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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, 2019
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)
Delaware
 
46-5743146
State or Other Jurisdiction of
Incorporation or Organization

 
I.R.S. Employer Identification No.

 
1950 Hassell Road,
Hoffman Estates,
IL
 
 
60169
Address of Principal Executive Offices
 
Zip 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 class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 Par Value
CDK
NASDAQ 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  ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 filer
ý
Accelerated filer
Non-accelerated filer
Smaller 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  ý
The number of shares outstanding of the registrant’s common stock as of October 31, 2019 was 121,398,182.




Table of Contents

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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,
 
 
2019
 
2018
 
Revenues
$
494.6

 
$
446.3

 
 
 
 
 
 
Expenses:
 
 
 
 
Cost of revenues
247.3

 
203.3

 
Selling, general and administrative expenses
107.9

 
91.1

 
Restructuring expenses

 
15.8

 
Total expenses
355.2

 
310.2

 
Operating earnings
139.4

 
136.1

 
 
 
 
 
 
Interest expense
(37.7
)
 
(32.2
)
 
Other income, net
2.3

 
2.6

 
 
 
 
 
 
Earnings before income taxes
104.0

 
106.5

 
 
 
 
 
 
Provision for income taxes
(25.6
)
 
(30.0
)
 
 
 
 
 
 
Net earnings from continuing operations
78.4

 
76.5

 
Net earnings from discontinued operations
5.7

 
15.8

 
Net earnings
84.1

 
92.3

 
Less: net earnings attributable to noncontrolling interest
2.1

 
2.0

 
Net earnings attributable to CDK
$
82.0

 
$
90.3

 
 
 
 
 
 
Net earnings attributable to CDK per share - basic:
 
 
 
 
Continuing operations
$
0.63

 
$
0.58

 
Discontinued operations
0.05

 
0.12

 
Total net earnings attributable to CDK per share - basic
$
0.68

 
$
0.70

 
 
 
 
 
 
Net earnings attributable to CDK per share - diluted:
 
 
 
 
Continuing operations
$
0.62

 
$
0.57

 
Discontinued operations
0.05

 
0.12

 
Total net earnings attributable to CDK per share - diluted
$
0.67

 
$
0.69

 
 
 
 
 
 
Weighted-average common shares outstanding:
 
 
 
 
Basic
121.4

 
129.6

 
Diluted
122.0

 
130.4

 


See notes to the consolidated financial statements.

2


CDK Global, Inc.
Consolidated Statements of Comprehensive Income
(In millions)
(Unaudited)
 
Three Months Ended
 
September 30,
 
2019
 
2018
Net earnings
$
84.1

 
$
92.3

Other comprehensive loss:

 

Currency translation adjustments
(19.9
)
 
(6.0
)
Other comprehensive loss
(19.9
)
 
(6.0
)
Comprehensive income
64.2

 
86.3

Less: comprehensive income attributable to noncontrolling interest
2.1

 
2.0

Comprehensive income attributable to CDK
$
62.1

 
$
84.3


See notes to the consolidated financial statements.


3


CDK Global, Inc.
Consolidated Balance Sheets
(In millions, except par values)
(Unaudited)
 
September 30,
 
June 30,
 
2019
 
2019
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
313.1

 
$
311.4

Accounts receivable, net of allowances of $11.4 and $9.5, respectively
410.4

 
412.3

Current assets held for sale
103.8

 
98.6

Other current assets
175.5

 
164.8

Total current assets
1,002.8

 
987.1

Property, plant and equipment, net of accumulated depreciation of $254.5 and $250.8, respectively
131.4

 
144.8

Other assets
352.6

 
284.9

Goodwill
1,344.1

 
1,356.3

Intangible assets, net
228.0

 
225.9

Total assets
$
3,058.9

 
$
2,999.0

 
 
 
 
Liabilities and Stockholders' Deficit
 

 
 

Current liabilities:
 

 
 

Current maturities of long-term debt and finance lease liabilities
$
271.3

 
$
270.8

Accounts payable
45.9

 
57.4

Accrued expenses and other current liabilities
246.3

 
203.8

Litigation liability
65.0

 
90.0

Accrued payroll and payroll-related expenses
59.1

 
89.2

Current liabilities held for sale
7.1

 
1.9

Short-term deferred revenues
111.2

 
124.8

Total current liabilities
805.9

 
837.9

Long-term debt and finance lease liabilities
2,655.2

 
2,659.4

Long-term deferred revenues
74.2

 
68.4

Deferred income taxes
82.3

 
80.5

Other liabilities
112.9

 
67.3

Total liabilities
3,730.5

 
3,713.5

 
 
 
 
Commitments and Contingencies (Note 13)
 
 
 
 
 
 
 
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; 121.4 and 121.1 shares outstanding, respectively
1.6

 
1.6

Additional paid-in-capital
677.7

 
688.5

Retained earnings
975.3

 
911.6

Treasury stock, at cost: 38.9 and 39.2 shares, respectively
(2,312.4
)
 
(2,324.6
)
Accumulated other comprehensive income (loss)
(26.6
)
 
(6.7
)
Total CDK stockholders' deficit
(684.4
)
 
(729.6
)
Noncontrolling interest
12.8

 
15.1

Total stockholders' deficit
(671.6
)
 
(714.5
)
Total liabilities and stockholders' deficit
$
3,058.9

 
$
2,999.0



See notes to the consolidated financial statements.

