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SSNC > SEC Filings for SSNC > Form 10-Q on 9-Aug-2013All Recent SEC Filings

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Form 10-Q for SS&C TECHNOLOGIES HOLDINGS INC


9-Aug-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

Revenues

Our revenues consist primarily of software-enabled services and maintenance revenues, and, to a lesser degree, software license and professional services revenues. As a general matter, fluctuations in our software-enabled services revenues are attributable to the number of new software-enabled services clients as well as total assets under management in our clients' portfolios and the number of outsourced transactions provided to our existing clients, while our software license and professional services revenues tend to fluctuate based on the number of new licensing clients. Maintenance revenues vary based on the rate by which we add or lose maintenance clients over time and, to a lesser extent, on the annual increases in maintenance fees, which are generally tied to the consumer price index.

The following table sets forth the percentage of our total revenues represented by each of the following sources of revenues for the periods indicated:

                                       Three Months Ended June 30,                  Six Months Ended June 30,
                                       2013                    2012                2013                   2012
Revenues:
Software-enabled services                    78 %                    70 %                78 %                   70 %
Software licenses                             4                       5                   3                      4
Maintenance                                  14                      19                  15                     20
Professional services                         4                       6                   4                      6

Total revenues                              100 %                   100 %               100 %                  100 %

The following table sets forth revenues (dollars in thousands) and percentage change in revenues for the periods indicated:

                                          Three Months Ended                        Six Months Ended
                                               June 30,                %                June 30,                %
                                          2013          2012        Change         2013          2012        Change
Revenues:
Software-enabled services               $ 138,047     $  84,889          63 %    $ 273,786     $ 149,464          83 %
Software licenses                           6,626         5,768          15         12,696         9,578          33
Maintenance                                25,410        22,976          11         51,425        42,474          21
Professional services                       7,374         7,217           2         12,768        13,009          (2 )

Total revenues                          $ 177,457     $ 120,850          47      $ 350,675     $ 214,525          63

Three and Six Months Ended June 30, 2013 versus 2012. Our revenues increased primarily due to revenues related to our acquisitions of GlobeOp and the PORTIA Business, which contributed in aggregate $46.7 million and $121.9 million in revenues for the three and six months ended June 30, 2013, respectively, as well as a continued increase in demand for our hedge fund and private equity services from alternative investment managers. Our license and maintenance revenues experienced increases due to revenues related to the PORTIA Business, which contributed $0.3 million and $3.2 million to license and maintenance revenues for the three months ended June 30, 2013, respectively. Our license and maintenance revenues experienced increases due to revenues related to the PORTIA Business, which contributed $1.0 million and $10.5 million to license and maintenance revenues for the six months ended June 30, 2013, respectively. Additionally, the number and average size of perpetual licenses sold increased from 2012, as well as revenue associated with term licenses.

Cost of Revenues

Cost of software-enabled services revenues consists primarily of the cost related to personnel utilized in servicing our software-enabled services clients and amortization of intangible assets. Cost of software license revenues consists primarily of amortization of completed technology, royalties, third-party software, and the costs of product media, packaging and documentation. Cost of maintenance revenues consists primarily of technical client support, costs associated with the distribution of products and regulatory updates and amortization of intangible assets. Cost of professional services revenues consists primarily of the cost related to personnel utilized to provide implementation, conversion and training services to our software licensees, as well as system integration and custom programming consulting services.


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The following table sets forth each of the following cost of revenues as a percentage of their respective revenue source for the periods indicated:

                                          Three Months Ended June 30,                Six Months Ended June 30,
                                          2013                   2012               2013                   2012
Cost of revenues:
Cost of software-enabled services              58 %                   55 %               59 %                   54 %
Cost of software licenses                      20                     27                 21                     30
Cost of maintenance                            40                     43                 40                     43
Cost of professional services                  66                     65                 77                     67
Total cost of revenues                         55                     52                 55                     51
Gross margin percentage                        45                     48                 45                     49

The following table sets forth cost of revenues (dollars in thousands) and percentage change in cost of revenues for the periods indicated:

