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Item 7. Management’s Discussion and Analysis

2024-08-06 compared with 2023-08-08 · 88 added, 109 removed, 497 unchanged (28% of the section changed)

18 unchanged sentences

The excess of the purchase price over the estimated fair values of the underlying assets acquired and liabilities assumed is allocated to Goodwill.

During the fiscal years ended June 30, 2023 and June 30, 2022, there were no material acquisitions.

Fiscal Year 2024 Acquisition:

AdvisorTarget

In May 2024, the Company acquired AdvisorTarget, a market leader in providing asset management and wealth management firms with data products to help power digital marketing, sales and engagement programs targeting financial advisors.

AdvisorTarget is included in the Company’s ICS reportable segment.

The aggregate purchase price included $34.3 million in cash, $1.0 million in deferred payments, $1.6 million for the settlement of a preexisting relationship, and contingent consideration with a maximum potential pay-out of $30.5 million.

The contingent consideration is payable through fiscal year 2028 upon the achievement by the acquired business of certain defined revenue targets.

Net tangible liabilities assumed in the transaction were $3.1 million, and contingent liabilities incurred were valued at $14.0 million.

This acquisition resulted in $41.8 million of Goodwill, which is tax deductible.

Intangible assets acquired, which totaled $12.1 million, consist primarily of software technology and customer relationships, which are being amortized over a five-year life.

Announced Acquisition:

Kyndryl Securities Industry Services (“Kyndryl SIS”)

In May 2024, Broadridge announced the proposed acquisition of Kyndryl SIS to provide wealth management, capital markets, and information technology solutions to the Canadian financial services industry, expanding our product offerings in our Global Technology and Operations segment.

The total purchase price is approximately $200 million.

The acquisition is subject to customary closing conditions, including regulatory approvals.

BASIS OF PRESENTATION

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“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.

“Investment Gains” represent non-operating, non-cash gains on privately held investments.

“Real Estate Realignment and Covid-19 Related Expenses” are comprised of two major components:

Real Estate Realignment Expenses, and Covid-19 Related Expenses.

Real Estate Realignment Expenses are expenses associated with the exit of certain of the Company’s leased facilities in response to the Covid-19 pandemic, which consist of the impairment of certain right of use assets, leasehold improvements and equipment, as well as other related facility exit expenses directly resulting from, and attributable to, the exit of these leased facilities.

Covid-19 Related Expenses are direct and incremental expenses incurred by the Company to protect the health and safety of Broadridge associates during the Covid-19 outbreak, including expenses associated with monitoring the temperatures for associates entering our facilities, enhancing the safety of our office environment in preparation for workers to return to Company facilities on a more regular basis, ensuring proper social distancing in our production facilities, personal protective equipment, enhanced cleaning measures in our facilities, and other safety related expenses.

“Restructuring Charges” represent severance costs associated with the Company’s initiative to streamline our management structure, reallocate work to lower cost locations, and reduce headcount in deprioritized areas.

“Restructuring and Other Related Costs” represent costs associated with the Company’s Corporate Restructuring Initiative to exit and/or realign some of our businesses, streamline the Company’s management structure, reallocate work to lower cost locations, and reduce headcount in deprioritized areas.

“Litigation Settlement Charges” represents reserves established during the third and fourth quarter of 2024 related to the settlement of claims.

“Russia-Related Exit Costs” are direct and incremental costs associated with the Company’s wind down of business activities in Russia in response to Russia’s invasion of Ukraine, including relocation-related expenses of impacted associates.

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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 2024, mutual fund proxy revenues were 66% higher than the prior fiscal year.

During fiscal year 2023, mutual fund proxy revenues were 51% lower than the prior fiscal year.

During fiscal year 2022, mutual fund proxy revenues were 57% greater than the prior fiscal year.

Although it is difficult to forecast the levels of event-driven activity, we expect that the portion of revenues derived from mutual fund proxy activity may continue to experience volatility in the future.

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The fiscal years ended June 30, 2024 and 2023, are net of an allowance adjustment of $18.0 million and $12.9 million, respectively.

Recent Developments

New SEC Rule on Tailored Shareholder Reports

On October 26, 2022, the SEC adopted a rule modifying mutual fund and exchange-traded fund investor communications.

