cdk-20200930
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q

(Mark One)
        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
or
        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number 001-36486

CDK Global, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware46-5743146
State or Other Jurisdiction of
Incorporation or Organization
I.R.S. Employer Identification No.

 

1950 Hassell Road,Hoffman Estates,IL60169
Address of Principal Executive OfficesZip Code
(847) 397-1700
Registrant’s Telephone Number, Including Area Code

__________________________________________
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Securities registered pursuant to Section 12(b) of the Act: 
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 Par ValueCDKNASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes ☒ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No 
The number of shares outstanding of the registrant’s common stock as of October 30, 2020 was 121,691,905.




Table of Contents

  Page
PART I – FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
Item 2.
Item 3.
Item 4.
 
Item 1.
Item 1A.
Item 2.
Item 6.

1


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

Three Months Ended
September 30,
20202019
Revenues$493.6 $494.6 
Expenses:
Cost of revenues262.1 247.3 
Selling, general and administrative expenses112.2 107.9 
Restructuring expenses8.7  
Litigation provision12.0 — 
Total expenses395.0 355.2 
Operating earnings98.6 139.4 
Interest expense(34.7)(37.7)
Loss from equity method investment(3.4)— 
Other income, net23.7 2.3 
Earnings before income taxes84.2 104.0 
Provision for income taxes(26.4)(25.6)
Net earnings from continuing operations57.8 78.4 
Net earnings from discontinued operations0.2 5.7 
Net earnings58.0 84.1 
Less: net earnings attributable to noncontrolling interest2.3 2.1 
Net earnings attributable to CDK$55.7 $82.0 
Net earnings attributable to CDK per share - basic:
Continuing operations$0.46 $0.63 
Discontinued operations 0.05 
Total net earnings attributable to CDK per share - basic$0.46 $0.68 
Net earnings attributable to CDK per share - diluted:
Continuing operations$0.46 $0.62 
Discontinued operations 0.05 
Total net earnings attributable to CDK per share - diluted$0.46 $0.67 
Weighted-average common shares outstanding:
Basic121.7 121.4 
Diluted122.3 122.0 

See notes to the consolidated financial statements.
2


CDK Global, Inc.
Consolidated Statements of Comprehensive Income
(In millions)
(Unaudited)
Three Months Ended
September 30,
20202019
Net earnings$58.0 $84.1 
Other comprehensive income (loss):
Currency translation adjustments27.2 (19.9)
Total other comprehensive income (loss)27.2 (19.9)
Comprehensive income85.2 64.2 
Less: comprehensive income attributable to noncontrolling interest2.3 2.1 
Comprehensive income attributable to CDK$82.9 $62.1 

See notes to the consolidated financial statements.

3


CDK Global, Inc.
Consolidated Balance Sheets
(In millions, except par values)
(Unaudited)
September 30,June 30,
20202020
Assets
Current assets:  
Cash and cash equivalents$281.1 $215.7 
Accounts receivable, net288.7 300.0 
Other current assets176.4 169.9 
Total current assets746.2 685.6 
Property, plant and equipment, net of accumulated depreciation of $286.6 and $275.2, respectively105.2 109.1 
Other assets464.4 475.7 
Goodwill1,362.9 1,348.5 
Intangible assets, net237.0 235.2 
Total assets$2,915.7 $2,854.1 
Liabilities and Stockholders' Deficit  
Current liabilities:  
Current maturities of long-term debt and finance lease liabilities$320.5 $20.7 
Accounts payable39.4 39.4 
Accrued expenses and other current liabilities232.4 223.8 
Litigation liability69.0 57.0 
Accrued payroll and payroll-related expenses68.9 78.0 
Short-term deferred revenues104.2 107.9 
Total current liabilities 834.4 526.8 
Long-term debt and finance lease liabilities2,356.9 2,655.1 
Long-term deferred revenues47.0 52.8 
Deferred income taxes79.5 78.4 
Other liabilities112.4 121.7 
Total liabilities3,430.2 3,434.8 
Commitments and Contingencies (Note 12)
Stockholders' Deficit:  
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; 121.7 and 121.5 shares outstanding, respectively1.6 1.6 
Additional paid-in-capital689.7 687.9 
Retained earnings1,074.6 1,045.5 
Treasury stock, at cost: 38.7 and 38.8 shares, respectively(2,298.2)(2,305.2)
Accumulated other comprehensive loss1.3 (25.9)
Total CDK stockholders' deficit(531.0)(596.1)
Noncontrolling interest16.5 15.4 
Total stockholders' deficit(514.5)(580.7)
Total liabilities and stockholders' deficit$2,915.7 $2,854.1 


See notes to the consolidated financial statements.
4


CDK Global, Inc.
Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
Three Months Ended
September 30,
20202019
Cash Flows from Operating Activities
Net earnings$58.0 $84.1 
Less: net earnings from discontinued operations0.2 5.7 
Net earnings from continuing operations57.8 78.4 
Adjustments to reconcile net earnings from continuing operations to cash flows provided by operating activities, continuing operations:
Depreciation and amortization24.9 23.5 
Loss from equity method investment3.4 — 
Deferred income taxes2.5  
Stock-based compensation expense13.1 2.9 
Other2.2 6.4 
Changes in assets and liabilities, net of effect from acquisitions of businesses:  
Change in accounts receivable13.4 (8.1)
Change in other assets(8.5)(4.5)
Change in accounts payable(0.6)(5.5)
Change in accrued expenses and other liabilities(8.5)(28.7)
Net cash flows provided by operating activities, continuing operations99.7 64.4 
Net cash flows provided by operating activities, discontinued operations 7.8 
Net cash flows provided by operating activities99.7 72.2 
Cash Flows from Investing Activities
Capital expenditures(7.2)(3.1)
Capitalized software(14.8)(10.3)
Investment in certificates of deposit (12.0)
Net cash flows used in investing activities, continuing operations(22.0)(25.4)
Net cash flows used in investing activities, discontinued operations (2.5)
Net cash flows used in investing activities(22.0)(27.9)
Cash Flows from Financing Activities
Proceeds from long-term debt5.0  
Repayments of long-term debt and lease liabilities(5.3)(5.2)
Dividends paid to stockholders(18.2)(18.2)
Proceeds from exercises of stock options0.3 2.7 
Withholding tax payments for stock-based compensation awards(3.7)(5.2)
Dividend payments to noncontrolling owners(1.2)(4.4)
Acquisition-related payments (3.6)
Net cash flows used in financing activities, continuing operations(23.1)(33.9)
Net cash flows used in financing activities, discontinued operations  
Net cash flows used in financing activities(23.1)(33.9)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash8.6 (7.4)
Net change in cash, cash equivalents, and restricted cash63.2 3.0 
Cash, cash equivalents, and restricted cash, beginning of period232.2 321.1 
Cash, cash equivalents, and restricted cash end of period$295.4 $324.1 

See notes to the consolidated financial statements.







