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, 2015
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 | 000-53653 | |
SunGard Capital Corp. II | 000-53654 | |
SunGard Data Systems Inc. | 001-12989 |
SunGard®
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 | (IRS Employer | |
incorporation or organization) | 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 | Yes | x | No | ¨ | ||||
SunGard Capital Corp. II | Yes | x | No | ¨ | ||||
SunGard Data Systems Inc. | Yes | ¨ | No | x |
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 | 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 | 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 | 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, 2015:
SunGard | 261,863,739 shares of Class A common stock and 29,095,969 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
SUNGARD CAPITAL CORP. II
SUNGARD DATA SYSTEMS INC.
AND SUBSIDIARIES
PAGE | ||||||
PART I. |
FINANCIAL INFORMATION | 1 | ||||
Item 1. |
Financial Statements: (unaudited) | 2 | ||||
SunGard | ||||||
Condensed Consolidated Balance Sheets as of December 31, 2014 and September 30, 2015 | 2 | |||||
3 | ||||||
4 | ||||||
SunGard Capital Corp. II | ||||||
Condensed Consolidated Balance Sheets as of December 31, 2014 and September 30, 2015 |
5 | |||||
6 | ||||||
7 | ||||||
SunGard Data Systems Inc. | ||||||
Condensed Consolidated Balance Sheets as of December 31, 2014 and September 30, 2015 |
8 | |||||
9 | ||||||
10 | ||||||
11 | ||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
33 | ||||
Item 3. |
51 | |||||
Item 4. |
51 | |||||
PART II. |
52 | |||||
Item 1. |
52 | |||||
Item 1A. |
52 | |||||
Item 5. |
52 | |||||
Item 6. |
53 | |||||
54 |
Explanatory Note
This Quarterly Report on Form 10-Q (Report) is a combined quarterly report being filed separately by three registrants: SunGard, SunGard Capital Corp. II (SCCII) and SunGard Data Systems Inc. (SDS). SunGard and SCCII 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 SDS. 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
Condensed Consolidated Balance Sheets
(In millions except share and per-share amounts)
(Unaudited)
December 31, | September 30, | |||||||
2014 | 2015 | |||||||
Assets |
||||||||
Current: |
||||||||
Cash and cash equivalents |
$ | 447 | $ | 591 | ||||
Trade receivables, less allowance for doubtful accounts of $22 and $21 |
572 | 439 | ||||||
Earned but unbilled receivables |
114 | 108 | ||||||
Prepaid expenses and other current assets |
116 | 149 | ||||||
Assets held for sale |
| 24 | ||||||
|
|
|
|
|||||
Total current assets |
1,249 | 1,311 | ||||||
Property and equipment, less accumulated depreciation of $414 and $428 |
152 | 142 | ||||||
Software products, less accumulated amortization of $1,754 and $1,756 |
224 | 210 | ||||||
Customer base, less accumulated amortization of $531 and $553 |
360 | 321 | ||||||
Other assets, less accumulated amortization of $22 and $23 |
94 | 69 | ||||||
Trade name |
672 | 672 | ||||||
Goodwill |
3,760 | 3,733 | ||||||
|
|
|
|
|||||
Total Assets |
$ | 6,511 | $ | 6,458 | ||||
|
|
|
|
|||||
Liabilities and Equity |
||||||||
Current: |
||||||||
Accounts payable |
$ | 21 | $ | 7 | ||||
Accrued compensation and benefits |
227 | 183 | ||||||
Accrued interest expense |
30 | 68 | ||||||
Other accrued expenses |
131 | 124 | ||||||
Deferred revenue |
589 | 507 | ||||||
Liabilities related to assets held for sale |
| 8 | ||||||
|
|
|
|
|||||
Total current liabilities |
998 | 897 | ||||||
Long-term debt |
4,669 | 4,669 | ||||||
Deferred and other income taxes |
616 | 618 | ||||||
Other long-term liabilities |
39 | 27 | ||||||
|
|
|
|
|||||
Total liabilities |
6,322 | 6,211 | ||||||
|
|
|
|
|||||
Commitments and contingencies |
||||||||
Noncontrolling interest in preferred stock of SCCII subject to a put option |
37 | 44 | ||||||
Class L common stock subject to a put option |
57 | 63 | ||||||
Class A common stock subject to a put option |
3 | 3 | ||||||
Stockholders equity: |
||||||||
Class L common stock, convertible, par value $.001 per share; cumulative 13.5% per annum, compounded quarterly; aggregate liquidation preference of $8,064 million and $8,952 million; 50,000,000 shares authorized, 29,062,421 and 29,107,221 shares issued |
| | ||||||
Class A common stock, par value $.001 per share; 550,000,000 shares authorized, 261,565,118 and 261,965,007 shares issued |
| | ||||||
Capital in excess of par value |
2,674 | 2,612 | ||||||
Treasury stock, 442,460 and 11,252 shares of Class L common stock; and 3,985,453 and 101,268 shares of Class A common stock |
(38 | ) | (1 | ) | ||||
Accumulated deficit |
(3,902 | ) | (3,921 | ) | ||||
Accumulated other comprehensive income (loss) |
(132 | ) | (190 | ) | ||||
|
|
|
|
|||||
Total SunGard stockholders equity (deficit) |
(1,398 | ) | (1,500 | ) | ||||
Non-controlling interest in preferred stock of SCCII |
1,490 | 1,637 | ||||||
|
|
|
|
|||||
Total equity |
92 | 137 | ||||||
|
|
|
|
|||||
Total Liabilities and Equity |
$ | 6,511 | $ | 6,458 | ||||
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In millions)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2015 | 2014 | 2015 | |||||||||||||
Revenue |
$ | 691 | $ | 702 | $ | 2,017 | $ | 2,060 | ||||||||
Costs and expenses: |
||||||||||||||||
Cost of sales and direct operating (excluding items described in Note 1) |
280 | 282 | 822 | 833 | ||||||||||||
Sales, marketing and administration |
167 | 163 | 493 | 476 | ||||||||||||
Product development and maintenance |
91 | 83 | 287 | 256 | ||||||||||||
Depreciation |
28 | 31 | 79 | 87 | ||||||||||||
Amortization of acquisition-related intangible assets |
30 | 23 | 114 | 65 | ||||||||||||
Trade name impairment charge |
| | 339 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total costs and expenses |
596 | 582 | 2,134 | 1,717 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating income (loss) |
95 | 120 | (117 | ) | 343 | |||||||||||
Other income (expense): |
||||||||||||||||
Interest income |
| 1 | 1 | 2 | ||||||||||||
Interest expense and amortization of deferred financing fees |
(73 | ) | (73 | ) | (220 | ) | (215 | ) | ||||||||
Loss on extinguishment of debt |
| | (61 | ) | | |||||||||||
Other income (expense) |
| | | 1 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other income (expense) |
(73 | ) | (72 | ) | (280 | ) | (212 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) from continuing operations before income taxes |
22 | 48 | (397 | ) | 131 | |||||||||||
Benefit from (provision for) income taxes |
(11 | ) | 17 | 88 | (7 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) from continuing operations |
11 | 65 | (309 | ) | 124 | |||||||||||
Income (loss) from discontinued operations, net of tax |
| 2 | (17 | ) | 4 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
11 | 67 | (326 | ) | 128 | |||||||||||
Income attributable to the non-controlling interest |
(42 | ) | (60 | ) | (132 | ) | (147 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) attributable to SunGard |
(31 | ) | 7 | (458 | ) | (19 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Other comprehensive income (loss): |
||||||||||||||||
Foreign currency translation, net |
(56 | ) | (13 | ) | (35 | ) | (52 | ) | ||||||||
Unrealized gain (loss) on derivative instruments, net of tax |
2 | (3 | ) | | (6 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other comprehensive income (loss), net of tax |
(54 | ) | (16 | ) | (35 | ) | (58 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Comprehensive income (loss) |
(43 | ) | 51 | (361 | ) | 70 | ||||||||||
Comprehensive (income) loss attributable to the non-controlling interest |
(42 | ) | (60 | ) | (132 | ) | (147 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Comprehensive income (loss) attributable to SunGard |
$ | (85 | ) | $ | (9 | ) | $ | (493 | ) | $ | (77 | ) | ||||
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Condensed Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
Nine Months Ended September 30, | ||||||||
2014 | 2015 | |||||||
Cash flow from operations: |
||||||||
Net income (loss) |
$ | (326 | ) | $ | 128 | |||
Income (loss) from discontinued operations |
(17 | ) | 4 | |||||
|
|
|
|
|||||
Income (loss) from continuing operations |
(309 | ) | 124 | |||||
Reconciliation of income (loss) from continuing operations to cash flow from (used in) operations: |
||||||||
Depreciation and amortization |
193 | 152 | ||||||
Trade name impairment charge |
339 | | ||||||
Deferred income tax provision (benefit) |
(105 | ) | (20 | ) | ||||
Stock compensation expense |
33 | 36 | ||||||
Amortization of deferred financing costs and debt discount |
14 | 12 | ||||||
Loss on extinguishment of debt |
61 | | ||||||
Other non-cash items |
| (1 | ) | |||||
Excess income tax benefit from equity compensation |
| (7 | ) | |||||
Changes in working capital: |
||||||||
Accounts receivable and other current assets |
123 | 124 | ||||||
Accounts payable and accrued expenses |
(80 | ) | (68 | ) | ||||
Accrued interest |
34 | 38 | ||||||
Accrued income taxes |
(7 | ) | 4 | |||||
Deferred revenue |
(74 | ) | (71 | ) | ||||
|
|
|
|
|||||
Cash flow from (used in) continuing operations |
222 | 323 | ||||||
Cash flow from (used in) discontinued operations |
34 | | ||||||
|
|
|
|
|||||
Cash flow from (used in) operations |
256 | 323 | ||||||
|
|
|
|
|||||
Investment activities: |
||||||||
Cash paid for acquired businesses, net of cash acquired |
(4 | ) | (25 | ) | ||||
Additions to property and equipment, and software |
(52 | ) | (41 | ) | ||||
Additions to capitalized software |
(46 | ) | (44 | ) | ||||
Other investing activities |
| 1 | ||||||
|
|
|
|
|||||
Cash provided by (used in) continuing operations |
(102 | ) | (109 | ) | ||||
Cash provided by (used in) discontinued operations |
7 | 1 | ||||||
|
|
|
|
|||||
Cash provided by (used in) investment activities |
(95 | ) | (108 | ) | ||||
|
|
|
|
|||||
Financing activities: |
||||||||
Cash received from borrowings, net of fees |
(7 | ) | | |||||
Cash used to repay debt |
(1,324 | ) | (1 | ) | ||||
Excess income tax benefit from equity compensation |
| 7 | ||||||
Cash used to purchase treasury stock |
(7 | ) | (56 | ) | ||||
Other financing activities |
(11 | ) | (4 | ) | ||||
|
|
|
|
|||||
Cash provided by (used in) continuing operations |
(1,349 | ) | (54 | ) | ||||
Cash provided by (used in) discontinued operations |
887 | | ||||||
|
|
|
|
|||||
Cash provided by (used in) financing activities |
(462 | ) | (54 | ) | ||||
|
|
|
|
|||||
Effect of exchange rate changes on cash |
(9 | ) | (13 | ) | ||||
|
|
|
|
|||||
Increase (decrease) in cash and cash equivalents |
(310 | ) | 148 | |||||
Beginning cash and cash equivalents, including cash of discontinued operations: 2014, $31; 2015, $0 |
706 | 447 | ||||||
|
|
|
|
|||||
Ending cash and cash equivalents, including cash held for sale: 2014, $0; 2015, $4 |
$ | 396 | $ | 595 | ||||
|
|
|
|
|||||
Supplemental information: |
||||||||
Interest paid |
$ | 195 | $ | 164 | ||||
|
|
|
|
|||||
Income taxes paid, net of refunds of $17 million and $21 million, respectively |
$ | 32 | $ | 23 | ||||
|
|
|
|
|||||
Non-cash financing activities: |
||||||||
Distribution of net assets of SpinCo (See Note 1) |
$ | 229 | $ | | ||||
|
|
|
|
|||||
Receipt of SpinCo Notes in connection with the AS Split-Off (See Note 1) |
$ | 425 | $ | | ||||
|
|
|
|
|||||
Exchange of SpinCo Notes for SDS Notes |
$ | 389 | $ | | ||||
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Condensed Consolidated Balance Sheets
(In millions except share and per-share amounts)
(Unaudited)
December 31, | September 30, | |||||||
2014 | 2015 | |||||||
Assets |
||||||||
Current: |
||||||||
Cash and cash equivalents |
$ | 447 | $ | 591 | ||||
Trade receivables, less allowance for doubtful accounts of $22 and $21 |
572 | 439 | ||||||
Earned but unbilled receivables |
114 | 108 | ||||||
Prepaid expenses and other current assets |
116 | 149 | ||||||
Assets held for sale |
| 24 | ||||||
|
|
|
|
|||||
Total current assets |
1,249 | 1,311 | ||||||
Property and equipment, less accumulated depreciation of $414 and $428 |
152 | 142 | ||||||
Software products, less accumulated amortization of $1,754 and $1,756 |
224 | 210 | ||||||
Customer base, less accumulated amortization of $531 and $553 |
360 | 321 | ||||||
Other assets, less accumulated amortization of $22 and $23 |
94 | 69 | ||||||
Trade name |
672 | 672 | ||||||
Goodwill |
3,760 | 3,733 | ||||||
|
|
|
|
|||||
Total Assets |
$ | 6,511 | $ | 6,458 | ||||
|
|
|
|
|||||
Liabilities and Equity |
||||||||
Current: |
||||||||
Accounts payable |
$ | 21 | $ | 7 | ||||
Accrued compensation and benefits |
227 | 183 | ||||||
Accrued interest expense |
30 | 68 | ||||||
Other accrued expenses |
127 | 118 | ||||||
Deferred revenue |
589 | 507 | ||||||
Liabilities related to assets held for sale |
| 8 | ||||||
|
|
|
|
|||||
Total current liabilities |
994 | 891 | ||||||
Long-term debt |
4,669 | 4,669 | ||||||
Deferred and other income taxes |
616 | 618 | ||||||
Other long-term liabilities |
32 | 26 | ||||||
|
|
|
|
|||||
Total liabilities |
6,311 | 6,204 | ||||||
|
|
|
|
|||||
Commitments and contingencies |
||||||||
Preferred stock subject to a put option |
31 | 30 | ||||||
Stockholders equity: |
||||||||
Preferred stock, par value $.001 per share; cumulative 11.5% per annum, compounded quarterly; aggregate liquidation preference of $1,498 million and $1,639 million; 14,999,000 shares authorized, 10,060,069 and 10,064,615 shares issued |
| | ||||||
Common stock, par value $.001 per share; 1,000 shares authorized, 100 shares issued and outstanding |
| | ||||||
Capital in excess of par value |
3,519 | 3,485 | ||||||
Treasury stock, 2,516,374 and 2,395,453 preferred shares |
(280 | ) | (261 | ) | ||||
Accumulated deficit |
(2,939 | ) | (2,811 | ) | ||||
Accumulated other comprehensive income (loss) |
(132 | ) | (190 | ) | ||||
|
|
|
|
|||||
Total stockholders equity |
168 | 223 | ||||||
Non-controlling interest |
1 | 1 | ||||||
|
|
|
|
|||||
Total Equity |
169 | 224 | ||||||
|
|
|
|
|||||
Total Liabilities and Equity |
$ | 6,511 | $ | 6,458 | ||||
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In millions)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2015 | 2014 | 2015 | |||||||||||||
Revenue |
$ | 691 | $ | 702 | $ | 2,017 | $ | 2,060 | ||||||||
Costs and expenses: |
||||||||||||||||
Cost of sales and direct operating (excluding items described in Note 1) |
280 | 282 | 822 | 833 | ||||||||||||
Sales, marketing and administration |
167 | 163 | 493 | 476 | ||||||||||||
Product development and maintenance |
91 | 83 | 287 | 256 | ||||||||||||
Depreciation |
28 | 31 | 79 | 87 | ||||||||||||
Amortization of acquisition-related intangible assets |
30 | 23 | 114 | 65 | ||||||||||||
Trade name impairment charge |
| | 339 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total costs and expenses |
596 | 582 | 2,134 | 1,717 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating income (loss) |
95 | 120 | (117 | ) | 343 | |||||||||||
Other income (expense): |
||||||||||||||||
Interest income |
| 1 | 1 | 2 | ||||||||||||
Interest expense and amortization of deferred financing fees |
(73 | ) | (73 | ) | (220 | ) | (215 | ) | ||||||||
Loss on extinguishment of debt |
| | (61 | ) | | |||||||||||
Other income (expense) |
| | | 1 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other income (expense) |
(73 | ) | (72 | ) | (280 | ) | (212 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) from continuing operations before income taxes |
22 | 48 | (397 | ) | 131 | |||||||||||
Benefit from (provision for) income taxes |
