SS&C Technologies Holdings, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods. Financial amounts below are in millions unless stated otherwise. SS&C provides software-enabled services, software, maintenance and professional services, including fund administration.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $188.7 | $177.5 | $374.5 | $350.7 |
| Gross profit / reported gross margin | $86.5 / 46% | $80.7 / 45% | $170.8 / 46% | $156.5 / 45% |
| Operating income | $45.4 | $45.3 | $92.4 | $87.3 |
| Net income | $27.2 | $26.1 | $53.7 | $47.5 |
| Diluted EPS | $0.31 | $0.31 | $0.62 | $0.56 |
| Net interest expense | $6.6 | $11.8 | $13.7 | $24.3 |
- Q2 revenue rose 6%; first-half revenue rose 7%. Software-enabled services, the largest revenue category, increased 5% and 6%, respectively. Software license revenue increased 49% in Q2 and 37% for the first half.
- Q2 operating income was nearly flat despite revenue growth, as operating expenses increased 16%, including higher sales-force investment and general and administrative costs. First-half operating income increased 6%.
- Management attributed gross-margin improvement primarily to cost-reduction synergies from acquired businesses. Lower average debt and repricings reduced interest expense.
- First-half effective tax rate was 31% versus 27%, including a $2.5 million charge tied to New York tax-law changes. Q2 rates were 30% and 27%, respectively.
Cash flow, balance sheet and debt
- For the six months, operating cash flow was $92.8 million, compared with $70.0 million. Investing used $10.2 million, including $9.5 million of property and equipment additions and $1.7 million of capitalized software. Financing used $94.3 million, including $107.0 million of debt repayments and $7.4 million of share repurchases.
- Cash was $73.5 million at June 30, down $11.0 million from year-end 2013. Current assets were $200.0 million and current liabilities $142.4 million.
- Credit-facility principal was $675.0 million at June 30, versus $782.0 million at December 31, 2013; balance-sheet debt, net of discount and current portion, was $644.4 million long-term and $23.8 million current. The reported weighted-average interest rate was 2.95%.
- The February 2014 repricing reduced Term A loan margins. The company reported compliance with its credit covenants; the maximum permitted senior secured leverage ratio was 4.75x and the actual ratio was 1.97x.
- Management said cash on hand and operating cash flows should fund obligations, working capital and capital spending for at least the next 12 months. The company reported $46.5 million held at certain foreign subsidiaries under a permanent-reinvestment determination.
Outlook, risks and unusual items
- The company forecast a 2014 consolidated effective tax rate of 28%–30%; it provided no revenue or earnings guidance in this filing. Management cautioned that interim results are not necessarily indicative of full-year results.
- A 1% increase in interest rates was estimated to add approximately $3.8 million of annual interest expense. About 34% of first-half revenue came from clients outside the United States; foreign-exchange movements may affect results.
- The Millennium U.S. class action settlement was approved July 7, 2014, subject to finality and consummation; insurers agreed to fund the settlement amount attributable to GlobeOp. Claims between GlobeOp and the Millennium Master Fund remain in arbitration, including a claim alleging damages exceeding $160 million. The company said potential loss could not be reasonably estimated.
- The company increased the Prime acquisition contingent-consideration liability by $0.4 million in Q2, recorded in other expense. It also cited legal costs related to an IP infringement lawsuit settled during the period and costs associated with office consolidations.
- ASU 2014-09 on revenue recognition was under evaluation and effective for periods beginning after December 15, 2016. Adoption of ASU 2013-11 had no material impact.
Important facts for investors to verify
- Progress and remaining exposure in the Millennium Master Fund arbitration, including insurance coverage and any subsequent resolution.
- Whether revenue growth and gross-margin improvement continue while sales, administrative and other operating costs rise.
- Debt repayment capacity, interest-rate exposure and ongoing compliance with credit-facility covenants.
- Cash accessibility and potential tax costs associated with foreign-held funds, including the disclosed potential distribution taxes on certain Indian cash.
- The eventual impact of the new revenue-recognition standard and changes in the effective tax rate.