Notes to the Consolidated Financial Statements
(Tabular amounts in millions, except per share amounts)
Note 1. Basis of Presentation
Description of Business. CDK Global, Inc. (the "Company" or "CDK") enables end-to-end automotive commerce across the globe. For over 40 years, the Company has served automotive retailers and original equipment manufacturers ("OEMs") by providing innovative solutions that allow them to better connect, manage, analyze, and grow their businesses. The Company's solutions automate and integrate all parts of the buying process, including the acquisition, sale, financing, insuring, parts supply, repair, and maintenance of vehicles, in more than 100 countries around the world, for approximately 30,000 retail locations and most OEMs.
The Company is organized into two main operating groups, CDK North America ("CDKNA") and CDK International ("CDKI"), which are also reportable segments. In addition, the Company has an Other segment, the primary components of which are corporate allocations and other expenses not recorded in the segment results. Refer to Note 20 - Financial Data by Segment for further information.
In June 2019, the Company committed to a plan to divest its Digital Marketing Business and completed the divestiture on April 21, 2020. The Digital Marketing Business is presented as discontinued operations. For additional information refer to Note 4, Discontinued Operations.
Basis of Preparation. The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect assets, liabilities, revenues, and expenses that are reported in the accompanying financial statements and footnotes thereto. Actual results may differ from those estimates.
Certain prior year amounts have been reclassified to conform to current year presentation. Refer to Note 4 - Discontinued Operations for the impact of presenting Digital Marketing Business as held for sale and discontinued operations.
Note 2. Summary of Significant Accounting Policies
Consolidation. The financial statements include the accounts of the Company and its wholly owned subsidiaries. In addition, the financial statements include the accounts of Computerized Vehicle Registration ("CVR") in which CDK holds a controlling financial or management interest. Intercompany transactions and balances between consolidated CDK businesses have been eliminated.
Business Combinations. The purchase price allocations for acquisitions are based on estimates of the fair value of tangible and intangible assets acquired and liabilities assumed. The Company engages independent valuation specialists, when necessary, to assist with purchase price allocations and uses recognized valuation techniques, including the income and market approaches, to determine fair value. Management makes estimates and assumptions in determining purchase price allocations and valuation analysis, which may involve significant unobservable inputs. The excess of the purchase price over the estimated fair values of the underlying assets acquired and liabilities assumed is allocated to goodwill. In certain circumstances, the determination of the purchase price and allocation to assets acquired and liabilities assumed are based upon preliminary estimates and assumptions. Accordingly, the allocation may be subject to revision during the measurement period, which may be up to one year from the acquisition date, when the Company receives final information, including appraisals and other analyses. Measurement period adjustments are recorded to goodwill in the reporting period in which the adjustments to the provisional amounts are determined.
Assets acquired and liabilities assumed in business combinations are recorded on the Company’s Consolidated Balance Sheets as of the respective acquisition dates based upon their estimated fair values at such dates. The results of operations of businesses acquired by the Company are included in the Company’s Consolidated Statements of Operations since their respective acquisition dates.
Restructuring. Restructuring expenses consist of employee-related costs, including severance and other termination benefits calculated based on long-standing benefit practices and local statutory requirements, and contract termination costs. Restructuring liabilities are recognized at fair value in the period the liability is incurred. In some jurisdictions, the Company has ongoing benefit arrangements under which the Company records the estimated severance and other termination benefits when such costs are deemed probable and estimable, approved by the appropriate corporate management, and if actions required to complete the termination plan indicate that it is unlikely that significant changes to the plan will be made or the plan will be withdrawn. In jurisdictions where there is not an ongoing benefit arrangement, the Company records estimated severance and other termination benefits when appropriate corporate management has committed to the plan and the benefit arrangement is communicated to the affected employees. A liability for costs to terminate a contract before the end of its term is
recognized at fair value when the Company terminates the contract in accordance with its terms. Estimates are evaluated periodically to determine whether an adjustment is required.
Revenue Recognition. Effective July 1, 2018, the Company adopted the Financial Accounting Standard Board (“FASB”) Accounting Standards Update ("ASU") 2014-09, “Revenue from Contracts with Customers,” and related ASUs ("ASC 606") using the modified retrospective approach. The comparative information has not been restated and continues to be reported under the accounting standards in effect for the period presented. Refer to Note 2. Summary of Significant Accounting Policies in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2018 for the Company's revenue recognition and deferred costs policies prior to adoption of ASC 606.
The Company determines the amount of revenue to be recognized through the following steps:
•Identification of the contract, or contracts, with a customer;
•Identification of the performance obligations in the contract;
•Determination of the transaction price;
•Allocation of the transaction price to the performance obligations in the contract; and
•Recognition of revenue when, or as, the Company satisfies the performance obligations.
The majority of the Company’s revenue is generated from contracts with multiple performance obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company is required to estimate the total consideration expected to be received from contracts with customers. In limited circumstances, the consideration expected to be received may be variable based on the specific terms of the contract.
The Company rarely licenses or sells products or services on a standalone basis. As such, the Company is required to develop its best estimate of standalone selling price of each distinct good or service as the basis for allocating the total transaction price. The primary method used to estimate standalone selling price is the adjusted market assessment approach, with some product categories using the expected cost plus a margin approach. When establishing standalone selling price, the Company considers various factors which may include geographic region, current market trends, customer class, its market share and position, its general pricing practices for bundled products and services, and recent contract sales data.
The Company applies significant judgment in order to identify and determine the number of performance obligations, estimate the total transaction price, determine the allocation of the transaction price to each identified performance obligation, and determine the appropriate method and timing of revenue recognition.
Taxes collected from customers and remitted to governmental authorities are presented on a net basis; that is, such taxes are excluded from revenues.
The Company generates revenues from the following four categories: subscription, on-site licenses and installation, transaction, and other. The Company does not evaluate a contract for a significant financing component if payment is expected within one year or less from the transfer of the promised items to the customer.
Subscription. In the CDKNA and CDKI segments, CDK provides software and technology solutions for automotive retailers and OEMs, which includes:
•Dealer Management Systems (“DMSs”) and layered applications, 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;
•Prior to adoption of ASC 842, subscription revenue included technology solutions in which hardware was provided on a service basis. This revenue was previously classified as subscription revenue because, under lease accounting guidance in effect prior to ASC 842, substitution rights were considered substantive.
SaaS and other hosted service arrangements, which allow the customer continuous access to the software over the contract period without taking possession, are provided on a subscription basis. The Company has concluded that under its SaaS and hosted service arrangements, the customer obtains access to the Company’s software which resides and is maintained on its managed servers. The customer does not obtain the right to take possession of the software. As such, the Company has concluded that its SaaS and hosted services arrangements do not include a software license. Furthermore, the Company has concluded that while the support and maintenance and hosting services are capable of being distinct performance obligations, the obligations are not distinct within the context of the contract. In addition, as the support and maintenance and hosting services are provided over the same period and have the same pattern of transfer of control, the support and maintenance and hosting services are combined and recognized as a single performance obligation. The Company may provide new customers with interrelated setup activities such as installation, initial training and data updates that the Company must undertake to fulfill the contract. These are considered fulfillment activities that do not transfer the service to the customer. In addition to the core
DMS software application, the customer may also contract for layered applications, which are each considered a distinct performance obligation.
Revenues for SaaS and other hosted service arrangements, are recognized ratably over the duration of the contract. The Company has determined its obligation under these arrangements is to stand ready to perform the underlying services as required by the customer. The customer receives the benefit of the services and the Company has the right to payment as the services are performed. A time-elapsed output method is used to measure progress as the Company transfers control evenly over the duration of the contract.
On-site licenses and installation. In the CDKNA and CDKI segments, on-site software arrangements include a license of intellectual property as the customer has the contractual right to take possession of the software and the customer can either run the software on its own hardware or contract with another party unrelated to the Company to host the software. The customer receives the right to use the software license upon its installation for the term of the arrangement. As such, the Company has concluded that the software license is a distinct performance obligation and recognizes the transaction price allocated to on-site software upon installation. The Company also provides maintenance and support of the software applications. Such maintenance and support services may include server and desktop support, bug fixes, and support resolving other issues a customer may encounter in utilizing the software. Revenue allocated to maintenance and support is generally recognized ratably over the contract period as customers simultaneously consume and receive benefits, given the support and maintenance comprise distinct performance obligations that are satisfied ratably over time. A time-elapsed output method is used to measure progress as the Company transfers control evenly over the duration of the contract. Accordingly, maintenance and support revenue for on-site licenses is included in subscription revenue.
Transaction. The Company receives fees per transaction for providing auto retailers interfaces with third parties to process credit reports, vehicle registrations, and automotive equity mining. Transaction revenues are variable based on the volume of transactions processed. For these transaction revenues, the Company has a right to payment as the transactions are performed in an amount that corresponds directly with the value to the customer. As such, the Company recognizes transaction revenues as the services are rendered and in the amount to which it has the right to invoice. Transaction revenues for credit report processing and automotive equity mining are recorded in revenues gross of costs incurred when the Company is substantively and contractually responsible for providing the service, software, and/or connectivity to the customer, and controls the specified good or service before it is transferred to the customer. The Company recognizes vehicle registration revenues net of the state registration fee when it is acting as an agent and does not control the related goods and services before they are transferred to the customer.
Other. The Company provides consulting and professional services, including marketing campaign solutions, and sells hardware such as laser printers, networking and telephony equipment, and related items. Consulting and professional services are either billed on a time and materials basis or on a fixed monthly, quarterly or semi-annual basis based on the amount of services contracted. Revenue from these services are recorded when the Company’s obligation is satisfied. Where the Company’s obligation is to provide continuous services throughout the contract period and the customer receives the benefit of those services as they are performed, the Company recognizes these services revenues over time using a time-elapsed output method as the Company believes the passage of time faithfully depicts the transfer of services to its customers. Where the professional service represents a single performance obligation, the customer receives the benefit of the services only upon their completion, and the Company does not have the right to payment as the services are performed, such services revenue are recognized upon completion.
The Company often sells hardware bundled with maintenance services and has concluded that these bundles include two distinct performance obligations. The first performance obligation is to transfer the hardware product and the second performance obligation is to provide maintenance on the hardware and its embedded software. As such, the transaction price allocated to the sold hardware is recognized upon delivery at which point the customer is able to direct the use of, and obtain substantially all of the remaining benefits of the hardware. Upon delivery of the hardware, the Company generally has the right to payment, the customer has legal title, physical possession of, and control of the hardware. The transaction price allocated to the maintenance of hardware and its embedded software is recognized ratably over the duration of the contract as the customer simultaneously consumes and receives the benefit of this maintenance. The Company has determined its obligation under these arrangements is to stand ready to perform the underlying services as required by the customer. A time-elapsed output method is used to measure progress as the Company transfers control evenly over the duration of the contract. Hardware maintenance is included in subscription revenues.
After the adoption of ASC 842, Other revenues also includes leasing revenue from hardware where the customer has a right of use during the contract term under ASC 842, as hardware substitution rights are not considered substantive.
Income Taxes. Income tax expense is recognized for the amount of taxes payable or refundable for the current year. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Management must make assumptions, judgments, and estimates to determine the provision for income taxes, taxes payable or refundable, and deferred tax assets and liabilities. The Company's assumptions, judgments, and estimates take into consideration the realization of deferred tax assets and changes in tax laws or interpretations thereof. The Company's income tax returns are subject to examination by various tax authorities. A change in the assessment of the outcomes of such matters could materially impact the Company's consolidated financial statements.
The Company records a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. In determining the need for a valuation allowance, the Company considers future market growth, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies. In the event the Company determines that it is more likely than not that an entity will be unable to realize all or a portion of its deferred tax assets in the future, the Company would increase the valuation allowance and recognize a corresponding charge to earnings in the period in which such a determination is made. Likewise, if the Company later determines that it is more likely than not that the deferred tax assets will be realized, the Company would reverse the applicable portion of the previously recognized valuation allowance. In order to realize deferred tax assets, the Company must be able to generate sufficient taxable income of the appropriate character in the jurisdictions in which the deferred tax assets are located.
The Company recognizes tax benefits for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in the Company's income tax returns that do not meet these recognition and measurement standards. Assumptions, judgments, and the use of estimates are required in determining whether the "more likely than not" standard has been met when developing the provision for income taxes.
If certain pending tax matters settle within the next twelve months, the total amount of unrecognized tax benefits may increase or decrease for all open tax years and jurisdictions. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. The Company continually assesses the likelihood and amount of potential adjustments and adjusts the income tax provision, the current taxes payable and deferred taxes in the period in which the facts that give rise to a revision become known.
The Company accounts for the Global Intangible Low Taxed Income (GILTI) tax as a period expense when incurred. The GILTI provision is effective beginning in fiscal year 2019.
Beginning in fiscal year 2019, our accounting policy is to allocate goodwill impairment first to any permanent portion of goodwill (when there is an excess of book goodwill over tax goodwill) and to record a period cost when the impairment occurs.
Stock-Based Compensation. Certain of the Company's employees (a) have been granted stock options to purchase shares of the Company’s common stock and (b) have been granted restricted stock or restricted stock units under which shares of the Company's common stock vest based on the passage of time or achievement of performance and market conditions. The Company recognizes stock-based compensation expense in net earnings based on the fair value of the award on the date of the grant. The Company records the impact of forfeitures on stock compensation expense in the period the forfeitures occur. The Company determines the fair value of stock options issued using a binomial option-pricing model. The binomial option-pricing model considers a range of assumptions related to volatility, dividend yield, risk-free interest rate, and employee exercise behavior. Expected volatilities utilized in the binomial option pricing model are based on a combination of implied market volatilities and historical volatilities of peer companies. Similarly, the dividend yield is based on historical experience and expected future dividend payments. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The binomial option pricing model also incorporates exercises based on an analysis of historical data. The expected life of a stock option grant is derived from the output of the binomial model and represents the period of time that options granted are expected to be outstanding.
The grant date fair value of restricted stock and restricted stock units that vest upon achievement of service conditions is based on the closing price of the Company's common stock on the date of grant. The Company also grants performance-based awards that vest over a performance period. Certain performance-based awards are further subject to adjustment (increase or decrease) based on a market condition defined as total stockholder return of the Company’s common stock compared to a peer group of companies. The fair value of performance-based awards subject to a market condition is determined using a Monte Carlo simulation model. The principal variable assumptions utilized in determining the grant date fair value of performance-based awards subject to a market condition include the risk-free rate, stock volatility, dividend yield, and correlations between the Company's stock price and the stock prices of the peer group of companies. The probability associated with the achievement of performance conditions affects the vesting of the Company's performance-based awards. Expense is only recognized for those shares expected to vest. The Company adjusts stock-based compensation expense (increase or decrease) when it becomes probable that actual performance will differ from the estimate.
Cash and Cash Equivalents. Investment securities with an original maturity of three months or less at the time of purchase are considered cash equivalents.
Accounts Receivable, Net. Accounts receivable, net comprises trade receivables and lease receivables, net of allowances. Trade receivables consist of amounts due to the Company in the normal course of business, which are not collateralized and do not bear interest. Lease receivables primarily relate to sales-type leases arising from the sale of hardware elements in bundled DMS or other integrated solutions, which are accounted for under ASC 842. Lease receivables represent the current portion of the present value of the minimum lease payments at the beginning of the lease term. The long-term portion of the present value of the minimum lease payments is included within other assets on the Consolidated Balance Sheets. The Company considers lease receivables to be a single portfolio segment.
The accounts receivable allowances for both trade receivables and lease receivables are estimated based on historical collection experience, an analysis of the age of outstanding accounts receivable, and credit issuance experience. Receivables are considered past due if payment is not received by the date agreed upon with the customer. Write-offs are made when management believes it is probable a receivable will not be recovered.
Funds Receivable and Funds Held for Clients and Client Fund Obligations. Funds receivable and funds held for clients represent amounts received or expected to be received from clients in advance of performing titling and registration services on behalf of those clients. These amounts are classified within other current assets on the Consolidated Balance Sheets. The total amount due to remit for titling and registration obligations with the department of motor vehicles is recorded to client fund obligations which is classified as accrued expenses and other current liabilities on the Consolidated Balance Sheets. Funds receivable was $40.7 million and $32.3 million, and funds held for clients was $16.5 million and $9.7 million as of June 30, 2020 and 2019, respectively. Client fund obligation was $57.2 million and $42.0 million as of June 30, 2020 and 2019, respectively.
