UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM 10-K
______________
ýANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 20152018
OR
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to
Commission File Number 001-36486
______________
CDK Global, Inc.
(Exact name of registrant as specified in its charter)
______________
|
| |
| Delaware | 46-5743146 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
| 1950 Hassell Road, Hoffman Estates, IL | 60169 |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (847) 397-1700
______________
|
| |
| Securities registered pursuant to Section 12(b) of the Act: |
| Title of class | Name of each exchange on which registered |
| Common Stock, $0.01 Par Value | NASDAQ Global Select Market |
| | |
| Securities registered pursuant to Section 12(g) of the Act: |
| None |
______________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes oý No ýo
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No ý
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this 10-K. ýo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|
| |
Large accelerated filer oý | Accelerated filer o |
Non-accelerated filer ýo (Do not check if a smaller reporting company) | Smaller reporting company o |
| Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
The aggregate market value of common stock held by non-affiliates of the registrant, as of December 31, 2014,29, 2017, the last business day of the registrant's most recently completed second fiscal quarter, was approximately $6.6$9.6 billion.
The number of shares outstanding of the registrant’s common stock as of August 10, 20159, 2018 was 160,062,055.129,440,956.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference to the registrant's definitive proxy statement, to be filed with the Securities and Exchange Commission within 120 days after the fiscal year end of June 30, 2015.2018.
Table of Contents
|
| | |
| | | Page |
| Part I | | |
| Item 1. | | |
| Item 1A. | | |
| Item 1B. | | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
| | | |
| Part II | | |
| Item 5. | | |
| Item 6. | | |
| Item 7. | | |
| Item 7A. | | |
| Item 8. | | |
| Item 9. | | |
| Item 9A. | | |
| Item 9B. | | |
| | | |
| Part III | | |
| Item 10. | | |
| Item 11. | | |
| Item 12. | | |
| Item 13. | | |
| Item 14. | | |
| | | |
| Part IV | | |
| Item 15. | | |
| | | |
Part I
Forward-Looking Statements
This Annual Report on Form 10-K and other written or oral statements made from time to time by CDK Global, Inc. ("CDK," or the "Company") may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are not historical in nature, and which may be identified by the use of words like “expects,” “assumes,” “projects,” “anticipates,” “estimates,” “we believe,” “could” and other words of similar meaning, are forward-looking statements. In particular, information appearing under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes forward-looking statements. These statements are based on management's expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ materially from those expressed. Factors that could cause actual results to differ materially from those contemplated by the forward-looking statements include:
the Company's success in obtaining, retaining, and selling additional services to clients;
the pricing of our products and services;
overall market and economic conditions, including interest rate and foreign currency trends;
competitive conditions;
auto sales and related industry changes;
employment and wage levels;
changes in regulation;
changes in technology;
availability of capital for the payment of debt service obligations, dividends, or the repurchase of shares;
availability of skilled technical employees/labor/personnel;
the impact of new acquisitions and divestitures;
our ability to timely and effectively implement our business transformation plan as planned, which is intended to increase operating efficiency and improve our global cost structure, while limiting or mitigating business disruption; and
the ability of significant stockholders of the Company and their affiliates to significantly influence our decisions.
There may be other factors that may cause our actual results to differ materially from the forward-looking statements. Our actual results, performance or achievements could differ materially from those expressed in, or implied by, the forward-looking statements. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition. You should carefully read the factors described elsewhere in this document under "Risk Factors" in Part I, Item 1A in this Annual Report on Form 10-K for a description of certain risks that could, among other things, cause our actual results to differ from these forward-looking statements.
All forward-looking statements speak only as of the date of this Annual Report on Form 10-K and are expressly qualified in their entirety by the cautionary statements included in this Annual Report on Form 10-K. We disclaim any obligation to update or revise forward-looking statements that may be made to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events, other than as required by law.
The following discussion should be read in conjunction with our consolidated and combined financial statements and accompanying notes thereto included elsewhere herein. In this Annual Report on Form 10-K, all references to "we," "our," and "us" refer collectively to CDK and its consolidated subsidiaries.
Item 1. Business
This Annual Report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements based on management’s expectations and assumptions as of the date of this filing. Actual results may differ materially from those expressed in forward-looking statements. See Item 1A of Part I–“Risk Factors.”
CDK Global, Inc. is the former Dealer Services division of Automatic Data Processing, Inc. (“ADP”). We were incorporated in Delaware as a wholly-owned subsidiary of ADP on September 29, 2014 and began operating as an independent public company on September 30, 2014. Our Companyprincipal corporate offices are located in Hoffman Estates, Illinois. Our common stock is listed on the Nasdaq Global Select Market under the symbol “CDK.”
We areAs used herein, “CDK Global,” “CDK,” the largest global provider, both in“Company,” “we,” “our,” and similar terms of revenuesinclude CDK Global, Inc. and geographic reach, of integrated information technology and digital marketing/advertising solutionsits consolidated subsidiaries, unless the context indicates otherwise.
Overview
Our purpose is to enable end-to-end automotive commerce across the automotive retail industry. We have a 43 year history of providing innovative solutions toglobe. For over 40 years, CDK Global has served automotive retailers and original equipment manufacturers (“OEMs”("OEMs") by providing innovative solutions that allow them to better connect, manage, analyze, and grow their businesses. Our solutions automate and integrate critical workflow processes from pre-sale targetedall parts of the buying process, including the advertising, and marketing campaigns to theacquisition, sale, financing, insurance,insuring, parts supply, and repair, and maintenance of vehicles, with an increasing focus on utilizing data analyticsin more than 100 countries around the world, for approximately 28,000 retail locations and predictive intelligence. We believe the breadth of our integrated solutions allows us to more comprehensively address the varied needs of automotive retailers than any other single competitor in our industry.
Our solutions address the entire automotive retailers’ value chain. Our automotive retail solutions offer technology that helps manage and generate additional efficiency on the supply side of the retail value chain. These solutions were built through decades of innovation and experience in helping our clients with all aspects of the automotive retail process. We also offer digital marketing solutions to enable our clients to create demand for their products by designing and managing complete digital marketing and advertising strategies for their businesses. These solutions allow our clients to plan and automate sophisticated marketing campaigns, gather comprehensive data on these campaigns and further refine their strategies to maximize the effectiveness of their advertising spend.
Our History and Our Separation from ADPmost OEMs.
We were the Dealer Services business of Automatic Data Processing, Inc. ("ADP"). In 1972, Dealer Services became ADP's third major business unit, offering accounting, service, management, and inventory processing services to automotive retailers. We have since expandedorganized our role in the industry to encompass the full automotive retail value chain by developing integrated Dealer Management Systems (“DMSs”) and other solutions that help retailers manage and grow their businesses. In 2005, we expanded our international footprint through our acquisition of Kerridge Computer Company Limited ("Kerridge"), which provided us with a multi-country DMS platform in Europe, the Middle East, Asia, Africa, and Latin America and has become the basis for the international operations of our Automotive Retail business. In 2010, we acquired Cobalt, a leading provider of automotive digital marketing solutions, which has enabled us to solidify and expand our digital marketing capabilities.
On April 9, 2014, the board of directors of ADP approved the spin-off of the Dealer Services business. On September 30, 2014, the spin-off became effective and ADP distributed 100% of the common stock of the Company to the holders of record of ADP's common stock as of September 24, 2014 (the "spin-off").
Reportable Segments
Our operations are organized into two main businesses: Automotive Retail and Digital Marketing. The Automotive Retail business comprises our Automotive Retailoperating groups, CDK North America ("ARNA"and CDK International. CDK North America comprises two reportable operating segments, Retail Solutions North America (“RSNA”) and Automotive RetailAdvertising North America (“ANA”). CDK International ("ARI"(“CDKI”) is also a reportable operating segment. Additional information on our reportable segments and the Digital Marketing business comprises our Digital Marketing ("DM") operating segment. A brief description of each of these three segments’ operationsgeographic areas is provided below.
Automotive Retail North America
Through our ARNA segment, we provide technology-based solutions that help automotive retailers, OEMs, and other industry participants manage the sale, financing, insurance, parts supply, and repair and maintenance of vehicles. Our solutions help our clients streamline their operations, better target and serve their customers and enhance the financial performance of their retail operations. In addition to providing solutions to retailers and manufacturers of automobiles, we also provide solutions to retailers and manufacturers of heavy trucks, construction equipment, agricultural equipment, motorcycles, boats, and other marine and recreational vehicles.
Automotive Retail International
Through our ARI segment, we provide technology-based solutions similar to those providedcontained in our ARNA segment in approximately 100 countries outside of the United States and Canada. The solutions provided to our clients within the ARI segment of our business help streamline operations for their businesses and enhance the financial performance of their operations within their local marketplace, and in some cases where we deal directly with OEMs, across international borders. Clients of our ARI segment include automotive retail dealers and OEMs across Europe, the Middle East, Asia, Africa, and Latin America.
Digital Marketing
Through our DM segment, we provide a suite of integrated digital marketing solutions for OEMs and automotive retailers, including websites and management of their digital advertising spend. These solutions provide a coordinated offering across multiple digital marketing channels to help achieve client marketing and sales objectives and coordinate execution between OEMs and their retailer networks. Our solutions are currently provided in the United States, Canada, Mexico, Australia, and New Zealand.
Refer to "Analysis of Reportable Segments" within "Results of Operations" under Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 18 "Financial Data by Segment" to our consolidated and combined financial statements under Item 8 of Part II, “Financial Statements and Supplementary Data - Note 18 - Financial Data by Segment.”
Our Strategy
To enable end-to-end automotive commerce, our strategy is to invest for the long-term in integrated software products and an open technology platform that can deliver seamless, workflow-driven solutions for our customers. The automotive retail market is evolving and demand for new and integrated technology solutions is growing: consumers increasingly expect a seamless omnichannel experience when purchasing or servicing vehicles; OEMs see technology as a tool to ensure a consistent and positive customer experience across their retail networks; and retailers are seeking integrated workflow technology solutions to help them improve both customer satisfaction and dealership cost structure. We believe that the best way to compete in a world with numerous providers of this Annual Report on Form 10-Kunconnected software solutions for financial information regarding our operating segmentsnumerous automotive retailers, OEMs, consumers, and geographic areas.vehicles is to provide integrated technology solutions and platform tools that can connect the disparate elements to create continuous retail workflows.
Products and Services
Automotive Retail
ClientsOur Business
We servegenerate revenue primarily by providing a broad suite of subscription-based software and diverse client base intechnology solutions for automotive retailers through our RSNA and CDKI segments. We are focused on the use of software-as-a-service (“SaaS”) and mobile-centric solutions that are highly functional, flexible, and fast. Our flagship Dealer Management System (“DMS”) software solutions are hosted enterprise resource planning applications tailored to the unique requirements of the retail automotive retail industry. Our clients include most major OEMs and a significant number of their associated franchised retail locations. Our client base also includes lenders, aftermarket providers and other service and information providers to the automotive retail industry.
Automotive Retailers. We primarily serve franchised independent automotive retailers in North America and internationally. We work with the following types of automotive retail organizations:
Public Franchised Automotive Retail Groups - clients in this group are publicly traded companies that own multiple automotive retail locations and have multiple franchises;
Private Franchised Automotive Retail Groups - clients in this group own two or more automotive retail locations consisting of two or more franchises;
Private Single-Location Franchised Automotive Retailers - clients in this group own and manage a single automotive retail location consisting of one or more franchises;
OEM Company-Owned Retail Locations - clients in this group are OEMs which own and operate one or more automotive retail locations; and
Independent Used Car Retailers - clients in this group own and manage one or more retail locations. Independent used car retailers do not have OEM franchises for new vehicle sales and authorized services and instead sell only used cars and related financing, insurance, parts, and repair and maintenance services.
OEMs. We directly sell data management, business intelligence, benchmarking, and DMS integration services to OEMs. In addition, we coordinate with OEMs to offer, on either a mandatory or elective basis, branded and/or endorsed solutions for their associated franchised automotive retail networks.
Other Application, Service and Information Providers. Through a certified integration program for our Drive DMS solution in North America, we enable third-party application and service providers to deliver their solutions more broadly into our DMS client base.
Services
The following table includes a list and summary description of the primary solutions we provide as part of our Automotive Retail business.
|
| | |
Solutions | | Description |
Dealer Management Systems | | Integrated suite of features and services to manage the information systems and process workflows involved in running automotive retail operations |
Front Office/Vehicle Sales Solutions (1)(2)
| | Technology tools and services to streamline the entire vehicle inventory, sales, and finance and insurance (“F&I”) process |
Fixed Operations Solutions (1)(2)
| | Solutions to create and efficiently manage service sales leads and communicate with customers through multiple channels |
Customer Relationship Management Solutions (1)(3)
| | A system that provides instant access to manage interactions with current and prospective customers |
Financial Management Solutions (1)(3)
| | Value-added capabilities for accounts payable, payments, and payroll |
Document Management Solutions (1)(3)
| | Document creation and archiving solutions to address the complex automotive retail sales process |
Network Management Solutions (1)(2)
| | Wired and wireless network solutions to support dealer connectivity and security efforts |
Integrated Telephony Management Solutions (1)(3)
| | Integrated telephony solutions that allow automotive retailers to connect and communicate via presence, instant messaging, voice and video |
Data Management & Business Intelligence Solutions (1)(2)
| | Solutions to extract, cleanse, normalize, enhance, and distribute data and to provide actionable insights |
Implementation and Training Solutions (3)
| | Solution delivery and configuration services and development of end user utilization skills and productivity |
Client Support (1)(3)
| | Full range of award-winning support services |
Professional Services (1)(2)
| | Consulting services that provide in-depth analysis and recommendations on optimizing retail workflows |
(1) Indicates solutions that may be integrated into our Dealer Management System.
(2) Indicates solutions that may be implemented as a stand-alone product or solution without the core Dealer Management System.
(3) Indicates solutions that require purchase of our Dealer Management System.
Dealer Management Systems
Our DMSs form the core of our Automotive Retail offerings and generate a substantial portion of our revenues for those businesses. DMSs are enterprise technology solutions that provide an integrated suite of features and services that enable our clients to manage the information systems and process workflows involved in running automotive retail operations. These DMSsproducts facilitate the sale of new and used vehicles, consumer financing, repair and maintenance services, and vehicle and parts inventory management. Additionally, these solutions enable company-wide accounting, financial reporting, cash flow management, and payroll services. Our DMSs are typically integrated with OEM data processing systems that enable automotive retailers to order vehicles and parts, receive vehicle records, process warranties, and check recall campaigns and service bulletins while helping them to fulfill their franchisee responsibilities to their OEM franchisors.
Front Office/Vehicle Sales Solutions
Our full suiteComplimentary to our core DMSs in the RSNA segment, we also provide a portfolio of Front Office/Vehicle Sales Solutions helps automotive retailers streamline the vehicle inventory, sales,layered software applications and F&I process. Our solutions integrate new and used vehicle sales workflows with supporting services to deliver seamless and streamlinedaddress the unique needs of automotive retail transactions. Additionally, we provide automotive retailers with tools to help them purchase, stock, and price new and used vehicle inventory. At the conclusion of a retail sales transaction, our majority-owned subsidiary, Computerized Vehicle Registration (“CVR”), enables certain of our retailer clients in the U.S. to register sold vehicles with the appropriate state department of motor vehicles. Our Front Office/Vehicle Sales Solutions are designed to be integrated with the automotive retailer’s DMS.
Fixed Operations Solutions
Our Fixed Operations Solutions help automotive retailers create and manage new service sales leads, reduce the effort required to manage those leads, and communicate with their customers through multiple channels (including e-mail, text, voice, mobile and direct mail). Because vehicle repair and maintenance services are a vital element of our clients’ revenue and profit streams, we enable automotive retailers to manage the entire workflow in the parts, and repair and maintenance profit centers. Managing vehicle service activities helps automotive retailers strengthen their relationships with their customers and drive the profitability of a single vehicle sale beyond the original transaction. Our Fixed Operations Solutions work in conjunction with the automotive retailer’s DMS.
Customer Relationship Management Solutions
Our Customer Relationship Management (“CRM”) Solutions provide automotive retailers the ability to manage leads for vehicle sales, parts, and services while automating business development processes and managing marketing campaigns for current and prospective customers. We enable data warehouse technology to aggregate customer, vehicle, and transaction information in order to provide key performance indicators for the retailer. Our CRM Solutions work in conjunction with the automotive retailer’s DMS.
Financial Management Solutions
We deliver true multi-company accounting capabilities in our North American and international DMSs. In addition to the finance and accounting capabilities in our DMSs, we provide value-added Financial Management Solutions for automotive retailers in North America to enable optimized capabilities for accounts payable, payments, and payroll. Ourworkflows. These solutions are often tightly integrated with mostto and targeted at users of our DMSs, but may, in ordersome cases, be provided to provide a unified user experience.
Document Management Solutions
Document Management Solutions address the needs of complex sales processescustomers that require multiple certifications and contracts across our clients’ retail operations. We are a single source to automotive retailers for laser document printing, custom and standard forms development, and scanning, storing and archiving important automotive retail documents.
Network Management Solutions
We offer a wide variety of wired and wireless network solutions to support retailer connectivity and security efforts. Our Network Management Solutions deliver the connectivity and dependability required for automotive retailers to conduct their operations while helping to protect their information systems from unauthorized access, use, disclosure, and disruption.
Integrated Telephony Management Solutions
We provide Integrated Telephony Solutions that allows automotive retailers to connect and communicate via presence, instant messaging, voice, and video. Our telephony service is a cloud-based solution that can help minimize costs, provides scale to match growing businesses, and deploys applications faster. Our Integrated Telephony Management Solutions are fully integrated with most of our DMSs, Front Office/Vehicle Sales Solutions, Fixed Operations Solutions, and CRM Solutions.
Data Management and Business Intelligence Solutions
We provide an extensive portfolio of solutions that enable automotive retailers, OEMs, and other participants in the automotive retail industry to solve problems associated with the highly fragmented systems and data across the industry. In conjunction with OEM or third party sponsored programs (and with automotive retailer consent), wedo not otherwise use our highly automated capabilities to extract data from various DMSs, which we then cleanse, normalize, and enhance to distribute to public and private franchised automotive retail groups, OEMs, consumer-facing websites, and other industry participants. In addition, we provide data integration capabilities that link disparate industry systems and provide them with the ability to exchange data securely, reliably and in real time. Many OEMs and other industry participants in North America utilize our data management solutions to process millions of transactions every month. As an extension of our data management capabilities, we also provide various capabilities in business intelligence, which help us to turn complex data into actionable insights for our clients.
Implementation and Training Solutions
Our Implementation and Training Solutions are designed to deliver and configure technology and to develop and enhance end user utilization skills and productivity. Better technology utilization helps our clients optimize business results faster.
Client Support
We provide a full range of award-winning support services to our clients around the world. In many countries, clients can call a local support specialist or submit an inquiry online, respond to updates using web chat, find answers to hundreds of frequently asked questions, download documentation, and access important resources to help improve employee productivity and increase system utilization.
Professional Services
We provide consulting services to our clients, offering in-depth analysis and recommendations for optimizing automotive retail processes. We help clients increase revenue opportunities, reduce expenses, mitigate risks, and enhance customer sales transaction experiences in all areas of their retail business.
Digital Marketing
Clients
DMS. Our principal clients in our Digital Marketing business are automotive retailers and OEMs, with a particular focus on North America. We provide integrated marketing solutions for OEMs and their retail networks, as well as automotive retail groups. As a result, our clients are concentrated in the 10 OEM brands for which we have OEM endorsements. This network strategy enables us to offer coordinated marketing solutions with higher performance and value to our clients, in turn increasing network penetration and reducing client churn. Our most significant OEM client is General Motors. We generate slightly more revenue in Digital Marketing Solutions from OEMs than from automotive retailers.layered applications are:
Services
We provide digital marketing solutions that allow retailers and OEMs to connect with customers and manage their brands. Our integrated digital marketing solutions help streamline the consumer’s path to our clients’ retail locations, linking advertising spend by OEMs, maximizing exposure for the retailers’ message, and minimizing competitive distractions by giving buyers the information they need. We benefit from an intimate understanding of the modern consumer purchase journey and have deep insights into shopper behavior with what we believe is the industry’s most comprehensive suite of digital marketing and predictive analytics solutions. As a result, we provide our clients with tangible and quantifiable business results, such as increased brand awareness and additional revenue, and consistently help them to improve their marketing return on investment.
Revenues in our Digital Marketing business are predominately generated from website services and digital advertising. Website services include development, management and hosting of websites, and related consulting. These revenues are generally based on monthly contractual subscriptions. Advertising revenues are based on contracted digital advertising spend levels from both automotive retailers and OEMs. We generate slightly more revenues from digital advertising than from website services.
The following table includes a list and summary description of the solutions we provide as part of our Digital Marketing business.
|
| | |
| Solutions | | Description |
Vehicle Sales Solutions | | Technology tools and services to streamline the entire vehicle inventory, sales, and finance and insurance (“F&I”) process |
| Fixed Operations Solutions | | Solutions to manage the parts and service profit center of dealerships, including customer targeting, appointment scheduling, on-site workflow, and billing |
| Customer Relationship Management Solutions | | Software to manage interactions with current and prospective customers |
| Financial Management Solutions | | Value-added capabilities for accounts payable, payments, and payroll |
| Document Management Solutions | | Document creation and archiving solutions to address the complex automotive retail sales process |
| Network Management Solutions | | Wired and wireless network solutions to support dealer connectivity and security efforts |
| Integrated Telephony Management Solutions | | Integrated telephony solutions that allow automotive retailers to connect and communicate via presence, instant messaging, voice, and video |
| Websites | | Proprietary Internetinternet content delivery platform |
Advertising | | Multi-channel advertising delivered through a proprietary advertising technology platform |
Business Intelligence | | Actionable insights delivered through advanced dashboards that use performance indicators |
Marketing Services and Expertise | | Digital marketing strategy consultancy and execution for providing compelling, dynamic websites for auto retailers |
Websites
We offer a highly scalable, proprietary Internet content delivery platform that delivers compelling, dynamic, personalized content to consumers on their device of choice in a manner that is coordinated across national, regional, and local entities. This platform providesIn the RSNA segment, we further connect the automotive retailerecosystem by providing third party retail solution providers with greater flexibility, control,robust and results from their web presence while providingsecure interfaces to the OEM or automotive retailer network-wide visibility into marketing performance.
The content platform is offered with a range of value added solutions, such as advanced design customization and merchandising features, premium search engine optimization, reputation management, and social media marketing. Our clients have the ability to tailor the platform to reflect their brand, marketing, and sales practices. With a wide variety of professional designs,core DMS through our clients get a website that clearly and effectively communicates their brand and value proposition and differentiates them from the competition. We make it easy to add functionality and drive client engagement through advanced “drag and drop” design tools, configurable functionality, and hundreds of third-party solutions that enable our clients to continue innovating and managing their digital storefront across desktop, tablet, and smartphone devices.
Advertising
Our Digital Marketing business provides solutions that helpPartner Program. For both automotive retailers and OEMs we provided data management and business intelligence solutions that extract, cleanse, normalize, enhance, and distribute data and to more effectively communicateprovide actionable insights.
In both our RSNA and establish the first point of contact with in-market, prospective car buyers. Our advertising solutions are designed to optimize both (i) direct-response campaigns focused on generating specific consumer vehicle or repairCDKI segments, we offer automotive retailers and maintenance purchases or responses and (ii) brand campaigns geared towards lifting brand metrics. We conduct market research regularly to identify trends in the marketplace and understand shifting buyer preferences, which we translate into powerful insights for our clients. Our complete solution begins with an advertising service that allows our clients to amplify their brand awareness and manage online marketing campaigns. These multi-channel advertising packages can consist ofOEMs a variety of media, suchprofessional services, custom programming, consulting, implementation and training solutions, as paid search, displaywell as a full range of customer support solutions.
In addition to providing solutions to automotive retailers and OEMs, our RSNA segment also provides solutions to retailers and manufacturers of heavy trucks, construction equipment, agricultural equipment, motorcycles, boats, and other marine and recreational vehicles.
Through our ANA segment, we provide advertising display re-marketing, mobile content,solutions, including management of digital advertising spend, for primarily North American automotive retailers, automotive retailer associations, and campaign landing pages, among others.
Underlying these advertising services isOEMs. These solutions provide a proprietary advertising technology platform designed for the unique structure of the automotive retail industry that dynamically adjusts content, spend, and biddingcoordinated offering across multiple marketing channels to optimize retailhelp achieve customer marketing and sales outcomes. As one of theobjectives and coordinate execution between OEMs and their retailer networks. Primarily driven by revenue generated through our ANA and RSNA segments, our largest purchasers of automotive retail advertising inventory, we leverage our relationships with premium content providers, shopping destinations, and advertising channels, such as Amazon, Edmunds, Google, and Yahoo, to optimize both reach and value for our clients.
Business Intelligence
Our Digital Marketing business employs business intelligence and data science professionals to develop insights and report on results from our proprietary data warehouse. These insights are delivered to our clients through advanced dashboards that use performance indicators that we believe are better correlated with sales outcomes than current standard industry practice. These insights are also used to develop models for our website and advertising execution, which optimize advertising return on investment for allcustomer is General Motors. We generated approximately 9% of our clients. Additionally, we develop proprietary analytic models with high predictive value to inform our OEM clientsconsolidated revenues from a combination of opportunities to improve their future business performance.
Marketing ServicesGeneral Motors and Expertise
We provide digital marketing strategy consultancy and execution for our digital marketing clients through marketing professionals who proactively engage our retailer clients, complementing their organizations with cost-effective outsourced
digital marketing expertise from merchandising, and promotion through brand strategy. These services are both contracted by OEMs on behalf of their retailer networks and byGeneral Motors automotive retailers to supplement their internal resources and are an important contributor to client satisfaction and retention.during the fiscal year ended June 30, 2018 ("fiscal 2018").
Product Development and Innovation
Our ability to bring newstrengthen and extend our solutions to marketportfolio is a key element of our business strategy. We execute on this strategy through a combination of development and to develop or acquire the dataselective pursuit of strategic acquisitions. In our fiscal years ended June 30, 2018, June 30, 2017 ("fiscal 2017"), and technology that enables these solutions is important to our continued success. In June 30, 2016 ("fiscal 20152016"), 2014, and 2013, we spent $170.1$131.3 million, $165.7$150.0 million, and $156.4$161.0 million, respectively, to research, develop, and deploy new and enhanced solutions for our clients.customers. Additionally, we had cash flows used for qualifying capitalized software development cost of $41.1 million, $31.8 million, and $13.5 million in fiscal 2018, 2017, and 2016, respectively.
SalesIn addition to the ongoing investment to enhance existing solutions within our core business, we also invest in long- and Marketing
Our salesmedium-term product innovation aligned with our strategy. For example, the Fortellis Automotive Commerce Exchange under development is expected to be the foundation of our open technology platform for automotive commerce. Within the automotive commerce market, Fortellis will allow CDK Global and marketing functions are managedthird parties to develop adaptive and organizedinterchangeable application programming interfaces ("APIs") that can be used to provide local agility and expertise. We organize, locate, and manage our sales professionals in discrete territories in our targeted geographies. We have redefined our sales force roles and account coverage by merging the ARNA and DM sales teams at the regional leadership level. Our sales teams focus specifically on OEM and dealer relationships.
OEM Relationships—we have a team of professionals assigned to establish relationships with automotive OEMs, sell ourconnect existing technology solutions and managebuild new solutions quickly and with high levels of reliability. Similarly, we are developing Drive Flex DMS, a cloud-based DMS designed for smaller dealerships that will introduce an innovative, adaptive commercial model in addition to new technology. We are developing these solutions using a methodical and measured approach with respect to capital and resource allocation. We believe these investments align to our relationships beyond the initial sale, with targets for account performancestrategy and satisfaction.
Public Franchised Automotive Retail Groups, Private Franchised Automotive Retail Groups, Private Single-Location Automotive Retailers, OEM Company-Owned Retail Locations and Independent Used Car Retailers—we target these automotive retailers through our sales force and marketing programswill position CDK Global to drive demand generation and ensure retention. We operate this way in North America and internationally.
Our sales strategy leverages our existing client relationships to enable us to offer additional solutions that help make our clients more competitive.
Though our business is not highly cyclical, it is seasonal. Our revenues experience volatility around seasonal consumer vehicle shopping activity. We address this seasonality in sales by establishing annual quotas for each of our sales professionals. While this volatility is experienced throughout the industry, it is amplified in our Digital Marketing business where advertising spend may vary significantly throughout the year given the increasing importance to OEMs and automotive retailers of capturing buyer attention during certain seasonal periods and major events such as the launch of a new vehicle model.
Our marketing group structure is built to provide insight into development of products, communication, and branding to ensure we grow brand equity and competitive positioning in the market. This group focuses on market research and analysis, developing new sales opportunities through a range of marketing communications including campaigns and trade exhibitions, and the positioning and branding of our solutions in the markets that we serve.
Following the spin-off, we operate under the brand name CDK Global. As parttake advantage of the spin-off, we obtained the right to use the ADP name and trademark in our business for a transitional period of approximately 12 months, except for the use of the ADP trademark or logo on tangible materials acquired by us, which was for a transitional period of approximately six months while we phased out the use of such trademark in the operation of our business. We market and enhance our new brand by, among other things, applying our brand assets to our websites, search engine listings, traditional and digital marketing campaigns, social media accounts, printed marketing collateral, facilities signage, employee business cards, email signatures, trade show booths, and our software solutions portfolio. We also leverage and build our brand equity as we promote and position our solutions to customers in theevolving automotive retail market.
Competition
Our industry is highly competitive and fragmented. We compete with a broad and diverse range of information, technology, services, and consulting companies, as well as with the in-house capabilities of OEMs. Our competitors range from local providers to regional and global competitors. However, we believe that no competitor provides the same combination of geographical reach and breadth of solutions that we do.
Automotive Retail
InEach of our Automotive Retail business,solutions faces competition from an array of solution providers. For our DMS solutions in North America, our principal competitors vary by capabilities within the automotive retail value chain. They include:
DMS providers, includingare Reynolds and Reynolds, Dealertrack Technologies (Cox Automotive entered into an Agreement and Plan of Merger to acquire Dealertrack Technologies on June 12, 2015)Automotive), Auto/Mate, AutoSoft, PBS Systems, and various local and regional providers globally;
sales, marketing and F&I software and service providers, including Dealertrack Technologies (Cox Automotive), First Look, Market Scan Information Systems, StoneEagle Group, vAuto (Cox Automotive), VinSolutions (Cox Automotive), and variousproviders. For our CDKI segment, DMS competition is principally from local and regional providers globally;
providers of vehicle electronic registration solutions that compete with CVR, including ELS, MVSC, TitleTec, and triVIN (Cox Automotive); and
providers of web-based automotive finance credit applications and eContracting processors that compete with our Open Dealer Exchange joint venture with Reynolds and Reynolds, including Dealertrack Technologies (Cox Automotive) and RouteOne.
providers. The most significant competitive factors that we face inacross our Automotive Retail businesssolutions are price, brand, breadth of features and functionality, scalability, and service capability.
Digital Marketing
The primary competitors of our Digital Marketing business for OEM network endorsements are Dealer.com (Dealertrack Technologies), AutoTrader.com (Cox Automotive), Dominion Enterprises, and Naked Lime (Reynolds and Reynolds). Several hundred specialty vendors and agencies offer website, digital marketing, and third-party applications that can be alternatives to our services with individual automotive retailers and groups. We also compete with traditional marketing channels, such as print, radio, and television, for a share of the automotive retailer’s marketing budget. The most significant competitive factors that we face in our Digital Marketing business areuser experience, quality, brand, breadth of features and functionality, scalability, and service capability.
Regulation
The automotive retail industry is highly regulated and automotive retailers and OEMs are subject to a broad array of complex regulations governing virtually every aspect of their operations. Our clientscustomers must ensure their compliance with their regulatory requirements, and, in turn, we must ensure that our solutions effectively address their regulatory compliance needs.
Because our business delivers solutions across a broad spectrum of automotive retailer operations, our activities are impacted by a wide variety of federal, state, local, and international laws and regulations. Central to the value of our Document Management Solutions, for example, is that the forms we provide for our customers meet the requirements of their applicable laws. Likewise, within our Vehicle Sales Solutions, our electronic vehicle registration service is dependent on our compliance with complex and detailed regulatory requirements. Across our portfolio of automotive retail solutions, we are focused on ensuring that we meet our regulatory compliance obligations and that our solutions enable our customers to comply with the laws and regulations applicable to them. See “Risk Factors-Risks Relating to Our Business" for additional information regarding the application and impact of laws and regulations on our operations.
Privacy and Data Security LawsProtection Regulations
We are subject to a number of federal, state, and foreign laws and regulations regarding data governance and the privacy and protection of personal data. For example, under the Gramm-Leach-Bliley Act (the “GLB Act”), automotive retailers are generally deemed to be regulated financial institutions and therefore are subject to the GLB Act and applicable regulations, including the Federal Trade Commission's ("FTC") Privacy Rule and Safeguards Rule. In our capacity as a service provider to automotive retailers, we generally commit to our clientscustomers that we will process and usehandle non-public personal information such as information regarding their customers that we process in their DMS, consistent with the GLB Act and the related regulations. Similarly, many United States ("U.S.") states and foreign jurisdictions have adopted regulations that requireimpose obligations on businesses that handle personal information, including notification to individualsrequirements in the event of a security breachdata breaches relating to their sensitive personal data, or that mandateas well as minimum security standards with respect to the handling and transmission of suchpersonal data. For a discussion of privacy and data securityprotection regulation and the potential impacts on our business, see “Risk Factors—RisksFactors-Risks Relating to Our Business—ChangesBusiness.”
Seasonality in regulations or consumer concerns regarding privacy and protection of consumer data, or any failure to comply with privacy and data protection obligations, could negatively impactOur Business
Though our business results of operations, and financial condition.”
Automotive Retail Regulation
Because our Automotive Retail business delivers solutions across a broad spectrum of automotive retailer operations, our activities are impactedis not highly cyclical, it is seasonal. Our revenues experience volatility around seasonal consumer vehicle shopping activity. We address this seasonality in sales by a wide variety of federal, state, local, and international laws and regulations. Central to the valueestablishing annual quotas for each of our Document Management Solutions, for example,sales professionals. While this volatility is thatexperienced throughout the forms we provide forindustry, it is amplified in our clients meetadvertising business where advertising spend may vary significantly throughout the requirementsyear given the increasing importance to OEMs and automotive retailers of their applicable laws. Likewise, within our Front Office Solutions, our CVR service is dependent on our compliance with complexcapturing buyer attention during certain seasonal periods and detailed regulatory requirements. Across our portfolio of automotive retail solutions, we are focused on ensuring that we meet our regulatory compliance obligations and that our solutions enable our clients to comply with the laws and regulations applicable to them. See “Risk Factors—Risks Relating to Our Business—We are directly and indirectly subject to, and impacted by, extensive and complex regulation in the U.S. and abroad, and new regulations and/or changes to existing regulations may negatively impact our business, results of operations, and financial condition,” for additional information regarding the application and impact of laws and regulations on our operations.
Digital Marketing Regulation
Our Digital Marketing clients must comply with an array of state and local laws specific to the advertising of automobiles, finance and insurance, and related services. The advertising of automobile financing in the United States is generally subject to the federal Truth in Lending Act and attendant regulations, while the advertising of consumer automobile leases is subject to similar regulations under the Consumer Leasing Act and enabling regulations. In each case, the regulations prescribe the information,major events such as payment amount, payment period, term, and interest rate, to be disclosed tothe launch of a consumer in connection with the advertising ofnew vehicle financing or a vehicle lease. Similarly, state and local laws establish requirements with respect to the advertising of vehicles and vehicle attributes, from the required elements of pricing information to the presentation of fuel efficiency data.
Some of our solutions include email marketing as a component, which is governed by a variety of U.S. federal, state, and foreign laws and regulations. In the United States, for example, the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (the "CAN-SPAM Act") establishes requirements, such as mandatory opt-out mechanisms, for the distribution of “commercial” email messages for the primary purpose of advertising or promoting commercial products or services and provides for criminal and civil penalties for failure to comply. Individual states as well as some foreign jurisdictions, such as Australia, Canada, and the European Union, have also enacted laws that regulate sending commercial email, some of which are more restrictive than the CAN-SPAM Act.
As with the majority of our solutions, the compliance obligation lies with our clients and, in purchasing our solutions, our clients agree to use our services in compliance with applicable laws. Nonetheless, we strive to ensure that our solutions enable our clients to achieve and maintain that compliance.model.
Employees
As of June 30, 2015,2018, we had a total of approximately 8,9008,500 full-time employees worldwide. None of our employees isin the United States are represented by a collective bargaining agreement. We have work councils and statutory employee representation obligations in certain countries outside the United States. We believe that relations with our employees are good.
Available Information
Our investor relations website is investors.cdkglobal.com. We electronicallyencourage investors to use it as a way of easily finding information about us. We promptly make available on this website, free of charge, the reports that we file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports, and proxy statements,or furnish with the Securities and Exchange Commission (“SEC”). We also filed with the SEC, corporate governance information (including our Registration Statement on Form 10. You may readCode of Business Conduct and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549, or you may obtain information by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet address at http://www.sec.gov that contains reports, proxy statementsEthics), and information statements, and other information, which you may obtain free of charge. In addition, our corporate website, www.cdkglobal.com, provides materials for investors, information about our services and copies of our filings with the SEC. Access to these filings is free of charge. The content on any website referenced in this filing is not incorporated by reference into this filing unless expressly noted.select press releases.
Item 1A. Risk Factors
You should carefully consider each of the following risks and all of the other information set forth in this Annual Report on Form 10-K. Based on the information currently known to us, we believe that the following information identifies the material risk factors affectingthat could materially affect our Company in eachbusiness, results of operations, and financial condition.However, the noted risk categories: (i) Risks Relatingrisks and uncertainties described below are not the only risks and uncertainties facing us; our business is also subject to Our Business; (ii) Risks Relatinggeneral risks and uncertainties that affect many other companies, and may be subject to Our Separation from ADP;additional risks and (iii) Risks Relatinguncertainties not currently known to Our Common Stock.
Risks Relatingus or that we currently believe to Our Business
Market trends influencing the automotive retail industry couldbe immaterial, and such risks and uncertainties may have a negative impactmaterial adverse effect on our business, results of operations, and financial condition. If any of the following risks and uncertainties develop into actual events, they could have a material adverse effect on our business, results of operations, and financial condition.
Market trends that negatively impactRisks Relating to Our Business
We face intense competition. If we do not continue to compete effectively against other providers of technology solutions to automotive retailers, OEMs, and other participants in the automotive retail industry, may affect our business by reducing the number and/or size of actual or potential clients or the money that actual or potential clients are willing or able to spend on our solution portfolio. Such market factors include:
the adverse effect of long-term unemployment on the number of vehicle purchasers;
pricing and purchase incentives for vehicles;
disruption in the available inventory of vehicles;
the expectation that consumers will be purchasing fewer vehicles overall during their lifetime as a result of better quality vehicles and longer warranties;
the cost of gasoline and other forms of energy;
the availability and cost of credit to finance the purchase of vehicles;
increased federal and other taxation; and
reductions in business and consumer confidence.
Additionally, due to the most recent economic downturn, there was a substantial decline in 2009 and 2010 in the number of franchised automotive retailer locations in countries where the retail automotive marketplace is considered “mature,” most notably in North America and Western Europe. Although these declines have stabilized in North America, and the pace of declines in Western Europe has slowed, a further reduction in the number of automotive retailer locations would reduce the number of opportunities we have to sell our solutions. Additionally, auto retailers that close or otherwise scale back their businesses may not be willing or able to pay amounts owed to us. Any such outcomeit could have a material adverse effect on our business, results of operations, and financial condition.
We may not be able to continue to compete effectively against other providers of integrated solutions to automotive retailers, OEMs, and other participants in the automotive retail industry.
Competition among automotive retail solutions and digital marketingadvertising solutions providers is intense. The industry is highly fragmented and subject to changing technology, shifting clientcustomer needs, and frequent introductions of new solutions. We have a variety of competitors both for our integrated solutions and for each of our individual solutions. For example:
for our Automotive Retail business competes with integrated providers of automotive retailing technologyDMS solutions such asin North America, our principal competitors are Reynolds and Reynolds, Company, Dealertrack Technologies (Cox Automotive), RouteOne LLC, AutoTrader,Auto/Mate, AutoSoft, PBS Systems and Dominion Enterprises;various local and regional providers; and
for our Digital Marketing business competes with integrated providers of automotive digital marketing/advertising solutions, such as Dealertrack Technologies (Cox Automotive), AutoTrader, Dominion Enterprises,CDKI segment, DMS competition is principally from local and Reynolds and Reynolds Company.regional providers.
Our competitors may be able to respond more quickly or effectively to new or emerging technologies and changes in clientcustomer demands or to devote greater resources to the development, promotion, and sale of their solutions than we can to ours. We expect the industry to continue to attract new competitors and new technologies, possibly involving alternative technologies
that are more sophisticated and cost-effective than our solutions. There can be no assurance that we will be able to compete successfully against current or future competitors or that the competitive pressures we face will not have a material adverse effect on our business, results of operations, and financial condition.
Changes in regulations or consumer concerns regarding privacy and protection of consumer data, or any failure to comply with privacy and data protection obligations,Market trends influencing the automotive retail industry could negativelyhave a negative impact on our business, results of operations, and financial condition.
Federal laws and regulations governing privacy and security of consumer information generally apply to our clients and/or to us as a service provider. These include the federal Fair Credit Reporting Act, the GLB Act and regulations implementing its information safeguarding requirements, the Junk Fax Prevention Act of 2005, the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, the Telephone Consumer Protection Act, the Do-Not-Call-Implementation Act, applicable Federal Communications Commission (the “FCC”) telemarketing rules, and the Federal Trade Commission (the “FTC”) Privacy Rule, Safeguards Rule, Consumer Report Information Disposal Rule, Telemarketing Sales Rule, Risk-Based Pricing Rule, and Red Flags Rule. International laws, such as the European Union’s Data Protection Directive, and the country-specific regulationsMarket trends that implement that directive, similarly apply to our collection, storage, use, and transmission of protected data.
In addition, many U.S. and foreign jurisdictions have passed, or are currently contemplating, a variety of consumer protection, privacy, and data security laws and regulations that may relate to our business. For example, some state legislatures and regulatory agencies have imposed, and others may impose, greater restrictions on the disclosure of the data we collect, use or transmit than are already contained in federal laws such as the GLB Act and its implementing regulations or the FTC rules described above. Similarly, it is possible that in the future, U.S. and foreign jurisdictions may adopt legislation or regulations that impair our ability to effectively track consumers’ use of our digital marketing services, such as the FTC’s proposed “Do-Not-Track” standard or other legislation or regulations similar to European Union Directive 2009/136/EC, commonly referred to as the “Cookie Directive,” which directs EU member states to ensure that accessing information on an Internet user’s computer, such as through a cookie, is allowed only if the Internet user has given his or her consent.
The costs and other burdens of compliance with privacy and data security laws and regulations could negatively impact the useautomotive retail industry may affect our business by reducing the number and/or size of actual or potential customers or the money that actual or potential customers are willing or able to spend on our solution portfolio. Such market factors include:
the adverse effect of long-term wage stagnation on the purchasing power of vehicle purchasers and adoptionthe number of our solutionsvehicle purchasers;
pricing and reducepurchase incentives for vehicles;
disruption in the available inventory of vehicles;
disruption in the franchised automotive retailer dealership model, including potential disintermediation by emerging business models;
reductions in growth or decreases of automotive retailer spend on technology;
contractions in the number of franchised automotive retailers;
market oversupply of vehicles and declining used-vehicle pricing;
the expectation that consumers will be purchasing fewer vehicles overall during their lifetime as a result of better quality vehicles and longer warranties and the development of shared-use mobility;
the cost of gasoline and other forms of energy;
the availability and cost of credit to finance the purchase of vehicles and excess negative equity in existing vehicle loans;
the effect of adverse macroeconomic conditions on consumer shopping activity and the demand for them. Additionally, concerns regarding data privacyadvertising that may cause our clients, advertisers to reduce their advertising budget allocations;
increased federal and other taxation; and
reductions in business and consumer confidence.
Such market trends could have a material adverse effect on our business, results of operations, and financial condition.
Market acceptance of and influence over our products and services, particularly of our advertising and website solutions, is concentrated in a limited number of automobile OEMs and consolidated retailer groups, and we may not be able to maintain or grow these relationships.
Although the automotive retail industry is fragmented, a relatively small number of OEMs, consolidated retailer groups and retailer associations exert significant influence over the market acceptance of automotive retail products and services due to their concentrated purchasing activity, their endorsement or recommendation of specific products and services and/or their customersability to define technical standards and potential customers,certifications. For example, our DMSs are certified to resist providingtechnical standards established by OEMs and certain of our products and services are provided pursuant to OEM-designated endorsement or preferred vendor programs. While automotive retailers are generally free to purchase the data necessarysolutions of their choosing, when an OEM has endorsed or certified a provider of products or services to allow us to deliverits associated franchised automotive retailers and if our solutions effectively. Even the perception that the privacy of personal information is not satisfactorily protectedlack such certification or does not meet regulatory requirements could inhibit salesendorsement, adoption or retention of our products and services among the franchised dealers of such OEM could be materially impaired.
Some of our products, such as our advertising and website solutions, are primarily sold to or through OEMs and any failure to complydepend on us maintaining strong relationships with those OEMs. Our advertising and website solutions are primarily marketed and delivered through programs sponsored or endorsed by OEMs, the most significant of which is General Motors. We generated approximately 9% of our consolidated revenues from a combination of General Motors and General Motors automotive retailers during fiscal year 2018, and as of June 30, 2018, General Motors accounted for 11% of our accounts receivable. OEM switching costs for advertising and website solutions are generally low and our agreements with such lawscustomers generally may be terminated by each OEM on short notice, with or without cause, do not automatically renew upon expiration and regulationshave no minimum volume or payment requirements. In addition, if renewed, such agreements may shift from exclusive to multi-vendor relationships. Finally, advertising budget allocations by our customers tend to be cyclical, reflecting overall economic conditions and budgeting and buying patterns. Adverse macroeconomic conditions can have a material negative impact on consumer shopping activity and the demand for advertising that may cause our advertisers to reduce their advertising budget allocations. The termination, or renewal on less beneficial terms, of one or more of these relationships, changes in our customers’ advertising budget allocations or marketing strategies, or a change in the economy could lead to significant fines, penalties or other liabilities. Any such decreaseresult in demand or incurred fines, penalties or other liabilitiesa decline in the level of advertising and website services that they purchase from us, which in turn could have a material adverse effect on our business, results of operations, and financial condition.
We may be unable to develop and bring products and services in development to market, or bring new products and services to market in a timely manner or at all.
Our success depends in part upon our ability to bring to market new products and services, and enhancements thereto that address evolving customer demands. For example, our advertising and website solutions must effectively address the market shift to mobile technology. The time, expense, and effort associated with developing and offering new and enhanced products and services may be greater than anticipated. The length of the development cycle varies depending on the nature and complexity of the product, the availability of development, product management, and other internal resources and the role, if any, of strategic partners. If we are unable to develop and bring to market additional products and services, and enhancements thereto, in a timely manner, or at all, we could lose market share to competitors who are able to offer these new products and services, which could have a material adverse effect on our business, results of operations, and financial condition.
Our failure or inability to execute any element of our business strategy, including our business transformation plan, could negatively impact our business, results of operations, or financial condition.
Our business, results of operations, and financial condition depend on our ability to execute our business strategy, which includes the following key elements:
deepening relationships with our existing customer base;
continuing to expand our customer base;
strengthening and extending our solutions portfolio;
driving additional operational efficiency; and
selectively pursuing strategic acquisitions.
We may not succeed in implementing a portion or all of our business strategy, and even if we do succeed, our strategy may not have the favorable impact on our business, results of operations, or financial condition that we anticipate. We may not be able to effectively manage the expansion of our business or achieve the rapid execution necessary to fully avail ourselves of the market opportunity for our solution portfolio. If we are unable to adequately implement our business strategy, our business, results of operations, and financial condition could suffer a material adverse effect.
We may experience difficulties, delays, or unexpected costs and not achieve anticipated benefits and savings from our business transformation plan.
During fiscal 2015, we initiated a business transformation plan described under "Business Transformation Plan" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" under Item 7 of Part II of this Annual Report on Form 10-K. We may not realize, in full or in part, the anticipated benefits and savings from the business transformation plan due to unforeseen difficulties, delays, or unexpected costs, which may adversely affect our business and results of operations, and even if the anticipated benefits and savings are substantially realized, there may be consequences or business impacts that were not expected.
We are dependent on our key management, direct sales force, and technical personnel for continued success.
Our global senior management team is concentrated in a small number of key members, and our future success depends to a meaningful extent on the services of our executive officers and other key team members, including members of our direct sales force and technology staff. Generally, our executive officers and employees can terminate their employment relationship at any time. The loss of any key employees or our inability to attract or retain other qualified personnel could materially harm our business and prospects.
Effective succession planning is important to our long-term success. Disruptions in future leadership transitions or reorganizations could have a material adverse effect on our business, results of operations, and financial condition and could adversely affect our ability to attract and retain other key executives.
Competition for qualified leadership and technical personnel in the technology industry is intense, and we compete for leadership and technical personnel with other technology companies that have greater financial and other resources than we do. Our future success will depend in large part on our ability to attract, retain, and motivate highly qualified leadership and technical personnel, and there can be no assurance that we are able to do so. Any difficulty in hiring or retaining needed personnel, or increased costs related thereto, could have a material adverse effect on our business, results of operations, and financial condition.
Real or perceived errors or failures in our software and systems could negatively impact our results of operations and growth prospects.
We depend upon the sustained and uninterrupted performance of numerous proprietary and third-party technologies to deliver our solution portfolio. If one or more of those technologies cannot scale to meet demand, or if there are human or technological errors in our execution of any feature or functionality using any such technologies, then our business may be harmed. Because our software is often complex, undetected errors and failures may occur, especially when new versions or updates are made. Despite testing by us, errors or bugs in our solutions may not be found until the software or service is in
active use by us or our customers. Moreover, our customers could incorrectly implement or inadvertently misuse our solutions, which could result in customer dissatisfaction and adversely impact the perceived utility of our solutions as well as our brand. Any of these real or perceived errors, failures, or bugs could result in negative publicity, reputational harm, loss of or delay in market acceptance of our solutions, loss of competitive position or claims by customers for losses sustained by them, all of which, along with the costs of responding to such effects, may have a material adverse effect on our business, results of operations, and financial condition.
Data security concerns relating to our technology or services could damage our reputation and deter current and potential customers from using our products and services. If our security measures fail to prevent the improper use and disclosure of our customers’ data, our products and services may be perceived as notbeing secure, customers may curtail or stop using our products and services, and we may incur significant legal and financial exposure.
We handle substantial amounts of confidential information, including personal information of our employees and customers' consumers and employees. Our success depends on the confidence of OEMs, dealers, lenders, major credit reporting agencies and other data providers, and other users of (or participants in) our solutions, in our ability to store, process, and transmit this confidential information securely (whether over the internet or otherwise), and to operate our computer systems and operations without significant disruption or failure.
Our computer systems experience cyber attacks of varying degrees on a regular basis. These cyber attacks may lead to interruptions and delays in our service and operations as well as loss, misuse, or theft of data that we store, process and transmit. Our security measures may also fail to prevent unauthorized access to our systems and data may be exfiltrated and improperly used or disclosed due to employee error, malfeasence, system errors, or vulnerabilities, including vulnerabilities of our vendors, suppliers, their products, or otherwise. While security measures are in place, concerns over the security of third-party data that we store, process, and transmit, which may be heightened by any well-publicized compromise of security, may deter customers from using our solution portfolio and/or deter vendors from providing their solutions to us. Moreover, if our security measures fail to prevent unauthorized access to such data, our solutions may be perceived as not being secure and our customers may curtail or stop using our solutions and/or vendors may curtail or stop providing their solutions to us. Any failure of, or lack of confidence in, the security of our solutions could have a material adverse effect on our business, results of operations, and financial condition.
Despite our focus on data security, we may not be able to stop unauthorized attempts to gain access to data that we store and process, or to stop disruptions in the transmission or provision of data and communications or other data by us. Advances in computer capabilities, new discoveries in the field of cryptography, or other events or developments could result in a compromise or breach of the controls used by our solutions to protect data contained in our, our customers’ and/or our vendors’ databases and the information being stored, transferred, or processed. While warranties and liabilities are usually limited in our customer and vendor contracts, they or other third parties may seek to hold us liable for any losses suffered as a result of unauthorized access to their confidential information or non-public personal information of consumers. In addition, while effort has been expanded to have insurance to cover these losses, we may be required to expend significant capital and other resources to protect against or alleviate any problems caused by actual or threatened cyber attacks or unauthorized access to such data. Our security measures may not be sufficient to prevent security breaches, and any failure to prevent the improper use and disclosure of data and/or to adequately alleviate any problems caused by such improper use and disclosure could have a material adverse effect on our business, results of operations, and financial condition.
Interruption or failure of our networks, systems, and infrastructure could hurt our ability to effectively provide our products and services, which could damage our reputation and/or subject us to litigation or contractual penalties.
The availability of our products and services depends on the continuing operation of our network and systems. From time to time, we have experienced, and may experience in the future, network or system slowdowns and interruptions. These network and system slowdowns and interruptions may interfere with our ability to do business. While the appropriate upgrades to various systems, shoring up backup processes, and other measures to protect against data loss and system failures have been implemented and tested, there is still risk that we may lose critical data or experience network failures.
Despite the resiliency plans and facilities we have in place, our ability to conduct business may be adversely impacted by a disruption in the infrastructure that supports our businesses. This may include a disruption involving electrical, satellite, undersea cable or other communications, internet, cloud computing, transportation, or other services facilities used by us or third parties with which we conduct business. These disruptions may occur as a result of events that affect only our buildings or systems or those of such third parties, or as a result of events with a broader impact globally, regionally or in the cities where those buildings or systems are located, including, but not limited, to natural disasters, war, civil unrest, economic or political developments, pandemics, and weather events.
Such network, system or infrastructure failures or disruptions could result in lengthy interruptions in our service and lost revenue opportunities for our customers, which could result in litigation against us and/or our customers may curtail or stop using our solutions or vendors may curtail or stop providing their solutions to us. Additionally, we have service level agreements with certain of our customers that may result in penalties or trigger cancellation rights in the event of a network or system slowdown or interruption. Any of these could have a material adverse effect on our business, results of operations, and financial condition.
Our business is directly and indirectly subject to, and impacted by, extensive and complex regulationlaws and regulations in the U.S. and abroad, and new laws and regulations and/or changes to existing laws and regulations may negatively impact our business, results of operations, and financial condition.
Our business is directly and indirectly subject to, and impacted by, numerous U.S. and foreign laws and regulations covering a wide variety of subject matters. Compliance with complex foreign and U.S. laws and regulations that apply to our operations increases our costs and may impede our competitiveness. In addition, failure to comply with such laws or regulations may result in the suspension or termination of our ability to do business in applicable jurisdictions or the imposition of civil and criminal penalties, including fines or exposure to civil litigation. New regulations and/or changes to existing regulations could require us to modify our business practices, including modify the manner in which we contract with or provide products and services to our customers; directly or indirectly limit how much we can charge for our services; require us to invest additional time and resources to comply with such regulations; or limit our ability to update our existing products and services, or require us to develop new ones.
In addition to the data privacy and security laws and regulations mentioned above,below, our business is also directly or indirectly governed by domestic and international laws and regulations relating to issues such as information services, telecommunications, anti-trustantitrust or competition, employment, motor vehicle and manufacturer licensing or franchising, vehicle registration, advertising, taxation, consumer protection, and accessibility. We must also comply with anti-corruption laws such as the U.S. Foreign Corrupt Practices Act and local laws prohibiting corrupt payments to governmental officials and private entities, such as the U.K. Anti-Bribery Act.Act and the Criminal Law and Anti-Unfair Competition Law of the People’s Republic of China. In addition, motor vehicle and manufacturer licensing, franchising and advertising is highly regulated at the state level and is subject to changing legislative, regulatory, political, and other influences. Such state laws are complex and subject to frequent change. The application of this framework of laws and regulations to our business is complex and, in many instances, is unclear or unsettled, which in turn increases our cost of doing business, may interfere with our ability to offer our solutions competitively in one or more jurisdictions and may expose us and our employees to potential fines, penalties or other enforcement actions. In some cases, our clientscustomers may seek to impose additional requirements on our business in efforts to comply with their interpretation of their own or our legal obligations. These requirements may differ significantly from our existing solutions or processes and may require engineering and other costly resources to accommodate.
In addition, we are and expect to continue to be the subject of investigations, inquiries, data requests, actions, and audits from regulatory authorities, particularly in the area of competition. On June 22, 2017, the Company received from the FTC a Civil Investigative Demand consisting of interrogatories and a request to produce documents relating to any agreements between the Company and Reynolds and Reynolds. On March 12, 2018, a parallel request was received from the New York State Attorney General. The Company is responding to the requests. The requests merely seek information, and no proceedings have been instituted. 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.
12
These laws and regulations, as well as any associated inquiries or investigations or any other government actions, may be costly to comply with and may delay or impede the development of new products, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business, including fines or demands or orders that we modify or cease existing business practices. Our failure to comply, or to provide solutions that allow our clientscustomers to comply, or any new investments of additional time and resources necessary to comply, or to provide solutions that allow our customers to comply, with any of the foregoing laws and regulations could have a material adverse effect on our business, results of operations, and financial condition.
New legislationOur business is directly or changesindirectly subject to, or impacted by, complex and rapidly evolving U.S. and foreign laws and regulation regarding privacy and data protection. Many of these laws and regulations are subject to change and uncertain interpretation and could result in existing legislation regarding the Internet may negatively impactclaims, adjustments to our business practices, penalties, increased cost of operations, or declines in customer growth or engagement, or otherwise harm our business.
Our abilityMany U.S. and foreign jurisdictions have passed, or are currently contemplating, a variety of consumer protection, privacy, and data security laws and regulations that may relate directly or indirectly to conduct, our business. For example, federal laws
and regulations governing privacy and security of consumer information generally apply to our costcustomers and/or to us as a service provider. These include, but are not limited to, the federal Fair Credit Reporting Act, the GLB Act and regulations implementing its information safeguarding requirements, the Junk Fax Prevention Act of conducting,2005, the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (the "CAN-SPAM Act"), the Telephone Consumer Protection Act, the Do-Not-Call-Implementation Act, applicable Federal Communications Commission (the “FCC”) telemarketing rules, the FTC Privacy Rule, Safeguards Rule, Consumer Report Information Disposal Rule, Telemarketing Sales Rule, Risk-Based Pricing Rule, and Red Flags Rule. Laws of foreign jurisdictions, such as Canada's Anti-Spam Law and Personal Information Protection and Electronic Documents Act, similarly apply to our businesscollection, processing, storage, use, and transmission of protected data.
In addition, the European Union's ("EU") General Data Protection Regulation (the "GDPR"), which became effective on May 25, 2018, and superseded the previous Data Protection Directive of 95/46/EC imposes more stringent operational requirements for entities processing personal information and greater penalties for noncompliance. While we have made adjustments to our operations in Europe to comply with new requirements contained in the GDPR and to address customer concerns related to the GDPR, we may be negatively impacted by a number of legislativeneed to make more adjustments as more clarification and regulatory proposals concerning various aspectsguidance on compliance with the GDPR become available. Any such adjustments may result in costs and expenses, and any failure to meet the requirements of the Internet, whichGDPR may result in significant fines, penalties, or other liabilities (including possible fines of up to 4% of global annual turnover for the preceding financial year or €20 million (whichever is higher) for the most serious infringements).
In the U.S., some state laws and regulations have imposed, and others have contemplated imposing, enhanced disclosure obligations and greater restrictions or prohibitions on the use of data than are currently under consideration byalready contained in federal state, local, and foreign governments, administrative agencieslaws such as the GLB Act and its implementing regulations or the FTC rules described above. For example, many states within the U.S. and certain countries have passed data protection laws that require notification to users when there is a security breach of personal data. While we have made adjustments to our operations in such states to comply with the requirements, any new laws and regulations could further impact the way we collect, store, process, transmit, or otherwise interact with data, particularly consumer data. These adjustments could have consequences for the design, development, and delivery of our products and services. Any such adjustment may result in costs and expenses, and any failure to meet the requirements may result in significant fines, penalties, or other liabilities.
For example, on June 28, 2018, California passed the California Consumer Financial Protection BureauPrivacy Act of 2018 (“CCPA”), to be effective on January 1, 2020. The new law provides California consumers with a greater level of transparency and broader rights and choices with respect to their personal information than those contained in any existing state and federal laws in the U.S. The “personal information” regulated by CCPA is broadly defined to include identification or association with a California consumer or household, including demographics, usage, transactions and inquiries, preferences, inferences drawn to create a profile about a consumer, and education information. Compliance with CCPA requires the implementation of a series of operational measures such as preparing data maps, inventories, or other records of all personal information pertaining to California residents, households and devices, as well as information sources, usage, storage, and sharing, maintaining and updating detailed disclosures in privacy policies, establishing mechanisms (including, at a minimum, a toll-free telephone number and an online channel) to respond to consumers’ data access, deletion, portability, and opt-out requests, providing a clear and conspicuous “Do Not Sell My Personal Information” link on the home page of the business’ website, etc. CCPA prohibits businesses from discriminating against consumers who have opted out of the sale of their personal information, subject to a narrow exception. It allows companies to provide financial incentives to California consumers in order to obtain their consent to the collection and use of their personal information. Violations of CCPA will result in civil penalties up to $7,500 per violation. CCPA further allows consumers to file lawsuits again a business if a data breach has occurred and the FCC,California Attorney General decides not (or fails) to prosecute the business.
To comply with CCPA and various courts. These proposals include regulationassist many of our customers who are subject to CCPA to comply with CCPA, we may need to modify or adjust the following matters, among others: on-line content, user privacy, taxation, access chargesdesign, development, and so-called “net-neutrality” liabilitydelivery of third-party activitiesour products and jurisdiction. Moreover, we do not know how existing laws relatingservices in a significant way. Such modifications and adjustments may result in significant costs and expenses, and any delay or failure to thesemake such changes may negatively affect our customers’ confidence in or perception of our product and services, result in their ceasing to use our products or services or even lawsuits and significant liabilities.
Similarly, it is possible that in the future, other U.S. and foreign jurisdictions may adopt legislation or regulations that impair our ability to effectively track consumers’ use of our advertising services, such as the FTC’s proposed “Do-Not-Track” standard or other issues will be appliedlegislation or regulations similar to the Internet. The adoption of new laws or the application of existing laws could decrease the growth in the use of the Internet, which could in turn decrease the demand for our solutions that are provided via the Internet, increase our costs of doing business or otherwise have a material adverse effect on our business, results of operations and financial condition. During 2010, the FCC imposed rules of nondiscrimination and transparency,EU Directive 2009/136/EC, commonly referred to as the "net-neutrality" rules, upon wireline broadband providers. Similar transparency requirements were imposed“Cookie Directive,” which directs EU member states to ensure that accessing information on wireless broadband providers, in addition to prohibitions from blocking websites and applications that compete with voice and video telephony services. The FCC’s 2010 net-neutrality rules have been challenged in Federal courts and on January 14, 2014, the U.S. Court of Appeals for the D.C. Circuit upheld the FCC’s transparency rule, but vacated both the nondiscrimination and anti-blocking rules. In response, on February 26, 2015, the FCC adopted new net-neutrality rules, which are expected to be released to the public and become effective later in 2015. Based upon information that has been publicly issued by the FCC, the new rules will, among other things, prohibit broadband providers from blocking or impairing lawful services and devices, ban paid prioritization of certain lawful Internet traffic over others, and impose expanded transparency requirements. These new rules will apply equally to wireline and wireless broadband providers. Itan internet user’s computer, such as through a cookie, is uncertain whether these new net neutrality rules will be challenged in the courts and, if challenged, whether they will be upheld. In the event that these new net-neutrality rules are not upheld it is possible that we may have to pay premium rates to providers for wireline and wireless broadband services. Evenallowed only if the new net neutrality rules survive court challenges, it is uncertain how these rules may be interpretedinternet user has given his or her consent.
The costs and enforced by the FCC; therefore, we cannot predict the practical effectother burdens of these rulescompliance with privacy and related proceedings on our ability to conduct,data security laws and our cost of conducting, our business.
Real or perceived errors or failures in our software and systemsregulations could negatively impact the use and adoption of our results of operationssolutions and growth prospects.reduce overall demand for them. Additionally, evolving concerns regarding
We depend upon
data privacy may cause our customers, or their customers and potential customers, to resist providing the sustained and uninterrupted performance of numerous proprietary and third-party technologiesdata necessary to allow us to deliver our solution portfolio. If onesolutions effectively. Even the perception that personal information is not satisfactorily protected or more of those technologies cannot scale todoes not meet demand, or if there are errors in our execution of any feature or functionality using any such technologies, then our business may be harmed. Because our software is often complex, undetected errors and failures may occur, especially when new versions or updates are made. Despite testing by us, errors or bugs in our solutions may not be found until the software or service is in active use by us or our clients. Moreover, our clientsregulatory requirements could incorrectly implement or inadvertently misuse our solutions, which could result in client dissatisfaction and adversely impact the perceived utilityinhibit sales of our solutions as well as our brand. Any of these real or perceived errors, failures or bugs could result in negative publicity, reputational harm, loss of or delay in market acceptance of our solutions, loss of competitive position or claims by clients for losses sustained by them, all of which, along with the costs of responding to such effects, may have a material adverse effect on our business, results of operations, and financial condition.
Our systems may be subject to security breaches.
