SS&C TECHNOLOGIES HOLDINGS, INC. This Management's Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, is intended to provide readers of our Condensed Consolidated Financial Statements with the perspectives of management. It presents, in narrative form, information regarding our financial condition, results of operations, liquidity and certain other factors that may affect our future results. It should be read in conjunction with our 2019 Form 10-K and the Condensed Consolidated Financial Statements included in this Form 10-Q. The impacts of COVID-19 and related economic conditions on our results are uncertain and, in many respects, outside our control. While we have experienced some client delays in committing to services and products, to date we have experienced no direct material negative effects on our business and results of operations as a result of the current COVID-19 outbreak. The situation remains dynamic and subject to rapid and possibly material change, which ultimately could result in material negative effects on our business and results of operations. In addition, because COVID-19 did not begin to affect our financial results until late in the first quarter of 2020, its impact on our results in the first quarter of 2020 may not be indicative of its impact on our results for the remainder of 2020. We will continue to evaluate the nature and extent of the potential impacts to our business, consolidated results of operations, segment results, liquidity and capital resources.
Critical Accounting Policies
Certain of our accounting policies require the application of significant judgment by our management, and such judgments are reflected in the amounts reported in our Condensed 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. Actual results may differ significantly from the estimates contained in our Condensed Consolidated Financial Statements. There have been no material changes to our critical accounting estimates and assumptions or the judgments affecting the application of those estimates and assumptions since the filing of our 2019 Form 10-K. Our critical accounting policies are described in the 2019 Form 10-K and include: • Investments • Long-Lived Assets, Intangible Assets andGoodwill • Software Capitalization • Acquisition Accounting • Revenue Recognition • Depreciation of Fixed Assets • Stock-based Compensation • Income Taxes 16
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Results of Operations Revenues We derive our revenues from two sources: software-enabled services revenues and license, maintenance and related 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. Software-enabled services revenues also fluctuate as a result of reimbursements received for "out-of-pocket" expenses, such as postage and telecommunications charges, which are recorded as revenues on an accrual basis. Because these additional revenues are offset by the reimbursable expenses incurred, there is no impact on gross profit, operating income and net income, however the reimbursements billed and expenses incurred can lead to fluctuations in revenues, cost of revenues and gross margin percentage each period. License, maintenance and related revenues consist primarily of term and perpetual license fees, maintenance fees and professional services. Maintenance revenues vary based on customer retention and on the annual increases in fees, which are generally tied to the consumer price index. License and professional services revenues tend to fluctuate based on the number of new licensing clients, the timing and terms of contract renewals and demand for consulting services.
The following table sets forth the percentage of our total revenues represented by each of the following sources of revenues for the periods indicated:
Three Months Ended March 31,
2020 2019
Software-enabled services 84.3 % 85.5 %
License, maintenance and related 15.7 % 14.5 %
Total revenues 100.0 % 100.0 %
The following table sets forth revenues (dollars in millions) and percent change in revenues for the periods indicated:
Percent
Change from
Prior
Three Months Ended March 31, Period
2020 2019
Software-enabled services $ 989.5 $ 972.0 1.8 %
License, maintenance and related 184.1 165.2 11.4 %
Total revenues $ 1,173.6 $ 1,137.2 3.2 %
Three Months Ended March 31, 2020 and 2019. Our revenues increased $36.4
million , or 3.2%, primarily due to an increase of $23.8 million in organic
revenues. Our revenues also increased due to our acquisitions, which included
Investrack and Algorithmics in the fourth quarter of 2019 and our acquisition of
Captricity in March of 2020, which, combined, contributed $18.1 million in
revenues. These increases were partially offset by the unfavorable impact from
foreign currency translation, which reduced revenues by $5.5
million . Software-enabled services revenues increased $17.5 million , or 1.8%,
due to a continued increase in organic revenues, as well as from our
acquisitions, which added revenues of $2.5 million . These increases were
partially offset by the unfavorable impact from foreign currency translation of
$4.5 million . License, maintenance and related revenues increased $18.9 million ,
or 11.4%, primarily due to an increased in organic revenues, as well as our
acquisitions, which added revenues of $15.6 million . The unfavorable impact from
foreign currency translation was $1.0 million .
