BROADRIDGE FINANCIAL SOLUTIONS, INC. annual report, Q2 FY2009

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Business Context and Reporting Period

Company: Broadridge Financial Solutions, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: June 30, 2009
Business Overview: Broadridge is a leading global provider of technology-based solutions to the financial services industry, operating through three segments: Investor Communication Solutions (proxy processing, investor communications), Securities Processing Solutions (transaction lifecycle automation), and Clearing and Outsourcing Solutions (securities clearing and margin lending via subsidiary Ridge Clearing). The company spun off from Automatic Data Processing (ADP) in March 2007.

Key Financial Metrics (Fiscal Year 2009)

Metric 2009 (in millions) 2008 (in millions)
Net Revenues $2,149.3 $2,207.5
Net Earnings $223.3 $192.2
Diluted EPS $1.58 $1.36
Operating Margin 16.1% 14.8%
Cash and Cash Equivalents $280.9 $198.3
Long-Term Debt $324.1 $447.9
Total Stockholders' Equity $909.0 $745.8
Operating Cash Flow $358.8 $482.0

Material Changes vs. Prior Period

  • Revenue Decline: Net revenues decreased 3% ($58.2 million) primarily due to a 48% drop in "Other" revenues (driven by lower interest income from margin lending due to lower Federal Funds rates) and a 2% decline in services revenues.
  • Profitability Increase: Despite lower revenues, Net Earnings increased 16% ($31.1 million) and Operating Margin expanded to 16.1%. This was driven by a 4% reduction in total expenses and a lower effective tax rate (35.5% vs. 41.0% in 2008).
  • Debt Reduction: Long-term debt decreased by $123.8 million. The company repurchased $125.0 million of its 6.125% Senior Notes, resulting in an $8.4 million non-cash gain on early extinguishment of debt.
  • Segment Performance:
    • Investor Communication Solutions: Revenues down 3%; Earnings before tax down 3%.
    • Securities Processing Solutions: Revenues up 4%; Earnings before tax up 4%.
    • Clearing and Outsourcing Solutions: Revenues up 6%; Loss before tax widened to $9.1 million (from $5.0 million) due to lower interest income.

Guidance, Outlook, Risks, and Unusual Items

  • Management Commentary: Management highlighted that the current economic slowdown has led to increased client consolidation and pricing pressure, particularly in the Securities Processing segment. Contract renewal price concessions are estimated at 5% of segment revenues (historical average 3%).
  • Client Concentration Risk: Approximately 27% of total revenues were derived from the five largest clients. One major client (generating $23.0 million in 2009 revenue) notified the company of its intent to terminate certain securities processing services due to an acquisition.
  • Unusual Items:
    • Gain on Debt Extinguishment: $8.4 million gain from repurchasing Senior Notes.
    • Acquisitions: Acquired two businesses in 2009 (Investor Communication and Securities Processing) for a total of $58.9 million, resulting in $42.6 million of goodwill.
  • Risks:
    • Regulatory Changes: Potential changes to SEC proxy rules (e.g., "notice and access") could adversely affect the Investor Communication segment.
    • Market Volatility: Revenues are sensitive to trading volumes and market liquidity; declines in these areas reduce transaction fees and margin lending income.
    • ADP Dependency: The company relies on ADP for data center services under an agreement expiring in 2012. Failure of ADP to perform could disrupt operations.
  • Dividends: On August 11, 2009, the Board increased the quarterly cash dividend to $0.14 per share (from $0.07).

Investor Verification Checklist

  • Client Retention: Verify the status of the $23.0 million client terminating services and the impact of industry consolidation on the top 5 clients (27% of revenue).
  • Margin Lending Exposure: Assess the sensitivity of the Clearing segment's profitability to Federal Funds rates and average margin balances, which dropped from $898.3 million in 2008 to $638.0 million in 2009.
  • Regulatory Capital: Confirm Ridge Clearing's compliance with SEC net capital rules, noting the subsidiary reported net capital of $217.4 million (30.9% of aggregate debit items) as of June 30, 2009.
  • ADP Contract Renewal: Monitor the upcoming expiration of the data center outsourcing agreement with ADP in June 2012 and potential costs of transitioning infrastructure.
  • Goodwill Valuation: Review the $511.1 million goodwill balance for potential impairment risks given the economic slowdown and pricing pressures.