Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
A. Description of Business
. Broadridge Financial Solutions, Inc. (“Broadridge” or the “Company”), a Delaware corporation, is a leading global provider of investor communications and technology-driven solutions to banks, broker-dealers, mutual funds and corporate issuers. Our services include investor and customer communications, securities processing, and data and analytics solutions. In short, we provide the infrastructure that helps the financial services industry operate. With over 50 years of experience, we provide financial services firms with advanced, dependable, scalable and cost-effective integrated systems. Our systems help reduce the need for clients to make significant capital investments in operations infrastructure, thereby allowing them to increase their focus on core business activities. We deliver a broad range of solutions that help our clients better serve their retail and institutional customers across the entire investment lifecycle, including pre-trade, trade, and post-trade processing functionality.
The Company operates in
two
reportable segments: Investor Communication Solutions and Global Technology and Operations. Broadridge serves a large and diverse client base across
four
client groups: capital markets, asset management, wealth management and corporations.
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•
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Investor Communication Solutions
—Broadridge offers Bank/Broker-Dealer Investor Communication Solutions, Customer Communication Solutions, Corporate Issuer Solutions, Advisor Solutions and Mutual Fund and Retirement Solutions in this segment. A large portion of Broadridge’s 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
®
, Broadridge’s innovative electronic proxy delivery and voting solution for institutional investors and financial advisors, helps ensure the participation of the largest stockholders of many companies. Broadridge also provides the distribution of regulatory reports and corporate action/reorganization event information, as well as tax reporting solutions that help its clients meet their regulatory compliance needs.
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Broadridge also provides customer communications, financial information distribution and transaction reporting services to financial services firms, corporations and mutual funds. These services include the processing and distribution of account statements and trade confirmations, traditional and personalized document fulfillment and content management services, marketing communications, and imaging, archival and workflow solutions that enable and enhance Broadridge’s clients’ communications with investors and customers. All of these communications are delivered through print, electronic or digital channels. In addition, Broadridge provides corporations with registered proxy services as well as registrar, stock transfer and record-keeping services.
Broadridge’s advisor solutions enable firms, financial advisors, wealth managers, and insurance agents to better engage with customers through cloud-based marketing and customer communication tools. Broadridge’s marketing ecosystem integrates data, content and technology to drive new client acquisition and cross-sell opportunities through the creation of sales and educational content, including seminars and a library of financial planning topics as well as customizable advisor websites, search engine marketing and electronic and print newsletters. Broadridge’s advisor solutions also help advisors optimize their practice management through customer and account data aggregation and reporting.
Broadridge’s mutual fund and retirement solutions are a full range of tools for mutual funds, exchange traded fund (“ETF”) providers, and asset management firms. They include data-driven technology solutions for data management, analytics, investment accounting, marketing and customer communications. In addition, Broadridge provides mutual fund trade processing services for retirement providers, third party administrators, financial advisors, banks and wealth management professionals through its subsidiary, Matrix Financial Solutions, Inc.
In July 2016, Broadridge acquired the North American Customer Communications (“NACC”) business of DST Systems, Inc. NACC is a leading provider of customer communication services including print and digital communication solutions, content management, postal optimization, and fulfillment. The NACC business will be integrated into the existing customer communications business and is now known as Broadridge Customer Communications.
In September 2016, Broadridge acquired intellectual property assets from Inveshare, Inc. (“Inveshare”) and concurrently entered into a development agreement with an affiliate of Inveshare to use these assets to develop
blockchain technology applications for Broadridge’s proxy business. Broadridge also granted Inveshare a perpetual license to the acquired technology assets, and Inveshare will remain an independent provider of proxy communication services.
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Global Technology and Operations
—Broadridge offers a suite of advanced computerized real-time transaction processing services that automate the securities transaction lifecycle, from desktop productivity tools, data aggregation, performance reporting, and portfolio management to order capture and execution, trade confirmation, settlement, reference data, reconciliations and accounting. Broadridge’s services help financial institutions and investment managers efficiently and cost-effectively consolidate their books and records, gather and service assets under management, focus on their core businesses, and manage risk. Broadridge’s multi-currency solutions support real-time global trading of equity, fixed income, mutual fund, foreign exchange and exchange traded derivative securities in established and emerging markets. In addition, Broadridge’s Managed Services solution allows broker- dealers to outsource certain administrative functions relating to clearing and settlement and asset servicing, while maintaining their ability to finance and capitalize their businesses.
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In November 2016, Broadridge acquired M&O Systems, Inc. (“M&O”). M&O is a provider of SaaS-based compensation management and related solutions for broker-dealers and registered investment advisors.
B. Consolidation and Basis of Presentation
. The Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America (“U.S.”). These financial statements present the condensed consolidated position of the Company and include the entities in which the Company directly or indirectly has a controlling financial interest as well as various entities in which the Company has investments recorded under either the cost or equity methods of accounting. Intercompany balances and transactions have been eliminated. Amounts presented may not sum due to rounding. The results of operations reported for interim periods are not necessarily indicative of the results of operations for the entire year or any subsequent interim period. These Condensed Consolidated Financial Statements should be read in conjunction with the Company’s Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the fiscal year ended
June 30, 2016
(the “
2016
Annual Report”) filed on August 9, 2016 with the Securities and Exchange Commission (the “SEC”). These Condensed Consolidated Financial Statements include all normal and recurring adjustments necessary for a fair presentation in accordance with GAAP of the Company’s financial position at
December 31, 2016
and
June 30, 2016
, the results of its operations for the
three and six
months ended
December 31, 2016
and
2015
, and its cash flows for the six months ended December 31, 2016 and
2015
.
Effective in the first quarter of fiscal year 2017, the Company revised the presentation in the Condensed Consolidated Statements of Earnings to separately present Interest expense, net. Previously, Interest expense, net, was reported as part of Non-operating expenses, net, and was not separately presented in the Condensed Consolidated Statements of Earnings. All prior period information has been conformed to the current period presentation. See Note 4, “Interest Expense, Net,” for details of the Company’s Interest expense, net, and Note 5, “Other Non-Operating Expenses, Net,” for details of the Company’s Other non-operating expenses, net.
Effective in the first quarter of fiscal year 2017, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs” (“ASU No. 2015-03”), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The Company has applied this guidance on a retrospective basis and accordingly, the Condensed Consolidated Balance Sheets as of
June 30, 2016
has been updated to reflect this new classification, which resulted in a decrease in Other non-current assets of
$7.1 million
, a decrease in Long-term debt, excluding current portion of
$7.0 million
and a decrease of
$0.1 million
in Current portion of long-term debt at
June 30, 2016
.
C. Use of Estimates
. The preparation of these financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes thereto. These estimates are based on management’s best knowledge of current events, historical experience, actions that the Company may undertake in the future and on various other assumptions and judgment that are believed to be reasonable under the circumstances. Accordingly, actual results could differ from those estimates.
D. Cash and Cash Equivalents
. Investment securities with an original maturity of
90 days
or less are considered cash equivalents. The fair value of the Company’s Cash and cash equivalents approximates carrying value due to their short term nature.
