CDK GLOBAL, INC. (Tabular amounts in millions, except per share amounts)
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q and the documents incorporated herein by
reference contain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. All statements, other than statements
of historical fact, may be forward-looking statements. Words such as "might,"
"will," "may," "could," "should," "estimates," "expects," "continues,"
"contemplates," "anticipates," "projects," "plans," "potential," "predicts,"
"intends," "believes," "forecasts," "future," "assumes," and variations of such
words or similar expressions are intended to identify forward-looking
statements. These statements are based on management's expectations and
assumptions as of the date of this filing and are subject to risks and
uncertainties that may cause actual results to differ materially from those
expressed, or implied by, these forward-looking statements. Factors that could
cause actual results to differ materially from those contemplated by the
forward-looking statements include, but are not limited to: our expectations
regarding the continuing impacts on our business of the COVID-19 pandemic; our
success in obtaining, retaining, and selling additional services to customers;
the pricing of our products and services; our success in integrating our recent
acquisitions and realizing the anticipated benefits of those combinations;
overall market and economic conditions, including interest rate and foreign
currency trends, and technology trends; adverse global economic conditions and
credit markets and volatility in the countries in which we do business; auto
sales and related industry changes; competitive conditions; changes in
regulation (including new regulations that restrict the manner and extent to
which we can control access to our Dealer Management System ("DMS") and other
software applications and limit what, if anything, we may charge for integration
with those applications); changes in technology, security breaches,
interruptions, failures, and other errors involving our systems; availability of
skilled technical employees/labor/personnel; the impact of new acquisitions and
divestitures; employment and wage levels; availability of capital for the
payment of debt service obligations or dividends or the repurchase of shares;
any changes to our credit rating and the impact of such changes on our financing
costs, rates, terms, debt service obligations, and access to capital market and
working capital needs; the impact of our indebtedness, our access to cash and
financing, and our ability to secure financing or financing at attractive rates;
the onset of or developments in litigation involving contract, intellectual
property, competition, stockholder, and other matters, and governmental
investigations; and the ability of our significant stockholders and their
affiliates to significantly influence our decisions, or cause us to incur
significant costs.
There may be other factors that may cause our actual results, performance or
achievements to 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 Part I, Item 1A of our Form
10-K, filed on August 18, 2021 , under the heading "Risk Factors," which are
incorporated herein by reference, for a description of certain risks that could,
among other things, cause the Company's actual results to differ from any
forward-looking statements contained herein. We disclaim any obligation to
update or revise forward-looking statements that may be made to reflect new
information or future events or circumstances that arise after the date made or
to reflect the occurrence of unanticipated events, other than as required by
law. The following discussion should be read in conjunction with the
consolidated financial statements and accompanying notes included in Part II,
Item 8 of our most recent Form 10-K. As used herein, "CDK Global ," "CDK," the
"Company," "we," "our," and similar terms include CDK Global, Inc. and its
consolidated subsidiaries, unless the context indicates otherwise.
RESULTS OF OPERATIONS
Executive Overview. CDK is a leading provider of retail technology and software
as a service ("SaaS") solutions that help dealers and auto manufacturers run
their businesses more efficiently, drive improved profitability and create
frictionless purchasing and ownership experiences for consumers. Today, CDK
serves over 15,000 retail locations in North America .
Sale of the International and Digital Marketing Businesses. On March 1, 2021 , we
completed the sale of the CDK International business ("International Business")
to Francisco Partners . On April 21, 2020 , we completed our sale of the Digital
Marketing Business to Sincro LLC . The International Business and Digital
Marketing Business are presented as discontinued operations. For additional
information refer to Item 1 of Part I, "Notes to the Consolidated Financial
Statements", Note 1 - Basis of Presentation and Note 4 - Discontinued
Operations.
Acquisitions. On February 1, 2021 , we acquired Square Root, Inc. , an
Austin -based developer of data curation software for original equipment
manufacturers ("OEMs"). On June 2, 2021 , we acquired Roadster Inc. , a Palo Alto,
California -based digital sales platform that modernizes the way consumers buy
vehicles and the process in which dealers sell them. On October 1, 2021 , we
acquired Salty Dot, Inc. , a privately held automobile insurance technology
solution provider.
Impacts of COVID-19. In March 2020 , the World Health Organization declared the
outbreak of COVID-19 a pandemic. The COVID-19 outbreak and associated
counter-acting measures implemented by governments around the world, as well as
increased business uncertainty, caused a significant shift in automotive retail
activity, and the operations of our dealer customers in particular. To support
our customers, we offered financial and other assistance during the fourth
quarter of fiscal 2020 and added product benefits to facilitate remote delivery
and touchless transactions. We also took steps to monitor our cash flow and
liquidity and to migrate many employees to their current work-from-home status.
As conditions continue to fluctuate around the world, governments and
organizations have responded by adjusting their restrictions and guidelines
accordingly. Activity in the automotive market improved during fiscal 2021, and
we expect that improvement trend to continue during fiscal 2022, though
substantial uncertainty remains, including supply chain disruption and resulting
inflationary pressures. Our focus remains on promoting employee health and
safety, serving our dealer customers and ensuring business continuity. Overall,
we believe we are well positioned for further growth opportunities as the impact
of the COVID-19 pandemic recedes in the markets we serve and we remain committed
to our management philosophy, company goals and our business strategy. However,
while our revenue and earnings are relatively predictable as a result of our
subscription-based business model, the duration of the pandemic and the broader
implications of the macro-economic recovery on our business remain uncertain.
