SS&C Technologies Holdings, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Amounts are in millions of dollars, except per-share data. SS&C provides software-enabled services, software licenses, maintenance and related services.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $1,138.1 | $1,148.0 | $2,311.7 | $2,285.2 |
| Gross profit | $511.3 | $498.9 | $1,019.3 | $974.2 |
| Operating income | $241.3 | $223.5 | $460.1 | $425.5 |
| Net income | $169.5 | $121.1 | $268.7 | $201.9 |
| Diluted EPS | $0.64 | $0.45 | $1.01 | $0.76 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $555.7 | $416.6 |
- Q2 gross margin was 44.9%, versus 43.5%; operating margin was approximately 21.2%, versus 19.5%. Six-month gross margin was 44.1%, versus 42.6%.
- Q2 revenue declined 0.9% year over year: software-enabled services fell 1.8%, while license, maintenance and related revenue grew 4.2%. For the first half, revenue increased 1.2%.
- Q2 interest expense, net, was $60.5, down from $104.3; the six-month amounts were $137.9 and $205.9. The filing attributes the decline mainly to lower average interest rates and debt balances.
- Other income, net, was $19.0 in Q2 and $3.7 for the first half; it included investment gains of $16.8 and $6.5, respectively.
Liquidity, debt and capital allocation
- At June 30, cash and cash equivalents were $261.9, compared with $152.8 at year-end 2019. Debt carrying value was $6,902.5, including $6,830.7 long-term debt. The $786.5 of funds receivable and funds held for clients is matched by client funds obligations and should not be treated as ordinary available cash.
- Six-month operating cash flow of $555.7 funded, among other uses, $114.1 of acquisition payments, $35.9 of capitalized software and $16.0 of capital expenditures. Financing cash outflow was $1,221.1, driven largely by a $947.4 decrease in client funds obligations, $257.3 net debt repayments and $64.0 of dividends. Cash, cash equivalents and restricted cash decreased $838.9, substantially reflecting the client-funds movement.
- The company had $246.0 available under its $250 million revolving facility at June 30; the $211 million precautionary borrowing and an earlier $35 million seasonal draw had been repaid. The reported covenant leverage ratio was 2.53x against a maximum of 6.75x.
- In January, SS&C reduced the Term Loan B interest margin from LIBOR plus 2.25% to LIBOR plus 1.75%. It also repurchased $50.0 principal of term loans in Q2. The $2.0 billion of 5.5% senior notes mature in 2027; scheduled term-loan balance is due April 2025.
- SS&C paid $0.125 per share in dividends in each of the first two quarters and repurchased $27.9 of shares in Q2. In July, the board renewed and increased the buyback authorization to $750 million.
Changes, outlook and risks
- Management said there had been no direct material negative effect from COVID-19 through the reporting date, but noted client delays, weakness in certain products and uncertainty about future effects. Organic Q2 revenue decreased $27.8; acquisitions added $25.1 and foreign currency translation reduced revenue by $7.2. Remote-work technology costs rose, while travel and other discretionary expenses fell. The company was limiting discretionary spending and reprioritizing capital projects.
- Q2 profitability improved despite lower revenue, supported by lower organic costs, reduced interest expense and investment gains. Acquisition-related integration severance was $31.7 for the first half, versus $9.3 a year earlier.
- SS&C acquired Captricity in March and Innovest in May. The acquisitions contributed $25.1 of Q2 revenue combined; purchase-price allocations were preliminary. No full-year financial guidance is provided in the supplied filing text.
- Other notable item: first-half comprehensive income was $149.4, down from $229.9, including a $116.6 foreign-currency translation loss. Effective tax rates were 14.8% for Q2 and 16.8% for the first half, compared with 22.0% and 19.9%; the company cites a state tax benefit and changes in income mix, among other factors.
- Legal contingencies include ERISA-related litigation, a Department of Labor action and hundreds of individual arbitration demands involving DST’s retirement plan. The company said it could not yet determine their financial effect, if any, while stating it did not believe other claims were probable to result in material losses.
- Risks include COVID-19 uncertainty, substantial debt and interest-rate exposure, foreign-currency movements, investment-value volatility, and potential covenant defaults. A 1% increase in rates was estimated to raise annual interest expense by about $49.4, partly offset by rate-sensitive client cash earnings. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether organic revenue and client commitments recover from pandemic-related weakness, and how much future growth depends on acquisitions.
- Available unrestricted liquidity after excluding client funds, upcoming debt maturities, borrowing costs and covenant headroom.
- Sustainability of margins and earnings given lower discretionary costs, acquisition integration expenses and investment gains.
- Final acquisition purchase-price allocations, goodwill and intangible amortization, and acquisition-related cash requirements.
- Developments and potential exposure in the DST ERISA litigation and arbitration matters.
- Foreign-exchange effects and the liquidity/timing of private-equity fund distributions, including the fund concentrated in energy and real estate.