FILED PURSUANT TO RULE 424(B)(3)
File Number 333-174529
SUNGARD DATA SYSTEMS INC.
SUPPLEMENT NO. 5 TO
MARKET-MAKING PROSPECTUS DATED JUNE 16, 2011
THE DATE OF THIS SUPPLEMENT IS NOVEMBER 14, 2011
ON NOVEMBER 14, 2011, SUNGARD DATA SYSTEMS INC. FILED THE ATTACHED
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2011
OR
¨ | Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission file numbers:
SunGard Capital Corp. | 000-53653 | |
SunGard Capital Corp. II | 000-53654 | |
SunGard Data Systems Inc. | 001-12989 |
SunGard® Capital Corp.
SunGard® Capital Corp. II
SunGard® Data Systems Inc.
(Exact name of registrant as specified in its charter)
Delaware | 20-3059890 | |
Delaware | 20-3060101 | |
Delaware | 51-0267091 | |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
680 East Swedesford Road, Wayne, Pennsylvania 19087
(Address of principal executive offices, including zip code)
484-582-2000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
SunGard Capital Corp. | Yes x No ¨ | |
SunGard Capital Corp. II | Yes x No ¨ | |
SunGard Data Systems Inc. | Yes x No ¨ |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
SunGard Capital Corp. | Yes x No ¨ | |
SunGard Capital Corp. II | Yes x No ¨ |
SunGard Data Systems Inc. | Yes x No ¨ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
SunGard Capital Corp. Large accelerated filer ¨. Accelerated filer ¨. Non-accelerated filer x. Smaller reporting company ¨.
SunGard Capital Corp. II Large accelerated filer ¨. Accelerated filer ¨. Non-accelerated filer x. Smaller reporting company ¨.
SunGard Data Systems Inc. Large accelerated filer ¨. Accelerated filer ¨. Non-accelerated filer x. Smaller reporting company ¨.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
SunGard Capital Corp. | Yes ¨ No x | |
SunGard Capital Corp. II | Yes ¨ No x | |
SunGard Data Systems Inc. | Yes ¨ No x |
The number of shares of the registrants common stock outstanding as of September 30, 2011:
SunGard Capital Corp. | 256,000,216 shares of Class A common stock and 28,444,390 shares of Class L common stock | |
SunGard Capital Corp. II | 100 shares of common stock | |
SunGard Data Systems Inc. | 100 shares of common stock |
SUNGARD CAPITAL CORP. II
SUNGARD DATA SYSTEMS INC.
AND SUBSIDIARIES
INDEX
PART II. | OTHER INFORMATION | |||||
Item 1. |
43 | |||||
Item 1A. |
43 | |||||
Item 2. |
43 | |||||
Item 3. |
43 | |||||
Item 4. |
43 | |||||
Item 5. |
43 | |||||
Item 6. |
43 | |||||
SIGNATURES | 44 |
Explanatory Note
This Form 10-Q is a combined quarterly report being filed separately by three registrants: SunGard Capital Corp. (SCC), SunGard Capital Corp. II (SCCII) and SunGard Data Systems Inc. (SunGard). SCC and SCC II are collectively referred to as the Parent Companies. Unless the context indicates otherwise, any reference in this report to the Company, we, us and our refer to the Parent Companies together with their direct and indirect subsidiaries, including SunGard. Each registrant hereto is filing on its own behalf all of the information contained in this quarterly report that relates to such registrant. Each registrant hereto is not filing any information that does not relate to such registrant, and therefore makes no representation as to any such information.
1
(In millions except share and per-share amounts)
(Unaudited)
December 31, 2010 |
September 30, 2011 |
|||||||
Assets |
||||||||
Current: |
||||||||
Cash and cash equivalents |
$ | 771 | $ | 746 | ||||
Trade receivables, less allowance for doubtful accounts of $37 and $44 |
833 | 689 | ||||||
Earned but unbilled receivables |
135 | 154 | ||||||
Prepaid expenses and other current assets |
166 | 163 | ||||||
Clearing broker assets |
230 | 220 | ||||||
Deferred income taxes |
7 | 8 | ||||||
Assets held for sale |
1,339 | 1,321 | ||||||
|
|
|
|
|||||
Total current assets |
3,481 | 3,301 | ||||||
Property and equipment, less accumulated depreciation of $1,109 and $1,258 |
892 | 877 | ||||||
Software products, less accumulated amortization of $1,203 and $1,376 |
723 | 586 | ||||||
Customer base, less accumulated amortization of $1,049 and $1,213 |
1,806 | 1,639 | ||||||
Other intangible assets, less accumulated amortization of $23 and $22 |
187 | 156 | ||||||
Trade name, less accumulated amortization of $7 and $10 |
1,023 | 1,020 | ||||||
Goodwill |
4,856 | 4,853 | ||||||
|
|
|
|
|||||
Total Assets |
$ | 12,968 | $ | 12,432 | ||||
|
|
|
|
|||||
Liabilities and Equity |
||||||||
Current: |
||||||||
Short-term and current portion of long-term debt |
$ | 9 | $ | 11 | ||||
Accounts payable |
63 | 40 | ||||||
Accrued compensation and benefits |
284 | 293 | ||||||
Accrued interest expense |
103 | 103 | ||||||
Other accrued expenses |
405 | 347 | ||||||
Clearing broker liabilities |
210 | 178 | ||||||
Deferred revenue |
887 | 817 | ||||||
Liabilities related to assets held for sale |
243 | 254 | ||||||
|
|
|
|
|||||
Total current liabilities |
2,204 | 2,043 | ||||||
Long-term debt |
8,046 | 7,840 | ||||||
Deferred income taxes |
1,114 | 1,040 | ||||||
|
|
|
|
|||||
Total liabilities |
11,364 | 10,923 | ||||||
|
|
|
|
|||||
Commitments and contingencies |
||||||||
Noncontrolling interest in preferred stock of SCCII subject to a put option |
54 | 31 | ||||||
Class L common stock subject to a put option |
87 | 54 | ||||||
Class A common stock subject to a put option |
11 | 7 | ||||||
Stockholders equity: |
||||||||
Class L common stock, convertible, par value $.001 per share; cumulative 13.5% per annum, compounded quarterly; aggregate liquidation preference of $4,699 million and $5,206 million; 50,000,000 shares authorized, 28,670,331 and 28,787,402 shares issued |
| | ||||||
Class A common stock, par value $.001 per share; 550,000,000 shares authorized, 258,037,523 and 259,091,380 shares issued |
| | ||||||
Capital in excess of par value |
2,703 | 2,753 | ||||||
Treasury stock, 326,329 and 343,012 shares of Class L common stock; and 2,940,981 and 3,091,164 shares of Class A common stock |
(34 | ) | (36 | ) | ||||
Accumulated deficit |
(2,970 | ) | (3,246 | ) | ||||
Accumulated other comprehensive income (loss) |
(29 | ) | (28 | ) | ||||
|
|
|
|
|||||
Total SunGard Capital Corp. stockholders equity (deficit) |
(330 | ) | (557 | ) | ||||
Noncontrolling interest in preferred stock of SCCII |
1,782 | 1,974 | ||||||
|
|
|
|
|||||
Total equity |
1,452 | 1,417 | ||||||
|
|
|
|
|||||
Total Liabilities and Equity |
$ | 12,968 | $ | 12,432 | ||||
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
2
Consolidated Statements of Operations
(In millions)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2010 | 2011 | 2010 | 2011 | |||||||||||||
Revenue: |
||||||||||||||||
Services |
$ | 1,004 | $ | 1,043 | $ | 3,012 | $ | 3,060 | ||||||||
License and resale fees |
47 | 50 | 178 | 192 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total products and services |
1,051 | 1,093 | 3,190 | 3,252 | ||||||||||||
Reimbursed expenses |
28 | 17 | 91 | 77 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
1,079 | 1,110 | 3,281 | 3,329 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Costs and expenses: |
||||||||||||||||
Cost of sales and direct operating |
500 | 510 | 1,549 | 1,544 | ||||||||||||
Sales, marketing and administration |
245 | 291 | 753 | 832 | ||||||||||||
Product development |
62 | 74 | 194 | 228 | ||||||||||||
Depreciation and amortization |
70 | 67 | 209 | 204 | ||||||||||||
Amortization of acquisition-related intangible assets |
115 | 107 | 338 | 334 | ||||||||||||
Goodwill impairment charge |
205 | | 205 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
1,197 | 1,049 | 3,248 | 3,142 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating income (loss) |
(118 | ) | 61 | 33 | 187 | |||||||||||
Interest income |
| 1 | 1 | 3 | ||||||||||||
Interest expense and amortization of deferred financing fees |
(160 | ) | (129 | ) | (479 | ) | (396 | ) | ||||||||
Other income (expense) |
(9 | ) | (1 | ) | 5 | (2 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) from continuing operations before income taxes |
(287 | ) | (68 | ) | (440 | ) | (208 | ) | ||||||||
Benefit from (provision for) income taxes |
26 | 27 | 79 | 58 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) from continuing operations |
(261 | ) | (41 | ) | (361 | ) | (150 | ) | ||||||||
Income (loss) from discontinued operations, net of tax |
(117 | ) | 27 | (92 | ) | 40 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
(378 | ) | (14 | ) | (453 | ) | (110 | ) | ||||||||
Income attributable to the noncontrolling interest (including $1 million, $-, $4 million and $2 million in temporary equity) |
(51 | ) | (57 | ) | (147 | ) | (166 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) attributable to SunGard Capital Corp. |
$ | (429 | ) | $ | (71 | ) | $ | (600 | ) | $ | (276 | ) | ||||
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
3
Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
Nine Months Ended September 30, | ||||||||
2010 | 2011 | |||||||
Cash flow from operations: |
||||||||
Net loss |
$ | (453 | ) | $ | (110 | ) | ||
Income (loss) from discontinued operations |
(92 | ) | 40 | |||||
|
|
|
|
|||||
Income (loss) from continuing operations |
(361 | ) | (150 | ) | ||||
Reconciliation of income (loss) from continuing operations to cash flow from (used in) operations: |
||||||||
Depreciation and amortization |
548 | 538 | ||||||
Goodwill impairment charge |
205 | | ||||||
Deferred income tax provision (benefit) |
(92 | ) | (84 | ) | ||||
Stock compensation expense |
23 | 23 | ||||||
Amortization of deferred financing costs and debt discount |
33 | 29 | ||||||
Other noncash items |
(1 | ) | 3 | |||||
Accounts receivable and other current assets |
175 | 134 | ||||||
Accounts payable and accrued expenses |
(101 | ) | (47 | ) | ||||
Clearing broker assets and liabilities, net |
(1 | ) | (22 | ) | ||||
Deferred revenue |
(84 | ) | (70 | ) | ||||
|
|
|
|
|||||
Cash flow from (used in) continuing operations |
344 | 354 | ||||||
Cash flow from (used in) discontinued operations |
91 | 73 | ||||||
|
|
|
|
|||||
Cash flow from (used in) operations |
435 | 427 | ||||||
|
|
|
|
|||||
Investment activities: |
||||||||
Cash paid for acquired businesses, net of cash acquired |
(62 | ) | (35 | ) | ||||
Cash paid for property and equipment and software |
(212 | ) | (183 | ) | ||||
Other investing activities |
6 | (2 | ) | |||||
|
|
|
|
|||||
Cash provided by (used in) continuing operations |
(268 | ) | (220 | ) | ||||
Cash provided by (used in) discontinued operations |
(10 | ) | (7 | ) | ||||
|
|
|
|
|||||
Cash provided by (used in) investment activities |
(278 | ) | (227 | ) | ||||
|
|
|
|
|||||
Financing activities: |
||||||||
Cash received from issuance of common stock |
1 | 1 | ||||||
Cash received from issuance of preferred stock |
| 1 | ||||||
Cash received from borrowings, net of fees |
22 | 1 | ||||||
Cash used to repay debt |
(51 | ) | (218 | ) | ||||
Cash used to purchase treasury stock |
(3 | ) | (3 | ) | ||||
Other financing activities |
(1 | ) | (9 | ) | ||||
|
|
|
|
|||||
Cash provided by (used in) continuing operations |
(32 | ) | (227 | ) | ||||
Cash provided by (used in) discontinued operations |
| | ||||||
|
|
|
|
|||||
Cash provided by (used in) financing activities |
(32 | ) | (227 | ) | ||||
|
|
|
|
|||||
Effect of exchange rate changes on cash |
(2 | ) | (2 | ) | ||||
|
|
|
|
|||||
Increase (decrease) in cash and cash equivalents |
123 | (29 | ) | |||||
Beginning cash and cash equivalents includes cash of discontinued operations: (2010: $26; 2011: $7) |
664 | 778 | ||||||
|
|
|
|
|||||
Ending cash and cash equivalents includes cash of discontinued operations: (2010: $44; 2011: $3) |
$ | 787 | $ | 749 | ||||
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
4
Consolidated Balance Sheets
(In millions except share and per-share amounts)
(Unaudited)
December 31, 2010 |
September 30, 2011 |
|||||||
Assets |
||||||||
Current: |
||||||||
Cash and cash equivalents |
$ | 771 | $ | 746 | ||||
Trade receivables, less allowance for doubtful accounts of $37 and $44 |
833 | 689 | ||||||
Earned but unbilled receivables |
135 | 154 | ||||||
Prepaid expenses and other current assets |
166 | 163 | ||||||
Clearing broker assets |
230 | 220 | ||||||
Deferred income taxes |
7 | 8 | ||||||
Assets held for sale |
1,339 | 1,321 | ||||||
|
|
|
|
|||||
Total current assets |
3,481 | 3,301 | ||||||
Property and equipment, less accumulated depreciation of $1,109 and $1,258 |
892 | 877 | ||||||
Software products, less accumulated amortization of $1,203 and $1,376 |
723 | 586 | ||||||
Customer base, less accumulated amortization of $1,049 and $1,213 |
1,806 | 1,639 | ||||||
Other intangible assets, less accumulated amortization of $23 and $22 |
187 | 156 | ||||||
Trade name, less accumulated amortization of $7 and $10 |
1,023 | 1,020 | ||||||
Goodwill |
4,856 | 4,853 | ||||||
|
|
|
|
|||||
Total Assets |
$ | 12,968 | $ | 12,432 | ||||
|
|
|
|
|||||
Liabilities and Stockholders Equity |
||||||||
Current: |
||||||||
Short-term and current portion of long-term debt |
$ | 9 | $ | 11 | ||||
Accounts payable |
63 | 40 | ||||||
Accrued compensation and benefits |
284 | 293 | ||||||
Accrued interest expense |
103 | 103 | ||||||
Other accrued expenses |
406 | 347 | ||||||
Clearing broker liabilities |
210 | 178 | ||||||
Deferred revenue |
887 | 817 | ||||||
Liabilities related to assets held for sale |
243 | 254 | ||||||
|
|
|
|
|||||
Total current liabilities |
2,205 | 2,043 | ||||||
Long-term debt |
8,046 | 7,840 | ||||||
Deferred income taxes |
1,113 | 1,040 | ||||||
|
|
|
|
|||||
Total liabilities |
11,364 | 10,923 | ||||||
|
|
|
|
|||||
Commitments and contingencies |
||||||||
Preferred stock subject to a put option |
37 | 24 | ||||||
Stockholders equity: |
||||||||
Preferred stock, par value $.001 per share; cumulative 11.5% per annum, compounded quarterly; aggregate liquidation preference of $1,818 million and $1,987 million; 14,999,000 shares authorized, 9,924,392 and 9,964,925 issued |
| | ||||||
Common stock, par value $.001 per share; 1,000 shares authorized, 100 shares issued and outstanding |
| | ||||||
Capital in excess of par value |
3,747 | 3,775 | ||||||
Treasury stock, 112,987 and 118,762 shares |
(14 | ) | (15 | ) | ||||
Accumulated deficit |
(2,137 | ) | (2,247 | ) | ||||
Accumulated other comprehensive income (loss) |
(29 | ) | (28 | ) | ||||
|
|
|
|
|||||
Total stockholders equity |
1,567 | 1,485 | ||||||
|
|
|
|
|||||
Total Liabilities and Stockholders Equity |
$ | 12,968 | $ | 12,432 | ||||
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
5
Consolidated Statements of Operations
(In millions)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2010 | 2011 | 2010 | 2011 | |||||||||||||
Revenue: |
||||||||||||||||
Services |
$ | 1,004 | $ | 1,043 | $ | 3,012 | $ | 3,060 | ||||||||
License and resale fees |
47 | 50 | 178 | 192 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total products and services |
1,051 | 1,093 | 3,190 | 3,252 | ||||||||||||
Reimbursed expenses |
28 | 17 | 91 | 77 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
1,079 | 1,110 | 3,281 | 3,329 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Costs and expenses: |
||||||||||||||||
Cost of sales and direct operating |
500 | 510 | 1,549 | 1,544 | ||||||||||||
Sales, marketing and administration |
245 | 291 | 753 | 832 | ||||||||||||
Product development |
62 | 74 | 194 | 228 | ||||||||||||
Depreciation and amortization |
70 | 67 | 209 | 204 | ||||||||||||
Amortization of acquisition-related intangible assets |
115 | 107 | 338 | 334 | ||||||||||||
Goodwill impairment charge |
205 | | 205 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
1,197 | 1,049 | 3,248 | 3,142 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating income (loss) |
(118 | ) | 61 | 33 | 187 | |||||||||||
Interest income |
| 1 | 1 | 3 | ||||||||||||
Interest expense and amortization of deferred financing fees |
(160 | ) | (129 | ) | (479 | ) | (396 | ) | ||||||||
Other income (expense) |
(9 | ) | (1 | ) | 5 | (2 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) from continuing operations before income taxes |
(287 | ) | (68 | ) | (440 | ) | (208 | ) | ||||||||
Benefit from (provision for) income taxes |
26 | 27 | 79 | 58 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) from continuing operations |
(261 | ) | (41 | ) | (361 | ) | (150 | ) | ||||||||
Income (loss) from discontinued operations, net of tax |
(117 | ) | 27 | (92 | ) | 40 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
$ | (378 | ) | $ | (14 | ) | $ | (453 | ) | $ | (110 | ) | ||||
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
6
Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
Nine Months Ended September 30, | ||||||||
2010 | 2011 | |||||||
Cash flow from operations: |
||||||||
Net income (loss) |
$ | (453 | ) | $ | (110 | ) | ||
Income (loss) from discontinued operations |
(92 | ) | 40 | |||||
|
|
|
|
|||||
Income (Loss) from continuing operations |
(361 | ) | (150 | ) | ||||
Reconciliation of income (loss) from continuing operations to cash flow from (used in) operations: |
||||||||
Depreciation and amortization |
548 | 538 | ||||||
Goodwill impairment charge |
205 | | ||||||
Deferred income tax provision (benefit) |
(92 | ) | (85 | ) | ||||
Stock compensation expense |
23 | 23 | ||||||
Amortization of deferred financing costs and debt discount |
33 | 29 | ||||||
Other noncash items |
(1 | ) | 3 | |||||
Accounts receivable and other current assets |
175 | 134 | ||||||
