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Leases | 3 Months Ended
--- | ---
Mar. 31, 2019
Leases [Abstract] |
Leases | Leases Adoption of ASC Topic 842, "Leases" On January 1, 2019, the Company adopted Topic 842 using the modified retrospective method applied to leases that were in place as of January 1, 2019. Results for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 840. The Company's portfolio of leases contains both finance and operating leases that relate primarily to real estate agreements and manufacturing equipment agreements. Substantially all of the value of the Company's lease portfolio relates to a real estate master lease agreement with Store Master Funding XII, LLC, an affiliate of Store Capital Corporation ("Store") that was entered into in 2016, and amended with the 2018 MUSA-Galvanized and 2019 ASTI acquisitions. As of March 31, 2019, operating lease liabilities related to the master lease agreement with Store totaled $37,192,255, or 96 percent of the total lease liabilities on the accompanying condensed consolidated balance sheet. Practical Expedients and Elections The Company elected the package of practical expedients permitted under the transition guidance, which allowed us to carryforward our historical lease classification, our assessment on whether a contract is or contains a lease, and our initial direct costs for any leases that exist prior to adoption of the new standard. We did not elect the hindsight practical expedient to determine the reasonably certain lease term for existing leases. We also elected to combine lease and non-lease components, and elected the short-term lease recognition exemption for all leases that qualify. Deferred Gain on Sale Leaseback On January 1, 2019, the Company recorded cumulative-effect adjustments to increase equity and deferred tax assets totaling $4,622,500 and $1,310,850, respectively, related to the derecognition of the deferred gain on its sale leaseback, consistent with transition guidance set forth in ASC 842-10-65-1. Discount Rate To determine the present value of minimum future lease payments for operating leases at January 1, 2019, the Company was required to estimate a rate of interest that we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment (the "incremental borrowing rate" or "IBR"). The Company determined the appropriate IBR by identifying a reference rate and making adjustments that take into consideration financing options and certain lease-specific circumstances. For the reference rate, treasury rates for five years, 10 years, and 30 years were used as they cover the periods of the leases. The Company additionally used the Damodaran Credit Rating Model, which assesses a credit rating based on the interest coverage ratio and relates this to credit ratings of other large public manufacturers. Inputs required include EBIT, interest expense, future minimum lease payments, outstanding debt, and a reference rate. Based on this assessment of the aforementioned qualitative and quantitative factors, the Company determined that 7.32 percent was an appropriate incremental borrowing rate to apply to its portfolio of real-estate operating leases. The Company elected to utilize a single discount rate for its portfolio of operating leases because of similar lease characteristics; the resulting calculation does not differ materially from applying the standard to the individual leases. Weighted average discount rates for operating and finance leases are as follows:
Operating Leases | 7.32 | %
Finance Leases | 11.85 | %
Balance Sheet Presentation Operating and finance lease amounts included in the Consolidated Balance Sheet are as follows:
Financial Statement Line Item | Classification | March 31, 2019 |
Right-of-use assets, operating leases | Assets | $ | 36,759,065 |
Right-of-use assets, finance leases | Property, plant, and equipment | 532,062 |
Current lease liabilities, operating leases | Current liabilities | 3,473,925 |
Current lease liabilities, finance leases | Current liabilities | 235,685 |
Non-current lease liabilities, operating leases | Non-current liabilities | 34,366,152 |
Non-current lease liabilities, finance leases | Non-current liabilities | 539,073 |
Total Lease Cost Individual components of the total lease cost incurred by the Company for the three month period ended March 31, 2019 is as follows:
| Mar 31, 2019
Operating lease cost | $ | 1,005,191 |
