We are a leading provider of mission-critical, sophisticated software products and software-enabled services that allow financial services providers to automate complex business processes and effectively manage their information processing requirements. Our portfolio of software products and rapidly deployable software-enabled services allows our clients to automate and integrate front-office functions such as trading and modeling, middle-office functions such as portfolio management and reporting, and back-office functions such as accounting, performance measurement, reconciliation, reporting, processing and clearing. Our solutions enable our clients to focus on core operations, better monitor and manage investment performance and risk, improve operating efficiency and reduce operating costs. We provide our solutions globally to more than 6,900 clients, principally within the institutional asset management, alternative investment management and financial institutions vertical markets. In addition, our clients include commercial lenders, corporate treasury groups, insurance and pension funds, municipal finance groups and real estate property managers. Since 2010, through a combination of strategic acquisitions and internal development of new products and services, we have expanded our presence in current markets and entered new markets, increased our contractually recurring revenues, more than doubled our operating income and expanded our reach in the financial services market. Our acquisitions since 2010 have expanded our offerings for alternative investment managers and added to our portfolio management systems. Our acquisitions of GlobeOp and the PORTIA Business in 2012 significantly expanded our geographic footprint, most notably in
Europeand Asia, and our client base and added broader employee expertise. Our contractually recurring revenues, which we define as our maintenance revenues and software-enabled services revenues, were $656.0 millionin 2013, compared to $500.2 millionand $324.3 millionin 2012 and 2011, respectively. In 2013, contractually recurring revenues represented 92.0% of total revenues, compared to 90.6% and 87.4% in 2012 and 2011, respectively. We believe our high level of contractually recurring revenues provides us with the ability to better manage our costs and capital investments. Our revenues from sales outside the United Stateswere $246.0 millionin 2013, compared to $191.4 millionand $111.1 millionin 2012 and 2011, respectively. As we have expanded our business, we have focused on increasing our contractually recurring revenues. Since 2010, we have seen increased demand in the financial services industry for our software-enabled services from existing and new customers. We have taken a number of steps to support that demand, such as automating our software-enabled services delivery methods, expanded our service offerings and providing our employees with sales incentives. We have also acquired businesses that offer software-enabled services or have a large base of maintenance clients. Our software-enabled services revenues increased from $246.0 millionin 2011 to $552.6 millionin 2013. Our maintenance revenues increased from $78.3 millionin 2011 to $103.4 millionin 2013. Maintenance customer retention rates have continued to be in excess of 90% for our core enterprise products, and we have maintained both pricing levels for new contracts and annual price increases for existing contracts. To support the growth in our software-enabled services revenues and maintain our level of customer service, we have added personnel, expanded our facilities and invested in information technology. These investments and automation improvements in our software-enabled services have served to improve gross margins, although our acquisitions of GlobeOp and the PORTIA Business in 2012 have added a significant amount of amortization expense related to intangible assets, which has resulted in an initial decrease in gross margins. Gross margins have decreased from 50.3% in 2011 to 45.4% in 2013. In connection with the acquisitions of GlobeOp and the PORTIA Business in the second quarter of 2012, we entered into a new credit agreement, which is described below in "Liquidity and Capital Resources", to fund a portion of the purchase prices and refinance amounts outstanding under our prior senior credit facility. We generated $208.3 millionin cash from operating activities in 2013, compared to $134.4 millionand $110.4 millionin 2012 and 2011, respectively. In 2013, we used our operating cash flow and existing cash to repay $239.0 millionof debt, invest $11.9 millionin capital equipment in our business, acquire Prime Management Limitedfor $3.7 millionand invest $2.4 millionin internally-developed capitalized software. 35
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Acquisitions. To supplement our growth, we evaluate and execute acquisitions that provide complementary products or services, add proven technology and an established client base, expand our intellectual property portfolio or address a highly specialized problem or a market niche. Since the beginning of 2011, we have spent approximately
$991 millionto acquire eight businesses in the financial services industry, using a combination of cash and debt financing (as discussed in Notes 6 and 12 to our consolidated financial statements). The following table lists the businesses we have acquired since January 1, 2011: Acquisition Acquired Capabilities, Products Acquired Business Date and Services Prime Management Limited October 2013 Expanded fund administration services in the insurance linked securities market Hedgemetrix LLC October 2012 Expanded fund administration services in southwest USA Gravity September 2012 Expanded fund administration services in northeast USA GlobeOp June 2012 Expanded fund administration services in hedge fund and other asset management sectors The PORTIA Business May 2012 Added portfolio management software and outsourcing services for institutional managers Acquisition of Teledata December 2011 Added background search and Communications, Inc. credit retrieval Software software-as-a-service Ireland Fund Admin September 2011 Expanded fund administration services to UCITS funds BenefitsXML March 2011 Added employee benefits administration solutions
The discussion in this Part II, Item 7 of this Annual Report on Form 10-K includes the operations of the business listed in the table above for the respective time periods each was owned by SS&C.
