Broadridge Financial Solutions, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2019; comparisons are to the corresponding 2018 periods. Amounts are in U.S. dollars unless noted.
Business context
Broadridge provides investor communications and technology-driven services to financial institutions, asset and wealth managers, and corporate issuers. Its reportable segments are Investor Communication Solutions (ICS) and Global Technology and Operations (GTO).
Financial performance
| Metric | Three months ended Dec. 31, 2019 | Year-over-year | Six months ended Dec. 31, 2019 | Year-over-year |
|---|---|---|---|---|
| Revenue | $968.7 million | Up 2% | $1,917.2 million | Down $9.0 million |
| Operating income / margin | $26.8 million / 2.8% | Down 66%; prior margin 8.2% | $99.9 million / 5.2% | Down 44%; prior margin 9.3% |
| Net earnings | $10.1 million | Down 80% | $66.0 million | Down 48% |
| Diluted EPS | $0.09 | Prior period $0.42 | $0.56 | Prior period $1.06 |
| Adjusted diluted EPS (non-GAAP) | $0.53 | Prior period $0.56 | $1.22 | Prior period $1.35 |
Quarterly recurring-fee revenue grew 7% to $648.4 million, while event-driven fees fell 36% to $31.0 million, primarily due to lower mutual fund proxy activity. Distribution revenue declined 2% to $317.0 million. For the six months, recurring fees rose 8%, but event-driven fees fell 43% and distribution revenue fell 5%, leaving total revenue essentially flat.
Quarterly ICS revenue declined 2% to $715.6 million and segment earnings before tax fell 40% to $22.1 million. Six-month ICS revenue declined 4% to $1,418.2 million and earnings before tax fell 53% to $45.1 million. GTO revenue increased 14% in both periods; earnings before tax increased 3% for the quarter to $49.0 million and 12% for the six months to $105.5 million.
Management reported that acquisitions drove much of recurring-fee growth, while weaker mutual fund proxy activity reduced ICS results. Closed sales, a company-defined operational measure, fell 57% year over year to $45.1 million for the quarter and 33% to $82.7 million for the six months.
Cash flow, liquidity and debt
Six-month operating cash flow was $11.5 million, down from $82.1 million. Capital expenditures and software spending totaled $43.0 million, resulting in negative free cash flow of $31.5 million, versus positive free cash flow of $51.8 million in the prior-year period. Management attributed lower operating cash flow mainly to reduced earnings and increased client implementation spending.
At December 31, 2019, cash and equivalents were $234.0 million, total debt carrying value was $1,848.8 million, and stockholders’ equity was $1,125.4 million. The $400 million 2020 senior notes were classified as current debt. The company had $1,287.8 million of unused revolving-credit capacity and reported compliance with debt covenants. Net working capital was negative $114.2 million, compared with positive $239.8 million at June 30, 2019.
Management expects operating cash generation, existing cash and borrowing capacity to cover working capital, capital spending, acquisitions, dividends and repurchases. The filing provides no specific earnings or revenue guidance.
Material changes, outlook and risks
- A $31.8 million non-cash pre-tax charge was recorded in cost of revenues for equipment to be transferred to IBM under a new private-cloud arrangement. The charge contributed to the sharp fall in GAAP operating profit; the company’s adjusted measures exclude IBM private-cloud charges, acquisition and integration costs, and acquired-intangible amortization.
- Broadridge issued $750 million of 2.90% senior notes due 2029 in December 2019. Acquisitions and higher borrowings contributed to increased interest expense.
- Fiscal 2020 acquisitions of Shadow Financial, Fi360 and ClearStructure had an aggregate purchase price of $227.3 million. In January 2020, the company agreed to acquire FundsLibrary for approximately $69 million net of cash acquired, subject to closing adjustments; the acquisition was expected to close in February 2020.
- IBM arrangements include fixed minimum commitments of $263.4 million under the amended IT services agreement, $242.8 million under the private-cloud agreement and $26.3 million under the amended European IT services agreement. The private-cloud agreement extends to 2030.
- Management cited volatility in mutual fund proxy activity, seasonality in proxy processing, currency movements, client concentration and retention, cybersecurity, service interruptions, technology changes, competition, regulation and economic conditions as risks. The filing reports no material change to previously disclosed risk factors and no litigation expected to have a material effect.
- The effective tax rate was 3.8% for the quarter and 11.2% for the six months, reflecting discrete tax items, including excess stock-based compensation tax benefits. These rates may not indicate future periods.
Important facts for investors to verify
- Whether recurring-fee growth and GTO expansion can offset continued weakness or volatility in mutual fund proxy and other event-driven activity.
- The duration and cash-flow effects of client implementation spending, negative six-month free cash flow, and lower operating cash generation.
- The impact and timing of IBM transition charges, long-term contractual commitments, and the expected transfer of hardware and employees.
- Debt repayment or refinancing plans for the $400 million notes due in 2020, alongside acquisition-related borrowing and interest costs.
- Acquisition integration, purchase-price allocations and the expected contribution from FundsLibrary; the filing does not provide a quantified earnings outlook.