(11 | ) | 17 | 88 | (7 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) from continuing operations |
11 | 65 | (309 | ) | 124 | |||||||||||
Income (loss) from discontinued operations, net of tax |
| 2 | (17 | ) | 4 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
11 | 67 | (326 | ) | 128 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other comprehensive income (loss): |
||||||||||||||||
Foreign currency translation, net |
(56 | ) | (13 | ) | (35 | ) | (52 | ) | ||||||||
Unrealized gain (loss) on derivative instruments, net of tax |
2 | (3 | ) | | (6 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other comprehensive income (loss) |
(54 | ) | (16 | ) | (35 | ) | (58 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Comprehensive income (loss) |
$ | (43 | ) | $ | 51 | $ | (361 | ) | $ | 70 | ||||||
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
Condensed Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
Nine Months Ended September 30, | ||||||||
2014 | 2015 | |||||||
Cash flow from operations: |
||||||||
Net income (loss) |
$ | (326 | ) | $ | 128 | |||
Income (loss) from discontinued operations |
(17 | ) | 4 | |||||
|
|
|
|
|||||
Income (loss) from continuing operations |
(309 | ) | 124 | |||||
Reconciliation of income (loss) from continuing operations to cash flow from (used in) operations: |
||||||||
Depreciation and amortization |
193 | 152 | ||||||
Trade name impairment charge |
339 | | ||||||
Deferred income tax provision (benefit) |
(105 | ) | (20 | ) | ||||
Stock compensation expense |
33 | 36 | ||||||
Amortization of deferred financing costs and debt discount |
14 | 12 | ||||||
Loss on extinguishment of debt |
61 | | ||||||
Other non-cash items |
| (1 | ) | |||||
Excess income tax benefit from equity compensation |
| (7 | ) | |||||
Changes in working capital: |
||||||||
Accounts receivable and other current assets |
123 | 124 | ||||||
Accounts payable and accrued expenses |
(80 | ) | (68 | ) | ||||
Accrued interest |
34 | 38 | ||||||
Accrued income taxes |
(7 | ) | 4 | |||||
Deferred revenue |
(74 | ) | (71 | ) | ||||
|
|
|
|
|||||
Cash flow from (used in) continuing operations |
222 | 323 | ||||||
Cash flow from (used in) discontinued operations |
34 | | ||||||
|
|
|
|
|||||
Cash flow from (used in) operations |
256 | 323 | ||||||
|
|
|
|
|||||
Investment activities: |
||||||||
Cash paid for acquired businesses, net of cash acquired |
(4 | ) | (25 | ) | ||||
Additions to property and equipment, and software |
(52 | ) | (41 | ) | ||||
Additions to capitalized software |
(46 | ) | (44 | ) | ||||
Other investing activities |
| 1 | ||||||
|
|
|
|
|||||
Cash provided by (used in) continuing operations |
(102 | ) | (109 | ) | ||||
Cash provided by (used in) discontinued operations |
7 | 1 | ||||||
|
|
|
|
|||||
Cash provided by (used in) investment activities |
(95 | ) | (108 | ) | ||||
|
|
|
|
|||||
Financing activities: |
||||||||
Cash received from borrowings, net of fees |
(7 | ) | | |||||
Cash used to repay debt |
(1,324 | ) | (1 | ) | ||||
Excess income tax benefit from equity compensation |
| 7 | ||||||
Cash used to purchase treasury stock |
(3 | ) | (20 | ) | ||||
Other financing activities |
(15 | ) | (40 | ) | ||||
|
|
|
|
|||||
Cash provided by (used in) continuing operations |
(1,349 | ) | (54 | ) | ||||
Cash provided by (used in) discontinued operations |
887 | | ||||||
|
|
|
|
|||||
Cash provided by (used in) financing activities |
(462 | ) | (54 | ) | ||||
|
|
|
|
|||||
Effect of exchange rate changes on cash |
(9 | ) | (13 | ) | ||||
|
|
|
|
|||||
Increase (decrease) in cash and cash equivalents |
(310 | ) | 148 | |||||
Beginning cash and cash equivalents, including cash of discontinued operations: 2014, $31; 2015, $0 |
706 | 447 | ||||||
|
|
|
|
|||||
Ending cash and cash equivalents, including cash held for sale: 2014, $0; 2015, $4 |
$ | 396 | $ | 595 | ||||
|
|
|
|
|||||
Supplemental information: |
||||||||
Interest paid |
$ | 195 | $ | 164 | ||||
|
|
|
|
|||||
Income taxes paid, net of refunds of $17 million and $21 million, respectively |
$ | 32 | $ | 23 | ||||
|
|
|
|
|||||
Non-cash financing activities: |
||||||||
Distribution of net assets of SpinCo (See Note 1) |
$ | 229 | $ | | ||||
|
|
|
|
|||||
Receipt of SpinCo Notes in connection with the AS Split-Off (See Note 1) |
$ | 425 | $ | | ||||
|
|
|
|
|||||
Exchange of SpinCo Notes for SDS Notes |
$ | 389 | $ | | ||||
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
Condensed Consolidated Balance Sheets
(In millions except share and per-share amounts)
(Unaudited)
December 31, | September 30, | |||||||
2014 | 2015 | |||||||
Assets |
||||||||
Current: |
||||||||
Cash and cash equivalents |
$ | 447 | $ | 591 | ||||
Trade receivables, less allowance for doubtful accounts of $22 and $21 |
572 | 439 | ||||||
Earned but unbilled receivables |
114 | 108 | ||||||
Prepaid expenses and other current assets |
112 | 145 | ||||||
Assets held for sale |
| 24 | ||||||
|
|
|
|
|||||
Total current assets |
1,245 | 1,307 | ||||||
Property and equipment, less accumulated depreciation of $414 and $428 |
152 | 142 | ||||||
Software products, less accumulated amortization of $1,754 and $1,756 |
224 | 210 | ||||||
Customer base, less accumulated amortization of $531 and $553 |
360 | 321 | ||||||
Other assets, less accumulated amortization of $22 and $23 |
94 | 69 | ||||||
Trade name |
672 | 672 | ||||||
Goodwill |
3,760 | 3,733 | ||||||
|
|
|
|
|||||
Total Assets |
$ | 6,507 | $ | 6,454 | ||||
|
|
|
|
|||||
Liabilities and Equity |
||||||||
Current: |
||||||||
Accounts payable |
$ | 21 | $ | 7 | ||||
Accrued compensation and benefits |
227 | 183 | ||||||
Accrued interest expense |
30 | 68 | ||||||
Other accrued expenses |
127 | 123 | ||||||
Deferred revenue |
589 | 507 | ||||||
Liabilities related to assets held for sale |
| 8 | ||||||
|
|
|
|
|||||
Total current liabilities |
994 | 896 | ||||||
Long-term debt |
4,669 | 4,669 | ||||||
Deferred and other income taxes |
608 | 609 | ||||||
Other long-term liabilities |
31 | 26 | ||||||
|
|
|
|
|||||
Total liabilities |
6,302 | 6,200 | ||||||
|
|
|
|
|||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Common stock, par value $.01 per share; 100 shares authorized, issued and outstanding |
| | ||||||
Capital in excess of par value |
3,380 | 3,359 | ||||||
Accumulated deficit |
(3,044 | ) | (2,916 | ) | ||||
Accumulated other comprehensive income (loss) |
(132 | ) | (190 | ) | ||||
|
|
|
|
|||||
Total stockholders equity |
204 | 253 | ||||||
Non-controlling interest |
1 | 1 | ||||||
|
|
|
|
|||||
Total Equity |
205 | 254 | ||||||
|
|
|
|
|||||
Total Liabilities and Equity |
$ | 6,507 | $ | 6,454 | ||||
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In millions)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2015 | 2014 | 2015 | |||||||||||||
Revenue |
$ | 691 | $ | 702 | $ | 2,017 | $ | 2,060 | ||||||||
Costs and expenses: |
||||||||||||||||
Cost of sales and direct operating (excluding items described in Note 1) |
280 | 282 | 822 | 833 | ||||||||||||
Sales, marketing and administration |
167 | 163 | 493 | 476 | ||||||||||||
Product development and maintenance |
91 | 83 | 287 | 256 | ||||||||||||
Depreciation |
28 | 31 | 79 | 87 | ||||||||||||
Amortization of acquisition-related intangible assets |
30 | 23 | 114 | 65 | ||||||||||||
Trade name impairment charge |
| | 339 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total costs and expenses |
596 | 582 | 2,134 | 1,717 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating income (loss) |
95 | 120 | (117 | ) | 343 | |||||||||||
Other income (expense): |
||||||||||||||||
Interest income |
| 1 | 1 | 2 | ||||||||||||
Interest expense and amortization of deferred financing fees |
(73 | ) | (73 | ) | (220 | ) | (215 | ) | ||||||||
Loss on extinguishment of debt |
| | (61 | ) | | |||||||||||
Other income (expense) |
| | | 1 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other income (expense) |
(73 | ) | (72 | ) | (280 | ) | (212 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) from continuing operations before income taxes |
22 | 48 | (397 | ) | 131 | |||||||||||
Benefit from (provision for) income taxes |
(11 | ) | 17 | 88 | (7 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) from continuing operations |
11 | 65 | (309 | ) | 124 | |||||||||||
Income (loss) from discontinued operations, net of tax |
| 2 | (17 | ) | 4 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
11 | 67 | (326 | ) | 128 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other comprehensive income (loss): |
||||||||||||||||
Foreign currency translation, net |
(56 | ) | (13 | ) | (35 | ) | (52 | ) | ||||||||
Unrealized gain (loss) on derivative instruments, net of tax |
2 | (3 | ) | | (6 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other comprehensive income (loss) |
(54 | ) | (16 | ) | (35 | ) | (58 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Comprehensive income (loss) |
$ | (43 | ) | $ | 51 | $ | (361 | ) | $ | 70 | ||||||
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
9
Condensed Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
Nine Months Ended September 30, | ||||||||
2014 | 2015 | |||||||
Cash flow from operations: |
||||||||
Net income (loss) |
$ | (326 | ) | $ | 128 | |||
Income (loss) from discontinued operations |
(17 | ) | 4 | |||||
|
|
|
|
|||||
Income (loss) from continuing operations |
(309 | ) | 124 | |||||
Reconciliation of income (loss) from continuing operations to cash flow from (used in) operations: |
||||||||
Depreciation and amortization |
193 | 152 | ||||||
Trade name impairment charge |
339 | | ||||||
Deferred income tax provision (benefit) |
(105 | ) | (20 | ) | ||||
Stock compensation expense |
33 | 36 | ||||||
Amortization of deferred financing costs and debt discount |
14 | 12 | ||||||
Loss on extinguishment of debt |
61 | | ||||||
Other non-cash items |
| (1 | ) | |||||
Excess income tax benefit from equity compensation |
| (7 | ) | |||||
Changes in working capital: |
||||||||
Accounts receivable and other current assets |
123 | 124 | ||||||
Accounts payable and accrued expenses |
(80 | ) | (68 | ) | ||||
Accrued interest |
34 | 38 | ||||||
Accrued income taxes |
(7 | ) | 4 | |||||
Deferred revenue |
(74 | ) | (71 | ) | ||||
|
|
|
|
|||||
Cash flow from (used in) continuing operations |
222 | 323 | ||||||
Cash flow from (used in) discontinued operations |
34 | | ||||||
|
|
|
|
|||||
Cash flow from (used in) operations |
256 | 323 | ||||||
|
|
|
|
|||||
Investment activities: |
||||||||
Cash paid for acquired businesses, net of cash acquired |
(4 | ) | (25 | ) | ||||
Additions to property and equipment, and software |
(52 | ) | (41 | ) | ||||
Additions to capitalized software |
(46 | ) | (44 | ) | ||||
Other investing activities |
| 1 | ||||||
|
|
|
|
|||||
Cash provided by (used in) continuing operations |
(102 | ) | (109 | ) | ||||
Cash provided by (used in) discontinued operations |
7 | 1 | ||||||
|
|
|
|
|||||
Cash provided by (used in) investment activities |
(95 | ) | (108 | ) | ||||
|
|
|
|
|||||
Financing activities: |
||||||||
Cash received from borrowings, net of fees |
(7 | ) | | |||||
Cash used to repay debt |
(1,324 | ) | (1 | ) | ||||
Excess income tax benefit from equity compensation |
| 7 | ||||||
Other financing activities |
(18 | ) | (60 | ) | ||||
|
|
|
|
|||||
Cash provided by (used in) continuing operations |
(1,349 | ) | (54 | ) | ||||
Cash provided by (used in) discontinued operations |
887 | | ||||||
|
|
|
|
|||||
Cash provided by (used in) financing activities |
(462 | ) | (54 | ) | ||||
|
|
|
|
|||||
Effect of exchange rate changes on cash |
(9 | ) | (13 | ) | ||||
|
|
|
|
|||||
Increase (decrease) in cash and cash equivalents |
(310 | ) | 148 | |||||
Beginning cash and cash equivalents, including cash of discontinued operations: 2014, $31; 2015, $0 |
706 | 447 | ||||||
|
|
|
|
|||||
Ending cash and cash equivalents, including cash held for sale: 2014, $0; 2015, $4 |
$ | 396 | $ | 595 | ||||
|
|
|
|
|||||
Supplemental information: |
||||||||
Interest paid |
$ | 195 | $ | 164 | ||||
|
|
|
|
|||||
Income taxes paid, net of refunds of $17 million and $21 million, respectively |
$ | 32 | $ | 23 | ||||
|
|
|
|
|||||
Non-cash Financing activities: |
||||||||
Distribution of net assets of SpinCo (See Note 1) |
$ | 233 | $ | | ||||
|
|
|
|
|||||
Receipt of SpinCo Notes in connection with the AS Split-Off (See Note 1) |
$ | 425 | $ | | ||||
|
|
|
|
|||||
Exchange of SpinCo Notes for SDS Notes |
$ | 389 | $ | | ||||
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
10
SUNGARD CAPITAL CORP. II
SUNGARD DATA SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation:
SunGard (the Company), which was formerly named SunGard Capital Corp., is one of the worlds leading software and technology services companies and has two reportable segments: Financial Systems (FS) and Public Sector & Education (PS&E). The condensed consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated.
SunGard Data Systems, a wholly-owned subsidiary of SunGard, (SDS) was acquired on August 11, 2005 in a leveraged buy-out (the LBO) 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).
SDS is a wholly-owned, direct 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. All four of these companies were formed for the purpose of facilitating the LBO and are collectively referred to as the Holding Companies. SunGard, SCCII and SDS are separate reporting companies and, together with their direct and indirect subsidiaries, are collectively referred to as the Company. The Holding Companies have no other operations beyond those of their ownership of SDS.
On August 12, 2015, the Company and SCCII entered into an Agreement and Plan of Merger (Merger Agreement) with Fidelity National Information Services, Inc., a Georgia corporation (FIS) and other parties named therein. Under the terms of the Merger Agreement, FIS will acquire 100 percent of the equity of SunGard as well as assume $4.7 billion of debt representing an unaffected enterprise value of $9.1 billion. At closing, SunGard shareholders will receive an aggregate of 44,663,899 shares of common stock of FIS and $2,288,700,000 in cash, subject to certain adjustments and less the number of FIS shares representing unvested RSUs of SunGard that will be converted into RSUs of FIS at the closing. In addition, FIS will also assume, repay or refinance all of SunGards outstanding debt, totaling approximately $4.7 billion. The transaction is subject to certain customary closing conditions, including the approval by the stockholders of SunGard.
On March 31, 2014, the Company completed the split-off of its Availability Services (AS) business to its existing preferred stockholders, including its private equity owners, on a tax-free and pro-rata basis. As part of that transaction, the assets and liabilities of the AS business were contributed to a new subsidiary, and then SDS transferred all of its ownership interests in that subsidiary to Sungard Availability Services Capital, Inc. (SpinCo) in exchange for common stock of SpinCo, approximately $425 million of SpinCo senior notes (SpinCo Notes), and $1,005 million of net cash proceeds from the issuance of an AS term loan facility (SpinCo Term Loan). Immediately after these transactions, SDS distributed the common stock of SpinCo through SDS ownership chain ultimately to SCCII, and then all stockholders of preferred stock of SCCII exchanged a portion of their shares of preferred stock for all of the shares of common stock of SpinCo on a pro-rata basis (together, with the transactions described above, the AS Split-Off).