5




CDK Global, Inc.
Consolidated Statements of Cash Flows (continued)
(In millions)
(Unaudited)
Three Months Ended
September 30,
20202019
Reconciliation of cash, cash equivalents, and restricted cash to the Consolidated Balance Sheets
Cash and cash equivalents$281.1 $313.1 
Restricted cash in funds held for clients included in other current assets14.3 11.0 
Total cash, cash equivalents, and restricted cash$295.4 $324.1 
Supplemental Disclosures
Cash paid for:
Income taxes and foreign withholding taxes, net of refunds, continuing operations$31.8 $11.9 
Interest18.5 15.4 
Non-cash investing and financing activities:
Capitalized property and equipment obtained under lease1.2 12.0 
Lease liabilities incurred (1.2)1.0 
Capital expenditures and capitalized software, accrued not paid1.1 1.5 


See notes to the consolidated financial statements.
6


CDK Global, Inc.
Consolidated Statements of Stockholders' Deficit
(In millions)
(Unaudited)

Three Months Ended September 30, 2020

Common StockAdditional Paid-in-CapitalRetained EarningsTreasury StockAccumulated Other Comprehensive Income (Loss)Total CDK Stockholders' DeficitNon-controlling InterestTotal Stockholders' Deficit
Shares IssuedAmount
Balance as of June 30, 2020160.3 $1.6 $687.9 $1,045.5 $(2,305.2)$(25.9)$(596.1)$15.4 $(580.7)
Cumulative impact of ASC 326 - current expected credit losses, net of tax— — — (8.2)— — (8.2)— (8.2)
Net earnings— — — 55.7 — — 55.7 2.3 58.0 
Foreign currency translation adjustments— — — — — 27.2 27.2 — 27.2 
Stock-based compensation expense and related dividend equivalents— — 12.2 (0.2)— — 12.0 — 12.0 
Common stock issued for the exercise and vesting of stock-based compensation awards, net— — (10.4)— 7.0 — (3.4)— (3.4)
Dividends paid to stockholders ($0.15 per share)— — — (18.2)— — (18.2)— (18.2)
Dividend payments to noncontrolling owners— — — — — — — (1.2)(1.2)
Balance as of September 30, 2020160.3 $1.6 $689.7 $1,074.6 $(2,298.2)$1.3 $(531.0)$16.5 $(514.5)


Three Months Ended September 30, 2019

Common StockAdditional Paid-in-CapitalRetained EarningsTreasury StockAccumulated Other Comprehensive Income (Loss)Total CDK Stockholders' DeficitNon-controlling InterestTotal Stockholders' Deficit
Shares IssuedAmount
Balance as of June 30, 2019160.3 $1.6 $688.5 $911.6 $(2,324.6)$(6.7)$(729.6)$15.1 $(714.5)
Net earnings— — — 82.0 — — 82.0 2.1 84.1 
Foreign currency translation adjustments— — — — — (19.9)(19.9)— (19.9)
Stock-based compensation expense and related dividend equivalents— — 3.9 (0.1)— — 3.8 — 3.8 
Common stock issued for the exercise and vesting of stock-based compensation awards, net— — (14.7)— 12.2 — (2.5)— (2.5)
Dividends paid to stockholders ($0.15 per share)— — — (18.2)— — (18.2)— (18.2)
Dividend payments to noncontrolling owners— — — — — — — (4.4)(4.4)
Balance as of September 30, 2019160.3 $1.6 $677.7 $975.3 $(2,312.4)$(26.6)$(684.4)$12.8 $(671.6)

See notes to the consolidated financial statements.
7


CDK Global, Inc.
Notes to the Consolidated Financial Statements
(Tabular amounts in millions, except per share amounts)
(Unaudited)
Note 1. Basis of Presentation
Description of Business. CDK Global, Inc. (the "Company" or "CDK") enables end-to-end automotive commerce across the globe. For over 40 years, the Company has served automotive retailers and original equipment manufacturers ("OEMs") by providing innovative solutions that allow them to better connect, manage, analyze, and grow their businesses. The Company's solutions automate and integrate all parts of the buying process, including the acquisition, sale, financing, insuring, parts supply, repair, and maintenance of vehicles, in more than 100 countries around the world, for approximately 30,000 retail locations and most OEMs.
The Company is organized into two main operating groups, CDK North America ("CDKNA") and CDK International ("CDKI"), which are also the two reportable segments. In addition, the Company has an Other segment, the primary components of which are corporate allocations and other expenses not recorded in the segment results. For additional information refer to Note 13, Financial Data by Segment.
Basis of Preparation. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect assets, liabilities, revenues, and expenses that are reported in the accompanying financial statements and footnotes thereto. Actual results may differ from those estimates and assumptions.
The accompanying consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods. Interim financial results are not necessarily indicative of financial results for a full year. The financial statements in this Quarterly Report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2020.
Effective July 1, 2020, the Company adopted the Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" (“ASU 2016-13”). The comparative information has not been restated and continues to be reported under the accounting standards in effect for the periods presented. For additional information, refer to Note 8, Allowance for Credit Losses.
Note 2. Summary of Significant Accounting Policies
The Company's significant accounting policies are described in the aforementioned Annual Report. Included below are certain updates to those policies.
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 $40.9 million and $40.7 million, and funds held for clients was $14.3 million and $16.5 million as of September 30, 2020 and June 30, 2020, respectively. Client fund obligations were $55.2 million and $57.2 million as of September 30, 2020 and June 30, 2020, respectively.

