Leases (Notes)

6 Months Ended

Mar. 27, 2020

Leases [Abstract]

Leases

2. LEASES

On October 1, 2019, we adopted ASC Topic 842 using the modified retrospective transition method. Topic 842 requires the recognition of lease assets and liabilities for operating leases, in addition to the finance lease assets and liabilities previously recorded on our condensed consolidated balance sheets. Beginning on October 1, 2019, our condensed consolidated financial statements are presented in accordance with the revised policies, while prior period amounts are not adjusted and continue to be reported in accordance with our historical policies. The modified retrospective transition method required the cumulative effect, if any, of initially applying the guidance to be recognized as an adjustment to our accumulated deficit as of our adoption date. As a result of adopting Topic 842, we recognized additional operating lease assets and liabilities of $45,519 and $46,941 as of October 1, 2019. The discount rate primarily used to calculate that adjustment was the Company's incremental borrowing rate as of the adoption date, October 1, 2019, as a rate implicit in most contracts was not readily determinable. The Company recorded a cumulative effect adjustment of $1,053 to accumulated deficit, net of tax, as a result of the adoption.

The Company elected the package of practical expedients permitted under the transition guidance within Topic 842, which allowed us to carry forward prior conclusions about lease identification, classification and initial direct costs for leases

entered into prior to adoption of Topic 842. Additionally, for leases with a term of 12 months or less, the Company elected the short-term lease exemption, which allowed us to not recognize right-of-use assets ("ROU") or lease liabilities for qualifying leases existing at transition and new leases we may enter into in the future. Leases with an initial term of 12 months or less are classified as short-term leases and are not recorded on the condensed consolidated balance sheets. The lease expense for short-term leases is recognized on a straight-line basis over the lease term.

The Company engages in leasing transactions to meet the needs of the business. The Company leases certain warehouses and distribution centers, office space, forklifts, vehicles and other machinery and equipment. The determination to lease, rather than purchase, an asset is primarily contingent upon capital requirements, duration of the forecasted business investment, and asset availability.

The Company determines if an arrangement is a lease at inception and all arrangements deemed to be leases are subject to an assessment to determine the classification between finance and operating leases. The Company's significant assumptions and judgments in determining whether a contract is or contains a lease include establishing whether the supplier has the ability to use other assets to fulfill its service or whether the terms of the agreement enable the Company to control the use of a dedicated property, plant and equipment asset during the contract term. In the majority of the Company's contracts where it must identify whether a lease is present, it is readily determinable that the Company controls the use of the assets and obtains substantially all of the economic benefit during the term of the contract. In those contracts where identification is not readily determinable, the Company has determined that the supplier has either the ability to use another asset to provide the service or the terms of the contract give the supplier the rights to operate the asset at its discretion during the term of the contract, in which case the arrangement would not constitute a lease.

Right-of-use assets and lease obligations are recognized based on the present value of the future minimum lease payments over the lease term as of the commencement date. The Company’s lease agreements have terms that include both lease and non-lease components. Lease component fees are included in the present value of future minimum lease payments. Conversely, non-lease components are not subject to capitalization and are expensed as incurred. Per Topic 842, the contractual interest rate is used to calculate the present value of the future minimum lease payments. However, the majority of the Company’s leases do not provide an implicit rate. Therefore, the Company's significant assumption and judgments in determining the discount rate include determining the incremental borrowing rate. The Company’s incremental borrowing rates are based on the term of the lease, the economic environment of the lease and the effect of collateralization. The valuation of the ROU asset also includes lease payments made in advance of the lease commencement date and initial direct costs incurred to secure the lease and is reduced for lease incentives. The lease terms include options to extend or terminate the lease when it is reasonably certain the Company will exercise the options.

The Company has certain leasing agreements, related to leased vehicles available to our sales personnel, that contain guaranteed residual value terms, which are not expected to be triggered. The Company’s leasing portfolio does not contain any material restrictive covenants.

Leases

(in thousands)	March 27, 2020
Assets
Operating lease assets	$	39,900
Finance lease assets	3,564
Total right-of-use assets, gross	$	43,464
Less: accumulated depreciation	(1,835		)
Right-of-use assets, net	$	41,629
Liabilities
Current liabilities:
Current portion of operating lease liabilities	$	11,556
Current portion of finance lease liabilities	492
Lease obligations	$	12,048
Noncurrent liabilities:
Operating lease liabilities	$	29,476
Finance lease liabilities	935
Long-term lease obligations	$	30,411
Total lease obligations	$	42,459

Lease Cost

The following table summarizes lease costs by type of cost for the three months ended March 27, 2020. In the condensed consolidated statements of operations, cost of sales and selling, general and administrative expenses included lease costs of $3,194 and $967, respectively.

