CDK_Q3FY15 10-Q
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 March 31, 2015

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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
    Large accelerated filer o
 
Accelerated filer o
    Non-accelerated filer ý (Do not check if a smaller reporting company)
Smaller reporting company 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 April 27, 2015 was 160,316,124.




Table of Contents

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


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

 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
 
2015
 
2014
 
2015
 
2014
Revenues
$
526.4

 
$
501.1

 
$
1,560.4

 
$
1,470.9

 
 
 
 
 
 
 
 
Expenses:
 

 
 

 
 

 
 

Cost of revenues
321.8

 
304.9

 
956.6

 
900.5

Selling, general and administrative expenses
105.5

 
96.1

 
321.9

 
303.4

Separation costs
0.6

 

 
34.6

 

Total expenses
427.9

 
401.0

 
1,313.1

 
1,203.9

Operating earnings
98.5

 
100.1

 
247.3

 
267.0

 
 
 
 
 
 
 
 
Interest expense
(9.3
)
 
(0.2
)
 
(19.4
)
 
(0.7
)
Other income, net
1.8

 
0.6

 
4.7

 
1.8

 
 
 
 
 
 
 
 
Earnings before income taxes
91.0

 
100.5

 
232.6

 
268.1

 
 
 
 
 
 
 
 
Provision for income taxes
(32.8
)
 
(29.1
)
 
(89.0
)
 
(86.9
)
 
 
 
 
 
 
 
 
Net earnings
58.2

 
71.4

 
143.6

 
181.2

Less: net earnings attributable to noncontrolling interest
1.9

 
1.8

 
5.9

 
5.2

Net earnings attributable to CDK
$
56.3

 
$
69.6

 
$
137.7

 
$
176.0

 
 
 
 
 
 
 
 
Net earnings attributable to CDK per common share:
 
 
 
 
 
 
 
Basic
$
0.35

 
$
0.43

 
$
0.86

 
$
1.10

Diluted
$
0.35

 
$
0.43

 
$
0.85

 
$
1.10

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
160.6

 
160.6

 
160.7

 
160.6

Diluted
161.9

 
160.6

 
161.5

 
160.6

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.12

 
$

 
$
0.24

 
$


See notes to the condensed consolidated and combined financial statements.

3


CDK Global, Inc.
Condensed Consolidated and Combined Statements of Comprehensive Income
(In millions)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
 
2015
 
2014
 
2015
 
2014
Net earnings
$
58.2

 
$
71.4

 
$
143.6

 
$
181.2

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Currency translation adjustments
(23.2
)
 
6.4

 
(40.1
)
 
30.4

Other comprehensive (loss) income
(23.2
)
 
6.4

 
(40.1
)
 
30.4

Comprehensive income
35.0

 
77.8

 
103.5

 
211.6

Less: comprehensive income attributable to noncontrolling interest
1.9

 
1.8

 
5.9

 
5.2

Comprehensive income attributable to CDK
$
33.1

 
$
76.0

 
$
97.6

 
$
206.4



4


CDK Global, Inc.
Condensed Consolidated and Combined Balance Sheets
(In millions, except per share par value)
(Unaudited)
 
March 31,
 
June 30,
 
2015
 
2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
368.5

 
$
402.8

Accounts receivable, net of allowance for doubtful accounts of $12.7 and $12.2, respectively
352.8

 
310.7

Notes receivable from ADP and its affiliates

 
40.6

Other current assets
185.1

 
164.1

Total current assets
906.4

 
918.2

Property, plant and equipment, net
85.3

 
82.6

Other assets
245.4

 
233.1

Goodwill
1,169.1

 
1,230.9

Intangible assets, net
103.1

 
133.8

Total assets
$
2,509.3

 
$
2,598.6

 
 
 
 
Liabilities and Equity
 

 
 

Current liabilities:
 

 
 

Current maturities of long-term debt
$
12.5

 
$

Accounts payable
20.9

 
17.2

Accrued expenses and other current liabilities
161.5

 
158.0

Accrued payroll and payroll-related expenses
97.3

 
105.6

Short-term deferred revenues
183.5

 
194.8

Notes payable to ADP and its affiliates

 
21.9

Total current liabilities
475.7

 
497.5

Long-term debt
981.3

 

Long-term deferred revenues
179.4

 
182.8

Deferred income taxes
73.3

 
76.5

Other liabilities
35.6

 
32.5

Total liabilities
1,745.3

 
789.3

 
 
 
 
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, 161.1 shares; outstanding, 160.4 shares
1.6

 

Additional paid-in-capital
677.2

 

Retained earnings
59.9

 

Treasury stock, at cost: 0.7 shares
(32.2
)
 

Net parent company investment

 
1,712.2

Accumulated other comprehensive income
45.6

 
85.7

Total CDK stockholders' equity
752.1

 
1,797.9

Noncontrolling interest
11.9

 
11.4

Total equity
764.0

 
1,809.3

Total liabilities and equity
$
2,509.3

 
$
2,598.6



See notes to the condensed consolidated and combined financial statements.

5


CDK Global, Inc.
Condensed Consolidated and Combined Statements of Cash Flows
(In millions)
(Unaudited)
 
Nine Months Ended
 
March 31,
 
2015
 
2014
Cash Flows from Operating Activities:
 
 
 
Net earnings
$
143.6

 
$
181.2

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

 
 

Depreciation and amortization
57.1

 
39.6

Deferred income taxes
(2.0
)
 
(14.1
)
Stock-based compensation expense
22.0

 
15.0

Pension expense
0.8

 
2.9

Other
(5.9
)
 
(7.1
)
Changes in operating assets and liabilities, net of effects from acquisitions and divestitures of businesses:
 

 
 

Increase in accounts receivable
(55.6
)
 
(36.0
)
Increase in other assets
(19.1
)
 
(11.7
)
Increase/(decrease) in accounts payable
4.7

 
(2.5
)
Increase/(decrease) in accrued expenses and other liabilities
14.6

 
(24.7
)
Net cash flows provided by operating activities
160.2

 
142.6

 
 
 
 
Cash Flows from Investing Activities:
 

 
 

Capital expenditures
(27.2
)
 
(30.4
)
Proceeds from sale of property, plant and equipment
0.9

 

Capitalized software
(7.5
)
 
(4.6
)
Acquisitions of businesses, net of cash acquired

 
(25.7
)
Contributions to investments
(14.6
)
 

Proceeds from (advances) on notes receivable from ADP and its affiliates
40.6

 
(2.5
)
Net cash flows used in investing activities
(7.8
)
 
(63.2
)
 
 
 
 
Cash Flows from Financing Activities:
 

 
 

Repayments of notes payable to ADP and its affiliates
(21.9
)
 
(2.1
)
Borrowings on notes payable to ADP and its affiliates

 
1.0

Net transactions of parent company investment
(240.8
)
 
12.1

Proceeds from long-term debt
1,750.0

 

Repayments of long-term debt
(756.2
)
 

Dividend paid to ADP at separation
(825.0
)
 

Dividends paid to stockholders
(38.8
)
 

Repurchases of common stock
(32.2
)
 

Proceeds from exercises of stock options
6.9

 

Excess tax benefit from stock-based compensation awards
9.7

 
7.2

Withholding tax payment for stock-based compensation awards
(0.9
)
 

Payment of deferred financing costs
(9.2
)
 

Dividend payments of CVR to noncontrolling owners
(5.4
)
 
(8.0
)
Net cash flows (used in) provided by financing activities
(163.8
)
 
10.2

 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(22.9
)
 
(5.9
)
 
 
 
 
Net change in cash and cash equivalents
(34.3
)
 
83.7

 
 
 
 
Cash and cash equivalents, beginning of period
402.8

 
276.3

 
 
 
 
Cash and cash equivalents, end of period
$
368.5

 
$
360.0

 
 
 
 
Supplemental Disclosure:
 
 
 
Cash paid for:
 
 
 
Income taxes and foreign withholding taxes, net of refunds
$
67.3

 
$
13.2

Interest
2.7

 
0.7


See notes to the condensed consolidated and combined financial statements.

6




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

 
Common Stock
 
Additional Paid-in-Capital
 
Retained Earnings
 
Treasury Stock
 
Net Parent Company Investment
 
Accumulated Other Comprehensive Income
 
Total CDK Stockholders' Equity
 
Non-controlling Interest
 
Total Equity
 
Shares Issued
 
Amount
 
 
 
 
 
 
 
 
Balance as of June 30, 2014

 
$

 
$

 
$

 
$

 
$
1,712.2

 
$
85.7

 
$
1,797.9

 
$
11.4

 
$
1,809.3

Net earnings

 

 

 
98.7

 

 
39.0

 

 
137.7

 
5.9

 
143.6

Foreign currency translation adjustments

 

 

 

 

 

 
(40.1
)
 
(40.1
)
 

 
(40.1
)
Net distributions to Parent

 

 

 

 

 
(271.8
)
 

 
(271.8
)
 

 
(271.8
)
Dividend paid to ADP at separation

 

 

 

 

 
(825.0
)
 

 
(825.0
)
 

 
(825.0
)
Reclassification of net parent company investment to common stock and additional paid-in capital in conjunction with the Distribution
160.6

 
1.6

 
652.8

 

 

 
(654.4
)
 

 

 

 

Stock-based compensation expense

 

 
12.4

 

 

 

 

 
12.4

 

 
12.4

Common stock issued for the exercise and vesting of stock-based compensation awards
0.5

 

 
7.1

 

 

 

 

 
7.1

 

 
7.1

Excess tax benefit from stock-based compensation awards

 

 
5.8

 

 

 

 

 
5.8

 

 
5.8

Withholding tax payment for stock-based compensation awards

 

 
(0.9
)
 

 

 

 

 
(0.9
)
 

 
(0.9
)
Dividends paid to stockholders

 

 

 
(38.8
)
 

 

 

 
(38.8
)
 

 
(38.8
)
Repurchases of common stock

 

 

 

 
(32.2
)
 

 

 
(32.2
)
 

 
(32.2
)
Dividend payments of CVR to noncontrolling owners

 

 

 

 

 

 

 

 
(5.4
)
 
(5.4
)
Balance as of March 31, 2015
161.1

 
$
1.6

 
$
677.2

 
$
59.9

 
$
(32.2
)
 
$

 
$
45.6

 
$
752.1

 
$
11.9

 
$
764.0


See notes to the condensed consolidated and combined financial statements.