Our success depends on the confidence of OEMs, dealers, lenders, major credit reporting agencies and other data providers, and other users of (or participants in) our solutions in our ability to store, process, and transmit confidential information securely (whether over the Internet or otherwise), and to operate our computer systems and operations without significant disruption or failure. We transmit substantial amounts of confidential information, including non-public personal information of consumers, over the Internet. Even if our security measures are adequate, concerns over the security of third-party data that we store, process and transmit, which may be heightened by any well-publicized compromise of security, may deter clients from using our solution portfolio and/or deter vendors from providing their solutions to us. Moreover, if our security measures are breached and unauthorized access is obtained to confidential information, our solutions may be perceived as not being secure and our clients may curtail or stop using our solutions and/or vendors may curtail or stop providing their solutions to us. Any failure of, or lack of confidence in, the security of our solutions could have a material adverse effect on our business, results of operations, and financial condition. Despite our focus on data security, we may not be able to stop unauthorized attempts to gain access to data that we store and process, or to stop disruptions in the transmission or provision of data and communications or other data by us. Advances in computer capabilities, new discoveries in the field of cryptography, or other events or developments could result in a compromise or breach of the algorithms used by our solutions to protect data
contained in our, our clients’ and/or our vendors’ databases and the information being stored, transferred, or processed. Although we generally limit warranties and liabilities relating to data and system security in our client and vendor contracts, they or other third parties may seek to hold us liable for any losses suffered as a result of unauthorized access to their confidential information or non-public personal information of consumers. In addition, we may not have limited our warranties and liabilities sufficiently or have adequate insurance to cover these losses. We may be required to expend significant capital and other resources to protect against security breaches, and/or to alleviate any problems caused by actual or threatened security breaches. Our security measures may not be sufficient to prevent security breaches, and any failure to prevent security breaches and/orcomply with such laws and regulations could lead to adequately alleviate any problems caused by security breaches could have a material adverse effect on our business, results of operations, and financial condition.
Our networks and systems may be vulnerable to interruptions or failure.
From time to time, we have experienced, and may experience in the future, network or system slowdowns and interruptions. These network and system slowdowns and interruptions may interfere with our ability to do business. Although we believe we have made the appropriate upgrades to our various systems, regularly back up data, and take other measures to protect against data loss and system failures, there is still risk that we may lose critical data or experience network failures. Such failures or disruptions may result in lost revenue opportunities for our clients, which could result in litigation against us or a loss of clients. Additionally, we have service level agreements with certain of our clients that may result insignificant fines, penalties, or trigger cancelation rightsother liabilities. Any such decrease in the event of a networkdemand or system slowdownincurred fines, penalties, or interruption. Any of theseother liabilities could have a material adverse effect on our business, results of operations, and financial condition.
Our business operations may be harmed by events beyond our control.
Our business operations are vulnerable to damage or interruption from natural disasters, such as fires, floods and hurricanes, or from power outages, telecommunications failures, terrorist attacks, computer network service outages and disruptions, “denial of service” attacks, computer viruses,malware and ransomware, break-ins, sabotage, employee error or malfeasance, and other similar events beyond our control. For example, the majority of our North American research and development activities, and the research and development and operations activities of our digital marketingadvertising business, are located near significant seismic faults in the Portland, Oregon and Seattle, Washington areas, respectively. The occurrence of any such event at any of our facilities or at any third-party facility utilized by us or our third-party providers could cause interruptions or delays in our business, loss of data, or could render us unable to provide our solution portfolio. In addition, any failure of a third-party to provide the data, products, services, or facilities required by us, as a result of human error, bankruptcy, natural disaster, or other operational disruption, could cause interruptions to our computer systems and operations. The occurrence of any of these events could have a material adverse effect on our business, results of operations, and financial condition.
We may experience difficulties, delays, or unexpected costs and not achieve anticipated benefits and savings from our recently announced business transformation plan.
During the second half of fiscal 2015, we initiated a business transformation plan as described herein under the caption, "Business Transformation Plan" under Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations." We may not realize, in full or in part, the anticipated benefits and savings from the business transformation plan due to unforeseen difficulties, delays, or unexpected costs, which may adversely affect our business and results of operations, and even if the anticipated benefits and savings are substantially realized, there may be consequences or business impacts that were not expected.
We utilize certain key technologies, data, and services from, and integrate certain of our solutions with, third parties and may be unable to replace those technologies, data, and services if they become obsolete, unavailable, or incompatible with our solutions.
We utilize certain key technologies and data from, and/or integrate certain of our solutions with, hardware, software, services, and data of third parties, including Chrome Systems, TrueCar, Microsoft, Google, Yahoo, EMC, Cisco Systems, Kyocera, Experian, Equifax, TransUnion and others. Some of these vendors are also our competitors in various respects. These third-party vendors could, in the future, seek to charge us cost-prohibitive fees for such use or integration or may design or utilize their solutions in a manner that makes it more difficult for us to continue to utilize their solutions, or integrate their technologies with our solutions, in the same manner or at all. Any significant interruption in the supply or maintenance of such third-party hardware, software, services, or data could negatively impact our ability to offer our solutions unless and until we replace the functionality provided by this third-party hardware, software, and/or data. In addition, we are dependent upon these third parties’ ability to enhance their current products, develop new products on a timely and cost-effective basis, and respond to emerging industry standards and other technological changes. There can be no assurance that we would be able to replace the
functionality or data provided by third-party vendors in the event that such technologies or data becomes obsolete or incompatible with future versions of our solutions or are otherwise not adequately maintained or updated. Any delay in or inability to replace any such functionality could have a material adverse effect on our business, results of operations, and financial condition. Furthermore, delays in the release of new and upgraded versions of third-party software applications could have a material adverse effect on our business, results of operations, and financial condition.
Market acceptance of and influence over our products and services, particularly in our Digital Marketing business, is concentrated in a limited number of automobile OEMs and consolidated retailer groups, and we may not be able to maintain or grow these relationships.
Although the automotive retail industry is fragmented, a relatively small number of OEMs, consolidated retailer groups and retailer associations exert significant influence over the market acceptance of automotive retail products and services due to their concentrated purchasing activity, their endorsement or recommendation of specific products and services and/or their ability to define technical standards and certifications. For example, our DMSs are certified to technical standards established by OEMs and certain of our products and services are provided pursuant to OEM-designated endorsement or preferred vendor programs. While automotive retailers are generally free to purchase the solutions of their choosing, when an OEM has endorsed or certified a provider of products or services to its associated franchised automotive retailers and if our solutions lack such certification or endorsement, adoption or retention of our products and services among the franchised dealers of such OEM could be materially impaired.
Some of our products, such as our digital marketing solutions, are primarily sold to or through OEMs and depend on us maintaining strong relationships with those OEMs. Our digital marketing solutions are primarily marketed and delivered through programs sponsored or endorsed by OEMs, the most significant of which is General Motors. We generated approximately 10% of our consolidated and combined revenues from General Motors during the fiscal year ended June 30, 2015. OEM switching costs for digital marketing solutions are generally low and our agreements with such clients generally may be terminated by each OEM on short notice or without cause. The termination of one or more of these relationships, changes in our clients’ advertising budget allocations or marketing strategies, or a change in the economy could result in a decline in the level of digital marketing services that they purchase from us, which in turn could have a material adverse effect on our business, results of operations, and financial condition.
We have clientscustomers in over 100 countries, where we are subject to country-specific risks that could negatively impact our business, results of operations, and financial condition.
During the fiscal yeartwelve months ended June 30, 2015,2018, we generated 20% of our revenues outside of the United States,U.S., and we expect revenues from other countries to continue to represent a significant part of our total revenues in the future.future, and such revenues are likely to increase as a result of our efforts to expand our business in non-U.S. markets. Business and operations in individual countries are subject to changes in local government regulations and policies, including those related to tariffs and trade barriers, investments, taxation, currency exchange controls, and repatriation of earnings.earnings (as described below), and environmental, and employment laws. For example, the referendum vote held in the United Kingdom's ("U.K.") on June 23, 2016 resulted in the decision to leave the European Union ("Brexit"). Our results are subject to the uncertainties and instability in economic and market conditions caused by such vote, including uncertainty regarding the U.K.’s access to the EU Single Market and the wider trading, legal, regulatory, and labor environments, especially in the U.K. and EU. Our results are also subject to the difficulties of coordinating our activities across the countries in which we are active. In addition, our operations in each country are vulnerable to changes in local socio-economic conditions and monetary and fiscal policies, currency exchange rates, intellectual property protection disputes, the settlement of legal disputes through foreign legal systems, the collection of receivables through foreign legal systems, exposure to possible expropriation or other governmental actions, product preference and product requirements, difficulty to effectively establish and expand our business and operations in such markets, unsettled political conditions, possible terrorist attacks, acts of war, natural disasters, and pandemic disease. These and other factors
relating to our international operations may have a material adverse effect on our business, results of operations, and financial condition.
Our indebtedness could negatively impactWe maybe subject to additional taxation to the extent we repatriate earnings from our abilityforeign operations to raise additionalthe U.S. In the event we require more capital to fund our operations and limit our ability to react to changes in the economy orU.S. than is generated by our industry.
In connection with our spin-off from ADP, we entered into debt financing arrangements and borrowed $250.0 million under our term loan facility and $750.0 million under our bridge loan facility. Additionally, we entered into a $300.0 million revolving credit facility, which was undrawn as of June 30, 2015. On October 14, 2014, we completed an offering of 3.30% senior notes with a $250.0 million aggregate principal amount due in October 2019 and 4.50% senior notes with a $500.0 million aggregate principal amount due in October 2024, the net proceeds of which, together with cash on hand, were usedU.S. operations to repay the bridge loan facility. Our indebtedness could have important consequences, including the following:
the ability to obtain additional financing, if necessary, for working capital, capital expenditures,fund acquisitions or other purposesactivities and elect to repatriate earnings from foreign jurisdictions, our effective tax rate may be impaired or the financing may not be available on favorable terms, or at all;
any failure to comply with the obligations of any of our debt instruments could result in an event of default under the agreements governing such indebtedness;
higher as a portion of cash flows will be required to make payment of principal of, and interest on, our indebtedness, reducing the funds that would otherwise be available for operations, future business opportunities, and potential dividends to our stockholders;
our indebtedness will make us more vulnerable to competitive pressures or a downturn in our business or the economy generally; and
our indebtedness may limit our flexibility in responding to changing business and economic conditions.
Our ability to service our indebtedness will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If operating results are not sufficient to service our current or future indebtedness, we may be forced to take actions such as reducing or delaying business activities, acquisitions, investments or capital expenditures, selling assets, restructuring or refinancing debt, reducing or discontinuing dividends we may pay in the future, or seeking additional equity capital. These actions may not be effected on satisfactory terms, or at all.
Our indebtedness and debt service obligations will effectively reduce the amount of funds available for other business purposes and may adversely affect us.
Costs related to the notes are substantial, and our level of indebtedness, including any future borrowings under our revolving credit facility, could reduce funds available for acquisitions, capital expenditures or other business purposes, impact our credit ratings, restrict our financial and operating flexibility, or create competitive disadvantages compared to other companies with lower debt levels. Further, increased indebtedness could make it more difficult for us to satisfy our obligations with respect to our debt, increase our vulnerability to adverse economic or industry conditions and limit our ability to obtain additional financing.result.
Our business, results of operations, and financial condition could be harmed by negative rating actions by credit rating agencies.
Our long-term debt has an investment grade rating.Nationally recognized credit rating organizations have issued credit ratings relating to the Company and our senior notes. In November 2016, our credit ratings were downgraded to non-investment grade. If our initial rating isratings are downgraded further or if ratings agencies indicate that a downgrade may occur, it could limit our business, resultsaccess to new financing, reduce our flexibility with respect to working capital needs, adversely affect the market price of operationsour senior notes, result in an increase in financing costs, including interest expense under certain of our debt instruments, and result in less favorable covenants and financial condition could be negatively impacted and perceptions ofterms in our financial strength could be damaged.future financing arrangements. Any of these outcomes could also negatively impact our relationships with our clients, increase our costs of borrowing,customers or otherwise have a material adverse effect on our business, results of operations, and financial condition. See Note 13, "Debt" to our consolidated financial statements under Item 8 of Part II of this Annual Report on form 10-K for details about the terms of our debt.
We are dependent on our key management, direct sales force,currently, and technical personnel for continued success.expect to be in the future, involved in litigation that is expensive and time consuming and, if resolved adversely, that may materially adversely affect us.
Our global senior management team is concentratedFrom time to time, we may become involved in a small number of key members, and our future success dependsvarious legal proceedings relating to a meaningful extent onmatters incidental to the servicesordinary course of our executive officersbusiness, including patent, copyright, commercial, product liability, employment, class action, whistleblower, antitrust and other key team members, including members of our direct sales forcelitigation and technology staff. Generally, our executive officersclaims, in addition to governmental and employeesother regulatory investigations and proceedings. Such matters can terminate their employment relationship at any time. The loss of any key employeesbe time-consuming, divert management’s attention and resources, cause us to incur significant expenses or our inabilityliability and/or require us to attract or retain other qualified personnel could materially harmchange our business practices. Because of the potential risks, expenses and prospects.uncertainties of litigation, we may, from time to time, settle disputes, even where we have meritorious claims or defenses, by agreeing to settlement agreements.
We rely primarily on our direct sales forceThe Company is currently involved in several lawsuits that set forth allegations of anti-competitive conduct by the Company and anti-competitive agreements between the Company and Reynolds and Reynolds relating to sellthe manner in which the defendants control access to, and allow integration with, their respective DMSs. Any negative outcome from any such lawsuits could result in payments of substantial monetary damages or fines, or undesirable changes to our products or business practices, and servicesaccordingly our business, financial condition, or results of operations could be materially and adversely affected. Although the results of such lawsuits and claims cannot be predicted with certainty, we do not believe that the final outcome of these matters relating to automotive retailersthe manner in which we control access to, and OEMs. We expectallow integration with, our DMS, that we currently face will need to hire additional sales, customer service, integration and training personnel in the near-term and beyond if we are to achieve revenue growth in the future. If we fail to attract qualified and productive sales and service personnel, or if we suffer unanticipated losses of such personnel, it could have a material adverse effect on our business, financial condition, or results of operations,operations. We believe these cases are without merit and financial condition.intend to continue to contest the claims in these cases vigorously.
Competition for qualified personnel in the technology industryBecause litigation is intense, and we compete for technical personnel with other technology companies that have greater financial and other resources than we do. Our future success will depend in large part on our ability to attract, retain and motivate highly qualified technical personnel, andinherently unpredictable, there can be no assuranceassurances that a favorable final outcome will be obtained in all our cases, and we are able to do so. Any difficulty in hiring or retaining needed personnel, or increased costs related thereto, couldcannot assure you that the results of any of these actions will not have a material adverse effect on our business, financial condition, results of operations and financial condition.
Our revenue, operating results, and profitability will vary from quarter to quarter,prospects. For more information regarding the litigation in which may result in volatility in our stock price.
Our revenue, operating results, and profitability have varied in the past and are likely to continue to vary significantly from quarter to quarter, which may lead to volatility in our stock price. These variations are due to several factors, including:
our ability to timely and effectively implement our business transformation plan;
the timing, size, and nature of our client revenues (particularly with respect to our Digital Marketing business) and any losses with respect thereto;
product and price competition regarding our products and services;
the timing of introduction and market acceptance of new products, services or product enhancements by us, or our competitors;
changes in our operating expenses;
foreign currency fluctuations;
the timing of acquisitions or divestitures of businesses, products, and services;
the seasonality of car sales;
personnel changes; and
fluctuations in economic and financial market conditions.
If our long-lived assets and goodwill become impaired we may be required to record a significant non-cash charge to earnings, which would negatively impact our results of operations.
Under generally accepted accounting principles in the United States (“GAAP”), we review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset group may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset group. Estimates of future cash flows are based on a long-term financial outlook of our operations. Actual performance in the near-term or long-term could be materially different from these forecasts, which could impact future estimates and the recorded value of long-lived assets.
Goodwill is not amortized, but is instead tested for impairment annually and whenever events or changes in circumstances indicate the carrying value may not be recoverable. Factors that may impact our annual impairment test or constitute changes in circumstances indicating that the carrying value of our goodwill may not be recoverable include declines in our stock price, market capitalization, cash flow expectations, or slower growth rates in our industry. Estimates of future cash flows are based on long-term financial outlook of our operations.
We will continue to monitor and evaluate the carrying value of our long-lived assets and goodwill. In the event we have to recognize an impairment, any such impairment charge could have a material adverse effect on our results of operations.
We may be unable to develop and bring products and services in development to market, or bring new products and services to market in a timely manner or at all.
Our success depends in part upon our ability to bring to market new products and services, and enhancements thereto that address evolving client demands. For example, our digital marketing solutions must effectively address the market shift to mobile technology. The time, expense, and effort associated with developing and offering new and enhanced products and services may be greater than anticipated. The length of the development cycle varies depending on the nature and complexity of the product, the availability of development, product management, and other internal resources and the role, if any, of strategic partners. If we are unable to develop and bring to market additional products and services, and enhancements thereto,currently involved, see the information set forth under “Legal Proceedings” in a timely manner, or at all, we could lose market share to competitors who are able to offer these new products and services, which could have a material adverse effectItem 3 of Part I of this Annual Report on our business, results of operations, and financial condition.
Our failure or inability to execute any element of our business strategy, including our business transformation plan, could negatively impact our business, results of operations, or financial condition.
Our business, results of operations, and financial condition depend on our ability to execute our business strategy, which includes the following key elements:
executing on our business transformation plan;
deepening relationships with our existing client base;
continuing to expand our client base;
strengthening and extending our solutions portfolio;
driving additional operational efficiency; and
selectively pursuing strategic acquisitions.
We may not succeed in implementing a portion or all of our business strategy, and even if we do succeed, our strategy may not have the favorable impact on our business, results of operations, or financial condition that we anticipate. We may not be able to effectively manage the expansion of our business or achieve the rapid execution necessary to fully avail ourselves of the market opportunity for our solution portfolio. If we are unable to adequately implement our business strategy, our business, results of operations, and financial condition could suffer a material adverse effect.Form 10-K.
We may be unable to adequately protect, and we may incur significant costs in defending, our intellectual property and other proprietary rights.
Our success depends, in large part, on our ability to protect our intellectual property and other proprietary rights. We rely upon a combination of trademark, trade secret, copyright, patent and unfair competition laws, as well as license agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. In addition, we attempt to protect our intellectual property and proprietary information by requiring certain of our team members and consultants to enter into confidentiality, non-competition and assignment of inventions agreements. To the extent that our intellectual property and other proprietary rights are not adequately protected, third parties might gain access to our proprietary information, develop and market products and services similar to ours or use trademarks similar to ours. Existing U.S. federal and state intellectual property laws offer only limited protection. Moreover, the laws of some foreign countries in which we market our products and services afford little or no effective protection of our intellectual property. If we resort to legal proceedings to enforce our
intellectual property rights or to determine the validity and scope of the intellectual property or other proprietary rights of others, the proceedings could be burdensome and expensive, and we may not prevail. The failure to adequately protect our intellectual property and other proprietary rights, or manage costs associated with enforcing those rights, could have a material adverse effect on our business, results of operations, and financial condition.
Claims that we or our technologies infringe upon the intellectual property or other proprietary rights of a third party may require us to incur significant costs, enter into royalty or licensing agreements, or develop or license substitute technology.
We have in the past and may in the future be subject to claims that our technologies in our products and services infringe upon the intellectual property or other proprietary rights of a third party. In addition, the vendors providing us with technology that we use in our own technology could become subject to similar infringement claims. Although we believe that our products and services do not infringe any intellectual property or other proprietary rights, we cannot assure you that our products and services do not, or that they will not in the future, infringe intellectual property or other proprietary rights held by others. Any claims of infringement could cause us to incur substantial costs defending against the claim, even if the claim is without merit, and could distract our management from our business. Moreover, any settlement or adverse judgment resulting from the claim could require us to pay substantial amounts, obtain a license to continue to use the products and services that are the subject of the claim, and/or otherwise restrict or prohibit our use of the technology. There can be no assurance that we would be able to obtain a license on commercially reasonable terms, or at all, from the third party asserting any particular claim, that we would be able to successfully develop alternative technology on a timely basis, if at all, or that we would be able to obtain a license from another provider of suitable alternative technology to permit us to continue offering, and our clientscustomers to continue using, the products and services. In addition, we generally provide in our clientcustomer agreements for certain products and services that we will indemnify our clientscustomers against third-party infringement claims relating to technology that we provide to those clients,customers, which could obligate us to pay damages if the products and services were ever found to be infringing.
Infringement claims asserted against us, our vendors, or our clientscustomers could have a material adverse effect on our business, results of operations, and financial condition.
We have made strategic acquisitions and formed strategic alliances in the past and expect to do so in the future. If we are unable to find suitable acquisitions or alliance partners that strengthen our value proposition to clientscustomers or to achieve the expected benefits from such acquisitions or alliances, there could be a material adverse effect on our business, results of operations, and financial condition.
Since 2000, weWe have completed 31 acquisitions. These have rangedhistorically pursued growth through acquisitions, ranging from acquisitions of small start-up companies that provide a discrete application to a handful of clients,customers, to acquisitions of substantial companies with more mature solutions and a larger clientcustomer base, such as our acquisition of Kerridge in 2005, which facilitated our international expansion, and our acquisition of Cobalt in 2010, which is the foundation of our Digital Marketingadvertising business. As part of our ongoing business strategy to expand solutions offerings, acquire new technologies, and strengthen our value proposition to clients,customers, we frequently engage in discussions with third parties regarding, and enter into agreements relating to, possible acquisitions, strategic alliances, and joint ventures. However, there may be significant competition for acquisition, alliance, and joint venture targets in our industry, or we may not be able to identify suitable candidates, or negotiate attractive terms, or obtain necessary regulatory approvals for such transactions in the future. Acquisitions, strategic alliances, and joint ventures also involve numerous other risks, including potential exposure to assumed litigation and unknown environmental and other liabilities, as well as undetected internal control, regulatory or other issues, or additional costs not anticipated at the time the transaction was approved or completed.
Even if we are able to complete acquisitions or enter into alliances and joint ventures that we believe will provide attractive growth opportunities, such transactions are inherently risky. Significant risks from these transactions include risks relating to:
integration and restructuring costs, both one-time and ongoing;
developing and maintaining sufficient controls, policies, and procedures;
diversion of management’s attention from ongoing business operations;
establishing new informational, operational, and financial systems to meet the needs of our business;
losing key employees, clients,customers, and vendors;
failing to achieve anticipated synergies, including with respect to complementary solutions; and
unanticipated or unknown liabilities.
If we are not successful in completing acquisitions in the future, we may be required to reevaluate our acquisition strategy. We also may incur substantial expenses and devote significant management time and resources in seeking to complete acquisitions. In addition, we could use substantial portions of our available cash to pay all or a portion of the purchase prices of future acquisitions. If we do not achieve the anticipated benefits of our acquisitions as rapidly or to the extent anticipated by our management and financial or industry analysts, others may not perceive the same benefits of the acquisition as we do. If these risks materialize, there could be a material adverse effect on our business, results of operations, and financial condition.
Our future acquisitions may involve the issuance of our equity securities as payment, in part or in full, for the businessesbusiness or assets acquired, which would dilute our existing stockholders’stockholders' ownership interests. Future acquisitions may also decrease our earnings or earnings per share and the benefits derived by us from an acquisition might not outweigh or exceed the dilutive effect of the acquisition. We also may incur additional indebtedness, issue equity, have future impairment of assets or suffer adverse tax and accounting consequences in connection with any future acquisitions.
We could be suedliable for contract or product liability claims, and disputes over such lawsuitsclaims may disrupt our business, divert management’s attention, or have a negative impact on our financial results.
We provide limited warranties to purchasers of our products and services. In addition, errors, defects or other performance problems in our products and services, including with respect to data that we store, process and provide in connection with our products and services, could result in financial or other damages to our clientscustomers or consumers. There can be no assurance that any limitations of liability set forth in our contracts would be enforceable or would otherwise protect us from liability for damages. We maintain general liability insurance coverage, including coverage for errors and omissions in excess of the applicable deductible amount; however, there can be no assurance that this coverage will continue to be available on acceptable terms, in sufficient amounts to cover one or more large claims or at all, or that the insurer will not deny coverage for any future claim. The successful assertion of one or more large claims against us that exceeds available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, results of operations, and financial condition. Furthermore, any litigation, regardless of its outcome, could result in substantial cost to us and divert management’s attention from our operations and could have a material adverse effect on our business, results of operations, and financial condition. In addition, some of our products and services are business-critical for our clients,customers, and a failure or inability to meet a client’scustomer’s expectations could seriously damage our reputation and negatively impact our ability to retain existing business or attract new business.
Because we recognize a majority of our revenue from our subscription-based products and services over the term of the subscription, downturns or upturns in new business may not be immediately reflected in our operating results.
We generally recognize a majority of our revenue from sales of our subscription-based products and services ratably over the term of the subscription contract. As a result, the majority of our quarterly revenue is attributable to service contracts entered into during previous quarters. A decline in new or renewed service agreements in any one quarter will not be fully reflected in our revenue in that quarter but will harm our revenue in future quarters. Consequently, the effect of significant downturns in sales and market acceptance of our subscription services in a particular quarter may not be fully reflected in our operating results until future periods. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, because revenue from new subscription contracts, and from additional orders under existing subscription contracts, must be recognized over the applicable subscription term. In addition, delays or failures in deployment of our subscription services may prevent us from recognizing subscription revenue for indeterminate periods of time. Further, we may experience unanticipated increases in costs associated with providing our subscription services to clientscustomers over the term of our subscription contracts as a result of inaccurate internal cost projections or other factors, which may harm our operating results.
Changes in, or interpretations of, accounting principles may negatively impact our financial position and results of operations.
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States ("GAAP"). These principles are subject to interpretation by the SEC and other organizations that develop and interpret accounting principles. New accounting principles arise regularly, implementation of which can have a significant effect on and may increase the volatility of our reported operating results and may even retroactively affect previously reported operating results. In addition, the implementation of new accounting principles may require significant changes to our customer and vendor contracts, business processes, accounting systems, and internal controls over financial reporting. The costs and
effects of these changes could adversely impact our operating results, and difficulties in implementing new accounting principles could cause us to fail to meet our financial reporting obligations.
For example, in May 2014, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes nearly all existing GAAP revenue recognition guidance, changes how and when revenue is recognized, and provides guidance on how to account for costs related to contracts with customers. This new guidance became effective for us on July 1, 2018. We are implementing changes to our accounting systems and processes, internal controls, and disclosures to comply with the requirements of the new guidance. Our assessment of this new revenue recognition guidance and its impact is further discussed in Note 3, “New Accounting Policies” to our consolidated financial statements included under Item 8 of Part II of this Annual Report on Form 10-K, under “Recently Issued Accounting Pronouncements,” along with discussions of other new accounting standards.
We may experience foreign currency gains and losses.
We conduct a significant number of transactions and hold cash in currencies other than the U.S. dollar. Changes in the value of major foreign currencies, particularly the Canadian dollar, Euro, Pound Sterling, and Renminbi relative to the U.S. dollar, can significantly affect our assets, revenues, and operating results. Generally, our revenues are adversely affected when the dollar strengthens relative to other currencies and are positively affected when the dollar weakens. Similarly, cash, other bank deposits, and other assets held in foreign currency are adversely affected when the dollar strengthens relative to other currencies and are positively affected when the dollar weakens.
We may implement a program which primarily utilizes foreign currency forward contracts to offset the risks associated with these foreign currency exposures that we may suspend from time to time. As a part of this program, we would enter into foreign currency forward contracts so that increases or decreases in our foreign currency exposures are offset by gains or losses on the foreign currency forward contracts in order to mitigate the risks and volatility associated with our foreign currency transaction gains or losses. With respect to our international operations, we expect that we will realize gains or losses with respect to our foreign currency exposures, net of gains or losses from any foreign currency forward contracts. For example, we will experience foreign currency gains and losses in certain instances if it is not possible or cost effective to hedge our foreign currency exposures or if we suspend our foreign currency forward contract program. Our ultimate realized loss or gain with respect to currency fluctuations will generally depend on the size and type of cross-currency exposures that we enter into, the currency exchange rates associated with these exposures and changes in those rates, whether we have entered into foreign currency forward contracts to offset these exposures and other factors. All of these factors could materially impact our results of operations, financial condition, and cash flows, the timing of which is variable and generally outside of our control.
We may have exposure to unanticipated tax liabilities, which could harm our business, results of operations, financial condition, and prospects.
Our global business operations will subject us to income taxes as welland as non-income based taxes, in both the United StatesU.S. and various foreign jurisdictions. The computation of the provision for income taxes and other tax liabilities is complex, as it is based on the laws of numerous taxing jurisdictions and requires significant judgment regarding the application of complicated rules governing accounting for tax provisions under GAAP. ProvisionThe provision for income taxes may require forecasts of effective tax rates for the year, which include assumptions and forward looking financial projections, including the expectations of profit and loss by jurisdiction. Various items cannot be accurately forecasted and future events may materially differ from our forecasts. Our provision for income tax cancould be materially impacted for example, by a number of factors, including changes in the geographical mix of our profits and losses, changes in our business, such as internal restructuring and acquisitions, changes in tax laws and accounting guidance and other regulatory, legislative or judicial developments, tax audit determinations, changes in our uncertain tax positions, changes in our intent and capacityability to permanentlyindefinitely reinvest foreign earnings, changes in our ability to utilize foreign tax credits, changes to our transfer pricing practices, tax deductions attributed to equityassociated with stock-based compensation, and changes in our need for a valuation allowance for deferred tax assets.valuation allowances. Any changes in corporate income tax laws or any implementation of tax laws relating to corporate tax reform, could significantly impact our overall tax liability. For these reasons, our actual income taxes or other tax liabilities in a future period may be materially different than our provisions for anticipatedincome tax obligations.provision.
In addition, changes in tax laws or tax rulings may have a significantlysignificant adverse impact on our effective tax rate. Further, in the ordinary course of a global business, there are many intercompany transactions and calculations where the ultimate tax determination is uncertain.
In the event that changes in tax laws negatively impact our effective tax rates, our provision for taxes, or generate unanticipated tax liabilities, our business, results of operations, and financial condition could suffer a material adverse effect.
Changes in tax laws or tax rulings could materially affect our financial position, results of operations, and cash flows.
The income and non-income tax regimes we are subject to or operate under are unsettled and may be subject to significant change. Changes in tax laws or tax rulings, or changes in interpretations of existing laws, could materially affect our financial position, results of operations, and cash flows. For example, changes to U.S. tax laws enacted in December 2017 had a significant impact on our tax obligations and effective tax rate for fiscal 2018 and beyond. In addition, many countries in Europe, as well as a number of other countries and organizations, have recently proposed or recommended changes to existing tax laws or have enacted new laws that could significantly increase our tax obligations in many countries where we do business or require us to change the manner in which we operate our business. The Organization for Economic Cooperation and Development has been working on a Base Erosion and Profit Shifting Project and is expected to continue to issue guidelines and proposals that may change various aspects of the existing framework under which our tax obligations are determined in many of the countries in which we do business. Due to our international business activities, these types of changes to the taxation of our activities could increase our worldwide effective tax rate and harm our financial position, results of operations, and cash flows.
Uncertainties in the interpretation and application of the 2017 Tax Cuts and Jobs Act could materially affect our tax obligations and effective tax rate.
The 2017 Tax Cuts and Jobs Act (the "Tax Reform Act") was enacted on December 22, 2017, and significantly affected U.S. federal tax law by changing how the U.S. imposes income tax on multinational corporations along with other changes. The U.S. Department of Treasury will likely issue regulations and interpretative guidance. In addition, the Tax Reform Act has U.S. state and local implications and additional guidance and interpretations are anticipated from state taxing authorities. The issuance of additional regulations and interpretations may significantly impact how we will apply the law and impact our results of operations in the period issued.
The Tax Reform Act requires complex computations not previously provided in U.S. tax law. Compliance with the Tax Reform Act and the accounting for such provisions require accumulation of information not previously required or regularly produced. We have provided estimates of the effect of the Tax Reform Act in our financial statements. Due to additional regulatory and interpretive guidance issued by the applicable taxing authorities, the ultimate tax consequences of the Tax Reform Act may be different from our current estimates.
There can be no assurance that we will have access to the capital markets on terms acceptable to us.
From time to time we may need to access the long-term and short-term capital markets to obtain financing. Although we believe that the sources of capital currently in place will permit us to finance our operations for the foreseeable future on acceptable terms and conditions, our access to, and the availability of, financing on acceptable terms and conditions in the future or at all will be impacted by many factors, including, but not limited to:
our financial performance;
our credit ratings;
the liquidity of the overall capital markets; and
the state of the economy.
There can be no assurance that we will have access to the capital markets on terms acceptable to us.
Risks RelatingOur current level of indebtedness and our plan to Our Separation from ADPsubstantially increase our level of indebtedness could negatively impact our ability to raise additional capital to fund our operations and limit our ability to react to changes in the economy or our industry.
We have experiencedentered into the following debt financing arrangements. In connection with the spin-off in 2014, we borrowed $250.0 million under a term loan facility that will mature on September 16, 2019; we entered into a $300.0 million revolving credit facility, which was undrawn as of June 30, 2017; and we completed an offering of 3.30% senior notes with a $250.0 million aggregate principal amount due in October 2019 and 4.50% senior notes with a $500.0 million aggregate principal amount due in October 2024. In December 2015, we borrowed $250.0 million under a term loan facility that will continuemature on December 14, 2020. In December 2016, we borrowed an additional $400.0 million under a term loan facility that will mature on December 9, 2021. In February 2017, we announced our plan to experience increased costs afterreturn approximately $750.0 million to $1.0 billion of capital to shareholders each calendar year through 2019, via a combination of dividends and share repurchases. We announced that we expect to fund this return of capital, through a combination of free cash flow and incremental borrowings intended to bring leverage, measured as financial debt, net of cash, divided by adjusted EBITDA, to a range of 2.5x to 3.0x over the separation or as a resultterm of the separation.
We have had to replicate certain facilities, systems, infrastructureplan. In May 2017, we completed an offering of 4.875% senior notes with a $600.0 million aggregate principal amount due in June 2027 and personnel to whichin June 2018, we no longer have access after our separation from ADP. We also have had to make investments to operate without access to ADP’s existing operational and administrative infrastructure. These initiatives are costly to implement. Due to the scope and complexitycompleted an offering of the underlying projects, the5.875% senior notes with a $500.0 million aggregate principal amount of total costs cannot be estimated at this time.
ADP historically performed many important corporate functions for our operations, including information technology support, treasury, accounting, financial reporting, tax administration, human resource administration, procurement, security, real estate and other services priordue in June 2026. See Note 13, ”Debt“ to our separation. We paid ADP for these services on a cost-allocation basis. ADP continues to provide someconsolidated financial statements under Item 8 of these services to us on a short-term, transitional basis, for which we pay ADP fees generally based on the applicable allocable costPart II of ADP’s services to the Dealer Services business prior to the spin-off. As we operate these functions independently, if we do not have our own adequate systems and business functions in place, or are unable to obtain them from other providers, we may not be able to operate our business effectively or at comparable costs, and our profitability may decline.
Our accounting and other management systems and resources may not be adequately prepared to meet the financial reporting and other requirements to which we are subject following the spin-off.
Our financial results previously were included within the consolidated results of ADP, and our reporting and control systems were appropriate for those of subsidiaries of a public company. Prior to the spin-off, we were not directly subject to reporting and other requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Sarbanes-Oxley Act of 2002. As a result of the spin-off, we are directly subject to reporting and other obligations under the Exchange Act. Further, beginning with ourthis Annual Report on Form 10-K for details about the fiscal year ending June 30, 2016, weterms of our debt.
Our current indebtedness and the expected increase in our indebtedness could have important consequences, including, but not limited to:
increasing our vulnerability to, and reducing our flexibility to plan for and respond to, general adverse economic and industry conditions and changes in our business and the competitive environment;
an increasingly substantial portion of our cash flow from operations will be requireddedicated to making payments of principal
of, and interest on, our indebtedness, thereby reducing the availability of funds that would otherwise be available to fund working capital, capital expenditures, acquisitions, dividends, share repurchases or other corporate purposes;
increasing our vulnerability to further downgrades of our credit rating, which could adversely affect our interest rates on existing indebtedness, cost of additional indebtedness, liquidity and access to capital markets;
restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
the introduction of secured debt to our capital structure;
making it more difficult for us to repay, refinance or satisfy our obligations with respect to our debt;
limiting or eliminating our ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions, or other purposes; and
any failure to comply with Section 404the obligations of any of our debt instruments could result in an event of default under the agreements governing such indebtedness, which in turn, if not cured or waived, could result in the acceleration of the Sarbanes Oxley Actapplicable debt, and may result in the acceleration of 2002,any other debt to which a cross-acceleration or cross-default provision applies.
Our ability to service our current and future levels of indebtedness will require annual management assessments of the effectiveness of our internal control over financial reporting and a report by our independent registered public accounting firm addressing the effectiveness of our internal control over financial reporting. These and other obligations will place significant demands on our management, administrative and operational resources, including accounting and IT resources.
To comply with these requirements, we continue to upgrade our systems, including computer hardware infrastructure, implementing additional financial and management controls, reporting systems and procedures and hiring additional accounting, finance, and IT staff. We have, and will continue to incur additional annual expenses related to these steps, including with respect to,depend upon, among other things, directorour future financial and officer liability insurance, director fees, expenses associated withoperating performance, which will be affected by prevailing economic conditions, including the interest rate environment, and financial, business, regulatory and other factors, some of which are beyond our SEC reporting obligations, transfer agent fees, increased auditingcontrol.
There is no assurance that we will generate cash flow from operations or that future debt or equity financings will be available to us to enable us to pay our indebtedness or to fund other needs and legal fees, and similar expenses, which expenseswe may be significant. Ifforced to take actions such as reducing or delaying business activities, acquisitions, investments or capital expenditures, selling assets, restructuring or refinancing debt, reducing or discontinuing dividends we are unablemay pay in the future, or seeking additional equity capital. These actions may not be effected on satisfactory terms, or at all. Any inability to upgradegenerate sufficient cash flow or refinance our financial and management controls, reporting systems, IT systems, and procedures in a timely and effective fashion, our ability to comply with our financial reporting requirements and other rules that apply to reporting companies could be impaired. Any failure to achieve and maintain effective internal controlsindebtedness on favorable terms could have a material adverse effect on our business, results of operations, and financial condition.
Being a public company subject to additional laws, rules and regulations has and will continue to require the investment of additional resources to ensure ongoing compliance with these laws, rules, and regulations.
The spin-off could result in significant tax liability to ADP, and we could be required to indemnify ADP for such liability.
ADP obtained an opinion from Paul, Weiss, Rifkind, Wharton & Garrison LLP, its counsel, to the effect that, based on certain facts, assumptions, representations and undertakings set forth in the opinion, the spin-off qualifies as a transaction that is tax-free under Section 355 and other related provisions of the Code. ADP also received a private letter ruling from the U.S. Internal Revenue Service ("IRS") with respect to certain discrete and significant issues arising in connection with the transactions affected in connection with the spin-off.
The opinion and the ruling were based upon various factual representations and assumptions, as well as certain undertakings made by ADP and CDK. If any of those factual representations or assumptions are untrue or incomplete in any material respect, any undertaking is not complied with, or the facts upon which the opinion and the ruling were based are materially different from the facts at the time of the spin-off, the spin-off may not qualify for tax-free treatment. Although a private letter ruling from the IRS generally is binding on the IRS, the IRS did not rule that the spin-off satisfies every requirement for a tax-free distribution. Opinions of counsel are not binding on the IRS or the courts. As a result, the conclusions expressed in an opinion of counsel could be challenged by the IRS, and if the IRS prevails in such challenge, the tax consequences to you could be materially less favorable.
If the spin-off were determined not to qualify as a tax-free transaction under Section 355 of the Code, each United States holder generally would be treated as receiving a distribution taxable as a dividend in an amount equal to the fair market value of the shares of our common stock received by the holder. In addition, ADP generally would recognize gain with respect to the spin-off and certain related transactions, and we could be required to indemnify ADP for any resulting taxes and related expenses, which could be material.
The spin-off and certain related transactions could be taxable to ADP if CDK or its stockholders were to engage in certain transactions after the spin-off. In such cases, ADP and/or its stockholders could incur significant U.S. federal income tax liabilities, and we could be required to indemnify ADP for any resulting taxes and related expenses, which could be material.
We are agreeing to certain restrictions to preserve the treatment of the spin-off as tax-free to ADP and its stockholders, which will reduce our strategic and operating flexibility.
If the spin-off fails to qualify for tax-free treatment as discussed above, it will be treated as a taxable dividend to ADP stockholders in an amount equal to the fair market value of our stock issued to ADP stockholders. In that event, ADP would be required to recognize a gain equal to the excess of the sum of the fair market value of our stock on the spin-off date and the amount of cash received in the cash distribution over ADP’s tax basis in our stock.
In addition, current tax law generally creates a presumption that the spin-off would be taxable to ADP, but not to its stockholders, if we or our stockholders were to engage in a transaction that would result in a 50% or greater change by vote or by value in our stock ownership during the two-year period beginning on September 30, 2014, unless it is established that the spin-off and the transaction are not part of a plan or series of related transactions to effect such a change in ownership. In the case of such a 50% or greater change in our stock ownership, tax imposed on ADP in respect of the spin-off would be based on the fair market value of our stock on the spin-off date over ADP’s tax basis in our stock.
Under the tax matters agreement that we have entered into with ADP, we are generally prohibited, except in specified circumstances, for specified periods of up to 24 months following the spin-off, from
issuing, redeeming or being involved in other significant acquisitions of our equity securities;
transferring significant amounts of our assets;
amending our certificate of incorporation or by-laws;
failing to engage in the active conduct of a trade or business; or
engaging in certain other actions or transactions that could jeopardize the tax-free status of the spin-off.
In connection with our separation from ADP, we and ADP incurred potentially significant indemnity obligations. If we are required to act on these indemnities to ADP, we may need to divert cash to meet those obligations, which could have a material adverse effect on our business, results of operations, and financial condition. In the case of ADP’s indemnity, there can be no assurance that the indemnity will be sufficient to insure us against the full amount of such liabilities or that ADP will be able to satisfy its indemnification obligations in the future.
Under the tax matters agreement that we have entered into with ADP, we agreed generally to indemnify ADP for taxes and related losses it suffers as a result of the spin-off failing to qualify as a tax-free transaction, if the taxes and related losses are attributable to:
direct or indirect acquisitions of our stock or assets (regardless of whether we consent to such acquisitions);
negotiations, understandings, agreements, or arrangements in respect of such acquisitions; or
our failure to comply with certain representations and undertakings from us, including the restrictions described in the preceding risk factor.
Our indemnity will cover both corporate level taxes and related losses imposed on ADP in the event of a 50% or greater change in our stock ownership described in the preceding risk factor, as well as taxes and related losses imposed on both ADP and its stockholders if, due to our representations or undertakings being incorrect or violated, the spin-off is determined to be taxable for other reasons.
Indemnities that we may be required to provide ADP may be significant and could have a material adverse effect on our business, results of operations, and financial condition, particularly indemnities relating to certain actions that could impact the tax-free nature of the spin-off. Third parties could also seek to hold us responsible for any of the liabilities that ADP has agreed to retain. Further, there can be no assurance that the indemnity from ADP will be sufficient to protect us against the full amount of such liabilities, or that ADP will be able to fully satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering from ADP any amounts for which we are held liable, we may be temporarily required to bear these losses ourselves. Each of these risks could have a material adverse effect on our business, results of operations, and financial condition.
We potentially could have received better terms from unaffiliated third parties than the terms we received in our agreements with ADP.
The agreements we entered into with ADP in connection with the separation, including the separation and distribution agreement and other agreements, were negotiated in the context of the separation while we were still a wholly owned subsidiary of ADP. Accordingly, during the period in which the terms of those agreements were negotiated, we did not have an independent board of directors or a management team independent of ADP. As a result, the terms of those agreements may not reflect terms that would have resulted from arm’s-length negotiations between unaffiliated third parties. The terms of the agreements negotiated in the context of the separation relate to, among other things, the allocation of assets, liabilities, rights, and other obligations between ADP and us. Arm’s-length negotiations between ADP and an unaffiliated third party in another form of transaction, such as a buyer in a sale of a business transaction, may have resulted in more favorable terms to us.
Risks Relating to Our Common Stock
The market price of our shares may fluctuate widely.
The market price of our common stock may fluctuate widely, depending upon many factors, some of which may be beyond our control, including:
our business profile and market capitalization may not fit the investment objectives of our stockholders, and our common stock may not be included in some indices, causing certain holders to sell their shares;
a shift in our investor base;
the actions of significant stockholders;
our quarterly or annual earnings, or those of other companies in our industry;
actual or anticipated fluctuations in our operating results;
announcements of acquisitions or dispositions and strategic moves, such as acquisitions or restructurings, by us or our competitors of significant acquisitions or dispositions;competitors;
the failure of securities analysts to cover our common stock;
the operating and stock price performance of other comparable companies;
changes in expectations concerning our future financial performance and the future performance of our industry in general, including financial estimates and recommendations by securities analysts;
differences between our actual financial and operating results and those expected by investors and analysts;
changes in the regulatory framework of our industry and regulatory action;
changes in general economic or market conditions; and
the other factors described in these “Risk Factors” and elsewhere in this Annual Report on Form 10-K.
Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the trading price of our common stock.
Our revenue, operating results, and profitability vary from quarter to quarter, which may result in volatility in our stock price.
Our revenue, operating results, and profitability have varied in the past and are likely to continue to vary significantly from quarter to quarter, which may lead to volatility in our stock price. These variations are due to several factors, including:
our ability to timely and effectively implement our business transformation plan;
the timing, size, and nature of our customer revenues (particularly with respect to our advertising business) and any losses with respect thereto;
product and price competition regarding our products and services;
the timing of introduction and market acceptance of new products, services or product enhancements by us, or our competitors;
changes in our operating expenses;
foreign currency fluctuations;
the timing of acquisitions or divestitures of businesses, products, and services;
the seasonality of car sales;
personnel changes; and
fluctuations in economic and financial market conditions.
There is substantial volatility in the domestic and international stock markets that could negatively impact our stock regardless of our actual operating performance.
The stock market in general and the market for technology companies in particular have experienced extreme price and volume fluctuations. These fluctuations have often been unrelated or disproportionate to operating performance. These forces reached unprecedented levels in the second half of 2008 through the first quarter of 2009, resulting in the bankruptcy or acquisition of, or government assistance to, several major domestic and international financial institutions and a material decline in economic conditions. In particular, the U.S. equity markets experienced significant price and volume fluctuations that
have affected the market prices of equity securities of many technology companies. These broad market and industry factors could materially and adversely affect the market price of our stock, regardless of our actual operating performance.
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Due to the potential volatility of our stock price, we may therefore be the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources from our business.
Holders of our common stock may be adversely affected through the issuance of more senior securities or through dilution.
In addition to theour existing debt financing arrangements, we entered into as parthave announced that we expect to incur additional incremental borrowings related to our return of the spin-off from ADP, wecapital plan. We may also need to incur additional debt or issue equity in order to fund working capital, capital expenditures and product development requirements, maintain debt capacity levels, repurchase shares of our common stock, or to make acquisitions and other investments. If we raise funds through the issuance of debt or equity, any debt securities or preferred stock issued will have liquidation rights, preferences, and privileges senior to those of holders of our common stock. If we raise funds through the issuance of common equity, the issuance will dilute yourthe ownership interest.interests of our stockholders. We cannot assure youour investors or potential investors that debt or equity financing will be available to us on acceptable terms, if at all. If we are not able to obtain sufficient financing, we may be unable to maintain or grow our business. It may also be more expensive for us to raise funds through the issuancebusiness or complete our return of additional debt than the cost of raising funds or issuing debt for our business while we were part of ADP.capital plan as expected.
Provisions in our certificate of incorporation and by-laws and of Delaware law and our tax matters agreement may prevent or delay an acquisition of our Company.
Our certificate of incorporation and by-laws and Delaware law contain provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making them more burdensome to the bidder and to encourage prospective acquirers to negotiate with our Board of Directors rather than to attempt a hostile takeover. These provisions include, among others:
the inability of our stockholders to act by written consent; and
the right of our Board of Directors to issue preferred stock without stockholder approval.
We have not opted out of the protections afforded by Section 203 of the Delaware General Corporation Law, which provides that a stockholder acquiring more than 15% of our outstanding voting shares (an “Interested Stockholder”) but less than 85% of such shares may not engage in certain business combinations with us for a period of three years subsequent to the date on which the stockholder became an Interested Stockholder unless, prior to such date, our Board of Directors approves either the business combination or the transaction which resulted in the stockholder becoming an Interested Stockholder or the business combination is approved by our Board of Directors and by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the Interested Stockholder.
We believe these provisions protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our Board of Directors and by providing our Board of Directors with more time to assess any acquisition proposal, and are not intended to make our Company immune from takeovers. However, these provisions apply even if the offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that our boardBoard of directorsDirectors determines is not in the best interests of our Company and our stockholders.
Under the tax matters agreement that we entered into with ADP, we are generally prohibited, except in specified circumstances, for specified periods of up to 24 months following the spin-off from consenting to certain acquisitions of significant amounts of our stock.
As discussed above, an acquisition or further issuance of our equity securities could trigger a tax to ADP, requiring us under the tax matters agreement to indemnify ADP for such tax. This indemnity obligation might discourage, delay or prevent a change of control that you may consider favorable.
We cannot assure you that we will continue to pay dividends or repurchase shares of our common stock at the times or in the amounts we currently anticipate.
Since our spin-off from ADP, ourOur Board of Directors has declared, and we have paid, regular quarterly cash dividends on our common stock of $0.12 per share.stock. The payment of such quarterly dividends and any other future dividends will be at the
discretion of our Board of Directors. There can be no assurance that we will continue to pay dividends, as to what the amount of any future dividends will be, or that we will have sufficient surplus under Delaware law to be able to pay any future dividends. This may result from extraordinary cash expenses, actual expenses exceeding contemplated costs, funding of capital expenditures, or increases in reserves. If we do not pay future dividends, the price of our common stock must appreciate for you to receive a gain on your investment in us. This appreciation may not occur and our stock may in fact depreciate in value.
OnIn January 20, 2015, our2017, the Board of Directors authorized us to repurchase up to 10.0$2.0 billion of our common stock. In connection with this authorization, we indicated that we expect to return approximately $750 million to $1 billion of capital to shareholders each calendar year through 2019, via a combination of dividends and share repurchases. We have funded and expect to continue to fund this return of capital plan through a combination of free cash flow and incremental borrowings intended to bring leverage, measured as financial debt, net of cash, divided by adjusted EBITDA, to a range of 2.5x to 3.0x over the term of the plan. We have repurchased a total of approximately $1.0 billion of shares of our common stock under a program expiring on January 19, 2018. The authorization was intended to offset dilution from our employee equity compensation plans and return capital to our stockholders. We have also indicated that we intend to return a significant portion of the free cash flow we expect to generate from our business transformation plan to our stockholders through, among other mechanisms, dividends and share repurchases. During the fiscal year ended June 30, 2015 we repurchased a total of approximately 1.1 million shares of our common stock, or 0.7% of our outstanding shares of our common stock as of October 1, 2014.prior authorization. There can be no assurance that we will be able to repurchase shares of our common stock at the times or in the amounts we currently anticipate due to due to market conditions, our cash and debt position, our ability to access new financing, applicable laws and other factors, or that the results of the share repurchase program will be as beneficial as we currently anticipate.
The interests of significant stockholders may conflict with our interests or those of other stockholders, and their actions could disrupt our business and affect the market price and volatility of our securities.
As of June 30, 2015,Since we began operating as an independent public company, three of our stockholders have made filings on Schedule 13D with the SEC indicating that they may take positions or make proposals with respect to, or with respect to potential changes in, among other things, our operations, management, management and employee incentives, our certificate of incorporation and bylaws, the composition of our Board of Directors, ownership, capital allocation policies, capital or corporate structure, dividend policy, potential acquisitions involving us or certain of our businesses or assets, strategy, and plans. The foregoing positions or proposals may not in all cases be aligned with the interests of our other stockholders. Significant stockholders may have an interest in pursuing acquisitions, divestitures, and other transactions that, in their judgment, could enhance their investment, even though such transactions involve risks to our other stockholders.
Responding to actions by these, or other, significant stockholders can be costly, time-consuming, and disrupting to our operations and can divert the attention of management and our employees. Such activities could interfere with our ability to execute our business strategy, including our business transformation plan.plan and the return of capital to our stockholders. In addition, a proxy contest for the election of directors at our annual meeting would require us to incur significant legal fees and proxy solicitation expenses and require significant time and attention by management and our Board of Directors. The perceived uncertainties as to our future direction also could affect the market price and volatility of our securities.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We own or lease approximately1.41.2 million square feet of real estate, consisting of office and other commercial facilities around the world. We own and maintain our global headquarters, totaling approximately 155,000 square feet, in Hoffman Estates, Illinois. We also own or lease approximately 8023 locations globally. in North America and 38 locations internationally.
We regularly add or reduce facilities as necessary or appropriate to accommodate changes in our business operations. We believe that our facilities are adequate to meet our immediate needs, and that, if and when needed, we will be able to secure adequate additional space to accommodate future expansion.
Item 3. Legal Proceedings
From time to time, we are involved in legal, regulatory, and arbitration proceedings concerning matters arising in connection with the conduct of our business activities. We do not expect that any adverse outcome in one or moreSuch proceedings can be expensive and disruptive to normal business operations. Moreover, the results of complex proceedings are difficult to predict and our view of these matters may change in the future as the legal, regulatory, and arbitration proceedings willand events related thereto unfold.
Competition Matters
We are involved in several lawsuits that set forth allegations of anti-competitive agreements between ourselves and The Reynolds and Reynolds Company (“Reynolds and Reynolds”) relating to the manner in which the defendants control access to, and allow integration with, our DMSs; several of the actions also include allegations of independent anticompetitive action on behalf of the Company. We have also received a Civil Investigative Demand from the FTC requesting the production of documents relating to any agreement between ourselves and Reynolds and Reynolds.
As of February 1, 2018, the following antitrust lawsuits have been transferred to, or filed as part of the U.S. District Court for the Northern District of Illinois for consolidated or coordinated for pretrial proceedings as part of a Multi-District Litigation proceeding (“MDL”). Currently, the parties to the MDL are engaged in preliminary proceedings and document discovery. Each of these lawsuits seeks, among other things, treble damages and injunctive relief.
Motor Vehicle Software Corporation (“MVSC”) brought a suit against the Company, Reynolds and Reynolds, and Computerized Vehicle Registration (“CVR”), a majority owned joint venture of the Company. MVSC’s suit was originally filed in the U.S. District Court for the Central District of California on February 3, 2017. Currently, Defendants’ motions to dismiss MVSC’s second amended complaint are under consideration by the court.
| |
| • | Authenticom, Inc.brought a suit against CDK Global, LLC (the Company’s operating subsidiary), and Reynolds and Reynolds. Authenticom’s suit was originally filed in the U.S. District Court for the Western District of Wisconsin on May 1, 2017. Defendants’ motions to dismiss were granted in part, and dismissed in part. |
Teterboro Automall, Inc. d/b/a Teterboro Chrysler Dodge Jeep Ram (“Teterboro”) brought a putative class-action suit against CDK Global, LLC and Reynolds and Reynolds. Teterboro’s suit was originally filed in the U.S. District Court for the District of New Jersey on October 19, 2017. Since that time, several more putative class actions have been filed in a variety of Federal District Courts, with substantively similar allegations; all of them have been consolidated with the MDL proceeding. On June 4, 2018, a Consolidated Class Action Complaint was filed on behalf of a putative class made up of all dealerships in the United States that directly or indirectly purchase DMS or data integration services from CDK or Reynolds and Reynolds. The Company has moved to dismiss the complaint, or in the alternative, stay the cases in the event Reynolds and Reynolds’
concurrent motion to compel arbitration (or, in the alternative, dismiss the complaint) is granted; those motions are currently being briefed by the parties.
Cox Automotive, along with multiple subsidiaries (“Cox”), brought suit against CDK Global, LLC. Cox’s suit was originally filed in the U.S. District Court for the Western District of Wisconsin, on December 11, 2017. CDK Global, LLC has moved to dismiss Cox’s claims; that motion is currently under consideration by the court.
Loop LLC d/b/a Autoloop (“Autoloop”) brought suit against CDK Global, LLC in the U.S. District Court for the Northern District of Illinois on April 9, 2018, but reserved its rights with respect to remand to the U.S. District Court for the Western District of Wisconsin at the conclusion of the MDL proceedings. On June 5, 2018, Autoloop amended its complaint as a putative class action on behalf of itself and all other similarly situated vendors. CDK Global LLC has moved to dismiss Autoloop's claims; that motion is currently being briefed by the parties.
We believe that these cases are without merit and we intend to continue to contest the claims in these cases vigorously. Legal and expert fees may be significant, and an adverse result in these suits could have a material adverse effect on our business, results of operations, financial condition, or liquidity.
On June 22, 2017, we received from the FTC a Civil Investigative Demand consisting of interrogatories and a request to produce documents relating to any agreements between ourselves and Reynolds and Reynolds. On March 12, 2018, a parallel request was received from the New York State Attorney General. We are responding to the requests. The requests merely seek information, and no proceedings have been instituted. We believe there has not been any conduct by our Company or our current or former employees that would be actionable under the antitrust laws in connection with the agreements between ourselves and Reynolds and Reynolds or otherwise. At this time, we do not have sufficient information to predict the outcome of, or the cost of responding to or resolving these investigations.
Other Proceedings
We are otherwise involved from time to time in other proceedings not described above. Based on information available at this time, we believe that the resolution of these other matters currently pending will not individually or in the aggregate have a material adverse effect on our business, results of operations, financial condition, or liquidity. Our view of these matters may change as the proceedings and events related thereto unfold.
Item 4. Mine Safety Disclosures
Not applicable.
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market for Registrant's Common Equity
Our common stock began trading "regular way" on the NASDAQ Global Select Market under the symbol "CDK" on October 1, 2014. As of June 30, 2015,2018, there were 17,73815,430 holders of record of our common stock. As of such date, approximately 190,000159,645 additional holders held their common stock in "street name." The following table sets forth the reported high and low sales prices of the Company's common stock reported on the NASDAQ Global Select Market and the cash dividend per share of common stock declared during the fiscal quarters indicated.
| | | | Price Per Share | | Dividends | Price Per Share | | Dividends |
| | High | | Low | | Per Share | High | | Low | | Per Share |
| Year ended June 30, 2015 | | | | | | |
| Year ended June 30, 2018 | | | | | | |
| First Quarter | | $ | 67.03 |
| | $ | 60.28 |
| | $ | 0.140 |
|
| Second Quarter | $ | 43.16 |
| | $ | 25.00 |
| | $ | 0.12 |
| $ | 72.25 |
| | $ | 61.87 |
| | $ | 0.150 |
|
| Third Quarter | $ | 49.80 |
| | $ | 38.83 |
| | $ | 0.12 |
| $ | 76.04 |
| | $ | 62.08 |
| | $ | 0.150 |
|
| Fourth Quarter | $ | 57.89 |
| | $ | 44.69 |
| | $ | 0.12 |
| $ | 66.61 |
| | $ | 62.02 |
| | $ | 0.150 |
|
| | | | | | | |
| Year ended June 30, 2017 | | | | | | |
| First Quarter | | $ | 60.09 |
| | $ | 54.34 |
| | $ | 0.135 |
|
| Second Quarter | | $ | 61.25 |
| | $ | 53.46 |
| | $ | 0.140 |
|
| Third Quarter | | $ | 67.49 |
| | $ | 58.52 |
| | $ | 0.140 |
|
| Fourth Quarter | | $ | 65.89 |
| | $ | 59.33 |
| | $ | 0.140 |
|
Dividends
We expect to continue to pay dividends on our common stock. However, the declaration and payment of future dividends to holders of our common stock will be at the discretion of our Board of Directors and will depend upon many factors, including our financial condition, earnings, capital requirements of our businesses, legal requirements, regulatory constraints, industry practice and other factors that our Board of Directors deems relevant. There can be no assurance that we will continue to pay dividends or guarantee of the amounts of such dividends.
Stock Performance Graph
The following graph compares the cumulative total stockholder return on our common stock from October 1, 2014 to June 30, 20152018 with the comparable cumulative return of thethe: (i) Standard & Poor's (S&P) 500 Index, the(ii) S&P MidCap 400 Index, and the NASDAQ Composite(iii) S&P 400 Information Technology Index.
The graph isassumes $100 was invested on October 1, 2014 in our common stock and in each of the indices and assumes that all cash dividends are reinvested. The comparisons in the graph are required by the Securities Exchange Commission (“SEC”) and are not intended to forecast or be indicative of future performance of our common stock. ThisThe graph is furnished and related information shall not be deemed "filed"“soliciting material” or to be “filed” with the SEC, or subject to Section 18 of the Exchange Act, nor shall itsuch information be deemed incorporated by reference ininto any of our filingsfuture filing under the Securities Act of 1933 or the Securities Exchange Act of 1934 (the “Exchange Act”), each as amended.amended, except to the extent that we specifically incorporate it by reference into such filing.
|
| | | | | | | | | | | | | | | |
| | October 1, 2014 | | December 31, 2014 | | March 31, 2015 | | June 30, 2015 |
| CDK Global, Inc. | $ | 100.00 |
| | $ | 131.90 |
| | $ | 151.71 |
| | $ | 175.51 |
|
| S&P 500 Index | $ | 100.00 |
| | $ | 106.32 |
| | $ | 107.34 |
| | $ | 107.63 |
|
| S&P MidCap 400 Index | $ | 100.00 |
| | $ | 107.84 |
| | $ | 113.57 |
| | $ | 112.36 |
|
| NASDAQ Composite Index | $ | 100.00 |
| | $ | 107.46 |
| | $ | 111.61 |
| | $ | 113.90 |
|
The above graph assumes the following:
The investment of $100 at the close of business on October 1, 2014 in CDK common stock, the S&P 500 Index, the S&P MidCap 400 Index, and the NASDAQ Composite Index.
Reinvestment of dividends.
Issuer Purchases of Equity Securities
The following table presents a summary of common stock repurchases made during the three months ended June 30, 2015.2018.
|
| | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares as Part of Publicly Announced Programs (2) | | Maximum Number that May Yet Be Purchased Under the Program (2) |
| April 1 - 30, 2015 | | 139,508 |
| | $ | 47.89 |
| | 139,508 |
| | 9,171,624 |
|
| May 1 - 31, 2015 | | 120,000 |
| | $ | 52.48 |
| | 120,000 |
| | 9,051,624 |
|
| June 1 - 30, 2015 | | 102,793 |
| | $ | 53.31 |
| | 102,793 |
| | 8,948,831 |
|
| Total | | 362,301 |
| | $ | 50.95 |
| | 362,301 |
| | |
|
| | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares as Part of Publicly Announced Programs (2) | | Maximum Number (or Approximate Dollar Value) that May Yet Be Purchased Under the Program (2) |
| April 1 - 30, 2018 | | 1,991,545 |
| | $ | 64.33 |
| | 1,991,300 |
| | $ | 1,083,599,767 |
|
| May 1 - 31, 2018 | | 235,075 |
| | $ | 65.30 |
| | 233,200 |
| | $ | 1,068,370,450 |
|
| June 1 - 30, 2018 | | 644,150 |
| | $ | 65.29 |
| | 643,325 |
| | $ | 1,026,366,159 |
|
| Total | | 2,870,770 |
| | $ | 64.63 |
| | 2,867,825 |
| | |
(1) Pursuant to the Company's 2014 Omnibus Award Plan, shares of our common stock may be withheld upon exercise of stock options or vesting of restricted stock to satisfy tax withholdings. There were no sharesShares withheld for such purpose duringpurposes have been included within the three months ended June 30, 2015.total number of shares purchased.
(2) OnIn January 20, 2015, our2017, the Board of Directors authorized us to repurchase up to 10.0 million shares$2.0 billion of our common stock under a program expiring on January 19, 2018.return of capital program. This authorization will expire when it is exhausted or at such time as it is revoked by the Board of Directors.
Item 6. Selected Financial Data
Our spin-off from Automatic Data Processing, Inc. ("ADP") was completed on September 30, 2014. Selected financial data is presented on a combined basis for periods preceding the spin-off and on a consolidated basis for subsequent periods. The following table sets forth selected consolidated and combined financial data from our audited consolidated and combined financial statements as of June 30, 2018 and 2017 and for the years ended June 30, 2018, 2017, and 2016. The selected consolidated and combined financial data as of June 30, 2016, 2015, and 2014 and for the years ended June 30, 2015 and 2014 and 2013. The selected combined financial data as of June 30, 2013, 2012, and 2011 and for the years ended June 30, 2012 and 2011 hashave been derived from ourconsolidated and combined financial statements which can be found eitherare not included in our Registration Statement onthis Form S-4 or our Form 10 Registration Statement.10-K.
