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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
 
FORM 10-Q
______________

ý        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended December 31, 2017

OR

o        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
46-5743146
(State or other jurisdiction of incorporation or
organization)
(IRS Employer Identification No.)
 
1950 Hassell Road, Hoffman Estates, IL
60169
(Address of principal executive offices) 
(Zip Code)

Registrant’s telephone number, including area code: (847) 397-1700
______________
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý   No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ý       No   o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting 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 ý
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No  ý

The number of shares outstanding of the registrant’s common stock as of January 26, 2018 was 134,558,474.




Table of Contents

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1


Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CDK Global, Inc.
Condensed Consolidated Statements of Operations
(In millions, except per share amounts)
(Unaudited)

 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2017
 
2016
 
2017
 
2016
Revenues
$
561.7

 
$
547.8

 
$
1,127.4

 
$
1,098.5

 
 
 
 
 
 
 
 
Expenses:
 

 
 

 
 
 
 
Cost of revenues
290.8

 
303.2

 
598.5

 
618.3

Selling, general and administrative expenses
122.2

 
110.9

 
235.9

 
224.6

Restructuring expenses
7.6

 
2.3

 
14.1

 
3.4

Total expenses
420.6

 
416.4

 
848.5

 
846.3

Operating earnings
141.1

 
131.4

 
278.9

 
252.2

 
 
 
 
 
 
 
 
Interest expense
(23.2
)
 
(12.3
)
 
(46.5
)
 
(23.0
)
Other income (expense), net
2.4

 
(0.2
)
 
7.7

 
1.6

 
 
 
 
 
 
 
 
Earnings before income taxes
120.3

 
118.9

 
240.1

 
230.8

 
 
 
 
 
 
 
 
Provision for income taxes
(14.1
)
 
(35.3
)
 
(50.8
)
 
(68.0
)
 
 
 
 
 
 
 
 
Net earnings
106.2

 
83.6

 
189.3

 
162.8

Less: net earnings attributable to noncontrolling interest
2.2

 
0.9

 
4.0

 
3.2

Net earnings attributable to CDK
$
104.0

 
$
82.7

 
$
185.3

 
$
159.6

 
 
 
 
 
 
 
 
Net earnings attributable to CDK per common share:
 
 
 
 
 
 
 
Basic
$
0.76

 
$
0.56

 
$
1.34

 
$
1.07

Diluted
$
0.75

 
$
0.55

 
$
1.33

 
$
1.06

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
136.9

 
148.7

 
138.5

 
149.5

Diluted
138.2

 
149.9

 
139.8

 
150.7

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.150

 
$
0.140

 
$
0.290

 
$
0.275



See notes to the condensed consolidated financial statements.

2


CDK Global, Inc.
Condensed Consolidated Statements of Comprehensive Income
(In millions)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2017
 
2016
 
2017
 
2016
Net earnings
$
106.2

 
$
83.6

 
189.3

 
162.8

Other comprehensive income (loss):
 
 
 
 
 
 
 
Currency translation adjustments
9.9

 
(26.8
)
 
24.1

 
(30.9
)
Other comprehensive income (loss)
9.9

 
(26.8
)
 
24.1

 
(30.9
)
Comprehensive income
116.1

 
56.8

 
213.4

 
131.9

Less: comprehensive income attributable to noncontrolling interest
2.2

 
0.9

 
4.0

 
3.2

Comprehensive income attributable to CDK
$
113.9

 
$
55.9

 
$
209.4

 
$
128.7


See notes to the condensed consolidated financial statements.


3


CDK Global, Inc.
Condensed Consolidated Balance Sheets
(In millions, except per share par value)
(Unaudited)
 
December 31,
 
June 30,
 
2017
 
2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
443.6

 
$
726.1

Accounts receivable, net of allowances of $7.6 and $6.3, respectively
407.3

 
372.1

Other current assets
195.3

 
180.6

Total current assets
1,046.2

 
1,278.8

Property, plant and equipment, net
140.8

 
135.0

Other assets
175.0

 
184.1

Goodwill
1,216.1

 
1,181.2

Intangible assets, net
111.9

 
104.0

Total assets
$
2,690.0

 
$
2,883.1

 
 
 
 
Liabilities and (Deficit) Equity
 

 
 

Current liabilities:
 

 
 

Current maturities of long-term debt and capital lease obligations
$
45.9

 
$
46.5

Accounts payable
17.7

 
38.9

Accrued expenses and other current liabilities
226.1

 
188.7

Accrued payroll and payroll-related expenses
64.4

 
106.2

Short-term deferred revenues
178.0

 
172.3

Total current liabilities
532.1

 
552.6

Long-term debt and capital lease obligations
2,103.9

 
2,125.2

Long-term deferred revenues
122.6

 
136.1

Deferred income taxes
54.6

 
65.9

Other liabilities
64.8

 
60.1

Total liabilities
2,878.0

 
2,939.9

 
 
 
 
(Deficit) Equity:
 

 
 

Preferred stock, $0.01 par value: Authorized, 50.0 shares; issued and outstanding, none

 

Common stock, $0.01 par value: Authorized, 650.0 shares; issued, 160.3 and 160.3 shares, respectively; outstanding, 134.6 and 140.0 shares, respectively
1.6

 
1.6

Additional paid-in-capital
671.7

 
608.6

Retained earnings
597.7

 
452.7

Treasury stock, at cost: 25.7 and 20.3 shares, respectively
(1,512.1
)
 
(1,144.7
)
Accumulated other comprehensive income
32.1

 
8.0

Total CDK stockholders' deficit
(209.0
)
 
(73.8
)
Noncontrolling interest
21.0

 
17.0

Total (deficit) equity
(188.0
)
 
(56.8
)
Total liabilities and (deficit) equity
$
2,690.0

 
$
2,883.1



See notes to the condensed consolidated financial statements.

4


CDK Global, Inc.
Condensed Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
 
Six Months Ended
 
December 31,
 
2017
 
2016
Cash Flows from Operating Activities:

 

Net earnings
$
189.3

 
$
162.8

Adjustments to reconcile net earnings to cash flows provided by operating activities:


 


Depreciation and amortization
39.0

 
34.4

Deferred income taxes
(12.1
)
 
5.0

Stock-based compensation expense
21.0

 
20.5

Other
1.2

 
2.4

Changes in operating assets and liabilities, net of effect from acquisitions of businesses:
 

 
 

Increase in accounts receivable
(33.2
)
 
(2.2
)
Increase in other assets
(6.1
)
 
(7.6
)
Decrease in accounts payable
(21.0
)
 
(11.3
)
Decrease in accrued expenses and other liabilities
(26.1
)
 
(30.6
)
Net cash flows provided by operating activities
152.0

 
173.4

 
 
 
 
Cash Flows from Investing Activities:


 


Capital expenditures
(28.4
)
 
(29.7
)
Proceeds from sale of property, plant and equipment

 
0.5

Capitalized software
(17.7
)
 
(10.0
)
Acquisitions of businesses, net of cash acquired
(12.8
)
 

Contributions to investments

 
(0.6
)
Proceeds from investments
0.8

 
4.0

Net cash flows used in investing activities
(58.1
)
 
(35.8
)
 
 
 
 
Cash Flows from Financing Activities:


 


Proceeds from long-term debt

 
400.0

Repayments of long-term debt and capital lease obligations
(23.2
)
 
(13.5
)
Dividends paid to stockholders
(40.2
)
 
(40.6
)
Repurchases of common stock
(315.4
)
 
(350.0
)
Proceeds from exercises of stock options
3.8

 
5.1

Withholding tax payments for stock-based compensation awards
(9.6
)
 
(10.5
)
Dividend payments to noncontrolling owners

 
(3.0
)
Payments of deferred financing costs
(0.4
)
 
(2.0
)
Acquisition-related payments
(1.9
)
 
(6.2
)
Net cash flows used in financing activities
(386.9
)
 
(20.7
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
10.5

 
(8.4
)
 
 
 
 
Net change in cash and cash equivalents
(282.5
)
 
108.5

 
 
 
 
Cash and cash equivalents, beginning of period
726.1

 
219.1

 
 
 
 
Cash and cash equivalents, end of period
$
443.6

 
$
327.6

 
Six Months Ended
 
December 31,
 
2017
 
2016
Supplemental Disclosure:
 
 
 
Cash paid for:
 
 
 
Income taxes and foreign withholding taxes, net of refunds
$
70.4

 
$
68.3

Interest
46.2

 
20.4


See notes to the condensed consolidated financial statements.

