Adoption of Accounting Standards Codification 842

9 Months Ended

Sep. 28, 2019

Adoption of Accounting Standards Codification 842

We adopted ASC 842 with an initial application as of January 1, 2019. We utilized the additional transition method, under which the cumulative effect of initially applying the new guidance is recognized as an adjustment to certain captions on the condensed consolidated balance sheet, including the opening balance of retained earnings in the nine months ended September 28, 2019. As part of the adoption of ASC 842, we have elected to utilize the following practical expedients that are permitted under ASC 842:


•	Need not reassess whether any expired or existing contracts are or contain leases;


•	Need not reassess the lease classification for any expired or existing leases;


•	Need not reassess initial direct costs for any existing leases;


•	As an accounting policy election by class of underlying asset, choose not to separate nonlease components from lease components and instead to account for each separate lease component and the nonlease components associated with that lease component as a single lease component; and


•	As an accounting policy election not to apply the recognition requirements in ASC 842 to short term leases (a lease at commencement date has a lease term of 12 months or less and does not contain a purchase option that the lessee is reasonably certain to exercise).

The net impact to the various captions on our January 1, 2019 opening unaudited condensed consolidated balance sheets was as follows:



	(In thousands)
	December 31, 2018					January 1, 2019
Unaudited Condensed Consolidated Balance Sheets	Balances Without Adoption of ASC 842		Effect of Adoption			Balances With Adoption of ASC 842
Assets
Other current assets	$	6,531	$	(208	)	$	6,323
Operating lease right-of-use assets	$	—	$	18,985		$	18,985
Non-current deferred income taxes	$	308	$	5		$	313
Other assets	$	5,155	$	254		$	5,409
Liabilities
Operating lease liabilities	$	—	$	2,544		$	2,544
Accrued and other liabilities	$	37,786	$	(329	)	$	37,457
Non-current operating lease liabilities	$	—	$	18,117		$	18,117
Non-current deferred income taxes	$	18,070	$	(76	)	$	17,994
Other long-term liabilities	$	14,441	$	(956	)	$	13,485
Shareholders’ Equity
Retained earnings	$	180,356	$	(264	)	$	180,092

The net impact to retained earnings as a result of adopting ASC 842 on the January 1, 2019 opening balance sheet was shown as a change in “other” on the condensed consolidated statements of cash flows.

We have operating and finance leases for manufacturing facilities, corporate offices, and various equipment. Our leases have remaining lease terms of 1 year to 10 years, some of which include options to extend the leases for up to 10 years, and some of which include options to terminate the leases within 1 year.

The components of lease expense for the three and nine months ended September 28, 2019 were as follows:



	(In thousands)
	Three Months Ended		Nine Months Ended
	September 28, 2019		September 28, 2019
Operating leases expense	$	1,041	$	2,960

Finance leases expense:
Amortization of right-of-use assets	$	59	$	159
Interest on lease liabilities	12		32
Total finance lease expense	$	71	$	191

Short term lease expense for the three and nine months ended September 28, 2019 were not material.

Supplemental cash flow information related to leases for the nine months ended September 28, 2019 was as follows:



	(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	3,005
Operating cash flows from finance leases	$	32
Financing cash flows from finance leases	$	119

Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	1,437
Finance leases	$	483

The weighted average remaining lease terms as of September 28, 2019 were as follows:



	(In years)
Operating leases	7
Finance leases	4

When a lease is identified, we recognize a right-of-use asset and a corresponding lease liability based on the present value of the lease payments over the lease term discounted using our incremental borrowing rate, unless an implicit rate is readily determinable. As the discount rate in our leases is usually not readily available, we use our own incremental borrowing rate as the discount rate. Our incremental borrowing rate is based on the interest rate on our term loan, which is a secured rate.

The weighted average discount rate as of September 28, 2019 was as follows:



Operating leases	6.5	%
Finance leases	6.5	%

Maturity of operating and finance lease liabilities are as follows:



	(In thousands)
	Operating Leases		Finance Leases
2019 (Excluding the nine months ended September 28, 2019)	$	1,025	$	60
2020	4,129		242
2021	4,005		229
2022	3,610		92
2023	3,275		53
Thereafter	8,832		73
Total lease payments	24,876		749
Less imputed interest	4,805		84
Total	$	20,071	$	665

Operating lease payments include $11.4 million related to options to extend lease terms that are reasonably certain of being exercised. As of September 28, 2019, there are no legally binding minimum lease payments for leases signed but not yet commenced.

Finance lease payments related to options to extend lease terms that are reasonably certain of being exercised are not significant. As of September 28, 2019, it excludes $2.1 million of legally binding minimum lease payments for leases signed but not yet commenced. These finance leases will commence during 2019 with lease terms of 5 years to 10 years.

As previously disclosed in our 2018 Annual Report on Form 10-K and under the previous accounting maturities of lease liabilities were as follows as of December 31, 2018:



	(In thousands)
2019	$	3,680
2020	3,405
2021	2,789
2022	1,404
2023	980
Thereafter	580
Total	$	12,838