Broadridge Financial Solutions, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended June 30, 2018, compared primarily with fiscal 2017. The request metadata says “2017 Q4,” but this filing covers FY2018; it is not a quarterly filing. Amounts are in U.S. dollars unless stated otherwise.
Business context
Broadridge provides investor and customer communications, securities processing, and data and analytics services to financial institutions, public companies, and other businesses. Its two reportable segments are Investor Communication Solutions (ICS) and Global Technology and Operations (GTO). ICS represented approximately 81% of FY2018 revenue; GTO represented approximately 21% before foreign-currency reconciliation. Broadridge reported processing approximately 80% of U.S. outstanding shares for proxy services, more than 6 billion communications, and over $5 trillion in U.S. and Canadian equity and fixed-income trades per day.
Key financial results
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $4,329.9 million | $4,142.6 million | +5% |
| Operating income | $594.9 million | $531.6 million | +12% |
| Operating margin | 13.7% | 12.8% | +0.9 percentage points |
| Earnings before income taxes | $561.0 million | $488.1 million | +15% |
| Net earnings | $427.9 million | $326.8 million | +31% |
| Diluted EPS | $3.56 | $2.70 | +32% |
| Operating cash flow | $693.6 million | $515.9 million | +$177.6 million |
| Free cash flow (non-GAAP) | $595.7 million | $402.2 million | +$193.5 million |
Recurring fee revenue increased $159.2 million (6%) and event-driven fee revenue rose $65.0 million (30%), while distribution revenue fell $41.0 million (3%). Higher proxy contest and mutual fund proxy activity boosted event-driven fees. Recurring revenue growth reflected net new business, internal growth, and acquisitions. Selling, general and administrative expenses rose 13%, partly due to growth initiatives, sales-related costs, and acquisitions.
Segment revenue was $3,495.6 million for ICS (+3%) and $911.6 million for GTO (+10%). Segment earnings before tax increased to $494.6 million for ICS (+16%) and $199.3 million for GTO (+23%). Segment reporting was reorganized in FY2018; prior periods were revised for comparability.
Financial position, liquidity, and capital allocation
- At June 30, 2018, cash and cash equivalents were $263.9 million, total current assets $991.1 million, and current liabilities $777.3 million. Net working capital was $213.8 million, down from $244.6 million a year earlier.
- Debt carrying value was $1,053.4 million, versus $1,102.1 million in FY2017. This included $160.0 million drawn on a $1.0 billion revolving facility, leaving $840.0 million available, and senior notes due 2020 and 2026. The company reported compliance with debt covenants.
- Operating cash flow was $693.6 million; capital expenditures and software purchases totaled $97.9 million. Investing cash outflow was $249.3 million, including $108.3 million for acquisitions and $40.0 million for blockchain-related intellectual property. Financing cash outflow was $449.9 million, including $277.1 million of treasury-stock purchases and $165.8 million of dividends paid.
- FY2018 declared dividends were $1.46 per share. On August 7, 2018, the board announced an increase in the quarterly dividend to $0.485 per share, or an expected annual rate of $1.94, subject to future board approval.
Material changes, outlook, and unusual items
- Net income benefited from a lower effective tax rate: 23.7% versus 33.1%. FY2018 included $40.9 million of excess tax benefits from stock-based compensation and $15.4 million of net Tax Act charges. The new U.S. federal statutory rate of 21% applies beginning in FY2019.
- FY2018 acquisitions included Summit, ActivePath, and FundAssist, with aggregate stated purchase prices of $30.6 million, $24.2 million, and $47.0 million, respectively. Goodwill was $1,254.9 million, and goodwill plus net intangible assets represented approximately 53% of total assets. No goodwill impairment was recorded.
- Management said operating cash flow, existing cash, and borrowing capacity were expected to cover working capital, capital expenditures, acquisitions, dividends, and repurchases; it also expected domestic and foreign funding needs to be met for at least the next 12 months. No numerical FY2019 revenue or earnings guidance is provided in the supplied filing text.
- Adoption of the new revenue standard (ASU 2014-09) was planned for FY2019. The company expected proxy revenue to be recognized predominantly when materials are distributed and anticipated changes to the timing of certain other revenue and costs. Estimated annual impact was less than 1% of FY2017 revenue and less than 3% of FY2017 pretax earnings; the estimated cumulative opening-retained-earnings impact was less than $100 million.
- Revenue and earnings are seasonal, with proxy processing historically making the fourth fiscal quarter the largest. Management cautioned that quarterly results may not predict future performance. The company also identified client concentration, market activity, cybersecurity, regulatory change, system and vendor disruption, postal dependence, competition, acquisitions, and technology change as material risks.
- Five clients generated approximately 21% of FY2018 revenue; the largest client accounted for approximately 6%. Legal claims were described as arising in the normal course, with no material adverse outcome expected. The filing reports prior cyber threats and attacks but says these had not materially affected financial condition, results, or liquidity.
Most important facts for investors to verify
- Separate underlying operating growth from the substantial tax-rate benefit and the effects of acquisitions; compare GAAP results with the company’s non-GAAP adjustments.
- Assess whether recurring fee growth and new sales can offset declining distribution revenue and volatility in event-driven proxy work.
- Review debt maturities, revolver availability, lease and purchase commitments, and the cash-flow effect of buybacks, dividends, and future acquisitions.
- Monitor the FY2019 revenue-recognition transition, including proxy revenue timing and the actual retained-earnings adjustment.
- Evaluate exposure to major clients, cybersecurity and third-party service providers, and the high goodwill and intangible-asset balances.