Accounts payable and accrued expenses |
(101 | ) | (46 | ) | ||||
Clearing broker assets and liabilities, net |
(1 | ) | (22 | ) | ||||
Deferred revenue |
(84 | ) | (70 | ) | ||||
|
|
|
|
|||||
Cash flow from (used in) continuing operations |
344 | 354 | ||||||
Cash flow from (used in) discontinued operations |
91 | 73 | ||||||
|
|
|
|
|||||
Cash flow from (used in) operations |
435 | 427 | ||||||
|
|
|
|
|||||
Investment activities: |
||||||||
Cash paid for acquired businesses, net of cash acquired |
(62 | ) | (35 | ) | ||||
Cash paid for property and equipment and software |
(212 | ) | (183 | ) | ||||
Other investing activities |
6 | (2 | ) | |||||
|
|
|
|
|||||
Cash provided by (used in) continuing operations |
(268 | ) | (220 | ) | ||||
Cash provided by (used in) discontinued operations |
(10 | ) | (7 | ) | ||||
|
|
|
|
|||||
Cash provided by (used in) investment activities |
(278 | ) | (227 | ) | ||||
|
|
|
|
|||||
Financing activities: |
||||||||
Cash received from issuance of preferred stock |
| 1 | ||||||
Cash received from borrowings, net of fees |
22 | 1 | ||||||
Cash used to repay debt |
(51 | ) | (218 | ) | ||||
Cash used to purchase treasury stock |
(1 | ) | (1 | ) | ||||
Other financing activities |
(2 | ) | (10 | ) | ||||
|
|
|
|
|||||
Cash provided by (used in) continuing operations |
(32 | ) | (227 | ) | ||||
Cash provided by (used in) discontinued operations |
| | ||||||
|
|
|
|
|||||
Cash provided by (used in) financing activities |
(32 | ) | (227 | ) | ||||
|
|
|
|
|||||
Effect of exchange rate changes on cash |
(2 | ) | (2 | ) | ||||
|
|
|
|
|||||
Increase (decrease) in cash and cash equivalents |
123 | (29 | ) | |||||
Beginning cash and cash equivalents includes cash of discontinued operations: (2010: $26; 2011: $7) |
664 | 778 | ||||||
|
|
|
|
|||||
Ending cash and cash equivalents includes cash of discontinued operations: (2010: $44; 2011: $3) |
$ | 787 | $ | 749 | ||||
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
7
Consolidated Balance Sheets
(In millions except share and per-share amounts)
(Unaudited)
December 31, 2010 |
September 30, 2011 |
|||||||
Assets |
||||||||
Current: |
||||||||
Cash and cash equivalents |
$ | 771 | $ | 746 | ||||
Trade receivables, less allowance for doubtful accounts of $37 and $44 |
833 | 689 | ||||||
Earned but unbilled receivables |
135 | 154 | ||||||
Prepaid expenses and other current assets |
166 | 163 | ||||||
Clearing broker assets |
230 | 220 | ||||||
Deferred income taxes |
7 | 8 | ||||||
Assets held for sale |
1,339 | 1,321 | ||||||
|
|
|
|
|||||
Total current assets |
3,481 | 3,301 | ||||||
Property and equipment, less accumulated depreciation of $1,109 and $1,258 |
892 | 877 | ||||||
Software products, less accumulated amortization of $1,203 and $1,376 |
723 | 586 | ||||||
Customer base, less accumulated amortization of $1,049 and $1,213 |
1,806 | 1,639 | ||||||
Other intangible assets, less accumulated amortization of $23 and $22 |
187 | 156 | ||||||
Trade name, less accumulated amortization of $7 and $10 |
1,023 | 1,020 | ||||||
Goodwill |
4,856 | 4,853 | ||||||
|
|
|
|
|||||
Total Assets |
$ | 12,968 | $ | 12,432 | ||||
|
|
|
|
|||||
Liabilities and Stockholders Equity |
||||||||
Current: |
||||||||
Short-term and current portion of long-term debt |
$ | 9 | $ | 11 | ||||
Accounts payable |
63 | 40 | ||||||
Accrued compensation and benefits |
284 | 293 | ||||||
Accrued interest expense |
103 | 103 | ||||||
Other accrued expenses |
407 | 349 | ||||||
Clearing broker liabilities |
210 | 178 | ||||||
Deferred revenue |
887 | 817 | ||||||
Liabilities related to assets held for sale |
243 | 254 | ||||||
|
|
|
|
|||||
Total current liabilities |
2,206 | 2,045 | ||||||
Long-term debt |
8,046 | 7,840 | ||||||
Deferred income taxes |
1,109 | 1,035 | ||||||
|
|
|
|
|||||
Total liabilities |
11,361 | 10,920 | ||||||
|
|
|
|
|||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Common stock, par value $.01 per share; 100 shares authorized, issued and outstanding |
| | ||||||
Capital in excess of par value |
3,773 | 3,787 | ||||||
Accumulated deficit |
(2,137 | ) | (2,247 | ) | ||||
Accumulated other comprehensive income (loss) |
(29 | ) | (28 | ) | ||||
|
|
|
|
|||||
Total stockholders equity |
1,607 | 1,512 | ||||||
|
|
|
|
|||||
Total Liabilities and Stockholders Equity |
$ | 12,968 | $ | 12,432 | ||||
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
8
Consolidated Statements of Operations
(In millions)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2010 | 2011 | 2010 | 2011 | |||||||||||||
Revenue: |
||||||||||||||||
Services |
$ | 1,004 | $ | 1,043 | $ | 3,012 | $ | 3,060 | ||||||||
License and resale fees |
47 | 50 | 178 | 192 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total products and services |
1,051 | 1,093 | 3,190 | 3,252 | ||||||||||||
Reimbursed expenses |
28 | 17 | 91 | 77 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
1,079 | 1,110 | 3,281 | 3,329 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Costs and expenses: |
||||||||||||||||
Cost of sales and direct operating |
500 | 510 | 1,549 | 1,544 | ||||||||||||
Sales, marketing and administration |
245 | 291 | 753 | 832 | ||||||||||||
Product development |
62 | 74 | 194 | 228 | ||||||||||||
Depreciation and amortization |
70 | 67 | 209 | 204 | ||||||||||||
Amortization of acquisition-related intangible assets |
115 | 107 | 338 | 334 | ||||||||||||
Goodwill impairment charge |
205 | | 205 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
1,197 | 1,049 | 3,248 | 3,142 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating income (loss) |
(118 | ) | 61 | 33 | 187 | |||||||||||
Interest income |
| 1 | 1 | 3 | ||||||||||||
Interest expense and amortization of deferred financing fees |
(160 | ) | (129 | ) | (479 | ) | (396 | ) | ||||||||
Other income (expense) |
(9 | ) | (1 | ) | 5 | (2 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) from continuing operations before income taxes |
(287 | ) | (68 | ) | (440 | ) | (208 | ) | ||||||||
Benefit from (provision for) income taxes |
26 | 27 | 79 | 58 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) from continuing operations |
(261 | ) | (41 | ) | (361 | ) | (150 | ) | ||||||||
Income (loss) from discontinued operations, net of tax |
(117 | ) | 27 | (92 | ) | 40 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
$ | (378 | ) | $ | (14 | ) | $ | (453 | ) | $ | (110 | ) | ||||
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
9
Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
Nine Months Ended September 30, | ||||||||
2010 | 2011 | |||||||
Cash flow from operations: | ||||||||
Net income (loss) |
$ | (453 | ) | $ | (110 | ) | ||
Income (loss) from discontinued operations |
(92 | ) | 40 | |||||
|
|
|
|
|||||
Income (loss) from continuing operations |
(361 | ) | (150 | ) | ||||
Reconciliation of income (loss) from continuing operations to cash flow from (used in) operations: |
||||||||
Depreciation and amortization |
548 | 538 | ||||||
Goodwill impairment charge |
205 | | ||||||
Deferred income tax provision (benefit) |
(93 | ) | (85 | ) | ||||
Stock compensation expense |
23 | 23 | ||||||
Amortization of deferred financing costs and debt discount |
33 | 29 | ||||||
Other noncash items |
(1 | ) | 3 | |||||
Accounts receivable and other current assets |
175 | 134 | ||||||
Accounts payable and accrued expenses |
(99 | ) | (46 | ) | ||||
Clearing broker assets and liabilities, net |
(1 | ) | (22 | ) | ||||
Deferred revenue |
(84 | ) | (70 | ) | ||||
|
|
|
|
|||||
Cash flow from (used in) continuing operations |
345 | 354 | ||||||
Cash flow from (used in) discontinued operations |
91 | 73 | ||||||
|
|
|
|
|||||
Cash flow from (used in) operations |
436 | 427 | ||||||
|
|
|
|
|||||
Investment activities: | ||||||||
Cash paid for acquired businesses, net of cash acquired |
(62 | ) | (35 | ) | ||||
Cash paid for property and equipment and software |
(212 | ) | (183 | ) | ||||
Other investing activities |
6 | (2 | ) | |||||
|
|
|
|
|||||
Cash provided by (used in) continuing operations |
(268 | ) | (220 | ) | ||||
Cash provided by (used in) discontinued operations |
(10 | ) | (7 | ) | ||||
|
|
|
|
|||||
Cash provided by (used in) investment activities |
(278 | ) | (227 | ) | ||||
|
|
|
|
|||||
Financing activities: | ||||||||
Cash received from borrowings, net of fees |
22 | 1 | ||||||
Cash used to repay debt |
(51 | ) | (218 | ) | ||||
Other financing activities |
(4 | ) | (10 | ) | ||||
|
|
|
|
|||||
Cash provided by (used in) continuing operations |
(33 | ) | (227 | ) | ||||
Cash provided by (used in) discontinued operations |
| | ||||||
|
|
|
|
|||||
Cash provided by (used in) financing activities |
(33 | ) | (227 | ) | ||||
|
|
|
|
|||||
Effect of exchange rate changes on cash |
(2 | ) | (2 | ) | ||||
|
|
|
|
|||||
Increase (decrease) in cash and cash equivalents |
123 | (29 | ) | |||||
Beginning cash and cash equivalents includes cash of discontinued operations: (2010: $26; 2011: $7) |
664 | 778 | ||||||
|
|
|
|
|||||
Ending cash and cash equivalents includes cash of discontinued operations: (2010: $44; 2011: $3) |
$ | 787 | $ | 749 | ||||
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
10
SUNGARD CAPITAL CORP. II
SUNGARD DATA SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation:
SunGard Data Systems Inc. (SunGard) was acquired on August 11, 2005 (the LBO) in a leveraged buy-out by a consortium of private equity investment funds associated with Bain Capital Partners, The Blackstone Group, Goldman Sachs & Co., Kohlberg Kravis Roberts & Co., Providence Equity Partners, Silver Lake and TPG (collectively, the Sponsors).
SunGard is a wholly owned subsidiary of SunGard Holdco LLC, which is wholly owned by SunGard Holding Corp., which is wholly owned by SunGard Capital Corp. II (SCCII), which is a subsidiary of SunGard Capital Corp. (SCC). All four of these companies were formed for the purpose of facilitating the LBO and are collectively referred to as the Holding Companies. SCC, SCCII and SunGard are separate reporting companies and, together with their direct and indirect subsidiaries, are collectively referred to as the Company.
The Company has three reportable segments: Financial Systems (FS), Availability Services (AS) and Other, which is comprised of K-12 Education (K-12) and Public Sector (PS). On August 5, 2011, the Company announced an agreement to sell its Higher Education (HE) business (excluding K-12). The balances at December 31, 2010 and September 30, 2011 and for the three and nine months ended September 30, 2010 and 2011 have been revised to include HE in discontinued operations. The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated.
The accompanying interim consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP), consistent in all material respects with those applied in the Companys Annual Report on Form 10-K for the year ended December 31, 2010. Interim financial reporting does not include all of the information and footnotes required by GAAP for annual financial statements. The interim financial information is unaudited, but, in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments necessary to provide a fair statement of results for the interim periods presented. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.
In May 2011, the Financial Accounting Standard Board (FASB) revised the fair value measurement and disclosure requirements so that the requirements under GAAP and International Financial Reporting Standards (IFRS) are the same. The guidance clarifies the FASBs intent about the application of existing fair value measurements and requires enhanced disclosures, most significantly related to unobservable inputs used in a fair value measurement that is categorized within Level 3 of the fair value hierarchy. The guidance is effective prospectively during interim and annual periods beginning after December 15, 2011. The Company does not anticipate that this adoption will have a significant impact on its financial position or results of operations.
In June 2011, the FASB amended guidance relating to the presentation requirements of comprehensive income within an entitys financial statements. Under the guidance, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income in a single continuous statement or in two separate but consecutive statements. The amended guidance eliminates the previously available option of presenting the components of other comprehensive income as part of the statement of changes in equity. In addition, an entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented. The amendment is effective for fiscal years beginning after December 15, 2011 and will be applied retrospectively. In October 2011, the FASB decided that the specific requirement to present items that are reclassified from other comprehensive income to net income alongside their respective components of net income and other comprehensive income will be deferred. Therefore, those requirements will not be effective for fiscal years and interim periods within those years beginning after December 31, 2011.
In September 2011, the FASB issued amended guidance that will simplify how entities test goodwill for impairment. After assessment of certain qualitative factors, if it is determined to be more likely than not that the fair value of a reporting unit is less than its carrying amount, entities must perform the quantitative analysis of the goodwill impairment test. Otherwise, the quantitative test(s) become optional. The guidance is effective January 1, 2012 with early adoption permitted. The Company will adopt this guidance for the 2012 goodwill impairment test.
2. Revision:
During the second quarter of 2011, the Company identified a classification error within its consolidated statements of operations. The misclassification resulted in overstating the product development expense line item on the statement of operations. Generally, the offsetting understatement was to cost of sales and direct operating expenses. The error in classification had no impact on total reported expenses for any period and therefore had no impact on operating or net
11
income. The Company assessed the materiality of this item on previously reported periods and concluded the misclassification error was not material and did not warrant restatement of previously issued financial statements. Accordingly, product development expense for the three- and nine-month periods ended September 30, 2010 has been revised from $85 million to $62 million and from $265 million to $194 million, respectively, to correct the immaterial misclassification. In future filings, any comparative period presentations will be revised when those periods are presented.
3. Acquisitions and Discontinued Operations:
Acquisitions
The Company seeks to acquire businesses that broaden its existing product lines and service offerings by adding complementary products and service offerings and by expanding its geographic reach. During the nine months ended September 30, 2011, the Company completed five acquisitions in its FS segment. Cash paid, net of cash acquired and subject to certain adjustments, was $35 million. The impact of these five acquisitions individually and in the aggregate was not material to the consolidated financial statements.
Discontinued Operations
In December 2010, the Company sold its PS UK business. Also, as previously disclosed, the Company announced that SCC, SunGard, private equity firm Hellman & Friedman Capital Partners VI, L.P. (Hellman & Friedman) and certain of their respective affiliates had entered into an Agreement and Plan of Merger dated as of August 4, 2011, and that SunGard, SunGard Higher Education Inc. and certain affiliates of Hellman & Friedman had entered into an Asset Purchase Agreement dated as of August 4, 2011 (together, the Transaction Agreements) to sell SunGards HE business (excluding K-12). The HE business will be combined under a new holding company with Datatel, an existing Hellman & Friedman portfolio company. SunGard intends to use the transaction proceeds of $1.775 billion, less applicable taxes and fees, to repay a portion of its existing indebtedness. The results for the discontinued operations for the three and nine months ended September 30, 2010 and 2011 were as follows (in millions):
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2010 | 2011 | 2010 | 2011 | |||||||||||||
Revenue |
$ | 162 | $ | 116 | $ | 508 | $ | 373 | ||||||||
Operating Income (loss) |
(100 | ) | 26 | (52 | ) | 70 | ||||||||||
Income (loss) before income taxes |
(100 | ) | 26 | (52 | ) | 70 | ||||||||||
Benefit from (provision for) income taxes |
(17 | ) | 1 | (40 | ) | (30 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) from discontinued operations, net |
($ | 117 | ) | $ | 27 | ($ | 92 | ) | $ | 40 | ||||||
|
|
|
|
|
|
|
|
The Company recorded $123 million of goodwill impairment charges, of which $91 million was related to Public Sector UK, during the three and nine months ended September 30, 2010 that are reflected in income (loss) from discontinued operations, net.
Included in the three months ended September 30, 2010 for HE was revenue of $121 million and an operating loss of $13 million, which includes a goodwill impairment charge of $32 million related to HE managed services. Included in the nine months ended September 30, 2010 for HE was revenue of $372 million and operating income of $32 million, which includes the goodwill impairment charge of $32 million noted above.
