Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our Condensed Consolidated Financial Statements and accompanying Notes thereto included elsewhere herein.
Overview
Broadridge, a Delaware corporation and a part of the S&P 500® Index, is a global financial technology leader providing investor communications and technology-driven solutions to banks, broker-dealers, asset and wealth managers and corporate issuers. With over 50 years of experience, including over 10 years as an independent public company, we provide financial services firms with advanced, dependable, scalable and cost-effective integrated solutions and an important infrastructure that powers the financial services industry. Our solutions enable better financial lives by powering investing, governance and communications and help reduce the need for our clients to make significant capital investments in operations infrastructure, thereby allowing them to increase their focus on core business activities.
We operate our business in two reportable segments: Investor Communication Solutions and Global Technology and Operations.
Investor Communication Solutions
We provide the following governance and communications solutions through our Investor Communication Solutions business segment: Regulatory Solutions, Data-Driven Fund Solutions, Corporate Issuer Solutions, and Customer Communications Solutions.
A large portion of our Investor Communication Solutions business involves the processing and distribution of proxy materials to investors in equity securities and mutual funds, as well as the facilitation of related vote processing. ProxyEdge® is our innovative electronic proxy delivery and voting solution for institutional investors and financial advisors that helps ensure the voting participation of the largest stockholders of many companies. We have implemented digital applications to make voting easier for retail investors. We also provide the distribution of regulatory reports, class action and corporate action/reorganization event information, as well as tax reporting solutions that help our clients meet their regulatory compliance needs.
For asset managers and retirement service providers, we offer data-driven solutions and an end-to-end platform for content management, composition, and omni-channel distribution of regulatory, marketing, and transactional information. Our data and analytics solutions provide investment product distribution data, analytical tools, insights, and research to enable asset managers to optimize product distribution across retail and institutional channels globally. Through Matrix Financial Solutions, Inc. (“Matrix”), we provide mutual fund trade processing services for retirement service providers, third-party administrators, financial advisors, banks and wealth management professionals.
In addition, we provide public corporations and mutual funds with a full suite of solutions to help manage their annual meeting process, including registered and beneficial proxy materials distribution, proxy processing and tabulation services, digital voting solutions, proxy and shareholder report document management solutions, virtual shareholder meeting services, and shareholder data services. We also offer financial reporting document composition and management solutions, SEC disclosure and filing services, and registrar, stock transfer and record-keeping services through Broadridge Corporate Issuer Solutions.
We provide omni-channel customer communications solutions, which include print and digital solutions, to modernize technology infrastructures, simplify communications processes, accelerate digital adoption and improve the customer experience. Through one point of integration, the Broadridge Communications CloudSM platform (the “Communications Cloud”) helps companies create, deliver, and manage their communications and customer engagement. The platform includes data-driven composition tools, identity and preference management, omni-channel optimization and digital communication experience, archive and information management, digital and print delivery, and analytics and reporting tools.
Global Technology and Operations
We are a leading global provider of business solutions for capital markets and wealth and investment management firms. We offer advanced solutions that automate firms’ transaction lifecycle, from desktop productivity tools, data aggregation, performance reporting, and portfolio management to order capture and execution, trade confirmation, margin, cash management, clearance and settlement, asset servicing, reference data management, reconciliations, securities financing and collateral optimization, compliance and regulatory reporting, and portfolio accounting and custody-related services. In addition, we provide business process outsourcing services (“BPO”) that support the entire trade lifecycle operations of our buy- and sell-side clients’ businesses through a combination of our technology and our operations expertise.
For capital markets firms, we help our clients lower their costs and improve the effectiveness of their businesses across the front, middle and back office. Our core post-trade services help financial institutions efficiently and cost-effectively consolidate their books and records, gather and service assets under management and manage risk, thereby enabling them to focus on their core business activities. Provided on a software as a service (“SaaS”) basis within large user communities, our technology is a global solution, processing clearance and settlement in over 100 countries. Our multi-asset, multi-market, multi-entity and multi-currency solutions support real-time global trade processing of equity, fixed income, mutual fund, foreign exchange, and exchange-traded derivatives. With the recent acquisition of Itiviti Holding AB (“Itiviti”), we have strengthened our capabilities with a set of front-office trade order and execution management solutions, connectivity and network offerings which will integrate with our existing middle and back-office solutions.
Our comprehensive wealth management platform offers capabilities across the entire wealth management lifecycle and streamlines all aspects of wealth management services, including account management, fee management and client on-boarding. The wealth management platform enables full-service, regional and independent broker-dealers and investment advisors to better engage with customers through digital marketing and customer communications tools. We also integrate data, content and technology to drive new customer acquisition, support holistic and personalized advice and cross-sell opportunities through the creation of sales and educational content, including seminars as well as customizable advisor websites, search engine marketing and electronic and print newsletters. Our advisor solutions help advisors optimize their practice management through customer and account data aggregation and reporting.
We also offer buy-side technology solutions for the global investment management industry, including portfolio management, compliance and operational workflow solutions for hedge funds, family offices, alternative asset managers, traditional asset managers and the providers that service this space.
Consolidation and Basis of Presentation
The Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America (“U.S.”). These Condensed Consolidated Financial Statements present the condensed consolidated position of the Company and include the entities in which the Company directly or indirectly has a controlling financial interest as well as various entities in which the Company has investments recorded under the equity method of accounting as well as certain marketable and non-marketable securities. Intercompany balances and transactions have been eliminated. Amounts presented may not sum due to rounding.
Beginning with the first quarter of fiscal year 2022, the Company revised the foreign exchange rates used to present segment revenues, segment earnings (loss) before income taxes, and Closed sales, to further allocate the foreign exchange impact to the individual segment revenue and profit metrics. The presentation of segment revenues and earnings (loss) before income taxes for the prior periods provided has been changed to conform to the current period presentation. Total consolidated revenues and earnings before income taxes were not impacted.
The results of operations reported for interim periods are not necessarily indicative of the results of operations for the entire year or any subsequent interim period. These Condensed Consolidated Financial Statements should be read in conjunction with the Company’s Consolidated Financial Statements for the fiscal year ended June 30, 2021 in the 2021 Annual Report.
Critical Accounting Policies
In presenting the Condensed Consolidated Financial Statements, management makes estimates and assumptions that affect the amounts reported and related disclosures. Management continually evaluates the accounting policies and estimates used to prepare the Condensed Consolidated Financial Statements. The estimates, by their nature, are based on judgment, available information, and historical experience and are believed to be reasonable. However, actual amounts and results could differ from these estimates made by management. In management’s opinion, the Condensed Consolidated Financial Statements contain all normal recurring adjustments necessary for a fair presentation of results reported. The results of operations reported for the periods presented are not necessarily indicative of the results of operations for subsequent periods. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed in the “Critical Accounting Policies” section of Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2021 Annual Report.
