BROADRIDGE FINANCIAL SOLUTIONS, INC. quarterly report, Q1 FY2012

Broadridge Financial Solutions, Inc. — Form 10-Q Summary

Business context and reporting period. The filing covers the three months ended September 30, 2011, the first quarter of Broadridge’s fiscal 2012. Broadridge provides investor communications, securities processing and operations outsourcing services. Its reportable segments are Investor Communication Solutions and Securities Processing Solutions. Results exclude the securities-clearing business, reported as discontinued operations.

Financial results

Metric	Quarter ended Sep. 30, 2011	Prior-year quarter	Change
Revenue	$476.4 million	$421.4 million	+13%
Pretax earnings from continuing operations	$26.2 million	$20.9 million	+25%
Net earnings from continuing operations	$16.7 million	$13.3 million	+26%
Diluted EPS from continuing operations	$0.13	$0.10	+30%
Operating cash flow	$23.3 million provided	$24.5 million used	Improved

Pretax margin rose to 5.5% from 5.0%. The effective tax rate was 36.3%, versus 36.4%.
Revenue increased in both segments: Investor Communication Solutions was $313.0 million, up 12%; Securities Processing Solutions was $158.4 million, up 12%. Segment pretax earnings were $8.4 million and $27.8 million, respectively.
Cash from operations was $23.3 million; investing activities used $79.3 million, including $72.7 million for the Paladyne acquisition; financing activities provided $66.9 million.
At September 30, cash and cash equivalents were $252.8 million, total assets $1.927 billion, and stockholders’ equity $792.5 million. Net working capital was $391.7 million.
Total debt was $614.3 million: a $490.0 million term loan and $124.3 million of senior notes. The company had $500.0 million available under its revolving facility and no short-term borrowings.
Quarterly dividends declared were $0.16 per share. The company repurchased 347,650 shares during the quarter at an average $24.05 per share.

Material changes and management commentary

Revenue growth reflected acquisitions, internal growth and net new business, the Penson outsourcing agreement, and favorable foreign exchange. Acquisitions and the Penson agreement contributed $21.4 million of revenue. Event-driven fee revenue was essentially unchanged.
Expenses rose 12%, mainly from acquisitions and Penson-related costs, higher distribution costs, variable costs, and $3.2 million of IBM data-center migration costs. Management said migration costs reduced the quarter’s overall margin by 70 basis points.
Adjusted net earnings, a non-GAAP measure, were $18.7 million versus GAAP net earnings of $16.7 million, adding back IBM migration costs net of tax. The filing cautions that this measure is not a substitute for GAAP results.
On September 22, 2011, Broadridge replaced its prior credit facilities with a $990 million unsecured facility: a $490 million five-year term loan and a $500 million five-year revolver. Borrowings bear interest at LIBOR plus 125 basis points. The company reported no covenant noncompliance.
In September, Broadridge acquired Paladyne Systems for $72.7 million net of cash acquired. The acquisition added $63.4 million of goodwill and $23.9 million of intangible assets.
Management believes cash, operating cash flows and available credit will meet anticipated operating, capital expenditure and working-capital needs. No specific earnings or revenue guidance is provided. Results are seasonal, with investor-communications activity typically highest in the fourth fiscal quarter.

Outlook, risks and contingencies

In October 2011, after quarter-end, Broadridge amended its Penson outsourcing agreement. Expanded services are expected to generate an additional $8.0 million in annual revenue over the remaining ten-year term, with rollout beginning in 2012 and completion expected by July 2013. Broadridge paid Penson $7.0 million in connection with the amendment; a shortfall payment may be due if annualized fees are below specified levels by July 2013.
The company expects to complete its data-center migration from ADP to IBM substantially by June 2012. The IBM agreement runs through June 2022 and carries $563.9 million of commitments. Transition disruption and provider performance are identified risks; the ADP agreement expires in June 2012, and an extension was being negotiated.
Broadridge held a Penson equity investment with a $3.6 million fair value and a $20.6 million seller-note receivable. Management did not consider these assets impaired at September 30, but disclosed risk of a future impairment of the Penson equity investment amid price volatility and Penson’s financial condition.
The company cited risks involving client retention and concentration, securities-market activity, regulation, cybersecurity, system reliability, technology change, acquisitions, competition, and dependence on outsourced data-center services.
Broadridge disclosed an early-stage patent lawsuit with Inveshare seeking injunctive relief and unspecified damages; management did not expect a material adverse effect. It also noted that clearinghouse-member guarantees could exceed posted collateral, though payments were considered remote. Ridge reported $9.1 million in net capital, $8.8 million above its minimum requirement.
Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

How much reported growth reflects acquired businesses and the Penson agreement versus organic growth, and whether segment margins are sustained.
Progress, costs and operational risks of the ADP-to-IBM migration, including the transition schedule and ADP extension.
Penson’s ability to meet its obligations and the expected revenue realization, payment protections and asset recoverability under the amended agreement.
Debt-service costs, facility covenants and availability of the revolving credit line as borrowing rates and cash needs change.
Seasonality and volatility in event-driven activity, and the effect of distribution costs on margins and cash flows.