12
Assets held for sale and liabilities related to assets held for sale represents SunGards HE business and consists of the following (in millions) at December 31, 2010 and September 30, 2011, respectively:
December 31, 2010 |
September 30, 2011 |
|||||||
Cash |
$ | 7 | $ | 3 | ||||
Accounts receivable, less allowance for doubtful accounts of $4 and $7 |
62 | 71 | ||||||
Earned but unbilled receivables |
32 | 30 | ||||||
Prepaid expenses and other current assets |
11 | 10 | ||||||
Deferred income taxes |
3 | 2 | ||||||
Property and equipment, less accumulated depreciation of $26 and $27 |
27 | 28 | ||||||
Software products, less accumulated amortization of $98 and $110 |
86 | 77 | ||||||
Customer base, less accumulated amortization of $110 and $121 |
193 | 182 | ||||||
Goodwill |
918 | 918 | ||||||
|
|
|
|
|||||
Assets held for sale |
$ | 1,339 | $ | 1,321 | ||||
|
|
|
|
|||||
Accounts payable |
$ | 1 | $ | 1 | ||||
Accrued compensation and benefits |
18 | 15 | ||||||
Other accrued expenses |
16 | 11 | ||||||
Deferred revenue |
110 | 116 | ||||||
Deferred income taxes |
98 | 111 | ||||||
|
|
|
|
|||||
Liabilities related to assets held for sale |
$ | 243 | $ | 254 | ||||
|
|
|
|
4. Trade Name and Goodwill:
Trade Name
The trade name intangible asset primarily represents the fair value of the SunGard trade name at August 11, 2005, the date of the LBO, and is an indefinite-lived asset not subject to amortization. The Company performed its annual impairment test of the SunGard trade name in the third quarter and based on the results of this test, the fair value of the trade name exceeded its carrying value, resulting in no impairment of the trade name. As a result of the expected sale of the Higher Education business, future cash flows which drive the value of the trade name were significantly decreased and the estimated fair value of the trade name when compared to its carrying value was lower in the current year impairment test compared to prior years. A one-percent decrease in the assumed royalty rate or a one-percent increase in the discount rate assumption would have resulted in an impairment of the Trade Name asset. To the extent that additional businesses are divested in the future, the cash flows supporting the trade name will continue to decline and impairment charges may result.
Goodwill
Generally accepted accounting principles in the United States require the Company to perform a goodwill impairment test, a two-step test, annually and more frequently when negative conditions or a triggering event arise. The Company completes its annual goodwill impairment test as of July 1 for each of its 13 reporting units. In step one, the estimated fair value of each reporting unit is compared to its carrying value. The Company estimated the fair values of each reporting unit by a combination of (i) estimation of the discounted cash flows of each of the reporting units based on projected earnings in the future (the income approach) and (ii) a comparative analysis of revenue and EBITDA multiples of public companies in similar markets (the market approach). If there is a deficiency (the estimated fair value of a reporting unit is less than its carrying value), a step two test is required. In step two, the amount of any goodwill impairment is measured by comparing the implied fair value of the reporting units goodwill to the carrying value of goodwill, with the resulting impairment reflected in operations. The implied fair value is determined in the same manner as the amount of goodwill recognized in a business combination.
Estimating the fair value of a reporting unit requires various assumptions including projections of future cash flows, perpetual growth rates and discount rates. The assumptions about future cash flows and growth rates are based on managements assessment of a number of factors including the reporting units recent performance against budget, performance in the market that the reporting unit serves, as well as industry and general economic data from third party sources. Discount rate assumptions reflect an assessment of the risk inherent in those future cash flows. Changes to the underlying businesses could affect the future cash flows, which in turn could affect the fair value of the reporting unit. For the July 1, 2011 impairment test, the discount rates and perpetual growth rates used were between 10% and 12% and 3% and 4%, respectively.
Based on the results of the step one tests, the Company determined that the fair values of each of its reporting units exceeded carrying value and a step two test was not required for any of the 13 reporting units.
13
The Company has three reporting units, whose goodwill balances in the aggregate total $1.2 billion as of September 30, 2011, where the excess of the estimated fair value over carrying value of the reporting unit was less than 15% of the carrying value. A one percentage point decrease in the perpetual growth rate and a one percentage point increase in the discount rate would cause each of these reporting units to fail the step one test and require a step two analysis, and some or all of this goodwill could be impaired. Furthermore, if any of these units fail to achieve expected performance levels in the next twelve months or experience a downturn in the business below current expectations, goodwill could be impaired.
The Companys remaining 10 reporting units each had estimated fair values in excess of 20% more than the carrying value of the reporting unit.
The following table summarizes changes in goodwill by reportable segment (in millions):
Cost | Cumulative Impairment | |||||||||||||||||||||||||||||||
FS | AS | Other | Subtotal | AS | Other | Subtotal | Total | |||||||||||||||||||||||||
Balance at December 31, 2010 |
$ | 3,450 | $ | 2,203 | $ | 534 | $ | 6,187 | $ | (1,126 | ) | $ | (205 | ) | $ | (1,331 | ) | $ | 4,856 | |||||||||||||
2011 acquisitions |
6 | | | 6 | | | | 6 | ||||||||||||||||||||||||
Adjustments related to the LBO and prior year acquisitions |
(4 | ) | (2 | ) | (1 | ) | (7 | ) | | | | (7 | ) | |||||||||||||||||||
Effect of foreign currency translation |
(1 | ) | (1 | ) | | (2 | ) | | | | (2 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance at September 30, 2011 |
$ | 3,451 | $ | 2,200 | $ | 533 | $ | 6,184 | $ | (1,126 | ) | $ | (205 | ) | $ | (1,331 | ) | $ | 4,853 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. Clearing Broker Assets and Liabilities:
Clearing broker assets and liabilities are comprised of the following (in millions):
December 31, 2010 |
September 30, 2011 |
|||||||
Segregated customer cash and treasury bills |
$ | 57 | $ | 33 | ||||
Securities borrowed |
154 | 146 | ||||||
Receivables from customers and other |
19 | 41 | ||||||
|
|
|
|
|||||
Clearing broker assets |
$ | 230 | $ | 220 | ||||
|
|
|
|
|||||
Payables to customers |
$ | 19 | $ | 15 | ||||
Securities loaned |
137 | 135 | ||||||
Payable to brokers and dealers |
54 | 28 | ||||||
|
|
|
|
|||||
Clearing broker liabilities |
$ | 210 | $ | 178 | ||||
|
|
|
|
Segregated customer cash and treasury bills are held by the Company on behalf of customers. Securities borrowed and loaned are collateralized financing transactions which are cash deposits made to or received from other broker/dealers. Receivables from and payables to customers represent amounts due or payable on cash and margin transactions.
14
6. Debt and Derivatives:
On January 31, 2011, SunGard entered into the First Refinancing Amendment to its Amended and Restated Senior Secured Credit Agreement, dated as of June 9, 2009 (Credit Agreement) to, among other things, (a) eliminate the LIBOR and base rate floors and (b) reduce the Eurocurrency rate spread from 3.75% to 3.50% and the base rate spread from 2.75% to 2.50% with no impact on maturity.
On March 11, 2011, SunGard entered into the Second Refinancing and Incremental Amendment to its Credit Agreement to, among other things, obtain new revolving credit commitments in an aggregate amount equal to $300 million that will terminate on May 11, 2013, thereby increasing the Companys revolving credit commitments by $50 million, to $880 million, all of which now have been extended to (or expire on) May 11, 2013.
The Company uses interest rate swap agreements to manage the amount of its floating rate debt in order to reduce its exposure to variable rate interest payments associated with the senior secured credit facilities. Each of these swap agreements is designated as a cash flow hedge. SunGard pays a stream of fixed interest payments for the term of the swap, and in turn, receives variable interest payments based on LIBOR. The net receipt or payment from the interest rate swap agreements is included in interest expense. The Company does not enter into interest rate swaps for speculative or trading purposes. A summary of the Companys interest rate swaps follows:
Inception |
Maturity | Notional Amount (in millions) |
Interest rate paid |
Interest rate received (LIBOR) | ||||||||
January/February 2009 |
February 2012 | $ | 1,200 | 1.78 | % | 1-Month | ||||||
February 2010 |
May 2013 | 500 | 1.99 | % | 3-Month | |||||||
|
|
|||||||||||
Total / Weighted Average interest rate |
$ | 1,700 | 1.84 | % | ||||||||
|
|
The fair values of interest rate swaps designated as cash flow hedging instruments, included in other accrued expenses on the consolidated balance sheets, are $38 million and $18 million as of December 31, 2010 and September 30, 2011, respectively.
15
The table below summarizes the impact of the effective portion of interest rate swaps on the balance sheets and statements of operations for the three and nine months ended September 30, 2010 and 2011 (in millions):
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||
Classification |
2010 | 2011 | 2010 | 2011 | ||||||||||||||
Gain (loss) recognized in Accumulated Other Comprehensive Loss (OCI) |
OCI | $ | (16 | ) | $ | (1 | ) | $ | (53 | ) | $ | (8 | ) | |||||
Loss reclassified from accumulated OCI into income |
Interest expense and amortization of deferred financing fees | 21 | 7 | 63 | 27 |
The Company has no ineffectiveness related to its swap agreements.
The Company expects to reclassify in the next twelve months approximately $16 million from OCI into earnings related to the Companys interest rate swaps based on the borrowing rates at September 30, 2011.
7. Fair Value Measurements:
The following table summarizes assets and liabilities measured at fair value on a recurring basis at September 30, 2011 (in millions):
Fair Value Measures Using | Total | |||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Assets |
||||||||||||||||
Cash and cash equivalents - money market funds |
$ | 249 | $ | | $ | | $ | 249 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Interest rate swap agreements and other |
$ | | $ | 19 | $ | | $ | 19 | ||||||||
|
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|
|
|
|
|
|
The following table summarizes assets and liabilities measured at fair value on a recurring basis at December 31, 2010 (in millions):
Fair Value Measures Using | Total | |||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Assets |
||||||||||||||||
Cash and cash equivalents - money market funds |
$ | 210 | $ | | $ | | $ | 210 | ||||||||
Clearing broker assets - U.S. treasury bills |
2 | | | 2 | ||||||||||||
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|
|
|
|
|
|
|||||||||
$ | 212 | $ | | $ | | $ | 212 | |||||||||
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|
|
|||||||||
Liabilities |
||||||||||||||||
Interest rate swap agreements and other |
$ | | $ | 34 | $ | | $ | 34 | ||||||||
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|
|
A Level 1 fair value measure is based upon quoted prices in active markets for identical assets or liabilities. A Level 2 fair value measure is based upon quoted prices for similar assets and liabilities in active markets or inputs that are observable. A Level 3 fair value measure is based upon inputs that are unobservable (for example, cash flow modeling inputs based on assumptions).
Cash and cash equivalents money market funds and Clearing broker assets U.S. treasury bills are recognized and measured at fair value in the Companys financial statements. Clearing broker assets and liabilities securities owned and customer securities sold short, not yet purchased are recorded at closing exchange-quoted prices. Fair values of the interest rate swap agreements are calculated using a discounted cash flow model using observable applicable market swap rates and assumptions and are compared to market valuations obtained from brokers.
16
The following table presents the carrying amount and estimated fair value of the Companys debt, including current portion and excluding the interest rate swaps, as of December 31, 2010 and September 30, 2011 (in millions):
December 31, 2010 | September 30, 2011 | |||||||||||||||
Carrying Value |
Fair Value |
Carrying Value |
Fair Value |
|||||||||||||
Floating rate debt |
$ | 4,707 | $ | 4,644 | $ | 4,497 | $ | 4,356 | ||||||||
Fixed rate debt |
3,348 | 3,432 | 3,354 | 3,288 |
The fair value of the Companys floating rate and fixed rate long-term debt is primarily based on market rates.
8. Comprehensive Income (Loss):
Comprehensive income (loss) consists of net income (loss) adjusted for other increases and decreases affecting stockholders equity that are excluded from the determination of net income (loss). The calculation of comprehensive income (loss) follows (in millions):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2010 | 2011 | 2010 | 2011 | |||||||||||||
Net income (loss) |
$ | (378 | ) | $ | (14 | ) | $ | (453 | ) | $ | (110 | ) | ||||
Foreign currency translation gains (losses) |
105 | (81 | ) | (34 | ) | (6 | ) | |||||||||
Unrealized gains (losses) on derivative instruments |
6 | 2 | 9 | 7 | ||||||||||||
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|
|||||||||
Comprehensive income (loss) |
$ | (267 | ) | $ | (93 | ) | $ | (478 | ) | $ | (109 | ) | ||||
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|
|
9. Equity:
A rollforward of SCCs equity for 2011 follows (in millions):
SunGard Capital Corp. stockholders | Noncontrolling interest | |||||||||||||||||||||||||||
Class L - temporary equity |
Class A - temporary equity |
Permanent equity |
Total | Temporary equity |
Permanent equity |
Total | ||||||||||||||||||||||
Balance at December 31, 2010 |
$ | 87 | $ | 11 | $ | (330 | ) | $ | (232 | ) | $ | 54 | $ | 1,782 | $ | 1,836 | ||||||||||||
Net income (loss) |
| | (276 | ) | (276 | ) | 2 | 164 | 166 | |||||||||||||||||||
Foreign currency translation |
| | (6 | ) | (6 | ) | | | | |||||||||||||||||||
Net unrealized gain on derivative instruments |
| | 7 | 7 | | | | |||||||||||||||||||||
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|
|
|
|||||||||||||||
Comprehensive income (loss) |
| | (275 | ) | (275 | ) | 2 | 164 | 166 | |||||||||||||||||||
Stock compensation expense |
| | 23 | 23 | | | | |||||||||||||||||||||
Termination of put options due to employee terminations and other |
(39 | ) | (5 | ) | 45 | 1 | (29 | ) | 28 | (1 | ) | |||||||||||||||||
Issuance of common and preferred stock |
(1 | ) | | 4 | 3 | (1 | ) | 1 | | |||||||||||||||||||
Purchase of treasury stock |
| | (2 | ) | (2 | ) | | (1 | ) | (1 | ) | |||||||||||||||||
Transfer intrinsic value of vested restricted stock units |
7 | 1 | (13 | ) | (5 | ) | 5 | | 5 | |||||||||||||||||||
Other |
| | (9 | ) | (9 | ) | | | | |||||||||||||||||||
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|
|
|
|
|
|
|
|||||||||||||||
Balance at September 30, 2011 |
$ | 54 | $ | 7 | $ | (557 | ) | $ | (496 | ) | $ | 31 | $ | 1,974 | $ | 2,005 | ||||||||||||
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17
A rollforward of SCCs equity for 2010 follows (in millions):
SunGard Capital Corp. stockholders | Noncontrolling interest | |||||||||||||||||||||||||||
Class L - temporary equity |
Class A - temporary equity |
Permanent equity |
Total | Temporary equity |
Permanent equity |
Total | ||||||||||||||||||||||
Balance at December 31, 2009 |
$ | 88 | $ | 11 | $ | 321 | $ | 420 | $ | 51 | $ | 1,593 | $ | 1,644 | ||||||||||||||
Net income (loss) |
| | (600 | ) | (600 | ) | 4 | 143 | 147 | |||||||||||||||||||
Foreign currency translation |
| | (34 | ) | (34 | ) | | | | |||||||||||||||||||
Net unrealized gain on derivative instruments |
| | 9 | 9 | | | | |||||||||||||||||||||
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|
|
|
|||||||||||||||
Comprehensive income (loss) |
| | (625 | ) | (625 | ) | 4 | 143 | 147 | |||||||||||||||||||
Stock compensation expense |
| | 24 | 24 | | | | |||||||||||||||||||||
Termination of put options due to employee terminations and other |
(2 | ) | | | (2 | ) | (1 | ) | 1 | | ||||||||||||||||||
Purchase of treasury stock |
| | (1 | ) | (1 | ) | | (1 | ) | (1 | ) | |||||||||||||||||
Transfer intrinsic value of vested restricted stock units |
6 | 1 | (10 | ) | (3 | ) | 3 | | 3 | |||||||||||||||||||
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|
|||||||||||||||
Balance at September 30, 2010 |
$ | 92 | $ | 12 | $ | (291 | ) | $ | (187 | ) | $ | 57 | $ | 1,736 | $ | 1,793 | ||||||||||||
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In the case of termination of employment resulting from disability or death, an employee or his/her estate may exercise a put option which would require the Company to repurchase vested shares at the current fair market value. These common or preferred shares must be classified as temporary equity (between liabilities and equity) on the balance sheet of SCC and SCCII. At vesting or exercise, grant-date intrinsic value or exercise value, respectively, is reclassified to temporary equity. On termination of employment, the value included in temporary equity is reclassified to permanent equity.
18
10. Segment Information:
The Company has three reportable segments: FS, AS and Other (Other includes PS and K-12 which are combined for reporting purposes). The Company evaluates the performance of its segments based on operating results before interest, income taxes, amortization of acquisition-related intangible assets, stock compensation and certain other costs. The operating results apply to each of SCC, SCCII and SunGard unless otherwise noted. The operating results for each segment follow (in millions):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2010 | 2011 | 2010 | 2011 | |||||||||||||
Revenue: |
||||||||||||||||
Financial systems |
$ | 659 | $ | 695 | $ | 2,021 | $ | 2,081 | ||||||||
Availability services |
366 | 364 | 1,100 | 1,094 | ||||||||||||
Other |
54 | 51 | 160 | 154 | ||||||||||||
|
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|
|
|
|
|
|
|||||||||
$ | 1,079 | $ | 1,110 | $ | 3,281 | $ | 3,329 | |||||||||
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|
|
|
|||||||||
Depreciation and amortization: |
||||||||||||||||
Financial systems |
$ | 22 | $ | 20 | $ | 61 | $ | 62 | ||||||||
Availability services |
46 | 45 | 143 | 136 | ||||||||||||
Other |
2 | 2 | 5 | 6 | ||||||||||||
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|
|
|
|
|
|
|||||||||
$ | 70 | $ | 67 | $ | 209 | $ | 204 | |||||||||
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|
|||||||||
Income (loss) from operations: |
||||||||||||||||
Financial systems |
$ | 135 | $ | 120 | $ | 394 | $ | 374 | ||||||||
Availability services |
86 | 80 | 240 | 234 | ||||||||||||
Other |
16 | 15 | 42 | 44 | ||||||||||||
Corporate and other items (1) |
(344 | ) | (146 | ) | (611 | ) | (436 | ) | ||||||||
Other costs |
(11 | ) | (8 | ) | (32 | ) | (29 | ) | ||||||||
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|
|
|
|||||||||
$ | (118 | ) | $ | 61 | $ | 33 | $ | 187 | ||||||||
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|
|||||||||
Cash paid for property and equipment and software: |
||||||||||||||||
Financial systems |
$ | 26 | $ | 18 | $ | 67 | $ | 62 | ||||||||
Availability services |
41 | 34 | 138 | 114 | ||||||||||||
Other |
2 | 1 | 6 | 4 | ||||||||||||
Corporate administration |
| | 1 | 3 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 69 | $ | 53 | $ | 212 | $ | 183 | |||||||||
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|
|
(1) | Includes corporate administrative expenses, stock compensation expense, management fees paid to the Sponsors, other items and amortization of acquisition-related intangible assets of $115 million and $107 million for the three months ended September 30, 2010 and 2011, respectively, and $338 million and $334 million for the nine months ended September 30, 2010 and 2011, respectively. |
During the third quarter of 2011, the Company incurred severance charges of approximately $47 million. As of September 30, 2011, the Company had an accrued severance balance of $49 million, most of which is related to the third quarter 2011 actions. The Company expects the majority of the accrued severance will be paid out by the end of the first quarter of 2012.
