SS&C Technologies Holdings, Inc.
SS&C Technologies Holdings Inc (Form: 10-Q, Received: 11/06/2013 14:58:11)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 001-34675

 

 

SS&C TECHNOLOGIES HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   71-0987913

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

80 Lamberton Road

Windsor, CT 06095

(Address of principal executive offices, including zip code)

860-298-4500

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes   x     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

There were 82,228,873 shares of the registrant’s common stock outstanding as of November 4, 2013.

 

 

 


Table of Contents

SS&C TECHNOLOGIES HOLDINGS, INC.

INDEX

 

     Page
Number
 

PART 1. FINANCIAL INFORMATION

  

Item 1. Financial Statements (unaudited)

  

Condensed Consolidated Balance Sheets at September 30, 2013 and December 31, 2012

     3   

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September  30, 2013 and 2012

     4   

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012

     5   

Notes to Condensed Consolidated Financial Statements

     6   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     12   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     19   

Item 4. Controls and Procedures

     19   

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     20   

Item 1A. Risk Factors

     20   

Item 6. Exhibits

     20   

SIGNATURE

     21   

EXHIBIT INDEX

     22   

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes”, “anticipates”, “plans”, “expects”, “estimates”, “projects”, “forecasts”, “may” and “should” and similar expressions are intended to identify forward-looking statements. The important factors discussed under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission on March 1, 2013, among others, could cause actual results to differ materially from those indicated by forward-looking statements made herein and presented elsewhere by management from time to time. We do not undertake an obligation to update forward-looking statements to reflect future events or circumstances.

 

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Part I. FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

SS&C TECHNOLOGIES HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(unaudited)

 

     September 30,
2013
    December 31,
2012
 
ASSETS   

Current assets:

    

Cash

   $ 81,575      $ 86,160   

Accounts receivable, net of allowance for doubtful accounts of $2,957 and $2,359, respectively

     85,871        91,690   

Prepaid expenses and other current assets

     20,263        11,548   

Prepaid income taxes

     23,203        9,651   

Deferred income taxes

     4,031        5,408   

Restricted cash

     2,460        2,460   
  

 

 

   

 

 

 

Total current assets

     217,403        206,917   

Property, plant and equipment:

    

Land

     2,655        2,655   

Building and improvements

     29,937        28,557   

Equipment, furniture, and fixtures

     64,700        58,046   
  

 

 

   

 

 

 
     97,292        89,258   

Less accumulated depreciation

     (43,975     (34,219
  

 

 

   

 

 

 

Net property, plant and equipment

     53,317        55,039   

Deferred income taxes

     733        1,459   

Goodwill

     1,542,947        1,559,607   

Intangible and other assets, net of accumulated amortization of $317,922 and $255,449, respectively

     478,432        539,883   
  

 

 

   

 

 

 

Total assets

   $ 2,292,832      $ 2,362,905   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY   

Current liabilities:

    

Current portion of long-term debt (Note 4)

   $ 21,782      $ 22,248   

Accounts payable

     17,298        10,528   

Income taxes payable

     —          1,314   

Accrued employee compensation and benefits

     34,730        39,812   

Other accrued expenses

     28,675        22,650   

Deferred maintenance and other revenue

     59,108        63,700   
  

 

 

   

 

 

 

Total current liabilities

     161,593        160,252   

Long-term debt, net of current portion (Note 4)

     814,377        989,890   

Other long-term liabilities

     12,569        17,102   

Deferred income taxes

     108,246        120,158   
  

 

 

   

 

 

 

Total liabilities

     1,096,785        1,287,402   

Commitments and contingencies (Note 5)

    

Stockholders’ equity (Note 2):

    

Common stock:

    

Class A non-voting common stock, $0.01 par value per share, 5,000 shares authorized; 2,704 and 1,429 shares issued and outstanding, respectively, of which 0 and 13 are unvested, respectively

     27        14   

Common stock, $0.01 par value per share, 100,000 shares authorized; 79,997 shares and 78,141 shares issued, respectively, and 79,509 shares and 77,653 shares outstanding, respectively, of which 25 and 0 are unvested, respectively

     800        781   

Additional paid-in capital

     902,356        853,455   

Accumulated other comprehensive income

     32,115        51,518   

Retained earnings

     266,568        175,554   
  

 

 

   

 

 

 
     1,201,866        1,081,322   

Less: cost of common stock in treasury, 488 shares

     (5,819     (5,819
  

 

 

   

 

 

 

Total stockholders’ equity

     1,196,047        1,075,503   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,292,832      $ 2,362,905   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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SS&C TECHNOLOGIES HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, except per share data)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  

Revenues:

        

Software-enabled services

   $ 138,123      $ 125,605      $ 411,909      $ 275,069   

Software licenses

     8,184        5,885        20,880        15,463   

Maintenance

     26,178        25,519        77,603        67,993   

Professional services

     7,020        8,553        19,788        21,562   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     179,505        165,562        530,180        380,087   

Cost of revenues:

        

Software-enabled services

     79,875        75,965        240,847        155,940   

Software licenses

     1,286        1,764        3,908        4,609   

Maintenance

     10,150        10,883        30,953        29,338   

Professional services

     4,884        5,126        14,689        13,803   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     96,195        93,738        290,397        203,690   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     83,310        71,824        239,783        176,397   

Operating expenses:

        