Results of Operations
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. 36
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The following table sets forth the percentage of our total revenues represented by each of the following sources of revenues for the periods indicated:
Year Ended December 31, 2013 2012 2011 Revenues: Software-enabled services 78 % 74 % 67 % Software licenses 4 4 6 Maintenance 14 17 21 Professional services 4 5 6 Total revenues 100.0 % 100.0 % 100.0 %
The following table sets forth revenues (dollars in thousands) and percent change in revenues for the periods indicated:
Percent Change from Prior Year Ended December 31, Period 2013 2012 2011 2013 2012 Revenues: Software-enabled services
$ 552,565 $ 406,477 $ 246,00736 % 65 % Software licenses 28,687 22,466 23,507 28 (4 ) Maintenance 103,409 93,760 78,266 10 20 Professional services 28,041 29,139 23,048 (4 ) 26 Total revenues $ 712,702 $ 551,842 $ 370,82829 49 Fiscal 2013 versus Fiscal 2012. Our revenues increased in 2013 as compared to 2012 primarily due to revenues related to our 2012 acquisitions of GlobeOp and the PORTIA Business, for which revenues increased $119.2 million, reflecting a full year of activity, as well as a continued increase in demand for our hedge fund and private equity services from alternative investment managers. These increases were partially offset by the unfavorable impact from foreign currency translation of $2.0 million, which resulted from the strength of the U.S. dollar relative to currencies such as the Canadian dollar and the Australian dollar. Our software licenses revenues in 2013 increased by $6.2 millionfrom 2012 due to increased demand for our PORTIA, CAMRA, and Pages software products, which increased 2013 by approximately $4.8 millionin the aggregate, as compared to 2012. Additionally, revenues associated with term licenses increased. Maintenance revenues experienced a substantial increase due to revenues related to the PORTIA Business, which increased $9.6 millionin 2013, reflecting a full year of activity. Fiscal 2012 versus Fiscal 2011. Our revenues increased in 2012 as compared to 2011 primarily due to revenues related to our acquisitions of GlobeOp and the PORTIA Business, which contributed $168.1 millionin revenues, as well as a continued increase in demand for our hedge fund and private equity services from alternative investment managers. These increases were partially offset by the unfavorable impact from foreign currency translation of $0.9 million, resulting from the strength of the U.S. dollar relative to currencies such as the Canadian dollar, the Euro and the British pound. Our maintenance and professional services revenues experienced substantial increases due to revenues related to the PORTIA Business, which contributed $16.4 millionin 2012 and $3.1 million, respectively. Additionally, professional services revenues experienced an increase in product implementation projects.