E. Financial Instruments
. Substantially all of the financial instruments of the Company other than Long-term debt are carried at fair values, or at carrying amounts that approximate fair values because of the short maturity of the instruments. The carrying value of the Company’s long-term fixed-rate senior notes represents the face value of the long-term fixed-rate senior notes net of the unamortized discount and net of the associated unamortized debt issuance cost. The fair value of the Company’s long-term fixed-rate senior notes is based on quoted market prices. Refer to Note 10, “Borrowings,” for a further discussion of the Company’s long-term fixed-rate senior notes.
F. Subsequent Events
. In preparing the accompanying Condensed Consolidated Financial Statements, the Company has reviewed events that have occurred after
December 31, 2016
, through the date of issuance of the Condensed Consolidated Financial Statements. Refer to Note 16, “Subsequent Event” for a description of the Company’s subsequent event.
NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS
In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Accounting for Goodwill Impairment” (ASU No. 2017-04). ASU No. 2017-04 removes Step 2 of the current goodwill impairment test, which currently requires a hypothetical purchase price allocation if the fair value of a reporting unit were to be less than its book value, for purposes of determining the amount of goodwill impaired. Under ASU No. 2017-04, the Company would now recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds the fair value of the reporting unit; however, the loss recognized would not exceed the total amount of goodwill allocated to that reporting unit. ASU No. 2017-04 will be effective for the Company beginning in the first quarter of fiscal 2021, to be applied on a prospective basis. The pending adoption of this guidance is not expected to have a material impact on the Company’s Condensed Consolidated Financial Statements.
In January 2017, the FASB issued ASU No. 2017-01, “Clarifying the Definition of a Business” (ASU No. 2017-01). ASU No. 2017-01 narrows the definition of a business, in part by concluding that an integrated set of assets and activities (referred to as a “set”) is not a business when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets. ASU No. 2017-01 is effective for the Company beginning in the first quarter of fiscal year 2019, to be applied on a prospective basis. The pending adoption of this guidance is not expected to have a material impact on the Company’s Condensed Consolidated Financial Statements.
In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting” (“ASU No. 2016-09”). ASU No. 2016-09 identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including presenting the excess tax benefit or deficit from the exercise or vesting of share-based payments in the income statement, a revision to the criteria for classifying an award as equity or liability, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. In addition, ASU No. 2016-09 eliminates the excess tax benefit from the assumed proceeds calculation under the treasury stock method for purposes of calculating diluted shares. ASU No. 2016-09 is effective for the Company beginning in the first quarter of fiscal year 2018, with early adoption permitted. Certain provisions of ASU No. 2016-09 are required to be adopted prospectively, most notably the requirement to recognize the excess tax benefit or deficit in the income statement, while other provisions of ASU No. 2016-09 require modified retrospective application or in some cases full retrospective application. The most significant impact of the pending adoption of this guidance on the Company’s Condensed Consolidated Financial Statements, specifically the Company’s Condensed Consolidated Statements of Earnings, will largely be dependent upon the intrinsic value of the Company’s share-based compensation awards at the time of exercise or vesting and may result in more variability in the Company’s effective tax rates and Net earnings, and may also impact the dilution of common stock equivalents. During the three and six months ended December 31, 2016 and 2015, the Company recorded
$1.1 million
and
$4.1 million
, respectively, and
$22.0 million
and
$5.5 million
, respectively, to consolidated equity as excess tax benefits from share-based compensation awards. In addition, upon adoption of ASU 2016-09, the Company will classify the excess tax benefit or deficit as an operating activity in the Condensed Consolidated Statements of Cash Flows rather than as a financing activity.
In February 2016, the FASB issued ASU No. 2016-02, “Leases” (“ASU No. 2016-02”). Under ASU No. 2016-02, all lease arrangements, with certain limited exceptions, exceeding a twelve month term must now be recognized as assets and liabilities on the balance sheet of the lessee by recording a right-of-use asset and corresponding lease obligation generally equal to the present value of the future lease payments over the lease term. Further, the income statement will reflect lease expense for leases classified as operating and amortization/interest expense for leases classified as financing, determined using classification criteria substantially similar to the current lease guidance for distinguishing between an operating and capital lease. ASU No. 2016-02 also contains certain additional qualitative and quantitative disclosures to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing
activities, including significant judgments and changes in judgments. ASU No. 2016-02 is effective for the Company in the first quarter of fiscal year 2020 and will be adopted on a modified retrospective basis, which will require adjustment to all comparative periods presented in the consolidated financial statements. The Company is currently evaluating the impact of the pending adoption of ASU No. 2016-02 on the Company’s Condensed Consolidated Financial Statements.
In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU No. 2016-01”), which provides guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities. ASU No. 2016-01 is effective for the Company beginning in the first quarter of fiscal year 2019. The pending adoption of this guidance is not expected to have a material impact on the Company’s Condensed Consolidated Financial Statements.
In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes” (“ASU No.
2015-17”). The amendments in ASU No. 2015-17 require entities that present a classified balance sheet to classify all deferred tax liabilities and assets as a noncurrent amount. The amendments in ASU No. 2015-17 are effective for the Company in the first quarter of fiscal year 2018, applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The pending adoption of this guidance is not expected to have a material impact on the Company’s Condensed Consolidated Financial Statements.
In April 2015, the FASB issued ASU No. 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement” (“ASU No. 2015-05”). ASU No. 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU No. 2015-05 does not change the accounting for a customer’s accounting for service contracts. Following adoption of ASU No. 2015-05, all software licenses within its scope are accounted for consistent with other licenses of intangible assets. The Company adopted No. 2015-05 effective in the first quarter of fiscal year 2017 prospectively to all arrangements entered into or materially modified after the effective date. The adoption of this guidance did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU No. 2014-9”), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU No. 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU No. 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers - Deferral of the Effective Date,” which defers the effective date of ASU No. 2014-09 by one year, with an option that would permit companies to adopt the standard as early as the original effective date. As a result, ASU No. 2014-09 will be effective for the Company as of the first quarter of fiscal year 2019 using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU No. 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU No. 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU No. 2014-09.
In March 2016, the FASB issued ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” (“ASU No. 2016-08”), which provides clarifying implementation guidance to the principal versus agent provisions of ASU No. 2014-09.
In April 2016, the FASB issued ASU No. 2016-10 “Identifying Performance Obligations and Licensing” (“ASU No. 2016-10”), which provides clarifying implementation guidance for applying ASU No. 2014-09 with respect to identifying performance obligations and the accounting for licensing arrangements.
In May 2016, the FASB issued ASU No. 2016-12 “Narrow-Scope Improvements and Practical Expedients” (“ASU No. 2016-12”), which provides certain clarifying guidance for ASU No. 2014-09 relative to treatment of sales taxes, noncash consideration, collectibility and certain aspects of transitional guidance.
In December 2016, the FASB issued ASU No. 2016-20 “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers”, which provides certain technical corrections for ASU No. 2014-09 including the
impairment testing of capitalized contract costs, disclosure of remaining performance obligations, and certain other matters.
