UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of July 2023
Commission
File Number: 001-37775 |
|
Commission
File Number: 001-41313 |
|
|
|
BROOKFIELD BUSINESS PARTNERS L.P.
(Exact name of Registrant as specified
in its charter) |
|
BROOKFIELD BUSINESS CORPORATION
(Exact name of Registrant as specified
in its charter) |
|
|
|
73 Front Street, 5th Floor
Hamilton, HM 12
Bermuda
(Address of principal executive office) |
|
250 Vesey Street, 15th Floor
New York, NY 10281
United States
(Address of principal executive office) |
Indicate by check mark whether the registrant
files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F x Form 40-F ¨
Exhibits 99.1, 99.2, 99.3 and 99.5 included in
this Form 6-K are incorporated by reference into Brookfield Business Partners L.P.’s registration statements on Form F-3
(File Nos: 333-264630, 333-251316 and 333-258765).
EXHIBIT INDEX
The following documents, which are attached as exhibits hereto, are
incorporated by reference herein:
Exhibit |
|
Title |
99.1 |
|
Audited consolidated financial statements of CDK Global, Inc. as of and for the years ended June 30, 2022 and 2021 |
|
|
|
99.2 |
|
Unaudited interim combined financial statements of the Lottery Business (a carve-out of certain operations of Scientific Games Corporation) as of March 31, 2022 and December 31, 2021 and for the three months ended March 31, 2022 and March 31, 2021 |
|
|
|
99.3 |
|
Unaudited pro forma financial statements of Brookfield Business Partners L.P. as of March 31, 2023 and for the twelve months ended December 31, 2022 and three months ended March 31, 2023 |
|
|
|
99.4 |
|
Unaudited pro forma financial statements of Brookfield Business Corporation as of March 31, 2023 and for the twelve months ended December 31, 2022 and three months ended March 31, 2023 |
|
|
|
99.5 |
|
Consent of Deloitte & Touche LLP (in respect of CDK Global, Inc.) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
BROOKFIELD BUSINESS
PARTNERS L.P. by its general partner, BROOKFIELD BUSINESS PARTNERS LIMITED |
|
|
|
Date:
July 7, 2023 |
By: |
/s/ Jane Sheere |
|
|
Name: |
Jane Sheere |
|
|
Title: |
Corporate Secretary |
|
BROOKFIELD BUSINESS
CORPORATION |
|
|
|
Date:
July 7, 2023 |
By: |
/s/ A.J. Silber |
|
|
Name: |
A.J. Silber |
|
|
Title: |
General Counsel and
Corporate Secretary |
Exhibit 99.1
Consolidated Financial
Statements
as of and for the years ended
June, 30, 2022 and 2021
and Independent Auditor's Report
|
|
Deloitte
& Touche LLP
111 South Wacker Drive
Chicago, IL 60606-4301
USA
Tel:+1
312 486 1000
Fax:+1 312 486 1486
www.deloitte.com |
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of CDK Global, Inc.
Hoffman Estates, Illinois
Opinion
We have audited the consolidated financial statements of
CDK Global, Inc. and subsidiaries (the "Company"), which comprise the consolidated balance sheets as of June 30, 2022 and 2021,
and the related consolidated statements of operations, comprehensive Income, stockholder's Equity (Deficit), and cash flows for the years
then ended, and the related notes to the consolidated financial statements (collectively referred to as the "financial statements").
In our opinion, the accompanying financial statements present
fairly, in all material respects, the financial position of the Company as of June 30, 2022 and 2021, and the results of its operations
and its cash flows for the years then ended, in accordance with accounting principles generally accepted in the United States of America.
Basis for Opinion
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor's
Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the Company and
to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audits. We believe that
the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Responsibilities of Management for the Financial Statements
Management is responsible for the preparation and fair presentation
of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design,
implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are
free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is required to evaluate
whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company's ability to continue
as a going concern for one year after the date that the financial statements are available to be issued.
Auditor's Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's
report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is
not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk
of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve
collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered
material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a
reasonable user based on the financial statements.
In performing an audit in accordance with GAAS, we:
· | Exercise professional judgment and maintain professional skepticism throughout
the audit. |
| |
· | Identify and assess the risks of material misstatement
of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures
include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. |
| |
· | Obtain an understanding of internal control relevant to the audit in order
to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the Company's internal control. Accordingly, no such opinion is expressed. |
| |
· | Evaluate the appropriateness of accounting policies
used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the
financial statements. |
| |
· | Conclude whether, in our judgment, there are
conditions or events, considered in the aggregate, that raise substantial doubt about the Company's ability to continue as a going concern
for a reasonable period of time. |
We are required to communicate with those charged with governance
regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related
matters that we identified during the audit.
/s/ Deloitte & Touche LLP
August
9, 2022
CDK Global, Inc.
Consolidated
Statements of Operations
(In millions)
| |
Year Ended June 30, | |
| |
2022 | | |
2021 | |
Revenue | |
$ | 1,791.4 | | |
$ | 1,673.2 | |
| |
| | | |
| | |
Expenses: | |
| | | |
| | |
Cost of revenue | |
| 948.7 | | |
| 875.0 | |
Selling, general and administrative expenses | |
| 388.2 | | |
| 360.9 | |
Litigation provision | |
| — | | |
| 12.0 | |
Total expenses | |
| 1,336.9 | | |
| 1,247.9 | |
Operating earnings | |
| 454.5 | | |
| 425.3 | |
| |
| | | |
| | |
Interest expense | |
| (88.5 | ) | |
| (124.6 | ) |
Gain (loss) on extinguishment of debt | |
| 2.1 | | |
| (25.6 | ) |
Loss from equity method investment | |
| (7.8 | ) | |
| (27.3 | ) |
Other income, net | |
| 7.2 | | |
| 36.9 | |
| |
| | | |
| | |
Earnings before income taxes | |
| 367.5 | | |
| 284.7 | |
| |
| | | |
| | |
Provision for income taxes | |
| (99.6 | ) | |
| (94.5 | ) |
| |
| | | |
| | |
Net earnings from continuing operations | |
| 267.9 | | |
| 190.2 | |
Net earnings from discontinued operations | |
| 1.3 | | |
| 852.8 | |
Net earnings | |
| 269.2 | | |
| 1,043.0 | |
Less: net earnings attributable to noncontrolling interest | |
| 7.4 | | |
| 8.7 | |
Net earnings attributable to CDK | |
$ | 261.8 | | |
$ | 1,034.3 | |
See notes to the consolidated financial statements.
CDK Global, Inc.
Consolidated Statements of Comprehensive
Income
(In millions)
| |
Year Ended June 30, | |
| |
2022 | | |
2021 | |
Net earnings | |
$ | 269.2 | | |
$ | 1,043.0 | |
Other comprehensive income (loss): | |
| | | |
| | |
Currency translation adjustments | |
| (5.8 | ) | |
| 60.7 | |
Reclassification of foreign currency loss to net income | |
| — | | |
| 37.9 | |
Unrealized gain on available-for-sale security | |
| 0.2 | | |
| — | |
Total other comprehensive income (loss) | |
| (5.6 | ) | |
| 98.6 | |
Comprehensive income | |
| 263.6 | | |
| 1,141.6 | |
Less: comprehensive income attributable to noncontrolling interest | |
| 7.4 | | |
| 8.7 | |
Comprehensive income attributable to CDK | |
$ | 256.2 | | |
$ | 1,132.9 | |
See notes to the consolidated financial
statements.
CDK Global, Inc.
Consolidated Balance Sheets
(In
millions, except per share par value)
| |
June 30, | |
| |
2022 | | |
2021 | |
Assets | |
| | |
| |
Current assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 111.6 | | |
$ | 157.0 | |
Accounts receivable, net | |
| 246.8 | | |
| 236.4 | |
Other current assets | |
| 177.5 | | |
| 168.9 | |
Total current assets | |
| 535.9 | | |
| 562.3 | |
Property, plant and equipment, net | |
| 70.1 | | |
| 71.8 | |
Other assets | |
| 471.0 | | |
| 448.7 | |
Goodwill | |
| 1,438.0 | | |
| 1,297.1 | |
Intangible assets, net | |
| 385.5 | | |
| 332.7 | |
Total assets | |
$ | 2,900.5 | | |
$ | 2,712.6 | |
| |
| | | |
| | |
Liabilities and Stockholders' Equity | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Current maturities of long-term debt and finance lease liabilities | |
$ | 4.7 | | |
$ | 7.1 | |
Accounts payable | |
| 19.6 | | |
| 29.0 | |
Accrued expenses and other current liabilities | |
| 205.5 | | |
| 188.1 | |
Litigation liabilities | |
| 34.0 | | |
| 34.0 | |
Accrued payroll and payroll-related expenses | |
| 92.9 | | |
| 81.5 | |
Deferred revenue | |
| 33.8 | | |
| 28.6 | |
Total current liabilities | |
| 390.5 | | |
| 368.3 | |
Long-term liabilities: | |
| | | |
| | |
Debt and finance lease liabilities | |
| 1,733.3 | | |
| 1,586.5 | |
Deferred income taxes | |
| 160.1 | | |
| 111.4 | |
Deferred revenue | |
| 30.5 | | |
| 40.4 | |
Other liabilities | |
| 86.4 | | |
| 111.1 | |
Total liabilities | |
| 2,400.8 | | |
| 2,217.7 | |
| |
| | | |
| | |
Stockholders' Equity: | |
| | | |
| | |
Preferred stock, $0.01 par value: 50.0 shares authorized; none issued and outstanding | |
| — | | |
| — | |
Common stock, $0.01 par value: 650.0 shares authorized; 160.3 and 160.3 shares issued, respectively; 116.7 and 121.5 shares outstanding, respectively | |
| 1.6 | | |
| 1.6 | |
Paid-in capital | |
| 742.7 | | |
| 715.1 | |
Retained earnings | |
| 2,186.8 | | |
| 1,997.4 | |
Treasury stock, at cost: 43.6 and 38.8 shares, respectively | |
| (2,514.4 | ) | |
| (2,306.0 | ) |
Accumulated other comprehensive income | |
| 67.1 | | |
| 72.7 | |
Total CDK stockholders' equity | |
| 483.8 | | |
| 480.8 | |
Noncontrolling interest | |
| 15.9 | | |
| 14.1 | |
Total stockholder's equity | |
| 499.7 | | |
| 494.9 | |
Total liabilities and stockholders' equity | |
$ | 2,900.5 | | |
$ | 2,712.6 | |
See notes to the consolidated financial statements.
CDK Global, Inc.
Consolidated Statements of Cash Flows
(In millions)
| |
| Year
Ended June 30, | |
| |
| 2022 | | |
| 2021 | |
Cash Flows from Operating Activities: | |
| | | |
| | |
Net earnings | |
$ | 269.2 | | |
$ | 1,043.0 | |
Less: net earnings from discontinued
operations | |
| 1.3 | | |
| 852.8 | |
Net earnings from continuing operations | |
| 267.9 | | |
| 190.2 | |
Adjustments to reconcile net earnings from continuing operations
to cash flows provided by operating activities, continuing operations: | |
| | | |
| | |
Depreciation and amortization | |
| 125.7 | | |
| 98.7 | |
Asset impairment | |
| — | | |
| 4.1 | |
(Gain) loss on extinguishment of debt | |
| (2.1 | ) | |
| 25.6 | |
Loss from equity method investment | |
| 7.8 | | |
| 27.3 | |
Deferred income taxes | |
| 42.8 | | |
| 30.8 | |
Stock-based compensation expense | |
| 62.4 | | |
| 43.0 | |
Other | |
| 6.5 | | |
| 6.9 | |
Changes in assets and liabilities, net of effect from acquisitions
of businesses: | |
| | | |
| | |
Accounts receivable | |
| (12.3 | ) | |
| 13.8 | |
Other assets | |
| (37.3 | ) | |
| (65.2 | ) |
Accounts payable | |
| (10.0 | ) | |
| (6.3 | ) |
Accrued expenses
and other liabilities | |
| (27.4 | ) | |
| (27.4 | ) |
Net cash flows provided by operating activities, continuing
operations | |
| 424.0 | | |
| 341.5 | |
Net cash flows used in operating activities,
discontinued operations | |
| (0.5 | ) | |
| (124.8 | ) |
Net cash flows provided by operating
activities | |
| 423.5 | | |
| 216.7 | |
| |
| | | |
| | |
Cash Flows from Investing Activities: | |
| | | |
| | |
Capital expenditures | |
| (26.3 | ) | |
| (20.6 | ) |
Capitalized software | |
| (112.5 | ) | |
| (74.8 | ) |
Acquisitions of businesses, net of cash acquired | |
| (154.2 | ) | |
| (359.5 | ) |
Purchases of investments | |
| — | | |
| (5.0 | ) |
Net cash flows used in investing activities, continuing operations | |
| (293.0 | ) | |
| (459.9 | ) |
Net cash flows provided by investing
activities, discontinued operations | |
| 1.9 | | |
| 1,380.9 | |
Net cash flows provided by (used in)
investing activities | |
| (291.1 | ) | |
| 921.0 | |
| |
| | | |
| | |
Cash Flows from Financing Activities: | |
| | | |
| | |
Net proceeds from (repayments of) revolving credit facilities | |
| 145.0 | | |
| (15.0 | ) |
Repayments of long-term debt and finance lease liabilities | |
| (7.0 | ) | |
| (1,098.5 | ) |
Dividends paid to stockholders | |
| (70.8 | ) | |
| (73.0 | ) |
Repurchases of common stock | |
| (229.1 | ) | |
| (12.1 | ) |
Proceeds from exercise of stock options | |
| — | | |
| 2.5 | |
Withholding tax payments for stock-based compensation awards | |
| (11.4 | ) | |
| (5.0 | ) |
Dividend payments to noncontrolling owners | |
| (5.6 | ) | |
| (10.0 | ) |
Payments of debt financing costs | |
| — | | |
| (2.7 | ) |
Net cash flows used in financing activities, continuing operations | |
| (178.9 | ) | |
| (1,213.8 | ) |
Net cash flows used in financing activities,
discontinued operations | |
| — | | |
| — | |
Net cash flows used in financing activities | |
| (178.9 | ) | |
| (1,213.8 | ) |
Effect of exchange rate changes
on cash, cash equivalents, and restricted cash, including cash classified in current assets held for sale | |
| (3.1 | ) | |
| 21.1 | |
Net change in cash, cash equivalents, and restricted cash,
including cash classified in current assets held for sale | |
| (49.6 | ) | |
| (55.0 | ) |
Net change in cash classified in current
assets held for sale | |
| — | | |
| 134.9 | |
Net change in cash, cash equivalents, and restricted cash | |
| (49.6 | ) | |
| 79.9 | |
| |
| | | |
| | |
Cash, cash equivalents, and restricted
cash, beginning of period | |
| 177.2 | | |
| 97.3 | |
Cash, cash equivalents, and restricted
cash end of period | |
$ | 127.6 | | |
$ | 177.2 | |
| |
Year Ended June
30, | |
| |
2022 | | |
2021 | |
Reconciliation of cash, cash equivalents, and restricted
cash to the Consolidated Balance Sheets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 111.6 | | |
$ | 157.0 | |
Restricted cash
in funds held for clients included in other current assets | |
| 16.0 | | |
| 20.2 | |
Total cash, cash equivalents, and restricted
cash | |
$ | 127.6 | | |
$ | 177.2 | |
| |
Year Ended June
30, |
| |
2022 | | |
2021 | |
Supplemental Disclosure: | |
| | |
| |
Cash paid for: | |
| | |
| |
Income taxes and foreign
withholding taxes, net of refunds, continuing operations | |
$ | 58.9 | | |
$ | 74.9 | |
Income taxes and foreign withholding
taxes, net of refunds, discontinued operations | |
| — | | |
| 174.0 | |
Interest | |
| 84.3 | | |
| 119.8 | |
Non-cash investing and financing activities: | |
| | | |
| | |
Capitalized property and equipment
obtained under lease | |
| 11.3 | | |
| 11.9 | |
Lease liabilities incurred | |
| (11.3 | ) | |
| (11.9 | ) |
Capital expenditures and capitalized
software, accrued not paid | |
| 0.4 | | |
| 0.3 | |
Cash consideration not yet transferred | |
| — | | |
| 16.8 | |
See notes to the consolidated financial statements.
CDK Global, Inc.
Consolidated Statements of Stockholders' Equity
(In millions)
| |
Common
Stock | | |
| | |
| | |
| | |
Accumulated | | |
Total
CDK | | |
| | |
Total | |
| |
Shares
Issued | | |
Amount | | |
Paid-in
Capital | | |
Retained
Earnings | | |
Treasury
Stock | | |
Other
Comprehensive Income | | |
Stockholders'
Equity (Deficit) | | |
Non-
controlling
Interest | | |
Stockholders'
Equity (Deficit) | |
Balance as of June 30, 2020 | |
| 160.3 | | |
$ | 1.6 | | |
$ | 687.9 | | |
$ | 1,045.5 | | |
$ | (2,305.2 | ) | |
$ | (25.9 | ) | |
$ | (596.1 | ) | |
$ | 15.4 | | |
$ | (580.7 | ) |
Net earnings | |
| — | | |
| — | | |
| — | | |
| 1,034.3 | | |
| — | | |
| — | | |
| 1,034.3 | | |
| 8.7 | | |
| 1,043.0 | |
Impact of
Adoption of ASC 326-current expected credit losses, net of tax | |
| — | | |
| — | | |
| — | | |
| (8.2 | ) | |
| — | | |
| — | | |
| (8.2 | ) | |
| — | | |
| (8.2 | ) |
Foreign
currency translation adjustments | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 60.7 | | |
| 60.7 | | |
| — | | |
| 60.7 | |
Reclassification of foreign
currency loss to net income | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 37.9 | | |
| 37.9 | | |
| — | | |
| 37.9 | |
Stock-based
compensation expense and related dividend equivalents | |
| — | | |
| — | | |
| 41.0 | | |
| (1.2 | ) | |
| — | | |
| — | | |
| 39.8 | | |
| — | | |
| 39.8 | |
Common stock
issued for the exercise and vesting of stock-based compensation awards, net | |
| — | | |
| — | | |
| (13.8 | ) | |
| — | | |
| 11.3 | | |
| — | | |
| (2.5 | ) | |
| — | | |
| (2.5 | ) |
Dividends
paid to stockholders ($0.60 per share) | |
| — | | |
| — | | |
| — | | |
| (73.0 | ) | |
| — | | |
| — | | |
| (73.0 | ) | |
| — | | |
| (73.0 | ) |
Repurchases
of common stock | |
| — | | |
| — | | |
| — | | |
| — | | |
| (12.1 | ) | |
| — | | |
| (12.1 | ) | |
| — | | |
| (12.1 | ) |
Dividend
payments to noncontrolling owners | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (10.0 | ) | |
| (10.0 | ) |
Balance
as of June 30, 2021 | |
| 160.3 | | |
$ | 1.6 | | |
$ | 715.1 | | |
$ | 1,997.4 | | |
$ | (2,306.0 | ) | |
$ | 72.7 | | |
$ | 480.8 | | |
$ | 14.1 | | |
$ | 494.9 | |
Net
earnings | |
| — | | |
| — | | |
| — | | |
| 261.8 | | |
| — | | |
| — | | |
| 261.8 | | |
| 7.4 | | |
| 269.2 | |
Foreign
currency translation adjustments | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (5.8 | ) | |
| (5.8 | ) | |
| — | | |
| (5.8 | ) |
Unrealized
gain on available-for-sale security | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 0.2 | | |
| 0.2 | | |
| — | | |
| 0.2 | |
Stock-based
compensation expense and related dividend equivalents | |
| — | | |
| — | | |
| 59.7 | | |
| (1.6 | ) | |
| — | | |
| — | | |
| 58.1 | | |
| — | | |
| 58.1 | |
Common stock
issued for the exercise and vesting of stock-based compensation awards, net | |
| — | | |
| — | | |
| (32.1 | ) | |
| — | | |
| 20.7 | | |
| — | | |
| (11.4 | ) | |
| — | | |
| (11.4 | ) |
Dividends
paid to stockholders ($0.60 per share) | |
| — | | |
| — | | |
| — | | |
| (70.8 | ) | |
| — | | |
| — | | |
| (70.8 | ) | |
| — | | |
| (70.8 | ) |
Repurchases
of common stock | |
| — | | |
| — | | |
| — | | |
| — | | |
| (229.1 | ) | |
| — | | |
| (229.1 | ) | |
| — | | |
| (229.1 | ) |
Dividend
payments to noncontrolling owners | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (5.6 | ) | |
| (5.6 | ) |
Balance
as of June 30, 2022 | |
| 160.3 | | |
$ | 1.6 | | |
$ | 742.7 | | |
$ | 2,186.8 | | |
$ | (2,514.4 | ) | |
$ | 67.1 | | |
$ | 483.8 | | |
$ | 15.9 | | |
$ | 499.7 | |
See
notes to the consolidated financial statements
CDK Global, Inc.
Notes to the Consolidated Financial
Statements
(Tabular amounts in millions, except
share and per share amounts)
Note 1. Basis of Presentation
Description
of Business. CDK Global, Inc. (the "Company" or "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.
Basis
of Preparation. The accompanying consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America ("GAAP"). The preparation of the financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect assets, liabilities, revenue, and expenses that are reported in
the accompanying financial statements and footnotes thereto. Actual results may differ from those estimates and assumptions.
On March 1, 2021, the Company completed the
sale of the CDK International business ("International Business") to Francisco Partners. Following the sale of the International
Business, the Company is organized as a single operating segment. The financial results of the International Business are presented in
net earnings (loss) from discontinued operations in the Consolidated Statements of Operations for all periods presented. Certain prior
year amounts have been reclassified to conform to the current year presentation. Unless otherwise noted, discussion in these Notes to
the Consolidated Financial Statements refers to continuing operations. For additional information, refer to Note 4 - Discontinued Operations.
Note 2. Summary of Significant Accounting Policies
Consolidation.
The financial statements include the accounts of the Company and its wholly owned subsidiaries. In addition, the financial
statements include the accounts of Computerized Vehicle Registration ("CVR") in which CDK holds a controlling financial interest.
Intercompany transactions and balances between consolidated CDK businesses have been eliminated.
Business
Combinations. The Company accounts for business combinations using the acquisition method of accounting, which allocates the
fair value of the purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated
fair values. The excess of the purchase consideration over the fair values of these identifiable assets and liabilities is recorded as
goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions.
The Company may utilize third-party valuation specialists to assist the Company in the purchase price allocation. Initial purchase price
allocations are subject to revision within the measurement period, not to exceed one year from the date of acquisition. Acquisition-related
transaction and other costs associated with business combinations are expensed as incurred.
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 to transfer a distinct good or service
to the customer, and is the unit of account in Accounting Standards Codification ("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 revenue.
The Company generates revenue from the following
three categories: subscription, transaction, and other. The Company does not evaluate a contract for a significant financing component
if payment is expected within one year from the transfer of the promised items to the customer.
Subscription.
CDK provides software and technology solutions for automotive retailers and OEMs, which includes:
| · | Dealer Management Systems ("DMSs") and layered applications, which may
be installed on-site at the customer's location, or hosted and provided on a software-as-a-service ("SaaS") basis, including
ongoing maintenance and support; |
| · | Interrelated services such as installation, initial training, and data updates; |
| · | Prior to adoption of ASC 842 "Leases" ("ASC 842"), subscription
revenue included technology solutions in which hardware was provided on a service basis. This revenue was previously classified as subscription
revenue because, under lease accounting guidance in effect prior to ASC 842, substitution rights were considered substantive. |
SaaS and other hosted service arrangements,
which allow the customer continuous access to the software over the contract period without taking control of the software, 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 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.
Revenue 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.
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 revenue varies based on the volume of transactions processed.
For transaction revenue, 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 revenue as the services are rendered and in the amount to which
it has the right to invoice. Transaction revenue for credit report processing and automotive equity mining is recorded in revenue on a
gross basis, 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
revenue net of the state registration fee since it is acting as an agent and does not control the related goods and services before they
are transferred to the customer.
Other.
The Company provides consulting and professional services, including marketing campaign solutions, and sells hardware such
as laser printers, networking and telephony equipment, and related items. Consulting and professional services are either billed on a
time and materials basis or on a fixed monthly, quarterly or semi-annual basis based on the amount of services contracted. Revenue from
these services is 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 services
revenue 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
is 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 revenue.
After the adoption of ASC 842, Other revenue
also includes leasing revenue from hardware where the customer has a right of use during the contract term under ASC 842, as hardware
substitution rights are not considered substantive.
Also included in the Other category are on-site
software arrangements which include a license of intellectual property as the customer has the contractual right to take possession of
the software and the customer can either run the software on its own hardware or contract with another party unrelated to the Company
to host the software. The customer receives the right to use the software license upon its installation for the term of the arrangement.
As such, the Company has concluded that the software license is a distinct performance obligation and recognizes the transaction price
allocated to on-site software upon installation. The Company also provides maintenance and support of the software applications. Such
maintenance and support services may include server and desktop support, bug fixes, and support resolving other issues a customer may
encounter in utilizing the software. Revenue allocated to maintenance and support is generally recognized ratably over the contract period
as customers simultaneously consume and receive benefits, given the support and maintenance comprise distinct performance obligations
that are satisfied ratably over time. A time-elapsed output method is used to measure progress as the Company transfers control evenly
over the duration of the contract. Accordingly, maintenance and support revenue for on-site licenses is included in subscription revenue.
