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 acquisition, sale, financing, insuring, parts supply, repair, and maintenance of vehicles, in more than
100
countries around the world, for approximately
30,000
retail locations and most OEMs.
The Company is organized into two main operating groups, CDK North America ("CDKNA") and CDK International ("CDKI"), which are also reportable segments. 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 19 - Financial Data by Segment for further information.
The Company previously reported the results of Advertising North America ("ANA") as a reportable segment. During the fourth quarter of fiscal year 2019, the Company committed to a plan to divest: (a) all of the assets of ANA; and (b) certain assets of CDKNA related to mobile advertising solutions and website services (collectively, the “Digital Marketing Business”). The Digital Marketing Business is presented as discontinued operations. Additional information on discontinued operations is contained in Note 4 - Discontinued Operations.
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.
Certain prior year amounts have been reclassified to conform to current year presentation. Refer to Note 3 - New Accounting Pronouncements for discussion relating to the impact of adopting Accounting Standards Update ("ASU") 2016-18 on the presentation of changes in restricted cash in the consolidated statement of cash flows, and Note 4 - Discontinued Operations for the impact of presenting Digital Marketing Business as held for sale and discontinued operations.
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 Note 10 - Income Taxes and Note 18 - Transactions with ADP for further information.
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. The carrying value of these equity method investments was not significant as of June 30, 2019 and 2018.
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 analysis, 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
and Deferred Costs
Effective July 1, 2018, the Company adopted the Financial Accounting Standard Board (“FASB”) Accounting Standards Update ("ASU") 2014-09, “Revenue from Contracts with Customers,” and related ASUs ("ASC 606") using the modified retrospective approach. The comparative information has not been restated and continues to be reported under the accounting standards in effect for the period presented. Refer to Note 6 - Revenue for the required disclosures related to the impact of adopting ASC 606 and a discussion of the Company's updated policy related to revenue recognition and deferred costs. Refer to Note 2 - Summary of Significant Accounting Policies in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2018 for the Company's revenue recognition and deferred costs policies prior to adoption of ASC 606.
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 accounts for the Global Intangible Low Taxed Income (GILTI) tax as a period cost when incurred. The GILTI provision is effective beginning in fiscal year 2019.
The Company accounts for goodwill impairment as a permanent tax difference and as a period cost when incurred effective beginning in fiscal year 2019.
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 stockholder 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 the Company's 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.
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 comprises 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. 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
$32.3 million
and
$33.1 million
, and funds held for clients was
$9.7 million
and
$12.7 million
as of
June 30, 2019
and
2018
, respectively. Client fund obligation was
$42.0 million
and
$45.8 million
as of
June 30, 2019
and
2018
, respectively.
J. 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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K. 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 of the reporting unit exceeds its fair value, the difference, up to the amount of goodwill recorded for the reporting unit, is recognized as an impairment.
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 the Company's reporting units could result in an impairment charge which could be material to its consolidated earnings.
L. 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.
M. Internal Use Software and Computer Software to be Sold, Leased, or Otherwise Marketed
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.
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 these policies, the Company incurred expenses to research, develop, and deploy new and enhanced solutions of
$79.5 million
,
$115.0 million
, and
$125.1 million
for fiscal
2019
,
2018
, and
2017
, respectively. These expenses were classified within cost of revenues on the consolidated statements of operations.
N. Assets Held for Sale
The Company considers assets to be held for sale when management, with appropriate authority, approves and commits to a formal plan to actively market the assets for sale at a price reasonable in relation to their estimated fair value, the assets are available for immediate sale in their present condition, an active program to locate a buyer has been initiated, the sale of the assets is probable and expected to be completed within one year and it is unlikely that significant changes will be made to the plan. Upon designation as held for sale, the Company records the assets at the lower of their carrying value or their estimated fair value, reduced for the cost to dispose the assets, and ceases to record depreciation and amortization expenses on the assets.
Assets and liabilities of a discontinued operation are reclassified for all comparative periods presented in the consolidated balance sheet. For assets and liabilities that meet the held for sale criteria but do not meet the definition of a discontinued operation, the Company reclassifies the assets and liabilities in the period in which the held for sale criteria are met, but does not reclassify prior period amounts. Refer to Note 4 - Discontinued Operations for further information regarding Company's assets and liabilities held for sale.
O. Discontinued Operations
The Company reports financial results for discontinued operations separately from continuing operations to distinguish the financial impact of disposal transactions from ongoing operations. Discontinued operations reporting occurs only when the disposal of a component or a group of components of the Company (i) meets the held-for-sale classification criteria, is disposed of by sale, or other than by sale, and (ii) represents a strategic shift that will have a major effect on the Company's operations and financial results. The results of operations and cash flows of a discontinued operation are restated for all comparative periods presented. Unless otherwise noted, discussion in the Notes to Consolidated Financial Statements refers to the Company's continuing operations. Refer to Note 4 - Discontinued Operations for further information regarding the Company's discontinued operations.
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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•
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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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•
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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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•
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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 15 - Debt), 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, 2019
, and
2018
, was
$2,441.6 million
and
$1,849.3 million
, respectively, based on quoted market prices for the same or similar instruments compared to a carrying value of
$2,350.0 million
and
$1,850.0 million
as of
June 30, 2019
, and
2018
. 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 2019
,
2018
, and
2017
, none of the CDKNA and CDKI segment customers accounted for 10% or more of the Company's consolidated revenues. As of
June 30, 2019
, and
2018
, accounts receivable from
one
customer represented approximately
9%
and
11%
, respectively, of the Company's accounts receivable. Revenues from this customer were generated by the Digital Marketing Business and are reported in discontinued operations.
Note 3. New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other.” ASU 2017-04 simplifies the accounting for goodwill impairment by eliminating Step 2 of the current goodwill impairment test, which required a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which the reporting unit’s carrying
value exceeds its fair value, limited to the carrying value of the goodwill. ASU 2017-04 is effective for financial statements issued for fiscal years, and interim periods beginning after December 15, 2019. The Company adopted this standard on July 1, 2018, and eliminated Step 2 of the goodwill impairment test in calculating goodwill impairment for ANA. Additional information on goodwill impairment for ANA is contained in Note 4 - Discontinued Operations.
In November 2016, the FASB issued ASU 2016-18, “Restricted Cash.” ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. ASU 2016-18 is effective for financial statements issued for fiscal years, and interim periods beginning after December 15, 2017. The Company adopted ASU 2016-18 retrospectively on July 1, 2018, and as a result included restricted cash with cash and cash equivalents when reconciling the beginning of the period and end of the period total amounts presented on the consolidated statements of cash flows. Accordingly, the consolidated statement of cash flows has been revised to include restricted cash associated with funds held for clients as a component of cash, cash equivalents, and restricted cash.
As a result of the adoption, the Company adjusted the consolidated statements of cash flows from previously reported amounts as follows:
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Year ended June 30, 2018
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Year ended June 30, 2017
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Originally Reported
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Adjustments due to ASU 2016-18
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As Adjusted
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Originally Reported
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Adjustments due to ASU 2016-18
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As Adjusted
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Cash, cash equivalents, and restricted cash, beginning of period
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$
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726.1
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$
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7.9
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$
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734.0
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$
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219.1
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$
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3.2
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$
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222.3
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Net cash flows provided by operating activities
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461.6
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4.8
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466.4
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431.0
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4.7
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435.7
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Cash, cash equivalents, and restricted cash end of period
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804.4
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12.7
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817.1
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726.1
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7.9
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734.0
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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 did not have a material impact on the Company's consolidated statements of cash flows.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” Refer to Note 6, Revenue, for the required disclosures related to the impact of adopting ASC 606.
Recently Issued Accounting Pronouncements
In November 2018, the FASB issued ASU 2018-18, "Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606" to resolve the diversity in practice concerning the manner in which entities account for transactions based on their assessment of the economics of a collaborative arrangement. ASU 2018-18 is effective for fiscal years, and interim periods beginning after December 15, 2019. Early adoption is permitted. The Company is currently in the process of evaluating the potential impact of the adoption of ASU 2018-18 on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, "Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," which aligns the accounting for implementation cost incurred in a hosting arrangement that is a service contract with the accounting for implementation costs incurred to develop or obtain internal-use software under ASC 350-40, in order to determine which costs to capitalize and recognize as an asset. ASU 2018-15 is effective for fiscal years, and interim periods beginning after December 15, 2019, and can be applied either prospectively to implementation costs incurred after the date of adoption or retrospectively to all arrangements. Early adoption is permitted. The Company plans to early adopt ASU 2018-15 on July 1, 2019 using the prospective approach and will apply this guidance to all implementation costs incurred after the date of adoption.
In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments," which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate
credit losses on certain types of financial instruments, including trade receivables. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019. The Company is currently in the process of evaluating the potential impact of the adoption of ASU 2016-13 on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" and subsequent amendments to the initial guidance: ASU 2017-13, ASU 2018-11 and ASU 2018-20 (collectively, "ASC 842"). ASC 842 requires that lessees recognize right-of-use assets and lease liabilities for any lease classified as either a finance or an operating lease that is not considered short-term. The accounting applied by lessors is largely consistent with the existing lease standard but updated to align with certain changes to the lessee model (e.g., certain definitions, such as substantive substitution rights, have been updated) and the new revenue recognition guidance issued in 2014. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, and early adoption is permitted. Entities are required to adopt this standard using a modified retrospective transition approach. Under this approach, the standard is implemented either (1) as of the earliest period presented and through the comparative periods in the entity's financial statements or (2) as of the effective date of ASC 842, with a cumulative-effect adjustment to equity.
The Company plans to adopt ASC 842 on July 1, 2019 using the transition method whereby prior comparative periods will not be restated. In addition, the Company plans to elect the package of practical expedients permitted under the transition guidance for all leases (where the Company is a lessee or a lessor), which does not require reassessment of prior conclusions related to contracts containing a lease, lease classification, and initial direct lease costs.
CDK as a Lessee:
The Company has obligations under lease arrangements mainly for facilities, vehicles and equipment, which are classified as operating leases under the existing lease standard. In preparation of adopting this new standard, the Company has implemented a third-party lease management software to capture leases and support the required disclosures, and updated its accounting policies, internal controls, and processes related to this new guidance.
The Company has made the following policy elections:
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–
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The Company will elect to not recognize right-of-use assets and lease liabilities for leases with a term of 12 months or less for all asset classes.
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–
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The Company will elect the practical expedient that allows entities to combine lease components with related non-lease components.
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The Company is in the process of finalizing the impact of adopting this standard and currently anticipates recognizing a right-of-use asset, net of prepaids, incentives and impairments, of approximately
$65.0 million
to
$70.0 million
, and a lease liability of approximately
$70.0 million
to
$75.0 million
in the Company's consolidated balance sheets. 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.
CDK as a Lessor:
The Company evaluated its hardware-as-a-service arrangements and concluded that such arrangements will be accounted for as a sales-type lease under the new standard, primarily because they do not contain substantive substitution rights. Since the Company has elected to not reassess prior conclusions related to contracts containing a lease, lease classification, and initial direct costs, only hardware leases that commence or are modified subsequent to our July 1, 2019 adoption will be accounted for under ASC 842. These arrangements provide customers continuous access to CDK owned hardware, such as networking and telephony equipment and laser printers. Historically, the Company has accounted for these arrangements as a distinct performance obligation under the revenue recognition guidance and recognized revenue over the term of the arrangement.
Note 4. Discontinued Operations
In June 2019, the Company committed to a plan to divest Digital Marketing Business which comprises: (a) all of the assets of ANA; and (b) certain assets of CDKNA related to mobile advertising solutions and website services in order to focus on its core suite of SaaS software and technology solutions for the markets it serves through the CDKNA and CDKI segments.
The Company's decision to divest the Digital Marketing Business was the result of a comprehensive strategic review of the Company’s business, undertaken during the fiscal quarter ending June 30, 2019 (the “fourth quarter”). The Company intends to complete its divestiture of the Digital Marketing Business during the next 12 months. This action resulted in the reclassification of the assets and liabilities comprising that business to assets and liabilities held for sale in the accompanying
consolidated balance sheets, and a corresponding adjustment to consolidated statements of operations and cash flows to reflect discontinued operations, for all periods presented. The net of assets and liabilities held-for-sale related to discontinued operations are required to be recorded at the lower of carrying value or fair value less costs to sell.