Selling and marketing

     10,849        8,970        30,876        24,628   

Research and development

     13,117        13,193        40,558        32,478   

General and administrative

     11,480        11,668        33,197        24,527   

Transaction costs

     —          748        —          14,322   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     35,446        34,579        104,631        95,955   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     47,864        37,245        135,152        80,442   

Interest expense, net

     (9,036 )     (13,726 )     (33,325     (18,760

Other (expense) income, net

     (110     (1,808     2,406        (16,225

Loss on extinguishment of debt

     —          —          —          (4,355
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     38,718        21,711        104,233        41,102   

(Benefit) provision for income taxes

     (4,748 )     4,096        13,219        11,364   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 43,466      $ 17,615      $ 91,014      $ 29,738   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 0.53      $ 0.22      $ 1.13      $ 0.38   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic weighted average number of common shares outstanding

     81,784        78,548        80,779        78,123   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 0.51      $ 0.21      $ 1.07      $ 0.36   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted average number of common and common equivalent shares outstanding

     86,068        83,202        85,126        82,744   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 43,466      $ 17,615      $ 91,014      $ 29,738   

Other comprehensive income (loss):

        

Foreign currency exchange translation adjustment

     21,807        24,649        (19,403     28,119   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     21,807        24,649        (19,403     28,119   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 65,273      $ 42,264      $ 71,611      $ 57,857   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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SS&C TECHNOLOGIES HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

     Nine Months Ended September 30,  
     2013     2012  

Cash flow from operating activities:

    

Net income

   $ 91,014      $ 29,738   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     74,441        50,620   

Amortization and write-offs of loan origination costs

     4,408        7,814   

Income tax benefit related to exercise of stock options

     (11,796     (2,863 )

Deferred income taxes

     (10,049     (7,723 )

Stock-based compensation expense

     6,010        3,798   

Provision for doubtful accounts

     528        473   

Loss on sale or disposition of property and equipment

     316        13  

Changes in operating assets and liabilities, excluding effects from acquisitions:

    

Accounts receivable

     5,911        (14,652 )

Prepaid expenses and other assets

     (8,405     8,873   

Income taxes prepaid and payable

     8,854        (4,333 )

Accounts payable

     5,189        (2,240 )

Accrued expenses

     (7,611     (5,420

Deferred maintenance and other revenue

     (4,534     (3,432
  

 

 

   

 

 

 

Net cash provided by operating activities

     154,276        60,666   
  

 

 

   

 

 

 

Cash flow from investing activities:

    

Additions to property and equipment

     (9,933     (8,839 )

Proceeds from sale of property and equipment

     61        —     

Cash paid for business acquisitions, net of cash acquired

     —          (964,523 )

Additions to capitalized software

     (1,570     (640 )

Other

     —          87   
  

 

 

   

 

 

 

Net cash used in investing activities

     (11,442     (973,915 )
  

 

 

   

 

 

 

Cash flow from financing activities:

    

Cash received from debt borrowings, net of loan origination costs

     —          1,304,210   

Repayments of debt

     (177,000     (366,600 )

Income tax benefit related to exercise of stock options

     11,796        2,863   

Payment of contingent consideration

     —          (1,800

Proceeds from exercise of stock options

     22,360        12,325   

Other

     (1,917     —     
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (144,761     950,998   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     (2,658     2,188   
  

 

 

   

 

 

 

Net (decrease) increase in cash

     (4,585     39,937   

Cash, beginning of period

     86,160        40,318   
  

 

 

   

 

 

 

Cash, end of period

   $ 81,575      $ 80,255   
  

 

 

   

 

 

 

Supplemental disclosure of non-cash activities:

    

Excess tax benefit related to stock option exercises

   $ 10,279      $ —     

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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SS&C TECHNOLOGIES HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SS&C Technologies Holdings, Inc., or Holdings, is our top-level holding company. SS&C Technologies, Inc., or “SS&C”, is our primary operating company and a wholly-owned subsidiary of SS&C Technologies Holdings, Inc. The “Company” means SS&C Technologies Holdings, Inc. and its consolidated subsidiaries, including SS&C.

1. Basis of Presentation

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These accounting principles were applied on a basis consistent with those of the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission (the “SEC”) on March 1, 2013 (the “2012 Form 10-K”). In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments, except as noted elsewhere in the notes to the condensed consolidated financial statements) necessary for a fair statement of its financial position as of September 30, 2013, the results of its operations for the three and nine months ended September 30, 2013 and 2012 and its cash flows for the nine months ended September 30, 2013 and 2012. These statements do not include all of the information and footnotes required by GAAP for annual financial statements. The financial statements contained herein should be read in conjunction with the audited consolidated financial statements and footnotes as of and for the year ended December 31, 2012, which were included in the 2012 Form 10-K. The December 31, 2012 consolidated balance sheet data contained in the accompanying financial statements were derived from the Company’s audited financial statements but do not include all disclosures required by GAAP for annual financial statements. The results of operations for the three and nine months ended September 30, 2013 are not necessarily indicative of the expected results for any subsequent quarters or the full year.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, Comprehensive Income (Topic 220)—Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which amends the accounting guidance for the presentation of comprehensive income to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments do not change the current requirements for reporting net income or other comprehensive income, but do require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about these amounts. For public companies, these amendments are effective prospectively for reporting periods beginning after December 15, 2012. The new guidance affects disclosures only and did not have any impact on the Company’s financial position, results of operations or cash flows.

