UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM 10-K
______________
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to
Commission File Number 001-36486
______________
CDK Global, Inc.
(Exact name of registrant as specified in its charter)
______________
Delaware
(State or other jurisdiction of incorporation or
organization)
46-5743146
(IRS Employer Identification No.)
1950 Hassell Road, Hoffman Estates
IL, 60169
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (847) 397-1700
______________
Title of class
Common Stock, $0.01 Par Value
Securities registered pursuant to Section 12(b) of the Act:
Trading Symbol(s)
Name of each exchange on which registered
CDK
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
______________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes ☒ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer," “smaller reporting
company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☒
☐
Accelerated filer
☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of
its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public
accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of common stock held by non-affiliates of the registrant, as of December 31, 2019, the last business day of
the registrant's most recently completed second fiscal quarter, was approximately $6.6 billion.
The number of shares outstanding of the registrant’s common stock as of August 3, 2020 was 121,540,576.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference to the registrant's definitive proxy statement, to be filed with the Securities and Exchange
Commission within 120 days after the fiscal year end of June 30, 2020.
Table of Contents
Part I
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6.
Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Part IV
Item 15. Exhibits, Financial Statement Schedules
Signatures
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Part I
Item 1. Business
This Annual Report on Form 10-K and the documents incorporated herein by reference contain "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical
fact, may be forward-looking statements. These statements are based on management's expectations and assumptions as of the
date of this filing and are subject to risks and uncertainties that may cause actual results to differ materially from those
expressed, or implied by, these forward-looking statements. Factors that could cause actual results to differ materially from
those contemplated by the forward-looking statements include, but are not limited to, those discussed in Part I, Item 1A of this
Form 10-K under the heading “Risk Factors,” which are incorporated herein by reference. We disclaim any obligation to
update or revise forward-looking statements that may be made to reflect new information or future events or circumstances that
arise after the date made or to reflect the occurrence of unanticipated events, other than as required by law. The following
discussion should be read in conjunction with the consolidated financial statements and accompanying notes included in Part
II, Item 8 of this Form 10-K. As used herein, "CDK Global," "CDK," the "Company," "we," "our," and similar terms include
CDK Global, Inc. and its consolidated subsidiaries, unless the context indicates otherwise.
CDK Global, Inc. is the former Dealer Services division of Automatic Data Processing, Inc. ("ADP"). We were incorporated in
Delaware as a wholly-owned subsidiary of ADP on September 29, 2014 and began operating as an independent public company
on September 30, 2014. Our principal corporate offices are located in Hoffman Estates, Illinois. Our common stock is listed on
the NASDAQ Global Select Market under the symbol “CDK.”
As used herein, "CDK Global," "CDK," the "Company," "we," "our," and similar terms include CDK Global, Inc. and its
consolidated subsidiaries, unless the context indicates otherwise.
Overview
Our purpose is to enable end-to-end automotive commerce across the globe. For over 40 years, CDK Global 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. Our 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.
We have organized our operations into two main operating groups, CDK North America ("CDKNA") and CDK International
("CDKI"), which are also the two reportable operating 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. Additional information
on our reportable segments and geographic areas is contained in Item 8 of Part II, "Financial Statements and Supplementary
Data - Note 20 - Financial Data by Segment."
In June 2019, we committed to a plan to divest our Digital Marketing Business and completed the divestiture on April 21, 2020.
The Digital Marketing Business is presented as discontinued operations. Additional information on discontinued operations is
contained in Item 8 of Part II, "Financial Statements and Supplementary Data - Note 4 - Discontinued Operations."
Our Strategy
To enable end-to-end automotive commerce, our strategy is to invest for the long-term in integrated software products and an
open technology platform that can deliver seamless, workflow-driven solutions for our customers. The automotive retail market
is evolving and demand for new and integrated technology solutions is growing: consumers increasingly expect a seamless
omnichannel experience when purchasing or servicing vehicles; OEMs see technology as a tool to ensure a consistent and
positive customer experience across their retail networks; and retailers are seeking integrated workflow technology solutions to
help them improve both customer satisfaction and dealership cost structure. We believe that the best way to compete in a world
with numerous providers of unconnected software solutions for numerous automotive retailers, OEMs, consumers, and vehicles
is to provide integrated technology solutions and platform tools that can connect the disparate elements to create continuous
retail workflows.
Our Business
We generate revenue primarily by providing a broad suite of subscription-based software and technology solutions for
automotive retailers through our CDKNA segment. We are focused on the use of software-as-a-service ("SaaS") and mobile-
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centric solutions that are highly functional, flexible, and fast. Our flagship Dealer Management System ("DMS") software
solutions are hosted enterprise resource planning applications tailored to the unique requirements of the retail automotive
industry. Our DMS products facilitate the sale of new and used vehicles, consumer financing, repair and maintenance services,
and vehicle and parts inventory management. Additionally, these solutions enable company-wide accounting, financial
reporting, cash flow management, and payroll services. Our DMSs are typically integrated with OEM data processing systems
that enable automotive retailers to order vehicles and parts, receive vehicle records, process warranties, and check recall
campaigns and service bulletins while helping them to fulfill their franchisee responsibilities to their OEM franchisors.
Complementary to our core DMSs in the CDKNA segment, we also provide a portfolio of layered software applications and
services to address the unique needs of automotive retail workflows. These solutions are often integrated to and targeted at
users of our DMSs, but may, in some cases, be provided to customers that do not otherwise use our DMS.
In response to the global COVID-19 pandemic, we have provided products and support to help dealers virtually sell vehicles.
We have made enhancements to our Connected Store software that enables dealers to deliver quotes and complete sales. We
have also implemented installation procedures for our DMS and layered application products on a fully remote basis to meet the
needs of our dealers.
Our principal layered applications are:
Solutions
Description
Vehicle Sales Solutions
Fixed Operations Solutions
Customer Relationship Management Solutions
Financial Management Solutions
Document Management Solutions
Network Management Solutions
Integrated Telephony Management Solutions
Technology tools and services to streamline the entire vehicle
inventory, sales, and finance and insurance ("F&I") process
Solutions to manage the parts and service profit center of
dealerships, including customer targeting, appointment scheduling,
on-site workflow, and billing
Software to manage interactions with current and prospective
customers
Value-added capabilities for accounts payable, payments, and
payroll
Document creation and archiving solutions to address the complex
automotive retail sales process
Wired and wireless network solutions to support dealer connectivity
and security efforts
Integrated telephony solutions that allow automotive retailers to
connect and communicate via presence, instant messaging, voice,
and video
In the CDKNA segment, we further connect the automotive ecosystem by providing third party retail solution providers with
robust and secure interfaces to the core DMS through our Partner Program. For both automotive retailers and OEMs we provide
data management and business intelligence solutions that extract, cleanse, normalize, enhance, and distribute data and that
provide actionable insights.
Through our CDKI segment, we provide automotive retailers with core DMS solutions and we offer automotive retailers and
OEMs a variety of professional services, custom programming, consulting, implementation and training solutions, as well as a
full range of customer support solutions in approximately 100 countries outside of the United States ("U.S.") and Canada. The
solutions that we provide within this segment allow our customers to streamline their business operations and enhance their
financial performance within their local marketplace, and in some cases where we deal directly with OEMs, across international
borders. Customers of this segment include automotive retail dealers and OEMs across Europe, the Middle East, Asia, Africa,
and Latin America.
In both our CDKNA and CDKI segments, we offer automotive retailers and OEMs a variety of professional services, custom
programming, consulting, implementation and training solutions, as well as a full range of customer support solutions.
In addition to providing solutions to automotive retailers and OEMs, our CDKNA segment also provides solutions to retailers
and manufacturers of heavy trucks, construction equipment, agricultural equipment, motorcycles, boats, and other marine and
recreational vehicles.
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Product Development and Innovation
Our ability to strengthen and extend our solutions portfolio is a key element of our business strategy. We execute on this
strategy through a combination of development and the selective pursuit of strategic acquisitions.
In addition to the ongoing investment to enhance existing solutions within our core business, we also invest in long- and
medium-term product innovation aligned with our strategy. For example, the Fortellis Automotive Commerce Exchange
("Fortellis") under development is expected to be the foundation of our open technology platform for automotive commerce.
Within the automotive commerce market, Fortellis allows CDK Global and third parties to develop adaptive and
interchangeable application programming interfaces ("APIs") that can be used to connect existing technology solutions and
build new solutions quickly and with high levels of reliability. Similarly, we have developed Drive Flex, a cloud-based DMS.
We are developing these solutions using a methodical and measured approach with respect to capital and resource allocation.
We believe these investments align to our strategy and will position CDK Global to take advantage of the evolving automotive
retail market.
Competition
Our industry is highly competitive and fragmented. We compete with a broad and diverse range of information, technology,
services, and consulting companies, as well as with the in-house capabilities of OEMs. Our competitors range from local
providers to regional and global competitors. However, we believe that no competitor provides the same combination of
geographical reach and breadth of solutions that we do.
Each of our solutions faces competition from an array of solution providers. For our DMS solutions in North America, our
principal competitors are Reynolds and Reynolds, Dealertrack (Cox Automotive), Auto/Mate, AutoSoft, PBS Systems, and
various local and regional providers. For our CDKI segment, DMS competition is principally from local and regional providers.
The most significant competitive factors that we face across our solutions are price, breadth of features and functionality, user
experience, quality, brand, scalability, and service capability.
Regulation
The automotive retail industry is highly regulated and automotive retailers and OEMs are subject to a broad array of complex
regulations governing virtually every aspect of their operations. Our customers must ensure their compliance with their
regulatory requirements, and, in turn, we must ensure that our solutions effectively address their regulatory compliance needs.
Because our business delivers solutions across a broad spectrum of automotive retailer operations, our activities are impacted
by a wide variety of federal, state, local, and international laws and regulations. Central to the value of our Document
Management Solutions application, for example, is that the forms we provide for our customers meet the requirements of their
applicable laws. Likewise, within our Vehicle Sales Solutions application, our electronic vehicle registration service is
dependent on our compliance with complex and detailed regulatory requirements. Across our portfolio of automotive retail
solutions, we are focused on ensuring that we meet our regulatory compliance obligations and that our solutions enable our
customers to comply with the laws and regulations applicable to them. See “Risk Factors-Risks Relating to Our Business" for
additional information regarding the application and impact of laws and regulations on our operations.
Privacy and Data Protection Regulations
We are subject to a number of federal, state, and foreign laws and regulations regarding data governance and the privacy and
protection of personal data. For example, under the Gramm-Leach-Bliley Act (the "GLB Act"), automotive retailers are
generally deemed to be regulated financial institutions and therefore are subject to the GLB Act and applicable regulations,
including the Federal Trade Commission's ("FTC") Privacy Rule and Safeguards Rule. In our capacity as a service provider to
automotive retailers, we generally commit to our customers that we will handle non-public personal information consistent with
the GLB Act and the related regulations. Similarly, many United States ("U.S.") states and foreign jurisdictions have adopted
regulations that impose obligations on businesses that handle personal information, including notification requirements in the
event of data breaches relating to personal data, as well as minimum security standards with respect to the handling and
transmission of personal data. For a discussion of privacy and data protection regulation and the potential impacts on our
business, see "Risk Factors - Risks Relating to Our Business."
Seasonality in Our Business
Though our business is not highly cyclical, a portion of it is seasonal. Our transaction revenues experience volatility around
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seasonal consumer vehicle shopping activity, and our Other revenues have a seasonal increase in the third quarter of each fiscal
year.
Employees
As of June 30, 2020, we had a total of approximately 9,000 employees worldwide. None of our employees in the United States
are represented by a collective bargaining agreement. We have work councils and statutory employee representation obligations
in certain countries outside the United States. We believe that relations with our employees are good.
Available Information
Our company website is cdkglobal.com. The investor relations section of our website is investors.cdkglobal.com. We encourage
investors to use our website as a way of easily finding information about us. We promptly make available on the investor
relations section of our website, free of charge, the reports that we file or furnish with the Securities and Exchange Commission
("SEC"), corporate governance information (including our Code of Business Conduct and Ethics), and select press releases. The
information contained on the websites referenced in this Annual Report on Form 10-K is not incorporated by reference into this
filing. Further, the Company’s references to website URLs are intended to be inactive textual references only.
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Item 1A. Risk Factors
The following discussion of risk factors contains forward-looking statements. These risk factors may be important to
understanding other statements in this Annual Report on Form 10-K. The following information should be read in conjunction
with Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the
consolidated financial statements and accompanying notes in Part II, Item 8, “Financial Statements and Supplementary Data”
of this Annual Report on Form 10-K.
The business, financial condition and operating results of the Company can be affected by a number of factors, whether
currently known or unknown, including but not limited to those described below, any one or more of which could, directly or
indirectly, cause the Company’s actual financial condition and operating results to vary materially from past, or from
anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and
adversely affect the Company’s business, financial condition, operating results and stock price.
Because of the following factors, as well as other factors affecting the Company’s financial condition and operating results,
past financial performance should not be considered to be a reliable indicator of future performance, and investors should not
use historical trends to anticipate results or trends in future periods.
Risks Relating to Our Business
The COVID-19 pandemic could materially adversely affect our business, results of operations, and financial condition.
The global spread of COVID-19 has resulted in authorities imposing, and businesses and individuals implementing, numerous
unprecedented measures to try to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place/stay-at-
home and social distancing orders, and shutdowns. These measures have impacted and may further impact our workforce and
operations, the workforce and operations of our customers, and those of our respective vendors, suppliers, and partners. The
ultimate impact and efficacy of current containment and mitigation measures and potential future measures is currently
unknown.
There is considerable uncertainty regarding the direct and indirect business impacts from such measures and potential future
measures. We have been able to continue to conduct our business on a relatively normal basis to date while implementing
business process modifications to protect our employees and customers, such as travel mobility restrictions and work-from-
home and social distancing policies. Restrictions on product installation operations or workforce can impact our ability to meet
customer demand and could have a material adverse effect on our financial condition and results of operations, particularly if
prolonged. Our customers have experienced, and may continue to experience, restrictions on their ability to operate in addition
to reduced automotive retail demand. Such reductions in demand directly impact our transaction revenue in addition to
negatively impacting the financial health of our customers. In response to the COVID-19 pandemic we provided our customers
with pricing concessions during the fourth quarter of fiscal 2020 on most of our subscription-based solutions, including the
DMS. The direct financial impact of these concessions was a near-term decrease in cash receipts and a reduction in revenue that
will be recognized over the next two years. Any future concessions are likely to have a similar impact. A discussion of the
impact of these concessions is provided in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” of this Annual Report on Form 10-K.
The pandemic has significantly increased economic and demand uncertainty. Certain scientists and medical experts have
forecasted that a potential “second wave” of COVID-19 may occur in the U.S. in the late third quarter or the fourth quarter of
calendar 2020 and continue into calendar 2021, and there is the risk that any second wave may be on a larger scale than the
initial wave of COVID-19 that the U.S. has experienced and is currently experiencing. The sustained current outbreak and
continued spread of COVID-19 has caused economic disruption, including wide scale unemployment, and it is possible that it
could cause a global recession. There is a significant degree of uncertainty and lack of visibility as to the extent and duration of
any such slowdown or recession. Risks related to a slowdown or recession are described in our risk factor titled “We have
customers in over 100 countries, where we are subject to global, regional and country-specific risks that could negatively
impact our business, results of operations, and financial condition,” below, and include the risk that sales within the automotive
retail industry will be significantly curtailed for various reasons including the impact of economic conditions on consumer
confidence and demand, the impact of COVID-19 containment and mitigation measures on consumer's ability to access dealers
and purchase vehicles, and the ability to meet customer demand for vehicles due to disruption in the available inventory of
vehicles related to supply chain and production disruption caused by measures taken to limit the spread of the virus, which
could in turn reduce the number and/or size of actual or potential customers or the money that actual or potential customers are
willing or able to spend on our solution portfolio. While consumer demand within the automotive retail industry has improved
from the declines seen in April and May of 2020, we continue to see negative impacts on demand within the automotive retail
industry, and we expect that slowing economic conditions will continue to negatively impact demand during fiscal 2021, as
discussed in the “Financial Condition, Liquidity and Capital Resources” section of this Annual Report on Form 10-K. Given the
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significant economic uncertainty and volatility created by the pandemic, it is difficult to predict the nature and extent of impacts
on our business. These expectations are subject to change without warning and investors are cautioned not to place undue
reliance on them.
The pandemic has led to increased disruption and volatility in capital markets and credit markets. On May 4, 2020, we amended
our Credit Agreements to temporarily increase the total indebtedness to consolidated EBITDA ratio covenants to enhance our
liquidity position given the uncertainty regarding the length and severity of the pandemic and ongoing economic uncertainty.
Unanticipated consequences of the pandemic and resulting economic uncertainty could adversely affect our liquidity and capital
resources in the future.
The spread of COVID-19 has also caused us to modify our business practices (including employee travel, employee work
locations, cancellation of physical participation in meetings, events and conferences, and social distancing measures), and we
may take further actions as may be required by government authorities or that we determine are in the best interests of our
employees, customers, partners, vendors, and suppliers. Work-from-home and other measures introduce additional operational
risks, including cybersecurity risks, and have affected the way we conduct our product development, customer support, and
other activities, which could have an adverse effect on our operations. There is no certainty that such measures will be sufficient
to mitigate the risks posed by the virus, and illness and workforce disruptions could lead to unavailability of key personnel and
harm our ability to perform critical functions.
The degree to which the COVID-19 pandemic impacts our results will depend on future developments, which are highly
uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, the
possibility of a "second wave" of COVID-19, the actions to contain the virus or treat its impact, other actions taken by
governments, businesses, and individuals in response to the virus and resulting economic disruption, and how quickly and to
what extent normal economic and operating conditions can resume. We are similarly unable to predict the degree to which the
pandemic will impact our customers, suppliers, vendors, and other partners, and their financial conditions, but a material effect
on these parties could also adversely affect us. The impact of the COVID-19 pandemic may also exacerbate other risks
discussed in the Risk Factors sections of this Annual Report on Form 10-K, which could in turn have a material adverse effect
on us. Developments related to the COVID-19 pandemic have been rapidly changing, and additional impacts and risks may
arise that we are not aware of or able to appropriately respond to currently.
We face intense competition. If we do not continue to compete effectively against other providers of technology solutions to
automotive retailers, OEMs, and other participants in the automotive retail industry, it could have a material adverse effect
on our business, results of operations, and financial condition.
Competition among automotive retail solutions providers is intense. The industry is highly fragmented and subject to changing
technology, shifting customer needs, and frequent introductions of new solutions. We have a variety of competitors both for our
integrated solutions and for each of our individual solutions. For example:
•
•
for our Dealer Management System (“DMS”) solutions in our CDKNA segment, our principal competitors are
Reynolds and Reynolds, Dealertrack (Cox Automotive), Auto/Mate, AutoSoft, PBS Systems and various local and
regional providers; and
for our CDKI segment, DMS competition is principally from local and regional providers.
Our competitors may be able to respond more quickly or effectively to new or emerging technologies and changes in customer
demands or to devote greater resources to the development, promotion, and sale of their solutions than we can to ours. We
expect the industry to continue to attract new competitors and new technologies, possibly involving alternative technologies that
are more sophisticated and cost-effective than our solutions. There can be no assurance that we will be able to compete
successfully against current or future competitors or that the competitive pressures we face will not have a material adverse
effect on our business, results of operations, and financial condition.
Market trends influencing the automotive retail industry could have a negative impact on our business, results of operations,
and financial condition.
Market trends that negatively impact the automotive retail industry may affect our business by reducing the number and/or size
of actual or potential customers or the money that actual or potential customers are willing or able to spend on our solution
portfolio. Such market factors include:
•
the adverse effect of long-term wage stagnation on the purchasing power of vehicle purchasers and the number of
vehicle purchasers;
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•
•
•
•
•
pricing and purchase incentives for vehicles;
disruption in the available inventory of vehicles;
disruption in the franchised automotive retailer dealership model, including potential disintermediation by emerging
business models;
reductions in growth or decreases of automotive retailer spend on technology;
contractions in the number of franchised automotive retailers;
• market oversupply of vehicles and declining used-vehicle pricing;
•
•
•
•
•
•
the expectation that consumers will be purchasing fewer vehicles overall during their lifetime as a result of better
quality vehicles and longer warranties and the development of shared-use mobility;
the cost of gasoline and other forms of energy;
the availability and cost of credit to finance the purchase of vehicles and excess negative equity in existing vehicle
loans;
the effect of adverse macroeconomic conditions on consumer shopping activity;
increased federal and other taxation; and
reductions in business and consumer confidence.
Such market trends could have a material adverse effect on our business, results of operations, and financial condition.
Market acceptance of and influence over our products and services is concentrated in a limited number of automobile
OEMs and consolidated retailer groups, and we may not be able to maintain or grow these relationships.
Although the automotive retail industry is fragmented, a relatively small number of OEMs, consolidated retailer groups and
retailer associations exert significant influence over the market acceptance of automotive retail products and services due to
their concentrated purchasing activity, their endorsement or recommendation of specific products and services and/or their
ability to define technical standards and certifications. For example, our DMSs are certified to technical standards established
by OEMs and certain of our products and services are provided pursuant to OEM-designated endorsement or preferred vendor
programs. While automotive retailers are generally free to purchase the solutions of their choosing, when an OEM has endorsed
or certified a provider of products or services to its associated franchised automotive retailers and if our solutions lack such
certification or endorsement, adoption or retention of our products and services among the franchised dealers of such OEM
could be materially impaired.
We may be unable to develop and bring products and services in development to market, or bring new products and services
to market in a timely manner or at all.
Our success depends in part upon our ability to bring to market new products and services, and enhancements thereto that
address evolving customer demands. The successful development of Drive Flex, for example, is important to our future product
strategy. The time, expense, and effort associated with developing and offering Drive Flex, Fortellis, and other new and
enhanced products and services may be greater than anticipated. The length of the development cycle varies depending on the
nature and complexity of the product, the availability of development, product management, and other internal resources and
the role, if any, of strategic partners. If we are unable to develop and bring to market additional products and services, and
enhancements thereto, in a timely manner, or at all, we could lose market share to competitors who are able to offer these new
products and services, which could have a material adverse effect on our business, results of operations, and financial condition.
Our failure or inability to execute any element of our business strategy could negatively impact our business, results of
operations, or financial condition.
Our business, results of operations, and financial condition depend on our ability to execute our business strategy, which
includes the following key elements:
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•
•
•
•
•
•
•
deepening relationships with our existing customer base;
continuing to expand our customer base;
delivering on our business transformation initiatives;
strengthening and extending our solutions through intelligence and innovation;
developing and delivering our next generation of solutions;
selectively pursuing strategic acquisitions; and
building and maintaining a culture of performance and accountability.
We may not succeed in implementing a portion or all of our business strategy, and even if we do succeed, our strategy may not
have the favorable impact on our business, results of operations, or financial condition that we anticipate. We may not be able
to effectively manage the expansion of our business or achieve the rapid execution necessary to fully avail ourselves of the
market opportunity for our solution portfolio. If we are unable to adequately implement our business strategy, our business,
results of operations, and financial condition could suffer a material adverse effect.
We are dependent on our key management, direct sales force, and technical personnel for continued success.
Our global senior management team is concentrated in a small number of key members, and our future success depends to a
meaningful extent on the services of our executive officers and other key team members, including members of our direct sales
force and technology staff. Generally, our executive officers and employees can terminate their employment relationship at any
time. The loss of any key employees or our inability to attract or retain other qualified personnel could materially harm our
business and prospects.
Effective succession planning is important to our long-term success. Disruptions in future leadership transitions or
reorganizations could have a material adverse effect on our business, results of operations, and financial condition and could
adversely affect our ability to attract and retain other key executives.
Competition for qualified leadership and technical personnel in the technology industry is intense, and we compete for
leadership and technical personnel with other technology companies that have greater financial and other resources than we do.
Our future success will depend in large part on our ability to attract, retain, and motivate highly qualified leadership and
technical personnel, and there can be no assurance that we are able to do so. Any difficulty in hiring or retaining needed
personnel, or increased costs related thereto, could have a material adverse effect on our business, results of operations, and
financial condition.
Real or perceived errors or failures in our software and systems could negatively impact our results of operations and
growth prospects.
We depend upon the sustained and uninterrupted performance of numerous proprietary and third-party technologies to deliver
our solution portfolio. If one or more of those technologies cannot scale to meet demand, or if there are human or technological
errors in our execution of any feature or functionality using any such technologies, then our business may be harmed. Because
our software is often complex, undetected errors and failures may occur, especially when new versions or updates are made.
Despite testing by us, errors or bugs in our solutions may not be found until the software or service is in active use by us or our
customers. Moreover, our customers could incorrectly implement or inadvertently misuse our solutions, which could result in
customer dissatisfaction and adversely impact the perceived utility of our solutions as well as our brand. Any of these real or
perceived errors, failures, or bugs could result in negative publicity, reputational harm, loss of or delay in market acceptance of
our solutions, loss of competitive position or claims by customers for losses sustained by them, all of which, along with the
costs of responding to such effects, may have a material adverse effect on our business, results of operations, and financial
condition.
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Data security concerns relating to our technology or services could damage our reputation and deter current and potential
customers from using our products and services. If our security measures fail to protect our customers' data from
unauthorized access and disclosure, our products and services may be perceived as not being secure, customers may curtail
or stop using our products and services, and we may incur significant legal and financial exposure. A significant breach of
the data security of our customers’, vendors’ or other partners’ information technology systems may negatively impact our
business, results of operations, and financial condition.
We handle substantial amounts of confidential information, including personal information of our employees and of our
customers' consumers and employees. Our success depends on the confidence of OEMs, dealers, lenders, major credit reporting
agencies and other data providers, and other users of (or participants in) our solutions, in our ability to store, process, and
transmit this confidential information securely (whether over the internet or otherwise), and to operate our computer systems
and operations without significant disruption or failure.
Our computer systems experience cyber-attacks and data security incidents of varying degrees on a regular basis. These events
may lead to interruptions and delays in our service and operations as well as loss, misuse, or theft of data that we store, process
and transmit. Our security measures may also fail to prevent unauthorized access to our systems and data may be exfiltrated and
improperly disclosed or used due to employee error, malfeasance, system errors, or vulnerabilities, including vulnerabilities of
our vendors, suppliers, their products, or otherwise. While security measures are in place, if our security measures fail to
prevent unauthorized access to such data, our solutions may be perceived as not being secure and our customers may curtail or
stop using our solutions and/or vendors may curtail or stop providing their solutions to us. Any failure of, or lack of confidence
in, the security of our solutions could have a material adverse effect on our business, results of operations, and financial
condition.