Our combined financial statements for periods preceding the spin-off present the combined financial condition and results of operations of the Company, which was under common control and common management by ADP until September 30, 2014. Our combined financial data may not be indicative of our future performance and does not necessarily reflect what our financial condition and results of operations would have been had we operated as a separate, stand-alone entity during the periods presented, including many changes that have occurred in operations and capitalization of our Company as a result of our separationspin-off from ADP. The selected financial data presented below should be read in conjunction with our consolidated and combined financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K and Item 7 of Part II "Management's Discussion and Analysis of Financial Condition and Results of Operations."
| | | | | Years Ended June 30, | | Years Ended June 30, |
| (In millions, except per share amounts) | | 2015 | | 2014 | | 2013 | | 2012 | | 2011 | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| Income Statement Data | | | | | | | | | | | | | | | | | | | | |
| Revenues | | $ | 2,063.5 |
| | $ | 1,976.5 |
| | $ | 1,839.4 |
| | $ | 1,695.6 |
| | $ | 1,562.2 |
| | $ | 2,273.2 |
| | $ | 2,220.2 |
| | $ | 2,114.6 |
| | $ | 2,063.5 |
| | $ | 1,976.5 |
|
| Earnings before income taxes | | 299.9 |
| | 353.3 |
| | 320.7 |
|
| 256.4 |
| | 228.4 |
| | 512.0 |
| | 435.3 |
| | 369.1 |
|
| 299.9 |
| | 353.3 |
|
| Provision for income taxes | | 113.6 |
| | 117.4 |
| | 115.0 |
| | 91.3 |
| | 89.5 |
| | 123.3 |
| | 132.8 |
| | 122.3 |
| | 113.6 |
| | 117.4 |
|
| Net earnings | | 186.3 |
| | 235.9 |
| | 205.7 |
| | 165.1 |
| | 138.9 |
| | 388.7 |
| | 302.5 |
| | 246.8 |
| | 186.3 |
| | 235.9 |
|
| Net earnings attributable to noncontrolling interest | | 7.9 |
| | 8.0 |
| | 6.3 |
| | 5.0 |
| | 4.6 |
| | 7.9 |
| | 6.9 |
| | 7.5 |
| | 7.9 |
| | 8.0 |
|
| Net earnings attributable to CDK/Dealer Services | | 178.4 |
| | 227.9 |
| | 199.4 |
| | 160.1 |
| | 134.3 |
| | 380.8 |
| | 295.6 |
| | 239.3 |
| | 178.4 |
| | 227.9 |
|
| Basic net earnings attributable to CDK/Dealer Services per share | | $ | 1.11 |
| | $ | 1.42 |
| | $ | 1.24 |
| | $ | 1.00 |
| | $ | 0.84 |
| | $ | 2.80 |
| | $ | 2.01 |
| | $ | 1.52 |
| | $ | 1.11 |
| | $ | 1.42 |
|
| Diluted net earnings attributable to CDK/Dealer Services per share | | $ | 1.10 |
| | $ | 1.42 |
| | $ | 1.24 |
| | $ | 1.00 |
| | $ | 0.84 |
| | $ | 2.78 |
| | $ | 1.99 |
| | $ | 1.51 |
| | $ | 1.10 |
| | $ | 1.42 |
|
Weighted-average basic shares outstanding (1) | | 160.6 |
| | 160.6 |
| | 160.6 |
| | 160.6 |
| | 160.6 |
| | 135.8 |
| | 146.7 |
| | 157.0 |
| | 160.6 |
| | 160.6 |
|
Weighted-average diluted shares outstanding (1) | | 161.6 |
| | 160.6 |
| | 160.6 |
| | 160.6 |
| | 160.6 |
| | 136.8 |
| | 148.2 |
| | 158.0 |
| | 161.6 |
| | 160.6 |
|
| Cash dividends declared per share | | $ | 0.36 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 0.590 |
| | $ | 0.555 |
| | $ | 0.525 |
| | $ | 0.360 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | |
| Balance Sheet Data | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 408.2 |
| | $ | 402.8 |
| | $ | 276.3 |
| | $ | 223.1 |
| | $ | 317.7 |
| | $ | 804.4 |
| | $ | 726.1 |
| | $ | 219.1 |
| | $ | 408.2 |
| | $ | 402.8 |
|
| Total current assets | | 885.2 |
| | 918.2 |
| | 783.6 |
| | 686.5 |
| | 769.8 |
| | 1,367.3 |
| | 1,278.8 |
| | 738.7 |
| | 885.2 |
| | 918.2 |
|
| Property, plant and equipment, net | | 100.0 |
| | 82.6 |
| | 68.4 |
| | 64.0 |
| | 62.4 |
| | 131.9 |
| | 135.0 |
| | 118.6 |
| | 100.0 |
| | 82.6 |
|
| Total assets | | 2,518.5 |
| | 2,598.6 |
| | 2,436.8 |
| | 2,347.2 |
| | 2,364.3 |
| | 3,008.4 |
| | 2,883.1 |
| | 2,365 |
| | 2,518.5 |
| | 2,598.6 |
|
| Total current liabilities | | 498.4 |
| | 497.5 |
| | 532.5 |
| | 528.9 |
| | 523.1 |
| | 548.4 |
| | 552.6 |
| | 523.4 |
| | 498.4 |
| | 497.5 |
|
| Long-term debt | | 971.1 |
| | — |
| | — |
| | — |
| | — |
| | 2,575.5 |
| | 2,125.2 |
| | 1,190.3 |
| | 971.1 |
| | — |
|
| Total liabilities | | 1,734.4 |
| | 789.3 |
| | 882.1 |
| | 873.6 |
| | 830.6 |
| | 3,355.7 |
| | 2,939.9 |
| | 1,988.8 |
| | 1,734.4 |
| | 789.3 |
|
| Total equity | | 784.1 |
| | 1,809.3 |
| | 1,554.7 |
| | 1,473.6 |
| | 1,533.7 |
| |
| Total stockholders' (deficit) equity | | | (347.3 | ) | | (56.8 | ) | | 376.2 |
| | 784.1 |
| | 1,809.3 |
|
(1) On September 30, 2014, ADP stockholders of record as of the close of business on September 24, 2014 received one share of our common stock for every three shares of ADP common stock held as of the record date. For all periods prior to the spin-off, basic and diluted earnings per share were computed using the number of shares of our stock outstanding on September 30, 2014, the date on which our common stock was distributed to the stockholders of ADP.
31The weighted-average common shares outstanding for the fiscal year ended June 30, 2016 ("fiscal 2016") reflect a reduction of 1.0 million shares that were inadvertently issued and distributed at the spin-off to ADP with respect to certain unvested ADP equity awards. For additional information on this matter, refer to Note 1, "Basis of Presentation" to our audited consolidated financial statements under Item 8 of Part II of this Annual Report on Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The following discussion should be read in conjunction with our consolidated and combined financial statements and accompanying notes thereto included elsewhere in this Annual Report on Form 10-K. The following discussion
This Annual Report on Form 10-K contains, and other written or oral statements made from time to time by CDK Global, Inc. ("CDK," or the "Company") may contain, “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, including: the Company's business outlook, generally accepted in the United States ("GAAP") and adjusted EBITDA targets for the Company's fiscal year ending June 30, 2019 ("fiscal 2019"); statements concerning the Company's payment of dividends and the repurchase of shares, leverage targets and the funding of such dividends and repurchases; the Company's objectives for its multi-year business transformation plan; other plans; objectives; forecasts; goals; beliefs; business strategies; future events; business conditions; results of operations; financial position business outlook trends; and other information, may be forward-looking statements. Words such as "might," "will," "may," "could," "should," "estimates," "expects," "continues," "contemplates," "anticipates," "projects," "plans," "potential," "predicts," "intends," "believes," "forecasts," "future," "assumes," and variations of such words or similar expressions are intended to identify forward-looking statements. In particular, information appearing under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes forward-looking statements. These statements are based on management's expectations and assumptions and are subject to risks and uncertainties that reflect our plans, estimates, and beliefs. Ourmay cause actual results couldto differ materially from those discussed inexpressed, or implied by, these forward-looking statements. Factors that could cause actual results to differ materially from those contemplated by the forward-looking statements include:
the Company's success in obtaining, retaining, and selling additional services to customers;
the pricing of our products and services;
overall market and economic conditions, including interest rate and foreign currency trends, and technology trends;
adverse global economic conditions and credit markets and volatility in the countries in which we do business (such as the adverse economic impact and related uncertainty caused by the United Kingdom's ("U.K.") decision to leave the European Union ("Brexit"));
auto sales and advertising and related industry changes;
competitive conditions;
changes in regulation (including future interpretations, assumptions and regulatory guidance related to the Tax Cuts and Jobs Act);
changes in technology, security breaches, interruptions, failures, and other errors involving our systems;
availability of skilled technical employees/labor/personnel;
the impact of new acquisitions and divestitures;
employment and wage levels;
availability of capital for the payment of debt service obligations or contributedividends or the repurchase of shares;
any changes to these differences include, but are not limitedour credit rating and the impact of such changes on our financing costs, rates, terms, debt service obligations, and access to capital market and working capital needs;
the impact of our indebtedness, our access to cash and financing, and our ability to secure financing or financing at attractive rates;
litigation involving contract, intellectual property, competition, shareholder, and other matters, and governmental investigations;
our ability to timely and effectively implement our business transformation plan; and
the ability of our significant stockholders and their affiliates to significantly influence our decisions, or cause us to incur significant costs.
There may be other factors that may cause our actual results, performance or achievements to differ materially from those discussed belowexpressed in, or implied by, the forward-looking statements. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition. You should carefully read the factors described elsewhere herein. See "Forward Looking Statements" and “Risk Factors” includedin this document under "Risk Factors" in Part I, and Part I, Item 1A respectively, in this Annual Report on Form 10-K for a description of certain risks that could, among other things, cause our actual results to differ from these forward-looking statements.
All forward-looking statements speak only as of the date of this Annual Report on Form 10-K, even if subsequently made available by us on our website or otherwise, and are expressly qualified in their entirety by the cautionary statements included in this Annual Report on Form 10-K. We disclaim any obligation to update or revise forward-looking statements that may be made to reflect new information or future events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events, other than as required by law.
The following discussion should be read in conjunction with our consolidated financial statements and accompanying notes thereto included elsewhere herein. In this Annual Report on Form 10-K, all references to "we," "our," and "us" refer collectively to CDK and its consolidated subsidiaries.
(Tabular amounts in millions, except per share amounts)
Executive Overview
We areCDK Global enables end-to-end automotive commerce across the largest global provider, both in terms of revenuesglobe. For over 40 years, we have served automotive retailers and geographic reach, of integrated information technology and digital marketing/advertising solutions to the automotive retail industry. We have a 43 year history oforiginal equipment manufacturers ("OEMs") by providing innovative solutions to automotive retailers and OEMsthat allow them to better connect, manage, analyze, and grow their businesses. Our solutions automate and integrate critical workflow processes from pre-sale targetedall parts of the buying process, including the advertising, and marketing campaigns to theacquisition, sale, financing, insurance,insuring, parts supply, and repair, and maintenance of vehicles, with an increasing focus on utilizing big data analyticsin more than 100 countries around the world, for approximately 28,000 retail locations and predictive intelligence. most OEMs.
We believe the breadthgenerate revenue primarily by providing a broad suite of our integratedsubscription-based software and technology solutions allows us to more comprehensively address the varied needs offor automotive retailers than any other single competitor inthrough our industry.
Our solutions address the entire automotive retailers’ value chain. Our automotive retail solutions offer technology that helps manageRetail Solutions North America ("RSNA") and generate additional efficiencyCDK International ("CDKI") segments. We are focused on the supply sideuse of software-as-a-service (“SaaS”) and mobile-centric solutions that are highly functional, flexible and fast. Our flagship Dealer Management System (“DMS”) software solutions are hosted enterprise resource planning applications tailored to the unique requirements of the retail value chain. Theseautomotive industry. Our DMS products facilitate the sale of new and used vehicles, consumer financing, repair and maintenance services, and vehicle and parts inventory management. Additionally, these solutions were built through decades of innovationenable company-wide accounting, financial reporting, cash flow management, and experience in helping our clientspayroll services. Our DMSs are typically integrated with all aspects of theOEM data processing systems that enable automotive retail process. We also offer digital marketing solutionsretailers to enable our clients to create demand for their products by designingorder vehicles and managing complete digital marketingparts, receive vehicle records, process warranties, and advertising strategies for their businesses. These solutions allow our clients to plan and automate sophisticated marketing campaigns, gather comprehensive data on thesecheck recall campaigns and further refineservice bulletins while helping them to fulfill their strategiesfranchisee responsibilities to maximize the effectiveness of their advertising spend. Our common stockOEM franchisors.
The Company is listed on the NASDAQ Global Select Market® under the symbol "CDK."
We are organized into three reportable segments: Automotive Retailtwo main operating groups. The Company's first operating group is CDK North America (“ARNA”), Automotive Retail International (“ARI”),which is comprised of two reportable segments, RSNA and Digital Marketing (“DM”Advertising North America ("ANA"). The second operating group, which is also a reportable segment, is CDKI. A brief description of each of these three segments’segments' operations is provided below.
Automotive Retail Solutions North America
Through our ARNARSNA segment, we provide technology-based solutions, thatincluding our DMS products, a broad portfolio of layered software applications and services, a robust and secure interface to the DMS through our Partner Program, data management and business intelligence solutions, a variety of professional services, and a full range of customer support solutions. These solutions help automotive retailers, OEMs, consumers and other industry participants manage the acquisition, sale, financing, insurance,insuring, parts supply, and repair and maintenance of vehicles. Our solutions help our clientscustomers streamline their operations, better target and serve their customers, and enhance the financial performance of their retail operations. In addition to providing solutions to retailers and manufacturers of automobiles, we also provide solutions to retailers and manufacturers of heavy trucks, construction equipment, agricultural equipment, motorcycles, boats, and other marine and recreational vehicles. In addition to providing solutions to automotive retailers and OEMs, our RSNA segment also provides solutions to retailers and manufacturers of heavy trucks, construction equipment, agricultural equipment, motorcycles, boats, and other marine and recreational vehicles.
Automotive RetailAdvertising North America
Through our ANA segment, we provide advertising solutions, including management of digital advertising spend, for primarily North American automotive retailers, automotive retailer associations, and OEMs. These solutions provide a coordinated offering across multiple marketing channels to help achieve customer marketing and sales objectives and coordinate execution between OEMs and their retailer networks.
CDK International
Through our ARICDKI segment, we provide technology-basedautomotive retailers with core DMS solutions similar to those provided in our ARNA segmentand we offer automotive retailers and OEMs a variety of professional services, custom programming, consulting, implementation and training solutions, as well as a full range of customer support solutions in approximately 100 countries outside of the United States ("U.S.") and Canada. The solutions providedthat we provide within this segment allow our customers to our clients within the ARI segment of ourstreamline their business help streamline operations for their businesses and enhance thetheir financial performance of their operations within their local marketplace, and in some cases where we deal directly with OEMs, across international borders. ClientsCustomers of our ARIthis segment include automotive retail dealers and OEMs across Europe, the Middle East, Asia, Africa, and Latin America.
Digital Marketing
Through our DM segment, we provide a suite of integrated digital marketing solutions for OEMs and automotive retailers, including websites and management of their digital advertising spend. These solutions provide a coordinated offering
across multiple digital marketing channels to help achieve client marketing and sales objectives and coordinate execution between OEMs and their retailer networks. Our solutions are currently provided in the United States, Canada, Mexico, Australia, and New Zealand.
Business Transformation Plan
During fiscal year ended June 30, 2015 ("fiscal 2015"), we initiated a three yearthree-year business transformation plan that is intendeddesigned to increase operating efficiency and improve the cost structure withinof our global operations. TheAs we execute the business transformation plan, is expected to produce significant benefitswe continually monitor, evaluate and refine its structure, including its design, goals, term, and our estimate and allocation of total restructuring expenses. As part of this ongoing review process, in our long-term business performance and is built on three pillars:
Drive operational excellence by streamliningfiscal year ended June 30, 2017 ("fiscal 2017") we extended the organization, simplifying the business and pricing, and engaging clients more efficiently;
Deliver organic growth by increasing our revenues annually in order to protect our market leadership position and enhance long-term value; and
Maintain disciplined capital allocation by preserving our strong balance sheet and debt ratios, maintaining financial flexibility, and maintaining a target cash balance.
We believe that the successful execution of our business transformation plan will result in a strong, go-forward financial profile as listed below:
Revenuesby one year through fiscal 2019. We estimated the cost to grow 4% to 5% annually on average forexecute the next threeplan through fiscal years, and 5% to 7% thereafter;
Additional EBITDA of $250 to $275 million estimated2019 to be generated over the next three fiscal years resulting in significant margin expansion. Our targetedapproximately $250.0 million and updated our target of additional consolidated adjusted EBITDA generated to more than $300.0 million over four years with a targeted adjusted EBITDA exit margin of 40% or above for fiscal 2018 is 35%;2019.
Targeted adjusted pre-tax margins forBased on additional opportunities we identified to further improve our cost structure, we have increased the estimated cost to execute the plan through fiscal 2018 by segment is as follows: ARNA - 45%, ARI - 25%, and DM - 20%;
Adjusted pre-tax earnings estimated to grow more than 25% annually on average for the next three fiscal years; and
Increased earnings expected to drive free cash flow (the amount of cash generated from operating activities less capital expenditures and capitalized software) of approximately $1 billion over the next three fiscal years. 70% to 80% of this free cash flow, along with any additional borrowings, is estimated2019 to be returnedapproximately $300.0 million, an increase of $50.0 million from previous estimates. The incremental cost savings will allow us to stockholders through dividends and share repurchases or other available mechanisms.
fund investment opportunities while maintaining the adjusted 40% EBITDA exit margin. We expect to incur expenses in connection with the execution of our business transformation plan ofestimate approximately $150.0 million. These expenses are comprised$100.0 million of restructuring expensesexpense and approximately $200.0 million of approximately $80.0 million and other expenses to implement the business transformation plan of $70.0 million.plan. For additional information on fiscal 2019 targets, see "Non-GAAP Measures" below.
The following table describes the key workstreams through which we monitor and evaluate our performance under the business transformation plan.
|
| | |
| Workstream | | Description |
| MoveUp! | | Migrate customers to latest software versions; engineer to reduce customizations |
| Streamline implementation | | Streamline installation and training process through improved technology, process, tools, and workflow |
| Enhance customer service | | Decrease resolution times through optimized case management and technology-enabled, intelligent, user-driven support |
| Optimize sales and product offering | | Adjust sales structure; reduce product complexity; expand bundling; optimize discount management; standardize pricing |
| Simplify quote to cash | | Reduce business complexity through integrated go-to-market model that leverages an automated contracting process, SKU rationalization, and streamlined invoicing |
| Workforce efficiency and footprint | | Increase efficiency through fewer layers and larger spans of control, geographic wage arbitrage, and reduced facility footprint |
| Strategic sourcing | | Disciplined vendor management and vendor consolidation |
| CDK International | | Comprehensive optimization across back office, R&D, implementation, and support |
| Other | | |
Restructuring expenses associated with the business transformation plan included employee-related costs, which represent severance and other termination-related benefits, inand contract termination costs, which include costs to terminate facility leases. We recognized $20.9 million, $18.4 million, and $20.2 million of restructuring expenses for fiscal 2015. In future periods as we execute ouryears ended June 30, 2018 ("fiscal 2018"), 2017 and 2016 ("fiscal 2016"), respectively. Since the inception of the business transformation plan, we also expect to incur contract termination expenses. Of the $80.0 million ofhave recognized cumulative restructuring expenses we expect to incur in connection with the business transformation plan, $2.4 million was recognized as expense in fiscal 2015 with the remaining expense expected to be recognized through fiscal 2018.of $61.9 million. Restructuring expenses wereare presented separately on the consolidated and combined statementstatements of operations. Restructuring expenses wereare recorded in the "Other"Other segment, as these initiatives are predominantly centrally directed and are not included in internal measures of segment operating performance.
Accruals for restructuring expenses were included within accrued expenses and other current liabilities on the consolidated balance sheet.sheets as of June 30, 2018 and 2017. The following table summarizes the cumulative fiscal 2015 activity for the restructuring related accruals:accrual for fiscal 2018 and 2017:
|
| | | |
| | Employee-Related Costs |
| Balance as of June 30, 2014 | $ | — |
|
| Charges | 2.4 |
|
| Cash payments | — |
|
| Foreign exchange | — |
|
| Balance as of June 30, 2015 | $ | 2.4 |
|
|
| | | | | | | | | | | |
| | Employee-Related Costs | | Contract Termination Costs | | Total |
| Balance as of June 30, 2016 | $ | 9.0 |
| | $ | 0.9 |
| | $ | 9.9 |
|
| Charges | 14.5 |
| | 4.8 |
| | 19.3 |
|
| Cash payments | (16.5 | ) | | (3.0 | ) | | (19.5 | ) |
| Adjustments | (0.6 | ) | | (0.3 | ) | | (0.9 | ) |
| Balance as of June 30, 2017 | $ | 6.4 |
| | $ | 2.4 |
| | $ | 8.8 |
|
| Charges | 20.8 |
| | 1.8 |
| | 22.6 |
|
| Cash payments | (21.5 | ) | | (3.0 | ) | | (24.5 | ) |
| Adjustments | (1.3 | ) | | (0.4 | ) | | (1.7 | ) |
| Balance as of June 30, 2018 | $ | 4.4 |
| | $ | 0.8 |
| | $ | 5.2 |
|
In addition to the restructuring expenses discussed above, we expect to incur additional costs to implement the business transformation plan, including consulting, training, and other transition costs. We may also incur accelerated depreciation and/or amortization expenses ifwhen the expected useful lifelives of our assets isare adjusted. While these costs are directly attributable to our business transformation plan, they wereare not included in restructuring expenses on our consolidated and combined statementstatements of operations. Of the $70.0We recognized $51.1 million, $80.6 million, and $39.7 million of other business transformation expenses, we expect to incur, $1.9 million was recognized asinclusive of stock-based compensation expense and accelerated depreciation, for fiscal 2018, 2017, and 2016, respectively. Since the inception of the business transformation plan in the fourth quarter of fiscal 2015, with the remaining expense expected to bewe have recognized through fiscal 2018. Othercumulative other business transformation expenses incurred in fiscalof $173.3 million.
In December 2015, were comprised primarily of consulting expenses, were recordedwe announced our intent to return $1.0 billion to our stockholders in the Other segment,form of dividends and were included within selling, generalshare repurchases. In December 2016, we completed the $1.0 billion return of capital plan. In February 2017, we announced our intent to return $750 million to $1.0 billion of capital to shareholders per calendar year through 2019 through a combination of dividends and administrative expenses onshare repurchases. We believe that the execution of our consolidatedbusiness transformation plan will continue to result in increased earnings, which will drive free cash flow (the amount of cash generated from operating activities less capital expenditures and combined statementcapitalized software). We intend to continue to return free cash flow to our stockholders as our business transformation plan progresses. Our new return of operations.capital plan has been and is expected to continue to be, funded through a combination of free cash flow and incremental borrowings intended to bring leverage, measured as financial debt, net of cash, divided by adjusted EBITDA, to a range of 2.5x to 3.0x over the period.
Sources of Revenues and Expenses
Revenues. We generally receive fee-based revenuesrevenue by providing services to clients. customers.
In our ARNA and ARI segments (together, our “Automotive Retail segments”),RSNA segment, we receive feeshave the following sources of revenue:
Subscription: for software licenses, ongoing software support and maintenance of Dealer Management Systems (“DMSs”),technology solutions provided to automotive retailers and other integrated solutions that are either hosted orOEMs, which includes:
DMSs and layered applications, which may be installed on-site at the client’s location. We also receive revenues for installing on-sitecustomer’s location, or hosted and hosted DMS solutionsprovided on a SaaS basis, including ongoing maintenance and forsupport;
Interrelated services such as installation, initial training, and consulting with clients, in addition to monthly fees related to hosting DMS solutions in cases where clients outsource their information technologydata updates;
Websites, search marketing, and reputation management activities to the Company. In our ARNA segment, we also receive revenuesservices; and
Hardware on a feeservice basis, meaning no specific assets are identified or a substantive right of substitution exists.
Transaction: fees per transaction processed basis, where we provide automotive retailers, primarily in the United States, solutions with third parties to process credit reports, vehicle registrations, and data updates. automotive equity mining.
Other: consulting and professional services, sales of hardware, and other miscellaneous revenues.
In our DMANA segment, revenues are primarily earned for advertising, search marketing, websites,placing internet advertisements for OEMs and reputation management services delivered to automotive retailersretailers.
CDKI revenues are generated primarily from Subscription revenue as described above, aside from the absence of layered applications and OEMs. We receive monthly recurring fees for services provided and we receive revenues for placement of automotive retail advertising. We also receive revenues for customization services and for training and consulting services.website offerings.
Expenses. Expenses generally relate to the cost of providing the services to clientscustomers in theour three businessreportable segments. In the Automotive RetailRSNA and CDKI segments, significant expenses include employee payroll and other labor relatedlabor-related costs, the cost of hosting customer systems, third-party costs for transaction basedtransaction-based solutions and licensed software utilized in our solution offerings, computer hardware, software, telecommunications, transportation and distribution costs, third-party content for website offerings, the cost of hosting customer websites, computer hardware, software, and other general overhead items. In the DMANA segment, significant expenses include third-party content for website and other Internet-based offerings such asinternet-based advertising placements, employee payroll and other labor-related costs, the cost of hosting customer websites, computer hardware, software, and other general overhead items. We also have some company-wide expenses attributable to management compensation and corporate overhead.
Potential Material Trends and Uncertainties in our Marketplace
A number of material trends and/or uncertainties in our marketplace could have either a positive or negative impact on our ability to conduct business, our results of operations, and/or our financial condition. The following is a summary of trends or uncertainties that have the potential to effectaffect our liquidity, capital resources, or results of operations:
Our revenues, operating earnings, and profitability have varied in the past as a result of these trends and uncertainties and are likely to continue to vary from quarter to quarter, which may lead to volatility in our stock price. These trends or uncertainties could occur in a variety of different areas of our business and the marketplace.
Changing market trends, including changes in the automotive marketplace, both in North America and internationally, could have a material impact on our business. From time to time, the economic trends of a region could have an impact on the volume of automobiles sold at retail within one or more of the geographic markets in which we operate. To some extent, our business is impacted by these trends, either directly through a shift in the number of transactions
processed by clientscustomers of our transactional business, or indirectly through changes in our clients’customers’ spending habits based on their own changes in profitability.
Our presence in multiple markets internationally could pose challenges that would impact our business or results of operations. We currently operate in over 100 countries and derive a significant amount of our overall revenuerevenues from markets outside of North America. The geographic breadth of our presence exposes us to potential economic, social, regulatory, and political shifts.
Our ability to bring new solutions to market, research and develop, or acquire the data and technology that enables those solutions is important to our continued success. During fiscal 2015, 2014, and 2013, we incurred $170.1 million, $165.7 million, and $156.4 million, respectively, of expenses to research, develop, and deploy new and enhanced solutions for our clients. In addition, our strategy includes the selective pursuit of acquisitions that support or complement our existing technology and solution set. An inability to invest in the continued development of new solutions for the automotive marketplace, or an inability to acquire new technology or solutions due to a lack of liquidity or resources, could impair our strategic position.
Along with our development and acquisition expenditures, our success depends on our ability to maintain the security of our data and intellectual property, as well as our clients’customers’ data. Although we maintain a clear focus on data and system security, and we incur significant costs securing our infrastructure annually in support of that focus, we may experience interruptions of service or potential security issues that may be beyond our control.
Factors Affecting Comparability of Financial Results
Our Separation from ADP
On April 9, 2014, the board of directors of ADP approved the spin-off of the Dealer Services business of ADP Dealer Services. On September 30, 2014, the spin-off became effective and ADP distributed 100% of the common stock of the Company to the holders of record of ADP's common stock as of September 24, 2014 (the "spin-off").
Historical ADP Cost Allocations Versus CDK as a Stand-alone Company
Our historical combined financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). These financial statements include the combined financial condition and results of operations of the Dealer Services business of ADP, which was the subject of the spin-off. The combined financial statements include allocated costs for facilities, functions, and services used by the Company at shared ADP sites and costs for certain functions and services performed by centralized ADP organizations and directly charged to the Company based on usage.
Specifically, these costs were allocated by ADP to the Company as follows:
cost of certain systems, such as for procurement and expense management, which were supported by ADP’s corporate information technology group, were allocated based on the approximate usage of information technology systems by the Company in relation to ADP’s total usage;
corporate human resources costs were allocated based on the estimated percentage of usage by the Company, including benefits, recruiting, global learning and development, employee relocation services, and other human resources shared services;
travel department costs were allocated based on the estimated percentage of travel directly related to the Company;
security department costs were allocated based on the estimated percentage of usage of security for the Company in relation to ADP’s total security usage;
real estate department costs were allocated based on the estimated percentage of square footage of facilities for the Company that were managed by the ADP corporate real estate department in relation to ADP’s total managed facilities; and
all other allocations were based on an estimated percentage of support staff time related to the Company in comparison to ADP as a whole.
Although we believe these allocation methods are reasonable, we also believe, for the reasons discussed below, that the historical allocation of ADP's expenses to the Company may be significantly less than the actual costs we will incur as an independent public company.
Size and influence of ADP. We generally benefited from the size of ADP in negotiating many of our overhead costs and were able to leverage the ADP business as a whole in obtaining favorable pricing. ADP is a larger company than we are and, as such, is capable of negotiating large volume discounts. As a stand-alone company, we also seek discounts, but our discounts may be less favorable because of lower volumes.
Shared corporate overhead. As a division of ADP, we were historically managed by the senior management of ADP. Moreover, ADP performed all public company obligations, including:
compensation of corporate headquarters management and of directors;
corporate finance functions including accounting, treasury, internal audit, investor relations, and tax;
annual meetings of stockholders;
board of directors and committee meetings;
Exchange Act annual, quarterly, and current report preparation and filing, including reports to stockholders;
SEC and stock exchange corporate governance compliance;
stock exchange listing fees and transfer agent fees; and
directors and officers insurance.
As an independent public company, these obligations are ours and we bear all of these expenses directly. The historical allocation of ADP’s expenses to the Company may be significantly less than the actual costs we will incur as an independent public company. In addition to public company expenses, other general overhead transactions were handled for us by ADP, such as data center services, which, after the spin-off are still provided by ADP, but will be transitioned to us by the end of the second year following the spin-off date based on the terms of agreements entered into with ADP.
NewDebt Financing
We entered into debt financing arrangements in connection with the spin-off. At the time of the spin-off, we borrowed $250.0 million under oura term loan facility that matures on September 16, 2019 (our "2019 term loan facility") and $750.0 million under our bridge loan facility, the proceeds of which were used to pay ADP a cash dividend. Additionally, we entered into a $300.0 million revolving credit facility, which was undrawn as of June 30, 2015.
On October 14, 2014, we completed an offering of 3.30% senior notes with a $250.0 million aggregate principal amount due in October 2019 (the "2019 notes") and 4.50% senior notes with a $500.0 million aggregate principal amount due in October 2024 (the "2024 notes" and together with the 2019 notes, the "senior notes"). The issuance price of the senior notes was equal to the stated value. We used the net proceeds from the senior2019 and 2024 notes, together with cash on hand, to repay all outstanding borrowings under the bridge loan facility.
On December 14, 2015, we borrowed an additional $250.0 million under a term loan facility that matures on December 14, 2020 (our "2020 term loan facility").
On December 9, 2016, we borrowed an additional $400.0 million under a term loan facility that will mature on December 9, 2021(our "2021 term loan facility", together with our 2019 and 2020 term loan facilities, our "term loan facilities"). Borrowings under the 2020 and 2021 term loan facilities were used for general corporate purposes, which included the repurchase of shares of our common stock as part of a return of capital plan.
On May 15, 2017, we completed an offering of 4.875% senior notes with a $600.0 million aggregate principal amount due in 2027 (the "2027 notes"). The net proceeds from the sale of the 2027 notes was used for general corporate purposes, which included share repurchases, dividends and acquisitions.
On June 18, 2015,2018, we completed the exchange offeran offering of the senior notes. We issued new notes, which are identical in all material respects to the5.875% senior notes issuedwith a $500.0 million aggregate principal amount due in 2026 (the "2026 notes"). The net proceeds will primarily be used for general corporate purposes, which includes share repurchases, dividends, acquisitions (including ELEAD1ONE refer to Note 4, "Acquisitions" to our consolidated financial statements under Item 8 of Part II of this Annual Report on October 14, 2014, except thatForm 10-K), repayments of debt, and working capital and capital expenditures.
Acquisitions
On February 1, 2016, the Company acquired certain assets of RedBumper, LLC and NewCarIQ, LLC, providers of technology solutions for new notes are registeredand used car pricing. The Company had a pre-existing relationship with these entities under the Securities Act, are not subject to transfer restrictions, are not subject to registration rights and the additional interest provisions under the registration rights, and bear different CUSIP numbers. We did not receive any proceeds from the exchange offer.
Acquisitions and Divestiture
On April 2, 2015, Computerized Vehicle Registration (“CVR”), our majority owned subsidiary, acquired AVRS, Inc. ("AVRS"),which CDK was a providerreseller of electronic vehicle registration software in California. CVR acquired all of the outstanding stock of AVRS under an agreement of merger. In fiscal 2014, we acquired ServiceBook Pro and One-Eighty Corp.their products. The results of operations of the acquired businesses are included in our consolidated and combined statements of operations since their respectivethe acquisition dates.date.
On October 20, 2017, the Company acquired the outstanding stock of Dashboard Dealership Enterprises, a provider of executive reporting solutions for auto dealers.
36On April 3, 2018, the Company acquired the membership interests of Progressus Media LLC, a provider of mobile advertising solutions for dealerships, agencies, and automotive marketing companies.
Tax Cuts and Jobs Act of 2017
We evaluate our businesses periodicallyOn December 22, 2017, the Tax Cuts and Jobs Act ("Tax Reform Act") was enacted into law. The Tax Reform Act significantly revises the U.S. corporate income tax laws by, among other things, reducing the corporate income tax rate from 35.0% to 21.0% and implementing a modified territorial tax system that includes a one-time transition tax on accumulated undistributed foreign earnings. Other provisions included in orderthe Tax Reform Act include the broadening of the executive compensation deduction limitation, a repeal of the domestic production activity deduction and several new international provisions. The modified territorial tax system includes a new anti-deferral provision, referred to improve efficiencies in our operationsas global intangible low taxed income (“GILTI”), which subjects certain foreign income to current U.S. tax.
In December 2017, the SEC issued Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and focusJobs Act” (“SAB 118”), which provides guidance on accounting for the more profitable linestax effects of business. the Tax Reform Act. Under SAB 118, companies are able to record a reasonable estimate of the impacts of the Tax Reform Act if one is able to be determined and report it as a provisional amount during the measurement period. The measurement period is not to extend beyond one year from the enactment date. Impacts of the Tax Reform Act that a company is not able to make a reasonable estimate for should not be recorded until a reasonable estimate can be made during the measurement period.
On May 21, 2015,a year-to-date basis, we sold our Internet sales leads business, which wasrecorded a one-time tax benefit of $18.5 million related to the Tax Reform Act comprised of Dealix Corporation$26.2 million for the re-measurement of our net deferred tax liability, partially offset by tax expense of $3.4 million for the one-time transition tax recorded within accrued liabilities and Autotegrity, Inc. and operated in$4.3 million for foreign withholding taxes associated with undistributed foreign earnings recorded primarily within deferred taxes. The year-to-date adjustment was made up of: a net $14.1 million provisional tax benefit for the ARNA segment, toone-time impacts of the Tax Reform Act recorded during the three months ended December 31, 2017; a third party. We recognized a loss on the sale of this businessmeasurement period adjustment of $0.8 million in selling, generalof tax benefit as a result of re-measuring the net deferred tax liability upon filing the income tax return recorded during the three months ended March 31, 2018; a measurement period adjustment recorded during the three months ended June 30, 2018 of $3.6 million of tax benefit consisting of $2.8 million to re-measure the net deferred tax liability based on finalized temporary differences and administrative expenses$0.8 million to revise the one-time transition tax and foreign withholding taxes based on revised earnings and profits computations completed during the period. As of June 30, 2018, we consider our accounting for the Tax Reform Act to be complete. In addition to the one-time tax effects of the
Tax Reform Act, we revised our annual effective tax rate to consider the impact of the reduced corporate tax rate. Due to our fiscal year, the statutory corporate tax rate for fiscal 2018 is 28.1%, representing a blended tax rate based on the consolidatedtax rate in effect on a pro-rata basis.
Our accounting policy election related to GILTI was incomplete as of December 31, 2017 and combined statementMarch 31, 2018. During the three months ended June 30, 2018, as a result of operationsadditional analysis and evaluation, we elected to account for the GILTI tax as a period cost when incurred. The GILTI provision is effective beginning in fiscal 2015. year 2019 and therefore, will have an impact on future period annual effective tax rates.
The results of operationsultimate impact of the Internet sales leads business were not included inTax Reform Act may differ from our consolidated and combined statement of operations subsequentestimates due to the disposal date.issuance of additional regulatory guidance, the interpretation of the Tax Reform Act evolving over time and actions taken by us as a result of the Tax Reform Act.
Key Performance Measures
We regularly review the following key performance measures in evaluating our business results, identifying trends affecting our business, and making operating and strategic decisions:
Dealer Management System ClientCustomer Sites. We track the number of clientcustomer sites that have an active DMS. Consistent with our strategy of growing our Automotive Retail clientautomotive retail customer base, we view the number of clientcustomer sites purchasing our DMS solutions as an indicator of market penetration for our Automotive RetailRSNA and CDKI segments. Our DMS clientcustomer site count includes retailers with an active DMS that sell vehicles in the automotive and adjacent markets. Adjacent markets include heavy truck dealerships that provide vehicles to the over-the-road trucking industry;industry, recreation dealerships in the motorcycle, marine, and recreational vehicle industries;industries, and heavy equipment dealerships in the agriculture and construction equipment industries. We consider a DMS to be active if we have billed a subscription fee for that solution during the most recently ended calendar month.
Average Revenue Per DMS ClientCustomer Site. Average revenue per Automotive Retailautomotive retail DMS clientcustomer site is an indicator of the adoption of our solutions by DMS clients,customers, and we monitor changes in this metric to measure the effectiveness of our strategy to deepen our relationships with our current clientcustomer base through upgrading and expanding solutions and increasing transaction volumes.solutions. We calculate average revenue per DMS clientcustomer site by dividing the monthly applicable revenue generated from our solutions in a period by the average number of DMS clientcustomer sites in the period. This metric has been updated to reflect the new segments and now includes revenue generated from websites. The metric excludes subscription revenue generated by customers not included in our DMS site count as well as subscription revenue related to certain installation and training activities that is deferred then recognized as revenue over the life of the contract. Revenue underlying this metric is based on budgeted foreign exchange rates. When we discuss growth in average revenue per DMS customer site, revenue for the comparable prior period has been adjusted to reflect budgeted foreign exchange rates for the current period.
Websites. For the DMRSNA segment, we track the number of websites that we host and develop for our OEM and automotive retail clientscustomers as an indicator of business activity.activity, regardless of whether or not the website is tied to a DMS customer site. The number of websites as of a specified date is the total number of full function dealer websites or portals that are currently accessible as of the end of the most recent calendar month.
Average Revenue Per Website. We monitor changes in our average revenue per website as an indicator of the relative depth of our relationships in our DM segment. We calculate average revenue per website by dividing the monthly revenue generated from our DM solutions in a period, excluding OEM advertising revenues, by the average number of client websites in the period.
OEM Advertising. For the DMANA segment, we track the amount of advertising revenue generated from OEMsautomotive retailers on either a national or regional scale as a measure of our effectiveness in delivering advertising services to the OEM market.
Results of Operations
37Non-GAAP Measures
Throughout the following results of operations discussions, we disclose certain financial measures for our consolidated and operating segment results on both a GAAP and a non-GAAP (adjusted) basis. The non-GAAP financial measures disclosed should be viewed in addition to, and not as an alternative to, results prepared in accordance with GAAP. Our use of each of the following non-GAAP financial measures may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define these non-GAAP financial measures, or reconcile them to the comparable GAAP financial measures, in the same way.
|
| |
| Non-GAAP Financial Measure | Comparable GAAP Financial Measure |
| Adjusted earnings before income taxes | Earnings before income taxes |
| Adjusted provision for income taxes | Provision for income taxes |
| Adjusted net earnings attributable to CDK | Net earnings attributable to CDK |
| Adjusted diluted earnings attributable to CDK per share | Diluted earnings attributable to CDK per share |
| Adjusted EBITDA | Net earnings attributable to CDK |
| Adjusted EBITDA margin | Net earnings attributable to CDK margin |
| Constant currency revenues | Revenues |
| Constant currency adjusted earnings before income taxes | Earnings before income taxes |
We use adjusted earnings before income taxes, adjusted provision for income taxes, adjusted net earnings attributable to CDK, adjusted diluted earnings attributable to CDK per share, adjusted EBITDA and adjusted EBITDA margin internally to evaluate our performance on a consistent basis, because the measures adjust for the impact of certain items that we believe do not directly reflect our underlying operations. By adjusting for these items we believe we have more precise inputs for use as factors in (i) our budgeting process, (ii) making financial and operational decisions, (iii) evaluating ongoing segment and overall operating performance on a consistent period-to-period basis and relative to our competitors, (iv) target leverage calculations, (v) debt covenant calculations, and (vi) determining incentive-based compensation.
We believe our non-GAAP financial measures are helpful to users of the financial statements because they (i) provide investors with meaningful supplemental information regarding financial performance by excluding certain items, (ii) permit investors to view performance using the same tools that management uses, and (iii) otherwise provide supplemental information that may be useful to investors in evaluating our ongoing operating results on a consistent basis. We believe that the presentation of these non-GAAP financial measures, when considered in addition to with the corresponding GAAP financial measures and the reconciliations to those measures disclosed below, provides investors with a fuller understanding of the factors and trends affecting our business than could be obtained absent these disclosures.
We use constant currency revenues and constant currency adjusted earnings before income taxes as a way to review revenues and adjusted earnings before income taxeson a constant currency basis to understand underlying business trends. To present these results on a constant currency basis, current period results for entities reporting in currencies other than the U.S. dollar were translated into U.S. dollars using the average monthly exchange rates for the comparable prior period. As a result, constant currency results neutralize the effects of foreign currency.
Effective July 1, 2017, we incorporated additional adjustments within our calculations of adjusted earnings before income taxes, adjusted provision for income taxes, adjusted net earnings attributable to CDK, adjusted diluted net earnings attributable to CDK per share, adjusted EBITDA, and adjusted EBITDA margin where management has deemed it appropriate to better reflect our underlying operations. For fiscal 2018, management modified the fiscal 2017 and fiscal 2016 adjustments for (i) other business transformation expenses and (ii) officer transition expense to remove stock-based compensation expense since we will exclude total stock-based compensation expense and certain legal and regulatory expenses related to the competition matters from adjusted earnings before income taxes. There was $2.5 million and $1.4 million of stock-based compensation expense included in business transformation expenses for fiscal 2017 and fiscal 2016, respectively.
The fiscal 2019 business transformation plan target represents financial objectives distinct from forecasts of performance. Therefore, we have not provided a reconciliation of our fiscal 2019 adjusted EBITDA margin exit targets to the most directly comparable GAAP measure of net earnings attributable to CDK, because projecting potential adjustments to GAAP results for the fiscal 2019 target is not practical and could be misleading to users of this financial information. The adjusted EBITDA reconciliation disclosed below is indicative of the reconciliations that will be prepared for the same fiscal 2019 adjusted measures in the future.
Segment Reporting
We review segment results on a constant currency basis to understand underlying business trends. To present these results on a constant currency basis, current period results for entities reporting in currencies other than the U.S. dollar were translated into U.S. dollars using the average monthly exchange rate for the comparable prior period. As a result, constant currency results neutralize the effects of foreign currency.
Fiscal 20152018 Compared to Fiscal 2014
Results of Operations2017
The following is a discussion of the results of our consolidated and combinedresults of operations for the fiscal years ended June 30, 20152018 and 2014 ("fiscal 2015" and "fiscal 2014," respectively).2017, respectively. For a discussion of our operations by segment, see "Analysis of Reportable Segments" below.
The table below presents consolidated and combined statements of operations data for the periods indicated and the dollar change and percentage change between periods.
| | | | Years Ended June 30, | | Change | Years Ended June 30, | | Change |
| | 2015 | | 2014 | | $ | | % | 2018 | | 2017 | | $ | | % |
| Revenues | $ | 2,063.5 |
| | $ | 1,976.5 |
| | $ | 87.0 |
| | 4 | % | $ | 2,273.2 |
| | $ | 2,220.2 |
| | $ | 53.0 |
| | 2 | % |
| Costs of revenues | 1,273.2 |
| | 1,204.5 |
| | 68.7 |
| | 6 | % | 1,182.0 |
| | 1,234.9 |
| | (52.9 | ) | | (4 | )% |
| Selling, general and administrative expenses | 431.1 |
| | 411.8 |
| | 19.3 |
| | 5 | % | 475.8 |
| | 477.7 |
| | (1.9 | ) | | — | % |
| Restructuring expenses | 2.4 |
| | — |
| | 2.4 |
| | 100 | % | 20.9 |
| | 18.4 |
| | 2.5 |
| | 14 | % |
| Separation costs | 34.6 |
| | 9.3 |
| | 25.3 |
| | n/m |
| |
| Total expenses | 1,741.3 |
| | 1,625.6 |
| | 115.7 |
| | 7 | % | 1,678.7 |
| | 1,731.0 |
| | (52.3 | ) | | (3 | )% |
| Operating earnings | 322.2 |
| | 350.9 |
| | (28.7 | ) | | (8 | )% | 594.5 |
| | 489.2 |
| | 105.3 |
| | 22 | % |
| Interest expense | (28.8 | ) | | (1.0 | ) | | (27.8 | ) | | n/m |
| (95.9 | ) | | (57.2 | ) | | (38.7 | ) | | (68 | )% |
| Other income, net | 6.5 |
| | 3.4 |
| | 3.1 |
| | 91 | % | 13.4 |
| | 3.3 |
| | 10.1 |
| | n/m |
|
| Earnings before income taxes | 299.9 |
| | 353.3 |
| | (53.4 | ) | | (15 | )% | 512.0 |
| | 435.3 |
| | 76.7 |
| | 18 | % |
| Margin % | 14.5 | % | | 17.9 | % | | | | | 22.5 | % | | 19.6 | % | | | | |
| Provision for income taxes | (113.6 | ) | | (117.4 | ) | | 3.8 |
| | (3 | )% | (123.3 | ) | | (132.8 | ) | | 9.5 |
| | 7 | % |
| Effective tax rate | 37.9 | % | | 33.2 | % | | | | | 24.1 | % | | 30.5 | % | | | | |
| Net earnings | 186.3 |
| | 235.9 |
| | (49.6 | ) | | (21 | )% | 388.7 |
| | 302.5 |
| | 86.2 |
| | 28 | % |
| Less: net earnings attributable to noncontrolling interest | 7.9 |
| | 8.0 |
| | (0.1 | ) | | (1 | )% | 7.9 |
| | 6.9 |
| | 1.0 |
| | 14 | % |
| Net earnings attributable to CDK | $ | 178.4 |
| | $ | 227.9 |
| | $ | (49.5 | ) | | (22 | )% | $ | 380.8 |
| | $ | 295.6 |
| | $ | 85.2 |
| | 29 | % |
Revenues. Revenues for fiscal 2015 were $2,063.52018 increased $53.0 million as compared to fiscal 2017. The CDKI segment contributed $44.4 million, the RSNA segment contributed $10.4 million partially offset by a decline in the ANA segment of $1.8 million. The impact of foreign exchange rates on revenues was an increase of $87.0 million, or 4%, as compared to $1,976.5 million in fiscal 2014. We also review revenues on a constant currency basis to understand underlying business trends. We computed constant currency by translating fiscal 2015 results using fiscal 2014 average monthly exchange rates. Revenues for fiscal 2015 increased by 6% on a constant currency basis as shown in the table below.
|
| | | | | | | | | | | | | | |
| | Years Ended June 30, | | Change |
| | 2015 | | 2014 | | $ | | % |
| Revenues | $ | 2,063.5 |
| | $ | 1,976.5 |
| | $ | 87.0 |
| | 4 | % |
| Adjustment: | | | | | | | |
| Impact of exchange rates | 31.9 |
| | — |
| | 31.9 |
| | |
| Constant currency revenues | $ | 2,095.4 |
| | $ | 1,976.5 |
| | $ | 118.9 |
| | 6 | % |
$27.1 million. The foreign exchange rate impact was primarily due to the strength of the U.S. dollar against the Euro, the Canadian dollar, the Pound Sterling, and the Danish Krone. Based on budgeted foreign exchange rates, which may differ from the constant currency effect previously described, the ARNA segment contributed $72.4 million, the DM segment contributed $40.9 million, and the ARI segment contributed $6.9 million of CDK revenue growth. See the discussion below for drivers of each segment's revenue growth.Canada Dollar.
Cost of Revenues. Cost of revenues for fiscal 2015 increased $68.72018 decreased $52.9 million or 6%, as compared to fiscal 2014.2017. The increase inimpact of foreign exchange rates on cost of revenues was primarily duean increase of $12.8 million. Cost of revenues was favorably impacted by lower labor-related costs attributable to $15.6 million of accelerated amortization recognized in the DM segment for the Cobalt trademarkongoing initiatives under our business transformation plan primarily related to the change in useful life, increased costs for advertising placement to support growth in DM revenues,lower headcount and increased costs associated with the migration of hosting facilities that support the ARNA segment,geographic labor mix, lower incentive compensation, and lower business transformation expenses partially offset by the effect of foreign currency exchange rates.an increase in depreciation and amortization. Cost of revenues also includedinclude expenses to research, develop, and deploy new and enhanced solutions for our clientscustomers of $170.1$131.3 million and $165.7$150.0 million for fiscal 20152018 and 2014,2017, respectively, representing 8.2%5.8% and 8.4%6.8% of revenues in each period, respectively.revenues.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for fiscal 2015 increased $19.3 million, or 5%, as compared to fiscal 2014, due primarily to costs incurred related to the formation of corporate departments as a stand-alone public company, increased stock-based compensation expense, higher sales force expenses incurred to drive deeper penetration in our DM client base, and the effects of a favorable acquisition-related adjustment of $5.6 million and a favorable legal settlement both in the ARNA segment in fiscal 2014, partially offset by the trademark royalty fee charged by ADP in fiscal 2014, a reduction of our accounts receivable allowances as a result of a change in estimate in fiscal 2015, and the effect of foreign currency exchange rates.
Restructuring Expenses. Restructuring expenses represent employee-related costs incurred in connection with the business transformation plan we initiated in fiscal 2015. Restructuring expenses for fiscal 2015 were $2.4 million; there was no comparable transformation plan in fiscal 2014.
Separation Costs. Separation costs represent costs directly attributable to our spin-off from ADP and are primarily related to professional services. Separation costs for fiscal 2015 were $34.6 million as compared to $9.3 million for fiscal 2014.
Interest Expense. Interest expense for fiscal 2015 increased $27.82018 decreased $1.9 million as compared to fiscal 20142017. The impact of foreign exchange rates on selling, general and administrative expenses was an increase of $7.2 million. Selling, general and administrative expenses were favorably impacted by lower labor-related costs attributable to ongoing initiatives under our business transformation plan, stock-based compensation, lower business transformation expenses, and incentive compensation partially offset by increased expenses due to acquisition transaction and integration-related expenses, costs to implement the new revenue recognition standard and other outside services, and legal and regulatory expenses related to competition matters.
Restructuring Expenses. Restructuring expenses related to the business transformation plan for fiscal 2018 increased $2.5 million as compared to fiscal 2017.
Interest Expense. Interest expense for fiscal 2018 increased $38.7 million as compared to fiscal 2017 due to the full year impact of borrowings under our term loan facility2027 notes issued in May 2017, and seniorthe partial year impact of issuing our 2026 notes revolving credit facility commitment fees, and amortization of deferred financing costs.entered into in June 2018.
Other Income, Net. Other income, net for fiscal 20152018 increased by $3.1$10.1 million as compared to fiscal 20142017 due primarily to increaseda recovery in fiscal 2018 of a non-operating receivable that had been impaired in fiscal 2017 upon execution of a licensing and service agreement, higher interest income from sales-type leasesin fiscal 2018, and netfluctuations in foreign exchange gains related to intercompany loans denominated in a currency other than that of the loan counterparty, which do not eliminate upon consolidation.and losses.
Provision for Income Taxes. The effective tax rate for fiscal 20152018 was 37.9%24.1% as compared to 33.2%30.5% for fiscal 2014. The effective tax rate was unfavorably impacted by certain separation costs that were not tax deductible and tax expense associated with the tax law change for bonus depreciation, offset by tax benefits associated with a valuation allowance adjustment and the resolution of certain tax matters.2017. The effective tax rate for fiscal 20142018 was favorably impacted by $21.6 million for the current year effect of the reduced corporate income tax rate and $18.5 million for the estimated net one-time Tax Reform Act adjustments discussed above. In addition, the effective tax rate for fiscal 2018 and 2017 was favorably impacted by $5.1 million and $13.1 million of excess tax benefits, associated with adjustments to the valuation allowance of $7.2 million and the liability for uncertain tax matters of $3.6 million, offset by the impact of non-deductible separation costs.respectively.
Net Earnings Attributable to CDK. Net earnings attributable to CDK for fiscal 2015 were $178.42018 increased $85.2 million a decrease of $49.5 million, or 22%, as compared to $227.9 million in fiscal 2014.2017. The decreaseincrease in net earnings attributable to CDK was primarily due to the factors previously discussed.
Consolidated Non-GAAP MeasuresResults
We use certain adjusted results, among other measures, to evaluate our operating performance in the absence of certain items for planning and forecasting purposes. We believe that adjusted results provide relevant and useful information for investors because they allow investors to view performance in a manner similar to the method used by the Company and improve our ability to understand our operating performance. Because non-GAAP measures are not measures of performance that are calculated in accordance with GAAP, they should not be considered in isolation from, or as a substitute for, other metrics that are calculated in accordance with GAAP.
Adjusted revenues for fiscal 2015 and 2014 exclude the revenues related to the Internet sales leads business. Adjusted earnings before income taxes and adjusted net earnings attributable to CDK for fiscal 2015 and 2014 reflect adjustments to exclude costs directly attributable to our separation from ADP, incremental costs associated with the formation of corporate departments as a stand-alone public company, costs attributable to the business transformation plan, earnings related to the Internet sales leads business, certain one-time adjustments, and the tax effect of the pre-tax adjustments. Adjusted provision for income taxes reflects the tax effect of the pre-tax adjustments and certain one-time adjustments.
We also review adjusted revenues and earnings before income taxes on a constant currency basis to understand underlying business trends. We computed constant currency by translating fiscal 2015 results using fiscal 2014 average monthly exchange rates. As a result, constant currency results exclude the effects of foreign currency.
The tables below present the reconciliation of the most directly comparable GAAP measures to constant currency revenues, adjusted revenues,earnings before income taxes, constant currency adjusted earnings before income taxes, adjusted provision for income taxes, adjusted net earnings attributable to CDK, and adjusted netdiluted earnings attributable to CDK per common share. |
| | | | | | | | | | | | | | |
| | Years Ended June 30, | | Change |
| | 2015 | | 2014 | | $ | | % |
| Revenues | $ | 2,063.5 |
| | $ | 1,976.5 |
| | $ | 87.0 |
| | 4 | % |
| Adjustment: | | | | | | | |
Internet sales leads revenues (1) | (46.2 | ) | | (70.9 | ) | | 24.7 |
| | |
| Adjusted revenues | $ | 2,017.3 |
| | $ | 1,905.6 |
| | $ | 111.7 |
| | 6 | % |
| | | | | | | | |
| Earnings before income taxes | $ | 299.9 |
| | $ | 353.3 |
| | $ | (53.4 | ) | | (15 | )% |
| Adjustments: | | | | | | | |
Separation costs (2) | 34.6 |
| | 9.3 |
| | 25.3 |
| | |
Accelerated trademark amortization (3) | 15.6 |
| | — |
| | 15.6 |
| | |
Stand-alone public company costs (4) | — |
| | (30.3 | ) | | 30.3 |
| | |
Trademark royalty fee (5) | — |
| | 16.6 |
| | (16.6 | ) | | |
Stock-based compensation (4) | — |
| | (7.9 | ) | | 7.9 |
| | |
Interest expense (4) | — |
| | (27.8 | ) | | 27.8 |
| | |
Restructuring expenses (6) | 2.4 |
| | — |
| | 2.4 |
| | |
Other business transformation expenses (6) | 1.9 |
| | — |
| | 1.9 |
| | |
Tax matters indemnification loss (7) | 1.1 |
| | — |
| | 1.1 |
| | |
Internet sales leads earnings (1) | (2.5 | ) | | (12.1 | ) | | 9.6 |
| | |
| Adjusted earnings before income taxes | $ | 353.0 |
| | $ | 301.1 |
| | $ | 51.9 |
| | 17 | % |
| Adjusted margin % | 17.5 | % | | 15.8 | % | | | | |
| | | | | | | | |
| Provision for income taxes | $ | 113.6 |
| | $ | 117.4 |
| | $ | (3.8 | ) | | (3 | )% |
| Adjustments: | | | | | | | |
Income tax effect of pre-tax adjustments (8) | 14.0 |
| | (23.7 | ) | | 37.7 |
| | |
Income tax expense due to bonus depreciation law change (9) | (4.6 | ) | | — |
| | (4.6 | ) | | |
Valuation allowance adjustment (10) | — |
| | 7.2 |
| | (7.2 | ) | | |
Pre spin-off filed tax return adjustment (11) | (0.5 | ) | | — |
| | (0.5 | ) | | |
| Adjusted provision for income taxes | $ | 122.5 |
| | $ | 100.9 |
| | $ | 21.6 |
| | 21 | % |
| Adjusted effective tax rate | 34.7 | % | | 33.5 | % | | | | |
|
| | | | | | | | | | | | | | |
| | Years Ended June 30, | | Change |
| | 2018 | | 2017 | | $ | | % |
| Revenues | $ | 2,273.2 |
| | $ | 2,220.2 |
| | $ | 53.0 |
| | 2 | % |
| Impact of exchange rates | (27.1 | ) | | — |
| | (27.1 | ) | | |
| Constant currency revenues | $ | 2,246.1 |
| | $ | 2,220.2 |
| | $ | 25.9 |
| | 1 | % |
| | | | | | | | |
| Earnings before income taxes | $ | 512.0 |
| | $ | 435.3 |
| | $ | 76.7 |
| | 18 | % |
| Margin % | 22.5 | % | | 19.6 | % | | | | |
Restructuring expenses (1) | 20.9 |
| | 18.4 |
| | 2.5 |
| | |
Other business transformation expenses (1) | 50.3 |
| | 78.1 |
| | (27.8 | ) | | |
Total stock-based compensation (2) | 35.7 |
| | 55.4 |
| | (19.7 | ) | | |
Acquisition and integration-related expenses (3) | 15.7 |
| | 0.7 |
| | 15.0 |
| | |
Officer transition expense (4) | 0.6 |
| | 0.7 |
| | (0.1 | ) | | |
Legal and regulatory expenses related to competition matters (5) | 7.4 |
| | — |
| | 7.4 |
| | |
Tax matters indemnification gain, net (6) | (0.4 | ) | | — |
| | (0.4 | ) | | |
| Adjusted earnings before income taxes | $ | 642.2 |
| | $ | 588.6 |
| | $ | 53.6 |
| | 9 | % |
| Adjusted margin % | 28.3 | % | | 26.5 | % | | | | |
| Impact of exchange rates | (8.5 | ) | | — |
| | (8.5 | ) | | |
| Constant currency adjusted earnings before income taxes | $ | 633.7 |
| | $ | 588.6 |
| | $ | 45.1 |
| | 8 | % |
| | | | | | | | |
| Provision for income taxes | $ | 123.3 |
| | $ | 132.8 |
| | $ | (9.5 | ) | | (7 | )% |
| Effective tax rate | 24.1 | % | | 30.5 | % | | | | |
Income tax effect of pre-tax adjustments (7) | 39.7 |
| | 55.5 |
| | (15.8 | ) | | |
Excess tax benefit from stock-based compensation (8) | 5.1 |
| | 13.1 |
| | (8.0 | ) | | |
Pre spin-off filed tax return adjustment (9) | 0.4 |
| | — |
| | 0.4 |
| | |
Impact of U.S tax reform (10) | 18.5 |
| | — |
| | 18.5 |
| | |
| Adjusted provision for income taxes | $ | 187.0 |
| | $ | 201.4 |
| | $ | (14.4 | ) | | (7 | )% |
| Adjusted effective tax rate | 29.1 | % | | 34.2 | % | | | | |
| | | | | | | | |
| Net earnings attributable to CDK | $ | 380.8 |
| | $ | 295.6 |
| | $ | 85.2 |
| | 29 | % |
Restructuring expenses (1) (11) | 20.6 |
| | 18.4 |
| | 2.2 |
| | |
Other business transformation expenses (1) (11) | 50.0 |
| | 78.1 |
| | (28.1 | ) | | |
Total stock-based compensation (2) (11) | 35.6 |
| | 55.4 |
| | (19.8 | ) | | |
Acquisition and integration-related expenses (3) | 15.7 |
| | 0.7 |
| | 15.0 |
| | |
Officer transition expense (4) | 0.6 |
| | 0.7 |
| | (0.1 | ) | | |
|
| | | | | | | | | | | | | | |
| | Years Ended June 30, | | Change |
| | 2015 | | 2014 | | $ | | % |
| Net earnings attributable to CDK | $ | 178.4 |
| | $ | 227.9 |
| | $ | (49.5 | ) | | (22 | )% |
| Adjustments: | | | | | | | |
Separation costs (2) | 34.6 |
| | 9.3 |
| | 25.3 |
| | |
Accelerated trademark amortization (3) | 15.6 |
| | — |
| | 15.6 |
| | |
Stand-alone public company costs (4) | — |
| | (30.3 | ) | | 30.3 |
| | |
Trademark royalty fee (5) | — |
| | 16.6 |
| | (16.6 | ) | | |
Stock-based compensation (4) | — |
| | (7.9 | ) | | 7.9 |
| | |
Interest expense (4) | — |
| | (27.8 | ) | | 27.8 |
| | |
Restructuring expenses (6) | 2.4 |
| | — |
| | 2.4 |
| | |
Other business transformation expenses (6) | 1.9 |
| | — |
| | 1.9 |
| | |
Tax matters indemnification loss (7) | 1.1 |
| | — |
| | 1.1 |
| | |
Internet sales leads earnings (1) | (2.5 | ) | | (12.1 | ) | | 9.6 |
| | |
Income tax effect of pre-tax adjustments (8) | (14.0 | ) | | 23.7 |
| | (37.7 | ) | | |
Income tax expense due to bonus depreciation law change (9) | 4.6 |
| | — |
| | 4.6 |
| | |
Valuation allowance adjustment (10) | — |
| | (7.2 | ) | | 7.2 |
| | |
Pre spin-off filed tax return adjustment (11) | 0.5 |
| | — |
| | 0.5 |
| | |
| Adjusted net earnings attributable to CDK | $ | 222.6 |
| | $ | 192.2 |
| | $ | 30.4 |
| | 16 | % |
| | | | | | | | |
| Adjusted net earnings attributable to CDK per common share: | | | | | | | |
| Basic | $ | 1.39 |
| | $ | 1.20 |
| | | | 16 | % |
| Diluted | $ | 1.38 |
| | $ | 1.20 |
| | | | 15 | % |
| | | | | | | | |
| Weighted-average common shares outstanding: | | | | | | | |
| Basic | 160.6 |
| | 160.6 |
| | | | |
| Diluted | 161.6 |
| | 160.6 |
| | | | |
|
| | | | | | | | | | | | | | |
Legal and regulatory expenses related to competition matters (5) | 7.4 |
| | — |
| | 7.4 |
| | |
Tax matters indemnification gain, net (6) | (0.4 | ) | | — |
| | (0.4 | ) | | |
Income tax effect of pre-tax adjustments (7) | (39.7 | ) | | (55.5 | ) | | 15.8 |
| | |
Excess tax benefit from stock-based compensation (8) | (5.1 | ) | | (13.1 | ) | | 8.0 |
| | |
Pre spin-off filed tax return adjustment (9) | (0.4 | ) | | — |
| | (0.4 | ) | | |
Impact of U.S. tax reform (10) | (18.5 | ) | | — |
| | (18.5 | ) | | |
| Adjusted net earnings attributable to CDK | $ | 446.6 |
| | $ | 380.3 |
| | $ | 66.3 |
| | 17 | % |
| | | | | | | | |
| Diluted earnings attributable to CDK per share | $ | 2.78 |
| | $ | 1.99 |
| | $ | 0.79 |
| | 40 | % |
Restructuring expenses (1) (11) | 0.15 |
| | 0.12 |
| | | | |
Other business transformation expenses (1) (11) | 0.37 |
| | 0.54 |
| | | | |
Total stock-based compensation (2) (11) | 0.26 |
| | 0.37 |
| | | | |
Acquisition and integration-related expenses (3) | 0.12 |
| | — |
| | | | |
Officer transition expense (4) | — |
| | — |
| | | | |
Legal and regulatory expenses related to competition matters (5) | 0.05 |
| | — |
| | | | |
Tax matters indemnification gain, net (6) | — |
| | — |
| | | | |
Income tax effect of pre-tax adjustments (7) | (0.29 | ) | | (0.37 | ) | | | | |
Excess tax benefit from stock-based compensation (8) | (0.04 | ) | | (0.08 | ) | | | | |
Pre spin-off filed tax return adjustment (9) | — |
| | — |
| | | | |
Impact of U.S. tax reform (10) | (0.14 | ) | | — |
| | | | |
| Adjusted diluted earnings attributable to CDK per share | $ | 3.26 |
| | $ | 2.57 |
| | $ | 0.69 |
| | 27 | % |
| | | | | | | | |
| Weighted-average common shares outstanding: | | | | | | | |
| Diluted | 136.8 |
| | 148.2 |
| | | | |
(1) Elimination of revenues and earnings before income taxes related to the Internet sales leads business, which was part of the ARNA segment and was sold on May 21, 2015. Earnings before income taxes related to the Internet sales leads business includes the loss recognized on the sale of $0.8 million in fiscal 2015 and an acquisition-related adjustment of $5.6 million recognized in fiscal 2014.
(2) Incremental costs incurred in fiscal 2015 and 2014 that were directly attributable to our separation from ADP.
(3) Accelerated amortization recognized in the second quarter of fiscal 2015 in the DM segment for the Cobalt trademark related to the change in useful life.
(4) Incremental costs associated with the formation of corporate departments as a stand-alone public company, incremental stock-based compensation expenses incurred for staff additions to build out corporate functions and director compensation costs, and interest expense related to our indebtedness. These costs were incurred in fiscal 2015 and have been reflected as adjustments in fiscal 2014 to present these periods on a comparable basis.
(5) Elimination of the royalty paid to ADP for the utilization of the ADP trademark during the period October 1, 2013 through June 30, 2014 as there was no comparable royalty paid in the period from October 1, 2014 through June 30, 2015 after our separation from ADP.
(6) Restructuring expense recognized in connection with our business transformation plan in fiscal 2015.for the periods presented. Other business transformation expenses arewere included within cost of revenues and selling, general and administrative expenses and were incurred in connection with our business transformation plan for the periods presented.
