Business context and reporting period
Broadridge Financial Solutions, Inc. filed this Form 10-Q for the three months ended September 30, 2016, its fiscal 2017 first quarter. It provides investor communications, securities processing, and related technology and data services through Investor Communication Solutions (ICS) and Global Technology and Operations (GTO).
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Revenue | $895.3 million | $594.7 million |
| Operating income / margin | $66.0 million / 7.4% | $59.1 million / 9.9% |
| Income before taxes | $51.5 million | $51.7 million |
| Net earnings | $33.7 million | $33.5 million |
| Diluted EPS | $0.28 | $0.28 |
| Operating cash flow | $(87.4) million | $(24.6) million |
| Free cash flow (non-GAAP) | $(102.1) million | $(42.4) million |
Reported revenue grew 51%, with $277.7 million of the increase attributed to acquisitions, primarily NACC. Distribution revenue rose 103%; recurring fee revenue rose 32%. Operating income increased 12%, but margin contracted, primarily due to NACC. Higher revenue was offset by higher costs, interest expense, and foreign-exchange-related non-operating expense; net earnings increased just 1%. Adjusted operating income was $81.6 million versus $68.4 million, adjusted net earnings were $43.9 million versus $39.6 million, and adjusted diluted EPS was $0.36 versus $0.33. These are non-GAAP measures.
ICS revenue was $723.3 million, up 68%; segment pretax earnings declined 3% to $32.9 million. GTO revenue was $187.8 million, up 6%; segment pretax earnings rose 26% to $38.3 million. Mutual fund proxy fee revenue was down 22% year over year, while total event-driven fee revenue was down 1%.
Liquidity, debt, and cash flow
Cash and cash equivalents were $227.4 million at September 30, down from $727.7 million at June 30. Net working capital was $244.0 million, compared with $596.2 million. Carrying value of total debt was $1,125.8 million, including $124.9 million due in June 2017. The company had $110.0 million drawn on its $750 million revolving facility and $640.0 million of unused capacity; it reported compliance with facility and note covenants.
Operating cash use increased primarily because of working-capital movements, including a receivable related to the transition of NACC cash collections, and lower income-tax accruals. Investing cash use was $508.4 million, including $402.0 million for the NACC acquisition and $90.0 million for intellectual property. Management stated it expects cash, operating cash generation, and borrowing capacity to cover anticipated needs, including dividends, debt repayments, capital expenditures, acquisitions, and repurchases.
Material changes, outlook, and risks
- Broadridge acquired NACC in July for $410.0 million cash, or $402.0 million net of cash acquired and closing adjustments. The purchase-price allocation remained preliminary. The acquisition materially increased revenue but also contributed to lower operating and ICS pretax margins.
- In September, the company acquired Inveshare intellectual property for $95.0 million, including $90.0 million paid at closing and $5.0 million payable by September 2017. A further $40.0 million is payable upon delivery of blockchain applications, expected by September 2018.
- In November 2016, after quarter-end, Broadridge acquired M&O Systems for $25.0 million in cash, subject to adjustments; it is expected to be included in GTO.
- No specific earnings or revenue guidance was provided in the supplied filing text. Management cautioned that results are seasonal: proxy processing typically makes the fourth fiscal quarter stronger, so this quarter is not necessarily indicative of full-year performance. Event-driven activity, particularly mutual fund proxies, is difficult to forecast.
- Disclosed risks include client retention and concentration, regulatory changes, cybersecurity breaches, securities-market activity, service-provider or systems disruption, technology changes, talent retention, acquisitions, and competition. Management said litigation was not expected to have a material impact and reported no material changes to previously disclosed risk factors.
- Broadridge disclosed that a UK subsidiary’s inherited software-licensing agreement with a Syrian bank, subsequently designated under Executive Order 13382, generated approximately $20,000 in fiscal 2016 revenue and $6,400 in net profit. The company said termination became effective November 7, 2016.
Important facts for investors to verify
- How NACC integration, purchase accounting, and distribution costs affect margins and cash generation in coming quarters.
- Whether working capital normalizes and operating cash flow improves after the NACC cash-collection transition.
- The delivery, timing, and total economics of the blockchain applications tied to the additional $40.0 million payment.
- Plans for the $124.9 million debt maturity due in June 2017 and continued covenant compliance.
- Subsequent disclosures on M&O, event-driven proxy activity, and the effects of seasonality on full-year results.