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1. Principles of Consolidation
The condensed consolidated financial statements for the three-month periods ended March 31, 2010 and 2009 are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the condensed consolidated financial statements have been included. Such adjustments consisted of normal recurring items. Interim results are not necessarily indicative of results for a full year. The condensed consolidated financial statements and accompanying notes are presented as permitted by Form 10-Q and do not contain certain information included in the annual consolidated financial statements and accompanying notes of Fiserv, Inc. (the “Company”). These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
The condensed consolidated financial statements include the accounts of Fiserv, Inc. and all 100% owned subsidiaries. Investments in less than 50% owned affiliates in which the Company has significant influence are accounted for using the equity method of accounting. All intercompany transactions and balances have been eliminated in consolidation.
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2. Fair Value Measurements
Assets and liabilities which are measured at fair value are classified in the following categories:
Level 1 – At March 31, 2010 and December 31, 2009, the fair values of available-for-sale investments in asset-backed securities of $10 million and $11 million, respectively, were based on quoted prices in active markets for identical instruments as of the reporting date.
Level 2 – At March 31, 2010 and December 31, 2009, the fair values of available-for-sale investments in asset-backed securities of $5 million and $6 million, respectively, and liabilities for interest rate hedge contracts of $93 million and $92 million, respectively, were determined from market based valuation models for which pricing inputs were either directly or indirectly observable as of the reporting date.
Level 3 – At March 31, 2010 and December 31, 2009, the fair values of available-for-sale investments of $23 million were based on valuation models with unobservable pricing inputs and management estimates. Unrealized losses of $2 million were recorded in accumulated other comprehensive loss at March 31, 2010 and December 31, 2009.
The fair value of the Company’s total debt was estimated using discounted cash flows based on the Company’s current incremental borrowing rates or quoted prices in active markets and totaled $3.6 billion and $3.8 billion at March 31, 2010 and December 31, 2009, respectively.
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5. Interest Rate Hedge Contracts
To manage exposure to fluctuations in interest rates, the Company maintains a series of interest rate swap agreements (“Swaps”) with total notional values of $1.2 billion at March 31, 2010 and December 31, 2009. The Swaps have been designated by the Company as cash flow hedges, effectively fix interest rates on floating rate term loan borrowings at a weighted-average rate of approximately 4.8% prior to financing spreads and related fees, and have expiration dates through September 2012. The fair values of the Swaps, as discussed in Note 2, were recorded in other long-term liabilities and in accumulated other comprehensive loss, net of income taxes, in the condensed consolidated balance sheets. The components of other comprehensive income (loss) pertaining to interest rate hedge contracts are presented in Note 6. In the first quarter of 2010 and 2009, interest expense recognized due to hedge ineffectiveness was not significant, and no amounts were excluded from the assessments of hedge effectiveness. Based on the amounts recorded in accumulated other comprehensive loss at March 31, 2010, the Company estimates that it will recognize approximately $40 million in interest expense related to interest rate hedge contracts during the next twelve months.
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6. Comprehensive Income
Comprehensive income was as follows:
| Three Months Ended March 31, |
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| (In millions) | 2010 | 2009 | ||||||
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Net income |
$ | 121 | $ | 103 | ||||
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Other comprehensive income (loss), net of income taxes: |
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Fair market value adjustments on investments |
1 | 10 | ||||||
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Fair market value adjustments on cash flow hedges |
(8 | ) | (3 | ) | ||||
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Reclassification adjustment for net realized losses on cash flow hedges included in interest expense |
8 | 8 | ||||||
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Foreign currency translation adjustments |
(2 | ) | (1 | ) | ||||
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Other comprehensive income (loss) |
(1 | ) | 14 | |||||
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Comprehensive income |
$ | 120 | $ | 117 | ||||
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7. Business Segment Information
The Company’s operations are comprised of the Payments and Industry Products (“Payments”) segment, the Financial Institution Services (“Financial”) segment, and the Corporate and Other segment. The Payments segment primarily provides electronic bill payment and settlement, electronic funds transfer, and debit processing products and services to meet the electronic transaction processing needs of the financial services industry. The businesses in this segment also provide card and print personalization services, Internet banking, investment account processing services for separately managed accounts, and fraud and risk management products and services. The Financial segment provides banks, thrifts and credit unions with account processing services, item processing services, loan origination and servicing products, cash management and consulting services, and other products and services that support numerous types of financial transactions. The Corporate and Other segment primarily consists of unallocated corporate overhead expenses, amortization of acquisition-related intangible assets and intercompany eliminations.