Income Taxes. Income tax expense is recognized
for the amount of taxes payable or refundable for the current year. Deferred tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating
losses and tax credit carryforwards. Management must make assumptions, judgments, and estimates to determine the provision for income
taxes, taxes payable or refundable, and deferred tax assets and liabilities. The Company's assumptions, judgments, and estimates take
into consideration the realization of deferred tax assets and changes in tax laws or interpretations thereof. The Company's income tax
returns are subject to examination by various tax authorities. A change in the assessment of the outcomes of such matters could materially
impact the Company's consolidated financial statements.
The Company records a valuation allowance
to reduce deferred tax assets to the amount that is more likely than not to be realized. In determining the need for a valuation allowance,
the Company considers future market growth, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies.
In the event the Company determines that it is more likely than not that an entity will be unable to realize all or a portion of its deferred
tax assets in the future, the Company would increase the valuation allowance and recognize a corresponding charge to earnings in the period
in which such a determination is made. Likewise, if the Company later determines that it is more likely than not that the deferred tax
assets will be realized, the Company would reverse the applicable portion of the previously recognized valuation allowance. In order to
realize deferred tax assets, the Company must be able to generate sufficient taxable income of the appropriate character in the jurisdictions
in which the deferred tax assets are located.
The Company recognizes tax benefits for tax
positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the
largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized tax benefits are
tax benefits claimed in the Company's income tax returns that do not meet these recognition and measurement standards. Assumptions, judgments,
and the use of estimates are required in determining whether the "more likely than not" standard has been met when developing
the provision for income taxes.
If certain pending tax matters settle within
one year, the total amount of unrecognized tax benefits may increase or decrease for all open tax years and jurisdictions. Audit outcomes
and the timing of audit settlements are subject to significant uncertainty. The Company continually assesses the likelihood and amount
of potential adjustments and adjusts the income tax provision, the current taxes payable and deferred taxes in the period in which the
facts that give rise to a revision become known.
Stock-Based
Compensation. Certain of the Company's employees have been granted (a) stock options to purchase shares of the Company's common
stock and/or (b) restricted stock or restricted stock units under which shares of the Company's common stock vest based on the passage
of time or achievement of performance and market conditions. The Company recognizes stock-based compensation expense in net earnings based
on the fair value of the award on the date of the grant. The Company records the impact of forfeitures on stock compensation expense in
the period the forfeitures occur. The Company determines the fair value of stock options issued using a binomial option-pricing model.
The binomial option-pricing model considers a range of assumptions related to volatility, dividend yield, risk-free interest rate, and
employee exercise behavior. Expected volatility utilized in the binomial option pricing model is based on a combination of implied market
volatility and historical volatility of peer companies. Similarly, the dividend yield is based on historical experience and expected future
dividend payments. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The binomial option
pricing model also incorporates exercises based on an analysis of historical data. The expected life of a stock option grant is derived
from the output of the binomial model and represents the period of time that options granted are expected to be outstanding.
The grant date fair value of restricted stock
and restricted stock units that vest upon achievement of service conditions is based on the closing price of the Company's common stock
on the date of grant. The Company also grants performance-based awards that vest over a performance period. Certain performance-based
awards are further subject to adjustment (increase or decrease) based on a market condition defined as total stockholder return of the
Company's common stock compared to a peer group of companies. The fair value of performance-based awards subject to a market condition
is determined using a Monte Carlo simulation model. The principal variable assumptions utilized in determining the grant date fair value
of performance-based awards subject to a market condition include the risk-free rate, stock volatility, dividend yield, and correlations
between the Company's stock price and the stock prices of the peer group of companies. The probability associated with the achievement
of performance conditions affects the vesting of the Company's performance-based awards. Expense is only recognized for those shares expected
to vest. The Company adjusts stock-based compensation expense (increase or decrease) when it becomes probable that actual performance
will differ from the estimate.
Cash
and Cash Equivalents. Investment securities with an original maturity of three months or less at the time of purchase are considered
cash equivalents.
Accounts
Receivable, Net. Accounts receivable, net is primarily comprised of trade receivables and lease receivables, net of allowances.
Trade receivables consist of amounts due to the Company in the normal course of business, which are not collateralized and do not bear
interest. Lease receivables primarily relate to sales-type leases arising from the sale of hardware elements in bundled DMS or other integrated
solutions. Lease receivables represent the current portion of the present value of the minimum lease payments at the beginning of the
lease term. The long-term portion of the present value of the minimum lease payments is included in other assets on the Consolidated Balance
Sheets.
Allowance
for Credit Losses. The Company is exposed to credit losses primarily through the sales of its products and services. The
majority of the Company's receivables are trade receivables due in less than one year. The Company's receivables also include the
short and long-term portions of contract assets, lease receivables and other accrued and unbilled receivables. Refer to Note 6 -
Revenue for more information about contract assets.
After the adoption of Accounting Standards
Update ("ASU") 2016-13, which requires the application of a current expected credit loss impairment model ("CECL"),
the Company identified the following risk characteristics of its customers and the related receivables and financial assets: geographic
region, major line of business (e.g. Automotive, OEM, etc.), size or a combination of these characteristics. Receivables with similar
risk characteristics have been grouped into pools. For each pool, the Company considers the historical credit loss experience, current
economic conditions, adjusted for external data and macroeconomic factors such as unemployment rates in certain operating regions or automobile
sales. Due to the short-term nature of trade receivables, the estimated amount of accounts receivable that may not be collected is based
on the aging of the receivable balances, the financial condition of customers and the Company's historical loss rates. For certain other
financial assets, the expected credit losses are also evaluated based on the credit rating of the counterparty, or reasonable and supportable
forecasts of future economic conditions. Additionally, specific reserves are established for certain financial assets on an individual
basis when they no longer meet the criteria to be classified in a particular pool. Should a particular asset's risk characteristics change,
the Company will assess whether the asset should be moved to another pool. This analysis and the review of credit quality indicators are
performed at each quarter-end, or more often as deemed necessary based on specific facts and circumstances.
The Company also carries financial assets
that are attributable to the sale of the Digital Marketing Business. These assets consist of a 10-year note receivable and receivables
related to transition services agreements in connection with the sale of the business. Specific reserves are established for these assets
if it is determined that there is a higher probability of default, which considers the aging of the receivable balances and the financial
condition of the counterparty.
The Company's monitoring activities
include timely account reconciliation, reviews of credit and collection performance, consideration of customers' financial
conditions and macroeconomic conditions. For trade receivables and unbilled accounts receivable, credit quality indicators relate to
collection history and the delinquency status of amounts due, which is determined based on the aging of such receivables. For
certain other financial assets including contract assets, lease receivables, other accrued and unbilled receivables, and financial
assets attributable to the sale of the Digital Marketing Business, credit quality indicators are generally based on rating agency
data, publicly available information and information provided by customers which may affect their ability to pay. Financial assets
are written off when they are determined to be uncollectible.
Prior to the adoption of CECL, the accounts
receivable allowances for both trade receivables and lease receivables were estimated based on historical collection experience, an analysis
of the age of outstanding accounts receivable, and credit issuance experience. Receivables were considered past due if payment was not
received by the date agreed upon with the customers. Write-offs were made when management believed it was probable a receivable would
not be recovered.
Funds
Receivable and Funds Held for Clients and Client Fund Obligations. Funds receivable and funds held for clients represent amounts
received or expected to be received from clients in advance of performing titling and registration services on behalf of those clients.
These amounts are classified in other current assets on the Consolidated Balance Sheets. The total amount due to remit for titling and
registration obligations with the department of motor vehicles is recorded to client fund obligations which is classified as accrued expenses
and other current liabilities on the Consolidated Balance Sheets. Funds receivable was $42.2 million and $42.7 million, and funds held
for clients was $16.0 million and $20.2 million as of June 30, 2022 and 2021, respectively. Client fund obligation was $58.2 million and
$62.9 million as of June 30, 2022 and 2021, respectively.
Property,
Plant and Equipment, Net. Property, plant and equipment, net is stated at cost and depreciated over the estimated useful lives
of the assets using the straight-line method. Leasehold improvements are amortized over the shorter of the term of the lease or the estimated
useful lives of the improvements. The estimated useful lives of assets are primarily as follows:
Buildings | |
20 to 40 years |
Furniture and fixtures | |
4 to 7 years |
Data processing equipment | |
3 to 5 years |
Goodwill.
The Company performs an evaluation of goodwill, utilizing either a qualitative or quantitative impairment test. A qualitative
assessment is performed at least annually to determine whether it is more likely than not that the fair value of a reporting unit is less
than its carrying value. The Company performs a quantitative impairment test for each reporting unit every three years, or more frequently
if circumstances indicate a potential impairment. The annual test for impairment is conducted as of April 1. A reporting unit is an operating
segment or a component of an operating segment. Goodwill is not amortized but is subject to periodic testing for impairment at the reporting
unit level.
Under a qualitative assessment, the most
recent quantitative assessment is used to determine if it is more likely than not that the reporting unit's goodwill is impaired. As part
of this qualitative assessment, the Company assesses relevant events and circumstances including macroeconomic conditions, industry and
market conditions, cost factors, overall financial performance, changes in share price and entity-specific events to determine if there
is an indication of impairment.
Under a quantitative assessment, goodwill
impairment is identified by comparing the fair value of a reporting unit to its carrying amount, including goodwill. If the carrying amount
of a reporting unit exceeds its fair value, goodwill is considered impaired and an impairment charge is recognized in an amount equal
to that excess, not to exceed the carrying amount of goodwill. The fair value of a reporting unit is generally determined by using a weighted
combination of an income approach and a market approach, as this combination is considered the most indicative of the Company's fair value
in an orderly transaction between market participants. The Company currently applies a 100% income approach weighting to one of its reporting
units due to the limited publicly available information for guideline companies.
Under the income approach, the Company determines
fair value based on estimated future cash flows of a reporting unit, discounted by an estimated weighted average cost of capital, which
reflects the overall level of inherent risk of a reporting unit and the rate of return an outside investor would expect to earn. The estimated
future cash flows of each reporting unit are based on internally generated forecasts for the remainder of the respective reporting period
and the next five to ten years.
Under the market approach, the Company utilizes
valuation multiples derived from publicly available information for guideline companies to provide an indication of how much a knowledgeable
investor in the marketplace would be willing to pay for a company. The valuation multiples are applied to the reporting units.
Determining the fair value of a reporting
unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates, operating
margins, discount rates and future market conditions, among others. Any changes in the judgments, estimates or assumptions used could
produce significantly different results.
Impairment
of Long-Lived Assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying
amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount
exceeds the fair value.
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 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 typically amortizes
internal use software over a 3 to 8 years life.
The Company's policy provides for the capitalization
of certain costs of computer software to be sold, leased, or otherwise marketed. The Company capitalizes software production costs upon
reaching technological feasibility for a specific product. Technological feasibility is attained when software products have a completed
working model whose consistency with the overall product design has been confirmed by testing. Costs incurred prior to the establishment
of technological feasibility are expensed as incurred. The establishment of technological feasibility requires judgment by management
and in many instances is only attained a short time prior to the general release of the software. Maintenance-related costs are expensed
as incurred.
Pursuant to these policies, the Company incurred
expenses to research, develop, and deploy new and enhanced solutions of $81.0 million and $79.3 million for fiscal 2022 and 2021, respectively.
These expenses were classified in cost of revenue on the Consolidated Statements of Operations.
Discontinued
Operations. The Company reports financial results for discontinued operations separately from continuing operations to distinguish
the financial impact of disposal transactions from ongoing operations. Discontinued operations reporting occurs only when the disposal
of a component or a group of components of the Company (i) meets the held-for-sale classification criteria, is disposed of by sale, or
other than by sale, and (ii) represents a strategic shift that will have a major effect on the Company's operations and financial results.
The results of operations and cash flows of a discontinued operation are restated for all comparative periods presented. Unless otherwise
noted, discussion in the Notes to Consolidated Financial Statements refers to the Company's continuing operations. Refer to Note 4 - Discontinued
Operations for further information.
Fair
Value Measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability
(an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use
of unobservable inputs. A fair value hierarchy has been established based on three levels of inputs, of which the first two are considered
observable and the last unobservable.
| · | Level 1: Inputs that are based upon quoted prices in active markets for identical assets or liabilities. |
| · | Level 2: Inputs, other than quoted prices included in Level 1, which are observable
for the asset or liability, either directly or indirectly. |
| · | Level 3: Unobservable inputs where there is little or no market activity for the
asset or liability. These inputs reflect management's best estimate of what market participants would use to price the assets or liabilities
at the measurement date. |
The Company determines the fair value of
financial instruments in accordance with ASC 820, "Fair Value Measurements." This standard defines fair value and establishes
a framework for measuring fair value in accordance with GAAP. Cash and cash equivalents, accounts receivable, other current assets, accounts
payable, and other current liabilities are reflected on the Consolidated Balance Sheets at cost, which approximates fair value due to
the short-term nature of these instruments. The carrying value of the Company's term loan facilities (as described in Note 14 - Debt),
including accrued interest, approximated fair value based on the Company's current estimated incremental borrowing rate for similar types
of arrangements.
The Company has derivatives not designated
as hedges which consisted of foreign currency forward contracts to offset the risks associated with the effects of certain foreign currency
exposure on intercompany loans. The Company recognized changes in fair value of the derivative instruments in other income, net in the
Consolidated Statements of Operations.
Foreign
Currency. For foreign subsidiaries where the local currency is the functional currency, net assets are translated into U.S.
dollars based on exchange rates in effect for each period, and revenue and expenses are translated at average exchange rates in the periods.
Gains or losses from balance sheet translation of such entities are included in accumulated other comprehensive income on the Consolidated
Balance Sheets. Currency transaction gains or losses relate to intercompany loans denominated in a currency other than that of the loan
counterparty, which do not eliminate upon consolidation. Currency transaction gains or losses are included in other income, net on the
Consolidated Statements of Operations.
Leases. The Company has
lease arrangements where the Company acts as either a lessee or a lessor. The Company applies judgment in order to determine if an arrangement
contains a lease, to assess which party retains a material amount of economic benefit from the underlying asset, and to determine which
party holds control over the direction and use of the asset. The Company also applies judgment to determine whether the Company will
exercise renewal options, to identify substantive substitution rights over the asset, to determine the incremental borrowing rate, and
to estimate the fair value of the leased asset.
CDK
as a Lessee. The Company has obligations under lease arrangements mainly for facilities, equipment, data centers, and vehicles.
These leases have original lease periods expiring between fiscal 2023 and 2029. The Company classifies leases as finance leases when there
is either a transfer of ownership of the underlying asset by the end of the lease term, the lease contains an option to purchase the asset
that the Company is reasonably certain will be exercised, the lease term is for the major part of the remaining economic life of the asset,
the present value of the lease payments and any residual value guarantee equals or substantially exceeds all the fair value of the asset,
or the asset is of such a specialized nature that it will have no alternative use to the lessor at the end of the lease term. When none
of these criteria are met, the Company classifies leases as operating leases.
Several of the Company's leases include one
or more options to renew. The Company does not assume renewal periods in its determination of lease term unless it is reasonably certain
that the Company will exercise the renewal option. The Company considers leases with an initial term of 12 months or less as short-term
in nature and does not record such leases on the balance sheets. The Company records all other leases on the balance sheets with right-of-use
("ROU") assets representing the right to use the underlying asset for the lease term and lease liabilities representing the
obligation to make lease payments arising from the lease.
The Company recognizes ROU assets and lease
liabilities based on the present value of lease payments over the lease term. The ROU asset is adjusted for prepaid or deferred rent,
lease incentives and impairments. The Company uses the incremental borrowing rate at the lease commencement date to determine the present
value of the lease payments as the implicit rate in the leases is generally not readily determinable. The incremental borrowing rate is
generally determined using factors such as treasury yields, the Company's credit rating and lease term, and may differ for individual
leases.
In addition to fixed lease payments, several
lease arrangements contain provisions for variable lease payments relating to utilities and maintenance costs or rental increases not
scheduled in the lease. Variable lease payments are expensed in the period in which the obligation for those payments is incurred. The
Company has elected to combine lease and non-lease components, such as fixed maintenance costs, as a single lease component in calculating
ROU assets and lease liabilities.
CDK
as a Lessor. The Company's hardware-as-a-service arrangements, in which the Company provides customers continuous access to
CDK owned hardware, such as networking and telephony equipment and laser printers, are accounted for as sales-type leases under ASC 842,
primarily because they do not contain substantive substitution rights. Since the Company elected to not reassess prior conclusions related
to arrangements containing leases, the lease classification, and the initial direct costs, only hardware leases that commenced or are
modified on or subsequent to July 1, 2019, are accounted for under ASC 842. Historically, the Company has accounted for these arrangements
as a distinct performance obligation under the revenue recognition guidance and recognized revenue over the term of the arrangement. Sales-type
lease arrangements follow the Company's customary contracting practices and, generally, include a fixed monthly fee for the lease and
non-lease components for the duration of the contract term. The Company does not typically provide renewal, termination or purchase options
to its customers.
The Company recognizes net investment in
sales-type leases based on the present value of the lease receivable when collectability is probable. The Company accounts for lease and
non-lease components such as maintenance costs, separately. Consideration is allocated between lease and non-lease components based on
stand-alone selling price in accordance with ASC 606, Revenue from Contracts with Customers.
Note 3. New Accounting Pronouncements
Recently
Adopted Accounting Pronouncements. In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting
Standards Update ("ASU") No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes," ("ASU
2019-12"), which simplifies the accounting for income taxes in various areas. ASU 2019-12 is effective for public business entities
for fiscal years beginning after December 15, 2020, including interim periods therein. The Company adopted ASU 2019-12 on July 1, 2021.
The adoption of the new standard did not have a material impact on the Company's consolidated financial statements.
In October 2021, the FASB issued ASU No.
2021-08 "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts With Customers"
("ASU 2021-08"). ASU 2021-08 requires companies to apply "Revenue from Contracts with Customers (Topic 606)" ("ASC
606") when recognizing and measuring contract assets and contract liabilities acquired in a business combination. ASU 2021-08 is
effective for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years. Early adoption is permitted.
The Company elected to adopt ASU 2021-08 effective October 1, 2021. ASU 2021-08 will apply to all business combinations that occur during
fiscal year ended June 30, 2022. The adoption of the new standard did not have a material impact on the Company's consolidated financial
statements.
Recently
Issued Accounting Pronouncements. In July 2021, the FASB issued ASU No. 2021-05 "Leases (Topic 842): Lessors —Certain
Leases with Variable Lease Payments," ("ASU 2021-05"). ASU 2021-05 requires lessors to classify leases as operating leases
if they have variable lease payments that do not depend on an index or rate and would have selling losses if they were classified as sales-type
or direct financing leases. ASU 2021-05 is effective for fiscal years beginning after December 15, 2021, and interim periods within those
fiscal years. The Company does not expect the adoption to have a material impact on its consolidated financial statements but the Company
will examine a potential adoption based on 2023 results.
Note 4. Discontinued Operations
International
Business. On March 1, 2021, the Company completed its sale of the CDK International business ("International Business")
to Francisco Partners. The Company recorded a pre-tax gain on sale of $967.7 million in fiscal 2021. The pre-tax gain on sale includes
a $37.9 million reclassification of net currency losses from accumulated other comprehensive income. The pre-tax gain on sale excludes
transaction costs of $32.4 million, which were recorded as selling, general and administrative expenses in the table below. The Company
provided limited services to Francisco Partners to assist in the integration of the International Business through February 2022. The
financial results are presented in net earnings from discontinued operations in the Consolidated Statements of Operations for all periods
presented.
Digital
Marketing Business. On April 21, 2020, the Company completed its sale of the Digital Marketing Business to Sincro LLC, a newly
formed company owned by Ansira Partners, Inc., which is a subsidiary of Advent International.
The following table summarizes the comparative
financial results of discontinued operations which are presented in net earnings from discontinued operations in the Consolidated Statements
of Operations:
| |
Year Ended June 30, | |
| |
2022 | | |
2021 | |
Revenue | |
$ | ¾ | | |
$ | 223.1 | |
Cost of revenue | |
| ¾ | | |
| 102.0 | |
Selling, general and administrative expenses | |
| 1.3 | | |
| 83.4 | |
Valuation adjustment | |
| ¾ | | |
| (1.9 | ) |
Restructuring expenses | |
| ¾ | | |
| 11.2 | |
Operating earnings (loss) | |
| (1.3 | ) | |
| 28.4 | |
Interest expense | |
| ¾ | | |
| (0.1 | ) |
Other income, net | |
| ¾ | | |
| 2.5 | |
Earnings (loss) before income taxes | |
| (1.3 | ) | |
| 30.8 | |
Gain on sale | |
| 1.9 | | |
| 967.7 | |
Benefit (provision) for income taxes | |
| 0.7 | | |
| (145.7 | ) |
Net earnings (loss) from discontinued operations | |
$ | 1.3 | | |
$ | 852.8 | |
Note 5. Acquisitions
Fiscal 2022 Acquisitions
Salty
Dot, Inc. On October 1, 2021, the Company acquired all of the outstanding equity of Salty Dot, Inc.("Salty"), a privately
held automobile insurance technology solution provider. The acquisition is being recorded using the acquisition method of accounting,
which requires, among other things, the assets acquired and liabilities assumed to be recognized at their respective fair values as of
the acquisition date. Under the acquisition method, total consideration was determined to be $181.6 million, subject to customary adjustments.
Total consideration includes the fair value of contingent payments. The fair value of contingent payments, determined using an option
pricing model, was estimated at $23.7 million as of the acquisition date. The range of contingent payments is zero to $147.0 million with
the final amount dependent on the achievement of certain revenue and gross margin milestones over the 3-year period following acquisition.
The following table summarizes the amounts
recognized for assets acquired and liabilities assumed as of the acquisition date, subject to the finalized purchase price allocation:
Cash and cash equivalents | |
$ | 6.2 | |
Intangible assets | |
| 38.1 | |
Other assets | |
| 0.9 | |
Other liabilities | |
| (4.7 | ) |
Total identifiable net assets | |
$ | 40.5 | |
Goodwill | |
| 141.1 | |
Total consideration | |
$ | 181.6 | |
The intangible assets acquired primarily
relate to software that is being amortized over a useful life of 8 years. The goodwill resulting from this acquisition reflects expected
synergies resulting from adding Salty products and processes to the Company's portfolio. The acquired goodwill is not deductible for tax
purposes.
The results of operations for Salty has been included
in the Consolidated Statements of Operations from the date of acquisition.
Fiscal 2021 Acquisitions
Roadster.
On June 2, 2021, the Company acquired Roadster, Inc., ("Roadster"), a Palo Alto, California-based digital sales platform.
Roadster's customer relationship management ("CRM") solution enables dealers and OEMs to sell vehicles completely online, and
to enhance the consumer retail experience. The Company acquired all of the outstanding equity of Roadster. The acquisition is being recorded
using the acquisition method of accounting, which requires, among other things, the assets acquired and liabilities assumed to be recognized
at their respective fair values as of the acquisition date. Under the acquisition method, total consideration was determined to be $364.4
million, subject to customary adjustments. Total consideration includes the fair value of contingent payments up to $14.5 million as of
the acquisition date, for which the amount payable will vary depending on the occurrence of certain events over an 18-month period after
the closing.
The following table summarizes the amounts
recognized for assets acquired and liabilities assumed as of the acquisition date, subject to the finalized purchase price allocation:
Cash and cash equivalents | |
$ | 8.5 | |
Intangible assets | |
| 74.8 | |
Other assets | |
| 8.2 | |
Other liabilities | |
| (10.3 | ) |
Total identifiable net assets | |
$ | 81.2 | |
Goodwill | |
| 283.2 | |
Total consideration | |
$ | 364.4 | |
The intangible assets acquired primarily
relate to customer relationships, software, and trademarks, which are being amortized over a useful life of 10, 8 and 4 years, respectively.
The weighted average useful life of the acquired intangible assets is 8 years. The goodwill resulting from this acquisition reflects expected
synergies resulting from adding Roadster products and processes to the Company's products and processes. The acquired goodwill is not
deductible for tax purposes.
Square
Root. On February 1, 2021, the Company acquired Square Root, Inc. ("Square Root"), an Austin-based developer of data
curation software for OEMs. The Company acquired all of the outstanding equity of Square Root for a purchase price of up to $25.0 million.
The purchase price includes a contingent purchase price payment of up to $5.0 million, which becomes payable if certain performance conditions
are met by Square Root over a two-year period after the closing. The fair value of the contingent payments was $2.3 million as of the
acquisition date, for which the amount payable will vary depending on the occurrence of certain events over the 24-month period after
the closing.
The results of operations for all acquisitions
have been included in the Consolidated Statements of Operations from the date of acquisition. The pro forma effects of this acquisition
are not significant to the Company's reported results for any period presented. Accordingly, no pro forma financial statements have been
presented herein.
