UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2007
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number
BROADRIDGE FINANCIAL SOLUTIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 33-1151291 | |
|
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) | |
|
1981 Marcus Avenue Lake Success, NY |
11042 | |
| (Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code (516) 472-5400
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one).
Large accelerated filer x Accelerated filer ¨ Non-Accelerated filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of the registrant’s common stock, $0.01 par value, as of October 31, 2007 was 139,420,362.
TABLE OF CONTENTS
| ITEM | PAGE | |||
|
PART I. |
FINANCIAL INFORMATION | 3 | ||
|
Item 1. |
FINANCIAL STATEMENTS | 3 | ||
|
Item 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 17 | ||
|
Item 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 28 | ||
|
Item 4. |
CONTROLS AND PROCEDURES | 29 | ||
|
PART II. |
OTHER INFORMATION | 30 | ||
|
Item 1. |
LEGAL PROCEEDINGS | 30 | ||
|
Item 1A. |
RISK FACTORS | 30 | ||
|
Item 2. |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 30 | ||
|
Item 3. |
DEFAULTS UPON SENIOR SECURITIES | 30 | ||
|
Item 4. |
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | 31 | ||
|
Item 5. |
OTHER INFORMATION | 31 | ||
|
Item 6. |
EXHIBITS | 31 | ||
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Broadridge Financial Solutions, Inc.
Condensed Consolidated and Combined Statements of Earnings
(In millions, except per share amounts)
(Unaudited)
Three months ended
September 30,
Revenues:
Services revenues
Other
Total revenues
Interest expense from securities operations
Net revenues
Cost of net revenues
Selling, general and administrative expenses
Other expenses, net
Earnings before income taxes
Provision for income taxes
Net earnings
Earnings per share:
Basic
Diluted
Weighted-average shares outstanding:
Basic
Diluted
Dividends declared per common share
na – not applicable
See Notes to Condensed Consolidated and Combined Financial Statements.
3
Broadridge Financial Solutions, Inc.
Condensed Consolidated Balance Sheets
(In millions, except per share amounts)
(Unaudited)
Assets
Current assets:
Cash and cash equivalents
Cash and securities segregated for regulatory purposes and securities deposited with clearing organizations
Accounts receivable, net of allowance for doubtful accounts of $3.1 and $2.6, respectively
Securities clearing receivables, net of allowance for doubtful accounts of $2.1 and $2.1, respectively
Other current assets
Total current assets
Property, plant and equipment, net
Other non-current assets
Goodwill
Intangible assets, net
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Securities clearing payables
Deferred revenues
Short-term borrowings
Total current liabilities
Long-term debt
Other non-current liabilities
Deferred revenues
Total liabilities
Commitments and contingencies (Note 9)
Stockholders’ equity:
Preferred stock: Authorized, 25.0 shares; issued and outstanding, none
Common stock, $.01 par value: Authorized, 650.0 shares; issued, 139.4 shares and 139.3 shares, respectively
Additional paid-in capital
Retained earnings
Treasury stock – at cost
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
See Notes to Condensed Consolidated and Combined Financial Statements.
4
Broadridge Financial Solutions, Inc.
Condensed Consolidated and Combined Statements of Cash Flows
(In millions)
(Unaudited)
Cash Flows From Operating Activities
Net earnings
Adjustments to reconcile net earnings to net cash flows provided by operating activities:
Depreciation and amortization
Amortization of other assets
Deferred income taxes
Stock-based compensation expense
Other
Changes in operating assets and liabilities:
Current assets and liabilities:
Decrease in accounts receivable
Decrease (increase) in other current assets
Decrease in accounts payable
Decrease in accrued expenses and other current liabilities
Decrease in deferred revenues
Decrease in cash and securities segregated for regulatory purposes and securities deposited with clearing organizations
Increase in securities clearing receivables
Increase in securities clearing payables
Non-current assets and liabilities:
Increase in other non-current assets
Increase in other non-current liabilities
Net cash flows provided by operating activities
Cash Flows From Investing Activities
Capital expenditures
Purchases of intangibles
Acquisition of a business
Net cash flows used in investing activities
Cash Flows From Financing Activities
Net payments on short-term debt
Payments on long-term debt
Dividends paid
Proceeds from exercise of stock options
Purchases of common stock
Payments on notes payable to ADP and ADP affiliates
Net returns of investments to ADP and ADP affiliates
Net cash flows used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosure of cash flow information:
Cash payments made for interest
Cash payments made for income taxes
Non-cash investing activities:
Increase in liabilities for property, plant and equipment
Transfer of equipment, software and software licenses to ADP
See Notes to Condensed Consolidated and Combined Financial Statements.
