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Leases

6 Months Ended

Dec. 31, 2019

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.

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 and six months ended December 31, 2019, the Company recorded lease expense of $4.1 million and $9.4 million within cost of revenues, respectively, $4.4 million and $8.4 million within selling, general and administrative expenses, respectively, and $0.2 million and $0.4 million within interest expense, respectively, on the consolidated statements of operations. The following table summarizes the components of net lease expense:



	Three Months Ended December 31, 2019			Six Months Ended December 31, 2019
Leases classified as finance:
Amortization of ROU assets	$	1.3		$	3.0
Interest on lease liabilities	0.2			0.4
Leases classified as operating:
Lease expense	4.0			8.7
Sublease income (gross basis)	(0.3		)	(0.4		)
Unclassified leases:
Short-term lease expense (including lease term of one month or less)	0.8			2.0
Variable lease expense	2.3			4.5
Total net lease expense	$	8.3		$	18.2

For the three and six months ended December 31, 2018, rent expense related to operating leases under previous accounting guidance was $7.6 million and $17.2 million, respectively. The following table presents supplemental information related to leases:



	Six Months Ended December 31, 2019
Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows paid for operating leases	$	9.1
Operating cash flows paid for interest portion of finance leases	0.4
Finance cash flows paid for principal portion of finance leases	3.0
ROU assets obtained in exchange for new operating lease liabilities	18.8
ROU assets obtained in exchange for new finance lease liabilities	0.1

As of December 31, 2019, the weighted-average remaining lease term was 5.4 years for operating leases and 3 years for finance leases; and the weighted-average discount rate was 3.7% for operating leases and 4.6% for finance leases. The following table presents supplemental balance sheet information related to leases as of December 31, 2019:



	Operating Leases		Finance Leases
ROU assets, net ⁽¹⁾	$	59.3	$	16.4

Lease liabilities, current ⁽²⁾	9.3		6.1
Lease liabilities, non-current ⁽³⁾	57.1		11.0
Total lease liabilities	$	66.4	$	17.1

⁽¹⁾ Included in other assets for operating leases and property, plant and equipment, net for finance leases on the consolidated balance sheets.

⁽²⁾ Included in accrued expenses and other current liabilities for operating leases and current maturities of long-term debt and finance lease liabilities for finance leases on the consolidated balance sheets.

⁽³⁾ Included in other liabilities for operating leases and long-term debt and finance lease liabilities for finance leases on the consolidated balance sheets.

The following table presents maturity analysis of lease liabilities as of December 31, 2019:



	Operating Leases			Finance Leases
Six months ending June 30, 2020	$	10.0		$	3.5
Twelve months ending June 30, 2021	17.8			6.1
Twelve months ending June 30, 2022	15.5			5.1
Twelve months ending June 30, 2023	11.4			3.5
Twelve months ending June 30, 2024	9.2			0.1
Twelve months ending June 30, 2025	7.7			—
Thereafter	10.5			—
Total undiscounted lease payments	$	82.1		$	18.3
Less: imputed interest	(7.8		)	(1.2		)
Less: lease incentive receivable	(7.9		)	—
Total lease liabilities	$	66.4		$	17.1

The Company did not have any material minimum lease payments for executed leases that have not yet commenced as of December 31, 2019.

Minimum operating lease commitments as of June 30, 2019 and accounted for under previous lease guidance were as follows:



	Amount
Twelve months ending June 30, 2020	$	16.7
Twelve months ending June 30, 2021	13.9
Twelve months ending June 30, 2022	12.5
Twelve months ending June 30, 2023	8.9
Twelve months ending June 30, 2024	6.9
Thereafter	15.8
Total minimum operating lease liabilities	$	74.7

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 within the consolidated statements of operations:



	Three Months Ended December 31, 2019			Six Months Ended December 31, 2019
Revenues ⁽¹⁾	$	5.9		$	15.8
Cost of revenues	(7.4		)	(15.2		)
Interest income	0.2			0.2
Total lease income (loss)	$	(1.3	)	$	0.8

