Item 1. Financial Statements
CDK Global, Inc.
Condensed Consolidated Statements of Operations
(In millions, except per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
December 31,
|
|
December 31,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Revenues
|
$
|
547.8
|
|
|
$
|
520.1
|
|
|
$
|
1,098.5
|
|
|
$
|
1,034.7
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
303.2
|
|
|
301.2
|
|
|
618.3
|
|
|
612.0
|
|
Selling, general and administrative expenses
|
110.9
|
|
|
105.8
|
|
|
224.6
|
|
|
203.2
|
|
Restructuring expenses
|
2.3
|
|
|
1.8
|
|
|
3.4
|
|
|
3.7
|
|
Total expenses
|
416.4
|
|
|
408.8
|
|
|
846.3
|
|
|
818.9
|
|
Operating earnings
|
131.4
|
|
|
111.3
|
|
|
252.2
|
|
|
215.8
|
|
|
|
|
|
|
|
|
|
Interest expense
|
(12.3
|
)
|
|
(9.5
|
)
|
|
(23.0
|
)
|
|
(18.8
|
)
|
Other income (expense), net
|
(0.2
|
)
|
|
5.0
|
|
|
1.6
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
118.9
|
|
|
106.8
|
|
|
230.8
|
|
|
202.6
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
(35.3
|
)
|
|
(37.1
|
)
|
|
(68.0
|
)
|
|
(71.7
|
)
|
|
|
|
|
|
|
|
|
Net earnings
|
83.6
|
|
|
69.7
|
|
|
162.8
|
|
|
130.9
|
|
Less: net earnings attributable to noncontrolling interest
|
0.9
|
|
|
1.5
|
|
|
3.2
|
|
|
3.7
|
|
Net earnings attributable to CDK
|
$
|
82.7
|
|
|
$
|
68.2
|
|
|
$
|
159.6
|
|
|
$
|
127.2
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to CDK per common share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.56
|
|
|
$
|
0.43
|
|
|
$
|
1.07
|
|
|
$
|
0.80
|
|
Diluted
|
$
|
0.55
|
|
|
$
|
0.43
|
|
|
$
|
1.06
|
|
|
$
|
0.80
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
148.7
|
|
|
158.7
|
|
|
149.5
|
|
|
158.9
|
|
Diluted
|
149.9
|
|
|
159.7
|
|
|
150.7
|
|
|
160.0
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
$
|
0.140
|
|
|
$
|
0.135
|
|
|
$
|
0.275
|
|
|
$
|
0.255
|
|
See notes to the condensed consolidated financial statements.
CDK Global, Inc.
Condensed Consolidated Statements of Comprehensive Income
(In millions)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
December 31,
|
|
December 31,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net earnings
|
$
|
83.6
|
|
|
$
|
69.7
|
|
|
$
|
162.8
|
|
|
$
|
130.9
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
Currency translation adjustments
|
(26.8
|
)
|
|
(15.0
|
)
|
|
(30.9
|
)
|
|
(31.8
|
)
|
Other comprehensive loss
|
(26.8
|
)
|
|
(15.0
|
)
|
|
(30.9
|
)
|
|
(31.8
|
)
|
Comprehensive income
|
56.8
|
|
|
54.7
|
|
|
131.9
|
|
|
99.1
|
|
Less: comprehensive income attributable to noncontrolling interest
|
0.9
|
|
|
1.5
|
|
|
3.2
|
|
|
3.7
|
|
Comprehensive income attributable to CDK
|
$
|
55.9
|
|
|
$
|
53.2
|
|
|
$
|
128.7
|
|
|
$
|
95.4
|
|
See notes to the condensed consolidated financial statements.
CDK Global, Inc.
Condensed Consolidated Balance Sheets
(In millions, except per share par value)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
June 30,
|
|
2016
|
|
2016
|
Assets
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
327.6
|
|
|
$
|
219.1
|
|
Accounts receivable, net of allowances of $6.9 and $7.1, respectively
|
363.0
|
|
|
365.5
|
|
Other current assets
|
171.1
|
|
|
154.1
|
|
Total current assets
|
861.7
|
|
|
738.7
|
|
Property, plant and equipment, net
|
125.5
|
|
|
118.6
|
|
Other assets
|
197.0
|
|
|
217.2
|
|
Goodwill
|
1,159.2
|
|
|
1,182.7
|
|
Intangible assets, net
|
101.5
|
|
|
107.8
|
|
Total assets
|
$
|
2,444.9
|
|
|
$
|
2,365.0
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Current maturities of long-term debt and capital lease obligations
|
$
|
46.8
|
|
|
$
|
26.8
|
|
Accounts payable
|
23.4
|
|
|
38.8
|
|
Accrued expenses and other current liabilities
|
191.9
|
|
|
165.3
|
|
Accrued payroll and payroll-related expenses
|
67.8
|
|
|
115.3
|
|
Short-term deferred revenues
|
165.7
|
|
|
177.2
|
|
Total current liabilities
|
495.6
|
|
|
523.4
|
|
Long-term debt and capital lease obligations
|
1,555.7
|
|
|
1,190.3
|
|
Long-term deferred revenues
|
145.3
|
|
|
157.7
|
|
Deferred income taxes
|
52.2
|
|
|
46.9
|
|
Other liabilities
|
69.7
|
|
|
70.5
|
|
Total liabilities
|
2,318.5
|
|
|
1,988.8
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
Preferred stock, $0.01 par value: Authorized, 50.0 shares; issued and outstanding, none
|
—
|
|
|
—
|
|
Common stock, $0.01 par value: Authorized, 650.0 shares; issued, 160.3 and 160.3 shares, respectively; outstanding, 144.9 and 150.1 shares, respectively
|
1.6
|
|
|
1.6
|
|
Additional paid-in-capital
|
615.8
|
|
|
640.7
|
|
Retained earnings
|
357.0
|
|
|
238.3
|
|
Treasury stock, at cost: 15.4 and 10.2 shares, respectively
|
(839.5
|
)
|
|
(526.6
|
)
|
Accumulated other comprehensive income
|
(25.1
|
)
|
|
5.8
|
|
Total CDK stockholders' equity
|
109.8
|
|
|
359.8
|
|
Noncontrolling interest
|
16.6
|
|
|
16.4
|
|
Total equity
|
126.4
|
|
|
376.2
|
|
Total liabilities and equity
|
$
|
2,444.9
|
|
|
$
|
2,365.0
|
|
See notes to the condensed consolidated financial statements.
CDK Global, Inc.
Condensed Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
December 31,
|
|
2016
|
|
2015
|
Cash Flows from Operating Activities:
|
|
|
|
Net earnings
|
$
|
162.8
|
|
|
$
|
130.9
|
|
Adjustments to reconcile net earnings to cash flows provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
34.4
|
|
|
28.7
|
|
Deferred income taxes
|
5.0
|
|
|
19.0
|
|
Stock-based compensation expense
|
20.5
|
|
|
12.8
|
|
Other
|
2.4
|
|
|
(5.0
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Increase in accounts receivable
|
(2.2
|
)
|
|
(69.8
|
)
|
Increase in other assets
|
(7.6
|
)
|
|
(41.6
|
)
|
Decrease in accounts payable
|
(11.3
|
)
|
|
(7.8
|
)
|
Decrease in accrued expenses and other liabilities
|
(30.6
|
)
|
|
(41.4
|
)
|
Net cash flows provided by operating activities
|
173.4
|
|
|
25.8
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
Capital expenditures
|
(29.7
|
)
|
|
(18.1
|
)
|
Proceeds from sale of property, plant and equipment
|
0.5
|
|
|
—
|
|
Capitalized software
|
(10.0
|
)
|
|
(2.1
|
)
|
Contributions to investments
|
(0.6
|
)
|
|
(6.7
|
)
|
Proceeds from investments
|
4.0
|
|
|
7.7
|
|
Net cash flows used in investing activities
|
(35.8
|
)
|
|
(19.2
|
)
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
Proceeds from long-term debt
|
400.0
|
|
|
250.0
|
|
Repayments of long-term debt and capital lease obligations
|
(13.5
|
)
|
|
(6.7
|
)
|
Dividends paid to stockholders
|
(40.6
|
)
|
|
(40.8
|
)
|
Repurchases of common stock
|
(350.0
|
)
|
|
(261.0
|
)
|
Proceeds from exercises of stock options
|
5.1
|
|
|
2.9
|
|
Excess tax benefit from stock-based compensation awards
|
—
|
|
|
7.0
|
|
Withholding tax payments for stock-based compensation awards
|
(10.5
|
)
|
|
(8.5
|
)
|
Dividend payments to noncontrolling owners
|
(3.0
|
)
|
|
—
|
|
Payments of deferred financing costs
|
(2.0
|
)
|
|
(1.6
|
)
|
Acquisition-related payments
|
(6.2
|
)
|
|
—
|
|
Recovery of dividends paid (Note 1E)
|
—
|
|
|
0.4
|
|
Net cash flows used in financing activities
|
(20.7
|
)
|
|
(58.3
|
)
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
(8.4
|
)
|
|
(9.0
|
)
|
|
|
|
|
Net change in cash and cash equivalents
|
108.5
|
|
|
(60.7
|
)
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
219.1
|
|
|
408.2
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
$
|
327.6
|
|
|
$
|
347.5
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
December 31,
|
|
2016
|
|
2015
|
Supplemental Disclosure:
|
|
|
|
Cash paid for:
|
|
|
|
Income taxes and foreign withholding taxes, net of refunds
|
$
|
68.3
|
|
|
$
|
86.3
|
|
Interest
|
20.4
|
|
|
17.5
|
|
Non-cash transactions:
|
|
|
|
Non-cash settlement of common stock
|
$
|
56.9
|
|
|
$
|
—
|
|
See notes to the condensed consolidated financial statements.
CDK Global, Inc.
Condensed Consolidated Statement of Equity
(In millions)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional Paid-in-Capital
|
|
Retained Earnings
|
|
Treasury Stock
|
|
Accumulated Other Comprehensive Income
|
|
Total CDK Stockholders' Equity
|
|
Non-controlling Interest
|
|
Total Equity
|
|
Shares Issued
|
|
Amount
|
|
|
|
|
|
|
|
Balance as of June 30, 2016
|
160.3
|
|
|
$
|
1.6
|
|
|
$
|
640.7
|
|
|
$
|
238.3
|
|
|
$
|
(526.6
|
)
|
|
$
|
5.8
|
|
|
$
|
359.8
|
|
|
$
|
16.4
|
|
|
$
|
376.2
|
|
Net earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
159.6
|
|
|
—
|
|
|
—
|
|
|
159.6
|
|
|
3.2
|
|
|
162.8
|
|
Foreign currency translation adjustments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(30.9
|
)
|
|
(30.9
|
)
|
|
—
|
|
|
(30.9
|
)
|
Stock-based compensation expense and related dividend equivalents
|
—
|
|
|
—
|
|
|
17.6
|
|
|
(0.3
|
)
|
|
—
|
|
|
—
|
|
|
17.3
|
|
|
—
|
|
|
17.3
|
|
Common stock issued for the exercise and vesting of stock-based compensation awards, net
|
—
|
|
|
—
|
|
|
(33.4
|
)
|
|
—
|
|
|
28.0
|
|
|
—
|
|
|
(5.4
|
)
|
|
—
|
|
|
(5.4
|
)
|
Dividends paid to stockholders
|
—
|
|
|
—
|
|
|
—
|
|
|
(40.6
|
)
|
|
—
|
|
|
—
|
|
|
(40.6
|
)
|
|
—
|
|
|
(40.6
|
)
|
Repurchases of common stock
|
—
|
|
|
—
|
|
|
(9.1
|
)
|
|
—
|
|
|
(340.9
|
)
|
|
—
|
|
|
(350.0
|
)
|
|
—
|
|
|
(350.0
|
)
|
Dividend payments to noncontrolling owners
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3.0
|
)
|
|
(3.0
|
)
|
Balance as of December 31, 2016
|
160.3
|
|
|
$
|
1.6
|
|
|
$
|
615.8
|
|
|
$
|
357.0
|
|
|
$
|
(839.5
|
)
|
|
$
|
(25.1
|
)
|
|
$
|
109.8
|
|
|
$
|
16.6
|
|
|
$
|
126.4
|
|
See notes to the condensed consolidated financial statements.
CDK Global, Inc.
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts in millions, except per share amounts)
(Unaudited)
Note 1. Basis of Presentation
A. Description of Business
CDK Global, Inc. (the "Company" or "CDK") is a leading global provider of integrated information technology and digital marketing solutions to the automotive retail and adjacent industries. The Company’s solutions automate and integrate all parts of the buying process from targeted digital advertising and marketing campaigns to the sale, financing, insuring, parts supply, repair, and maintenance of vehicles.
Effective July 1, 2016, the Company executed a comprehensive reorganization to streamline its organization to enable it to deliver an improved customer experience, create significant efficiencies, and better align it to implement the ongoing business transformation plan discussed further in Note 3. The Company reorganized into two main operating groups. In connection with this reorganization, the Company's operating segments were changed. The Company's first operating group is CDK North America which is comprised of two reportable segments, Retail Solutions North America and Advertising North America. The second operating group, which is also a reportable segment, is CDK International. In addition, the Company has an Other segment, the primary components of which are corporate allocations and other expenses not recorded in the segment results. Refer to Note 13 for further information.
B. Basis of Preparation
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect assets, liabilities, revenues, and expenses that are reported in the accompanying financial statements and footnotes thereto. Actual results may differ from those estimates and assumptions.
The accompanying condensed consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods. Interim financial results are not necessarily indicative of financial results for a full year. The financial statements in this Quarterly Report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 2016
.
C. Significant Accounting Policies
Revenue Recognition
. The Company recognizes software revenues in accordance with Accounting Standards Codification (“ASC”) 985-605, “Software - Revenue Recognition,” and non-software related revenue, including Software-as-a-Service (“SaaS”), in accordance with ASC 605, "Revenue Recognition" ("ASC 605").
The Company generates revenues from four categories: subscription, digital advertising, transactional services, and other. Taxes collected from customers and remitted to governmental authorities are presented on a net basis; that is, such taxes are excluded from revenues.
Subscription.
In the Retail Solutions North America (“RSNA”) and CDK International (“CDKI”) segments, CDK provides software and technology solutions for automotive retailers and OEMs, which includes:
|
|
•
|
Dealer Management Systems (“DMSs”) and layered applications, where the software may be installed onsite at the customer’s location, or hosted and provided on a SaaS basis, including ongoing maintenance and support;
|
|
|
•
|
Interrelated services such as installation, initial training, and data updates;
|
|
|
•
|
Websites, search marketing, and reputation management services (RSNA only); and
|
|
|
•
|
Hardware on a service basis, meaning no specific assets are identified or a substantive right of substitution exists.
|
Revenues for term licenses are recognized ratably over the software license term, as vendor-specific objective evidence of the fair values of the individual elements in the sales arrangement does not exist. Revenue recognition commences at the installation dates, when customer acceptance has occurred, and collectability of a determinable amount is probable. In the case of hosted applications, the customer does not have the contractual right to take possession of the software and the items delivered at the outset of the contract (e.g., installation, training, etc.) do not have value to the customer without the software
license and ongoing support and maintenance. Any upfront fees charged in the case of hosted arrangements are recognized ratably over the expected benefit period of the arrangement, typically five years. The unrecognized portion of these revenue elements is recorded as deferred revenue.
Advertising services.
In the Advertising North America (“ANA”) segment, the Company receives revenues from the placement of internet advertising for automotive retailers and OEMs. Advertising revenues are recognized when the services are rendered.
Transaction revenues
. In the RSNA segment, the Company receives fees per transaction for providing auto retailers interfaces with third parties to process credit reports, vehicle registrations, and automotive equity mining. Revenue is recognized at the time the services are rendered. Transaction revenues are recorded in revenues gross of costs incurred for credit report processing, vehicle registrations, and automotive equity mining as the Company is contractually responsible for providing the service, software, and/or connectivity to the customers, and therefore, the Company is the primary obligor under ASC 605.
Other
. The Company provides consulting and professional services and sells hardware such as laser printers, networking and telephony equipment, and related items. These revenues are recognized upon their delivery or service completion.
Deferred Costs.
Costs to deliver services are expensed to cost of revenues as incurred with the exception of specific costs directly related to transition or installation activities, including payroll-related costs for the Company's implementation and training teams, as well as commission costs for the sale. These costs are deferred and expensed proportionately over the same period that the deferred revenues are recognized as revenues. Deferred amounts are monitored regularly to ensure appropriate asset and expense recognition. Current deferred costs classified within other current assets on the condensed consolidated balance sheets were
$96.7 million
and
$104.0 million
as of
December 31, 2016
and
June 30, 2016
, respectively. Long-term deferred costs classified within other assets on the condensed consolidated balance sheets were
$124.2 million
and
$135.5 million
as of
December 31, 2016
and
June 30, 2016
, respectively.
Funds receivable and funds held for Clients and Client Fund Obligations.