As a result of the Company's decision to sell the business, the Company evaluated ANA reporting unit's goodwill for impairment, which is included in its entirety within the Digital Marketing Business. The impairment test indicated that the carrying value of ANA was higher than its fair value. The decline in ANA's fair value was driven by a decrease in estimated future earnings and an unfavorable change in the discount rate representing management’s assessment of increased risk with respect to the business forecasts primarily due to business uncertainty after the public announcement of the planned sale of business and management's shift in focus to customer retention instead of growth. As a result, the Company recorded a goodwill impairment charge of
$168.7 million
which is included as a component of discontinued operations for the year ended June 30, 2019.
The Company determined the fair value of the Digital Marketing Business and ANA primarily based on third-party valuation analysis, data from sales of comparable businesses, and analysis of current market conditions. The Company did not record any valuation allowance for the Digital Marketing Business as the fair value, less cost to sell, was in excess of its carrying value.
The following table summarizes the comparative financial results of discontinued operations which are presented as (Loss)/Earnings from discontinued operations, net of taxes on the Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
2019
|
|
2018
|
|
2017
|
Revenues
|
|
$
|
418.1
|
|
|
$
|
475.2
|
|
|
$
|
489.5
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
Cost of revenues
|
|
307.4
|
|
|
327.5
|
|
|
336.6
|
|
Selling, general and administrative expenses
|
|
30.5
|
|
|
34.6
|
|
|
44.6
|
|
Goodwill impairment
|
|
168.7
|
|
|
—
|
|
|
—
|
|
Restructuring expenses
|
|
1.5
|
|
|
0.3
|
|
|
0.7
|
|
Total expenses
|
|
508.1
|
|
|
362.4
|
|
|
381.9
|
|
(Loss) Earnings before income taxes
|
|
(90.0
|
)
|
|
112.8
|
|
|
107.6
|
|
|
|
|
|
|
|
|
Provision from income taxes
|
|
19.8
|
|
|
35.2
|
|
|
40.0
|
|
|
|
|
|
|
|
|
(Loss) Earnings from discontinued operations, net of taxes
|
|
$
|
(109.8
|
)
|
|
$
|
77.6
|
|
|
$
|
67.6
|
|
The total assets and liabilities held for sale related to discontinued operations are stated separately as of June 30, 2019 and 2018, respectively, in the Consolidated Balance Sheets comprised the following items:
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
June 30, 2018
|
Assets:
|
|
|
|
|
|
|
|
|
|
Prepaid and other current assets
|
|
$
|
1.1
|
|
|
$
|
1.8
|
|
Total current assets held for sale*
|
|
|
|
1.8
|
|
Property, plant and equipment, net
|
|
2.3
|
|
|
4.3
|
|
Goodwill
|
|
59.4
|
|
|
228.0
|
|
Intangible assets, net
|
|
35.6
|
|
|
34.1
|
|
Other assets
|
|
0.2
|
|
|
1.2
|
|
Total long-term assets held for sale*
|
|
|
|
267.6
|
|
Total assets held for sale
|
|
$
|
98.6
|
|
|
$
|
269.4
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Deferred revenues
|
|
$
|
0.8
|
|
|
$
|
3.5
|
|
Accrued expenses and other current liabilities
|
|
0.7
|
|
|
0.2
|
|
Total current liabilities held for sale*
|
|
|
|
3.7
|
|
Deferred revenues
|
|
—
|
|
|
0.2
|
|
Other liabilities
|
|
0.4
|
|
|
0.6
|
|
Total long-term liabilities held for sale*
|
|
|
|
0.8
|
|
Total liabilities held for sale
|
|
$
|
1.9
|
|
|
$
|
4.5
|
|
* The assets and liabilities of Digital Marketing Business classified as held for sale are classified as current on the June 30, 2019 balance sheet as it is probable that the sale will occur within one year.
Note 5. Acquisitions
For the year ended
June 30, 2019
, the Company incurred
$13.2 million
of costs related to the assessment and integration-related activities of which
$6.6 million
was recorded within cost of revenue and
$6.6 million
was recorded within selling, general and administrative expenses. For the year ended
June 30, 2018
, the Company incurred
$15.6 million
of costs related to the assessment and integration-related activities of which
$0.3 million
was recorded within cost of revenue and
$15.3 million
was recorded within selling, general and administrative expenses.
Fiscal 2019 Acquisitions
ELEAD1ONE
On September 14, 2018, the Company acquired the equity interests of ELEAD1ONE ("ELEAD"). ELEAD’s automotive customer relationship management ("CRM") software and call center solutions enable interaction between sales, service and marketing operations to provide dealers with an integrated customer acquisition and retention platform.
The acquisition was made pursuant to an equity purchase agreement, which contains customary representations, warranties, covenants, and indemnities by the sellers and the Company. The Company acquired all of the outstanding equity of ELEAD for an initial cash purchase price of
$513.0 million
, net of cash acquired of
$7.0 million
.
The acquisition of ELEAD has been accounted for using the acquisition method of accounting, which requires, among other things, the assets acquired and liabilities assumed be recognized at their respective fair values as of the acquisition date. As of June 30, 2019, the Company has finalized the purchase price allocation. The following table summarizes the final amounts recognized for assets acquired and liabilities assumed as of the acquisition date.
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7.0
|
|
Accounts receivable
|
|
18.9
|
|
Other current assets
|
|
3.4
|
|
Property, plant and equipment
|
|
14.8
|
|
Intangible assets
|
|
132.0
|
|
Accrued expenses and other current liabilities
|
|
(21.6
|
)
|
Short-term deferred revenues
|
|
(6.6
|
)
|
Capital lease obligations
|
|
(7.3
|
)
|
Total identifiable net assets
|
|
140.6
|
|
Goodwill
|
|
379.4
|
|
Net assets acquired
|
|
$
|
520.0
|
|
The amounts in the table above are reflective of measurement period adjustments made during fiscal year 2019, which mainly included an increase of
$2.9 million
to accrued expenses and other liabilities,
$1.7 million
to intangible assets,
$1.4 million
to property, plant and equipment,
$1.2 million
to capital leases,
$1.1 million
to goodwill, and
$0.1 million
to deferred revenue; and a decrease of
$0.2 million
to accounts receivable. The measurement period adjustments did not have a significant impact on the consolidated statement of operations, balance sheet or cash flows.
The intangible assets acquired primarily relate to customer lists, software, and trademarks, which will be amortized over a weighted-average useful life of
12
years. The goodwill resulting from this acquisition reflects expected synergies resulting from adding ELEAD products and processes to the Company's products and processes. The acquired goodwill is allocated to the CDKNA reportable segment and is deductible for tax purposes.
In December 2018, the Company sold the airplane acquired as part of the ELEAD acquisition for cash less costs to sell of
$6.7 million
. Given the short time between the ELEAD acquisition and the sale of the acquired airplane, the final purchase price allocated to the airplane was adjusted to equal the cash less costs to sell in accordance with ASC 805, "Business Combinations" and ASC 360, "Property, Plant and Equipment." As such, there was
no
gain or loss recognized on the sale of the airplane.
The results of operations for ELEAD have been included in the consolidated statements of operations from the date of acquisition. The pro forma effects of this acquisition are not significant to the Company's reported results for any period presented. Accordingly, no pro forma financial statements have been presented herein.
In addition to the acquisition, the Company entered into a joint venture agreement with the sellers. Under the terms of the joint venture agreement, the Company contributed
$10.0 million
to the venture at the ELEAD acquisition closing, committed to an additional $10.0 million in contributions over time, and acquired
50%
ownership in the joint venture. The Company's contributions were expected to fund the initial operations of the joint venture. Under ASC 810 "Consolidation," the joint venture was determined to be a variable interest entity ("VIE"); however, the Company was not considered the primary beneficiary. As such, the joint venture was accounted for as an equity method investment and the initial
$10.0 million
contribution was recorded as an investment on the consolidated balance sheets. During the fourth quarter of fiscal 2019, the Company entered into a joint venture termination agreement with the former owners of ELEAD in exchange for a termination payment of
$7.0 million
. The initial
$10.0 million
contribution and the
$7.0 million
termination payment were recorded as a loss from equity method investment within the consolidated statements of operations.
For fiscal
2019
, the Company incurred
$11.9 million
of costs in connection with the ELEAD acquisition and integration-related activities of which
$6.1 million
was recorded within cost of revenues and
$5.8 million
was recorded within selling, general and administrative expenses.
Fiscal 2018 Acquisitions
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 intangible 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 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. For the holdback provision and contingent consideration as of
June 30, 2019
and
June 30, 2018
, the Company recorded
$2.4 million
and
$1.6 million
of accrued expenses and other current liabilities, respectively; and
$2.3 million
and
$4.4 million
of other liabilities, respectively.
During the fourth quarter of fiscal year 2019, the Company committed to a plan to divest the Digital Marketing Business, which includes the Progressus business. The Progressus business is presented as discontinued operations. Additional information on discontinued operations is contained in Note 4 - Discontinued Operations.
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, 2019. For the holdback provision and contingent consideration as of
June 30, 2019
and
June 30, 2018
, the Company recorded
$2.7 million
and
$7.6 million
of accrued expenses and other current liabilities, respectively; and other liabilities of
$0.9 million
as of
June 30, 2018
.
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 CDKNA 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.
Fiscal 2017 Acquisitions
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.
Note 6. Revenue
A. Adoption of ASC 606, "Revenue from Contracts with Customers"
On July 1, 2018, the Company adopted ASC 606 applying the modified retrospective method to all contracts that were not completed as of July 1, 2018. For contracts that were modified before the effective date, the Company reflected the aggregate effect of all modifications when identifying performance obligations and allocating transaction price in accordance with the available practical expedient, which did not have a material effect on the adjustment to accumulated deficit. Results for reporting periods beginning after July 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period.