Business Process Modernization Program. As of July 1, 2019 , we initiated what
was anticipated to be a three-year program designed to improve the way we do
business for our customers through best-in-class product offerings, processes,
governance and systems. The business process modernization program includes a
comprehensive redesign in the way we go to market, including the quoting,
contracting, fulfilling, and invoicing processes, and the systems and tools we
use. We expect to incur expenses of approximately $5.0 million during fiscal
2022. We now expect that the program will extend into fiscal 2023.
Sources of Revenue and Expenses
Revenue. We generally receive fee-based revenue by providing services to customers. We generate revenue from three categories: subscription, transaction and other.
Subscription: for software and technology solutions provided to automotive retailers and OEMs, which includes:
•DMSs and layered applications, which may be installed on-site at the customer's location, or hosted and provided on a SaaS basis, including ongoing maintenance and support;
•Interrelated services such as installation, initial training, and data updates; and
•Prior to adoption of Accounting Standards Update No. 2016-02 "Leases (Topic
842)" ("ASC 842"), subscription revenue included technology solutions in which
hardware was provided on a service basis. This revenue was previously classified
as subscription revenue because under lease accounting guidance in effect prior
to ASC 842, substitution rights were considered substantive.
Transaction: fees per transaction to process credit reports, vehicle registrations, and automotive equity mining.
Other: consulting and professional services, sales of hardware, on-site licenses and installation and other miscellaneous revenue. After the adoption of ASC 842 in fiscal 2020, Other revenue also includes leasing revenue from hardware provided to customers on a service basis, as hardware substitution rights are not considered substantive. Expenses. Expenses generally relate to the cost of providing services to customers. Significant expenses include employee payroll and other labor-related costs, the cost of hosting customer systems, third-party costs for transaction-based solutions and licensed software utilized in our solution offerings, telecommunications, transportation and distribution costs, computer hardware, software, and other general overhead items.
Key Performance Measures. We regularly review the following key performance measures in evaluating our business results, identifying trends affecting our business, and making operating and strategic decisions:
Dealer Management System Customer Sites (end of period). We track the number of retail customer sites that have an active DMS and sell vehicles in automotive and adjacent markets as an indicator of our opportunity set for generating subscription revenue. We consider a DMS to be active if we have billed a subscription fee for that solution during the last billing cycle in the
most recently ended calendar month. Adjacent markets include heavy truck dealerships that provide vehicles to the over-the-road trucking industry, recreation dealerships in the motorcycle, powersports, marine, and recreational vehicle industries, and heavy equipment dealerships in the agriculture and construction equipment industries.
Average Revenue Per DMS Customer Site (monthly average for period). Average revenue per DMS customer site is an indicator of the scope of adoption of our solutions by DMS customers. We monitor changes in this metric to measure the effectiveness of our strategy to deepen our relationships with our current customer base through upgrading and expanding solutions. We calculate average revenue per DMS customer site by dividing subscription revenue generated from our solutions in an applicable period by the monthly average number of DMS customer sites in the same period, divided by three. The metric includes monthly billing directly associated with the reported DMS sites inclusive of DMS monthly fees, layered applications and data integration fees and excludes (i) subscription revenue generated from customers not included in our DMS customer site count and (ii) subscription revenue related to certain installation and training activities that is deferred then recognized as revenue over the life of the contract.
Results of Operations. The following is a discussion of the results of our
consolidated operations for the three and nine months ended
The table below presents consolidated results of operations for the periods indicated and the change when comparing periods.
Three Months Ended Nine Months Ended
March 31, Change March 31, Change
2022 2021 $ % 2022 2021 $ %
Revenue $ 459.7 $ 433.1 $ 26.6 6 % $ 1,336.4 $ 1,253.1 $ 83.3 7 %
Cost of revenue 241.2 221.3 19.9 9 % 697.8 653.7 44.1 7 %
Selling, general, and administrative
expenses 98.6 90.2 8.4 9 % 295.3 263.8 31.5 12 %
Litigation provision - - - - % - 12.0 (12.0) (100) %
Total expenses 339.8 311.5 28.3 9 % 993.1 929.5 63.6 7 %
Operating earnings 119.9 121.6 (1.7) (1) % 343.3 323.6 19.7 6 %
Interest expense (22.3) (32.2) 9.9 (31) % (66.0) (101.2) 35.2 (35) %
Gain (loss) on extinguishment of debt - (2.2) 2.2 (100) % 2.1 (2.2) 4.3 n/m
Loss from equity method investment (3.0) (19.6) 16.6 (85) % (5.6) (24.8) 19.2 (77) %
Other income, net 1.4 3.6 (2.2) (61) % 8.4 32.3 (23.9) (74) %
Earnings before income taxes 96.0 71.2 24.8 35 % 282.2 227.7 54.5 24 %
Margin % 20.9% 16.4% 21.1% 18.2%
Provision for income taxes (25.9) (24.1) (1.8) 7 % (75.1) (73.8) (1.3) 2 %
Effective tax rate 27.0% 33.8% 26.6% 32.4%
Net earnings from continuing operations 70.1 47.1 23.0 49 % 207.1 153.9 53.2 35 %
Net earnings from discontinued
operations (2.4) 815.8 (818.2) n/m (0.3) 837.1 (837.4) n/m
Net earnings 67.7 862.9 (795.2) (92) % 206.8 991.0 (784.2) (79) %
Less: net earnings attributable to
noncontrolling interest 1.6 2.0 (0.4) (20) % 5.3 6.1 (0.8) (13) %
Net earnings attributable to CDK $ 66.1 $ 860.9 $ (794.8) (92) % $ 201.5 $ 984.9 $ (783.4) (80) %
n/m - not meaningful
The table below presents the revenue disaggregation for the periods indicated and the change when comparing periods.
