SS&C Technologies Holdings Inc - Quarter Report: 2018 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

FORM 10-Q 

For the quarterly period ended September 30, 2018

For the transition period from        to        

Commission File Number 001-34675

SS&C TECHNOLOGIES HOLDINGS, INC.

(Exact name of Registrant as specified in its charter) 

80 Lamberton Road

Windsor, CT 06095

(Address of principal executive offices, including zip code)

860-298-4500

(Registrant’s telephone number, including area code)

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

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐

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

There were 240,481,972 shares of the registrant’s common stock outstanding as of October 30, 2018.

SS&C TECHNOLOGIES HOLDINGS, INC.

INDEX

This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes”, “anticipates”, “plans”, “expects”, “estimates”, “projects”, “forecasts”, “may”, “assume”, “intend”, “will”, “continue”, “opportunity”, “predict”, “potential”, “future”, “guarantee”, “likely”, “target”, “indicate”, “would”, “could” and “should” and similar expressions are intended to identify forward-looking statements. The important factors discussed under the caption “Risk Factors” in this Quarterly Report on Form 10-Q and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission on February 28, 2018, and the Company’s Quarterly Reports on Form 10-Q for the quarter ended March 31, 2018 and June 30, 2018, filed with the Securities and Exchange Commission on May 10, 2018 and August 9, 2018, respectively, among others, could cause actual results to differ materially from those indicated by forward-looking statements made herein and presented elsewhere by management from time to time. The Company does not undertake an obligation to update its forward-looking statements to reflect future events or circumstances.

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PART I

SS&C TECHNOLOGIES HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except per share data) (Unaudited)

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

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SS&C TECHNOLOGIES HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In millions, except per share data) (Unaudited)

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

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SS&C TECHNOLOGIES HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions) (Unaudited)

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

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SS&C TECHNOLOGIES HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1—Basis of Presentation

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These accounting principles were applied on a basis consistent with those of the audited Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2018 (the “2017 Form 10-K”). In the opinion of the Company, the accompanying unaudited Condensed Consolidated Financial Statements contain all adjustments (consisting of only normal recurring adjustments, except as noted elsewhere in the notes to the Condensed Consolidated Financial Statements) necessary for a fair statement of its financial position as of September 30, 2018, the results of its operations for the three and nine months ended September 30, 2018 and 2017, and its cash flows for the nine months ended September 30, 2018 and 2017. Certain prior year balances have been reclassified to conform to the current year presentation. Such reclassifications did not affect total revenues, operating income or net income.  These statements do not include all of the information and footnotes required by GAAP for annual financial statements. The Condensed Consolidated Financial Statements contained herein should be read in conjunction with the audited Consolidated Financial Statements and footnotes as of and for the year ended December 31, 2017, which were included in the 2017 Form 10-K. The December 31, 2017 Consolidated Balance Sheet data were derived from audited financial statements but do not include all disclosures required by GAAP for annual financial statements. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the expected results for any subsequent quarters or the full year.  

In connection with the adoption of Accounting Standards Codification (“ASC”) 606, the Company revised its presentation of revenues to illustrate its two primary sources of revenues: software-enabled services revenues and license, maintenance and other related revenues. The Company believes its prior presentation of recurring and non-recurring revenue streams is no longer useful, as the license portion of revenue from multi-year term license agreements is now recognized up-front and is no longer annually recurring in nature.  

Recently Adopted Accounting Pronouncements

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15, Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows under ASC Topic 230, Statement of Cash Flow, and other Topics.  ASU 2016-15 is effective for the Company for its first quarter of fiscal 2018 and the guidance requires application using a retrospective method.  The impact of the Company’s adoption of ASU 2016-15 to the Company’s Condensed Consolidated Financial Statements was to reflect the presentation of debt prepayment or debt extinguishment costs as cash outflows from financing activities within the Company’s Condensed Consolidated Statement of Cash Flows.  The Company adopted ASU 2016-15 as of January 1, 2018, which resulted in the Company presenting fees paid for debt extinguishment as a financing activity within the Condensed Consolidated Statement of Cash Flows for all periods shown.

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 requires equity investments, except those accounted for under the equity method of accounting, that have readily determinable fair values to be measured at fair value with any changes in fair value recognized in net income. Equity securities that do not have readily determinable fair values may be measured at estimated fair value or cost less impairment, if any, adjusted for subsequent observable price changes, with changes in the carrying value recognized in net income. A qualitative assessment for impairment is required for equity investments without readily determinable fair values. The updated guidance also eliminates the requirement to disclose the method and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost on the balance sheet. The Company adopted ASU 2016-01 as of January 1, 2018, which did not have a material impact on the Company’s financial position, results of operations or cash flows.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASC 606). ASC 606 supersedes the revenue recognition requirements in ASC 605 and 985 and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The Company adopted ASC 606 as of January 1, 2018 using the modified retrospective transition method.  See Note 3 for further details.

