BROADRIDGE FINANCIAL SOLUTIONS, INC. quarterly report, Q2 FY2011

Business context and reporting period

Broadridge Financial Solutions, Inc. filed this Form 10-Q for the quarter ended December 31, 2010, the second quarter of fiscal 2011. The company provides investor communications and securities processing and operations outsourcing services. Comparisons below are with the corresponding 2009 periods; amounts are in millions except per-share data.

Financial performance and liquidity

For the six months, investing cash outflow from continuing operations was $112.0, mainly reflecting $95.7 of acquisitions; financing cash outflow was $149.6, including $120.8 of treasury-stock purchases and $37.7 of dividends paid. Cash and equivalents were $187.8 at December 31, 2010, down from $412.6 at June 30, 2010. Working capital was $320.4, versus $506.0. Long-term debt was $324.2: a $200.0 variable-rate term loan and $124.2 of senior notes. A $500.0 revolving facility had no balance outstanding at December 31. The company reported no known covenant noncompliance and said available cash, operating cash flow and borrowing capacity should meet anticipated needs.

Material changes versus the prior comparable periods

• Investor Communication Solutions revenue declined 25% in the quarter and 18% for the half year, primarily because of lower event-driven mutual-fund proxy activity and related distribution revenue. Consolidated fee revenue and distribution revenue both fell.
• Securities Processing Solutions revenue rose 9% in both periods, but segment pre-tax earnings fell 18%. Excluding the Penson transaction and City Networks acquisition, revenue and earnings were described as essentially unchanged.
• Lower revenue reduced continuing-operations pre-tax earnings sharply. SG&A increased 15% in both comparison periods, reflecting acquisition costs and strategic initiatives; lower distribution costs partly offset this.
• The 2010 periods had higher effective tax rates: 35.8% for the quarter and 36.1% for the half year, versus 24.8% and 29.6%. The filing attributes the comparison primarily to a one-time tax benefit recognized in December 2009.
• The prior-year six-month net loss from discontinued operations included an $17.9 impairment charge; the current-period discontinued-operations loss was $0.2.

Outlook, risks, contingencies and unusual items

• Management gave no specific earnings or revenue forecast. It noted that proxy and annual-report processing is seasonal, with the greatest activity typically in the fourth fiscal quarter, and cautioned that quarterly results may not indicate full-year performance.
• After quarter-end, Broadridge completed its acquisition of Matrix Financial Solutions on January 7, 2011, for $201.0 in cash plus a working-capital adjustment. It borrowed $200.0 under the revolving facility to finance the acquisition; the purchase-price allocation was still being determined.
• During the reported half year, the company acquired NewRiver for $77.4 and Forefield for $18.3, net of cash acquired. These acquisitions contributed to higher goodwill, intangible assets and acquisition-related costs.
• Broadridge planned to migrate data-center processing from ADP to IBM by June 2012. The IBM agreement runs through October 2021 and carries disclosed commitments of $561.5 through fiscal 2022. ADP service costs were $54.5 for the six-month period; no IBM service expenses were recorded in the period.
• The securities-clearing business was being wound down following the sale of substantially all client contracts to Penson in June 2010; completion was expected in fiscal 2011. Transitional cash flows and income-statement activity continued.
• Broadridge described an early-stage patent lawsuit with Inveshare, which seeks injunctive relief and unspecified damages. The company said it could not predict the outcome. It also disclosed clearinghouse and exchange guarantees whose potential liability is unquantifiable, while stating that payment was remote.
• Key stated risks include client retention and new sales, pricing, regulation, securities-market activity, economic conditions, data security, outsourced-provider performance, system disruptions, technology change, personnel, acquisitions and competition. The filing reported no material change to the risk factors in the 2010 Form 10-K.

Important facts for investors to verify

• Whether event-driven proxy activity remains weak and how seasonal fourth-quarter volumes affect full-year revenue and earnings.
• Whether Matrix integration and the NewRiver and Forefield acquisitions deliver expected benefits, including the impact of acquisition-related costs and the additional borrowing.
• Cash conversion and working-capital trends, given the substantial decline in continuing-operations operating cash flow and period-end cash.
• Funding and execution of the IBM data-center transition and the long-term contractual commitment.
• Developments in the Inveshare litigation, securities-clearing wind-down and any remaining Penson transaction adjustments.
• Share repurchases, dividends, debt covenant compliance and available capacity under the revolving facility.