Each of ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-12 and ASU No. 2016-20 have the same effective date as ASU No. 2014-09. The Company has not yet elected a transition method. While the Company is still in process of evaluating the full impact of the pending adoption of ASU No. 2014-09 and related amendments on its Condensed Consolidated Financial Statements and related disclosures, including assessing the need for system or process changes or enhancements, to date the Company has identified certain expected impacts of the new standard on its Condensed Consolidated Financial Statements. Specifically, the Company expects to capitalize certain sales commissions as well as capitalize certain additional costs that are part of setting up or converting a client’s systems to function with the Company’s technology, both of which are currently expensed. Additionally, expected changes to the timing of revenue recognition include deferral of revenue from certain transaction processing platform enhancements as well as acceleration of revenue from certain multi-year software license arrangements that are currently recognized over the term of the software subscription.
NOTE 3. EARNINGS PER SHARE
Basic earnings per share (“EPS”) is calculated by dividing the Company’s Net earnings by the basic Weighted-average shares outstanding for the periods presented. The Company calculates diluted EPS using the treasury stock method, which reflects the potential dilution that could occur if outstanding stock options at the presented date are exercised and restricted stock unit awards have vested.
The computation of diluted EPS excluded options of less than
0.1 million
to purchase Broadridge common stock for the three months ended
December 31, 2016
, and options of less than
0.1 million
options to purchase Broadridge common stock for the six months ended
December 31, 2016
, as the effect of their inclusion would have been anti-dilutive.
The computation of diluted EPS did not include
0.1 million
options to purchase Broadridge common stock for the three months ended
December 31, 2015
, and
0.5 million
options to purchase Broadridge common stock for the six months ended
December 31, 2015
, as the effect of their inclusion would have been anti-dilutive.
The following table sets forth the denominators of the basic and diluted EPS computations (in millions):
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Three Months Ended
December 31,
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Six Months Ended
December 31,
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2016
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2015
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2016
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|
2015
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Weighted-average shares outstanding:
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Basic
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118.7
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|
118.5
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118.6
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118.4
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Common stock equivalents
|
2.8
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3.5
|
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3.0
|
|
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3.5
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Diluted
|
121.5
|
|
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122.0
|
|
|
121.5
|
|
|
121.9
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NOTE 4. INTEREST EXPENSE, NET
Interest expense, net consisted of the following:
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Three Months Ended
December 31,
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Six Months Ended
December 31,
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2016
|
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2015
|
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2016
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2015
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(in millions)
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Interest expense on borrowings
|
$
|
11.0
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|
$
|
7.0
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$
|
21.7
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$
|
13.7
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Interest income
|
(0.3
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)
|
|
(0.5
|
)
|
|
(0.7
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)
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(1.0
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)
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Interest expense, net
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$
|
10.6
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$
|
6.4
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$
|
21.0
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$
|
12.7
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NOTE
5.
OTHER NON-OPERATING EXPENSES, NET
Other non-operating expenses, net consisted of the following:
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Three Months Ended
December 31,
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Six Months Ended
December 31,
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2016
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2015
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2016
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2015
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(in millions)
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Losses from equity method investments
|
$
|
1.9
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$
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2.1
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$
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3.8
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$
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3.7
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Foreign currency transaction (gain) loss
|
0.6
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|
0.3
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2.9
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(0.1
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)
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Other non-operating expenses, net
|
$
|
2.5
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|
|
$
|
2.4
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|
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$
|
6.7
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$
|
3.6
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NOTE 6. ACQUISITIONS
BUSINESS COMBINATIONS
Assets acquired and liabilities assumed in business combinations are recorded on the Company’s Condensed 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 Condensed 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.
During the first quarter of fiscal year
2017
, the Company acquired
one
business in the Investor Communication Solutions segment:
NACC
In July 2016, the Company acquired the assets of NACC, a leading provider of customer communication services including print and digital communication solutions, content management, postal optimization, and fulfillment. This acquisition will expand the Company’s existing customer communications business.
The aggregate purchase price was
$410.0 million
in cash, or
$406.2 million
net of cash acquired and other closing adjustments. Net tangible assets acquired in the transaction were
$61.7 million
. This acquisition resulted in
$140.4 million
of Goodwill, which is primarily tax deductible. Intangible assets acquired, which totaled
$204.1 million
, consist primarily of customer relationships and software technology. The results of NACC’s operations were included in the Company’s Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q from the date of acquisition. As of
December 31, 2016
, the NACC purchase price allocation has not yet been finalized, primarily the fair values and the useful lives of the acquired intangible assets.
The following summarizes the preliminary allocation of purchase price for the NACC acquisition (in millions):
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NACC
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Accounts receivable, net
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$
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89.2
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Other current assets
|
19.5
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Property, plant and equipment
|
45.1
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Intangible assets
|
204.1
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Goodwill
|
140.4
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Other non-current assets
|
1.6
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Accounts payable
|
(14.4
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)
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Accrued expenses and other current liabilities
|
(59.1
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)
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Deferred taxes
|
(19.2
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)
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Deferred revenue
|
(1.1
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)
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Consideration paid, net of cash acquired
|
$
|
406.2
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Unaudited Pro Forma Financial Information
The unaudited pro forma condensed consolidated results of operations in the table below are provided for illustrative purposes only and summarize the combined results of operations of Broadridge and NACC. For purposes of this pro forma presentation, the acquisition of NACC is assumed to have occurred on July 1, 2015.
The pro forma financial information for all periods presented also includes the estimated business combination accounting effects resulting from this acquisition, notably amortization expense from the acquired intangible assets (of which the purchase accounting allocation has not yet been finalized), interest expense from a recent bond offering, the proceeds of which were used to fund the acquisition, and certain integration related expenses.
This unaudited pro forma financial information should not be relied upon as being indicative of the historical results that would have been obtained if the acquisition had actually occurred on July 1, 2015, nor of the results of operations that may be obtained in the future.
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Three Months Ended December 31, 2016
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Six Months Ended December 31, 2016
|
|
2016
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2015
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2016
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2015
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(in millions, except per share data)
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Revenues
|
$
|
892.6
|
|
|
$
|
925.8
|
|
|
$
|
1,787.9
|
|
|
$
|
1,800.6
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Net earnings
|
$
|
33.6
|
|
|
$
|
40.2
|
|
|
$
|
66.1
|
|
|
$
|
76.9
|
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Basic earnings per share
|
$
|
0.28
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|
$
|
0.34
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|
|
$
|
0.56
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|
|
$
|
0.65
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Diluted earnings per share
|
$
|
0.28
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$
|
0.33
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$
|
0.54
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$
|
0.63
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During the second quarter of fiscal year
2017
, the Company acquired
one
business in the Global Technology and Operations segment:
M&O
In November 2016, the Company’s Global Technology and Operations segment acquired M&O. M&O is a provider of SaaS-based compensation management and related solutions for broker-dealers and registered investment advisors. The aggregate purchase price was
$24.8 million
in cash, consisting of
$22.3 million
of cash payments as well as a
$2.5 million
note payable to the sellers that will be settled in the future. Net tangible liabilities assumed in the transaction were
$3.3 million
. This acquisition resulted in
$17.0 million
of Goodwill. Intangible assets acquired, which totaled
$11.2 million
, consist primarily of customer relationships and acquired software technology, which are being amortized over a
seven
-year life and
six
-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, which is still subject to a working capital adjustment.
