SEC Filing | CDK Global Inc.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________

FORM 10-Q

______________

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended December 31, 2018

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 every Interactive Data File required to be submitted 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 such files). Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer ý	Accelerated filer o
Non-accelerated filer o	Smaller reporting company o
	Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o

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

The number of shares outstanding of the registrant’s common stock as of January 31, 2019 was 124,712,345.

Table of Contents



		Page
PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Statements of Operations Three and Six months ended December 31, 2018 and 2017	2

	Condensed Consolidated Statements of Comprehensive Income Three and Six months ended December 31, 2018 and 2017	3

	Condensed Consolidated Balance Sheets As of December 31, 2018 and June 30, 2018	4

	Condensed Consolidated Statements of Cash Flows Six months ended December 31, 2018 and 2017	5

	Condensed Consolidated Statements of (Deficit) Equity Six months ended December 31, 2018 and 2017	6

	Notes to the Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	54

Item 4.	Controls and Procedures	54

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	54

Item 1A.	Risk Factors	54

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55

Item 6.	Exhibits	56

	Signatures	57

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

CDK Global, Inc.

Condensed Consolidated Statements of Operations

(In millions, except per share amounts)

(Unaudited)



	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2018			2017			2018			2017
Revenues	$	590.4		$	561.7		$	1,144.9		$	1,127.4

Expenses:
Cost of revenues	309.9			290.8			591.5			598.5
Selling, general and administrative expenses	122.7			122.2			221.0			235.9
Restructuring expenses	3.8			7.6			21.0			14.1
Total expenses	436.4			420.6			833.5			848.5
Operating earnings	154.0			141.1			311.4			278.9

Interest expense	(34.3		)	(23.2		)	(66.5		)	(46.5		)
Other income, net	1.6			2.4			4.2			7.7

Earnings before income taxes	121.3			120.3			249.1			240.1

Provision for income taxes	(30.4		)	(14.1		)	(65.9		)	(50.8		)

Net earnings	90.9			106.2			183.2			189.3
Less: net earnings attributable to noncontrolling interest	1.9			2.2			3.9			4.0
Net earnings attributable to CDK	$	89.0		$	104.0		$	179.3		$	185.3

Net earnings attributable to CDK per common share:
Basic	$	0.70		$	0.76		$	1.40		$	1.34
Diluted	$	0.70		$	0.75		$	1.39		$	1.33

Weighted-average common shares outstanding:
Basic	126.8			136.9			128.2			138.5
Diluted	127.5			138.2			129.1			139.8

See notes to the condensed consolidated financial statements.

CDK Global, Inc.

Condensed Consolidated Statements of Comprehensive Income

(In millions)

(Unaudited)



	Three Months Ended					Six Months Ended
	December 31,					December 31,
	2018			2017		2018			2017
Net earnings	$	90.9		$	106.2	$	183.2		$	189.3
Other comprehensive income (loss):
Currency translation adjustments	(12.1		)	9.9		(18.1		)	24.1
Other comprehensive income (loss)	(12.1		)	9.9		(18.1		)	24.1
Comprehensive income	78.8			116.1		165.1			213.4
Less: comprehensive income attributable to noncontrolling interest	1.9			2.2		3.9			4.0
Comprehensive income attributable to CDK	$	76.9		$	113.9	$	161.2		$	209.4

See notes to the condensed consolidated financial statements.

CDK Global, Inc.

Condensed Consolidated Balance Sheets

(In millions, except per share par value)

(Unaudited)



	December 31,			June 30,
	2018			2018
Assets
Current assets:
Cash and cash equivalents	$	228.7		$	804.4
Accounts receivable, net of allowances of $5.8 and $7.4, respectively	411.6			374.6
Other current assets	126.8			188.3
Total current assets	767.1			1,367.3
Property, plant and equipment, net	139.0			131.9
Other assets	277.8			165.5
Goodwill	1,587.4			1,217.2
Intangible assets, net	245.8			126.5
Total assets	$	3,017.1		$	3,008.4

Liabilities and Stockholders' Deficit
Current liabilities:
Current maturities of long-term debt and capital lease obligations	$	268.0		$	45.2
Accounts payable	36.9			50.5
Accrued expenses and other current liabilities	214.2			198.0
Accrued payroll and payroll-related expenses	60.6			85.7
Short-term deferred revenues	131.0			169.0
Total current liabilities	710.7			548.4
Long-term debt and capital lease obligations	2,592.0			2,575.5
Long-term deferred revenues	68.4			110.4
Deferred income taxes	84.6			56.7
Other liabilities	61.5			64.7
Total liabilities	3,517.2			3,355.7

Stockholders' Deficit:
Preferred stock, $0.01 par value: Authorized, 50.0 shares; issued and outstanding, none	—			—
Common stock, $0.01 par value: Authorized, 650.0 shares; issued, 160.3 and 160.3 shares, respectively; outstanding, 124.7 and 130.1 shares, respectively	1.6			1.6
Additional paid-in-capital	604.8			679.8
Retained earnings	1,003.8			753.0
Treasury stock, at cost: 35.7 and 30.2 shares, respectively	(2,116.5		)	(1,810.7		)
Accumulated other comprehensive income (loss)	(7.0		)	11.5
Total CDK stockholders' deficit	(513.3		)	(364.8		)
Noncontrolling interest	13.2			17.5
Total stockholders' deficit	(500.1		)	(347.3		)
Total liabilities and stockholders' deficit	$	3,017.1		$	3,008.4

See notes to the condensed consolidated financial statements.

