Lease Obligations

6 Months Ended

Jun. 30, 2019

Note 8 – Lease Obligations

In the ordinary course of business, the Company enters into agreements that provide financing for machinery and equipment and for other of its facility, vehicle and equipment needs, including related party leases. The Company reviews all arrangements for potential leases, and at inception, determines whether a lease is an operating or finance lease. Lease assets and liabilities, which generally represent the present value of future minimum lease payments over the term of the lease, are recognized as of the commencement date. Leases with an initial lease term of twelve months or less are classified as short-term leases and are not recognized in the consolidated balance sheets unless the lease contains a purchase option that is reasonably certain to be exercised.

Lease term, discount rate, variable lease costs and future minimum lease payment determinations require the use of judgment, and are based on the facts and circumstances related to the specific lease. Lease terms are generally based on their initial non-cancelable terms, unless there is a renewal option that is reasonably certain to be exercised. Various factors, including economic incentives, intent, past history and business need are considered to determine if a renewal option is reasonably certain to be exercised. The incremental borrowing rate, which is based on information available as of the lease commencement date, including applicable lease terms and the current economic environment, is generally used to determine the value of the lease obligation. The Company applies a portfolio approach in determining its incremental borrowing rate.

Finance Leases

Assets associated with finance leases are recorded within property and equipment, with a corresponding amount recorded within the Company’s debt obligations. Expense associated with finance leases is composed of the leased asset’s depreciation expense and interest on the lease liability. Additions are included within the supplemental disclosures of non-cash information in the consolidated statements of cash flows. Many of the Company’s finance lease agreements contain a purchase option, which the Company generally intends to exercise, as the purchase option prices are typically below the estimated fair market values of the related assets. The gross amount of assets held under finance leases as of June 30, 2019 and December 31, 2018 totaled $387.2 million and $337.6 million, respectively. Assets held under finance leases, net of accumulated depreciation, totaled $314.3 million and $246.8 million as of June 30, 2019 and December 31, 2018, respectively. Depreciation expense associated with finance leases totaled $11.2 million and $21.2 million for the three and six month periods ended June 30, 2019, respectively.

Operating Leases

Operating lease right-of-use assets and liabilities are recognized on the consolidated balance sheets. Operating lease costs are recognized over the term of the lease on a straight-line basis, and are recorded as rent expense, primarily within costs of revenue, excluding depreciation and amortization. Fixed costs for operating leases are composed of initial base rent amounts plus any fixed annual increases. Variable costs for operating leases consist primarily of common area maintenance expenses and taxes. In the event the Company cancels or terminates a lease before the end of the lease term, the Company is typically liable for the remaining lease payments, and such payments are generally recorded within rent expense. For operating leases with purchase options, the option to purchase equipment is considered to be at its estimated fair market value. For the three and six month periods ended June 30, 2019, operating lease additions, excluding the effect of adoption of approximately $230 million, totaled $54 million and $66 million, respectively.

For the three and six month periods ended June 30, 2019, rent expense for leases that have terms in excess of one year totaled approximately $27.4 million and $55.3 million, respectively, of which $2.1 million and $4.4 million, respectively, represented variable lease costs. The Company also incurred rent expense for leases with terms of one year or less totaling approximately $115.6 million and $208.4 million for the three and six month periods ended June 30, 2019, respectively. For the three and six month periods ended June 30, 2018, rent and related expense for operating leases that have non-cancelable terms in excess of one year totaled approximately $25.3 million and $52.2 million, respectively, and rent and related expense for operating leases having original terms of one year or less totaled approximately $104.9 million and $196.6 million, respectively. Rent expense for operating leases is generally consistent with the amount of the related payments, and is included within operating activities in the consolidated statements of cash flows.

Additional Lease Information

Future minimum lease commitments as of June 30, 2019 were as follows (in millions):



	Finance Leases			Operating Leases
2019, remaining six months	$	48.6		$	45.9
2020	92.7			75.8
2021	79.0			53.7
2022	41.3			32.3
2023	7.6			17.8
Thereafter	0.3			41.3
Total minimum lease payments	$	269.5		$	266.8
Less amounts representing interest	(16.6		)	(20.5		)
Total lease obligations, net of interest	$	252.9		$	246.3
Less current portion	86.9			77.6
Long-term portion of lease obligations, net of interest	$	166.0		$	168.7

As of June 30, 2019, finance leases had a weighted average remaining lease term of 3.0 years and a weighted average discount rate of 4.2%. Non-cancelable operating leases had a weighted average remaining lease term of 4.5 years and a weighted average discount rate of 4.3% as of June 30, 2019.

See Note 1 - Business, Basis of Presentation and Significant Accounting Policies for information pertaining to the Company’s adoption of ASU 2016-02, Leases (Topic 842).