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. 37
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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:
Year Ended December 31, 2013 2012 2011 Cost of revenues: Cost of software-enabled services 58 % 58 % 52 % Cost of software licenses 18 28 29 Cost of maintenance 40 43 45 Cost of professional services 70 65 67 Total cost of revenues 55 54 50 Gross margin percentage 45 46 50
The following table sets forth cost of revenues (dollars in thousands) and percent change in cost of revenues for the periods indicated:
Percent Change from Prior Year Ended December 31, Period 2013 2012 2011 2013 2012 Cost of revenues: Cost of software-enabled services
$ 322,719 $ 234,214 $ 126,92138 % 85 % Cost of software licenses 5,302 6,336 6,825 (16 ) (7 ) Cost of maintenance 41,046 40,394 34,993 2 15 Cost of professional services 19,733 18,973 15,549 4 22 Total cost of revenues $ 388,800 $ 299,917 $ 184,28830 63 Fiscal 2013 versus Fiscal 2012. Our gross margin decreased slightly in 2013 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 synergies with respect to the acquired businesses. Our total cost of revenues increased in 2013 primarily due to our acquisitions of GlobeOp and the PORTIA Business. These increases were partially offset by a decrease in costs of $3.0 millionrelated to the favorable effect of foreign currency translation resulting from the strength of the U.S. dollar relative to currencies such as the Indian rupee and the Canadian dollar. 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. Fiscal 2012 versus Fiscal 2011. Our gross margin decreased in 2012 primarily due to amortization expense related to intangible assets acquired in the acquisitions of GlobeOp and the PORTIA Business. Our total cost of revenue increased in 2012 primarily as a result of costs associated with acquired businesses. These increases were partially offset by a decrease in stock-based compensation due to the final vesting of performance-based stock options in 2011 and in costs of $0.7 millionrelated to the favorable effect of foreign currency translation. 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.
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. 38
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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:
Year Ended December 31, 2013 2012 2011 Operating expenses: Selling and marketing 6 % 6 % 8 % Research and development 8 8 10 General and administrative 6 6 8 Transaction costs - 3 - Total operating expenses 20 23 25
The following table sets forth operating expenses (dollars in thousands) and percent change in operating expenses for the periods indicated:
Percent Change from Prior Year Ended December 31, Period 2013 2012 2011 2013 2012 Operating expenses: Selling and marketing
$ 41,885 $ 33,858 $ 28,89224 % 17 % Research and development 53,862 45,779 35,650 18 28 General and administrative 45,187 34,797 28,221 30 23 Transaction costs - 14,275 - (100 ) - Total operating expenses $ 140,934 $ 128,709 $ 92,7639 39 Fiscal 2013 versus 2012. The increase in total operating expenses in 2013 was primarily due to costs related to GlobeOp and the PORTIA Business, reflecting a full year of activity, and an increase in stock-based compensation, partially offset by a decrease in costs of $0.9 millionrelated to the favorable impact from foreign currency translation, resulting from the relative strength of the U.S. dollar to currencies such as the Indian rupee. Fiscal 2012 versus 2011. The increase in total operating expenses in 2012 was primarily due to our acquisitions and the transaction costs associated with our acquisitions of GlobeOp and the PORTIA Business, partially offset by a decrease in stock-based compensation expense and a decrease in costs of $0.4 millionrelated to the favorable effect of foreign currency translation.
Comparison of Fiscal 2013, 2012 and 2011 for Interest, Taxes and Other
Interest income and interest expense. We had interest expense of
$42.4 millionin 2013 compared to $32.9 millionin 2012 and $14.7 millionin 2011. The increase in interest expense in 2013 reflected a full year of interest associated with the credit facility that we entered into during the second quarter of 2012 in connection with our acquisitions of GlobeOp and the PORTIA Business, partially offset by a decrease in average interest rates. We had interest income of $1.1 millionin 2013 compared to $0.4 millionin 2012 and $0.1 millionin 2011. The increase in interest income in 2013 and 2012 resulted from higher average cash balances. The increase in interest expense in 2012 reflects the higher average debt balance resulting from the credit facility that we entered into in connection with our acquisitions of GlobeOp and the PORTIA Business, and the related amortization of an original issue discount. The credit facility is discussed further in "Liquidity and Capital Resources." 39
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Other income (expense), net. Other income, net for 2013 consisted primarily of foreign currency transaction gains. Other expense, net for 2012 consisted primarily of foreign currency transaction losses and a loss recorded on foreign currency contracts associated with our acquisition of GlobeOp, which is discussed further in Note 12 to our consolidated financial statements. Other (expense) income, net for 2011 consisted primarily of changes in accrued earn-out liabilities and foreign currency transaction gains and losses. Loss on extinguishment of debt. Loss on extinguishment of debt in 2012 consisted of write-offs of deferred financing costs associated with the repayment of our prior senior credit facility. Loss on extinguishment of debt in 2011 consisted of note redemption premiums and write-offs of deferred financing costs associated with the redemption of the remaining
$133.3 millionof our 11 3/4% senior subordinated notes due 2013. The redemption of our notes is discussed further in "Liquidity and Capital Resources."