Internal Use Software and Computer Software to be Sold, Leased, or Otherwise Marketed. Pursuant to its software policies, the Company incurred expenses to research, develop, and deploy new and enhanced solutions of $26.0 million and $22.1 million for the three months ended September 30, 2020 and 2019, respectively. These expenses were classified in cost of revenues on the Consolidated Statements of Operations. Additionally, the Company had cash flows used for qualifying capitalized software development cost of $14.8 million and $10.3 million for the three months ended September 30, 2020 and 2019, respectively.
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Fair Value of Financial Instruments. Cash and cash equivalents, accounts receivable, other current assets, accounts payable, and other current liabilities are reflected in 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 revolving credit facility and term loan facilities (as described in Note 10, Debt), including accrued interest, approximates fair value based on the Company's current estimated incremental borrowing rate for similar types of arrangements. The approximate aggregate fair value of the Company's senior notes as of September 30, 2020 was $2,242.0 million, based on quoted market prices for the same or similar instruments compared to a carrying value of $2,100.0 million. The term loan facilities and senior notes are considered Level 2 fair value measurements in the fair value hierarchy.
Investments. The Company has elected to apply cost method accounting to its equity interest in Ripcord since the equity does not have a readily determinable fair value. The carrying amount of this investment, which is included in other assets on the Consolidated Balance Sheets, was $20.00 million as of September 30, 2020 and June 30, 2020. From acquisition through September 30, 2020, there have been no impairment or other adjustments to the carrying amount of this investment.
Note 3. New Accounting Pronouncements
Recently Adopted Accounting Pronouncements. In November 2018, the FASB issued ASU 2018-18, "Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606" to resolve the diversity in practice concerning the manner in which entities account for transactions based on their assessment of the economics of a collaborative arrangement. For public business entities, ASU 2018-18 is effective for fiscal years beginning after December 15, 2019 and interim periods in those years. The Company adopted this standard as of July 1, 2020. The adoption did not have a material impact to its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13. Refer to Note 8, Allowance for Credit Losses, for the required disclosures related to the adoption of this standard.
Recently Issued Accounting Pronouncements. In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): "Simplifying the Accounting for Income Taxes," which simplifies the accounting for income taxes in various areas. The amendments in ASU 2019-12 are effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. The Company is evaluating the impact of adoption on its consolidated financial statements, including accounting policies, processes and systems.
Note 4. Discontinued Operations
In June 2019, the Company committed to a plan to divest its Digital Marketing Business during the fiscal year ending June 30, 2020 ("fiscal 2020") in order to focus on its core software-as-a-service and technology solutions for the markets it serves through the CDKNA and CDKI segments. The Digital Marketing Business comprised all of the assets of the former Advertising North America segment and certain assets of CDKNA related to mobile advertising solutions and websites services. The Company's decision to divest its Digital Marketing Business was the result of a comprehensive strategic review of the Company’s business, undertaken during the fiscal quarter ended June 30, 2019.
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. ("Ansira"), which is a subsidiary of Advent International. Total consideration for the transaction was $71.2 million, consisting of a $24.4 million 10-year note receivable, a 15% equity interest in Ansira, and the fair value of other contingent consideration. The Company previously recorded a valuation allowance of $96.3 million through June 30, 2020. During the first quarter of fiscal 2021, the Company recorded a reduction to the valuation allowance of $1.5 million resulting in a total loss on sale of $94.8 million. Pursuant to the transaction, the Company expects to continue to provide limited services during fiscal 2021.

For the three months ended September 30, 2020 and 2019, the Company recognized net earnings of $0.2 million and $5.7 million in net earnings from discontinued operations on the Consolidated Statements of Operations.
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Note 5. Revenue
Contract Balances. 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 and these timing differences result in unbilled receivables, contract assets, or contract liabilities, on the Company’s Consolidated Balance Sheets. Unbilled receivables are recorded when the right to consideration becomes unconditional based only on the passage of time. Contract assets include amounts related to the Company's contractual right to consideration for completed performance when the right to consideration is conditional. The Company records contract liabilities when cash payments are received or due in advance of performance. Contract assets and contract liabilities are recognized at the contract level.
The following table provides information about accounts receivables, contract assets, and contract liabilities from contracts with customers:
September 30, 2020June 30, 2020
Accounts receivable (including unbilled receivables)$288.7 $300.0 
Short-term contract assets (included in other current assets)59.6 52.5 
Long-term contract assets (included in other assets)34.7 40.1 
Short-term contract liabilities (included in short-term deferred revenue)(104.2)(107.9)
Long-term contract liabilities (included in long-term deferred revenue)(47.0)(52.8)
Net contract assets/(liabilities)$(56.9)$(68.1)
During the three months ended September 30, 2020, the Company recognized $113.1 million of revenue upon satisfaction of performance obligations and invoiced and reclassified $34.2 million to accounts receivable. These amounts were included in the net contract assets or liabilities balance as of June 30, 2020. The Company had no asset impairment charges related to contract assets in the periods presented.
The Company may occasionally recognize an adjustment in revenue in the current period for performance obligations partially or fully satisfied in the previous periods resulting from changes in estimates for the transaction price, including any changes to the Company's assessment of whether an estimate of variable consideration is constrained. For the three months ended September 30, 2020, the impact on revenue recognized in the current period, from performance obligations partially or fully satisfied in the previous period, was not significant.
Remaining Performance Obligations. As of September 30, 2020, the Company had $2.5 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 remaining performance obligations as revenue as follows:
September 30, 2020
Nine months ending June 30, 2021$930.0 
Twelve months ending June 30, 2022850.0 
Twelve months ending June 30, 2023410.0 
Twelve months ending June 30, 2024200.0 
Twelve months ending June 30, 202560.0 
Thereafter30.0 
Total remaining performance obligations$2,480.0 
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 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
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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 September 30, 2020 and June 30, 2020, the Company capitalized contract acquisition and fulfillment costs from continuing operations of $204.3 million and $202.6 million, respectively. The Company expects that incremental commission fees incurred as a result of obtaining contracts and fulfillment costs are recoverable. During the three months ended September 30, 2020 and 2019, the Company recognized cost amortization of $20.2 million and $20.1 million, respectively, and there were no significant impairment losses.
Note 6. Restructuring
On May 2, 2020, the Company adopted a plan to restructure the CDKI segment to reduce costs and improve margins. The Company expects to incur up to $25.0 million in costs related to one-time employee termination benefit. In connection with the implementation of these restructuring actions, the Company incurred costs of $14.2 million during fiscal 2020. During the three months ended September 30, 2020, the Company incurred costs of $8.7 million. Additional charges related to these actions are expected to be incurred through early fiscal 2021.
Accruals for restructuring expenses were included in accrued expenses and other current liabilities on the Consolidated Balance Sheets as of September 30, 2020 and June 30, 2020.
The following table summarizes restructuring accrual activity for the three months ended September 30, 2020:
Employee-Related CostsTotal Costs
Balance as of June 30, 2020$14.2 $14.2 
Charges8.7 8.7 
Cash payments(8.3)(8.3)
Foreign exchange0.4 0.4 
Balance as of September 30, 2020$15.0 $15.0 

Note 7. Earnings per Share
The numerator for basic and diluted earnings per share is Net earnings attributable to CDK. The denominator for basic and diluted earnings per share is based on the weighted-average number of shares of the Company's common stock outstanding during the applicable reporting periods. Diluted earnings per share also reflects the dilutive effect of unexercised in-the-money stock options and unvested restricted stock.
Net earnings allocated to participating securities were not significant for the three months ended September 30, 2020 and 2019.
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The following table summarizes the components of earnings per share:
Three Months Ended
September 30,
20202019
Net earnings from continuing operations attributable to CDK$55.5 $76.3 
Net earnings from discontinued operations0.2 5.7 
Net earnings attributable to CDK$55.7 $82.0 
Weighted-average shares outstanding:
Basic121.7 121.4 
Effect of employee stock options 0.1 
Effect of employee restricted stock0.6 0.5 
Diluted122.3 122.0 
Net earnings attributable to CDK per share - basic:
Continuing operations$0.46 $0.63 
Discontinued operations 0.05 
Total net earnings attributable to CDK per share - basic$0.46 $0.68 
Net earnings attributable to CDK per share - diluted:
Continuing operations$0.46 $0.62 
Discontinued operations 0.05 
Total net earnings attributable to CDK per share - diluted$0.46 $0.67 
The weighted-average number of shares outstanding used in the calculation of diluted earnings per share does not include the effect of the following anti-dilutive securities.
Three Months Ended
September 30,
20202019
Stock-based awards0.9 0.7 

