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Leases

12 Months Ended

Dec. 31, 2019

11.

Leases

Effective January 1, 2019, the Company adopted ASU No. 2016-02, “Leases (Topic 842)” and the series of related ASUs that followed (collectively referred to as “Topic 842”). The most significant changes under the new guidance include clarification of the definition of a lease, and the requirements for lessees to recognize a right-of-use (ROU) asset and a lease liability for all qualifying leases with terms longer than twelve months in the consolidated balance sheet. In addition, under Topic 842, additional disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.

The Company elected the practical expedient available under ASU 2018-11 “Leases: Targeted Improvements,” which allows the Company to apply the transition provision for Topic 842 at the Company’s adoption date instead of at the earliest comparative period presented in the Company’s financial statements. Therefore, the Company recognized and measured leases existing at January 1, 2019 but without retrospective application. The Company also elected all other available practical expedients except the hindsight practical expedient. In electing the practical expedients, the Company utilized the transition practical expedient package whereby the Company did not reassess (i) whether any of the Company’s expired or existing contracts contain a lease, (ii) the classification for any expired or existing leases and (iii) initial direct costs for any existing leases.

The impact of Topic 842 on the Company’s consolidated balance sheet as of January 1, 2019 was the recognition of ROU assets and lease liabilities for operating leases, while the Company’s accounting for finance leases remained substantially unchanged. The Company’s finance leases were immaterial prior to the adoption of Topic 842, and no change was made to the classification of these leases. As a result of the adoption of Topic 842, beginning retained earnings was impacted by $0.1 million and there was no impact to the income statement.

The Company leases property including warehouse space, offices, vehicles and equipment. The Company determines if an arrangement is a lease at inception. As part of the transition to the new standard, the Company reviewed agreements with suppliers, vendors, customers, and other outside parties to determine if any agreements met the definition of an embedded lease. This is based on the nature of the contracts reviewed, and various factors, including identified assets included in the agreement to which the Company has exclusive rights of control as described by Topic 842. The Company concluded that these are not material agreements with parties that would constitute an embedded lease. For purposes of calculating operating lease liabilities, lease terms may be deemed to include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

Beginning January 1, 2019, operating ROU assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Operating leases in effect prior to January 1, 2019 were recognized at the present value of the remaining lease payments over the remaining lease term as of January 1, 2019. The Company is required to determine a discount rate in order to calculate the present value of lease payments. If the rate is not included in the lease or cannot be readily determined, the Company uses its incremental secured borrowing rate based on lease term information available at the commencement date of the lease in determining the present value of lease payments. The Company recognizes lease components and non-lease components together and not as separate parts of a lease for all leases. The Company will exercise this practical expedient in the future by asset class.

The expenses generated by the lease activity of the Company as lessee for the twelve months ended December 31, 2019 were as follows:

Lease Type	Income Statement Classification	Amount
(Dollars in thousands)
Consolidated operating lease expense	Operating expenses	$	5,887

Consolidated financing lease amortization	Depreciation and amortization		305
Consolidated financing lease interest	Interest expense		61
Consolidating financing lease expense			366

Net lease cost		$	6,253

Rent expense was approximately $3.7 million and $3.5 million in 2018 and 2017, respectively.

The value of the net assets and liabilities generated by the leasing activity of the Company as lessee as of December 31, 2019 were as follows:

Lease Type	Balance Sheet Classification	Amount
(Dollars in thousands)
Total ROU operating lease assets ⁽¹⁾	Operating lease right-of-use assets, net	$	13,481
Total ROU financing lease assets ⁽²⁾	Property and equipment, net		2,430
Total lease assets		$	15,911

Total current operating lease obligation	Operating lease liabilities	$	2,742
Total current financing lease obligation	Accrued and other current liabilities		593
Total current lease obligation		$	3,335

Total long term operating lease obligation	Operating lease long term liabilities	$	11,182
Total long term financing lease obligation	Other long term liabilities		1,860
Total long term lease obligation		$	13,042

⁽¹⁾ Operating lease assets are recorded net of accumulated amortization of $2.3 million as of December 31, 2019

⁽²⁾ Financing lease assets are recorded net of accumulated amortization of $0.4 million as of December 31, 2019

The future minimum lease payments for finance and operating lease liabilities of the Company as lessee as of December 31, 2019 were as follows:

Maturity Date of Lease Liabilities	Operating Leases		Financing Leases		Total
(Dollars in thousands)
Year one	$	3,391		708		4,099
Year two		3,298		661		3,959
Year three		3,169		599		3,768
Year four		2,509		517		3,026
Year five		2,181		256		2,437
Subsequent years		1,266		—		1,266
Total lease payments		15,814		2,741		18,555
Less: Interest		1,900		289		2,189
Present value of lease liabilities	$	13,914		2,452		16,366

The weighted average remaining lease terms and discount rates of the leases held by the Company as of December 31, 2019 were as follows:

Lease Type

Weighted Average

Term in Years

Weighted Average
Interest Rate

Operating leases

4.9

5.3

Financing leases

4.2

5.3

The cash outflows of the leasing activity of the Company as lessee for the twelve months ended December 31, 2019 were as follows:

Cash Flow Source	Classification	Amount
(Dollars in thousands)
Operating cash outflows from operating leases	Operating activities	$	6,140
Operating cash outflows from financing leases	Operating activities		54
Financing cash outflows from financing leases	Financing activities		293

During the year ended December 31, 2019, the Company recorded non-cash ROU financing lease assets and corresponding financing lease obligations totaling $2.5 million primarily related to warehouse machinery and IT infrastructure lease agreements.

During the year ended December 31, 2019, the Company modified certain terms of the lease agreement with the landlord of Vertex’s Massachusetts facility, including early termination of the lease on November 30, 2019 and Vertex subleasing a portion of the space until the end of November. In connection with the modification, the Company recognized expense related to the early termination of approximately $2.2 million.

The Company has entered into two operating leases during 2020, with significant rights and obligations that total $0.8 million. All other leases are not material.