Three Months Nine Months
Ended Ended
March 31, Change March 31, Change
2022 2021 $ % 2022 2021 $ %
Subscription
$ 984.3 $ 66.7 7 % Transaction 40.8 43.3 (2.5) (6) % 121.9 126.3 (4.4) (3) % Other 62.3 57.7 4.6 8 % 163.5 142.5 21.0 15 % Revenue$ 459.7 $ 433.1 $ 26.6 6 %$ 1,336.4
Three Months Ended
Revenue. Revenue for the three months ended
•Subscription revenues increased due to the growth in DMS and applications, and$12.6 million from acquisitions in fiscal 2022, partially offset by the impact of ASC 842 which reallocates hardware-related lessor revenue from subscription revenue to other revenue and a decline in Partner Program revenue.
•Transaction revenues saw a slight decline driven by ongoing dealer inventory shortages.
•Other revenues increased reflecting higher hardware sales and revenue timing under ASC 842.
Cost of Revenue. Cost of revenue for the three months endedMarch 31, 2022 increased by$19.9 million as compared to the three months endedMarch 31, 2021 . Cost of revenue increased due to higher employee-related costs including an increase in technology headcount and travel expenses to support growth and an increase in amortization due to higher levels of capitalized software supporting developed technologies. Cost of revenue includes expenses to research, develop, and deploy new and enhanced solutions for our customers of$23.6 million and$19.4 million for the three months endedMarch 31, 2022 and 2021, respectively, representing 5.1% and 4.5% of revenue, respectively. Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months endedMarch 31, 2022 increased by$8.4 million compared to the three months endedMarch 31, 2021 . Selling, general and administrative expenses increased due to higher employee-related costs including stock-based compensation, travel expenses, and marketing expenditures connected to theNational Automobile Dealers Association show, partially offset by lower costs associated with our business process modernization program compared to the third quarter of fiscal 2021. Interest Expense. Interest expense for the three months endedMarch 31, 2022 decreased by$9.9 million as compared to the three months endedMarch 31, 2021 largely due to lower average debt level in the third quarter of fiscal 2022, which was primarily attributable to the repayment of the three-year and five-year term loan facilities and the 5.875% unsecured senior notes with a$500 million aggregate principal amount due in 2026 in the third and fourth quarter of fiscal 2021, respectively. Loss on Extinguishment of Debt. In the third quarter of fiscal 2021, we repaid the indebtedness under the three-year term loan facility and five-year term loan facility. As a result, we recorded expenses of$2.2 million for the write-off of unamortized debt financing costs. Loss fromEquity Method Investment . Loss from equity method investment for the three months endedMarch 31, 2022 decreased by$16.6 million as compared to the three months endedMarch 31, 2021 driven by$14.5 million of impairment charges for an equity method investment along with the recognition of equity losses in the third quarter of fiscal 2021. Other Income, net. Other income, net for the three months endedMarch 31, 2022 decreased by$2.2 million compared to the three months endedMarch 31, 2021 . The decrease is attributable to higher income related to the transition services agreement in connection with the sale of the International Business in fiscal 2021. Provision for Income Taxes. Income tax expense was$25.9 million and$24.1 million for the three months endedMarch 31, 2022 and 2021, respectively. The effective tax rate, expressed by calculating the provision for income taxes as a percentage of earnings before income taxes, was 27.0% and 33.8% for the three months endedMarch 31, 2022 and 2021, respectively. The effective tax rate for the three months endedMarch 31, 2022 differed from theU.S. federal statutory rate of 21.0% primarily due to state and local income taxes and non-deductible officers' compensation. The effective tax rate for the three months endedMarch 31, 2021 differed from theU.S. federal statutory rate of 21.0% primarily due to$7.0 million of tax expense for a valuation allowance on a deferred tax asset for the future capital loss on an equity method investment that is not expected to be realized and$1.3 million tax expense for non-deductible officers' compensation, offset by a$2.4 million tax benefit related to a prior year. Net Earnings from Discontinued Operations. Net earnings from discontinued operations reflect the results of the International Business and the Digital Marketing Business. Net earnings from discontinued operations declined as a result of the completion of the sale of the International Business in the third quarter of fiscal 2021. Refer to Note 4 - Discontinued Operations for additional information. Net Earnings Attributable to CDK. Net earnings attributable to CDK for the three months endedMarch 31, 2022 decreased by$794.8 million as compared to the three months endedMarch 31, 2021 . The decrease in net earnings attributable to CDK was primarily due to the factors previously discussed.
Nine Months Ended
Revenue. Revenue for the nine months ended
•Subscription revenues increased due to the growth in DMS and applications and$34.6 million from acquisitions in fiscal 2022, partially offset by the impact of ASC 842 which reallocates hardware-related lessor revenue from subscription revenue to other revenue and a decline in Partner Program revenue.
•Transaction revenues saw a slight decline due to ongoing dealer inventory shortages.
•Other revenues increased reflecting higher hardware sales and revenue timing under ASC 842.
