Ecovyst, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Leases

Leases

9 Months Ended

Sep. 30, 2019

12. Leases:

The Company has operating and finance lease agreements with remaining lease terms as of September 30, 2019 of up to 30 years, including leases of land, buildings, railcars, vehicles, manufacturing equipment and general office equipment. Some leases include options to terminate or extend for one or more years. These options are incorporated in the Company’s lease term when it is reasonably certain that the option will be exercised. Some leases include options to purchase, which the Company assesses under the guidance to determine if these leases should be classified as finance lease agreements.

When the Company enters into an arrangement, at inception, the Company determines if the arrangement contains a lease and whether that lease meets the classification criteria of a finance or operating lease. Some of the Company’s lease arrangements contain lease components (e.g. minimum rent payments) and non-lease components (e.g. maintenance). The Company accounts for the lease and non-lease components based on the estimated standalone price of each component. Certain of the Company’s lease agreements include rental payments that are adjusted periodically for an index or rate and these are initially measured using the index or rate in effect at the commencement date. Variable lease expense is recognized in the period in which the obligation for those payments is incurred. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The Company recognizes a right-of-use lease asset and lease liability at the lease commencement date based on the present value of the remaining lease payments over the lease term using the Company’s incremental borrowing rate. The Company is required to use the rate of interest that it would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. When the Company is unable to readily determine the discount rate implicit in the lease agreement, the Company utilizes its incremental borrowing rate over the relevant lease term. Short-term leases, which have an initial term of twelve months or less, are not recorded on the Company’s balance sheet.

Lease expense for operating leases is recognized on a straight-line basis over the lease term. Operating lease costs of $4,858 and $14,217 are included in cost of goods sold and in selling, general and administrative expenses on the condensed consolidated statements of income for the three and nine months ended September 30, 2019, respectively.

Lease expense for financing leases is bifurcated into two components, with the amortization expense component of the right-of-use asset recognized on a straight-line basis and the interest expense component recognized using the effective interest method over the lease term. The amortization expense component of the right-of-use lease asset is included in cost of goods sold and in selling, general and administrative expenses and the interest expense component is included in interest expense, net on the condensed consolidated statements of income. Finance lease, short-term lease and variable lease costs for the three and nine months ended September 30, 2019 were not material. Lease income is not material to the results of operations for the three and nine months ended September 30, 2019.

The table below presents the operating and finance right-of-use lease assets and lease liabilities recognized on the condensed consolidated balance sheet as of September 30, 2019:



	Classification	September 30, 2019
Assets
Operating lease assets	Right-of-use lease assets	$	54,238
Finance lease assets	Property, plant and equipment, net	1,582
Total leased assets		$	55,820

Liabilities
Current:
Operating lease liabilities	Operating lease liabilities—current	$	14,095
Finance lease liabilities	Accrued liabilities	176

Noncurrent:
Operating lease liabilities	Operating lease liabilities—noncurrent	38,473
Finance lease liabilities	Other long-term liabilities	364
Total lease liabilities		$	53,108

The Company’s weighted average remaining lease term and weighted average discount rate for operating leases as of September 30, 2019 are as follows:



	September 30, 2019
Weighted average remaining lease term (in years):
Operating leases	5.86
Finance leases	2.90

Weighted average discount rate:
Operating leases	5.74	%
Finance leases	4.67	%

Maturities of lease liabilities as of September 30, 2019 are as follows:



	Operating Leases			Finance Leases
Remainder of 2019	$	16,522		$	47
2020	13,198			201
2021	9,816			201
2022	7,256			123
2023	4,767			3
Thereafter	11,395			—
Total lease payments	62,954			575
Less: Interest	(10,386		)	(35		)
Total lease liabilities ⁽¹⁾	$	52,568		$	540


⁽¹⁾	Refer to the above table regarding the Company’s right-of-use lease assets and lease liabilities for the presentation of the lease liabilities in the Company’s condensed consolidated balance sheet at September 30, 2019.

At December 31, 2018, future minimum payments under non-cancelable operating leases under previous lease guidance was as follows:



Year	Amount
2019	$	18,457
2020	14,344
2021	11,432
2022	8,354
2023	6,198
Thereafter	17,477
	$	76,262

The following table presents other information related to our operating and finance leases and the impact on the Company’s condensed consolidated statement of cash flows:



	Nine months ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Payments on operating leases included in operating cash flows	$	12,158
Interest payments under finance lease obligations included in operating cash flows	29
Principal payments under finance lease obligations included in financing cash flows	169

Right-of-use assets obtained in exchange for new lease liabilities (non-cash):
Operating leases	5,148
Finance leases	—

Leases, Operating Leases