4


CDK Global, Inc.
Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
 
Three Months Ended
 
September 30,
 
2019
 
2018
Cash Flows from Operating Activities:

 

Net earnings
$
84.1

 
$
92.3

Less: net earnings from discontinued operations
5.7

 
15.8

Net earnings from continuing operations
78.4

 
76.5

Adjustments to reconcile net earnings from continuing operations to cash flows provided by operating activities, continuing operations:


 


Depreciation and amortization
23.5

 
17.8

Deferred income taxes

 
7.8

Stock-based compensation expense
2.9

 
3.0

Other
6.4

 
1.4

Changes in assets and liabilities, net of effect from acquisitions of businesses:
 

 
 

Change in accounts receivable
(8.1
)
 
11.7

Change in other assets
(4.5
)
 
14.3

Change in accounts payable
(5.5
)
 
(3.6
)
Change in accrued expenses and other liabilities
(28.7
)
 
(5.3
)
Net cash flows provided by operating activities, continuing operations
64.4

 
123.6

Net cash flows provided by operating activities, discontinued operations
7.8

 
16.4

Net cash flows provided by operating activities
72.2

 
140.0

 
 
 
 
Cash Flows from Investing Activities:


 


Capital expenditures
(3.1
)
 
(8.8
)
Capitalized software
(10.3
)
 
(7.7
)
Acquisitions of businesses, net of cash acquired

 
(513.2
)
Investment in certificates of deposit
(12.0
)
 

Investment in joint venture

 
(10.0
)
Net cash flows used in investing activities, continuing operations
(25.4
)
 
(539.7
)
Net cash flows used in investing activities, discontinued operations
(2.5
)
 
(2.4
)
Net cash flows used in investing activities
(27.9
)
 
(542.1
)
 
 
 
 
Cash Flows from Financing Activities:


 


Proceeds from long-term debt

 
860.0

Repayments of long-term debt and lease liabilities
(5.2
)
 
(792.3
)
Dividends paid to stockholders
(18.2
)
 
(19.3
)
Repurchases of common stock

 
(114.1
)
Proceeds from exercises of stock options
2.7

 
1.0

Withholding tax payments for stock-based compensation awards
(5.2
)
 
(14.9
)
Dividend payments to noncontrolling owners
(4.4
)
 
(4.4
)
Payments of deferred financing costs

 
(4.4
)
Acquisition-related payments
(3.6
)
 
(1.1
)
Net cash flows used in financing activities, continuing operations
(33.9
)
 
(89.5
)
 
 
 
 
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(7.4
)
 
(3.5
)
 
 
 
 
Net change in cash, cash equivalents, and restricted cash
3.0

 
(495.1
)
Cash, cash equivalents, and restricted cash, beginning of period
321.1

 
817.1

Cash, cash equivalents, and restricted cash end of period
$
324.1

 
$
322.0

 
 
 
 
Reconciliation of cash, cash equivalents, and restricted cash to the Consolidated Balance Sheets
 
 
 
Cash and cash equivalents
$
313.1

 
$
312.8

Restricted cash in funds held for clients included in other current assets
11.0

 
9.2

Total cash, cash equivalents, and restricted cash
$
324.1

 
$
322.0





5


CDK Global, Inc.
Consolidated Statements of Cash Flows (continued)
(In millions)
(Unaudited)
 
Three Months Ended
 
September 30,
 
2019
 
2018
Supplemental Disclosures:
 
 
 
Cash paid for:
 
 
 
Income taxes and foreign withholding taxes, net of refunds, continuing operations
$
11.9

 
$
10.1

Interest
15.4

 
6.8

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Capitalized property and equipment obtained under lease
12.0

 

Lease liabilities incurred
1.0

 
0.2

Intangible assets purchased, not paid
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, 2019
 
Common Stock
 
Additional Paid-in-Capital
 
Retained Earnings
 
Treasury Stock
 
Accumulated Other Comprehensive Income (Loss)
 
Total CDK Stockholders' Deficit
 
Non-controlling Interest
 
Total Stockholders' Deficit
 
Shares Issued
 
Amount
 
 
 
 
 
 
 
Balance as of June 30, 2019
160.3

 
$
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, 2019
160.3

 
$
1.6

 
$
677.7

 
$
975.3

 
$
(2,312.4
)
 
$
(26.6
)
 
$
(684.4
)
 
$
12.8

 
$
(671.6
)




Three Months Ended September 30, 2018
 
Common Stock
 
Additional Paid-in-Capital
 
Retained Earnings
 
Treasury Stock
 
Accumulated Other Comprehensive Income
 
Total CDK Stockholders' Deficit
 
Non-controlling Interest
 
Total Stockholders'
Deficit
 
Shares Issued
 
Amount
 
 
 
 
 
 
 
