Broadridge Financial Solutions, Inc. — Form 10-K Summary
Period clarification: Although the request metadata says “2019 Q4,” this filing is the annual report for the fiscal year ended June 30, 2020, filed August 11, 2020. Fiscal Q4 was the three months ended June 30, 2020.
Business context and reporting period
Broadridge provides investor communications, securities processing, data and analytics, and customer communications services. It reports two segments: Investor Communication Solutions (ICS) and Global Technology and Operations (GTO). ICS accounted for about 77% of FY2020 revenue and GTO about 26%, before foreign-currency reconciliation. The business is seasonal, with proxy-related activity typically strongest in fiscal Q3 and Q4.
Financial performance and liquidity
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $4,529.0 million | $4,362.2 million | +4% |
| Operating income | $624.9 million | $652.7 million | -4% |
| Operating margin | 13.8% | 15.0% | -1.2 percentage points |
| Net earnings | $462.5 million | $482.1 million | -4% |
| Diluted EPS | $3.95 | $4.06 | -3% |
| Operating cash flow | $598.2 million | $617.0 million | -$18.7 million |
| Free cash flow (non-GAAP) | $499.5 million | $544.4 million | -$44.9 million |
Recurring fee revenue rose 10% to $3,036.3 million, with reported growth attributed to 4 points from net new business, 1 point from internal growth, and 6 points from acquisitions (rounded). Event-driven fees fell 27% to $178.0 million, primarily due to lower mutual fund proxy, equity special-meeting, and contest activity. Distribution revenue decreased 1% to $1,451.2 million. Foreign exchange reduced reported revenue by $34.0 million.
ICS revenue increased 1% to $3,491.3 million, while segment earnings before income taxes declined 8% to $464.1 million and pretax margin fell to 13.3% from 14.6%. GTO revenue increased 18% to $1,174.2 million and segment pretax earnings increased 15% to $245.0 million; pretax margin eased to 20.9% from 21.3%. GTO benefited from acquisitions and higher trading volumes amid market volatility.
Adjusted operating income was $794.8 million and adjusted operating margin was 17.5%, compared with $746.5 million and 17.1% in FY2019. Adjusted net earnings were $588.5 million and adjusted diluted EPS was $5.03. These are non-GAAP measures; adjustments included acquired-intangible amortization, acquisition and integration costs, IBM private-cloud charges, COVID-related expenses, and, for adjusted earnings, a joint-venture investment gain.
At June 30, 2020, cash and cash equivalents were $476.6 million, total assets $4,889.8 million, and stockholders’ equity $1,346.5 million. Total debt was $1,799.8 million principal ($1,787.5 million carrying value); $400.0 million of notes was due in September 2020. The $1.5 billion revolving facility had $1,350.2 million of unused capacity. Current liabilities of $1,341.0 million slightly exceeded current assets of $1,328.0 million. Management said available cash, operating cash flows, and borrowing capacity were expected to cover operating and investment needs, dividends, debt repayments, and material capital expenditures for at least 12 months and thereafter for the foreseeable future.
Operating cash flow declined mainly because of increased scaling of client platform implementation and development. Investing cash outflow was $441.7 million, including $339.1 million for acquisitions. Financing cash flow was $51.2 million, reflecting lower share repurchases than in the prior year, partly offset by borrowing and dividend activity. FY2020 dividends declared were $2.16 per share; on August 10, 2020, the board raised the quarterly dividend to $0.575 per share, or an expected $2.30 annually.
Material changes, outlook and unusual items
- FY2020 included four acquisitions—Shadow Financial, Fi360, ClearStructure, and FundsLibrary—with aggregate purchase consideration of $296.3 million. Acquisitions were a significant contributor to recurring-fee growth and increased goodwill and acquired-intangible amortization.
- Operating income included $32.0 million of IBM private-cloud charges, including a $30.4 million non-cash write-down of hardware classified as held for sale. Adjusted measures exclude these charges and other specified items.
- COVID-19 had not materially affected consolidated revenue or pretax income through the filing date, according to management. Higher trading activity in Q3 and Q4 partly offset weaker internal growth in portions of ICS. Management warned that the pandemic’s future effects remained uncertain and could affect client demand, operations, costs, liquidity, and results.
- No quantified earnings or revenue guidance is provided. Management described liquidity as adequate for anticipated needs, subject to continuing uncertainty from COVID-19 and market conditions.
- The SEC proposed a mutual-fund and ETF disclosure-framework change in August 2020. If adopted, streamlined shareholder reports and other changes could affect Broadridge’s services and financial results.
- Key risks include client concentration (five largest clients supplied about 20% of FY2020 revenue; the largest about 6%), market and trading activity, cybersecurity and privacy, dependence on critical vendors including IBM, regulatory change, competition, acquisitions and integration, and goodwill impairment. Goodwill was $1,674.5 million, about 34% of total assets; no impairment was recorded.
- Ordinary-course claims and litigation were disclosed; management did not expect their resolution to materially affect financial condition, results, or cash flows. The auditor gave unqualified opinions on the financial statements and internal controls; goodwill was identified as a critical audit matter.
Most important facts for investors to verify
- Confirm the reporting period: this is FY2020, not a 2019 Q4 filing; compare the June 2020 quarter with the same quarter in prior years while accounting for seasonality.
- Assess whether recurring-fee growth and GTO trading-volume gains can persist, and whether weak ICS internal growth and lower event-driven fees continue.
- Review the maturity and refinancing or repayment of the $400 million notes due September 2020, alongside revolving-credit availability and covenant compliance.
- Track integration and returns from FY2020 acquisitions, elevated amortization, deferred client implementation costs, and the long-term costs and execution of the IBM private-cloud agreements.
- Evaluate COVID-19 effects, the proposed fund-disclosure rules, client concentration, cybersecurity exposure, and the sensitivity of goodwill valuations to future operating assumptions.