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BROADRIDGE FINANCIAL SOLUTIONS, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion should be read in conjunction with our Condensed Consolidated Financial Statements (the "Financial Statements") and accompanying Notes thereto included elsewhere herein. Forward-Looking Statements This Quarterly Report on Form 10-Q may contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are not historical in nature and which may be identified by the use of words like "expects," "assumes," "projects," "anticipates," "estimates," "we believe," "could be" and other words of similar meaning, are forward-looking statements. In particular, information appearing under "Business," "Risk Factors," and "Management's Discussion and Analysis of Financial Condition and Results of Operations" includes forward-looking statements. These statements are based on management's expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ materially from those expressed. Factors that could cause actual results to differ materially from those contemplated by the forward-looking statements include: • the success of Broadridge Financial Solutions, Inc. ("Broadridge" or the "Company") in retaining and selling additional services to its existing clients and in obtaining new clients; • Broadridge's reliance on a relatively small number of clients, the continued financial health of those clients, and the continued use by such clients of Broadridge's services with favorable pricing terms; • changes in laws and regulations affecting the investor communication services provided by Broadridge; • declines in participation and activity in the securities markets; • overall market and economic conditions and their impact on the securities markets; • any material breach of Broadridge security affecting its clients' customer information; • the failure of our outsourced data center services provider to provide the anticipated levels of service; • any significant slowdown or failure of Broadridge's systems or error in the performance of Broadridge's services; • Broadridge's failure to keep pace with changes in technology and demands of its clients; • the ability to attract and retain key personnel; • the impact of new acquisitions and divestitures; and • competitive conditions. There may be other factors that may cause our actual results to differ materially from the forward-looking statements. Our actual results, performance or achievements could differ materially from those expressed in, or implied by, the forward-looking statements. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition. You should carefully read the factors described in the "Risk Factors" section of in Part I, "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended June 30, 2012 (the "2012 Annual Report") for a description of certain risks that could, among other things, cause our actual results to differ from these forward-looking statements. All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q and the 2012 Annual Report. We disclaim any obligation to update or revise forward-looking statements that may be made to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events, other than as required by law. Overview Broadridge is a leading global provider of investor communications and technology-driven solutions to broker-dealers, banks, mutual funds and corporate issuers. Our systems and services include investor communication solutions, and securities processing and operations outsourcing solutions. In short, we provide the infrastructure that helps the financial services industry operate. With 50 years of experience, we provide financial services firms with advanced, dependable, scalable and cost-effective integrated systems. Our systems help reduce the need for clients to make significant capital investments in operations infrastructure, thereby allowing them to increase their focus on core business activities. Our operations are classified into two business segments: Investor Communication Solutions and Securities Processing Solutions. 16-------------------------------------------------------------------------------- Table of Contents Investor Communication Solutions A large portion of our Investor Communication Solutions business involves the processing and distribution of proxy materials to investors in equity securities and mutual funds, as well as the facilitation of related vote processing. ProxyEdge, our innovative electronic proxy delivery and voting solution for institutional investors, helps ensure the participation of the largest stockholders of many companies. We also provide the distribution of regulatory reports and corporate action/reorganization event information, as well as tax reporting solutions that help our clients meet their regulatory compliance needs. In addition, we provide financial information distribution and transaction reporting services to both financial institutions and securities issuers. These services include the processing and distribution of account statements and trade confirmations, traditional and personalized document fulfillment and content management services, marketing communications, and imaging, archival and workflow solutions that enable and enhance our clients' communications with investors. All of these communications are delivered in paper or electronic form. In addition, Broadridge provides registered proxy services and stock transfer and record keeping services to corporate issuers. In fiscal year 2011, the Company acquired three businesses in the Investor Communication Solutions segment. In August 2010, the Company acquired NewRiver, Inc., a leader in mutual fund electronic investor disclosure solutions. In December 2010, the Company acquired Forefield, Inc., a leading provider of real-time sales, education and client communication solutions for financial institutions and their advisors. In January 2011, the Company acquired Matrix Financial Solutions, Inc. ("Matrix"). Matrix is a provider of mutual fund processing services for third party administrators, financial advisors, banks and wealth management professionals. Matrix's back-office, trust, custody, trading and mutual fund settlement services are integrated into our product suite thereby strengthening Broadridge's role as a provider of data processing and distribution channel solutions to the mutual fund industry. Securities Processing Solutions We offer a suite of advanced computerized real-time transaction processing services that automate the securities transaction lifecycle, from desktop productivity tools, data aggregation, performance reporting, and portfolio management to order capture and execution, trade confirmation, settlement, and accounting. Our services help financial institutions efficiently and cost-effectively consolidate their books and records, gather and service assets