Business context and reporting period
Broadridge Financial Solutions, Inc. provides investor communications, securities processing and business process outsourcing services to the financial services industry. This Form 10-Q covers the quarter and six months ended December 31, 2014 (fiscal 2015 Q2), compared with the corresponding 2013 periods. The report presents two segments: Investor Communication Solutions and Global Technology and Operations (renamed from Securities Processing Solutions).
Financial performance and position
| Metric | Three months ended Dec. 31, 2014 | Six months ended Dec. 31, 2014 | Comparable 2013 change |
|---|---|---|---|
| Revenue | $574.6 million | $1,130.4 million | Up 10% and 6% |
| Earnings before income taxes | $51.6 million; 9.0% margin | $101.6 million; 9.0% margin | Up 21%; down 9% |
| Net earnings | $34.7 million | $67.2 million | Up 26%; down 7% |
| Diluted EPS | $0.28 | $0.54 | Up 27%; down 7% |
| Operating cash flow | Not presented for quarter | $70.8 million | Down from $90.9 million |
| Free cash flow (company-defined, non-GAAP) | Not presented for quarter | $55.0 million | Down from $60.1 million |
For the quarter, revenue growth reflected higher recurring fees, distribution revenue and event-driven fees. For the six-month period, revenue growth did not translate into higher earnings: SG&A rose 21%, contributing to lower pretax earnings and net earnings. The effective tax rate fell to 32.8% for the quarter and 33.9% for six months, partly due to reinstated U.S. federal R&D credits and a lower state rate.
By segment, Investor Communication Solutions revenue rose 16% for the quarter and 10% for six months; pretax earnings increased 73% and 20%, respectively. Global Technology and Operations revenue rose 2% for the quarter and was essentially flat for six months; pretax earnings fell 9% and 14%, respectively.
At December 31, 2014, cash and equivalents were $314.1 million, working capital was $420.7 million, and total assets were $2,099.8 million. Long-term debt was $524.3 million, comprising notes due 2017 and 2020. The company had no revolver borrowings and $750 million of available capacity. Cash declined $33.5 million from June 30, 2014. Six-month dividends paid were $57.6 million; treasury-stock purchases were $25.1 million.
Material changes, outlook and risks
- In December 2014, Broadridge acquired TwoFour Systems for $31.6 million, adding real-time foreign-exchange solutions. The purchase included $24.9 million of goodwill and contingent payments tied to revenue and earnings targets. In January 2015, it agreed to acquire M&T Bank’s Wilmington Trust trade-processing business; closing was expected late in fiscal Q3, subject to customary conditions and regulatory approvals. The company did not expect a material financial impact.
- Management said available cash, operating cash flows and credit capacity should meet anticipated operating, investment and financing needs. No specific earnings or revenue guidance was provided. Management cautioned that interim results may not indicate full-year performance; proxy processing is seasonal, and event-driven activity is difficult to forecast.
- Six-month operating cash flow declined $20.1 million, primarily from working-capital timing, including receivables and vendor payments, partly offset by a $26.1 million Canadian tax refund. Currency movements reduced six-month revenue by $5.7 million and contributed to a $15.9 million foreign-currency translation loss in other comprehensive income.
- Key disclosed risks include dependence on a relatively small number of clients, securities-market activity, event-driven revenue volatility, cybersecurity and service disruptions, reliance on outsourced data-center services, technology changes, competition, acquisitions, and regulatory scrutiny of business-process outsourcing. Litigation is described as ordinary-course, with no expected material effect. The company reported effective disclosure controls and no material change in internal control over financial reporting.
- Contractual commitments include $426.8 million under the main IBM IT services agreement through fiscal 2022 and $41.7 million under the IBM UK agreement through fiscal 2024. A separate equity-method investment had $4.0 million of remaining commitment through June 30, 2015.
Important facts for investors to verify
- Whether quarterly growth in recurring and event-driven revenue persists, given seasonality and the reported 21% decline in mutual-fund proxy fee revenue for the six-month period.
- Whether higher SG&A, acquisition-related costs and growth investments continue to pressure six-month earnings and segment margins.
- Cash-flow conversion and working-capital trends, including the timing-related factors behind lower operating cash flow.
- Integration, contingent consideration and performance of TwoFour Systems, and the closing and expected economics of the pending Wilmington Trust transaction.
- Debt maturities, covenant compliance, liquidity availability and the company’s substantial long-term IBM service commitments.