Funds receivable and funds held for clients represent amounts received or expected to be received from clients in advance of performing titling and registration services on behalf of those clients. These amounts are classified within other current assets on the condensed consolidated balance sheets. The total amount due to remit for titling and registration obligations with the department of motor vehicles is recorded to client fund obligations which is classified as accrued expenses and other current liabilities on the condensed consolidated balance sheet. Funds receivable was
$26.3 million
and funds held for clients was
$7.3 million
as of
December 31, 2016
. Client fund obligation was
$33.6 million
as of
December 31, 2016
.
In fiscal year 2015, the Company entered into a two-year service agreement with a Automatic Data Processing, Inc. (“ADP”) to provide cash collection and disbursement services for the business which expired in September 2016. As such, the amounts were not significant as of
June 30, 2016
.
Goodwill.
The Company tests for impairment annually and whenever events or changes in circumstances indicate the carrying value may not be recoverable. The Company tests goodwill for impairment at the reporting unit level. A reporting unit is an operating segment or a component of an operating segment. In July 2016, the Company revised its reportable segments and reporting units due to changes in how the chief operating decision maker regularly reviews information for purposes of allocating resources and assessing performance. Due to the change in organization structure, the Company expanded its reporting units from three to five.
The Company tests impairment by first comparing the fair value of each reporting unit to its carrying amount. If the carrying value for a reporting unit exceeds its fair value, the Company then compares the implied fair value of the Company's goodwill to the carrying amount in order to determine the amount of the impairment, if any.
The Company estimates the fair value of the Company's reporting units by weighting the results from the income approach, which is the present value of expected cash flows discounted at a risk-adjusted weighted-average cost of capital, and the market approach, which uses market multiples of companies in similar lines of business. These valuation approaches require significant judgment and consider a number of factors including assumptions about the future growth and profitability of the Company's reporting units, the determination of appropriate comparable publicly traded companies in the Company's industry, discount rates, and terminal growth rates.
Computer Software to be Sold, Leased, or Otherwise Marketed.
The Company's policy provides for the capitalization of certain costs of computer software to be sold, leased, or otherwise marketed. The Company's policy provides for the capitalization of all software production costs upon reaching technological feasibility for a specific product. Technological feasibility is attained when software products have a completed working model whose consistency with the overall product design has been confirmed by testing. Costs incurred prior to the establishment of technological feasibility are expensed as incurred. The establishment of technological feasibility requires judgment by management and in many instances is only attained a short time prior to the general release of the software. Maintenance-related costs are expensed as incurred.
Pursuant to this policy, the Company recognized expenses of
$36.1 million
and
$39.1 million
for the
three months ended
December 31, 2016
and
2015
, respectively, and
$74.8 million
and
$78.6 million
for the
six months ended
December 31, 2016
and
2015
, respectively. These expenses were classified within cost of revenues on the condensed consolidated statements of operations.
Stock-Based Compensation.
Certain of the Company's employees (a) have been granted stock options to purchase shares of the Company’s common stock and (b) have been granted restricted stock or restricted stock units under which shares of the Company's common stock vest based on the passage of time or achievement of performance and market conditions. The Company recognizes stock-based compensation expense in net earnings based on the fair value of the award on the date of the grant. The Company determines the fair value of stock options issued using a binomial option-pricing model. The binomial option-pricing model considers a range of assumptions related to volatility, dividend yield, risk-free interest rate, and employee exercise behavior. Expected volatilities utilized in the binomial option pricing model are based on a combination of implied market volatilities and historical volatilities of peer companies. Similarly, the dividend yield is based on historical experience and expected future dividend payments. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The binomial option pricing model also incorporates exercise based on an analysis of historical data. The expected life of a stock option grant is derived from the output of the binomial model and represents the period of time that options granted are expected to be outstanding.
The grant date fair value of restricted stock and restricted stock units that vest upon achievement of service conditions is based on the closing price of the Company's common stock on the date of grant. The Company also grants performance-based awards that vest over a performance period. Certain performance-based awards are further subject to adjustment (increase or decrease) based on a market condition defined as total shareholder return of the Company’s common stock compared to a peer group of companies. The fair value of performance-based awards subject to a market condition is determined using a Monte Carlo simulation model. The principal variable assumptions utilized in determining the grant date fair value of performance-based awards subject to a market condition include the risk-free rate, stock volatility, dividend yield, and correlations between the Company's stock price and the stock prices of the peer group of companies.
Upon adoption of Accounting Standards Update ("ASU") 2016-09, "Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" the Company no longer estimates its forfeiture rate in order to record stock compensation expense. The Company now records the impact of forfeitures on stock compensation expense in the period the forfeitures occur.
Fair Value of Financial Instruments.
The Company determines the fair value of financial instruments in accordance with accounting standards pertaining to fair value measurements. Such standards define fair value and establish a framework for measuring fair value in accordance with GAAP. Cash and cash equivalents, accounts receivable, other current assets, accounts payable, and other current liabilities are reflected in the condensed consolidated balance sheets at cost, which approximates fair value due to the short-term nature of these instruments. The carrying value of the Company's term loan facilities (as described in Note 6), including accrued interest, approximates fair value based on the Company's current estimated incremental borrowing rate for similar types of arrangements. The approximate aggregate fair value of the Company's senior notes as of
December 31, 2016
was
$743.6 million
based on quoted market prices for the same or similar instruments and the carrying value was
$750.0 million
. The term loan facilities and senior notes are considered Level 2 fair value measurements in the fair value hierarchy.
D. Spin-off
On
April 9, 2014
, the board of directors of ADP approved the spin-off of the Dealer Services business of ADP. On
September 30, 2014
, the spin-off became effective and ADP distributed
100%
of the Company's common stock to the holders of record of ADP's common stock as of
September 24, 2014
(the "spin-off").
Concurrent with the spin-off, the Company and ADP entered into several agreements providing for transition services and governing relationships between the Company and ADP. Refer to Notes 8 and 12 for further information.
E. Spin-off Common Stock Issued
During the three months ended September 30, 2015, the Company became aware that
1.0 million
shares of common stock were inadvertently issued and distributed to ADP at the spin-off with respect to certain unvested ADP equity awards. The Company previously reported that
160.6 million
shares were issued in connection with the spin-off, which was overstated by
1.0 million
shares. In addition, dividends paid to stockholders in
fiscal 2016
were overstated by
$0.4 million
. The Company assessed the materiality and concluded that the impact was not material to previously reported results of operations, financial condition, or cash flows. During the three months ended September 30, 2015, the Company and ADP took corrective action to cancel the
1.0 million
shares of common stock effective as of September 30, 2014 and the Company recovered the
$0.4 million
of cumulative dividends paid on such shares, thereby increasing the Company's retained earnings. The effects of these adjustments were reflected in the accompanying financial statements for the
six months ended
December 31, 2015
.
Note 2. New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-09, "Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." ASU 2016-09 includes provisions to simplify several aspects of accounting for share-based payment transactions, including income tax consequences, accounting for forfeitures, classification of awards as either equity or liability, and classification on the statement of cash flows. ASU 2016-09 includes a requirement that the tax effect related to the settlement of share-based awards be recorded within income tax expense or benefit in the income statement. The simplification of income tax accounting for share-based payment transactions also impacts the computation of weighted-average diluted shares outstanding under the treasury stock method. ASU 2016-09 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2016, with early adoption permitted. The Company elected to adopt ASU 2016-09 during the three months ended September 30, 2016 and the impact of the adoption resulted in the following:
|
|
•
|
The Company elected to account for forfeitures of stock-based compensation awards when they occur. This adoption did not have a material impact on the Company's consolidated results of operations, financial condition, or cash flows.
|
|
|
•
|
The Company recorded a tax benefit of
$8.7 million
within provision for income taxes for the
six months ended December 31, 2016
related to excess tax benefits on stock options, restricted stock, and restricted stock units. Prior to adoption, the tax effect of share-based awards would have been recognized in additional paid-in capital. This change will result in increased volatility in the Company's effective tax rate.
|
|
|
•
|
In addition, ASU 2016-09 modifies the classification of certain share-based payment activities within the statements of cash flows. Under ASU 2016-09, excess tax benefits from share-based arrangements are classified within cash flow from operations, rather than as cash flow from financing activities. The Company applied this provision on a prospective basis and the prior period statement of cash flows was not adjusted.
|
In June 2014, the FASB issued ASU 2014-12, "Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force)." ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU 2014-12 is effective for annual, and interim periods within those annual periods, beginning after December 15, 2015. The Company adopted ASU 2014-12 during the three months ended September 30, 2016. This adoption did not have a material impact on the Company's consolidated results of operations, financial condition, or cash flows.
Recently Issued Accounting Pronouncements
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other” ASU 2017-04 simplifies the accounting for goodwill impairment by eliminating Step 2 of the current goodwill impairment test, which required a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which the reporting unit’s carrying value exceeds its fair value, limited to the carrying value of the goodwill. ASU 2017-04 is effective for financial statements issued for fiscal years, and interim periods beginning after December 15, 2019. The adoption of ASU 2017-04 is not expected to have a material impact on the Company's consolidated results of operations, financial condition, or cash flows.
In November 2016, the FASB issued ASU 2016-18, “Restricted Cash.” ASU 2016-18 clarifies cash flow presentation for restricted cash. ASU 2016-18 is effective for financial statements issued for fiscal years, and interim periods beginning after December 15, 2017. The adoption of ASU 2016-18 will not have a material impact on the Company's consolidated statements of cash flows.
In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments (Topic 230).” ASU 2016-15 addresses eight specific cash flow issues where there is diversity in practice in how these certain cash receipts and cash payments are presented and classified in the statements of cash flows. ASU 2016-15 is effective for financial statements issued for fiscal years, and interim periods beginning after December 15, 2017. The adoption of ASU 2016-15 will not have a material impact on the Company's consolidated statements of cash flows.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 requires that lessees recognize right-of-use assets and lease liabilities for any lease classified as either a finance or operating lease that is not considered short-term. The accounting applied by lessors is largely consistent with the existing lease standard. ASU 2016-02 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2018. The Company has obligations under lease agreements for facilities and equipment, which are classified as operating leases under the existing lease standard. While the Company is still evaluating the impact that ASU 2016-02 will have on the consolidated results of operations, financial condition, or cash flows, the Company's financial statements will reflect an increase in both assets and liabilities due to the requirement to recognize right-of-use assets and lease liabilities on the consolidated balance sheets for its facility and equipment leases.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 requires an entity to recognize revenue depicting the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will also result in enhanced revenue related disclosures. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). In July 2015, the FASB decided to defer the effective date of ASU 2014-09 by one year and subsequently issued ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date." As a result, this standard, and subsequent amendments thereto, will be effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2017. While the Company is currently evaluating the impact of ASU 2014-09, and related ASUs, on its consolidated results of operations, financial condition, or cash flows, the Company has concluded that it will adopt this standard on a modified retrospective basis, which will result in a cumulative effect adjustment to retained earnings when the standard is adopted on July 1, 2018.
Note 3. Restructuring
During the fiscal year ended June 30, 2015, the Company initiated a
three
-year business transformation plan intended to increase operating efficiency and improve the Company's cost structure within its global operations. The business transformation plan is expected to produce significant benefits in the Company's long-term business performance. As it executes the business transformation plan, the Company continually monitors, evaluates and refines its structure, including its design, goals, term and estimate of total restructuring expenses. As part of this process, during the three months ended December 31, 2016, the Company extended the business transformation plan by
one
year to June 30, 2019 ("fiscal 2019"), and updated its current estimate of total restructuring expenses under the business transformation plan to approximately
$70 million
through fiscal 2019.
Restructuring expenses associated with the business transformation plan included employee-related costs, which represent severance and other termination-related benefits calculated based on long-standing benefit practices and local statutory requirements, and contract termination costs. The Company recognized
$2.3 million
and
$1.8 million
of restructuring expenses for the
three months ended
December 31, 2016
and
2015
, respectively, and
$3.4 million
and
$3.7 million
for the
six months ended
December 31, 2016
and
2015
, respectively. Since the inception of the business transformation plan in the fourth quarter of fiscal 2015, the Company has recognized cumulative restructuring expenses of
$26.0 million
. Restructuring expenses are presented separately on the condensed consolidated statements of operations. Restructuring expenses are recorded in the Other segment, as these initiatives are predominantly centrally directed and are not included in internal measures of segment operating performance.
Accruals for restructuring expenses were included within accrued expenses and other current liabilities on the consolidated balance sheets as of
December 31, 2016
and
June 30, 2016
. The following table summarizes the activity for the restructuring accrual for the
six months ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee-Related Costs
|
|
Contract Termination Costs
|
|
Total Costs
|
Balance as of June 30, 2016
|
$
|
9.0
|
|
|
$
|
0.9
|
|
|
$
|
9.9
|
|
Charges
|
2.7
|
|
|
1.4
|
|
|
4.1
|
|
Cash payments
|
(7.8
|
)
|
|
(1.5
|
)
|
|
(9.3
|
)
|
Adjustments
|
(0.4
|
)
|
|
(0.3
|
)
|
|
(0.7
|
)
|
Foreign exchange
|
(0.1
|
)
|
|
—
|
|
|
(0.1
|
)
|
Balance as of December 31, 2016
|
$
|
3.4
|
|
|
$
|
0.5
|
|
|
$
|
3.9
|
|
Note 4. Earnings per Share
The numerator for both basic and diluted earnings per share is net earnings attributable to CDK. The denominator for basic and diluted earnings per share is based upon the weighted-average number of shares of the Company's common stock outstanding during the reporting periods. Diluted earnings per share also reflects the dilutive effect of unexercised in-the-money stock options and unvested restricted stock.
Holders of certain stock-based compensation awards are eligible to receive dividends as described in Note 7. Net earnings allocated to participating securities were not significant for the three and
six months ended
December 31, 2016
and
2015
.
The following table summarizes the components of basic and diluted earnings per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
December 31,
|
|
December 31,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net earnings attributable to CDK
|
$
|
82.7
|
|
|
$
|
68.2
|
|
|
$
|
159.6
|
|
|
$
|
127.2
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
148.7
|
|
|
158.7
|
|
|
149.5
|
|
|
158.9
|
|
Effect of employee stock options
|
0.7
|
|
|
0.6
|
|
|
0.7
|
|
|
0.6
|
|
Effect of employee restricted stock
|
0.5
|
|
|
0.4
|
|
|
0.5
|
|
|
0.5
|
|
Diluted
|
149.9
|
|
|
159.7
|
|
|
150.7
|
|
|
160.0
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings attributable to CDK per share
|
$
|
0.56
|
|
|
$
|
0.43
|
|
|
$
|
1.07
|
|
|
$
|
0.80
|
|
Diluted earnings attributable to CDK per share
|
$
|
0.55
|
|
|
$
|
0.43
|
|
|
$
|
1.06
|
|
|
$
|
0.80
|
|
The weighted-average number of shares outstanding used in the calculation of diluted earnings per share does not include the effect of the following anti-dilutive securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
December 31,
|
|
December 31,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Stock-based awards
|
0.8
|
|
|
0.2
|
|
|
0.7
|
|
|
0.2
|
|
Note 5. Goodwill and Intangible Assets, Net
In July 2016, the Company revised its reportable segments and reporting units due to how the chief operating decision maker regularly reviews information for purposes of allocating resources and assessing performance. Due to the change in organization structure, the Company expanded its reporting units from three to five. As a result, goodwill was reallocated to the new reporting units using a relative fair value approach. The indicated fair values substantially exceeded the carrying values of all reporting units. Goodwill has been restated to reflect the reallocation of goodwill based on the current reportable segments. Refer to Note 13 for further information.
Changes in goodwill for the
six months ended
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Solutions North America
|
|
Advertising North America
|
|
CDK International
|
|
Total
|
Balance as of June 30, 2016
|
$
|
604.7
|
|
|
$
|
214.3
|
|
|
$
|
363.7
|
|
|
$
|
1,182.7
|
|
Currency translation adjustments
|
(0.9
|
)
|
|
—
|
|
|
(22.6
|
)
|
|
(23.5
|
)
|
Balance as of December 31, 2016
|
$
|
603.8
|
|
|
$
|
214.3
|
|
|
$
|
341.1
|
|
|
$
|
1,159.2
|
|
Components of intangible assets, net were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
June 30, 2016
|
|
Original Cost
|
|
Accumulated Amortization
|
|
Intangible Assets, net
|
|
Original Cost
|
|
Accumulated Amortization
|
|
Intangible Assets, net
|
Customer lists
|
$
|
173.1
|
|
|
$
|
(122.0
|
)
|
|
$
|
51.1
|
|
|
$
|
175.5
|
|
|
$
|
(117.5
|
)
|
|
$
|
58.0
|
|
Software
|
149.6
|
|
|
(103.8
|
)
|
|
45.8
|
|
|
141.0
|
|
|
(96.1
|
)
|
|
44.9
|
|
Trademarks
|
25.0
|
|
|
(23.8
|
)
|
|
1.2
|
|
|
25.0
|
|
|
(23.5
|
)
|
|
1.5
|
|
Other intangibles
|
6.3
|
|
|
(2.9
|
)
|
|
3.4
|
|
|
6.1
|
|
|
(2.7
|
)
|
|
3.4
|
|
|
$
|
354.0
|
|
|
$
|
(252.5
|
)
|
|
$
|
101.5
|
|
|
$
|
347.6
|
|
|
$
|
(239.8
|
)
|
|
$
|
107.8
|
|
Other intangibles consist primarily of purchased rights, covenants, and patents (acquired directly or through acquisitions). All of the intangible assets have finite lives and, as such, are subject to amortization. The weighted-average remaining useful life of intangible assets is
5 years
(
7 years
for customer lists,
4 years
for software and software licenses, and
3 years
for trademarks). Amortization of intangible assets was
$7.5 million
and
$6.4 million
for the
three months ended
December 31, 2016
and
2015
, respectively, and
$15.2 million
and
$12.9 million
for the
six months ended
December 31, 2016
and
2015
, respectively.