KEY PERFORMANCE INDICATORS
Management focuses on a variety of key indicators to plan, measure and evaluate the Company’s business and financial performance. These performance indicators include Revenue and Recurring fee revenue as well as not generally accepted accounting principles measures (“Non-GAAP”) of Adjusted Operating income, Adjusted Net earnings, Adjusted earnings per share, Free Cash flow, and Closed sales. In addition, management focuses on select operating metrics specific to Broadridge of Record Growth and Internal Trade Growth, as defined below.
Refer to the section “Explanation and Reconciliation of the Company’s Use of Non-GAAP Financial Measures” for a reconciliation of Adjusted Operating income, Adjusted Net earnings, Adjusted earnings per share, and Free Cash flow to the most directly comparable GAAP measures, and an explanation for why these Non-GAAP metrics provide useful information to investors and how management uses these Non-GAAP metrics for operational and financial decision-making. Refer to the section “Results of Operations” for a description of Closed sales and an explanation of why Closed sales is a useful performance metric for management and investors.
Revenues
Revenues are primarily generated from fees for processing and distributing investor communications and fees for technology-enabled services and solutions. The Company monitors revenue in each of our two reportable segments as a key measure of success in addressing our clients’ needs. Fee revenues are derived from both recurring and event-driven activity. The level of recurring and event-driven activity the Company processes directly impacts distribution revenues. While event-driven activity is highly repeatable, it may not recur on an annual basis. Event-driven fee revenues are based on the number of special events and corporate transactions the Company processes. Event-driven activity is impacted by financial market conditions and changes in regulatory compliance requirements, resulting in fluctuations in the timing and levels of event-driven fee revenues. Distribution revenues primarily include revenues related to the physical mailing of proxy materials, interim communications, transaction reporting, customer communications and fulfillment services as well as Matrix administrative services.
Recurring fee revenue growth represents the Company’s total annual fee revenue growth, less growth from event-driven fee revenues. We distinguish recurring fee revenue growth between organic and acquired:
•Organic – We define organic revenue as the recurring fee revenue generated from Net New Business and internal growth.
•Acquired – We define acquired revenue as the recurring fee revenue generated from acquired services in the first twelve months following the date of acquisition. This type of growth comes as a result of our strategy to purchase, integrate, and leverage the value of assets we acquire.
Revenues and Recurring fee revenue are useful metrics for investors in understanding how management measures and evaluates the Company’s ongoing operational performance. See “Results of Operations” as well as Note 3, “Revenue Recognition” to our Condensed Consolidated Financial Statements in this Form 10-Q.
Record Growth and Internal Trade Growth
The Company uses select operating metrics specific to Broadridge of Record Growth and Internal Trade Growth in evaluating its business results and identifying trends affecting its business. Record Growth is defined as stock record growth and interim record growth which measure the estimated annual change in total positions eligible for equity proxy materials and mutual fund and exchange traded fund interim communications, respectively, for equities and mutual fund position data reported to Broadridge in both the current and prior year periods. Internal Trade Growth represents the estimated change in trade volumes for Broadridge securities processing clients whose contracts are linked to trade volumes and who were on Broadridge’s trading platforms in both the current and prior year periods. Record Growth and Internal Trade Growth are useful non-financial metrics for investors in understanding how management measures and evaluates Broadridge’s ongoing operational performance within its Investor Communication Solutions and Global Technology and Operations reportable segments, respectively.
The key performance indicators for the three months ended September 30, 2021, and 2020, are as follows:
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Select Operating Metrics
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Three Months Ended
September 30,
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2021
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2020
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Record Growth
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Equity proxy
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39
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%
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|
16
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%
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Mutual fund interims
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9
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%
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6
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%
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Internal Trade Growth
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2
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%
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12
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%
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Results of Operations
The following discussions of Analysis of Condensed Consolidated Statements of Earnings and Analysis of Reportable Segments refer to the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The Analysis of Condensed Consolidated Statements of Earnings should be read in conjunction with the Analysis of Reportable Segments, which provides a more detailed discussion concerning certain components of the Condensed Consolidated Statements of Earnings.
The following references are utilized in the discussions of Analysis of Condensed Consolidated Statements of Earnings and Analysis of Reportable Segments:
“Amortization of Acquired Intangibles and Purchased Intellectual Property” and “Acquisition and Integration Costs” represent certain non-cash amortization expenses associated with acquired intangible assets and purchased intellectual property assets, as well as certain transaction and integration costs associated with the Company’s acquisition activities, respectively.
“Real Estate Realignment and Covid-19 Related Expenses” represent costs associated with the Company's real estate realignment initiative, including lease exit and impairment charges and other facility exit costs, as well as certain expenses associated with the Covid-19 pandemic.
“Investment Gain” represents a non-operating, non-cash gain on a privately held investment.
“Software Charge” represents a charge related to an internal use software product that is no longer expected to be used.
“Net New Business” refers to recurring revenue from Closed sales less recurring revenue from client losses.
The following definitions describe the Company’s Revenues:
Fee revenues in the Investor Communication Solutions segment are derived from both recurring and event-driven activity. In addition, the level of recurring and event-driven activity we process directly impacts distribution revenues. While event-driven activity is highly repeatable, it may not recur on an annual basis. The types of services we provide that comprise event-driven activity are:
•Mutual Fund Proxy: The proxy and related services we provide to mutual funds when certain events occur requiring a shareholder vote including changes in directors, sub-advisors, fee structures, investment restrictions, and mergers of funds.
•Mutual Fund Communications: Mutual fund communications services consist primarily of the distribution on behalf of mutual funds of supplemental information required to be provided to the annual mutual fund prospectus as a result of certain triggering events such as a change in portfolio managers. In addition, mutual fund communications consist of notices and marketing materials such as newsletters.
•Equity Proxy Contests and Specials, Corporate Actions, and Other: The proxy services we provide in connection with shareholder meetings driven by special events such as proxy contests, mergers and acquisitions, and tender/exchange offers.
Event-driven fee revenues are based on the number of special events and corporate transactions we process. Event-driven activity is impacted by financial market conditions and changes in regulatory compliance requirements, resulting in fluctuations in the timing and levels of event-driven fee revenues. As such, the timing and level of event-driven activity and its potential impact on revenues and earnings are difficult to forecast.
Generally, mutual fund proxy activity has been subject to a greater level of volatility than the other components of event-driven activity. For the three months ended September 30, 2021, mutual fund proxy fee revenues were 169% greater compared to the three months ended September 30, 2020. During fiscal year 2021, mutual fund proxy fee revenues were 17% greater than the prior fiscal year. Although it is difficult to forecast the levels of event-driven activity, we expect that the portion of fee revenues derived from mutual fund proxy activity may continue to experience volatility in the future.
Distribution revenues primarily include revenues related to the physical mailing of proxy materials, interim communications, transaction reporting, customer communications and fulfillment services, as well as Matrix administrative services.
