Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion summarizes the significant factors affecting the results of operations and financial condition of Broadridge during the fiscal years ended June 30, 2020 and 2019, and should be read in conjunction with our Consolidated Financial Statements and accompanying Notes thereto included elsewhere herein. Certain information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are not historical in nature and which may be identified by the use of words such as “expects,” “assumes,” “projects,” “anticipates,” “estimates,” “we believe,” “could be” and other words of similar meaning, are forward-looking statements. These statements are based on management’s expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ materially from those expressed. Our actual results, performance or achievements may differ materially from the results discussed in this Item 7 because of various factors, including those set forth elsewhere herein. See “Forward-Looking Statements” and “Risk Factors” included in Part 1 of this Annual Report on Form 10-K.

The discussion summarizing the significant factors affecting the results of operations and financial condition of Broadridge during the fiscal year ended June 30, 2018 can be found in Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year 2019 (the “2019 Annual Report”), which was filed with the Securities and Exchange Commission on August 6, 2019.

DESCRIPTION OF THE COMPANY AND BUSINESS SEGMENTS

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. Our services include investor communications, securities processing, data and analytics, and customer communications solutions. 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.

Our businesses operate in two reportable segments: Investor Communication Solutions and Global Technology and Operations.

Investor Communication Solutions

We provide governance and communications solutions through our Investor Communication Solutions business segment to the following financial services clients: banks/broker-dealers, asset management firms/mutual funds, wealth management firms, and corporate issuers. In addition to financial services firms, our Customer Communications business also serves companies in the healthcare, insurance, consumer finance, telecommunications, utilities and other service industries.

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 also provide the distribution of regulatory reports 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 multi-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, 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 distribution and processing services, proxy and annual report document management solutions, virtual shareholder meeting services, and solutions that help gain insight into their shareholder base through our 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 customer communications solutions which include print and digital solutions, content management, postal optimization, and fulfillment services. These services include customer communications management capabilities through the Broadridge Communications Cloud platform. Through one point of integration, the Communications Cloud helps companies create, deliver, and manage multi-channel communications and customer engagement. The platform includes data-driven composition tools, identity and preference management, multi-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 securities processing solutions for capital markets, wealth management, and asset management firms. We offer advanced solutions that automate the securities 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.

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. 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.

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 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 offer buy-side technology solutions for the global investment management industry, including portfolio management, compliance and operational workflow solutions for hedge funds, family offices, investment managers and the providers that service this space. Through our Managed Services, we provide business process outsourcing services 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 and we provide support for advisor, investor and compliance workflow.

ACQUISITIONS

Assets acquired and liabilities assumed in business combinations are recorded on the Company’s Consolidated Balance Sheets as of the respective acquisition date based upon the estimated fair values at such date. The results of operations of the business acquired by the Company are included in the Company’s Consolidated Statements of Earnings since the respective date of acquisition. The excess of the purchase price over the estimated fair values of the underlying assets acquired and liabilities assumed is allocated to Goodwill.

Pro forma supplemental financial information for all acquisitions is not provided as the impact of these acquisitions on the Company’s operating results was not material for any acquisition individually or in the aggregate.

The following represents the fiscal year 2020 acquisitions:

Fiscal Year 2020 Acquisitions:

BUSINESS COMBINATIONS

Financial information on each transaction is as follows:


	Shadow Financial		Fi360		Clear-Structure		Funds-Library		Total
	(in millions)
Cash payments, net of cash acquired	$	35.6	$	116.0	$	59.1	$	69.6	$	280.3
Deferred payments, net	2.9		3.5		2.6		—		9.0
Contingent consideration liability	—		—		7.0		—		7.0
Aggregate purchase price	$	38.5	$	119.5	$	68.7	$	69.6	$	296.3

Net tangible assets acquired / (liabilities assumed)	$	(0.2)	$	(7.9)	$	0.6	$	(3.3)	$	(10.8)
Goodwill	17.6		84.4		44.2		39.1		185.3
Intangible assets	21.1		43.1		23.9		33.8		121.8
Aggregate purchase price	$	38.5	$	119.5	$	68.7	$	69.6	$	296.3

Shadow Financial

In October 2019, we acquired Shadow Financial, a provider of multi-asset class post-trade solutions for the capital markets industry. The acquisition builds upon Broadridge’s post-trade processing capabilities by adding a market-ready solution for exchanges, inter-dealer brokers and proprietary trading firms. In addition, the acquisition adds capabilities across exchange traded derivatives and cryptocurrency.

Goodwill is tax deductible.
Intangible assets acquired consist primarily of customer relationships and software technology, which are being amortized over a seven-year life and five-year life, respectively.

The allocation of the purchase price will be finalized upon completion of the analysis of the fair values of the acquired business’ assets and liabilities.

Fi360

In November 2019, we acquired Fi360, a provider of fiduciary and Regulation BI solutions for the wealth and retirement industry, including the accreditation and continuing education for the Accredited Investment Fiduciary® Designation, the leading designation focused on fiduciary responsibility. The acquisition enhances Broadridge’s retirement solutions by providing wealth and retirement advisors with fiduciary tools that will complement its Matrix trust and trading platform. The acquisition also further strengthens Broadridge’s data and analytics tools and solutions suite that enable asset managers to grow their businesses by providing greater transparency into the retirement market.

Goodwill is not tax deductible.
Intangible assets acquired consist primarily of customer relationships and software technology, which are being amortized over a seven-year life and five-year life, respectively.

The allocation of the purchase price will be finalized upon completion of the analysis of the fair values of the acquired business’ assets and liabilities.

ClearStructure

In November 2019, we acquired ClearStructure, a global provider of portfolio management solutions for the private debt markets. ClearStructure’s component services enhance Broadridge’s existing multi-asset class, front-to-back office asset management technology suite, providing Broadridge clients with a capability to access the public and private markets.

The contingent consideration liability is payable through fiscal year 2023 upon the achievement by the acquired business of certain revenue targets, and has a maximum potential pay-out of $12.5 million upon the achievement in full of the defined financial targets by the acquired business.
The fair value of the contingent consideration liability at June 30, 2020 is $7.0 million.
Goodwill is primarily tax deductible.
Intangible assets acquired consist primarily of customer relationships and software technology, which are being amortized over a seven-year life and five-year life, respectively.

The allocation of the purchase price will be finalized upon completion of the analysis of the fair values of the acquired business’ assets and liabilities, and is still subject to a working capital adjustment.