Note 8. Allowance for Credit Losses
In June 2016, the FASB issued ASU 2016-13, which requires the application of a current expected credit loss (“CECL”) impairment model to financial assets measured at amortized cost (including trade accounts receivable), net investments in leases, and certain off-balance-sheet credit exposures. Under the CECL model, lifetime expected credit losses on such financial assets are measured and recognized at each reporting date based on historical, current, and forecasted information. Furthermore, the CECL model requires financial assets with similar risk characteristics to be analyzed on a collective basis.
On July 1, 2020, the Company adopted the CECL model using a modified retrospective approach. The noncash cumulative effect of adopting the CECL model 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. 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 period.
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. Financial assets also include the short and long-term portions of contract assets, lease receivables and other accrued and unbilled receivables. Refer to Note 5. Revenue for more information about contract assets.
The Company has 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
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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 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. While developments related to the COVID-19 pandemic continue to evolve, management has elected to make judgmental adjustments to the historical loss rates based on expected impacts. 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 is 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 in the Other segment. These assets primarily consist of a 10-year note receivable, receivables related to a transition services agreement in connection with the sale, and the fair value of other contingent consideration. Specific reserves are established for these assets on an individual basis 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 counterparties.
The Company’s monitoring activities include timely account reconciliation, reviews of credit and collection performance, consideration of customers' financial condition 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.
Credit loss expense is included in selling, general and administrative expenses in the Consolidated Statements of Operations. The following table provides a rollforward 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 September 30, 2020.
Accounts receivable, netOther current assetsOther assetsTotal
Balance as of June 30, 2020$14.9 $ $ $14.9 
Cumulative-effect adjustment upon adoption2.1 0.5 8.3 10.9 
Provision for expected credit losses(1.4)0.1 0.7 (0.6)
Write-offs(0.5)  (0.5)
Other0.2   0.2 
Balance as of September 30, 2020$15.3 $0.6 $9.0 $24.9 

Note 9. Leases
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 collectibility 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.



The following summarizes components of net lease income reported in the Consolidated Statements of Operations:
Three Months Ended September 30, 2020Three Months Ended September 30, 2019
Revenues (1)
$12.5 $9.9 
Cost of revenues(8.0)(7.8)
Interest income0.4  
Total lease income$4.9 $2.1 
(1) Revenues from lease components are included in other revenue in the Consolidated Statements of Operations.
Note 10. Debt
Long-term debt and finance lease liabilities consisted of:
September 30, 2020June 30, 2020
Revolving credit facility, matures 2023$20.0 $15.0 
Three year term loan facility, due 2021300.0 300.0 
Five year term loan facility, due 2023270.0 273.8 
4.50% senior notes, due 2024500.0 500.0 
5.875% senior notes, due 2026500.0 500.0 
4.875% senior notes, due 2027600.0 600.0 
5.250% senior notes due 2029500.0 500.0 
Finance lease liabilities12.9 14.1 
Unamortized debt financing costs(25.5)(27.1)
Total debt and finance lease liabilities$2,677.4 $2,675.8 
Current maturities of long-term debt and finance lease liabilities320.5 20.7 
Total long-term debt and finance lease liabilities$2,356.9 $2,655.1 
Revolving Credit Facility. On August 17, 2018, the Company entered into a five-year 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 in Euro, Pound Sterling, and, if approved by the revolving lenders, other currencies. The average outstanding balances of the revolving credit facility were $116.4 million and zero for the three months ended September 30, 2020 and 2019, respectively.
Term Loan Facilities. The three-year term loan facility due August 17, 2021 and the five-year term loan facility due August 17, 2023 had interest rates per annum of 2.750% and 2.875%, respectively, as of September 30, 2020.
Unamortized Debt Financing Costs. As of September 30, 2020 and June 30, 2020, gross debt issuance costs related to debt instruments were $45.0 million. Accumulated amortization was $19.5 million and $17.9 million as of September 30, 2020 and June 30, 2020, respectively. Debt financing costs are amortized over the terms of the related debt instruments and recorded to interest expense on the Consolidated Statements of Operations.
Note 11. Income Taxes
Provision for Income Taxes. The effective tax rate for the three months ended September 30, 2020 and 2019 was 31.4% and 24.6%, respectively. The effective tax rate for the three months ended September 30, 2020 was impacted primarily by $4.1 million of tax expense from prior year true-up of income taxes payable, $2.4 million tax expense from officer's compensation limitation, and $2.0 million of tax expense from recording valuation allowances on foreign net operating losses and U.S. foreign tax credits offset by $2.2 million tax benefit from tax law changes including the High Tax Exception promulgated under the U.S. Global Intangible Low-Taxed Income ("GILTI") final regulations and $1.4 million benefit from foreign tax credits derived from tax planning initiatives undertaken during fiscal 2020. The effective tax rate for the three months ended September 30, 2019 was impacted by a $1.2 million benefit resulting from an adjustment of an accrual for foreign withholding taxes related to undistributed earnings as a result of the Tax Cuts and Jobs Act of 2017 ("Tax Reform Act"). The effective tax rate increase from fiscal 2020 to fiscal 2021 is also impacted by the mix of earnings by jurisdiction.
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Valuation Allowances. The Company had valuation allowances of $7.7 million and $5.7 million as of September 30, 2020 and June 30, 2020, respectively, because the Company has concluded it is more likely than not that it will be unable to utilize net operating and capital loss carryforwards of certain subsidiaries to offset future taxable earnings. As of each reporting date, the Company’s management considers new evidence, both positive and negative, which could impact management’s view with regard to future realization of deferred tax assets.
During the three months ended September 30, 2020, the valuation allowance balance increase of $2.0 million is related to the expectation that more likely than not the Company will be unable to utilize certain U.S. foreign tax credits and tax losses in various foreign jurisdictions.
Unrecognized Income Tax Benefits. As of September 30, 2020 and June 30, 2020, the Company had unrecognized income tax benefits of $25.2 million and $24.8 million, respectively. Of these amounts, $8.6 million and $8.1 million, respectively, would have a net impact on the effective tax rate if recognized. During the three months ended September 30, 2020, the Company increased its unrecognized income tax benefits related to current tax positions by $0.2 million and its prior period tax positions by $0.2 million based on information that indicates the extent to which certain tax positions are more likely than not of being sustained. Based on the expiration of the statute of limitations, it is reasonably possible that the liability for uncertain tax positions will change within the next twelve months. The associated net tax impact on the effective tax rate is estimated to be a $1.6 million tax benefit.

