Leases |
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| Leases |
Leases
Our leasing operations consist of various arrangements, where we act either (i) as the lessee (mostly our corporate and regional offices on leased-facility model), or (ii) as the lessor (for our owned equipment rented to connectivity customers). Described below are the nature of these arrangements and financial statement impact:
Real Estate Leases (as a Lessee)
The Company has operating leases for office facilities throughout the United States and around the world. Upon inception of a contract, the Company evaluates if the contract, or part of the contract, contains a lease. A lease conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Leases include both a right-of-use asset and a lease liability. The right-of-use asset represents the Company’s right to use the underlying asset in the lease. The right-of-use asset also includes prepaid lease payments. The lease liability represents the present value of the remaining lease payments discounted using the incremental borrowing rate (“IBR”). Maintenance and property tax expenses are accounted for on an accrual basis as variable lease costs. The Company has elected to combine lease and nonlease components, if applicable.
The Company records lease expense on a straight-line basis over the lease term in general and administrative expense. Total rent expense for the three months ended March 31, 2019 was $1.6 million.
The Company’s leases have remaining lease terms of 1 year to 12 years. Lease terms include renewal or termination options that the Company is reasonably certain to exercise. For leases with a term of twelve months or less, the Company does not record a right-of-use asset and associated lease liability on its condensed consolidated balance sheet.
The Company reviews the carrying value of its right-of-use assets for impairment whenever events or changes in circumstances indicate that the recorded value may not be recoverable. Recoverability of assets is measured by comparing the carrying amounts of the assets to the estimated future undiscounted cash flows, excluding financing costs. If the Company determines that an impairment exists, any related impairment loss is estimated based on fair values.
Equipment Held by Customers (as a Lessor)
The Company either sells or leases certain equipment (including antennas, modems and routers, among others) as part of the bandwidth service to our maritime and land connectivity customers. To the extent there are no changes to existing customer lease arrangements, we account for equipment transactions as operating leases and, hence, recorded the equipment cost as part of property and equipment. We recognize lease payments for operating leases as licensing & services revenue in our consolidated statement of operations on a straight-line basis over the lease term.
We assess any new arrangements or modifications to existing arrangements and determine the impact of the economic circumstances (and any changes thereto) to the lease classification of these equipment held by our connectivity customers. We recognize investments in leases for sales-type leases when the risk and rewards of ownership are not fully transferred to the customer due to our continued involvement with the equipment.
The income on operating leases and sales-type lease for the three-months ended March 31, 2019 is presented in the foregoing table (in thousands):
(1) This is classified as Licensing and services revenue.
(2) This includes the customer equipment arrangement classified as sales-type lease as of March 31, 2019.
Other Arrangements (as a Lessee)
The Company leases certain computer software and equipment under finance leases that expire on various dates through 2020, for which the outstanding lease liability balance is assessed as insignificant as of March 31, 2019.
The Company also evaluates its satellite bandwidth arrangements for embedded leases when the Company has the right to control the use of a significant portion of the asset. The Company has entered into a lease arrangement for bandwidth capacity that will commence during the quarter ended June 30, 2019.
Impact on Financial Statements
The following table summarizes the impact of the adoption of ASC 842 on the Company’s condensed consolidated balance sheet and consolidated statement of operations, including both our real estate leases and a customer equipment arrangement meeting the sales-type lease classification (in thousands):
(1) This includes the customer equipment arrangement classified as sales-type lease as of March 31, 2019, with net impact to our gross margin of $185,000.
(2) Since we elected to adopt the package of practical expedients with the ASC 842 implementation as of January 1, 2019, all existing customer equipment arrangements continue to be classified as operating leases, except as described in preceding footnote. Any new arrangements or changes/modifications to existing contracts after January 1, 2019 adoption date are subject to lease classification assessment in accordance with ASC 842’s new lease accounting model.
Supplemental Cash Flow Information, Weighted-Average Remaining Lease Term and Discount Rate
Because the rate implicit in each lease is not readily determinable, the Company uses its IBR to determine the present value of the lease payments. The following table discloses the weighted-average remaining lease term and IBR for our operating real estate leases, as well as supplemental cash flow information (in thousands):
Maturity Analysis
As Lessee -- Real Estate Operating Leases
The following table reflects undiscounted cash flows on an annual basis for the Company’s lease liabilities as of March 31, 2019 (in thousands):
The following is a schedule of future minimum lease payments under operating leases as of December 31, 2018 (in thousands):
As Lessor -- Maritime & Land Monthly Recurring Charges
The following is a schedule of future monthly recurring charges (“MRCs”) arising from our contractual arrangements with Maritime & Land Connectivity customers as of March 31, 2019 (in thousands):
The following is a schedule of future MRCs arising from our contractual arrangements with Maritime & Land Connectivity customers as of December 31, 2018 (in thousands):
The book value of the equipment held by customers under operating leases, which are classified as “Equipment” in Note 4 - Property & Equipment, follows:
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