Balance as of June 30, 2018
160.3

 
$
1.6

 
$
679.8

 
$
753.0

 
$
(1,810.7
)
 
$
11.5

 
$
(364.8
)
 
$
17.5

 
$
(347.3
)
Net earnings

 

 

 
90.3

 

 

 
90.3

 
2.0

 
92.3

Foreign currency translation adjustments

 

 

 

 

 
(6.0
)
 
(6.0
)
 

 
(6.0
)
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

 

 
(29.1
)
 

 
15.2

 

 
(13.9
)
 

 
(13.9
)
Dividends paid to stockholders ($0.15 per share)

 

 

 
(19.3
)
 

 

 
(19.3
)
 

 
(19.3
)
Repurchases of common stock

 

 


 

 
(114.1
)
 

 
(114.1
)
 

 
(114.1
)
Dividend payments to noncontrolling owners

 

 

 

 

 

 

 
(4.4
)
 
(4.4
)
Cumulative impact of adopting ASC 606

 

 

 
109.7

 

 
(0.4
)
 
109.3

 

 
109.3

Balance as of September 30, 2018
160.3

 
$
1.6

 
$
654.6

 
$
933.6

 
$
(1,909.6
)
 
$
5.1

 
$
(314.7
)
 
$
15.1

 
$
(299.6
)
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
A. Description of Business
CDK Global, Inc. (the "Company" or "CDK") enables end-to-end automotive commerce across the globe. For over 40 years, the Company has served automotive retailers and original equipment manufacturers ("OEMs") by providing innovative solutions that allow them to better connect, manage, analyze, and grow their businesses. The Company's solutions automate and integrate all parts of the buying process, including the 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 14, Financial Data by Segment.
The Company has committed to a plan to divest its Digital Marketing Business. The Digital Marketing Business is presented as discontinued operations. For additional information refer to Note 4, Discontinued Operations.
B. 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, 2019.
Certain prior year amounts have been reclassified to conform to the current year presentation. See the discussion in Note 4, Discontinued Operations for the impact of presenting the Digital Marketing Business as held for sale and discontinued operations.
Effective July 1, 2019, the Company adopted the Financial Accounting Standards Board ("FASB") Accounting Standards Codification , "Leases," as amended ("ASC 842"). The comparative information has not been restated and continues to be reported under the accounting standards in effect for the period presented. For additional information, refer to Note 10, Leases for a discussion of the Company's policy related to leases.
Note 2. Summary of Significant Accounting Policies
A. Funds Receivable and Funds Held for Clients and Client Fund Obligations
Funds receivable and funds held for clients represent amounts received or expected to be received from clients in advance of performing titling and registration services on behalf of those clients. These amounts are classified within other current assets on the 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 $27.8 million and $32.3 million, and funds held for clients was $11.0 million and $9.7 million as of September 30, 2019 and June 30, 2019, respectively. Client fund obligations were $38.8 million and $42.0 million as of September 30, 2019 and June 30, 2019, respectively.

8


B. Internal Use Software and Computer Software to be Sold, Leased, or Otherwise Marketed
The Company’s policy provides for the capitalization of external direct costs of materials and services associated with developing or obtaining internal use computer software. In addition, the Company’s policy also provides for the capitalization of certain payroll and payroll-related costs for employees who are directly associated with the internal use computer software projects. The amount of capitalizable payroll costs with respect to these employees is limited to the time directly spent on such projects. Costs associated with preliminary project stage activities, training, maintenance, and all other post-implementation stage activities are expensed as incurred. The Company also expenses internal costs related to minor upgrades and enhancements, as it is impracticable to separate these costs from normal maintenance activities. The Company amortizes internal use software typically over a three to five year life.
The Company's policy provides for the capitalization of certain costs of computer software to be sold, leased, or otherwise marketed. The Company's policy provides for the capitalization of all software production costs upon reaching technological feasibility for a specific product. Technological feasibility is attained when software products have a completed working model whose consistency with the overall product design has been confirmed by testing. Costs incurred prior to the establishment of technological feasibility are expensed as incurred. The establishment of technological feasibility requires judgment by management and in many instances is only attained a short time prior to the general release of the software. Maintenance-related costs are expensed as incurred.
Pursuant to these policies, the Company incurred expenses to research, develop, and deploy new and enhanced solutions of $22.1 million and $16.7 million for the three months ended September 30, 2019 and 2018, respectively. These expenses were classified within cost of revenues on the consolidated statements of operations. Additionally, the Company had cash flows used for qualifying capitalized software development cost of $10.3 million and $7.7 million for the three months ended September 30, 2019 and 2018, respectively.
C. Fair Value of Financial Instruments
The Company determines the fair value of financial instruments in accordance with accounting standards pertaining to fair value measurements. Such standards define fair value and establish a framework for measuring fair value in accordance with GAAP. Cash and cash equivalents, accounts receivable, other current assets, accounts payable, and other current liabilities are reflected in the consolidated balance sheets at cost, which approximates fair value due to the short-term nature of these instruments. The carrying value of the Company's revolving credit facility and term loan facilities (as described in Note 9), including accrued interest, approximates fair value based on the Company's current estimated incremental borrowing rate for similar types of arrangements. The approximate aggregate fair value of the Company's senior notes as of September 30, 2019 was $2,463.0 million, based on quoted market prices for the same or similar instruments compared to a carrying value of $2,350.0 million. The term loan facilities and senior notes are considered Level 2 fair value measurements in the fair value hierarchy.
Note 3. New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-15, "Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," which aligns the accounting for implementation cost incurred in a hosting arrangement that is a service contract with the accounting for implementation costs incurred to develop or obtain internal-use software under ASC 350-40, in order to determine which costs to capitalize and recognize as an asset. ASU 2018-15 is effective for fiscal years, and interim periods beginning after December 15, 2019, and can be applied either prospectively to implementation costs incurred after the date of adoption or retrospectively to all arrangements. Early adoption is permitted. The Company early adopted this standard on July 1, 2019, using the prospective approach and applied this guidance to all implementation costs incurred after the date of adoption.
In February 2016, the FASB issued ASC 842. Refer to Note 10, Leases, for the required disclosures related to the adoption of this standard.
Recently Issued Accounting Pronouncements    
In November 2018, the FASB issued ASU 2018-18, "Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606" to resolve the diversity in practice concerning the manner in which entities account for transactions based on their assessment of the economics of a collaborative arrangement. ASU 2018-18 is effective

