Broadridge Financial Solutions, Inc. — Form 10-Q summary
Business context and period: Broadridge provides investor communications, securities processing and operations outsourcing to the financial services industry. This filing covers the quarter and six months ended December 31, 2012, the second quarter of fiscal 2013. Amounts are in millions except per-share data.
Financial performance
| Metric | Quarter ended Dec. 31, 2012 | Prior-year quarter | Six months ended Dec. 31, 2012 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $493.2 | $479.8 | $989.0 | $956.2 |
| Pre-tax earnings from continuing operations | $24.7 | $10.6 | $53.3 | $36.8 |
| Pre-tax margin | 5.0% | 2.2% | 5.4% | 3.8% |
| Net earnings from continuing operations | $15.8 | $6.8 | $34.1 | $23.5 |
| Diluted EPS | $0.13 | $0.05 | $0.27 | $0.19 |
- Quarter revenue rose 3%; quarterly pre-tax earnings increased 133%. For the six-month period, revenue rose 3% and pre-tax earnings increased 45%.
- Management attributed improved earnings primarily to higher revenues, business mix, productivity and cost containment. The prior-year periods included a $9.7 million impairment charge related to Penson Worldwide securities; the prior year also included IBM migration costs.
- Quarterly segment revenue: Investor Communication Solutions (ICS) $326.8, up 3%; Securities Processing Solutions (SPS) $163.8, up 2%. Six-month revenue: ICS $666.3, up 6%; SPS $317.7, down 1%.
- Six-month segment pre-tax earnings were $43.7 for ICS, up from $19.0, and $29.4 for SPS, down from $48.0. SPS weakness reflected revenue mix and increased systems investment.
- Quarterly recurring and distribution revenues increased, while event-driven fees were essentially flat. Six-month event-driven fees rose to $59.9 from $55.1.
- Closed sales declined: 34% for the quarter to $30.9 and 35% for the six months to $50.2. Management cited longer-than-anticipated sales cycles for some larger pending recurring-revenue sales.
- Adjusted net earnings, a non-GAAP measure, were $21.8 for the quarter and $44.1 for six months, versus $19.4 and $42.2, respectively. Adjusted diluted EPS was $0.17 and $0.35, versus $0.15 and $0.33. These figures exclude acquisition-related costs, restructuring and impairment charges, and IBM migration costs.
Cash flow, liquidity and debt
- Six-month operating cash flow was $73.5, down from $88.1, primarily due to working-capital timing, including receivable collections and vendor payments. Investing cash outflow was $19.0 versus $93.9, reflecting no current-period acquisitions versus $72.3 of acquisition spending in the prior period.
- Financing cash outflow was $118.2, mainly reflecting $92.7 of treasury-stock purchases and $42.3 of dividends paid. Cash and cash equivalents declined $61.4 to $259.1 from June 30, 2012.
- At December 31, cash was $259.1, working capital was $309.2, total assets were $1,856.2 and stockholders’ equity was $783.4. Cash held by foreign subsidiaries was $125.9; repatriation to the U.S. could incur U.S. tax. A previously agreed $50.0 net cash transfer from Canadian subsidiaries to the U.S. parent was expected in fiscal Q3 2013, with related tax effects accrued in the prior fiscal year.
- Total debt was $524.4: a $400.0 variable-rate term loan and $124.4 of senior notes. The $500.0 revolving credit facility was undrawn. The term loan bears interest at LIBOR plus 125 basis points; its weighted-average rate was 1.48% for the six-month period. Senior notes bear 6.125% interest and mature in June 2017. Management reported covenant compliance.
- Management said cash, operating cash flow and available credit were expected to be sufficient for anticipated operating needs, capital expenditures, acquisitions, dividends and repurchases. The filing does not provide quantitative earnings or revenue guidance.
Outlook, risks and notable items
- Proxy and annual-report processing is seasonal, with activity and cash flows historically highest in the fourth fiscal quarter. Event-driven revenues, particularly mutual fund proxy activity, can fluctuate and are difficult to forecast.
- The company completed its data-center migration from ADP to IBM in August 2012. Remaining commitments under the IBM services agreement were $525.3 through fiscal 2022.
- Key disclosed risks include client retention and concentration, securities-market activity and economic conditions, regulation, cybersecurity or service disruption, dependence on outsourced data-center services, technology changes, competition, and attracting and retaining personnel.
- The company settled its Inveshare patent litigation during the quarter; the settlement had no material adverse financial impact. Management said other claims and litigation were not expected to have a material impact.
- Guarantees to clearinghouses and exchanges are not quantifiable and could exceed posted collateral, though the company considered the likelihood of payment remote. No contingent liability was recorded.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Investor verification points
- Track whether lower recurring-revenue closed sales and longer sales cycles convert into future revenue and whether the pipeline recovers.
- Assess SPS performance, including the effects of lower trade volumes, the Apex contract replacing Penson, and higher systems investment.
- Compare operating cash flow across periods and monitor working-capital timing, repurchases and dividends against cash generation.
- Review debt repayment requirements beginning March 2013, floating-rate exposure, covenant headroom and the substantial remaining IBM contract commitments.
- Evaluate the sustainability of earnings growth, including the prior-year impairment comparison and the company’s non-GAAP adjustments, alongside seasonality and event-driven revenue volatility.