FundsLibrary

In February 2020, we acquired FundsLibrary, a provider of fund document and data dissemination in the European market. FundsLibrary's solutions enable fund managers to increase distribution opportunities and help them comply with regulations such as Solvency II and MiFID II. The business will be combined with FundAssist, Broadridge's existing European funds regulatory communications business. The combined solution provides funds with a single, integrated provider to manage data, perform calculations, compose documents, manage regulatory compliance and disseminate information across multiple jurisdictions.

Goodwill is not tax deductible.
Intangible assets acquired consist primarily of customer relationships and software technology, which are being amortized over a seven-year life and three-year life, respectively.

The following represents the fiscal year 2019 acquisitions:

Fiscal Year 2019 Acquisitions:

BUSINESS COMBINATIONS

Financial information on each transaction is as follows:


	Rockall		RPM		TD Ameritrade*		Total
	(in millions)
Cash payments, net of cash acquired	$	34.9	$	258.3	$	61.5	$	354.7
Deferred payments, net	0.5		40.9		—		41.4
Contingent consideration liability	7.0		0.8		—		7.9
Aggregate purchase price	$	42.4	$	300.1	$	61.5	$	404.0

Net tangible assets acquired / (liabilities assumed)	$	(2.9)	$	6.8	$	—	$	3.9
Goodwill	31.1		181.6		27.1		239.8
Intangible assets	14.2		111.7		34.4		160.3
Aggregate purchase price	$	42.4	$	300.1	$	61.5	$	404.0

Broadridge acquired the retirement plan custody and trust assets from TD Ameritrade Trust Company.

Rockall

In May 2019, we acquired Rockall, a provider of SBL and collateral management solutions for wealth management firms and commercial banks. The acquisition expands Broadridge's core front-to-back office wealth capabilities, providing innovative SBL and collateral management technology solutions to help firms manage risk and optimize clients' securities lending and financing needs.

The contingent consideration liability is payable over the next two years upon the achievement by the acquired business of certain revenue targets, and has a maximum potential pay-out of $10.1 million upon the achievement in full of the defined financial targets by the acquired business.
The fair value of the contingent consideration liability at June 30, 2020 is $7.6 million.
Goodwill is not tax deductible.
Intangible assets acquired consist primarily of software technology and customer relationships, which are being amortized over a four-year life and six-year life, respectively.
In the first quarter of fiscal year 2020, the Company settled deferred payment obligations totaling $0.5 million.

RPM

In June 2019, we acquired RPM, a Canadian provider of enterprise wealth management software solutions and services. The addition of RPM’s state-of-the-art technology platforms builds upon our Canadian wealth management business, providing a solution set for the retail banking sector with enhanced mutual fund and deposit manufacturing capabilities.

The contingent consideration liability is payable over the next two years upon the achievement by the acquired business of certain revenue targets, and has a maximum potential pay-out of $3.7 million upon the achievement in full of the defined financial targets by the acquired business.
The fair value of the contingent consideration liability at June 30, 2020 is $0.8 million.
Goodwill is partially tax deductible.
Intangible assets acquired consist primarily of software technology and customer relationships, which are being amortized over a five-year life and seven-year life, respectively.
In the first quarter of fiscal year 2020, the Company settled deferred payment obligations totaling $40.9 million.

Retirement Plan Custody and Trust Assets from TD Ameritrade

In June 2019, Broadridge acquired the retirement plan custody and trust assets from TD Ameritrade Trust Company, a subsidiary of TD Ameritrade Holding Company. The acquisition expands Broadridge's suite of solutions for the growing qualified and non-qualified retirement plan services market and the support it provides for third-party administrators, financial advisors, record-keepers, banks, and brokers.

Goodwill is tax deductible.
Intangible assets acquired consist of customer relationships, which are being amortized over a seven-year life.

BASIS OF PRESENTATION

The Consolidated Financial Statements have been prepared in accordance with GAAP in the U.S. and in accordance with the SEC requirements for Annual Reports on Form 10-K. These financial statements present the 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. Certain prior period amounts have been reclassified to conform to the current year presentation where applicable, except as it relates to (i) ASU No. 2016-02, as amended “Leases” (“ASU No. 2016-02”), (ii) ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU No. 2014-09”), (iii) ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU No. 2016-01”), and (iv) ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU No. 2018-02”), as described further below.

In presenting the 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 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 those estimates made by management. In management’s opinion, the 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.

Effective July 1, 2019, the Company adopted ASU No. 2016-02, “Leases” and its related amendments (collectively referred to as “ASU 2016-02, as amended”) by recognizing a ROU asset and corresponding lease liability, along with a cumulative-effect adjustment to the opening balance of retained earnings, in the period of adoption. Under this method of adoption, the Company has not restated the prior period Consolidated Financial Statements presented to the current period presentation. Additional information about the impact of the Company's adoption of ASU No. 2016-02, as amended is included in Note 2, “Summary of Significant Accounting Policies” and Note 8, “Leases” to the Consolidated Financial Statements.

Effective July 1, 2018, we adopted ASU No. 2014-09 using the modified retrospective transition approach applied to all contracts. Under this transition approach, we have not restated the prior period Consolidated Financial Statements presented to the current period presentation. Additional information about the Company’s revenue recognition policies and the related impact of the adoption of ASU No. 2014-09 is included in Note 2, “Summary of Significant Accounting Policies” and Note 3, “Revenue Recognition”.

Effective July 1, 2018, we adopted ASU No. 2016-01, which requires changes in the fair value of publicly traded equity securities for which we do not have significant influence to be recorded as part of Net earnings rather than as Other comprehensive income (loss), net. In addition, equity investments that do not have a readily determinable fair value will be recorded at cost less impairment as further adjusted for observable price changes in orderly transactions for identical or similar investments of the issuer. We adopted ASU No. 2016-01 using the modified-retrospective transition approach by recording the cumulative effect of previously unrecognized gains or losses on publicly traded equity securities to retained earnings as of July 1, 2018. The provisions of ASU No. 2016-01 relative to equity investments that do not have a readily determinable fair value have been applied prospectively. The Consolidated Financial Statements have not been revised for periods prior to July 1, 2018. The impact of adopting ASU No. 2016-01 resulted in a reclassification of less than $0.1 million in unrealized gains, net from accumulated other comprehensive loss to retained earnings as of July 1, 2018.

Effective July 1, 2018, we adopted ASU No. 2018-02, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects associated with the change in the U.S. federal corporate tax rate resulting from the U.S. Tax Cuts and Jobs Act (the “Tax Act”) enacted in December 2017. The adoption of ASU No. 2018-02 resulted in an increase to retained earnings of $1.5 million.

