Finance and Operating Leases

9 Months Ended

Mar. 31, 2020

Finance and Operating Leases

Finance and Operating Leases

5.   Finance and Operating Leases

Finance Leases

The Company is a lessee under finance leases for student computers and peripherals under agreements with PNC Equipment Finance, LLC (“PNC”) and Banc of America Leasing & Capital, LLC (“BALC”). As of March 31, 2020  and June 30, 2019, the finance lease liability (“capital leases” as of June 30, 2019) was $23.3 million and $24.6 million, respectively, with interest rates ranging from 1.52% to 3.87%. As of March 31, 2020 and June 30, 2019, the balance of the associated right-of-use assets (“student computers” as of June 30, 2019) was $23.9 million and 19.8 million, respectively. The right-of-use asset is recorded within property and equipment, net on the condensed consolidated balance sheets. Lease amortization expense associated with the Company’s finance leases is recorded within selling, general, and administrative expenses on the condensed consolidated statements of operations.

Individual leases under the agreement with PNC include 36-month payment terms, at varying rates, with a $1 purchase option at the end of each lease term. The Company has pledged the assets financed to secure the outstanding leases.

The Company executed an agreement with BALC in February 2019 for $25.0 million to provide financing for its leases through December 2019 at a fluctuating rate of LIBOR plus 1.25%. The Company executed an additional $25.0 million agreement in March 2020 to provide financing for its leases through January 2021 at a fluctuating rate of LIBOR plus 0.75%. Individual leases with BALC include 12-month payment terms, fixed rates ranging from 1.52% to 3.58%, and a $1 purchase option at the end of each lease term. The Company has pledged the assets financed to secure the outstanding leases.

The following is a summary as of March 31, 2020 (under ASC 842) and June 30, 2019 (under ASC 840), respectively, of the present value of the minimum lease payments under the Company’s finance leases:

	March 31, 2020		June 30, 2019
	(in thousands)
2020	$	6,449	$	20,070
2021		13,316		4,819
2022		2,383		340
2023		1,532		—
Total minimum payments		23,680		25,229
Less: imputed interest		(427)		(581)
Finance lease liability		23,253		24,648
Less: current portion of finance lease liability		(17,988)		(19,588)
Long-term finance lease liability	$	5,265	$	5,060

Operating Leases

The Company is a lessee under operating leases for various facilities to support the Company’s operations. As of  March 31, 2020 and June 30, 2019, the operating lease liability was $121.2 million and zero, respectively. As of March 31, 2020 and June 30, 2019, the balance of the associated right-of-use assets was $106.9 million and zero, respectively. Each of the above balances as of March 31, 2020 includes the impact of Galvanize’s adoption of ASC 842 as part of the purchase price accounting which is discussed in more detail in Note 11, “Acquisitions and Investments.” Lease expense associated with the Company’s operating leases is recorded within selling, general, and administrative expenses on the condensed consolidated statements of operations.

Individual operating leases range in terms of 1 to 11 years that expire on various dates through fiscal year 2031 and the minimum lease payments are discounted using the Company’s incremental borrowing rate of 3.86% or 2.55%.

The following is a summary as of March 31, 2020 (under ASC 842) and June 30, 2019 (under ASC 840), respectively of the present value of the minimum lease payments under the Company’s operating leases:

	March 31, 2020		June 30, 2019
	(in thousands)
2020	$	5,991	$	8,441
2021		23,337		8,229
2022		22,054		6,735
2023		15,567		550
2024		14,486		137
Thereafter		52,393		—
Total minimum payments		133,828	$	24,092
Less: imputed interest		(12,584)
Operating lease liability		121,244
Less: current portion of operating lease liability		(20,441)
Long-term operating lease liability	$	100,803

The Company is subleasing one of its facilities through June 2021, two others through May 2022 and one through July 2023. The following is a summary as of March 31, 2020 and June 30, 2019, respectively, of the expected sublease income:

	March 31, 2020		June 30, 2019
	(in thousands)
2020	$	494	$	930
2021		1,976		961
2022		1,513		528
2023		813		—
2024		67		—
Total sublease income	$	4,863	$	2,419

The following is a summary of the Company’s lease cost, weighted-average remaining lease term, weighted-average discount rate and certain other cash flows as it relates to its operating leases for the three and nine months ended March 31, 2020:

	Three months ended		Nine months ended
	March 31, 2020		March 31, 2020
Lease cost
Finance lease cost:
Amortization of right-of-use assets	$	4,232	$	12,418
Interest on lease liabilities		276		657
Operating lease cost		4,035		7,370
Short-term lease cost		280		987
Sublease income		(215)		(531)
Total lease cost	$	8,608	$	20,901
Other information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	(4,062)	$	(8,151)
Financing cash flows from finance leases		(6,644)		(21,603)
Right-of-use assets obtained in exchange for new finance lease liabilities		3,715		16,490
Right-of-use assets obtained in exchange for new operating lease liabilities		502		5,349
Weighted-average remaining lease term - finance leases				0.90	yrs.
Weighted-average remaining lease term - operating leases				7.32	yrs.
Weighted-average discount rate - finance leases				2.88	%
Weighted-average discount rate - operating leases				2.78	%