Broadridge Financial Solutions, Inc. — Form 10-Q summary
Reporting period: Quarter and nine months ended March 31, 2012 (fiscal 2012 third quarter), compared with the corresponding 2011 periods. The filing date was May 8, 2012. The supplied metadata labels the period “2011 Q3,” but the filing itself reports fiscal 2012 Q3.
Business context: Broadridge provides investor communications, securities processing and operations outsourcing to financial-services clients. Its reportable segments are Investor Communication Solutions and Securities Processing Solutions.
Financial performance
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue | $547.0 million, up 4% from $527.1 million | $1,503.2 million, up 8% from $1,390.8 million |
| Pre-tax earnings from continuing operations | $28.8 million, down 44%; margin 5.3% versus 9.7% | $65.6 million, down 26%; margin 4.4% versus 6.4% |
| Net earnings from continuing operations | $18.1 million versus $32.6 million | $41.6 million versus $56.5 million |
| Net earnings, including discontinued operations | $16.7 million versus $29.7 million | $40.2 million versus $53.4 million |
| Diluted EPS from continuing operations | $0.14 versus $0.25 | $0.33 versus $0.44 |
| Operating cash flow | Not provided for the quarter alone | $103.9 million versus $38.9 million |
For the nine months, investing activities used $102.7 million, including $72.4 million for the Paladyne acquisition and $22.8 million of capital expenditures. Financing activities used $20.5 million. Cash declined $22.7 million from fiscal year-end to $218.8 million.
Segments: Investor Communication Solutions revenue was $374.0 million for the quarter, up 1%, and $1,003.8 million for nine months, up 7%; segment pre-tax earnings rose 23% and 43%, respectively. Securities Processing Solutions revenue was $169.3 million for the quarter, up 10%, and $488.8 million for nine months, up 11%; segment pre-tax earnings fell 8% for the quarter but rose 8% year to date.
Balance sheet, liquidity and debt
- At March 31, 2012, cash and cash equivalents were $218.8 million, total assets $2,014.3 million, and stockholders’ equity $800.8 million. Net working capital was $311.3 million, compared with negative $31.3 million at June 30, 2011.
- Debt totaled $564.3 million: $440.0 million outstanding under a term loan and $124.3 million of senior notes. The company had no short-term borrowings and $500.0 million available under its revolving facility. The term loan bears interest at LIBOR plus 125 basis points; senior notes carry a 6.125% fixed rate.
- Management said operating cash flow, cash on hand and available credit were expected to cover anticipated operating needs, capital expenditures, working capital, acquisitions, dividends and repurchases. Of cash, $88.5 million was held by foreign subsidiaries; repatriation for U.S. use could incur U.S. taxes.
Changes, unusual items and management commentary
- Revenue growth reflected higher recurring fees, net new business, internal growth, acquisitions and Penson outsourcing services. Lower mutual-fund proxy activity reduced event-driven fees and distribution revenue.
- Other expenses included $22.5 million of Penson-related impairment charges in the quarter and $32.2 million for nine months. The nine-month amount comprised impairment of Penson shares and a full write-off of the Penson note receivable, which Broadridge agreed to exchange for additional Penson shares under a proposed debt restructuring. IBM data-center migration costs were $5.7 million for the quarter and $12.6 million year to date.
- Broadridge reported non-GAAP adjusted net earnings from continuing operations of $36.2 million for the quarter and $70.3 million year to date, excluding Penson impairment and IBM migration costs. These figures compare with GAAP continuing-operations earnings of $18.1 million and $41.6 million, respectively.
- Paladyne Systems was acquired in September 2011 for $72.4 million net of cash acquired. No significant acquisitions occurred during the quarter.
- The company expects its migration of data-center processing from ADP to IBM to be substantially complete by June 2012. The ADP agreement expires June 30, 2012; a short-term extension was being negotiated. The IBM agreement runs through June 2022, with $563.1 million of remaining commitments disclosed.
- No specific earnings or revenue guidance was provided. Management cautioned that investor-communication activity is seasonal, with the largest volumes typically in the fourth fiscal quarter, and event-driven activity is difficult to forecast.
Risks, contingencies and controls
- Penson’s financial distress is a significant exposure: it is a major Securities Processing Solutions client, with approximately $50 million of projected annual revenue under the original outsourcing agreement. An amendment is expected to add $8.0 million of annual revenue after transition, targeted for completion by July 1, 2013. Broadridge warned that deterioration in Penson’s ability to perform could jeopardize revenue and lead to further impairment, including on $47.0 million of Penson-related deferred conversion and start-up costs that management continued to monitor.
- The filing identifies client concentration, contract renewals and pricing pressure, securities-market activity, cybersecurity and service interruptions, technology changes, competition, and the ADP-to-IBM transition as risks. The five largest clients represented approximately 24% of fiscal 2011 revenue; the largest client approximately 5%.
- Broadridge reported an Inveshare patent counterclaim seeking injunctive relief and unspecified damages; management did not expect a material adverse impact. It also disclosed clearinghouse-member guarantees whose potential payment is unquantifiable, but considered the likelihood of payment remote.
- Management concluded disclosure controls were effective as of March 31, 2012, with no material change in internal control over financial reporting during the quarter. The filing reported no material subsequent events through issuance.
Important facts for investors to verify
- Whether the Penson restructuring is completed, whether the exchange and expanded-services terms are finalized, and whether Penson continues meeting its obligations.
- Recoverability of Penson-related deferred conversion costs and any risk of additional impairment.
- Completion and operational performance of the IBM data-center migration, including any transition disruption or added costs.
- Underlying earnings trends excluding the sizable Penson impairments and migration costs, while considering that adjusted earnings are non-GAAP.
- Revenue and margin contribution from recurring business, acquisitions and new sales versus volatile event-driven activity and client concentration.
- Debt repayment, interest-rate exposure, and the scale of long-term IBM service commitments relative to cash generation.