Property, Plant and Equipment, Net. Property, plant and equipment, net is stated at cost and depreciated over the estimated useful lives of the assets using the straight-line method. Leasehold improvements are amortized over the shorter of the term of the lease or the estimated useful lives of the improvements. The estimated useful lives of assets are primarily as follows:
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Buildings
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20 to 40 years
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Furniture and fixtures
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4 to 7 years
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Data processing equipment
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2 to 5 years
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Goodwill. The Company tests goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying value may not be recoverable. The Company tests goodwill for impairment at the reporting unit level. A reporting unit is an operating segment or a component of an operating segment.
The Company tests impairment by first comparing the fair value of each reporting unit to its carrying amount. If the carrying value of the reporting unit exceeds its fair value, the difference, up to the amount of goodwill recorded for the reporting unit, is recognized as an impairment.
The Company estimates the fair value of the Company's reporting units by weighting the results from the income approach, which is the present value of expected cash flows discounted at a risk-adjusted weighted-average cost of capital, and the market approach, which uses market multiples of companies in similar lines of business. These valuation approaches require significant judgment and consider a number of factors including assumptions about the future growth and profitability of the Company's reporting units, the determination of appropriate comparable publicly traded companies in the Company's industry, discount rates, and terminal growth rates. An adverse change to the fair value of the Company's reporting units could result in an impairment charge which could be material to its consolidated earnings.
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.
Internal Use Software and Computer Software to be Sold, Leased, or Otherwise Marketed. The Company’s policy provides for the capitalization of external direct costs of materials and services associated with developing or obtaining internal use computer software. In addition, the Company’s policy also provides for the capitalization of certain payroll and payroll-related costs for employees who are directly associated with the internal use computer software projects. The amount of capitalizable payroll costs with respect to these employees is limited to the time directly spent on such projects. Costs associated with preliminary project stage activities, training, maintenance, and all other post-implementation stage activities are expensed as incurred. The Company also expenses internal costs related to minor upgrades and enhancements, as it is impracticable to separate these costs from normal maintenance activities. The Company amortizes internal use software typically over a three to five year life.
The Company’s policy provides for the capitalization of certain costs of computer software to be sold, leased, or otherwise marketed. The Company’s policy provides for the capitalization of all software production costs upon reaching technological feasibility for a specific product. Technological feasibility is attained when software products have a completed working model whose consistency with the overall product design has been confirmed by testing. Costs incurred prior to the establishment of technological feasibility are expensed as incurred. The establishment of technological feasibility requires judgment by management and in many instances is only attained a short time prior to the general release of the software. Maintenance-related costs are expensed as incurred.
Pursuant to these policies, the Company incurred expenses to research, develop, and deploy new and enhanced solutions of $72.9 million, $79.5 million, and $115.0 million for fiscal 2020, 2019, and 2018, respectively. These expenses were classified within cost of revenues on the Consolidated Statements of Operations.
Assets Held for Sale. The Company considers assets to be held for sale when management, with appropriate authority, approves and commits to a formal plan to actively market the assets for sale at a price reasonable in relation to their estimated fair value, the assets are available for immediate sale in their present condition, an active program to locate a buyer has been initiated, the sale of the assets is probable and expected to be completed within one year and it is unlikely that significant changes will be made to the plan. Upon designation as held for sale, the Company records the assets at the lower of their carrying value or their estimated fair value, reduced for the cost to dispose the assets, and ceases to record depreciation and amortization expenses on the assets.
Assets and liabilities of a discontinued operation are reclassified for all comparative periods presented in the Consolidated Balance Sheets. For assets and liabilities that meet the held for sale criteria but do not meet the definition of a discontinued operation, the Company reclassifies the assets and liabilities in the period in which the held for sale criteria are met, but does not reclassify prior period amounts. Refer to Note 4 - Discontinued Operations for further information regarding Company's assets and liabilities held for sale.
Discontinued Operations. The Company reports financial results for discontinued operations separately from continuing operations to distinguish the financial impact of disposal transactions from ongoing operations. Discontinued operations reporting occurs only when the disposal of a component or a group of components of the Company (i) meets the held-for-sale classification criteria, is disposed of by sale, or other than by sale, and (ii) represents a strategic shift that will have a major effect on the Company's operations and financial results. The results of operations and cash flows of a discontinued operation are restated for all comparative periods presented. Unless otherwise noted, discussion in the Notes to Consolidated Financial Statements refers to the Company's continuing operations. Refer to Note 4 - Discontinued Operations for further information regarding the Company's discontinued operations.
Foreign Currency. For foreign subsidiaries where the local currency is the functional currency, net assets are translated into U.S. dollars based on exchange rates in effect for each period, and revenues and expenses are translated at average exchange rates in the periods. Gains or losses from balance sheet translation of such entities are included in accumulated other comprehensive income on the Consolidated Balance Sheets. Currency transaction gains or losses relate to intercompany loans denominated in a currency other than that of the loan counterparty, which do not eliminate upon consolidation. Currency transaction gains or losses are included within other income, net on the Consolidated Statements of Operations.
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." This standard defines fair value and establishes a framework for measuring fair value in accordance with GAAP. Cash and cash equivalents, accounts receivable, other current assets, accounts payable, and other current liabilities are reflected in the Consolidated Balance Sheets at cost, which approximates fair value due to the short-term nature of these instruments. The carrying value of the Company's term loan facilities (as described in Note 17 - Debt), including accrued interest, approximates fair value based on the Company's current estimated incremental borrowing rate for similar types of arrangements. The approximate aggregate fair value of the Company's senior notes as of June 30, 2020, and 2019, was $2,187.6 million and $2,441.6 million, respectively, based on quoted market prices for the same or similar instruments compared to a carrying value of $2,100.0 million and $2,350.0 million as of June 30, 2020, and 2019. The term loan facilities and the senior notes are considered Level 2 fair value measurements in the fair value hierarchy.
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.
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 2020, 2019, and 2018, none of the CDKNA and CDKI segment customers accounted for 10% or more of the Company's consolidated revenues. As of June 30, 2020, and 2019, none of the customers represented 10% or more of the Company's accounts receivable.
Note 3. New Accounting Pronouncements
Recently Adopted Accounting Pronouncements. In August 2018, the FASB issued ASU 2018-15, "Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," which aligns the accounting for implementation costs incurred in a hosting arrangement that is a service contract with the accounting for implementation costs incurred to develop or obtain internal-use software under ASC 350-40, in order to determine which costs to capitalize and recognize as an asset. The Company adopted this standard as of July 1, 2019, using the prospective approach and applied this guidance to all implementation costs incurred after the date of adoption.
In February 2016, the FASB issued ASC 842. Refer to Note 10, Leases, for the required disclosures related to the adoption of this standard.
Recently Issued Accounting Pronouncements. In November 2018, the FASB issued ASU 2018-18, "Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606" to resolve the diversity in practice concerning the manner in which entities account for transactions based on their assessment of the economics of a collaborative arrangement. For public business entities, ASU 2018-18 is effective for fiscal years beginning after December 15, 2019 and interim periods within those years. The Company intends to adopt this standard as of July 1, 2020. Based on its evaluation, the Company does not anticipate a material impact to its consolidated financial statements upon adoption of this standard.
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" (“ASU 2016-13”), which requires the application of a current expected credit loss (“CECL”) impairment model to financial assets measured at amortized cost (including certain receivables), net investments in leases, and certain off-balance sheet credit exposures. Under the CECL model, lifetime expected credit losses on these financial assets are measured and recognized at each reporting date based on historical, current, and forecasted information. Furthermore, the CECL model requires financial assets with similar risk characteristics to be analyzed on a collective basis. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019 and interim periods within those years. The Company adopted ASU 2016-13 on July 1, 2020. The adoption of the new standard will not have a material impact on the Company’s consolidated financial statements. Certain enhanced disclosures required by the standard will be provided in the Company's Quarterly Report on Form 10-Q for the first quarter of fiscal 2021.
In December 2019, the FASB issued ASU No. 2019-12 which modifies ASC 740 "Income Taxes" to simplify the accounting for income taxes in various areas. The amendments in ASU 2019-12 are effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. The Company is evaluating the impact of adoption on its consolidated financial statements, including accounting policies, processes and systems.
Note 4. Discontinued Operations
In June 2019, the Company committed to a plan to divest its Digital Marketing Business during the fiscal year ending June 30, 2020 in order to focus on its core software-as-a-service and technology solutions for the markets it serves through the CDKNA and CDKI segments. The Digital Marketing Business comprised all of the assets of the former Advertising North America segment and certain assets of CDKNA related to mobile advertising solutions and websites services. The Company's decision to divest its Digital Marketing Business was the result of a comprehensive strategic review of the Company’s business, undertaken during the fiscal year ended June 30, 2019.
On April 21, 2020, the Company completed its sale of the Digital Marketing Business to Sincro, LLC, a newly formed company owned by Ansira Partners, Inc. ("Ansira"), which is a subsidiary of Advent International. Total consideration for the transaction was $71.2 million, consisting of a $24.4 million 10-year note receivable, a 15% equity interest in Ansira, and the fair value of other contingent consideration. The Company previously recorded a valuation allowance of $95.7 million through March 31, 2020, and recorded an additional $0.6 million in the fourth quarter of fiscal 2020 for a total loss on sale of $96.3 million. Pursuant to the transaction, the Company expects to continue to provide limited services during the next fiscal year. Refer to Note 16 Investments for additional information.
During fiscal 2019, as a result of the Company's decision to sell the business, the Company evaluated ANA reporting unit's goodwill for impairment, which is included in its entirety within the Digital Marketing Business. The impairment test indicated that the carrying value of ANA was higher than its fair value. The decline in ANA's fair value was driven by a decrease in estimated future earnings and an unfavorable change in the discount rate representing management’s assessment of increased risk with respect to the business forecasts primarily due to business uncertainty after the public announcement of the planned sale of business and management's shift in focus to customer retention instead of growth. As a result, the Company recorded a goodwill impairment charge of $168.7 million which is included as a component of discontinued operations for the year ended June 30, 2019.
The Company reclassified the assets and liabilities comprising the Digital Marketing Business as assets and liabilities held for sale in the accompanying Consolidated Balance Sheets at June 30, 2019, and a corresponding adjustment to Consolidated Statements of Operations and cash flows to reflect discontinued operations, for all periods presented.
The following table summarizes the comparative financial results of discontinued operations which are presented as net earnings (loss) from discontinued operations in the Consolidated Statements of Operations:
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Years Ended June 30,
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2020
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2019
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2018
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Revenues
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$
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235.0
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$
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418.1
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$
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475.2
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Expenses:
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Cost of revenues
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|
209.1
|
|
|
307.4
|
|
|
327.5
|
|
Selling, general and administrative expenses
|
|
36.5
|
|
|
30.5
|
|
|
34.6
|
|
Loss on sale
|
|
96.3
|
|
|
—
|
|
|
—
|
|
Goodwill impairment
|
|
—
|
|
|
168.7
|
|
|
—
|
|
Restructuring expenses
|
|
—
|
|
|
1.5
|
|
|
0.3
|
|
Total expenses
|
|
$
|
341.9
|
|
|
$
|
508.1
|
|
|
$
|
362.4
|
|
(Loss) earnings before income taxes
|
|
(106.9)
|
|
|
(90.0)
|
|
|
112.8
|
|
Benefit from (provision for) income taxes
|
|
17.6
|
|
|
(19.8)
|
|
|
(35.2)
|
|
Net earnings (loss) from discontinued operations
|
|
$
|
(89.3)
|
|
|
$
|
(109.8)
|
|
|
$
|
77.6
|
|
The total assets and liabilities held for sale are stated separately on the Consolidated Balance Sheets at June 30, 2019 and were classified as current as it was probable that the sale would occur within one year as of that date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
Assets:
|
|
|
|
|
Current assets:
|
|
|
|
|
Accounts receivable
|
|
|
|
$
|
121.9
|
|
Prepaid and other current assets
|
|
|
|
1.1
|
|
Total current assets
|
|
|
|
123.0
|
|
Property, plant and equipment, net
|
|
|
|
2.3
|
|
Goodwill
|
|
|
|
59.4
|
|
Intangible assets, net
|
|
|
|
35.6
|
|
Other assets
|
|
|
|
0.2
|
|
Total current assets held for sale
|
|
|
|
220.5
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
|
|
|
19.4
|
|
Deferred revenues
|
|
|
|
0.8
|
|
Accrued expenses and other current liabilities
|
|
|
|
26.0
|
|
Total current liabilities
|
|
|
|
46.2
|
|
Other liabilities
|
|
|
|
2.7
|
|
Total current liabilities held for sale
|
|
|
|
48.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets held for sale, at fair value less selling costs
|
|
|
|
$
|
171.6
|
|
Note 5. Acquisitions
Fiscal 2019 Acquisitions
ELEAD1ONE. On September 14, 2018, the Company acquired the equity interests of ELEAD1ONE ("ELEAD"). ELEAD’s automotive customer relationship management ("CRM") software and call center solutions enable interaction between sales, service and marketing operations to provide dealers with an integrated customer acquisition and retention platform. The acquisition was made pursuant to an equity purchase agreement, which contained customary representations, warranties, covenants, and indemnities by the sellers and the Company. The Company acquired all of the outstanding equity of ELEAD for an initial cash purchase price of $513.0 million, net of cash acquired of $7.0 million.
The acquisition of ELEAD was accounted for using the acquisition method of accounting, which required, among other things, the assets acquired and liabilities assumed be recognized at their respective fair values as of the acquisition date. As of June 30, 2019, the Company finalized the purchase price allocation.
The following table summarizes the final amounts recognized for assets acquired and liabilities assumed as of the acquisition date:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7.0
|
|
Accounts receivable
|
|
18.9
|
|
Other current assets
|
|
3.4
|
|
Property, plant and equipment
|
|
14.8
|
|
Intangible assets
|
|
132.0
|
|
Accrued expenses and other current liabilities
|
|
(21.6)
|
|
Short-term deferred revenues
|
|
(6.6)
|
|
Capital lease obligations
|
|
(7.3)
|
|
Total identifiable net assets
|
|
140.6
|
|
Goodwill
|
|
379.4
|
|
Net assets acquired
|
|
$
|
520.0
|
|
The amounts in the table above are reflective of measurement period adjustments made during fiscal year 2019, which mainly included an increase of $2.9 million to accrued expenses and other liabilities, $1.7 million to intangible assets, $1.4 million to property, plant and equipment, $1.2 million to capital leases, $1.1 million to goodwill, and $0.1 million to deferred revenue; and a decrease of $0.2 million to accounts receivable. The measurement period adjustments did not have a significant impact on the Consolidated Statements of Operations, balance sheet or cash flows.
The intangible assets acquired primarily relate to customer lists, software, and trademarks, which will be amortized over a weighted-average useful life of 12 years. The goodwill resulting from this acquisition reflects expected synergies resulting from adding ELEAD products and processes to the Company's products and processes. The acquired goodwill is allocated to the CDKNA reportable segment and is deductible for tax purposes.
In December 2018, the Company sold the airplane acquired as part of the ELEAD acquisition for cash less costs to sell of $6.7 million. Given the short time between the ELEAD acquisition and the sale of the acquired airplane, the final purchase price allocated to the airplane was adjusted to equal the cash less costs to sell in accordance with ASC 805, "Business Combinations" and ASC 360, "Property, Plant and Equipment." As such, there was no gain or loss recognized on the sale of the airplane.
The results of operations for ELEAD have been included in the Consolidated Statements of Operations from the date of acquisition. The pro forma effects of this acquisition are not significant to the Company's reported results for any period presented. Accordingly, no pro forma financial statements have been presented herein.
In addition to the acquisition, the Company entered into a joint venture agreement with the sellers. Under the terms of the joint venture agreement, the Company contributed $10.0 million to the venture at the ELEAD acquisition closing, committed to an additional $10.0 million in contributions over time, and acquired 50% ownership in the joint venture. The Company's contributions were expected to fund the initial operations of the joint venture. Under ASC 810 "Consolidation," the joint venture was determined to be a variable interest entity; however, the Company was not considered the primary beneficiary. As such, the joint venture was accounted for as an equity method investment and the initial $10.0 million contribution was recorded as an investment on the Consolidated Balance Sheets. During the fourth quarter of fiscal 2019, the Company entered into a joint venture termination agreement with the former owners of ELEAD in exchange for a termination payment of $7.0 million. The initial $10.0 million contribution and the $7.0 million termination payment were recorded as a loss from equity method investment within the Consolidated Statements of Operations.