7


CDK Global, Inc.
Notes to the Condensed Consolidated and Combined Financial Statements
(Tabular dollars and shares in millions, except per share amounts)
(Unaudited)
Note 1. Basis of Presentation
A. Spin-off
On April 9, 2014, the board of directors of Automatic Data Processing, Inc. (“ADP” or the “Parent”) approved the spin-off of the Dealer Services business of ADP ("Dealer Services"). On May 6, 2014, in preparation of the spin-off, ADP formed Dealer Services Holdings LLC, a Delaware limited liability company, to hold Dealer Services. On September 1, 2014, Dealer Services Holdings LLC was renamed CDK Global Holdings, LLC. On September 29, 2014, immediately prior to the spin-off, CDK Global Holdings, LLC converted to CDK Global, Inc. ("CDK" or the "Company"). On September 30, 2014 (the "Separation Date"), the spin-off became effective and ADP distributed 100% of the common stock of the Company to the holders of record of ADP's common stock as of September 24, 2014 (the "Distribution"). The Distribution was made pursuant to a Separation and Distribution Agreement by which ADP contributed the subsidiaries that operated the Dealer Services business to the Company. The Distribution is expected to be a tax-free transaction under Section 355 and other related provisions of the Internal Revenue Code of 1986, as amended.
Concurrent with the Distribution, the Company and ADP entered into several agreements providing for transition services and governing relationships between the Company and ADP. Refer to Notes 7 and 10 for further information.
B. Description of Business
The Company is a global provider of integrated technology solutions to the information technology and marketing/advertising markets of the automotive retail industry. The Company’s solutions enable automotive retailers and original equipment manufacturers (“OEMs”) to better manage, analyze and grow their businesses. The Company classifies its operations into the following reportable segments: Automotive Retail North America, Automotive Retail International, and Digital Marketing. 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, such as stock-based compensation expense, corporate costs, separation costs, and interest expense.
C. Basis of Preparation
The financial statements presented herein represent (i) periods prior to September 30, 2014 when the Company was a wholly owned subsidiary of ADP (referred to as "combined financial statements") and (ii) periods subsequent to September 30, 2014 when the Company became a separate publicly-traded company (referred to as "consolidated financial statements"). Throughout this Quarterly Report on Form 10-Q when we refer to the "financial statements," we are referring to the "condensed consolidated and combined financial statements," unless the context indicates otherwise. Beginning with the interim periods ending March 31, 2015, the Company elected to present two separate statements for the statements of operations and comprehensive income as opposed to a single continuous statement of comprehensive income.
The financial statements include the accounts of Computerized Vehicle Registration, Inc. ("CVR") in which CDK holds a controlling financial and management interest. All significant intercompany transactions and balances between consolidated CDK businesses have been eliminated.
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. These financial statements present the consolidated and combined financial position and results of operations of the Company, which was under common control and common management by ADP until the Separation Date. The historical financial results in the accompanying financial statements presented may not be indicative of the results that would have been achieved had the Company operated as a separate, stand-alone entity.
The accompanying 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 combined

8


financial statements and related notes of the Company as of and for the fiscal year ended June 30, 2014 as filed with the Securities and Exchange Commission in the Registration Statement on Form 10 relating to the Distribution.
Prior to the Distribution, the financial statements in this Quarterly Report on Form 10-Q included costs for facilities, functions, and services used by the Company at shared ADP sites and costs for certain functions and services performed by centralized ADP organizations and directly charged to the Company based on revenue and headcount. Following the Distribution, the Company performs these functions using internal resources or purchased services, certain of which may be provided by ADP during a transitional period pursuant to the transition services agreement. Refer to Note 10 for further information on agreements entered into with ADP as a result of the Distribution. The expenses allocated to the Company for these services are not necessarily indicative of the expenses that would have been incurred if the Company had been a separate, independent entity and had otherwise managed these functions. The Company’s financial statements include the following transactions with ADP or its affiliates:
Separation Costs. The financial statements of the Company include certain incremental costs that are directly attributable to the Distribution. Prior to the Distribution, separation costs were paid by ADP and allocated to the Company. These costs were related to professional services and amounted to $0.6 million and $34.6 million for the three and nine months ended March 31, 2015, respectively. The Company did not incur any separation costs during the three and nine months ended March 31, 2014.
Overhead Expenses. Prior to the Distribution, the financial statements of the Company included an allocation of certain general expenses of ADP and its affiliates, which were in support of the Company, including departmental costs for travel, procurement, treasury, tax, internal audit, risk management, real estate, benefits, and other corporate and infrastructure costs. The Company was allocated overhead costs related to ADP's shared functions of $7.4 million for the three months ended March 31, 2014 and $7.1 million and $21.9 million for the nine months ended March 31, 2015 and 2014, respectively. These costs were reported in selling, general and administrative expenses on the consolidated and combined statements of operations. These allocations were based on a variety of factors. The allocation of the travel department costs was based on the estimated percentage of travel directly related to the Company. The allocation of benefits was based on the approximate benefit claims or payroll costs directly related to the Company as compared to ADP’s total claims and payroll costs. The allocation of real estate management costs was based on the estimated percentage of square footage of facilities for the Company's business that was managed by the ADP corporate real estate department in relation to ADP’s total managed facilities. All other allocations were based on an estimated percentage of support staff time or system utilization in comparison to ADP as a whole. Management believes that these allocations were made on a reasonable basis.
Royalty Fees. Prior to the Distribution, the financial statements included a trademark royalty fee charged by ADP to the Company based on revenues for licensing fees associated with the use of the ADP trademark. The Company was charged trademark royalty fees of $5.6 million for the three months ended March 31, 2014 and $5.7 million and $16.3 million for the nine months ended March 31, 2015 and 2014, respectively. These charges were included in selling, general, and administrative expenses on the consolidated and combined statements of operations. Management believes that these allocations were made on a reasonable basis.
Services Received from Affiliated Companies. Prior to the Distribution, certain systems development functions were outsourced to an ADP shared services facility located in India. This facility provided services to the Company as well as to other ADP affiliates. The Company purchased services from this facility of $5.2 million for the three months ended March 31, 2014 and $5.5 million and $14.2 million for the nine months ended March 31, 2015 and 2014, respectively. The charge for these services was included within cost of revenues on the consolidated and combined statements of operations.
Notes Receivable from ADP and its Affiliates and Notes Payable to ADP and its Affiliates. As of June 30, 2014, the Company recorded notes receivable from ADP and its affiliates of $40.6 million and notes payable to ADP and its affiliates of $21.9 million under contractual arrangements. Prior to the Distribution, the notes were settled; therefore, there were no outstanding notes receivable from or payable to ADP and its affiliates in the accompanying consolidated balance sheet as of March 31, 2015. Interest income on notes receivable from ADP and its affiliates was $0.2 million for the three months ended March 31, 2014 and was $0.2 million and $0.6 million for the nine months ended March 31, 2015 and 2014, respectively. The Company recorded interest income on notes receivable from ADP and its affiliates within other income, net on the consolidated and combined statements of operations. Interest expense on notes payable to ADP and its affiliates was $0.3 million for the three months ended March 31, 2014 and was $0.2 million and $0.7 million for the nine months ended March 31, 2015 and 2014, respectively. The Company recorded interest expense on notes payable to ADP and its affiliates within interest expense on the consolidated and combined statements of operations.