Estimated amortization expenses of the Company's existing intangible assets as of
December 31, 2016
were as follows:
|
|
|
|
|
|
Amount
|
Six months ending June 30, 2017
|
$
|
15.0
|
|
Twelve months ending June 30, 2018
|
26.4
|
|
Twelve months ending June 30, 2019
|
16.4
|
|
Twelve months ending June 30, 2020
|
11.4
|
|
Twelve months ending June 30, 2021
|
11.1
|
|
Twelve months ending June 30, 2022
|
8.6
|
|
Thereafter
|
12.6
|
|
|
$
|
101.5
|
|
Note 6. Debt
Debt was comprised of the following as of
December 31, 2016
and
June 30, 2016
:
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
June 30, 2016
|
Revolving credit facility
|
$
|
—
|
|
|
$
|
—
|
|
2019 term loan facility
|
221.9
|
|
|
228.1
|
|
2020 term loan facility
|
237.5
|
|
|
243.8
|
|
2021 term loan facility
|
400.0
|
|
|
—
|
|
3.30% senior notes, due 2019
|
250.0
|
|
|
250.0
|
|
4.50% senior notes, due 2024
|
500.0
|
|
|
500.0
|
|
Capital lease obligations
|
2.5
|
|
|
3.6
|
|
Unamortized debt financing costs
|
(9.4
|
)
|
|
(8.4
|
)
|
Total debt and capital lease obligations
|
1,602.5
|
|
|
1,217.1
|
|
Current maturities of long-term debt and capital lease obligations
|
46.8
|
|
|
26.8
|
|
Total long-term debt and capital lease obligations
|
$
|
1,555.7
|
|
|
$
|
1,190.3
|
|
Revolving Credit Facility
The Company has a
five
-year senior unsecured revolving credit facility, which was undrawn as of
December 31, 2016
and
June 30, 2016
.
The revolving credit facility provides up to
$300.0 million
of borrowing capacity and includes a sub-limit of up to
$100.0 million
for loans in Euro and Pound Sterling. In addition, the revolving credit facility contains an accordion feature that allows for an increase in the available borrowing capacity under the revolving credit facility of up to
$100.0 million
, subject to the agreement of lenders under the revolving credit facility or other financial institutions that become lenders to extend commitments as part of the increased revolving credit facility. Borrowings under the revolving credit facility are available for general corporate purposes. The revolving credit facility will mature on
September 30, 2019
, subject to no more than
two
one
-year extensions if lenders holding a majority of the revolving commitments approve such extensions.
The revolving credit facility is unsecured and loans thereunder bear interest, at the Company's option, at (a) the rate at which deposits in the applicable currency are offered in the London interbank market (or, in the case of borrowings in Euro, the European interbank market) plus margins varying from
1.125%
to
2.000%
per annum based on the Company's senior, unsecured non-credit-enhanced, long-term debt ratings from Standard & Poor's Ratings Group and Moody's Investors Services Inc. (the "Ratings") or (b) solely in the case of U.S. dollar loans, (i) the highest of (A) the
prime rate
of JPMorgan Chase Bank, N.A., (B) a rate equal to the average of the overnight
federal funds rate
with a maturity of one day plus a margin of
0.500%
per annum and (C) the rate at which dollar deposits are offered in the London interbank market for a one-month interest period plus
1.000%
plus (ii) margins varying from
0.125%
to
1.000%
per annum based on the Ratings. The unused portion of the revolving credit facility is subject to commitment fees ranging from
0.125%
to
0.350%
per annum based on the Ratings.
Term Loan Facilities
The Company has two
five
-year
$250.0 million
senior unsecured term loan facilities that mature on
September 16, 2019
(the "2019 term loan facility") and
December 14, 2020
(the "2020 term loan facility"), respectively. On December 9, 2016, the Company entered into a
five
-year
$400.0 million
senior unsecured term loan facility that matures on
December 9, 2021
(the "2021 term loan facility"). Borrowings under the 2021 term loan facility were used for general corporate purposes including the repurchase of shares of the Company's common stock. The 2019 term loan facility, 2020 term loan facility, and 2021 term loan facility are together referred to as the "term loan facilities." The term loan facilities are subject to amortization in equal quarterly installments of
1.25%
of the aggregate principal amount of the term loans made on the respective closing dates, with any unpaid principal amount to be due and payable on the maturity date.
The 2019 term loan facility and 2020 term loan facility term loan facilities bear interest at the same calculations as are applicable to dollar loans under the revolving credit facility. The interest rate per annum on both the 2019 term loan facility and 2020 term loan facility was
2.52%
as of
December 31, 2016
and
1.97%
as of
June 30, 2016
.
The 2021 term loan bears interest, at the Company's option, at (a) the rate at which deposits in the applicable currency are offered in the London interbank market plus margins varying from
1.250%
to
2.500%
per annum based on the Company's senior, unsecured non-credit-enhanced, long-term debt ratings from Standard & Poor's Ratings Group and Moody's Investors Services Inc. (the "Ratings") or (b) (i) the highest of (A) the prime rate of Bank of America, N.A., (B) a rate equal to the average of the overnight federal funds rate with a maturity of one day plus a margin of
0.500%
per annum and (C) the rate at which dollar deposits are offered in the London interbank market for a one-month interest period plus
1.000%
plus (ii) margins varying from
0.25%
to
1.50%
per annum based on the Ratings. The interest rate per annum on the 2021 term loan facility was
2.41%
as of
December 31, 2016
.
Restrictive Covenants and Other Matters
The revolving credit facility and the term loan facilities are together referred to as the "credit facilities." The credit facilities contain various covenants and restrictive provisions that limit the Company's subsidiaries' ability to incur additional indebtedness; the Company's ability to consolidate or merge with other entities; and the Company's subsidiaries' ability to incur liens, enter into sale and leaseback transactions, and enter into agreements restricting the ability of the Company's subsidiaries to pay dividends. If the Company fails to perform the obligations under these and other covenants, the credit facilities could be terminated and any outstanding borrowings, together with accrued interest, under the credit facilities could be declared immediately due and payable. The credit facilities also have, in addition to customary events of default, an event of default triggered by the acceleration of the maturity of any other indebtedness the Company may have in an aggregate principal amount in excess of
$75.0 million
.
The credit facilities also contain financial covenants that provide that (i) the ratio of total consolidated indebtedness to consolidated EBITDA shall not exceed
3.50
to
1.00
and (ii) the ratio of consolidated EBITDA to consolidated interest expense shall be a minimum of
3.00
to
1.00
.
On December 9, 2016, the Company entered into (i) an Amendment to its Credit Agreement that covered the revolving credit facility and the 2019 term loan facility (the “2014 amendment”), and (ii) an Amendment to its Credit Agreement that covered the 2020 term loan facility (the “2015 amendment”). The 2014 amendment and the 2015 amendment amended certain “bail-in” language relating to EEA Financial Institutions and make certain changes to the definitions of “Change in Control,” “Consolidated EBITDA,” “Defaulting Lender,” and “Eligible Assignee.”
Senior Notes
On
October 14, 2014
, the Company completed an offering of
3.30%
senior notes with a
$250.0 million
aggregate principal amount due in 2019 (the "2019 notes") and
4.50%
senior notes with a
$500.0 million
aggregate principal amount due in 2024 (the "2024 notes" and together with the 2019 notes, the "senior notes"). The issuance price of the senior notes was equal to the stated value. Interest is payable semi-annually on
April 15
and
October 15
of each year, and payment commenced on
April 15, 2015
. The interest rate payable on each applicable series of senior notes is subject to adjustment from time to time if the credit ratings assigned to any series of senior notes by the rating agencies is downgraded (or subsequently upgraded). The 2019 notes will mature on
October 15, 2019
, and the 2024 notes will mature on
October 15, 2024
. The senior notes are general unsecured obligations of the Company and are not guaranteed by any of the Company's subsidiaries.
The senior notes rank equally in right of payment with the Company's existing and future unsecured unsubordinated obligations, including the credit facilities. The senior notes contain covenants restricting the Company's ability to incur additional indebtedness secured by liens, engage in sale/leaseback transactions, and merge, consolidate, or transfer all or substantially all of the Company's assets.
The senior notes are redeemable at the Company's option prior to September 15, 2019 for the 2019 notes and prior to July 15, 2024 for the 2024 notes at a redemption price equal to the greater of (i)
100%
of the aggregate principal amount of the senior notes to be redeemed, and (ii) the sum of the present value of the remaining scheduled payments (as defined in the agreement), plus in each case, accrued and unpaid interest thereon. Subsequent to September 15, 2019 and July 15, 2024, the redemption price for the 2019 notes and the 2024 notes, respectively, will equal
100%
of the aggregate principal amount of the notes redeemed, plus accrued and unpaid interest thereon. The senior notes are also subject to a change of control provision whereby each holder of the senior notes has the right to require the Company to purchase all or a portion of such holder's senior notes at a purchase price equal to
101%
of the principal amount thereof plus accrued and unpaid interest upon the occurrence of both a change of control and a decline in the rating of the senior notes.
In November 2016, Moody's and S&P lowered their credit ratings on the senior notes to Ba1 (Stable Outlook) from Baa3 (Negative Outlook) and to BB+ (Stable Outlook) from BBB- (Negative Outlook), respectively. The downgrades triggered
interest rate adjustments for the senior notes. Interest rates for the 2019 notes and 2024 notes increased to
3.80%
from
3.30%
, and to
5.00%
from
4.50%
, respectively, effective October 15, 2016.
Capital Lease Obligations
The Company has lease agreements for equipment, which are classified as capital lease obligations. The Company recognized the capital lease obligations and related leased equipment assets based on the present value of the minimum lease payments at lease inception.
Unamortized Debt Financing Costs
As of
December 31, 2016
and
June 30, 2016
, gross debt issuance costs related to debt instruments were
$13.1 million
and
$11.1 million
, respectively. Accumulated amortization was
$3.7 million
and
$2.7 million
as of
December 31, 2016
and
June 30, 2016
, respectively. Debt issuance costs of
$2.0 million
were capitalized for the 2021 term loan facility in December 2016. Debt financing costs are amortized over the terms of the related debt instruments to interest expense on the consolidated statements of operations.
The Company's aggregate scheduled maturities of the long-term debt and capital lease obligations as of
December 31, 2016
were as follows:
|
|
|
|
|
|
Amount
|
Twelve months ending December 31, 2017
|
$
|
46.8
|
|
Twelve months ending December 31, 2018
|
45.7
|
|
Twelve months ending December 31, 2019
|
479.4
|
|
Twelve months ending December 31, 2020
|
220.0
|
|
Twelve months ending December 31, 2021
|
320.0
|
|
Thereafter
|
500.0
|
|
Total debt and capital lease obligations
|
1,611.9
|
|
Unamortized debt financing costs
|
(9.4
|
)
|
Total debt and capital lease obligations, net of unamortized debt financing costs
|
$
|
1,602.5
|
|
Note 7. Stock-Based Compensation
Incentive Equity Awards Granted by the Company
The 2014 Omnibus Award Plan ("2014 Plan") provides for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, other stock-based awards, and performance compensation awards to employees, directors, officers, consultants, and advisors, and those of the Company's affiliates. The 2014 Plan provides for an aggregate of
12.0 million
shares of the Company's common stock to be reserved for issuance and is effective for a period of
ten years
. In fiscal 2016, the Company began reissuing treasury stock to satisfy issuances of common stock upon option exercise or vesting.
Prior to the spin-off, all employee equity awards (stock options and restricted stock) were granted by ADP. All subsequent awards, including all incentive equity awards converted from ADP awards, were granted under the 2014 Plan. The Company recognizes stock-based compensation expense associated with employee equity awards in net earnings based on the fair value of the awards on the date of grant. Effective July 1, 2016, the Company adopted ASU 2016-09. Upon adoption, the Company made an accounting policy election to account for forfeitures as they occur rather than apply an estimated forfeiture rate. See Note 2 for additional details regarding the adoption of ASU 2016-09. Stock-based compensation primarily consisted of the following for the three and
six months ended
December 31, 2016
and
2015
:
Stock Options.
Stock options are granted to employees at exercise prices equal to the fair market value of the Company's common stock on the date of grant. Stock options are issued under a graded vesting schedule and generally have a term of
ten years
. Compensation expense is measured based on the fair value of the stock option on the grant date and recognized over the requisite service period for each separately vesting portion of the stock option award.
Time-Based Restricted Stock and Time-Based Restricted Stock Units.
Time-based restricted stock and restricted stock units generally vest over a
two
to
five
-year period.
Time-based restricted stock cannot be transferred during the vesting period. Compensation expense related to the issuance of time-based restricted stock is measured based on the fair value of the award on the grant date and recognized on a straight-line basis over the vesting period. Employees are eligible to receive dividends on the CDK shares awarded under the time-based restricted stock program.
Time-based restricted stock units are primarily settled in cash, but may also be settled in stock. Compensation expense related to the issuance of time-based restricted stock units is recorded over the vesting period and is initially based on the fair value of the award on the grant date. Cash-settled, time-based restricted stock units are subsequently remeasured at each reporting date during the vesting period to the current stock value. No dividend equivalents are paid on units awarded under the time-based restricted stock unit program during the restricted period.
Performance-Based Restricted Stock Units.
Performance-based restricted stock units generally vest over a
three
-year performance period. In the
six months ended
December 31, 2016
, an additional one-time grant of performance restricted stock was made which will vest at the end of fiscal year June 30, 2020. Under these programs, the Company communicates "target awards" at the beginning of the performance period with possible payouts at the end of the performance period ranging from
0%
to
250%
of the "target awards" plus any dividend equivalents, as described below. Certain performance-based restricted stock units are further subject to adjustment (increase or decrease) based on a market condition defined as the total shareholder return of the Company's common stock compared to a peer group of companies.
Performance-based restricted stock units are settled in either cash or stock, depending on the employee’s home country, and cannot be transferred during the vesting period. Compensation expense related to the issuance of performance-based restricted stock units settled in cash is recorded over the vesting period, is initially based on the fair value of the award on the grant date, and is subsequently remeasured at each reporting date to the current stock value during the performance period, based upon the probability that the performance target will be met. Compensation expense related to the issuance of performance-based restricted stock units settled in stock is recorded over the vesting period based on the fair value of the award on the grant date. Prior to settlement, dividend equivalents are earned on "target awards" under the performance-based restricted stock unit program.
The following table represents stock-based compensation expense and the related income tax benefits for the three and
six months ended
December 31, 2016
and
2015
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
December 31,
|
|
December 31,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Cost of revenues
|
$
|
1.0
|
|
|
$
|
1.5
|
|
|
$
|
2.3
|
|
|
$
|
2.7
|
|
Selling, general and administrative expenses
|
9.7
|
|
|
5.5
|
|
|
18.2
|
|
|
10.1
|
|
Total pre-tax stock-based compensation expense
|
$
|
10.7
|
|
|
$
|
7.0
|
|
|
$
|
20.5
|
|
|
$
|
12.8
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
$
|
3.7
|
|
|
$
|
2.3
|
|
|
$
|
7.0
|
|
|
$
|
4.4
|
|
Stock-based compensation expense for the
six months ended
December 31, 2016
consisted of
$17.3 million
of expense related to equity classified awards and
$3.2 million
of expense related to liability classified awards. As of
December 31, 2016
, the total unrecognized compensation cost related to non-vested stock options, restricted stock units, and restricted stock awards was
$4.8 million
,
$39.7 million
, and
$19.6 million
, respectively, which will be amortized over the weighted-average remaining requisite service periods of
2.4 years
,
2.0 years
, and
1.7 years
, respectively.
