Broadridge Financial Solutions, Inc. — Form 10-Q Summary
Business context and period. This filing covers the three months ended September 30, 2021, Broadridge’s first quarter of fiscal 2022 (not calendar-year Q1). Broadridge provides financial technology, investor communications and transaction-processing services through Investor Communication Solutions (ICS) and Global Technology and Operations (GTO). Comparisons are with the three months ended September 30, 2020.
Financial performance
| Metric | Q1 FY2022 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $1,192.9 million | $1,017.4 million | +17% |
| Operating income / margin | $103.3 million / 8.7% | $78.6 million / 7.7% | +31% income |
| Net earnings | $67.2 million | $65.8 million | +2% |
| Diluted EPS | $0.57 | $0.56 | +2% |
| Operating cash flow | $(135.4) million | $(44.2) million | More cash used |
| Free cash flow (non-GAAP) | $(151.4) million | $(50.2) million | More cash used |
| Cash and cash equivalents | $316.7 million | $274.5 million at June 30, 2021 | Quarter-end balance |
| Total debt, carrying value | $4,165.9 million | $3,887.6 million at June 30, 2021 | +$278.3 million |
Adjusted operating income was $176.7 million, with a 14.8% adjusted margin, unchanged from the prior-year margin. Adjusted net earnings were $126.3 million and adjusted diluted EPS was $1.07; these are non-GAAP measures and exclude specified items, including acquired-intangible amortization.
Revenue growth included recurring fees of $750.8 million (+16%), event-driven fees of $76.3 million (+69%) and distribution revenue of $366.9 million (+11%). Growth reflected acquisitions, including Itiviti, new business and ICS internal growth, as well as higher mutual fund proxy activity. Equity proxy record growth was 39% versus 16%; mutual fund interim record growth was 9% versus 6%; internal trade growth slowed to 2% from 12%.
Segments and material changes
- ICS: Revenue rose 14% to $853.5 million. Pretax earnings increased 57% to $82.4 million and pretax margin rose to 9.7% from 7.0%, supported by recurring revenue, event-driven activity and distribution revenue.
- GTO: Revenue rose 21% to $340.6 million, largely reflecting acquisitions, including 19 percentage points of growth from Itiviti. Pretax earnings fell to $18.7 million from $69.9 million, and margin declined to 5.5% from 24.9%, primarily due to higher acquired-intangible amortization and costs to implement and support new business.
- Interest expense increased to $22.6 million from $14.4 million, mainly due to higher average debt. Other non-operating results shifted from $9.5 million of income to $2.4 million of expense; the prior-year period included higher investment gains.
- Operating cash outflow worsened mainly because of working-capital use, including lower payables, and increased client-platform implementation and development spending. Financing cash flow was positive $217.0 million, reflecting debt proceeds net of repayments; dividends paid were $66.8 million.
Liquidity, debt and outlook
At September 30, 2021, cash was $316.7 million and debt carrying value was $4.17 billion. The company had $1.11 billion of unused revolving-credit capacity and reported compliance with debt covenants. Management expects operating cash flows, existing cash and borrowing capacity to fund working capital, investment, dividends and debt obligations for at least the next 12 months and the foreseeable future. No specific full-year revenue or earnings guidance is stated in the provided filing text.
Broadridge reported no material consolidated revenue or pretax-income impact from COVID-19 so far in fiscal 2022, while cautioning that future effects remain uncertain. The quarter is seasonally less active for proxy processing; the company typically has higher revenue, operating income, earnings and operating cash flow in its third and fourth fiscal quarters.
Risks, contingencies and unusual items
- Key risks include client retention and concentration, cybersecurity incidents, regulatory changes, securities-market activity, service-provider or systems disruption, technology change, competition, personnel retention, acquisitions and economic conditions. The company reported no material changes to the risks in its FY2021 Form 10-K.
- IBM novated U.S. and European IT services agreements to Kyndryl effective September 1, 2021. Remaining fixed minimum commitments were $189.3 million for the U.S. IT services agreement, $192.3 million for the private-cloud agreement and $29.5 million for the European agreement.
- Management said ordinary-course claims and litigation are not expected to have a material impact. A variable-interest-entity investment had maximum loss exposure of $31.3 million; the company also had a $1.7 million future funding commitment to another investee.
- Prior-year results included a $28.6 million real-estate and facility-exit charge and an investment gain; those items affect period comparisons. Current-quarter acquired-intangible amortization was $68.7 million, up from $32.3 million, principally due to Itiviti.
Most important facts for investors to verify
- How much of recurring revenue growth is organic and sustainable versus acquired, and how Itiviti’s integration and implementation costs develop.
- Whether GTO profitability and margins recover as acquisition-related amortization and new-business implementation costs evolve.
- Drivers and timing of working-capital outflows and the company’s path back to positive operating and free cash flow.
- Debt levels, refinancing needs and covenant headroom, particularly the $1.55 billion term loan maturing in May 2024.
- Potential effects of volatile mutual fund proxy activity, COVID-19, regulatory proposals affecting fund communications, and Kyndryl’s delivery of critical technology services.