The AS business, which was split-off on March 31, 2014, and two small FS businesses, which were sold on January 31, 2014, have been included in our financial results as discontinued operations for all periods presented.
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, 2014. 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, 2015.
The Condensed Consolidated Statement of Comprehensive Income (Loss) for the three and nine months ended September 30, 2014 has been revised to present stock compensation expense and developer time spent on customer billable professional services projects in the correct functional expense categories. Refer to Note 2 for additional details.
All of the previously-issued interim financial statements included in Quarterly Reports on Form 10-Q for 2014 included an error in the Condensed Consolidated Statements of Comprehensive Income (Loss) related to the removal of the cumulative foreign currency translation loss associated with the AS businesses that were split-off on March 31, 2014. The removal of the cumulative foreign
11
currency translation loss was reflected in both the Condensed Consolidated Statements of Comprehensive Income (Loss) and the rollforwards of stockholders equity included in the notes to the condensed consolidated financial statements in each of the Quarterly Reports. However, the inclusion of this item in the 2014 Condensed Consolidated Statements of Comprehensive Income (Loss) was not appropriate since it relates to the distribution of the AS businesses to the Companys owners and should have been excluded from the 2014 Other Comprehensive Income according to GAAP. Management does not believe the error is material to any of the previously-issued financial statements. The table below shows the impact of the correction of this error for the three and nine months ended September 30, 2014. The following table presents the amounts as originally reported and as revised for each of SunGard, SCCII and SDS (in millions):
Three Months Ended September 30, 2014 | Nine Months Ended September 30, 2014 | |||||||||||||||
As Reported | As Revised | As Reported | As Revised | |||||||||||||
Other comprehensive income (loss) |
$ | (47 | ) | $ | (54 | ) | $ | (110 | ) | $ | (35 | ) | ||||
Comprehensive income (loss) |
(36 | ) | (43 | ) | (436 | ) | (361 | ) | ||||||||
Comprehensive income (loss) attributable to SunGard |
(78 | ) | (85 | ) | (568 | ) | (493 | ) |
Cost of Sales and Direct Operating
Cost of sales and direct operating represents the cost of providing the Companys software and services offerings to customers and excludes depreciation, amortization and the cost of maintenance.
Recent Accounting Pronouncements
Recently Adopted
In April 2014, the Financial Accounting Standards Board (FASB) issued Auditing Standards Update (ASU) 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity that changes the criteria for reporting a discontinued operation. According to the new guidance, only disposals of a component that represents a strategic shift that has (or will have) a major effect on an entitys operations and financial results is a discontinued operation. The new guidance also requires expanded disclosures about discontinued operations and disposals of a significant part of an entity that does not qualify for discontinued operations reporting. ASU 2014-08 was effective beginning January 1, 2015, but only for disposals (or classifications as held for sale) that have not been reported in previously-issued financial statements. ASU 2014-08 will affect how the Company identifies and presents discontinued operations in the consolidated financial statements.
Recently Issued
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which outlines a comprehensive revenue recognition model and supersedes most current revenue recognition guidance. This new guidance establishes a five step process that companies must use in order to recognize revenue properly. Those five steps are: (i) identifying contract(s) with a customer, (ii) identifying the performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the performance obligations in the contract, and (v) recognizing revenue when (or as) the entity satisfies a performance obligation. The new ASU will affect any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. ASU 2014-09 was to be effective for the Company starting in the first quarter of fiscal 2017. However, in July 2015, the FASB voted to defer the effective date of the new revenue standard by one year, and to permit entities to adopt one year earlier if they choose (i.e., the original effective date). ASU 2014-09 allows for two methods of adoption: (a) full retrospective adoption, meaning the standard is applied to all periods presented, or (b) modified retrospective adoption, meaning the cumulative effect of applying ASU 2014-09 is recognized as an adjustment to the opening retained earnings balance. The Company is in the process of determining the date of adoption, the adoption method as well as the effects the adoption of ASU 2014-09 will have on its consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, in conjunction with their initiative to reduce complexity in accounting standards. This new guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with presentation of a debt discount. The new standard is limited to the presentation of debt issuance costs and will not affect the recognition and measurement of debt issuance costs. In August 2015, the FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. ASU 2015-15 clarifies ASU 2015-03 by allowing the presentation of debt issuance costs related to a line-of-credit to be recorded as an asset instead of as a direct deduction of the carrying amount of the debt liability as required by ASU 2015-03, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-03 will be effective for the Company for the fiscal year beginning after December 15, 2015 and within those fiscal years with early adoption permitted. The adoption of ASU 2015-03 is not expected to have a material impact on the Companys consolidated financial statements.
12
In April 2015, the FASB issued ASU 2015-05, Customers Accounting for Fees Paid in a Cloud Computing Arrangement. Under the new standard, customers will apply the same criteria as vendors to determine whether a cloud computing arrangement contains a software license or is solely a service contract. For public companies, the new standard is effective for annual periods, including interim periods, beginning after December 15, 2015. The adoption of ASU 2015-05 is not expected to have a material impact on the Companys consolidated financial statements.
In September 2015, the FASB issued ASU-2015-16 Business Combination: Simplifying the Accounting for Measurement-Period Adjustments. The new guidance eliminates the requirement to make retrospective adjustments and revise comparative information from prior periods when new information is obtained about facts and circumstances that existed as of the acquisition date. Instead, the acquiring entity is required to record adjustments in the reporting period they are determined. For public companies, the new standard is effective for annual periods, including interim periods, beginning after December 15, 2015. The adoption of ASU 2015-16 is not expected to have a material impact on the Companys consolidated financial statements.
2. Expense Classification:
Effective December 31, 2014, within the Condensed Consolidated Statements of Comprehensive Income (Loss), the Company revised its presentation of stock compensation expense. Formerly, the Company presented this expense entirely within sales, marketing and administration expense. The Companys revised presentation allocates these costs to the appropriate functional areas. Further, the Company has revised its presentation of the costs for developer time spent on customer billable professional services projects. Formerly, the Company presented this expense within product development and maintenance expense. The Companys revised presentation records these amounts to cost of sales and direct operating. There was no impact on total reported costs and expenses for any period as a result of the changes. Management does not believe these revisions are material to the previously issued financial statements.
The impact of these items within the functional areas for the three and nine months ended September 30, 2014 is as follows (in millions):
Three Months Ended September 30, 2014 | ||||||||||||||||
As reported | Revised presentation of stock compensation expense |
Revised presentation of developer time spent on professional services projects |
As presented in the statement of comprehensive income (loss) |
|||||||||||||
Cost of sales and direct operating (See Note 1) |
$ | 271 | $ | 3 | $ | 6 | $ | 280 | ||||||||
Sales, marketing and administration |
171 | (4 | ) | | 167 | |||||||||||
Product development and maintenance |
96 | 1 | (6 | ) | 91 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total functional expenses |
$ | 538 | $ | | $ | | $ | 538 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Nine Months Ended September 30, 2014 | ||||||||||||||||
As reported | Revised presentation of stock compensation expense |
Revised presentation of developer time spent on professional services projects |
As presented in the statement of comprehensive income (loss) |
|||||||||||||
Cost of sales and direct operating (See Note 1) |
$ | 799 | $ | 6 | $ | 17 | $ | 822 | ||||||||
Sales, marketing and administration |
503 | (10 | ) | | 493 | |||||||||||
Product development and maintenance |
300 | 4 | (17 | ) | 287 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total functional expenses |
$ | 1,602 | $ | | $ | | $ | 1,602 | ||||||||
|
|
|
|
|
|
|
|
13
3. Acquisitions and Discontinued Operations:
Acquisitions
During March 2015, the Company completed one acquisition in its FS segment, and in June 2015, the Company completed one acquisition in its PS&E segment. Total combined cash paid, net of cash acquired was $25 million. Below is a summary of the combined purchase price allocation (in millions):
Nine months ended September 30, |
||||
2015 | ||||
Acquired businesses: |
||||
Software products |
$ | 10 | ||
Customer base |
6 | |||
Goodwill |
16 | |||
Other intangible assets |
2 | |||
Deferred income taxes |
(6 | ) | ||
Purchase price obligations and debt assumed |
(1 | ) | ||
Net current assets (liabilities) assumed |
(2 | ) | ||
|
|
|||
Cash paid for acquired business |
$ | 25 | ||
|
|
The acquisitions discussed above for March and June of 2015 were not material to the Companys operations, financial position, or cash flows.
Discontinued Operations
On January 31, 2014, the Company completed the sale of two small businesses within the FS segment in exchange for 27 million paid at closing, 9 million to be paid no later than March 2016 (deferred purchase price) which is included in trade receivables and 2 million to be paid upon the successful assignment of certain customer contracts. The deferred purchase price is unconditional and is secured by a bank guarantee. During the first quarter of 2015, the Company successfully assigned certain of these customer contracts and recognized a $2 million gain in discontinued operations. Also included in discontinued operations are the results of our former AS business as a result of the AS Split-Off (see Note 1), which was completed on March 31, 2014. These businesses have been included in our financial results as discontinued operations for all periods presented.
During the third quarter of 2015, a $2 million benefit for income taxes was included in discontinued operations.
The results for discontinued operations for the three and nine months ended September 30, 2014 and 2015 were as follows (in millions):
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2014 | 2015 | 2014 | 2015 | |||||||||||||
Revenue |
$ | | $ | | $ | 338 | $ | | ||||||||
|
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|
|
|
|
|
|
|||||||||
Operating income (loss) |
| | (25 | ) | | |||||||||||
Interest expense |
| | (18 | ) | | |||||||||||
Gain on sale of business |
| | 22 | 2 | ||||||||||||
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|
|
|
|
|
|||||||||
Income (loss) before income taxes |
| | (21 | ) | 2 | |||||||||||
Benefit from income taxes |
| 2 | 4 | 2 | ||||||||||||
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|
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|
|||||||||
Income (loss) from discontinued operations |
$ | | $ | 2 | $ | (17 | ) | $ | 4 | |||||||
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Assets and Liabilities Classified as Held for Sale
On October 1, 2015 the Company completed the sale of a small business within the FS segment in exchange for $12 million plus cash assumed, subject to a final working capital adjustment. During the three months ended September 30, 2015, the Company recognized a combined $3 million impairment of its customer base and software assets.
14
Assets held for sale and liabilities related to assets held for sale at September 30, 2015 include the following (in millions):
September 30, 2015 | ||||
Cash |
$ | 4 | ||
Trade receivables, net |
9 | |||
Property and equipment, net |
1 | |||
Software products, net |
4 | |||
Goodwill |
6 | |||
|
|
|||
Assets classified as held for sale |
$ | 24 | ||
|
|
|||
Accrued compensation and benefits |
$ | 2 | ||
Other accrued expenses |
1 | |||
Deferred revenue |
5 | |||
|
|
|||
Liabilities related to assets held for sale |
$ | 8 | ||
|
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4. Intangible Assets and Goodwill:
Trade Name
The trade name intangible asset represents the fair value of the SunGard trade name and is an indefinite lived asset not subject to amortization. As of July 1, 2015, the Company performed its annual impairment test and determined that the fair value of the trade name exceeded its carrying value resulting in no impairment of the trade name.
The Company developed certain assumptions and estimates related to the calculation of the fair value of its trade name. The fair value assumptions and estimates primarily included projections of future revenues and growth rates, a royalty rate, a tax rate, and a discount rate. The assumptions about future revenues and growth rates are based on managements assessment of a number of factors, including the Companys recent performance against budget, performance in the markets that the company serves, as well as industry and general economic data from third party sources. In addition to future revenue projections, the assumed royalty rate and discount rate are critical assumptions considered in the trade name impairment test. Furthermore, to the extent that businesses are divested in the future, or projected revenues decline, the revenue supporting the trade name will decline which may result in impairment charges.
Goodwill
GAAP requires the Company to perform a goodwill impairment test annually and more frequently when negative conditions or triggering events arise. The Company completes its annual goodwill impairment test as of July 1 for each of its 10 reporting units. The Company has the option of performing an assessment of certain qualitative factors to determine if it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying value (referred to as a step zero test) or proceeding directly to a quantitative analysis (referred to as a step one test).
As a result of a 2015 re-organization impacting the makeup of its reporting units, the timing of the last step-one tests, and the evidence of an external valuation of SunGard, management chose to perform a step-one test for each SunGard reporting unit.
In these step-one tests, 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 assigning an EBITDA multiple to each reporting unit (the market approach), based on an overall SunGard EBITDA multiple implied as a part of the planned acquisition of SunGard by FIS. Multiples were assigned to each reporting unit based on projected revenue and EBITDA growth, EBITDA margins, CAPEX, and other qualitative factors. The valuation for each reporting unit was based on three years of EBITDA (2014, 2015, and 2016) multiplied by the selected multiple and averaged over the three year period. 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. For each reporting unit, the calculated fair value exceeded carrying value. Moreover, the reporting unit multiples as well as the overall valuation were consistent with the Companys value implied as part of the planned acquisition of SunGard by FIS. Therefore, management determined that it was not necessary to perform any step-two tests.
Estimating the fair value of a reporting unit requires various assumptions including projections of future earnings, as well as the presumed multiple for each reporting unit. The assumptions about future earnings 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. Changes to the underlying businesses could affect the future earnings, which in turn could affect the fair value of the reporting unit.
15
The following table summarizes the changes in goodwill, by segment, for the nine months ended September 30, 2015 (in millions):
Cost | Accumulated impairment |
|||||||||||||||||||
FS | PS&E | Subtotal | PS&E | Total | ||||||||||||||||
Balance at December 31, 2014 |
$ | 3,433 | $ | 544 | $ | 3,977 | $ | (217 | ) | $ | 3,760 | |||||||||
2015 acquisitions |
1 | 15 | 16 | | 16 | |||||||||||||||
Effect of foreign currency translation |
(36 | ) | | (36 | ) | | (36 | ) | ||||||||||||
Transfer to assets held for sale |
(6 | ) | | (6 | ) | | (6 | ) | ||||||||||||
Other |
(1 | ) | | (1 | ) | | (1 | ) | ||||||||||||
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|
|
|
|
|
|
|
|
|||||||||||
Balance at September 30, 2015 |
$ | 3,391 | $ | 559 | $ | 3,950 | $ | (217 | ) | $ | 3,733 | |||||||||
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A portion of the Companys goodwill is denominated in currencies other than the U.S. Dollar.
Intangible Asset amortization
The total expected amortization of acquisition-related intangible assets for years ended December 31 is as follows (in millions):
2015 |
$ | 85 | ||
2016 |
69 | |||
2017 |
61 | |||
2018 |
56 | |||
2019 |
48 |
5. Accumulated Other Comprehensive Income:
The following table provides a rollforward of the components of accumulated other comprehensive loss, net of tax, for the nine months ended September 30, 2015 (in millions):
Gains and Losses on Cash Flow Hedges |
Currency Translation |
Other | Accumulated Other Comprehensive Income (Loss) |
|||||||||||||
Balance at December 31, 2014 |
$ | (1 | ) | $ | (125 | ) | $ | (6 | ) | $ | (132 | ) | ||||
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|
|
|
|
|
|||||||||
Other comprehensive loss before reclassifications |
(18 | ) | (52 | ) | | (70 | ) | |||||||||
Amounts reclassified from accumulated other comprehensive income, net of tax |
12 | | | 12 | ||||||||||||
|
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|
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|
|
|
|||||||||
Net current-period other comprehensive loss |
(6 | ) | (52 | ) | | (58 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at September 30, 2015 |
$ | (7 | ) | $ | (177 | ) | $ | (6 | ) | $ | (190 | ) | ||||
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16
The following table summarizes the unrealized gains (losses) on derivative instruments, including the impact of components reclassified into net income from accumulated other comprehensive income, for the three and nine months ended September 30, 2014 and 2015 (in millions):
Three months ended September 30, |
Nine months ended September 30, |
Affected Line Item in the Statement of Comprehensive Income (Loss) for Components Reclassified from OCI | ||||||||||||||||
Other Comprehensive Income (Loss) Components |
2014 | 2015 | 2014 | 2015 | ||||||||||||||
Unrealized gain (loss) on derivative instruments |
$ | | $ | (8 | ) | $ | (6 | ) | $ | (18 | ) | |||||||
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|
|
|
|
|
|
|||||||||||
Loss (gain) on derivatives reclassified into income: |
||||||||||||||||||
Interest rate contracts |
3 | 2 | 6 | 6 | Interest expense and amortization of deferred financing fees | |||||||||||||
Forward currency hedges |
| | | 1 | Cost of sales and direct operating | |||||||||||||
|
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|
|
|
|
|
|
|||||||||||
Total reclassified into income |
3 | 2 | 6 | 7 | ||||||||||||||
Income tax benefit (expense) |
(1 | ) | 3 | | 5 | |||||||||||||
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|
|
|
|
|
|
|||||||||||
Amounts reclassified from accumulated other comprehensive income, net of tax |
2 | 5 | 6 | 12 | ||||||||||||||
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|
|
|
|
|
|
|||||||||||
Unrealized gain (loss) on derivative instruments, net of tax |
$ | 2 | $ | (3 | ) | $ | | $ | (6 | ) | ||||||||
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|
|
|
|
|
|
6. Debt and Derivatives:
On September 30, 2015, SDS had $593 million of available borrowing capacity and $7 million of outstanding letters of credit under its $600 million revolving credit facility. In addition, there were $4 million of letters of credit outstanding at September 30, 2015 that did not impact availability under the revolving credit facilities.