For fiscal 2020, the Company incurred $7.8 million of costs in connection with the ELEAD acquisition and integration-related activities of which $5.1 million was recorded within cost of revenues and $2.7 million was recorded within selling, general and administrative expenses. For fiscal 2019, the Company incurred $11.9 million of costs in connection with the ELEAD acquisition and integration-related activities of which $6.1 million was recorded within cost of revenues and $5.8 million was recorded within selling, general and administrative expenses.
Fiscal 2018 Acquisitions
Progressus Media LLC. On April 3, 2018, the Company acquired the membership interests of Progressus Media LLC ("Progressus"), a specialty provider of mobile advertising solutions for dealerships, agencies, and automotive marketing companies. The acquisition was made pursuant to a membership interest purchase agreement, which contains customary representations, warranties, covenants, and indemnities by the sellers and the Company. The acquisition date fair value of the total consideration transferred was $22.2 million which consists primarily of an initial cash price of $16.2 million, net of cash acquired, the fair value of the holdback provision of $0.3 million and the fair value of contingent consideration of $5.7 million, which was payable upon achievement of certain milestones and metrics over a three year period ending on March 31, 2021. Prior to the acquisition, a CDK officer had an existing advisory relationship with Progressus which entitled the individual to a portion of the proceeds from a sale of Progressus under a unit appreciation rights agreement. At the time of closing, $0.5 million of the total consideration transferred by CDK was paid to the officer to settle Progressus’ obligation under the terms of the officer’s unit appreciation rights agreement.
The fair value of acquired intangible assets and other net assets was $8.7 million and $2.2 million, respectively. The excess of the acquisition consideration over the estimated fair value of the acquired net assets of $11.3 million was allocated to goodwill. The goodwill recognized from this acquisition reflects expected synergies resulting from direct ownership of the products and processes, allowing greater flexibility for future product development. The acquired goodwill is deductible for tax purposes. A holdback provision and contingent consideration, was recorded as of June 30, 2019, which included $2.4 million of Accrued expenses and Other current liabilities and $2.3 million in Other liabilities. During fiscal 2020, CDK paid $1.1 million in accordance with a settlement agreement with the sellers that extinguished the holdback and contingent consideration.
During the fourth quarter of fiscal year 2019, the Company committed to a plan to divest the Digital Marketing Business, which includes the Progressus business. The Progressus business is presented as discontinued operations. See Note 4 - Discontinued Operations for additional information.
Dashboard Dealership Enterprises. On October 20, 2017, the Company acquired the outstanding stock of Dashboard Dealership Enterprises, a provider of executive reporting solutions for auto dealers. The acquisition was made pursuant to a stock purchase agreement, which contains customary representations, warranties, covenants, and indemnities by the sellers and the Company. The acquisition date fair value of total consideration to be transferred was $21.3 million, which consists primarily of an initial cash price of $12.8 million, the fair value of the holdback provision of $1.9 million, and the fair value of contingent consideration of $6.6 million, which is payable upon achievement of certain milestones and metrics if achieved by December 31, 2019. The Company recorded a liability of $2.7 million for the holdback provision and contingent consideration in Accrued expenses and Other current liabilities as of June 30, 2019. The holdback and contingent consideration were paid in full in fiscal 2020.
The fair value of acquired intangible assets and liabilities assumed, including deferred tax liabilities, was $3.9 million and $1.6 million, respectively. The excess of the acquisition consideration over the estimated fair value of the acquired assets of $19.0 million was allocated to goodwill. The acquired assets and goodwill are included in the CDKNA segment. The intangible assets will be amortized over a weighted-average useful life of approximately 8 years. The goodwill recognized from this acquisition reflects expected synergies resulting from direct ownership of the products and processes, allowing greater flexibility for future product development. The acquired goodwill is not deductible for tax purposes.
The pro forma effects of these acquisitions are not significant to the Company's reported results for any period presented. Accordingly, no pro forma financial statements have been presented herein.
Note 6. Revenue
Contract Balances. The Company receives payments from customers based upon contractual billing schedules. Payment terms can vary by contract but the period between invoicing and when payments are due is not significant. The timing of revenue recognition may differ from the timing of invoicing to customers and these timing differences result in unbilled receivables, contract assets, or contract liabilities, on the Company’s Consolidated Balance Sheets. Unbilled receivables are recorded when the right to consideration becomes unconditional based only on the passage of time. Contract assets include amounts related to the Company's contractual right to consideration for completed performance when the right to consideration is conditional. The Company records contract liabilities when cash payments are received or due in advance of performance. Contract assets and contract liabilities are recognized at the contract level.
The following table provides information about accounts receivables, contract assets, and contract liabilities from contracts with customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
June 30, 2019
|
Accounts receivable (including unbilled receivables)
|
$
|
300.0
|
|
|
$
|
290.4
|
|
|
|
|
|
Short-term contract assets (included in other current assets)
|
52.5
|
|
|
29.9
|
|
Long-term contract assets (included in other assets)
|
40.1
|
|
|
20.2
|
|
Short-term contract liabilities (included in short-term deferred revenue)
|
(107.9)
|
|
|
(124.8)
|
|
Long-term contract liabilities (included in long-term deferred revenue)
|
(52.8)
|
|
|
(68.4)
|
|
Net contract liabilities
|
$
|
(68.1)
|
|
|
$
|
(143.1)
|
|
During fiscal 2020, the Company recognized $178.2 million of revenue upon satisfaction of performance obligations and invoiced and reclassified $26.4 million to accounts receivable. These amounts were included in the net contract assets or liabilities balance as of June 30, 2019. The Company had no asset impairment charges related to contract assets in the periods presented.
The Company may occasionally recognize an adjustment in revenue in the current period for performance obligations partially or fully satisfied in the previous periods resulting from changes in estimates for the transaction price, including any changes to the Company's assessment of whether an estimate of variable consideration is constrained. For the fiscal year ended June 30, 2020, the impact on revenue recognized in the current period, from performance obligations partially or fully satisfied in the previous period, was not significant.
Remaining Performance Obligations. As of June 30, 2020, the Company had $2.8 billion of remaining performance obligations which represent contracted revenue that has not yet been recognized, including contracted revenue where the contract's original expected duration is one year or less. The Company expects to recognize remaining performance obligations as revenue as follows:
|
|
|
|
|
|
|
June 30, 2020
|
Twelve months ending June 30, 2021
|
$
|
1,150.0
|
|
Twelve months ending June 30, 2022
|
740.0
|
|
Twelve months ending June 30, 2023
|
520.0
|
|
Twelve months ending June 30, 2024
|
290.0
|
|
Twelve months ending June 30, 2025
|
120.0
|
|
Thereafter
|
20.0
|
|
Total remaining performance obligations
|
2,840.0
|
|
The remaining performance obligations exclude future transaction revenue where revenue is recognized as the services are rendered and in the amount to which the Company has the right to invoice.
Costs to Obtain and Fulfill a Contract. The Company capitalizes certain contract acquisition costs consisting primarily of commissions incurred when contracts are signed. The Company does not capitalize commissions related to contracts with a duration of less than one year; such commissions are expensed within selling, general and administrative expenses when incurred. Costs to fulfill contracts are capitalized when such costs are direct and related to transition or installation activities for hosted software solutions. Capitalized costs to fulfill primarily include travel and employee compensation and benefit related costs for the Company's implementation and training teams. Capitalized costs to obtain a contract and most costs to fulfill a contract are amortized over a period of five years which represents the expected period of benefit of these costs. In instances where the contract term is significantly less than five years, costs to fulfill are amortized over the contract term which the Company believes best reflects the period of benefit of these costs.
As of June 30, 2020 and June 30, 2019, the Company capitalized contract acquisition and fulfillment costs from continuing operations of $202.6 million and $200.4 million, respectively. The Company expects that incremental commission fees incurred as a result of obtaining contracts and fulfillment costs are recoverable. During fiscal 2020 and 2019, the Company recognized cost amortization of $82.5 million and $78.7 million, respectively, and there were no significant impairment losses.
Note 7. Restructuring
During fiscal year ended June 30, 2015, the Company initiated a three-year business transformation plan designed to increase operating efficiency and improve the Company's cost structure within its global operations. The business transformation plan
produced significant benefits in the Company's long-term business performance. As the Company executed the business transformation plan, the Company continually monitored, evaluated and refined its structure, including its design, goals, term and estimate and allocation of total restructuring expenses. As part of this ongoing review process, during fiscal 2017, the Company extended the business transformation plan by one year through the fiscal year ending June 30, 2019 ("fiscal 2019"). The Company incurred $182.5 million of cost from continuing operations and $11.9 million of cost from discontinued operations to execute the plan through its completion at the end of fiscal 2019.
Restructuring expenses associated with the business transformation plan included employee-related costs, which represent severance and other termination-related benefits calculated based on long-standing benefit practices and local statutory requirements, and contract termination costs, which include costs to terminate facility leases. The business transformation plan was completed at the end of fiscal year 2019. The Company recognized $28.0 million and $20.6 million of restructuring expenses from continuing operations for fiscal 2019 and 2018, respectively. Restructuring expenses from continuing operations are presented separately on the Consolidated Statements of Operations and are recorded in the Other segment, as these initiatives are predominantly centrally directed and are not included in internal measures of segment operating performance. The Company also recorded $1.5 million, and $0.3 million of restructuring expenses from discontinued operations for fiscal 2019 and 2018, respectively, which are presented within Net earnings (loss) from discontinued operations line on the Consolidated Statements of Operations. Since the inception of the business transformation plan in fiscal 2015 through its completion at the end of fiscal 2019, the Company has recognized cumulative restructuring expenses of $87.8 million from continuing operations and $3.6 million from discontinued operations.
On May 2, 2020, the Company adopted a plan to restructure the CDKI segment to reduce costs and improve margins. The Company expects to incur up to $30.0 million in costs related to one-time employee termination benefit. In connection with the implementation of these restructuring actions, the Company incurred costs of $14.2 million during the fiscal fourth quarter of fiscal 2020. Additional charges related to these actions are expected to be incurred through early fiscal 2021.
Accruals for restructuring expenses were included within accrued expenses and other current liabilities on the Consolidated Balance Sheets as of June 30, 2020 and 2019. The following table summarizes the fiscal 2020 and 2019 activity for the restructuring accrual:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee-Related Costs
|
|
Contract Termination Costs
|
|
|
|
Total
|
Balance as of June 30, 2018
|
$
|
4.4
|
|
|
$
|
0.8
|
|
|
|
|
$
|
5.2
|
|
Charges
|
31.1
|
|
|
0.7
|
|
|
|
|
31.8
|
|
Cash payments
|
(25.1)
|
|
|
(1.7)
|
|
|
|
|
(26.8)
|
|
Adjustments
|
(0.9)
|
|
|
(1.4)
|
|
|
|
|
(2.3)
|
|
Foreign exchange
|
(0.1)
|
|
|
—
|
|
|
|
|
(0.1)
|
|
Non-cash items
|
—
|
|
|
1.7
|
|
|
|
|
1.7
|
|
Balance as of June 30, 2019
|
$
|
9.4
|
|
|
$
|
0.1
|
|
|
|
|
$
|
9.5
|
|
Charges
|
13.9
|
|
|
0.3
|
|
|
|
|
14.2
|
|
Cash payments
|
(8.8)
|
|
|
(0.3)
|
|
|
|
|
(9.1)
|
|
Adjustments
|
(0.2)
|
|
|
(0.1)
|
|
|
|
|
(0.3)
|
|
Foreign exchange
|
(0.1)
|
|
|
—
|
|
|
|
|
(0.1)
|
|
Non-cash items
|
—
|
|
|
—
|
|
|
|
|
—
|
|
Balance as of June 30, 2020
|
$
|
14.2
|
|
|
$
|
—
|
|
|
|
|
$
|
14.2
|
|
Note 8. Stock-Based Compensation
Incentive Equity Awards Granted by the Company. The Company's 2014 Omnibus Award Plan ("2014 Plan") provides for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, other stock-based awards, and performance compensation awards to employees, directors, officers, consultants, advisors, and those of the Company's affiliates. The 2014 Plan provides for an aggregate of 12.0 million shares of the Company's common stock to be reserved for issuance and is effective for a period of ten years. As of June 30, 2020, there were 6.1 million shares available for issuance under the 2014 Plan after considering awards granted by the Company and converted as a result of the spin-off from ADP. The Company reissues treasury stock to satisfy issuances of common stock upon option exercise, equity vesting, or grants of restricted stock.
On October 1, 2014, Automatic Data Processing, Inc. (“ADP”) distributed 100% of the common stock of the Company to the holders of record of ADP common stock as of September 24, 2014 (the "spin-off"). Prior to the spin-off, all employee equity awards (stock options and restricted stock) were granted by ADP. All subsequent awards, including all incentive equity awards converted from ADP awards, were granted under the 2014 Plan. The Company recognizes stock-based compensation expense associated with employee equity awards in net earnings based on the fair value of the awards on the date of grant. Effective July 1, 2016, the Company adopted ASU 2016-09 "Compensation—Stock Compensation (Topic 718): Improvement to Employee Share-Based Payment Accounting." Upon adoption, the Company made an accounting policy election to account for forfeitures as they occur rather than apply an estimated forfeiture rate. Stock-based compensation primarily consisted of the following:
Time-Based Stock Options and Performance-Based Stock Options. Time-based stock options and performance-based stock options have a term of ten years. Upon termination of employment, unvested stock options are evaluated for forfeiture or modification, subject to the terms of the awards and Company policies.
Time-based stock options are granted to employees at an exercise prices equal to the fair market value of the Company's common stock on the date of grant and are generally issued under a three or four-year graded vesting schedule.
Performance-based stock options are granted to the CEO at an exercise price equal to the fair market value of the Company's stock on the date of grant. These awards vest, subject to the Company's stock price performance and the CEO's continued employment with the Company, over a three-year performance period.
Time-Based Restricted Stock and Time-Based Restricted Stock Units. Time-based restricted stock and restricted stock units generally vest over a two to five-year period. Upon termination of employment, unvested time-based awards are evaluated for forfeiture or modification, subject to the terms of the awards and Company policies.
Time-based restricted stock cannot be transferred during the vesting period. Compensation expense related to the issuance of time-based restricted stock is measured based on the fair value of the award on the grant date and recognized on a straight-line basis over the vesting period. Employees are eligible to receive cash dividends on the CDK shares awarded under the time-based restricted stock program during the restricted period.
Time-based restricted stock units are primarily settled in cash for non-U.S. recipients and may be settled in stock or cash for U.S. recipients at the discretion of the Company and cannot be transferred during the restriction period. Compensation expense related to the issuance of time-based restricted stock units is recorded over the vesting period and is initially based on the fair value of the award on the grant date. Cash-settled, time-based restricted stock units are subsequently remeasured at each reporting date during the vesting period to the current stock value. For grants made prior to September 6, 2018, no dividend equivalents are paid on units awarded during the restricted period. For grants made on or subsequent to September 6, 2018, U.S. recipients are credited with dividend equivalents on units awarded during the restricted period, and no dividend equivalents are paid or credited on units awarded to non-U.S. recipients during the restricted period.
Performance-Based Restricted Stock Units. Performance-based restricted stock units generally vest over a three-year performance period. Under these programs, the Company communicates "target awards" at the beginning of the performance period with possible payouts at the end of the performance period ranging from 0% to 260% of the "target awards." Certain performance-based awards are further subject to adjustment (increase or decrease) based on a market condition, defined as total stockholder return of the Company's common stock compared to a peer group of companies. The probability associated with the achievement of performance conditions affects the vesting of the Company's performance-based awards. Expense is only recognized for those shares expected to vest. Upon termination of employment, unvested awards are evaluated for forfeiture or modification, subject to the terms of the awards and Company policies.
Performance-based restricted stock units are settled in either cash or stock for employees whose home country is the U.S. at the discretion of the Company, and are settled in cash for all other employees and cannot be transferred during the vesting period. Compensation expense related to the issuance of performance-based restricted stock units settled in cash is recorded over the vesting period, is initially based on the fair value of the award on the grant date and is subsequently remeasured at each reporting date to the current stock value during the performance period, based upon the probability that the performance target will be met. Compensation expense related to the issuance of performance-based restricted stock units settled in stock is
recorded over the vesting period based on the fair value of the award on the grant date. Prior to settlement, dividend equivalents are earned on "target awards" under the performance-based restricted stock unit program.