Cost of Revenue. Cost of revenue for the nine months endedMarch 31, 2022 increased by$44.1 million compared to the nine months endedMarch 31, 2021 . Cost of revenue increased due to slightly higher leased hardware costs, network and infrastructure fees, employee-related costs and travel expenses to support growth, partially offset by a decrease in the cost to support the transition of our sold businesses. Cost of revenue includes expenses to research, develop, and deploy new and enhanced solutions for our customers of$59.7 million and$55.7 million for the nine months endedMarch 31, 2022 and 2021, respectively, representing 4.5% and 4.4% of revenue, respectively. Selling, General and Administrative Expenses. Selling, general and administrative expenses for the nine months endedMarch 31, 2022 increased by$31.5 million compared to the nine months endedMarch 31, 2021 . Selling, general and administrative expenses increased primarily due to higher transaction and integration related costs associated with acquisitions and strategical business opportunities, travel and marketing expenses, and employee-related costs including stock-based compensation. These increases were partially offset by decreases in costs to support the transition of our sold businesses and lower costs associated with our business process modernization program compared to fiscal 2021. Litigation Provision. Litigation provision for the nine months endedMarch 31, 2022 decreased by$12.0 million as compared to nine months endedMarch 31, 2021 as a result of minimal current year adjustments from the quarterly reassessment of our litigation liability where we evaluate legal proceedings that could affect the amount of liability, including amounts in excess of any prior accruals and make adjustments to those accruals as appropriate. Additional information on the litigation provision is contained in Item 1 of Part I, "Notes to the Consolidated Financial Statements", Note 12 - Commitments and Contingencies. Interest Expense. Interest expense for the nine months endedMarch 31, 2022 decreased by$35.2 million as compared to the nine months endedMarch 31, 2021 largely due to lower average debt level in the first nine months of fiscal 2022, which was primarily attributable to the repayment of the three-year and five-year term loan facilities and the 5.875% unsecured senior notes with a$500 million aggregate principal amount due in 2026 in the third and fourth quarter of fiscal 2021, respectively. Gain (Loss) on Extinguishment of Debt. In the first quarter of fiscal 2022, we recognized a gain on extinguishment of debt as a result of the forgiveness of a Paycheck Protection Program loan. The loan was assumed as part of the acquisition ofRoadster Inc. Also, in the third quarter of fiscal 2021, we repaid the indebtedness under the three-year term loan facility and five-year term loan facility. As a result, we recorded expenses of$2.2 million for the write-off of unamortized debt financing costs. Loss fromEquity Method Investment . Loss from equity method investment for the nine months endedMarch 31, 2022 decreased by$19.2 million as compared to the nine months endedMarch 31, 2021 driven by$14.5 million of impairment charges for an equity method investment along with the recognition of equity losses in the third quarter of fiscal 2021. Other Income, net. Other income, net for the nine months endedMarch 31, 2022 decreased by$23.9 million as compared to the nine months endedMarch 31, 2021 due largely to the decline in income associated with on-going transition support of our sold businesses. Provision for Income Taxes. Income tax expense was$75.1 million and$73.8 million for the nine months endedMarch 31, 2022 and 2021, respectively. The effective tax rate expressed by calculating the provision for income taxes as a percentage of earnings before income taxes was 26.6% and 32.4%, for the nine months endedMarch 31, 2022 and 2021, respectively. The effective tax rate for the nine months endedMarch 31, 2022 differed from theU.S. federal statutory rate of 21.0% primarily due to state and local income taxes and non-deductible officers' compensation, partially offset by a$2.0 million benefit due to the expiration of the statute of limitations related to certain transfer pricing exposures. The effective tax rate for the nine months endedMarch 31, 2021 differed from theU.S. federal statutory rate of 21.0% primarily due to$7.0 million of tax expense for a valuation allowance on a deferred tax asset for the future capital loss on an equity method investment that was not expected to be realized,$4.8 million tax expense from non-deductible officers' compensation,$1.7 million of tax expense related to a prior year and$1.4 million of tax expense from recording valuation allowances onU.S. foreign tax credits. Net Earnings from Discontinued Operations. Net earnings from discontinued operations reflect the results of the International Business and the Digital Marketing Business. Net earnings from discontinued operations declined as a result of the completion of the sale of the International Business in the third quarter of fiscal 2021. Refer to Note 4 - Discontinued Operations for additional information. Net Earnings Attributable to CDK. Net earnings attributable to CDK for the nine months endedMarch 31, 2022 decreased by$783.4 million as compared to the nine months endedMarch 31, 2021 . The decrease in net earnings attributable to CDK was primarily due to the factors previously discussed.
Non-GAAP Financial Measures
We disclose certain financial measures for our consolidated results on a
generally accepted accounting principles (GAAP) and a non-GAAP (adjusted) basis.
The non-GAAP financial measures disclosed should be viewed in addition to, and
not as an alternative to, results prepared in accordance with GAAP. Our use of
each of the following non-GAAP financial measures may differ from similarly
titled non-GAAP financial measures presented by other companies, and other
companies may not define these non-GAAP financial measures, or reconcile them to
the most directly comparable GAAP financial measures, in the same way.
