SS&C Technologies Holdings, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; filed February 27, 2014. This is an annual report, not a standalone fourth-quarter filing. Fourth-quarter results are noted separately below.
Business context
SS&C provides financial-services software and software-enabled services, including portfolio accounting, trading, fund administration, and related processing. It served more than 6,900 clients. Contractually recurring software-enabled services and maintenance made up 92% of 2013 revenue. The 2013 results include a full year of activity from the 2012 GlobeOp and PORTIA acquisitions; Prime Management was acquired in October 2013.
Financial performance
- Revenue: $712.7 million, up 29% from $551.8 million in 2012. Software-enabled services revenue rose 36% to $552.6 million; maintenance rose 10% to $103.4 million.
- Profit: Operating income was $183.0 million, up from $123.2 million. Net income was $117.9 million versus $45.8 million; diluted EPS was $1.38 versus $0.55. The effective tax rate fell to 19% from 35%, contributing to the net-income increase.
- Margins: Gross margin was approximately 45.4%, down from approximately 45.7% in 2012; management attributed pressure primarily to acquisition-related intangible amortization, partly offset by synergies. Operating margin was approximately 25.7%, compared with 22.3%.
- Cash flow: Operating cash flow was $208.3 million, versus $134.4 million in 2012. Investing used $17.9 million, including $11.9 million in capital expenditures, $3.7 million for Prime, and $2.4 million for capitalized software. Financing used $189.8 million, including $239.0 million of debt repayments.
- Liquidity and debt: Cash was $84.5 million at year-end, compared with $86.2 million. Credit-facility principal was $782.0 million ($774.5 million carrying value net of discount), down from $1.021 billion principal in 2012. Management said cash and operating cash flow should fund current obligations and projected working capital and capital spending for at least 12 months. The company reported compliance with debt covenants; its actual net senior secured leverage ratio was 2.38x against a 5.50x maximum.
- Other measures: Covenant-defined Consolidated EBITDA was $292.8 million versus $256.0 million in 2012; it is a non-GAAP measure and includes permitted adjustments. No dividends were paid. The company repurchased 23,900 shares for approximately $0.9 million during 2013.
Material changes and fourth-quarter results
Growth primarily reflected the full-year contribution from GlobeOp and PORTIA, which added $119.2 million of revenue year over year, plus continued demand for alternative-investment services. International revenue was $246.0 million, or 35% of total revenue, compared with $191.4 million in 2012. Foreign-currency translation reduced 2013 revenue by $2.0 million.
Fourth-quarter 2013 revenue was $182.5 million, gross profit $84.1 million, operating income $47.8 million, and net income $26.9 million; diluted EPS was $0.31. Third-quarter net income was unusually high at $43.5 million, with tax benefits from recognized prior-period tax benefits, a UK rate change, and research and development credits and other discrete items.
Outlook, risks, contingencies, and unusual items
- No formal numerical revenue or earnings guidance is provided. Management anticipated continued financial-services investment in IT in 2014 and described ongoing plans to develop software-enabled and cloud offerings, expand internationally, grow existing-client relationships, and pursue acquisitions.
- Key risks include economic or financial-market weakness, client activity and assets under management, competition, dependence on acquired businesses and a greater hedge-fund exposure, cybersecurity or service disruptions, and recruiting and retaining skilled staff. Six named products and related services accounted for approximately 36% of 2013 revenue.
- Debt is substantial and variable-rate; a 1% interest-rate change was estimated to change annual interest expense by approximately $4.5 million. Debt covenants restrict activities including additional borrowing, acquisitions, and dividends. The company repriced its term B loans in June 2013 and its term A-2 loans in February 2014, reducing interest margins.
- Litigation: The Fairfield Greenwich-related matters were settled, with the settlement funded entirely by insurers and the matters concluded by January 2014. Millennium-related proceedings remained material: a January 2014 settlement with the U.S. class-action plaintiff and Millennium managers was awaiting court approval; it did not resolve the Master Fund’s arbitration claim, alleged to exceed $160 million. The filing says the potential loss could not be reasonably estimated. The filing also describes a putative class-action claim of $844 million, an asserted amount based on fund assets at peak valuation, not a stated expected loss.
- Foreign-currency exposure is not hedged routinely. Goodwill was $1.54 billion, with no impairment identified at year-end; future amortization of acquired intangible assets was expected to remain significant.
- Disclosure controls and internal control over financial reporting were reported effective; the independent auditor issued unqualified opinions on the financial statements and internal control.
Important facts for investors to verify
- How much of revenue and earnings growth is organic versus attributable to acquisitions, and whether acquired operations deliver expected synergies.
- The pace of debt repayment, refinancing terms, variable-rate exposure, covenant headroom, and availability under the revolving facility.
- The final court outcome and remaining financial exposure in the Millennium matters, including insurance limits and coverage.
- Whether margins recover as acquisition-related intangible amortization declines, and the sustainability of the unusually low 2013 effective tax rate.
- Trends in recurring-revenue retention, client assets and transaction volumes, international performance, and concentration in key products and hedge-fund clients.