The activity related to the Company's incentive equity awards from
June 30, 2016
to
December 31, 2016
consisted of the following:
Stock Options
|
|
|
|
|
|
|
|
|
Number
of Options
(in thousands)
|
|
Weighted
Average Exercise Price
(in dollars)
|
Options outstanding as of June 30, 2016
|
1,594
|
|
|
$
|
27.64
|
|
Options granted
|
397
|
|
|
58.75
|
|
Options exercised
|
(275
|
)
|
|
18.88
|
|
Options canceled
|
(9
|
)
|
|
35.96
|
|
Options outstanding as of December 31, 2016
|
1,707
|
|
|
$
|
36.25
|
|
Time-Based Restricted Stock and Time-Based Restricted Stock Units
|
|
|
|
|
|
|
|
Number of Shares
(in thousands)
|
|
Number of Units
(in thousands)
|
Non-vested restricted units/shares as of June 30, 2016
|
616
|
|
|
271
|
|
Restricted shares/units granted
|
306
|
|
|
97
|
|
Restricted shares/units vested
|
(370
|
)
|
|
(120
|
)
|
Restricted shares/units forfeited
|
(22
|
)
|
|
(7
|
)
|
Non-vested restricted units/shares as of December 31, 2016
|
530
|
|
|
241
|
|
Performance-Based Restricted Stock Units
|
|
|
|
|
Number of Units
(in thousands)
|
Non-vested restricted units as of June 30, 2016
|
476
|
|
Restricted units granted
|
396
|
|
Dividend equivalents
|
4
|
|
Restricted units forfeited
|
(8
|
)
|
Non-vested restricted units as of December 31, 2016
|
868
|
|
In the
six months ended
December 31, 2016
, two grants of performance-based stock units were made which will vest at the end of fiscal years June 30, 2019 and 2020. The Monte Carlo simulation model was used to determine the grant date fair value of each grant based on an average historical stock price volatility for the Company and the peer companies of
32.2%
and
31.9%
and a risk-free interest rate of
0.9%
and
1.0%
for the grants vesting at the end of fiscal years June 30, 2019 and 2020, respectively. Because these awards earn dividend equivalents, the model did not assume an expected dividend yield.
The following table presents the assumptions used in the binomial model to determine the fair value of stock options granted during the
six months ended
December 31, 2016
:
|
|
|
|
|
Risk-free interest rate
|
1.4
|
%
|
Dividend yield
|
0.9
|
%
|
Weighted-average volatility factor
|
24.5
|
%
|
Weighted-average expected life (in years)
|
6.3
|
|
Weighted-average fair value (in dollars)
|
$
|
13.90
|
|
Note 8. Income Taxes
Tax Matters Agreement
The Company and ADP entered into a tax matters agreement as part of the spin-off that governs the rights and obligations of both parties after the spin-off with respect to taxes for both pre and post spin-off periods. Under this agreement, ADP is generally required to indemnify the Company for any income taxes attributable to ADP's operations or the Company's operations and for any non-income taxes attributable to ADP's operations, in each case for all pre spin-off periods as well as any taxes arising from transactions effected to consummate the spin-off, and the Company generally is required to indemnify ADP for any non-income taxes attributable to the Company's operations for all pre spin-off periods and for any income taxes attributable to the Company's operations for post spin-off periods.
The Company is generally required to indemnify ADP against any tax resulting from the spin-off (and against any claims made against ADP in respect of any tax imposed on its stockholders), in each case if that tax results from (i) an issuance of a significant amount of the Company's equity securities, a redemption of a significant amount of the Company's equity securities or the Company's involvement in other significant acquisitions of the Company's equity securities (excluding the spin-off), (ii) other actions or failures to act by the Company, or (iii) any of the Company's representations or undertakings referred to in the tax matters agreement being incorrect or violated. ADP will generally be required to indemnify the Company for any tax resulting from the spin-off if that tax results from (a) ADP's issuance of its equity securities, redemption of its equity securities or involvement in other acquisitions of its equity securities, (b) other actions or failures to act by ADP, or (c) any of ADP's representations or undertakings referred to in the tax matters agreement being incorrect or violated.
The Company recognized receivables from ADP of
$0.9 million
and
$1.1 million
as of
December 31, 2016
and
June 30, 2016
, respectively, and payables to ADP of
$1.1 million
and
$1.6 million
as of
December 31, 2016
and
June 30, 2016
, respectively, under the tax matters agreement.
Valuation Allowance
The Company had valuation allowances of
$34.0 million
and
$34.3 million
as of
December 31, 2016
and
June 30, 2016
, respectively. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will expire unutilized. At the end of each reporting period, the Company reviews the realizability of its deferred tax assets. During the
six months ended
December 31, 2016
, the valuation allowance balance was decreased for a Canadian valuation allowance adjustment and increased for current year deferred tax movements and currency exchange fluctuations. The valuation allowance adjustment was recorded during the
three months ended
December 31, 2016
based on achieving three years of cumulative pre-tax income in the quarter and forecasts of future pre-tax income, and therefore, the Company adjusted the valuation allowance by
$1.1 million
resulting in an income tax provision benefit.
Unrecognized Income Tax Benefits
As of
December 31, 2016
and
June 30, 2016
, the Company had unrecognized income tax benefits of
$5.2 million
and
$4.7 million
, respectively, of which
$4.2 million
and
$3.6 million
, respectively, would impact the effective tax rate if recognized. During the
six months ended
December 31, 2016
, the Company increased its unrecognized income tax benefits by
$0.5 million
based on information that indicates the extent to which certain tax positions are more likely than not of being sustained.
Provision for Income Taxes
The effective tax rate for the
three months ended
December 31, 2016
and
2015
was
29.7%
and
34.7%
, respectively. The effective tax rate for
three months ended
December 31, 2016
was favorably impacted by
$3.0 million
excess tax benefits associated with adopting ASU 2016-09 effective July 1, 2016 as described in Note 2 and a
$1.1 million
Canadian valuation allowance adjustment. The effective tax rate for the
three months ended December 31, 2015
was favorably impacted by a non-taxable indemnification gain of
$2.6 million
recorded in other income and a tax benefit associated with pre spin-off tax refunds.
The effective tax rate for the
six months ended
December 31, 2016
and
2015
was
29.5%
and
35.4%
, respectively. The effective tax rate for the
six months ended
December 31, 2016
was favorably impacted by
$8.7 million
of excess tax benefits associated with adopting ASU 2016-09 and a
$1.1 million
Canadian valuation allowance adjustment. The effective tax rate for the
six months ended December 31,
2015
was favorably impacted by a non-taxable indemnification gain of
$2.6 million
recorded in other income and a tax benefit associated with pre spin-off tax refunds.
Note 9. Commitments and Contingencies
The Company is subject to various claims and litigation in the normal course of business. When a loss is considered probable and reasonably estimable, the Company records a liability in the amount of its best estimate for the ultimate loss. There can be no assurance that these matters will be resolved in a manner that is not adverse to the Company.
In the normal course of business, the Company may enter into contracts in which it makes representations and warranties that relate to the performance of the Company’s services and products. The Company does not expect any material losses related to such representations and warranties.
Note 10. Accumulated Other Comprehensive Income ("AOCI")
Comprehensive income is a measure of income that includes both net earnings and other comprehensive income (loss). Other comprehensive income (loss) results from items deferred on the consolidated balance sheets in CDK stockholders' equity. The Company's other comprehensive income (loss) for the three and
six months ended
December 31, 2016
and
2015
and AOCI balances as of
December 31, 2016
and
June 30, 2016
were comprised solely of currency translation adjustments. Other comprehensive income (loss) was
$(26.8) million
and
$(15.0) million
for the
three months ended
December 31, 2016
and
2015
, respectively, and was
$(30.9) million
and
$(31.8) million
for the
six months ended
December 31, 2016
and
2015
, respectively. The accumulated balances reported in AOCI on the consolidated balance sheets for currency translation adjustments were
$(25.1) million
and
$5.8 million
as of
December 31, 2016
and
June 30, 2016
, respectively.
Note 11. Share Repurchase Transactions
In December 2015, the Board of Directors authorized the Company to repurchase up to
$1.0 billion
of its common stock as part of its
$1.0 billion
return of capital plan. In December 2016, the Company completed its
$1.0 billion
return of capital plan. Under the authorization, the Company may purchase its common stock in the open market or in privately negotiated transactions from time to time as permitted by federal securities laws and other legal requirements. The actual timing, number, and price of any shares to be repurchased was determined at management's discretion and depended on a number of factors, including the market price of the shares, general market and economic conditions, and other potential uses for free cash flow.
In June 2016, the Company entered into an accelerated share repurchase agreement ("June 2016 ASR") to purchase
$300.0 million
of the Company's common stock. Under the terms of the June 2016 ASR, the Company made a
$300.0 million
payment in June 2016 and received an initial delivery of approximately
4.3 million
of the Company's common stock. In September 2016, the Company received an additional
1.0 million
shares of common stock in final settlement of the June 2016 ASR, for a total of
5.3 million
shares. The value reflected in treasury stock upon completion of the June 2016 ASR represents the value of the shares received based on the closing price of the Company's stock on the respective settlement dates, which is less than the
$300.0 million
cash paid by
$3.1 million
.
In December 2016, the Company entered into an accelerated share repurchase agreement ("December 2016 ASR") to purchase
$330.0 million
of the Company's common stock. Under the terms of the December 2016 ASR, the Company made a
$330.0 million
payment in December 2016 and received an initial delivery of approximately
4.5 million
shares of the Company's common stock. The payment was recorded as a reduction to stockholders' equity, consisting of a
$264.0 million
increase in treasury stock, which reflects the value of the
4.5 million
shares received upon initial settlement, and a
$66.0 million
decrease in additional paid-in-capital, which reflects the value of stock held back. The final settlement of the December 2016 ASR is expected to occur no later than the end of the Company's fiscal year ending June 30, 2017 and may result in the receipt or delivery of additional shares of common stock. Additionally, the Company made open market repurchases of
0.3 million
shares of our common stock during the
three months ended
December 31, 2016
for a total cost of approximately
$20.0 million
.
The final number of shares purchased under the ASRs is calculated based on the average of the daily volume-weighted average price of the Company's common stock during the term of the respective ASR transaction, less a discount and subject to adjustments pursuant to the terms and conditions of the respective ASR agreement.
Note 12. Transactions with ADP
Prior to the spin-off, the Company entered into a transition services agreement with ADP to provide for an orderly transition to being an independent company. Among the principal services to be provided by ADP to the Company were operational and administrative infrastructure-related services, such as use of the e-mail domain “adp.com,” facilities sharing, procurement support, tax, human resources administrative services and services related to back office support, and software development in ADP's Indian facilities. Among the principal services to be provided by the Company to ADP were operational and administrative infrastructure-related services, such as facilities sharing, and human resources administrative services. The agreement expired
one year
after the spin-off date.
The Company entered into a data services agreement with ADP prior to the spin-off under which ADP provided the Company with certain data center sharing services relating to the provision of information technology, platform support, hosting, network services, and leases of equipment. The term of the agreement expired
two years
after the spin-off date.
For the three and
six months ended
December 31, 2016
, the Company recorded
$1.0 million
and
$2.3 million
of expenses related to the data services agreement in the accompanying financial statements, respectively. The continuing data services expenses in fiscal 2017 primarily relate to leases of equipment that have expiration dates past the term of the agreement. For the three and
six months ended
December 31, 2015
, the Company recorded
$0.8 million
and
$1.7 million
, respectively, of expense related to the transition services agreement and
$2.3 million
and
$4.5 million
, respectively, of expense related to the data services agreement in the accompanying financial statements. As of
June 30, 2016
, the Company had amounts payable to ADP under the transition services and data services agreements of
$0.1 million
and the Company had
no
amounts payable to ADP at
December 31, 2016
.
Note 13. Interim Financial Data by Segment
Effective July 1, 2016, the Company executed a comprehensive reorganization to streamline its organization that will enable it to deliver an improved customer experience, create significant efficiencies, and better align it to implement the business transformation plan. The organizational changes included integrating product management, combining the Digital Marketing and Automotive Retail North America operations into a single organization, creating a single North America sales organization, and forming a global research and development organization. In connection with this reorganization, information that the Company's chief operating decision maker regularly reviews for purposes of allocating resources and assessing performance changed resulting in a reassessment of operating segments.
The Company reorganized into two main operating groups. In connection with this reorganization, our operating segments have changed. The Company's first operating group is CDK North America which is comprised of two reportable segments, Retail Solutions North America and Advertising North America. The second operating group, which is also a reportable segment, is CDK International. Segment information for the three and
six months ended December 31,
2015
has been updated to conform to the new presentation.
The primary components of the Other segment are corporate allocations and other expenses not recorded in the segment results, such as stock-based compensation expense, corporate costs, interest expense, costs attributable to the business transformation plan, results of our captive insurance company and certain unallocated expenses. Certain expenses are charged to the reportable segments at a standard rate for management reasons. Other costs are recorded based on management responsibility.
Revenue by segment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
Three Months Ended
|
|
Six Months Ended
|
|
December 31,
|
|
December 31,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
CDK North America:
|
|
|
|
|
|
|
|
Retail Solutions North America
|
$
|
393.8
|
|
|
$
|
375.0
|
|
|
$
|
789.2
|
|
|
$
|
748.2
|
|
Advertising North America
|
78.1
|
|
|
66.3
|
|
|
155.6
|
|
|
129.5
|
|
CDK International
|
75.9
|
|
|
78.8
|
|
|
153.7
|
|
|
157.0
|
|
Total
|
$
|
547.8
|
|
|
$
|
520.1
|
|
|
$
|
1,098.5
|
|
|
$
|
1,034.7
|
|
Supplemental disclosure of revenue by type was as follows:
Retail Solutions North America:
Subscription
:
for software and technology solutions provided to automotive retailers and OEMs, which includes:
|
|
•
|
Dealer Management Systems (“DMSs”) and layered applications, which may be installed onsite at the customer’s location, or hosted and provided on a Software-as-a-Service ("SaaS") basis, including ongoing maintenance and support;
|
|
|
•
|
Interrelated services such as installation, initial training, and data updates;
|
|
|
•
|
Websites, search marketing, and reputation management services; and
|
|
|
•
|
Hardware on a service basis, meaning no specific assets are identified or a substantive right of substitution exists.
|
Transaction
: fees per transaction to process credit reports, vehicle registrations, and automotive equity mining.
Other
: consulting and professional services, sales of hardware, and other miscellaneous revenues.
Advertising North America revenues are primarily earned for placing internet advertisements for OEMs and automotive retailers.
CDK International revenues are generated primarily from Subscription revenue as described above, aside from the absence of website offerings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
Three Months Ended
|
|
Six Months Ended
|
|
December 31,
|
|
December 31,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
CDK North America:
|
|
|
|
|
|
|
|
Retail Solutions North America:
|
|
|
|
|
|
|
|
|
|
Subscription revenue
|
$
|
313.4
|
|
|
$
|
294.5
|
|
|
$
|
629.7
|
|
|
$
|
589.1
|
|
Transaction revenue
|
42.7
|
|
|
42.5
|
|
|
89.6
|
|
|
88.2
|
|
Other revenue
|
37.7
|
|
|
38.0
|
|
|
69.9
|
|
|
70.9
|
|
Total Retail Solutions North America
|
$
|
393.8
|
|
|
$
|
375.0
|
|
|
$
|
789.2
|
|
|
$
|
748.2
|
|
Advertising North America revenue
|
78.1
|
|
|
66.3
|
|
|
155.6
|
|
|
129.5
|
|
CDK International revenue
|
75.9
|
|
|
78.8
|
|
|
153.7
|
|
|
157.0
|
|
Total
|
$
|
547.8
|
|
|
$
|
520.1
|
|
|
$
|
1,098.5
|
|
|
$
|
1,034.7
|
|
Earnings before Income Taxes by segment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before Income Taxes
|
|
Three Months Ended
|
|
Six Months Ended
|
|
December 31,
|
|
December 31,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
CDK North America:
|
|
|
|
|
|
|
|
Retail Solutions North America
|
$
|
142.3
|
|
|
$
|
116.3
|
|
|
287.8
|
|
|
225.4
|
|
Advertising North America
|
9.8
|
|
|
5.0
|
|
|
21.3
|
|
|
8.8
|
|
CDK International
|
18.3
|
|
|
15.9
|
|
|
35.2
|
|
|
30.1
|
|
Other
|
(51.5
|
)
|
|
(30.4
|
)
|
|
(113.5
|
)
|
|
(61.7
|
)
|
Total
|
$
|
118.9
|
|
|
$
|
106.8
|
|
|
$
|
230.8
|
|
|
$
|
202.6
|
|
Assets by segment were as follows:
|
|
|
|
|
|
|
|
|
|
Assets
|
|
December 31, 2016
|
|
June 30, 2016
|
CDK North America:
|
|
|
|
Retail Solutions North America
|
$
|
1,228.3
|
|
|
$
|
1,240.9
|
|
Advertising North America
|
308.6
|
|
|
307.9
|
|
CDK International
|
517.1
|
|
|
539.4
|
|
Other
|
390.9
|
|
|
276.8
|
|
Total
|
$
|
2,444.9
|
|
|
$
|
2,365.0
|
|
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
(Tabular amounts in millions, except per share amounts)
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q and other written or oral statements made from time to time by CDK Global, Inc. ("CDK" or the "Company") may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, including statements concerning the Company's business transformation plan, other plans, objectives, forecasts, goals, beliefs, business strategies, future events, business conditions, results of operations, financial position, business outlook and business trends, intention to make share repurchases and to declare and pay future dividends, and other information may be forward-looking statements. Words such as "might," "will," "may," "could," "should," "estimates," "expects," "continues," "contemplates," "anticipates," "projects," "plans," "potential," "predicts," "intends," "believes," "forecasts," "future," "assumes," and variations of such words or similar expressions are intended to identify forward-looking statements. In particular, information appearing under “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes forward-looking statements. These statements are based on management's expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ materially from those expressed, or implied by, these forward-looking statements. Factors that could cause actual results to differ materially from those contemplated by the forward-looking statements include:
|
|
•
|
the Company's success in obtaining, retaining, and selling additional services to customers;
|
|
|
•
|
the pricing of our products and services;
|
|
|
•
|
overall market and economic conditions, including interest rate and foreign currency trends, and technology trends;
|
|
|
•
|
auto sales and advertising and related industry changes;
|
|
|
•
|
competitive conditions;
|
|
|
•
|
changes in technology, security breaches, interruptions, failures, and other errors involving our systems;
|
|
|
•
|
availability of skilled technical employees/labor/personnel;
|
|
|
•
|
the impact of new acquisitions and divestitures;
|
|
|
•
|
employment and wage levels;
|
|
|
•
|
availability of capital for the payment of debt service obligations or dividends or the repurchase of shares;
|
|
|
•
|
any changes to our credit ratings and the impact of such changes on our financing costs, rates, terms, debt service obligations, access to capital market and working capital needs;
|
|
|
•
|
the impact of our indebtedness, our access to cash and financing, and our ability to secure financing or financing at attractive rates;
|
|
|
•
|
our ability to timely and effectively implement our business transformation plan, which is intended to increase operating efficiency and improve our global cost structure, while limiting or mitigating business disruption; and
|
|
|
•
|
the ability of significant stockholders of the Company and their affiliates to significantly influence our decisions.
|
There may be other factors that may cause our actual results to differ materially from the forward-looking statements. Our actual results, performance or achievements could differ materially from those expressed in, or implied by, the forward-looking statements. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition. You should carefully read the factors described in the “Risk Factors” under “Item 1A. Risk Factors” of our Annual Report on Form 10-K (the “Form 10-K”) and in this Quarterly Report on Form 10-Q under “Item 1A. Risk Factors,” for a description of certain risks that could, among other things, cause our actual results to differ from these forward-looking statements.
