Business Context and Reporting Period
Company: Broadridge Financial Solutions, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: Broadridge is a global provider of investor communication, securities processing, and clearing/outsourcing solutions. Operations are divided into three segments: Investor Communication Solutions, Securities Processing Solutions, and Clearing and Outsourcing Solutions.
Key Financial Metrics
| Metric (in millions, except per share) | Q3 2009 | Q3 2008 |
|---|---|---|
| Total Net Revenues | $457.9 | $472.4 |
| Net Earnings | $26.4 | $35.6 |
| Diluted EPS | $0.19 | $0.25 |
| Operating Margin | 9.2% | 12.3% |
| Cash and Cash Equivalents | $231.5 | $68.0 |
| Long-term Debt | $324.1 | $324.1 |
| Working Capital | $551.6 | N/A |
Note: Working capital calculated as Current Assets ($2,123.6M) minus Current Liabilities ($1,572.0M).
Material Changes vs. Prior Period
- Revenue Decline: Net revenues decreased 3% ($14.5 million) year-over-year. This was driven by a 2% drop in services revenues and a 37% drop in other revenues (primarily lower interest income due to reduced Federal Funds rates and margin balances).
- Profitability Compression: Net earnings fell 26% ($9.2 million). Operating margins contracted from 12.3% to 9.2%.
- Segment Performance:
- Investor Communication Solutions: Revenues down 1%; earnings flat.
- Securities Processing Solutions: Revenues down 7%; earnings down 25% due to price concessions and lower fixed income trade volumes.
- Clearing and Outsourcing Solutions: Revenues up 10%; losses narrowed slightly.
- Cash Flow: Net cash used in operating activities was $2.2 million, a significant improvement from the $246.3 million used in the prior year. This improvement is largely due to reduced cash usage in securities clearing activities.
- Share Repurchases: The company repurchased approximately 3.5 million shares of common stock during the quarter under a new plan authorized in August 2009.
Guidance, Outlook, and Risks
- Subsequent Event (Divestiture): On November 2, 2009, Broadridge entered an agreement to sell substantially all securities clearing client contracts to Penson Worldwide, Inc. for between $60 million and $70 million. A 10-year outsourcing agreement was also signed to provide services to the buyer.
- Liquidity: Management believes cash on hand, operating cash flows, and available credit facilities ($575 million total capacity) are sufficient to meet current and anticipated needs.
- Risks: Key risks include declines in trading volume, regulatory changes affecting investor communications and clearing firms, and the company's reliance on ADP for data center services. The company also faces market risk from foreign currency exchange rates and counterparty risk in its clearing operations.
- Tax Rate: The effective tax rate decreased to 37.5% from 38.8%, attributed to state tax credits and lower international tax rates.
Investor Verification Checklist
- Divestiture Closing: Verify the final purchase price and closing date of the Penson Worldwide transaction, including any post-closing adjustments.
- Securities Processing Growth: Monitor the impact of price concessions and fixed income volume trends on the Securities Processing segment's margin recovery.
- Interest Rate Sensitivity: Assess the impact of the Federal Funds rate on the Clearing and Outsourcing segment's net interest income.
- Share Buyback Progress: Track the remaining capacity ($6.5 million shares) and execution of the stock repurchase plan.
- ADP Dependency: Review the status of the data center outsourcing agreement with ADP, which expires in June 2012.