Broadridge Financial Solutions, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2014 (the first quarter of fiscal 2015); comparisons are with the three months ended September 30, 2013 unless otherwise noted. Broadridge provides investor communications, securities processing and related outsourcing services to the financial services industry.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Revenue | $555.8 million | $545.2 million | Up 2% |
| Earnings before income taxes | $50.0 million | $69.3 million | Down 28% |
| Pre-tax margin | 9.0% | 12.7% | Down 3.7 points |
| Net earnings | $32.5 million | $44.4 million | Down 27% |
| Diluted EPS | $0.26 | $0.36 | Down 28% |
| Operating cash flow | $17.1 million | $(5.4) million | Improved $22.5 million |
Recurring fee revenue grew $14.5 million, supported by net new business and acquisitions; distribution revenue rose $3.3 million. Event-driven fee revenue fell $5.7 million to $34.9 million, including mutual fund proxy fee revenue down 37%. Foreign exchange reduced revenue by $1.5 million. SG&A increased $18.2 million, chiefly from commissions, performance-based compensation, sales and marketing investment, and acquisition costs; the prior-year period also included a $3.3 million credit from a decrease in contingent acquisition consideration. Cost of revenue rose 2%. The effective tax rate was 35.0%, versus 35.9%.
Segments
- Investor Communication Solutions: Revenue of $394.4 million, up 4%; pre-tax earnings of $37.7 million, down 7%, with a 9.6% margin. Recurring fee growth and acquisitions were partly offset by lower event-driven fees and higher selling costs.
- Securities Processing Solutions: Revenue of $162.6 million, down 2%; pre-tax earnings of $25.9 million, down 20%, with a 15.9% margin. Lower trading-related activity, compensation costs and business investments contributed to the decline.
Cash, debt and liquidity
Cash and cash equivalents were $331.3 million at September 30, 2014, down from $347.6 million at June 30, 2014; working capital was $411.6 million. Operating cash flow benefited in part from a $26.1 million Canadian tax refund. The company reported non-GAAP free cash flow of $9.7 million, compared with $(18.7) million a year earlier; this measure subtracts capital expenditures and software purchases from operating cash flow.
Long-term debt was $524.2 million: $124.6 million of 6.125% notes due 2017 and $399.6 million of 3.95% notes due 2020. No revolving facility borrowings were outstanding. In August 2014, Broadridge replaced its $500 million facility with a five-year $750 million revolving facility, all of which was unused at quarter-end. Management said cash, operating cash flow and available borrowing capacity should fund anticipated needs. Of cash, $182.6 million was held by foreign subsidiaries and $40.9 million by regulated entities; repatriating foreign cash for U.S. use could incur taxes.
Outlook, risks and notable items
- The filing provides no specific full-year earnings or revenue guidance. Management cautioned that quarterly results are not necessarily indicative of the full year because proxy processing is seasonal, typically making the fourth fiscal quarter the strongest.
- Recurring revenue closed sales were $32.3 million, up 114%; total closed sales were $42.8 million, up 108%. The company noted larger recurring contracts can take 12 to 24 months to convert to revenue.
- Management cited risks including client retention and concentration, securities-market activity, regulatory changes, cybersecurity or system failures, dependence on outsourced data-center services, technology and competition, and acquisition execution. Mutual fund proxy activity is difficult to forecast and may remain volatile.
- Remaining commitments to IBM for technology and data-center services were $425.9 million through fiscal 2022 and $45.9 million through fiscal 2024. A further $5.7 million remained committed to an equity-method investment through June 2015.
- Broadridge reported no known debt covenant violations, no material changes to previously disclosed risk factors, and no subsequent events requiring disclosure. It believed ordinary-course litigation would not materially affect its financial condition or results.
- The company declared dividends of $0.27 per share, versus $0.21 a year earlier, and repurchased 351,428 shares during the quarter at an average $42.70 per share.
Important facts for investors to verify
- Whether revenue growth and higher closed sales convert into sustained recurring revenue, given implementation lags and seasonality.
- Whether margins recover after the quarter’s sharp earnings decline and elevated compensation and sales-investment costs.
- How much operating cash flow normalizes after the one-time $26.1 million tax refund and working-capital movements.
- The expected cash use and returns from acquisitions, share repurchases, dividends, and the remaining investment commitment.
- Exposure to event-driven proxy volumes, client concentration, regulatory scrutiny, and outsourced technology-service performance.