LEASES

6 Months Ended

Jun. 30, 2019

Products Corporation leases facilities for executive offices, warehousing, research and development and sales operations and leases various types of equipment under operating and finance lease agreements. The majority of Products Corporation’s real estate leases, in terms of total undiscounted payments, are located in the U.S.

As disclosed in Note 1, in February 2016, the FASB issued ASU No. 2016-02, which requires that a lessee recognize, for both finance leases and operating leases, a liability to make lease payments (the lease liability) and a right-of-use (“ROU”) asset representing its right to use the underlying leased asset for the lease term. The lease liability is equal to the present value of the lease payments and the ROU asset is based on the lease liability, subject to certain adjustments, such as pre-payments, initial direct costs, lease incentives and accrued rent.

The Company adopted ASU No. 2016-02 beginning as of January 1, 2019, using a modified retrospective approach and applying the standard’s transition provisions at the effective date of January 1, 2019. The comparative information has not been restated and continues to be reported under the lease accounting standard in effect for those periods. Refer to Note 20, "Contingencies," in the Company's 2018 Form 10-K for detail of its minimum rental commitments at December 31, 2018 under legacy ASC 840, "Leases".

The standard had a material impact on the Company’s unaudited consolidated balance sheets but did not have an impact on the Company’s unaudited statements of operations and comprehensive loss and cash flows.

As of January 1, 2019, the Company's adoption of ASU No. 2016-02 resulted in:


•	the recognition of ROU assets for operating leases and finance leases of approximately $109.3 million and $1.5 million, respectively;


•	the recognition of lease liabilities for operating leases and finance leases of approximately $123.4 million and $1.4 million, respectively; and

•

a decrease of approximately $11.3 million in accrued rent (of which $10.7 million was recorded in other long-term liabilities and $0.6 million was recorded in accrued expenses and other current liabilities), a decrease of approximately $3.5 million in lease termination liabilities and a decrease of approximately $0.7 million in prepaid rent, due to adjustments to balances previously recorded on the unaudited condensed consolidated balance sheets upon transition from the legacy ASC 840 to ASC 842.

Upon adoption of ASU No. 2016-02, the Company elected the available practical expedients allowed by the guidance under:


•	ASC 842-10-15-37, by not separating lease components from non-lease components and instead accounting for all components as a single lease component for all of its classes of underlying assets, i.e., for any type of equipment leases and real estate leases; and


•	ASC 842-10-65-1, by not reassessing at the transition date: (i) whether any expired or existing contracts are or contain leases; (ii) lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases.

The Company determines if an arrangement is a lease at inception, considering whether the contract conveys a right to control the use of the identified asset for a period of time in exchange for consideration. Operating leases are included in operating lease ROU assets, recorded within “Property, Plant and Equipment”, and operating lease liabilities are recorded within either "Accrued expenses and other current liabilities" and/or "Other long-term liabilities" in the Company’s unaudited consolidated balance sheets. Finance leases are included in finance lease ROU assets recorded within “Property, Plant and Equipment”, and finance lease liabilities are recorded within either "Accrued expenses and other current liabilities" and/or "Other long-term liabilities" in the Company’s unaudited consolidated balance sheets.

As most of the Company’s leases do not provide the lease implicit rates, the Company uses its incremental borrowing rates as the discount rate, adjusted as applicable, based on the information available at the lease commencement dates to determine the present value of lease payments. The Company may use the lease implicit rate, when readily determinable, as the discount rate to determine the present value of lease payments. As of January 1, 2019, the Company used an average discount rate of approximately 16%, based on an estimate of the Company's incremental borrowing rates.

Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for operating lease payments is recognized on a straight-line basis over the applicable lease term.

At lease commencement, for initial measurement, variable lease payments that do not depend on an index or rate, if any, are excluded from lease payments. Subsequent to initial measurement, these variable payments are recognized when the event determining the amount of the variable consideration to be paid occurs. Leases with an initial lease term of 12 months or less are not included in the lease liability or ROU asset.

The following table includes disclosure related to the new lease standard:



	Six Months Ended
	June 30, 2019
Lease Cost:
Finance Lease Cost:
Amortization of ROU assets	$	0.1
Interest on lease liabilities	0.0
Operating Lease Cost	21.3
Total Lease Cost	21.4

Other Information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from finance leases	0.0
Operating cash flows from operating leases	21.0
Financing cash flows from finance leases	0.4

ROU assets for finance leases	$	1.6
ROU assets for operating leases	99.2
Amortization on ROU assets for finance leases	0.1
Amortization on ROU assets for operating leases	11.5

Weighted-average remaining lease term - finance leases	3.4 years
Weighted-average remaining lease term - operating leases	6.3 years

Weighted-average discount rate - finance leases	15.9		%
Weighted-average discount rate - operating leases	15.8		%

Maturities of lease liabilities as of June 30, 2019 were as follows:



	Operating Leases		Finance Leases
July 2019 through December 2019	$	18.7	$	0.5
2020	33.0		0.6
2021	29.5		0.5
2022	23.1		0.3
2023	18.9		—
Thereafter	60.3		—
Total undiscounted cash flows	$	183.5	$	1.9

Present value:
Short-term lease liability	$	17.6	$	0.9
Long-term lease liability	94.0		0.7
Total lease liability	$	111.6	$	1.6
Difference between undiscounted cash flows and discounted cash flows	$	71.9	$	0.3

LEASES

As of January 1, 2019, the Company's adoption of ASU No. 2016-02 resulted in:


•	the recognition of ROU assets for operating leases and finance leases of approximately $109.3 million and $1.5 million, respectively;


•	the recognition of lease liabilities for operating leases and finance leases of approximately $123.4 million and $1.4 million, respectively; and

•

Upon adoption of ASU No. 2016-02, the Company elected the available practical expedients allowed by the guidance under:


•	ASC 842-10-15-37, by not separating lease components from non-lease components and instead accounting for all components as a single lease component for all of its classes of underlying assets, i.e., for any type of equipment leases and real estate leases; and


•	ASC 842-10-65-1, by not reassessing at the transition date: (i) whether any expired or existing contracts are or contain leases; (ii) lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases.

The following table includes disclosure related to the new lease standard:



	Six Months Ended
	June 30, 2019
Lease Cost:
Finance Lease Cost:
Amortization of ROU assets	$	0.1
Interest on lease liabilities	0.0
Operating Lease Cost	21.3
Total Lease Cost	21.4

Other Information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from finance leases	0.0
Operating cash flows from operating leases	21.0
Financing cash flows from finance leases	0.4

ROU assets for finance leases	$	1.6
ROU assets for operating leases	99.2
Amortization on ROU assets for finance leases	0.1
Amortization on ROU assets for operating leases	11.5

Weighted-average remaining lease term - finance leases	3.4 years
Weighted-average remaining lease term - operating leases	6.3 years

Weighted-average discount rate - finance leases	15.9		%
Weighted-average discount rate - operating leases	15.8		%

Maturities of lease liabilities as of June 30, 2019 were as follows:



	Operating Leases		Finance Leases
July 2019 through December 2019	$	18.7	$	0.5
2020	33.0		0.6
2021	29.5		0.5
2022	23.1		0.3
2023	18.9		—
Thereafter	60.3		—
Total undiscounted cash flows	$	183.5	$	1.9

Present value:
Short-term lease liability	$	17.6	$	0.9
Long-term lease liability	94.0		0.7
Total lease liability	$	111.6	$	1.6
Difference between undiscounted cash flows and discounted cash flows	$	71.9	$	0.3