Despite our focus on data security, we may not be able to stop unauthorized attempts to gain access to data that we store and
process, or to stop disruptions in the transmission or provision of data and communications or other data by us. Advances in
computer capabilities, new discoveries in the field of cryptography, or other events or developments could result in a
compromise or breach of the controls used by our solutions to protect data contained, processed in and transferred to or from
our, our customers’ and/or our vendors’ databases. While warranties and liabilities are usually limited in our customer and
vendor contracts, they or other third parties may seek to hold us liable for any losses suffered as a result of unauthorized access
to their confidential information or non-public personal information of consumers. In addition, while effort has been expanded
to have insurance to cover these losses, we may be required to expend significant capital and other resources to protect against
or alleviate any problems caused by actual or threatened cyber-attacks or other unauthorized access to such data. Our security
measures may not be sufficient to prevent security breaches, and any failure to prevent the improper use and disclosure of data
and/or to adequately alleviate any problems caused by such improper use and disclosure could have a material adverse effect on
our business, results of operations, and financial condition.
Our customers, vendors and other partners are primarily responsible for the security of their information technology systems,
and we rely on them to supply clean data content and/or to utilize our products and services in a secure manner. While we
provide guidance and specific requirements of data security in some cases, we do not directly control any of such parties’ cyber
security programs and operations. If our customers, vendors and other partners fail to prevent any significant cyber security
breaches, their businesses could be disrupted and therefore may negatively impact our business, results of operations, and
financial condition.
Interruption or failure of our networks, systems, and infrastructure could hurt our ability to effectively provide our products
and services, which could damage our reputation and/or subject us to litigation or contractual penalties.
The availability of our products and services depends on the continuing operation of our network and systems. From time to
time, we have experienced, and may experience in the future, network or system slowdowns and interruptions. These network
and system slowdowns and interruptions may interfere with our ability to do business. While the appropriate upgrades to
various systems, shoring up backup processes, and other measures to protect against data loss and system failures have been
implemented and tested, there is still risk that we may lose critical data or experience network failures.
Despite the resiliency plans and facilities we have in place, our ability to conduct business may be adversely impacted by a
disruption in the infrastructure that supports our businesses. This may include a disruption involving electrical, satellite,
undersea cable or other communications, internet, cloud computing, transportation, or other services facilities used by us or
third parties with which we conduct business. These disruptions may occur as a result of events that affect only our buildings or
systems or those of such third parties, or as a result of events with a broader impact globally, regionally or in the cities where
those buildings or systems are located, including, but not limited, to natural disasters, war, civil unrest, economic or political
developments, pandemics, and weather events.
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Such network, system or infrastructure failures or disruptions could result in lengthy interruptions in our service and lost
revenue opportunities for our customers, which could result in litigation against us and/or our customers may curtail or stop
using our solutions or vendors may curtail or stop providing their solutions to us. Additionally, we have service level
agreements with certain of our customers that may result in penalties or trigger cancellation rights in the event of a network or
system slowdown or interruption. Any of these could have a material adverse effect on our business, results of operations, and
financial condition.
Our business is directly and indirectly subject to, and impacted by, extensive and complex laws and regulations in the U.S.
and abroad, and new laws and regulations and/or changes to existing laws and regulations may negatively impact our
business, results of operations, and financial condition.
Our business is directly and indirectly subject to, and impacted by, numerous U.S. and foreign laws and regulations covering a
wide variety of subject matters. Compliance with complex foreign and U.S. laws and regulations that apply to our operations
increases our costs and may impede our competitiveness. In addition, failure to comply with such laws or regulations may result
in the suspension or termination of our ability to do business in applicable jurisdictions or the imposition of civil and criminal
penalties, including fines or exposure to civil litigation. New regulations and/or changes to existing regulations could require us
to modify our business practices, including modify the manner in which we contract with or provide products and services to
our customers; directly or indirectly limit how much we can charge for our services; require us to invest additional time and
resources to comply with such regulations; or limit our ability to update our existing products and services, or require us to
develop new ones.
In addition to the data privacy and security laws and regulations mentioned below, our business is also directly or indirectly
governed by domestic and international laws and regulations relating to issues such as information services,
telecommunications, antitrust or competition, employment, motor vehicle and manufacturer licensing or franchising, vehicle
registration, advertising, taxation, consumer protection, and accessibility. We must also comply with anti-corruption laws such
as the U.S. Foreign Corrupt Practices Act and local laws prohibiting corrupt payments to governmental officials and private
entities, such as the U.K. Anti-Bribery Act and the Criminal Law and Anti-Unfair Competition Law of the People’s Republic of
China. In addition, motor vehicle and manufacturer licensing, franchising and advertising is highly regulated at the state level
and is subject to changing legislative, regulatory, political, and other influences. Such state laws are complex and subject to
frequent change. The application of this framework of laws and regulations to our business is complex and, in many instances,
is unclear or unsettled, which in turn increases our cost of doing business, may interfere with our ability to offer our solutions
competitively in one or more jurisdictions and may expose us and our employees to potential fines, penalties, or other
enforcement actions. In some cases, our customers may seek to impose additional requirements on our business in efforts to
comply with their interpretation of their own or our legal obligations. These requirements may differ significantly from our
existing solutions or processes and may require engineering and other costly resources to accommodate.
In addition, we are and expect to continue to be the subject of investigations, inquiries, data requests, actions, and audits from
regulatory authorities, particularly in the area of competition. On June 22, 2017, the Company received from the Federal Trade
Commission (“FTC”) a Civil Investigative Demand consisting of interrogatories and a request to produce documents relating to
any agreements between the Company and Reynolds and Reynolds. On April 22, 2019, the Company received a subsequent
request to schedule interviews with certain current and former Company employees. Parallel document requests have been
received from certain states’ Attorneys General. The Company has responded to the requests and no proceedings have been
instituted. At this time, the Company does not have sufficient information to predict the outcome of, or the cost of resolving
these investigations.
These laws and regulations, as well as any associated inquiries or investigations or any other government actions, may be costly
to comply with and may delay or impede the development of new products, result in negative publicity, increase our operating
costs, require significant management time and attention, and subject us to remedies that may harm our business, including
fines or demands or orders that we modify or cease existing business practices. Our failure to comply, or to provide solutions
that allow our customers to comply, or any new investments of additional time and resources necessary to comply, or to provide
solutions that allow our customers to comply, with any of the foregoing laws and regulations could have a material adverse
effect on our business, results of operations, and financial condition.
We are subject to new regulations that restrict the manner and extent to which we can control access to our DMS and other
software applications and limit what, if anything, we may charge for integration with those applications.
Revenue from the Partner Program in our CDKNA segment is dependent on the business model of charging third party retail
solution providers for integration to our DMS through a program of robust and secure interfaces. Our ability to control the
manner in which we provide this robust and secure access to information in our systems, and our pricing model for this service,
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has been, and will likely continue to be, challenged, dictated and constrained in certain jurisdictions. For example, during our
fourth quarter ending June 30, 2019, Arizona, Montana, North Carolina and Oregon passed legislation that requires us to
provide access or integrations to our software to read or write data within our systems. The legislation in some of these states
purports to impose such requirements on us at our cost and without markup, or even without compensation, to any third party
designated by a dealer licensee of our software, regardless of whether the dealer licensee has title to the data on our systems or
the right under its software license to authorize non-licensee third parties access to our systems. In addition, each statute
imposes administrative and technical requirements that are inconsistent with our current solutions and capabilities. We believe
that compliance with such legislation will impair our ability to provide our customers with robust and secure technology
solutions and will increase our risk of data security and privacy breaches, system and data integrity problems, and associated
adverse competitive, financial, operational, and reputational impacts. Similar legislation has been proposed in other states and
additional states may consider or pass similar legislation. We may incur significant legal and regulatory expenses in connection
with assessing or challenging the applicability of this legislation to our products and offerings and while we seek legal,
regulatory, or policy solutions to address concerns with respect to the validity of the legislation or our ability to comply with it.
Ultimately, our failure to comply, or to provide solutions that allow our customers to comply, or any new investments of
additional time and resources necessary to comply, or to provide solutions that allow our customers to comply, with this
legislation will increase our operating costs and reduce our revenue, and could have a material adverse effect on our business,
results of operations, and financial condition.
Our business is directly or indirectly subject to, or impacted by, complex and rapidly evolving U.S. and foreign laws and
regulation regarding privacy and data protection. Many of these laws and regulations are subject to change and uncertain
interpretation and could result in claims, adjustments to our business practices, penalties, increased cost of operations, or
declines in customer growth or engagement, or otherwise harm our business.
Many U.S. and foreign jurisdictions have passed, or are currently contemplating, a variety of consumer protection, privacy, and
data security laws and regulations that may relate directly or indirectly to our business. For example, federal laws and
regulations governing privacy and security of consumer information generally apply to our customers and/or to us as a service
provider. These include, but are not limited to, the federal Fair Credit Reporting Act, the Gramm-Leach-Bliley Act (the "GLB
Act") and regulations implementing its information safeguarding requirements, the Junk Fax Prevention Act of 2005, the
Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (the "CAN-SPAM Act"), the Telephone
Consumer Protection Act, the Do-Not-Call-Implementation Act, applicable Federal Communications Commission (the “FCC”)
telemarketing rules (including the declaratory ruling affirming the blocking of unwanted robocalls), the FTC Privacy Rule,
Safeguards Rule, Consumer Report Information Disposal Rule, Telemarketing Sales Rule, Risk-Based Pricing Rule, Red Flags
Rule, and California Consumer Privacy Act of 2018 ("CCPA"). Laws of foreign jurisdictions, such as Canada's Anti-Spam Law
and Personal Information Protection and Electronic Documents Act, and European Union's General Data Protection Regulation
(the "GDPR") similarly apply to our collection, processing, storage, use, and transmission of protected data.
For example, the GDPR, which became effective on May 25, 2018 imposes more stringent operational requirements for entities
processing personal information and greater penalties for noncompliance than previous laws. While we have made adjustments
to our products, services and operations in Europe to comply with the new requirements contained in the GDPR and to facilitate
our customers' compliance with the GDPR, we may need to make more adjustments as more clarification and guidance on
compliance with the GDPR become available. Any such adjustments may result in costs and expenses, and any failure to meet
the requirements of the GDPR may result in significant fines, penalties, or other liabilities (including possible fines of up to 4%
of global annual turnover for the preceding financial year or €20 million (whichever is higher) for the most serious violations).
Further, the European Union is expected to replace the EU Privacy and Electronic Communications Directive 2002/58/EC
(“ePrivacy Directive”) governing the use of technologies to collect consumer information with the ePrivacy Regulation. The
ePrivacy Regulation may impose burdensome requirements around obtaining consent, and impose fines for violations that are
materially higher than those imposed under the European Union’s current ePrivacy Directive and related EU member state
legislation.
In addition to the GDPR in Europe, there is also rapid development of new privacy laws and regulations elsewhere around the
globe, including amendments of existing data protection laws to the scope of such laws and penalties for noncompliance.
Failure to comply with these international data protection laws and regulations could have a negative impact on our reputation
and subject us to significant fines, penalties or other liabilities, all of which may cause increased cost of operations or decline in
customer growth, or otherwise harm our business, results of operations, and financial condition.
In the U.S., some state laws and regulations have imposed, and others have contemplated imposing, enhanced disclosure
obligations and greater restrictions or prohibitions on the use of data than are already contained in federal laws such as the GLB
Act and its implementing regulations or the FTC rules described above. For example, a new law in California, the California
Consumer Privacy Act of 2018 (“CCPA”), went into effect on January 1, 2020. CCPA provides California consumers with a
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greater level of transparency and broader rights and choices with respect to their personal information than those contained in
any existing state and federal laws in the U.S. The “personal information” regulated by CCPA is broadly defined to include any
information that identifies or is reasonably capable of being associated with or linked, directly or indirectly, with a California
consumer or household, including, for example, demographics, usage, transactions and inquiries, preferences, inferences drawn
to create a profile about a consumer. Compliance with CCPA requires the implementation of a series of operational measures
such as preparing data maps, inventories, or other records of all personal information pertaining to California residents,
households and devices, as well as information sources, usage, storage, and sharing, maintaining and updating detailed
disclosures in privacy policies, establishing mechanisms to respond to consumers’ data access, deletion, portability, and opt-out
requests, etc. Violations of CCPA will result in civil penalties up to $7,500 per violation. CCPA further allows consumers to
file lawsuits against a business if a data breach has occurred as a result of the business' violation of the duty to implement and
maintain reasonable security procedures and practices.
The enforcement of the CCPA commenced on July 1, 2020. In the meantime, significant uncertainties in the interpretation and
application some key CCPA provisions remain outstanding. On June 2, 2020, the California Attorney General submitted the
draft of the implementation regulations to the CCPA (“CCPA Regulations”) to the California Office of Administration Law for
its final approval. Furthermore, the privacy group whose efforts led to the CCPA in 2018 has proposed a new law, the
California Privacy Rights Act (“CPRA”), which, if passed, would replace the CCPA and impose further compliance burdens
and risks on service providers such as us.
To comply with CCPA and assist many of our customers who are subject to CCPA to comply with CCPA, we have modified or
adjusted the design, development, and delivery of our products and services in a significant way. However, with further
clarifications and interpretations of the CCPA, the approval of the CCPA Regulations, and the passage of the CPRA and/or any
new laws and regulations, additional modifications and adjustments may be required, which may result in significant costs and
expenses, and any delay or failure to make such changes may negatively affect our customers’ confidence in or perception of
our product and services, result in their ceasing to use our products or services or even lawsuits and significant liabilities.
In addition, all 50 states have passed data breach notification laws that require notifications to affected consumers, attorneys
general, consumer protection agencies and/or other government authorities when there is a breach of personal data, and provide
consumers with credit monitoring and other remedies. Any data breaches and the related notifications and remedies may result
in significant compliance costs in addition to potential liability and reputational damage.
The costs and other burdens of compliance with privacy and data security laws and regulations could negatively impact the use
and adoption of our solutions and reduce overall demand for them. Additionally, evolving concerns regarding data privacy may
cause our customers, or their customers and potential customers, to resist providing the data necessary to allow us to deliver our
solutions effectively. Even the perception that personal information is not satisfactorily protected or does not meet regulatory
requirements could inhibit sales of our solutions and any failure to comply with such laws and regulations could lead to
significant fines, penalties, or other liabilities. Any such decrease in demand or incurred fines, penalties, or other liabilities
could have a material adverse effect on our business, results of operations, and financial condition.
Our business operations may be harmed by events beyond our control.
Our business operations are vulnerable to damage or interruption from natural disasters, such as fires, floods, earthquakes,
hurricanes, and pandemics or outbreaks of disease or similar public health concerns, such as the COVID-19 pandemic
(discussed further in the risk factor "The COVID-19 pandemic could have a material adverse effect on our business, results of
operations, and financial condition," above), or fears of such events, or from power outages, telecommunications failures,
terrorist attacks, computer network service outages and disruptions, “denial of service” attacks, computer malware and
ransomware, break-ins, sabotage, employee error or malfeasance, and other similar events beyond our control. The occurrence
of any such event at any of our facilities or at any third-party facility utilized by us or our third-party providers could cause
interruptions or delays in our business, loss of data, or could render us unable to provide our solution portfolio. In addition, any
failure of a third-party to provide the data, products, services, or facilities required by us, as a result of human error, bankruptcy,
natural disaster, or other operational disruption, could cause interruptions to our computer systems and operations. The
occurrence of any of these events could have a material adverse effect on our business, results of operations, and financial
condition.
We utilize certain key technologies, data, and services from, and integrate certain of our solutions with, third parties and
may be unable to replace those technologies, data, and services if they become obsolete, unavailable, or incompatible with
our solutions.
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We utilize certain key technologies and data from, and/or integrate certain of our solutions with, hardware, software, services,
and data of third parties, including Chrome Systems, TrueCar, Microsoft, Google, Yahoo, EMC, Cisco Systems, Kyocera,
Experian, Equifax, TransUnion and others. Some of these vendors are also our competitors in various respects. These third-
party vendors could, in the future, seek to charge us cost-prohibitive fees for such use or integration or may design or utilize
their solutions in a manner that makes it more difficult for us to continue to utilize their solutions, or integrate their technologies
with our solutions, in the same manner or at all. Any significant interruption in the supply or maintenance of such third-party
hardware, software, services, or data could negatively impact our ability to offer our solutions unless and until we replace the
functionality provided by this third-party hardware, software, and/or data. In addition, we are dependent upon these third
parties’ ability to enhance their current products, develop new products on a timely and cost-effective basis, and respond to
emerging industry standards and other technological changes. There can be no assurance that we would be able to replace the
functionality or data provided by third-party vendors in the event that such technologies or data becomes obsolete or
incompatible with future versions of our solutions or are otherwise not adequately maintained or updated. Any delay in or
inability to replace any such functionality could have a material adverse effect on our business, results of operations, and
financial condition. Furthermore, delays in the release of new and upgraded versions of third-party software applications could
have a material adverse effect on our business, results of operations, and financial condition.
We have customers in over 100 countries, where we are subject to country-specific risks that could negatively impact our
business, results of operations, and financial condition.
During the twelve months ended June 30, 2020, we generated 21% of our revenues outside of the U.S. As a result, our business,
operations, and financial condition are at times adversely affected by a number of global, regional and country-specific factors
outside of our control.
Adverse changes in global, regional or country specific economic conditions, including recession or slowing growth, changes or
uncertainty in fiscal, monetary, or trade policy, higher interest rates, tighter credit, inflation, increases in unemployment, and
lower consumer confidence and spending, periodically occur. For example, the COVID-19 pandemic has significantly
increased economic and demand uncertainty. The current outbreak and continued spread of COVID-19 has caused an economic
slowdown, and it is possible that it could cause a global recession. Adverse changes in economic conditions, including as a
result of the pandemic, can significantly harm sustained demand within the automotive retail industry, which in turn may affect
our business by reducing the number and/or size of actual or potential customers or the money that actual or potential customers
are willing or able to spend on our solution portfolio, and make it more challenging to forecast our operating results and make
business decisions, including regarding prioritization of investments in our business. An economic downturn or increased
uncertainty may also lead to increased credit and collectability risks, higher borrowing costs or reduced availability of capital
markets, reduced liquidity, adverse impacts on our suppliers, failures of counterparties including financial institutions and
insurers, and asset impairments.
Business and operations in individual countries are subject to changes in local government regulations and policies, including
those related to tariffs and trade barriers, investments, taxation, currency exchange controls, repatriation of earnings (as
described below) and environmental, and employment laws. For example, the referendum vote held in the U.K. on June 23,
2016 resulted in Brexit. Our results are subject to the uncertainties and instability in economic and market conditions caused by
Brexit, including uncertainty regarding the U.K.’s access to the EU Single Market and the wider trading, legal, regulatory, and
labor environments, especially in the U.K. and EU. Our results are also subject to the difficulties of coordinating our activities
across the countries in which we are active. In addition, our operations in each country are vulnerable to changes in local socio-
economic conditions and monetary and fiscal policies, currency exchange rates, intellectual property protection disputes, the
settlement of legal disputes through foreign legal systems, the collection of receivables through foreign legal systems, exposure
to possible expropriation or other governmental actions, product preference and product requirements, difficulty to effectively
establish and expand our business and operations in such markets, unsettled political conditions, possible terrorist attacks, acts
of war, natural disasters, and pandemic disease, such as COVID-19. These and other factors relating to our international
operations may have a material adverse effect on our business, results of operations, and financial condition.
Our business, results of operations, and financial condition could be harmed by negative rating actions by credit rating
agencies.
Nationally recognized credit rating organizations have issued credit ratings relating to the Company and our senior notes. In
November 2016, our credit ratings were downgraded to non-investment grade. If our ratings are downgraded further or if
ratings agencies indicate that a downgrade may occur, it could limit our access to new financing, reduce our flexibility with
respect to working capital needs, adversely affect the market price of our senior notes, result in an increase in financing costs,
including interest expense under certain of our debt instruments, and result in less favorable covenants and financial terms in
our future financing arrangements. Any of these outcomes could also negatively impact our relationships with our customers or
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otherwise have a material adverse effect on our business, results of operations, and financial condition. Additional details about
the terms of our debt is contained in Item 8 of Part II, "Financial Statements and Supplementary Data - Note 17 - "Debt."
We are currently, and expect to be in the future, involved in litigation that is expensive and time consuming and, if resolved
adversely, that may materially adversely affect us.
From time to time, we may become involved in various legal proceedings, including patent, copyright, commercial, product
liability, employment, class action, whistleblower, antitrust and other litigation and claims, in addition to governmental and
other regulatory investigations and proceedings. Such matters can be time-consuming, divert management’s attention and
resources, cause us to incur significant expenses or liability and/or require us to change our business practices. Because of the
potential risks, expenses and uncertainties of litigation, we may, from time to time, settle disputes, even where we have
meritorious claims or defenses, by agreeing to settlement agreements.
The Company is currently involved in several lawsuits that set forth allegations of anti-competitive conduct by the Company
and anti-competitive agreements between the Company and Reynolds and Reynolds relating to the manner in which the
defendants control access to, and allow integration with, their respective DMSs. Any negative outcome from any such lawsuits
could result in payments of substantial monetary damages or fines, or undesirable changes to our products or business practices,
and accordingly our business, financial condition, or results of operations could be materially and adversely affected. Although
the results of such lawsuits and claims cannot be predicted with certainty, we do not believe that the final outcome of these
matters relating to the manner in which we control access to, and allow integration with, our DMS, that we currently face will
have a material adverse effect on our business, financial condition, or results of operations. We believe these cases are without
merit and intend to continue to contest the claims in these cases vigorously.
Because litigation is inherently unpredictable, there can be no assurances that a favorable final outcome will be obtained in all
our cases, and we cannot assure you that the results of any of these actions will not have a material adverse effect on our
business, financial condition, results of operations and prospects. For more information regarding the litigation in which we are
currently involved, see the information set forth under “Legal Proceedings” in Item 3 of Part I of this Annual Report on Form
10-K.
We may be unable to adequately protect, and we may incur significant costs in defending, our intellectual property and other
proprietary rights.
Our success depends, in large part, on our ability to protect our intellectual property and other proprietary rights. We rely upon
a combination of trademark, trade secret, copyright, patent and unfair competition laws, as well as license agreements and other
contractual provisions, to protect our intellectual property and other proprietary rights. In addition, we attempt to protect our
intellectual property and proprietary information by requiring certain of our team members and consultants to enter into
confidentiality, non-competition and assignment of inventions agreements. To the extent that our intellectual property and other
proprietary rights are not adequately protected, third parties might gain access to our proprietary information, develop and
market products and services similar to ours or use trademarks similar to ours. Existing U.S. federal and state intellectual
property laws offer only limited protection. Moreover, the laws of some foreign countries in which we market our products and
services afford little or no effective protection of our intellectual property. If we resort to legal proceedings to enforce our
intellectual property rights or to determine the validity and scope of the intellectual property or other proprietary rights of
others, the proceedings could be burdensome and expensive, and we may not prevail. The failure to adequately protect our
intellectual property and other proprietary rights, or manage costs associated with enforcing those rights, could have a material
adverse effect on our business, results of operations, and financial condition.
Claims that we or our technologies infringe upon the intellectual property or other proprietary rights of a third party may
require us to incur significant costs, enter into royalty or licensing agreements, or develop or license substitute technology.
We have in the past and may in the future be subject to claims that our technologies in our products and services infringe upon
the intellectual property or other proprietary rights of a third party. In addition, the vendors providing us with technology that
we use in our own technology could become subject to similar infringement claims. Although we believe that our products and
services do not infringe any intellectual property or other proprietary rights, we cannot assure you that our products and services
do not, or that they will not in the future, infringe intellectual property or other proprietary rights held by others. Any claims of
infringement could cause us to incur substantial costs defending against the claim, even if the claim is without merit, and could
distract our management from our business. Moreover, any settlement or adverse judgment resulting from the claim could
require us to pay substantial amounts, obtain a license to continue to use the products and services that are the subject of the
claim, and/or otherwise restrict or prohibit our use of the technology. There can be no assurance that we would be able to obtain
a license on commercially reasonable terms, or at all, from the third party asserting any particular claim, that we would be able
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to successfully develop alternative technology on a timely basis, if at all, or that we would be able to obtain a license from
another provider of suitable alternative technology to permit us to continue offering, and our customers to continue using, the
products and services. In addition, we generally provide in our customer agreements for certain products and services that we
will indemnify our customers against third-party infringement claims relating to technology that we provide to those customers,
which could obligate us to pay damages if the products and services were ever found to be infringing. Infringement claims
asserted against us, our vendors, or our customers could have a material adverse effect on our business, results of operations,
and financial condition.
We have made strategic acquisitions and formed strategic alliances in the past and expect to do so in the future. If we are
unable to find suitable acquisitions or alliance partners that strengthen our value proposition to customers or to achieve the
expected benefits from such acquisitions or alliances, there could be a material adverse effect on our business, results of
operations, and financial condition.
We have historically pursued growth through acquisitions, ranging from acquisitions of small start-up companies that provide a
discrete application to a handful of customers, to acquisitions of substantial companies with more mature solutions and a larger
customer base, such as our acquisition of ELEAD1ONE ("ELEAD") in 2018, which supports our CRM business. As part of our
ongoing business strategy to expand solutions offerings, acquire new technologies, and strengthen our value proposition to
customers, we frequently engage in discussions with third parties regarding, and enter into agreements relating to, possible
acquisitions, strategic alliances, and joint ventures. However, there may be significant competition for acquisition, alliance, and
joint venture targets in our industry, or we may not be able to identify suitable candidates, negotiate attractive terms, or obtain
necessary regulatory approvals for such transactions in the future. Acquisitions, strategic alliances, and joint ventures also
involve numerous other risks, including potential exposure to assumed litigation and unknown environmental and other
liabilities, as well as undetected internal control, regulatory or other issues, or additional costs not anticipated at the time the
transaction was approved or completed.
Even if we are able to complete acquisitions or enter into alliances and joint ventures that we believe will provide attractive
growth opportunities, such transactions are inherently risky. Significant risks from these transactions include risks relating to:
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integration and restructuring costs, both one-time and ongoing;
developing and maintaining sufficient controls, policies, and procedures;
diversion of management’s attention from ongoing business operations;
establishing new informational, operational, and financial systems to meet the needs of our business;
losing key employees, customers, and vendors;
failing to achieve anticipated synergies, including with respect to complementary solutions; and
unanticipated or unknown liabilities.