| (In millions) | Payments | Financial | Corporate and Other |
Total | |||||||||
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Three Months Ended March 31, 2010 |
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Processing and services revenue |
$ | 397 | $ | 432 | $ | 2 | $ | 831 | |||||
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Product revenue |
143 | 40 | (6 | ) | 177 | ||||||||
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Total revenue |
$ | 540 | $ | 472 | $ | (4 | ) | $ | 1,008 | ||||
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Operating income |
$ | 148 | $ | 136 | $ | (46 | ) | $ | 238 | ||||
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Three Months Ended March 31, 2009 |
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Processing and services revenue |
$ | 386 | $ | 445 | $ | — | $ | 831 | |||||
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Product revenue |
158 | 43 | (9 | ) | 192 | ||||||||
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Total revenue |
$ | 544 | $ | 488 | $ | (9 | ) | $ | 1,023 | ||||
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Operating income |
$ | 155 | $ | 142 | $ | (72 | ) | $ | 225 | ||||
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8. Subsidiary Guarantors of Long-Term Debt
Certain of the Company’s 100% owned domestic subsidiaries (“Guarantor Subsidiaries”) jointly and severally, and fully and unconditionally guarantee the Company’s indebtedness under its revolving credit facility, senior term loan and senior notes. The following condensed consolidating financial information is presented on the equity method and reflects the summarized financial information for: (a) the Company; (b) the Guarantor Subsidiaries on a combined basis; and (c) the Company’s non-guarantor subsidiaries on a combined basis.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 2010
| (In millions) | Parent Company |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||
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Revenue: |
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Processing and services |
$ | — | $ | 589 | $ | 260 | $ | (18 | ) | $ | 831 | |||||||||
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Product |
— | 156 | 30 | (9 | ) | 177 | ||||||||||||||
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Total revenue |
— | 745 | 290 | (27 | ) | 1,008 | ||||||||||||||
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Expenses: |
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Cost of processing and services |
(1 | ) | 322 | 161 | (20 | ) | 462 | |||||||||||||
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Cost of product |
— | 120 | 22 | (6 | ) | 136 | ||||||||||||||
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Selling, general and administrative |
18 | 109 | 45 | — | 172 | |||||||||||||||
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Total expenses |
17 | 551 | 228 | (26 | ) | 770 | ||||||||||||||
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Operating income (loss) |
(17 | ) | 194 | 62 | (1 | ) | 238 | |||||||||||||
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Interest (expense) income, net |
14 | (57 | ) | (2 | ) | — | (45 | ) | ||||||||||||
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Income (loss) from continuing operations before income taxes and income from investment in unconsolidated affiliate |
(3 | ) | 137 | 60 | (1 | ) | 193 | |||||||||||||
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Income tax (provision) benefit |
2 | (52 | ) | (23 | ) | — | (73 | ) | ||||||||||||
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Income from investment in unconsolidated affiliate, net of income taxes |
— | — | 3 | — | 3 | |||||||||||||||
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Income (loss) from continuing operations |
(1 | ) | 85 | 40 | (1 | ) | 123 | |||||||||||||
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Equity in earnings of consolidated affiliates |
124 | — | — | (124 | ) | — | ||||||||||||||
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Loss from discontinued operations, net of income taxes |
(2 | ) | — | — | — | (2 | ) | |||||||||||||
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Net income |
$ | 121 | $ | 85 | $ | 40 | $ | (125 | ) | $ | 121 | |||||||||
CONDENSED CONSOLIDATING STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 2009
| (In millions) | Parent Company |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||
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Revenue: |
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Processing and services |
$ | — | $ | 584 | $ | 264 | $ | (17 | ) | $ | 831 | |||||||||
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Product |
— | 171 | 27 | (6 | ) | 192 | ||||||||||||||
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Total revenue |
— | 755 | 291 | (23 | ) | 1,023 | ||||||||||||||
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Expenses: |
