Business Context and Reporting Period
Company: Broadridge Financial Solutions, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010 (Third Fiscal Quarter)
Business Overview: Broadridge is a global provider of investor communication and securities processing solutions. The company recently restructured its reporting segments, moving its securities clearing business to "Discontinued Operations" following an agreement to sell these assets to Penson Financial Services, Inc. Continuing operations are now reported under two segments: Investor Communication Solutions and Securities Processing Solutions.
Key Financial Metrics
| Metric (in millions) | Three Months Ended Mar 31, 2010 |
Three Months Ended Mar 31, 2009 |
Nine Months Ended Mar 31, 2010 |
Nine Months Ended Mar 31, 2009 |
|---|---|---|---|---|
| Revenues | $490.8 | $463.7 | $1,458.7 | $1,356.7 |
| Net Earnings (Continuing Ops) | $30.8 | $41.2 | $108.9 | $107.3 |
| Net Earnings (Total) | $24.9 | $40.9 | $84.9 | $106.4 |
| Diluted EPS (Continuing Ops) | $0.22 | $0.29 | $0.78 | $0.76 |
| Diluted EPS (Total) | $0.18 | $0.29 | $0.61 | $0.75 |
| Operating Cash Flow (9mo) | $180.8 (2010) vs $130.8 (2009) | |||
| Cash & Equivalents | $177.9 (as of Mar 31, 2010) | |||
| Long-Term Debt | $324.1 (as of Mar 31, 2010) |
Material Changes vs. Prior Period
- Revenue Growth: Revenues from continuing operations increased 6% ($27.1M) for the quarter and 8% ($102.0M) for the nine-month period. Growth was driven by a new seven-year contract with Morgan Stanley Smith Barney, event-driven mutual fund proxy revenues, and favorable foreign currency exchange rates.
- Profitability Decline (Quarterly): Net earnings from continuing operations decreased 25% ($10.4M) for the quarter. This was primarily due to a 23% increase in Selling, General, and Administrative (SG&A) expenses and a higher effective tax rate (36.3% vs 24.4%).
- Profitability Stability (Nine Months): Net earnings from continuing operations increased slightly by 1% ($1.6M) for the nine-month period, aided by a lower effective tax rate (31.7% vs 33.9%) and higher revenues offsetting increased expenses.
- Discontinued Operations Impact: The company recorded a significant loss of $5.9 million for the quarter and $24.0 million for the nine months from discontinued operations, largely due to asset impairments related to the pending sale of the securities clearing business.
- Segment Performance: Investor Communication Solutions revenues grew 7% (quarter) and 12% (nine months). Securities Processing Solutions revenues declined 2% (quarter) and 6% (nine months) due to lower trade volumes and client losses.
Guidance, Outlook, and Risks
- Strategic Transition: The company is in the process of selling its securities clearing business to Penson Financial Services, Inc., with closing anticipated in the fourth quarter of fiscal 2010. The retained operations outsourcing business is now part of the Securities Processing Solutions segment.
- IT Infrastructure Migration: Broadridge entered a 10-year agreement with IBM to provide data center services, replacing its current provider, ADP. The migration is expected to commence in January 2011 and take 18-24 months. Management notes risks associated with service disruption during this transition.
- Capital Allocation: The company remains committed to returning capital to shareholders, having repurchased $142.5 million of treasury stock and paid $47.6 million in dividends over the nine-month period.
- Liquidity: Management believes cash on hand, operating cash flows, and available credit facilities ($500M revolving credit) are sufficient to meet current and anticipated needs.
- Legal Proceedings: Broadridge is involved in patent litigation with Inveshare, Inc. regarding electronic solicitation delivery. The outcome is uncertain, but management does not currently expect a material adverse impact.
Investor Verification Checklist
- Discontinued Operations: Verify the final terms and closing date of the securities clearing business sale to Penson Financial Services, as this impacts future revenue streams and one-time impairment charges.
- IBM Migration Risks: Monitor the timeline and execution of the data center migration from ADP to IBM, specifically regarding potential service disruptions or cost overruns.
- Segment Mix: Assess the sustainability of revenue growth in Investor Communication Solutions versus the decline in Securities Processing Solutions, particularly regarding trade volume sensitivity.
- Tax Rate Volatility: Review the effective tax rate trends, noting the impact of valuation allowance releases and non-U.S. tax jurisdictions on future profitability.
- Share Repurchases: Track the remaining capacity under the $10 million share repurchase plan and the company's commitment to offsetting dilution from equity compensation.