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Leases | 9 Months Ended
--- | ---
Sep. 30, 2019
Leases [Abstract] |
Leases | Leases On January 1, 2019 the Company adopted Accounting Standards Codification Topic 842 (ASC 842), Leases. This new guidance requires a lessee to recognize assets and liabilities on the balance sheet for all leases, with the result being the recognition of a right of use (ROU) asset and a lease liability. The lease liability is equal to the present value of the minimum lease payments for the term of the lease, including any optional renewal periods determined to be reasonably certain to be exercised, using the discount rate determined at lease commencement. This discount rate is the rate implicit in the lease, if known; otherwise, the incremental borrowing rate (IBR) for the expected lease term is used. The Company’s IBRs approximate the rate the Company would have to pay to borrow on a collateralized basis over a similar term at lease inception. The ROU asset is equal to the initial measurement of the lease liability plus any lease payments made to the lessor at or before the commencement date and any unamortized initial direct costs incurred by the lessee, less any unamortized lease incentives received. The Company has lease contracts for real property and machinery and equipment, primarily for mobile, office and information technology equipment. At inception of a contract, the Company determines whether the contract is or contains a lease. If the Company has a right to obtain substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the asset, then the contract contains a lease. Several of the Company’s real property lease contracts include options to extend the lease term; however, the Company currently has not included the renewal options for these leases in the ROU asset and lease liability because the likelihood of renewal was not determined to be reasonably certain. The Company will reassess the likelihood of renewal on at least an annual basis. In addition, several real property leases include variable lease payments, for items such as common area maintenance and utilities, which are expensed as incurred as variable lease expense. There are two types of leases, operating leases and finance leases. Lease classification is determined at lease commencement. The criteria used for a lease to be classified as a finance lease is generally consistent with the criteria under the previous lease accounting guidance, ASC 840, for capital leases. All other leases not meeting the finance lease criteria are classified as operating leases. Operating lease expense is recognized on a straight-line basis on the consolidated statement of income. Finance leases have front-loaded expense recognition which is reported as amortization expense and interest expense on the consolidated statement of income. ROU assets for operating leases are classified in other long-term assets, and ROU assets for finance leases are classified in property, plant and equipment on the consolidated balance sheet. For operating leases, short-term lease liabilities are classified in other current liabilities, and long-term lease liabilities are classified in other long-term liabilities on the consolidated balance sheet. For finance leases, short-term lease liabilities are classified in short-term debt, and long-term lease liabilities are classified in long-term debt on the consolidated balance sheet. On the cash flow statement, payments for operating leases are classified as operating activities. Payments for finance leases are classified as a financing activity, with the exception of the interest component of the payment which is classified as an operating activity. Adoption Method and Impact The Company applied ASC 842 to all leases in effect at January 1, 2019 and adopted the accounting standard using the alternative transition method, which does not require the restatement of prior years. Comparative information has not been adjusted and continues to be reported under the previous accounting guidance. The Company has elected the package of practical expedients, which allows entities to not reassess (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. The Company has also elected the practical expedient to not separate lease components from non-lease components for all asset classes, and did not elect the hindsight practical expedient to determine the lease term. The Company has made an accounting policy election to apply the short-term exception, which does not require the capitalization of leases with terms of 12 months or less. On January 1, 2019, the Company recognized $51.7 million of ROU assets and $55.6 million of lease liabilities ($12.5 million short-term and $43.1 million long-term) on the consolidated balance sheet for operating leases, with the difference due to deferred rent balances as of December 31, 2018 that reduced the ROU asset balance on January 1, 2019. The adoption did not have a material impact on the Company’s results of operations or cash flows, and had no impact to the net deferred tax position on the consolidated balance sheet due to the Company’s income tax valuation allowances for federal and state purposes (see Note 13). The Company has entered into finance lease contracts with lenders for progress payments on machinery and equipment that is being constructed at the request and specification of the Company. As of September 30, 2019, the lenders had made $1.7 million of progress payments on behalf of the Company, and $9.5 million of progress payments are scheduled to be paid. Upon payment of the final progress payments by the lenders, finance leases will commence, and $11.2 million, discounted using the applicable discount rates at lease inceptions, of ROU assets and lease liabilities will be recognized by the Company. The following represents the components of lease cost and other information for both operating and financing leases for the three and nine months ending September 30, 2019:
($ in millions) |  | Three months ended | Nine months ended
|  | September 30, 2019 | September 30, 2019
Lease Cost |  |  |
Finance Lease Cost: |  |  |
Amortization of right of use asset |  | $ | 0.5 |  | $ | 1.0 |
Interest on lease liabilities |  | 0.1 |  | 0.3 |
Operating lease cost |  | 5.0 |  | 15.4 |
Short-term lease cost |  | 0.7 |  | 2.4 |
Variable lease cost |  | 0.2 |  | 0.6 |
Sublease income |  | — |  | — |
Total lease cost |  | $ | 6.5 |  | $ | 19.7 |
Other information |  |  |
Cash paid for amounts included in the measurement of lease liabilities |  |  |
Operating cash flows from finance leases |  | $ | 0.1 |  | $ | 0.3 |
Operating cash flows from operating leases |  | $ | 5.0 |  | $ | 15.4 |
Financing cash flows from finance leases |  | $ | 0.7 |  | $ | 1.5 |
Right of use assets obtained in exchange for new finance lease liabilities |  | $ | 6.7 |  | $ | 12.6 |
Right of use assets obtained in exchange for new operating lease liabilities |  | $ | 2.8 |  | $ | 20.3 |
Weighted average remaining lease term - finance leases |  |  | 4 years |
Weighted average remaining lease term - operating leases |  |  | 5 years |
Weighted average discount rate - finance leases |  |  | 5.3 | %
Weighted average discount rate - operating leases |  |  | 7.1 | %
The following table reconciles future minimum undiscounted rental commitments for operating leases to the operating lease liabilities recorded on the consolidated balance sheet as of September 30, 2019 (in millions):
|  | September 30, 2019
Remainder of 2019 |  | $ | 5.1 |
2020 |  | 18.5 |
2021 |  | 16.9 |
2022 |  | 13.2 |
2023 |  | 9.0 |
2024 and thereafter |  | 18.9 |
Total undiscounted lease payments |  | $ | 81.6 |
Present value adjustment |  | (15.3 | )
Operating lease liabilities |  | $ | 66.3 |
The following table reconciles future minimum undiscounted rental commitments for finance leases to the finance lease liabilities recorded on the consolidated balance sheet as of September 30, 2019 (in millions):
|  | September 30, 2019
Remainder of 2019 |  | $ | 1.0 |
2020 |  | 4.1 |
2021 |  | 3.9 |
2022 |  | 3.5 |
2023 |  | 2.4 |
2024 and thereafter |  | 0.5 |
Total undiscounted lease payments |  | $ | 15.4 |
Present value adjustment |  | (1.6 | )
Finance lease liabilities |  | $ | 13.8 |
Leases | Leases On January 1, 2019 the Company adopted Accounting Standards Codification Topic 842 (ASC 842), Leases. This new guidance requires a lessee to recognize assets and liabilities on the balance sheet for all leases, with the result being the recognition of a right of use (ROU) asset and a lease liability. The lease liability is equal to the present value of the minimum lease payments for the term of the lease, including any optional renewal periods determined to be reasonably certain to be exercised, using the discount rate determined at lease commencement. This discount rate is the rate implicit in the lease, if known; otherwise, the incremental borrowing rate (IBR) for the expected lease term is used. The Company’s IBRs approximate the rate the Company would have to pay to borrow on a collateralized basis over a similar term at lease inception. The ROU asset is equal to the initial measurement of the lease liability plus any lease payments made to the lessor at or before the commencement date and any unamortized initial direct costs incurred by the lessee, less any unamortized lease incentives received. The Company has lease contracts for real property and machinery and equipment, primarily for mobile, office and information technology equipment. At inception of a contract, the Company determines whether the contract is or contains a lease. If the Company has a right to obtain substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the asset, then the contract contains a lease. Several of the Company’s real property lease contracts include options to extend the lease term; however, the Company currently has not included the renewal options for these leases in the ROU asset and lease liability because the likelihood of renewal was not determined to be reasonably certain. The Company will reassess the likelihood of renewal on at least an annual basis. In addition, several real property leases include variable lease payments, for items such as common area maintenance and utilities, which are expensed as incurred as variable lease expense. There are two types of leases, operating leases and finance leases. Lease classification is determined at lease commencement. The criteria used for a lease to be classified as a finance lease is generally consistent with the criteria under the previous lease accounting guidance, ASC 840, for capital leases. All other leases not meeting the finance lease criteria are classified as operating leases. Operating lease expense is recognized on a straight-line basis on the consolidated statement of income. Finance leases have front-loaded expense recognition which is reported as amortization expense and interest expense on the consolidated statement of income. ROU assets for operating leases are classified in other long-term assets, and ROU assets for finance leases are classified in property, plant and equipment on the consolidated balance sheet. For operating leases, short-term lease liabilities are classified in other current liabilities, and long-term lease liabilities are classified in other long-term liabilities on the consolidated balance sheet. For finance leases, short-term lease liabilities are classified