In July 2012, the FASB issued ASU No. 2012-02, Intangibles—Goodwill and Other (Topic 350)— Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”), to simplify how entities, both public and nonpublic, test indefinite-lived intangible assets for impairment. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this standard in the first quarter of 2013 did not have a material impact on the Company’s financial position, results of operations or cash flows.

2. Equity and Stock-based Compensation

During the three months ended September 30, 2013, the Company granted 25,000 restricted shares of its common stock, which vest over a period of four years.

 

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For stock options and restricted stock, the total amount of stock-based compensation expense recognized in the Company’s Condensed Consolidated Statements of Comprehensive Income was as follows (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2013      2012      2013      2012  

Statements of Comprehensive Income Classification

           

Cost of software-enabled services

   $ 721       $ 383       $ 2,191       $ 942   

Cost of maintenance

     66         57         204         171   

Cost of professional services

     81         61         252         184   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cost of revenues

     868         501         2,647         1,297   

Selling and marketing

     375         255         981         726   

Research and development

     215         145         681         384   

General and administrative

     517         485         1,701         1,391   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     1,107         885         3,363         2,501   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 1,975       $ 1,386       $ 6,010       $ 3,798   
  

 

 

    

 

 

    

 

 

    

 

 

 

A summary of stock option activity as of and for the nine months ended September 30, 2013 is as follows:

 

     Shares of Common
Stock Underlying
Options
 

Outstanding at January 1, 2013

     13,411,130   

Granted

     234,500   

Cancelled/forfeited

     (261,958

Exercised

     (3,106,423
  

 

 

 

Outstanding at September 30, 2013

     10,277,249   
  

 

 

 

During the nine months ended September 30, 2013, the Company recorded $24.1 million of income tax benefits related to the exercise of stock options. Of this amount, $3.6 million was recorded to goodwill and $20.5 million was recorded to additional paid-in capital on the Company’s Condensed Consolidated Balance Sheet. The Company realized $13.8 million of cash savings through September 30, 2013 related to these benefits, of which a proportional amount relating to the additional paid in capital was recognized as cash inflows from financing activities while the remainder was recognized as cash inflows from operations on its Condensed Consolidated Statements of Cash Flows.

3. Basic and Diluted Earnings per Share

Earnings per share (“EPS”) is calculated in accordance with the relevant standards. Basic EPS includes no dilution and is computed by dividing income available to the Company’s common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares consist of stock options and restricted stock using the treasury stock method. Common equivalent shares are excluded from the computation of diluted earnings per share if the effect of including such common equivalent shares is anti-dilutive because their exercise prices together with other assumed proceeds exceed the average fair value of common stock for the period. The Company has two classes of common stock, each with identical participation rights to earnings and liquidation preferences, and therefore the calculation of EPS as described above is identical to the calculation under the two-class method.

The following table sets forth the weighted average common shares used in the computation of basic and diluted EPS (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2013      2012      2013      2012  

Weighted average common shares outstanding

     81,784         78,548         80,779         78,123   

Weighted average common stock equivalents – options and restricted shares

     4,284         4,654         4,347         4,621   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common and common equivalent shares outstanding

     86,068         83,202         85,126         82,744   
  

 

 

    

 

 

    

 

 

    

 

 

 

Options to purchase 94,587 and 577,556 shares were outstanding for the three months ended September 30, 2013 and 2012, respectively, and options to purchase 40,007 and 407,589 shares were outstanding for the nine months ended September 30, 2013 and 2012, respectively, but were not included in the computation of diluted earnings per share because the effect of including the options would be anti-dilutive.

 

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4. Debt

At September 30, 2013 and December 31, 2012, debt consisted of the following (in thousands):

 

     September 30,
2013
    December 31,
2012
 

Credit facility, weighted-average interest rate of 3.34% and 4.42%, respectively

   $ 844,000      $ 1,021,000  

Unamortized original issue discount

     (7,841     (8,862
  

 

 

   

 

 

 
     836,159        1,012,138   

Short-term borrowings and current portion of long-term debt

     (21,782     (22,248
  

 

 

   

 

 

 

Long-term debt

   $ 814,377      $ 989,890   
  

 

 

   

 

 

 

Capitalized financing costs of $1.1 million and $1.0 million were amortized to interest expense in the three months ended September 30, 2013 and 2012, respectively. Capitalized financing costs of $3.4 million and $1.5 million were amortized to interest expense in the nine months ended September 30, 2013 and 2012, respectively. Additionally, the Company amortized to interest expense $0.3 million and $1.0 million of the original issue discount in the three and nine months ended September 30, 2013, respectively. During the three and nine months ended September 30, 2012, the Company amortized to interest expense $0.3 million and $0.4 million, respectively, of the original issue discount. During the nine months ended September 30, 2012, the Company incurred expenses of $4.4 million in losses on extinguishment of debt associated with the repayment of the prior senior credit facility. The unamortized balance of capitalized financing costs is included in intangible and other assets in the Company’s Condensed Consolidated Balance Sheets.

The estimated fair value of the Company’s credit facility, which is a Level 2 liability, was $845.4 million and $1,030.0 million at September 30, 2013 and December 31, 2012, respectively. These fair values were computed based on comparable quoted market prices.