Amortization of acquisition-related intangible assets by segment follows (in millions):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2010 | 2011 | 2010 | 2011 | |||||||||||||
Amortization of acquisition-related intangible assets: |
||||||||||||||||
Financial systems |
$ | 66 | (1) | $ | 59 | $ | 193 | (1) | $ | 191 | (1) | |||||
Availability services |
43 | 43 | 128 | 129 | ||||||||||||
Other |
5 | 5 | 16 | 14 | ||||||||||||
Corporate administration |
1 | | 1 | | ||||||||||||
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|
|
|
|
|
|||||||||
$ | 115 | $ | 107 | $ | 338 | $ | 334 | |||||||||
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|
|
(1) | Amortization of acquisition-related intangible assets in 2010 includes impairment charges related to customer base and software, respectively, for a subsidiary in the FS segment of approximately $1 million and $2 million. Amortization of acquisition-related intangible assets in 2011 includes impairment charges related to |
19
customer base and software, respectively, for a subsidiary in the FS segment of approximately $3 million and $4 million. |
The FS Segment is organized to align with customer-facing business areas. FS revenue by these business areas follows (in millions):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2010 | 2011 | 2010 | 2011 | |||||||||||||
Capital Markets |
$ | 153 | $ | 172 | $ | 472 | $ | 533 | ||||||||
Global Trading |
150 | 131 | 496 | 430 | ||||||||||||
Asset Management |
86 | 99 | 257 | 284 | ||||||||||||
Wealth Management |
96 | 97 | 283 | 275 | ||||||||||||
Banking |
48 | 54 | 139 | 158 | ||||||||||||
Corporate Liquidity |
41 | 50 | 128 | 141 | ||||||||||||
Insurance |
43 | 45 | 125 | 126 | ||||||||||||
Other |
42 | 47 | 121 | 134 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Financial Systems |
$ | 659 | $ | 695 | $ | 2,021 | $ | 2,081 | ||||||||
|
|
|
|
|
|
|
|
11. Related Party Transactions:
In accordance with the Management Agreement between the Company and affiliates of the Sponsors, the Company recorded $4 million of management fees in sales, marketing and administration expenses during each of the three months ended September 30, 2010 and 2011. The Company recorded $11 million and $9 million of management fees in sales, marketing and administration expenses during the nine months ended September 30, 2010 and 2011, respectively. Management fees of $1 million is reported in discontinued operations in each of the nine months ended September 30, 2010 and 2011. At December 31, 2010 and September 30, 2011, $6 million and $4 million, respectively, was included in other accrued expenses.
12. Supplemental Cash Flow Information:
Supplemental cash flow information for the nine months ended September 30, 2010 and 2011 follows (in millions):
Nine Months ended September 30, | ||||||||
Supplemental information: | 2010 | 2011 | ||||||
Acquired businesses: |
||||||||
Property and equipment |
$ | 5 | $ | 1 | ||||
Software products |
16 | 21 | ||||||
Customer base |
23 | 12 | ||||||
Goodwill |
29 | 6 | ||||||
Other intangible assets |
2 | | ||||||
Deferred income taxes |
(3 | ) | (5 | ) | ||||
Purchase price obligations and debt assumed |
(12 | ) | (1 | ) | ||||
Net current liabilities assumed |
2 | 1 | ||||||
|
|
|
|
|||||
Cash paid for acquired businesses, net of cash acquired of $8 and $4, respectively |
$ | 62 | $ | 35 | ||||
|
|
|
|
13. Supplemental Guarantor Condensed Consolidating Financial Statements:
SunGards senior unsecured notes are jointly and severally, fully and unconditionally guaranteed on a senior unsecured basis and the senior subordinated notes are jointly and severally, fully and unconditionally guaranteed on an unsecured senior subordinated basis, in each case, subject to certain exceptions, by substantially all wholly owned, domestic subsidiaries of SunGard (collectively, the Guarantors). Each of the Guarantors is 100% owned, directly or indirectly, by SunGard. None of the other subsidiaries of SunGard, either direct or indirect, nor any of the Holding
20
Companies guarantee the senior notes and senior subordinated notes (Non-Guarantors). The Guarantors and SunGard Holdco LLC also unconditionally guarantee the senior secured credit facilities. The Guarantors are subject to release under certain circumstances as described below.
The indentures evidencing the guarantees provide for a Guarantor to be automatically and unconditionally released and discharged from its guarantee obligations in certain circumstances, including upon the earliest to occur of:
| The sale, exchange or transfer of the subsidiarys capital stock or all or substantially all of its assets; |
| Designation of the Guarantor as an unrestricted subsidiary for purposes of the indenture covenants; |
| Release or discharge of the Guarantors guarantee of certain other indebtedness; or |
| Legal defeasance or covenant defeasance of the indenture obligations when provision has been made for them to be fully satisfied. |
The following tables present the financial position, results of operations and cash flows of SunGard (referred to as Parent Company for purposes of this note only), the Guarantor subsidiaries, the Non-Guarantor subsidiaries and Eliminations as of December 31, 2010 and September 30, 2011, and for the three and nine month periods ended September 30, 2010 and 2011 to arrive at the information for SunGard on a consolidated basis. SCC and SCCII are neither parties nor guarantors to the debt issued as described in the notes to consolidated financial statements included in the Companys Form 10-K for the year ended December 31, 2010.
Supplemental Condensed Consolidating Balance Sheet December 31, 2010 |
||||||||||||||||||||
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
(in millions) | ||||||||||||||||||||
Assets |
||||||||||||||||||||
Current: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 179 | $ | 4 | $ | 588 | $ | | $ | 771 | ||||||||||
Intercompany balances |
(6,865 | ) | 6,028 | 837 | | | ||||||||||||||
Trade receivables, net |
2 | 617 | 349 | | 968 | |||||||||||||||
Prepaid expenses, taxes and other current assets |
2,545 | 71 | 308 | (2,521 | ) | 403 | ||||||||||||||
Assets held for sale |
| 1,323 | 19 | (3 | ) | 1,339 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current assets |
(4,139 | ) | 8,043 | 2,101 | (2,524 | ) | 3,481 | |||||||||||||
Property and equipment, net |
1 | 576 | 315 | | 892 | |||||||||||||||
Intangible assets, net |
150 | 3,050 | 539 | | 3,739 | |||||||||||||||
Intercompany balances |
(4 | ) | | 4 | | | ||||||||||||||
Goodwill |
| 3,739 | 1,117 | | 4,856 | |||||||||||||||
Investment in subsidiaries |
13,561 | 2,447 | | (16,008 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Assets |
$ | 9,569 | $ | 17,855 | $ | 4,076 | $ | (18,532 | ) | $ | 12,968 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Liabilities and Stockholders Equity |
||||||||||||||||||||
Current: |
||||||||||||||||||||
Short-term and current portion of long-term debt |
$ | | $ | 2 | $ | 7 | $ | | $ | 9 | ||||||||||
Accounts payable and other current liabilities |
204 | 3,343 | 928 | (2,521 | ) | 1,954 | ||||||||||||||
Liabilities related to assets held for sale |
| 231 | 12 | | 243 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current liabilities |
204 | 3,576 | 947 | (2,521 | ) | 2,206 | ||||||||||||||
Long-term debt |
7,607 | 2 | 437 | | 8,046 | |||||||||||||||
Intercompany debt |
(195 | ) | 65 | 250 | (120 | ) | | |||||||||||||
Deferred income taxes |
346 | 651 | 112 | | 1,109 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities |
7,962 | 4,294 | 1,746 | (2,641 | ) | 11,361 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total stockholders equity |
1,607 | 13,561 | 2,330 | (15,891 | ) | 1,607 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Liabilities and Stockholders Equity |
$ | 9,569 | $ | 17,855 | $ | 4,076 | $ | (18,532 | ) | $ | 12,968 | |||||||||
|
|
|
|
|
|
|
|
|
|
21
Supplemental Condensed Consolidating Balance Sheet September 30, 2011 |
||||||||||||||||||||
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
(in millions) |
||||||||||||||||||||
Assets |
||||||||||||||||||||
Current: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 312 | $ | (6 | ) | $ | 440 | $ | | $ | 746 | |||||||||
Intercompany balances |
(5,960 | ) | 5,252 | 708 | | | ||||||||||||||
Trade receivables, net |
1 | 588 | 254 | | 843 | |||||||||||||||
Prepaid expenses, taxes and other current assets |
1,529 | 76 | 415 | (1,629 | ) | 391 | ||||||||||||||
Assets held for sale |
| 1,310 | 15 | (4 | ) | 1,321 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current assets |
(4,118 | ) | 7,220 | 1,832 | (1,633 | ) | 3,301 | |||||||||||||
Property and equipment, net |
| 573 | 304 | | 877 | |||||||||||||||
Intangible assets, net |
129 | 2,785 | 487 | | 3,401 | |||||||||||||||
Intercompany balances |
250 | 5 | (255 | ) | | | ||||||||||||||
Goodwill |
| 3,733 | 1,120 | | 4,853 | |||||||||||||||
Investment in subsidiaries |
13,475 | 2,408 | | (15,883 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Assets |
$ | 9,736 | $ | 16,724 | $ | 3,488 | $ | (17,516 | ) | $ | 12,432 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Liabilities and Stockholders Equity |
||||||||||||||||||||
Current: |
||||||||||||||||||||
Short-term and current portion of long-term debt |
$ | | $ | 3 | $ | 8 | $ | | $ | 11 | ||||||||||
Accounts payable and other current liabilities |
195 | 2,373 | 841 | (1,629 | ) | 1,780 | ||||||||||||||
Liabilities related to assets held for sale |
| 242 | 12 | | 254 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current liabilities |
195 | 2,618 | 861 | (1,629 | ) | 2,045 | ||||||||||||||
Long-term debt |
7,610 | 3 | 227 | | 7,840 | |||||||||||||||
Intercompany debt |
83 | 23 | 11 | (117 | ) | | ||||||||||||||
Deferred income taxes |
336 | 605 | 94 | | 1,035 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities |
8,224 | 3,249 | 1,193 | (1,746 | ) | 10,920 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total stockholders equity |
1,512 | 13,475 | 2,295 | (15,770 | ) | 1,512 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Liabilities and Stockholders Equity |
$ | 9,736 | $ | 16,724 | $ | 3,488 | $ | (17,516 | ) | $ | 12,432 | |||||||||
|
|
|
|
|
|
|
|
|
|
22
Supplemental Condensed Consolidating Schedule of Operations Three Months Ended September 30, 2010 |
||||||||||||||||||||
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
(in millions) | ||||||||||||||||||||
Total revenue |
$ | | $ | 774 | $ | 348 | $ | (43 | ) | $ | 1,079 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Costs and expenses: |
||||||||||||||||||||
Cost of sales and direct operating |
| 335 | 208 | (43 | ) | 500 | ||||||||||||||
Sales, marketing and administration |
26 | 110 | 109 | | 245 | |||||||||||||||
Product development |
| 17 | 45 | | 62 | |||||||||||||||
Depreciation and amortization |
| 48 | 22 | | 70 | |||||||||||||||
Amortization of acquisition-related intangible assets |
1 | 93 | 21 | | 115 | |||||||||||||||
Goodwill impairment charge |
| 205 | | | 205 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
27 | 808 | 405 | (43 | ) | 1,197 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating income (loss) |
(27 | ) | (34 | ) | (57 | ) | | (118 | ) | |||||||||||
Net interest income (expense) |
(147 | ) | (79 | ) | 66 | | (160 | ) | ||||||||||||
Other income (expense) |
(304 | ) | (94 | ) | (9 | ) | 398 | (9 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) from continuing operations before income taxes |
(478 | ) | (207 | ) | | 398 | (287 | ) | ||||||||||||
Benefit from (provision for) income taxes |
100 | (73 | ) | (1 | ) | | 26 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) from continuing operations |
(378 | ) | (280 | ) | (1 | ) | 398 | (261 | ) | |||||||||||
Income (loss) from discontinued operations, net of tax |
| (23 | ) | (93 | ) | (1 | ) | (117 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
$ | (378 | ) | $ | (303 | ) | $ | (94 | ) | $ | 397 | $ | (378 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
(in millions) | Supplemental Condensed Consolidating Schedule of Operations Three Months Ended September 30, 2011 |
|||||||||||||||||||
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
Total revenue |
$ | | $ | 751 | $ | 359 | $ | | $ | 1,110 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Costs and expenses: |
||||||||||||||||||||
Cost of sales and direct operating |
| 296 | 214 | | 510 | |||||||||||||||
Sales, marketing and administration |
40 | 135 | 116 | | 291 | |||||||||||||||
Product development |
| 20 | 54 | | 74 | |||||||||||||||
Depreciation and amortization |
| 45 | 22 | | 67 | |||||||||||||||
Amortization of acquisition-related intangible assets |
| 87 | 20 | | 107 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
40 | 583 | 426 | | 1,049 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating income (loss) |
(40 | ) | 168 | (67 | ) | | 61 | |||||||||||||
Net interest income (expense) |
(89 | ) | 12 | (51 | ) | | (128 | ) | ||||||||||||
Other income (expense) |
71 | (80 | ) | | 8 | (1 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) from continuing operations before income taxes |
(58 | ) | 100 | (118 | ) | 8 | (68 | ) | ||||||||||||
Benefit from (provision for) income taxes |
44 | (56 | ) | 39 | | 27 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) from continuing operations |
(14 | ) | 44 | (79 | ) | 8 | (41 | ) | ||||||||||||
Income (loss) from discontinued operations, net of tax |
| 27 | (2 | ) | 2 | 27 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
$ | (14 | ) | $ | 71 | $ | (81 | ) | $ | 10 | $ | (14 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
23
Supplemental Condensed Consolidating Schedule of Operations Nine Months Ended September 30, 2010 |
||||||||||||||||||||
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
(in millions) |
||||||||||||||||||||
Total revenue |
$ | | $ | 2,316 | $ | 1,083 | $ | (118 | ) | $ | 3,281 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Costs and expenses: |
||||||||||||||||||||
Cost of sales and direct operating |
| 998 | 669 | (118 | ) | 1,549 | ||||||||||||||
Sales, marketing and administration |
75 | 360 | 318 | | 753 | |||||||||||||||
Product development |
| 53 | 141 | | 194 | |||||||||||||||
Depreciation and amortization |
| 146 | 63 | | 209 | |||||||||||||||
Amortization of acquisition-related intangible assets |
1 | 279 | 58 | | 338 | |||||||||||||||
Goodwill impairment charge |
| 205 | | | 205 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
76 | 2,041 | 1,249 | (118 | ) | 3,248 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating income (loss) |
(76 | ) | 275 | (166 | ) | | 33 | |||||||||||||
Net interest income (expense) |
(442 | ) | (203 | ) | 167 | | (478 | ) | ||||||||||||
Other income (expense) |
(153 | ) | (87 | ) | 4 | 241 | 5 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) from continuing operations before income taxes |
(671 | ) | (15 | ) | 5 | 241 | (440 | ) | ||||||||||||
Benefit from (provision for) income taxes |
218 | (138 | ) | (1 | ) | | 79 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) from continuing operations |
(453 | ) | (153 | ) | 4 | 241 | (361 | ) | ||||||||||||
Income (loss) from discontinued operations, net of tax |
| | (91 | ) | (1 | ) | (92 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
$ | (453 | ) | $ | (153 | ) | $ | (87 | ) | $ | 240 | $ | (453 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
(in millions) | Supplemental Condensed Consolidating Schedule of Operations Nine Months Ended September 30, 2011 |
|||||||||||||||||||
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
Total revenue |
$ | | $ | 2,219 | $ | 1,110 | $ | | $ | 3,329 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Costs and expenses: |
||||||||||||||||||||
Cost of sales and direct operating |
| 885 | 659 | | 1,544 | |||||||||||||||
Sales, marketing and administration |
104 | 387 | 341 | | 832 | |||||||||||||||
Product development |
| 58 | 170 | | 228 | |||||||||||||||
Depreciation and amortization |
| 137 | 67 | | 204 | |||||||||||||||
Amortization of acquisition-related intangible assets |
| 265 | 69 | | 334 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
104 | 1,732 | 1,306 | | 3,142 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating income (loss) |
(104 | ) | 487 | (196 | ) | | 187 | |||||||||||||
Net interest income (expense) |
(294 | ) | (101 | ) | 2 | | (393 | ) | ||||||||||||
Other income (expense) |
148 | (132 | ) | | (18 | ) | (2 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) from continuing operations before income taxes |
(250 | ) | 254 | (194 | ) | (18 | ) | (208 | ) | |||||||||||
Benefit from (provision for) income taxes |
140 | (144 | ) | 62 | | 58 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) from continuing operations |
(110 | ) | 110 | (132 | ) | (18 | ) | (150 | ) | |||||||||||
Income (loss) from discontinued operations, net of tax |
| 40 | | | 40 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
$ | (110 | ) | $ | 150 | $ | (132 | ) | $ | (18 | ) | $ | (110 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
24
Supplemental Condensed Consolidating Schedule of Cash Flows Nine Months Ended September 30, 2010 |
||||||||||||||||||||
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
(in millions) |
||||||||||||||||||||
Cash flow from operations: |
||||||||||||||||||||
Net income (loss) |
$ | (453 | ) | $ | (153 | ) | $ | (87 | ) | $ | 240 | $ | (453 | ) | ||||||
Income (loss) from discontinued operations |
| | (91 | ) | (1 | ) | (92 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) from continuing operations |
(453 | ) | (153 | ) | 4 | 241 | (361 | ) | ||||||||||||
Non cash adjustments |
214 | 631 | 111 | (241 | ) | 715 | ||||||||||||||
Changes in operating assets and liabilities |
(300 | ) | 370 | (79 | ) | | (9 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash flow provided by (used in) continuing operations |
(539 | ) | 848 | 36 | | 345 | ||||||||||||||
Cash flow provided by (used in) discontinued operations |
| 80 | 11 | | 91 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash flow provided by (used in) operations |
(539 | ) | 928 | 47 | | 436 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Investment activities: |
||||||||||||||||||||
Intercompany transactions |
653 | (707 | ) | 54 | | | ||||||||||||||
Cash paid for acquired businesses, net of cash acquired |
| (57 | ) | (5 | ) | | (62 | ) | ||||||||||||
Cash paid for property and equipment and software |
(1 | ) | (158 | ) | (53 | ) | | (212 | ) | |||||||||||
Other investing activities |
(1 | ) | 9 | (2 | ) | | 6 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash provided by (used in) continuing operations |
651 | (913 | ) | (6 | ) | | (268 | ) | ||||||||||||
Cash provided by (used in) discontinued operations |
| (8 | ) | (2 | ) | | (10 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash provided by (used in) investment activities |
651 | (921 | ) | (8 | ) | | (278 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Financing activities: |
||||||||||||||||||||
Net repayments of long-term debt |
(43 | ) | (5 | ) | 19 | | (29 | ) | ||||||||||||
Other financing activities |
(4 | ) | | | | (4 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash provided by (used in) continuing operations |
(47 | ) | (5 | ) | 19 | | (33 | ) | ||||||||||||
Cash provided by (used in) discontinued operations |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash provided by (used in) financing activities |
(47 | ) | (5 | ) | 19 | | (33 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Effect of exchange rate changes on cash |
| | (2 | ) | | (2 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Increase (decrease) in cash and cash equivalents |
65 | 2 | 56 | | 123 | |||||||||||||||
Beginning cash and cash equivalents |
126 | (9 | ) | 547 | | 664 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending cash and cash equivalents |
$ | 191 | $ | (7 | ) | $ | 603 | $ | | $ | 787 | |||||||||
|
|
|
|
|
|
|
|
|
|
25
Supplemental Condensed Consolidating Schedule of Cash Flows Nine Months Ended September 30, 2011 |
||||||||||||||||||||
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
(in millions) |
||||||||||||||||||||
Cash flow from operations: |
||||||||||||||||||||
Net income (loss) |
$ | (110 | ) | $ | 150 | $ | (132 | ) | $ | (18 | ) | $ | (110 | ) | ||||||
Income (loss) from discontinued operations |
| 40 | | | 40 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) from continuing operations |
(110 | ) | 110 | (132 | ) | (18 | ) | (150 | ) | |||||||||||
Non cash adjustments |
(71 | ) | 446 | 115 | 18 | 508 | ||||||||||||||
Changes in operating assets and liabilities |
(202 | ) | 277 | (79 | ) | | (4 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash flow provided by (used in) continuing operations |
(383 | ) | 833 | (96 | ) | | 354 | |||||||||||||
Cash flow provided by (used in) discontinued operations |
| 75 | (2 | ) | | 73 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash flow provided by (used in) operations |
(383 | ) | 908 | (98 | ) | | 427 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Investment activities: |
||||||||||||||||||||
Intercompany transactions |
535 | (772 | ) | 237 | | | ||||||||||||||
Cash paid for acquired businesses, net of cash acquired |
| (14 | ) | (21 | ) | | (35 | ) | ||||||||||||
Cash paid for property and equipment and software |
(1 | ) | (124 | ) | (58 | ) | | (183 | ) | |||||||||||
Other investing activities |
(3 | ) | | 1 | | (2 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash provided by (used in) continuing operations |
531 | (910 | ) | 159 | | (220 | ) | |||||||||||||
Cash provided by (used in) discontinued operations |
| (6 | ) | (1 | ) | | (7 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash provided by (used in) investment activities |
531 | (916 | ) | 158 | | (227 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Financing activities: |
||||||||||||||||||||
Net repayments of long-term debt |
(5 | ) | | (212 | ) | | (217 | ) | ||||||||||||
Other financing activities |
(10 | ) | | | | (10 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash provided by (used in) continuing operations |
(15 | ) | | (212 | ) | | (227 | ) | ||||||||||||
Cash provided by (used in) discontinued operations |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash provided by (used in) financing activities |
(15 | ) | | (212 | ) | | (227 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Effect of exchange rate changes on cash |
| | (2 | ) | | (2 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Increase (decrease) in cash and cash equivalents |
133 | (8 | ) | (154 | ) | | (29 | ) | ||||||||||||
Beginning cash and cash equivalents |
179 | 1 | 598 | | 778 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending cash and cash equivalents |
$ | 312 | $ | (7 | ) | $ | 444 | $ | | $ | 749 | |||||||||
|
|
|
|
|
|
|
|
|
|
26
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Introduction
The following discussion and analysis supplement the managements discussion and analysis in the Companys Annual Report on Form 10-K for the year ended December 31, 2010 and presumes that readers have read or have access to the discussion and analysis in this filing. The following discussion and analysis includes historical and certain forward-looking information that should be read together with the accompanying Consolidated Financial Statements, related footnotes, and the discussion below of certain risks and uncertainties that could cause future operating results to differ materially from historical results or from the expected results indicated by forward-looking statements. The following discussion reflects the results of operations and financial condition of SCC, which are materially the same as the results of operations and financial condition of SCCII and SunGard. Therefore, the discussions provided are applicable to each of SCC, SCCII and SunGard unless otherwise noted.
