E. Leases

July 1, 2019,

we adopted FASB Accounting Standards Codification, or ASC, Topic

842,

Leases

, or ASC

842,

which requires the recognition of the right-of-use assets and related operating and finance lease liabilities on the balance sheet. As permitted by ASC

842,

we elected the adoption date of

July 1, 2019,

which is the date of initial application. As a result, the consolidated balance sheet prior to

July 1, 2019

was

not

restated, continues to be reported under ASC Topic

840,

Leases

, or ASC

840,

which did

not

require the recognition of operating lease assets or liabilities on the balance sheet, and is

not

comparative. Under ASC

842,

all leases are required to be recorded on the balance sheet and are classified as either operating leases or finance leases. The lease classification affects the expense recognition in the income statement. Operating lease expenses are recorded entirely in operating expenses. Finance lease charges are split, where amortization of the right-of-use asset is recorded in operating expenses and an implied interest component is recorded in interest expense. The expense recognition for operating leases and finance leases under ASC

842

is substantially consistent with ASC

840.

As a result, there is

material difference in our results of operations presented in our Condensed Consolidated Statement of Income and Comprehensive Income for each period presented.

We adopted ASC

842

using a modified retrospective approach for all leases existing at

July 1, 2019.

The adoption of ASC

842

had a substantial impact on our balance sheet. The most significant impact was the recognition of the operating lease right-of-use assets and the liability for operating leases. As of

July 1, 2019,

we had

finance leases. Upon adoption, leases that were previously classified as operating leases under ASC

840

were classified as operating leases under ASC

842,

and we recorded an adjustment of

$20.7

million to operating lease right-of-use assets and an adjustment of

$20.9

million to the related lease liability. The lease liability is based on the present value of the remaining minimum lease payments, determined under ASC

840,

discounted using our secured incremental borrowing rate at the effective date of

July 1, 2019,

and using the expected lease term, including any optional renewals, as the tenor. As permitted under ASC

842,

we elected several practical expedients that permit us to

not

reassess (

) whether existing contracts are or contain a lease, (

) the classification of existing leases, and (

) whether previously capitalized costs continue to qualify as initial indirect costs. The application of the practical expedients did

not

have a significant impact on the measurement of the operating lease liability.

The impact of the adoption of ASC

842

on the balance sheet at

June 30, 2019

was (in thousands):

	As Reported June 30, 2019		Adoption of ASC 842 Increase (Decrease)			Balance of July 1, 2019
Operating lease right-of-use assets	$	—	$	20,774		$	20,774
Total assets		93,490		20,774			114,264
Deferred rent		543		(543	)		—
Long-term liability – Operating leases		—		20,897			20,897
Retained earnings		57,380		420			57,800
Total liabilities and equity		93,490		20,774			114,264

We lease substantially all of our manufacturing and support office space used to conduct our business. We adopted ASC

842

effective

July, 1 2019.

For contracts entered into on or after that effective date, at the inception of a contract we assess whether the contract is, or contains, a lease. Our assessment is based on: (

) whether the contract involves the use of a distinct identified asset, (

) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period of the contract, and (

) whether we have the right to direct the use of the asset during such time period. At inception of a lease, we allocate the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments.

Leases are classified as either finance leases or operating leases. A lease must be classified as a finance lease if any of the following criteria are met: the lease transfers ownership of the asset by the end of the lease term, the lease contains an option to purchase the asset that is reasonably certain to be exercised, the lease term is for a major part of the remaining useful life of the asset or the present value of the lease payments equals or exceeds substantially all of the fair value of the asset. A lease is classified as an operating lease if it does

not

meet any of these criteria. Substantially all our operating leases are comprised of payments for the use of manufacturing space leases.

For all leases at the lease commencement date, a right-of-use asset and a lease liability are recognized. The right-of-use asset represents the right to use the leased asset for the lease term. The lease liability represents the present value of the lease payments under the lease.

The right-of-use asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any initial direct costs incurred, consisting mainly of brokerage commissions, less any lease incentives received. All right-of-use assets are reviewed for impairment. The lease liability is initially measured at the present value of the lease payments, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, our secured incremental borrowing rate for the same term as the underlying lease. For our real estate and other operating leases, we use our secured incremental borrowing rate. For our finance leases, we will use the rate implicit in the lease or our secured incremental borrowing rate if the implicit lease rate cannot be determined.

Lease payments included in the measurement of the lease liability comprise the following: the fixed noncancelable lease payments, payments for optional renewal periods where it is reasonably certain the renewal period will be exercised, and payments for early termination options unless it is reasonably certain the lease will

not

be terminated early.

Some of our manufacturing leases contain variable lease payments, including payments based on an index or rate. Variable lease payments based on an index or rate are initially measured using the index or rate in effect at lease commencement and separated into lease and non-lease components based on the initial amount stated in the lease or standalone selling prices. Lease components are included in the measurement of the initial lease liability. Additional payments based on the change in an index or rate, or payments based on a change in our portion of the operating expenses, including real estate taxes and insurance, are recorded as a period expense when incurred. Lease modifications result in remeasurement of the lease liability.

Lease expense for operating leases consists of the lease payments plus any initial direct costs, primarily brokerage commissions, and is recognized on a straight-line basis over the lease term. Included in lease expense are any variable lease payments incurred in the period that were

not

included in the initial lease liability. Lease expense for finance leases consists of the amortization of the right-of-use asset on a straight-line basis over the lease term and interest expense determined on an amortized cost basis. The lease payments are allocated between a reduction of the lease liability and interest expense.

We have elected

not

to recognize right-of-use assets and lease liabilities for short-term leases that have a term of

months or less. The effect of short-term leases on our right-of-use asset and lease liability was

not

material.