Notes to the Consolidated Financial Statements
(Tabular amounts in millions, except per share amounts)
Note 1. Basis of Presentation
A. Description of Business
CDK Global, Inc (the "Company" or "CDK") enables end-to-end automotive commerce across the globe. For over 40 years, the Company has served automotive retailers and original equipment manufacturers ("OEMs") by providing innovative solutions that allow them to better connect, manage, analyze, and grow their businesses. The Company's solutions automate and integrate all parts of the buying process, including the advertising, acquisition, sale, financing, insuring, parts supply, repair, and maintenance of vehicles, in more than
100
countries around the world, for approximately
28,000
retail locations and most OEMs.
The Company is organized into two main operating groups. The Company's first operating group is CDK North America which is comprised of two reportable segments, Retail Solutions North America ("RSNA") and Advertising North America ("ANA"). The second operating group, which is also a reportable segment, is CDK International ("CDKI"). 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 18 for further information.
B. Basis of Preparation
The accompanying 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.
C. Spin-off
On
April 9, 2014
, the board of directors of Automatic Data Processing, Inc. (“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 common stock of CDK 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 17 for further information.
D. 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 2015 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 fiscal 2016.
Note 2. Summary of Significant Accounting Policies
A. Consolidation
The financial statements include the accounts of the Company and its wholly owned subsidiaries. In addition, the financial statements include the accounts of Computerized Vehicle Registration ("CVR") in which CDK holds a controlling financial or management interest. Intercompany transactions and balances between consolidated CDK businesses have been eliminated.
The Company's share of earnings or losses of non-controlled affiliates, over which the Company exercises significant influence (generally a 20% to 50% ownership interest), are included in the consolidated operating results using the equity
method of accounting. Equity method investments were not significant for fiscal years ended June 30,
2018
("fiscal
2018
"), June 30,
2017
("fiscal
2017
"), and June 30,
2016
("fiscal
2016
").
B. Business Combinations
The purchase price allocations for acquisitions are based on estimates of the fair value of tangible and intangible assets acquired and liabilities assumed. The Company engages independent valuation specialists, when necessary, to assist with purchase price allocations and uses recognized valuation techniques, including the income and market approaches, to determine fair value. Management makes estimates and assumptions in determining purchase price allocations and valuation analyses, which may involve significant unobservable inputs. The excess of the purchase price over the estimated fair values of the underlying assets acquired and liabilities assumed is allocated to goodwill. In certain circumstances, the determination of the purchase price and allocation to assets acquired and liabilities assumed are based upon preliminary estimates and assumptions. Accordingly, the allocation may be subject to revision during the measurement period, which may be up to one year from the acquisition date, when the Company receives final information, including appraisals and other analyses. Measurement period adjustments are recorded to goodwill in the reporting period in which the adjustments to the provisional amounts are determined.
Assets acquired and liabilities assumed in business combinations are recorded on the Company’s consolidated balance sheets as of the respective acquisition dates based upon their estimated fair values at such dates. The results of operations of businesses acquired by the Company are included in the Company’s consolidated statements of operations since their respective acquisition dates.
C. Restructuring
Restructuring expenses consist of employee-related costs, including severance and other termination benefits calculated based on long-standing benefit practices and local statutory requirements, and contract termination costs. Restructuring liabilities are recognized at fair value in the period the liability is incurred. In some jurisdictions, the Company has ongoing benefit arrangements under which the Company records the estimated severance and other termination benefits when such costs are deemed probable and estimable, approved by the appropriate corporate management, and if actions required to complete the termination plan indicate that it is unlikely that significant changes to the plan will be made or the plan will be withdrawn. In jurisdictions where there is not an ongoing benefit arrangement, the Company records estimated severance and other termination benefits when appropriate corporate management has committed to the plan and the benefit arrangement is communicated to the affected employees. A liability for costs to terminate a contract before the end of its term is recognized at fair value when the Company terminates the contract in accordance with its terms. Estimates are evaluated periodically to determine whether an adjustment is required.
D. 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 RSNA and CDKI segments, CDK provides software and technology solutions for automotive retailers and OEMs, which includes:
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Dealer Management Systems (“DMSs”) and layered applications, where the software may be installed on-site at the customer’s location, or hosted and provided on a SaaS basis, including ongoing maintenance and support;
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Interrelated services such as installation, initial training, and data updates;
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Websites, search marketing, and reputation management services (RSNA only); and
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Hardware on a service basis, meaning no specific assets are identified or a substantive right of substitution exists.
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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 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 when the Company is substantively and contractually responsible for providing the service, software, and/or connectivity to the customers, and therefore, bears the risks and benefits of the contractual arrangement. When the Company is acting as an agent in the transaction, revenue is recorded net of costs incurred.
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.
E. Income Taxes
Income tax expense is recognized for the amount of taxes payable or refundable for the current year. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Management must make assumptions, judgments, and estimates to determine the provision for income taxes, taxes payable or refundable, and deferred tax assets and liabilities. The Company's assumptions, judgments, and estimates take into consideration the realization of deferred tax assets and changes in tax laws or interpretations thereof. The Company's income tax returns are subject to examination by various tax authorities. A change in the assessment of the outcomes of such matters could materially impact the Company's consolidated financial statements.
The Company records a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. In determining the need for a valuation allowance, the Company considers future market growth, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies. In the event the Company determines that it is more likely than not that an entity will be unable to realize all or a portion of its deferred tax assets in the future, the Company would increase the valuation allowance and recognize a corresponding charge to earnings in the period in which such a determination is made. Likewise, if the Company later determines that it is more likely than not that the deferred tax assets will be realized, the Company would reverse the applicable portion of the previously recognized valuation allowance. In order to realize deferred tax assets, the Company must be able to generate sufficient taxable income of the appropriate character in the jurisdictions in which the deferred tax assets are located.
The Company recognizes tax benefits for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in the Company's income tax returns that do not meet these recognition and measurement standards. Assumptions, judgments, and the use of estimates are required in determining whether the "more likely than not" standard has been met when developing the provision for income taxes.
If certain pending tax matters settle within the next twelve months, the total amount of unrecognized tax benefits may increase or decrease for all open tax years and jurisdictions. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. The Company continually assesses the likelihood and amount of potential adjustments and adjusts the income tax provision, the current taxes payable and deferred taxes in the period in which the facts that give rise to a revision become known.
The Company finalized its accounting policy decision with respect to global intangible low taxed income (“GILTI”) and elects to account for the GILTI tax as a period cost when incurred. The GILTI provision is effective beginning in fiscal year 2019 and therefore, will have an impact on future period annual effective tax rates.
F. 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 records the impact of forfeitures on stock compensation expense in the period the forfeitures occur. 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 exercises 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. The probability associated with the achievement of performance conditions affects the vesting of our performance-based awards. Expense is only recognized for those shares expected to vest. The Company adjusts stock-based compensation expense (increase or decrease) when it becomes probable that actual performance will differ from the estimate.
Upon adopting Accounting Standards Update (“ASU”) 2016-09 "Compensation—Stock Compensation (Topic 718): Improvement to Employee Share-Based Payment Accounting," in fiscal 2017, we recognize forfeitures when they occur and no longer estimate a forfeiture rate to recognize stock-based compensation expense.
G. Cash and Cash Equivalents
Investment securities with an original maturity of three months or less at the time of purchase are considered cash equivalents.
H. Accounts Receivable, Net
Accounts receivable, net is comprised of trade receivables and lease receivables, net of allowances. Trade receivables consist of amounts due to the Company in the normal course of business, which are not collateralized and do not bear interest. Lease receivables primarily relate to sales-type leases arising from the sale of hardware elements in bundled DMS or other integrated solutions. Lease receivables represent the current portion of the present value of the minimum lease payments at the beginning of the lease term. The long-term portion of the present value of the minimum lease payments is included within other assets on the consolidated balance sheets. The Company considers lease receivables to be a single portfolio segment.
The accounts receivable allowances for both trade receivables and lease receivables are estimated based on historical collection experience, an analysis of the age of outstanding accounts receivable, and credit issuance experience. Receivables are considered past due if payment is not received by the date agreed upon with the customer. Write-offs are made when management believes it is probable a receivable will not be recovered.
I. 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 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 consolidated balance sheets were
$89.2
million
and
$94.4 million
as of
June 30, 2018
and
2017
, respectively. Long-term deferred costs classified within other assets on the consolidated balance sheets were
$95.7 million
and
$115.0 million
as of
June 30, 2018
and
2017
, respectively.
J. 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 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 consolidated balance sheets. Funds receivable was
$33.1 million
and
$25.7 million
, and funds held for clients was
$12.7 million
and
$7.9 million
as of
June 30, 2018
and
2017
, respectively. Client fund obligation was
$45.8 million
and
$33.6 million
as of
June 30, 2018
and
2017
, respectively.
K. Property, Plant and Equipment, Net
Property, plant and equipment, net is stated at cost and depreciated over the estimated useful lives of the assets using the straight-line method. Leasehold improvements are amortized over the shorter of the term of the lease or the estimated useful lives of the improvements. The estimated useful lives of assets are primarily as follows:
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Buildings
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20 to 40 years
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Furniture and fixtures
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4 to 7 years
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Data processing equipment
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2 to 5 years
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L. Goodwill
The Company tests goodwill 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.
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. An adverse change to the fair value of our reporting units could result in an impairment charge which could be material to our consolidated earnings.
M. Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount exceeds the fair value.
N. Internal Use Software
The Company’s policy provides for the capitalization of external direct costs of materials and services associated with developing or obtaining internal use computer software. In addition, the Company’s policy also provides for the capitalization of certain payroll and payroll-related costs for employees who are directly associated with the internal use computer software projects. The amount of capitalizable payroll costs with respect to these employees is limited to the time directly spent on such projects. Costs associated with preliminary project stage activities, training, maintenance, and all other post-implementation stage activities are expensed as incurred. The Company also expenses internal costs related to minor upgrades and
enhancements, as it is impracticable to separate these costs from normal maintenance activities. The Company amortizes internal use software typically over a
three
to
five
year life.