CDK Global, Inc.

Condensed Consolidated Statements of Cash Flows

(In millions)

(Unaudited)



	Six Months Ended
	December 31,
	2018			2017
Cash Flows from Operating Activities:
Net earnings	$	183.2		$	189.3
Adjustments to reconcile net earnings to cash flows provided by operating activities:
Depreciation and amortization	45.3			39.0
Impairment of intangible assets	14.9			—
Deferred income taxes	4.3			(12.1		)
Stock-based compensation expense	6.8			21.0
Other	4.1			1.2
Changes in operating assets and liabilities, net of effect from acquisitions of businesses:
Increase in accounts receivable	(19.8		)	(33.2		)
Decrease (increase) in other assets	8.5			(6.8		)
Decrease in accounts payable	(17.0		)	(21.0		)
Decrease in accrued expenses and other liabilities	(31.0		)	(26.1		)
Net cash flows provided by operating activities	199.3			151.3

Cash Flows from Investing Activities:
Capital expenditures	(27.1		)	(28.4		)
Proceeds from sale of property, plant and equipment	6.7			—
Capitalized software	(21.3		)	(17.7		)
Acquisitions of businesses, net of cash acquired	(513.2		)	(12.8		)
Contributions to investments	(10.0		)	—
Proceeds from investments	0.4			0.8
Net cash flows used in investing activities	(564.5		)	(58.1		)

Cash Flows from Financing Activities:
Proceeds from long-term debt	1,030.0			—
Repayments of long-term debt and capital lease obligations	(796.9		)	(23.2		)
Dividends paid to stockholders	(38.0		)	(40.2		)
Repurchases of common stock	(374.1		)	(315.4		)
Proceeds from exercises of stock options	1.5			3.8
Withholding tax payments for stock-based compensation awards	(15.3		)	(9.6		)
Dividend payments to noncontrolling owners	(8.2		)	—
Payments of deferred financing costs	(4.4		)	(0.4		)
Acquisition-related payments	(3.2		)	(1.9		)
Net cash flows used in financing activities	(208.6		)	(386.9		)

Effect of exchange rate changes on cash, cash equivalents, and restricted cash	(6.5		)	10.5

Net change in cash, cash equivalents, and restricted cash	(580.3		)	(283.2		)

Cash, cash equivalents, and restricted cash, beginning of period	817.1			734.0

Cash, cash equivalents, and restricted cash end of period	$	236.8		$	450.8

Reconciliation of cash, cash equivalents, and restricted cash to the Condensed Consolidated Balance Sheets
Cash and cash equivalents	$	228.7		$	443.6
Restricted cash in funds held for clients included in other current assets	8.1			7.2
Total cash, cash equivalents, and restricted cash	$	236.8		$	450.8



Supplemental Disclosure:
Cash paid for:
Income taxes and foreign withholding taxes, net of refunds	$	71.2	$	70.4
Interest	62.9		46.2

See notes to the condensed consolidated financial statements.

CDK Global, Inc.

Condensed Consolidated Statement of (Deficit) Equity

(In millions)

(Unaudited)



	Common Stock			Additional Paid-in-Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income			Total CDK Stockholders' Deficit			Non-controlling Interest			Total Stockholders' Deficit
	Shares Issued	Amount		Additional Paid-in-Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income			Total CDK Stockholders' Deficit			Non-controlling Interest			Total Stockholders' Deficit
Balance as of June 30, 2018	160.3	$	1.6	$	679.8		$	753.0		$	(1,810.7	)	$	11.5		$	(364.8	)	$	17.5		$	(347.3	)
Net earnings	—	—		—			179.3			—			—			179.3			3.9			183.2
Foreign currency translation adjustments	—	—		—			—			—			(18.1		)	(18.1		)	—			(18.1		)
Stock-based compensation expense and related dividend equivalents	—	—		7.1			(0.2		)	—			—			6.9			—			6.9
Common stock issued for the exercise and vesting of stock-based compensation awards, net	—	—		(30.1		)	—			16.3			—			(13.8		)	—			(13.8		)
Dividends paid to stockholders ($0.30 per share)	—	—		—			(38.0		)	—			—			(38.0		)	—			(38.0		)
Repurchases of common stock	—	—		(52.0		)	—			(322.1		)	—			(374.1		)	—			(374.1		)
Dividend payments to noncontrolling owners	—	—		—			—			—			—			—			(8.2		)	(8.2		)
Cumulative impact of adopting ASC 606 (Note 5)	—	—		—			109.7			—			(0.4		)	109.3			—			109.3
Balance as of December 31, 2018	160.3	$	1.6	$	604.8		$	1,003.8		$	(2,116.5	)	$	(7.0	)	$	(513.3	)	$	13.2		$	(500.1	)



