SS&C Technologies Holdings, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited results; comparisons are with the corresponding 2020 periods. Amounts are in U.S. dollars.
Business context and financial performance
SS&C provides software-enabled services and software licensing, maintenance and related services. Software-enabled services generated 84% of Q2 revenue. The filing reports broad-based organic growth across fund administration, retirement, investor and distribution solutions, healthcare, and other product lines.
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $1,259.0m (+10.6%) | $1,138.1m | $2,492.4m (+7.8%) | $2,311.7m |
| Gross profit / margin | $595.0m / 47.3% | $511.3m / 44.9% | $1,154.1m / 46.3% | $1,019.3m / 44.1% |
| Operating income | $312.9m (+29.7%) | $241.3m | $582.0m (+26.5%) | $460.1m |
| Net income | $189.8m (+12.0%) | $169.5m | $364.7m (+35.7%) | $268.7m |
| Diluted EPS | $0.71 | $0.64 | $1.36 | $1.01 |
| Net interest expense | $51.0m | $60.5m | $102.4m | $137.9m |
Q2 revenue growth included $76.8m of organic growth, $17.8m from acquisitions and $26.3m from favorable foreign currency translation. First-half growth included $101.9m organic, $36.4m from acquisitions and $42.4m from currency. Improved gross margin reflected lower cost of revenue as a share of sales; lower average interest rates and debt balances reduced interest expense.
Cash flow, debt and liquidity
- First-half operating cash flow was $562.3m, versus $555.7m; investing activities used $17.9m, versus $168.1m; financing activities provided $1,175.8m, versus $1,221.1m used in 2020.
- Operating cash flow included working-capital outflows, notably accounts receivable and accrued expenses. Capitalized software development was $42.1m and capital expenditures were $17.6m.
- At June 30, cash and cash equivalents were $247.1m; reported cash, cash equivalents and restricted cash totaled $3,056.5m, including $2,805.5m classified within client funds. Client funds obligations were also $2,921.3m; these balances should not be treated as unrestricted corporate liquidity.
- Debt carrying value was $6,270.1m, including $4,304.5m under secured credit facilities and $2,000m of 5.5% senior notes due 2027. The company repaid $183.1m net debt in the first half. It reported $246.2m available under its $250m revolving facility.
- Management said cash, operating cash flows and credit availability should meet obligations, working-capital needs and capital spending for at least the next 12 months. Covenant net secured leverage was 2.09x against a maximum of 6.25x.
Material developments, outlook and risks
- Capita Life & Pensions Services was acquired effective March 1, 2021. It contributed $11.2m of Q2 and $14.9m of first-half revenue. The transaction produced a $3.2m bargain-purchase gain; purchase accounting remained preliminary.
- First-half severance expense related to integration of acquired businesses was $22.9m, down from $31.7m in 2020. Share repurchases were $325.0m and dividends paid were $82.1m in the first half. In July, the board authorized a new repurchase program of up to $1bn.
- The effective tax rate rose to 28.8% in Q2 from 14.8%, and to 27.4% for the first half from 16.8%. The company cited a U.K. tax-law change, fewer stock-award tax windfalls, changes in geographic income mix, and a prior-year state tax benefit.
- No specific financial guidance was provided in the supplied filing text. Management said COVID-19 had caused some client delays but no direct material negative effects to date; impacts remained uncertain and could become material. The company continued to limit discretionary spending and reprioritize capital projects.
- A substantial portion of variable-rate debt references USD-LIBOR. The company was assessing reference-rate transition effects. A 1% rise in interest rates was estimated to increase annual interest expense by about $43m, partly offset by interest earnings on client cash balances.
- DST-related ERISA litigation remains a material uncertainty. A proposed $27m settlement was subject to court approval and objections; 576 individual arbitration demands had been filed through July 15, 2021, with outcomes varying. The filing says the ultimate exposure is uncertain and the company has not determined the matter’s financial impact.
- On July 15, 2021, SS&C entered a joint venture with Anthem and Humana to develop a benefits-management platform; SS&C held an 80.2% interest at formation. Management reported effective disclosure controls and no material change in previously disclosed risk factors.
Most important facts for investors to verify
- Whether organic growth and margin improvement continue after separating acquisition and currency effects.
- Unrestricted cash and liquidity available after excluding client funds, and debt repayment, interest-rate and LIBOR-transition exposure.
- Resolution, approval and accounting treatment of the proposed ERISA settlement, arbitrations and related litigation.
- Final Capita purchase accounting and integration costs, and the financial contributions and obligations of the DomaniRx joint venture.
- Drivers of the higher effective tax rate and sustainability of earnings growth given investment gains, bargain-purchase income and other unusual items.