If we are not successful in completing acquisitions in the future, we may be required to reevaluate our acquisition strategy. We
also may incur substantial expenses and devote significant management time and resources in seeking to complete acquisitions.
In addition, we could use substantial portions of our available cash to pay all or a portion of the purchase prices of future
acquisitions. If we do not achieve the anticipated benefits of our acquisitions as rapidly or to the extent anticipated by our
management and financial or industry analysts, others may not perceive the same benefits of the acquisition as we do. If these
risks materialize, there could be a material adverse effect on our business, results of operations, and financial condition.
Our future acquisitions may involve the issuance of our equity securities as payment, in part or in full, for the business or assets
acquired, which would dilute our existing stockholders' ownership interests. Future acquisitions may also decrease our earnings
and the benefits derived by us from an acquisition might not outweigh or exceed the dilutive effect of the acquisition. We also
may incur additional indebtedness, issue equity, have future impairment of assets or suffer adverse tax and accounting
consequences in connection with any future acquisitions.
15
We could be liable for contract or product liability claims, and disputes over such claims may disrupt our business, divert
management’s attention, or have a negative impact on our financial results.
We provide limited warranties to purchasers of our products and services. In addition, errors, defects or other performance
problems in our products and services, including with respect to data that we store, process and provide in connection with our
products and services, could result in financial or other damages to our customers or consumers. There can be no assurance that
any limitations of liability set forth in our contracts would be enforceable or would otherwise protect us from liability for
damages. We maintain general liability insurance coverage, including coverage for errors and omissions in excess of the
applicable deductible amount; however, there can be no assurance that this coverage will continue to be available on acceptable
terms, in sufficient amounts to cover one or more large claims or at all, or that the insurer will not deny coverage for any future
claim. The successful assertion of one or more large claims against us that exceeds available insurance coverage, or the
occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-
insurance requirements, could have a material adverse effect on our business, results of operations, and financial condition.
Furthermore, any litigation, regardless of its outcome, could result in substantial cost to us and divert management’s attention
from our operations and could have a material adverse effect on our business, results of operations, and financial condition. In
addition, some of our products and services are business-critical for our customers, and a failure or inability to meet a
customer’s expectations could seriously damage our reputation and negatively impact our ability to retain existing business or
attract new business.
Because we recognize a majority of our revenue from our subscription-based products and services over the term of the
subscription, downturns or upturns in new business may not be immediately reflected in our operating results.
We generally recognize a majority of our revenue from sales of our subscription-based products and services ratably over the
term of the subscription contract. As a result, the majority of our quarterly revenue is attributable to service contracts entered
into during previous quarters. A decline in new or renewed service agreements in any one quarter will not be fully reflected in
our revenue in that quarter but will harm our revenue in future quarters. Consequently, the effect of significant downturns in
sales and market acceptance of our subscription services in a particular quarter may not be fully reflected in our operating
results until future periods. Our subscription model also makes it difficult for us to rapidly increase our revenue through
additional sales in any period, because revenue from new subscription contracts, and from additional orders under existing
subscription contracts, must be recognized over the applicable subscription term. In addition, delays or failures in deployment
of our subscription services may prevent us from recognizing subscription revenue for indeterminate periods of time. Further,
we may experience unanticipated increases in costs associated with providing our subscription services to customers over the
term of our subscription contracts as a result of inaccurate internal cost projections or other factors, which may harm our
operating results.
Changes in, or interpretations of, accounting principles may negatively impact our financial position and results of
operations.
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United
States ("GAAP"). These principles are subject to interpretation by the SEC and other organizations that develop and interpret
accounting principles. New accounting principles arise regularly, implementation of which can have a significant effect on and
may increase the volatility of our reported operating results and may even retroactively affect previously reported operating
results. In addition, the implementation of new accounting principles may require significant changes to our customer and
vendor contracts, business processes, accounting systems, and internal controls over financial reporting. The costs and effects of
these changes could adversely impact our operating results, and difficulties in implementing new accounting principles could
cause us to fail to meet our financial reporting obligations.
We may experience foreign currency gains and losses.
We conduct transactions and hold cash in currencies other than the U.S. dollar. Changes in the value of major foreign
currencies, particularly the Canadian dollar, Euro, Pound Sterling, and Renminbi relative to the U.S. dollar, can significantly
affect our assets, revenues, and operating results. Generally, our revenues are adversely affected when the dollar strengthens
relative to other currencies and are positively affected when the dollar weakens. Similarly, cash, other bank deposits, and other
assets held in foreign currency are adversely affected when the dollar strengthens relative to other currencies and are positively
affected when the dollar weakens.
16
We may have exposure to unanticipated tax liabilities, which could harm our business, results of operations, financial
condition, and prospects.
Our global business operations subject us to income taxes and non-income based taxes, in both the U.S. and various foreign
jurisdictions. The computation of the provision for income taxes and other tax liabilities is complex, as it is based on the laws of
numerous taxing jurisdictions and requires significant judgment regarding the application of complicated rules governing
accounting for tax provisions under GAAP. The provision for income taxes may require forecasts of effective tax rates for the
year, which include assumptions and forward looking financial projections, including the expectations of profit and loss by
jurisdiction. Various items cannot be accurately forecasted and future events may materially differ from our forecasts. Our
provision for income tax could be materially impacted by a number of factors, including changes in the geographical mix of our
profits and losses, changes in our business, such as internal restructuring and acquisitions, changes in tax laws and accounting
guidance and other regulatory, legislative or judicial developments, tax audit determinations, changes in our uncertain tax
positions, changes in our intent and ability to indefinitely reinvest foreign earnings, changes in our ability to utilize foreign tax
credits, changes to our transfer pricing practices, tax deductions associated with stock-based compensation, and changes in our
need for deferred tax valuation allowances. Any changes in corporate income tax laws or any implementation of tax laws
relating to corporate tax reform, could significantly impact our overall tax liability. For these reasons, our actual tax liabilities in
a future period may be materially different than our income tax provision.
In addition, changes in tax laws or tax rulings may have a significant adverse impact on our effective tax rate.
In the event that changes in tax laws negatively impact our effective tax rates, our provision for taxes, or generate unanticipated
tax liabilities, our business, results of operations, and financial condition could suffer a material adverse effect.
Changes in tax laws or tax rulings could materially affect our financial position, results of operations, and cash flows.
The income and non-income tax regimes we are subject to or operate under are unsettled and may be subject to significant
change. Changes in tax laws or tax rulings, or changes in interpretations of existing laws, could materially affect our financial
position, results of operations, and cash flows. For example, changes to U.S. tax laws enacted in December 2017 had a
significant impact on our tax obligations and effective tax rate for fiscal 2018 and beyond. In addition, many countries in
Europe, as well as a number of other countries and organizations, have recently proposed or recommended changes to existing
tax laws or have enacted new laws that could significantly increase our tax obligations in many countries where we do business
or require us to change the manner in which we operate our business. The Organization for Economic Cooperation and
Development has been working on a Base Erosion and Profit Shifting Project and is expected to continue to issue guidelines
and proposals that may change various aspects of the existing framework under which our tax obligations are determined in
many of the countries in which we do business. Due to our international business activities, these types of changes to the
taxation of our activities could increase our worldwide effective tax rate and harm our financial position, results of operations,
and cash flows.
Uncertainties in the interpretation and application of the 2017 Tax Cuts and Jobs Act could materially affect our tax
obligations and effective tax rate.
The 2017 Tax Cuts and Jobs Act (the “Tax Reform Act”) was enacted on December 22, 2017, and significantly affected U.S.
federal tax law by changing how the U.S. imposes income tax on multinational corporations along with other changes. The U.S.
Department of Treasury may issue regulations and interpretative guidance. In addition, the Tax Reform Act has U.S. state and
local implications and additional guidance and interpretations are anticipated from state taxing authorities. The issuance of
additional regulations and interpretations may significantly impact how we will apply the law and impact our results of
operations in the period issued.
There can be no assurance that we will have access to the capital markets on terms acceptable to us.
From time to time we may need to access the long-term and short-term capital markets to obtain financing. Although we believe
that the sources of capital currently in place will permit us to finance our operations for the foreseeable future on acceptable
terms and conditions, our access to, and the availability of, financing on acceptable terms and conditions in the future or at all
will be impacted by many factors, including, but not limited to:
•
•
our financial performance;
our credit ratings;
17
•
•
the liquidity of the overall capital markets; and
the state of the economy.
There can be no assurance that we will have access to the capital markets on terms acceptable to us.
Our current level of indebtedness could negatively impact our ability to raise additional capital to fund our operations and
limit our ability to react to changes in the economy or our industry.
We have significant debt obligations. On August 17, 2018, we entered into a $750.0 million revolving credit facility (which was
drawn by $15.0 million as of June 30, 2020) and borrowed $300.0 million under a three-year term loan facility that will mature
on August 17, 2021 and $300.0 million under a five year term loan facility that will mature on August 17, 2023. In addition, we
have approximately $2.1 billion of existing senior notes outstanding. See Note 17 - Debt to our consolidated financial
statements under Item 8 of Part II of this Annual Report on Form 10-K for details about the terms of our debt.
Our current indebtedness could have important consequences, including, but not limited to:
•
•
•
•
•
increasing our vulnerability to, and reducing our flexibility to plan for and respond to, general adverse economic and
industry conditions and changes in our business and the competitive environment;
an increasingly substantial portion of our cash flow from operations will be dedicated to making payments of principal
of, and interest on, our indebtedness, thereby reducing the availability of funds that would otherwise be available to
fund working capital, capital expenditures, acquisitions, dividends, share repurchases or other corporate purposes;
increasing our vulnerability to further downgrades of our credit rating, which could adversely affect our interest rates
on existing indebtedness, cost of additional indebtedness, liquidity and access to capital markets;
restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
requiring us to secure our credit agreements and other indebtedness and provide subsidiary guarantees if certain
conditions are met;
• making it more difficult for us to repay, refinance or satisfy our obligations with respect to our debt;
•
•
limiting or eliminating our ability to obtain additional financing, if necessary, for working capital, capital expenditures,
acquisitions, or other purposes; and
any failure to comply with the obligations of any of our debt instruments could result in an event of default under the
agreements governing such indebtedness, which in turn, if not cured or waived, could result in the acceleration of the
applicable debt, and may result in the acceleration of any other debt to which a cross-acceleration or cross-default
provision applies.
Our ability to service our current and future levels of indebtedness will depend upon, among other things, our future financial
and operating performance, which will be affected by prevailing economic conditions, including the interest rate environment,
and financial, business, regulatory and other factors, some of which are beyond our control.
There is no assurance that we will generate cash flow from operations or that future debt or equity financings will be available
to us to enable us to pay our indebtedness or to fund other needs and we may be forced to take actions such as reducing or
delaying business activities, acquisitions, investments or capital expenditures, selling assets, restructuring or refinancing debt,
reducing or discontinuing dividends we may pay in the future, or seeking additional equity capital. These actions may not be
effected on satisfactory terms, or at all. Any inability to generate sufficient cash flow or refinance our indebtedness on favorable
terms could have a material adverse effect on our business, results of operations, and financial condition.
Higher levels of indebtedness and increased debt service obligations will effectively reduce the amount of funds available for
other business purposes and may adversely affect us.
Interest costs related to the notes will be substantial, and our increased level of indebtedness, including any future borrowings,
could reduce funds available for acquisitions, capital expenditures or other business purposes, impact our credit ratings, restrict
our financial and operating flexibility or create competitive disadvantages compared to other companies with lower debt levels.
18
Further, increased indebtedness could make it more difficult for us to satisfy our obligations with respect to our debt, increase
our vulnerability to adverse economic or industry conditions and limit our ability to obtain additional financing.
Our ability to make payments of principal and interest on our indebtedness, including the notes, depends upon our future
performance, which will be subject to general economic conditions and financial, business and other factors affecting our
consolidated operations, many of which are beyond our control. If we are unable to generate sufficient cash flow from
operations in the future to service our debt and meet our other cash requirements, we may be required, among other things:
•
•
•
•
to seek additional financing in the debt or equity markets;
to refinance or restructure all or a portion of our indebtedness, including the notes;
to sell selected assets or businesses; or
to reduce or delay planned capital or operating expenditures.
Such measures might not be sufficient to enable us to service our debt, including the notes, and meet our other cash
requirements. In addition, any such financing, refinancing or sale of assets might not be available on economically favorable
terms or at all.
Risks Relating to Our Common Stock
The market price of our shares may fluctuate widely.
The market price of our common stock may fluctuate widely, depending upon many factors, some of which may be beyond our
control, including:
•
•
•
•
•
•
•
•
•
•
•
•
•
our business profile and market capitalization may not fit the investment objectives of our stockholders, and our
common stock may not be included in some indices, causing certain holders to sell their shares;
a shift in our investor base;
the actions of significant stockholders;
our quarterly or annual earnings, or those of other companies in our industry;
actual or anticipated fluctuations in our operating results;
announcements of acquisitions or dispositions and strategic moves, such as acquisitions or restructurings, by us or our
competitors;
the failure of securities analysts to cover our common stock;
the operating and stock price performance of other comparable companies;
changes in expectations concerning our future financial performance and the future performance of our industry in
general, including financial estimates and recommendations by securities analysts;
differences between our actual financial and operating results and those expected by investors and analysts;
changes in the regulatory framework of our industry and regulatory action;
changes in general economic or market conditions, including the impact of COVID-19; and
the other factors described in these “Risk Factors” and elsewhere in this Annual Report on Form 10-K.
Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular
company. These broad market fluctuations may adversely affect the trading price of our common stock.
19
Our revenue, operating results, and profitability vary from quarter to quarter, which may result in volatility in our stock
price.
Our revenue, operating results, and profitability have varied in the past and are likely to continue to vary significantly from
quarter to quarter, which may lead to volatility in our stock price. These variations are due to several factors, including:
•
•
•
•
•
•
•
•
•
•
the timing, size, and nature of our customer revenues and any losses with respect thereto;
product and price competition regarding our products and services;
the timing of introduction and market acceptance of new products, services or product enhancements by us, or our
competitors;
changes in our operating expenses;
foreign currency fluctuations;
the timing of acquisitions or divestitures of businesses, products, and services;
the seasonality of car sales;
the impact of COVID-19;
personnel changes; and
fluctuations in economic and financial market conditions.
There is substantial volatility in the domestic and international stock markets that could negatively impact our stock
regardless of our actual operating performance.
The stock market in general and the market for technology companies in particular have experienced extreme price and volume
fluctuations. These fluctuations have often been unrelated or disproportionate to operating performance. These broad market
and industry factors could materially and adversely affect the market price of our stock, regardless of our actual operating
performance.
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has
often been brought against that company. Due to the potential volatility of our stock price, we may therefore be the target of
securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and
resources from our business.
Holders of our common stock may be adversely affected through the issuance of more senior securities or through dilution.
We may need to incur additional debt or issue equity in order to fund working capital, capital expenditures and product
development requirements, maintain debt capacity levels, or to make acquisitions and other investments. If we raise funds
through the issuance of debt or equity, any debt securities or preferred stock issued will have liquidation rights, preferences, and
privileges senior to those of holders of our common stock. If we raise funds through the issuance of common equity, the
issuance will dilute the ownership interests of our stockholders. We cannot assure our investors or potential investors that debt
or equity financing will be available to us on acceptable terms, if at all. If we are not able to obtain sufficient financing, we may
be unable to maintain or grow our business.
20
Provisions in our certificate of incorporation and by-laws and of Delaware law may prevent or delay an acquisition of our
Company.
Our certificate of incorporation and by-laws and Delaware law contain provisions that are intended to deter coercive takeover
practices and inadequate takeover bids by making them more burdensome to the bidder and to encourage prospective acquirers
to negotiate with our Board of Directors rather than to attempt a hostile takeover. These provisions include, among others:
•
•
the inability of our stockholders to act by written consent; and
the right of our Board of Directors to issue preferred stock without stockholder approval.
We have not opted out of the protections afforded by Section 203 of the Delaware General Corporation Law, which provides
that a stockholder acquiring more than 15% of our outstanding voting shares (an “Interested Stockholder”) but less than 85% of
such shares may not engage in certain business combinations with us for a period of three years subsequent to the date on which
the stockholder became an Interested Stockholder unless, prior to such date, our Board of Directors approves either the business
combination or the transaction which resulted in the stockholder becoming an Interested Stockholder or the business
combination is approved by our Board of Directors and by the affirmative vote of at least 66 2/3% of the outstanding voting
stock that is not owned by the Interested Stockholder.
We believe these provisions protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential
acquirers to negotiate with our Board of Directors and by providing our Board of Directors with more time to assess any
acquisition proposal, and are not intended to make our Company immune from takeovers. However, these provisions apply
even if the offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that our Board of
Directors determines is not in the best interests of our Company and our stockholders.
We cannot assure you that we will continue to pay dividends or repurchase shares of our common stock at the times or in
the amounts we currently anticipate.
Our Board of Directors has declared, and we have paid, regular quarterly cash dividends on our common stock. The payment of
such quarterly dividends and any other future dividends will be at the discretion of our Board of Directors. There can be no
assurance that we will continue to pay dividends, as to what the amount of any future dividends will be, or that we will have
sufficient surplus under Delaware law to be able to pay any future dividends. This may result from extraordinary cash expenses,
actual expenses exceeding contemplated costs, funding of capital expenditures, or increases in reserves. If we do not pay future
dividends, the price of our common stock must appreciate for you to receive a gain on your investment in us. This appreciation
may not occur and our stock may in fact depreciate in value.
In January 2017, the Board of Directors authorized us to repurchase up to $2.0 billion of our common stock. As of June 30,
2020, we have spent a total of approximately $1.5 billion to repurchase shares of our common stock under the authorization.
We have funded these repurchases through a combination of free cash flow and incremental borrowings. As intended, such
borrowings brought leverage, measured as financial debt, net of cash, divided by adjusted EBITDA, to approximately 3.3x as of
June 30, 2020. Our leverage ratio of 3.3x net debt to adjusted EBITDA as of June 30, 2020, is currently in excess of our target
leverage ratio. In addition, on May 4, 2020, we entered into amendments to our credit agreements that restrict us from making
repurchases of our common stock in excess of $40.0 million in any fiscal year through the earlier of: (i) delivery of the financial
statements for the fiscal quarter ending December 31, 2021, provided certain conditions are met; and (ii) the provision of the
relevant liens and subsidiary guarantees to the creditor banks. As a result of these conditions, we do not anticipate any material
share repurchases in fiscal 2021. There can be no assurance that we will be able to repurchase shares of our common stock at
the times or in the amounts we currently anticipate due to market conditions, our cash position, our ability to access new
financing, applicable laws and other factors, or that the results of the share repurchase program will be as beneficial as we
currently anticipate.
The interests of significant stockholders may conflict with our interests or those of other stockholders, and their actions
could disrupt our business and affect the market price and volatility of our securities.
Since we began operating as an independent public company, three of our stockholders have, at various times, made filings on
Schedule 13D with the SEC indicating that they may take positions or make proposals with respect to, or with respect to
potential changes in, among other things, our operations, management, management and employee incentives, our certificate of
incorporation and bylaws, the composition of our Board of Directors, ownership, capital allocation policies, capital or corporate
structure, dividend policy, potential acquisitions involving us or certain of our businesses or assets, strategy, and plans. Any
such positions or proposals may not in all cases be aligned with the interests of our other stockholders. Significant stockholders
21
may be proponents of pursuing acquisitions, divestitures, and other transactions that, in their judgment, could enhance their
investment, even though such transactions involve risks to our other stockholders.
Responding to actions by significant stockholders can be costly, time-consuming, and disrupting to our operations and can
divert the attention of management and our employees. Such activities could interfere with our ability to execute our business
strategy, including plans relating to, growth strategies, business process improvement, or the return of capital to our
stockholders. In addition, a proxy contest for the election of directors at our annual meeting would require us to incur
significant legal fees and proxy solicitation expenses and require significant time and attention by management and our Board
of Directors. The perceived uncertainties as to our future direction also could affect the market price and volatility of our
securities.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We own or lease approximately 1.0 million square feet of real estate, consisting of office and other commercial facilities around
the world. We own and maintain our global headquarters, totaling approximately 155,000 square feet, in Hoffman Estates,
Illinois. We also own or lease approximately 21 locations in North America and 36 locations internationally.
We regularly add or reduce facilities as necessary to accommodate changes in our business operations. We believe that our
facilities are adequate to meet our immediate needs, and that, if and when needed, we will be able to secure adequate additional
space to accommodate future expansion.
Item 3. Legal Proceedings
For a description of our legal proceedings, see Item 8 of Part II, "Financial Statements and Supplementary Data - Note 18 -
Commitments and Contingencies" included in this Annual Report of Form 10-K.
Item 4. Mine Safety Disclosures
Not applicable.
22
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market for Registrant's Common Equity
Our common stock began trading "regular way" on the NASDAQ Global Select Market under the symbol "CDK" on October 1,
2014. As of June 30, 2020, there were 13,905 holders of record of our common stock.
Dividends
We expect to continue to pay dividends on our common stock. However, the declaration and payment of future dividends to
holders of our common stock will be at the discretion of our Board of Directors and will depend upon many factors, including
our financial condition, earnings, capital requirements of our businesses, legal requirements, regulatory constraints, industry
practice and other factors that our Board of Directors deems relevant. There can be no assurance that we will continue to pay
dividends or guarantee of the amounts of such dividends.
Stock Performance Graph
The following graph compares the cumulative total stockholder return on our common stock for the five years ended June 30,
2020 with the comparable cumulative return of the: (i) Standard & Poor's (S&P) 500 Index, (ii) S&P MidCap 400 Index, and
(iii) S&P 400 Information Technology Index.
The graph assumes $100 was invested in our common stock and in each of the indices as of the market close on June 30, 2015
and assumes that all cash dividends are reinvested. The comparisons in the graph are required by the Securities Exchange
23
CDK Global, Inc.S&P 500 IndexS&P MidCap 400 IndexS&P 400 Information Technology Index06/30/1506/30/1606/30/1706/30/1806/30/1906/30/20$100$110$120$130$140$150$160$170$180$190$200$210$220 Commission (“SEC”) and are not intended to forecast or be indicative of future performance of our common stock. The graph
and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be
incorporated by reference into any future filing under the Securities Act of 1933 or the Securities Exchange Act of 1934 (the
“Exchange Act”), each as amended, except to the extent that we specifically incorporate it by reference into such filing.
Issuer Purchases of Equity Securities
The following table presents a summary of common stock repurchases made during the three months ended June 30, 2020.
Period
April 1 - 30, 2020
May 1 - 31, 2020
June 1 - 30, 2020
Total
Total
Number of
Shares
Purchased (1)
4,484
3,170
4,217
11,871
Average
Price Paid
per Share
$
$
$
$
34.07
35.98
41.41
37.19
Total
Number of
Shares as
Part of
Publicly
Announced
Programs (2)
Maximum Number
(or Approximate
Dollar Value) that
May Yet Be
Purchased Under the
Program (2)
— $
— $
— $
—
502,297,495
502,297,495
502,297,495
(1) Pursuant to the Company's 2014 Omnibus Award Plan, shares of our common stock may be withheld upon exercise of stock
options or vesting of restricted stock to satisfy tax withholdings. Shares withheld for such purposes have been included within
the total number of shares purchased.
(2) In January 2017, the Board of Directors authorized us to repurchase up to $2.0 billion of our common stock under a return
of capital program. This authorization will expire when it is exhausted or at such time as it is revoked by the Board of Directors.
Item 6. Selected Financial Data
Selected financial data is presented on a consolidated basis. The following table sets forth selected consolidated financial data
from our audited consolidated financial statements as of June 30, 2020 and 2019 and for the years ended June 30, 2020, 2019,
and 2018. The selected consolidated financial data as of June 30, 2018, 2017, and 2016 and for the years ended June 30, 2017
and 2016 have been derived from consolidated financial statements which are not included in this Form 10-K.
The selected financial data presented below should be read in conjunction with our consolidated financial statements and the
accompanying notes included elsewhere in this Annual Report on Form 10-K and Item 7 of Part II "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
In June 2019, the Company committed to a plan to divest its Digital Marketing Business and completed the divestiture on April
21, 2020. The operating results of the Digital Marketing Business is being presented as discontinued operations for all periods
presented.
24
(In millions, except per share amounts)
2020(1) (2)
2019 (1)
2018
2017
2016
Years Ended June 30,
Income Statement Data
Revenues
Earnings before income taxes
Provision for income taxes
Net earnings from continuing operations
(Loss) earnings from discontinued operations, net of taxes
(89.3)
(109.8)
Net earnings
Net earnings attributable to noncontrolling interest
Net earnings attributable to CDK
214.5
7.0
207.5
131.9
7.9
124.0
$ 1,960.1 $ 1,914.8 $ 1,798.0 $ 1,730.7 $ 1,658.9
424.2
120.4
303.8
303.9
62.2
241.7
399.2
88.1
311.1
77.6
388.7
7.9
380.8
327.7
92.8
234.9
67.6
302.5
6.9
295.6
283.3
90.1
193.2
53.6
246.8
7.5
239.3
Net earnings (loss) attributable to CDK per share - basic:
Continuing operations
Discontinued operations
Total net earnings attributable to CDK per share - basic
Net earnings (loss) attributable to CDK per share - diluted:
Continuing operations
Discontinued operations
Total net earnings attributable to CDK per share - diluted
$
$
$
$
$
$
2.44 $
1.86 $
(0.73) $
(0.87) $
2.23 $
0.57 $
1.55 $
0.46 $
1.18
0.34
1.71 $
0.99 $
2.80 $
2.01 $
1.52
2.43 $
1.85 $
(0.73) $
(0.87) $
2.21 $
0.57 $
1.53 $
0.46 $
1.17
0.34
1.70 $
0.98 $
2.78 $
1.99 $
1.51
Weighted-average basic shares outstanding
Weighted-average diluted shares outstanding
121.6
122.1
125.5
126.4
135.8
136.8
146.7
148.2
Cash dividends declared per share
$
0.600 $
0.600 $
0.590 $
0.555 $
157.0
158.0
0.525
219.1
738.7
111.0
$
215.7 $
311.4 $
804.4 $
726.1 $
685.6
109.1
987.1
144.8
1,367.3
1,278.8
127.6
129.6
2,854.1
2,999.0
3,008.4
2,883.1
2,365.0
526.8
840.2
2,655.1
2,659.4
3,434.8
3,713.5
548.4
2,575.5
3,355.7
552.6
2,125.2
2,939.9
(580.7)
(714.5)
(347.3)
(56.8)
523.4
1,190.3
1,988.8
376.2
Balance Sheet Data
Cash and cash equivalents
Total current assets
Property, plant and equipment, net
Total assets
Total current liabilities
Long-term debt
Total liabilities
Total stockholders' (deficit) equity
(1) Effective July 1, 2018, the Company adopted the Financial Accounting Standard Board Accounting Standards Update
("ASU") 2014-09, "Revenue from Contracts with Customers," and related ASUs 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
periods presented. For further information, see Item 8 of Part II, "Financial Statements and Supplementary Data - Note 6 -
Revenue."
