(The following was released by the rating agency)Overview
-- Broadridge Financial Solutions Inc. (BR), a U.S. leading provider of investor communications and securities processing services, has reported consistent operating performance.
-- It has maintained a moderate financial policy over the 12 months ended March 2012.
-- We are affirming our ‘BBB’ corporate credit rating and revising the outlook to positive from stable.
-- The positive outlook reflects our expectation that Broadridge will continue to maintain its current financial profile, consistent with its publicly stated financial goals, over the next two years.
On May 24, 2012, Standard & Poor’s Ratings Services revised the outlook on Lake Success, N.Y.-based Broadridge Financial Solutions Inc. (BR) to positive from stable. We also affirmed our ‘BBB’ corporate credit rating on the company.
The outlook revision reflects Broadridge’s consistent operating performance and cash flow, and our expectation that it will maintain its current financial profile in accordance with its financial policy, which includes maintaining leverage below the 2x area, avoiding debt-financed shareholder returns, and pursuing only modest tuck-in acquisitions.
The rating reflects our expectation that Broadridge will grow revenues in the low- to mid-single-digit range with stable margins and that it will maintain “intermediate” financial risk (as our criteria define the term). Additional factors include a “satisfactory” business profile with a strong franchise in its core businesses, partly offset by a moderately acquisitive and shareholder-friendly management.
With revenues for the past 12 months ended March 2012 of about $2.3 billion, Broadridge provides a wide range of services to the global financial services industry. Investor Communication Solutions (ICS), which provides proxy mailing and vote processing, is the company’s core business and largest segment. Broadridge’s reputation for consistently delivering communications in compliance with regulatory requirements allows it to maintain its strong position in the industry. The trend for corporate issuers to communicate more with their shareholders electronically because of the SEC’s amendments to the proxy rules (the Notice and Access Rule) would affect revenues, but not necessarily profits because of lower distribution costs associated with electronic delivery.
Broadridge’s Securities Processing Solutions segment provides order execution, trade confirmation, settlement, accounting, and other back-office outsourcing services to broker-dealers. Performance in this segment can be somewhat volatile because the revenue correlates with industry trading volumes.
Broadridge’s well-established competitive positions in the investor communications and securities-processing businesses are significant for the rating. However, consolidation in the U.S. financial services industry combined with somewhat concentrated customers (its top five customers represent 24% of revenue) presents modest risk to the client base.
We expect Broadridge to deliver revenue growth in the low- to mid-single digits in fiscal 2013, as acquisition activity has moderated in fiscal 2012, with EBITDA margins in the high-teen area. Fiscal year-to-date revenue growth has been resilient at 8%, with organic sources contributing 4% in the face of declines in event-driven revenue. Event-driven revenue was down significantly in fiscal 2011 ended June, and continues to be depressed in 2012. The rating does not incorporate an expectation of a rebound to normal levels in event-driven revenue. The IBM data center migration could also modestly improve profitability.
We view the company’s financial profile as intermediate, with debt to EBITDA for the past 12 months at 1.6x as of March 2012. Cash flow is relatively stable, largely because of the high proportion of recurring revenue. We expect operating cash flow to continue to support solid ratios of interest coverage and leverage. Management has indicated it remains committed to maintaining a debt to EBITDA ratio below the 2.0x area in the long term.
In our view, liquidity and financial flexibility are “adequate,” as a result of the company’s free cash flow generation in the $260 million area in the 12 months ended March 2012, limited debt maturities, and its revolving credit facilities. On March 31, 2012, cash and cash equivalents were $219 million and Broadridge has full availability under its $500 million revolving credit facility (expiring 2016).
Our assessment of Broadridge’s liquidity includes the following expectations and assumptions:
-- Sources will exceed uses by 20% over the next 24 months.
-- Net sources would be positive, even with a drop in EBITDA of 15%.
-- Covenants have adequate headroom.
The positive outlook reflects our opinion that Broadridge has demonstrated resilient operating performance and a moderate financial policy. We could raise the rating if the company maintains operating stability and manages the company in a manner consistent with its publicly stated financial objectives over the next 12 to 24 months. Conversely, if the company increases leverage above the 2x area as the result of debt-financed acquisitions or shareholder returns, we could revise the outlook to stable.