(2) Total stock-based compensation expense recognized for the periods presented was included within cost of revenues and selling, general and administrative expenses.
(3) Acquisition and integration-related expenses include legal, accounting, other professional fees, and other integration costs incurred in fiscal 2015.connection with assessment and integration of acquisitions for the periods presented and were included within selling, general and administrative expenses.
(4) Officer transition expense includes severance expense in connection with officer departures and was included within selling, general and administrative expenses for the periods presented.
41(5) Legal and regulatory expenses related to competition matters recognized for the periods presented were included within selling, general and administrative expenses.
(7) Loss(6) Net gain recorded inwithin other income, net associated with an indemnification liability toreceivable from ADP for pre spin-off tax refundsperiods in accordance with the tax matters agreement.agreement for fiscal 2018.
(8)(7) Income tax effect of pre-tax adjustments including separation costs, which were partiallycalculated at applicable statutory rates for each adjustment for fiscal 2018 and 2017.
(8) Excess tax deductible in fiscal 2015 and were not tax deductible in fiscal 2014, andbenefit from stock-based compensation for the tax effect of the Internet sales leads business.periods presented.
(9) Adjustment recognized inNet income tax benefit to adjust the second quarter of fiscal 2015 to deferred taxesliability for pre spin-off tax returns related to the bonus depreciation to which ADP is entitled under the tax law andgain in accordance with the tax matters agreement to claim additional tax depreciation for assets associated with our business for tax periods prior to our separation from ADP.fiscal 2018.
(10) Income tax benefit associated with a valuation allowance adjustment recognized during the third quarter of fiscal 2014.
(11) Net income tax expense recognized asAs a result of the filing of pre spin-off tax returns, including aTax Reform Act, an estimated one-time tax benefit for refundsof $26.2 million from the revaluation of the net deferred tax liability partially offset by an estimated one-time expense of $7.7 million associated with undistributed foreign earnings in fiscal 2018.
(11) The portion of expense related to the loss in (7) above.
Adjusted Revenues. Adjusted revenues for fiscal 2015 were $2,017.3noncontrolling interest of $0.3 million an increase of $111.7has been excluded from restructuring expense, $0.3 million or 6%, as compared to $1,905.6from other business transformation expenses, and $0.1 million from total stock-based compensation in fiscal 2014. The increase in adjusted revenues is primarily due to increased revenues in our reportable segments as further discussed below excluding the effect of revenues related to the Internet sales leads business. Adjusted revenues for fiscal 2015 increased by 8% on a constant currency basis as shown in the table below. Adjusted revenues were impacted by the same currencies discussed above in the discussion of revenues.2018. |
| | | | | | | | | | | | | | |
| | Years Ended June 30, | | Change |
| | 2015 | | 2014 | | $ | | % |
| Adjusted revenues | $ | 2,017.3 |
| | $ | 1,905.6 |
| | $ | 111.7 |
| | 6 | % |
| Adjustment: | | | | | | | |
| Impact of exchange rates | 31.9 |
| | — |
| | 31.9 |
| | |
| Constant currency adjusted revenues | $ | 2,049.2 |
| | $ | 1,905.6 |
| | $ | 143.6 |
| | 8 | % |
Adjusted Earnings Beforebefore Income Taxes. Adjusted earnings before income taxes for fiscal 2015 were $353.02018 increased $53.6 million an increase of $51.9 million, or 17%, as compared to $301.1 million in fiscal 2014.2017. Adjusted margin increased from 15.8%26.5% to 17.5% primarily due to growth in revenues in our segments, operating efficiencies, and a reduction28.3%. The impact of our accounts receivable allowances as a resultforeign exchange rates on adjusted earnings before income taxes was an increase of a change in estimate, partially offset by increased costs associated with the migration of hosting facilities that support the ARNA segment, and higher sales force expenses incurred to drive increased growth within our DM client base.$8.5 million. Adjusted earnings before income taxes forwas favorably impacted by benefits obtained from ongoing initiatives under our business transformation plan, primarily related to lower headcount and geographic mix, and operating efficiencies inclusive of revenue growth, lower incentive compensation, and a recovery in fiscal 2015 increased by 19%2018 on a constant currency basis as shownnon-operating receivable that had been impaired in fiscal 2017 upon execution of a licensing and service agreement. The favorable effects of these items were partially offset by increased interest expense, costs to implement the table below.new revenue recognition standard and other outside services, and depreciation and amortization.
|
| | | | | | | | | | | | | | |
| | Years Ended June 30, | | Change |
| | 2015 | | 2014 | | $ | | % |
| Adjusted earnings before income taxes | $ | 353.0 |
| | $ | 301.1 |
| | $ | 51.9 |
| | 17 | % |
| Adjustment: | | | | | | | |
| Impact of exchange rates | 5.8 |
| | — |
| | 5.8 |
| | |
| Constant currency adjusted earnings before income taxes | $ | 358.8 |
| | $ | 301.1 |
| | $ | 57.7 |
| | 19 | % |
Adjusted Provision for Income Taxes. The adjusted effective tax rate for fiscal 20152018 was 34.7%29.1% as compared to 33.5%34.2% for fiscal 2014.2017. The adjusted effective tax rate for fiscal 20142018 was favorably impacted by a tax benefit associated with an adjustment$29.6 million due to the liability for uncertainreduced corporate income tax matters of $3.6 million. In addition, the adjusted effective tax rate for fiscal 2015 was favorably impacted by tax benefits associated with adjustments to the valuation allowance.rate.
Adjusted Net Earnings Attributable to CDK. Adjusted net earnings attributable to CDK for fiscal 2015 were $222.62018 increased $66.3 million an increase of $30.4 million, or 16%, as compared to $192.2 million in fiscal 2014.2017. The increase in adjusted net earnings attributable to CDK was primarily due to the items discussed above in adjusted earnings before income taxes partially offset by the associated tax effect.
EBITDA is calculated as earnings before income taxes adjusted to exclude interest expense, depreciation, and amortization. Adjusted EBITDA for fiscal 2015 and 2014 reflects adjustments to exclude costs directly attributable to our separation from ADP, incremental costs associated with the formation of corporate departments as a stand-alone public company, total stock-based compensation expense, costs attributable to the business transformation plan, certain one-time adjustments, and earnings related to the Internet sales leads business. Because EBITDA and adjusted EBITDA are not measures of performance that are calculated in accordance with GAAP, they should not be considered in isolation from, or as a substitute for, other metrics that are calculated in accordance with GAAP.
The table below presents the reconciliation of net earnings before income taxesattributable to EBITDA andCDK to adjusted EBITDA.
|
| | | | | | | | | | | | | | |
| | Years Ended June 30, | | Change |
| | 2015 | | 2014 | | $ | | % |
| Earnings before income taxes | $ | 299.9 |
| | $ | 353.3 |
| | $ | (53.4 | ) | | (15 | )% |
| Adjustments: | | | | | | | |
Interest expense (1) | 28.8 |
| | 1.0 |
| | 27.8 |
| | |
Depreciation and amortization (2) | 76.5 |
| | 52.3 |
| | 24.2 |
| | |
| EBITDA | $ | 405.2 |
| | $ | 406.6 |
| | $ | (1.4 | ) | | — | % |
| Adjustments: | | | | | | | |
Separation costs (3) | 34.6 |
| | 9.3 |
| | 25.3 |
| | |
Stand-alone public company costs (4) | — |
| | (30.3 | ) | | 30.3 |
| | |
Trademark royalty fee (5) | — |
| | 16.6 |
| | (16.6 | ) | | |
Total stock-based compensation (6) | 30.4 |
| | 21.0 |
| | 9.4 |
| | |
Restructuring expenses (7) | 2.4 |
| | — |
| | 2.4 |
| | |
Other business transformation expenses (7) | 1.9 |
| | — |
| | 1.9 |
| | |
Tax matters indemnification loss (8) | 1.1 |
| | — |
| | 1.1 |
| | |
Internet sales leads earnings (9) | (2.5 | ) | | (12.1 | ) | | 9.6 |
| | |
| Adjusted EBITDA | $ | 473.1 |
| | $ | 411.1 |
| | $ | 62.0 |
| | 15 | % |
| Adjusted margin % | 23.5 | % | | 21.6 | % | | | | |
|
| | | | | | | | | | | | | | |
| | Years Ended June 30, | | Change |
| | 2018 | | 2017 | | $ | | % |
| Net earnings attributable to CDK | $ | 380.8 |
| | $ | 295.6 |
| | $ | 85.2 |
| | 29 | % |
| Margin % | 16.8 | % | | 13.3 | % | | | | |
Net earnings attributable to noncontrolling interest (1) | 7.9 |
| | 6.9 |
| | 1.0 |
| | |
Provision for income taxes (2) | 123.3 |
| | 132.8 |
| | (9.5 | ) | | |
Interest expense (3) | 95.9 |
| | 57.2 |
| | 38.7 |
| | |
Depreciation and amortization (4) | 79.1 |
| | 70.3 |
| | 8.8 |
| | |
Total stock-based compensation (5) | 35.7 |
| | 55.4 |
| | (19.7 | ) | | |
Restructuring expenses (6) | 20.9 |
| | 18.4 |
| | 2.5 |
| | |
Other business transformation expenses (6) | 50.1 |
| | 75.6 |
| | (25.5 | ) | | |
Acquisition and integration-related expenses (7) | 15.7 |
| | 0.7 |
| | 15.0 |
| | |
Officer transition expense (8) | 0.6 |
| | 0.7 |
| | (0.1 | ) | | |
Legal and regulatory expenses related to competition matters (9) | 7.4 |
| | — |
| | 7.4 |
| | |
Tax matters indemnification gain, net (10) | (0.4 | ) | | — |
| | (0.4 | ) | | |
| Adjusted EBITDA | $ | 817.0 |
| | $ | 713.6 |
| | $ | 103.4 |
| | 14 | % |
| Adjusted margin % | 35.9 | % | | 32.1 | % | | | | |
(1) Net earnings attributable to noncontrolling interest included within the financial statements for the periods presented.
(2) Provision for income taxes included within the financial statements for the periods presented.
(3) Interest expense included within the financial statements for the periods presented.
(2)(4) Depreciation and amortization included within the financial statements for the periods presented, including the accelerated amortization attributable to the Cobalt trademark recognized during the second quarter of fiscal 2015.
(3) Incremental costs incurred in fiscal 2015 and 2014 that were directly attributable to our separation from ADP.
(4) Incremental costs associated with the formation of corporate departments as a stand-alone public company. These costs were incurred in fiscal 2015 and have been reflected as adjustments in fiscal 2014 to present all periods on a comparable basis.presented.
(5) Elimination of the royalty paid to ADP for the utilization of the ADP trademark during the period October 1, 2013 through June 30, 2014 as there was no comparable royalty paid in the period from October 1, 2014 through June 30, 2015 after our separation from ADP.
(6) Total stock-based compensation expense recognized for the periods presented.
(7)(6) Restructuring expense recognized in connection with our business transformation plan in fiscal 2015.2018 and 2017. Other business transformation expenses are included within cost of revenues and selling, general and administrative expenses and were incurred in connection with our business transformation plan in fiscal 2015.2018 and 2017. Other business transformation expenses exclude $0.2 million and $2.5 million of accelerated depreciation expense for fiscal 2018 and 2017 for purposes of calculating adjusted EBITDA.
(7) Acquisition and integration-related expenses include legal, accounting, other professional fees, and other integration costs incurred in connection with assessment and integration of acquisitions and were included within selling, general and administrative expenses.
(8) LossOfficer transition expense includes severance expense in connection with officer departures is included within selling, general and administrative expenses for the periods presented.
(9) Legal and regulatory expenses related to competition matters recognized for the periods presented were included within selling, general and administrative expenses.
(10) Net gain recorded within other income, net associated with an indemnification liability toreceivable from ADP for pre spin-off tax refundsperiods in accordance with the tax matters agreement.
(9) Elimination of earnings before income taxes related to the Internet sales leads business. Earnings before income taxes related to the Internet sales leads business includes the loss recognized on the sale of $0.8 million in fiscal 2015 and an acquisition-related adjustment of $5.6 million recognized in fiscal 2014.
EBITDA. EBITDAagreement for fiscal 2015 was $405.2 million, a decrease of $1.4 million, as compared to $406.6 million in fiscal 2014. The decrease in EBITDA was primarily due to costs associated with our separation from ADP, costs incurred related to the formation of corporate departments as a stand-alone public company, increased costs associated with the migration of hosting facilities that support the ARNA segment, increased stock-based compensation expense, higher sales force expenses incurred to drive increased growth with our DM client base, and the effects of a favorable acquisition-related adjustment of $5.6 million and a favorable legal settlement both in the ARNA segment in fiscal 2014, partially offset by growth in revenues in our segments, operating efficiencies, and the royalty expense incurred prior to the spin-off.2018.
Adjusted EBITDA. Adjusted EBITDA for fiscal 2015 was $473.12018 increased $103.4 million an increase of $62.0 million, or 15%, as compared to $411.1 millionfiscal 2017. Adjusted margin increased from 32.1% to 35.9%. Adjusted EBITDA was favorably impacted by benefits obtained from ongoing initiatives under our business transformation plan, primarily related to lower headcount and geographic mix, and operating efficiencies inclusive of revenue growth, lower incentive compensation, a recovery in fiscal 2014. The increase in adjusted EBITDA was due to the items discussed above in EBITDA excluding costs associated with our separation from ADP, costs incurred as2018 of a stand-alone public company, the royalty fee charged by ADPnon-operating receivable that had been impaired in fiscal 2014 as there is no comparable royalty expense in the same periods in fiscal 2015, total stock-based compensation expense,2017 upon execution of a licensing and service agreement, and the effectimpact of earnings relatedforeign exchange rates. The favorable effects of these items were partially offset by costs to implement the Internet sales leads business.new revenue recognition standard and other outside services.
Analysis of Reportable Segments
The following is a discussion of the results of our operations by reportable segment for fiscal 20152018 and 2014.2017. Certain expenses are charged to the reportable segments at a standard rate for management reporting purposes. Other costs are charged to the reportable segments based on management’s responsibility for the applicable costs. Reportable segment revenues and earnings before income taxes for fiscal 2014 have been adjusted to reflect updated budgeted foreign exchange rates for the fiscal year ended June 30, 2015. This adjustment is made for management reporting purposes so that the reportable revenues and earnings before taxes for each segment are presented on a consistent basis without the impact of fluctuations in foreign currency exchange rates. This adjustment is a reconciling item to revenues and earnings before income taxes in order to eliminate the adjustment in consolidation.
Adjusted revenues and adjusted earnings before income taxes by reportable segment are included throughout this section. Since adjusted revenues and adjusted earnings before income taxes by reportable segment are not measures of performance that are calculated in accordance with GAAP, they should not be considered in isolation from, or as a substitute for, other metrics that are calculated in accordance with GAAP.
GAAP Segment Revenues
The table below presents data on revenues by segment for the periods indicated and the dollar change and percentage change between periods. |
| | | | | | | | | | | | | | |
| | Years Ended June 30, | | Change |
| | 2015 | | 2014 | | $ | | % |
| Automotive Retail North America | $ | 1,342.7 |
| | $ | 1,270.3 |
| | $ | 72.4 |
| | 6 | % |
| Automotive Retail International | 346.2 |
| | 339.3 |
| | 6.9 |
| | 2 | % |
| Digital Marketing | 414.1 |
| | 373.2 |
| | 40.9 |
| | 11 | % |
| Reconciling item: | | | | | | | |
| Foreign exchange | (39.5 | ) | | (6.3 | ) | | (33.2 | ) | | n/m |
|
| Total | $ | 2,063.5 |
| | $ | 1,976.5 |
| | $ | 87.0 |
| | 4 | % |
GAAP Segment Earnings Before Income Taxes
The table below presents data on earnings before income taxes by segment for the periods indicated and the dollar change and percentage change between periods.
|
| | | | | | | | | | | | | | |
| | Years Ended June 30, | | Change |
| | 2015 | | 2014 | | $ | | % |
| Automotive Retail North America | $ | 389.8 |
| | $ | 361.3 |
| | $ | 28.5 |
| | 8 | % |
| Margin % | 29.0 | % | | 28.4 | % | | | | |
| Automotive Retail International | 50.1 |
| | 45.3 |
| | 4.8 |
| | 11 | % |
| Margin % | 14.5 | % | | 13.4 | % | | | | |
| Digital Marketing | 25.6 |
| | 25.6 |
| | — |
| | — | % |
| Margin % | 6.2 | % | | 6.9 | % | | | | |
| Other | (158.6 | ) | | (76.7 | ) | | (81.9 | ) | | 107 | % |
| Reconciling item: | | | | | | | |
| Foreign exchange | (7.0 | ) | | (2.2 | ) | | (4.8 | ) | | n/m |
|
| Total | $ | 299.9 |
| | $ | 353.3 |
| | $ | (53.4 | ) | | (15 | )% |
| Margin % | 14.5 | % | | 17.9 | % | | | | |
Automotive Retail Solutions North America Segment
The table below presents the reconciliation of revenues to adjustedconstant currency revenues, and earnings before income taxes to constant currency adjusted earnings before income taxes for the ARNARSNA segment. Refer to the footnotes in "Non-GAAP Measures""Consolidated Non-GAAP Results" for additional information on the adjustments presented below.
|
| | | | | | | | | | | | | | |
| | Years Ended June 30, | | Change |
| | 2015 | | 2014 | | $ | | % |
| Revenues | $ | 1,342.7 |
| | $ | 1,270.3 |
| | $ | 72.4 |
| | 6 | % |
| Adjustment: | | | | | | | |
| Internet sales leads revenues | (46.2 | ) | | (70.9 | ) | | 24.7 |
| | |
| Adjusted revenues | $ | 1,296.5 |
| | $ | 1,199.4 |
| | $ | 97.1 |
| | 8 | % |
| | | | | | | | |
| Earnings before income taxes | $ | 389.8 |
| | $ | 361.3 |
| | $ | 28.5 |
| | 8 | % |
| Adjustments: | | | | | | | |
| Stand-alone public company costs | — |
| | (8.0 | ) | | 8.0 |
| | |
| Internet sales leads earnings | (2.5 | ) | | (12.1 | ) | | 9.6 |
| | |
| Adjusted earnings before income taxes | $ | 387.3 |
| | $ | 341.2 |
| | $ | 46.1 |
| | 14 | % |
| Adjusted margin % | 29.9 | % | | 28.4 | % | | | | |
|
| | | | | | | | | | | | | | |
| | Years Ended June 30, | | Change |
| | 2018 | | 2017 | | $ | | % |
| Revenues | $ | 1,611.1 |
| | $ | 1,600.7 |
| | $ | 10.4 |
| | 1 | % |
| Impact of exchange rates | (4.5 | ) | | — |
| | (4.5 | ) | | |
| Constant currency revenues | $ | 1,606.6 |
| | $ | 1,600.7 |
| | $ | 5.9 |
| | — | % |
| | | | | | | | |
| Earnings before income taxes | $ | 659.0 |
| | $ | 605.5 |
| | $ | 53.5 |
| | 9 | % |
| Margin % | 40.9 | % | | 37.8 | % | | | | |
| Acquisition and integration-related expenses | 15.6 |
| | 0.7 |
| | 14.9 |
| | |
| Legal and regulatory expenses related to competition matters | 7.4 |
| | — |
| | 7.4 |
| | |
| Adjusted earnings before income taxes | $ | 682.0 |
| | $ | 606.2 |
| | $ | 75.8 |
| | 13 | % |
| Adjusted margin % | 42.3 | % | | 37.9 | % | | | | |
| Impact of exchange rates | (2.4 | ) | | — |
| | (2.4 | ) | | |
| Constant currency adjusted earnings before income taxes | $ | 679.6 |
| | $ | 606.2 |
| | $ | 73.4 |
| | 12 | % |
The table below presents revenue by type for the RSNA segment:
|
| | | | | | | | | | | |
| | Years Ended June 30, | | Change |
| | 2018 | | 2017 | | $ | | % |
| Subscription revenue | 1,306.3 |
| | 1,261.4 |
| | 44.9 |
| | 4 | % |
| Transaction revenue | 164.0 |
| | 179.5 |
| | (15.5 | ) | | (9 | )% |
| Other revenue | 140.8 |
| | 159.8 |
| | (19.0 | ) | | (12 | )% |
| Total | 1,611.1 |
| | 1,600.7 |
| | 10.4 |
| | 1 | % |
Revenues. ARNARSNA revenues increased $72.4 million, or 6%, to $1,342.7 million for fiscal 20152018 increased $10.4 million as compared to fiscal 2014. DMS client site count as2017. RSNA revenues were favorably impacted by the strength of June 30, 2015 was 14,219 sites comparedthe U.S. dollar against the Canadian dollar on a constant currency basis, which contributed to 13,650 sites as of June 30, 2014, an increase of approximately 4%. The$4.5 million.
Subscription revenues grew due to an increase in DMS client sites contributed $30.2 million, or 2 percentage points, of overall revenue growth. In addition, we experienced 3% growth in average revenue per DMS clientcustomer site driven byof 4.9%, which resulted from a combination of increased sales of additionalnew or expanded solutions to our existing clientcustomer base and pricing. In addition, we experienced an increase in customer websites from 6,879 websites as of June 30, 2017 to 6,953 websites as of June 30, 2018. This was partially offset by a decrease in DMS customer site count from 14,611 sites as of June 30, 2017 to 14,557 sites as of June 30, 2018. The growthincrease in average revenue per DMS clientcustomer site contributed $30.5$44.9 million of revenue growth, or 2 percentage points,approximately 3%, and includes a favorable currency impact of overall revenue growth.$4.1 million. Transaction related revenues contributed a $16.4generated from vehicle registrations, credit checks, and automotive equity mining, decreased $15.5 million, or 1 percentage point, decline in revenuesprimarily due to decreased volume from the Internet sales leads business.dropped point solutions. Other revenue items such asdecreased $19.0 million primarily due to lower hardware sales consulting, and data aggregation services contributed the remaining growth in revenues.includes a favorable currency impact of $0.4 million.
Adjusted Revenues. ARNA adjusted revenuesEarnings before Income Taxes. RSNA earnings before income taxes for fiscal 2015 were $1,296.52018 increased $53.5 million an increase of $97.1 million, or 8%, as compared to fiscal 2014. The increase in adjusted revenues is primarily due2017. Margin increased from 37.8% to the items discussed above in revenues excluding the effect of revenues related to the Internet sales leads business. Transaction related revenues excluding the Internet sales leads business contributed $8.4 million, or approximately 1 percentage point, of adjusted revenue growth.40.9%.
Earnings Before Income Taxes. ARNARSNA earnings before income taxes increased $28.5 million, or 8%,were favorably impacted by operating efficiencies inclusive of benefits obtained from ongoing initiatives under our business transformation plan, primarily related to $389.8 million for fiscal 2015 as compared to fiscal 2014. Margin increased from 28.4% to 29.0% as compared to fiscal 2014, primarily due to increased DMS client sites, increased average revenue per DMS client site,lower headcount and geographic mix, lower incentive compensation, and a reduction of our accounts receivable allowances as a resultrecovery in fiscal 2018 of a changenon-operating receivable that had been impaired in estimate,fiscal 2017 upon execution of a licensing and service agreement partially offset by an increase in acquisition and integration costs, associated with the migration of hosting facilities, stand-alone public company costs in fiscal 2015,legal and the effects of a favorable acquisition-related adjustment of $5.6 million and a favorable legal settlement both in fiscal 2014.
Adjusted Earnings Before Income Taxes. ARNA adjusted earnings before income taxes increased by $46.1 million, or 14%, to $387.3 million for fiscal 2015 as compared to fiscal 2014 due to the items discussed above excluding costs incurred as a stand-alone public company and the effect of earningsregulatory expenses related to the Internet sales leads business.competition matters, depreciation and amortization, and outside services.
Automotive Retail International SegmentAdvertising North America
There were no non-GAAP adjustments to the ARI segment for fiscal 2015 or 2014.
Revenues. ARI revenues increased $6.9 million, or 2%, to $346.2 million for fiscal 2015 as compared to fiscal 2014. The increase in revenues was primarily due to increased average revenue per client.
Earnings Before Income Taxes. ARI earnings before income taxes increased $4.8 million, or 11%, to $50.1 million for fiscal 2015 as compared to fiscal 2014. Margin increased from 13.4% to 14.5% due to operating efficiencies.
Digital Marketing Segment
The table below presents the reconciliation of earnings before income taxes to adjusted earnings before income taxes for the DMANA segment. Refer to the footnotes in "Non-GAAP Measures""Consolidated Non-GAAP Results" for additional information on the adjustments presented below.
| | | | Years Ended June 30, | | Change | Years Ended June 30, | | Change |
| | 2015 | | 2014 | | $ | | % | 2018 | | 2017 | | $ | | % |
| Revenues | | $ | 305.8 |
| | $ | 307.6 |
| | $ | (1.8 | ) | | (1 | )% |
| | | | | | | | | |
| Earnings before income taxes | $ | 25.6 |
| | $ | 25.6 |
| | $ | — |
| | — | % | $ | 37.1 |
| | $ | 44.4 |
| | $ | (7.3 | ) | | (16 | )% |
| Adjustment: | | | | | | | | |
| Accelerated trademark amortization | 15.6 |
| | — |
| | 15.6 |
| | | |
| Margin % | | 12.1 | % | | 14.4 | % | | | | |
| Acquisition and integration-related expenses | | 0.1 |
| | — |
| | 0.1 |
| | |
| Adjusted earnings before income taxes | $ | 41.2 |
| | $ | 25.6 |
| | $ | 15.6 |
| | 61 | % | $ | 37.2 |
| | $ | 44.4 |
| | $ | (7.2 | ) | | (16 | )% |
| Adjusted margin % | 9.9 | % | | 6.9 | % | | | | | 12.2 | % | | 14.4 | % | | | | |
Revenues. DMANA revenues increased $40.9 million, or 11%, to $414.1 million for fiscal 20152018 decreased $1.8 million as compared to fiscal 2014. This increase2017. The overall decrease was due to a reduction in certain OEM funded advertising placements partially offset by an 11% increase in new dealer spend, local marketing association internet advertising placements, and contributions from the Progressus acquisition.
Earnings before Income Taxes. ANA earnings before income taxes for fiscal 2018 decreased $7.3 million as compared to fiscal 2017. Margin decreased from 14.4% to 12.1%. ANA margin decline was primarily due to a shift in revenue mix.
CDK International
The table below presents the reconciliation of revenues to constant currency revenues, and earnings before income taxes to constant currency earnings before income taxes for the CDKI segment. There were no other non-GAAP adjustments to the CDKI segment for fiscal 2018 and 2017.
|
| | | | | | | | | | | | | | |
| | Years Ended June 30, | | Change |
| | 2018 | | 2017 | | $ | | % |
| Revenue | $ | 356.3 |
| | $ | 311.9 |
| | $ | 44.4 |
| | 14 | % |
| Impact of exchange rates | (22.6 | ) | | — |
| | (22.6 | ) | | |
| Constant currency revenues | $ | 333.7 |
| | $ | 311.9 |
| | $ | 21.8 |
| | 7 | % |
| | | | | | | | |
| Earnings before income taxes | $ | 97.7 |
| | $ | 75.0 |
| | $ | 22.7 |
| | 30 | % |
| Margin % | 27.4 | % | | 24.0 | % | | | | |
| Impact of exchange rates | (5.3 | ) | | — |
| | (5.3 | ) | | |
| Constant currency earnings before income taxes | $ | 92.4 |
| | $ | 75.0 |
| | $ | 17.4 |
| | 23 | % |
Revenues. CDKI revenues for fiscal 2018 increased $44.4 million as compared to fiscal 2017. CDKI revenues were impacted by the strength of the Euro, the Pound Sterling, and the Renminbi against the U.S. dollar, which contributed to an increase of $22.6 million, or 7 percentage points. CDKI experienced growth in revenues on a constant currency basis primarily due to increased average monthly revenue per website, which contributed $29.4 million, or 8 percentage points, ofcustomer site and accelerated deferred revenue growth and a 22% increase in OEM advertising, which contributed $20.0 million, or 5 percentage points, of revenue growth. We experienceddue to an early contract termination despite a decrease in website count of 10%, which contributed $5.9 million, or 2 percentage points, of revenue decline.DMS customer site count.
Earnings Beforebefore Income Taxes. DMCDKI earnings before income taxes for fiscal 2018 increased $22.7 million as compared to fiscal 2017. Margin increased from 24.0% to 27.4%. The constant currency impact of foreign exchange rates on CDKI earnings before income taxes was consistent between fiscal 2015 and fiscal 2014. Margin decreased from 6.9% to 6.2% primarily due to accelerated trademark amortization and costs incurred to expand our sales force partially offset by increased OEM advertising revenues, an increased mixincrease of higher margin website-related revenues, a reduction of our accounts receivable allowances as a result of a change in estimate, and a reduction to employee-related costs.
Adjusted Earnings Before Income Taxes. DM adjusted$5.3 million. CDKI earnings before income taxes were favorably impacted by increased by $15.6 million, or 61%, to $41.2 million for fiscal 2015 as compared to fiscal 2014. The increase in adjusted earnings before income taxes was attributable to the items discussed above excluding accelerated trademark amortization.average revenue per customer site and operating efficiencies, which resulted from benefits obtained from ongoing initiatives under our business transformation plan and lower incentive compensation.
Other Segment
The table below presents the reconciliation of loss before income taxes to adjusted loss before income taxes for the Other segment. Refer to the footnotes in "Non-GAAP Measures""Consolidated Non-GAAP Results" for additional information on the adjustments presented below.
|
| | | | | | | | | | | | | | |
| | Years Ended June 30, | | Change |
| | 2015 | | 2014 | | $ | | % |
| Loss before income taxes | $ | (158.6 | ) | | $ | (76.7 | ) | | $ | (81.9 | ) | | 107 | % |
| Adjustments: | | | | | | | |
| Separation costs | 34.6 |
| | 9.3 |
| | 25.3 |
| | |
| Stand-alone public company costs | — |
| | (22.3 | ) | | 22.3 |
| | |
| Trademark royalty fee | — |
| | 16.6 |
| | (16.6 | ) | | |
| Stock-based compensation | — |
| | (7.9 | ) | | 7.9 |
| | |
| Interest expense | — |
| | (27.8 | ) | | 27.8 |
| | |
| Restructuring expenses | 2.4 |
| | — |
| | 2.4 |
| | |
| Other business transformation expenses | 1.9 |
| | — |
| | 1.9 |
| | |
| Tax matters indemnification loss | 1.1 |
| | — |
| | 1.1 |
| | |
| Adjusted loss before income taxes | $ | (118.6 | ) | | $ | (108.8 | ) | | $ | (9.8 | ) | | 9 | % |
|
| | | | | | | | | | | | | | |
| | Years Ended June 30, | | Change |
| | 2018 | | 2017 | | $ | | % |
| Loss before income taxes | $ | (281.8 | ) | | $ | (289.6 | ) | | $ | 7.8 |
| | 3 | % |
| Restructuring expenses | 20.9 |
| | 18.4 |
| | 2.5 |
| | |
| Other business transformation expenses | 50.3 |
| | 78.1 |
| | (27.8 | ) | | |
| Total stock-based compensation | 35.7 |
| | 55.4 |
| | (19.7 | ) | | |
| Officer transition expense | 0.6 |
| | 0.7 |
| | (0.1 | ) | | |
| Tax matters indemnification gain, net | (0.4 | ) | | — |
| | (0.4 | ) | | |
| Adjusted loss before income taxes | $ | (174.7 | ) | | $ | (137.0 | ) | | $ | (37.7 | ) | | (28 | )% |
| Impact of exchange rates | (0.8 | ) | | — |
| | (0.8 | ) | | |
| Constant currency adjusted loss before income taxes | $ | (175.5 | ) | | $ | (137.0 | ) | | $ | (38.5 | ) | | (28 | )% |
The primary components of the Other loss before income taxes in the Other segment are certain costs that are not allocated to our reportable segments, such as interest expense, stock-based compensation expense, stand-alone public company costs, costs that are directly attributable to our separation from ADP, costs attributable to the business transformation plan, the trademark royalty fee charged by ADP prior to the spin-off, and certain unallocated expenses.
Loss Beforebefore Income Taxes. The Other loss before income taxes in Other increased by $81.9 million, or 107%, to $158.6 million for fiscal 20152018 decreased by $7.8 million as compared to fiscal 2014 primarily due to increased separation costs, interest expense associated with our indebtedness, stand-alone public company costs, stock-based compensation expense, and expenses associated with our business transformation plan partially offset by the trademark royalty fee charged by ADP in fiscal 2014 and employee benefit-related costs.
Adjusted Loss Before Income Taxes. 2017. The adjustedOther loss before income taxes inwas favorably impacted by lower business transformation expenses, lower stock-based compensation, and higher interest income. The Other loss before income taxes was unfavorably impacted by increased by $9.8 million, or 9%, to $118.6 million for fiscal 2015 as compared to fiscal 2014 primarilyinterest expense due to employee benefit-related costs.the full year impact of the 2027 notes issued in May 2017 and the partial year impact of our 2026 notes issued in June 2018, and costs to implement the new revenue recognition standard and other outside services.
Fiscal 20142017 Compared to Fiscal 2013
Results of Operations2016
The following is a discussion of the results of our combinedconsolidated results of operations for fiscal 20142017 and the year ended June 30, 2013 ("fiscal 2013").2016. For a discussion of our operations by segment, see "Analysis of Reportable Segments" below.
The table below presents combinedconsolidated statements of operations data for the periods indicated and the dollar change and percentage change between periods.
| | | | Years Ended June 30, | | Change | Years Ended June 30, | | Change |
| | 2014 | | 2013 | | $ | | % | 2017 | | 2016 | | $ | | % |
| Revenues | $ | 1,976.5 |
| | $ | 1,839.4 |
| | $ | 137.1 |
| | 7 | % | $ | 2,220.2 |
| | $ | 2,114.6 |
| | $ | 105.6 |
| | 5 | % |
| Costs of revenues | 1,204.5 |
| | 1,104.6 |
| | 99.9 |
| | 9 | % | 1,234.9 |
| | 1,243.4 |
| | (8.5 | ) | | (1 | )% |
| Selling, general and administrative expenses | 411.8 |
| | 416.9 |
| | (5.1 | ) | | (1 | )% | 477.7 |
| | 448.5 |
| | 29.2 |
| | 7 | % |
| Separation costs | 9.3 |
| | — |
| | 9.3 |
| | n/m |
| |
| Restructuring expenses | | 18.4 |
| | 20.2 |
| | (1.8 | ) | | n/m |
|
| Total expenses | 1,625.6 |
| | 1,521.5 |
| | 104.1 |
| | 7 | % | 1,731.0 |
| | 1,712.1 |
| | 18.9 |
| | 1 | % |
| Operating earnings | 350.9 |
| | 317.9 |
| | 33.0 |
| | 10 | % | 489.2 |
| | 402.5 |
| | 86.7 |
| | 22 | % |
| Interest expense | (1.0 | ) | | (0.9 | ) | | (0.1 | ) | | 11 | % | (57.2 | ) | | (40.2 | ) | | (17.0 | ) | | (42 | )% |
| Other income, net | 3.4 |
| | 3.7 |
| | (0.3 | ) | | (8 | )% | 3.3 |
| | 6.8 |
| | (3.5 | ) | | (51 | )% |
| Earnings before income taxes | 353.3 |
| | 320.7 |
| | 32.6 |
| | 10 | % | 435.3 |
| | 369.1 |
| | 66.2 |
| | 18 | % |
| Margin % | 17.9 | % | | 17.4 | % | | | | | 19.6 | % | | 17.5 | % | | | | |
| Provision for income taxes | (117.4 | ) | | (115.0 | ) | | (2.4 | ) | | 2 | % | (132.8 | ) | | (122.3 | ) | | (10.5 | ) | | (9 | )% |
| Effective tax rate | 33.2 | % | | 35.9 | % | | | | | 30.5 | % | | 33.1 | % | | | | |
| Net earnings | 235.9 |
| | 205.7 |
| | 30.2 |
| | 15 | % | 302.5 |
| | 246.8 |
| | 55.7 |
| | 23 | % |
| Less: net earnings attributable to noncontrolling interest | 8.0 |
| | 6.3 |
| | 1.7 |
| | 27 | % | 6.9 |
| | 7.5 |
| | (0.6 | ) | | (8 | )% |
| Net earnings attributable to CDK | $ | 227.9 |
| | $ | 199.4 |
| | $ | 28.5 |
| | 14 | % | $ | 295.6 |
| | $ | 239.3 |
| | $ | 56.3 |
| | 24 | % |
Revenues. Revenues for fiscal 2014 were $1,976.52017 increased $105.6 million an increase of $137.1 million, or 7%, as compared to $1,839.4 million in fiscal 2013. We also review revenues on a constant currency basis to understand underlying business trends. We computed constant currency by translating fiscal 2014 results using fiscal 2013 average monthly exchange rates. Revenues for fiscal 2014 increased by 7% on a constant currency basis as shown in the table below.
|
| | | | | | | | | | | | | | |
| | Years Ended June 30, | | Change |
| | 2014 | | 2013 | | $ | | % |
| Revenues | $ | 1,976.5 |
| | $ | 1,839.4 |
| | $ | 137.1 |
| | 7 | % |
| Adjustment: | | | | | | | |
| Impact of exchange rates | (0.8 | ) | | — |
| | (0.8 | ) | | |
| Constant currency revenues | $ | 1,975.7 |
| | $ | 1,839.4 |
| | $ | 136.3 |
| | 7 | % |
2016. The foreign exchange rate impact was minimal due to the impact of offsetting foreign currency exchange fluctuations. Based on budgeted foreign exchange rates, which may differ from the constant currency effect previously described, the ARNARSNA segment contributed $63.6 million, the DM segment contributed $62.9$79.4 million and the ARIANA segment contributed $9.7$27.9 million, partially offset by a decrease in revenues in the CDKI segment of CDK revenue growth.$1.7 million. See the discussion below for drivers of each segment's revenue growth. The impact of foreign exchange rates on revenues was a decrease of $17.4 million. The foreign exchange rate impact was primarily due to the strength of the U.S. dollar against the Pound Sterling, the Euro, and the Renminbi.
Cost of Revenues. Cost of revenues for fiscal 2014 increased $99.92017 decreased $8.5 million or 9%, as compared to fiscal 2013.2016. The increase inimpact of foreign exchange rates on cost of revenues was a decrease of $11.1 million. Cost of revenues was favorably impacted by lower labor-related costs attributable to ongoing initiatives under our business transformation plan primarily duerelated to higherlower headcount and geographic labor mix, and a reduction of expenses related to employee benefits. The favorable effects of these items were partially offset by an increase in direct operating expenses related to implementingother business transformation expenses and servicing new customers and products, highera growth in advertising costs related to such revenues, and increased expenses incurred for research and development.the ANA segment. Cost of revenues includedinclude expenses to research, develop, and deploy new and enhanced solutions for our clientscustomers of $165.7$150.0 million and $156.4$161.0 million for fiscal 20142017 and 2013,2016, respectively, representing 8.4%6.8% and 8.5%7.6% of revenues in fiscal 2014 and 2013, respectively.revenues.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for fiscal 2014 decreased $5.1 million, or 1%, as compared to fiscal 2013 due primarily to the effects of a favorable acquisition-related adjustment of $5.6
million and a favorable legal settlement both in the ARNA segment in fiscal 2014, partially offset by2017 increased stock-based compensation expense.
Separation Costs. Separation costs represent costs directly attributable to our spin-off from ADP and are primarily related to professional services. Separation costs were $9.3 million in fiscal 2014; there were no comparable separation costs in fiscal 2013.
Interest Expense. Interest expense for fiscal 2014 increased $0.1$29.2 million as compared to fiscal 2013.2016. The impact of foreign exchange rates on selling, general and administrative expenses was a decrease of $5.8 million. Selling, general and administrative expenses increased as a result of other business transformation expenses, an increase in stock-based compensation expense primarily due to a cumulative adjustment in the fourth quarter of fiscal 2017 based on management's assessment that it is probable our performance metrics for fiscal 2018 associated with performance-based restricted stock units will exceed the target, an increase in outside service costs including costs to implement the new revenue recognition standard, officer transition expense of $3.8 million, and an accrued liability for estimated employment tax audit assessment. These increases were partially offset by lower labor-related costs attributable to ongoing initiatives under our business transformation plan primarily related to lower headcount and geographic labor mix, and
a fiscal 2016 accrual for cash payments and increased stock compensation in connection with the Transition and Release Agreement between the company and our former CEO, Steve Anenen (the "CEO transition").
Restructuring Expenses. Restructuring expenses related to the business transformation plan for fiscal 2017 decreased $1.8 million as compared to fiscal 2016.
Interest Expense. Interest expense for fiscal 2017 increased $17.0 million as compared to fiscal 2016 due to borrowings under our 2021 term loan facility in December 2016, our 2027 notes in May 2017, the full impact of the 2020 term loan, and an increase in interest rates on our term loan facilities and 2019 and 2024 notes due to downgrades and a higher interest rate environment.
Other Income, Net. Other income, net for fiscal 2017 decreased by $3.5 million as compared to fiscal 2016 due primarily to a net gain associated with an indemnification receivable from ADP for pre spin-off tax periods in accordance with the tax matters agreement in fiscal 2016 and an impairment of a non-operating receivable in fiscal 2017, which is partially offset by fluctuations in foreign exchange gains and losses.
Provision for Income Taxes. The effective tax rate for fiscal 20142017 was 33.2%30.5% as compared to 35.9%33.1% for fiscal 2013.2016. The effective tax rate for fiscal 2017 was favorably impacted by $13.1 million of excess tax benefits associated with adjustmentsadopting Accounting Standard Update ("ASU") 2016-09, "Compensation-Stock Compensation (Topic 718): Improvements to theEmployee Share-Based Payment Accounting" effective July 1, 2016 as described in Note 2, and a Canadian valuation allowance adjustment. The effective tax rate for fiscal 2016 was favorably impacted by a return-to-provision adjustment related to domestic production activities, a non-taxable indemnification gain of $7.2$2.6 million recorded in other income, and the liability for uncertaina tax matters of $3.6 million,benefit associated with pre spin-off tax refunds, partially offset by certain separation costs that were not tax deductible.expense associated with the repatriation of foreign earnings and a valuation allowance adjustment.
Net Earnings Attributable to CDK. Net earnings attributable to CDK for fiscal 2014 were $227.92017 increased $56.3 million an increase of $28.5 million, or 14%, as compared to $199.4 million in fiscal 2013.2016. The increase in net earnings attributable to CDK was attributableprimarily due to the factors previously discussed.
Non-GAAP Measures
Adjusted revenues for fiscal 2014 and 2013 exclude the revenues related to the Internet sales leads business. Adjusted earnings before income taxes and adjusted net earnings attributable to CDK for fiscal 2014 and 2013 reflect adjustments to exclude costs directly attributable to our separation from ADP and earnings related to the Internet sales leads business. Adjusted provision for income taxes reflects the tax effect of the pre-tax adjustments.
We also review adjusted revenues and adjusted earnings before income taxes on a constant currency basis to understand underlying business trends. We computed constant currency by translating fiscal 2014 results using fiscal 2013 average monthly exchange rates. As a result, constant currency results exclude the effects of foreign currency.
Consolidated Non-GAAP Results
The tabletables below presentspresent the reconciliation of the most directly comparable GAAP measuresmeasure to constant currency revenues, adjusted revenues,earnings before income taxes, constant currency adjusted earnings before income taxes, adjusted provision for income taxes, adjusted net earnings attributable to CDK, and adjusted netdiluted earnings attributable to CDK per common share.
|
| | | | | | | | | | | | | | |
| | Years Ended June 30, | | Change |
| | 2014 | | 2013 | | $ | | % |
| Revenues | $ | 1,976.5 |
| | $ | 1,839.4 |
| | $ | 137.1 |
| | 7 | % |
| Adjustment: | | | | | | | |
Internet sales leads revenues (1) | (70.9 | ) | | (91.8 | ) | | 20.9 |
| | |
| Adjusted revenues | $ | 1,905.6 |
| | $ | 1,747.6 |
| | $ | 158.0 |
| | 9 | % |
| | | | | | | | |
| Earnings before income taxes | $ | 353.3 |
| | $ | 320.7 |
| | $ | 32.6 |
| | 10 | % |
| Adjustments: | | | | | | | |
Separation costs (2) | 9.3 |
| | — |
| | 9.3 |
| | |
Internet sales leads earnings (1) | (12.1 | ) | | (15.7 | ) | | 3.6 |
| | |
| Adjusted earnings before income taxes | $ | 350.5 |
| | $ | 305.0 |
| | $ | 45.5 |
| | 15 | % |
| Adjusted margin % | 18.4 | % | | 17.5 | % | | | | |
| | | | | | | | |
| Provision for income taxes | $ | 117.4 |
| | $ | 115.0 |
| | $ | 2.4 |
| | 2 | % |
| Adjustment: | | | | | | | |
Income tax effect of pre-tax adjustments above (3) | (4.6 | ) | | (6.0 | ) | | 1.4 |
| | |
| Adjusted provision for income taxes | $ | 112.8 |
| | $ | 109.0 |
| | $ | 3.8 |
| | 3 | % |
| Adjusted effective rate | 32.2 | % | | 35.7 | % | | | | |
| | | | | | | | |
| Net earnings attributable to CDK | $ | 227.9 |
| | $ | 199.4 |
| | $ | 28.5 |
| | 14 | % |
| Adjustments: | | | | | | | |
Separation costs (2) | 9.3 |
| | — |
| | 9.3 |
| | |
Internet sales leads earnings (1) | (12.1 | ) | | (15.7 | ) | | 3.6 |
| | |
Income tax effect of pre-tax adjustments above (3) | 4.6 |
| | 6.0 |
| | (1.4 | ) | | |
| Adjusted net earnings attributable to CDK | $ | 229.7 |
| | $ | 189.7 |
| | $ | 40.0 |
| | 21 | % |
| | | | | | | | |
| Adjusted basic and diluted net earnings attributable to CDK per common share | $ | 1.43 |
| | $ | 1.18 |
| | | | 21 | % |
| | | | | | | | |
| Weighted-average basic and diluted common shares outstanding | 160.6 |
| | 160.6 |
| | | | |
|
| | | | | | | | | | | | | | |
| | Years Ended June 30, | | Change |
| | 2017 | | 2016 | | $ | | % |
| Revenues | $ | 2,220.2 |
| | $ | 2,114.6 |
| | $ | 105.6 |
| | 5 | % |
| Impact of exchange rates | 17.4 |
| | — |
| | 17.4 |
| | |
| Constant currency revenues | $ | 2,237.6 |
| | $ | 2,114.6 |
| | $ | 123.0 |
| | 6 | % |
| | | | | | | | |
| Earnings before income taxes | $ | 435.3 |
| | $ | 369.1 |
| | $ | 66.2 |
| | 18 | % |
| Margin % | 19.6 | % | | 17.5 | % | | | | |
Restructuring expenses (1) | 18.4 |
| | 20.2 |
| | (1.8 | ) | | |
Other business transformation expenses (1) | 78.1 |
| | 38.3 |
| | 39.8 |
| | |
Total stock-based compensation (2) | 55.4 |
| | 36.4 |
| | 19.0 |
| | |
Acquisition and integration-related expenses (3) | 0.7 |
| | — |
| | 0.7 |
| | |
Officer transition expense (4) | 0.7 |
| | — |
| | 0.7 |
| | |
Tax matters indemnification gain, net (5) | — |
| | (2.6 | ) | | 2.6 |
| | |
| Adjusted earnings before income taxes | $ | 588.6 |
| | $ | 461.4 |
| | $ | 127.2 |
| | 28 | % |
| Adjusted margin % | 26.5 | % | | 21.8 | % | | | | |
| Impact of exchange rates | 0.4 |
| | — |
| | 0.4 |
| | |
| Constant currency adjusted earnings before income taxes | $ | 589.0 |
| | $ | 461.4 |
| | $ | 127.6 |
| | 28 | % |
| | | | | | | | |
| Provision for income taxes | $ | 132.8 |
| | $ | 122.3 |
| | $ | 10.5 |
| | 9 | % |
| Effective tax rate | 30.5 | % | | 33.1 | % | | | | |
Income tax effect of pre-tax adjustments (6) | 55.5 |
| | 34.0 |
| | 21.5 |
| | |
Excess tax benefit from stock-based compensation (7) | 13.1 |
| | — |
| | 13.1 |
| | |
Pre spin-off filed tax return adjustment (8) | — |
| | 0.4 |
| | (0.4 | ) | | |
| Adjusted provision for income taxes | $ | 201.4 |
| | $ | 156.7 |
| | $ | 44.7 |
| | 29 | % |
| Adjusted effective tax rate | 34.2 | % | | 34.0 | % | | | | |
| | | | | | | | |
| Net earnings attributable to CDK | $ | 295.6 |
| | $ | 239.3 |
| | $ | 56.3 |
| | 24 | % |
Restructuring expenses (1) | 18.4 |
| | 20.2 |
| | (1.8 | ) | | |
Other business transformation expenses (1) | 78.1 |
| | 38.3 |
| | 39.8 |
| | |
Total stock-based compensation (2) | 55.4 |
| | 36.4 |
| | 19.0 |
| | |
Acquisition and integration-related expenses (3) | 0.7 |
| | — |
| | 0.7 |
| | |
Officer transition expense (4) | 0.7 |
| | — |
| | 0.7 |
| | |
Tax matters indemnification gain, net (5) | — |
| | (2.6 | ) | | 2.6 |
| | |
Income tax effect of pre-tax adjustments (6) | (55.5 | ) | | (34.0 | ) | | (21.5 | ) | | |
Excess tax benefit from stock-based compensation (7) | (13.1 | ) | | — |
| | (13.1 | ) | | |
Pre spin-off filed tax return adjustment (8) | — |
| | (0.4 | ) | | 0.4 |
| | |
| Adjusted net earnings attributable to CDK | $ | 380.3 |
| | $ | 297.2 |
| | $ | 83.1 |
| | 28 | % |
|
| | | | | | | | | | | | | |
| | Years Ended June 30, | | Change |
| | 2017 | | 2016 | | $ | | % |
| Diluted earnings attributable to CDK per share | $ | 1.99 |
| | $ | 1.51 |
| | 0.48 |
| | 32 | % |
Restructuring expenses (1) | 0.12 |
| | 0.13 |
| | | | |
Other business transformation expenses (1) | 0.54 |
| | 0.24 |
| | | | |
Total stock-based compensation (2) | 0.37 |
| | 0.23 |
| | | | |
Acquisition and integration-related expenses (3) | — |
| | — |
| | | | |
Officer transition expense (4) | — |
| | — |
| | | | |
Tax matters indemnification gain, net (5) | — |
| | (0.01 | ) | | | | |
Income tax effect of pre-tax adjustments (6) | (0.37 | ) | | (0.22 | ) | | | | |
Excess tax benefit from stock-based compensation (7) | (0.08 | ) | | — |
| | | | |
Pre spin-off filed tax return adjustment (7) | — |
| | — |
| | | | |
| Adjusted diluted earnings attributable to CDK per share | $ | 2.57 |
| | $ | 1.88 |
| | 0.69 |
| | 37 | % |
| | | | | | | | |
| Weighted-average common shares outstanding: | | | | | | | |
| Diluted | 148.2 |
| | 158.0 |
| | | | |
(1) EliminationRestructuring expense recognized in connection with our business transformation plan for fiscal 2017 and 2016. Other business transformation expenses were included within cost of revenues and earnings before income taxes related to the Internet sales leadsselling, general and administrative expenses and were incurred in connection with our business inclusive of an acquisition-related adjustment of $5.6 million recognized intransformation plan for fiscal 2014.2017 and 2016.
(2) IncrementalTotal stock-based compensation expense recognized for the periods presented was included within cost of revenues and selling, general and administrative expenses.
(3) Acquisition and integration-related expenses include legal, accounting, other professional fees, and other integration costs incurred in fiscal 2014 thatconnection with assessment and integration of acquisitions and were directly attributable to our separationincluded within selling, general and administrative expenses.
(4) Officer transition expense includes stock-based compensation and severance expense in connection with officer departures and was included within selling, general and administrative expenses for the periods presented.
(5) Net gain recorded within other income, net associated with an indemnification receivable from ADP which include separation costs. The separation costs were notfor pre spin-off tax deductibleperiods in fiscal 2014 and therefore, no adjustment to the provision for income taxes has been provided.accordance with tax matters agreement.
(3)(6) Income tax effect of pre-tax adjustments excluding separation costs, which were notcalculated at applicable statutory rates for each adjustment for fiscal 2017 and 2016.
(7) Excess tax deductiblebenefit from stock-based compensation associated with adopting ASU 2016-09 in fiscal 2014, and2017.
(8) Net income tax benefit to adjust the liability for pre spin-off tax effect of the Internet sales leads business.
Adjusted Revenues. Adjusted revenues for fiscal 2014 were $1,905.6 million, an increase of $158.0 million, or 9.0%, as compared to $1,747.6 million in fiscal 2013. The increase in adjusted revenues is primarily due to increased revenues in our reportable segments as further discussed below excluding the effect of revenuesreturns related to the Internet sales leads business. Adjusted revenues forgain in fiscal 2014 increased by 9% on a constant currency basis as shown in the table below. The foreign exchange rate impact was minimal due to the impact of offsetting foreign currency exchange fluctuations.2016.
|
| | | | | | | | | | | | | | |
| | Years Ended June 30, | | Change |
| | 2014 | | 2013 | | $ | | % |
| Adjusted revenues | $ | 1,905.6 |
| | $ | 1,747.6 |
| | $ | 158.0 |
| | 9 | % |
| Adjustment: | | | | | | | |
| Impact of exchange rates | (0.8 | ) | | — |
| | (0.8 | ) | | |
| Constant currency adjusted revenues | $ | 1,904.8 |
| | $ | 1,747.6 |
| | $ | 157.2 |
| | 9 | % |
Adjusted Earnings Beforebefore Income Taxes. Adjusted earnings before income taxes for fiscal 2014 were $350.52017 increased $127.2 million an increase of $45.5 million, or 15%, as compared to $305.0 million in fiscal 2013. Margin2016. Adjusted margin increased from 17.5%21.8% to 18.4% primarily due to operating efficiencies in our segments, partially offset by increased stock-based compensation expense.26.5%. The impact of foreign exchange rates on adjusted earnings before income taxes was a decrease of $0.4 million. Adjusted earnings before income taxes was favorably impacted by benefits obtained from ongoing initiatives under our business transformation plan, primarily related to lower headcount and geographic mix, and operating efficiencies inclusive of revenue growth, and a reduction of expenses related to employee benefits. Additionally, adjusted earnings before income taxes was favorably impacted by a fiscal 2016 accrual for fiscalcash payments and increased stock-based compensation expense in connection with the CEO transition. The favorable effects of these items were partially offset by an increase in outside service costs including costs to implement the new revenue recognition standard, an accrued liability for estimated employment tax audit assessment, and an impairment of a non-operating receivable. In addition, increased interest expense had an unfavorable impact due to borrowings under our 2021 term loan facility in December 2016 and 2027 notes in May 2017, the full impact of the 2020 term loan facility, and an increase in interest rates on our term loan facilities and 2019 and 2014 increased by 16% onnotes due to downgrades and a constant currency basis as shown in the table below.higher interest environment.
|
| | | | | | | | | | | | | | |
| | Years Ended June 30, | | Change |
| | 2014 | | 2013 | | $ | | % |
| Adjusted earnings before income taxes | $ | 350.5 |
| | $ | 305.0 |
| | $ | 45.5 |
| | 15 | % |
| Adjustment: | | | | | | | |
| Impact of exchange rates | 2.8 |
| | — |
| | 2.8 |
| | |
| Constant currency adjusted earnings before income taxes | $ | 353.3 |
| | $ | 305.0 |
| | $ | 48.3 |
| | 16 | % |
Adjusted Provision for Income Taxes. The adjusted effective tax rate for fiscal 20142017 was 32.2%34.2% as compared to 35.7%34.0% for fiscal 2013.2016. The adjusted effective tax rate for fiscal 20142017 was impacted by a Canadian valuation allowance adjustment. The effective tax rate for fiscal 2016 was favorably impacted by a return-to-provision adjustment related to the domestic production
activities deduction, partially offset by tax benefitsexpense associated with adjustments tothe repatriation of foreign earnings and a valuation allowance of $7.2 million and the liability for uncertain tax matters of $3.6 million.adjustment.
Adjusted Net Earnings Attributable to CDK. Adjusted net earnings attributable to CDK for fiscal 2014 were $229.72017 increased $83.1 million an increase of $40.0 million, or 21%, as compared to $189.7 million in fiscal 2013.2016. The increase in adjusted net earnings attributable to CDK was primarily due to the items discussed above in adjusted earnings before income taxes partially offset by the associated tax effect and an increase in net earnings attributable to the noncontrolling interest.
Adjusted EBITDA for fiscal 2014 and 2013 reflects adjustments to exclude costs directly attributable to our separation from ADP, total stock-based compensation expense, and earnings related to the Internet sales leads business. Because EBITDA and adjusted EBITDA are not measures of performance that are calculated in accordance with GAAP, they should not be considered in isolation from, or as a substitute for, other metrics that are calculated in accordance with GAAP.effect.
The table below presents the reconciliation of net earnings before income taxesattributable to EBITDA andCDK to adjusted EBITDA.
|
| | | | | | | | | | | | | | |
| | Years Ended June 30, | | Change |
| | 2014 | | 2013 | | $ | | % |
| Earnings before income taxes | $ | 353.3 |
| | $ | 320.7 |
| | $ | 32.6 |
| | 10 | % |
| Adjustments: | | | | | | | |
Interest expense (1) | 1.0 |
| | 0.9 |
| | 0.1 |
| | |
Depreciation and amortization (2) | 52.3 |
| | 51.1 |
| | 1.2 |
| | |
| EBITDA | $ | 406.6 |
| | $ | 372.7 |
| | $ | 33.9 |
| | 9 | % |
| Adjustments: | | | | | | | |
Separation costs (3) | 9.3 |
| | — |
| | 9.3 |
| | |
Total stock-based compensation (4) | 21.0 |
| | 14.1 |
| | 6.9 |
| | |
Internet sales leads earnings (5) | (12.1 | ) | | (15.7 | ) | | 3.6 |
| | |
| Adjusted EBITDA | $ | 424.8 |
| | $ | 371.1 |
| | $ | 53.7 |
| | 14 | % |
| Adjusted margin % | 22.3 | % | | 21.2 | % | | | | |
|
| | | | | | | | | | | | | | |
| | Years Ended June 30, | | Change |
| | 2017 | | 2016 | | $ | | % |
| Net earnings attributable to CDK | $ | 295.6 |
| | $ | 239.3 |
| | $ | 56.3 |
| | 24 | % |
| Margin % | 13.3 | % | | 11.3 | % | | | | |
Net earnings attributable to noncontrolling interest (1) | 6.9 |
| | 7.5 |
| | (0.6 | ) | | |
Provision for income taxes (2) | 132.8 |
| | 122.3 |
| | 10.5 |
| | |
Interest expense (3) | 57.2 |
| | 40.2 |
| | 17.0 |
| | |
Depreciation and amortization (4) | 70.3 |
| | 64.0 |
| | 6.3 |
| | |
Total stock-based compensation (5) | 55.4 |
| | 36.4 |
| | 19.0 |
| | |
Restructuring expenses (6) | 18.4 |
| | 20.2 |
| | (1.8 | ) | | |
Other business transformation expenses (6) | 75.6 |
| | 34.8 |
| | 40.8 |
| | |
Acquisition and integration-related expenses (7) | 0.7 |
| | — |
| | 0.7 |
| | |
Officer transition expense (8) | 0.7 |
| | — |
| | 0.7 |
| | |
Tax matters indemnification gain, net (9) | — |
| | (2.6 | ) | | 2.6 |
| | |
| Adjusted EBITDA | $ | 713.6 |
| | $ | 562.1 |
| | $ | 151.5 |
| | 27 | % |
| Adjusted margin % | 32.1 | % | | 26.6 | % | | | | |
(1) Net earnings attributable to noncontrolling interest included within the financial statements for the periods presented.
(2) Provision for income taxes included within the financial statements for the periods presented.
(3) Interest expense included within the financial statements for the periods presented.
(2)(4) Depreciation and amortization included within the financial statements for the periods presented.
(3) Incremental costs incurred in fiscal 2014 that were directly attributable to our separation from ADP which include separation costs.
(4)(5) Total stock-based compensation expense recognized for the periods presented.presented, of which $3.5 million relates to incremental expense in connection with the CEO transition in fiscal 2016.
(5) Elimination of earnings before income taxes related to the Internet sales leads business inclusive of an acquisition-related adjustment of $5.6 million(6) Restructuring expense recognized in connection with our business transformation plan in fiscal 2014.
EBITDA. EBITDA2017 and 2016. Other business transformation expenses are included within cost of revenues and selling, general and administrative expenses and were incurred in connection with our business transformation plan in fiscal 2017 and 2016. Other business transformation expenses exclude $5.0 million and $4.9 million of accelerated depreciation expense and stock-based compensation expense for fiscal 2014 was $406.62017 and 2016 for purposes of calculating adjusted EBITDA.
(7) Acquisition and integration-related expenses include legal, accounting, other professional fees, and other integration costs incurred in connection with assessment and integration of pending acquisitions and were included within selling, general and administrative expenses.
(8) Officer transition expense includes severance expense in connection with officer departures is included within selling, general and administrative expenses for the periods presented. Officer transition expense excludes $3.1 million an increase of $33.9 million, or 9%, as compared to $372.7 million in fiscal 2013. The increase was primarily due to operating efficiencies in our segments and the effect of a favorable acquisition-related adjustment of $5.6 million and a favorable legal settlement both in the ARNA segment in fiscal 2014, partially offset by one-time separation costs and increased stock-based compensation expense.expense for fiscal 2017 for purposes of calculating adjusted EBITDA.
(9) Net gain recorded within other income, net associated with an indemnification receivable from ADP or liability to ADP for pre spin-off tax periods in accordance with the tax matters agreement.
Adjusted EBITDA. Adjusted EBITDA for fiscal 2014 was $424.82017 increased $151.5 million an increase of $53.7 million, or 14%, as compared to $371.1 million in fiscal 2013. The increase in adjusted2016. Adjusted margin increased from 26.6% to 32.1%. Adjusted EBITDA was due to the items discussed above in EBITDA excluding the one-time separation costs, total stock-compensation expense, and the effect of earningsfavorably impacted by benefits obtained from ongoing initiatives under our business transformation plan, primarily related to lower headcount and geographic mix, and operating efficiencies inclusive of revenue growth, and a reduction of expenses related to employee benefits. Additionally, adjusted
EBITDA was favorably impacted by a fiscal 2017 accrual for estimated cash payments in connection with the Internet sales leads business.CEO transition. The favorable effects of these items were partially offset by outside service costs including costs to implement the new revenue recognition standard, an accrued liability for estimated employment tax audit assessment, and an impairment of a non-operating receivable recorded during fiscal 2017.
Analysis of Reportable Segments
The following is a discussion of the results of our operations by reportable segment for fiscal 20142017 and 2013.2016. Certain expenses are charged to the reportable segments at a standard rate for management reporting purposes. Other costs are charged to the reportable segments based on management’s responsibility for the applicable costs. Reportable segment revenues and earnings before income taxes for fiscal 2014 and 2013 have been adjusted to reflect updated budgeted foreign exchange rates for the fiscal year ended June 30, 2015. This adjustment is made for management reporting purposes so that the reportable revenues and earnings before taxes for each segment are presented on a consistent basis without the impact of fluctuations in foreign currency exchange rates. This adjustment is a reconciling item to revenues and earnings before income taxes in order to eliminate the adjustment in consolidation.
Adjusted revenues and adjusted earnings before income taxes by reportable segment are included throughout this section. Since adjusted revenues and adjusted earnings before income taxes by reportable segment are not measures of performance that are calculated in accordance with GAAP, they should not be considered in isolation from, or as a substitute for, other metrics that are calculated in accordance with GAAP.
