SS&C Technologies Holdings Inc. - 10-Q Summary (Period Ended June 30, 2012)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2012, for SS&C Technologies Holdings Inc., a provider of software and services to the financial services industry. The reporting period is significantly impacted by two major acquisitions: the PORTIA Business (acquired May 9, 2012) and GlobeOp Financial Services S.A. (acquired May 31, 2012). These transactions expanded the company's footprint in middle and back-office services for hedge funds and asset managers.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2012 | Six Months Ended June 30, 2012 |
|---|---|---|
| Total Revenues | $120.9 million | $214.5 million |
| Gross Profit | $57.8 million (48% margin) | $104.6 million (49% margin) |
| Operating Income | $21.1 million | $43.2 million |
| Net Income (Loss) | $(5.8) million | $12.1 million |
| Diluted EPS | $(0.07) | $0.15 |
| Cash and Cash Equivalents | $134.5 million | $134.5 million (Balance Sheet) |
| Total Debt (Long-term + Current) | $1.15 billion | $1.15 billion |
| Operating Cash Flow (6 months) | N/A | $35.7 million |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 32% year-over-year for the quarter and 19% for the six-month period. This growth was primarily driven by the acquisitions of GlobeOp and PORTIA, which contributed approximately $27.2 million in revenue for the quarter.
- Profitability Impact: While operating income remained positive, the company reported a net loss of $5.8 million for the quarter compared to net income of $13.0 million in the prior year quarter. This was due to significant non-recurring costs, including $9.4 million in transaction costs and a $18.5 million loss on foreign currency contracts related to the GlobeOp acquisition.
- Debt Structure: Total debt increased substantially from $100 million at December 31, 2011, to approximately $1.16 billion at June 30, 2012. This reflects new credit facilities entered into to finance the GlobeOp and PORTIA acquisitions.
- Goodwill: Goodwill increased from $931.6 million to $1.51 billion, reflecting the purchase price allocation of the new acquisitions.
Guidance, Outlook, and Risks
Management Commentary: Management expects cash on hand, operating cash flows, and availability under the revolving credit facility to be sufficient to fund obligations for the next twelve months. The company forecasts a consolidated effective tax rate between 41% and 43% for the full year 2012, impacted by the GlobeOp acquisition and non-deductible transaction costs.
Risks and Contingencies:
- Legal Proceedings: The acquired subsidiary, GlobeOp, is a defendant in several significant litigations, including the "Anwar Action" (Madoff-related) and "Millennium Actions" (alleging negligence in valuation services with claims up to $844 million). The company intends to defend these vigorously but notes the uncertainty of outcomes.
- Integration Risks: The company faces challenges in integrating GlobeOp and PORTIA, including retaining key employees, combining systems, and managing a significantly larger workforce (headcount increased to 4,034).
- Debt Covenants: The company is subject to a consolidated net senior secured leverage ratio covenant (maximum 5.50x). As of June 30, 2012, the actual ratio was 4.20x.
- Foreign Currency: The company incurred significant losses on foreign currency hedging instruments related to the GlobeOp acquisition, highlighting exposure to exchange rate fluctuations.
Investor Verification Checklist
- Verify the status and potential financial exposure of the pending litigation involving GlobeOp (Anwar, Pierce/Ferber, and Millennium Actions).
- Monitor the company's ability to maintain compliance with the 5.50x leverage ratio covenant under the new credit facility.
- Assess the integration progress of GlobeOp and PORTIA, specifically regarding revenue retention and cost synergies.
- Review the impact of foreign currency fluctuations on future earnings, given the increased international exposure.
- Confirm the sustainability of organic revenue growth separate from acquisition-driven increases.