Broadridge Financial Solutions, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended June 30, 2017, compared principally with fiscal 2016. The request metadata says “2016 Q4,” but the filing is an annual report for FY2017; the filing also notes that Q4 is typically the company’s most seasonal quarter.
Business context
Broadridge provides investor and customer communications, securities processing, and data and analytics services to financial institutions, asset managers, corporations, and other businesses. Its two segments are Investor Communication Solutions (ICS) and Global Technology and Operations (GTO). ICS generated about 83% of FY2017 revenue; GTO generated about 19%, before foreign-currency and other consolidating effects.
Key financial metrics
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $4,142.6 million | $2,897.0 million | +43% |
| Operating income | $531.6 million | $500.3 million | +6% |
| Operating margin | 12.8% | 17.3% | -4.5 percentage points |
| Net earnings | $326.8 million | $307.5 million | +6% |
| Diluted EPS | $2.70 | $2.53 | +7% |
| Cash from operations | $515.9 million | $437.7 million | +$78.2 million |
| Free cash flow (non-GAAP) | $402.2 million | $362.2 million | +$40.0 million |
Gross profit was $1,033.0 million, or approximately 24.9% of revenue, compared with $921.2 million, or approximately 31.8%, in FY2016. Interest expense, net, rose to $42.7 million from $25.7 million. The effective tax rate was 33.1%, versus 34.4%.
At June 30, 2017, cash and cash equivalents were $271.1 million (down from $727.7 million); current assets were $989.6 million and current liabilities $744.9 million, for net working capital of $244.6 million. Carrying-value debt was $1,102.1 million, compared with $1,015.5 million in total debt a year earlier; cash less carrying-value debt was approximately negative $831 million. The company had $790 million of unused capacity on its $1.0 billion revolving credit facility and reported covenant compliance.
Material changes versus the prior year
- Revenue growth was largely acquisition-driven. Acquisitions contributed $1,092.1 million of the consolidated revenue increase; the NACC customer communications acquisition alone contributed $1,067.1 million. FY2017 revenue also benefited from net new business and internal growth.
- ICS revenue increased 54% to $3,421.4 million, including higher recurring, event-driven, and distribution revenue. ICS pre-tax margin fell 6.1 percentage points to 12.3%, mainly reflecting NACC-related costs, acquired-intangible amortization, and integration expenses.
- GTO revenue increased 9% to $802.7 million, while pre-tax earnings increased 25% to $169.6 million. Management cited net new business, organic revenue growth, and efficiency initiatives.
- Consolidated operating margin declined despite higher operating income, primarily due to NACC’s lower-margin revenue mix. Acquisition and integration costs rose to $19.1 million from $5.0 million, and acquired-intangible and purchased-IP amortization rose to $72.6 million from $31.8 million.
- Investing cash outflow increased to $659.3 million, chiefly from $448.7 million of net acquisition spending and $90.0 million paid for intellectual property. Financing cash outflow was $311.7 million, including $342.8 million of treasury-stock purchases and $152.2 million of dividends paid.
Outlook, management commentary, risks, and unusual items
- The filing provides no quantified earnings or revenue guidance. Management expected operating cash flow, cash, and borrowing capacity to cover working capital, capital expenditure, acquisitions, dividends, and repurchases; it also expected domestic and foreign funding needs to be met for at least the next 12 months.
- On August 9, 2017, the board raised the quarterly dividend from $0.33 to $0.365 per share, an expected annual rate increase from $1.32 to $1.46. On August 2, the board authorized repurchases of up to 6.3 million additional shares; the company reported approximately 10.0 million shares then available under its program.
- FY2017 included a $9.3 million non-cash, non-taxable gain on Broadridge’s previously held 25% investment in MAL when it acquired the remaining interest. Reported FY2017 effective tax rate and earnings therefore include this unusual gain. Adjusted net earnings and adjusted diluted EPS, which exclude specified acquisition-related items and the gain, were $378.3 million and $3.13, respectively; these are non-GAAP measures.
- Broadridge bought Inveshare intellectual property for $95 million, including $90 million paid at closing and a further $5 million obligation, to support development of blockchain applications for proxy services. An additional $40 million is payable upon delivery of applications, expected by September 2018.
- Principal risks include dependence on a relatively small group of clients (five clients contributed about 20% of revenue; the largest contributed about 6%), cybersecurity and service interruptions, reliance on IBM for significant data-center services, regulatory and privacy changes, market activity and transaction volumes, competition, postal costs, and acquisition integration. The company reported prior cyber incidents but said they had not materially affected its financial condition, results, or liquidity.
- Seasonality is significant: proxy and annual-report processing typically makes the fourth fiscal quarter the strongest for revenue, operating income, net earnings, and operating cash flow. Ordinary-course litigation was not expected to have a material effect. The financial statement auditor gave unqualified opinions; the NACC business, representing 26% of FY2017 revenue, was excluded from management’s FY2017 internal-control assessment and was to enter scope in FY2018.
Important facts for investors to verify
- How much of FY2017 growth and future growth is attributable to NACC and other acquisitions versus recurring organic growth, and whether acquired margins improve.
- The timing and costs of NACC integration, acquisition-related amortization, and the expected delivery and commercial contribution of the blockchain applications.
- Cash generation and capital allocation after substantial acquisition spending, share repurchases, and the higher dividend; also monitor debt levels and revolving-credit covenants.
- Client concentration, contract renewal terms, and exposure to changes in securities-market activity and transaction volumes.
- NACC’s FY2018 inclusion in internal-control testing, plus cybersecurity, data-center continuity, and evolving privacy and regulatory requirements.