O. 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 incurred expenses to research, develop, and deploy new and enhanced solutions of
$131.3 million
,
$150.0 million
, and
$161.0 million
for fiscal
2018
,
2017
, and
2016
, respectively. These expenses were classified within cost of revenues on the consolidated statements of operations. Additionally, we had cash flows used for qualifying capitalized software development cost of
$41.1 million
,
$31.8 million
, and
$13.5 million
in fiscal
2018
,
2017
, and
2016
, respectively.
P. Foreign Currency
For foreign subsidiaries where the local currency is the functional currency, net assets are translated into U.S. dollars based on exchange rates in effect for each period, and revenues and expenses are translated at average exchange rates in the periods. Gains or losses from balance sheet translation of such entities are included in accumulated
other comprehensive income on the consolidated balance sheets. Currency transaction gains or losses relate to intercompany loans denominated in a currency other than that of the loan counterparty, which do not eliminate upon consolidation. Currency transaction gains or losses are included within other income, net on the consolidated statements of operations.
Q. Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. A fair value hierarchy has been established based on three levels of inputs, of which the first two are considered observable and the last unobservable.
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Level 1: Inputs that are based upon quoted prices in active markets for identical assets or liabilities.
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Level 2: Inputs, other than quoted prices included within Level 1, which are observable for the asset or liability, either directly or indirectly.
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Level 3: Unobservable inputs where there is little or no market activity for the asset or liability. These inputs reflect management's best estimate of what market participants would use to price the assets or liabilities at the measurement date.
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The Company determines the fair value of financial instruments in accordance with ASC 820, "Fair Value Measurements." This standard defines fair value and establishes 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 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 13), 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
June 30, 2018
and
2017
was
$1,849.3 million
and
$1,407.9 million
, respectively, based on quoted market prices for the same or similar instruments compared to a carrying value of
$1,850.0 million
and
$1,350.0 million
as of
June 30, 2018
and
2017
. The term loan facilities and the senior notes are considered Level 2 fair value measurements in the fair value hierarchy.
T
he Company has derivatives not designated as hedges which consisted of foreign currency forward contracts to offset the risks associated with the effects of certain foreign currency exposure on intercompany loans. The Company recognized changes in fair value of the derivative instruments in Other income, net in the consolidated statements of operations.
R. Concentrations
The C
ompany maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company maintains deposits in a diversified group of financial institutions, has not experienced any losses to date, and monitors the credit ratings of the primary depository institutions where deposits reside.
For
fiscal 2018
,
2017
and
2016
, revenues to
one
customer represented approximately
9%
,
11%
and
11%
, respectively, of the Company's revenues. Accounts receivable from this customer represented approximately
11%
and
14%
of the Company's accounts receivable as of
June 30, 2018
and
2017
, respectively. Revenues and accounts receivable from this customer were primarily generated by the ANA and RSNA segments.
Note 3. New Accounting Pronouncements
Recently Issued Accounting Pronouncements
In January 2017, the Financial Accounting Standard Board (“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 and required companies to apply a modified retrospective transition as of the earliest period presented. In July 2018, the FASB issued ASU 2018-11, “Lease (Topic 842), Targeted Improvements,” which permits companies to apply a modified retrospective transition as of the effective date and provide comparative period disclosures under ASC Topic 840. The Company has obligations under lease agreements for facilities, equipment and vehicles, 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: 1) retrospectively to each prior reporting period presented (full retrospective), or 2) retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective). In July 2015, the FASB deferred the effective date of ASU 2014-09 by one year and
subsequently issued ASU 2015-14, "Revenue from Contracts with Customers (ASC 606): Deferral of the Effective Date." As a result, the standard and subsequent amendments thereto, will be effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2017.
During fiscal 2017, the Company established a cross-functional implementation team which evaluated the impact of the new standard on its revenue contracts.
The Company will adopt this standard on a modified retrospective basis, on July 1, 2018. The Company expects the most significant impacts of adopting ASU 2014-09, and the related ASUs, on its consolidated results of operations, financial condition, or cash flows, will be as follows:
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The Company currently applies accounting guidance for software, ASC 985-605, and recognizes revenues for on-site licenses ratably over the software license term, as CDK lacks vendor-specific objective evidence ("VSOE") of the fair values of the individual elements of the sales arrangement. Under ASC 606, the Company will no longer be required to establish VSOE and will allocate an arrangement's transaction price to on-site software licenses, based on estimated standalone selling price at the time of the sale. Therefore, upon adoption of the standard, the Company will recognize revenue and costs for on-site licenses upon installation of the software. Aside from revenues for on-site software licenses, the Company will continue to recognize the majority of its revenues, including SaaS and other service arrangements ratably over the term of arrangement and transaction revenue when service is rendered.
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In ASC 340, "Other Assets and Deferred Costs", the FASB provides guidance for contract costs that require capitalization and subsequent amortization - costs to obtain a customer contract, and costs to fulfill the contract, which for CDK consists primarily of direct sales commissions and implementation costs of service arrangements. The adoption of the new standard will result in an increase in the costs deferred and amortized over the economic life of the contract.
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The Company is in the process of finalizing the impact of adoption of this standard on its financial statements and currently anticipates at the date of adoption a pre-tax cumulative adjustment increasing retained earnings, primarily as a result of the two items discussed above, of approximately
$150 million
to
$180 million
, with a corresponding decrease in deferred revenues and increase in unbilled receivables due to timing of revenue recognition for on-site software and a slight increase in deferred costs due to costs capitalized under ASC 340 partially offset by costs related to on-site software installations prior to the date of adoption. Implications to tax related accounts are not included in these estimated amounts. The Company’s assessment of the full impact of adoption of the standard is subject to finalization, such that the actual impact of the adoption may differ from the estimated range described above.
In preparation of adopting the new standard, the Company has updated its accounting policies, systems, internal controls and processes related to revenue recognition and contract costs.
Note 4. Acquisitions
For the years ended
June 30, 2018
and
2017
, the Company incurred
$15.7 million
and
$0.7 million
of costs related to the assessment and integration of acquisitions which are included in selling, general and administrative expenses, respectively.
ELEAD1ONE
In July 2018, CDK announced that it had entered into a definitive agreement to acquire ELEAD1ONE. ELEAD1ONE provides automotive customer relationship management software and call center solutions that enable interaction between sales, service and marketing operations to provide dealers with an integrated customer acquisition and retention platform. The transaction was unanimously approved by the CDK Board of Directors and is currently pending regulatory approval.
Progressus Media LLC
On April 3, 2018, the Company acquired the membership interests of Progressus Media LLC ("Progressus"), a specialty provider of mobile advertising solutions for dealerships, agencies, and automotive marketing companies. The acquisition was made pursuant to a membership interest purchase agreement, which contains customary representations, warranties, covenants, and indemnities by the sellers and the Company. The acquisition date fair value of the total consideration transferred was
$22.2 million
which consists primarily of an initial cash price of
$16.2 million
, net of cash acquired, the fair value of the holdback provision of
$0.3 million
and the fair value of contingent consideration of
$5.7 million
, which is payable upon achievement of certain milestones and metrics over a three year period ending on March 31, 2021. Prior to the
acquisition, a CDK officer had an existing advisory relationship with Progressus which entitled the individual to a portion of the proceeds from a sale of Progressus under a unit appreciation rights agreement. At the time of closing,
$0.5 million
of the total consideration transferred by CDK was paid to the officer to settle Progressus’ obligation under the terms of the officer’s unit appreciation rights agreement.
The fair value of acquired intangibles assets and other net assets was
$8.7 million
and
$2.2 million
, respectively. The excess of the acquisition consideration over the estimated fair value of the acquired net assets of
$11.3 million
was allocated to goodwill. The acquired net assets and goodwill are included in the ANA segment. The intangible assets will be amortized over a weighted-average useful life of approximately
9
years. The goodwill recognized from this acquisition reflects expected synergies resulting from direct ownership of the products and processes, allowing greater flexibility for future product development. The acquired goodwill is deductible for tax purposes. As of
June 30, 2018
, the Company recorded
$1.6 million
of accrued expenses and other current liabilities and
$4.4 million
of other liabilities for the holdback and contingent consideration. The contingent consideration payments will be classified as financing activities on the statement of cash flows as the payments will occur more than three months after the acquisition date.
The fair values of intangible assets and the contingent consideration liability were based on preliminary valuation analysis. These estimates and assumptions are subject to change within the one-year measurement period if additional information, which existed as of the acquisition date, becomes known to the Company.
Dashboard Dealership Enterprises
On October 20, 2017, the Company acquired the outstanding stock of Dashboard Dealership Enterprises, a provider of executive reporting solutions for auto dealers. The acquisition was made pursuant to a stock purchase agreement, which contains customary representations, warranties, covenants, and indemnities by the sellers and the Company. The acquisition date fair value of total consideration to be transferred was
$21.3 million
, which consists primarily of an initial cash price of
$12.8 million
, the fair value of the holdback provision of
$1.9 million
, and the fair value of contingent consideration of
$6.6 million
, which is payable upon achievement of certain milestones and metrics if achieved by December 31, 2018. As of
June 30, 2018
, the Company recorded
$7.6 million
of accrued expenses and other current liabilities and
$0.9 million
of other liabilities for the holdback and contingent consideration.
The fair value of acquired intangibles assets and liabilities assumed, including deferred tax liabilities, was
$3.9 million
and
$1.6 million
, respectively. The excess of the acquisition consideration over the estimated fair value of the acquired assets of
$19.0 million
was allocated to goodwill. The acquired assets and goodwill are included in the RSNA segment. The intangible assets will be amortized over a weighted-average useful life of approximately
8
years. The goodwill recognized from this acquisition reflects expected synergies resulting from direct ownership of the products and processes, allowing greater flexibility for future product development. The acquired goodwill is not deductible for tax purposes.