GAAP Segment Revenues
The table below presents data on revenues by segment for the periods indicated and the dollar change and percentage change between periods. |
| | | | | | | | | | | | | | |
| | Years Ended June 30, | | Change |
| | 2014 | | 2013 | | $ | | % |
| Automotive Retail North America | $ | 1,270.3 |
| | $ | 1,206.7 |
| | $ | 63.6 |
| | 5 | % |
| Automotive Retail International | 339.3 |
| | 329.6 |
| | 9.7 |
| | 3 | % |
| Digital Marketing | 373.2 |
| | 310.3 |
| | 62.9 |
| | 20 | % |
| Reconciling item: | | | | | | | |
| Foreign Exchange | (6.3 | ) | | (7.2 | ) | | 0.9 |
| | (13 | )% |
| Total | $ | 1,976.5 |
| | $ | 1,839.4 |
| | $ | 137.1 |
| | 7 | % |
GAAP Segment Earnings Before Income Taxes
The table below presents data on earnings before income taxes by segment for the periods indicated and the dollar change and percentage change between periods.
|
| | | | | | | | | | | | | | |
| | Years Ended June 30, | | Change |
| | 2014 | | 2013 | | $ | | % |
| Automotive Retail North America | $ | 361.3 |
| | $ | 319.7 |
| | $ | 41.6 |
| | 13 | % |
| Margin % | 28.4 | % | | 26.5 | % | | | | |
| Automotive Retail International | 45.3 |
| | 33.7 |
| | 11.6 |
| | 34 | % |
| Margin % | 13.4 | % | | 10.2 | % | | | | |
| Digital Marketing | 25.6 |
| | 27.3 |
| | (1.7 | ) | | (6 | )% |
| Margin % | 6.9 | % | | 8.8 | % | | | | |
| Other | (76.7 | ) | | (62.0 | ) | | (14.7 | ) | | 24 | % |
| Reconciling item: | | | | | | | |
| Foreign Exchange | (2.2 | ) | | 2.0 |
| | (4.2 | ) | | n/m |
|
| Total | $ | 353.3 |
| | $ | 320.7 |
| | $ | 32.6 |
| | 10 | % |
| Margin % | 17.9 | % | | 17.4 | % | | | | |
Automotive Retail Solutions North America Segment
The table below presents the reconciliation of revenues to adjustedconstant currency revenues, and earnings before income taxes to constant currency adjusted earnings before income taxes for the ARNARSNA segment. Refer to the footnotes in "Non-GAAP Measures""Consolidated Non-GAAP Results" for additional information on the adjustments presented below.
|
| | | | | | | | | | | | | | |
| | Years Ended June 30, | | Change |
| | 2014 | | 2013 | | $ | | % |
| Revenues | $ | 1,270.3 |
| | $ | 1,206.7 |
| | $ | 63.6 |
| | 5 | % |
| Adjustment: | | | | | | | |
| Internet sales leads revenues | (70.9 | ) | | (91.8 | ) | | 20.9 |
| | |
| Adjusted revenues | $ | 1,199.4 |
| | $ | 1,114.9 |
| | $ | 84.5 |
| | 8 | % |
| | | | | | | | |
| Earnings before income taxes | $ | 361.3 |
| | $ | 319.7 |
| | $ | 41.6 |
| | 13 | % |
| Adjustment: | | | | | | | |
| Internet sales leads earnings | (12.1 | ) | | (15.7 | ) | | 3.6 |
| | |
| Adjusted earnings before income taxes | $ | 349.2 |
| | $ | 304.0 |
| | $ | 45.2 |
| | 15 | % |
| Adjusted margin % | 29.1 | % | | 27.3 | % | | | | |
|
| | | | | | | | | | | | | | |
| | Years Ended June 30, | | Change |
| | 2017 | | 2016 | | $ | | % |
| Revenues | $ | 1,600.7 |
| | $ | 1,521.3 |
| | $ | 79.4 |
| | 5 | % |
| Impact of exchange rates | 0.1 |
| | — |
| | 0.1 |
| | |
| Constant currency revenues | $ | 1,600.8 |
| | $ | 1,521.3 |
| | $ | 79.5 |
| | 5 | % |
| | | | | | | | |
| Earnings before income taxes | $ | 605.5 |
| | $ | 481.3 |
| | $ | 124.2 |
| | 26 | % |
| Margin % | 37.8 | % | | 31.6 | % | | | | |
| Acquisition and integration-related expenses | 0.7 |
| | — |
| | 0.7 |
| | |
| Adjusted earnings before income taxes | $ | 606.2 |
| | $ | 481.3 |
| | $ | 124.9 |
| | 26 | % |
| Adjusted margin % | 37.9 | % | | 31.6 | % | | | | |
The table below presents revenue by type for the RSNA segment:
|
| | | | | | | | | | | | | | |
| | Years Ended June 30, | | Change |
| | 2017 | | 2016 | | $ | | % |
| Subscription revenue | $ | 1,261.4 |
| | $ | 1,191.2 |
| | $ | 70.2 |
| | 6 | % |
| Transaction revenue | 179.5 |
| | 179.1 |
| | 0.4 |
| | — | % |
| Other revenue | 159.8 |
| | 151.0 |
| | 8.8 |
| | 6 | % |
| Total | $ | 1,600.7 |
| | $ | 1,521.3 |
| | $ | 79.4 |
| | 5 | % |
Revenues. ARNARSNA revenues increased $63.6 million, or 5%, to $1,270.3 million for fiscal 20142017 increased $79.4 million as compared to fiscal 2013. DMS client site count as2016. RSNA revenues were unfavorably impacted by the strength of June 30, 2014 was 13,650 sites comparedthe U.S. dollar against the Canadian dollar on a constant currency basis, which contributed to 13,234 sites asa decrease of June, 30, 2013,$0.1 million.
Subscription revenues grew due to an increase of approximately 3% . The increase in DMS client sites contributed $18.4 million, or 2 percentage points, of overall revenue growth. In addition, we experienced 5% growth in average revenue per DMS clientcustomer site driven byof 7%, which resulted from a combination of increased sales of additionalnew or expanded solutions to our existing clientcustomer base and pricing. The growthAdditionally, DMS customer site count was a slight increase to 14,611 sites as of June 30, 2017 compared to 14,533 sites as of June 30, 2016 and customer websites as of June 30, 2017 was 6,879 websites compared to 6,641 websites as of June 30, 2016, an increase of approximately 4%. On a combined basis, the increase in DMS customer sites and average revenue per DMS clientcustomer site contributed $41.0$70.2 million of revenue growth, or 3 percentage points,approximately 5%, and includes an unfavorable currency impact of overall$0.1 million. Transaction revenues generated from vehicle registrations and automotive equity mining contributed $0.4 million of revenue growth. Transaction relatedOther revenue contributed a $9.0$8.8 million or less than 1 percentage point, decline in revenuesprimarily due to decreased Internet sales leads business transactions. Other revenue items such asprofessional services related to websites partially offset by a reduction in hardware sales, consulting, and data aggregation services contributed the remaining growth in revenues.sales.
Adjusted Revenues. ARNA adjusted revenues
Earnings before Income Taxes. RSNA earnings before income taxes for fiscal 2014 were $1,199.42017 increased $124.2 million an increase of $84.5 million, or 8%, as compared to fiscal 2013. The increase in adjusted revenues is primarily due2016. Margin increased from 31.6% to the items discussed above in revenues excluding the effect of revenues related to the Internet sales leads business. Transaction related revenues excluding the leads business contributed $11.8 million, or 1 percentage point, of revenue growth.37.8%.
Earnings Before Income Taxes. ARNARSNA earnings before income taxes increased $41.6 million, or 13%, to $361.3 million for fiscal 2014 as compared to fiscal 2013. Margin increased from 26.5% to 28.4% primarily due towere favorably impacted by operating efficiencies inclusive of benefits obtained from ongoing initiatives under our business transformation plan, primarily related to lower headcount and thegeographic mix, a reduction of expenses related to employee benefits, and revenue growth as discussed above. The favorable effects of these items were partially offset by an impairment of a favorable acquisition-related adjustmentnon-operating receivable, and costs incurred in connection with our assessment of $5.6 million and a favorable legal settlement both inacquisitions during fiscal 2014.2017.
Adjusted Earnings Before Income Taxes. ARNA adjusted earnings before income taxes increased by $45.2 million, or 15%, to $349.2 million for fiscal 2014 as compared to fiscal 2013 due to the items discussed above excluding the effect of earnings related to the Internet sales leads business.Advertising North America
Automotive Retail International Segment
There were no non-GAAP adjustments tofor the ARIANA segment for fiscal 2014 or 2013.2017 and 2016. The table below presents the revenues and earnings before income taxes for the ANA segment.
|
| | | | | | | | | | | | | | |
| | Years Ended June 30, | | Change |
| | 2017 | | 2016 | | $ | | % |
| Revenues | $ | 307.6 |
| | $ | 279.7 |
| | $ | 27.9 |
| | 10 | % |
| | | | | | | | |
| Earnings before income taxes | $ | 44.4 |
| | $ | 27.5 |
| | $ | 16.9 |
| | 61 | % |
| Margin % | 14.4 | % | | 9.8 | % | | | | |
Revenues. ARIANA revenues increased $9.7 million, or 3%, to $339.3 million for fiscal 20142017 increased $27.9 million as compared to fiscal 2013.2016. The overall increase was due to an increase in OEM driven local marketing association internet advertising placements.
Earnings before Income Taxes. ANA earnings before income taxes for fiscal 2017 increased $16.9 million as compared to fiscal 2016. Margin increased from 9.8% to 14.4%. ANA earnings before income taxes were favorably impacted by revenue growth as discussed above and operating efficiencies from ongoing initiatives under our business transformation plan, partially offset by a growth in advertising costs.
CDK International
The table below presents the reconciliation of revenues wasto constant currency revenues and earnings before income taxes to constant currency earnings before income taxes for the CDKI segment. There were no other non-GAAP adjustments to the CDKI segment for fiscal 2017 and 2016.
|
| | | | | | | | | | | | | | |
| | Years Ended June 30, | | Change |
| | 2017 | | 2016 | | $ | | % |
| Revenue | $ | 311.9 |
| | $ | 313.6 |
| | $ | (1.7 | ) | | (1 | )% |
| Impact of exchange rates | 17.3 |
| | — |
| | 17.3 |
| | |
| Constant currency revenues | $ | 329.2 |
| | $ | 313.6 |
| | $ | 15.6 |
| | 5 | % |
| | | | | | | | |
| Earnings before income taxes | $ | 75.0 |
| | $ | 61.1 |
| | $ | 13.9 |
| | 23 | % |
| Margin % | 24.0 | % | | 19.5 | % | | | | |
| Impact of exchange rates | 0.4 |
| | — |
| | 0.4 |
| | |
| Constant currency earnings before income taxes | $ | 75.4 |
| | $ | 61.1 |
| | $ | 14.3 |
| | 23 | % |
Revenues. CDKI revenues for fiscal 2017 decreased $1.7 million as compared to fiscal 2016. CDKI revenues were impacted by the strength of the U.S. dollar against the Pound Sterling, the Euro, and the Renminbi, which contributed to a decrease of $17.3 million, or 6 percentage points. CDKI experienced growth in revenues on a constant currency basis primarily due to an increase in sites and average revenue per customer site.
Earnings before Income Taxes. CDKI earnings before income taxes for fiscal 2017 increased $13.9 million as compared to fiscal 2016. Margin increased from 19.5% to 24.0%. The constant currency impact of foreign exchange rates on
CDKI earnings before income taxes was a decrease of $0.4 million. CDKI earnings before income taxes were favorably impacted by increased average revenue per client.customer site and benefits obtained from ongoing initiatives under our business transformation plan.
Earnings Before Income Taxes. ARI earnings before income taxes increased $11.6 million, or 34%, to $45.3 million for fiscal 2014 as compared to fiscal 2013. Margin increased from 10.2% to 13.4% due to operating efficiencies.
Digital MarketingOther Segment
There were no non-GAAP adjustments to the DM segment for fiscal 2014 or 2013.
Revenues. DM revenues increased $62.9 million, or 20%, to $373.2 million for fiscal 2014 as compared to fiscal 2013. This increase was due to a 26% increase in OEM advertising over the prior period, which contributed $19.4 million, or 6 percentage points, of revenue growth. Average monthly revenue per website increased 18%, which contributed $43.4 million, or 14 percentage points, of revenue growth. We experienced an increase in website count of 2%, which contributed $0.1 million of revenue growth.
Earnings Before Income Taxes and Adjusted Earnings Before Income Taxes. DM earnings before income taxes decreased $1.7 million, or 6%, to $25.6 million for fiscal 2014 as compared to fiscal 2013. Margin decreased from 8.8% to 6.9% primarily due to increased expenditures in development to support new contract rollout and product enhancement and increased costs for advertising placement.
Other
The table below presents the reconciliation of loss before income taxes to adjusted loss before income taxes for the Other segment. Refer to the footnotes in "Non-GAAP Measures""Consolidated Non-GAAP Results" for additional information on the adjustments presented below.
| | | | Years Ended June 30, | | Change | Years Ended June 30, | | Change |
| | 2014 | | 2013 | | $ | | % | 2017 | | 2016 | | $ | | % |
| Loss before income taxes | $ | (76.7 | ) | | $ | (62.0 | ) | | $ | (14.7 | ) | | 24 | % | $ | (289.6 | ) | | $ | (200.8 | ) | | $ | (88.8 | ) | | (44 | )% |
| Adjustment: | | | | | | | | |
| Separation costs | 9.3 |
| | — |
| | 9.3 |
| | | |
| Restructuring expenses | | 18.4 |
| | 20.2 |
| | (1.8 | ) | | |
| Other business transformation expenses | | 78.1 |
| | 38.3 |
| | 39.8 |
| | |
Total stock-based compensation | | 55.4 |
| | 36.4 |
| | 19.0 |
| | |
| Officer transition expense | | 0.7 |
| | — |
| | 0.7 |
| | |
| Tax matters indemnification gain, net | | — |
| | (2.6 | ) | | 2.6 |
| | |
| Adjusted loss before income taxes | $ | (67.4 | ) | | $ | (62.0 | ) | | $ | (5.4 | ) | | 9 | % | $ | (137.0 | ) | | $ | (108.5 | ) | | $ | (28.5 | ) | | (26 | )% |
The primary components of the Other loss before income taxes in the Other segment are certain unallocated expenses and costs that are directlynot allocated to our reportable segments, such as interest expense, stock-based compensation expense, costs attributable to our separation from ADP.the business transformation plan, and certain unallocated expenses.
Loss Beforebefore Income Taxes. The Other loss before income taxes in Otherfor fiscal 2017 increased by $14.7$88.8 million or 24%, to $76.7 million, for fiscal 2014 as compared to fiscal 20132016. The Other loss before income taxes was unfavorably impacted by expenses associated with our business transformation plan, an increase in stock-based compensation expense primarily due to separationa cumulative adjustment in the fourth quarter of fiscal 2017 based on management's assessment that it is probable our performance metrics for fiscal 2018 associated with performance-based restricted stock units will exceed the target, an increase in expenses related to outside service costs including costs to implement the new revenue recognition standard, officer transition expense, and an accrued liability for estimated employment tax audit assessment. In addition, increased interest expense had an unfavorable impact due to borrowings under our 2021 term loan facility in December 2016 and 2027 notes in May 2017, the full impact of the 2020 term loan facility, and an increase in interest rates on our term loan facilities and 2019 and 2024 notes due to downgrades and a higher interest rate environment. Partially offsetting the increases is the favorable impact of a fiscal 2016 accrual for cash payments and increased stock-based compensation expense.expense in connection with the CEO transition and a reduction of expenses related to employee benefits during fiscal 2017.
Adjusted Loss Before Income Taxes. The adjusted loss before income taxes in Other increased by $5.4 million, or 9%, to $67.4 million for fiscal 2014 as compared to fiscal 2013 primarily due to increased stock-based compensation expense.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Capital Structure Overview
As of June 30, 2015, cash and cash equivalents were $408.2 million, CDK stockholders' equity was $770.2 million, and total debt was $984.1 million, net of unamortized deferred financing costs of $8.0 million. Working capital as of June 30, 2015 was $399.8 million, which is consistent with working capital of $402.0 million as of June 30, 2014. Working capital as used herein excludes current maturities of long-term debt and notes receivable from and payable to ADP and its affiliates.
Our principal source of liquidity is derived from cash generated through operations. We also entered intoAt present, and in future periods, we expect cash generated by our operations, together with existing cash and cash equivalents, availability under our revolving credit facility, and borrowings from the capital markets to be sufficient to cover our cash needs for working capital, capital expenditures, strategic acquisitions, anticipated quarterly dividends, and anticipated stock repurchases.
As of June 30, 2018, cash and cash equivalents were $804.4 million, CDK stockholders' deficit was $364.8 million, and total debt was $2,620.7 million, net of unamortized deferred financing arrangements in connectioncosts of $21.4 million. Working capital as of June 30, 2018 was $864.1 million as compared to $772.7 million as of June 30, 2017. Working capital as used herein excludes current maturities of long-term debt.
Our borrowings consist of two term loan facilities with the spin-off. At the timeinitial principal amounts of the spin-off, we borrowed $250.0 million, under oura term loan facility with an initial principal amount of $400.0 million, 3.30% senior notes with a $250.0 million aggregate principal amount due in 2019, 4.50% senior notes with a $500.0 million aggregate principal amount due in 2024, 5.875% senior notes with a $500.0 million aggregate principal amount due in 2026, and $750.04.875% senior notes with a $600.0 million under our bridge loan facility,aggregate principal amount due
in 2027. Interest rates for the proceeds of which were used2019 notes and 2024 notes increased to pay ADP a cash dividend.3.80% from 3.30% and to 5.00% from 4.50%, respectively. Additionally, we entered intohave a $300.0 million revolving credit facility, which was undrawn as of June 30, 2015. On October 14, 2014, we completed an offering of 3.30%2018.
Our long-term credit ratings and senior notesunsecured debt ratings are Ba1 (Stable Outlook) with a $250.0 million aggregate principal amount due in October 2019 (the "2019 notes")Moody's, and 4.50% senior notesBB+ (Stable Outlook) with a $500.0 million aggregate principal amount due in October 2024 (the "2024 notes" and together with the 2019 notes, the "senior notes"). The issuance price of the senior notes was equal to the stated value. We used net proceeds from the notes, together with cash on hand, to repay all outstanding borrowings under the bridge loan facility.S&P, which are non-investment grade.
Of the $408.2$804.4 million of cash and cash equivalents held as of June 30, 2015, $147.72018, $261.9 million was held by our foreign subsidiaries. Amounts held byUndistributed foreign earnings that the Company intends to indefinitely reinvest, and for which no taxes have been provided, aggregated to approximately $115.0 million as of June 30, 2018. The foreign earnings are indefinitely reinvested as of June 30, 2018 to cover local working capital needs and restrictions and to fund future foreign investments, including potential acquisitions. In determining whether the undistributed earnings of our foreign subsidiaries ifare indefinitely reinvested, we consider the following: (i) cash flow forecasts and cash requirements of our U.S. business and our foreign subsidiaries, both for the short and long term; (ii) costs associated with permanent reinvestment plans, including cost of capital and tax consequences; and (iii) local country legal restrictions.
In fiscal 2018, we concluded that approximately $244.0 million of accumulated foreign earnings as of December 31, 2017 were no longer indefinitely reinvested. We concluded the earnings were no longer indefinitely reinvested after considering cash flow forecasts, anticipated cash outflows for potential acquisitions in the U.S., and in light of the fact that the earnings were deemed repatriated and taxed due to the one-time transition tax included in the Tax Reform Act. We considered the incremental cost of repatriating the foreign earnings, such as foreign withholding taxes, and concluded the earnings would be repatriated to the U.S., would generally be subject to foreign withholding and U.S. income taxes, adjusted for foreign Accordingly, during fiscal 2018, we recorded an estimated one-time tax credits. A minimal amountexpense of U.S. income tax has been accrued$7.7 million on the undistributed foreign earnings since our intent is to permanently reinvest these funds outsideas of December 31, 2017, consisting of $3.4 million for the U.S.one-time transition tax recorded within accrued liabilities and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations. $4.3 million for foreign withholding taxes associated with undistributed foreign earnings recorded primarily within deferred taxes.
If circumstances change, and it becomes apparent that some or all of the permanentlyearnings currently considered indefinitely reinvested earnings will be remitted to the U.S. in the foreseeable future,distributed, an additional income tax charge may be necessary.necessary, which would affect our results of operations and payment of such taxes would affect our liquidity. Given the uncertain time and manner of repatriation, it is not practicable to estimate the amount of any additional income tax charge on permanentlyindefinitely reinvested earnings.
We believe that cash on hand, cash from operations, and our revolving credit facility will provide sufficient liquidity for our working capital needs, planned capital expenditures, future contractual obligations, stock repurchases to offset dilution from our employee equity compensation plans, and paymentReturn of our anticipated quarterly dividends.
Dividends to Common Stockholders
The Company declared and paid cash dividends during fiscal 2015 as follows:
|
| | | | | | | | | | | | |
| Three Months Ended | | Record Date | | Payment Date | | Dividend Per Share | | Amount |
| December 31, 2014 | | 12/1/2014 | | 12/29/2014 | | $ | 0.12 |
| | $ | 19.4 |
|
| March 31, 2015 | | 3/2/2015 | | 3/27/2015 | | 0.12 |
| | 19.4 |
|
| June 30, 2015 | | 6/22/2015 | | 6/30/2015 | | 0.12 |
| | 19.4 |
|
| Total | | | | | | $ | 0.36 |
| | $ | 58.2 |
|
Stock Repurchase Program
OnIn January 20, 2015,2017, the Board of Directors authorized theus to repurchase of up to 10.0 million shares$2.0 billion of our common stock expiring on January 19, 2018.as part of a return of capital plan whereby we expect to return approximately $750.0 million to $1.0 billion per year through 2019 via a combination of dividends and share repurchases. Under the stock repurchase program authorization, we may purchase our common stock in the open market or in privately negotiated transactions from time to time as permitted by federal securities laws and other legal requirements. Our return of capital plan has been, and is expected to continue to be, funded through a combination of free cash flow and incremental borrowings intended to bring leverage, measured as financial debt, net of cash, divided by adjusted EBITDA, to a range of 2.5x to 3.0x over the period. The actual timing, number, and price of any shares to be repurchased will be determined at management's discretion and will depend on a number of factors, which may include the market price of the shares, general market and economic conditions, the availability and cost of additional indebtedness, and other potential uses for free cash flow. We made open market repurchases of approximately 1.1 million shares of our common stock at an average price per share of $48.22flow including, but not limited to, potential acquisitions.
Dividends to Common Stockholders
The Company declared and paid cash dividends during fiscal 2015 for a total cost of approximately $50.7 million.2018 as follows:
|
| | | | | | | | | | | | |
| Three Months Ended | | Record Date | | Payment Date | | Dividend Per Share | | Amount |
| September 30, 2017 | | 9/11/2017 | | 9/29/2017 | | $ | 0.140 |
| | $ | 19.7 |
|
| December 31, 2017 | | 12/1/2017 | | 12/29/2017 | | 0.150 |
| | 20.5 |
|
| March 31, 2018 | | 3/1/2018 | | 3/29/2018 | | 0.150 |
| | 20.2 |
|
| June 30, 2018 | | 6/19/2018 | | 6/29/2018 | | 0.150 |
| | 19.7 |
|
| Total | | | | | | $ | 0.590 |
| | $ | 80.1 |
|
Cash Flows
Our cash flows from operating, investing, and financing activities, as reflected in the consolidated and combined statements of cash flows for fiscal 2015, 2014,2018, 2017, and 20132016, are summarized as follows:
| | | | Years Ended June 30, | | $ Change | Years Ended June 30, | | $ Change |
| | 2015 |
| 2014 | | 2013 | | 2015 | | 2014 | 2018 |
| 2017 | | 2016 | | 2018 | | 2017 |
| Cash provided by (used in): | | | | | | | | | | | | | | | | | | |
| Operating activities | $ | 267.9 |
| | $ | 245.9 |
| | $ | 246.5 |
| | $ | 22.0 |
| | $ | (0.6 | ) | $ | 461.6 |
| | $ | 431.0 |
| | $ | 320.1 |
| | $ | 30.6 |
| | $ | 110.9 |
|
| Investing activities | (40.8 | ) | | (74.0 | ) | | (36.2 | ) | | 33.2 |
| | (37.8 | ) | (113.5 | ) | | (87.9 | ) | | (81.6 | ) | | (25.6 | ) | | (6.3 | ) |
| Financing activities | (199.9 | ) | | (48.3 | ) | | (153.9 | ) | | (151.6 | ) | | 105.6 |
| (271.2 | ) | | 159.9 |
| | (419.3 | ) | | (431.1 | ) | | 579.2 |
|
| Effect of exchange rate changes on cash and cash equivalents | (21.8 | ) | | 2.9 |
| | (3.2 | ) | | (24.7 | ) | | 6.1 |
| 1.4 |
| | 4.0 |
| | (8.3 | ) | | (2.6 | ) | | 12.3 |
|
| Net change in cash and cash equivalents | $ | 5.4 |
| | $ | 126.5 |
| | $ | 53.2 |
| | $ | (121.1 | ) | | $ | 73.3 |
| $ | 78.3 |
| | $ | 507.0 |
| | $ | (189.1 | ) | | $ | (428.7 | ) | | $ | 696.1 |
|
Fiscal 20152018 Compared to Fiscal 20142017
Net cash flows provided by operating activities were $267.9$461.6 million for fiscal 20152018 as compared to $245.9$431.0 million in fiscal 2014.2017. This $22.0$30.6 million increase was primarily due to a comparativean increase in cash provided by net earnings adjusted for non-cash items of $59.8$44.7 million primarily due to earnings growth in netour business. This increase was partially offset by an increase in cash used for working capital components,of $14.1 million, which was due to the timing of cash payments made to our vendors and employees andpartially offset by the timing of cash payments received from our clientscustomers in the normal course of business. Net earnings adjusted for non-cash items decreased by $37.8 million when compared to fiscal 2014.
Net cash flows used in investing activities were $40.8$113.5 million for fiscal 20152018 as compared to $74.0$87.9 million in fiscal 2014.2017. This $33.2$25.6 million decreaseincrease in cash used in investing activities was primarily due to proceeds from notes receivable from ADP and its affiliates of $40.6 million and proceeds from the sale of the Internet sales leads business of $24.5 million partially offset by an increase in cash used for acquisitionsthe acquisition of businesses, net of cash acquired of $10.9 millionProgressus Media LLC and increased investmentsDashboard Dealership Enterprises in capital expenditures and capitalized software.fiscal 2018.
Net cash flows used in financing activities were $199.9$271.2 million for fiscal 20152018 as compared to $48.3net cash flows provided by financing activities of $159.9 million in fiscal 2014.2017. This $151.6$431.1 million increase in cash used in financing activities was primarily due to proceeds from long-term debt in fiscal 2017 of $1.8 billion, which consists$1,000.0 million compared to the fiscal 2018 additional borrowing of $250.0$500.0 million. During fiscal 2018, our primary cash outflows were repurchases of common stock of $623.6 million, fromdividend payments to our term loan facility, $750.0stockholders of $80.1 million, from our bridge loan facility, and $750.0 million from our senior notes. Proceeds from our long-term debt were offset bythe repayments of our debt and capital lease obligations of $759.5 million, which includes $750.0 million related to$46.4 million. During fiscal 2017, our bridge loan facility, and transactions related to our spin-off from ADP, including the $825.0primary cash outflows consisted of common stock repurchases of $700.0 million, dividend paid to ADP, an increase in net transactions of parent company investment of $204.5 million, and an increase in repayments of notes payable to ADP and its affiliates of $19.8 million. We also paid dividendspayments to our stockholders of $58.2$80.7 million, and paid $50.0 million to repurchase our common stock.repayments of debt and capital lease obligations of $36.9 million.
Fiscal 20142017 Compared to Fiscal 20132016
Net cash flows provided by operating activities were $245.9$431.0 million for fiscal 20142017 as compared to $246.5$320.1 million forin fiscal 2013.2016. This $0.6$110.9 million decreaseincrease was primarily due to a comparative decreasean increase in cash provided by net earnings adjusted for non-cash items of $23.5$115.7 million primarily due to earnings growth in netour business. This increase was partially offset by an increase in cash used for working capital components,of $4.8 million, which was due to the timing of cash payments made to our vendors and employees andpartially offset by the timing of cash payments received from our clientscustomers in the normal course of business. This decrease in net working capital was partially offset by an increase in net earnings, adjusted for the non-cash items of $22.9 million.
Net cash flows used in investing activities were $74.0$87.9 million for fiscal 20142017 as compared to $36.2$81.6 million forin fiscal 2013.2016. This $37.8$6.3 million increase in cash used in investing activities was primarily due to cash payments related to business acquisitionsan increase in capitalized software and capital expenditures of $29.9 million in fiscal 20142017. This was partially offset by cash used for acquisition of business in fiscal 2016.
Net cash flows provided by financing activities were $159.9 million for fiscal 2017 as compared to none in fiscal 2013, and increased capital expenditures in fiscal 2014.
Netnet cash flows used in financing activities were $48.3of $419.3 million forin fiscal 2014 as compared to $153.9 million for fiscal 2013.2016. This $105.6$579.2 million decrease in cash used in financing activities was primarily due to lower net transactionsnew borrowings offset by the return of parent company investmentcapital plan. During fiscal 2017, our primary inflows were the new 2027 notes with an aggregate principal amount of $600.0 million and a new term loan facility with initial principal of $400.0 million. These cash inflows were partially offset by repurchases of common stock of $700.0 million, dividend payments to our stockholders of $80.7 million, and the repayments of debt and capital lease obligations of $36.9 million. During fiscal 2016, our primary cash outflows consisted of common stock repurchases of $561.0 million, dividend payments to our stockholders of $82.3 million, and repayments of debt and capital lease obligations of $20.0 million partially offset by the 2020 term loan
facility for $250.0 million and $8.9 million of excess tax benefits reflected as financing activity in fiscal 2014.2016 and operating activity in fiscal 2017 with the adoption of ASU 2016-19 effective July 1, 2016.
Contractual Obligations
The following table provides a summary of our contractual obligations as of June 30, 2015:2018.
| |
| | Payments Due by Period | | Payments Due by Period |
| Contractual Obligations | | Less than 1 year |
| 1-3 years |
| 3-5 years |
| More than 5 years |
| Total | | Less than 1 year |
| 1-3 years |
| 3-5 years |
| More than 5 years |
| Total |
Term loan facility (1) | | $ | 12.5 |
| | $ | 25.0 |
| | $ | 203.1 |
| | $ | — |
| | $ | 240.6 |
| |
Term loan facilities (1) | | | $ | 45.0 |
| | $ | 436.9 |
| | $ | 310.0 |
| | $ | — |
| | $ | 791.9 |
|
Senior notes (2) | | — |
| | — |
| | 250.0 |
| | 500.0 |
| | 750.0 |
| | — |
| | 250.0 |
| | — |
| | 1,600.0 |
| | 1,850.0 |
|
Interest on senior notes (2) | | 30.8 |
| | 61.5 |
| | 57.4 |
| | 101.3 |
| | 251.0 |
| | 93.1 |
| | 170.1 |
| | 167.3 |
| | 234.7 |
| | 665.2 |
|
| Capital lease obligations | | 0.5 |
| | 1.0 |
| | — |
| | — |
| | 1.5 |
| | 0.2 |
| | — |
| | — |
| | — |
| | 0.2 |
|
Operating lease obligations (3) | | 41.3 |
| | 56.1 |
| | 23.1 |
| | 14.7 |
| | 135.2 |
| | 20.0 |
| | 24.1 |
| | 11.7 |
| | 10.8 |
| | 66.6 |
|
Purchase obligations (4) | | 9.0 |
| | 19.7 |
| | 10.7 |
| | — |
| | 39.4 |
| |
Other long-term liabilities reflected within other liabilities on the consolidated balance sheet (5) | | — |
| | 4.4 |
| | — |
| | — |
| | 4.4 |
| |
Other long-term liabilities reflected within other liabilities on the consolidated balance sheet (4) | | | 0.2 |
| | 12.3 |
| | 0.1 |
| | — |
| | 12.6 |
|
| Total | | $ | 94.1 |
| | $ | 167.7 |
| | $ | 544.3 |
| | $ | 616.0 |
| | $ | 1,422.1 |
| | $ | 158.5 |
| | $ | 893.4 |
| | $ | 489.1 |
| | $ | 1,845.5 |
| | $ | 3,386.5 |
|
(1) These amounts represent the principal repayments of ourthe term loan facilityfacilities included within our consolidated balance sheet as of June 30, 2015.2018. Interest on our term loan facilityfacilities is based on a variable raterates, and interest payments will fluctuate as our interest rate fluctuatesrates fluctuate each period. Accordingly, future interest payments related to this instrumentthese instruments have been excluded from the table above. The interest rate per annum on the two $250.0 million term loan facilityfacilities was 1.69%3.85% and the $400.0 million was 3.85% as of June 30, 2015.2018. Refer to Note 1413, "Debt" in the accompanying notes to the consolidated and combined financial statements in this Annual Report on Form 10-K for further information.
(2) These amounts represent the principal repayments of ourthe senior notes included within our consolidated balance sheet as of June 30, 20152018 and expected future interest payments over the term of the senior notes based on the stated interest rates in effect as of June 30, 2015.2018. Our 2019 notes bear interest at a rate of 3.30% and3.80%, our 2024 notes bear interest at a rate of 4.50%5.00%, our 2026 notes bear interest at a rate of 5.875%, and our 2027 notes bear interest at a rate of 4.875%. Interest is payable semi-annually on April 15 and October 15 of each year.year for the 2019 and 2024 notes, June 15 and December 15 of each year for the 2026 notes, and June 1 and December 1 of each year for the 2027 notes. Refer to Note 1413, "Debt" in the accompanying notes to the consolidated and combined financial statements in this Annual Report on Form 10-K for further information.
(3) These amounts represent various operating leases for facilities and equipment entered into in the normal course of business. The majority of our lease agreements have fixed payment terms based on the passage of time. Certain facility and equipment leases require payment of maintenance and real estate taxes and contain escalation provisions based on future adjustments in price indices. Our future operating lease obligations could change if we exit certain contracts or if we enter into additional operating lease agreements.
(4) Purchase obligations comprise obligations related to royalty, purchase, and maintenance agreements on our software, equipment, and other assets.
(5) Other long-term liabilities for which a payment date is readily available include a hold-back liability related tocontingent consideration payable in installments through March 31, 2021 for the AVRS acquisition of RedBumper, LLC and NewCarIQ, LLC and Progressus Media LLC, software license fees, and cash settlements expected for restricted stock units accounted for as liability awards.awards based on the closing price of our common stock on June 30, 2018.
In the normal course of business, we also enter into contracts in which we make representations and warranties that relate to the performance of our services and products. We do not expect any material losses related to such representations and warranties.
Off-Balance Sheet Arrangements
As of June 30, 2015,2018, we did not have any off-balance sheet arrangements consisting of transactions, agreements, or other contractual arrangements to which an entity not consolidated in our financial statements was a party. However, in the
normal course of operations, we may enter into contractual obligations consisting of operating lease obligations and purchase commitments. Such obligations have been presented under the caption "Contractual Obligations."
Related Party Agreements
WeRefer to Note 8, "Income Taxes" and Note 17, "Transactions with ADP" to our consolidated financial statements under Item 8 of Part II of this Annual Report on Form 10-K for financial information regarding agreements entered into a tax matters agreement with ADP 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 us for any income taxes attributable to its operations or our operations and for any non-income taxes attributable to its 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 we are generally required to indemnify ADP for any non-income taxes attributable to our operations for all pre spin-off periods and for any taxes attributable to our operations for post spin-off periods.
We are 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 our equity securities, a redemption of a significant amount of our equity securities or our involvement in other significant acquisitions of our equity securities (excluding the spin-off), (ii) other actions or failures to act by us, or (iii) any of our representations or undertakings referred to in the tax matters agreement being incorrect or violated. ADP is generally required to indemnify us 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.
Prior to the spin-off, we entered into a transition services agreement with ADP to provide for an orderly transition to being an independent company. Among the principal services to be provided by ADP to us are operational and administrative infrastructure-related services, such as use of the e-mail domain “adp.com,” facilities sharing, procurement support, tax, human resources administrative services and services related to back office support, and software development in our Indian facilities.
Among the principal services to be provided by us to ADP are operational and administrative infrastructure-related services, such as facilities sharing and human resources administrative services. The agreement will expire and services under it will cease no later than one year following the spin-off date or sooner in the event we no longer require such services.
We entered into a data services agreement with ADP prior to the spin-off under which ADP provides us with certain data center sharing services relating to the provision of information technology, platform support, hosting, and network services. The term of the agreement will expire two years after the spin-off date.
We entered into an intellectual property transfer agreement with ADP prior to the spin-off under which ADP assigned us certain patents, trademarks, copyrights, and other intellectual property developed or owned by ADP or certain of its subsidiaries and with respect to which we are the primary or exclusive user today or the anticipated primary or exclusive user in the future. The assignment is perpetual after the spin-off date of the agreement.
We also entered into an employee matters agreement with ADP prior to the spin-off pursuant to which certain employee benefit matters will be addressed, such as the treatment of ADP options held by our employees after the separation and the treatment of benefits for our management employees who participated in and have accrued benefits under the ADP Supplemental Officers Retirement Plan. The agreement also, to the extent provided therein, delineates the benefit plans and programs in which our employees participate following the spin-off. ADP remains responsible for the payment of all benefits under the ADP plans.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to interest rate risk related to our revolving credit facility and term loan facility as those arrangements contain interest rates that are not fixed. As of June 30, 2015, our revolving credit facility was undrawn. The interest rate per annum on the term loan facility was 1.69% as of June 30, 2015. A hypothetical increase in the interest rate of 25 basis points would have resulted in an immaterial impact on earnings before income taxes for the year ended June 30, 2015.
We operate and transact business in various foreign jurisdictions and are therefore exposed to market risk from changes in foreign currency exchange rates that could impact our financial condition, results of operations, and cash flows. We have not been materially impacted by fluctuations in foreign currency exchange rates as a significant portion of our business is transacted in U.S. dollars, and is expected to continue to be transacted in U.S. dollars or U.S. dollar-based currencies. As of June 30, 2015, operations in foreign jurisdictions were principally transacted in Canadian dollars, Euros, Pound Sterling, and Renminbi. A hypothetical change in all foreign currency exchange rates of 10% would have resulted in an increase or decrease in consolidated and combined operating earnings of approximately $8.0 million for the year ended June 30, 2015.
We manage our exposure to these market risks through our regular operating and financing activities. We may in the future use derivative financial instruments as risk management tools.
CRITICAL ACCOUNTING POLICIES
Our consolidated and combined financial statements and accompanying notes have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates, judgments, and assumptions that affect reported amounts of assets, liabilities, revenues, and expenses. We continually evaluate the accounting policies and estimates used to prepare the consolidated and combined financial statements. Estimates are based on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from estimates made by management. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial condition are discussed below.
Revenue Recognition
Revenues are generated from software licenses, hosting arrangements, hardware sales and rentals, support and maintenance, professional services, advertising, and digital marketing, as well as certain transactional services.
We recognize software related revenues (on-site) in accordance with the provisions of Accounting Standards Codification (“ASC”) 985-605, “Software-Revenue“Software - Revenue Recognition,” and non-software related revenue, upfront hardware sales, and software delivered under a hosted modelincluding SaaS, in accordance with ASC 605, "Revenue Recognition" ("ASC 605").
In general, revenueWe generate revenues from four categories: subscription, digital advertising, transactional services, and other. Taxes collected from customers and remitted to governmental authorities are presented on a net basis; that is, recognized when all of the following criteria have been met:
•persuasive evidence of an arrangement exists;such taxes are excluded from revenues.
•delivery has occurred or services have been rendered;
•fees are fixed or determinable; and
•collection of the revenue is reasonably assured.
The following are our major components of revenues:
•Bundled sales of Dealer Management Systems (“DMS”) and integrated solutions. Subscription.In the Automotive Retail North AmericaRSNA and Automotive Retail InternationalCDKI segments, we receive feesprovide software and technology solutions for product installation, monthly fees forautomotive retailers and OEMs, which include:
DMSs and layered applications, where the software licenses, ongoing software support and maintenance of DMS, and other integrated solutions that are either hosted by us ormay be installed on-site at the client’s location. customer’s location, or hosted and provided on a SaaS basis, including ongoing maintenance and support;
Interrelated services such as installation, initial training, and data updates;
Websites, search marketing, and reputation management services (RSNA only); and
Hardware on a service basis, meaning no specific assets are identified or a substantive right of substitution exists.
Revenues for term licenses are recognized ratably over the software license term, as vendor-specific objective evidence (“VSOE”) of the fair values of the individual elements in the sales arrangement does not exist. Revenue recognition commences at the installation dates, when clientcustomer acceptance has occurred, and collectability of a determinable amount is probable. In the case of hosted applications, the clientcustomer does not have the contractual right to take possession of the software and the items delivered at the outset of the contract (e.g., installation, training, etc.) do not have value to the clientcustomer without the software license and ongoing support and maintenance. Any upfront fees charged in the case of hosted arrangements are recognized ratably over the expected benefit period of the arrangement, typically five years. The unrecognized portion of these revenue elements is recorded as deferred revenue.
We also offer various hardware elements in connection with DMSAdvertising services. In the ANA segment, we receive revenues from the placement of internet advertising for automotive retailers and integrated solution sales, which in some instances are considered sales-type leases under ASC 840, "Leases," and in other instances are sold upfront. Revenues related to leased hardwareOEMs. Advertising revenues are recognized upon installation and receivableswhen the services are recorded based onrendered.
Transaction revenues. In the present value of the minimum lease payments at the beginning of the lease term.
•Transactional revenues. WeRSNA segment, we receive revenues on a feefees per transaction processed basis in connection withfor providing auto retailers interfaces with third parties to process credit reports, vehicle registrations, data updates, and Internet sales leads. Transactional revenues are recorded in accordance with ASC 605. Delivery occursautomotive equity mining. Revenue is recognized at the time the services are rendered. TransactionalTransaction revenues are recorded in revenues gross of costs incurred for credit report processingwhen the Company is substantively and vehicle registrations as we are contractually responsible for providing the service, software, and/or connectivity to the clients,customers, and therefore, we arebears the primary obligor under ASC 605.risks and benefits of the contractual arrangement. When the Company is acting as an agent in the transaction, revenue is recorded net of costs incurred.
•Digital Marketing services.
Other. We receive revenues from the placement of advertising for clientsprovide consulting and providing websitesprofessional services and sell hardware such as laser printers, networking and telephony equipment, and related advertising and marketing services. Digital marketingitems. These revenues are recorded in accordance with ASC 605 asrecognized upon their delivery occurs at the time the services are rendered.or service completion.
Stock-Based Compensation
Certain of our employees (a) have been granted stock options to purchase shares of CDK’sour common stock and (b) have been granted restricted stock or restricted stock units under which shares of our common stock vest based on the passage of time or achievement of performance and market conditions.
We recognize stock-based compensation expense in net earnings based on the fair value of the award on the date of the grant. We determine the fair value of stock options issued using a binomial option pricingoption-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 other factors.historical volatilities of our stock and a peer group of companies due to the limited trading history associated with our common stock. Inclusion of our stock volatility in the valuation of future stock option grants may impact stock-based compensation expense recognized. Similarly, the dividend yield is based on historical experience and expected future dividend payments. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The binomial option pricing model also incorporates exercise and forfeiture assumptions 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 our common stock on the date of grant. We also grant performance-based awards that vest over a performance period. Under these programs, we communicate “target awards” at the beginning of the performance period with possible payouts at the end of the performance period ranging from 0% to 250% of the target awards. 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 our stock price and the stock prices of the peer group of companies. The probability associated with the achievement of performance conditions affects the vesting of our performance-based awards. Expense is only recognized for those shares expected to vest. We adjust stock-based compensation expense (increase or decrease) when it becomes probable that actual performance will differ from our estimate.
Upon adopting ASU 2016-09 in fiscal 2017, we recognize forfeitures when they occur and no longer estimate a forfeiture rate to recognize stock-based compensation expense.
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. Our assumptions, judgments, and estimates take into consideration the realization of deferred tax assets and changes in tax laws or interpretations thereof. Our 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 our consolidated and combined financial statements.
We record 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, we consider future market growth, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies. In the event we determine that it is more likely than not that wean entity will be unable to realize all or a portion of ourits deferred tax assets in the future, we would increase the valuation allowance and recognize a corresponding charge to earnings in the period in which such a determination is made. Likewise, if we later determine that we areit is more likely than not to realizethat the deferred tax assets will be realized, we would reverse the applicable portion of the previously recognized valuation allowance. In order to realize deferred tax assets, we must be able to generate sufficient taxable income of the appropriate character in the jurisdictions in which the deferred tax assets are located.
We recognize tax benefits only 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 of beingto be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in our income tax returns that do not meet
these recognition and measurement standards. Assumptions, judgment,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. We continually assessesassess the likelihood and amount of potential adjustments and adjust 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.
Prior to the spin-off, we computed the provision for income taxes as if we filed separate tax returns, which applies theWe finalized our accounting guidance for income taxes to the stand-alone financial statements as if we were a separate taxpayer and stand-alone enterprise. Our operations were included in the income tax returns of ADP for U.S. federal income tax purposes andpolicy decision with respect to certain consolidated, combined, unitary, or similar group filings for U.S. stateGILTI and local and certain foreign tax jurisdictions. The payment of income tax by ADP on our behalf was recorded within group equity on the combined balance sheets as of September 30, 2014. In addition, we file on a stand-alone basis with respectelect to certain other state and local and foreign jurisdictions in accordance with the taxing jurisdiction’s filing requirements. Subsequent to the spin-off, we file our own U.S. federal, state, and foreign income tax returns.
Deferred Costs
Costs to deliver services are expensed to cost of revenues as incurred with the exception of specific costs directly related to transition or installation activities, including the payroll related costs for our implementation and training teams, as well as commission costsaccount for the sale. These costs are deferredGILTI tax as a period cost when incurred. The GILTI provision is effective beginning in fiscal year 2019 and expensed proportionately over the sametherefore, will have an impact on future period that deferred revenues are recognized as revenues. Deferred amounts are monitored regularly to ensure appropriate asset and expense recognition.annual effective tax rates.
Goodwill
Goodwill is not amortized, but is instead testedWe test goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying value may not be recoverable. We test goodwill for impairment at the reporting unit level. A reporting unit is an operating segment or a component of an operating segment. OurIn July 2016, we revised our reportable segments and reporting units due to changes in how the chief operating segments aredecision maker regularly reviews information for purposes of allocating resources and assessing performance. Due to the change in organization structure, we expanded our reporting units as the components of our operating segments are economically similar with respectfrom three to operating margin, type or class of customer, nature of product or service, manner in which the components conduct business, and the extent to which assets and resources are shared. five.
We perform thistest impairment test by first comparing the fair value of each reporting unit to its carrying amount. If the carrying value for a reporting unit exceeds its fair value, we then compare the implied fair value of our goodwill to the carrying amount in order to determine the amount of the impairment, if any.
We estimate the fair value of our 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 our reporting units, the determination of appropriate comparable publicly traded companies in our industry, discount rates, and terminal growth rates. Based upon
During fiscal 2018, our ANA segment and reporting unit was at risk of failing step one of the fair value analysis completed in the fourth quarter of fiscal 2015, management concludedgoodwill impairment test. The impairment test indicated that the fair value substantiallyof the reporting unit exceeded the carrying value of eachby less than 10%. The goodwill allocated to the reporting unit is $225.6 million. Declines in advertising revenue from certain OEM contracts and that nochanges in revenue mix were the primary drivers of the decline in fair value. Further adverse changes in these factors could negatively impact the estimated fair value and result in an impairment for the reporting units were at risk of goodwill impairment.unit which could be material to our consolidated earnings. An adverse change to the fair value of our other reporting unitunits could also result in an impairment charge which could be material to our consolidated earnings.
Long-Lived Assets
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying value of the asset to its undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated undiscounted future cash flow, an impairment charge is recognized for the amount by which the carrying amount exceeds the fair value. Given the significance of our long-lived assets, an adverse change to the fair value of our long-lived assets could result in an impairment charge which could be material to our consolidated earnings.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Recently IssuedRefer to Note 3, "New Accounting Pronouncements
In May 2015,Pronouncements" to our consolidated financial statements under Item 8 of Part II of this Annual Report on Form 10-K for financial information regarding recently issued and adopted accounting pronouncements including the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-05, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement." ASU 2015-05 requires that if the arrangement contains a software license, the customer would account for the fees related to the software license element in a manner consistent with how the acquisition of other software licenses is accounted for under ASC 350-40; if the arrangement does not contain a software license, the customer would account for the arrangement as a service contract. ASU 2015-05 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2015. The adoption of ASU 2015-05 will not have a material impacteffects on the Company's consolidated and combinedour results of operations, financial condition, orand cash flows.
In June 2014, the FASB issued ASU 2014-12, "Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force)." ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU 2014-12 is effective for annual and interim periods within those annual periods beginning after December 15, 2015. The adoption of ASU 2014-12 will not have an impact on our consolidated results of operations, financial condition, or cash flows.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 requires an entity to recognize revenue depicting the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will also result in enhanced revenue related disclosures. In July 2015, the FASB decided to defer the effective date of ASU 2014-09 by one year and subsequently issued ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date." As a result, this standard will be effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2017. We have not yet determined the impact of ASU 2014-09 on its consolidated results of operations, financial condition, or cash flows.
Recently Adopted Accounting Pronouncements
In April 2015, the FASB issued ASU 2015-03, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs." ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that liability, consistent with debt discounts. ASU 2015-03 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2015. The Company elected to adopt ASU 2015-03 during the fourth quarter of fiscal 2015 and reclassified unamortized deferred financing costs of $8.0 million from other assets to long-term debt within the consolidated balance sheet as of June 30, 2015. The adoption of this standard did not impact prior periods as there was no outstanding indebtedness as of June 30, 2014.
In November 2014, the FASB issued and we adopted ASU 2014-17, "Business Combinations (Topic 805): Pushdown Accounting." ASU 2014-17 provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. An acquired entity will have
the option to elect to apply pushdown accounting in a subsequent reporting period to the acquired entity's most recent change-in-control event. In connection with the FASB's issuance of ASU 2014-17, the SEC rescinded Staff Accounting Bulletin ("SAB") Topic 5.J, "New Basis of Accounting Required in Certain Circumstances." All entities, including SEC registrants, will apply ASU 2014-17 for guidance on the use of pushdown accounting. ASU 2014-17 is effective immediately. The adoption of ASU 2014-17 did not have an impact on our consolidated and combined results of operations, financial condition, or cash flows.
In July 2014, we adopted ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” ASU 2013-11 requires netting of unrecognized tax benefits against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax position. The adoption of ASU 2013-11 did not have a material impact on our consolidated and combined results of operations, financial condition, or cash flows.
In April 2014, the FASB issued ASU 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” ASU 2014-08 requires that a disposal representing a strategic shift that has (or will have) a major effect on an entity’s financial results or a business activity classified as held for sale should be reported as discontinued operations. ASU 2014-08 also expands the disclosure requirements for discontinued operations and adds new disclosures for individually significant dispositions that do not qualify as discontinued operations. ASU 2014-08 is effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2014. The Company elected to adopt ASU 2014-08 during the fiscal year ended June 30, 2015 and applied this guidance to determine the accounting for the Internet sales leads business disposal.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are subject to interest rate risk related to our revolving credit facility and term loan facilities as those arrangements contain interest rates that are not fixed. As of June 30, 2018, our revolving credit facility was undrawn. The information calledinterest rate per annum on the two $250.0 million term loan facilities was 3.85% and on the $400.0 million term loan facility was 3.85% as of June 30, 2018. A hypothetical increase in the interest rate of 40 basis points would have resulted in a $3.3 million impact on earnings before income taxes for the year ended June 30, 2018.
We operate and transact business in various foreign jurisdictions and are therefore exposed to market risk from changes in foreign currency exchange rates that could impact our financial condition, results of operations, and cash flows. We have not been materially impacted by this itemfluctuations in foreign currency exchange rates as a significant portion of our business is provided undertransacted in U.S. dollars, and is expected to continue to be transacted in U.S. dollars or U.S. dollar-based currencies. As of June 30, 2018, operations in foreign jurisdictions were principally transacted in Canadian dollars, Euros, Pound Sterling, and Renminbi. A hypothetical change in all foreign currency exchange rates of 10% would have resulted in an increase or decrease in consolidated operating earnings of approximately $13.8 million for the caption "Quantitativeyear ended June 30, 2018.
We primarily manage our exposure to these market risks through our regular operating and Qualitative Disclosures about Market Risk" under Item 7 – "Management's Discussion and Analysisfinancing activities. We also use derivatives not designated as hedges which consisted of Financial Condition and Resultsforeign currency forward contracts to offset the risks associated with the effects of Operations."certain foreign currency exposure on intercompany loans.
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
|
| |
Consolidated and Combined Financial Statements | |
| |
| |
| |
| |
| |
| |
| |
| | |
| Financial Statement Schedule | |
| |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors and Stockholders of
CDK Global, Inc.
Hoffman Estates, Illinois
Opinion on the Financial Statements
We have audited the accompanying consolidated and combined balance sheets of CDK Global, Inc. and subsidiaries (the "Company") as of June 30, 20152018 and 2014, and2017, the related consolidated and combined statements of operations, comprehensive income, stockholders' (deficit) equity, and cash flows for each of the three years in the period ended June 30, 2015. Our audits also included2018, and the consolidatedrelated notes and combined financial statementthe schedule listed in the Index at Item 8. These consolidated and combined8 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2018, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial statement schedulereporting as of June 30, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 14, 2018 expressed an unqualified opinion on the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated and combinedCompany's financial statements and financial statement schedule based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not requiredmisstatement, whether due to have, nor were we engaged to perform, an audit of its internal control over financial reporting.error or fraud. Our audits included considerationperforming procedures to assess the risks of internal control overmaterial misstatement of the financial reporting as a basis for designing auditstatements, whether due to error or fraud, and performing procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includesrespond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated and combined financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2015, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated and combined financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated and combined financial statements, prior to September 30, 2014 the accompanying combined financial statements were derived from the consolidated financial statements and accounting records of Automatic Data Processing, Inc. ("ADP"). The accompanying combined financial statements include expense allocations for certain corporate functions historically provided by ADP. These allocations may not be reflective of the actual expenses which would have been incurred had the Company operated as a separate entity apart from ADP during the periods prior to September 30, 2014.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
August 13, 201514, 2018
We have served as the Company's auditor since 2014.
CDK Global, Inc.
Consolidated and Combined Statements of Operations
(In millions, except per share amounts)
|
| | | | | | | | | | | |
| | Years Ended June 30, |
| | 2018 | | 2017 | | 2016 |
| Revenues | $ | 2,273.2 |
| | $ | 2,220.2 |
| | $ | 2,114.6 |
|
| | | |
|
| | |
| Expenses: | |
| | |
| | |
|
| Cost of revenues | 1,182.0 |
| | 1,234.9 |
| | 1,243.4 |
|
| Selling, general and administrative expenses | 475.8 |
| | 477.7 |
| | 448.5 |
|
| Restructuring expenses | 20.9 |
| | 18.4 |
| | 20.2 |
|
| Total expenses | 1,678.7 |
| | 1,731.0 |
| | 1,712.1 |
|
| Operating earnings | 594.5 |
| | 489.2 |
| | 402.5 |
|
| | | | | | |
| Interest expense | (95.9 | ) | | (57.2 | ) | | (40.2 | ) |
| Other income, net | 13.4 |
| | 3.3 |
| | 6.8 |
|
| | | | | | |
| Earnings before income taxes | 512.0 |
| | 435.3 |
| | 369.1 |
|
| | | | | | |
| Provision for income taxes | (123.3 | ) | | (132.8 | ) | | (122.3 | ) |
| | | | | | |
| Net earnings | 388.7 |
| | 302.5 |
| | 246.8 |
|
| Less: net earnings attributable to noncontrolling interest | 7.9 |
| | 6.9 |
| | 7.5 |
|
| Net earnings attributable to CDK | $ | 380.8 |
| | $ | 295.6 |
| | $ | 239.3 |
|
| | | | | | |
| Net earnings attributable to CDK per share: | | | | | |
| Basic | $ | 2.80 |
| | $ | 2.01 |
| | $ | 1.52 |
|
| Diluted | $ | 2.78 |
| | $ | 1.99 |
| | $ | 1.51 |
|
| | | | | | |
| Weighted-average common shares outstanding: | | | | | |
| Basic | 135.8 |
| | 146.7 |
| | 157.0 |
|
| Diluted | 136.8 |
| | 148.2 |
| | 158.0 |
|
|
| | | | | | | | | | | |
| | Years Ended June 30, |
| | 2015 | | 2014 | | 2013 |
| Revenues | $ | 2,063.5 |
| | $ | 1,976.5 |
| | $ | 1,839.4 |
|
| | | |
|
| | |
| Expenses: | |
| | |
| | |
|
| Cost of revenues | 1,273.2 |
| | 1,204.5 |
| | 1,104.6 |
|
| Selling, general and administrative expenses | 431.1 |
| | 411.8 |
| | 416.9 |
|
| Restructuring expenses | 2.4 |
| | — |
| | — |
|
| Separation costs | 34.6 |
| | 9.3 |
| | — |
|
| Total expenses | 1,741.3 |
| | 1,625.6 |
| | 1,521.5 |
|
| Operating earnings | 322.2 |
| | 350.9 |
| | 317.9 |
|
| | | | | | |
| Interest expense | (28.8 | ) | | (1.0 | ) | | (0.9 | ) |
| Other income, net | 6.5 |
| | 3.4 |
| | 3.7 |
|
| | | | | | |
| Earnings before income taxes | 299.9 |
| | 353.3 |
| | 320.7 |
|
| | | | | | |
| Provision for income taxes | (113.6 | ) | | (117.4 | ) | | (115.0 | ) |
| | | | | | |
| Net earnings | 186.3 |
| | 235.9 |
| | 205.7 |
|
| Less: net earnings attributable to noncontrolling interest | 7.9 |
| | 8.0 |
| | 6.3 |
|
| Net earnings attributable to CDK | $ | 178.4 |
| | $ | 227.9 |
| | $ | 199.4 |
|
| | | | | | |
| Net earnings attributable to CDK per common share: | | | | | |
| Basic | $ | 1.11 |
| | $ | 1.42 |
| | $ | 1.24 |
|
| Diluted | $ | 1.10 |
| | $ | 1.42 |
| | $ | 1.24 |
|
| | | | | | |
| Weighted-average common shares outstanding: | | | | | |
| Basic | 160.6 |
| | 160.6 |
| | 160.6 |
|
| Diluted | 161.6 |
| | 160.6 |
| | 160.6 |
|
See notes to the consolidated and combined financial statements.
CDK Global, Inc.
Consolidated and Combined Statements of Comprehensive Income
(In millions)
| | | | Years Ended June 30, | Years Ended June 30, |
| | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| Net earnings | $ | 186.3 |
| | $ | 235.9 |
| | $ | 205.7 |
| $ | 388.7 |
| | $ | 302.5 |
| | $ | 246.8 |
|
| Other comprehensive (loss) income: | | | | | | |
| Other comprehensive income (loss): | | | | | | |
| Currency translation adjustments | (34.1 | ) | | 42.6 |
| | (1.1 | ) | 3.5 |
| | 2.2 |
| | (45.8 | ) |
| Other comprehensive (loss) income | (34.1 | ) | | 42.6 |
| | (1.1 | ) | |
| Other comprehensive income (loss) | | 3.5 |
| | 2.2 |
| | (45.8 | ) |
| Comprehensive income | 152.2 |
| | 278.5 |
| | 204.6 |
| 392.2 |
| | 304.7 |
| | 201.0 |
|
| Less: comprehensive income attributable to noncontrolling interest | 7.9 |
| | 8.0 |
| | 6.3 |
| 7.9 |
| | 6.9 |
| | 7.5 |
|
| Comprehensive income attributable to CDK | $ | 144.3 |
| | $ | 270.5 |
| | $ | 198.3 |
| $ | 384.3 |
| | $ | 297.8 |
| | $ | 193.5 |
|
See notes to the consolidated and combined financial statements.
CDK Global, Inc.
Consolidated and Combined Balance Sheets
(In millions, except per share par value)
| | | | June 30, | June 30, |
| | 2015 | | 2014 | 2018 | | 2017 |
| Assets | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | $ | 408.2 |
| | $ | 402.8 |
| $ | 804.4 |
| | $ | 726.1 |
|
| Accounts receivable, net of allowances of $6.8 and $12.2, respectively | 314.6 |
| | 310.7 |
| |
| Notes receivable from ADP and its affiliates | — |
| | 40.6 |
| |
| Accounts receivable, net of allowances of $7.4 and $6.3, respectively | | 374.6 |
| | 372.1 |
|
| Other current assets | 162.4 |
| | 164.1 |
| 188.3 |
| | 180.6 |
|
| Total current assets | 885.2 |
| | 918.2 |
| 1,367.3 |
| | 1,278.8 |
|
| Property, plant and equipment, net | 100.0 |
| | 82.6 |
| 131.9 |
| | 135.0 |
|
| Other assets | 224.1 |
| | 233.1 |
| 165.5 |
| | 184.1 |
|
| Goodwill | 1,209.9 |
| | 1,230.9 |
| 1,217.2 |
| | 1,181.2 |
|
| Intangible assets, net | 99.3 |
| | 133.8 |
| 126.5 |
| | 104.0 |
|
| Total assets | $ | 2,518.5 |
| | $ | 2,598.6 |
| $ | 3,008.4 |
| | $ | 2,883.1 |
|
| | | | | | | |
| Liabilities and Equity | |
| | |
| |
| Liabilities and Stockholders' Deficit | | |
| | |
|
| Current liabilities: | |
| | |
| |
| | |
|
| Current maturities of long-term debt and capital lease obligations | $ | 13.0 |
| | $ | — |
| $ | 45.2 |
| | $ | 46.5 |
|
| Accounts payable | 21.7 |
| | 17.2 |
| 50.5 |
| | 38.9 |
|
| Accrued expenses and other current liabilities | 154.4 |
| | 158.0 |
| 198.0 |
| | 188.7 |
|
| Accrued payroll and payroll-related expenses | 123.2 |
| | 105.6 |
| 85.7 |
| | 106.2 |
|
| Short-term deferred revenues | 186.1 |
| | 194.8 |
| 169.0 |
| | 172.3 |
|
| Notes payable to ADP and its affiliates | — |
| | 21.9 |
| |
| Total current liabilities | 498.4 |
| | 497.5 |
| 548.4 |
| | 552.6 |
|
| Long-term debt and capital lease obligations | 971.1 |
| | — |
| 2,575.5 |
| | 2,125.2 |
|
| Long-term deferred revenues | 162.9 |
| | 182.8 |
| 110.4 |
| | 136.1 |
|
| Deferred income taxes | 58.2 |
| | 76.5 |
| 56.7 |
| | 65.9 |
|
| Other liabilities | 43.8 |
| | 32.5 |
| 64.7 |
| | 60.1 |
|
| Total liabilities | 1,734.4 |
| | 789.3 |
| 3,355.7 |
| | 2,939.9 |
|
| | | | | | | |
| Equity: | |
| | |
| |
| Stockholders' Deficit: | | |
| | |
|
| Preferred stock, $0.01 par value: Authorized, 50.0 shares; issued and outstanding, none | — |
| | — |
| — |
| | — |
|
| Common stock, $0.01 par value: Authorized, 650.0 shares; issued, 161.3 shares; outstanding, 160.2 shares | 1.6 |
| | — |
| |
| Common stock, $0.01 par value: Authorized, 650.0 shares; issued, 160.3 and 160.3 shares, respectively; outstanding, 130.1 and 140.0 shares, respectively | | 1.6 |
| | 1.6 |
|
| Additional paid-in-capital | 686.5 |
| | — |
| 679.8 |
| | 608.6 |
|
| Retained earnings | 81.2 |
| | — |
| 753.0 |
| | 452.7 |
|
| Treasury stock, at cost: 1.1 shares | (50.7 | ) | | — |
| |
| Net parent company investment | — |
| | 1,712.2 |
| |
| Treasury stock, at cost: 30.2 and 20.3 shares, respectively | | (1,810.7 | ) | | (1,144.7 | ) |
| Accumulated other comprehensive income | 51.6 |
| | 85.7 |
| 11.5 |
| | 8.0 |
|
| Total CDK stockholders’ equity | 770.2 |
| | 1,797.9 |
| |
| Total CDK stockholders’ deficit | | (364.8 | ) | | (73.8 | ) |
| Noncontrolling interest | 13.9 |
| | 11.4 |
| 17.5 |
| | 17.0 |
|
| Total equity | 784.1 |
| | 1,809.3 |
| |
| Total liabilities and equity | $ | 2,518.5 |
| | $ | 2,598.6 |
| |
| Total stockholder's deficit | | (347.3 | ) | | (56.8 | ) |
| Total liabilities and stockholders' deficit | | $ | 3,008.4 |
| | $ | 2,883.1 |
|
See notes to the consolidated and combined financial statements.
CDK Global, Inc.
