Broadridge Financial Solutions, Inc. — Form 10-Q Summary
Business context and reporting period
Broadridge provides investor communications, securities processing, and related technology and operations services. This filing covers the three months ended September 30, 2019, the first quarter of fiscal 2020—not calendar-year 2019 Q1. Comparisons are with the three months ended September 30, 2018, unless otherwise noted. Amounts are in millions except per-share data.
Financial performance
| Metric | Quarter ended September 30, 2019 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $948.6 | $972.8 | Down 2% |
| Operating income / margin | $73.1 / 7.7% | $100.1 / 10.3% | Income down 27% |
| Net earnings | $55.9 | $76.7 | Down 27% |
| Diluted EPS | $0.48 | $0.64 | Down 25% |
| Operating cash flow | $(86.4) | $(95.5) | Cash use improved by $9.0 |
| Free cash flow, non-GAAP | $(106.7) | $(111.0) | Cash use improved by $4.3 |
- Recurring fee revenue rose 8% to $623.2, supported by acquisitions and net new business. Event-driven fees fell 48% to $40.1, primarily due to lower mutual fund proxy activity; distribution revenue declined 8% to $313.3. Foreign exchange reduced reported revenue by $28.0, compared with $20.7 in the prior-year quarter.
- Investor Communication Solutions revenue fell 7% to $702.6 and pretax earnings fell 61% to $23.0. Global Technology and Operations revenue rose 15% to $273.9 and pretax earnings rose 21% to $56.4, with growth reflecting acquisitions and higher organic revenue.
- SG&A increased 11% to $148.0, mainly reflecting acquisitions and higher depreciation and amortization. Cost of revenues decreased 2% to $727.5. Net interest expense rose to $13.1 from $9.6 as borrowings increased.
- Adjusted operating income was $103.7 and adjusted diluted EPS was $0.68; these non-GAAP measures exclude acquired-intangible amortization and acquisition and integration costs. The GAAP effective tax rate was 12.4%, versus 14.1%, with discrete tax items including $5.7 of excess stock-compensation tax benefits.
Liquidity, debt, and cash flow
- Cash and cash equivalents were $358.3 at September 30, up from $273.2 at June 30, 2019. Net working capital was $54.3, compared with $239.8 at June 30.
- Total debt carrying value was $1,768.2, up from $1,470.4 at June 30. This included $873.2 drawn on the revolving facility and $399.4 of senior notes due September 2020, classified as current. The company reported $626.8 of unused revolving capacity and compliance with debt covenants.
- Operating cash use was $86.4; investing cash use was $86.3, including $48.1 for acquisitions and $20.3 for capital expenditures and software. Financing provided $258.1, including $337.5 of debt proceeds, partly offset by $40.0 of repayments and $55.4 of dividends paid.
- Management said available cash, operating cash generation, and borrowing capacity are expected to cover working capital, capital expenditures, acquisitions, dividends, and debt service. This is management’s assessment, not formal earnings guidance.
Changes, outlook, risks, and unusual items
- Results were pressured by weaker event-driven and distribution activity, while recurring fees grew. Management cautioned that mutual fund proxy activity is volatile and difficult to forecast. The business is seasonal, with proxy and annual-report processing generally highest in the third and fourth fiscal quarters.
- Broadridge adopted lease accounting on July 1, 2019, recognizing $252.0 of lease liabilities and $235.4 of right-of-use assets at adoption. At September 30, operating lease liabilities were $244.8; $103.4 of legally binding payments related to leases not yet commenced.
- After quarter-end, the company acquired Shadow Financial Systems on October 1 for approximately $39.0 and Fi360 on November 1 for approximately $120.0, subject to closing adjustments.
- Risks highlighted include client retention and concentration, cybersecurity incidents, regulatory change, securities-market activity, reliance on key service providers and systems, technology change, personnel, acquisitions, and competition. The company said there were no material changes to the risk factors in its fiscal 2019 Form 10-K; ordinary-course litigation was not expected to have a material effect.
- No formal financial outlook or numerical earnings guidance is provided in the supplied filing text. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether recurring-fee growth can offset continued volatility or weakness in mutual fund proxy and distribution activity.
- How the elevated debt balance and the September 2020 maturity of $400.0 in senior notes will be managed, including refinancing or repayment plans.
- The acquired businesses’ contribution to recurring revenue, profitability, integration costs, and future cash requirements.
- Cash conversion: operating and free cash flow remained negative despite improved year-over-year cash use; assess the effect of implementation spending and working-capital movements.
- Lease obligations, including the $103.4 of signed leases not yet commenced, and the company’s reliance on IBM data-center agreements.