Distribution cost of revenues consists primarily of postage-related expenses incurred in connection with our Investor Communication Solutions segment, as well as Matrix administrative services expenses. These costs are reflected in Cost of revenues.
Closed sales represent an estimate of the expected annual recurring fee revenue for new client contracts that were signed by Broadridge in the current reporting period. Closed sales does not include event-driven or distribution activity. We consider contract terms, expected client volumes or activity, knowledge of the marketplace and experience with our clients, among other factors, when determining the estimate. Management uses Closed sales to measure the effectiveness of our sales and marketing programs, as an indicator of expected future revenues and as a performance metric in determining incentive compensation.
Closed sales is not a measure of financial performance under GAAP, and should not be considered in isolation or as a substitute for revenue or other income statement data prepared in accordance with GAAP. Closed sales is a useful metric for investors in understanding how management measures and evaluates our ongoing operational performance.
The inherent variability of transaction volumes and activity levels can result in some variability of amounts reported as actual achieved Closed sales. Larger Closed sales can take up to 12 to 24 months or longer to convert to revenues, particularly for the services provided by our Global Technology and Operations segment. For the fiscal year ending June 30, 2022 and for the fiscal year ended June 30, 2021, we reported Closed sales net of a 5.0% allowance adjustment. Consequently, our reported Closed sales amounts will not be adjusted for actual revenues achieved because these adjustments are estimated in the period the sale is reported. We assess this allowance amount at the end of each fiscal year to establish the appropriate allowance for the subsequent year using the trailing five years actual data as the starting point, normalized for outlying factors, if any, to enhance the accuracy of the allowance.
Closed sales for the three months ended September 30, 2021 were $29.8 million, a decrease of $2.0 million or 6%, compared to $31.8 million for the three months ended September 30, 2020. Closed sales for the three months ended September 30, 2021 are net of an allowance adjustment of $1.6 million.
Recent Developments
In March 2020, the World Health Organization declared the outbreak of Covid-19 as a pandemic, which continues to persist throughout the world including the U.S., India, Canada, Europe and other locations where we operate. To date, the Covid-19 pandemic has negatively impacted the global economy, created significant financial market volatility, disrupted global supply chains, and resulted in a significant number of deaths and infections worldwide. In response, several countries worldwide have enacted fiscal stimulus packages while central banks have increased monetary stimulus, both designed to help mitigate the negative macroeconomic effects of Covid-19. In addition, several national, state and local governments continue to place restrictions on people from gathering in groups or interacting within a certain physical distance (i.e. social distancing) and they may also continue to place restrictions on businesses, limit operations or mandate that people stay at home.
The safety and well-being of our associates and our ability to fulfill our client service commitments are our highest priorities. After addressing the initial surge of the Covid-19 pandemic, we are now focused on running our business effectively in the new work from home paradigm while preparing for a more flexible workplace model in the future. Accordingly, the Company has taken several measures designed to protect the health of our employees and to minimize our operational disruption and resulting provision of services to our clients from the Covid-19 pandemic, including adopting masking, social distancing and cleaning measures in our production facilities. We have actively promoted vaccination by providing our associates with paid time off to get vaccinated and offer Covid-19 vaccines at our on-site medical clinic in Long Island, New York.
In fiscal year 2022 to date, there has not been a material impact as a result of Covid-19 on our consolidated revenues and pre-tax income. In addition, all of our production-related facilities remain operational and are continuing to provide ongoing services to our clients. Further, we have not experienced any significant supply-chain issues as our critical vendors have also remained operational and continue to meet their on-going service level requirements. We continue to engage with our clients to assist with their service demands, including our clients’ needs for any supplemental operational services and/or changes to existing service requirements in response to the Covid-19 pandemic.
Notwithstanding the foregoing, we are unable to precisely predict the impact that Covid-19 will have in the future due to numerous uncertainties, including the severity of the disease, the duration of the outbreak, actions that may be taken by governmental authorities, the impact to the business of our clients, and other factors identified in Part I, Item 1A. “Risk Factors” in our 2021 Annual Report. Given these uncertainties, Covid-19 could disrupt the business of certain of our clients, decrease our clients’ demand for our services, impact our business operations and our ability to execute on our associated business strategies and initiatives, and adversely impact our consolidated results of operations and/or our financial condition in the future. We will continue to closely monitor and evaluate the nature and extent of the impact of Covid-19 to our business, consolidated results of operations, and financial condition.
On August 5, 2020, the SEC proposed modifications to the mutual fund and exchange-traded fund disclosure framework (the “Proposal”). The Proposal would allow fund companies to send investors streamlined and tailored annual and semi-annual shareholder reports instead of long-form shareholder reports. The Proposal also would replace the need for funds to distribute an annual prospectus to existing shareholders with instead sending timely communication of material changes via supplemental communications. Adoption and implementation of the Proposal as proposed could have an impact on our services, business and financial results. We will closely monitor and evaluate the progress of the Proposal and its potential impact on our business. Please see our “Risk Factors” in Part I, Item 1A. of our 2021 Annual Report for more information.
Analysis of Condensed Consolidated Statements of Earnings
Three Months Ended September 30, 2021 versus Three Months Ended September 30, 2020
The table below presents Condensed Consolidated Statements of Earnings data for the three months ended September 30, 2021 and 2020, and the dollar and percentage changes between periods:
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Three Months Ended
September 30,
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Change
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2021
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2020
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$
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%
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(in millions, except per share amounts)
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Revenues
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$
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1,192.9
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$
|
1,017.4
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$
|
175.5
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17
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Cost of revenues
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914.1
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|
787.1
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|
127.0
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16
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Selling, general and administrative expenses
|
175.5
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151.7
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23.8
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|
|
16
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Total operating expenses
|
1,089.6
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|
938.8
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|
150.8
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16
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Operating income
|
103.3
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|
78.6
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24.7
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|
31
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Margin
|
8.7
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%
|
|
7.7
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%
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Interest expense, net
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(22.6)
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(14.4)
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(8.2)
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|
57
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Other non-operating income (expenses), net
|
(2.4)
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|
9.5
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(11.9)
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|
(125)
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Earnings before income taxes
|
78.2
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|
|
73.6
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|
|
4.6
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|
|
6
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|
|
Provision for income taxes
|
11.0
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|
|
7.8
|
|
|
3.2
|
|
|
41
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|
|
Effective tax rate
|
14.1
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%
|
|
10.6
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%
|
|
|
|
|
|
Net earnings
|
$
|
67.2
|
|
|
$
|
65.8
|
|
|
$
|
1.4
|
|
|
2
|
|
|
Basic earnings per share
|
$
|
0.58
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|
|
$
|
0.57
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|
|
$
|
0.01
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|
|
2
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|
Diluted earnings per share
|
$
|
0.57
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|
|
$
|
0.56
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|
|
$
|
0.01
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|
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2
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|
Weighted average shares outstanding:
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Basic
|
116.2
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|
|
115.3
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Diluted
|
118.3
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|
|
117.4
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|
|
|
|
|
Revenues
The table below presents Condensed Consolidated Statements of Earnings data for the three months ended September 30, 2021 and 2020, and the dollar and percentage changes between periods:
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Three Months Ended
September 30,
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Change
|
|
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2021
|
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2020
|
|
$
|
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%
|
|
|
($ in millions)
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|
Recurring fee revenues
|
$
|
750.8
|
|
|
$
|
649.6
|
|
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$
|
101.3
|
|
|
16
|
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Event-driven fee revenues
|
76.3
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|
|
45.2
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|
|
31.2
|
|
|
69
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|
Distribution revenues
|
366.9
|
|
|
331.2
|
|
|
35.7
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|
|
11
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Foreign currency exchange
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(1.2)
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|
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(8.6)
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7.4
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(86)
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Total
|
$
|
1,192.9
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|
|
$
|
1,017.4
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|
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$
|
175.5
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|
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17
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Points of Growth
|
|
|
Net New Business
|
|
Internal Growth
|
|
Acquisitions
|
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Total
|
|
Recurring fee revenue Growth Drivers
|
5pts
|
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2pts
|
|
9pts
|
|
16
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%
|
Revenues increased $175.5 million, or 17%, to $1,192.9 million from $1,017.4 million.