In June 2013, the Company completed a repricing of its $620.2 million term B-1 loans and $64.2 million 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 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 repricing of the debt was evaluated in accordance with FASB Accounting Standards Codification 470-50, Debt – Modifications and Extinguishments, for modification and extinguishment accounting. The Company accounted for the repricing as a debt modification with respect to amounts that remained in the syndicate and a debt extinguishment with respect to the amounts that exited the syndicate.

5. Commitments and Contingencies

As described below, the Company’s subsidiary, GlobeOp Financial Services S.A. (“GlobeOp”), is a defendant in pending litigation relating to several clients for which GlobeOp performed services.

Fairfield Greenwich-Related Actions

In April 2009, GlobeOp was named as a defendant in a putative class action (the “Anwar Action”), filed by Pasha S. Anwar in the United States District Court for the Southern District of New York against multiple defendants relating to Greenwich Sentry L.P. and Greenwich Sentry Partners L.P., (the “FG Funds”), and the alleged losses sustained by the FG Funds’ investors as a result of Bernard Madoff’s Ponzi scheme. The complaint alleges breach of fiduciary duties by GlobeOp and negligence in the performance of its duties and seeks to recover as damages the net losses sustained by investors in the putative class, together with applicable interest, costs, and attorneys’ fees. GlobeOp served as administrator for the Greenwich Sentry fund from October 2003 through August 2006 and for the Greenwich Sentry Partners fund from May 2006 through August 2006, during which time the approximate net asset value of the Greenwich Sentry Fund was $135.0 million and the Greenwich Sentry Partners Fund was $6.0 million. In February 2013, the U.S. District Court for the Southern District of New York granted the plaintiffs’ motion for class certification of a class consisting of all net loss investors in the litigated funds (excluding investors from a number of enumerated foreign countries). GlobeOp petitioned the Court of Appeals to permit an interlocutory appeal of the class certification order, but subsequently requested that the Court of Appeals hold its petition in abeyance pending the consummation of a settlement, as detailed below.

 

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GlobeOp was also named as one of five defendants in two derivative actions (the “Derivative Actions”) that were initially filed in New York State Supreme Court in February 2009. Following initial motion practice, the court ordered the plaintiffs to arbitrate the claims asserted against GlobeOp. A litigation trustee on behalf of the bankrupt FG Funds subsequently substituted in as the plaintiff in these actions, which relate to the same losses alleged in the Anwar Action. The litigation trustee is seeking unspecified compensatory and punitive damages, together with applicable interest, costs, and attorneys’ fees, as well as contribution and indemnification from GlobeOp for the FG Funds’ settlement with Irving Picard, trustee for the liquidation of Bernard L. Madoff Investment Securities, LLC. GlobeOp maintains that the prior orders compelling arbitration apply to the litigation trustee. The litigation trustee has not yet commenced arbitration proceedings.

In August 2013, GlobeOp and the plaintiffs in the Anwar Action and the Derivative Actions, as well as certain insurers who have agreed to provide GlobeOp with coverage for these claims, entered into a settlement agreement resolving all disputes and claims between and among the parties. The prospective settlements are subject to approval by the court in which the Anwar Action is pending and various other conditions. GlobeOp’s insurers have funded the entirety of the contemplated settlement payments into escrow where funds are being held subject to final consummation of the settlement agreement.

Millennium Actions

Several actions (the “Millennium Actions”) have been filed in various jurisdictions against GlobeOp alleging claims and damages with respect to services performed by GlobeOp under a valuation agent services agreement for the Millennium Funds. These actions include (i) a class action in the U.S. District Court for the Southern District of New York on behalf of investors in the Millennium Funds filed in May 2012 asserting claims of $844.0 million (the alleged aggregate value of assets under management by the Millennium Funds at the funds’ peak valuation); (ii) an arbitration proceeding in the United Kingdom on behalf of the Millennium Funds’ investment manager, which commenced with a request for arbitration in July 2011, seeking an indemnity of $26.5 million for sums paid by way of settlement to the Millennium Funds in a separate arbitration to which GlobeOp was not a party, as well as an indemnity for any losses that may be incurred by the investment manager in the U.S. class action; and (iii) a claim in the same arbitration proceeding by the Millennium Global Emerging Credit Master Fund Ltd against GlobeOp for damages alleged to be in excess of $160.0 million. These actions allege that GlobeOp breached its contractual obligations and/or negligently breached a duty of care in the performance of services for the funds and that, inter alia , GlobeOp should have discovered and reported a fraudulent scheme perpetrated by the portfolio manager employed by the investment manager. The putative class action pending in the Southern District of New York also asserts claims against SS&C identical to the claims against GlobeOp in that action. In the arbitration, GlobeOp has asserted counterclaims against both the investment managers and the Millennium Emerging Credit Mast Fund Ltd. for indemnity, including in respect of the U.S. class action.

A hearing on the merits of the claims asserted in the United Kingdom arbitration was conducted in London in July and August 2013. The hearing has been adjourned and is not expected to be reconvened until 2014.

GlobeOp has secured insurance coverage that provides reimbursement of various litigation costs up to pre-determined limits. GlobeOp was reimbursed for litigation costs incurred in 2012 and 2013 under the applicable insurance policy.

The Company cannot predict the outcome of these matters, but the Company believes that it has strong defenses to the Millennium Actions and is vigorously contesting these matters. The full amount of any potential loss, if any at all, cannot be reasonably estimated at this time.

In addition to the foregoing legal proceedings, from time to time, the Company is subject to other legal proceedings and claims that arise in the normal course of its business. In the opinion of the Company’s management, the Company is not involved in any other such litigation or proceedings with third parties that would have a material adverse effect on the Company or its business.