Note
6. Revenue
Contract Balances
Accounts Receivable
A receivable is recorded when an unconditional
right to invoice and receive payment exists, such that only the passage of time is required before payment of consideration is due. The
Company receives payments from customers based upon contractual billing schedules. Payment terms can vary by contract but the period between
invoicing and when payments are due is not significant. The timing of revenue recognition may differ from the timing of invoicing to customers.
Included in accounts receivable on the Consolidated Balance Sheets are unbilled receivable balances which have not yet been invoiced.
As of June 30, 2022, the balance of accounts receivable, net of allowances for doubtful accounts, was $246.8 million, inclusive of unbilled
receivables of $1.7 million. As of June 30, 2021, the balance of accounts receivable, net of allowances for doubtful accounts, was $236.4
million, inclusive of unbilled receivables of $1.8 million.
Contract Assets
A
contract asset is recognized when a conditional right to consideration exists and transfer of control has occurred. Contract assets
are typically related to subscription contracts where the transaction price allocated to the satisfied performance obligation
exceeds the value of billings to-date. Contract assets are reported in a net position on a contract-by-contract basis and are
included in other current assets for the current portion and other assets for the long-term portion on the Consolidated Balance
Sheets. The Company regularly reviews contract asset balances for impairment, considering factors such as historical experience,
credit-worthiness, age of the balance, and other economic or business factors. Refer to Note 9
– Allowance for Credit Losses for more information about contract assets exposure to credit losses. Contract asset impairments
were not significant in the twelve months ended June 30, 2022. Contract assets were $60.0 million and $64.3 million as of June 30,
2022 and 2021, respectively.
Deferred Revenue
The Company's deferred revenue primarily
consists of payments received from customers, or such consideration that is contractually due, in advance of providing the product or
performing services. Deferred revenue is reported in a net position on a contract-by-contract basis at the end of each reporting period.
As of June 30, 2022 and June 30, 2021, the deferred revenue balance was $64.3 million and $69.0 million, respectively. For the years ended
June 30, 2022 and 2021, the Company recognized revenue of $61.8 million and $76.5 million, respectively, related to its deferred revenue.
Remaining
Performance Obligations. 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 following information represents the total transaction price for
the remaining performance obligations as of June 30, 2021 related to non-cancelable contracts, including contracts less than one year
in duration, that is expected to be recognized over future periods. In each case the fiscal period represents the year ended June 30.
As of June 30, 2022, the Company had $2.6
billion of remaining performance obligations which represent contracted revenue that has not yet been recognized, including contracted
revenue where the contract's original expected duration is one year or less. The Company expects to recognize approximately $1.0 billion
of the remaining performance obligations as revenue for fiscal 2023, $720.0 million for fiscal 2024, $480.0 million for fiscal year 2025,
$290.0 million for fiscal 2026, $90.0 million for fiscal 2027, and $10.0 million thereafter. The remaining performance obligations exclude
future transaction revenue where revenue is recognized as the services are rendered and in the amount to which the Company has the right
to invoice.
Costs
to Obtain and Fulfill a Contract. The Company capitalizes certain contract acquisition costs consisting primarily of commissions
incurred when contracts are signed. The Company does not capitalize commissions related to contracts with a duration of less than one
year; such commissions are expensed in selling, general and administrative expenses when incurred. Costs to fulfill contracts are capitalized
when such costs are direct and related to transition or installation activities for hosted software solutions. Capitalized costs to fulfill
contracts primarily include travel and employee compensation and benefit related costs for the Company's implementation and training teams.
Capitalized costs to obtain a contract and most costs to fulfill a contract are amortized over a period of five years which represents
the expected period of benefit of these costs. In instances where the contract term is significantly less than five years, costs to fulfill
are amortized over the contract term which the Company believes best reflects the period of benefit of these costs.
As of June 30, 2022 and 2021, the Company
capitalized contract acquisition and fulfillment costs of $223.7 million and $195.7 million, respectively. The Company expects that incremental
commission fees incurred as a result of obtaining contracts and fulfillment costs are recoverable. During fiscal 2022 and 2021, the Company
recognized cost amortization of $81.4 million and $73.9 million; there were no significant impairment losses.
Revenue Disaggregation. The following
table presents revenue by category for twelve months ended June 30, 2022 and 2021:
| |
Year Ended June 30, | |
| |
2022 | | |
2021 | |
Subscription | |
$ | 1,408.1 | | |
$ | 1,313.9 | |
Transaction | |
| 166.9 | | |
| 174.9 | |
Other | |
| 216.4 | | |
| 184.4 | |
Total Revenue | |
$ | 1,791.4 | | |
$ | 1,673.2 | |
The Company recognizes subscription revenue over time
and substantially all transaction and other revenue at a point in time.
Note 7. Stock-Based Compensation
Incentive
Equity Awards Granted by the Company. The Company's 2014 Omnibus Award Plan ("2014 Plan") provides for the
granting of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units,
other stock-based awards, and performance compensation awards to employees, directors, officers, consultants, advisors, and those of the
Company's affiliates. The 2014 Plan provides for an aggregate of 16.4 million shares of the Company's common stock to be reserved for
issuance and is effective for a period of ten years. As of June 30, 2022, there were 9.5 million shares available for issuance under the
2014 Plan. The Company reissues treasury stock to satisfy issuances of common stock upon option exercise, equity vesting, or grants of
restricted stock.
The Company recognizes stock-based compensation
expense associated with employee equity awards in net earnings based on the fair value of the awards on the date of grant. The Company
accounts for forfeitures as they occur. Stock-based compensation primarily consisted of the following:
Time-Based
Stock Options and Performance-Based Stock Options. Time-based stock options and performance-based stock options have a term
of ten years. Upon termination of employment, unvested stock options are evaluated for forfeiture or modification, subject to the terms
of the awards and Company policies.
Time-based stock options are granted to employees
at an exercise price equal to the fair market value of the Company's common stock on the date of grant and are generally issued under
a three or four-year graded vesting schedule.
Performance-based stock options are granted
to the CEO at an exercise price equal to the fair market value of the Company's stock on the date of grant. These awards vest, subject
to the Company's stock price performance and the CEO's continued employment with the Company, over a three-year performance period.
Time-Based
Restricted Stock and Time-Based Restricted Stock Units. Time-based restricted stock and restricted stock units generally vest
over a two to five-year period. Upon termination of employment, unvested time-based awards are evaluated for forfeiture or modification,
subject to the terms of the awards and Company policies.
Time-based restricted stock cannot be transferred
during the vesting period. Compensation expense related to the issuance of time-based restricted stock is measured based on the fair value
of the award on the grant date and recognized on a straight-line basis over the vesting period. Employees are eligible to receive cash
dividends on the CDK shares awarded under the time-based restricted stock program during the restricted period.
Time-based restricted stock units are primarily
settled in cash for non-U.S. recipients and may be settled in stock or cash for U.S. recipients at the discretion of the Company and cannot
be transferred during the restriction period. Compensation expense related to the issuance of time-based restricted stock units is recorded
over the vesting period and is initially based on the fair value of the award on the grant date. Cash-settled, time-based restricted stock
units are subsequently remeasured at each reporting date during the vesting period to the current stock value. For grants made prior to
September 6, 2018, no dividend equivalents are paid on units awarded during the restricted period. For grants made on or subsequent to
September 6, 2018, U.S. recipients are credited with dividend equivalents on units awarded during the restricted period, and no dividend
equivalents are paid or credited on units awarded to non-U.S. recipients during the restricted period.
Performance-Based
Restricted Stock Units. Performance-based restricted stock units generally vest over a three-year performance period. Under
these programs, the Company communicates "target awards" at the beginning of the performance period with possible payouts at
the end of the performance period ranging from 0% to 260% of the "target awards". Certain performance-based awards are further
subject to adjustment based on a market condition, defined as total stockholder return of the Company's common stock compared to a peer
group of companies. The probability associated with the achievement of performance conditions affects the vesting of the Company's performance-based
awards. Expense is only recognized for those shares expected to vest. Upon termination of employment, unvested awards are evaluated for
forfeiture or modification, subject to the terms of the awards and Company policies.
Performance-based restricted
stock units are settled in either cash or stock for employees whose home country is the U.S. at the discretion of the Company, and are
settled in cash for all other employees and cannot be transferred during the vesting period. Compensation expense related to the issuance
of performance-based restricted stock units settled in cash is recorded over the vesting period, is initially based on the fair value
of the award on the grant date and is subsequently remeasured at each reporting date to the current stock value during the performance
period, based upon the probability that the performance target will be met. Compensation expense related to the issuance of performance-based
restricted stock units settled in stock is recorded over the vesting period based on the fair value of the award on the grant date. Prior
to settlement, dividend equivalents are earned on "target awards" under the performance-based restricted stock unit program.
The following table represents
stock-based compensation expense and the related income tax benefits for fiscal 2022 and 2021, respectively:
| |
Year Ended June 30, | |
| |
2022 | | |
2021 | |
Cost of revenue | |
$ | 22.4 | | |
$ | 14.1 | |
Selling, general and administrative expenses | |
| 40.0 | | |
| 28.9 | |
Total stock-based compensation expense | |
| 62.4 | | |
| 43.0 | |
Income tax benefit(1) | |
| 10.6 | | |
| 6.2 | |
Stock-based compensation expense, net of tax | |
$ | 51.8 | | |
$ | 36.8 | |
(1) Represents stock-based
compensation expense exclusive of non-deductible executive compensation at the statutory tax rates. Excess tax benefits or shortfalls
associated with stock awards are excluded from this disclosure and presented separately in Note 15 - Income Taxes.
Stock-based compensation
expense for fiscal 2022 consisted of $59.1 million of expense related to equity-classified awards and $3.3 million of expense related
to liability-classified awards. Total stock-based compensation expense for fiscal 2022 includes $0.4 million of cumulative adjustments
related to the achievement of financial performance metrics based on the outcome of fiscal 2022 associated with performance-based restricted
stock units.
Stock-based compensation
expense for fiscal 2021 consisted of $40.8 million of expense related to equity-classified awards and $2.2 million of expense related
to liability-classified awards. Total stock-based compensation expense for fiscal 2021 includes $3.9 of cumulative adjustments related
to the achievement of financial performance metrics based on the outcome of fiscal 2021 associated with performance-based restricted stock
units.
As of June 30, 2022, the
total unrecognized compensation cost related to non-vested stock options and restricted stock units was $2.8 million and $66.3 million,
respectively, which will be amortized over the weighted average remaining requisite service periods of 1.9 years and 1.6 years, respectively.
There was no unrecognized compensation cost related to non-vested restricted stock awards as of June 30, 2022.
The activity related to the
Company's incentive equity awards for fiscal 2022, including amounts attributable to the Company's discontinued operations, consisted
of the following:
Time-Based Stock Options.
| |
Number of Options (in thousands) | | |
Weighted Average Exercise Price (in dollars) | | |
Weighted Average Remaining Contractual Life
(in years) | | |
Aggregate Intrinsic Value (in millions) | |
Options outstanding as of June 30, 2021 | |
| 1,029 | | |
$ | 46.88 | | |
| | | |
| | |
Options granted | |
| 397 | | |
| 42.59 | | |
| | | |
| | |
Options exercised | |
| (2 | ) | |
| 22.43 | | |
| | | |
| | |
Options canceled | |
| (1 | ) | |
| 43.54 | | |
| | | |
| | |
Options outstanding as of June 30, 2022 | |
| 1,423 | | |
$ | 45.71 | | |
| 7.1 | | |
$ | 14.0 | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable as of June 30, 2022 | |
| 849 | | |
$ | 48.40 | | |
| 5.9 | | |
$ | 5.9 | |
The Company received proceeds from the exercise
of stock options of approximately $0.1 million and $2.5 million during fiscal 2022 and 2021, respectively. The aggregate intrinsic value
of stock options exercised during fiscal 2022 and 2021 was approximately $0.1 million and $1.0 million, respectively.
The Binomial model used to determine the
grant date fair value of the time-based stock options granted in the first quarter of fiscal 2022 used an expected volatility based on
the average of implied volatility and historical stock price volatility for the Company, the average of which was 27.2%, a risk-free interest
rate of 1.0%, an expected dividend yield of 1.4%, and weighted average expected life of 6.
Performance-Based
Stock Options. There were no grants of performance-based stock options during the fiscal 2022.
| |
| | |
Weighted | |
| |
Number | | |
Average | |
| |
of Options | | |
Exercise | |
| |
(in | | |
Price | |
| |
thousands) | | |
(in dollars) | |
Options outstanding as of June 30, 2021 | |
| 152 | | |
$ | 50.77 | |
Options granted | |
| — | | |
| — | |
Options outstanding as of June 30, 2022 | |
| 152 | | |
$ | 50.77 | |
The following table presents the assumptions used to determine
the fair value of the stock options granted by the Company:
| |
Fiscal 2022 | | |
Fiscal 2021 | |
Risk-free interest rate | |
| 1.0 | % | |
| 0.4 | % |
Dividend yield | |
| 1.4 | % | |
| 1.4 | % |
Weighted average volatility factor | |
| 27.2 | % | |
| 33.0 | % |
Weighted average expected life (in years) | |
| 6.0 | | |
| 6.0 | |
Weighted average fair value (in dollars) | |
$ | 9.83 | | |
$ | 11.73 | |
Time-Based Restricted Stock and Time-Based Restricted
Stock Units.
| |
Restricted Stock Units | |
| |
Number of Units (in thousands) | | |
Weighted
Average
Grant Date
Fair Value
(in dollars) | |
Non-vested as of June 30, 2021 | |
| 1,525 | | |
$ | 47.60 | |
Granted | |
| 1,132 | | |
| 42.49 | |
Vested | |
| (588 | ) | |
| 48.15 | |
Forfeited | |
| (316 | ) | |
| 47.21 | |
Non-vested as of June 30, 2022 | |
| 1,753 | | |
$ | 44.23 | |
| |
| | | |
| | |
Performance-Based
Restricted Stock Units. | |
| | | |
| | |
| |
| Restricted Stock Units | |
| |
| Number of Units (in thousands) | | |
| Weighted Average Grant Date Fair Value (in dollars) | |
Non-vested as of June 30, 2021 | |
| 785 | | |
$ | 45.99 | |
Granted | |
| 448 | | |
| 42.69 | |
Vested | |
| (343 | ) | |
| 47.12 | |
Forfeited | |
| (62 | ) | |
| 46.45 | |
Non-vested as of June 30, 2022 | |
| 828 | | |
$ | 43.70 | |
The Monte Carlo simulation model used to
determine the grant date fair value of the total three-year performance-based restricted stock units granted during fiscal 2022 used an
expected volatility based on historical stock price volatility for the Company and the peer companies, the average of which was 33.3%
and a risk-free interest rate of 0.4%. Because these awards earn dividend equivalents, the model did not assume an expected dividend yield.
Note 8. Employee Benefit Plans
The Company offers a defined contribution
savings plan. This plan covers all eligible full-time domestic employees and provides company-matching contributions on a portion of employee
contributions. The costs recorded by the Company for this plan were $17.0 million and $17.2 million for fiscal 2022 and 2021, respectively.
Note 9. Allowance for Credit Losses
On July 1, 2020, the Company adopted ASU
2016-13 using a modified retrospective approach. The noncash cumulative effect of adopting CECL resulted in a decrease of $8.2 million,
net of tax impacts, to retained earnings, with corresponding increases to the allowance for expected credit losses impacting accounts
receivable, net, other current assets and other assets on the Consolidated Balance Sheets. The cumulative-effect adjustment in retained
earnings includes amounts related to the International Business, which represented an impact upon adoption of $1.2 million, net of tax.
At adoption, there was no impact on the Company's Consolidated Statements of Operations and Cash Flows. The impacts related to prior comparative
periods have not been restated and continue to be reported under the accounting standards in effect for the prior periods.
Credit
loss expense is included in selling, general and administrative expenses in the Consolidated Statements of Operations. The following
table provides a roll forward of the allowance for credit losses that is deducted from the amortized cost basis to present the net
amount expected to be collected as of June 30, 2022.
| |
Accounts receivable, net | | |
Other current assets | | |
Other assets | | |
Total | |
Balance as of June 30, 2020 | |
$ | 10.6 | | |
$ | — | | |
$ | — | | |
$ | 10.6 | |
Cumulative-effect adjustment upon adoption | |
| 0.7 | | |
| 0.5 | | |
| 8.2 | | |
| 9.4 | |
Provision (release of provision) for expected credit losses | |
| (2.3 | ) | |
| 0.2 | | |
| 1.2 | | |
$ | (0.9 | ) |
Write-offs | |
| (3.0 | ) | |
| — | | |
| (0.2 | ) | |
| (3.2 | ) |
Other | |
| 0.3 | | |
| — | | |
| — | | |
$ | 0.3 | |
Balance as of June 30, 2021 | |
| 6.3 | | |
| 0.7 | | |
| 9.2 | | |
| 16.2 | |
Provision (release of provision) for expected credit losses | |
| 1.4 | | |
| (0.1 | ) | |
| 1.7 | | |
| 3.0 | |
Write-offs | |
| (5.6 | ) | |
| — | | |
| — | | |
| (5.6 | ) |
Recoveries | |
| 0.8 | | |
| — | | |
| — | | |
| 0.8 | |
Balance as of June 30, 2022 | |
$ | 2.9 | | |
$ | 0.6 | | |
$ | 10.9 | | |
$ | 14.4 | |
Note 10. Property, Plant and Equipment, Net
Depreciation expense for property,
plant and equipment was $33.3 million and $40.0 million for fiscal 2022 and 2021, respectively. Property, plant and equipment at cost
and accumulated depreciation consisted of the following:
| |
June 30, | |
| |
2022 | | |
2021 | |
Land and buildings | |
$ | 32.7 | | |
$ | 32.4 | |
Data processing equipment | |
| 213.3 | | |
| 221.9 | |
Furniture and fixtures, leasehold improvements and other | |
| 40.7 | | |
| 53.9 | |
Total property, plant and equipment | |
| 286.7 | | |
| 308.2 | |
Less: accumulated depreciation | |
| 216.6 | | |
| 236.4 | |
Property, plant and equipment, net | |
$ | 70.1 | | |
$ | 71.8 | |
Note 11. Leases
CDK as a Lessee. For fiscal 2022,
the Company recorded lease expense of $15.2 million in cost of revenue, $8.8 million in selling, general and administrative expenses,
and $0.3 million in interest expense, in the Consolidated Statements of Operations. For fiscal 2021, the Company recorded lease expense
of $26.7 million in cost of revenue, $3.1 million in selling, general and administrative expenses, and $0.5 million in interest expense,
in the Consolidated Statements of Operations.
The
following table summarizes the components of net lease expense for the year ended June 30, 2022 and 2021:
| |
June 30, | |
| |
2022 | | |
2021 | |
Finance Leases: | |
| | | |
| | |
Amortization expense of ROU assets | |
$ | 5.5 | | |
$ | 5.5 | |
Interest expense on lease liabilities | |
| 0.3 | | |
| 0.5 | |
Operating Leases: | |
| | | |
| | |
Lease expense | |
| 11.5 | | |
| 14.3 | |
Sublease income | |
| (0.3 | ) | |
| (1.9 | ) |
| |
| | | |
| | |
Short-term lease expense | |
| 3.5 | | |
| 3.3 | |
Variable lease expense | |
| 3.8 | | |
| 8.6 | |
Total net lease expense | |
$ | 24.3 | | |
$ | 30.3 | |
The following table presents
supplemental information related to leases:
| |
June 30, | |
| |
2022 | | |
2021 | |
Cash paid for amounts included in measurement of lease liabilities: | |
| | | |
| | |
Operating cash flows paid for operating leases | |
$ | 13.1 | | |
$ | 16.3 | |
Operating cash flows paid for interest portion of finance leases | |
| 0.3 | | |
| 0.5 | |
Finance cash flows paid for principal portion of finance leases | |
| 10.1 | | |
| 5.7 | |
| |
June 30, | |
| |
2022 | | |
2021 | |
Operating leases | |
| | | |
| | |
Weighted average remaining lease term | |
| 4.0 years | | |
| 4.2 years | |
Weighted average discount rate | |
| 2.4 | % | |
| 3.9 | % |
Finance leases | |
| | | |
| | |
Weighted average remaining lease term | |
| 2.0 years | | |
| 1.8 years | |
Weighted average discount rate | |
| 3.8 | % | |
| 4.4 | % |
The
following table presents supplemental balance sheet information related to leases as of June 30, 2022 and 2021:
| |
June 30, | |
| |
2022 | | |
2021 | |
Operating Leases: | |
| | | |
| | |
ROU assets, net (1) | |
$ | 27.9 | | |
$ | 31.4 | |
| |
| | | |
| | |
Lease liabilities, current (2) | |
| 10.7 | | |
| 13.4 | |
Lease liabilities, non-current (3) | |
| 27.5 | | |
| 31.1 | |
Total lease liabilities | |
$ | 38.2 | | |
$ | 44.5 | |
| |
| | | |
| | |
Finance Leases: | |
| | | |
| | |
ROU assets, net (1) | |
$ | 8.4 | | |
$ | 8.3 | |
| |
| | | |
| | |
Lease liabilities, current (2) | |
| 4.7 | | |
| 4.9 | |
Lease liabilities, non-current (3) | |
| 2.5 | | |
| 3.8 | |
Total lease liabilities | |
$ | 7.2 | | |
$ | 8.7 | |
(1) Included
in other assets for operating leases and property, plant and equipment, net for finance leases on the Consolidated Balance
Sheets.
(2)
Included in accrued expenses and other current liabilities for operating leases and current maturities of long-term debt
and finance lease liabilities for finance leases on the Consolidated Balance Sheets.
(3)
Included in other liabilities for operating leases and long-term debt and finance lease liabilities for finance leases on
the Consolidated Balance Sheets.
The following table presents maturity analysis
of lease liabilities as of June 30, 2022:
| | |
Operating Leases | | |
Finance Leases | |
Twelve months ending June 30: | | |
| | | |
| | |
2023 | | |
$ | 11.7 | | |
$ | 4.9 | |
2024 | | |
| 9.4 | | |
| 2.4 | |
2025 | | |
| 8.8 | | |
| 0.1 | |
2026 | | |
| 6.6 | | |
| — | |
2027 | | |
| 4.2 | | |
| — | |
Thereafter | | |
| 0.4 | | |
| — | |
Total lease payments | | |
| 41.1 | | |
| 7.4 | |
Less: interest | | |
| (2.9 | ) | |
| (0.2 | ) |
Present value of lease liabilities | | |
$ | 38.2 | | |
$ | 7.2 | |
The
Company had $7.4 million in minimum lease payments for executed leases that have not yet commenced as of June 30, 2022.
CDK
as a Lessor. The following summarizes components of net lease income reported on the Consolidated Statements of Operations
as of June 30, 2022 and 2021:
| |
Year ended June 30, | |
| |
2022 | | |
2021 | |
Revenue (1) | |
$ | 66.6 | | |
$ | 45.1 | |
Cost of revenue | |
| (40.1 | ) | |
| (37.6 | ) |
Interest income | |
| 3.5 | | |
| 2.4 | |
Total lease income | |
$ | 30.0 | | |
$ | 9.9 | |
(1)
Revenue from lease components are included in the Other category in revenue disaggregation table in Note 6 - Revenue.
As
of June 30, 2022, the carrying value of the Company's lease receivable reported in accounts receivable, net and other assets
on the Consolidated Balance Sheets was $33.0 million and $61.3 million, respectively. As of June 30, 2021, the carrying value of the
Company's lease receivable reported in accounts receivable, net and other assets on the Consolidated Balance Sheets was $19.5
million and $40.9 million, respectively. The following table presents maturity analysis of the lease payments the Company expects to
receive as of June 30, 2022:
| | |
Amount | |
Twelve months ending June 30: | | |
| |
2023 | | |
$ | 34.6 | |
2024 | | |
| 29.1 | |
2025 | | |
| 20.3 | |
2026 | | |
| 12.1 | |
2027 | | |
| 3.6 | |
Thereafter | | |
| 0.1 | |
Total cash flows to be received | | |
| 99.8 | |
Less: interest | | |
| (5.0 | ) |
Present value of lease receivable | | |
$ | 94.8 | |
Note
12. Goodwill and Intangible Assets, Net
Changes in goodwill were as follows:
| |
Amount | |
Balance as of June 30, 2020 | |
$ | 999.5 | |
Acquisitions | |
| 295.5 | |
Currency translation | |
| 2.1 | |
Balance as of June 30, 2021 | |
$ | 1,297.1 | |
Acquisitions | |
| 141.7 | |
Currency translation | |
| (0.8 | ) |
Balance as of June 30, 2022 | |
$ | 1,438.0 | |
Intangible assets, net from continuing operations
consisted of:
| |
| |
June 30, | |
| |
| |
2022 | | |
2021 | |
| |
Useful lives
(in years) | |
| Gross
Carrying
Amount | | |
| Accumulated
Amortization | | |
| Intangible
Assets, net | | |
| Gross
Carrying
Amount | | |
| Accumulated
Amortization | | |
| Intangible
Assets, net | |
| |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Customer
lists | |
5-15 | |
$ | 187.5 | | |
$ | (90.8 | ) | |
$ | 96.7 | | |
$ | 187.9 | | |
$ | (81.2 | ) | |
$ | 106.7 | |
Software | |
3-8 | |
| 555.5 | | |
| (273.0 | ) | |
| 282.5 | | |
| 412.5 | | |
| (192.3 | ) | |
| 220.2 | |
Trademarks | |
2-15 | |
| 12.6 | | |
| (6.3 | ) | |
| 6.3 | | |
| 10.4 | | |
| (4.6 | ) | |
| 5.8 | |
| |
| |
$ | 755.6 | | |
$ | (370.1 | ) | |
$ | 385.5 | | |
$ | 611.7 | | |
$ | (279.0 | ) | |
$ | 332.7 | |
Other
intangibles consist primarily of purchased rights, covenants, and patents (acquired directly or through acquisitions). All of the intangible
assets have finite lives and, as such, are subject to amortization. Amortization of intangible assets from continuing operations was
$92.4 million and $58.7 million for fiscal 2022 and 2021.