5



CDK Global, Inc.
Condensed Consolidated Statement of (Deficit) Equity
(In millions)
(Unaudited)

 
Common Stock
 
Additional Paid-in-Capital
 
Retained Earnings
 
Treasury Stock
 
Accumulated Other Comprehensive Income
 
Total CDK Stockholders' (Deficit) Equity
 
Non-controlling Interest
 
Total (Deficit)Equity
 
Shares Issued
 
Amount
 
 
 
 
 
 
 
Balance as of June 30, 2017
160.3

 
$
1.6

 
$
608.6

 
$
452.7

 
$
(1,144.7
)
 
$
8.0

 
$
(73.8
)
 
$
17.0

 
$
(56.8
)
Net earnings

 

 

 
185.3

 

 

 
185.3

 
4.0

 
189.3

Foreign currency translation adjustments

 

 

 

 

 
24.1

 
24.1

 

 
24.1

Stock-based compensation expense and related dividend equivalents

 

 
16.9

 
(0.1
)
 

 

 
16.8

 

 
16.8

Common stock issued for the exercise and vesting of stock-based compensation awards, net

 

 
(20.7
)
 

 
14.9

 

 
(5.8
)
 

 
(5.8
)
Dividends paid to stockholders

 

 

 
(40.2
)
 

 

 
(40.2
)
 

 
(40.2
)
Repurchases of common stock

 

 
66.9

 

 
(382.3
)
 

 
(315.4
)
 

 
(315.4
)
Balance as of December 31, 2017
160.3

 
$
1.6

 
$
671.7

 
$
597.7

 
$
(1,512.1
)
 
$
32.1

 
$
(209.0
)
 
$
21.0

 
$
(188.0
)

See notes to the condensed consolidated financial statements.


6


CDK Global, Inc.
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts in millions, except per share amounts)
(Unaudited)
Note 1. Basis of Presentation
A. Description of Business
CDK Global, Inc. (the "Company" or "CDK") is a leading global provider of integrated information technology and digital marketing solutions to the automotive retail and adjacent industries. The Company’s solutions automate and integrate all parts of the buying process from targeted digital advertising and marketing campaigns to the sale, financing, insuring, parts supply, repair, and maintenance of vehicles.
The Company is organized into two main operating groups. The Company's first operating group is CDK North America which is comprised of two reportable segments, Retail Solutions North America and Advertising North America. The second operating group, which is also a reportable segment, is CDK International. 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 14 for further information.
B. Basis of Preparation
The accompanying condensed consolidated 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 and assumptions.
The accompanying condensed consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods. Interim financial results are not necessarily indicative of financial results for a full year. The financial statements in this Quarterly Report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2017.
Note 2. Summary of Significant Accounting Policies
A. Revenue Recognition
The Company recognizes software revenues in accordance with Accounting Standards Codification (“ASC”) 985-605, “Software - Revenue Recognition,” and non-software related revenue, including Software-as-a-Service (“SaaS”), in accordance with ASC 605, "Revenue Recognition" ("ASC 605").
The Company generates revenues from four categories: subscription, digital advertising, transactional services, and other. Taxes collected from customers and remitted to governmental authorities are presented on a net basis; that is, such taxes are excluded from revenues.
Subscription. In the Retail Solutions North America (“RSNA”) and CDK International (“CDKI”) segments, CDK provides software and technology solutions for automotive retailers and original equipment manufacturers ("OEMs"), which includes:
Dealer Management Systems (“DMSs”) and layered applications, where the software may be installed onsite at the customer’s location, or hosted and provided on a SaaS basis, including ongoing maintenance and support;
Interrelated services such as installation, initial training, and data updates;
Websites, search marketing, and reputation management services (RSNA only); and
Hardware on a service basis, meaning no specific assets are identified or a substantive right of substitution exists.
Revenues for term licenses are recognized ratably over the software license term, as vendor-specific objective evidence of the fair values of the individual elements in the sales arrangement does not exist. Revenue recognition commences at the installation dates, when customer acceptance has occurred, and collectability of a determinable amount is probable. In the case of hosted applications, the customer does not have the contractual right to take possession of the software and the items delivered at the outset of the contract (i.e., installation, training, etc.) do not have value to the customer without the software

7


license and ongoing support and maintenance. Any upfront fees charged in the case of hosted arrangements are recognized ratably over the expected benefit period of the arrangement, typically five years. The unrecognized portion of these revenue elements is recorded as deferred revenue.
Advertising services. In the Advertising North America (“ANA”) segment, the Company receives revenues from the placement of internet advertising for automotive retailers and OEMs. Advertising revenues are recognized when the services are rendered.
Transaction revenues. In the RSNA segment, the Company receives fees per transaction for providing auto retailers interfaces with third parties to process credit reports, vehicle registrations, and automotive equity mining. Revenue is recognized at the time the services are rendered. Transaction revenues are recorded in revenues gross of costs incurred for credit report processing, vehicle registrations, and automotive equity mining as the Company is contractually responsible for providing the service, software, and/or connectivity to the customers, and therefore, the Company is the primary obligor under ASC 605.
Other. The Company provides consulting and professional services and sells hardware such as laser printers, networking and telephony equipment, and related items. These revenues are recognized upon their delivery or service completion.
B. Deferred Costs
Costs to deliver services are expensed to cost of revenues as incurred with the exception of specific costs directly related to transition or installation activities, including payroll-related costs for the Company's implementation and training teams, as well as commission costs for the sale. These costs are deferred and expensed proportionately over the same period that the deferred revenues are recognized as revenues. Deferred amounts are monitored regularly to ensure appropriate asset and expense recognition. Current deferred costs classified within other current assets on the condensed consolidated balance sheets were $93.5 million and $94.4 million as of December 31, 2017 and June 30, 2017, respectively. Long-term deferred costs classified within other assets on the condensed consolidated balance sheets were $105.0 million and $115.0 million as of December 31, 2017 and June 30, 2017, respectively.
C. 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 condensed 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 condensed consolidated balance sheet. Funds receivable was $29.5 million and $25.7 million, and funds held for clients was $7.2 million and $7.9 million as of December 31, 2017 and June 30, 2017, respectively. Client fund obligation was $36.7 million and $33.6 million as of December 31, 2017 and June 30, 2017, respectively.
D. Computer Software to be Sold, Leased, or Otherwise Marketed
The Company's policy provides for the capitalization of certain costs of computer software to be sold, leased, or otherwise marketed. The Company's policy provides for the capitalization of all software production costs upon reaching technological feasibility for a specific product. Technological feasibility is attained when software products have a completed working model whose consistency with the overall product design has been confirmed by testing. Costs incurred prior to the establishment of technological feasibility are expensed as incurred. The establishment of technological feasibility requires judgment by management and in many instances is only attained a short time prior to the general release of the software. Maintenance-related costs are expensed as incurred.
Pursuant to this policy, the Company recognized expenses of $34.7 million and $36.1 million for the three months ended December 31, 2017 and 2016, respectively, and $72.7 million and $74.8 million for the six months ended December 31, 2017 and 2016. These expenses were classified within cost of revenues on the condensed consolidated statements of operations.
E. Fair Value of Financial Instruments
The Company determines the fair value of financial instruments in accordance with accounting standards pertaining to fair value measurements. Such standards define fair value and establish 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

