SS&C Technologies Holdings, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Financial statements are unaudited and prepared under U.S. GAAP. Unless stated otherwise, amounts are in U.S. dollars; financial figures below are in millions.
Business context and results
SS&C provides software-enabled services, software licenses, maintenance and professional services, primarily for financial institutions and investment managers. The company reports one operating segment. Management attributed much of the period’s growth to the 2012 acquisitions of GlobeOp and the PORTIA business, as well as increased demand for hedge fund and private equity services.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $177.5 | $120.9 | $350.7 | $214.5 |
| Gross profit / margin | $80.7 / 45% | $57.8 / 48% | $156.5 / 45% | $104.6 / 49% |
| Operating income | $45.3 | $21.1 | $87.3 | $43.2 |
| Net income (loss) | $26.1 | $(5.8) | $47.5 | $12.1 |
| Diluted EPS | $0.31 | $(0.07) | $0.56 | $0.15 |
| Operating cash flow | Not separately provided for quarter | $70.0 | $35.7 |
Financial position, liquidity and debt
- At June 30, 2013, cash was $60.6, total current assets $212.3 and current liabilities $143.9. Cash declined $25.6 from year-end 2012.
- Balance-sheet debt was $910.8, including $20.2 current and $890.6 long-term, net of unamortized discount. Principal outstanding was $919.0; the credit facility’s weighted-average rate was 3.34%.
- Six-month investing cash outflow was $8.1, principally capital expenditures of $7.7. Financing cash outflow was $84.9, including $102.0 of debt repayments, partly offset by stock-option exercise proceeds and tax benefits.
- Management said cash on hand and operating cash flows should be sufficient for obligations, working capital and capital spending for at least the next 12 months. The company reported compliance with credit-agreement covenants; its net senior secured leverage ratio was 3.10x versus a maximum of 5.50x.
Material changes versus prior comparable periods
- Revenue rose 47% in Q2 and 63% for the six-month period. Acquisitions contributed $46.7 of Q2 revenue and $121.9 for the six months; growth also reflected stronger demand in alternative investment services.
- Software-enabled services accounted for 78% of revenue in both 2013 periods, compared with 70% in 2012. Portfolio management/accounting was the largest product group.
- Gross margin fell to 45% from 48% in Q2 and to 45% from 49% for six months. Management cited acquired-intangible amortization, including increases of $7.9 in Q2 and $20.2 for six months, and higher service-delivery costs.
- Operating income increased, while interest expense rose to $11.8 in Q2 and $24.3 for six months, primarily reflecting the higher debt balance following the 2012 acquisitions and financing-cost amortization.
- Q2 2012 included $9.4 of acquisition transaction costs and a large foreign-currency-related other expense; six-month 2012 also included $13.6 of transaction costs and a $4.4 debt-extinguishment loss. These items make reported year-over-year earnings comparisons less directly comparable.
- In June 2013, the company repriced $684.4 of term B loans, reducing applicable margins and the LIBOR floor; maturity remained June 8, 2019, with no covenant or scheduled amortization changes.
Outlook, risks and contingencies
- The filing gives no revenue or earnings guidance. It forecasts a 2013 consolidated effective tax rate of 27%–28%; approximately $7.6 of unrecognized tax benefits may be recognized within 12 months as statutes of limitation lapse.
- Interest-rate exposure is material: all $919.0 of principal debt was variable-rate, and a 1 percentage-point rate increase was estimated to raise annual interest expense by approximately $5.5. About 35% of six-month revenue came from clients outside the United States; currency movements also pose risk.
- GlobeOp-related Fairfield Greenwich/Madoff litigation: parties reached a binding memorandum of understanding, and insurers agreed to fund the contemplated settlement payments. Final documentation, court approval and other conditions remained outstanding.
- Millennium-related proceedings include a U.S. investor class action asserting $844 million in claims, a U.K. arbitration seeking a $26.5 million indemnity and a fund claim alleged to exceed $160 million. These are asserted amounts, not estimated company liabilities. The company said it could not reasonably estimate any potential loss and was contesting the claims.
- The credit agreement is secured by substantially all specified assets and restricts, among other things, additional debt, liens, investments and dividends. A covenant breach could trigger default and acceleration. Management reported no material change to previously disclosed risk factors.
- Management stated disclosure controls were effective as of June 30, 2013, with no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- How much of reported revenue and earnings growth reflects acquired businesses versus organic demand, and how acquisition-related amortization affects margins.
- Debt principal, variable-rate exposure, covenant headroom and the realized savings from the June loan repricing.
- Whether the Fairfield Greenwich settlement receives court approval and whether insurers fund all contemplated payments as described.
- Developments and potential exposure in the Millennium actions, for which the filing provides no reasonably estimable loss value.
- Cash conversion and working-capital trends, including the effects of annual bonus payments and maintenance-revenue recognition.
- Whether the 27%–28% tax-rate forecast and potential recognition of unrecognized tax benefits remain applicable.