Most Directly Comparable GAAP Financial
Non-GAAP Financial Measure Measure
Adjusted earnings before income taxes Earnings before income taxes
Adjusted provision for income taxes Provision for income
taxes
Adjusted net earnings attributable to CDK Net earnings attributable to CDK
Adjusted diluted earnings attributable to CDK per Diluted earnings attributable to CDK per
share share
Adjusted EBITDA Net earnings attributable to CDK
Adjusted EBITDA margin Net earnings attributable to CDK margin
We use adjusted earnings before income taxes, adjusted provision for income
taxes, adjusted net earnings attributable to CDK, adjusted diluted earnings
attributable to CDK per share, adjusted EBITDA and adjusted EBITDA margin
internally to evaluate our performance on a consistent basis. These measures
adjust for the impact of certain items that we believe are inconsistent in
amount and frequency and do not directly reflect our underlying operations. By
adjusting for these items, we believe we have more precise inputs for use as
factors in (i) our budgeting process, (ii) financial and operational decisions,
(iii) evaluations of ongoing operating performance on a consistent
period-to-period basis and relative to our competitors, (iv) target leverage
calculations, (v) debt covenant calculations, and (vi) incentive-based
compensation decisions.
We believe our non-GAAP financial measures are helpful to users of the financial
statements because they (i) provide investors with meaningful supplemental
information regarding financial performance by excluding certain items, (ii)
permit investors to view performance using the same tools that management uses,
and (iii) provide supplemental information that may be useful to investors in
evaluating our ongoing operating results on a consistent basis. We believe that
the presentation of these non-GAAP financial measures, when considered in
addition to the corresponding GAAP financial measures and the reconciliations to
those
measures disclosed below, provides investors with a better understanding of the
factors and trends affecting our business than could be obtained absent these
disclosures.
Consolidated Non-GAAP Results. The tables below present the reconciliation of
the most directly comparable GAAP measures to adjusted earnings before income
taxes, adjusted provision for income taxes, adjusted net earnings attributable
to CDK, adjusted diluted earnings attributable to CDK per share, and adjusted
EBITDA.
Three Months Ended Nine Months Ended
March 31, Change March 31, Change
2022 2021 $ % 2022 2021 $ %
Revenue (1) $ 459.7 $ 433.1 $ 26.6 6 % $ 1,336.4 $ 1,253.1 $ 83.3 7 %
Earnings before income taxes (1)
$ 24.8 35 % $ 282.2$ 227.7 $ 54.5 24 % Margin % 20.9 % 16.4 % 21.1 % 18.2 % Stock-based compensation expense (1) (2) 17.0 10.4 6.6 45.6 31.7
13.9
Amortization of acquired intangible assets (1) (3) 7.3 4.2 3.1 20.9 12.4
8.5
Transaction and integration-related costs (1) (4) 2.0 2.4 (0.4) 15.0 3.6
11.4
Legal and other expenses related to regulatory and competition matters (5) 0.4 0.9 (0.5) 1.1 15.6
(14.5)
Business process modernization program (6) 0.2 3.9 (3.7) 3.8 9.4
(5.6)
Officer transition expense (7) - - - - 1.1
(1.1)
Net adjustments related to loss from equity method investment (8) 2.6 17.1 (14.5) 5.4 21.6
(16.2)
Loss (gain) on extinguishment of debt (9) - 2.2 (2.2) (2.1) 2.2
(4.3)
Adjusted earnings before income taxes
$ 13.2 12 % $ 371.9$ 325.3 $ 46.6 14 % Adjusted margin % 27.3 % 25.9 % 27.8 % 26.0 % Three Months Ended Nine Months Ended March 31, Change March 31, Change 2022 2021 $ % 2022 2021 $ %
Provision for income taxes (1)
7 %$ 75.1 $ 73.8 $ 1.3 2 % Effective tax rate 27.0 % 33.8 % 26.6 % 32.4 % Income tax effect of pre-tax adjustments (10) 6.1 8.4 (2.3) 18.5 18.3 0.2 Change in deferred tax valuation allowance(11) (0.5) (7.0) 6.5 (1.4) (7.0) 5.6 Adjusted provision for income taxes (1)$ 31.5 $ 25.5 $ 6.0 24 %$ 92.2 $ 85.1 $ 7.1 8 % Adjusted effective tax rate 25.1 % 22.7 % 24.8 % 26.2 % Nine Months Three Months Ended Ended March 31, Change March 31, Change 2021 2021 $ % 2022 2021 $ % Net earnings$ 67.7 $ 862.9 $ (795.2) (92) %$ 206.8 $ 991.0 $ (784.2) (79) % Less: net earnings attributable to noncontrolling interest 1.6 2.0 5.3 6.1 Net earnings attributable to CDK$ 66.1 $ 860.9 $ (794.8) (92) %$ 201.5 $ 984.9 $ (783.4) (80) % Net loss (earnings) from discontinued operations (12) 2.4 (815.8) 818.2 0.3 (837.1)
837.4
Stock-based compensation expense (1) (2) 17.0 10.4 6.6 45.6 31.7
13.9
Amortization of acquired intangible assets (1) (3) (13) 7.3 4.1 3.2 20.7 12.1
8.6
Transaction and integration-related costs (1) (4) 2.0 2.4 (0.4) 15.0 3.6
11.4
Legal and other expenses related to regulatory and competition matters(5) 0.4 0.9 (0.5) 1.1 15.6
(14.5)
Business process modernization program (6) 0.2 3.9 (3.7) 3.8 9.4
(5.6)
Officer transition expense (7) - - - - 1.1
(1.1)
Net adjustments related to loss from equity method investment(8) 2.6 17.1 (14.5) 5.4 21.6
(16.2)
Loss (gain) on extinguishment of debt (9) - 2.2 (2.2) (2.1) 2.2