(2) Effective July 1, 2019, the Company adopted the Financial Accounting Standard Board Accounting Standards Update
("ASU") 2016-02, "Leases," and related ASUs 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 periods presented. For further
information, see Item 8 of Part II, "Financial Statements and Supplementary Data - Note 14 - Leases."
25
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our consolidated financial statements and accompanying notes
thereto included elsewhere herein. In this Annual Report on Form 10-K, all references to "we," "our," and "us" refer
collectively to CDK and its consolidated subsidiaries.
(Tabular amounts in millions, except per share amounts)
Executive Overview. CDK Global enables end-to-end automotive commerce across the globe. For over 40 years, we have
served automotive retailers and original equipment manufacturers ("OEMs") by providing innovative solutions that allow them
to better connect, manage, analyze, and grow their businesses. Our 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.
We generate revenue primarily by providing a broad suite of subscription-based software and technology solutions for
automotive retailers through our CDK North America and CDK International segments. We are focused on the use of software-
as-a-service ("SaaS") and mobile-centric solutions that are highly functional, flexible and fast. Our flagship Dealer Management
System ("DMS") software solutions are hosted enterprise resource planning applications tailored to the unique requirements of
the retail automotive industry. Our DMS products facilitate the sale of new and used vehicles, consumer financing, repair and
maintenance services, and vehicle and parts inventory management. Additionally, these solutions enable company-wide
accounting, financial reporting, cash flow management, and payroll services. Our DMSs are typically integrated with OEM data
processing systems that enable automotive retailers to order vehicles and parts, receive vehicle records, process warranties, and
check recall campaigns and service bulletins while helping them to fulfill their franchisee responsibilities to their OEM
franchisors.
We have organized our operations into two main operating groups, CDK North America ("CDKNA") and CDK International
("CDKI"), which are also the two reportable operating segments. A brief description of each of these two segments' operations
is provided below. 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. Additional information on our reportable segments and geographic
areas is contained in Item 8 of Part II, "Financial Statements and Supplementary Data - Note 20 - Financial Data by Segment."
In June 2019, we committed to a plan to divest our Digital Marketing Business and completed the divestiture on April 21, 2020.
The Digital Marketing Business is presented as discontinued operations. Additional information on discontinued operations is
contained in Item 8 of Part II, "Financial Statements and Supplementary Data - Note 4 - Discontinued Operations."
CDK North America. Through our CDKNA segment, we provide technology-based solutions, including our DMS products, a
broad portfolio of layered software applications and services, a robust and secure interface to the DMS through our Partner
Program, data management and business intelligence solutions, a variety of professional services, and a full range of customer
support solutions. These solutions help automotive retailers, OEMs, consumers and other industry participants manage the
acquisition, sale, financing, insuring, parts supply, and repair and maintenance of vehicles. Our solutions help our customers
streamline their operations, better target and serve their customers, and enhance the financial performance of their retail
operations. In addition to providing solutions to automotive retailers and OEMs, we also provide solutions to retailers and
manufacturers of heavy trucks, construction equipment, agricultural equipment, motorcycles, boats, and other marine and
recreational vehicles.
CDK International. Through our CDKI segment, we provide automotive retailers with core DMS solutions and we offer
automotive retailers and OEMs a variety of professional services, custom programming, consulting, implementation and
training solutions, as well as a full range of customer support solutions in approximately 100 countries outside of the United
States ("U.S.") and Canada. The solutions that we provide within this segment allow our customers to streamline their business
operations and enhance their financial performance within their local marketplace, and in some cases where we deal directly
with OEMs, across international borders. Customers of this segment include automotive retail dealers and OEMs across
Europe, the Middle East, Asia, Africa, and Latin America.
26
Impacts of COVID-19. As the COVID-19 pandemic spread at scale in Europe and the U.S., by mid-March we began to see a
significant shift in automotive retail, and the operations of our dealer customers in particular, stemming from travel bans and
restrictions, quarantines, shelter-in-place orders and related business shutdowns. The full extent and timing of the impact of the
COVID-19 pandemic on our business is currently unknown. Our business remains fully operational with modifications to
accommodate employee and customer safety considerations, including limitations on travel, a migration of nearly all employees
to work-from-home status for the present time, increased virtual delivery of certain services, and other modifications. We have
observed that other companies including our customers and vendors are taking precautionary and preemptive actions to address
the COVID-19 pandemic and companies may take further actions that alter their normal business operations. We continue to
actively monitor the situation and may take further actions in response to guidance from federal, state or local authorities or that
we determine are in the best interests of our employees, customers, partners, suppliers and stockholders.
We have experienced impacts related to the COVID-19 pandemic during the second half of fiscal 2020, mainly attributable to
lower volume of transactional revenue and reduced installation activities. Additionally, to support our customers in this difficult
period, we have offered financial and other assistance and added product benefits to reflect today’s environment, while
continuing to provide the high level of customer service they expect and rely on. The impacts of the financial assistance
provided are expected be a near-term decrease in cash receipts in addition to a reduction in revenue that will be recognized over
the next two years. The earnings and cash flow impacts of the reduced revenue is partially offset by expense reductions in the
areas of travel expenses and other discretionary spending.
In response to the economic uncertainty engendered by the ongoing COVID-19 pandemic, we have taken steps to preserve cash
and improve our liquidity position. We are reducing costs and eliminating discretionary spending where possible while
continuing to serve our customers’ needs. We have also amended our revolving credit facility and term loans to increase the
maximum allowable leverage ratio through the first quarter of 2022 in order to provide us with access to additional borrowing
capacity. In addition, we reviewed our plans for foreign cash balances and, based on the increase in uncertainty and higher
expected U.S. cash needs associated with the pandemic, we have removed our assertion that foreign earnings are indefinitely
reinvested, making these earnings available for repatriation as necessary. At this point in time, it is not clear to what extent or
over what length of time the COVID-19 pandemic will impact our financial results. We continue to monitor cash flow and
liquidity and will take further steps as necessary depending on the duration and severity of the COVID-19 pandemic crisis and
its impact on our cash flows.
Business Process Modernization Program. As of July 1, 2019, we initiated a three-year program designed to improve the way
we do business for our customers through best-in-class product offerings, process, governance and systems. The Business
Process Modernization Program will include a comprehensive redesign in the way we go to market, including the quoting,
contracting, fulfilling, and invoicing processes, and systems and tools used by the Company. We estimate the investment to
implement this holistic business reform, including the design and implementation of a new enterprise resource planning
("ERP") system, will require investment of approximately $30 million over a three-year time horizon.
CDKI Restructuring. On May 2, 2020, we adopted a plan to restructure the CDKI segment to reduce costs and improve
margins. The Company expects to incur costs related to one-time employee termination benefits up to $30.0 million. We have
incurred costs of $14.2 million during the fourth quarter of fiscal 2020, additional charges related to these actions are expected
to be incurred through early fiscal 2021.
Business Transformation Plan. During fiscal year ended June 30, 2015 ("fiscal 2015"), we initiated a three-year business
transformation plan designed to increase operating efficiency and improve the cost structure of our global operations. The
business transformation plan was completed at the end of our fiscal year ended June 30, 2019 (“fiscal 2019”). It produced
significant benefits in our business performance. Additional information on the business transformation plan is contained in
Item 8 of Part II, "Financial Statements and Supplementary Data, Note 7 - Restructuring."
In January 2017, the Board of Directors authorized us to repurchase up to $2.0 billion of our common stock as part of a return
of capital plan, whereby we have repurchased approximately $1.5 billion of common stock through June 30, 2020. On May 4,
2020, we entered into amendments to our credit agreements that restrict us from making repurchases of our common stock in
excess of $40.0 million in any fiscal year through the earlier of: (i) delivery of the financial statements for the fiscal quarter
ending December 31, 2021, provided certain conditions are met; and (ii) the provision of the relevant liens and subsidiary
guarantees to the creditor banks. We did not make stock repurchases during the fiscal 2020. For fiscal 2020, the shareholder
returns consisted solely of dividends with an aggregate value of $73.0 million. Our top priorities for capital allocation will
continue to be a thoughtful balance between: (i) organic investments that will continue to accelerate the growth and
performance of the business; (ii) inorganic opportunities that are synergistic with our portfolio and would meaningfully provide
additional profitable revenue and increased long-term value; and (iii) return of capital to shareholders, while targeting a
leverage ratio, measured as financial debt, net of cash, divided by adjusted EBITDA, at a range of 2.5x to 3.0x net debt to
adjusted EBITDA. Our leverage ratio of 3.3x net debt to adjusted EBITDA as of June 30, 2020, is currently in excess of our
target leverage ratio. As a result, we do not anticipate any material share repurchase during fiscal 2021.
27
Under the authorization, and subject to the restrictions of our credit agreements, as amended, we may continue to purchase our
common stock in the open market or in privately negotiated transactions from time to time as permitted by federal securities
laws and other legal requirements. The actual timing, number, and price of any shares repurchased will be determined at
management's discretion and will depend on a number of factors, which may include the market price of the shares, general
market and economic conditions, the availability and cost of additional indebtedness, and other potential uses for free cash flow
including, but not limited to, potential acquisitions.
Sources of Revenues and Expenses
Revenues. We generally receive fee-based revenue by providing services to customers. We generate revenues from four
categories: subscription, on-site licenses and installation, transaction services, and other.
In our CDKNA segment, we have the following sources of revenue:
•
Subscription: for software and technology solutions provided to automotive retailers and OEMs, which includes:
DMSs and layered applications, which may be installed on-site at the customer’s location, or hosted and
provided on a SaaS basis, including ongoing maintenance and support;
Interrelated services such as installation, initial training, and data updates; and
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.
•
•
On-site licenses and installation: DMSs applications where the software is installed on-site at the customer's location
and interrelated services such as installation.
Transaction: fees per transaction to process credit reports, vehicle registrations, and automotive equity mining.
Other: consulting and professional services, sales of hardware, and other miscellaneous revenues. 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.
CDKI revenues are generated primarily from Subscription revenue, On-site licenses and installation revenue, and other revenue,
as described above.
Expenses. Expenses generally relate to the cost of providing services to customers in our two reportable segments. In the
CDKNA and CDKI segments, significant expenses include employee payroll and other labor-related costs, the cost of hosting
customer systems, third-party costs for transaction-based solutions and licensed software utilized in our solution offerings,
telecommunications, transportation and distribution costs, computer hardware, software, and other general overhead items. We
also have some company-wide expenses attributable to management compensation and corporate overhead.
Potential Material Trends and Uncertainties in our Marketplace
A number of material trends and/or uncertainties in our marketplace could have either a positive or negative impact on our
ability to conduct business, our results of operations, and/or our financial condition. The following is a summary of trends or
uncertainties that have the potential to affect our liquidity, capital resources, or results of operations:
•
•
•
Our revenues, operating earnings, and profitability have varied in the past as a result of these trends and uncertainties
and are likely to continue to vary from quarter to quarter, which may lead to volatility in our stock price. These trends
or uncertainties could occur in a variety of different areas of our business and the marketplace.
Changing market trends, including changes in the automotive marketplace, both in North America and internationally,
could have a material impact on our business. From time to time, the economic trends of a region could have an impact
on the volume of automobiles sold at retail within one or more of the geographic markets in which we operate. To
some extent, our business is impacted by these trends, either directly through a shift in the number of transactions
processed by customers of our transactional business, or indirectly through changes in our customers’ spending habits
based on their own changes in profitability.
Our presence in multiple markets internationally could pose challenges that would impact our business or results of
operations. We currently operate in over 100 countries and derive a significant amount of our overall revenues from
28
•
•
markets outside of North America. The geographic breadth of our presence exposes us to potential economic, social,
regulatory, and political shifts.
Our ability to bring new solutions to market, research and develop, or acquire the data and technology that enables
those solutions is important to our continued success. In addition, our strategy includes the selective pursuit of
acquisitions that support or complement our existing technology and solution set. An inability to invest in the
continued development of new solutions for the automotive marketplace, or an inability to acquire new technology or
solutions due to a lack of liquidity or resources, could impair our strategic position.
Our success depends on our ability to maintain the security of our data and intellectual property, as well as our
customers’ data. Although we maintain a clear focus on data and system security, and we incur significant costs
securing our infrastructure annually in support of that focus, we may experience interruptions of service or potential
security issues that may be beyond our control.
Factors Affecting Comparability of Financial Results
Debt Financing
Revolving Credit Facility. On August 17, 2018, we entered into a five-year senior unsecured 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. The average outstanding balances
of the revolving credit facility were $209.5 million and $268.4 million for the three months ending June 30, 2020 and 2019,
respectively, and $122.7 million and $282.3 million for the year ended June 30, 2020, and 2019, respectively.
Term Loan Facilities. On August 17, 2018, we borrowed an aggregate of $600.0 million under term loan facilities comprising
a $300.0 million term loan facility that will mature on August 17, 2021 (our "three year term loan facility"), and a $300.0
million term loan facility that will mature on August 17, 2023 (our "five year term loan facility"). Borrowings under the three
year term loan facility and the five year term loan facility were used to pay off all of the outstanding principal, interest and
related fees with respect to each of the two $250.0 million senior unsecured term loan facilities, and the $400.0 million senior
unsecured term loan facility.
Senior Notes. On May 2, 2019, we completed an offering of 5.250% senior notes with a $500.0 million aggregate principal
amount due in 2029 (the "2029 notes"). The net proceeds from the sale of the 2029 notes was primarily used to repay
borrowings under the Company's revolving credit facility and for general corporate purposes, which included share repurchases,
dividends, acquisitions, working capital and capital expenditures.
On October 15, 2019, we paid off the unsecured senior note at its maturity with an interest rate of 3.30% and an aggregate
principal amount of $250.0 million.
Acquisitions
On September 14, 2018, the Company acquired the equity interests of 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.
Adoption of Accounting Standard Updates related to Leases.
On July 1, 2019, we adopted Accounting Standard Codification 842 "Leases," as amended ("ASC 842"). ASC 842 requires that
lessees recognize right-of-use assets and lease liabilities for any lease classified as either a finance or an operating lease that is
not considered short-term. We adopted ASC 842 using the modified retrospective transition method whereby prior comparative
periods have not been restated. As a result, there are year-over-year variances discussed in the sections below that result from
the change in timing of revenue and cost recognition for our Hardware as a Service ("HaaS") arrangements beginning in fiscal
2020. For additional information, refer to Item 8 of Part II, "Financial Statements and Supplementary Data - Note 14 - Leases"
of this Annual Report on Form 10-K
29
Key Performance Measures. We regularly review the following key performance measures in evaluating our business results,
identifying trends affecting our business, and making operating and strategic decisions:
Dealer Management System Customer Sites. We track the number of retail customer sites that have an active DMS and
sell vehicles in automotive and adjacent markets. This metric is an indicator of our opportunity set for generating
subscription revenue. We consider a DMS to be active if we have billed a subscription fee for that solution during the
most recently ended calendar month. Adjacent markets include heavy truck dealerships that provide vehicles to the
over-the-road trucking industry, recreation dealerships in the motorcycle, marine, and recreational vehicle industries,
and heavy equipment dealerships in the agriculture and construction equipment industries.
Average Revenue Per DMS Customer Site. Average revenue per DMS customer site is an indicator of the scope of
adoption of our solutions by DMS customers. We monitor changes in this metric to measure the effectiveness of our
strategy to deepen our relationships with our current customer base through upgrading and expanding solutions. We
calculate average revenue per DMS customer site by dividing the revenue generated from our solutions, in an
applicable period, by the average number of DMS customer sites in the same period. The metric excludes subscription
revenue generated by customers not included in our DMS customer site count as well as subscription revenue related
to certain installation and training activities that is deferred then recognized as revenue over the life of the contract.
Revenue underlying this metric is based on budgeted foreign exchange rates. When we discuss growth in average
revenue per DMS customer site, revenue for the comparable prior period has been adjusted to reflect budgeted foreign
exchange rates for the current period.
Non-GAAP Measures
We disclose certain financial measures for our consolidated and operating segment results on a generally accepted accounting
principles (GAAP) and a non-GAAP (adjusted) basis. The non-GAAP financial measures disclosed should be viewed in
addition to, and not as an alternative to, results prepared in accordance with GAAP. Our use of each of the following non-
GAAP financial measures may differ from similarly titled non-GAAP financial measures presented by other companies, and
other companies may not define these non-GAAP financial measures, or reconcile them to the comparable GAAP financial
measures, in the same way.
Non-GAAP Financial Measure
Adjusted earnings before income taxes
Adjusted provision for income taxes
Comparable GAAP Financial Measure
Earnings (Loss) before income taxes
Provision for income taxes
Adjusted net earnings attributable to CDK
Net (loss) earnings attributable to CDK
Adjusted diluted earnings attributable to CDK per share
Diluted (loss) earnings attributable to CDK per share
Adjusted EBITDA
Adjusted EBITDA margin
Constant currency revenues
Net (loss) earnings attributable to CDK
Net (loss) earnings attributable to CDK margin
Revenues
Constant currency adjusted earnings before income taxes
(Loss) Earnings before income taxes
Free cash flow from continuing operations
Net cash flows provided by operating activities
We use adjusted earnings before income taxes, adjusted provision for income taxes, adjusted net earnings attributable to CDK,
adjusted diluted earnings attributable to CDK per share, adjusted EBITDA and adjusted EBITDA margin internally to evaluate
our performance on a consistent basis because the measures adjust for the impact of certain items that we believe do not directly
reflect our underlying operations. By adjusting for these items, we believe we have more precise inputs for use as factors in (i)
our budgeting process, (ii) financial and operational decisions, (iii) evaluations of ongoing segment and overall operating
performance on a consistent period-to-period basis and relative to our competitors, (iv) target leverage calculations, (v) debt
covenant calculations, and (vi) incentive-based compensation decisions.
We believe our non-GAAP financial measures are helpful to users of the financial statements because they (i) provide investors
with meaningful supplemental information regarding financial performance by excluding certain items, (ii) permit investors to
view performance using the same tools that management uses, and (iii) provide supplemental information that may be useful to
investors in evaluating our ongoing operating results on a consistent basis. We believe that the presentation of these non-GAAP
financial measures, when considered in addition to the corresponding GAAP financial measures and the reconciliations to those
measures disclosed below, provides investors with a better understanding of the factors and trends affecting our business than
could be obtained absent these disclosures.
30
We review revenues and adjusted earnings before income taxes on a constant currency basis to understand underlying business
trends. To present these results on a constant currency basis, current period results for entities reporting in currencies other than
the U.S. dollar were translated into U.S. dollars using the average monthly exchange rates for the comparable prior period. As a
result, constant currency results neutralize the effects of foreign currency.
We incorporated additional adjustments within our calculations of non-GAAP financial measures where management has
deemed it appropriate to better reflect our underlying operations. These adjustments are inconsistent in amount and frequency
and do not directly reflect our underlying operations. Therefore, management believes that excluding such information provides
us with a better understanding of our ongoing operating performance across periods. Prior period information has been revised
to conform to the new presentation.
Fiscal 2020 Modifications to Our Adjustments.
As of July 1, 2019, we initiated a three-year program designed to improve the way we do business for our customers through
best-in-class product offerings, process, governance and systems. The business process modernization program will include a
comprehensive redesign in the way we go to market, including the quoting, contracting, fulfilling, and invoicing processes, and
the systems and tools we use. We estimate the investment to implement this holistic business reform, including the design and
implementation of a new ERP system, will require investment of approximately $30 million over a three-year time horizon. In
connection with our initiation of the business process modernization program, we have modified our presentations of adjusted
net earnings attributable to CDK, adjusted diluted net earnings attributable to CDK per share, and adjusted EBITDA because
such costs do not directly reflect our underlying operations.
Effective January 1, 2020, we modified our presentation of adjusted provision for income taxes, adjusted net earnings
attributable to CDK, adjusted diluted earnings attributable to CDK per share to include an adjustment for the income tax effect
of a change in CDK’s assertion that foreign earnings are no longer considered indefinitely reinvested.
Effective April 1, 2020, we modified our presentation of adjusted earnings before income taxes, adjusted provision for income
taxes, adjusted net earnings attributable to CDK, adjusted diluted earnings attributable to CDK per share, and adjusted EBITDA
to include our plan to restructure the CDKI segment to reduce costs and improve margins.
Effective April 21, 2020, we modified our presentation of adjusted earnings before income taxes, adjusted provision for income
taxes, adjusted net earnings attributable to CDK, adjusted diluted earnings attributable to CDK per share, and adjusted EBITDA
to include net adjustments related to the loss from an equity method investment.
Results of Operations. We review results on a constant currency basis to understand underlying business trends. To present
these results on a constant currency basis, current period results for entities reporting in currencies other than the U.S. dollar
were translated into U.S. dollars using the average monthly exchange rate for the comparable prior period. As a result, constant
currency results neutralize the effects of foreign currency.
Fiscal 2020 Compared to Fiscal 2019. The following is a discussion of the results of our consolidated results of operations for
fiscal 2020 and 2019, respectively. For a discussion of our operations by segment, see "Analysis of Reportable Segments"
below.
For a discussion of our results of operations for fiscal 2019 compared to fiscal 2018, please refer to Part II, Item7,
"Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-
K for the fiscal year ended June 30, 2019 which was filed with the SEC on August 14, 2019.
31
The table below presents our Consolidated Statements of Operations for the periods indicated and the dollar change and
percentage change between periods.
Revenues
Costs of revenues
Selling, general and administrative expenses
Restructuring expenses
Litigation provision
Total expenses
Operating earnings
Interest expense
Loss from equity method investment
Other income, net
Earnings before income taxes
Margin %
Provision for income taxes
Effective tax rate
Net earnings from continuing operations
Net loss from discontinued operations
Net earnings
Less: net earnings attributable to noncontrolling interest
Net earnings attributable to CDK
Years Ended June 30,
Change
2020
2019
$
%
$ 1,960.1
$ 1,914.8
$
966.5
899.8
429.9
14.2
—
444.7
28.0
90.0
1,410.6
1,462.5
549.5
(144.3)
(2.7)
21.7
424.2
21.6 %
(120.4)
28.4 %
303.8
(89.3)
214.5
7.0
452.3
(139.1)
(17.0)
7.7
303.9
15.9 %
(62.2)
20.5 %
241.7
(109.8)
131.9
7.9
45.3
66.7
2 %
7 %
(14.8)
(13.8)
(3) %
(49) %
(90.0)
(100) %
(51.9)
97.2
(5.2)
14.3
14.0
120.3
(4) %
21 %
(4) %
84 %
182 %
40 %
(58.2)
(94) %
62.1
20.5
82.6
26 %
(19) %
63 %
(0.9)
(11) %
$ 207.5
$ 124.0
$
83.5
67 %
Revenues. Revenues for fiscal 2020 increased by $45.3 million as compared to fiscal 2019. The CDKNA segment contributed
$46.0 million, partially offset by declines in the CDKI segment of $0.7 million. See the discussion below for drivers of each
segment's revenue variance. The impact of foreign exchange rates on revenues was a decrease of $10.7 million. The foreign
exchange rate impact was primarily due to the strength of the Euro, British pound, South African rand, Canadian dollar,
Chinese yuan, and Danish krone, against the U.S. dollar.
Cost of Revenues. Cost of revenues for fiscal 2020 increased by $66.7 million as compared to fiscal 2019. The constant
currency impact of foreign exchange rates on cost of revenues was a decrease of $5.1 million. Cost of revenues increased due to
the ELEAD acquisition, higher costs relating to investments in strategic growth initiatives, a post-ASC 842 change in the timing
of cost recognition for our HaaS arrangements, and an increase in depreciation and amortization resulted from capitalized
software. These increases were partially offset by the cost containment efforts in response to the COVID-19 pandemic,
impairment charges recorded related to certain intangible assets during the second quarter of the prior year, and lower employee
related expenses. Cost of revenues include expenses to research, develop, and deploy new and enhanced solutions for our
customers of $72.9 million and $79.5 million for fiscal 2020 and 2019, respectively, representing 3.7% and 4.2% of revenues,
respectively.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for fiscal 2020 decreased $14.8
million as compared to fiscal 2019. The constant currency impact of foreign exchange rates on selling, general and
administrative expenses was a decrease of $2.6 million. Selling, general and administrative expenses decreased due to lower
stock-based compensation expense resulting from cumulative adjustments related to the achievement of financial performance
metrics associated with performance-based restricted stock units, certain expenses incurred in the prior year related to the
business transformation plan which was completed at the end of fiscal 2019, and lower travel expenses as a result of the
COVID-19 pandemic, partially offset by costs related to the business process modernization program that began during fiscal
2020.
Restructuring Expenses. Restructuring expenses for fiscal 2020 decreased $13.8 million as compared to fiscal 2019. The
expenses in fiscal 2020 relate to our restructuring plan for the CDKI segment. The expenses incurred in the prior year relate to
our business transformation plan which was completed at the end of fiscal 2019.
32
Litigation Provision. The Company recorded a $90.0 million litigation provision related to antitrust lawsuits during fiscal
2019. Additional information on the litigation provision is contained in Item 8 of Part II, "Financial Statements and
Supplementary Data - Note 18 - Commitments and Contingencies."
Interest Expense. Interest expense for fiscal 2020 increased $5.2 million as compared to fiscal 2019 due to higher interest rates
and higher average debt levels in fiscal 2020 compared to fiscal 2019.
Loss from Equity Method Investment. The Company recorded a $2.7 million loss from the equity earnings of Ansira, an
equity-method investment. The Company recorded a $17.0 million loss from equity method investment related to termination of
a joint-venture contract during fiscal 2019. Refer to Note 16. Investments for additional information on equity method
investments.