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:
Year Ended December 31, 2013 2012 2011 Provision for income taxes
$ 27,292 $ 24,665 $ 22,918Effective tax rate 19 % 35 % 31 % Our 2013, 2012 and 2011 effective tax rates differ from the statutory rate primarily due to the effect of our foreign operations. The decrease in effective rate from 2012 to 2013 was primarily due to an increase in operations outside the United States, which are subject to lower tax rates than the U.S. statutory rate, research and development tax credits, a release of an uncertain income tax position, a decrease in the impact of foreign valuation allowances and non-deductible transaction costs in 2012. The increase in effective rate from 2011 to 2012 was primarily due to the impact of a valuation allowance recorded on deferred tax assets and non-deductible transaction costs, partially offset by the favorable impact of a rate change in the United Kingdom. We had $128.7 millionof deferred tax liabilities and $25.9 millionof deferred tax assets at December 31, 2013. 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, Indiaand the United Kingdom, where the statutory rates were 26.5%, 34.0% and 23.3%, respectively, in 2013 and 26.5%, 32.4% and 24.5%, respectively, in 2012. The statutory rates for Canadaand the United Kingdomwere 28.2% and 26.0% in 2011. 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 and cash equivalents at
December 31, 2013were $84.5 million, a decrease of $1.7 millionfrom $86.2 millionat 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 $208.3 millionin 2013. Cash provided by operating activities primarily resulted from net income of $117.9 millionadjusted for non-cash items of $79.7 millionand changes in our working capital accounts (excluding the effect of acquisitions) totaling $10.7 million. The changes in our working capital accounts were driven by changes in income taxes prepaid and payable and an increase in accrued expenses and a decrease in accounts receivable, partially offset by an increase in prepaid expenses and other current assets and decreases in accounts payable and deferred revenues. The change in income taxes prepaid and payable was primarily related to the utilization of prepaid taxes in 2013. The decrease in accounts payable was primarily due to timing of payments. 40
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Investing activities used net cash of
$17.9 millionin 2013, primarily related to $11.9 millionin cash paid for capital expenditures, $3.7 millionin cash paid for our acquisition of Prime Management Limited, and $2.4 millionin cash paid for capitalized software. Financing activities used net cash of $189.8 millionin 2013, representing $239.0 millionin repayments of debt, $1.9 millionin deferred financing costs, and $0.9 millionin the purchases of common stock for treasury, partially offset by proceeds of $27.8 millionfrom stock option exercises and income tax windfall benefits of $24.2 millionrelated 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 December 31, 2013, we held approximately $55.3 millionin 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 December 31, 2013, we held approximately $24.0 millionin cash by subsidiaries of SS&C TechnologiesHoldings Europe S.A.R.L., or SS&C Sarl, the foreign borrower under our credit facility that will be used to facilitate debt servicing of SS&C Sarl. At December 31, 2013, we held approximately $19.3 millionin cash at our Indian operations that if repatriated to our foreign debt holder would incur distribution taxes of approximately $3.3 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.