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Cost of processing and services |
2 | 311 | 158 | (13 | ) | 458 | ||||||||||||||
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Cost of product |
— | 130 | 26 | (14 | ) | 142 | ||||||||||||||
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Selling, general and administrative |
25 | 115 | 58 | — | 198 | |||||||||||||||
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Total expenses |
27 | 556 | 242 | (27 | ) | 798 | ||||||||||||||
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Operating income (loss) |
(27 | ) | 199 | 49 | 4 | 225 | ||||||||||||||
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Interest (expense) income, net |
10 | (61 | ) | (3 | ) | — | (54 | ) | ||||||||||||
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Income (loss) from continuing operations before income taxes and income from investment in unconsolidated affiliate |
(17 | ) | 138 | 46 | 4 | 171 | ||||||||||||||
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Income tax (provision) benefit |
6 | (53 | ) | (17 | ) | (2 | ) | (66 | ) | |||||||||||
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Income from investment in unconsolidated affiliate, net of income taxes |
— | — | 1 | — | 1 | |||||||||||||||
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Income (loss) from continuing operations |
(11 | ) | 85 | 30 | 2 | 106 | ||||||||||||||
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Equity in earnings of consolidated affiliates |
114 | — | — | (114 | ) | — | ||||||||||||||
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(Loss) income from discontinued operations, net of income taxes |
— | (4 | ) | 1 | — | (3 | ) | |||||||||||||
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Net income |
$ | 103 | $ | 81 | $ | 31 | $ | (112 | ) | $ | 103 | |||||||||
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2010
| (In millions) | Parent Company |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||
| ASSETS | |||||||||||||||||
|
Cash and cash equivalents |
$ | 116 | $ | 152 | $ | 148 | $ | — | $ | 416 | |||||||
|
Trade accounts receivable, net |
(2 | ) | 341 | 175 | — | 514 | |||||||||||
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Prepaid expenses and other current assets |
58 | 137 | 119 | — | 314 | ||||||||||||
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Total current assets |
172 | 630 | 442 | — | 1,244 | ||||||||||||
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Investments in consolidated affiliates |
5,163 | — | — | (5,163 | ) | — | |||||||||||
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Goodwill and intangible assets, net |
2 | 5,413 | 924 | — | 6,339 | ||||||||||||
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Other long-term assets |
113 | 300 | 313 | — | 726 | ||||||||||||
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Total assets |
$ | 5,450 | $ | 6,343 | $ | 1,679 | $ | (5,163 | ) | $ | 8,309 | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||||||||
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Total current liabilities |
$ | 229 | $ | 439 | $ | 322 | $ | — | $ | 990 | |||||||
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Long-term debt |
3,373 | 8 | — | — | 3,381 | ||||||||||||
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Due to (from) consolidated affiliates |
(2,053 | ) | 1,961 | 92 | — | — | |||||||||||
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Other long-term liabilities |
783 | 36 | 1 | — | 820 | ||||||||||||
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Total liabilities |
2,332 | 2,444 | 415 | — | 5,191 | ||||||||||||
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Total shareholders’ equity |
3,118 | 3,899 | 1,264 | (5,163 | ) | 3,118 | |||||||||||
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Total liabilities and shareholders’ equity |
$ | 5,450 | $ | 6,343 | $ | 1,679 | $ | (5,163 | ) | $ | 8,309 | ||||||
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2009
| (In millions) | Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||
| ASSETS | |||||||||||||||||
|
Cash and cash equivalents |
$ | 55 | $ | 169 | $ | 139 | $ | — | $ | 363 | |||||||
|
Trade accounts receivable, net |
(2 | ) | 361 | 195 | — | 554 | |||||||||||
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Prepaid expenses and other current assets |
91 | 135 | 134 | — | 360 | ||||||||||||
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Total current assets |
144 | 665 | 468 | — | 1,277 | ||||||||||||
|
Investments in consolidated affiliates |
3,154 | — | — | (3,154 | ) | — | |||||||||||
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Goodwill and intangible assets, net |
2 | 5,447 | 928 | — | 6,377 | ||||||||||||
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Other long-term assets |
114 | 305 | 305 | — | 724 | ||||||||||||
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Total assets |
$ | 3,414 | $ | 6,417 | $ | 1,701 | $ | (3,154 | ) | $ | 8,378 | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||||||||