The pro forma effects of these acquisitions are not significant to the Company's reported results for any period presented. Accordingly, no pro forma financial statements have been presented herein.
Auto/Mate Dealership Systems
In May 2017, the Company entered into a definitive agreement to acquire Auto/Mate Dealership Systems, a privately held company that provides a suite of DMS products and solutions. In the third quarter of fiscal 2018, the Company and Auto/Mate Dealership Systems terminated the agreement. This outcome followed the decision of the Federal Trade Commission to oppose the proposed acquisition. There was no termination fee.
RedBumper, LLC and NewCarIQ, LLC
On February 1, 2016, the Company acquired certain assets of RedBumper, LLC and NewCarIQ, LLC, providers of technology solutions for new and used car pricing. The Company had a pre-existing relationship with these entities under which CDK was a reseller of their products. The acquisitions were made pursuant to asset purchase agreements, which contain customary representations, warranties, covenants, and indemnities by the sellers and the Company. The acquisition date fair value of total consideration to be transferred was
$32.4 million
, which consists primarily of an initial cash price of
$17.7 million
and a liability for contingent consideration of
$14.3 million
. Contingent consideration payments occurring within three months following the acquisition date were classified within investing activities on the statement of cash flows; subsequent payments were included within financing activities. Accordingly,
$0.4 million
of contingent consideration payments made during the three months following the acquisition date were included in investing activities as cash paid for the acquisitions. The minimum contingent consideration payable under the asset purchase agreements is
$14.7 million
and is payable in
installments over a
four
-year period; there is no maximum payment amount. The Company funded the initial payment with cash on hand.
The fair value of acquired software intangible assets and other assets was
$15.0 million
and
$0.6 million
, respectively. The excess of the acquisition consideration over the fair value of the acquired assets of
$16.8 million
was allocated to goodwill. The acquired assets and goodwill are included in the RSNA segment. The software intangible assets will be amortized over a weighted-average useful life of
8
years. The goodwill recognized from these acquisitions reflects expected synergies resulting from direct ownership of the products and processes, allowing greater flexibility for future product development and bundling, as opposed to licensing these products for sale. The acquired goodwill is deductible for tax purposes.
Note 5. 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 the Company 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 fiscal 2017, the Company extended the business transformation plan by
one
year through the fiscal year ending
June 30, 2019
("fiscal 2019"), and updated its estimate of total restructuring expenses under the business transformation plan to approximately
$70.0 million
through fiscal 2019. Based on additional opportunities we identified to further improve our cost structure, we have increased the estimated cost to execute the plan through fiscal 2019 to be approximately
$100.0 million
.
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, which include costs to terminate facility leases. The Company recognized
$20.9 million
,
$18.4 million
, and
$20.2 million
of restructuring expenses for fiscal
2018
,
2017
and
2016
, respectively. Since the inception of the business transformation plan in fiscal 2015, the Company has recognized cumulative restructuring expenses of
$61.9 million
. Restructuring expenses are presented separately on the 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
June 30, 2018
and
2017
. The following table summarizes the
fiscal 2018
and
2017
activity for the restructuring accrual:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee-Related Costs
|
|
Contract Termination Costs
|
|
Total
|
Balance as of June 30, 2016
|
$
|
9.0
|
|
|
$
|
0.9
|
|
|
$
|
9.9
|
|
Charges
|
14.5
|
|
|
4.8
|
|
|
19.3
|
|
Cash payments
|
(16.5
|
)
|
|
(3.0
|
)
|
|
(19.5
|
)
|
Adjustments
|
(0.6
|
)
|
|
(0.3
|
)
|
|
(0.9
|
)
|
Balance as of June 30, 2017
|
6.4
|
|
|
2.4
|
|
|
8.8
|
|
Charges
|
20.8
|
|
|
1.8
|
|
|
22.6
|
|
Cash payments
|
(21.5
|
)
|
|
(3.0
|
)
|
|
(24.5
|
)
|
Adjustments
|
(1.3
|
)
|
|
(0.4
|
)
|
|
(1.7
|
)
|
Balance as of June 30, 2018
|
$
|
4.4
|
|
|
$
|
0.8
|
|
|
$
|
5.2
|
|
Note 6. Stock-Based Compensation
Incentive Equity Awards Converted from ADP Awards
On October 1, 2014, ADP's outstanding equity awards for employees of the Company were converted into equity awards of CDK at a ratio of
2.757
CDK equity awards for every ADP equity award held immediately prior to the spin-off. The converted equity awards have the same terms and conditions as the ADP equity awards. As a result, the Company issued
2.3 million
stock options with a weighted-average exercise price of
$19.64
,
0.7 million
time-based restricted shares, and
0.2 million
performance-based restricted shares upon completion of the conversion of existing ADP equity awards into the
Company's equity awards. As the conversion was considered a modification of an award in accordance with ASC 718, "Compensation - Stock Compensation," the Company compared the fair value of the award immediately prior to the spin-off to the fair value immediately after the spin-off to measure the incremental compensation cost. The fair values immediately prior to and after the spin-off were estimated using a binomial option-pricing model. The conversion resulted in an increase in the fair value of the awards by
$1.4 million
, which was recognized in full as of June 30, 2016.
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, 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
. As of
June 30, 2018
, there were
5.3 million
shares available for issuance under the 2014 Plan after considering awards granted by the Company and converted as a result of the spin-off from ADP. 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 "Compensation—Stock Compensation (Topic 718): Improvement to Employee Share-Based Payment Accounting." Upon adoption, the Company made an accounting policy election to account for forfeitures as they occur rather than apply an estimated forfeiture rate. Stock-based compensation primarily consisted of the following:
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 with 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. Upon termination of employment, unvested stock options are evaluated for forfeiture or modification, subject to the terms of the awards and Company policies.
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. Upon termination of employment, unvested awards are evaluated for forfeiture or modification, subject to the terms of the awards and Company policies.
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 shares awarded under the time-based restricted stock program during the restricted period.
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. 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." 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 probability associated with the achievement of performance conditions affects the vesting of the Company's performance-based awards. Expense is only recognized for those shares expected to vest. Upon termination of employment, unvested awards are evaluated for forfeiture or modification, subject to the terms of the awards and Company policies.
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
fiscal 2018
,
2017
, and
2016
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2018
|
|
2017
|
|
2016
|
Cost of revenues
|
$
|
4.9
|
|
|
$
|
6.3
|
|
|
$
|
6.2
|
|
Selling, general and administrative expenses
|
30.8
|
|
|
49.1
|
|
|
30.2
|
|
Total pre-tax stock-based compensation expense
|
$
|
35.7
|
|
|
$
|
55.4
|
|
|
$
|
36.4
|
|
|
|
|
|
|
|
Income tax benefit
|
$
|
10.5
|
|
|
$
|
19.4
|
|
|
$
|
12.9
|
|
Stock-based compensation expense for
fiscal 2018
consisted of
$30.1 million
of expense related to equity-classified awards and
$5.6 million
of expense related to liability-classified awards. This includes
$1.5 million
of incremental stock-based compensation expense for awards that were modified or expense recognition was accelerated related to an officer's departure for
fiscal 2018
.
Stock-based compensation expense for fiscal
2017
consisted of
$46.8 million
of expense related to equity-classified awards and
$8.6 million
of expense related to liability-classified awards. Stock-based compensation expense for fiscal 2017 includes
$11.9 million
of expense due to a cumulative adjustment in the fourth quarter based on management's assessment that it is probable CDK's performance metrics for fiscal 2018 associated with performance-based restricted stock units will exceed the target. Additionally, there was
$3.1 million
of incremental stock-based compensation expense for awards that were modified or expense recognition was accelerated related to an officer's departure in fiscal 2017.
Stock-based compensation expense for fiscal
2016
consisted of
$31.4 million
of expense related to equity-classified awards,
$5.0 million
of expense related to liability-classified awards. Stock-based compensation expense for fiscal 2016 includes
$3.5 million
of incremental stock-based compensation expense for awards that were modified or expense recognition was accelerated related to the Transition and Release Agreement entered into with Mr. Anenen on February 2, 2016.
As of
June 30, 2018
, the total unrecognized compensation cost related to non-vested stock options, restricted stock units, and restricted stock awards was
$1.7 million
,
$16.7 million
, and
$8.0 million
, respectively, which will be amortized over the weighted-average remaining requisite service periods of
1.8 years
,
1.6 years
, and
1.2 years
, respectively.
The activity related to the Company's incentive equity awards for
fiscal 2018
consisted of the following:
Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Options
(in thousands)
|
|
Weighted-Average Exercise Price
(in dollars)
|
|
Weighted-Average Remaining Contractual Life (in years)
|
|
Aggregate Intrinsic Value (in millions)
|
Options outstanding as of June 30, 2017
|
1,310
|
|
|
$
|
39.70
|
|
|
|
|
|
Options granted
|
25
|
|
|
62.03
|
|
|
|
|
|
Options exercised
|
(334
|
)
|
|
26.77
|
|
|
|
|
|
Options canceled
|
(44
|
)
|
|
51.77
|
|
|
|
|
|
Options outstanding as of June 30, 2018
|
957
|
|
|
$
|
44.25
|
|
|
6.7
|
|
$
|
19.9
|
|
|
|
|
|
|
|
|
|
Exercisable as of June 30, 2018
|
532
|
|
|
$
|
34.55
|
|
|
5.6
|
|
$
|
16.2
|
|
The Company received proceeds from the exercise of stock options of
$8.9 million
,
$14.7 million
, and
$6.7 million
during
fiscal 2018
,
2017
, and
2016
respectively. The aggregate intrinsic value of stock options exercised during
fiscal 2018
,
2017
, and
2016
was approximately
$14.0 million
,
$26.0 million
, and
$12.4 million
, respectively.
