Business context and reporting period
Broadridge provides investor communications, securities processing and related outsourcing services to the financial services industry. This Form 10-Q covers the fiscal third quarter and first nine months ended March 31, 2015, compared with the same periods in 2014. The request metadata’s “2014 Q3” does not match the filing’s stated reporting period.
Reportable segments are Investor Communication Solutions (ICS) and Global Technology and Operations (GTO), formerly Securities Processing Solutions. The company acquired Direxxis in March 2015 and TwoFour Systems in December 2014; a $61.0 million acquisition of M&T Bank’s Wilmington Trust trade processing business closed April 10, 2015.
Financial performance and position
| Metric | Three months ended March 31, 2015 | Nine months ended March 31, 2015 | Change vs. prior year |
|---|---|---|---|
| Revenue | $634.2 million | $1,764.6 million | +5%; +6% |
| Earnings before income taxes | $81.9 million | $183.5 million | +7%; -3% |
| Pre-tax margin | 12.9% | 10.4% | +0.2; -0.9 percentage points |
| Net earnings | $54.0 million | $121.2 million | +6%; -1% |
| Diluted EPS | $0.43 | $0.97 | +5%; -2% |
| Operating cash flow | Not presented quarterly | $156.6 million | Down from $187.4 million |
| Free cash flow (company-defined, non-GAAP) | Not presented quarterly | $126.0 million | Down from $143.7 million |
For the quarter, gross margin (revenue less cost of revenues, divided by revenue) was approximately 28.6%, versus 29.5% a year earlier; for nine months it was approximately 27.8%, versus 27.6%. Dividends declared were $0.27 per share for the quarter and $0.81 for nine months, compared with $0.21 and $0.63.
At March 31, 2015, cash and equivalents were $310.1 million, current assets $932.0 million, current liabilities $530.7 million, working capital $401.3 million, total assets $2,281.2 million and stockholders’ equity $898.7 million. Long-term debt was $629.3 million, including $105.0 million drawn on the $750 million revolving facility, leaving $645.0 million of available capacity. Debt was $524.1 million at June 30, 2014. Management reported covenant compliance and expected available cash, operating cash flows and borrowing capacity to meet anticipated needs.
Material changes and management commentary
- Quarterly revenue growth reflected higher recurring fees, event-driven fees and distribution revenue. Foreign exchange reduced revenue by $8.0 million for the quarter and $13.7 million for nine months.
- For nine months, ICS revenue rose 9% to $1,264.4 million and pre-tax earnings rose 15% to $135.4 million. GTO revenue increased 1% to $514.9 million, while pre-tax earnings fell 11% to $91.7 million, with margin pressure attributed to compensation, growth and sales-expansion costs, and TwoFour acquisition costs.
- Nine-month pre-tax earnings and net earnings declined despite revenue growth, primarily as SG&A rose 12%, including higher sales and marketing, commissions, acquisition costs and corporate expenses. Other expenses increased, partly from $5.1 million of equity-method investment losses and higher interest expense.
- Operating cash flow declined $30.8 million, mainly from working-capital timing, including receivables collections and vendor payments; the company cited a $26.1 million Canadian tax refund as a partial offset. Investing cash outflow was $101.0 million, including $64.9 million for acquisitions. Financing included $156.0 million of treasury-stock purchases and $90.1 million of dividends paid.
- Management noted substantial seasonality: proxy and annual-report processing typically makes the fourth fiscal quarter the strongest for revenue, operating income, earnings and operating cash flow. Event-driven proxy activity can be volatile, and interim results are not necessarily indicative of full-year results.
Outlook, risks and unusual items
No quantified earnings or revenue guidance is provided in the supplied filing text. Management expects cash resources and available credit to cover operating needs, capital expenditures, acquisitions, dividends and repurchases. It also states that foreign-held funds are considered permanently reinvested and that repatriation for U.S. use would entail U.S. tax.
Key risks include client retention and concentration, securities-market activity, changing regulation, cybersecurity or system failures, reliance on outsourced data-center services, technology and competitive pressures, and integration of acquisitions. The company reported $551.7 million of remaining commitments under its principal IBM IT services agreement, extended through June 2024, and $41.4 million under its European IBM services agreement. It said ordinary-course claims and litigation were not expected to have a material effect. Increased regulatory scrutiny of securities-industry outsourcing could result in more restrictive rules.
Unusual or notable items include acquisition amortization and other costs excluded from company-defined adjusted earnings; nine-month non-GAAP adjusted diluted EPS was $1.09 versus $1.08, while GAAP diluted EPS was $0.97 versus $0.99. Currency translation reduced nine-month comprehensive income by $32.6 million. The company reported no derivatives outstanding and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether recurring revenue and the strong ICS performance can offset GTO’s declining segment earnings and margin.
- How working-capital timing, seasonality and event-driven proxy volumes affect full-year cash generation and earnings.
- Acquisition integration, purchase-price allocation and returns from Direxxis, TwoFour and the April 2015 M&T/Wilmington Trust transaction.
- Debt levels, interest costs, revolving-facility availability, and the company’s substantial long-term IBM service commitments.
- The distinction between GAAP results and adjusted earnings/free cash flow, including acquisition-related exclusions and currency effects.