in short-term debt, and long-term lease liabilities are classified in long-term debt on the consolidated balance sheet. On the cash flow statement, payments for operating leases are classified as operating activities. Payments for finance leases are classified as a financing activity, with the exception of the interest component of the payment which is classified as an operating activity. Adoption Method and Impact The Company applied ASC 842 to all leases in effect at January 1, 2019 and adopted the accounting standard using the alternative transition method, which does not require the restatement of prior years. Comparative information has not been adjusted and continues to be reported under the previous accounting guidance. The Company has elected the package of practical expedients, which allows entities to not reassess (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. The Company has also elected the practical expedient to not separate lease components from non-lease components for all asset classes, and did not elect the hindsight practical expedient to determine the lease term. The Company has made an accounting policy election to apply the short-term exception, which does not require the capitalization of leases with terms of 12 months or less. On January 1, 2019, the Company recognized $51.7 million of ROU assets and $55.6 million of lease liabilities ($12.5 million short-term and $43.1 million long-term) on the consolidated balance sheet for operating leases, with the difference due to deferred rent balances as of December 31, 2018 that reduced the ROU asset balance on January 1, 2019. The adoption did not have a material impact on the Company’s results of operations or cash flows, and had no impact to the net deferred tax position on the consolidated balance sheet due to the Company’s income tax valuation allowances for federal and state purposes (see Note 13). The Company has entered into finance lease contracts with lenders for progress payments on machinery and equipment that is being constructed at the request and specification of the Company. As of September 30, 2019, the lenders had made $1.7 million of progress payments on behalf of the Company, and $9.5 million of progress payments are scheduled to be paid. Upon payment of the final progress payments by the lenders, finance leases will commence, and $11.2 million, discounted using the applicable discount rates at lease inceptions, of ROU assets and lease liabilities will be recognized by the Company. The following represents the components of lease cost and other information for both operating and financing leases for the three and nine months ending September 30, 2019:
($ in millions) |  | Three months ended | Nine months ended
|  | September 30, 2019 | September 30, 2019
Lease Cost |  |  |
Finance Lease Cost: |  |  |
Amortization of right of use asset |  | $ | 0.5 |  | $ | 1.0 |
Interest on lease liabilities |  | 0.1 |  | 0.3 |
Operating lease cost |  | 5.0 |  | 15.4 |
Short-term lease cost |  | 0.7 |  | 2.4 |
Variable lease cost |  | 0.2 |  | 0.6 |
Sublease income |  | — |  | — |
Total lease cost |  | $ | 6.5 |  | $ | 19.7 |
Other information |  |  |
Cash paid for amounts included in the measurement of lease liabilities |  |  |
Operating cash flows from finance leases |  | $ | 0.1 |  | $ | 0.3 |
Operating cash flows from operating leases |  | $ | 5.0 |  | $ | 15.4 |
Financing cash flows from finance leases |  | $ | 0.7 |  | $ | 1.5 |
Right of use assets obtained in exchange for new finance lease liabilities |  | $ | 6.7 |  | $ | 12.6 |
Right of use assets obtained in exchange for new operating lease liabilities |  | $ | 2.8 |  | $ | 20.3 |
Weighted average remaining lease term - finance leases |  |  | 4 years |
Weighted average remaining lease term - operating leases |  |  | 5 years |
Weighted average discount rate - finance leases |  |  | 5.3 | %
Weighted average discount rate - operating leases |  |  | 7.1 | %
The following table reconciles future minimum undiscounted rental commitments for operating leases to the operating lease liabilities recorded on the consolidated balance sheet as of September 30, 2019 (in millions):
|  | September 30, 2019
Remainder of 2019 |  | $ | 5.1 |
2020 |  | 18.5 |
2021 |  | 16.9 |
2022 |  | 13.2 |
2023 |  | 9.0 |
2024 and thereafter |  | 18.9 |
Total undiscounted lease payments |  | $ | 81.6 |
Present value adjustment |  | (15.3 | )
Operating lease liabilities |  | $ | 66.3 |
The following table reconciles future minimum undiscounted rental commitments for finance leases to the finance lease liabilities recorded on the consolidated balance sheet as of September 30, 2019 (in millions):
|  | September 30, 2019
Remainder of 2019 |  | $ | 1.0 |
2020 |  | 4.1 |
2021 |  | 3.9 |
2022 |  | 3.5 |
2023 |  | 2.4 |
2024 and thereafter |  | 0.5 |
Total undiscounted lease payments |  | $ | 15.4 |
Present value adjustment |  | (1.6 | )
Finance lease liabilities |  | $ | 13.8 |

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- Definition The entire disclosure for finance leases of lessee. Includes, but is not limited to, description of lessee's finance lease and maturity analysis of finance lease liability. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 842 -SubTopic 20 -URI http://asc.fasb.org/subtopic&trid=77888251 + Details
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- Definition The entire disclosure for operating leases of lessee. Includes, but is not limited to, description of operating lease and maturity analysis of operating lease liability. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 842 -SubTopic 20 -URI http://asc.fasb.org/subtopic&trid=77888251 + Details
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