9


for fiscal years, and interim periods beginning after December 15, 2019. Early adoption is permitted. The Company is currently in the process of evaluating the potential impact of the adoption of ASU 2018-18 on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments," which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019. The Company is currently in the process of evaluating the potential impact of the adoption of ASU 2016-13 on its consolidated financial statements.
Note 4. Discontinued Operations
In June 2019, the Company committed to a plan to divest the Digital Marketing Business which comprises: (a) all of the assets of ANA; and (b) certain assets of CDKNA related to mobile advertising solutions and website services, in order to focus on its core suite of SaaS software and technology solutions for the markets it serves through the CDKNA and CDKI segments.
The Company's decision to divest the 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. The Company intends to complete its divestiture of the Digital Marketing Business during the current fiscal year. This action resulted in the reclassification of the assets and liabilities comprising the Digital Marketing Business as assets and liabilities held for sale in the accompanying consolidated balance sheets, and a corresponding adjustment to consolidated statements of operations and cash flows to reflect discontinued operations, for all periods presented. The net of assets and liabilities held-for-sale related to discontinued operations are required to be recorded at the lower of carrying value or fair value less costs to sell.
The following table summarizes the comparative financial results of discontinued operations which are presented as Net earnings from discontinued operations on the Consolidated Statements of Operations:
 
 
Three months Ended September 30,
 
 
2019
 
2018
 
Revenues
 
$
85.7

 
$
108.2

 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
Cost of revenues
 
67.0

 
78.4

 
Selling, general and administrative expenses
 
11.1

 
7.1

 
Restructuring expenses
 

 
1.4

 
Total expenses
 
78.1

 
86.9

 
Earnings before income taxes
 
7.6

 
21.3

 
 
 
 
 
 
 
Provision for income taxes
 
(1.9
)
 
(5.5
)
 
 
 
 
 
 
 
Net earnings from discontinued operations
 
$
5.7

 
$
15.8

 

10


The total assets and liabilities held for sale related to discontinued operations are stated separately in the consolidated balance sheets and comprised the following items:
 
 
September 30, 2019
 
June 30, 2019
Assets:
 
 
 
 
Prepaid and other current assets
 
$
1.0

 
$
1.1

Property, plant and equipment, net
 
2.3

 
2.3

Goodwill
 
59.4

 
59.4

Intangible assets, net
 
38.1

 
35.6

Other assets
 
3.0

 
0.2

Total current assets held for sale
 
$
103.8

 
$
98.6

 
 
 
 
 
Liabilities:
 
 
 
 
Deferred revenues
 
$
1.6

 
$
0.8

Accrued expenses and other current liabilities
 
4.7

 
0.7

Other liabilities
 
0.8

 
0.4

Total current liabilities held for sale
 
$
7.1

 
$
1.9



All assets and liabilities held for sale were classified as current in the September 30, 2019 and June 30, 2019 Consolidated Balance Sheets as it was probable that the sale would occur within one year.
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, 2019
 
June 30, 2019
Accounts receivable (including unbilled receivables)
$
410.4

 
$
412.3

 
 
 
 
Short-term contract assets (included in other current assets)
29.8

 
29.9

Long-term contract assets (included in other assets)
24.0

 
20.2

Short-term contract liabilities (included in short-term deferred revenue)
(111.2
)
 
(124.8
)
Long-term contract liabilities (included in long-term deferred revenue)
(74.2
)
 
(68.4
)
Net contract assets/(liabilities)
$
(131.6
)
 
$
(143.1
)

During the three months ended September 30, 2019, the Company recognized $119.8 million of revenue upon satisfaction of performance obligations and invoiced and reclassified $22.5 million to accounts receivable. These amounts were included in the net contract assets or liabilities balance as of June 30, 2019. The Company had no asset impairment charges related to contract assets in the period presented.