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Recent Accounting Pronouncements Not Yet Effective

In June 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. ASU 2016-13 is effective for the Company for its first quarter of fiscal 2020 and earlier adoption is permitted beginning in the first quarter of fiscal 2019.  Application of the ASU is through a cumulative-effect adjustment to retained earnings as of the effective date.  The Company is currently evaluating the impact of the pending adoption of ASU 2016-13 on the Company’s Condensed Consolidated Financial Statements.  This ASU is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessor accounting is largely unchanged under the amendments of ASU 2016-02. Additional disclosures will be required to allow the user to assess the amount, timing and uncertainty of cash flows arising from leasing activities. A modified retrospective transition approach is required for leases existing at the time of adoption.  ASU 2016-02 is effective for the Company for its first quarter of fiscal 2019 and earlier adoption is permitted.  The impact of the Company’s adoption of ASU 2016-02 to the Company’s Condensed Consolidated Financial Statements will be to recognize the majority of the Company’s operating lease commitments as operating lease liabilities and right-of-use assets upon adoption, which will result in a material increase in the assets and liabilities recorded on the Company’s Condensed Consolidated Balance Sheet.  The Company is continuing its assessment, which may identify additional impacts ASU 2016-02 will have on the Company’s Condensed Consolidated Financial Statements and related disclosures and internal controls over financial reporting.

In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides another transition method no longer requiring application to previously reported periods. The Company plans to adopt ASU 2018-11 by applying the new standard on January 1, 2019 and recognizing a cumulative adjustment to the opening balance of retained earnings.  

Note 2—Significant Accounting Policies

Principles of Consolidation

The Consolidated Financial Statements include the accounts of the Company and its subsidiaries.  All significant accounts, transactions and profits between the consolidated companies have been eliminated in consolidation.  The Company consolidates any entity in which it has a controlling financial interest.  Under the voting interest model, generally the investor that has voting control (usually more than 50% of an entity’s voting interests) consolidates the entity.  Under the variable interest entity (“VIE”) model, the party that has the power to direct the entity’s most significant economic activities and the ability to participate in the entity’s economics consolidates the entity.  An entity is considered a VIE if it possesses one of the following characteristics: 1) the entity is thinly capitalized; 2) residual equity holders do not control the entity; 3) equity holders are shielded from economic losses; 4) equity holders do not participate fully in an entity’s residual economics; and 5) the entity was established with non-substantive voting interests.  The Company’s investments in private equity funds meet the definition of a VIE; however, the private equity fund investments are not consolidated as the Company does not have the power to direct the entities’ most significant economic activities.

The Company is the lessee in a series of operating leases covering a large portion of the Company’s Kansas City, Missouri-based leased office facilities.  The lessors are generally joint ventures (in which the Company has 50% ownership) that have been established specifically to purchase, finance and engage in leasing activities with the joint venture partners and unrelated third parties. The Company’s analysis of its real estate joint ventures for all periods presented indicate that none qualified as a VIE and, accordingly, they have not been consolidated.

Unconsolidated investments in entities over which the Company does not have control but has the ability to exercise influence over operating and financial policies, if any, are accounted for under the equity method of accounting.  Earnings and losses from such investments are recorded on a pre-tax basis, if any.  

Client Funds/Obligations

Funds receivable and funds held on behalf of clients

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The Company holds client funds on behalf of transfer agency clients and pharmacy processing clients in connection with providing its data processing services.  End-of-day available client bank balances for full service mutual fund transfer agency clients are invested overnight in credit quality money market funds.  Invested balances are returned to the full service mutual fund transfer agency clients’ accounts the following business day.  Funds received from clients for the payment of pharmacy claims incurred by its members are invested in credit quality money market funds and certificates of deposit until the claims are paid.  Client funding receivables represent amounts due to the Company for pharmacy claims paid in advance of receiving client funding and for pharmacy claims processed for which client funding requests have not been made.

Funds held on behalf of clients in the form of cash, cash equivalents and certificates of deposit with a maturity of less than twelve months are included in Funds receivable and funds held on behalf of clients in the Condensed Consolidated Balance Sheet.  Funds held on behalf of clients in the form of certificates of deposit with a maturity of greater than twelve months are classified as Investments in the Condensed Consolidated Balance Sheet.  All funds held on behalf of clients represent assets that are restricted for use.

The Company has included funds held on behalf of clients that meet the definition of restricted cash and restricted cash equivalents in the beginning and end of period balances in the Condensed Consolidated Statements of Cash Flows.  Cash inflows and outflows related to investment of funds held on behalf of clients are reported on a gross basis as “Investments in securities” and “Proceeds from sales / maturities of investments” in the investing section of the Condensed Consolidated Statements of Cash Flows.

Client funds obligations

Client funds obligations represent funds owed to full service mutual fund transfer agency clients for cash balances invested overnight, and the Company’s contractual obligations to satisfy client pharmacy claim obligations that are recorded on the balance sheet when incurred, generally after the Company has processed a claim on behalf of its pharmacy clients.

Investments

The Company holds various investments, including investments in marketable securities, non-marketable securities, and partnership interests in private equity funds, joint ventures and other similar entities.

The equity method of accounting is used for investments in entities, partnerships and similar interests (including investments in private equity funds where the Company is a limited partner and holds a greater than 5% partnership interest in the fund) in which the Company has significant influence but does not control.  Under the equity method, the Company recognizes income or losses from its pro-rata share of these unconsolidated affiliates’ net income or loss, which changes the carrying value of the investment of the unconsolidated affiliate.

The Company measures equity investments in marketable securities, seed capital investments and other investments, other than those accounted for under the equity method of accounting or those that result in consolidation of the investee, at fair value, with changes in the fair value recognized in earnings. The Company uses net asset value as a practical expedient for the fair value of partnership interests in private equity funds that are not accounted for under the equity method of accounting.  

