Broadridge Financial Solutions, Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter and nine months ended March 31, 2017 (fiscal 2017 third quarter), compared with the corresponding 2016 periods. The request metadata’s “2016 Q3” label does not match the filing period.
Business context
Broadridge provides investor communications, securities processing, and data and technology services to financial institutions, funds, and corporate issuers. Its reportable segments are Investor Communication Solutions (ICS) and Global Technology and Operations (GTO). The July 2016 acquisition of DST’s North American Customer Communications business (NACC) materially expanded ICS.
Financial performance
| Metric | Three months ended March 31, 2017 | Year-over-year | Nine months ended March 31, 2017 | Year-over-year |
|---|---|---|---|---|
| Revenue | $1,008.9 million | +46% | $2,796.8 million | +45% |
| Operating income | $109.7 million | +9% | $234.6 million | +2% |
| Operating margin | 10.9% | 14.6% prior year | 8.4% | 12.0% prior year |
| Net earnings | $75.9 million | +19% | $139.7 million | +2% |
| Diluted EPS | $0.63 | $0.52 prior year | $1.15 | $1.13 prior year |
Quarterly growth included $283.1 million of revenue from acquisitions, primarily NACC. For the nine-month period, acquisitions contributed $833.9 million of the $874.3 million revenue increase. Higher costs, including acquisition-related expenses and acquired-intangible amortization, weighed on operating margins. Interest expense rose 66% in both comparison periods, mainly due to higher borrowings.
- Segments: ICS revenue increased 60% in the quarter and 59% year to date, largely from NACC; ICS pre-tax earnings rose 10% in the quarter but fell 15% year to date. GTO revenue grew 6% and 8%, respectively; pre-tax earnings grew 10% and 29%.
- Cash flow: Nine-month operating cash flow was $162.1 million, versus $161.1 million. Company-defined free cash flow, a non-GAAP measure, was $92.6 million, down from $105.0 million, reflecting higher capital and software spending.
- Liquidity: Cash and cash equivalents were $269.5 million at March 31, 2017, versus $727.7 million at June 30, 2016; net working capital was $232.3 million, down from $596.2 million.
- Debt: Debt carrying value totaled $1,266.6 million, including $250 million drawn on the revolving facility; $750 million remained available under the $1.0 billion facility. A $125 million senior note was due in June 2017. The company reported compliance with debt covenants.
- Shareholder returns: Nine-month dividends paid were $113.6 million; treasury-stock purchases were $212.6 million. The declared dividend was $0.33 per share for the quarter, versus $0.30 a year earlier.
Material changes, outlook, and risks
- Acquisitions and unusual item: Broadridge acquired NACC, M&O Systems, and the remaining 75% of Message Automation Limited (MAL) during fiscal 2017. The MAL transaction generated a $9.3 million non-cash, non-taxable investment gain, which benefited reported non-operating income and reduced the effective tax rate. The company also paid $90 million for Inveshare intellectual property and expects a further $40 million payment upon delivery of blockchain applications.
- Management outlook: No specific earnings or revenue guidance is provided in the filing. Management expects operating cash generation, existing cash, and borrowing capacity to cover working capital, capital expenditures, acquisitions, dividends, and repurchases, and to fund commitments for at least the next 12 months. Management cautions that results are seasonal: proxy and annual-report processing typically peaks in the fourth fiscal quarter. Event-driven activity, including mutual fund proxy work, is difficult to forecast.
- Key risks and commitments: Risks include client retention and concentration, market activity, regulation, cybersecurity, service or system interruptions, reliance on outsourced data-center services, technology changes, competition, and acquisition integration. Remaining IBM data-center commitments were $408.2 million through fiscal 2024, plus $26.8 million under the European agreement. The company said ordinary-course claims and litigation are not expected to have a material impact; a $1.6 million letter of credit was undrawn.
- Accounting and controls: Adoption of the new revenue standard is expected to affect timing of some revenue recognition and capitalization of certain commissions and client setup costs; the company had not selected a transition method. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Separate NACC’s acquisition-driven revenue contribution from organic growth, and monitor integration costs and margin recovery.
- Review the June 2017 $125 million note maturity and subsequent debt repayment or refinancing, along with ongoing revolver utilization and covenant headroom.
- Assess whether operating cash flow converts into free cash flow after capital spending, acquisitions, dividends, and share repurchases.
- Track ICS event-driven revenue volatility and the seasonal fourth-quarter concentration of business activity.
- Monitor the final purchase-price allocations, acquisition performance, and the $40 million contingent payment tied to delivery of Inveshare blockchain applications.
- Evaluate the actual effects of the forthcoming revenue-recognition standard, including timing changes and required systems or process changes.