Broadridge Financial Solutions, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2019, the three months ended September 30, 2018 (not calendar-year Q1). Broadridge provides investor communications, securities processing, and related technology services through Investor Communication Solutions (ICS) and Global Technology and Operations (GTO).
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Revenue | $972.8 million | $924.8 million | +5% |
| Operating income / margin | $100.1 million / 10.3% | $85.2 million / 9.2% | Income +17% |
| Net earnings | $76.7 million | $49.9 million | +54% |
| Diluted EPS | $0.64 | $0.42 | +52% |
| Operating cash flow | $(95.5) million | $(93.3) million | More cash used |
| Free cash flow (non-GAAP) | $(111.0) million | $(129.3) million | Improved by $18.2 million |
Revenue growth included higher recurring fees (+5%), event-driven fees (+30%) and distribution revenue (+2%). ICS revenue rose 5% to $765.8 million; GTO revenue rose 6% to $227.7 million. ICS pretax earnings increased 29% to $59.0 million, while GTO pretax earnings increased 3% to $46.4 million. GTO pretax margin declined to 20.4% from 20.9%.
Operating expenses increased 4% to $872.7 million. Selling, general and administrative expense rose 18%, primarily due to labor and performance-based compensation and acquisitions. The effective tax rate fell to 14.1% from 32.8%, reflecting the lower U.S. federal tax rate under the Tax Act and $7.0 million of excess tax benefits from stock-based compensation.
Cash, debt and liquidity
Cash and equivalents were $204.7 million at September 30, 2018, down from $263.9 million at June 30. Net working capital was $394.5 million, compared with $213.8 million. Operating cash use reflected working-capital outflows, including a $199.3 million decrease in payables and accrued expenses. Investing cash use was $16.3 million; financing provided $54.2 million, including $120.0 million of debt proceeds and $30.0 million of repayments. Dividends paid were $42.5 million.
Debt carrying value was $1,143.7 million, versus $1,053.4 million at June 30; principal debt was $1.15 billion. The company had $750 million of unused capacity on its $1.0 billion revolving facility and reported compliance with debt covenants. Management said operating cash, existing cash and borrowing access should be sufficient for anticipated needs, including dividends and capital expenditures.
Comparability, outlook and risks
- Revenue accounting adoption: Effective July 1, 2018, Broadridge adopted ASC 606 using the modified retrospective method and did not restate prior-year results. The adoption increased reported Q1 revenue by $36.7 million, operating income and pretax earnings by $40.4 million, and net earnings by $30.5 million versus results without the new standard. The company recorded a $101.3 million cumulative increase to opening retained earnings, principally from capitalizing prior-period sales commissions.
- ASC 606 changed the timing of proxy revenue recognition, capitalization of certain contract costs, recognition of software-license revenue, and recognition of termination fees. On the current accounting basis, prior-year event-driven and distribution revenues would have been $43.9 million and $18.5 million higher, respectively. Reported year-over-year comparisons are therefore affected by timing differences.
- Mutual-fund proxy revenue was unusually strong and volatile; management noted it may continue to fluctuate. Proxy processing is seasonal, with historically higher activity in the third and fourth fiscal quarters. Closed sales were $18.5 million, down 19% from $22.9 million.
- No specific earnings or revenue guidance was provided in the supplied filing text. Management cited client retention and new sales, cybersecurity, regulation, market activity, service-provider performance, system outages, technology change, personnel, acquisitions and competition as risks. It reported no material change to the risk factors in the prior annual report.
- IBM data-center service commitments totaled $352.5 million through fiscal 2024. Litigation claims arise in the ordinary course; management did not expect their resolution to materially affect results or financial condition. No derivatives were outstanding at quarter-end.
- Non-GAAP adjusted net earnings were $94.5 million and adjusted diluted EPS was $0.79, excluding specified amortization and acquisition/integration costs. These measures are supplemental and not substitutes for GAAP results.
Important facts for investors to verify
- Assess underlying growth and margins after accounting for ASC 606’s revenue and expense timing effects.
- Track recurring revenue, net new business, event-driven activity and the conversion of closed sales into revenue.
- Evaluate cash generation and working-capital seasonality against the quarter’s negative operating and free cash flow.
- Monitor debt, refinancing and covenant capacity, along with IBM service commitments and dividend obligations.
- Separate the lower tax rate and $7.0 million stock-compensation tax benefit from recurring earnings trends.