11


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, 2019, 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, 2019, the Company had $2.9 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 $860.0 million of the remaining performance obligation as revenue during the remainder of fiscal year ending June 30, 2020 ("fiscal 2020"), $810.0 million for the fiscal year ended June 30, 2021, $600.0 million for the fiscal year ended June 30, 2022, and $360.0 million for the fiscal year ended June 30, 2023. The Company expect to recognize the remaining $250.0 million as revenue 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 within selling, general and administrative expenses when incurred. Costs to fulfill contracts are capitalized when such costs are direct, incremental, 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 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, 2019 and June 30, 2019, the Company capitalized contract acquisition and fulfillment costs from continuing operations of $202.3 million and $200.4 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, 2019 and 2018, the Company recognized cost amortization of $20.1 million and $19.5 million, respectively, and there were no significant impairment losses.
Note 6. Restructuring
During the fiscal year ended June 30, 2015, the Company initiated a three-year business transformation plan intended to increase operating efficiency and improve the Company's cost structure within its global operations. The business transformation plan was completed at the end of the fiscal 2019. Accruals for restructuring expenses were included within accrued expenses and other current liabilities on the consolidated balance sheets as of September 30, 2019 and June 30, 2019. The following table summarizes the activity for the restructuring accrual for the three months ended September 30, 2019:
 
Employee-Related Costs
 
Contract Termination Costs
 
Total Costs
Balance as of June 30, 2019
$
9.4

 
$
0.1

 
$
9.5

Cash payments
(3.1
)
 

 
(3.1
)
Non-cash and other adjustments
(0.4
)
 
(0.1
)
 
(0.5
)
Foreign exchange
(0.2
)
 

 
(0.2
)
Balance as of September 30, 2019
$
5.7

 
$

 
$
5.7



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 upon the weighted-average number of shares of the Company's common stock

12


outstanding during the reporting periods. Diluted earnings per share also reflects the dilutive effect of unexercised in-the-money stock options and unvested restricted stock.
Holders of certain stock-based compensation awards are eligible to receive dividends as described in Note 11. Net earnings allocated to participating securities were not significant for the three months ended September 30, 2019 and 2018.
The following table summarizes the components of basic and diluted earnings per share:
 
Three Months Ended
 
September 30,

2019
 
2018
Net earnings from continuing operations attributable to CDK
$
76.3

 
$
74.5

Net earnings from discontinued operations
5.7

 
15.8

Net earnings attributable to CDK
$
82.0

 
$
90.3


 
 
 
Weighted-average shares outstanding:
 
 
 
Basic
121.4

 
129.6

Effect of employee stock options
0.1

 
0.3

Effect of employee restricted stock
0.5

 
0.5

Diluted
122.0

 
130.4


 
 
 
Net earnings attributable to CDK per share - basic:
 
 
 
Continuing operations
$
0.63

 
$
0.58

Discontinued operations
0.05

 
0.12

Total net earnings attributable to CDK per share - basic
$
0.68

 
$
0.70

 
 
 
 
Net earnings attributable to CDK per share - diluted:
 
 
 
Continuing operations
$
0.62

 
$
0.57

Discontinued operations
0.05

 
0.12

Total net earnings attributable to CDK per share - diluted
$
0.67

 
$
0.69


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,
 
2019
 
2018
Stock-based awards
0.7

 
0.2



Note 8. Goodwill and Intangible Assets, Net
Changes in goodwill for the three months ended September 30, 2019 were as follows:
 
CDKNA
 
CDKI
 
Total
Balance as of June 30, 2019
$
1,000.3

 
$
356.0

 
$
1,356.3

Currency translation adjustments
(0.3
)
 
(11.9
)
 
(12.2
)
Balance as of September 30, 2019
$
1,000.0

 
$
344.1

 
$
1,344.1


13



The Company performs its annual impairment testing for goodwill balances as of April 1 each year; however, the Company may test for impairment between annual tests if an event occurs or circumstances change that indicate that the fair value of the reporting unit may fall below its carrying amount. During the first quarter of fiscal 2020, there were no events or changes in circumstances that indicated a need to reassess impairment before the annual test date.
Components of intangible assets, net from continuing operations were as follows:
 
September 30, 2019
 
June 30, 2019
 
Original Cost
 
Accumulated Amortization
 
Intangible Assets, net
 
Original Cost
 
Accumulated Amortization
 
Intangible Assets, net
Software
$
261.9

 
$
(133.1
)
 
$
128.8

 
$
250.8

 
$
(126.7
)
 
$
124.1

Customer lists
195.3

 
(101.2
)
 
94.1

 
196.6

 
(100.2
)
 
96.4

Trademarks
7.5

 
(3.2
)
 
4.3

 
7.5

 
(3.1
)
 
4.4

Other intangibles
3.2

 
(2.4
)
 
0.8

 
3.2

 
(2.2
)
 
1.0

 
$
467.9

 
$
(239.9
)
 
$
228.0

 
$
458.1

 
$
(232.2
)
 