5
Broadridge Financial Solutions, Inc.
Notes to Condensed Consolidated and Combined Financial Statements
(Tabular
dollars in millions, except per share amounts)
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
A. Spin-off.
The spin-off of Broadridge Financial Solutions,
Inc. (“Broadridge” or the “Company”), a Delaware corporation, by Automatic Data Processing, Inc. (“ADP” or the “Former Parent”) became effective on March 30, 2007 through a distribution of 100% of the
common stock of the Company to the holders of record of ADP’s common stock (the “Distribution”). The Distribution was effected pursuant to a separation and distribution agreement by which ADP contributed to the Company the
subsidiaries that operated its brokerage services business which includes the businesses described below.
B. Description of
Business
. The Company is a leading global provider of investor communication, securities processing, and clearing and outsourcing solutions to the financial services industry. The Company classifies its operations into the following three
reportable segments:
Investor Communication Solutions
— provides solutions for the processing and distribution of proxy materials to investors, as well as vote processing,
and for the distribution of regulatory reports and corporate action/reorganization event information, as well as tax reporting solutions. Investor Communication Solutions also provides 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,
and imaging, archival and workflow solutions.
Securities Processing Solutions
— provides advanced, computerized real-time transaction processing services that automate the securities transaction
lifecycle. Securities Processing Solutions’ products and services include desktop productivity tools and portfolio management, order capture and execution, trade confirmation, settlement and accounting services.
Clearing and Outsourcing Solutions
— provides securities clearing services, which include the process of matching, recording, and processing transaction
instructions and then exchanging payment between counterparties. The Company’s securities clearing solutions enable clients to finance inventory and margin balances. The Company’s operations outsourcing solutions allow broker-dealers to
outsource certain administrative functions relating to clearing and settlement to the Company, from order entry to trade matching and settlement, while maintaining their ability to finance and capitalize their business.
C. Basis of Presentation
. The Condensed Consolidated and Combined Financial Statements have been prepared in accordance with accounting
principles generally accepted in the United States of America. These financial statements present the consolidated position of the Company as a separate, stand-alone entity subsequent to the Distribution, presented along with the historical
operations of the brokerage services business on a combined basis which were operated as part of ADP prior to the Distribution. 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 the cost and equity methods of accounting. Intercompany balances and transactions have been eliminated. Amounts included in retained earnings reflect the
Company’s earnings subsequent to the Distribution. The Company’s combined results of operations and cash flows for periods prior to the Distribution may not be indicative of its future performance and do not necessarily reflect what its
results of operations and cash flows would have been had the Company operated as a separate, stand-alone entity during the periods presented, including changes in its operations and capitalization as a result of the separation from ADP. 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 financial statements should be read in conjunction with the Company’s financial
statements for the fiscal year ended June 30, 2007 in the Company’s Annual Report on
6
Form 10-K for the fiscal year ended June 30, 2007 (the “2007 Annual Report”) filed with the Securities and Exchange Commission (the
“SEC”) on August 23, 2007.
The Condensed Consolidated and Combined Financial Statements for periods prior to the
Distribution include costs for facilities, functions and services used by the Company at shared ADP sites and costs for certain functions and services performed by centralized ADP organizations and directly charged to the Company based on usage.
