Broadridge Financial Solutions, Inc. (BR) was spun off by Automatic Data Processing, Inc. (ADP) to shareholders on 30 March 2007. The new company provides investor communication, securities processing, and clearing services to financial companies. We evaluated Broadridge after the December 2007 quarter, but we didn't compute gauge scores because the GCFR methodology requires a historical record to which current financial metrics can be compared.
In our analysis of the December quarter, we pointed out that Broadridge's Cash Flow from Operations was minus $272.5 million in the quarter -- the negative number signifies that cash was used for operations -- primarily because of a $380.0 million loan that was repaid on 17 January 2008. The transaction also increased the Broadridge's Short-Term Debt and led to questions about the company's risk management practices. In lowering the company's counter-party credit rating with a negative outlook, S&P specifically mentioned:
"The downgrade and negative outlook reflect our concerns about mgmt's risk appetite as well as corporate and risk mgmt governance, in particular, at the regulated broker dealer, Ridge Clearing."
Broadridge subsequently disclosed the following information about the $380 million transaction and risk management:
The $380 million transaction in question involved 143 specified pools of AAA-rated mortgage-backed bonds issued by the Federal National Mortgage Association (FNMA). These securities are liquid and have low price volatility. There were no exotic or illiquid mortgage-backed derivative securities in this transaction. The party who had committed to purchase these bonds is a global financial services company rated A+ by Standard & Poor’s. Consequently, Broadridge’s risk in this transaction was low. The transaction settled and the related loan was repaid on January 17, 2008, as previously disclosed.Settling the subject transaction restored Broadridge's Cash Flow from Operations to a positive value ($612 million) through the first nine months of the fiscal year.
Before we review the latest values for the gauge metrics, we will examine the Income Statement for the recent quarter. We didn't attempt to predict Broadridge's earnings in advance. Note that Broadridge was part of ADP during the year-earlier period.
Please also note that the tabular format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.
| ($ M) | | March 2008 (actual) | March 2007 (actual) |
| Revenue (1) | | 499 | 493 |
| Operating expenses | | | |
| | CGS (2) | (383) | (375) |
| | SG&A | (60) | (48) |
| | Other | 0 | (0) |
| Operating Income | | 56 | 70 |
| Other income | | | |
| | Investments | 0 | 0 |
| | Interest, etc. (3) | (7) | (0) |
| Pretax income | | 48 | 70 |
| Income tax | | (19) | (28) |
| Net Income | | 30 | 42 |
| | | $0.21/sh | $0.30/sh |
| Shares outstanding | 141 | 139 |
2. Cost of Net Revenues
3. Other expenses, net (mostly interest)
Revenue in the quarter was 1.2 percent above the value in the year-earlier period. Year-over-year Revenue Growth was 5.1 percent. The Gross Margin in the quarter was 23.2 percent, a little less than the 23.9 percent margin in the March 2007 quarter. The actual margin translates into a Cost of Goods Sold (CGS) -- called Cost of Net Revenues on Broadridge's Income Statement -- of 76.8 percent of Revenue.
Sales, General, and Administrative (SG&A) expenses were 12 percent of Revenue, up rather substantially from 9.7 percent.
Operating Income, as we defined it, was 20 percent less than the amount attained one year earlier.
Other expenses, mostly interest, increased by $7.1 million. The 10-Q indicates that increased interest costs on borrowings was the reason "other expenses" soared. These borrowings might not have been necessary when Broadridge was part of ADP.
The Income Tax Rate was 39.0 percent in the quarter, down from 40.1 percent in the year-earlier period.
Greater operating and interest expenses resulted in a 28.6 percent decline in Net Income.
Cash Management.
| March 2008 | 3 months ago | 12 months ago | |
| Current Ratio | 1.3 | 1.3 | 1.2 |
| LTD/Equity | 75.3% | 85.7% | 103.4% |
| Debt/CFO | 1.0 yrs | N/A | 4.5 yrs |
| Inventory/CGS | N/A | N/A | N/A |
| Finished Goods/Inventory | N/A | N/A | N/A |
| Days of Sales Outstanding (DSO) | 62.8 days | 55.7 days | 65.1 days |
| Working Capital/Market Capitalization | 16.6% | 12.3% | 7.1% |
| Cash Conversion Cycle Time | 40.6 days | 46.2 days | 55.3 days |
The debt ratios have come down as a result of both debt repayment, restored cash flow, and rising Stockholders' Equity. Working Capital has also improved substantially.
Growth.
| March 2008 | 3 months ago | 12 months ago | |
| Revenue growth | 5.1% | 7.0% | N/A |
| Revenue/Assets | 67.6% | 75.0% | 89.5% |
| CFO growth | 220.8% | -67.2% | N/A |
| Net Income growth | -3.0% | 7.9% | N/A |
Revenue growth is a concern as the industry the company serves has been buffeted by waves of mortgage-induced asset write-downs. We noted above the effects (first negative, then positive) a single large transaction had on CFO.
Profitability.
| March 2008 | 3 months ago | 12 months ago | |
| Operating Expenses/Revenue | 84.0% | 83.3% | 84.0% |
| ROIC | 24.2% | 15.4% | 17.3% |
| FCF/Equity | 78.6% | -40.8% | 32.7% |
| Accrual Ratio | -9.3% | 16.0% | 2.9% |
We noted some increased Operating Expenses in the March quarter, but in the aggregate they have remained steady. The $380 million transaction's effects on CFO in the December 2007 and March 2008 quarters led to the wide swings in the Profitability metrics.
Value. Broadridge's share price fell during 2008's first quarter from $22.43 to $17.60. The shares sold for $19.51 when the company was spun off from ADP. In the ratios below, the quarter-end share was used.
| March 2008 | 3 months ago | 12 months ago | |
| P/E | 12.9 | 15.4 | 13.6 |
| P/E to S&P 500 average P/E | 77.6% | 86.4% | 85.6% |
| Price/Revenue | 1.1 | 1.4 | 1.3 |
| Enterprise Value/Cash Flow (EV/CFO) | 5.0 | N/A | 19.4 |
These metrics are at levels that might be attractive to value investors.
One-year-old Broadridge is maturing while its customers, and thus Broadridge itself are facing turbulent market conditions. We haven't yet seen any indication as to whether security-rating agencies were satisfied by the company's description of its risk management practices and its explanation of a now-closed, seemingly normal transaction. The transaction in question might not have been noticed if it hadn't spanned the boundary between two fiscal quarters.
However, investors certainly bid up the price of Broadridge shares when the company reported, in this press release, its results from the March quarter and raised its earnings guidance.
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