Effective July 1, 2018, we adopted ASU No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU No. 2017-07”) whereby we revised its presentation in the Consolidated Statements of Earnings to reflect the non-service cost components of net benefit cost as part of Other non-operating income (expenses), net, which were previously recorded as part of Total operating expenses. All prior period information has been conformed to the current period presentation.

CRITICAL ACCOUNTING POLICIES

We continually evaluate the accounting policies and estimates used to prepare the 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. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed below.

Goodwill*.* We review the carrying value of all our goodwill by comparing the carrying value of our reporting units to their fair values. We are required to perform this comparison at least annually or more frequently if circumstances indicate a possible impairment. When determining fair value of a reporting unit, we utilize the income approach which considers a discounted future cash flow analysis using various assumptions, including projections of revenues based on assumed long-term growth rates, estimated costs and appropriate discount rates based on the particular reporting unit’s weighted-average cost of capital. The principal factors used in the discounted cash flow analysis requiring judgment are the projected future operating cash flows based on forecasted earnings before interest and taxes, and the selection of the terminal value growth rate and discount rate assumptions. The weighted-average cost of capital takes into account the relative weight of each component of our consolidated capital structure (equity and long-term debt). Our estimates of long-term growth and costs are based on historical data, various internal estimates and a variety of external sources, and are developed as part of our routine, long-range planning process.

Changes in economic and operating conditions impacting these assumptions could result in goodwill impairments in future periods. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination is determined. We had $1,674.5 million of goodwill as of June 30, 2020. Given the significance of our goodwill, an adverse change to the fair value of one of our reporting units could result in an impairment charge, which could be material to our earnings.

The Company performs a sensitivity analysis under Step 1 of the goodwill impairment test assuming hypothetical reductions in the fair values of our reporting units. A 10% change in our estimates of projected future operating cash flows, discount rates, or terminal value growth rates used in our calculations of the fair values of the reporting units would not result in an impairment of our goodwill.

Income Taxes*.* The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in addressing the future tax consequences of events that have been recognized in our Consolidated Financial Statements or tax returns (e.g., realization of deferred tax assets, changes in tax laws or interpretations thereof). The Company is subject to regular examination of its income tax returns by the U.S. federal, state and foreign tax authorities. A change in the assessment of the outcomes of such matters could materially impact our Consolidated Financial Statements. The Company has estimated foreign net operating loss carryforwards of approximately $13.1 million as of June 30, 2020 of which $1.5 million are subject to expiration in the June 30, 2020 through June 30, 2028 period. The remaining $11.6 million of carryforwards has an indefinite utilization period. In addition, the Company has estimated U.S. federal net operating loss carryforwards of approximately $37.0 million of which $16.9 million can be utilized through June 30, 2030 with the balance of $20.2 million having an indefinite utilization period. U.S. federal net operating loss carryforwards resulting from tax losses beginning with the fiscal year ended June 30, 2019 have an indefinite carryforward under the Tax Act. The Company did not realize any federal net operating losses for the fiscal year ended June 30, 2020.

Valuation allowances are recognized to reduce deferred tax assets when it is more likely than not that the Company will not be able to utilize the deferred tax assets attributable to net operating and capital loss carryforwards of certain subsidiaries to offset future taxable earnings. The Company has recorded valuation allowances of $6.7 million and $3.3 million at June 30, 2020 and 2019, respectively. The determination as to whether a deferred tax asset will be recognized is made on a jurisdictional basis and is based on the evaluation of historical taxable income or loss, projected future taxable income, carryforward periods, scheduled reversals of deferred tax liabilities and tax planning strategies. Projected future taxable income is based on expected results and assumptions as to the jurisdiction in which the income will be earned. The assumptions used to project future taxable income requires significant judgment and are consistent with the plans and estimates used to manage the underlying businesses.

On the same date that the Tax Act was enacted, December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) which provided the Company with up to one year to finalize accounting for the impacts of the Tax Act. Under SAB 118, the Company finalized the prior year estimate of the net tax impact to the Company arising from the enactment of the Tax Act, and recognized a tax benefit of approximately $0.5 million in the fiscal year ended June 30, 2019.

Share-based Payments*.* Accounting for stock-based compensation requires the measurement of stock-based compensation expense based on the fair value of the award on the date of grant. We determine the fair value of stock options issued by using a binomial option-pricing model. The binomial option-pricing model considers a range of assumptions related to volatility, dividend yield, risk-free interest rate and employee exercise behavior. Expected volatilities utilized in the binomial option-pricing model are based on a combination of implied market volatilities, historical volatility of our stock price and other factors. Similarly, the dividend yield is based on historical experience and expected future changes. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The binomial option-pricing model also incorporates exercise and forfeiture assumptions based on an analysis of historical data. The expected life of the stock option grants is derived from the output of the binomial model and represents the period of time that options granted are expected to be outstanding. Determining these assumptions are subjective and complex, and therefore, a change in the assumptions utilized could impact the calculation of the fair value of our stock options. A hypothetical change of five percentage points applied to the volatility assumption used to determine the fair value of the fiscal year 2020 stock option grants would result in approximately a $2.4 million change in total pre-tax stock-based compensation expense for the fiscal year 2020 grants, which would be amortized over the vesting period. A hypothetical change of one year in the expected life assumption used to determine the fair value of the fiscal year 2020 stock option grants would result in approximately a $0.8 million change in the total pre-tax stock-based compensation expense for the fiscal year 2020 grants, which would be amortized over the vesting period. A hypothetical change of one percentage point in the forfeiture rate assumption used for the fiscal year 2020 stock option grants would result in approximately a $0.1 million change in the total pre-tax stock-based compensation expense for the fiscal year 2020 grants, which would be amortized over the vesting period. A hypothetical one-half percentage point change in the dividend yield

assumption used to determine the fair value of the fiscal year 2020 stock option grants would result in approximately a $0.9 million change in the total pre-tax stock-based compensation expense for the fiscal year 2020 grants, which would be amortized over the vesting period.

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 Diluted 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 Diluted earnings per share, and Free Cash flow to the most directly comparable generally accepted accounting principles (“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 2 “Summary of Significant Accounting Policies” and Note 3, “Revenue Recognition” to our Consolidated Financial Statements under Item 8 of Part II of this Annual Report on Form 10-K.