All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q, even if subsequently made available by us on our website or otherwise, and are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q and the Annual Report on Form 10-K. We disclaim any obligation to update or
revise any forward-looking statements that may be made to reflect new information or future events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events, other than as required by law.
The following discussion should be read in conjunction with our condensed consolidated financial statements and accompanying notes thereto included elsewhere herein. In this Quarterly Report on Form 10-Q, all references to "we," "our," and "us" refer collectively to CDK and its consolidated subsidiaries.
RESULTS OF OPERATIONS
Executive Overview
We are a leading global provider of integrated information technology and digital marketing solutions to the automotive retail and adjacent industries. Focused on evolving the automotive retail experience, we provide solutions to dealers in more than 100 countries around the world, covering more than 27,000 retail locations and most original equipment manufacturers ("OEMs"). We have over 40 years of history providing innovative solutions to automotive retailers and OEMs to better manage, analyze, and grow their businesses. Our solutions automate and integrate all parts of the dealership and buying process from targeted digital advertising and marketing campaigns to the sale, financing, insuring, parts supply, repair, and maintenance of vehicles. We believe the breadth of our integrated solutions allows us to more comprehensively address the varied needs of automotive retailers than any other single competitor in our industry.
Effective July 1, 2016, we executed a comprehensive plan to streamline our organization that will enable us to deliver an improved customer experience, create significant efficiencies, and better align us to implement our business transformation plan described below. The organizational changes included integrating product management, combining the Digital Marketing and Automotive Retail North America operations into a single organization, creating a single North America sales organization, and forming a global research and development organization. In connection with this reorganization, information that our chief operating decision maker regularly reviews for purposes of allocating resources and assessing performance changed resulting in a reassessment of operating segments.
The Company reorganized into two main operating groups. In connection with this reorganization, our operating segments have changed. The Company's first operating group is CDK North America which is comprised of two reportable segments, Retail Solutions North America and Advertising North America. The second operating group, which is also a reportable segment, is CDK International. Segment information for the three and
six months ended
December 31, 2015
, has been updated to conform to the new presentation. A brief description of each of these three segments' operations is provided below.
Retail Solutions North America
Through our Retail Solutions North America ("RSNA") segment, we provide technology-based solutions, including automotive website platforms, that help automotive retailers, OEMs, and other industry participants manage the acquisition, sale, financing, insuring, parts supply, and repair and maintenance of vehicles. Our solutions help our customers streamline their operations, better target and serve their customers, and enhance the financial performance of their retail operations. In addition to providing solutions to retailers and manufacturers of automobiles, we also provide solutions to retailers and manufacturers of heavy trucks, construction equipment, agricultural equipment, motorcycles, boats, and other marine and recreational vehicles.
Advertising North America
Through our Advertising North America ("ANA") segment, we provide advertising solutions, including management of digital advertising spend, for OEMs and automotive retailers. These solutions provide a coordinated offering across multiple marketing channels to help achieve customer marketing and sales objectives and coordinate execution between OEMs and their retailer networks.
CDK International
Through our CDK International ("CDKI") segment, we provide technology-based solutions similar to the retail solutions provided in our RSNA segment in approximately 100 countries outside of the United States ("U.S.") and Canada. The solutions that we provide within this segment allow our customers to streamline their business operations and enhance their financial performance within their local marketplace, and in some cases where we deal directly with OEMs, across international borders. Customers of this segment include automotive retail dealers and OEMs across Europe, the Middle East, Asia, Africa, and Latin America.
Business Transformation Plan
During the fiscal year ended June 30, 2015 ("fiscal 2015"), we initiated a three-year business transformation plan that is intended to increase operating efficiency and improve the cost structure within our global operations. The business
transformation plan is expected to produce significant benefits in our long-term business performance. We have described below the key workstreams on which we monitor and evaluate performance under the business transformation plan.
|
|
|
|
|
|
Workstream
|
|
Description
|
|
Savings Goal
|
MoveUp!
|
|
Migrate customers to latest software versions; engineer to reduce customizations
|
|
$15 - 20 million
|
Streamline implementation
|
|
Streamline installation and training process through improved technology, process, tools, and workflow
|
|
$25 - 30 million
|
Enhance customer service
|
|
Decrease resolution times through optimized case management and technology-enabled, intelligent, user-driven support
|
|
$10 - 15 million
|
Optimize sales and product offering
|
|
Adjust sales structure; reduce product complexity; expand bundling; optimize discount management; standardize pricing
|
|
$65 - 75 million
|
Simplify quote to cash
|
|
Reduce business complexity through integrated go-to-market model that leverages an automated contracting process, SKU rationalization, and streamlined invoicing
|
|
$25 - 30 million
|
Workforce efficiency and footprint
|
|
Increase efficiency through fewer layers and larger spans of control, geographic wage arbitrage, and reduced facility footprint
|
|
$65 - 70 million
|
Strategic sourcing
|
|
Disciplined vendor management and vendor consolidation
|
|
$30 - 35 million
|
CDK International
|
|
Comprehensive optimization across back office, R&D, implementation, and support
|
|
$10 - 15 million
|
Other
|
|
|
|
$20 million
|
Target
|
|
|
|
approximately$300 million
|
In the second quarter of fiscal 2017, we reviewed our business transformation plan and have adjusted expected savings associated with the plan to be approximately $300 million over the periods covering fiscal 2016 extended through fiscal year ended June 30, 2019 (“fiscal 2019”) with a targeted adjusted EBITDA margin for the fiscal year ended June 30, 2018 (“fiscal 2018”) of 35%. We expect to achieve a target EBITDA exit margin of 36%-38% for fourth quarter of fiscal 2018 and 40% or above for fourth quarter of fiscal 2019. See "Results of Operations - Non-GAAP Measures" for a discussion regarding our use of non-GAAP measures and a reconciliation of our non-GAAP measures to the nearest GAAP measures.
Fiscal 2018 and 2019 targets represent a financial objective distinct from forecasts of performance. Therefore, we have not provided a reconciliation of our fiscal 2018 and 2019 adjusted EBITDA targets to the most directly comparable GAAP measure of net earnings attributable to CDK, because projecting potential adjustments to GAAP results for fiscal 2018 and 2019 targets is not feasible and could be misleading to users of this financial information. The EBITDA reconciliation disclosed under "Results of Operations - Non-GAAP Measures" is indicative of the reconciliation that will be prepared for the same fiscal 2018 and 2019 adjusted measure in the future.
We estimate the cost to execute the plan through fiscal 2019 to be approximately $225 to
$250 million
comprised of approximately
$70 million
of restructuring expense and approximately $155 to
$180 million
of other expenses to implement the business transformation plan. We will continue to evaluate our estimate of expenses and the allocation of those expenses as we execute the business transformation plan.
Restructuring expenses associated with the business transformation plan included employee-related costs, which represent severance and other termination-related benefits, and contract termination costs, which include costs to terminate facility leases. We recognized
$2.3 million
and
$1.8 million
of restructuring expenses for the
three months ended
December 31, 2016
and 2015, respectively, and
$3.4 million
and
$3.7 million
for the
six months ended
December 31, 2016
and 2015, respectively. Since the inception of the business transformation plan in the fourth quarter of fiscal 2015, we have recognized cumulative restructuring expenses of
$26.0 million
. Restructuring expenses are recorded in the Other segment, as these initiatives are predominantly centrally directed and are not included in internal measures of segment operating performance.
Accruals for restructuring expenses were included within accrued expenses and other current liabilities on the consolidated balance sheets as of
December 31, 2016
and June 30, 2016. The following table summarizes the activity for the restructuring accrual for the
six months ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee-Related Costs
|
|
Contract Termination Costs
|
|
Total Costs
|
Balance as of June 30, 2016
|
$
|
9.0
|
|
|
$
|
0.9
|
|
|
$
|
9.9
|
|
Charges
|
2.7
|
|
|
1.4
|
|
|
4.1
|
|
Cash payments
|
(7.8
|
)
|
|
(1.5
|
)
|
|
(9.3
|
)
|
Adjustments
|
(0.4
|
)
|
|
(0.3
|
)
|
|
(0.7
|
)
|
Foreign exchange
|
(0.1
|
)
|
|
—
|
|
|
(0.1
|
)
|
Balance as of December 31, 2016
|
$
|
3.4
|
|
|
$
|
0.5
|
|
|
$
|
3.9
|
|
Our business transformation plan includes a goal to reduce the number of North American facilities we occupy by 40%. In August 2016, we announced all of the North American facilities that we intend to close through fiscal 2018. In the
six months ended
December 31, 2016
, we have closed five facilities. These efforts are expected to result in an increase in contract termination costs in future periods.
In addition to the restructuring expenses discussed above, we expect to incur additional costs to implement the business transformation plan, including consulting, training, and other transition costs. We may also incur accelerated depreciation and/or amortization expenses if the expected useful lives of our assets are adjusted. While these costs are directly attributable to our business transformation plan, they are not included in restructuring expenses on our consolidated statements of operations. We recognized
$19.0 million
and
$5.1 million
of other business transformation expenses for the
three months ended
December 31, 2016
and 2015, respectively, and
$39.6 million
and
$6.8 million
for the
six months ended
December 31, 2016
and 2015, respectively. Since the inception of the business transformation plan in the fourth quarter of fiscal 2015, we have recognized cumulative other business transformation expenses of
$81.2 million
.
In December 2015, we announced our intent to return $1.0 billion to our stockholders in the form of dividends and share repurchases. In December 2016, we completed the $1.0 billion return of capital plan. In February 2017, we announced our intent to return $750 million to $1.0 billion of capital per calendar year through 2019 through a combination of dividends and share repurchases. Execution of our business transformation plan will result in increased earnings, which will drive free cash flow (the amount of cash generated from operating activities less capital expenditures and capitalized software). We intend to continue to return free cash flow to our stockholders as our business transformation plan progresses. Our new return of capital plan is expected to be funded through a combination of free cash flow and incremental borrowings intended to bring leverage, measured as financial debt, net of cash, divided by adjusted EBITDA, to a range of 2.5x to 3.0x over the period.
Sources of Revenues and Expenses
Revenues.
We generally receive fee-based revenue by providing services to customer.
In our RSNA segment, we have the following sources of revenue:
Subscription:
for software and technology solutions provided to automotive retailers and OEMs, which includes:
|
|
•
|
Dealer Management Systems (“DMSs”) and layered applications, which may be installed onsite at the customer’s location, or hosted and provided on a Software-as-a-Service ("SaaS") basis, including ongoing maintenance and support;
|
|
|
•
|
Interrelated services such as installation, initial training, and data updates;
|
|
|
•
|
Websites, search marketing, and reputation management services; and
|
|
|
•
|
Hardware on a service basis, meaning no specific assets are identified or a substantive right of substitution exists.
|
Transaction:
fees per transaction to process credit reports, vehicle registrations, and automotive equity mining.
Other:
consulting and professional services, sales of hardware, and other miscellaneous revenues.
In our ANA segment, revenues are primarily earned for placing internet advertisements for OEMs an automotive retailers.
CDKI revenues are generated primarily from Subscription revenue as described above, aside from the absence of website offerings.
Expenses.
Expenses generally relate to the cost of providing services to customers in the three reportable segments. In the RSNA and CDKI segments, significant expenses include employee payroll and other labor-related costs, the cost of hosting customer systems, third-party costs for transaction-based solutions and licensed software utilized in our solution offerings, computer hardware, software, telecommunications, transportation and distribution costs, third-party content for website offerings, the cost of hosting customer websites, computer hardware, software, and other general overhead items. In the ANA segment, significant expenses include third-party Internet-based advertising placements, employee payroll and other labor-related costs, computer hardware, software, and other general overhead items. We also have some company-wide expenses attributable to management compensation and corporate overhead.
Key Performance Measures
We regularly review the following key performance measures in evaluating our business results, identifying trends affecting our business, and making operating and strategic decisions:
Dealer Management System Customer Sites.
We track the number of customer sites that have an active DMS. Consistent with our strategy of growing our automotive retail customer base, we view the number of customer sites purchasing our DMS solutions as an indicator of market penetration for our RSNA and CDKI segments. Our DMS customer site count includes retailers with an active DMS that sell vehicles in the automotive and adjacent markets. Adjacent markets include heavy truck dealerships that provide vehicles to the over-the-road trucking industry, recreation dealerships in the motorcycle, marine, and recreational vehicle industries, and heavy equipment dealerships in the agriculture and construction equipment industries. We consider a DMS to be active if we have billed a subscription fee for that solution during the most recently ended calendar month.
Average Revenue Per DMS Customer Site.
Average revenue per automotive retail DMS customer site is an indicator of the adoption of our solutions by DMS customers, and we monitor changes in this metric to measure the effectiveness of our strategy to deepen our relationships with our current customer base through upgrading and expanding solutions. We calculate average revenue per DMS customer site by dividing the monthly applicable revenue generated from our solutions in a period by the average number of DMS customer sites in the period. This metric has been updated to reflect the new segments and now includes revenue generated from websites. The metric excludes subscription revenue generated by customers not included in our DMS site count as well as subscription revenue related to certain installation and training activities that is deferred then recognized as revenue over the life of the contract. Revenue underlying this metric is based on budgeted foreign exchange rates. When we discuss growth in average revenue per DMS customer site, revenue for the comparable prior period has been adjusted to reflect budgeted foreign exchange rates for the current period.
Websites.
For the RSNA segment, we track the number of websites that we host and develop for our OEM and automotive retail customers as an indicator of business activity, regardless of whether or not the website is tied to a DMS customer site. The number of websites as of a specified date is the total number of full function dealer websites or portals that are currently accessible as of the end of the most recent calendar month.
Advertising.
For the ANA segment, we track the amount of advertising revenue generated from automotive retailers on either a national or regional scale as a measure of our effectiveness in delivering advertising services to the market.
Results of Operations
The following is a discussion of the results of our consolidated operations for the three and
six months ended
December 31, 2016
and
2015
. For a discussion of our operations by segment, see "Analysis of Reportable Segments" below.