 

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6. Goodwill

The change in carrying value of goodwill as of and for the nine months ended September 30, 2013 is as follows (in thousands):

 

Balance at December 31, 2012

   $  1,559,607   

Adjustments to prior acquisitions

     117   

Income tax benefit on rollover options exercised

     (3,557

Effect of foreign currency translation

     (13,220
  

 

 

 

Balance at September 30, 2013

   $ 1,542,947   
  

 

 

 

7. Product and Geographic Sales Information

The Company operates in one reportable segment. The Company attributes net sales to an individual country based upon location of the client. The Company manages its business primarily on a geographic basis. The Company operates in the following geographic locations: the United States, Canada, Americas excluding the United States and Canada, Europe and Asia Pacific and Japan. The European region includes European countries as well as the Middle East and Africa.

Revenues by geography were (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2013      2012      2013      2012  

United States

   $ 121,390       $ 105,553       $ 347,603       $ 253,668   

Canada

     12,737         14,248         44,740         42,723   

Americas excluding United States and Canada

     4,118         4,278         13,028         8,503   

Europe

     36,538         37,499         110,329         65,544   

Asia Pacific and Japan

     4,722         3,984         14,480         9,649   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 179,505       $ 165,562       $ 530,180       $ 380,087   
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues by product group were (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2013      2012      2013      2012  

Portfolio management/accounting

   $ 161,451       $ 146,959       $ 476,464       $ 324,861   

Trading/treasury operations

     7,980         8,888         24,498         27,571   

Financial modeling

     2,156         2,124         6,323         6,491   

Loan management/accounting

     1,705         1,652         5,060         5,318   

Property management

     3,804         4,052         10,944         10,387   

Money market processing

     1,977         1,357         5,568         3,907   

Training

     432         530         1,323         1,552   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 179,505       $ 165,562       $ 530,180       $ 380,087   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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8. Acquisitions

The following unaudited pro forma condensed consolidated results of operations are provided for illustrative purposes only and assume that the 2012 acquisitions of Hedgemetrix LLC (“Hedgemetrix”), Gravity Financial, LLC (“Gravity”), GlobeOp and Thomson Reuters’ PORTIA business (the “PORTIA Business”), occurred on January 1, 2011. There were no acquisitions during the nine months ended September 30, 2013. This unaudited pro forma information (in thousands, except per share data) should not be relied upon as being indicative of the historical results that would have been obtained if the acquisitions had actually occurred on that date, nor of the results that may be obtained in the future. The net assets and results of operations for these acquisitions are included in the Company’s condensed consolidated financial statements as of and for the three and nine months ended September 30, 2013.

 

    Three Months
Ended
September 30,
2012
    Nine Months
Ended
September 30,
2012
 

Revenues

  $ 166,895      $ 496,413   

Net income

  $ 18,340      $ 44,221   

Basic earnings per share

  $ 0.23      $ 0.57   

Basic weighted average number of common shares outstanding

    78,548        78,123   

Diluted earnings per share

  $ 0.22      $ 0.53   

Diluted weighted average number of common and common equivalent shares outstanding

    83,202        82,744   

9. Income Taxes

The Company’s effective tax rates decreased from 2012 to 2013 primarily due to discrete items recorded during the three months ended September 30, 2013. The third quarter 2013 effective rate was benefited by the recognition of previously unrecognized tax benefits of approximately $7.3 million, an enacted rate change in the United Kingdom, which resulted in a tax benefit of approximately $2.9 million, and research and development credits and other discrete items, which resulted in tax benefits of approximately $5.6 million. The decrease in the effective rate on a year-to-date basis was primarily due to the effect of these discrete items recorded during the three months ended September 30, 2013.

10. Subsequent Events

In October 2013, the Company purchased all of the outstanding stock of Prime Management Limited (“Prime”) for approximately $4.0 million in cash, plus the cost of effecting the transaction and the assumption of certain liabilities. Prime provides fund administration to investment structures, sponsors and managers in the insurance-linked securities market. The net assets and results of operations of Prime will be included in the Company’s consolidated financial statements from October 1, 2013. The relevant business combination disclosures will be included in the Company’s consolidated financial statements once the preliminary accounting has been finalized.

 

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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
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  

Revenues:

        

Software-enabled services

     77     76     78     72

Software licenses

     5        4        4        4   

Maintenance

     14        15        14        18   

Professional services

     4        5        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
September 30,
     %     Nine Months Ended
September 30,
     %  
     2013      2012      Change     2013      2012      Change  

Revenues:

                

Software-enabled services

   $ 138,123       $ 125,605         10   $ 411,909       $ 275,069         50

Software licenses

     8,184         5,885         39        20,880         15,463         35   

Maintenance

     26,178         25,519         3        77,603         67,993         14   

Professional services

     7,020         8,553         (18     19,788         21,562         (8
  

 

 

    

 

 

      

 

 

    

 

 

    

Total revenues

   $ 179,505       $ 165,562         8      $ 530,180       $ 380,087         39   
  

 

 

    

 

 

      

 

 

    

 

 

    

Three Months Ended September 30, 2013 versus 2012. Our total revenues increased primarily due to a continued increase in demand for our hedge fund and private equity services from alternative investment managers. Software license revenue increased primarily due to increased demand for our PORTIA product. Additionally, the average size of perpetual licenses sold increased from 2012, as did revenue associated with term licenses.