The ability to make dividend payments to SunGards equity holders is governed by the covenants in its debt agreements. Without obtaining an amendment to those documents, SunGards covenants currently limit such a dividend to a total of $200 million.
Debt consisted of the following (in millions):
December 31, 2014 |
September 30, 2015 |
|||||||
Senior Secured Credit Facilities: |
||||||||
Secured revolving credit facility due March 8, 2018 |
$ | | $ | | ||||
Tranche C due February 28, 2017, effective interest rate of 4.44% and 4.44% |
400 | 400 | ||||||
Tranche E due March 8, 2020, effective interest rate of 4.31% and 4.31% |
1,918 | 1,918 | ||||||
|
|
|
|
|||||
Total Senior Secured Credit Facilities |
2,318 | 2,318 | ||||||
Senior Notes due 2018 at 7.375% |
511 | 511 | ||||||
Senior Notes due 2020 at 7.625% |
700 | 700 | ||||||
Senior Subordinated Notes due 2019 at 6.625% |
1,000 | 1,000 | ||||||
Secured Accounts Receivable Facility, at 3.16% and 3.22% |
140 | 140 | ||||||
|
|
|
|
|||||
Total debt |
$ | 4,669 | $ | 4,669 | ||||
|
|
|
|
|||||
Short-term borrowings and current portion of long-term debt |
$ | | $ | | ||||
Long-term debt |
4,669 | 4,669 | ||||||
|
|
|
|
|||||
Total debt |
$ | 4,669 | $ | 4,669 | ||||
|
|
|
|
17
Future Maturities
At September 30, 2015, the contractual future maturities of debt are as follows (in millions):
Contractual Maturities | ||||
2015 |
$ | | ||
2016 |
| |||
2017 |
400 | |||
2018 |
511 | |||
2019 |
1,140 | |||
Thereafter |
2,618 | |||
|
|
|||
Total debt |
$ | 4,669 | ||
|
|
SDS uses interest rate swaps to manage the amount of its floating rate debt in order to reduce its exposure to variable rate interest payments associated with the Amended and Restated Credit Agreement dated as of August 11, 2005, as amended from time to time (Credit Agreement). Each swap agreement is designated as a cash flow hedge. SDS pays a stream of fixed interest payments for the term of the swap, and in turn, receives variable interest payments based on LIBOR. At September 30, 2015, one-month and three-month LIBOR were 0.19% and 0.33%, respectively. The net receipt or payment from the interest rate swap agreements is included in the Condensed Consolidated Statements of Comprehensive Income (Loss) as interest expense. The interest rates in the components of the debt table above reflect the impact of the swaps.
A summary of the Companys interest rate swaps at September 30, 2015 follows (in millions):
Inception |
Maturity | Notional amount (in millions) |
Weighted- average Interest rate paid |
Interest rate received (LIBOR) | ||||||||
August-September 2012 |
February 2017 | $ | 400 | 0.69 | % | 1-Month | ||||||
June 2013 |
June 2019 | 100 | 1.86 | % | 3-Month | |||||||
September 2013 |
June 2019 | 100 | 2.26 | % | 3-Month | |||||||
February-March 2014 |
March 2020 | 300 | 2.27 | % | 3-Month | |||||||
|
|
|||||||||||
Total / Weighted-Average Interest Rate |
$ | 900 | 1.52 | % | ||||||||
|
|
The fair values of the swap agreements at December 31, 2014 were $1 million and $5 million and were included in other assets and other accrued expenses, respectively. The fair value of the swap agreements at September 30, 2015 was $14 million and was included in other accrued expenses.
The Company has no ineffectiveness related to its swap agreements. During the next twelve months, the Company expects to reclassify approximately $8 million from accumulated other comprehensive income (loss) into earnings, specifically interest expense and amortization of deferred financing fees, related to the Companys interest rate swaps based on the borrowing rates at September 30, 2015.
18
7. Fair Value Measurements:
Accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under this guidance, the Company is required to classify certain assets and liabilities based on the following fair value hierarchy:
| Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities that can be accessed at the measurement date; |
| Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and |
| Level 3 Unobservable inputs for the asset or liability. |
The following table summarizes assets and liabilities measured at fair value on a recurring basis at September 30, 2015 (in millions):
Fair Value Measures Using | ||||||||||||||||||
Balance Sheet Caption |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||
Assets |
||||||||||||||||||
Money market funds |
Cash and cash equivalents | $ | 134 | $ | | $ | | $ | 134 | |||||||||
Currency forward contracts |
Prepaid expenses and other current assets | | 1 | | 1 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 134 | $ | 1 | $ | | $ | 135 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Liabilities |
||||||||||||||||||
Interest rate swap agreements |
Other accrued expenses | $ | | $ | 14 | $ | | $ | 14 | |||||||||
Currency forward contracts |
Other accrued expenses | | | | | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
$ | | $ | 14 | $ | | $ | 14 | |||||||||||
|
|
|
|
|
|
|
|
The following table summarizes assets and liabilities measured at fair value on a recurring basis at December 31, 2014 (in millions):
Fair Value Measures Using | ||||||||||||||||||
Balance Sheet Caption |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||
Assets |
||||||||||||||||||
Money market funds |
Cash and cash equivalents | $ | 106 | $ | | $ | | $ | 106 | |||||||||
Interest rate swap agreements |
Other assets | | 1 | | 1 | |||||||||||||
Currency forward contracts |
Prepaid expenses and other current assets | | 3 | | 3 | |||||||||||||
|
|
|
|
|
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|
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Total |
$ | 106 | $ | 4 | $ | | $ | 110 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Liabilities |
||||||||||||||||||
Interest rate swap agreements |
Other accrued expenses | $ | | $ | 5 | $ | | $ | 5 | |||||||||
Currency forward contracts |
Other accrued expenses | | 1 | | 1 | |||||||||||||
|
|
|
|
|
|
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|
|||||||||||
Total |
$ | | $ | 6 | $ | | $ | 6 | ||||||||||
|
|
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|
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|
|
Money market funds are recognized and measured at fair value in the Companys financial statements. 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.
The Company uses currency forward contracts to manage its exposure to fluctuations in costs caused by variations in Indian Rupee (INR) exchange rates. These INR forward contracts are designated as cash flow hedges. The fair value of these currency forward contracts is determined using currency exchange market rates, obtained from reliable, independent, third party banks, at the balance sheet date. The fair value of forward contracts is subject to changes in currency exchange rates. The Company has no ineffectiveness related to its use of currency forward contracts in connection with INR cash flow hedges. The Company expects to reclassify in the next twelve months approximately $1 million from other comprehensive income (loss) into earnings related to the Companys INR forward contracts.
19
The fair value of the trade name is categorized as Level 3, a non-recurring fair value measurement using significant unobservable inputs, and is estimated by discounted cash flows based on projected future revenues. This requires the use of various assumptions including projections of future cash flows, perpetual growth rates and discount rates. During the nine months ended September 30, 2014, the Company recorded a $339 million trade name impairment charge. See Notes 1 and 7 of Notes to Consolidated Financial Statements in the Companys Annual Report on Form 10-K for the year ended December 31, 2014.
The fair values of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, to the extent the underlying liability will be settled in cash, approximate carrying values because of the short-term nature of these instruments. Derivative financial instruments are recorded at fair value. The fair value of the Companys floating rate and fixed rate long-term debt (Level 2) is determined using actual market quotes and benchmark yields received from independent vendors.
The following table presents the carrying amount and estimated fair value of the Companys debt, including the current portion and excluding the interest rate swaps, as of December 31, 2014 and September 30, 2015 (in millions):
December 31, 2014 | September 30, 2015 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Value | Value | Value | Value | |||||||||||||
Floating rate debt |
$ | 2,458 | $ | 2,431 | $ | 2,458 | $ | 2,456 | ||||||||
Fixed rate debt |
2,211 | 2,286 | 2,211 | 2,274 |
8. Equity:
On August 10, 2015, in anticipation of completing the merger with FIS, SunGard and SCCIIs boards of directors approved a modification to the 2014 and 2015 restricted stock unit (RSU) grants that had vesting tied to the price of SunGards and SCCIIs stock (market-based vesting) to (i) change the measurement date from the third anniversary of the date of grant to the date of the change in control (CIC), and (ii) to set the amount earned as of the measurement date to be 150% and 100% for RSUs granted in 2014 and 2015, respectively. The modification, which is contingent upon successful completion of the merger with FIS, is expected to impact RSU awards held by 428 people, and will result in approximately $10 million of incremental stock compensation expense to be recognized over the remaining service period, which, on a weighted-average basis, is 1.9 years. SunGard expects to record a catch-up adjustment of approximately $2 million upon the CIC, reflecting the expense from the date of the modification through the CIC.
A rollforward of SunGards non-controlling interest for the nine months ended September 30, 2015 is as follows (in millions):
Non-controlling interest | ||||||||||||
Temporary equity |
Permanent equity | Total | ||||||||||
Balances at December 31, 2014 |
$ | 37 | $ | 1,490 | $ | 1,527 | ||||||
Net income |
9 | 138 | 147 | |||||||||
Purchase of treasury stock |
| (1 | ) | (1 | ) | |||||||
Transfer intrinsic value of vested restricted stock units to temporary equity |
7 | | 7 | |||||||||
Issuance of common and preferred stock |
2 | 7 | 9 | |||||||||
Cancellation of put options due to employee terminations |
(11 | ) | 3 | (8 | ) | |||||||
|
|
|
|
|
|
|||||||
Balances at September 30, 2015 |
$ | 44 | $ | 1,637 | $ | 1,681 | ||||||
|
|
|
|
|
|
20
A rollforward of SunGards non-controlling interest for the nine months ended September 30, 2014 follows (in millions):
Non-controlling interest | ||||||||||||
Temporary equity | Permanent equity |
Total | ||||||||||
Balances at December 31, 2013 |
$ | 42 | $ | 1,741 | $ | 1,783 | ||||||
Net income |
| 132 | 132 | |||||||||
Purchase of treasury stock |
| (3 | ) | (3 | ) | |||||||
Impact of exchange of SpinCo common stock for SCCII preferred stock |
(1 | ) | (428 | ) | (429 | ) | ||||||
Impact of modification of SunGard Awards |
(4 | ) | | (4 | ) | |||||||
Impact of modification of SpinCo Awards |
(6 | ) | | (6 | ) | |||||||
Transfer intrinsic value of vested restricted stock units to temporary equity |
8 | | 8 | |||||||||
Cancellation of put options due to employee terminations |
(7 | ) | 5 | (2 | ) | |||||||
|
|
|
|
|
|
|||||||
Balances at September 30, 2014 |
$ | 32 | $ | 1,447 | $ | 1,479 | ||||||
|
|
|
|
|
|
9. Income Taxes:
The effective income tax rates for the three month periods ended September 30, 2015 and 2014 were (33)% and 51%, respectively. The Companys effective tax rate reflects changes in the mix of income or losses in jurisdictions with a wide range of tax rates, permanent differences between GAAP and local tax laws, the impact of valuation allowances, unrecognized tax benefits, and the timing of recording discrete items. For the three months ended September 30, 2015, the provision for income taxes includes a deferred income tax benefit of $33 million recorded as a discrete item related to the tax-over-book basis difference of a small business within the FS segment which was sold on October 1, 2015. Also for the period, the Company continued to generate losses in France which exceed the scheduled reversal of deferred tax liabilities. As a result, no benefit has been recorded for these losses for the three months ended September 30, 2015. Changes in the mix of income, losses in particular jurisdictions or the total amount of income for 2015 may significantly impact the estimated effective income tax rate for the year.
The tax rate for the three month period ended September 30, 2014 reflected a decrease in the expected full year effective tax rate due primarily to a change in the mix of income.
The effective income tax rates for the nine month periods ended September 30, 2015 and 2014 were 6% and 22%, respectively. The Companys effective tax rate reflects changes in the mix of income or losses in jurisdictions with a wide range of tax rates, permanent differences between GAAP and local tax laws, the impact of valuation allowances, unrecognized tax benefits, and the timing of recording discrete items. For the nine months ended September 30, 2015, the provision for income taxes includes a deferred income tax benefit of $33 million recorded as a discrete item related to the tax-over-book basis difference of a small business within the FS segment which was sold on October 1, 2015, and a benefit of $10 million recorded as a discrete item for the reversal of a portion of the Companys reserve for uncertain tax positions, triggered by a favorable decision received by the Company from an appellate body on a matter between the Company and a state taxing authority during the period. Also for the period, the Company continued to generate losses in France which exceed the scheduled reversal of deferred tax liabilities. As a result, no benefit has been recorded for these losses for the nine months ended September 30, 2015.
For the nine months ended September 30, 2014, the benefit for income taxes includes a benefit of $138 million recorded as a discrete item related to the impairment of the trade name, an expense of $48 million recorded as a discrete item due to changes in certain state deferred tax rates, primarily driven by the change in the legal entity ownership of the trade name caused by the AS Split-Off, and an expense of $9 million recorded as a discrete item to increase the valuation allowance on state net operating losses driven by the change in managements judgment of their realizability due to the AS Split-Off.
In evaluating the realizability of deferred tax assets, management considered the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income, and tax planning strategies in making this assessment. Changes in the mix of income, losses in particular jurisdictions or the total amount of income for 2015 may significantly impact the estimated effective income tax rate for the year.
21
10. Segment Information:
The Companys measure of segment profit or loss is Adjusted EBITDA. Management believes Adjusted EBITDA is an effective tool to measure the Companys operating performance since it excludes non-cash items, including depreciation (which includes amortization of capitalized software), amortization of acquisition-related intangible assets, trade name and goodwill impairment charges and stock compensation expense, and certain variable charges including severance and facility closure costs, management fees paid to the Sponsors and certain other costs. Management uses Adjusted EBITDA extensively to measure the financial performance of the Company and its reportable segments, and also to report the Companys results to its board of directors. The Company uses a similar measure, as defined in SDSs Credit Agreement, for purposes of computing its debt covenants. The operating results apply to each of SunGard, SCCII and SDS unless otherwise noted.