Upon adoption, recognition of revenue and costs for on-site licenses and installation was changed from recognition ratably over the software license term to recognition upon installation of the software. Additionally, the Company began deferring costs to obtain and costs to fulfill the contract which for the Company consists primarily of direct sales commissions and implementation costs for service arrangements. The cumulative effects of the changes made to the consolidated July 1, 2018 balance sheet for the adoption of ASC 606 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2018
|
|
Adjustments due to ASC 606
|
|
Balance at
July 1, 2018
|
Assets
|
|
|
|
|
|
Accounts receivable
|
$
|
374.6
|
|
|
$
|
2.4
|
|
|
$
|
377.0
|
|
Current assets held for sale
|
1.8
|
|
|
(0.4
|
)
|
|
1.4
|
|
Other current assets
|
186.5
|
|
|
(61.2
|
)
|
|
125.3
|
|
Long-term assets held for sale
|
267.6
|
|
|
(0.8
|
)
|
|
266.8
|
|
Other assets
|
164.3
|
|
|
113.6
|
|
|
277.9
|
|
Liabilities
|
|
|
|
|
|
Accrued expenses and other current liabilities
|
197.9
|
|
|
0.3
|
|
|
198.2
|
|
Current liabilities held for sale
|
3.7
|
|
|
(0.3
|
)
|
|
3.4
|
|
Short-term deferred revenues
|
165.5
|
|
|
(38.0
|
)
|
|
127.5
|
|
Long-term deferred revenues
|
110.2
|
|
|
(40.8
|
)
|
|
69.4
|
|
Deferred income taxes
|
56.7
|
|
|
23.2
|
|
|
79.9
|
|
Long-term liabilities held for sale
|
0.8
|
|
|
(0.2
|
)
|
|
0.6
|
|
Other liabilities
|
64.1
|
|
|
0.1
|
|
|
64.2
|
|
Stockholders' Deficit
|
|
|
|
|
|
Retained earnings
|
753.0
|
|
|
109.7
|
|
|
862.7
|
|
Accumulated other comprehensive income
|
11.5
|
|
|
(0.4
|
)
|
|
11.1
|
|
Impact on Consolidated Financial Statements
The following table summarizes the effects of ASC 606 on selected line items within the consolidated statement of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2019
|
|
As Reported ASC 606
|
|
Impact of ASC 606
|
|
ASC 605
|
Revenues
|
$
|
1,914.8
|
|
|
$
|
(31.0
|
)
|
|
$
|
1,945.8
|
|
Cost of revenues
|
899.8
|
|
|
(24.7
|
)
|
|
924.5
|
|
Selling, general and administrative expenses
|
444.7
|
|
|
(0.5
|
)
|
|
445.2
|
|
Total expenses
|
1,462.5
|
|
|
(25.2
|
)
|
|
1,487.7
|
|
Operating earnings
|
452.3
|
|
|
(5.8
|
)
|
|
458.1
|
|
Earnings before income taxes
|
303.9
|
|
|
(5.8
|
)
|
|
309.7
|
|
Provision for income taxes
|
(62.2
|
)
|
|
2.0
|
|
|
(64.2
|
)
|
Net earnings from continuing operations
|
241.7
|
|
|
(3.8
|
)
|
|
245.5
|
|
Loss from discontinued operations, net of taxes
|
(109.8
|
)
|
|
(0.5
|
)
|
|
(109.3
|
)
|
Net earnings
|
131.9
|
|
|
(4.3
|
)
|
|
136.2
|
|
Net earnings attributable to CDK
|
124.0
|
|
|
(4.3
|
)
|
|
128.3
|
|
Net earnings (loss) attributable to CDK per common share - basic:
|
|
|
|
|
|
Continuing operations
|
1.86
|
|
|
(0.03
|
)
|
|
1.89
|
|
Discontinued operations
|
(0.87
|
)
|
|
—
|
|
|
(0.87
|
)
|
Net earnings (loss) attributable to CDK per common share - diluted:
|
|
|
|
|
|
Continuing operations
|
1.85
|
|
|
(0.03
|
)
|
|
1.88
|
|
Discontinued operations
|
(0.87
|
)
|
|
(0.01
|
)
|
|
(0.86
|
)
|
The following table summarizes the effects of ASC 606 on selected line items within the balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
As Reported ASC 606
|
|
Impact of ASC 606
|
|
ASC 605
|
Assets
|
|
|
|
|
|
Accounts receivable
|
$
|
412.3
|
|
|
$
|
(1.8
|
)
|
|
$
|
410.5
|
|
Current assets held for sale
|
98.6
|
|
|
0.4
|
|
|
99.0
|
|
Other current assets
|
164.8
|
|
|
58.2
|
|
|
223.0
|
|
Other assets
|
284.9
|
|
|
(108.1
|
)
|
|
176.8
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Accrued expenses and other current liabilities
|
203.8
|
|
|
—
|
|
|
203.8
|
|
Current liabilities held for sale
|
1.9
|
|
|
0.6
|
|
|
2.5
|
|
Short-term deferred revenues
|
124.8
|
|
|
22.9
|
|
|
147.7
|
|
Long-term deferred revenues
|
68.4
|
|
|
28.8
|
|
|
97.2
|
|
Deferred income taxes
|
80.5
|
|
|
0.8
|
|
|
81.3
|
|
Other liabilities
|
67.3
|
|
|
(0.1
|
)
|
|
67.2
|
|
Stockholders' Deficit
|
|
|
|
|
|
Retained earnings
|
911.6
|
|
|
(105.5
|
)
|
|
806.1
|
|
Accumulated other comprehensive loss
|
(6.7
|
)
|
|
1.2
|
|
|
(5.5
|
)
|
The adoption of ASC 606 had no impact to net cash provided by or (used in) operating, financing, or investing activities on the Company’s consolidated statements of cash flows.
B. Revenue Recognition
The Company determines the amount of revenue to be recognized through the following steps:
|
|
•
|
Identification of the contract, or contracts, with a customer;
|
|
|
•
|
Identification of the performance obligations in the contract;
|
|
|
•
|
Determination of the transaction price;
|
|
|
•
|
Allocation of the transaction price to the performance obligations in the contract; and
|
|
|
•
|
Recognition of revenue when, or as, the Company satisfies the performance obligations.
|
The majority of the Company’s revenue is generated from contracts with multiple performance obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company is required to estimate the total consideration expected to be received from contracts with customers. In limited circumstances, the consideration expected to be received may be variable based on the specific terms of the contract.
The Company rarely licenses or sells products or services on a standalone basis. As such, the Company is required to develop its best estimate of standalone selling price of each distinct good or service as the basis for allocating the total transaction price. The primary method used to estimate standalone selling price is the adjusted market assessment approach, with some product categories using the expected cost plus a margin approach. When establishing standalone selling price, the Company considers various factors which may include geographic region, current market trends, customer class, its market share and position, its general pricing practices for bundled products and services, and recent contract sales data.
The Company applies significant judgment in order to identify and determine the number of performance obligations, estimate the total transaction price, determine the allocation of the transaction price to each identified performance obligation, and determine the appropriate method and timing of revenue recognition.
Taxes collected from customers and remitted to governmental authorities are presented on a net basis; that is, such taxes are excluded from revenues.
The Company generates revenues from the following four categories: subscription, on-site licenses and installation, transaction, and other. The Company does not evaluate a contract for a significant financing component if payment is expected within one year or less from the transfer of the promised items to the customer.
Subscription.
In the CDKNA and CDKI segments, CDK provides software and technology solutions for automotive retailers and OEMs, which includes:
|
|
•
|
Dealer Management Systems (“DMSs”) and layered applications, where the software is hosted and provided on a software-as-a-service (“SaaS”) basis;
|
|
|
•
|
Interrelated services such as installation, initial training, and data updates;
|
|
|
•
|
Ongoing maintenance and support related to on-site software; and
|
|
|
•
|
Hardware on a service basis, meaning no specific assets are identified or a substantive right of substitution exists, that provides the customer continuous access to hardware owned by the Company.
|
SaaS and other hosted service arrangements, which allow the customer continuous access to the software over the contract period without taking possession, are provided on a subscription basis. The Company has concluded that under its SaaS and hosted service arrangements, the customer obtains access to the Company’s software which resides and is maintained on its managed servers. The customer does not obtain the right to take possession of the software. As such, the Company has concluded that its SaaS and hosted services arrangements do not include a software license. Furthermore, the Company has concluded that while the support and maintenance and hosting services are capable of being distinct performance obligations, the obligations are not distinct within the context of the contract. In addition, as the support and maintenance and hosting services are provided over the same period and have the same pattern of transfer of control, the support and maintenance and hosting services are combined and recognized as a single performance obligation. The Company may provide new customers with interrelated setup activities such as installation, initial training and data updates that the Company must undertake to fulfill the contract. These are considered
fulfillment activities that do not transfer the service to the customer. In addition to the core DMS software application, the customer may also contract for layered applications, which are each considered a distinct performance obligation.
Revenues for SaaS and other hosted service arrangements, are recognized ratably over the duration of the contract. The Company has determined its obligation under these arrangements is to stand ready to perform the underlying services as required by the customer. The customer receives the benefit of the services and the Company has the right to payment as the services are performed. A time-elapsed output method is used to measure progress as the Company transfers control evenly over the duration of the contract.
On-site licenses and installation.
In the CDKNA and CDKI segments, on-site software arrangements include a license of intellectual property as the customer has the contractual right to take possession of the software and the customer can either run the software on its own hardware or contract with another party unrelated to the Company to host the software. The customer receives the right to use the software license upon its installation for the term of the arrangement. As such, the Company has concluded that the software license is a distinct performance obligation and recognizes the transaction price allocated to on-site software upon installation. The Company also provides maintenance and support of the software applications. Such maintenance and support services may include server and desktop support, bug fixes, and support resolving other issues a customer may encounter in utilizing the software. Revenue allocated to support and maintenance is generally recognized ratably over the contract period as customers simultaneously consume and receive benefits, given the support and maintenance comprise distinct performance obligations that are satisfied ratably over time. A time-elapsed output method is used to measure progress as the Company transfers control evenly over the duration of the contract.
Transaction
. The Company receives fees per transaction for providing auto retailers interfaces with third parties to process credit reports, vehicle registrations, and automotive equity mining. Transaction revenues are variable based on the volume of transactions processed. For these transaction revenues, the Company has a right to payment as the transactions are performed in an amount that corresponds directly with the value to the customer. As such, the Company recognizes transaction revenues as the services are rendered and in the amount to which it has the right to invoice. Transaction revenues for credit report processing and automotive equity mining 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 customer, and controls the specified good or service before it is transferred to the customer. The Company recognizes vehicle registration revenues net of the state registration fee when it is acting as an agent and does not control the related goods and services before they are transferred to the customer.
Other
. The Company provides consulting and professional services, including marketing campaign solutions, and sells hardware such as laser printers, networking and telephony equipment, and related items. Consulting and professional services are either billed on a time and materials basis or on a fixed monthly, quarterly or semi-annual basis based on the amount of services contracted. Revenue from these services are recorded when the Company’s obligation is satisfied. Where the Company’s obligation is to provide continuous services throughout the contract period and the customer receives the benefit of those services as they are performed, the Company recognizes these services revenues over time using a time-elapsed output method as the Company believes the passage of time faithfully depicts the transfer of services to its customers. Where the professional service represents a single performance obligation, the customer receives the benefit of the services only upon their completion, and the Company does not have the right to payment as the services are performed, such services revenue are recognized upon completion.
The Company often sells hardware bundled with maintenance services and has concluded that these bundles include two distinct performance obligations. The first performance obligation is to transfer the hardware product and the second performance obligation is to provide maintenance on the hardware and its embedded software. As such, the transaction price allocated to the sold hardware is recognized upon delivery at which point the customer is able to direct the use of, and obtain substantially all of the remaining benefits of the hardware. Upon delivery of the hardware, the Company generally has the right to payment, the customer has legal title, physical possession of, and control of the hardware. The transaction price allocated to the maintenance of hardware and its embedded software is recognized ratably over the duration of the contract as the customer simultaneously consumes and receives the benefit of this maintenance. The Company has determined its obligation under these arrangements is to stand ready to perform the underlying services as required by the customer. A time-elapsed output method is used to measure progress as the Company transfers control evenly over the duration of the contract. Hardware maintenance is included in subscription revenues.
C. Disaggregation of Revenue
The following table presents segment revenues by revenue category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2019
|
|
CDKNA
|
|
CDKI
|
|
Total
|
Revenues:
|
|
|
|
|
|
Subscription
|
$
|
1,283.3
|
|
|
$
|
257.3
|
|
|
$
|
1,540.6
|
|
On-site licenses and installation
|
7.9
|
|
|
47.1
|
|
|
55.0
|
|
Transaction
|
162.5
|
|
|
—
|
|
|
162.5
|
|
Other
|
139.3
|
|
|
17.4
|
|
|
156.7
|
|
Total revenues
|
$
|
1,593.0
|
|
|
$
|
321.8
|
|
|
$
|
1,914.8
|
|
D. Contract Balances
The Company receives payments from customers based upon contractual billing schedules. Payment terms can vary by contract but the period between invoicing and when payments are due is not significant. The timing of revenue recognition may differ from the timing of invoicing to customers and these timing differences result in unbilled receivables, contract assets, or contract liabilities, on the Company’s consolidated balance sheet. Unbilled receivables are recorded when the right to consideration becomes unconditional based only on the passage of time. Contract assets include amounts related to the contractual right to consideration for completed performance when the right to consideration is conditional. The Company records contract liabilities when cash payments are received or due in advance of performance. Contract assets and contract liabilities are recognized at the contract level.
The following table provides information about accounts receivables, contract assets, and contract liabilities from contracts with customers:
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
July 1, 2018
|
Accounts receivable (including unbilled receivables)
|
$
|
412.3
|
|
|
$
|
377.0
|
|
|
|
|
|
Short-term contract assets (included in other current assets)
|
29.9
|
|
|
28.0
|
|
Long-term contract assets (included in other assets)
|
20.2
|
|
|
26.0
|
|
Short-term contract liabilities (included in short-term deferred revenue)
|
(124.8
|
)
|
|
(127.5
|
)
|
Long-term contract liabilities (included in long-term deferred revenue)
|
(68.4
|
)
|
|
(69.4
|
)
|
Net contract assets/(liabilities)
|
$
|
(143.1
|
)
|
|
$
|
(142.9
|
)
|
During fiscal year ended
June 30, 2019
, the Company recognized
$172.8 million
of revenue upon satisfaction of performance obligations and invoiced
$26.0 million
to accounts receivable. These amounts were included in the net contract assets or (liabilities) balance as of July 1, 2018. The Company had no asset impairment charges related to contract assets in the period.
