12 August 2010

BR: Income Statement Analysis for the June 2010 Quarter

Broadridge Financial (NYSE: BR) earned $0.76 per diluted share on a GAAP basis in fiscal 2010's fourth quarter, which ended 30 June.  Earnings per share decreased 7.5 percent when compared to the $0.83 Broadridge made in the same quarter of 2009.

As you can see, Broadridge's earnings are always highest in the June quarter of each year.

Earnings from continuing operations were $0.84 per share in the June 2010 quarter, up from $0.82 one year earlier.  The securities clearing business, which was treated as a discontinued operation, lost $0.08 per share, after tax, in the quarter.  The sale of this business, announced last November, to Penson Worldwide (NASDAQ: PNSN) closed on 25 June 2010.  The final purchase price, in income and equity securities, was $35.2 million.

This post examines Broadridge's Income Statement for the quarter and compares the entries on each line to our "look-ahead" estimates.  Reported GAAP earnings were $0.05 per share lower than the $0.81 we had forecast, but earnings from continuing operations only were $0.03 higher.

The principal sources for this income statement analysis were the earnings announcement, the conference call presentation, the call transcript (available from Seeking Alpha), and the formal 10-K report for the fiscal year.

In a second article, we will report Broadridge's scores as measured by the GCFR financial gauges.  The follow-up post will also provide the latest figures for the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value.

Before getting into the details, we will take a step back to introduce the subject of today's analysis.

Broadridge Financial Solutions, Inc., provides brokerage and other services to financial companies.  The Investor Communication Solutions business, which distributes and processes proxies for public companies and mutual funds, contributed more than 75 percent of Broadridge's revenue and earnings in fiscal 2010.  Broadridge's Securities Processing business in fiscal 2010 "processed over 1.5 million equity trades per day and over $3.5 trillion in fixed income trades per day of United States (U.S.) and Canadian securities."

Last year, Broadridge reached a seven-year agreement with Morgan Stanley Smith Barney to provide customer communications services.  MSSB combines the wealth management businesses of Morgan Stanley with those of Citi Smith Barney.

Automatic Data Processing (NASDAQ: ADP) spun off Broadridge on 30 March 2007.  (GCFR articles related to ADP can be found here.)

Additional background information about Broadridge and the business environment in which it is currently operating can be found in the look-ahead.

Please click here to see a normalized depiction of the actual and projected results for the just-concluded quarter, as well as the quarterly Income Statements for the last couple of years.  Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

Revenue in the June quarter increased 4.8 percent, from $716.3 million last year to $750.5 million in the most recent three months.  The earlier period's Revenue was restated to exclude revenue from the securities clearing business, which is now treated as a discontinued operation. 

If foreign currency exchange effects are excluded, Revenue grew a more modest 3.4 percent, from $723.9 million in the June 2009 quarter to $748.4 million in June 2010.

Broadridge's reported revenue fell 1.1 percent, a relatively minor amount, short of our $759 million estimate.  The estimate was based on Broadridge's guidance in May 2010 to expect fiscal 2010 Revenue growth near 7 percent.  Revenue for the year, after all adjustments, increased 6.6 percent.

The Investor Communication Solutions business achieved a fourth-quarter revenue increase of 3.9 percent, from $587.0 million to $609.9 million.  This business was responsible for 81.3 percent of the company's total revenue in the quarter.  Revenue from the smaller Securities Processing Solutions business rose 1.2 percent, from $136.7 million to $138.4 million.

Management ascribed Revenue growth in the June quarter to "continued growth in event-driven mutual fund proxy revenues and increased transaction reporting revenues from the MSSB [Morgan Stanley Smith Barney] transaction."

The Cost of Revenues -- we call it Cost of Goods Sold  -- increased to $497.3 million (66.3 percent of Revenue) from $476.4 million in fiscal 2009's fourth quarter.  The latest amount translates into a Gross Margin of 33.7 percent, 20 basis points more profitable than last year. 

According to our records, this was the most lucrative quarterly Gross Margin in Broadridge's history as an independent company.

The Gross Margin was an impressive 170 basis points better than the conservative 32.0 percent we had estimated.

Sales, General, and Administrative expenses increased a hefty 44 percent, from $48.5 million to $69.8 million.   It's likely that the latest amount was inflated by non-recurring costs required for strategic investments, but we weren't able to find a detailed breakout of the SG&A costs.  As a percentage of Revenue, SG&A rose from 6.8 percent to 9.3 percent. 

The latest SG&A expense was 15.0 percent more than our $60.7 million estimate.

Subtracting the various operating expenses mentioned above from Revenue yields Operating Income, as we define it, of $183.4 million, down 4.2 percent from $191.4 million in the year-earlier quarter.  The decrease was due to the additional SG&A expense, partially offset by greater Revenue and the improved Gross Margin.

The latest Operating Income value was slightly more, 0.7 percent, than our $182.2 million target.  The better-than-expected Gross Margin mostly balanced the higher-than-expected SG&A expense and modestly lower-than-expected Revenue.

Other items that we classify as non-operating (generally interest income and expense, plus foreign exchange gains and losses) summed to a $0.7 million net expense.  Our target was $4.0 million.

The effective Income Tax Rate (on pretax earnings from continuing operations) was 36.4 percent, down a little from 37.0 percent last year.  We expected the tax rate to remain at 37 percent.

After-tax earnings from continuing operations were $116.2 million ($0.84 per share), basically the same as last year's $115.8 million ($0.82 per share) but with fewer shares outstanding in the more recent period.

We didn't expect the rather substantial $11.1 million loss on discontinued operations, which was related to the securities clearing business prior to its sale.  This loss reduced overall GAAP Net Income to $105.1 million ($0.76 per share), down 10 percent from $116.9 million ($0.83 per share) in the June 2009 quarter.  Our Net Income estimate was $112.2 million ($0.81 per share).

In summary, earnings for continuing operations were slightly ahead of our expectations and would have been even better had not SG&A expenses risen so much.  (We suspect, but haven't been able to confirm, the SG&A figure for the June quarter includes some significant one-time items.)  The large loss on discontinued operations brought the overall results below our target.

Full disclosure: Long BR at time of writing.

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