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 fiscal years ended June 30, 2020, and 2019, are as follows:


	Select Operating Metrics

	Years Ended June 30,
	2020		2019


Record Growth
Equity proxy	10	%	6	%
Mutual fund interims	2	%	9	%
Internal Trade Growth
Equity	8	%	6	%
Fixed Income	12	%	5	%

RESULTS OF OPERATIONS

The following discussions of Analysis of Consolidated Statements of Earnings and Analysis of Reportable Segments refer to the fiscal year ended June 30, 2020 compared to the fiscal year ended June 30, 2019. The Analysis of Consolidated Statements of Earnings should be read in conjunction with the Analysis of Reportable Segments, which provides more detailed discussions concerning certain components of the Consolidated Statements of Earnings. Discussions of Analysis of Consolidated Statements of Earnings and Analysis of Reportable Segments for the fiscal year ended June 30, 2019 compared to the fiscal year ended June 30, 2018 is disclosed in Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2019 Annual Report.

The following references are utilized in the discussions of Analysis of 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.

“IBM Private Cloud Charges” represent a charge on the hardware assets to be transferred to IBM and other charges related to the IBM Private Cloud Agreement.

“Gain on Sale of a Joint Venture Investment” represents a non-operating, cash gain on the sale of one of the Company’s joint venture investments.

“Covid-19 Related Expenses” represents certain non-recurring expenses associated with the Covid-19 pandemic.

“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.
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. During fiscal year 2020, mutual fund proxy fee revenues were 35% lower than the prior fiscal year while during fiscal year 2019 mutual fund proxy revenues were 14% lower 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 fiscal years ended June 30, 2020 and 2019, we are reporting Closed sales net of a 4.0% allowance adjustment. Consequently, our reported Closed sales amounts are not adjusted for actual revenues achieved because these adjustments are estimated in the period the sale is reported. We assess the allowance amount at the end of each fiscal year to establish the appropriate allowance for the subsequent year using trailing five years actual data as the starting point, normalized for outlying factors, if any, to enhance the accuracy of the allowance.

For the fiscal years ended June 30, 2020 and 2019, Closed sales were $238.9 million and $233.3 million, respectively. The fiscal years ended June 30, 2020 and 2019, are net of an allowance adjustment of $10.0 million and $9.7 million, respectively.

Recent Developments

In March 2020, the World Health Organization declared the outbreak of Covid-19 as a pandemic, which continues to spread throughout the world including the U.S., India, Canada, Europe and other locations where we operate. Developments have occurred rapidly with respect to the spread of Covid-19 and its impact on human health and businesses. 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 enacted fiscal stimulus packages while central banks increased monetary stimulus, both designed to help mitigate the negative macroeconomic effects of Covid-19. In addition, several national, state and local governments have placed restrictions on people from gathering in groups or interacting within a certain physical distance (i.e. social distancing) and in certain cases, have ordered businesses to close, limit operations or mandate that people stay at home.

The Company’s operations, both our Investor Communication Solutions and Global Technology and Operations segments, are critical components of the overall financial markets infrastructure in the U.S. and globally. As a result, we have been permitted to continue operating in all jurisdictions in which we conduct business (in most cases remotely), including in jurisdictions that have mandated the closure of certain businesses. 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 strict social distancing and cleaning measures in our production facilities, taking the temperature of production-related employees in affected areas on a daily basis as a prerequisite to entering our facilities, load balancing of client jobs between various facilities, and instituting work from home protocols for employees not involved in production operations, amongst other measures.

To date, there has not been a material impact as a result of Covid-19 on our consolidated revenues and pre-tax income. The Company processed above average levels of equity and fixed income trades in the third and fourth quarters of fiscal 2020 for our financial services clients, many of whom themselves have experienced higher levels of trading activity from market volatility caused by the Covid-19 pandemic, partially offset by lower internal growth in certain aspects of our Investor Communication Solutions business. 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 actively 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 this Form 10-K. 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 “Fund Disclosure Proposal”). The Fund Disclosure Proposal is intended to provide a disclosure framework that would better serve the needs of retail investors. Among the modifications proposed are the requirement for streamlined shareholder reports with concise and visually engaging content which would replace prospectus updates, and improvements to prospectus disclosure. Adoption and implementation of the Fund Disclosure Proposal amendments as proposed could have an impact on our services, business and financial results. We will closely monitor and evaluate the progress of the Fund Disclosure Proposal and its potential impact on our business. Please see our “Risk Factors” in Part I, Item 1A. of this Form 10-K for more information.

ANALYSIS OF CONSOLIDATED STATEMENTS OF EARNINGS

Fiscal Year 2020 Compared to Fiscal Year 2019

The table below presents Consolidated Statements of Earnings data for the fiscal years ended June 30, 2020 and 2019, and the dollar and percentage changes between periods:


	Years Ended June 30,
	2020			2019			Change
							($)		(%)
	(in millions, except for per share amounts)
Revenues	$	4,529.0		$	4,362.2		$	166.9	4
Cost of revenues	3,265.1			3,131.9			133.2		4
Selling, general and administrative expenses	639.0			577.5			61.5		11
Total operating expenses	3,904.1			3,709.5			194.7		5

Operating income	624.9			652.7			(27.8)		(4)
Margin	13.8		%	15.0		%			(1.2)	pts
Interest expense, net	(58.8)			(41.8)			(17.0)		41
Other non-operating income (expenses), net	13.4			(3.7)			17.1		NM
Earnings before income taxes	579.5			607.3			(27.7)		(5)
Provision for income taxes	117.0			125.2			(8.1)		(7)
Effective tax rate	20.2		%	20.6		%			(0.4)	pts
Net earnings	$	462.5		$	482.1		$	(19.6)	(4)
Basic earnings per share	$	4.03		$	4.16		$	(0.13)	(3)
Diluted earnings per share	$	3.95		$	4.06		$	(0.11)	(3)

Weighted average shares outstanding:
Basic	114.7			115.9
Diluted	117.0			118.8

NM - Not meaningful

Revenues

The table below presents Consolidated Statements of Earnings data for the fiscal years ended June 30, 2020 and 2019, and the dollar and percentage changes between periods:


	Years Ended June 30,
	2020		2019		Change
					$		%
	($ in millions)
Recurring fee revenues	$	3,036.3	$	2,760.3	$	275.9	10
Event-driven fee revenues	178.0		244.5		(66.5)		(27)
Distribution revenues	1,451.2		1,459.8		(8.6)		(1)
Foreign currency exchange	(136.4)		(102.4)		(34.0)		NM
Total	$	4,529.0	$	4,362.2	$	166.9	4
NM - Not meaningful
	Points of Growth
	Net New Business		Internal Growth		Acquisitions		Total
Recurring fee revenue Growth Drivers	4pts		1pt		6pts		10	%

Revenues increased $166.9 million, or 4%, to $4,529.0 million from $4,362.2 million.