The Company may occasionally recognize an adjustment in revenue in the current period for performance obligations partially or fully satisfied in the previous periods resulting from changes in estimates for the transaction price, including any changes to the Company's assessment of whether an estimate of variable consideration is constrained. For the fiscal year ended
June 30, 2019
, the impact on revenue recognized in the current period, from performance obligations partially or fully satisfied in the previous period, was not significant.
E. Remaining Performance Obligations
As of
June 30, 2019
, the Company had
$3.0 billion
of remaining performance obligations which represent contracted revenue that has not yet been recognized, including contracted revenue where the contracts original expected duration is one year or less. The Company expects to recognize approximately
$1.1 billion
of the remaining performance obligation as revenue for fiscal year ended June 30, 2020,
$790.0 million
for the fiscal year ended June 30, 2021,
$570.0 million
for the fiscal year
ended June 30, 2022, and
$340.0 million
for the fiscal year ended June 30, 2023. The Company expects to recognize the remaining
$210.0 million
as revenue thereafter. The remaining performance obligations exclude future transaction revenue where revenue is recognized as the services are rendered and in the amount to which the Company has the right to invoice.
F. Costs to Obtain and Fulfill a Contract
In connection with the adoption of ASC 606, the Company capitalizes certain contract acquisition costs consisting primarily of commissions incurred when contracts are signed. The Company does not capitalize commissions related to contracts with a duration of less than one year; such commissions are expensed within selling, general and administrative expenses when incurred. Costs to fulfill contracts are capitalized when such costs are direct, incremental, and related to transition or installation activities for hosted software solutions. Capitalized costs to fulfill primarily include travel and employee compensation and benefit related costs for the Company's implementation and training teams. Capitalized costs to obtain a contract and most costs to fulfill a contract are amortized over a period of five years which represents the expected period of benefit of these costs. In instances where the contract term is significantly less than five years, costs to fulfill are amortized over the contract term which the Company believes best reflects the period of benefit of these costs.
As of July 1, 2018 and
June 30, 2019
, the Company capitalized contract acquisition and fulfillment costs from continuing operations of
$192.7 million
and
$200.4 million
, respectively. The Company expects that incremental commission fees incurred as a result of obtaining contracts and fulfillment costs are recoverable. During the fiscal
2019
, the Company recognized cost amortization of
$78.7 million
, and there were no significant impairment losses.
Note 7. Restructuring
During fiscal year ended June 30, 2015, the Company initiated a
three
-year business transformation plan designed to increase operating efficiency and improve the Company's cost structure within its global operations. The business transformation plan produced significant benefits in the Company's long-term business performance. As the Company executed the business transformation plan, the Company continually monitored, evaluated and refined its structure, including its design, goals, term and estimate and allocation of total restructuring expenses. As part of this ongoing review process, during fiscal 2017, the Company extended the business transformation plan by
one
year through the fiscal year ending
June 30, 2019
("fiscal 2019"). The Company incurred
$182.5 million
of cost from continuing operations and
$11.9 million
of cost from discontinued operations to execute the plan through its completion at the end of fiscal 2019.
Restructuring expenses associated with the business transformation plan included employee-related costs, which represent severance and other termination-related benefits calculated based on long-standing benefit practices and local statutory requirements, and contract termination costs, which include costs to terminate facility leases. The Company recognized
$28.0 million
,
$20.6 million
, and
$17.7 million
of restructuring expenses from continuing operations for fiscal
2019
,
2018
and
2017
, respectively. Restructuring expenses from continuing operations are presented separately on the consolidated statements of operations and are recorded in the Other segment, as these initiatives are predominantly centrally directed and are not included in internal measures of segment operating performance. The Company also recorded
$1.5 million
,
$0.3 million
, and
$0.7 million
of restructuring expenses from discontinued operations for fiscal
2019
,
2018
and
2017
, respectively, which are presented within Loss (Earnings) from discontinued operations, net of taxes line on the consolidated statements of operations. Since the inception of the business transformation plan in fiscal 2015 through its completion at the end of fiscal 2019, the Company has recognized cumulative restructuring expenses of
$87.8 million
from continuing operations and
$3.6 million
from discontinued operations.
Accruals for restructuring expenses were included within accrued expenses and other current liabilities on the consolidated balance sheets as of
June 30, 2019
and
2018
. The following table summarizes the
fiscal 2019
and
2018
activity for the restructuring accrual:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee-Related Costs
|
|
Contract Termination Costs
|
|
Total
|
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
|
|
Charges
|
31.1
|
|
|
0.7
|
|
|
31.8
|
|
Cash payments
|
(25.1
|
)
|
|
(1.7
|
)
|
|
(26.8
|
)
|
Adjustments
|
(0.9
|
)
|
|
(1.4
|
)
|
|
(2.3
|
)
|
Foreign exchange
|
(0.1
|
)
|
|
—
|
|
|
(0.1
|
)
|
Non-cash items
|
—
|
|
|
1.7
|
|
|
1.7
|
|
Balance as of June 30, 2019
|
$
|
9.4
|
|
|
$
|
0.1
|
|
|
$
|
9.5
|
|
Note 8. Stock-Based Compensation
Incentive Equity Awards Granted by the Company
The Company's 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, 2019
, there were
6.1 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. The Company reissues treasury stock to satisfy issuances of common stock upon option exercise, equity vesting, or grants of restricted stock.
On October 1, 2014, Automatic Data Processing, Inc. (“ADP”) distributed 100% of the common stock of the Company to the holders of record of ADP common stock as of September 24, 2014 (the "spin-off"). 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:
Time-Based Stock Options and Performance-Based Stock Options.
Time-based stock options and performance-based stock options have a term of
ten years
. 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 stock options are granted to employees at an exercise prices equal to the fair market value of the Company's common stock on the date of grant and are generally issued under a three or four-year graded vesting schedule.
Performance-based stock options are granted to the CEO at an exercise price equal to the fair market value of the Company's stock on the date of grant. These awards vest, subject to the Company's stock price performance and the CEO's continued employment with the Company, over a three-year performance period.
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 time-based 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 cash dividends on the CDK shares awarded under the time-based restricted stock program during the restricted period.
Time-based restricted stock units are primarily settled in cash for non-U.S. recipients and may be settled in stock or cash for U.S. recipients at the discretion of the Company and cannot be transferred during the restriction period. 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. For grants made prior to September 6, 2018, no dividend equivalents are paid on units awarded during the restricted period. For grants made on or subsequent to September 6, 2018, U.S. recipients are credited with dividend equivalents on units awarded during the restricted period, and no dividend equivalents are paid or credited on units awarded to non-U.S. recipients 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
260%
of the "target awards." Certain performance-based awards are further subject to adjustment (increase or decrease) based on a market condition, defined as total stockholder 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 for employees whose home country is the U.S. at the discretion of the Company, and are settled in cash for all other employees 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 2019
,
2018
, and
2017
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2019
|
|
2018
|
|
2017
|
Cost of revenues
|
$
|
3.5
|
|
|
$
|
4.0
|
|
|
$
|
5.5
|
|
Selling, general and administrative expenses
|
27.0
|
|
|
29.4
|
|
|
47.2
|
|
Total pre-tax stock-based compensation expense
|
$
|
30.5
|
|
|
$
|
33.4
|
|
|
$
|
52.7
|
|
|
|
|
|
|
|
Income tax benefit
|
$
|
5.9
|
|
|
$
|
10.5
|
|
|
$
|
19.4
|
|
Stock-based compensation expense for
fiscal 2019
consisted of
$28.2 million
of expense related to equity-classified awards and
$2.3 million
of expense related to liability-classified awards. Total stock-based compensation expense for fiscal
2019
includes
$11.2 million
of additional expense for a cumulative adjustment in the fourth quarter related to the achievement of financial performance metrics for performance based restricted stock, and a net
$2.9 million
benefit for awards that were forfeited or expense recognition that was accelerated related to certain officer transitions during
fiscal 2019
.
Stock-based compensation expense for fiscal
2018
consisted of
$27.9 million
of expense related to equity-classified awards and
$5.5 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 that was accelerated relating to an officer transition in
fiscal 2018
.
Stock-based compensation expense for fiscal
2017
consisted of
$44.2 million
of expense related to equity-classified awards and
$8.5 million
of expense related to liability-classified awards. Stock-based compensation expense for fiscal 2017 includes
$11.7 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 that was accelerated relating to an officer transition in fiscal 2017.
As of
June 30, 2019
, the total unrecognized compensation cost related to non-vested stock options, restricted stock units, and restricted stock awards was
$3.2 million
,
$24.9 million
, and
$1.2 million
, respectively, which will be amortized over the weighted-average remaining requisite service periods of
2.5
years,
1.7
years, and
0.8
years, respectively.
The activity related to the Company's incentive equity awards for
fiscal 2019
, including amounts attributable to the Company's discontinued operations, consisted of the following:
Time-Based 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, 2018
|
957
|
|
|
$
|
44.25
|
|
|
|
|
|
Options granted
|
170
|
|
|
51.37
|
|
|
|
|
|
Options exercised
|
(179
|
)
|
|
28.85
|
|
|
|
|
|
Options canceled
|
(154
|
)
|
|
58.35
|
|
|
|
|
|
Options outstanding as of June 30, 2019
|
794
|
|
|
$
|
46.47
|
|
|
6.6
|
|
$
|
2.4
|
|
|
|
|
|
|
|
|
|
Exercisable as of June 30, 2019
|
510
|
|
|
$
|
42.13
|
|
|
5.5
|
|
$
|
3.7
|
|
The Company received proceeds from the exercise of stock options of
$5.0 million
,
$8.9 million
, and
$14.7 million
during
fiscal 2019
,
2018
, and
2017
, respectively. The aggregate intrinsic value of stock options exercised during
fiscal 2019
,
2018
, and
2017
was approximately
$5.0 million
,
$14.0 million
, and
$26.0 million
, respectively.
Performance-Based Stock Options
|
|
|
|
|
|
|
|
|
Number
of Options
(in thousands)
|
|
Weighted
Average Exercise Price
(in dollars)
|
Options outstanding as of June 30, 2018
|
—
|
|
|
$
|
—
|
|
Options granted
|
152
|
|
|
50.77
|
|
Options outstanding as of June 30, 2019
|
152
|
|
|
$
|
50.77
|
|
The Monte Carlo simulation model used to determine the grant date fair value of the three-year performance-based stock options granted in the second quarter of fiscal 2019 used an expected volatility based on the average of implied volatility and historical stock price volatility for the Company, the average of which was
23.21%
, a risk-free interest rate of
3.09%
, an expected dividend yield of
1.18%
, and weighted average expected life of
6.5
years.
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, 2018
|
379
|
|
|
$
|
60.14
|
|
|
142
|
|
|
$
|
58.55
|
|
Restricted shares/units granted
|
2
|
|
|
60.59
|
|
|
423
|
|
|
57.71
|
|
Restricted shares/units vested
|
(179
|
)
|
|
58.46
|
|
|
(95
|
)
|
|
53.97
|
|
Restricted shares/units forfeited
|
(57
|
)
|
|
61.59
|
|
|
(62
|
)
|
|
57.51
|
|
Non-vested restricted shares/units as of June 30, 2019
|
145
|
|
|
$
|
62.68
|
|
|
408
|
|
|
$
|
58.52
|
|
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, 2018
|
411
|
|
|
$
|
63.26
|
|
Restricted units granted
|
503
|
|
|
56.19
|
|
Restricted units vested
|
(389
|
)
|
|
58.86
|
|
Restricted units forfeited
|
(111
|
)
|
|
59.07
|
|
Non-vested restricted units as of June 30, 2019
|
414
|
|
|
$
|
56.05
|
|
The Monte Carlo simulation model used to determine the grant date fair value of the
106 thousand
units of the three-year performance-based restricted stock units granted in the first quarter of fiscal 2019 used an expected volatility based on historical stock price volatility for the Company and the peer companies, the average of which was
20.40%
and a risk-free interest rate of
2.68%
. Because these awards earn dividend equivalents, the model did not assume an expected dividend yield.