Time-Based Restricted Stock and Time-Based Restricted Stock Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
Restricted Stock Units
|
|
Number of Shares
(in thousands)
|
|
Weighted-Average Grant Date Fair Value (in dollars)
|
|
Number of Units
(in thousands)
|
|
Weighted-Average Grant Date Fair Value (in dollars)
|
Non-vested restricted shares/units as of June 30, 2017
|
497
|
|
|
$
|
53.98
|
|
|
214
|
|
|
$
|
66.17
|
|
Restricted shares/units granted
|
184
|
|
|
63.71
|
|
|
79
|
|
|
64.86
|
|
Restricted shares/units vested
|
(230
|
)
|
|
50.23
|
|
|
(138
|
)
|
|
50.12
|
|
Restricted shares/units forfeited
|
(72
|
)
|
|
58.66
|
|
|
(13
|
)
|
|
58.65
|
|
Non-vested restricted shares/units as of June 30, 2018
|
379
|
|
|
$
|
60.14
|
|
|
142
|
|
|
$
|
58.55
|
|
Performance-Based Restricted Stock Units
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Number of Units
(in thousands)
|
|
Weighted-Average Grant Date Fair Value (in dollars)
|
Non-vested restricted units as of June 30, 2017
|
742
|
|
|
$
|
65.41
|
|
Restricted units granted
|
236
|
|
|
52.36
|
|
Dividend equivalents
|
7
|
|
|
57.53
|
|
Restricted units vested
|
(513
|
)
|
|
50.38
|
|
Restricted units forfeited
|
(61
|
)
|
|
59.33
|
|
Non-vested restricted units as of June 30, 2018
|
411
|
|
|
$
|
63.26
|
|
The following table presents the assumptions used to determine the fair value of the stock options granted by the Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2018
|
Fiscal 2017
|
Fiscal 2016
|
Risk-free interest rate
|
2.0
|
%
|
1.4
|
%
|
1.8
|
%
|
Dividend yield
|
0.9
|
%
|
0.9
|
%
|
0.9
|
%
|
Weighted-average volatility factor
|
24.5
|
%
|
24.5
|
%
|
24.7
|
%
|
Weighted-average expected life (in years)
|
6.3
|
|
6.3
|
|
6.3
|
|
Weighted-average fair value (in dollars)
|
$
|
15.65
|
|
$
|
13.90
|
|
$
|
12.55
|
|
Note 7. Employee Benefit Plans
Defined Contribution Savings Plan.
The Company's Board of Directors approved a CDK-sponsored defined contribution plan covering eligible full-time domestic employees of the Company after the spin-off date. This plan provides company matching contributions on a portion of employee contributions. In addition, this plan includes a transitional contribution for certain employees who were previously eligible to participate under ADP's domestic defined benefit plan since the Company did not adopt a similar plan. The costs recorded by the Company for this plan were
$16.9 million
,
$18.7 million
and
$18.9 million
for
fiscal 2018
,
2017
and
2016
, respectively.
International Benefit Plans.
The Company’s foreign subsidiaries have benefit plans that cover certain international employees. To the extent required by local statutory laws, the Company funds these benefit plans through periodic contributions under statutorily prescribed formulas. The Company’s expense for these plans was approximately
$15.8 million
,
$14.8 million
, and
$14.1 million
for fiscal
2018
,
2017
, and
2016
, respectively.
Note 8. Income Taxes
Tax Cuts and Jobs Act of 2017
On December 22, 2017, the Tax Cuts and Jobs Act ("Tax Reform Act") was enacted into law. The Tax Reform Act significantly revises the U.S. corporate income tax laws by, among other things, reducing the corporate income tax rate from
35.0%
to
21.0%
and implementing a modified territorial tax system that includes a one-time transition tax on accumulated undistributed foreign earnings. Other provisions included in the Tax Reform Act include the broadening of the executive compensation deduction limitation, a repeal of the domestic production activity deduction and several new international provisions. The modified territorial tax system includes a new anti-deferral provision, referred to as global intangible low taxed income (“GILTI”), which subjects certain foreign income to current U.S. tax.
In December
2017
, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Reform Act. Under SAB 118, companies are able to record a reasonable estimate of the impacts of the Tax Reform Act if one is able to be determined and report it as a provisional amount during the measurement period. The measurement period is not to extend beyond one year from the enactment date. Impacts of the Tax Reform Act that a company is not able to make a reasonable estimate for should not be recorded until a reasonable estimate can be made during the measurement period.
On a year-to-date basis, the Company recorded a one-time tax benefit of
$18.5 million
related to the Tax Reform Act comprised of
$26.2 million
for the re-measurement of the Company's net deferred tax liability, partially offset by tax expense of
$3.4 million
for the one-time transition tax recorded within accrued liabilities and
$4.3 million
for foreign withholding taxes associated with undistributed foreign earnings recorded primarily within deferred taxes. The year-to-date adjustment was made up of: a net
$14.1 million
provisional tax benefit for the one-time impacts of the Tax Reform Act recorded during the three months ended December 31, 2017; a measurement period adjustment of
$0.8 million
of tax benefit as a result of re-measuring the net deferred tax liability upon filing the income tax return recorded during the three months ended March 31, 2018; a measurement period adjustment recorded during the three months ended June 30, 2018 of
$3.6 million
of tax benefit consisting of
$2.8 million
to re-measure the net deferred tax liability based on finalized temporary differences and
$0.8 million
to revise the one-time transition tax and foreign withholding taxes based on revised earnings and profits computations completed during the period. As of
June 30, 2018
, the Company considers its accounting for the Tax Reform Act to be complete. In addition to the one-time tax effects of the Tax Reform Act, the Company revised its annual effective tax rate to consider the impact of the reduced corporate tax rate. Due to the Company's fiscal year, the statutory corporate tax rate for fiscal
2018
is
28.1%
, representing a blended tax rate based on the tax rate in effect on a pro-rata basis.
The Company’s accounting policy election related to GILTI was incomplete as of
December 31, 2017
and
March 31, 2018
. During the three months ended
June 30, 2018
, as a result of additional analysis and evaluation, the Company elected to account for the GILTI tax as a period cost when incurred. The GILTI provision is effective beginning in fiscal year
2019
and therefore, will have an impact on future period annual effective tax rates.
The ultimate impact of the Tax Reform Act may differ from the Company's estimates due to the issuance of additional regulatory guidance, the interpretation of the Tax Reform Act evolving over time and actions taken by the Company as a result of the Tax Reform Act.
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
$0.5 million
and
$1.0 million
as of
June 30, 2018
and
2017
, respectively, and payables to ADP of
$0.9 million
and
$1.2 million
as of
June 30, 2018
and
2017
, respectively, under the tax matters agreement.
Provision for Income Taxes
Earnings before income taxes presented below is based on the geographic location to which such earnings were attributable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2018
|
|
2017
|
|
2016
|
Earnings before income taxes:
|
|
|
|
|
|
U.S.
|
$
|
367.3
|
|
|
$
|
324.9
|
|
|
$
|
293.1
|
|
Foreign
|
144.7
|
|
|
110.4
|
|
|
76.0
|
|
|
$
|
512.0
|
|
|
$
|
435.3
|
|
|
$
|
369.1
|
|
The provision (benefit) for income taxes consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2018
|
|
2017
|
|
2016
|
Current:
|
|
|
|
|
|
Federal
|
$
|
76.6
|
|
|
$
|
69.6
|
|
|
$
|
84.9
|
|
Foreign
|
35.8
|
|
|
27.5
|
|
|
24.5
|
|
State
|
21.0
|
|
|
14.8
|
|
|
16.5
|
|
Total current
|
133.4
|
|
|
111.9
|
|
|
125.9
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(14.7
|
)
|
|
17.0
|
|
|
(3.3
|
)
|
Foreign
|
2.9
|
|
|
2.0
|
|
|
1.3
|
|
State
|
1.7
|
|
|
1.9
|
|
|
(1.6
|
)
|
Total deferred
|
(10.1
|
)
|
|
20.9
|
|
|
(3.6
|
)
|
Total provision for income taxes
|
$
|
123.3
|
|
|
$
|
132.8
|
|
|
$
|
122.3
|
|
A reconciliation between the Company’s effective tax rate and the U.S. federal statutory rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2018
|
|
%
|
|
2017
|
|
%
|
|
2016
|
|
%
|
Provision for taxes at U.S. statutory rate
|
$
|
143.9
|
|
|
28.1
|
%
|
|
$
|
152.4
|
|
|
35.0
|
%
|
|
$
|
129.2
|
|
|
35.0
|
%
|
Increase (decrease) in provision from:
|
|
|
|
|
|
|
|
|
|
|
|
State taxes, net of federal benefit
|
17.3
|
|
|
3.4
|
%
|
|
10.8
|
|
|
2.5
|
%
|
|
9.7
|
|
|
2.6
|
%
|
Stock compensation - excess tax benefits
|
(4.9
|
)
|
|
(1.0
|
)%
|
|
(12.0
|
)
|
|
(2.8
|
)%
|
|
—
|
|
|
—
|
%
|
Noncontrolling interest
|
(1.8
|
)
|
|
(0.4
|
)%
|
|
(2.0
|
)
|
|
(0.5
|
)%
|
|
(2.5
|
)
|
|
(0.7
|
)%
|
Foreign tax rate differential
|
(2.2
|
)
|
|
(0.4
|
)%
|
|
(12.4
|
)
|
|
(2.8
|
)%
|
|
(7.8
|
)
|
|
(2.1
|
)%
|
U.S. tax on foreign earnings
|
19.0
|
|
|
3.7
|
%
|
|
1.1
|
|
|
0.3
|
%
|
|
0.8
|
|
|
0.2
|
%
|
Foreign tax credits
|
(18.3
|
)
|
|
(3.6
|
)%
|
|
(1.9
|
)
|
|
(0.4
|
)%
|
|
(1.5
|
)
|
|
(0.4
|
)%
|
Foreign withholding taxes
|
4.5
|
|
|
0.9
|
%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
U.S. tax reform deferred tax re-measurement
|
(27.3
|
)
|
|
(5.3
|
)%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
Valuation allowances
|
(3.6
|
)
|
|
(0.7
|
)%
|
|
0.8
|
|
|
0.2
|
%
|
|
1.1
|
|
|
0.3
|
%
|
Domestic production activities deduction
|
(4.0
|
)
|
|
(0.8
|
)%
|
|
(4.2
|
)
|
|
(1.0
|
)%
|
|
(6.4
|
)
|
|
(1.7
|
)%
|
Pre spin-off tax return adjustments
|
(0.4
|
)
|
|
(0.1
|
)%
|
|
—
|
|
|
—
|
%
|
|
(0.4
|
)
|
|
(0.1
|
)%
|
Other
|
1.1
|
|
|
0.3
|
%
|
|
0.2
|
|
|
—
|
%
|
|
0.1
|
|
|
—
|
%
|
Provision for income taxes
|
$
|
123.3
|
|
|
24.1
|
%
|
|
$
|
132.8
|
|
|
30.5
|
%
|
|
$
|
122.3
|
|
|
33.1
|
%
|
During fiscal
2018
, the effective tax rate was favorably impacted by
$18.5 million
of net tax benefit due to the Tax Reform Act as discussed above. The impact of the Tax Reform Act is reflected within the following lines in the effective tax rate reconciliation above: U.S. tax reform deferred tax re-measurement, U.S. tax on foreign earnings, Foreign tax credits, Foreign withholding taxes and State taxes, net of federal benefit.