The SEC rule requires that shorter summary documents, referred to as tailored shareholder reports, be distributed in lieu of long-form annual and semi-annual fund reports or notices of the availability of such reports, which the SEC had permitted under Rule 30e-3.

The rule went into effect on January 24, 2023 and includes an 18-month transition period for implementation by mutual funds and exchange-traded funds, with a final compliance date of July 24, 2024.

We are reviewing the full impact of the new rule, however we currently estimate a reduction in our annual Recurring revenues of approximately $30 million phasing in over fiscal years 2025 and 2026, assuming no offset from new services.

See the risk factor titled “ Our clients are subject to complex laws and regulations, and new laws or regulations and/or changes to existing laws or regulations could impact our clients and, in turn, adversely impact our business or may reduce our profitability.

” in Part I, Item 1A.

“Risk Factors” in this Annual Report.

Conflict in Ukraine

We are monitoring the events related to Russia’s invasion of Ukraine and have been actively managing any exposure we may have through a cross-functional taskforce that includes members of our senior management.

We have historically had a limited presence in Russia, and we have no presence in Ukraine.

We do not store any client data in Russia.

Prior to the conflict, we had approximately 280 associates in St.

Petersburg, Russia who provided software development and support services for several of our GTO products, less than 2% of our total associates.

As of June 30, 2023, we do not have any associates remaining in Russia.

We have historically provided services to a very small number of Russian entities and subsidiaries of Russian entities.

The revenues from those services represented less than 0.1% of our total revenues in fiscal year 2022 and 2023 and our outstanding accounts receivable from these entities is de minimis.

We are in the process of terminating and winding down these relationships and have closed our operations in Russia.

We have moved the services provided in Russia to other locations in Europe and Asia.

We are monitoring and believe we are in compliance with all global sanctions arising out of Russia’s invasion of Ukraine.

We have taken actions to enhance our information security defenses in response to the Ukraine conflict.

At present, we do not expect the Ukraine conflict and the actions we are taking in response to have a material impact on our core operations or financial results.

ANALYSIS OF CONSOLIDATED STATEMENTS OF EARNINGS

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Interest expense, net (138.1) (135.5) (2.6) 2

Other non-operating income (expenses), net (6.0) (3.0) (3.0) 100

Other non-operating expenses, net (1.7) (6.0) 4.3 (72)

Earnings before income taxes 877.4 794.9 82.5 10

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Net New Business Internal Growth Acquisitions Foreign Exchange Total

Recurring revenue Growth Drivers 4pts 4pts 0pts -1pt 7 %

Recurring revenue Growth Drivers 3pts 2pts 0pts 0pts 6 %

Revenues increased $445.9 million, or 7%, to $6,506.8 million from $6,060.9 million.

• Recurring revenues increased $235.9 million, or 6%, to $4,222.6 million.

Recurring revenue growth constant currency (Non-GAAP) was 9%, all organic, driven by Net New Business growth and Internal Growth in both ICS and GTO.

• Event-driven revenues decreased $58.3 million, or 22%, primarily due to the decrease in volume of mutual fund proxy communications.

• Distribution revenues increased $146.2 million, or 9%, driven by the impact of postage rate increases of $120.8 million and the impact of modestly higher mail volumes, primarily in Customer Communications Solutions.

Recurring revenue growth constant currency (Non-GAAP) was 6%, driven by Net New Business and Internal Growth in both ICS and GTO.

• Event-driven revenues increased $74.2 million, or 35%, driven by higher mutual fund proxy, equity proxy contests and corporate action activity.

• Distribution revenues increased $135.9 million, or 7%, driven by the impact of postage rate increases of approximately $116.3 million, as well as higher event-driven mailings .

Total operating expenses.

Operating expenses increased $365.2 million, or 7%, to $5,489.7 million from $5,124.5 million primarily as a result of the increase in Cost of revenues:

• Cost of revenues - The increase of $158.6 million in Cost of revenues primarily reflects the impact of higher postage and distribution expenses in our Investor Communication Solutions segment of $169.4 million, offset by lower acquisition amortization of $35.8 million.

• Selling, general and administrative expenses - The increase of $16.7 million in Selling, general, and administrative expenses primarily reflects higher compensation expenses of $21.8 million and higher technology related expenses of $4.3 million, offset by lower external labor costs.

