Broadridge Financial Solutions, Inc. — Form 10-K Summary
Period clarification: The filing is the annual report for the fiscal year ended June 30, 2019, not a 2018 fourth-quarter filing. The company reports seasonally stronger activity in its third and fourth fiscal quarters.
Business context and reporting period
Broadridge provides investor communications, securities processing, data and analytics, and customer communications services. Its two reportable segments are Investor Communication Solutions (ICS) and Global Technology and Operations (GTO). ICS generated about 80% of fiscal 2019 revenue; GTO generated about 22%, with foreign-currency translation shown separately in the segment reconciliation.
Key financial metrics
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $4,362.2 million | $4,329.9 million | +$32.3 million, about 1% |
| Operating income / margin | $652.7 million / 15.0% | $598.1 million / 13.8% | +$54.6 million; margin +1.2 points |
| Net earnings | $482.1 million | $427.9 million | +$54.1 million, about 13% |
| Diluted EPS | $4.06 | $3.56 | +$0.50, about 14% |
| Operating cash flow | $617.0 million | $693.6 million | −$76.6 million |
| Free cash flow (non-GAAP) | $544.4 million | $595.7 million | −$51.3 million |
Recurring fee revenue rose 6% to $2,759.3 million, while event-driven fees fell 14% to $244.5 million and distribution revenue fell 3% to $1,460.8 million. A stronger U.S. dollar reduced reported revenue by $25.1 million. ICS revenue was $3,511.1 million, essentially flat; GTO revenue rose 5% to $953.5 million. Segment pre-tax margins were 14.5% for ICS and 22.1% for GTO.
Reported gross profit was $1,230.2 million, approximately 28.2% of revenue, versus $1,162.5 million, approximately 26.9%, in FY2018. The effective tax rate declined to 20.6% from 23.7%, primarily reflecting the lower U.S. federal corporate tax rate and nonrecurrence of prior-year Tax Act charges, partly offset by lower excess tax benefits from stock-based compensation.
At June 30, 2019, cash and cash equivalents were $273.2 million; current assets were $1,042.3 million and current liabilities $802.6 million. Net working capital was $239.8 million. Long-term debt carrying value was $1,470.4 million, up from $1,053.4 million; cash less debt was approximately $1,197.2 million net debt. The $1.5 billion revolving facility had $924.3 million of unused capacity, and the company reported compliance with its covenants. Management expects cash, operating cash flows and borrowing capacity to meet foreseeable needs.
FY2019 fourth-quarter revenue was $1,211.2 million, net earnings $183.2 million and diluted EPS $1.55, compared with $1,320.4 million, $206.9 million and $1.72, respectively, in FY2018’s fourth quarter.
Material changes and unusual items
- Broadridge adopted the new revenue standard (ASC 606) on July 1, 2018 using the modified retrospective method; prior periods were not restated. The filing’s FY2019 reconciliation attributes $101.1 million of revenue, $77.4 million of operating income and $58.2 million of net earnings to the adoption compared with results without the standard. Adoption increased opening retained earnings by $101.3 million and did not change cash flows. This accounting change materially affects year-over-year comparability.
- Fiscal 2019 acquisitions were Rockall, RPM Technologies and TD Ameritrade retirement-plan custody and trust assets, for aggregate purchase price of $406.4 million. Acquisitions drove $354.7 million of investing cash outflow, net of cash acquired, and added $247.7 million of goodwill. RPM accounted for $302.9 million of the aggregate purchase price.
- Operating cash flow fell despite higher earnings, principally due to increased cash use for client implementations and working capital. Investing outflows increased, primarily because of acquisitions. Financing outflows were lower than the prior year, partly reflecting increased net borrowing proceeds, alongside higher share repurchases and dividends.
- Share repurchases were $397.8 million in FY2019, and dividends paid were $211.2 million. The board raised the quarterly dividend after year-end to $0.54 per share, or an indicated $2.16 annual rate, and authorized a total of 10 million shares for repurchase.
Outlook, risks and contingencies
Management states that cash generation, existing cash and borrowing capacity are expected to fund working capital, capital expenditures, acquisitions, dividends, repurchases and debt service. The filing does not provide specific FY2020 revenue or earnings guidance.
- Revenue depends on client retention and spending, securities-market participation and transaction activity; event-driven proxy activity is volatile, and the business is seasonally weighted toward the third and fourth fiscal quarters.
- Client concentration is material: five clients generated about 22% of consolidated revenue, and the largest client about 6%. GTO’s 15 largest clients generated about 55% of that segment’s revenue.
- Cybersecurity, data privacy, service interruptions, operational errors and reliance on third parties are significant risks. IBM provides key data-center and technology services under long-term agreements.
- Goodwill was $1.5 billion, about 39% of total assets. No impairment was identified, but valuation depends on forecasts and discount-rate assumptions. The auditor identified goodwill valuation as a critical audit matter.
- Other exposures include regulatory change, competition and technology shifts, acquisitions and integration, foreign-exchange movements, interest-rate changes, and postal delivery costs. A 100-basis-point rise in rates was estimated to reduce FY2019 pre-tax earnings by about $3.3 million before interest earned on cash; a hypothetical 10% decline in the Canadian dollar and pound was estimated to reduce pre-tax earnings by $12.2 million.
- The company reported no material expected impact from ordinary-course litigation and no derivative financial instruments at year-end. It reported effective disclosure controls and internal control over financial reporting; the auditor gave unqualified opinions.
Important facts for investors to verify
- Reconcile the ASC 606 adoption effects and compare FY2019 with FY2018 on a consistent accounting basis.
- Assess whether recurring-fee growth can offset weaker event-driven and distribution revenue, and track seasonality in quarterly results.
- Review cash conversion, working-capital needs, acquisition spending, repurchases and dividends against the higher debt balance and debt maturities.
- Monitor acquisition integration and returns, especially RPM, and the assumptions supporting the substantial goodwill balance.
- Evaluate client concentration, retention and renewal terms, cybersecurity and IBM/vendor continuity risks.