The Monte Carlo simulation model used to determine the grant date fair value of the
196 thousand
units of the three-year performance-based restricted stock units granted in the second quarter of fiscal 2019 used an expected volatility based on historical stock price volatility for the Company and the peer companies, the average of which was
20.53%
and a risk-free interest rate of
2.96%
. Because these awards earn dividend equivalents, the model did not assume an expected dividend yield.
The following table presents the assumptions used to determine the fair value of the stock options granted by the Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2019
|
|
Fiscal 2018
|
|
Fiscal 2017
|
Risk-free interest rate
|
3.1
|
%
|
|
2.0
|
%
|
|
1.4
|
%
|
Dividend yield
|
1.2
|
%
|
|
0.9
|
%
|
|
0.9
|
%
|
Weighted-average volatility factor
|
23.2
|
%
|
|
24.5
|
%
|
|
24.5
|
%
|
Weighted-average expected life (in years)
|
6.0
|
|
|
6.3
|
|
|
6.3
|
|
Weighted-average fair value (in dollars)
|
$
|
12.72
|
|
|
$
|
15.65
|
|
|
$
|
13.90
|
|
Note 9. 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
$15.4 million
,
$16.9 million
, and
$18.7 million
for
fiscal 2019
,
2018
, and
2017
, 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
$14.5 million
,
$15.8 million
, and
$14.8 million
for fiscal
2019
,
2018
, and
2017
, respectively.
Note 10. Income Taxes
Provision for Income Taxes
Earnings before income taxes presented below is based on the geographic location to which such earnings were attributable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2019
|
|
2018
|
|
2017
|
Earnings before income taxes:
|
|
|
|
|
|
U.S.
|
$
|
182.7
|
|
|
$
|
265.5
|
|
|
$
|
228.0
|
|
Foreign
|
121.2
|
|
|
133.7
|
|
|
99.7
|
|
|
$
|
303.9
|
|
|
$
|
399.2
|
|
|
$
|
327.7
|
|
The provision (benefit) for income taxes consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2019
|
|
2018
|
|
2017
|
Current:
|
|
|
|
|
|
Federal
|
$
|
25.2
|
|
|
$
|
49.8
|
|
|
$
|
37.6
|
|
Foreign
|
31.6
|
|
|
32.8
|
|
|
24.7
|
|
State
|
10.5
|
|
|
15.6
|
|
|
9.6
|
|
Total current
|
67.3
|
|
|
98.2
|
|
|
71.9
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(1.3
|
)
|
|
(14.7
|
)
|
|
17.0
|
|
Foreign
|
(1.8
|
)
|
|
2.9
|
|
|
2.0
|
|
State
|
(2.0
|
)
|
|
1.7
|
|
|
1.9
|
|
Total deferred
|
(5.1
|
)
|
|
(10.1
|
)
|
|
20.9
|
|
Total provision for income taxes
|
$
|
62.2
|
|
|
$
|
88.1
|
|
|
$
|
92.8
|
|
A reconciliation between the Company’s effective tax rate from continuing operations and the U.S. federal statutory rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2019
|
|
%
|
|
2018
|
|
%
|
|
2017
|
|
%
|
Provision for taxes at U.S. statutory rate
|
$
|
63.8
|
|
|
21.0
|
%
|
|
$
|
112.2
|
|
|
28.1
|
%
|
|
$
|
114.7
|
|
|
35.0
|
%
|
Increase (decrease) in provision from:
|
|
|
|
|
|
|
|
|
|
|
|
State taxes, net of federal benefit
|
8.6
|
|
|
2.8
|
%
|
|
13.4
|
|
|
3.4
|
%
|
|
7.5
|
|
|
2.3
|
%
|
Stock compensation - excess tax benefits
|
(1.6
|
)
|
|
(0.5
|
)%
|
|
(4.9
|
)
|
|
(1.2
|
)%
|
|
(12.0
|
)
|
|
(3.7
|
)%
|
Noncontrolling interest
|
(1.4
|
)
|
|
(0.5
|
)%
|
|
(1.8
|
)
|
|
(0.5
|
)%
|
|
(2.0
|
)
|
|
(0.6
|
)%
|
Foreign tax rate differential
|
2.9
|
|
|
1.0
|
%
|
|
(2.0
|
)
|
|
(0.5
|
)%
|
|
(11.5
|
)
|
|
(3.4
|
)%
|
U.S. tax on foreign earnings
|
13.4
|
|
|
4.4
|
%
|
|
19.0
|
|
|
4.8
|
%
|
|
1.1
|
|
|
0.3
|
%
|
Foreign tax credits
|
(15.5
|
)
|
|
(5.1
|
)%
|
|
(18.3
|
)
|
|
(4.6
|
)%
|
|
(1.9
|
)
|
|
(0.6
|
)%
|
Foreign withholding taxes
|
—
|
|
|
—
|
%
|
|
4.5
|
|
|
1.1
|
%
|
|
—
|
|
|
—
|
%
|
U.S. tax reform deferred tax re-measurement
|
—
|
|
|
—
|
%
|
|
(27.3
|
)
|
|
(6.8
|
)%
|
|
—
|
|
|
—
|
%
|
Valuation allowances
|
(10.9
|
)
|
|
(3.6
|
)%
|
|
(3.6
|
)
|
|
(0.9
|
)%
|
|
0.8
|
|
|
0.2
|
%
|
Domestic production activities deduction
|
—
|
|
|
—
|
%
|
|
(4.0
|
)
|
|
(1.0
|
)%
|
|
(4.2
|
)
|
|
(1.3
|
)%
|
Pre spin-off tax return adjustments
|
—
|
|
|
—
|
%
|
|
0.1
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
Other
|
2.9
|
|
|
1.0
|
%
|
|
0.8
|
|
|
0.2
|
%
|
|
0.3
|
|
|
0.1
|
%
|
Provision for income taxes
|
$
|
62.2
|
|
|
20.5
|
%
|
|
$
|
88.1
|
|
|
22.1
|
%
|
|
$
|
92.8
|
|
|
28.3
|
%
|
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.
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. The Company accounts 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. In fiscal
2019
, the Company recorded
$2.9 million
of GILTI tax expense net of foreign tax credits. The Company also recorded
$1.5 million
tax benefit from foreign derived intangible income ("FDII").
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.
The effective tax rate was impacted by
$2.8 million
of net expenses in fiscal 2019 and
$18.5 million
of net benefit in fiscal 2018 for one-time adjustments related to the Tax Reform Act. The fiscal 2019 amount is comprising a
$0.6 million
benefit due to a true-up to the one-time transition tax initially recorded in fiscal 2018 associated with the Tax Reform Act, and a
$3.4 million
deferred tax charge associated with executive compensation limitations. The fiscal 2018 amount is comprising a
$26.2 million
for the re-measurement of the Company’s net deferred tax liability, partially offset by tax expense of
$3.4 million
from the one-time transition tax and
$4.3 million
for foreign withholding taxes. 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.
The balance sheet classification and significant components of deferred income tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2019
|
|
2018
|
Classification:
|
|
|
|
Long term deferred tax assets (included in other assets)
|
$
|
14.6
|
|
|
$
|
21.9
|
|
Long term deferred tax liabilities (included in deferred income taxes)
|
(80.5
|
)
|
|
(56.7
|
)
|
Net deferred tax liabilities
|
$
|
(65.9
|
)
|
|
$
|
(34.8
|
)
|
|
|
|
|
Components:
|
|
|
|
Deferred tax assets:
|
|
|
|
Accrued expenses
|
$
|
24.5
|
|
|
$
|
8.3
|
|
Compensation and benefits
|
24.9
|
|
|
32.7
|
|
Deferred revenue
|
25.0
|
|
|
44.4
|
|
Net operating losses
|
4.2
|
|
|
5.5
|
|
Capital losses
|
22.7
|
|
|
18.8
|
|
|
101.3
|
|
|
109.7
|
|
Less: valuation allowances
|
(10.3
|
)
|
|
(21.6
|
)
|
Net deferred tax assets
|
91.0
|
|
|
88.1
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Deferred expenses
|
58.5
|
|
|
46.7
|
|
Property, plant and equipment and intangible assets
|
95.1
|
|
|
70.1
|
|
Prepaid expenses
|
0.8
|
|
|
2.0
|
|
Undistributed foreign earnings
|
1.6
|
|
|
2.8
|
|
Other
|
0.9
|
|
|
1.3
|
|
Deferred tax liabilities
|
156.9
|
|
|
122.9
|
|
Net deferred tax liabilities
|
$
|
(65.9
|
)
|
|
$
|
(34.8
|
)
|
In the second quarter of fiscal
2018
, the Company concluded that
$244.0 million
of unremitted foreign earnings as of December 31, 2017 were no longer indefinitely reinvested. In response to recently issued guidance from the Internal Revenue Service (IRS) related to the Tax Reform Act, the Company changed its assertion with respect to certain unremitted foreign earning. As of
June 30, 2019
, the Company plans to distribute approximately
$32.0 million
of unremitted foreign earnings. As of
June 30, 2019
, the Company intends to indefinitely reinvest the aggregate of approximately
$329.0 million
of undistributed foreign earnings to cover local working capital needs and restrictions and to fund future investments, including potential acquisitions. If circumstances change, and it becomes apparent that earnings currently considered indefinitely reinvested will be distributed, the Company does not expect to incur significant additional tax.
As of
June 30, 2019
, the Company had federal capital losses of
$92.3 million
which expire in
2020
through
2024
and state capital losses of
$92.3 million
which expire in
2020
through
2034
. The Company had foreign net operating loss carryforwards of approximately
$15.1 million
as of
June 30, 2019
, of which
$0.9 million
expires in
2020
through
2023
and
$14.2 million
has an indefinite carryforward period.
Valuation Allowance
The Company recorded valuation allowances of
$10.3 million
and
$21.6 million
as of
June 30, 2019
and
2018
, 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 all available evidence, both positive and negative, which could impact management’s determination with regard to future realization of deferred tax assets.
During fiscal
2019
, the valuation allowance balance decreased by
$10.9 million
, including a
$14.8 million
decrease related to the capital gain the Company expects to recognize in conjunction with the sale of the of the assets of the Digital Marketing Business which were classified as held for sale in the fourth quarter of fiscal 2019, a
$4.3 million
increase related to
a new capital loss generated in the fourth quarter of 2019 resulting from the termination of a joint venture agreement and $0.4 million net decrease due to certain non-U.S. tax loss carryforwards. In addition, there was a $0.4 million decrease in the valuation allowance due to the adoption of ASC 606.
During fiscal
2018
, the valuation allowance balance decreased by
$13.5 million
, including a
$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.
Income tax payments, net of refunds were
$124.2 million
,
$118.9 million
, and
$120.3 million
for
fiscal 2019
,
2018
, and
2017
, respectively.
Unrecognized Income Tax Benefits
As of
June 30, 2019
,
2018
, and
2017
, the Company had unrecognized income tax benefits of
$7.8 million
,
$6.2 million
, and
$6.4 million
, respectively, of which
$7.0 million
,
$5.3 million
, and
$4.8 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,
|
|
2019
|
|
2018
|
|
2017
|
Beginning of the year balance
|
$
|
6.2
|
|
|
$
|
6.4
|
|
|
$
|
4.7
|
|
Additions for current year tax positions
|
1.6
|
|
|
1.3
|
|
|
1.0
|
|
Additions for tax positions of prior years
|
0.8
|
|
|
0.7
|
|
|
1.2
|
|
Reductions for tax positions of prior years
|
—
|
|
|
(0.8
|
)
|
|
—
|
|
Settlement with tax authorities
|
(0.1
|
)
|
|
(0.6
|
)
|
|
(0.2
|
)
|
Expiration of the statute of limitations
|
(0.7
|
)
|
|
(0.8
|
)
|
|
(0.2
|
)
|
Impact of foreign exchange rate fluctuations
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
End of year balance
|
$
|
7.8
|
|
|
$
|
6.2
|
|
|
$
|
6.4
|
|
The Company's net unrecognized income tax benefits were impacted by an increase of
$1.6 million
, decrease of
$0.2 million
, and an increase of
$1.7 million
during fiscal
2019
,
2018
, and
2017
, respectively. For all fiscal 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
2019
,
2018
, and
2017
were not significant. As of
June 30, 2019
and
2018
, 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. 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
|
United States (IRS)
|
|
6/30/2016
|
New Jersey
|
|
6/30/2008 thru 6/30/2011
|
Oregon
|
|
6/30/2015 thru 6/30/2018
|
Michigan
|
|
6/30/2015 thru 6/30/2017
|
Massachuetts
|
|
6/30/2015 thru 6/30/2017
|
New York
|
|
6/30/2015 thru 6/30/2017
|
Belgium
|
|
6/30/2016 thru 6/30/2017
|
Kuwait
|
|
6/30/2017 thru 6/30/2018
|
India
|
|
6/30/2015 thru 6/30/2016
|
Italy
|
|
6/30/2018
|
Malaysia
|
|
06/30/2016 thru 6/30/2017
|
Spain
|
|
6/30/2011
|
UK
|
|
6/30/2017 thru 6/30/2018
|
Canada
|
|
6/30/2012 & 6/30/2014
|
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
$2.4 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.