                                          Three Months Ended                         Six Months Ended
                                               June 30,                %                 June 30,                %
                                           2013          2012        Change         2013          2012         Change
Cost of revenues:
Cost of software-enabled services       $   80,245     $ 47,063           71 %    $ 160,972     $  79,975          101 %
Cost of software licenses                    1,348        1,543          (13 )        2,622         2,845           (8 )
Cost of maintenance                         10,283        9,789            5         20,803        18,455           13
Cost of professional services                4,885        4,705            4          9,805         8,677           13

Total cost of revenues                  $   96,761     $ 63,100           53      $ 194,202     $ 109,952           77

Three and Six Months Ended June 30, 2013 versus 2012. Our total cost of revenues increased for the three and six months ended June 30, 2013 primarily as a result of $23.6 million and $60.8 million in aggregate costs, respectively, associated with our acquisitions of GlobeOp and the PORTIA Business. The decrease in our gross margins is primarily due to an increase in amortization expense of $7.9 million and $20.2 million for the three- and six-month periods, respectively, related to intangible assets acquired in those acquisitions. Additionally, cost of software-enabled services revenues increased to support the increased demand for our hedge fund and private equity services from alternative investment managers and as a result of stock-based compensation expense.

Operating Expenses

Selling and marketing expenses consist primarily of the personnel costs associated with the selling and marketing of our products, including salaries, commissions and travel and entertainment. Such expenses also include amortization of intangible assets, the cost of branch sales offices, trade shows and marketing and promotional materials. Research and development expenses consist primarily of personnel costs attributable to the enhancement of existing products and the development of new software products. General and administrative expenses consist primarily of personnel costs related to management, accounting and finance, information management, human resources and administration and associated overhead costs, as well as fees for professional services. Transaction costs consist primarily of legal, third-party valuation and other fees related to our acquisitions of GlobeOp and the PORTIA Business.


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The following table sets forth the percentage of our total revenues represented by each of the following operating expenses for the periods indicated:

                                       Three Months Ended June 30,                Six Months Ended June 30,
                                       2013                   2012               2013                   2012
Operating expenses:
Selling and marketing                        6 %                    7 %                6 %                    7 %
Research and development                     8                      9                  8                      9
General and administrative                   6                      7                  6                      6
Transaction costs                           -                       8                 -                       6

Total operating expenses 20 30 20 29

The following table sets forth operating expenses (dollars in thousands) and percentage change in operating expenses for the periods indicated:

                                            Three Months Ended                       Six Months Ended
                                                 June 30,                %               June 30,               %
                                             2013          2012       Change         2013         2012       Change
Operating expenses:
Selling and marketing                     $   10,563     $  8,286          28 %    $ 20,027     $ 15,658          28 %
Research and development                      13,639       10,646          28        27,441       19,285          42
General and administrative                    11,202        8,271          35        21,717       12,859          69
Transaction costs                                 -         9,421        (100 )          -        13,574        (100 )

Total operating expenses                  $   35,404     $ 36,624          (3 )    $ 69,185     $ 61,376          13

Three Months Ended June 30, 2013 versus 2012. The decrease in total operating expenses in the second quarter of 2013 was primarily due to the transaction costs incurred in the second quarter of 2012 associated with our acquisitions of GlobeOp and the PORTIA Business, partially offset by an increase in operating expenses as a result of those acquisitions, which added $6.5 million in costs, and amortization expense of $0.2 million related to intangible assets acquired in the acquisitions.

Six Months Ended June 30, 2013 versus 2012. The increase in total operating expenses in the first six months of 2013 was primarily due to our acquisitions of GlobeOp and the PORTIA Business, which added $17.7 million in costs, and amortization expense of $1.2 million related to intangible assets acquired in the acquisitions, partially offset by transaction costs associated with those acquisitions included in the first six months of 2012.