The following table summarizes our contractual obligations as of
Payments Due by Period Less Contractual Obligations and than 3-5 More than All Other Commitments Total 1 Year 1-3 Years Years 5 Years Other Short-term and long-term debt
$ 782,000 $ 23,212 $ 61,015 $ 160,231 $ 537,542$ - Interest payments(1) 117,635 24,286 46,222 39,420 7,707 - Operating lease obligations(2) 84,186 13,878 26,060 18,900 25,348 - Purchase obligations(3) 14,501 6,889 5,217 2,395 - - Uncertain tax positions and related interest(4) 7,760 - - - - 7,760 Total contractual obligations $ 1,006,082 $ 68,265 $ 138,514 $ 220,946 $ 570,597 $ 7,760
(1) Reflects interest payments on our Credit Facility at an assumed interest rate
facility and 3.25% on our Term B-1 and B-2 facilities. On
we completed a repricing of our Term A-2 facility. See Note 17 to our
consolidated financial statements.
(2) We are obligated under noncancelable operating leases for office space and
office equipment. The lease for the corporate facility in
leases. For the years ended
rental income under these leases of
million, respectively. The effect of the rental income to be received in the
future has not been included in the table above. 41
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for goods and services.
(4) As of
related net interest payable was
We are unable to reasonably estimate the timing of such liability and
interest payments in individual years beyond 12 months due to uncertainties
in the timing of the effective settlement of tax positions.
March 14, 2012, in connection with our acquisition of GlobeOp, we entered into a credit agreement with SS&C and 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 $0term A-1 facility with a five and one-half year term for borrowings by SS&C, (ii) a $325.0 millionterm A-2 facility with a five and one-half year term for borrowings by SS&C Sarl, (iii) a $725.0 millionterm B-1 facility with a seven year term for borrowings by SS&C and (iv) a $75.0 millionterm B-2 facility with a seven year term for borrowings by SS&C Sarl. In addition, the Credit Agreement had a $142.0 millionbridge loan facility, of which $31.6 millionwas 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 millionin commitments. The revolving credit facility contains a $25.0 millionletter of credit sub-facility and a $20.0 millionswingline loan sub-facility. The bridge loan was repaid in July 2012and 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 LIBORplus 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 LIBORmargin, 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 have been reduced to either LIBORplus 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 17 to our 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 have been reduced to either LIBORplus 2.75% or the base rate plus 1.75%, and the LIBORfloor 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 LIBORmargin, 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 December 31, 2013, there was $215.9 millionin principal amount outstanding under the term A-2 facility, $513.0 millionin principal amount outstanding under the term B-1 facility and $53.1 millionin 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 December 31, 2013, we were in compliance with the financial and non-financial covenants. 42
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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.
Under the Credit Agreement, we are required to satisfy and maintain a specified financial ratio and other financial condition tests. As of
December 31, 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. 43
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The following is a reconciliation of net income to Consolidated EBITDA as defined in our senior credit facility.
Year Ended December 31, 2013 2012 2011 (In thousands) Net income
$ 117,895 $ 45,820 $ 51,021Interest expense, net (1) 41,279 36,856 19,415 Income tax provision 27,292 24,665 22,918 Depreciation and amortization 99,780 75,814
EBITDA 286,246 183,155
Purchase accounting adjustments (2) (52 ) 894
Capital-based taxes 182 (785 )
Unusual or non-recurring charges (gains) (3) (3,121 ) 31,629
2,355 Acquired EBITDA (4) 890 35,531 1,192 Stock-based compensation 8,386 5,590 13,493 Other (5) 235 (17 ) (183 ) Consolidated EBITDA, as defined
$ 292,766 $ 255,997 $ 152,416
(1) Interest expense includes loss from extinguishment of debt shown as a
separate line item on our Consolidated Statements of Comprehensive Income
(2) 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
(3) Unusual or non-recurring charges include transaction costs, losses 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 the bond redemptions and acquisitions.
(4) 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.