(4.3)
Income tax effect of pre-tax adjustments (10) (6.1) (8.4) 2.3 (18.5) (18.3)
(0.2)
Change in deferred tax valuation allowance (11) 0.5 7.0 (6.5) 1.4 7.0
(5.6)
Adjusted net earnings attributable to CDK (1)$ 92.4 $ 84.7 $ 7.7 9 %$ 274.2 $ 233.8 $ 40.4 17 % Three Months Ended Nine Months Ended March 31, Change March 31, Change 2022 2021 $ % 2022 2021 $ % Diluted earnings attributable to CDK per share$ 0.56 $ 7.00 $ (6.44) (92) %$ 1.68 $ 8.04 $ (6.36) (79) % Net loss (earnings) from discontinued operations (12) 0.02 (6.64) 6.66 - (6.83)
6.83
Stock-based compensation expense (1) (2) 0.15 0.08 0.07 0.38 0.26
0.12
Amortization of acquired intangible assets (1) (3) (13) 0.06 0.03 0.03 0.17 0.10
0.07
Transaction and integration-related costs (1) (4) 0.02 0.02 - 0.13 0.03
0.10
Legal and other expenses related to regulatory and competition matters (5) - 0.02 (0.02) 0.01 0.12
(0.11)
Business process modernization program (6) - 0.03 (0.03) 0.03 0.07
(0.04)
Officer transition expense (7) - - - - 0.01
(0.01)
Net adjustments related to loss from equity method investment (8) 0.02 0.14 (0.12) 0.05 0.18
(0.13)
Loss (gain) on extinguishment of debt (9) - 0.02 (0.02) (0.02) 0.02
(0.04)
Income tax effect of pre-tax adjustments (10) (0.05) (0.07) 0.02 (0.15) (0.15)
-
Change in deferred tax valuation allowance (11) - 0.06 (0.06) 0.01 0.06
(0.05)
Adjusted diluted earnings attributable to CDK per share (1)$ 0.78 $ 0.69 $ 0.09 13 %$ 2.29 $ 1.91 $ 0.38 20 % Weighted average common shares outstanding: Diluted 118.1 122.9 119.7 122.5 Nine Months Three Months Ended Ended March 31, Change March 31, Change 2021 2021 $ % 2022 2021 $ % Net earnings attributable to CDK$ 66.1 $ 860.9 $ (794.8) (92) %$ 201.5 $ 984.9 $ (783.4) (80) % Margin % 14.4 % 198.8 % 15.1 % 78.6 % Net earnings attributable to noncontrolling interest (14) 1.6 2.0 (0.4) 5.3 6.1 (0.8) Net loss (earnings) from discontinued operations (12) 2.4 (815.8) 818.2 0.3 (837.1)
837.4
Provision for income taxes (1) (15) 25.9 24.1 1.8 75.1 73.8 1.3 Interest expense (16) 22.3 32.2 (9.9) 66.0 101.2 (35.2) Depreciation and amortization (1) (17) 32.8 24.6 8.2 91.7 71.1
20.6
Stock-based compensation expense (1) (2) 17.0 10.4 6.6 45.6 31.7
13.9
Transaction and integration-related costs (1) (4) 2.0 2.4 (0.4) 15.0 3.6
11.4
Legal and other expenses related to regulatory and competition matters (5) 0.4 0.9 (0.5) 1.1 15.6
(14.5)
Business process modernization program (6) 0.2 3.9 (3.7) 3.8 9.4
(5.6)
Officer transition expense (7) - - - - 1.1
(1.1)
Net adjustments related to loss from equity method investment(8) 3.8 18.5 (14.7) 9.2 25.7
(16.5)
Loss (gain) on extinguishment of debt (9) - 2.2 (2.2) (2.1) 2.2 (4.3) Adjusted EBITDA$ 174.5 $ 166.3 $ 8.2 5 %$ 512.5 $ 489.3 $ 23.2 5 % Adjusted margin % 38.0 % 38.4 % 38.3 % 39.0 %
(1) Excludes amounts attributable to discontinued operations.
(2) Stock-based compensation expense included in cost of revenue and selling, general and administrative expenses.
(3) Amortization of acquired intangible assets consists of non-cash amortization of intangible assets such as customer lists, purchased software, and trademarks acquired in connection with business combinations. We exclude the impact of amortization of acquired intangible assets because these non-cash amounts are significantly impacted by the timing and size of individual acquisitions and do not factor into our budgeting process, financial and operational decision making, target leverage calculations, and determination of incentive-based pay. (4) Transaction and integration-related costs include: (i) legal, accounting, outside service fees, and other costs incurred in connection with assessment and integration of acquisitions and other strategic business opportunities; and (ii) post-close adjustments to acquisition-related contingent consideration, included in selling, general and administrative expenses.
(5) Legal and other expenses, related to regulatory and competition matters included in selling, general and administrative expenses and litigation provision.
(6) Business process modernization program designed to improve the way we do business for our customers through best-in-class product offerings, processes, governance and systems. The business process modernization program includes a comprehensive redesign in the way we go to market, including the quoting, contracting, fulfilling, and invoicing processes, and the systems and tools we use. The program is an investment to implement holistic business reform, including the design and implementation of a new ERP system. The expense is included in cost of revenue and selling, general and administrative expenses.
(7) Officer transition expense includes severance expense in connection with officer departures included in cost of revenue and selling, general and administrative expenses.
(8) Net adjustments related to loss from equity method investment includes certain portions of earnings attributable to an equity interest owned by CDK.
