NOTE K. LEASES

Contracts are assessed by the Company to determine if the contract conveys the right to control an identified asset in exchange for consideration during a period of time. The Company classifies all identified leases as either operating or finance leases. As of September 30, 2022, the Company was not a party to any finance leases. Contracts that contain leases are assessed to determine if the consideration in the contract is related to a lease component, non-lease component or other components not related to the lease. Lease components are recorded as right-of-use (“ROU”) assets and lease liabilities while any non-lease component is expensed as incurred. The consideration in the contract related to other components not related to the lease is allocated among the lease component and the non-lease component, as applicable, based on the stand-alone selling price of the lease and non-lease components.

Certain lease contracts may contain an option to extend or terminate the lease. The Company considers the economic impact of extension and termination options by contract. If the Company concludes it is reasonably certain an option will be exercised, that option is included in the lease term and impacts the amount recorded as an ROU asset and lease liability at inception of the contract.

The Company's lease liability is determined by discounting the future cash flows over the lease period. The Company determines its discount rates utilizing current secured financing rates based on the length of the lease period plus the Company's margin over LIBOR on the Term Loan. The Company believes this rate effectively represents a borrowing rate the Company could obtain on a debt instrument possessing similar terms as the lease. Lease liabilities are classified between current and non-current liabilities based on the terms of the underlying leases. The weighted average discount rate on operating leases as of September 30, 2022 and December 31, 2021 was 4.27% and 4.25%, respectively.

As of September 30, 2022, the Company recorded current and non-current operating lease liabilities of $3 million and $12 million, respectively. As of December 31, 2021, the Company recorded current and non-current operating lease liabilities of $4 million and $13 million, respectively. The following table reconciles future undiscounted cash flows for operating leases as of September 30, 2022 to total operating lease liabilities:

ROU assets are calculated as the related lease liability adjusted for lease incentives, prepayments and the effect of escalating lease payments on period expense. The below table depicts the ROU assets held by the Company based on the underlying asset:

The weighted average remaining lease term as of September 30, 2022 and September 30, 2021 was 6.7 years and 7.2 years, respectively.

Operating lease expense was $1 million for each of the three months ended September 30, 2022 and 2021 and $4 million for each of the nine months ended September 30, 2022 and 2021, and was recorded within Selling, general and administrative expense and Engineering—research and development on the Company's Condensed Consolidated Statements of Comprehensive Income. There was no material short-term operating lease expense for any of the three or nine months ended September 30, 2022 or 2021.

The calculation of the Company's ROU assets and lease liabilities did not include cash consideration as of either September 30, 2022 or December 31, 2021. During the nine months ended September 30, 2022 and 2021, the Company recorded $2 million and $1 million, respectively, of new ROU assets obtained in exchange for lease obligations.