Effective July 1, 2016, the Company adopted ASU 2016-09 which favorably impacts the effective tax rate for fiscal
2018
and
2017
for excess tax benefits from stock-based compensation.
The balance sheet classification and significant components of deferred income tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2018
|
|
2017
|
Classification:
|
|
|
|
Long term deferred tax assets (included in other assets)
|
$
|
21.9
|
|
|
$
|
22.1
|
|
Long term deferred tax liabilities (included in deferred income taxes)
|
(56.7
|
)
|
|
(65.9
|
)
|
Net deferred tax liabilities
|
$
|
(34.8
|
)
|
|
$
|
(43.8
|
)
|
|
|
|
|
Components:
|
|
|
|
Deferred tax assets:
|
|
|
|
Accrued expenses
|
$
|
8.3
|
|
|
$
|
13.9
|
|
Compensation and benefits
|
32.7
|
|
|
46.1
|
|
Deferred revenue
|
44.4
|
|
|
53.8
|
|
Net operating losses
|
5.5
|
|
|
10.5
|
|
Capital losses
|
18.8
|
|
|
28.8
|
|
|
109.7
|
|
|
153.1
|
|
Less: valuation allowances
|
(21.6
|
)
|
|
(35.1
|
)
|
Net deferred tax assets
|
88.1
|
|
|
118.0
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Deferred expenses
|
46.7
|
|
|
64.9
|
|
Property, plant and equipment and intangible assets
|
70.1
|
|
|
92.1
|
|
Prepaid expenses
|
2.0
|
|
|
2.6
|
|
Undistributed foreign earnings
|
2.8
|
|
|
—
|
|
Other
|
1.3
|
|
|
2.2
|
|
Deferred tax liabilities
|
122.9
|
|
|
161.8
|
|
Net deferred tax liabilities
|
$
|
(34.8
|
)
|
|
$
|
(43.8
|
)
|
In the second quarter of fiscal
2018
, the Company concluded that
$244.0 million
of accumulated foreign earnings as of
December 31, 2017
were no longer indefinitely reinvested. The Company continues to remain indefinitely reinvested in any outside basis differences with respect to its foreign subsidiaries to cover local working capital needs and restrictions and to fund future investments, including potential acquisitions. Undistributed foreign earnings that the Company intends to indefinitely reinvest aggregate to approximately
$115.0 million
as of
June 30, 2018
. If circumstances change, and it becomes apparent that earnings currently considered indefinitely reinvested will be distributed, an additional tax charge may be necessary.
The Company had federal capital losses of $
75.4 million
which expire in
2020
and state capital losses of $
75.4 million
which expire in
2020
through
2030
. The Company had foreign net operating loss carryforwards of approximately
$20.4 million
as of
June 30, 2018
, of which
$3.0 million
expires in
2019
through
2028
and
$17.4 million
has an indefinite carryforward period.
Valuation Allowance
The Company recorded valuation allowances of
$21.6 million
and
$35.1 million
as of
June 30, 2018
and
2017
, respectively, because the Company has concluded it is more likely than not that it will be unable to utilize net operating and capital loss carryforwards of certain subsidiaries to offset future taxable earnings. As of each reporting date, the Company’s management considers new evidence, both positive and negative, which could impact management’s view with regard to future realization of deferred tax assets.
During fiscal
2018
, the valuation allowance balance decreased by
$13.5 million
, including
$10.0 million
reduction for the tax rate impact on a capital loss carryforward and
$3.5 million
for the expiration of certain non-U.S. tax loss carryforwards.
During fiscal
2017
, the valuation allowance balance was decreased by
$1.1 million
for a Canadian valuation allowance adjustment based on positive evidence which indicated that the foreign loss carryforward would be utilized prior to expiration.
The company concluded the deferred tax asset would be realizable based on a three-year cumulative profit position and forecasts of future year pre-tax income.
Income tax payments, net of refunds were
$118.9 million
,
$120.3 million
, and
$109.4 million
for
fiscal 2018
,
2017
, and
2016
, respectively.
Unrecognized Income Tax Benefits
As of
June 30, 2018
,
2017
, and
2016
, the Company had unrecognized income tax benefits of
$6.2 million
,
$6.4 million
, and
$4.7 million
, respectively, of which
$5.3 million
,
$4.8 million
, and
$3.6 million
, respectively, would impact the effective tax rate, if recognized. The remainder, if recognized, would principally affect deferred taxes.
A roll-forward of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2018
|
|
2017
|
|
2016
|
Beginning of the year balance
|
$
|
6.4
|
|
|
$
|
4.7
|
|
|
$
|
1.9
|
|
Additions for current year tax positions
|
1.3
|
|
|
1.0
|
|
|
1.9
|
|
Additions for tax positions of prior years
|
0.7
|
|
|
1.2
|
|
|
1.1
|
|
Reductions for tax positions of prior years
|
(0.8
|
)
|
|
—
|
|
|
(0.1
|
)
|
Settlement with tax authorities
|
(0.6
|
)
|
|
(0.2
|
)
|
|
—
|
|
Expiration of the statute of limitations
|
(0.8
|
)
|
|
(0.2
|
)
|
|
—
|
|
Impact of foreign exchange rate fluctuations
|
—
|
|
|
(0.1
|
)
|
|
(0.1
|
)
|
End of year balance
|
$
|
6.2
|
|
|
$
|
6.4
|
|
|
$
|
4.7
|
|
During fiscal
2018
, the Company decreased its net unrecognized income tax benefits by
$0.2 million
. During fiscal
2017
and
2016
, the Company increased its net unrecognized income tax benefits by
$1.7 million
and
$2.8 million
, respectively. For all years, changes were based on information which indicated the extent to which certain tax positions were more likely than not to be sustained. Penalties and interest expense associated with uncertain income tax positions have been recorded in the provision for income taxes on the consolidated statements of operations. Penalties and interest incurred during fiscal
2018
,
2017
, and
2016
were not significant. As of
June 30, 2018
and
2017
, the Company had an insignificant amount of accrued penalty and interest associated with uncertain tax positions, which was included within other liabilities on the consolidated balance sheets.
The Company conducts business globally and, as a result, files income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities. The tax years currently under examination vary by jurisdiction. During fiscal year
2018
, the U.S. Internal Revenue Service ("IRS") completed the income tax audit for the tax year ended
June 30, 2015
and the employment tax audit for calendar tax years
2014
through
2016
. The Company regularly considers the likelihood of assessments in each of the jurisdictions resulting from examinations. The Company has established a liability for unrecognized income tax benefits which it believes to be adequate in relation to the potential assessments. Once established, the liability for unrecognized tax benefits is adjusted when there is more information available, when an event occurs necessitating a change, or the statute of limitations for the relevant taxing authority to examine the tax position has expired.
Income tax-related examinations currently in progress in which the Company has significant business operations are as follows:
|
|
|
|
Tax Jurisdictions
|
|
Fiscal Years Ended
|
New Jersey
|
|
6/30/2008 thru 6/30/2011
|
Canada
|
|
6/30/2012 thru 6/30/2014
|
Kuwait
|
|
6/30/2017
|
India
|
|
6/30/2015 thru 6/30/2016
|
Spain
|
|
6/30/2011
|
Italy
|
|
6/30/2014 thru 6/30/2016
|
Belgium
|
|
6/30/2015 thru 6/30/2017
|
Based on the possible outcomes of the Company's tax audits and expiration of the statute of limitations, it is reasonably possible that the liability for uncertain tax positions will change within the next twelve months. The associated net tax impact on the effective tax rate is estimated to be a
$1.0 million
tax benefit, with minimal cash payments.
Although the final resolution of the Company's tax disputes is uncertain, based on current information, the resolution of tax matters is not expected to have a material effect on the Company's consolidated financial condition, liquidity, or results of operations. However, an unfavorable resolution could have a material impact on the Company’s consolidated financial condition, liquidity, or results of operations in the periods in which the matters are ultimately resolved.
Note 9. 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 number of weighted-average 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 6. Net earnings allocated to participating securities were not significant for
fiscal 2018
,
2017
and
2016
.