Cost of Revenues
Cost of software-enabled services revenues consists primarily of costs related to personnel utilized in providing our software-enabled services and amortization of intangible assets. Cost of license, maintenance and other related revenues consists primarily of the costs related to personnel utilized in servicing our maintenance contracts and to provide implementation, conversion and training services to our software licensees, as well as system integration and custom programming consulting services and amortization of intangible assets.
The following tables set forth each of the following cost of revenues as a percentage of their respective revenue source for the periods indicated:
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Three Months Ended March 31,
2020 2019
Cost of software-enabled services 59.0 % 60.4 %
Cost of license, maintenance and related 44.6 % 45.4 %
Total cost of revenues 56.7 % 58.2 %
Gross margin percentage 43.3 % 41.8 %
The following table sets forth cost of revenues (dollars in millions) and percent change in cost of revenues for the periods indicated:
Percent
Change from
Prior
Three Months Ended March 31, Period
2020 2019
Cost of software-enabled services $ 583.5 $ 586.9 (0.6 )%
Cost of license, maintenance and related 82.1 75.0 9.5 %
Total cost of revenues $ 665.6 $ 661.9 0.6 %
Three Months Ended March 31, 2020 and 2019. Our total cost of revenues increased
by $3.7 million , or 0.6%, primarily due to our acquisitions of Investrack,
Algorithmics and Captricity, which added $7.9 million in costs, partially offset
by the favorable impact from foreign currency translation which reduced costs by
$3.2 million . Total costs of revenues, excluding the impact of acquisitions and
foreign currency translation, decreased by $1.0 million , primarily due to
reductions in various non-personnel related expenses partially offset by an
increase in severance expense of approximately $22.9 million related to
reductions in headcount in connection with continued integration efforts within
our recently acquired businesses. Cost of software-enabled services revenues
decreased $3.4 million , or 0.6%, primarily due to reductions in various
non-personnel related expenses partially offset by severance expense of $21.7
million during the three months ended March 31, 2020 and by our acquisitions,
which added $0.9 million in costs. The favorable impact from foreign currency
translation reduced costs by $2.5 million . Cost of license, maintenance and
related revenues increased $7.1 million , or 9.5%, primarily due to our
acquisitions, which added $6.9 million in costs, partially offset by the
favorable impact from foreign currency translation reduced costs by $0.7
million .
Operating Expenses
Selling and marketing expenses consist primarily of the personnel costs
associated with the selling and marketing of our products, including salaries,
commissions and travel and entertainment. Such expenses also include
amortization of intangible assets, the cost of branch sales offices, trade shows
and marketing and promotional materials. Research and development expenses
consist primarily of personnel costs attributable to the enhancement of existing
products and the development of new software products. General and
administrative expenses consist primarily of personnel costs related to
management, accounting and finance, information management, human resources and
administration and associated overhead costs, as well as fees for professional
services.
The following table sets forth the percentage of our total revenues represented by each of the following operating expenses for the periods indicated:
Three Months Ended March 31,
2020 2019
Selling and marketing 7.8 % 7.7 %
Research and development 8.9 % 8.3 %
General and administrative 7.9 % 8.0 %
Total operating expenses 24.6 % 24.0 %
The following table sets forth operating expenses (dollars in millions) and percent change in operating expenses for the periods indicated:
Percent
Change from
Prior
Three Months Ended March 31, Period
2020 2019
Selling and marketing $ 91.4 $ 87.0 5.1 %
Research and development 104.9 94.8 10.7 %
General and administrative 92.9 91.5 1.5 %
Total operating expenses $ 289.2 $ 273.3 5.8 %
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-------------------------------------------------------------------------------- Three Months EndedMarch 31, 2020 and 2019. Operating expenses increased$15.9 million , or 5.8%, primarily due to our acquisitions of Investrack, Algorithmics and Captricity, which added$12.2 million in expenses, as well as an increase in severance expense of$4.2 million related to reductions in headcount in connection with continued integration efforts within our recently acquired businesses. The impact from foreign currency translation reduced costs by$2.6 million .