Following the separation from ADP, the Company performs these functions using internal resources or purchased services, certain of which may be provided by ADP during a transitional period pursuant to the transition services agreement. Refer to Note
10, “Transactions with Former Parent,” for a detailed description of the Company’s transactions with ADP subsequent to the Distribution. The expenses allocated to the Company for these services are not necessarily indicative of the
expenses that would have been incurred if the Company had been a separate, independent entity and had otherwise managed these functions. The Company’s Condensed Consolidated and Combined Financial Statements include the following transactions
with ADP or ADP affiliates prior to the Distribution:
Overhead Expenses
: The Condensed Consolidated and Combined Statements of
Earnings of the Company include an allocation of certain general expenses of ADP and ADP affiliates, which were in support of the Company, including departmental costs for information technologies, travel, treasury, tax, internal audit, risk
management, real estate, benefits and other corporate and infrastructure costs. The Company was allocated $2.8 million of these overhead costs related to ADP’s shared functions for the three months ended September 30, 2006. These allocated
costs are reported in selling, general and administrative expenses. These allocations were based on a variety of factors. The cost for information technology support was allocated based on the number of Company end-users in relation to ADP’s
total number of users. The allocation of the travel department costs was based on the estimated percentage of travel directly related to the Company. The allocation of the treasury department costs was a combination of an estimated percentage of
support staff time and bank service charges that are directly related to the Company’s activities. The allocation of the internal audit department costs was based on the internal audit hours incurred for the Company in relation to ADP’s
total internal audit hours. The allocation of the risk management department costs was based on the estimated percentage of insurance coverage for the Company in relation to ADP’s total insurance coverage. The allocation of the real estate
department costs was based on the number of leased facilities for the Company managed by ADP’s Corporate real estate department in relation to ADP’s total leased facilities. All other allocations were based on an estimated percentage of
support staff time related to the Company in comparison to ADP as a whole. Management believes that these allocations were made on a reasonable basis.
Royalty Fees
: The Condensed Consolidated and Combined Statements of Earnings include a trademark royalty fee charged by ADP to the Company based on revenues for licensing fees associated with the use of the ADP
trademark. The Company was charged $11.3 million for the three months ended September 30, 2006 for such trademark royalty fees. This charge is recorded in Selling, general and administrative expenses.
Services Received from ADP Affiliated Companies
: Certain systems development functions were outsourced to an ADP shared services facility located
in India. This facility provided services to the Company as well as to ADP affiliates. The Company purchased $2.3 million of services from this facility for the three months ended September 30, 2006. The cost of these services is included
within Cost of net revenues. The Company recorded a charge of $27.5 million for the use of ADP’s shared services data center for the three months ended September 30, 2006. The charge for these services is included within Cost of net
revenues.
Services Provided to ADP Affiliated Companies
: The Company has charged ADP and ADP affiliates for providing certain
investor communication services. The Company recorded revenue of $4.2 million for these services for the three months ended September 30, 2006. These charges approximate what the Company would have charged a third-party customer for similar
services. Management believes that these charges were made on a reasonable basis.
Notes Payable to ADP Affiliated Parties
: The
Condensed Consolidated and Combined Statements of Earnings for the three months ended September 30, 2006 includes a charge of $0.5 million for interest expense on notes payable to ADP affiliated parties.
7
Other Services
: The Company received other services from ADP and ADP affiliates including payroll
processing services and the use of information technology software for recruiting employees. The Company was primarily charged at a fixed rate per employee per month for such payroll processing services. The charge for the use of information
technology software for recruiting employees was based on the Company’s headcount in relation to ADP’s total headcount. Expenses incurred for such services were $0.2 million for the three months ended September 30, 2006. These costs
are included in the Condensed Consolidated and Combined Statements of Earnings in Selling, general and administrative expenses.
D.
Financial Instruments
. Substantially all of the financial instruments of the Company other than long-term debt are carried at market or fair values, or at carrying amounts that approximate fair values because of the short maturity of the
instruments. The carrying value of the Company’s long-term variable-rate debt approximates fair value because these instruments reflect market changes to interest rates. The carrying value of the Company’s long-term fixed-rate debt
represents the face value of the debt net of the unamortized discount. The fair value of the Company’s long-term fixed-rate debt is based on quoted market prices.