The table below presents consolidated results of operations for the periods indicated and the dollar change and percentage change between periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
December 31,
|
|
Change
|
|
December 31,
|
|
Change
|
|
2016
|
|
2015
|
|
$
|
|
%
|
|
2016
|
|
2015
|
|
$
|
|
%
|
Revenues
|
$
|
547.8
|
|
|
$
|
520.1
|
|
|
$
|
27.7
|
|
|
5
|
%
|
|
$
|
1,098.5
|
|
|
$
|
1,034.7
|
|
|
$
|
63.8
|
|
|
6
|
%
|
Cost of revenues
|
303.2
|
|
|
301.2
|
|
|
2.0
|
|
|
1
|
%
|
|
618.3
|
|
|
612.0
|
|
|
6.3
|
|
|
1
|
%
|
Selling, general, and administrative costs
|
110.9
|
|
|
105.8
|
|
|
5.1
|
|
|
5
|
%
|
|
224.6
|
|
|
203.2
|
|
|
21.4
|
|
|
11
|
%
|
Restructuring expenses
|
2.3
|
|
|
1.8
|
|
|
0.5
|
|
|
n/m
|
|
|
3.4
|
|
|
3.7
|
|
|
(0.3
|
)
|
|
n/m
|
|
Total expenses
|
416.4
|
|
|
408.8
|
|
|
7.6
|
|
|
2
|
%
|
|
846.3
|
|
|
818.9
|
|
|
27.4
|
|
|
3
|
%
|
Operating earnings
|
131.4
|
|
|
111.3
|
|
|
20.1
|
|
|
18
|
%
|
|
252.2
|
|
|
215.8
|
|
|
36.4
|
|
|
17
|
%
|
Interest expense
|
(12.3
|
)
|
|
(9.5
|
)
|
|
(2.8
|
)
|
|
29
|
%
|
|
(23.0
|
)
|
|
(18.8
|
)
|
|
(4.2
|
)
|
|
22
|
%
|
Other income (expense), net
|
(0.2
|
)
|
|
5.0
|
|
|
(5.2
|
)
|
|
(104
|
)%
|
|
1.6
|
|
|
5.6
|
|
|
(4.0
|
)
|
|
(71
|
)%
|
Earnings before income taxes
|
118.9
|
|
|
106.8
|
|
|
12.1
|
|
|
11
|
%
|
|
230.8
|
|
|
202.6
|
|
|
28.2
|
|
|
14
|
%
|
Margin %
|
21.7
|
%
|
|
20.5
|
%
|
|
|
|
|
|
21.0
|
%
|
|
19.6
|
%
|
|
|
|
|
Provision for income taxes
|
(35.3
|
)
|
|
(37.1
|
)
|
|
1.8
|
|
|
(5
|
)%
|
|
(68.0
|
)
|
|
(71.7
|
)
|
|
3.7
|
|
|
(5
|
)%
|
Effective tax rate
|
29.7
|
%
|
|
34.7
|
%
|
|
|
|
|
|
29.5
|
%
|
|
35.4
|
%
|
|
|
|
|
|
Net earnings
|
83.6
|
|
|
69.7
|
|
|
13.9
|
|
|
20
|
%
|
|
162.8
|
|
|
130.9
|
|
|
31.9
|
|
|
24
|
%
|
Less: net earnings attributable to noncontrolling interest
|
0.9
|
|
|
1.5
|
|
|
(0.6
|
)
|
|
(40
|
)%
|
|
3.2
|
|
|
3.7
|
|
|
(0.5
|
)
|
|
(14
|
)%
|
Net earnings attributable to CDK
|
$
|
82.7
|
|
|
$
|
68.2
|
|
|
$
|
14.5
|
|
|
21
|
%
|
|
$
|
159.6
|
|
|
$
|
127.2
|
|
|
$
|
32.4
|
|
|
25
|
%
|
Three Months Ended December 31,
2016
Compared to the
Three Months Ended December 31,
2015
Revenues.
Revenues for the
three months ended
December 31, 2016
increased
$27.7 million
as compared to the three months ended
December 31, 2015
. The RSNA segment contributed
$18.8 million
and the ANA segment contributed
$11.8 million
of revenue growth, offset by a decrease in revenues in the CDKI segment of
$2.9 million
. See the discussion below for drivers of each segment's revenue growth.
Cost of Revenues.
Cost of revenues for the
three months ended
December 31, 2016
increased
by
$2.0 million
as compared to the
three months ended
December 31, 2015
. The constant currency impact of foreign exchange rates on cost of revenues was a decrease of
$3.6 million
. Cost of revenues was unfavorably impacted by increased direct operating expenses related to other business transformation expenses, a growth in advertising costs for the ANA segment, and an increase in employee-related costs, primarily related to incentive compensation. The unfavorable effects of these items were offset by lower expenses as a result of lower labor-related costs attributable to ongoing initiatives under our business transformation plan primarily related to lower headcount and geographic labor mix. Cost of revenues include expenses to research, develop, and deploy new and enhanced solutions for our customers of
$36.1 million
and
$39.1 million
for the
three months ended
December 31, 2016
and 2015, respectively, representing
6.6%
and
7.5%
of revenues, respectively.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses for the
three months ended
December 31, 2016
increased
by
$5.1 million
as compared to the
three months ended
December 31, 2015
. The constant currency impact of foreign exchange rates on selling, general and administrative expenses was a decrease of
$2.0 million
. Selling, general and administrative expenses increased as a result of other business transformation expenses, and an increase in stock based compensation expense. These increases were partially offset by lower labor-related costs attributable to ongoing initiatives under our business transformation plan primarily related to lower headcount and geographic labor mix.
Restructuring Expenses.
Restructuring expenses for the
three months ended
December 31, 2016
increased
by
$0.5 million
as compared to the
three months ended
December 31, 2015
and relates to the business transformation plan we initiated in fiscal 2015.
Interest Expense.
Interest expense for the
three months ended
December 31, 2016
increased
by
$2.8 million
as compared to the
three months ended
December 31, 2015
due to borrowings under our 2021 term loan facility in December 2016, full quarter impact of 2020 term loan facility, and an increase in interest rates on our term loan facilities and senior notes due to downgrades and high interest rate environment.
Other Income (Expense), net.
Other income (expense), net for the
three months ended
December 31, 2016
decreased
by
$5.2 million
as compared to the
three months ended
December 31, 2015
due primarily to a net gain associated with an indemnification receivable from ADP for pre spin-off tax periods in accordance with the tax matters agreement in the
six months ended
December 31, 2015
and an impairment of a non-operating receivable in the
six months ended
December 31, 2016
.
Provision for Income Taxes.
The effective tax rate for the
three months ended
December 31, 2016
and
2015
was
29.7%
and
34.7%
, respectively. The effective tax rate for the three months ended
December 31, 2016
was favorably impacted by
$3.0 million
excess tax benefit associated with adopting Accounting Standards Update ("ASU") 2016-09, "Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" effective July 1, 2016 as described in Note 2 and a
$1.1 million
Canadian valuation allowance adjustment. The effective tax rate for the
three months ended
December 31, 2015
was favorably impacted by a non-taxable indemnification gain of
$2.6 million
recorded in other income and a tax benefit associated with pre spin-off tax refunds.
Net Earnings Attributable to CDK.
Net earnings attributable to CDK for the
three months ended
December 31, 2016
increased
$14.5 million
as compared to the
three months ended
December 31, 2015
. The
increase
in net earnings attributable to CDK was primarily due to the factors previously discussed.
Six Months Ended
December 31, 2016
Compared to the
Six Months Ended
December 31, 2015
Revenues.
Revenues for the
six months ended
December 31, 2016
increased
$63.8 million
as compared to the
six months ended
December 31, 2015
. The RSNA segment contributed
$41.0 million
and the ANA segment contributed
$26.1 million
of revenue growth, offset by a decrease in revenues in the CDKI segment of
$3.3 million
. See the discussion below for drivers of each segment's revenue growth.
Cost of Revenues.
Cost of revenues for the
six months ended
December 31, 2016
increased
by
$6.3 million
as compared to the
six months ended
December 31, 2015
. The constant currency impact of foreign exchange rates on cost of revenues was a decrease of
$6.0 million
. Cost of revenues was unfavorably impacted by increased direct operating expenses related to other business transformation expenses, a growth in advertising costs for the ANA segment, and an increase in employee-related costs, primarily related to incentive compensation. The unfavorable effects of these items were offset by lower expenses as a result of lower labor-related costs attributable to ongoing initiatives under our business transformation plan primarily related to lower headcount and geographic labor mix. Cost of revenues include expenses to research, develop, and deploy new and enhanced solutions for our customers of
$74.8 million
and
$78.6 million
for the
six months ended
December 31, 2016
and 2015, respectively, representing
6.8%
and
7.6%
of revenues, respectively.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses for the
six months ended
December 31, 2016
increased
by
$21.4 million
as compared to the
six months ended
December 31, 2015
. The constant currency impact of foreign exchange rates on selling, general and administrative expenses was a decrease of
$3.2 million
. Selling, general and administrative expenses increased as a result of other business transformation expenses, an increase in stock based compensation expense, and outside services. These increases were partially offset by lower labor-related costs attributable to ongoing initiatives under our business transformation plan primarily related to lower headcount and geographic labor mix.
Restructuring Expenses.
Restructuring expenses for the
six months ended
December 31, 2016
decreased
by
$0.3 million
as compared to the
six months ended
December 31, 2015
and relates to the business transformation plan we initiated in fiscal 2015.
Interest Expense.
Interest expense for the
six months ended
December 31, 2016
increased
by
$4.2 million
as compared to the
six months ended
December 31, 2015
due to borrowings under our 2021 term loan facility in December 2016, full impact of the 2020 term loan, and an increase in interest rates on our term loan facilities and senior notes due to downgrades and higher interest rate environment.
Other Income (Expense), net.
Other income (expense), net for the
six months ended
December 31, 2016
decreased
by
$4.0 million
as compared to the
six months ended
December 31, 2015
due primarily to a net gain associated with an
indemnification receivable from ADP for pre spin-off tax periods in accordance with the tax matters agreement in the
six months ended
December 31, 2015
and an impairment of a non-operating receivable in the
six months ended
December 31, 2016
.
Provision for Income Taxes.
The effective tax rate for the
six months ended
December 31, 2016
and
2015
was
29.5%
and
35.4%
, respectively. The effective tax rate for the
six months ended
December 31, 2016
was favorably impacted by an
$8.7 million
excess tax benefit associated with adopting ASU 2016-09 and a
$1.1 million
Canadian valuation allowance adjustment. The effective tax rate for the
six months ended
December 31, 2015
was favorably impacted by a non-taxable indemnification gain of
$2.6 million
recorded in other income and tax benefit associated with pre spin-off tax refunds.
Net Earnings Attributable to CDK.
Net earnings attributable to CDK for the
six months ended
December 31, 2016
increased
$32.4 million
as compared to the
six months ended
December 31, 2015
. The
increase
in net earnings attributable to CDK was primarily due to the factors previously discussed
Non-GAAP Measures
Throughout the following results of operations discussions, we disclose certain adjusted results. We use certain adjusted results to evaluate our operating performance. In addition, we use adjusted EBITDA, among other measures, as an input to determine incentive-based compensation and target leverage. Our non-GAAP adjustments principally relate to expenses and benefits that impact comparability of the underlying GAAP measures. We believe our non-GAAP measures provide relevant and useful information for users of the financial statements because they provide insight into our ongoing operating results.
We also review certain non-GAAP measures, namely adjusted revenues and adjusted earnings before income taxes, on a constant currency basis to understand underlying business trends. To present these results on a constant currency basis, current period results for entities reporting in currencies other than the U.S. dollar were translated into U.S. dollar using the average monthly exchange rates for the comparable prior period. As a result, constant currency results neutralize the effects of foreign currency.
Because non-GAAP measures are not measures of performance that are calculated in accordance with GAAP, they should not be considered in isolation from, or as a substitute for, other metrics that are calculated in accordance with GAAP.
Consolidated Non-GAAP Results
The tables below present the reconciliation of the most directly comparable GAAP measures to constant currency revenues, constant currency adjusted earnings before income taxes, adjusted provision for income taxes, adjusted net earnings attributable to CDK, and adjusted net earnings attributable to CDK per common share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
December 31,
|
|
Change
|
|
December 31,
|
|
Change
|
|
2016
|
|
2015
|
|
$
|
|
%
|
|
2016
|
|
2015
|
|
$
|
|
%
|
Revenues
|
$
|
547.8
|
|
|
$
|
520.1
|
|
|
$
|
27.7
|
|
|
5
|
%
|
|
$
|
1,098.5
|
|
|
$
|
1,034.7
|
|
|
$
|
63.8
|
|
|
6
|
%
|
Impact of exchange rates
|
5.4
|
|
|
—
|
|
|
5.4
|
|
|
|
|
9.5
|
|
|
—
|
|
|
9.5
|
|
|
|
Constant currency adjusted revenues
|
$
|
553.2
|
|
|
$
|
520.1
|
|
|
$
|
33.1
|
|
|
6
|
%
|
|
1,108.0
|
|
|
1,034.7
|
|
|
$
|
73.3
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
$
|
118.9
|
|
|
$
|
106.8
|
|
|
$
|
12.1
|
|
|
11
|
%
|
|
$
|
230.8
|
|
|
$
|
202.6
|
|
|
$
|
28.2
|
|
|
14
|
%
|
Margin %
|
21.7
|
%
|
|
20.5
|
%
|
|
|
|
|
|
21.0
|
%
|
|
19.6
|
%
|
|
|
|
|
Restructuring expenses
(1)
|
2.3
|
|
|
1.8
|
|
|
0.5
|
|
|
|
|
3.4
|
|
|
3.7
|
|
|
(0.3
|
)
|
|
|
Other business transformation expenses
(1)
|
19.0
|
|
|
5.1
|
|
|
13.9
|
|
|
|
|
39.6
|
|
|
6.8
|
|
|
32.8
|
|
|
|
Tax matters indemnification gain, net
(2)
|
—
|
|
|
(2.6
|
)
|
|
2.6
|
|
|
|
|
—
|
|
|
(2.6
|
)
|
|
2.6
|
|
|
|
Adjusted earnings before income taxes
|
$
|
140.2
|
|
|
$
|
111.1
|
|
|
$
|
29.1
|
|
|
26
|
%
|
|
$
|
273.8
|
|
|
$
|
210.5
|
|
|
$
|
63.3
|
|
|
30
|
%
|
Adjusted margin %
|
25.6
|
%
|
|
21.4
|
%
|
|
|
|
|
|
24.9
|
%
|
|
20.3
|
%
|
|
|
|
|
Impact of exchange rates
|
(0.1
|
)
|
|
—
|
|
|
(0.1
|
)
|
|
|
|
0.2
|
|
|
—
|
|
|
0.2
|
|
|
|
Constant currency adjusted earnings before income taxes
|
$
|
140.1
|
|
|
$
|
111.1
|
|
|
$
|
29.0
|
|
|
26
|
%
|
|
$
|
274.0
|
|
|
$
|
210.5
|
|
|
$
|
63.5
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
$
|
35.3
|
|
|
$
|
37.1
|
|
|
$
|
(1.8
|
)
|
|
(5
|
)%
|
|
$
|
68.0
|
|
|
$
|
71.7
|
|
|
$
|
(3.7
|
)
|
|
(5
|
)%
|
Effective tax rate
|
29.7
|
%
|
|
34.7
|
%
|
|
|
|
|
|
29.5
|
%
|
|
35.4
|
%
|
|
|
|
|
Income tax effect of pre-tax adjustments
(3)
|
7.9
|
|
|
2.1
|
|
|
5.8
|
|
|
|
|
16.0
|
|
|
3.3
|
|
|
12.7
|
|
|
|
Pre spin-off filed tax return adjustment
(4)
|
—
|
|
|
0.4
|
|
|
(0.4
|
)
|
|
|
|
—
|
|
|
0.4
|
|
|
(0.4
|
)
|
|
|
Adjusted provision for income taxes
|
$
|
43.2
|
|
|
$
|
39.6
|
|
|
$
|
3.6
|
|
|
9
|
%
|
|
$
|
84.0
|
|
|
$
|
75.4
|
|
|
$
|
8.6
|
|
|
11
|
%
|
Adjusted effective tax rate
|
30.8
|
%
|
|
35.6
|
%
|
|
|
|
|
|
30.7
|
%
|
|
35.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to CDK
|
$
|
82.7
|
|
|
$
|
68.2
|
|
|
$
|
14.5
|
|
|
21
|
%
|
|
$
|
159.6
|
|
|
$
|
127.2
|
|
|
$
|
32.4
|
|
|
25
|
%
|
Restructuring expenses
(1)
|
2.3
|
|
|
1.8
|
|
|
0.5
|
|
|
|
|
3.4
|
|
|
3.7
|
|
|
(0.3
|
)
|
|
|
Other business transformation expenses
(1)
|
19.0
|
|
|
5.1
|
|
|
13.9
|
|
|
|
|
39.6
|
|
|
6.8
|
|
|
32.8
|
|
|
|
Tax matters indemnification gain, net
(2)
|
—
|
|
|
(2.6
|
)
|
|
2.6
|
|
|
|
|
—
|
|
|
(2.6
|
)
|
|
—
|
|
|
|
Income tax effect of pre-tax adjustments
(3)
|
(7.9
|
)
|
|
(2.1
|
)
|
|
(5.8
|
)
|
|
|
|
(16.0
|
)
|
|
(3.3
|
)
|
|
(12.7
|
)
|
|
|
Pre spin-off filed tax return adjustment
(4)
|
—
|
|
|
(0.4
|
)
|
|
0.4
|
|
|
|
|
—
|
|
|
(0.4
|
)
|
|
0.4
|
|
|
|
Adjusted net earnings attributable to CDK
|
$
|
96.1
|
|
|
$
|
70.0
|
|
|
$
|
26.1
|
|
|
37
|
%
|
|
$
|
186.6
|
|
|
$
|
131.4
|
|
|
$
|
55.2
|
|
|
42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings attributable to CDK per share
|
$
|
0.55
|
|
|
$
|
0.43
|
|
|
$
|
0.12
|
|
|
28
|
%
|
|
$
|
1.06
|
|
|
$
|
0.80
|
|
|
$
|
0.26
|
|
|
33
|
%
|
Restructuring expenses
(1)
|
0.01
|
|
|
0.01
|
|
|
|
|
|
|
0.02
|
|
|
0.02
|
|
|
|
|
|
Other business transformation expenses
(1)
|
0.13
|
|
|
0.03
|
|
|
|
|
|
|
0.26
|
|
|
0.04
|
|
|
|
|
|
Tax matters indemnification gain, net
(2)
|
—
|
|
|
(0.02
|
)
|
|
|
|
|
|
—
|
|
|
(0.02
|
)
|
|
|
|
|
Income tax effect of pre-tax adjustments
(3)
|
(0.05
|
)
|
|
(0.01
|
)
|
|
|
|
|
|
(0.10
|
)
|
|
(0.02
|
)
|
|
|
|
|
Pre spin-off filed tax return adjustment
(4)
|
—
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
Adjusted diluted earnings attributable to CDK per share
|
$
|
0.64
|
|
|
$
|
0.44
|
|
|
$
|
0.20
|
|
|
45
|
%
|
|
$
|
1.24
|
|
|
$
|
0.82
|
|
|
$
|
0.42
|
|
|
51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
149.9
|
|
|
159.7
|
|
|
|
|
|
|
150.7
|
|
|
160.0
|
|
|
|
|
|
(1) Restructuring expense recognized in connection with our business transformation plan for the three and
six months ended
December 31, 2016
and
2015
. Other business transformation expenses were included within cost of revenues and selling,
general and administrative expenses and were incurred in connection with our business transformation plan for the three and
six months ended
December 31, 2016
and
2015
.