Other Income, Net. Other income, net for fiscal 2020 increased by $14.0 million as compared to fiscal 2019 due largely to the
recognition of income related to a transition services agreement in connection with the sale of the Digital Marketing Business.
Provision for Income Taxes. The effective tax rate for fiscal 2020 was 28.4% as compared to 20.5% for fiscal 2019. The
effective tax rate for fiscal 2020 was primarily impacted by $14.8 million of tax expense from the increase in valuation
allowance for capital loss carryforward credits which was triggered by a change in estimate of the expected capital gain
associated with the sale of the assets of the Digital Marketing Business and $3.7 million tax expense from CDK's change in
assertion regarding our intent to no longer indefinitely reinvest foreign earnings offset by $1.2 million of one-time tax benefit
resulting from an adjustment of an accrual for foreign withholding taxes related to undistributed earnings as a result of the Tax
Reform Act in the first quarter of fiscal 2020. The effective tax rate for fiscal 2019 was impacted by a $14.8 million tax benefit
from decrease in valuation allowance related to the capital gain that we expected to recognize in conjunction with the sale of the
Digital Marketing Business, a $4.3 tax expense from an increase to valuation allowance related to a new capital loss generated
from termination of a joint venture, a one-time tax expense of $3.4 million from a revaluation of deferred tax assets associated
with executive compensation, $0.6 million tax benefit due to a true-up to the one-time transition tax initially recorded in fiscal
2018 as a result of the Tax Reform Act, and $1.4 million tax benefit for excess tax benefits from stock-based compensation.
The effective tax rate increase from fiscal 2019 to fiscal 2020 is also impacted by the mix of earnings by jurisdiction offset by a
tax benefit from a decrease of nondeductible expenses for tax purposes due to reduced executive compensation, tax benefits
from various tax planning implemented in fiscal 2020 including an update to transfer pricing policies and a tax benefit from a
state audit refund.
Net Loss from Discontinued Operations. Net loss from discontinued operations reflect the results of the Digital Marketing
Business. During fiscal 2019, the Digital Marketing Business was impacted by a $168.7 million goodwill impairment charge.
On April 21, 2020, the Company completed its sale of the Digital Marketing Business. 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. Refer to Note 4 - Discontinued operations for additional information. In
addition, the Digital Marketing Business generated lower earnings in fiscal 2020 due to a decline in our advertising business
revenues which were impacted by a reduction in OEM-funded advertising placements and dealer spend, a decline in our website
business revenues and the fact that fiscal 2020 only included the business through April 21, 2020. The unfavorable effects of
these items were partially offset by a net tax benefit.
Net Earnings Attributable to CDK. Net earnings attributable to CDK for fiscal 2020 increased $83.5 million as compared to
fiscal 2019. The increase in net earnings attributable to CDK was primarily due to the factors previously discussed.
Consolidated Non-GAAP Results. The tables below present the reconciliation of the most directly comparable GAAP
measures to constant currency revenues, constant currency adjusted earnings before income taxes, adjusted provision for
income taxes, adjusted net earnings attributable to CDK, and adjusted diluted earnings attributable to CDK per share.
33
Revenues (1)
Impact of exchange rates
Constant currency revenues
Earnings before income taxes (1)
Margin %
Total stock-based compensation (1) (2)
Amortization of acquired intangible assets (1) (3)
Transaction and integration-related costs (1) (4)
Legal and other expenses related to regulatory and competition matters (5)
Business process modernization program (6)
Restructuring expenses (1) (7)
Other business transformation expenses (1) (7)
Impairment of intangible assets (8)
Officer transition expense (9)
Net adjustments related to loss from equity method investment (10)
ELEAD joint venture agreement termination (11)
Adjusted earnings before income taxes (1)
Adjusted margin %
Impact of exchange rates
Years Ended June 30,
2019
2020
$ 1,914.8
$ 1,960.1
—
10.7
$ 1,914.8
$ 1,970.8
Change
$
$ 45.3
10.7
$ 56.0
%
2 %
3 %
$ 424.2
$ 303.9
$ 120.3
40 %
21.6 %
19.6
16.1
10.2
19.4
16.1
14.2
—
—
—
15.9 %
30.5
15.3
13.2
111.2
—
28.0
20.9
14.9
6.4
(10.9)
0.8
(3.0)
(91.8)
16.1
(13.8)
(20.9)
(14.9)
(6.4)
2.2
—
$ 522.0
—
17.0
$ 561.3
2.2
(17.0)
$ (39.3)
26.6 %
29.3 %
2.6
—
2.6
(7) %
Constant currency adjusted earnings before income taxes
$ 524.6
$ 561.3
$ (36.7)
(7) %
Change
$
$ 58.2
%
94 %
(35.2)
(3.4)
(29.6)
4.0
(6.0)
$
(5) %
Provision for income taxes (1)
Effective tax rate
Income tax effect of pre-tax adjustments (13)
Years Ended June 30,
2020
2019
$ 120.4
$
28.4 %
23.6
62.2
20.5 %
58.8
Income tax effect for foreign earnings previously deemed indefinitely reinvested (14)
Change in valuation allowance (15)
Impact of U.S. tax reform (16)
Adjusted provision for income taxes (1)
Adjusted effective tax rate
(3.4)
(14.8)
1.2
$ 127.0
—
14.8
(2.8)
$ 133.0
24.3 %
23.7 %
34
Net earnings
Less: net earnings attributable to noncontrolling interest
Net earnings attributable to CDK
Net loss from discontinued operations (17)
Total stock-based compensation (1) (2)
Amortization of acquired intangible assets (1) (3) (18)
Transaction and integration-related costs (1) (4)
Legal and other expenses related to regulatory and competition matters (5) (18)
Business process modernization program (6)
Restructuring expenses (1) (7) (18)
Other business transformation expenses (1) (7)
Impairment of intangible assets (8)
Officer transition expense (9)
Net adjustments related to loss from equity method investment (10)
ELEAD joint venture agreement termination (11)
Tax matters indemnification gain (12)
Income tax effect of pre-tax adjustments (13)
Income tax effect for foreign earnings previously deemed indefinitely reinvested (14)
Change in valuation allowance (15)
Impact of U.S. tax reform (16)
Years Ended June 30,
2019
2020
Change
$
%
$
214.5
$
131.9
$ 82.6
63 %
67 %
7.0
207.5
89.3
19.6
15.8
10.2
19.3
16.1
14.2
—
—
—
2.2
—
—
(23.6)
3.4
14.8
(1.2)
7.9
124.0
109.8
30.5
15.0
13.2
111.0
—
27.9
20.9
14.9
6.4
—
17.0
—
(58.8)
—
(14.8)
2.8
83.5
(20.5)
(10.9)
0.8
(3.0)
(91.7)
16.1
(13.7)
(20.9)
(14.9)
(6.4)
2.2
(17.0)
—
35.2
3.4
29.6
(4.0)
Adjusted net earnings attributable to CDK (1)
$
387.6
$
419.8
$ (32.2)
(8) %
35
Years Ended June 30,
2019
2020
Change
$
%
$ 0.72
73 %
Diluted earnings attributable to CDK per share
$
Net loss from discontinued operations (17)
Total stock-based compensation (1) (2)
Amortization of acquired intangible assets (1) (3) (18)
Transaction and integration-related costs (1) (4)
Legal and other expenses related to regulatory and competition matters (5) (18)
Business process modernization program (6)
Restructuring expenses (1) (7) (18)
Other business transformation expenses (1) (7)
Impairment of intangible assets (8)
Officer transition expense (9)
Net adjustments related to loss from equity method investment (10)
ELEAD joint venture agreement termination (11)
Tax matters indemnification gain (12)
Income tax effect of pre-tax adjustments (13)
Income tax effect for foreign earnings previously deemed indefinitely reinvested (14)
Decrease in valuation allowance (15)
Impact of U.S. tax reform (16)
1.70
0.73
0.16
0.13
0.08
0.15
0.13
0.12
—
—
—
0.02
—
—
(0.19)
0.03
0.12
(0.01)
$
0.98
0.87
0.24
0.12
0.10
0.88
—
0.22
0.17
0.12
0.05
—
0.13
—
(0.46)
—
(0.12)
0.02
Adjusted diluted earnings attributable to CDK per share (1)
$
3.17
$
3.32
$ (0.15)
(5) %
Weighted-average common shares outstanding:
Diluted
(1) Excludes amounts attributable to discontinued operations.
122.1
126.4
(2) Total stock-based compensation expense included within cost of revenues and selling, general and administrative expenses.
(3) Amortization of acquired intangible assets consists of non-cash amortization of intangible assets such as customer lists,
purchased software, and trademarks acquired in connection with business combinations. We exclude the impact of amortization
of acquired intangible assets because these non-cash amounts are significantly impacted by the timing and size of individual
acquisitions and do not factor into our budgeting process, financial and operational decision making, target leverage
calculations, and determination of incentive based pay. Furthermore, management believes that this adjustment enables better
comparison of our segment and overall operating results as amortization of acquired intangibles will not recur in future periods
once such intangible assets have been fully amortized. Although we exclude amortization of acquired intangible assets from our
presentation of adjusted earnings before income taxes, adjusted provision for income taxes, adjusted net earnings attributable to
CDK, and adjusted diluted net earnings attributable to CDK per share, we believe that it is important for the users of the
financial statements to understand that the associated intangible assets were recorded as part of purchase accounting and
contribute to revenue generation. Amortization of intangible assets that relate to past acquisitions will recur in future periods
until such intangible assets have been fully amortized. Any future acquisitions may result in the amortization of additional
intangible assets.
(4) Transaction and integration-related expenses include: (i) legal, accounting, outside service fees, and other costs incurred in
connection with assessment and integration of acquisitions and other strategic business opportunities; and (ii) post-close
adjustments to acquisition-related contingent consideration, reported within cost of revenues and selling, general and
administrative expenses.
(5) Legal and other expenses, including litigation provision, related to regulatory and competition matters included within
selling, general and administrative expenses and litigation provision.
(6) Business process modernization program designed to improve the way we do business for our customers through best-in-
class product offerings, process, governance and systems. The business process modernization program will include a
comprehensive redesign in the way we go to market, including the quoting, contracting, fulfilling, and invoicing processes, and
the systems and tools we use. The investment to implement this holistic business reform, including the design and
36
implementation of a new ERP system will be completed over a three-year time horizon. The expense is included within cost of
revenues and selling, general and administrative expenses.
(7) Restructuring expense in fiscal 2019 relate to other business transformation expenses incurred in connection with our
business transformation plan. Restructuring expense in fiscal 2020 related to the restructuring plan for the CDKI segment,
which was adopted by the Company on May 2, 2020. These charges are included within cost of revenues and selling, general
and administrative expenses.
(8) Impairment of intangible assets consists of the write-off of certain intangible assets within the CDKNA segment and is
reported within cost of revenues.
(9) Officer transition expense includes severance expense in connection with officer departures included within selling, general
and administrative expenses.
(10) Net adjustments related to loss from equity method investment included certain portions of Ansira earnings attributable to
the equity interest owned by CDK reported within loss from equity method investment
(11) Loss related to ELEAD joint venture contract termination included within loss from equity method investment.
(12) Net gain recorded within other income, net associated with an indemnification receivable from ADP for pre spin-off tax
periods in accordance with tax matters agreement.
(13) Income tax effect of pre-tax adjustments calculated at applicable statutory rates.
(14) Recognition of income tax expense for cumulative withholding tax associated with historical foreign earnings that are no
longer considered indefinitely reinvested as of March 31, 2020. The change in assertion was made in the third quarter in
response to the uncertainty related to the COVID-19 pandemic and its potential impact on CDK’s liquidity needs. In the fourth
quarter of fiscal 2020, an adjustment was made to true up the estimate recorded in the third quarter of fiscal 2020.
(15) In fiscal 2019, decrease in valuation allowance associated with a deferred tax asset for a capital loss carryforward which
the Company expected to utilize in connection with the plan to divest the Digital Marketing Business. In fiscal 2020, based on
new information about the plan for the sale the valuation allowance was restored.
(16) In fiscal 2020, a one-time tax benefit of $1.2 million for an adjustment of an accrual for foreign withholding taxes related
to undistributed earnings and in fiscal 2019, a one-time tax expense of $3.4 million from a revaluation of deferred tax assets
associated with executive compensation as a result of the Tax Reform Act offset by $0.6 million tax benefit due to a true-up to
the one-time transition tax initially recorded in fiscal 2018 as a result of the Tax Reform Act.
(17) Net loss from discontinued operations associated with our divestiture of the Digital Marketing Business, which closed on
April 21, 2020.
(18) The portion of expense related to noncontrolling interest of $0.3 million and $0.1 million has been removed from
amortization of acquired intangible assets and legal and other expenses related to regulatory and competition matters,
respectively, in fiscal 2020. The portion of expense related to noncontrolling interest of $0.3 million, $0.2 million, and $0.1
million, has been excluded from amortization of acquired intangible assets, legal and other expenses related to regulatory and
competition matters, and restructuring expenses, respectively, in fiscal 2019.
Adjusted Earnings Before Income Taxes. Adjusted earnings before income taxes for fiscal 2020 decreased $39.3 million as
compared to fiscal 2019. Adjusted margin decreased from 29.3% to 26.6%. The constant currency impact of foreign exchange
rates on adjusted earnings before income taxes was a decrease of $2.6 million. Adjusted earnings before income taxes were
unfavorably impacted by the COVID-19 pandemic, a decrease in Partner Program revenues, higher investments in strategic
growth initiatives, and increase in depreciation and amortization resulting from capitalized software, and interest partially offset
by growth in the core business and the recognition of income related to the recovery of costs through the transition services
agreement in connection with the sale of the Digital Marketing Business.
Adjusted Provision for Income Taxes. The adjusted effective tax rate for fiscal 2020 was 24.3% as compared to 23.7% for
fiscal 2019. The effective tax rate was impacted by withholding tax recorded for certain foreign earnings in the fourth quarter
and a change in the mix of earnings by jurisdiction offset by a tax benefit from a decrease of nondeductible expenses for tax
purposes due to reduced executive compensation, tax benefits from various tax planning implemented in fiscal 2020 including
an update to transfer pricing policies, and a tax benefit from a state audit refund.
Adjusted Net Earnings Attributable to CDK. Adjusted net earnings attributable to CDK for fiscal 2020 decreased $32.2
million as compared to fiscal 2019. The decrease in adjusted net earnings attributable to CDK was primarily due to the items
discussed above in adjusted earnings before income taxes and by the associated tax effect.
37
The table below presents the reconciliation of net earnings attributable to CDK to adjusted EBITDA.
Net earnings attributable to CDK
Margin %
Net earnings attributable to noncontrolling interest (2)
Net loss from discontinued operations (3)
Provision for income taxes (1) (4)
Interest expense (5)
Depreciation and amortization (1) (6)
Total stock-based compensation (1) (7)
Transaction and integration-related costs (1) (8)
Legal and other expenses related to regulatory and competition matters (9)
Business process modernization program (10)
Restructuring expenses (1) (11)
Other business transformation expenses (1) (11)
Impairment of intangible assets (12)
Officer transition expense (13)
Net adjustments related to loss from equity method investment (14)
ELEAD joint venture termination (15)
Adjusted EBITDA
Adjusted margin %
Years Ended June 30,
Change
2020
207.5
$
2019
124.0
$
$
$ 83.5
%
67 %
10.6 %
7.0
89.3
120.4
144.3
99.6
19.6
10.2
19.4
16.1
14.2
—
—
—
3.3
6.5 %
7.9
109.8
62.2
139.1
89.8
30.5
13.2
111.2
—
28.0
20.9
14.9
6.4
—
(0.9)
(20.5)
58.2
5.2
9.8
(10.9)
(3.0)
(91.8)
16.1
(13.8)
(20.9)
(14.9)
(6.4)
3.3
—
750.9
$
17.0
774.9
$
(17.0)
$ (24.0)
(3) %
38.3 %
40.5 %
(1) Excludes amounts attributable to discontinued operations.
(2) Net earnings attributable to noncontrolling interest included within the financial statements.
(3) Net loss from discontinued operations associated with our divestiture of the Digital Marketing Business, which closed on
April 21, 2020.
(4) Provision for income taxes included within the financial statements.
(5) Interest expense included within the financial statements.
(6) Depreciation and amortization included within the financial statements.
(7) Total stock-based compensation expense recognized.
(8) Transaction and integration-related expenses include: (i) legal, accounting, outside service fees, and other costs incurred in
connection with assessment and integration of acquisitions and other strategic business opportunities; and (ii) post-close
adjustments to acquisition-related contingent consideration, reported within cost of revenues and selling, general and
administrative expenses.
(9) Legal and other expenses, including litigation provision, related to regulatory and competition matters included within
selling, general and administrative expenses and litigation provision.
(10) Business process modernization program designed to improve the way we do business for our customers through best-in-
class product offerings, process, governance and systems. The business process modernization program will include a
comprehensive redesign in the way we go to market, including the quoting, contracting, fulfilling, and invoicing processes, and
the systems and tools we use. The investment to implement this holistic business reform, including the design and
implementation of a new ERP system will be completed over a three-year time horizon. The expense is included within cost of
revenues and selling, general and administrative expenses.
(11) Restructuring expense recognized in connection with our business transformation plan in fiscal 2019 and 2018, and the
restructuring plan for the CDKI segment, which was adopted by the Company during fiscal 2020. Other business
transformation expenses incurred in connection with our business transformation plan and included within cost of revenues and
selling, general and administrative expenses. Other business transformation expenses exclude $3.3 million of accelerated
depreciation expense for fiscal 2019.
38
(12) Impairment of intangible assets consists of the write-off of certain intangible assets within the CDKNA segment and is
reported within cost of revenues and selling, general and administrative expenses.
(13) Officer transition expense includes severance expense in connection with officer departures is included within selling,
general and administrative expenses.
(14) Net adjustments related to loss from equity method investment included certain portions of Ansira earnings attributable to
the equity interest owned by CDK reported within loss from equity method investment
(15) Loss related to ELEAD joint venture contract termination included within loss from equity method investment.
Adjusted EBITDA. Adjusted EBITDA for fiscal 2020 decreased $24.0 million as compared to fiscal 2019. Adjusted margin
decreased from 40.5% to 38.3%. Adjusted EBITDA was unfavorably impacted by the COVID-19 pandemic, a decrease in
Partner Program revenues and higher investments in strategic growth initiatives, partially offset by growth in the core business
and the recognition of income related to the recovery of costs through the transition services agreement in connection with the
sale of the Digital Marketing Business.
Analysis of Reportable Segments
The Digital Marketing Business is presented as discontinued operations and prior year amounts associated with Digital
Marketing Business have been reclassified as such. Additional information on discontinued operations is contained in the
"Consolidated Results of Operations" of this section and Item 8 of Part II, "Financial Statements and Supplementary Data -
Note 4 - Discontinued Operations."
The following is a discussion of the results of our continuing operations by reportable segment for fiscal 2020 and 2019.
Certain expenses are charged to the reportable segments at a standard rate for management reporting purposes. Other costs are
charged to the reportable segments based on management’s responsibility for the applicable costs.
CDK North America Segment. The table below presents the reconciliation of revenues to constant currency revenues and
earnings before income taxes to constant currency adjusted earnings before income taxes for the CDKNA segment. Refer to the
footnotes in "Consolidated Non-GAAP Results" for additional information on the adjustments presented below.
Revenues
Impact of exchange rates
Constant currency revenues
Earnings before income taxes
Margin %
Transaction and integration-related costs
Amortization of acquired intangible assets
Legal and other expenses related to regulatory and competition matters
Business process modernization program
Impairment of intangible assets
ELEAD joint venture agreement termination
Adjusted earnings before income taxes
Adjusted margin %
Impact of exchange rates
Years Ended June 30,
Change
2020
2019
$
%
$ 1,639.0
$ 1,593.0
$ 46.0
3 %
$
1.2
$
—
$
1.2
$ 1,640.2
$ 1,593.0
$ 47.2
3 %
$
587.6
$
517.5
$ 70.1
14 %
35.9 %
32.5 %
8.7
15.3
19.4
16.1
—
—
11.2
14.6
111.2
—
14.9
17.0
(2.5)
0.7
(91.8)
16.1
(14.9)
(17.0)
$
647.1
$
686.4
$ (39.3)
(6) %
39.5 %
43.1 %
$
0.7
$
—
$
0.7
Constant currency adjusted earnings before income taxes
$
647.8
$
686.4
$ (38.6)
(6) %
39
The table below presents revenue disaggregation for the CDKNA segment for fiscal 2020 and for fiscal 2019.
Revenue:
Subscription
On-site license and installation
Transaction
Other
Total Revenues
Years Ended June 30,
Change
2020
2019
$
%
$
1,306.0 $
1,283.3 $ 22.7
10.8
155.0
167.2
7.9
162.5
139.3
2.9
(7.5)
27.9
$
1,639.0 $
1,593.0 $ 46.0
2 %
37 %
(5) %
20 %
3 %
Revenues. CDKNA revenues for fiscal 2020 increased $46.0 million as compared to fiscal 2019 and includes an unfavorable
currency impact of $1.2 million.
Subscription revenues grew due to the ELEAD acquisition, an increase in average revenue per DMS customer site primarily
due to a combination of higher layered application sales, and a net increase in DMS customer site count which increased from
14,681 sites as of June 30, 2019 to 14,719 sites as of June 30, 2020. These increases were partially offset by pricing
concessions, including customer discounts and credits in response to the COVID-19 pandemic. Transaction revenues decreased
primarily due to a reduction in vehicle registrations and credit report activity attributable to the COVID-19 pandemic. Other
revenue increased due to a post-ASC 842 change in the timing of revenue recognition for our HaaS arrangements.
Earnings before Income Taxes. CDKNA earnings before income taxes increased by $70.1 million for fiscal 2020 as compared
to fiscal 2019 and includes an unfavorable currency impact of $0.7 million. Margin increased from 32.5% to 35.9%.
CDKNA earnings before income taxes for fiscal 2020 increased compared to fiscal 2019 due to a $90.0 million litigation
provision related to antitrust lawsuits recorded in the fourth quarter of the prior year, an impairment charge recorded related to
certain intangible assets during the second quarter of the prior year, growth in the core business despite COVID-19 related
impacts and lower employee related costs. These increases were partially offset by investments related to strategic growth
initiatives and costs related to the business process modernization program.
CDK International Segment. The table below presents the reconciliation of revenues to constant currency revenues, and
earnings before income taxes to constant currency adjusted earnings before income taxes for the CDKI segment. Refer to the
footnotes in "Consolidated Non-GAAP Results" for additional information on the adjustments presented below.
Revenues
Impact of exchange rates
Constant currency revenues
Earnings before income taxes
Margin %
Restructuring expenses
Amortization of acquired intangible assets
Adjusted earnings before income taxes
Adjusted Margin %
Impact of exchange rates
Years Ended June 30,
Change
2020
2019
$
%
$ 321.1
$ 321.8
$
(0.7)
— %
9.5
—
$ 330.6
$ 321.8
9.5
8.8
3 %
$
58.1
$
77.1
$ (19.0)
(25) %
18.1 %
24.0 %
14.2
0.8
—
0.7
14.2
0.1
$
73.1
$
77.8
$
(4.7)
(6) %
22.8 %
24.2 %
2.0
—
2.0
Constant currency adjusted earnings before income taxes
$
75.1
$
77.8
$
(2.7)
(3) %
40
The table below presents revenue disaggregation for the CDKI segment for fiscal 2020 and for fiscal 2019.
Subscription(1)
On-site license and installation(1)
Other
Revenues
Years Ended June 30,
Change
2020
2019
$
%
$
253.5 $
239.4 $ 14.1
6 %
46.7
20.9
65.0
17.4
(18.3)
(28) %
3.5
20 %
— %
$
321.1 $
321.8 $
(0.7)
(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.
Revenues. CDKI revenues decreased by $0.7 million for fiscal 2020 as compared to fiscal 2019. CDKI revenues were impacted
by the strength of the Euro, British pound, South African rand, Chinese yuan, and Danish krone, against the U.S. dollar which
contributed to a decrease of $9.5 million or 3.0 percentage point.
CDKI's growth in revenues on a constant currency basis was primarily due to increased average revenue per customer site
resulting from incremental subscription revenues despite a decrease in DMS customer site count from 13,098 sites for fiscal
2019 to 12,722 sites for fiscal 2020 and customer pricing concessions in response to the COVID-19 pandemic. This increase
was offset by the On-site license and installation revenue decrease primarily driven by a lower demand from customers for
additional licenses and the continuing change in product mix from onsite to SaaS. Other revenue also increased through higher
customization project revenues.
Earnings before Income Taxes. CDKI earnings before income taxes decreased by $19.0 million for fiscal 2020 as compared
to fiscal 2019 and margin decreased from 24.0% to 18.1%. The constant currency impact of foreign exchange rates on earnings
before income taxes, due to the strength of the Euro, British pound, South African rand, Chinese yuan, and Danish krone,
against the U.S. dollar, was a decrease of $2.0 million.
CDKI earnings before income taxes on a constant currency basis decreased primarily due to one-time employee termination
benefits that relate to our restructuring plan for the CDKI segment and customer pricing concessions in response to the
COVID-19 pandemic.
Other Segment. The table below presents the reconciliation of loss before income taxes to adjusted loss before income taxes
for the Other segment. Refer to the footnotes in "Consolidated Non-GAAP Results" for additional information on the
adjustments presented below.
Loss before income taxes
Total stock-based compensation
Transaction and integration-related costs
Net adjustments related to loss from equity method investment
Restructuring expenses
Other business transformation expenses
Officer transition expense
Tax matters indemnification gain, net
Adjusted loss before income taxes
Impact of exchange rates
Years Ended June 30,
2019
2020
Change
$
%
$
(221.5) $
(290.7) $ 69.2
24 %
19.6
1.5
2.2
—
—
—
—
30.5
2.0
—
28.0
20.9
6.4
—
$
(198.2) $
(202.9) $
(10.9)
(0.5)
2.2
(28.0)
(20.9)
(6.4)
—
4.7
2 %
(0.1)
—
(0.1)
Constant currency adjusted loss before income taxes
$
(198.3) $
(202.9) $
4.6
2 %
The primary components of the Other segment loss before income taxes are certain costs that are not allocated to our reportable
segments, such as interest expense, stock-based compensation expense, and certain unallocated expenses.