8


are reflected in the condensed 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 8), 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 December 31, 2017 was $1,382.4 million based on quoted market prices for the same or similar instruments and the carrying value was $1,350.0 million. The term loan facilities and senior notes are considered Level 2 fair value measurements in the fair value hierarchy.
Note 3. New Accounting Pronouncements
Recently Issued Accounting Pronouncements    
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other.” ASU 2017-04 simplifies the accounting for goodwill impairment by eliminating Step 2 of the current goodwill impairment test, which required a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which the reporting unit’s carrying value exceeds its fair value, limited to the carrying value of the goodwill. ASU 2017-04 is effective for financial statements issued for fiscal years, and interim periods beginning after December 15, 2019. The adoption of ASU 2017-04 is not expected to have a material impact on the Company's consolidated results of operations, financial condition, or cash flows.
In November 2016, the FASB issued ASU 2016-18, “Restricted Cash.” ASU 2016-18 clarifies cash flow presentation for restricted cash. ASU 2016-18 is effective for financial statements issued for fiscal years, and interim periods beginning after December 15, 2017. The adoption of ASU 2016-18 will not have a material impact on the Company's consolidated statements of cash flows.
In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments (Topic 230).” ASU 2016-15 addresses eight specific cash flow issues where there is diversity in practice in how these certain cash receipts and cash payments are presented and classified in the statements of cash flows. ASU 2016-15 is effective for financial statements issued for fiscal years, and interim periods beginning after December 15, 2017. The adoption of ASU 2016-15 will not have a material impact on the Company's consolidated statements of cash flows.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 requires that lessees recognize right-of-use assets and lease liabilities for any lease classified as either a finance or operating lease that is not considered short-term. The accounting applied by lessors is largely consistent with the existing lease standard. ASU 2016-02 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2018. The Company has obligations under lease agreements for facilities and equipment, which are classified as operating leases under the existing lease standard. While the Company is still evaluating the impact that ASU 2016-02 will have on the consolidated results of operations, financial condition, or cash flows, the Company's financial statements will reflect an increase in both assets and liabilities due to the requirement to recognize right-of-use assets and lease liabilities on the consolidated balance sheets for its facility and equipment leases.     
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 requires an entity to recognize revenue depicting the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will also result in enhanced revenue related disclosures. The guidance permits two methods of adoption: 1) retrospectively to each prior reporting period presented (full retrospective), or 2) retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective). In July 2015, the FASB deferred the effective date of ASU 2014-09 by one year and subsequently issued ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date." As a result, the standard and subsequent amendments thereto, will be effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2017.
In fiscal 2017, the Company established a cross-functional implementation team to evaluate the impact of the new standard on its revenue contracts including reviewing current accounting policies, evaluating new disclosure requirements, identifying appropriate changes to business processes, information technology systems, and internal controls to support revenue recognition, and disclosure under the new guidance. The Company has made significant progress in its qualitative assessment of the impact of the new revenue recognition standard; however, efforts to quantify the impact upon adoption remain ongoing.
The Company has concluded that it will adopt this standard on a modified retrospective basis, which will result in a cumulative effect adjustment to retained earnings when the standard is adopted on July 1, 2018. While the Company continues

9


to evaluate the impact of ASU 2014-09, and related ASUs, on its consolidated results of operations, financial condition, or cash flows, the following determinations have been made:
Under the current accounting guidance for software, ASC 985-605, revenues for onsite licenses are recognized ratably over the software license term, as CDK lacks vendor-specific objective evidence of the fair values of the individual elements of the sales arrangement; however, upon adoption of ASC 606 revenues may be recognized upon installation of onsite software based on estimated standalone selling price at the time of the sale. This will result in a cumulative adjustment (an increase) to beginning retained earnings, for which management is completing its evaluation and quantifying the impact.
Aside from revenues for onsite software licenses discussed above, the Company currently accounts for the majority of its revenues, including SaaS and other service arrangements under ASC 605. Under both the existing revenue standard, ASC 605, and the new standard pending adoption, ASC 606, the revenue for ongoing services will be recognized ratably over the term of arrangement; however, management is currently evaluating the impact of other aspects of the standard, including variable consideration.
In ASC 340, the FASB provides guidance for contract costs that require capitalization and subsequent amortization costs to obtain a customer contract, and costs to fulfill the contract, which for CDK consists primarily of direct sales commissions and implementation costs of service arrangements. The adoption of the new standard may result in an increase in the costs deferred and amortized over the economic life of the contract.
Note 4. Acquisitions
Auto/Mate Dealership Systems
In May 2017, the Company entered into a definitive agreement to acquire Auto/Mate Dealership Systems, a privately held company that provides a suite of DMS products and solutions. The transaction is subject to regulatory approval.
Dashboard Dealership Enterprises    
On October 20, 2017, the Company acquired the outstanding stock of Dashboard Dealership Enterprises, providers of executive reporting solutions for auto dealers. The acquisition was made pursuant to a stock purchase agreement, which contains customary representations, warranties, covenants, and indemnities by the sellers and the Company. The acquisition date fair value of total consideration to be transferred was $21.3 million, which consists primarily of an initial cash price of $12.8 million, the fair value of the holdback provision of $1.9 million, and the fair value of contingent consideration of $6.6 million, which is payable upon achievement of certain milestones and metrics if achieved by December 31, 2018. As of December 31, 2017, the Company recorded $7.6 million of accrued expenses and other current liabilities and $0.9 million of other liabilities for the holdback and contingent consideration.
The estimated fair value of acquired intangibles assets and liabilities assumed, including deferred tax liabilities, was $3.9 million and $1.6 million, respectively. The excess of the acquisition consideration over the estimated fair value of the acquired assets of $19.0 million was allocated to goodwill. The acquired assets and goodwill are included in the RSNA segment. The intangible assets will be amortized over a weighted-average useful life of approximately 8 years. The goodwill recognized from this acquisition reflects expected synergies resulting from direct ownership of the products and processes, allowing greater flexibility for future product development. The acquired goodwill is not deductible for tax purposes.
The fair values of intangible assets and the contingent consideration liability were based on preliminary valuation analysis. These estimates and assumptions are subject to change within the one-year measurement period if additional information, which existed as of the acquisition date, becomes known to the Company.
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.
For the three months ended and six months ended December 31, 2017, the Company incurred $3.1 million and $3.7 million of costs related to the acquisition and pending acquisition which are included in selling, general and administrative expenses.