Comparison of the Three and Six Months Ended June 30, 2013 and 2012 for Interest, Taxes and Other

Interest expense, net. We had interest expense, net of $11.8 million and $24.3 million for the three and six months ended June 30, 2013, respectively, compared to $4.5 million and $5.0 million for the three and six months ended June 30, 2012, respectively. The increase in interest expense in 2013 reflects the higher average debt balance resulting from the new credit facility, which was entered into during the second quarter of 2012 in connection with our acquisitions of GlobeOp and the PORTIA Business, and the related amortization of deferred financing costs and an original issue discount. This facility is discussed further in "Liquidity and Capital Resources".

Other income (expense), net. Other income, net for the three and six months ended June 30, 2013 consists primarily of foreign currency transaction gains. Other expense, net for the three and six months ended June 30, 2012 consisted foreign currency transaction losses and a loss recorded on foreign currency contracts associated with our acquisition of GlobeOp.


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Provision (benefit) for income taxes. The following table sets forth the provision for income taxes (dollars in thousands) and effective tax rates for the periods indicated:

                                            Three Months Ended June 30,                Six Months Ended June 30,
                                             2013                  2012                 2013                 2012
Provision (benefit) for income taxes             9,759                 (497 )              17,967             7,268
Effective tax rate                                27.2 %               (7.9 %)               27.4 %            37.5 %

Our effective tax rates for the six months ended June 30, 2013 and 2012 differ primarily due to the impact of the GlobeOp acquisition on our global tax provision. Most notably, the second quarter 2012 effective rate was adversely impacted by certain non-deductible transaction-related costs and a valuation allowance with respect to a foreign holding company. Our effective tax rates differ from the statutory rate primarily due to the effect of our foreign operations. The decrease in effective rate from 2012 to 2013 was primarily due to the impact of the foreign restructuring that was completed in December 2012. Our effective tax rate includes the effect of operations outside the United States, which historically have been taxed at rates lower than the U.S. statutory rate. While we have income from multiple foreign sources, the majority of the Company's non-U.S. operations are in Canada, India and the United Kingdom, where we anticipate the statutory rates to be approximately 27%, 34% and 23%, respectively, in 2013. The consolidated expected effective tax rate for the year ended December 31, 2013 is forecasted to be between 27% and 28%. A future proportionate change in the composition of income before income taxes from foreign and domestic tax jurisdictions could impact our periodic effective tax rate. Additionally, unrecognized tax benefits of approximately $7.6 million are likely to be recognized within the next 12 months due to the lapse of a statute of limitation, which would further impact our effective tax rate for 2013.

Liquidity and Capital Resources

Our principal cash requirements are to finance the costs of our operations pending the billing and collection of client receivables, to fund payments with respect to our indebtedness, to invest in research and development and to acquire complementary businesses or assets. We expect our cash on hand and cash flows from operations to provide sufficient liquidity to fund our current obligations, projected working capital requirements and capital spending for at least the next twelve months.

Our cash at June 30, 2013 was $60.6 million, a decrease of $25.6 million from $86.2 million at December 31, 2012. The decrease in cash is due primarily to cash used for repayments of debt and capital expenditures, partially offset by cash provided by operations.

Net cash provided by operating activities was $70.0 million for the six months ended June 30, 2013. Cash provided by operating activities was primarily due to net income of $47.5 million adjusted for non-cash items of $48.0 million, partially offset by changes in our working capital accounts (excluding the effect of acquisitions) totaling $25.5 million. The changes in our working capital accounts were driven by decreases in accrued expenses, accounts payable and deferred revenues and increases in accounts receivable and prepaid expenses and other assets, partially offset by a change in income taxes prepaid and payable. The decrease in deferred revenues was primarily due to the recognition of annual maintenance fees. The decrease in accrued expenses was primarily due to the payment of annual employee bonuses. The increase in accounts receivable was primarily due to the increase in revenue.

Investing activities used net cash of $8.1 million for the six months ended June 30, 2013, primarily related to $7.7 million in cash paid for capital expenditures and $0.4 million in cash paid for capitalized software.

Financing activities used net cash of $84.9 million for the six months ended June 30, 2013, representing $102.0 million in repayments of debt and $1.9 million in deferred financing costs, partially offset by proceeds of $14.1 million from stock option exercises and realized income tax windfall benefits of $4.9 million related to the exercise of stock options.