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
$0.5 million
as of
June 30, 2019
and
2018
, respectively, and payables to ADP of
$0.8 million
and
$0.9 million
as of
June 30, 2019
and
2018
, respectively, under the tax matters agreement.
Note 11. 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 8. Net earnings allocated to participating securities were not significant for
fiscal 2019
,
2018
, and
2017
.
The following table summarizes the components of basic and diluted earnings per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2019
|
|
2018
|
|
2017
|
Net earnings from continuing operations attributable to CDK
|
$
|
233.8
|
|
|
$
|
303.2
|
|
|
$
|
228.0
|
|
(Loss) Earnings from discontinued operations, net of taxes
|
(109.8
|
)
|
|
77.6
|
|
|
67.6
|
|
Net earnings attributable to CDK
|
$
|
124.0
|
|
|
$
|
380.8
|
|
|
$
|
295.6
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
Basic
|
125.5
|
|
|
135.8
|
|
|
146.7
|
|
Effect of employee stock options
|
0.2
|
|
|
0.3
|
|
|
0.7
|
|
Effect of employee restricted stock
|
0.7
|
|
|
0.7
|
|
|
0.8
|
|
Diluted
|
126.4
|
|
|
136.8
|
|
|
148.2
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to CDK per share - basic:
|
|
|
|
|
|
Continuing operations
|
$
|
1.86
|
|
|
$
|
2.23
|
|
|
$
|
1.55
|
|
Discontinued operations
|
(0.87
|
)
|
|
0.57
|
|
|
0.46
|
|
Total net earnings attributable to CDK per share - basic
|
$
|
0.99
|
|
|
$
|
2.80
|
|
|
$
|
2.01
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to CDK per share - diluted:
|
|
|
|
|
|
Continuing operations
|
$
|
1.85
|
|
|
$
|
2.21
|
|
|
$
|
1.53
|
|
Discontinued operations
|
(0.87
|
)
|
|
0.57
|
|
|
0.46
|
|
Total net earnings attributable to CDK per share - diluted
|
$
|
0.98
|
|
|
$
|
2.78
|
|
|
$
|
1.99
|
|
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,
|
|
2019
|
|
2018
|
|
2017
|
Stock-based awards
|
0.5
|
|
|
0.2
|
|
|
0.3
|
|
Note 12. Accounts Receivable, Net
Accounts receivable, net from continuing operations comprised the following:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2019
|
|
2018
|
Trade receivables
|
$
|
414.3
|
|
|
$
|
373.1
|
|
Unbilled receivables
|
4.0
|
|
|
1.4
|
|
Lease receivables
|
3.5
|
|
|
7.5
|
|
Accounts receivable, gross
|
421.8
|
|
|
382.0
|
|
Less: allowances
|
9.5
|
|
|
7.4
|
|
Account receivable, net
|
$
|
412.3
|
|
|
$
|
374.6
|
|
The investment in lease receivables consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2019
|
|
2018
|
Lease receivables, gross:
|
|
|
|
Minimum lease payments
|
$
|
4.0
|
|
|
$
|
11.9
|
|
Unearned income
|
(0.1
|
)
|
|
(0.6
|
)
|
|
3.9
|
|
|
11.3
|
|
Less: lease receivables, current (included in accounts receivable, net)
|
3.5
|
|
|
7.5
|
|
Lease receivables, long-term (included in other assets)
|
$
|
0.4
|
|
|
$
|
3.8
|
|
Scheduled minimum payments on lease receivables as of
June 30, 2019
were as follows:
|
|
|
|
|
|
Amount
|
Fiscal year ending 2020
|
$
|
3.6
|
|
Fiscal year ending 2021
|
0.3
|
|
Fiscal year ending 2022
|
0.1
|
|
Fiscal year ending 2023
|
—
|
|
Fiscal year ending 2024
|
—
|
|
|
$
|
4.0
|
|
The Company recognized interest income on sales-type leases of
$0.5 million
,
$1.0 million
, and
$1.8 million
, in
fiscal 2019
,
2018
, and
2017
, respectively, within other income, net on the consolidated statements of operations.
Note 13. Property, Plant and Equipment, Net
Depreciation expense for property, plant and equipment was
$56.7 million
,
$45.6 million
, and
$38.6 million
for
fiscal 2019
,
2018
, and
2017
, respectively. Property, plant and equipment at cost and accumulated depreciation consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2019
|
|
2018
|
Property, plant and equipment:
|
|
|
|
Land and buildings
|
$
|
38.9
|
|
|
$
|
38.7
|
|
Data processing equipment
|
278.7
|
|
|
235.1
|
|
Furniture and fixtures, leasehold improvements and other
|
78.0
|
|
|
63.4
|
|
Total property, plant and equipment
|
395.6
|
|
|
337.2
|
|
Less: accumulated depreciation
|
250.8
|
|
|
209.6
|
|
Property, plant and equipment, net
|
$
|
144.8
|
|
|
$
|
127.6
|
|
During the third quarter of fiscal 2019, the Company assessed the recoverability of certain long-lived assets upon exiting certain facilities and concluded that that the carrying amount of these assets were not recoverable. As a result, the Company recorded an impairment charge of
$3.3 million
within the Other segment, of which
$2.6 million
was included in cost of revenues and
$0.7 million
was recorded in selling, general and administrative expense within the consolidated statement of operations.
Note 14. Goodwill and Intangible Assets, Net
Changes in goodwill were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CDK North America
|
|
CDK International
|
|
Total
|
Balance as of June 30, 2017
|
$
|
602.2
|
|
|
$
|
362.3
|
|
|
$
|
964.5
|
|
Additions (Note 5)
|
19.0
|
|
|
—
|
|
|
19.0
|
|
Currency translation adjustments
|
(0.3
|
)
|
|
6.0
|
|
|
5.7
|
|
Balance as of June 30, 2018
|
620.9
|
|
|
368.3
|
|
|
989.2
|
|
Additions (Note 5)
|
379.3
|
|
|
—
|
|
|
379.3
|
|
Currency translation adjustments
|
0.1
|
|
|
(12.3
|
)
|
|
(12.2
|
)
|
Balance as of June 30, 2019
|
$
|
1,000.3
|
|
|
$
|
356.0
|
|
|
$
|
1,356.3
|
|
Components of intangible assets, net from continuing operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2019
|
|
2018
|
|
Original Cost
|
|
Accumulated Amortization
|
|
Intangible Assets, net
|
|
Original Cost
|
|
Accumulated Amortization
|
|
Intangible Assets, net
|
Customer lists
|
$
|
196.6
|
|
|
$
|
(100.2
|
)
|
|
$
|
96.4
|
|
|
$
|
115.1
|
|
|
$
|
(92.5
|
)
|
|
$
|
22.6
|
|
Software
|
250.8
|
|
|
(126.7
|
)
|
|
124.1
|
|
|
176.9
|
|
|
(110.3
|
)
|
|
66.6
|
|
Trademarks
|
7.5
|
|
|
(3.1
|
)
|
|
4.4
|
|
|
2.6
|
|
|
(2.2
|
)
|
|
0.4
|
|
Other intangibles
|
3.2
|
|
|
(2.2
|
)
|
|
1.0
|
|
|
6.8
|
|
|
(4.0
|
)
|
|
2.8
|
|
|
$
|
458.1
|
|
|
$
|
(232.2
|
)
|
|
$
|
225.9
|
|
|
$
|
301.4
|
|
|
$
|
(209.0
|
)
|
|
$
|
92.4
|
|
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
8 years
(
13 years
for customer lists,
3 years
for software and software licenses, and
6 years
for trademarks). Amortization of intangible assets from continuing operations was
$33.1 million
,
$25.2 million
, and
$24.8 million
for
fiscal 2019
,
2018
, and
2017
, respectively.
During the second quarter of fiscal 2019, the Company identified indicators requiring assessment of certain intangible assets within the CDKNA segment. The identified indicators primarily consisted of abandonment of a project relating to the Company's inventory solutions intended to address evolving market conditions. As a result, the Company analyzed these intangible assets and recorded impairment charges of
$13.2 million
for software and
$1.7 million
for customer lists. Of the total
$14.9 million
impairment charge, the Company recorded
$12.0 million
in cost of revenues and
$2.9 million
in selling, general and administrative expenses within its consolidated statements of operations.
Estimated amortization expenses of the Company's existing intangible assets from continuing operations as of
June 30, 2019
were as follows:
|
|
|
|
|
|
Amount
|
Fiscal year ending 2020
|
$
|
43.7
|
|
Fiscal year ending 2021
|
40.6
|
|
Fiscal year ending 2022
|
35.7
|
|
Fiscal year ending 2023
|
21.2
|
|
Fiscal year ending 2024
|
15.5
|
|
Thereafter
|
69.2
|
|
|
$
|
225.9
|
|
Note 15. Debt
Debt comprised the following:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2019
|
|
2018
|
Revolving credit facility
|
$
|
—
|
|
|
$
|
—
|
|
Three year term loan facility, due 2021
|
300.0
|
|
|
—
|
|
Five year term loan facility, due 2023
|
288.8
|
|
|
—
|
|
2019 term loan facility
|
—
|
|
|
203.1
|
|
2020 term loan facility
|
—
|
|
|
218.8
|
|
2021 term loan facility
|
—
|
|
|
370.0
|
|
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
|
|
|
500.0
|
|
4.875% senior notes, due 2027
|
600.0
|
|
|
600.0
|
|
5.250% senior notes, due 2029
|
500.0
|
|
|
—
|
|
Capital lease obligations
|
19.9
|
|
|
0.2
|
|
Unamortized debt financing costs
|
(28.5
|
)
|
|
(21.4
|
)
|
Total debt and capital lease obligations
|
2,930.2
|
|
|
2,620.7
|
|
Current maturities of long-term debt and capital lease obligations
|
270.8
|
|
|
45.2
|
|
Total long-term debt and capital lease obligations
|
$
|
2,659.4
|
|
|
$
|
2,575.5
|
|
Revolving Credit Facility
On
August 17, 2018
, the Company entered into a five-year senior unsecured revolving credit facility (the "revolving credit facility") which was undrawn as of June 30, 2019. The revolving credit facility replaced the previous unsecured revolving credit facility agreement, which was undrawn as of June 30, 2018. The revolving credit facility provides up to
$750.0 million
of borrowing capacity and includes a sub-limit of up to
$100.0 million
for loans in Euro, Pound Sterling, and, if approved by the revolving lenders, other currencies. 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
August 17, 2023
, 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
1.250%
to
2.375%
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, 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
0.250%
to
1.375%
per annum based on the Ratings. The unused portion of the revolving credit facility is subject to commitment fees ranging from
0.150%
to
0.350%
per annum based on the Ratings.