41
Loss before Income Taxes. The Other loss before income taxes decreased by $69.2 million for fiscal 2020 as compared to
fiscal 2019. The Other loss before income taxes was favorably impacted by the expenses incurred in the prior year related to the
business transformation plan which was completed at the end of fiscal 2019, lower stock-based compensation expense resulting
from cumulative adjustments related to the achievement of financial performance metrics associated with performance-based
restricted stock units, the recognition of income related to a transition services agreement in connection with the sale of the
Digital Marketing Business, and lower employee related expenses. These impacts were partially offset by increased interest
expense due to higher interest rates and average debt levels during fiscal 2020.
42
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Refer to Impacts of COVID-19 in the Results of Operations section of Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations for additional information about liquidity and capital resources.
Capital Structure Overview
Our principal source of liquidity is derived from cash generated through operations. At present, and in future periods, we expect
cash generated by our operations, together with cash and cash equivalents and borrowings from the capital markets, including
our revolving credit facility, to be sufficient to cover our cash needs for working capital, capital expenditures, strategic
acquisitions, and anticipated quarterly dividends and stock repurchases under our return of capital plan.
As of June 30, 2020, cash and cash equivalents were $215.7 million, total CDK stockholders' deficit was $596.1 million, and
total debt was $2,675.8 million, which is net of unamortized financing costs of 27.1 million. Working capital as of June 30,
2020 was $179.5 million as compared to $417.7 million as of June 30, 2019. Working capital as used herein excludes current
maturities of long-term debt and finance lease liabilities.
Our borrowings consist of two term loan facilities with initial principal amounts of $600.0 million, 4.50% senior notes with a
$500.0 million aggregate principal amount due in 2024, 5.875% senior notes with a $500.0 million aggregate principal amount
due in 2026, 4.875% senior notes with a $600.0 million aggregate principal amount due in 2027, and 5.250% senior notes with
a $500.0 million aggregate principal amount due in 2029. The interest rates for the 2024 notes increased to 5.00% from 4.50%
effective October 15, 2016. Additionally, we have a $750.0 million revolving credit facility, of which $15.0 million was drawn
as of June 30, 2020.
On May 4, 2020, we entered into an amendment of our credit facilities that temporarily increased the maximum ratio of total
consolidated indebtedness to consolidated EBITDA (the "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 our senior unsecured credit rating is downgraded below BB+ by S&P
and below Ba1 by Moody’s, we 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 agreement and to provide subsidiary guarantees to the
creditor banks. We 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 our 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.
Our long-term credit ratings and senior unsecured debt ratings are Ba1 (Stable Outlook) with Moody's, and BB+ (Negative
Outlook) with S&P, which are non-investment grade.
Of the $215.7 million of cash and cash equivalents held as of June 30, 2020, $175.2 million was held by our foreign
subsidiaries. As of March 31, 2020, in conjunction with our assessment of the impact of the global emergence of COVID-19 on
our business including the increase in uncertainty and higher expected U.S. cash needs associated with the pandemic, we
removed the assertion that foreign earnings are indefinitely reinvested, making these and subsequent earnings available for
repatriation as necessary.
Return of Capital Plan
Stock Repurchase Program. In January 2017, the Board of Directors authorized us to repurchase up to $2.0 billion of our
common stock as part of a return of capital plan, whereby we have repurchased approximately $1.5 billion of common stock
through June 30, 2020. On May 4, 2020, we entered into amendments to our credit agreements that restrict us from making
repurchases of our common stock in excess of $40.0 million in any fiscal year through the earlier of: (i) delivery of the financial
statements for the fiscal quarter ending December 31, 2021, provided certain conditions are met; and (ii) the provision of the
relevant liens and subsidiary guarantees to the creditor banks. We did not make stock repurchases during fiscal 2020. For fiscal
2020, the shareholder returns consisted solely of dividends with an aggregate value of $73.0 million. Our top priorities for
capital allocation will continue to be a thoughtful balance between: (i) organic investments that will continue to accelerate the
growth and performance of the business; (ii) inorganic opportunities that are synergistic with our portfolio and would
meaningfully provide additional profitable revenue and increased long-term value; and (iii) return of capital to shareholders,
while targeting a leverage ratio, measured as financial debt, net of cash, divided by adjusted EBITDA, at a range of 2.5x to 3.0x
43
net debt to adjusted EBITDA. Our leverage ratio of 3.3x net debt to adjusted EBITDA as of June 30, 2020, is currently in
excess of our target leverage ratio. As a result, we do not anticipate any material share repurchases in fiscal 2021.
Under the authorization, and subject to the restrictions of our credit agreements, as amended, we may continue to purchase our
common stock in the open market or in privately negotiated transactions from time to time as permitted by federal securities
laws and other legal requirements. The actual timing, number, and price of any shares repurchased will be determined at
management's discretion and will depend on a number of factors, which may include the market price of the shares, general
market and economic conditions, the availability and cost of additional indebtedness, and other potential uses for free cash flow
including, but not limited to, potential acquisitions.
Dividends to Common Stockholders. The Company declared and paid cash dividends during fiscal 2020 as follows:
Three Months Ended
Record Date
Payment Date
Dividend Per Share
Amount
September 30, 2019
December 31, 2019
March 31, 2020
June 30, 2020
Total
9/3/2019
12/2/2019
3/2/2020
6/5/2020
9/27/2019
12/30/2019
3/30/2020
6/29/2020
$
$
0.150 $
0.150
0.150
0.150
0.600 $
18.2
18.3
18.2
18.2
72.9
Cash Flows. Our cash flows from operating, investing, and financing activities, as reflected in the Consolidated Statements of
Cash Flows for fiscal 2020, 2019, and 2018, are summarized as follows:
Cash provided by (used in):
Operating activities, continuing operations
Operating activities, discontinued operations
Investing activities, continuing operations
Investing activities, discontinued operations
Financing activities, continuing operations
Financing activities, discontinuing operations
Effect of exchange rate changes on cash and cash equivalents
Years Ended June 30,
Change
2020
2019
2020
$
370.5 $
438.5 $
(68.0)
4.6
44.6
(102.0)
(614.5)
(6.3)
(8.7)
(344.8)
(349.0)
(1.1)
(9.8)
—
(6.9)
(40.0)
512.5
2.4
4.2
(1.1)
(2.9)
Net change in cash and cash equivalents
$
(88.9) $
(496.0) $
407.1
Fiscal 2020 Compared to Fiscal 2019
Net cash flows provided by operating activities from continuing operations decreased by $68.0 million due to a decrease of
$122.2 million in net working capital components, which was primarily due to timing of cash payments made for legal
settlements; partially offset by lower income tax payments. Net cash flows provided by operating activities from discontinued
operations decreased by $40.0 million due to increase in cash used for working capital associated with the Digital Marketing
Business and lower earnings.
Net cash flows used in investing activities for continuing operations decreased by $512.5 million largely due to the acquisition
of ELEAD in fiscal 2019.
Net cash flows used in financing activities decreased by $4.2 million primarily due to proceeds net of repayments from our term
loan and senior notes; partially offset by higher cash outflows associated with repurchases of common stock in fiscal 2019.
44
Contractual Obligations. The following table provides a summary of our contractual obligations as of June 30, 2020.
Contractual Obligations
Term loan facilities (1)
Revolving facilities
Senior notes (2)
Interest on senior notes (2)
Finance lease liabilities
Operating lease obligations (3)
Purchase obligations (4)
Other long-term liabilities reflected within Other liabilities on the
Consolidated Balance Sheets (5)
Payments Due by Period
Less than
1 year
1-3 years
3-5 years
More
than 5
years
Total
$
15.0 $ 330.0 $ 228.8 $
— $ 573.8
—
—
—
—
15.0
—
15.0
500.0
1,600.0
2,100.0
109.9
219.8
202.0
185.9
717.6
6.2
18.8
10.4
13.9
8.7
28.8
26.3
10.6
0.1
17.8
4.6
0.1
—
10.5
—
—
15.0
75.9
41.3
24.6
Total
$ 174.2 $ 624.2 $ 968.4 $ 1,796.4 $ 3,563.2
(1) These amounts represent the principal repayments of the term loan facilities included within our Consolidated Balance
Sheets as of June 30, 2020. Interest on our term loan facilities is based on variable rates, and interest payments will fluctuate as
our interest rates fluctuate each period. Accordingly, future interest payments related to these instruments have been excluded
from the table above. The interest rate per annum on the two $300.0 million term loan facilities with three year term was 2.75%
and with five year term was 2.88% as of June 30, 2020. Additional information is contained in Item 8 of Part II, "Financial
Statements and Supplementary Data - Note 17 - Debt" in this Annual Report on Form 10-K for further information.
(2) These amounts represent the principal repayments of the senior notes included within our Consolidated Balance Sheets as of
June 30, 2020 and expected future interest payments over the term of the senior notes based on the stated interest rates in effect
as of June 30, 2020. Our 2024 notes bear interest at a rate of 5.00%, our 2026 notes bear interest at a rate of 5.875%, our 2027
notes bear interest at a rate of 4.875%, and our 2029 notes bear interest at a rate of 5.250%. Interest is payable semi-annually on
April 15 and October 15 of each year for the 2024 notes, June 15 and December 15 of each year for the 2026 notes, June 1 and
December 1 of each year for the 2027 notes, and March 15 and September 15 of each year for the 2029 notes. Additional
information is contained in Item 8 of Part II, "Financial Statements and Supplementary Data - Note 17 - Debt" in this Annual
Report on Form 10-K for further information.
(3) These amounts represent various operating leases for facilities and equipment entered into in the normal course of business.
The majority of our lease agreements have fixed payment terms based on the passage of time. Certain facility and equipment
leases require payment of maintenance and real estate taxes and contain escalation provisions based on future adjustments in
price indices. Our future operating lease obligations could change if we exit certain contracts or if we enter into additional
operating lease agreements.
(4) These amounts represent payments related to the Company's purchase and maintenance agreements for software, equipment,
and other assets.
(5) Other long-term liabilities for which a payment date is readily available including software license fees, and cash
settlements expected for restricted stock units accounted for as liability awards based on the closing price of our common stock
on June 30, 2020.
In the normal course of business, we also enter into contracts in which we make representations and warranties that relate to the
performance of our services and products. We do not expect any material losses related to such representations and warranties.
45
Off-Balance Sheet Arrangements. As of June 30, 2020, we did not have any off-balance sheet arrangements consisting of
transactions, agreements, or other contractual arrangements to which an entity not consolidated in our financial statements was
a party. However, in the normal course of operations, we may enter into contractual obligations consisting of operating lease
obligations and purchase commitments. Such obligations have been presented under the caption "Contractual Obligations."
Related Party Agreements. Refer to Item 8 of Part II, Financial Statement and Supplementary Data, "Note 10 - Income Taxes"
of this Annual Report on Form 10-K for financial information regarding agreements entered into with ADP as part of the spin-
off.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements and accompanying notes have been prepared in accordance with GAAP. The preparation
of these financial statements requires management to make estimates, judgments, and assumptions that affect reported amounts
of assets, liabilities, revenues, and expenses. We continually evaluate the accounting policies and estimates used to prepare the
consolidated financial statements. Estimates are based on historical experience and assumptions believed to be reasonable under
current facts and circumstances. Actual amounts and results could differ from estimates made by management. Certain
accounting policies that require significant management estimates and are deemed critical to our results of operations or
financial condition are discussed below.
Revenue Recognition
We recognize revenues in accordance with Accounting Standards Codification ("ASC") 606 "Revenue from Contracts with
Customers." We adopted ASC 606 effective July 1, 2018 using the modified retrospective approach. The comparative
information has not been restated and continues to be reported under ASC 985-605 "Software - Revenue Recognition," and
non-software related revenue, including Software-as-a-Service ("SaaS"), in accordance with ASC 605, "Revenue Recognition".
The Company determines the amount of revenue to be recognized through the following steps:
•
•
•
•
•
Identification of the contract, or contracts, with a customer;
Identification of the performance obligations in the contract;
Determination of the transaction price;
Allocation of the transaction price to the performance obligations in the contract; and
Recognition of revenue when, or as, the Company satisfies the performance obligations.
The majority of the Company’s revenue is generated from contracts with multiple performance obligations. A performance
obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606.
A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the
performance obligation is satisfied. The Company is required to estimate the total consideration expected to be received from
contracts with customers. In limited circumstances, the consideration expected to be received may be variable based on the
specific terms of the contract.
The Company rarely licenses or sells products or services on a standalone basis. As such, the Company is required to develop
its best estimate of standalone selling price of each distinct good or service as the basis for allocating the total transaction price.
The primary method used to estimate standalone selling price is the adjusted market assessment approach, with some product
categories using the expected cost plus a margin approach. When establishing standalone selling price, the Company considers
various factors which may include geographic region, current market trends, customer class, its market share and position, its
general pricing practices for bundled products and services, and recent contract sales data.
The Company applies significant judgment in order to identify and determine the number of performance obligations, estimate
the total transaction price, determine the allocation of the transaction price to each identified performance obligation, and
determine the appropriate method and timing of revenue recognition.
The Company generates revenues from the following four categories: subscription, on-site licenses and installation, transaction,
and other. Taxes collected from customers and remitted to governmental authorities are presented on a net basis; that is, such
taxes are excluded from revenues.
Subscription. In the CDKNA and CDKI segments, CDK provides software and technology solutions for automotive retailers
and OEMs, which includes:
46
•
•
•
Dealer Management Systems (“DMSs”) and layered applications, where the software is hosted and provided on a
("SaaS") basis.
Interrelated services such as installation, initial training, and data updates; and
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.
Revenues for SaaS and other hosted service arrangements, are recognized ratably over the duration of the contract. The
Company has determined its obligation under these arrangements is to stand ready to perform the underlying services as
required by the customer. The customer receives the benefit of the services and the Company has the right to payment as the
services are performed. A time-elapsed output method is used to measure progress as the Company transfers control evenly
over the duration of the contract.
On-site licenses and installation. In the CDKNA and CDKI segments, on-site software arrangements include a license of
intellectual property as the customer has the contractual right to take possession of the software and the customer can either run
the software on its own hardware or contract with another party unrelated to the Company to host the software. The customer
receives the right to use the software license upon its installation for the term of the arrangement. As such, the Company has
concluded that the software license is a distinct performance obligation and recognizes the transaction price allocated to on-site
software upon installation. The Company also provides maintenance and support of the software applications. Such
maintenance and support services may include server and desktop support, bug fixes, and support resolving other issues a
customer may encounter in utilizing the software. Revenue allocated to support and maintenance is generally recognized ratably
over the contract period as customers simultaneously consume and receive benefits, given the support and maintenance
comprise distinct performance obligations that are satisfied ratably over time. A time-elapsed output method is used to measure
progress as the Company transfers control evenly over the duration of the contract.
Transaction. The Company receives fees per transaction for providing auto retailers interfaces with third parties to process
credit reports, vehicle registrations, and automotive equity mining. Transaction revenues are variable based on the volume of
transactions processed. For these transaction revenues, the Company has a right to payment as the transactions are performed in
an amount that corresponds directly with the value to the customer. As such, the Company recognizes transaction revenues as
the services are rendered and in the amount to which it has the right to invoice. Transaction revenues for credit report
processing and automotive equity mining are recorded in revenues gross of costs incurred when the Company is substantively
and contractually responsible for providing the service, software, and/or connectivity to the customer, and controls the specified
good or service before it is transferred to the customer. The Company recognizes vehicle registration revenues net of the state
registration fee when it is acting as an agent and does not control the related goods and services before they are transferred to
the customer.
Other. The Company provides consulting and professional services, including marketing campaign solutions, and sells
hardware such as laser printers, networking and telephony equipment, and related items. Consulting and professional services
are either billed on a time and materials basis or on a fixed monthly, quarterly or semi-annual basis based on the amount of
services contracted. 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.
Stock-Based Compensation
Certain of our employees (a) have been granted stock options to purchase shares of our common stock and (b) have been
granted restricted stock or restricted stock units under which shares of our common stock vest based on the passage of time or
achievement of performance and market conditions.
We recognize stock-based compensation expense in net earnings based on the fair value of the award on the date of the grant.
We determine the fair value of stock options issued using a binomial option-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 our stock and a peer group of companies due to the limited trading history associated with our common
stock. Inclusion of our stock volatility in the valuation of future stock option grants may impact stock-based compensation
expense recognized. Similarly, the dividend yield is based on historical experience and expected future dividend payments. The
risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The binomial option pricing model also
incorporates exercise and forfeiture assumptions based on an analysis of historical data. The expected life of a stock option
47
grant is derived from the output of the binomial model and represents the period of time that options granted are expected to be
outstanding.
The grant date fair value of restricted stock and restricted stock units that vest upon achievement of service conditions is based
on the closing price of our common stock on the date of grant. We also grant performance-based awards that vest over a
performance period. Under these programs, we communicate “target awards” at the beginning of the performance period with
possible payouts at the end of the performance period ranging from 0% to 260% of the target awards. The fair value of
performance-based awards subject to a market condition is determined using a Monte Carlo simulation model. The principal
variable assumptions utilized in determining the grant date fair value of performance-based awards subject to a market
condition include the risk-free rate, stock volatility, dividend yield, and correlations between our stock price and the stock
prices of the peer group of companies. The probability associated with the achievement of performance conditions affects the
vesting of our performance-based awards. Expense is only recognized for those shares expected to vest. We adjust stock-based
compensation expense (increase or decrease) when it becomes probable that actual performance will differ from our estimate.
Income Taxes
Income tax expense is recognized for the amount of taxes payable or refundable for the current year. Deferred tax assets and
liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and
tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Management must make assumptions,
judgments, and estimates to determine the provision for income taxes, taxes payable or refundable, and deferred tax assets and
liabilities. Our assumptions, judgments, and estimates take into consideration the realization of deferred tax assets and changes
in tax laws or interpretations thereof. Our income tax returns are subject to examination by various tax authorities. A change in
the assessment of the outcomes of such matters could materially impact our consolidated financial statements.
We record a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. In
determining the need for a valuation allowance, we consider future market growth, forecasted earnings, future taxable income,
and prudent and feasible tax planning strategies. In the event we determine that it is more likely than not that an entity will be
unable to realize all or a portion of its deferred tax assets in the future, we would increase the valuation allowance and recognize
a corresponding charge to earnings in the period in which such a determination is made. Likewise, if we later determine that it
is more likely than not that the deferred tax assets will be realized, we would reverse the applicable portion of the previously
recognized valuation allowance. In order to realize deferred tax assets, we must be able to generate sufficient taxable income of
the appropriate character in the jurisdictions in which the deferred tax assets are located.
We recognize tax benefits 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 our 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. We continually assess the likelihood and amount of potential adjustments and adjust the income tax provision, the
current taxes payable and deferred taxes in the period in which the facts that give rise to a revision become known.
We account for the global intangible low taxed income ("GILTI") tax as a period cost when incurred. The GILTI provision is
effective beginning in fiscal year 2019.
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 expense when the impairment
occurs.
Goodwill
We test goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying value may not
be recoverable. We test goodwill for impairment at the reporting unit level. A reporting unit is an operating segment or a
component of an operating segment. Based on how the chief operating decision maker regularly reviews information for
purposes of allocating resources and assessing performance, we have four reporting units.
48
We test 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.
We estimate the fair value of our reporting units by weighting the results from the income approach, which is the present value
of expected cash flows discounted at a risk-adjusted weighted-average cost of capital, and the market approach, which uses
market multiples of companies in similar lines of business. These valuation approaches require significant judgment and
consider a number of factors including assumptions about the future growth and profitability of our reporting units, the
determination of appropriate comparable publicly traded companies in our industry, discount rates, and terminal growth rates.
The valuation of a reporting unit requires significant judgment and is highly sensitive to underlying assumptions including
forecasted revenue growth, profitability and discount rates. An adverse change to the fair value of reporting units could result in
an impairment charge which could be material to consolidated earnings.
Long-Lived Assets
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount
of the asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying
value of the asset to its undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the asset
exceeds its estimated undiscounted future cash flow, an impairment charge is recognized for the amount by which the carrying
amount exceeds the fair value. Given the significance of our long-lived assets, an adverse change to the fair value of our long-
lived assets could result in an impairment charge which could be material to our consolidated earnings.
Assets Held for Sale
We consider 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, we record the assets at the lower of their carrying value or their estimated fair value, reduced
for the cost to dispose the assets. Depending on the net realized value from the sale, the potential charge could be material to
our consolidated earnings.
Legal and Other Contingencies
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 Item 8
of Part II, "Financial Statements and Supplementary Data - Note 18 - Commitments and Contingencies." We routinely assess
the likelihood of any adverse judgments or outcomes related to these matters, as well as ranges of probable losses, by consulting
with internal personnel involved with such matters as well as with outside legal counsel handling such matters. We accrue for
estimated losses for those matters where we believe that the likelihood of a loss has occurred, is probable and the amount of the
loss is reasonably estimable. The determination of the amount of such reserves is made after careful analysis of each matter.
The amount of such reserves may change in the future due to new developments or changes in approach such as a change in
settlement strategy in dealing with these matters. The inherent uncertainty related to the outcome of these matters can result in
amounts materially different from any provisions made with respect to their resolution.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Refer to Item 8 of Part II, "Financial Statements and Supplementary Data - Note 3 - New Accounting Pronouncements" of this
Annual Report on Form 10-K for financial information regarding recently issued and adopted accounting pronouncements
including the effects on our results of operations, financial condition, and cash flows.
49
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are subject to interest rate risk related to our revolving credit facility and term loan facilities as those arrangements contain
interest rates that are not fixed. As of June 30, 2020, $15.0 million of our revolving credit facility was drawn and the interest
rate per annum was 2.875%. The interest rate per annum on the two $300.0 million term loan facilities with three year term was
2.75% and with five year term was 2.875% as of June 30, 2020. A hypothetical increase in the interest rate of 30 basis points
would have resulted in approximately $1.8 million impact on earnings before income taxes for the year ended June 30, 2020.
We operate and transact business in various foreign jurisdictions and are therefore exposed to market risk from changes in
foreign currency exchange rates that could impact our financial condition, results of operations, and cash flows. We have not
been materially impacted by fluctuations in foreign currency exchange rates as a significant portion of our business is transacted
in U.S. dollars, and is expected to continue to be transacted in U.S. dollars or U.S. dollar-based currencies. As of June 30, 2020,
operations in foreign jurisdictions were principally transacted in Canadian dollars, Euros, Pound Sterling, and Renminbi. A
hypothetical change in all foreign currency exchange rates of 10% would have resulted in an increase or decrease in
consolidated operating earnings of approximately $11.2 million for the year ended June 30, 2020.
We primarily manage our exposure to these market risks through our regular operating and financing activities. We also use
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.
50
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders' (Deficit) Equity
Notes to the Consolidated Financial Statements
Financial Statement Schedule
Schedule II—Valuation and Qualifying Accounts
52
54
55
56
57
59
60
97
51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of
CDK Global, Inc.
Hoffman Estates, Illinois
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of CDK Global, Inc. and subsidiaries (the "Company") as of
June 30, 2020 and 2019, the related consolidated statements of operations, comprehensive income, stockholders' (deficit)
equity, and cash flows, for each of the three years in the period ended June 30, 2020, and the related notes and the schedule
listed in the Index at Item 8 (collectively referred to as the "financial statements"). In our opinion, the financial statements
present fairly, in all material respects, the financial position of the Company as of June 30, 2020 and 2019, and the results of its
operations and its cash flows for each of the three years in the period ended June 30, 2020, in conformity with accounting
principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of June 30, 2020, based on criteria established in Internal
Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated August 6, 2020, expressed an unqualified opinion on the Company's internal control over financial
reporting.
Changes in Accounting Principle
As discussed in Note 14 to the financial statements, effective July 1, 2019, the Company adopted the Financial Accounting
Standards Board Accounting Standards Codification 842, Leases, using the modified retrospective approach.
As discussed in Note 2 to the financial statements, effective July 1, 2018, the Company adopted the Financial Accounting
Standards Board Accounting Standards Codification 606, Revenue from Contracts with Customers, using the modified
retrospective approach.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that
was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that
are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and
we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the
accounts or disclosures to which it relates.
Revenue — Refer to Notes 2 and 6 to the financial statements
Critical Audit Matter Description
The Company generates revenue from the following four categories: subscription, on-site licenses and installation, transaction,
and other. The majority of the Company’s revenue is generated from contracts with multiple performance obligations, and the
Company’s products and services are rarely licensed or sold on a standalone basis. Due to the multiple element nature of the
Company’s contracts, appropriate revenue recognition requires the Company to exercise significant judgment in the following
areas:
52
•
•
•
•
Determination of whether products and services are considered distinct performance obligations that should be
accounted for separately versus together, such as software licenses and related services that are sold in hosted service
arrangements.
Determination of stand-alone selling prices for products and services.
Estimation of contract transaction price and allocation of the transaction price to identified performance obligations.
The pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation.
In addition, the Company’s subscription and on-site license and installation revenue consists of a significant volume of
transactions, sourced from multiple systems, databases, and other tools across different business entities. The processing and
recording of revenue is highly automated and involves migrating, formatting, and combining significant volumes of data across
multiple systems and interfaces, partially facilitated by custom-built algorithms.
Given the complexity of certain of the Company’s contracts and judgments necessary to evaluate the revenue recognition
considerations as noted above, the volume of contracts, and the complex automated systems to process and record revenue,
performing procedures to audit revenue required a high degree of auditor judgment and extensive audit effort, including
involvement of professionals with expertise in information technology (IT).
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Company’s accounting for contracts with customers included the following, among others:
• We tested the effectiveness of controls over the review of customer contracts, including, among others the
identification of performance obligations, determination of stand-alone selling prices, estimating transaction price, and
determination of pattern of delivery of performance obligations.
• With the assistance of our IT specialists, we:
–
–
Identified the significant systems used to process revenue transactions and tested the general IT controls over
each of these systems, including testing of user access controls, change management controls, and IT
operations controls.
Performed testing of system interface controls and automated controls within the relevant revenue streams, as
well as the controls designed to determine the accuracy and completeness of revenue.
• We selected a sample of customer contracts and performed the following, among others:
– Obtained contract documents for each selection, including master agreements, and other documents that were
part of the agreement.
– Analyzed the contract to determine if arrangement terms that may have an impact on revenue recognition
were identified and properly considered in the evaluation of the accounting for the contract.
– Confirmed the contract terms with the counterparty and performed alternative procedures in the event of
nonreplies.