Investments in non-marketable equity securities that do not have readily determinable fair values and do not qualify for the practical expedient to measure the investment using a net asset value per share are recorded using the measurement alternative in ASU 2016-01.  These investments are recorded at cost, less impairment, adjusted for observable price changes in orderly transactions for an identical or similar investment of the same issuer.  At each reporting period, the Company assesses if these investments continue to qualify for this measurement alternative.  Impairment is recorded when there is evidence that the expected fair value of the investment has declined to below the recorded cost.  

The Company has certain investments in unconsolidated affiliates accounted for under the equity method of accounting in which the Company’s carrying value exceeds the proportionate share of net assets of the unconsolidated affiliate.  The total investment in unconsolidated affiliates, including basis differences, is included in Investments on the Condensed Consolidated Balance Sheet.  The Company records its proportionate share of the results of the unconsolidated affiliates and amortization expense related to basis differences in Equity in earnings of unconsolidated affiliates, net on the Condensed Consolidated Statement of Comprehensive Income (Loss).

Derivative and Hedging Activities

The Company recognizes all derivatives as either assets or liabilities in the Condensed Consolidated Balance Sheet and measures those instruments at fair value and the changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income (loss), depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction.  From time to time, the Company utilizes derivatives to manage foreign currency risks.  The Company does not enter into derivative arrangements for speculative purposes.  At September 30, 2018, the Company had derivative instruments

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outstanding as described in Note 7, “Hedging Transactions and Derivative Financial Instruments.”  The Company includes cash flows related to derivative instruments qualifying for hedge accounting and economic hedges in the same category as the item being hedged in the Condensed Consolidated Statement of Cash Flows.

Transaction Expenses

Transaction expenses are those costs that are directly related to the Company’s acquisition of DST Systems, Inc. (“DST”), as described in Note 11, “Acquisitions.”  Transaction expenses consist primarily of certain costs associated with the amendment and restatement of the Company’s Credit Agreement, as described in Note 4, “Debt”, investment banker advisory fees, legal fees and other fees.

Comprehensive Income (Loss)

The Company’s comprehensive income (loss) consists of net income and foreign currency translation adjustments, which are presented in the Condensed Consolidated Statement of Comprehensive Income (Loss), net of tax and reclassifications to earnings.

Note 3—Revenues

Adoption of ASC Topic 606, “Revenue from Contracts with Customers”

On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method for those contracts that were not completed as of the date of adoption.  Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts continue to be reported in accordance with ASC 605 and 985. The most significant impact of the standard to the Company relates to the timing of revenue recognition for arrangements involving term licenses. Under ASC 606, the Company is required to recognize term license revenues upon the transfer of the license and recognize the associated maintenance revenues over the contract period, as opposed to the Company’s prior practice of recognizing both the term license and maintenance revenues ratably over the contract period. In addition, the Company is required to capitalize and amortize incremental costs of obtaining a contract, such as certain sales commission costs, over the expected customer relationship period if the Company expects to recover those costs. The Company previously expensed these costs over the length of the initial contract excluding any renewals.

The Company recorded an increase to retained earnings of $65.8 million, or $47.9 million net of tax, as of January 1, 2018 due to the cumulative impact of adopting ASC 606, with the impact primarily related to the Company’s term license revenues.  The impact to revenues for the three and nine months ended September 30, 2018 related to these adjustments was a decrease of $7.2 million and $28.6 million, respectively.

The impact of adoption of ASC 606 on the Company’s Condensed Consolidated Statement of Comprehensive Income (Loss) was as follows (in millions):

The impact of adoption of ASC 606 on the Company’s Condensed Consolidated Balance Sheet was as follows (in millions):

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The adoption of ASC 606 had no impact on the Company’s total cash flows from operations.

Revenue Recognition

Software-enabled Services Revenue

The Company primarily offers software-enabled outsourcing services in which the Company utilizes its own software to offer comprehensive fund administration services for alternative investment managers, including fund manager services, transfer agency services, funds-of-funds services, tax processing and accounting. The Company also uses its own software applications to provide healthcare organizations a variety of medical and pharmacy benefit solutions to satisfy their information processing, quality of care, cost management concerns and payment integrity programs. The Company’s healthcare solutions include claims adjudication, benefit management, care management, business intelligence and other ancillary services. The Company also offers subscription-based on-demand software applications that are managed and hosted at the Company’s facilities. The software-enabled services arrangements provide an alternative for clients who do not wish to install, run and maintain complicated financial software. Under these arrangements, the client does not have the right to take possession of the software, rather, the Company agrees to provide access to its applications, remote use of its equipment to process transactions, access to client’s data stored on its equipment, and connectivity between its environment and the client’s computing systems.

Software-enabled services are generally provided under 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.

In software-enabled services arrangements, the arrangement is a single performance obligation or a stand-ready performance obligation, which in either case is comprised of a series of distinct services that are substantially the same and have the same pattern of transfer to the customer (i.e. distinct days or months of service).  The Company applies a measure of progress (typically time-based) to any fixed consideration and allocates variable consideration to the distinct periods of service based on usage or summarization of account information.  These variable payments relate specifically to the Company’s efforts to perform the services in the period in which the fee applies. This variability is solely attributed to and resolved as a result of the transfer of these services; these fees are independent of the transfer of past or future goods or services.  These fees meet the allocation objective of ASC 606 because they represent the amount of consideration the Company is entitled to for these services.  Revenue is generally recognized over the period the services are provided, which results in revenue recognition that corresponds with the value to the client of the services transferred to date relative to the remaining services promised.