Term Loan Facilities
On
August 17, 2018
, the Company entered into a term loan agreement which provided the Company an aggregate of
$600.0 million
under term loans comprising a
$300.0 million
term loan that will mature on
August 17, 2021
(the "three year term loan facility"), and a
$300.0 million
term loan that will mature on
August 17, 2023
(the "five year term loan facility"). The aggregate principal amount of the three year term loan facility will be repayable in full on the maturity date. The five year term loan facility is subject to amortization in equal quarterly installments of
1.25%
of the aggregate principal amount of the term
loan made on the closing date, with any unpaid principal amount due and payable on the maturity date. The interest rate per annum on the three year term loan facility and the five year term loan facility was 3.91% and 4.04%, respectively, as of June 30, 2019.
The three year term loan facility and the five year term loan facility are unsecured and bear interest (a) with respect to the three year term loan facility, (i) at the rate at which deposits in the applicable currency are offered in the London interbank market plus margins varying from 1.125% to 2.250% per annum based on the Company’s senior, unsecured, non-credit-enhanced, long-term debt ratings from the Ratings or (ii) the highest of (X) a rate equal to the average of the overnight federal funds rate with a maturity of one day plus a margin of 0.50% per annum, (Y) the prime rate of Bank of America, N.A. and (Z) the rate at which dollar deposits are offered in the London interbank market for a one-month interest period plus 1.00%, plus margins varying from 0.125% to 1.250% per annum based on the Ratings, and (b) with respect to the five year term loan facility (i) at the rate at which deposits in the applicable currency are offered in the London interbank market plus margins varying from 1.250% to 2.375% per annum based on the Company’s Ratings or (ii) the highest of (X) a rate equal to the average of the overnight federal funds rate with a maturity of one day plus a margin of 0.50% per annum, (Y) the prime rate of Bank of America, N.A. and (Z) the rate at which dollar deposits are offered in the London interbank market for a one-month interest period, plus 1.00%, plus margins varying from 0.250% to 1.375% per annum based on the Ratings.
As of
June 30, 2018
, the Company had two
$250.0 million
senior unsecured term loan facilities (the "2019 term loan facility" and the "2020 term loan facility") and a
five
-year
$400.0 million
senior unsecured term loan facility (the "2021 term loan facility") outstanding. The interest rate per annum on both the 2019 term loan facility, the 2020 term loan facility, and the 2021 term loan facility was
3.85%
as of
June 30, 2018
. The Company utilized the borrowings under the three year term loan facility and the five year term loan facility to pay-off all of the outstanding principal, interest and related fees with respect to each of the 2019 term loan facility, the 2020 term loan facility, and the 2021 term loan facility.
London Interbank Market (“LIBOR”) Transition
LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform. These reforms and other pressure may cause LIBOR to disappear entirely or to perform differently than in the past. It is expected that certain banks will stop reporting information used to set LIBOR at the end of 2021 when their reporting obligations cease. This will effectively end the usefulness of LIBOR and may end its publication. The consequences of these developments cannot be entirely predicted but, as noted above, could impact the interest rates of the revolving credit facility and the five year term loan. If LIBOR is no longer widely available, the Company will pursue alternative interest rate calculations in its revolving credit facility and five year term loan agreements. However, if no alternative rate can be determined, the LIBOR rate component will no longer be utilized in determining the rates. As of June 30, 2019 and 2018, the hypothetical impact to the Company’s interest rates without utilizing the LIBOR rate component would not have had a material effect on either rate, thus we do not believe the discontinuation of LIBOR will have a material impact on the Company's financial position and results of operations.
Restrictive Covenants and Other Matters
The revolving credit facility, the three year term loan facility, and the five year term loan facility 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
3.75
to
1.00
and (ii) the ratio of consolidated EBITDA to consolidated interest expense shall be a minimum of
3.00
to
1.00
.
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"). 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.
On
May 2, 2019
, the Company completed an offering of
5.250%
unsecured senior notes with a
$500.0 million
aggregate principal amount due in
2029
(the "
2029
notes," together with the "
2027
notes," "2026 notes," "
2024
notes," and "
2019
notes" are the "senior notes"). The issuance price of the 2029 notes was equal to the stated value. Interest is payable semi-annually on
March 15
and
September 15
of each year, and payment will commence on
September 15, 2019
. The
2029
notes will mature on
May 15, 2029
. The
2029
notes are redeemable at the Company's option prior to
May 15, 2024
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
May 15, 2024
, the Company may redeem the
2029
notes at a price equal to: (i)
102.625%
of the aggregate principal amount of the
2029
notes redeemed prior to
May 15, 2025
; (ii)
101.750%
of the aggregate principal amount of the notes redeemed on or after
May 15, 2025
but prior to
May 15, 2026
; (iii)
100.875%
of the aggregate principal amount of the
2029
notes redeemed on or after
May 15, 2026
but prior to
May 15, 2027
; and (iv)
100.000%
of the aggregate principal amount of the
2029
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, 2019
and
2018
, gross debt issuance costs related to debt instruments were
$41.3 million
and $
29.6 million
, respectively. Accumulated amortization was
$12.8 million
and
$8.2 million
as of
June 30, 2019
and
2018
, respectively. Additional debt issuance costs of
$11.7 million
were capitalized in fiscal
2019
. 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, 2019
were as follows:
|
|
|
|
|
|
Amount
|
Fiscal year ending 2020
|
$
|
270.8
|
|
Fiscal year ending 2021
|
20.9
|
|
Fiscal year ending 2022
|
320.1
|
|
Fiscal year ending 2023
|
17.9
|
|
Fiscal year ending 2024
|
229.0
|
|
Thereafter
|
2,100.0
|
|
Total debt and capital lease obligations
|
2,958.7
|
|
Unamortized deferred financing costs
|
(28.5
|
)
|
Total debt and capital lease obligations, net of unamortized deferred financing costs
|
$
|
2,930.2
|
|
Note 16. Commitments and Contingencies
The Company has obligations under various operating lease agreements for facilities and equipment. Total expense from continuing operations under these agreements was approximately
$25.4 million
,
$36.6 million
, and
$43.7 million
in fiscal
2019
,
2018
, and
2017
, respectively, with minimum commitments as of
June 30, 2019
as follows:
|
|
|
|
|
|
Amount
|
Fiscal year ending 2020
|
$
|
16.7
|
|
Fiscal year ending 2021
|
13.9
|
|
Fiscal year ending 2022
|
12.5
|
|
Fiscal year ending 2023
|
8.9
|
|
Fiscal year ending 2024
|
6.9
|
|
Thereafter
|
15.8
|
|
|
$
|
74.7
|
|
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, 2019
, the Company had purchase commitments and obligations related to the Company's software, equipment, and other assets.
|
|
|
|
|
|
Amount
|
Fiscal year ending 2020
|
$
|
6.2
|
|
Fiscal year ending 2021
|
7
|
|
Fiscal year ending 2022
|
7.7
|
|
Fiscal year ending 2023
|
8.1
|
|
Fiscal year ending 2024
|
2.7
|
|
|
$
|
31.7
|
|
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 subject to various claims and is involved in various legal, regulatory, and arbitration proceedings concerning matters arising in connection with the conduct of its business activities, including those noted in this section. Although management at present has no basis to conclude that the ultimate outcome of these proceedings, individually and in the aggregate, will materially harm the Company's financial position, results of operations, cash flows, or overall trends, legal proceedings and related government investigations are subject to inherent uncertainties, and unfavorable rulings or other events could occur. Unfavorable resolutions could include substantial monetary damages. In addition, in matters for which injunctive relief or other conduct remedies are sought, unfavorable resolutions could include an injunction or other order prohibiting us from selling one or more products at all or in particular ways, precluding particular business practices, or requiring other remedies. An unfavorable outcome may result in a material adverse impact on the Company's business, results of operations, financial position, and overall trends. The Company might also conclude that settling one or more such matters is in the best interests of its stockholders, employees, and customers, and any such settlement could include substantial payments.
Competition Matters
The Company is involved in the following antitrust 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 DMS, and that seek, among other things, treble damages and injunctive relief. These lawsuits have been transferred to, or filed in, the U.S. District Court for the Northern District of Illinois for consolidated and coordinated pretrial proceedings as part of a multi-district litigation proceeding (“MDL”).
|
|
•
|
Motor Vehicle Software Corporation (“MVSC”) brought a suit against the CDK Global, LLC (after initially naming the Company), Reynolds and Reynolds, and Computerized Vehicle Registration (“CVR”), a majority owned joint venture of the Company. MVSC’s suit was originally filed on February 3, 2017, in the U.S. District Court for the Central District of California. Defendants’ motions to dismiss MVSC’s second amended complaint were denied, and Defendants answered MVSC’s complaint on November 7, 2018.
|
|
|
•
|
Authenticom, Inc. brought a suit against CDK Global, LLC and Reynolds and Reynolds. Authenticom’s suit was originally filed on May 1, 2017, in the U.S. District Court for the Western District of Wisconsin. Defendants’ motions to dismiss were granted in part, and denied in part. Defendants filed answers to Authenticom’s complaint and asserted counterclaims against Authenticom on June 30, 2018; Authenticom filed motions to dismiss those Counterclaims. Authenticom Inc.’s motion to dismiss CDK Global, LLC’s counterclaims were granted in part and denied in part; its motion to dismiss one of Reynolds and Reynolds’s Counterclaims was granted. On February 15, 2019, Authenticom filed an answer to both Defendants’ Counterclaims.
|
|
|
•
|
Teterboro Automall, Inc. d/b/a Teterboro Chrysler Dodge Jeep Ram (“Teterboro”) brought a putative class action suit on behalf of itself and all similarly situated automobile dealerships against CDK Global, LLC and Reynolds and Reynolds. Teterboro’s suit was originally filed on October 19, 2017, in the U.S. District Court for the District of New Jersey. Since that time, several more putative class actions were filed in a number 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 purchased DMS and/or allegedly indirectly purchased DMS or data integration services from CDK Global, LLC or Reynolds and Reynolds (“Putative Dealership Class Plaintiffs”). CDK Global, LLC moved to dismiss the complaint, or in the alternative, compel arbitration of certain of the cases while staying the remainder pending the outcome of those arbitration proceedings; its motion to dismiss was granted in part and denied in part, while its motion to compel arbitration was denied. On February 22, 2019, CDK Global, LLC filed an answer to the remaining claims in Putative Dealership Class Plaintiffs’ complaint and asserted counterclaims against the Putative Dealership Class Plaintiffs. The Putative Dealership Class Plaintiffs filed a motion to dismiss CDK Global, LLC’s counterclaims; that motion has been fully briefed and remains pending before the Court. On October 23, 2018, the Putative Dealership Class Plaintiffs and Reynolds and Reynolds filed a Motion for Preliminary
|
Approval of Settlement and for Conditional Certification of the Proposed Settlement Class. The Court approved that settlement on January 22, 2019.
|
|
•
|
Cox Automotive, along with multiple subsidiaries (“Cox”), brought suit against CDK Global, LLC. Cox’s suit was originally filed on December 11, 2017, in the U.S. District Court for the Western District of Wisconsin. CDK Global, LLC’s motion to dismiss was granted in part and denied in part on January 25, 2019. CDK Global, LLC filed an Answer to the remainder of Cox’s complaint and asserted counterclaims against Cox on February 15, 2019. Cox filed an Answer to CDK Global, LLC’s counterclaims on March 8, 2019. On July 10, 2019, CDK Global, LLC and Cox entered into a settlement agreement that resulted in a dismissal of all claims brought by the affiliated parties in the MDL, and CDK Global, LLC making a one-time cash payment to Cox.
|
|
|
•
|
Loop LLC d/b/a AutoLoop (“AutoLoop”) brought suit against CDK Global, LLC on April 9, 2018, in the U.S. District Court for the Northern District of Illinois, 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 to sue on behalf of itself and a putative class action of all other automotive software vendors in the United States that purchased data integration services from CDK Global, LLC or Reynolds and Reynolds. CDK Global, LLC moved to compel arbitration of AutoLoop’s claims, or in the alternative, to dismiss those claims; that motion was denied on January 25, 2019. CDK Global, LLC filed an answer to AutoLoop’s complaint and asserted counterclaims against AutoLoop on February 15, 2019. AutoLoop filed an Answer to CDK Global, LLC’s counterclaims on March 8, 2019.
