Broadridge Financial Solutions, Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter and nine months ended March 31, 2014 (fiscal 2014 third quarter), compared with the same periods in 2013. This differs from the request metadata’s “2013 Q3.” Broadridge provides investor communications and securities processing services to the financial services industry.
Financial performance
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue | $606.3 million, up 5% | $1,672.1 million, up 7% |
| Pre-tax earnings | $76.9 million, up 14%; margin 12.7% versus 11.7% | $188.9 million, up 56%; margin 11.3% versus 7.7% |
| Net earnings | $50.8 million, up 17% | $122.8 million, up 58% |
| Diluted EPS | $0.41 versus $0.35 | $0.99 versus $0.62 |
- Revenue drivers: Recurring fees, net new business and internal growth led increases. Nine-month event-driven fees rose to $106.8 million from $97.6 million, including mutual fund proxy activity. Foreign exchange reduced revenue by $4.7 million in the quarter and $8.8 million over nine months.
- Segments: Investor Communication Solutions revenue increased 6% for the quarter and 8% for nine months; pre-tax earnings rose 9% and 24%. Securities Processing Solutions revenue increased 5% and 7%; pre-tax earnings rose 32% and 79%, respectively, with operating leverage and productivity cited as contributors.
- Costs and taxes: Quarterly SG&A rose 21%, partly from selling and marketing, performance compensation and acquisitions. Nine-month other expense increased to $17.9 million from $11.8 million, primarily from higher interest expense. Effective tax rates were 33.9% for the quarter and 35.0% for nine months, down from 35.9% and 36.0%; management cited tax reserve releases and, for the nine-month comparison, foreign income mix and lower foreign tax rates.
- Cash flow: Nine-month operating cash flow was $187.4 million versus $72.3 million. Company-defined free cash flow was $143.7 million versus $36.7 million, after $43.7 million of capital expenditures and software purchases. Investing cash outflow was $140.8 million, including $97.1 million for acquisitions; financing cash outflow was $69.4 million. Cash declined $21.6 million from fiscal year-end to $244.4 million.
- Liquidity and debt: Working capital was $320.5 million; total assets were $2,129.9 million and stockholders’ equity was $898.9 million. Debt was $524.1 million, all fixed-rate senior notes: $124.6 million due 2017 at 6.125% and $399.5 million due 2020 at 3.95%. The $500 million revolver was undrawn, with no covenant non-compliance reported. Management said cash, operating flows and available credit should meet anticipated needs.
Material changes, outlook and risks
- Broadridge acquired Bonaire in July 2013 for $37.6 million and Emerald in February 2014 for $60.0 million, both in Investor Communication Solutions. Acquisition cash outflow was $97.1 million; Emerald’s purchase-price allocation remained subject to finalization.
- In August 2013, the company issued $400 million of 3.95% senior notes due 2020 and repaid the remaining $400 million term loan. Management expects the NYSE proxy fee changes effective January 1, 2014 to have a neutral to slightly positive net financial impact.
- The filing gives no specific full-year earnings or revenue guidance. Management noted seasonality: proxy processing generally makes the fourth fiscal quarter the strongest, so interim results may not predict full-year performance. Mutual fund proxy revenue is particularly volatile; nine-month mutual fund proxy fees were 59% above the prior-year period.
- Long-term IBM service commitments totaled $457.5 million through fiscal 2022; a new IBM UK agreement carries $52.3 million of commitments through fiscal 2024. Management reported no material subsequent events and did not expect pending claims or litigation to materially affect results or financial condition.
- Risks include client concentration and retention, securities-market activity, changing regulation, data security and privacy, service-provider or systems failures, technology change, competition, and acquisition execution. Clearinghouse guarantees are not quantifiable but potential payment was described as remote. No derivatives were outstanding at March 31, 2014.
- Unusual items include tax reserve releases that lowered the effective tax rate and an approximately $0.8 million executive separation payment. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the filing period: it is for the quarter ended March 31, 2014, not 2013.
- Assess the sustainability of earnings growth given the contribution from tax reserve releases, volatile event-driven revenue, and seasonality.
- Review acquisition integration and the final valuation of Emerald’s acquired assets and liabilities.
- Monitor cash conversion and working-capital timing, including the impact of acquisition spending, dividends and share repurchases.
- Evaluate long-term IBM commitments, client concentration, regulatory exposure and information-security risks.