SS&C Technologies Holdings, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Amounts are in millions of dollars unless stated otherwise. The results include DST from April 16, 2018 and CACEIS from June 1, 2018; therefore, reported growth is substantially acquisition-driven and not a like-for-like comparison.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $895.8 | $411.0 | $1,317.7 | $818.7 |
| Gross profit / margin | $292.3 / 32.6% | $187.3 / 45.6% | $484.7 / 36.8% | $377.5 / 46.1% |
| Operating income (loss) | ($50.7) | $89.9 | $36.1 | $179.7 |
| Net income (loss) | ($63.7) | $51.1 | ($12.5) | $99.3 |
| Diluted EPS | ($0.27) | $0.24 | ($0.06) | $0.47 |
| Net interest expense | $70.2 | $26.3 | $95.6 | $55.3 |
- Q2 revenue rose 118%; six-month revenue rose 61%. Management attributed $474.6 million of Q2 and $476.4 million of six-month revenue growth to acquisitions. Software-enabled services drove most of the increase.
- Operating results included $91.1 million of Q2 transaction expenses and a $44.4 million debt-extinguishment loss. The six-month figures include $94.5 million and $44.4 million, respectively.
- Operating cash flow was $119.7 million for the first six months, versus $195.2 million in 2017. Management said $135.0 million of one-time DST-related payments negatively affected 2018 operating cash flow. Investing cash flow was ($4,648.8) million, primarily reflecting acquisitions; financing cash flow was $5,969.4 million.
Financial position, liquidity and debt
- At June 30, cash and cash equivalents were $785.1 million; total cash, cash equivalents and restricted cash reported in the cash-flow reconciliation was $1,503.1 million. This latter amount includes $708.4 million of client funds, which are restricted and should not be treated as freely available corporate cash. Client funds obligations were $770.8 million.
- Debt carrying value was $6,910.3 million, including $6,837.0 million long-term debt; senior secured facilities had a $6,962.2 million principal balance and a 4.57% weighted-average rate. The $250 million revolving facility had $241.2 million available, with $8.8 million of letters of credit drawn.
- The company raised approximately $1.4 billion net from an April common-stock offering and paid $31.4 million in dividends during the first half. Management stated cash, operating cash flow and credit availability were expected to fund obligations and projected needs for at least the next 12 months.
- Substantially all relevant borrower assets secure the credit facilities. A minimum secured-leverage covenant applies to the revolver under specified borrowing conditions and becomes effective for the period ending September 30, 2018.
Material changes, outlook and risks
- DST acquisition: Purchased April 16 for approximately $5.1 billion in cash. The acquisition drove significant increases in revenue, assets, goodwill, debt, amortization and interest costs. A $54.3 million severance charge related to integration headcount reductions was recorded; the reduction was expected to be complete by December 2018.
- Accounting change: ASC 606 adoption increased opening retained earnings by $65.8 million pre-tax ($47.9 million after tax). It reduced reported revenue by $9.6 million in Q2 and $21.4 million for the first half versus presentation without adoption; prior-year comparisons were not restated.
- Tax and unusual items: The Q2 income-tax benefit was $99.9 million; the first-half benefit was $89.2 million. The filing attributes the unusually low effective tax rates partly to DST-related deferred-tax remeasurement and stock-award tax benefits. DST award conversions generated $33.3 million of Q2 stock-compensation expense, including $28.1 million for accelerated vesting.
- Interest-rate exposure: The filing estimates a 1 percentage-point rate increase would add approximately $69.6 million of annual interest expense on variable-rate debt. It also estimates a 100-basis-point change in client-account interest earnings would affect annual net income by approximately $8.7 million.
- Further acquisition: On July 31, 2018, SS&C agreed to acquire Eze Software for $1.45 billion in cash, expected to close by Q4 2018 subject to customary conditions. The company planned to use cash on hand and term-loan debt. No quantified operating guidance is provided in the filing.
- Other matters: A DST-related ERISA class action and Department of Labor inquiry were disclosed; the company had not determined their potential effect. Management judged the controls and procedures effective, while DST’s separate systems and related internal controls were still being reviewed.
Important facts for investors to verify
- How much post-acquisition growth and margin performance is organic, and whether cost synergies offset integration, amortization and other acquired costs.
- Debt reduction capacity, covenant headroom and the financing impact of the planned Eze acquisition; assess corporate liquidity separately from client funds.
- The sustainability of cash generation after the disclosed one-time acquisition payments and the sensitivity of earnings to variable interest rates.
- The extent to which reported losses reflect recurring operations versus transaction, restructuring, debt-extinguishment, stock-compensation and tax items.
- Progress on DST integration and internal-control review, and any developments in the disclosed litigation or regulatory inquiry.