ASSET ACQUISITIONS
Purchase of Intellectual Property
In September 2016, the Company’s Investor Communication Solutions segment acquired intellectual property assets from Inveshare and concurrently entered into a development agreement with an affiliate of Inveshare to use these assets to develop blockchain technology applications for Broadridge’s proxy business. The purchase price was
$95.0 million
, which consisted of a
$90.0 million
cash payment upon closing of the acquisition and a
$5.0 million
obligation payable which the Company expects to pay by September 2017, plus an additional deferred payment of
$40.0 million
to an affiliate of Inveshare upon delivery of the new blockchain technology applications, which the Company expects to pay by September 2018.
NOTE 7. FAIR VALUE OF FINANCIAL INSTRUMENTS
Accounting guidance on fair value measurements for certain financial assets and liabilities requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
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Level 1
|
Quoted market prices in active markets for identical assets and liabilities.
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Level 2
|
Observable market-based inputs other than quoted prices in active markets for identical assets and liabilities.
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Level 3
|
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
|
In valuing assets and liabilities, the Company is required to maximize the use of quoted market prices and minimize the use of unobservable inputs. The Company calculates the fair value of its Level 1 and Level 2 instruments based on the exchange traded price of similar or identical instruments where available or based on other observable instruments. These calculations take into consideration the credit risk of both the Company and its counterparties. The Company has not changed its valuation techniques in measuring the fair value of any financial assets and liabilities during the period.
The Company holds available-for-sale securities issued by a non-public entity for which the lowest level of significant inputs is unobservable. On a recurring basis, the Company uses pricing models and similar techniques for which the determination of fair value requires significant judgment by management. Accordingly, the Company classifies the available-for-sale securities as Level 3 in the table below.
The fair value of the contingent consideration obligations are based on a probability weighted approach derived from the estimates of earn-out criteria and the probability assessment with respect to the likelihood of achieving those criteria. The measurement is based on significant inputs that are not observable in the market, therefore, the Company classifies this liability as Level 3 in the table below.
The following tables set forth the Company’s financial assets and liabilities at
December 31, 2016
and
June 30, 2016
, respectively, that are measured at fair value on a recurring basis during the period, segregated by level within the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(in millions)
|
Assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
Money market funds (1)
|
$
|
89.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
89.2
|
|
Other current assets:
|
|
|
|
|
|
|
|
Available-for-sale securities
|
0.1
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
Other non-current assets:
|
|
|
|
|
|
|
|
Available-for-sale securities
|
44.5
|
|
|
—
|
|
|
1.1
|
|
|
45.6
|
|
Total assets as of December 31, 2016
|
$
|
133.8
|
|
|
$
|
—
|
|
|
$
|
1.1
|
|
|
$
|
134.9
|
|
Liabilities
|
|
|
|
|
|
|
|
Contingent consideration obligations:
|
—
|
|
|
—
|
|
|
5.9
|
|
|
5.9
|
|
Total liabilities as of December 31, 2016
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5.9
|
|
|
$
|
5.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(in millions)
|
Assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
Money market funds (1)
|
$
|
121.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
121.0
|
|
Other current assets:
|
|
|
|
|
|
|
|
Available-for-sale securities
|
0.1
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
Other non-current assets:
|
|
|
|
|
|
|
|
Available-for-sale securities
|
34.4
|
|
|
—
|
|
|
1.1
|
|
|
35.5
|
|
Total assets as of June 30, 2016
|
$
|
155.5
|
|
|
$
|
—
|
|
|
$
|
1.1
|
|
|
$
|
156.6
|
|
Liabilities
|
|
|
|
|
|
|
|
Contingent consideration obligations:
|
—
|
|
|
—
|
|
|
5.5
|
|
|
5.5
|
|
Total liabilities as of June 30, 2016
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5.5
|
|
|
$
|
5.5
|
|
_____________
|
|
(1)
|
Money market funds include money market deposit account balances of
$41.4 million
and
$91.0 million
as of
December 31, 2016
and
June 30, 2016
, respectively.
|
The following table sets forth an analysis of changes during the
six
months ended
December 31, 2016
and
2015
, in Level 3 financial assets of the Company:
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
December 31,
2015
|
|
(in millions)
|
Beginning balance
|
$
|
1.1
|
|
|
$
|
1.1
|
|
Net realized/unrealized gains (losses)
|
—
|
|
|
—
|
|
Purchases
|
—
|
|
|
—
|
|
Transfers in (out) of Level 3
|
—
|
|
|
—
|
|
Ending balance
|
$
|
1.1
|
|
|
$
|
1.1
|
|
The Company did not incur any Level 3 fair value asset impairments during the
six
months ended
December 31, 2016
and
2015
.
The following table sets forth an analysis of changes during the
six
months ended
December 31, 2016
and
2015
, in Level 3 financial liabilities of the Company:
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
December 31,
2015
|
|
(in millions)
|
Beginning balance
|
$
|
5.5
|
|
|
$
|
15.7
|
|
Additional contingent consideration incurred
|
—
|
|
|
0.7
|
|
Increase (decrease) in contingent consideration liability
|
0.3
|
|
|
(1.0
|
)
|
Payments
|
—
|
|
|
(1.0
|
)
|
Ending balance
|
$
|
5.9
|
|
|
$
|
14.4
|
|
Changes in economic conditions or model based valuation techniques may require the transfer of financial instruments between levels. The Company’s policy is to record transfers between levels if any, as of the beginning of the fiscal year.
NOTE 8. OTHER NON-CURRENT ASSETS
Other non-current assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
June 30,
2016
|
|
(in millions)
|
Deferred client conversion and start-up costs
|
$
|
148.5
|
|
|
$
|
139.4
|
|
Deferred data center costs
|
41.9
|
|
|
43.1
|
|
Long-term investments
|
56.7
|
|
|
48.5
|
|
Long-term broker fees
|
28.0
|
|
|
12.4
|
|
Other (a)
|
21.8
|
|
|
18.4
|
|
Total
|
$
|
296.8
|
|
|
$
|
261.8
|
|
(a) On July 1, 2016, the Company adopted ASU 2015-03 on a retrospective basis and accordingly, the Condensed Consolidated Balance Sheets as of
June 30, 2016
has been updated to reflect this new classification, which resulted in a decrease in Other non-current assets of
$7.1 million
, a decrease in Long-term debt, excluding current portion of
$7.0 million
and a decrease of
$0.1 million
in Current portion of long-term debt at
June 30, 2016
.