(5) 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 year ended
Covenant Actual Requirement Ratio Maximum consolidated net senior secured leverage to Consolidated EBITDA ratio(1) 5.50 x 2.38 x
(1) Calculated as the ratio of consolidated senior secured funded debt, net of
cash and cash equivalents, to Consolidated EBITDA, as defined by 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. 44
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Critical Accounting Estimates
A number of our accounting policies require the application of significant judgment by our management, and such judgments are reflected in the amounts reported in our consolidated financial statements. In applying these policies, our management uses its judgment to determine the appropriate assumptions to be used in the determination of estimates. Those estimates are based on our historical experience, terms of existing contracts, management's observation of trends in the industry, information provided by our clients and information available from other outside sources, as appropriate. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, goodwill and other intangible assets and other contingent liabilities. Actual results may differ significantly from the estimates contained in our consolidated financial statements. We believe that the following are our critical accounting policies.
Our revenues consist primarily of software-enabled services and maintenance revenues, and, to a lesser degree, software license and professional services revenues.
Software-enabled services revenues, which are based on a monthly fee or are transaction-based, are recognized as the services are performed. Software-enabled services are generally provided under non-cancelable contracts with initial terms of one to five years that require monthly or quarterly payments, and are subject to automatic annual renewal at the end of the initial term unless terminated by either party. We recognize software-enabled services revenues on a monthly basis as the software-enabled services are provided and when persuasive evidence of an arrangement exists, the price is fixed or determinable and collectability is reasonably assured. We do not recognize any revenues before services are performed. Certain contracts contain additional fees for increases in market value, pricing and trading activity. Revenues related to these additional fees are recognized in the month in which the activity occurs based upon our summarization of account information and trading volume. We recognize revenues from the sale of software licenses when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed or determinable and collection of the resulting receivable is reasonably assured. Our products generally do not require significant modification or customization of the underlying software and, accordingly, the implementation services we provide are not considered essential to the functionality of the software. We use a signed license agreement as evidence of an arrangement for the majority of our transactions. Delivery generally occurs when the product is delivered to a common carrier F.O.B. shipping point, or if delivered electronically, when the client has been provided with access codes that allow for immediate possession via a download. Although our arrangements generally do not have acceptance provisions, if such provisions are included in the arrangement, then delivery occurs at acceptance, unless such acceptance is deemed perfunctory. At the time of the transaction, we assess whether the fee is fixed or determinable based on the payment terms. Collection is assessed based on several factors, including past transaction history with the client and the creditworthiness of the client. The arrangements for perpetual software licenses are generally sold with maintenance and professional services. We allocate revenue to the delivered components, normally the license component, using the residual value method based on vendor-specific objective evidence of the fair value of the undelivered elements. The total contract value is attributed first to the maintenance and customer support arrangement based on the fair value, which is derived from substantive renewal rates. Fair value of the professional services is based upon stand-alone sales of those services. Professional services are generally billed at an hourly rate plus out-of-pocket expenses. Professional services revenues are recognized as the services are performed. Maintenance agreements generally require us to provide technical support and software updates to our clients (on a when-and-if-available basis). We generally provide maintenance services under one-year renewable contracts. Maintenance revenues are recognized ratably over the term of the contract. We also sell term licenses with maintenance. These arrangements range from one to seven years where vendor-specific objective evidence does not exist for the maintenance element in the term licenses. Revenues are recognized ratably over the contractual term of the arrangement. 45
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We occasionally enter into software license agreements requiring significant customization or fixed-fee professional service arrangements. We account for these arrangements in accordance with the percentage-of-completion method based on the ratio of hours incurred to expected total hours; accordingly we must estimate the costs to complete the arrangement utilizing an estimate of man-hours remaining. Due to uncertainties inherent in the estimation process, it is at least reasonably possible that completion costs may be revised. Such revisions are recognized in the period in which the revisions are determined. Due to the complexity of some software license agreements, we routinely apply judgments to the application of software revenue recognition accounting principles to specific agreements and transactions. Different judgments or different contract structures could have led to different accounting conclusions, which could have a material effect on our reported results of operations.
