Broadridge Financial Solutions, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2011. Comparisons are with the corresponding periods ended December 31, 2010, unless noted. Financial amounts are in millions except per-share data.
Business context
Broadridge provides investor communications, securities processing, and operations outsourcing services to the financial services industry. Its reportable segments are Investor Communication Solutions and Securities Processing Solutions. The quarter included the September 2011 acquisition of Paladyne Systems, a buy-side technology provider.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $479.8; up 8% from $442.3 | $956.2; up 11% from $863.7 |
| Pretax continuing earnings | $10.6, down 36%; margin 2.2% versus 3.7% | $36.8, down 2%; margin 3.8% versus 4.3% |
| Net earnings from continuing operations | $6.8 versus $10.6 | $23.5 versus $23.9 |
| Diluted EPS from continuing operations | $0.05 versus $0.08 | $0.19 versus $0.18 |
| Dividends declared per share | $0.16 versus $0.15 | $0.32 versus $0.30 |
- Revenue growth reflected recurring fees, internal growth, acquisitions, and the Penson outsourcing agreement. Lower mutual fund proxy activity reduced event-driven fees. Acquisitions and the Penson agreement contributed $23.5 of quarterly revenue and $44.9 for the six-month period.
- Investor Communication Solutions revenue rose 8% for the quarter and 10% for six months; Securities Processing Solutions revenue rose 10% and 11%, respectively. Six-month segment pretax earnings increased to $19.0 from $9.0 in Investor Communication Solutions and to $48.0 from $40.2 in Securities Processing Solutions.
- Operating cash flow was $88.1 for six months, versus $26.9 a year earlier, primarily reflecting improved receivable collections and working-capital movements. Investing activities used $93.9, including $72.3 for the Paladyne acquisition; financing activities provided $6.5.
- Cash and cash equivalents were $238.2 at December 31, 2011. Net working capital was $334.1, compared with negative $31.3 at June 30, 2011. Long-term debt was $594.3, including a $470.0 term loan and $124.3 of senior notes; $500.0 remained available under the revolving facility.
Changes, outlook, and risks
- Quarterly pretax earnings declined despite higher revenue, largely due to a $9.7 other-than-temporary impairment charge on Penson Worldwide shares, IBM data-center migration costs of $3.7, and increased acquisition, outsourcing, and other operating costs. For six months, the impairment and migration costs were $9.7 and $6.9, respectively.
- Management reported non-GAAP adjusted net earnings from continuing operations of $15.4 for the quarter and $34.1 for six months, excluding restructuring, impairment, and IBM migration costs; these compare with GAAP continuing earnings of $6.8 and $23.5, respectively.
- No specific earnings or revenue guidance is provided. Management said cash, operating cash flows, and available credit are expected to cover anticipated operating needs, capital expenditures, and working capital requirements. It expected the migration from ADP to IBM to be substantially complete by June 2012.
- Key uncertainties include volatility in event-driven activity, client concentration and retention, market and regulatory conditions, cybersecurity and service interruptions, and execution of the data-center transition. The IBM agreement carries $539.3 of remaining commitments through fiscal 2022. The company disclosed possible impairment exposure to Penson-related deferred conversion costs and a note receivable, though it considered them recoverable at quarter-end and said Penson was current on obligations.
- The company described an Inveshare patent lawsuit seeking injunctive relief and unspecified damages; management assessed the matter as not expected to have a material adverse impact. The filing also notes that clearinghouse guarantees are not quantifiable, although payment was considered remote.
Important facts for investors to verify
- Whether recurring revenue growth and new business can offset volatile, lower event-driven activity.
- How much the $9.7 Penson investment impairment and other excluded costs affect sustainable earnings, and whether Penson-related assets remain recoverable.
- Progress, costs, and service continuity in the ADP-to-IBM migration, including the long-term contractual commitment.
- Debt repayment, interest-rate exposure under the variable-rate term loan, covenant compliance, and continued access to the $500.0 revolving facility.
- Seasonality: the filing says investor communications activity is generally highest in the fourth fiscal quarter, limiting quarter-to-quarter comparability.