NOTE 9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
June 30,
2016
|
|
(in millions)
|
Employee compensation and benefits
|
$
|
142.6
|
|
|
$
|
181.2
|
|
Accrued broker fees
|
31.4
|
|
|
65.4
|
|
Accrued taxes
|
16.9
|
|
|
49.9
|
|
Accrued dividend payable
|
39.0
|
|
|
34.9
|
|
Customer deposits
|
37.1
|
|
|
—
|
|
Other
|
27.2
|
|
|
20.7
|
|
Total
|
$
|
294.2
|
|
|
$
|
352.2
|
|
NOTE 10. BORROWINGS
Outstanding borrowings and available capacity under the Company’s borrowing arrangements were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration
Date
|
|
Par value at December 31, 2016
|
|
Carrying value at December 31, 2016
|
|
Carrying value at June 30, 2016 (a)
|
|
Unused
Available
Capacity
|
|
Fair Value at December 31, 2016
|
|
|
|
|
|
(in millions)
|
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007 Senior Notes
|
June 2017
|
|
$
|
125.0
|
|
|
$
|
124.9
|
|
|
$
|
124.8
|
|
|
$
|
—
|
|
|
$
|
126.9
|
|
|
|
|
$
|
125.0
|
|
|
$
|
124.9
|
|
|
$
|
124.8
|
|
|
$
|
—
|
|
|
$
|
126.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, excluding current portion
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2015 Revolving Credit Facility
|
August 2019
|
|
$
|
—
|
|
|
$
|
190.0
|
|
|
$
|
—
|
|
|
$
|
560.0
|
|
|
$
|
190.0
|
|
Fiscal 2014 Senior Notes
|
September 2020
|
|
400.0
|
|
|
397.4
|
|
|
397.2
|
|
|
—
|
|
|
417.5
|
|
Fiscal 2016 Senior Notes
|
June 2026
|
|
500.0
|
|
|
493.7
|
|
|
493.5
|
|
|
—
|
|
|
481.8
|
|
|
|
|
$
|
900.0
|
|
|
$
|
1,081.1
|
|
|
$
|
890.7
|
|
|
$
|
560.0
|
|
|
$
|
1,089.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
$
|
1,025.0
|
|
|
$
|
1,206.0
|
|
|
$
|
1,015.5
|
|
|
$
|
560.0
|
|
|
$
|
1,216.2
|
|
(a) On July 1, 2016, the Company has adopted ASU 2015-03 on a retrospective basis and accordingly, the Condensed Consolidated Balance Sheets as of
June 30, 2016
has been updated to reflect this new classification, which resulted in a decrease in Other non-current assets of
$7.1 million
, a decrease in Long-term debt, excluding current portion of
$7.0 million
and a decrease of
$0.1 million
in Current portion of long-term debt at
June 30, 2016
.
Fiscal 2015 Revolving Credit Facility:
On August 14, 2014, the Company entered into an amended and restated
$750.0 million
five
-year revolving credit facility (the “Fiscal 2015 Revolving Credit Facility”), which replaced the
$500.0 million
five
-year revolving credit facility entered into in September 2011 (the “Fiscal 2012 Revolving Credit Facility”). The Fiscal 2015 Revolving Credit Facility is comprised of a
$670.0 million
U.S. dollar tranche and an
$80.0 million
multicurrency tranche. At
December 31, 2016
, the Company had $
190.0 million
in outstanding borrowings and had unused available capacity of $
560.0 million
under the Fiscal 2015 Revolving Credit Facility. The weighted-average interest rate on the Fiscal 2015 Revolving Credit Facility was
1.52%
and
1.51%
for the three and six months ended
December 31, 2016
, respectively, and
1.19%
and
1.18%
for the three and six months ended December 31, 2015, respectively. The fair value of the variable-rate Fiscal 2015 Revolving Credit Facility borrowings at
December 31, 2016
approximates carrying value.
Borrowings under the Fiscal 2015 Revolving Credit Facility can be made in tranches up to
360
days and bear interest at LIBOR plus
100
basis points. In addition, the Fiscal 2015 Revolving Credit Facility has an annual facility fee equal to
12.5
basis points on the entire facility, which totaled
$0.2 million
and
$0.5 million
for the
three and six
months ended
December 31, 2016
and 2015, respectively. The Company incurred
$1.9 million
in debt issuance costs to establish the Fiscal 2015 Revolving Credit Facility. As of
December 31, 2016
,
$1.3 million
of debt issuance costs remain to be amortized (including
$0.3 million
of issuance costs from the Fiscal 2012 Revolving Credit Facility). Such costs are capitalized in Other non-current assets in the Condensed Consolidated Balance Sheets and are being amortized to Non-operating expenses, net on a straight-line basis, which approximates the effective interest method, over the term of this facility.
The Company may voluntarily prepay, in whole or in part and without premium or penalty, borrowings under the Fiscal 2015 Revolving Credit Facility at any time. The Fiscal 2015 Revolving Credit Facility is subject to covenants, including financial covenants consisting of a leverage ratio and an interest coverage ratio. At
December 31, 2016
, the Company is in compliance with the financial covenants of the Fiscal 2015 Revolving Credit Facility.
Fiscal 2007 Senior Notes
: In May 2007, the Company completed an offering of
$250.0 million
in aggregate principal amount of senior notes (the “Fiscal 2007 Senior Notes”). The Fiscal 2007 Senior Notes will mature on
June 1, 2017
and bear interest at a rate of
6.125%
per annum. Interest on the Fiscal 2007 Senior Notes is payable semi-annually in arrears on June 1st and December 1st each year. The Fiscal 2007 Senior Notes were issued at a price of
99.1%
(effective yield to maturity of
6.251%
). The indenture governing the Fiscal 2007 Senior Notes contains certain covenants including covenants restricting the Company’s ability to create or incur liens securing indebtedness for borrowed money and to enter into certain sale-leaseback transactions. At
December 31, 2016
, the Company is in compliance with the covenants of the indenture governing the Fiscal
2007 Senior Notes. The indenture also contains covenants regarding the purchase of the Fiscal 2007 Senior Notes upon a change of control triggering event. The Company may redeem the Fiscal 2007 Senior Notes in whole or in part at any time before their maturity. The Company incurred
$1.9 million
in debt issuance costs to establish the Fiscal 2007 Senior Notes. These costs have been capitalized and are being amortized to interest expenses, net on a straight-line basis, over the
ten
-year term. As of
December 31, 2016
and
June 30, 2016
, less than
$0.1 million
and
$0.1 million
, respectively, of debt issuance costs remain to be amortized and have been presented as a direct deduction from the carrying value of the Fiscal 2007 Senior Notes. During the fiscal year ended June 30, 2009, the Company purchased
$125.0 million
principal amount of the Fiscal 2007 Senior Notes (including
$1.0 million
unamortized bond discount) pursuant to a cash tender offer for such notes. The fair value of the fixed-rate Fiscal 2007 Senior Notes at
December 31, 2016
and
June 30, 2016
was
$126.9 million
and
$129.1 million
, respectively, based on quoted market prices and has been classified as a Level 1 financial liability (as defined in Note 7, “Fair Value of Financial Instruments”).
