 )% (0.5 )% (2 ) n/m
Net income 9 223 0.3 % 14.7 % (214 ) (96 )%
Net income attributable to
noncontrolling interests 7 - 0.2 % - 7 n/m
Net income attributable to
Fiserv, Inc. $ 2 $ 223 0.1 % 14.7
%
(1) Percentage of revenue is calculated as the relevant revenue, expense,
income or loss amount divided by total revenue, except for cost of
processing and services and cost of product amounts, which are divided by
the related component of revenue.
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Six Months Ended June 30,
Percentage of
Revenue (1) Increase (Decrease)
(In millions) 2020 2019 2020 2019 $ %
Revenue:
Processing and services $ 5,965 $ 2,621 82.5 % 87.0 % $ 3,344 128 %
Product 1,269 393 17.5 % 13.0 % 876 223 %
Total revenue 7,234 3,014 100.0 % 100.0 % 4,220 140 %
Expenses:
Cost of processing and services 3,101 1,241 52.0 % 47.3 % 1,860 150 %
Cost of product 986 342 77.7 % 87.0 % 644 188 %
Sub-total 4,087 1,583 56.5 % 52.5 % 2,504 158 %
Selling, general and
administrative 2,781 684 38.4 % 22.7 % 2,097 307 %
Gain on sale of businesses (428 ) (10 ) (5.9 )% (0.3 )% 418 n/m
Total expenses 6,440 2,257 89.0 % 74.9 % 4,183 185 %
Operating income 794 757 11.0 % 25.1 % 37 5 %
Interest expense, net (361 ) (115 ) (5.0 )% (3.8 )% (246 ) (214 )%
Debt financing activities - (96 ) - % (3.2 )% 96 100 %
Other income 21 3 0.3 % 0.1 % 18 n/m
Income before income taxes and
loss from investments in
unconsolidated affiliates 454 549 6.3 % 18.2 % (95 ) (17 )%
Income tax provision (52 ) (91 ) (0.7 )% (3.0 )% 39 43 %
Loss from investments in
unconsolidated affiliates (16 ) (10 ) (0.2 )% (0.3 )% (6 ) 60 %
Net income 386 448 5.3 % 14.9 % (62 ) (14 )%
Net loss attributable to
noncontrolling interests (8 ) - (0.1 )% - (8 ) n/m
Net income attributable to
Fiserv, Inc. $ 394 $ 448 5.4 % 14.9
%
(1) Percentage of revenue is calculated as the relevant revenue, expense,
income or loss amount divided by total revenue, except for cost of
processing and services and cost of product amounts, which are divided by
the related component of revenue.
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Three Months Ended June 30,
Corporate
(In millions) Acceptance Fintech Payments and Other Total
Total revenue:
2020 $ 1,223 $ 714 $ 1,320 $ 208 $ 3,465
2019 - 731 662 119 1,512
Revenue growth $ 1,223 $ (17 ) $ 658 $ 89 $ 1,953
Revenue growth
percentage n/m (2 )% 99 % 129 %
Operating income
(loss):
2020 $ 245 $ 252 $ 548 $ (880 ) $ 165
2019 - 221 288 (125 ) 384
Operating income
growth $ 245 $ 31 $ 260 $ (755 ) $ (219 )
Operating income
growth percentage n/m 14 % 90 % (57 )%
Operating margin:
2020 20.0 % 35.4 % 41.5 % 4.7 %
2019 - % 30.2 % 43.4 % 25.4 %
Operating margin
growth (1) n/m 520 bps (190 ) bps (2,070 ) bps
Six Months Ended June 30,
Corporate
(In millions) Acceptance Fintech Payments and Other Total
Total revenue:
2020 $ 2,624 $ 1,432 $ 2,706 $ 472 $ 7,234
2019 - 1,456 1,313 245 3,014
Revenue growth $ 2,624 $ (24 ) $ 1,393 $ 227 $ 4,220
Revenue growth
percentage n/m (2 )% 106 % 140 %
Operating income
(loss):
2020 $ 562 $ 456 $ 1,113 $ (1,337 ) $ 794
2019 - 424 562 (229 ) 757
Operating income
growth $ 562 $ 32 $ 551 $ (1,108 ) $ 37
Operating income
growth percentage n/m 8 % 98 % 5 %
Operating margin:
2020 21.4 % 31.9 % 41.2 % 11.0 %
2019 - 29.1 % 42.8 % 25.1 %
Operating margin
growth (1) n/m 280 bps (160 ) bps (1,410 ) bps
(1) Represents the basis point growth or decline in operating margin.