We have made a permanent reinvestment determination in certain non-U.S. operations that have historically generated positive operating cash flows. At June 30, 2013, we held approximately $45.3 million in cash and cash equivalents at non-U.S. subsidiaries where we had made such a determination and in turn no provision for U.S. income taxes had been made. As of June 30, 2013, we believe we have sufficient foreign tax credits available to offset tax obligations associated with the repatriation of funds at our Canadian operations. At June 30, 2013, approximately $15.4 million in cash was held at our Indian operations that if repatriated to our foreign debt holder would incur distribution taxes of approximately $2.6 million. Excess cash held by subsidiaries of our foreign debt holder will be used to facilitate debt servicing of our foreign debt holder.


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Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Credit Facility

On March 14, 2012, in connection with our acquisition of GlobeOp, we entered into a Credit Agreement with SS&C and SS&C Technologies Holdings Europe S.A.R.L., an indirect wholly-owned subsidiary of SS&C, or SS&C Sarl, as the borrowers. The Credit Agreement has four tranches of term loans: (i) a $0 term A-1 facility with a five and one-half year term for borrowings by SS&C, (ii) a $325 million term A-2 facility with a five and one-half year term for borrowings by SS&C Sarl, (iii) a $725 million term B-1 facility with a seven year term for borrowings by SS&C and (iv) a $75 million term B-2 facility with a seven year term for borrowings by SS&C Sarl. In addition, the Credit Agreement had a $142 million bridge loan facility, of which $31.6 million was immediately drawn, with a 364-day term available for borrowings by SS&C Sarl and has a revolving credit facility with a five and one-half year term available for borrowings by SS&C with $100 million in commitments. The revolving credit facility contains a $25 million letter of credit sub-facility and a $20 million swingline loan sub-facility. The bridge loan was repaid in July 2012 and is no longer available for borrowing.

The term loans and the revolving credit facility bear interest, at the election of the borrowers, at the base rate (as defined in Credit Agreement) or LIBOR, plus the applicable interest rate margin for the revolving credit facility. The term A loans and the revolving credit facility initially bear interest at either LIBOR plus 2.75% or at the base rate plus 1.75%, and then will be subject to a step-down at any time SS&C's consolidated net senior secured leverage ratio is less than 3.00 times, to 2.50% in the case of the LIBOR margin, and 1.50% in the case of the base rate margin.

In June 2013, we completed a repricing of our $620.2 million term B-1 loans and $64.2 million term B-2 loans, which replaced them with new term B-1 loans and term B-2 loans at the same outstanding principal balance of $684.4 million, but at a different interest rate. The applicable interest rates have been reduced to either LIBOR plus 2.75% or the base rate plus 1.75%, and the LIBOR floor has been reduced from 1.00% to 0.75%, subject to a step-down at any time that the consolidated net senior secured leverage ratio is less than 2.75 times, to 2.50% in the case of the LIBOR margin, and 1.50% in the case of the base rate margin. The maturity date of the new loans remains June 8, 2019, and no changes were made to the financial covenants or scheduled amortization.

The initial proceeds of the borrowings under the Credit Agreement were used to satisfy a portion of the consideration required to fund our acquisition of GlobeOp and refinance amounts outstanding under SS&C's prior senior credit facility. As of June 30, 2013, there was $257.8 million in principal amount outstanding under the term A-2 facility, $599.2 million in principal amount outstanding under the term B-1 facility and $62.0 million in principal amount outstanding under the term B-2 facility.

Holdings, SS&C and the material domestic subsidiaries of SS&C have pledged substantially all of their tangible and intangible assets to support the obligations of SS&C and SS&C Sarl under the Credit Agreement. In addition, SS&C Sarl has agreed, in certain circumstances, to cause subsidiaries in foreign jurisdictions to guarantee SS&C Sarl's obligations and pledge substantially all of their assets to support the obligations of SS&C Sarl under the Credit Agreement.