Finance lease cost |
Amortization of right-of-use assets | 43,714 |
Interest on finance lease liabilities | 20,297 |
Short-term lease cost | — |
Total lease cost | $ | 1,069,202 |
Amortization of assets held under finance leases is included in depreciation expense. Minimum rental payments under operating leases are recognized on a straight-line basis over the term of the lease including any periods of free rent. Maturity of Leases The amount of undiscounted future minimum lease payments under operating leases are as follows:
Remainder of 2019 | $ | 2,622,191 |
2020 | 3,562,092 |
2021 | 3,635,376 |
2022 | 3,672,731 |
2023 | 3,563,383 |
2024 | 3,634,651 |
Thereafter | 48,553,620 |
Total undiscounted minimum future operating lease payments | 69,244,044 |
Imputed Interest | 31,403,967 |
Total operating lease liabilities recorded as of March 31, 2019 | $ | 37,840,077 |
The amount of undiscounted future minimum lease payments under finance leases are as follows:
Remainder of 2019 | $ | 238,206 |
2020 | 329,534 |
2021 | 335,462 |
2022 | 11,998 |
Total undiscounted minimum future finance lease payments | 915,200 |
Imputed Interest | 140,442 |
Total finance lease liabilities recorded as of March 31, 2019 | $ | 774,758 |
Additional Information Weighted average remaining lease terms for operating and finance leases as of March 31, 2019 are as follows:
Operating Leases | 207 months
Finance Leases | 33 months
During the three-month period ended March 31, 2019, right-of-use assets obtained in exchange for new operating lease liabilities totaled $4,900,243. On January 1, 2019, the Company and Store Master Funding XII, LLC, entered into an Amended and Restated Master Lease Agreement (the “Master Lease”), pursuant to which the Company will lease the Statesville and Troutman, NC facilities, purchased by Store from American Stainless on January 1, 2019, for the remainder of the initial term of 20 years set forth in the Master Lease, with two renewal options of ten years each. Because the Company is reasonably certain to exercise these renewal options, the options are not considered in determining the lease term, and associated potential option payments are excluded from lease payments. The Master Lease includes a rent escalator equal to the lesser of 1.25 times the percentage increase in the Consumer Price Index since the previous increase or 2 percent. Undiscounted future minimum lease payments under non-cancellable operating leases accounted for under ASC 840 "Leases" were as follows:
| Dec 31, 2018 |
2019 | $ | 3,207,053 |
2020 | 3,243,694 |
2021 | 3,238,745 |
2022 | 3,224,810 |
2023 | 3,102,815 |
Thereafter | 45,337,403 |
Undiscounted future minimum lease payments under non-cancellable capital leases accounted for under ASC 840 "Leases" were as follows:
| Dec 31, 2018 |
2019 | $ | 354,299 |
2020 | 329,534 |
2021 | 335,462 |
2022 | 11,998 |
2023 | — |
Total minimum lease payments | 1,031,293 |
Less imputed interest costs | 164,826 |
Present value of minimum lease payments | $ | 866,467 |
Leases | Leases Adoption of ASC Topic 842, "Leases" On January 1, 2019, the Company adopted Topic 842 using the modified retrospective method applied to leases that were in place as of January 1, 2019. Results for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 840. The Company's portfolio of leases contains both finance and operating leases that relate primarily to real estate agreements and manufacturing equipment agreements. Substantially all of the value of the Company's lease portfolio relates to a real estate master lease agreement with Store Master Funding XII, LLC, an affiliate of Store Capital Corporation ("Store") that was entered into in 2016, and amended with the 2018 MUSA-Galvanized and 2019 ASTI acquisitions. As of March 31, 2019, operating lease liabilities related to the master lease agreement with Store totaled $37,192,255, or 96 percent of the total lease liabilities on the accompanying condensed consolidated balance sheet. Practical Expedients and Elections The Company elected the package of practical expedients permitted under the transition guidance, which allowed us to carryforward our historical lease classification, our assessment on whether a contract is or contains a lease, and our initial direct costs for any leases that exist prior to adoption of the new standard. We did not elect the hindsight practical expedient to determine the reasonably certain lease term