Operating margin percentages are calculated using actual, unrounded amounts.
Total Revenue
Total revenue increased $1,953 million , or 129%, in the second quarter of 2020
and increased $4,220 million , or 140%, in the first six months of 2020 compared
to 2019, primarily driven by the incremental revenue from the First Data
acquisition. The First Data acquisition contributed $2,021 million and $4,296
million of revenue during the second quarter and first six months of 2020, with
$1,223 million and $2,624 million to the Acceptance segment, $666 million and
$1,380 million to the Payments segment, and $132 million and $292 million to
Corporate and Other, respectively. Conversely, dispositions reduced revenue by
$54 million and $87 million in the second quarter and first six months of 2020
compared to 2019, respectively.
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Revenue in our Acceptance segment of$1,223 million and$2,624 million in the second quarter and first six months of 2020, respectively, was attributable to our acquisition of First Data and is primarily comprised of merchant acquiring processing revenue. Revenue in our Acceptance segment, which earns transaction-based fees, was adversely affected in the last two weeks of March and throughout the second quarter due to the economic impact of the COVID-19 pandemic. Merchant acquiring payment volumes began to recover inMay 2020 and continued to improve inJune 2020 as economic activity renewed. Revenue in our Fintech segment decreased$17 million , or 2%, in the second quarter of 2020 and decreased$24 million , or 2%, in the first six months of 2020 compared to 2019. The Fintech segment decline was attributable to a reduction in termination fee revenue as well as the disposition of our remittance solutions business inDecember 2019 , which each reduced Fintech segment growth by 1% in both the second quarter and first six months of 2020. Revenue in our Payments segment increased$658 million , or 99%, in the second quarter of 2020 and increased$1,393 million , or 106%, during the first six months of 2020 compared to 2019. Revenue from the First Data acquisition contributed 101% and 105% in the second quarter and first six months of 2020, respectively, to Payments segment revenue partially offset by lower transaction volumes due to the COVID-19 pandemic and related decline in global economic activity. Revenue at Corporate and Other increased$89 million , or 75%, in the second quarter of 2020 and increased$227 million , or 93%, during the first six months of 2020 compared to 2019. Postage revenue from the First Data acquisition contributed 110% and 119% to the Corporate and Other growth in the second quarter and first six months of 2020, respectively, while the disposition of a 60% controlling interest of our Investment Services business reduced revenue by 36% and 26% in the second quarter and first six months of 2020, respectively. Total Expenses Total expenses increased$2,172 million , or 193%, in the second quarter of 2020 and increased$4,183 million , or 185%, in the first six months of 2020 compared to 2019. Total expenses as a percentage of total revenue increased to 95.2% in the second quarter of 2020 and increased to 89.0% in the first six months of 2020. Total expenses in 2020 include the expenses of First Data, which include acquired intangible asset amortization, resulting in the overall significant increase in expenses compared to 2019. Total expenses and total expenses as a percentage of total revenue were reduced by a$428 million gain on sale of a 60% interest of our Investment Services business inFebruary 2020 and a$10 million gain on sale resulting from consideration received in 2019 related to the sale of a 55% interest of our Lending Solutions business. Cost of processing and services as a percentage of processing and services revenue increased to 50.7% in the second quarter of 2020 compared to 46.5% in the second quarter of 2019 and increased to 52.0% in the first six months of 2020 compared to 47.3% in the first six months of 2019. Cost of processing and services as a percentage of processing and services revenue increased in both the second quarter and the first six months of 2020 by approximately 350 basis points from incremental First Data acquisition intangible amortization and by approximately 300 basis points from integration-related expenses associated with the First Data acquisition, including$33 million and$80 million of accelerated depreciation and amortization associated with the termination of certain vendor contracts, respectively. Partially offsetting these increases, operating leverage in our recurring revenue businesses favorably impacted cost of processing and services as a percentage of processing and services revenue in the second quarter and first six months of 2020. Cost of product as a percentage of product revenue decreased to 79.0% in the second quarter of 2020 compared to 91.3% in the second quarter of 2019 and decreased to 77.7% in the first six months of 2020 compared to 87.0% in the first six months of 2019 due entirely to the First Data acquisition. Selling, general and administrative expenses as a percentage of total revenue increased to 39.7% in the second quarter of 2020 compared to 22.7% in the second quarter of 2019 and increased to 38.4% in