The operating results for the three and nine months ended September 30, 2015 and 2014 for each segment follow (in millions):
Three Months Ended September 30, 2015 | ||||||||||||||||||||
FS | PS&E | Sum of segments |
Corporate (1) | Total | ||||||||||||||||
Software |
$ | 230 | $ | 36 | $ | 266 | $ | | $ | 266 | ||||||||||
SaaS and cloud |
262 | 10 | 272 | | 272 | |||||||||||||||
Services |
154 | 10 | 164 | | 164 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total revenue |
$ | 646 | $ | 56 | $ | 702 | $ | | $ | 702 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Adjusted EBITDA |
$ | 196 | $ | 16 | $ | 212 | $ | (13 | ) | $ | 199 | |||||||||
Depreciation (2) |
29 | 2 | 31 | | 31 | |||||||||||||||
Amortization of acquisition-related intangible assets |
21 | 2 | 23 | | 23 | |||||||||||||||
Capital expenditures |
28 | 2 | 30 | | 30 | |||||||||||||||
Three Months Ended September 30, 2014 | ||||||||||||||||||||
FS | PS&E | Sum of segments |
Corporate (1) | Total | ||||||||||||||||
Software |
$ | 235 | $ | 34 | $ | 269 | $ | | $ | 269 | ||||||||||
SaaS and cloud |
259 | 10 | 269 | | 269 | |||||||||||||||
Services |
143 | 10 | 153 | | 153 | |||||||||||||||
|
|
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|
|
|
|
|
|
|
|||||||||||
Total revenue |
$ | 637 | $ | 54 | $ | 691 | $ | | $ | 691 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Adjusted EBITDA |
$ | 184 | $ | 17 | $ | 201 | $ | (13 | ) | $ | 188 | |||||||||
Depreciation (2) |
24 | 3 | 27 | 1 | 28 | |||||||||||||||
Amortization of acquisition-related intangible assets |
29 | 1 | 30 | | 30 | |||||||||||||||
Capital expenditures |
37 | 2 | 39 | 1 | 40 |
22
Nine Months Ended September 30, 2015 | ||||||||||||||||||||
FS | PS&E | Sum of segments |
Corporate (1) | Total | ||||||||||||||||
Software |
$ | 675 | $ | 105 | $ | 780 | $ | | $ | 780 | ||||||||||
SaaS and cloud |
790 | 29 | 819 | | 819 | |||||||||||||||
Services |
429 | 32 | 461 | | 461 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total revenue |
$ | 1,894 | $ | 166 | $ | 2,060 | $ | | $ | 2,060 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Adjusted EBITDA |
$ | 543 | $ | 49 | $ | 592 | $ | (40 | ) | $ | 552 | |||||||||
Depreciation (2) |
79 | 7 | 86 | 1 | 87 | |||||||||||||||
Amortization of acquisition-related intangible assets |
61 | 4 | 65 | | 65 | |||||||||||||||
Capital expenditures |
74 | 9 | 83 | 2 | 85 | |||||||||||||||
Nine Months Ended September 30, 2014 | ||||||||||||||||||||
FS | PS&E | Sum of segments |
Corporate (1) | Total | ||||||||||||||||
Software |
$ | 674 | $ | 103 | $ | 777 | $ | | $ | 777 | ||||||||||
SaaS and cloud |
774 | 28 | 802 | | 802 | |||||||||||||||
Services |
407 | 31 | 438 | | 438 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total revenue |
$ | 1,855 | $ | 162 | $ | 2,017 | $ | | $ | 2,017 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Adjusted EBITDA |
$ | 477 | $ | 50 | $ | 527 | $ | (35 | ) | $ | 492 | |||||||||
Depreciation (2) |
70 | 6 | 76 | 3 | 79 | |||||||||||||||
Amortization of acquisition-related intangible assets |
108 | 6 | 114 | | 114 | |||||||||||||||
Capital expenditures |
90 | 7 | 97 | 1 | 98 |
(1) | Corporate is included to reconcile each item to the total for the Company. |
Reconciliation of consolidated Adjusted EBITDA to income (loss) from continuing operations before income taxes:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2014 | 2015 | 2014 | 2015 | |||||||||||||
Adjusted EBITDA (including corporate) |
$ | 188 | 199 | $ | 492 | $ | 552 | |||||||||
Depreciation (2) |
(28 | ) | (31 | ) | (79 | ) | (87 | ) | ||||||||
Amortization of acquisition-related intangible assets |
(30 | ) | (23 | ) | (114 | ) | (65 | ) | ||||||||
Trade name impairment |
| | (339 | ) | | |||||||||||
Severance and facility closure costs |
(17 | ) (3) | (3 | ) | (24 | ) (4) | (7 | ) (5) | ||||||||
Stock compensation expense |
(13 | ) | (13 | ) | (33 | ) | (36 | ) | ||||||||
Management fees |
(3 | ) | (2 | ) | (6 | ) | (6 | ) | ||||||||
Other costs (included in operating income) |
(2 | ) | (7 | ) | (14 | ) | (8 | ) | ||||||||
Interest expense, net |
(73 | ) | (72 | ) | (219 | ) | (213 | ) | ||||||||
Loss on extinguishment of debt |
| | (61 | ) | | |||||||||||
Other income (expense) |
| | | 1 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) from continuing operations before income taxes |
$ | 22 | $ | 48 | $ | (397 | ) | $ | 131 | |||||||
|
|
|
|
|
|
|
|
(2) | Includes amortization of capitalized software |
(3) | Includes $17 million of severance, primarily in FS |
(4) | Includes $23 million of severance and $1 million of lease exit costs, primarily in FS |
(5) | Includes $7 million of severance, primarily in FS |
23
11. Employee Termination Benefits and Facility Closures:
The following table provides a rollforward of the liability balances for workforce reductions and facility closures for the nine months ended September 30, 2015 (in millions):
Workforce-related | Facilities | Total | ||||||||||
Balance at December 31, 2014 |
$ | 12 | $ | 13 | $ | 25 | ||||||
Expense related to 2015 actions |
10 | | 10 | |||||||||
Paid |
(14 | ) | (3 | ) | (17 | ) | ||||||
Other adjustments |
(4 | ) | | (4 | ) | |||||||
|
|
|
|
|
|
|||||||
Balance at September 30, 2015 |
$ | 4 | $ | 10 | $ | 14 | ||||||
|
|
|
|
|
|
The majority of the workforce-related actions are expected to be completed over the next 12 months. The facilities accruals are for ongoing obligations to pay rent for vacant space and are net of sublease reserves. The lengths of these obligations vary by lease with the majority ending in 2019.
12. Related Party Transactions:
Sponsor Transactions
In accordance with the Management Agreement between the Company and affiliates of the Sponsors, the Company recorded $2 million of management fees in sales, marketing and administration expenses for each of the three month periods ended September 30, 2014 and 2015 respectively. The Company recorded $6 million of management fees in sales, marketing and administration expenses for the nine month periods ended September 30, 2014 and 2015 respectively. In the nine months ended September 30, 2014, the Company recorded approximately $3 million of management fees in income (loss) from discontinued operations. At December 31, 2014 and September 30, 2015, the Company had accrued management fees due to Sponsors included in other accrued expenses of $3 million and $2 million, respectively.
For the nine months ended September 30, 2014, Goldman Sachs & Co. and/or its respective affiliates, received less than $1 million in connection with amendments to SunGards Credit Agreement.
In addition to the amounts above, on March 31, 2014 the Company recorded $15 million of management fees, which is included in income (loss) from discontinued operations, as provided in the Management Agreement for services rendered in connection with the issuance of the $1.025 billion SpinCo Term Loan and $425 million of SpinCo Notes. Also during the first quarter of 2014, the Company recorded $1 million of management fees which is included in income (loss) from discontinued operations resulting from the sale of two FS businesses.
AS Transactions
In connection with the Global Master Services Agreement (GMSA) with AS, the Company incurred expenses of $12 million and $13 million for services provided under the GMSA, most of which are included in cost of sales and direct operating, in the condensed consolidated statement of comprehensive income (loss) for each of the three months ended September 30, 2014 and 2015, respectively. The Company incurred expenses of $30 million and $20 million for services provided under the GMSA, most of which are included in cost of sales and direct operating, in the condensed consolidated statement of comprehensive income (loss) for the nine months ended September 30, 2015 and the six months ending September 30, 2014, respectively. At September 30, 2015, the Company had approximately $2 million of prepaid balances and recorded approximately $1 million of accounts payable due to AS under the GMSA. The Company has incurred a total of $58 million to date under the GMSA, and has a remaining commitment, which expires on March 31, 2016, of approximately $8 million.
In addition, for each of the three months ended September 30, 2014 and 2015, AS purchased certain data center outsourcing services and treasury products from FS, for which FS recognized revenue of approximately $1 million. For the six months ended September 30, 2014, AS purchased certain data center outsourcing services and treasury products from FS, for which FS recognized revenue of approximately $1 million. For the nine months ended September 30, 2015, AS purchased certain data center outsourcing services and treasury products from FS, for which FS recognized revenue of approximately $2 million. At September 30, 2015, the Company had recorded approximately $1 million of accounts receivable related to certain data center outsourcing and treasury products provided to AS.
13. Commitments and Contingencies:
The Company is presently a party to certain lawsuits arising in the ordinary course of its business. In the opinion of management, none of its current legal proceedings are expected to have a material impact on the Companys business or financial results. The Companys customer contracts generally include typical indemnification of customers, primarily for intellectual property infringement claims. Liabilities in connection with such obligations have not been material.
24
The Company has had patent infringement lawsuits filed against it or certain of its customers claiming that certain of its products infringe the intellectual property rights of others. Adverse results in these lawsuits may include awards of substantial monetary damages, costly royalty or licensing agreements, or limitations on the Companys ability to offer certain features, functionalities, products, or services, and may also cause the Company to change its business practices, and require development of non-infringing products or technologies, which could result in a loss of revenues and otherwise harm the Companys business. Also, certain agreements with previously owned businesses of the Company require indemnification to the new owners for certain matters as part of the sale of those businesses. At September 30, 2015, the Company does not have any significant accruals related to patent indemnification or infringement claims.
The Company evaluates, on a regular basis, developments in its legal matters. The Company records a provision for a liability when it believes that it is both probable that a liability has been incurred, and the amount can be reasonably estimated.
With respect to any current legal proceedings or claims pending against the Company for which it has not made an accrual, but for which it is reasonably possible that a loss may occur, the Company is unable to estimate a range of loss due to various reasons, including, among others: (1) that the proceedings are in early stages, (2) that there is uncertainty as to the outcome of pending appeals, motions, or settlements, (3) that there are significant factual issues to be resolved, and (4) that there are novel legal issues presented. Such legal matters are inherently unpredictable and subject to significant uncertainties, some of which are beyond the Companys control. Based on current knowledge, the Company believes that the final outcome of the matters discussed above will not, individually or in the aggregate, have a material adverse effect on its business, consolidated financial position, results of operations, or cash flows. While the Company intends to vigorously defend these matters, in light of the uncertainties involved in such matters, there exists the possibility of adverse outcomes, and the final outcome of a particular matter could have a material adverse effect on results of operations or cash flows in a particular period.
The Company has recorded a reserve for unrecognized tax benefits and related accrued interest for certain matters. Also, the Company is under examination in various federal, state and local and foreign jurisdictions related to income and non-income tax matters. Based on current knowledge, the Company believes that resolution of these matters, giving recognition to the reserve for unrecognized tax benefits, will not have a materially adverse impact on its business, consolidated financial position, results of operations or cash flows.
The State of Delaware, Department of Finance, Division of Revenue (Unclaimed Property) and nine other states are currently conducting a joint examination of the books and records of certain wholly owned subsidiaries of the Company to determine compliance with the unclaimed property laws. Additionally, the Company has entered into voluntary disclosure agreements to address the potential unclaimed property exposure for certain entities not included in the scope of the ongoing unclaimed property examination. The potential exposure related to the examination and the voluntary disclosure programs is not currently determinable.
For approximately one week in August 2015, certain U.S. operations of a single SunGard customer were disrupted by an issue affecting its SunGard-hosted fund accounting platform that occurred following a recommended operating system update implemented by SunGard. The customer uses the platform for the processing of net asset values (NAVs) for certain mutual funds, exchange-traded funds and collective investment funds. No data was lost as a result of the incident. Delayed publication of NAVs or use of alternative NAVs may have affected some of the customers clients. No other SunGard customers were disrupted. SunGard continues to work with its customer in evaluating the possible impact of the event. However, at this preliminary stage, we are unable to determine the amount of costs or any other consequences we may be subject to as a result of this incident.
14. Supplemental Guarantor Condensed Consolidating Financial Statements:
SDS 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 SDS (collectively, the Guarantors). Each of the Guarantors is 100% owned, directly or indirectly, by SDS. None of the other subsidiaries of SDS, either direct or indirect, nor any of the Holding 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.
25
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. |
As a result of the AS Split-Off, all U.S. subsidiaries of AS were removed as guarantors as of March 31, 2014.
The following tables present the financial position, results of operations and cash flows of SDS (referred to as Parent Company for purposes of this note only), the Guarantor subsidiaries, the Non-Guarantor subsidiaries and Eliminations as of December 31, 2014 and September 30, 2015, and for the three and nine month periods ended September 30, 2014 and 2015, to arrive at the information for SDS on a consolidated basis. SunGard and SCCII are neither parties to nor guarantors of the debt issued as described in Note 5 of Notes to Consolidated Financial Statements included in the Companys Annual Report on Form 10-K for 2014.