(9) In fiscal 2022, gain on extinguishment of debt in connection with the forgiveness of Roadster's indebtedness related to the Paycheck Protection Program instituted underthe United States' Coronavirus Aid, Relief and Economic Security Act of 2020. Loss on extinguishment of debt as ofMarch 31, 2021 related to the write-off of unamortized debt financing cost as a result of the repayment of the indebtedness under the three-year and five-year term loan facilities onMarch 1, 2021 .
(10) Income tax effect of pre-tax adjustments calculated at applicable statutory rates net of applicable permanent differences.
(11) In fiscal 2022, a valuation allowance on a deferred tax asset for the tax basis difference of an equity method investment that is not expected to be realized. In fiscal 2021, a valuation allowance on a deferred tax asset for the future capital loss on an equity method investment that is not expected to be realized recorded in the third quarter of fiscal 2021. (12) Net earnings from discontinued operations associated with our sale of the International Business that closed onMarch 1, 2021 , and the divestiture of the Digital Marketing Business that closed onApril 21, 2020 .
(13) The portion of expense related to noncontrolling interest has been removed
from amortization of acquired intangible assets for the nine months
ended
(14) Net earnings attributable to noncontrolling interest included in the financial statements.
(15) Provision for income taxes included in the financial statements.
(16) Interest expense included in the financial statements.
(17) Depreciation and amortization included in the financial statements.
Three Months Ended
Adjusted Earnings before Income Taxes. Adjusted earnings before income taxes for the three months endedMarch 31, 2022 increased by$13.2 million as compared to the three months endedMarch 31, 2021 . Adjusted margin increased from 25.9% to 27.3%. Adjusted earnings before income taxes was favorably impacted by revenue growth and lower interest expenses, partially offset by higher employee-related costs and increases in travel and marketing expenses. Adjusted Provision for Income Taxes. Adjusted income tax expense was$31.5 million and$25.5 million for the three months endedMarch 31, 2022 and 2021, respectively. The adjusted effective tax rate for the three months endedMarch 31, 2022 was 25.1% as compared to 22.7% for the three months endedMarch 31, 2021 . The adjusted effective tax rate for the three months endedMarch 31, 2022 differed from theU.S. federal statutory rate of 21% primarily due to state and local taxes. The adjusted effective tax rate for the three months endedMarch 31, 2021 was primarily impacted by a$2.4 million tax benefit for an income tax payable true-up. Adjusted Net Earnings Attributable to CDK. Adjusted net earnings attributable to CDK for the three months endedMarch 31, 2022 increased by$7.7 million as compared to the three months endedMarch 31, 2021 . The increase in adjusted net earnings attributable to CDK was primarily due to the items discussed above in adjusted earnings before income taxes. Adjusted EBITDA. Adjusted EBITDA for the three months endedMarch 31, 2022 increased by$8.2 million as compared to the three months endedMarch 31, 2021 . Adjusted margin decreased from 38.4% to 38.0%. Adjusted EBITDA was favorably impacted by revenue growth, partially offset by higher employee-related costs and increases in travel and marketing expenses.
Nine Months Ended
Adjusted Earnings before Income Taxes. Adjusted earnings before income taxes for the nine months endedMarch 31, 2022 increased by$46.6 million as compared to the nine months endedMarch 31, 2021 . Adjusted margin increased from 26.0% to 27.8%. Adjusted earnings before income taxes was favorably impacted by revenue growth and lower interest expenses, partially offset by higher employee-related costs and increases in travel and marketing expenses.. Adjusted Provision for Income Taxes. Adjusted income tax expense was$92.2 million and$85.1 million for the nine months endedMarch 31, 2022 and 2021, respectively. The adjusted effective tax rate for the nine months endedMarch 31, 2022 was 24.8% as compared to 26.2% for the nine months endedMarch 31, 2021 . The adjusted effective tax rate for the nine months endedMarch 31, 2022 differed from theU.S. federal statutory rate of 21% primarily due to state and local income taxes partially offset by a$2.0 million benefit due to the expiration of the statute of limitations related to certain transfer pricing exposures. The adjusted effective rate for the nine months endedMarch 31, 2021 was primarily impacted by$1.7 million of tax expense from the prior year true-up of income taxes payable and$1.4 million of tax expense from recording valuation allowances onU.S. foreign tax credits. Adjusted Net Earnings Attributable to CDK. Adjusted net earnings attributable to CDK for the nine months endedMarch 31, 2022 increased by$40.4 million as compared to the nine months endedMarch 31, 2021 . The increase in adjusted net earnings attributable to CDK was primarily due to the items discussed above in adjusted earnings before income taxes. Adjusted EBITDA. Adjusted EBITDA for the nine months endedMarch 31, 2022 increased by$23.2 million compared to the nine months endedMarch 31, 2021 . Adjusted margin decreased from 39.0% to 38.3%. Adjusted EBITDA was favorably impacted by revenue growth, partially offset by higher employee-related costs and increases in travel and marketing expenses. 16 --------------------------------------------------------------------------------
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Refer to Impacts of COVID-19 in the Results of Operations section of Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information about liquidity and capital resources.
Capital Structure Overview
Our principal source of liquidity is derived from cash generated through
operations. At present, and in future periods, we expect cash generated by our
operations, together with cash and cash equivalents and borrowings from the
capital markets, including our five-year senior unsecured revolving credit
facility ("revolving credit facility"), to be sufficient to cover our cash needs
for working capital, capital expenditures, strategic acquisitions, and
anticipated quarterly dividends and stock repurchases.
