SS&C Technologies Holdings, Inc. — Q3 2012 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2012; balance-sheet comparisons are with December 31, 2011. SS&C provides financial software and software-enabled services. Results include acquired businesses only from their respective acquisition dates, notably GlobeOp and the PORTIA Business from May 2012. All dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $165.6 | $94.3 | $380.1 | $275.1 |
| Gross profit / margin | $71.8 / 43% | $47.8 / 51% | $176.4 / 46% | $138.5 / 50% |
| Operating income | $37.2 | $24.1 | $80.4 | $70.1 |
| Net income | $17.6 | $14.9 | $29.7 | $37.8 |
| Diluted EPS | $0.21 | $0.18 | $0.36 | $0.47 |
| Operating cash flow | Not separately provided | Not separately provided | $60.7 | $71.6 |
- Revenue grew 76% in Q3 and 38% year to date. Management attributed most of the increase to acquisitions; organic revenue increased $0.6 million in Q3 and $6.5 million for the nine-month period.
- Software-enabled services were the largest revenue category: $125.6 million in Q3 and $275.1 million year to date. They represented 76% and 72% of revenue, respectively.
- Q3 net income rose 18%, but nine-month net income fell 21%; nine-month diluted EPS declined from $0.47 to $0.36. Higher acquisition-related amortization, interest expense, transaction costs and foreign-currency losses affected comparisons.
- Cash was $80.3 million at September 30, up from $40.3 million at year-end. Current assets were $208.7 million and current liabilities $141.2 million.
- Debt was $1,080.0 million principal, with a $9.2 million original-issue discount and $1,047.4 million reported as long-term debt after the current portion. Approximate net debt using principal less cash was $999.7 million. The variable-rate facilities had a 4.42% weighted-average rate.
- Interest expense, net was $13.7 million in Q3 and $18.8 million for nine months. The company estimated that a 1 percentage-point rate change would alter annual interest expense by approximately $4.9 million.
- The nine-month effective tax rate was 27.6%, versus 32.1% a year earlier; Q3 rates were 18.9% and 29.8%, respectively. Management forecast a 31%–32% effective tax rate for full-year 2012.
Material changes and notable items
- Major acquisitions included GlobeOp (approximately $834.3 million), the PORTIA Business (approximately $170.0 million) and Gravity (approximately $5.8 million). Acquisitions contributed $96.9 million of revenue from their acquisition dates through September 30. The preliminary purchase-price allocations included substantial goodwill and acquired intangible assets.
- Acquisition funding materially increased leverage: the company entered a new credit agreement in March 2012, refinanced prior debt and used borrowings to fund acquisitions. The $31.6 million drawn bridge loan was repaid in July. A $100 million revolving facility was available; the filing does not clearly state its unused amount at quarter-end.
- Q3 gross margin fell to 43% from 51%, and nine-month gross margin declined to 46% from 50%. Management cited acquired service costs and higher amortization, particularly in software-enabled services.
- Nine-month operating expenses included $14.3 million of acquisition transaction costs. Other expense included a $14.3 million loss on foreign-currency contracts associated with the GlobeOp offer; the company also recorded a $4.4 million loss on extinguishment of debt.
- Operating cash flow declined year over year, while investing cash use rose to $973.9 million, primarily from acquisitions. Financing activities provided $951.0 million; cash paid for acquisitions, net of cash acquired, was $964.5 million.
Outlook, risks and contingencies
- Management said cash, operating cash flow and availability under the revolving facility were expected to cover current obligations, working-capital needs and capital spending for at least the next 12 months. No revenue or earnings guidance was provided.
- The company planned to complete a reorganization of European subsidiaries in Q4 2012 and expected it to reduce the effective tax rate on a go-forward basis.
- At September 30, the company complied with its debt covenants. The maximum net senior secured leverage covenant was 5.50x; the reported actual ratio was 4.02x. A covenant breach could trigger acceleration of debt and termination of credit commitments. Substantially all domestic assets were pledged as collateral.
- GlobeOp faced ongoing litigation related to fund-administration and valuation services. Millennium-related claims included a U.S. class action asserting $844 million, a $160 million claim in U.K. arbitration and an investment-manager indemnity claim of $26.5 million plus potential U.S. class-action losses. The company said outcomes could not be predicted and that it intended to defend the cases. These asserted amounts are claims, not stated liabilities or loss estimates.
- Other exposures include variable interest rates, foreign-currency movements and acquisition integration. Management reported no material change to previously disclosed risk factors. Disclosure controls were assessed as effective at the reasonable-assurance level.
Important facts for investors to verify
- How much of reported revenue and earnings growth reflects acquired operations versus sustainable organic growth, and how acquired businesses perform after integration.
- The drivers and potential persistence of lower gross margins, increased amortization and acquisition-related costs.
- Debt terms, revolving-credit availability, covenant headroom and sensitivity to interest-rate increases.
- The status and potential financial exposure of the GlobeOp litigation, particularly the Millennium matters; the filing does not provide a clear loss estimate.
- Whether the European reorganization is completed as planned and whether the expected tax-rate benefit materializes.
- Whether acquisition purchase-price allocations, goodwill and acquired intangible-asset valuations change as measurement periods are finalized.