⁽¹⁾Revenues from lease components are included within Other revenue

As of December 31, 2019, the carrying value of the Company’s lease receivable reported in accounts receivable, net and other assets within the consolidated balance sheets was $4.1 million and $10.3 million, respectively. The following table presents maturity analysis of the lease payments the Company expects to receive as of December 31, 2019:



	Amount
Six months ending June 30, 2020	$	2.3
Twelve months ending June 30, 2021	4.2
Twelve months ending June 30, 2022	3.7
Twelve months ending June 30, 2023	2.8
Twelve months ending June 30, 2024	2.3
Twelve months ending June 30, 2025	0.6
Thereafter	—
Total undiscounted cash flows to be received	$	15.9
Less: imputed interest	1.5
Total lease receivable	$	14.4

Leases



	Three Months Ended December 31, 2019			Six Months Ended December 31, 2019
Leases classified as finance:
Amortization of ROU assets	$	1.3		$	3.0
Interest on lease liabilities	0.2			0.4
Leases classified as operating:
Lease expense	4.0			8.7
Sublease income (gross basis)	(0.3		)	(0.4		)
Unclassified leases:
Short-term lease expense (including lease term of one month or less)	0.8			2.0
Variable lease expense	2.3			4.5
Total net lease expense	$	8.3		$	18.2



	Six Months Ended December 31, 2019
Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows paid for operating leases	$	9.1
Operating cash flows paid for interest portion of finance leases	0.4
Finance cash flows paid for principal portion of finance leases	3.0
ROU assets obtained in exchange for new operating lease liabilities	18.8
ROU assets obtained in exchange for new finance lease liabilities	0.1



	Operating Leases		Finance Leases
ROU assets, net ⁽¹⁾	$	59.3	$	16.4

Lease liabilities, current ⁽²⁾	9.3		6.1
Lease liabilities, non-current ⁽³⁾	57.1		11.0
Total lease liabilities	$	66.4	$	17.1

⁽¹⁾ Included in other assets for operating leases and property, plant and equipment, net for finance leases on the consolidated balance sheets.

⁽³⁾ Included in other liabilities for operating leases and long-term debt and finance lease liabilities for finance leases on the consolidated balance sheets.

The following table presents maturity analysis of lease liabilities as of December 31, 2019:



	Operating Leases			Finance Leases
Six months ending June 30, 2020	$	10.0		$	3.5
Twelve months ending June 30, 2021	17.8			6.1
Twelve months ending June 30, 2022	15.5			5.1
Twelve months ending June 30, 2023	11.4			3.5
Twelve months ending June 30, 2024	9.2			0.1
Twelve months ending June 30, 2025	7.7			—
Thereafter	10.5			—
Total undiscounted lease payments	$	82.1		$	18.3
Less: imputed interest	(7.8		)	(1.2		)
Less: lease incentive receivable	(7.9		)	—
Total lease liabilities	$	66.4		$	17.1

The Company did not have any material minimum lease payments for executed leases that have not yet commenced as of December 31, 2019.

Minimum operating lease commitments as of June 30, 2019 and accounted for under previous lease guidance were as follows:



	Amount
Twelve months ending June 30, 2020	$	16.7
Twelve months ending June 30, 2021	13.9
Twelve months ending June 30, 2022	12.5
Twelve months ending June 30, 2023	8.9
Twelve months ending June 30, 2024	6.9
Thereafter	15.8
Total minimum operating lease liabilities	$	74.7

The following summarizes components of net lease income reported within the consolidated statements of operations:



	Three Months Ended December 31, 2019			Six Months Ended December 31, 2019
Revenues ⁽¹⁾	$	5.9		$	15.8
Cost of revenues	(7.4		)	(15.2		)
Interest income	0.2			0.2
Total lease income (loss)	$	(1.3	)	$	0.8