April
1, 2022 and 2021 Impairment Analysis. The Company completed its annual impairment analysis as of April 1, 2022 and 2021. For
all reporting units, the Company performed a qualitative analysis at April 1, 2022 and at 2021. Based on the results of the analysis,
the Company determined that no impairment existed for any reporting unit.
Estimated future amortization expense related to existing intangible
assets is as follows:
| | |
Amount | |
Year ending June 30, | | |
| | |
2023 | | |
$ | 114.5 | |
2024 | | |
| 89.4 | |
2025 | | |
| 59.7 | |
2026 | | |
| 26.6 | |
2027 | | |
| 22.0 | |
Thereafter | | |
| 73.3 | |
Total future amortization expense | | |
$ | 385.5 | |
Note 13. Investments
As
of June 30, 2021, the Company's equity investments principally comprised a 15% ownership interest in Ansira and a 50% ownership interest
in Open Dealer Exchange ("ODE"). ODE processes certain credit bureau and other credit related transactions on behalf of the
Company. The operations of ODE are integral to the Company's business due to the access ODE has to credit bureaus, which provides an
extension of the business over a critical functional area. As a result, the Company records earnings related to the investment in costs
of revenues in the Consolidated Statements of Operations. For the years ended June 30, 2022 and 2021, the Company incurred expenses from
ODE of $12.0 million and $17.6 million, respectively, in cost of revenues in the Consolidated Statements of Operations. During fiscal
2022 and 2021, the Company made payments to ODE of $16.1 million and $14.9 million, respectively.
| |
June 30, | |
| |
2022 | | |
2021 | |
Equity method investments | |
$ | 21.4 | | |
$ | 30.4 | |
Other investments | |
| 20.0 | | |
| 20.0 | |
Total | |
$ | 41.4 | | |
$ | 50.4 | |
| |
| | | |
| | |
Opening balance | |
$ | 50.4 | | |
$ | 76.1 | |
Losses recognized in loss from equity method investment (1) | |
| (7.8 | ) | |
| (27.3 | ) |
Amounts recognized in cost of revenue | |
| 15.6 | | |
| 13.3 | |
Dividends received | |
| (16.8 | ) | |
| (11.7 | ) |
Closing balance | |
$ | 41.4 | | |
$ | 50.4 | |
(1) Fiscal 2021 includes a $14.5 million impairment charge with
respect to one of the Company's equity investments.
In addition, the Company has a 10-year note
receivable due 2030, with respect to one of its equity investments. As of June 30, 2022 and 2021, the note receivable was $30.0 million
and $27.3 million, respectively, recorded in other assets on the Consolidated Balance Sheets.
Other investments include entities where
the Company does not have significant influence over the operating or financial policy and their fair values are not readily determinable.
Therefore, the Company has elected to measure these investments at cost with adjustments for observable changes in price or impairment.
Note
14. Debt
Long-term debt and finance lease liabilities consisted of:
| |
| |
As of June 30, 2022 | | |
As of June 30, 2021 | |
| |
Maturity Date | |
Interest Rate | | |
Amount | | |
Interest Rate | | |
Amount | |
Credit Facilities | |
| |
| | | |
| | | |
| | | |
| | |
Revolving credit facility | |
May 2026 | |
| 3.310 | % | |
$ | 145.0 | | |
| — | % | |
$ | — | |
Total credit facilities | |
| |
| | | |
| | | |
| | | |
| | |
| |
| |
| | | |
| | | |
| | | |
| | |
Unsecured Senior Notes | |
| |
| | | |
| | | |
| | | |
| | |
Senior notes, due 2024 | |
October 2024 | |
| 6.500 | % | |
| 500.0 | | |
| 5.000 | % | |
| 500.0 | |
Senior notes, due 2027 | |
June 2027 | |
| 4.875 | % | |
| 600.0 | | |
| 4.875 | % | |
| 600.0 | |
Senior notes, due 2029 | |
May 2029 | |
| 5.250 | % | |
| 500.0 | | |
| 5.250 | % | |
| 500.0 | |
Total unsecured senior notes | |
| |
| | | |
| 1,600.0 | | |
| | | |
| 1,600.0 | |
| |
| |
| | | |
| | | |
| | | |
| | |
Finance lease liabilities | |
| |
| | | |
| 7.3 | | |
| | | |
| 8.7 | |
Other | |
| |
| | | |
| — | | |
| | | |
| 2.2 | |
Unamortized debt financing costs | |
| |
| | | |
| (14.3 | ) | |
| | | |
| (17.3 | ) |
Total debt and finance lease liabilities | |
| |
| | | |
| 1,738.0 | | |
| | | |
| 1,593.6 | |
Less: current maturities of long-term debt | |
| |
| | | |
| 4.7 | | |
| | | |
| 7.1 | |
Total long-term debt and finance lease liabilities | |
| |
| | | |
$ | 1,733.3 | | |
| | | |
$ | 1,586.5 | |
Credit Facility. The Company has
a variable rate senior unsecured revolving credit facility (the "revolving credit facility"). The revolving credit facility
provides up to $750.0 million of borrowing capacity and includes a sub-limit of up to $100.0 million for loans denominated in euro, pound
sterling, and, if approved by the revolving lenders, other currencies. The average outstanding balances of the revolving credit facility
were $147.0 million and $42.7 million for the fiscal year ended June 30, 2022 and 2021, respectively.
The
revolving credit facility contains various covenants and restrictive provisions that limit the Company's subsidiaries' ability to incur
additional indebtedness, the Company's ability to consolidate or merge with other entities, and the Company's subsidiaries' ability to
incur liens, enter into sale and leaseback transactions, and enter into agreements restricting the ability of the Company's subsidiaries
to pay dividends. If the Company fails to perform the obligations under these and other covenants, the revolving credit facility could
be terminated and any outstanding borrowings, together with accrued interest, 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 the Company may have in an aggregate principal amount in excess of $75.0 million.
Unamortized
Debt Financing Costs. Debt financing costs are amortized over the terms of the related debt instruments and recorded to interest
expense on the Consolidated Statements of Operations.
Unsecured
Senior Notes. The senior notes have fixed interest rates, for which interest is paid semi-annually. The notes are redeemable
at certain dates in whole or in part at the Company's option. The redemption price would be equal to, or in excess of, 100% of the aggregate
principal amount thereof plus accrued and unpaid interest, if any, plus the applicable "make-whole" premium.
On April 23, 2021, the Company repaid all
indebtedness under the 2026 notes. As a result, the Company recorded expenses of $18.5 million for the call premium and $4.8 million for
the write-off of unamortized debt financing costs in the Consolidated Statements of Operations.
The senior notes are general unsecured
obligations of the Company and are not guaranteed by any of the Company's subsidiaries. The senior notes rank equally in right of
payment with the Company's existing and future unsecured unsubordinated obligations, including the credit facilities. The senior
notes contain covenants restricting the Company's ability to incur additional indebtedness secured by liens, engage in
sale/leaseback transactions, and merge, consolidate, or transfer all or substantially all of the Company's assets. The senior notes
are also subject to a change of control provision whereby each holder of the senior notes has the right to require the Company to
purchase all or a portion of such holder's senior notes at a purchase price equal to 101% of the principal amount thereof plus
accrued and unpaid interest upon the occurrence of both a change of control and a decline in the rating of the senior notes.
Finance
Lease Liabilities. The Company has lease agreements for equipment, which are classified as finance lease liabilities. Refer
to Note 11 - Leases for scheduled maturities and additional information relating to finance lease liabilities.
Fair
Value. The Company's senior notes are considered Level 2 fair value measurements in the fair value hierarchy and the approximate
aggregate fair value is based on quoted market prices for similar instruments. The fair value of the revolving credit facility is equal
to its carrying value as the Company has the ability to repay the outstanding principal at par value at any time.
The approximate fair values and related carrying values of the
long-term debt and finance lease liabilities, including current maturities and excluding unamortized debt financing costs, are as follows:
| |
June 30, | |
| |
2022 | | |
2021 | |
Fair value | |
$ | 1,585.8 | | |
$ | 1,746.8 | |
Carrying value | |
| 1,752.3 | | |
| 1,610.9 | |
The Company's aggregate scheduled maturities of the long-term
debt as of June 30, 2022 were as follows:
| |
Amount | |
Fiscal year ending 2023 | |
$ | — | |
Fiscal year ending 2024 | |
| — | |
Fiscal year ending 2025 | |
| 500.0 | |
Fiscal year ending 2026 | |
| 145.0 | |
Fiscal year ending 2027 | |
| 600.0 | |
Thereafter | |
| 500.0 | |
Total debt | |
| 1,745.0 | |
Unamortized deferred financing costs | |
| (14.3 | ) |
Total debt, net of unamortized deferred financing costs | |
$ | 1,730.7 | |
Note 15. Income Taxes
Provision
for Income Taxes. The provision for income taxes consisted of the following components:
| |
June 30, | |
| |
2022 | | |
2021 | |
Current: | |
| | | |
| | |
Federal | |
$ | 32.0 | | |
$ | 42.6 | |
State | |
| 14.0 | | |
| 12.7 | |
Foreign | |
| 10.8 | | |
| 8.4 | |
Total current | |
| 56.8 | | |
| 63.7 | |
Deferred: | |
| | | |
| | |
Federal | |
| 35.9 | | |
| 23.3 | |
State | |
| 4.8 | | |
| 7.4 | |
Foreign | |
| 2.1 | | |
| 0.1 | |
Total deferred | |
| 42.8 | | |
| 30.8 | |
Total provision for income taxes | |
$ | 99.6 | | |
$ | 94.5 | |
A reconciliation between
the Company's effective tax rate from continuing operations and the U.S. federal statutory rate is as follows. Certain prior
year amounts have been reclassified to conform to current
year presentation.
| |
June 30, | |
| |
2022 | | |
% | | |
2021 | | |
% | |
Provision for taxes at U.S. statutory rate | |
$ | 77.2 | | |
| 21.0 | % | |
$ | 59.8 | | |
| 21.0 | % |
Increase (decrease) in provision from: | |
| | | |
| | | |
| | | |
| | |
State income taxes, net of federal benefit | |
| 15.7 | | |
| 4.3 | % | |
| 15.9 | | |
| 5.6 | % |
U.S. tax on foreign earnings | |
| (1.1 | ) | |
| (0.3 | )% | |
| (0.2 | ) | |
| (0.1 | )% |
Foreign tax rate differential | |
| 1.5 | | |
| 0.4 | % | |
| 1.4 | | |
| 0.5 | % |
Foreign tax credits | |
| (1.4 | ) | |
| (0.4 | )% | |
| (2.7 | ) | |
| (0.9 | )% |
Foreign withholding taxes | |
| 1.1 | | |
| 0.3 | % | |
| 1.9 | | |
| 0.7 | % |
Valuation allowances | |
| 1.6 | | |
| 0.4 | % | |
| 7.6 | | |
| 2.7 | % |
Uncertain tax positions | |
| 0.5 | | |
| 0.1 | % | |
| (0.1 | ) | |
| — | % |
Advance pricing agreement | |
| (1.9 | ) | |
| (0.5 | )% | |
| 0.9 | | |
| 0.3 | % |
Tax shortfalls / (excess tax benefits) on stock-based compensation | |
| — | | |
| — | % | |
| 3.1 | | |
| 1.1 | % |
Nondeductible officer compensation | |
| 5.0 | | |
| 1.4 | % | |
| 5.6 | | |
| 2.0 | % |
Noncontrolling interest | |
| (1.5 | ) | |
| (0.4 | )% | |
| (1.5 | ) | |
| (0.5 | )% |
Other | |
| 2.9 | | |
| 0.8 | % | |
| 2.8 | | |
| 1.0 | % |
Provision for income taxes | |
$ | 99.6 | | |
| 27.1 | % | |
$ | 94.5 | | |
| 33.2 | % |
The balance sheet classification and significant components of
deferred income tax assets and liabilities are as follows:
| |
June 30, | |
| |
2022 | | |
2021 | |
Classification: | |
| | | |
| | |
Long term deferred tax assets (included in other non-current assets) | |
$ | 2.3 | | |
$ | 1.3 | |
Long term deferred tax assets (included in long-term assets held for sale) | |
| — | | |
| — | |
Long term deferred tax liabilities (included in deferred income taxes) | |
| (160.0 | ) | |
| (111.4 | ) |
Long term deferred tax liabilities (included in long-term liabilities held for sale) | |
| — | | |
| — | |
Net deferred tax liabilities | |
$ | (157.7 | ) | |
$ | (110.1 | ) |
| |
| | | |
| | |
Components: | |
| | | |
| | |
Deferred tax assets: | |
| | | |
| | |
Accrued expenses | |
$ | 12.4 | | |
$ | 15.0 | |
Compensation and benefits | |
| 18.5 | | |
| 17.6 | |
Deferred revenue | |
| — | | |
| 1.7 | |
Net operating losses | |
| 9.5 | | |
| 15.8 | |
Capital losses | |
| 3.8 | | |
| 3.4 | |
Lease liabilities | |
| 10.3 | | |
| 12.3 | |
Tax credits | |
| 4.3 | | |
| 2.3 | |
Other | |
| 10.9 | | |
| 10.1 | |
| |
| 69.7 | | |
| 78.2 | |
Less: valuation allowances | |
| (17.7 | ) | |
| (13.6 | ) |
Deferred tax assets | |
| 52.0 | | |
| 64.6 | |
| |
| | | |
| | |
Deferred tax liabilities: | |
| | | |
| | |
Deferred expenses | |
| 51.9 | | |
| 51.2 | |
Deferred revenue | |
| 13.9 | | |
| — | |
Property, plant and equipment and intangible assets | |
| 135.5 | | |
| 115.7 | |
ROU assets | |
| 6.5 | | |
| 6.9 | |
Prepaid expenses | |
| 1.9 | | |
| 0.9 | |
Deferred tax liabilities | |
| 209.7 | | |
| 174.7 | |
Net deferred tax liabilities | |
$ | (157.7 | ) | |
$ | (110.1 | ) |
Carryforward
Attributes. As of June 30, 2022, the Company had federal capital losses of $14.9 million which expire in fiscal 2024 and pre-apportioned
state capital losses of $13.4 million which expire in 2024 through 2034. The Company has $32.9 million of federal net operating losses,
a portion of which begin to expire in 2034, and $43.6 million of post-apportioned state net operating losses, a portion of which begin
to expire in 2023, both the federal and state net operating losses were derived from fiscal 2021 acquisitions. The Company had no foreign
net operating loss carryforwards as of June 30, 2022.
The Company had U.S. federal foreign tax
credits of $3.8 million which expire in 2031, U.S. federal research and development credits of $1.2 million which begin to expire in 2037,
and state tax credits of $0.2 million which begin to expire in 2023.
Valuation
Allowances. The Company has recorded valuation allowances of $17.7 million and $13.6 million as of June 30, 2022 and 2021,
respectively, because the Company has concluded it is more likely than not that it will be unable to utilize certain net operating loss
carryforwards, capital loss carryforwards and certain U.S. tax credits. As of each reporting date, the Company's management considers
new evidence, both positive and negative, which could impact management's determination with regard to future realization of deferred
tax assets.
Unrecognized
Income Tax Benefits. As of June 30, 2022 and 2021, the Company had unrecognized income tax benefits of $14.9 million and $20.4
million, respectively. These amounts when netted against offsetting receivables, would have a net impact on the effective tax rate of
$(0.1) million and $3.9 million, respectively, would impact the effective tax rate, if recognized. The remainder, if recognized, would
principally affect deferred taxes.
Penalties and interest expense associated
with uncertain income tax positions have been recorded in the provision for income taxes on the Consolidated Statements of Operations.
Penalties and interest accrued during fiscal 2022 were not significant. Penalties and interest accrued during fiscal 2021 were $0.8 million
primarily related to changes in methodology related to transfer pricing. As of June 30, 2022 and June 30, 2021, respectively, the Company
had $1.7 million and $2.6 million of penalties and interest associated with uncertain tax positions, which was included in other liabilities
on the Consolidated Balance Sheets.
In addition, an offsetting long-term receivable
of $13.7 million of tax and interest has been recorded as of June 30, 2022 as a result of the Company filing an advance pricing agreement
procedure consideration under applicable U.S. and Canadian treaties for an update to transfer pricing policies. This long-term receivable
is offset by $12.8 million of tax and interest recorded as uncertain tax positions as of June 30, 2022. An offsetting long-term receivable
of $17.7 million of tax and interest has been recorded as of June 30, 2021 as a result of the Company filing an advance pricing agreement
procedure consideration under applicable U.S. and Canadian treaties for an update to transfer pricing policies. This long-term receivable
is offset by $18.2 million of tax and interest recorded as uncertain tax positions as of June 30, 2021.
The Company files income tax returns in the
U.S. federal jurisdiction and various state, local, and foreign jurisdictions and is subject to examination by taxing authorities. The
tax years currently under examination vary by jurisdiction but remain open predominantly for tax years after 2014. Based on the possible
outcomes of the Company's tax audits and expiration of the statute of limitations, the Company does not expect any material reversal of
the liability for uncertain tax positions will decrease in the next twelve months. The resolution of tax matters is not expected to have
a material effect on the Company's consolidated financial condition, liquidity, or results of operation.
Note 16. Commitments and Contingencies
Legal
Proceedings. From time to time, the Company is subject to various claims and is involved in various legal, regulatory, and
arbitration proceedings concerning matters arising in connection with the conduct of its business activities, including those noted in
this section. Although management at present has no basis to conclude that the ultimate outcome of these proceedings, individually and
in the aggregate, will materially harm the Company's financial position, results of operations, cash flows, or overall trends, legal proceedings
and related government investigations are subject to inherent uncertainties, and unfavorable rulings or other events could occur. Unfavorable
resolutions could include substantial monetary damages. In addition, in matters for which injunctive relief or other conduct remedies
are sought, unfavorable resolutions could include an injunction or other order prohibiting the Company from selling one or more products
at all or in particular ways, precluding particular business practices, or requiring other remedies. An unfavorable outcome may result
in a material adverse impact on the Company's business, results of operations, financial position, and overall trends. The Company might
also conclude that settling one or more such matters is in the best interests of its stockholders, employees, and customers, and any such
settlement could include substantial payments.
Competition
Matters. The Company is currently involved in the following antitrust lawsuits that set forth allegations of anti-competitive
agreements between the Company and The Reynolds and Reynolds Company ("Reynolds") relating to the manner in which the defendants
control access to, and allow integration with, their respective Dealer Management System ("DMS"), and that seek, among other
things, treble damages and injunctive relief. These lawsuits have been transferred to, or filed in, the U.S. District Court for the Northern
District of Illinois for consolidated and coordinated pretrial proceedings as part of a multi-district litigation proceeding ("MDL").
| · | Teterboro Automall, Inc. d/b/a Teterboro Chrysler Dodge Jeep Ram
("Teterboro") brought a putative class action suit on behalf of itself and all similarly situated automobile dealerships
against CDK Global, LLC and Reynolds. Teterboro's suit was originally filed on October 19, 2017, in the U.S. District Court for the
District of New Jersey. Since that time, several more putative class actions were filed in a number of federal district courts, with
substantively similar allegations; all of them have been consolidated with the MDL proceeding. On June 4, 2018, a consolidated class
action complaint was filed on behalf of a putative class made up of all dealerships in the United States that directly purchased DMS
and/or allegedly indirectly purchased DMS or data integration services from CDK Global, LLC or Reynolds ("Putative Dealership
Class Plaintiffs"). CDK Global, LLC moved to dismiss the complaint, or in the alternative, compel arbitration of certain of the
cases while staying the remainder pending the outcome of those arbitration proceedings; its motion to dismiss was granted in part
and denied in part, while its motion to compel arbitration was denied. On February 22, 2019, CDK Global, LLC filed an answer to the
remaining claims in Putative Dealership Class Plaintiffs' complaint and asserted counterclaims against the Putative Dealership Class
Plaintiffs. The Putative Dealership Class Plaintiffs filed a motion to dismiss CDK Global, LLC's counterclaims; that motion was
granted in part and denied in part on September 3, 2019. On October 23, 2018, the Putative Dealership Class Plaintiffs and Reynolds
filed a motion for preliminary approval of settlement and for conditional certification of the
proposed settlement class. The court finally approved that settlement on January 22, 2019. The parties' cross-motions for summary judgment
and Daubert motions were fully briefed as of September 28, 2020. On January 21, 2022 the court issued a memorandum opinion and
order with respect to the Daubert motions, granting the motions in part and denying in part. The parties' cross-motions for summary
judgment remain pending. |
| · | Loop LLC d/b/a AutoLoop ("AutoLoop") brought suit against CDK Global,
LLC on April 9, 2018, in the U.S. District Court for the Northern District of Illinois, but reserved its rights with respect to remand
to the U.S. District Court for the Western District of Wisconsin at the conclusion of the MDL proceedings. On June 5, 2018, AutoLoop amended
its complaint to sue on behalf of itself and a putative class of all other automotive software vendors in the United States that purchased
data integration services from CDK Global, LLC or Reynolds. CDK Global, LLC moved to compel arbitration of AutoLoop's claims, or in the
alternative, to dismiss those claims; that motion was denied on January 25, 2019. CDK Global, LLC filed an answer to AutoLoop's complaint
and asserted counterclaims against AutoLoop on February 15, 2019. AutoLoop filed an answer to CDK Global, LLC's counterclaims on March
8, 2019. The parties' cross-motions for summary judgment and Daubert motions were fully briefed as of September 28, 2020. On January
21, 2022 the court issued a memorandum opinion and order with respect to the Daubert motions, granting the motions in part and
denying in part. The parties' cross-motions for summary judgment remain pending. |
The Company believes that the remaining unsettled
cases are without merit and will continue to vigorously contest all asserted claims. Nonetheless, in light of the Company's settlements
with Authenticom, i3 Brands, MVSC, and Cox and its continued expenditure of legal costs to contest the remaining claims, the Company has
determined that a loss of some measure is probable and can be reasonably estimated. As of June 30, 2022, and 2021, the litigation liability
for the remaining unsettled cases was $34.0 million and $34.0 million, respectively. This estimated loss is based upon currently available
information and represents the Company's best estimate of such loss. Estimating the value of this estimated loss involved significant
judgment given the uncertainty that still exists with respect to the remaining unsettled cases due to a variety of factors typical of
complex, large scale litigation, including, among others: (i) formative issues, including: (a) the causes of action the plaintiffs can
pursue; (b) the definition of the class(es) of plaintiffs; (c) the types of damages that can be recovered; and (d) whether plaintiffs
can establish loss causation as a matter of law, all of which have yet to be determined pending the outcome of dispositive motions (e.g.,
motions for class certification and motions for summary judgment); (ii) significant factual issues remain to be resolved; (iii) expert
perspectives with respect to, among other things, alleged antitrust injury and damages is widely divergent and remains subject to dispositive
motions; (iv) the absence of productive settlement discussions to date with the remaining plaintiffs; and (v) the novel or uncertain nature
of the legal issues presented. For these same reasons, the Company cannot reasonably estimate a maximum potential loss exposure at this
time. In addition, the Company's estimate does not incorporate or reflect the potential value of the Company's counterclaims against certain
of the plaintiffs in the ongoing cases. The legal proceedings underlying the estimated litigation liability will change from time to time
and actual results may vary significantly from the estimate. As noted above, an adverse result in any of the remaining cases could have
a material adverse effect on the Company's business, results of operations, financial condition, or liquidity.
On June 22, 2017, the Company received from
the Federal Trade Commission ("FTC") a Civil Investigative Demand consisting of specifications calling for the production of
documents relating to any agreements between the Company and Reynolds. Parallel document requests have been received from certain states'
Attorneys General. Since 2017, the Company has engaged in continuing communication with and received subsequent requests from the FTC
related to its investigation. The Company has responded to the requests and no proceedings have been instituted. The Company believes
there has not been any conduct by the Company or its current or former employees that would be actionable under the antitrust laws in
connection with the agreements between the Company and Reynolds or otherwise. At this time, the Company does not have sufficient information
to predict the outcome of, or the cost of responding to or resolving, these investigations.
Other
Commitments and Contingencies. In the normal course of business, the Company may enter into contracts in which the Company
makes representations and warranties that relate to the performance of the Company's services and products. The Company does not expect
any material losses related to such representations and warranties.
The Company has provided approximately $28.2
million of guarantees as of June 30, 2022 in the form of surety bonds issued to support certain licenses and contracts which require a
surety bond as a guarantee of performance of contractual obligations. In general, the Company would only be liable for the amount of these
guarantees in the event the Company defaulted in performing the obligations under each contract, of which, the probability is remote.
