Broadridge Financial Solutions, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended June 30, 2011, with comparisons to fiscal 2010 and 2009. The request metadata says “2010 Q4,” but this filing is the FY2011 annual report; the filing’s fiscal fourth quarter ended June 30, 2011.
Business context
Broadridge provides investor communications and securities-processing technology and operations services to financial institutions and corporate issuers. Investor Communication Solutions (ICS) handled about 72% of FY2011 revenue; Securities Processing Solutions (SPS) handled about 28%. During the year, the company distributed more than 1.0 billion investor communications and processed an average of more than 1.5 million equity trades per day and over $4.0 trillion in U.S. and Canadian fixed-income trades per day.
Financial results and position
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Revenue | $2,166.9 million | $2,209.2 million | Down 2% |
| Pretax earnings from continuing operations | $269.7 million | $342.1 million | Down 21% |
| Pretax margin | 12.4% | 15.5% | Down 3.1 percentage points |
| Net earnings from continuing operations | $171.8 million | $225.1 million | Down 24% |
| Net earnings, including discontinued operations | $169.6 million | $190.0 million | Down 11% |
| Diluted EPS from continuing operations | $1.34 | $1.62 | Down 17% |
| Operating cash flow from continuing operations | $190.9 million | $360.1 million | Down $169.2 million |
- Segment performance: ICS revenue fell 7% to $1,559.4 million and pretax earnings fell 22% to $213.4 million, reflecting lower event-driven activity. SPS revenue rose 11% to $593.6 million, largely from acquisitions and the Penson outsourcing agreement, while pretax earnings fell 12% to $87.4 million. SPS margin was 14.7%; excluding Penson and City Networks, management reported margin of 19.7%.
- Cash flows: Investing used $340.8 million, including $293.5 million for acquisitions; financing used $45.3 million. Capital expenditures were $29.2 million.
- Liquidity and debt: Cash and equivalents were $241.5 million, down from $412.6 million. Total debt was $524.3 million: $400.0 million classified as short-term and $124.3 million in senior notes. The company reported $300.0 million of unused revolving capacity, but the credit facilities were due to expire in March 2012. Net working capital was negative $31.3 million, primarily because $400.0 million of debt was reclassified as current.
- Other balance-sheet items: Total assets were $1,904.0 million, stockholders’ equity $797.3 million, and goodwill $735.6 million. Five largest clients generated approximately 24% of consolidated revenue; the largest accounted for about 5%.
Material changes and unusual items
- Revenue declined mainly because mutual-fund proxy activity normalized from a record FY2010 level: FY2011 mutual-fund proxy fee revenue was 74% lower. Event-driven fee revenue fell $121.4 million; distribution revenue fell $76.5 million. Recurring revenue growth, acquisitions, the Penson agreement, net new business, internal growth, and currency partially offset the declines.
- FY2011 acquisitions included NewRiver ($77.6 million), Forefield ($18.3 million), and Matrix ($197.6 million), each net of cash acquired. Matrix added mutual-fund processing, custody, trust, trading, and settlement services. Acquisition spending contributed to the rise in goodwill and intangible assets.
- Broadridge completed the sale of substantially all Ridge securities-clearing client contracts in June 2010. FY2011 discontinued operations recorded a $2.2 million loss, compared with a $35.1 million loss in FY2010, primarily reflecting disposal-related items.
- FY2011 expenses included $6.3 million of IBM transition costs. Management estimated total migration costs of approximately $95 million, of which about $40 million would be expensed and $55 million capitalized.
- Quarterly results are seasonal: proxy and annual-report activity is concentrated in the fourth fiscal quarter. FY2011 Q4 revenue was $776.1 million, versus $527.1 million in Q3.
Outlook, risks, and contingencies
- Management expected to complete the data-center migration from ADP to IBM by June 2012. It anticipated average annual cost savings of approximately $25 million, net of deferred-cost amortization, over the agreement’s term beginning in FY2013. These are expectations, not guaranteed results.
- The company intended to refinance its term and revolving credit facilities in the first quarter of FY2012 and expected higher interest rates on the refinanced facilities. Management stated that cash, operating cash flow, and available borrowing capacity were expected to meet anticipated needs.
- An August 4, 2011 letter of intent contemplated expanded outsourcing work with Penson, but was non-binding and subject to definitive agreements and conditions.
- Key risks include dependence on financial-services clients and market activity, client concentration and pricing pressure, regulatory and proxy-fee changes, data-security breaches, operational or technology failures, reliance on outsourced data centers and the ADP-to-IBM transition, competition, and acquisition integration. A sufficiently unfavorable FFIEC review could also affect clients’ ability to use Broadridge’s services.
- Broadridge was involved in patent litigation with Inveshare concerning electronic solicitation services; Inveshare sought injunctive relief and unspecified damages. The company said the outcome could not be predicted. Other claims were not expected by management to have a material effect.
- The board increased the quarterly dividend after year-end to $0.16 per share, from $0.15; future dividends remain discretionary. The company reported compliance with credit-facility covenants. Independent auditors gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether proxy and mutual-fund event activity stabilizes after the unusually high FY2010 comparison, and the resulting effect on ICS revenue and margins.
- Progress, total costs, service continuity, and realized savings from the IBM migration; confirm refinancing terms and liquidity before the March 2012 facility maturities.
- Whether Matrix and the other acquisitions deliver expected growth and synergies, including how goodwill and acquired intangible assets perform.
- Collectability and value of the $20.6 million Penson note and Penson share investment, plus completion and economics of any expanded outsourcing arrangement.
- Developments in the Inveshare patent case, regulatory or proxy-fee changes, and any material client losses or security and service interruptions.