The Credit Agreement contains customary covenants limiting our ability and the ability of our subsidiaries to, among other things, pay dividends, incur debt or liens, redeem or repurchase equity, enter into transactions with affiliates, make investments, merge or consolidate with others or dispose of assets. In addition, the Credit Agreement contains a financial covenant requiring SS&C to maintain a consolidated net senior secured leverage ratio. As of June 30, 2013, we were in compliance with the financial and non-financial covenants.

The Credit Agreement contains various events of default (including failure to comply with the covenants contained in the Credit Agreement and related agreements) and upon an event of default, the lenders may, subject to various customary cure rights, require the immediate repayment of all amounts outstanding under the term loans, the bridge loans and the revolving credit facility and foreclose on the collateral.

Covenant Compliance

Under the Credit Agreement, we are required to satisfy and maintain a specified financial ratio and other financial condition tests. As of June 30, 2013, we were in compliance with the financial ratios and other financial condition tests. Our continued ability to meet this financial ratio and these tests can be affected by events beyond our control, and we cannot assure you that we will meet this ratio and these tests. A breach of any of these covenants could result in a default under the Credit Agreement. Upon the occurrence of any event of default under the Credit Agreement, the lenders could elect to declare all amounts outstanding under the Credit Agreement to be immediately due and payable and terminate all commitments to extend further credit.


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Consolidated EBITDA is a non-GAAP financial measure used in key financial covenants contained in the Credit Agreement, which is a material facility supporting our capital structure and providing liquidity to our business. Consolidated EBITDA is defined as earnings before interest, taxes, depreciation and amortization (EBITDA), further adjusted to exclude unusual items and other adjustments permitted in calculating covenant compliance under the Credit Agreement. We believe that the inclusion of supplementary adjustments to EBITDA applied in presenting Consolidated EBITDA is appropriate to provide additional information to investors to demonstrate compliance with the specified financial ratio and other financial condition tests contained in the Credit Agreement.

Management uses Consolidated EBITDA to gauge the costs of our capital structure on a day-to-day basis when full financial statements are unavailable. Management further believes that providing this information allows our investors greater transparency and a better understanding of our ability to meet our debt service obligations and make capital expenditures.

Any breach of covenants in the Credit Agreement that are tied to ratios based on Consolidated EBITDA could result in a default under that agreement, in which case the lenders could elect to declare all amounts borrowed immediately due and payable and to terminate any commitments they have to provide further borrowings. Any default and subsequent acceleration of payments under the Credit Agreement would have a material adverse effect on our results of operations, financial position and cash flows. Additionally, under the Credit Agreement, our ability to engage in activities such as incurring additional indebtedness, making investments and paying dividends is also tied to ratios based on Consolidated EBITDA.

Consolidated EBITDA does not represent net income or cash flow from operations as those terms are defined by generally accepted accounting principles, or GAAP, and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. Further, the Credit Agreement requires that Consolidated EBITDA be calculated for the most recent four fiscal quarters. As a result, the measure can be disproportionately affected by a particularly strong or weak quarter. Further, it may not be comparable to the measure for any subsequent four-quarter period or any complete fiscal year.

Consolidated EBITDA is not a recognized measurement under GAAP and investors should not consider Consolidated EBITDA as a substitute for measures of our financial performance and liquidity as determined in accordance with GAAP, such as net income, operating income or net cash provided by operating activities. Because other companies may calculate Consolidated EBITDA differently than we do, Consolidated EBITDA may not be comparable to similarly titled measures reported by other companies. Consolidated EBITDA has other limitations as an analytical tool, when compared to the use of net income, which is the most directly comparable GAAP financial measure, including:

Consolidated EBITDA does not reflect the provision of income tax expense in our various jurisdictions;

Consolidated EBITDA does not reflect the significant interest expense we incur as a result of our debt leverage;

Consolidated EBITDA does not reflect any attribution of costs to our operations related to our investments and capital expenditures through depreciation and amortization charges;

Consolidated EBITDA does not reflect the cost of compensation we provide . . .

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