⁽¹⁾Revenues from lease components are included within Other revenue



	Amount
Six months ending June 30, 2020	$	2.3
Twelve months ending June 30, 2021	4.2
Twelve months ending June 30, 2022	3.7
Twelve months ending June 30, 2023	2.8
Twelve months ending June 30, 2024	2.3
Twelve months ending June 30, 2025	0.6
Thereafter	—
Total undiscounted cash flows to be received	$	15.9
Less: imputed interest	1.5
Total lease receivable	$	14.4

Leases



	Three Months Ended December 31, 2019			Six Months Ended December 31, 2019
Leases classified as finance:
Amortization of ROU assets	$	1.3		$	3.0
Interest on lease liabilities	0.2			0.4
Leases classified as operating:
Lease expense	4.0			8.7
Sublease income (gross basis)	(0.3		)	(0.4		)
Unclassified leases:
Short-term lease expense (including lease term of one month or less)	0.8			2.0
Variable lease expense	2.3			4.5
Total net lease expense	$	8.3		$	18.2



	Six Months Ended December 31, 2019
Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows paid for operating leases	$	9.1
Operating cash flows paid for interest portion of finance leases	0.4
Finance cash flows paid for principal portion of finance leases	3.0
ROU assets obtained in exchange for new operating lease liabilities	18.8
ROU assets obtained in exchange for new finance lease liabilities	0.1



	Operating Leases		Finance Leases
ROU assets, net ⁽¹⁾	$	59.3	$	16.4

Lease liabilities, current ⁽²⁾	9.3		6.1
Lease liabilities, non-current ⁽³⁾	57.1		11.0
Total lease liabilities	$	66.4	$	17.1

⁽¹⁾ Included in other assets for operating leases and property, plant and equipment, net for finance leases on the consolidated balance sheets.

⁽³⁾ Included in other liabilities for operating leases and long-term debt and finance lease liabilities for finance leases on the consolidated balance sheets.

The following table presents maturity analysis of lease liabilities as of December 31, 2019:



	Operating Leases			Finance Leases
Six months ending June 30, 2020	$	10.0		$	3.5
Twelve months ending June 30, 2021	17.8			6.1
Twelve months ending June 30, 2022	15.5			5.1
Twelve months ending June 30, 2023	11.4			3.5
Twelve months ending June 30, 2024	9.2			0.1
Twelve months ending June 30, 2025	7.7			—
Thereafter	10.5			—
Total undiscounted lease payments	$	82.1		$	18.3
Less: imputed interest	(7.8		)	(1.2		)
Less: lease incentive receivable	(7.9		)	—
Total lease liabilities	$	66.4		$	17.1

The Company did not have any material minimum lease payments for executed leases that have not yet commenced as of December 31, 2019.

Minimum operating lease commitments as of June 30, 2019 and accounted for under previous lease guidance were as follows:



	Amount
Twelve months ending June 30, 2020	$	16.7
Twelve months ending June 30, 2021	13.9
Twelve months ending June 30, 2022	12.5
Twelve months ending June 30, 2023	8.9
Twelve months ending June 30, 2024	6.9
Thereafter	15.8
Total minimum operating lease liabilities	$	74.7

The following summarizes components of net lease income reported within the consolidated statements of operations:



	Three Months Ended December 31, 2019			Six Months Ended December 31, 2019
Revenues ⁽¹⁾	$	5.9		$	15.8
Cost of revenues	(7.4		)	(15.2		)
Interest income	0.2			0.2
Total lease income (loss)	$	(1.3	)	$	0.8

⁽¹⁾Revenues from lease components are included within Other revenue



	Amount
Six months ending June 30, 2020	$	2.3
Twelve months ending June 30, 2021	4.2
Twelve months ending June 30, 2022	3.7
Twelve months ending June 30, 2023	2.8
Twelve months ending June 30, 2024	2.3
Twelve months ending June 30, 2025	0.6
Thereafter	—
Total undiscounted cash flows to be received	$	15.9
Less: imputed interest	1.5
Total lease receivable	$	14.4