Fiscal 2014 Senior Notes
: In August 2013, the Company completed an offering of
$400.0 million
in aggregate principal amount of senior notes (the “Fiscal 2014 Senior Notes”). The Fiscal 2014 Senior Notes will mature on
September 1, 2020
and bear interest at a rate of
3.95%
per annum.
Interest on the Fiscal 2014 Senior Notes is payable semi-annually in arrears on March 1st and September 1st each year.
The Fiscal 2014 Senior Notes were issued at a price of
99.871%
(effective yield to maturity of
3.971%
). The indenture governing the Fiscal 2014 Senior Notes contains certain covenants including covenants restricting the Company’s ability to create or incur liens securing indebtedness for borrowed money and to enter into certain sale-leaseback transactions. At
December 31, 2016
, the Company is in compliance with the covenants of the indenture governing the Fiscal 2014 Senior Notes. The indenture also contains covenants regarding the purchase of the Fiscal 2014 Senior Notes upon a change of control triggering event. The Company may redeem the Fiscal 2014 Senior Notes in whole or in part at any time before their maturity. The Company incurred
$4.3 million
in debt issuance costs to establish the Fiscal 2014 Senior Notes. These costs have been capitalized and are being amortized to interest expenses, net on a straight-line basis, over the
seven
-year term. As of
December 31, 2016
and
June 30, 2016
,
$2.2 million
and
$2.5 million
, respectively, of debt issuance costs remain to be amortized and have been presented as a direct deduction from the carrying value of the Fiscal 2014 Senior Notes. The fair value of the fixed-rate Fiscal 2014 Senior Notes at
December 31, 2016
and
June 30, 2016
was
$417.5 million
and
$427.6 million
, respectively, based on quoted market prices and has been classified as a Level 1 financial liability (as defined in Note 7, “Fair Value of Financial Instruments”).
Fiscal 2016 Senior Notes:
In June 2016, the Company completed an offering of
$500.0 million
in aggregate principal amount of senior notes (the “Fiscal 2016 Senior Notes”). The Fiscal 2016 Senior Notes will mature on June 27, 2026 and bear interest at a rate of
3.40%
per annum. Interest on the Fiscal 2016 Senior Notes is payable semi-annually in arrears on June 27 and December 27 of each year. The Fiscal 2016 Senior Notes were issued at a price of
99.589%
(effective yield to maturity of
3.449%
). The indenture governing the Fiscal 2016 Senior Notes contains certain covenants including covenants restricting the Company’s ability to create or incur liens securing indebtedness for borrowed money, to enter into certain sale-leaseback transactions, and to engage in mergers or consolidations and transfer or lease all or substantially all of our assets. At
December 31, 2016
, the Company is in compliance with the covenants of the indenture governing the Fiscal 2016 Senior Notes. The indenture also contains covenants regarding the purchase of the Fiscal 2016 Senior Notes upon a change of control triggering event. The Company may redeem the Fiscal 2016 Senior Notes in whole or in part at any time before their maturity. The Company incurred
$4.5 million
in debt issuance costs to establish the Fiscal 2016 Senior Notes. These costs have been capitalized and are being amortized to interest expenses, net on a straight-line basis, which approximates the effective interest method, over the
ten
-year term. As of
December 31, 2016
and
June 30, 2016
,
$4.2 million
and
$4.5 million
, respectively, of debt issuance costs remain to be amortized and have been presented as a direct deduction from the carrying value of the Fiscal 2016 Senior Notes.
The fair value of the fixed-rate Fiscal 2016 Senior Notes at
December 31, 2016
and
June 30, 2016
was
$481.8 million
and
$507.9 million
, respectively, based on quoted market prices and has been classified as a Level 1 financial liability (as defined in Note 7, “Fair Value of Financial Instruments”).
The Fiscal 2015 Revolving Credit Facility, Fiscal 2007 Senior Notes, Fiscal 2014 Senior Notes, and Fiscal 2016 Senior Notes are senior unsecured obligations of the Company and are ranked equally in right of payment.
In addition, certain of the Company’s subsidiaries established unsecured, uncommitted lines of credit with banks. As of
December 31, 2016
and
June 30, 2016
, there were
no
outstanding borrowings under these lines of credit.
NOTE 11. STOCK-BASED COMPENSATION
The activity related to the Company’s incentive equity awards for the three months ended
December 31, 2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
Time-based
Restricted Stock Units
|
|
Performance-based
Restricted Stock Units
|
|
Number of
Options
|
|
Weighted-
Average
Exercise
Price
|
|
Number
of Shares
|
|
Weighted-
Average
Grant
Date Fair
Value
|
|
Number
of Shares
|
|
Weighted-
Average
Grant
Date Fair
Value
|
Balances at October 1, 2016
|
5,634,253
|
|
|
$
|
34.82
|
|
|
1,205,927
|
|
|
$
|
44.62
|
|
|
458,819
|
|
|
$
|
47.44
|
|
Granted
|
40,048
|
|
|
64.89
|
|
|
469,895
|
|
|
64.15
|
|
|
150,687
|
|
|
64.58
|
|
Exercise of stock options (a)
|
(74,058
|
)
|
|
20.65
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Vesting of restricted stock units
|
—
|
|
|
—
|
|
|
(2,460
|
)
|
|
55.17
|
|
|
—
|
|
|
—
|
|
Expired/forfeited
|
—
|
|
|
—
|
|
|
(17,135
|
)
|
|
56.77
|
|
|
(4,804
|
)
|
|
65.94
|
|
Balances at December 31, 2016 (b), (c)
|
5,600,243
|
|
|
$
|
35.22
|
|
|
1,656,227
|
|
|
$
|
50.02
|
|
|
604,702
|
|
|
$
|
51.56
|
|
____________
|
|
(a)
|
Stock options exercised during the period of October 1, 2016 through
December 31, 2016
had an aggregate intrinsic value of
$3.3 million
.
|
|
|
(b)
|
As of
December 31, 2016
, the Company’s outstanding vested and currently exercisable stock options using the
December 31, 2016
closing stock price of
$66.30
(approximately
2.9 million
shares) had an aggregate intrinsic value of
$108.5 million
with a weighted-average exercise price of
$28.41
and a weighted-average remaining contractual life of
5.2
years. The total of all stock options outstanding as of
December 31, 2016
have a weighted-average remaining contractual life of
6.4
years.
|
|
|
(c)
|
As of
December 31, 2016
, time-based restricted stock units and performance-based restricted stock units expected to vest using the
December 31, 2016
closing stock price of
$66.30
(approximately
1.6 million
and
0.6 million
shares, respectively) had an aggregate intrinsic value of
$104.1 million
and
$37.8 million
, respectively.