for existing leases. We also elected to combine lease and non-lease components, and elected the short-term lease recognition exemption for all leases that qualify. Deferred Gain on Sale Leaseback On January 1, 2019, the Company recorded cumulative-effect adjustments to increase equity and deferred tax assets totaling $4,622,500 and $1,310,850, respectively, related to the derecognition of the deferred gain on its sale leaseback, consistent with transition guidance set forth in ASC 842-10-65-1. Discount Rate To determine the present value of minimum future lease payments for operating leases at January 1, 2019, the Company was required to estimate a rate of interest that we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment (the "incremental borrowing rate" or "IBR"). The Company determined the appropriate IBR by identifying a reference rate and making adjustments that take into consideration financing options and certain lease-specific circumstances. For the reference rate, treasury rates for five years, 10 years, and 30 years were used as they cover the periods of the leases. The Company additionally used the Damodaran Credit Rating Model, which assesses a credit rating based on the interest coverage ratio and relates this to credit ratings of other large public manufacturers. Inputs required include EBIT, interest expense, future minimum lease payments, outstanding debt, and a reference rate. Based on this assessment of the aforementioned qualitative and quantitative factors, the Company determined that 7.32 percent was an appropriate incremental borrowing rate to apply to its portfolio of real-estate operating leases. The Company elected to utilize a single discount rate for its portfolio of operating leases because of similar lease characteristics; the resulting calculation does not differ materially from applying the standard to the individual leases. Weighted average discount rates for operating and finance leases are as follows:
Operating Leases | 7.32 | %
Finance Leases | 11.85 | %
Balance Sheet Presentation Operating and finance lease amounts included in the Consolidated Balance Sheet are as follows:
Financial Statement Line Item | Classification | March 31, 2019 |
Right-of-use assets, operating leases | Assets | $ | 36,759,065 |
Right-of-use assets, finance leases | Property, plant, and equipment | 532,062 |
Current lease liabilities, operating leases | Current liabilities | 3,473,925 |
Current lease liabilities, finance leases | Current liabilities | 235,685 |
Non-current lease liabilities, operating leases | Non-current liabilities | 34,366,152 |
Non-current lease liabilities, finance leases | Non-current liabilities | 539,073 |
Total Lease Cost Individual components of the total lease cost incurred by the Company for the three month period ended March 31, 2019 is as follows:
| Mar 31, 2019
Operating lease cost | $ | 1,005,191 |
Finance lease cost |
Amortization of right-of-use assets | 43,714 |
Interest on finance lease liabilities | 20,297 |
Short-term lease cost | — |
Total lease cost | $ | 1,069,202 |
Amortization of assets held under finance leases is included in depreciation expense. Minimum rental payments under operating leases are recognized on a straight-line basis over the term of the lease including any periods of free rent. Maturity of Leases The amount of undiscounted future minimum lease payments under operating leases are as follows:
Remainder of 2019 | $ | 2,622,191 |
2020 | 3,562,092 |
2021 | 3,635,376 |
2022 | 3,672,731 |
2023 | 3,563,383 |
2024 | 3,634,651 |
Thereafter | 48,553,620 |
Total undiscounted minimum future operating lease payments | 69,244,044 |
Imputed Interest | 31,403,967 |
Total operating lease liabilities recorded as of March 31, 2019 | $ | 37,840,077 |
The amount of undiscounted future minimum lease payments under finance leases are as follows:
Remainder of 2019 | $ | 238,206 |
2020 | 329,534 |
2021 | 335,462 |
2022 | 11,998 |
Total undiscounted minimum future finance lease payments | 915,200 |
Imputed Interest | 140,442 |
Total finance lease liabilities recorded as of March 31, 2019 | $ | 774,758 |
Additional Information Weighted average remaining lease terms for operating and finance leases as of March 31, 2019 are as follows:
Operating Leases | 207 months
Finance Leases | 33 months