Recurring fee revenue growth was primarily driven by acquisitions that were not in the prior year period, as well as 4pts of Organic growth primarily from Net New Business. Internal growth was slightly positive with positive growth in our Global Technology and Operations segment driven by higher trading volumes resulting from market volatility, partially offset by negative internal growth in our Investor Communication Solutions segment.
Event-driven fee revenues decreased $66.5 million, or 27%, primarily due to decreased activity in mutual fund proxy, equity special meetings, and equity contests.
Distribution revenues decreased $8.6 million, or 1%, to $1,451.2 million primarily due to the decrease in Event-driven fee revenues.
Currencies negatively impacted revenues by $34.0 million due to a combination of foreign acquisitions, continued international revenue growth, and the strengthening of the U.S. dollar against other currencies.

Total operating expenses. Operating expenses increased $194.7 million, or 5%, to $3,904.1 million from $3,709.5 million as a result of:

Cost of revenues - The increase of $133.2 million in cost of revenues primarily reflected higher operating costs from acquisitions and related amortization expense and charges associated with the IBM Private Cloud Agreement, partially offset by certain lower operational expenses.
Selling, general and administrative expenses - The increase of $61.5 million in selling, general, and administrative expenses primarily reflected the impact of acquisitions and higher compensation expense.
Currencies positively impacted total operating expenses by $31.3 million due to a combination of foreign acquisitions, the strengthening of the U.S. dollar against other currencies, and continued international operating expense growth.

Operating income margin of 13.8% for the fiscal year ended June 30, 2020 declined 120 bps from 15.0% for the fiscal year ended June 30, 2019 partly due to charges associated with the IBM Private Cloud Agreement. However, Adjusted Operating income margin of 17.5% for the fiscal year ended June 30, 2020 increased 40 bps on higher recurring revenues from 17.1% for the fiscal year ended June 30, 2019, which excludes certain charges associated with the IBM Private Cloud Agreement and certain other Non-GAAP adjustments. See “Explanation and Reconciliation of the Company’s Use of Non-GAAP Financial Measures.”

Interest expense, net. Interest expenses, net, was $58.8 million, an increase of $17.0 million from $41.8 million in the fiscal year ended June 30, 2019. The increase of $17.0 million was primarily due to an increase in interest expense from higher borrowings primarily related to acquisitions.

Other non-operating income (expenses), net. Other non-operating income, net for the fiscal year ended June 30, 2020 was $13.4 million, an increase of $17.1 million, compared to $3.7 million of Other non-operating expenses, net for the fiscal year ended June 30, 2019. The increase of $17.1 million was primarily due to higher investment gains as compared to the prior year period.

Provision for income taxes.

Effective tax rate for the fiscal year ended June 30, 2020 - 20.2%.
Effective tax rate for the fiscal year ended June 30, 2019 - 20.6%.

The decrease in the effective tax rate for the fiscal year ended June 30, 2020 compared to the fiscal year ended June 30, 2019 was primarily driven by higher discrete tax benefits, partially offset by lower excess tax benefits of $15.6 million for the fiscal year ended June 30, 2020 compared to $19.3 million for the fiscal year ended June 30, 2019.

ANALYSIS OF REPORTABLE SEGMENTS

Broadridge has two reportable business 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.

In connection with an organizational change made in the first quarter of fiscal year 2020, in order to further align and enhance our portfolio of services, the results for the Company’s wealth management Advisor Solutions services that were previously reported in our Investor Communication Solutions reportable segment are now reported within the Global Technology and Operations reportable segment. As a result, our prior period segment results for the fiscal year ended June 30, 2019 have been revised to reflect this change, which resulted in transferring $42.8 million of revenues and $2.2 million of earnings before income taxes between reportable segments, respectively.

Revenues


	Years Ended June 30,
	2020		2019		Change
					$		%
	($ in millions)
Investor Communication Solutions	$	3,491.3	$	3,468.3	$	23.0	1
Global Technology and Operations	1,174.2		996.3		177.9		18
Foreign currency exchange	(136.4)		(102.4)		(34.0)		NM
Total	$	4,529.0	$	4,362.2	$	166.9	4

NM - Not meaningful

Earnings Before Income Taxes


	Years Ended June 30,
	2020		2019		Change
					$		%
	($ in millions)
Investor Communication Solutions	$	464.1	$	506.2	$	(42.1)	(8)
Global Technology and Operations	245.0		212.5		32.5		15
Other	(146.3)		(130.9)		(15.4)		12
Foreign currency exchange	16.8		19.4		(2.7)		NM
Total	$	579.5	$	607.3	$	(27.7)	(5)

NM - Not meaningful

Investor Communication Solutions

Fiscal Year 2020 Compared to Fiscal Year 2019

Revenues increased $23.0 million to $3,491.3 million from $3,468.3 million, and earnings before income taxes decreased $42.1 million to $464.1 million from $506.2 million as a result of:


	Years Ended June 30,
	2020			2019			Change
							$		%
	($ in millions)
Revenues
Recurring fee revenues	$	1,862.0		$	1,764.0		$	98.0	6
Event-driven fee revenues	178.0			244.5			(66.5)		(27)
Distribution revenues	1,451.2			1,459.8			(8.6)		(1)
Total	$	3,491.3		$	3,468.3		$	23.0	1

Earnings before Income Taxes
Earnings before income taxes	$	464.1		$	506.2		$	(42.1)	(8)
Pre-tax Margin	13.3		%	14.6		%

	Points of Growth
	Net New Business			Internal Growth			Acquisitions		Total
Recurring fee revenue Growth Drivers	4pts			-1pt			2pts		6	%

For the fiscal year ended June 30, 2020:

Recurring fees grew 6% driven by Organic growth and growth from acquisitions. Organic growth reflected continued growth from new sales. Internal growth was down 1pt as 10% position growth in annual equity proxy communications and 2% for mutual fund and exchange traded funds interims was offset by lower customer communications volumes and lower revenue from other services.
Lower event-driven fee revenues were due to decreased activity in mutual fund proxy, equity special meetings, and equity contests.
Lower distribution revenues resulted from the decrease in event-driven fee revenues, which more than offset the impact of higher recurring fee revenues.
The earnings decrease of $42.1 million was due to lower event-driven activity more than offsetting the contribution from higher recurring fee revenues.
Pre-tax margins decreased by 1.3 percentage points to 13.3% from 14.6%.