the first six months of 2020 compared to 22.7% in the first six months of 2019. Incremental acquired intangible asset amortization from the First Data acquisition increased selling, general and administrative expenses as a percentage of total revenue by approximately 1,000 basis points in both the second quarter and first six months of 2020. The remaining increase in selling, general and administrative expenses as a percentage of total revenue was due to increased costs associated with the First Data acquisition, including integration related expenses. The gains on sale of businesses of$428 million and$10 million in the first six months of 2020 and 2019, respectively, resulted from the sale of a 60% interest of our Investment Services business inFebruary 2020 and contingent consideration received in 2019 related to the sale of a 55% interest of our Lending Solutions business, respectively. 38
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Operating Income and Operating Margin Total operating income decreased$219 million , or 57%, in the second quarter of 2020 and increased$37 million , or 5%, in the first six months of 2020 compared to 2019. Total operating margin decreased to 4.7% in the second quarter of 2020 and decreased to 11.0% in the first six months of 2020 compared to 2019. Operating income in our Acceptance segment of$245 million and$562 million , at an operating margin of 20.0% and 21.4%, in the second quarter and first six months of 2020, respectively, was attributable to our acquisition of First Data. Operating income in our Acceptance segment, which earns transaction-based fees, was adversely affected in the last two weeks of March and throughout the second quarter due to the economic impact of the COVID-19 pandemic. Merchant acquiring payment volumes and related operating income began to recover inMay 2020 and continued to improve inJune 2020 as economic activity renewed. Operating income in our Fintech segment increased$31 million , or 14%, in the second quarter of 2020 and increased$32 million , or 8%, in the first six months of 2020 compared to 2019. Operating margin increased 520 basis points to 35.4% in the second quarter of 2020 and increased 280 basis points to 31.9% in the first six months of 2020 compared to 2019. The improvement in the Fintech segment operating margin was driven by expense management across the segment, including synergy savings within personnel and technology of 290 basis points and 130 basis points and additional expense reductions attributable COVID-19 of 210 basis points and 130 basis points in the second quarter and first six months of 2020, respectively. The favorable impact of the above and various other items was partially offset by 90 basis points and 70 basis points in the second quarter and first six months of 2020, respectively, from a decrease in higher-margin termination fee revenue. Operating income in our Payments segment increased$260 million , or 90%, in the second quarter of 2020 and increased$551 million , or 98%, in the first six months of 2020 compared to 2019. Operating margin decreased 190 basis points to 41.5% in the second quarter of 2020 and decreased 160 basis points to 41.2% in the first six months of 2020 compared to 2019. The increase in operating income and decrease in operating margin was driven by the integration of First Data results into this combined operating segment in 2020. The operating loss in Corporate and Other increased$755 million in the second quarter of 2020 and increased$1,108 million in the first six months of 2020 compared to 2019. The increase in Corporate and Other operating loss was primarily due to the acquisition of First Data, including incremental amortization of acquired intangible assets of$477 million and$957 million in the second quarter and first six months of 2020, respectively, acquisition and related integration costs of$209 million and$407 million in the second quarter of 2020, respectively, and other First Data related corporate expenses. Corporate and Other was favorably impacted by a$428 million gain on the sale of a 60% interest of our Investment Services business in the first six months of 2020. Interest Expense, Net Interest expense, net increased$116 million , or 200%, in the second quarter of 2020 and increased$246 million , or 214%, in the first six months of 2020 compared to 2019 primarily due to theJune 2019 issuance of$9.0 billion of fixed-rate senior notes, theJuly 2019 issuance of €1.5 billion and £1.05 billion of fixed-rate senior notes and the term loan borrowings that were incurred for the purpose of funding the repayment of certain indebtedness of First Data and its subsidiaries on the closing date of the acquisition. Debt Financing Activities In connection with the definitive merger agreement entered into onJanuary 16, 2019 to acquire First Data, we entered into a bridge facility commitment letter providing for a 364-day senior unsecured bridge term loan facility in an aggregate principal amount of$17.0 billion for the purpose of refinancing certain indebtedness of First Data on the closing date of the acquisition. We recorded$37 million and$96 million of expense during the second quarter and first six months of 2019, respectively, associated with such bridge term loan facility and other refinancing and related activities in connection with the acquisition of First Data. Other Income Other income decreased$1 million in the second quarter of 2020 and increased$18 million in the first six months of 2020 compared to 2019. Other income includes net foreign currency transaction (losses) gains of$(7) million and$11 million in the second quarter and first six months of 2020, respectively. In addition, other income includes$4 million and$2 million in the second quarter of 2020 and 2019, respectively, and$6 million and$3 million in the first six months of 2020 and 2019, respectively, related to the release of risk under our non-contingent guarantee arrangements as well as a change in the provision of estimated credit losses associated with certain indebtedness of theLending Joint Ventures . 39
