Broadridge Financial Solutions, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended September 30, 2020; comparisons are with the three months ended September 30, 2019, unless stated otherwise. Amounts are in millions except per-share data.
Business context
Broadridge provides investor communications, securities processing, data and analytics, and customer communications services. Its reportable segments are Investor Communication Solutions (ICS) and Global Technology and Operations (GTO). Results are seasonal: proxy and annual-report processing generally makes revenue, earnings, and operating cash flows higher in the third and fourth fiscal quarters.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Revenue | $1,017.4 | $948.6 | +7% |
| Operating income / margin | $78.6 / 7.7% | $73.1 / 7.7% | +8% / flat |
| Net earnings | $65.8 | $55.9 | +18% |
| Diluted EPS | $0.56 | $0.48 | +17% |
| Adjusted operating income / margin | $150.6 / 14.8% | $103.7 / 10.9% | Non-GAAP |
| Adjusted net earnings / diluted EPS | $114.5 / $0.98 | $80.0 / $0.68 | Non-GAAP |
Revenue growth included recurring fee revenue of $671.2 (+8%), event-driven fees of $45.5 (+13%), and distribution revenue of $332.2 (+6%); foreign currency reduced reported revenue by $31.5, versus $28.0 in the prior year. ICS revenue grew 7% to $752.9; GTO revenue grew 8% to $296.0. Segment pre-tax earnings rose to $52.8 from $23.0 for ICS and to $75.3 from $56.4 for GTO. The effective tax rate fell to 10.6% from 12.4%, primarily due to higher excess tax benefits from stock-based compensation. Other non-operating income was $9.5, including higher investment gains.
Cash flow, balance sheet and debt
- Operating cash flow was negative $44.2, compared with negative $86.4. Free cash flow, a company-defined non-GAAP measure, was negative $50.2 versus negative $106.7. Management attributed the improvement mainly to higher earnings and lower working-capital cash use; client-platform implementation and development spending partly offset it.
- Investing cash flow was negative $8.7 versus negative $86.3, reflecting no current-quarter acquisitions and $18.0 of proceeds from an IBM hardware sale. Financing cash flow was negative $72.7, including $62.2 of dividends paid.
- Cash and cash equivalents were $356.6 at September 30, down from $476.6 at June 30, 2020. Total assets were $4,749.7 and stockholders’ equity was $1,413.8.
- Total debt carrying value was $1,776.1 ($1,787.9 principal), compared with $1,787.5 at June 30. Broadridge repaid $400.0 of senior notes at maturity and had $537.9 outstanding on its revolving credit facility, with $962.1 of unused capacity. The company reported compliance with debt covenants.
- Management said available cash, operating cash flow and borrowing capacity are expected to cover operating and investment needs, dividends, debt service and material capital expenditures for at least 12 months and the foreseeable future.
Material changes, outlook and risks
- Growth reflected new-client onboarding and acquired businesses; management reported neutral company-wide internal recurring-fee growth. Equity proxy record growth was 16% (7% prior year), mutual-fund interim record growth was 6% (1%), and equity internal trade growth was 20% versus negative 7%. Fixed-income internal trade growth was negative 11% versus 19%.
- Closed sales declined 13% to $32.9 from $37.6. Management noted that larger sales may take 12–24 months or longer to convert to revenue.
- Operating results included $31.9 of real-estate realignment and COVID-related expenses and a $6.0 software charge; adjusted earnings also exclude $32.3 of acquired-intangible and purchased-IP amortization, $1.7 of acquisition and integration costs, and an $8.7 investment gain. These exclusions materially affect the difference between GAAP and adjusted results.
- Management reported no material COVID-19 impact on consolidated revenue or pre-tax income to date in FY2021; facilities remained operational. It cautioned that future effects remain uncertain and could reduce client demand or disrupt operations. The SEC’s proposed changes to mutual-fund and ETF disclosures could also affect services and results if adopted and implemented.
- Broadridge has substantial IBM service commitments: $235.7 under its IT services agreement, $226.5 under its private-cloud agreement, and $29.0 under its amended EU agreement, as of September 30, 2020. The company said ordinary-course claims and litigation are not expected to have a material effect. No material changes to previously disclosed risk factors were reported.
- No specific earnings or revenue guidance was provided in the supplied filing text. The company noted mutual-fund proxy activity can be volatile and that quarterly comparisons are affected by seasonality.
Important facts for investors to verify
- Review the composition and sustainability of reported earnings growth, especially the $31.9 of real-estate and COVID-related charges, software charge, and investment gain.
- Track cash conversion: operating cash flow and free cash flow remained negative despite improvement from the prior-year quarter.
- Monitor revolving-credit-facility borrowings, available capacity, covenants, and the maturity profile following repayment of the $400.0 notes.
- Assess whether closed sales convert to recurring revenue and whether recent record and trading-volume growth persists.
- Evaluate potential effects of COVID-19, market activity, client concentration, cybersecurity and operational dependence on service providers, and proposed fund-disclosure changes.