• Cost of revenues - The increase of $297.4 million primarily reflecting the impact of higher postage and distribution expenses in our ICS segment of $116.3 million, higher amortization and depreciation expense in our GTO segment of $62.8 million, higher Restructuring and Other Related costs of $42.6 million, and Litigation Settlement Charges of $18.4 million primarily for the settlement of litigation claims.

• Selling, general and administrative expenses - The increase of $67.8 million was primarily driven by higher compensation related expenses of $65.4 million.

Interest expense, net.

Interest expense, net, was $135.5 million, an increase of $50.9 million from $84.7 million in the fiscal year ended June 30, 2022 primarily due to an increase in interest expense from higher borrowing costs.

Other non-operating income (expenses), net.

Other non-operating expense, net for the fiscal year ended June 30, 2023 was $6.0 million, compared to $3.0 million of Other non-operating expense, net for the fiscal year ended June 30, 2022.

The increased expense was primarily due to higher net gains on investments in the prior year period.

Interest expense, net, was $138.1 million, an increase of $2.6 million from $135.5 million in the fiscal year ended June 30, 2023 as the impact of higher interest rates was partially offset by a decrease in average borrowings.

Other non-operating expenses, net.

Other non-operating expenses, net for the fiscal year ended June 30, 2024 was $1.7 million, compared to $6.0 million for the fiscal year ended June 30, 2023.

The decreased expense of $4.3 million was primarily driven by improved performance on investments associated with our retirement plans and other investments compared to the prior year period.

Provision for income taxes .

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• Effective tax rate for the fiscal year ended June 30, 2023 - 20.7%.

The increase in the effective tax rate for the fiscal year ended June 30, 2023 compared to the fiscal year ended June 30, 2022 was driven by the lower excess tax benefit related to equity compensation as compared to the prior year.

The decrease in the effective tax rate for the fiscal year ended June 30, 2024 compared to the fiscal year ended June 30, 2023 was driven by an increase in discrete tax benefits relative to pre-tax income.

The higher excess tax benefit related to equity compensation contributed to the increase in total discrete tax benefits.

ANALYSIS OF REPORTABLE SEGMENTS

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• Recurring revenues increased $112.2 million, or 5%, to $2,573.6 million.

Recurring revenue growth constant currency (Non-GAAP) was 9%, all organic, driven by Internal Growth and Net New Business.

Recurring revenue growth constant currency (Non-GAAP) was 5%, driven by Net New Business and Internal Growth.

• By product line, Recurring revenue growth and Recurring revenue growth constant currency (Non-GAAP) were as follows:

◦ Regulatory rose 5% and 5%, respectively, driven by equity position growth of 6% and mutual fund/ETF position growth of 3%.

◦ Data-Driven Fund Solutions rose 11% and 12%, respectively, driven by growth in our mutual fund trade processing business and continued growth in our data and analytics solutions;

◦ Data-Driven Fund Solutions rose 8% and 7%, respectively, driven by growth in our retirement and workplace products, as well as data and analytics solutions.

◦ Issuer rose 7% and 7%, respectively, driven by growth in our registered shareholder solutions and disclosure solutions.

◦ Customer Communications rose 9% and 10%, respectively, driven by higher print and digital communications.

• Event-driven revenues decreased $58.3 million, or 22% primarily due to the decrease in volume of mutual fund proxy communications.

• Earnings before income taxes increased $86.8 million, or 12.0%.

The earnings benefit from higher Recurring revenue was partially offset by lower event-driven revenues.

Operating expenses rose 5%, or $192.2 million, to $3,724.2 million, primarily driven by distribution and other revenue related expenses.

Amortization expense from acquired intangibles decreased by $13.2 million to $55.5 million from $68.7 million in the prior period.

◦ Customer Communications rose 1% and 2%, respectively, driven by growth in digital communications, partially offset by flat growth in print revenues.

• Event-driven revenues increased $74.2 million, or 35% driven by higher mutual fund proxy, equity proxy contests, and corporate action communications.

• Distribution revenues increased $135.9 million, or 7%, driven by the postage rate increase of approximately $116.3 million, as well as higher event-driven mailings.