•Recurring fee revenues increased $101.3 million driven by 5 pts of growth from onboarding of new business and 2 pts from internal growth driven by our ICS business. Growth from acquisitions was 9 pts, most notably from our recent Itiviti acquisition which closed in May 2021.
•Event-driven fee revenues increased $31.2 million primarily due to increased mutual fund proxy activity.
•Distribution revenues increased $35.7 million primarily due to the increase in customer communication mailings and event-driven activity.
Total operating expenses. Operating expenses increased $150.8 million, or 16%, to $1,089.6 million from $938.8 million as a result of an increase in both cost of revenues and selling, general and administrative expenses:
•Cost of revenues - The increase of $127.0 million in cost of revenues primarily reflects (i) higher operating costs from acquisitions including amortization expense from acquired intangible assets, (ii) higher distribution expenses, and (iii) higher labor related expenses, partially offset by (iv) the absence of the real estate realignment charge that occurred in the prior year period.
•Selling, general and administrative expenses - The increase of $23.8 million in selling, general, and administrative expenses primarily reflects the impact of acquisitions.
Interest expense, net. Interest expense, net was $22.6 million, an increase of $8.2 million, from $14.4 million for the three months ended September 30, 2020. The increase of $8.2 million was primarily due to an increase in higher average debt outstanding.
Other non-operating income (expenses), net. Other non-operating expense, net for the three months ended September 30, 2021 was $2.4 million, compared to other non-operating income, net of $9.5 million for the three months ended September 30, 2020. The increased expense of $11.9 million was primarily due to higher gains on investments in the prior year period.
Provision for income taxes.
•Effective tax rate for the three months ended September 30, 2021: 14.1%
•Effective tax rate for the three months ended September 30, 2020: 10.6%
The increase in the effective tax rate for the three months ended September 30, 2021 was driven by lower total discrete tax items, inclusive of the excess tax benefits related to equity compensation, compared to the prior year period.
Analysis of Reportable Segments
Broadridge has two reportable segments: (1) Investor Communication Solutions and (2) Global Technology and Operations.
The primary component of “Other” are certain gains, losses, corporate overhead expenses and non-operating expenses that have not been allocated to the reportable segments, such as interest expense. Foreign currency exchange is a reconciling item between the actual foreign currency exchange rates and the constant foreign currency exchange rates used for internal management reporting.
Certain corporate expenses, as well as certain centrally managed expenses, are allocated based upon budgeted amounts in a reasonable manner. Because the Company compensates the management of its various businesses on, among other factors, segment profit, the Company may elect to record certain segment-related operating and non-operating expense items in Other rather than reflect such items in segment profit.
Revenues
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|
Three Months Ended
September 30,
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|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
$
|
|
%
|
|
|
|
|
|
|
|
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|
|
($ in millions)
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|
Investor Communication Solutions
|
$
|
853.5
|
|
|
$
|
745.6
|
|
|
$
|
108.0
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
Global Technology and Operations
|
340.6
|
|
|
280.4
|
|
|
60.2
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange
|
(1.2)
|
|
|
(8.6)
|
|
|
7.4
|
|
|
(86)
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
1,192.9
|
|
|
$
|
1,017.4
|
|
|
$
|
175.5
|
|
|
17
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Investor Communication Solutions
|
$
|
82.4
|
|
|
$
|
52.4
|
|
|
$
|
30.0
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
Global Technology and Operations
|
18.7
|
|
|
69.9
|
|
|
(51.2)
|
|
|
(73)
|
|
|
|
|
|
|
|
|
|
|
Other
|
(21.5)
|
|
|
(45.9)
|
|
|
24.4
|
|
|
(53)
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange
|
(1.4)
|
|
|
(2.8)
|
|
|
1.4
|
|
|
(50)
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
78.2
|
|
|
$
|
73.6
|
|
|
$
|
4.6
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of amortization of acquired intangibles and purchased intellectual property by segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Investor Communication Solutions
|
$
|
20.9
|
|
|
$
|
22.2
|
|
|
$
|
(1.4)
|
|
|
(6)
|
|
|
|
|
|
|
|
|
|
|
Global Technology and Operations
|
48.4
|
|
|
10.7
|
|
|
37.7
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
Other
|
—
|
|
|
0.4
|
|
|
(0.4)
|
|
|
(100)
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange
|
(0.6)
|
|
|
(1.0)
|
|
|
0.4
|
|
|
(40)
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
68.7
|
|
|
$
|
32.3
|
|
|
$
|
36.4
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM - Not meaningful
Investor Communication Solutions
Revenues for the three months ended September 30, 2021 increased $108.0 million to $853.5 million from $745.6 million, and earnings before income taxes increased $30.0 million to $82.4 million from $52.4 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring fee revenues
|
$
|
410.3
|
|
$
|
369.2
|
|
$
|
41.1
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
Event-driven fee revenues
|
76.3
|
|
45.2
|
|
31.2
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
Distribution revenues
|
366.9
|
|
331.2
|
|
35.7
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
853.5
|
|
$
|
745.6
|
|
$
|
108.0
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
$
|
82.4
|
|
$
|
52.4
|
|
$
|
30.0
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
Pre-tax Margin
|
9.7
|
%
|
|
7.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Points of Growth
|
|
|
|
|
Net New Business
|
|
Internal Growth
|
|
Acquisitions
|
|
Total
|
|
|
|
|
|
|
|
|
|
Recurring fee revenue Growth Drivers
|
6pts
|
|
5pts
|
|
0pts
|
|
11
|
%
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2021:
•Recurring fee revenues grew 11% driven primarily by Net New Business and Internal Growth. Internal Growth benefited from higher volume of mutual fund and exchange-traded fund communications and equity proxy.