The following table represents stock-based compensation expense and the related income tax benefits for fiscal 2020, 2019, and 2018, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Cost of revenues
|
$
|
6.3
|
|
|
$
|
3.5
|
|
|
$
|
4.0
|
|
Selling, general and administrative expenses
|
13.3
|
|
|
27.0
|
|
|
29.4
|
|
Total pre-tax stock-based compensation expense
|
$
|
19.6
|
|
|
$
|
30.5
|
|
|
$
|
33.4
|
|
|
|
|
|
|
|
Income tax benefit
|
$
|
4.8
|
|
|
$
|
5.9
|
|
|
$
|
10.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense for fiscal 2020 consisted of $18.7 million of expense related to equity-classified awards and $0.9 million of expense related to liability-classified awards. Total stock-based compensation expense for fiscal 2020 was impacted by $6.9 million of cumulative adjustments related to the achievement of financial performance metrics based on the outcome of fiscal 2020 associated with performance-based restricted stock units; partially offset by a net benefit from forfeited awards that were primarily related to an officer's transition during fiscal 2019.
Stock-based compensation expense for fiscal 2019 consisted of $28.2 million of expense related to equity-classified awards and $2.3 million of expense related to liability-classified awards. Total stock-based compensation expense for fiscal 2019 includes $11.2 million of additional expense for a cumulative adjustment in the fourth quarter related to the achievement of financial performance metrics for performance based restricted stock, and a net $2.9 million benefit for awards that were forfeited or expense recognition that was accelerated related to certain officer transitions during fiscal 2019.
Stock-based compensation expense for fiscal 2018 consisted of $27.9 million of expense related to equity-classified awards and $5.5 million of expense related to liability-classified awards. This includes $1.5 million of incremental stock-based compensation expense for awards that were modified or expense recognition that was accelerated relating to an officer transition in fiscal 2018.
As of June 30, 2020, the total unrecognized compensation cost related to non-vested stock options, restricted stock units, and restricted stock awards was $3.4 million, $32.8 million, and $0.1 million, respectively, which will be amortized over the weighted-average remaining requisite service periods of 1.9 years, 1.6 years, and 0.3 years, respectively.
The activity related to the Company's incentive equity awards for fiscal 2020, including amounts attributable to the Company's discontinued operations, consisted of the following:
Time-Based Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Options
(in thousands)
|
|
Weighted-Average Exercise Price
(in dollars)
|
|
Weighted-Average Remaining Contractual Life (in years)
|
|
Aggregate Intrinsic Value (in millions)
|
Options outstanding as of June 30, 2019
|
794
|
|
|
$
|
46.47
|
|
|
|
|
|
Options granted
|
334
|
|
|
47.13
|
|
|
|
|
|
Options exercised
|
(184)
|
|
|
34.25
|
|
|
|
|
|
Options canceled
|
(122)
|
|
|
57.48
|
|
|
|
|
|
Options outstanding as of June 30, 2020
|
822
|
|
|
$
|
47.85
|
|
|
6.9
|
|
$
|
1.0
|
|
|
|
|
|
|
|
|
|
Exercisable as of June 30, 2020
|
323
|
|
|
$
|
45.40
|
|
|
4.3
|
|
$
|
1.0
|
|
The Company received proceeds from the exercise of stock options of $6.2 million, $5.0 million, and $8.9 million during fiscal 2020, 2019, and 2018, respectively. The aggregate intrinsic value of stock options exercised during fiscal 2020, 2019, and 2018 was approximately $3.3 million, $5.0 million, and $14.0 million, respectively.
The Binomial model used to determine the grant date fair value of the time-based stock options granted in the first quarter of fiscal 2020 used an expected volatility based on the average of implied volatility and historical stock price volatility for the
Company, the average of which was 25.9%, a risk-free interest rate of 1.7%, an expected dividend yield of 1.3%, and weighted average expected life of 6 years.
Performance-Based Stock Options. There were no grants of performance-based stock options during the fiscal 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Options
(in thousands)
|
|
Weighted
Average Exercise Price
(in dollars)
|
Options outstanding as of June 30, 2019
|
152
|
|
|
$
|
50.77
|
|
Options granted
|
—
|
|
|
—
|
|
Options outstanding as of June 30, 2020
|
152
|
|
|
$
|
50.77
|
|
The following table presents the assumptions used to determine the fair value of the stock options granted by the Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2020
|
|
Fiscal 2019
|
|
Fiscal 2018
|
Risk-free interest rate
|
1.7
|
%
|
|
3.1
|
%
|
|
2.0
|
%
|
Dividend yield
|
1.3
|
%
|
|
1.2
|
%
|
|
0.9
|
%
|
Weighted-average volatility factor
|
25.9
|
%
|
|
23.2
|
%
|
|
24.5
|
%
|
Weighted-average expected life (in years)
|
6.0
|
|
6.0
|
|
6.3
|
Weighted-average fair value (in dollars)
|
$
|
11.24
|
|
|
$
|
12.72
|
|
|
$
|
15.65
|
|
Time-Based Restricted Stock and Time-Based Restricted Stock Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
|
|
Restricted Stock Units
|
|
|
|
Number of Shares
(in thousands)
|
|
Weighted-Average Grant Date Fair Value (in dollars)
|
|
Number of Units
(in thousands)
|
|
Weighted-Average Grant Date Fair Value (in dollars)
|
Non-vested restricted shares/units as of June 30, 2019
|
145
|
|
|
$
|
62.68
|
|
|
408
|
|
|
$
|
58.52
|
|
Restricted shares/units granted
|
—
|
|
|
—
|
|
|
595
|
|
|
46.91
|
|
Restricted shares/units vested
|
(123)
|
|
|
62.67
|
|
|
(141)
|
|
|
56.54
|
|
Restricted shares/units forfeited
|
(4)
|
|
|
63.55
|
|
|
(136)
|
|
|
50.04
|
|
Non-vested restricted shares/units as of June 30, 2020
|
18
|
|
|
$
|
62.08
|
|
|
726
|
|
|
$
|
50.92
|
|
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, 2019
|
414
|
|
|
$
|
56.05
|
|
Restricted units granted
|
391
|
|
|
50.20
|
|
|
|
|
|
Restricted units vested
|
(99)
|
|
|
57.93
|
|
Restricted units forfeited
|
(43)
|
|
|
58.75
|
|
Non-vested restricted units as of June 30, 2020
|
663
|
|
|
$
|
50.71
|
|
The Monte Carlo simulation model used to determine the grant date fair value of the total 391 thousand three-year performance-based restricted stock units granted during fiscal 2020 used an expected volatility based on historical stock price volatility for the Company and the peer companies, the average of which was 24.7% and a risk-free interest rate of 1.7%. Because these awards earn dividend equivalents, the model did not assume an expected dividend yield.
Note 9. Employee Benefit Plans
Defined Contribution Savings Plan. The Company's Board of Directors approved a CDK-sponsored defined contribution plan covering eligible full-time domestic employees of the Company after the spin-off date. This plan provides company matching contributions on a portion of employee contributions. In addition, this plan includes a transitional contribution for certain employees who were previously eligible to participate under ADP's domestic defined benefit plan since the Company did not adopt a similar plan. The costs recorded by the Company for this plan were $16.5 million, $15.4 million, and $16.9 million for fiscal 2020, 2019, and 2018, respectively.
International Benefit Plans. The Company’s foreign subsidiaries have benefit plans that cover certain international employees. To the extent required by local statutory laws, the Company funds these benefit plans through periodic contributions under statutorily prescribed formulas. The Company’s expense for these plans was approximately $14.9 million, $14.5 million, and $15.8 million for fiscal 2020, 2019, and 2018, respectively.
Note 10. Income Taxes
Provision for Income Taxes. Earnings before income taxes presented below is based on the geographic location to which such earnings were attributable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Earnings before income taxes:
|
|
|
|
|
|
U.S.
|
$
|
325.2
|
|
|
$
|
182.7
|
|
|
$
|
265.5
|
|
Foreign
|
99.0
|
|
|
121.2
|
|
|
133.7
|
|
|
$
|
424.2
|
|
|
$
|
303.9
|
|
|
$
|
399.2
|
|
The provision (benefit) for income taxes consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Current:
|
|
|
|
|
|
Federal
|
$
|
83.0
|
|
|
$
|
25.2
|
|
|
$
|
49.8
|
|
Foreign
|
14.3
|
|
|
31.6
|
|
|
32.8
|
|
State
|
18.2
|
|
|
10.5
|
|
|
15.6
|
|
Total current
|
115.5
|
|
|
67.3
|
|
|
98.2
|
|
Deferred:
|
|
|
|
|
|
Federal
|
6.3
|
|
|
(1.3)
|
|
|
(14.7)
|
|
Foreign
|
(2.4)
|
|
|
(1.8)
|
|
|
2.9
|
|
State
|
1.0
|
|
|
(2.0)
|
|
|
1.7
|
|
Total deferred
|
4.9
|
|
|
(5.1)
|
|
|
(10.1)
|
|
Total provision for income taxes
|
$
|
120.4
|
|
|
$
|
62.2
|
|
|
$
|
88.1
|
|
A reconciliation between the Company’s effective tax rate from continuing operations and the U.S. federal statutory rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
%
|
|
2019
|
|
%
|
|
2018
|
|
%
|
Provision for taxes at U.S. statutory rate
|
$
|
89.1
|
|
|
21.0
|
%
|
|
$
|
63.8
|
|
|
21.0
|
%
|
|
$
|
112.2
|
|
|
28.1
|
%
|
Increase (decrease) in provision from:
|
|
|
|
|
|
|
|
|
|
|
|
State taxes, net of federal benefit
|
12.8
|
|
|
3.1
|
%
|
|
7.3
|
|
|
2.4
|
%
|
|
13.2
|
|
|
3.4
|
%
|
U.S. tax on foreign earnings
|
5.5
|
|
|
1.3
|
%
|
|
13.4
|
|
|
4.4
|
%
|
|
19.0
|
|
|
4.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign tax rate differential
|
4.0
|
|
|
0.9
|
%
|
|
2.7
|
|
|
0.9
|
%
|
|
(2.0)
|
|
|
(0.5)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign tax credits
|
(12.2)
|
|
|
(2.9)
|
%
|
|
(15.5)
|
|
|
(5.1)
|
%
|
|
(18.3)
|
|
|
(4.6)
|
%
|
Foreign withholding taxes
|
2.6
|
|
|
0.6
|
%
|
|
—
|
|
|
—
|
%
|
|
4.5
|
|
|
1.1
|
%
|
Valuation allowances
|
14.8
|
|
|
3.5
|
%
|
|
(10.9)
|
|
|
(3.6)
|
%
|
|
(3.6)
|
|
|
(0.9)
|
%
|
Uncertain tax positions
|
17.1
|
|
|
4.1
|
%
|
|
1.5
|
|
|
0.5
|
%
|
|
0.2
|
|
|
—
|
%
|
Mutual agreement procedure receivable
|
(16.2)
|
|
|
(3.8)
|
%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
Stock compensation - shortfalls/(excess tax benefits)
|
0.5
|
|
|
0.1
|
%
|
|
(1.6)
|
|
|
(0.5)
|
%
|
|
(4.9)
|
|
|
(1.2)
|
%
|
Noncontrolling interest
|
(1.1)
|
|
|
(0.3)
|
%
|
|
(1.4)
|
|
|
(0.5)
|
%
|
|
(1.8)
|
|
|
(0.5)
|
%
|
U.S. tax reform deferred tax re-measurement
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
(27.3)
|
|
|
(6.8)
|
%
|
Domestic production activities deduction
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
(4.0)
|
|
|
(1.0)
|
%
|
Pre spin-off tax return adjustments
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
0.1
|
|
|
—
|
%
|
Other
|
3.5
|
|
|
0.8
|
%
|
|
2.9
|
|
|
1.0
|
%
|
|
0.8
|
|
|
0.2
|
%
|
Provision for income taxes
|
$
|
120.4
|
|
|
28.4
|
%
|
|
$
|
62.2
|
|
|
20.5
|
%
|
|
$
|
88.1
|
|
|
22.1
|
%
|
Certain prior year amounts have been reclassified to conform to current year presentation.
Tax Cuts and Jobs Act of 2017. On December 22, 2017, the Tax Cuts and Jobs Act ("Tax Reform Act") was enacted into law. The Tax Reform Act significantly revises the U.S. corporate income tax laws by, among other things, reducing the corporate income tax rate from 35.0% to 21.0% and implementing a modified territorial tax system.
The modified territorial tax system includes a new anti-deferral provision, referred to as global intangible low taxed income (“GILTI”), which subjects certain foreign income to current U.S. tax. The Company accounts for the GILTI tax as a period cost when incurred. The GILTI provision is effective beginning in fiscal year 2019. The Company recorded $2.2 million and $2.9 million of GILTI tax expense net of foreign tax credits for fiscal 2020 and fiscal 2019, respectively. The Company also recorded $2.8 million and $1.5 million of tax benefit from foreign derived intangible income ("FDII") for fiscal 2020 and fiscal 2019, respectively.
The ultimate impact of the Tax Reform Act may differ from the Company's estimates due to the issuance of additional regulatory guidance, the interpretation of the Tax Reform Act evolving over time and actions taken by the Company as a result of the Tax Reform Act.
The balance sheet classification and significant components of deferred income tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2020
|
|
2019
|
Classification:
|
|
|
|
Long term deferred tax assets (included in other non-current assets)
|
$
|
8.5
|
|
|
$
|
14.6
|
|
Long term deferred tax liabilities (included in deferred income taxes)
|
(78.4)
|
|
|
(80.5)
|
|
Net deferred tax liabilities
|
$
|
(69.9)
|
|
|
$
|
(65.9)
|
|
|
|
|
|
Components:
|
|
|
|
Deferred tax assets:
|
|
|
|
Accrued expenses
|
$
|
20.4
|
|
|
$
|
24.5
|
|
Compensation and benefits
|
17.7
|
|
|
24.9
|
|
Deferred revenue
|
11.1
|
|
|
25.0
|
|
Net operating losses
|
3.4
|
|
|
4.2
|
|
Capital losses
|
4.3
|
|
|
22.7
|
|
Lease liabilities
|
14.9
|
|
|
—
|
|
Foreign tax credit carryforward
|
2.9
|
|
|
—
|
|
Other
|
5.5
|
|
|
—
|
|
|
80.2
|
|
|
101.3
|
|
Less: valuation allowances
|
(5.7)
|
|
|
(10.3)
|
|
Net deferred tax assets
|
74.5
|
|
|
91.0
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Deferred expenses
|
54.1
|
|
|
58.5
|
|
Property, plant and equipment and intangible assets
|
79.1
|
|
|
95.1
|
|
ROU assets
|
10.0
|
|
|
—
|
|
Prepaid expenses
|
1.2
|
|
|
0.8
|
|
Undistributed foreign earnings
|
—
|
|
|
1.6
|
|
Other
|
—
|
|
|
0.9
|
|
Deferred tax liabilities
|
144.4
|
|
|
156.9
|
|
Net deferred tax liabilities
|
$
|
(69.9)
|
|
|
$
|
(65.9)
|
|
As discussed in Note 14, CDK adopted ASC 842 on July 1, 2019. Therefore, in fiscal 2020 CDK has recognized deferred tax assets for lease liabilities and deferred tax liabilities for right-of-use ("ROU") assets as shown in the table above.
Deferred Taxes on Unremitted Foreign Earnings. In the two years since the Tax Reform Act was enacted until March 31, 2020, the Company maintained that all post transition tax foreign earnings would be indefinitely reinvested outside the U.S. for future acquisitions and working capital needs. This assertion was based on the Company’s intent and ability (at the time) to indefinitely reinvest post transition tax earnings of foreign subsidiaries. As of December 31,2019, the Company had approximately $28.0 million of foreign earnings remaining from the Tax Reform Act assertion which were not indefinitely reinvested and approximately $384.0 million of indefinitely reinvested foreign earnings.
During the three months ended March 31, 2020, the Company began assessing the impact of the global emergence of COVID-19 on its business. In response to the economic uncertainty engendered by the ongoing COVID-19 pandemic, the Company has taken steps to preserve cash and improve its liquidity position. The Company reviewed its plans for foreign cash balances and, based on the increase in uncertainty and higher expected U.S. cash needs associated with the pandemic, the Company removed its assertion that foreign earnings are indefinitely reinvested, making these earnings available for repatriation as necessary. In addition, during the three months ended June 30, 2020, the Company enhanced its methodology to compute distributable foreign earnings which resulted in a change to the withholding tax recorded as of March 31, 2020. For fiscal 2020, the Company recognized $3.7 million of withholding tax on foreign earnings after the Company decided to no longer indefinitely reinvest these earnings. In addition, earlier in fiscal 2020 a reduction of $1.2 million was recorded for an accrual for foreign withholding taxes originally recorded as a result of the Tax Reform Act. Accordingly, the Company
recognized a net $2.5 million income tax expense in fiscal 2020 to record withholding taxes on the cumulative foreign earnings through June 30, 2020.
