Commitments and Contingencies

3 Months Ended

Sep. 30, 2020

Commitments and Contingencies

Commitments and Contingencies

Note 9. Commitments and Contingencies

Leases

In February 2016, the FASB issued new lease accounting guidance in ASU No. 2016-02, Leases (Topic 842). This new standard was initiated as a joint project with the International Accounting Standards Board to simplify lease accounting and improve the quality of and comparability of financial information for users. This accounting standard, as updated, eliminated the concept of off-balance sheet treatment for “operating leases” for lessees for the vast majority of lease contracts. Under ASU No. 2016-02, at inception, a lessee must classify all leases with a term of over one year as either finance or operating, with both classifications resulting in the recognition of a defined “right-of-use” asset and a lease liability on the balance sheet. However, recognition in the income statement will differ depending on the lease classification, with finance leases recognizing the amortization of the right-of-use asset separate from the interest on the lease liability and operating leases recognizing a single total lease expense. Lessor accounting under ASU No. 2016-02 is substantially unchanged from the previous lease requirements under U.S. GAAP.

The Company adopted ASU No. 2016-02 effective July 1, 2019, utilizing a modified retrospective transition approach and using the effective date as the date of initial application. As a result, financial information was not updated and the disclosures required under the new accounting standard was not provided for dates and periods before July 1, 2019. The accounting standard included optional transitional practical expedients intended to simplify its adoption and the Company adopted the package of practical expedients, which allowed it to retain the historical lease classification determined under legacy U.S. GAAP, as well as relief from reviewing expired or existing contracts to determine if they contain leases. As of July 1, 2019, the right of use assets (operating lease assets) related to operating leases recorded on the Company’s consolidated balance sheet was $70,797,000 and the related liabilities (operating lease liabilities) was $71,298,000. The difference between the right of use assets and related lease liabilities is predominantly deferred rent. The adoption of this accounting standard did not materially impact the Company’s consolidated statements of operations or cash flows.

Operating Lease Assets and Liabilities

We lease our corporate office, certain administrative offices, and certain branch locations through the United States, Canada, and Asia-Pacific. Additionally, we lease equipment to support our operations, including vehicles and office equipment. For operating leases with an initial term greater than twelve months, the Company recognizes a lease asset and liability at commencement date. The Company follows the short-term lease exception as an accounting policy; therefore, leases with an original term of 12 months or less are not recognized on the balance sheet. Lease assets are initially measured at cost, which includes the initial amount of the lease liability, plus any initial direct costs incurred, less lease incentives received. The liability is initially and subsequently measured as the

present value of the unpaid lease payments. The Company uses estimates and judgments in the determination of our lease liabilities. Key estimates and judgments include the following:

Lease Discount Rate – The Company is required to discount unpaid fixed lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, the incremental borrowing rate, which would typically be the senior lending borrowing rate at the respective geographic venue of the operating lease.

Lease Term – The Company includes the non-cancellable period of the lease, plus any additional periods covered by an extension of the lease that are reasonably certain to be exercised. The Company expects to exercise options to extend many operating leases after considering the relevant economic factors.

Fixed Payments – Lease payments included in the measurement of the lease liability include fixed payments owed over the lease term, termination penalties if it is expected that a termination option will be exercised, the price to purchase the underlying asset if it is reasonably certain that the purchase option will be exercised and residual value guarantees, if applicable.

Future payments of operating lease liabilities at June 30, 2020 and September 30, 2020 are as follows (in thousands):

Year Ending June 30,
2021	$	11,628
2022		10,336
2022		9,121
2024		7,858
2025		6,750
Thereafter		57,190
Total commitments		102,883
Less – effect of discounting		(35,741)
	$	67,142

Year Ending September 30,
2021	$	12,427
2022		11,441
2022		9,980
2024		8,720
2025		7,639
Thereafter		69,600
Total commitments		119,807
Less – effect of discounting		(41,894)
	$	77,913

Operating Lease Expense and Activity

Payments due under lease contracts include fixed payments plus, if applicable, variable payments. Fixed payments under leases are recognized on a straight-line basis over the term of the lease, including any periods of free rent. Variable expenses associated with leases are recognized when they are incurred. For real estate leases, variable payments include such items as allocable property taxes, local sales and business taxes, and common area maintenance charges. Variable payments associated with equipment leases include such items as maintenance services provided by the lessor and local sales and business taxes. The Company has elected the accounting policy to not separate lease components and non-lease components. All expenses for operating leases are recognized within the costs and expenses in determining operating income.

Operating lease activity during the periods was as follows (in thousands):

	Quarter Ended September 30,
	2019		2020
Expense:
Short-term lease expense	$	925	$	822
Fixed lease expense		3,223		3,524
Variable lease expense		263		391
Sublease income		(1,163)		(1,080)
	$	3,248	$	3,657
Cash paid and new or modified operating lease information:
Operating cash flows from operating leases	$	2,932	$	3,230
Net operating lease assets obtained in exchange for new or modified operating lease liabilities		1,381		10,826

The weighted-average remaining lease term and weighted average discount rate for operating leases at June 30, 2020 and September 30, 2020 was 12.6 years and 6.3%, and 13.3 years and 6.3%, respectively.

Finance Leases

Specific criteria differentiate a finance lease from an operating lease, but generally leases under which substantially all the risks and benefits incidental to ownership of the leased assets are assumed by the Company are classified as finance leases. At adoption of ASU No. 2016-02, all previously classified capital leases were classified as finance leases. In the accompanying consolidated balance sheets, finance lease assets are included in property, plant and equipment (see Note 2), while finance lease liabilities are included in senior and other debt (see Note 5). Finance leased assets as of June 30, 2020 and September 30, 2020, include gross costs of $8,650,000 and $8,650,000, and accumulated amortization of $2,871,000 and $3,301,000 resulting in a net book value of $5,779,000 and $5,349,000, respectively.

Self-Insurance

The Company has insurance policies to cover auto liability, general liability, directors and officers liability and workers compensation-related claims. Effective on February 1, 2017, the Company became self-insured for auto liability and general liability through GFNI, a wholly-owned captive insurance company, up to a maximum of $1,200,000 per policy period. Claims and expenses are reported when it is probable that a loss has occurred and the amount of the loss can be reasonably estimated. These losses include an estimate of claims that have been incurred but not reported. At June 30, 2020 and September 30, 2020, reported liability totaled $1,278,000 and 1,412,000, respectively, and has been recorded in the caption “Trade payables and accrued liabilities” in the accompanying consolidated balance sheets.

Other Matters

The Company is not involved in any material lawsuits or claims arising out of the normal course of business. The nature of its business is such that disputes can occasionally arise with employees, vendors (including suppliers and subcontractors) and customers over warranties, contract specifications and contract interpretations among other things. The Company assesses these matters on a case-by-case basis as they arise. Reserves are established, as required, based on its assessment of its exposure. The Company has insurance policies to cover general liability and workers compensation related claims. In the opinion of management, the ultimate amount of liability not covered by insurance under pending litigation and claims, if any, will not have a material adverse effect on our financial position, operating results or cash flows.