Broadridge Financial Solutions, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2011 (fiscal 2011 Q3), compared with the corresponding 2010 periods. The request metadata says “2010 Q3,” but the filing itself is for the quarter ended March 31, 2011. Amounts are in millions except per-share data.
Business context
Broadridge provides investor communications, securities processing, and operations outsourcing services to financial institutions and securities issuers. Its continuing operations comprise Investor Communication Solutions and Securities Processing Solutions. The securities-clearing business is reported as discontinued operations following the sale of substantially all client contracts to Penson in June 2010.
Financial performance
| Metric | Three months ended March 31, 2011 | Three months ended March 31, 2010 | Nine months ended March 31, 2011 | Nine months ended March 31, 2010 |
|---|---|---|---|---|
| Revenue | $527.1 | $490.8 | $1,390.8 | $1,458.7 |
| Continuing pretax earnings | $51.1 | $48.4 | $88.5 | $159.4 |
| Continuing net earnings | $32.6 | $30.8 | $56.5 | $108.9 |
| Total net earnings, including discontinued operations | $29.7 | $24.9 | $53.4 | $84.9 |
| Diluted EPS from continuing operations | $0.25 | $0.22 | $0.44 | $0.78 |
| Diluted EPS, total | $0.23 | $0.18 | $0.42 | $0.61 |
| Continuing pretax margin | 9.7% | 9.9% | 6.4% | 10.9% |
- Quarter revenue grew 7%, and continuing pretax earnings rose 6%; higher recurring revenue, acquisitions, and securities-processing growth more than offset weaker mutual-fund proxy activity. The quarter’s continuing pretax margin eased 0.2 percentage points.
- Nine-month revenue declined 5%, while continuing pretax earnings fell 44% and continuing net earnings fell 48%. The principal driver was a $95.3 decline in event-driven fee revenue, mainly mutual-fund proxy activity, versus a record comparison period. A prior-year one-time tax benefit also contributed to the higher 2011 effective tax rate.
- Investor Communication Solutions revenue rose 3% in the quarter but fell 11% for the nine months. Securities Processing Solutions revenue increased 15% and 11%, respectively. Nine-month pretax earnings fell 62% in Investor Communication Solutions and 8% in Securities Processing Solutions.
- Discontinued operations generated net losses of $2.9 for the quarter and $3.1 for the nine months, primarily disposal-related; comparable 2010 losses were $5.9 and $24.0.
Cash flow, liquidity, and capital
- For the nine months, operating cash flow from continuing operations was $38.9, down from $180.8. Management attributed the decline mainly to lower earnings and an $89.4 working-capital increase, including timing of receivable collections and vendor payments.
- Continuing investing cash outflow was $323.3, including $293.3 for acquisitions; financing cash flow was positive $8.8, including $240.0 of borrowing proceeds. The company spent $202.8 repurchasing treasury stock and paid $56.4 in dividends.
- At March 31, cash was $151.3, total borrowings were $564.2, and stockholders’ equity was $692.3. Borrowings included $440.0 classified as short-term—$200.0 under a term loan and $240.0 under a revolver—and $124.2 of senior notes. Net working capital was negative $149.5, versus positive $506.0 at June 30, 2010.
- The $200.0 term loan and $240.0 revolver mature in March 2012. Management said it intended to refinance the revolver in fiscal Q1 2012 and the term loan before maturity. It considered cash, operating cash flow, and available credit sufficient for anticipated needs. No borrowing covenant non-compliance was reported.
- Senior notes carry a fixed 6.125% rate and mature in 2017. Variable-rate borrowings totaled $440.0. The filing reports no derivative financial instruments outstanding.
Outlook, risks, and notable items
- No specific earnings or revenue guidance is provided. Management cautioned that event-driven activity, particularly mutual-fund proxy work, is difficult to forecast and may remain volatile; activity in the nine months was 75% below the prior-year period.
- Management highlighted the business’s seasonal pattern: proxy and annual-report processing is typically greatest in fiscal Q4, so interim results may not indicate full-year performance.
- Broadridge acquired NewRiver, Forefield, and Matrix during the nine months for a combined stated purchase price of approximately $293.1 net of cash acquired. These acquisitions added $213.8 of goodwill; total goodwill rose to $733.4. Integration, expected synergies, and the acquired businesses’ performance are relevant execution considerations.
- The company is transitioning data-center services from ADP to IBM, expecting migration completion by June 2012. The IBM agreement runs through January 2022 and includes $573.7 of commitments; no related expenses had been recorded through March 31, 2011.
- Risks identified include client retention and new sales, pricing and competition, securities-market activity, regulatory changes, data security and privacy, service interruptions or errors, outsourced-provider performance, acquisitions, and retention of key personnel. Regulatory developments concerning the U.S. proxy system could require changes or additional costs.
- Broadridge described an early-stage patent dispute with Inveshare, which seeks injunctive relief and unspecified damages. Management said ordinary-course claims and litigation were not expected to have a material adverse impact, but the outcome of this case could not be predicted.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress and terms of refinancing the $440.0 of borrowings due in March 2012, and continued compliance with credit covenants.
- Whether operating cash flow recovers from the nine-month decline and working-capital pressure.
- Mutual-fund proxy volumes, event-driven revenue, and the sustainability of recurring revenue and closed sales.
- Integration results and realized growth or cost synergies from Matrix, NewRiver, and Forefield, including the basis for acquired goodwill.
- Execution and cost implications of the ADP-to-IBM data-center transition and the long-term service commitment.
- Developments in the Inveshare litigation, proxy-system regulation, and operational, cybersecurity, or privacy risks.