Global Technology and Operations

Fiscal Year 2020 Compared to Fiscal Year 2019

Revenues increased $177.9 million to $1,174.2 million from $996.3 million, and earnings before income taxes increased $32.5 million to $245.0 million from $212.5 million as a result of:


	Years Ended June 30,
	2020			2019			Change
							$		%
	($ in millions)
Revenues
Recurring fee revenues	$	1,174.2		$	996.3		$	177.9	18

Earnings before Income Taxes
Earnings before income taxes	$	245.0		$	212.5		$	32.5	15
Pre-tax Margin	20.9		%	21.3		%

	Points of Growth
	Net New Business			Internal Growth			Acquisitions		Total
Recurring fee revenue Growth Drivers	4pts			3pts			11pts		18	%

For the fiscal year ended June 30, 2020:

Recurring fees grew 18% driven by growth from acquisitions, including software license sales, and Organic growth. Organic growth was driven by both Net New Business and Internal growth, as internal growth was driven by higher trading volumes resulting from market volatility.
The earnings increase was due to higher revenues from acquisitions and higher organic revenues, partially offset by the impact of expenditures to implement and support new business and the amortization of acquired intangibles. Pre-tax margins decreased by 0.4 percentage points to 20.9% from 21.3%.

Other

Loss before income taxes was $146.3 million for the fiscal year ended June 30, 2020, an increase of $15.4 million, or 12%, compared to $130.9 million for the fiscal year ended June 30, 2019.

*•*The increased loss before income taxes was primarily due to charges associated with the IBM Private Cloud Agreement and higher interest expense versus the prior year period, partially offset by lower compensation expense and gain on sale of investments.

Explanation and Reconciliation of the Company’s Use of Non-GAAP Financial Measures

The Company’s results in this Annual Report on Form 10-K are presented in accordance with U.S. GAAP except where otherwise noted. In certain circumstances, results have been presented in Non-GAAP measures. 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, for internal planning and forecasting purposes and in the calculation of performance-based compensation. 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, as adjusted to exclude the impact of certain costs, expenses, gains and losses and other specified items that management believes are not indicative of our ongoing operating performance. These adjusted measures exclude the impact of: (i) Amortization of Acquired Intangibles and Purchased Intellectual Property, (ii) Acquisition and Integration Costs, (iii) IBM Private Cloud Charges, (iv) the Gain on Sale of a Joint Venture Investment, and (v) Covid-19 Related Expenses. 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. IBM Private Cloud Charges represent a charge on the hardware assets to be transferred to IBM and other charges related to the IBM Private Cloud Agreement. The Gain on Sale of a Joint Venture Investment represents a non-operating, cash gain on the sale of one of the Company’s joint venture investments. Covid-19 Related Expenses represents certain non-recurring expenses associated with the Covid-19 pandemic.

We exclude IBM Private Cloud Charges, Gain on Sale of a Joint Venture Investment, and Covid-19 Related Expenses from our Adjusted Operating income and other earnings measures because excluding such information provides us with an understanding of the results from the primary operations of our business and these items do not reflect ordinary operations or earnings. 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 Flows

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 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):


	Years ended June 30,
	2020			2019
	(in millions)
Operating income (GAAP)	$	624.9		$	652.7
Adjustments:
Amortization of Acquired Intangibles and Purchased Intellectual Property	122.9			87.4
Acquisition and Integration Costs	12.5			6.4
IBM Private Cloud Charges	32.0			—
Covid-19 Related Expenses	2.4			—
Adjusted Operating income (Non-GAAP)	$	794.8		$	746.5
Operating income margin (GAAP)	13.8		%	15.0		%
Adjusted Operating income margin (Non-GAAP)	17.5		%	17.1		%


	Years ended June 30,
	2020		2019
	(in millions)
Net earnings (GAAP)	$	462.5	$	482.1
Adjustments:
Amortization of Acquired Intangibles and Purchased Intellectual Property	122.9		87.4
Acquisition and Integration Costs	12.5		6.4
IBM Private Cloud Charges	32.0		—
Covid-19 Related Expenses	2.4		—
Gain on Sale of a Joint Venture Investment	(6.5)		—
Taxable adjustments	163.4		93.8


Tax impact of adjustments (a)	(37.4)		(22.3)
Adjusted Net earnings (Non-GAAP)	$	588.5	$	553.6


	Years ended June 30,
	2020		2019

Diluted earnings per share (GAAP)	$	3.95	$	4.06
Adjustments:
Amortization of Acquired Intangibles and Purchased Intellectual Property	1.05		0.74
Acquisition and Integration Costs	0.11		0.05
IBM Private Cloud Charges	0.27		—
Covid-19 Related Expenses	0.02		—
Gain on Sale of a Joint Venture Investment	(0.06)		—
Taxable adjustments	1.40		0.79


Tax impact of adjustments (a)	(0.32)		(0.19)
Adjusted earnings per share (Non-GAAP)	$	5.03	$	4.66

(a) Calculated using the GAAP effective tax rate, adjusted to exclude $15.6 million of excess tax benefits (“ETB”) associated with stock-based compensation for the fiscal year ended June 30, 2020, and $19.3 million of ETB associated with stock-based compensation for the fiscal year ended June 30, 2019. For purposes of calculating the Adjusted earnings per share, the same adjustments were made on a per share basis.


	Years ended June 30,
	2020		2019
	(in millions)
Net cash flows provided by operating activities (GAAP)	$	598.2	$	617.0
Capital expenditures and Software purchases and capitalized internal use software	(98.7)		(72.6)
Free cash flow (Non-GAAP)	$	499.5	$	544.4

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents consisted of the following:


	June 30,
	2020		2019
	(in millions)

Cash and cash equivalents:
Domestic cash	$	291.2	$	95.5
Cash held by foreign subsidiaries	118.6		99.8
Cash held by regulated entities	66.8		77.9
Total cash and cash equivalents	$	476.6	$	273.2

At June 30, 2020 and 2019, Cash and cash equivalents were $476.6 million and $273.2 million, respectively. Total stockholders’ equity was $1,346.5 million and $1,127.5 million at June 30, 2020 and 2019, respectively. 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:


	Expiration Date	Principal amount outstanding at June 30, 2020		Carrying value at June 30, 2020		Carrying value at June 30, 2019		Unused Available Capacity		Fair Value at June 30, 2020
				(in millions)
Current portion of long-term debt
Fiscal 2014 Senior Notes (a)	September 2020	$	400.0	$	399.9	$	—	—		$	402.1
Total		$	400.0	$	399.9	$	—	—		$	402.1

Long-term debt, excluding current portion
Fiscal 2019 Revolving Credit Facility:
U.S. dollar tranche	March 2024	$	—	$	—	$	360.0	$	1,100.0	$	—
Multicurrency tranche	March 2024	149.8		149.8		215.7		250.2		149.8
Total Revolving Credit Facility		$	149.8	$	149.8	$	575.7	$	1,350.2	$	149.8

Fiscal 2014 Senior Notes (a)	September 2020	—		—		399.2		—		—
Fiscal 2016 Senior Notes	June 2026	500.0		496.1		495.5		—		554.3
Fiscal 2020 Senior Notes	December 2029	750.0		741.7		—		—		803.6
Total Senior Notes		$	1,250.0	$	1,237.8	$	894.7	$	—	$	1,357.8

Total long-term debt		$	1,399.8	$	1,387.6	$	1,470.4	$	1,350.2	$	1,507.7

Total debt		$	1,799.8	$	1,787.5	$	1,470.4	$	1,350.2	$	1,909.7

(a) The Fiscal 2014 Senior Notes were reclassified from Long-term debt to Current portion of long-term debt in September 2019 to reflect the remaining maturity of less than a year.