•Event-driven fee revenues grew 69% primarily due to increased mutual fund proxy activity.
•Higher distribution revenues resulted primarily due to an increase in customer communication mailings and event-driven activity.
•The earnings increase was primarily due to the increase in recurring and event-driven fee revenues. Pre-tax margins increased by 2.7 percentage points to 9.7% from 7.0%. Amortization expense from acquired intangibles decreased by $1.4 million to $20.9 million in the first quarter of fiscal year 2022 from $22.2 million in the prior period.
Global Technology and Operations
Revenues for the three months ended September 30, 2021 increased $60.2 million to $340.6 million from $280.4 million, and earnings before income taxes decreased $51.2 million to $18.7 million from $69.9 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring fee revenues
|
$
|
340.6
|
|
$
|
280.4
|
|
$
|
60.2
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
$
|
18.7
|
|
$
|
69.9
|
|
$
|
(51.2)
|
|
|
(73)
|
|
|
|
|
|
|
|
|
|
|
Pre-tax Margin
|
5.5
|
%
|
|
24.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Points of Growth
|
|
|
|
|
Net New Business
|
|
Internal Growth
|
|
Acquisitions
|
|
Total
|
|
|
|
|
|
|
|
|
|
Recurring fee revenue Growth Drivers
|
3pts
|
|
(2)pts
|
|
20pts
|
|
21
|
%
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2021:
•Recurring fee revenues grew 21% driven primarily by 20pts of growth from recent acquisitions including 19pts from the Itiviti acquisition.
•The earnings decrease was driven by increased amortization of acquired intangibles and increased expenditures to implement and support new business. Pre-tax margins decreased by 19.4 percentage points to 5.5% from 24.9%. Amortization expense from acquired intangibles increased by $37.7 million to $48.4 million in the first quarter of fiscal year 2022 from $10.7 million in the prior year period primarily as a result of the Itiviti acquisition.
Other
Loss before income taxes was $21.5 million for the three months ended September 30, 2021, a decrease of $24.4 million compared to $45.9 million for the three months ended September 30, 2020.
•The decreased loss before income taxes was primarily due to (i) the absence of the real estate realignment charge that occurred in the prior year period in which the Company recorded lease and other facility exit costs of $28.6 million, partially offset by (ii) higher interest expense due to an increase in average debt outstanding.
Explanation and Reconciliation of the Company’s Use of Non-GAAP Financial Measures
The Company’s results in this Quarterly Report on Form 10-Q are presented in accordance with U.S. GAAP except where otherwise noted. In certain circumstances, Non-GAAP results have been presented. These Non-GAAP measures are Adjusted Operating income, Adjusted Operating income margin, Adjusted Net earnings, Adjusted earnings per share, and Free cash flow. These Non-GAAP financial measures should be viewed in addition to, and not as a substitute for, the Company’s reported results.
The Company believes our Non-GAAP financial measures help investors understand how management plans, measures and evaluates the Company’s business performance. Management believes that Non-GAAP measures provide consistency in its financial reporting and facilitates investors’ understanding of the Company’s operating results and trends by providing an additional basis for comparison. Management uses these Non-GAAP financial measures to, among other things, evaluate our ongoing operations, and for internal planning and forecasting purposes. In addition, and as a consequence of the importance of these Non-GAAP financial measures in managing our business, the Company’s Compensation Committee of the Board of Directors incorporates Non-GAAP financial measures in the evaluation process for determining management compensation.
Adjusted Operating Income, Adjusted Operating Income Margin, Adjusted Net Earnings and Adjusted Earnings Per Share
These Non-GAAP measures reflect Operating income, Operating income margin, Net earnings, and Diluted earnings per share, each as adjusted to exclude the impact of certain costs, expenses, gains and losses and other specified items the exclusion of which management believes provides insight regarding our ongoing operating performance. Depending on the period presented, these adjusted measures exclude the impact of certain of the following items: (i) Amortization of Acquired Intangibles and Purchased Intellectual Property, (ii) Acquisition and Integration Costs, (iii) Real Estate Realignment and Covid-19 Related Expenses, (iv) Investment Gain, and (v) Software Charge. Amortization of Acquired Intangibles and Purchased Intellectual Property represents non-cash amortization expenses associated with the Company's acquisition activities. Acquisition and Integration Costs represent certain transaction and integration costs associated with the Company’s acquisition activities. Real Estate Realignment and Covid-19 Related Expenses represent costs associated with the Company’s real estate realignment initiative, including lease exit and impairment charges and other facility exit costs, as well as certain expenses associated with the Covid-19 pandemic. Investment Gain represents a non-operating, non-cash gain on a privately held investment. Software Charge represents a charge related to an internal use software product that is no longer expected to be used.
We exclude Acquisition and Integration Costs, Real Estate Realignment and Covid-19 Related Expenses, the Investment Gain, and the Software Charge from our Adjusted Operating income (as applicable) and other adjusted earnings measures because excluding such information provides us with an understanding of the results from the primary operations of our business and enhances comparability across fiscal reporting periods, as these items are not reflective of our underlying operations or performance. We also exclude the impact of Amortization of Acquired Intangibles and Purchased Intellectual Property, as these non-cash amounts are significantly impacted by the timing and size of individual acquisitions and do not factor into the Company's capital allocation decisions, management compensation metrics or multi-year objectives. Furthermore, management believes that this adjustment enables better comparison of our results as Amortization of Acquired Intangibles and Purchased Intellectual Property will not recur in future periods once such intangible assets have been fully amortized. Although we exclude Amortization of Acquired Intangibles and Purchased Intellectual Property from our adjusted earnings measures, our management believes that it is important for investors to understand that these intangible assets contribute to revenue generation. Amortization of intangible assets that relate to past acquisitions will recur in future periods until such intangible assets have been fully amortized. Any future acquisitions may result in the amortization of additional intangible assets.
Free Cash Flow
In addition to the Non-GAAP financial measures discussed above, we provide Free cash flow information because we consider Free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated that could be used for dividends, share repurchases, strategic acquisitions, other investments, as well as debt servicing. Free cash flow is a Non-GAAP financial measure and is defined by the Company as Net cash flows provided by operating activities plus Proceeds from asset sales, less Capital expenditures as well as Software purchases and capitalized internal use software.