Deferred Taxes on Unremitted Foreign Earnings. During the three months ended March 31, 2020, the Company removed its assertion that foreign earnings are indefinitely reinvested, making foreign earnings available for repatriation as necessary. For fiscal 2020, the Company recognized $3.7 million of withholding tax on foreign earnings after the Company decided to no longer indefinitely reinvest these earnings. In addition, earlier in fiscal 2020 a reduction of $1.2 million was recorded for an accrual for foreign withholding taxes originally recorded as a result of the Tax Reform Act.
For the three months ended September 30, 2020, the Company recognized $0.4 million of withholding taxes as a result of foreign earnings no longer being indefinitely reinvested.
Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was enacted into law. The CARES Act is aimed at providing emergency relief and health care for individuals and businesses affected by the COVID-19 pandemic. The CARES Act, among other things, includes provisions related to refundable payroll tax credits, deferral of the employer portion of social security payments, expanded net operating loss application, modifications to the net interest deduction limitations, and technical corrections to tax depreciation methods for qualified improvement property. The Company has completed its assessment of the impact of the legislation, and there is no significant impact to the consolidated financial statements.
Note 12. 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 us 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, or where indicated, has settled, 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 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”).
Active MDL Lawsuits
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
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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 has been fully briefed and remains pending before the court. 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 approved that settlement on January 22, 2019.
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 action 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.
Settled MDL Lawsuits
Authenticom, Inc. ("Authenticom") brought a suit against CDK Global, LLC and Reynolds. Authenticom’s suit was originally filed on May 1, 2017, in the U.S. District Court for the Western District of Wisconsin. Defendants’ motions to dismiss were granted in part, and denied in part. Defendants filed answers to Authenticom’s complaint and asserted counterclaims against Authenticom on June 30, 2018; Authenticom filed motions to dismiss those counterclaims. Authenticom's motion to dismiss CDK Global, LLC’s counterclaims were granted in part and denied in part; its motion to dismiss one of Reynolds’s counterclaims was granted. On February 15, 2019, Authenticom filed an answer to both defendants’ counterclaims. On October 20, 2020, CDK Global, LLC and Authenticom entered into a settlement agreement that resulted in a dismissal of all claims brought by Authenticom in the MDL, and CDK Global, LLC making a one-time cash payment to Authenticom.
i3 Brands, Inc. and PartProtection LLC (“i3 Brands”) brought suit against CDK Global, LLC and Reynolds. i3 Brands' suit was originally filed on February 4, 2019, in the U.S. District Court for the Southern District of California; it was subsequently transferred to the U.S. District Court for the Northern District of Illinois and consolidated as part of the MDL. On April 1, 2019, Reynolds filed a motion to dismiss i3 Brands’ suit in favor of arbitration, or in the alternative, for failure to state a claim, and CDK Global, LLC filed a motion to stay this case pending the outcome of the proposed arbitration proceedings between Reynolds and i3 Brands, or in the alternative, to dismiss certain of its claims for failure to state a claim. On March 4, 2020, CDK Global, LLC and i3 Brands entered into a settlement agreement that resulted in a dismissal of all claims brought by i3 Brands against CDK in the MDL, and CDK Global, LLC agreeing to a release of i3 Brands and an agreement to abandon all claims against i3 Brands
Motor Vehicle Software Corporation (“MVSC”) brought a suit against the CDK Global, LLC (after initially naming the Company), Reynolds, and Computerized Vehicle Registration (“CVR”), a majority owned joint venture of the Company. MVSC’s suit was originally filed on February 3, 2017, in the U.S. District Court for the Central District of California. Defendants’ motions to dismiss MVSC’s second amended complaint were denied, and the defendants answered MVSC’s complaint on November 7, 2018. On October 10, 2019, CDK Global, LLC and MVSC entered into a settlement agreement that resulted in a dismissal of all claims brought by MVSC in the MDL, and CDK Global, LLC making a one-time cash payment to MVSC.
Cox Automotive, along with multiple subsidiaries (“Cox”), brought suit against CDK Global, LLC. Cox’s suit was originally filed on December 11, 2017, in the U.S. District Court for the Western District of Wisconsin. CDK Global, LLC’s motion to dismiss was granted in part and denied in part on January 25, 2019. CDK Global, LLC filed an answer to the remainder of Cox’s complaint and asserted counterclaims
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against Cox on February 15, 2019. Cox filed an answer to CDK Global, LLC’s counterclaims on March 8, 2019. On July 10, 2019, CDK Global, LLC and Cox entered into a settlement agreement that resulted in a dismissal of all claims brought by the affiliated parties in the MDL, and CDK Global, LLC making a one-time cash payment to Cox.
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 settlement 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. In the fourth quarter of fiscal 2019, the Company initially recorded a litigation provision of $90 million and has continued to re-assess the liability in each subsequent quarter. In the first quarter of fiscal 2021, the Company's reassessment of its litigation liability resulted in an increase of $12 million. As of September 30, 2020, the litigation liability, including the amount of the settlement, was $69 million. 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) discovery is ongoing and significant factual issues remain to be resolved; (iii) expert discovery with respect to, among other things, alleged antitrust injury and damages is not sufficiently advanced; (iv) the absence of productive settlement discussions to date with plaintiffs other than Authenticom, i3 Brands, MVSC, and Cox; 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 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 $27.8 million of guarantees as of September 30, 2020 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 $2.3 million in letters of credit outstanding as of September 30, 2020 primarily in connection with insurance programs and its foreign subsidiaries.
Note 13. Financial Data by Segment
The Company is organized into two main operating groups, CDK North America and CDK International, which are also reportable segments. The Company's previously reported Advertising North America segment has been classified as discontinued operations for all periods presented. Discontinued operations also includes the Company's mobile advertising and website services businesses, the results of which were previously reported in the CDKNA segment. Additional information on discontinued operations is contained in Note 4, Discontinued Operations.
The primary components of the Other segment are corporate allocations and other expenses not recorded in the segment results, such as stock-based compensation expense, corporate costs, interest expense, costs attributable to the business transformation plan, and certain unallocated expenses. Certain expenses are charged to the reportable segments at a standard rate for management reasons. Other costs are recorded based on management responsibility.
Revenues by category by segment were as follows:
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Three Months Ended
September 30,
20202019
CDKNA
Subscription $323.9 $332.4 
On-site license and installation1.7 2.1 
Transaction 43.9 42.7 
Other 44.2 40.5 
Total CDKNA413.7 417.7 
CDKI
Subscription (1)
67.4 63.3 
On-site license and installation (1)
8.0 8.9 
Other 4.5 4.7 
Total CDKI79.9 76.9 
Total$493.6 $494.6 
(1) During the fourth quarter of fiscal 2020, the Company determined that certain revenue in the CDKI segment categorized as Subscription should be reported as On-site license and installation. As a result, for the three months ended September 30, 2019, the Company reclassified $4.4 million of revenue to conform to the current year presentation. The Company believes this reclassification is not material. The reclassification did not impact the Consolidated Statements of Operations.
Earnings (loss) before income taxes by segment were as follows:
 Three Months Ended
September 30,
 20202019
CDKNA$139.9 $144.2 
CDKI17.3 15.2 
Other(73.0)(55.4)
Total earnings before income taxes$84.2 $104.0 

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
(Tabular amounts in millions, except per share amounts)

FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, may be forward-looking statements. These statements may be identified by the use of forward-looking words such as
“expect,” “anticipate,” “may,” “could,” “plan,” “estimate” or similar terminology. These statements are based on management's expectations and assumptions as of the date of this filing and are subject to risks and uncertainties that may cause actual results to differ materially from those expressed, or implied by, these forward-looking statements. Factors that could cause actual results to differ materially from those contemplated by the forward-looking statements include, but are not limited to: our expectations regarding the potential impacts on our business of the outbreak of the COVID-19 pandemic; our success in obtaining, retaining, and selling additional services to customers; the pricing of our products and services; overall market and economic conditions, including interest rate and foreign currency trends, and technology trends; adverse global economic conditions and credit markets and volatility in the countries in which we do business; auto sales and related industry changes; competitive conditions; changes in regulation (including new regulations that restrict the manner and extent to which we can control access to our DMS and other software applications and limit what, if anything, we may charge for integration with those applications); changes in technology, security breaches, interruptions, failures, and other errors involving our systems; availability of skilled technical employees/labor/personnel; the impact of new acquisitions and divestitures; employment and wage levels; availability of capital for the payment of debt service obligations or dividends or the repurchase of shares; any changes to our credit rating and the impact of such changes on our financing costs, rates, terms, debt service obligations, and access to capital market and working capital needs; the impact of our indebtedness, our access to cash and financing, and our ability to secure financing or financing at attractive rates; the onset of or developments in litigation involving contract, intellectual property, competition, stockholder, and other matters, and governmental investigations; and the ability of our significant stockholders and their affiliates to significantly influence our decisions, or cause us to incur significant costs.

There may be other factors that may cause our actual results, performance or achievements to differ materially from those expressed in, or implied by, the forward-looking statements. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition. You should carefully read the factors described in Part I, Item 1A of our Form 10-K, filed on August 6, 2020, under the heading “Risk Factors,” which are incorporated herein by reference. We disclaim any obligation to update or revise forward-looking statements that may be made to reflect new information or future events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events, other than as required by law. The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes included in Part II, Item 8 of our most recent Form 10-K. As used herein, "CDK Global," "CDK," the "Company," "we," "our," and similar terms include CDK Global, Inc. and its consolidated subsidiaries, unless the context indicates otherwise.
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RESULTS OF OPERATIONS
Executive Overview. CDK enables end-to-end automotive commerce across the globe. For over 40 years, we have served automotive retailers and original equipment manufacturers ("OEMs") by providing innovative solutions that allow them to better connect, manage, analyze, and grow their businesses. Our solutions automate and integrate all parts of the buying process, including the acquisition, sale, financing, insuring, parts supply, repair, and maintenance of vehicles, in more than 100 countries around the world, for approximately 30,000 retail locations and most OEMs.
We generate revenue primarily by providing a broad suite of subscription-based software and technology solutions for automotive retailers through our CDK North America and CDK International segments. We are focused on the use of software-as-a-service ("SaaS") and mobile-centric solutions that are highly functional, flexible and fast. Our flagship Dealer Management System ("DMS") software solutions are hosted enterprise resource planning applications tailored to the unique requirements of the retail automotive industry. Our DMS products facilitate the sale of new and used vehicles, consumer financing, repair and maintenance services, and vehicle and parts inventory management. Additionally, these solutions enable company-wide accounting, financial reporting, cash flow management, and payroll services. Our DMSs are typically integrated with OEM data processing systems that enable automotive retailers to order vehicles and parts, receive vehicle records, process warranties, and check recall campaigns and service bulletins while helping them to fulfill their franchisee responsibilities to their OEM franchisors.
The Digital Marketing Business is presented as discontinued operations. Refer to Form 10-Q, Item 1 of Part I, "Notes to the Consolidated Financial Statements, Note 4, Discontinued Operations" for more information.
CDK North America. Through our CDKNA segment, we provide technology-based solutions, including our DMS products, a broad portfolio of layered software applications and services, a robust and secure interface to the DMS through our Partner Program, data management and business intelligence solutions, a variety of professional services, and a full range of customer support solutions. These solutions help automotive retailers, OEMs, consumers and other industry participants manage the acquisition, sale, financing, insuring, parts supply, and repair and maintenance of vehicles. Our solutions help our customers streamline their operations, better target and serve their customers, and enhance the financial performance of their retail operations. In addition to providing solutions to automotive retailers and OEMs, we also provide solutions to retailers and manufacturers of heavy trucks, construction equipment, agricultural equipment, motorcycles, boats, and other marine and recreational vehicles.
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CDK International. Through our CDKI segment, we provide automotive retailers with core DMS solutions and we offer automotive retailers and OEMs a variety of professional services, custom programming, consulting, implementation and training solutions, as well as a full range of customer support solutions in approximately 100 countries outside of the United States ("U.S.") and Canada. The solutions that we provide in this segment allow our customers to streamline their business operations and enhance their financial performance in their local marketplace, and in some cases where we deal directly with OEMs, across international borders. Customers of this segment include automotive retail dealers and OEMs across Europe, the Middle East, Asia, Africa, and Latin America.
Impacts of COVID-19. As the COVID-19 pandemic spread at scale in Europe and the U.S., by mid-March we began to see a significant shift in automotive retail, and the operations of our dealer customers in particular, stemming from travel bans and restrictions, quarantines, shelter-in-place orders and related business shutdowns. The full extent and timing of the impact of the COVID-19 pandemic on our business is currently unknown. Our business remains fully operational with modifications to accommodate employee and customer safety considerations, including limitations on travel, a migration of many employees to work-from-home status, increased virtual delivery of certain services, and other modifications. We have observed that other companies, including our customers and vendors, are taking precautionary and preemptive actions to address the COVID-19 pandemic and companies may take further actions that alter their normal business operations. We continue to actively monitor the situation and may take further actions in response to guidance from federal, state or local authorities or that we determine are in the best interests of our employees, customers, partners, suppliers and stockholders.
During the first quarter of fiscal 2021, we have navigated the crisis while maintaining the health of our core business.To support our customers in this difficult period, we have offered financial and other assistance and added product benefits to reflect today’s environment, while continuing to provide the high level of customer service they expect and rely on. We have gained momentum in delivering on our mission to accelerate the business, including progress made in sales and installations, together with a strong rebound in our transactions volumes. When coupled with our focus on being dealer-centric, we’ve been able to improve customer sentiment, resulting in lower losses and growing sites. Overall, we are well positioned for further growth opportunities through the rebound of our business following the impact of the COVID-19 pandemic on revenue, our investments, expense actions and resulting earnings growth.

