Broadridge Financial Solutions, Inc. — Q1 FY2013 Form 10-Q
Reporting period: Three months ended September 30, 2012; comparisons are with the three months ended September 30, 2011 unless noted. Broadridge provides investor communications and securities processing services to the financial services industry.
Financial results
- Revenue: $495.8 million, up 4% from $476.4 million. Recurring fee revenue rose $9.1 million, distribution revenue rose $8.0 million, and event-driven fees rose $4.9 million. Paladyne contributed $5.1 million; foreign exchange reduced revenue by $2.6 million.
- Profit and margins: Earnings before tax were $28.6 million, up 9%; pretax margin was 5.8%, versus 5.5%. Net earnings from continuing operations were $18.3 million, up 10%; diluted continuing-operations EPS was $0.14 versus $0.13. The effective tax rate was 36.0%, compared with 36.3%.
- Expenses: Total expenses increased 4% to $467.2 million. SG&A increased 13% to $72.9 million; other expenses rose to $4.3 million, mainly reflecting higher interest expense.
- Cash flow: Operating activities used $15.6 million, versus $23.3 million provided in the prior-year quarter. Management attributed the change primarily to working-capital movements, including collection and payment timing. Investing activities used $8.1 million, compared with $79.3 million, largely because the prior-year period included the Paladyne acquisition. Financing activities used $86.9 million, versus $66.9 million provided, reflecting greater share repurchases and lower net borrowing proceeds.
- Liquidity and debt: Cash was $211.8 million at September 30, down from $320.5 million at June 30, 2012; working capital was $307.3 million, versus $367.1 million. Debt totaled $524.4 million: $400.0 million under the term loan and $124.4 million of senior notes. The $500 million revolving facility was undrawn. $127.0 million of cash was held by foreign subsidiaries; repatriation for U.S. use could incur U.S. taxes.
- Capital returns: The company paid $20.3 million in dividends and repurchased $76.1 million of treasury stock. It declared dividends of $0.18 per share, up from $0.16.
Changes and segment performance
- Investor Communication Solutions: Revenue rose 8% to $339.5 million; pretax earnings increased to $27.2 million from $8.4 million, with margin up 5.3 percentage points to 8.0%. The filing cites higher recurring and event-driven fees, distribution revenue, and productivity improvements.
- Securities Processing Solutions: Revenue fell 3% to $153.9 million; pretax earnings declined 66% to $9.4 million and margin fell 11.5 points to 6.1%. Trade volumes were down 19% to 821,000 trades per day. The company cited the lower revenue from the replacement Apex outsourcing contract after termination of the Penson contract, revenue mix, and increased systems investment.
- Closed sales decreased 38% to $19.3 million: recurring closed sales fell 31% and event-driven closed sales fell 50%. Management cautioned that closed sales are estimates based on client activity and may take time to convert to revenue.
- Non-GAAP adjusted net earnings were $22.3 million versus $22.8 million, and adjusted diluted EPS was $0.18 in both periods. The filing excludes acquisition amortization and other costs, Penson charges, and IBM migration costs from these adjusted measures.
Outlook, risks, and notable items
- No numerical earnings or revenue guidance is provided. Management expects cash, operating cash flow, and available credit to cover anticipated operating needs, capital expenditures, acquisitions, dividends, and repurchases.
- Results are seasonal: proxy and annual-report processing is typically greatest in the fourth fiscal quarter, and the company warns that first-quarter results are not necessarily indicative of full-year performance. Event-driven activity, particularly mutual fund proxy work, can be volatile.
- The IBM data-center migration was completed in August 2012; the agreement runs through June 2022, with $535.7 million of remaining commitments. The former ADP arrangement and extension had ended by August 2012.
- Risks highlighted include client concentration and retention, securities-market activity, regulation, cybersecurity, technology and service disruptions, reliance on outsourced data-center services, competition, and acquisitions. Management reported no material changes to the risk factors in its 2012 Form 10-K and no known credit-covenant noncompliance.
- The Inveshare patent dispute includes a counterclaim seeking injunctive relief and unspecified damages; management believes it will not materially affect the company. The filing also describes potential clearinghouse-member guarantees whose exposure is not quantifiable, though the chance of payment is considered remote.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the decline in Securities Processing Solutions earnings and trade volumes persists, and how the Apex replacement contract develops.
- Whether recurring revenue growth and closed-sales trends convert into sustained revenue, considering seasonality and event-driven volatility.
- The drivers and timing of negative quarterly operating cash flow and the substantial cash balance reduction.
- Debt-service capacity, floating-rate exposure on the $400 million term loan, and the effect of foreign cash repatriation taxes if U.S. funding needs change.
- Execution and service risks under the long-term IBM agreement and the $535.7 million remaining commitment.
- Developments in the Inveshare litigation and any material changes in the disclosed regulatory, cybersecurity, client, or operational risks.