|
|
|
•
|
i3 Brands, Inc. and PartProtection LLC (“i3 Brands”) brought suit against CDK Global, LLC and Reynolds and Reynolds. i3 Brand’s suit was originally filed on February 4, 2019, in the U.S. District Court for the Southern District of California; it was subsequently transferred to the N.D. Illinois and consolidated as part of the MDL. On April 1, 2019, Reynolds and Reynolds filed a motion to dismiss i3 Brands’ suit in favor of arbitration, or in the alternative, for failure to state a claim, and CDK Global, LLC filed a motion to stay this case pending the outcome of the proposed arbitration proceedings between Reynolds and Reynolds with i3 Brands, or in the alternative, to dismiss certain of its claims for failure to state a claim. These motions are fully briefed and remain pending before the Court.
|
The Company believes that the remaining unsettled cases are without merit and will continue to vigorously contest all asserted claims. Nonetheless, in light of the Company’s settlement with Cox and its continued expenditure of legal costs to contest the claims, the Company has determined that a loss of some measure is probable and can be reasonably estimated. Accordingly, the Company has established a litigation provision of
$90 million
in the fourth quarter of fiscal 2019 for both the settlement and the remaining unsettled cases. This estimated loss is based upon currently available information and represents the Company’s best estimate of such loss. Estimating the value of this estimated loss involved significant judgment given the uncertainty that still exists with respect to the remaining unsettled cases due to a variety of factors typical of complex, large scale litigation, including, among others: (i) formative issues, including: (a) the causes of action the plaintiffs can pursue; (b) the definition of the class(es) of plaintiffs; (c) the types of damages that can be recovered; and (d) whether plaintiffs can establish loss causation as a matter of law, all of which have yet to be determined pending the outcome of dispositive motions (e.g., motions for class certification and motions for summary judgment); (ii) discovery is ongoing and significant factual issues remain to be resolved; (iii) expert discovery with respect to, among other things, alleged antitrust injury and damages is not sufficiently advanced; (iv) the absence of productive settlement discussions to date with plaintiffs other than Cox; and (v) the novel or uncertain nature of the legal issues presented. For these same reasons, the Company cannot reasonably estimate a maximum potential loss exposure at this time. In addition, the Company’s estimate does not incorporate or reflect the potential value of the Company’s counterclaims against certain of the plaintiffs in the ongoing cases. The legal proceedings underlying the estimated litigation liability will change from time to time and actual results may vary significantly from the estimate. As noted above, an adverse result in any of the remaining cases 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 specifications calling for the production of documents relating to any agreements between the Company and Reynolds and Reynolds. Parallel document requests have been received from certain states' Attorneys General. Since 2017, the Company has engaged in continuing communication with and received subsequent requests from the FTC related to its investigation. The Company is responding to the requests 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 the Company 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 Commitments and Contingencies
In the normal course of business, the Company may enter into contracts in which the Company 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.
The Company has provided approximately
$27.6 million
of guarantees as of
June 30, 2019
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
$2.2 million
in letters of credit outstanding as of
June 30, 2019
primarily in connection with insurance programs and its foreign subsidiaries.
Note 17. 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 its 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 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
.
In November 2018, the Company entered into an accelerated share repurchase agreement ("November 2018 ASR") to purchase
$260.0 million
of the Company's common stock. Under the terms of the November 2018 ASR, the Company made a
$260.0 million
payment in November 2018 and received initial delivery of approximately
4.1 million
of the Company's common stock. In February 2019, the Company received an additional
1.1 million
shares of common stock in final settlement of the November 2018 ASR, for a total of
5.2 million
shares. The value reflected in treasury stock upon completion of the November 2018 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
$260.0 million
cash paid by
$13.0 million
.
Additionally, the Company made open market repurchases of
4.4 million
shares of the Company's common stock during fiscal 2019 for a total cost of
$264.1 million
and
9.4 million
shares of the Company's common stock during fiscal 2018 for a total cost of
$623.6 million
.
Note 18. 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.
The Company recorded
$3.4 million
of expenses related to the data services agreement in the accompanying financial statements for fiscal 2017.
Refer to Note 10 for further information on the tax matters agreement with ADP.
Note 19. Financial Data by Segment
The Company is organized into two main operating groups, CDK North America and CDK International, which are also reportable segments. The Company's previously reported Advertising North America segment has been classified as discontinued operations for all periods presented. Discontinued operations also includes the Company's mobile advertising and website services businesses, the results of which were previously reported within the CDKNA segment. Additional information on discontinued operations is contained in Note 4 - Discontinued Operations.
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 the 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CDK North America
|
|
CDK International
|
|
Other*
|
|
Total
|
Year ended June 30, 2019
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,593.0
|
|
|
$
|
321.8
|
|
|
$
|
—
|
|
|
$
|
1,914.8
|
|
Earnings before income taxes
|
517.5
|
|
|
77.1
|
|
|
(290.7
|
)
|
|
303.9
|
|
Loss from equity method investment
|
(17.0
|
)
|
|
—
|
|
|
—
|
|
|
(17.0
|
)
|
Assets
|
1,881.4
|
|
|
497.7
|
|
|
619.9
|
|
|
2,999.0
|
|
Capital expenditures
|
49.3
|
|
|
5.1
|
|
|
—
|
|
|
54.4
|
|
Depreciation and amortization
|
73.9
|
|
|
9.3
|
|
|
6.6
|
|
|
89.8
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2018
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,441.7
|
|
|
$
|
356.3
|
|
|
$
|
—
|
|
|
$
|
1,798.0
|
|
Earnings before income taxes
|
576.4
|
|
|
97.7
|
|
|
(274.9
|
)
|
|
399.2
|
|
Assets
|
1,203.2
|
|
|
509.6
|
|
|
1,295.6
|
|
|
3,008.4
|
|
Capital expenditures
|
40.1
|
|
|
5.8
|
|
|
—
|
|
|
45.9
|
|
Depreciation and amortization
|
54.0
|
|
|
11.7
|
|
|
5.1
|
|
|
70.8
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2017
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,418.8
|
|
|
$
|
311.9
|
|
|
$
|
—
|
|
|
$
|
1,730.7
|
|
Earnings before income taxes
|
534.2
|
|
|
75.0
|
|
|
(281.5
|
)
|
|
327.7
|
|
Assets
|
1,174.9
|
|
|
538.9
|
|
|
1,169.3
|
|
|
2,883.1
|
|
Capital expenditures
|
54.6
|
|
|
7.8
|
|
|
—
|
|
|
62.4
|
|
Depreciation and amortization
|
44.3
|
|
|
11.4
|
|
|
7.7
|
|
|
63.4
|
|
* Includes assets held for sale of
$98.6 million
,
$269.4 million
, and
$245.1 million
as of June 30, 2019, 2018, and 2017, respectively.
Revenues and property, plant and equipment, net by geographic area were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
Europe
|
|
Canada
|
|
Other
|
|
Total
|
Year ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,500.3
|
|
|
$
|
235.4
|
|
|
$
|
92.7
|
|
|
$
|
86.4
|
|
|
$
|
1,914.8
|
|
Property, plant and equipment, net
|
122.7
|
|
|
11.2
|
|
|
4.3
|
|
|
6.6
|
|
|
144.8
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,347.9
|
|
|
$
|
253.3
|
|
|
$
|
93.8
|
|
|
$
|
103.0
|
|
|
$
|
1,798.0
|
|
Property, plant and equipment, net
|
101.6
|
|
|
14.1
|
|
|
3.9
|
|
|
8.0
|
|
|
127.6
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,330.2
|
|
|
$
|
221.0
|
|
|
$
|
88.6
|
|
|
$
|
90.9
|
|
|
$
|
1,730.7
|
|
Property, plant and equipment, net
|
99.1
|
|
|
16.3
|
|
|
3.7
|
|
|
10.5
|
|
|
129.6
|
|
Note 20. Quarterly Financial Results (Unaudited)
Summarized quarterly results of operations for the fiscal
2019
and
2018
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
Year ended June 30, 2019
|
|
|
|
|
|
|
|
Revenues
(1)
|
$
|
446.3
|
|
|
$
|
478.7
|
|
|
$
|
501.2
|
|
|
$
|
488.6
|
|
Gross profit
(1) (2)
|
243.0
|
|
|
248.1
|
|
|
271.9
|
|
|
252.0
|
|
Earnings before income taxes
(1)
|
106.5
|
|
|
96.6
|
|
|
120.7
|
|
|
(19.9
|
)
|
Net earnings from continuing operations
|
76.5
|
|
|
72.6
|
|
|
89.3
|
|
|
3.3
|
|
(Loss) Earnings from discontinued operations, net of taxes
|
15.8
|
|
|
18.3
|
|
|
12.3
|
|
|
(156.2
|
)
|
Net earnings
|
92.3
|
|
|
90.9
|
|
|
101.6
|
|
|
(152.9
|
)
|
Net earnings attributable to noncontrolling interest
|
2.0
|
|
|
1.9
|
|
|
1.9
|
|
|
2.1
|
|
Net earnings attributable to CDK
|
90.3
|
|
|
89.0
|
|
|
99.7
|
|
|
(155.0
|
)
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to CDK per share - basic:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.58
|
|
|
$
|
0.56
|
|
|
$
|
0.70
|
|
|
$
|
0.01
|
|
Discontinued operations
|
0.12
|
|
|
0.14
|
|
|
0.10
|
|
|
(1.28
|
)
|
Total net earnings attributable to CDK per share - basic
|
$
|
0.70
|
|
|
$
|
0.70
|
|
|
$
|
0.80
|
|
|
$
|
(1.27
|
)
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to CDK per share - diluted:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.57
|
|
|
$
|
0.56
|
|
|
$
|
0.70
|
|
|
$
|
0.01
|
|
Discontinued operations
|
0.12
|
|
|
0.14
|
|
|
0.10
|
|
|
(1.28
|
)
|
Total net earnings attributable to CDK per share - diluted
|
$
|
0.69
|
|
|
$
|
0.70
|
|
|
$
|
0.80
|
|
|
$
|
(1.27
|
)
|
|
|
|
|
|
|
|
|
Year ended June 30, 2018
|
|
|
|
|
|
|
|
Revenues
(1)
|
$
|
441.1
|
|
|
$
|
441.7
|
|
|
$
|
461.2
|
|
|
$
|
454.0
|
|
Gross profit
(1) (2)
|
219.7
|
|
|
232.3
|
|
|
246.3
|
|
|
245.2
|
|
Earnings before income taxes
(1)
|
90.6
|
|
|
90.8
|
|
|
107.7
|
|
|
110.1
|
|
Net earnings from continuing operations
|
64.8
|
|
|
84.1
|
|
|
79.0
|
|
|
83.2
|
|
Earnings from discontinued operations, net of taxes
|
18.2
|
|
|
22.2
|
|
|
18.7
|
|
|
18.5
|
|
Net earnings
|
83.0
|
|
|
106.3
|
|
|
97.7
|
|
|
101.7
|
|
Net earnings attributable to noncontrolling interest
|
1.8
|
|
|
2.2
|
|
|
1.6
|
|
|
2.3
|
|
Net earnings attributable to CDK
|
81.2
|
|
|
104.1
|
|
|
96.1
|
|
|
99.4
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to CDK per share - basic:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.45
|
|
|
$
|
0.60
|
|
|
$
|
0.57
|
|
|
$
|
0.67
|
|
Discontinued operations
|
0.13
|
|
|
0.16
|
|
|
0.14
|
|
|
0.15
|
|
Total net earnings attributable to CDK per share - basic
|
$
|
0.58
|
|
|
$
|
0.76
|
|
|
$
|
0.71
|
|
|
$
|
0.82
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to CDK per share - diluted:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.44
|
|
|
$
|
0.59
|
|
|
$
|
0.57
|
|
|
$
|
0.66
|
|
Discontinued operations
|
0.13
|
|
|
0.16
|
|
|
0.14
|
|
|
0.15
|
|
Total net earnings attributable to CDK per share - diluted
|
$
|
0.57
|
|
|
$
|
0.75
|
|
|
$
|
0.71
|
|
|
$
|
0.81
|
|
(1) Amounts differ from previously reported in the Quarterly Reports on Form 10-Q as a result of the Digital Marketing Business being classified as discontinued operations. See Note 15, "Discontinued Operations" for additional information.
(2) Gross profit is calculated as revenues less cost of revenues.