Carryforward Attributes. As of June 30, 2020, the Company had federal capital losses of $17.0 million which expire in 2024 and state capital losses of $17.0 million which expire in 2024 through 2034. The Company had foreign net operating loss carryforwards of $12.3 million as of June 30, 2020, of which $0.6 million expires in 2021 through 2023 and $11.7 million has an indefinite carryforward period.
Valuation Allowances. The Company has recorded valuation allowances of $5.7 million and $10.3 million as of June 30, 2020 and 2019, 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 determination with regard to future realization of deferred tax assets.
During fiscal 2020, the valuation allowance balance decreased $4.6 million, including a decrease of $18.4 million in the valuation allowance due to the expiration of U.S. capital loss carryforward on June 30, 2020, an increase of $14.8 million related to a reversal of the fiscal year 2019 capital gain the Company previously expected to recognize in conjunction with the sale of the assets of the Digital Marketing Business, a $0.7 million net decrease due to certain non-US tax loss carryforwards, and a $0.3 million decrease due to adjustment to state tax expense.
During fiscal 2019, the valuation allowance balance decreased by $10.9 million, including a $14.8 million decrease related to the capital gain the Company expects to recognize in conjunction with the sale of the assets of the Digital Marketing Business which were classified as held for sale in the fourth quarter of fiscal 2019, a $4.3 million increase related to a new capital loss generated in the fourth quarter of 2019 resulting from the termination of a joint venture agreement and $0.4 million net decrease due to certain non-U.S. tax loss carryforwards. In addition, there was a $0.4 million decrease in the valuation allowance due to the adoption of ASC 606.
Unrecognized Income Tax Benefits. As of June 30, 2020, 2019, and 2018, the Company had unrecognized income tax benefits of $24.8 million, $7.8 million, and $6.2 million, respectively of which $8.1 million, $7.0 million, and $5.3 million, respectively, would impact the effective tax rate, if recognized. The remainder, if recognized, would principally affect deferred taxes. During fiscal 2020, the Company increased its unrecognized income tax benefits related to current tax positions by $1.1 million and its prior period tax positions by $14.8 million based on information that indicates the extent to which certain tax positions are more likely than not of being sustained. The Company decreased its unrecognized income tax benefits by $1.0 million due to expiration of the statute of limitations.
A roll-forward of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Beginning of the year balance
|
$
|
7.8
|
|
|
$
|
6.2
|
|
|
$
|
6.4
|
|
Additions for current year tax positions
|
1.1
|
|
|
1.6
|
|
|
1.3
|
|
Additions for tax positions of prior years
|
15.8
|
|
|
0.8
|
|
|
0.7
|
|
Reductions for tax positions of prior years
|
(1.0)
|
|
|
—
|
|
|
(0.8)
|
|
Settlement with tax authorities
|
—
|
|
|
(0.1)
|
|
|
(0.6)
|
|
Expiration of the statute of limitations
|
(1.0)
|
|
|
(0.7)
|
|
|
(0.8)
|
|
Impact of foreign exchange rate fluctuations
|
(0.1)
|
|
|
—
|
|
|
—
|
|
End of year balance
|
$
|
22.6
|
|
|
$
|
7.8
|
|
|
$
|
6.2
|
|
The Company's net unrecognized income tax benefits were impacted by an increase of $14.8 million, an increase of $1.6 million, and a decrease of $0.2 million during fiscal 2020, 2019, and 2018, respectively. For all fiscal years, changes were based on information which indicated the extent to which certain tax positions were more likely than not to be sustained. Penalties and interest expense associated with uncertain income tax positions have been recorded in the provision for income taxes on the Consolidated Statements of Operations. Penalties and interest accrued during fiscal 2020 was $1.8 million primarily related to changes in methodology related to transfer pricing. Penalties and interest incurred in fiscal 2019, and 2018 were not significant. As of June 30, 2020, June 30, 2019, June 30, 2018, respectively, the Company had $2.2 million, $0.4 million, and $0.2 million of penalties and interest associated with uncertain tax positions, which was included within other liabilities on the Consolidated Balance Sheets.
In addition, an offsetting long-term receivable of $16.2 million of tax and interest has been recorded as of June 30, 2020 as a result of the Company filing to obtain mutual agreement procedure consideration under applicable U.S. and Canadian treaties
for an update to transfer pricing policies, and the tax benefit offsets additional tax expense recorded in the current period. This long-term receivable is offset by $16.7 million of tax and interest recorded as uncertain tax positions.
The Company conducts business globally and, as a result, files income tax returns in the U.S. federal jurisdiction and various state, local, and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities. The tax years currently under examination vary by jurisdiction. The Company regularly considers the likelihood of assessments in each of the jurisdictions resulting from examinations. The Company has established a liability for unrecognized income tax benefits, which it believes to be adequate in relation to the potential assessments. Once established, the liability for unrecognized tax benefits is adjusted when there is more information available, when an event occurs necessitating a change, or the statute of limitations for the relevant taxing authority to examine the tax position has expired.
Income tax-related examinations currently in progress in which the Company has significant business operations are as follows:
|
|
|
|
|
|
|
|
|
Tax Jurisdictions
|
|
Fiscal Years Ended
|
|
|
|
Colorado
|
|
6/30/2016 thru 6/30/2018
|
Florida
|
|
6/30/2016 thru 6/30/2018
|
Illinois
|
|
6/30/2017 thru 6/30/2018
|
New Jersey
|
|
6/30/2008 thru 6/30/2011
|
|
|
|
Michigan
|
|
6/30/2015 thru 6/30/2017
|
|
|
|
|
|
|
Belgium
|
|
6/30/2017 thru 6/30/2019
|
|
|
|
India
|
|
6/30/2015 and 6/30/2018
|
|
|
|
|
|
|
Singapore
|
|
6/30/2015 thru 6/30/2017
|
Spain
|
|
6/30/2011
|
|
|
|
Canada
|
|
6/30/2012 & 6/30/2014
|
|
|
|
Based on the possible outcomes of the Company's tax audits and expiration of the statute of limitations, it is reasonably possible that the liability for uncertain tax positions will change within the next twelve months. The associated net tax impact on the effective tax rate is estimated to be a $2.7 million tax benefit, with minimal cash payments.
Although the final resolution of the Company's tax disputes is uncertain, based on current information, the resolution of tax matters is not expected to have a material effect on the Company's consolidated financial condition, liquidity, or results of operations. However, an unfavorable resolution could have a material impact on the Company’s consolidated financial condition, liquidity, or results of operations in the periods in which the matters are ultimately resolved.
Tax Matters Agreement. The Company and ADP entered into a tax matters agreement as part of the spin-off that governs the rights and obligations of both parties after the spin-off with respect to taxes for both pre and post spin-off periods. Under this agreement, ADP is generally required to indemnify the Company for any income taxes attributable to ADP's operations or the Company's operations and for any non-income taxes attributable to ADP's operations, in each case for all pre spin-off periods as well as any taxes arising from transactions effected to consummate the spin-off, and the Company generally is required to indemnify ADP for any non-income taxes attributable to the Company's operations for all pre spin-off periods and for any income taxes attributable to the Company's operations for post spin-off periods.
The Company is generally required to indemnify ADP against any tax resulting from the spin-off (and against any claims made against ADP in respect of any tax imposed on its stockholders), in each case if that tax results from (i) an issuance of a significant amount of the Company's equity securities, a redemption of a significant amount of the Company's equity securities or the Company's involvement in other significant acquisitions of the Company's equity securities (excluding the spin-off), (ii) other actions or failures to act by the Company, or (iii) any of the Company's representations or undertakings referred to in the tax matters agreement being incorrect or violated. ADP will generally be required to indemnify the Company for any tax resulting from the spin-off if that tax results from (a) ADP's issuance of its equity securities, redemption of its equity securities, or involvement in other acquisitions of its equity securities, (b) other actions or failures to act by ADP, or (c) any of ADP's representations or undertakings referred to in the tax matters agreement being incorrect or violated.
The Company recognized receivables from ADP of $0.4 million and $0.5 million as of June 30, 2020 and 2019, respectively, and payables to ADP of $0.7 million and $0.8 million as of June 30, 2020 and 2019, respectively, under the tax matters agreement.
Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was enacted into law. The CARES Act is aimed at providing emergency relief and health care for individuals and businesses affected by the COVID-19 pandemic. The CARES Act, among other things,
includes provisions related to refundable payroll tax credits, deferral of the employer portion of social security payments, expanded net operating loss application, modifications to the net interest deduction limitations, and technical corrections to tax depreciation methods for qualified improvement property. While the Company is still assessing the impact of the legislation, it does not expect there to be a material impact to its consolidated financial statements.
Note 11. Earnings per Share
The numerator for both basic and diluted earnings per share is net earnings attributable to CDK. The denominator for basic and diluted earnings per share is based upon the number of weighted-average shares of the Company's common stock outstanding during the applicable reporting periods. Diluted earnings per share also reflects the dilutive effect of unexercised in-the-money stock options and unvested restricted stock.
Holders of certain stock-based compensation awards are eligible to receive dividends as described in Note 8. Net earnings allocated to participating securities were not significant for fiscal 2020, 2019, and 2018.
The following table summarizes the components of basic and diluted earnings per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Net earnings from continuing operations attributable to CDK
|
$
|
296.8
|
|
|
$
|
233.8
|
|
|
$
|
303.2
|
|
Net earnings (loss) from discontinued operations
|
(89.3)
|
|
|
(109.8)
|
|
|
77.6
|
|
Net earnings attributable to CDK
|
$
|
207.5
|
|
|
$
|
124.0
|
|
|
$
|
380.8
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
Basic
|
121.6
|
|
|
125.5
|
|
|
135.8
|
|
Effect of employee stock options
|
0.1
|
|
|
0.2
|
|
|
0.3
|
|
Effect of employee restricted stock
|
0.4
|
|
|
0.7
|
|
|
0.7
|
|
Diluted
|
122.1
|
|
|
126.4
|
|
|
136.8
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to CDK per share - basic:
|
|
|
|
|
|
Continuing operations
|
$
|
2.44
|
|
|
$
|
1.86
|
|
|
$
|
2.23
|
|
Discontinued operations
|
(0.73)
|
|
|
(0.87)
|
|
|
0.57
|
|
Total net earnings attributable to CDK per share - basic
|
$
|
1.71
|
|
|
$
|
0.99
|
|
|
$
|
2.80
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to CDK per share - diluted:
|
|
|
|
|
|
Continuing operations
|
$
|
2.43
|
|
|
$
|
1.85
|
|
|
$
|
2.21
|
|
Discontinued operations
|
(0.73)
|
|
|
(0.87)
|
|
|
0.57
|
|
Total net earnings attributable to CDK per share - diluted
|
$
|
1.70
|
|
|
$
|
0.98
|
|
|
$
|
2.78
|
|
The weighted-average number of shares outstanding used in the calculation of diluted earnings per share does not include the effect of the following anti-dilutive securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Stock-based awards
|
1.0
|
|
|
0.5
|
|
|
0.2
|
|
Note 12. Accounts Receivable, Net
Accounts receivable, net from continuing operations comprised the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2020
|
|
2019
|
Trade receivables
|
$
|
309.1
|
|
|
$
|
291.7
|
|
Unbilled receivables
|
4.8
|
|
|
4.0
|
|
Leases and other receivables
|
8.2
|
|
|
3.5
|
|
Accounts receivable, gross
|
322.1
|
|
|
299.2
|
|
Less: allowances
|
22.1
|
|
|
8.8
|
|
Account receivable, net
|
$
|
300.0
|
|
|
$
|
290.4
|
|
Note 13. Property, Plant and Equipment, Net
Depreciation expense for property, plant and equipment was $54.8 million, $56.7 million, and $45.6 million for fiscal 2020, 2019, and 2018, respectively. Property, plant and equipment at cost and accumulated depreciation consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2020
|
|
2019
|
Property, plant and equipment:
|
|
|
|
Land and buildings
|
$
|
34.6
|
|
|
$
|
38.9
|
|
Data processing equipment
|
279.6
|
|
|
278.7
|
|
Furniture and fixtures, leasehold improvements and other
|
70.1
|
|
|
78.0
|
|
Total property, plant and equipment
|
384.3
|
|
|
395.6
|
|
Less: accumulated depreciation
|
275.2
|
|
|
250.8
|
|
Property, plant and equipment, net
|
$
|
109.1
|
|
|
$
|
144.8
|
|
During the third quarter of fiscal 2019, the Company assessed the recoverability of certain long-lived assets upon exiting certain facilities and concluded that that the carrying amount of these assets were not recoverable. As a result, the Company recorded an impairment charge of $3.3 million within the Other segment, of which $2.6 million was included in cost of revenues and $0.7 million was recorded in selling, general and administrative expense within the Consolidated Statements of Operations.
Note 14. Leases
Adoption of ASC 842. On July 1, 2019, the Company adopted ASC 842 using the modified retrospective transition method whereby prior comparative periods have not been restated and continue to be reported under the accounting standards in effect for the prior period. The Company elected the package of practical expedients permitted under the transition guidance for all leases (where the Company is a lessee or a lessor), which allowed the Company to adopt ASC 842 without reassessing whether arrangements contain leases, the lease classification, and the determination of initial direct cost.
Upon adoption on July 1, 2019, the Company recognized right-of-use ("ROU") assets inclusive of finance leases, net of prepaids, incentives and impairments, of $68.2 million, and lease liabilities of $76.8 million in the Company's Consolidated Balance Sheets. At adoption, there was no impact on the Company’s Consolidated Statements of Operations, Cash Flows, and Stockholders' Deficit.
Significant Judgments. The Company has lease arrangements where the Company acts as either a lessee or a lessor. The Company applies significant judgment in order to determine if an arrangement contains a lease, to assess which party retains a material amount of economic benefit from the underlying asset, and to determine which party holds control over the direction and use of the asset. The Company also applies significant judgment to determine whether the Company will exercise renewal options, to identify substantive substitution rights over the asset, to determine the incremental borrowing rate, and to estimate the fair value of the leased asset.
CDK as a Lessee. The Company has obligations under lease arrangements mainly for facilities, equipment, data centers, and vehicles. These leases have original lease periods expiring between fiscal 2020 and 2028. The Company classifies leases as finance leases when there is either a transfer of ownership of the underlying asset by the end of the lease term, the lease contains an option to purchase the asset that the Company is reasonably certain will be exercised, the lease term is for the major part of the remaining economic life of the asset, the present value of the lease payments and any residual value guarantee equals or substantially exceeds all the fair value of the asset, or the asset is of such a specialized nature that it will have no alternative use to the lessor at the end of the lease term. When none of these criteria are met, the Company classifies leases as operating leases.
Several of the Company's leases include one or more options to renew. The Company does not assume renewal periods in its determination of lease term unless it is reasonably certain that the Company will exercise the renewal option. The Company considers leases with an initial term of 12 months or less as short-term in nature and does not record such leases on the balance sheet. The Company records all other leases on the balance sheet with ROU assets representing the right to use the underlying asset for the lease term and lease liabilities representing the obligation to make lease payments arising from the lease.
The Company recognizes ROU assets and lease liabilities based on the present value of lease payments over the lease term. The ROU asset is adjusted for prepaid or deferred rent, lease incentives and impairments. The Company uses the incremental borrowing rate at the lease commencement date to determine the present value of the lease payments as the implicit rate within the leases is generally not readily determinable. The incremental borrowing rate is generally determined using factors such as treasury yields, the Company's credit rating and lease term, and may differ for individual leases.
In addition to fixed lease payments, several lease arrangements contain provisions for variable lease payments relating to utilities and maintenance costs or rental increases not scheduled in the lease. Variable lease payments are expensed in the period in which the obligation for those payments is incurred. The Company has elected to combine lease and non-lease components, such as fixed maintenance costs, as a single lease component in calculating ROU assets and lease liabilities.