Set forth below is a reconciliation of such Non-GAAP measures to the most directly comparable GAAP measures (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
|
2021
|
|
2020
|
|
|
|
|
|
|
(in millions)
|
|
Operating income (GAAP)
|
$
|
103.3
|
|
|
$
|
78.6
|
|
|
|
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
Amortization of Acquired Intangibles and Purchased Intellectual Property
|
68.7
|
|
|
32.3
|
|
|
|
|
|
|
Acquisition and Integration Costs
|
2.9
|
|
|
1.7
|
|
|
|
|
|
|
Real Estate Realignment and Covid-19 Related Expenses
|
1.8
|
|
|
31.9
|
|
|
|
|
|
|
Software Charge
|
—
|
|
|
6.0
|
|
|
|
|
|
|
Adjusted Operating income (Non-GAAP)
|
$
|
176.7
|
|
|
$
|
150.6
|
|
|
|
|
|
|
Operating income margin (GAAP)
|
8.7
|
%
|
|
7.7
|
%
|
|
|
|
|
|
Adjusted Operating income margin (Non-GAAP)
|
14.8
|
%
|
|
14.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
|
2021
|
|
2020
|
|
|
|
|
|
|
(in millions)
|
|
Net earnings (GAAP)
|
$
|
67.2
|
|
|
$
|
65.8
|
|
|
|
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
Amortization of Acquired Intangibles and Purchased Intellectual Property
|
68.7
|
|
|
32.3
|
|
|
|
|
|
|
Acquisition and Integration Costs
|
2.9
|
|
|
1.7
|
|
|
|
|
|
|
Real Estate Realignment and Covid-19 Related Expenses
|
1.8
|
|
|
31.9
|
|
|
|
|
|
|
Investment Gain
|
—
|
|
|
(8.7)
|
|
|
|
|
|
|
Software Charge
|
—
|
|
|
6.0
|
|
|
|
|
|
|
Subtotal of adjustments
|
73.4
|
|
|
63.3
|
|
|
|
|
|
|
Tax impact of adjustments (a)
|
(14.4)
|
|
|
(14.6)
|
|
|
|
|
|
|
Adjusted Net earnings (Non-GAAP)
|
$
|
126.3
|
|
|
$
|
114.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
|
2021
|
|
2020
|
|
|
|
|
|
Diluted earnings per share (GAAP)
|
$
|
0.57
|
|
|
$
|
0.56
|
|
|
|
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
Amortization of Acquired Intangibles and Purchased Intellectual Property
|
0.58
|
|
|
0.28
|
|
|
|
|
|
|
Acquisition and Integration Costs
|
0.02
|
|
|
0.01
|
|
|
|
|
|
|
Real Estate Realignment and Covid-19 Related Expenses
|
0.02
|
|
|
0.27
|
|
|
|
|
|
|
Investment Gain
|
—
|
|
|
(0.07)
|
|
|
|
|
|
|
Software Charge
|
—
|
|
|
0.05
|
|
|
|
|
|
|
Subtotal of adjustments
|
0.62
|
|
|
0.54
|
|
|
|
|
|
|
Tax impact of adjustments (a)
|
(0.12)
|
|
|
(0.12)
|
|
|
|
|
|
|
Adjusted earnings per share (Non-GAAP)
|
$
|
1.07
|
|
|
$
|
0.98
|
|
|
|
|
|
(a) Calculated using the GAAP effective tax rate, adjusted to exclude $4.3 million of excess tax benefits associated with stock-based compensation for the three months ended September 30, 2021, and $9.3 million of excess tax benefits associated with stock-based compensation for the three months ended September 30, 2020. For purposes of calculating the Adjusted earnings per share, the same adjustments were made on a per share basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
2021
|
|
2020
|
|
|
(in millions)
|
|
Net cash flows used in operating activities (GAAP)
|
$
|
(135.4)
|
|
|
$
|
(44.2)
|
|
|
Capital expenditures and Software purchases and capitalized internal use software
|
(15.9)
|
|
|
(23.9)
|
|
|
Proceeds from asset sales
|
—
|
|
|
18.0
|
|
|
Free cash flow (Non-GAAP)
|
$
|
(151.4)
|
|
|
$
|
(50.2)
|
|
|
|
|
|
|
Financial Condition, Liquidity and Capital Resources
Cash and cash equivalents consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
June 30, 2021
|
|
|
(in millions)
|
|
Cash and cash equivalents:
|
|
|
|
|
Domestic cash
|
$
|
93.7
|
|
|
$
|
40.9
|
|
|
Cash held by foreign subsidiaries
|
146.4
|
|
|
159.8
|
|
|
Cash held by regulated entities
|
76.6
|
|
|
73.8
|
|
|
Total cash and cash equivalents
|
$
|
316.7
|
|
|
$
|
274.5
|
|
At September 30, 2021, Cash and cash equivalents were $316.7 million and Total stockholders’ equity was $1,753.8 million. At the current time, and in future periods, we expect cash generated by our operations, together with existing cash, cash equivalents, and borrowings from the capital markets, to be sufficient to cover cash needs for working capital, capital expenditures, strategic acquisitions, dividends and common stock repurchases. Given the volatility in the rapidly changing market and economic conditions related to the Covid-19 pandemic, we will continue to evaluate the nature and extent of the impact of the Covid-19 pandemic on our business and financial position.
We expect existing domestic cash, cash equivalents, cash flows from operations and borrowing capacity to continue to be sufficient to fund our domestic operating activities and cash commitments for investing and financing activities, such as regular quarterly dividends, debt repayment schedules, and material capital expenditures, for at least the next 12 months and thereafter for the foreseeable future. In addition, we expect existing foreign cash, cash equivalents, cash flows from operations and borrowing capacity to continue to be sufficient to fund our foreign operating activities and cash commitments for investing activities, such as material capital expenditures, for at least the next 12 months and thereafter for the foreseeable future. If these funds are needed for our operations in the U.S., we may be required to pay additional foreign taxes to repatriate these funds. However, while we may do so at a future date, the Company does not need to repatriate future foreign earnings to fund U.S. operations.