License, Maintenance and Related Revenue Agreements

The Company generates revenues in the form of software license fees and related maintenance and services fees. License fees include perpetual license fees and term license fees that differ mainly in the duration over which the customer benefits from the software. Maintenance and services primarily consist of fees for maintenance services (including support and unspecified upgrades and enhancements when and if they are available) and to a lesser extent professional services which focus on both deployment and training the Company’s customers to fully leverage the use of its products although the user can benefit from the software without the Company’s assistance.

Under ASC 606, the Company identifies a contract with a customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to each performance obligation in the contract and recognizes revenues when (or as) the Company satisfies a performance obligation.

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Software license performance obligations are functional intellectual property that are distinct as the user can benefit from the software on its own as defined under ASC 606.  Software license revenues are recognized at the point of time when the software license has been delivered.  Term license fees are typically due in annual installments at the beginning of each annual period and the Company records a contract asset for amounts recognized as revenue in excess of amounts billed.

The Company recognizes revenues from maintenance ratably over the term of the underlying maintenance contract term because the Company transfers control evenly by providing a stand-ready service. The term of the maintenance contract is usually one year. Renewals of maintenance contracts create new performance obligations that are satisfied over the term with the revenues recognized ratably over the term.

Revenues from professional services consist mostly of services provided on a time and materials basis. The performance obligations are satisfied, and revenues are recognized, over time as the services are provided.

In contracts with multiple performance obligations, the Company accounts for individual performance obligations separately if they are distinct. The Company allocates the transaction price to each performance obligation based on its relative standalone selling price out of total consideration of the contract. Standalone selling price is determined utilizing observable prices to the extent available.  If the standalone selling price for a performance obligation is not directly observable, the Company estimates it maximizing the use of observable inputs.  For maintenance and support, the Company determines the standalone selling price based on the price at which the Company separately sells a renewal contract and the economic relationship between licenses and maintenance. The Company primarily determines the standalone selling price for sales of licenses using the residual approach. For professional services, the Company determines the standalone selling prices based on the price at which the Company separately sells those services.

The Company occasionally enters into license agreements requiring significant customization of the Company’s software that are not material to the Company’s results of operations. The Company accounts for the license and professional service fees under these agreements as a single performance obligation, recognized over time using an input method during the development of the license.  This method requires estimates to be made for costs to complete the agreement utilizing an estimate of development man-hours remaining. Revenue is recognized each period based on the hours incurred to date compared to the total hours expected to complete the project. Due to uncertainties inherent in the estimation process, it is at least reasonably possible that completion costs will be revised. Such revisions are recognized in the period in which the revisions are determined. Provisions for estimated losses on uncompleted contracts are determined on a contract-by-contract basis, and are made in the period in which such losses are first estimated or determined.

Accounts Receivable, net is primarily comprised of billed and unbilled receivables for which the Company has an unconditional right to consideration, net of an allowance for doubtful accounts.

Deferred revenues represent mostly unrecognized fees billed or collected for maintenance and professional services. Deferred revenues are recognized as (or when) the Company performs under the contract. Deferred revenues are recorded on a net basis with contract assets at the contract level.  Accordingly, as of September 30, 2018, approximately $32.9 million of deferred revenue is presented net within contract assets arising from the same contracts.  The amount of revenues recognized in the period that was included in the opening deferred revenues balance was $33.1 million and $164.1 million for the three and nine months ended September 30, 2018, respectively.

As of September 30, 2018, revenue of approximately $305.1 million is expected to be recognized from remaining performance obligations for license, maintenance and related revenues, of which $210.3 million is expected to be recognized over the next twelve months.

Revenue Disaggregation

The following table disaggregates the Company’s revenues by geography (in millions):

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The following table disaggregates the Company’s revenues by source (in millions):

Costs of Revenues

Costs of revenues include all costs, including depreciation and amortization, incurred to produce revenues. Incremental costs of obtaining a contract (e.g., sales commissions) are capitalized and amortized on a basis consistent with the pattern of transfer of goods or services to the customer to which the asset relates over the expected customer relationship period if the Company expects to recover those costs. Prior to the adoption of ASC 606, the Company previously expensed these costs over the length of the initial contract excluding any renewals. The expected customer relationship period is determined based on average historical customer relationship periods, including expected renewals. Expected renewal periods are only included in the expected customer relationship period if commission amounts paid upon renewal are not commensurate with amounts paid on the initial contract. Incremental costs of obtaining a contract include only those costs the Company incurs to obtain a contract that it would not have incurred if the contract had not been obtained. The Company has determined that certain commissions programs meet the requirements to be capitalized.  Certain sales commissions associated with multi-year contracts are subject to an employee service requirement. As an action other than each party approving the contract is required to trigger payment of these sales commissions, they are not considered incremental costs to obtain a contract and are expensed as incurred.  These costs are included in selling and marketing and general and administrative expenses.

Practical Expedients

The Company expenses sales commissions as incurred when the amortization period would have been one year or less.

The Company does not account for significant financing components if the period between when the Company transfers the promised product or service to the client and when the client pays for that product or service will be one year or less.  

For the Company’s software-enabled services contracts which are cancelable with 90 days’ notice or meet the allocation objective for series performance obligations under ASC 606, the Company has not disclosed the transaction price for the remaining performance obligations as of the end of each reporting period or when the Company expects to recognize this revenue.

The Company records revenue net of any taxes assessed by governmental authorities.

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Note 4—Debt

At September 30, 2018 and December 31, 2017, debt consisted of the following (in millions):

Senior Secured Credit Facilities

On April 16, 2018, in connection with its acquisition of DST Systems, Inc. (“DST”), the Company entered into an amended and restated credit agreement with SS&C Technologies, Inc. (“SS&C”), SS&C European Holdings SARL, an indirect wholly-owned subsidiary of SS&C (“SS&C SARL”) and SS&C Technologies Holdings Europe SARL, an indirect wholly-owned subsidiary of SS&C (“SS&C Tech SARL”) as the borrowers (“Credit Agreement”).  

The Credit Agreement includes four tranches of term loans (together the “Initial Term Loans”): (i) a $518.6 million term B-1 facility which matures on July 8, 2022 for SS&C (“Term B-1 Loan”); (ii) a $5.9 million term B-2 facility which matures on July 8, 2022 for SS&C SARL (“Term B-2 Loan”) (iii) a new $5.046 billion term B-3 facility, which matures on April 16, 2025 for SS&C (“Term B-3 Loan”); and (iv) a new $1.8 billion term B-4 facility, which matures on April 16, 2025 for SS&C SARL (“Term B-4 Loan”).  In addition, the Credit Agreement has a revolving credit facility with a five-year term available for borrowings by SS&C with $250.0 million in available commitments (“Revolving Credit Facility”), of which $245.6 million was available as of September 30, 2018.  The Revolving Credit Facility also contains a $25 million letter of credit sub-facility, of which $4.4 million was drawn as of September 30, 2018.

The majority of the initial proceeds from the Initial Term Loans was used to satisfy the consideration required to fund the acquisition of DST, repay certain amounts outstanding under the Company’s then-existing credit agreement (“Prior Credit Agreement”), repay all of the outstanding principal amount of the Company’s 5.875% Senior Notes due 2023 (“Senior Notes”) and to repay acquired debt associated with DST.

The refinancing of the Prior Credit Agreement was evaluated in accordance with FASB ASC 470-50, Debt-Modifications and Extinguishments, for modification and extinguishment accounting. The Company accounted for the refinancing 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 Loss on extinguishment of debt section below.

The Initial Term Loans and 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 credit facility. Amounts drawn on the Revolving Credit Facility initially bear interest at either LIBOR plus 2.25% or at the base rate plus 1.25%, and is subject to a step-down at any time SS&C’s consolidated net secured leverage ratio is less than 4.75 times, to 2.00% in the case of the LIBOR margin and 1.00% in the case of the base rate margin.  The Term B-1 Loan and Term B-2 Loan bear interest at either LIBOR plus 2.25% or at the base rate plus 1.25%. The Term B-3 Loan and Term B-4 Loan initially bear interest at either LIBOR plus 2.50% or at the base rate plus 1.50%, and are subject to a step-down at any time SS&C’s consolidated net secured leverage ratio is less than 4.75 times, to 2.25% in the case of the LIBOR margin and 1.25% in the case of the base rate margin.

SS&C and SS&C SARL are required to make scheduled quarterly payments of approximately 0.25% of the remaining principal amount of the Term B-1 Loan with the balance due and payable on July 8, 2022.  SS&C and SS&C SARL are required to make scheduled quarterly payments of 0.25% of the original principal amount of the Term B-3 Loan and Term B-4 Loan, respectively, beginning on September 30, 2018, with the balance due and payable on April 16, 2025.  The Term B-2 Loan was paid in full as of September 30, 2018. No amortization is required under the Revolving Credit Facility.

SS&C’s and SS&C SARL’s obligations under the Initial Term Loans are guaranteed by (i) the Company, SS&C and each of its existing and future U.S. wholly-owned restricted subsidiaries, in the case of the Term B-1 Loan, B-3 Loan and the Revolving Credit

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Facility and (ii) the Company, SS&C and each of its existing and future wholly-owned restricted subsidiaries, in the case of the Term B-2 Loan and the Term B-4 Loan.

The obligations of the U.S. loan parties under the 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 the U.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 Credit Agreement are secured by substantially all of the Company’s and the other guarantors’ assets (subject to customary exceptions and limitations), including a pledge of all of the capital stock of substantially all of the Company’s wholly-owned restricted subsidiaries (with customary exceptions and limitations).

The Credit Agreement includes negative covenants that, among other things and subject to certain thresholds and exceptions, limit the Company’s ability and the ability of its 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 its subsidiaries, pay dividends on its capital stock or redeem, repurchase or retire its capital stock, alter the business the Company conducts, amend, prepay, redeem or purchase subordinated debt, or engage in transactions with its affiliates.  The Credit Agreement also contains customary representations and warranties, affirmative covenants and events of default, subject to customary thresholds and exceptions. In addition, the Credit Agreement contains a financial covenant for the benefit of the Revolving Credit Facility requiring the Company to maintain a minimum consolidated net secured leverage ratio. In addition, under the Credit Agreement, certain defaults under agreements governing other material indebtedness could result in an event of default under the Credit Agreement, in which case the lenders could elect to accelerate payments under the Credit Agreement and terminate any commitments they have to provide future borrowings.  