The Company recorded leases expense of $27.3 million within cost of revenues, $9.4 million within selling, general and administrative expenses, and $0.9 million within interest expense, on the Consolidated Statements of Operations for fiscal 2020. The following table summarizes the components of net lease expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2020
|
Leases classified as finance:
|
|
|
|
Amortization of ROU assets
|
|
|
$
|
6.2
|
|
Interest on lease liabilities
|
|
|
0.8
|
|
Leases classified as operating:
|
|
|
|
Lease expense
|
|
|
18.6
|
|
Sublease income (gross basis)
|
|
|
(0.6)
|
|
Unclassified leases:
|
|
|
|
Short-term lease expense (including lease term of one month or less)
|
|
|
3.9
|
|
Variable lease expense
|
|
|
8.7
|
|
|
|
|
|
Total net lease expense
|
|
|
$
|
37.6
|
|
For fiscal 2019, rent expense related to operating leases under previous accounting guidance was $28.0 million. The following table presents supplemental information related to leases:
|
|
|
|
|
|
|
Year ended June 30, 2020
|
|
|
Cash paid for amounts included in measurement of lease liabilities:
|
|
Operating cash flows paid for operating leases
|
$
|
18.3
|
|
Operating cash flows paid for interest portion of finance leases
|
0.8
|
|
Finance cash flows paid for principal portion of finance leases
|
6.2
|
|
ROU assets obtained in exchange for new operating lease liabilities
|
23.4
|
|
ROU assets obtained in exchange for new finance lease liabilities
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2020, the weighted-average remaining lease term was 5.0 years for operating leases and 2.6 years for finance leases; and the weighted-average discount rate was 3.6% for operating leases and 4.6% for finance leases. The following table presents supplemental balance sheet information related to leases as of June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
ROU assets, net (1)
|
$
|
55.0
|
|
|
$
|
13.5
|
|
|
|
|
|
Lease liabilities, current (2)
|
8.8
|
|
|
5.7
|
|
Lease liabilities, non-current (3)
|
52.3
|
|
|
8.4
|
|
Total lease liabilities
|
$
|
61.1
|
|
|
$
|
14.1
|
|
(1) Included in other assets for operating leases and property, plant and equipment, net for finance leases on the Consolidated Balance Sheets.
(2) Included in accrued expenses and other current liabilities for operating leases and current maturities of long-term debt and finance lease liabilities for finance leases on the Consolidated Balance Sheets.
(3) Included in other liabilities for operating leases and long-term debt and finance lease liabilities for finance leases on the Consolidated Balance Sheets.
The following table presents maturity analysis of lease liabilities as of June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
|
|
|
|
Twelve months ending June 30, 2021
|
$
|
18.8
|
|
|
$
|
6.2
|
|
Twelve months ending June 30, 2022
|
16.4
|
|
|
5.2
|
|
Twelve months ending June 30, 2023
|
12.4
|
|
|
3.5
|
|
Twelve months ending June 30, 2024
|
9.8
|
|
|
0.1
|
|
Twelve months ending June 30, 2025
|
8.0
|
|
|
—
|
|
Thereafter
|
10.5
|
|
|
—
|
|
Total undiscounted lease payments
|
75.9
|
|
|
15.0
|
|
Less: imputed interest
|
(6.9)
|
|
|
(0.9)
|
|
Less: lease incentive receivable
|
(7.9)
|
|
|
—
|
|
Total lease liabilities
|
$
|
61.1
|
|
|
$
|
14.1
|
|
The Company did not have any material minimum lease payments for executed leases that have not yet commenced as of June 30, 2020.
Minimum operating lease commitments as of June 30, 2019 and accounted for under previous lease guidance were as follows:
|
|
|
|
|
|
|
Amount
|
Twelve months ending June 30, 2020
|
$
|
16.7
|
|
Twelve months ending June 30, 2021
|
13.9
|
|
Twelve months ending June 30, 2022
|
12.5
|
|
Twelve months ending June 30, 2023
|
8.9
|
|
Twelve months ending June 30, 2024
|
6.9
|
|
Thereafter
|
15.8
|
|
Total minimum operating lease liabilities
|
$
|
74.7
|
|
CDK as a Lessor. The Company’s hardware-as-a-service arrangements, in which the Company provides customers continuous access to CDK owned hardware, such as networking and telephony equipment and laser printers, are accounted for as sales-type leases under ASC 842, primarily because they do not contain substantive substitution rights. Since the Company elected to not reassess prior conclusions related to arrangements containing leases, the lease classification, and the initial direct costs, only hardware leases that commenced or are modified on or subsequent to July 1, 2019, are accounted for under ASC 842. Historically, the Company has accounted for these arrangements as a distinct performance obligation under the revenue recognition guidance and recognized revenue over the term of the arrangement. Sales-type lease arrangements follow the Company’s customary contracting practices and, generally, include a fixed monthly fee for the lease and non-lease components for the duration of the contract term. The Company does not typically provide renewal, termination or purchase options to its customers.
The Company recognizes net investment in sales-type leases based on the present value of the lease receivable when collectibility is probable. The Company accounts for lease and non-lease components such as maintenance costs, separately. Consideration is allocated between lease and non-lease components based on stand-alone selling price in accordance with ASC 606, Revenue from Contracts with Customers.
The following summarizes components of net lease income reported on the Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2020
|
Revenues (1)
|
|
|
$
|
30.9
|
|
Cost of revenues
|
|
|
(30.1)
|
|
Interest income
|
|
|
0.7
|
|
|
|
|
|
Total lease income (loss)
|
|
|
$
|
1.5
|
|
(1) Revenues from lease components are included in other revenue, net
As of June 30, 2020, the carrying value of the Company’s lease receivable reported in accounts receivable, net and other assets on the Consolidated Balance Sheets was $7.8 million and $18.7 million, respectively. The following table presents maturity analysis of the lease payments the Company expects to receive as of June 30, 2020:
|
|
|
|
|
|
|
Amount
|
|
|
Twelve months ending June 30, 2021
|
$
|
8.5
|
|
Twelve months ending June 30, 2022
|
7.5
|
|
Twelve months ending June 30, 2023
|
6.1
|
|
Twelve months ending June 30, 2024
|
4.7
|
|
Twelve months ending June 30, 2025
|
2.2
|
|
Thereafter
|
0.1
|
|
Total undiscounted cash flows to be received
|
$
|
29.1
|
|
Less: imputed interest
|
2.6
|
|
Total lease receivable
|
$
|
26.5
|
|
Note 15. Goodwill and Intangible Assets, Net
Changes in goodwill were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CDK North America
|
|
CDK International
|
|
Total
|
Balance as of June 30, 2018
|
$
|
620.9
|
|
|
$
|
368.3
|
|
|
$
|
989.2
|
|
Additions (Note 5)
|
379.3
|
|
|
—
|
|
|
379.3
|
|
Currency translation adjustments
|
0.1
|
|
|
(12.3)
|
|
|
(12.2)
|
|
Balance as of June 30, 2019
|
1,000.3
|
|
|
356.0
|
|
|
1,356.3
|
|
|
|
|
|
|
|
Currency translation adjustments
|
(0.9)
|
|
|
(6.9)
|
|
|
(7.8)
|
|
Balance as of June 30, 2020
|
$
|
999.4
|
|
|
$
|
349.1
|
|
|
$
|
1,348.5
|
|
The Company performs its annual impairment testing for goodwill balances as of April 1 each year; however, the Company may test for impairment between annual tests if an event occurs or circumstances change that indicate that the fair value of the reporting unit may fall below its carrying amount.
During the fourth quarter of fiscal 2020, the Company continued assessing the impact of the global emergence of COVID-19 on its business. In response to the economic uncertainty engendered by the ongoing COVID-19 pandemic, the Company incorporated considerations of COVID-19 in our annual test to identify potential impairment of goodwill at any of its reporting units as of April 1, 2020. The analysis considered facts and circumstances available through June 30, 2020, including the extent to which fair value exceeded reporting unit carrying value. Based on the testing performed, the Company believes that goodwill is not impaired. The Company will continue to closely monitor conditions and to reassess goodwill for potential impairment if warranted.
Intangible assets, net from continuing operations consisted of:
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June 30,
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|
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2020
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|
2019
|
|
|
|
|
|
Original Cost
|
|
Accumulated Amortization
|
|
Intangible Assets, net
|
|
Original Cost
|
|
Accumulated Amortization
|
|
Intangible Assets, net
|
Customer lists
|
$
|
195.7
|
|
|
$
|
(108.6)
|
|
|
$
|
87.1
|
|
|
$
|
196.6
|
|
|
$
|
(100.2)
|
|
|
$
|
96.4
|
|
Software
|
299.7
|
|
|
(155.9)
|
|
|
143.8
|
|
|
250.8
|
|
|
(126.7)
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|
|
124.1
|
|
Trademarks
|
7.5
|
|
|
(3.8)
|
|
|
3.7
|
|
|
7.5
|
|
|
(3.1)
|
|
|
4.4
|
|
Other intangibles
|
3.2
|
|
|
(2.6)
|
|
|
0.6
|
|
|
3.2
|
|
|
(2.2)
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|
|
1.0
|
|
|
$
|
506.1
|
|
|
$
|
(270.9)
|
|
|
$
|
235.2
|
|
|
$
|
458.1
|
|
|
$
|
(232.2)
|
|
|
$
|
225.9
|
|
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 6 years (12 years for customer lists, 3 years for software and software licenses, and 5 years for trademarks). Amortization of intangible assets from continuing operations was $44.8 million, $33.1 million, and $25.2 million for fiscal 2020, 2019, and 2018, respectively.
During the fourth quarter of fiscal 2020, the Company performed a qualitative assessment of intangible assets to determine if a triggering event had occurred which would indicate the assets were impaired at June 30, 2020. Based on facts and circumstances available at June 30, 2020, the Company believes that intangible assets are not impaired. The Company will continue to closely monitor conditions and to reassess intangible assets for potential impairment if warranted.
During the second quarter of fiscal 2019, the Company identified indicators requiring assessment of certain intangible assets within the CDKNA segment. The identified indicators primarily consisted of abandonment of a project relating to the Company's inventory solutions intended to address evolving market conditions. As a result, the Company analyzed these intangible assets and recorded impairment charges of $13.2 million for software and $1.7 million for customer lists. Of the total $14.9 million impairment charge, the Company recorded $12.0 million in cost of revenues and $2.9 million in selling, general and administrative expenses within its Consolidated Statements of Operations.
Estimated amortization expenses of the Company's existing intangible assets from continuing operations as of June 30, 2020 were as follows:
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Amount
|
Fiscal year ending 2021
|
$
|
55.1
|
|
Fiscal year ending 2022
|
51.3
|
|
Fiscal year ending 2023
|
39.8
|
|
Fiscal year ending 2024
|
19.7
|
|
Fiscal year ending 2025
|
13.4
|
|
Thereafter
|
55.9
|
|
|
$
|
235.2
|
|
Note 16. Investments
The equity method is used to account for investments or partially-owned affiliates in which the Company has the ability to exercise significant influence over the investee’s operating and financial policies. Such investments are recorded in other assets on the Consolidated Balance Sheets.
Ansira. In connection with the closing of the sale of the Digital Marketing Business, the Company received total consideration, which included a 10-year note receivable and a 15% equity interest in Ansira. Ansira provides consumer-facing websites to automotive retailers as well as integrated applications of third-party website add-on software. The equity interest in Ansira is deemed more than minor and is accounted for under the equity method. As of June 30, 2020, the carrying amount of the investment was $37.2 million recorded in other assets on the Consolidated Balance Sheets. For the years ended June 30, 2020, the Company recorded losses related to this investment of $2.7 million in loss from equity method investment on the Consolidated Statements of Operations.
The Company is providing certain services, through a transition services agreement, to Ansira to assist in its integration of the Digital Marketing Business. For the year ended June 30, 2020, the Company recorded income related to the transition services agreement of $16.3 million in other income on the Consolidated Statements of Operations. As of June 30, 2020, receivables due from Ansira were $18.0 million included in accounts receivable on the Consolidated Balance Sheets. As of June 30, 2020, the note receivable was $24.4 million recorded in other assets on our Consolidated Balance Sheets.
Open Dealer Exchange ("ODE"). The Company holds a 50% equity interest in ODE, a joint venture entered into with Reynolds and Reynolds on January 16, 2009. ODE provides online tools through the Company's DMS to sell credit bureau reports and related products to dealerships, as well as financial and other vehicle related products. As of June 30, 2020 and 2019, the carrying amount of the investment was $18.9 million and $17.3 million respectively, recorded in other assets on the Consolidated Balance Sheets. The operations of ODE are integral to the Company's business due to the access ODE has to credit bureaus, which provides an extension of the business over a critical functional area. For the years ended June 30, 2020, 2019 and 2018, the Company recorded earnings related to this investment of $11.0 million, $8.8 million and $6.9 million, respectively, in cost of revenues on the Consolidated Statements of Operations.
ODE processes certain credit bureau and other credit related transactions on behalf of the Company. For the years ended June 30, 2020, 2019 and 2018, the Company incurred expenses from ODE of $13.7 million, $12.3 million and $10.8 million, respectively in cost of revenues on the Consolidated Statement of Operations. There were no outstanding liabilities to ODE as of June 30, 2020. As of June 30, 2019 liabilities to ODE were $0.1 million. The Company records amounts due to ODE in accounts payable on the Consolidated Balance Sheets.
Ripcord. The Company holds a 5.633% equity interest in Ripcord, a robotic digitization company. The Company elects to measure its equity investment in Ripcord at cost, less any impairment, as its investment does not have a readily determinable fair value and the Company does not have the ability to exercise significant influence over the operating and financial policy of Ripcord. As of June 30, 2020, the carrying amount of the investment was $20.0 million recorded in other assets on the Consolidated Balance Sheets. There have been no identified events or changes in circumstances that may have a significant adverse impact on the investment.
Note 17. Debt
Long-term debt and finance lease liabilities consisted of:
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|
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|
|
|
|
|
|
June 30,
|
|
|
|
2020
|
|
2019
|
Revolving credit facility
|
$
|
15.0
|
|
|
$
|
—
|
|
Three year term loan facility, due 2021
|
300.0
|
|
|
300.0
|
|
Five year term loan facility, due 2023
|
273.8
|
|
|
288.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.30% senior notes, due 2019
|
—
|
|
|
250.0
|
|
4.50% senior notes, due 2024
|
500.0
|
|
|
500.0
|
|
5.875% senior notes due 2026
|
500.0
|
|
|
500.0
|
|
4.875% senior notes, due 2027
|
600.0
|
|
|
600.0
|
|
5.250% senior notes, due 2029
|
500.0
|
|
|
500.0
|
|
Finance lease liabilities
|
14.1
|
|
|
19.9
|
|
Unamortized debt financing costs
|
(27.1)
|
|
|
(28.5)
|
|
Total debt and finance lease liabilities
|
2,675.8
|
|
|
2,930.2
|
|
Current maturities of long-term debt and finance lease liabilities
|
20.7
|
|
|
270.8
|
|
Total long-term debt and finance lease liabilities
|
$
|
2,655.1
|
|
|
$
|
2,659.4
|
|
Revolving Credit Facility. On August 17, 2018, the Company entered into a five-year senior unsecured revolving credit facility (the "revolving credit facility") The revolving credit facility provides up to $750.0 million of borrowing capacity and includes a sub-limit of up to $100.0 million for loans in Euro, Pound Sterling, and, if approved by the revolving lenders, other currencies. In addition, the revolving credit facility contains an accordion feature that allows for an increase in the available borrowing capacity of up to $100.0 million, subject to the agreement of lenders under the revolving credit facility or other financial institutions that become lenders to extend commitments as part of the increased revolving credit facility. The average outstanding balances of the revolving credit facility were $122.7 million and $282.3 million for the years ended June 30, 2020 and 2019, respectively. Borrowings under the revolving credit facility are available for general corporate purposes. The revolving credit facility will mature on August 17, 2023, subject to no more than two one-year extensions if lenders holding a majority of the revolving commitments approve such extensions.
The revolving credit facility is unsecured and loans thereunder bear interest, at the Company's option, at (a) the rate at which deposits in the applicable currency are offered in the London interbank market (or, in the case of borrowings in Euro, the European interbank market) plus margins varying from 1.750% to 2.875% per annum based on the Company's senior, unsecured non-credit-enhanced, long-term debt ratings from Standard & Poor's Ratings Group and Moody's Investors Services Inc. (the "Ratings") or (b) solely in the case of U.S. dollar loans, (i) the highest of (A) the prime rate of Bank of America, N.A., (B) a rate equal to the average of the overnight federal funds rate with a maturity of one day plus a margin of 0.500% per annum, and (C) the rate at which dollar deposits are offered in the London interbank market for a one-month interest period plus 1.00% plus (ii) margins varying from 0.750% to 1.875% per annum based on the Ratings. The unused portion of the revolving credit facility is subject to commitment fees ranging from 0.200% to 0.400% per annum based on the Ratings.