–
–
–
–
Tested management’s identification of distinct performance obligations by evaluating whether the underlying
goods, services, or both were highly interdependent and interrelated.
Evaluated the total transaction price determined by management based on the terms of the contract, including
any variable consideration, and recalculated the allocation of the total transaction price to each distinct
performance obligation based on respective standalone selling prices.
Evaluated the appropriateness of the selected pattern of revenue recognition for each performance obligation
and tested delivery/installation of the goods and services.
For a sample of revenue transactions, we performed detail transaction testing by agreeing the amounts
recognized to source documents and testing the mathematical accuracy of the recorded revenue.
– We evaluated the reasonableness of the Company’s methodology for estimating standalone selling prices.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
August 6, 2020
We have served as the Company's auditor since 2014.
53
CDK Global, Inc.
Consolidated Statements of Operations
(In millions, except per share amounts)
Revenues
Expenses:
Cost of revenues
Selling, general and administrative expenses
Restructuring expenses
Litigation provision
Total expenses
Operating earnings
Interest expense
Loss from equity method investment
Other income, net
Earnings before income taxes
Years Ended June 30,
2019
2018
2020
$
1,960.1 $
1,914.8 $
1,798.0
966.5
429.9
14.2
—
1,410.6
549.5
(144.3)
(2.7)
21.7
899.8
444.7
28.0
90.0
1,462.5
452.3
(139.1)
(17.0)
7.7
854.5
441.2
20.6
—
1,316.3
481.7
(95.9)
—
13.4
424.2
303.9
399.2
Provision for income taxes
(120.4)
(62.2)
(88.1)
Net earnings from continuing operations
Net earnings (loss) from discontinued operations
Net earnings
Less: net earnings attributable to noncontrolling interest
Net earnings attributable to CDK
Net earnings (loss) attributable to CDK per share - basic:
Continuing operations
Discontinued operations
Total net earnings attributable to CDK per share - basic
Net earnings (loss) attributable to CDK per share - diluted:
Continuing operations
Discontinued operations
Total net earnings attributable to CDK per share - diluted
Weighted-average common shares outstanding:
Basic
Diluted
$
$
$
$
$
$
$
303.8
(89.3)
214.5
7.0
207.5 $
2.44 $
(0.73) $
1.71 $
241.7
(109.8)
131.9
7.9
124.0 $
1.86 $
(0.87) $
0.99 $
2.43 $
(0.73) $
1.70 $
1.85 $
(0.87) $
0.98 $
311.1
77.6
388.7
7.9
380.8
2.23
0.57
2.80
2.21
0.57
2.78
121.6
122.1
125.5
126.4
135.8
136.8
See notes to the consolidated financial statements.
54
CDK Global, Inc.
Consolidated Statements of Comprehensive Income
(In millions)
Years Ended June 30,
2020
2019
2018
$
214.5 $
131.9 $
388.7
(19.2)
(19.2)
195.3
7.0
(17.8)
(17.8)
114.1
7.9
3.5
3.5
392.2
7.9
384.3
Net earnings
Other comprehensive income (loss):
Currency translation adjustments
Total other comprehensive income (loss)
Comprehensive income
Less: comprehensive income attributable to noncontrolling interest
Comprehensive income attributable to CDK
$
188.3 $
106.2 $
See notes to the consolidated financial statements.
55
CDK Global, Inc.
Consolidated Balance Sheets
(In millions, except per share par value)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowances of $22.1 and $8.8, respectively
Other current assets
Current assets held for sale
Total current assets
Property, plant and equipment, net of accumulated depreciation of $275.2 and $250.8, respectively
Other assets
Goodwill
Intangible assets, net
Total assets
Liabilities and Stockholders' Deficit
Current liabilities:
Current maturities of long-term debt and finance lease liabilities
Accounts payable
Accrued expenses and other current liabilities
Litigation liability
Accrued payroll and payroll-related expenses
Short-term deferred revenues
Current liabilities held for sale
Total current liabilities
Long-term debt and finance lease liabilities
Long-term deferred revenues
Deferred income taxes
Other liabilities
Total liabilities
Commitments and Contingencies (Note 18)
Stockholders' Deficit:
$
$
$
June 30,
2020
2019
215.7 $
300.0
169.9
—
685.6
109.1
475.7
1,348.5
235.2
2,854.1 $
20.7 $
39.4
223.8
57.0
78.0
107.9
—
526.8
2,655.1
52.8
78.4
121.7
3,434.8
311.4
290.4
164.8
220.5
987.1
144.8
284.9
1,356.3
225.9
2,999.0
270.8
38.0
178.5
90.0
89.2
124.8
48.9
840.2
2,659.4
68.4
80.5
65.0
3,713.5
Preferred stock, $0.01 par value: 50.0 shares authorized; none issued and outstanding
—
—
Common stock, $0.01 par value: 650.0 shares authorized; 160.3 and 160.3 shares issued, respectively; 121.5
and 121.1 shares outstanding, respectively
Additional paid-in-capital
Retained earnings
Treasury stock, at cost: 38.8 and 39.2 shares, respectively
Accumulated other comprehensive loss
Total CDK stockholders’ deficit
Noncontrolling interest
Total stockholder's deficit
Total liabilities and stockholders' deficit
$
1.6
687.9
1,045.5
(2,305.2)
(25.9)
(596.1)
15.4
(580.7)
2,854.1 $
1.6
688.5
911.6
(2,324.6)
(6.7)
(729.6)
15.1
(714.5)
2,999.0
See notes to the consolidated financial statements.
56
CDK Global, Inc.
Consolidated Statements of Cash Flows
(In millions)
Years Ended June 30,
2019
2018
2020
Cash Flows from Operating Activities:
Net earnings
Less: net earnings (loss) from discontinued operations
Net earnings from continuing operations
Adjustments to reconcile net earnings from continuing operations to cash flows provided by
operating activities, continuing operations:
$
214.5 $
(89.3)
303.8
131.9 $
(109.8)
241.7
Depreciation and amortization
Asset impairment
Loss from equity method investment
Deferred income taxes
Stock-based compensation expense
Other
Changes in assets and liabilities, net of effect from acquisitions of businesses:
Change in accounts receivable
Change in other assets
Change in accounts payable
Change in accrued expenses and other liabilities
Net cash flows provided by operating activities, continuing operations
Net cash flows provided by operating activities, discontinued operations
Net cash flows provided by operating activities
Cash Flows from Investing Activities:
Capital expenditures
Capitalized software
Proceeds from sale of property, plant and equipment
Acquisitions of businesses, net of cash acquired
Investment in certificates of deposit
Proceeds from maturities of certificates of deposit
Purchases of investments
Proceeds from investments
Net cash flows used in investing activities, continuing operations
Net cash flows used in investing activities, discontinued operations
Net cash flows used in investing activities
Cash Flows from Financing Activities:
Proceeds from long-term debt
Repayments of long-term debt and lease liabilities
Dividends paid to stockholders
Repurchases of common stock
Proceeds from exercise of stock options
Withholding tax payments for stock-based compensation awards
Dividend payments to noncontrolling owners
Payments of deferred financing costs
Acquisition-related payments
Net cash flows used in financing activities, continuing operations
Net cash flows used in financing activities, discontinued operations
Net cash flows used in financing activities
99.6
—
2.7
4.9
19.6
27.9
(19.0)
(32.7)
(3.7)
(32.6)
370.5
4.6
375.1
(23.5)
(58.5)
—
—
(12.0)
12.0
(20.0)
—
(102.0)
(6.3)
(108.3)
15.0
(271.2)
(72.9)
—
6.2
(6.2)
(6.7)
(3.7)
(5.3)
(344.8)
(1.1)
(345.9)
89.8
19.3
17.0
(5.1)
30.5
11.1
(20.1)
(49.2)
(1.6)
105.1
438.5
44.6
483.1
(54.4)
(37.9)
7.4
(513.0)
—
—
(17.0)
0.4
(614.5)
(8.7)
(623.2)
1,100.0
(806.5)
(74.8)
(524.1)
5.0
(15.8)
(10.3)
(11.7)
(10.8)
(349.0)
—
(349.0)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
Net change in cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash, beginning of period
Cash, cash equivalents, and restricted cash end of period
(9.8)
(88.9)
321.1
232.2 $
(6.9)
(496.0)
817.1
321.1 $
$
See notes to the consolidated financial statements.
57
388.7
77.6
311.1
70.8
—
—
(10.1)
33.4
4.6
(10.6)
14.0
10.5
(49.8)
373.9
92.5
466.4
(45.9)
(30.8)
1.8
(12.8)
—
—
—
0.8
(86.9)
(26.6)
(113.5)
500.0
(46.4)
(80.1)
(623.6)
8.9
(10.6)
(7.4)
(7.9)
(4.1)
(271.2)
—
(271.2)
1.4
83.1
734.0
817.1
CDK Global, Inc.
Consolidated Statements of Cash Flows (continued)
(In millions)
Reconciliation of cash, cash equivalents, and restricted cash to the Consolidated Balance
Sheets:
Cash and cash equivalents
Restricted cash in funds held for clients included in other current assets
Total cash, cash equivalents, and restricted cash
$
$
215.7 $
311.4 $
16.5
9.7
232.2 $
321.1 $
804.4
12.7
817.1
Years Ended June 30,
2020
2019
2018
Years Ended June 30,
2020
2019
2018
Supplemental Disclosure:
Cash paid for:
Income taxes and foreign withholding taxes, net of refunds, continuing operations
$
54.1 $
124.2 $
Interest
135.9
130.0
Non-cash investing and financing activities:
Capitalized property and equipment obtained under lease
Lease liabilities incurred
Capital expenditures and capitalized software, accrued not paid
Consideration received - equity method investment in Ansira
Consideration received - note receivable
Consideration issued for acquisitions (Note 5)
23.7
(23.7)
3.2
39.9
24.4
—
15.9
(15.9)
14.0
—
—
—
118.9
92.8
0.4
(0.4)
3.1
—
—
14.5
See notes to the consolidated financial statements.
58
CDK Global, Inc.
Consolidated Statements of Stockholders' (Deficit) Equity
(In millions)
Common Stock
Shares
Issued
Amount
Additional
Paid-in-
Capital
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Income
Total CDK
Stockholders'
(Deficit)
Equity
Non-
controlling
Interest
Total
Stockholders'
(Deficit)
Equity
Balance as of June 30, 2017
160.3
$
1.6
$
608.6
$ 452.7
$ (1,144.7) $
8.0
$
(73.8) $
17.0
$
Net earnings
Foreign currency translation adjustments
Stock-based compensation expense and related
dividend equivalents
—
—
—
Common stock issued for the exercise and vesting
of stock-based compensation awards, net
—
Dividends paid to stockholders ($.59 per share)
—
Repurchases of common stock
Dividend payments to noncontrolling owners
Balance as of June 30, 2018
Net earnings
Foreign currency translation adjustments
Stock-based compensation expense and related
dividend equivalents
—
—
160.3
—
—
—
Common stock issued for the exercise and vesting
of stock-based compensation awards, net
—
Dividends paid to stockholders ($0.60 per share)
—
Repurchases of common stock
Dividend payments to noncontrolling owners
Cumulative impact of ASC 606
Balance as of June 30, 2019
Net earnings
Foreign currency translation adjustments
Stock-based compensation expense and related
dividend equivalents
—
—
—
160.3
—
—
—
Common stock issued for the exercise and vesting
of stock-based compensation awards, net
—
Dividends paid to stockholders ($0.60 per share)
—
Dividend payments to noncontrolling owners
—
—
—
—
—
—
—
—
1.6
—
—
—
—
—
—
—
—
1.6
—
—
—
—
—
—
—
—
380.8
—
30.5
(0.4)
—
—
—
(26.2)
—
24.5
—
66.9
—
(80.1)
—
—
—
(690.5)
—
679.8
753.0
(1,810.7)
—
—
124.0
—
29.7
(0.3)
—
—
—
(34.0)
—
23.2
—
13.0
—
(74.8)
—
—
—
(537.1)
—
—
—
109.7
688.5
911.6
(2,324.6)
—
—
207.5
—
18.8
(0.7)
—
—
—
(19.4)
—
19.4
—
—
(72.9)
—
—
—
—
3.5
—
—
—
—
—
11.5
—
(17.8)
—
—
—
—
—
(0.4)
(6.7)
—
(19.2)
—
—
—
—
380.8
3.5
30.1
(1.7)
(80.1)
(623.6)
—
(364.8)
124.0
(17.8)
29.4
(10.8)
(74.8)
(524.1)
7.9
—
—
—
—
—
(7.4)
17.5
7.9
—
—
—
—
—
—
(10.3)
109.3
(729.6)
207.5
(19.2)
18.1
—
(72.9)
—
—
15.1
7.0
—
—
—
—
(6.7)
(56.8)
388.7
3.5
30.1
(1.7)
(80.1)
(623.6)
(7.4)
(347.3)
131.9
(17.8)
29.4
(10.8)
(74.8)
(524.1)
(10.3)
109.3
(714.5)
214.5
(19.2)
18.1
—
(72.9)
(6.7)
Balance as of June 30, 2020
160.3
$
1.6
$
687.9
$ 1,045.5
$ (2,305.2) $
(25.9) $
(596.1) $
15.4
$
(580.7)
See notes to the consolidated financial statements.
59
CDK Global, Inc.
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
60
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
61
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.
62
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.
63
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:
Buildings
Furniture and fixtures
Data processing equipment
20 to 40 years
4 to 7 years
2 to 5 years
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.
64
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.
65
•
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 14 - 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.
66
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:
Revenues
Expenses:
Cost of revenues
Selling, general and administrative expenses
Loss on sale
Goodwill impairment
Restructuring expenses
Total expenses
(Loss) earnings before income taxes
Benefit from (provision for) income taxes
Net earnings (loss) from discontinued operations
2020
Years Ended June 30,
2019
2018
$
235.0 $
418.1 $
475.2
209.1
36.5
96.3
—
—
341.9 $
(106.9)
17.6
307.4
30.5
—
168.7
1.5
508.1 $
(90.0)
(19.8)
(89.3) $
(109.8) $
327.5
34.6
—
—
0.3
362.4
112.8
(35.2)
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.
67
Assets:
Current assets:
Accounts receivable
Prepaid and other current assets
Total current assets
Property, plant and equipment, net
Goodwill
Intangible assets, net
Other assets
Total current assets held for sale
Liabilities:
Current liabilities:
Accounts payable
Deferred revenues
Accrued expenses and other current liabilities
Total current liabilities
Other liabilities
Total current liabilities held for sale
June 30, 2019
$
121.9
1.1
123.0
2.3
59.4
35.6
0.2
220.5
19.4
0.8
26.0
46.2
2.7
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:
68
Cash and cash equivalents
Accounts receivable
Other current assets
Property, plant and equipment
Intangible assets
Accrued expenses and other current liabilities
Short-term deferred revenues
Capital lease obligations
Total identifiable net assets
Goodwill
Net assets acquired
$
$
7.0
18.9
3.4
14.8
132.0
(21.6)
(6.6)
(7.3)
140.6
379.4
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.
69
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:
70
Accounts receivable (including unbilled receivables)
$
300.0 $
290.4
June 30, 2020
June 30, 2019
Short-term contract assets (included in other current assets)
Long-term contract assets (included in other assets)
Short-term contract liabilities (included in short-term deferred revenue)
Long-term contract liabilities (included in long-term deferred revenue)
Net contract liabilities
$
52.5
40.1
(107.9)
(52.8)
(68.1) $
29.9
20.2
(124.8)
(68.4)
(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:
Twelve months ending June 30, 2021
Twelve months ending June 30, 2022
Twelve months ending June 30, 2023
Twelve months ending June 30, 2024
Twelve months ending June 30, 2025
Thereafter
Total remaining performance obligations
June 30, 2020
$
1,150.0
740.0
520.0
290.0
120.0
20.0
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
71
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
Charges
Cash payments
Adjustments
Foreign exchange
Non-cash items
Balance as of June 30, 2019
Charges
Cash payments
Adjustments
Foreign exchange
Non-cash items
$
$
4.4 $
31.1
(25.1)
(0.9)
(0.1)
—
9.4 $
13.9
(8.8)
(0.2)
(0.1)
—
Balance as of June 30, 2020
$
14.2 $
0.8 $
0.7
(1.7)
(1.4)
—
1.7
0.1 $
0.3
(0.3)
(0.1)
—
—
— $
5.2
31.8
(26.8)
(2.3)
(0.1)
1.7
9.5
14.2
(9.1)
(0.3)
(0.1)
—
14.2
72
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
73
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:
Cost of revenues
Selling, general and administrative expenses
Total pre-tax stock-based compensation expense
Income tax benefit
2020
June 30,
2019
2018
6.3 $
13.3
19.6 $
3.5 $
27.0
30.5 $
4.0
29.4
33.4
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
Options granted
Options exercised
Options canceled
Options outstanding as of June 30, 2020
$
794
334
(184)
(122)
822
$
46.47
47.13
34.25
57.48
47.85
Exercisable as of June 30, 2020
323
$
45.40
6.9
$
4.3
$
1.0
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
74
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.
Options outstanding as of June 30, 2019
Options granted
Options outstanding as of June 30, 2020
Number
of Options
(in thousands)
Weighted
Average
Exercise Price
(in dollars)
152 $
—
152 $
50.77
—
50.77
The following table presents the assumptions used to determine the fair value of the stock options granted by the Company:
Risk-free interest rate
Dividend yield
Weighted-average volatility factor
Weighted-average expected life (in years)
Weighted-average fair value (in dollars)
Time-Based Restricted Stock and Time-Based Restricted Stock Units
Fiscal
2020
Fiscal
2019
Fiscal
2018
1.7 %
1.3 %
3.1 %
1.2 %
2.0 %
0.9 %
25.9 %
23.2 %
24.5 %
6.0
6.0
6.3
$ 11.24
$ 12.72
$ 15.65
Non-vested restricted shares/units as of June 30, 2019
Restricted shares/units granted
Restricted shares/units vested
Restricted shares/units forfeited
Non-vested restricted shares/units as of June 30, 2020
Performance-Based Restricted Stock Units
Non-vested restricted units as of June 30, 2019
Restricted units granted
Restricted units vested
Restricted units forfeited
Non-vested restricted units as of June 30, 2020
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)
145 $
—
(123)
(4)
18 $
62.68
—
62.67
63.55
62.08
408 $
595
(141)
(136)
726 $
58.52
46.91
56.54
50.04
50.92
Restricted Stock Units
Number of
Units
(in thousands)
Weighted-
Average Grant
Date Fair
Value (in
dollars)
414 $
391
(99)
(43)
663 $
56.05
50.20
57.93
58.75
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.
75
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.
Earnings before income taxes:
U.S.
Foreign
The provision (benefit) for income taxes consisted of the following components:
2020
June 30,
2019
2018
$
$
325.2 $
99.0
424.2 $
182.7 $
121.2
303.9 $
265.5
133.7
399.2
2020
June 30,
2019
2018
Current:
Federal
Foreign
State
Total current
Deferred:
Federal
Foreign
State
Total deferred
$
83.0 $
25.2 $
14.3
18.2
115.5
6.3
(2.4)
1.0
4.9
31.6
10.5
67.3
(1.3)
(1.8)
(2.0)
(5.1)
Total provision for income taxes
$
120.4 $
62.2 $
49.8
32.8
15.6
98.2
(14.7)
2.9
1.7
(10.1)
88.1
76
A reconciliation between the Company’s effective tax rate from continuing operations and the U.S. federal statutory rate is as
follows:
Provision for taxes at U.S. statutory rate
Increase (decrease) in provision from:
State taxes, net of federal benefit
U.S. tax on foreign earnings
Foreign tax rate differential
Foreign tax credits
Foreign withholding taxes
Valuation allowances
Uncertain tax positions
Mutual agreement procedure receivable
Stock compensation - shortfalls/(excess tax benefits)
Noncontrolling interest
U.S. tax reform deferred tax re-measurement
Domestic production activities deduction
Pre spin-off tax return adjustments
Other
Provision for income taxes
2020
$ 89.1
12.8
5.5
4.0
(12.2)
2.6
14.8
17.1
(16.2)
0.5
(1.1)
—
—
—
3.5
$ 120.4
June 30,
%
2019
%
2018
21.0 % $ 63.8
21.0 % $ 112.2
7.3
3.1 %
13.4
1.3 %
2.7
0.9 %
(15.5)
(2.9) %
—
0.6 %
(10.9)
3.5 %
1.5
4.1 %
—
(3.8) %
(1.6)
0.1 %
(1.4)
(0.3) %
—
— %
—
— %
—
— %
2.9
0.8 %
28.4 % $ 62.2
13.2
2.4 %
19.0
4.4 %
(2.0)
0.9 %
(18.3)
(5.1) %
4.5
— %
(3.6)
(3.6) %
0.2
0.5 %
—
— %
(4.9)
(0.5) %
(1.8)
(0.5) %
(27.3)
— %
(4.0)
— %
0.1
— %
0.8
1.0 %
20.5 % $ 88.1
%
28.1 %
3.4 %
4.8 %
(0.5) %
(4.6) %
1.1 %
(0.9) %
— %
— %
(1.2) %
(0.5) %
(6.8) %
(1.0) %
— %
0.2 %
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.
77
The balance sheet classification and significant components of deferred income tax assets and liabilities are as follows:
Classification:
Long term deferred tax assets (included in other non-current assets)
Long term deferred tax liabilities (included in deferred income taxes)
Net deferred tax liabilities
Components:
Deferred tax assets:
Accrued expenses
Compensation and benefits
Deferred revenue
Net operating losses
Capital losses
Lease liabilities
Foreign tax credit carryforward
Other
Less: valuation allowances
Net deferred tax assets
Deferred tax liabilities:
Deferred expenses
Property, plant and equipment and intangible assets
ROU assets
Prepaid expenses
Undistributed foreign earnings
Other
Deferred tax liabilities
Net deferred tax liabilities
June 30,
2020
2019
$
$
8.5 $
(78.4)
(69.9) $
14.6
(80.5)
(65.9)
$
20.4 $
17.7
11.1
3.4
4.3
14.9
2.9
5.5
80.2
(5.7)
74.5
54.1
79.1
10.0
1.2
—
—
144.4
$
(69.9) $
24.5
24.9
25.0
4.2
22.7
—
—
—
101.3
(10.3)
91.0
58.5
95.1
—
0.8
1.6
0.9
156.9
(65.9)
As discussed in Note 14 - Leases, 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
78
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:
Beginning of the year balance
Additions for current year tax positions
Additions for tax positions of prior years
Reductions for tax positions of prior years
Settlement with tax authorities
Expiration of the statute of limitations
Impact of foreign exchange rate fluctuations
End of year balance
2020
June 30,
2019
2018
$
7.8 $
6.2 $
1.1
15.8
(1.0)
—
(1.0)
(0.1)
1.6
0.8
—
(0.1)
(0.7)
—
$
22.6 $
7.8 $
6.4
1.3
0.7
(0.8)
(0.6)
(0.8)
—
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
79
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
Colorado
Florida
Illinois
New Jersey
Michigan
Belgium
India
Singapore
Spain
Canada
Fiscal Years Ended
6/30/2016 thru 6/30/2018
6/30/2016 thru 6/30/2018
6/30/2017 thru 6/30/2018
6/30/2008 thru 6/30/2011
6/30/2015 thru 6/30/2017
6/30/2017 thru 6/30/2019
6/30/2015 and 6/30/2018
6/30/2015 thru 6/30/2017
6/30/2011
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,
80
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 - Stock-Based
Compensation, 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.
Net earnings from continuing operations attributable to CDK
Net earnings (loss) from discontinued operations
Net earnings attributable to CDK
Weighted-average shares outstanding:
Basic
Effect of employee stock options
Effect of employee restricted stock
Diluted
Net earnings (loss) attributable to CDK per share - basic:
Continuing operations
Discontinued operations
Total net earnings attributable to CDK per share - basic
Net earnings (loss) attributable to CDK per share - diluted:
Continuing operations
Discontinued operations
Total net earnings attributable to CDK per share - diluted
2020
June 30,
2019
2018
296.8 $
233.8 $
(89.3)
(109.8)
207.5 $
124.0 $
121.6
0.1
0.4
122.1
125.5
0.2
0.7
126.4
2.44 $
1.86 $
(0.73)
(0.87)
1.71 $
0.99 $
2.43 $
1.85 $
(0.73)
(0.87)
1.70 $
0.98 $
303.2
77.6
380.8
135.8
0.3
0.7
136.8
2.23
0.57
2.80
2.21
0.57
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.
Stock-based awards
2020
June 30,
2019
2018
1.0
0.5
0.2
81
Note 12. Accounts Receivable, Net
Accounts receivable, net from continuing operations comprised the following:
Trade receivables
Unbilled receivables
Leases and other receivables
Accounts receivable, gross
Less: allowances
Account receivable, net
June 30,
2020
2019
$
309.1 $
291.7
4.8
8.2
322.1
22.1
4.0
3.5
299.2
8.8
$
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:
Property, plant and equipment:
Land and buildings
Data processing equipment
Furniture and fixtures, leasehold improvements and other
Total property, plant and equipment
Less: accumulated depreciation
Property, plant and equipment, net
June 30,
2020
2019
$
34.6 $
279.6
70.1
384.3
275.2
$
109.1 $
38.9
278.7
78.0
395.6
250.8
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.
82
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:
Leases classified as finance:
Amortization of ROU assets
Interest on lease liabilities
Leases classified as operating:
Lease expense
Sublease income (gross basis)
Unclassified leases:
Short-term lease expense (including lease term of one month or less)
Variable lease expense
Total net lease expense
Year ended June 30, 2020
$
$
6.2
0.8
18.6
(0.6)
3.9
8.7
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:
Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows paid for operating leases
$
Operating cash flows paid for interest portion of finance leases
Finance cash flows paid for principal portion of finance leases
ROU assets obtained in exchange for new operating lease liabilities
ROU assets obtained in exchange for new finance lease liabilities
Year ended June 30, 2020
18.3
0.8
6.2
23.4
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:
83
ROU assets, net (1)
Lease liabilities, current (2)
Lease liabilities, non-current (3)
Operating Leases
Finance Leases
$
55.0 $
13.5
8.8
52.3
5.7
8.4
Total lease liabilities
(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.