Comparison of the Three Months Ended
Interest expense, net. We had net interest expense of$77.4 million in 2020 compared to$101.6 million in 2019. The decrease in interest expense, net for the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 relates to lower average debt balances and a lower average interest rate. These facilities are discussed further in "Liquidity and Capital Resources". Other (expense) income, net. We had other expense, net of$15.3 million in 2020 compared to other income, net of$3.5 million in 2019. During the three months endedMarch 31, 2020 , other expense, net included investment losses net of dividend income of$10.9 million . The remaining portion of other expense, net consisted primarily of foreign currency transaction losses. During the three months endedMarch 31, 2019 , other income, net included investment gains and dividend income of$8.0 million . The remaining portion of other income, net consisted primarily of foreign currency transaction losses. Equity in earnings of unconsolidated affiliates, net. We had equity in earnings of unconsolidated affiliates, net of$0.7 million in 2020. No equity in earnings of unconsolidated affiliates was recognized for the three months endedMarch 31, 2019 . Loss on extinguishment of debt. We recorded a$2.8 million loss on extinguishment of debt in the three months endedMarch 31, 2020 in connection with the amendment to our senior secured credit agreement. The loss on extinguishment of debt includes the write-off of a portion of the unamortized capitalized financing fees related to the senior secured credit agreement for amounts accounted for as a debt extinguishment, as well as new financing fees related to amounts accounted for as a debt modification. We recorded a$7.1 million loss on extinguishment of debt in the three months endedMarch 31, 2019 in connection with the repayment of a portion of our Term Loans with the proceeds from the issuance of our Senior Notes. The loss on extinguishment of debt includes costs incurred by us which did not meet the criteria for capitalization. The Senior Notes are discussed further in "Liquidity and Capital Resources."
Provision for income taxes. The following table sets forth the provision for income taxes (dollars in millions) and effective tax rates for the periods indicated:
Three Months Ended March 31,
2020 2019
Provision for income taxes $ 24.8 $ 16.0 Effective tax rate
20.0 % 16.5 %
Our effective tax rates for the three months ended March 31, 2020 and 2019
differ from the statutory rate of 21.0% primarily due to the composition of
income before income taxes from foreign and domestic tax jurisdictions, foreign
income that is being taxed in the U.S. offset by foreign tax credits that are
being limited, and the recognition of windfall tax benefits from stock awards.
The change in the effective tax rate for the three months ended March 31, 2020
compared to the prior year was primarily due to a decreased recognition of
windfall tax benefits from stock awards, partially offset by a proportionate
change in the composition of income before income taxes from foreign and
domestic tax jurisdictions. While we have income from multiple foreign sources,
the majority of our non-U.S. operations are in the U.K. and India , where we
anticipate the statutory tax rates to be 17.5% and 29.1%, respectively, in
2020. A future 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, to acquire complementary businesses or assets and to pay dividends on our common stock. 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. We continue to evaluate and take action, as necessary, to preserve adequate liquidity. This includes limiting discretionary spending across the organization and re-prioritizing our capital projects amid the COVID-19 pandemic. For example, as ofMarch 31, 2020 , we borrowed a total of$246.0 million , representing all amounts available to us under our Revolving Credit Facility, as a precautionary measure in order to increase liquidity and preserve financial flexibility in light of current uncertainty resulting from the COVID-19 pandemic. 19 -------------------------------------------------------------------------------- InMarch 2020 , we purchased all of the outstanding stock ofCaptricity, Inc. for approximately$15.3 million in cash, net of cash acquired, plus the costs of effecting the transaction and the assumption of certain liabilities. During the three months endedMarch 31, 2020 , we paid a quarterly cash dividend of$0.125 per share of common stock totaling$31.9 million in the aggregate. During the three months endedMarch 31, 2019 , we paid a quarterly cash dividend of$0.10 per share of common stock totaling$25.2 million in the aggregate. Our cash, cash equivalents and restricted cash and cash equivalents, including amounts held on behalf of clients, atMarch 31, 2020 were$1,339.0 million , a decrease of$450.4 million from$1,789.4 million atDecember 31, 2019 . Client funds obligations include our transfer agency client balances invested overnight as well as our contractual obligations to remit funds to satisfy client pharmacy claim obligations and are recorded on the Condensed Consolidated Balance Sheet when incurred, generally after a claim has been processed by us. Our contractual obligations to remit funds to satisfy client obligations are primarily sourced by funds held on behalf of clients. We had$1,073.1 million of client funds obligations atMarch 31, 2020 .
