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SSNC > SEC Filings for SSNC > Form 10-Q on 7-May-2014All Recent SEC Filings

Show all filings for SS&C TECHNOLOGIES HOLDINGS INC

Form 10-Q for SS&C TECHNOLOGIES HOLDINGS INC


7-May-2014

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 March 31,
                                               2014          2013
                   Revenues:
                   Software-enabled services         78 %        78 %
                   Software licenses                  4           4
                   Maintenance                       14          15
                   Professional services              4           3

                   Total revenues                 100.0 %     100.0 %

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

                                   Three Months Ended March 31,          Percentage
                                     2014                 2013             Change
    Revenues:
    Software-enabled services   $      145,383       $      135,739                7 %
    Software licenses                    7,499                6,070               24
    Maintenance                         25,526               26,015               (2 )
    Professional services                7,402                5,394               37

    Total revenues              $      185,810       $      173,218                7

Three Months Ended March 31, 2014 versus 2013. Our revenues increased in the first quarter of 2014 as compared to the first quarter of 2013 primarily due to a continued increase in demand for our fund administration services from alternative investment managers, as well as revenues related to Prime Management Limited, or Prime, which we acquired in October 2013 and contributed $2.3 million in revenue. Our software licenses revenues increased by $1.4 million primarily due to increased demand for our CAMRA and LMS software products and an overall increase in the average size of perpetual licenses sold. Additionally, professional services revenues increased due to a rise in the number of product implementation projects. These increases were partially offset by the unfavorable impact from foreign currency translation of $1.0 million, which resulted from the strength of the U.S. dollar relative to currencies such as the Canadian dollar.

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 March 31,
                                                   2014          2013
              Cost of revenues:
              Cost of software-enabled services        59 %          59 %
              Cost of software licenses                11            21
              Cost of maintenance                      39            40
              Cost of professional services            68            91
              Total cost of revenues                   55            56
              Gross margin percentage                  45            44

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

                                                Three Months
                                              Ended March 31,          Percentage
                                             2014          2013          Change
       Cost of revenues:
       Cost of software-enabled services   $  85,691     $ 80,727                6 %
       Cost of software licenses                 851        1,274              (33 )
       Cost of maintenance                     9,931       10,520               (6 )
       Cost of professional services           5,026        4,920                2

       Total cost of revenues              $ 101,499     $ 97,441                4

Three Months Ended March 31, 2014 versus 2013. Our gross margins increased in 2014 primarily due to cost synergies with respect to the businesses acquired since 2012 and a decrease in amortization expense related to intangible assets. Our total cost of revenues increased in the first quarter of 2014 primarily as a result of an increase in cost of software-enabled services revenues to support the increased demand for our fund administration services from alternative investment managers, as well as our acquisition of Prime, which added $1.3 million in costs.

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.

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 March 31,
                                                2014          2013
                  Operating expenses:
                  Selling and marketing              6 %           5 %
                  Research and development           7             8
                  General and administrative         6             6
                  Total operating expenses          20            20


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

                                            Three Months
                                           Ended March 31,         Percentage
                                          2014         2013          Change
           Operating expenses:
           Selling and marketing        $ 11,898     $  9,464               26 %
           Research and development       13,587       13,802               (2 )
           General and administrative     11,801       10,515               12

           Total operating expenses     $ 37,286     $ 33,781               10

Three Months Ended March 31, 2014 versus 2013. The increase in total operating expenses in the first quarter of 2014 was primarily due to an increase in selling and marketing expenses as we invested heavily in our sales force. Additionally, general and administrative expense increased primarily as a result of legal expenses related to an IP infringement lawsuit we filed during the period.

Comparison of the Three Months Ended March 31, 2014 and 2013 for Interest, Taxes and Other

Interest expense, net. We had net interest expense of $7.1 million in 2014 compared to $12.5 million in 2013. The decrease in interest expense in 2014 reflects the lower average debt balance resulting from repayments of the credit facility and a decrease in average interest rates resulting from the 2013 and 2014 repricings. These facilities are discussed further in "Liquidity and Capital Resources".

Other (expense) income, net. Other expense, net for 2014 consists primarily of foreign currency transaction losses. Other income, net for 2013 consists primarily of foreign currency transaction gains.

Provision 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 March 31,
                                            2014                  2013
          Provision for income taxes   $       12,793         $      8,208
          Effective tax rate                       33 %                 28 %

Our March 31, 2014 and 2013 effective tax rates differ from the statutory rate primarily due to the effect of our foreign operations. The increase in effective rate from 2013 to 2014 was primarily due to a one-time charge of $2.5 million related to a change in the apportionment method caused by tax law changes enacted in New York during the first quarter of 2014. 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 26.5%, 34.0% and 21.5%, respectively, in 2014. The consolidated expected effective tax rate for the year ended December 31, 2014 is forecasted to be between 27% and 29%. 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.