Supplemental Condensed Consolidating Balance Sheet | ||||||||||||||||||||
(in millions) | December 31, 2014 | |||||||||||||||||||
Parent | Guarantor | Non-Guarantor | ||||||||||||||||||
Company | Subsidiaries (c) | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Assets |
||||||||||||||||||||
Current: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 202 | $ | 1 | $ | 244 | $ | | $ | 447 | ||||||||||
Intercompany balances |
| 3,049 | 500 | (3,549 | ) | | ||||||||||||||
Trade receivables, net |
1 | 446 | (a) | 239 | | 686 | ||||||||||||||
Prepaid expenses, taxes and other current assets |
32 | 43 | 39 | (2 | ) | 112 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current assets |
235 | 3,539 | 1,022 | (3,551 | ) | 1,245 | ||||||||||||||
Property and equipment, net |
| 94 | 58 | | 152 | |||||||||||||||
Intangible assets, net |
68 | 348 | 262 | | 678 | |||||||||||||||
Trade name |
| 672 | | | 672 | |||||||||||||||
Deferred income taxes |
69 | | | (69 | ) | | ||||||||||||||
Intercompany balances |
194 | 8 | 154 | (356 | ) | | ||||||||||||||
Goodwill |
| 3,099 | 661 | | 3,760 | |||||||||||||||
Investment in subsidiaries |
8,039 | 1,366 | | (9,405 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Assets |
$ | 8,605 | $ | 9,126 | $ | 2,157 | $ | (13,381 | ) | $ | 6,507 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Liabilities and Stockholders Equity |
||||||||||||||||||||
Current: |
||||||||||||||||||||
Intercompany balances |
$ | 3,549 | $ | | $ | | $ | (3,549 | ) | $ | | |||||||||
Accounts payable and other current liabilities |
59 | 510 | 427 | (2 | ) | 994 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current liabilities |
3,608 | 510 | 427 | (3,551 | ) | 994 | ||||||||||||||
Long-term debt |
4,529 | | 140 | | 4,669 | |||||||||||||||
Intercompany debt |
162 | | 194 | (356 | ) | | ||||||||||||||
Deferred and other income taxes |
101 | 559 | 17 | (69 | ) | 608 | ||||||||||||||
Other liabilities |
| 18 | 13 | | 31 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities |
8,400 | 1,087 | 791 | (3,976 | ) | 6,302 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total stockholders equity |
205 | 8,039 | 1,366 | (9,405 | ) | 205 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Liabilities and Stockholders Equity |
$ | 8,605 | $ | 9,126 | $ | 2,157 | $ | (13,381 | ) | $ | 6,507 | |||||||||
|
|
|
|
|
|
|
|
|
|
(a) | This balance includes receivables related to the Companys accounts receivable financing subsidiary, which is a non-guarantor, resulting from the normal, recurring sale of accounts receivable under the receivables facility. In a liquidation, the first $140 million (plus interest) of collections of accounts receivable sold to this subsidiary are due to the receivables facility lender. The remaining balance would be available for collection for the benefit of the Guarantors. |
26
Supplemental Condensed Consolidating Balance Sheet | ||||||||||||||||||||
(in millions) | September 30, 2015 | |||||||||||||||||||
Parent | Guarantor | Non-Guarantor | ||||||||||||||||||
Company | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Assets |
||||||||||||||||||||
Current: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 317 | $ | (1 | ) | $ | 275 | $ | | $ | 591 | |||||||||
Intercompany balances |
| 3,422 | 479 | (3,901 | ) | | ||||||||||||||
Trade receivables, net |
| 384 | (b) | 163 | | 547 | ||||||||||||||
Prepaid expenses, taxes and other current assets |
27 | 82 | 44 | (8 | ) | 145 | ||||||||||||||
Assets held for sale |
| | 24 | | 24 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current assets |
344 | 3,887 | 985 | (3,909 | ) | 1,307 | ||||||||||||||
Property and equipment, net |
1 | 94 | 47 | | 142 | |||||||||||||||
Intangible assets, net |
57 | 320 | 223 | | 600 | |||||||||||||||
Trade name |
| 672 | | | 672 | |||||||||||||||
Deferred income taxes |
55 | | | (55 | ) | | ||||||||||||||
Intercompany balances |
179 | 7 | 154 | (340 | ) | | ||||||||||||||
Goodwill |
| 3,112 | 621 | | 3,733 | |||||||||||||||
Investment in subsidiaries |
8,432 | 1,380 | | (9,812 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Assets |
$ | 9,068 | $ | 9,472 | $ | 2,030 | $ | (14,116 | ) | $ | 6,454 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Liabilities and Stockholders Equity |
||||||||||||||||||||
Current: |
||||||||||||||||||||
Intercompany balances |
$ | 3,901 | $ | | $ | | $ | (3,901 | ) | $ | | |||||||||
Accounts payable and other current liabilities |
126 | 479 | 291 | (8 | ) | 888 | ||||||||||||||
Liabilities related to assets held for sale |
| | 8 | | 8 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current liabilities |
4,027 | 479 | 299 | (3,909 | ) | 896 | ||||||||||||||
Long-term debt |
4,529 | | 140 | | 4,669 | |||||||||||||||
Intercompany debt |
161 | | 179 | (340 | ) | | ||||||||||||||
Deferred and other income taxes |
97 | 547 | 20 | (55 | ) | 609 | ||||||||||||||
Other liabilities |
| 14 | 12 | | 26 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities |
8,814 | 1,040 | 650 | (4,304 | ) | 6,200 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total stockholders equity |
254 | 8,432 | 1,380 | (9,812 | ) | 254 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Liabilities and Stockholders Equity |
$ | 9,068 | $ | 9,472 | $ | 2,030 | $ | (14,116 | ) | $ | 6,454 | |||||||||
|
|
|
|
|
|
|
|
|
|
(b) | This balance includes receivables related to the Companys accounts receivable financing subsidiary, which is a non-guarantor, resulting from the normal, recurring sale of accounts receivable under the receivables facility. In a liquidation, the first $140 million (plus interest) of collections of accounts receivable sold to this subsidiary are due to the receivables facility lender. The remaining balance would be available for collection for the benefit of the Guarantors. |
27
Supplemental Condensed Consolidating Schedule of Comprehensive Income (Loss) | ||||||||||||||||||||
(in millions) | Three Months Ended September 30, 2014 | |||||||||||||||||||
Parent | Guarantor | Non-Guarantor | ||||||||||||||||||
Company | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Revenue |
$ | | $ | 487 | $ | 298 | $ | (94 | ) | $ | 691 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Costs and expenses |
27 | 387 | 276 | (94 | ) | 596 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating income (loss) |
(27 | ) | 100 | 22 | | 95 | ||||||||||||||
Net interest income (expense) |
(69 | ) | (1 | ) | (3 | ) | | (73 | ) | |||||||||||
Net earnings (losses) of equity affiliates |
83 | 10 | | (93 | ) | | ||||||||||||||
Other income (expense) |
| (1 | ) | 1 | | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) from continuing operations before income taxes |
(13 | ) | 108 | 20 | (93 | ) | 22 | |||||||||||||
Benefit from (provision for) income taxes |
24 | (25 | ) | (10 | ) | | (11 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) from continuing operations |
11 | 83 | 10 | (93 | ) | 11 | ||||||||||||||
Income (loss) from discontinued operations, net of tax |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
$ | 11 | $ | 83 | $ | 10 | $ | (93 | ) | $ | 11 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Comprehensive income (loss) |
$ | (43 | ) | $ | 40 | $ | (35 | ) | $ | (5 | ) | $ | (43 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Supplemental Condensed Consolidating Schedule of Comprehensive Income (Loss) | ||||||||||||||||||||
(in millions) | Three Months Ended September 30, 2015 | |||||||||||||||||||
Parent | Guarantor | Non-Guarantor | ||||||||||||||||||
Company | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Revenue |
$ | | $ | 500 | $ | 313 | $ | (111 | ) | $ | 702 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Costs and expenses |
32 | 403 | 258 | (111 | ) | 582 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating income (loss) |
(32 | ) | 97 | 55 | | 120 | ||||||||||||||
Net interest income (expense) |
(69 | ) | | (3 | ) | | (72 | ) | ||||||||||||
Net earnings (losses) of equity affiliates |
140 | 43 | | (183 | ) | | ||||||||||||||
Other income (expense) |
(2 | ) | (1 | ) | 3 | | | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) from continuing operations before income taxes |
37 | 139 | 55 | (183 | ) | 48 | ||||||||||||||
Benefit from (provision for) income taxes |
30 | (1 | ) | (12 | ) | | 17 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) from continuing operations |
67 | 138 | 43 | (183 | ) | 65 | ||||||||||||||
Income (loss) from discontinued operations, net of tax |
| 2 | | | 2 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
$ | 67 | $ | 140 | $ | 43 | $ | (183 | ) | $ | 67 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Comprehensive income (loss) |
$ | 51 | $ | 125 | $ | 27 | $ | (152 | ) | $ | 51 | |||||||||
|
|
|
|
|
|
|
|
|
|
28
Supplemental Condensed Consolidating Schedule of Comprehensive Income (Loss) | ||||||||||||||||||||
(in millions) | Nine Months Ended September 30, 2014 | |||||||||||||||||||
Parent | Guarantor | Non-Guarantor | ||||||||||||||||||
Company | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Revenue |
$ | | $ | 1,437 | $ | 882 | $ | (302 | ) | $ | 2,017 | |||||||||
Costs and expenses |
75 | 1,549 | 812 | (302 | ) | 2,134 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating income (loss) |
(75 | ) | (112 | ) | 70 | | (117 | ) | ||||||||||||
Net interest income (expense) |
(205 | ) | (1 | ) | (13 | ) | | (219 | ) | |||||||||||
Net earnings (losses) of equity affiliates |
(50 | ) | 46 | | 4 | | ||||||||||||||
Other income (expense) |
(61 | ) | (1 | ) | 1 | | (61 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) from continuing operations before income taxes |
(391 | ) | (68 | ) | 58 | 4 | (397 | ) | ||||||||||||
Benefit from (provision for) income taxes |
92 | 17 | (21 | ) | | 88 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) from continuing operations |
(299 | ) | (51 | ) | 37 | 4 | (309 | ) | ||||||||||||
Income (loss) from discontinued operations, net of tax |
(27 | ) | 1 | 9 | | (17 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
$ | (326 | ) | $ | (50 | ) | $ | 46 | $ | 4 | $ | (326 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Comprehensive income (loss) |
$ | (361 | ) | $ | (118 | ) | $ | 23 | $ | 95 | $ | (361 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
All of the previously-issued interim financial statements included in Quarterly Reports on Form 10-Q for 2014 included an error in the Condensed Consolidated Statements of Comprehensive Income (Loss) related to the removal of the cumulative foreign currency translation loss associated with the AS businesses that were split-off on March 31, 2014. The removal of the cumulative foreign currency translation loss was reflected in the 2014 Supplemental Condensed Consolidated Schedule of Comprehensive Income (Loss). However, the inclusion of this item was not appropriate since it relates to the distribution of the AS businesses to the Companys owners and should have been excluded from the 2014 Other Comprehensive Income according to GAAP. Management does not believe the error is material to any of the previously-issued financial statements. The table below shows the impact of the correction of this error for the nine months ended September 30, 2014 (in millions).
Nine Months Ended September 30, 2014 | ||||||||
As Reported | As Revised | |||||||
Comprehensive Income - Parent |
$ | (436 | ) | $ | (361 | ) | ||
Comprehensive Income - Guarantor |
(151 | ) | (118 | ) | ||||
Comprehensive Income - Non-Guarantor |
(26 | ) | 23 | |||||
Comprehensive Income - Eliminations |
177 | 95 |
29
Supplemental Condensed Consolidating Schedule of Comprehensive Income (Loss) | ||||||||||||||||||||
(in millions) | Nine Months Ended September 30, 2015 | |||||||||||||||||||
Parent | Guarantor | Non-Guarantor | ||||||||||||||||||
Company | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Revenue |
$ | | $ | 1,480 | $ | 883 | $ | (303 | ) | $ | 2,060 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Costs and expenses |
80 | 1,165 | 775 | (303 | ) | 1,717 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating income (loss) |
(80 | ) | 315 | 108 | | 343 | ||||||||||||||
Net interest income (expense) |
(203 | ) | | (10 | ) | | (213 | ) | ||||||||||||
Net earnings (losses) of equity affiliates |
320 | 74 | | (394 | ) | | ||||||||||||||
Other income (expense) |
(2 | ) | (1 | ) | 4 | | 1 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) from continuing operations before income taxes |
35 | 388 | 102 | (394 | ) | 131 | ||||||||||||||
Benefit from (provision for) income taxes |
93 | (70 | ) | (30 | ) | | (7 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) from continuing operations |
128 | 318 | 72 | (394 | ) | 124 | ||||||||||||||
Income (loss) from discontinued operations, net of tax |
| 2 | 2 | | 4 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
$ | 128 | $ | 320 | $ | 74 | $ | (394 | ) | $ | 128 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Comprehensive income (loss) |
$ | 70 | $ | 281 | $ | 35 | $ | (316 | ) | $ | 70 | |||||||||
|
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|
|
|
|
|
|
|
|
30
Supplemental Condensed Consolidating Schedule of Cash Flows | ||||||||||||||||||||
(in millions) | Nine Months Ended September 30, 2014 | |||||||||||||||||||
Parent | Guarantor | Non-Guarantor | ||||||||||||||||||
Company | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Cash flow from operations: |
||||||||||||||||||||
Net income (loss) |
$ | (326 | ) | $ | (50 | ) | $ | 46 | $ | 4 | $ | (326 | ) | |||||||
Income (loss) from discontinued operations |
(27 | ) | 1 | 9 | | (17 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) from continuing operations |
(299 | ) | (51 | ) | 37 | 4 | (309 | ) | ||||||||||||
Non cash adjustments |
169 | 314 | 56 | (4 | ) | 535 | ||||||||||||||
Changes in operating assets and liabilities |
(59 | ) | 74 | (19 | ) | | (4 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash flow from (used in) continuing operations |
(189 | ) | 337 | 74 | | 222 | ||||||||||||||
Cash flow from (used in) discontinued operations |
(43 | ) | 52 | 25 | | 34 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash flow from (used in) operations (c) |
(232 | ) | 389 | 99 | | 256 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Investment activities: |
||||||||||||||||||||
Intercompany transactions |
191 | (168 | ) | 51 | (74 | ) | | |||||||||||||
Cash paid for acquired businesses, net of cash acquired |
| (4 | ) | | | (4 | ) | |||||||||||||
Cash paid for property and equipment and software |
(1 | ) | (62 | ) | (35 | ) | | (98 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash provided by (used in) continuing operations |
190 | (234 | ) | 16 | (74 | ) | (102 | ) | ||||||||||||
Cash provided by (used in) discontinued operations |
1,041 | (41 | ) | (993 | ) | | 7 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash provided by (used in) investment activities |
1,231 | (275 | ) | (977 | ) | (74 | ) | (95 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Financing activities: |
||||||||||||||||||||
Intercompany dividends |
| (37 | ) | (37 | ) | 74 | | |||||||||||||
Net repayments of long-term debt |
(1,269 | ) | | (62 | ) | | (1,331 | ) | ||||||||||||
Other financing activities |
(18 | ) | | | | (18 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash provided by (used in) continuing operations |
(1,287 | ) | (37 | ) | (99 | ) | 74 | (1,349 | ) | |||||||||||
Cash provided by (used in) discontinued operations |
| (80 | ) | 967 | | 887 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash provided by (used in) financing activities |
(1,287 | ) | (117 | ) | 868 | 74 | (462 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Effect of exchange rate changes on cash |
| | (9 | ) | | (9 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Increase (decrease) in cash and cash equivalents |
(288 | ) | (3 | ) | (19 | ) | | (310 | ) | |||||||||||
Beginning cash and cash equivalents (d) |
403 | 2 | 301 | | 706 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending cash and cash equivalents |
$ | 115 | $ | (1 | ) | $ | 282 | $ | | $ | 396 | |||||||||
|
|
|
|
|
|
|
|
|
|
(c) | Cash flows from (used in) operations for the Parent Company and Guarantor Subsidiaries do not include any amounts related to their respective stand-alone income tax liabilities as the Company has not historically cash settled the intercompany balances associated with the push down of such liabilities to the Guarantor Subsidiaries. During the nine months ended September 30, 2014, the Parent Company allocated approximately $126 million of tax liabilities to its Guarantor Subsidiaries. During the three months ended March 31, 2014, the Parent Company and the Guarantor Subsidiaries decided to effect a non-cash settlement of the accumulated income tax receivable and payable balances in the amount of approximately $1.5 billion. Therefore, these transactions are not reflected in the Condensed Consolidating Statement of Cash Flows presented above. |
(d) | Includes cash of discontinued operations. |
31
Supplemental Condensed Consolidating Schedule of Cash Flows | ||||||||||||||||||||
(in millions) | Nine Months Ended September 30, 2015 | |||||||||||||||||||
Parent | Guarantor | Non-Guarantor | ||||||||||||||||||
Company | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Cash flow from operations: |
||||||||||||||||||||
Net income (loss) |
$ | 128 | $ | 320 | $ | 74 | $ | (394 | ) | $ | 128 | |||||||||
Income (loss) from discontinued operations |
| 2 | 2 | | 4 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) from continuing operations |
128 | 318 | 72 | (394 | ) | 124 | ||||||||||||||
Non cash adjustments |
(253 | ) | (29 | ) | 60 | 394 | 172 | |||||||||||||
Changes in operating assets and liabilities |
(61 | ) | 138 | (50 | ) | | 27 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash flow from (used in) continuing operations |
(186 | ) | 427 | 82 | | 323 | ||||||||||||||
Cash flow from (used in) discontinued operations |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash flow from (used in) operations (e) |
(186 | ) | 427 | 82 | | 323 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Investment activities: |
||||||||||||||||||||
Intercompany transactions |
356 | (293 | ) | 49 | (112 | ) | | |||||||||||||
Cash paid for acquired businesses, net of cash acquired |
| (21 | ) | (4 | ) | | (25 | ) | ||||||||||||
Cash paid for property and equipment and software |
(2 | ) | (59 | ) | (24 | ) | | (85 | ) | |||||||||||
Other investing activities |
| | 1 | | 1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash provided by (used in) continuing operations |
354 | (373 | ) | 22 | (112 | ) | (109 | ) | ||||||||||||
Cash provided by (used in) discontinued operations |
| | 1 | | 1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash provided by (used in) investment activities |
354 | (373 | ) | 23 | (112 | ) | (108 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Financing activities: |
||||||||||||||||||||
Intercompany dividends |
| (56 | ) | (56 | ) | 112 | | |||||||||||||
Other financing activities |
(53 | ) | | (1 | ) | | (54 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash provided by (used in) continuing operations |
(53 | ) | (56 | ) | (57 | ) | 112 | (54 | ) | |||||||||||
Cash provided by (used in) discontinued operations |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash provided by (used in) financing activities |
(53 | ) | (56 | ) | (57 | ) | 112 | (54 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
| ||||||||||||||||||||
Effect of exchange rate changes on cash |
| | (13 | ) | | (13 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Increase (decrease) in cash and cash equivalents |
115 | (2 | ) | 35 | | 148 | ||||||||||||||
Beginning cash and cash equivalents |
202 | 1 | 244 | | 447 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending cash and cash equivalents (f) |
$ | 317 | $ | (1 | ) | $ | 279 | $ | | $ | 595 | |||||||||
|
|
|
|
|
|
|
|
|
|
(e) | Cash flows from (used in) operations for the Parent Company and Guarantor Subsidiaries do not include any amounts related to their respective stand-alone income tax liabilities as the Company has not historically cash settled the intercompany balances associated with the push down of such liabilities to the Guarantor Subsidiaries. During the nine months ended September 30, 2015, the Parent Company allocated approximately $117 million of tax liabilities to its Guarantor Subsidiaries. |
(f) | Includes $4 million of Non-Guarantor cash reflected in assets held for sale. |
32
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Introduction
The following discussion and analysis supplements managements discussion and analysis in the Companys Annual Report on Form 10-K for the year ended December 31, 2014 and presumes that readers are familiar with the discussion and analysis in that 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 SDS, which are materially the same as the results of operations and financial condition of SunGard and SCCII. Therefore, the discussions provided are applicable to each of SunGard, SCCII and SDS unless otherwise noted.
On August 12, 2015, the Company and SCCII entered into an Agreement and Plan of Merger (Merger Agreement) with Fidelity National Information Services, Inc., a Georgia corporation (FIS) and other parties named therein. Under the terms of the Merger Agreement, FIS will acquire 100 percent of the equity of SunGard as well as assume $4.7 billion of debt representing an unaffected enterprise value of $9.1 billion. At closing, SunGard shareholders will receive an aggregate of 44,663,899 shares of common stock of FIS and $2,288,700,000 in cash, subject to certain adjustments and less the number of FIS shares representing unvested RSUs of SunGard that will be converted into RSUs of FIS at the closing. In addition, FIS will also assume, repay or refinance all of SunGards outstanding debt, totaling approximately $4.7 billion. The transaction is subject to certain customary closing conditions, including the approval by the stockholders of SunGard.