under management, focus on their core businesses, and manage risk. With multi-currency capabilities, our Global Processing Solution supports real-time global trading of equity, option, mutual fund, and fixed income securities in established and emerging markets. In addition, our operations outsourcing solutions allow broker-dealers to outsource certain administrative functions relating to clearing and settlement, from order entry to trade matching and settlement, while maintaining their ability to finance and capitalize their business. In fiscal year 2012, the Company acquired Paladyne Systems, Inc. ("Paladyne"), a provider of buy-side technology solutions for the global investment management industry. Basis of Presentation The Condensed Consolidated Financial Statements have been prepared in accordance with United States ("U.S.") generally accepted accounting principles ("GAAP"). These financial statements present the condensed consolidated position of the Company. These financial statements include the entities in which the Company directly or indirectly has a controlling financial interest and various entities in which the Company has investments recorded under both the cost and equity methods of accounting. Intercompany balances and transactions have been eliminated. The results of operations reported for interim periods are not necessarily indicative of the results of operations for the entire year or any subsequent interim period. These Condensed Consolidated Financial Statements should be read in conjunction with the Company's Consolidated Financial Statements for the fiscal year ended June 30, 2012 in the 2012 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on August 9, 2012. In presenting the Condensed Consolidated Financial Statements, management makes estimates and assumptions that affect the amounts reported and related disclosures. Estimates, by their nature, are based on judgment and available information. Accordingly, actual results could differ from those estimates. In management's opinion, the Condensed Consolidated Financial Statements contain all normal recurring adjustments necessary for a fair presentation of results reported. The results of operations reported for the periods presented are not necessarily indicative of the results of operations for subsequent periods. As a result of Broadridge's sale in June 2010 of substantially all of the contracts of the securities clearing clients of its former subsidiary, Ridge Clearing & Outsourcing Solutions, Inc. ("Ridge") to Penson Financial Services, Inc. ("PFSI"), a wholly owned subsidiary of Penson Worldwide, Inc. ("PWI," referred to herein together with PFSI as "Penson"), the securities clearing business is reflected in discontinued operations and the operations outsourcing solutions business retained by Broadridge is now reported as part of the Securities Processing Solutions business segment. This change is reflected in all prior periods presented in this Quarterly Report on Form 10-Q. For the three and six months ended December 31, 2012 and 2011, the Company did not generate any revenues or losses from discontinued operations. 17-------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies In presenting the Condensed Consolidated Financial Statements, management makes estimates and assumptions that affect the amounts reported and related disclosures. Management continually evaluates the accounting policies and estimates used to prepare the Condensed Consolidated Financial Statements. The estimates, by their nature, are based on judgment, available information, and historical experience and are believed to be reasonable. However, actual amounts and results could differ from these estimates made by management. In management's opinion, the Condensed Consolidated Financial Statements contain all normal recurring adjustments necessary for a fair presentation of results reported. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed in the "Critical Accounting Policies" section of Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2012 Annual Report on Form 10-K. Results of Continuing Operations The following discussions of Analysis of Condensed Consolidated Statements of Earnings from Continuing Operations and Analysis of Reportable Segments refer to the three and six months ended December 31, 2012 compared to the three and six months ended December 31, 2011. The following discussions of the Company's results of continuing operations exclude the results related to the securities clearing business. This business is segregated from continuing operations and is included in discontinued operations for the three and six months ended December 31, 2012 and the three and six months ended December 31, 2011. The Analysis of Condensed Consolidated Statements of Earnings from Continuing Operations should be read in conjunction with the Analysis of Reportable Segments, which provides more detailed discussions concerning certain components of the Condensed Consolidated Statements of Earnings from Continuing Operations. The following references are utilized in the discussions of Analysis of Condensed Consolidated Statements of Earnings from Continuing Operations and Analysis of Reportable Segments: "Acquisitions" refers to the Company's acquisition of Paladyne in our Securities Processing Solutions segment. "Acquisition Amortization and Other Costs" represents amortization charges associated with intangible asset values as well as other deal costs associated with the Company's acquisitions. "IBM Migration costs" refers to costs related to the Information Technology Services Agreement the Company entered into in March 2010 (the "IT Services Agreement") with International Business Machines Corporation ("IBM") and the associated migration of the Company's data center to IBM. "Net New Business" refers to our closed sales less client losses. "Restructuring and Impairment Charges" referred to herein represent the following charges that were previously referred to as "Penson Charges, net": "Penson Transition Costs" represent transition costs incurred in fiscal year 2013 related to the June 2012 termination and mutual release agreement with Penson and Penson Financial Services Canada, Inc. terminating the Penson outsourcing services contract, including the transfer of the Ridge entity to Apex Clearing Holdings LLC ("Apex"). "Penson OTTI Charge" refers to the charge incurred in fiscal year 2012 that resulted after the Company reviewed its investment in the PWI common stock for impairment during the three months ended December 31, 2011. Based on the Company's review, factoring in the level of decline in the fair value of the PWI common stock, management determined that the market value of the PWI common stock would not equal or exceed the cost basis of our investment within a reasonable period of time. After consideration