• Earnings before income taxes increased $138.9 million, or 17%, primarily from higher Recurring revenue and higher event-driven revenue.

Operating expenses rose 5%, or $183.4 million, to $3,907.5 million primarily driven by higher distribution expenses, as well as higher technology and selling expenses.

• Pre-tax margins increased by 1.7 percentage points to 19.6% from 17.9%.

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Fiscal Year 2024 Compared to Fiscal Year 2023

Revenues increased $72.8 million to $1,525.2 million from $1,452.4 million, and earnings before income taxes increased $44.5 million to $183.9 million from $139.4 million.

Revenues increased $123.7 million to $1,648.9 million from $1,525.2 million, and earnings before income taxes decreased $10.6 million to $173.3 million from $183.9 million.

Years Ended June 30,

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• By product line, Recurring revenue growth and Recurring revenue growth constant currency (Non-GAAP) were as follows:

◦ Capital markets rose 7% and 11%, respectively, driven by a combination of Internal Growth and Net New Business;

◦ Wealth and investment management rose 2% and 4%, respectively, primarily driven by Net New Business.

• Earnings before income taxes increased $44.5 million, driven primarily by the $72.8 million growth in Recurring revenues, partially offset by increased labor costs.

Amortization expense from acquired intangibles decreased by $22.6 million to $158.9 million in fiscal year 2023 from $181.5 million in the prior year period due to the impact of changes in foreign currency exchange rates and certain intangible assets now being fully amortized.

• Pre-tax margins increased by 2.5 percentage points to 12.1% from 9.6%.

◦ Capital markets rose 9% and 8%, respectively, driven by Net New Business and Internal Growth, which benefited from higher trading volumes.

◦ Wealth and investment management rose 7% and 7%, respectively, driven by Net New Business and Internal Growth.

• Earnings before income taxes decreased $10.6 million, as higher revenues were more than offset by higher expenses, including an increase in amortization and depreciation expenses of $62.8 million.

• Pre-tax margins decreased by 1.6 percentage points to 10.5% from 12.1%.

Loss before income taxes was $246.3 million for the fiscal year ended June 30, 2024, an increase of $45.8 million, or 23%, compared to $200.5 million for the fiscal year ended June 30, 2023.

The impact of a $50.9 million increase in net interest expense and higher severance costs related to the corporate restructuring initiative were partially offset by the absence of the prior year $30.5 million in Real Estate Realignment and Covid-19 related expenses and lower compensation related expenses.

The increased loss before income taxes was primarily due to $42.6 million of higher Restructuring and Other Related Costs related to the Corporate Restructuring Initiative and Litigation Settlement Charges of $18.4 million , partially offset by the absence of the prior year Russia-Related Exit Costs of $10.9 million.

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

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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) Restructuring Charges, (iv) Real Estate Realignment and Covid-19 Related Expenses, (v) Russia-Related Exit Costs, and (vi) Investment Gain.

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.

Restructuring Charges represent severance costs associated with the Company’s initiative to streamline our management structure, reallocate work to lower cost locations, and reduce headcount in deprioritized areas.

Real Estate Realignment and Covid-19 Related Expenses are comprised of two major components:

Real Estate Realignment Expenses, and Covid-19 Related Expenses.

Covid-19 Related Expense are direct and incremental expenses incurred by the Company to protect the health and safety of Broadridge associates during the Covid-19 outbreak, including expenses associated with monitoring the temperatures for associates entering our facilities, enhancing the safety of our office environment in preparation for workers to return to Company facilities on a more regular basis, ensuring proper social distancing in our production facilities, personal protective equipment, enhanced cleaning measures in our facilities, and other safety related expenses.

Russia-Related Exit Costs are direct and incremental costs associated with the Company’s wind down of business activities in Russia in response to Russia’s invasion of Ukraine, including relocation-related expenses of impacted associates.

Investment Gain represents a non-operating, non-cash gain on a privately held investment.

We exclude Acquisition and Integration Costs, Restructuring Charges, Real Estate Realignment and Covid-19 Related Expenses, Russia-Related Exit Costs, and Investment Gain 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.

(i) Amortization of Acquired Intangibles and Purchased Intellectual Property, which represent non-cash amortization expenses associated with the Company’s acquisition activities.