Overview
SunGard is a leading provider of mission-critical software to financial institutions globally. Our solutions automate a wide range of complex business processes across the financial services industry, including those associated with trading, securities operations, administering investment portfolios, accounting for investment assets, and managing risk and compliance requirements. We are the largest provider of industry-specific software by revenue to the segments that we serve, and are differentiated by the breadth of our offerings, leading edge technology, operating scale, deep domain expertise, and global reach.
Our business model is founded on software, which is surrounded by services, resulting in strong recurring revenue streams with attractive profit margins and strong cash flows. At the heart of our business model is our proprietary intellectual property that is licensed or rented to customers for periods typically ranging from three to seven years and also offered as a service, which we refer to as our SaaS offering. Our license offerings have traditionally been run on our customers premises but are increasingly delivered from our private cloud. In addition, we provide professional services and business processing as a service, or BPaaS (collectively, Services).
Because we sell our software maintenance, rentals, SaaS, cloud and BPaaS offerings under long-term contracts and recognize the revenue ratably over the term of the contracts, we have good visibility into future revenue, which helps us to manage spending proactively. We refer to this contractually committed revenue as recurring revenue. Our revenue streams are highly recurring as a result of our deeply embedded solutions and long-running contracts typically ranging from three to seven years for software maintenance, rentals, SaaS, cloud and BPaaS offerings. In 2014, these offerings comprised 70% of our revenue, with a revenue retention rate of 95%. Our retention rate is defined as the percentage of the prior years recurring revenue which is retained in the current year.
The remaining 30% of our 2014 total revenue was comprised of software license fees and professional services revenue.
We classify our revenue into three categories: Software revenue, SaaS and cloud revenue and Services revenue, as described below.
Software Revenue
Our Software revenue represented 40% of our 2014 total revenue and is comprised of traditional software license fees, maintenance and support fees, and fees from the resale of third-party software licenses. These software license fees include term licenses, perpetual licenses and, for customers who would prefer a periodic fee instead of a larger up-front payment, rental fees. Maintenance and support fees provide customers with periodic technology updates and interactive support related to our software.
Within Software, perpetual and term license revenue is generally recognized at the time of sale. The majority of our software license revenue results from the sale of term licenses, which generally have terms of three to seven years. The scheduled renewals of these term licenses provide good visibility to our future revenue pipeline. However, the timing of these license sales can significantly impact our revenue and profitability in any given quarter.
33
SaaS and Cloud Revenue
Our SaaS and cloud offerings comprised 38% of our total revenue in 2014. SaaS and cloud offerings are delivered from SunGards private cloud to provide customers with a secure and reliable environment operated by qualified SunGard personnel. These offerings allow customers to take advantage of SunGards deep domain expertise while avoiding the upfront cost of licensing and IT infrastructure. SaaS and cloud revenue also includes revenue from our proprietary trading algorithms and trade execution network.
Our cloud offerings have been a source of consistent growth in recent years as an increasing number of customers have opted to deploy their licensed SunGard applications in our private cloud. In these instances, we charge separately for hosting these licensed SunGard applications in our private cloud. We classify that hosting revenue in our SaaS and cloud revenue category, while the corresponding software license, maintenance and rental revenue is classified in our Software revenue category.
Our SaaS offerings include fully integrated software, hosting and application management services, which are also delivered from SunGards private cloud. All revenue related to our SaaS offerings is classified in our SaaS and cloud revenue category, noting the fully integrated service that we provide.
These SaaS and cloud offerings are generally sold on multi-year contracts. As such, they form a strong recurring revenue stream for our company and have historically generated high customer renewal rates. Consistent with industry trends, we expect SaaS and cloud revenue to become a greater portion of our overall revenue going forward.
Services Revenue
Professional services and BPaaS revenue represented approximately 22% of our 2014 total revenue. Professional services offerings help customers to install, optimize and integrate SunGards software into their computing environment.
As is typical in our industry, our profit margins on professional services revenue are lower than on our revenue from software offerings. We are currently investing to expand our global professional services delivery capacity in order to further improve our customers adoption of our core technologies.
Our BPaaS offerings typically provide back-office processing services to our customers where the process is built on a SunGard application. The combination of our industry and application knowledge, coupled with our customers desire to focus on their core competencies, is resulting in continued growth in these BPaaS offerings. Recently, we have expanded our BPaaS services to include utility offerings covering derivatives processing and U.S. transfer agency services. These utilities are based on SunGards proprietary software and allow us to service multiple customers from a single delivery center. We expect revenue to grow from these utility offerings, modestly increasing the percentage of SunGard revenue that is recurring. However, the margins from these offerings are expected to be lower than our software and SaaS & Cloud revenue margins, especially over the next few years as we invest to establish these offerings.
Results of Operations
We evaluate our performance using both U.S. GAAP (accounting principles generally accepted in the United States) and non-GAAP measures. Our primary non-GAAP measure is Adjusted EBITDA. For a definition of Adjusted EBITDA and a reconciliation to net income, please refer to Non-GAAP Financial Measures included elsewhere in this document. We are supplementing certain GAAP measures with comparable measures on a constant-currency basis, a non-GAAP measure, which exclude the impacts from changes in currency translation. We believe providing the year-to-year variances in 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 of our international operations, total revenues and expenses are affected by changes in the U.S. Dollar against international currencies. To present our constant currency year-over-year changes, 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.
34
Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014
Consolidated Results of Operations - Unaudited
Three Months Ended September 30, | Year-over-Year Change | |||||||||||||||||||||||
($ in millions) | % of Revenue | At Constant Currency |
||||||||||||||||||||||
2014 | 2015 | 2014 | 2015 | As Reported | ||||||||||||||||||||
Total revenue |
$ | 691 | $ | 702 | 100 | % | 100 | % | 2 | % | 4 | % | ||||||||||||
Costs and expenses: |
||||||||||||||||||||||||
Cost of sales and direct operating |
280 | 282 | 41 | % | 40 | % | 1 | % | 4 | % | ||||||||||||||
Sales, marketing and administration |
167 | 163 | 24 | % | 23 | % | (3 | )% | 2 | % | ||||||||||||||
Product development and maintenance |
91 | 83 | 13 | % | 12 | % | (10 | )% | (3 | )% | ||||||||||||||
Depreciation |
28 | 31 | 4 | % | 4 | % | 14 | % | 18 | % | ||||||||||||||
Amortization of acquisition-related intangible assets |
30 | 23 | 4 | % | 3 | % | (24 | )% | (21 | )% | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total costs and expenses |
596 | 582 | 86 | % | 83 | % | (2 | )% | 2 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Operating income |
95 | 120 | 14 | % | 17 | % | 26 | % | 20 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Operating margin |
13.7 | % | 17.0 | % | 3.3 | pts | 2.1 | pts | ||||||||||||||||
Interest income |
| 1 | 0 | % | 0 | % | nm | nm | ||||||||||||||||
Interest expense and amortization of deferred financing fees |
(73 | ) | (73 | ) | (10 | )% | (10 | )% | 0 | % | nm | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Other income (expense) |
(73 | ) | (72 | ) | (10 | )% | (10 | )% | nm | nm | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Income from continuing operations before income taxes |
22 | 48 | 3 | % | 7 | % | nm | nm | ||||||||||||||||
Provision for (benefit from) income taxes |
(11 | ) | 17 | (2 | )% | 2 | % | nm | nm | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Income from continuing operations before income taxes |
11 | 65 | 2 | % | 9 | % | nm | nm | ||||||||||||||||
Income from discontinued operations, net of tax |
| 2 | 0 | % | 0 | % | nm | nm | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Net income |
11 | 67 | 2 | % | 10 | % | nm | nm | ||||||||||||||||
Income attributable to non-controlling interests |
(42 | ) | (60 | ) | (6 | )% | (9 | )% | nm | nm | ||||||||||||||
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Net income (loss) attributable to SunGard |
$ | (31 | ) | $ | 7 | (4 | )% | 1 | % | nm | nm | |||||||||||||
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Other Financial Information |
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Adjusted EBITDA (1) |
$ | 188 | $ | 199 | 27 | % | 28 | % | 6 | % | 4 | % | ||||||||||||
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Adjusted EBITDA margin |
27.1 | % | 28.3 | % | 1.2 | pts | (0.1 | )pts | ||||||||||||||||
Note: Columns may not total due to rounding. |
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nm = not meaningful pts = points |
(1) | Adjusted EBITDA is a non-GAAP financial measure we use to evaluate the performance of SunGard and its reportable segments. Please refer to Non-GAAP Financial Measures for more information and a reconciliation to the nearest comparable GAAP financial measure. |
35
Revenue
Total revenue increased $11 million, or 2%, to $702 million in the third quarter of 2015. Foreign currency translation had a $20 million net unfavorable impact on the current period results. Excluding the effects of foreign currency changes, total revenue increased $31 million, or 4%, in the third quarter of 2015. Our revenue growth was primarily due to an increase in Services revenue related to our BPaaS utilities and professional services, license fees related to our new technology driven by a combination of new sales and renewals, and higher SaaS and broker-dealer volumes and adoption of our cloud offerings. This growth was particularly evident in the established markets. For the quarters ended September 30, 2015 and 2014, Software represented 38% and 39% of total revenue, SaaS and cloud revenue represented 39% of total revenue, and Services revenue represented 23% and 22% of total revenue, respectively.
Please refer to the Segment Results of Operations section for additional information about revenue for the three-month periods ended September 30, 2015 and 2014.
Cost of Sales and Direct Operating
Cost of sales and direct operating increased $2 million, or 1%, to $282 million in the third quarter of 2015. Foreign currency translation had a $9 million net favorable impact on the current period results. Excluding the effects of foreign currency translation, cost of sales and direct operating increased $11 million, or 4%, in the current-year quarter. The variance in cost of sales and direct operating was primarily due to a $10 million increase in employment- and consultant-related expenses primarily associated with the delivery of services and start-up of BPaaS utilities and principally includes wages, incentive compensation, employer taxes and employee benefit costs; a $6 million increase in expenses associated with customer trading activity in our broker/dealer business that have a direct correlation with trading volumes, including clearing fees, trading ticket charges, and electronic communication network (ECN) fees; partially offset by a $4 million decrease in restructuring actions taken in the third quarter of 2014. Cost of sales and direct operating was 40% and 41% of total revenue in the quarters ended September 30, 2015 and 2014, respectively.
Sales, Marketing and Administration
Sales, marketing and administration expense decreased $4 million, or 3%, to $163 million in the third quarter of 2015. Foreign currency translation had an $8 million net favorable impact on the current period results. Excluding the effects of foreign currency changes, sales, marketing and administration expense increased $4 million, or 2%, in the current-year quarter. The increase in sales, marketing and administration expense was primarily due to an $11 million increase in employment-related expenses including increased sales commissions, investments in additional sales resources, employer taxes and employee benefit costs; and $3 million in strategic initiative costs primarily related to the planned initial public offering and subsequent expected merger of SunGard with FIS. Offsetting these increases were a $5 million decrease in restructuring actions taken in the third quarter of 2014; $2 million decrease in foreign currency transaction losses; and a $1 million decrease in external services expenses. Sales, marketing and administration expense was 23% and 24% of total revenue in the quarters ended September 30, 2015 and 2014, respectively.
Product Development and Maintenance
Product development and maintenance expense decreased $8 million, or 10%, to $83 million in the third quarter of 2015. Foreign currency translation had a $6 million net favorable impact on the current period results. Excluding the effects of foreign currency changes, product development and maintenance expense decreased $2 million, or 3%, in the current-year quarter. The variance in product development and maintenance expense was primarily due to a $5 million decrease in severance from restructuring actions in the third quarter of 2014, partially offset by a $2 million decrease in capitalized software development costs in the current-year quarter. Product development and maintenance expense was 12% and 13% of total revenue in the quarters ended September 30, 2015 and 2014, respectively.
Depreciation
Depreciation expense increased $3 million, or 14%, to $31 million in the third quarter of 2015. Foreign currency translation had a $1 million net unfavorable impact on the current period results. Excluding the effects of foreign currency changes, depreciation expense increased $4 million, or 18%, in the current-year quarter. The increase in depreciation expense was due to increased capitalization of software assets in the past year. Depreciation expense was 4% of total revenue in each of the quarters ended September 30, 2015 and 2014.
Amortization of Acquisition-Related Intangible Assets
Amortization of acquisition-related intangible assets decreased $7 million, or 24%, to $23 million in the third quarter of 2015. Foreign currency translation had a $1 million net favorable impact on the current period results. Excluding the effects of foreign currency changes, amortization of acquisition-related intangible assets decreased $6 million, or 21%, in the current-year quarter. The variance in amortization of acquisition-related intangible assets was primarily due to the continued runoff of certain acquisition-related intangible assets primarily stemming from the LBO transaction in 2005. Amortization of acquisition-related intangible assets was 3% and 4% of total revenue in the quarters ended September 30, 2015 and 2014, respectively.
36
Operating Income
Operating income increased $25 million, or 26%, to $120 million in the third quarter of 2015. Foreign currency translation had a $5 million net favorable impact on the current period results. Excluding the effects of foreign currency changes, operating income increased $20 million, or 20%, and operating margin increased by 2.1 points in the current-year quarter. Operating income was impacted by the items discussed above.
Adjusted EBITDA
Adjusted EBITDA increased $11 million, or 6%, to $199 million in the third quarter of 2015. Foreign currency translation had a $3 million net favorable impact on the current period results. Excluding the impacts of currency, Adjusted EBITDA margin was essentially unchanged in the current-year quarter and includes growth in our Software, SaaS and cloud, and Services revenues and improved professional services profitability, partially offset by higher employment-related costs related to the start-up of BPaaS utilities and investments in sales resources, and higher incentive compensation.
Interest expense and amortization of deferred financing fees
Interest expense and amortization of deferred financing fees was unchanged in the quarter at $73 million.
Benefit from (provision for) income taxes
The effective income tax rates for the three month periods ended September 30, 2015 and 2014 were (33)% and 51%, respectively. The Companys effective tax rate reflects changes in the mix of income or losses in jurisdictions with a wide range of tax rates, permanent differences between GAAP and local tax laws, the impact of valuation allowances, unrecognized tax benefits, and the timing of recording discrete items. For the three months ended September 30, 2015, the provision for income taxes includes a deferred income tax benefit of $33 million recorded as a discrete item related to the tax-over-book basis difference of a small business within the FS segment which was sold on October 1, 2015.Also for the period, the Company continued to generate losses in France which exceed the scheduled reversal of deferred tax liabilities. As a result, no benefit has been recorded for these losses for the three months ended September 30, 2015. Changes in the mix of income, losses in particular jurisdictions or the total amount of income for 2015 may significantly impact the estimated effective income tax rate for the year.
The tax rate for the three month period ended September 30, 2014 reflected a decrease in the expected full year effective tax rate due primarily to a change in the mix of income.
Income attributable to the non-controlling interest (SunGard only)
Accrued dividends on SCCIIs cumulative preferred stock were $60 million and $42 million in the quarters ended September 30, 2015 and 2014, respectively. The increase in accrued dividends is due to the compounding of the cumulative, undeclared dividend.
Segment Results of Operations
Our business is organized into two segments, FS and PS&E. Corporate spending, which includes the costs of various support functions such as corporate finance, human resources, and legal, are not allocated to our reporting segments. As reflected below, we measure our financial performance using Adjusted EBITDA, which is a non-GAAP financial measure. We believe Adjusted EBITDA is an effective tool to measure our operating performance since it excludes non-cash items and certain variable charges. We use Adjusted EBITDA extensively to measure the financial performance of SunGard and its reportable segments, and also to report our results to our board of directors. Please refer to Non-GAAP Financial Measures for more information and a reconciliation to the nearest comparable GAAP financial measure.