Consolidated and Combined Statements of Cash Flows
(In millions)
|
| | | | | | | | | | | |
| | Years Ended June 30, |
| | 2018 | | 2017 | | 2016 |
| Cash Flows from Operating Activities: | | | | | |
| Net earnings | $ | 388.7 |
| | $ | 302.5 |
| | $ | 246.8 |
|
| Adjustments to reconcile net earnings to cash flows provided by operating activities: | |
| | |
| | |
| Depreciation and amortization | 79.1 |
| | 70.3 |
| | 64.0 |
|
| Deferred income taxes | (10.1 | ) | | 20.9 |
| | (3.6 | ) |
| Stock-based compensation expense | 35.7 |
| | 55.4 |
| | 36.4 |
|
| Other | 5.0 |
| | 4.6 |
| | (5.6 | ) |
| Changes in operating assets and liabilities, net of effects of acquisitions: | |
| | |
| | |
| Increase in accounts receivable | (2.8 | ) | | (8.3 | ) | | (57.0 | ) |
| Decrease (increase) in other assets | 7.9 |
| | (1.9 | ) | | 3.0 |
|
| Increase in accounts payable | 11.8 |
| | 4.4 |
| | 15.3 |
|
| (Decrease) increase in accrued expenses and other liabilities | (53.7 | ) | | (16.9 | ) | | 20.8 |
|
| Net cash flows provided by operating activities | 461.6 |
| | 431.0 |
| | 320.1 |
|
| | | | | | |
| Cash Flows from Investing Activities: | |
| | |
| | |
| Capital expenditures | (46.0 | ) | | (62.4 | ) | | (50.8 | ) |
| Proceeds from sale of property, plant and equipment | 1.8 |
| | 0.5 |
| | 1.1 |
|
| Capitalized software | (41.1 | ) | | (31.8 | ) | | (13.5 | ) |
| Acquisitions of businesses, net of cash acquired | (29.0 | ) | | — |
| | (18.1 | ) |
| Contributions to investments | — |
| | (2.1 | ) | | (10.0 | ) |
| Proceeds from investments | 0.8 |
| | 7.9 |
| | 9.7 |
|
| Net cash flows used in investing activities | (113.5 | ) | | (87.9 | ) | | (81.6 | ) |
| | | | | | |
| Cash Flows from Financing Activities: | |
| | |
| | |
| Proceeds from long-term debt | 500.0 |
| | 1,000.0 |
| | 250.0 |
|
| Repayments of long-term debt and capital lease obligations | (46.4 | ) | | (36.9 | ) | | (20.0 | ) |
| Dividends paid to stockholders | (80.1 | ) | | (80.7 | ) | | (82.3 | ) |
| Repurchases of common stock | (623.6 | ) | | (700.0 | ) | | (561.0 | ) |
| Proceeds from exercise of stock options | 8.9 |
| | 14.7 |
| | 6.7 |
|
| Excess tax benefit from stock-based compensation awards | — |
| | — |
| | 8.9 |
|
| Withholding tax payments for stock-based compensation awards | (10.6 | ) | | (12.2 | ) | | (8.7 | ) |
| Dividend payments to noncontrolling owners | (7.4 | ) | | (6.3 | ) | | (5.0 | ) |
| Payments of deferred financing costs | (7.9 | ) | | (10.6 | ) | | (2.1 | ) |
| Acquisition-related payments | (4.1 | ) | | (8.1 | ) | | (6.2 | ) |
| Recovery of dividends paid (Note 1D) | — |
| | — |
| | 0.4 |
|
| Net cash flows (used in) provided by financing activities | (271.2 | ) | | 159.9 |
| | (419.3 | ) |
| | | | | | |
| Effect of exchange rate changes on cash and cash equivalents | 1.4 |
| | 4.0 |
| | (8.3 | ) |
| | | | | | |
| Net change in cash and cash equivalents | 78.3 |
| | 507.0 |
| | (189.1 | ) |
| | | | | | |
| Cash and cash equivalents, beginning of period | 726.1 |
| | 219.1 |
| | 408.2 |
|
| | | | | | |
| Cash and cash equivalents, end of period | $ | 804.4 |
| | $ | 726.1 |
| | $ | 219.1 |
|
| | | | | | |
|
| | | | | | | | | | | |
| | Years Ended June 30, |
| | 2015 | | 2014 | | 2013 |
| Cash Flows from Operating Activities: | | | | | |
| Net earnings | $ | 186.3 |
| | $ | 235.9 |
| | $ | 205.7 |
|
| Adjustments to reconcile net earnings to cash flows provided by operating activities: | |
| | |
| | |
| Depreciation and amortization | 76.5 |
| | 52.3 |
| | 51.1 |
|
| Deferred income taxes | (25.3 | ) | | (15.5 | ) | | (5.8 | ) |
| Stock-based compensation expense | 30.4 |
| | 21.0 |
| | 14.1 |
|
| Pension expense | 0.8 |
| | 3.7 |
| | 6.1 |
|
| Other | (12.6 | ) | | (3.5 | ) | | (0.2 | ) |
Changes in operating assets and liabilities, net of effects from acquisitions and divestitures of businesses: | |
| | |
| | |
| Increase in accounts receivable | (16.9 | ) | | (36.4 | ) | | (33.9 | ) |
| Increase in other assets | (24.3 | ) | | (24.4 | ) | | (24.6 | ) |
| Increase in accounts payable | 3.0 |
| | 0.3 |
| | 0.7 |
|
| Increase in accrued expenses and other liabilities | 50.0 |
| | 12.5 |
| | 33.3 |
|
| Net cash flows provided by operating activities | 267.9 |
| | 245.9 |
| | 246.5 |
|
| | | | | | |
| Cash Flows from Investing Activities: | |
| | |
| | |
| Capital expenditures | (44.0 | ) | | (36.6 | ) | | (27.5 | ) |
| Proceeds from sale of property, plant and equipment | 0.9 |
| | — |
| | — |
|
| Additions to software | (19.9 | ) | | (7.5 | ) | | (3.4 | ) |
| Acquisitions of businesses, net of cash acquired | (36.6 | ) | | (25.7 | ) | | — |
|
| Proceeds from the sale of a business | 24.5 |
| | — |
| | — |
|
| Contributions to investments | (22.9 | ) | | — |
| | — |
|
| Proceeds from investments | 16.6 |
| | — |
| | — |
|
| Proceeds from (advances on) notes receivable from ADP and its affiliates | 40.6 |
| | (4.2 | ) | | (5.3 | ) |
| Net cash flows used in investing activities | (40.8 | ) | | (74.0 | ) | | (36.2 | ) |
| | | | | | |
| Cash Flows from Financing Activities: | |
| | |
| | |
| Repayments of notes payable to ADP and its affiliates | (21.9 | ) | | (2.1 | ) | | (2.0 | ) |
| Borrowings on notes payable to ADP and its affiliates | — |
| | 1.0 |
| | — |
|
| Net transactions of parent company investment | (240.8 | ) | | (36.3 | ) | | (142.1 | ) |
| Proceeds from debt | 1,750.0 |
| | — |
| | — |
|
| Repayments of debt and capital lease obligations | (759.5 | ) | | — |
| | — |
|
| Dividend paid to ADP at separation | (825.0 | ) | | — |
| | — |
|
| Dividends paid to stockholders | (58.2 | ) | | — |
| | — |
|
| Repurchases of common stock | (50.0 | ) | | — |
| | — |
|
| Proceeds from exercise of stock options | 9.8 |
| | — |
| | — |
|
| Excess tax benefit from exercises of stock options | 11.2 |
| | 7.1 |
| | 4.7 |
|
| Withholding tax payment for stock-based compensation awards | (0.9 | ) | | — |
| | — |
|
| Payment of deferred financing costs | (9.2 | ) | | — |
| | — |
|
| Dividend payments of CVR to noncontrolling owners | (5.4 | ) | | (8.0 | ) | | — |
|
| Acquisition-related payments | — |
| | (10.0 | ) | | (14.5 | ) |
| Net cash flows used in financing activities | (199.9 | ) | | (48.3 | ) | | (153.9 | ) |
| | | | | | |
| Effect of exchange rate changes on cash and cash equivalents | (21.8 | ) | | 2.9 |
| | (3.2 | ) |
| | | | | | |
| Net change in cash and cash equivalents | 5.4 |
| | 126.5 |
| | 53.2 |
|
| | | | | | |
| Cash and cash equivalents, beginning of period | 402.8 |
| | 276.3 |
| | 223.1 |
|
| | | | | | |
| Cash and cash equivalents, end of period | $ | 408.2 |
| | $ | 402.8 |
| | $ | 276.3 |
|
| | | | | | |
| | | | | | |
|
| | | | | | | | | | | |
| | Years Ended June 30, |
| | 2018 | | 2017 | | 2016 |
| Supplemental Disclosure: | | | | | |
| Cash paid for: | | | | | |
| Income taxes and foreign withholding taxes, net of refunds | $ | 118.9 |
| | $ | 120.3 |
| | $ | 109.4 |
|
| Interest | 92.8 |
| | 49.6 |
| | 37.8 |
|
| Non-cash transactions: | | | | | |
| Non-cash consideration issued for acquisitions (Note 4) | 14.5 |
| | — |
| | 13.5 |
|
|
| | | | | | | | | | | |
| Supplemental Disclosure: | | | | | |
| Cash paid for: | | | | | |
| Income taxes and foreign withholding taxes, net of refunds | $ | 120.8 |
| | $ | 18.1 |
| | $ | 14.2 |
|
| Interest | 19.2 |
| | 0.1 |
| | 0.2 |
|
| Non-cash transactions: | | | | | |
| Non-cash consideration issued for acquisition of AVRS, Inc. (Note 4) | 8.5 |
| | — |
| | — |
|
See notes to the consolidated and combined financial statements.
CDK Global, Inc.
Consolidated and Combined Statements of Stockholders' (Deficit) Equity
(In millions)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in-Capital | | Retained Earnings | | Treasury Stock | | Net Parent Company Investment | | Accumulated Other Comprehensive Income | | Total CDK Stockholders' Equity | | Non-controlling Interest | | Total Equity |
| | Shares Issued | | Amount | | | | | | | | |
| Balance as of June 30, 2012 | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,424.3 |
| | $ | 44.2 |
| | $ | 1,468.5 |
| | $ | 5.1 |
| | $ | 1,473.6 |
|
| Net earnings | — |
| | — |
| | — |
| | — |
| | — |
| | 199.4 |
| | — |
| | 199.4 |
| | 6.3 |
| | 205.7 |
|
| Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1.1 | ) | | (1.1 | ) | | — |
| | (1.1 | ) |
| Net distributions to Parent | — |
| | — |
| | — |
| | — |
| | — |
| | (123.5 | ) | | — |
| | (123.5 | ) | | — |
| | (123.5 | ) |
| Balance as of June 30, 2013 | — |
| | — |
| | — |
| | — |
| | — |
| | 1,500.2 |
| | 43.1 |
| | 1,543.3 |
| | 11.4 |
| | 1,554.7 |
|
| | | | | | | | | | | | | | | | | | | | |
| Net earnings | — |
| | — |
| | — |
| | — |
| | — |
| | 227.9 |
| | — |
| | 227.9 |
| | 8.0 |
| | 235.9 |
|
| Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 42.6 |
| | 42.6 |
| | — |
| | 42.6 |
|
| Net distributions to Parent | — |
| | — |
| | — |
| | — |
| | — |
| | (15.9 | ) | | — |
| | (15.9 | ) | | — |
| | (15.9 | ) |
| Dividend payments of CVR to noncontrolling owners | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (8.0 | ) | | (8.0 | ) |
| Balance as of June 30, 2014 | — |
| | — |
| | — |
| | — |
| | — |
| | 1,712.2 |
| | 85.7 |
| | 1,797.9 |
| | 11.4 |
| | 1,809.3 |
|
| | | | | | | | | | | | | | | | | | | | |
| Net earnings | — |
| | — |
| | — |
| | 139.4 |
| | — |
| | 39.0 |
| | — |
| | 178.4 |
| | 7.9 |
| | 186.3 |
|
| Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (34.1 | ) | | (34.1 | ) | | — |
| | (34.1 | ) |
| Net distributions to Parent | — |
| | — |
| | — |
| | — |
| | | | (271.8 | ) | | — |
| | (271.8 | ) | | — |
| | (271.8 | ) |
| Dividend paid to ADP | — |
| | — |
| | — |
| | — |
| | — |
| | (825.0 | ) | | — |
| | (825.0 | ) | | — |
| | (825.0 | ) |
| Reclassifications of net parent company investment to common stock and additional paid-in-capital in conjunction with the spin-off | 160.6 |
| | 1.6 |
| | 652.8 |
| | — |
| | — |
| | (654.4 | ) | | — |
| | — |
| | — |
| | — |
|
| Stock-based compensation expense | — |
| | — |
| | 17.5 |
| | — |
| | — |
| | — |
| | — |
| | 17.5 |
| | — |
| | 17.5 |
|
| Common stock issued for the exercise and vesting of stock-based compensation awards | 0.7 |
| | — |
| | 9.8 |
| | — |
| | — |
| | — |
| | — |
| | 9.8 |
| | — |
| | 9.8 |
|
| Excess tax benefit from stock-based compensation awards | — |
| | — |
| | 7.3 |
| | — |
| | — |
| | — |
| | — |
| | 7.3 |
| | — |
| | 7.3 |
|
| Withholding tax payment for stock-based compensation awards | — |
| | — |
| | (0.9 | ) | | — |
| | — |
| | — |
| | — |
| | (0.9 | ) | | — |
| | (0.9 | ) |
| Dividends paid to stockholders | — |
| | — |
| | — |
| | (58.2 | ) | | — |
| | — |
| | — |
| | (58.2 | ) | | — |
| | (58.2 | ) |
| Repurchases of common stock | — |
| | — |
| | — |
| | — |
| | (50.7 | ) | | — |
| | — |
| | (50.7 | ) | | — |
| | (50.7 | ) |
| Dividend payments of CVR to noncontrolling owners | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (5.4 | ) | | (5.4 | ) |
| Balance as of June 30, 2015 | 161.3 |
| | $ | 1.6 |
| | $ | 686.5 |
| | $ | 81.2 |
| | $ | (50.7 | ) | | $ | — |
| | $ | 51.6 |
| | $ | 770.2 |
| | $ | 13.9 |
| | $ | 784.1 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in-Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Income | | Total CDK Stockholders' (Deficit)Equity | | Non-controlling Interest | | Total Stockholders' (Deficit) Equity |
| | Shares Issued | | Amount | | | | | | | |
| Balance as of June 30, 2015 | 161.3 |
| | $ | 1.6 |
| | $ | 686.5 |
| | $ | 81.2 |
| | $ | (50.7 | ) | | $ | 51.6 |
| | $ | 770.2 |
| | $ | 13.9 |
| | $ | 784.1 |
|
| Net earnings | — |
| | — |
| | — |
| | 239.3 |
| | — |
| | — |
| | 239.3 |
| | 7.5 |
| | 246.8 |
|
| Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | — |
| | (45.8 | ) | | (45.8 | ) | | — |
| | (45.8 | ) |
| Stock-based compensation expense | — |
| | — |
| | 31.7 |
| | (0.3 | ) | | — |
| | — |
| | 31.4 |
| | — |
| | 31.4 |
|
| Common stock issued for the exercise and vesting of stock-based compensation awards, net | — |
| | — |
| | (32.6 | ) | | — |
| | 30.6 |
| | — |
| | (2.0 | ) | | — |
| | (2.0 | ) |
| Excess tax benefit from stock-based compensation awards | — |
| | — |
| | 8.9 |
| | — |
| | — |
| | — |
| | 8.9 |
| | — |
| | 8.9 |
|
| Cash dividends paid to stockholders | — |
| | — |
| | — |
| | (82.3 | ) | | — |
| | — |
| | (82.3 | ) | | — |
| | (82.3 | ) |
| Repurchases of common stock | — |
| | — |
| | (53.8 | ) | | — |
| | (506.5 | ) | | — |
| | (560.3 | ) | | — |
| | (560.3 | ) |
| Dividend payments to noncontrolling owners | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (5.0 | ) | | (5.0 | ) |
| Correction of common stock issued in connection with the spin-off and dividends paid (Note1D) | (1.0 | ) | | — |
| | — |
| | 0.4 |
| | — |
| | — |
| | 0.4 |
| | — |
| | 0.4 |
|
| Balance as of June 30, 2016 | 160.3 |
| | 1.6 |
| | 640.7 |
| | 238.3 |
| | (526.6 | ) | | 5.8 |
| | 359.8 |
| | 16.4 |
| | 376.2 |
|
| Net earnings | — |
| | — |
| | — |
| | 295.6 |
| | — |
| | — |
| | 295.6 |
| | 6.9 |
| | 302.5 |
|
| Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | — |
| | 2.2 |
| | 2.2 |
| | — |
| | 2.2 |
|
| Stock-based compensation expense and related dividend equivalents | — |
| | — |
| | 47.3 |
| | (0.5 | ) | | — |
| | — |
| | 46.8 |
| | — |
| | 46.8 |
|
| Common stock issued for the exercise and vesting of stock-based compensation awards, net | — |
| | — |
| | (45.1 | ) | | — |
| | 47.6 |
| | — |
| | 2.5 |
| | — |
| | 2.5 |
|
| Cash dividends paid to stockholders | — |
| | — |
| | — |
| | (80.7 | ) | | — |
| | — |
| | (80.7 | ) | | — |
| | (80.7 | ) |
| Repurchases of common stock | — |
| | — |
| | (34.3 | ) | | — |
| | (665.7 | ) | | — |
| | (700.0 | ) | | — |
| | (700.0 | ) |
| Dividend payments to noncontrolling owners | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (6.3 | ) | | (6.3 | ) |
| Balance as of June 30, 2017 | 160.3 |
| | 1.6 |
| | 608.6 |
| | 452.7 |
| | (1,144.7 | ) | | 8.0 |
| | (73.8 | ) | | 17.0 |
| | (56.8 | ) |
| Net earnings | — |
| | — |
| | — |
| | 380.8 |
| | — |
| | — |
| | 380.8 |
| | 7.9 |
| | 388.7 |
|
| Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | — |
| | 3.5 |
| | 3.5 |
| | — |
| | 3.5 |
|
| Stock-based compensation expense and related dividend equivalents | — |
| | — |
| | 30.5 |
| | (0.4 | ) | | — |
| | — |
| | 30.1 |
| | — |
| | 30.1 |
|
| Common stock issued for the exercise and vesting of stock-based compensation awards, net | — |
| | — |
| | (26.2 | ) | | — |
| | 24.5 |
| | — |
| | (1.7 | ) | | — |
| | (1.7 | ) |
| Cash dividends paid to stockholders | — |
| | — |
| | — |
| | (80.1 | ) | | — |
| | — |
| | (80.1 | ) | | — |
| | (80.1 | ) |
| Repurchases of common stock | — |
| | — |
| | 66.9 |
| | — |
| | (690.5 | ) | | — |
| | (623.6 | ) | | — |
| | (623.6 | ) |
| Dividend payments to noncontrolling owners | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (7.4 | ) | | (7.4 | ) |
| Balance as of June 30, 2018 | 160.3 |
| | $ | 1.6 |
| | $ | 679.8 |
| | $ | 753.0 |
| | $ | (1,810.7 | ) | | $ | 11.5 |
| | $ | (364.8 | ) | | $ | 17.5 |
| | $ | (347.3 | ) |
See notes to the consolidated and combined financial statements.
CDK Global, Inc.
Notes to the Consolidated and Combined Financial Statements
(Tabular amounts in millions, except per share amounts)
Note 1. Basis of Presentation
A. Spin-off
On April 9, 2014, the board of directors of Automatic Data Processing, Inc. (“ADP” or the “Parent”) approved the spin-off of the Dealer Services business of ADP ("Dealer Services"). On May 6, 2014, in preparation of the spin-off, ADP formed Dealer Services Holdings LLC, a Delaware limited liability company, to hold Dealer Services. On September 1, 2014, Dealer Services Holdings LLC was renamed CDK Global Holdings, LLC. On September 29, 2014, immediately prior to the spin-off, CDK Global Holdings, LLC converted to CDK Global, Inc. ("CDK" or the "Company"). On September 30, 2014 (the "Separation Date"), the spin-off became effective and ADP distributed 100% of the common stock of the Company to the holders of record of ADP's common stock as of September 24, 2014 (the "spin-off"). The spin-off was made pursuant to a Separation and Distribution Agreement by which ADP contributed the subsidiaries that operated the Dealer Services business to the Company.
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 17 for further information.
B. Description of Business
TheCDK Global, Inc (the "Company" or "CDK") enables end-to-end automotive commerce across the globe. For over 40 years, the Company is a global provider of integrated technology solutions to the information technology and marketing/advertising markets of the automotive retail industry. The Company’s solutions enablehas served automotive retailers and original equipment manufacturers (“OEMs”("OEMs") by providing innovative solutions that allow them to better connect, manage, analyze, and grow their businesses. The Company's solutions automate and integrate all parts of the buying process, including the advertising, acquisition, sale, financing, insuring, parts supply, repair, and maintenance of vehicles, in more than 100 countries around the world, for approximately 28,000 retail locations and most OEMs.
The Company classifies its operationsis organized into the following reportable segments: Automotive Retailtwo main operating groups. The Company's first operating group is CDK North America Automotivewhich is comprised of two reportable segments, Retail Solutions North America ("RSNA") and Advertising North America ("ANA"). The second operating group, which is also a reportable segment, is CDK International and Digital Marketing.("CDKI"). In addition, the Company has an “Other”Other segment, the primary components of which are corporate allocations and other expenses not recorded in the segment results, such as stock-based compensation expense, corporate costs, separation costs, interest expense, costs attributable to the business transformation plan, the trademark royalty fee charged by ADP prior to the spin-off, and certain unallocated expenses.results. Refer to Note 18 for further information.
C.B. Basis of Preparation
The financial statements presented herein represent (i) periods prior to September 30, 2014 when the Company was a wholly owned subsidiary of ADP (referred to as "combined financial statements") and (ii) periods subsequent to September 30, 2014, when the Company became a separate publicly-traded company (referred to as "consolidated financial statements"). Throughout this Annual Report on Form 10-K when we refer to the "financial statements," we are referring to the "consolidated and combined financial statements," unless the context indicates otherwise.
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, revenue,revenues, and expenses that are reported in the accompanying financial statements and footnotes thereto. Actual results may differ from those estimates. These financial statements present
C. Spin-off
On April 9, 2014, the consolidatedboard 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 combined financial conditionADP distributed 100% of the common stock of CDK to the holders of record of ADP's common stock as of September 24, 2014 (the "spin-off").
Concurrent with the spin-off, the Company and ADP entered into several agreements providing for transition services and governing relationships between the Company and ADP. Refer to Notes 8 and 17 for further information.
D. Spin-off Common Stock Issued
During the three months ended September 30, 2015, the Company became aware that 1.0 million shares of common stock were inadvertently issued and distributed to ADP at the spin-off with respect to certain unvested ADP equity awards. The Company previously reported that 160.6 million shares were issued in connection with the spin-off, which was overstated by 1.0 million shares. In addition, dividends paid to stockholders in fiscal 2015 were overstated by $0.4 million. The Company assessed the materiality and concluded that the impact was not material to previously reported results of operations, offinancial condition, or cash flows. During the three months ended September 30, 2015, the Company which was underand ADP took corrective action to cancel the 1.0 million shares of common controlstock effective as of September 30, 2014 and common management by ADP until the Separation Date.Company recovered the $0.4 million of cumulative dividends paid on such shares, thereby increasing the Company's retained earnings. The historical financial resultseffects of these adjustments were reflected in the accompanying financial statements presented may not be indicative of the results that would have been achieved had the Company operated as a separate, stand-alone entity.
Prior to the spin-off, the financial statements in this Annual Report on Form 10-K included costs for facilities, functions, and services used by the Company at shared ADP sites and costs for certain functions and services performed by centralized ADP organizations and directly charged to the Company based on revenue and headcount. Following the spin-off, the Company performs these functions using internal resources or purchased services, certain of which may be provided by ADP during a transitional period pursuant to the transition services agreement. Refer to Note 17 for further information on agreements entered into with ADP as a result of the spin-off. The expenses allocated to the Company for these services are not necessarily indicative of the expenses that would have been incurred if the Company had been a separate, independent entity and had otherwise managed these functions. The Company’s financial statements include the following transactions with ADP or its affiliates:
Separation Costs. The financial statements of the Company include certain incremental costs that are directly attributable to the spin-off. These costs were related to professional services and amounted to $34.6 million and $9.3 million for the years ended June 30, 2015 and 2014 ("fiscal 2015" and "fiscal 2014"), respectively. The Company did not incur any separation costs during the year ended June 30, 2013 ("fiscal 2013").
Overhead Expenses. Prior to the spin-off, the financial statements of the Company included an allocation of certain general expenses of ADP and its affiliates, which were in support of the Company, including departmental costs for travel, procurement, treasury, tax, internal audit, risk management, real estate, benefits, and other corporate and infrastructure costs. The Company was allocated $7.1 million, $29.0 million, and $27.9 million of these overhead costs related to ADP’s shared functions for fiscal 2015, 2014, and 2013, respectively. These costs were reported in selling, general and administrative expenses on the consolidated and combined statements of operations. These allocations were based on a variety of factors. The allocation of the travel department costs was based on the estimated percentage of travel directly related to the Company. The allocation of benefits was based on the approximate benefit claims or payroll costs directly related to the Company as compared to ADP’s total claims and payroll costs. The allocation of real estate management costs was based on the estimated percentage of square footage of facilities for the Company's business that was managed by the ADP corporate real estate department in relation to ADP’s total managed facilities. All other allocations were based on an estimated percentage of support staff time or system utilization in comparison to ADP as a whole. Management believes that these allocations were made on a reasonable basis.2016.
Royalty Fees. Prior to the spin-off, the financial statements included a trademark royalty fee charged by ADP to the Company based on revenues for licensing fees associated with the use of the ADP trademark. The Company was charged $5.7 million, $21.9 million, and $20.2 million for fiscal 2015, 2014, and 2013, respectively, for such trademark royalty fees. These charges were included in selling, general and administrative expenses on the consolidated and combined statements of operations. Management believes that these allocations were made on a reasonable basis.
Services Received from Affiliated Companies. Prior to the spin-off, certain systems development functions were outsourced to an ADP shared services facility located in India. This facility provides services to the Company as well as to other ADP affiliates. The Company purchased $5.5 million, $18.7 million, and $13.6 million of services from this facility for fiscal 2015, 2014, and 2013, respectively. The charges for these services were included within cost of revenues on the consolidated and combined statements of operations.
Notes Receivable from ADP and its Affiliates and Notes Payable to ADP and its Affiliates. The amounts recorded in the financial statements as of June 30, 2014 as notes receivable from ADP and its affiliates and notes payable to ADP and its affiliates represent amounts that were receivable or payable under contractual arrangements. Refer to Note 11 for further information on these notes and the related interest income and expense.
Other Services. Prior to the spin-off, the Company received other services from ADP and its affiliates (e.g., payroll processing services). The Company was charged primarily at a fixed rate per employee per month for such payroll processing services. Expenses incurred for such services were $0.4 million, $1.3 million, and $1.3 million for fiscal 2015, 2014, and 2013, respectively. These expenses were included in selling, general and administrative expenses on the consolidated and combined statements of operations.
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 Inc. ("CVR") in which CDK holds a controlling financial or management interest. All significant intercompanyIntercompany 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 and combined operating results using the equity
method of accounting. Equity method investments were not significant for fiscal 2015, 2014,years ended June 30, 2018 ("fiscal 2018"), June 30, 2017 ("fiscal 2017"), and 2013.June 30, 2016 ("fiscal 2016").
B. Business Combinations
The purchase price allocations for acquisitions are based on estimates of the fair value of tangible and intangible assets acquired and liabilities assumed. The Company engages independent valuation specialists, when necessary, to assist with purchase price allocations and uses recognized valuation techniques, including the income and market approaches, to determine
fair value. Management makes estimates and assumptions in determining purchase price allocations and valuation analyses, which may involve significant unobservable inputs. The excess of the purchase price over the estimated fair values of the underlying assets acquired and liabilities assumed is allocated to goodwill. In certain circumstances, the allocationsdetermination of the excess purchase price and allocation to assets acquired and liabilities assumed are based upon preliminary estimates and assumptions. Accordingly, the allocationsallocation 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 and combined 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 and combined statements of operations since their respective dates of acquisition.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.requirements, and contract termination costs. Restructuring obligations and 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
Revenues are generated from software licenses, hosting arrangements, hardware sales and leases, support and maintenance, professional services, advertising, and digital marketing, as well as certain transactional services.
The Company recognizes software related revenues (on-site) in accordance with the provisions of Accounting Standards Codification (“ASC”) 985-605, “Software-Revenue“Software - Revenue Recognition,” and non-software related revenue, upfront hardware sales, and software delivered under a hosted modelincluding Software-as-a-Service (“SaaS”), in accordance with ASC 605, "Revenue Recognition" ("ASC 605").
The Company generates revenues from four categories: subscription, digital advertising, transactional services, and other. Taxes collected from customers and remitted to governmental authorities are presented on a net basis; that is, such taxes are excluded from revenues.
Subscription.In general, revenue is recognized when all of the following criteria have been met:RSNA and CDKI segments, CDK provides software and technology solutions for automotive retailers and OEMs, which includes:
persuasive evidence of an arrangement exists;
delivery has occurred or services have been rendered;
fees are fixed or determinable; and
collection of the revenue is reasonably assured.
The following are the Company’s major components of revenues:
Bundled sales of Dealer Management Systems (“DMS”DMSs”) and integrated solutions. Inlayered applications, where the Automotive Retail North America and Automotive Retail International segments, the Company receives fees for product installation, monthly fees for software licenses, ongoing software support and maintenance of DMS, and other integrated solutions that are either hosted by the Company ormay be installed on-site at the client’s location. customer’s location, or hosted and provided on a SaaS basis, including ongoing maintenance and support;
Interrelated services such as installation, initial training, and data updates;
Websites, search marketing, and reputation management services (RSNA only); and
Hardware on a service basis, meaning no specific assets are identified or a substantive right of substitution exists.
Revenues for term licenses are recognized ratably over the software license term, as vendor-specific objective evidence (“VSOE”) of the fair values of the individual elements in the sales arrangement does not exist. Revenue recognition commences at the installation dates, when clientcustomer acceptance has occurred, and collectability of a determinable amount is probable. In the case of hosted applications, the clientcustomer does not have the contractual right to take possession of the software and the items
delivered at the outset of the contract (e.g., installation, training, etc.) do not have value to the clientcustomer without the software license and ongoing support and maintenance. Any upfront fees charged in the case of hosted arrangements are recognized ratably over the expected benefit period of the arrangement, typically five years. The unrecognized portion of these revenue elements is recorded as deferred revenue.
The Company also offers various hardware elements in connection with DMS and integrated solution sales, which in some instances are considered sales-type leases under ASC 840, "Leases," and in other instances are sold upfront. Revenues related to leased hardware are recognized upon installation and receivables are recorded based onAdvertising services. In the present value ofANA segment, the minimum lease payments at the beginning of the lease term.
Transactional revenues. The Company receives revenues on a feefrom the placement of internet advertising for automotive retailers and OEMs. Advertising revenues are recognized when the services are rendered.
Transaction revenues. In the RSNA segment, the Company receives fees per transaction processed basis in connection withfor providing auto retailers interfaces with third parties to process credit reports, vehicle registrations, data updates, and Internet sales leads through May 21, 2015, the date on which this business was sold. Transactional revenues are recorded in accordance with ASC 605. Delivery occursautomotive equity mining. Revenue is recognized at the time the services are rendered. TransactionalTransaction revenues are recorded in revenues gross of costs incurred for credit report processing and vehicle registrations aswhen the Company is substantively and contractually responsible for providing the service, software, and/or connectivity to the clients,customers, and therefore, bears the risks and benefits of the contractual arrangement. When the Company is acting as an agent in the primary obligor under ASC 605.
transaction, revenue is recorded net of costs incurred.Digital Marketing services. Other. The Company receives revenues from the placement of advertising for clientsprovides consulting and providing websitesprofessional services and sells hardware such as laser printers, networking and telephony equipment, and related advertising and marketing services. Digital marketingitems. These revenues are recorded in accordance with ASC 605 asrecognized upon their delivery occurs at the time the services are rendered.
or service completion.E. Income Taxes
Income tax expense is recognized for the amount of taxes payable or refundable for the current year. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Management must make assumptions, judgments, and estimates to determine the provision for income taxes, taxes payable or refundable, and deferred tax assets and liabilities. OurThe Company's assumptions, judgments, and estimates take into consideration the realization of deferred tax assets and changes in tax laws or interpretations thereof. OurThe 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 ourthe Company's consolidated and combined 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 itan 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 to realizethat 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 only 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 of beingto 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, judgment,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.
Prior to the spin-off, we computed the provision for income taxes as if we filed separate tax returns, which applies theThe Company finalized its accounting guidance for income taxes to the stand-alone financial statements as if we were a separate taxpayer and stand-alone enterprise. The Separate Return Method applies the accounting guidance for income taxes to the stand-alone financial statements as if the Company was a separate taxpayer and a stand-alone enterprise for the periods presented. The Company’s operations were included in the income tax returns of ADP for U.S. federal income tax purposes andpolicy decision with respect to certain consolidated, combined, unitary,global intangible low taxed income (“GILTI”) and elects to account for the GILTI tax as a period cost when incurred. The GILTI provision is effective beginning in fiscal year 2019 and therefore, will have an impact on future period annual effective tax rates.
F. Stock-Based Compensation
Certain of the Company's employees (a) have been granted stock options to purchase shares of the Company’s common stock and (b) have been granted restricted stock or similar group filings for U.S. state and local and certain foreign tax jurisdictions. The paymentrestricted stock units under which shares of income tax by ADPthe Company's common stock vest based on the Company's behalf was recorded within group equity on the combined balance sheets as
passage of September 30, 2014. In addition, the Company files on a stand-alone basis with respect to certain other statetime or achievement of performance and local and foreign jurisdictions in accordance with the taxing jurisdiction’s filing requirements. Subsequent to the spin-off, the Company files its own U.S. federal, state, and foreign income tax returns.
F. Stock-Based Compensation
Prior to the spin-off, all employee equity awards (stock options and restricted stock) were granted by ADP. All subsequent awards were granted under the Company's 2014 Omnibus Award Plan ("2014 Plan").
Subsequent to the spin-off, themarket 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 each stock optionoptions issued is estimated on the date of grant using a binomial option pricingoption-pricing model. The binomial option-pricing model considers a range of assumptions related to volatility, dividend yield, risk-free interest rates,rate, and employee exercise behavior. Expected volatilities utilized in thisthe binomial option pricing model are based on a combination of implied market volatilities and other factors. Thehistorical volatilities of peer companies. Similarly, the dividend yield wasis 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. ThisThe binomial option pricing model also incorporates exercise and forfeiture assumptions based on an analysis of historical data. The expected life of the stock option grants represents the period of time that options granted are expected to be outstanding on the date of grant.
Prior to the spin-off, the Company determined the fair value of stock options issued using a binomial option-pricing model and recognized stock-based compensation expense in net earnings based on the fair value of the award on the date of grant. Expected volatilities utilized in this were based on a combination of implied market volatilities, historical volatility of ADP’s stock price, and other factors. Similarly, the dividend yield was based on ADP's historical experience and expected future changes. The risk-free rate was derived from the U.S. Treasury yield curve in effect at the time of grant. This model incorporated exercise and forfeiture assumptionsexercises based on an analysis of historical data. The expected life of a stock option grant wasis derived from the output of the binomial model and representedrepresents the period of time that options granted are expected to be outstanding.
The grant date fair value of restricted stock and restricted stock units that vest upon achievement of service conditions is based on the closing price of the Company's common stock on the date of grant. The Company also grants performance-based awards that vest over a performance period. Certain performance-based awards are further subject to adjustment (increase or decrease) based on a market condition defined as total shareholder return of the Company’s common stock compared to a peer group of companies. The fair value of performance-based awards subject to a market condition is determined using a Monte Carlo simulation model. The principal variable assumptions utilized in determining the grant date fair value of performance-based awards subject to a market condition include the risk-free rate, stock volatility, dividend yield, and correlations between the Company's stock price and the stock prices of the peer group of companies. The probability associated with the achievement of performance conditions affects the vesting of our performance-based awards. Expense is only recognized for those shares expected to vest. The Company adjusts stock-based compensation expense (increase or decrease) when it becomes probable that actual performance will differ from the estimate.
Upon adopting Accounting Standards Update (“ASU”) 2016-09 "Compensation—Stock Compensation (Topic 718): Improvement to Employee Share-Based Payment Accounting," in fiscal 2017, we recognize forfeitures when they occur and no longer estimate a forfeiture rate to recognize stock-based compensation expense.
G. Cash and Cash Equivalents
Investment securities with an original maturity of three months or less at the time of purchase are considered cash equivalents. Prior to the spin-off, the Company participated in a centralized approach to cash management and financing of operations governed by ADP. The Company’s cash was available for use and was regularly “swept” by ADP. Transfers of cash both to and from ADP are reflected as a financing activity in the consolidated and combined statements of cash flows and as Parent company’s net investment in the combined balance sheet as of June 30, 2014.
H. Accounts Receivable, Net
Accounts receivable, net is comprised of trade receivables and lease receivables, net of allowances. Trade receivables consist of amounts due to the Company in the normal course of business, which are not collateralized and do not bear interest. Lease receivables primarily relate to sales-type leases arising from the sale of hardware elements in bundled DMS or other integrated solutions. Lease receivables represent the current portion of the present value of the minimum lease payments at the beginning of the lease term. The long-term portion of the present value of the minimum lease payments is included within other assets on the consolidated and combined 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. Notes Receivable from ADP and its Affiliates and Notes Payable to ADP and its Affiliates
The amounts recorded in the financial statements as notes receivable from ADP and its affiliates and notes payable to ADP and its affiliates represent amounts that were receivable or payable under contractual arrangements. The interest rates on these notes were based on the AA rating for the currency of the loan and were based on market indices from Bloomberg (average yield for debt outstanding of similar maturities). The standard term of these notes was two years with an option to extend by one year for a maximum of two additional years.
J. Deferred Costs
Costs to deliver services are expensed to cost of revenues as incurred with the exception of specific costs directly related to transition or installation activities, including the payroll relatedpayroll-related costs for the Company's implementation and training teams, as well as commission costs for the sale. These costs are deferred and expensed proportionately over the same period that deferred revenues are recognized as revenues. Deferred amounts are monitored regularly to ensure appropriate asset and expense recognition. Current deferred costs classified within other current assets on the consolidated and combined balance sheets were $105.3 $89.2
million and $120.3$94.4 million as of June 30, 20152018 and June 30, 2014,2017, respectively. Long-term deferred costs classified within other assets on the consolidated and combined balance sheets were $144.7$95.7 million and $166.8$115.0 million as of June 30, 20152018 and June 30, 2014,2017, respectively.
K. Time DepositsJ. Funds Receivable and Funds Held for Clients and Client Fund Obligations
From timeFunds receivable and funds held for clients represent amounts received or expected to time, the Company enters into various time deposit agreements whereby certain fundsbe received from clients in advance of performing titling and registration services on deposit with financial institutions may not be withdrawn for a specified periodbehalf of time. Time deposits with original maturity periods greater than three monthsthose clients. These amounts are includedclassified within other current assets on the consolidated balance sheet. Assheets. The total amount due to remit for titling and registration obligations with the department of motor vehicles is recorded to client fund obligations which is classified as accrued expenses and other current liabilities on the consolidated balance sheets. Funds receivable was $33.1 million and $25.7 million, and funds held for clients was $12.7 million and $7.9 million as of June 30, 2015, the Company had time deposits2018 and 2017, respectively. Client fund obligation was $45.8 million and $33.6 million as of $5.8 million.June 30, 2018 and 2017, respectively.
L.K. Property, Plant and Equipment, Net
Property, plant and equipment, net is stated at cost and depreciated over the estimated useful lives of the assets using the straight-line method. Leasehold improvements are amortized over the shorter of the term of the lease or the estimated useful lives of the improvements. The estimated useful lives of assets are primarily as follows: |
| |
| Buildings | 20 to 40 years |
| Furniture and fixtures | 34 to 7 years |
| Data processing equipment | 2 to 5 years |
M. Goodwill
L. Goodwill is not amortized, but is instead tested
The Company tests goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying value may not be recoverable. We testThe Company tests goodwill for impairment at the reporting unit level. A reporting unit is an operating segment or a component of an operating segment. Our operating segments are our reporting units as the components of our operating segments are economically similar with respect to operating margin, type or class of customer, nature of product or service, manner in which the components conduct business, and the extent to which assets and resources are shared. We perform this
The Company tests impairment test by first comparing the fair value of each reporting unit to its carrying amount. If the carrying value for a reporting unit exceeds its fair value, wethe Company then comparecompares the implied fair value of ourthe Company's goodwill to the carrying amount in order to determine the amount of the impairment, if any.
We estimateThe Company estimates the fair value of ourthe 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 ourthe Company's reporting units, the determination of appropriate comparable publicly traded companies in ourthe Company's industry, discount rates, and terminal growth rates. An adverse change to the fair value of our reporting units could result in an impairment charge which could be material to our consolidated earnings.
N.M. Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount exceeds the fair value.
O.N. Internal Use Software
The Company’s policy provides for the capitalization of external direct costs of materials and services associated with developing or obtaining internal use computer software. In addition, the Company’s policy also provides for the capitalization of certain payroll and payroll-related costs for employees who are directly associated with the internal use computer software projects. The amount of capitalizable payroll costs with respect to these employees is limited to the time directly spent on such projects. Costs associated with preliminary project stage activities, training, maintenance, and all other post-implementation stage activities are expensed as incurred. The Company also expenses internal costs related to minor upgrades and
enhancements, as it is impracticable to separate these costs from normal maintenance activities. The Company amortizes internal use software typically over a three to five year life.
P.O. Computer Software to be Sold, Leased, or Otherwise Marketed
The Company’s policy provides for the capitalization of certain costs of computer software to be sold, leased, or otherwise marketed. The Company’s policy provides for the capitalization of all software production costs upon reaching technological feasibility for a specific product. Technological feasibility is attained when software products have a completed working model whose consistency with the overall product design has been confirmed by testing. Costs incurred prior to the establishment of technological feasibility are expensed as incurred. The establishment of technological feasibility requires judgment by management and in many instances is only attained a short time prior to the general release of the software. Maintenance-related costs are expensed as incurred.
Pursuant to this policy, the Company incurred expenses to research, develop, and deploy new and enhanced solutions of $170.1$131.3 million, $165.7$150.0 million, and $156.4$161.0 million for fiscal 20152018, 20142017, and 20132016, respectively. These expenses were classified within cost of revenues on the consolidated and combined statements of operations. Additionally, we had cash flows used for qualifying capitalized software development cost of $41.1 million, $31.8 million, and $13.5 million in fiscal 2018, 2017, and 2016, respectively.
Q.P. Foreign Currency
TheFor foreign subsidiaries where the local currency is the functional currency, net assets of the Company’s foreign subsidiaries 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 accumulatedother comprehensive income on the consolidated and combined 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 and combined statements of operations.
R.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.
Level 1: Inputs that are based upon quoted prices in active markets for identical assets or liabilities.
Level 2: Inputs, other than quoted prices included within Level 1, which are observable for the asset or liability, either directly or indirectly.
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.
The Company determines the fair value of financial instruments in accordance with ASC 820, "Fair Value Measurements." Such standards defineThis standard defines fair value and establishestablishes 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 and combined 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 facilityfacilities (as described in Note 14)13), including accrued interest, approximates fair value based on the Company's current estimated incremental borrowing rate for similar types of arrangements. The approximate aggregate fair value of ourthe Company's senior notes as of June 30, 20152018 and 2017 was $747.8$1,849.3 million and $1,407.9 million, respectively, based on
quoted market prices for the same or similar instruments compared to a carrying value of $750.0 million.$1,850.0 million and $1,350.0 million as of June 30, 2018 and 2017. The term loan facilityfacilities and the senior notes are considered Level 2 fair value measurements in the fair value hierarchy.
S.
The 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 Company 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 2015,2018, 2017 and 2016, revenues to one customer represented approximately 10%9%, 11% and 11%, respectively, of the Company's revenues. Accounts receivable from this customer represented approximately 11% and 14% of the Company's accounts receivable as of June 30, 2018 and 2017, respectively. Revenues and accounts receivable from this customer were primarily generated by our Digital Marketing segment.the ANA and RSNA segments.
Note 3. New Accounting Pronouncements
Recently Issued Accounting Pronouncements
In May 2015,January 2017, the Financial Accounting StandardsStandard Board ("FASB"(“FASB”) issued Accounting Standards Update ("ASU") 2015-05, "IntangiblesASU 2017-04, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's AccountingOther.” ASU 2017-04 simplifies the accounting for Fees Paidgoodwill impairment by eliminating Step 2 of the current goodwill impairment test, which required a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which the reporting unit’s carrying value exceeds its fair value, limited to the carrying value of the goodwill. ASU 2017-04 is effective for financial statements issued for fiscal years, and interim periods beginning after December 15, 2019. The adoption of ASU 2017-04 is not expected to have a material impact on the Company's consolidated results of operations, financial condition, or cash flows.
In November 2016, the FASB issued ASU 2016-18, “Restricted Cash.” ASU 2016-18 clarifies cash flow presentation for restricted cash. ASU 2016-18 is effective for financial statements issued for fiscal years, and interim periods beginning after December 15, 2017. The adoption of ASU 2016-18 will not have a material impact on the Company's consolidated statements of cash flows.
In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments (Topic 230).” ASU 2016-15 addresses eight specific cash flow issues where there is diversity in practice in how these certain cash receipts and cash payments are presented and classified in the statements of cash flows. ASU 2016-15 is effective for financial statements issued for fiscal years, and interim periods beginning after December 15, 2017. The adoption of ASU 2016-15 will not have a Cloud Computing Arrangement.material impact on the Company's consolidated statements of cash flows.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU 2015-052016-02 requires that if the arrangement containslessees recognize right-of-use assets and lease liabilities for any lease classified as either a software license, the customer would account for the fees related to the software license element in a mannerfinance or operating lease that is not considered short-term. The accounting applied by lessors is largely consistent with how the acquisition of other software licenses is accounted for under ASC 350-40; if the arrangement does not contain a software license, the customer would account for the arrangement as a service contract.existing lease standard. ASU 2015-052016-02 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2015. The adoption2018 and required companies to apply a modified retrospective transition as of ASU 2015-05 will not have a material impact on the Company's consolidated and combined results of operations, financial condition, or cash flows.
earliest period presented. In June 2014,July 2018, the FASB issued ASU 2014-12, "Compensation - Stock Compensation2018-11, “Lease (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That842), Targeted Improvements,” which permits companies to apply a Performance Target Could Be Achieved after the Requisite Service Period (a consensusmodified retrospective transition as of the FASB Emerging Issues Task Force)."effective date and provide comparative period disclosures under ASC Topic 840. The Company has obligations under lease agreements for facilities, equipment and vehicles, which are classified as operating leases under the existing lease standard. While the Company is still evaluating the impact that ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU 2014-12 is effective for annual and interim periods within those annual periods beginning after December 15, 2015. The adoption of ASU 2014-122016-02 will not have an impact on the Company's consolidated results of operations, financial condition, or cash flows.flows, the Company's financial statements will reflect an increase in both assets and liabilities due to the requirement to recognize right-of-use assets and lease liabilities on the consolidated balance sheets for its facility and equipment leases.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 requires an entity to recognize revenue depicting the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will also result in enhanced revenue related disclosures. The guidance permits two methods of adoption: 1) retrospectively to each prior reporting period presented (full retrospective), or 2) retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective). In July 2015, the FASB decided to deferdeferred the effective date of ASU 2014-09 by one year and
subsequently issued ASU 2015-14, "Revenue from Contracts with Customers (Topic(ASC 606): Deferral of the Effective Date." As a result, thisthe standard and subsequent amendments thereto, will be effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2017. The
During fiscal 2017, the Company has not yet determinedestablished a cross-functional implementation team which evaluated the impact of the new standard on its revenue contracts.
The Company will adopt this standard on a modified retrospective basis, on July 1, 2018. The Company expects the most significant impacts of adopting ASU 2014-09, and the related ASUs, on its consolidated results of operations, financial condition, or cash flows.flows, will be as follows:
Recently Adopted Accounting PronouncementsThe Company currently applies accounting guidance for software, ASC 985-605, and recognizes revenues for on-site licenses ratably over the software license term, as CDK lacks vendor-specific objective evidence ("VSOE") of the fair values of the individual elements of the sales arrangement. Under ASC 606, the Company will no longer be required to establish VSOE and will allocate an arrangement's transaction price to on-site software licenses, based on estimated standalone selling price at the time of the sale. Therefore, upon adoption of the standard, the Company will recognize revenue and costs for on-site licenses upon installation of the software. Aside from revenues for on-site software licenses, the Company will continue to recognize the majority of its revenues, including SaaS and other service arrangements ratably over the term of arrangement and transaction revenue when service is rendered.
In April 2015,ASC 340, "Other Assets and Deferred Costs", the FASB issued ASU 2015-03, "Interestprovides guidance for contract costs that require capitalization and subsequent amortization - Imputationcosts to obtain a customer contract, and costs to fulfill the contract, which for CDK consists primarily of Interest (Subtopic 835-30): Simplifyingdirect sales commissions and implementation costs of service arrangements. The adoption of the Presentation of Debt Issuance Costs." ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presentednew standard will result in an increase in the balance sheet as a direct deduction fromcosts deferred and amortized over the carrying amounteconomic life of that liability, consistent with debt discounts. ASU 2015-03 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2015. the contract.
The Company elected to adopt ASU 2015-03 duringis in the fourth quarterprocess of fiscal 2015 and reclassified unamortized deferred financing costsfinalizing the impact of $8.0 million from other assets to long-term debt within the consolidated balance sheet as of June 30, 2015. The adoption of this standard didon its financial statements and currently anticipates at the date of adoption a pre-tax cumulative adjustment increasing retained earnings, primarily as a result of the two items discussed above, of approximately $150 million to $180 million, with a corresponding decrease in deferred revenues and increase in unbilled receivables due to timing of revenue recognition for on-site software and a slight increase in deferred costs due to costs capitalized under ASC 340 partially offset by costs related to on-site software installations prior to the date of adoption. Implications to tax related accounts are not included in these estimated amounts. The Company’s assessment of the full impact prior periods as there was no outstanding indebtedness as of adoption of the standard is subject to finalization, such that the actual impact of the adoption may differ from the estimated range described above.
In preparation of adopting the new standard, the Company has updated its accounting policies, systems, internal controls and processes related to revenue recognition and contract costs.
Note 4. Acquisitions
For the years ended June 30, 2014.
In November 2014, the FASB issued2018 and 2017, the Company adopted ASU 2014-17, "Business Combinations (Topic 805): Pushdown Accounting." ASU 2014-17 provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrenceincurred $15.7 million and $0.7 million of an event in which an acquirer obtains control of the acquired entity. An acquired entity will have the option to elect to apply pushdown accounting in a subsequent reporting periodcosts related to the acquired entity's most recent
change-in-control event. In connection with the FASB's issuanceassessment and integration of ASU 2014-17, the SEC rescinded Staff Accounting Bulletin ("SAB") Topic 5.J, "New Basis of Accounting Requiredacquisitions which are included in Certain Circumstances." All entities, including SEC registrants, will apply ASU 2014-17 for guidance on the use of pushdown accounting. ASU 2014-17 is effective immediately. The adoption of ASU 2014-17 did not have an impact on the Company's consolidatedselling, general and combined results of operations, financial condition, or cash flows.administrative expenses, respectively.
ELEAD1ONE
In July 2014,2018, CDK announced that it had entered into a definitive agreement to acquire ELEAD1ONE. ELEAD1ONE provides automotive customer relationship management software and call center solutions that enable interaction between sales, service and marketing operations to provide dealers with an integrated customer acquisition and retention platform. The transaction was unanimously approved by the CDK Board of Directors and is currently pending regulatory approval.
Progressus Media LLC
On April 3, 2018, the Company adopted ASU 2013-11, “Presentationacquired the membership interests of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” ASU 2013-11 requires netting of unrecognized tax benefits against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax position. The adoption of ASU 2013-11 did not have a material impact on the Company’s consolidated and combined results of operations, financial condition, or cash flows.
In April 2014, the FASB issued ASU 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” ASU 2014-08 requires that a disposal representing a strategic shift that has (or will have) a major effect on an entity’s financial results or a business activity classified as held for sale should be reported as discontinued operations. ASU 2014-08 also expands the disclosure requirements for discontinued operations and adds new disclosures for individually significant dispositions that do not qualify as discontinued operations. ASU 2014-08 is effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2014. The impact of ASU 2014-08 is dependent upon the nature of dispositions, if any, after adoption. The Company elected to adopt ASU 2014-08 during the fiscal year ended June 30, 2015 and applied this guidance to determine the accounting for the Internet sales leads business disposal discussed in Note 4.
Note 4. Acquisitions and Divestiture
Acquisitions
On April 2, 2015, the Company, through its majority owned subsidiary, CVR, acquired AVRS, Inc.Progressus Media LLC ("AVRS"Progressus"), a specialty provider of electronic vehicle registration software in California.mobile advertising solutions for dealerships, agencies, and automotive marketing companies. The acquisition was made pursuant to ana membership interest purchase agreement, of merger, which contains customary representations, warranties, covenants, and indemnities by the sellers and CVR. CVR acquired allthe Company. The acquisition date fair value of the outstanding stocktotal consideration transferred was $22.2 million which consists primarily of AVRS for an initial cash purchase price of $36.6$16.2 million, net of cash acquired, the fair value of the holdback provision of $0.3 million and the fair value of contingent consideration of $5.7 million, which is payable upon achievement of certain milestones and metrics over a three year period ending on March 31, 2021. Prior to the
acquisition, a CDK officer had an existing advisory relationship with Progressus which entitled the individual to a portion of the proceeds from a sale of Progressus under a unit appreciation rights agreement. At the time of closing, $0.5 million of the total consideration transferred by CDK was paid to the officer to settle Progressus’ obligation under the terms of the officer’s unit appreciation rights agreement.
The fair value of acquired intangibles assets and other net assets was $8.7 million and $2.2 million, respectively. The excess of the acquisition consideration over the estimated fair value of the acquired net assets of $11.3 million was allocated to goodwill. The acquired net assets and goodwill are included in the ANA segment. The intangible assets will be amortized over a weighted-average useful life of approximately 9 years. The goodwill recognized from this acquisition reflects expected synergies resulting from direct ownership of the products and processes, allowing greater flexibility for future product development. The acquired goodwill is deductible for tax purposes. As of June 30, 2018, the Company recorded $1.6 million of accrued expenses and other current liabilities and $4.4 million.million of other liabilities for the holdback and contingent consideration. The contingent consideration payments will be classified as financing activities on the statement of cash flows as the payments will occur more than three months after the acquisition date.
The fair values of intangible assets and the contingent consideration liability were based on preliminary valuation analysis. These estimates and assumptions are subject to change within the one-year measurement period if additional information, which existed as of the acquisition date, becomes known to the Company.
Dashboard Dealership Enterprises
On October 20, 2017, the Company acquired the outstanding stock of Dashboard Dealership Enterprises, a provider of executive reporting solutions for auto dealers. The acquisition was made pursuant to a stock purchase agreement, which contains customary representations, warranties, covenants, and indemnities by the sellers and the Company. The acquisition date fair value of total consideration to be transferred was $49.5$21.3 million, which includes a liability forconsists 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 $3.9 million and a guaranteed payment to the sellers of $3.6$6.6 million, which are included withinis payable upon achievement of certain milestones and metrics if achieved by December 31, 2018. As of June 30, 2018, the Company recorded $7.6 million of accrued expenses and other current liabilities onand $0.9 million of other liabilities for the consolidatedholdback and combined balance sheet.contingent consideration.
The purchase price for thisfair 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 assets acquired and liabilities assumed based on their fair values as follows: |
| | | | |
| Accounts receivable | | $ | 2.6 |
|
| Other current assets | | 0.4 |
|
| Property, plant and equipment | | 1.1 |
|
| Intangible assets | | 19.3 |
|
| Accrued expenses and other current liabilities | | (6.6 | ) |
| Deferred tax liabilities | | (7.4 | ) |
| Total identifiable net assets | | 9.4 |
|
| Goodwill | | 35.7 |
|
| Net assets acquired | | $ | 45.1 |
|
RSNA segment. The intangible assets acquired primarily relate to client lists, software, and trademarks, which will be amortized over a weighted-average useful life of 12approximately 8 years. The goodwill resultingrecognized from this acquisition reflects expected synergies resulting from adding AVRSdirect ownership of the products and processes, to CVR's current products and processes. Thisallowing greater flexibility for future product development. The acquired goodwill is not deductible for tax purposes.
The pro forma effects of this acquisitionthese acquisitions are not significant to the Company's reported results for any period presented. Accordingly, no pro forma financial statements have been presented herein.
Auto/Mate Dealership Systems
80In May 2017, the Company entered into a definitive agreement to acquire Auto/Mate Dealership Systems, a privately held company that provides a suite of DMS products and solutions. In the third quarter of fiscal 2018, the Company and Auto/Mate Dealership Systems terminated the agreement. This outcome followed the decision of the Federal Trade Commission to oppose the proposed acquisition. There was no termination fee.
RedBumper, LLC and NewCarIQ, LLC
On February 1, 2016, the Company acquired certain assets of RedBumper, LLC and NewCarIQ, LLC, providers of technology solutions for new and used car pricing. The Company acquired two businesses, ServiceBook Pro and One-Eighty Corp, during fiscal 2014 for approximately $12.5 million and $16.0 million, respectively, nethad a pre-existing relationship with these entities under which CDK was a reseller of cash acquired. ServiceBook Pro provides service workflow solutions to automotive retailers and One-Eighty Corp provides cloud-based, mobile solutions to automotive retailers. Both businesses operate within the Automotive Retail North America segment.their products. The acquisitions were not significantmade pursuant to asset purchase agreements, which contain customary representations, warranties, covenants, and indemnities by the Company’s resultssellers and the Company. The acquisition date fair value of operations, financial condition, ortotal consideration to be transferred was $32.4 million, which consists primarily of an initial cash flows.
During fiscal 2014,price of $17.7 million and a liability for contingent consideration of $14.3 million. Contingent consideration payments occurring within three months following the Company paid $10.0 million for acquisition-related contingencies related to the Autotegrity, Inc. acquisition and recorded an adjustment in selling, general and administrative expensesdate were classified within investing activities on the combined statement of operations to reducecash flows; subsequent payments were included within financing activities. Accordingly, $0.4 million of contingent consideration payments made during the contingency by $5.6 million.
three months following the acquisition date were included in investing activities as cash paid for the acquisitions. The Company did not acquire any businesses during fiscal 2013.minimum contingent consideration payable under the asset purchase agreements is $14.7 million and is payable in
Divestiture
installments over a four-year period; there is no maximum payment amount. The Company funded the initial payment with cash on hand.
The Company evaluates its businesses periodically in order to improve efficiencies in its operationsfair value of acquired software intangible assets and focus on the more profitable lines of business. On May 21, 2015, the Company sold its Internet sales leads business, whichother assets was comprised of Dealix Corporation$15.0 million and Autotegrity, Inc. and operated in the Automotive Retail North America segment.$0.6 million, respectively. The Company does not have significant continuing involvement following the sale. The saleexcess of the Internet sales leads business unit does not constitute a strategic shift that will have a major effect on the Company’s financial results and business activities. Accordingly, this disposal does not qualify for discontinued operations presentation. As a result of the sale, the Company recognized a loss of $0.8 million in selling, general and administrative expenses on the consolidated and combined statement of operations for fiscal 2015. In determining the loss on sale, $1.9 million of goodwill was allocated on a relative fair value basis comparingacquisition consideration over the fair value of the Internet sales leads businessacquired assets of $16.8 million was allocated to goodwill. The acquired assets and goodwill are included in the fair valueRSNA segment. The software intangible assets will be amortized over a weighted-average useful life of 8 years. The goodwill recognized from these acquisitions reflects expected synergies resulting from direct ownership of the Automotive Retail North America segment.products and processes, allowing greater flexibility for future product development and bundling, as opposed to licensing these products for sale. The acquired goodwill is deductible for tax purposes.
The following table summarizes revenue and earnings before taxes for the Internet sales leads business unit:Note 5. Restructuring |
| | | | | | | | | | | |
| | June 30, |
| | 2015 | | 2014 | | 2013 |
| Revenues | $ | 46.2 |
| | $ | 70.9 |
| | $ | 91.8 |
|
Earnings before income taxes (1) | 2.5 |
| | 12.1 |
| | 15.7 |
|
(1) Earnings before income taxes forDuring the fiscal year ended June 30, 2015, includes the loss of $0.8 million.
Note 5. Restructuring
During fiscal 2015, the Company initiated a three yearthree-year business transformation plan intended to increase operating efficiency and improve the Company's cost structure within its global operations. The business transformation plan is expected to produce significant benefits in the Company’sCompany's long-term business performance. As the Company executes the business transformation plan, the Company continually monitors, evaluates and refines its structure, including its design, goals, term and estimate of total restructuring expenses. As part of this process, during fiscal 2017, the Company extended the business transformation plan by one year through the fiscal year ending June 30, 2019 ("fiscal 2019"), and updated its estimate of total restructuring expenses under the business transformation plan to approximately $70.0 million through fiscal 2019. Based on additional opportunities we identified to further improve our cost structure, we have increased the estimated cost to execute the plan through fiscal 2019 to be approximately $100.0 million.
Restructuring expenses associated with the business transformation plan included employee-related costs, which represent severance and other termination-related benefits calculated based on long-standing benefit practices and local statutory requirements.requirements, and contract termination costs, which include costs to terminate facility leases. The Company expects to incur totalrecognized $20.9 million, $18.4 million, and $20.2 million of restructuring expenses underfor fiscal 2018, 2017 and 2016, respectively. Since the inception of the business transformation plan of approximately $80.0 million, of which $2.4 million was recognized as expense in fiscal 2015, with the remaining expense expected to beCompany has recognized through fiscal 2018.cumulative restructuring expenses of $61.9 million. Restructuring expenses wereare presented separately on the consolidated and combined statementstatements of operations. Restructuring expenses wereare recorded in the "Other"Other segment, as these initiatives are predominantly centrally directed and are not included in internal measures of segment operating performance.
Accruals for restructuring expenses were included within accrued expenses and other current liabilities on the consolidated balance sheets as of June 30, 2018 and combined balance sheet.2017. The following table summarizes the fiscal 20152018 and 2017 activity for the restructuring expenses and the related accruals:accrual:
81 |
| | | | | | | | | | | |
| | Employee-Related Costs | | Contract Termination Costs | | Total |
| Balance as of June 30, 2016 | $ | 9.0 |
| | $ | 0.9 |
| | $ | 9.9 |
|
| Charges | 14.5 |
| | 4.8 |
| | 19.3 |
|
| Cash payments | (16.5 | ) | | (3.0 | ) | | (19.5 | ) |
| Adjustments | (0.6 | ) | | (0.3 | ) | | (0.9 | ) |
| Balance as of June 30, 2017 | 6.4 |
| | 2.4 |
| | 8.8 |
|
| Charges | 20.8 |
| | 1.8 |
| | 22.6 |
|
| Cash payments | (21.5 | ) | | (3.0 | ) | | (24.5 | ) |
| Adjustments | (1.3 | ) | | (0.4 | ) | | (1.7 | ) |
| Balance as of June 30, 2018 | $ | 4.4 |
| | $ | 0.8 |
| | $ | 5.2 |
|
|
| | | |
| | Employee-Related Costs |
| Balance as of June 30, 2014 | $ | — |
|
| Charges | 2.4 |
|
| Cash payments | — |
|
| Foreign exchange | — |
|
| Balance as of June 30, 2015 | $ | 2.4 |
|
Note 6. Stock-Based Compensation
Incentive Equity Awards Converted from ADP Awards
On October 1, 2014, ADP's outstanding equity awards for employees of the Company were converted into equity awards of CDK at a ratio of 2.757 CDK equity awards for every ADP equity award held immediately prior to the spin-off. The Company'sconverted equity awards have the same terms and conditions as the ADP equity awards. As a result, the Company issued 2.3 million stock options with a weighted-average exercise price of $19.64, 0.7 million time-based restricted shares, and 0.2 million performance-based restricted shares upon completion of the conversion of existing ADP equity awards into the
Company's equity awards. As the conversion was considered a modification of an award in accordance with ASC 718, "Compensation - Stock Compensation," the Company compared the fair value of the award immediately prior to the spin-off to the fair value immediately after the spin-off to measure the incremental compensation cost. The fair values immediately prior to and after the spin-off were estimated using a binomial option pricingoption-pricing model. The conversion resulted in an increase in the fair value of the awards by $1.4 million, of which $1.1 million was recognized during fiscal 2015 and the remaining $0.3 million will be recognized in net earnings in the year endingfull as of June 30, 2016.
Incentive Equity Awards Granted by the Company
The 2014 Omnibus Award Plan ("2014 Plan") provides for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, other stock-based awards, and performance compensation awards to employees, directors, officers, consultants, advisors, and those of the Company's affiliates. The 2014 Plan provides for an aggregate of 12.0 million shares of the Company's common stock to be reserved for issuance and is effective for a period of ten years. As of June 30, 2015,2018, there were 7.85.3 million shares available for issuance under the 2014 Plan after considering awards granted by the Company and converted as a result of the spin-off from ADP. In fiscal 2016, the Company began reissuing treasury stock to satisfy issuances of common stock upon option exercise or vesting.
Prior to the spin-off, all employee equity awards (stock options and restricted stock) were granted by ADP. All subsequent awards, including all incentive equity awards converted from ADP awards, were granted under the 2014 Plan. The Company recognizes stock-based compensation expense associated with employee equity awards in net earnings based on the fair value of the awards on the date of grant. Effective July 1, 2016, the Company adopted ASU 2016-09 "Compensation—Stock Compensation (Topic 718): Improvement to Employee Share-Based Payment Accounting." Upon adoption, the Company made an accounting policy election to account for forfeitures as they occur rather than apply an estimated forfeiture rate. Stock-based compensation primarily consisted of the following for the fiscal years ended June 30, 2015 and 2014:following:
Stock Options: Stock options are granted to employees at exercise prices equal to the fair market value of the Company's common stock on the date of grant. Stock options are issued under a graded vesting schedule with a term of ten years. Compensation expense is measured based on the fair value of the stock option on the grant date and recognized over the requisite service period for each separately vesting portion of the stock option award. StockUpon termination of employment, unvested stock options are forfeited ifevaluated for forfeiture or modification, subject to the employee ceases to be employed byterms of the awards and Company prior to vesting.policies.
Time-Based Restricted Stock and Time-Based Restricted Stock Units. Time-based restricted stock and restricted stock units generally vest over a two- to five-year period. AwardsUpon termination of employment, unvested awards are forfeited ifevaluated for forfeiture or modification, subject to the employee ceases to be employed byterms of the awards and Company prior to vesting.policies.
Time-based restricted stock cannot be transferred during the vesting period. Compensation expense relatingrelated to the issuance of time-based restricted stock is measured based on the fair value of the award on the grant date and recognized on a straight-line basis over the vesting period. Employees are eligible to receive dividends on the shares awarded under the time-based restricted stock program.program during the restricted period.
Time-based restricted stock units are primarily settled in cash.cash, but may also be settled in stock. Compensation expense relatingrelated to the issuance of time-based restricted stock units is recorded over the vesting period, wasand is initially based on the fair value of the award on the grant date, and isdate. Cash settled, time-based restricted stock units are subsequently remeasured at each reporting date during the vesting period to the current stock value. No dividend equivalents are paid on units awarded under the time-based restricted stock unit program.program during the restricted period.
Performance-Based Restricted Stock and Performance-Based Restricted Stock Units. Performance-based restricted stock and performance-based restricted stock units generally vest over a one- to three-year performance period and subsequent to a service period of up to 26 months.period. Under these programs, management communicatedthe 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 150%250% of the "target awards." AwardsCertain performance-based awards are forfeited iffurther subject to adjustment (increase or decrease) based on a market condition defined as total shareholder return of the employee ceasesCompany's common stock compared to be employed bya peer group of companies. The probability associated with the Company prior to vesting.
Performance-based restricted stock cannot be transferred duringachievement of performance conditions affects the vesting period. Compensation expense relatingof 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 issuance of performance-based restricted stock is measured based upon the fair valueterms of the award on the grant dateawards and recognized on a straight-line basis over the vesting period, based upon the probability that the performance target will be met. After the performance period, if the performance targets are achieved, employees are eligible to receive dividends on the shares awarded under the performance-based restricted stock program.Company policies.