|
The activity related to the Company’s incentive equity awards for the
six months ended December 31, 2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
Time-based
Restricted Stock Units
|
|
Performance-based
Restricted Stock Units
|
|
Number of
Options
|
|
Weighted-
Average
Exercise
Price
|
|
Number
of Shares
|
|
Weighted-
Average
Grant
Date Fair
Value
|
|
Number
of Shares
|
|
Weighted-
Average
Grant
Date Fair
Value
|
Balances at July 1, 2016
|
7,059,067
|
|
|
$
|
32.57
|
|
|
1,202,896
|
|
|
$
|
44.34
|
|
|
468,516
|
|
|
$
|
47.15
|
|
Granted
|
40,048
|
|
|
64.89
|
|
|
485,790
|
|
|
64.23
|
|
|
163,026
|
|
|
63.74
|
|
Exercise of stock options (a)
|
(1,458,633
|
)
|
|
23.11
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Vesting of restricted stock units
|
—
|
|
|
—
|
|
|
(2,460
|
)
|
|
55.17
|
|
|
—
|
|
|
—
|
|
Expired/forfeited
|
(40,239
|
)
|
|
38.97
|
|
|
(29,999
|
)
|
|
51.72
|
|
|
(26,840
|
)
|
|
48.54
|
|
Balances at December 31, 2016
|
5,600,243
|
|
|
$
|
35.22
|
|
|
1,656,227
|
|
|
$
|
50.02
|
|
|
604,702
|
|
|
$
|
51.56
|
|
____________
|
|
(a)
|
Stock options exercised during the period of July 1, 2016 through
December 31, 2016
had an aggregate intrinsic value of
$66.2 million
.
|
The Company has stock-based compensation plans under which the Company annually grants stock option and restricted stock unit awards. Stock options are granted to employees at exercise prices equal to the fair market value of the Company’s common stock on the dates of grant, with the measurement of stock-based compensation expense recognized in Net earnings based on the fair value of the award on the date of grant. Stock-based compensation expense of
$14.0 million
and
$13.3 million
, as well as related tax benefits of
$4.9 million
and
$4.9 million
were recognized for the three months ended
December 31, 2016
and
2015
, respectively. Stock-based compensation expense of
$22.8 million
and
$22.2 million
, as well as related tax benefits of
$8.1 million
and
$8.3 million
were recognized for the six months ended
December 31, 2016
and
2015
, respectively.
As of
December 31, 2016
, the total remaining unrecognized compensation cost related to non-vested stock options and restricted stock unit awards amounted to
$8.3 million
and
$55.8 million
, respectively, which will be amortized over the weighted-average remaining requisite service periods of
2.2 years
and
1.8 years
, respectively.
For stock options issued, the fair value of each stock option was estimated on the date of grant using a binomial option pricing model. The binomial model considers a range of assumptions related to volatility, risk-free interest rate and employee exercise behavior. Expected volatilities utilized in the binomial model are based on a combination of implied market volatilities, historical volatility of the Company’s 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 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.
NOTE 12. INCOME TAXES
The provision for income taxes and effective tax rates for the
three and six
months ended
December 31, 2016
were
$15.6 million
and
34.1%
, and $
33.4 million
and
34.4%
, compared to
$21.1 million
and
34.4%
, and $
39.2 million
and
34.7%
for the
three and six
months ended
December 31, 2015
, respectively. The decrease in the effective tax rate for the
three and six
months ended
December 31, 2016
compared to the comparable prior year period is primarily attributable to an increase in the percentage of lower taxed foreign earnings as a percentage of total earnings.
NOTE 13. CONTRACTUAL COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET ARRANGEMENTS
Data Center Agreements
In March 2010, the Company and International Business Machines Corporation (“IBM”) entered into an Information Technology Services Agreement (the “IT Services Agreement”), under which IBM 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, open systems, network and data center operations, as well as providing disaster recovery services. The Company has the option of incorporating additional services into the agreement over time. The migration of data center processing to IBM was completed in August 2012. The IT Services Agreement would have expired on June 30, 2022. In March 2015, the Company signed a
two
-year extension to the IT Services Agreement which expires on
June 30, 2024
. The Company has the right to renew the term of the IT Services Agreement for up to
one
additional
12
-month term. Commitments remaining under this agreement at
December 31, 2016
are
$422.2 million
through fiscal year 2024, the final year of the contract.
In March 2014, the Company and IBM United Kingdom Limited (“IBM UK”) entered into an Information Technology Services Agreement (the “EU IT Services Agreement”), under which IBM UK provides data center services supporting the Company’s technology outsourcing services for certain clients in Europe and Asia. The EU IT Services Agreement expires in October 2023. The Company has the right to renew the initial term of the EU IT Services Agreement for up to
one
additional
12
-month term or
one
additional
24
-month term. Commitments remaining under this agreement at
December 31, 2016
are
$27.3 million
through fiscal year 2024, the final year of the contract.
Equity Method Investment
The Company contributed
$3.0
million to an equity method investment during the
six
months ended
December 31, 2016
, and has
no
remaining commitment to fund this investment at
December 31, 2016
.
Purchase of Intellectual Property
As discussed in Note 6, “Acquisitions,” the Company expects to pay
$40.0 million
to an affiliate of Inveshare by September 2018 upon delivery of certain new blockchain technology applications.
Other
In the normal course of business, the Company is subject to various claims and litigation. While the outcome of any claim or litigation is inherently unpredictable, the Company believes that the ultimate resolution of these matters will not, individually or in the aggregate, result in a material impact on its financial condition, results of operations or cash flows.
As of
December 31, 2016
, the Company had an outstanding letter of credit for
$1.6 million
. This letter of credit was issued in May 2007 to guarantee certain claim payments to a third-party insurance company in the event the Company does not pay its portion of the claims.
No
amounts were drawn on this letter of credit.
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 may use derivative financial instruments as risk management tools and not for trading purposes. The Company was not a party to any derivative financial instruments at
December 31, 2016
or at
June 30, 2016
.
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.
Our business process outsourcing and mutual fund processing services are performed by Broadridge Business Process Outsourcing, LLC (“BBPO”), a wholly-owned indirect subsidiary, which is a broker-dealer registered with the Securities and Exchange Commission and a member of the Financial Industry Regulatory Authority, Inc. (“FINRA”). Although BBPO’s FINRA membership agreement allows it to engage in clearing and the retailing of corporate securities in addition to mutual fund retailing on a wire order basis, BBPO does not clear customer transactions or carry customer accounts. As a registered broker-dealer and member of FINRA, BBPO is subject to the Uniform Net Capital Rule 15c3-1 of the Securities Exchange Act of 1934, as amended (“Rule 15c3-1”), which requires BBPO to maintain a minimum amount of net capital. At
December 31, 2016
, BBPO was in compliance with this capital requirement.
BBPO, as a “Managing Clearing Member” of the Options Clearing Corporation (the “OCC”), is also subject to OCC Rule 309(b) with respect to the business process outsourcing services that it provides to other OCC “Managed Clearing Member” broker-dealers. OCC Rule 309(b) requires that BBPO maintain a minimum amount of net capital. At
December 31, 2016
, BBPO was in compliance with this capital requirement.