Except as otherwise noted, all explanations below exclude the impacts from changes in currency translation, which we refer to as constant currency, a non-GAAP measure. We believe presenting our results on a constant currency basis is meaningful for assessing how our underlying businesses have performed due to the fact that we have international operations that are material to our overall operations. As a result, total revenues and expenses are affected by changes in the U.S. Dollar against international currencies. To present this information, current period results for entities reporting in currencies other than U.S. Dollars are converted to U.S. Dollars at the average exchange rate used in the prior year period rather than the actual exchange rates in effect during the current year period. In each of the tables below, we present the percent change based on actual, unrounded results in reported currency and in constant currency.
27
Results of Operations:
Three Months Ended September 30, 2011 Compared To Three Months Ended September 30, 2010
The following table sets forth, for the periods indicated, certain amounts included in our Consolidated Statements of Operations, the relative percentage that those amounts represent to consolidated revenue (unless otherwise indicated), and the percentage change in those amounts from period to period.
Constant Currency | ||||||||||||||||||||||||||||||||
Three Months Ended September 30, |
Three Months Ended September 30, |
Percent Increase (Decrease) |
Three Months Ended September 30, |
Percent Increase (Decrease) |
||||||||||||||||||||||||||||
2010 | 2011 | 2011 vs. 2010 | 2011 | 2011 vs. 2010 | ||||||||||||||||||||||||||||
percent of revenue |
percent of revenue |
percent of revenue |
||||||||||||||||||||||||||||||
(in millions) |
||||||||||||||||||||||||||||||||
Revenue |
||||||||||||||||||||||||||||||||
Financial systems (FS) |
$ | 659 | 61 | % | $ | 695 | 63 | % | 5 | % | $ | 675 | 62 | % | 2 | % | ||||||||||||||||
Availability services (AS) |
366 | 34 | % | 364 | 33 | % | | % | 358 | 33 | % | (2 | )% | |||||||||||||||||||
Other (1) |
54 | 5 | % | 51 | 5 | % | (6 | )% | 51 | 5 | % | (6 | )% | |||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
$ | 1,079 | 100 | % | $ | 1,110 | 100 | % | 3 | % | $ | 1,084 | 100 | % | | % | |||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Costs and Expenses |
||||||||||||||||||||||||||||||||
Cost of sales and direct operating |
$ | 500 | 46 | % | $ | 510 | 46 | % | 2 | % | $ | 497 | 46 | % | (1 | )% | ||||||||||||||||
Sales, marketing and administration |
245 | 23 | % | 291 | 26 | % | 18 | % | 284 | 26 | % | 16 | % | |||||||||||||||||||
Product development |
62 | 6 | % | 74 | 7 | % | 21 | % | 69 | 6 | % | 12 | % | |||||||||||||||||||
Depreciation and amortization |
70 | 6 | % | 67 | 6 | % | (4 | )% | 66 | 6 | % | (6 | )% | |||||||||||||||||||
Amortization of acquisition-related intangible assets |
115 | 11 | % | 107 | 10 | % | (7 | )% | 106 | 10 | % | (8 | )% | |||||||||||||||||||
Goodwill impairment |
205 | 19 | % | | | % | (100 | )% | | | % | (100 | )% | |||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
$ | 1,197 | 111 | % | $ | 1,049 | 94 | % | (12 | )% | $ | 1,022 | 94 | % | (15 | )% | |||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Operating Income |
||||||||||||||||||||||||||||||||
Financial systems (2) |
$ | 135 | 20 | % | $ | 120 | 17 | % | (10 | )% | $ | 122 | 18 | % | (9 | )% | ||||||||||||||||
Availability services (2) |
86 | 24 | % | 80 | 22 | % | (7 | )% | 78 | 22 | % | (8 | )% | |||||||||||||||||||
Other (1)(2) |
16 | 28 | % | 15 | 29 | % | (1 | )% | 15 | 29 | % | (1 | )% | |||||||||||||||||||
Corporate administration |
(18 | ) | (2 | )% | (30 | ) | (3 | )% | (66 | )% | (30 | ) | (3 | )% | (66 | )% | ||||||||||||||||
Amortization of acquisition-related intangible assets |
(115 | ) | (11 | )% | (107 | ) | (10 | )% | 7 | % | (106 | ) | (10 | )% | 8 | % | ||||||||||||||||
Goodwill impairment |
(205 | ) | (19 | )% | | | % | 100 | % | | | % | 100 | % | ||||||||||||||||||
Stock compensation expense |
(6 | ) | (1 | )% | (9 | ) | (1 | )% | (52 | )% | (9 | ) | (1 | )% | (52 | )% | ||||||||||||||||
Other costs (3) |
(11 | ) | (1 | )% | (8 | ) | (1 | )% | 11 | % | (8 | ) | (1 | )% | 11 | % | ||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
$ | (118 | ) | (11 | )% | $ | 61 | 6 | % | 152 | % | $ | 62 | 6 | % | 153 | % | ||||||||||||||||
|
|
|
|
|
|
(1) | Other includes our Public Sector (PS) segment and our K-12 business (K-12) that formerly had been included in our Higher Education segment prior to our agreement in the third quarter of 2011 to sell our Higher Education business (HE). As a result of that agreement, HE is now included in discontinued operations. |
(2) | Percent of revenue is calculated as a percent of revenue from FS, AS and Other, respectively. |
(3) | Other costs include certain purchase accounting adjustments, management fees paid to the Sponsors and certain other costs, partially offset in each period by capitalized software development costs. |
28
The following table sets forth, for the periods indicated, certain supplemental revenue data, the relative percentage that those amounts represent to total revenue and the percentage change in those amounts from period to period.
Constant Currency | ||||||||||||||||||||||||||||||||
Three Months Ended September 30, 2010 |
Three Months Ended September 30, 2011 |
Percent Increase (Decrease) 2011 vs. 2010 |
Three Months Ended September 30, 2011 |
Percent Increase (Decrease) 2011 vs. 2010 |
||||||||||||||||||||||||||||
percent of revenue |
percent of revenue |
percent of revenue |
||||||||||||||||||||||||||||||
(in millions) |
||||||||||||||||||||||||||||||||
Financial Systems |
||||||||||||||||||||||||||||||||
Services |
$ | 598 | 55 | % | $ | 641 | 58 | % | 7 | % | $ | 623 | 57 | % | 4 | % | ||||||||||||||||
License and resale fees |
38 | 3 | % | 43 | 4 | % | 18 | % | 41 | 4 | % | 14 | % | |||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Total products and services |
636 | 59 | % | 684 | 62 | % | 8 | % | 664 | 61 | % | 5 | % | |||||||||||||||||||
Reimbursed expenses |
23 | 2 | % | 11 | 1 | % | (56 | )% | 11 | 1 | % | (57 | )% | |||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
$ | 659 | 61 | % | $ | 695 | 63 | % | 5 | % | $ | 675 | 62 | % | 2 | % | |||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Availability Services |
||||||||||||||||||||||||||||||||
Services |
$ | 362 | 34 | % | $ | 358 | 32 | % | (1 | )% | $ | 352 | 32 | % | (3 | )% | ||||||||||||||||
License and resale fees |
| | % | | | % | 8 | % | | | % | 2 | % | |||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Total products and services |
362 | 34 | % | 358 | 32 | % | (1 | )% | 352 | 33 | % | (3 | )% | |||||||||||||||||||
Reimbursed expenses |
4 | | % | 6 | | % | 49 | % | 6 | | % | 41 | % | |||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
$ | 366 | 34 | % | $ | 364 | 33 | % | | % | $ | 358 | 33 | % | (2 | )% | |||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Other |
||||||||||||||||||||||||||||||||
Services |
$ | 44 | 4 | % | $ | 44 | 4 | % | (2 | )% | $ | 44 | 4 | % | (2 | )% | ||||||||||||||||
License and resale fees |
9 | 1 | % | 7 | 1 | % | (21 | )% | 7 | 1 | % | (21 | )% | |||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Total products and services |
53 | 5 | % | 51 | 5 | % | (6 | )% | 51 | 5 | % | (6 | )% | |||||||||||||||||||
Reimbursed expenses |
1 | | % | | | % | (23 | )% | | | % | (23 | )% | |||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
$ | 54 | 5 | % | $ | 51 | 5 | % | (6 | )% | $ | 51 | 5 | % | (6 | )% | |||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Total Revenue |
||||||||||||||||||||||||||||||||
Services |
$ | 1,004 | 93 | % | $ | 1,043 | 94 | % | 4 | % | $ | 1,019 | 94 | % | 1 | % | ||||||||||||||||
License and resale fees |
47 | 4 | % | 50 | 5 | % | 10 | % | 48 | 5 | % | 7 | % | |||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Total products and services |
1,051 | 97 | % | 1,093 | 99 | % | 4 | % | 1,067 | 99 | % | 2 | % | |||||||||||||||||||
Reimbursed expenses |
28 | 3 | % | 17 | 1 | % | (41 | )% | 17 | 1 | % | (43 | )% | |||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
$ | 1,079 | 100 | % | $ | 1,110 | 100 | % | 3 | % | $ | 1,084 | 100 | % | | % | |||||||||||||||||
|
|
|
|
|
|
29
Results of operations, excluding broker/dealer business
We assess our performance both with and without one of our global trading businesses, a broker/dealer with an inherently lower margin than our other software and processing businesses, whose performance is a function of market volatility and customer mix (the Broker/Dealer). By excluding the Broker/Dealers results, we are able to perform additional analysis of our business which we believe is important in understanding the results of both the Broker/Dealer and the other financial systems businesses. We use the information excluding the Broker/Dealer business for a variety of purposes and we regularly communicate our results excluding this business to our board of directors.
The following is a reconciliation of revenue excluding the Broker/Dealer and operating income (loss) excluding the Broker/Dealer, which are each non-GAAP measures, to the corresponding reported GAAP measures that we believe to be most directly comparable. While these adjusted results are useful for analysis purposes, they should not be considered as an alternative to our reported GAAP results.
Three Months Ended September 30, | ||||||||||||||||||||
Constant Currency | ||||||||||||||||||||
2010 | 2011 | % change | 2011 | % change | ||||||||||||||||
(in millions) |
||||||||||||||||||||
Revenue |
||||||||||||||||||||
Total |
$ | 1,079 | $ | 1,110 | 3 | % | $ | 1,084 | | % | ||||||||||
Less Broker/Dealer business |
37 | 11 | 11 | |||||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total excluding Broker/Dealer business |
$ | 1,042 | $ | 1,099 | 6 | % | $ | 1,073 | 3 | % | ||||||||||
|
|
|
|
|
|
|||||||||||||||
Financial Systems |
$ | 659 | $ | 695 | 5 | % | $ | 675 | 2 | % | ||||||||||
Less Broker/Dealer business |
37 | 11 | 11 | |||||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Financial Systems excluding Broker/Dealer business |
$ | 622 | $ | 684 | 10 | % | $ | 664 | 7 | % | ||||||||||
|
|
|
|
|
|
|||||||||||||||
Operating Income (loss) |
||||||||||||||||||||
Total |
$ | (118 | ) | $ | 61 | 152 | % | $ | 62 | 153 | % | |||||||||
Less Broker/Dealer business |
(7 | ) (1) | (3 | ) (1) | (3 | ) (1) | ||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total excluding Broker/Dealer business |
$ | (111 | ) | $ | 64 | 157 | % | $ | 65 | 159 | % | |||||||||
|
|
|
|
|
|
|||||||||||||||
Operating margin |
(11 | )% | 6 | % | 6 | % | ||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Financial Systems |
$ | 135 | $ | 120 | (10 | )% | $ | 122 | (9 | )% | ||||||||||
Less Broker/Dealer business |
(7 | ) (1) | (2 | ) (1) | (2 | ) (1) | ||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Financial Systems excluding Broker/Dealer business |
$ | 142 | $ | 122 | (14 | )% | $ | 124 | (13 | )% | ||||||||||
|
|
|
|
|
|
|||||||||||||||
Operating margin |
23 | % | 18 | % | 19 | % | ||||||||||||||
|
|
|
|
|
|
(1) | The operating income related to the Broker/Dealer excluded from Total and FS differ because we evaluate performance of our segments based on operating results before amortization of acquisition-related intangible assets, stock compensation and certain other costs. |
30
Income from Operations:
Our total operating margin (both including and excluding the Broker/Dealer) was 6% for the three months ended September 30, 2011, compared to -11% for the three months ended September 30, 2010. Included in the three months ended September 30, 2011 and 2010 were restructuring charges of $48 million, which includes $47 million of severance, and $5 million, which includes $6 million of severance, respectively. The operating margin increase is due primarily to a $205 million goodwill impairment charge in the third quarter of 2010, partially offset by a $56 million increase in employment-related expenses in 2011. The higher employment expenses included the severance charges noted above.
