Broadridge Financial Solutions, Inc. — Fiscal Q1 2016 10-Q
Reporting period: Three months ended September 30, 2015, compared with the three months ended September 30, 2014. Dollar amounts are in millions except per-share data. Broadridge provides investor communications and financial technology and operations services through Investor Communication Solutions (ICS) and Global Technology and Operations (GTO).
Financial results
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $594.7 | $555.8 | +7% |
| Operating income | $59.1 | $57.1 | +4% |
| Operating margin | 9.9% | 10.3% | Down 0.4 points |
| Earnings before taxes | $51.7 | $50.0 | +3% |
| Net earnings | $33.5 | $32.5 | +3% |
| Diluted EPS | $0.28 | $0.26 | +8% |
| Operating cash flow | $(24.6) | $17.1 | Down $41.7 |
| Free cash flow (non-GAAP) | $(42.4) | $9.7 | Down $52.1 |
- Revenue growth reflected higher recurring fees ($34.5), event-driven fees ($3.1), and distribution revenue ($11.9). Foreign-exchange movements reduced reported revenue by $10.5.
- Operating expenses rose 7% to $535.7; cost of revenues increased 8% and SG&A increased 5%. Higher acquired-intangible amortization contributed to margin compression.
- Non-operating expenses were $7.4, including $6.8 of interest expense. The effective tax rate was 35.1%, versus 35.0%; management attributed the slight increase mainly to a lower share of lower-taxed non-U.S. earnings, partly reflecting weaker foreign currencies.
- Management’s non-GAAP adjusted operating income was $68.4 versus $63.5; adjusted net earnings were $39.6 versus $36.7, and adjusted diluted EPS was $0.33 versus $0.30. These exclude acquisition amortization and other costs and are not substitutes for GAAP results.
Segments and changes versus prior year
- ICS: Revenue grew 9% to $429.7, including recurring fee growth of 10%. Pretax earnings fell 10% to $33.9, and pretax margin declined 1.7 points to 7.9%, mainly from acquisition-related and other operating costs.
- GTO: Revenue grew 9% to $176.8; pretax earnings rose 17% to $30.3, with pretax margin up 1.3 points to 17.2%. Growth reflected net new business, higher trade and non-trade activity, and an acquisition.
- Closed sales were $17.2, down 47% from $32.3, primarily because two large sales had boosted the prior-year quarter.
- Reported growth occurred despite adverse currency effects. Segment revenue includes a foreign-currency reconciliation; total reported revenue was $594.7.
Cash, debt, liquidity, and commitments
- Cash and cash equivalents were $286.3 at September 30, down from $324.1 at June 30. Working capital was $382.5, versus $352.5. Current assets were $795.5 and current liabilities $413.0.
- Long-term debt was $734.4, up from $689.4 at June 30. It included $210.0 drawn on a $750.0 revolving facility, with $540.0 of unused capacity; the facility expires in August 2019. The company reported compliance with its debt covenants.
- Debt also included $124.8 of 6.125% notes due June 2017 and $399.6 of 3.95% notes due September 2020.
- Operating cash use was attributed mainly to working-capital timing, including receivables collections and vendor payments, and the prior-year period’s $26.1 Canadian tax refund. Capital expenditures and software purchases were $17.8, versus $7.4.
- Financing cash flow was $13.7, including $45.0 net proceeds from revolving-facility borrowings and $32.0 of dividends paid. Cash also declined by $8.8 from exchange-rate changes.
- Of cash on hand, $199.4 was held by foreign subsidiaries and $42.4 by regulated entities. The company said existing resources and operating cash flows should fund anticipated needs for at least the next 12 months; repatriating foreign cash for U.S. use would incur U.S. taxes.
Outlook, risks, and notable items
- No specific full-year revenue or earnings guidance is provided. Management cautioned that the quarter is not necessarily indicative of full-year results and that the business is seasonal: proxy and annual-report processing is typically greatest in the fourth fiscal quarter.
- Management noted that event-driven activity, particularly mutual-fund proxy work, can be volatile and difficult to forecast. It also cited client retention and concentration, securities-market activity, regulation, competition, technology change, cybersecurity, systems or service disruptions, and reliance on outsourced data-center services as risks.
- The IBM IT-services agreement was extended through June 2024; remaining commitments were $514.0. The separate IBM UK agreement had $39.6 of remaining commitments through fiscal 2024. A further $1.5 investment commitment was due by December 31, 2015.
- The company reported no material expected impact from ordinary-course claims and litigation, no material changes to previously disclosed risk factors, and no derivatives outstanding at September 30, 2015. It stated that disclosure controls were effective and that no material internal-control change occurred during the quarter.
- Presentation of the income statement was revised to separately show operating income and non-operating expenses; prior-period figures were conformed. Early adoption of ASU 2015-16 had no material impact. Revenue-recognition guidance was still under evaluation and was scheduled to take effect in fiscal Q1 2019.
Important facts for investors to verify
- Whether recurring revenue growth and closed-sales conversion continue, particularly given the lower closed-sales figure and seasonal results.
- Whether ICS can improve margins after acquisition-related costs and increased amortization, and whether GTO’s earnings growth is sustained.
- Whether operating cash flow returns to positive levels as working-capital timing normalizes; assess the elevated capital and software spending.
- Debt levels, revolving-facility usage, covenant compliance, and the company’s liquidity assumptions, including cash held outside the U.S.
- The effects of foreign exchange, client concentration, event-driven business volatility, and long-term IBM outsourcing commitments.