Leases

9 Months Ended

Sep. 30, 2019

Leases

The Company determines if an arrangement is a lease at inception. Lease Right of Use, or ROU, assets and noncurrent lease liabilities are presented as distinct accounts in the Condensed Consolidated Balance Sheet. Current lease liabilities are included within Other current liabilities in the Condensed Consolidated Balance Sheet. The Company does not have any Finance leases. ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. The Company uses its estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments, as the implicit rate is not readily determinable. The Company gives consideration to publicly available data for instruments with similar characteristics when calculating its incremental borrowing rates. The lease term includes options to extend the lease when it is reasonably certain that the Company will exercise that option. Leases with a term of 12 months or less are not recorded on the balance sheet. Certain leases include one or more options to renew, with renewal terms that can extend the lease up to five years and certain leases also include options to purchase the leased property. We include options that we are reasonably certain to exercise in our evaluation of the lease term after considering all relevant economic and financial factors. We have lease agreements with lease and non-lease components, which are generally accounted for as a single lease component.

The Company primarily leases rail cars, inventory tanks, buildings, equipment, and fleet cars. The Company recorded ROU assets of $48.8 million and lease liabilities of $48.9 million, respectively at January 1, 2019. The impact to the Company's Condensed Consolidated Statement of Comprehensive Income and Condensed Consolidated Statement of Cash Flows was not material. As of September 30, 2019, the Company had 45 leases, with remaining terms ranging from less than 1 year to 20 years.

Under one of its warehousing agreements with third-party service providers, the Company controls the amount, timing, placing, and removing of items for the entire capacity of the warehouse. Therefore the Company controls the asset, and the warehouse is deemed to be leased for accounting purposes. For this warehousing agreement, the Company accounts for the lease and non-lease components separately. The lease component consists of the warehouse and the non-lease components consist of services, such as loading, unloading, and maintenance. The Company allocates the consideration in the warehousing agreement to the lease and non-lease components using their relative standalone prices.

In December 2018, the Company sold its Chicago Heights, IL warehouse for $23.0 million. Under the agreement, the Company is leasing back the property from the purchaser over a period of 20 years. The Company is accounting for the leaseback as an operating lease. The annual rent for the initial period of 5 years is approximately $1.5 million plus taxes and subsequently will increase 10% every 5 years through the end of the lease. Prior to the adoption of the new lease standard, gains on sale-leaseback transactions were deferred and recognized in the statement of comprehensive income over the lease term. Under the new lease standard, gains on sale-leaseback transactions (subject to adjustment for off-market terms) are recognized immediately. Therefore, the sale-leaseback gain of $11.9 million (net of tax of $4.0 million) was deferred as of December 31, 2018 and on the transition to ASC 842 effective January 1, 2019, was reclassed to retained earnings.

The components of lease expense were as follows:



	Three months ended		Nine months ended
	September 30, 2019		September 30, 2019
Operating lease expense:
Cost of goods sold	$	1,538	$	4,529
Selling, general and administrative	902		2,711
Total lease expense	$	2,440	$	7,240

Supplemental balance sheet information related to the leases were as follows:



	September 30, 2019
Operating lease ROU assets	$	55,597

Current operating lease liabilities	$	6,830
Noncurrent operating lease liabilities	49,077
Total operating lease liabilities	$	55,907

Supplemental cash flow and other information related to the leases were as follows:



	Nine months ended
	September 30, 2019
Cash paid for amounts included in the measurement of operating lease liabilities	$	7,103
ROU assets obtained in exchange for new operating lease liabilities	$	11,844



	September 30, 2019
Weighted average remaining lease term of operating leases (in years)	11
Weighted average discount rate of operating leases	5.29	%

Maturities of lease liabilities were as follows:



	September 30, 2019
2019	$	2,403
2020	9,455
2021	8,625
2022	8,068
2023	7,475
2024 and thereafter	39,521
Total lease payments	$	75,547
Less: imputed interest	19,640
Total lease obligations	$	55,907
Less: current obligations	6,830
Long-term lease obligations	$	49,077

As required by ASC 842, the future minimum operating lease payments on non-cancelable leases as of December 31, 2018 under the accounting standards in effect as of that period were as follows:



	December 31, 2018
2019	$	8,259
2020	7,130
2021	6,490
2022	6,032
2023	5,467
2024 and thereafter	33,957
Long-term lease obligations	$	67,335

Innophos Holdings, Inc. 10-Q