In response to the economic uncertainty engendered by the ongoing COVID-19 pandemic, we have taken steps to preserve cash and improve our liquidity position. We are reducing costs and eliminating discretionary spending where possible while continuing to serve our customers’ needs. We have also amended our revolving credit facility and term loans to increase the maximum allowable leverage ratio through the first quarter of 2022 in order to provide us with access to additional borrowing capacity. In addition, we reviewed our plans for foreign cash balances and, based on the increase in uncertainty and higher expected U.S. cash needs associated with the pandemic, we have removed our assertion that foreign earnings are indefinitely reinvested, making these earnings available for repatriation as necessary. At this time, it is not clear to what extent or over what length of time the COVID-19 pandemic will impact our financial results. We continue to monitor cash flow and liquidity and will take further steps as necessary depending on the duration and severity of the COVID-19 pandemic crisis and its impact on our cash flows.
Business Process Modernization Program. As of July 1, 2019, we initiated a three-year program designed to improve the way we do business for our customers through best-in-class product offerings, processes, governance and systems. The business process modernization program will include a comprehensive redesign in the way we go to market, including the quoting, contracting, fulfilling, and invoicing processes, and the systems and tools we use. We estimate the investment to implement this holistic business reform, including the design and implementation of a new enterprise resource planning ("ERP") system, will require approximately $30.0 million over a three-year time horizon.
CDKI Restructuring. On May 2, 2020, we adopted a plan to restructure the CDKI segment to reduce costs and improve margins. We expect to incur costs related to one-time employee termination benefits up to $25.0 million. We have incurred costs of $8.7 million during the first quarter of fiscal 2021, additional charges related to these actions are expected to be incurred through early fiscal 2021.
Sources of Revenues and Expenses
Revenues. We generally receive fee-based revenue by providing services to customers. We generate revenues from four categories: subscription, on-site licenses and installation, transaction services, and other.
In our CDKNA segment, we have the following sources of revenue:
Subscription: for software and technology solutions provided to automotive retailers and OEMs, which includes:
DMS and layered applications, which may be installed on-site at the customer’s location, or hosted and provided on a SaaS basis, including ongoing maintenance and support;
Interrelated services such as installation, initial training, and data updates; and
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Prior to the adoption of 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. We recognize certain hardware-as-a-service ("HaaS") arrangements in subscription revenue under legacy guidance until they convert to current guidance.
On-site licenses and installation: DMS applications where the software is installed on-site at the customer's location and interrelated services such as installation.
Transaction: fees per transaction to process credit reports, vehicle registrations, and automotive equity mining.
Other: consulting and professional services, sales of hardware, and other miscellaneous revenues. After the adoption of ASC 842, Other revenues 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.
CDKI revenues are generated primarily from Subscription revenue, On-site licenses and installation revenue, and Other revenue, as described above.
Expenses. Expenses generally relate to the cost of providing services to customers in our two reportable segments. In the CDKNA and CDKI segments, significant expenses include employee payroll and other labor-related costs, the cost of hosting customer systems, third-party costs for transaction-based solutions and licensed software utilized in our solution offerings, telecommunications, transportation and distribution costs, computer hardware, software, and other general overhead items. We also have some company-wide expenses attributable to management compensation and corporate overhead.
Key Performance Measures. We regularly review the following key performance measures in evaluating our business results, identifying trends affecting our business, and making operating and strategic decisions:
Dealer Management System Customer Sites (end of period). We track the number of retail customer sites that have an active DMS and sell vehicles in automotive and adjacent markets as an indicator of our opportunity set for generating subscription revenue. We consider a DMS to be active if we have billed a subscription fee for that solution during the last billing cycle in the most recently ended calendar month. Adjacent markets include heavy truck dealerships that provide vehicles to the over-the-road trucking industry, recreation dealerships in the motorcycle, powersports, marine, and recreational vehicle industries, and heavy equipment dealerships in the agriculture and construction equipment industries.
Average Revenue Per DMS Customer Site (monthly average for period). Average revenue per DMS customer site is an indicator of the scope of adoption of our solutions by DMS customers. We monitor changes in this metric to measure the effectiveness of our strategy to deepen our relationships with our current customer base through upgrading and expanding solutions. We calculate average revenue per DMS customer site by dividing subscription revenue generated from our solutions in an applicable period by the monthly average number of DMS customer sites in the same period, divided by three. The metric excludes subscription revenue generated from customers not included in our DMS customer site count and subscription revenue related to certain installation and training activities that is deferred then recognized as revenue over the life of the contract. Revenue underlying this metric is based on budgeted foreign exchange rates. When we discuss growth in average revenue per DMS customer site, revenue for the comparable prior period has been adjusted to reflect budgeted foreign exchange rates for the current period.
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Results of Operations. The following is a discussion of the results of our consolidated operations for the three months ended September 30, 2020 and 2019. For a discussion of our operations by segment, see "Analysis of Reportable Segments" below.
The table below presents consolidated results of operations for the periods indicated and the dollar change and percentage change between periods.
Three Months Ended
September 30,Change
 20202019$%
Revenues$493.6 $494.6 $(1.0)— %
Cost of revenues262.1 247.3 14.8 %
Selling, general, and administrative expenses112.2 107.9 4.3 %
Restructuring expenses8.7 — 8.7 n/m
Litigation provision12.0 — 12.0 n/m
Total expenses395.0 355.2 39.8 11 %
Operating earnings98.6 139.4 (40.8)(29)%
Interest expense(34.7)(37.7)3.0 (8)%
Loss from equity method investment(3.4)— (3.4)— %
Other income, net23.7 2.3 21.4 n/m
Earnings before income taxes84.2 104.0 (19.8)(19)%
Margin %17.1 %21.0 %
Provision for income taxes(26.4)(25.6)(0.8)%
Effective tax rate31.4 %24.6 %
Net earnings from continuing operations57.8 78.4 (20.6)(26)%
Net earnings from discontinued operations0.2 5.7 (5.5)(96)%
Net earnings58.0 84.1 (26.1)(31)%
Less: net earnings attributable to noncontrolling interest2.3 2.1 0.2 10 %
Net earnings attributable to CDK$55.7 $82.0 $(26.3)(32)%
Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019
Revenues. Revenues for the three months ended September 30, 2020 decreased by $1.0 million compared to the three months ended September 30, 2019. CDKNA segment revenues decreased by $4.0 million and CDKI segment revenues increased by $3.0 million. See the discussion below for drivers of each segment's revenue variance. The impact of foreign exchange rates on revenues was an increase of $2.1 million. The foreign exchange rate impact was primarily due to the strength of the U.S. dollar against the Euro, British pound, South African rand, and Danish krone.
Cost of Revenues. Cost of revenues for the three months ended September 30, 2020 increased by $14.8 million compared to the three months ended September 30, 2019. The constant currency impact of foreign exchange rates on cost of revenues was an increase of $1.2 million. Cost of revenues increased due to the recognition of costs related to a transition services agreement in connection with the sale of the Digital Marketing Business, higher costs relating to investments in strategic growth initiatives, hhigher stock compensation expense driven by the achievement of financial performance metrics associated with performance-based restricted stock units and an increase in restricted stock unit grants, and an increase in depreciation and amortization resulted from capitalized software additions. These increases were partially offset by lower transaction and integration related costs, and lower travel expenses as a result of the COVID-19 pandemic. Cost of revenues includes expenses to research, develop, and deploy new and enhanced solutions for our customers of $26.0 million and $22.1 million for the three months ended September 30, 2020 and 2019, respectively, representing 5.3% and 4.5% of revenues, respectively.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended September 30, 2020 increased by $4.3 million compared to the three months ended September 30, 2019. The constant currency impact of foreign exchange rates on selling, general and administrative expenses was an increase of $0.5 million. Selling, general and administrative expenses increased due to higher stock compensation expense driven by the achievement of financial performance metrics associated with performance-based restricted stock units and an increase in restricted stock unit grants, and higher transaction and integration related costs; partially offset by lower travel expenses as a result of the COVID-19 pandemic.
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Restructuring Expenses. Restructuring expenses for the three months ended September 30, 2020 increased by $8.7 million as compared to the three months ended September 30, 2019 related to our restructuring plan for the CDKI segment.
Litigation Provision. In the first quarter of fiscal 2021, our reassessment of the litigation liability resulted in an increase of $12 million. Additional information on litigation provision is contained in Item 8 of Part II, "Financial Statements and Supplementary Data - Note 12 - Commitments and Contingencies."
Interest Expense. Interest expense for the three months ended September 30, 2020 decreased by $3.0 million as compared to the three months ended September 30, 2019 largely due to lower average debt levels in the first quarter of fiscal 2021 compared to fiscal 2020 largely attributable to the payoff of the $250 million 3.30% senior notes in the second quarter of fiscal 2020.
Loss from Equity Method Investment. We recorded a loss from the equity earnings of Ansira, an equity-method investment.
Other Income, net. Other income, net for the three months ended September 30, 2020 increased by $21.4 million as compared to the three months ended September 30, 2019 due largely to the recognition of income related to a transition services agreement in connection with the sale of the Digital Marketing Business.
Provision for Income Taxes. The effective tax rate for the three months ended September 30, 2020 and 2019 was 31.4% and 24.6%, respectively. The effective tax rate for the three months ended September 30, 2020 was impacted primarily by $4.1 million of tax expense from a prior year true up of income taxes payable, $2.4 million tax expense from officer's compensation limitation, and $2.0 million of tax expense from recording valuation allowances on foreign net operating losses and U.S. foreign tax credits offset by $2.2 million tax benefit from tax law changes including the High Tax Exception promulgated under the U.S. Global Intangible Low-Taxed Income ("GILTI") final regulations and $1.4 million benefit from foreign tax credits derived from tax planning initiatives undertaken during fiscal 2020. The effective tax rate for the three months ended September 30, 2019 was impacted by a $1.2 million benefit resulting from an adjustment of an accrual for foreign withholding taxes related to undistributed earnings as a result of the Tax Reform Act. The effective tax rate increase from fiscal 2020 to fiscal 2021 is also impacted by the mix of earnings by jurisdiction.
Net Earnings from Discontinued Operations. Net earnings from discontinued operations reflect the results of the Digital Marketing Business. The Digital Marketing Business generated higher earnings in fiscal 2020 as it was included as part of our business until the completion of the sale on April 21, 2020. Refer to Note 4 Discontinued operations for additional information.
Net Earnings Attributable to CDK. Net earnings attributable to CDK for the three months ended September 30, 2020 decreased $26.3 million as compared to the three months ended September 30, 2019. The decrease in Net earnings attributable to CDK was primarily due to the factors previously discussed.
Non-GAAP Measures
We disclose certain financial measures for our consolidated and operating segment results on a generally accepted accounting principles (GAAP) and a non-GAAP (adjusted) basis. The non-GAAP financial measures disclosed should be viewed in addition to, and not as an alternative to, results prepared in accordance with GAAP. Our use of each of the following non-GAAP financial measures may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define these non-GAAP financial measures, or reconcile them to the comparable GAAP financial measures, in the same way.
Non-GAAP Financial MeasureComparable GAAP Financial Measure
Adjusted earnings before income taxesEarnings before income taxes
Adjusted provision for income taxesProvision for income taxes
Adjusted net earnings attributable to CDKNet earnings attributable to CDK
Adjusted diluted earnings attributable to CDK per shareDiluted earnings attributable to CDK per share
Adjusted EBITDANet earnings attributable to CDK
Adjusted EBITDA marginNet earnings attributable to CDK margin
Constant currency revenuesRevenues
Constant currency adjusted earnings before income taxesEarnings before income taxes
Free cash flow from continuing operationsNet cash flows provided by operating activities