Financial Systems:
The FS operating margin was 18% and 20% for the three months ended September 30, 2011 and 2010, respectively. Excluding the impact of the Broker/Dealer, the FS operating margin was approximately 19% and 23% in the three months ended September 30, 2011 and 2010, respectively. The decrease in the operating margin is due mainly to a $41 million increase in employment-related costs, driven primarily by $30 million of severance charges in the third quarter of 2011. Also contributing to higher employment costs are business expansion, merit increases and increased development expenses. The operating margin impact of these expense increases was partially offset by a $4 million increase in license fee revenue.
Availability Services:
The AS operating margin was 22% and 24% for the three months ended September 30, 2011 and 2010, respectively. In North America, severance charges of $8 million and higher advertising expense reduced the margin in 2011. Also, a decrease in higher margin recovery services revenue, which typically uses shared resources, partially offset by reduced equipment expense and reduced depreciation and amortization, reduced the operating margin in 2011. An increase in typically lower margin managed services revenue, which uses dedicated resources, partially offset by increased equipment expense, helped the margin in 2011 by improving utilization of our fixed cost base. In Europe, increased severance of $1 million and higher facilities costs, partially offset by lower equipment expense reduced the operating margin on higher revenue.
Other:
The operating margin from Other was 29% and 28% for the three months ended September 30, 2011 and 2010, respectively. The operating margin increased due primarily to decreasing employment-related expense being proportionately more than the decrease in revenue.
Revenue:
Total reported revenue increased $31 million or 3% for the three months ended September 30, 2011 compared to the third quarter of 2010. On a constant currency basis and excluding the Broker/Dealer, revenue increased 3%.
Financial Systems:
FS reported revenue increased $36 million or 5% in the third quarter of 2011 from the prior year period, and increased 2% on a constant currency basis. Excluding the Broker/Dealer, revenue increased 7%. Processing revenue increased $14 million, or 7%, due mainly to increases in transaction volumes and additional hosted services and increased $2.5 million from acquired businesses. Professional services revenue increased $12 million, or 9%, due mainly to implementation, consulting and project work associated with new and expanded relationships sold in the past twelve months and increased $4 million from acquired businesses. Reported revenue from license and resale fees included software license revenue of $38 million, an increase of $5 million compared to the same quarter in 2010, due mainly to expansion of current licenses and from renewals. On a constant currency basis, software license revenue increased $4 million.
Availability Services:
AS reported revenue decreased $2 million in the third quarter of 2011 from the prior year period. On a constant currency basis, revenue decreased 2% in the quarter. In North America, which accounts for over 75% of our AS business, revenue decreased 4%, where decreases in recovery services and professional services revenue exceeded growth in managed services revenue. Revenue in Europe, primarily from our U.K. operations, increased 5%, where an increase in managed services revenue was partially offset by a decrease in recovery services revenue. Most of our recovery services
31
revenue is derived from tape-based solutions. Recovery services has been shifting from tape-based solutions to disk-based and managed service solutions. We expect this shift to continue in the future.
Other:
Reported revenue from Other decreased $3 million, or 6%, in the three months ended September 30, 2011 from the corresponding period in 2010, and decreased 6% on a constant currency basis. Professional services revenue decreased $1.5 million, or 14%, due primarily to replacing consultants with eLearning content and utilities, whereby clients can run most of their own conversions, in order to remain competitive. Reported revenue from license and resale fees included software license revenue of $2.5 million in the three months ended September 30, 2011, a $1.5 million decrease from the prior year period.
Costs and Expenses:
Cost of sales and direct operating expenses as a percentage of total revenue was 46% in each of the three-month periods ended September 30, 2011 and 2010. Excluding the Broker/Dealers expenses of $11 million in 2011 and $40 million in 2010, cost of sales and direct operating expenses as a percentage of total revenue (also excluding the Broker/Dealer) was 45% and 44% in the three months ended September 30, 2011 and 2010, respectively, and increased $26 million. Impacting the period was a $23 million combined increase in FS and AS employment-related expenses, which included a $10 million increase in severance costs, and the increase from acquired businesses of $5 million, $3 million of which was employment-related expense.
Excluding the Broker/Dealer, sales, marketing and administration expenses as a percentage of total revenue (also excluding the Broker/Dealer) was 26% and 23% in the three months ended September 30, 2011 and 2010, respectively, and increased $40.5 million. Increases in sales, marketing and administration expenses were primarily due to a combined increase of $28 million in FS and corporate severance, a $5 million increase in currency transaction losses and a $3 million increase in stock compensation expense, partially offset by a decrease of $4.5 million of third party professional services expense in FS.
Because AS product development costs are insignificant, it is more meaningful to measure product development expenses as a percentage of revenue excluding AS. For the three months ended September 30, 2011 and 2010, product development costs were 9% and 8% of revenue excluding AS, respectively, an increase of $7.5 million. The increase is primarily related to a $3 million increase in FS employment-related expenses to enhance functionality to attract and retain customers and a $3.5 million increase in FS severance. During the second quarter of 2011, we corrected a misclassification of expense between product development and cost of sales and direct operating expenses. Prior year amounts have been revised to conform to the current year presentation.
Excluding the Broker/Dealer, amortization of acquisition-related intangible assets was 10% and 11% of total revenue in the three months ended September 30, 2011 and 2010, respectively, a decrease of $9 million. The decrease is due primarily to the impact of software assets that were fully amortized in the prior year and $3 million of impairment charges in the prior year period.
We recorded a goodwill impairment charge of $205 million in our Other segment in the three months ended September 30, 2010. There were no goodwill impairment charges in the three months ended September 30, 2011.
Interest expense was $129 million and $160 million for the three months ended September 30, 2011 and 2010, respectively. The decrease in interest expense was due primarily to interest rate decreases mainly due to the expiration of certain of our interest rate swaps and refinancing the senior notes due 2013, as well as decreased term loan borrowings resulting from prepayments that occurred in December 2010.
Other expense was $1 million in the three months ended September 30, 2011 compared to $9 million in the prior year period. The decrease in other expense was due primarily to $10 million of foreign currency transaction losses in 2010 related to our Euro denominated term loans that were repaid in December 2010.
The effective income tax rates for the three months ended September 30, 2011 and 2010 were 40% and 9%, respectively. The rate in the third quarter of 2011 reflects a change in the mix of taxable income in various jurisdictions as well as a change in the total amount of projected taxable income for the year. Changes in the mix of income or the total amount of income for 2011 may significantly impact the estimated effective income tax rate for the year. The rate in the third quarter of 2010 reflects nondeductible goodwill impairment partially offset by the different mix of taxable income in various jurisdictions.
32
Accreted dividends on SCCIIs cumulative preferred stock were $57 million and $51 million for the three months ended September 30, 2011 and 2010, respectively. The increase in dividends is due to compounding. No dividends have been declared by SCCII.
Nine Months Ended September 30, 2011 Compared To Nine Months Ended September 30, 2010
The following table sets forth, for the periods indicated, certain amounts included in our Consolidated Statements of Operations, the relative percentage that those amounts represent to consolidated revenue (unless otherwise indicated), and the percentage change in those amounts from period to period.
Constant Currency | ||||||||||||||||||||||||||||||||
Nine Months Ended September 30, |
Nine Months Ended September 30, |
Percent Increase (Decrease) |
Nine Months Ended September 30, |
Percent Increase (Decrease) |
||||||||||||||||||||||||||||
2010 | 2011 | 2011 vs. 2010 | 2011 | 2011 vs. 2010 | ||||||||||||||||||||||||||||
percent of revenue |
percent of revenue |
percent of revenue |
||||||||||||||||||||||||||||||
(in millions) |
||||||||||||||||||||||||||||||||
Revenue |
||||||||||||||||||||||||||||||||
Financial systems (FS) |
$ | 2,021 | 62 | % | $ | 2,081 | 62 | % | 3 | % | $ | 2,024 | 62 | % | | % | ||||||||||||||||
Availability services (AS) |
1,100 | 34 | % | 1,094 | 33 | % | (1 | )% | 1,074 | 33 | % | (2 | )% | |||||||||||||||||||
Other (1) |
160 | 5 | % | 154 | 5 | % | (4 | )% | 154 | 5 | % | (4 | )% | |||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
$ | 3,281 | 100 | % | $ | 3,329 | 100 | % | 1 | % | $ | 3,252 | 100 | % | (1 | )% | |||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Costs and Expenses |
||||||||||||||||||||||||||||||||
Cost of sales and direct operating |
$ | 1,549 | 47 | % | $ | 1,544 | 46 | % | | % | $ | 1,509 | 46 | % | (3 | )% | ||||||||||||||||
Sales, marketing and administration |
753 | 23 | % | 832 | 25 | % | 10 | % | 809 | 25 | % | 7 | % | |||||||||||||||||||
Product development |
194 | 6 | % | 228 | 7 | % | 18 | % | 212 | 7 | % | 9 | % | |||||||||||||||||||
Depreciation and amortization |
209 | 6 | % | 204 | 6 | % | (2 | )% | 200 | 6 | % | (4 | )% | |||||||||||||||||||
Amortization of acquisition- related intangible assets |
338 | 10 | % | 334 | 10 | % | (1 | )% | 331 | 10 | % | (2 | )% | |||||||||||||||||||
Goodwill impairment |
205 | 6 | % | | | % | (100 | )% | | | % | (100 | )% | |||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
$ | 3,248 | 99 | % | $ | 3,142 | 94 | % | (3 | )% | $ | 3,061 | 94 | % | (6 | )% | |||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Operating Income |
||||||||||||||||||||||||||||||||
Financial systems (2) |
$ | 394 | 19 | % | $ | 374 | 18 | % | (5 | )% | $ | 380 | 19 | % | (3 | )% | ||||||||||||||||
Availability services (2) |
240 | 22 | % | 234 | 21 | % | (2 | )% | 229 | 21 | % | (4 | )% | |||||||||||||||||||
Other (1)(2) |
42 | 26 | % | 44 | 28 | % | 3 | % | 44 | 28 | % | 3 | % | |||||||||||||||||||
Corporate administration |
(46 | ) | (1 | )% | (79 | ) | (2 | )% | (72 | )% | (79 | ) | (2 | )% | (72 | )% | ||||||||||||||||
Amortization of acquisition- related intangible assets |
(338 | ) | (10 | )% | (334 | ) | (10 | )% | 1 | % | (331 | ) | (10 | )% | 2 | % | ||||||||||||||||
Goodwill impairment |
(205 | ) | (6 | )% | | | % | 100 | % | | | % | 100 | % | ||||||||||||||||||
Stock compensation expense |
(23 | ) | (1 | )% | (23 | ) | (1 | )% | (2 | )% | (23 | ) | (1 | )% | (2 | )% | ||||||||||||||||
Other costs (3) |
(31 | ) | (1 | )% | (29 | ) | (1 | )% | 6 | % | (29 | ) | (1 | )% | 6 | % | ||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
$ | 33 | 1 | % | $ | 187 | 6 | % | 468 | % | $ | 191 | 6 | % | 480 | % | |||||||||||||||||
|
|
|
|
|
|
(1) | Other includes PS and K-12 that formerly had been included in our Higher Education segment prior to our agreement in the third quarter of 2011 to sell HE. As a result of that agreement, HE is now included in discontinued operations. |
(2) | Percent of revenue is calculated as a percent of revenue from FS, AS and Other, respectively. |
(3) | Other costs include certain purchase accounting adjustments, management fees paid to the Sponsors and certain other costs, partially offset in each period by capitalized software development costs. |
33
The following table sets forth, for the periods indicated, certain supplemental revenue data, the relative percentage that those amounts represent to total revenue and the percentage change in those amounts from period to period.
Constant Currency | ||||||||||||||||||||||||||||||||
Nine Months Ended September 30, 2010 |
Nine Months Ended September 30, 2011 |
Percent Increase (Decrease) 2011 vs. 2010 |
Nine Months Ended September 30, 2011 |
Percent Increase (Decrease) 2011 vs. 2010 |
||||||||||||||||||||||||||||
percent of revenue |
percent of revenue |
percent of revenue |
||||||||||||||||||||||||||||||
(in millions) |
||||||||||||||||||||||||||||||||
Financial Systems |
||||||||||||||||||||||||||||||||
Services |
$ | 1,792 | 55 | % | $ | 1,849 | 56 | % | 3 | % | $ | 1,801 | 55 | % | 1 | % | ||||||||||||||||
License and resale fees |
152 | 5 | % | 170 | 5 | % | 13 | % | 161 | 5 | % | 6 | % | |||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Total products and services |
1,944 | 59 | % | 2,019 | 61 | % | 4 | % | 1,962 | 60 | % | 1 | % | |||||||||||||||||||
Reimbursed expenses |
77 | 2 | % | 62 | 2 | % | (20 | )% | 62 | 2 | % | (21 | )% | |||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
$ | 2,021 | 62 | % | $ | 2,081 | 62 | % | 3 | % | $ | 2,024 | 62 | % | | % | |||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Availability Services |
||||||||||||||||||||||||||||||||
Services |
$ | 1,088 | 33 | % | $ | 1,080 | 32 | % | (1 | )% | $ | 1,061 | 33 | % | (2 | )% | ||||||||||||||||
License and resale fees |
1 | | % | 1 | | % | (24 | )% | 1 | | % | (25 | )% | |||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Total products and services |
1,089 | 33 | % | 1,081 | 32 | % | (1 | )% | 1,062 | 33 | % | (3 | )% | |||||||||||||||||||
Reimbursed expenses |
11 | | % | 13 | | % | 23 | % | 12 | | % | 16 | % | |||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
$ | 1,100 | 34 | % | $ | 1,094 | 33 | % | (1 | )% | $ | 1,074 | 33 | % | (2 | )% | |||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Other |
||||||||||||||||||||||||||||||||
Services |
$ | 132 | 4 | % | $ | 131 | 4 | % | (1 | )% | $ | 131 | 4 | % | (1 | )% | ||||||||||||||||
License and resale fees |
25 | 1 | % | 21 | 1 | % | (15 | )% | 21 | 1 | % | (15 | )% | |||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Total products and services |
157 | 5 | % | 152 | 5 | % | (4 | )% | 152 | 5 | % | (4 | )% | |||||||||||||||||||
Reimbursed expenses |
3 | | % | 2 | | % | (20 | )% | 2 | | % | (20 | )% | |||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
$ | 160 | 5 | % | $ | 154 | 5 | % | (4 | )% | $ | 154 | 5 | % | (4 | )% | |||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Total Revenue |
||||||||||||||||||||||||||||||||
Services |
$ | 3,012 | 92 | % | $ | 3,060 | 92 | % | 2 | % | $ | 2,993 | 92 | % | (1 | )% | ||||||||||||||||
License and resale fees |
178 | 5 | % | 192 | 6 | % | 8 | % | 183 | 6 | % | 3 | % | |||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
Total products and services |
3,190 | 97 | % | 3,252 | 98 | % | 2 | % | 3,176 | 98 | % | | % | |||||||||||||||||||
Reimbursed expenses |
91 | 3 | % | 77 | 2 | % | (15 | )% | 76 | 2 | % | (17 | )% | |||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||
$ | 3,281 | 100 | % | $ | 3,329 | 100 | % | 1 | % | $ | 3,252 | 100 | % | (1 | )% | |||||||||||||||||
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Results of operations, excluding broker/dealer business
The following is a reconciliation of revenue excluding the Broker/Dealer and operating income (loss) excluding the Broker/Dealer, which are each non-GAAP measures, to the corresponding reported GAAP measures that we believe to be most directly comparable. While these adjusted results are useful for analysis purposes, they should not be considered as an alternative to our reported GAAP results.
Nine Months Ended September 30, | ||||||||||||||||||||
Constant Currency | ||||||||||||||||||||
(in millions) | 2010 | 2011 | % change | 2011 | % change | |||||||||||||||
Revenue |
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Total |
$ | 3,281 | $ | 3,329 | 1 | % | $ | 3,252 | (1 | )% | ||||||||||
Less Broker/Dealer business |
155 | 70 | 70 | |||||||||||||||||
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Total excluding Broker/Dealer business |
$ | 3,126 | $ | 3,259 | 4 | % | $ | 3,182 | 2 | % | ||||||||||
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Financial Systems |
$ | 2,021 | $ | 2,081 | 3 | % | $ | 2,024 | | % | ||||||||||
Less Broker/Dealer business |
155 | 70 | 70 | |||||||||||||||||
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Financial Systems excluding Broker/Dealer business |
$ | 1,866 | $ | 2,011 | 8 | % | $ | 1,954 | 5 | % | ||||||||||
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Operating Income (loss) |
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Total |
$ | 33 | $ | 187 | 468 | % | $ | 191 | 480 | % | ||||||||||
Less Broker/Dealer business |
(30 | ) (1) | (9 | ) (1) | (9 | ) (1) | ||||||||||||||
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Total excluding Broker/Dealer business |
$ | 63 | $ | 196 | 214 | % | $ | 200 | 220 | % | ||||||||||
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Operating margin |
2 | % | 6 | % | 6 | % | ||||||||||||||
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Financial Systems |
$ | 394 | $ | 374 | (5 | )% | $ | 380 | (3 | )% | ||||||||||
Less Broker/Dealer business |
(20 | ) (1) | (5 | ) (1) | (5 | ) (1) | ||||||||||||||
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Financial Systems excluding Broker/Dealer business |
$ | 414 | $ | 379 | (8 | )% | $ | 385 | (7 | )% | ||||||||||
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Operating margin |
22 | % | 19 | % | 20 | % | ||||||||||||||
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(1) | The operating income related to the Broker/Dealer excluded from Total and FS differ because we evaluate performance of our segments based on operating results before amortization of acquisition-related intangible assets, stock compensation and certain other costs. |
35
Income from Operations:
Our total operating margin was 6% for the nine months ended September 30, 2011 compared to 1% for the nine months ended September 30, 2010. Excluding the impact of the Broker/Dealer, total operating margin was 6% and 2% in the nine months ended September 30, 2011 and 2010, respectively. Included in the nine months ended September 30, 2011 and 2010 were restructuring charges of $62 million and $28 million, respectively, which includes $58 million and $19 million, respectively, of severance. Also included in the 2010 restructuring costs was $7 million of costs to shutdown the Broker/Dealer professional trading business. The increase in the operating margin is primarily due to a $205 million goodwill impairment charge in the third quarter of 2010, partially offset by a $94 million increase in employment-related expenses in 2011. The higher employment expenses included the severance charges noted above. We are continuing to evaluate several programs designed to identify cost savings and productivity improvements. While still in their early stages, further actions taken could result in additional charges that may have a material impact to our results of operations in future periods.