The Company had a total of $1.7 million in
letters of credit outstanding as of June 30, 2022 primarily in connection with insurance programs.
Note 17. Share Repurchase Transactions
In January 2017, the Board of Directors authorized
the Company to repurchase up to $2.0 billion of its common stock as part of a return of capital plan. Under the authorization, the Company
may purchase its common stock in the open market or in privately negotiated transactions from time to time as permitted by federal securities
laws and other legal requirements. The actual timing, number, and price of any shares to be repurchased is determined at management's
discretion and depends on a number of factors, including the market price of the shares, general market and economic conditions, and other
potential uses for free cash flow including, but not limited to, potential acquisitions.
In November 2018, the Company entered into
an accelerated share repurchase agreement ("November 2018 ASR") to purchase $260.0 million of the Company's common stock. Under
the terms of the November 2018 ASR, the Company made a $260.0 million payment in November 2018 and received initial delivery of approximately
4.1 million of the Company's common stock. In February 2019, the Company received an additional 1.1 million shares of common stock in
final settlement of the November 2018 ASR, for a total of 5.2 million shares. The value reflected in treasury stock upon completion of
the November 2018 ASR represents the value of the shares received based on the closing price of the Company's stock on the respective
settlement dates, which is higher than the $260.0 million cash paid by $13.0 million.
In June 2021, the Company made open market
repurchases of 236 thousand shares of the Company's common stock for a total cost of $12.1 million.
In June 2022, the Company made open market
repurchases of 5.2 million shares of the Company's common stock for a total cost of $229.1 million.
Note 18. Subsequent Events
On July 6, 2022, Brookfield Business Partners,
together with institutional partners (collectively "Brookfield") completed a $8.3 billion acquisition of the Company, with
Brookfield acquiring all of the Company's outstanding shares of common stock valued at a per share price of $54.87. This included
the outstanding stock-based awards as disclosed in Note 7 – Stock-Based Compensation, all of which vested upon the
acquisition. The deal allows the Company to continue to elevate the dealer and consumer experience when selling, buying or owning a
vehicle. Brookfield's investment was funded with $3.5 billion of equity, of which Brookfield invested approximately $500 million,
with the remaining balance funded from institutional partners.
Additionally, on July 6, 2022, in connection
with the merger, the Company and Brookfield entered into a first lien credit agreement providing for a 7-year, $3.6 billion principal
amount senior secured U.S. dollar denominated first lien term loan facility and a 5-year, $650 million senior secured revolving credit
facility. In addition, the Company and Brookfield entered into a $755 million senior secured U.S. dollar denominated second lien term
loan facility.
In connection with the acquisition, the Company
and Brookfield completed a private offering of $750 million in aggregate principal amount of their first lien notes due 2029 (the "Notes").
Brookfield's newly formed wholly owned subsidiary, Central Parent Inc., was listed as the issuer. Interest on the Notes is payable on
June 15 and December 15 of each year, beginning on December 15, 2022, with maturity on June 15, 2029.
Additionally, the Company redeemed the majority
of its senior notes in conjunction with the Brookfield acquisition. The notes provided an option to be redeemable at certain dates in
whole or through a tender offer. The settlement date for the redemption coincided with the Brookfield acquisition on July 6, 2022. Of
the $1.6 billion in total senior notes the Company reported on June 30, 2022, $75 million remains outstanding.
Exhibit 99.2
INDEX TO UNAUDITED INTERIM FINANCIAL INFORMATION
|
|
Page |
1. Unaudited Interim Financial Statements: |
|
|
|
|
|
Combined Statements of Operations for the Three Months Ended March 31, 2022 and 2021 |
|
2 |
|
|
|
Combined Statements of Comprehensive Income for the Three Months Ended March 31, 2022 and 2021 |
|
3 |
|
|
|
Combined Balance Sheets as of March 31, 2022 and December 31, 2021 |
|
4 |
|
|
|
Condensed Combined Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021 |
|
5 |
|
|
|
Notes to Condensed Combined Financial Statements |
|
6 |
LOTTERY BUSINESS
(Carve-Out of Certain Operations of Scientific
Games Corporation)
COMBINED STATEMENTS OF OPERATIONS
(Unaudited, in millions)
| |
Three Months Ended March 31, | |
| |
2022 | | |
2021 | |
Revenue: | |
| | | |
| | |
Instant products | |
$ | 171 | | |
$ | 162 | |
Lottery systems | |
| 87 | | |
| 86 | |
Total revenue | |
| 258 | | |
| 248 | |
Operating expenses: | |
| | | |
| | |
Cost of instant products(1) | |
| 89 | | |
| 77 | |
Cost of lottery systems(1) | |
| 54 | | |
| 53 | |
Selling, general and administrative | |
| 27 | | |
| 27 | |
Research and development | |
| 1 | | |
| 1 | |
Depreciation and amortization | |
| 16 | | |
| 14 | |
Restructuring and other | |
| (2 | ) | |
| — | |
Operating income | |
| 73 | | |
| 76 | |
Other income: | |
| | | |
| | |
Earnings from equity investments | |
| 4 | | |
| 8 | |
Other expense, net | |
| — | | |
| (6 | ) |
Total other income, net | |
| 4 | | |
| 2 | |
Net income before income taxes | |
| 77 | | |
| 78 | |
Income tax expense | |
| (16 | ) | |
| (17 | ) |
Net income | |
$ | 61 | | |
$ | 61 | |
| (1) | Excludes depreciation and amortization. |
See accompanying notes to condensed combined financial
statements.
LOTTERY BUSINESS
(Carve-Out of Certain Operations of Scientific
Games Corporation)
COMBINED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in millions)
| |
Three Months Ended March 31, | |
| |
2022 | | |
2021 | |
Net income | |
$ | 61 | | |
$ | 61 | |
Other comprehensive loss: | |
| | | |
| | |
Foreign currency translation loss, net of tax | |
| (4 | ) | |
| (10 | ) |
Total other comprehensive loss | |
| (4 | ) | |
| (10 | ) |
Total comprehensive income | |
$ | 57 | | |
$ | 51 | |
See accompanying notes to condensed combined financial
statements.
LOTTERY BUSINESS
(Carve-Out of Certain Operations of Scientific
Games Corporation)
COMBINED BALANCE SHEETS
(Unaudited, in millions)
| |
As of | |
| |
March 31, 2022 | | |
December 31, 2021 | |
ASSETS | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 49 | | |
$ | 15 | |
Restricted cash | |
| 4 | | |
| 8 | |
Receivables, net of allowance for credit losses of $6 each year | |
| 156 | | |
| 186 | |
Inventories | |
| 113 | | |
| 94 | |
Contract assets | |
| 87 | | |
| 84 | |
Prepaid expenses, deposits and other current assets | |
| 25 | | |
| 19 | |
Total current assets | |
| 434 | | |
| 406 | |
Non-current assets: | |
| | | |
| | |
Property and equipment, net | |
| 205 | | |
| 201 | |
Operating lease right-of-use assets | |
| 35 | | |
| 31 | |
Goodwill | |
| 363 | | |
| 361 | |
Intangible assets, net | |
| 79 | | |
| 68 | |
Software, net | |
| 74 | | |
| 70 | |
Equity investments | |
| 249 | | |
| 251 | |
Other assets | |
| 8 | | |
| 7 | |
Total assets | |
$ | 1,447 | | |
$ | 1,395 | |
LIABILITIES AND PARENT'S EQUITY | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable | |
$ | 93 | | |
$ | 85 | |
Contract liabilities | |
| 55 | | |
| 42 | |
Accrued liabilities | |
| 98 | | |
| 113 | |
Total current liabilities | |
| 246 | | |
| 240 | |
Deferred income taxes | |
| 34 | | |
| 34 | |
Operating lease liabilities | |
| 28 | | |
| 24 | |
Long-term license liabilities | |
| 33 | | |
| 21 | |
Pension liabilities | |
| 4 | | |
| 4 | |
Other long-term liabilities | |
| 24 | | |
| 25 | |
Total liabilities | |
| 369 | | |
| 348 | |
Parent's equity: | |
| | | |
| | |
Accumulated net parent investment | |
| 1,113 | | |
| 1,078 | |
Accumulated other comprehensive loss | |
| (35 | ) | |
| (31 | ) |
Total Parent's equity | |
| 1,078 | | |
| 1,047 | |
Total liabilities and Parent's equity | |
$ | 1,447 | | |
$ | 1,395 | |
See accompanying notes to condensed combined financial
statements.
LOTTERY BUSINESS
(Carve-Out of Certain Operations of Scientific
Games Corporation)
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
| |
Three Months Ended March 31, | |
| |
2022 | | |
2021 | |
Net cash provided by operating activities | |
$ | 88 | | |
$ | 91 | |
Cash flows from investing activities: | |
| | | |
| | |
Capital expenditures | |
| (21 | ) | |
| (14 | ) |
Additions to equity method investments | |
| — | | |
| (10 | ) |
Net cash used in investing activities | |
| (21 | ) | |
| (24 | ) |
Cash flows from financing activities: | |
| | | |
| | |
Payments on license obligations | |
| (2 | ) | |
| (1 | ) |
Transfers to Parent and affiliates, net | |
| (35 | ) | |
| (85 | ) |
Net cash used in financing activities | |
| (37 | ) | |
| (86 | ) |
Effect of exchange rate changes on cash and cash equivalents | |
| — | | |
| (1 | ) |
Increase (decrease) in cash, cash equivalents, and restricted cash | |
| 30 | | |
| (20 | ) |
Cash, cash equivalents, and restricted cash, beginning of period | |
| 23 | | |
| 62 | |
Cash, cash equivalents, and restricted cash, end of period | |
$ | 53 | | |
$ | 42 | |
| |
| | | |
| | |
Supplemental cash flow information: | |
| | | |
| | |
Cash paid for income taxes | |
$ | 2 | | |
$ | 1 | |
See accompanying notes to condensed combined financial
statements.
LOTTERY BUSINESS
(Carve-Out of Certain Operations of Scientific
Games Corporation)
NOTES TO CONDENSED COMBINED FINANCIAL
STATEMENTS
(amounts in USD and in millions)
(1) Description of the Business and Summary of Significant
Accounting Policies
Background and nature of operations
The accompanying condensed combined interim carve-out
financial statements include the historical accounts of the Scientific Games Corporation (the Parent, now doing business as Light &
Wonder, Inc.), 100%-owned direct and indirect subsidiaries that hold substantially all of the assets of, and operate, the lottery
business, herein collectively referred to as “the Lottery Business”, “we”, "us", and “our.”
Subsequent to the completion of the sale, the Lottery Business will retain and operate under the Scientific Games brand name.
The Lottery Business provides instant and draw
lottery products and related value-added services including licensed brands used in instant lottery products, and loyalty, reward services,
and lottery systems products and comprehensive services generally comprised of point-of-sale terminals, a central system, customized computer
software, data communication services, support and/or related equipment.
On October 28, 2021, the Parent entered into
an agreement to sell the Lottery Business to Brookfield Business Partners LP (“Brookfield”) in a transaction valued at $6.05
billion, subject to certain customary adjustments. Under the terms of the agreement, the Parent will receive $5.825 billion in cash (subject
to normal closing adjustments) and an earn-out of up to $225 million based on the achievement of certain EBITDA targets in 2022 and 2023.
Basis of presentation
The accompanying combined carve out financial statements
of the Lottery Business have been derived from the unaudited condensed consolidated financial statements and accounting records of the
Parent using the historical results of operations and historical cost basis of the assets and liabilities as if the Lottery Business operated
on a stand-alone basis during the periods presented.
The
accompanying condensed combined financial statements of the Lottery Business have been prepared in accordance with the accounting rules applicable
for interim periods and therefore, do not include all information and footnotes necessary for complete financial statements in conformity
with accounting principles generally accepted in the United States ("GAAP"). For ease of reference the accompanying condensed
combined carve out financial statements are herein referred to as "financial statements" unless otherwise stated or the context
requires otherwise. All intercompany balances and transactions within the Lottery Business have been eliminated. Transactions between
the Lottery Business and the Parent and its other subsidiaries are reflected as affiliate transactions within these financial statements.
The accompanying financial statements include the
assets, liabilities, revenues, and expenses that are specifically identifiable to the Lottery Business. In addition, the accompanying
financial statements include certain costs that have been allocated from the Parent, which relate to certain corporate functions and shared
services performed by the Parent, including but not limited to, finance, human resources, legal, information technology and other. These
expenses have been allocated to the Lottery Business on the basis of direct usage when identifiable, with the remainder allocated on the
basis of revenues, operating expenses, headcount, or other relevant measures.
We believe the assumptions underlying the financial
statements, including assumptions regarding the allocations from the Parent, are reasonable. Nevertheless, the financial statements may
not include all of the expenses that would have been incurred had the Lottery Business been a stand-alone company during the periods
presented and may not reflect the Lottery Business’s financial position, results of operations, and cash flows had the Lottery Business
been a stand-alone company during the periods presented. Actual costs that would have been incurred if the Lottery Business had been a
stand-alone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas,
including information technology, infrastructure and acquisition of intellectual property. For additional information related to costs
allocated to the Lottery Business by the Parent, see Note 12.
In the opinion of management, we have made all
adjustments necessary to present fairly the combined financial position, results of operations, comprehensive income and cash flows for
the periods presented. Such adjustments are of a normal, recurring nature. These financial statements should be read in conjunction with
the 2021 combined financial statements and related notes. Interim results of operations are not necessarily indicative of results of operations
to be expected for a full year.
We
have two business segments – Instant Products and Lottery Systems – representing our instant and draw-based
lottery products and related services and comprehensive lottery system solutions to lottery operators worldwide. We had $56 million and
$58 million in Property and equipment, net outside the U.S. as of March 31, 2022 and December 31, 2021, respectively. For additional
information related to our business segments, see Note 2.
Significant Accounting Policies
Equity Method Investments
The Company classifies distributions received from
equity method investments using the nature of distribution approach on the Consolidated Statements of Cash Flows.
There
have been no changes to our significant accounting policies described within the notes to our 2021 financial statements. We do
not expect that any recently issued accounting guidance will have a significant effect on our financial statements.
Subsequent events
We
evaluated subsequent events through May 6, 2022, which is the date the financial statements were available to be issued.
On April 4, 2022, the sale of the Lottery
business was completed (excluding the Austria Business and subsidiaries) and $5.6 billion in gross proceeds was paid to the selling
Parent. The sale of the Austrian subsidiaries is awaiting regulatory approval in Austria which is expected to be received and the full
transaction to be completed by the end of the second quarter of 2022. $104 million of the initial acquisition proceeds, subject to
customary working capital adjustments will be remitted at this transfer.
(2) Business Segments
Operating segments are components of the Lottery
Business for which separate discrete financial information is available to and evaluated regularly by the chief operating decision maker
(CODM) in making decisions regarding resource allocation and assessing performance. We report our operations in two business
segments – Instant Products and Lottery Systems – representing our different products and services. In evaluating
financial performance, our CODM focuses on Adjusted EBITDA (AEBITDA) as management’s segment measure of profit or loss, which is
described below. The following tables present our segment information:
| |
Three Months Ended March 31, 2022 | |
| |
| | |
| | |
Unallocated and | | |
| |
| |
Instant | | |
Lottery | | |
Reconciling | | |
| |
| |
Products | | |
Systems | | |
Items (1) | | |
Total | |
Total revenue | |
$ | 171 | | |
$ | 87 | | |
$ | — | | |
$ | 258 | |
AEBITDA(2) | |
| 84 | | |
| 32 | | |
| (11 | ) | |
| 105 | |
Reconciling items to net income before income taxes: | |
| | | |
| | | |
| | | |
| | |
Depreciation and amortization | |
| (6 | ) | |
| (9 | ) | |
| (1 | ) | |
| (16 | ) |
Restructuring and other | |
| 1 | | |
| 1 | | |
| — | | |
| 2 | |
EBITDA from equity investments (2) | |
| | | |
| | | |
| (15 | ) | |
| (15 | ) |
Earnings from equity investments | |
| | | |
| | | |
| 4 | | |
| 4 | |
Other income, net | |
| | | |
| | | |
| — | | |
| — | |
Stock-based compensation | |
| | | |
| | | |
| (3 | ) | |
| (3 | ) |
Net income before income taxes | |
| | | |
| | | |
| | | |
$ | 77 | |
| (1) | Includes amounts not allocated to the business segments (including shared costs) and reconciling items to reconcile the total business
segments AEBITDA to our net income before income taxes. |
| (2) | AEBITDA is reconciled to net income before income taxes and includes the following adjustments: (1) restructuring and other,
which includes charges or expenses attributable to: (i) employee severance; (ii) management restructuring and related costs;
(iii) restructuring and integration; (iv) cost savings initiatives; (v) major litigation; and (vi) acquisition costs
and other unusual items; (2) depreciation and amortization expense and impairment charges (including goodwill impairments); (3) interest
expense; (4) income tax expense; (5) stock-based compensation; and (6) other (expense) income, net, including foreign currency
gains and (losses). In addition to the preceding adjustments, we exclude earnings (loss) from equity method investments and add (without
duplication) our pro rata share of EBITDA of our equity investments, which represents our share of earnings (whether or not distributed
to us) before income tax expense, depreciation and amortization expense, and interest income (expense), net of our joint ventures and
minority investees. AEBITDA is presented exclusively as our segment measure of profit or loss. |
| |
Three Months Ended March 31, 2021 | |
| |
| | |
| | |
Unallocated and | | |
| |
| |
Instant | | |
Lottery | | |
Reconciling | | |
| |
| |
Products | | |
Systems | | |
Items (1) | | |
Total | |
Total revenue | |
$ | 162 | | |
$ | 86 | | |
$ | — | | |
$ | 248 | |
AEBITDA(2) | |
| 85 | | |
| 33 | | |
| (6 | ) | |
| 112 | |
Reconciling items to net income before income taxes: | |
| | | |
| | | |
| | | |
| | |
Depreciation and amortization | |
| (5 | ) | |
| (9 | ) | |
| — | | |
| (14 | ) |
Restructuring and other | |
| — | | |
| — | | |
| — | | |
| — | |
EBITDA from equity investments (2) | |
| | | |
| | | |
| (19 | ) | |
| (19 | ) |
Loss from equity investments | |
| | | |
| | | |
| 8 | | |
| 8 | |
Other income, net | |
| | | |
| | | |
| (6 | ) | |
| (6 | ) |
Stock-based compensation | |
| | | |
| | | |
| (3 | ) | |
| (3 | ) |
Net income before income taxes | |
| | | |
| | | |
| | | |
$ | 78 | |
| (1) | Includes amounts not allocated to the business segments (including shared costs) and reconciling items to reconcile the total business
segments AEBITDA to our net income before income taxes. |
| (2) | AEBITDA and EBITDA from equity investments are described in footnote (2) to the first table in this Note 2. |
(3) Revenue Recognition
The following table disaggregates our revenues
by segment, line of business, and by geographical location:
| |
Revenue recognized for | |
| |
Three Months Ended | |
| |
March 31, | |
Revenue by segment and line of business | |
| 2022 | | |
| 2021 | |
Instant products: | |
| | | |
| | |
SGEP | |
$ | 29 | | |
$ | 26 | |
PPK | |
| 77 | | |
| 74 | |
POS | |
| 65 | | |
| 62 | |
Total instant products | |
$ | 171 | | |
$ | 162 | |
Lottery systems: | |
| | | |
| | |
Systems and solutions(1) | |
$ | 80 | | |
$ | 80 | |
iLottery | |
| 7 | | |
| 6 | |
Total lottery systems | |
$ | 87 | | |
$ | 86 | |
Total | |
$ | 258 | | |
$ | 248 | |
| |
| | | |
| | |
Revenue by geography | |
| | | |
| | |
U.S. | |
$ | 184 | | |
$ | 182 | |
International | |
| 74 | | |
| 66 | |
Total | |
$ | 258 | | |
$ | 248 | |
| (1) | Product sales included in lottery systems were $15 million and $14 million for the three months ended March 31, 2022 and 2021,
respectively. |
Contract Liabilities and Other Disclosures
The following table summarizes the activity in
our contract liabilities for the reporting period:
| |
Three Months Ended | |
| |
March 31, 2022 | |
Contract liability balance, beginning of period(1) | |
$ | 42 | |
Liabilities recognized during the period | |
| 23 | |
Amounts recognized in revenue from beginning balance | |
| (10 | ) |
Contract liability balance, end of period(1) | |
$ | 55 | |
| (1) | Long-term contract liabilities are included within Other long-term liabilities. We expect to recognize revenue on approximately 95%
of remaining performance obligations over the next 24 months, with the balance recognized thereafter. |
The timing of revenue recognition, billings and
cash collections results in billed receivables, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities).
Revenue recognition is generally proximal to conversion to cash, except for the POS instant products revenue. Revenue is recognized for
such contracts upon delivery to our customers, while conversion to cash is based on the retail sale of the underlying tickets to end consumers.
As a result, revenue recognition under ASC 606 does not approximate conversion to cash for such contracts in any periods presented. The
following table summarizes our opening and closing balances in these accounts (other than contract liabilities disclosed above):
| |
Receivables | | |
Contract Assets | |
End of period balance, December 31, 2021 | |
$ | 186 | | |
$ | 84 | |
End of period balance, March 31, 2022 | |
| 156 | | |
| 87 | |
(4) Inventories
Inventories consisted of the following:
| |
As of | |
| |
March 31, 2022 | | |
December 31, 2021 | |
Parts and work-in-process | |
$ | 55 | | |
$ | 51 | |
Finished goods | |
| 58 | | |
| 43 | |
Total inventories | |
$ | 113 | | |
$ | 94 | |
Parts and work-in-process include parts for terminals
and instant ticket materials, as well as labor and overhead costs for work-in-process associated with the manufacturing of instant tickets
and lottery terminals. Our finished goods inventory primarily consists of instant products.
(5) Property and Equipment, net
Property and equipment, net consisted of the following:
| |
As of | |
| |
March 31, 2022 | | |
December 31, 2021 | |
Land | |
$ | 9 | | |
$ | 9 | |
Buildings and leasehold improvements | |
| 75 | | |
| 75 | |
Lottery machinery and equipment | |
| 563 | | |
| 555 | |
Furniture and fixtures | |
| 6 | | |
| 6 | |
Construction in progress | |
| 59 | | |
| 51 | |
Less: accumulated depreciation | |
| (507 | ) | |
| (495 | ) |
Total property and equipment, net | |
$ | 205 | | |
$ | 201 | |
Depreciation expense is excluded from Cost of instant
products, Cost of lottery systems, and Other operating expenses and is separately presented within depreciation and amortization.
| |
Three Months Ended March 31, | |
| |
2022 | | |
2021 | |
Depreciation expense | |
$ | 8 | | |
$ | 8 | |
(6) Intangible Assets, net and Goodwill
Intangible assets, net
The following tables present certain information
regarding our intangible assets as of March 31, 2022 and December 31, 2021:
| |
March 31, 2022 | |
December 31, 2021 | |
| |
Gross | |
Accumulated | |
Net | |
Gross | |
Accumulated | |
Net | |
| |
Carrying Value | |
Amortization | |
Balance | |
Carrying Value | |
Amortization | |
Balance | |
Amortizable intangible assets: | |
| | |
| | |
| | |
| | |
| | |
| | |
Customer relationships | |
$ | 15 | |
$ | (13 | ) |
$ | 2 | |
$ | 15 | |
$ | (13 | ) |
$ | 2 | |
Intellectual property | |
| 17 | |
| (9 | ) |
| 8 | |
| 17 | |
| (8 | ) |
| 9 | |
Licenses | |
| 112 | |
| (78 | ) |
| 34 | |
| 86 | |
| (64 | ) |
| 22 | |
Patents and other | |
| 10 | |
| (6 | ) |
| 4 | |
| 10 | |
| (6 | ) |
| 4 | |
| |
| 154 | |
| (106 | ) |
| 48 | |
| 128 | |
| (91 | ) |
| 37 | |
Non-amortizable intangible assets: | |
| | |
| | |
| | |
| | |
| | |
| | |
Trade names | |
| 33 | |
| (2 | ) |
| 31 | |
| 33 | |
| (2 | ) |
| 31 | |
Total intangible assets | |
$ | 187 | |
$ | (108 | ) |
$ | 79 | |
$ | 161 | |
$ | (93 | ) |
$ | 68 | |
The following reflects intangible amortization
expense included within depreciation and amortization:
| |
Three Months Ended March 31, | |
| |
2022 | | |
2021 | |
Amortization expense | |
$ | 3 | | |
$ | 2 | |
Goodwill
The table below reconciles the change in the carrying
value of goodwill, for the period from December 31, 2021 to March 31, 2022.
| |
Instant Products | | |
Lottery
Systems
(1) | | |
Total | |
Balance as of December 31, 2021 | |
$ | 325 | | |
$ | 36 | | |
$ | 361 | |
Foreign currency adjustments | |
| 2 | | |
| — | | |
| 2 | |
Balance as of March 31, 2022 | |
$ | 327 | | |
$ | 36 | | |
$ | 363 | |
| (1) | Accumulated goodwill impairment charges as of March 31, 2022 were $137 million. |
(7) Software, net
Software, net consisted of the following:
| |
As of | |
| |
March 31, 2022 | | |
December 31, 2021 | |
Software | |
$ | 213 | | |
$ | 205 | |
Accumulated amortization | |
| (139 | ) | |
| (135 | ) |
Software, net | |
$ | 74 | | |
$ | 70 | |
The following reflects amortization of software
included within depreciation and amortization:
| |
Three Months Ended March 31, | |
| |
2022 | | |
2021 | |
Amortization expense | |
$ | 5 | | |
$ | 4 | |
(8) Equity Investments
Equity investment consisted of the following:
| |
| |
| |
Equity earnings | |
Cash distributions
and | |
| |
| |
(loss) recognized | |
dividends
received | |
| |
Equity investment | |
for the Three
Months Ended | |
for the Three
Months Ended | |
| |
balance
as of | |
March 31, | |
March 31, | |
Equity Investment | |
March 31, 2022 | |
December 31, 2021 | |
2022 | |
2021 | |
2022 | |
2021 | |
LNS | |
$ | 189 | |
$ | 188 | |
$ | 7 | |
$ | 8 | |
$ | — | |
$ | — | |
GLB and CSG | |
| 27 | |
| 8 | |
| 1 | |
| 2 | |
| — | |
| — | |
Greece | |
| 7 | |
| 18 | |
| (3 | ) |
| (5 | ) |
| — | |
| — | |
Northstar
NJ and NJ Supply Co | |
| 26 | |
| 37 | |
| (1 | ) |
| 3 | |
| — | |
| — | |
Total
under equity method | |
$ | 249 | |
$ | 251 | |
$ | 4 | |
$ | 8 | |
$ | — | |
$ | — | |
(9) Leases
Our operating leases primarily consist of real
estate leases such as offices, warehouses, and research and development facilities. Our leases have remaining lease terms ranging from
1 year to 10 years, some of which include options to extend the leases for up to 5 years or to terminate the leases within
1 year. Our finance leases are immaterial.