10


Note 5. Restructuring
During the fiscal year ended June 30, 2015 ("fiscal 2015"), the Company initiated a three-year business transformation plan intended to increase operating efficiency and improve the Company's cost structure within its global operations. The business transformation plan is expected to produce significant benefits in the Company's long-term business performance. As the Company executes the business transformation plan, the Company continually monitors, evaluates and refines its structure, including its design, goals, term and estimate of total restructuring expenses. As part of this process, the Company extended the business transformation plan by one year to June 30, 2019 ("fiscal 2019"), and updated its current estimate of total restructuring expenses under the business transformation plan to approximately $70 million through 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. The Company recognized $7.6 million and $2.3 million of restructuring expenses for the three months ended December 31, 2017 and 2016, respectively, and $14.1 million and $3.4 million for the six months ended December 31, 2017 and 2016. Since the inception of the business transformation plan in the fourth quarter of fiscal 2015, the Company has recognized cumulative restructuring expenses of $55.1 million. Restructuring expenses are presented separately on the condensed consolidated statements of operations. Restructuring expenses are recorded in the Other segment, as these initiatives are predominantly centrally directed and are not included in internal measures of segment operating performance.
Accruals for restructuring expenses were included within accrued expenses and other current liabilities on the consolidated balance sheets as of December 31, 2017 and June 30, 2017. The following table summarizes the activity for the restructuring accrual for the six months ended December 31, 2017:
 
Employee-Related Costs
 
Contract Termination Costs
 
Total Costs
Balance as of June 30, 2017
$
6.4

 
$
2.4

 
$
8.8

Charges
13.4

 
1.4

 
14.8

Cash payments
(12.3
)
 
(1.1
)
 
(13.4
)
Adjustments
(0.5
)
 
(0.2
)
 
(0.7
)
Foreign exchange
0.1

 

 
0.1

Balance as of December 31, 2017
$
7.1

 
$
2.5

 
$
9.6



Note 6. 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 weighted-average number of shares of the Company's common stock outstanding during the reporting periods. Diluted earnings per share also reflects the dilutive effect of unexercised in-the-money stock options and unvested restricted stock.
Holders of certain stock-based compensation awards are eligible to receive dividends as described in Note 9. Net earnings allocated to participating securities were not significant for the three and six months ended December 31, 2017 and 2016.

11


The following table summarizes the components of basic and diluted earnings per share:
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,

2017

2016

2017
 
2016
Net earnings attributable to CDK
$
104.0

 
$
82.7

 
$
185.3

 
$
159.6








 
 
 
Weighted-average shares outstanding:






 
 
 
Basic
136.9


148.7


138.5

 
149.5

Effect of employee stock options
0.4


0.7


0.4

 
0.7

Effect of employee restricted stock
0.9


0.5


0.9

 
0.5

Diluted
138.2


149.9


139.8

 
150.7








 
 
 
Basic earnings attributable to CDK per share
$
0.76


$
0.56


$
1.34

 
$
1.07

Diluted earnings attributable to CDK per share
$
0.75


$
0.55


$
1.33

 
$
1.06


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.
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2017
 
2016
 
2017
 
2016
Stock-based awards
0.2

 
0.8

 
0.5

 
0.7



Note 7. Goodwill and Intangible Assets, Net
Changes in goodwill for the six months ended December 31, 2017 were as follows:
 
Retail Solutions North America
 
Advertising North America
 
CDK International
 
Total
Balance as of June 30, 2017
$
604.6

 
$
214.3

 
$
362.3

 
$
1,181.2

Additions (Note 4)
19.0

 

 

 
19.0

Currency translation adjustments
0.7

 

 
15.2

 
15.9

Balance as of December 31, 2017
$
624.3

 
$
214.3

 
$
377.5

 
$
1,216.1


Components of intangible assets, net were as follows:
 
December 31, 2017
 
June 30, 2017
 
Original Cost
 
Accumulated Amortization
 
Intangible Assets, net
 
Original Cost
 
Accumulated Amortization
 
Intangible Assets, net
Software
$
185.8

 
$
(119.0
)
 
$
66.8

 
$
163.7

 
$
(109.4
)
 
$
54.3

Customer lists
178.7

 
(137.5
)
 
41.2

 
175.5

 
(130.0
)
 
45.5

Trademarks
25.0

 
(24.4
)
 
0.6

 
25.0

 
(24.1
)
 
0.9

Other intangibles
6.9

 
(3.6
)
 
3.3

 
6.4

 
(3.1
)
 
3.3

 
$
396.4

 
$
(284.5
)
 
$
111.9

 
$
370.6

 
$
(266.6
)
 
$
104.0


Other intangibles consist primarily of purchased rights, covenants, and patents (acquired directly or through acquisitions). All of the intangible assets have finite lives and, as such, are subject to amortization. The weighted-average

12



remaining useful life of intangible assets is 5 years (3 years for software and software licenses, 7 years for customer lists, and 2 years for trademarks). Amortization of intangible assets was $7.8 million and $7.5 million for the three months ended December 31, 2017 and 2016, respectively, and $15.8 million and $15.2 million for the six months ended December 31, 2017.
Estimated amortization expenses of the Company's existing intangible assets as of December 31, 2017 were as follows:
 
Amount
Six months ending June 30, 2018
$
16.6

Twelve months ending June 30, 2019
28.2

Twelve months ending June 30, 2020
23.5

Twelve months ending June 30, 2021
18.6

Twelve months ending June 30, 2022
10.6

Twelve months ending June 30, 2023
5.4

Thereafter
9.0

 
$
111.9



Note 8. Debt
Debt was comprised of the following:
 
December 31, 2017
 
June 30, 2017
Revolving credit facility
$

 
$

2019 term loan facility
209.4

 
215.6

2020 term loan facility
225.0

 
231.3

2021 term loan facility
380.0

 
390.0

3.30% senior notes, due 2019
250.0

 
250.0

4.50% senior notes, due 2024
500.0

 
500.0

4.875% senior notes, due 2027
600.0

 
600.0

Capital lease obligations
0.9

 
1.5

Unamortized debt financing costs
(15.5
)
 
(16.7
)
Total debt and capital lease obligations
2,149.8

 
2,171.7

Current maturities of long-term debt and capital lease obligations
45.9

 
46.5

Total long-term debt and capital lease obligations
$
2,103.9

 
$
2,125.2


Revolving Credit Facility
The Company has a five-year senior unsecured revolving credit facility, which was undrawn as of December 31, 2017 and June 30, 2017. The revolving credit facility provides up to $300.0 million of borrowing capacity and includes a sub-limit of up to $100.0 million for loans in Euro and Pound Sterling. In addition, the revolving credit facility contains an accordion feature that allows for an increase in the available borrowing capacity of up to $100.0 million, subject to the agreement of lenders under the revolving credit facility or other financial institutions that become lenders to extend commitments as part of the increased revolving credit facility. Borrowings under the revolving credit facility are available for general corporate purposes. The revolving credit facility will mature on September 30, 2019, subject to no more than two one-year extensions if lenders holding a majority of the revolving commitments approve such extensions.
The revolving credit facility is unsecured and loans thereunder bear interest, at the Company's option, at (a) the rate at which deposits in the applicable currency are offered in the London interbank market (or, in the case of borrowings in Euro, the European interbank market) plus margins varying from 1.125% to 2.000% per annum based on the Company's senior, unsecured non-credit-enhanced, long-term debt ratings from Standard & Poor's Ratings Group and Moody's Investors Services Inc. (the "Ratings") or (b) solely in the case of U.S. dollar loans, (i) the highest of (A) the prime rate of JPMorgan Chase Bank, N.A., (B) a rate equal to the average of the overnight federal funds rate with a maturity of one day plus a margin of 0.750% per

