Broadridge Financial Solutions, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2018. This is the company’s fiscal 2019 second quarter. Amounts are in U.S. dollars; financial statements are unaudited.
Business context
Broadridge provides investor communications, securities processing, and related technology and data services to financial institutions and corporate issuers. Its reportable segments are Investor Communication Solutions (ICS) and Global Technology and Operations (GTO).
Financial performance
| Metric | Three months ended Dec. 31, 2018 | Six months ended Dec. 31, 2018 |
|---|---|---|
| Revenue | $953.4 million, down 6% | $1,926.2 million, down 1% |
| Operating income / margin | $78.2 million / 8.2% | $178.3 million / 9.3% |
| Net earnings | $49.9 million, down 20% | $126.6 million, up 13% |
| Diluted EPS | $0.42, down from $0.52 | $1.06, up from $0.93 |
| Operating cash flow | Not presented separately for the quarter | $82.1 million, versus $141.8 million |
| Free cash flow (non-GAAP) | Not presented separately for the quarter | $51.8 million, versus $89.3 million |
For the six-month period, lower operating income was more than offset in net earnings by a lower tax provision: the effective tax rate was 17.6%, versus 37.0% a year earlier. The prior-year period included a one-time Tax Act-related net tax expense of approximately $16.1 million. The current-period effective rate also reflects stock-compensation tax benefits.
Quarterly revenue declined mainly because ICS event-driven fees fell $49.2 million and distribution revenue fell $47.6 million, partly offset by a $41.4 million increase in recurring fees. For six months, recurring fees rose $68.7 million, while event-driven and distribution revenue declined $31.5 million and $40.4 million, respectively. Foreign exchange reduced revenue by $4.0 million for the quarter and $8.1 million for six months.
Segments and material changes
- ICS: Revenue was $738.1 million for the quarter, down 8%, and $1,503.9 million for six months, down 2%. Lower mutual fund proxy and equity proxy contest activity, and lower distribution revenue, outweighed recurring-fee growth. Six-month segment pretax earnings fell 19% to $96.0 million.
- GTO: Revenue increased 4% to $236.6 million for the quarter and 5% to $464.3 million for six months, supported by new business and higher trade levels. Pretax earnings declined 7% for the quarter and 2% for six months, reflecting product development and client conversion costs.
- Management reported six-month closed sales of $124.3 million, up 102% year over year. This is a non-GAAP operating measure, net of a 4% allowance, and larger sales may take 12–24 months or longer to convert to revenue.
Comparability is significantly affected by the company’s July 1, 2018 adoption of the new revenue standard. Prior-year statements were not restated. For the current quarter, adoption reduced reported revenue by $82.2 million, operating income by $67.7 million, and net earnings by $51.1 million compared with amounts calculated without the new standard. For six months, the respective reductions were $118.9 million, $108.1 million, and $81.6 million. Adoption also increased opening retained earnings by $101.3 million. Changes include capitalizing certain commissions and client setup costs and changing the timing of proxy, termination-fee, and some software-license revenue recognition.
Financial position, liquidity, and capital allocation
- At December 31, cash and equivalents were $249.8 million, down from $263.9 million at June 30. Net working capital was $368.5 million, versus $213.8 million.
- Debt principal was $1.2 billion (carrying value $1,194.1 million); $300 million was drawn on the $1.0 billion revolving facility, leaving $700 million available. The company reported compliance with debt covenants.
- Six-month operating cash flow declined $59.7 million year over year, which management attributed primarily to client implementation and contract-payment cash outflows and working-capital use. Capital expenditures and software investment totaled $30.3 million.
- Financing included $120.3 million of treasury-stock purchases and $99.0 million of dividends paid. The quarterly dividend declared was $0.485 per share, up from $0.365.
- Management said cash, operating cash generation, and borrowing capacity are expected to cover anticipated needs, including operations, capital spending, dividends, and debt service. It stated that domestic resources should be sufficient for at least the next 12 months and thereafter for the foreseeable future.
Outlook, risks, and other notable items
The filing provides no quantitative earnings or revenue guidance. Management cautioned that proxy processing is seasonal, event-driven activity is difficult to forecast, and mutual fund proxy revenue can be volatile. The company expects the majority of equity proxy revenue to be recognized in fiscal third and fourth quarters under the new revenue standard.
Key disclosed risks include client retention and concentration, cybersecurity incidents, regulatory or market changes, securities-market activity, service-provider or systems failures, technological change, competition, and attracting and retaining personnel. Management reported no material change to the risks in its latest Form 10-K. It believes pending litigation will not materially affect the company. Commitments under two IBM data-center services agreements totaled $345.4 million through fiscal 2024. No derivative instruments were outstanding at December 31, 2018.
Important facts for investors to verify
- Separate underlying growth from the substantial revenue-standard timing effects; prior-year results were not restated.
- Track recovery or further weakness in ICS event-driven proxy activity and distribution volumes, alongside recurring-fee and closed-sales conversion.
- Assess whether operating cash flow and free cash flow rebound after implementation-related and working-capital cash uses.
- Monitor debt, repurchases, dividends, and available revolver capacity against liquidity needs and upcoming maturities.
- Evaluate earnings against the unusually favorable year-over-year tax comparison, including the prior-year Tax Act charge and current stock-compensation tax benefits.