Broadridge Financial Solutions, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2018, the three months ended September 30, 2017; comparisons are with the three months ended September 30, 2016 unless otherwise noted. Broadridge provides investor communications, securities processing, and related technology services. Its reportable segments are Investor Communication Solutions (ICS) and Global Technology and Operations (GTO).
Financial performance
| Metric | Q1 FY2018 | Prior year | Change |
|---|---|---|---|
| Revenue | $924.8 million | $895.3 million | Up 3% |
| Operating income / margin | $84.4 million / 9.1% | $66.0 million / 7.4% | Income up 28% |
| Net earnings | $49.9 million | $33.7 million | Up 48% |
| Diluted EPS | $0.42 | $0.28 | Up 50% |
| Operating cash flow | $(93.3) million | $(87.4) million | More cash used |
| Free cash flow (non-GAAP) | $(129.3) million | $(102.1) million | More cash used |
- Revenue growth reflected recurring fees up $30.9 million and event-driven fees up $21.8 million, partly offset by distribution revenue down $22.5 million. Higher event-driven revenue was primarily due to proxy contests and mutual fund proxy activity; mutual fund proxy fees rose 102% year over year.
- Operating expenses increased 1% to $840.3 million. Higher acquired-intangible and purchased-IP amortization and acquisition-related operating costs partly offset revenue growth. The company reported $19.4 million of such amortization and $2.0 million of acquisition and integration costs. Adjusted operating income was $105.9 million and adjusted diluted EPS was $0.54 (both non-GAAP).
- The effective tax rate declined to 32.8% from 34.8%, reflecting stock-compensation tax benefits and a more favorable geographic income mix. The company recorded $1.5 million of excess tax benefits in the quarter under newly adopted accounting guidance.
- By segment, ICS revenue was $733.5 million, up 1%, and pretax earnings were $44.5 million, up 35%. GTO revenue was $207.9 million, up 11%, and pretax earnings were $46.2 million, up 21%. GTO growth reflected net new business, acquisitions, and higher activity; ICS benefited from recurring and event-driven fees, with distribution revenue a partial offset.
Balance sheet, liquidity, and capital
- At September 30, 2017, cash and cash equivalents were $288.8 million, total assets $3.22 billion, and stockholders’ equity $1.04 billion. Net working capital was $424.9 million, compared with $244.6 million at June 30, 2017.
- Debt carrying value was $1.29 billion, up from $1.10 billion at June 30, principally reflecting additional revolving-credit borrowings. The company had $400 million drawn on its $1.0 billion revolving facility and $600 million of unused capacity. It reported compliance with debt covenants.
- Operating cash use was driven in part by working-capital changes, including a $162.5 million decrease in accrued expenses and other current liabilities. Capital expenditures and software purchases totaled $36.0 million, versus $14.7 million in the prior-year quarter.
- The company paid $37.9 million in dividends and declared a quarterly dividend of $0.365 per share. It stated that cash, operating cash generation, and borrowing capacity are expected to be sufficient for anticipated needs, including for at least the next 12 months.
Outlook, risks, and notable items
- The filing provides no specific revenue, earnings, or cash-flow guidance. Management described liquidity as adequate for working capital, investment, dividends, repurchases, and debt service.
- Management noted that proxy processing is seasonal, typically making the fourth fiscal quarter the strongest for revenue, operating income, earnings, and operating cash flow. Event-driven activity, particularly mutual fund proxies, can be volatile and difficult to forecast.
- Key stated risks include client retention and concentration, cybersecurity or service disruptions, reliance on outsourced data-center services, regulatory and market changes, technology demands, competition, and execution of acquisitions. The filing reported no material change to the risk factors in the FY2017 annual report.
- Remaining commitments include $376.3 million under the principal IBM data-center agreement and $27.7 million under the European agreement, through fiscal 2024; a $40 million payment for blockchain applications, conditional on delivery by September 2018; and $1.3 million of remaining equity-investment funding. The company reported ordinary-course claims and litigation but did not expect a material adverse impact.
- After quarter-end, Broadridge acquired Summit Financial Disclosure for $29 million in cash, plus contingent consideration of up to $11 million. The preliminary purchase-price allocation had not been finalized as of the filing.
- The company expects its adoption of the revenue-recognition standard in fiscal 2019 to affect timing and classification, including proxy revenue timing and capitalization of certain commissions and client setup costs; its transition method was not yet selected.
Important facts for investors to verify
- Whether recurring-fee and GTO growth persist, and how much quarterly earnings depend on unusually strong proxy-related event activity.
- Whether negative operating and free cash flow is primarily timing and seasonal working capital, and whether capital spending remains elevated.
- Debt levels, revolver utilization, covenant headroom, and the company’s ability to meet substantial data-center and other contractual commitments.
- The effect of the Summit acquisition and the revenue-recognition standard on future reported results and cash flows.
- The durability of the lower effective tax rate, including the impact of stock-compensation tax benefits and geographic income mix.