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Income Tax (Provision) Benefit Income tax (provision) benefit as a percentage of income (loss) before loss from investments in unconsolidated affiliates was 337.5% and 20.6% in the second quarter of 2020 and 2019, respectively, and was 11.5% and 16.6% in the first six months of 2020 and 2019, respectively. The income tax benefit of$27 million on the$8 million loss before income taxes and loss from investments in unconsolidated affiliates in the second quarter of 2020 includes equity compensation related tax benefits, changes in uncertain tax positions and other discrete tax items. The effective rate in the first six months of 2020 also includes$112 million of income tax expense associated with the$428 million gain on the sale of a 60% interest of our Investment Services business. Loss from Investments in Unconsolidated Affiliates Our share of net loss from affiliates accounted for using the equity method of accounting, including merchant bank alliance affiliates from the acquisition of First Data, is reported as loss from investments in unconsolidated affiliates and the related tax benefit is reported within the income tax (provision) benefit in the consolidated statements of income. Loss from investments in unconsolidated affiliates, including acquired intangible asset amortization from valuations in purchase accounting, was$10 million and$8 million in the second quarter of 2020 and 2019, respectively, and was$16 million and$10 million in the first six months of 2020 and 2019, respectively. Net Income (Loss) Attributable to Noncontrolling Interests Net income (loss) attributable to noncontrolling interests, including acquired intangible asset amortization from valuations in purchase accounting, of$7 million and$(8) million in the second quarter and first six months of 2020, respectively, relates to our consolidated alliance partners obtained through the acquisition of First Data. Net Income Per Share - Diluted Net income attributable toFiserv, Inc. per share-diluted was$0.00 and$0.56 in the second quarter of 2020 and 2019, respectively, and was$0.57 and$1.12 in the first six months of 2020 and 2019, respectively. Net income attributable toFiserv, Inc. per share-diluted in the second quarter and first six months of 2020 included integration costs and acquired intangible asset amortization from the application of purchase accounting associated with the acquisition of First Data. In addition, net income attributable toFiserv, Inc. per share-diluted in the first six months of 2020 included a gain from the sale of a 60% interest of our Investment Services business. Net income attributable toFiserv, Inc. per share-diluted in the second quarter and first six months of 2019 included transaction costs and financing activities associated with the acquisition of First Data. Liquidity and Capital Resources General Our primary liquidity needs in the ordinary course of business are to: (i) fund normal operating expenses; (ii) meet the interest and principal requirements of our outstanding indebtedness, including finance leases; and (iii) fund capital expenditures and operating lease payments. We believe these needs will be satisfied using cash flow generated by our operations, along with our cash and cash equivalents of$869 million and available borrowings under our revolving credit facility of$2.5 billion atJune 30, 2020 . The following table summarizes our operating cash flow and capital expenditure amounts for the six months endedJune 30, 2020 and 2019, respectively. 40
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Six Months Ended
June 30, Increase (Decrease)
(In millions) 2020 2019 $ %
Net income $ 386 $ 448 $ (62 )
Depreciation and amortization 1,673 396 1,277
Share-based compensation 202 34 168
Deferred income taxes (94 ) 12 (106 )
Gain on sale of businesses (428 ) (10 ) (418 )
Loss from investments in unconsolidated
affiliates 16 10 6
Settlement of interest rate hedge contracts - (183 )
183
Distributions from unconsolidated affiliates 12 -
12
Non-cash impairment charges 40 -
40