of the severity and duration of this decline in fair value as well as the reasons for the decline in value, the Company believed that the impairment was "other-than-temporary" and recorded a charge of $9.7 million for the three months ended December 31, 2011. The following definitions describe the Company's Revenues: Fee revenues in the Investor Communication Solutions segment are derived from both recurring and event-driven activity. In addition, the level of recurring and event-driven activity we process directly impacts distribution revenues. While event-driven activity is highly repeatable, it may not recur on an annual basis. The types of services we provide that comprise event-driven activity are: • Mutual Fund Proxy: The proxy and related services we provide to mutual funds when certain events occur requiring a shareholder vote including changes in directors, sub-advisors, fee structures, investment restrictions, and mergers of funds. • Mutual Fund Communications: Mutual fund communications services consist primarily of the distribution on behalf of mutual funds of supplemental information required to be provided to the annual mutual fund prospectus as a result of certain triggering events such as a change in portfolio managers. In addition, mutual fund communications consist of notices and marketing materials such as newsletters. 18 -------------------------------------------------------------------------------- Table of Contents • Proxy Contests and Specials, Corporate Actions, and Other: The proxy services we provide in connection with shareholder meetings driven by special events such as proxy contests, mergers and acquisitions, and tender/exchange offers. Event-driven fee revenues are based on the number of special events and corporate transactions we process. Event-driven activity is impacted by financial market conditions and changes in regulatory compliance requirements, resulting in fluctuations in the timing and levels of event-driven fee revenue. As such, the timing and level of event-driven activity and its potential impact on revenues and earnings is difficult to forecast. Generally, mutual fund proxy activity has been subject to a greater level of volatility than the other components of event-driven activity. During fiscal year 2010, the Company processed a record level of mutual fund proxy activity. In contrast, during fiscal years 2011 and 2012, mutual fund proxy fee revenues were 74% and 28% lower respectively, than in prior fiscal years. Although it is difficult to forecast the levels of event-driven activity, we expect that the portion of fee revenues derived from mutual fund proxy activity may continue to experience volatility in the future. However, the level of volatility experienced between fiscal year 2010 and fiscal year 2011 was greater than we had experienced in prior years. Revenues derived from sales are a component of "Net New Business," which is defined as our closed sales less client losses. Closed sales represent anticipated revenues for new client contracts that were signed by Broadridge during the periods referenced. A sale is considered closed when the Company has received the signed client contract. For recurring revenue closed sales, the amount of the closed sale is generally a reasonable estimate of annual revenues based on client volumes or activity, excluding pass-through revenues such as distribution revenues. Event-driven revenue closed sales primarily occur in our Investor Communication Solutions segment. The amount of the event-driven revenue closed sale is generally a reasonable estimate of production revenues based on client volumes or activity, excluding pass-through revenues such as distribution revenues. Broadridge's determination of the amount of a closed sale is based on the client's estimate of transaction volumes and activity levels, as our fees are largely based on transaction volume and activity levels. The inherent variability of transaction volumes and activity levels can result in some variability of amounts reported as closed sales. Larger recurring revenue closed sales can take up to 12 to 24 months to convert to revenues, particularly for the services provided by our Securities Processing Solutions segment. The majority of event-driven revenue closed sales are usually recognized during the year the contract is signed. The Company tracks actual revenue achieved during the first year that the client contract is fully implemented and compares this to the amount that was included in the Company's previously reported closed sales amount. The Company adjusts the current year closed sales amount for any difference between the prior year's reported closed sales amount and the actual revenue achieved in the first year of the applicable contract. Closed sales were adjusted by $(1.7) million and $(1.7) million for the three and six months ended December 31, 2012, respectively. Recurring revenue closed sales were adjusted by $(1.7) million and $(1.7) million for the three and six months ended December 31, 2012, respectively. There were no adjustments necessary for closed sales and recurring revenue closed sales for the three and six months ended December 31, 2011. Analysis of Condensed Consolidated Statements of Earnings Three Months Ended December 31, 2012 versus Three Months Ended December 31, 2011 The table below presents Condensed Consolidated Statements of Earnings data for the three months ended December 31, 2012 and 2011, and the dollar and percentage changes between periods: 19 -------------------------------------------------------------------------------- Table of Contents Three Months Ended December 31, Change 2012 2011 $ % ($ in millions, except per share amounts) Revenues $ 493.2 $ 479.8 $ 13.4 3 Cost of revenues 387.6 382.6 5.0 1 Selling, general and administrative expenses 77.2 73.5 3.7 5 Impairment charge - 9.7 (9.7 ) (100 ) Other expenses, net 3.7 3.4 0.3 9 Total expenses 468.5 469.2 (0.7 ) - Earnings from continuing operations before income taxes 24.7 10.6 14.1 133 Margin 5.0 % 2.2 % 2.8 pts Provision for income taxes 8.9 3.8 5.1 134 Effective tax rate 36.0 % 35.8 % 0.2 pts Net earnings from continuing operations $ 15.8 $ 6.8 $ 9.0 132 Basic Earnings per share from continuing operations $ 0.13 $ 0.05 $ 0.08 160 Diluted Earnings per share from continuing operations $ 0.13 $ 0.05 $ 0.08 160 Six Months Ended December 31, 2011 versus Six Months Ended December 31, 2010 The table below presents Condensed Consolidated Statements of Earnings data for the six months ended December 31, 2012 and 2011, and the dollar and percentage changes between periods: Six Months Ended December 31, Change 2012 2011 $ % ($ in millions, except per share amounts) Revenues $ 989.0 $ 956.2 $ 32.8 3 Cost of revenues 777.6 765.4 12.2 2 Selling, general and administrative expenses 150.1 138.2 11.9 9 Impairment charge - 9.7 (9.7 ) (100 ) Other expenses, net 8.0 6.1 1.9 31 Total expenses 935.7 919.4 16.3 2 Earnings from continuing operations before income taxes 53.3 36.8 16.5 45 Margin 5.4 % 3.8 % 1.6 pts Provision for income taxes 19.2 13.3 5.9 44 Effective tax rate 36.0 % 36.1 % (0.1 ) pts Net earnings from continuing operations $ 34.1 $ 23.5 $ 10.6 45 Basic Earnings per share from continuing operations $ 0.28 $ 0.19 $ 0.09 47 Diluted Earnings per share from continuing operations $ 0.27 $ 0.19 $ 0.08 42 Three Months Ended December 31, 2012 versus Three Months Ended December 31, 2011 Revenues. Revenues for the three months ended December 31, 2012 were $493.2 million, an increase of $13.4 million, or 3%, compared to $479.8 million for the three months ended December 31, 2011. The $13.4 million increase was driven by higher recurring fee revenues of $9.4 million, or 3%, and higher distribution revenues of $3.3 million, or 2%. The positive contribution from recurring fee revenues reflected gains from Net New Business. Event-driven fee revenues were $27.6 million, essentially flat compared to $27.7 million for the three months ended December 31, 2011. Fluctuations in foreign currency exchange rates positively impacted revenues by $0.8 million. 20-------------------------------------------------------------------------------- Table of Contents Closed sales for the three months ended December 31, 2012 were $30.9 million, a decrease of $15.8 million, or 34%, compared to $46.7 million for the three months ended December 31, 2011. Recurring revenue closed sales for the three months ended December 31, 2012 were $20.4 million, a decrease of $22.3 million, or 52%, compared to $42.7 million for the three months ended December 31, 2011. The decrease in recurring revenue closed sales was primarily due to a longer than anticipated sales cycle for certain of the larger pending sales currently in our pipeline. Event-driven revenue closed sales for the three months ended December 31, 2012 were $10.5 million, an increase of $6.5 million, or 163%, compared to $4.0 million for the three months ended December 31, 2011. Six Months Ended December 31, 2012 versus Six Months Ended December 31, 2011 Revenues. Revenues for the six months ended December 31, 2012 were $989.0 million, an increase of $32.8 million, or 3%, compared to $956.2 million for the six months ended December 31, 2011. The $32.8 million increase was driven by higher recurring fee revenues of $18.5 million, higher distribution revenues of $11.3 million, and higher event-driven fee revenues, which increased from $55.1 million to $59.9 million, or $4.8 million. The positive contribution from recurring fee revenues reflected higher Net New Business. Fluctuations in foreign currency exchange rates negatively impacted revenues by $1.8 million. Closed sales for the six months ended December 31, 2012 were $50.2 million, a decrease of $27.4 million, or 35%, compared to $77.6 million for the six months ended December 31, 2011. Recurring revenue closed sales for the six months ended December 31, 2012 were $34.1 million, a decrease of $28.4 million, or 45%, compared to $62.5 million for the six months ended December 31, 2011. The decrease in recurring revenue closed sales was primarily due to a longer than anticipated sales cycle for certain of the larger pending sales currently in our pipeline. Event-driven revenue closed sales for the six months ended December 31, 2012 were $16.1 million, an increase of $1.0 million, or 7%, compared to $15.1 million for the six months ended December 31, 2011. Three Months Ended December 31, 2012 versus Three Months Ended December 31, 2011 Total Expenses. Total expenses for the three months ended December 31, 2012 were essentially unchanged at $468.5 million, a decrease of $0.7 million, compared to $469.2 million for the three months ended December 31, 2011. Impairment charges were not incurred in the three months ended December 31, 2012 compared with $9.7 million for the three months ended December 31, 2011. This decline in impairment charges was partially offset by higher Cost of revenues of $5.0 million, or 1%, higher Selling, general and administrative expenses of $3.7 million, or 5%, and a $0.3 million increase in Other expenses, net. Cost of revenues for the three months ended December 31, 2012 were $387.6 million, an increase of $5.0 million, or 1%, compared to $382.6 million for the three months ended December 31, 2011. The increase reflects restructuring costs of $3.6 million related to Penson Transition Costs for the three months ended December 31, 2012, higher cost of distribution revenues of $2.2 million and other variable costs of $7.7 million. These costs were partially offset by savings related to the migration of the data center to IBM of $5.3 million and IBM Migration costs recorded in the prior year of $3.7 million. Distribution cost of revenues for the three months ended December 31, 2012 were $132.0 million, an increase of $2.2 million, or 2%, compared to $129.8 million for the three months ended December 31, 2011. Distribution cost of revenues consists primarily of postage-related expenses. Selling, general and administrative expenses for the three months ended December 31, 2012 were $77.2 million, an increase of $3.7 million, or 5%, compared to $73.5 million for the three months ended December 31, 2011. The 5% increase was primarily due to higher strategic initiatives of $1.1 million and the prior year included a one-time non-recurring credit of $0.9 million. Fluctuations in foreign currency exchange rates increased Selling, general and administrative expenses by $0.5 million. Impairment charges for the three months ended December 31, 2011 were $9.7 million as a result of the Penson OTTI Charge. Other expenses, net for the three months ended December 31, 2012 were $3.7 million, an increase of $0.3 million, or 9%, compared to $3.4 million for the three months ended December 31, 2011, reflecting mainly higher impact of foreign currency exchange rates. Six Months Ended December 31, 2012 versus Six Months Ended December 31, 2011 Total Expenses. Total expenses for the six months ended December 31, 2012 were $935.7 million, an increase of $16.3 million, or 2%, compared to $919.4 million for the six months ended December 31, 2011. The increase reflects higher Cost of revenues of $12.2 million, or 2%, higher Selling, general and administrative expenses of $11.9 million, or 9%, partially offset by the Penson OTTI Charge of $9.7 million recorded in the prior year. The increase in Total expenses relates mainly to acquisitions of $4.5 million, higher Cost of distribution revenues of $8.6 million related to higher distribution revenues, higher selling and marketing expenses of $2.9 million, and other variable costs of $17.4 million, partially offset by savings related to the migration of the data center to IBM of $5.3 million, lower