(ii) Acquisition and Integration Costs, which represent certain transaction and integration costs associated with the Company’s acquisition activities.

(iii) Restructuring and Other Related Costs, which represent costs associated with the Company’s Corporate Restructuring Initiative to exit and/or realign some of our businesses, streamline the Company’s management structure, reallocate work to lower cost locations, and reduce headcount in deprioritized areas.

Refer to Note 13, “Payables and Accrued Expenses” for further details on the Company’s Corporate Restructuring Initiative.

(iv) Litigation Settlement Charges, which represent reserves established during the third and fourth quarters of fiscal year 2024 related to the settlement of claims.

Refer to Note 19, “Contractual Commitments, Contingencies and Off-Balance Sheet Arrangements” for further details.

(v) Russia-Related Exit Costs, which are direct and incremental costs associated with the Company’s wind down of business activities in Russia in response to Russia’s invasion of Ukraine, including relocation-related expenses of impacted associates.

We exclude Acquisition and Integration Costs, Restructuring and Other Related Costs, Litigation Settlement Charges, and Russia-Related Exit Costs 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.

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Acquisition and Integration Costs 3.9 15.8

Restructuring Charges 20.4 —

Real Estate Realignment and Covid-19 Related Expenses (a) — 30.5

Russia-Related Exit Costs (c) 12.1 1.4

Restructuring and Other Related Costs (a) 63.0 20.4

Litigation Settlement Charges 18.4 —

Russia-Related Exit Costs (b) — 12.1

Adjusted Operating income (Non-GAAP) $ 1,302.8 $ 1,199.1

6 unchanged sentences

Acquisition and Integration Costs 3.9 15.8

Restructuring Charges 20.4 —

Real Estate Realignment and Covid-19 Related Expenses (a) — 30.5

Russia-Related Exit Costs (c) 10.9 1.4

Investment Gains — (14.2)

Restructuring and Other Related Costs (a) 63.0 20.4

Litigation Settlement Charges 18.4 —

Russia-Related Exit Costs (b) — 10.9

Subtotal of adjustments 285.6 261.6

Tax impact of adjustments (d) (57.5) (65.7)

Tax impact of adjustments (c) (62.6) (57.5)

Adjusted Net earnings (Non-GAAP) $ 921.2 $ 834.6

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Acquisition and Integration Costs 0.03 0.13

Restructuring Charges 0.17 —

Real Estate Realignment and Covid-19 Related Expenses (b) — 0.26

Restructuring and Other Related Costs (a) 0.53 0.17

Litigation Settlement Charges 0.15 —

Russia-Related Exit Costs — 0.09

Investment Gains — (0.12)

Subtotal of adjustments 2.40 2.20

Tax impact of adjustments (d) (0.48) (0.55)

Tax impact of adjustments (c) (0.53) (0.48)

Adjusted earnings per share (Non-GAAP) $ 7.73 $ 7.01

(a) Real Estate Realignment Expenses and Covid-19 Related Expenses were $23.0 million and $7.5 million for the fiscal year ended June 30, 2022, respectively.

(b) Real Estate Realignment Expenses and Covid-19 Expenses impacted Adjusted earnings per share by $0.19 and $0.06 for the fiscal year ended June 30, 2022, respectively.

(c) Russia-Related Exit Costs were $10.9 million and $1.4 million for the fiscal years ended June 30, 2023 and June 30, 2022, comprised of $12.1 million of operating expenses, offset by a gain of $1.2 million in non-operating income for the fiscal year ended June 30, 2023, and $1.4 million of operating expenses for the fiscal year ended June 30, 2022.

(d) Calculated using the GAAP effective tax rate, adjusted to exclude $10.4 million of excess tax benefits (“ETB”) associated with stock-based compensation for the fiscal year ended June 30, 2023, and $18.1 million of ETB associated with stock-based compensation for the fiscal year ended June 30, 2022.

(a) Restructuring and Other Related Costs for the fiscal year ended June 30, 2024 includes $56.0 million of severance and professional services costs directly related to the Corporate Restructuring Initiative and a $7.0 million asset impairment charge as a result of the exit of a business in connection with the Corporate Restructuring Initiative.

Restructuring and Other Related Costs for the fiscal year ended June 30, 2023 includes $20.4 million of severance costs.