Outstanding borrowings and available capacity under the Company’s borrowing arrangements were as follows:
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|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration
Date
|
|
Principal amount outstanding at September 30, 2021
|
|
Carrying value at September 30, 2021
|
|
Carrying value at June 30, 2021
|
|
Unused
Available
Capacity
|
|
Fair Value at September 30, 2021
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, excluding current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2021 Revolving Credit Facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. dollar tranche
|
April 2026
|
|
$
|
300.0
|
|
|
$
|
300.0
|
|
|
$
|
20.0
|
|
|
$
|
800.0
|
|
|
$
|
300.0
|
|
|
Multicurrency tranche
|
April 2026
|
|
91.4
|
|
|
91.4
|
|
|
94.4
|
|
|
308.6
|
|
|
91.4
|
|
|
Total Revolving Credit Facility
|
|
|
391.4
|
|
|
391.4
|
|
|
114.4
|
|
|
1,108.6
|
|
|
391.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2021 Term Loans
|
May 2024
|
|
1,550.0
|
|
|
1,544.0
|
|
|
1,543.4
|
|
|
—
|
|
|
1,550.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2016 Senior Notes
|
June 2026
|
|
500.0
|
|
|
496.9
|
|
|
496.7
|
|
|
—
|
|
|
545.9
|
|
|
Fiscal 2020 Senior Notes
|
December 2029
|
|
750.0
|
|
|
742.7
|
|
|
742.5
|
|
|
—
|
|
|
787.7
|
|
|
Fiscal 2021 Senior Notes
|
May 2031
|
|
1,000.0
|
|
|
990.8
|
|
|
990.6
|
|
|
—
|
|
|
1,019.3
|
|
|
Total Senior Notes
|
|
|
2,250.0
|
|
|
2,230.4
|
|
|
2,229.8
|
|
|
—
|
|
|
2,352.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
$
|
4,191.4
|
|
|
$
|
4,165.9
|
|
|
$
|
3,887.6
|
|
|
$
|
1,108.6
|
|
|
$
|
4,294.4
|
|
Future principal payments on our outstanding debt are as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ending June 30,
|
|
2022
|
|
2023
|
|
2024
|
|
2025
|
|
2026
|
|
Thereafter
|
|
Total
|
|
(In millions)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,550.0
|
|
|
$
|
—
|
|
|
$
|
891.4
|
|
|
$
|
1,750.0
|
|
|
$
|
4,191.4
|
|
The Company has a $1.5 billion five-year revolving credit facility (the “Fiscal 2021 Revolving Credit Facility”), which is comprised of a $1.1 billion U.S. dollar tranche and a $400.0 million multicurrency tranche. Under the Fiscal 2021 Revolving Credit Facility, revolving loans denominated in U.S. Dollars, Canadian Dollars, Euro, Yen, and Swedish Kronor initially bear interest at LIBOR, CDOR, EURIBOR, TIBOR and STIBOR, respectively, plus 1.015% per annum (subject to step-ups to 1.175% and step-downs to 0.805% based on ratings) and revolving loans denominated in Sterling initially bear interest at SONIA plus 1.0476% per annum (subject to step-ups to 1.2076% and step-downs to 0.8376% based on ratings). The Fiscal 2021 Revolving Credit Facility also has an annual facility fee equal to 11.0 basis points on the entire facility (subject to step-ups to 20.0 basis points and step-downs to 7.0 basis points based on ratings).
In March 2021, the Company entered into a term credit agreement (“Term Credit Agreement”) providing for term loan commitments in an aggregate principal amount of $2.55 billion, comprised of a $1.0 billion tranche (“Tranche 1”) and a $1.55 billion tranche (“Tranche 2,” together with Tranche 1, the “Fiscal 2021 Term Loans”). The Tranche 1 Loans were repaid in full in May 2021. The Tranche 2 Loans will mature in May 2024 on the third anniversary of the Funding Date. The proceeds of the Fiscal 2021 Term Loans were used by the Company to solely finance the Itiviti acquisition and pay certain fees and expenses in connection therewith. Interest on the outstanding portion of the Fiscal 2021 Term Loans bears interest at LIBOR plus 0.875% per annum (subject to step-ups to LIBOR plus 1.250% or a step-down to LIBOR plus 0.750% based on ratings).
In June 2016, the Company completed an offering of $500.0 million in aggregate principal amount of senior notes (the “Fiscal 2016 Senior Notes”). Interest on the Fiscal 2016 Senior Notes is payable semiannually on June 27 and December 27 of each year based on a fixed per annum rate equal to 3.40%. In December 2019, the Company completed an offering of $750.0 million in aggregate principal amount of senior notes (the “Fiscal 2020 Senior Notes”). Interest on the Fiscal 2020 Senior Notes is payable semiannually on June 1 and December 1 of each year based on a fixed per annum rate equal to 2.90%. In May 2021, the Company completed an offering of $1.0 billion in aggregate principal amount of senior notes (the “Fiscal 2021 Senior Notes”). Interest on the Fiscal 2021 Senior Notes is payable semi-annually in arrears on May 1 and November 1 of each year based on a fixed per annum rate equal to 2.60%.
The Fiscal 2021 Revolving Credit Facility, Fiscal 2021 Term Loans, Fiscal 2016 Senior Notes, Fiscal 2020 Senior Notes and Fiscal 2021 Senior Notes are senior unsecured obligations of the Company and are ranked equally in right of payment.
Our liquidity position may be negatively affected by changes in general economic conditions, regulatory requirements and access to the capital markets, which may be limited if we were to fail to renew any of the credit facilities on their renewal dates or if we were to fail to meet certain ratios.
Please refer to Note 10, “Borrowings” to our Condensed Consolidated Financial Statements in Item 1. of Part I of this Quarterly Report on Form 10-Q for a more detailed discussion.
Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
|
|
|
Change
|
|
|
2021
|
|
2020
|
|
$
|
|
|
(in millions)
|
|
Net cash flows used in operating activities
|
$
|
(135.4)
|
|
|
$
|
(44.2)
|
|
|
$
|
(91.2)
|
|
|
Net cash flows used in investing activities
|
$
|
(36.4)
|
|
|
$
|
(8.7)
|
|
|
$
|
(27.7)
|
|
|
Net cash flows provided by (used in) financing activities
|
$
|
217.0
|
|
|
$
|
(72.7)
|
|
|
$
|
289.7
|
|
|
|
|
|
|
|
|
|
Free cash flow:
|
|
|
|
|
|
|
Net cash flows used in operating activities (GAAP)
|
$
|
(135.4)
|
|
|
$
|
(44.2)
|
|
|
$
|
(91.2)
|
|
|
Capital expenditures and Software purchases and capitalized internal use software
|
(15.9)
|
|
|
(23.9)
|
|
|
8.0
|
|
|
Proceeds from asset sales
|
—
|
|
|
18.0
|
|
|
(18.0)
|
|
|
Free cash flow (Non-GAAP)
|
$
|
(151.4)
|
|
|
$
|
(50.2)
|
|
|
$
|
(101.2)
|
|
The increase in cash used in operating activities of $91.2 million in the three months ended September 30, 2021, as compared to the three months ended September 30, 2020, was primarily due to higher cash used in working capital and increased scaling of client-related platform implementation and development as compared to the prior year period.
The increase in cash used in investing activities of $27.7 million in the three months ended September 30, 2021, as compared to the three months ended September 30, 2020, primarily reflects higher acquisition activity and the absence of the $18 million in proceeds from asset sales which occurred in the prior year period, partially offset by lower capital expenditures.
The increase in cash provided by financing activities of $289.7 million in the three months ended September 30, 2021, as compared to the three months ended September 30, 2020, primarily reflects higher borrowings net of repayments in the current year period as compared to the prior year period.
