Broadridge Financial Solutions, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2015, compared with the corresponding 2014 periods. Broadridge provides investor communications, securities processing, and related technology and data services. Amounts are in U.S. dollars.
Financial performance
| Metric | Three months ended Dec. 31, 2015 | Change year over year | Six months ended Dec. 31, 2015 | Change year over year |
|---|---|---|---|---|
| Revenue | $638.9 million | Up 11% | $1,233.7 million | Up 9% |
| Operating income | $70.2 million | Up 19% | $129.3 million | Up 11% |
| Operating margin | 11.0% | Up 0.7 percentage points | 10.5% | Up 0.2 percentage points |
| Net earnings | $40.2 million | Up 16% | $73.8 million | Up 10% |
| Diluted EPS | $0.33 | Up $0.05 | $0.61 | Up $0.07 |
| Operating cash flow | Not separately reported for the quarter | $42.6 million | Down from $70.8 million | |
| Free cash flow (non-GAAP) | Not separately reported for the quarter | $5.7 million | Down from $55.0 million |
Second-quarter revenue gains reflected higher recurring fee revenue (+$28.8 million), distribution revenue (+$25.6 million), and event-driven fee revenue (+$19.4 million), partly offset by a $9.4 million foreign-currency impact. Six-month foreign-currency effects reduced revenue by $19.9 million. The effective tax rate rose to 34.4% for the quarter and 34.7% for the six months, mainly reflecting lower tax benefits and a lower share of earnings from lower-tax non-U.S. jurisdictions.
Segments and material changes
- Investor Communication Solutions: Revenue rose 17% to $471.7 million for the quarter and 13% to $901.4 million for six months. Growth included acquisition contributions, net new business, and higher event-driven activity, especially mutual fund proxies and corporate actions. Segment pretax earnings increased 33% for the quarter and 10% for six months.
- Global Technology and Operations: Revenue rose 3% to $180.3 million for the quarter and 6% to $357.0 million for six months. Quarterly pretax earnings fell 9% to $29.4 million, with margin down 2.2 percentage points to 16.3%, reflecting negative internal growth, acquisition costs, and acquired-intangible amortization. Six-month pretax earnings increased 3%.
- Recurring revenue growth benefited from acquisitions and net new business, while internal growth was slightly negative in some areas. Closed sales were $48.5 million for the quarter, essentially flat year over year, and $65.7 million for six months, down 19%; management attributed the six-month comparison to two large sales in the prior-year September quarter.
- Broadridge acquired QED Financial Systems in November 2015 for an aggregate purchase price of $15.5 million. The acquisition added $8.3 million of goodwill and $7.5 million of primarily customer-relationship intangibles; management said its impact was not material to consolidated results.
Cash, debt, and liquidity
- At December 31, 2015, cash and cash equivalents were $305.1 million, total debt was $754.5 million, and working capital was $399.8 million. Debt increased from $689.4 million at June 30, 2015. The company had $520.0 million of unused capacity under its $750.0 million revolving credit facility.
- Six-month operating cash flow declined $28.2 million year over year. Management attributed much of the comparison to a $26.1 million Canadian tax refund received in the prior-year period. Free cash flow also reflected capital expenditures and software spending of $36.9 million, up from $15.8 million.
- Six-month investing cash outflow was $52.0 million; financing cash flow was positive $2.5 million, including $105.0 million of debt proceeds, $40.0 million of repayments, $67.4 million of dividends paid, and $10.6 million of treasury-stock purchases. Cash declined $19.0 million over the period.
- Management expects operating cash, existing cash, investments, and available borrowings to meet anticipated needs, including dividends, capital expenditures, acquisitions, and repurchases. Of cash on hand, $208.0 million was held by foreign subsidiaries and $46.0 million by regulated entities; repatriating foreign funds for U.S. use could trigger U.S. taxes.
Outlook, risks, and unusual items
- The filing provides no specific numerical full-year revenue, earnings, or cash-flow guidance. Management cautioned that interim results may not indicate full-year results and noted seasonality: proxy and annual-report processing typically peaks in the fourth fiscal quarter.
- Event-driven revenue, particularly mutual fund proxy activity, can be volatile and difficult to forecast. Mutual fund proxy revenue was 46% higher for the six months, but management cautioned that the period is not necessarily indicative of the full year.
- Key disclosed risks include client retention and concentration, securities-market activity, regulatory changes, cybersecurity and data protection, service disruptions or outsourced-provider performance, technology changes, competition, personnel, and acquisition execution. The filing reported no material change to previously disclosed risk factors.
- Remaining commitments included $481.1 million under the principal IBM IT services agreement, $37.3 million under the European IBM agreement, and $38.5 million under a CA mainframe software agreement. The company said ordinary-course claims and litigation are not expected to have a material effect. It was in compliance with debt and relevant subsidiary regulatory capital requirements.
- Foreign-currency translation reduced comprehensive income; accumulated other comprehensive loss was $38.0 million at December 31, 2015. The company reported no derivative financial instruments at the period end.
Important facts for investors to verify
- Whether recurring revenue and closed-sales trends convert into sustained growth, particularly given negative internal growth in some businesses and the timing of larger implementations.
- How much revenue and earnings depend on volatile event-driven activity, including mutual fund proxies and corporate actions.
- Whether operating cash flow and free cash flow recover after the prior-year tax-refund comparison and higher current-period capital and software spending.
- Debt levels, interest expense, and continued compliance with credit-facility covenants as borrowings and investment needs evolve.
- The contribution and integration costs of acquisitions, including QED, and the effect of foreign exchange and tax-rate changes.