Supplemental balance sheet and cash flow information
related to operating leases is as follows:
| |
As of | |
| |
March 31, 2022 | | |
December 31, 2021 | |
Operating lease right-of-use assets(1) | |
$ | 35 | | |
$ | 31 | |
Accrued liabilities | |
| 8 | | |
| 8 | |
Operating lease liabilities | |
| 28 | | |
| 24 | |
Total operating lease liabilities | |
$ | 36 | | |
$ | 32 | |
Cash paid for amounts included in the measurement of lease liabilities: | |
| | | |
| | |
Operating cash flows for operating leases for the three-month periods ended March 31, 2022 and 2021, respectively | |
$ | 3 | | |
$ | 2 | |
Weighted average remaining lease term, years | |
| 6 | | |
| 5 | |
Weighted average discount rate(2) | |
| 5 | % | |
| 5 | % |
| (1) | Operating lease right-of-use assets obtained in exchange for lease obligations were immaterial. |
| (2) | As our leases do not provide an implicit rate, nor is one readily available, we use the incremental borrowing rate based on information
available at the capitalization date to determine the present value of future minimum rental payments. |
Lease liability maturities:
| |
Operating Leases | |
Remainder of 2022 | |
$ | 7 | |
2023 | |
| 9 | |
2024 | |
| 7 | |
2025 | |
| 6 | |
2026 | |
| 4 | |
Thereafter | |
| 8 | |
Less: imputed interest | |
| (5 | ) |
Total | |
$ | 36 | |
As of March 31, 2022, we did not have material
additional operating leases that have not yet commenced.
(10) Parent’s Equity
The
following table presents certain information regarding Parent’s equity as of March 31, 2022 and 2021:
| |
| | |
| | |
Accumulated | | |
| |
| |
| | |
Accumulated | | |
Other | | |
| |
| |
Retained | | |
Net Parent | | |
Comprehensive | | |
| |
| |
Earnings | | |
Investment | | |
Loss | | |
Total | |
January 1, 2022 | |
$ | — | | |
$ | 1,078 | | |
$ | (31 | ) | |
$ | 1,047 | |
Net income | |
| 61 | | |
| — | | |
| — | | |
| 61 | |
Transactions with parent and affiliates, net | |
| (61 | ) | |
| 35 | | |
| — | | |
| (26 | ) |
Other comprehensive loss | |
| — | | |
| — | | |
| (4 | ) | |
| (4 | ) |
March 31, 2022 | |
$ | — | | |
$ | 1,113 | | |
$ | (35 | ) | |
$ | 1,078 | |
| |
| | |
| | |
Accumulated | | |
| |
| |
| | |
Accumulated | | |
Other | | |
| |
| |
Retained | | |
Net Parent | | |
Comprehensive | | |
| |
| |
Earnings | | |
Investment | | |
Loss | | |
Total | |
January 1, 2021 | |
$ | — | | |
$ | 1,037 | | |
$ | (20 | ) | |
$ | 1,017 | |
Net income | |
| 61 | | |
| — | | |
| — | | |
| 61 | |
Transactions with parent and affiliates, net | |
| (61 | ) | |
| (20 | ) | |
| — | | |
| (81 | ) |
Other comprehensive income | |
| — | | |
| — | | |
| (10 | ) | |
| (10 | ) |
March 31, 2021 | |
$ | — | | |
$ | 1,017 | | |
$ | (30 | ) | |
$ | 987 | |
(11) Income Taxes
We consider new evidence (both positive and negative)
at each reporting period that could affect our view of the future realization of deferred tax assets. Based upon the evaluation of all
available evidence, we maintain a valuation allowance for certain of our foreign operations as of March 31, 2022.
Our
effective income tax rates for the three months ended March 31, 2022 and 2021 were 21.3% and 22.3%, respectively. The rate
was determined using an estimated annual effective tax rate after considering any discrete items for such periods. The tax rates in both
periods differ from the U.S. statutory rate primarily due to foreign earnings at rates other than the U.S. statutory rate.
COVID-19 disruptions had impacted our operating
results during the first quarter of 2021, the operating results substantially recovered during the first quarter of 2022 due to the lifting
of COVID-19 restrictions, such as social distancing and mask mandates. We considered the COVID-19 disruptions and lifting of restrictions
in our ability to realize deferred tax assets in the future and determined that such conditions did not change our overall valuation allowance
positions. Additionally, we continue to monitor and evaluate the tax implications resulting from any existing and forthcoming legislation
passed in response to COVID-19 in the federal, state, and foreign jurisdictions where we have an income tax presence.
(12) Related Party Transactions
Parent Services
Parent services represent allocations of corporate
level general and administrative expenses, including but not limited to, finance, corporate development, human resources, legal, information
technology, as well as rental fees for shared assets. These expenses have been allocated to the Lottery Business on the basis of direct
usage when identifiable, with the remainder allocated on the basis of revenues, operating expenses, headcount or other relevant measures,
which we believe to be the most meaningful allocation methodologies.
Total parent services expense recorded for the
three months ended March 31, 2022 and 2021 was $9 million and $7 million, respectively, and is included in Selling, general
and administrative expenses. These charges are not cash settled but allocated for purposes of these financial statements and as such are
accounted for as a component of Parent’s equity.
IP Licensing
The Parent frequently licenses intellectual property
(IP) from third parties, which is utilized by the Lottery Business in developing the instant games. These IP licenses are generally pushed
down to the Lottery Business at the origination of these agreements based upon agreed usage commitment. We account for these minimum guaranteed
obligations within accrued and other long-term liabilities at the onset of the license arrangement and record a corresponding license
asset within intangible assets, net. The total liability associated with these agreements as of March 31, 2022 and December 31,
2021 was $45 million and $25 million, respectively.
Amortization expense related to these licenses
and recorded in depreciation and amortization for the three months ended March 31, 2022 and 2021 was $1 million and $1 million,
respectively.
We market many of our products under trademarks
and copyrights that provide product differentiation and recognition and promote our portfolio of product offerings. All of our games feature
elements that are subject to copyrights and protection. In addition, we generally obtain trademark protection and often seek to register
trademarks for the names and designs under which we market and license our products and games. Protections for trademarks exist in many
countries, including the U.S., for as long as the trademark is registered and/or used. Registrations are generally issued for fixed, but
renewable terms, although trademark rights may exist whether or not a mark is registered and the duration of the registrations varies
by country.
Exhibit 99.3
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
These Unaudited Pro Forma
Financial Statements of Brookfield Business Partners L.P. (the “partnership”) are based on the consolidated financial statements
of the partnership, the combined audited and unaudited historical financial statements of the Lottery Business of Scientific Games Corporation
(Carve-Out of Certain Operations of Scientific Games Corporation) (“Scientific Games Lottery”), and the consolidated audited
historical financial statements of CDK Global, Inc. (“CDK Global”) and have been prepared to illustrate the estimated
effects of the following transactions (collectively, the “Transactions”) on the consolidated financial statements of the
partnership:
| · | The partnership, together with institutional partners, acquired a 100% interest in Scientific Games
Lottery on April 4, 2022 for total consideration of $5.8 billion (the “Scientific Games Lottery acquisition”).
Scientific Games Lottery is a service provider to government sponsored lottery programs through its capabilities in game design,
distribution, systems and terminals, and turnkey technology solutions. The partnership holds a 100% voting interest and a 36%
economic interest in Scientific Games Lottery, with the balance held by institutional partners. The partnership, together with institutional partners, funded a
portion of the Scientific Games Lottery acquisition with approximately $3.3 billion of non-recourse borrowings, net of debt
issuance costs. |
| · | The
partnership, together with institutional partners, acquired a 100% interest in CDK Global
on July 6, 2022 for total consideration of $8.3 billion (the “CDK Global acquisition”).
CDK Global is a leading automotive retail technology company. The partnership holds a 100% voting interest and a 28% economic interest
in CDK Global. A portion of the partnership’s economic interest may be syndicated to institutional partners, which is expected to
decrease the partnership’s economic interest to 25%. Prior to the completion of the CDK Global acquisition, $1.7 billion of
debt within CDK Global was extinguished. The partnership, together with institutional partners, funded a portion of the CDK Global acquisition
with approximately $4.9 billion of non-recourse borrowings, net of debt issuance costs. |
| · | On
October 11, 2022, an agreement was entered into to sell Westinghouse to a strategic
consortium led by Cameco Corporation and Brookfield Renewable Partners for consideration
of approximately $4.2 billion, before working capital and other adjustments (the “Westinghouse
disposition”). The transaction is subject to certain closing conditions, including
regulatory approval and other customary conditions. The disposition has been reflected in
these unaudited pro forma financial statements since the transaction is probable for the
purposes of pro forma financial information and is considered to be significant to the partnership.
The Westinghouse disposition is expected to close in the second half of 2023. |
| · | On
May 1, 2023, the partnership’s dealer software and technology services operations
completed the sale of a non-core division servicing the heavy equipment sector for consideration
of approximately $490 million (the “software assets disposition”). The assets
and liabilities associated with this non-core division were classified as held for sale in
the partnership’s historical financial information as at March 31, 2023. The disposition
is considered to be significant to the partnership. |
The information in the Unaudited
Pro Forma Statements of Operating Results for the year ended December 31, 2022 and for the three months ended March 31, 2023
gives effect to the pro forma adjustments as if each of the Transactions had been consummated on January 1, 2022. No adjustments
were made for the acquisitions of Scientific Games Lottery and CDK Global to the Unaudited Pro Forma Statements of Operating Results
for the three months ended March 31, 2023 as the historical financial results of the partnership for the three months ended March 31,
2023 already include the financial results of the businesses acquired in 2022.
The information in the Unaudited
Pro Forma Statement of Financial Position as at March 31, 2023 gives effect to the pro forma adjustments as if the Westinghouse
disposition and software assets disposition had been consummated on March 31, 2023. No adjustments were made for Scientific Games
Lottery and CDK Global to the Unaudited Pro Forma Statement of Financial Position as at March 31, 2023 as the financial position
of the acquired businesses are already included in the partnership’s historical financial information as at such date.
All financial data in the
Unaudited Pro Forma Financial Statements is presented in U.S. dollars, unless otherwise noted, and the Unaudited Pro Forma Financial
Statements have been prepared using accounting policies that are consistent with International Financial Reporting Standards (“IFRS”)
as issued by the International Accounting Standards Board (“IASB”).
The partnership and CDK Global
have different fiscal years ending December 31 and June 30, respectively. CDK Global’s audited consolidated statement
of operations for the fiscal year ended June 30, 2022 has been aligned to the fiscal year of the partnership for the fiscal year
ended December 31, 2022 by adjusting to include CDK Global’s unaudited consolidated statement of operations data for the six
months ended December 31, 2022 and to exclude CDK Global’s unaudited consolidated statement of operations data for the six
months ended December 31, 2021.
The Unaudited Pro Forma
Financial Statements are based on preliminary estimates, accounting judgments and currently available information and assumptions
that management believes are reasonable. All financial data for the Westinghouse disposition and software assets disposition has
been derived from the historical actual financial information of the businesses disposed. The notes to the Unaudited Pro Forma
Financial Statements provide a detailed discussion of how such adjustments were derived and presented in the Unaudited Pro Forma
Financial Statements. The Unaudited Pro Forma Financial Statements should be read in conjunction with the audited financial
statements of the partnership as at December 31, 2022 and 2021 and for the years ended December 31, 2022, 2021 and 2020,
the unaudited interim financial statements of the partnership as at March 31, 2023 and for the three months ended
March 31, 2023 and 2022, the audited combined financial statements of Scientific Games Lottery as at December 31, 2021 and
2020 and for the years ended December 31, 2021 and 2020, the unaudited interim combined financial statements of Scientific
Games Lottery as at March 31, 2022 and for the three months ended March 31, 2022 and 2021 and the audited consolidated
financial statements of CDK Global as at June 30, 2022 and 2021 and for the years ended June 30, 2022 and 2021.
The Unaudited Pro Forma Financial
Statements have been prepared for illustrative purposes only and are not necessarily indicative of the financial position or operating
results of the partnership had the Transactions occurred on the dates indicated, nor is such pro forma financial information necessarily
indicative of the results to be expected for any future period. The actual financial position and operating results may differ significantly
from the pro forma amounts reflected herein due to a variety of factors.
UNAUDITED PRO FORMA STATEMENT OF FINANCIAL
POSITION
| |
| | |
Transaction
Accounting
Adjustments | |
| | |
| | |
Transaction
Accounting Adjustments | |
| | |
| |
US$
MILLIONS
As
at March 31, 2023 | |
Brookfield
Business
Partners L.P.
(historical) | | |
Software
assets (consummated disposition) | |
Notes | | |
Pro
Forma -
Consummated
Transactions | | |
Westinghouse
(probable disposition) | |
Notes | | |
Pro
Forma -
Combined | |
| |
| | | |
| | |
| | | |
| | | |
(2a) | |
| | | |
| | |
Assets | |
| | | |
| | |
| | | |
| | | |
| | |
| | | |
| | |
Current Assets | |
| | | |
| | |
| | | |
| | | |
| | |
| | | |
| | |
Cash and cash equivalents | |
$ | 3,045 | | |
$ | 427 | |
| (1f) | | |
$ | 3,472 | | |
$ | 3,978 | |
| (2f) | | |
$ | 7,450 | |
Financial assets | |
| 1,762 | | |
| — | |
| | | |
| 1,762 | | |
| (20 | ) |
| | | |
| 1,742 | |
Accounts and other receivable,
net | |
| 6,725 | | |
| — | |
| | | |
| 6,725 | | |
| (565 | ) |
| | | |
| 6,160 | |
Inventory, net | |
| 5,194 | | |
| — | |
| | | |
| 5,194 | | |
| (594 | ) |
| | | |
| 4,600 | |
Other assets | |
| 2,236 | | |
| (516 | ) |
| (1a) | | |
| 1,720 | | |
| (447 | ) |
| | | |
| 1,273 | |
| |
| 18,962 | | |
| (89 | ) |
| | | |
| 18,873 | | |
| 2,352 | |
| | | |
| 21,225 | |
Non-Current Assets | |
| | | |
| | |
| | | |
| | | |
| | |
| | | |
| | |
Financial assets | |
| 11,125 | | |
| — | |
| | | |
| 11,125 | | |
| (281 | ) |
| | | |
| 10,844 | |
Accounts and other receivable,
net | |
| 925 | | |
| — | |
| | | |
| 925 | | |
| — | |
| | | |
| 925 | |
Other assets | |
| 535 | | |
| 63 | |
| (1f) | | |
| 598 | | |
| (140 | ) |
| | | |
| 458 | |
Property, plant and equipment | |
| 16,218 | | |
| — | |
| | | |
| 16,218 | | |
| (1,056 | ) |
| | | |
| 15,162 | |
Deferred income tax assets | |
| 1,305 | | |
| — | |
| | | |
| 1,305 | | |
| (328 | ) |
| | | |
| 977 | |
Intangible assets | |
| 23,618 | | |
| — | |
| | | |
| 23,618 | | |
| (2,106 | ) |
| | | |
| 21,512 | |
Equity accounted investments | |
| 2,083 | | |
| — | |
| | | |
| 2,083 | | |
| (17 | ) |
| | | |
| 2,066 | |
Goodwill | |
| 15,474 | | |
| — | |
| | | |
| 15,474 | | |
| (437 | ) |
| | | |
| 15,037 | |
| |
$ | 90,245 | | |
$ | (26 | ) |
| | | |
$ | 90,219 | | |
$ | (2,013 | ) |
| | | |
$ | 88,206 | |
Liabilities and Equity | |
| | | |
| | |
| | | |
| | | |
| | |
| | | |
| | |
Current Liabilities | |
| | | |
| | |
| | | |
| | | |
| | |
| | | |
| | |
Accounts payable and other | |
$ | 13,010 | | |
$ | 50 | |
| (1a),
(1d) | | |
$ | 13,060 | | |
$ | (1,475 | ) |
| (2d),
(2e) | | |
$ | 11,585 | |
Non-recourse
borrowings in subsidiaries of the partnership | |
| 3,185 | | |
| — | |
| | | |
| 3,185 | | |
| (294 | ) |
| | | |
| 2,891 | |
| |
| 16,195 | | |
| 50 | |
| | | |
| 16,245 | | |
| (1,769 | ) |
| | | |
| 14,476 | |
Non-Current Liabilities | |
| | | |
| | |
| | | |
| | | |
| | |
| | | |
| | |
Accounts payable and other | |
| 7,547 | | |
| — | |
| | | |
| 7,547 | | |
| (856 | ) |
| | | |
| 6,691 | |
Corporate borrowings | |
| 2,030 | | |
| — | |
| | | |
| 2,030 | | |
| — | |
| | | |
| 2,030 | |
Non-recourse borrowings in subsidiaries
of the partnership | |
| 41,887 | | |
| — | |
| | | |
| 41,887 | | |
| (3,418 | ) |
| | | |
| 38,469 | |
Deferred
income tax liabilities | |
| 3,769 | | |
| (29 | ) |
| (1e) | | |
| 3,740 | | |
| (31 | ) |
| | | |
| 3,709 | |
| |
| 71,428 | | |
| 21 | |
| | | |
| 71,449 | | |
| (6,074 | ) |
| | | |
| 65,375 | |
Equity | |
| | | |
| | |
| | | |
| | | |
| | |
| | | |
| | |
Limited partners | |
| 1,464 | | |
| (5 | ) |
| (1a),
(1f) | | |
| 1,459 | | |
| 613 | |
| (2f) | | |
| 2,072 | |
Non-controlling interests attributable
to: | |
| | | |
| | |
| | | |
| — | | |
| | |
| | | |
| | |
Redemption-exchange
units | |
| 1,367 | | |
| (4 | ) |
| (1a),
(1f) | | |
| 1,363 | | |
| 573 | |
| (2f) | | |
| 1,936 | |
Special
limited partners | |
| — | | |
| — | |
| | | |
| — | | |
| — | |
| | | |
| — | |
BBUC exchangeable shares | |
| 1,431 | | |
| (4 | ) |
| (1a),
(1f) | | |
| 1,427 | | |
| 599 | |
| (2f) | | |
| 2,026 | |
Preferred
securities | |
| 1,490 | | |
| — | |
| | | |
| 1,490 | | |
| — | |
| | | |
| 1,490 | |
Interest
of others in operating subsidiaries | |
| 13,065 | | |
| (34 | ) |
| (1a),
(1f) | | |
| 13,031 | | |
| 2,276 | |
| (2f) | | |
| 15,307 | |
| |
$ | 18,817 | | |
$ | (47 | ) |
| | | |
$ | 18,770 | | |
$ | 4,061 | |
| | | |
$ | 22,831 | |
| |
$ | 90,245 | | |
$ | (26 | ) |
| | | |
$ | 90,219 | | |
$ | (2,013 | ) |
| | | |
$ | 88,206 | |
See the accompanying notes to the Unaudited
Pro Forma Financial Statements.
UNAUDITED PRO FORMA STATEMENTS OF OPERATING
RESULTS
| |
| | |
Transaction
Accounting
Adjustments | | |
| | |
Transaction
Accounting
Adjustments | | |
| |
US$
MILLIONS (except as noted)
For
the three months ended March 31, 2023 | |
Brookfield
Business
Partners L.P.
(historical) | | |
Software
assets (consummated disposition) | | |
Pro
Forma -
Consummated
Transactions | | |
Westinghouse
(probable
disposition) | | |
Pro
Forma -
Combined | |
| |
| | | |
(1b) | | |
| | | |
(2b) | | |
| | |
Revenues | |
$ | 13,758 | | |
$ | (11 | ) | |
$ | 13,747 | | |
$ | (1,056 | ) | |
$ | 12,691 | |
Direct operating costs | |
| (12,466 | ) | |
| 7 | | |
| (12,459 | ) | |
| 935 | | |
| (11,524 | ) |
General and administrative expenses | |
| (401 | ) | |
| 1 | | |
| (400 | ) | |
| 46 | | |
| (354 | ) |
Interest income (expense), net | |
| (865 | ) | |
| — | | |
| (865 | ) | |
| 67 | | |
| (798 | ) |
Equity accounted income (loss),
net | |
| 25 | | |
| — | | |
| 25 | | |
| 1 | | |
| 26 | |
Gain (loss) on acquisitions/dispositions,
net | |
| 81 | | |
| — | | |
| 81 | | |
| (14 | ) | |
| 67 | |
Other income
(expense), net | |
| 129 | | |
| — | | |
| 129 | | |
| 19 | | |
| 148 | |
Income (loss) before income tax | |
| 261 | | |
| (3 | ) | |
| 258 | | |
| (2 | ) | |
| 256 | |
Income tax (expense) recovery | |
| | | |
| | | |
| | | |
| | | |
| | |
Current | |
| (126 | ) | |
| — | | |
| (126 | ) | |
| 35 | | |
| (91 | ) |
Deferred | |
| 68 | | |
| — | | |
| 68 | | |
| (30 | ) | |
| 38 | |
Net income (loss) | |
$ | 203 | | |
$ | (3 | ) | |
$ | 200 | | |
$ | 3 | | |
$ | 203 | |
Attributable to: | |
| | | |
| | | |
| | | |
| | | |
| | |
Limited
partners | |
$ | 25 | | |
$ | (1 | ) | |
$ | 24 | | |
$ | 1 | | |
$ | 25 | |
Non-controlling
interests attributable to: | |
| | | |
| | | |
| — | | |
| | | |
| | |
Redemption-exchange
units | |
| 24 | | |
| — | | |
| 24 | | |
| — | | |
| 24 | |
Special
limited partners | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
BBUC exchangeable shares | |
| 25 | | |
| — | | |
| 25 | | |
| — | | |
| 25 | |
Preferred
securities | |
| 22 | | |
| — | | |
| 22 | | |
| — | | |
| 22 | |
Interest
of others in operating subsidiaries | |
| 107 | | |
| (2 | ) | |
| 105 | | |
| 2 | | |
| 107 | |
| |
$ | 203 | | |
$ | (3 | ) | |
$ | 200 | | |
$ | 3 | | |
$ | 203 | |
Basic and diluted earnings (loss)
per limited partner unit | |
$ | 0.34 | | |
| | | |
| | | |
| | | |
$ | 0.34 | |
Weighted-average LP Units (millions) | |
| 74.6 | | |
| | | |
| | | |
| | | |
| 74.6 | |
See the accompanying notes to the Unaudited
Pro Forma Financial Statements.
| |
| | |
Transaction
Accounting Adjustments | | |
| | |
Transaction
Accounting
Adjustments | | |
| | |
| | |
Transaction
Accounting
Adjustments | | |
| | |
| |
US$
MILLIONS (except as noted)
For the year ended December 31, 2022 | |
Brookfield
Business
Partners L.P.