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 March 31, 2014 was $78.4 million, a decrease of $6.1 million from $84.5 million at December 31, 2013. 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 $38.0 million for the three months ended March 31, 2014. Cash provided by operating activities was primarily due to net income of $26.4 million adjusted for non-cash items of $25.8 million, partially offset by changes in our working capital accounts (excluding the effect of acquisitions) totaling $14.2 million. The changes in our working capital accounts were driven by decreases in accrued expenses and accounts payable, partially offset by a change in income taxes prepaid and payable, decreases in accounts receivable and prepaid expenses and other assets and increases in deferred revenues. The increase in deferred revenues was primarily due to the collection of annual maintenance fees. The decrease in accrued expenses was primarily due to the payment of annual employee bonuses in the first quarter of 2014. The decrease in accounts receivable was primarily due to the decrease in days' sales outstanding from 45 days at December 31, 2013 to 43 days at March 31, 2014.


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Investing activities used net cash of $2.6 million for the three months ended March 31, 2014, primarily related to $2.8 million in cash paid for capital expenditures and $0.8 million in cash paid for capitalized software, partially offset by the release of $1.0 million in restricted cash previously held as collateral for a letter of credit.

Financing activities used net cash of $42.0 million for the three months ended March 31, 2014, representing $45.0 million in repayments of debt and $3.5 million in treasury stock repurchases, partially offset by proceeds of $4.0 million from stock option exercises and realized income tax windfall benefits of $2.5 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 March 31, 2014, we held approximately $47.2 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. At March 31, 2014, we held approximately $21.1 million in cash by subsidiaries of our foreign debt holder that will be used to facilitate debt servicing of our foreign debt holder. At March 31, 2014, we held approximately $18.8 million in cash at our Indian operations that if repatriated to our foreign debt holder would incur distribution taxes of approximately $3.2 million.

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, which we refer to as the Credit Agreement. 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 $325.0 million term A-2 facility with a five and one-half year term for borrowings by SS&C Sarl, (iii) a $725.0 million term B-1 facility with a seven year term for borrowings by SS&C and (iv) a $75.0 million term B-2 facility with a seven year term for borrowings by SS&C Sarl. In addition, the Credit Agreement had a $142.0 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 $100.0 million in commitments. The revolving credit facility contains a $25.0 million letter of credit sub-facility and a $20.0 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 the 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 bore 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 February 2014, we completed a repricing of our term A loans, which replaced these loans with new term A loans at the same outstanding principal balance, but at a different interest rate. The applicable interest rates were reduced to either LIBOR plus 2.0% or the base rate plus 1.0%. The maturity date of the new loans remains December 8, 2017, and no changes were made to the financial accounts or scheduled amortization. See Note 5 to our condensed consolidated financial statements.

In June 2013, we completed a repricing of our term B-1 loans and term B-2 loans, which replaced these loans with new term B-1 loans and term B-2 loans at the same outstanding principal balance, but at a different interest rate. The applicable interest rates were reduced to either LIBOR plus 2.75% or the base rate plus 1.75%, and the LIBOR floor was 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 March 31, 2014, there was $202.0 million in principal amount outstanding under the term A-2 facility, $484.8 million in principal amount outstanding under the term B-1 facility and $50.2 million in principal amount outstanding under the term B-2 facility.


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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 March 31, 2014, 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 March 31, 2014, 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 continue to 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.

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, or 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;


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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 to our employees in the form of stock option awards; and

Consolidated EBITDA excludes expenses that we believe are unusual or non-recurring, but which others may believe are normal expenses for the operation of a business.

The following is a reconciliation of net income to Consolidated EBITDA as defined in our senior credit facility.

                                                                                        Twelve Months
                                               Three Months Ended March 31,            Ended March 31,
                                               2014                   2013                  2014
                                                                  (In thousands)
Net income                                 $      26,448          $      21,429       $         122,914
Interest expense, net                              7,098                 12,505                  35,872
Income tax provision                              12,793                  8,208                  31,877
Depreciation and amortization                     24,936                 24,752                  99,964

EBITDA                                            71,275                 66,894                 290,627
Purchase accounting adjustments(1)                   (27 )                   65                    (144 )
Capital-based taxes                                    6                     -                      188
Unusual or non-recurring charges
(gains) (2)                                        2,014                   (556 )                  (551 )
Acquired EBITDA (3)                                   -                      -                      394
Stock-based compensation                           2,975                  2,106                   9,255
Other(4)                                             (49 )                  211                     (25 )

Consolidated EBITDA, as defined            $      76,194          $      68,720       $         299,744

(1) Purchase accounting adjustments include (a) an adjustment to increase rent expense by the amount that would have been recognized if lease obligations were not adjusted to fair value at the date of acquisitions and (b) an adjustment to increase revenues by the amount that would have been recognized if deferred revenue were not adjusted to fair value at the date of acquisitions.

(2) Unusual or non-recurring charges include foreign currency gains and losses, severance expenses, proceeds from legal and other settlements and other one-time expenses, such as expenses associated with facilities, acquisitions and the sale of fixed assets.

(3) Acquired EBITDA reflects the EBITDA impact of significant businesses that were acquired during the period as if the acquisition occurred at the beginning of the period.

(4) Other includes the non-cash portion of straight-line rent expense.

Our covenant requirement for net senior secured leverage ratio and the actual ratio for the three months ended March 31, 2014 are as follows:

. . .

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