$
225.9


Other intangibles primarily consist of purchased rights, covenants, and patents (acquired directly or through acquisitions). All of the intangible assets have finite lives and, as such, are subject to amortization. The weighted-average remaining useful life of intangible assets is 7 years (3 years for software and software licenses, 13 years for customer lists, and 6 years for trademarks).
Amortization of intangible assets was $9.4 million and $5.6 million for the three months ended September 30, 2019 and 2018, respectively.
Estimated amortization expenses of the Company's existing intangible assets as of September 30, 2019 were as follows:
 
Amount
Nine months ending June 30, 2020
$
54.6

Twelve months ending June 30, 2021
41.7

Twelve months ending June 30, 2022
27.4

Twelve months ending June 30, 2023
20.2

Twelve months ending June 30, 2024
15.6

Twelve months ending June 30, 2025
12.9

Thereafter
55.6

 
$
228.0




14



Note 9. Debt
Debt was comprised of the following:
 
September 30, 2019
 
June 30, 2019
Revolving credit facility
$

 
$

Three year term loan facility, due 2021
300.0

 
300.0

Five year term loan facility, due 2023
285.0

 
288.8

3.30% senior notes, due 2019
250.0

 
250.0

4.50% senior notes, due 2024
500.0

 
500.0

5.875% senior notes, due 2026
500.0

 
500.0

4.875% senior notes, due 2027
600.0

 
600.0

5.250% senior notes due 2029
500.0

 
500.0

Finance lease liabilities
18.7

 
19.9

Unamortized debt financing costs
(27.2
)
 
(28.5
)
Total debt and finance lease liabilities
$
2,926.5

 
$
2,930.2

Current maturities of long-term debt and finance lease liabilities
271.3

 
270.8

Total long-term debt and finance lease liabilities
$
2,655.2

 
$
2,659.4


Revolving Credit Facility
On August 17, 2018, the Company entered into a five-year senior unsecured revolving credit facility (the "revolving credit facility") which was undrawn as of September 30, 2019 and June 30, 2019. 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. In addition, the revolving credit facility contains an accordion feature that allows for an increase in the available borrowing capacity of up to $100.0 million, subject to the agreement of lenders under the revolving credit facility or other financial institutions that become lenders to extend commitments as part of the increased revolving credit facility. Borrowings under the revolving credit facility are available for general corporate purposes. The revolving credit facility will mature on August 17, 2023, subject to no more than two one-year extensions if lenders holding a majority of the revolving commitments approve such extensions.
The revolving credit facility is unsecured and loans thereunder bear interest, at the Company's option, at (a) the rate at which deposits in the applicable currency are offered in the London interbank market (or, in the case of borrowings in Euro, the European interbank market) plus margins varying from 1.250% to 2.375% per annum based on the Company's senior, unsecured non-credit-enhanced, long-term debt ratings from Standard & Poor's Ratings Group and Moody's Investors Services Inc. (the "Ratings") or (b) solely in the case of U.S. dollar loans, (i) the highest of (A) the prime rate of Bank of America, N.A., (B) a rate equal to the average of the overnight federal funds rate with a maturity of one day plus a margin of 0.500% per annum, and (C) the rate at which dollar deposits are offered in the London interbank market for a one-month interest period plus 1.000% plus (ii) margins varying from 0.250% to 1.375% per annum based on the Ratings. The unused portion of the revolving credit facility is subject to commitment fees ranging from 0.150% to 0.350% per annum based on the Ratings.
Term Loan Facilities
On August 17, 2018, the Company entered into a term loan agreement which provided the Company with an aggregate of $600.0 million of term loans comprised of a $300.0 million term loan that will mature on August 17, 2021 (the "three year term loan facility") and a $300.0 million term loan that will mature on August 17, 2023 (the "five year term loan facility"). The aggregate principal amount of the three year term loan facility will be repayable in full on the maturity date. The five year term loan facility is subject to amortization in equal quarterly installments of 1.25% of the aggregate principal amount made on the closing date, with any unpaid principal amount to be due and payable on the maturity date. The three year term loan facility and the five year term loan facility are together referred to as the "term loan facilities." The interest rate per annum on the three year term loan facility and the five year term loan facility was 3.55% and 3.68%, respectively, as of September 30, 2019.
The three year term loan facility and the five year term loan facility are unsecured and bear interest (a) with respect to the three year term loan facility, (i) at the rate at which deposits in the applicable currency are offered in the London interbank