Seasonality
Processing and distributing proxy materials and annual reports to investors comprises a large portion of our Investor Communication Solutions business. We process and distribute the greatest number of proxy materials and annual reports during our third and fourth fiscal quarters. The recurring periodic activity of this business is linked to significant filing deadlines imposed by law on public reporting companies. This has caused our revenues, operating income, net earnings, and cash flows from operating activities to be higher in our third and fourth fiscal quarters. Notwithstanding, the seasonality of our revenues makes it difficult to estimate future operating results based on the results of any specific fiscal quarter and could affect an investor’s ability to compare our financial condition, results of operations, and cash flows on a fiscal quarter-by-quarter basis.
Contractual Obligations
In March 2010, the Company and International Business Machines Corporation (“IBM”) entered into an Information Technology Services Agreement (the “IT Services Agreement”), under which IBM provided certain aspects of the Company’s information technology infrastructure. Under the IT Services Agreement, IBM provided a broad range of technology services to the Company including supporting its mainframe, midrange, network and data center operations, as well as providing disaster recovery services. The migration of data center processing to IBM was completed in August 2012. In December 2019, the Company and IBM amended and restated the IT Services Agreement (the “Amended IT Services Agreement”), which now expires on June 30, 2027. The Company has the option of incorporating additional services into the Amended IT Services Agreement over time. The Company may renew the term of the Amended IT Services Agreement for up to one additional 12-month period. On July 28, 2021, the Company entered into a novation agreement with IBM (the “U.S. Novation Agreement”) pursuant to which IBM novated the Amended IT Services Agreement to Kyndryl, Inc., an entity formed in connection with IBM’s planned spin-off of its managed infrastructure services business (“Kyndryl”), effective September 1, 2021. Fixed minimum commitments remaining under the Amended IT Services Agreement at September 30, 2021 are $189.3 million through fiscal year 2027, the final year of the Amended IT Services Agreement.
In December 2019, the Company and IBM entered into an information technology agreement for private cloud services (the “Private Cloud Agreement”) under which IBM will operate, manage and support the Company’s private cloud global distributed platforms and products, and operate and manage certain Company networks. The Private Cloud Agreement has an initial term of approximately 10 years and three months, expiring on March 31, 2030. As a result of the Private Cloud Agreement, the Company transferred certain of its employees in April 2020 to IBM and its affiliates, and that such transferred employees are expected to continue providing services to the Company on behalf of IBM under the Private Cloud Agreement. Pursuant to the Private Cloud Agreement, the Company agreed to transfer the ownership of certain Company-owned hardware (the “Hardware”) located at Company facilities worldwide to IBM. The transfer of the Hardware and Maintenance Contracts to IBM closed on September 30, 2020 for a selling price of $18.0 million. On July 28, 2021, IBM novated the Private Cloud Agreement to Kyndryl, effective September 1, 2021, pursuant to the U.S. Novation Agreement. Fixed minimum commitments remaining under the Private Cloud Agreement at September 30, 2021 are $192.3 million through March 31, 2030, the final year of the contract.
In March 2014, the Company and IBM United Kingdom Limited (“IBM UK”) entered into an Information Technology Services Agreement (the “EU IT Services Agreement”), under which IBM UK provides data center services supporting the Company’s technology outsourcing services for certain clients in Europe and Asia. The EU IT Services Agreement would have expired in October 2023. In December 2019, the Company amended the existing EU IT Services Agreement whereby the Company will migrate from the existing dedicated on-premises solution to a managed Broadridge private cloud environment provided by IBM, as well as extended the term of the EU IT Services Agreement to June 2029 (the “Amended EU IT Services Agreement”). The Company has the right to renew the term of the Amended EU IT Services Agreement for up to one additional 12-month period or one additional 24-month period. On August 19, 2021, the Company entered into a novation agreement with IBM UK pursuant to which IBM UK novated the EU IT Services Agreement to Kyndryl UK Limited, effective September 1, 2021. Fixed minimum commitments remaining under the Amended EU IT Services Agreement at September 30, 2021 are $29.5 million through fiscal year 2029, the final year of the contract.
The Company has an equity method investment that is a variable interest in a variable interest entity, the Company is not the primary beneficiary and therefore does not consolidate the investee. The Company’s potential maximum loss exposure related to this unconsolidated investment totaled $31.3 million as of September 30, 2021, which represents the carrying value of our investment and is recorded in Other non-current assets in the Company’s Condensed Consolidated Balance Sheets.
In addition, as of September 30, 2021, the Company also has a future commitment to fund $1.7 million to one of the Company’s other investees.
Fixed Operating Lease Cost
Fixed operating lease cost for the three months ending September 30, 2021 and September 30, 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
|
2021
|
|
2020
|
|
|
|
|
|
|
(in millions)
|
|
Fixed Operating Lease Cost
|
$
|
11.3
|
|
|
$
|
24.4
|
|
|
|
|
|
Other Commercial Agreements
Certain of the Company’s subsidiaries established unsecured, uncommitted lines of credit with banks. There were no outstanding borrowings under these lines of credit at September 30, 2021.
Off-balance Sheet Arrangements
It is not the Company’s business practice to enter into off-balance sheet arrangements. However, the Company is exposed to market risk from changes in foreign currency exchange rates that could impact its financial position, results of operations, and cash flows. The Company manages its exposure to these market risks through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. The Company was not a party to any outstanding derivative financial instruments at September 30, 2021 and June 30, 2021. In March 2021, the Company entered into a derivative instrument designed to mitigate the Company’s exposure to the impact of changes in interest rates on the Fiscal 2021 Senior Notes.
The Company executed a forward treasury lock agreement (“Treasury Lock”), designated as a cash flow hedge, in the aggregate notional amount of $1.0 billion to manage exposure to fluctuations in the benchmark interest rate associated with the Fiscal 2021 Senior Notes, which were used to pay down a portion of the Term Credit Agreement associated with the Itiviti acquisition. Accordingly, changes in the fair value of the Treasury Lock were recorded as part of Other comprehensive income (loss), net each period up to when the Treasury Lock was settled. In May 2021, the Treasury Lock was settled for a pre-tax loss of $11.0 million, after which the final settlement loss will be reclassified into Interest expense, net ratably over the ten year term of the Fiscal 2021 Senior Notes. The expected amount of the existing loss that would be reclassified into earnings before income taxes within the next twelve months is approximately $1.1 million.
In the normal course of business, the Company also enters into contracts in which it makes representations and warranties that relate to the performance of the Company’s products and services. The Company does not expect any material losses related to such representations and warranties, or collateral arrangements.
Recently-issued Accounting Pronouncements
Please refer to Note 2, “New Accounting Pronouncements” to our Condensed Consolidated Financial Statements under Item 1. of Part I of this Quarterly Report on Form 10-Q, for a discussion on the impact of new accounting pronouncements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the quantitative and qualitative disclosures about market risk previously disclosed in Item 7A of our 2021 Annual Report.
Item 4. CONTROLS AND PROCEDURES
Management’s Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2021. The Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures as of September 30, 2021 were effective to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended September 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
