SS&C Technologies Holdings, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unaudited consolidated results; amounts below are in millions unless stated. SS&C provides software-enabled services, software, maintenance and professional services, principally to investment managers. The company reports one operating segment.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $179.5 | $165.6 | $530.2 | $380.1 |
| Gross profit / margin | $83.3 / 46% | $71.8 / 43% | $239.8 / 45% | $176.4 / 46% |
| Operating income | $47.9 | $37.2 | $135.2 | $80.4 |
| Net income | $43.5 | $17.6 | $91.0 | $29.7 |
| Diluted EPS | $0.51 | $0.21 | $1.07 | $0.36 |
| Operating cash flow | Not presented separately | Not presented separately | $154.3 | $60.7 |
- Q3 revenue increased 8%; net income increased 147%. Nine-month revenue grew 39% and net income grew 206% year over year.
- Nine-month operating cash flow was $154.3; investing activities used $11.4 and financing activities used $144.8. Cash declined $4.6 from year-end 2012 to $81.6.
- At September 30, cash was $81.6 and current assets and liabilities were $217.4 and $161.6, respectively. Working capital was approximately $55.8; the filing does not present a current ratio.
- Credit-facility principal outstanding was $844.0; carrying value of total debt was $836.2, including the unamortized discount. Debt principal was down from $1,021.0 at December 31, 2012. The weighted-average interest rate was 3.34% versus 4.42%.
- Q3 operating margin was approximately 26.7% versus 22.5% a year earlier; nine-month operating margin was approximately 25.5% versus 21.2%.
Material changes and drivers
- Management attributed Q3 revenue growth to continued demand for hedge-fund and private-equity services and higher PORTIA software-license demand. For the nine-month comparison, GlobeOp and the PORTIA Business acquisitions contributed $119.2 of revenue; management also cited organic demand growth. No acquisitions were completed in the first nine months of 2013.
- Q3 gross margin improved to 46%, which management attributed largely to cost reductions at acquired businesses. Nine-month gross margin eased to 45% from 46%, mainly due to amortization of acquired intangible assets, partly offset by cost reductions.
- Nine-month interest expense increased to $33.3 from $18.8, reflecting the higher average debt balance following the 2012 acquisitions and financing-cost amortization. Q3 interest expense fell to $9.0 from $13.7, reflecting lower debt and the June 2013 repricing of term loans.
- The Q3 effective tax rate was a benefit of 12.3%, compared with a 18.9% expense rate in Q3 2012. Discrete tax benefits included $7.3 from recognition of previously unrecognized tax benefits, $2.9 from a U.K. tax-rate change, and $5.6 from R&D credits and other items. The nine-month 2013 effective rate was 12.7%, versus 27.6%.
Outlook, risks and contingencies
- Management forecast a 2013 consolidated effective tax rate of 16%–17% and said cash on hand and operating cash flows were expected to cover obligations, working capital and capital spending for at least 12 months. No revenue or earnings guidance was provided in the filing.
- In June 2013, SS&C repriced $684.4 of term B loans, reducing applicable interest margins; maturity remains June 8, 2019, with no change to covenants or scheduled amortization. The company reported covenant compliance and a 2.67x net senior secured leverage ratio against a 5.00x maximum.
- All $844.0 of facility principal was variable-rate debt. Management estimated that a 1 percentage-point rate increase would add about $5.0 annually to interest expense. About 34% of nine-month revenue came from clients outside the U.S.; foreign exchange movements are an identified exposure.
- Management said no material off-balance-sheet arrangements existed. It reported $56.4 of cash at certain foreign subsidiaries treated as permanently reinvested; repatriation of $17.8 held in India would incur approximately $3.0 of distribution taxes.
- GlobeOp’s Fairfield Greenwich-related actions were subject to a settlement agreement awaiting court approval and other conditions; insurers had funded the contemplated payments into escrow. Millennium-related litigation includes a U.S. investor class action alleging $844.0 in claims and arbitration claims alleged to exceed $160.0, among others. SS&C said it was contesting these matters, had insurance coverage for certain costs, and could not reasonably estimate any potential loss.
- In October 2013, SS&C acquired Prime Management Limited for approximately $4.0 in cash plus transaction costs and assumed liabilities. The filing says its results would be consolidated from October 1, 2013.
Important facts for investors to verify
- How much of reported growth and future performance reflects acquired businesses versus organic demand, particularly given the substantial 2012 acquisitions.
- The sustainability of margins after acquisition-related intangible amortization and the unusually favorable discrete tax benefits; the company’s stated full-year tax-rate estimate was 16%–17%.
- Debt repayment capacity, variable-rate exposure, and ongoing compliance with the credit agreement’s leverage covenant.
- Developments and potential financial exposure in the Millennium litigation and final court approval and completion of the insured Fairfield Greenwich settlement.
- Prime’s finalized purchase accounting and subsequent contribution to results; the filing did not yet provide those details.