Restructuring and Impairment Charges of $5.4 million and IBM Migration costs incurred in the prior year of $6.9 million. Fluctuations in foreign currency exchange rates decreased Total expenses by $2.7 million. Cost of revenues for the six months ended December 31, 2012 were $777.6 million, an increase of $12.2 million, or 2%, compared to $765.4 million for the six months ended December 31, 2011. The increase reflects costs of $4.5 million related to 21 -------------------------------------------------------------------------------- Table of Contents acquisitions, restructuring costs of $4.3 million related to Penson Transition Costs and other variable costs of $17.4 million. These costs were partially offset by savings related to the migration of the data center to IBM of $5.3 million, IBM Migration costs recorded in the prior year of $6.9 million coupled with lower investments and strategic initiatives of $4.8 million and lower acquisition costs of $1.3 million. Distribution cost of revenues for the six months ended December 31, 2012 were $268.5 million, an increase of $8.6 million, or 3%, compared to $259.9 million for the six months ended December 31, 2011. Fluctuations in foreign currency exchange rates decreased Cost of revenues by $3.8 million. Distribution cost of revenues consists primarily of postage-related expenses. Selling, general and administrative expenses for the six months ended December 31, 2012 were $150.1 million, an increase of $11.9 million, or 9%, compared to $138.2 million for the six months ended December 31, 2011. The 9% increase was primarily due to higher costs related to strategic initiatives of $2.5 million, higher sales and marketing expenses of $2.9 million, the impact of acquisitions of $1.5 million and the impact of a one-time non-recurring credit in the prior year of $0.9 million. Fluctuations in foreign currency exchange rates increased Selling, general and administrative expenses by $0.3 million. Impairment charges for the six months ended December 31, 2011 were $9.7 million as a result of the Penson OTTI Charge. Other expenses, net for the six months ended December 31, 2012 were $8.0 million, an increase of $1.9 million, or 31%, compared to $6.1 million for the six months ended December 31, 2011, reflecting mainly higher interest expense on borrowings and fluctuations in foreign currency exchange rates. Earnings from Continuing Operations before Income Taxes. Earnings from continuing operations before income taxes for the three months ended December 31, 2012 were $24.7 million, an increase of $14.1 million, or 133%, compared to $10.6 million for the three months ended December 31, 2011. The increase is mainly due to higher recurring revenues, increased margins driven by the mix of business and cost containment. Overall margin increased to 5.0% for the three months ended December 31, 2012 compared to 2.2% for the three months ended December 31, 2011. Earnings from continuing operations before income taxes for the six months ended December 31, 2012 were $53.3 million, an increase of $16.5 million, or 45%, compared to $36.8 million for the six months ended December 31, 2011. The increase is mainly due to higher revenues, increased margins driven by the mix of business and cost containment. Overall margin increased to 5.4% for the six months ended December 31, 2012 compared to 3.8% for the six months ended December 31, 2011. Provision for Income Taxes. Our Provision for income taxes and effective tax rates for the three and six months ended December 31, 2012 were $8.9 million and 36.0%, and $19.2 million and 36.0%, respectively, compared to $3.8 million and 35.8%, and $13.3 million and 36.1%, for the three and six months ended December 31, 2011, respectively. The decrease in our effective tax rate for the six months ended December 31, 2012 when compared to the comparable prior year period is primarily attributable to the geographical mix of income and lower tax rates in certain non-U.S. tax jurisdictions. Net Earnings from Continuing Operations and Basic and Diluted Earnings per Share from Continuing Operations. Net earnings from continuing operations for the three months ended December 31, 2012 were $15.8 million, an increase of $9.0 million, or 132%, compared to $6.8 million for the three months ended December 31, 2011. The increase in Net earnings from continuing operations reflects higher revenues, increased margins driven by the mix of business and cost containment. Net earnings from continuing operations for the six months ended December 31, 2012 were $34.1 million, an increase of $10.6 million, or 45%, compared to $23.5 million for the six months ended December 31, 2011. The increase in Net earnings from continuing operations reflects higher revenues, increased margins driven by the mix of business and cost containment. Basic and Diluted earnings per share from Continuing Operations for the three months ended December 31, 2012 were $0.13, an increase of $0.08, or 160%, compared to $0.05 for the three months ended December 31, 2011, respectively. Penson Transition Costs decreased Basic and Diluted earnings per share by $0.01 for the three months ended December 31, 2012. The IBM Migration costs and Penson OTTI Charge decreased Basic and Diluted earnings per share in the prior year period by $0.02 and $0.05, respectively. Basic earnings per share from Continuing Operations for the six months ended December 31, 2012 and December 31, 2011 were $0.28 and $0.19, respectively. Diluted earnings per share from Continuing Operations for the six months ended December 31, 2012 were $0.27, an increase of $0.08, or 42%, compared to $0.19 for the six months ended December 31, 2011. Penson Transition Costs decreased Basic and Diluted earnings per share by $0.02 for the six months ended December 31, 2012. The IBM Migration costs and Penson OTTI Charge decreased Basic and Diluted earnings per share in the prior year period by $0.03 and $0.05, respectively. Analysis of Reportable Segments The Company classifies its operations into the following two reportable segments: Investor Communication Solutions and Securities Processing Solutions. 