Long-lived Assets, Intangible Assets and Goodwill
We must test goodwill annually for impairment (and in interim periods if certain events occur indicating that the carrying value of goodwill or indefinite-lived intangible assets may be impaired). Historically, we have tested the recoverability of goodwill based on our reporting unit structure by comparing fair value to carrying value. To the extent that we do not achieve our revenue or operating cash flow plans or other measures of fair value decline, including external valuation assumptions, our current goodwill carrying value could be impaired. Additionally, since fair value is also based in part on the market approach, if our stock price declines, it is possible we could be required to perform the second step of the goodwill impairment test and impairment could result. The first step of the impairment analysis indicated that the fair value significantly exceeded the carrying value at
December 31, 2013. We assess the impairment of identifiable intangibles, long-lived assets and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following: • significant underperformance relative to historical or projected future operating results; • significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and • significant negative industry or economic trends. When we determine that the carrying value of intangibles and long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of potential impairment, we assess whether an impairment has occurred based on whether net book value of the assets exceeds related projected undiscounted cash flows from these assets. We consider a number of factors, including past operating results, budgets, economic projections, market trends and product development cycles in estimating future cash flows. Differing estimates and assumptions as to any of the factors described above could result in a materially different impairment charge, if any, and thus materially different results of operations.
In connection with our acquisitions, we allocate the purchase price to the assets and liabilities we acquire, such as net tangible assets, completed technology, in-process research and development, client contracts, other identifiable intangible assets, deferred revenue and goodwill. We applied significant judgments and estimates in determining the fair market value of the assets acquired and their useful lives. For example, we have determined the fair value of existing client contracts based on the discounted estimated net future cash flows from such client contracts existing at the date of acquisition and the fair value of the completed technology based on the relief-from-royalties method on estimated future revenues of such completed technology and assumed obsolescence factors. While actual results during the years ended
December 31, 2013, 2012 and 2011 were consistent with our estimated cash flows and we did not incur any impairment charges during those years, different estimates and assumptions in valuing acquired assets could yield materially different results. 46
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Using the fair value recognition provisions of relevant accounting literature, stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the appropriate service period. Determining the fair value of stock-based awards requires considerable judgment, including estimating the expected term of stock options, expected volatility of our stock price, and the number of awards expected to be forfeited. In addition, for stock-based awards where vesting is dependent upon achieving certain operating performance goals, we estimate the likelihood of achieving the performance goals. Differences between actual results and these estimates could have a material effect on our financial results. A deferred income tax asset is recorded over the vesting period as stock compensation expense is recorded for non-qualified stock options. The realizability of the deferred tax asset is ultimately based on the actual value of the stock-based award upon exercise. If the actual value is lower than the fair value determined on the date of grant, then there could be an income tax expense for the portion of the deferred tax asset that is not realizable.
The carrying value of our deferred tax assets assumes that we will be able to generate sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions. If these estimates and related assumptions change in the future, we may be required to record additional valuation allowances against our deferred tax assets resulting in additional income tax expense in our Consolidated Statements of Comprehensive Income. On a quarterly basis, we evaluate whether deferred tax assets are realizable and assess whether there is a need for additional valuation allowances. The carrying value of our deferred tax assets and liabilities is recorded based on the statutory rates that we expect our deferred tax assets and liabilities to reverse into income. We estimate the state rate at which our deferred tax assets and liabilities will reverse based on estimates of state income apportionment for future years. Each of these estimates requires significant judgment on the part of our management. In addition, we evaluate the need to provide additional tax provisions for adjustments proposed by taxing authorities. As of
December 31, 2013, we had $7.6 millionin liabilities associated with unrecognized tax benefits. All of the unrecognized tax benefits, if recognized, would decrease our effective tax rate and increase our net income. We recognize accrued interest and penalties relating to unrecognized tax benefits as a component of the income tax provision.
Recent Accounting Pronouncements
February 2013, the Financial Accounting Standards Board, or the 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 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, 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 the Company's financial position, results of operations or cash flows. In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740) - Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, or ASU 2012-02. The objective is to end some inconsistent practices with regard to the presentation on the balance sheet of unrecognized tax benefits. ASU 2012-02 is effective for financial statement periods beginning after December 15, 2013, wither early adoption permitted. The Company will adopt this standard beginning January 1, 2014. The Company does not expect these changes to have a material impact on its financial position, results of operations or cash flows. 47
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