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We use adjusted earnings before income taxes, adjusted provision for income taxes, adjusted net earnings attributable to CDK, adjusted diluted earnings attributable to CDK per share, adjusted EBITDA and adjusted EBITDA margin internally to evaluate our performance on a consistent basis because the measures adjust for the impact of certain items that we believe do not directly reflect our underlying operations. By adjusting for these items, we believe we have more precise inputs for use as factors in (i) our budgeting process, (ii) financial and operational decisions, (iii) evaluations of ongoing segment and overall operating performance on a consistent period-to-period basis and relative to our competitors, (iv) target leverage calculations, and (v) incentive-based compensation decisions.
We believe our non-GAAP financial measures are helpful to users of the financial statements because they (i) provide investors with meaningful supplemental information regarding financial performance by excluding certain items, (ii) permit investors to view performance using the same tools that management uses, and (iii) provide supplemental information that may be useful to investors in evaluating our ongoing operating results on a consistent basis. We believe that the presentation of these non-GAAP financial measures, when considered in addition to the corresponding GAAP financial measures and the reconciliations to those measures disclosed below, provides investors with a better understanding of the factors and trends affecting our business than could be obtained absent these disclosures.
We review revenues and adjusted earnings before income taxes on a constant currency basis to understand underlying business trends. To present these results on a constant currency basis, current period results for entities reporting in currencies other than the U.S. dollar were translated into U.S. dollars using the average monthly exchange rates for the comparable prior period. As such, constant currency results neutralize the effects of foreign currency.
We incorporated additional adjustments in our calculations of non-GAAP financial measures where management has deemed it appropriate to better reflect our underlying operations. These adjustments are inconsistent in amount and frequency and do not directly reflect our underlying operations. Therefore, management believes that excluding such information provides us with a better understanding of our ongoing operating performance across periods. Prior period information has been revised to conform to the new presentation.

Consolidated Non-GAAP Results. The tables below present the reconciliation of the most directly comparable GAAP measures to constant currency revenues, constant currency adjusted earnings before income taxes, adjusted provision for income taxes, adjusted net earnings attributable to CDK, and adjusted diluted earnings attributable to CDK per share.
Three Months Ended
September 30,Change
20202019$%
Revenues (1)
$493.6 $494.6 $(1.0) %
Impact of exchange rates(2.1)— (2.1)
Constant currency revenues$491.5 $494.6 $(3.1)(1)%
Earnings before income taxes (1)
$84.2 $104.0 $(19.8)(19)%
Margin %17.1 %21.0 %
Total stock-based compensation (1) (2)
13.1 2.9