Cash flows from operating, investing and financing activities, as reflected in our Condensed Consolidated Statements of Cash Flows, are summarized in the following table (in millions):
Three Months Ended March 31,
Net cash, cash equivalents and restricted Change From cash provided by (used in): 2020 2019 Prior Year Operating activities$ 147.7 $ 137.4 $ 10.3 Investing activities (73.3 ) (16.1 ) (57.2 ) Financing activities (517.7 ) (211.9 ) (305.8 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash (7.1 ) 0.7 (7.8 ) Net decrease in cash, cash equivalents and restricted cash$ (450.4 ) $
(89.9 )
Net cash provided by operating activities was$147.7 million for the three months endedMarch 31, 2020 . Cash provided by operating activities primarily resulted from net income of$99.2 million adjusted for non-cash items of$197.4 million , offset by changes in our working capital accounts (excluding the effect of acquisitions) totaling$148.9 million . The changes in our working capital accounts were driven by decreases in accrued expenses, an increase in accounts receivable and an increase in contract assets, partially offset by changes in income taxes prepaid and payable, decreases in prepaid expenses and other assets, an increase in accounts payable and an increase in deferred revenues. The decrease in accrued expenses was primarily due to the payment of annual employee bonuses in the first quarter of 2020. The increase in accounts receivable was primarily due to an increase in days' sales outstanding as well as the billing of receivables for annual maintenance invoices that are typically billed in the first quarter of each year. The increase in contract assets was primarily due to new term license deals. The change in income taxes prepaid and payable is primarily driven by the timing of tax payments. The decrease in prepaid expenses and other assets and the increase in accounts payable were primarily due to the timing of payments. Investing activities used net cash of$73.3 million for the three months endedMarch 31, 2020 , primarily related to$40.0 million in investments in securities,$18.0 million in capitalized software development costs,$16.3 million in cash paid for business acquisitions (net of cash acquired) and$8.5 million in capital expenditures, partially offset by proceeds from sales and maturities of investments of$6.9 million and the collection of other non-current receivables of$2.6 million . Financing activities used net cash of$517.7 million for the three months endedMarch 31, 2020 , representing a net decrease in client funds obligations of$670.7 million ,$31.9 million in quarterly dividends paid and$3.3 million in withholding taxes paid related to equity award net share settlements. These payments were partially offset by net borrowings of debt totaling$150.1 million and proceeds of$38.1 million from stock option exercises. Our cash, cash equivalents and restricted cash and cash equivalents, including amounts held on behalf of clients, were$1,023.4 million atMarch 31, 2019 , a decrease of$89.9 million from$1,113.3 million atDecember 31, 2018 . The decrease in cash, cash equivalents and restricted cash and cash equivalents is primarily due to a decrease in restricted cash associated with funds receivable and held on behalf of clients. Net cash provided by operating activities was$137.4 million for the three months endedMarch 31, 2019 . Cash provided by operating activities primarily resulted from net income of$80.8 million adjusted for non-cash items of$193.4 million , partially offset by changes in our working capital accounts (excluding the effect of acquisitions) totaling$136.8 million . The changes in our working capital accounts were driven by decreases in accrued expenses, changes in income taxes prepaid and payable and increases in accounts 20 -------------------------------------------------------------------------------- receivable, partially offset by decreases in contract assets and prepaid expenses and other assets, as well as increases in deferred revenue and accounts payable. The decrease in accrued expenses was primarily due to the payment of annual employee bonuses in the three months endedMarch 31, 2019 . The increase in accounts receivable was primarily due to a slight increase in days' sales outstanding as well as the billing of receivables for annual maintenance invoices that are typically billed in the first quarter of each year. The decrease in prepaid expenses and other assets and the increase in accounts payable was primarily due to the timing of payments. Investing activities used net cash of$16.1 million for the three months endedMarch 31, 2019 , primarily related to$16.4 million in capitalized software development costs and$16.3 million in capital expenditures, partially offset by proceeds from sales and maturities of investments of$10.8 million , cash received of$3.2 million related to purchase price adjustments for prior acquisitions and the collection of other non-current receivables of$2.6 million . Financing activities used net cash of$211.9 million for the three months endedMarch 31, 2019 , representing repayments of debt totaling$2,278.4 million , a net decrease in client funds obligations of$79.3 million ,$25.2 million in quarterly dividends paid,$9.5 million in withholding taxes paid related to equity award net share settlements and the payment of$4.6 million in fees related to debt extinguishment and refinancing activities. These payments were partially offset by$2,140.0 million received from debt borrowings and proceeds of$45.1 million from stock option exercises. We have made a permanent reinvestment determination in certain non-U.S. operations that have historically generated positive operating cash flows. AtMarch 31, 2020 , we held approximately$115.8 million in cash and cash equivalents at non-U.S. subsidiaries where we had made such a determination and in turn, no provision for foreign withholding, foreign local, orU.S. state income taxes had been made. AtMarch 31, 2020 , we held approximately$96.8 million in cash that was available to our foreign borrowers under our senior secured credit facility and will be used to facilitate debt servicing of those entities.
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.
Senior Secured Credit Facilities
OnJanuary 31, 2020 , we entered into an amendment ("the Amendment") to our senior secured credit agreement ("Amended Senior Secured Credit Agreement"), whereby the interest rate margin applicable to the term loans was reduced from LIBOR plus 2.25% to LIBOR plus 1.75%. No changes were made to the financial covenants, outstanding principal amounts or the scheduled amortization. The Amendment was evaluated in accordance with FASB Accounting Standards Codification 470-50, Debt-Modifications and Extinguishments, for debt modification and extinguishment accounting. We accounted for the debt re-pricing as a debt modification with respect to amounts that remained obligations of the same lender in the syndicate with minor changes in cash flows and as a debt extinguishment with respect to amounts that were obligations of lenders that exited the syndicate or remained in the syndicate but experienced a change in cash flows of greater than 10%. See Note 7 to our Condensed Consolidated Financial Statements for further discussion of debt. We recorded a$2.8 million loss on extinguishment of debt in the three months endedMarch 31, 2020 in connection with the Amendment. The loss on extinguishment of debt includes the write-off of a portion of the unamortized capitalized financing fees related to our senior secured credit agreement for amounts accounted for as a debt extinguishment, as well as new financing fees related to amounts accounted for as a debt modification. As ofMarch 31, 2020 , there was$1,906.1 million in principal amount outstanding under the Term B-3 Loan,$1,360.2 million in principal amount outstanding under the Term B-4 Loan and$1,836.7 million in principal amount outstanding under the Term B-5 Loan. There were no principal amounts outstanding under the Term B-1 Loan or Term B-2 Loan. In addition, the Amended Senior Secured Credit Agreement has a revolving credit facility with a five-year term available for borrowings bySS&C with$250 million in available commitments ("Revolving Credit Facility"), of which no availability remained as ofMarch 31, 2020 . The Revolving Credit Facility also contains a$25 million letter of credit sub-facility, of which$4.0 million was drawn as ofMarch 31, 2020 . We are required to make scheduled quarterly payments of 0.25% of the original principal amount of the Term B-3 Loan, Term B-4 Loan and Term B-5 Loan, with the balance due and payable onApril 16, 2025 . No amortization is required under the Revolving 21
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Credit Facility. We may also, from time to time in our sole discretion, purchase, redeem, or retire our existing term loans, through tender offers, in privately negotiated or open market transactions, or otherwise.
Our obligations under the Term Loans are guaranteed by (i) our existing and futureU.S. wholly-owned restricted subsidiaries, in the case of the Term B-3 Loan, Term B-5 Loan and the Revolving Credit Facility and (ii) our existing and future wholly-owned restricted subsidiaries, in the case of the Term B-4 Loan. The obligations of theU.S. loan parties under the Amended Senior Secured Credit Agreement are secured by substantially all of the assets of such persons (subject to customary exceptions and limitations), including a pledge of all of the capital stock of substantially all of theU.S. wholly-owned restricted subsidiaries of such persons (with customary exceptions and limitations) and 65% of the capital stock of certain foreign restricted subsidiaries of such persons (with customary exceptions and limitations). All obligations of the non-U.S. loan parties under the Amended Senior Secured Credit Agreement are secured by substantially all of our and the other guarantors' assets (subject to customary exceptions and limitations), including a pledge of all of the capital stock of substantially all of our wholly-owned restricted subsidiaries (with customary exceptions and limitations). The Amended Senior Secured Credit Agreement includes negative covenants that, among other things and subject to certain thresholds and exceptions, limit our ability and the ability of our restricted subsidiaries to incur debt or liens, make investments (including in the form of loans and acquisitions), merge, liquidate or dissolve, sell property and assets, including capital stock of our subsidiaries, pay dividends on our capital stock or redeem, repurchase or retire our capital stock, alter the business we conduct, amend, prepay, redeem or purchase subordinated debt, or engage in transactions with our affiliates. The Amended Senior Secured Credit Agreement also contains customary representations and warranties, affirmative covenants and events of default, subject to customary thresholds and exceptions. In addition, the Amended Senior Secured Credit Agreement contains a financial covenant for the benefit of the Revolving Credit Facility requiring us to maintain a minimum consolidated net secured leverage ratio. In addition, under the Amended Senior Secured Credit Agreement, certain defaults under agreements governing other material indebtedness could result in an event of default under the Amended Senior Secured Credit Agreement, in which case the lenders could elect to accelerate payments under the Amended Senior Secured Credit Agreement and terminate any commitments they have to provide future borrowings.
Senior Notes
OnMarch 28, 2019 , we issued$2.0 billion aggregate principal amount of 5.5% Senior Notes due 2027 ("Senior Notes"), the proceeds of which were used to repay a portion of the outstanding Term B-3 Loan under our existing senior secured credit facilities. The Senior Notes are guaranteed, jointly and severally, bySS&C Holdings and all of its existing and future domestic restricted subsidiaries that guarantee our existing senior secured credit facilities or certain other indebtedness. The Senior Notes are unsecured senior obligations that are equal in right of payment to all of our existing and future senior unsecured indebtedness. Interest on the Senior Notes is payable onMarch 30 andSeptember 30 of each year. At any time prior toMarch 30, 2022 , we may, at our option, redeem the Senior Notes, in whole or in part, at a price equal to 100% of the principal amount of the Senior Notes, plus an applicable "make-whole" premium, plus accrued and unpaid interest to the redemption date. At any time on or afterMarch 30, 2022 , we may redeem some or all of the Senior Notes, in whole or in part, at the redemption prices set forth in the indenture governing the Senior Notes plus accrued and unpaid interest to the redemption date. In addition, at any time on or beforeMarch 30, 2022 , we may redeem up to 40% of the aggregate principal amount of the Senior Notes at a redemption price equal to 105.5% of the principal amount thereof, plus accrued and unpaid interest to the redemption date, with the net proceeds of one or more equity offerings. The indenture governing the Senior Notes contains a number of covenants that restrict, subject to certain thresholds and exceptions, our ability and the ability of our domestic restricted subsidiaries to incur debt or liens, make certain investments, pay dividends, dispose of certain assets, or enter into transactions with its affiliates. Any event of default under the Amended Senior Secured Credit Agreement that leads to an acceleration of those amounts due also results in a default under the indenture governing the Senior Notes.