61.1 $
$
14.1
The following table presents maturity analysis of lease liabilities as of June 30, 2020:
Twelve months ending June 30, 2021
Twelve months ending June 30, 2022
Twelve months ending June 30, 2023
Twelve months ending June 30, 2024
Twelve months ending June 30, 2025
Thereafter
Total undiscounted lease payments
Less: imputed interest
Less: lease incentive receivable
Total lease liabilities
Operating Leases
Finance Leases
$
18.8 $
16.4
12.4
9.8
8.0
10.5
75.9
(6.9)
(7.9)
$
61.1 $
6.2
5.2
3.5
0.1
—
—
15.0
(0.9)
—
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:
Twelve months ending June 30, 2020
Twelve months ending June 30, 2021
Twelve months ending June 30, 2022
Twelve months ending June 30, 2023
Twelve months ending June 30, 2024
Thereafter
Total minimum operating lease liabilities
Amount
16.7
13.9
12.5
8.9
6.9
15.8
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.
84
The following summarizes components of net lease income reported on the Consolidated Statements of Operations:
Revenues (1)
Cost of revenues
Interest income
Total lease income (loss)
(1) Revenues from lease components are included in other revenue, net
Year ended June 30, 2020
$
$
30.9
(30.1)
0.7
1.5
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:
Twelve months ending June 30, 2021
Twelve months ending June 30, 2022
Twelve months ending June 30, 2023
Twelve months ending June 30, 2024
Twelve months ending June 30, 2025
Thereafter
Total undiscounted cash flows to be received
Less: imputed interest
Total lease receivable
Amount
8.5
7.5
6.1
4.7
2.2
0.1
29.1
2.6
26.5
$
$
$
85
Note 15. Goodwill and Intangible Assets, Net
Changes in goodwill were as follows:
Balance as of June 30, 2018
Additions (Note 5)
Currency translation adjustments
Balance as of June 30, 2019
Currency translation adjustments
Balance as of June 30, 2020
CDK North
America
CDK
International
Total
$
620.9 $
368.3 $
379.3
0.1
1,000.3
(0.9)
—
(12.3)
356.0
(6.9)
989.2
379.3
(12.2)
1,356.3
(7.8)
$
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:
Customer lists
Software
Trademarks
Other intangibles
June 30,
2020
2019
Original
Cost
Accumulated
Amortization
Intangible
Assets, net
Original
Cost
Accumulated
Amortization
Intangible
Assets, net
$
195.7 $
(108.6) $
87.1 $
196.6 $
(100.2) $
299.7
(155.9)
143.8
250.8
(126.7)
7.5
3.2
(3.8)
(2.6)
3.7
0.6
7.5
3.2
(3.1)
(2.2)
96.4
124.1
4.4
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.
86
Estimated amortization expenses of the Company's existing intangible assets from continuing operations as of June 30, 2020
were as follows:
Fiscal year ending 2021
Fiscal year ending 2022
Fiscal year ending 2023
Fiscal year ending 2024
Fiscal year ending 2025
Thereafter
Note 16. Investments
$
Amount
55.1
51.3
39.8
19.7
13.4
55.9
$
235.2
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.
87
Note 17. Debt
Long-term debt and finance lease liabilities consisted of:
Revolving credit facility
Three year term loan facility, due 2021
Five year term loan facility, due 2023
3.30% senior notes, due 2019
4.50% senior notes, due 2024
5.875% senior notes due 2026
4.875% senior notes, due 2027
5.250% senior notes, due 2029
Finance lease liabilities
Unamortized debt financing costs
Total debt and finance lease liabilities
Current maturities of long-term debt and finance lease liabilities
Total long-term debt and finance lease liabilities
June 30,
2020
2019
$
15.0 $
300.0
273.8
—
500.0
500.0
600.0
500.0
14.1
—
300.0
288.8
250.0
500.0
500.0
600.0
500.0
19.9
(27.1)
2,675.8
20.7
(28.5)
2,930.2
270.8
$
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
88
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)
89
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:
Fiscal year ending 2021
Fiscal year ending 2022
Fiscal year ending 2023
Fiscal year ending 2024
Fiscal year ending 2025
Thereafter
Total debt
Unamortized deferred financing costs
Total debt, net of unamortized deferred financing costs
90
Amount
15.0
315.0
15.0
243.8
500.0
1,600.0
2,688.8
(27.1)
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.
91
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.
92
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.
93
Year ended June 30, 2020
Revenues
Earnings before income taxes
Loss from equity method investment
Assets
Capital expenditures
Depreciation and amortization
Year ended June 30, 2019
Revenues
Earnings before income taxes
Loss from equity method investment
Assets
Capital expenditures
Depreciation and amortization
Year ended June 30, 2018
Revenues
Earnings before income taxes
Assets
Capital expenditures
Depreciation and amortization
CDK North
America
CDK
International
Other(1)
Total
$
1,639.0 $
321.1 $
— $ 1,960.1
587.6
—
1,990.3
16.6
89.5
58.1
—
491.0
6.3
7.8
(221.5)
(2.7)
424.2
(2.7)
372.8
2,854.1
0.6
2.3
23.5
99.6
$
1,593.0 $
321.8 $
— $ 1,914.8
517.5
(17.0)
1,881.4
49.3
73.9
77.1
—
497.7
5.1
9.3
(290.7)
—
303.9
(17.0)
619.9
2,999.0
—
6.6
54.4
89.8
$
1,441.7 $
356.3 $
— $ 1,798.0
576.4
1,203.2
40.1
54.0
97.7
509.6
5.8
11.7
(274.9)
399.2
1,295.6
3,008.4
—
5.1
45.9
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:
Year ended June 30, 2020
Revenues
United States
Europe
Canada
Other
Total
$
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
94
Revenues by category by segment were as follows:
CDKNA
Subscription
On-site licenses and installation
Transaction
Other
Total CDKNA
CDKI
Subscription(1)
On-site license and installation(1)
Other
Total CDKI
Total
Twelve Months Ended June 30,
2020
2019
2018
$
1,306.0 $
1,283.3 $
1,176.4
10.8
155.0
167.2
7.9
162.5
139.3
—
164.0
101.3
1,639.0
1,593.0
1,441.7
253.5
46.7
20.9
321.1
239.4
65.0
17.4
321.8
356.3
—
—
356.3
$
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.
95
Note 21. Quarterly Financial Results (Unaudited)
Summarized quarterly results of operations for the fiscal 2020 and 2019 were as follows:
Year ended June 30, 2020
Revenues
Gross profit (2)
Earnings before income taxes
Net earnings from continuing operations
Net earnings (loss) from discontinued operations
Net earnings
Net earnings attributable to noncontrolling interest
Net earnings attributable to CDK
Net earnings (loss) attributable to CDK per share - basic:
Continuing operations
Discontinued operations
Total net earnings attributable to CDK per share - basic
Net earnings (loss) attributable to CDK per share - diluted:
Continuing operations
Discontinued operations
Total net earnings attributable to CDK per share - diluted
Year ended June 30, 2019
Revenues (1)
Gross profit (1) (2)
Earnings before income taxes (1)
Net earnings from continuing operations
Net earnings (loss) from discontinued operations
Net earnings
Net earnings attributable to noncontrolling interest
Net earnings attributable to CDK
Net earnings attributable to CDK per share - basic:
Continuing operations
Discontinued operations
Total net earnings attributable to CDK per share - basic
Net earnings attributable to CDK per share - diluted:
Continuing operations
Discontinued operations
Total net earnings attributable to CDK per share - diluted
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
494.6 $
247.3
104.0
78.4
5.7
84.1
2.1
82.0
499.6 $
263.7
113.0
69.8
(45.7)
24.1
1.8
22.3
516.3 $
273.8
132.4
94.4
(34.9)
59.5
1.9
57.6
449.6
208.8
74.8
61.2
(14.4)
46.8
1.2
45.6
0.63 $
0.56 $
0.76 $
0.49
0.05
(0.38)
(0.29)
(0.12)
0.68 $
0.18 $
0.47 $
0.37
0.62 $
0.55 $
0.76 $
0.49
0.05
(0.37)
(0.29)
(0.12)
0.67 $
0.18 $
0.47 $
0.37
446.3 $
243.0
106.5
76.5
15.8
92.3
2.0
90.3
478.7 $
248.1
96.6
72.6
18.3
90.9
1.9
89.0
501.2 $
271.9
120.7
89.3
12.4
101.7
1.9
99.8
488.6
252.0
(19.9)
3.3
(156.3)
(153.0)
2.1
(155.1)
0.58 $
0.56 $
0.70 $
0.01
0.12
0.14
0.10
0.70 $
0.70 $
0.80 $
(1.29)
(1.28)
0.57 $
0.56 $
0.70 $
0.01
0.12
0.14
0.10
0.69 $
0.70 $
0.80 $
(1.28)
(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.
96
CDK Global, Inc.
Schedule II - Valuation and Qualifying Accounts
(In millions)
Column A
Column B
Column C
Additions
Column D
Column E
Balance at
beginning
of period
Charged
(credited) to
costs and
expenses
Charged
(credited) to
other
accounts
Deductions
Balance at
end of
period
Year ended June 30, 2020
Accounts receivable allowances
Deferred tax valuation allowance
Year ended June 30, 2019 (1)
Accounts receivable allowances
Deferred tax valuation allowance
Year ended June 30, 2018
Accounts receivable allowances
Deferred tax valuation allowance
$
$
$
8.8 $
10.3
25.9
—
$
(0.1)
$
4.0 $
21.2
6.3 $
35.1
$
$
8.2
—
3.7
—
—
—
—
—
—
$
$
(12.5) (2) $
(4.6) (3)
(3.4) (2) $
(10.9) (4)
(2.6) (2) $
(13.5) (5)
22.1
5.7
8.8
10.3
7.4
21.6
(1) Effective July 1, 2018, the Company adopted 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.
(2) Doubtful accounts written off, less recoveries on accounts previously written off.
(3) Includes $18.4 million reduction due to expiration of U.S. capital loss carryforwards, increase of $14.8 million related to a
reversal of the fiscal year 2019 capital gain previously expected to be used with sale of Digital Marketing Business,
$0.7 million decrease due to certain non-U.S. tax loss carryforwards, and $0.3 million decrease due to adjustment of state tax
expense.
(4) Includes $14.8 million reduction related to the capital gain the Company expected 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, $4.3
million increase related to capital loss resulting from termination of a joint venture contract, and a $0.4 million net decrease due
to certain non-U.S. tax loss carryforwards.
(5) Includes $10.0 million reduction for the tax rate impact on a capital loss carryforward and $3.5 million for the expiration of
certain non-U.S. tax loss carryforwards.
97
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Management's Evaluation of Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the Company's management,
including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act (the "evaluation"). Disclosure controls and
procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's
management, including its Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure. Based on the evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were effective as of
June 30, 2020 in ensuring that (i) information required to be disclosed by the Company in reports that it files or submits under
the Exchange Act is accumulated and communicated to the Company's management, including its Chief Executive Officer and
Chief Financial Officer, to allow timely decisions regarding required disclosure, and (ii) such information is recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and
forms.
Internal Control Over Financial Reporting
Management's Annual Report on Internal Control Over Financial Reporting. Our management is responsible for
establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial
reporting as of June 30, 2020 based on the guidelines established in Internal Control - Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of our evaluation, our
management has concluded that our internal control over financial reporting was effective as of June 30, 2020.
Deloitte & Touche LLP, an independent registered public accounting firm, has audited the effectiveness of our internal control
over financial reporting as of June 30, 2020. Their report is included in this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting. In the fourth quarter of fiscal 2020, there were no significant
changes to the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) that materially affected, or are reasonably likely to materially affect, the Company's internal control over
financial reporting.
98
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of
CDK Global, Inc.
Hoffman Estates, Illinois
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of CDK Global, Inc. and subsidiaries (the “Company”) as of June
30, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of June 30, 2020, based on criteria established in Internal Control
- Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated financial statements as of and for the year ended June 30, 2020, of the Company and our report
dated August 6, 2020, expressed an unqualified opinion on those financial statements and included an explanatory paragraph
regarding the Company’s adoption of Financial Accounting Standards Board Accounting Standards Codification 606, Revenue
from Contracts with Customers, and Financial Accounting Standards Board Accounting Standards Codification 842, Leases.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s
Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's
internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
August 6, 2020
99
Item 9B. Other Information
None.
100
Part III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item will be set forth under the captions "Proposal 1: Election of Directors," “Section 16(a)
Beneficial Ownership Reporting Compliance,” “Code of Business Conduct and Ethics,” and “Board and Committee
Governance” in the Proxy Statement to be filed with the SEC no later than 120 days after the close of our fiscal year ended June
30, 2020. If the Proxy Statement is not filed with the SEC by such time, such information will be included in an amendment to
this Annual Report by such time.
Item 11. Executive Compensation
The information required by this item will be set forth under the captions "Compensation of Named Executive Officers" and
"Compensation Discussion and Analysis" in the Proxy Statement to be filed with the SEC no later than 120 days after the close
of our fiscal year ended June 30, 2020. If the Proxy Statement is not filed with the SEC by such time, such information will be
included in an amendment to this Annual Report by such time.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item will be set forth under the caption "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement to be filed with the SEC no later than 120 days after the close of our fiscal year ended
June 30, 2020. If the Proxy Statement is not filed with the SEC by such time, such information will be included in an
amendment to this Annual Report by such time.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be set forth under the caption "Certain Relationships and Related Party Transactions"
in the Proxy Statement to be filed with the SEC no later than 120 days after the close of our fiscal year ended June 30, 2020. If
the Proxy Statement is not filed with the SEC by such time, such information will be included in an amendment to this Annual
Report by such time.
Item 14. Principal Accounting Fees and Services
The information required by this item will be set forth under the caption "Fees of Independent Accounting Firm" in the Proxy
Statement to be filed with the SEC no later than 120 days after the close of our fiscal year ended June 30, 2020. If the Proxy
Statement is not filed with the SEC by such time, such information will be included in an amendment to this Annual Report by
such time.
101
Part IV
Item 15. Exhibits, Financial Statement Schedules
The following documents are included in "Financial Statements and Supplementary Data" in Part II, Item 8 of this Annual
Report on Form 10-K:
1. Financial Statements
Reports of Independent Registered Public Accounting Firm
Consolidated Statements of Operations for the years ended June 30, 2020, 2019, and 2018
Consolidated Statements of Comprehensive Income for the years ended June 30, 2020, 2019, and 2018
Consolidated Balance Sheets as of June 30, 2020 and 2019
Consolidated Statements of Cash Flows for the years ended June 30, 2020, 2019, and 2018
Consolidated Statements of Stockholders' (Deficit) Equity for the years ended June 30, 2020, 2019, and 2018
Notes to the Consolidated Financial Statements
2. Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts.
The following exhibits are filed with this Annual Report on Form 10-K or incorporated herein by reference to the document set
forth next to the exhibit in the list below:
Exhibit
Number
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
10.3
10.4
10.5
10.6
Exhibit Description
Certificate of Incorporation of CDK Global, Inc.
Amended and Restated By-Laws of CDK Global, Inc.,
dated March 7, 2017
Description of Securities of the Registrant
Indenture, dated as of October 14, 2014, among CDK
Global, Inc. and U.S. Bank National Association, as trustee,
pursuant to which the 3.30% Senior Notes due 2019 were
issued
Indenture, dated as of October 14, 2014, among CDK
Global, Inc. and U.S. Bank National Association, as trustee,
pursuant to which the 4.50% Senior Notes due 2024 were
issued
Indenture, dated as of May 15, 2017, between CDK Global,
Inc. and U.S. Bank National Association, as trustee,
pursuant to which the 4.875% senior notes due 2027 were
issued
Incorporated by Reference
Form
8-K
8-K
File No.
1-36486
1-36486
Exhibit
Filing Date
3.1
3.1
10/1/2014
3/9/2017
8-K
1-36486
4.1
10/17/2014
Filed
Herewith
X
8-K
1-36486
4.2
10/17/2014
8-K
1-36486
4.1
5/15/2017
Base Indenture, dated as of June 18, 2018, between CDK
Global, Inc. and U.S. Bank National Association, as trustee
8-K
1-36486
4.1
4.2
4.1
6/18/2018
6/18/2018
5/15/2019
1-36486
1-36486
1-36486
1-36486
10.1
10.1
6/7/2018
9/7/2017
10-K
1-36486
10.11
8/8/2017
10-Q
1-36486
10.7
11/7/2018
8-K
8-K
8-K
8-K
Officer’s Certificate, dated as of June 18, 2018 (including
the form of the Company’s 5.875% Senior Notes due 2026)
Indenture, dated as of May 15, 2019, between CDK Global,
Inc. and U.S. Bank National Association, as trustee,
pursuant to which the 5.25% senior notes due 2029 were
issued
Form of Indemnification Agreement
Amended and Restated Corporate Officer Severance Plan
(Management Compensatory Plan)
Third Amended and Restated Change in Control Severance
Plan for Corporate Officers (Management Compensatory
Plan)
CDK Global Inc., Amended and Restated Deferred
Compensation Plan, effective November 6, 2018
102
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
CDK Global, Inc., Amended and Restated Retirement and
Savings Restoration Plan, effective November 6, 2018
(Management Compensatory Plan)
CDK Global, Inc. 2014 Omnibus Award Plan (Management
Compensatory Plan)
First Amendment to the CDK Global, Inc. 2014 Omnibus
Award Plan (Management Compensatory Plan)
UK Tax Advantaged Sub-Plan (Management
Compensatory Plan)
Form of Deferred Unit Award Agreement under the 2014
Omnibus Award Plan (Form for Non-Employee Director)
(Management Compensatory Plan)
Form of Restricted Stock Unit Award Agreement under the
2014 Omnibus Award Plan (Form for Non-Employee
Director) (Management Compensatory Plan)
Form of Stock Option Grant Agreement under the 2014
Omnibus Award Plan (Form for Non-Employee Director)
(Management Compensatory Plan)
Form of Stock Option Grant Agreement under the 2014
Omnibus Award Plan (Form for Corporate Officers)
(Management Compensatory Plan)
Form of Stock Option Grant Agreement under the 2014
Omnibus Award Plan (Form for Corporate Officers)
(Management Compensatory Plan)
Form of Performance Based Stock Option Award
Agreement under the 2014 Omnibus Award Plan (Form for
Corporate Officers) (Management Compensatory Plan)
Form of Performance Based Stock Option Award
Agreement under the 2014 Omnibus Award Plan (Form for
Corporate Officers) (Management Compensatory Plan)
UK Tax Advantaged Sub-Plan Form of Stock Option Grant
Agreement under the 2014 Omnibus Award Plan (Form for
Corporate Officers) (Management Compensatory Plan)
Form of Restricted Unit Award Agreement under the 2014
Omnibus Award Plan (Form for Corporate Officers)
(Management Compensatory Plan)
Form of Restricted Stock Unit Award Agreement under the
2014 Omnibus Award Plan (Form for Corporate Officers)
(Management Compensatory Plan)
Form of Restricted Stock Unit Award Agreement under the
2014 Omnibus Award Plan (Form for Corporate Officers)
(Management Compensatory Plan)
Form of Restricted Stock Unit Award Agreement under the
2014 Omnibus Award Plan (Form for Corporate Officers)
(Management Compensatory Plan)
Form of Restricted Stock Award Agreement under the 2014
Omnibus Award Plan (Form for Corporate Officers)
(Management Compensatory Plan)
Form of Performance Stock Unit Award Agreement under
the 2014 Omnibus Award Plan (Form for Corporate
Officers) (Management Compensatory Plan)
Form of Performance Stock Unit Award Agreement under
the 2014 Omnibus Award Plan (Form for Corporate
Officers) (Management Compensatory Plan)
Form of Performance Stock Unit Award Agreement under
the 2014 Omnibus Award Plan (Form for Corporate
Officers) (Management Compensatory Plan)
Form of Performance Stock Unit Award Agreement under
the 2014 Omnibus Award Plan (Form for Corporate
Officers) (Management Compensatory Plan)
Employment Agreement, dated as of November 5, 2018, by
and between the Company and Brian Krzanich
Transition and Release Agreement, dated as of November
5, 2018, by and between the Company and Brian P.
MacDonald
103
10-Q
1-36486
10.8
11/7/2018
DEF
14A
10-K
1-36486
Appendix
A
9/22/2015
1-36486
10.6
8/8/2017
8-K
1-36486
10.1
1/26/2015
10-Q
1-36486
10.18
11/13/2014
10-Q
1-36486
10.7
11/3/2015
10-Q
1-36486
10.8
11/3/2015
10-Q
1-36486
10.8
2/3/2016
10-Q
1-36486
10.5
11/7/2018
10-Q
1-36486
10.6
11/7/2018
10-Q
1-36486
10.9
2/3/2016
10-Q
1-36486
10.10
2/3/2016
8-K
1-36486
10.1
9/6/2018
8-K
1-36846
10.1
9/11/2019
10-Q
1-36486
10.11
2/3/2016
10-Q
1-36486
10.12
2/3/2016
8-K
1-36486
10.2
9/6/2018
8-K
1-36846
10.2
9/11/2019
8-K
1-36486
10.9
11/7/2018
8-K
1-36486
10.10
11/7/2018
X
X
X
8-K
1-36486
10.1
8/23/2018
8-K
1-36486
10.2
8/23/2018
8-K
1-36486
10.1
5/6/2020
8-K
1-36486
10.2
5/6/2020
10.30
10.31
10.32
10.33
21.1
23.1
31.1
31.2
32.1
32.2
Term Loan Credit Agreement, dated as of August 17, 2018,
among the Company, the Lenders party thereto, and Bank
of America, N.A., as Administrative Agent
Revolving Credit Agreement, dated as of August 17, 2018,
among the Company, the Lenders party thereto, and Bank
of America, N.A., as Administrative Agent
Amendment No. 1 to the Term Loan Credit Agreement,
dated as of August 17, 2018, with Bank of America, N.A.,
as Administrative Agent, and the other lenders party
thereto.
Amendment No. 1 to the Revolving Credit Agreement,
dated as of August 17, 2018, with Bank of America, N.A.,
as Administrative Agent, and the other lenders party
thereto.
Subsidiaries of the Registrant
Consent of Deloitte & Touche LLP, independent registered
public accounting firm
Certification by Brian Krzanich pursuant to Rule 13a-14(a)
of the Securities Exchange Act of 1934
Certification by Joseph A. Tautges pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934
Certification by Brian Krzanich pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Certification by Joseph A. Tautges pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
101.INS
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101.SCH XBRL taxonomy extension schema document
101.CAL XBRL taxonomy extension calculation linkbase document
101.LAB XBRL taxonomy label linkbase document
101.PRE
101.DEF
104
XBRL taxonomy extension presentation linkbase document
XBRL taxonomy extension definition linkbase document
Cover Page Interactive Data File (formatted as Inline
XBRL and contained in Exhibit 101)
X
X
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104
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
CDK GLOBAL, INC.
By:
/s/ Joseph A. Tautges
Joseph A. Tautges
Executive Vice President, Chief Financial Officer
August 6, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
President, Chief Executive Officer and Director (principal
executive officer)
Date
August 6, 2020
Executive Vice President, Chief Financial Officer (principal
financial officer)
August 6, 2020
Vice President, Corporate Controller and Chief Accounting Officer
(principal accounting officer)
August 6, 2020
/s/ Brian Krzanich
Brian Krzanich
/s/ Joseph A. Tautges
Joseph A. Tautges
/s/ Jennifer A.Williams
Jennifer A. Williams
/s/ Leslie A. Brun
Leslie A. Brun
/s/ Willie A. Deese
Willie A. Deese
/s/ Amy J. Hillman
Amy J. Hillman
/s/ Stephen A. Miles
Stephen A. Miles
/s/ Robert E. Radway
Robert E. Radway
Director
Director
Director
Director
Director
/s/ Stephen F. Schuckenbrock
Director
Stephen F. Schuckenbrock
/s/ Frank S. Sowinski
Frank S. Sowinski
/s/ Eileen J. Voynick
Eileen J. Voynick
Director
Director
105
August 6, 2020
August 6, 2020
August 6, 2020
August 6, 2020
August 6, 2020
August 6, 2020
August 6, 2020
August 6, 2020
Name of Subsidiary
CDK Global Holdings, LLC
CDK Global Holdings II, LLC
CDK Global, LLC
CDK Global International Holdings, Inc.
CDK Global (UK) LP
CDK Global Holdings (UK) Limited
CDK Global (UK) Limited
CDK Global (Netherland) BV
CDK Global (Canada) Holding Co.
CDK Global (Canada) Limited
CDK Data Services, Inc.
Exhibit 21.1
Jurisdiction of
Incorporation
Delaware
Delaware
Delaware
Delaware
United Kingdom
United Kingdom
United Kingdom
Netherlands
Nova Scotia
Canada
Texas
In accordance with Item 601(b)(21) of Regulation S-K, the Company has omitted the names of particular subsidiaries because
the unnamed subsidiaries would not have constituted a significant subsidiary as of June 30, 2020.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
We consent to the incorporation by reference in Registration Statement No. 333-199078 on Form S-8 and
Registration Statement No. 333-224580 on Form S-3 of our reports dated August 6, 2020, relating to the financial
statements of CDK Global, Inc. and the effectiveness of CDK Global, Inc.'s internal control over financial reporting
appearing in this Annual Report on Form 10-K for the year ended June 30, 2020.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
August 6, 2020
EXHIBIT 31.1
Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
I, Brian Krzanich, certify that:
1.
I have reviewed this Annual Report on Form 10-K of CDK Global, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: August 6, 2020
/s/ Brian Krzanich
Brian Krzanich
President, Chief Executive Officer
(principal executive officer)
EXHIBIT 31.2
Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
I, Joseph A. Tautges, certify that:
1.
I have reviewed this Annual Report on Form 10-K of CDK Global, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: August 6, 2020
/s/ Joseph A. Tautges
Joseph A. Tautges
Executive Vice President, Chief Financial Officer
(principal financial officer)
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of CDK Global, Inc. (the "Company") on Form 10-K for the fiscal year ended June 30,
2020 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Brian Krzanich, President,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-
Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: August 6, 2020
/s/ Brian Krzanich
Brian Krzanich
President, Chief Executive Officer
(principal executive officer)
CERTIFICATION OF CHIEF FINANCIAL OFFICER
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of CDK Global, Inc. (the "Company") on Form 10-K for the fiscal year ended June 30,
2020 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Joseph A. Tautges, Executive
Vice President, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of
the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: August 6, 2020
/s/ Joseph A. Tautges
Joseph A. Tautges
Executive Vice President, Chief Financial Officer
(principal financial officer)
BR12508E-0920-10K