15



market plus margins varying from 1.125% to 2.250% per annum based on the Company’s senior, unsecured, non-credit-enhanced, long-term debt ratings from the Ratings or (ii) the highest of (X) a rate equal to the average of the overnight federal funds rate with a maturity of one day plus a margin of 0.50% per annum, (Y) the prime rate of Bank of America, N.A. and (Z) the rate at which dollar deposits are offered in the London interbank market for a one-month interest period plus 1.00%, plus margins varying from 0.125% to 1.250% per annum based on the Ratings, and (b) with respect to the five year term loan facility (i) at the rate at which deposits in the applicable currency are offered in the London interbank market plus margins varying from 1.250% to 2.375% per annum based on the Company’s Ratings or (ii) the highest of (X) a rate equal to the average of the overnight federal funds rate with a maturity of one day plus a margin of 0.50% per annum, (Y) the prime rate of Bank of America, N.A. and (Z) the rate at which dollar deposits are offered in the London interbank market for a one-month interest period, plus 1.00%, plus margins varying from 0.250% to 1.375% per annum based on the Ratings.
London Interbank Market (“LIBOR”) Transition
LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform. These reforms and other pressure may cause LIBOR to disappear entirely or to perform differently than in the past. It is expected that certain banks will stop reporting information used to set LIBOR at the end of 2021 when their reporting obligations cease. This will effectively end the usefulness of LIBOR and may end its publication. The consequences of these developments cannot be entirely predicted but, as noted above, could impact the interest rates of the revolving credit facility and the five year term loan. If LIBOR is no longer widely available, the Company will pursue alternative interest rate calculations in its revolving credit facility and five year term loan agreements. However, if no alternative rate can be determined, the LIBOR rate component will no longer be utilized in determining the rates. As of September 30, 2019 and June 30, 2019, the hypothetical impact to the Company’s interest rates without utilizing the LIBOR rate component would not have had a material effect on either rate, thus the Company does not believe the discontinuation of LIBOR will have a material impact on itsfinancial position and results of operations.

Restrictive Covenants and Other Matters
The revolving credit facility, the three year term loan facility, and the five year term loan facility are together referred to as the "credit facilities." The credit facilities contain various covenants and restrictive provisions that limit the Company's subsidiaries' ability to incur additional indebtedness, the Company's ability to consolidate or merge with other entities, and the Company's subsidiaries' ability to incur liens, enter into sale and leaseback transactions, and enter into agreements restricting the ability of the Company's subsidiaries to pay dividends. If the Company fails to perform the obligations under these and other covenants, the revolving credit facility could be terminated and any outstanding borrowings, together with accrued interest, under the credit facilities could be declared immediately due and payable. The credit facilities also have, in addition to customary events of default, an event of default triggered by the acceleration of the maturity of any other indebtedness the Company may have in an aggregate principal amount in excess of $75.0 million.
The credit facilities also contain financial covenants that will provide that (i) the ratio of total consolidated indebtedness to consolidated EBITDA shall not exceed 3.75 to 1.00 and (ii) the ratio of consolidated EBITDA to consolidated interest expense shall be a minimum of 3.00 to 1.00.
Senior Notes
On October 14, 2014, the Company completed an offering of 3.30% unsecured senior notes with a $250.0 million aggregate principal amount due in 2019 (the "2019 notes") and 4.50% unsecured senior notes with a $500.0 million aggregate principal amount due in 2024 (the "2024 notes"). The issuance price of the 2019 and 2024 notes was equal to the stated value. Interest is payable semi-annually on April 15 and October 15 of each year, and payment commenced on April 15, 2015. The interest rate payable on each applicable series of 2019 and 2024 notes is subject to adjustment from time to time if the credit ratings assigned to any series of 2019 and 2024 notes by the rating agencies is downgraded (or subsequently upgraded). The 2019 notes matured on October 15, 2019, and the 2024 notes will mature on October 15, 2024. The 2024 notes are redeemable at the Company's option prior to July 15, 2024 at a redemption price equal to the greater of (i) 100% of the aggregate principal amount of the 2024 notes to be redeemed, and (ii) the sum of the present value of the remaining scheduled payments (as defined in the agreement), plus accrued and unpaid interest thereon. Subsequent to July 15, 2024, the redemption price for the 2024 notes will equal 100% of the aggregate principal amount of the notes redeemed, plus accrued and unpaid interest thereon.
On June 18, 2018, the Company completed an offering of 5.875% unsecured senior notes with a $500.0 million aggregate principal amount due in 2026 (the "2026 notes"). The issuance price of the 2026 notes was equal to the stated value. Interest is payable semi-annually on June 15 and December 15 of each year, and payment will commence on December 15, 2018. The 2026 notes will mature on June 15, 2026. The 2026 notes are redeemable at the Company's option prior to June 15,

16



2021 in whole or in part at a redemption price equal to 100% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, plus the applicable "make-whole" premium. Subsequent to June 15, 2021, the Company may redeem the 2026 notes at a price equal to: (i) 102.938% of the aggregate principal amount of the 2026 notes redeemed prior to June 15, 2022; (ii) 101.958% of the aggregate principal amount of the notes redeemed on or after June 15, 2022 but prior to June 15, 2023; (iii) 100.979% of the aggregate principal amount of the 2026 notes redeemed on or after June 15, 2023 but prior to June 15, 2024; and (iv) 100.000% of the aggregate principal amount of the 2026 notes redeemed thereafter.
On May 15, 2017, the Company completed an offering of 4.875% unsecured senior notes with a $600.0 million aggregate principal amount due in 2027 (the "2027 notes"). The issuance price of the 2027 notes was equal to the stated value. Interest is payable semi-annually on June 1 and December 1 of each year, and payment commenced on December 1, 2017. The 2027 notes will mature on June 1, 2027. The 2027 notes are redeemable at the Company's option prior to June 1, 2022 in whole or in part at a redemption price equal to 100% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, plus the applicable "make-whole" premium. Subsequent to June 1, 2022, the Company may redeem the 2027 notes at a price equal to: (i) 102.438% of the aggregate principal amount of the 2027 notes redeemed prior to June 1, 2023; (ii) 101.625% of the aggregate principal amount of the notes redeemed on or after June 1, 2023 but prior to June 1, 2024; (iii) 100.813% of the aggregate principal amount of the 2027 notes redeemed on or after June 1, 2024 but prior to June 1, 2025; and (iv) 100.000% of the aggregate principal amount of the 2027 notes redeemed thereafter.