E. Reclassifications.
Certain prior year information has been reclassified to conform to the current year presentation. The Company has provided further detail to the changes in operating assets and liabilities
as well as payments on notes payable to ADP and ADP affiliates in the Condensed Consolidated and Combined Statements of Cash Flows.
NOTE 2. NEW
ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertain tax positions by prescribing a minimum recognition threshold for recognition of tax benefits in the financial
statements. FIN 48 also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of applying FIN 48, the amount of benefit recognized in the
financial statements may differ from the amount taken or expected to be taken in a tax return. These differences are referred to as unrecognized tax benefits and represent financial statement liabilities. In the event unrecognized tax positions are
ultimately allowed (for example, when the matter is settled with taxing authorities or statutes of limitations expire), the benefit is recognized, generally resulting in a reduction of tax expense in the period of recognition. The Company’s
adoption of FIN 48 on July 1, 2007 resulted in a decrease to Retained earnings of $0.7 million and an increase to Other non-current liabilities of $0.7 million. See Note 8 for further discussion regarding the adoption of FIN 48.
In February 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“SFAS No. 159”). This statement provides a fair value option election that allows companies to irrevocably elect fair value as the initial and subsequent measurement attribute for certain
financial assets and liabilities, with changes in fair value recognized in earnings as they occur. SFAS No. 159 permits the fair value option election on an instrument by instrument basis at initial recognition of an asset or liability or upon
an event that gives rise to a new basis of accounting for that instrument. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company expects to adopt SFAS
No. 159 on July 1, 2008. The adoption of SFAS No. 159 is not expected to have a material effect on the Company’s consolidated results of operations or financial condition.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). This statement clarifies the
definition of fair value, establishes a framework for measuring fair value, and expands the disclosures on fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company expects to adopt
SFAS No. 157 on July 1, 2008. The adoption of SFAS No. 157 is not expected to have a material effect on the Company’s consolidated results of operations or financial condition
2007
2006
$
435.5
$
426.1
24.5
19.4
460.0
445.5
8.8
5.4
451.2
440.1
334.2
342.6
49.1
50.5
8.8
0.6
392.1
393.7
59.1
46.4
23.1
17.9
$
36.0
$
28.5
$
0.26
$
0.21
$
0.26
$
0.21
139.1
138.8
139.8
138.8
$
0.06
na
September 30,
2007
June 30,
2007
$
86.4
$
88.6
27.0
66.4
374.2
502.7
1,290.6
1,241.2
66.7
61.1
1,844.9
1,960.0
74.5
77.4
138.1
129.2
484.4
480.2
33.0
31.4
$
2,574.9
$
2,678.2
$
91.3
$
91.5
193.0
287.9
963.2
915.4
18.9
24.6
108.7
109.2
1,375.1
1,428.6
532.7
617.7
59.6
61.0
42.3
39.8
2,009.7
2,147.1
—
—
1.4
1.4
418.9
412.9
117.2
90.3
(0.5
)
(0.1
)
28.2
26.6
565.2
531.1
$
2,574.9
$
2,678.2
Three Months ended
September 30,
2007
2006
$
36.0
$
28.5
9.9
9.8
2.5
5.7
(8.0
)
(1.8
)
5.6
5.7
(0.3
)
2.2
129.0
43.6
(3.2
)
11.5
(0.4
)
(14.7
)
(78.6
)
(28.7
)
(5.6
)
(4.8
)
39.4
0.1
(49.4
)
(193.9
)
47.7
181.4
(13.1
)
(7.1
)
8.3
0.2
119.8
37.7
(4.9
)
(3.5
)
(1.1
)
(0.1
)
(6.1
)
—
(12.1
)
(3.6
)
(17.0
)
—
(85.0
)
—
(8.4
)
—
0.5
—
(0.5
)
—
—
(31.7
)
—
(36.5
)
(110.4
)
(68.2
)
0.5
(0.1
)
(2.2
)
(34.2
)
88.6
50.1
$
86.4
$
15.9
$
13.8
$
5.6
$
61.5
$
0.7
$
2.4
$
1.1
—
$
24.0
•
•
•