In addition, Matrix Trust Company, a wholly-owned indirect subsidiary, is a Colorado State non-depository trust company and National Securities Clearing Corporation trust member, whose primary business is to provide cash agent, custodial and directed or non-discretionary trust services to institutional customers. As a result, Matrix Trust Company is subject to various regulatory capital requirements administered by the Colorado Division of Banking and other state regulators where it does business, as well as the National Securities Clearing Corporation. Specific capital requirements that involve quantitative measures of assets, liabilities, and certain off-balance sheet items, when applicable, must be met. At
December 31, 2016
, Matrix Trust Company was in compliance with its capital requirements.
NOTE 14. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS) BY COMPONENT
The following tables summarize the changes in the accumulated balances for each component of accumulated other comprehensive income/(loss) for the three and six months ended
December 31, 2016
, and
2015
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
|
|
Available-
for-Sale
Securities
|
|
Pension
and Post-
Retirement
Liabilities
|
|
Total
|
|
(in millions)
|
Balances at October 1, 2016
|
$
|
(43.2
|
)
|
|
$
|
1.7
|
|
|
$
|
(7.5
|
)
|
|
$
|
(48.9
|
)
|
Other comprehensive income/(loss) before reclassifications
|
(12.0
|
)
|
|
(0.2
|
)
|
|
—
|
|
|
(12.2
|
)
|
Amounts reclassified from accumulated other comprehensive income/(loss)
|
—
|
|
|
—
|
|
|
0.1
|
|
|
0.1
|
|
Balances at December 31, 2016
|
$
|
(55.1
|
)
|
|
$
|
1.5
|
|
|
$
|
(7.3
|
)
|
|
$
|
(60.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
|
|
Available-
for-Sale
Securities
|
|
Pension
and Post-
Retirement
Liabilities
|
|
Total
|
|
(in millions)
|
Balances at October 1, 2015
|
$
|
(28.0
|
)
|
|
$
|
1.4
|
|
|
$
|
(6.3
|
)
|
|
$
|
(32.9
|
)
|
Other comprehensive income/(loss) before reclassifications
|
(5.4
|
)
|
|
0.3
|
|
|
—
|
|
|
(5.1
|
)
|
Amounts reclassified from accumulated other comprehensive income/(loss)
|
—
|
|
|
—
|
|
|
0.1
|
|
|
0.1
|
|
Balances at December 31, 2015
|
$
|
(33.5
|
)
|
|
$
|
1.7
|
|
|
$
|
(6.2
|
)
|
|
$
|
(38.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
|
|
Available-
for-Sale
Securities
|
|
Pension
and Post-
Retirement
Liabilities
|
|
Total
|
|
(in millions)
|
Balances at July 1, 2016
|
$
|
(31.9
|
)
|
|
$
|
1.3
|
|
|
$
|
(7.6
|
)
|
|
$
|
(38.2
|
)
|
Other comprehensive income/(loss) before reclassifications
|
(23.2
|
)
|
|
0.2
|
|
|
—
|
|
|
(23.0
|
)
|
Amounts reclassified from accumulated other comprehensive income/(loss)
|
—
|
|
|
—
|
|
|
0.3
|
|
|
0.3
|
|
Balances at December 31, 2016
|
$
|
(55.1
|
)
|
|
$
|
1.5
|
|
|
$
|
(7.3
|
)
|
|
$
|
(60.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
|
|
Available-
for-Sale
Securities
|
|
Pension
and Post-
Retirement
Liabilities
|
|
Total
|
|
(in millions)
|
Balances at July 1, 2015
|
$
|
(16.6
|
)
|
|
$
|
2.0
|
|
|
$
|
(6.3
|
)
|
|
$
|
(20.9
|
)
|
Other comprehensive income/(loss) before reclassifications
|
(17.0
|
)
|
|
(0.3
|
)
|
|
—
|
|
|
(17.3
|
)
|
Amounts reclassified from accumulated other comprehensive income/(loss)
|
—
|
|
|
—
|
|
|
0.2
|
|
|
0.2
|
|
Balances at December 31, 2015
|
$
|
(33.5
|
)
|
|
$
|
1.7
|
|
|
$
|
(6.2
|
)
|
|
$
|
(38.0
|
)
|
The following table summarizes the reclassifications out of accumulated other comprehensive income/(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
Six Months Ended
December 31,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(in millions)
|
Pension and Post-retirement liabilities:
|
|
|
|
|
|
|
|
Amortization of loss reclassified into Selling, general and administrative expenses
|
$
|
0.2
|
|
|
$
|
0.1
|
|
|
$
|
0.4
|
|
|
$
|
0.3
|
|
Tax income
|
(0.1
|
)
|
|
(0.1
|
)
|
|
(0.2
|
)
|
|
(0.1
|
)
|
Amortization of loss, net of tax
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
0.3
|
|
|
$
|
0.2
|
|
NOTE 15. INTERIM FINANCIAL DATA BY SEGMENT
The Company classifies its operations into the following
two
reportable segments: Investor Communication Solutions and Global Technology and Operations. See Note 1, “Basis of Presentation” for a further description of the Company’s reportable segments.
The primary components of “Other” are the elimination of intersegment revenues and profits as well as certain unallocated expenses. 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 expense items in Other rather than reflect such items in segment profit.
Segment results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
Three Months Ended
December 31,
|
|
Six Months Ended
December 31,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(in millions)
|
Investor Communication Solutions
|
$
|
709.6
|
|
|
$
|
471.7
|
|
|
$
|
1,432.9
|
|
|
$
|
901.4
|
|
Global Technology and Operations
|
201.8
|
|
|
180.3
|
|
|
389.6
|
|
|
357.0
|
|
Foreign currency exchange
|
(18.8
|
)
|
|
(13.0
|
)
|
|
(34.6
|
)
|
|
(24.7
|
)
|
Total
|
$
|
892.6
|
|
|
$
|
638.9
|
|
|
$
|
1,787.9
|
|
|
$
|
1,233.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) before Income
Taxes
|
|
Three Months Ended
December 31,
|
|
Six Months Ended
December 31,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(in millions)
|
Investor Communication Solutions
|
$
|
18.2
|
|
|
$
|
46.1
|
|
|
$
|
51.1
|
|
|
$
|
80.0
|
|
Global Technology and Operations
|
46.3
|
|
|
29.4
|
|
|
84.6
|
|
|
59.8
|
|
Other
|
(20.8
|
)
|
|
(15.7
|
)
|
|
(43.6
|
)
|
|
(29.6
|
)
|
Foreign currency exchange
|
2.0
|
|
|
1.5
|
|
|
5.2
|
|
|
2.8
|
|
Total
|
$
|
45.7
|
|
|
$
|
61.3
|
|
|
$
|
97.2
|
|
|
$
|
113.0
|
|
NOTE 16. SUBSEQUENT EVENT
In February 2017, the Company entered into an amended and restated
$1.0 billion
five
-year revolving credit facility (the “Fiscal 2017 Revolving Credit Facility”), which replaced the
$750.0 million
five
-year revolving credit facility entered into in August 2014 (the “Fiscal 2015 Revolving Credit Facility”). The Fiscal 2017 Revolving Credit Facility is comprised of a
$900.0 million
U.S. dollar tranche and a
$100.0 million
multicurrency tranche.