Senior Notes

On April 16, 2018, the Company redeemed all of the outstanding principal amount of its Senior Notes utilizing a portion of the proceeds from the Term Loans described above.  The redemption of the Senior Notes required the payment of a “make whole” premium calculated pursuant to the indenture governing the Senior Notes.  See Loss on extinguishment of debt section below.  In addition, on May 1, 2018, the Company redeemed senior notes of DST, which were acquired as a part of the acquisition of DST, utilizing a portion of the proceeds from the Term Loans described above.  The redemption of DST’s senior notes totaled $600.4 million, which included a “make whole” premium.

Other indebtedness

In connection with the acquisition of DST, the Company assumed a mortgage with a principal amount of £21.0 million, which matures in October 2020 (“U.K. Mortgage”) and a $4.1 million mortgage on property in the U.S. The outstanding amount under the U.K. Mortgage was $26.1 million at September 30, 2018 with a fixed interest rate of 3.1%.  Principal payments of £1.0 million are payable semi-annually in April and October of each year and accrued interest payable quarterly, with the outstanding balance due at maturity.  

Debt issuance costs

In connection with the Credit Agreement, the Company capitalized an aggregate of $37.5 million in financing costs during the three months ended June 30, 2018.  Other costs incurred by the Company in connection with the Credit Agreement, which did not meet the criteria for capitalization, are included in Transaction expenses in the Condensed Consolidated Statement of Comprehensive Income (Loss).

Loss on extinguishment of debt

The Company recorded a $44.4 million loss on extinguishment of debt in connection with the entry into the Credit Agreement and redemption of the Senior Notes.  The loss on early extinguishment of debt includes the write-off of a portion of the unamortized capitalized financing fees and the unamortized original issue discount related to the Prior Credit Agreement for amounts accounted for as a debt extinguishment, a make-whole premium paid in connection with the redemption of the Senior Notes and the write-off of all unamortized capitalized financing fees and unamortized original issue discount related to the Senior Notes.

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Fair value of debt. The carrying amounts and fair values of financial instruments are as follows (in millions):

The above fair values, which are Level 2 liabilities, were computed based on comparable quoted market prices. The fair values of cash, accounts receivable, net, short-term borrowings, and accounts payable approximate the carrying amounts due to the short-term maturities of these instruments.

Note 5—Investments

Investments are as follows (in millions):

The Company had $474.8 million of investments as of September 30, 2018 as compared to no investments as of December 31, 2017.  The increase in investments was the result of acquiring the net assets of DST in the second quarter of 2018.

Realized and unrealized gains and losses for the Company’s equity securities are as follows (in millions):

Investments in unconsolidated affiliates are as follows (in millions):

Investments in unconsolidated affiliates are accounted for under the equity method of accounting.  The total investment in unconsolidated affiliates, including basis differences, is included in Investments on the Condensed Consolidated Balance Sheet.  The Company records its proportionate share of the results of the unconsolidated affiliates and amortization expense related to basis differences in Equity in earnings of unconsolidated affiliates, net on the Condensed Consolidated Statement of Comprehensive Income (Loss).

Equity in earnings of unconsolidated affiliates are as follows (in millions):

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International Financial Data Services L.P. (“IFDS L.P.”) is a 50% owned joint venture with State Street Corporation with operations in Canada, Ireland and Luxembourg.  Pershing Road Development Company, LLC (“PRDC LLC”) is a 50% owned special-purpose entity formed to develop and lease office space to the U.S. government.  Broadway Square Partners, LLP (“Broadway Square Partners”) is a 50% owned real estate joint venture.  The difference between the amount at which each of IFDS L.P., PRDC LLC and Broadway Square Partners, is carried, and the amount of underlying equity in net assets, will be amortized as a component of equity in earnings of unconsolidated affiliates over approximately 15 years, 28 years and 40 years, respectively.  

Fair Value Measurement

Authoritative accounting guidance on fair value measurements establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.  These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

As of September 30, 2018, the Company held certain investment assets and certain liabilities that are required to be measured at fair value on a recurring basis. These investments include money market funds, marketable equity securities and seed capital investments where fair value is determined using quoted prices in active markets. Accordingly, the fair value measurements of these investments have been classified as Level 1 in the tables below. Investments for which the Company elected net asset value as a practical expedient for fair value and investments measured using the fair value measurement alternative are excluded from the table below.  Fair value for deferred compensation liabilities that are credited with deemed gains or losses of the underlying hypothetical investments, primarily equity securities, have been classified as Level 1 in the tables below. The Company has foreign currency derivative instruments that are required to be reported at fair value.  Fair value for the derivative instruments was determined using inputs from quoted prices for similar assets and liabilities in active markets that are directly or indirectly observable.  Accordingly, the derivative instruments have been classified as Level 2 in the tables below.  

The following table present assets and liabilities measured at fair value on a recurring basis (in millions):

_____________________________________________________

The Company has not become aware of any information indicative of fair value impairments or adjustments to the carrying value of its non-marketable equity securities for the three and nine months ended September 30, 2018.

