SS&C Technologies Holdings, Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports unaudited fourth-quarter results. SS&C provides financial-services software and software-enabled outsourcing to more than 5,500 clients; recurring services and maintenance are central to its business.
Financial performance and position
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Revenue | $551.8 million | $370.8 million | +48.8% |
| Gross profit / margin | $251.9 million / 45.7% | $186.5 million / 50.3% | Margin down about 4.6 points |
| Operating income / margin | $123.2 million / 22.3% | $93.8 million / 25.3% | Income +31.4% |
| Net income | $45.8 million | $51.0 million | -10.2% |
| Diluted EPS | $0.55 | $0.63 | -12.7% |
| Cash from operations | $134.4 million | $110.4 million | +21.8% |
- Software-enabled services generated $406.5 million, up 65%, and maintenance generated $93.8 million, up 20%. Contractually recurring revenues were $500.2 million, or 90.6% of total revenue. Software licenses declined 4% to $22.5 million.
- Operating cash flow was $134.4 million. Capital expenditures were $17.2 million and capitalized software additions were $1.1 million. Investing activities used $985.0 million, principally for $967.1 million of acquisitions.
- Cash was $86.2 million at year-end, versus $40.3 million a year earlier. Current assets were $206.9 million and current liabilities $160.3 million.
- Debt was approximately $1.021 billion, versus $100.0 million at year-end 2011. Interest expense rose to $32.9 million from $14.7 million; management cited the acquisition-related credit facility and its original issue discount. A 1-point interest-rate increase was estimated to raise annual interest expense by about $4.7 million.
- Assets were $2.363 billion and stockholders’ equity $1.076 billion. The company reported a 35% effective tax rate, compared with 31% in 2011.
Fourth-quarter results
Q4 2012 revenue was $171.8 million, gross profit $75.5 million, operating income $42.8 million, and net income $16.1 million; basic and diluted EPS were $0.20 and $0.19. Q4 2011 revenue was $95.7 million, gross profit $48.0 million, operating income $23.7 million, and net income $13.3 million, with basic and diluted EPS of $0.17 and $0.16.
Material changes and management commentary
- Growth was driven substantially by the 2012 acquisitions of GlobeOp and Thomson Reuters’ PORTIA business, which contributed $168.1 million of reported 2012 revenue, as well as continued demand for alternative-investment services. GlobeOp was acquired for approximately $834.4 million and PORTIA for approximately $170.0 million.
- Acquisition-related intangible amortization and higher service-delivery costs reduced gross margin; gross margin fell from 50.3% in 2011 to 45.7% in 2012. The company also recorded $14.3 million of acquisition transaction costs and $14.3 million of losses on foreign-currency contracts, among other unusual items.
- Management stated that cash on hand and operating cash flows were expected to cover current obligations, projected working-capital needs, and capital spending for at least the next 12 months. No quantitative revenue or earnings guidance was provided.
- Under its credit agreement, the company reported a 3.65x consolidated net senior secured leverage ratio against a 5.50x maximum and said it was in compliance with covenants at year-end. The facility is secured by substantially all assets of the parent, operating company, and material domestic subsidiaries; it restricts additional debt, dividends, acquisitions, and other actions.
- Management reported average retention above 90% for core enterprise software-enabled services and maintenance contracts. It described opportunities from regulatory complexity, outsourcing, cloud services, cross-selling, and acquisitions.
Risks, contingencies, and controls
- GlobeOp faces litigation tied to the Fairfield Greenwich/Madoff funds and Millennium funds. Millennium claims include a U.S. putative class action alleging $844 million and U.K. arbitration claims exceeding $160 million, plus an indemnity request of at least $26.5 million. These are asserted claims, not stated amounts of probable loss; the company said outcomes could not be predicted and was vigorously contesting them.
- Other key risks include high leverage and variable interest rates; integration and execution risks from major acquisitions; exposure to hedge-fund assets and market activity; cybersecurity, service interruptions, and data loss; regulatory and cross-border risks; foreign-exchange exposure (the company said it did not hedge); competition; and reliance on key personnel and technology.
- Goodwill was $1.560 billion, substantially increased by acquisitions; the company reported no goodwill impairment and stated estimated fair value exceeded carrying value by more than 25%. Future amortization of acquired intangibles was estimated at $85.0 million for 2013.
- The auditor gave unqualified opinions on the financial statements and internal control over financial reporting. However, management and the auditor excluded acquired GlobeOp entities from the 2012 internal-control assessment and audit; those entities represented 41% of consolidated assets and 26% of revenue.
Important facts for investors to verify
- How much of reported growth and future earnings comes from acquired businesses, and whether integration and cost synergies materialize.
- Debt repayment, refinancing capacity, interest-rate sensitivity, and headroom under the leverage covenant.
- The trajectory of gross margins as acquisition-related amortization and service costs affect results.
- Developments, insurance coverage, and potential financial exposure in the Fairfield Greenwich and Millennium litigation.
- Post-acquisition internal-control coverage for GlobeOp and the difference between the filing’s geographic revenue descriptions: 24% outside North America versus 35% outside the United States.