Finance and Operating Leases

6 Months Ended

Dec. 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 December 31, 2020  and June 30, 2020, the finance lease liability was $59.3 million and $17.9 million, respectively, with lease interest rates ranging from 1.52% to 3.87%. As of December 31, 2020 and June 30, 2020, the balance of the associated right-of-use assets was $53.1 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 entered into an agreement with BALC in April 2020 for $25.0 million (increased to $41.0 million in July 2020) to provide financing for its leases through March 2021 at varying rates. The Company entered into an additional agreement in September 2020 to provide financing of $45.0 million for its leases through March 2021 at varying rates. Individual leases with BALC include 12 month and 36 month payment terms, fixed rates ranging from 1.52% to 2.58%, 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 December 31, 2020 and June 30, 2020, respectively, of the present value of the net minimum lease payments under the Company’s finance leases:

	December 31, 2020		June 30, 2020
	(in thousands)
2021	$	12,069	$	13,587
2022		20,943		2,653
2023		20,330		2,040
2024		8,100		—
Total minimum payments		61,442		18,280
Less: imputed interest		(2,140)		(342)
Finance lease liability		59,302		17,938
Less: current portion of finance lease liability		(21,506)		(13,304)
Long-term finance lease liability	$	37,796	$	4,634

Operating Leases

The Company is a lessee under operating leases for various facilities to support the Company’s operations. As of  December 31, 2020 and June 30, 2020, the operating lease liability was $108.2 million and $117.2 million, respectively. As of December 31, 2020 and June 30, 2020, the balance of the associated right-of-use assets was $104.0 million and $111.8 million, respectively. The impact of Galvanize’s adoption of ASC 842 was 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 and 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 December 31, 2020 and June 30, 2020, respectively of the present value of the minimum lease payments under the Company’s operating leases:

	December 31, 2020		June 30, 2020
	(in thousands)
2021	$	12,091	$	23,626
2022		22,880		22,326
2023		16,164		15,841
2024		14,890		14,769
2025		13,956		13,949
Thereafter		38,544		38,544
Total minimum payments		118,525		129,055
Less: imputed interest		(10,344)		(11,822)
Operating lease liability		108,181		117,233
Less: current portion of operating lease liability		(21,204)		(20,689)
Long-term operating lease liability	$	86,977	$	96,544

The Company is subleasing one of its facilities through June 2021, two others through May 2022 and one through July 2023. Sublease income is recorded as an offset to the related lease expense within selling, general, and administrative expenses on the condensed consolidated statements of operations. The following is a summary as of December 31, 2020 and June 30, 2020, respectively, of the expected sublease income:

	December 31, 2020		June 30, 2020
	(in thousands)
2021	$	980	$	1,960
2022		1,496		1,496
2023		797		797
2024		66		66
Total sublease income	$	3,339	$	4,319

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 six months ended December 31, 2020 and 2019:

	Three Months Ended December 31,				Six Months Ended December 31,
	2020		2019		2020			2019
Lease cost
Finance lease cost:
Amortization of right-of-use assets	$	8,341	$	4,241	$	13,178		$	8,186
Interest on lease liabilities		155		178		273			381
Operating lease cost		5,579		1,728		11,112			3,335
Short-term lease cost		315		319		600			707
Sublease income		(447)		(128)		(927)			(315)
Total lease cost	$	13,943	$	6,338	$	24,236		$	12,294
Other information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	(5,199)	$	(2,016)	$	(10,364)		$	(4,089)
Financing cash flows from finance leases		(5,786)		(7,499)		(11,455)			(14,959)
Right-of-use assets obtained in exchange for new finance lease liabilities		30,111		6,329		46,865			12,775
Right-of-use assets obtained in exchange for new operating lease liabilities		377		—		589			4,847
Weighted-average remaining lease term - finance leases						2.84	yrs.		1.07	yrs.
Weighted-average remaining lease term - operating leases						6.81	yrs.		2.99	yrs.
Weighted-average discount rate - finance leases						2.49	%		3.33	%
Weighted-average discount rate - operating leases						2.76	%		3.86	%