13



annum and (C) the rate at which dollar deposits are offered in the London interbank market for a one-month interest period plus 1.000% plus (ii) margins varying from 0.125% to 1.000% per annum based on the Ratings. The unused portion of the revolving credit facility is subject to commitment fees ranging from 0.125% to 0.350% per annum based on the Ratings.
Term Loan Facilities
The Company has two five-year $250.0 million senior unsecured term loan facilities that mature on September 16, 2019 (the "2019 term loan facility") and December 14, 2020 (the "2020 term loan facility"), respectively. On December 9, 2016, the Company entered into a five-year $400.0 million senior unsecured term loan facility that matures on December 9, 2021 (the "2021 term loan facility"). The 2019 term loan facility, 2020 term loan facility, and 2021 term loan facility are together referred to as the "term loan facilities." The term loan facilities are subject to amortization in equal quarterly installments of 1.25% of the aggregate original principal amount of the term loans made on the closing dates, with any unpaid principal amount to be due and payable on the maturity date.
The 2019 and 2020 term loan facilities bear interest at the same calculations as are applicable to dollar loans under the revolving credit facility. The interest rate per annum on both the 2019 and 2020 term loan facilities was 2.99% as of December 31, 2017 and 2.98% as of June 30, 2017.
The 2021 term loan bears interest, at the Company's option, at (a) the rate at which deposits in the applicable currency are offered in the London interbank market (or, in the case of borrowings in Euro, the European interbank market) plus margins varying from 1.250% to 2.500% per annum based on the Company's senior, unsecured non-credit-enhanced, long-term debt ratings from Standard & Poor's Ratings Group and Moody's Investors Services Inc. (the "Ratings") or b) solely in the case of U.S. dollar loans, (i) the highest of (A) the prime rate of Bank of America, (B) a rate equal to the average of the overnight federal funds rate with a maturity of one day plus a margin of 0.750% per annum and (C) the rate at which dollar deposits are offered in the London interbank market for a one-month interest period plus 1.000% plus (ii) margins varying from 0.250% to 1.500% per annum based on the Ratings. The interest rate per annum on the 2021 term loan facility was 2.99% as of December 31, 2017 and 2.98% as of June 30, 2017.
Restrictive Covenants and Other Matters
The revolving credit facility and the term loan facilities are together referred to as the "credit facilities." The credit facilities contain various covenants and restrictive provisions that limit the Company's subsidiaries' ability to incur additional indebtedness; the Company's ability to consolidate or merge with other entities; and the Company's subsidiaries' ability to incur liens, enter into sale and leaseback transactions, and enter into agreements restricting the ability of the Company's subsidiaries to pay dividends. If the Company fails to perform the obligations under these and other covenants, the revolving credit facility could be terminated and any outstanding borrowings, together with accrued interest, under the credit facilities could be declared immediately due and payable. The credit facilities also have, in addition to customary events of default, an event of default triggered by the acceleration of the maturity of any other indebtedness the Company may have in an aggregate principal amount in excess of $75.0 million.
The credit facilities also contain financial covenants that provide (i) the ratio of total consolidated indebtedness to consolidated EBITDA shall not exceed 3.50 to 1.00 and (ii) the ratio of consolidated EBITDA to consolidated interest expense shall be a minimum of 3.00 to 1.00.
On December 9, 2016, the Company entered into (i) an Amendment to its Credit Agreement that covered the revolving credit facility and the 2019 term loan facility (the “2014 amendment”), and (ii) an Amendment to its Credit Agreement that covered the 2020 term loan facility (the “2015 amendment”). The 2014 amendment and the 2015 amendment amended certain “bail-in” language relating to EEA Financial Institutions and make certain changes to the definitions of “Change in Control,” “Consolidated EBITDA,” “Defaulting Lender,” and “Eligible Assignee.”
Senior Notes
On October 14, 2014, the Company completed an offering of 3.30% unsecured senior notes with a $250.0 million aggregate principal amount due in 2019 (the "2019 notes") and 4.50% senior notes with a $500.0 million aggregate principal amount due in 2024 (the "2024 notes"). The issuance price of the 2019 and 2024 notes was equal to the stated value. Interest is payable semi-annually on April 15 and October 15 of each year, and payment commenced on April 15, 2015. The interest rate payable on each applicable series of 2019 and 2024 notes is subject to adjustment from time to time if the credit ratings assigned to any series of 2019 and 2024 notes by the rating agencies is downgraded (or subsequently upgraded). The 2019 notes will mature on October 15, 2019, and the 2024 notes will mature on October 15, 2024. The 2019 notes and 2024 notes are

14



redeemable at the Company's option prior to September 15, 2019 for the 2019 notes and prior to July 15, 2024 for the 2024 notes at a redemption price equal to the greater of (i) 100% of the aggregate principal amount of the 2019 notes or 2024 notes to be redeemed, and (ii) the sum of the present value of the remaining scheduled payments (as defined in the agreement), plus in each case, accrued and unpaid interest thereon. Subsequent to September 15, 2019 and July 15, 2024, the redemption price for the 2019 notes and the 2024 notes, respectively, will equal 100% of the aggregate principal amount of the notes redeemed, plus accrued and unpaid interest thereon.
On May 15, 2017, the Company completed an offering of 4.875% unsecured senior notes with a $600.0 million aggregate principal amount due in 2027 (the "2027 notes," together with the "2024 notes" and the 2019 notes, the "senior notes"). The issuance price of the 2027 notes was equal to the stated value. Interest is payable semi-annually on June 1 and December 1 of each year, and payment commenced on December 1, 2017. The 2027 notes will mature on June 1, 2027. The 2027 notes are redeemable at the Company's option prior to June 1, 2022 in whole or in part at a redemption price equal to 100% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, plus the applicable "make-whole" premium. Subsequent to June 1, 2022, the Company may redeem the 2027 notes at a price equal to: (i) 102.438% of the aggregate principal amount of the 2027 notes redeemed prior to June 1, 2023; (ii) 101.625% of the aggregate principal amount of the notes redeemed on or after June 1, 2023 but prior to June 1, 2024; (iii) 100.813% of the aggregate principal amount of the 2027 notes redeemed on or after June 1, 2024 but prior to June 1, 2025; and (iv) 100.000% of the aggregate principal amount of the 2027 notes redeemed thereafter.
The senior notes are general unsecured obligations of the Company and are not guaranteed by any of the Company's subsidiaries. The senior notes rank equally in right of payment with the Company's existing and future unsecured unsubordinated obligations, including the credit facilities. The senior notes contain covenants restricting the Company's ability to incur additional indebtedness secured by liens, engage in sale/leaseback transactions, and merge, consolidate, or transfer all or substantially all of the Company's assets.
The senior notes are also subject to a change of control provision whereby each holder of the senior notes has the right to require the Company to purchase all or a portion of such holder's senior notes at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest upon the occurrence of both a change of control and a decline in the rating of the senior notes.
In November 2016, Moody's and S&P lowered their credit ratings on the senior notes to Ba1 (Stable Outlook) from Baa3 (Negative Outlook) and to BB+ (Stable Outlook) from BBB- (Negative Outlook), respectively. The downgrades triggered interest rate adjustments for the 2019 and 2024 notes. Interest rates for the 2019 and 2024 notes increased to 3.80% from 3.30%, and to 5.00% from 4.50%, respectively, effective October 15, 2016.
Capital Lease Obligations
The Company has lease agreements for equipment, which are classified as capital lease obligations. The Company recognized the capital lease obligations and related leased equipment assets based on the present value of the minimum lease payments at lease inception.
Unamortized Debt Financing Costs
As of December 31, 2017 and June 30, 2017, gross debt issuance costs related to debt instruments were $22.1 million and $21.7 million, respectively. Accumulated amortization was $6.6 million and $5.0 million as of December 31, 2017 and June 30, 2017, respectively. Debt financing costs are amortized over the terms of the related debt instruments to interest expense on the consolidated statement of operations.

