In February 2016 the FASB issued ASU 2016-02, Leases (“ASC 842”), which requires lessees to recognize right of use (“ROU”) assets and lease liabilities on the balance sheet for all leases with terms greater than twelve months. Lease obligations are measured at the present value of remaining lease payments and accounted for using the effective interest method. Leases will be classified as finance or operating, with classification affecting the pattern and expense recognition in the income statement.

The Company adopted the new lease standard on January 1, 2019 by applying the new transition alternative. As such, the Company initially applied the new standard to all leases existing at the beginning of the period of adoption. Prior period financial results were not updated and the disclosures required under the new standard were not provided for dates and periods before January 1, 2019.

The new standard provides a number of optional practical expedients in transition. The Company has elected the package of practical expedients permitted under the transition guidance within the new standard, that allows the Company (1) to not reassess whether any expired or existing contracts are or contain leases, (2) to not reassess the lease classification for any expired or existing leases, and (3) to not reassess initial direct costs for any existing leases. The Company has also elected, for its vehicle and equipment leases, the practical expedient that permits the ability to choose not to separate non-lease components from lease components and instead to account for each separate lease component and the non-lease components associated with that lease component as a single lease component.

Further, the Company has made an accounting policy election to keep leases with an initial term of twelve months or less off the balance sheet. This policy applies to all classes of the underlying assets. The Company will recognize those lease payments in the consolidated income statement over the lease term.

The determination of the incremental borrowing rate used to calculate the present value of the ROU assets and lease liabilities depends on whether an interest rate is specified in the lease or not. If the lease specifies a rate, that rate is used when calculating the present value of lease payments. If the rate is not readily determinable, which is generally the case for the Company, the Company’s incremental borrowing rate (“IBR”) as of the date of inception is used (for initial measurement, the IBR was determined as of the adoption date of the standard). The incremental borrowing rate is the estimated rate of interest that Cambrex would have to pay to borrow on a collateralized basis over a similar term and amount equal to the lease payments in a similar economic environment.

The Company has operating leases expiring on various dates through the year 2032 with options to extend beyond this date. The leases are primarily for the rental of manufacturing, office and warehouse space in addition to vehicles, forklifts and equipment. The Company generally enters into operating leases when it doesn’t have the desire to own the asset.

The Company’s operating leases related to the rental of manufacturing, office and warehouse space often contain one or more options to extend the lease, typically for a period of three to five years each and based on the then prevailing market rental rate. The Company will generally exercise these options to extend the lease for its manufacturing space due to the significant costs to install and remove the manufacturing equipment should the Company decide to vacate the building. As such, the lease terms used in calculating the value of the ROU assets and lease liabilities for these types of leases will include the periods covered under any renewal options.

The Company’s equipment, vehicle and forklift leases may or may not contain an option to extend the lease but as a general rule, the Company doesn’t exercise these options because there are no associated costs to return the equipment and either purchase or lease new equipment. As a result, these extension options aren’t considered in the calculation of ROU assets and lease liabilities. If or when circumstances change and the Company becomes reasonably certain that it is going to exercise the extension option, the ROU asset and lease liability would be remeasured at that time.

For operating leases, expense is recognized evenly over the term of the lease as either cost of goods sold or selling, general and administrative expense, depending on the leased asset, in the Company’s income statement.

As of June 30, 2019, ROU assets related to operating leases were $36,474 and reflected in the Company’s balance sheet under the caption “Right of use assets.” As of June 30, 2019, short-term operating lease liabilities were $2,937 and reflected in the Company’s balance sheet under the caption “Operating lease liabilities, current” and long-term operating lease liabilities were $33,840 and reflected in the Company’s balance sheet under the caption “Operating lease liabilities, non-current.”

The Company leases its manufacturing and office facilities in Longmont, Colorado. This facility is part of the ESDT segment. The lease expires in May 2025 and includes two five year extension options at prevailing market rates. Rent expense is recognized on a straight-line basis and is approximately $1,700 per year.

The Company leases its manufacturing and office facilities in Durham, North Carolina and is part of the ESDT segment. The lease expires in March 2023 and includes one five year extension option at prevailing market rates. Rent expense is recognized on a straight-line basis and is approximately $1,300 per year.

The Company leases office space in East Rutherford, New Jersey for its corporate headquarters. The lease expires in November 2029. This lease includes one five year extension option at prevailing market rates but at this time, the expiration date is too far in the future to be reasonably certain that the lease will be extended. Rent expense is recognized on a straight-line basis and is approximately $400 per year.

The Company has finance leases expiring on various dates through the year 2023. The leases are primarily for the rental of manufacturing equipment. These leased assets are amortized on a straight-line basis and recorded as depreciation expense and the financing component is recorded as interest expense in the income statement resulting in higher expense in the earlier part of the lease term.

For finance leases, the depreciation expense is recognized evenly over the term of the lease as cost of goods sold and selling, general and administrative expense in the Company’s income statement. The interest expense component is recognized separately as interest expense in the Company’s income statement.

As of June 30, 2019, ROU assets related to finance leases were $3,471 and reflected in the Company’s balance sheet under the caption “Property, plant and equipment, net.” As of June 30, 2019, short-term finance lease liabilities were $1,118 and reflected in the Company’s balance sheet under the caption “Accrued expenses and other current liabilities” and long-term finance lease liabilities were $1,132 and reflected in the Company’s balance sheet under the caption “Other non-current liabilities.”

The following tables summarize the lease activity for the three and six months ended June 30, 2019:

	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
Lease cost:
Operating lease cost	$	1,191	$	2,377
Finance lease cost
Amortization of ROU assets		72		144
Interest on lease liabilities		41		88
Short-term lease cost		349		566
Total lease cost	$	1,653	$	3,175

	Three Months Ended June 30, 2019			Six Months Ended June 30, 2019
Supplemental cash flow information:
Operating cash flows from operating leases	$	(995	)	$	(2,062	)
Operating cash flows from finance leases		(38	)		(51	)
Financing cash flows from finance leases		(251	)		(527	)

				June 30, 2019
Supplemental balance sheet information:
Weighted-average remaining lease term - operating leases (yrs)					9.9
Weighted-average remaining lease term - finance leases (yrs)					2.6
Weighted-average discount rate - operating leases					4.2	%
Weighted-average discount rate - finance leases					4.1	%

The following table represents the Company’s undiscounted lease maturities over the next five years and beyond for its operating and finance leases. The undiscounted cash flows disclosed below represent full years for all periods presented.

Below is a reconciliation of the Company’s undiscounted cash flows to the operating and finance lease liabilities recognized in the consolidated balance sheet.

	Total Undiscounted Cash Flows
	Operating Leases		Finance Leases
2019	$	4,746	$	1,126
2020		5,142		1,033
2021		5,068		596
2022		4,972		201
2023		4,977		43
2024+		26,428		-
		51,333		2,999

Present values ("PV"):
Lease liabilities, current		2,937		1,118
Lease liabilities, non-current		33,840		1,132
Total PV of lease liabilities		36,777		2,250
Difference between undiscounted cash flows and discounted cash flows	$	14,556	$	749

At December 31, 2018, under ASC 840, the Company had operating leases expiring on various dates through the year 2029. The leases were primarily for the rental of office space. At December 31, 2018, future minimum commitments under non-cancelable operating lease arrangements were as follows:

	Total Undiscounted Cash Flows
2019	$	1,004
2020		1,204
2021		1,126
2022		974
2023		937
2024+		3,220
	$	8,465

The difference between 2018 and 2019 future undiscounted cash flows is mainly due to the acquisition of Avista on January 2, 2019. See Note 4 for additional information on this acquisition.