(2) Net gain recorded within other income (expense), net associated with an indemnification receivable from ADP for pre spin-off tax periods in accordance with tax matters agreement.
(3) Income tax effect of pre-tax adjustments for the three and
six months ended
December 31, 2016
and
2015
.
(4) Net income tax benefit to adjust the liability for pre spin-off tax returns related to the gain in fiscal 2016.
Three Months Ended December 31,
2016
Compared to the
Three Months Ended December 31,
2015
Adjusted Earnings before Income Taxes.
Adjusted earnings before income taxes for the
three months ended
December 31, 2016
increased
$29.1 million
as compared to the
three months ended
December 31, 2015
. Adjusted margin
increased
from
21.4%
to
25.6%
. The constant currency impact of foreign exchange rates on adjusted earnings before income taxes was
an
increase
of
$0.1 million
. Adjusted earnings before income taxes were favorably impacted by benefits obtained from ongoing initiatives under our business transformation plan, primarily related to lower-headcount and geographic mix, and operating efficiencies inclusive of revenue growth in our segments. The favorable effects of these items were partially offset by an increase stock-based compensation expense, increased interest expense and an impairment of a non-operating receivable.
Adjusted Provision for Income Taxes.
The adjusted effective tax rate for the
three months ended
December 31, 2016
was
30.8%
as compared to
35.6%
for the
three months ended
December 31, 2015
. The adjusted effective tax rate for the three months ended
December 31, 2016
was favorably impacted by a
$3.0 million
excess tax benefit associated with adopting ASU 2016-09 and a
$1.1 million
Canadian valuation allowance adjustment.
Adjusted Net Earnings Attributable to CDK.
Adjusted net earnings attributable to CDK for the
three months ended
December 31, 2016
increased
$26.1 million
as compared to the
three months ended
December 31, 2015
. The
increase
in adjusted net earnings attributable to CDK was primarily due to the items discussed above in adjusted earnings before income taxes and the favorable effective tax rate discussed above.
Six Months Ended
December 31, 2016
Compared to the
Six Months Ended
December 31, 2015
Adjusted Earnings before Income Taxes.
Adjusted earnings before income taxes for the
six months ended
December 31, 2016
increased
$63.3 million
as compared to the
six months ended
December 31, 2015
. Adjusted margin
increased
from
20.3%
to
24.9%
. The constant currency impact of foreign exchange rates on adjusted earnings before income taxes was
a
decrease
of
$0.2 million
. Adjusted earnings before income taxes were favorably impacted by benefits obtained from ongoing initiatives under our business transformation plan, primarily related to lower-headcount and geographic mix, and operating efficiencies inclusive of revenue growth in our segments. The favorable effects of these items were partially offset by an increase in stock-based compensation expense, increased interest expense, outside service costs, and an impairment of a non-operating receivable booked during the
three months ended
December 31, 2016
.
Adjusted Provision for Income Taxes.
The adjusted effective tax rate for the
six months ended
December 31, 2016
was
30.7%
as compared to
35.8%
for the
six months ended
December 31, 2015
. The adjusted effective tax rate for the
six months ended
December 31, 2016
was favorably impacted by an
$8.7 million
excess tax benefit associated with adopting ASU 2016-09 and a
$1.1 million
Canadian valuation allowance adjustment.
Adjusted Net Earnings Attributable to CDK.
Adjusted net earnings attributable to CDK for the
six months ended
December 31, 2016
increased
$55.2 million
as compared to the
six months ended
December 31, 2015
. The
increase
in adjusted net earnings attributable to CDK was primarily due to the items discussed above in adjusted earnings before income taxes and the favorable effective tax rate discussed above.
The table below presents the reconciliation of net earnings attributable to CDK to adjusted EBITDA.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
December 31,
|
|
Change
|
|
December 31,
|
|
Change
|
|
2016
|
|
2015
|
|
$
|
|
%
|
|
2016
|
|
2015
|
|
$
|
|
%
|
Net earnings attributable to CDK
|
$
|
82.7
|
|
|
$
|
68.2
|
|
|
$
|
14.5
|
|
|
21
|
%
|
|
$
|
159.6
|
|
|
$
|
127.2
|
|
|
$
|
32.4
|
|
|
25
|
%
|
Margin %
|
15.1
|
%
|
|
13.1
|
%
|
|
|
|
|
|
14.5
|
%
|
|
12.3
|
%
|
|
|
|
|
Net earnings attributable to noncontrolling interest
(1)
|
0.9
|
|
|
1.5
|
|
|
(0.6
|
)
|
|
|
|
3.2
|
|
|
3.7
|
|
|
(0.5
|
)
|
|
|
Provision for income taxes
(2)
|
35.3
|
|
|
37.1
|
|
|
(1.8
|
)
|
|
|
|
68.0
|
|
|
71.7
|
|
|
(3.7
|
)
|
|
|
Interest expense
(3)
|
12.3
|
|
|
9.5
|
|
|
2.8
|
|
|
|
|
23.0
|
|
|
18.8
|
|
|
4.2
|
|
|
|
Depreciation and amortization
(4)
|
17.3
|
|
|
14.7
|
|
|
2.6
|
|
|
|
|
34.4
|
|
|
28.7
|
|
|
5.7
|
|
|
|
Total stock-based compensation
(5)
|
10.7
|
|
|
7.0
|
|
|
3.7
|
|
|
|
|
20.5
|
|
|
12.8
|
|
|
7.7
|
|
|
|
Restructuring expenses
(6)
|
2.3
|
|
|
1.8
|
|
|
0.5
|
|
|
|
|
3.4
|
|
|
3.7
|
|
|
(0.3
|
)
|
|
|
Other business transformation expenses
(6)
|
18.2
|
|
|
4.6
|
|
|
13.6
|
|
|
|
|
38.0
|
|
|
6.2
|
|
|
31.8
|
|
|
|
Tax matters indemnification gain, net
(7)
|
—
|
|
|
(2.6
|
)
|
|
2.6
|
|
|
|
|
—
|
|
|
(2.6
|
)
|
|
2.6
|
|
|
|
Adjusted EBITDA
|
$
|
179.7
|
|
|
$
|
141.8
|
|
|
$
|
37.9
|
|
|
27
|
%
|
|
$
|
350.1
|
|
|
$
|
270.2
|
|
|
$
|
79.9
|
|
|
30
|
%
|
Adjusted margin %
|
32.8
|
%
|
|
27.3
|
%
|
|
|
|
|
|
31.9
|
%
|
|
26.1
|
%
|
|
|
|
|
(1) Net earnings attributable to noncontrolling interest included within the financial statements for the periods presented.
(2) Provision for income taxes included within the financial statements for the periods presented.
(3) Interest expense included within the financial statements for the periods presented.
(4) Depreciation and amortization included within the financial statements for the periods presented.
(5) Total stock-based compensation expense recognized for the periods presented.
(6) Restructuring expense recognized in connection with our business transformation plan for the three and
six months ended
December 31, 2016
and
2015
. Other business transformation expenses were included within cost of revenues and selling, general and administrative expenses and were incurred in connection with our business transformation plan for the three and
six months ended
December 31, 2016
and
2015
. Other business transformation expenses exclude
$0.8 million
and
$0.5 million
of accelerated depreciation and stock-based compensation expense for the
three months ended
December 31, 2016
and
2015
, respectively, and
$1.6 million
and
$0.6 million
for the
six months ended
December 31, 2016
and
2015
, respectively.
(7) Net gain recorded within other income (expense), net associated with an indemnification receivable from ADP for pre spin-off tax periods in accordance with the tax matters agreement.
Three Months Ended December 31,
2016
Compared to the
Three Months Ended December 31,
2015
Adjusted EBITDA
. Adjusted EBITDA for the
three months ended
December 31, 2016
increased
$37.9 million
as compared the
three months ended
December 31, 2015
. Adjusted margin
increased
from
27.3%
to
32.8%
. Adjusted EBITDA was favorably impacted by benefits obtained from ongoing initiatives under our business transformation plan, primarily related to lower-headcount and geographic mix, and operating efficiencies inclusive of revenue growth in our segments. The favorable effects of these items were partially offset by an impairment of a non-operating receivable.
Six Months Ended
December 31, 2016
Compared to the
Six Months Ended
December 31, 2015
Adjusted EBITDA
. Adjusted EBITDA for the
six months ended
December 31, 2016
increased
$79.9 million
as compared the
six months ended
December 31, 2015
. Adjusted margin
increased
from
26.1%
to
31.9%
. Adjusted EBITDA was favorably impacted by benefits obtained from ongoing initiatives under our business transformation plan, primarily related to lower-headcount and geographic mix, and operating efficiencies inclusive of revenue growth in our segments. The favorable effects of these items were partially offset by outside service costs and an impairment to a non-operating receivable.
Analysis of Reportable Segments
Effective July 1, 2016, our new operating segments are comprised of Retail Solutions North America, Advertising North America, and CDK International. We have revised prior period segment data to conform to the new segment reporting structure.
The following is a discussion of the results of our operations by reportable segment for the three and
six months ended
December 31, 2016
and
2015
. Certain expenses are charged to the reportable segments at a standard rate for management reporting purposes. Other costs are charged to the reportable segments based on management’s responsibility for the applicable costs.
Adjusted revenues and adjusted earnings before income taxes by reportable segment are included throughout this section. Since adjusted revenues and adjusted earnings before income taxes by reportable segment are not measures of performance that are calculated in accordance with GAAP, they should not be considered in isolation from, or as a substitute for, other metrics that are calculated in accordance with GAAP.
We also review segment results on a constant currency basis to understand underlying business trends. To present these results on a constant currency basis, current period results for entities reporting in currencies other than the U.S. dollar were translated into U.S. dollar using the average monthly exchange rate for the comparable prior period. As a result, constant currency results neutralize the effects of foreign currency.
Retail Solutions North America Segment
There were no non-GAAP adjustments to the RSNA segment for the three and
six months ended
December 31, 2016
and
2015
. The table below presents the reconciliation of revenues and earnings before income taxes for the RSNA segment on a constant currency basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
December 31,
|
|
Change
|
|
December 31,
|
|
Change
|
|
2016
|
|
2015
|
|
$
|
|
%
|
|
2016
|
|
2015
|
|
$
|
|
%
|
Revenues
|
$
|
393.8
|
|
|
$
|
375.0
|
|
|
$
|
18.8
|
|
|
5
|
%
|
|
$
|
789.2
|
|
|
$
|
748.2
|
|
|
$
|
41.0
|
|
|
5
|
%
|
Impact of exchange rates
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
(0.1
|
)
|
|
—
|
|
|
(0.1
|
)
|
|
|
Constant currency adjusted revenues
|
$
|
393.8
|
|
|
$
|
375.0
|
|
|
$
|
18.8
|
|
|
5
|
%
|
|
$
|
789.1
|
|
|
$
|
748.2
|
|
|
$
|
40.9
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
$
|
142.3
|
|
|
$
|
116.3
|
|
|
$
|
26.0
|
|
|
22
|
%
|
|
$
|
287.8
|
|
|
$
|
225.4
|
|
|
$
|
62.4
|
|
|
28
|
%
|
Margin %
|
36.1
|
%
|
|
31.0
|
%
|
|
|
|
|
|
36.5
|
%
|
|
30.1
|
%
|
|
|
|
|
The table below presents revenue by type for the RSNA segment or the three and
six months ended
December 31, 2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
December 31,
|
|
Change
|
|
December 31,
|
|
Change
|
|
2016
|
|
2015
|
|
$
|
|
%
|
|
2016
|
|
2015
|
|
$
|
|
%
|
Subscription revenue
|
$
|
313.4
|
|
|
$
|
294.5
|
|
|
$
|
18.9
|
|
|
6
|
%
|
|
629.7
|
|
|
589.1
|
|
|
$
|
40.6
|
|
|
7
|
%
|
Transaction revenue
|
42.7
|
|
|
42.5
|
|
|
0.2
|
|
|
—
|
%
|
|
89.6
|
|
|
88.2
|
|
|
1.4
|
|
|
2
|
%
|
Other revenue
|
37.7
|
|
|
38.0
|
|
|
(0.3
|
)
|
|
(1
|
)%
|
|
69.9
|
|
|
70.9
|
|
|
(1.0
|
)
|
|
(1
|
)%
|
Total
|
$
|
393.8
|
|
|
$
|
375.0
|
|
|
$
|
18.8
|
|
|
5
|
%
|
|
789.2
|
|
|
748.2
|
|
|
$
|
41.0
|
|
|
5
|
%
|
Three Months Ended December 31,
2016
Compared to the
Three Months Ended December 31,
2015
Revenues.
RSNA revenues
increased
by
$18.8 million
for the
three months ended
December 31, 2016
as compared to the
three months ended
December 31, 2015
.
Revenue growth was favorably impacted by the following: DMS customer site count as of
December 31, 2016
was
14,599
sites, an increase of approximately
1%
, as compared to
14,388
sites as of
December 31, 2015
. In addition, we experienced
8%
growth in average revenue per DMS customer site, which resulted from a combination of increased sales of
new or expanded solutions to our existing customer base and pricing. This was partially offset by a reduction in the number of websites. On a combined basis, the
increase
in DMS customer sites and average revenue per DMS customer site contributed
$18.9 million
of revenue growth, or approximately
5
percentage points. Transaction revenues generated from vehicle registrations and automotive equity mining contributed
$0.2 million
of revenue growth. Other revenue was down
$0.3 million
primarily due to a reduction in hardware sales.
Earnings before Income Taxes.
RSNA earnings before income taxes
increased
by
$26.0 million
for the
three months ended
December 31, 2016
as compared to the
three months ended
December 31, 2015
. Margin
increased
from
31.0%
to
36.1%
.
RSNA earnings before income taxes were favorably impacted by operating efficiencies inclusive of benefits obtained from ongoing initiatives under our business transformation plan, primarily related to lower headcount and geographic labor mix, and revenue growth
as discussed above. The favorable effects of these items were partially offset an impairment of a non-operating receivable.
Six Months Ended
December 31, 2016
Compared to the
Six Months Ended
December 31, 2015
Revenues.
RSNA revenues
increased
by
$41.0 million
for the
six months ended
December 31, 2016
as compared to the
six months ended
December 31, 2015
. RSNA revenues were slightly favorably impacted by the strength of the Canadian dollar against the U.S. dollar on a constant currency basis, which contributed to
an
increase
of
$0.1 million
.
Revenue growth was favorably impacted by the following: DMS customer site count as of
December 31, 2016
was
14,599
sites, an increase of approximately
1%
, as compared to
14,388
sites as of
December 31, 2015
. In addition, we experienced
8%
growth in average revenue per DMS customer site, which resulted from a combination of increased sales of new or expanded solutions to our existing customer base and pricing. This was partially offset by a reduction in the number of websites. On a combined basis, the
increase
in DMS customer sites and average revenue per DMS customer site contributed
$40.6 million
of revenue growth, or approximately
5
percentage points. Transaction revenues generated from vehicle registrations and automotive equity mining contributed
$1.4 million
of revenue growth. Other revenue was down
$1.0 million
primarily due to a reduction in hardware sales.
Earnings before Income Taxes.
RSNA earnings before income taxes
increased
by
$62.4 million
for the
six months ended
December 31, 2016
as compared to the
six months ended
December 31, 2015
. Margin
increased
from
30.1%
to
36.5%
.
RSNA earnings before income taxes were favorably impacted by operating efficiencies inclusive of benefits obtained from ongoing initiatives under our business transformation plan, primarily related to lower headcount and geographic labor mix, and revenue growth
as discussed above. The favorable effects of these items were partially offset an impairment of a non-operating receivable.