9


Other Services. Prior to the Distribution, the Company received other services from ADP and its affiliates (e.g., payroll processing services). The Company was charged primarily at a fixed rate per employee per month for such payroll processing services. Expenses incurred for such services were $0.3 million for the three months ended March 31, 2014 and $0.4 million and $0.9 million for the nine months ended March 31, 2015 and 2014, respectively. These expenses were included in selling, general and administrative expenses on the consolidated and combined statements of operations.
D. Financial Statement Revisions
During the three months ended March 31, 2015, the Company elected to make revisions to previously reported results of operations, financial condition, and cash flows as discussed below. The Company previously reported results of operations and cash flows for the nine months ended March 31, 2014, financial condition as of June 30, 2014, and revenues, earnings before income taxes, and net earnings for the three months ended March 31, 2014 in the Registration Statement on Form 10. The Company assessed the materiality of the misstatements discussed below on prior period financial statements and concluded that while such revisions are immaterial to the combined results of operations and cash flows for the nine months ended March 31, 2014, financial condition as of June 30, 2014, and revenues, earnings before income taxes, and net earnings for the three months ended March 31, 2014 presented herein, the combined financial statements should be revised to provide greater comparability. The Company plans to reflect the effect of the revisions on previously reported annual periods in its exchange offer registration statement to exchange the Company's senior notes for a new issue of substantially identical debt securities registered under the Securities Act (as described in Note 5).
Historically, leases of certain hardware components included within Dealer Management Systems ("DMS") and integrated solutions were accounted for as operating leases and revenues were recognized in accordance with Accounting Standards Codification ("ASC") 840, "Leases." The Company has now determined that these hardware components should be reported as sales-type leases in accordance with ASC 840, "Leases." In accordance with sales-type lease accounting, revenue for leased hardware is recognized upon installation and a receivable is recorded based on the present value of the minimum lease payments at the beginning of the lease term. The Company's combined financial statements have been revised to reflect sales-type lease accounting for these hardware components as well as the related income tax effects. This revision impacted the Automotive Retail North America and Automotive Retail International segments and all of these revisions are immaterial. Segment revenues and earnings before income taxes in Note 11 for the nine months ended March 31, 2014 include the effects of this revision.
The Company revised the presentation of the noncontrolling interest ("NCI") in CVR to comply with ASC 810, "Consolidations." Accordingly, earnings, comprehensive income, and net assets in CVR which are not attributable to the Company have been separately presented within the combined financial statements. Historically, the NCI in CVR's earnings was included within selling, general and administrative expenses in the combined statements of operations, and the NCI in CVR's net assets was included within other liabilities in the combined balance sheets. This revision impacted the Automotive Retail North America segment and earnings before income taxes in Note 11 for the nine months ended March 31, 2014 reflect this revision.
The following are selected line items from the Company's combined financial statements illustrating the effect of these immaterial revisions:

10


Condensed Combined Statements of Operations
 
Nine Months Ended March 31, 2014
 
 
 
Adjustments
 
 
 
As Reported
 
Hardware
 
NCI
 
As Revised
Revenues
$
1,469.3

 
$
1.6

 
$

 
$
1,470.9

Cost of revenues
899.1

 
1.4

 

 
900.5

Selling, general and administrative
308.3

 
0.3

 
(5.2
)
 
303.4

Total expenses
1,207.4

 
1.7

 
(5.2
)
 
1,203.9

Operating earnings
261.9

 
(0.1
)
 
5.2

 
267.0

Other income, net
0.1

 
1.7

 

 
1.8

Earnings before income taxes
261.3

 
1.6

 
5.2

 
268.1

Provision for income taxes
(86.3
)
 
(0.6
)
 

 
(86.9
)
Net earnings
175.0

 
1.0

 
5.2

 
181.2

Less: net earnings attributable to noncontrolling interest

 

 
5.2

 
5.2

Net earnings attributable to CDK
$
175.0

 
$
1.0

 
$

 
$
176.0

 
Three Months Ended March 31, 2014
 
 
 
Adjustments
 
 
 
As Reported
 
Hardware
 
NCI
 
As Revised
Revenues
$
500.5

 
$
0.6

 
$

 
$
501.1

Earnings before income taxes
98.3

 
0.4

 
1.8

 
100.5

Net earnings
69.3

 
0.3

 
1.8

 
71.4

Less: net earnings attributable to noncontrolling interest

 

 
1.8

 
1.8

Net earnings attributable to CDK
$
69.3

 
$
0.3

 
$

 
$
69.6

Condensed Combined Statement of Comprehensive Income
 
Nine Months Ended March 31, 2014
 
 
 
Adjustments
 
 
 
As Reported
 
Hardware
 
NCI
 
As Revised
Net earnings
$
175.0

 
$
1.0

 
$
5.2

 
$
181.2

Other comprehensive income:
 
 
 
 
 
 
 
Currency translation adjustments
30.4

 

 

 
30.4

Other comprehensive income
30.4

 

 

 
30.4

Comprehensive income
205.4

 
1.0

 
5.2

 
211.6

Less: comprehensive income attributable to noncontrolling interest

 

 
5.2

 
5.2

Comprehensive income attributable to CDK
$
205.4

 
$
1.0

 
$

 
$
206.4



11


Condensed Combined Balance Sheet
 
June 30, 2014
 
 
 
Adjustments
 
 
 
As Reported
 
Hardware
 
NCI
 
As Revised
Assets
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Accounts receivable, net
$
299.1

 
$
11.6

 
$

 
$
310.7

Other current assets
164.6

 
(0.5
)
 

 
164.1

Total current assets
907.1

 
11.1

 

 
918.2

Property, plant and equipment, net
109.9

 
(27.3
)
 

 
82.6

Other assets
205.5

 
27.6

 

 
233.1

Total assets
$
2,587.2

 
$
11.4

 

 
$
2,598.6

 
 
 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accrued expenses and other current liabilities
$
154.2

 
$
3.8

 
$

 
$
158.0

Total current liabilities
493.7

 
3.8

 

 
497.5

Deferred income taxes
76.6

 
(0.1
)
 

 
76.5

Other liabilities
43.9

 

 
(11.4
)
 
32.5

Total liabilities
797.0

 
3.7

 
(11.4
)
 
789.3

 
 
 
 
 
 
 
 
Equity:
 
 
 
 
 
 
 
Net parent company investment
1,704.6

 
7.6

 

 
1,712.2

Accumulated other comprehensive income
85.6

 
0.1

 

 
85.7

Total CDK stockholders' equity
1,790.2

 
7.7

 

 
1,797.9

Noncontrolling interest

 

 
11.4

 
11.4

Total equity
1,790.2

 
7.7

 
11.4

 
1,809.3

Total liabilities and equity
$
2,587.2

 
$
11.4

 
$

 
$
2,598.6


12


Condensed Combined Statement of Cash Flows
 
Nine Months Ended March 31, 2014
 
 
 
Adjustments
 
 
 
As Reported
 
Hardware
 
NCI
 
As Revised
Cash Flows from Operating Activities:
 
 
 
 
 
 
 
Net earnings
$
175.0

 
$
1.0

 
$
5.2

 
$
181.2

Adjustments to reconcile net earnings to cash flows provided by operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
51.2

 
(11.6
)
 

 
39.6

Deferred income taxes
(14.7
)
 
0.6

 

 
(14.1
)
Other
(0.7
)
 
(1.2
)
 
(5.2
)
 
(7.1
)
Changes in operating assets and liabilities, net of effects from acquisitions and divestitures of businesses:
 
 
 
 
 
 
 
Increase in accounts receivable
(34.9
)
 
(1.1
)
 

 
(36.0
)
Increase in other assets
(9.5
)
 
(2.2
)
 

 
(11.7
)
(Decrease)/increase in accrued expenses and other liabilities
(32.8
)
 
0.1

 
8.0

 
(24.7
)
Net cash flows provided by/(used in) operating activities
149.0

 
(14.4
)
 
8.0

 
142.6

 
 
 
 
 
 
 
 
Cash Flows from Investing Activities:
 
 
 
 
 
 
 
Capital expenditures
(44.8
)
 
14.4

 

 
(30.4
)
Net cash flows (used in)/provided by investing activities
(77.6
)
 
14.4

 

 
(63.2
)
 
 
 
 
 
 
 
 
Cash Flows from Financing Activities:
 
 
 
 
 
 
 
Dividend payments of CVR to minority owners

 

 
(8.0
)
 
(8.0
)
Net cash flows provided by/(used in) financing activities
18.2

 

 
(8.0
)
 
10.2

Combined Statement of Equity
 
June 30, 2014
 
 
 
Adjustments
 
 
 
As Reported
 
Hardware
 
NCI
 
As Revised
Net Parent Company Investment
 
 
 
 
 
 
 
Balance as of June 30, 2014
$
1,704.6

 
$
7.6

 
$

 
1,712.2

Accumulated Other Comprehensive Income
 
 
 
 
 
 
 
Balance as of June 30, 2014
85.6

 
0.1

 

 
85.7

Total CDK Stockholders' Equity
 
 
 
 
 
 
 
Balance as of June 30, 2014
1,790.2

 
7.7

 

 
1,797.9

Noncontrolling Interest
 
 
 
 
 
 
 
Balance as of June 30, 2014

 

 
11.4

 
11.4

Total Equity
 
 
 
 
 
 
 
Balance as of June 30, 2014
$
1,790.2

 
7.7

 
$
11.4

 
$
1,809.3

E. Significant Accounting Policies
Revenue Recognition. Revenue is generated from software licenses, hosting arrangements, hardware sales and leases, support and maintenance, professional services, advertising and digital marketing, as well as certain transactional services.