As of
Other Indebtedness
In connection with the acquisition of DST, we assumed a mortgage, which matures
in
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--------------------------------------------------------------------------------Covenant Compliance
Under the Revolving Credit Facility portion of the Amended Senior Secured Credit Agreement, we are required to satisfy and maintain a specified financial ratio at the end of each fiscal quarter if the sum of (i) outstanding amount of all loans under the Revolving Credit Facility and (ii) all non-cash collateralized letters of credit issued under the Revolving Credit Facility in excess of$20 million is equal to or greater than 30% of the total commitments under the Revolving Credit Facility. Our ability to meet this financial ratio can be affected by events beyond our control, and we cannot assure you that we will meet this ratio. Any breach of this covenant could result in an event of default under the Amended Senior Secured Credit Agreement. Upon the occurrence of any event of default under the Amended Senior Secured Credit Agreement, the lenders could elect to declare all amounts outstanding under the Amended Senior Secured Credit Agreement to be immediately due and payable and terminate all commitments to extend further credit. Any default and subsequent acceleration of payments under the Amended Senior Secured Credit Agreement would have a material adverse effect on our results of operations, financial position and cash flows. Additionally, under the Amended Senior Secured Credit Agreement, our ability to engage in activities such as incurring additional indebtedness, making investments and paying dividends is also tied to baskets and ratios based on Consolidated EBITDA. Consolidated EBITDA is a non-GAAP financial measure used in key financial covenants contained in the Amended Senior Secured Credit Agreement, which is the 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 Amended Senior Secured 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 Amended Senior Secured 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. 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 Amended Senior Secured 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 significant interest expense we
incur as a result of our debt leverage;
• Consolidated EBITDA does not reflect the provision of income tax expense in
our various jurisdictions;
• 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-based awards;
• Consolidated EBITDA does not reflect the equity in earnings of
unconsolidated affiliates; and
• Consolidated EBITDA excludes expenses and income that are permitted to be
excluded per the terms of our Amended Senior Secured Credit Agreement, but
which others may believe are normal expenses for the operation of a
business.
The following is a reconciliation of net income to Consolidated EBITDA as defined in our Amended Senior Secured Credit Agreement.
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Twelve Months
Three Months Ended March 31, Ended March 31,
(in millions) 2020 2019 2020
Net income $ 99.2 $ 80.8 $ 456.9
Interest expense, net 77.4 101.6 380.8
Provision for income taxes 24.8 16.0 102.0
Depreciation and amortization 184.7 202.8 757.1
EBITDA 386.1 401.2 1,696.8
Stock-based compensation 22.5 20.4 74.5
Acquired EBITDA and cost savings (1) (1.0 ) 5.8 25.1
Non-cash portion of straight-line rent
expense (0.1 ) - 0.1
Loss on extinguishment of debt 2.8 7.1 2.8
Equity in earnings of unconsolidated
affiliates, net (0.7 ) - (4.4 )
Purchase accounting adjustments (2) 1.8 8.0 7.8
ASC 606 adoption impact 2.3 4.2 17.0
Other (3) 48.8 2.5 53.4
Consolidated EBITDA $ 462.5 $ 449.2 $ 1,873.1
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(1) 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, as well as cost savings enacted in connection with
acquisitions.
(2) Purchase accounting adjustments include (a) 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, (b) an
adjustment to increase personnel and commissions expense by the amount that
would have been recognized if prepaid commissions and deferred personnel
costs were not adjusted to fair value at the date of the acquisitions and (c)
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.
(3) Other includes expenses and income that are permitted to be excluded per the
terms of our Amended Senior Secured Credit Agreement from Consolidated
EBITDA, a financial measure used in calculating our covenant
compliance. These include expenses and income related to foreign currency
transactions, investment gains and losses, facilities and workforce
restructuring, legal settlements, business acquisitions and other items.
Our covenant requirement for consolidated net secured leverage ratio and the
actual ratio as of
Covenant Actual
Requirement Ratio
Maximum consolidated net secured leverage to
Consolidated EBITDA ratio(1) 6.75x 2.67x
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(1) Calculated as the ratio of consolidated net secured funded indebtedness, net
of cash and cash equivalents, to Consolidated EBITDA, as defined by the
Amended Senior Secured Credit Agreement, for the period of four consecutive
fiscal quarters ended on the measurement date. Consolidated net secured
funded indebtedness is comprised of indebtedness for borrowed money, letters
of credit, deferred purchase price obligations and capital lease obligations,
all of which is secured by liens on our property.
Recently Adopted Accounting Pronouncements
InJune 2016 , the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Application of ASU 2016-13 is through a cumulative-effect adjustment to retained earnings as of the effective date. Upon adoption, ASU 2016-13 did not have a material impact on our financial position, results of operations or cash flows.
Recent Accounting Pronouncements Not Yet Effective
InDecember 2019 , the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). ASU 2019-12 simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for us for our first quarter of fiscal 2021. Certain amendments in this update must be applied on a prospective basis, certain 24
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amendments must be applied on a retrospective basis and certain amendments must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the effective date. We are currently evaluating the impact of the pending adoption of ASU 2019-12 on our Consolidated Financial Statements.
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