15



The Company's aggregate scheduled maturities of the long-term debt and capital lease obligations as of December 31, 2017 were as follows:
 
Amount
Twelve months ending December 31, 2018
$
45.9

Twelve months ending December 31, 2019
479.4

Twelve months ending December 31, 2020
32.5

Twelve months ending December 31, 2021
207.5

Twelve months ending December 31, 2022
300.0

Thereafter
1,100.0

Total debt and capital lease obligations
2,165.3

Unamortized debt financing costs
(15.5
)
Total debt and capital lease obligations, net of unamortized deferred financing costs
$
2,149.8



Note 9. 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, and 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. The Company reissues treasury stock to satisfy issuances of common stock upon option exercise, equity vesting, or grants of time-based restricted stock.
On September 30, 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. The Company accounts for forfeitures as they occur. Stock-based compensation primarily consisted of the following for the three and six months ended December 31, 2017 and 2016:
Stock Options. Stock options are granted to employees at exercise prices equal to the fair market value of the Company's common stock on the date of grant. Stock options are issued under a graded vesting schedule and generally have a term of ten years. Compensation expense is measured based on the fair value of the stock option on the grant date and recognized over the requisite service period for each separately vesting portion of the stock option award. Upon termination of employment, unvested stock options are evaluated for forfeiture or modification, subject to the terms of the awards and Company policies.
Time-Based Restricted Stock and Time-Based Restricted Stock Units. Time-based restricted stock and restricted stock units generally vest over a two to five-year period. Upon termination of employment, unvested stock options 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, but may also be settled in stock. Compensation expense related to the issuance of time-based restricted stock units is recorded over the vesting period and is initially based on the fair value of the award on the grant date. Cash-settled, time-based restricted stock units are subsequently remeasured at each reporting date during the vesting period to the current stock value. No dividend equivalents are paid on units awarded under the time-based restricted stock unit program during the restricted period.

16



Performance-Based Restricted Stock Units. Performance-based restricted stock units generally vest over a three-year performance period. Under these programs, the Company communicates "target awards" at the beginning of the performance period with possible payouts at the end of the performance period ranging from 0% to 250% of the "target awards" plus any dividend equivalents, as described below. The possible payouts for certain performance-based restricted stock units are subject to adjustment (increase or decrease) based on a market condition defined as the total shareholder return of the Company's common stock compared to a peer group of companies.
Performance-based restricted stock units are settled in either cash or stock, depending on the employee’s home country, and cannot be transferred during the vesting period. Compensation expense related to the issuance of performance-based restricted stock units settled in cash is recorded over the vesting period, is initially based on the fair value of the award on the grant date, and is subsequently remeasured at each reporting date to the current stock value during the performance period, based upon the probability that the performance target will be met. Compensation expense related to the issuance of performance-based restricted stock units settled in stock is recorded over the vesting period based on the fair value of the award on the grant date. Prior to settlement, dividend equivalents are earned on "target awards" under the performance-based restricted stock unit program.
The following table represents stock-based compensation expense and the related income tax benefits for the three and six months ended December 31, 2017 and 2016, respectively:
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2017
 
2016
 
2017
 
2016
Cost of revenues
$
1.4

 
$
1.0

 
$
2.5

 
$
2.3

Selling, general and administrative expenses
11.5

 
9.7

 
18.5

 
18.2

Total pre-tax stock-based compensation expense
$
12.9

 
$
10.7

 
$
21.0

 
$
20.5

 
 
 
 
 
 
 
 
Income tax benefit
$
3.3

 
$
3.7

 
$
6.1

 
$
7.0


Stock-based compensation expense for the six months ended December 31, 2017 consisted of $16.8 million of expense related to equity classified awards and $4.2 million of expense related to liability classified awards. Stock-based compensation expense includes additional expense based on management's assessment that it is probable CDK's performance metrics for fiscal year ending June 30, 2018 ("fiscal 2018") associated with performance-based restricted stock units will exceed target. Additionally, there was $1.5 million of incremental stock-based compensation expense for awards that were modified or expense recognition was accelerated related to an officer's departure for the three and six months ended December 31, 2017
As of December 31, 2017, the total unrecognized compensation cost related to non-vested stock options, restricted stock units, and restricted stock awards was $2.3 million, $29.4 million, and $14.8 million, respectively, which will be amortized over the weighted-average remaining requisite service periods of 2.0 years, 1.7 years, and 1.4 years, respectively.
The activity related to the Company's incentive equity awards from June 30, 2017 to December 31, 2017 consisted of the following:
Stock Options
 
Number
of Options
(in thousands)
 
Weighted
Average Exercise Price
(in dollars)
Options outstanding as of June 30, 2017
1,310

 
$
39.70

Options granted
25

 
62.03

Options exercised
(144
)
 
26.33

Options canceled
(40
)
 
53.53

Options outstanding as of December 31, 2017
1,151

 
$
41.37


17



Time-Based Restricted Stock and Time-Based Restricted Stock Units
 
Number of Shares
(in thousands)
 
Number of Units
(in thousands)
Non-vested restricted units/shares as of June 30, 2017
497

 
214

Restricted shares/units granted
178

 
78

Restricted shares/units vested
(218
)
 
(116
)
Restricted shares/units forfeited
(40
)
 
(6
)
Non-vested restricted units/shares as of December 31, 2017
417

 
170

Performance-Based Restricted Stock Units
 
Number of Units
(in thousands)
Non-vested restricted units as of June 30, 2017
742

Restricted units granted
31

Dividend equivalents
2

Restricted units vested
(6
)
Restricted units forfeited
(44
)
Non-vested restricted units as of December 31, 2017
725


The following table presents the assumptions used in the binomial model to determine the fair value of stock options granted during the six months ended December 31, 2017:
Risk-free interest rate
2.0
%
Dividend yield
0.9
%
Weighted-average volatility factor
24.5
%
Weighted-average expected life (in years)
6.3

Weighted-average fair value (in dollars)
$
15.65



Note 10. Income Taxes
Tax Cuts and Jobs Act of 2017
On December 22, 2017, the Tax Cuts and Jobs Act ("Tax Reform Act") was enacted into law. The Tax Reform Act significantly revises the U.S. corporate income tax laws by, amongst other things, reducing the corporate income tax rate from 35.0% to 21.0% and implementing a modified territorial tax system that includes a one-time transition tax on accumulated undistributed foreign earnings. Other provisions included in the Tax Reform Act include limitations on deductible executive compensation, a repeal of the domestic production activity deduction and several new international provisions. The modified territorial tax system includes a new anti-deferral provision, referred to as global intangible low taxed income (“GILTI”), which subjects certain foreign income to current U.S. tax.
In December 2017, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Reform Act. Under SAB 118, companies are able to record a reasonable estimate of the impacts of the Tax Reform Act if one is able to be determined and report it as a provisional amount during the measurement period. The measurement period is not to extend beyond one year from the enactment date. Impacts of the Tax Reform Act that a company is not able to make a reasonable estimate for should not be recorded until a reasonable estimate can be made during the measurement period.
The Company has not completed the accounting for the tax effects of the Tax Reform Act, however, in certain cases, the Company has made reasonable estimates of the effects on the income tax provision. During the three months