Term Loan Facilities. On August 17, 2018, the Company entered into a term loan agreement which provided the Company an aggregate of $600.0 million under term loans comprising a $300.0 million term loan that will mature on August 17, 2021 (the "three year term loan facility"), and a $300.0 million term loan that will mature on August 17, 2023 (the "five year term loan facility"). The aggregate principal amount of the three year term loan facility will be repayable in full on the maturity date. The five year term loan facility is subject to amortization in equal quarterly installments of 1.25% of the aggregate principal amount of the term loan made on the closing date, with any unpaid principal amount due and payable on the maturity date. The interest rate per annum on the three year term loan facility and the five year term loan facility was 2.75% and 2.875%, respectively, as of June 30, 2020.
The three year term loan facility and the five year term loan facility are unsecured and bear interest (a) with respect to the three year term loan facility, (i) at the rate at which deposits in the applicable currency are offered in the London interbank market plus margins varying from 1.625% to 2.750% per annum based on the Company’s senior, unsecured, non-credit-enhanced, long-term debt ratings from the Ratings or (ii) the highest of (X) a rate equal to the average of the overnight federal funds rate with a maturity of one day plus a margin of 0.50% per annum, (Y) the prime rate of Bank of America, N.A. and (Z) the rate at which dollar deposits are offered in the London interbank market for a one-month interest period plus 1.00%, plus margins varying from 0.625% to 1.750% per annum based on the Ratings, and (b) with respect to the five year term loan facility (i) at
the rate at which deposits in the applicable currency are offered in the London interbank market plus margins varying from 1.750% to 2.875% per annum based on the Company’s Ratings or (ii) the highest of (X) a rate equal to the average of the overnight federal funds rate with a maturity of one day plus a margin of 0.50% per annum, (Y) the prime rate of Bank of America, N.A. and (Z) the rate at which dollar deposits are offered in the London interbank market for a one-month interest period, plus 1.00%, plus margins varying from 0.750% to 1.875% per annum based on the Ratings.
London Interbank Market (“LIBOR”) Transition. LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform. These reforms and other pressure may cause LIBOR to disappear entirely or to perform differently than in the past. It is expected that certain banks will stop reporting information used to set LIBOR at the end of 2021 when their reporting obligations cease. This will effectively end the usefulness of LIBOR and may end its publication. The consequences of these developments cannot be entirely predicted but, as noted above, could impact the interest rates of the revolving credit facility and the five year term loan. If LIBOR is no longer widely available, the Company will pursue alternative interest rate calculations in its revolving credit facility and five year term loan agreements. However, if no alternative rate can be determined, the LIBOR rate component will no longer be utilized in determining the rates. As of June 30, 2020 and 2019, the hypothetical impact to the Company’s interest rates without utilizing the LIBOR rate component would not have had a material effect on either rate, thus the Company does not believe the discontinuation of LIBOR will have a material impact on its financial position and results of operations.
Restrictive Covenants and Other Matters. The revolving credit facility, the three year term loan facility, and the five year term loan facility are together referred to as the "credit facilities." The credit facilities contain various covenants and restrictive provisions that limit the Company's subsidiaries' ability to incur additional indebtedness, the Company's ability to consolidate or merge with other entities, and the Company's subsidiaries' ability to incur liens, enter into sale and leaseback transactions, and enter into agreements restricting the ability of the Company's subsidiaries to pay dividends. If the Company fails to perform the obligations under these and other covenants, the revolving credit facility could be terminated and any outstanding borrowings, together with accrued interest, under the credit facilities could be declared immediately due and payable. The credit facilities also have, in addition to customary events of default, an event of default triggered by the acceleration of the maturity of any other indebtedness the Company may have in an aggregate principal amount in excess of $75.0 million.
On May 4, 2020, the Company entered into an amendment of its credit facilities that temporarily increased the maximum leverage ratio in order to provide additional financial flexibility. Under the amendment, the leverage ratio may not exceed (i) 4.75 to 1.00 for the quarters ended March 31, 2020 through March 31, 2021 and (ii) 4.25 to 1.00 for the quarters ending June 30, 2021 through September 30, 2021. During this period, if at any time the Leverage Ratio exceeds 4.25 to 1.00 or the Company’s senior unsecured credit rating is downgraded below BB+ by S&P and below Ba1 by Moody’s, the Company would be required to provide the creditor banks with a security interest over substantially all of its property to secure the loans and other obligations under the credit agreements and to provide subsidiary guarantees to the creditor banks. The Company agreed that interest on the credit facilities would be increased by 0.50% and commitment fees by 0.05% until the earlier of (i) the delivery of the Company's financial statements for the fiscal quarter ending December 31, 2021 and (ii) the provision of the relevant liens and subsidiary guarantees to the creditor banks. The Company believes it is in compliance with its covenants as of June 30, 2020.
Senior Notes. On October 14, 2014, the Company completed an offering of 3.30% unsecured senior notes with a $250.0 million aggregate principal amount due in 2019 (the "2019 notes") and 4.50% unsecured senior notes with a $500.0 million aggregate principal amount due in 2024 (the "2024 notes"). The issuance price of the 2019 and 2024 notes was equal to the stated value. Interest is payable semi-annually on April 15 and October 15 of each year, and payment commenced on April 15, 2015. The interest rate payable on each applicable series of 2019 and 2024 notes is subject to adjustment from time to time if the credit ratings assigned to any series of 2019 and 2024 notes by the rating agencies is downgraded (or subsequently upgraded). The 2019 notes matured on October 15, 2019, and the 2024 notes will mature on October 15, 2024. The 2024 notes are redeemable at the Company's option prior to July 15, 2024 at a redemption price equal to the greater of (i) 100% of the aggregate principal amount of the 2024 notes to be redeemed, and (ii) the sum of the present value of the remaining scheduled payments (as defined in the agreement), plus accrued and unpaid interest thereon. Subsequent to July 15, 2024, the redemption price for the 2024 notes 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 payments have commenced on December 15, 2018. The 2026 notes will mature on June 15, 2026. The 2026 notes are redeemable at the Company's option prior to June 15, 2021 in whole or in part at a redemption price equal to 100% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, plus the applicable "make-whole" premium. Subsequent to June 15, 2021, the Company may redeem the 2026 notes at a price equal to: (i) 102.938% of the aggregate principal amount of the 2026 notes redeemed prior to June 15, 2022; (ii) 101.958% of the aggregate principal amount of the notes redeemed on or after June 15, 2022 but prior to June 15, 2023; (iii)
100.979% of the aggregate principal amount of the 2026 notes redeemed on or after June 15, 2023 but prior to June 15, 2024; and (iv) 100.000% of the aggregate principal amount of the 2026 notes redeemed thereafter.
On May 15, 2017, the Company completed an offering of 4.875% unsecured senior notes with a $600.0 million aggregate principal amount due in 2027 (the "2027 notes"). The issuance price of the 2027 notes was equal to the stated value. Interest is payable semi-annually on June 1 and December 1 of each year, and payment commenced on December 1, 2017. The 2027 notes will mature on June 1, 2027. The 2027 notes are redeemable at the Company's option prior to June 1, 2022 in whole or in part at a redemption price equal to 100% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, plus the applicable "make-whole" premium. Subsequent to June 1, 2022, the Company may redeem the 2027 notes at a price equal to: (i) 102.438% of the aggregate principal amount of the 2027 notes redeemed prior to June 1, 2023; (ii) 101.625% of the aggregate principal amount of the notes redeemed on or after June 1, 2023 but prior to June 1, 2024; (iii) 100.813% of the aggregate principal amount of the 2027 notes redeemed on or after June 1, 2024 but prior to June 1, 2025; and (iv) 100.000% of the aggregate principal amount of the 2027 notes redeemed thereafter.
On May 2, 2019, the Company completed an offering of 5.250% unsecured senior notes with a $500.0 million aggregate principal amount due in 2029 (the "2029 notes," together with the "2027 notes," "2026 notes," "2024 notes," and "2019 notes" are the "senior notes"). The issuance price of the 2029 notes was equal to the stated value. Interest is payable semi-annually on March 15 and September 15 of each year, and payments commenced on September 15, 2019. The 2029 notes will mature on May 15, 2029. The 2029 notes are redeemable at the Company's option prior to May 15, 2024 in whole or in part at a redemption price equal to 100% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, plus the applicable "make-whole" premium. Subsequent to May 15, 2024, the Company may redeem the 2029 notes at a price equal to: (i) 102.625% of the aggregate principal amount of the 2029 notes redeemed prior to May 15, 2025; (ii) 101.750% of the aggregate principal amount of the notes redeemed on or after May 15, 2025 but prior to May 15, 2026; (iii) 100.875% of the aggregate principal amount of the 2029 notes redeemed on or after May 15, 2026 but prior to May 15, 2027; and (iv) 100.000% of the aggregate principal amount of the 2029 notes redeemed thereafter.
The senior notes are general unsecured obligations of the Company and are not guaranteed by any of the Company's subsidiaries. The senior notes rank equally in right of payment with the Company's existing and future unsecured unsubordinated obligations, including the credit facilities. The senior notes contain covenants restricting the Company's ability to incur additional indebtedness secured by liens, engage in sale/leaseback transactions, and merge, consolidate, or transfer all or substantially all of the Company's assets.
The senior notes are also subject to a change of control provision whereby each holder of the senior notes has the right to require the Company to purchase all or a portion of such holder's senior notes at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest upon the occurrence of both a change of control and a decline in the rating of the senior notes.
In November 2016, Moody's and S&P lowered their credit ratings on the senior notes to Ba1 (Stable Outlook) from Baa3 (Negative Outlook) and to BB+ (Stable Outlook) from BBB- (Negative Outlook), respectively. The downgrades triggered interest rate adjustments for the 2024 notes. Interest rates for the 2024 notes increased to 5.00% from 4.50%, respectively, effective October 15, 2016. On August 13, 2019, S&P affirmed their rating at BB+ but revised their outlook to Negative from Stable.
Finance Lease Liabilities. The Company has lease agreements for equipment, which are classified as finance lease liabilities. Refer to Note 14, Leases for scheduled maturities and additional information relating to finance lease liabilities.
Unamortized Debt Financing Costs. As of June 30, 2020 and 2019, gross debt issuance costs related to debt instruments were $45.0and $41.3 million, respectively. Accumulated amortization was $17.9 and $12.8 million as of June 30, 2020 and 2019, respectively. Additional debt issuance costs of $3.7 million were capitalized in fiscal 2020. Debt financing costs are amortized over the terms of the related debt instruments and recorded to interest expense on the Consolidated Statements of Operations.
The Company's aggregate scheduled maturities of the long-term debt as of June 30, 2020 were as follows:
|
|
|
|
|
|
|
Amount
|
Fiscal year ending 2021
|
$
|
15.0
|
|
Fiscal year ending 2022
|
315.0
|
|
Fiscal year ending 2023
|
15.0
|
|
Fiscal year ending 2024
|
243.8
|
|
Fiscal year ending 2025
|
500.0
|
|
Thereafter
|
1,600.0
|
|
Total debt
|
2,688.8
|
|
Unamortized deferred financing costs
|
(27.1)
|
|
Total debt, net of unamortized deferred financing costs
|
$
|
2,661.7
|
|
Note 18. Commitments and Contingencies
Legal Proceedings. From time to time, the Company is subject to various claims and is involved in various legal, regulatory, and arbitration proceedings concerning matters arising in connection with the conduct of its business activities, including those noted in this section. Although management at present has no basis to conclude that the ultimate outcome of these proceedings, individually and in the aggregate, will materially harm the Company's financial position, results of operations, cash flows, or overall trends, legal proceedings and related government investigations are subject to inherent uncertainties, and unfavorable rulings or other events could occur. Unfavorable resolutions could include substantial monetary damages. In addition, in matters for which injunctive relief or other conduct remedies are sought, unfavorable resolutions could include an injunction or other order prohibiting us from selling one or more products at all or in particular ways, precluding particular business practices, or requiring other remedies. An unfavorable outcome may result in a material adverse impact on the Company's business, results of operations, financial position, and overall trends. The Company might also conclude that settling one or more such matters is in the best interests of its stockholders, employees, and customers, and any such settlement could include substantial payments.
Competition Matters. The Company is currently involved in, or where indicated, has settled, the following antitrust lawsuits that set forth allegations of anti-competitive agreements between the Company and The Reynolds and Reynolds Company ("Reynolds") relating to the manner in which the defendants control access to, and allow integration with, their respective DMS, and that seek, among other things, treble damages and injunctive relief. These lawsuits have been transferred to, or filed in, the U.S. District Court for the Northern District of Illinois for consolidated and coordinated pretrial proceedings as part of a multi-district litigation proceeding (“MDL”).
Active MDL Lawsuits
•Authenticom, Inc. ("Authenticom") brought a suit against CDK Global, LLC and Reynolds. Authenticom’s suit was originally filed on May 1, 2017, in the U.S. District Court for the Western District of Wisconsin. Defendants’ motions to dismiss were granted in part, and denied in part. Defendants filed answers to Authenticom’s complaint and asserted counterclaims against Authenticom on June 30, 2018; Authenticom filed motions to dismiss those counterclaims. Authenticom's motion to dismiss CDK Global, LLC’s counterclaims were granted in part and denied in part; its motion to dismiss one of Reynolds’s counterclaims was granted. On February 15, 2019, Authenticom filed an answer to both defendants’ counterclaims.
•Teterboro Automall, Inc. d/b/a Teterboro Chrysler Dodge Jeep Ram (“Teterboro”) brought a putative class action suit on behalf of itself and all similarly situated automobile dealerships against CDK Global, LLC and Reynolds. Teterboro’s suit was originally filed on October 19, 2017, in the U.S. District Court for the District of New Jersey. Since that time, several more putative class actions were filed in a number of federal district courts, with substantively similar allegations; all of them have been consolidated with the MDL proceeding. On June 4, 2018, a consolidated class action complaint was filed on behalf of a putative class made up of all dealerships in the United States that directly purchased DMS and/or allegedly indirectly purchased DMS or data integration services from CDK Global, LLC or Reynolds (“Putative Dealership Class Plaintiffs”). CDK Global, LLC moved to dismiss the complaint, or in the alternative, compel arbitration of certain of the cases while staying the remainder pending the outcome of those arbitration proceedings; its motion to dismiss was granted in part and denied in part, while its motion to compel arbitration was denied. On February 22, 2019, CDK Global, LLC filed an answer to the remaining claims in Putative Dealership Class Plaintiffs’ complaint and asserted counterclaims against the Putative Dealership Class Plaintiffs. The Putative Dealership Class Plaintiffs filed a motion to dismiss CDK Global, LLC’s counterclaims; that motion has been fully briefed and remains pending before the court. On October 23, 2018, the Putative Dealership Class Plaintiffs and Reynolds filed a motion for preliminary approval of settlement and for conditional certification of the proposed settlement class. The court approved that settlement on January 22, 2019.
•Loop LLC d/b/a AutoLoop (“AutoLoop”) brought suit against CDK Global, LLC on April 9, 2018, in the U.S. District Court for the Northern District of Illinois, but reserved its rights with respect to remand to the U.S. District Court for the Western District of Wisconsin at the conclusion of the MDL proceedings. On June 5, 2018, AutoLoop amended its complaint to sue on behalf of itself and a putative class action of all other automotive software vendors in the United States that purchased data integration services from CDK Global, LLC or Reynolds. CDK Global, LLC moved to compel arbitration of AutoLoop’s claims, or in the alternative, to dismiss those claims; that motion was denied on January 25, 2019. CDK Global, LLC filed an answer to AutoLoop’s complaint and asserted counterclaims against AutoLoop on February 15, 2019. AutoLoop filed an answer to CDK Global, LLC’s counterclaims on March 8, 2019.