Financial Systems:
The FS operating margin was 19% for each of the nine months ended September 30, 2011 and 2010. Excluding the impact of the Broker/Dealer, the FS operating margin was 20% and 22% in the nine months ended September 30, 2011 and 2010, respectively. This decrease is due mainly to a $77 million increase in employment-related costs resulting from business expansion, merit increases and increased development expenses, and includes a $29 million increase in severance charges. Also impacting the period was a $6 million increase in currency transaction losses, partially offset by an $8 million increase in license fees, a $5 million decrease in facilities and a $4 million decrease in third party professional services expense.
Availability Services:
The AS operating margin was 21% and 22% for the nine months ended September 30, 2011 and 2010, respectively. In North America, higher advertising costs reduced the operating margin in 2011. Also, reduced equipment expense, employment-related expense, and depreciation and amortization improved the operating margin on lower revenue in our recovery services business. Increased revenue and decreased depreciation and amortization, partially offset by increased employment-related expenses, including a $5 million increase in severance, and increased facilities and equipment expenses in managed services helped the operating margin in 2011. In Europe, increased revenue and lower equipment expense, partially offset by increased facilities and employment-related expenses, helped the margin in 2011.
Other:
The operating margin from Other was 28% and 26% for the nine months ended September 30, 2011 and 2010, respectively. The operating margin increased due primarily to decreasing employment-related expense being proportionately more than the decrease in revenue.
Revenue:
Total reported revenue increased $48 million or 1% for the nine months ended September 30, 2011 compared to the prior year period. On a constant currency basis, revenue decreased 1% in 2011 compared to the prior year period. Excluding the Broker/Dealer, revenue increased 2%.
Financial Systems:
FS reported revenue increased $60 million or 3% in the nine months ended September 30, 2011 from the prior year period. On a constant currency basis and excluding the Broker/Dealer, revenue increased 5%. Processing revenue increased $31 million, or 5%, due mainly to increases in transaction volumes and additional hosted services and increased $7 million from acquired businesses. Professional services revenue increased $14 million, or 3%, due primarily to implementation, consulting and project work associated with new and expanded relationships sold in the past twelve months and increased $10 million from acquired businesses. Reported revenue from license and resale fees included software license revenue of $157 million, an increase of $18 million compared to the nine months ended September 30, 2010. On a constant currency basis, software license revenue increased $8 million, or 6%.
Availability Services:
AS reported revenue decreased $6 million, or 1%, in the nine months ended September 30, 2011 from the prior year period. On a constant currency basis, revenue decreased 2% in the period. In North America, revenue decreased 4%, where decreases in recovery services and professional services revenue exceeded growth in managed services revenue. Revenue in Europe increased $5 million, or 2%, and included a $1.5 million increase from a business acquired in 2010, where an increase in managed services revenue was partially offset by a decrease in recovery services revenue. Most of our recovery services revenue is derived
36
from tape-based solutions. Recovery services has been shifting from tape-based solutions to disk-based and managed service solutions. We expect this shift to continue in the future.
Other:
Reported revenue from Other decreased $6 million, or 4%, for the nine months ended September 30, 2011, from the corresponding period in 2010, and decreased 4% on a constant currency basis. Professional services revenue decreased $3 million, or 9%, due primarily to replacing consultants with eLearning content and utilities, whereby clients can run most of their own conversions, in order to remain competitive. Reported revenue from license and resale fees included software license revenue of $7 million in the nine months ended September 30, 2011, a $3 million decrease from the prior year period.
Costs and Expenses:
Cost of sales and direct operating expenses as a percentage of total revenue was 46% and 47% in the nine-month periods ended September 30, 2011 and 2010, respectively. Excluding the Broker/Dealers expenses of $70 million in 2011 and $158 million in 2010, cost of sales and direct operating expenses as a percentage of total revenue (also excluding the Broker/Dealer) was 45% and 44% in the nine months ended September 30, 2011 and 2010, respectively, and increased $48 million. Impacting the period were a $36 million increase in FS employment-related expenses, including a $4 million increase in severance, a $20 million increase from acquired businesses, and a $7 million increase in AS facilities costs, mainly utilities, expansions of certain facilities that occurred in the second half of 2010 and a new facility added during the second quarter of the prior year. These expense increases were partially offset by a $10 million decrease in AS equipment expense, primarily resulting from renegotiation of maintenance contracts, and a $5 million decrease in AS employment-related expenses, which includes a $3 million decrease in severance.
Excluding the Broker/Dealer, sales, marketing and administration expenses as a percentage of total revenue (also excluding the Broker/Dealer) was 25% and 24% in the nine-month periods ended September 30, 2011 and 2010, respectively, and increased $65 million. Increases in sales, marketing and administration expenses were primarily due to a combined $56 million increase in FS and corporate employment-related expense, including a $36 million increase in severance and executive transition costs, a $9 million increase resulting from acquired businesses, a $6 million increase in AS advertising expenses and a $6 million increase in currency transaction losses. These increases were partially offset by decreases of a combined $8 million of FS and AS facilities costs, the $7 million of Broker/Dealer shutdown costs noted above and $4 million of third party professional services expenses in FS.
Because AS product development costs are insignificant, it is more meaningful to measure product development expenses as a percentage of revenue excluding AS. For the nine months ended September 30, 2011 and 2010, product development costs were 10% and 9% of revenue excluding AS, respectively, an increase of $18 million. The increase is primarily related to a $12 million increase in FS employment-related expenses to enhance functionality to attract and retain customers and includes a $4 million increase in severance. During the second quarter of 2011, we corrected a misclassification of expense between product development and cost of sales and direct operating expenses. Prior year amounts have been revised to conform to the current year presentation.
Depreciation and amortization was 6% of total revenue in each of the nine-month periods ended September 30, 2011, but decreased $9 million due primarily to certain AS leased facility improvements becoming fully depreciated during 2010.
Excluding the Broker/Dealer, amortization of acquisition-related intangible assets was 10% and 11% of total revenue in the nine-month periods ended September 30, 2011 and 2010, respectively, a decrease of $5 million which was due primarily to the impact of software that was fully amortized in 2010, partially offset by the impact of acquired businesses. During 2011, we recorded impairment charges of our customer base and software assets of $3 million and $4 million, respectively. During 2010, we recorded impairment charges of our customer base and software assets of $1 million and $2 million, respectively. These impairments are the result of reduced cash flow projections related to the software and customer base assets that were impaired.
We recorded a goodwill impairment charge of $205 million in our Other segment in the nine months ended September 30, 2010. There were no goodwill impairment charges during the nine months ended September 30, 2011.
Interest expense was $396 million and $479 million for the nine months ended September 30, 2011 and 2010, respectively. The decrease in interest expense was due primarily to interest rate decreases mainly due to the expiration of certain of our interest rate swaps and refinancing the senior notes due 2013, as well as decreased term loan borrowings resulting from prepayments that occurred in December 2010.
Other expense was $2 million in the nine months ended September 30, 2011 compared to other income of $5 million in the prior year period. The $7 million change was due primarily to $3 million of foreign currency transaction
37
gains in 2010 related to our Euro denominated term loans that were repaid in December 2010 and a $3 million write-off of deferred financing costs in 2011 primarily related to the refinancing of a portion of our U.S. $-denominated term loans and the partial retirement of the £-denominated term loans.
The effective income tax rates for the nine months ended September 30, 2011 and 2010 were 28% and 18%, respectively. The rate in the nine months ended September 30, 2011 reflects the impact on the tax rate of certain items, including nondeductible expenses and state income taxes, due to the small base of overall projected pretax income. Changes in the mix of income or the total amount of income for 2011 may significantly impact the estimated effective income tax rate for the year. The rate in the nine months ended September 30, 2010 reflects nondeductible goodwill impairment partially offset by the different mix of taxable income in various jurisdictions.
Accreted dividends on SCCIIs cumulative preferred stock were $166 million and $147 million for the nine months ended September 30, 2011 and 2010, respectively. The increase in dividends is due to compounding. No dividends have been declared by SCCII.
Liquidity and Capital Resources:
SunGards financing strategy is to secure long-term committed funding at attractive interest rates by making borrowings under secured credit agreements and issuing debt securities. Our international operations are funded through a combination of local borrowing and intercompany funding to minimize the total cost of funds and to manage and centralize currency exchange exposures. SunGard may, from time to time, seek to amend its outstanding secured credit agreements.
At September 30, 2011, cash and equivalents were $749 million, a decrease of $29 million from December 31, 2010. Cash flow from continuing operations was $354 million in the nine months ended September 30, 2011 compared to $344 million in the nine months ended September 30, 2010. The increase in cash flow from continuing operations is due primarily to $133 million less of interest payments made in the nine months ended September 30, 2011 from the prior year period, due primarily to a change in interest payment dates and a lower interest rate resulting from the refinancing in 2010 of senior notes due in 2013, the expiration of certain of our interest rate swaps and decreased term loan borrowings resulting from prepayments that occurred in December 2010, partially offset by reduced operating performance and $12 million higher income tax payments, net of refunds received, in the nine months ended September 30, 2011.
Net cash used by continuing operations in investing activities was $220 million in the nine months ended September 30, 2011, comprised of cash paid for property and equipment and other assets and five businesses acquired in our FS segment. Net cash used by continuing operations in investing activities was $268 million in the nine months ended September 30, 2010, comprised mainly of cash paid for property and equipment and other assets, two businesses acquired in our FS segment and one business acquired in our AS segment.
Net cash used by continuing operations in financing activities was $227 million for the nine months ended September 30, 2011, primarily related to repayments under the revolving portion of our receivables facility and the partial retirement of $100 million of our £-denominated term loans. Net cash used by continuing operations in financing activities was $32 million for the nine months ended September 30, 2010, primarily related to quarterly principal payments on the term loans, partially offset by increased borrowings under our receivables facility.
On January 31, 2011, SunGard entered into the First Refinancing Amendment to its Amended and Restated Senior Secured Credit Agreement dated as of June 9, 2009 (Credit Agreement) to, among other things, (a) eliminate the LIBOR and base rate floors and (b) reduce the Eurocurrency rate spread from 3.75% to 3.5% and the base rate spread from 2.75% to 2.5% with no impact on maturity. We expect to save approximately $14 million per year of interest expense as a result of this amendment.
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On March 11, 2011, SunGard entered into the Second Refinancing and Incremental Amendment to its Credit Agreement to, among other things, obtain new revolving credit commitments in an aggregate amount equal to $300 million that will terminate on May 11, 2013, thereby increasing the Companys revolving credit commitments by $50 million, to $880 million, all of which now have been extended to (or expire on) May 11, 2013.
On November 10, 2011, SunGard entered into the Third Amendment to its Credit Agreement to modify the definition of Consolidated EBITDA, to allow, for the purposes of determining the Total Leverage Ratio or Interest Coverage Ratio, the inclusion of EBITDA generated by discontinued operations until such operations are actually sold, transferred, closed or otherwise disposed.
As previously disclosed, the Company announced that SCC, SunGard, Hellman & Friedman Capital Partners VI, L.P. (Hellman & Friedman) and certain of their respective affiliates had entered into an Agreement and Plan of Merger dated as of August 4, 2011, and that SunGard, SunGard Higher Education Inc. and certain affiliates of Hellman & Friedman had entered into an Asset Purchase Agreement dated as of August 4, 2011 (together, the Transaction Agreements) to sell SunGards HE business (excluding the K-12 Education business). SunGard intends to use the transaction proceeds of $1.775 billion, less applicable taxes and fees, to repay a portion of its existing indebtedness.
At September 30, 2011, we have outstanding $7.85 billion in aggregate indebtedness, with additional borrowing capacity of $849 million under the revolving credit facility (after giving effect to outstanding letters of credit) and $130 million under the receivables facility (after giving effect to the $200 million outstanding debt and accounts receivable borrowing base). Effective October 3, 2011, and in preparation of the disposition of our HE business, participating HE subsidiaries and their associated receivables were removed from the receivables facility. These actions reduced our borrowing capacity under the receivables facility by approximately $60 million. At September 30, 2011, we have total outstanding letters of credit and bid bonds of approximately $46 million.
We expect our available cash balances and cash flows from operations, combined with availability under the revolving credit facility and receivables facility, to provide sufficient liquidity to fund our current obligations, projected working capital requirements and capital spending for a period that includes at least the next 12 months.
Covenant Compliance
Adjusted EBITDA is used to determine compliance with certain covenants contained in the indentures governing SunGards senior notes due 2015, 2018 and 2020 and senior subordinated notes due 2015 and in SunGards senior secured credit facilities. Adjusted EBITDA is defined as EBITDA, which we define as earnings before interest, taxes, depreciation, amortization and goodwill impairment, further adjusted to exclude certain adjustments permitted in calculating covenant compliance under the indentures and senior secured credit facilities. We believe that the inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA are appropriate to provide additional information to investors to demonstrate compliance with the financing covenants.
The breach of covenants in SunGards senior secured credit facilities that are tied to ratios based on Adjusted EBITDA could result in a default under that agreement and the lenders could elect to declare all amounts borrowed due and payable. Any such acceleration would also result in a default under the indentures. Additionally, under SunGards debt agreements, our ability to engage in activities such as incurring additional indebtedness, making investments and paying dividends is also tied to ratios based on Adjusted EBITDA.
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Adjusted EBITDA is calculated as follows (in millions):
Three Months Ended September 30, | Nine Months Ended September 30, | Last Twelve Months September 30, |
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2010 | 2011 | 2010 | 2011 | 2011 | ||||||||||||||||
Loss from continuing operations |
$ | (261 | ) | $ | (41 | ) | $ | (361 | ) | $ | (150 | ) | $ | (202 | ) | |||||
Interest expense, net |
160 | 128 | 478 | 393 | 552 | |||||||||||||||
Benefit from income taxes |
(26 | ) | (27 | ) | (79 | ) | (58 | ) | (47 | ) | ||||||||||
Depreciation and amortization |
185 | 174 | 547 | 538 | 721 | |||||||||||||||
Goodwill impairment charge |
205 | | 205 | | | |||||||||||||||
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EBITDA |
263 | 234 | 790 | 723 | 1,024 | |||||||||||||||
Purchase accounting adjustments (a) |
3 | 2 | 10 | 8 | 11 | |||||||||||||||
Non-cash charges (b) |
9 | 9 | 29 | 23 | 31 | |||||||||||||||
Restructuring and other charges (c) |
23 | 57 | 40 | 82 | 95 | |||||||||||||||
Acquired EBITDA, net of disposed EBITDA (d) |
2 | | 8 | | 1 | |||||||||||||||
Pro forma expense savings related to acquisitions (e) |
1 | | 2 | | | |||||||||||||||
Loss on extinguishment of debt (f) |
| 1 | | 3 | 61 | |||||||||||||||
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Adjusted EBITDA from continuing operations |
301 | 303 | 879 | 839 | 1,223 | |||||||||||||||
Adjusted EBITDA from operations held for sale |
32 | 32 | 102 | 103 | 148 | |||||||||||||||
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Adjusted EBITDA - senior secured credit facilities, senior notes due 2015, 2018 and 2020 and senior subordinated notes due 2015 |
$ | 333 | $ | 335 | $ | 981 | $ | 942 | $ | 1,371 | ||||||||||
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(a) | Purchase accounting adjustments include the adjustment of deferred revenue and lease reserves to fair value at the date of the LBO and subsequent acquisitions made by the Company and certain acquisition-related compensation expense. |
(b) | Non-cash charges include stock-based compensation and loss on the sale of assets. |
(c) | Restructuring and other charges include severance and related payroll taxes, reserves to consolidate certain facilities, strategic initiative expenses, certain other expenses associated with acquisitions made by the Company, gains or losses related to fluctuation of foreign currency exchange rates impacting the foreign-denominated debt, management fees paid to the Sponsors and franchise and similar taxes reported in operating expenses, partially offset by certain charges relating to the receivables facility. |
(d) | Acquired EBITDA net of disposed EBITDA reflects the EBITDA impact of businesses that were acquired or disposed of during the period as if the acquisition or disposition occurred at the beginning of the period. |
(e) | Pro forma adjustments represent the full-year impact of savings resulting from post-acquisition integration activities. |
(f) | Loss on extinguishment of debt includes the loss on extinguishment of $1.6 billion of senior notes due in 2013 and the write-off of deferred financing fees related to the refinancing of a portion of our US$-denominated term loans and retirement of $100 million of £-denominated term loans. |
40
The covenant requirements and actual ratios for the twelve months ended September 30, 2011 are as follows. All covenants are in compliance.