13


The Company recognizes software related revenue (on-site) in accordance with the provisions of ASC 985-605, “Software-Revenue Recognition,” and non-software related revenue, upfront hardware sales, and software delivered under a hosted model in accordance with ASC 605, "Revenue Recognition."
In general, revenue is recognized when all of the following criteria have been met:
persuasive evidence of an arrangement exists;
delivery has occurred or services have been rendered;
fees are fixed or determinable; and
collection of the revenue is reasonably assured.
The following are the Company’s major components of revenue:
Bundled sales of DMS and integrated solutions. In the Automotive Retail North America and Automotive Retail International segments, the Company receives fees for product installation, monthly fees for software licenses, ongoing software support and maintenance of DMS and other integrated solutions that are either hosted by the Company or installed on-site at the client’s location. The 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 client acceptance has occurred, and collectability of a determinable amount is probable. In the case of hosted applications, the client does not have the contractual right to take possession of the software and the items delivered at the outset of the contract (e.g., installation, training, etc.) do not have value to the client without the software license and ongoing support and maintenance. Any upfront fees charged in the case of hosted arrangements are recognized ratably over the expected benefit period of the arrangement, typically five years. The unrecognized portion of these revenue elements is recorded as deferred revenue.
The Company also offers various hardware elements in connection with DMS and integrated solution sales, which in some instances are considered sales-type leases under ASC 840. Revenue related to leased hardware is recognized upon installation and a receivable is recorded based on the present value of the minimum lease payments at the beginning of the lease term.
Transactional revenues. The Company receives revenues on a fee per transaction processed basis in connection with providing auto retailers interfaces with third parties to process credit reports, vehicle registrations, data updates, and Internet sales leads. Transactional revenues are recorded in accordance with ASC 605. Delivery occurs at the time the services are rendered. Transactional revenues are recorded in revenues gross of costs incurred for credit report processing, vehicle registrations, and Internet sales leads as the Company is contractually responsible for providing the service, software, and/or connectivity to the clients, and therefore, the Company is the primary obligor under ASC 605.
Digital Marketing services. The Company receives revenues from the placement of advertising for clients and providing websites and related advertising and marketing services. Digital marketing revenues are recorded in accordance with ASC 605 as delivery occurs at the time the services are rendered.
Deferred Costs. Costs to deliver services are expensed to cost of revenues as incurred with the exception of specific costs directly related to transition or installation activities, including the payroll related costs for 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 revenue is recognized as revenue. Deferred amounts are monitored regularly for impairment. Impairment losses are recorded when projected remaining undiscounted operating cash flows of the related contracts are not sufficient to recover the carrying amount of the contract assets. Current deferred costs classified within other current assets on the consolidated and combined balance sheets were $116.4 million and $120.3 million as of March 31, 2015 and June 30, 2014, respectively. Long-term deferred costs classified within other assets on the consolidated and combined balance sheets were $162.2 million and $166.8 million as of March 31, 2015 and June 30, 2014, respectively.
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

14


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 $43.3 million and $41.5 million for the three months ended March 31, 2015 and 2014, respectively, and $127.2 million and $123.4 million for the nine months ended March 31, 2015 and 2014, respectively. These expenses were classified within cost of revenues on the consolidated and combined statements of operations.
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 are reflected in the consolidated and combined balance sheets at cost, which approximates fair value due to the short-term nature of these instruments. The carrying value of the Company's term loan facility (as described in Note 5), 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 our senior notes as of March 31, 2015 was $764.4 million based on quoted market prices for the same or similar instruments and the carrying value was $750.0 million. The term loan facility and senior notes are considered Level 2 fair value measurements in the fair value hierarchy.


Note 2. New Accounting Pronouncements
Recently Issued Accounting Pronouncements    
In April 2015, the FASB issued ASU 2015-03, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs." ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that liability, consistent with debt discounts. ASU 2015-03 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2015. The adoption of ASU 2015-03 will result in a reclassification of our deferred financing costs from other assets to long-term debt within the balance sheet.
In June 2014, the FASB issued ASU 2014-12, "Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period." ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU 2014-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. The adoption of ASU 2014-12 will not have an impact on the Company's consolidated results of operations, financial condition, or cash flows.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 requires an entity to recognize revenue depicting the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will also result in enhanced revenue related disclosures. ASU 2014-09 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2016. The Company has not yet determined the impact of ASU 2014-09 on its consolidated results of operations, financial condition, or cash flows.
In April 2014, the FASB issued ASU 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” ASU 2014-08 requires that a disposal representing a strategic shift that has (or will have) a major effect on an entity’s financial results or a business activity classified as held for sale should be reported as discontinued operations. ASU 2014-08 also expands the disclosure requirements for discontinued operations and adds new disclosures for individually significant dispositions that do not qualify as discontinued operations. ASU 2014-08 is effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2014. The impact of ASU 2014-08 is dependent upon the nature of dispositions, if any, after adoption.

15


Recently Adopted Accounting Pronouncements
In November 2014, the FASB issued and the Company adopted ASU 2014-17, "Business Combinations (Topic 805): Pushdown Accounting." ASU 2014-17 provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. An acquired entity will have the option to elect to apply pushdown accounting in a subsequent reporting period to the acquired entity's most recent change-in-control event. In connection with the FASB's issuance of ASU 2014-17, the SEC rescinded Staff Accounting Bulletin ("SAB") Topic 5.J, "New Basis of Accounting Required in Certain Circumstances." All entities, including SEC registrants, will apply ASU 2014-17 for guidance on the use of pushdown accounting. ASU 2014-17 is effective immediately. The adoption of ASU 2014-17 did not have an impact on the Company's consolidated and combined results of operations, financial condition, or cash flows.
In July 2014, the Company adopted ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” ASU 2013-11 requires netting of unrecognized tax benefits against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax position. The adoption of ASU 2013-11 did not have a material impact on the Company’s consolidated and combined results of operations, financial condition, or cash flows.

Note 3. Earnings per Share
The numerator for both basic and diluted earnings per share is net earnings attributable to CDK. The denominator for basic and diluted earnings per share is based upon the number of weighted average shares of the Company's common stock outstanding during the reporting periods. Diluted earnings per share also reflects the dilutive effect of unexercised in-the-money stock options and unvested restricted stock. On September 30, 2014, ADP shareholders of record as of the close of business on September 24, 2014 received one share of the Company's common stock for every three shares of ADP common stock held as of the record date. For all periods prior to the Distribution, basic and diluted earnings per share were computed using the number of shares of the Company's stock outstanding on September 30, 2014, the date on which the Company's common stock was distributed to the shareholders of ADP. The same number of shares was used to calculate basic and diluted earnings per share for the three and nine months ended March 31, 2014 since there were no dilutive securities until after the Distribution.
Holders of certain stock-based compensation awards are eligible to receive dividends as described in Note 6. Net earnings allocated to participating securities were not significant for the three and nine months ended March 31, 2015.
The following table summarizes the components of basic and diluted earnings per share:
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,

2015

2014

2015
 
2014
Net earnings attributable to CDK
$
56.3

 
$
69.6

 
$
137.7

 
$
176.0










 
 
Weighted-average shares outstanding:








 
 
Basic
160.6


160.6


160.7

 
160.6

Effect of employee stock options
0.7




0.4

 

Effect of employee restricted stock
0.6




0.4

 

Diluted
161.9


160.6


161.5

 
160.6










 
 
Basic earnings attributable to CDK per share
$
0.35


$
0.43


$
0.86

 
$
1.10

Diluted earnings attributable to CDK per share
$
0.35


$
0.43


$
0.85

 
$
1.10


Options to purchase 0.3 million shares of common stock for both the three and nine months ended March 31, 2015, respectively, have been excluded from the calculation of diluted earnings per share because their exercise prices exceeded the average market price of outstanding common shares for the respective periods.



16



Note 4. Goodwill and Intangible Assets, Net
Changes in goodwill for the nine months ended March 31, 2015 were as follows:
 
Automotive Retail North America
 
Automotive Retail International
 
Digital Marketing
 
Total
Balance as of June 30, 2014
$
400.1

 
$
454.7

 
$
376.1

 
$
1,230.9

Currency translation adjustments
(3.4
)
 
(58.4
)
 

 
(61.8
)
Balance as of March 31, 2015
$
396.7

 
$
396.3

 
$
376.1

 
$
1,169.1

Components of intangible assets, net were as follows:
 
March 31,
 
June 30,
 
2015
 
2014
 
Original Cost
 
Accumulated Amortization
 
Intangible Assets, net
 
Original Cost
 
Accumulated Amortization
 
Intangible Assets, net
Software
$
110.3

 
$
(94.0
)
 
$
16.3

 
$
103.9

 
$
(87.4
)
 
$
16.5

Client lists
215.0

 
(131.4
)
 
83.6

 
222.1

 
(124.5
)
 
97.6

Trademarks
27.0

 
(23.8
)
 
3.2

 
27.1

 
(7.4
)
 
19.7

Other intangibles
2.4

 
(2.4
)
 

 
6.0

 
(6.0
)
 

 
$
354.7

 
$
(251.6
)
 
$
103.1

 
$
359.1

 
$
(225.3
)
 
$
133.8

    
In October 2014 following the Company's separation from ADP, the Company evaluated its branding strategy and the trademark names under which each of its businesses will operate. The Company determined that the Cobalt trademark used by the Digital Marketing segment will no longer be used. Therefore, the Company revised the estimated useful life assigned to the Cobalt trademark. The Company recognized accelerated amortization on the trademark of $15.6 million in cost of revenues during the nine months ended March 31, 2015. The effect of this change in estimate on both basic and diluted earnings per share, net of the related tax effect, was $0.06 for the nine months ended March 31, 2015.
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 (3 years for software and software licenses, 7 years for customer contracts and lists, and 10 years for trademarks). Amortization of intangible assets was $7.0 million and $7.1 million for the three months ended March 31, 2015 and 2014, respectively, and $37.5 million and $21.5 million for the nine months ended March 31, 2015 and 2014, respectively.
Estimated amortization expenses of the Company's existing intangible assets as of March 31, 2015 were as follows:
 
Amount
Three months ending June 30, 2015
$
7.2

Twelve months ending June 30, 2016
24.4

Twelve months ending June 30, 2017
18.6

Twelve months ending June 30, 2018
15.2

Twelve months ending June 30, 2019
9.0

Twelve months ending June 30, 2020
7.8

Thereafter
20.9

 
$
103.1

    