22 -------------------------------------------------------------------------------- Table of Contents The primary components of "Other" are the elimination of intersegment revenues and profits and certain unallocated expenses. Foreign currency exchange is a reconciling item between the actual foreign currency exchange rates and the fiscal year 2012 budgeted foreign currency exchange rates reflected in the segments. Certain corporate expenses, as well as certain centrally managed expenses, are allocated based upon budgeted amounts in a reasonable manner. Because the Company compensates the management of its various businesses on, among other factors, segment profit, the Company may elect to record certain segment-related expense items of an unusual or non-recurring nature in consolidation rather than reflect such items in segment profit. Revenues Three Months Ended Six Months Ended December 31, December 31, Change Change 2012 2011 $ % 2012 2011 $ % ($ in millions) ($ in millions)Investor Communication Solutions $ 326.8 $ 316.8 $ 10.0 3 $ 666.3 $ 629.8 $ 36.5 6 Securities Processing Solutions 163.8 161.1 2.7 2 317.7 319.5 (1.8 ) (1 ) Other - 0.1 (0.1 ) (100 ) - 0.1 (0.1 ) (100 ) Foreign currency exchange 2.6 1.8 0.8 44 5.0 6.8 (1.8 ) (26 ) Total $ 493.2 $ 479.8 $ 13.4 3 $ 989.0 $ 956.2 $ 32.8 3 Earnings (Loss) from Continuing Operations Before Income Taxes Three Months Ended Six Months Ended December 31, December 31, Change Change 2012 2011 $ % 2012 2011 $ % ($ in millions) ($ in millions)Investor Communication Solutions $ 16.5 $ 10.6 $ 5.9 56 $ 43.7 $ 19.0 $ 24.7 130 Securities Processing Solutions 20.0 20.2 (0.2 ) (1 ) 29.4 48.0 (18.6 ) (39 ) Other (15.1 ) (22.7 ) 7.6 33 (27.0 ) (35.6 ) 8.6 24 Foreign currency exchange 3.3 2.5 0.8 32 7.2 5.4 1.8 33 Total $ 24.7 $ 10.6 $ 14.1 133 $ 53.3 $ 36.8 $ 16.5 45 Investor Communication Solutions Revenues. Investor Communication Solutions segment's Revenues for the three months ended December 31, 2012 were $326.8 million, an increase of $10.0 million, or 3%, compared to $316.8 million for the three months ended December 31, 2011. Higher recurring fee revenues contributed $6.8 million, or 68%, and higher distribution revenues contributed $3.3 million, or 33%, to the $10.0 million increase in revenues. Higher recurring fee revenues were driven by Net New Business and internal growth. Distribution revenues for the three months ended December 31, 2012 were $146.1 million, an increase of $3.3 million, or 2%, compared to $142.8 million for the three months ended December 31, 2011. Investor Communication Solutions segment's Revenues for the six months ended December 31, 2012 were $666.3 million, an increase of $36.5 million, or 6%, compared to $629.8 million for the six months ended December 31, 2011. Higher recurring fee revenues contributed $20.4 million, or 56%, higher event-driven fee revenues contributed $4.8 million, or 13%, and higher distribution revenues contributed $11.3 million, or 31%, to the $36.5 million increase in revenues. Higher recurring fee revenues were driven by Net New Business and internal growth. Higher event-driven fee revenues were the result of increased Mutual Fund Communications activity. Distribution revenues for the six months ended December 31, 2012 were $296.3 million, an increase of $11.3 million, or 4%, compared to $285.0 million for the six months ended December 31, 2011. Earnings from Continuing Operations before Income Taxes. Earnings from Continuing Operations before income taxes for the three months ended December 31, 2012 were $16.5 million, an increase of $5.9 million, or 56%, compared to $10.6 million for the three months ended December 31, 2011. Margin increased by 1.7 percentage points to 5.0% mainly as a result of higher recurring fee and distribution revenues, as well as improved productivity from strategic initiatives. Earnings from Continuing Operations before income taxes for the six months ended December 31, 2012 were $43.7 million, an increase of $24.7 million, compared to $19.0 million for the six months ended December 31, 2011. Margin increased by 3.6 percentage points to 6.6% mainly as a result of higher recurring fee, event-driven fee and distribution revenues, as well as improved productivity from strategic initiatives. 23 -------------------------------------------------------------------------------- Table of Contents Securities Processing Solutions Revenues. Securities Processing Solutions segment's Revenues for the three months ended December 31, 2012 were $163.8 million, an increase of $2.7 million, or 2%, compared to $161.1 million for the three months ended December 31, 2011. The increase was driven by positive contributions from Net New Business offset by lower trade volumes and the decline in revenue resulting from the new outsourcing services contract with Apex replacing the terminated outsourcing services contract with Penson. Securities Processing Solutions segment's Revenues for the six months ended December 31, 2012 were $317.7 million, a decrease of $1.8 million, or 1%, compared to $319.5 million for the six months ended December 31, 2011. The decrease was driven by lower trade volumes and the decline in revenue resulting from the new outsourcing services contract with Apex replacing the terminated outsourcing services contract with Penson offset by positive contributions from Net New Business and the Paladyne acquisition. Earnings from Continuing Operations before Income Taxes. Earnings from Continuing Operations before income taxes for the three months ended December 31, 2012 were $20.0 million, a decrease of $0.2 million, or 1%, compared to $20.2 million for the three months ended December 31, 2011. Margin decreased by 0.3 percentage point to 12.2% for the three months ended December 31, 2012 as a result of revenue mix. Earnings from Continuing Operations before income taxes for the six months ended December 31, 2012 were $29.4 million, a decrease of $18.6 million, or 39%, compared to $48.0 million for the six months ended December 31, 2011. Margin decreased by 5.7 percentage points to 9.3% for the six months ended December 31, 2012 as a result of revenue mix and an increase in systems investments. Other Revenues. There were no significant reportable Revenues in our Other segment for the periods presented. Loss from Continuing Operations before Income Taxes. Loss from Continuing Operations before income taxes was $15.1 million for the three months ended December 31, 2012, an improvement of $7.6 million, compared to a $22.7 million Loss from Continuing Operations before income taxes for the three months ended December 31, 2011. The decreased loss was mainly due to the Penson OTTI Charge of $9.7 million in the three months ended December 31, 2011. Loss from Continuing Operations before income taxes was $27.0 million for the six months ended December 31, 2012, an improvement of $8.6 million, compared to a $35.6 million Loss from Continuing Operations before income taxes for the six months ended December 31, 2011. The decreased loss was mainly due to the Penson OTTI Charge of $9.7 million in the six months ended December 31, 2011. Adjusted Net Earnings from Continuing Operations We define Adjusted net earnings from Continuing Operations as Net earnings from Continuing Operations, net of taxes excluding all items associated with Acquisition Amortization and Other Costs, Restructuring and Impairment Charges and IBM Migration costs. Adjusted net earnings from Continuing Operations is not a measure defined in accordance with GAAP and should not be construed as an alternative to net income (loss), as determined in accordance with GAAP. We use Adjusted net earnings from Continuing Operations as a financial measure for a number of reasons, including: • in communications with our board of directors concerning our consolidated financial performance; • we believe it is an enterprise level performance measure commonly reported and widely used by analysts and investors; and • for planning purposes, including the preparation of our annual operating budget. We are reporting our Adjusted net earnings from Continuing Operations to exclude the impact of these items from our GAAP results because these items are significant and we believe this information helps our investors understand the effect of these non-recurring items on our reported results and therefore, will provide a better representation of our actual performance. Our presentation of Adjusted net earnings from Continuing Operations should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. 