Net changes in working capital and other 112 (128 ) 240 Operating cash flow$ 1,919 $ 579 $ 1,340 231 % Capital expenditures$ 488 $ 210 $ 278 132 % Our net cash provided by operating activities, or operating cash flow, was$1.92 billion in the first six months of 2020, an increase of 231% compared with$579 million in the first six months of 2019. This increase was primarily attributable to the acquisition of First Data, along with favorable working capital fluctuations, including timing of receivable collections. Our current policy is to use our operating cash flow primarily to fund capital expenditures, share repurchases, acquisitions and to repay debt rather than to pay dividends. Our capital expenditures were approximately 7% of our total revenue for both the first six months of 2020 and 2019. Share Repurchases We purchased$1.4 billion and$120 million of our common stock during the first six months of 2020 and 2019, respectively. In 2019, we deferred share repurchases as ofJanuary 16, 2019 until the close of the First Data acquisition. As ofJune 30, 2020 , we had approximately 7.5 million shares remaining under our current repurchase authorizations. Shares repurchased are generally held for issuance in connection with our equity plans. Repurchase of Indebtedness We may, at any time and from time to time, seek to repurchase our outstanding senior notes for cash in open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will be upon such terms and at such prices, including discounts to the face value of the senior notes, as we may determine, may involve amounts that are material and will depend on prevailing market conditions, our liquidity requirements and other factors. Acquisitions and Dispositions Acquisitions OnJuly 29, 2019 , we completed the acquisition of First Data for a total purchase price of$46.5 billion by acquiring 100% of the First Data stock that was issued and outstanding as of the date of acquisition. As a result of the acquisition, First Data stockholders received 286 million shares of common stock ofFiserv, Inc. , at an exchange ratio of 0.303 shares ofFiserv, Inc. for each share of First Data common stock, with cash paid in lieu of fractional shares. We also converted 15 million outstanding First Data equity awards into corresponding equity awards relating to common stock ofFiserv, Inc. in accordance with the exchange ratio. In addition, concurrent with the closing of the acquisition, we made a cash payment of$16.4 billion to repay existing First Data debt. We funded the transaction-related expenses and the repayment of First Data debt through a combination of available cash on-hand, proceeds from the issuance of senior notes and term loan and revolving credit facility borrowings. OnMarch 2, 2020 , we acquired MerchantPro, an independent sales organization that provides processing services, point-of-sale equipment and merchant cash advances to businesses acrossthe United States . MerchantPro is included within the Acceptance segment and further expands our merchant services business. OnMarch 18, 2020 , we acquired Bypass, an independent software vendor and innovator in enterprise point-of-sale systems for sports and entertainment venues, food service management providers and national restaurant chains. Bypass is included within the Acceptance segment and further enhances our omni-commerce capabilities, enabling enterprise businesses to deliver a seamless customer experience that spans physical and digital 41
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channels. OnMay 11, 2020 , we acquired Inlet, a provider of secure digital delivery solutions for enterprise and middle-market billers' invoices and statements. Inlet is included within the Payments segment and further enhances our digital bill payment strategy. We acquired these businesses for an aggregate purchase price of$161 million , net of$2 million of acquired cash, and including earn-out provisions estimated at a fair value of$42 million . Dispositions OnFebruary 18, 2020 , we completed the sale of a 60% controlling interest of our Investment Services business. We received pre-tax proceeds of$584 million , net of related expenses, resulting in a pre-tax gain on the sale of$428 million , with a related tax expense of$112 million . The net proceeds from the sale were primarily used to repurchase shares of our common stock. Indebtedness (In millions) June 30, 2020 December 31, 2019 Short-term and current maturities of long-term debt: Lines of credit $ 149 $ 150 Finance lease and other financing obligations 210 137
Total short-term and current maturities of long-term debt $ 359 $
287
Long-term debt:
2.7% senior notes due 2020 $ - $ 850 4.75% senior notes due 2021 400 400 3.5% senior notes due 2022 700 700 3.8% senior notes due 2023 1,000 1,000 0.375% senior notes due 2023 561 559 2.75% senior notes due 2024 2,000 2,000 3.85% senior notes due 2025 900 900 2.25% senior notes due 2025 648 687 3.2% senior notes due 2026 2,000 2,000 1.125% senior notes due 2027 561 559 2.25% senior notes due 2027 1,000 - 4.2% senior notes due 2028 1,000 1,000 3.5% senior notes due 2029 3,000 3,000 1.625% senior notes due 2030 561 559 2.65% senior notes due 2030 1,000 - 3.0% senior notes due 2031 648 687 4.4% senior notes due 2049 2,000 2,000 Receivable securitized loan 500 500 Term loan facility 1,750 3,950 Unamortized discount and deferred financing costs (166 ) (160 ) Revolving credit facility 960 174 Finance lease and other financing obligations 492 247 Total long-term debt$ 21,515 $ 21,612 AtJune 30, 2020 , our debt consisted primarily of$18.0 billion of fixed-rate senior notes,$1.0 billion of borrowings on our revolving credit facility and$1.8 billion of variable rate term loans. Interest on ourU.S. dollar-denominated senior notes is paid semi-annually, while interest on our foreign currency-denominated senior notes is paid annually. Interest on our revolving credit facility is paid weekly, or more frequently on occasion, and interest on our term loans is paid monthly. Our 4.75% senior notes due inJune 2021 were classified in the consolidated balance sheet as long-term, as we have the intent to refinance this debt on a long-term basis and the ability to do so under our revolving credit facility, which expires inSeptember 2023 . 42