37
Financial Systems segment
Year-over-Year Change | ||||||||||||||||
Three Months Ended September 30, | Reported | Constant Currency |
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2014 | 2015 | |||||||||||||||
(in millions) | ||||||||||||||||
Software |
$ | 235 | $ | 230 | (2 | )% | 2 | % | ||||||||
SaaS and cloud |
259 | 262 | 1 | % | 3 | % | ||||||||||
Services |
143 | 154 | 7 | % | 11 | % | ||||||||||
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Total FS Revenue |
$ | 637 | $ | 646 | 1 | % | 4 | % | ||||||||
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Adjusted EBITDA |
$ | 184 | $ | 196 | 7 | % | 5 | % | ||||||||
Adjusted EBITDA margin |
28.9 | % | 30.4 | % | 1.5 | pts | 0.1 | pts |
Revenue
Total FS revenue increased $9 million, or 1%, to $646 million in the third quarter of 2015. Foreign currency translation had a $20 million net unfavorable impact on the current period results. Excluding the effects of foreign currency changes, total FS revenue increased $29 million, or 4%, in the current-year quarter. The variance in total FS revenue was driven by growth in Software, SaaS and cloud, and Services revenue. These results reflect the customer reception of our new technology offerings, growth in the established markets, and growth in the array of services that surround and support our software. In the third quarters of 2015 and 2014 respectively, Software revenue was 36% and 37%, respectively, SaaS and cloud revenue was 40% and 41%, respectively, and Services revenue was 24% and 22%, respectively, of total FS revenue.
FS Software revenue decreased $5 million, or 2%, to $230 million in the third quarter of 2015. Foreign currency translation had a $10 million net unfavorable impact on the current period results. Excluding the effects of foreign currency changes, FS Software revenue increased $5 million, or 2%, in the current-year quarter. The variance in FS Software revenue was primarily due to strong license sales of our latest technology driven by a combination of new sales and renewals, particularly within our Global Trading business. Reported software license fee revenue was $53 million, a $5 million, or 9% increase, from the prior-year period.
FS SaaS and cloud revenue increased $3 million, or 1%, to $262 million in the third quarter of 2015. Foreign currency translation had a $4 million net unfavorable impact on the current period results. Excluding the effects of foreign currency changes, FS SaaS and cloud revenue increased $7 million, or 3%, in the current-year quarter. This variance in FS SaaS and cloud revenue was primarily due to increased SaaS and broker-dealer volumes.
FS Services revenue increased $11 million, or 7%, to $154 million in the third quarter of 2015. Foreign currency translation had a $6 million net unfavorable impact on the current period results. Excluding the effects of foreign currency changes, FS Services revenue increased $17 million, or 11%, in the current-year quarter. The variance in FS Services revenue was primarily due to growth in BPaaS utilities and professional services tied to our new technology offerings, as customers increased their spending to implement our solutions and integrate them into their operating environments, particularly within our Asset Management, Wealth and Retirement Administration, and Securities Finance and Processing businesses.
FS revenue from emerging markets, which represents 12% of total FS revenue and is comprised of China, India, Southeast Asia, the Middle East, Africa, Latin America and Eastern Europe, decreased 8% in the third quarter of 2015 over the prior-year period. Excluding the effects of foreign currency changes, FS revenue from emerging markets decreased 5% year over year, where decreases in professional services, reflecting the completion of key milestones in the second quarter of the prior year, and software rentals, due primarily to attrition, were partially offset by growth in software license, software maintenance and support, and SaaS. FS revenue in established markets, which represents 88% of total FS revenue and is comprised of the U.S., Western Europe, Japan and Australia, increased approximately 2% in the third quarter of 2015 over the prior-year period. Excluding the effects of foreign currency changes, FS revenue from established markets increased approximately 5% in the current-year quarter primarily due to strong license sales of our latest technology and increased Services revenue.
Adjusted EBITDA
FS Adjusted EBITDA increased $12 million, or 7%, to $196 million in the third quarter of 2015. Foreign currency translation had a $3 million net favorable impact on the current period results. Excluding the effects of foreign currency changes, FS Adjusted EBITDA margin increased by 0.1 points in the current-year quarter primarily due to the growth in our Software, SaaS and cloud, and Services revenues and improved professional services profitability, partially offset by increases in employment-related costs related to the start of BPaaS utilities and investments in sales resources, and a $2 million decrease in capitalized software development costs.
38
Public Sector & Education segment
Year-over-Year Change | ||||||||||||||||
Three Months Ended September 30, | Reported | Constant Currency |
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2014 | 2015 | |||||||||||||||
(in millions) | ||||||||||||||||
Software |
$ | 34 | $ | 36 | 3 | % | 3 | % | ||||||||
SaaS and cloud |
10 | 10 | 5 | % | 5 | % | ||||||||||
Services |
10 | 10 | 8 | % | 8 | % | ||||||||||
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Total PS&E Revenue |
$ | 54 | $ | 56 | 4 | % | 4 | % | ||||||||
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Adjusted EBITDA |
$ | 17 | $ | 16 | (6 | )% | (6 | )% | ||||||||
Adjusted EBITDA margin |
31.2 | % | 28.2 | % | (3.0 | )pts | (3.0 | )pts |
Revenue
Total PS&E revenue increased $2 million, or 4%, to $56 million in the third quarter of 2015 driven by growth in Software, and SaaS and cloud, and Services revenue. During the third quarters of 2015 and 2014, PS&E Software revenue was approximately 63%, PS&E SaaS and cloud revenue was approximately 17% and 18%, respectively, and PS&E Services revenue was approximately 20% and 19%, respectively, of total PS&E revenue. PS&E revenue, costs and expenses are unaffected by changes in foreign currency exchange rates since these businesses primarily transact in U.S. dollars.
PS&E Software revenue was $36 million and $34 million for the quarters ended September 30, 2015 and 2014, respectively, primarily due to an increase in software license fees and maintenance revenue for public safety solutions. PS&E SaaS and cloud revenue was $10 million for each of the quarters ended September 30, 2015 and 2014 due to increased SaaS and cloud revenues. PS&E Services revenue was $10 million for each of the quarters ended September 30, 2015 and 2014 and increased 8% related to the continued delivery of the contracted backlog resulting from new software license sales and product upgrades from 2013 and 2014 which generate related implementation and integration services. There is no business processing services revenue in this segment.
Adjusted EBITDA
PS&E Adjusted EBITDA decreased $1 million, or 6%, in the third quarter of 2015. The PS&E Adjusted EBITDA margin declined by 3 points during the current-year quarter to 28.2% driven by a higher mix of professional services.
Corporate
Corporate spending, as measured on an adjusted EBITDA basis, was $13 million for the quarters ended September 30, 2015 and 2014. Corporate expense in the third quarter of 2015 includes an increase in employer taxes primarily resulting from the exercise of share-based awards and increased medical benefits, partially offset by a decrease in external services expenses.
39
Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014
Consolidated Results of Operations - Unaudited
Nine Months Ended September 30, | Year-over-Year Change | |||||||||||||||||||||||
($ in millions) | % of Revenue | As Reported | At Constant Currency |
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2014 | 2015 | 2014 | 2015 | |||||||||||||||||||||
Total revenue |
$ | 2,017 | $ | 2,060 | 100 | % | 100 | % | 2 | % | 5 | % | ||||||||||||
Costs and expenses: |
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Cost of sales and direct operating |
822 | 833 | 41 | % | 40 | % | 1 | % | 5 | % | ||||||||||||||
Sales, marketing and administration |
493 | 476 | 24 | % | 23 | % | (4 | )% | 1 | % | ||||||||||||||
Product development and maintenance |
287 | 256 | 14 | % | 12 | % | (11 | )% | (5 | )% | ||||||||||||||
Depreciation |
79 | 87 | 4 | % | 4 | % | 10 | % | 14 | % | ||||||||||||||
Amortization of acquisition-related intangible assets |
114 | 65 | 6 | % | 3 | % | (43 | )% | (40 | )% | ||||||||||||||
Trade name impairment |
339 | | 17 | % | 0 | % | | % | | % | ||||||||||||||
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Total costs and expenses |
2,134 | 1,717 | 106 | % | 83 | % | (20 | )% | (16 | )% | ||||||||||||||
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Operating income (loss) |
(117 | ) | 343 | (6 | )% | 17 | % | 392 | % | 382 | % | |||||||||||||
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Operating margin |
(5.8 | )% | 16.7 | % | 22.5 | pts | 21.4 | pts | ||||||||||||||||
Interest income |
1 | 2 | 0 | % | 0 | % | nm | nm | ||||||||||||||||
Interest expense and amortization of deferred financing fees |
(220 | ) | (215 | ) | (11 | )% | (10 | )% | (2 | )% | nm | |||||||||||||
Loss on extinguishment of debt |
(61 | ) | | (3 | )% | 0 | % | nm | nm | |||||||||||||||
Other income (expense) |
| 1 | (0 | )% | (0 | )% | nm | nm | ||||||||||||||||
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Other income (expense) |
(280 | ) | (212 | ) | (14 | )% | (10 | )% | nm | nm | ||||||||||||||
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Income (loss) from continuing operations before income taxes |
(397 | ) | 131 | (20 | )% | 6 | % | nm | nm | |||||||||||||||
Provision for (benefit from) income taxes |
88 | (7 | ) | 4 | % | (0 | )% | nm | nm | |||||||||||||||
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Income (loss) from continuing operations before income taxes |
(309 | ) | 124 | (15 | )% | 6 | % | nm | nm | |||||||||||||||
Income (loss) from discontinued operations, net of tax |
(17 | ) | 4 | (1 | )% | 0 | % | nm | nm | |||||||||||||||
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Net income (loss) |
(326 | ) | 128 | (16 | )% | 6 | % | nm | nm | |||||||||||||||
Income attributable to non-controlling interests |
(132 | ) | (147 | ) | (7 | )% | (7 | )% | nm | nm | ||||||||||||||
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Net loss attributable to SunGard |
$ | (458 | ) | $ | (19 | ) | (23 | )% | (1 | )% | nm | nm | ||||||||||||
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Other Financial Information |
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Adjusted EBITDA (1) |
$ | 492 | $ | 552 | 24 | % | 27 | % | 12 | % | 11 | % | ||||||||||||
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Adjusted EBITDA margin |
24.4 | % | 26.8 | % | 2.4 | pts | 1.3 | pts |
Note: Columns may not total due to rounding.
nm = not meaningful
pts = points
(1) | Adjusted EBITDA is a non-GAAP financial measure we use to evaluate the performance of SunGard and its reportable segments. Please refer to Non-GAAP Financial Measures for more information and a reconciliation to the nearest comparable GAAP financial measure. |
40
Revenue
Total revenue increased $43 million, or 2%, to $2.1 billion in the nine-months ended September 30, 2015. Foreign currency translation had a $64 million net unfavorable impact on these results. Excluding the effects of foreign currency changes, total revenue increased $107 million, or 5%, in the nine-months ended September 30, 2015. Our revenue growth was primarily due to increased license fees related to our new technology driven by a combination of new sales and renewals, higher SaaS and broker-dealer volumes and adoption of our cloud offerings, and growth in Services revenue related to our BPaaS utilities and professional services. This growth was evident in both the established and emerging markets. For the nine-months ended September 30, 2015 and 2014, the mix of our revenue was similar, with Software representing 38% of total revenue, SaaS and cloud revenue representing 40% of total revenue, and Services revenue representing 22% of total revenue.
Please refer to the Segment Results of Operations section for additional information about revenue for the nine-months ended September 30, 2015 and 2014.
Cost of Sales and Direct Operating
Cost of sales and direct operating increased $11 million, or 1%, to $833 million in the nine-months ended September 30, 2015. Foreign currency translation had a $30 million net favorable impact on these results. Excluding the effects of foreign currency changes, cost of sales and direct operating increased $41 million, or 5%, in the nine-months ended September 30, 2015. The variance in cost of sales and direct operating was primarily due to a $19 million increase in expenses associated with customer trading activity in our broker/dealer business that have a direct correlation with trading volumes, including clearing fees, trading ticket charges, and electronic communication network (ECN) fees; and a $19 million increase in employment-related expenses related to the delivery of services and start-up of BPaaS utilities, consisting of wages, employer taxes and employee benefit costs. Cost of sales and direct operating was 40% and 41% of total revenue in each of the nine-months ended September 30, 2015 and 2014, respectively.
Sales, Marketing and Administration
Sales, marketing and administration expense decreased $17 million, or 4%, to $476 million in the nine-months ended September 30, 2015. Foreign currency translation had a $22 million net favorable impact on these results. Excluding the effects of foreign currency changes, sales, marketing and administration expense increased $5 million, or 1%, in the nine-months ended September 30, 2015. The variance in sales, marketing and administration expense was primarily due to $22 million of increased employment-related expenses related to increased medical benefit costs, investments in additional sales resources, increased sales commissions and incentive compensation, which were mostly offset by $8 million of one-time expenses in 2014 primarily related to the AS Split-Off, and $6 million in severance and facility restructuring costs associated with 2014 restructuring actions. Sales, marketing and administration expense was 23% and 24% of total revenue in the nine-months ended September 30, 2015 and 2014, respectively.
Product Development and Maintenance
Product development and maintenance expense decreased $31 million, or 11%, to $256 million in the nine-months ended September 30, 2015. Foreign currency translation had a $17 million net favorable impact on these results. Excluding the effects of foreign currency changes, product development and maintenance expense decreased $14 million, or 5%, in the nine-months ended September 30, 2015. The variance in product development and maintenance expense was primarily due to a $7 million decrease in employment-related expenses consisting primarily of wages, employer taxes, employee benefit costs, and travel expenses stemming primarily from headcount reductions which occurred in late 2014, and a $5 million decrease in severance costs associated with restructuring actions taken in 2014 and $3 million of facilities expense allocations due to the headcount reduction. Product development and maintenance expense was 12% and 14% of total revenue in the nine-months ended September 30, 2015 and 2014, respectively.
Depreciation
Depreciation expense increased $8 million, or 10%, to $87 million in the nine-months ended September 30, 2015. Foreign currency translation had a $3 million net favorable impact on these results. Excluding the effects of foreign currency changes, depreciation expense increased $11 million, or 14%, in the nine-months ended September 30, 2015. The variance in depreciation expense was primarily due to increased capitalization of software assets in 2015 and 2014. Depreciation expense was 4% of total revenue in each of the nine-months ended September 30, 2015 and 2014.
Amortization of Acquisition-Related Intangible Assets
Amortization of acquisition-related intangible assets decreased $49 million, or 43%, to $65 million in the nine-months ended September 30, 2015. Foreign currency translation had a $3 million net favorable impact on these results. Excluding the effects of
41
foreign currency changes, amortization of acquisition-related intangible assets decreased $46 million, or 40%, in the nine-months ended September 30, 2015. The variance in amortization of acquisition-related intangible assets was primarily due to the continued runoff of certain acquisition-related intangible assets primarily stemming from the LBO transaction in 2005. Amortization of acquisition-related intangible assets was 3% and 6% of total revenue in the nine-months ended September 30, 2015 and 2014, respectively.
Trade Name Impairment
As a result of the AS Split-Off, we recognized a $339 million impairment of the carrying value of the SunGard trade name as of March 31, 2014. There was no trade name impairment in the nine-months ended September 30, 2015.
Operating Income
Operating income increased $460 million, or 392%, to $343 million in the nine-months ended September 30, 2015. Foreign currency translation had a $11 million net favorable impact on these results. Excluding the effects of foreign currency changes, operating income increased $449 million, or 382%, and operating margin increased by 21.4 points in the nine-months ended September 30, 2015. Operating income was impacted by the items discussed above. Our operating margin increased primarily due to the 17 margin point impact of the trade name impairment in 2014, the 2 margin point impact of the decrease in amortization of acquisition-related intangible assets, and the 1 margin point impact of the decrease in restructuring charges, primarily related to severance.
Adjusted EBITDA
Adjusted EBITDA increased $60 million, or 12%, to $552 million in the nine-months ended September 30, 2015. Foreign currency translation had a $5 million net favorable impact on these results. Adjusted EBITDA margin increased by 1.3 points in the nine-months ended September 30, 2015 primarily due to the growth in our Software, SaaS and cloud, and Services revenues, improved professional services profitability, and decreases in employee-related product development spending; which were partially offset by higher employment-related costs related to the start-up of BPaaS utilities, higher incentive compensation, increases in employee medical benefits, and investments in sales resources.
Interest expense and amortization of deferred financing fees
Interest expense and amortization of deferred financing fees decreased $5 million, or 2%, to $215 million in the nine-months ended September 30, 2015. This decrease was primarily due to the write-off of deferred financing costs during the prior-year period resulting from the repayment and retirement of debt resulting from the AS Split-Off, and from non-capitalizable fees paid in connection with the February 2014 amendment of the Credit Agreement.
Loss on extinguishment of debt
Loss on extinguishment of debt was $61 million for the nine-months ended September 30, 2014. The loss on extinguishment of debt in the prior-year quarter includes (i) a $36 million loss associated with the exchange of approximately $425 million of senior notes issued by Sungard Availability Services, Inc. (SpinCo) (SpinCo Notes) for approximately $389 mil