17



Note 5. Debt
Debt comprised of the following as of March 31, 2015 and June 30, 2014:
 
March 31, 2015
 
June 30, 2014
Revolving credit facility
$

 
$

Term loan facility
243.8

 

3.30% senior notes, due 2019
250.0

 

4.50% senior notes, due 2024
500.0

 

Total debt
993.8

 

Current maturities of long-term debt
12.5

 

Total long-term debt
$
981.3

 
$

On September 16, 2014, the Company entered into (i) a five-year $300.0 million senior unsecured revolving credit facility (the "revolving credit facility"), which was undrawn as of March 31, 2015, and (ii) a five-year $250.0 million senior unsecured term loan facility (the "term loan facility"). The Company's revolving credit facility and term loan facility are referred together as the "Credit Facilities." The Company also entered into a $750.0 million senior unsecured bridge loan facility (the "bridge loan facility") on September 16, 2014. On September 30, 2014, the proceeds from the term loan facility and the bridge loan facility were used to pay ADP a cash dividend of $825.0 million, fees and expenses related to the Distribution, and fees related to the entry into the Credit Facilities and the bridge loan facility.
On October 14, 2014, the Company completed an offering of 3.30% senior notes with a $250.0 million aggregate principal amount due in 2019 (the "2019 notes") and 4.50% senior notes with a $500.0 million aggregate principal amount due in 2024 (the "2024 notes" and together with the 2019 notes, the "senior notes"). The net proceeds from the offering, together with cash on hand, were used to repay the bridge loan facility.    
Revolving Credit Facility
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 Sterling. In addition, the revolving credit facility contains an accordion feature that allows for an increase in the available borrowing capacity under the revolving credit facility of up to $100.0 million, subject to the agreement of lenders under the revolving credit facility or other financial institutions that become lenders to extend commitments as part of the increased revolving credit facility. Borrowings under the revolving credit facility are available for general corporate purposes. The revolving credit facility will mature on September 30, 2019, subject to no more than two one-year extensions if lenders holding a majority of the revolving commitments approve such extensions.
The revolving credit facility is unsecured and loans thereunder bear interest, at the Company's option, at (a) the rate at which deposits in the applicable currency are offered in the London interbank market (or, in the case of borrowings in Euro, the European interbank market) plus margins varying from 1.125% to 2.000% per annum based on the Company's senior, unsecured non-credit-enhanced, long-term debt ratings from Standard & Poor's Ratings Group and Moody's Investors Services Inc. (the "Ratings") or (b) solely in the case of U.S. dollar loans, (i) the highest of (A) the prime rate of JPMorgan Chase Bank, N.A., (B) a rate equal to the average of the overnight federal funds rate with a maturity of one day plus a margin of 0.500% per annum and (C) the rate at which dollar deposits are offered in the London interbank market for a one-month interest period plus 1.000% plus (ii) margins varying from 0.125% to 1.000% per annum based on the Ratings. The unused portion of the revolving credit facility is subject to commitment fees ranging from 0.125% to 0.350% per annum based on the Ratings.
Term Loan Facility
The Company had $243.8 million of borrowings outstanding under the term loan facility as of March 31, 2015. The term loan facility will mature on September 16, 2019. The term loan facility is subject to amortization in equal quarterly installments of 1.25% of the aggregate principal amount of the term loans made on the closing date, with any unpaid principal amount to be due and payable on the maturity date.
The term loan facility is unsecured and loans thereunder bear interest at the same rates as are applicable to dollar loans under the revolving credit facility. The interest rate per annum on the term loan facility was 1.68% as of March 31, 2015.

18



Restrictive Covenants and Other Matters
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 agreement also has, 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 that (i) the ratio of total consolidated indebtedness to consolidated EBITDA shall not exceed 3.50 to 1.00 and (ii) the ratio of consolidated EBITDA to consolidated interest expense shall be a minimum of 3.00 to 1.00.
Senior Notes
The issuance price of the senior notes was equal to the stated value. Interest is payable semi-annually on April 15 and October 15 of each year, commencing on April 15, 2015. The interest rate payable on each applicable series of senior notes is subject to adjustment from time to time if the credit ratings assigned to any series of senior notes by the rating agencies is downgraded (or subsequently upgraded). The 2019 notes will mature on October 15, 2019 and the 2024 notes will mature on October 15, 2024. The senior notes were offered to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. The senior notes are general unsecured obligations of the Company and are not guaranteed by any of the Company's subsidiaries.
The senior notes rank equally in right of payment with the Company's existing and future unsecured unsubordinated obligations, including the Credit Facilities. The senior notes contain covenants restricting our ability to incur additional indebtedness secured by liens, engage in sale/leaseback transactions, and merge, consolidate, or transfer all or substantially all of our assets.
The senior notes are redeemable at the Company's option prior to September 15, 2019 for the 2019 notes and prior to July 15, 2024 for the 2024 notes at a redemption price equal to the greater of (i) 100% of the aggregate principal amount of the senior 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. 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 connection with the issuance of the senior notes, the Company entered into registration rights agreements whereby the Company agreed to use commercially reasonable efforts to file an exchange offer registration statement to exchange the senior notes for a new issue of substantially identical debt securities registered under the Securities Act. The Company has also agreed to use commercially reasonable efforts to file a shelf registration statement to cover resales of the senior notes under certain circumstances (as defined in the registration rights agreements). If the exchange offer is not completed or a shelf registration statement, if required under the registration rights agreements, does not become effective by October 14, 2015, the interest rate on the senior notes will be increased by (i) 0.25% per annum for the first 90-day period following October 14, 2015, and (ii) an additional 0.25% per annum thereafter until the exchange offer is completed, the shelf registration statement, if required, becomes effective or the senior notes of the applicable series become freely tradable. In the event that the Company receives a shelf registration request and the shelf registration statement required to be filed does not become effective by the later of October 14, 2015 and 90 days after the delivery of such shelf registration request, the interest rate on the senior notes will be increased by (i) 0.25% per annum for the first 90-day period following the shelf registration request, and (ii) an additional 0.25% per annum thereafter until the shelf registration statement becomes effective or the senior notes become freely tradable. The maximum additional interest the Company could be required to pay to the note holders under the registration payment arrangement as of March 31, 2015 is $27.4 million. As of March 31, 2015, no liability for such registration payment arrangement has been recorded as it is not considered probable that additional interest will be paid under the registration rights.

19



The Company's aggregate scheduled maturities of the long-term debt as of March 31, 2015 were as follows:
 
Amount
Twelve months ended March 31, 2016
$
12.5

Twelve months ended March 31, 2017
12.5

Twelve months ended March 31, 2018
12.5

Twelve months ended March 31, 2019
12.5

Twelve months ended March 31, 2020
443.8

Thereafter
500.0

 
$
993.8


Note 6. Stock Based Compensation
Incentive Equity Awards Converted from ADP Awards
On October 1, 2014, ADP's outstanding equity awards for employees of the Company were converted into equity awards of CDK at a ratio of 2.757 CDK equity awards for every ADP equity award held prior to the spin-off. The converted equity awards have the same terms and conditions as the ADP equity awards. As a result, the Company issued 2.3 million stock options with a weighted average exercise price of $19.64, 0.7 million time-based restricted shares, and 0.2 million performance-based restricted shares upon completion of the conversion of existing ADP equity awards into the Company's equity awards. As the conversion was considered a modification of an award in accordance with ASC 718, "Compensation - Stock Compensation," the Company compared the fair value of the award immediately prior to the Distribution to the fair value immediately after the Distribution to measure the incremental compensation cost. The fair values immediately prior to and after Distribution were estimated using a binomial option pricing model. The conversion resulted in an increase in the fair value of the awards by $1.4 million, of which $1.0 million was recognized from the date of Distribution to March 31, 2015 and the remaining $0.4 million will be recognized in net earnings prospectively.    
Incentive Equity Awards Granted by the Company
Prior to the Distribution, the Company adopted the 2014 Omnibus Award Plan ("2014 Plan"). The 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.
Prior to the Distribution, all employee equity awards (stock options and restricted stock) were granted by ADP. All subsequent 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. Stock-based compensation primarily consisted of the following for the three and nine months ended March 31, 2015 and 2014:
Stock Options. Stock options are granted to employees at exercise prices equal to the fair market value of the Company's common stock on the date of grant. Stock options are issued under a graded vesting schedule with a term of ten years. Compensation expense is measured based on the fair value of the stock option on the grant date and recognized over the requisite service period for each separately vesting portion of the stock option award. Stock options are forfeited if the employee ceases to be employed by the Company prior to vesting.
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. Awards are forfeited if the employee ceases to be employed by the Company prior to vesting.
Time-based restricted stock cannot be transferred during the vesting period. Compensation expense relating to the issuance of time-based restricted stock is measured based on the fair value of the award on the grant date and recognized on a straight-line basis over the vesting period. Employees are eligible to receive dividends on the CDK shares awarded under the time-based restricted stock program.