The following table summarizes the components of basic and diluted earnings per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2018
|
|
2017
|
|
2016
|
Net earnings attributable to CDK
|
$
|
380.8
|
|
|
$
|
295.6
|
|
|
$
|
239.3
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
Basic
|
135.8
|
|
|
146.7
|
|
|
157.0
|
|
Effect of employee stock options
|
0.3
|
|
|
0.7
|
|
|
0.5
|
|
Effect of employee restricted stock
|
0.7
|
|
|
0.8
|
|
|
0.5
|
|
Diluted
|
136.8
|
|
|
148.2
|
|
|
158.0
|
|
|
|
|
|
|
|
Basic earnings attributable to CDK per share
|
$
|
2.80
|
|
|
$
|
2.01
|
|
|
$
|
1.52
|
|
Diluted earnings attributable to CDK per share
|
$
|
2.78
|
|
|
$
|
1.99
|
|
|
$
|
1.51
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2018
|
|
2017
|
|
2016
|
Stock-based awards
|
0.2
|
|
|
0.3
|
|
|
0.5
|
|
Note 10. Accounts Receivable, Net
Accounts receivable, net comprised of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2018
|
|
2017
|
Trade receivables
|
$
|
374.5
|
|
|
$
|
368.0
|
|
Lease receivables
|
7.5
|
|
|
10.4
|
|
Accounts receivable, gross
|
382.0
|
|
|
378.4
|
|
Less: allowances
|
7.4
|
|
|
6.3
|
|
Account receivable, net
|
$
|
374.6
|
|
|
$
|
372.1
|
|
The investment in lease receivables consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2018
|
|
2017
|
Lease receivables, gross:
|
|
|
|
Minimum lease payments
|
$
|
11.9
|
|
|
$
|
23.4
|
|
Unearned income
|
(0.6
|
)
|
|
(1.6
|
)
|
|
11.3
|
|
|
21.8
|
|
Less: lease receivables, current (included in accounts receivable, net)
|
7.5
|
|
|
10.4
|
|
Lease receivables, long-term (included in other assets)
|
$
|
3.8
|
|
|
$
|
11.4
|
|
Scheduled minimum payments on lease receivables as of
June 30, 2018
were as follows:
|
|
|
|
|
|
Amount
|
Fiscal year ending 2019
|
$
|
7.9
|
|
Fiscal year ending 2020
|
3.6
|
|
Fiscal year ending 2021
|
0.3
|
|
Fiscal year ending 2022
|
0.1
|
|
Fiscal year ending 2023
|
—
|
|
|
$
|
11.9
|
|
The Company recognized interest income on sales-type leases of
$1.0 million
,
$1.8 million
, and
$2.4 million
, in
fiscal 2018
,
2017
, and
2016
, respectively, within other income, net on the consolidated statements of operations.
Note 11. Property, Plant and Equipment, Net
Depreciation expense for property, plant and equipment was
$47.8 million
,
$40.7 million
, and
$35.1 million
for
fiscal 2018
,
2017
, and
2016
, respectively. Property, plant, and equipment at cost and accumulated depreciation consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2018
|
|
2017
|
Property, plant and equipment:
|
|
|
|
Land and buildings
|
$
|
38.7
|
|
|
$
|
39.4
|
|
Data processing equipment
|
241.8
|
|
|
215.5
|
|
Furniture and fixtures, leasehold improvements, and other
|
79.1
|
|
|
80.4
|
|
Total property, plant and equipment
|
359.6
|
|
|
335.3
|
|
Less: accumulated depreciation
|
227.7
|
|
|
200.3
|
|
Property, plant and equipment, net
|
$
|
131.9
|
|
|
$
|
135.0
|
|
Note 12. Goodwill and Intangible Assets, Net
Changes in goodwill 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
|
(0.1
|
)
|
|
—
|
|
|
(1.4
|
)
|
|
(1.5
|
)
|
Balance as of June 30, 2017
|
604.6
|
|
|
214.3
|
|
|
362.3
|
|
|
1,181.2
|
|
Additions (Note 4)
|
19.0
|
|
|
11.3
|
|
|
—
|
|
|
30.3
|
|
Currency translation adjustments
|
(0.3
|
)
|
|
—
|
|
|
6.0
|
|
|
5.7
|
|
Balance as of June 30, 2018
|
$
|
623.3
|
|
|
$
|
225.6
|
|
|
$
|
368.3
|
|
|
$
|
1,217.2
|
|
Components of intangible assets, net were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2018
|
|
2017
|
|
Original Cost
|
|
Accumulated Amortization
|
|
Intangible Assets, net
|
|
Original Cost
|
|
Accumulated Amortization
|
|
Intangible Assets, net
|
Customer lists
|
$
|
181.3
|
|
|
$
|
(142.4
|
)
|
|
$
|
38.9
|
|
|
$
|
175.5
|
|
|
$
|
(130.0
|
)
|
|
$
|
45.5
|
|
Software
|
208.6
|
|
|
(124.3
|
)
|
|
84.3
|
|
|
163.7
|
|
|
(109.4
|
)
|
|
54.3
|
|
Trademarks
|
25.0
|
|
|
(24.6
|
)
|
|
0.4
|
|
|
25.0
|
|
|
(24.1
|
)
|
|
0.9
|
|
Other intangibles
|
6.9
|
|
|
(4.0
|
)
|
|
2.9
|
|
|
6.4
|
|
|
(3.1
|
)
|
|
3.3
|
|
|
$
|
421.8
|
|
|
$
|
(295.3
|
)
|
|
$
|
126.5
|
|
|
$
|
370.6
|
|
|
$
|
(266.6
|
)
|
|
$
|
104.0
|
|
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
4 years
(
7 years
for customer lists,
3 years
for software and software licenses, and
2 years
for trademarks). Amortization of intangible assets was
$31.3 million
,
$29.6 million
, and
$28.9 million
for
fiscal 2018
,
2017
, and
2016
, respectively.
Estimated amortization expenses of the Company's existing intangible assets as of
June 30, 2018
were as follows:
|
|
|
|
|
|
Amount
|
Fiscal year ending 2019
|
$
|
30.2
|
|
Fiscal year ending 2020
|
30.9
|
|
Fiscal year ending 2021
|
26.3
|
|
Fiscal year ending 2022
|
18.4
|
|
Fiscal year ending 2023
|
7.4
|
|
Thereafter
|
13.3
|
|
|
$
|
126.5
|
|
Note 13. Debt
Debt comprised of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2018
|
|
2017
|
Revolving credit facility
|
$
|
—
|
|
|
$
|
—
|
|
2019 term loan facility
|
203.1
|
|
|
215.6
|
|
2020 term loan facility
|
218.8
|
|
|
231.3
|
|
2021 term loan facility
|
370.0
|
|
|
390.0
|
|
3.30% senior notes, due 2019
|
250.0
|
|
|
250.0
|
|
4.50% senior notes, due 2024
|
500.0
|
|
|
500.0
|
|
5.875% senior notes due 2026
|
500.0
|
|
|
—
|
|
4.875% senior notes, due 2027
|
600.0
|
|
|
600.0
|
|
Capital lease obligations
|
0.2
|
|
|
1.5
|
|
Unamortized debt financing costs
|
(21.4
|
)
|
|
(16.7
|
)
|
Total debt and capital lease obligations
|
2,620.7
|
|
|
2,171.7
|
|
Current maturities of long-term debt and capital lease obligations
|
45.2
|
|
|
46.5
|
|
Total long-term debt and capital lease obligations
|
$
|
2,575.5
|
|
|
$
|
2,125.2
|
|
Revolving Credit Facility
The Company has a five-year senior unsecured revolving credit facility, which was undrawn as of
June 30, 2018
and
2017
. 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 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"). 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 original principal amount of the term loans made on the closing dates, with any unpaid principal amount due and payable on the maturity date.
The 2019 and 2020 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 and 2020 term loan facilities was
3.85%
as of
June 30, 2018
and
2.98%
as of June 30,
2017
.
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 (or, in the case of borrowings in Euro, the European 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) solely in the case of U.S. dollar loans, (i) the highest of (A) the prime rate of Bank of America, (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
0.250%
to
1.500%
per annum based on the Ratings. The interest rate per annum on the 2021 term loan facility was
3.85%
as of
June 30, 2018
.
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 revolving credit facility 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 will 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%
unsecured senior notes with a
$250.0 million
aggregate principal amount due in
2019
(the "
2019
notes") and
4.50%
unsecured senior notes with a
$500.0 million
aggregate principal amount due in
2024
(the "2024 notes"). The issuance price of the 2019 and 2024 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 2019 and 2024 notes is subject to adjustment from time to time if the credit ratings assigned to any series of 2019 and 2024 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
2019
and
2024
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
2019
or
2024
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.
On June 18, 2018, the Company completed an offering of
5.875%
unsecured senior notes with a
$500.0 million
aggregate principal amount due in
2026
(the "
2026 notes
"). The issuance price of the
2026 notes
was equal to the stated value. Interest is payable semi-annually on June 15 and December 15 of each year, and payment will commence on December 15, 2018. The
2026 notes
will mature on June 15, 2026. The
2026 notes
are redeemable at the Company's option prior to June 15, 2021 in whole or in part at a redemption price equal to
100%
of the aggregate principal amount thereof plus accrued and unpaid interest, if any, plus the applicable "make-whole" premium. Subsequent to June 15, 2021, the Company may redeem the
2026 notes
at a price equal to: (i)
102.938%
of the aggregate principal amount of the
2026 notes
redeemed prior to June 15, 2022; (ii)
101.958%
of the aggregate principal amount of the notes redeemed on or after June 15, 2022 but prior to June 15, 2023; (iii)
100.979%
of the aggregate principal amount of the
2026 notes
redeemed on or after June 15, 2023 but prior to June 15, 2024; and (iv)
100.000%
of the aggregate principal amount of the
2026 notes
redeemed thereafter.
