Business context and reporting period
Broadridge Financial Solutions, Inc. provides investor communications, securities processing and operations outsourcing to the financial-services industry. This Form 10-Q reports the fiscal third quarter and first nine months ended March 31, 2013, with comparisons to the periods ended March 31, 2012. The filing identifies the reporting period as 2013 Q3, notwithstanding the request metadata.
Its two reportable segments are Investor Communication Solutions (ICS) and Securities Processing Solutions (SPS). Results are unaudited; amounts below are in millions except per-share data.
Financial performance
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue | 2013: $576.7; 2012: $547.0 (+5%) | 2013: $1,565.7; 2012: $1,503.2 (+4%) |
| Earnings before tax from continuing operations | $67.7 vs. $28.8; margin 11.7% vs. 5.3% | $121.0 vs. $65.6; margin 7.7% vs. 4.4% |
| Net earnings from continuing operations | $43.4 vs. $18.1 | $77.5 vs. $41.6 |
| Diluted EPS from continuing operations | $0.35 vs. $0.14 | $0.62 vs. $0.33 |
| Operating cash flow | Not separately provided for the quarter | $72.3 vs. $103.9 |
Quarterly revenue growth reflected higher recurring fees and distribution revenue; event-driven fees were also modestly higher. For the nine months, recurring fees, distribution and event-driven revenue all increased. Management attributed improved earnings and margins to revenue growth and mix, productivity and cost containment, as well as the absence of prior-year impairment charges.
GAAP diluted EPS from continuing operations was $0.35 for the quarter and $0.62 for the nine-month period. Non-GAAP adjusted diluted EPS was $0.39 and $0.74, respectively; adjusted net earnings were $49.5 and $93.6. These adjusted measures exclude acquisition amortization and other costs, restructuring and impairment charges, and IBM migration costs.
Segments and material period changes
- ICS: Revenue rose 8% to $404.2 for the quarter and 7% to $1,070.5 year to date. Pre-tax earnings were $50.8 for the quarter (+38%) and $94.5 year to date (+69%). Growth reflected recurring and distribution revenue, with higher nine-month event-driven activity also contributing.
- SPS: Revenue was essentially flat at $169.6 for the quarter and declined slightly to $487.3 year to date. Pre-tax earnings rose 16% to $28.7 for the quarter, but fell 20% to $58.1 year to date. Management cited IBM data-center savings in the quarter; year-to-date earnings were pressured by business mix and higher systems investment.
- Expenses and unusual items: No impairment charge was recorded in 2013. Prior-year charges were $22.5 for the quarter and $32.2 year to date, principally related to Penson. 2013 restructuring costs were $3.8 for the quarter and $8.1 year to date. SG&A increased 12% for the quarter and 10% year to date; cost of revenue rose 1% in both comparisons.
- Sales: Closed sales increased 43% to $32.8 in the quarter but declined 17% to $83.0 year to date. Year-to-date recurring closed sales fell 26%, primarily because larger pending sales had longer-than-anticipated sales cycles; excluding large sales, recurring closed sales were essentially flat.
Cash, liquidity and debt
At March 31, 2013, cash and cash equivalents were $182.2, down from $320.5 at June 30, 2012. Working capital was $262.1, compared with $367.1. Current assets were $711.3 and current liabilities $449.2. Total stockholders’ equity was $771.0.
For the first nine months, operating cash flow was $72.3, down from $103.9, principally reflecting working-capital timing, including receivables collections and vendor payments. Investing cash outflow was $35.6 versus $102.7, mainly because the prior-year period included $72.4 of acquisition spending. Financing cash outflow was $175.7 versus $20.5, primarily reflecting increased share repurchases and lower net borrowing proceeds.
Total debt was $524.5: a $400.0 term loan and $124.5 of senior notes. The company had no revolver borrowings and $500.0 of unused revolving capacity. The term loan bears interest at LIBOR plus 125 basis points; its weighted-average rate was 1.46% for the quarter. Senior notes carry a 6.125% rate and mature in June 2017. Management reported covenant compliance and said cash, operating cash flow and available credit should cover anticipated needs. Of cash on hand, $84.1 was held by foreign subsidiaries; repatriating it to the U.S. would require tax, although management said current plans did not require repatriation.
Outlook, risks and contingencies
The filing gives no specific earnings or revenue guidance. Management expects operating cash generation, existing cash and available borrowing capacity to fund working capital, capital expenditures, strategic acquisitions, dividends and repurchases. Results are seasonal: proxy and annual-report processing typically makes the fourth fiscal quarter the strongest, so individual-quarter results may not indicate full-year performance.
- Risks include client retention and concentration, market and securities activity, regulation, competition, technology change, cybersecurity, service or systems interruptions, and reliance on outsourced data-center services.
- The IBM IT-services agreement runs through June 2022, with $510.7 of remaining commitments at March 31, 2013. The data-center migration from ADP was completed in August 2012.
- The company provides clearinghouse and exchange guarantees whose potential liability is not quantifiable and could exceed posted collateral; management characterized the likelihood of payment as remote.
- Other litigation was not expected to have a material effect. The Inveshare patent litigation was settled in the quarter ended December 31, 2012, without material adverse impact. No material subsequent events were reported.
- The company repurchased 2.0 million shares during the quarter for an average $22.73 per share. On April 30, 2013, the board authorized a further six million-share repurchase plan; approximately 10 million shares were then available under its plans.
Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether delayed larger sales convert to revenue, and whether recurring closed sales recover after the year-to-date decline.
- How much of earnings growth reflects underlying operations versus the absence of prior-year Penson impairments and IBM migration costs; compare GAAP and adjusted results.
- Whether SPS year-to-date earnings pressure from business mix and systems investment continues, and whether ICS growth is sustained.
- Working-capital movements and operating cash conversion, given the year-over-year decline in nine-month operating cash flow.
- Debt repayment requirements, floating-rate exposure, credit-facility covenant compliance and the cash needed for the IBM contract commitments.
- Share-repurchase pace and its effect on cash, debt and shares outstanding; also consider foreign cash repatriation tax implications and the seasonality of fourth-quarter results.