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The Company has partnership interests in various private equity funds that are not included in the table above.  The Company’s investments in private equity funds were $117.8 million at September 30, 2018, of which $110.9 million were measured using net asset value as a practical expedient for fair value and $6.9 million were accounted for under the equity method of accounting. The investments in private equity funds represent underlying investments in domestic and international markets across various industry sectors. One of the Company’s investments in private equity funds as of September 30, 2018, representing 81% of the value of the private equity fund investments, was concentrated in one fund that is primarily invested in the energy sector and real estate. The Company has no management rights associated with its partnership interests in this fund and withdrawals from this fund are subject to general partner consent.  This fund has a termination date in 2019 with an optional two-year extension at the discretion of the general partner.  The Company expects to receive distributions from this fund upon liquidation of the underlying investments over the next several years, however the exact timing of the distributions is unknown.  The Company has no unfunded commitments related to this fund.  Future capital commitments related to the Company’s other private equity fund investments were approximately $1.9 million as of September 30, 2018.

Generally, the Company’s investments in private equity funds are non-transferable or are subject to long holding periods, and withdrawals from the private equity firm partnerships are typically not permitted.  Even when transfer restrictions do not apply, there is generally no public market for the securities.  Therefore, the Company may not be able to sell the securities at a time when it desires to do so. The Company may not always be able to sell those investments at the same or higher prices than it paid for them.  As of September 30, 2018, the Company did not have plans to sell any of these investments.  The maximum risk of loss related to the Company’s private equity fund investments is limited to the carrying value of its investments in the entities plus any future capital commitments, which include future commitments that the Company believes are unlikely to be called by the general partner.  

Note 6—Goodwill

The change in carrying value of goodwill as of and for the nine months ended September 30, 2018 is as follows (in millions):

Note 7—Hedging Transactions and Derivatives Instruments

The Company is directly and indirectly affected by changes in certain market conditions.  When determined appropriate, the Company uses derivative instruments as a risk management tool to mitigate the potential impact of certain market risks.  The primary market risks managed by the Company using derivative instruments is foreign currency exchange rate risk.  The Company may use various types of derivative instruments including, but not limited to, forward contracts, option contracts and swaps.  The Company does not enter into derivative arrangements for speculative purposes.

The Company determines the fair values of its derivatives based on quoted market prices that are directly or indirectly observable as further described within Note 5, “Investments.”

The Company currently uses certain derivatives as economic hedges of foreign currency exposure.  Although these derivatives are not designated for hedge accounting, they are effective economic hedges.  The changes in fair values of economic hedges are immediately recognized into earnings.

The Company uses foreign currency economic hedges to reduce the variability in cash flows of forecasted transactions caused by fluctuations in foreign currency exchange rates, primarily the Indian rupee and Thailand baht.  The foreign currency economic hedging program consists of forward foreign currency contracts with maturities through March 2019.  All changes in fair value of the economic hedges were recorded in Other income (expense), net, during the three and nine months ended September 30, 2018 and resulted in expense of $0.5 million and $0.9 million, respectively.  The total notional values of derivatives related to its foreign currency economic hedges were $14.5 million as of September 30, 2018.  

Note 8—Earnings per Share

Earnings per share (“EPS”) is calculated in accordance with the relevant standards. Basic EPS includes no dilution and is computed by dividing net income available to the Company’s common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares consist of stock options, stock appreciation

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rights (“SARs”), restricted stock units (“RSUs”) and restricted stock awards (“RSAs”) using the treasury stock method. Common equivalent shares are excluded from the computation of diluted earnings per share if the effect of including such common equivalent shares is anti-dilutive because their total assumed proceeds exceed the average fair value of common stock for the period.

The following table sets forth the computation of basic and diluted EPS (in millions, except per share amounts):

Stock options and SARs representing 4.4 and 5.2 million shares were outstanding for the three and nine months ended September 30, 2018, respectively, but were not included in the computation of diluted EPS because the effect of including them would be anti-dilutive.  Stock options and SARs representing 0.6 and 10.7 million shares were outstanding for the three and nine months ended September 30, 2017, respectively, but were not included in the computation of diluted EPS because the effect of including them would be anti-dilutive.  

Dividends. In 2018, the Company paid a quarterly cash dividend of $0.07 per share of common stock on March 15, 2018 and June 15, 2018 and $0.08 per share of common stock on September 18, 2018 to stockholders of record as of the close of business on March 1, 2018, June 1, 2018 and September 4, 2018, respectively, totaling $50.7 million in the aggregate.  In 2017, the Company paid a quarterly cash dividend of $0.0625 per share of common stock on March 15, 2017 and June 15, 2017 and $0.07 per share of common stock on September 15, 2017 to stockholders of record as of the close of business on March 1, 2017, June 1, 2017 and September 15, 2017, respectively, totaling $39.9 million in the aggregate.

Note 9—Equity and Stock Compensation

Public offering. In April 2018, the Company completed a public offering of its common stock. The offering included 30.3 million newly issued shares of common stock sold by the Company (including 3.9 million shares of common stock sold pursuant to the underwriters’ option to purchase additional shares) at an offering price to the public of $47.50 per share for which the Company received total net proceeds of approximately $1.4 billion.

Other comprehensive loss.  Accumulated other comprehensive loss balances, net of tax consist of the following (in millions):

Adjustments to accumulated other comprehensive loss attributable to the Company are as follows (in millions):

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Total stock options, SARs, RSUs and RSAs. The amount of stock-based compensation expense recognized in the Company’s Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2018 and 2017 was as follows (in millions):

In connection with the acquisition of DST, the Company converted DST’s unvested stock options, unvested RSUs and unvested PSUs into SS&C equity awards and rights to receive SS&C common stock.  During the three and nine months ended September 30, 2018, the Company recognized stock-based compensation expense of $5.9 million and $39.2 million related to these assumed awards, of which $0.7 million and $28.8 million, respectively, related to one-time charges for the accelerated vesting of certain awards.

