Broadridge Financial Solutions, Inc. — Q2 FY2018 Form 10-Q
Reporting period: Quarter and six months ended December 31, 2017; comparisons are with the corresponding prior-year periods. Broadridge provides investor communications, securities processing, and related technology services through Investor Communication Solutions (ICS) and Global Technology and Operations (GTO).
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $1,012.8 million; +13% | $1,937.6 million; +8% |
| Operating income / margin | $115.1 million / 11.4%; prior 6.6% | $199.5 million / 10.3%; prior 7.0% |
| Net earnings | $62.1 million; +106% | $112.0 million; +76% |
| Diluted EPS | $0.52; prior $0.25 | $0.93; prior $0.52 |
| Adjusted diluted EPS (non-GAAP) | $0.79; prior $0.39 | $1.32; prior $0.75 |
- Six-month revenue growth reflected event-driven fees up $89.3 million, recurring fees up $57.2 million, and acquisitions. Event-driven growth was chiefly increased mutual fund proxy activity and equity proxy contests. Recurring fees grew 5% overall, supported by net new business, acquisitions, and internal growth.
- ICS six-month revenue increased 7% to $1,528.6 million; pre-tax earnings rose 114% to $118.0 million. GTO revenue increased 11% to $442.9 million; pre-tax earnings rose 19% to $95.7 million.
- Six-month operating cash flow was $141.8 million, versus an outflow of $5.5 million a year earlier. Free cash flow, a non-GAAP measure, was $89.3 million versus negative $37.5 million. The improvement included $73.1 million more cash from advance client payments and a change in classification of stock-compensation tax benefits.
- Cash was $366.5 million at December 31, 2017, versus $271.1 million at June 30, 2017. Working capital was $465.1 million versus $244.6 million. Capital expenditures and software spending totaled $52.5 million for the six months.
- Debt carrying value was $1,222.7 million, up from $1,102.1 million at June 30; principal debt was $1,230.0 million. The company had $670 million of unused capacity on its $1.0 billion revolver and reported compliance with debt covenants.
- Dividends declared were $0.365 per share for the quarter and $0.73 for six months. The company paid $80.4 million in dividends during the six-month period.
Changes, outlook, and notable items
- Quarterly operating performance benefited materially from unusually strong event-driven revenue. Management says mutual fund proxy activity is volatile and difficult to forecast; it was 489% higher for the six months than a year earlier. Proxy processing is seasonal, with the greatest activity typically in the fourth fiscal quarter.
- Closed sales, a non-GAAP operational metric, declined 20% for the six months to $61.6 million; management cautions that larger sales can take 12–24 months or longer to convert to revenue.
- The Tax Cuts and Jobs Act increased the six-month effective tax rate to 37.0% from 34.4% (quarter: 40.0% versus 34.1%). The company recorded provisional tax effects, including $11.4 million of transition tax and $20.8 million of foreign withholding taxes, partly offset by a $16.1 million deferred-tax remeasurement benefit; estimates may change. The federal statutory rate for FY2018 is blended at 28.1%, then 21% beginning July 1, 2018.
- Broadridge acquired Summit Financial Disclosure in October for an aggregate purchase price of $30.6 million, including contingent consideration. It also expected to pay $40 million in February 2018 for delivery of blockchain applications under an earlier intellectual-property transaction.
- No specific earnings or revenue guidance is provided in the filing. Management expects cash, operating cash generation, and borrowing access to fund working capital, investment, dividends, and debt service; it expects domestic and foreign liquidity to be adequate for at least 12 months. Future foreign cash repatriation could involve taxes.
- Long-term commitments include $361.8 million under the primary IBM IT services agreement and $29.0 million under the EU agreement. The company identifies risks including client retention and concentration, cybersecurity, regulation, market activity, technology execution, outsourced data-center service, acquisitions, competition, and key-personnel retention.
- Management did not expect pending adoption of the new revenue standard to have a material annual income-statement impact based on its current estimate: less than 1% of FY2017 revenue and approximately 2% of FY2017 pre-tax earnings; estimated cumulative opening retained-earnings impact is less than $100 million. Revenue timing and capitalization of certain costs will change.
- Legal claims are described as ordinary-course matters; management does not expect their resolution to have a material impact. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether event-driven proxy revenue remains elevated; assess results separately from this volatile activity and consider seasonality.
- Whether closed sales convert to recurring revenue and whether net new business sustains recurring growth.
- The final Tax Act accounting and cash-tax effects, including the provisional foreign earnings taxes.
- Cash-flow quality: the contribution of advance client payments, working-capital movements, and the accounting reclassification of tax benefits.
- Debt, acquisition and blockchain-payment obligations, and the economics of the Summit acquisition.
- Management’s evolving impact estimates and implementation plans for the new revenue-recognition standard.