On
May 15, 2017
, the Company completed an offering of
4.875%
unsecured senior notes with a
$600.0 million
aggregate principal amount due in
2027
(the "
2027
notes," together with the "
2024
notes, "the
2019
notes", and "the 2026 notes" are the "senior notes"). The issuance price of the 2027 notes was equal to the stated value. Interest is payable semi-annually on
June 1
and
December 1
of each year, and payment commenced on
December 1, 2017
. The
2027
notes will mature on
June 1, 2027
. The
2027
notes are redeemable at the Company's option prior to
June 1, 2022
in whole or in part at a redemption price equal to
100%
of the aggregate principal amount thereof plus accrued and unpaid interest, if any, plus the applicable "make-whole" premium. Subsequent to
June 1, 2022
, the Company may redeem the
2027
notes at a price equal to: (i)
102.438%
of the aggregate principal amount of the
2027
notes redeemed prior to
June 1, 2023
; (ii)
101.625%
of the aggregate principal amount of the notes redeemed on or after
June 1, 2023
but prior to
June 1, 2024
; (iii)
100.813%
of the aggregate principal amount of the
2027
notes redeemed on or after
June 1, 2024
but prior to
June 1, 2025
; and (iv)
100.000%
of the aggregate principal amount of the
2027
notes redeemed thereafter.
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 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 2019 and 2024 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
June 30, 2018
and
2017
, gross debt issuance costs related to debt instruments were
$29.6 million
and $
21.7 million
, respectively. Accumulated amortization was
$8.2 million
and
$5.0 million
as of
June 30, 2018
and
2017
, respectively. Additional debt issuance costs of
$7.9 million
were capitalized in fiscal 2018. Debt financing costs are amortized over the terms of the related debt instruments to interest expense on the consolidated statement of operations.
The Company's aggregate scheduled maturities of the long-term debt and capital lease obligations as of
June 30, 2018
were as follows:
|
|
|
|
|
|
Amount
|
Fiscal year ending 2019
|
$
|
45.2
|
|
Fiscal year ending 2020
|
473.1
|
|
Fiscal year ending 2021
|
213.8
|
|
Fiscal year ending 2022
|
310.0
|
|
Fiscal year ending 2023
|
—
|
|
Thereafter
|
1,600.0
|
|
Total debt and capital lease obligations
|
2,642.1
|
|
Unamortized deferred financing costs
|
(21.4
|
)
|
Total debt and capital lease obligations, net of unamortized deferred financing costs
|
$
|
2,620.7
|
|
Note 14. Commitments and Contingencies
The Company has obligations under various operating lease agreements for facilities and equipment. Total expense under these agreements was approximately
$39.0 million
,
$46.0 million
, and
$49.3 million
in fiscal
2018
,
2017
, and
2016
, respectively, with minimum commitments as of
June 30, 2018
as follows:
|
|
|
|
|
|
Amount
|
Fiscal year ending 2019
|
$
|
20.0
|
|
Fiscal year ending 2020
|
14.3
|
|
Fiscal year ending 2021
|
9.8
|
|
Fiscal year ending 2022
|
7.3
|
|
Fiscal year ending 2023
|
4.4
|
|
Thereafter
|
10.8
|
|
|
$
|
66.6
|
|
In addition to fixed rentals, certain leases require payment of maintenance and real estate taxes and contain escalation provisions based on future adjustments in price indices.
As of
June 30, 2018
, the Company had
no
purchase commitments and obligations related to royalty, purchase, and maintenance agreements on the Company's software, equipment, and other assets.
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.
Legal Proceedings
From time to time, the Company is involved in legal, regulatory, and arbitration proceedings concerning matters arising in connection with the conduct of its business activities. Such proceedings can be expensive and disruptive to normal business operations. When losses are considered probable and reasonably estimable, the Company records a liability in the amount of its best estimate for the ultimate loss. At this time, the Company is unable to reasonably estimate any reasonably possible loss or ranges of losses on the matters and proceedings described below.
Competition Matters
The Company is involved in several lawsuits that set forth allegations of anti-competitive agreements between the Company and The Reynolds and Reynolds Company (“Reynolds and Reynolds”) relating to the manner in which the defendants control access to, and allow integration with, their respective DMSs; several of the actions also include allegations of independent anticompetitive action on behalf of the Company. The Company has also received a Civil Investigative Demand from the Federal Trade Commission (“FTC”) requesting the production of documents relating to any agreement between the Company and Reynolds and Reynolds.
As of February 1, 2018, the following antitrust lawsuits have been transferred to, or filed as part of the U.S. District Court for the Northern District of Illinois for consolidated or coordinated for pretrial proceedings as part of a Multi-District Litigation proceeding (“MDL”). Currently, the parties to the MDL are engaged in preliminary proceedings and document discovery. Each of these lawsuits seeks, among other things, treble damages and injunctive relief.
|
|
•
|
Motor Vehicle Software Corporation (“MVSC”) brought a suit against the Company, Reynolds and Reynolds, and Computerized Vehicle Registration (“CVR”), a majority owned joint venture of the Company. MVSC’s suit was originally filed in the U.S. District Court for the Central District of California on February 3, 2017. Currently, Defendants’ motions to dismiss MVSC’s second amended complaint are under consideration by the court.
|
|
|
•
|
Authenticom, Inc.
brought a suit against CDK Global, LLC (the Company’s operating subsidiary), and Reynolds and Reynolds. Authenticom’s suit was originally filed in the U.S. District Court for the Western District of Wisconsin on May 1, 2017. Defendants’ motions to dismiss were granted in part, and dismissed in part.
|
|
|
•
|
Teterboro Automall, Inc. d/b/a Teterboro Chrysler Dodge Jeep Ram (“Teterboro”) brought a putative class-action suit against CDK Global, LLC and Reynolds and Reynolds. Teterboro’s suit was originally filed in the U.S. District Court for the District of New Jersey on October 19, 2017. Since that time, several more putative class actions have been filed in a variety of Federal District Courts, with substantively similar allegations; all of them have been consolidated with the MDL proceeding. On June 4, 2018, a Consolidated Class Action Complaint was filed on behalf of a putative class made up of all dealerships in the United States that directly or indirectly purchase DMS or data integration services from CDK or Reynolds and Reynolds. The Company has moved to dismiss the complaint, or in the alternative, stay the cases in the event Reynolds and Reynolds’ concurrent motion to compel arbitration (or, in the alternative, dismiss the complaint) is granted; those motions are currently being briefed by the parties.
|
|
|
•
|
Cox Automotive, along with multiple subsidiaries (“Cox”), brought suit against CDK Global, LLC. Cox’s suit was originally filed in the U.S. District Court for the Western District of Wisconsin, on December 11, 2017. CDK Global, LLC has moved to dismiss Cox’s claims; that motion is currently under consideration by the court.
|
|
|
•
|
Loop LLC d/b/a Autoloop (“Autoloop”) brought suit against CDK Global, LLC in the U.S. District Court for the Northern District of Illinois on April 9, 2018, but reserved its rights with respect to remand to the U.S. District Court for the Western District of Wisconsin at the conclusion of the MDL proceedings. On June 5, 2018, Autoloop amended its complaint as a putative class action on behalf of itself and all other similarly situated vendors. CDK Global LLC has moved to dismiss Autoloop's claims; that motion is currently being briefed by the parties.
|
The Company believes that these cases are without merit and intends to continue to contest the claims in these cases vigorously. Legal and expert fees may be significant, and an adverse result in these suits could have a material adverse effect on the Company's business, results of operations, financial condition, or liquidity.
On June 22, 2017, the Company received from the FTC a Civil Investigative Demand consisting of interrogatories and a request to produce documents relating to any agreements between the Company and Reynolds and Reynolds. On March 12, 2018, a parallel request was received from the New York State Attorney General. The Company is responding to the requests. The requests merely seek information, and no proceedings have been instituted. The Company believes there has not been any conduct by the Company or its current or former employees that would be actionable under the antitrust laws in connection with the agreements between ourselves and Reynolds and Reynolds or otherwise. At this time, the Company does not have sufficient information to predict the outcome of, or the cost of responding to or resolving these investigations.
Other Proceedings
The Company is otherwise involved from time to time in other proceedings not described above. Based on information available at this time, the Company believes that the resolution of these other matters currently pending will not individually or in the aggregate have a material adverse effect on our business, results of operations, financial condition, or liquidity. The Company's view of these matters may change as the proceedings and events related thereto unfold.
Other Contingencies
The Company has provided approximately
$26.1 million
of guarantees as of
June 30, 2018
in the form of surety bonds issued to support certain licenses and contracts which require a surety bond as a guarantee of performance of contractual obligations. In general, the Company would only be liable for the amount of these guarantees in the event the Company defaulted in performing the obligations under each contract, of which, the probability is remote.
The Company had a total of
$2.0 million
in letters of credit outstanding as of
June 30, 2018
primarily in connection with insurance programs and our foreign subsidiaries.
Note 15. 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' (deficit) equity. The Company's other comprehensive income (loss) for fiscal
2018
,
2017
, and
2016
and AOCI balances as of
June 30, 2018
,
2017
, and
2016
were comprised solely of currency translation adjustments. Other comprehensive income (loss) was
$3.5 million
,
$2.2 million
, and
$(45.8) million
for fiscal
2018
,
2017
, and
2016
, respectively. The accumulated balances reported in AOCI on the consolidated balance sheets for currency translation adjustments were
$11.5 million
,
$8.0 million
, and
$5.8 million
as of
June 30,
2018
,
2017
, and
2016
, respectively.
Note 16. 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. In January 2017, the Board of Directors terminated this authorization and replaced it with an authorization for the Company to repurchase up to
$2.0 billion
of our common stock as part of a new 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 is determined at management's discretion and depends 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 including, but not limited to, potential acquisitions.