Covenant Requirements |
Actual Ratios |
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Senior secured credit facilities (1) |
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Minimum Adjusted EBITDA to consolidated interest expense ratio |
1.80x | 2.79x | ||||||
Maximum total debt to Adjusted EBITDA |
6.25x | 5.08x | ||||||
Senior notes due 2015, 2018 and 2020 and senior subordinated notes due 2015 (2) |
| |||||||
Minimum Adjusted EBITDA to fixed charges ratio required to incur additional debt pursuant to ratio provisions |
2.00x | 2.77x |
(1) | The senior secured credit facilities require us to maintain an Adjusted EBITDA to consolidated interest expense ratio starting at a minimum of 1.80x for the four-quarter period ended December 31, 2010 and increasing over time to 1.95x by the end of 2011 and 2.20x by the end of 2013. Consolidated interest expense is defined in the senior secured credit facilities as consolidated cash interest expense less cash interest income further adjusted for certain non-cash or non-recurring interest expense and the elimination of interest expense and fees associated with SunGards receivables facility. Beginning with the four-quarter period ending December 31, 2010, we are required to maintain a consolidated total debt to Adjusted EBITDA ratio of 6.25x and decreasing over time to 5.75x by the end of 2011 and to 4.75x by the end of 2013. Consolidated total debt is defined in the senior secured credit facilities as total debt less certain indebtedness and further adjusted for cash and cash equivalents on our balance sheet in excess of $50 million. Failure to satisfy these ratio requirements would constitute a default under the senior secured credit facilities. If our lenders failed to waive any such default, our repayment obligations under the senior secured credit facilities could be accelerated, which would also constitute a default under our indentures. |
(2) | SunGards ability to incur additional debt and make certain restricted payments under our indentures, subject to specified exceptions, is tied to an Adjusted EBITDA to fixed charges ratio of at least 2.0x, except that we may incur certain debt and make certain restricted payments and certain permitted investments without regard to the ratio, such as the ability to incur up to an aggregate principal amount of $5.75 billion under credit facilities (inclusive of amounts outstanding under the senior credit facilities from time to time; as of September 30, 2011, we had $4.30 billion outstanding under the term loan facilities and available commitments of $849 million under the revolving credit facility), to acquire persons engaged in a similar business that become restricted subsidiaries and to make other investments equal to 6% of our consolidated assets. Fixed charges is defined in the indentures governing the Senior Notes due 2015, 2018 and 2020 and the Senior Subordinated Notes due 2015 as consolidated interest expense less interest income, adjusted for acquisitions, and further adjusted for non-cash interest and the elimination of interest expense and fees associated with the receivables facility. |
Certain Risks and Uncertainties
Certain of the matters we discuss in this Report on Form 10-Q may constitute forward-looking statements. You can identify forward-looking statements because they contain words such as believes, expects, may, will, should, seeks, approximately, intends, plans, estimates, or anticipates or similar expressions which concern our strategy, plans or intentions. All statements we make relating to estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results are forward-looking statements. In addition, we, through our senior management, from time to time make forward-looking public statements concerning our expected future operations and performance and other developments. All of these forward-looking statements are subject to risks and uncertainties that may change at any time, and, therefore, our actual results may differ materially from those we expected. We derive most of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. Some of the factors that we believe could affect our results include: our high degree of leverage; general economic and market conditions; the condition of the financial services industry, including the effect of any further consolidation among financial services firms; the integration of acquired businesses, the performance of acquired businesses, and the prospects for future acquisitions; the effect of war, terrorism, natural disasters or other catastrophic events; the effect of disruptions
41
to our systems and infrastructure; the timing and magnitude of software sales; the timing and scope of technological advances; customers taking their information availability solutions in-house; the trend in information availability toward solutions utilizing more dedicated resources; the market and credit risks associated with clearing broker operations; the ability to retain and attract customers and key personnel; risks relating to the foreign countries where we transact business; the ability to obtain patent protection and avoid patent-related liabilities in the context of a rapidly developing legal framework for software and business-method patents; and a material weakness in our internal controls. The factors described in this paragraph and other factors that may affect our business or future financial results are discussed in our filings with the Securities and Exchange Commission, including this Form 10-Q. We assume no obligation to update any written or oral forward-looking statement made by us or on our behalf as a result of new information, future events or other factors.
Item 3. Quantitative and Qualitative Disclosures about Market Risk:
We do not use derivative financial instruments for trading or speculative purposes. We have invested our available cash in short-term, highly liquid financial instruments, with a substantial portion having initial maturities of three months or less. When necessary, we have borrowed to fund acquisitions.
At September 30, 2011, we had total debt of $7.85 billion, including $4.50 billion of variable rate debt. We have entered into interest rate swap agreements which fix the interest rates for $1.70 billion of our variable rate debt. Swap agreements expiring in February 2012 with a notional value of $1.2 billion effectively fix our interest rates at 1.78%. Swap agreements expiring in May 2013 with a notional value of $500 million effectively fix our interest rates at 1.99%. Our remaining variable rate debt of $2.8 billion is subject to changes in underlying interest rates, and, accordingly, our interest payments will fluctuate. During the period when all of our interest rate swap agreements are effective, a 1% change in interest rates would result in a change in interest of approximately $28 million per year. Upon the expiration of each interest rate swap agreement in February 2012 and May 2013, a 1% change in interest rates would result in a change in interest of approximately $40 million and $45 million per year, respectively.
Item 4. Controls and Procedures:
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this Report were effective.
No change in our internal control over financial reporting occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Item 1. Legal Proceedings: We are presently a party to certain lawsuits arising in the ordinary course of our business. We believe that none of our current legal proceedings will be material to our business, financial condition or results of operations.
Item 1A. Risk Factors: There have been no material changes to SCCs, SCCIIs or SunGards Risk Factors as previously disclosed in their Form 10-K for the year ended December 31, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds: None.
Item 3. Defaults Upon Senior Securities: None.
Item 4. (Removed and Reserved)
(a) The stockholders of each of SunGard, SCC and SCCII approved, by written consent dated September 14, 2011, the election of the following persons as directors to serve in such capacity until his or her successor is designated and qualified, or until he or she sooner dies, resigns, is removed or becomes disqualified: Chinh Chu, John Connaughton, Russell Fradin, James H. Greene, Jr., Glenn Hutchins, James L. Mann, John Marren, Sanjeev Mehra and Julie Richardson.
(b) None.
Number |
Document | |
10.1 | Third Amendment, dated as of November 10, 2011 to the Amended and Restated Credit Agreement, dated as of June 9, 2009. | |
12.1 | Computation of Ratio of Earnings to Fixed Charges. | |
31.1 | Certification of Russell P. Fradin, Chief Executive Officer of SunGard Capital Corp., SunGard Capital Corp. II and SunGard Data Systems Inc. required by Rule 13a-14(a) or Rule 15d-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Robert F. Woods, Chief Financial Officer of SunGard Capital Corp., SunGard Capital Corp. II and SunGard Data Systems Inc. required by Rule 13a-14(a) or Rule 15d-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of Russell P. Fradin, Chief Executive Officer of SunGard Capital Corp., SunGard Capital Corp. II and SunGard Data Systems Inc. required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of Robert F. Woods, Chief Financial Officer of SunGard Capital Corp., SunGard Capital Corp. II and SunGard Data Systems Inc. required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002. | |
101 | Interactive Data Files for SunGard Capital Corp., SunGard Capital Corp. II and SunGard Data Systems Inc. pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of December 31, 2010 and September 30, 2011, (ii) Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2010 and 2011, (iii) Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2011 and (iv) Notes to Consolidated Financial Statements. |
43
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
SUNGARD CAPITAL CORP. | ||||||
SUNGARD CAPITAL CORP. II | ||||||
Dated: November 14, 2011 | By: | /s/ Robert F. Woods | ||||
Robert F. Woods | ||||||
Executive Vice President and Chief Financial Officer | ||||||
(Principal Financial Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
SUNGARD DATA SYSTEMS INC. | ||||||
Dated: November 14, 2011 | By: | /s/ Robert F. Woods | ||||
Robert F. Woods | ||||||
Senior Vice President-Finance and Chief Financial Officer | ||||||
(Principal Financial Officer) |
44
EXHIBIT INDEX
Exhibit |
Document | |
10.1 | Third Amendment, dated as of November 10, 2011 to the Amended and Restated Credit Agreement, dated as of June 9, 2009. | |
12.1 | Computation of Ratio of Earnings to Fixed Charges. | |
31.1 | Certification of Russell P. Fradin, Chief Executive Officer of SunGard Capital Corp., SunGard Capital Corp. II and SunGard Data Systems Inc. required by Rule 13a-14(a) or Rule 15d-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Robert F. Woods, Chief Financial Officer of SunGard Capital Corp., SunGard Capital Corp. II and SunGard Data Systems Inc. required by Rule 13a-14(a) or Rule 15d-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of Russell P. Fradin, Chief Executive Officer of SunGard Capital Corp., SunGard Capital Corp. II and SunGard Data Systems Inc. required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of Robert F. Woods, Chief Financial Officer of SunGard Capital Corp., SunGard Capital Corp. II and SunGard Data Systems Inc. required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002. | |
101 | Interactive Data Files for SunGard Capital Corp., SunGard Capital Corp. II and SunGard Data Systems Inc. pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of December 31, 2010 and September 30, 2011, (ii) Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2010 and 2011, (iii) Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2011 and (iv) Notes to Consolidated Financial Statements. |
45
Exhibit 10.1
EXECUTION VERSION
THIRD AMENDMENT dated as of November 10, 2011 (this Amendment), to the Restated Credit Agreement dated as of August 11, 2005, as amended and restated as of June 9, 2009, as further amended by the First Refinancing Amendment dated as of January 31, 2011 and the Second Refinancing and Incremental Amendment dated as of March 11, 2011 (as previously amended, the Credit Agreement), among SUNGARD DATA SYSTEMS INC. (the Company), SUNGARD HOLDCO LLC (Holdings), the Overseas Borrowers from time to time party thereto (the Overseas Borrowers and, together with the Company, the Borrowers), the Lenders from time to time party thereto (the Lenders), and JPMORGAN CHASE BANK, N.A., as administrative agent (in such capacity, the Administrative Agent), collateral agent, Swing Line Lender and L/C Issuer.
RECITALS
Section 10.01 of the Credit Agreement permits the Borrowers and the Required Lenders to enter into amendments or waivers to the Credit Agreement, and the Required Lenders and the Borrowers desire to amend the Credit Agreement on the terms set forth herein.
AGREEMENTS
In consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:
ARTICLE I.
Amendments
SECTION 1.01. Defined Terms. Capitalized terms used herein (including in the recitals hereto) and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement. The rules of construction specified in Section 1.02 of the Credit Agreement also apply to this Amendment.
SECTION 1.02. Amendment of the Credit Agreement. Effective as of the Third Amendment Effective Date the Credit Agreement is hereby amended by replacing subclause (C) of subclause (iii) of the proviso to clause (b) of the definition of Consolidated EBITDA in Section 1.01 of the Credit Agreement with the following:
(C) for purposes of determining the Total Leverage Ratio or Interest Coverage Ratio only, there shall be excluded in determining Consolidated EBITDA for any period the Disposed EBITDA of any Person, property, business or asset sold, transferred or otherwise disposed of, or closed, by the Company or any Restricted Subsidiary during such period (each such Person, property, business or asset so sold or disposed of, a
Sold Entity or Business), based on the actual Disposed EBITDA of such Sold Entity or Business for such period (including the portion thereof occurring prior to such sale, transfer or disposition..
SECTION 1.03. Amendment Effectiveness. The Amendment shall become effective as of the first date (the Third Amendment Effective Date) on which the Administrative Agent (or its counsel) shall have received from (i) the Borrowers, (ii) Holdings, (iii) Lenders that constitute at least the Required Lenders and (iv) the Administrative Agent, either (x) counterparts of this Amendment signed on behalf of such parties or (y) written evidence satisfactory to the Administrative Agent (which may include facsimile or other electronic transmissions of signed signature pages) that such parties have signed counterparts of this Amendment.
The Administrative Agent shall notify the Borrowers and the Lenders of the Third Amendment Effective Date and such notice shall be conclusive and binding.
ARTICLE II.
Miscellaneous
SECTION 2.01. Representations and Warranties. Each Borrower hereby represents and warrants to the Administrative Agent and the Lenders that as of the date hereof: (a) no Default or Event of Default has occurred and is continuing, and (b) all representations and warranties of the Borrowers contained in the Credit Agreement are true and correct in all material respects as of the date hereof (except with respect to representations and warranties expressly made only as of an earlier date, which representations were true and correct in all material respects as of such earlier date).
SECTION 2.02. Effect of Amendment. (a) Except as expressly set forth herein, this Amendment shall not by implication or otherwise limit, impair, constitute a waiver of, or otherwise affect the rights and remedies of, the Lenders or the Agents under the Credit Agreement or any other Loan Document, and shall not alter, modify, amend or in any way affect any of the terms, conditions, obligations, covenants or agreements contained in the Credit Agreement or any other Loan Document, all of which are ratified and affirmed in all respects and shall continue in full force and effect. Nothing herein shall be deemed to establish a precedent for purposes of interpreting the provisions of the Credit Agreement or entitle any Loan Party to a consent to, or a waiver, amendment, modification or other change of, any of the terms, conditions, obligations, covenants or agreements contained in the Credit Agreement or any other Loan Document in similar or different circumstances. This Amendment shall apply to and be effective only with respect to the provisions of the Credit Agreement and the other Loan Documents specifically referred to herein.
(b) On and after the Third Amendment Effective Date, each reference in the Credit Agreement to this Agreement, hereunder, hereof, herein or words of like import, and each reference to the Credit Agreement, thereunder, thereof, therein or words of like import in any other Loan Document, shall be deemed a reference to the Credit Agreement as
2
modified hereby. This Amendment shall constitute a Loan Document for all purposes of the Credit Agreement and the other Loan Documents.
SECTION 2.03. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. The provisions of Section 10.17 of the Credit Agreement shall apply to this Amendment to the same extent as if fully set forth herein.
SECTION 2.04. Costs and Expenses. The Borrowers agree to reimburse each of the Administrative Agent for its reasonable out-of-pocket expenses in connection with this Amendment and the transactions contemplated hereby, including the reasonable fees, charges and disbursements of counsel for the Administrative Agent.
SECTION 2.05. Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. Delivery of any executed counterpart of a signature page of this Amendment by facsimile transmission or other electronic imaging means shall be effective as delivery of a manually executed counterpart hereof.
SECTION 2.06. Headings. The headings of this Amendment are for purposes of reference only and shall not limit or otherwise affect the meaning hereof.
3
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their officers as of the date first above written.
SUNGARD DATA SYSTEMS INC., | ||||
BY: | /S/ RICHARD J. OBETZ | |||
NAME: | RICHARD J. OBETZ | |||
TITLE: | VICE PRESIDENT, FINANCE and TREASURER | |||
SUNGARD HOLDCO LLC, | ||||
BY: | /S/ RICHARD J. OBETZ | |||
Name: | RICHARD J. OBETZ | |||
Title: | VICE PRESIDENT | |||
SUNGARD UK HOLDINGS LIMITED, | ||||
BY: | /S/ RICHARD J. OBETZ | |||
Name: | RICHARD J. OBETZ | |||
Title: | DIRECTOR |
[Third Amendment]
JPMORGAN CHASE BANK, N.A., individually and as Administrative Agent, | ||
BY: | /S/ ANN B. KERNS | |
NAME: ANN B. KERNS | ||
TITLE: VICE PRESIDENT |
[Third Amendment]
To approve the Third Amendment:
Name of Lender:
by | ||
Name: | ||
Title: |
For any Lender that requires a second signature line:
by | ||
Name: | ||
Title: |
Exhibit 12.1
SunGard Capital Corp.
SunGard Capital Corp. II
SunGard Data Systems Inc.
Computation of Ratio of Earnings to Fixed Charges (Unaudited)
($ in millions)
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2010 | 2011 | 2010 | 2011 | |||||||||||||
Fixed charges |
||||||||||||||||
Interest expense |
$ | 150 | $ | 120 | $ | 446 | $ | 366 | ||||||||
Amortization of debt issuance costs and debt discount |
10 | 10 | 33 | 29 | ||||||||||||
Portion of rental expense representative of interest |
19 | 20 | 58 | 59 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed charges |
$ | 179 | $ | 150 | $ | 537 | $ | 454 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Earnings |
||||||||||||||||
Income (loss) from continuing operations before income taxes |
$ | (287 | ) | $ | (68 | ) | $ | (440 | ) | $ | (208 | ) | ||||
Fixed charges per above |
179 | 150 | 537 | 454 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total earnings |
$ | (108 | ) | $ | 82 | $ | 97 | $ | 246 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Ratio of earnings to fixed charges |
* | * | * | * |
* | Earnings for the three months ended September 30, 2010 and 2011 were inadequate to cover fixed charges by $287 million and $68 million, respectively. Earnings for the nine months ended September 30, 2010 and 2011 were inadequate to cover fixed charges by $440 million and $208 million, respectively. |
Exhibit 31.1
Certification of Russell P. Fradin
Required by Rule 13a-14(a) or Rule 15d-14(a) and
Section 302 of the Sarbanes-Oxley Act of 2002
I, Russell P. Fradin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SunGard Capital Corp., SunGard Capital Corp. II and SunGard Data Systems Inc. (collectively, registrant);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: November 10, 2011 |
/s/ Russell P. Fradin |
Russell P. Fradin |
President and Chief Executive Officer |
SunGard Capital Corp., SunGard Capital Corp. II & SunGard Data Systems Inc. |
Exhibit 31.2
Certification of Robert F. Woods
Required by Rule 13a-14(a) or Rule 15d-14(a) and
Section 302 of the Sarbanes-Oxley Act of 2002
I, Robert F. Woods, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SunGard Capital Corp., SunGard Capital Corp. II and SunGard Data Systems Inc. (collectively, registrant);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: November 10, 2011 |
/s/ Robert F. Woods |
Robert F. Woods |
Chief Financial Officer |
SunGard Capital Corp., SunGard Capital Corp. II & SunGard Data Systems Inc. |
Exhibit 32.1
Certification of Russell P. Fradin
Required by Rule 13a-14(b) or Rule 15d-14(b) and
Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.(S) 1350, as adopted), I, Russell P. Fradin, Chief Executive Officer of SunGard Capital Corp., SunGard Capital Corp. II and SunGard Data Systems Inc. (collectively, the Company), hereby certify that to my knowledge:
1. The Companys Quarterly Report on Form 10-Q for the period ended September 30, 2011 (the Periodic Report) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 10, 2011 |
/s/ Russell P. Fradin |
Russell P. Fradin |
Chief Executive Officer |
A signed original of this written statement required by Section 906 has been provided to SunGard Capital Corp., SunGard Capital Corp. II and SunGard Data Systems Inc. and will be retained by SunGard Capital Corp., SunGard Capital Corp. II and SunGard Data Systems Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
Certification of Robert F. Woods
Required by Rule 13a-14(b) or Rule 15d-14(b) and
Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.(S) 1350, as adopted), I, Robert F. Woods, Chief Financial Officer of SunGard Capital Corp., SunGard Capital Corp. II and SunGard Data Systems Inc. (collectively, the Company), hereby certify that to my knowledge:
1. The Companys Quarterly Report on Form 10-Q for the period ended September 30, 2011 (the Periodic Report) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 10, 2011 |
/s/ Robert F. Woods |
Robert F. Woods |
Chief Financial Officer |
A signed original of this written statement required by Section 906 has been provided to SunGard Capital Corp., SunGard Capital Corp. II and SunGard Data Systems Inc. and will be retained by SunGard Capital Corp., SunGard Capital Corp. II and SunGard Data Systems Inc. and furnished to the Securities and Exchange Commission or its staff upon request.