18



ended December 31, 2017, the Company revised its annual effective tax rate to consider the impact of the reduced corporate tax rate. Due to the Company's fiscal year, the statutory corporate tax rate for fiscal 2018 is 28.1%, representing a blended tax rate based on the tax rate in effect on a pro-rata basis. In addition, during the three months ended December 31, 2017, the Company recorded a provisional one-time tax benefit associated with the Tax Reform Act in the amount of $14.1 million. The estimated one-time benefit is recorded in income tax expense. The estimated tax benefit is comprised of $22.6 million for the re-measurement of the Company's net deferred tax liability to reflect the new U.S. tax rate, partially offset by a one-time expense of $8.5 million associated with undistributed foreign earnings. Of the $8.5 million associated with undistributed foreign earnings, $4.8 million relates to a deferred tax liability established for foreign taxes on certain accumulated earnings as of December 31, 2017 no longer considered indefinitely reinvested and $3.7 million relates to the one-time transition tax recorded primarily within other liabilities. The one-time amounts are provisional due to complexities arising from a fiscal year-end, such as forecasting the timing of deferred tax reversals and projecting Earnings and Profits and related foreign tax credits, and are subject to change based on the issuance of additional regulatory guidance.
The accounting for certain provisions of the Tax Reform Act is incomplete and no provisional estimate has been made for the three months ended December 31, 2017. The Company requires additional time to evaluate the GILTI tax and review its outside basis differences in order to conclude on its policy election and the impact on the financial statements. The Company is allowed to make an accounting policy election whether to account for the GILTI tax as a current period expense when incurred or factor the GILTI tax into the measurement of deferred taxes. The Company will make the accounting policy election in the period the accounting is completed. For the items the Company was unable to make a reasonable estimate for, the Company has continued to apply ASC 740, "Income Taxes" based on the tax law in effect immediately prior to enactment of the Tax Reform Act.
The ultimate impact of the Tax Reform Act may differ from the Company's provisional estimates due to changes in interpretations and assumptions, additional regulatory guidance as the interpretation of the Tax Reform Act evolves over time, and actions taken by the Company as a result of the Tax Reform Act. The Company will finalize the provisional amounts during the measurement period as it completes its analysis and accounting. A reasonable estimate for the items for which no estimate has been made will be included in the first reporting period, within the measurement period, in which the Company is able to make a reasonable estimate.
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 $1.0 million as of December 31, 2017 and June 30, 2017, and payables to ADP of $1.4 million and $1.2 million as of December 31, 2017 and June 30, 2017, respectively, under the tax matters agreement. In accordance with the tax matters agreement, the Company recognized a net pretax loss of $0.4 million and a net pretax gain of $0.4 million in the three months ended and six months ended December 31, 2017, respectively, in other income (expense), net in the consolidated statement of operations associated with indemnification amounts for pre spin-off tax periods.

19



Valuation Allowance
The Company had valuation allowances of $21.5 million and $35.1 million as of December 31, 2017 and June 30, 2017, respectively, because the Company has concluded it is more likely than not that it will be unable to utilize net operating and capital loss carryforwards of certain subsidiaries to offset future taxable earnings. As of each reporting date, the Company’s management considers new evidence, both positive and negative, which could impact management’s view with regard to future realization of deferred tax assets. During the six months ended December 31, 2017, the valuation allowance balance was decreased by $13.6 million primarily due to the provisional estimate of the corporate rate reduction impact of a capital loss carryforward which reduced the valuation allowance balance by $10.0 million and the expiration of certain non-U.S. tax loss carryforwards.
Unrecognized Income Tax Benefits    
As of December 31, 2017 and June 30, 2017, the Company had unrecognized income tax benefits of $6.1 million and $6.4 million, respectively, of which $4.7 million and $4.8 million, respectively, would impact the effective tax rate if recognized. During the six months ended December 31, 2017, the Company decreased its unrecognized income tax benefits related to prior year tax positions by $0.8 million based on information that indicates the extent to which certain tax positions are more likely than not of being sustained, offset by an increase of $0.5 million in its unrecognized income tax benefits related to current year tax positions.
Provision for Income Taxes    
The effective tax rate for the three months ended December 31, 2017 and 2016 was 11.7% and 29.7%, respectively. The effective tax rate for the three months ended December 31, 2017 was favorably impacted by $14.1 million for the estimated net one-time Tax Reform Act adjustments discussed above and by $11.8 million for the cumulative current year effect of the reduced corporate income tax rate. In addition, the effective tax rate for the three months ended December 31, 2017 and 2016 was favorably impacted by $0.1 million and $3.0 million of excess tax benefits, respectively.
The effective tax rate for the six months ended December 31, 2017 and 2016 was 21.2% and 29.5%, respectively. The effective tax rate for the six months ended December 31, 2017 was favorably impacted by $14.1 million for the estimated net one-time Tax Reform Act adjustments discussed above and by $11.8 million for the current year effect of the reduced corporate income tax rate. In addition, the effective tax rate for the six months ended December 31, 2017 and 2016 was favorably impacted by $3.6 million and $8.7 million of excess tax benefits, respectively.
Note 11. Commitments and Contingencies
The Company is subject to various claims and litigation in the normal course of business. When a loss is considered probable and reasonably estimable, the Company records a liability in the amount of its best estimate for the ultimate loss. There can be no assurance that these matters will be resolved in a manner that is not adverse to the Company.
In the normal course of business, the Company may enter into contracts in which it makes representations and warranties that relate to the performance of the Company’s services and products. The Company does not expect any material losses related to such representations and warranties.
Legal Proceedings
From time to time, the Company is involved in legal, regulatory, and arbitration proceedings concerning matters arising in connection with the conduct of its business activities. Such proceedings can be expensive and disruptive to normal business operations. When losses are considered probable and reasonably estimable, the Company records a liability in the amount of its best estimate for the ultimate loss. At this time, the Company is unable to reasonably estimate any reasonably possible loss or ranges of losses on the matters and proceedings described below.
Competition Matters
The Company is involved in several lawsuits that set forth allegations of anti-competitive agreements between the Company and The Reynolds and Reynolds Company ("Reynolds and Reynolds") relating to the manner in which the defendants control access to, and allow integration with, their respective DMSs. The Company has also received from the Federal Trade Commission ("FTC") a Civil Investigative Demand consisting of a request to produce documents relating to any agreement between the Company and Reynolds and Reynolds.