20



Time-based restricted stock units are settled in cash. Compensation expense relating to the issuance of time-based restricted stock units 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 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.
Performance-Based Restricted Stock and Performance-Based Restricted Stock Units. Performance-based restricted stock and performance-based restricted stock units generally vest over a one- to three-year performance period and subsequent to a service period of up to 26 months. 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 150% of the "target awards." Awards are forfeited if the employee ceases to be employed by the Company prior to vesting.
Performance-based restricted stock cannot be transferred during the vesting period. Compensation expense relating to the issuance of performance-based restricted stock is measured based upon the fair value of the award on the grant date and recognized on a straight-line basis over the vesting period, based upon the probability that the performance target will be met. After the performance period, if the performance targets are achieved, employees are eligible to receive dividends on the CDK shares awarded under the performance-based restricted stock program.
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 relating to the issuance of performance-based restricted stock units settled in cash is recorded over the vesting period, is initially based on the fair value of the award on the grant date, and is subsequently remeasured at each reporting date to the current stock value during the one-year performance period, based upon the probability that the performance target will be met. Compensation expense relating 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. Dividend equivalents are paid on awards settled in stock under the performance-based restricted stock unit program.
The following table represents stock-based compensation expense and related income tax benefits for the three and nine months ended March 31, 2015 and 2014, respectively:
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
 
2015
 
2014
 
2015
 
2014
Cost of revenues
$
2.0

 
$
1.7

 
$
5.8

 
$
4.9

Selling, general and administrative expenses
6.6

 
3.5

 
16.2

 
10.1

Total pretax stock-based compensation expense
$
8.6

 
$
5.2

 
$
22.0

 
$
15.0

 
 
 
 
 
 
 
 
Income tax benefit
$
2.9

 
$
1.9

 
$
7.8

 
$
5.5

Stock-based compensation expense for the nine months ended March 31, 2015 consists of $12.4 million of expense related to equity classified awards, $4.2 million of expense related to liability classified awards, and $5.4 million of expense allocated from ADP during the three months ended September 30, 2014. As of March 31, 2015, the total unrecognized compensation cost related to non-vested stock options, restricted stock units, and restricted stock awards was $5.3 million, $14.4 million, and $15.3 million, respectively, which will be amortized over the weighted average remaining requisite service periods of 2.0 years, 1.9 years, and 1.5 years, respectively.
The activity related to the Company's incentive equity awards from the date of Distribution to March 31, 2015 consisted of the following:

21



Stock Options
 
Number
of Options
(in thousands)
 
Weighted
Average Exercise Price
(in dollars)
Options outstanding as of June 30, 2014

 
$

Options converted from ADP equity awards
2,269

 
$
19.64

Options granted
397

 
$
41.71

Options exercised
(444
)
 
$
15.95

Options canceled
(18
)
 
$
23.23

Options outstanding as of March 31, 2015
2,204

 
$
24.32

Time-Based Restricted Stock and Time-Based Restricted Stock Units
 
Number of Shares
(in thousands)
 
Number of Units
(in thousands)
Non-vested restricted shares/units as of June 30, 2014

 

Restricted shares/units converted from ADP equity awards
576

 
127

Restricted shares/units granted
513

 
180

Restricted shares/units vested
(52
)
 
(7
)
Restricted shares/units forfeited
(32
)
 
(12
)
Non-vested restricted shares/units as of March 31, 2015
1,005

 
288

Performance-Based Restricted Stock and Performance-Based Restricted Stock Units
 
Number of Shares
(in thousands)
 
Number of Units
(in thousands)
Non-vested restricted shares/units as of June 30, 2014

 

Restricted shares/units converted from ADP equity awards
70

 
89

Restricted shares/units granted

 
132

Restricted shares/units vested

 

Restricted shares/units forfeited

 

Non-vested restricted shares/units as of March 31, 2015
70

 
221

The fair value of each stock option issued was estimated on the date of grant using the binomial option pricing model. The binomial model considers a range of assumptions related to volatility, risk-free interest rates, and employee exercise behavior. Expected volatilities utilized in the model were based on a combination of implied market volatilities and other factors. The dividend yield was based on expected future dividend payments. The risk-free rate was derived from the U.S. Treasury yield curve in effect at the time of grant. The model also incorporates exercise and forfeiture assumptions based on an analysis of historical data. The expected life of the stock option grants represents the period of time that options granted were expected to be outstanding on the date of grant.
The following table presents the assumptions used to determine the fair value of the outstanding ADP awards converted into equity awards of CDK to measure the incremental compensation cost:
Risk-free interest rate
1.1
%
Dividend yield
1.1
%
Weighted average volatility factor
23.9
%
Weighted average expected life (in years)
3.4

Weighted average fair value (in dollars)
$
12.50


22



The following table presents the assumptions used to determine the fair value of the stock options granted after the date of Distribution through March 31, 2015:
Risk-free interest rate
1.6
%
Dividend yield
1.1
%
Weighted average volatility factor
25.6
%
Weighted average expected life (in years)
6.3

Weighted average fair value (in dollars)
$
10.24



23



Note 7. Income Taxes
Tax Matters Agreement
The Company and ADP entered into a tax matters agreement as part of the Distribution that governs the rights and obligations of both parties after the Distribution with respect to taxes for both pre- and post-Distribution 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-Distribution periods as well as any taxes arising from transactions effected to consummate the Distribution, and the Company generally is required to indemnify ADP for any non-income taxes attributable to the Company's operations for all pre-Distribution periods and for any income taxes attributable to the Company's operations for post-Distribution periods.
The Company is generally required to indemnify ADP against any tax resulting from the Distribution (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 Distribution), (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 Distribution 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.
As of March 31, 2015, the Company recorded a receivable from ADP of $0.9 million and a payable to ADP of $2.8 million under the tax matters agreement. There were no similar amounts receivable from ADP or payable to ADP as of June 30, 2014 as the tax matters agreement was entered into in connection with the Distribution.
On December 19, 2014, the Tax Increase Prevention Act of 2014 was signed into law. Among the changes included in the law is a provision allowing for additional first year depreciation for assets placed into service during calendar year 2014, commonly known as "bonus depreciation." The bonus depreciation provision partially relates to pre-distribution tax periods for which ADP is entitled under the tax law and in accordance with the tax matters agreement to claim additional tax depreciation for assets associated with the Company's business. During the nine months ended March 31, 2015, the Company recorded tax expense of $4.6 million to adjust deferred taxes for the additional tax depreciation to be taken by ADP in pre-distribution tax periods.
Valuation Allowance
The Company had valuation allowances of $3.4 million and $7.1 million as of March 31, 2015 and June 30, 2014, respectively. Valuation allowances are recorded to reduce deferred tax assets when it is more-likely-than-not that a tax benefit will expire unutilized. At the end of each reporting period, the Company reviews the realizability of its deferred tax assets. During the first quarter of fiscal 2015, after considering all available evidence, the Company concluded it was more-likely-than-not that certain future tax benefits would be realized. Therefore, an adjustment of $2.3 million was recorded in the provision for income taxes to reduce the previously recorded valuation allowance.
Unrecognized Income Tax Benefits    
The Company had unrecognized income tax benefits of $1.8 million and $0.2 million as of March 31, 2015 and June 30, 2014, respectively, of which $1.5 million and $0.2 million, respectively, would impact the effective tax rate if recognized. During the nine months ended March 31, 2015, the Company increased its unrecognized income tax benefits related to prior period tax positions by $0.9 million for facts that now indicate the extent to which certain tax positions are more-likely-than-not of being sustained.
Provision for Income Taxes    
The effective tax rate for the three months ended March 31, 2015 and 2014 was 36.0% and 29.0%, respectively. The effective tax rate for the three months ended March 31, 2014 was favorably impacted by a tax benefit associated with a valuation allowance adjustment of $7.2 million.

24



The effective tax rate for the nine months ended March 31, 2015 and 2014 was 38.3% and 32.4%, respectively. The effective tax rate for the nine months ended March 31, 2015 was unfavorably impacted by certain separation costs that were not tax deductible and $4.6 million of tax expense associated with the tax law change for bonus depreciation, offset by tax benefits associated with a valuation allowance adjustment and the resolution of certain tax matters. The effective tax rate for the nine months ended March 31, 2014 was favorably impacted by tax benefits associated with adjustments to the valuation allowance of $7.2 million and the Company's liability for uncertain tax matters of $3.6 million.

Note 8. 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.

Note 9. Accumulated Other Comprehensive Income ("AOCI")
Comprehensive income is a measure of income that includes both net earnings and other comprehensive (loss) income. Other comprehensive (loss) income results from items deferred on the consolidated and combined balance sheets in stockholders' equity. The Company's other comprehensive (loss) income for the three and nine months ended March 31, 2015 and 2014 and AOCI balances as of March 31, 2015 and June 30, 2014 were comprised solely of currency translation adjustments. Other comprehensive (loss) income was $(23.2) million and $6.4 million for the three months ended March 31, 2015 and 2014, respectively, and was $(40.1) million and $30.4 million for the nine months ended March 31, 2015 and 2014, respectively. The accumulated balances reported in AOCI on the consolidated and combined balance sheets for currency translation adjustments were $45.6 million and $85.7 million as of March 31, 2015 and June 30, 2014, respectively.