On May 2, 2019, the Company completed an offering of 5.250% unsecured senior notes with a $500.0 million aggregate principal amount due in 2029 (the "2029 notes," together with the "2027 notes," "2026 notes," "2024 notes," and "2019 notes" are the "senior notes"). The issuance price of the 2029 notes was equal to the stated value. Interest is payable semi-annually on March 15 and September 15 of each year, and payment will commence on September 15, 2019. The 2029 notes will mature on May 15, 2029. The 2029 notes are redeemable at the Company's option prior to May 15, 2024 in whole or in part at a redemption price equal to 100% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, plus the applicable "make-whole" premium. Subsequent to May 15, 2024, the Company may redeem the 2029 notes at a price equal to: (i) 102.625% of the aggregate principal amount of the 2029 notes redeemed prior to May 15, 2025; (ii) 101.750% of the aggregate principal amount of the notes redeemed on or after May 15, 2025 but prior to May 15, 2026; (iii) 100.875% of the aggregate principal amount of the 2029 notes redeemed on or after May 15, 2026 but prior to May 15, 2027; and (iv) 100.000% of the aggregate principal amount of the 2029 notes redeemed thereafter.
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.
In November 2016, Moody's and S&P lowered their credit ratings on the senior notes to Ba1 (Stable Outlook) from Baa3 (Negative Outlook) and to BB+ (Stable Outlook) from BBB- (Negative Outlook), respectively. The downgrades triggered interest rate adjustments for the 2019 and 2024 notes. Interest rates for the 2019 and 2024 notes increased to 3.80% from 3.30% and to 5.00% from 4.50%, respectively, effective October 15, 2016. On August 13, 2019, S&P affirmed their rating at BB+ but revised their outlook to Negative from Stable.
Finance Lease Liabilities
The Company has lease agreements for equipment, which are classified as finance lease liabilities. Refer to Note 10, Leases for scheduled maturities and additional information relating to finance lease liabilities.
Unamortized Debt Financing Costs
As of September 30, 2019 and June 30, 2019, gross debt issuance costs related to debt instruments were $41.3 million and $41.3 million, respectively. Accumulated amortization was $14.1 million and $12.8 million as of September 30, 2019 and June 30, 2019, respectively. Debt financing costs are amortized over the terms of the related debt instruments and recorded within interest expense on the consolidated statements of operations.

17



The Company's aggregate scheduled maturities of the long-term debt as of September 30, 2019 were as follows:
 
Amount
Twelve months ending September 30, 2020
$
265.0

Twelve months ending September 30, 2021
315.0

Twelve months ending September 30, 2022
15.0

Twelve months ending September 30, 2023
240.0

Twelve months ending September 30, 2024

Thereafter
2,100.0

Total debt
2,935.0

Unamortized debt financing costs
(27.2
)
Total debt, net of unamortized debt financing costs
$
2,907.8


Note 10. Leases
Adoption of ASC 842
On July 1, 2019, the Company adopted ASC 842 using the modified retrospective transition method whereby prior comparative periods have not been restated and continue to be reported under the accounting standards in effect for the prior period. The Company elected the package of practical expedients permitted under the transition guidance for all leases (where the Company is a lessee or a lessor), which allowed the Company to adopt ASC 842 without reassessing whether arrangements contain leases, the lease classification, and the determination of initial direct cost.
Upon adoption on July 1, 2019, the Company recognized right-of-use ("ROU") assets inclusive of finance leases, net of prepaids, incentives and impairments, of $68.2 million, and lease liabilities of $76.8 million in the Company's consolidated balance sheets. At adoption, there was no impact on the Company’s statements of operations, cash flows, and stockholders' deficit.
Significant judgments
The Company has lease arrangements where the Company acts as either a lessee or a lessor. The Company applies significant 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 significant 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 2019 and 2027. 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 sheet. The Company records all other leases on the balance sheet with 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 within 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.

18



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.
For the three months ended September 30, 2019, the Company recorded lease expense of $4.6 million within cost of revenues, $5.1 million within selling, general and administrative expenses, and $0.2 million within interest expense on the consolidated statements of operations. The following table summarizes the components of net lease expense:
 
Three months ended September 30, 2019
Leases classified as finance:
 
Amortization of ROU assets
$
1.7

Interest on lease liabilities
0.2

Leases classified as operating:
 
Lease expense
4.7

Sublease income (gross basis)
(0.1
)
Unclassified leases:
 
Short-term lease expense (including lease term of one month or less)