Future principal payments on the Company’s outstanding debt are as follows:


Years ending June 30,						2021						2022						2023						2024						2025						Thereafter						Total
(in millions)						$	400.0					$	—					$	—					$	149.8					$	—					$	1,250.0					$	1,799.8

The Company has a $1.5 billion five-year revolving credit facility (the “Fiscal 2019 Revolving Credit Facility”), which is comprised of a $1.1 billion U.S. dollar tranche and a $400.0 million multicurrency tranche. Borrowings under the Fiscal 2019 Revolving Credit Facility bear interest at LIBOR plus 101.5 basis points. In addition, the Fiscal 2019 Revolving Credit Facility has an annual facility fee equal to 11.0 basis points on the entire facility.

The Fiscal 2019 Revolving Credit Facility and senior notes are senior unsecured obligations of the Company and are ranked equally in right of payment. Interest on the senior notes due 2020 is payable semiannually on March 1st and September 1st of each year based on a fixed per annum rate equal to 3.95%. Interest on the senior notes due June 2026 is payable semiannually on June 27th and December 27th of each year based on a fixed per annum rate equal to 3.40%. Interest on the senior notes due 2029 is payable semiannually on June 1st and December 1st each year based on a fixed per annum rate equal to 2.90%.

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 13, “Borrowings” to our Consolidated Financial Statements under Item 8 of Part II of this Annual Report on Form 10-K for a more detailed discussion.

Cash Flows

Fiscal Year 2020 Compared to Fiscal Year 2019


	Years Ended June 30,
	2020		2019		$ Change
	(in millions)

Net cash flows provided by operating activities	$	598.2	$	617.0	$	(18.7)

Net cash flows used in investing activities	$	(441.7)	$	(433.5)	$	(8.1)

Net cash flows provided by (used in) financing activities	$	51.2	$	(173.1)	$	224.3

The decrease in cash provided by operating activities of $18.7 million primarily reflects increased scaling of client-related platform implementation and development, partially offset by cash flows from higher revenues, cash collections and working capital.

The increase in cash used in investing activities of $8.1 million primarily reflects an increase in capital expenditures and software purchases, partially offset by lower acquisition spend in fiscal year 2020.

The increase in cash provided by financing activities of $224.3 million primarily reflects a decrease in the repurchase of common stock, partially offset by a decrease in net proceeds from borrowings and an increase in dividends paid.

Income Taxes

The Company, headquartered in the U.S., is routinely examined by the IRS and is also routinely examined by the tax authorities in the U.S. states and foreign countries in which it conducts business. The tax years under audit examination vary by tax jurisdiction. The Company regularly considers the likelihood of assessments in each of the jurisdictions resulting from examinations. To the extent the Company determines it has potential tax assessments in particular tax jurisdictions, the Company has established tax reserves which it believes are adequate in relation to the potential assessments. Once established, reserves are adjusted when there is more information available, when an event occurs necessitating a change to the reserves or the statute of limitations for the relevant taxing authority to examine the tax position has expired. The resolution of tax matters should not have a material effect on the financial condition of the Company or on the Company’s Consolidated Statements of Earnings for a particular future period.

Defined Benefit Pension Plans

The Company sponsors a Supplemental Officer Retirement Plan (the “SORP”). The SORP is a nonqualified ERISA defined benefit plan pursuant to which the Company will pay supplemental pension benefits to certain key officers upon retirement based upon the officers’ years of service and compensation. The SORP was closed to new participants beginning in fiscal year 2015. The Company also sponsors a Supplemental Executive Retirement Plan (the “SERP”). The SERP is also a nonqualified ERISA defined benefit plan pursuant to which the Company will pay supplemental pension benefits to certain key executives upon retirement based upon the executives’ years of service and compensation. The SERP was closed to new participants beginning in fiscal year 2015.

The SORP and SERP are effectively funded with assets held in a Rabbi Trust. The assets invested in the Rabbi Trust are to be used in part to fund benefit payments to participants under the terms of the plans. The Rabbi Trust is irrevocable and no portion of the trust funds may be used for any purpose other than the delivery of those assets to the participants, except that assets held in the Rabbi Trust would be subject to the claims of the Company’s general creditors in the event of bankruptcy or insolvency of the Company. The SORP and SERP are nonqualified plans for federal tax purposes and for purposes of Title I of ERISA. The Rabbi Trust assets had a value of $54.5 million at June 30, 2020 and $41.9 million at June 30, 2019 and are included in Other non-current assets in the accompanying Consolidated Balance Sheets.

The benefit obligation to the Company under these plans at June 30, 2020 and 2019 was:


	Years ended June 30,
	2020		2019
	(in millions)
SORP	$	53.8	$	45.5
SERP	6.0		5.4
Total	$	59.8	$	50.8

Other Post-retirement Benefit Plan

The Company sponsors an Executive Retiree Health Insurance Plan. It is a post-retirement benefit plan pursuant to which the Company helps defray the health care costs of certain eligible key executive retirees and qualifying dependents, based upon the retirees’ age and years of service, until they reach the age of 65. The plan is currently unfunded.

The benefit obligation to the Company under this plan at June 30, 2020 and 2019 was:


	Years ended June 30,
	2020		2019
	(in millions)
Executive Retiree Health Insurance Plan	$	4.5	$	5.2

Other Post-employment Benefit Obligations

In accordance with the Payment of Gratuity Act of 1972, the Company sponsors a post-employment defined benefit plan (the “Gratuity Plan”) covering all employees in India who are eligible under the terms of their employment. The Gratuity Plan is required by local law and provides a lump sum payment to vested employees upon retirement, death, incapacitation, or termination of employment based on the respective employee’s salary and the tenure of employment. The Gratuity Plan is currently unfunded.

