Broadridge Financial Solutions, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2011, three months ended September 30, 2010; filed November 4, 2010. Dollar amounts are in millions except per-share data. Broadridge provides investor communications and securities processing and operations outsourcing services to the financial services industry.
Financial performance
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Revenue | $421.4 | $438.2 | Down 4% |
| Total expenses | $400.5 | $395.7 | Up $4.8 |
| Continuing-operations pretax earnings | $20.9 | $42.5 | Down 51% |
| Pretax margin | 5.0% | 9.7% | Down 4.7 percentage points |
| Continuing-operations net earnings | $13.3 | $26.6 | Down 50% |
| Diluted EPS from continuing operations | $0.10 | $0.19 | Down $0.09 |
| Operating cash flow from continuing operations | $(24.5) | $29.9 | Down $54.4 |
The effective tax rate was 36.4%, compared with 37.4%; management attributed the decrease primarily to a more favorable geographic mix of income. Basic and diluted weighted-average shares were 126.5 million and 129.6 million, respectively, versus 138.1 million and 140.4 million a year earlier.
Segments and drivers
- Investor Communication Solutions: Revenue was $279.5, down 10%; pretax earnings were $6.4, down 73%. Lower event-driven mutual fund proxy activity and related distribution revenue were the main pressures. Strategic initiatives, MSSB-related costs, and acquisition investment also weighed on margin, which declined to 2.3%.
- Securities Processing Solutions: Revenue was $141.7, up 9%, while pretax earnings were $20.9, down 18%. Growth reflected the Penson transaction and City Networks acquisition; excluding these, revenue and earnings were described as essentially unchanged. Segment margin was 14.7%.
Overall, fee revenue increased $3.1, but distribution revenue declined $19.9. Recurring revenue gains, including contributions from acquisitions and net new business, were largely offset by lower event-driven fees, particularly mutual fund proxy activity.
Cash, liquidity, debt, and capital allocation
- Cash and cash equivalents were $180.7 at September 30, down from $412.6 at June 30. Working capital was $348.0, versus $506.0 at June 30.
- Continuing-operations investing cash outflow was $84.5, including $77.4 for the NewRiver acquisition and $6.3 of capital expenditures. Financing cash outflow was $130.2, including $115.3 of common-stock purchases and $18.8 of dividends paid.
- Long-term debt totaled $324.2: a $200.0 term loan and $124.2 of senior notes. The term loan was priced at LIBOR plus 40 basis points at quarter-end; its quarterly weighted-average rate was 0.94%. Senior notes carry a fixed 6.125% rate. A $500.0 revolving facility had no borrowings outstanding.
- Management stated that cash, operating cash flows, and available credit were expected to be sufficient for current and anticipated operating requirements, capital expenditures, and working capital needs. The filing does not provide numerical earnings or revenue guidance.
Material changes, outlook, and risks
- Broadridge acquired NewRiver, a mutual-fund electronic disclosure provider, in August 2010 for $77.4 net of cash acquired. The acquisition added $43.7 of goodwill and $27.3 of intangible assets.
- The company completed the sale of substantially all Ridge securities-clearing client contracts to Penson in June 2010. Securities clearing is reported as discontinued operations; the company expected to complete the wind-down in fiscal 2011. The transaction consideration included a five-year $20.6 subordinated note and Penson shares, with certain purchase-price adjustments still possible.
- Broadridge expects its transition of data-center processing from ADP to IBM to be completed by June 2012. The IBM agreement runs through October 2021, with commitments of $561.5 through fiscal 2022. ADP services cost $27.2 in the quarter; no IBM service expense was recorded in the period.
- Management highlighted seasonality: proxy and annual-report processing typically makes the fourth fiscal quarter the strongest for revenue, operating income, earnings, and operating cash flow. Interim results may not indicate full-year performance.
- Risks include client retention and pricing, securities-market activity and economic conditions, regulatory changes, cybersecurity and service interruptions, technology execution, acquisition integration, and competition. An Inveshare patent lawsuit includes a counterclaim seeking injunctive relief and unspecified damages; the company said the case was at an early stage and its outcome could not be predicted.
- The company reported no material subsequent events, no material changes in internal control, and effective disclosure controls. It said ordinary-course claims and litigation were not expected to have a material adverse impact, while noting the uncertainty of the Inveshare matter.
Investor verification priorities
- Assess whether event-driven proxy revenue and distribution activity recover, and how recurring revenue and net new business develop.
- Track whether acquisition contributions and strategic investment translate into improved segment earnings and margins.
- Reconcile negative continuing-operations operating cash flow and the sharp cash decline with working-capital movements, buybacks, dividends, and acquisition spending.
- Review the Ridge wind-down, final Penson purchase-price adjustments, and collection or realization of the note and Penson shares.
- Monitor the IBM migration, long-term contractual commitments, floating-rate debt exposure, and developments in the Inveshare litigation.