Performance-based restricted stock units are settled in either cash or stock, depending on the employee’s home country, and cannot be transferred during the vesting period. Compensation expense relatingrelated 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 one-year performance period, based upon the probability that the performance target will be met. Compensation expense relatingrelated 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. DividendPrior to settlement, dividend equivalents were paidare earned on awards settled in stock"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 2015, 2014,2018, 2017, and 2013,2016, respectively: |
| | | | | | | | | | | |
| | June 30, |
| | 2018 | | 2017 | | 2016 |
| Cost of revenues | $ | 4.9 |
| | $ | 6.3 |
| | $ | 6.2 |
|
| Selling, general and administrative expenses | 30.8 |
| | 49.1 |
| | 30.2 |
|
| Total pre-tax stock-based compensation expense | $ | 35.7 |
| | $ | 55.4 |
| | $ | 36.4 |
|
| | | | | | |
| Income tax benefit | $ | 10.5 |
| | $ | 19.4 |
| | $ | 12.9 |
|
|
| | | | | | | | | | | |
| | June 30, |
| | 2015 | | 2014 | | 2013 |
| Cost of revenues | $ | 7.8 |
| | $ | 7.0 |
| | $ | 4.9 |
|
| Selling, general and administrative expenses | 22.6 |
| | 14.0 |
| | 9.2 |
|
| Total pre-tax stock-based compensation expense | $ | 30.4 |
| | $ | 21.0 |
| | $ | 14.1 |
|
| | | | | | |
| Income tax benefit | $ | 10.1 |
| | $ | 7.4 |
| | $ | 4.9 |
|
Stock-based compensation expense for fiscal 2015 consists2018 consisted of $17.5$30.1 million of expense related to equity classifiedequity-classified awards $7.5and $5.6 million of expense related to liability classifiedliability-classified awards. This includes $1.5 million of incremental stock-based compensation expense for awards and $5.4that were modified or expense recognition was accelerated related to an officer's departure for fiscal 2018.
Stock-based compensation expense for fiscal 2017 consisted of $46.8 million of expense allocated from ADP duringrelated to equity-classified awards and $8.6 million of expense related to liability-classified awards. Stock-based compensation expense for fiscal 2015 prior2017 includes $11.9 million of expense due to a cumulative adjustment in the fourth quarter based on management's assessment that it is probable CDK's performance metrics for fiscal 2018 associated with performance-based restricted stock units will exceed the target. Additionally, there was $3.1 million of incremental stock-based compensation expense for awards that were modified or expense recognition was accelerated related to an officer's departure in fiscal 2017.
Stock-based compensation expense for fiscal 2016 consisted of $31.4 million of expense related to equity-classified awards, $5.0 million of expense related to liability-classified awards. Stock-based compensation expense for fiscal 2016 includes $3.5 million of incremental stock-based compensation expense for awards that were modified or expense recognition was accelerated related to the spin-off. Transition and Release Agreement entered into with Mr. Anenen on February 2, 2016.
As of June 30, 2015,2018, the total unrecognized compensation cost related to non-vested stock options, restricted stock units, and restricted stock awards was $4.4$1.7 million, $12.7$16.7 million, and $11.4$8.0 million, respectively, which will be amortized over the weighted-average remaining requisite service periods of 1.8 years, 1.71.6 years, and 1.41.2 years, respectively.
The activity related to the Company's incentive equity awards from the date of spin-off to June 30, 2015for fiscal 2018 consisted of the following:
Stock Options
83 |
| | | | | | | | | | | | |
| | Number of Options (in thousands) | | Weighted-Average Exercise Price (in dollars) | | Weighted-Average Remaining Contractual Life (in years) | | Aggregate Intrinsic Value (in millions) |
| Options outstanding as of June 30, 2017 | 1,310 |
| | $ | 39.70 |
| | | | |
| Options granted | 25 |
| | 62.03 |
| | | | |
| Options exercised | (334 | ) | | 26.77 |
| | | | |
| Options canceled | (44 | ) | | 51.77 |
| | | | |
| Options outstanding as of June 30, 2018 | 957 |
| | $ | 44.25 |
| | 6.7 | | $ | 19.9 |
|
| | | | | | | | |
| Exercisable as of June 30, 2018 | 532 |
| | $ | 34.55 |
| | 5.6 | | $ | 16.2 |
|
|
| | | | | | | | | | | | |
| | 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, 2014 | — |
| | $ | — |
| | | | |
| Options converted from ADP equity awards | 2,269 |
| | 19.64 |
| | | | |
| Options granted | 397 |
| | 41.71 |
| | | | |
| Options exercised | (609 | ) | | 16.19 |
| | | | |
| Options canceled | (36 | ) | | 26.31 |
| | | | |
| Options outstanding as of June 30, 2015 | 2,021 |
| | $ | 24.88 |
| | 6.8 | | $ | 58.8 |
|
| | | | | | | | |
| Vested and expected to vest as of June 30, 2015 | 2,017 |
| | $ | 24.81 |
| | 6.8 | | $ | 58.8 |
|
| Exercisable as of June 30, 2015 | 968 |
| | $ | 17.45 |
| | 4.8 | | $ | 35.4 |
|
The Company received proceeds from the exercise of stock options of $9.8$8.9 million, $14.7 million, and $6.7 million during fiscal 2015.2018, 2017, and 2016 respectively. The aggregate intrinsic value of stock options exercised during fiscal 20152018, 2017, and 2016 was approximately$17.5 million.14.0 million, $26.0 million, and $12.4 million, respectively.
Time-Based Restricted Stock and Time-Based Restricted Stock Units
| | | | Restricted Stock | | Restricted Stock Units | 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) | 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, 2014 | — |
| | $ | — |
| | — |
| | $ | — |
| |
| Restricted shares/units converted from ADP equity awards | 576 |
| | 26.01 |
| | 143 |
| | 26.13 |
| |
| Non-vested restricted shares/units as of June 30, 2017 | | 497 |
| | $ | 53.98 |
| | 214 |
| | $ | 66.17 |
|
| Restricted shares/units granted | 513 |
| | 32.56 |
| | 180 |
| | 34.61 |
| 184 |
| | 63.71 |
| | 79 |
| | 64.86 |
|
| Restricted shares/units vested | (52 | ) | | 25.90 |
| | (7 | ) | | 25.90 |
| (230 | ) | | 50.23 |
| | (138 | ) | | 50.12 |
|
| Restricted shares/units forfeited | (70 | ) | | 27.90 |
| | (16 | ) | | 27.94 |
| (72 | ) | | 58.66 |
| | (13 | ) | | 58.65 |
|
| Non-vested restricted shares/units as of June 30, 2015 | 967 |
| | $ | 29.36 |
| | 300 |
| | $ | 31.12 |
| |
| Non-vested restricted shares/units as of June 30, 2018 | | 379 |
| | $ | 60.14 |
| | 142 |
| | $ | 58.55 |
|
Performance-Based Restricted Stock and Performance-Based Restricted Stock Units
|
| | | | | | |
| | Restricted Stock Units |
| | Number of Units (in thousands) | | Weighted-Average Grant Date Fair Value (in dollars) |
| Non-vested restricted units as of June 30, 2017 | 742 |
| | $ | 65.41 |
|
| Restricted units granted | 236 |
| | 52.36 |
|
| Dividend equivalents | 7 |
| | 57.53 |
|
| Restricted units vested | (513 | ) | | 50.38 |
|
| Restricted units forfeited | (61 | ) | | 59.33 |
|
| Non-vested restricted units as of June 30, 2018 | 411 |
| | $ | 63.26 |
|
|
| | | | | | | | | | | | | |
| | 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, 2014 | — |
| | $ | — |
| | — |
| | $ | — |
|
| Restricted shares/units converted from ADP equity awards | 70 |
| | 25.90 |
| | 89 |
| | 25.90 |
|
| Restricted shares/units granted | — |
| | — |
| | 133 |
| | 37.45 |
|
| Restricted shares/units vested | — |
| | — |
| | — |
| | — |
|
| Restricted shares/units forfeited | — |
| | — |
| | — |
| | — |
|
| Non-vested restricted shares/units as of June 30, 2015 | 70 |
| | $ | 25.90 |
| | 222 |
| | $ | 32.90 |
|
The following table presents the assumptions used to determine the fair value of the outstanding ADP awards converted into equity awards of CDK to measure the incremental compensation cost:
|
| | | |
| Risk-free interest rate | 1.1 | % |
| Dividend yield | 1.1 | % |
| Weighted-average volatility factor | 23.9 | % |
| Weighted-average expected life (in years) | 3.4 |
|
| Weighted-average fair value (in dollars) | $ | 12.50 |
|
The following table presents the assumptions used to determine the fair value of the stock options granted after the date of spin-off through June 30, 2015:
|
| | | |
| Risk-free interest rate | 1.6 | % |
| Dividend yield | 1.1 | % |
| Weighted-average volatility factor | 25.6 | % |
| Weighted-average expected life (in years) | 6.3 |
|
| Weighted-average fair value (in dollars) | $ | 10.24 |
|
The following table presents the assumptions used to determine the fair value of the stock options granted by ADP:the Company:
|
| | | | | | | | | |
| | | | |
| | Fiscal 2018 | Fiscal 2017 | Fiscal 2016 |
| Risk-free interest rate | 2.0 | % | 1.4 | % | 1.8 | % |
| Dividend yield | 0.9 | % | 0.9 | % | 0.9 | % |
| Weighted-average volatility factor | 24.5 | % | 24.5 | % | 24.7 | % |
| Weighted-average expected life (in years) | 6.3 |
| 6.3 |
| 6.3 |
|
| Weighted-average fair value (in dollars) | $ | 15.65 |
| $ | 13.90 |
| $ | 12.55 |
|
|
| | | | | | | |
| | 2014 | | 2013 |
| Risk-free interest rate | 1.5% - 1.7% |
| | 0.8% - 1.0% |
|
| Dividend yield | 2.3% - 2.4% |
| | 2.7% - 2.9% |
|
| Weighted-average volatility factor | 23.8% |
| | 23.5% - 24.4% |
|
| Weighted-average expected life (in years) | 5.4 |
| | 5.3 - 5.4 |
|
| Weighted-average fair value (in dollars) | $ | 13.53 |
| | $ | 8.62 |
|
Note 7. Employee Benefit Plans
Defined Contribution Savings Plan. The Company's Board of Directors approved a CDK sponsoredCDK-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 $12.4$16.9 million, $18.7 million and $18.9 million for fiscal 2015.2018, 2017 and 2016, respectively.
Prior to the spin-off, most domestic employees were covered under ADP's defined contribution plan. This 401(k) plan provides company matching under various formulas. Costs allocated to the Company for domestic associates for fiscal 2015 prior to the spin-off and fiscal 2014 and 2013 were $4.0 million, $12.4 million, and $11.4 million, respectively.
International Savings Plan. Benefit Plans. The Company’s foreign subsidiaries have retirement savings-typebenefit plans that cover certain international employees. TheTo the extent required by local statutory laws, the Company funds these retirement savings-typebenefit plans through periodic contributions under statutorily prescribed formulas. The Company’s expense for these plans was approximately $12.9$15.8 million, $12.5$14.8 million, and $11.5$14.1 million for fiscal 2015, 2014,2018, 2017, and 2013,2016, respectively.
Defined Benefit Pension Plans. Prior to the spin-off, certain employees of the Company were covered by ADP’s domestic defined benefit plans. In addition, certain employees of the Company were part of ADP’s Supplemental Officer Retirement Plan (“SORP”). The SORP is a defined benefit plan pursuant to which ADP will pay supplemental pension benefits to certain key officers upon retirement based upon the officers’ years of service and compensation. Liabilities and assets related to these plans remained with ADP. Domestic pension expense allocated to the Company for fiscal 2015 prior to the spin-off and fiscal 2014 and 2013 was $0.6 million, $3.0 million, and $5.3 million, respectively. SORP expense allocated to the Company for fiscal 2015 prior to the spin-off and fiscal 2014 and 2013 was $0.4 million, $1.7 million, and $1.7 million, respectively. The Company did not adopt a defined benefit plan or SORP plan for CDK employees in connection with the spin-off.
Note 8. Income Taxes
Tax Cuts and Jobs Act of 2017
On December 22, 2017, the Tax Cuts and Jobs Act ("Tax Reform Act") was enacted into law. The Tax Reform Act significantly revises the U.S. corporate income tax laws by, among other things, reducing the corporate income tax rate from 35.0% to 21.0% and implementing a modified territorial tax system that includes a one-time transition tax on accumulated undistributed foreign earnings. Other provisions included in the Tax Reform Act include the broadening of the executive compensation deduction limitation, a repeal of the domestic production activity deduction and several new international provisions. The modified territorial tax system includes a new anti-deferral provision, referred to as global intangible low taxed income (“GILTI”), which subjects certain foreign income to current U.S. tax.
In December 2017, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Reform Act. Under SAB 118, companies are able to record a reasonable estimate of the impacts of the Tax Reform Act if one is able to be determined and report it as a provisional amount during the measurement period. The measurement period is not to extend beyond one year from the enactment date. Impacts of the Tax Reform Act that a company is not able to make a reasonable estimate for should not be recorded until a reasonable estimate can be made during the measurement period.
On a year-to-date basis, the Company recorded a one-time tax benefit of $18.5 million related to the Tax Reform Act comprised of $26.2 million for the re-measurement of the Company's net deferred tax liability, partially offset by tax expense of $3.4 million for the one-time transition tax recorded within accrued liabilities and $4.3 million for foreign withholding taxes associated with undistributed foreign earnings recorded primarily within deferred taxes. The year-to-date adjustment was made up of: a net $14.1 million provisional tax benefit for the one-time impacts of the Tax Reform Act recorded during the three months ended December 31, 2017; a measurement period adjustment of $0.8 million of tax benefit as a result of re-measuring the net deferred tax liability upon filing the income tax return recorded during the three months ended March 31, 2018; a measurement period adjustment recorded during the three months ended June 30, 2018 of $3.6 million of tax benefit consisting of $2.8 million to re-measure the net deferred tax liability based on finalized temporary differences and $0.8 million to revise the one-time transition tax and foreign withholding taxes based on revised earnings and profits computations completed during the period. As of June 30, 2018, the Company considers its accounting for the Tax Reform Act to be complete. In addition to the one-time tax effects of the Tax Reform Act, the Company revised its annual effective tax rate to consider the impact of the reduced corporate tax rate. Due to the Company's fiscal year, the statutory corporate tax rate for fiscal 2018 is 28.1%, representing a blended tax rate based on the tax rate in effect on a pro-rata basis.
The Company’s accounting policy election related to GILTI was incomplete as of December 31, 2017 and March 31, 2018. During the three months ended June 30, 2018, as a result of additional analysis and evaluation, the Company elected to account for the GILTI tax as a period cost when incurred. The GILTI provision is effective beginning in fiscal year 2019 and therefore, will have an impact on future period annual effective tax rates.
The ultimate impact of the Tax Reform Act may differ from the Company's estimates due to the issuance of additional regulatory guidance, the interpretation of the Tax Reform Act evolving over time and actions taken by the Company as a result of the Tax Reform Act.
Tax Matters Agreement
The Company and ADP entered into a tax matters agreement as part of the spin-off that governs the rights and obligations of both parties after the spin-off with respect to taxes for both pre and post spin-off periods. Under this agreement, ADP is generally required to indemnify the Company for any income taxes attributable to ADP's operations or the Company's operations and for any non-income taxes attributable to ADP's operations, in each case for all pre spin-off periods as well as any taxes arising from transactions effected to consummate the spin-off, and the Company generally is required to indemnify ADP for any non-income taxes attributable to the Company's operations for all pre spin-off periods and for any income taxes attributable to the Company's operations for post spin-off periods.
The Company is generally required to indemnify ADP against any tax resulting from the spin-off (and against any claims made against ADP in respect of any tax imposed on its stockholders), in each case if that tax results from (i) an issuance of a significant amount of the Company's equity securities, a redemption of a significant amount of the Company's equity securities or the Company's involvement in other significant acquisitions of the Company's equity securities (excluding the spin-off), (ii) other actions or failures to act by the Company, or (iii) any of the Company's representations or undertakings
referred to in the tax matters agreement being incorrect or violated. ADP will generally be required to indemnify the Company for any tax resulting from the spin-off if that tax results from (a) ADP's issuance of its equity securities, redemption of its equity securities, or involvement in other acquisitions of its equity securities, (b) other actions or failures to act by ADP, or (c) any of ADP's representations or undertakings referred to in the tax matters agreement being incorrect or violated.
The Company recognized a receivablereceivables from ADP and a payable to ADP under the tax matters agreement of $0.5 million and $3.7$1.0 million as of June 30, 2015, respectively. There were no similar amounts receivable from2018 and 2017, respectively, and payables to ADP or payable to ADPof $0.9 million and $1.2 million as of June 30, 2014 as2018 and 2017, respectively, under the tax matters agreement was entered into in connection with the spin-off.
agreement.
Provision for Income Taxes
Prior to the spin-off, the provision for income taxes and the income tax balances were calculated as if we filed separately from ADP. As of June 30, 2015, our provision for income tax and income tax balances represent the Company's tax liabilities as an independent company.
Earnings before income taxes presented below wereis based on the geographic location to which such earnings were attributable.
|
| | | | | | | | | | | |
| | June 30, |
| | 2018 | | 2017 | | 2016 |
| Earnings before income taxes: | | | | | |
| U.S. | $ | 367.3 |
| | $ | 324.9 |
| | $ | 293.1 |
|
| Foreign | 144.7 |
| | 110.4 |
| | 76.0 |
|
| | $ | 512.0 |
| | $ | 435.3 |
| | $ | 369.1 |
|
|
| | | | | | | | | | | |
| | June 30, |
| | 2015 | | 2014 | | 2013 |
| Earnings before income taxes: | | | | | |
| United States | $ | 224.7 |
| | $ | 284.4 |
| | $ | 256.0 |
|
| Foreign | 75.2 |
| | 68.9 |
| | 64.7 |
|
| | $ | 299.9 |
| | $ | 353.3 |
| | $ | 320.7 |
|
The provision (benefit) for income taxes consisted of the following components:
|
| | | | | | | | | | | |
| | June 30, |
| | 2018 | | 2017 | | 2016 |
| Current: | | | | | |
| Federal | $ | 76.6 |
| | $ | 69.6 |
| | $ | 84.9 |
|
| Foreign | 35.8 |
| | 27.5 |
| | 24.5 |
|
| State | 21.0 |
| | 14.8 |
| | 16.5 |
|
| Total current | 133.4 |
| | 111.9 |
| | 125.9 |
|
| Deferred: | | | | | |
| Federal | (14.7 | ) | | 17.0 |
| | (3.3 | ) |
| Foreign | 2.9 |
| | 2.0 |
| | 1.3 |
|
| State | 1.7 |
| | 1.9 |
| | (1.6 | ) |
| Total deferred | (10.1 | ) | | 20.9 |
| | (3.6 | ) |
| Total provision for income taxes | $ | 123.3 |
| | $ | 132.8 |
| | $ | 122.3 |
|
|
| | | | | | | | | | | |
| | June 30, |
| | 2015 | | 2014 | | 2013 |
| Current: | | | | | |
| Federal | $ | 104.6 |
| | $ | 96.0 |
| | $ | 87.5 |
|
| Foreign | 18.3 |
| | 20.3 |
| | 20.4 |
|
| State | 16.0 |
| | 16.6 |
| | 12.9 |
|
| Total current | 138.9 |
| | 132.9 |
| | 120.8 |
|
| Deferred: | | | | | |
| Federal | (19.2 | ) | | (6.0 | ) | | (4.3 | ) |
| Foreign | (2.3 | ) | | (7.7 | ) | | (1.8 | ) |
| State | (3.8 | ) | | (1.8 | ) | | 0.3 |
|
| Total deferred | (25.3 | ) | | (15.5 | ) | | (5.8 | ) |
| Total provision for income taxes | $ | 113.6 |
| | $ | 117.4 |
| | $ | 115.0 |
|
A reconciliation between the Company’s effective tax rate and the U.S. federal statutory rate is as follows: |
| | | | | | | | | | | | | | | | | | | | |
| | June 30, |
| | 2018 | | % | | 2017 | | % | | 2016 | | % |
| Provision for taxes at U.S. statutory rate | $ | 143.9 |
| | 28.1 | % | | $ | 152.4 |
| | 35.0 | % | | $ | 129.2 |
| | 35.0 | % |
| Increase (decrease) in provision from: | | | | | | | | | | | |
| State taxes, net of federal benefit | 17.3 |
| | 3.4 | % | | 10.8 |
| | 2.5 | % | | 9.7 |
| | 2.6 | % |
| Stock compensation - excess tax benefits | (4.9 | ) | | (1.0 | )% | | (12.0 | ) | | (2.8 | )% | | — |
| | — | % |
| Noncontrolling interest | (1.8 | ) | | (0.4 | )% | | (2.0 | ) | | (0.5 | )% | | (2.5 | ) | | (0.7 | )% |
| Foreign tax rate differential | (2.2 | ) | | (0.4 | )% | | (12.4 | ) | | (2.8 | )% | | (7.8 | ) | | (2.1 | )% |
| U.S. tax on foreign earnings | 19.0 |
| | 3.7 | % | | 1.1 |
| | 0.3 | % | | 0.8 |
| | 0.2 | % |
| Foreign tax credits | (18.3 | ) | | (3.6 | )% | | (1.9 | ) | | (0.4 | )% | | (1.5 | ) | | (0.4 | )% |
| Foreign withholding taxes | 4.5 |
| | 0.9 | % | | — |
| | — | % | | — |
| | — | % |
| U.S. tax reform deferred tax re-measurement | (27.3 | ) | | (5.3 | )% | | — |
| | — | % | | — |
| | — | % |
| Valuation allowances | (3.6 | ) | | (0.7 | )% | | 0.8 |
| | 0.2 | % | | 1.1 |
| | 0.3 | % |
| Domestic production activities deduction | (4.0 | ) | | (0.8 | )% | | (4.2 | ) | | (1.0 | )% | | (6.4 | ) | | (1.7 | )% |
| Pre spin-off tax return adjustments | (0.4 | ) | | (0.1 | )% | | — |
| | — | % | | (0.4 | ) | | (0.1 | )% |
| Other | 1.1 |
| | 0.3 | % | | 0.2 |
| | — | % | | 0.1 |
| | — | % |
| Provision for income taxes | $ | 123.3 |
| | 24.1 | % | | $ | 132.8 |
| | 30.5 | % | | $ | 122.3 |
| | 33.1 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | June 30, |
| | 2015 | | % | | 2014 | | % | | 2013 | | % |
| Provision for taxes at U.S. statutory rate | $ | 105.0 |
| | 35.0 | % | | $ | 123.7 |
| | 35.0 | % | | $ | 112.3 |
| | 35.0 | % |
| Increase (decrease) in provision from: | | | | | | | | | | | |
| State taxes, net of federal benefit | 8.8 |
| | 2.9 | % | | 10.0 |
| | 2.8 | % | | 8.6 |
| | 2.7 | % |
| Noncontrolling interest | (2.8 | ) | | (0.9 | )% | | (2.8 | ) | | (0.8 | )% | | (2.2 | ) | | (0.7 | )% |
| Foreign rate differential | (4.3 | ) | | (1.4 | )% | | (3.3 | ) | | (0.9 | )% | | (3.2 | ) | | (1.0 | )% |
| Utilization of foreign tax credits | (1.7 | ) | | (0.6 | )% | | (2.1 | ) | | (0.6 | )% | | (0.7 | ) | | (0.2 | )% |
| Resolution of tax matters | (3.4 | ) | | (1.1 | )% | | (3.6 | ) | | (1.0 | )% | | — |
| | — | % |
| Non-deductible separation costs | 7.8 |
| | 2.6 | % | | 3.2 |
| | 0.9 | % | | — |
| | — | % |
| Tax law changes | 4.6 |
| | 1.5 | % | | — |
| | — | % | | — |
| | — | % |
| Capital losses | (29.2 | ) | | (9.7 | )% | | — |
| | — | % | | — |
| | — | % |
| Valuation allowances | 27.1 |
| | 9.0 | % | | (7.2 | ) | | (2.0 | )% | | — |
| | — | % |
| Pre spin-off tax return adjustments | 0.5 |
| | 0.2 | % | | — |
| | — | % | | — |
| | — | % |
| Other | 1.2 |
| | 0.4 | % | | (0.5 | ) | | (0.2 | )% | | 0.2 |
| | 0.1 | % |
| Provision for income taxes | $ | 113.6 |
| | 37.9 | % | | $ | 117.4 |
| | 33.2 | % | | $ | 115.0 |
| | 35.9 | % |
During fiscal 2015 and 2014, the Company incurred non-deductible separation costs which unfavorably impacted2018, the effective tax rate.
On December 19, 2014,rate was favorably impacted by $18.5 million of net tax benefit due to the Tax Increase PreventionReform Act as discussed above. The impact of 2014 was signed into law. Among the changes includedTax Reform Act is reflected within the following lines in the law is a provision allowing for additional first year depreciation for assets placed into service during calendar year 2014, commonly known as "bonus depreciation." The bonus depreciation provision relates to pre spin-offeffective tax periods for which ADP is entitled under therate reconciliation above: U.S. tax lawreform deferred tax re-measurement, U.S. tax on foreign earnings, Foreign tax credits, Foreign withholding taxes and in accordance with the tax matters agreement to claim additional tax depreciation for assets associated with the Company's business. During fiscal 2015,State taxes, net of federal benefit.
Effective July 1, 2016, the Company recordedadopted ASU 2016-09 which favorably impacts the effective tax expense of $4.6 million to adjust deferred taxesrate for the additionalfiscal 2018 and 2017 for excess tax depreciation to be taken by ADP in pre spin-off tax periods.benefits from stock-based compensation.
The balance sheet classification and significant components of deferred income tax assets and liabilities are as follows:
|
| | | | | | | |
| | June 30, |
| | 2018 | | 2017 |
| Classification: | | | |
| Long term deferred tax assets (included in other assets) | $ | 21.9 |
| | $ | 22.1 |
|
| Long term deferred tax liabilities (included in deferred income taxes) | (56.7 | ) | | (65.9 | ) |
| Net deferred tax liabilities | $ | (34.8 | ) | | $ | (43.8 | ) |
| | | | |
| Components: | | | |
| Deferred tax assets: | | | |
| Accrued expenses | $ | 8.3 |
| | $ | 13.9 |
|
| Compensation and benefits | 32.7 |
| | 46.1 |
|
| Deferred revenue | 44.4 |
| | 53.8 |
|
| Net operating losses | 5.5 |
| | 10.5 |
|
| Capital losses | 18.8 |
| | 28.8 |
|
| | 109.7 |
| | 153.1 |
|
| Less: valuation allowances | (21.6 | ) | | (35.1 | ) |
| Net deferred tax assets | 88.1 |
| | 118.0 |
|
| | | | |
| Deferred tax liabilities: | | | |
| Deferred expenses | 46.7 |
| | 64.9 |
|
| Property, plant and equipment and intangible assets | 70.1 |
| | 92.1 |
|
| Prepaid expenses | 2.0 |
| | 2.6 |
|
| Undistributed foreign earnings | 2.8 |
| | — |
|
| Other | 1.3 |
| | 2.2 |
|
| Deferred tax liabilities | 122.9 |
| | 161.8 |
|
| Net deferred tax liabilities | $ | (34.8 | ) | | $ | (43.8 | ) |
|
| | | | | | | |
| | June 30, |
| | 2015 | | 2014 |
| Classification: | | | |
| Current deferred tax assets (included in other current assets) | $ | 13.0 |
| | $ | 16.7 |
|
| Current deferred tax liabilities (included in accrued expenses and other current liabilities) | (1.4 | ) | | (4.4 | ) |
| Long term deferred tax assets (included in other assets) | 17.8 |
| | 16.5 |
|
| Long term deferred tax liabilities (included in deferred income taxes) | (58.2 | ) | | (76.5 | ) |
| Net deferred tax liabilities | $ | (28.8 | ) | | $ | (47.7 | ) |
| | | | |
| Components: | | | |
| Deferred tax assets: | | | |
| Accrued expenses | $ | 9.4 |
| | $ | 48.1 |
|
| Compensation and benefits | 41.2 |
| | 11.3 |
|
| Deferred revenue | 32.0 |
| | 27.2 |
|
| Net operating losses | 15.1 |
| | 18.9 |
|
| Capital losses | 29.2 |
| | — |
|
| | 126.9 |
| | 105.5 |
|
| Less: valuation allowances | (33.4 | ) | | (7.1 | ) |
| Net deferred tax assets | 93.5 |
| | 98.4 |
|
| | | | |
| Deferred tax liabilities: | | | |
| Deferred expenses | 54.5 |
| | 67.7 |
|
| Property, plant and equipment and intangible assets | 62.5 |
| | 73.6 |
|
| Prepaid expenses | 4.9 |
| | 2.2 |
|
| Other | 0.4 |
| | 2.6 |
|
| Deferred tax liabilities | 122.3 |
| | 146.1 |
|
| Net deferred tax liabilities | $ | (28.8 | ) | | $ | (47.7 | ) |
In the second quarter of fiscal 2018, the Company concluded that $244.0 million of accumulated foreign earnings as of December 31, 2017 were no longer indefinitely reinvested. The Company continues to remain indefinitely reinvested in any outside basis differences with respect to its foreign subsidiaries to cover local working capital needs and restrictions and to fund future investments, including potential acquisitions. Undistributed foreign earnings that the Company intends to indefinitely reinvest indefinitely, and for which no taxes have been provided, aggregatedaggregate to approximately $277.3 million and $302.1$115.0 million as of June 30, 20152018. If circumstances change, and 2014, respectively. The Company intends to utilize the offshoreit becomes apparent that earnings to fund working capital needs and future foreign investments. The U.S. incomecurrently considered indefinitely reinvested will be distributed, an additional tax that would arise on the repatriation of the undistributed earnings couldcharge may be offset, in part, by the foreign tax credits on such repatriation. Given the uncertain timing and manner of repatriation, it is not practicable to estimate the amount of any additional income tax charge.necessary.
The Company had federal net operating losses of approximately $7.4 million as of June 30, 2015 which expire in 2018 through 2021. The Company had federal capital losses of $76.6$75.4 million which expire in 2020 and state capital losses of $76.6$75.4 million which expire in 2020 through 2030. The Company had foreign net operating loss carryforwards of approximately $45.5$20.4 million as of June 30, 2015,2018, of which $17.7$3.0 million expireexpires in 20162019 through 20352028 and of which $27.9$17.4 million has an indefinite carryforward period.
Valuation Allowance
The Company recorded valuation allowances of $33.4$21.6 million and $7.1$35.1 million as of June 30, 20152018 and 2014,2017, respectively, because the Company has concluded it is more likely than not that it will be unable to utilize net operating and capital loss carryforwards of certain subsidiaries to offset future taxable earnings. As of each reporting date, the Company’s management considers new evidence, both positive and negative, which could impact management’s view with regard to future realization of deferred tax assets.
During fiscal 20152018, the valuation allowance balance decreased by $13.5 million, including $10.0 million reduction for the tax rate impact on a capital loss carryforward and 2014,$3.5 million for the expiration of certain non-U.S. tax loss carryforwards.
During fiscal 2017, the valuation allowance balance was decreased by $1.1 million for a Canadian valuation allowance adjustment based on achieving three years ofpositive evidence which indicated that the foreign loss carryforward would be utilized prior to expiration.
The company concluded the deferred tax asset would be realizable based on a three-year cumulative pre-tax incomeprofit position and forecasts of future year pre-tax income, management determined that sufficient positive evidence existed to conclude that it is more likely than not that certain non-U.S. tax losses were realizable, and therefore, recorded tax benefits to adjust the valuation allowance by $2.7 million and $7.2 million, respectively. In addition, tax expense was recorded to increase the deferred tax valuation allowance in fiscal 2015 by $29.2 million for capital losses realized on the Internet sales leads business disposition. The Company
concluded a full valuation allowance against the capital losses was necessary due to the short carryforward period and limitations on our ability to utilize the losses to offset income. The valuation allowance for fiscal 2015 was also impacted by foreign currency translation. The net impact of the adjustments related to the deferred tax valuation allowance and the capital losses realized on the Internet sales leads business disposition are included in the current year tax provision and are reflected within the effective tax rate reconciliation.
Income tax payments, net of refunds were approximately $120.8$118.9 million, $18.1$120.3 million, and $14.2$109.4 million for fiscal 2015, 2014,2018, 2017, and 2013, respectively. The income tax payments exclude payments made by ADP on behalf of the Company as these amounts are recorded within group equity in the historical combined balance sheets. Income tax payments paid by ADP on behalf of the Company were $20.3 million, $115.2 million, and $100.6 million, for fiscal 2015 prior to the spin-off and fiscal 2014 and 2013,2016, respectively.
Unrecognized Income Tax Benefits
As of June 30, 2015, 2014,2018, 2017, and 2013,2016, the Company had unrecognized income tax benefits of $1.9$6.2 million, $0.2$6.4 million, and $3.7$4.7 million, respectively, of which $1.6$5.3 million, $0.2$4.8 million, and $3.7$3.6 million, respectively, would impact the effective tax rate, if recognized. The remainder, if recognized, would principally affect deferred taxes.
A roll-forward of unrecognized tax benefits is as follows:
|
| | | | | | | | | | | |
| | June 30, |
| | 2018 | | 2017 | | 2016 |
| Beginning of the year balance | $ | 6.4 |
| | $ | 4.7 |
| | $ | 1.9 |
|
| Additions for current year tax positions | 1.3 |
| | 1.0 |
| | 1.9 |
|
| Additions for tax positions of prior years | 0.7 |
| | 1.2 |
| | 1.1 |
|
| Reductions for tax positions of prior years | (0.8 | ) | | — |
| | (0.1 | ) |
| Settlement with tax authorities | (0.6 | ) | | (0.2 | ) | | — |
|
| Expiration of the statute of limitations | (0.8 | ) | | (0.2 | ) | | — |
|
| Impact of foreign exchange rate fluctuations | — |
| | (0.1 | ) | | (0.1 | ) |
| End of year balance | $ | 6.2 |
| | $ | 6.4 |
| | $ | 4.7 |
|
|
| | | | | | | | | | | |
| | June 30, |
| | 2015 | | 2014 | | 2013 |
| Beginning of the year balance | $ | 0.2 |
| | $ | 3.7 |
| | $ | 5.5 |
|
| Additions for current year tax positions | 0.6 |
| | — |
| | — |
|
| Reductions for current year tax positions | — |
| | — |
| | — |
|
| Additions for tax positions of prior years | 1.1 |
| | 0.2 |
| | 0.2 |
|
| Reductions for tax positions of prior years | — |
| | (3.7 | ) | | (0.3 | ) |
| Settlement with tax authorities | — |
| | — |
| | (1.7 | ) |
| Expiration of the statute of limitations | — |
| | — |
| | — |
|
| Impact of foreign exchange rate fluctuations | — |
| | — |
| | — |
|
| End of year balance | $ | 1.9 |
| | $ | 0.2 |
| | $ | 3.7 |
|
During fiscal 2015,2018, the Company decreased its net unrecognized income tax benefits by $0.2 million. During fiscal 2017 and 2016, the Company increased its net unrecognized income tax benefits by $1.7 million and $2.8 million, respectively. For all years, changes were based on information that indicateswhich indicated the extent to which certain tax positions arewere more likely than not of beingto be sustained. Penalties and interest expense associated with uncertain income tax positions have been recorded in the provision for income taxes on the consolidated and combined statements of operations. Penalties and interest incurred during fiscal years ended June 30, 2015, 2014,2018, 2017, and 20132016 were not significant. As of June 30, 2015, 2014,2018 and 20132017, 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 and combined balance sheets.
The Company is routinely examined by tax authorities in countries in which it conducts business globally and, as well asa result, files income tax returns in the U.S. states in which it has significant operations.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 is included inDuring fiscal year 2018, the U.S. Internal Revenue Service ("IRS") examination of ADP's consolidated federalcompleted the income tax returns through the year ended September 30, 2014. In fiscal 2015, the Company, as part of the ADP consolidated group, reached agreements with the IRS regarding all outstanding audit issues for the tax years through and includingyear ended June 30, 2013, which did not have a material impact to2015 and the consolidated and combined financial statements of the Company.employment tax audit for calendar tax years 2014 through 2016. The Company regularly considers the likelihood of assessments in each of the jurisdictions resulting from examinations. The Company has established a liability for unrecognized income tax benefits which it believes to be adequate in relation to the potential assessments. Once established, the liability for unrecognized tax benefits is adjusted when there is more information available, when an event occurs necessitating a change, or the statute of limitations for the relevant taxing authority to examine the tax position has expired.
ExaminationsIncome tax-related examinations currently in progress in which the Company has significant business operations are as follows:
|
| | |
TaxingTax Jurisdictions | | Tax Periods under Examination |
United States (IRS) | | 6/30/2014 thru 9/30/2014 |
Spain | | 6/30/2010Fiscal Years Ended |
| New Jersey | | 6/30/2008 thru 6/30/2011 |
| Canada | | 6/30/2012 thru 6/30/2014 |
| Kuwait | | 6/30/2017 |
| India | | 6/30/2015 thru 6/30/2016 |
| Spain | | 6/30/2011 |
| Italy | | 6/30/2014 thru 6/30/2016 |
| Belgium | | 6/30/2015 thru 6/30/2017 |
Based on the possible outcomes of the Company's tax audits and expiration of the statute of limitations, it is reasonably possible that the liability for uncertain tax positions will change within the next twelve months. The associated net tax impact on the effective tax rate is estimated to be an amount no more than a $0.6$1.0 million tax benefit, with minimal cash payments.
Although the final resolution of the Company's tax disputes areis uncertain, based on current information, the resolution of tax matters is not expected to have a material effect on the Company's consolidated and combined financial condition, liquidity, or results of the Company,operations. However, an unfavorable resolution could have a material impact on the Company’s consolidated and combined statementsfinancial condition, liquidity, or results of operations for a particular future period or onin the Company’s effective tax rate.periods in which the matters are ultimately resolved.
Note 9. Earnings per Share (“EPS”)
The numerator for both basic and diluted earnings per share ("EPS") is net earnings attributable to the Company.CDK. The denominator for basic and diluted EPSearnings per share is based upon the number of weighted-average shares of the Company's common stock outstanding during the reporting periods. On September 30, 2014, ADP stockholders of record as of the close of business on September 24, 2014 received one share of the Company's common stock for every three shares of ADP common stock held as of the record date. For periods ended September 30, 2014 and prior, basic and dilutedDiluted earnings per share were computed usingalso reflects the numberdilutive effect of shares of the Company'sunexercised in-the-money stock outstanding on September 30, 2014, the date on which the Company's common stock was distributed to the stockholders of ADP. The same number of shares was used to calculate basicoptions and diluted earnings per share for fiscal 2014 and 2013 since there were no dilutive securities until after the spin-off.unvested restricted stock.
Holders of certain stock-based compensation awards are eligible to receive dividends as described in Note 6. Net earnings allocated to participating securities were not significant for fiscal 2015.2018, 2017 and 2016.
The following table summarizes the components of basic and diluted earnings per share:share.
|
| | | | | | | | | | | |
| | June 30, |
| | 2018 | | 2017 | | 2016 |
| Net earnings attributable to CDK | $ | 380.8 |
| | $ | 295.6 |
| | $ | 239.3 |
|
| | | | | | |
| Weighted-average shares outstanding: | | | | | |
| Basic | 135.8 |
| | 146.7 |
| | 157.0 |
|
| Effect of employee stock options | 0.3 |
| | 0.7 |
| | 0.5 |
|
| Effect of employee restricted stock | 0.7 |
| | 0.8 |
| | 0.5 |
|
| Diluted | 136.8 |
| | 148.2 |
| | 158.0 |
|
| | | | | | |
| Basic earnings attributable to CDK per share | $ | 2.80 |
| | $ | 2.01 |
| | $ | 1.52 |
|
| Diluted earnings attributable to CDK per share | $ | 2.78 |
| | $ | 1.99 |
| | $ | 1.51 |
|
|
| | | | | | | | | | | |
| | June 30, |
| | 2015 | | 2014 | | 2013 |
| Net earnings attributable to CDK | $ | 178.4 |
| | $ | 227.9 |
| | $ | 199.4 |
|
| | | | | | |
| Weighted-average shares outstanding: | | | | | |
| Basic | 160.6 |
| | 160.6 |
| | 160.6 |
|
| Effect of employee stock options | 0.5 |
| | — |
| | — |
|
| Effect of employee restricted stock | 0.5 |
| | — |
| | — |
|
| Diluted | 161.6 |
| | 160.6 |
| | 160.6 |
|
| | | | | | |
| Basic earnings attributable to CDK per share | $ | 1.11 |
| | $ | 1.42 |
| | $ | 1.24 |
|
| Diluted earnings attributable to CDK per share | $ | 1.10 |
| | $ | 1.42 |
| | $ | 1.24 |
|
Options to purchase 0.3 millionThe weighted-average number of shares of common stock for fiscal 2015 have been excluded fromoutstanding used in the calculation of diluted earnings per share because their exercise prices exceededdoes not include the average market priceeffect of outstanding common shares for the respective periods. There were no options to purchase common stock excluded from the calculation of diluted earnings per share for the periods prior to spin-off.following anti-dilutive securities.
|
| | | | | | | | |
| | June 30, |
| | 2018 | | 2017 | | 2016 |
| Stock-based awards | 0.2 |
| | 0.3 |
| | 0.5 |
|
Note 10. Accounts Receivable, Net
Accounts receivable, net comprised of the following:
| | | | June 30, | June 30, |
| | 2015 | | 2014 | 2018 | | 2017 |
| Trade receivables | $ | 306.5 |
| | $ | 310.0 |
| $ | 374.5 |
| | $ | 368.0 |
|
| Lease receivables | 14.9 |
| | 12.9 |
| 7.5 |
| | 10.4 |
|
| Accounts receivable, gross | 321.4 |
| | 322.9 |
| 382.0 |
| | 378.4 |
|
| Less: allowances | 6.8 |
| | 12.2 |
| 7.4 |
| | 6.3 |
|
| Account receivable, net | $ | 314.6 |
| | $ | 310.7 |
| $ | 374.6 |
| | $ | 372.1 |
|
The investment in lease receivables consisted of the following:
|
| | | | | | | |
| | June 30, |
| | 2018 | | 2017 |
| Lease receivables, gross: | | | |
| Minimum lease payments | $ | 11.9 |
| | $ | 23.4 |
|
| Unearned income | (0.6 | ) | | (1.6 | ) |
| | 11.3 |
| | 21.8 |
|
| Less: lease receivables, current (included in accounts receivable, net) | 7.5 |
| | 10.4 |
|
| Lease receivables, long-term (included in other assets) | $ | 3.8 |
| | $ | 11.4 |
|
|
| | | | | | | |
| | June 30, |
| | 2015 | | 2014 |
| Lease receivables, gross: | | | |
| Minimum lease payments | $ | 51.6 |
| | $ | 45.7 |
|
| Unearned income | (5.1 | ) | | (5.1 | ) |
| | 46.5 |
| | 40.6 |
|
| Less: lease receivables, current (included in accounts receivable, net) | 14.9 |
| | 12.9 |
|
| Lease receivables, long-term (included in other assets) | $ | 31.6 |
| | $ | 27.7 |
|
Scheduled minimum payments on lease receivables as of June 30, 20152018 were as follows:
|
| | | |
| | Amount |
| Fiscal year ending 2019 | $ | 7.9 |
|
| Fiscal year ending 2020 | 3.6 |
|
| Fiscal year ending 2021 | 0.3 |
|
| Fiscal year ending 2022 | 0.1 |
|
| Fiscal year ending 2023 | — |
|
| | $ | 11.9 |
|
|
| | | |
| | Amount |
| Fiscal year ended 2016 | $ | 17.2 |
|
| Fiscal year ended 2017 | 14.0 |
|
| Fiscal year ended 2018 | 10.7 |
|
| Fiscal year ended 2019 | 7.1 |
|
| Fiscal year ended 2020 | 2.6 |
|
| | $ | 51.6 |
|
The Company recognized interest income on sales-type leases of $3.4$1.0 million, $2.2$1.8 million, and $2.1$2.4 million, in fiscal 2015, 2014,2018, 2017, and 2013,2016, respectively, within other income, net on the consolidated and combined statements of operations.
Note 11. Notes Receivable From and Payable To ADP and its Affiliates
The following is a listing of all notes receivable from and payable to ADP and its affiliates as of June 30, 2015 and 2014, respectively:
|
| | | | | | | | | | | | | |
| | | Interest | | Date of | | June 30, |
| Type of Issue | | Rate | | Maturity | | 2015 | | 2014 |
| Notes receivable denominated in a foreign currency: | | | | | | | | |
| Note receivable from affiliate | | 0.6 | % | | 10/1/2014 | | $ | — |
| | $ | 9.6 |
|
| Note receivable from affiliate | | 0.3 | % | | 11/29/2014 | | — |
| | 11.6 |
|
| Note receivable from affiliate | | 2.8 | % | | 8/13/2014 | | — |
| | 1.8 |
|
| Note receivable from affiliate | | 2.8 | % | | 8/13/2014 | | — |
| | 1.0 |
|
| Note receivable from affiliate | | 2.8 | % | | 8/13/2014 | | — |
| | 1.3 |
|
| Note receivable from affiliate | | 3.6 | % | | 1/17/2015 | | — |
| | 1.3 |
|
| Note receivable from affiliate | | 3.6 | % | | 1/17/2015 | | — |
| | 1.3 |
|
| Note receivable from affiliate | | 3.6 | % | | 1/17/2015 | | — |
| | 0.7 |
|
| Note receivable from affiliate | | 6.0 | % | | 4/8/2015 | | — |
| | 1.8 |
|
| Note receivable from affiliate | | 6.0 | % | | 8/19/2015 | | — |
| | 1.8 |
|
| Note receivable from affiliate | | 6.0 | % | | 10/21/2015 | | — |
| | 1.4 |
|
| Note receivable from affiliate | | 6.0 | % | | 1/20/2016 | | — |
| | 0.9 |
|
| Note receivable from affiliate | | 5.5 | % | | 2/29/2016 | | — |
| | 1.7 |
|
| Note receivable from affiliate | | 5.5 | % | | 2/29/2016 | | — |
| | 0.9 |
|
| Note receivable from affiliate | | 5.5 | % | | 12/5/2016 | | — |
| | 1.7 |
|
| Note receivable from affiliate | | 5.5 | % | | 12/5/2016 | | — |
| | 0.8 |
|
| Note receivable from affiliate | | 5.5 | % | | 6/18/2015 | | — |
| | 1.0 |
|
| Total notes receivable from ADP and its affiliates | | | | | | $ | — |
| | $ | 40.6 |
|
| | | | | | | | | |
| Notes payable denominated in a foreign currency: | | | | | | | | |
| Note payable to affiliate | | 4.9 | % | | 1/16/2024 | | $ | — |
| | $ | 20.9 |
|
| Notes payable denominated in US dollars: | | | | | | | | |
| Note payable to affiliate | | 0.8 | % | | 8/16/2015 | | — |
| | 1.0 |
|
| Total notes payable to ADP and its affiliates | | | | | | $ | — |
| | $ | 21.9 |
|
Notes receivable from ADP and its affiliates and notes payable to ADP and its affiliates were settled prior to the spin-off. Accordingly, all notes payable to affiliate and all notes receivable from affiliate were classified as current assets or current liabilities, as appropriate, on the combined balance sheets as of June 30, 2014.
Interest income on notes receivable from ADP and its affiliates was $0.2 million, $0.8 million, and $0.7 million for fiscal 2015, 2014, and 2013, respectively, and was reported in other income, net on the consolidated and combined statements of operations. Interest expense on notes payable to ADP and its affiliates was $0.2 million, $1.0 million, and $0.9 million for fiscal 2015, 2014, and 2013, respectively, and was reported in interest expense on the consolidated and combined statements of operations.
Note 12.11. Property, Plant and Equipment, Net
Depreciation expense for property, plant and equipment was $28.3$47.8 million, $23.2$40.7 million, and $23.2$35.1 million for fiscal 2015, 2014,2018, 2017, and 2013,2016, respectively. Property, plant, and equipment at cost and accumulated depreciation asconsisted of June 30, 2015 and 2014 were as follows:the following:
|
| | | | | | | |
| | June 30, |
| | 2018 | | 2017 |
| Property, plant and equipment: | | | |
| Land and buildings | $ | 38.7 |
| | $ | 39.4 |
|
| Data processing equipment | 241.8 |
| | 215.5 |
|
| Furniture and fixtures, leasehold improvements, and other | 79.1 |
| | 80.4 |
|
| Total property, plant and equipment | 359.6 |
| | 335.3 |
|
| Less: accumulated depreciation | 227.7 |
| | 200.3 |
|
| Property, plant and equipment, net | $ | 131.9 |
| | $ | 135.0 |
|
|
| | | | | | | |
| | June 30, |
| | 2015 | | 2014 |
| Property, plant and equipment: | | | |
| Land and buildings | $ | 41.5 |
| | $ | 43.5 |
|
| Data processing equipment | 161.7 |
| | 162.8 |
|
| Furniture and fixtures, leasehold improvements, and other | 81.8 |
| | 64.2 |
|
| Total property, plant and equipment | 285.0 |
| | 270.5 |
|
| Less: accumulated depreciation | 185.0 |
| | 187.9 |
|
| Property, plant and equipment, net | $ | 100.0 |
| | $ | 82.6 |
|
Note 13.12. Goodwill and Intangible Assets, Net
Changes in goodwill for fiscal 2015 and fiscal 2014 were as follows:
|
| | | | | | | | | | | | | | | |
| | Retail Solutions North America | | Advertising North America | | CDK International | | Total |
| Balance as of June 30, 2016 | $ | 604.7 |
| | $ | 214.3 |
| | $ | 363.7 |
| | $ | 1,182.7 |
|
| Currency translation adjustments | (0.1 | ) | | — |
| | (1.4 | ) | | (1.5 | ) |
| Balance as of June 30, 2017 | 604.6 |
| | 214.3 |
| | 362.3 |
| | 1,181.2 |
|
| Additions (Note 4) | 19.0 |
| | 11.3 |
| | — |
| | 30.3 |
|
| Currency translation adjustments | (0.3 | ) | | — |
| | 6.0 |
| | 5.7 |
|
| Balance as of June 30, 2018 | $ | 623.3 |
| | $ | 225.6 |
| | $ | 368.3 |
| | $ | 1,217.2 |
|
|
| | | | | | | | | | | | | | | |
| | Automotive Retail North America | | Automotive Retail International | | Digital Marketing | | Total |
| Balance as of June 30, 2013 | $ | 376.9 |
| | $ | 414.3 |
| | $ | 376.1 |
| | $ | 1,167.3 |
|
| Additions | 23.8 |
| | — |
| | — |
| | 23.8 |
|
| Cumulative translation adjustments | (0.6 | ) | | 40.4 |
| | — |
| | 39.8 |
|
| Balance as of June 30, 2014 | 400.1 |
| | 454.7 |
| | 376.1 |
| | 1,230.9 |
|
| Additions | 35.7 |
| | — |
| | — |
| | 35.7 |
|
| Sale of Internet sales leads business | (1.9 | ) | | — |
| | — |
| | (1.9 | ) |
| Currency translation adjustments | (3.6 | ) | | (51.2 | ) | | — |
| | (54.8 | ) |
| Balance as of June 30, 2015 | $ | 430.3 |
| | $ | 403.5 |
| | $ | 376.1 |
| | $ | 1,209.9 |
|
Components of intangible assets, net were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, |
| | 2018 | | 2017 |
| | Original Cost | | Accumulated Amortization | | Intangible Assets, net | | Original Cost | | Accumulated Amortization | | Intangible Assets, net |
| Customer lists | $ | 181.3 |
| | $ | (142.4 | ) | | $ | 38.9 |
| | $ | 175.5 |
| | $ | (130.0 | ) | | $ | 45.5 |
|
| Software | 208.6 |
| | (124.3 | ) | | 84.3 |
| | 163.7 |
| | (109.4 | ) | | 54.3 |
|
| Trademarks | 25.0 |
| | (24.6 | ) | | 0.4 |
| | 25.0 |
| | (24.1 | ) | | 0.9 |
|
| Other intangibles | 6.9 |
| | (4.0 | ) | | 2.9 |
| | 6.4 |
| | (3.1 | ) | | 3.3 |
|
| | $ | 421.8 |
| | $ | (295.3 | ) | | $ | 126.5 |
| | $ | 370.6 |
| | $ | (266.6 | ) | | $ | 104.0 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, |
| | 2015 | | 2014 |
| | Original Cost | | Accumulated Amortization | | Intangible Assets, net | | Original Cost | | Accumulated Amortization | | Intangible Assets, net |
| Software | $ | 115.6 |
| | $ | (92.0 | ) | | $ | 23.6 |
| | $ | 103.9 |
| | $ | (87.4 | ) | | $ | 16.5 |
|
| Client lists | 199.1 |
| | (125.5 | ) | | 73.6 |
| | 222.1 |
| | (124.5 | ) | | 97.6 |
|
| Trademarks | 25.0 |
| | (22.9 | ) | | 2.1 |
| | 27.1 |
| | (7.4 | ) | | 19.7 |
|
| Other intangibles | 2.4 |
| | (2.4 | ) | | — |
| | 6.0 |
| | (6.0 | ) | | — |
|
| | $ | 342.1 |
| | $ | (242.8 | ) | | $ | 99.3 |
| | $ | 359.1 |
| | $ | (225.3 | ) | | $ | 133.8 |
|
In October 2014 following our separation from ADP, the Company evaluated its branding strategy and the trademark names under which each of its businesses will operate. The Company determined that the Cobalt trademark used by the Digital Marketing segment will no longer be used. Therefore, the Company revised the estimated useful life assigned to the Cobalt trademark. The Company recognized accelerated amortization on the trademark of $15.6 million in cost of revenues during fiscal 2015. The effect of this change in estimate on both basic and diluted earnings per share, net of the related tax effect, was $0.06 for both fiscal 2015 and 2014.
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 64 years (3(7 years for customer lists, 3 years for software and software licenses, 7 years for customer contracts and lists, and 42 years for trademarks). Amortization of intangiblesintangible assets was $48.2$31.3 million, $29.1$29.6 million, and $27.9$28.9 million for fiscal 2015, 2014,2018, 2017, and 2013,2016, respectively.
Estimated amortization expenses of the Company's existing intangible assets as of June 30, 20152018 were as follows:
|
| | | |
| | Amount |
| Fiscal year ending 2019 | $ | 30.2 |
|
| Fiscal year ending 2020 | 30.9 |
|
| Fiscal year ending 2021 | 26.3 |
|
| Fiscal year ending 2022 | 18.4 |
|
| Fiscal year ending 2023 | 7.4 |
|
| Thereafter | 13.3 |
|
| | $ | 126.5 |
|
|
| | | |
| | Amount |
| Fiscal year ended 2016 | $ | 25.8 |
|
| Fiscal year ended 2017 | 20.3 |
|
| Fiscal year ended 2018 | 15.6 |
|
| Fiscal year ended 2019 | 8.4 |
|
| Fiscal year ended 2020 | 7.0 |
|
| Thereafter | 22.2 |
|
| | $ | 99.3 |
|
Note 14.13. Debt
Debt comprised of the following:
|
| | | | | | | |
| | June 30, |
| | 2018 | | 2017 |
| Revolving credit facility | $ | — |
| | $ | — |
|
| 2019 term loan facility | 203.1 |
| | 215.6 |
|
| 2020 term loan facility | 218.8 |
| | 231.3 |
|
| 2021 term loan facility | 370.0 |
| | 390.0 |
|
| 3.30% senior notes, due 2019 | 250.0 |
| | 250.0 |
|
| 4.50% senior notes, due 2024 | 500.0 |
| | 500.0 |
|
| 5.875% senior notes due 2026 | 500.0 |
| | — |
|
| 4.875% senior notes, due 2027 | 600.0 |
| | 600.0 |
|
| Capital lease obligations | 0.2 |
| | 1.5 |
|
| Unamortized debt financing costs | (21.4 | ) | | (16.7 | ) |
| Total debt and capital lease obligations | 2,620.7 |
| | 2,171.7 |
|
| Current maturities of long-term debt and capital lease obligations | 45.2 |
| | 46.5 |
|
| Total long-term debt and capital lease obligations | $ | 2,575.5 |
| | $ | 2,125.2 |
|
|
| | | | | | | |
| | June 30, |
| | 2015 | | 2014 |
| Revolving credit facility | $ | — |
| | $ | — |
|
| Term loan facility | 240.6 |
| | — |
|
| 3.30% senior notes, due 2019 | 250.0 |
| | — |
|
| 4.50% senior notes due 2024 | 500.0 |
| | — |
|
| Capital lease obligations | 1.5 |
| | — |
|
| Unamortized debt financing costs | (8.0 | ) | | — |
|
| Total debt and capital lease obligations | 984.1 |
| | — |
|
| Current maturities of long-term debt and capital lease obligations | 13.0 |
| | — |
|
| Total long-term debt and capital lease obligations | $ | 971.1 |
| | $ | — |
|
On September 16, 2014, theThe Company entered into (i)has a five-year $300.0 million senior unsecured revolving credit facility, (the "revolving credit facility"), which was undrawn as of June 30, 2015,2018 and (ii) a five-year $250.0 million senior unsecured term loan facility (the "term loan facility"), which was fully drawn as of June 30, 2015. The Company's revolving credit facility and term loan facility are referred to together as the "Credit Facilities." The Company also entered into a $750.0 million senior unsecured bridge loan facility (the "bridge loan facility") on September 16, 2014. On September 30, 2014, the proceeds from the term loan facility and the bridge loan facility were used to pay ADP a cash dividend of $825.0 million, fees and expenses related to the spin-off, and fees related to the entry into the Credit Facilities and the bridge loan facility.
On October 14, 2014, the Company completed an offering of 3.30% senior notes with a $250.0 million aggregate principal amount due in 2019 (the "2019 notes") and 4.50% senior notes with a $500.0 million aggregate principal amount due in 2024 (the "2024 notes" and together with the 2019 notes, the "senior notes"). The net proceeds from the offering, together with cash on hand, were used to repay the bridge loan facility.
Revolving Credit Facility
2017. The revolving credit facility provides up to $300.0 million of borrowing capacity and includes a sub-limit of up to $100.0 million for loans in Euro and Pound Sterling. In addition, the revolving credit facility contains an accordion feature that allows for an increase in the available borrowing capacity of up to $100.0 million, subject to the agreement of lenders under the revolving credit facility or other financial institutions that become lenders to extend commitments as part of the increased revolving credit facility. Borrowings under the revolving credit facility are available for general corporate purposes. The revolving credit facility will mature on September 30, 2019, subject to no more than two one-year extensions if lenders holding a majority of the revolving commitments approve such extensions.
The revolving credit facility is unsecured and loans thereunder bear interest, at the Company's option, at (a) the rate at which deposits in the applicable currency are offered in the London interbank market (or, in the case of borrowings in Euro, the European interbank market) plus margins varying from 1.125% to 2.000% per annum based on the Company's senior, unsecured non-credit-enhanced, long-term debt ratings from Standard & Poor's Ratings Group and Moody's Investors Services Inc. (the "Ratings") or (b) solely in the case of U.S. dollar loans, (i) the highest of (A) the prime rate of JPMorgan Chase Bank, N.A., (B) a rate equal to the average of the overnight federal funds rate with a maturity of one day plus a margin of 0.500% per annum, and (C) the rate at which dollar deposits are offered in the London interbank market for a one-month interest period plus 1.000% plus (ii) margins varying from 0.125% to 1.000% per annum based on the Ratings. The unused portion of the revolving credit facility is subject to commitment fees ranging from 0.125% to 0.350% per annum based on the Ratings.
Term Loan FacilityFacilities
The Company had $240.6has two five-year $250.0 million of borrowings outstanding under thesenior unsecured term loan facility as of June 30, 2015. The term loan facility willfacilities that mature on September 16, 2019.2019 (the "2019 term loan facility") and December 14, 2020 (the "2020 term loan facility"), respectively. On December 9, 2016, the company entered into a five-year $400.0 million senior unsecured term loan facility that matures on December 9, 2021 (the "2021 term loan facility"). The 2019 term loan facility, 2020 term loan facility, and 2021 term loan facility are together referred to as the "term loan facilities." The term loan facility isfacilities are subject to amortization in equal quarterly installments of 1.25% of the aggregate original principal amount of the term loanloans made on the closing date,dates, with any unpaid principal amount to be due and payable on the maturity date.
The 2019 and 2020 term loan facility is unsecured and loans thereunderfacilities bear interest at the same ratescalculations as are applicable to dollar loans under the revolving credit facility. The interest rate per annum on both the 2019 and 2020 term loan facilities was 3.85% as of June 30, 2018 and 2.98% as of June 30, 2017.
The 2021 term loan bears interest, at the Company's option, at (a) the rate at which deposits in the applicable currency are offered in the London interbank market (or, in the case of borrowings in Euro, the European interbank market) plus margins varying from 1.250% to 2.500% per annum based on the Company's senior, unsecured non-credit enhanced, long-term debt ratings from Standard & Poor's Ratings Group and Moody's Investors Services Inc. (the "Ratings") or (b) solely in the case of U.S. dollar loans, (i) the highest of (A) the prime rate of Bank of America, (B) a rate equal to the average of the overnight federal funds rate with a maturity of one day plus a margin of 0.500% per annum, and (C) the rate at which dollar deposits are offered in the London interbank market for a one-month interest period plus 1.000% plus (ii) margins varying from 0.250% to 1.500% per annum based on the Ratings. The interest rate per annum on the 2021 term loan facility was 1.69%3.85% as of June 30, 2015.2018.
Restrictive Covenants and Other Matters
The Credit Facilitiesrevolving credit facility and the term loan facilities are together referred to as the "credit facilities." The credit facilities contain various covenants and restrictive provisions that limit the Company's subsidiaries' ability to incur additional indebtedness;indebtedness, the Company's ability to consolidate or merge with other entities;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 Facilitiescredit facilities could be declared immediately due and payable. The credit agreementfacilities also has,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 Facilitiescredit facilities also contain financial covenants that will provide that (i) the ratio of total consolidated indebtedness to consolidated EBITDA shall not exceed 3.50 to 1.00 and (ii) the ratio of consolidated EBITDA to consolidated interest expense shall be a minimum of 3.00 to 1.00.
On December 9, 2016, the Company entered into (i) an Amendment to its Credit Agreement that covered the revolving credit facility and the 2019 term loan facility (the “2014 amendment”), and (ii) an Amendment to its Credit Agreement that covered the 2020 term loan facility (the “2015 amendment”). The 2014 amendment and the 2015 amendment amended certain “bail-in” language relating to EEA Financial Institutions and make certain changes to the definitions of “Change in Control,” “Consolidated EBITDA,” “Defaulting Lender,” and “Eligible Assignee.”
Senior Notes
On October 14, 2014, the Company completed an offering of 3.30% unsecured senior notes with a $250.0 million aggregate principal amount due in 2019 (the "2019 notes") and 4.50% unsecured senior notes with a $500.0 million aggregate principal amount due in 2024 (the "2024 notes"). The issuance price of the senior2019 and 2024 notes was equal to the stated value. Interest is payable semi-annually on April 15 and October 15 of each year, commencingand payment commenced on April 15, 2015. The interest rate payable on each applicable series of senior2019 and 2024 notes is subject to adjustment from time to time if the credit ratings assigned to any series of senior2019 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 senior notes were initially offered to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"),2019 and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. 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 our ability to incur additional indebtedness secured by liens, engage in sale/leaseback transactions, and merge, consolidate, or transfer all or substantially all of our assets.
The senior2024 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 senior2019 or 2024 notes to be redeemed, and (ii) the sum of the present value of the remaining scheduled payments (as defined in the agreement), plus in each case, accrued and unpaid interest thereon. Subsequent to September 15, 2019 and July 15, 2024, the redemption price for the
2019 notes and the 2024 notes, respectively, will equal 100% of the aggregate principal amount of the notes redeemed, plus accrued and unpaid interest thereon.
On June 18, 2018, the Company completed an offering of 5.875% unsecured senior notes with a $500.0 million aggregate principal amount due in 2026 (the "2026 notes"). The issuance price of the 2026 notes was equal to the stated value. Interest is payable semi-annually on June 15 and December 15 of each year, and payment will commence on December 15, 2018. The 2026 notes will mature on June 15, 2026. The 2026 notes are redeemable at the Company's option prior to June 15, 2021 in whole or in part at a redemption price equal to 100% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, plus the applicable "make-whole" premium. Subsequent to June 15, 2021, the Company may redeem the 2026 notes at a price equal to: (i) 102.938% of the aggregate principal amount of the 2026 notes redeemed prior to June 15, 2022; (ii) 101.958% of the aggregate principal amount of the notes redeemed on or after June 15, 2022 but prior to June 15, 2023; (iii) 100.979% of the aggregate principal amount of the 2026 notes redeemed on or after June 15, 2023 but prior to June 15, 2024; and (iv) 100.000% of the aggregate principal amount of the 2026 notes redeemed thereafter.
On May 15, 2017, the Company completed an offering of 4.875% unsecured senior notes with a $600.0 million aggregate principal amount due in 2027 (the "2027 notes," together with the "2024 notes, "the 2019 notes", and "the 2026 notes" are the "senior notes"). The issuance price of the 2027 notes was equal to the stated value. Interest is payable semi-annually on June 1 and December 1 of each year, and payment commenced on December 1, 2017. The 2027 notes will mature on June 1, 2027. The 2027 notes are redeemable at the Company's option prior to June 1, 2022 in whole or in part at a redemption price equal to 100% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, plus the applicable "make-whole" premium. Subsequent to June 1, 2022, the Company may redeem the 2027 notes at a price equal to: (i) 102.438% of the aggregate principal amount of the 2027 notes redeemed prior to June 1, 2023; (ii) 101.625% of the aggregate principal amount of the notes redeemed on or after June 1, 2023 but prior to June 1, 2024; (iii) 100.813% of the aggregate principal amount of the 2027 notes redeemed on or after June 1, 2024 but prior to June 1, 2025; and (iv) 100.000% of the aggregate principal amount of the 2027 notes redeemed thereafter.
The senior notes are general unsecured obligations of the Company and are not guaranteed by any of the Company's subsidiaries. The senior notes rank equally in right of payment with the Company's existing and future unsecured unsubordinated obligations, including the credit facilities. The senior notes contain covenants restricting the Company's ability to incur additional indebtedness secured by liens, engage in sale/leaseback transactions, and merge, consolidate, or transfer all or substantially all of the Company's assets.