24 -------------------------------------------------------------------------------- Table of Contents Set forth below is a reconciliation of Adjusted net earnings from Continuing Operations (Non-GAAP) to the comparable GAAP measure. Three Months Ended Six Months Ended December 31, December 31, 2012 2011 2012 2011 ($ in millions) Adjusted net earnings from Continuing Operations (Non-GAAP) $ 21.8 $ 19.4 $ 44.1 $ 42.2 Adjustments: Acquisition Amortization and Other Costs (5.8 ) (6.4 ) (11.3 ) (12.7 ) Restructuring and Impairment Charges (3.6 ) (9.7 ) (4.3 ) (9.7 ) IBM Migration costs - (3.7 ) - (6.9 ) Tax impact of adjustments 3.4 7.2 5.6 10.6 Net earnings from Continuing Operations (GAAP) $ 15.8 $ 6.8 $ 34.1 $ 23.5 Set forth below is a reconciliation of Adjusted diluted earnings per share from Continuing Operations (Non-GAAP) to the comparable GAAP measure. Three Months Ended Six Months Ended December 31, December 31, 2012 2011 2012 2011 Adjusted diluted earnings per share from Continuing Operations (Non-GAAP) $ 0.17 $ 0.15 $ 0.35 $ 0.33 Adjustments: Acquisition Amortization and Other Costs (0.04 ) (0.05 ) (0.09 ) (0.10 ) Restructuring and Impairment Charges (0.02 ) (0.08 ) (0.03 ) (0.08 ) IBM Migration costs - (0.03 ) - (0.05 ) Tax impact of adjustments 0.02 0.06 0.04 0.09 Diluted earnings per share from Continuing Operations (GAAP) $ 0.13 $ 0.05 $ 0.27 $ 0.19 Financial Condition, Liquidity and Capital Resources At December 31, 2012, Cash and cash equivalents were $259.1 million and Total stockholders' equity was $783.4 million. At December 31, 2012, working capital was $309.2 million, compared to $367.1 million at June 30, 2012. At the current time, and in future periods, we expect cash generated by our operations, together with existing cash, cash equivalents, marketable securities and borrowings from the capital markets, to be sufficient to cover cash needs for working capital, capital expenditures, strategic acquisitions, dividends and common stock repurchases. We do not rely on short-term borrowings to meet our liquidity needs. As of December 31, 2012, $125.9 million of the $259.1 million of cash and cash equivalents was held by our foreign subsidiaries. If these funds are needed for our operations in the U.S., we would be required to accrue and pay U.S. taxes to repatriate these funds. However, our current plans do not demonstrate a need to repatriate them to fund our U.S. operations. On December 28, 2012, Broadridge, the U.S. Internal Revenue Service (the "IRS") and the Canadian Revenue Authority entered into an Advanced Pricing Agreement ("APA"). Under the APA, a net $50.0 million of cash will transfer from two of the Company's Canadian subsidiaries to the Broadridge U.S. parent company during the Company's third fiscal quarter of 2013. All tax effects pertaining to this APA have been accrued in the prior fiscal year. At December 31, 2012, the Company had $524.4 million outstanding Long-term debt, consisting of a $400.0 million five-year term loan facility and unsecured senior notes of $124.4 million principal amount. The senior notes are senior unsecured obligations of the Company and rank equally with the Company's other senior indebtedness. Interest is payable semiannually on June 1st and December 1st each year based on a fixed per annum rate equal to 6.125%. On September 22, 2011, the Company entered into a $990.0 million senior unsecured credit facility, consisting of a $490.0 million five-year term loan facility (the "Fiscal 2012 Term Loan") and a $500.0 million five-year revolving credit facility (the "Fiscal 2012 Revolving Credit Facility") (collectively the "Fiscal 2012 Credit Facilities"). Borrowings under the Fiscal 2012 Credit Facilities bear interest at LIBOR plus 125 basis points. The Fiscal 2012 Revolving Credit Facility also has 25-------------------------------------------------------------------------------- Table of Contents an annual facility fee equal to 15 basis points, on the unused portion of the facility, which would total $0.8 million in annual fees if the facility is completely unused. The Fiscal 2012 Term Loan contains a repayment schedule that requires the Company to make minimum principal repayments on the loan of $12.3 million, on a quarterly basis, commencing with the first payment due by March 31, 2013, and the final payment due by June 30, 2016, for a total repayment of $171.5 million before the balance of the loan becomes due in September 2016. As of December 31, 2012, the Company has repaid $90.0 million of the $490.0 million of borrowings under the Fiscal 2012 Term Loan. Under the terms of the Fiscal 2012 Term Loan, any prepayment of a term borrowing shall be applied to reduce the subsequent scheduled repayment, in direct order of maturity, with no prepayment penalty. At December 31, 2012, the Company had met the repayment requirements on the Fiscal 2012 Term Loan through September 30, 2014. The weighted-average interest rate on the Fiscal 2012 Term Loan was 1.47% and 1.48% for the three and six months ended December 31, 2012, respectively. As of December 31, 2012, the Company had no outstanding borrowings on the Fiscal 2012 Revolving Credit Facility. For the three and six months ended December 31, 2012, the Company incurred $0.2 million and $0.4 million, respectively, in facility fees related to the unused portion of the Fiscal 2012 Revolving Credit Facility. Based upon current and anticipated levels of operation, management believes that the Company's cash on hand and cash flows from operations, combined with borrowings available under credit facilities, will be sufficient to enable the Company to meet its current and anticipated cash operating requirements, capital expenditures and working capital needs. Please refer to the discussion of net cash flows provided by financing activities in the following section for further discussion of the Company's financing activities. Cash Flows Net cash