Note 10. Transactions with ADP
Prior to the Distribution, the Company entered into a transition services agreement with ADP to provide for an orderly transition to being an independent company. Among the principal services to be provided by ADP to the Company are operational and administrative infrastructure-related services, such as use of the e-mail domain “adp.com,” facilities sharing, procurement support, tax, human resources administrative services and services related to back office support and software development in ADP's Indian facilities. Among the principal services to be provided by the Company to ADP are operational and administrative infrastructure-related services, such as facilities sharing and human resources administrative services. The agreement will expire and services under it will cease no later than one year following the Distribution date or sooner in the event the Company no longer requires such services.
The Company entered into a data services agreement with ADP prior to the Distribution under which ADP will provide the Company with certain data center sharing services relating to the provision of information technology, platform support, hosting and network services. The term of the agreement will expire two years after the Distribution date.
The Company entered into an intellectual property transfer agreement with ADP prior to the Distribution under which ADP assigned to the Company certain patents, trademarks, copyrights and other intellectual property developed or owned by ADP or certain of its subsidiaries and with respect to which the Company is the primary or exclusive user today or the anticipated primary or exclusive user in the future. The term of the agreement is perpetual after the Distribution date.
The Company also entered into an employee matters agreement with ADP prior to the Distribution pursuant to which certain employee benefit matters will be addressed, such as the treatment of ADP options held by Company employees after the separation and the treatment of benefits for Company management employees who participate in and have accrued benefits under the ADP Supplemental Officers Retirement Plan. The agreement also, to the extent provided therein, delineates the benefit plans and programs in which the Company's employees participate following the Distribution. ADP will remain responsible for the payment of all benefits under the ADP plans.

25


For the period from the date of Distribution to March 31, 2015, the Company recorded $12.9 million of expense related to the transition services agreement and $6.8 million of expense related to the data services agreement in the accompanying financial statements. As of March 31, 2015, the Company had amounts payable to ADP under the transition services and data services agreements of $8.3 million. There were no similar amounts payable to ADP as of June 30, 2014 as these agreements were entered into in connection with the Distribution.
  
Note 11. Interim Financial Data by Segment
The Company manages its business operations through strategic business units. The Company's reportable segments represent its strategic business units, or operating segments, which include: Automotive Retail North America, Automotive Retail International, and Digital Marketing. 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, separation costs, interest expense, and certain unallocated expenses. Certain expenses are charged to the reportable segments at a standard rate for management reasons. Other costs are recorded based on management responsibility. Reportable segment revenues and earnings before income taxes for the three and nine months ended March 31, 2014 have been adjusted to reflect updated budgeted foreign exchange rates for the fiscal year ending June 30, 2015. This adjustment is made for management reporting purposes so that the reportable revenues and earnings before taxes for each segment are presented on a consistent basis without the impact of fluctuations in foreign currency exchange rates. This adjustment is a reconciling item to revenues and earnings before income taxes in order to eliminate the adjustment in consolidation.
Segment results:
 
Revenues
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
 
2015
 
2014
 
2015
 
2014
Automotive Retail North America
$
347.3

 
$
321.5

 
$
1,007.0

 
$
948.5

Automotive Retail International
87.6

 
85.2

 
261.7

 
255.2

Digital Marketing
106.2

 
95.9

 
315.2

 
272.6

Foreign Exchange
(14.7
)
 
(1.5
)
 
(23.5
)
 
(5.4
)
Total
$
526.4

 
$
501.1

 
$
1,560.4

 
$
1,470.9

  
 
Earnings before Income Taxes
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
 
2015
 
2014
 
2015
 
2014
Automotive Retail North America
$
103.2

 
$
100.3

 
$
290.4

 
$
264.7

Automotive Retail International
13.0

 
12.5

 
41.5

 
37.0

Digital Marketing (a)
10.9

 
5.6

 
14.9

 
17.7

Other (b)
(33.7
)
 
(17.7
)
 
(110.1
)
 
(51.6
)
Foreign Exchange
(2.4
)
 
(0.2
)
 
(4.1
)
 
0.3

Total
$
91.0

 
$
100.5

 
$
232.6

 
$
268.1


(a) Digital Marketing includes $15.6 million of accelerated amortization during the nine months ended March 31, 2015 attributable to the Cobalt trademark.

(b) Other includes $0.6 million and $34.6 million of separation costs for the three and nine months ended March 31, 2015, respectively. The Company did not incur any separation costs during the three and nine months ended March 31, 2014.

26



Note 12. Subsequent Events
On April 2, 2015, the Company, through its majority owned subsidiary, CVR, acquired AVRS, Inc. ("AVRS"), a provider of electronic vehicle registration software in California. The acquisition was made pursuant to an agreement of merger, which contains customary representations, warranties, covenants, and indemnities by the sellers and CVR. CVR acquired all of the outstanding stock of AVRS for approximately $50.0 million, which includes contingent consideration payable upon the satisfaction of specified conditions. The acquisition was funded with cash on hand. The Company is still gathering information necessary to perform the allocation of the purchase price to the fair value of assets acquired and liabilities assumed; therefore, disclosure of this information is impracticable at this time.

    


27


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
(Tabular dollars are presented in millions)

FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q and other written or oral statements made from time to time by CDK Global, Inc. ("CDK" or the "Company") may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are not historical in nature, and which may be identified by the use of words like “expects,” “assumes,” “projects,” “anticipates,” “estimates,” “we believe,” “could” and other words of similar meaning, are forward-looking statements. In particular, information appearing under “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes forward-looking statements. These statements are based on management's expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ materially from those expressed. Factors that could cause actual results to differ materially from those contemplated by the forward-looking statements include:
the Company's success in obtaining, retaining and selling additional services to clients;
the pricing of our products and services;
overall market and economic conditions, including interest rate and foreign currency trends;
competitive conditions;
auto sales and related industry changes;
employment and wage levels;
changes in regulation;
changes in technology;
availability of capital for the payment of dividends or the repurchase of shares;
availability of skilled technical employees/labor/personnel; and
the impact of new acquisitions and divestitures.
There may be other factors that may cause our actual results to differ materially from the forward-looking statements. Our actual results, performance or achievements could differ materially from those expressed in, or implied by, the forward-looking statements. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition. You should carefully read the factors described in the “Risk Factors” under “Item 1A. Risk Factors” of our Registration Statement on Form 10 (the “Form 10”) and in this Quarterly Report on Form 10-Q under “Item 1A. Risk Factors,” for a description of certain risks that could, among other things, cause our actual results to differ from these forward-looking statements.
All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q and the Form 10. We disclaim any obligation to update or revise forward-looking statements that may be made to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events, other than as required by law.
The following discussion should be read in conjunction with our condensed consolidated and combined financial statements and accompanying notes thereto included elsewhere herein. In this Quarterly Report on Form 10-Q, all references to "we," "our," and "us" refer collectively to CDK and its consolidated subsidiaries.
RESULTS OF OPERATIONS
Executive Overview
We are the largest global provider, both in terms of revenue and geographic reach, of integrated technology and digital marketing/advertising solutions to the automotive retail industry. We have over 40 years of experience in innovating, designing, and implementing solutions for automotive retailers and original equipment manufacturers ("OEMs") to better manage, analyze and grow their businesses. Our solutions automate and integrate critical workflow processes from pre-sale targeted advertising and marketing campaigns to the sale, financing, insurance, parts supply, repair and maintenance of vehicles, with an increasing

28



focus on utilizing big data analytics and predictive intelligence. We believe the breadth of our integrated solutions allows us to more comprehensively address the varied needs of automotive retailers than any other single competitor in our industry.
Our solutions address the entire breadth of the automotive retailers’ value chain. Our automotive retail solutions offer technology that helps manage and generate additional efficiency on the supply side of the industry. These solutions were built through decades of innovation and experience in helping our clients with all aspects of the automotive retail process. We also offer digital marketing solutions to enable our clients to create demand for their products by designing and managing complete digital marketing and advertising strategies for their businesses. These solutions allow our clients to plan and automate sophisticated marketing campaigns, gather comprehensive data on these campaigns and further refine their strategies to maximize the effectiveness of their advertising spend.
We are organized into three reportable segments: Automotive Retail North America (“ARNA”), Automotive Retail International (“ARI”), and Digital Marketing (“DM”). A brief description of each of these three segments’ operations is provided below.
Automotive Retail North America
Through our ARNA segment, we provide technology-based solutions that help automotive retailers, OEMs, and other industry participants manage the sale, financing, insurance, parts supply, repair and maintenance of vehicles. Our solutions help our clients streamline their operations, better target and serve their customers and enhance the financial performance of their retail operations. In addition to providing solutions to retailers and manufacturers of automobiles, minivans, light trucks and sport utility vehicles, we also provide solutions to retailers and manufacturers of heavy trucks, construction equipment, agricultural equipment, motorcycles, boats and other marine vehicles and recreational vehicles.
Automotive Retail International
Through our ARI segment, we provide technology-based solutions similar to those provided in our ARNA segment in approximately 100 countries outside of the United States and Canada. The solutions provided to our clients within the ARI segment of our business help streamline operations for their businesses and enhance the financial performance of their operations within their local marketplace, and in some cases where we deal directly with OEMs, across international borders. Clients of our ARI segment include automotive retail dealers and OEMs across Europe, the Middle East, Asia, Africa and Latin America.
Digital Marketing
Through our DM segment, we provide a suite of integrated digital marketing solutions for OEMs and automotive retailers, including websites and management of their digital advertising spend. These solutions provide a coordinated offering across multiple digital marketing channels to help achieve client marketing and sales objectives, and coordinate execution between OEMs and their retailer networks. Our solutions are currently provided in the United States, Canada, Mexico, Australia, and New Zealand.
Factors Affecting Comparability of Financial Results
Our Separation from ADP
On April 9, 2014, the board of directors of Automatic Data Processing, Inc. (“ADP” or the “Parent”) approved the spin-off of the Dealer Services business of ADP ("Dealer Services"). On May 6, 2014, in preparation of the spin-off, ADP formed Dealer Services Holdings LLC, a Delaware limited liability company, to hold Dealer Services. On September 1, 2014, Dealer Services Holdings LLC was renamed CDK Global Holdings, LLC. On September 29, 2014, immediately prior to the spin-off, CDK Global Holdings, LLC converted to CDK Global, Inc. On September 30, 2014 (the "Separation Date"), the spin-off became effective and ADP distributed 100% of the common stock of the Company to the holders of record of ADP's common stock as of September 24, 2014 (the "Distribution"). The Distribution was made pursuant to a Separation and Distribution Agreement by which ADP contributed the subsidiaries that operated the Dealer Services business to the Company. The Distribution is expected to be a tax-free transaction under Section 355 and other related provisions of the Internal Revenue Code of 1986, as amended.