The following table summarizes stock option and SAR activity as of and for the nine months ended September 30, 2018 (shares in millions):

The following table summarizes RSU activity as of and for the nine months ended September 30, 2018 (shares in millions):

Note 10—Income Taxes

The effective tax rate was 51.7% and 14.5% for the three months ended September 30, 2018 and 2017, respectively and (174.7)% and 16.5% for the nine months ended September 30, 2018 and 2017, respectively. The change in the effective tax rate for the three months ended September 30, 2018 and nine months ended September 30, 2018 was primarily due to the relative proportionate impact of permanent book to tax differences and discrete items on reduced pre-tax book income in 2018 as well as

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changes in the forecast of pre-tax book income due to increased realized synergies related to the acquisition of DST occurring during the year.  The income tax benefit recorded during the nine months ended September 30, 2018 includes a net $8.1 million benefit for the remeasurement of state deferred tax liabilities as a result of the DST acquisition and state law changes enacted during the year, an $18.9 million benefit related to stock award windfalls and a $7.1 million benefit for a lapse in the statute of limitations of previously unrecognized tax benefits.  The effective tax rate in 2018 includes the impact of a tax on Global Intangible Low-Taxed Income (“GILTI”) and the reduction in the domestic statutory tax rate from 35% to 21%, both of which became effective January 1, 2018 as a result of the Tax Cut and Jobs Act of 2017 (“Tax Act”) enacted into law in the U.S. on December 22, 2017.  In December 2017, the SEC Staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to provide guidance on how to implement the accounting required as a result of the Tax Act. Due to the complexity of the Tax Act, SAB 118 allowed companies to record provisional amounts, or reasonable estimates of the tax effects of the Act during a measurement period not to exceed one year beyond the enactment date.  Accordingly, the Company provided provisional amounts for the period ending December 31, 2017 relating to the deemed repatriation provisions, revaluation of deferred taxes, other international provisions and the related state tax impacts.  The Company has not yet completed its accounting related to these items and the Company did not record any significant adjustments related to our provisional amounts during the three or nine months ending September 30, 2018.  The Company will continue to analyze the provisional amounts in conjunction with guidance issued by the Department of Treasury in order to complete our accounting during the measurement period.

Note 11—Acquisitions

DST Systems Inc.

On April 16, 2018, the Company purchased all of the outstanding stock of DST Systems, Inc. (“DST”) for approximately $5.1 billion in cash, plus the costs of effecting the transaction. In connection with this acquisition, the Company entered into the Credit Agreement pursuant to which the Company’s subsidiaries SS&C and SS&C SARL borrowed an aggregate of approximately $7.4 billion (approximately $524.5 million of which was rolled over from the Company’s existing credit facility). DST is a global provider of specialized technology, strategic advisory and business operations outsourcing to the financial services and healthcare industries.

The net assets and results of operations of DST have been included in the Company’s Consolidated Financial Statements from April 16, 2018.  The fair value of the intangible assets, consisting of customer relationships, completed technologies, trade names and a non-compete agreement, was determined using the income approach. Specifically, the relief from-royalty method was utilized for the completed technology and trade name, the excess earnings method was utilized for the customer relationships and the lost profits method was utilized for the non-compete agreement. The intangible assets are amortized each year based on the ratio that the projected cash flows for the intangible assets bear to the total of current and expected future cash flows for the intangible assets. The completed technology is amortized over approximately twelve years, customer relationships are amortized over approximately fourteen years, the trade name is amortized over approximately twelve years and the non-compete agreement is amortized over approximately two years, in each case the estimated lives of the assets. The fair value of the fixed assets was determined using a combination of income, market and cost approaches, dependent on the type of fixed asset that was valued.  The fair value of investments was determined based on the nature of the underlying investment. The fair value of investments in marketable equity securities and seed capital investments were determined using quoted prices in active markets for identical assets.  The fair value of investment in partnership interests in private equity funds was primarily determined using the net asset value of the fund.  The fair value of investments in non-marketable equity securities was determined based on recent observable transactions of similar equity securities of the investee. The fair value of the investments in unconsolidated affiliates was determined using a combination of income and market approaches.  The remainder of the purchase price was allocated to goodwill and is not tax deductible.

CACEIS North America

On June 1, 2018, the Company purchased all of the outstanding stock of CACEIS North America (“CACEIS”) for approximately $20.0 million in cash, plus the costs of effecting the transaction and the assumption of certain liabilities. CACEIS provides fund administration services and support for complex investment strategies.

The net assets and results of operations of CACEIS have been included in the Company’s Consolidated Financial Statements from June 1, 2018.  The fair value of the intangible assets, consisting of customer relationships, was determined using the income approach. Specifically, the excess earnings method was utilized for the customer relationships. The intangible assets are amortized each year based on the ratio that the projected cash flows for the intangible assets bear to the total of current and expected future cash flows for the intangible assets. The customer relationships are amortized over approximately sixteen years, which is the estimated life of the asset. The remainder of the purchase price was allocated to goodwill and is not tax deductible.

The following summarizes the preliminary allocation of the purchase price for the acquisitions of DST and CACEIS (in

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millions):