During the three-month period ended March 31, 2019, right-of-use assets obtained in exchange for new operating lease liabilities totaled $4,900,243. On January 1, 2019, the Company and Store Master Funding XII, LLC, entered into an Amended and Restated Master Lease Agreement (the “Master Lease”), pursuant to which the Company will lease the Statesville and Troutman, NC facilities, purchased by Store from American Stainless on January 1, 2019, for the remainder of the initial term of 20 years set forth in the Master Lease, with two renewal options of ten years each. Because the Company is reasonably certain to exercise these renewal options, the options are not considered in determining the lease term, and associated potential option payments are excluded from lease payments. The Master Lease includes a rent escalator equal to the lesser of 1.25 times the percentage increase in the Consumer Price Index since the previous increase or 2 percent. Undiscounted future minimum lease payments under non-cancellable operating leases accounted for under ASC 840 "Leases" were as follows:
| Dec 31, 2018 |
2019 | $ | 3,207,053 |
2020 | 3,243,694 |
2021 | 3,238,745 |
2022 | 3,224,810 |
2023 | 3,102,815 |
Thereafter | 45,337,403 |
Undiscounted future minimum lease payments under non-cancellable capital leases accounted for under ASC 840 "Leases" were as follows:
| Dec 31, 2018 |
2019 | $ | 354,299 |
2020 | 329,534 |
2021 | 335,462 |
2022 | 11,998 |
2023 | — |
Total minimum lease payments | 1,031,293 |
Less imputed interest costs | 164,826 |
Present value of minimum lease payments | $ | 866,467 |
Leases | Leases Adoption of ASC Topic 842, "Leases" On January 1, 2019, the Company adopted Topic 842 using the modified retrospective method applied to leases that were in place as of January 1, 2019. Results for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 840. The Company's portfolio of leases contains both finance and operating leases that relate primarily to real estate agreements and manufacturing equipment agreements. Substantially all of the value of the Company's lease portfolio relates to a real estate master lease agreement with Store Master Funding XII, LLC, an affiliate of Store Capital Corporation ("Store") that was entered into in 2016, and amended with the 2018 MUSA-Galvanized and 2019 ASTI acquisitions. As of March 31, 2019, operating lease liabilities related to the master lease agreement with Store totaled $37,192,255, or 96 percent of the total lease liabilities on the accompanying condensed consolidated balance sheet. Practical Expedients and Elections The Company elected the package of practical expedients permitted under the transition guidance, which allowed us to carryforward our historical lease classification, our assessment on whether a contract is or contains a lease, and our initial direct costs for any leases that exist prior to adoption of the new standard. We did not elect the hindsight practical expedient to determine the reasonably certain lease term for existing leases. We also elected to combine lease and non-lease components, and elected the short-term lease recognition exemption for all leases that qualify. Deferred Gain on Sale Leaseback On January 1, 2019, the Company recorded cumulative-effect adjustments to increase equity and deferred tax assets totaling $4,622,500 and $1,310,850, respectively, related to the derecognition of the deferred gain on its sale leaseback, consistent with transition guidance set forth in ASC 842-10-65-1. Discount Rate To determine the present value of minimum future lease payments for operating leases at January 1, 2019, the Company was required to estimate a rate of interest that we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment (the "incremental borrowing rate" or "IBR"). The Company determined the appropriate IBR by identifying a reference rate and making adjustments that take into consideration financing options and certain lease-specific circumstances. For the reference rate, treasury rates for five years, 10 years, and 30 years were used as they cover the periods of the leases. The Company additionally used the Damodaran Credit Rating Model, which assesses a credit rating based on the interest coverage ratio and relates this to credit ratings of other large public manufacturers. Inputs required include EBIT, interest expense, future minimum lease payments, outstanding debt, and a reference rate. Based on this assessment of the aforementioned qualitative and quantitative factors, the Company determined that 7.32 percent was an appropriate incremental borrowing rate to apply to its portfolio of real-estate operating leases. The Company elected to utilize a single discount rate for its portfolio of operating leases because of similar lease characteristics; the resulting calculation does not differ materially from applying the standard to the individual leases. Weighted average discount rates for operating and finance leases are as follows:
Operating Leases | 7.32 | %
Finance Leases | 11.85 | %
Balance Sheet Presentation Operating and finance lease amounts included in the Consolidated Balance Sheet are as follows:
Financial Statement Line Item | Classification | March 31, 2019 |
Right-of-use assets, operating leases | Assets | $ | 36,759,065 |
Right-of-use assets, finance leases | Property, plant, and equipment | 532,062 |
Current lease liabilities, operating leases | Current liabilities | 3,473,925 |
Current lease liabilities, finance leases | Current liabilities | 235,685 |
Non-current lease liabilities, operating leases | Non-current liabilities | 34,366,152 |
Non-current lease liabilities, finance leases | Non-current liabilities | 539,073 |
Total Lease Cost Individual components of the total lease cost incurred by the Company for the three month period ended March 31, 2019 is as follows:
| Mar 31, 2019
Operating lease cost | $ | 1,005,191 |
Finance lease cost |
Amortization of right-of-use assets | 43,714 |
Interest on finance lease liabilities | 20,297 |
Short-term lease cost | — |
Total lease cost | $ | 1,069,202 |
Amortization of assets held under finance leases is included in depreciation expense. Minimum rental payments under operating leases are recognized on a straight-line basis over the term of the lease including any periods of free rent. Maturity of Leases The amount of undiscounted future minimum lease payments under operating leases are as follows:
Remainder of 2019 | $ | 2,622,191 |
2020 | 3,562,092 |
2021 | 3,635,376 |
2022 | 3,672,731 |
2023 | 3,563,383 |
2024 | 3,634,651 |
Thereafter | 48,553,620 |
Total undiscounted minimum future operating lease payments | 69,244,044 |
Imputed Interest | 31,403,967 |
Total operating lease liabilities recorded as of March 31, 2019 | $ | 37,840,077 |
The amount of undiscounted future minimum lease payments under finance leases are as follows:
Remainder of 2019 | $ | 238,206 |
2020 | 329,534 |
2021 | 335,462 |
2022 | 11,998 |
Total undiscounted minimum future finance lease payments | 915,200 |
Imputed Interest | 140,442 |
Total finance lease liabilities recorded as of March 31, 2019 | $ | 774,758 |
Additional Information Weighted average remaining lease terms for operating and finance leases as of March 31, 2019 are as follows:
Operating Leases | 207 months
Finance Leases | 33 months
During the three-month period ended March 31, 2019, right-of-use assets obtained in exchange for new operating lease liabilities totaled $4,900,243. On January 1, 2019, the Company and Store Master Funding XII, LLC, entered into an Amended and Restated Master Lease Agreement (the “Master Lease”), pursuant to which the Company will lease the Statesville and Troutman, NC facilities, purchased by Store from American Stainless on January 1, 2019, for the remainder of the initial term of 20 years set forth in the Master Lease, with two renewal options of ten years each. Because the Company is reasonably certain to exercise these renewal options, the options are not considered in determining the lease term, and associated potential option payments are excluded from lease payments. The Master Lease includes a rent escalator equal to the lesser of 1.25 times the percentage increase in the Consumer Price Index since the previous increase or 2 percent. Undiscounted future minimum lease payments under non-cancellable operating leases accounted for under ASC 840 "Leases" were as follows:
| Dec 31, 2018 |
2019 | $ | 3,207,053 |
2020 | 3,243,694 |
2021 | 3,238,745 |
2022 | 3,224,810 |
2023 | 3,102,815 |
Thereafter | 45,337,403 |
Undiscounted future minimum lease payments under non-cancellable capital leases accounted for under ASC 840 "Leases" were as follows:
| Dec 31, 2018 |
2019 | $ | 354,299 |
2020 | 329,534 |
2021 | 335,462 |
2022 | 11,998 |
2023 | — |
Total minimum lease payments | 1,031,293 |
Less imputed interest costs | 164,826 |
Present value of minimum lease payments | $ | 866,467 |

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