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During the first six months of 2020, we were in compliance with all financial debt covenants. Our ability to meet future debt covenant requirements will depend on our continued ability to generate earnings and cash flows. As described below, the COVID-19 pandemic has created significant uncertainty as to general economic and market conditions for the remainder of 2020 and beyond. We expect to remain in compliance with all terms and conditions associated with our outstanding debt, including financial debt covenants. Senior Notes OnMay 13, 2020 , we completed an offering of$2.0 billion of senior notes comprised of$1.0 billion aggregate principal amount of 2.25% senior notes due inJune 2027 and$1.0 billion aggregate principal amount of 2.65% senior notes due inJune 2030 . The senior notes pay interest semi-annually onJune 1 andDecember 1 , commencing onDecember 1, 2020 . The indentures governing the senior notes contain covenants that, among other matters, limit (i) our ability to consolidate or merge with or into, or convey, transfer or lease all or substantially all of our properties and assets to, another person, (ii) our and certain of our subsidiaries' ability to create or assume liens, and (iii) our and certain of our subsidiaries' ability to engage in sale and leaseback transactions. We may, at our option, redeem the senior notes, in whole or from time to time in part, at any time prior to the applicable maturity date. We used the net proceeds from the offerings described above to repay the outstanding principal balance of$850 million under our 2.7% senior notes due inJune 2020 and outstanding borrowings under our revolving credit facility totaling$1.1 billion . Variable Rate Debt AtJune 30, 2020 , we had$3.2 billion of variable rate debt, which included$1.8 billion of outstanding term loan borrowings and$500 million under our accounts receivable securitization facility, as described below. In addition, we maintain a$3.5 billion revolving credit facility with a syndicate of banks. There were$960 million of outstanding borrowings on the revolving credit facility atJune 30, 2020 . Outstanding borrowings under the term loan and revolving credit facility bear interest at a variable rate based on LIBOR or on a base rate, plus a specified margin based on our long-term debt rating in effect from time to time. There are no significant commitment fees and no compensating balance requirements on the revolving credit facility, which matures inSeptember 2023 . The outstanding principal balance on the term loan of$1.8 billion is due at maturity inJuly 2024 . The variable interest rate was 1.20% on the revolving credit facility borrowings and 1.43% on the term loan borrowings atJune 30, 2020 . The revolving credit facility and the term loan contain various, substantially similar, restrictions and covenants that require us, among other things, to: (i) limit our consolidated indebtedness as of the end of each fiscal quarter to either four times or four and one-half times our consolidated net earnings before interest, taxes, depreciation, amortization, non-cash charges and expenses and certain other adjustments ("EBITDA") for a specified period following certain acquisitions and (ii) maintain consolidated EBITDA of at least three times our consolidated interest expense as of the end of each fiscal quarter for the period of four fiscal quarters then ended. InNovember 2019 , we elected to increase the permitted leverage ratio to four times our consolidated EBITDA throughJune 30, 2020 , with the leverage ratio decreasing to three and one-half times consolidated EBITDA thereafter. Foreign Lines of Credit In connection with the acquisition of First Data, we assumed certain short-term lines of credit with foreign banks and alliance partners primarily to fund settlement activity. These arrangements are primarily associated with our international operations and are in various functional currencies, the most significant of which are the Australian dollar, Polish zloty and Argentine peso. We had amounts outstanding on these lines of credit totaling$149 million at a weighted-average interest rate of 19.6% atJune 30, 2020 . Receivable Securitized Loan In connection with the acquisition of First Data, we acquired a consolidated wholly-owned subsidiary,First Data Receivables, LLC ("FDR"). FDR is a party to certain receivables financing arrangements, including an agreement ("Receivables Financing Agreement") with certain financial institutions and other persons from time to time party thereto as lenders and group agents, pursuant to which certain of our wholly-owned subsidiaries have agreed to transfer and contribute receivables to FDR, and FDR in turn may obtain borrowings from the financial