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

(b) Russia-Related Exit Costs were $10.9 million for the fiscal year ended June 30, 2023, comprised of $12.1 million of operating expenses, offset by a gain of $1.2 million in non-operating income for the fiscal year ended June 30, 2023.

(c) Calculated using the GAAP effective tax rate, adjusted to exclude $12.9 million of excess tax benefits (“ETB”) associated with stock-based compensation for the fiscal year ended June 30, 2024, and $10.4 million of ETB associated with stock-based compensation for the fiscal year ended June 30, 2023.

For purposes of calculating the Adjusted earnings per share, the same adjustments were made on a per share basis.

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(in millions)

Net cash flows provided by operating activities (GAAP) $ 823.3 $ 443.5

Net cash flows from operating activities (GAAP) $ 1,056.2 $ 823.3

Capital expenditures and Software purchases and capitalized internal use software (113.0) (75.2)

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Total Revolving Credit Facility $ — $ — $ — $ 1,500.0 $ —

Fiscal 2021 Term Loans (a) May 2024 $ — $ — $ 1,535.8 $ — $ —

Fiscal 2024 Amended Term Loan (a) August 2026 $ 1,120.0 $ 1,117.9 $ — $ — $ 1,120.0

Fiscal 2016 Senior Notes June 2026 $ 500.0 $ 498.7 $ 498.0 $ — $ 480.4

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Total debt $ 3,370.0 $ 3,355.1 $ 3,413.3 $ 1,500.0 $ 3,111.6

(a) The Fiscal 2021 Term Loans were reclassified from Long-term debt to Current portion of long-term debt in May 2023 to reflect the remaining maturity of less than a year.

(a) The Fiscal 2021 Term Loans were reclassified from Current portion of long-term debt to Long-term debt in the first quarter of fiscal year 2024 upon amendment of the loan, to reflect the remaining maturity of more than one year.

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

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The Fiscal 2021 Revolving Credit Facility also has an annual facility fee equal to 15.0 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).

On May 23, 2023, we amended the interest rate index from LIBOR to Adjusted SOFR.

On May 23, 2023, we amended the interest rate index from LIBOR to Adjusted Term SOFR.

All other terms remained unchanged.

In March 2021, the Company entered into a term credit agreement (as amended on December 23, 2021 and May 23, 2023, “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”).

In March 2021, the Company entered into an amended and restated term credit agreement (as amended on December 23, 2021 and May 23, 2023, “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 Tranche 2 Loans was to mature in May 2024.

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 Adjusted Term SOFR plus 1.100% per annum (subject to step-ups to Adjusted Term SOFR plus 1.350% or a step-down to SOFR plus 0.850% based on ratings).

On May 23, 2023, we amended the interest rate index from LIBOR to Adjusted SOFR.

All other terms remained unchanged.

Interest on the outstanding portion of the Fiscal 2021 Term Loans bore interest at Adjusted Term SOFR plus 1.000% per annum (subject to step-ups to Adjusted Term SOFR plus 1.250% or a step-down to SOFR plus 0.750% based on ratings).

On August 17, 2023, the Company amended and restated the Term Credit Agreement (the “Amended and Restated Term Credit Agreement”), providing for term loan commitment in an aggregate principal amount of $1.3 billion, replacing the Tranche 2 Loan of the Fiscal 2021 Term Loans (the “Fiscal 2024 Amended Term Loan”).

The Fiscal 2024 Amended Term Loan will mature in August 2026 on the third anniversary of the amended Funding Date of August 17, 2023.

The Fiscal 2024 Amended Term Loan bears interest at Adjusted Term SOFR plus 1.250% per annum (subject to a step-up to Adjusted Term SOFR plus 1.375% or step-downs to Adjusted Term SOFR plus 1.125% and Adjusted Term SOFR plus 1.000%, in each case, 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”).

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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.

The Fiscal 2021 Revolving Credit Facility, Fiscal 2024 Amended 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.

Please refer to Note 14, “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.