Settled MDL Lawsuits
•Motor Vehicle Software Corporation (“MVSC”) brought a suit against the CDK Global, LLC (after initially naming the Company), Reynolds, and Computerized Vehicle Registration (“CVR”), a majority owned joint venture of the Company. MVSC’s suit was originally filed on February 3, 2017, in the U.S. District Court for the Central District of California. Defendants’ motions to dismiss MVSC’s second amended complaint were denied, and the defendants answered MVSC’s complaint on November 7, 2018. On October 10, 2019, CDK Global, LLC and MVSC entered into a settlement agreement that resulted in a dismissal of all claims brought by MVSC in the MDL, and CDK Global, LLC making a one-time cash payment to MVSC.
•Cox Automotive, along with multiple subsidiaries (“Cox”), brought suit against CDK Global, LLC. Cox’s suit was originally filed on December 11, 2017, in the U.S. District Court for the Western District of Wisconsin. CDK Global, LLC’s motion to dismiss was granted in part and denied in part on January 25, 2019. CDK Global, LLC filed an answer to the remainder of Cox’s complaint and asserted counterclaims against Cox on February 15, 2019. Cox filed an answer to CDK Global, LLC’s counterclaims on March 8, 2019. On July 10, 2019, CDK Global, LLC and Cox entered into a settlement agreement that resulted in a dismissal of all claims brought by the affiliated parties in the MDL, and CDK Global, LLC making a one-time cash payment to Cox.
•i3 Brands, Inc. and PartProtection LLC (“i3 Brands”) brought suit against CDK Global, LLC and Reynolds. i3 Brands' suit was originally filed on February 4, 2019, in the U.S. District Court for the Southern District of California; it was subsequently transferred to the U.S. District Court for the Northern District of Illinois and consolidated as part of the MDL. On April 1, 2019, Reynolds filed a motion to dismiss i3 Brands’ suit in favor of arbitration, or in the alternative, for failure to state a claim, and CDK Global, LLC filed a motion to stay this case pending the outcome of the proposed arbitration proceedings between Reynolds and i3 Brands, or in the alternative, to dismiss certain of its claims for failure to state a claim. On March 4, 2020, CDK Global, LLC and i3 Brands entered into a settlement agreement that resulted in a dismissal of all claims brought by i3 Brands against CDK in the MDL, and CDK Global, LLC agreeing to a release of i3 Brands and an agreement to abandon all claims against i3 Brands.
The Company believes that the remaining unsettled cases are without merit and will continue to vigorously contest all asserted claims. Nonetheless, in light of the Company’s settlement with Cox, MVSC, and i3 Brands and its continued expenditure of legal costs to contest the remaining claims, the Company has determined that a loss of some measure is probable and can be reasonably estimated. In the fourth quarter of 2019, the Company recorded a litigation provision of $90 million. As of June 30, 2020, and 2019, the litigation liability was $57.0 million and $90.0 million, respectively, related to the remaining unsettled cases. This estimated loss is based upon currently available information and represents the Company’s best estimate of such loss. Estimating the value of this estimated loss involved significant judgment given the uncertainty that still exists with respect to the remaining unsettled cases due to a variety of factors typical of complex, large scale litigation, including, among others: (i) formative issues, including: (a) the causes of action the plaintiffs can pursue; (b) the definition of the class(es) of plaintiffs; (c) the types of damages that can be recovered; and (d) whether plaintiffs can establish loss causation as a matter of law, all of which have yet to be determined pending the outcome of dispositive motions (e.g., motions for class certification and motions for summary judgment); (ii) discovery is ongoing and significant factual issues remain to be resolved; (iii) expert discovery with respect to, among other things, alleged antitrust injury and damages is not sufficiently advanced; (iv) the absence of productive settlement discussions to date with plaintiffs other than Cox, MVSC and i3 Brands; and (v) the novel or uncertain nature of the legal issues presented. For these same reasons, the Company cannot reasonably estimate a maximum potential loss exposure at this time. In addition, the Company’s estimate does not incorporate or reflect the potential value of the Company’s counterclaims against certain of the plaintiffs in the ongoing cases. The legal proceedings underlying the estimated litigation liability will change from time to time and actual results may vary significantly from the estimate. As noted above, an adverse result in any of the remaining cases could have a material adverse effect on the Company's business, results of operations, financial condition, or liquidity.
On June 22, 2017, the Company received from the FTC a Civil Investigative Demand consisting of specifications calling for the production of documents relating to any agreements between the Company and Reynolds. Parallel document requests have been received from certain states' Attorneys General. Since 2017, the Company has engaged in continuing communication with and received subsequent requests from the FTC related to its investigation. The Company has responded to the requests and no proceedings have been instituted. The Company believes there has not been any conduct by the Company or its current or former employees that would be actionable under the antitrust laws in connection with the agreements between the Company and Reynolds or otherwise. At this time, the Company does not have sufficient information to predict the outcome of, or the cost of responding to or resolving, these investigations.
Other Commitments and Contingencies. In the normal course of business, the Company may enter into contracts in which the Company makes representations and warranties that relate to the performance of the Company’s services and products. The Company does not expect any material losses related to such representations and warranties.
The Company has provided approximately $27.9 million of guarantees as of June 30, 2020 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 has a total of $41.3 million of outstanding purchase commitments and contracts with expiration dates through 2025.
The Company had a total of $2.3 million in letters of credit outstanding as of June 30, 2020 primarily in connection with insurance programs and its foreign subsidiaries.
Note 19. Share Repurchase Transactions
In December 2015, the Board of Directors authorized the Company to repurchase up to $1.0 billion of its common stock as part of its $1.0 billion return of capital plan. In December 2016, the company completed its $1.0 billion return of capital plan. In January 2017, the Board of Directors terminated this authorization and replaced it with an authorization for the Company to repurchase up to $2.0 billion of its common stock as part of a new return of capital plan. Under the authorization, the Company may purchase its common stock in the open market or in privately negotiated transactions from time to time as permitted by federal securities laws and other legal requirements. The actual timing, number, and price of any shares to be repurchased is determined at management's discretion and depends on a number of factors, including the market price of the shares, general market and economic conditions, and other potential uses for free cash flow including, but not limited to, potential acquisitions.
In November 2018, the Company entered into an accelerated share repurchase agreement ("November 2018 ASR") to purchase $260.0 million of the Company's common stock. Under the terms of the November 2018 ASR, the Company made a $260.0 million payment in November 2018 and received initial delivery of approximately 4.1 million of the Company's common stock. In February 2019, the Company received an additional 1.1 million shares of common stock in final settlement of the November 2018 ASR, for a total of 5.2 million shares. The value reflected in treasury stock upon completion of the November 2018 ASR represents the value of the shares received based on the closing price of the Company's stock on the respective settlement dates, which is higher than the $260.0 million cash paid by $13.0 million.
Additionally, the Company made open market repurchases of 4.4 million shares of the Company's common stock during fiscal 2019 for a total cost of $264.1 million.
Note 20. Financial Data by Segment
The Company is organized into two main operating groups, CDK North America and CDK International, which are also reportable segments. The Company's previously reported Advertising North America segment has been classified as discontinued operations for all periods presented. Discontinued operations also includes the Company's mobile advertising and website services businesses, the results of which were previously reported within the CDKNA segment. Additional information on discontinued operations is contained in Note 4 - Discontinued Operations.
The primary components of the Other segment are corporate allocations and other expenses not recorded in the segment results, such as stock-based compensation expense, corporate costs, interest expense, costs attributable to the business transformation plan, results of the captive insurance company and certain unallocated expenses. Certain expenses are charged to the reportable segments at a standard rate for management reasons. Other costs are recorded based on management responsibility.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CDK North America
|
|
CDK International
|
|
Other(1)
|
|
Total
|
Year ended June 30, 2020
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,639.0
|
|
|
$
|
321.1
|
|
|
$
|
—
|
|
|
$
|
1,960.1
|
|
Earnings before income taxes
|
587.6
|
|
|
58.1
|
|
|
(221.5)
|
|
|
424.2
|
|
Loss from equity method investment
|
—
|
|
|
—
|
|
|
(2.7)
|
|
|
(2.7)
|
|
Assets
|
1,990.3
|
|
|
491.0
|
|
|
372.8
|
|
|
2,854.1
|
|
Capital expenditures
|
16.6
|
|
|
6.3
|
|
|
0.6
|
|
|
23.5
|
|
Depreciation and amortization
|
89.5
|
|
|
7.8
|
|
|
2.3
|
|
|
99.6
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2019
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,593.0
|
|
|
$
|
321.8
|
|
|
$
|
—
|
|
|
$
|
1,914.8
|
|
Earnings before income taxes
|
517.5
|
|
|
77.1
|
|
|
(290.7)
|
|
|
303.9
|
|
Loss from equity method investment
|
(17.0)
|
|
|
—
|
|
|
—
|
|
|
(17.0)
|
|
Assets
|
1,881.4
|
|
|
497.7
|
|
|
619.9
|
|
|
2,999.0
|
|
Capital expenditures
|
49.3
|
|
|
5.1
|
|
|
—
|
|
|
54.4
|
|
Depreciation and amortization
|
73.9
|
|
|
9.3
|
|
|
6.6
|
|
|
89.8
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2018
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,441.7
|
|
|
$
|
356.3
|
|
|
$
|
—
|
|
|
$
|
1,798.0
|
|
Earnings before income taxes
|
576.4
|
|
|
97.7
|
|
|
(274.9)
|
|
|
399.2
|
|
Assets
|
1,203.2
|
|
|
509.6
|
|
|
1,295.6
|
|
|
3,008.4
|
|
Capital expenditures
|
40.1
|
|
|
5.8
|
|
|
—
|
|
|
45.9
|
|
Depreciation and amortization
|
54.0
|
|
|
11.7
|
|
|
5.1
|
|
|
70.8
|
|
(1)Includes assets held for sale of $220.5 million, and $269.4 million as of June 30, 2019, and 2018, respectively.
Revenues and property, plant and equipment, net by geographic area were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
Europe
|
|
Canada
|
|
Other
|
|
Total
|
Year ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,548.6
|
|
|
$
|
237.3
|
|
|
$
|
90.4
|
|
|
$
|
83.8
|
|
|
$
|
1,960.1
|
|
Property, plant and equipment, net
|
92.5
|
|
|
9.3
|
|
|
2.1
|
|
|
5.2
|
|
|
109.1
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,500.3
|
|
|
$
|
235.4
|
|
|
$
|
92.7
|
|
|
$
|
86.4
|
|
|
$
|
1,914.8
|
|
Property, plant and equipment, net
|
122.7
|
|
|
11.2
|
|
|
4.3
|
|
|
6.6
|
|
|
144.8
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,347.9
|
|
|
$
|
253.3
|
|
|
$
|
93.8
|
|
|
$
|
103.0
|
|
|
$
|
1,798.0
|
|
Property, plant and equipment, net
|
101.6
|
|
|
14.1
|
|
|
3.9
|
|
|
8.0
|
|
|
127.6
|
|
Revenues by category by segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended June 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
CDKNA
|
|
|
|
|
|
Subscription
|
$
|
1,306.0
|
|
|
$
|
1,283.3
|
|
|
$
|
1,176.4
|
|
On-site licenses and installation
|
10.8
|
|
|
7.9
|
|
|
—
|
|
Transaction
|
155.0
|
|
|
162.5
|
|
|
164.0
|
|
Other
|
167.2
|
|
|
139.3
|
|
|
101.3
|
|
Total CDKNA
|
1,639.0
|
|
|
1,593.0
|
|
|
1,441.7
|
|
CDKI
|
|
|
|
|
|
Subscription(1)
|
253.5
|
|
|
239.4
|
|
|
356.3
|
|
On-site license and installation(1)
|
46.7
|
|
|
65.0
|
|
|
—
|
|
Other
|
20.9
|
|
|
17.4
|
|
|
—
|
|
Total CDKI
|
321.1
|
|
|
321.8
|
|
|
356.3
|
|
Total
|
$
|
1,960.1
|
|
|
$
|
1,914.8
|
|
|
$
|
1,798.0
|
|
(1) During the fourth quarter of fiscal 2020, the Company determined that certain revenue within the CDKI segment categorized as Subscription should be reported as On-site license and installation. As a result, for the year ended June 30, 2019, the Company reclassified $17.9 million of revenue to conform to the current year presentation. The Company believes this reclassification is not material. The reclassification did not impact the Consolidated Statements of Operations.
Note 21. Quarterly Financial Results (Unaudited)
Summarized quarterly results of operations for the fiscal 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
Year ended June 30, 2020
|
|
|
|
|
|
|
|
Revenues
|
$
|
494.6
|
|
|
$
|
499.6
|
|
|
$
|
516.3
|
|
|
$
|
449.6
|
|
Gross profit (2)
|
247.3
|
|
|
263.7
|
|
|
273.8
|
|
|
208.8
|
|
Earnings before income taxes
|
104.0
|
|
|
113.0
|
|
|
132.4
|
|
|
74.8
|
|
Net earnings from continuing operations
|
78.4
|
|
|
69.8
|
|
|
94.4
|
|
|
61.2
|
|
Net earnings (loss) from discontinued operations
|
5.7
|
|
|
(45.7)
|
|
|
(34.9)
|
|
|
(14.4)
|
|
Net earnings
|
84.1
|
|
|
24.1
|
|
|
59.5
|
|
|
46.8
|
|
Net earnings attributable to noncontrolling interest
|
2.1
|
|
|
1.8
|
|
|
1.9
|
|
|
1.2
|
|
Net earnings attributable to CDK
|
82.0
|
|
|
22.3
|
|
|
57.6
|
|
|
45.6
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to CDK per share - basic:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.63
|
|
|
$
|
0.56
|
|
|
$
|
0.76
|
|
|
$
|
0.49
|
|
Discontinued operations
|
0.05
|
|
|
(0.38)
|
|
|
(0.29)
|
|
|
(0.12)
|
|
Total net earnings attributable to CDK per share - basic
|
$
|
0.68
|
|
|
$
|
0.18
|
|
|
$
|
0.47
|
|
|
$
|
0.37
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to CDK per share - diluted:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.62
|
|
|
$
|
0.55
|
|
|
$
|
0.76
|
|
|
$
|
0.49
|
|
Discontinued operations
|
0.05
|
|
|
(0.37)
|
|
|
(0.29)
|
|
|
(0.12)
|
|
Total net earnings attributable to CDK per share - diluted
|
$
|
0.67
|
|
|
$
|
0.18
|
|
|
$
|
0.47
|
|
|
$
|
0.37
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2019
|
|
|
|
|
|
|
|
Revenues (1)
|
$
|
446.3
|
|
|
$
|
478.7
|
|
|
$
|
501.2
|
|
|
$
|
488.6
|
|
Gross profit (1) (2)
|
243.0
|
|
|
248.1
|
|
|
271.9
|
|
|
252.0
|
|
Earnings before income taxes (1)
|
106.5
|
|
|
96.6
|
|
|
120.7
|
|
|
(19.9)
|
|
Net earnings from continuing operations
|
76.5
|
|
|
72.6
|
|
|
89.3
|
|
|
3.3
|
|
Net earnings (loss) from discontinued operations
|
15.8
|
|
|
18.3
|
|
|
12.4
|
|
|
(156.3)
|
|
Net earnings
|
92.3
|
|
|
90.9
|
|
|
101.7
|
|
|
(153.0)
|
|
Net earnings attributable to noncontrolling interest
|
2.0
|
|
|
1.9
|
|
|
1.9
|
|
|
2.1
|
|
Net earnings attributable to CDK
|
90.3
|
|
|
89.0
|
|
|
99.8
|
|
|
(155.1)
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to CDK per share - basic:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.58
|
|
|
$
|
0.56
|
|
|
$
|
0.70
|
|
|
$
|
0.01
|
|
Discontinued operations
|
0.12
|
|
|
0.14
|
|
|
0.10
|
|
|
(1.29)
|
|
Total net earnings attributable to CDK per share - basic
|
$
|
0.70
|
|
|
$
|
0.70
|
|
|
$
|
0.80
|
|
|
$
|
(1.28)
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to CDK per share - diluted:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.57
|
|
|
$
|
0.56
|
|
|
$
|
0.70
|
|
|
$
|
0.01
|
|
Discontinued operations
|
0.12
|
|
|
0.14
|
|
|
0.10
|
|
|
(1.28)
|
|
Total net earnings attributable to CDK per share - diluted
|
$
|
0.69
|
|
|
$
|
0.70
|
|
|
$
|
0.80
|
|
|
$
|
(1.27)
|
|
(1) Amounts differ from previously reported in the Quarterly Reports on Form 10-Q as a result of the Digital Marketing Business being classified as discontinued operations. See Note 4, "Discontinued Operations" for additional information.
(2) Gross profit is calculated as revenues less cost of revenues.