As of March 31, 2022 , cash and cash equivalents were $120.3 million , total CDK
stockholders' equity was $432.8 million , and total debt was $1,787.8 million ,
which is net of unamortized financing costs of $15.0 million . Working capital at
March 31, 2022 was $113.1 million , as compared to $201.1 million as of June 30,
2021 . Working capital as presented herein excludes current maturities of
long-term debt and finance lease liabilities.
Our borrowings consist of 5.000% senior notes with a $500.0 million aggregate
principal amount due in 2024, 4.875% senior notes with a $600.0 million
aggregate principal amount due in 2027, and 5.250% senior notes with a $500.0
million aggregate principal amount due in 2029. Additionally, we have a $750.0
million revolving credit facility, of which $190.0 million was drawn as of
March 31, 2022 .
The revolving credit facility contains various covenants and restrictive
provisions that limit our subsidiaries' ability to incur additional
indebtedness, our ability to consolidate or merge with other entities, and our
subsidiaries' ability to incur liens, enter into sale and leaseback
transactions, and enter into agreements restricting the ability of our
subsidiaries to pay dividends. If we fail to perform the obligations under these
and other covenants, the revolving credit facility could be terminated and any
outstanding borrowings, together with accrued interest, could be declared
immediately due and payable. In addition to customary events of default on the
revolving credit facility, an event of default may also be triggered by the
acceleration of the maturity of any other indebtedness we may have in an
aggregate principal amount in excess of $75.0 million .
The financial covenants provide that (i) the ratio of our total consolidated
indebtedness to consolidated EBITDA (the "Leverage Ratio") may not exceed 3.75
to 1.00. Upon the occurrence of certain acquisitions for each of the four
consecutive fiscal quarters immediately following such certain acquisitions
(including the fiscal quarter in which such certain acquisition was
consummated), the ratio set forth above will be increased to 4.25 to 1.00, and
(ii) the ratio of our consolidated EBITDA to consolidated interest expense may
not be less than 3.00 to 1.00. The related debt financing costs were not
material to the consolidated financial statements.
Our long-term credit ratings and senior unsecured debt ratings are Ba1 with Moody's, and BB+ with S&P, which are non-investment grade.
In the normal course of business, we also enter into contracts in which we make representations and warranties that relate to the performance of our services and products. We do not expect any material losses related to such representations and warranties. Return of Capital Plan. Our return of capital plan is a component of our broader capital allocation strategy. Our top priorities for capital allocation will continue to be a thoughtful balance between: (i) organic investments that will continue to accelerate the growth and performance of the business; (ii) inorganic opportunities that are synergistic with our portfolio and would meaningfully provide additional profitable revenue and increased long-term value; and (iii) return of capital to shareholders through a mix of common stock repurchases and dividends, while targeting a leverage ratio, measured as financial debt, net of cash, divided by adjusted EBITDA, at a range of 2.5x to 3.0x net debt to adjusted EBITDA over the long-term. Stock Repurchase Program. InJanuary 2017 , the Board of Directors authorized us to repurchase up to$2.0 billion of our common stock as part of our return of capital plan, whereby we have repurchased approximately$1.7 billion of common stock throughMarch 31, 2022 . Under the authorization, we may continue to purchase our common stock in the open market or in privately negotiated transactions from time to time as permitted by federal securities laws and other legal requirements. The actual timing, number, and price of any shares repurchased will be determined at management's discretion and will depend on a number of factors, which may include the market price of the shares, general market and economic conditions, the availability and cost of additional indebtedness, and other potential uses for free cash flow including, but not limited to, potential acquisitions. In the third quarter of fiscal 2021, we announced that we expect to repurchase$200 million to$250 million of our common stock over a period of 12 to 18 months. We made stock repurchases of$229.1 million during the nine months endedMarch 31, 2022 as part of this program. 17 --------------------------------------------------------------------------------
Dividends to Common Stockholders. The Board of Directors declared a quarterly
cash dividend of
Cash Flows. Our cash flows from operating, investing, and financing activities, as reflected in the Consolidated Statements of Cash Flows for the nine months endedMarch 31, 2022 and 2021, are summarized as follows: Nine Months Ended March 31, 2022 2021 $ Change Cash provided by (used in): Operating activities, continuing operations$ 324.5 $ 253.9 $ 70.6 Operating activities, discontinued operations (2.1) 6.9 (9.0) Investing activities, continuing operations (248.7) (84.3) (164.4) Investing activities, discontinued operations 1.9 1,380.9 (1,379.0) Financing activities, continuing operations (112.4) (656.4) 544.0
Effect of exchange rate changes on cash, cash equivalents and restricted cash, including cash classified in current assets held for sale
(0.7) 21.1 (21.8)
Net change in cash, cash equivalents and restricted cash,
including cash classified in current assets held for sale
Net cash flows provided by operating activities from continuing operations increased due to improved operating performance and litigation payments made in fiscal 2021, partially offset by higher incentive compensation payments in fiscal 2022.
Net cash flows used in operating activities from discontinued operations decreased due to the sale of the International Business during the third quarter of fiscal 2021.
Net cash flows used in investing activities from continuing operations increased
due to a payment made for the acquisition of
Net cash flows used in financing activities decreased primarily due to increased borrowings from our revolving credit facility and a decrease in term loan repayments partially offset by stock repurchases.
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