(historical) | | |
Scientific
Games
Lottery | | |
CDK
Global | | |
Pro
Forma -
Consummated
Acquisitions | | |
Software
assets
(consummated
disposition) | | |
Notes | | |
Pro
Forma -
Consummated
Transactions | | |
Westinghouse
(probable
disposition) | | |
Notes | | |
Pro
Forma -
Combined | |
| |
| | | |
(3) | | |
(4) | | |
| | | |
(1b) | | |
| | | |
| | | |
(2b) | | |
| | | |
| | |
Revenues | |
$ | 57,545 | | |
$ | 258 | | |
$ | 915 | | |
$ | 58,718 | | |
$ | (40 | ) | |
| | | |
$ | 58,678 | | |
$ | (3,795 | ) | |
| | | |
$ | 54,883 | |
Direct operating costs | |
| (53,102 | ) | |
| (192 | ) | |
| (630 | ) | |
| (53,924 | ) | |
| 38 | | |
| | | |
| (53,886 | ) | |
| 3,302 | | |
| | | |
| (50,584 | ) |
General and administrative expenses | |
| (1,372 | ) | |
| (27 | ) | |
| (139 | ) | |
| (1,538 | ) | |
| 2 | | |
| | | |
| (1,536 | ) | |
| 169 | | |
| | | |
| (1,367 | ) |
Interest income (expense), net | |
| (2,538 | ) | |
| (62 | ) | |
| (221 | ) | |
| (2,821 | ) | |
| — | | |
| | | |
| (2,821 | ) | |
| 219 | | |
| | | |
| (2,602 | ) |
Equity accounted income (loss),
net | |
| 165 | | |
| 4 | | |
| (5 | ) | |
| 164 | | |
| — | | |
| | | |
| 164 | | |
| (5 | ) | |
| | | |
| 159 | |
Impairment reversal (expense),
net | |
| 9 | | |
| — | | |
| — | | |
| 9 | | |
| — | | |
| | | |
| 9 | | |
| — | | |
| | | |
| 9 | |
Gain (loss) on acquisitions/dispositions,
net | |
| 28 | | |
| — | | |
| — | | |
| 28 | | |
| 4 | | |
| (1c) | | |
| 32 | | |
| 4,138 | | |
| (2c) | | |
| 4,170 | |
Other income
(expense), net | |
| (658 | ) | |
| 2 | | |
| (4 | ) | |
| (660 | ) | |
| — | | |
| | | |
| (660 | ) | |
| 48 | | |
| (2e) | | |
| (612 | ) |
Income (loss) before income tax | |
| 77 | | |
| (17 | ) | |
| (84 | ) | |
| (24 | ) | |
| 4 | | |
| | | |
| (20 | ) | |
| 4,076 | | |
| | | |
| 4,056 | |
Income tax (expense) recovery | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Current | |
| (458 | ) | |
| (16 | ) | |
| (8 | ) | |
| (482 | ) | |
| (79 | ) | |
| (1d) | | |
| (561 | ) | |
| 4 | | |
| (2d) | | |
| (557 | ) |
Deferred | |
| 736 | | |
| (5 | ) | |
| (35 | ) | |
| 696 | | |
| 30 | | |
| (1e) | | |
| 726 | | |
| (400 | ) | |
| | | |
| 326 | |
Net income
(loss) | |
$ | 355 | | |
$ | (38 | ) | |
$ | (127 | ) | |
$ | 190 | | |
$ | (45 | ) | |
| | | |
$ | 145 | | |
$ | 3,680 | | |
| | | |
$ | 3,825 | |
Attributable
to: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Limited
partners | |
$ | 55 | | |
$ | (6 | ) | |
$ | (15 | ) | |
$ | 34 | | |
$ | (4 | ) | |
| | | |
$ | 30 | | |
$ | 599 | | |
| | | |
$ | 629 | |
Non-controlling
interests attributable to: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| — | | |
| | | |
| | | |
| | |
Redemption-exchange
units | |
| 49 | | |
| (6 | ) | |
| (14 | ) | |
| 29 | | |
| (5 | ) | |
| | | |
| 24 | | |
| 556 | | |
| | | |
| 580 | |
Special
limited partners | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| | | |
| — | | |
| — | | |
| | | |
| — | |
BBUC exchangeable shares | |
| 42 | | |
| (1 | ) | |
| (9 | ) | |
| 32 | | |
| (4 | ) | |
| | | |
| 28 | | |
| 463 | | |
| | | |
| 491 | |
Preferred
securities | |
| 27 | | |
| — | | |
| — | | |
| 27 | | |
| — | | |
| | | |
| 27 | | |
| — | | |
| | | |
| 27 | |
Interest
of others in operating subsidiaries | |
| 182 | | |
| (25 | ) | |
| (89 | ) | |
| 68 | | |
| (32 | ) | |
| | | |
| 36 | | |
| 2,062 | | |
| | | |
| 2,098 | |
| |
$ | 355 | | |
$ | (38 | ) | |
$ | (127 | ) | |
$ | 190 | | |
$ | (45 | ) | |
| | | |
$ | 145 | | |
$ | 3,680 | | |
| | | |
$ | 3,825 | |
Basic and diluted earnings (loss)
per limited partner unit | |
$ | 0.73 | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
$ | 8.36 | |
Weighted-average LP Units (millions) | |
| 75.3 | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 75.3 | |
See the accompanying notes to the Unaudited
Pro Forma Financial Statements.
NOTES TO THE
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. | Software assets disposition |
(1a) | On
May 1, 2023, the partnership’s dealer software and technology services operations
sold a non-core division servicing the heavy equipment sector. The adjustments on the Unaudited
Pro Forma Statement of Financial Position reflect the derecognition of assets held for sale
of $516 million, included in Other assets, and derecognition of liabilities held for sale
of $30 million, included in Accounts payable and other. |
(1b) | These
pro forma adjustments reflect the elimination of historical operating results for the three
months ended March 31, 2023 and for the year ended December 31, 2022. |
(1c) | The
pre-tax gain from the disposition of approximately $4 million is reflected as an adjustment
on the Unaudited Pro Forma Statement of Operating Results. See note (1d) regarding the basis
for the income tax effect. |
Transaction costs of $3 million have
been included in the historical Statements of Operating Results of the partnership.
(1d) | The
current income tax effect of $80 million from the software assets disposition was calculated
using an effective tax rate of 27% in effect for the year presented. |
(1e) | The
deferred income tax impact of $29 million from the software assets disposition is reflected
as an adjustment on the Unaudited Pro Forma Statement of Operating Results. |
(1f) | The
total consideration of $490 million includes cash proceeds of $427 million, included
in cash and cash equivalents, and deferred consideration of $63 million, included in other
non-current assets. |
2. | Westinghouse disposition |
(2a) | On
October 11, 2022, an agreement was entered into to sell Westinghouse to a strategic
consortium led by Cameco Corporation and Brookfield Renewable Partners. The adjustment to
the Unaudited Pro Forma Statement of Financial Position includes the derecognition of total
assets of $6.2 billion and the derecognition of total liabilities of $6.2 billion.
The pro forma adjustment to the Unaudited Pro Forma Statement of Financial Position to reflect
the Westinghouse disposition also includes other effects discussed in note (2d) and (2e). |
(2b) | These
pro forma adjustments include the elimination of the historical operating results of Westinghouse
for the three months ended March 31, 2023 and for the year ended December 31, 2022. |
(2c) | The
estimated pre-tax gain of approximately $4.1 billion from the disposition is reflected
as an adjustment on the Unaudited Pro Forma Statement of Operating Results. |
| |
| The actual gain and related tax effect
will be calculated based on the net book value as of the closing of the transaction and therefore, could differ from the current estimate.
See note (2d) regarding the basis for the income tax effect. |
(2d) | Includes
the estimated current income tax effect of the Westinghouse disposition of $25 million. The
tax effect of the Westinghouse disposition was calculated using an effective tax rate of
27% in effect as at January 1, 2022. |
(2e) | Includes
the accrual of approximately $52 million of additional transaction costs to be incurred by
the partnership upon the disposition of Westinghouse. Transaction costs of $18 million have
been included in the historical Statements of Operating Results of the partnership. |
(2f) | Includes
estimated cash proceeds of approximately $4.2 billion, included in cash and cash equivalents,
before working capital and other adjustments. |
3. | Acquisition of Scientific Games Lottery |
The following tables and
explanatory notes present the statement of operating results of Scientific Games Lottery for the period ended April 4, 2022, as
adjusted to give effect to the Scientific Games Lottery acquisition as if it had occurred at the beginning of the period.
| |
| | |
| | |
Transaction
Accounting Adjustments | | |
| |
US$
MILLIONS (except as noted)
For
the period ended April 4, 2022 | |
Pre-acquisition
Jan 1, 2022 to
Mar 31, 2022 | | |
Reclassification
to Conform
Presentation | | |
IFRS
3
Adjustments | | |
Notes | | |
Other | | |
Notes | | |
Scientific
Games Lottery
Pro Forma | |
| |
(3a) | | |
(3a) | | |
| | | |
| | | |
| | | |
| | | |
| | |
Revenues | |
$ | — | | |
$ | 258 | | |
$ | — | | |
| | | |
$ | — | | |
| | | |
$ | 258 | |
Instant products | |
| 171 | | |
| (171 | ) | |
| — | | |
| | | |
| — | | |
| | | |
| — | |
Lottery systems | |
| 87 | | |
| (87 | ) | |
| — | | |
| | | |
| — | | |
| | | |
| — | |
Direct operating costs | |
| — | | |
| (160 | ) | |
| (32 | ) | |
| (3b) | | |
| — | | |
| | | |
| (192 | ) |
Cost of instant products | |
| (89 | ) | |
| 89 | | |
| — | | |
| | | |
| — | | |
| | | |
| — | |
Cost of lottery systems | |
| (54 | ) | |
| 54 | | |
| — | | |
| | | |
| — | | |
| | | |
| — | |
General and administrative expenses | |
| — | | |
| (27 | ) | |
| — | | |
| | | |
| — | | |
| | | |
| (27 | ) |
Selling, general and administrative | |
| (27 | ) | |
| 27 | | |
| — | | |
| | | |
| — | | |
| | | |
| — | |
Research and development | |
| (1 | ) | |
| 1 | | |
| — | | |
| | | |
| — | | |
| | | |
| — | |
Restructuring and other | |
| 2 | | |
| (2 | ) | |
| — | | |
| | | |
| — | | |
| | | |
| — | |
Depreciation and amortization
expense | |
| (16 | ) | |
| 16 | | |
| — | | |
| | | |
| — | | |
| | | |
| — | |
Interest income (expense), net | |
| — | | |
| — | | |
| — | | |
| | | |
| (62 | ) | |
| (3d) | | |
| (62 | ) |
Equity accounted income (loss),
net | |
| — | | |
| 4 | | |
| — | | |
| | | |
| — | | |
| | | |
| 4 | |
Earnings (loss) from equity investments | |
| 4 | | |
| (4 | ) | |
| — | | |
| | | |
| — | | |
| | | |
| — | |
Other income (expense), net | |
| — | | |
| 2 | | |
| — | | |
| | | |
| — | | |
| | | |
| 2 | |
Income tax (expense) recovery | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Current | |
| — | | |
| (16 | ) | |
| — | | |
| | | |
| — | | |
| | | |
| (16 | ) |
Deferred | |
| — | | |
| — | | |
| (5 | ) | |
| (3c) | | |
| — | | |
| | | |
| (5 | ) |
Income tax
expense | |
| (16 | ) | |
| 16 | | |
| — | | |
| | | |
| — | | |
| | | |
| — | |
Net income (loss) | |
$ | 61 | | |
$ | — | | |
$ | (37 | ) | |
| | | |
$ | (62 | ) | |
| | | |
$ | (38 | ) |
Attributable to: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Parent | |
$ | 61 | | |
$ | (61 | ) | |
$ | — | | |
| | | |
$ | — | | |
| | | |
$ | — | |
Limited partners | |
| — | | |
| 11 | | |
| (6 | ) | |
| | | |
| (11 | ) | |
| | | |
| (6 | ) |
Non-controlling interests attributable
to: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Redemption-exchange
units | |
| — | | |
| 10 | | |
| (6 | ) | |
| | | |
| (10 | ) | |
| | | |
| (6 | ) |
BBUC exchangeable shares | |
| — | | |
| 2 | | |
| (1 | ) | |
| | | |
| (2 | ) | |
| | | |
| (1 | ) |
Interest
of others in operating subsidiaries | |
| — | | |
| 38 | | |
| (24 | ) | |
| | | |
| (39 | ) | |
| | | |
| (25 | ) |
| |
$ | 61 | | |
$ | — | | |
$ | (37 | ) | |
| | | |
$ | (62 | ) | |
| | | |
$ | (38 | ) |
(3a) | On
April 4, 2022, the partnership completed the Scientific Games Lottery acquisition. The
acquisition was accounted for using the acquisition method under IFRS 3 with the partnership
being identified as the accounting acquirer. Acquisition related costs of $16 million
were included in the historical Statement of Operating Results for the year ended December 31,
2022. The historical financial information of Scientific Games Lottery was prepared in accordance
with accounting principles generally accepted in the United States. The partnership has reviewed
and determined there were no significant differences in accounting policies applied by Scientific
Games Lottery and the partnership. Certain pro forma adjustments have been made to conform
the presentation of the historical financial information of Scientific Games Lottery to the
presentation of financial information in the partnership’s financial statements. |
The operating results of Scientific
Games Lottery for the three months ended March 31, 2022 was determined to be an appropriate measure of the operating results of
Scientific Games Lottery for the period ended April 4, 2022 in the unaudited pro forma financial statements because the operating
results for the 4-day period ended April 4, 2022 was determined to be immaterial.
(3b) | As
part of the Scientific Games Lottery acquisition, the fair value adjustment applied to property,
plant and equipment increased the carrying value by $76 million with an average useful
life of 35 years. The fair value adjustment applied to intangible assets increased the carrying
value by $3.9 billion, where total intangible assets comprised customer relationships
with a fair value adjustment of $2.9 billion and an average useful life of 23 years
and brand with a fair value adjustment of $1.0 billion and an indefinite useful life.
If the acquisition had occurred on January 1, 2022, depreciation and amortization expense
for the period ended April 4, 2022 would have increased by $32 million. |
(3c) | The
Unaudited Pro Forma Statements of Operating Results have been adjusted to reflect the deferred
tax impact of the transaction accounting adjustments based on an effective tax rate of 26%. |
(3d) | Prior
to closing the Scientific Games Lottery acquisition, the partnership raised proceeds of $3.4 billion
of fixed and variable-rate non-recourse borrowings (the “New Scientific Games Lottery
Non-Recourse Borrowings”) and incurred debt issuance costs of approximately $90 million,
which were used to partially fund the Scientific Games Lottery acquisition. As at the date
of these unaudited pro forma financial statements, the weighted-average cost of borrowing
was 6.9%. |
The borrowing costs presented within
interest income (expense), net reflects the borrowing costs on the New Scientific Games Lottery Non-Recourse Borrowings and the amortization
of related debt issuance costs of $62 million for the period ended April 4, 2022. A 1/8 of a percentage point increase or decrease
in the benchmark rate would result in a change in interest expense of approximately $1 million for the period ended April 4,
2022.
1. | Acquisition of CDK Global |
The following tables and
explanatory notes present the statement of operating results of CDK Global for the period ended July 6, 2022, as adjusted to give
effect to the CDK Global acquisition as if it had occurred at the beginning of the period.
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Transaction
Accounting Adjustments |
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US$
MILLIONS
For the period ended July 6, 2022 |
|
Pre-acquisition
Jan 1, 2022 to
June 30, 2022 |
|
|
Accounting
Policy and
Reclassification |
|
|
IFRS
3
Adjustments |
|
|
Notes |
|
|
Other |
|
|
Notes |
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|
CDK
Global
Pro Forma |
|
|
|
(4a) |
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|
(4a) |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Revenues |
|
$ |
915 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
$ |
— |
|
|
|
|
|
|
$ |
915 |
|
Direct operating costs |
|
|
— |
|
|
|
(506 |
) |
|
|
(124 |
) |
|
|
(4b) |
|
|
|
— |
|
|
|
|
|
|
|
(630 |
) |
Cost of revenue |
|
|
(492 |
) |
|
|
492 |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
General and administrative expenses |
|
|
— |
|
|
|
(181 |
) |
|
|
42 |
|
|
|
(4c) |
|
|
|
— |
|
|
|
|
|
|
|
(139 |
) |
Selling, general and administrative
expenses |
|
|
(192 |
) |
|
|
192 |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
Interest income (expense), net |
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|
(45 |
) |
|
|
4 |
|
|
|
— |
|
|
|
|
|
|
|
(180 |
) |
|
|
(4e) |
|
|
|
(221 |
) |
Equity accounted income (loss), net |
|
|
— |
|
|
|
(5 |
) |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
(5 |
) |
Loss from equity method investment |
|
|
(5 |
) |
|
|
5 |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
Other income (expense), net |
|
|
— |
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
(4 |
) |
Income tax (expense) recovery |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
Current |
|
|
— |
|
|
|
(8 |
) |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
(8 |
) |
Deferred |
|
|
— |
|
|
|
(42 |
) |
|
|
7 |
|
|
|
(4d) |
|
|
|
— |
|
|
|
|
|
|
|
(35 |
) |
Income tax expense |
|
|
(50 |
) |
|
|
50 |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
Net income (loss) |
|
$ |
131 |
|
|
$ |
(3 |
) |
|
$ |
(75 |
) |
|
|
|
|
|
$ |
(180 |
) |
|
|
|
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|
$ |
(127 |
) |
Attributable to: |
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Owners of the company |
|
$ |
127 |
|
|
$ |
(127 |
) |
|
$ |
— |
|
|
|
|
|
|
$ |
— |
|
|
|
|
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$ |
— |
|
Limited partners |
|
|
— |
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|
|
14 |
|
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|
(9 |
) |
|
|
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|
(20 |
) |
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|
(15 |
) |
Non-controlling interests attributable
to: |
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Redemption-exchange
units |
|
|
— |
|
|
|
13 |
|
|
|
(8 |
) |
|
|
|
|
|
|
(19 |
) |
|
|
|
|
|
|
(14 |
) |
BBUC exchangeable shares |
|
|
— |
|
|
|
8 |
|
|
|
(5 |
) |
|
|
|
|
|
|
(12 |
) |
|
|
|
|
|
|
(9 |
) |
Interest of
others in operating subsidiaries |
|
|
— |
|
|
|
93 |
|
|
|
(53 |
) |
|
|
|
|
|
|
(129 |
) |
|
|
|
|
|
|
(89 |
) |
Non-controlling
interests |
|
|
4 |
|
|
|
(4 |
) |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
$ |
131 |
|
|
$ |
(3 |
) |
|
$ |
(75 |
) |
|
|
|
|
|
$ |
(180 |
) |
|
|
|
|
|
$ |
(127 |
) |
(4a) | Pro
forma adjustments have been made to conform the presentation of the historical financial
information of CDK Global to the presentation of financial information in the partnership’s
financial statements. In addition, certain pro forma adjustments have been made to CDK Global’s
historical financial statements prepared in accordance with standards generally accepted
in the United States (U.S. GAAP), to IFRS as issued by the IASB. Acquisition related costs
of $15 million were included in the historical Statement of Operating Results for the
year ended December 31, 2022. The conversion of CDK Global’s historical statements
of operating results to IFRS for the period ended July 6, 2022 includes an adjustment
to increase general and administrative expenses by $3 million related to the recognition
of implementation costs incurred as a customer in a cloud computing arrangement, net of historical
amortization expense. Certain other pro forma adjustments have been made to conform the presentation
of the consolidated financial statements of CDK Global prepared under U.S. GAAP to the presentation
of financial information in the partnership’s financial statements prepared under IFRS,
including reclassification of depreciation expense of $8 million from general and administrative
expenses and $492 million from cost of revenue to direct operating costs for the period
ended July 6, 2022. |
The operating results of CDK Global
for the six months ended June 30, 2022 was determined to be an appropriate measure of the operating results of CDK Global for the
period ended July 6, 2022 in the unaudited pro forma financial statements because the operating results for the 6-day period ended
July 6, 2022 was determined to be immaterial.
(4b) | As
part of the CDK Global acquisition, the fair value adjustment applied to property, plant
and equipment reduced the carrying value by $10 million. The fair value adjustment applied
to intangible assets increased the carrying value by $4.4 billion, where total intangible
assets comprised customer relationships with a fair value adjustment of $3.7 billion
and an average useful life of 15 years, brand with a fair value adjustment of approximately
$254 million and an average useful life of 15 years, and developed technology with fair
value adjustment of approximately $428 million and an average useful life of 5 years.
If the acquisition had occurred on January 1, 2022, depreciation and amortization expense
for the period ended July 6, 2022 would have increased by $124 million. |
(4c) | Certain
costs relating to contract acquisitions and fulfillment that were previously amortized under
U.S GAAP were derecognized upon acquisition of CDK Global, in order to conform with the requirements
under IFRS. If the acquisition had occurred on January 1, 2022, general and administrative
expenses for the period ended July 6, 2022 would have been lower by approximately $42 million. |
(4d) | The
Unaudited Pro Forma Statements of Operating Results have been adjusted to reflect the deferred
tax impact of the transaction accounting adjustments based on an effective tax rate of 27%. |
(4e) | Prior
to closing the CDK Global acquisition, $1.7 billion of its fixed and variable-rate borrowings
were extinguished (the “Extinguished CDK Global Borrowings”) with a weighted-average
interest rate of 5.3% and $16 million in accrued interest. CDK Global used proceeds
from the partnership to extinguish outstanding borrowings. Prior to closing the CDK Global
acquisition, the partnership raised proceeds of $5.1 billion of fixed and variable-rate
non-recourse borrowings (the “New CDK Global Non-Recourse Borrowings”) and incurred
debt issuance costs of approximately $222 million, which was used to partially fund
the CDK Global acquisition. As at the date of these unaudited pro forma financial statements,
the weighted-average cost of borrowing was 8.1%. |
The table below presents the net increase
to borrowing costs presented within interest income (expense), net.
(US$ MILLIONS) | |
Period
ended July 6, 2022 | |
Elimination of interest expense and amortization
of debt issuance costs – Extinguished CDK Global Borrowings | |
$ | 43 | |
Interest expense on New CDK Global Non-Recourse Borrowings | |
| (207 | ) |
Amortization of debt issuance costs on
New CDK Global Non-Recourse Borrowings | |
| (16 | ) |
Other transaction accounting adjustment
to interest income (expense), net | |
$ | (180 | ) |
A 1/8 of a percentage point increase
or decrease in the benchmark rate would result in a change in interest expense of approximately $3 million for the period ended
July 6, 2022.
Exhibit 99.4
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
These Unaudited Pro Forma
Financial Statements of Brookfield Business Corporation (the “company”) are based on the consolidated financial statements
of the company and the consolidated audited historical financial statements of CDK Global, Inc. (“CDK Global”) and have
been prepared to illustrate the estimated effects of the following transactions (collectively, the “Transactions”) on the
consolidated financial statements of the company:
| · | The company, together with institutional partners, acquired a 100% interest in CDK Global on
July 6, 2022 for total consideration of $8.3 billion (the “CDK Global acquisition”). CDK Global is a leading
automotive retail technology company. The company holds a 100% voting interest and a 28% economic interest in CDK Global. A portion
of the company’s economic interest may be syndicated to institutional partners, which is expected to decrease the company's economic interest to 25%. Prior to the completion of the CDK Global
acquisition, $1.7 billion of debt within CDK Global was extinguished. The company, together with institutional partners, funded
a portion of the CDK Global acquisition with approximately $4.9 billion of non-recourse borrowings, net of debt issuance
costs. |
| · | On
October 11, 2022, an agreement was entered into to sell Westinghouse to a strategic
consortium led by Cameco Corporation and Brookfield Renewable Partners for consideration
of approximately $4.2 billion, before working capital and other adjustments (the “Westinghouse
disposition”). The transaction is subject to certain closing conditions, including
regulatory approval and other customary conditions. The disposition has been reflected in
these unaudited pro forma financial statements since the transaction is probable for the
purposes of pro forma financial information and is considered to be significant to the company.
The Westinghouse disposition is expected to close in the second half of 2023. |
| · | On
May 1, 2023, the company’s dealer software and technology services operations
sold a non-core division servicing the heavy equipment sector for consideration of approximately
$490 million (the “software assets disposition”). The assets and liabilities
associated with this non-core division were classified as held for sale in the company’s
historical financial information as at March 31, 2023. The disposition is considered
to be significant to the company. |
The information in the Unaudited
Pro Forma Statements of Operating Results for the year ended December 31, 2022 and for the three months ended March 31, 2023
gives effect to the pro forma adjustments as if each of the Transactions had been consummated on January 1, 2022. No adjustments
were made for the acquisition of CDK Global to the Unaudited Pro Forma Statements of Operating Results for the three months ended March 31,
2023 as the historical financial results of the company for the three months ended March 31, 2023 already include the financial
results of the business acquired in 2022.
The information in the Unaudited
Pro Forma Statement of Financial Position as at March 31, 2023 gives effect to the pro forma adjustments as if the Westinghouse
disposition and software assets disposition had been consummated on March 31, 2023. No adjustments were made for CDK Global to the
Unaudited Pro Forma Statement of Financial Position as at March 31, 2023 as the financial position of the acquired business is already
included in the company’s historical financial information as at such date.
All financial data in the
Unaudited Pro Forma Financial Statements is presented in U.S. dollars, unless otherwise noted, and the Unaudited Pro Forma Financial
Statements have been prepared using accounting policies that are consistent with International Financial Reporting Standards (“IFRS”)
as issued by the International Accounting Standards Board (“IASB”).