The benefit obligation to the Company under this plan at June 30, 2020 and 2019 was:


	Years ended June 30,
	2020		2019
	(in millions)
The Gratuity Plan	$	6.4	$	5.8

Contractual Obligations

The following table summarizes our contractual obligations to third parties as of June 30, 2020 and the effect such obligations are expected to have on our liquidity and cash flows in future periods:


	Payments Due by Period
	Total		Less than 1 Year		1-3 Years		4-5 Years		After 5 Years
					(in millions)
Debt(1)	$	1,799.8	$	400.0	$	—	$	149.8	$	1,250.0
Interest and facility fee on debt(2)	325.7		45.7		86.1		80.7		113.1
Facility and equipment operating leases(3)	378.2		44.5		80.9		72.3		180.6
Purchase obligations(4)	580.8		93.4		173.4		144.0		170.0
Capital commitment to fund investment(5)	—		—		—		—		—
Uncertain tax positions(6)	—		—		—		—		—
Total(7)	$	3,084.5	$	583.6	$	340.4	$	446.8	$	1,713.7

(1)These amounts represent the principal repayments of Long-term debt and are included on our Consolidated Balance Sheets. See Note 13, “Borrowings” to our Consolidated Financial Statements under Item 8 of Part II of this Annual Report on Form 10-K for additional information about our Borrowings and related matters.

(2)Includes estimated future interest payments on our long-term debt and interest and facility fee on the revolving credit facility.

(3)We enter into operating leases in the normal course of business relating to facilities and equipment. The majority of our lease agreements have fixed payment terms based on the passage of time. Certain facility and equipment leases require payment of maintenance, real estate taxes and related executory costs, and contain escalation provisions based on future adjustments in price indices. Our future operating lease obligations could change if we exit certain contracts and if we enter into additional operating lease agreements. See Note 8, “Leases” to our Consolidated Financial Statements under Item 8 of Part II of this Annual Report on Form 10-K for additional information about our Leases and related matters.

(4)Purchase obligations relate to payments to IBM related to the Amended IT Services Agreement that expires in June 2027, the IBM Private Cloud Agreement that expires in March 2030, and the Amended EU IT Services Agreement that expires in June 2029, as well as software license agreements including hosted software arrangements, and software and hardware maintenance and support agreements.

(5)The Company has a future commitment to fund $3.5 million to an investee.

(6)Due to the uncertainty related to the timing of the reversal of uncertain tax positions, only uncertain tax benefits related to certain settlements have been provided in the table above. The Company is unable to make reasonably reliable estimates related to the timing of the remaining gross unrecognized tax benefit liability of $40.7 million (inclusive of interest). See Note 17, “Income Taxes” to our Consolidated Financial Statements under Item 8 of Part II of this Annual Report on Form 10-K for further detail.

(7)Certain post-employment benefit obligations reported in our Consolidated Balance Sheets in the amount of $70.7 million as of June 30, 2020 were not included in the table above due to the uncertainty of the timing of these future payments.

Data Center Agreements

In March 2010, the Company and IBM entered into the IT Services Agreement, under which IBM provides certain aspects of the Company’s information technology infrastructure. Under the IT Services Agreement, IBM provides 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 the data center processing to IBM was completed in August 2012. The IT Services Agreement would have expired on June 30, 2022, but a two-year extension was signed in March 2015, amending the expiration date to June 30, 2024. In December 2019, the Company and IBM amended and restated the IT Services Agreement and entered into 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. Fixed minimum commitments remaining under this agreement at June 30, 2020 are $251.7 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 IBM 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 IBM Private Cloud Agreement has an initial term of approximately 10 years and three months, expiring on March 31, 2030. As a result of the IBM Private Cloud Agreement, the Company transferred certain of its employees in April 2020 to IBM and its affiliates, and such transferred employees are expected to continue providing services to the Company on behalf of IBM under the IBM Private Cloud Agreement. Pursuant to the IBM Private Cloud Agreement, the Company has agreed to transfer the ownership of certain Company-owned hardware (the “Hardware”) located at Company facilities worldwide along with the Company’s maintenance agreements (“Maintenance Contracts”) associated with the Hardware to IBM. The transfer of the Hardware and Maintenance Contracts to IBM is expected to close no later than September 30, 2020. The Company concluded that the Hardware qualifies as assets held for sale since the Company has committed to a plan of disposal expected to be completed within a year, and therefore, has recorded the Hardware at fair value less costs to dispose based on the expected selling price to IBM (a Level 3 fair value measurement as defined in Note 7, “Fair Value of Financial Instruments” to the Company's Consolidated Financial Statements). Accordingly, the Company has recorded a non-cash pre-tax charge of $30.4 million for the fiscal year ended June 30, 2020, equal to the difference between the Hardware’s carrying value and estimated fair value less costs to dispose, included as part of Cost of revenues on the Company’s Consolidated Statements of Earnings and is included in Other for purposes of the Company's segment reporting. As of June 30, 2020, the Hardware classified as assets held for sale has a carrying amount of $18.0 million and is included in the Company’s Other current assets line item on the Consolidated Balance Sheets. Fixed minimum commitments remaining under the IBM Private Cloud Agreement at June 30, 2020 are $236.7 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 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 and entered into the Amended EU IT Services Agreement whereby the Company will migrate from the existing dedicated on-premise 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 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. Fixed minimum commitments remaining under the Amended EU IT Services Agreement at June 30, 2020 are $23.9 million through fiscal year 2029, the final year of the contract.

The following table summarizes the capitalized costs related to these agreements as of June 30, 2020:


	Amended IT Services Agreement		Amended EU IT Services Agreement		Total
	(in millions)
Capitalized costs, beginning balance	$	62.3	$	5.0	$	67.3
Capitalized costs incurred	0.3		1.6		1.8
Impact of foreign currency exchange	—		(0.2)		(0.2)
Total capitalized costs, ending balance	62.6		6.3		68.9
Total accumulated amortization	(40.1)		(4.3)		(44.4)
Net Deferred IBM Costs	$	22.5	$	2.0	$	24.5

Investments

At June 30, 2020, the Company has a future commitment to fund $3.5 million to one of the Company’s investees.

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 June 30, 2020.

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 derivative financial instruments at June 30, 2020 and 2019. 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, “Summary of Significant Accounting Policies” and Note 8, “Leases” to our Consolidated Financial Statements under Item 8 of Part II of this Annual Report on Form 10-K for a discussion on the impact of the adoption of new accounting pronouncements.

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