Nine Months Ended September 30, 2013 versus 2012. Our total revenues increased primarily due to revenues related to our acquisitions of GlobeOp and the PORTIA Business, which contributed an aggregate of $119.2 million in revenues for the nine months ended September 30, 2013, as well as a continued overall increase in demand for our hedge fund and private equity services from alternative investment managers. Software license revenue increased primarily due to increased demand for our PORTIA product. Additionally, the number and average size of perpetual licenses sold increased from 2012, as did 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 its respective revenue source for the periods indicated:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  

Cost of revenues:

        

Cost of software-enabled services

     58     60     58     57

Cost of software licenses

     16        30        19        30   

Cost of maintenance

     39        43        40        43   

Cost of professional services

     70        60        74        64   

Total cost of revenues

     54        57        55        54   

Gross margin percentage

     46        43        45        46   

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
September 30,
     %     Nine Months Ended
September 30,
     %  
     2013      2012      Change     2013      2012      Change  

Cost of revenues:

                

Cost of software-enabled services

   $ 79,875       $ 75,965         5   $ 240,847       $ 155,940         54

Cost of software licenses

     1,286         1,764         (27     3,908         4,609         (15

Cost of maintenance

     10,150         10,883         (7     30,953         29,338         6   

Cost of professional services

     4,884         5,126         (5     14,689         13,803         6   
  

 

 

    

 

 

      

 

 

    

 

 

    

Total cost of revenues

   $ 96,195       $ 93,738         3      $ 290,397       $ 203,690         43   
  

 

 

    

 

 

      

 

 

    

 

 

    

Three Months Ended September 30, 2013 versus 2012. Our total cost of revenues increased for the three months ended September 30, 2013 as compared to the same period in 2012 primarily due to increases in cost of software-enabled services revenues to support the increased demand for our hedge fund and private equity services from alternative investment managers. Additionally, costs increased due to our 2012 acquisitions of Gravity and Hedgemetrix and as a result of an increase in stock-based compensation expense, partially offset by the favorable impact from foreign currency translation, resulting from the relative strength of the U.S. dollar to currencies such as the Indian rupee. The decrease in cost of software licenses and cost of maintenance was primarily due to a decrease in amortization expense. The increase in our gross margins is primarily due to cost reductions at acquisitions that improved operating margins.

Nine Months Ended September 30, 2013 versus 2012. Our total cost of revenues increased for the nine months ended September 30, 2013 as compared to the same period in 2012 primarily due to our acquisitions of GlobeOp and the PORTIA Business, which added costs of $59.2 million in the aggregate as well as an increase in amortization expense 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, partially offset by the favorable impact from foreign currency translation, resulting from the relative strength of the U.S. dollar to currencies such as the Indian rupee. The decrease in cost of software licenses was primarily due to a decrease in amortization expense. The decrease in our gross margins for the nine months ended September 30, 2013 is primarily due to an increase in amortization expense related to intangible assets acquired in the acquisitions of GlobeOp and the PORTIA Business, partially offset by cost reductions at acquisitions that improved operating margins.

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
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  

Operating expenses:

        

Selling and marketing

     6     5     6     6

Research and development

     7        8        8        9   

General and administrative

     6        7        6        6   

Transaction costs

     —          —          —          4   

Total operating expenses

     20        21        20        25   

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

 

     Three Months Ended
September 30,
     %     Nine Months Ended
September 30,
     %  
     2013      2012      Change     2013      2012      Change  

Operating expenses:

                

Selling and marketing

   $ 10,849       $ 8,970         21   $ 30,876       $ 24,628         25

Research and development

     13,117         13,193         (1     40,558         32,478         25   

General and administrative

     11,480         11,668         (2     33,197         24,527         35   

Transaction costs

     —           748         (100     —           14,322         (100
  

 

 

    

 

 

      

 

 

    

 

 

    

Total operating expenses

   $ 35,446       $ 34,579         3      $ 104,631       $ 95,955         9   
  

 

 

    

 

 

      

 

 

    

 

 

    

Three Months Ended September 30, 2013 versus 2012. The increase in total operating expenses for the three months ended September 30, 2013 as compared to the same period in 2012 was primarily due to an increase in selling and marketing costs to support revenue growth, partially offset by transaction costs included in the three months ended September 30, 2012 and the favorable impact from foreign currency translation, resulting from the relative strength of the U.S. dollar to currencies such as the Indian rupee.

Nine Months Ended September 30, 2013 versus 2012. The increase in total operating expenses in the nine months ended September 30, 2013 as compared to the same period in 2012 was primarily due to our acquisitions of GlobeOp and the PORTIA Business, which added $17.7 million in costs in the aggregate, and an increase in amortization expense related to intangible assets acquired in the acquisitions. Additionally, operating expenses increased due to an increase in stock-based compensation, partially offset by transaction costs included in the first nine months of 2012 and the favorable impact from foreign currency translation, resulting from the relative strength of the U.S. dollar to currencies such as the Indian rupee.

