Broadridge Financial Solutions, Inc. — Form 10-Q Summary
Reporting period: The filing covers the fiscal quarter ended March 31, 2021 (the third quarter of fiscal 2021) and the nine months ended March 31, 2021, compared with the corresponding 2020 periods. This differs from the request metadata’s “2020 Q3.” Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
Business context and results
Broadridge provides investor communications and financial technology services through Investor Communication Solutions (ICS) and Global Technology and Operations (GTO). Its business includes seasonal proxy and annual-report processing, which typically makes revenue, earnings, and operating cash flow higher in fiscal Q3 and Q4.
| Metric | Three months ended Mar. 31, 2021 | Three months ended Mar. 31, 2020 | Nine months ended Mar. 31, 2021 | Nine months ended Mar. 31, 2020 |
|---|---|---|---|---|
| Revenue | $1,389.8 | $1,249.9 | $3,462.1 | $3,167.1 |
| Operating income | $239.2 | $226.3 | $397.3 | $326.1 |
| Operating margin | 17.2% | 18.1% | 11.5% | 10.3% |
| Net earnings | $165.0 | $166.8 | $287.1 | $232.8 |
| Diluted EPS | $1.40 | $1.43 | $2.44 | $1.99 |
Financial position, cash flow and liquidity
- Quarterly revenue increased 11%; operating income rose 6%, while net earnings declined 1% and diluted EPS declined 2%. The nine-month comparison showed revenue up 9%, operating income up 22%, net earnings up 23%, and diluted EPS up 23%.
- Quarterly revenue growth was led by recurring fees (+8%), event-driven fees (+89%), and distribution revenue (+9%). For the nine-month period, these grew 8%, 49%, and 8%, respectively. The filing attributes event-driven growth mainly to higher mutual fund proxy and other communications activity.
- For the nine months, operating cash flow was $189.5, versus $155.6; free cash flow, a company-defined non-GAAP measure, was $136.3, versus $82.2. Capital expenditures and software purchases totaled $71.2; asset-sale proceeds were $18.0.
- Cash and equivalents were $355.8 at March 31, 2021, down from $476.6 at June 30, 2020. Total debt was $1,758.8, compared with $1,787.5 at June 30, 2020. The company had $991.2 of unused capacity under its existing revolving facility and reported compliance with debt covenants.
- Current assets were $1,378.6 and current liabilities $1,002.6. The $2.55 billion term-loan commitments arranged for the pending Itiviti acquisition had not been drawn at quarter-end; the company expected to borrow them in fiscal Q4 before closing.
- Dividends paid in the nine-month period were $195.1. Management said cash from operations, existing cash, and borrowing capacity should meet operating and expected cash needs for at least the next 12 months and thereafter for the foreseeable future.
Material changes and management commentary
- ICS revenue increased 13% in the quarter and 10% year to date; segment pre-tax earnings rose 38% and 54%, respectively. GTO revenue rose 3% and 6%, while quarterly pre-tax earnings fell 8%; nine-month segment pre-tax earnings increased 11%.
- Quarterly GAAP operating margin fell 0.9 percentage point, with higher distribution and proxy fulfillment costs, performance-based compensation, and acquisition-related expenses. GTO quarterly margin also declined, reflecting client-conversion costs and growth spending.
- Quarterly other non-operating expense was $10.6, primarily reflecting a loss on a foreign-exchange instrument related to the proposed Itiviti acquisition. The quarter’s effective tax rate rose to 23.9% from 20.7%, which the company attributed to a smaller relative benefit from discrete tax items.
- For the nine months, adjusted operating income was $552.7 and adjusted diluted EPS was $3.47, compared with $459.6 and $2.88. These are non-GAAP measures that exclude specified items; the company’s reconciliations include acquisition costs, real-estate and COVID-related expenses, amortization, and other adjustments.
- Management reported no material COVID-19 impact on consolidated revenue or pre-tax income to date and said facilities remained operational. It cautioned that future effects remain uncertain, including possible effects on clients, demand, operations, and results.
Outlook, acquisition, risks and contingencies
- Broadridge signed an agreement in March 2021 to acquire Itiviti for approximately $2.5 billion in cash, subject to customary adjustments, closing conditions, and regulatory approval. Closing was expected in fiscal Q4 2021; the acquired business would be included in GTO.
- The acquisition is to be funded by $2.55 billion of committed term loans, with expected additional financing decisions and foreign-exchange and interest-rate hedges. The company recorded a $9.6 liability on its euro forward and a $7.8 asset on its treasury lock at March 31, 2021.
- The filing identifies risks that the transaction may not close as planned or at all, and that expected benefits, synergies, cost savings, and integration may not be achieved. Transaction costs, disruption, employee retention, and unknown liabilities are also cited.
- Management said event-driven activity, particularly mutual fund proxy work, can be volatile and difficult to forecast. A proposed SEC mutual-fund disclosure framework could affect services and results if adopted and implemented.
- Fixed minimum commitments to IBM under three technology-services agreements totaled $457.3 through 2027, 2030, and 2029. The company also disclosed a $19.7 investment exposure to an unconsolidated investee, up to $14.0 of additional conditional funding, and a separate $2.4 funding commitment.
- Routine claims and litigation were not expected by management to have a material effect. A new $1.5 billion revolving facility was entered into in April 2021, after quarter-end, replacing the facility then in place.
Most important facts for investors to verify
- Confirm the reporting period: this is the quarter ended March 31, 2021, not a 2020 quarter.
- Track whether the Itiviti acquisition closed, its final purchase price and financing, and the resulting leverage, integration costs, and realized benefits.
- Assess the persistence of recurring-fee growth versus more volatile event-driven activity and seasonal distribution volumes.
- Review the drivers of margin movement, including acquisition and growth spending, client-conversion expenses, and non-GAAP exclusions.
- Monitor cash generation, debt levels, revolving-credit availability, covenant compliance, and the company’s substantial multiyear IBM commitments.
- Evaluate the effects of foreign-exchange and interest-rate hedges, COVID-19 uncertainty, and any changes to the proposed mutual-fund disclosure rules.