Broadridge Financial Solutions, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended June 30, 2013. The filing also reports fourth-quarter results; the company’s proxy and annual-report processing business is seasonal, typically making Q4 its strongest quarter. Figures are in U.S. dollars; financial amounts are in millions unless noted.
Business context
Broadridge provides investor communications, securities processing, and business-process outsourcing services to financial institutions, funds, and public companies. Its two segments are Investor Communication Solutions and Securities Processing Solutions. In FY2013, it processed approximately 85% of U.S. outstanding shares for proxy services and more than $5 trillion of U.S. and Canadian equity and fixed-income trades per day on average.
Financial performance and liquidity
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $2,430.8 | $2,303.5 | +6% |
| Pre-tax earnings from continuing operations | $323.2 | $200.9 | +61% |
| Pre-tax margin | 13.3% | 8.7% | +4.6 points |
| Net earnings from continuing operations | $212.1 | $125.0 | +70% |
| Diluted EPS from continuing operations | $1.69 | $0.98 | +72% |
| Adjusted net earnings from continuing operations (non-GAAP) | $236.0 | $213.4 | +11% |
| Adjusted diluted EPS (non-GAAP) | $1.88 | $1.67 | +13% |
- Revenue growth reflected higher recurring fees (+$56.9), distribution revenue (+$50.3), and event-driven fees (+$23.6), including stronger mutual-fund proxy and supplemental prospectus activity. Distribution revenue is associated with related delivery costs.
- Investor Communication Solutions revenue rose 8% to $1,760.2; pre-tax earnings increased 24% to $302.1, with margin improving to 17.2% from 14.9%. Securities Processing Solutions revenue rose 1% to $660.5, while pre-tax earnings declined 6% to $85.2 and margin fell to 12.9% from 13.9%, reflecting lower trade volumes and the Apex agreement.
- Operating cash flow was $270.9, down from $290.6, mainly due to the timing of receivable collections and vendor payments. Investing used $52.0; financing used $273.2, including $238.5 of treasury-stock purchases and $85.8 of dividends paid.
- Cash and cash equivalents were $266.0, down from $320.5; net working capital was $337.5, down from $367.1. Total assets were $2,018.2 and stockholders’ equity was $816.0.
- Long-term debt was $524.5: a $400.0 floating-rate term loan and $124.5 of 6.125% senior notes. The $500.0 revolving credit facility was undrawn. The term-loan weighted-average rate was 1.47%; the company reported compliance with debt covenants.
Material changes, outlook, and unusual items
- FY2013’s sharp GAAP earnings improvement partly reflects FY2012 charges: $74.2 of impairment and other charges, including costs tied to Penson, as well as $24.6 of IBM migration costs. FY2013 had no impairment and other charges in the income statement, but included $96.3 of IBM-related expenses. Management reported approximately $15.0 of net IBM-transition savings in FY2013 and anticipated average annual net savings of approximately $25.0 beginning in FY2014.
- Management said cash, operating cash generation, and available credit were expected to cover working capital, capital expenditure, acquisitions, dividends, and share repurchases. The filing does not provide a specific revenue or earnings forecast.
- The company raised its quarterly dividend from $0.18 to $0.21 per share after year-end, effective following the August 2013 board action. FY2013 dividends declared were $0.72 per share. Future dividends remain subject to board discretion.
- Broadridge repurchased 9.7 million shares during FY2013. At June 30, 6,622,820 shares remained authorized for repurchase under its plans.
- IBM data-center migration was completed in August 2012. The agreement runs through June 2022; disclosed remaining commitments were $496.3. The filing identifies dependence on IBM and service continuity as risks.
- In July 2013, after year-end, Broadridge completed a $36.0 acquisition to expand mutual-fund offerings, with up to $4.0 additional contingent consideration tied to performance.
- Key risks include client concentration (five clients generated about 25% of revenue; the largest about 6%), market activity and trading-volume sensitivity, pricing pressure, regulatory change, cybersecurity and operational disruption, and dependence on outsourced data-center services. Goodwill was $778.4; management said a 10% change in specified valuation assumptions would not trigger impairment. Ordinary-course litigation was not expected to have a material impact.
- The filing reports effective disclosure controls and internal control over financial reporting; the independent auditor issued an unqualified opinion on the financial statements and internal controls.
Most important facts for investors to verify
- How much of the GAAP earnings increase reflects prior-year Penson and IBM charges versus ongoing operating improvement; compare with the company’s non-GAAP reconciliation.
- Whether anticipated IBM savings materialize, and how the long-term IBM contract’s costs and service risks develop.
- Whether Securities Processing Solutions can restore revenue and margin growth amid lower trade volumes and the Apex agreement.
- Trends in recurring versus event-driven communications revenue, including the volatility of mutual-fund proxy activity and the seasonally strong fourth quarter.
- Client retention and concentration, cash conversion, debt repayment capacity, and the sustainability of repurchases and dividend increases.