The senior notes are also subject to a change of control provision whereby each holder of the senior notes has the right to require the Company to purchase all or a portion of such holder's senior notes at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest upon the occurrence of both a change of control and a decline in the rating of the senior notes.
On June 18, 2015, the Company completed the exchange offer of the senior notes. The Company issued new notes, which are identical in all material respects toIn November 2016, Moody's and S&P lowered their credit ratings on the senior notes issued onto 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 14, 2014, except that the new notes are registered under the Securities Act, are not subject to transfer restrictions, are not subject to registration rights and the additional interest provisions under the registration rights, and bear different CUSIP numbers. The Company did not receive any proceeds from the exchange offer.15, 2016.
Capital Lease Obligations
In fiscal 2015, theThe Company entered intohas lease agreements for equipment, which wereare classified as capital lease obligations. The Company recognized the capital lease obligationobligations and related leased equipment assetassets based on the present value of the minimum lease payments at lease inception.
Unamortized Debt Financing Costs
As discussed in Note 3, the Company elected to adopt ASU 2015-03 during the fourth quarter of fiscal 2015. The unamortized debt financing costs associated with the Company's debt is now presented as a debt discount. As of June 30, 2015, the Company incurred2018 and 2017, gross debt issuance costs in connection with the issuance of itsrelated to debt instruments were $29.6 million and $21.7 million, respectively. Accumulated amortization was $8.2 million and $5.0 million as of $9.2June 30, 2018 and 2017, respectively. Additional debt issuance costs of $7.9 million net of accumulated amortization of $1.2 million.were capitalized in fiscal 2018. Debt financing costs are amortized over the terms of the related debt instruments to interest expense on the consolidated and combined statement of operations.
The Company's aggregate scheduled maturities of the long-term debt and capital lease obligations as of June 30, 20152018 were as follows: |
| | | |
| | Amount |
| Fiscal year ending 2019 | $ | 45.2 |
|
| Fiscal year ending 2020 | 473.1 |
|
| Fiscal year ending 2021 | 213.8 |
|
| Fiscal year ending 2022 | 310.0 |
|
| Fiscal year ending 2023 | — |
|
| Thereafter | 1,600.0 |
|
| Total debt and capital lease obligations | 2,642.1 |
|
| Unamortized deferred financing costs | (21.4 | ) |
| Total debt and capital lease obligations, net of unamortized deferred financing costs | $ | 2,620.7 |
|
|
| | | |
| | Amount |
| Fiscal year ended 2016 | $ | 13.0 |
|
| Fiscal year ended 2017 | 13.0 |
|
| Fiscal year ended 2018 | 13.0 |
|
| Fiscal year ended 2019 | 12.5 |
|
| Fiscal year ended 2020 | 440.6 |
|
| Thereafter | 500.0 |
|
| Total debt and capital lease obligations | 992.1 |
|
| Unamortized deferred financing costs | (8.0 | ) |
| Total debt and capital lease obligations, net of unamortized deferred financing costs | $ | 984.1 |
|
Note 15.14. Commitments and Contingencies
The Company has obligations under various operating lease agreements for facilities and equipment. Total expense under these agreements was approximately $45.2$39.0 million, $34.6$46.0 million, and $28.0$49.3 million in fiscal 20152018, 20142017, and 20132016, respectively, with minimum commitments at as of June 30, 20152018 as follows:
|
| | | |
| | Amount |
| Fiscal year ending 2019 | $ | 20.0 |
|
| Fiscal year ending 2020 | 14.3 |
|
| Fiscal year ending 2021 | 9.8 |
|
| Fiscal year ending 2022 | 7.3 |
|
| Fiscal year ending 2023 | 4.4 |
|
| Thereafter | 10.8 |
|
| | $ | 66.6 |
|
|
| | | |
| | Amount |
| Fiscal year ended 2016 | $ | 41.3 |
|
| Fiscal year ended 2017 | 32.7 |
|
| Fiscal year ended 2018 | 23.4 |
|
| Fiscal year ended 2019 | 13.5 |
|
| Fiscal year ended 2020 | 9.6 |
|
| Thereafter | 14.7 |
|
| | $ | 135.2 |
|
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, 2015,2018, the Company hashad no purchase commitments and obligations related to royalty, purchase, and maintenance agreements on ourthe Company's software, equipment, and other assets, of approximately $39.4 million, of which $9.0 million relates to fiscal year 2016, $10.0 million relates to fiscal year 2017, $9.7 million relates to fiscal year 2018, and $10.7 million relates to fiscal year 2019.
The Company is subject to various claims and litigation in the normal course of business. When a loss is considered probable and reasonably estimable, the Company records a liability in the amount of its best estimate for the ultimate loss. There can be no assurance that these matters will be resolved in a manner that is not adverse to the Company.
assets.
In the normal course of business, the Company may enter into contracts in which it makes representations and warranties that relate to the performance of the Company’s services and products. The Company does not expect any material losses related to such representations and warranties.
Legal Proceedings
From time to time, the Company is involved in legal, regulatory, and arbitration proceedings concerning matters arising in connection with the conduct of its business activities. Such proceedings can be expensive and disruptive to normal business operations. When losses are considered probable and reasonably estimable, the Company records a liability in the amount of its best estimate for the ultimate loss. At this time, the Company is unable to reasonably estimate any reasonably possible loss or ranges of losses on the matters and proceedings described below.
Competition Matters
The Company is involved in several lawsuits that set forth allegations of anti-competitive agreements between the Company and The Reynolds and Reynolds Company (“Reynolds and Reynolds”) relating to the manner in which the defendants control access to, and allow integration with, their respective DMSs; several of the actions also include allegations of independent anticompetitive action on behalf of the Company. The Company has also received a Civil Investigative Demand from the Federal Trade Commission (“FTC”) requesting the production of documents relating to any agreement between the Company and Reynolds and Reynolds.
As of February 1, 2018, the following antitrust lawsuits have been transferred to, or filed as part of the U.S. District Court for the Northern District of Illinois for consolidated or coordinated for pretrial proceedings as part of a Multi-District Litigation proceeding (“MDL”). Currently, the parties to the MDL are engaged in preliminary proceedings and document discovery. Each of these lawsuits seeks, among other things, treble damages and injunctive relief.
Motor Vehicle Software Corporation (“MVSC”) brought a suit against the Company, Reynolds and Reynolds, and Computerized Vehicle Registration (“CVR”), a majority owned joint venture of the Company. MVSC’s suit was originally filed in the U.S. District Court for the Central District of California on February 3, 2017. Currently, Defendants’ motions to dismiss MVSC’s second amended complaint are under consideration by the court.
| |
| • | Authenticom, Inc.brought a suit against CDK Global, LLC (the Company’s operating subsidiary), and Reynolds and Reynolds. Authenticom’s suit was originally filed in the U.S. District Court for the Western District of Wisconsin on May 1, 2017. Defendants’ motions to dismiss were granted in part, and dismissed in part. |
Teterboro Automall, Inc. d/b/a Teterboro Chrysler Dodge Jeep Ram (“Teterboro”) brought a putative class-action suit against CDK Global, LLC and Reynolds and Reynolds. Teterboro’s suit was originally filed in the U.S. District Court for the District of New Jersey on October 19, 2017. Since that time, several more putative class actions have been filed in a variety of Federal District Courts, with substantively similar allegations; all of them have been consolidated with the MDL proceeding. On June 4, 2018, a Consolidated Class Action Complaint was filed on behalf of a putative class made up of all dealerships in the United States that directly or indirectly purchase DMS or data integration services from CDK or Reynolds and Reynolds. The Company has moved to dismiss the complaint, or in the alternative, stay the cases in the event Reynolds and Reynolds’ concurrent motion to compel arbitration (or, in the alternative, dismiss the complaint) is granted; those motions are currently being briefed by the parties.
Cox Automotive, along with multiple subsidiaries (“Cox”), brought suit against CDK Global, LLC. Cox’s suit was originally filed in the U.S. District Court for the Western District of Wisconsin, on December 11, 2017. CDK Global, LLC has moved to dismiss Cox’s claims; that motion is currently under consideration by the court.
Loop LLC d/b/a Autoloop (“Autoloop”) brought suit against CDK Global, LLC in the U.S. District Court for the Northern District of Illinois on April 9, 2018, but reserved its rights with respect to remand to the U.S. District Court for the Western District of Wisconsin at the conclusion of the MDL proceedings. On June 5, 2018, Autoloop amended its complaint as a putative class action on behalf of itself and all other similarly situated vendors. CDK Global LLC has moved to dismiss Autoloop's claims; that motion is currently being briefed by the parties.
The Company believes that these cases are without merit and intends to continue to contest the claims in these cases vigorously. Legal and expert fees may be significant, and an adverse result in these suits could have a material adverse effect on the Company's business, results of operations, financial condition, or liquidity.
On June 22, 2017, the Company received from the FTC a Civil Investigative Demand consisting of interrogatories and a request to produce documents relating to any agreements between the Company and Reynolds and Reynolds. On March 12, 2018, a parallel request was received from the New York State Attorney General. The Company is responding to the requests. The requests merely seek information, and no proceedings have been instituted. The Company believes there has not been any conduct by the Company or its current or former employees that would be actionable under the antitrust laws in connection with the agreements between ourselves and Reynolds and Reynolds or otherwise. At this time, the Company does not have sufficient information to predict the outcome of, or the cost of responding to or resolving these investigations.
Other Proceedings
The Company is otherwise involved from time to time in other proceedings not described above. Based on information available at this time, the Company believes that the resolution of these other matters currently pending will not individually or in the aggregate have a material adverse effect on our business, results of operations, financial condition, or liquidity. The Company's view of these matters may change as the proceedings and events related thereto unfold.
Other Contingencies
The Company has provided approximately $26.1 million of guarantees as of June 30, 2018 in the form of surety bonds issued to support certain licenses and contracts which require a surety bond as a guarantee of performance of contractual obligations. In general, the Company would only be liable for the amount of these guarantees in the event the Company defaulted in performing the obligations under each contract, of which, the probability is remote.
The Company had a total of $2.0 million in letters of credit outstanding as of June 30, 2018 primarily in connection with insurance programs and our foreign subsidiaries.
Note 16.15. Accumulated Other Comprehensive Income ("AOCI")
Comprehensive income is a measure of income that includes both net earnings and other comprehensive income (loss). Other comprehensive income (loss) results from items deferred on the consolidated and combined balance sheets in CDK stockholders' (deficit) equity. The Company's other comprehensive income (loss) for fiscal 2015, 2014,2018, 2017, and 20132016 and AOCI balances as of June 30, 2015, 2014,2018, 2017, and 20132016 were comprised solely of currency translation adjustments. Other comprehensive income (loss) was $(34.1)$3.5 million, $42.6$2.2 million, and $(1.1)$(45.8) million for fiscal 2015, 2014,2018, 2017, and 2013,2016, respectively. The accumulated balances reported in AOCI on the consolidated and combined balance sheets for currency translation adjustments were $51.6$11.5 million, $85.7$8.0 million, and $43.1$5.8 million as of June 30, 2015, 2014,2018, 2017, and 2013,2016, respectively.
Note 16. Share Repurchase Transactions
In December 2015, the Board of Directors authorized the Company to repurchase up to $1.0 billion of its common stock as part of its $1.0 billion return of capital plan. In December 2016, the company completed its $1.0 billion return of capital plan. In January 2017, the Board of Directors terminated this authorization and replaced it with an authorization for the Company to repurchase up to $2.0 billion of our common stock as part of a new return of capital plan. Under the authorization, the Company may purchase its common stock in the open market or in privately negotiated transactions from time to time as permitted by federal securities laws and other legal requirements. The actual timing, number, and price of any shares to be repurchased is determined at management's discretion and depends on a number of factors, including the market price of the shares, general market and economic conditions, and other potential uses for free cash flow including, but not limited to, potential acquisitions.
In December 2015, the Company entered into an accelerated share repurchase agreement ("December 2015 ASR") to purchase $250.0 million of the Company's common stock. Under the terms of the December 2015 ASR, the Company made a $250.0 million payment in December 2015 and received an initial delivery of approximately 4.3 million shares of the Company's common stock. In June 2016, the Company received an additional 1.0 million shares of common stock in final settlement of the December 2015 ASR, for a total of 5.3 million shares. The value reflected in treasury stock upon completion of the December 2015 ASR represents the value of the shares received based on the closing price of the Company's stock on the respective settlement dates, which is higher than the $250.0 million cash paid by $6.2 million.
In June 2016, the Company entered into an accelerated share repurchase agreement ("June 2016 ASR") to purchase $300.0 million of the Company's common stock. Under the terms of the June 2016 ASR, the Company made a $300.0 million payment in June 2016 and received an initial delivery of approximately 4.3 million of the Company's common stock. In September 2016, the Company received an additional 1.0 million shares of common stock in final settlement of the June 2016 ASR, for a total of 5.3 million shares. The value reflected in treasury stock upon completion of the June 2016 ASR represents the value of the shares received based on the closing price of the Company's stock on the respective settlement dates, which is less than the $300.0 million cash paid by $3.1 million.
In December 2016, the Company entered into an accelerated share repurchase agreement ("December 2016 ASR") to purchase $330.0 million of the Company's common stock. Under the terms of the December 2016 ASR, the Company made a $330.0 million payment in December 2016 and received an initial delivery of approximately 4.5 million shares of the Company's common stock. In May 2017, the Company received an additional 0.7 million shares of common stock in final settlement of the December 2016 ASR, for a total of 5.2 million shares. The value reflected in treasury stock upon completion of the December 2016 ASR represents the value of the shares received based on the closing price of the Company's stock on the respective settlement dates, which is less than the $330.0 million cash paid by $21.2 million.
In May 2017, the Company entered into an accelerated share repurchase agreement ("May 2017 ASR") to purchase $350.0 million of the Company's common stock. Under the terms of the May 2017 ASR, the Company made a $350.0 million payment in May 2017 and received initial delivery of approximately 4.5 million of the Company's common stock. In
September 2017, the Company received an additional 1.1 million shares of common stock in final settlement of the May 2017 ASR, for a total of 5.6 million shares. The value reflected in treasury stock upon completion of the May 2017 ASR represents the value of the shares received based on the closing price of the Company's stock on the respective settlement dates, which is less than the $350.0 million cash paid by $3.1 million.
Additionally, the Company made open market repurchases of 9.4 million shares of the Company's common stock during fiscal 2018 for a total cost of $623.6 million and 0.3 million shares of the Company's common stock during fiscal 2017 for a total cost of $20.0 million.
Note 17. Transactions with ADP
Prior to the spin-off, the Company entered into a transition services agreement with ADP to provide for an orderly transition to being an independent company. Among the principal services to be provided by ADP to the Company are operational and administrative infrastructure-related services, such as use of the e-mail domain “adp.com,” facilities sharing, procurement support, tax, human resources administrative services and services related to back office support, and software development in ADP's Indian facilities. Among the principal services to be provided by the Company to ADP are operational and administrative infrastructure-related services, such as facilities sharing and human resources administrative services. The agreement will expire and services under it will cease no later than one year following the spin-off date or sooner in the event the Company no longer requires such services.
The Company entered into a data services agreement with ADP prior to the spin-off under which ADP provideswill 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 will expireexpired 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 also entered into an employee matters agreement with ADP prior to the spin-off pursuant to which certain employee benefit matters will be addressed, such as the treatment of ADP options held by Company employees after the separation and the treatment of benefits for Company management employees who participate in and have accrued benefits under the ADP Supplemental Officers Retirement Plan. The agreement also, to the extent provided therein, delineates the benefit plans and programs in which the Company's employees participate following the spin-off. ADP remains responsible for the payment of all benefits under the ADP plans.
For the period from the date of spin-off through the end of fiscal 2015,2016, the Company recorded $8.6$2.2 million of expenses related to the transition services agreementagreement. The Company recorded $3.4 million and $9.2$7.5 million of expenseexpenses related to the data services agreement in the accompanying financial statements. As of June 30, 2015, the Company had amounts payable to ADP under the transition servicesstatements for fiscal 2017 and data services agreements of $7.8 million. There were no similar amounts payable to ADP as of June 30, 2014 as these agreements were entered into in connection with the spin-off.2016, respectively.
Refer to Note 8 for further information on ourthe tax matters agreement with ADP.
Note 18. Financial Data by Segment
The Company manages its business operations through strategic business units.is organized into two main operating groups. The Company's first operating group is CDK North America which is comprised of two reportable segments, represent its strategic business units, orRetail Solutions North American and Advertising North America. The second operating segments,group, which include: Automotive Retail North America, Automotive Retail International, and Digital Marketing. is also a reportable segment, is CDK International.
The primary components of the Other segment are corporate allocations and other expenses not recorded in the segment results, such as corporate costs, separation costs, stock-based compensation expense, corporate costs, interest expense, costs attributable to the business transformation plan, the trademark royalty fee charged by ADP prior to the spin-off,results of our captive insurance company and certain unallocated expenses. Certain expenses are charged to the reportable segments at a standard rate for management reasons. Other costs are recorded based on management responsibility. Reportable segment revenues and earnings before income taxes for fiscal 2014 and 2013 have been adjusted to reflect updated budgeted foreign exchange rates for the fiscal year ended June 30, 2015. This adjustment is made for management reporting purposes so that the reportable revenues and earnings before taxes for each segment are presented on a consistent basis without the impact of fluctuations in foreign currency exchange rates. This adjustment is a reconciling item to revenues and earnings before income taxes in order to eliminate the adjustment in consolidation.
| | | | Automotive
Retail
North America (1) | | Automotive Retail International | | Digital Marketing (2) | | Other (3) | | Foreign Exchange | | Total | Retail Solutions North America | | Advertising North America | | CDK International | | Other | | Total |
| Year ended June 30, 2015 | | | | | | | | | | | | |
| Year ended June 30, 2018 | | | | | | | | | | |
| Revenues | $ | 1,342.7 |
| | $ | 346.2 |
| | $ | 414.1 |
| | $ | — |
| | $ | (39.5 | ) | | $ | 2,063.5 |
| $ | 1,611.1 |
| | $ | 305.8 |
| | $ | 356.3 |
| | $ | — |
| | $ | 2,273.2 |
|
| Earnings before income taxes | 389.8 |
| | 50.1 |
| | 25.6 |
| | (158.6 | ) | | (7.0 | ) | | 299.9 |
| 659.0 |
| | 37.1 |
| | 97.7 |
| | (281.8 | ) | | 512.0 |
|
| Assets | 957.2 |
| | 595.4 |
| | 501.0 |
| | 464.9 |
| | — |
| | 2,518.5 |
| 1,202.5 |
| | 332.0 |
| | 509.6 |
| | 964.3 |
| | 3,008.4 |
|
| Capital expenditures | 30.7 |
| | 7.1 |
| | 1.4 |
| | 4.8 |
| | — |
| | 44.0 |
| 39.1 |
| | — |
| | 5.8 |
| | 1.1 |
| | 46.0 |
|
| Depreciation and amortization | 33.8 |
| | 16.3 |
| | 26.1 |
| | 1.6 |
| | (1.3 | ) | | 76.5 |
| 59.0 |
| | 3.3 |
| | 11.7 |
| | 5.1 |
| | 79.1 |
|
| | | | | | | | | | | | | | | | | | | | | |
| Year ended June 30, 2014 | | | | | | | | | | | | |
| Year ended June 30, 2017 | | | | | | | | | | |
| Revenues | $ | 1,270.3 |
| | $ | 339.3 |
| | $ | 373.2 |
| | $ | — |
| | $ | (6.3 | ) | | $ | 1,976.5 |
| $ | 1,600.7 |
| | $ | 307.6 |
| | $ | 311.9 |
| | $ | — |
| | $ | 2,220.2 |
|
| Earnings before income taxes | 361.3 |
| | 45.3 |
| | 25.6 |
| | (76.7 | ) | | (2.2 | ) | | 353.3 |
| 605.5 |
| | 44.4 |
| | 75.0 |
| | (289.6 | ) | | 435.3 |
|
| Assets | 925.2 |
| | 709.0 |
| | 523.8 |
| | 440.6 |
| | — |
| | 2,598.6 |
| 1,231.1 |
| | 312.1 |
| | 538.9 |
| | 801.0 |
| | 2,883.1 |
|
| Capital expenditures | 22.4 |
| | 13.1 |
| | 1.1 |
| | — |
| | — |
| | 36.6 |
| 51.6 |
| | — |
| | 7.8 |
| | 3.0 |
| | 62.4 |
|
| Depreciation and amortization | 28.3 |
| | 13.0 |
| | 11.0 |
| | — |
| | — |
| | 52.3 |
| 48.2 |
| | 3.1 |
| | 11.4 |
| | 7.6 |
| | 70.3 |
|
| | | | | | | | | | | | | | | | | | | | | |
| Year ended June 30, 2013 | | | | | | | | | | | | |
| Year ended June 30, 2016 | | | | | | | | | | |
| Revenues | $ | 1,206.7 |
| | $ | 329.6 |
| | $ | 310.3 |
| | $ | — |
| | $ | (7.2 | ) | | $ | 1,839.4 |
| $ | 1,521.3 |
| | $ | 279.7 |
| | $ | 313.6 |
| | $ | — |
| | $ | 2,114.6 |
|
| Earnings before income taxes | 319.7 |
| | 33.7 |
| | 27.3 |
| | (62.0 | ) | | 2.0 |
| | 320.7 |
| 481.3 |
| | 27.5 |
| | 61.1 |
| | (200.8 | ) | | 369.1 |
|
| Assets | 959.8 |
| | 664.5 |
| | 510.0 |
| | 302.5 |
| | — |
| | 2,436.8 |
| 1,240.9 |
| | 307.9 |
| | 539.4 |
| | 276.8 |
| | 2,365.0 |
|
| Capital expenditures | 18.1 |
| | 8.5 |
| | 0.7 |
| | 0.2 |
| | — |
| | 27.5 |
| 37.4 |
| | — |
| | 8.3 |
| | 5.1 |
| | 50.8 |
|
| Depreciation and amortization | 27.5 |
| | 13.2 |
| | 11.2 |
| | — |
| | (0.8 | ) | | 51.1 |
| 39.3 |
| | 3.7 |
| | 12.5 |
| | 8.5 |
| | 64.0 |
|
(1) Automotive Supplemental disclosure of revenue by type was as follows:
Retail Solutions North America:
Subscription: for software and technology solutions provided to automotive retailers and OEMs, which includes:
DMSs and layered applications, which may be installed on-site at the customer’s location, or hosted and provided on a SaaS basis, including ongoing maintenance and support;
Interrelated services such as installation, initial training, and data updates;
Websites, search marketing, and reputation management services; and
Hardware on a service basis, meaning no specific assets are identified or a substantive right of substitution exists.
Transaction: fees per transaction to process credit reports, vehicle registrations, and automotive equity mining.
Other: consulting and professional services, sales of hardware, and other miscellaneous revenues.
Advertising North America includesrevenues are primarily earned for placing internet advertisements for OEMs and automotive retailers.
CDK International revenues are generated primarily from Subscription revenue as described above, aside from the loss on the saleabsence of the Internet sales leads business of $0.8 million in fiscal 2015.
(2) Digital Marketing includes $15.6 million of accelerated amortization in fiscal 2015 attributable to the Cobalt trademark.
(3) Other includes $34.6 million and $9.3 million of separation costs in fiscal 2015 and 2014, respectively. The Company did not incur separation costs in fiscal 2013. Other also includes $2.4 million of restructuring expenses related to the business transformation plan in fiscal 2015.
website offerings.
|
| | | | | | | | | | | |
| | Revenues |
| | Years Ended June 30, |
| | 2018 | | 2017 | | 2016 |
| CDK North America: | | | | | |
| Retail Solutions North America: | | | | | |
| Subscription revenue | $ | 1,306.3 |
| | $ | 1,261.4 |
| | $ | 1,191.2 |
|
| Transaction revenue | 164.0 |
| | 179.5 |
| | 179.1 |
|
| Other revenue | 140.8 |
| | 159.8 |
| | 151.0 |
|
| Total Retail Solutions North America | $ | 1,611.1 |
| | $ | 1,600.7 |
| | $ | 1,521.3 |
|
| Advertising North America revenue | 305.8 |
| | 307.6 |
| | 279.7 |
|
| CDK International revenue | 356.3 |
| | 311.9 |
| | 313.6 |
|
| Total | $ | 2,273.2 |
| | $ | 2,220.2 |
| | $ | 2,114.6 |
|
Revenues and property, plant and equipment, net by geographic area were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | United States | | Europe | | Canada | | Other | | Total |
| Year ended June 30, 2018 | | | | | | | | | |
| Revenues | $ | 1,811.7 |
| | $ | 253.3 |
| | $ | 105.0 |
| | $ | 103.2 |
| | $ | 2,273.2 |
|
| Property, plant and equipment, net | 105.9 |
| | 14.1 |
| | 3.9 |
| | 8.0 |
| | 131.9 |
|
| | | | | | | | | | |
| Year ended June 30, 2017 | | | | | | | | | |
| Revenues | $ | 1,808.9 |
| | $ | 221.0 |
| | $ | 99.2 |
| | $ | 91.1 |
| | $ | 2,220.2 |
|
| Property, plant and equipment, net | 104.5 |
| | 16.3 |
| | 3.7 |
| | 10.5 |
| | 135.0 |
|
| | | | | | | | | | |
| Year ended June 30, 2016 | | | | | | | | | |
| Revenues | $ | 1,706.4 |
| | $ | 227.8 |
| | $ | 94.5 |
| | $ | 85.9 |
| | $ | 2,114.6 |
|
| Property, plant and equipment, net | 91.2 |
| | 15.3 |
| | 2.1 |
| | 10.0 |
| | 118.6 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | United States | | Europe | | Canada | | Other | | Total |
| Year ended June 30, 2015 | | | | | | | | | |
| Revenues | $ | 1,641.1 |
| | $ | 226.2 |
| | $ | 102.9 |
| | $ | 93.3 |
| | $ | 2,063.5 |
|
| Property, plant and equipment, net | 72.7 |
| | 16.2 |
| | 0.4 |
| | 10.7 |
| | 100.0 |
|
| | | | | | | | | | |
| Year ended June 30, 2014 | | | | | | | | | |
| Revenues | $ | 1,547.5 |
| | $ | 250.4 |
| | $ | 92.1 |
| | $ | 86.5 |
| | $ | 1,976.5 |
|
| Property, plant and equipment, net | 56.3 |
| | 20.5 |
| | 0.9 |
| | 4.9 |
| | 82.6 |
|
| | | | | | | | | | |
| Year ended June 30, 2013 | | | | | | | | | |
| Revenues | $ | 1,426.1 |
| | $ | 241.5 |
| | $ | 91.2 |
| | $ | 80.6 |
| | $ | 1,839.4 |
|
| Property, plant and equipment, net | 48.3 |
| | 13.9 |
| | 0.6 |
| | 5.6 |
| | 68.4 |
|
Note 19. Quarterly Financial Results (Unaudited)
Summarized quarterly results of operations for the fiscal years ended June 30, 20152018 and 20142017 were as follows:
| | | | First Quarter (1) | | Second Quarter (1) | | Third Quarter | | Fourth Quarter | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Year ended June 30, 2015 | | | | | | | | |
| Year ended June 30, 2018 | | | | | | | | |
| Revenues | $ | 517.0 |
| | $ | 517.0 |
| | $ | 526.4 |
| | $ | 503.1 |
| $ | 565.7 |
| | $ | 561.7 |
| | $ | 576.6 |
| | $ | 569.2 |
|
Gross profit (2) | 205.5 |
| | 193.7 |
| | 204.6 |
| | 186.5 |
| |
Earnings before income taxes (3) | 64.5 |
| | 77.1 |
| | 91.0 |
| | 67.3 |
| |
Gross profit (1) | | 258.0 |
| | 270.9 |
| | 281.6 |
| | 280.7 |
|
| Earnings before income taxes | | 119.8 |
| | 120.3 |
| | 135.0 |
| | 136.9 |
|
Net earnings (3) | 41.0 |
| | 44.4 |
| | 58.2 |
| | 42.7 |
| 83.1 |
| | 106.2 |
| | 97.8 |
| | 101.6 |
|
| Net earnings attributable to noncontrolling interest | 2.0 |
| | 2.0 |
| | 1.9 |
| | 2.0 |
| 1.8 |
| | 2.2 |
| | 1.7 |
| | 2.2 |
|
| Net earnings attributable to CDK | 39.0 |
| | 42.4 |
| | 56.3 |
| | 40.7 |
| 81.3 |
| | 104.0 |
| | 96.1 |
| | 99.4 |
|
| Basic earnings attributable to CDK per share | $ | 0.24 |
| | $ | 0.26 |
| | $ | 0.35 |
| | $ | 0.25 |
| $ | 0.58 |
| | $ | 0.76 |
| | $ | 0.71 |
| | $ | 0.76 |
|
| Diluted earnings attributable to CDK per share | $ | 0.24 |
| | $ | 0.26 |
| | $ | 0.35 |
| | $ | 0.25 |
| $ | 0.57 |
| | $ | 0.75 |
| | $ | 0.71 |
| | $ | 0.75 |
|
| | | | | | | | | | | | | | | |
| Year ended June 30, 2014 | | | | | | | | |
| Year ended June 30, 2017 | | | | | | | | |
| Revenues | $ | 481.9 |
| | $ | 487.9 |
| | $ | 501.1 |
| | $ | 505.6 |
| $ | 550.7 |
| | $ | 547.8 |
| | $ | 556.3 |
| | $ | 565.4 |
|
Gross profit (2) | 184.5 |
| | 189.7 |
| | 196.2 |
| | 201.6 |
| |
Earnings before income taxes (3) | 81.7 |
| | 85.9 |
| | 100.5 |
| | 85.2 |
| |
Gross profit (1) | | 235.6 |
| | 244.6 |
| | 248.6 |
| | 256.5 |
|
| Earnings before income taxes | | 111.9 |
| | 118.9 |
| | 110.4 |
| | 94.1 |
|
Net earnings (3) | 55.6 |
| | 54.2 |
| | 71.4 |
| | 54.7 |
| 79.2 |
| | 83.6 |
| | 78.8 |
| | 60.9 |
|
| Net earnings attributable to noncontrolling interest | 1.9 |
| | 1.5 |
| | 1.8 |
| | 2.8 |
| 2.3 |
| | 0.9 |
| | 1.5 |
| | 2.2 |
|
| Net earnings attributable to CDK | 53.7 |
| | 52.7 |
| | 69.6 |
| | 51.9 |
| 76.9 |
| | 82.7 |
| | 77.3 |
| | 58.7 |
|
| Basic earnings attributable to CDK per share | $ | 0.33 |
| | $ | 0.33 |
| | $ | 0.43 |
| | $ | 0.32 |
| $ | 0.51 |
| | $ | 0.56 |
| | $ | 0.53 |
| | $ | 0.41 |
|
| Diluted earnings attributable to CDK per share | $ | 0.33 |
| | $ | 0.33 |
| | $ | 0.43 |
| | $ | 0.32 |
| $ | 0.51 |
| | $ | 0.55 |
| | $ | 0.53 |
| | $ | 0.41 |
|
(1) The summarized quarterly results for the three months periods ended September 30, 2014 and December 31, 2014 presented herein have been revised to reflect sales-type lease accounting for certain hardware components included DMS and integrated solutions and to properly present the noncontrolling interest in CVR. The Company assessed the materiality of these misstatements on prior period financial statements and concluded that while such revisions are immaterial to the consolidated and combined results of operations, financial condition, and cash flows, the financial statements should be revised to provide greater comparability.
The Company revised its results of operations for the three months periods ended September 30, 2014 and December 31, 2014 subsequent to filing these results in Quarterly Reports on Form 10-Q. The tables below present selected
line items from the results of operations for these periods as previously reported and as revised. The Company's results of operations for the three months ended September 30, 2013 and December 31, 2013 were previously presented on a revised basis in the Registration Statement on Form S-4.
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2014 |
| | | | Adjustments | | |
| | As Reported | | Hardware | | NCI | | As Revised |
| Revenues | $ | 516.0 |
| | $ | 1.0 |
| | $ | — |
| | $ | 517.0 |
|
| Gross profit | 206.2 |
| | (0.7 | ) | | — |
| | 205.5 |
|
| Earnings before income taxes | 62.7 |
| | (0.2 | ) | | 2.0 |
| | 64.5 |
|
| Net earnings | 39.1 |
| | (0.1 | ) | | 2.0 |
| | 41.0 |
|
| Less: net earnings attributable to noncontrolling interest | — |
| | — |
| | 2.0 |
| | 2.0 |
|
| Net earnings attributable to CDK | 39.1 |
| | (0.1 | ) | | — |
| | 39.0 |
|
| Basic earnings attributable to CDK per share | $ | 0.24 |
| | $ | — |
| | $ | — |
| | $ | 0.24 |
|
| Diluted earnings attributable to CDK per share | $ | 0.24 |
| | $ | — |
| | $ | — |
| | $ | 0.24 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended December 31, 2014 |
| | | | Adjustments | | |
| | As Reported | | Hardware | | NCI | | As Revised |
| Revenues | $ | 521.2 |
| | $ | (4.2 | ) | | $ | — |
| | $ | 517.0 |
|
| Gross profit | 194.3 |
| | (0.6 | ) | | — |
| | 193.7 |
|
| Earnings before income taxes | 75.2 |
| | (0.1 | ) | | 2.0 |
| | 77.1 |
|
| Net earnings | 42.5 |
| | (0.1 | ) | | 2.0 |
| | 44.4 |
|
| Less: net earnings attributable to noncontrolling interest | — |
| | — |
| | 2.0 |
| | 2.0 |
|
| Net earnings attributable to CDK | 42.5 |
| | (0.1 | ) | | — |
| | 42.4 |
|
| Basic earnings attributable to CDK per share | $ | 0.26 |
| | $ | — |
| | $ | — |
| | $ | 0.26 |
|
| Diluted earnings attributable to CDK per share | $ | 0.26 |
| | $ | — |
| | $ | — |
| | $ | 0.26 |
|
(2) Gross profit is calculated as revenues less cost of revenues.
(3) Earnings before income taxes and net earnings include the impact of incremental separation costs directly attributable to the planned separation from ADP. Separation costs totaled $34.6 million and $9.3 million in fiscal 2015 and 2014, respectively.
CDK Global, Inc.
Schedule II - Valuation and Qualifying Accounts
(In millions)
|
| | | | | | | | | | | | | | | | | | | | |
| Column A | | Column B | | Column C | | Column D | | Column E |
| | | | | Additions | | | | |
| | | Balance at beginning of period | | Charged (credited) to costs and expenses | | Charged (credited) to other accounts | | Deductions | | Balance at end of period |
| Year ended June 30, 2018 | | | | | | | | | | |
| Accounts receivable allowances | | $ | 6.3 |
| | $ | 3.7 |
| | $ | — |
| | $ | (2.6 | ) | (1) | $ | 7.4 |
|
| Deferred tax valuation allowance | | 35.1 |
| | — |
| | — |
| | (13.5 | ) | (2) | 21.6 |
|
| Year ended June 30, 2017 | | | | | | | | | | |
| Accounts receivable allowances | | $ | 7.1 |
| | $ | 1.7 |
| | $ | — |
| | $ | (2.5 | ) | (1) | $ | 6.3 |
|
| Deferred tax valuation allowance | | 34.3 |
| | 1.9 |
| | — |
| | (1.1 | ) | | 35.1 |
|
| Year ended June 30, 2016 | | | | | | | | | | |
| Accounts receivable allowances | | $ | 6.8 |
| | $ | 2.3 |
| | $ | (0.1 | ) | | $ | (1.9 | ) | (1) | $ | 7.1 |
|
| Deferred tax valuation allowance | | 33.4 |
| | 1.1 |
| | (0.2 | ) | (3) | — |
| | 34.3 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| Column A | | Column B | | Column C | | Column D | | Column E |
| | | | | Additions | | | | |
| | | Balance at beginning of period | | Charged (credited) to costs and expenses | | Charged (credited) to other accounts | | Deductions | | Balance at end of period |
| Year ended June 30, 2015 | | | | | | | | | | |
| Accounts receivable allowances | | $ | 12.2 |
| | $ | (2.8 | ) | | $ | (0.5 | ) | (1) | $ | (2.1 | ) | (2) | $ | 6.8 |
|
| Deferred tax valuation allowance | | 7.1 |
| | 29.8 |
| (3) | (0.8 | ) | (4) | (2.7 | ) | | 33.4 |
|
| Year ended June 30, 2014 | | | | | | | | | | |
| Accounts receivable allowances | | $ | 11.4 |
| | $ | 3.3 |
| | $ | — |
| | $ | (2.5 | ) | (2) | $ | 12.2 |
|
| Deferred tax valuation allowance | | 15.1 |
| | 0.3 |
| | (0.4 | ) | (4) | (7.9 | ) | | 7.1 |
|
| Year ended June 30, 2013 | | | | | | | | | | |
| Accounts receivable allowances | | $ | 10.4 |
| | $ | 5.3 |
| | $ | — |
| | $ | (4.3 | ) | (2) | $ | 11.4 |
|
| Deferred tax valuation allowance | | 15.0 |
| | 2.2 |
| | (1.5 | ) | (4) | (0.6 | ) | | 15.1 |
|
(1) Includes amounts written off as a result of divestitures and amounts related to foreign exchange fluctuations.
(2) Doubtful accounts written off, less recoveries on accounts previously written off.
(3) Primarily relates to(2) Includes $10.0 million reduction for the full valuation allowance recognizedtax rate impact on a capital loss carryforward and $3.5 million for capital losses realized on the Internet sales leads business disposition further discussed in Note 8.expiration of certain non-U.S. tax loss carryforwards.
(4)(3) Includes amounts related to foreign exchange fluctuations.
Item 9. Changes in and Disagreements withWith Accountants on Accounting and Financial DisclosuresDisclosure
None.
Item 9A. Controls and Procedures
Management's Evaluation of Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act (the "evaluation"). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were effective as of June 30, 20152018 in ensuring that (i) information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure, and (ii) such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.
Internal Control Over Financial Reporting
Management's Annual Report on Internal Control Over Financial Reporting. This Annual Report on Form 10-K does not include a report of management's assessment regardingOur management is responsible for establishing and maintaining adequate internal control over financial reporting, oras such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an attestation reportevaluation of the Company'seffectiveness of our internal control over financial reporting as of June 30, 2018 based on the guidelines established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of our evaluation, our management has concluded that our internal control over financial reporting was effective as of June 30, 2018.
Deloitte & Touche LLP, an independent registered public accounting firm, due to a transition period established by ruleshas audited the effectiveness of the SEC for newly public companies.our internal control over financial reporting as of June 30, 2018. Their report is included in Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting. Prior to The adoption of ASU 2014-09, “Revenue from Contracts with Customers,” and the spin-off, we relied on certainrelated ASUs, required the implementation of a new financial informationsystem and resources of ADP to manage specific aspects of our business and report results. These included investor relations, corporate communications,new accounting tax, legal, human resources, benefit plan administration, benefit plan reporting, general management, real estate, treasury, insurance and risk management, and oversight functions, such as board of directors and internal audit,processes, which includes Sarbanes-Oxley compliance. In conjunction withchanged the spin-off, we enhanced our financial, administrative, and other support systems and expanded our accounting, reporting, legal and internal audit departments. We also revised and adopted policies, as needed, to meet all regulatory requirements applicable to us as a stand-alone public company. We continue to review and document ourCompany's internal controls over revenue recognition, capture of costs to obtain and fulfill our contracts, and financial reporting,reporting. The Company has completed the design and may from timeimplementation of certain of these controls and some aspects of these new internal controls were in place in the fourth quarter of fiscal 2018 related to time make changes aimed at enhancing their effectiveness. These efforts may leadthe transition adjustment with the remainder of the new internal controls related to additional changesthe new revenue recognition standard becoming effective on July 1, 2018, therefore fiscal 2019. There was no other change in our internal control over financial reporting.
Other than those noted above, there were no changesreporting identified in connection with the Company's internal control over financial reporting (as defined inevaluation required by Rule 13a-15(f) under13a-15(d) and 15d-15(d) of the Exchange Act)Act that occurred during the quarter ended June 30, 20152018 that havehas materially affected, or areis reasonably likely to materially affect, our internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of
CDK Global, Inc.
Hoffman Estates, Illinois
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of CDK Global, Inc. and subsidiaries (the “Company”) as of June 30, 2018 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended June 30, 2018, of the Company and our report dated August 14, 2018, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
August 14, 2018
Item 9B. Other Information
None.
Part III
Item 10. Directors, Executive Officers and Corporate Governance
The executive officers of the Company, their ages, and positions are as follows:
|
| | | | |
| Name | | Age* | | Position(s) |
Steven J. AnenenBrian P. MacDonald | | 6252 | | President, Chief Executive Officer and Director |
AlfredJoseph A. NietzelTautges | | 5342 | | Executive Vice President, Chief Financial Officer |
Robert N. KarpDan Flynn | | 5448 | | President, Automotive RetailCDK North America |
Andrew DeanNeil Packham | | 5847 | | President, Automotive RetailCDK International |
Scott L. MathewsRajiv K. Amar | | 5751 | | President, Digital Marketing |
Yvonne M. Surowiec | | 54 | | Chief Human Resources Officer |
Malcolm Thorne | | 43 | | Executive Vice President, Global Chief StrategyTechnology Officer |
| Lee J. Brunz | | 4548 | | Executive Vice President, General Counsel and Secretary |
| Amy W. Byrne | | 47 | | Executive Vice President, Chief Human Resources Officer |
| Dean Crutchfield | | 57 | | Executive Vice President, Chief Information Officer |
| Ron L. Frey | | 52 | | Executive Vice President, Chief Global Strategy Officer |
| Scott L. Mathews | | 60 | | Executive Vice President, North America Sales |
* As of June 30, 20152018
Steven J. Anenen.Brian P. MacDonald has served as our President since January 1, 2016, as our Chief Executive Officer since March 8, 2016, and as a member of our Board of Directors since June 15, 2015. Prior to joining CDK, Mr. Anenen is ourMacDonald served as President and Chief Executive Officer of Hertz Rental Equipment Corporation from June 2014 to May 2015, and a Directoras interim Chief Executive Officer of CDK Global, Inc.Hertz Corporation from September 2014 to November 2014. Prior to Hertz, Mr. Anenen was with ADP for 39 years and, since 2004,MacDonald served as Group President and Chief Executive Officer of ADP Dealer Services,ETP Holdco Corp., an entity formed following Energy Transfer Partners' $5.3 billion acquisition of Sunoco, Inc. in 2012, where Mr. MacDonald had served as Chairman, President and Chief Executive Officer prior to ETP's acquisition of Sunoco. During his tenure at Sunoco, the company undertook a substantial restructuring to strengthen and transform the organization and better position it for growth. Sunoco exited unprofitable operations, significantly reduced costs, improved efficiencies, and refocused on established high-return businesses. Mr. MacDonald has also held executive management roles at Dell, General Motors Corporation, and Isuzu Motors Limited.
Mr. MacDonald has served as a director of Suncor Energy since July 2018. Mr. MacDonald previously served on the board of directors of Computer Sciences Corporation from August 2013 to April 2017, the board of directors of Sunoco from March 2012 to October 2012, Sunoco Logistics from October 2009 to October 2012, and on the board of directors of Ally Financial, Inc. from May 2013 to July 2014 following his appointment by the U.S. Department of the Treasury.
Joseph A. Tautges has served as our Executive Vice President since August 1, 2017 and began service as our Executive Vice President, Chief Financial Officer on August 9, 2017. Prior to servingjoining CDK, Mr. Tautges served as President,Chief Financial Officer of the $18 billion Enterprise Services segment of Hewlett Packard Enterprise (“HPE”) from May 2014 to April 2017. While at HPE, he led a transformation initiative which enabled significant margin expansion and improved free cash flow resulting in the recent spin-merger of Enterprise Services with Computer Science Corporation to form the $26 billion DXC Technology Company. Prior to HPE, Mr. Tautges held positionsvarious levels of increasing responsibility within Dealer Servicesin both operations and ADP, includingfinancial management with Sears Holdings from 2011 to 2014 and Aon Hewitt from 2002 to 2011. Mr. Tautges is a Certified Public Accountant.
Dan Flynn has served as our President, CDK North America since December 1, 2017. Mr. Flynn joined CDK in February 2016 as Executive Vice President, Business Transformation. Prior to joining CDK, Mr. Flynn served as the Senior Vice President, North America Systems, ADP Dealer Services North America,Rent-A-Car Operations at Hertz from 2014 through 2016. He previously served as Regional Vice President, Major Markets, General Manager of the ChicagoSoutheast Region and Separation Management Office, for Dealer Services, Director of Client Relations for ADP’s Employer Services DivisionHertz Equipment Rental Corporation. Mr. Flynn had extensive process and General Manager of ADP’s Manufacturing/ Wholesale Distribution Services Division.operational management responsibilities at Hertz, and led company-wide, Lean Six Sigma-based process improvement initiatives from 2007 to 2012 in various leadership roles.
Alfred A. Nietzel. Mr. Nietzel is our Chief Financial Officer, after serving as Chief Financial Officer and Chief Administrative Officer for ADP Dealer Services, Inc. Mr. Nietzel was with ADP since 2001 and Neil Packham has served as Seniorour President, CDK International since January 18, 2017. Mr. Packham joined CDK in July 2013 as Vice President Chief Financial Officer for Dealer Services, Chief Financial Officer for Employer Services DivisionCDK's UK region, which encompasses UK, Middle East, Ireland and ADP’s Corporate Controller.Africa. Prior to joining ADP,CDK, Mr. Nietzel served for 17 years with Gillette in numerous financial management rolesPackham worked in the United States, United Kingdomautomotive, digital, and Australia.software sectors working in a variety of business areas such as
Robert N. Karp. Mr. Karp is our President, Automotive Retail North America, after serving as Senior Vice President, North America Operations
business development and Sales for ADP Dealer Services. Mr. Karp joined ADP Dealer Services 1994.strategy, sales and marketing, product development, and general management. He has held senior positions within a varietynumber of roles within ADP Dealer Services, including Senior Vice President, eCommerce, Senior Vice President, North America Operations, Vice President, Strategic Accounts, Vice President, Alliance Segment,large corporations and Vice President, Client Relations. Prior to joining ADP Dealer Services, Mr. Karp held various general management and operations roles with IBM and PRC Corporation.start-ups.
Andrew Dean. Dr. Dean is our President, Automotive Retail International, after serving as President for ADP Dealer Services International. Dr. Dean joined ADP Dealer Services in December 2005 following the acquisition of Kerridge Computer Company Limited. Prior to joining ADP Dealer Services, he was a Director of Kerridge, joining in 2002, managing their services business. Since joining ADP Dealer Services in 2005, heRajiv K. Amar has held positions of increasing responsibility, including General Manager of Russia and the Middle East and Vice President of the U.K. and Ireland, until he was promoted to his current role in May 2011.
Scott L. Mathews. Mr. Mathews is our President, Digital Marketing, after serving as Senior Division Vice President & General Manager for the Digital Marketing business of ADP Dealer Services. Mr. Mathews joined ADP Dealer Services in August 2010 following the acquisition of Cobalt Holding Company. Prior to joining ADP Dealer Services, he served as Executive Vice President & General Manager of Cobalt from 2005 and as Cobalt’s Chief Operating Officer from 2002 to 2005.
Yvonne M. Surowiec. Ms. Surowiec is our Chief Human ResourcesTechnology Officer after serving as Vice President, Global Talent & Learning for ADP since 2013. Previously, Ms. Surowiec servedApril 14, 2016. Mr. Amar joined CDK in roles with ADPJuly 2014 as Division Vice President for Development. Prior to joining CDK, Mr. Amar was Senior Director of Human Resources, SBS, TotalSourceResearch and Retirement ServicesDevelopment for Sage Software Inc. from 20092012 to 20132014. He also previously held the role of Director of Product Development and Division Vice President of Human Resources, NAS and ES InternationalEngineering with Serena Software Inc. from 2008 to 2009. Prior to joining ADP, Ms. Surowiec held a variety of management positions with AT&T, including District Manager, HR Mergers and Acquisitions.2012.
Malcolm Thorne. Mr. Thorne is our Global Chief Strategy Officer, after serving as Global Chief Strategy Officer for ADP Dealer Services. Previously, Mr. ThorneLee J. Brunz has served as Divisionour Executive Vice President, Marketing, Strategy & Business Development, and Dealer Services International from 2011 to 2014. Prior to joining ADP Dealer Services, Mr. Thorne was President of Synergy Consulting Group, a provider of strategy consulting services from 2009 to 2011 as well as a lecturer in marketing and strategy at the University of Wisconsin School of Business from 2009 to 2010.
Lee J. Brunz. Mr. Brunz is our General Counsel and Secretary after servingsince the spin-off. Prior to the spin-off, Mr. Brunz served as Vice President, Counsel for the Digital Marketing business of ADPthe Dealer Services division of ADP since Dealer Services’ 2010 acquisition of Cobalt Holding Company. Prior to joining ADPthe Dealer Services division of ADP, he served as Vice President, Finance & General Counsel of Cobalt from 2008 to 2010 and as Vice President & General Counsel from 2004 to 2008.
Amy W. Byrne has served as our Executive Vice President, Chief Human Resources Officer since June 5, 2017. Prior to joining CDK, Ms. Byrne served as Vice President, Human Resources, Latin America for Avon Products from 2011 to 2016 and as Vice President, Corporate Human Resources and Global Compensation and Benefits from 2006 to 2011.
Dean Crutchfield has served as our Executive Vice President and Chief Information Officer since in June 8, 2016. Prior to joining CDK, Mr. Crutchfield served as the Chief Information Officer of Zebra Technologies from 2013 to 2016. He also previously held information technology leadership roles at Dell from 1999 to 2013.
Ron L. Frey has served as our Executive Vice President, Chief Global Strategy Officer since April 17, 2017. Prior to joining CDK, Mr. Frey served as Chief Strategy Officer for CU Direct Autonation from October 2016 through April 2017. In October 2015, Mr. Frey founded RL Frey, which provides consulting services to the automotive industry. From October 2007 through October 2015, Mr. Frey served as Chief Strategy Officer at Autonation. He is also a director of Dealer Tire since January 2017.
Scott L. Mathews has served as our Executive Vice President, North America Sales since July 1, 2016. From the spin-off through June 30, 2016, Mr. Mathews served as our President, Digital Marketing. Prior to the spin-off, Mr. Mathews served as the Senior Division Vice President & General Manager for the Digital Marketing business of the Dealer Services division of ADP. Mr. Mathews joined the Dealer Services division of ADP in August 2010 following the acquisition of Cobalt Holding Company. Prior to joining the Dealer Services division of ADP, he served as Executive Vice President & General Manager of Cobalt from 2005 and as Cobalt’s Chief Operating Officer from 2002 to 2005.
Directors, Audit Committee, and Section 16(a) Beneficial Ownership Reporting Compliance
The information required by this item will be set forth under the captions "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement to be filed with the SECSecurities Exchange Commission (“SEC”) no later than 120 days after the close of our fiscal year ended June 30, 2015.2018. If the Proxy Statement is not filed with the SEC by such time, such information will be included in an amendment to this Annual Report by such time.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics (the “Code of Ethics”) that applies to our executive officers, directors, and employees, including our principal executive officer, principal financial officer, principal accounting officer, controller, and persons performing similar functions. The Code of Ethics may be viewed on our website at www.cdkglobal.com under “Corporate Governance” in the “Investor Relations” section. We will provide a copy of the Code of Ethics without charge upon request to the Corporate Secretary, CDK Global, Inc., 1950 Hassell Road, Hoffman Estates, IL 60169. In the event we amend or waive any of the provisions of the Code of Ethics applicable to our directors and executive officers, including our principal executive officer, principal financial officer, principal accounting officer, controller, and persons performing similar functions, that relates to any element of the definition of “code of ethics” enumerated in Item 406(b) of Regulation S-K under the 1934 Act, we intend to disclose these actions on our website within four business days following the date of the amendment or waiver.
Item 11. Executive Compensation
The information required by this item will be set forth under the caption "Compensation of Executive Officers" and "Compensation Discussion and Analysis" in the Proxy Statement to be filed with the SEC no later than 120 days after the close
of our fiscal year ended June 30, 2015.2018. If the Proxy Statement is not filed with the SEC by such time, such information will be included in an amendment to this Annual Report by such time.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item will be set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement to be filed with the SEC no later than 120 days after the close of our fiscal year ended June 30, 2015.2018. If the Proxy Statement is not filed with the SEC by such time, such information will be included in an amendment to this Annual Report by such time.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be set forth under the caption "Certain Relationships and Related Party Transactions" in the Proxy Statement to be filed with the SEC no later than 120 days after the close of our fiscal year ended June 30, 2015.2018. If the Proxy Statement is not filed with the SEC by such time, such information will be included in an amendment to this Annual Report by such time.
Item 14. Principal AccountantAccounting Fees and Services
The information required by this item will be set forth under the caption "Fees of Independent Accounting Firm" under "Independent Accounting Firm Independence and Fee Pre-Approval Policies and Procedures" in the Proxy Statement to be filed with the SEC no later than 120 days after the close of our fiscal year ended June 30, 2015.2018. If the Proxy Statement is not filed with the SEC by such time, such information will be included in an amendment to this Annual Report by such time.
Part IV
Item 15. Exhibits, and Financial Statement Schedules
The following documents are included in "Financial Statements and Supplementary Data" in Part II, Item 8 of this Annual Report on Form 10-K:
ReportReports of Independent Registered Public Accounting Firm
Consolidated and Combined Statements of Operations for the years ended June 30, 2015, 2014,2018, 2017, and 20132016
Consolidated and Combined Statements of Comprehensive Income for the years ended June 30, 2015, 2014,2018, 2017, and 20132016
Consolidated and Combined Balance Sheets as of June 30, 20152018 and 20142017
Consolidated and Combined Statements of Cash Flows for the years ended June 30, 2015, 2014,2018, 2017, and 20132016
Consolidated and Combined Statements of Stockholders' (Deficit) Equity for the years ended June 30, 2015, 2014,2018, 2017, and 20132016
Notes to the Consolidated and Combined Financial Statements
| |
| 2. | Financial Statement Schedule |
Schedule II - Valuation and Qualifying Accounts.
The following exhibits are filed with this Annual Report on Form 10-K or incorporated herein by reference to the document set forth next to the exhibit in the list below:
|
| | | | | | | | | | | | |
| | | | | | | Incorporated by Reference | | |
| Exhibit Number | | Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | | Filed Herewith |
| 3.1 | | Certificate of Incorporation of CDK Global, Inc. | | 8-K | | 1-36486 | | 3.1 | | 10/1/2014 | | |
| 3.2 | | By-laws of CDK Global, Inc. | | 8-K | | 1-36486 | | 3.2 | | 10/1/2014 | | |
| 4.1 | | Indenture, dated as of October 14, 2014, among CDK Global, Inc. and U.S. Bank National Association, as trustee, pursuant to which the 3.30% Senior Notes due 2019 were issued | | 8-K | | 1-36486 | | 4.1 | | 10/17/2014 | | |
| 4.2 | | Indenture, dated as of October 14, 2014, among CDK Global, Inc. and U.S. Bank National Association, as trustee, pursuant to which the 4.50% Senior Notes due 2024 were issued | | 8-K | | 1-36486 | | 4.2 | | 10/17/2014 | | |
| 4.3 | | Registration Rights Agreement, dated as of October 14, 2014, among CDK Global, Inc. and the initial purchasers named therein, relating to the 3.30% Senior Notes due 2019 | | 8-K | | 1-36486 | | 4.3 | | 10/17/2014 | | |
| 4.4 | | Registration Rights Agreement, dated as of October 14, 2014, among CDK Global, Inc. and the initial purchasers named therein, relating to the 4.50% Senior Notes due 2024 | | 8-K | | 1-36486 | | 4.4 | | 10/17/2014 | | |
| 10.1 | | Credit Agreement, dated as of September 16, 2014, among the Company, the Borrowing Subsidiaries from time to time party thereto, the Lenders party thereto, and JP Morgan Chase Bank, N.A., as Administrative Agent | | 8-K | | 1-36486 | | 10.1 | | 9/16/2014 | | |
| 10.2 | | Bridge Credit Agreement, dated as of September 16, 2014, among the Company, the Lenders party thereto, and JP Morgan Chase Bank, N.A., as Administrative Agent | | 8-K | | 1-36486 | | 10.2 | | 9/16/2014 | | |
| 10.3 | | Separation and Distribution Agreement, dated as of September 29, 2014, by and between the Company and Automatic Data Processing, Inc. | | 8-K | | 1-36486 | | 10.1 | | 10/1/2014 | | |
| 10.4 | | Tax Matters Agreement, dated as of September 29, 2014, by and between the Company and Automatic Data Processing, Inc. | | 8-K | | 1-36486 | | 10.2 | | 10/1/2014 | | |
| 10.5 | | Transition Services Agreement, dated as of September 29, 2014, between the Company and Automatic Data Processing, Inc. | | 8-K | | 1-36486 | | 10.3 | | 10/1/2014 | | |
| 10.6 | | Data Center Services Agreement, dated as of September 29, 2014, between the Company and Automatic Data Processing, Inc. | | 8-K | | 1-36486 | | 10.4 | | 10/1/2014 | | |
|
| | | | | | | | | | | | |
| | | | | | | Incorporated by Reference | | |
| Exhibit Number | | Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | | Filed Herewith |
| 3.1 | | | | 8-K | | 1-36486 | | 3.1 | | 10/1/2014 | | |
| 3.2 | | | | 8-K | | 1-36486 | | 3.1 | | 3/9/2017 | | |
| 4.1 | | | | 8-K | | 1-36486 | | 4.1 | | 10/17/2014 | | |
| 4.2 | | | | 8-K | | 1-36486 | | 4.2 | | 10/17/2014 | | |
| 4.3 | | | | 8-K | | 1-36486 | | 4.1 | | 5/15/2017 | | |
| 4.4 | | | | 8-K | | 1-36486 | | 4.1 | | 6/18/2018 | | |
| 4.5 | | | | 8-K | | 1-36486 | | 4.2 | | 6/18/2018 | | |
| 10.1 | | | | 8-K | | 1-36486 | | 1.1 | | 6/7/2018 | | |
| 10.2 | | | | 8-K | | 1-36486 | | 10.1 | | 6/7/2018 | | |
| 10.3 | | | | 8-K | | 1-36486 | | 10.1 | | 9/7/2017 | | |
| 10.4 | | | | 10-K | | 1-36486 | | 10.11 | | 8/8/2017 | | |
| 10.5 | | | | 8-K | | 1-36486 | | 10.9 | | 10/1/2014 | | |
| 10.6 | | | | DEF 14A | | 1-36486 | | Appendix A | | 9/22/2015 | | |
| | | 10.7 | | Intellectual Property Transfer Agreement, dated as of September 29, 2014, between the Company and Automatic Data Processing, Inc. | | 8-K | | 1-36486 | | 10.5 | | 10/1/2014 | | | | | 10-K | | 1-36486 | | 10.6 | | 8/8/2017 | |
| 10.8 | | Employee Matters Agreement, dated as of September 29, 2014, by and between the Company and Automatic Data Processing, Inc. | | 8-K | | 1-36486 | | 10.6 | | 10/1/2014 | | | | | 8-K | | 1-36486 | | 10.1 | | 1/26/2015 | |
| 10.9 | | Change in Control Severance Plan for Corporate Officers (Management Compensatory Plan) | | 8-K | | 1-36486 | | 10.7 | | 10/1/2014 | | | | | 10-Q | | 1-36486 | | 10.18 | | 11/13/2014 | |
| 10.10 | | CDK Global, Inc. 2014 Omnibus Award Plan (Management Compensatory Plan) | | 8-K | | 1-36486 | | 10.8 | | 10/1/2014 | | | | | 10-Q | | 1-36486 | | 10.7 | | 11/3/2015 | |
| 10.11 | | CDK Global Inc. Deferred Compensation Plan (Management Compensatory Plan) | | 8-K | | 1-36486 | | 10.9 | | 10/1/2014 | | | | | 10-Q | | 1-36486 | | 10.8 | | 11/3/2015 | |
| 10.12 | | Form of Restricted Stock Award Agreement under the 2014 Omnibus Award Plan (Management Compensatory Plan) | | 10-Q | | 1-36486 | | 10.12 | | 11/13/2014 | | | | | 10-Q | | 1-36486 | | 10.8 | | 2/3/2016 | |
| 10.13 | | Form of Restricted Unit Award Agreement under the 2014 Omnibus Award Plan (Management Compensatory Plan) | | 10-Q | | 1-36486 | | 10.13 | | 11/13/2014 | | | | | 10-Q | | 1-36486 | | 10.9 | | 2/3/2016 | |
| 10.14 | | Form of Performance Stock Unit Award Agreement under the 2014 Omnibus Award Plan (Management Compensatory Plan) | | 10-Q | | 1-36486 | | 10.14 | | 11/13/2014 | | | | | 10-Q | | 1-36486 | | 10.10 | | 2/3/2016 | |
| 10.15 | | Form of Stock Option Grant Agreement under the 2014 Omnibus Award Plan (Management Compensatory Plan) | | 10-Q | | 1-36486 | | 10.15 | | 11/13/2014 | | | | | 10-Q | | 1-36486 | | 10.11 | | 2/3/2016 | |
| 10.16 | | Form of Stock Option Grant Agreement under the 2014 Omnibus Award Plan (Form for Non-Employee Directors) (Management Compensatory Plan) | | 10-Q | | 1-36486 | | 10.16 | | 11/13/2014 | | | | | 10-Q | | 1-36486 | | 10.12 | | 2/3/2016 | |
| 10.17 | | Form of Restricted Unit Award Agreement under the 2014 Omnibus Award Plan (Form for Non-Employee Directors) (Management Compensatory Plan) | | 10-Q | | 1-36486 | | 10.17 | | 11/13/2014 | | | | | 8-K | | 1-36486 | | 10.1 | | 12/11/2015 | |
| 10.18 | | Form of Deferred Unit Award Agreement under the 2014 Omnibus Award Plan (Form for Non-Employee Directors) (Management Compensatory Plan) | | 10-Q | | 1-36486 | | 10.18 | | 11/13/2014 | | |
| 10.19 | | UK Tax Advantaged Sub-Plan (Management Compensatory Plan) | | 8-K | | 1-36486 | | 10.1 | | 1/26/2015 | | |
| 10.20 | | Form of Stock Option Agreement Under the UK Tax Advantaged Sub-Plan (Management Compensatory Plan) | | 8-K | | 1-36486 | | 10.2 | | 1/26/2015 | | |
| 12.1 | | Computation of Ratio of Earnings to Fixed Charges | | X | | | | X |
| 21.1 | | Subsidiaries of the Registrant | | X | | | | X |
| 23.1 | | Consent of Deloitte & Touche LLP, independent registered public accounting firm | | X | | | | X |
| 31.1 | | Certification by Steven J. Anenen pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 | | X | | | | X |
| 31.2 | | Certification by Alfred A. Nietzel pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 | | X | | | | X |
| 32.1 | | Certification by Steven J. Anenen pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | X | | | | X |
| 32.2 | | Certification by Alfred A. Nietzel pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | X | | | | X |
| 101.INS | | XBRL instance document | | X | | XBRL instance document | | X |
| 101.SCH | | XBRL taxonomy extension schema document | | X | | XBRL taxonomy extension schema document | | X |
| 101.CAL | | XBRL taxonomy extension calculation linkbase document | | X | | XBRL taxonomy extension calculation linkbase document | | X |
| 101.LAB | | XBRL taxonomy label linkbase document | | X | | XBRL taxonomy label linkbase document | | X |
| 101.PRE | | XBRL taxonomy extension presentation linkbase document | | X | | XBRL taxonomy extension presentation linkbase document | | X |
| 101.DEF | | XBRL taxonomy extension definition linkbase document | | X | | XBRL taxonomy extension definition linkbase document | | X |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrantRegistrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | |
| | | CDK Global, Inc. (Registrant) |
| | | |
| Date: | August 13, 201514, 2018 | /s/ AlfredJoseph A. NietzelTautges AlfredJoseph A. NietzelTautges
|
| | | |
| | | Executive Vice President, Chief Financial Officer (principal (principal financial and accounting officer) (Title) |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
|
| | | | |
| Signature | | Title | | Date |
/s/ Steven J. AnenenBrian P. MacDonald | | President, Chief Executive Officer and Director (principal executive officer) | | August 13, 201514, 2018 |
Steven J. AnenenBrian P. MacDonald | | | | |
/s/ AlfredJoseph A. NietzelTautges | | Executive Vice President, Chief Financial Officer (principal financial officer) | | August 14, 2018 |
| Joseph A. Tautges | | | | |
| /s/ Jennifer A.Williams | | Vice President, Corporate Controller and Chief Accounting Officer (principal accounting officer) | | August 13, 201514, 2018 |
AlfredJennifer A. NietzelWilliams | | | | |
| /s/ Leslie A. Brun | | Director | | August 13, 201514, 2018 |
| Leslie A. Brun | | | | |
| /s/ Willie A. Deese | | Director | | August 13, 201514, 2018 |
| Willie A. Deese | | | | |
| /s/ Amy J. Hillman | | Director | | August 13, 201514, 2018 |
| Amy J. Hillman | | | | |
/s/ Brian P. MacDonaldEileen J. Martinson | | Director | | August 13, 201514, 2018 |
Brian P. MacDonaldEileen J. Martinson | | | | |
| /s/ Stephen A. Miles | | Director | | August 13, 201514, 2018 |
| Stephen A. Miles | | | | |
| /s/ Robert E. Radway | | Director | | August 13, 201514, 2018 |
| Robert E. Radway | | | | |
| /s/ Stephen F. Schuckenbrock | | Director | | August 14, 2018 |
| Stephen F. Schuckenbrock | | | | |
| /s/ Frank S. Sowinski | | Director | | August 13, 201514, 2018 |
| Frank S. Sowinski | | | | |
| /s/ Robert M. Tarkoff | | Director | | August 14, 2018 |
| Robert M. Tarkoff | | | | |