	Common Stock			Additional Paid-in-Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income		Total CDK Stockholders' Deficit			Non-controlling Interest		Total Stockholders' Deficit
	Shares Issued	Amount		Additional Paid-in-Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income		Total CDK Stockholders' Deficit			Non-controlling Interest		Total Stockholders' Deficit
Balance as of June 30, 2017	160.3	$	1.6	$	608.6		$	452.7		$	(1,144.7	)	$	8.0	$	(73.8	)	$	17.0	$	(56.8	)
Net earnings	—	—		—			185.3			—			—		185.3			4.0		189.3
Foreign currency translation adjustments	—	—		—			—			—			24.1		24.1			—		24.1
Stock-based compensation expense and related dividend equivalents	—	—		16.9			(0.1		)	—			—		16.8			—		16.8
Common stock issued for the exercise and vesting of stock-based compensation awards, net	—	—		(20.7		)	—			14.9			—		(5.8		)	—		(5.8		)
Repurchases of common stock	—	—		66.9			—			(382.3		)	—		(315.4		)	—		(315.4		)
Dividends paid to stockholders ($0.29 per share)	—	—		—			(40.2		)	—			—		(40.2		)	—		(40.2		)
Balance as of December 31, 2017	160.3	$	1.6	$	671.7		$	597.7		$	(1,512.1	)	$	32.1	$	(209.0	)	$	21.0	$	(188.0	)

See notes to the condensed consolidated financial statements.

CDK Global, Inc.

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts in millions, except per share amounts)

(Unaudited)

Note 1. Basis of Presentation

A. Description of Business

CDK Global, Inc. (the "Company" or "CDK") enables end-to-end automotive commerce across the globe. For over 40 years, the Company has served automotive retailers and original equipment manufacturers ("OEMs") by providing innovative solutions that allow them to better connect, manage, analyze, and grow their businesses. The Company's solutions automate and integrate all parts of the buying process, including the advertising, acquisition, sale, financing, insuring, parts supply, repair, and maintenance of vehicles, in more than 100 countries around the world, for approximately 30,000 retail locations and most OEMs.

The Company is organized into two main operating groups. The Company's first operating group is CDK North America which is comprised of two reportable segments, Retail Solutions North America ("RSNA") and Advertising North America ("ANA"). The second operating group, which is also a reportable segment, is CDK International ("CDKI"). In addition, the Company has an Other segment, the primary components of which are corporate allocations and other expenses not recorded in the segment results. Refer to Note 15 for further information.

B. Basis of Preparation

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect assets, liabilities, revenues, and expenses that are reported in the accompanying financial statements and footnotes thereto. Actual results may differ from those estimates and assumptions.

The accompanying condensed consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods. Interim financial results are not necessarily indicative of financial results for a full year. The financial statements in this Quarterly Report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2018.

Certain prior year amounts have been reclassified to conform to current year presentation. See the discussion in Note 3, New Accounting Pronouncements for the impact of adopting Accounting Standards Update ("ASU") 2016-18 on the presentation of changes in restricted cash in the condensed consolidated statement of cash flows.

Note 2. Summary of Significant Accounting Policies

A. Revenue Recognition and Deferred Costs

Effective July 1, 2018, the Company adopted the Financial Accounting Standard Board (“FASB”) Accounting Standards Update ("ASU") 2014-09, “Revenue from Contracts with Customers,” and related ASUs ("ASC 606") using the modified retrospective approach. The comparative information has not been restated and continues to be reported under the accounting standards in effect for the period presented. Refer to Note 5, Revenue for the required disclosures related to the impact of adopting ASC 606 and a discussion of the Company's updated policy related to revenue recognition and deferred costs. Refer to Note 2, Summary of Significant Accounting Policies in the Company's Annual Report on Form 10-K for the Company's revenue recognition and deferred costs policies prior to adoption of ASC 606.

B. Funds Receivable and Funds Held for Clients and Client Fund Obligations

Funds receivable and funds held for clients represent amounts received or expected to be received from clients in advance of performing titling and registration services on behalf of those clients. These amounts are classified within other current assets on the condensed consolidated balance sheets. The total amount due to remit for titling and registration obligations with the department of motor vehicles is recorded to client fund obligations which is classified as accrued expenses and other current liabilities on the condensed consolidated balance sheets. Funds receivable was $32.3 million and $33.1 million, and funds held for clients was $8.1 million and $12.7 million as of December 31, 2018 and June 30, 2018, respectively. Client fund obligation was $40.4 million and $45.8 million as of December 31, 2018 and June 30, 2018, respectively.

C. Internal Use Software and Computer Software to be Sold, Leased, or Otherwise Marketed

The Company’s policy provides for the capitalization of external direct costs of materials and services associated with developing or obtaining internal use computer software. In addition, the Company’s policy also provides for the capitalization of certain payroll and payroll-related costs for employees who are directly associated with the internal use computer software projects. The amount of capitalizable payroll costs with respect to these employees is limited to the time directly spent on such projects. Costs associated with preliminary project stage activities, training, maintenance, and all other post-implementation stage activities are expensed as incurred. The Company also expenses internal costs related to minor upgrades and enhancements, as it is impracticable to separate these costs from normal maintenance activities. The Company amortizes internal use software typically over a three to five year life.

The Company's policy provides for the capitalization of certain costs of computer software to be sold, leased, or otherwise marketed. The Company's policy provides for the capitalization of all software production costs upon reaching technological feasibility for a specific product. Technological feasibility is attained when software products have a completed working model whose consistency with the overall product design has been confirmed by testing. Costs incurred prior to the establishment of technological feasibility are expensed as incurred. The establishment of technological feasibility requires judgment by management and in many instances is only attained a short time prior to the general release of the software. Maintenance-related costs are expensed as incurred.

Pursuant to this policy, the Company recognized expenses of $27.1 million and $34.7 million for the three months ended December 31, 2018 and 2017, respectively, and $47.0 million and $72.7 million for the six months ended December 31, 2018 and 2017, respectively. These expenses were classified within cost of revenues on the condensed consolidated statements of operations. Additionally, we had cash flows used for qualifying capitalized software development cost of $21.3 million and $17.7 million for the six months ended December 31, 2018 and 2017, respectively.

D. 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 condensed consolidated balance sheets at cost, which approximates fair value due to the short-term nature of these instruments. The carrying value of the Company's revolving credit facility and term loan facilities (as described in Note 9), including accrued interest, approximates fair value based on the Company's current estimated incremental borrowing rate for similar types of arrangements. The approximate aggregate fair value of the Company's senior notes as of December 31, 2018 was $1,806.1 million based on quoted market prices for the same or similar instruments and the carrying value was $1,850.0 million. The term loan facilities and senior notes are considered Level 2 fair value measurements in the fair value hierarchy.

Note 3. New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other.” ASU 2017-04 simplifies the accounting for goodwill impairment by eliminating Step 2 of the current goodwill impairment test, which required a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which the reporting unit’s carrying value exceeds its fair value, limited to the carrying value of the goodwill. ASU 2017-04 is effective for financial statements issued for fiscal years, and interim periods beginning after December 15, 2019. The Company adopted this standard on July 1, 2018 with no impact on our condensed consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, “Restricted Cash.” ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. ASU 2016-18 is effective for financial statements issued for fiscal years, and interim periods beginning after December 15, 2017. The Company adopted ASU 2016-18 retrospectively during the first quarter of fiscal year 2019, and as a result included restricted cash with cash and cash equivalents when reconciling the beginning of the period and end of the period total amounts presented on the condensed consolidated statements of cash flows. Accordingly, the condensed consolidated statement of cash flows has been revised to include restricted cash associated with funds held for clients as a component of cash, cash equivalents, and restricted cash.

As a result of the adoption, the Company adjusted the condensed consolidated statements of cash flows from previously reported amounts as follows:



	Six Months Ended December 31, 2017
	Originally Reported		Adjustments due to ASU 2016-18			As Adjusted
Cash, cash equivalents, and restricted cash, beginning of period	$	726.1	$	7.9		$	734.0
Net cash flows provided by operating activities	152.0		(0.7		)	151.3
Cash, cash equivalents, and restricted cash end of period	443.6		7.2			450.8

In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments (Topic 230).” ASU 2016-15 addresses eight specific cash flow issues where there is diversity in practice in how these certain cash receipts and cash payments are presented and classified in the statements of cash flows. ASU 2016-15 is effective for financial statements issued for fiscal years, and interim periods beginning after December 15, 2017. The adoption of ASU 2016-15 did not have a material impact on the Company's condensed consolidated statements of cash flows.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” Refer to Note 5, Revenue, for the required disclosures related to the impact of adopting ASC 606.

Recently Issued Accounting Pronouncements

In November 2018, the FASB issued ASU 2018-18, "Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606" to resolve the diversity in practice concerning the manner in which entities account for transactions based on their assessment of the economics of a collaborative arrangement. ASU 2018-18 is effective for fiscal years, and interim periods beginning after December 15, 2019. Early adoption is permitted. The Company is currently in the process of evaluating the potential impact of the adoption of ASU 2018-18 on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, "Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," which aligns the accounting for implementation cost incurred in a hosting arrangement that is a service contract with the accounting for implementation costs incurred to develop or obtain internal-use software under ASC 350-40, in order to determine which costs to capitalize and recognize as an asset. ASU 2018-15 is effective for fiscal years, and interim periods beginning after December 15, 2019, and can be applied either prospectively to implementation costs incurred after the date of adoption or retrospectively to all arrangements. Early adoption is permitted. The Company is currently in the process of evaluating the impact of the adoption of ASU 2018-15 on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" and subsequent amendments to the initial guidance: ASU 2017-13, ASU 2018-11 and ASU 2018-20 (collectively, Topic 842). Topic 842 requires that lessees recognize right-of-use assets and lease liabilities for any lease classified as either a finance or an operating lease that is not considered short-term. The accounting applied by lessors is largely consistent with the existing lease standard. Topic 842 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2018. The Company has obligations under lease agreements for facilities and equipment, which are classified as operating leases under the existing lease standard. The Company is in the process of assessing its lease portfolio. The Company has also selected a software vendor and is in the early stages of implementing lease management software. While the Company is still evaluating the impact that Topic 842 will have on the consolidated results of operations, financial condition, or cash flows, the Company's financial statements will reflect an increase in both assets and liabilities due to the requirement to recognize right-of-use assets and lease liabilities on the consolidated balance sheets for its facility and equipment leases.

Note 4. Acquisitions

Fiscal 2019 Acquisition

ELEAD1ONE

On September 14, 2018, the Company acquired the equity interests of ELEAD1ONE. ELEAD1ONE’s automotive customer relationship management ("CRM") software and call center solutions enable interaction between sales, service and marketing operations to provide dealers with an integrated customer acquisition and retention platform. The acquisition was made pursuant to an equity purchase agreement, which contains customary representations, warranties, covenants, and indemnities by the sellers and the Company. The Company acquired all of the outstanding equity of ELEAD1ONE for an initial cash purchase price of $513.2 million, net of cash acquired of $7.0 million.

The purchase price for this acquisition was provisionally allocated to the assets acquired and liabilities assumed based on their estimated fair values as follows:




Cash and cash equivalents	$	7.0
Accounts receivable	18.9
Other current assets	3.4
Property, plant and equipment	13.5
Intangible assets	130.7
Accrued expenses and other current liabilities	(20.9		)
Short-term deferred revenues	(6.6		)
Capital lease obligations	(6.1		)
Total identifiable net assets	139.9
Goodwill	380.3
Net assets acquired	$	520.2

The amounts in the table above are reflective of measurement period adjustments made during the three months ended December 31, 2018, which mainly included a $2.2 million increase to accrued expenses and other liabilities, a $0.4 million increase to intangible assets, a $2.0 million decrease to goodwill, and a $0.2 million decrease to accounts receivable. The measurement period adjustments did not have a significant impact on our consolidated statement of operations, balance sheet or cash flows.

Given the timing of the acquisition, the fair value estimate of assets acquired and liabilities assumed are pending completion of multiple elements, including the finalization of working capital adjustments, the finalization of an independent appraisal and valuations of fair value of the assets acquired and liabilities assumed, and final review by the Company's management. The fair values of assets acquired and liabilities assumed were based on a preliminary valuation analysis and are considered provisional. These estimates and assumptions are subject to change within the one-year measurement period if additional information, which existed as of the acquisition date, becomes known to the Company. Accordingly, there could be material adjustments to the consolidated financial statements, including changes in our depreciation and amortization expense related to the valuation of property, plant and equipment and intangible assets acquired and their respective useful lives, among other adjustments.

The intangible assets acquired primarily relate to customer lists, software, and trademarks, which will be amortized over a weighted-average useful life of 12 years. The goodwill resulting from this acquisition reflects expected synergies resulting from adding ELEAD1ONE products and processes to the Company's products and processes. The acquired goodwill is allocated to the RSNA reportable segment and is deductible for tax purposes.

In December 2018, the Company sold the airplane acquired as part of the ELEAD1ONE acquisition for cash less costs to sell of $6.7 million. Given the short time between the ELEAD1ONE acquisition and the sale of the acquired airplane, the final purchase price allocated to the airplane was adjusted to equal the cash less costs to sell in accordance with ASC 806 and ASC 360. As such, there was no gain or loss recognized on the sale of the airplane.

The results of operations for ELEAD1ONE have been included in the condensed consolidated results of operations from the date of acquisition. The pro forma effects of this acquisition are not significant to the Company's reported results for any period presented. Accordingly, no pro forma financial statements have been presented herein.

In addition to the acquisition, the Company entered into a joint venture agreement with the sellers. Under the terms of the joint venture agreement, the Company contributed $10.0 million to the venture at the ELEAD1ONE acquisition closing and has an obligation to contribute an additional $10.0 million in the future based on defined milestones in the joint venture agreement and will own 50% of the joint venture. The Company’s contributions are expected to fund the initial operations of the joint venture. The Company does not have an obligation to fund the operations of the joint venture beyond this initial commitment. Under ASC 810 "Consolidation," the joint venture was determined to be a variable interest entity ("VIE"); however, the Company is not the primary beneficiary. As such, the joint venture will be accounted for as an equity method investment. The initial $10.0 million contribution was recorded as an investment and is included on the condensed consolidated balance sheets within other assets. The Company has assessed the maximum exposure to loss related to the joint venture to be the $20.0 million contributed and committed to be contributed. The Company has assessed the risk of loss equal to its maximum exposure to be remote and, accordingly, the Company has not recognized a liability associated with any portion of the maximum exposure to loss.

For the three months ended December 31, 2018, the Company incurred $1.7 million of costs in connection with the ELEAD1ONE acquisition and integration-related activities of which $0.4 million was recorded within cost of revenues and $1.3 million was recorded within selling, general and administrative expenses. For the six months ended December 31, 2018, the Company incurred $2.9 million of costs in connection with the ELEAD1ONE acquisition and integration-related activities of which $0.5 million was recorded within cost of revenues and $2.4 million was recorded within selling, general and administrative expenses.

Fiscal 2018 Acquisitions

Progressus Media LLC

On April 3, 2018, the Company acquired the membership interests of Progressus Media LLC ("Progressus"), a specialty provider of mobile advertising solutions for dealerships, agencies, and automotive marketing companies. The acquisition was made pursuant to a membership interest purchase agreement, which contains customary representations, warranties, covenants, and indemnities by the sellers and the Company. The acquisition date fair value of the total consideration transferred was $22.2 million which consists primarily of an initial cash price of $16.2 million, net of cash acquired, the fair value of the holdback provision of $0.3 million and the fair value of contingent consideration of $5.7 million, which is payable upon achievement of certain milestones and metrics over a three year period ending on March 31, 2021. Prior to the acquisition, a CDK officer had an existing advisory relationship with Progressus which entitled the individual to a portion of the proceeds from a sale of Progressus under a unit appreciation rights agreement. At the time of closing, $0.5 million of the total consideration transferred by CDK was paid to the officer to settle Progressus’ obligation under the terms of the officer’s unit appreciation rights agreement.

The fair value of acquired intangibles assets and other net assets was $8.7 million and $2.2 million, respectively. The excess of the acquisition consideration over the estimated fair value of the acquired net assets of $11.3 million was allocated to goodwill. The acquired net assets and goodwill are included in the RSNA segment. The intangible assets will be amortized over a weighted-average useful life of approximately 9 years. The goodwill recognized from this acquisition reflects expected synergies resulting from direct ownership of the products and processes, allowing greater flexibility for future product development. The acquired goodwill is deductible for tax purposes. For the holdback provision and contingent consideration as of December 31, 2018 and June 30, 2018, the Company recorded accrued expenses and other current liabilities of 2.3 million and $1.6 million, respectively; and other liabilities of $4.1 million and $4.4 million, respectively. During the three and six months ended December 31, 2018, the Company recorded a $0.4 million charge in selling, general and administrative expenses to true-up the contingent consideration liability. The contingent consideration payments will be classified as financing activities on the statement of cash flows as the payments will occur more than three months after the acquisition date.

Dashboard Dealership Enterprises

On October 20, 2017, the Company acquired the outstanding stock of Dashboard Dealership Enterprises ("DDE"), a provider of executive reporting solutions for auto dealers. The acquisition was made pursuant to a stock purchase agreement, which contains customary representations, warranties, covenants, and indemnities by the sellers and the Company. The acquisition date fair value of total consideration to be transferred was $21.3 million, which consists primarily of an initial cash price of $12.8 million, the fair value of the holdback provision of $1.9 million, and the fair value of contingent consideration of $6.6 million, which is payable upon achievement of certain milestones and metrics if achieved by December 31, 2018. For the

holdback provision and contingent consideration as of December 31, 2018, and June 30, 2018, the Company recorded accrued expenses and other current liabilities of $6.2 million and $7.6 million, respectively; and other liabilities of $0.9 million, as of June 30, 2018. During the three and six months ended December 31, 2018, the Company recorded a benefit of $1.4 million in selling, general and administrative expenses to true-up the contingent consideration liability.

The fair value of acquired intangibles assets and liabilities assumed, including deferred tax liabilities, was $3.9 million and $1.6 million, respectively. The excess of the acquisition consideration over the estimated fair value of the acquired assets of $19.0 million was allocated to goodwill. The acquired assets and goodwill are included in the RSNA segment. The intangible assets will be amortized over a weighted-average useful life of approximately 8 years. The goodwill recognized from this acquisition reflects expected synergies resulting from direct ownership of the products and processes, allowing greater flexibility for future product development. The acquired goodwill is not deductible for tax purposes.

The result of operations for Progresses and DDE have been included in the condensed consolidated results of operation from the date of acquisition. The pro forma effects of these acquisitions are not significant to the Company's reported results for any period presented. Accordingly, no pro forma financial statements have been presented herein.

Note 5. Revenue

A. Adoption of ASC 606, "Revenue from Contracts with Customers"

On July 1, 2018, the Company adopted ASC 606 applying the modified retrospective method to all contracts that were not completed as of July 1, 2018. For contracts that were modified before the effective date, the Company reflected the aggregate effect of all modifications when identifying performance obligations and allocating transaction price in accordance with the available practical expedient, which did not have a material effect on the adjustment to accumulated deficit. Results for reporting periods beginning after July 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period.

Upon adoption, recognition of revenue and costs for on-site licenses and installation was changed from recognition ratably over the software license term to recognition upon installation of the software. Additionally, the Company began deferring costs to obtain and costs to fulfill the contract which for the Company consists primarily of direct sales commissions and implementation costs for service arrangements. The cumulative effects of the changes made to the consolidated July 1, 2018 balance sheet for the adoption of ASC 606 were as follows:



	Balance at June 30, 2018		Adjustments due to ASC 606			Balance at July 1, 2018
Assets
Accounts receivable	$	374.6	$	2.6		$	377.2
Other current assets	188.3		(61.8		)	126.5
Other assets	165.5		112.8			278.3
Liabilities
Accrued expenses and other current liabilities	198.0		0.4			198.4
Short-term deferred revenues	169.0		(38.4		)	130.6
Long-term deferred revenues	110.4		(41.0		)	69.4
Deferred income taxes	56.7		23.2			79.9
Other liabilities	64.7		0.1			64.8
Stockholders' Deficit
Retained earnings	753.0		109.7			862.7
Accumulated other comprehensive income	11.5		(0.4		)	11.1

Impact on Consolidated Financial Statements

The following table summarizes the effects of ASC 606 on selected unaudited line items within our condensed consolidated statement of operations:



	Three Months Ended December 31, 2018									Six Months Ended December 31, 2018
	As Reported ASC 606			Impact of ASC 606			ASC 605			As Reported ASC 606			Impact of ASC 606			ASC 605
Revenues	$	590.4		$	(10.1	)	$	600.5		$	1,144.9		$	(21.5	)	$	1,166.4
Cost of revenues	309.9			(3.9		)	313.8			591.5			(12.5		)	604.0
Selling, general and administrative expenses	122.7			0.3			122.4			221.0			—			221.0
Total expenses	436.4			(3.6		)	440.0			833.5			(12.5		)	846.0
Operating earnings	154.0			(6.5		)	160.5			311.4			(9.0		)	320.4
Earnings before income taxes	121.3			(6.5		)	127.8			249.1			(9.0		)	258.1
Provision for income taxes	(30.4		)	1.6			(32.0		)	(65.9		)	2.3			(68.2		)
Net earnings	90.9			(4.9		)	95.8			183.2			(6.7		)	189.9
Net earnings attributable to CDK	89.0			(4.9		)	93.9			179.3			(6.7		)	186.0
Net earnings attributable to CDK per common share:
Basic	0.70			(0.04		)	0.74			1.40			(0.05		)	1.45
Diluted	0.70			(0.04		)	0.74			1.39			(0.05		)	1.44

The following table summarizes the effects of ASC 606 on selected unaudited line items within our balance sheet:



	December 31, 2018
	As Reported ASC 606			Impact of ASC 606			ASC 605
Assets
Accounts receivable	$	411.6		$	(3.5	)	$	408.1
Other current assets	126.8			57.4			184.2
Other assets	277.8			(123.6		)	154.2
Liabilities
Accrued expenses and other current liabilities	214.2			(1.6		)	212.6
Short-term deferred revenues	131.0			28.9			159.9
Long-term deferred revenues	68.4			31.3			99.7
Deferred income taxes	84.6			(26.9		)	57.7
Other liabilities	61.5			(0.1		)	61.4
Stockholders' Deficit
Retained earnings	1,003.8			(103.0		)	900.8
Accumulated other comprehensive income	(7.0		)	1.7			(5.3		)

Adoption of ASC 606 had no impact to net cash (used in) or provided by operating, financing, or investing activities on the Company’s condensed consolidated statements of cash flows.

B. Revenue Recognition

The Company determines the amount of revenue to be recognized through the following steps:


•	Identification of the contract, or contracts, with a customer;


•	Identification of the performance obligations in the contract;


•	Determination of the transaction price;


•	Allocation of the transaction price to the performance obligations in the contract; and


•	Recognition of revenue when, or as, the Company satisfies the performance obligations.

The majority of the Company’s revenue is generated from contracts with multiple performance obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company is required to estimate the total consideration expected to be received from contracts with customers. In limited circumstances, the consideration expected to be received may be variable based on the specific terms of the contract.

The Company rarely licenses or sells products or services on a standalone basis. As such, the Company is required to develop its best estimate of standalone selling price of each distinct good or service as the basis for allocating the total transaction price. The primary method used to estimate standalone selling price is the adjusted market assessment approach, with some product categories using the expected cost plus a margin approach. When establishing standalone selling price, the Company considers various factors which may include geographic region, current market trends, customer class, its market share and position, its general pricing practices for bundled products and services, and recent contract sales data.

The Company applies significant judgment in order to identify and determine the number of performance obligations, estimate the total transaction price, determine the allocation of the transaction price to each identified performance obligation, and determine the appropriate method and timing of revenue recognition.

Taxes collected from customers and remitted to governmental authorities are presented on a net basis; that is, such taxes are excluded from revenues.

The Company generates revenues from the following five categories: subscription, on-site licenses and installation, advertising, transaction, and other. The Company does not evaluate a contract for a significant financing component if payment is expected within one year or less from the transfer of the promised items to the customer.

Subscription. In the RSNA and CDKI segments, CDK provides software and technology solutions for automotive retailers and OEMs, which includes:


•	Dealer Management Systems (“DMSs”) and layered applications, where the software is hosted and provided on a software-as-a-service (“SaaS”) basis;


•	Interrelated services such as installation, initial training, and data updates;


•	Ongoing maintenance and support related to on-site software;


•	Websites, search marketing, and reputation management services (RSNA only); and


•	Hardware on a service basis, meaning no specific assets are identified or a substantive right of substitution exists, that provides the customer continuous access to hardware owned by the Company.

SaaS and other hosted service arrangements, which allow the customer continuous access to the software over the contract period without taking possession, are provided on a subscription basis. The Company has concluded that under its SaaS and hosted service arrangements, the customer obtains access to the Company’s software which resides and is maintained on its managed servers. The customer does not obtain the right to take possession of the software. As such, the Company has concluded that its SaaS and hosted services arrangements do not include a software license. Furthermore, the Company has concluded that while the support and maintenance and hosting services are capable of being distinct performance obligations, the obligations are not distinct within the context of the contract. In addition, as the support and maintenance and hosting services are provided over the same period and have the same pattern of transfer of control, the support and maintenance and hosting services are combined and recognized as a single performance obligation. The Company may provide new customers with interrelated setup activities such as installation, initial training and data updates that the Company must undertake to fulfill the contract. These are considered

fulfillment activities that do not transfer the service to the customer. In addition to the core DMS software application, the customer may also contract for layered applications, which are each considered a distinct performance obligation.

Revenues for SaaS and other hosted service arrangements, are recognized ratably over the duration of the contract. The Company has determined its obligation under these arrangements is to stand ready to perform the underlying services as required by the customer. The customer receives the benefit of the services and the Company has the right to payment as the services are performed. A time-elapsed output method is used to measure progress as the Company transfers control evenly over the duration of the contract.

On-site licenses and installation. In the RSNA and CDKI segments, on-site software arrangements include a license of intellectual property as the customer has the contractual right to take possession of the software and the customer can either run the software on its own hardware or contract with another party unrelated to the Company to host the software. The customer receives the right to use the software license upon its installation for the term of the arrangement. As such, the Company has concluded that the software license is a distinct performance obligation and recognizes the transaction price allocated to on-site software upon installation. The Company also provides maintenance and support of the software applications. Such maintenance and support services may include server and desktop support, bug fixes, and support resolving other issues a customer may encounter in utilizing the software. Revenue allocated to support and maintenance is generally recognized ratably over the contract period as customers simultaneously consume and receive benefits, given the support and maintenance comprise distinct performance obligations that are satisfied ratably over time. A time-elapsed output method is used to measure progress as the Company transfers control evenly over the duration of the contract.

Advertising. In the ANA segment, the Company receives revenues from the placement of internet advertising for automotive retailers and OEMs. Advertising contracts generally have a one year term and contain a single performance obligation recognized over time as the services are performed. The Company reports advertising revenues on a gross basis, that is, the amounts billed to our customers are recorded as revenues and amounts paid to publishers are recorded as cost of revenues. The Company provides a single optimized advertising service to its customers and controls the advertising, fulfills the advertising services, and establishes pricing.

Transaction. The Company receives fees per transaction for providing auto retailers interfaces with third parties to process credit reports, vehicle registrations, and automotive equity mining. Transaction revenues are variable based on the volume of transactions processed. For these transaction revenues, the Company has a right to payment as the transactions are performed in an amount that corresponds directly with the value to the customer. As such, the Company recognizes transaction revenues as the services are rendered and in the amount to which it has the right to invoice. Transaction revenues for credit report processing and automotive equity mining are recorded in revenues gross of costs incurred when the Company is substantively and contractually responsible for providing the service, software, and/or connectivity to the customer, and controls the specified good or service before it is transferred to the customer. The Company recognizes vehicle registration revenues net of the state registration fee when it is acting as an agent and does not control the related goods and services before they are transferred to the customer.

Other. The Company provides consulting and professional services, including mobile advertising and marketing campaign solutions, and sells hardware such as laser printers, networking and telephony equipment, and related items. Consulting and professional services are either billed on a time and materials basis or on a fixed monthly, quarterly or semi-annual basis based on the amount of services contracted. Revenue from these services are recorded when the Company’s obligation is satisfied. Where the Company’s obligation is to provide continuous services throughout the contract period and the customer receives the benefit of those services as they are performed, the Company recognizes these services revenues over time using a time-elapsed output method as the Company believes the passage of time faithfully depicts the transfer of services to its customers. Where the professional service represents a single performance obligation, the customer receives the benefit of the services only upon their completion, and the Company does not have the right to payment as the services are performed, such services revenue are recognized upon completion.

The Company often sells hardware bundled with maintenance services and has concluded that these bundles include two distinct performance obligations. The first performance obligation is to transfer the hardware product and the second performance obligation is to provide maintenance on the hardware and its embedded software. As such, the transaction price allocated to the sold hardware is recognized upon delivery at which point the customer is able to direct the use of, and obtain substantially all of the remaining benefits of the hardware. Upon delivery of the hardware, the Company generally has the right to payment, the customer has legal title, physical possession of, and control of the hardware. The transaction price allocated to the maintenance of hardware and its embedded software is recognized ratably over the duration of the contract as the customer simultaneously consumes and receives the benefit of this maintenance. The Company has determined its obligation under these arrangements is to stand ready to perform the underlying services as required by the customer. A time-elapsed output method is

used to measure progress as the Company transfers control evenly over the duration of the contract. Hardware maintenance is included in subscription revenues.

C. Disaggregation of Revenue

The following table presents segment revenues by revenue category:



	Three Months Ended December 31, 2018								Six Months Ended December 31, 2018
	RSNA		ANA		CDKI		Total		RSNA		ANA		CDKI		Total
Revenue:
Subscription	$	362.5	$	—	$	61.2	$	423.7	$	696.8	$	—	$	127.8	$	824.6
On-site licenses and installation	2.8		—		7.5		10.3		4.2		—		15.5		19.7
Advertising	—		70.5		—		70.5		—		136.3		—		136.3
Transaction	38.3		—		—		38.3		79.3		—		—