SS&C Technologies Holdings, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless noted. Financial statements are unaudited. SS&C provides software-enabled services, software licenses, maintenance and professional services, including fund administration.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $185.8 million | $173.2 million | +7% |
| Gross profit / margin | $84.3 million / 45% | $75.8 million / 44% | Margin +1 percentage point |
| Operating income | $47.0 million | $42.0 million | +12% |
| Net income | $26.4 million | $21.4 million | +23% |
| Diluted EPS | $0.30 | $0.26 | +15% |
| Net cash from operating activities | $38.6 million | $20.6 million | +$17.9 million |
Revenue growth reflected higher demand for alternative-investment fund administration, $2.3 million from the October 2013 Prime acquisition, increased software licensing and implementation work. Foreign-currency translation reduced revenue by approximately $1.0 million. Maintenance revenue declined 2%; software-enabled services, licenses and professional services increased 7%, 24% and 37%, respectively.
Gross margin improved primarily through acquisition-related cost synergies and lower intangible amortization. Operating expenses rose 10%, including a 26% increase in selling and marketing as the company invested in its sales force, and higher general and administrative expense, primarily related to an IP infringement lawsuit filed by the company. Net interest expense fell to $7.1 million from $12.5 million, reflecting lower average debt and interest rates. The effective tax rate increased to 33% from 28%, including a $2.5 million charge associated with New York tax-law changes.
Cash, debt and liquidity
Cash was $78.4 million at March 31, down $6.1 million from year-end. Operating cash flow was $38.6 million; investing activities used $2.6 million, and financing activities used $42.6 million, including $45.0 million of debt repayments and $3.5 million of share repurchases. The balance sheet reported $729.9 million of debt net of unamortized discount, including $23.3 million current; stated principal under the credit facility was $737.0 million. Cash less reported debt was approximately $651.5 million.
Current assets were $201.2 million and current liabilities $140.1 million. Management said cash on hand and operating cash flows were expected to cover obligations, working capital and capital spending for at least the next 12 months. The company repriced its term A-2 loans in February, reducing applicable margins to LIBOR plus 2.0% or base rate plus 1.0%; maturity and scheduled amortization were unchanged. At quarter-end, the senior secured leverage covenant maximum was 5.0x and the actual ratio was 2.2x; the company reported compliance. A 1 percentage-point increase in interest rates was estimated to raise annual interest expense by approximately $4.2 million.
Outlook, risks and unusual items
- No revenue or earnings guidance was provided. Management forecast a 27%–29% effective tax rate for full-year 2014.
- Approximately 35% of Q1 revenue came from clients outside the United States. Foreign exchange movements affected results; the company reported no material outstanding foreign-currency transaction exposures at quarter-end.
- Millennium-related litigation remained a material contingency. A proposed settlement of the U.S. class action was awaiting court approval, scheduled for July 7, 2014; insurers had agreed to fund the settlement amount contemplated for GlobeOp. Related claims between GlobeOp and the Millennium Managers in UK arbitration were to be withdrawn upon approval. Claims by the Master Fund, alleged to exceed $160 million, were not resolved by that settlement; the company said potential loss could not be reasonably estimated.
- Credit-facility covenants restrict certain actions, and a covenant breach could trigger acceleration of debt. The filing cautions that future covenant compliance may be affected by events outside the company’s control.
- Other notable items included $6.3 million of foreign-currency translation loss in Q1 2014, stock repurchases of 90,226 shares for approximately $3.5 million during the quarter, and $2.0 million of unusual or non-recurring adjustments in the credit-agreement EBITDA reconciliation.
Most important facts for investors to verify
- Outcome and approval status of the proposed Millennium settlement, and the remaining Master Fund arbitration claims and potential exposure.
- Debt balances, interest-rate sensitivity, covenant headroom and future debt-repayment requirements.
- Whether fund-administration demand, Prime contribution and improved gross margin continue, alongside selling, legal and other operating costs.
- Actual full-year tax rate versus management’s 27%–29% forecast and any further effects of tax-law changes or foreign earnings.
- Cash-flow presentation: the financial statements report Q1 operating cash flow of $38.554 million; MD&A describes it as $38.0 million.