SS&C Technologies Holdings, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with the three months ended March 31, 2012 unless otherwise stated. Unaudited consolidated financial statements. Amounts below are in U.S. dollars; financial figures are in millions unless noted.
Business context and results
SS&C provides software-enabled services, software licenses, maintenance, and professional services. The company reports one operating segment. Its first-quarter comparison reflects the 2012 acquisitions of GlobeOp and the PORTIA Business.
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $173.2 | $93.7 |
| Gross profit / margin | $75.8 / 43.8% | $46.8 / 50.0% |
| Operating income | $42.0 | $22.1 |
| Interest expense, net | $12.5 | $0.5 |
| Net income | $21.4 | $17.9 |
| Diluted EPS | $0.26 | $0.22 |
| Operating cash flow | $20.6 | $13.1 |
Financial position and liquidity
- Cash was $68.8 million at March 31, 2013, down from $86.2 million at December 31, 2012. Operating activities provided $20.6 million; investing activities used $2.2 million; financing activities used $34.4 million, including $45.0 million of debt repayments.
- Credit-facility principal outstanding was $976.0 million; reported debt carrying value, net of original issue discount, was $967.5 million, including $21.4 million current and $946.1 million long-term. The facility’s weighted-average interest rate was 4.42%.
- Management said cash on hand and operating cash flows should be sufficient for current obligations, working capital, and capital spending for at least the next 12 months. The company reported covenant compliance at quarter-end; actual senior secured leverage was 3.42x against a maximum of 5.50x.
Material changes and management commentary
- Revenue increased 85%, primarily because GlobeOp and PORTIA contributed $73.8 million, alongside continued demand for hedge fund and private equity services. The filing does not quantify organic revenue growth separately.
- Software-enabled services revenue rose 110% to $135.7 million; maintenance rose 33% to $26.0 million; licenses rose 59% to $6.1 million; professional services declined 7% to $5.4 million.
- Gross margin fell to 44% from 50%. Management attributed the decline primarily to $12.3 million of amortization on acquired intangible assets and higher service-delivery costs.
- Operating expenses rose 36% to $33.8 million, including acquisition-related costs. Q1 2012 had $4.2 million of transaction costs, compared with none in Q1 2013.
- Net interest expense increased substantially because of the higher debt balance following the 2012 acquisitions and amortization of financing costs and original issue discount. Other income was $0.1 million, versus $4.1 million in Q1 2012, which primarily reflected a gain on unsettled foreign-currency contracts.
- Foreign-currency translation produced a $27.4 million other comprehensive loss, and accumulated other comprehensive income declined to $24.1 million from $51.5 million at year-end.
Outlook, risks, contingencies, and unusual items
- Management forecast a 2013 effective tax rate of 27%–28%. It said approximately $7.6 million of unrecognized tax benefits could be recognized within 12 months as statutes of limitation lapse.
- After quarter-end, the company was seeking to reprice about $700.1 million of term B loans. Proposed margins were LIBOR plus 2.75% or base rate plus 1.75%, with possible step-downs if leverage is below 2.75x. Completion and terms were not assured.
- All $976.0 million of facility principal was variable-rate debt. A 1 percentage-point rate increase was estimated to raise annual interest expense by approximately $4.2 million.
- GlobeOp faces litigation related to the Fairfield Greenwich/Madoff funds and Millennium funds. The Anwar class was certified, and an appeal was pending. Millennium claims include a U.S. class action alleging $844 million, a UK arbitration seeking a $26.5 million indemnity plus additional amounts, and a separate claim alleged to exceed $160 million. These are asserted claims, not company estimates of probable losses; management said outcomes could not be predicted and stated it was vigorously defending the matters. Insurance coverage is described, but the filing does not provide a clear estimate of ultimate exposure.
- The company reported no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements, and effective disclosure controls as of March 31, 2013.
Important facts for investors to verify
- How much of revenue growth and future performance is recurring or organic, apart from the acquired businesses?
- Whether gross margins stabilize as acquisition-related intangible amortization and service costs evolve.
- Debt repayment capacity, floating-rate exposure, covenant headroom, and whether the proposed loan repricing was completed.
- Developments in the Fairfield Greenwich and Millennium proceedings, including any changes to claims, insurance coverage, or potential financial exposure.
- Cash availability and repatriation constraints: the filing identifies foreign cash subject to reinvestment decisions, debt-service needs, or potential distribution taxes.