flows provided by operating activities were $73.5 million for the six months ended December 31, 2012 compared to $88.1 million net cash flows provided by operating activities during the six months ended December 31, 2011. The decrease in cash provided by operating activities is primarily due to changes in working capital resulting from the timing of accounts receivable collections and vendor payments. Net cash flows used in investing activities for the six months ended December 31, 2012 were $19.0 million, a decrease of $74.9 million compared to $93.9 million net cash flows used in investing activities for the six months ended December 31, 2011. The decrease reflects lower spending of $72.3 million on acquisitions during the six months ended December 31, 2012, compared to the six months ended December 31, 2011. Net cash flows used in financing activities for the six months ended December 31, 2012 were $118.2 million, an increase of $124.7 million compared to $6.5 million net cash flows provided by financing activities for the six months ended December 31, 2011. The increased use of cash in the six months ended December 31, 2012 reflects an increase in the purchases of common stock of $72.0 million in the current year six month period versus the prior year, coupled with a decline of $67.1 million of net proceeds from borrowings after debt repayment and borrowing costs. Liquidity Risk Our liquidity position may be negatively affected by changes in general economic conditions, regulatory requirements and access to the capital markets, which may be limited if we were to fail to renew any of the credit facilities on their renewal dates or if we were to fail to meet certain ratios. Based upon current and anticipated levels of operation, management believes that the Company's cash on hand and cash flows from operations, combined with borrowings available under credit facilities, will be sufficient to enable the Company to meet its current and anticipated cash operating requirements, capital expenditures and working capital needs. Please refer to the discussion of net cash flows provided by financing activities in the preceding section for further discussion of the Company's financing activities. Seasonality Processing and distributing proxy materials and annual reports to investors in equity securities and mutual funds comprises a large portion of our Investor Communication Solutions business. We process and distribute the greatest number of proxy materials and annual reports during our fourth fiscal quarter (the second quarter of the calendar year). The recurring periodic activity of this business is linked to significant filing deadlines imposed by law on public reporting companies and mutual funds. Historically this has caused our revenues, operating income, net earnings, and cash flows from operating activities to be higher in our fourth fiscal quarter than in any other fiscal quarter. The seasonality of our revenues makes it difficult to estimate future operating results based on the results of any specific fiscal quarter and could affect an investor's ability to compare our financial condition, results of operations, and cash flows on a fiscal quarter-by-quarter basis. 26-------------------------------------------------------------------------------- Table of Contents Income Taxes Our effective tax rate for the three and six months ended December 31, 2012 was 36.0% and 36.0%, compared to 35.8% and 36.1% for the three and six months ended December 31, 2011, respectively. The decrease in our effective tax rate for the six months ended December 31, 2012 when compared to the comparable prior year period is primarily attributable to the geographical mix of income and lower tax rates in certain non-U.S. tax jurisdictions. Contractual Obligations The Company entered into a data center outsourcing services agreement with Automatic Data Processing, Inc. ("ADP") before the Company's spin-off from ADP in March 2007 (the "ADP Agreement") under which ADP provided the Company with data center services. The ADP Agreement expired on June 30, 2012. The Company entered into a short-term extension of the ADP Agreement which expired in August 2012. At December 31, 2012, the Company has no further obligation with ADP for data center services. In March 2010, the Company and IBM entered into the IT Services Agreement, under which IBM provides certain aspects of the Company's information technology infrastructure that were previously provided under the ADP Agreement. Under the IT Services Agreement, IBM provides a broad range of technology services to the Company including supporting its mainframe, midrange, server, network and data center operations, as well as providing disaster recovery services. The Company has the option of incorporating additional services into the agreement over time. The migration of the data center processing from ADP to IBM was completed in August 2012. The IT Services Agreement expires on June 30, 2022. The Company has the right to renew the initial term of the IT Services Agreement for up to one additional 12-month term. Commitments remaining under this agreement are $525.3 million through fiscal year 2022, the final year of the contract. Other Commercial Agreements The Company's Fiscal 2012 Revolving Credit Facility has an available capacity of $500.0 million. This revolving credit facility had zero outstanding at December 31, 2012. In addition, certain of the Company's foreign subsidiaries have unsecured, uncommitted lines of credit with banks. These lines of credit bear interest at LIBOR plus 250 basis points. There were no outstanding borrowings under these lines of credit at December 31, 2012. Off-balance Sheet Arrangements It is not the Company's business practice to enter into off-balance sheet arrangements. However, the Company is exposed to market risk from changes in foreign currency exchange rates that could impact its financial position, results of operations and cash flows. The Company manages its exposure to these market risks through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. The Company uses derivative financial instruments as risk management tools and not for trading purposes. The Company was not a party to any derivative financial instruments at December 31, 2012 or at June 30, 2012. In the normal course of business, the Company also enters into contracts in which it makes representations and warranties that relate to the performance of the Company's products and services. The Company does not expect any material losses related to such representations and warranties or collateral arrangements. Recently-issued Accounting Pronouncements Please refer to Note 2. "New Accounting Pronouncements" to our Financial Statements under Item 1. of Part I of this Quarterly Report on Form 10-Q for a discussion on the impact of new accounting pronouncements. |