Advertising North America Segment
There were no non-GAAP adjustments to the ANA segment for the three and
six months ended
December 31, 2016
and
2015
. The table below presents revenues and earnings before income taxes for the ANA segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
December 31,
|
|
Change
|
|
December 31,
|
|
Change
|
|
2016
|
|
2015
|
|
$
|
|
%
|
|
2016
|
|
2015
|
|
$
|
|
%
|
Revenues
|
$
|
78.1
|
|
|
$
|
66.3
|
|
|
$
|
11.8
|
|
|
18
|
%
|
|
$
|
155.6
|
|
|
$
|
129.5
|
|
|
$
|
26.1
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
$
|
9.8
|
|
|
$
|
5.0
|
|
|
$
|
4.8
|
|
|
96
|
%
|
|
$
|
21.3
|
|
|
$
|
8.8
|
|
|
$
|
12.5
|
|
|
142
|
%
|
Margin %
|
12.5
|
%
|
|
7.5
|
%
|
|
|
|
|
|
13.7
|
%
|
|
6.8
|
%
|
|
|
|
|
Three Months Ended December 31,
2016
Compared to the
Three Months Ended December 31,
2015
Revenues.
ANA revenues
increased
by
$11.8 million
to
$78.1 million
for the
three months ended
December 31, 2016
as compared to
$66.3 million
for the
three months ended
December 31, 2015
. The overall
increase
was due to
an
increase
in OEM driven local marketing association internet advertising placements.
Earnings before Income Taxes.
ANA earnings before income taxes
increased
by
$4.8 million
to
$9.8 million
for the
three months ended
December 31, 2016
as compared to
$5.0 million
for the
three months ended
December 31, 2015
. Margin
increased
from
7.5%
to
12.5%
. ANA earnings before income taxes were favorably impacted by revenue growth as discussed above.
Six Months Ended
December 31, 2016
Compared to the
Six Months Ended
December 31, 2015
Revenues.
ANA revenues
increased
by
$26.1 million
to
155.6 million
the
six months ended
December 31, 2016
as compared to
$129.5 million
for the
six months ended
December 31, 2015
. The overall
increase
was due to
an
increase
in OEM driven local marketing association internet advertising placements.
Earnings before Income Taxes.
ANA earnings before income taxes
increased
by
$12.5 million
to
$21.3 million
for the
six months ended
December 31, 2016
as compared to
$8.8 million
for the
six months ended
December 31, 2015
. Margin
increased
from
6.8%
to
13.7%
. ANA earnings before income taxes were favorably impacted by revenue growth as discussed above and operating efficiencies from ongoing initiatives under our business transformation plan.
CDK International Segment
There were no non-GAAP adjustments to the CDKI segment for the three and
six months ended
December 31, 2016
and
2015
. The table below presents the reconciliation of revenues and earnings before income taxes for the International segment on a constant currency basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
December 31,
|
|
Change
|
|
December 31,
|
|
Change
|
|
2016
|
|
2015
|
|
$
|
|
%
|
|
2016
|
|
2015
|
|
$
|
|
%
|
Revenues
|
$
|
75.9
|
|
|
$
|
78.8
|
|
|
$
|
(2.9
|
)
|
|
(4
|
)%
|
|
$
|
153.7
|
|
|
$
|
157.0
|
|
|
$
|
(3.3
|
)
|
|
(2
|
)%
|
Impact of exchange rates
|
5.4
|
|
|
—
|
|
|
5.4
|
|
|
|
|
9.6
|
|
|
—
|
|
|
9.6
|
|
|
|
Constant currency revenues
|
$
|
81.3
|
|
|
$
|
78.8
|
|
|
$
|
2.5
|
|
|
3
|
%
|
|
$
|
163.3
|
|
|
$
|
157.0
|
|
|
$
|
6.3
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
$
|
18.3
|
|
|
$
|
15.9
|
|
|
$
|
2.4
|
|
|
15
|
%
|
|
$
|
35.2
|
|
|
$
|
30.1
|
|
|
$
|
5.1
|
|
|
17
|
%
|
Margin %
|
24.1
|
%
|
|
20.2
|
%
|
|
|
|
|
|
22.9
|
%
|
|
19.2
|
%
|
|
|
|
|
Impact of exchange rates
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
0.3
|
|
|
—
|
|
|
0.3
|
|
|
|
Constant currency earnings before income taxes
|
$
|
18.3
|
|
|
$
|
15.9
|
|
|
$
|
2.4
|
|
|
15
|
%
|
|
$
|
35.5
|
|
|
$
|
30.1
|
|
|
$
|
5.4
|
|
|
18
|
%
|
Three Months Ended December 31,
2016
Compared to the
Three Months Ended December 31,
2015
Revenues.
CDKI revenues
decreased
by
$2.9 million
for the
three months ended
December 31, 2016
as compared to for the
three months ended
December 31, 2015
. CDKI revenues were impacted by the strength of the U.S. dollar primarily against the Pound Sterling, the Renminbi, and the Euro, which contributed to
a
decrease
of
$5.4 million
, or
7
percentage points. CDKI experienced growth in revenues on a constant currency basis primarily due to increased average revenue per customer site.
Earnings before Income Taxes.
CDKI earnings before income taxes
increased
by
$2.4 million
for the
three months ended
December 31, 2016
as compared to the
three months ended
December 31, 2015
. Margin
increased
from
20.2%
to
24.1%
. International earnings before income taxes were favorably impacted by operating efficiencies, which resulted from benefits obtained from ongoing initiatives under our business transformation plan and increased average revenue per customer site.
Six Months Ended
December 31, 2016
Compared to the
Six Months Ended
December 31, 2015
Revenues.
CDKI revenues
decreased
by
$3.3 million
for the
six months ended
December 31, 2016
as compared to for the
six months ended
December 31, 2015
. CDKI revenues were impacted by the same currencies as discussed above, which contributed to
a
decrease
of
$9.6 million
, or
6
percentage points. CDKI experienced growth in revenues on a constant currency basis primarily due to increased average revenue per customer site.
Earnings before Income Taxes.
CDKI earnings before income taxes
increased
by
$5.1 million
for the
six months ended
December 31, 2016
as compared to the
six months ended
December 31, 2015
. Margin
increased
from
19.2%
to
22.9%
. The constant currency impact of foreign exchange rates on CDKI earnings before income taxes was
a
decrease
of
$0.3 million
, or
1%
percentage points. International earnings before income taxes were favorably impacted by benefits obtained from ongoing initiatives under our business transformation plan and increased average revenue per customer site .
Other
The table below presents the reconciliation of loss before income taxes to adjusted loss before income taxes for the Other segment. Refer to the footnotes in "Consolidated Non-GAAP Results" for additional information on the adjustments presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
December 31,
|
|
Change
|
|
December 31,
|
|
Change
|
|
2016
|
|
2015
|
|
$
|
|
%
|
|
2016
|
|
2015
|
|
$
|
|
%
|
Loss before income taxes
|
$
|
(51.5
|
)
|
|
$
|
(30.4
|
)
|
|
$
|
(21.1
|
)
|
|
69
|
%
|
|
$
|
(113.5
|
)
|
|
$
|
(61.7
|
)
|
|
$
|
(51.8
|
)
|
|
84
|
%
|
Restructuring expenses
|
2.3
|
|
|
1.8
|
|
|
0.5
|
|
|
|
|
3.4
|
|
|
3.7
|
|
|
(0.3
|
)
|
|
|
Other business transformation expenses
|
19.0
|
|
|
5.1
|
|
|
13.9
|
|
|
|
|
39.6
|
|
|
6.8
|
|
|
32.8
|
|
|
|
Tax matters indemnification gain, net
|
—
|
|
|
(2.6
|
)
|
|
2.6
|
|
|
|
|
—
|
|
|
(2.6
|
)
|
|
2.6
|
|
|
|
Adjusted loss before income taxes
|
$
|
(30.2
|
)
|
|
$
|
(26.1
|
)
|
|
$
|
(4.1
|
)
|
|
16
|
%
|
|
$
|
(70.5
|
)
|
|
$
|
(53.8
|
)
|
|
$
|
(16.7
|
)
|
|
31
|
%
|
Impact of exchange rates
|
(0.1
|
)
|
|
—
|
|
|
(0.1
|
)
|
|
|
|
(0.1
|
)
|
|
—
|
|
|
(0.1
|
)
|
|
|
Constant currency adjusted loss before income taxes
|
$
|
(30.3
|
)
|
|
$
|
(26.1
|
)
|
|
$
|
(4.2
|
)
|
|
16
|
%
|
|
$
|
(70.6
|
)
|
|
$
|
(53.8
|
)
|
|
$
|
(16.8
|
)
|
|
31
|
%
|
The primary components of the Other loss before income taxes are certain costs that are not allocated to our reportable segments, such as interest expense, stock-based compensation expense, costs attributable to the business transformation plan, and certain unallocated expenses.
Three Months Ended December 31,
2016
Compared to the
Three Months Ended December 31,
2015
Loss before Income Taxes.
The Other loss before income taxes
increased
by
$21.1 million
for the
three months ended
December 31, 2016
as compared to the
three months ended
December 31, 2015
. The Other loss before income taxes was unfavorably impacted by expenses associated with our business transformation plan, an increase in stock-based compensation expense, interest expense related to our 2021 term facility, which was issued during the three months ended December 31, 2016, and an increase in interest rates on our other term loan facilities.
Six Months Ended
December 31, 2016
Compared to the
Six Months Ended
December 31, 2015
Loss before Income Taxes.
The Other loss before income taxes
increased
by
$51.8 million
for the
six months ended
December 31, 2016
as compared to the
six months ended
December 31, 2015
. The Other loss before income taxes was unfavorably impacted by expenses associated with our business transformation plan, an increase in stock-based compensation expense, expenses related to outside services,
employee-related costs and interest expense related to our 2021 term facility, which was issued during the three months ended December 31, 2016, and an increase in interest rates on our other term loan facilities.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Capital Structure Overview
Our principal source of liquidity is derived from cash generated through operations. At present, and in future periods, we expect cash generated by our operations, together with cash and cash equivalents and borrowings from the capital markets, including our revolving credit facility, to be sufficient to cover our cash needs for working capital, capital expenditures, strategic acquisitions, and anticipated quarterly dividends and stock repurchases under our return of capital plan.
As of
December 31, 2016
, cash and cash equivalents were
$327.6 million
, total CDK stockholders' equity was
$109.8 million
, and total debt was
$1,602.5 million
, which is net of unamortized financing costs of
$9.4 million
. Working capital at
December 31, 2016
was
$412.9 million
, as compared to
$242.1 million
as of
June 30, 2016
. Working capital as presented herein excludes current maturities of long-term debt.
Our borrowings consist of two term loan facilities with initial principals of
$250.0 million
, a term loan facility with initial principal of
$400.0 million
,
3.30%
senior notes with a
$250.0 million
aggregate principal amount due in 2019, and
4.50%
senior notes with a
$500.0 million
aggregate principal amount due in 2024. Interest rates for the 2019 notes and 2024 notes increased to
3.80%
from
3.30%
, and to
5.00%
from
4.50%
, respectively, effective October 15, 2016. Additionally, we have a
$300.0 million
revolving credit facility, which was undrawn as of
December 31, 2016
.
Our long-term credit ratings and senior unsecured debt ratings are Ba1 (Stable Outlook) and with Moody's, BB+ (Stable Outlook) with S&P, which are non-investment grade. In November 2016, Moody's lowered their long-term credit rating from Baa3 (Negative Outlook) to Ba1 (Stable Outlook) and S&P lowered their long-term credit rating from BBB- (Negative Outlook) to BB+ (Stable Outlook). We do not believe these long-term credit rating downgrades will have a material impact on our near-term liquidity.
Of the
$327.6 million
of cash and cash equivalents held as of
December 31, 2016
,
$200.4 million
was held by our foreign subsidiaries. Amounts held by foreign subsidiaries, if repatriated to the U.S., would generally be subject to foreign withholding and U.S. income taxes, net of foreign tax credits. The foreign earnings are considered indefinitely reinvested since our intent is to use the earnings outside of the U.S. to fund local working capital needs and future foreign investments, including potential acquisitions. Our current plans do not demonstrate a need to repatriate the earnings to fund our U.S. operations. In determining whether the undistributed earnings of our foreign subsidiaries are indefinitely reinvested, we consider the following: (i) cash flow forecasts and cash requirements of our U.S. business and our foreign subsidiaries, both for the short and long term; (ii) costs associated with permanent reinvestment plans, including cost of capital and tax consequences; and (iii) local country legal restrictions.
If circumstances change, and it becomes apparent that additional earnings considered indefinitely reinvested will be remitted to the U.S. in the foreseeable future, an additional income tax charge may be necessary, which would affect our results of operations and payment of such taxes would affect our liquidity. Given the uncertain time and manner of repatriation, it is not practicable to estimate the amount of any additional income tax charge on indefinitely reinvested earnings.
Return of Capital Plan
Stock Repurchase Program
In December 2015, the Board of Directors authorized us to repurchase up to
$1.0 billion
of our common stock as part of our
$1.0 billion
return of capital plan. In December 2016, we completed our
$1.0 billion
return of capital plan. In January 2017, the Board of Directors terminated this authorization and replaced it this with an authorization for us to repurchase up to $2.0 billion of our common stock as part of a new return of capital plan whereby we expect to return approximately $750.0 million to
$1.0 billion
per year through 2019 via a combination of dividends and share repurchases. As with the prior authorization, under the new authorization for the stock repurchase program, we may purchase our common stock in the open market or in privately negotiated transactions from time to time as permitted by federal securities laws and other legal requirements. Our new return of capital plan is expected to be funded through a combination of free cash flow and incremental borrowings intended to bring leverage, measured as financial debt, net of cash, divided by adjusted EBITDA, to a range of 2.5x to 3.0x over the period. The actual timing, number, and price of any shares to be repurchased will be determined at management's discretion and will depend on a number of factors, which may include the market price of the shares, general market and economic conditions, the availability and cost of additional indebtedness, and other potential uses for free cash flow.
Dividends to Common Stockholders
In November 2016, the Board of Directors approved a $0.005 increase in the quarterly cash dividend to an annual rate of $0.56 per share. The Board of Directors declared a quarterly cash dividend of
$0.140
per share payable on December 30, 2016 to shareholders of record at the close of business on December 20, 2016. We paid dividends of
$40.6 million
during the
six months ended
December 31, 2016
, and
$40.8 million
during the
six months ended
December 31, 2015
, respectively.
Cash Flows
Our cash flows from operating, investing, and financing activities, as reflected in the consolidated statements of cash flows for the
six months ended
December 31, 2016
and
2015
, are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
Cash provided by (used in):
|
|
|
|
|
|
Operating activities
|
$
|
173.4
|
|
|
$
|
25.8
|
|
|
$
|
147.6
|
|
Investing activities
|
(35.8
|
)
|
|
(19.2
|
)
|
|
(16.6
|
)
|
Financing activities
|
(20.7
|
)
|
|
(58.3
|
)
|
|
37.6
|
|
Effect of exchange rate changes on cash and cash equivalents
|
(8.4
|
)
|
|
(9.0
|
)
|
|
0.6
|
|
Net change in cash and cash equivalents
|
$
|
108.5
|
|
|
$
|
(60.7
|
)
|
|
$
|
169.2
|
|
Net cash flows
provided by
operating activities were
$173.4 million
for the
six months ended
December 31, 2016
as compared to
$25.8 million
for the
six months ended
December 31, 2015
. This
$147.6 million
increase
was primarily due to an improvement of
$108.9 million
in net working capital components, which was due to cash received from our customers, and the timing of cash payments made to tax authorities and our vendors in the normal course of business in all of our segments. Additionally, there was an increase in net earnings adjusted for non-cash items of
$38.7 million
when compared to the
six months ended
December 31, 2015
due to earnings growth in our business.
Net cash flows
used in
investing activities were $
35.8 million
for the
six months ended
December 31, 2016
as compared to net cash flows
used in
investing activities of $
19.2 million
for the
six months ended
December 31, 2015
. This
$16.6 million
increase
in cash
used in
investing activities was primarily due to an increase in capital expenditures and capitalized software of
$19.5 million
during the
six months ended
December 31, 2016
. This increase was partially offset by a
$6.1 million
decrease in contributions to investments.
Net cash flows
used in
financing activities were $
20.7 million
for the
six months ended
December 31, 2016
as compared to $
58.3 million
for the
six months ended
December 31, 2015
. This
$37.6 million
decrease
in cash
used in
financing activities was primarily due to the new term loan facility offset by the return of capital plan. During the
six months ended
December 31, 2016
, our primary cash outflows consisted of the repurchase of common stock of
$350.0 million
, dividend payments to our stockholders of
$40.6 million
, and the repayment of debt and capital lease obligations of
$13.5 million
, and
$6.2 million
earn-out payments related to the AVRS, Inc. and Redbumper, LLC acquisitions. These cash outflows were partially offset by the new term loan facility for
$400.0 million
. During the
six months ended
December 31, 2015
, our primary cash outflows consisted of the repurchase of common stock of
$261.0 million
, dividend payments to our stockholders of
$40.8 million
, and repayment of debt and capital lease obligations of
$6.7 million
partially offset by the term loan facility for
$250.0 million
and
$7.0 million
of excess tax benefits reflected as financing activity in the
six months ended
December 31, 2015
and operating activity in the
six months ended
December 31, 2016
with the adoption of ASU 2016-19 effective July 1, 2016.
Related Party Agreements
Refer to Note 8 "Income Taxes" and Note 12 "Transactions with ADP" to our consolidated financial statements under Item 1 of Part I of this Quarterly Report on Form 10-Q for financial information regarding agreements entered into with ADP as part of the spin-off.