Broadridge Financial Solutions, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended March 31, 2020 (the third quarter of fiscal 2020), not 2019 Q3. Unless stated otherwise, figures are in U.S. dollars; financial statement amounts are in millions except per-share data.
Business context and reporting period
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). The filing compares the three and nine months ended March 31, 2020 with the corresponding 2019 periods; balance-sheet comparisons are to June 30, 2019.
Financial performance and liquidity
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue | $1,249.9; up 2% from $1,224.8 | $3,167.1; up 1% from $3,151.0 |
| Operating income / margin | $226.3 / 18.1%, versus $233.6 / 19.1% | $326.1 / 10.3%, versus $411.9 / 13.1% |
| Net earnings | $166.8, down 3% from $172.2 | $232.8, down 22% from $298.8 |
| Diluted EPS | $1.43, versus $1.45 | $1.99, versus $2.51 |
For the quarter, recurring fee revenue grew 9%, led largely by acquisitions, while event-driven fees fell 43%. For the nine months, recurring fees rose 8%, but event-driven fees declined 43% and distribution revenue declined 4%. The filing attributes lower event-driven revenue mainly to reduced mutual-fund proxy activity and equity proxy contests. Segment results also diverged: Q3 ICS revenue fell 3% and pretax earnings fell 17%; GTO revenue rose 23% and pretax earnings rose 26%.
For the nine months, operating cash flow was $155.6, down from $217.9. Capital expenditures and software purchases totaled $73.5, leaving company-defined free cash flow of $82.2, versus $171.6. Investing cash outflow was $427.9, including $339.1 for acquisitions, net of cash acquired. Financing cash flow was $401.6, including debt proceeds of $1,575.3, repayments of $960.6, dividends of $179.2, and treasury-stock purchases of $50.5. Cash and cash equivalents were $402.1 at March 31, 2020, compared with $273.2 at June 30, 2019.
Total debt carrying value was $2,079.7, up from $1,470.4; cash less debt was approximately $1,677.6 net debt. A $400.0 senior-note maturity was classified as current and due in September 2020. The company had $1,057.5 of unused revolving-credit capacity and reported compliance with debt covenants. Net working capital was $106.0, down from $239.8. Management said cash, operating cash flow, and available borrowing capacity were expected to fund operating and planned cash needs for the foreseeable future.
Material changes, outlook, risks, and unusual items
- Acquisitions contributed to recurring-fee growth and higher expenses. Four fiscal 2020 acquisitions had aggregate purchase consideration of $296.3; acquisition-related amortization and costs also increased.
- A $32.1 non-cash pretax charge was recorded for hardware being transferred to IBM under the private-cloud arrangement. The company reported $18.0 of related hardware assets held for sale at March 31. The charge was included in cost of revenues and excluded from management’s adjusted non-GAAP measures.
- Q3 adjusted diluted EPS was $1.67 versus $1.59; nine-month adjusted diluted EPS was $2.88 versus $2.94. These are non-GAAP measures and exclude specified acquisition-related and IBM private-cloud charges, among other adjustments.
- Broadridge reported no material consolidated revenue or pretax-income impact from COVID-19 to date. Higher trading volumes supported GTO, offset by proxy communications shifted into Q4. Management could not predict the pandemic’s future effects; risks include client demand, service continuity, remote-work cybersecurity, and vendor disruption.
- The company noted that proxy activity is seasonal, with historically higher revenue, operating income, earnings, and operating cash flow in fiscal Q4. COVID-related safety measures and regulatory filing extensions shifted some proxy communications into that quarter. No numerical forward guidance is provided in the supplied filing text.
- IBM agreements carry substantial fixed minimum commitments: $251.7 through fiscal 2027 under the amended IT services agreement, $242.8 through March 2030 under the private-cloud agreement, and $25.5 through fiscal 2029 under the amended EU agreement. The filing describes ordinary-course litigation and claims but does not expect a material financial impact.
Important facts for investors to verify
- Confirm the reporting-period label: the filing covers Q3 fiscal 2020, ended March 31, 2020.
- Review the expected repayment or refinancing plan for the $400.0 senior notes due September 2020 and the company’s leverage and covenant headroom.
- Assess whether Q4 proxy activity recovered as expected and how event-driven revenue, COVID-19 effects, and market trading volumes developed after quarter-end.
- Reconcile GAAP earnings and free cash flow with the company’s non-GAAP adjustments, especially the $32.1 IBM-related charge and acquisition expenses.
- Evaluate the returns and integration progress of recent acquisitions alongside the increase in debt and long-term IBM commitments.