20



On February 3, 2017, Motor Vehicle Software Corporation (“MVSC”) filed an antitrust suit against the Company, Reynolds and Reynolds, and Computerized Vehicle Registration, Inc. ("CVR"), a majority owned subsidiary, in the U.S. District Court for the Central District of California, seeking treble damages and injunctive relief; plaintiff amended its complaint on May 1, 2017. On June 15, 2017, the defendants filed motions to dismiss the complaint, and on October 2, 2017 the court ruled on the motions. In its order, the court dismissed several claims with leave to amend, and allowed the remainder to go forward. Plaintiff filed a second amended complaint on November 2, 2017, and defendants moved to dismiss the repleaded counts on November 16, 2017. On November 7, 2017, Defendants moved to transfer and consolidate this action with other pending actions, described below, for consolidated or coordinated pretrial proceedings as part of a Multi-District Litigation ("MDL") proceeding in the U.S. District Court for the Northern District of Illinois. Plaintiffs in the various matters have responded either by objecting to MDL treatment, or by requesting that the MDL proceedings occur in a different jurisdiction. The Judicial Panel on Multidistrict Litigation responsible for ruling on defendants’ MDL motion heard the motion on January 25, 2018.
On May 1, 2017, Authenticom, Inc. ("Authenticom") filed an antitrust suit against the Company's operating subsidiary, CDK Global, LLC, and Reynolds and Reynolds, in the U.S. District Court for the Western District of Wisconsin, seeking treble damages and injunctive relief. Authenticom moved for a preliminary injunction on May 18, 2017, which the court granted on July 14, 2017. The form of that injunction was handed down by the court on July 28, 2017, and defendants filed notices of appeal on the same day with the U.S. Court of Appeals for the Seventh Circuit. On November 6, 2017, the Court of Appeals vacated the injunction. On July 21, 2017, the defendants filed motions to dismiss the complaint in the district court. Defendants have also moved to have this matter be included as part of an MDL proceeding. On January 12, 2018 the district court granted defendants’ motion for a partial stay of discovery pending a ruling on defendants’ motion for MDL treatment of this matter.
On October 19, 2017, Teterboro Automall, Inc. d/b/a Teterboro Chrysler Dodge Jeep Ram filed a putative class-action antitrust suit against the Company’s operating subsidiary, CDK Global, LLC, and Reynolds and Reynolds, in the U.S. District Court for the District of New Jersey, seeking certification as a class action, treble damages, and injunctive and declaratory relief. Since that time, several more putative class actions have been filed in a variety of Federal District Courts, with substantively similar allegations. Defendants have moved to have these putative class actions be included as part of an MDL proceeding.
On December 11, 2017, Cox Automotive, along with multiple subsidiaries, filed a lawsuit against CDK Global, LLC alleging violation of antitrust laws, business torts, and breach of contract in the Western District of Wisconsin, seeking treble damages and injunctive and declaratory relief. The Company has moved to have this matter be included as part of an MDL proceeding.
The Company believes that these cases are without merit and intends to continue to contest the claims in these cases vigorously. Accordingly, legal and expert fees may be significant, and an adverse result in these suits could have a material adverse effect on the Company's business, results of operations, financial condition, or liquidity.
On June 22, 2017, the Company received from the FTC a Civil Investigative Demand consisting of interrogatories and a request to produce documents relating to any agreements between the Company and Reynolds and Reynolds. The Company is responding to the request. The request merely seeks information, and no proceedings have been instituted. The Company believes there has not been any conduct by the Company or its current or former employees that would be actionable under the antitrust laws in connection with the agreements between ourselves and Reynolds and Reynolds. At this time, the Company does not have sufficient information to predict the outcome of, or the cost of responding to or resolving this investigation.
Other Proceedings
The Company is otherwise involved from time to time in other proceedings not described above. Based on information available at this time, the Company believes that the resolution of these other matters currently pending will not individually or in the aggregate have a material adverse effect on our business, results of operations, financial condition, or liquidity. The Company's view of these matters may change as the proceedings and events related thereto unfold.
Other Contingencies

The Company has provided approximately $26.7 million of guarantees as of December 31, 2017 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.


21



The Company had a total of $3.4 million in letters of credit outstanding as of December 31, 2017 primarily in connection with insurance programs and our foreign subsidiaries.
Note 12. Accumulated Other Comprehensive Income ("AOCI")
Comprehensive income is a measure of income that includes both net earnings and other comprehensive income (loss). Other comprehensive income (loss) results from items deferred on the consolidated balance sheets in CDK stockholders' (deficit) equity. The Company's other comprehensive income (loss) for the six months ended December 31, 2017 and 2016 and AOCI balances as of December 31, 2017 and June 30, 2017 were comprised solely of currency translation adjustments. Other comprehensive income (loss) was $9.9 million and $(26.8) million for the three months ended December 31, 2017 and 2016, respectively, and $24.1 million and $(30.9) million for the six months ended December 31, 2017 and 2016. The accumulated balances reported in AOCI on the consolidated balance sheets for currency translation adjustments were $32.1 million and $8.0 million as of December 31, 2017 and June 30, 2017, respectively.
Note 13. Share Repurchases
In January 2017, the Board of Directors authorized the Company to repurchase up to $2.0 billion of our common stock as part of a 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 May 2017, the Company entered into an accelerated share repurchase agreement ("May 2017 ASR") to purchase $350.0 million of the Company's common stock. Under the terms of the May 2017 ASR, the Company made a $350.0 million payment in May 2017 and received initial delivery of approximately 4.5 million of the Company's common stock. In September 2017, the Company received an additional 1.1 million shares of common stock in final settlement of the May 2017 ASR, for a total of 5.6 million shares. The value reflected in treasury stock upon completion of the May 2017 ASR represents the value of the shares received based on the closing price of the Company's stock on the respective settlement dates, which is less than the $350.0 million cash paid by $3.1 million. Additionally, the Company made open market repurchases of approximately 4.7 million shares of the Company's common stock during the six months ended December 31, 2017 for a total cost of $315.4 million.
Note 14. Financial Data by Segment
The Company is organized into two main operating groups. The Company's first operating group is CDK North America which is comprised of two reportable segments, Retail Solutions North America and Advertising North America. The second operating group, which is also a reportable segment, is CDK International.
The primary components of the Other segment are corporate allocations and other expenses not recorded in the segment results, such as stock-based compensation expense, corporate costs, interest expense, costs attributable to the business transformation plan, results of our captive insurance company and certain unallocated expenses. Certain expenses are charged to the reportable segments at a standard rate for management reasons. Other costs are recorded based on management responsibility.

22



Revenue by segment was as follows:
 
Revenues
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2017
 
2016
 
2017
 
2016
CDK North America:
 
 
 
 
 
 
 
Retail Solutions North America
$
398.1

 
$
393.8

 
$
799.7

 
$
789.2

Advertising North America
76.8

 
78.1

 
156.6

 
155.6

CDK International
86.8

 
75.9

 
171.1

 
153.7

Total
$
561.7

 
$
547.8

 
$
1,127.4

 
$
1,098.5


Supplemental disclosure of revenue by type was as follows:
Retail Solutions North America:
Subscription: for software and technology solutions provided to automotive retailers and OEMs, which includes:
Dealer Management Systems and layered applications, which may be installed onsite at the customer’s location, or hosted and provided on a Software as a Service basis, including ongoing maintenance and support;
Interrelated services such as installation, initial training, and data updates;
Websites, search marketing, and reputation management services; and
Hardware on a service basis, meaning no specific assets are identified or a substantive right of substitution exists.
Transaction: fees per transaction to process credit reports, vehicle registrations, and automotive equity mining.
Other: consulting and professional services, sales of hardware, and other miscellaneous revenues.    
Advertising North America revenues are primarily earned for placing internet advertisements for OEMs and automotive retailers.
CDK International revenues are generated primarily from Subscription revenue as described above, aside from the absence of website offerings.
 
Revenues
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2017
 
2016
 
2017
 
2016
CDK North America:
 
 
 
 
 
 
 
Retail Solutions North America:
 
 
 
 


 


Subscription revenue
$
326.4

 
$
313.4

 
$
653.0

 
$
629.7

Transaction revenue
39.1

 
42.7

 
82.8

 
89.6

Other revenue
32.6

 
37.7

 
63.9

 
69.9

Total Retail Solutions North America
$
398.1

 
$
393.8

 
$
799.7

 
$
789.2

Advertising North America revenue
76.8

 
78.1

 
156.6

 
155.6

CDK International revenue
86.8

 
75.9

 
171.1

 
153.7

Total
$