institutions and other lender parties to the Receivables Financing Agreement secured by liens on those receivables. FDR's assets are not available to satisfy the obligations of any other of our entities or affiliates, and FDR's creditors would be entitled, upon its liquidation, to be satisfied out of FDR's assets prior to any assets or value in FDR becoming available to us. The receivables held by FDR are recorded within trade accounts receivable, net in our consolidated balance sheet. AtJune 30, 2020 , FDR held$630 million in receivables as part of the securitization program. The maximum borrowing capacity, subject to collateral availability, under the Receivables Financing Agreement atJune 30, 2020 was$500 million . FDR utilized the receivables as collateral in borrowings of$500 million , at an average interest rate of 1.01%, atJune 30, 2020 . The term of the Receivables Financing Agreement is throughJuly 2022 . 43
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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. AtJune 30, 2020 andDecember 31, 2019 , we held$869 million and$893 million in cash and cash equivalents, respectively. The table below details the cash and cash equivalents at: June 30, 2020 December 31, 2019 (In millions) Domestic International Total Domestic International Total Available$ 349 $ 173$ 522 $ 383 $ 208$ 591 Unavailable (1) 114 233 347 130 172 302 Total$ 463 $ 406$ 869 $ 513 $ 380$ 893
(1) Represents cash held primarily by our joint ventures that is not available
to fund operations outside of those entities unless the Board of Directors
for said entities declares a dividend, as well as cash held by certain
other entities that are subject to foreign exchange controls in certain
countries or regulatory capital requirements.
Employee Termination Costs In connection with the acquisition of First Data, we continue to implement certain integration plans focused on reducing our overall cost structure, including reducing vendor spend and eliminating duplicate costs. We recorded$37 million and$77 million of employee termination costs related to severance and other separation costs for terminated employees in connection with the acquisition of First Data during the three and six months endedJune 30, 2020 , respectively. Accrued employee severance and other separation costs of$29 million atJune 30, 2020 are expected to be paid within the next twelve months. We continue to evaluate operating efficiencies and anticipate incurring additional costs in the next few years in connection with these activities but are unable to estimate those amounts at this time as such plans are not yet finalized. Impact of COVID-19 The COVID-19 pandemic has created significant uncertainty as to general global economic and market conditions for the remainder of 2020 and beyond. We believe we have adequate capital resources and sufficient access to external financing sources to satisfy our current and reasonably anticipated requirements for funds to conduct our operations and meet other needs in the ordinary course of our business. However, as the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our liquidity needs. The ability to continue to service debt and meet lease and other obligations as they come due is dependent on our continued ability to generate earnings and cash flows. A lack of recovery or further deterioration in economic and market conditions could materially affect our future access to our sources of liquidity, particularly our cash flows from operations. We engage in regular communication with the banks that participate in our revolving credit facility. During these communications, none of the banks have indicated that they may be unable to perform on their commitments. We periodically review our banking and financing relationships, considering the stability of the institutions, pricing we receive on services, and other aspects of the relationships. Based on these communications and our monitoring activities, we believe the likelihood of one of our banks not performing on its commitment is remote. As evidenced by ourMay 2020 senior notes offering described above, the long-term debt markets have historically provided us with a source of liquidity. Although we do not currently anticipate an inability to obtain financing from long-term debt markets in the future, the COVID-19 pandemic could make financing more difficult and/or expensive to obtain. Our ability to access the long-term debt markets on favorable interest rate and other terms also depends on the ratings assigned by the credit rating agencies to our indebtedness. As ofJune 30, 2020 , we had a corporate credit rating of Baa2 with a stable outlook fromMoody's Investors Service, Inc. and BBB with a stable outlook fromStandard & Poor's Rating Services . In the event that the ratings of our outstanding long-term debt securities were substantially lowered or withdrawn for any reason, or if the ratings assigned to any new issue of long-term debt securities were significantly lower than those noted above, particularly if we no longer had investment grade ratings, our ability to access the debt markets may be adversely affected and our interest expense would increase under the terms of certain of our long-term debt securities. 44
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