Comparison of the Three and Nine Months Ended September 30, 2013 and 2012 for Interest, Taxes and Other

Interest expense, net. We had interest expense, net of $9.0 million and $33.3 million for the three and nine months ended September 30, 2013, respectively, compared to $13.7 million and $18.8 million for the three and nine months ended September 30, 2012, respectively. The decrease in interest expense for the three months ended September 30, 2013 is due to the lower average debt balance and the lower average interest rates resulting from the repricing of the term B loans. The increase in interest expense for the nine months ended September 30, 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 nine months ended September 30, 2013 consists primarily of foreign currency transaction gains. Other expense, net for the three months ended September 30, 2013 and three and nine months ended September 30, 2012 consisted of foreign currency transaction losses. Additionally, other expense, net for the nine months ended September 30, 2012 consisted of a loss recorded on foreign currency contracts associated with our acquisition of GlobeOp.

Loss on extinguishment of debt. Loss on extinguishment of debt for the nine months ended September 30, 2012 consisted of $4.4 million in write-offs of deferred financing costs associated with the repayment of our prior credit facility.

 

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(Benefit) 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
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  

(Benefit) provision for income taxes

     (4,748     4,096        13,219        11,364   

Effective tax rate

     (12.3 %)      18.9     12.7     27.6

Our effective tax rates decreased from 2012 to 2013 primarily due to discrete items recorded during the three months ended September 30, 2013. The third quarter 2013 effective rate was benefited by the recognition of previously unrecognized tax benefits of approximately $7.3 million, an enacted rate change in the United Kingdom, which resulted in a tax benefit of approximately $2.9 million, and research and development credits and other discrete items, which resulted in tax benefits of approximately $5.6 million. The decrease in the effective rate on a year-to-date basis was primarily due to the effect of these discrete items recorded during the three months ended September 30, 2013.

Our effective tax rates differ from the statutory rate primarily due to the effect of the discrete items recorded during the three months ended September 30, 2013, as well as the effect of our foreign operations. 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 our 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 16% and 17%. 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 September 30, 2013 was $81.6 million, a decrease of $4.6 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 and proceeds from stock option exercises and the related income tax benefits.

Net cash provided by operating activities was $154.3 million for the nine months ended September 30, 2013. Cash provided by operating activities was primarily due to net income of $91.0 million adjusted for non-cash items of $63.9 million, partially offset by changes in our working capital accounts (excluding the effect of acquisitions) totaling $0.6 million. The changes in our working capital accounts were driven by decreases in accrued expenses and deferred revenues and increases in prepaid expenses and other assets, partially offset by a decrease in accounts receivable, an increase in accounts payable and a change in income taxes prepaid and payable. The decrease in accrued expenses was primarily due to the payment of annual employee bonuses. The decrease in deferred revenues was primarily due to the recognition of annual maintenance fees. The decrease in accounts receivable was primarily due to the improvement in days’ sales outstanding from 50 days at September 30, 2012 to 43 days at September 30, 2013.

Investing activities used net cash of $11.4 million for the nine months ended September 30, 2013, primarily related to $9.9 million in cash paid for capital expenditures and $1.6 million in cash paid for capitalized software.

Financing activities used net cash of $144.8 million for the nine months ended September 30, 2013, representing $177.0 million in repayments of debt and $1.9 million in deferred financing costs, partially offset by proceeds of $22.4 million from stock option exercises and realized income tax windfall benefits of $11.8 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 September 30, 2013, we held approximately $56.4 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 September 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 September 30, 2013, approximately $17.8 million in cash was held at our Indian operations that if repatriated to our foreign debt holder would incur distribution taxes of approximately $3.0 million. We intend to use excess cash held by subsidiaries of our foreign debt holder 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”). 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 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 these loans 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 September 30, 2013, there was $234.9 million in principal amount outstanding under the term A-2 facility, $552.0 million in principal amount outstanding under the term B-1 facility and $57.1 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 September 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.

 

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Covenant Compliance

Under the Credit Agreement, we are required to satisfy and maintain a specified financial ratio and other financial condition tests. As of September 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 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 (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 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.

 

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The following is a reconciliation of net income to Consolidated EBITDA as defined in our Credit Agreement.

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
    Twelve Months
Ended

September 30,
 
     2013     2012     2013     2012     2013  

Net income (loss)

   $ 43,466      $ 17,615      $ 91,014      $ 29,738      $ 107,096   

Interest expense, net

     9,036        13,726        33,325        23,115        47,066   

Income taxes

     (4,748     4,096        13,219        11,364        26,520   

Depreciation and amortization

     24,699        24,735        74,441        50,620        99,635   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     72,453        60,172        211,999        114,837        280,317   

Purchase accounting adjustments (1)

     (47     413        (6     661        227   

Unusual or non-recurring charges (2)

     217        3,223        (2,315     32,016        (2,702

Acquired EBITDA and cost savings (3)

     —          333        —          34,841        40   

Stock-based compensation

     1,975        1,386        6,010        3,798        7,802   

Capital-based taxes

     —          (20     —          (785     —     

Other (4)

     (38     (50     179        (141     303   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated EBITDA

   $ 74,560      $ 65,457      $ 215,867      $ 185,227      $ 285,987   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 transaction costs, gains on currency contracts, 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 as of September 30, 2013 are as follows:

 

     Covenant
Requirement
    Actual
Ratio
 

Maximum consolidated net senior secured leverage to Consolidated EBITDA ratio (1)

     5.00     2.67

 

(1) Calculated as the ratio of consolidated senior secured funded debt, net of cash and cash equivalents, to Consolidated EBITDA, as defined in the Credit Agreement, for the period of four consecutive fiscal quarters ended on the measurement date. Consolidated senior secured funded debt is comprised of indebtedness for borrowed money, notes, bonds or similar instruments, letters of credit, deferred purchase price obligations and capital lease obligations. This covenant is applied at the end of each quarter.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2013-02, Comprehensive Income (Topic 220)—Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which amends the accounting guidance for the presentation of comprehensive income to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments do not change the current requirements for reporting net income or other comprehensive income, but do require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about these amounts. For public companies, these amendments are effective prospectively for reporting periods beginning after December 15, 2012. The new guidance affects disclosures only and did not have any impact on our financial position, results of operations or cash flows.