In December 2015, the Company entered into an accelerated share repurchase agreement ("December 2015 ASR") to purchase
$250.0 million
of the Company's common stock. Under the terms of the December 2015 ASR, the Company made a
$250.0 million
payment in December 2015 and received an initial delivery of approximately
4.3 million
shares of the Company's common stock. In June 2016, the Company received an additional
1.0 million
shares of common stock in final settlement of the December 2015 ASR, for a total of
5.3 million
shares. The value reflected in treasury stock upon completion of the December 2015 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 higher than the
$250.0 million
cash paid by
$6.2 million
.
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. In May 2017, the Company received an additional
0.7 million
shares of common stock in final settlement of the December 2016 ASR, for a total of
5.2 million
shares. The value reflected in treasury stock upon completion of the December 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
$330.0 million
cash paid by
$21.2 million
.
In May 2017, the Company entered into an accelerated share repurchase agreement ("May 2017 ASR") to purchase
$350.0 million
of the Company's common stock. Under the terms of the May 2017 ASR, the Company made a
$350.0 million
payment in May 2017 and received initial delivery of approximately
4.5 million
of the Company's common stock. In
September 2017, the Company received an additional
1.1 million
shares of common stock in final settlement of the May 2017 ASR, for a total of
5.6 million
shares. The value reflected in treasury stock upon completion of the May 2017 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
$350.0 million
cash paid by
$3.1 million
.
Additionally, the Company made open market repurchases of
9.4 million
shares of the Company's common stock during fiscal 2018 for a total cost of
$623.6 million
and
0.3 million
shares of the Company's common stock during fiscal 2017 for a total cost of
$20.0 million
.
Note 17. 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. The Company entered into a data services agreement with ADP prior to the spin-off under which ADP will provide the Company with certain data center sharing services relating to the provision of information technology, platform support, hosting and network services. The term of the agreement expired on September 30, 2016,
two years
after the spin-off date.
The Company entered into an intellectual property transfer agreement with ADP prior to the spin-off under which ADP assigned to the Company certain patents, trademarks, copyrights, and other intellectual property developed or owned by ADP or certain of its subsidiaries and with respect to which the Company is the primary or exclusive user today or the anticipated primary or exclusive user in the future. The term of the agreement is perpetual after the spin-off date.
For fiscal 2016, the Company recorded
$2.2 million
of expenses related to the transition services agreement. The Company recorded
$3.4 million
and
$7.5 million
of expenses related to the data services agreement in the accompanying financial statements for fiscal 2017 and 2016, respectively.
Refer to Note 8 for further information on the tax matters agreement with ADP.
Note 18. Financial Data by Segment
The Company is organized into two main operating groups. The Company's first operating group is CDK North America which is comprised of two reportable segments, Retail Solutions North American and Advertising North America. The second operating group, which is also a reportable segment, is CDK International.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Solutions North America
|
|
Advertising North America
|
|
CDK International
|
|
Other
|
|
Total
|
Year ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,611.1
|
|
|
$
|
305.8
|
|
|
$
|
356.3
|
|
|
$
|
—
|
|
|
$
|
2,273.2
|
|
Earnings before income taxes
|
659.0
|
|
|
37.1
|
|
|
97.7
|
|
|
(281.8
|
)
|
|
512.0
|
|
Assets
|
1,202.5
|
|
|
332.0
|
|
|
509.6
|
|
|
964.3
|
|
|
3,008.4
|
|
Capital expenditures
|
39.1
|
|
|
—
|
|
|
5.8
|
|
|
1.1
|
|
|
46.0
|
|
Depreciation and amortization
|
59.0
|
|
|
3.3
|
|
|
11.7
|
|
|
5.1
|
|
|
79.1
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,600.7
|
|
|
$
|
307.6
|
|
|
$
|
311.9
|
|
|
$
|
—
|
|
|
$
|
2,220.2
|
|
Earnings before income taxes
|
605.5
|
|
|
44.4
|
|
|
75.0
|
|
|
(289.6
|
)
|
|
435.3
|
|
Assets
|
1,231.1
|
|
|
312.1
|
|
|
538.9
|
|
|
801.0
|
|
|
2,883.1
|
|
Capital expenditures
|
51.6
|
|
|
—
|
|
|
7.8
|
|
|
3.0
|
|
|
62.4
|
|
Depreciation and amortization
|
48.2
|
|
|
3.1
|
|
|
11.4
|
|
|
7.6
|
|
|
70.3
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,521.3
|
|
|
$
|
279.7
|
|
|
$
|
313.6
|
|
|
$
|
—
|
|
|
$
|
2,114.6
|
|
Earnings before income taxes
|
481.3
|
|
|
27.5
|
|
|
61.1
|
|
|
(200.8
|
)
|
|
369.1
|
|
Assets
|
1,240.9
|
|
|
307.9
|
|
|
539.4
|
|
|
276.8
|
|
|
2,365.0
|
|
Capital expenditures
|
37.4
|
|
|
—
|
|
|
8.3
|
|
|
5.1
|
|
|
50.8
|
|
Depreciation and amortization
|
39.3
|
|
|
3.7
|
|
|
12.5
|
|
|
8.5
|
|
|
64.0
|
|
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:
|
|
•
|
DMSs and layered applications, which may be installed on-site 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; 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
|
|
Years Ended June 30,
|
|
2018
|
|
2017
|
|
2016
|
CDK North America:
|
|
|
|
|
|
Retail Solutions North America:
|
|
|
|
|
|
Subscription revenue
|
$
|
1,306.3
|
|
|
$
|
1,261.4
|
|
|
$
|
1,191.2
|
|
Transaction revenue
|
164.0
|
|
|
179.5
|
|
|
179.1
|
|
Other revenue
|
140.8
|
|
|
159.8
|
|
|
151.0
|
|
Total Retail Solutions North America
|
$
|
1,611.1
|
|
|
$
|
1,600.7
|
|
|
$
|
1,521.3
|
|
Advertising North America revenue
|
305.8
|
|
|
307.6
|
|
|
279.7
|
|
CDK International revenue
|
356.3
|
|
|
311.9
|
|
|
313.6
|
|
Total
|
$
|
2,273.2
|
|
|
$
|
2,220.2
|
|
|
$
|
2,114.6
|
|
Revenues and property, plant and equipment, net by geographic area were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
Europe
|
|
Canada
|
|
Other
|
|
Total
|
Year ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,811.7
|
|
|
$
|
253.3
|
|
|
$
|
105.0
|
|
|
$
|
103.2
|
|
|
$
|
2,273.2
|
|
Property, plant and equipment, net
|
105.9
|
|
|
14.1
|
|
|
3.9
|
|
|
8.0
|
|
|
131.9
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,808.9
|
|
|
$
|
221.0
|
|
|
$
|
99.2
|
|
|
$
|
91.1
|
|
|
$
|
2,220.2
|
|
Property, plant and equipment, net
|
104.5
|
|
|
16.3
|
|
|
3.7
|
|
|
10.5
|
|
|
135.0
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,706.4
|
|
|
$
|
227.8
|
|
|
$
|
94.5
|
|
|
$
|
85.9
|
|
|
$
|
2,114.6
|
|
Property, plant and equipment, net
|
91.2
|
|
|
15.3
|
|
|
2.1
|
|
|
10.0
|
|
|
118.6
|
|
Note 19. Quarterly Financial Results (Unaudited)
Summarized quarterly results of operations for the fiscal
2018
and
2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
Year ended June 30, 2018
|
|
|
|
|
|
|
|
Revenues
|
$
|
565.7
|
|
|
$
|
561.7
|
|
|
$
|
576.6
|
|
|
$
|
569.2
|
|
Gross profit
(1)
|
258.0
|
|
|
270.9
|
|
|
281.6
|
|
|
280.7
|
|
Earnings before income taxes
|
119.8
|
|
|
120.3
|
|
|
135.0
|
|
|
136.9
|
|
Net earnings
|
83.1
|
|
|
106.2
|
|
|
97.8
|
|
|
101.6
|
|
Net earnings attributable to noncontrolling interest
|
1.8
|
|
|
2.2
|
|
|
1.7
|
|
|
2.2
|
|
Net earnings attributable to CDK
|
81.3
|
|
|
104.0
|
|
|
96.1
|
|
|
99.4
|
|
Basic earnings attributable to CDK per share
|
$
|
0.58
|
|
|
$
|
0.76
|
|
|
$
|
0.71
|
|
|
$
|
0.76
|
|
Diluted earnings attributable to CDK per share
|
$
|
0.57
|
|
|
$
|
0.75
|
|
|
$
|
0.71
|
|
|
$
|
0.75
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2017
|
|
|
|
|
|
|
|
Revenues
|
$
|
550.7
|
|
|
$
|
547.8
|
|
|
$
|
556.3
|
|
|
$
|
565.4
|
|
Gross profit
(1)
|
235.6
|
|
|
244.6
|
|
|
248.6
|
|
|
256.5
|
|
Earnings before income taxes
|
111.9
|
|
|
118.9
|
|
|
110.4
|
|
|
94.1
|
|
Net earnings
|
79.2
|
|
|
83.6
|
|
|
78.8
|
|
|
60.9
|
|
Net earnings attributable to noncontrolling interest
|
2.3
|
|
|
0.9
|
|
|
1.5
|
|
|
2.2
|
|
Net earnings attributable to CDK
|
76.9
|
|
|
82.7
|
|
|
77.3
|
|
|
58.7
|
|
Basic earnings attributable to CDK per share
|
$
|
0.51
|
|
|
$
|
0.56
|
|
|
$
|
0.53
|
|
|
$
|
0.41
|
|
Diluted earnings attributable to CDK per share
|
$
|
0.51
|
|
|
$
|
0.55
|
|
|
$
|
0.53
|
|
|
$
|
0.41
|
|
(1) Gross profit is calculated as revenues less cost of revenues.