|
Total current liabilities |
$ | 337 | $ | 488 | $ | 336 | $ | — | $ | 1,161 | |||||||
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Long-term debt |
3,373 | 9 | — | — | 3,382 | ||||||||||||
|
Due to (from) consolidated affiliates |
(4,094 | ) | 3,973 | 121 | — | — | |||||||||||
|
Other long-term liabilities |
772 | 34 | 3 | — | 809 | ||||||||||||
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Total liabilities |
388 | 4,504 | 460 | — | 5,352 | ||||||||||||
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Total shareholders’ equity |
3,026 | 1,913 | 1,241 | (3,154 | ) | 3,026 | |||||||||||
|
Total liabilities and shareholders’ equity |
$ | 3,414 | $ | 6,417 | $ | 1,701 | $ | (3,154 | ) | $ | 8,378 | ||||||
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2010
| (In millions) | Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||
|
Cash flows from operating activities: |
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Net cash provided by operating activities from continuing operations |
$ | 76 | $ | 120 | $ | 63 | $ | 1 | $ | 260 | ||||||||||
|
Cash flows from investing activities: |
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Capital expenditures, including capitalization of software costs |
— | (34 | ) | (8 | ) | — | (42 | ) | ||||||||||||
|
Other investing activities |
150 | — | 7 | (150 | ) | 7 | ||||||||||||||
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Net cash (used in) provided by investing activities from continuing operations |
150 | (34 | ) | (1 | ) | (150 | ) | (35 | ) | |||||||||||
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Cash flows from financing activities: |
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Repayments of long-term debt |
(126 | ) | — | — | — | (126 | ) | |||||||||||||
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Purchases of treasury stock |
(71 | ) | — | — | — | (71 | ) | |||||||||||||
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Other financing activities |
33 | (103 | ) | (53 | ) | 149 | 26 | |||||||||||||
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Net cash used in financing activities from continuing operations |
(164 | ) | (103 | ) | (53 | ) | 149 | (171 | ) | |||||||||||
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Net change in cash and cash equivalents from continuing operations |
62 | (17 | ) | 9 | — | 54 | ||||||||||||||
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Net cash transactions transferred to discontinued operations |
(1 | ) | — | — | — | (1 | ) | |||||||||||||
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Beginning balance |
55 | 169 | 139 | — | 363 | |||||||||||||||
|
Ending balance |
$ | 116 | $ | 152 | $ | 148 | $ | — | $ | 416 | ||||||||||
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2009
| (In millions) | Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||
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Cash flows from operating activities: |
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Net cash provided by operating activities from continuing operations |
$ | 56 | $ | 97 | $ | 83 | $ | (5 | ) | $ | 231 | |||||||||
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Cash flows from investing activities: |
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Capital expenditures, including capitalization of software costs |
(1 | ) | (38 | ) | (6 | ) | — | (45 | ) | |||||||||||
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Other investing activities |
— | (42 | ) | (51 | ) | 96 | 3 | |||||||||||||
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Net cash used in investing activities from continuing operations |
(1 | ) | (80 | ) | (57 | ) | 96 | (42 | ) | |||||||||||
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Cash flows from financing activities: |
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Repayments of long-term debt |
(100 | ) | — | (1 | ) | — | (101 | ) | ||||||||||||
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Purchases of treasury stock |
(25 | ) | — | — | — | (25 | ) | |||||||||||||
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Other financing activities |
102 | (1 | ) | 4 | (91 | ) | 14 | |||||||||||||
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Net cash (used in) provided by financing activities from continuing operations |
(23 | ) | (1 | ) | 3 | (91 | ) | (112 | ) | |||||||||||
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Net change in cash and cash equivalents from continuing operations |
32 | 16 | 29 | — | 77 | |||||||||||||||
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Net cash transactions transferred from (to) discontinued operations |
10 | (10 | ) | — | — | — | ||||||||||||||
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Beginning balance |
32 | 104 | 94 | — | 230 | |||||||||||||||
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Ending balance |
$ | 74 | $ | 110 | $ | 123 | $ | — | $ | 307 | ||||||||||