 

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In July 2012, the FASB issued ASU No. 2012-02, Intangibles—Goodwill and Other (Topic 350)— Testing Indefinite-Lived Intangible Assets for Impairment, or ASU 2012-02, to simplify how entities, both public and nonpublic, test indefinite-lived intangible assets for impairment. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this standard in the first quarter of 2013 did not have a material impact on our financial position, results of operations or cash flows.

 

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not use derivative financial instruments for trading or speculative purposes. We have invested our available cash in short-term, highly liquid financial instruments, having initial maturities of three months or less. When necessary, we have borrowed to fund acquisitions.

At September 30, 2013, we had total variable interest rate debt of $844.0 million. As of September 30, 2013, a 1% increase in interest rates would result in an increase in interest expense of approximately $5.0 million per year.

During the nine months ended September 30, 2013, approximately 34% of our revenues were from clients located outside the United States. A portion of the revenues from clients located outside the United States is denominated in foreign currencies, the majority being the Canadian dollar. While revenues and expenses of our foreign operations are primarily denominated in their respective local currencies, some subsidiaries do enter into certain transactions in currencies that are different from their local currency. These transactions consist primarily of cross-currency intercompany balances and trade receivables and payables. As a result of these transactions, we have exposure to changes in foreign currency exchange rates that result in foreign currency transaction gains and losses, which we report in other income (expense). These outstanding amounts were not material for the nine months ended September 30, 2013. The amount of these balances can fluctuate in the future as we bill customers and buy products or services in currencies other than our functional currency, which could increase our exposure to foreign currency exchange rates. We continue to monitor our exposure to foreign exchange rates as a result of our acquisitions and changes in our operations. We do not enter into any market risk sensitive instruments for trading purposes.

The foregoing risk management discussion and the effect thereof are forward-looking statements. Actual results in the future may differ materially from these projected results due to actual developments in global financial markets. The analytical methods used by us to assess and minimize risk discussed above should not be considered projections of future events or losses.

 

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer (our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2013. The term “disclosure controls and procedures”, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2013, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There have not been any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended September 30, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

The information regarding certain legal proceedings in which we are involved as set forth in Note 5 – Commitments and Contingencies of the Notes to the Condensed Consolidated Financial Statements (Part I, Item 1 of this Quarterly Report on Form 10-Q) is incorporated by reference into this Item 1.

 

ITEM 1A. RISK FACTORS

There have been no material changes to our Risk Factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission on March 1, 2013.

 

ITEM 6. EXHIBITS

The exhibits listed in the Exhibit Index immediately preceding such exhibits are filed as part of this Report.

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

SS&C TECHNOLOGIES HOLDINGS, INC.
By:  

/s/ Patrick J. Pedonti

 

Patrick J. Pedonti

Senior Vice President and Chief Financial Officer

(Duly Authorized Officer, Principal Financial and Accounting Officer)

Date: November 6, 2013

 

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Table of Contents

EXHIBIT INDEX

 

Exhibit
Number

  

Description of Exhibit

  31.1    Certifications of the Registrant’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31.2    Certifications of the Registrant’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32    Certification of the Registrant’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1351, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS    XBRL Instance Document.*
101.SCH    XBRL Taxonomy Extension Schema Document.*
101.CAL    XBRL Taxonomy Calculation Linkbase Document.*
101.LAB    XBRL Taxonomy Label Linkbase Document.*
101.PRE    XBRL Taxonomy Presentation Linkbase Document.*
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document.*

 

* submitted electronically herewith

Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at September 30, 2013 and December 31, 2012, (ii) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2013 and 2012, (iii) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012 and (iv) Notes to Condensed Consolidated Financial Statements.

 

22

Exhibit 31.1

CERTIFICATION

I, William C. Stone, certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of SS&C Technologies Holdings, Inc.;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 6, 2013       /s/ William C. Stone
      William C. Stone
      Chairman of the Board and Chief Executive Officer
      (Principal Executive Officer)

Exhibit 31.2

CERTIFICATION

I, Patrick J. Pedonti, certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of SS&C Technologies Holdings, Inc.;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 6, 2013       /s/ Patrick J. Pedonti
      Patrick J. Pedonti
     

Senior Vice President and Chief Financial Officer

(Principal Financial Officer)

Exhibit 32

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report on Form 10-Q of SS&C Technologies Holdings, Inc. (the “Company”) for the period ended September 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned officers of the Company hereby certify to their knowledge, pursuant to 18 U.S.C. Section 1350, that:

 

  (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: November 6, 2013     By:   /s/ William C. Stone
      William C. Stone
     

Chairman of the Board and Chief Executive Officer

(Principal Executive Officer)

Date: November 6, 2013     By:   /s/ Patrick J. Pedonti
      Patrick J. Pedonti
     

Senior Vice President and Chief Financial Officer

(Principal Financial Officer)