29



Historical ADP Cost Allocations Versus CDK as a Stand-alone Company
Our historical consolidated and combined financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). These financial statements include the combined financial position and results of operations of the Dealer Services business of ADP, which were the subject of the Distribution. The consolidated and combined financial statements include allocated costs for facilities, functions and services used by the Dealer Services business at shared ADP sites and costs for certain functions and services performed by centralized ADP organizations and directly charged to the Dealer Services business based on usage.
Specifically, these costs were allocated by ADP to the Company as follows:
cost of certain systems, such as for procurement and expense management, which were supported by ADP’s corporate information technology group, were allocated based on the approximate usage of information technology systems by CDK in relation to ADP’s total usage;
corporate human resources costs were allocated based on the estimated percentage of usage by CDK, including benefits, recruiting, global learning and development, employee relocation services and other human resources shared services;
travel department costs were allocated based on the estimated percentage of travel directly related to CDK;
security department costs were allocated based on the estimated percentage of usage of security for CDK in relation to ADP’s total security usage;
real estate department costs were allocated based on the estimated percentage of square footage of facilities for CDK that were managed by the ADP corporate real estate department in relation to ADP’s total managed facilities; and
all other allocations were based on an estimated percentage of support staff time related to CDK in comparison to ADP as a whole.
Although we believe these allocation methods are reasonable, we also believe, for the reasons discussed below, that the historical allocation of ADP's expenses to the Company may be significantly less than the actual costs we will incur as an independent public company.
Size and influence of ADP. We generally benefited from the size of ADP in negotiating many of our overhead costs and were able to leverage the ADP business as a whole in obtaining favorable pricing. ADP is a larger company than we are and, as such, is capable of negotiating large volume discounts. As a stand-alone company, we will also be seeking discounts, but our discounts may be less favorable because of lower volumes.
Shared corporate overhead. As a division of ADP, we were historically managed by the senior management of ADP. Moreover, ADP performed all public company obligations, including:
compensation of corporate headquarters management and of directors;
corporate finance functions including accounting, treasury, internal audit, investor relations, and tax;
annual meetings of stockholders;
board of directors and committee meetings;
Exchange Act annual, quarterly, and current report preparation and filing, including reports to stockholders;
SEC and stock exchange corporate governance compliance;
stock exchange listing fees and transfer agent fees; and
directors and officers insurance.

30



As an independent public company, these obligations are ours and we bear all of these expenses directly. The historical allocation of ADP’s expenses to the Company may be significantly less than the actual costs we will incur as an independent public company. In addition to public company expenses, other general overhead transactions were handled for us by ADP, such as data center services, which, after the Distribution will still be provided by ADP, but will be transitioned to us by the end of the second year following the Distribution date based on the terms of agreements entered into with ADP.
New Financing
We entered into new debt financing arrangements in connection with the Distribution. At the time of the Distribution, we borrowed $250.0 million under our term loan facility and $750.0 million under our bridge loan facility, the proceeds of which were used to pay ADP a cash dividend. Additionally, we entered into a $300.0 million revolving credit facility, which was undrawn as of March 31, 2015. On October 14, 2014, we completed an offering of 3.30% senior notes with a $250.0 million aggregate principal amount due in 2019 (the "2019 notes") and 4.50% senior notes with a $500.0 million aggregate principal amount due in 2024 (the "2024 notes" and together with the 2019 notes, the "notes"). The issuance price of the senior notes was equal to the stated value. We used net proceeds from the senior notes, together with cash on hand, to repay all outstanding borrowings under the bridge loan facility.
Business Review
We recently initiated a project to review our cost structure and operating efficiency. The intent of this review is to identify ways to enhance our profitability while improving our efficiency and protecting and sustaining our business. This project is in an early stage and the outcome of the project is unknown. We did not incur any material costs associated with this project during the three and nine months ended March 31, 2015.
Sources of Revenues and Expenses
Revenues. We generally receive fee-based revenues by providing services to clients. In our ARNA and ARI segments (together, our “Automotive Retail segments”), we receive fees for software licenses, ongoing software support and maintenance of Dealer Management Systems (“DMS”) and other integrated solutions that are either hosted or installed on-site at the customer’s location. We also receive revenues for installing on-site and hosted DMS solutions and for training and consulting with clients, in addition to monthly fees related to hosting DMS solutions in cases where clients outsource their information technology management activities to the Company. In our ARNA segment, we also receive revenues on a fee per transaction processed basis, where we provide automotive retailers, primarily in the United States, solutions with third parties to process credit reports, vehicle registrations, data updates, and Internet sales leads. In our DM segment, revenue is primarily earned for advertising, search marketing, websites, and reputation management services delivered to automotive retailers and OEMs. We receive monthly recurring fees for services provided and we receive revenues for placement of automotive retail advertising. We also receive revenues for customization services and for training and consulting services in all of our segments.
Expenses. Expenses generally relate to the cost of providing the services to clients in the three business segments. In the Automotive Retail 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, computer hardware, software, telecommunications, transportation, and distribution costs, and other general overhead items. In the DM segment, significant expenses include third-party content for website and other Internet-based offerings such as advertising placements, employee payroll and other labor related costs, the cost of hosting customer websites, computer hardware, software, and other general overhead items. We also have some company-wide expenses attributable to management compensation and corporate overhead.
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 Client Sites. We track the number of client sites that have an active DMS. Consistent with our strategy of growing our Automotive Retail client base, we view the number of client sites purchasing our DMS solutions as an indicator of market penetration for our Automotive Retail segments. Our DMS client site count includes retailers with an active DMS that sell vehicles in the automotive and adjacent markets. Adjacent markets include heavy truck dealerships that provide vehicles to the over-the-road trucking industry; recreation dealerships in the motorcycle, marine and recreational vehicle industries; and heavy equipment dealerships in the agriculture and construction equipment industries. We consider a DMS to be active if we have billed a subscription fee for that solution during the most recently ended calendar month.

31



Average Revenue Per DMS Client Site. Average revenue per Automotive Retail DMS client site is an indicator of the adoption of our solutions by DMS clients, and we monitor changes in this metric to measure the effectiveness of our strategy to deepen our relationships with our current client base through upgrading and expanding solutions and increasing transaction volumes. We calculate average revenue per DMS client site by dividing the monthly applicable revenue generated from our solutions in a period by the average number of DMS client sites in the period.
Websites. For the DM segment, we track the number of websites that we host and develop for our OEM and automotive retail clients as an indicator of business activity. The number of websites as of a specified date is the total number of full function dealer websites or portals that are currently accessible.
Average Revenue Per Website. We monitor changes in our average revenue per website as an indicator of the relative depth of our relationships in our DM segment. We calculate average revenue per website by dividing the monthly revenue generated from our DM solutions in a period, excluding OEM advertising revenues, by the average number of client websites in the period.
OEM Advertising. For the DM segment, we track the amount of advertising revenue generated from OEMs on either a national or regional scale as a measure of our effectiveness in delivering advertising services to the OEM market.
Results of Operations
The following is a discussion of the results of our consolidated and combined operations for the three and nine months ended March 31, 2015 and 2014 ("fiscal 2015" and "fiscal 2014," respectively). For a discussion of our operations by segment, see "Analysis of Reportable Segments."
Our combined results of operations, non-GAAP measures, segment revenues, and segment earnings before income taxes for the three and nine months ended March 31, 2014 have been revised to reflect sales-type lease accounting for certain hardware components of our DMS and integrated solutions, and to reflect the revised presentation of the noncontrolling interest in the earnings of Computerized Vehicle Registration, Inc. ("CVR"). Refer to Note 1 - Basis of Presentation in the accompanying Notes to the unaudited condensed consolidated and combined financial statements.
The table below presents consolidated and combined results of operations for the periods indicated and the dollar change and percentage change between periods:

 
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
March 31,
 
 
 
 
 
March 31,
 
 
 
 
 
2015
 
2014
 
$ Change
 
% Change
 
2015
 
2014
 
$ Change
 
% Change
Revenues
$
526.4

 
$
501.1

 
$
25.3

 
5
 %
 
$
1,560.4

 
$
1,470.9

 
$
89.5

 
6
 %
Cost of revenues
321.8

 
304.9

 
16.9

 
6
 %
 
956.6

 
900.5

 
56.1

 
6
 %
Selling, general and
    administrative costs
105.5

 
96.1

 
9.4

 
10
 %
 
321.9

 
303.4

 
18.5

 
6
 %
Separation costs
0.6

 

 
0.6

 
n/m

 
34.6

 

 
34.6

 
n/m

Total expenses
427.9

 
401.0

 
26.9

 
7
 %
 
1,313.1

 
1,203.9