Broadridge Financial Solutions, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2013; comparisons are with the corresponding 2012 periods. Broadridge provides investor communications, securities processing, and related business-process services to the financial services industry.
Financial performance
| Metric | Three months ended Dec. 31, 2013 | Year-over-year change | Six months ended Dec. 31, 2013 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $520.6 million | +6% | $1,065.8 million | +8% |
| Earnings before income taxes | $42.7 million | +73% | $112.0 million | +110% |
| Pre-tax margin | 8.2% | 5.0% prior year | 10.5% | 5.4% prior year |
| Net earnings | $27.6 million | +75% | $72.0 million | +111% |
| Diluted EPS | $0.22 | $0.13 prior year | $0.58 | $0.27 prior year |
- Recurring fee revenue growth and internal growth supported results. For the six-month period, event-driven revenue rose 15%, partly reflecting higher mutual fund proxy activity; distribution revenue increased 4%.
- Investor Communication Solutions revenue increased 6% for the quarter and 8% for six months. Segment pre-tax earnings were $20.7 million and $61.6 million, respectively.
- Securities Processing Solutions revenue increased 6% for the quarter and 8% for six months. Segment pre-tax earnings rose 73% to $34.6 million and 126% to $66.3 million; management attributed improvement to higher revenue and productivity initiatives.
- Management cited operating leverage and productivity improvements. Six-month effective tax rate was 35.7%, down from 36.0%, primarily due to geographic income mix and lower tax rates in certain non-U.S. jurisdictions.
Cash flow, balance sheet, and capital
- For the six months, operating cash flow was $90.9 million versus $73.5 million. Free cash flow, defined by the company as operating cash flow less capital expenditures and software purchases, was $60.1 million versus $54.5 million.
- Capital expenditures were $23.7 million; purchases of intangibles were $7.1 million; acquisition spending was $37.7 million, principally for Bonaire. Cash and cash equivalents declined to $240.3 million from $266.0 million at June 30, 2013.
- At December 31, 2013, working capital was $343.3 million, total assets $1.939 billion, total liabilities $1.082 billion, and stockholders’ equity $857.5 million.
- Long-term debt was $524.1 million, including $124.6 million of 6.125% senior notes due 2017 and $399.5 million of 3.95% notes due 2020. The company repaid its remaining $400 million term loan in September 2013 and issued $400 million of 2020 notes. Its $500 million revolving facility was undrawn; management reported covenant compliance.
- Cash dividends paid were $46.5 million in the six-month period. The company repurchased $13.4 million of treasury stock; 145,000 shares were bought in the December quarter at an average $38.82 per share.
Material changes, outlook, and risks
- Bonaire, a provider of billing and revenue/expense management software for asset managers, was acquired in July 2013 for $37.7 million net of cash acquired. The acquisition added $29.2 million of goodwill; its operating impact was described as not material to the financial statements.
- The SEC approved NYSE proxy distribution fee changes effective for shareholder meetings with record dates on or after January 1, 2014. Broadridge expected the net financial effect to be neutral to slightly positive.
- No quantified full-year earnings or revenue guidance is provided in the filing. Management said cash, operating cash flows, and available borrowing capacity should cover anticipated operating needs, capital expenditures, acquisitions, dividends, and repurchases.
- Results are seasonal: proxy and annual-report processing generally peaks in the fiscal fourth quarter. Mutual fund proxy activity is volatile and difficult to forecast; the filing cautions that first-half performance may not indicate full-year results.
- Key risks include client concentration and retention, market activity, regulatory changes, cybersecurity and protection of customer information, technology or service interruptions, reliance on IBM-provided infrastructure, competition, and acquisition execution. Remaining commitments under the IBM IT services agreement were $469.8 million through fiscal 2022.
- The company reported ordinary-course claims and litigation that it did not expect to have a material effect. Clearinghouse guarantees are not quantifiable and could exceed posted collateral, though the company considered payment remote. No derivatives were outstanding at period-end.
- Adjusted net earnings and adjusted EPS are non-GAAP measures excluding specified acquisition-related costs and, for the prior-year comparison, restructuring charges. Fiscal 2014-to-date restructuring and reorganization costs of $2.4 million were treated as normal business costs.
Most important facts to verify
- Whether strong earnings growth and margin improvement persist beyond the seasonally influenced reporting periods.
- How much revenue growth reflects recurring business and net new business versus volatile event-driven proxy activity.
- The cash-flow effect of working-capital timing, acquisition spending, and rising capital expenditures.
- Debt, refinancing, and liquidity capacity, including the long-term IBM commitment and cash held by foreign or regulated subsidiaries.
- The realized impact of the NYSE proxy fee changes and the integration and performance of Bonaire.