Broadridge Financial Solutions, Inc. — Form 10-Q Summary
Reporting period: Second quarter of fiscal 2017, the three months ended December 31, 2016; year-to-date figures cover the six months ended December 31, 2016. Amounts are in millions except per-share data.
Business context and financial performance
Broadridge provides investor and customer communications, securities processing, and related technology services. Its reportable segments are Investor Communication Solutions (ICS) and Global Technology and Operations (GTO).
| Metric | Three months 2016 | Three months 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $892.6 | $638.9 | $1,787.9 | $1,233.7 |
| Operating income | $58.8 | $70.2 | $124.9 | $129.3 |
| Operating margin | 6.6% | 11.0% | 7.0% | 10.5% |
| Net earnings | $30.1 | $40.2 | $63.8 | $73.8 |
| Diluted EPS | $0.25 | $0.33 | $0.52 | $0.61 |
| Interest expense, net | $10.6 | $6.4 | $21.0 | $12.7 |
For the quarter, revenue grew 40%, largely reflecting NACC acquisition contributions; operating income fell 16% and net earnings fell 25%. For the six months, revenue grew 45%, while operating income declined 3% and net earnings declined 14%. Higher amortization and operating costs, lower event-driven revenue, and increased interest expense pressured earnings. The six-month effective tax rate was 34.4%, versus 34.7%.
Segments and material changes
- ICS: Revenue was $709.6 for the quarter, up 50%, and $1,432.9 for six months, up 59%. Segment pre-tax earnings were $18.2 for the quarter (down 61%) and $51.1 year to date (down 36%). NACC drove much of the revenue increase; reduced mutual fund proxy activity lowered event-driven revenue.
- GTO: Revenue was $201.8 for the quarter, up 12%, and $389.6 year to date, up 9%. Pre-tax earnings increased to $46.3 for the quarter from $29.4 and to $84.6 year to date from $59.8, reflecting organic revenue growth and efficiency initiatives.
- Acquisitions and investment: Broadridge acquired DST’s North American Customer Communications business (NACC) in July 2016 for $410.0 cash, net of acquired cash and adjustments of $406.2. It acquired M&O Systems in November for $24.8, including a $2.5 seller note. In September, it purchased Inveshare intellectual property for $95.0, with a further $40.0 payable upon delivery of blockchain applications, expected by September 2018.
- Closed sales were $55.7 for the quarter, up 15%, and $77.3 for six months, up 18%; these are non-GAAP operating metrics, not recognized revenue.
Cash flow, debt, and liquidity
- Six-month operating cash flow was negative $5.5, versus positive $42.6 a year earlier. Free cash flow, a company-defined non-GAAP measure, was negative $37.5 versus positive $5.7.
- Investing cash outflow was $553.4, mainly reflecting $428.4 of acquisitions and $90.0 paid for intellectual property. Financing cash inflow was $70.2. Cash declined by $492.0 to $235.7.
- At December 31, cash was $235.7; current assets were $899.4 and current liabilities $638.2. Total debt carrying value was $1,206.0, including $124.9 current and $1,081.1 long-term. The company had $560.0 of unused capacity on its $750.0 revolving facility and reported compliance with its financial covenants.
- Management stated that cash, operating cash flows, and borrowing capacity are expected to cover working capital, investment, dividends, and other anticipated needs. Of cash, $88.9 was held by foreign subsidiaries and $48.2 by regulated entities; repatriating foreign cash for U.S. use would incur U.S. taxes.
- Dividends declared were $0.33 per share for the quarter and $0.66 for six months. The company repurchased 956,982 shares in the quarter for approximately $61 million, based on disclosed average price.
Outlook, risks, and unusual items
- No specific earnings or revenue guidance is provided in the filing. Management cautions that quarterly results are affected by seasonality; proxy processing and annual-report distribution typically peak in the fourth fiscal quarter. Event-driven activity, particularly mutual fund proxies, is difficult to forecast; mutual fund proxy fee revenue was down 58% year to date.
- Key stated risks include client retention and concentration, market and securities activity levels, regulatory changes, cybersecurity or system failures, dependence on outsourced data-center services, technology changes, acquisitions, and competition.
- IBM service agreements represent remaining commitments of $422.2 through fiscal 2024 and $27.3 through fiscal 2024 for the European agreement. The company also expects to pay $40.0 for blockchain application delivery.
- In February 2017, Broadridge replaced its $750.0 revolving credit facility with a new $1.0 billion five-year facility.
- Broadridge reported routine claims and litigation that it did not expect to materially affect results. It also disclosed that a U.K. subsidiary’s software license agreement with a Syrian bank designated under Executive Order 13382 was terminated effective November 7, 2016; prior-year revenue and net profit from the agreement were approximately $20,000 and $6,400.
- Management identified expected effects from the forthcoming revenue standard, including capitalization of certain sales commissions and client setup costs and changes to timing of revenue recognition; the company was still evaluating the full impact.
Important facts for investors to verify
- How NACC integration, acquisition-related amortization, and distribution costs affect future operating margins.
- Whether event-driven and mutual fund proxy revenue stabilizes, and how much growth is organic versus acquisition-driven.
- Whether operating cash flow and free cash flow recover after working-capital and client implementation demands.
- Debt refinancing and repayment plans for the $125.0 senior notes due June 2017, and the terms and covenant capacity of the new revolving facility.
- Final NACC purchase-price allocation and the delivery conditions and $40.0 deferred payment for the blockchain applications.