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(in millions)

Net cash flows provided by operating activities $ 823.3 $ 443.5 $ 379.9

Net cash flows used in investing activities (80.4) (110.4) 30.0

Net cash flows used in financing activities (714.7) (370.8) (344.0)

Net cash flows from operating activities $ 1,056.2 $ 823.3 $ 232.9

Net cash flows from investing activities ( 148.0 ) ( 80.4 ) (67.6)

Net cash flows from financing activities ( 855.5 ) ( 714.7 ) (140.8)

Effect of exchange rate changes on Cash and cash equivalents ( 0.6 ) ( 0.6 ) —

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Free cash flow:

Net cash flows provided by operating activities (GAAP) $ 823.3 $ 443.5 $ 379.9

Net cash flows from operating activities (GAAP) $ 1,056.2 $ 823.3 $ 232.9

Capital expenditures and Software purchases and capitalized internal use software (113.0) (75.2) (37.8)

Free cash flow (Non-GAAP) $ 943.2 $ 748.2 $ 195.1

The increase in cash provided by operating activities of $379.9 million was primarily due to an increase in advance client billings as well as a decrease in client-related platform implementation and development, partially offset by higher cash used in working capital.

The decrease in cash used in investing activities of $30.0 million primarily reflects lower acquisition spend in the current fiscal year compared to the prior year period.

The increase in cash used in financing activities of $344.0 million primarily reflects higher repayments net of borrowing.

The increase in cash from operating activities of $232.9 million for the twelve months ended June 30, 2024, as compared to the twelve months ended June 30, 2023, was due to an increase in Net earnings of $67.5 million, a decrease in cash used for client-related platform implementation and development costs of $300.8 million included in the change in Other non-current assets, and an increase in Accounts payable of $156.7 million from prior fiscal year, combined with a decrease of $87.6 million for the twelve months ended June 30, 2023.

This was partially offset by a decrease in collections of advanced client billings of $280.0 million included in the change in Contract liabilities, a decrease in the change in net Accounts receivable of $57.0 million due to billings exceeding collections relative to prior year, and an increase in cash used for income taxes of $60.0 million related to the reduction in deductible client-related platform implementation and development costs combined with the increase in pre-tax income.

The decrease in cash from investing activities of $67.6 million primarily reflects an increase in cash used for capital expenditures of $37.8 million and an increase in cash used for acquisitions of $34.3 million.

The decrease in cash from financing activities of $140.8 million primarily reflects an increase in cash used for stock buybacks of $461.0 million partially offset by an increase in net borrowings of $325.0 million.

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.

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See Note 14, “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 current portion of long-term debt and interest and facility fee on the revolving credit facility.

(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.

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Total accumulated amortization ( 53.2 ) ( 6.1 ) ( 59.3 )

Net Deferred Kyndryl Costs

Net Deferred Costs

$ 9.8 $ 1.6 $ 11.4

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We have elected the spot method of accounting whereby the net interest savings from the cross-currency swaps is recognized as a reduction in interest expense in our Consolidated Statements of Earnings.

In connection with the acquisition of Itiviti in March 2021 the Company entered into two derivative instruments designed to mitigate the Company’s exposure to the impact of (i) changes in foreign exchange rates on the acquisition of Itiviti purchase consideration, and (ii) changes in interest rates on the Fiscal 2021 Senior Notes.

In March 2021, the Company executed a forward foreign exchange derivative instrument (“Forward”) with an aggregate notional amount of EUR 1.955 billion.

The Forward acted as an economic hedge against the impact of changes in the Euro on the Company’s purchase consideration for the acquisition of Itiviti.

The Company recorded changes in fair value of the Forward as part of Other non-operating income (expenses), net in the Consolidated Statement of Earnings.

In May 2021, the Company settled the Forward derivative for a cumulative pre-tax gain of $66.7 million.

In May 2021, we settled a forward treasury lock agreement that was designated as a cash flow hedge, for a pre-tax loss of $11.0 million, after which the final settlement loss is being amortized into Interest expense, net ratably over the ten year term of the Fiscal 2021 Senior Notes.

In connection with the acquisition of Itiviti, in May 2021 we settled a forward treasury lock agreement that was designated as a cash flow hedge, for a pre-tax loss of $11.0 million, after which the final settlement loss is being amortized into Interest expense, net ratably over the ten year term of the Fiscal 2021 Senior Notes.

The expected amount of the existing loss that will be amortized into earnings before income taxes within the next twelve months is approximately $1.1 million.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis