Broadridge Financial Solutions, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2019 (fiscal 2019 third quarter). The filing was signed May 7, 2019. The supplied request metadata says “2018 Q3,” but the filing itself covers 2019 Q3.
Business context
Broadridge provides investor communications, securities processing, and related technology and data services to financial institutions, asset managers, and corporate issuers. Its reportable segments are Investor Communication Solutions (ICS) and Global Technology and Operations (GTO).
Financial performance
| Metric | Three months ended March 31, 2019 | Nine months ended March 31, 2019 |
|---|---|---|
| Revenue | $1,224.8 million; up 14% | $3,151.0 million; up 5% |
| Operating income / margin | $233.6 million / 19.1% | $411.9 million / 13.1% |
| Net earnings | $172.2 million; up 58% | $298.8 million; up 35% |
| Diluted EPS | $1.45, versus $0.90 | $2.51, versus $1.84 |
| Operating cash flow | Not presented for the quarter | $217.9 million, versus $274.8 million |
| Free cash flow (non-GAAP) | Not presented for the quarter | $171.6 million, versus $204.2 million |
For the nine-month period, operating cash flow fell by $56.8 million, which management attributed primarily to increased cash used for client implementations and related contract payments. Free cash flow is defined by the company as operating cash flow less capital expenditures and software purchases/capitalized internal-use software.
At March 31, 2019, cash and cash equivalents were $292.1 million, current assets were $1,195.4 million, and current liabilities were $705.2 million. Net working capital was $490.2 million, compared with $213.8 million at June 30, 2018. Long-term debt was $1,174.4 million carrying value ($1,180.0 million principal); the revolving facility had $1,220.0 million of unused capacity. The company reported compliance with its debt covenants.
Changes versus the prior comparable periods
- Reported quarterly revenue rose 14%, with ICS revenue up 19% and GTO up 1%. For the nine months, ICS revenue rose 6% while GTO rose 3%; lower event-driven and distribution revenue partly offset recurring-fee growth.
- ICS growth was supported by recurring fees, net new business, and acquisitions. GTO earnings before income taxes declined 8% for the quarter and 4% for the nine months, reflecting spending on new business, product development, and client conversions.
- Reported comparisons were materially affected by adoption of ASC 606 on July 1, 2018. The company changed revenue timing and presentation, including recognizing proxy revenue primarily when materials are distributed and capitalizing certain contract acquisition and implementation costs. Prior periods were not restated. The adoption increased opening retained earnings by $101.3 million.
- On the company’s stated comparable accounting basis, quarterly recurring fee revenue increased 4%, event-driven fees were approximately flat, and distribution revenue declined 1%. For the nine months, recurring fee revenue increased 5%, while event-driven and distribution revenue declined 13% and 4%, respectively.
- The nine-month effective tax rate declined to 20.8% from 27.0%, primarily reflecting the lower U.S. federal tax rate under the Tax Act and prior-year tax items. The quarterly rate increased to 23.0% from 12.9%, largely because prior-year excess tax benefits from stock-based compensation were substantially larger.
ASC 606 also has a substantial effect on reported quarterly earnings: the filing’s estimate excluding the standard’s effects is revenue of $1,055.0 million, operating income of $120.3 million, net earnings of $86.6 million, and diluted EPS of $0.73. These are company-provided illustrative figures, not restated GAAP results.
Outlook, risks, and notable items
- Management said cash from operations, existing cash, and borrowing capacity are expected to cover working capital, capital spending, acquisitions, dividends, and repurchases; it expects domestic and foreign funding needs to be met for at least the next 12 months. No specific earnings or revenue guidance was provided in the supplied filing text.
- Management cautioned that proxy processing is seasonal, with activity and results historically higher in the fourth fiscal quarter. Event-driven activity, particularly mutual fund proxy work, can be volatile and difficult to forecast.
- Risks highlighted include client retention and concentration, cybersecurity incidents, regulatory changes, securities-market activity, service-provider or system failures, technology and competitive pressures, and acquisition execution. The company reported no material change to the risk factors in its 2018 Form 10-K.
- The company reported ordinary-course litigation and claims, but did not expect their resolution to have a material financial effect. It had no derivative financial instruments outstanding at March 31, 2019.
- After quarter-end, Broadridge agreed to acquire retirement-plan custody and trust assets from TD Ameritrade for approximately $61.5 million, subject to closing conditions and regulatory approvals. It also acquired Rockall Technologies for approximately $37.0 million net of cash acquired, plus contingent consideration.
- The company entered into a new $1.5 billion revolving credit facility in March 2019, replacing its prior $1.0 billion facility. It had $280.0 million drawn at quarter-end.
Important facts for investors to verify
- Assess operating trends using comparable accounting-basis measures as well as reported figures, given the material ASC 606 transition effects and lack of prior-period restatement.
- Track operating cash flow and free cash flow, especially cash consumed by client implementations, alongside reported earnings growth.
- Monitor ICS event-driven activity and GTO investment and conversion costs, which affected segment growth and margins.
- Review debt maturities, revolving-facility availability and covenants, and the funding and integration implications of the announced acquisitions.
- Consider the effects of fourth-quarter seasonality and the risks identified by management when evaluating near-term performance.