The company and CDK Global
have different fiscal years ending December 31 and June 30, respectively. CDK Global’s audited consolidated statement
of operations for the fiscal year ended June 30, 2022 has been aligned to the fiscal year of the company for the fiscal year ended
December 31, 2022 by adjusting to include CDK Global’s unaudited consolidated statement of operations data for the six months
ended December 31, 2022 and to exclude CDK Global’s unaudited consolidated statement of operations data for the six months
ended December 31, 2021.
The Unaudited Pro Forma Financial
Statements are based on preliminary estimates, accounting judgments and currently available information and assumptions that management
believes are reasonable. All financial data for the Westinghouse disposition and software assets disposition has been derived from the
historical actual financial information of the businesses disposed. The notes to the Unaudited Pro Forma Financial Statements provide
a detailed discussion of how such adjustments were derived and presented in the Unaudited Pro Forma Financial Statements. The Unaudited
Pro Forma Financial Statements should be read in conjunction with the audited financial statements of the company as at December 31,
2022 and 2021 and for the years ended December 31, 2022, 2021 and 2020, the audited consolidated financial statements of CDK Global
as at June 30, 2022 and 2021 and for the years ended June 30, 2022 and 2021.
The Unaudited Pro Forma Financial
Statements have been prepared for illustrative purposes only and are not necessarily indicative of the financial position or operating
results of the company had the Transactions occurred on the dates indicated, nor is such pro forma financial information necessarily
indicative of the results to be expected for any future period. The actual financial position and operating results may differ significantly
from the pro forma amounts reflected herein due to a variety of factors.
UNAUDITED PRO FORMA STATEMENT OF FINANCIAL
POSITION
| |
| | |
Transaction
Accounting
Adjustments | |
| | |
| | |
Transaction
Accounting
Adjustments | |
| | |
| |
US$ MILLIONS
As at March 31, 2023 | |
Brookfield
Business
Corporation
(historical) | | |
Software
assets
(consummated
disposition) | |
Notes | | |
Pro
Forma -
Consummated
Transactions | | |
Westinghouse
(probable
disposition) | |
Notes | | |
Pro
Forma -
Combined | |
| |
| | | |
| | |
| | | |
| | | |
(2a) | |
| | | |
| | |
Assets | |
| | | |
| | |
| | | |
| | | |
| | |
| | | |
| | |
Current Assets | |
| | | |
| | |
| | | |
| | | |
| | |
| | | |
| | |
Cash and cash equivalents | |
$ | 810 | | |
$ | 427 | |
| (1f) | | |
$ | 1,237 | | |
$ | 3,978 | |
| (2f) | | |
$ | 5,215 | |
Financial assets | |
| 111 | | |
| — | |
| | | |
| 111 | | |
| (20 | ) |
| | | |
| 91 | |
Accounts and other receivable, net | |
| 2,554 | | |
| — | |
| | | |
| 2,554 | | |
| (565 | ) |
| | | |
| 1,989 | |
Inventory, net | |
| 655 | | |
| — | |
| | | |
| 655 | | |
| (594 | ) |
| | | |
| 61 | |
Other assets | |
| 1,440 | | |
| (516 | ) |
| (1a) | | |
| 924 | | |
| (447 | ) |
| | | |
| 477 | |
| |
| 5,570 | | |
| (89 | ) |
| | | |
| 5,481 | | |
| 2,352 | |
| | | |
| 7,833 | |
Non-Current Assets | |
| | | |
| | |
| | | |
| | | |
| | |
| | | |
| | |
Financial assets | |
| 364 | | |
| — | |
| | | |
| 364 | | |
| (281 | ) |
| | | |
| 83 | |
Accounts and other receivable, net | |
| 958 | | |
| — | |
| | | |
| 958 | | |
| — | |
| | | |
| 958 | |
Other assets | |
| 369 | | |
| 63 | |
| (1f) | | |
| 432 | | |
| (140 | ) |
| | | |
| 292 | |
Property, plant and equipment | |
| 3,731 | | |
| — | |
| | | |
| 3,731 | | |
| (1,056 | ) |
| | | |
| 2,675 | |
Deferred income tax assets | |
| 674 | | |
| — | |
| | | |
| 674 | | |
| (328 | ) |
| | | |
| 346 | |
Intangible assets | |
| 9,037 | | |
| — | |
| | | |
| 9,037 | | |
| (2,106 | ) |
| | | |
| 6,931 | |
Equity accounted investments | |
| 247 | | |
| — | |
| | | |
| 247 | | |
| (17 | ) |
| | | |
| 230 | |
Goodwill | |
| 6,628 | | |
| — | |
| | | |
| 6,628 | | |
| (437 | ) |
| | | |
| 6,191 | |
| |
$ | 27,578 | | |
$ | (26 | ) |
| | | |
$ | 27,552 | | |
$ | (2,013 | ) |
| | | |
$ | 25,539 | |
Liabilities and Equity | |
| | | |
| | |
| | | |
| | | |
| | |
| | | |
| | |
Current Liabilities | |
| | | |
| | |
| | | |
| | | |
| | |
| | | |
| | |
Accounts payable and other | |
$ | 4,309 | | |
$ | 50 | |
| (1a),
(1d) | | |
$ | 4,359 | | |
$ | (1,475 | ) |
| (2d),
(2e) | | |
$ | 2,884 | |
Non-recourse borrowings in subsidiaries of the company | |
| 611 | | |
| — | |
| | | |
| 611 | | |
| (294 | ) |
| | | |
| 317 | |
Exchangeable and class B shares | |
| 1,358 | | |
| — | |
| | | |
| 1,358 | | |
| — | |
| | | |
| 1,358 | |
| |
| 6,278 | | |
| 50 | |
| | | |
| 6,328 | | |
| (1,769 | ) |
| | | |
| 4,559 | |
Non-Current Liabilities | |
| | | |
| | |
| | | |
| | | |
| | |
| | | |
| | |
Accounts payable and other | |
| 3,339 | | |
| — | |
| | | |
| 3,339 | | |
| (856 | ) |
| | | |
| 2,483 | |
Non-recourse borrowings in subsidiaries of the company | |
| 12,585 | | |
| — | |
| | | |
| 12,585 | | |
| (3,418 | ) |
| | | |
| 9,167 | |
Deferred income tax liabilities | |
| 1,490 | | |
| (29 | ) |
| (1e) | | |
| 1,461 | | |
| (31 | ) |
| | | |
| 1,430 | |
| |
| 23,692 | | |
| 21 | |
| | | |
| 23,713 | | |
| (6,074 | ) |
| | | |
| 17,639 | |
Equity | |
| | | |
| | |
| | | |
| | | |
| | |
| | | |
| | |
Brookfield Business Partners | |
| 192 | | |
| (13 | ) |
| (1a),
(1f) | | |
| 179 | | |
| 1,096 | |
| (2f) | | |
| 1,275 | |
Non-controlling interests | |
| 3,694 | | |
| (34 | ) |
| (1a),
(1f) | | |
| 3,660 | | |
| 2,965 | |
| (2f) | | |
| 6,625 | |
| |
$ | 3,886 | | |
$ | (47 | ) |
| | | |
$ | 3,839 | | |
$ | 4,061 | |
| | | |
$ | 7,900 | |
| |
$ | 27,578 | | |
$ | (26 | ) |
| | | |
$ | 27,552 | | |
$ | (2,013 | ) |
| | | |
$ | 25,539 | |
See the accompanying notes to the Unaudited
Pro Forma Financial Statements.
UNAUDITED PRO FORMA STATEMENTS OF OPERATING
RESULTS
| |
| | |
Transaction Accounting
Adjustments | | |
| | |
Transaction Accounting
Adjustments | | |
| |
US$ MILLIONS For
the three months ended March 31, 2023 | |
Brookfield
Business Corporation (historical)1 | | |
Software
assets (consummated disposition) | | |
Pro
Forma - Consummated Transactions | | |
Westinghouse
(probable disposition) | | |
Pro
Forma - Combined | |
| |
| | | |
(1b) | | |
| | | |
(2b) | | |
| | |
Revenues | |
$ | 2,921 | | |
$ | (11 | ) | |
$ | 2,910 | | |
$ | (1,056 | ) | |
$ | 1,854 | |
Direct operating costs | |
| (2,551 | ) | |
| 7 | | |
| (2,544 | ) | |
| 935 | | |
| (1,609 | ) |
General and administrative expenses | |
| (107 | ) | |
| 1 | | |
| (106 | ) | |
| 46 | | |
| (60 | ) |
Interest income (expense), net | |
| (279 | ) | |
| — | | |
| (279 | ) | |
| 67 | | |
| (212 | ) |
Equity accounted income (loss), net | |
| (3 | ) | |
| — | | |
| (3 | ) | |
| 1 | | |
| (2 | ) |
Gain (loss) on acquisitions/dispositions, net | |
| 14 | | |
| — | | |
| 14 | | |
| (14 | ) | |
| — | |
Remeasurement of exchangeable and class B shares | |
| (121 | ) | |
| — | | |
| (121 | ) | |
| — | | |
| (121 | ) |
Other income (expense), net | |
| (57 | ) | |
| — | | |
| (57 | ) | |
| 19 | | |
| (38 | ) |
Income (loss) before income tax | |
| (183 | ) | |
| (3 | ) | |
| (186 | ) | |
| (2 | ) | |
| (188 | ) |
Income tax (expense) recovery | |
| | | |
| | | |
| | | |
| | | |
| | |
Current | |
| (45 | ) | |
| — | | |
| (45 | ) | |
| 35 | | |
| (10 | ) |
Deferred | |
| 43 | | |
| — | | |
| 43 | | |
| (30 | ) | |
| 13 | |
Net income (loss) | |
$ | (185 | ) | |
$ | (3 | ) | |
$ | (188 | ) | |
$ | 3 | | |
$ | (185 | ) |
Attributable to: | |
| | | |
| | | |
| | | |
| | | |
| | |
Brookfield Business Partners | |
$ | (140 | ) | |
$ | (1 | ) | |
$ | (141 | ) | |
$ | 1 | | |
$ | (140 | ) |
Non-controlling
interests | |
| (45 | ) | |
| (2 | ) | |
| (47 | ) | |
| 2 | | |
| (45 | ) |
| |
$ | (185 | ) | |
$ | (3 | ) | |
$ | (188 | ) | |
$ | 3 | | |
$ | (185 | ) |
| (1) | Earnings
per share have not been presented in these Unaudited Pro Forma Financial Statements, as the
underlying shares do not constitute “ordinary shares” under IAS 33, Earnings
per share (“IAS 33”). |
See the accompanying notes to the Unaudited
Pro Forma Financial Statements.
| |
| | |
Transaction
Accounting
Adjustments | | |
| | |
Transaction
Accounting
Adjustments | | |
| | |
| | |
Transaction
Accounting
Adjustments | | |
| | |
| |
US$ MILLIONS For
the year ended December 31, 2022 | |
Brookfield
Business Corporation (historical) | | |
CDK
Global | | |
Pro
Forma - Consummated Acquisition | | |
Software
assets (consummated disposition) | | |
Notes | | |
Pro
Forma - Consummated Transactions | | |
Westinghouse
(probable disposition) | | |
Notes | | |
Pro
Forma - Combined | |
| |
| | | |
| (3 | ) | |
| | | |
| (1b) | | |
| | | |
| | | |
| (2b) | | |
| | | |
| | |
Revenues | |
$ | 10,598 | | |
$ | 915 | | |
$ | 11,513 | | |
$ | (40 | ) | |
| | | |
$ | 11,473 | | |
$ | (3,795 | ) | |
| | | |
$ | 7,678 | |
Direct operating costs | |
| (9,466 | ) | |
| (630 | ) | |
| (10,096 | ) | |
| 38 | | |
| | | |
| (10,058 | ) | |
| 3,302 | | |
| | | |
| (6,756 | ) |
General and administrative expenses | |
| (372 | ) | |
| (139 | ) | |
| (511 | ) | |
| 2 | | |
| | | |
| (509 | ) | |
| 169 | | |
| | | |
| (340 | ) |
Interest income (expense), net | |
| (742 | ) | |
| (221 | ) | |
| (963 | ) | |
| — | | |
| | | |
| (963 | ) | |
| 219 | | |
| | | |
| (744 | ) |
Equity accounted income (loss), net | |
| 13 | | |
| (5 | ) | |
| 8 | | |
| — | | |
| | | |
| 8 | | |
| (5 | ) | |
| | | |
| 3 | |
Impairment expense, net | |
| (21 | ) | |
| — | | |
| (21 | ) | |
| — | | |
| | | |
| (21 | ) | |
| — | | |
| | | |
| (21 | ) |
Gain (loss) on acquisitions/dispositions, net | |
| — | | |
| — | | |
| — | | |
| 4 | | |
| (1c) | | |
| 4 | | |
| 4,138 | | |
| (2c) | | |
| 4,142 | |
Remeasurement of exchangeable and class B shares | |
| 836 | | |
| — | | |
| 836 | | |
| — | | |
| | | |
| 836 | | |
| — | | |
| | | |
| 836 | |
Other income (expense), net | |
| (175 | ) | |
| (4 | ) | |
| (179 | ) | |
| — | | |
| | | |
| (179 | ) | |
| 48 | | |
| (2e) | | |
| (131 | ) |
Income (loss) before income tax | |
| 671 | | |
| (84 | ) | |
| 587 | | |
| 4 | | |
| | | |
| 591 | | |
| 4,076 | | |
| | | |
| 4,667 | |
Income tax (expense) recovery | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Current | |
| (88 | ) | |
| (8 | ) | |
| (96 | ) | |
| (79 | ) | |
| (1d) | | |
| (175 | ) | |
| 4 | | |
| (2d) | | |
| (171 | ) |
Deferred | |
| 493 | | |
| (35 | ) | |
| 458 | | |
| 30 | | |
| (1e) | | |
| 488 | | |
| (400 | ) | |
| | | |
| 88 | |
Net income (loss) | |
$ | 1,076 | | |
$ | (127 | ) | |
$ | 949 | | |
$ | (45 | ) | |
| | | |
$ | 904 | | |
$ | 3,680 | | |
| | | |
$ | 4,584 | |
Attributable to: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Brookfield Business Partners | |
$ | 911 | | |
$ | (38 | ) | |
$ | 873 | | |
$ | (13 | ) | |
| | | |
$ | 860 | | |
$ | 993 | | |
| | | |
$ | 1,853 | |
Non-controlling
interests | |
| 165 | | |
| (89 | ) | |
| 76 | | |
| (32 | ) | |
| | | |
| 44 | | |
| 2,687 | | |
| | | |
| 2,731 | |
| |
$ | 1,076 | | |
$ | (127 | ) | |
$ | 949 | | |
$ | (45 | ) | |
| | | |
$ | 904 | | |
$ | 3,680 | | |
| | | |
$ | 4,584 | |
| (1) | Earnings
per share have not been presented in these Unaudited Pro Forma Financial Statements, as the
underlying shares do not constitute “ordinary shares” under IAS 33, Earnings
per share (“IAS 33”). |
See the accompanying notes to the Unaudited
Pro Forma Financial Statements.
NOTES TO THE UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. | Software assets disposition |
(1a) | On May 1, 2023, the company’s dealer software and
technology services operations sold a non-core division servicing the heavy equipment sector.
The adjustments on the Unaudited Pro Forma Statement of Financial Position reflect the derecognition
of assets held for sale of $516 million, included in Other assets, and derecognition of liabilities
held for sale of $30 million, included in Accounts payable and other. |
(1b) | These pro forma adjustments reflect the elimination of historical
operating results for the three months ended March 31, 2023 and for the year ended December 31,
2022. |
(1c) | The pre-tax gain from the disposition of approximately $4 million
is reflected as an adjustment on the Unaudited Pro Forma Statement of Operating Results. See
note (1d) regarding the basis for the income tax effect. |
Transaction costs of $3 million have
been included in the historical Statement of Operating Results of the company.
(1d) | The current income tax effect of $80 million from the software
assets disposition was calculated using using an effective tax rate of 27% in effect for the
year presented. |
(1e) | The deferred income tax impact of $29 million from the software
assets disposition is reflected as an adjustment on the Unaudited Pro Forma Statement of Operating
Results. |
(1f) | The total consideration of $490 million includes cash proceeds
of $427 million, included in Cash and cash equivalents, and deferred consideration of $63 million,
included in other non-current assets. |
2. | Westinghouse disposition |
(2a) | On October 11, 2022, an agreement was entered into to sell
Westinghouse to a strategic consortium led by Cameco Corporation and Brookfield Renewable Partners.
The adjustments to the Unaudited Pro Forma Statement of Financial Position reflect the derecognition
of total assets of $6.2 billion and derecognition of total liabilities of $6.2 billion.
The pro forma adjustment to the Unaudited Pro Forma Statement of Financial Position to reflect
the Westinghouse disposition also includes other effects discussed in note (2d) and (2e). |
(2b) | These pro forma adjustments reflect the elimination of the historical
operating results of Westinghouse for the three months ended March 31, 2023 and for the
year ended December 31, 2022. |
(2c) | The estimated pre-tax gain of approximately $4.1 billion
from the disposition is reflected as an adjustment on the Unaudited Pro Forma Statement of Operating
Results. |
The actual gain and related tax effect
will be calculated based on the net book value as of the closing of the transaction and therefore, could differ from the current estimate.
See note (2d) regarding the basis for the income tax effect.
(2d) | Includes the estimated current income tax effect of the Westinghouse
disposition of $25 million. The tax effect of the Westinghouse disposition was calculated using
an effective tax rate of 27% in effect as at January 1, 2022. |
(2e) | Includes the accrual of approximately $52 million of additional
transaction costs to be incurred by the company upon the disposition of Westinghouse. Transaction
costs of $18 million have been included in the historical Statement of Operating Results
of the company. |
(2f) | Includes the estimated cash proceeds of approximately $4.2 billion,
included in cash and cash equivalents, before working capital and other adjustments. |
3. Acquisition
of CDK Global
The following tables and
explanatory notes present the statement of operating results of CDK Global for the period ended July 6, 2022, as adjusted to give
effect to the CDK Global acquisition as if it had occurred at the beginning of the period.
| |
| | |
| | |
Transaction
Accounting Adjustments | | |
| |
US$
MILLIONS For the period ended July 6, 2022 | |
Pre-acquisition
Jan 1, 2022 to
June 30, 2022 | | |
Accounting
Policy and
Reclassification | | |
IFRS
3
Adjustments | | |
Notes | | |
Other | | |
Notes | | |
CDK
Global
Pro Forma | |
| |
| (3a) | | |
| (3a) | | |
| | | |
| | | |
| | | |
| | |
| | |
Revenues | |
$ | 915 | | |
$ | — | | |
$ | — | | |
| | | |
$ | — | | |
| | |
$ | 915 | |
Direct operating costs | |
| — | | |
| (506 | ) | |
| (124 | ) | |
| (3b) | | |
| — | | |
| | |
| (630 | ) |
Cost of revenue | |
| (492 | ) | |
| 492 | | |
| — | | |
| | | |
| — | | |
| | |
| — | |
General and administrative expenses | |
| — | | |
| (181 | ) | |
| 42 | | |
| (3c) | | |
| — | | |
| | |
| (139 | ) |
Selling, general and administrative expenses | |
| (192 | ) | |
| 192 | | |
| — | | |
| | | |
| — | | |
| | |
| — | |
Interest income (expense), net | |
| (45 | ) | |
| 4 | | |
| — | | |
| | | |
| (180 | ) | |
(3e) | | |
| (221 | ) |
Equity accounted income (loss), net | |
| — | | |
| (5 | ) | |
| — | | |
| | | |
| — | | |
| | |
| (5 | ) |
Loss from equity method investment | |
| (5 | ) | |
| 5 | | |
| — | | |
| | | |
| — | | |
| | |
| — | |
Other income (expense), net | |
| — | | |
| (4 | ) | |
| — | | |
| | | |
| — | | |
| | |
| (4 | ) |
Income tax (expense) recovery | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
Current | |
| — | | |
| (8 | ) | |
| — | | |
| | | |
| — | | |
| | |
| (8 | ) |
Deferred | |
| — | | |
| (42 | ) | |
| 7 | | |
| (3d) | | |
| — | | |
| | |
| (35 | ) |
Income tax expense | |
| (50 | ) | |
| 50 | | |
| — | | |
| | | |
| — | | |
| | |
| — | |
Net income (loss) | |
$ | 131 | | |
$ | (3 | ) | |
$ | (75 | ) | |
| | | |
$ | (180 | ) | |
| | |
$ | (127 | ) |
Attributable to: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
Owners of the company | |
$ | 127 | | |
$ | (127 | ) | |
$ | — | | |
| | | |
$ | — | | |
| | |
$ | — | |
Brookfield Business Partners | |
| — | | |
| 35 | | |
| (22 | ) | |
| | | |
| (51 | ) | |
| | |
| (38 | ) |
Non-controlling interests | |
| 4 | | |
| 89 | | |
| (53 | ) | |
| | | |
| (129 | ) | |
| | |
| (89 | ) |
| |
$ | 131 | | |
$ | (3 | ) | |
$ | (75 | ) | |
| | | |
$ | (180 | ) | |
| | |
$ | (127 | ) |
(3a) | Pro forma adjustments have been made to conform the presentation
of the historical financial information of CDK Global to the presentation of financial information
in the company’s financial statements. In addition, certain pro forma adjustments have
been made to CDK Global’s historical financial statements prepared in accordance with
standards generally accepted in the United States (U.S. GAAP), to IFRS as issued by the IASB.
Acquisition related costs of $15 million were included in the historical statement of operating
results for the year ended December 31, 2022. The conversion of CDK Global’s historical
statements of operating results to IFRS for the period ended July 6, 2022 includes an adjustment
to increase general and administrative expenses by $3 million related to the recognition
of implementation costs incurred as a customer in a cloud computing arrangement, net of historical
amortization expense. Certain other pro forma adjustments have been made to conform the presentation
of the consolidated financial statements of CDK Global prepared under U.S. GAAP to the presentation
of financial information in the company’s financial statements prepared under IFRS, including
reclassification of depreciation expense of $8 million from general and administrative
expenses and $492 million from cost of revenue to direct operating costs for the period
ended July 6, 2022. |
The operating results of CDK Global
for the six months ended June 30, 2022 was determined to be an appropriate measure of the operating results of CDK Global for the
period ended July 6, 2022 in the unaudited pro forma financial statements because the operating results for the 6-day period ended
July 6, 2022 was determined to be immaterial.
(3b) | As part of the CDK Global acquisition, the fair value adjustment
applied to property, plant and equipment reduced the carrying value by $10 million. The
fair value adjustment applied to intangible assets increased the carrying value by $4.4 billion,
where total intangible assets comprised customer relationships with a fair value adjustment
of $3.7 billion and an average useful life of 15 years, brand with a fair value adjustment
of approximately $254 million and an average useful life of 15 years, and developed technology
with a fair value adjustment of approximately $428 million and an average useful life of
5 years. If the acquisition had occurred on January 1, 2022, depreciation and amortization
expense for the period ended July 6, 2022 would have increased by $124 million. |
(3c) | Certain costs relating to contract acquisitions and fulfillment
that were previously amortized under U.S GAAP were derecognized upon acquisition of CDK Global,
in order to conform with the accounting requirements under IFRS. If the acquisition had occurred
on January 1, 2022, general and administrative expenses for the period ended July 6,
2022 would have been lower by approximately $42 million. |
(3d) | The Unaudited Pro Forma Statements of Operating Results have
been adjusted to reflect the deferred tax impact of the transaction accounting adjustments based
on an effective tax rate of 27%. |
(3e) | Prior to closing the CDK Global acquisition, $1.7 billion
of its fixed and variable-rate borrowings were extinguished (the “Extinguished CDK Global
Borrowings”) with a weighted-average interest rate of 5.3% and $16 million in accrued
interest. CDK Global used proceeds from the company to extinguish outstanding borrowings. Prior
to closing the CDK Global acquisition, the company raised proceeds of $5.1 billion of fixed
and variable-rate non-recourse borrowings (“New CDK Global Non-Recourse Borrowings”)
and incurred debt issuance costs of approximately $222 million, which was used to partially
fund the CDK Global acquisition. As at the date of these unaudited pro forma financial statements,
the weighted-average cost of borrowing was 8.1%. |
The table below presents the net increase
to borrowing costs presented within interest income (expense), net.
(US$ MILLIONS) | |
Period ended July 6,
2022 | |
Elimination of interest expense and amortization of debt issuance costs
– Extinguished CDK Global Borrowings | |
$ | 43 | |
Interest expense on New CDK Global Non-Recourse Borrowings | |
| (207 | ) |
Amortization of debt issuance costs on New CDK Global Non-Recourse
Borrowings | |
| (16 | ) |
Other transaction accounting adjustment to interest income (expense),
net | |
$ | (180 | ) |
A 1/8 of a percentage point increase
or decrease in the benchmark rate would result in a change in interest expense of approximately $3 million for the period ended
July 6, 2022.
Exhibit 99.5
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Brookfield Business
Partners L.P.’s Registration Statements on Form F-3 (File Nos. 333-251316, 333-258765 and 333-264630) of our report dated August 9,
2022, relating to the consolidated financial statements of CDK Global, Inc., appearing in this Current Report on Form 6-K of
Brookfield Business Partners L.P. and Brookfield Business Corporation filed on July 7, 2023.
/s/ Deloitte & Touche LLP |
|
|
|
Chicago, Illinois |
|
July 7, 2023 |
|
|
|
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