4. Lease Obligations

Change in Accounting Policy

On January 1, 2019, the Company adopted ASU No. 2016‑02, Leases (Topic 842) using the modified retrospective method. Under this guidance, the net present value of future lease payments are recorded as right-of-use assets and liabilities. In addition, the Company elected the ‘package of practical expedients’ permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification. In addition, the Company elected not to utilize the hindsight practical expedient to determine the lease term for existing leases. The Company elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, the Company did not recognize right-of-use assets or lease liabilities, including not recognizing right-of-use assets or lease liabilities for existing short-term leases of those assets in transition. The Company also elected the practical expedient to not separate lease and non-lease components for our real estate and vehicle leases. Adoption of the new standard resulted in the recording of additional operating right-of-use assets and operating lease liabilities of approximately $15.1 million, as of January 1, 2019. The adoption of Topic 842 did not impact the Company’s retained earnings, consolidated net earnings or cash flows.

The Company enters into non-cancelable leases for some of our facility, vehicle and equipment needs. These leases allow the Company to conserve cash by paying a monthly lease rental fee for the use of facilities, vehicles and equipment rather than purchasing them. The Company’s leases have remaining terms ranging from one to eight years, some of which may include options to extend the leases for up to five years, and some of which may include options to terminate the leases within one year. Currently, all the Company’s leases contain fixed payment terms. The Company may decide to cancel or terminate a lease before the end of its term, in which case we are typically liable to the lessor for the remaining lease payments under the term of the lease. Additionally, all of Company's month-to-month leases are cancelable, by the Company or the lessor, at any time and are not included in our right-of-use asset or liability. At September 30, 2019, the Company had several leases with residual value guarantees, due to the acquisition of CSI. Typically, the Company has purchase options on the equipment underlying its long-term leases and many of its short-term rental arrangements. The Company may exercise some of these purchase options when the need for equipment is on-going and the purchase option price is attractive. Nonperformance-related default covenants, cross-default provisions, subjective default provisions and material adverse change clauses contained in material lease agreements, if any, are also evaluated to determine whether those clauses affect lease classification in accordance with ASC Topic 842‑10‑25. Leases are accounted for as operating or finance leases, depending on the terms of the lease.

Finance Leases

The Company leases some vehicles and certain equipment under finance leases. The economic substance of the leases is a financing transaction for acquisition of the vehicles and equipment. Accordingly, the right-of-use assets for these leases are included in the balance sheets in property and equipment, net of accumulated depreciation, with a corresponding amount recorded in current portion of finance lease obligations or finance lease obligations, net of current maturities, as appropriate. The finance lease assets are amortized over the life of the lease or, if shorter, the life of the leased asset, on a straight-line basis and included in depreciation expense. The interest associated with finance lease obligations is included in interest expense.

Operating Right-of-Use Leases

Operating right-of-use leases are included in operating lease right-of-use assets, and current portion of operating lease obligations and operating lease obligations, net of current maturities, as appropriate. Operating lease right-of-use assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate to calculate present value, the Company determines this rate by estimating the Company’s incremental borrowing rate, utilizing the borrowing rates associated with the Company's various debt instruments. The operating lease right-of-use asset also includes any lease payments made and initial direct costs incurred and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

The following is a summary of the lease-related assets and liabilities recorded as of September 30, 2019:


(in thousands)
Assets	Classification on the Consolidated Balance Sheet
Operating lease right-of-use assets	Operating lease right-of-use assets	$	22,968
Finance lease right-of-use assets	Property and equipment, net of accumulated depreciation		1,781
Total right-of-use lease assets		$	24,749

Liabilities
Current
Operating lease obligations	Current portion of operating lease obligations	$	6,068
Finance lease obligations	Current portion of finance lease obligations		1,144
Total current obligations			7,212
Non-current
Operating lease obligations	Operating lease obligations, net of current maturities		17,084
Finance lease obligations	Finance lease obligations, net of current maturities		633
Total non-current obligations			17,717
Total lease obligations		$	24,929

The following is a summary of the lease terms and discount rates as of September 30, 2019:


Weighted-average remaining lease term - finance leases		1.6 years
Weighted-average remaining lease term - operating leases		4.1 years
Weighted-average discount rate - finance leases		2.5%
Weighted-average discount rate - operating leases		3.8%

The following is a summary of certain information related to the lease costs for finance and operating leases for the three and nine months ended September 30, 2019:


	Three months ended		Nine months ended
(in thousands)	September 30, 2019		September 30, 2019
Lease cost:
Finance lease cost:
Amortization of right-of-use assets	$	273	$	820
Interest on lease liabilities		16		53
Operating lease cost		2,055		5,016
Short-term lease cost		—		8
Variable lease costs		67		198
Total lease cost	$	2,411	$	6,095

The following is a summary of other information and supplemental cash flow information related to finance and operating leases for the nine months ended September 30, 2019:


(in thousands)
Other information:
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	5,064
Right-of-use asset obtained in exchange for new operating lease obligations	$	11,374

The future undiscounted minimum lease payments, as reconciled to the discounted minimum lease obligation indicated on the Company’s consolidated balance sheets, under financial leases, less interest, and under operating leases, less imputed interest, as of September 30, 2019 were as follows:


	Finance		Operating		Total
	Lease		Lease		Lease
(in thousands)	Obligations		Obligations		Obligations

Remainder of 2019	$	296	$	2,202	$	2,498
2020		1,185		7,407		8,592
2021		345		6,407		6,752
2022		—		5,051		5,051
2023		—		3,296		3,296
Thereafter		—		3,138		3,138
Total minimum lease payments		1,826		27,501		29,327
Financing component		(49)		(4,349)		(4,398)
Net present value of minimum lease payments		1,777		23,152		24,929
Less: current portion of finance and operating lease obligations		(1,144)		(6,068)		(7,212)
Long-term finance and operating lease obligations	$	633	$	17,084	$	17,717

The financing component for finance lease obligations represents the interest component of capital leases that will be recognized as interest expense in future periods. The financing component for operating lease obligations represents the effect of discounting the lease payments to their present value.

Certain subsidiaries of the Company have operating leases for facilities from third party companies that are owned, in whole or part, by employees of the subsidiaries. The terms and rental rates of these leases are at market rental rates. As of September 30, 2019, the minimum lease payments required under these leases totaled $4.8 million, which is to be paid over the next 4.8 years.

Capital Leases

Prior to the adoption of ASU No. 2016‑02, Leases (Topic 842), certain of the Company’s leased vehicles and equipment leases met the characteristics of capital leases. The economic substance of these leases was a financing transaction for acquisition of the vehicles and equipment and, accordingly, the leases were included in the balance sheets in property and equipment, net of accumulated depreciation, with a corresponding amount recorded in current portion of lease obligations or lease obligations, net of current maturities, as appropriate. The capital lease assets were amortized on a straight-line basis over the life of the lease or, if shorter, the life of the leased asset, and were included in depreciation expense in the statements of operations. The interest associated with capital leases was included in interest expense in the statements of operations.

As of December 31, 2018, the Company had $2.7 million of capital lease obligations outstanding, $1.1 million of which was classified as a current liability.

As of December 31, 2018, $2.6 million of leased assets were capitalized in property and equipment, net of accumulated depreciation.