(in thousands)	Three months ended March 27, 2020
Condensed Consolidated Statement of Operations Classification	Total
Amortization of right-of-use assets	$	3,757
Interest on lease liabilities	14
Variable lease costs	43
Short term lease costs	347
Total lease costs	$	4,161

The following table summarizes lease costs by type of cost for the six months ended March 27, 2020. In the condensed consolidated statements of operations, cost of sales and selling, general and administrative expenses included lease costs of $5,950 and $2,125, respectively.

(in thousands)	Six months ended March 27, 2020
Condensed Consolidated Statement of Operations Classification	Total
Amortization of right-of-use assets	$	7,384
Interest on lease liabilities	22
Variable lease costs	82
Short term lease costs	587
Total lease costs	$	8,075

Maturity of Lease Liabilities

The Company's maturity analysis of its lease liabilities as of March 27, 2020 is as follows:

(in thousands)	Financing Leases			Operating Leases
2020	$	462		$	13,274
2021	388			10,366
2022	382			8,202
2023	237			6,010
2024	16			4,826
2025 and after	—			4,919
Total lease payments	$	1,485		$	47,597
Less: Interest	(59		)	(6,565		)
Present value of lease liabilities	$	1,426		$	41,032

The following represents the Company's future minimum rental payments at September 30, 2019 for agreements classified as operating leases under ASC 840 with non-cancelable terms in excess of one year:

2020	$	13,526
2021	11,592
2022	8,666
2023	6,362
2024	5,097
2025 and thereafter	6,938
Total	$	52,181

Lease Term and Discount Rate

	March 27, 2020
Weighted-average remaining lease term (years)
Operating leases	4.74
Finance leases	3.52
Weighted-average discount rate
Operating leases	4.34	%
Finance leases	3.16	%

Other Information

(in thousands)	Six months ended March 27, 2020
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	6,517
Operating cash flows from finance leases	14
Financing cash flows from finance leases	267

Leases

2. LEASES

On October 1, 2019, we adopted ASC Topic 842 using the modified retrospective transition method. Topic 842 requires the recognition of lease assets and liabilities for operating leases, in addition to the finance lease assets and liabilities previously recorded on our condensed consolidated balance sheets. Beginning on October 1, 2019, our condensed consolidated financial statements are presented in accordance with the revised policies, while prior period amounts are not adjusted and continue to be reported in accordance with our historical policies. The modified retrospective transition method required the cumulative effect, if any, of initially applying the guidance to be recognized as an adjustment to our accumulated deficit as of our adoption date. As a result of adopting Topic 842, we recognized additional operating lease assets and liabilities of $45,519 and $46,941 as of October 1, 2019. The discount rate primarily used to calculate that adjustment was the Company's incremental borrowing rate as of the adoption date, October 1, 2019, as a rate implicit in most contracts was not readily determinable. The Company recorded a cumulative effect adjustment of $1,053 to accumulated deficit, net of tax, as a result of the adoption.

The Company elected the package of practical expedients permitted under the transition guidance within Topic 842, which allowed us to carry forward prior conclusions about lease identification, classification and initial direct costs for leases

entered into prior to adoption of Topic 842. Additionally, for leases with a term of 12 months or less, the Company elected the short-term lease exemption, which allowed us to not recognize right-of-use assets ("ROU") or lease liabilities for qualifying leases existing at transition and new leases we may enter into in the future. Leases with an initial term of 12 months or less are classified as short-term leases and are not recorded on the condensed consolidated balance sheets. The lease expense for short-term leases is recognized on a straight-line basis over the lease term.

The Company engages in leasing transactions to meet the needs of the business. The Company leases certain warehouses and distribution centers, office space, forklifts, vehicles and other machinery and equipment. The determination to lease, rather than purchase, an asset is primarily contingent upon capital requirements, duration of the forecasted business investment, and asset availability.

The Company determines if an arrangement is a lease at inception and all arrangements deemed to be leases are subject to an assessment to determine the classification between finance and operating leases. The Company's significant assumptions and judgments in determining whether a contract is or contains a lease include establishing whether the supplier has the ability to use other assets to fulfill its service or whether the terms of the agreement enable the Company to control the use of a dedicated property, plant and equipment asset during the contract term. In the majority of the Company's contracts where it must identify whether a lease is present, it is readily determinable that the Company controls the use of the assets and obtains substantially all of the economic benefit during the term of the contract. In those contracts where identification is not readily determinable, the Company has determined that the supplier has either the ability to use another asset to provide the service or the terms of the contract give the supplier the rights to operate the asset at its discretion during the term of the contract, in which case the arrangement would not constitute a lease.

Right-of-use assets and lease obligations are recognized based on the present value of the future minimum lease payments over the lease term as of the commencement date. The Company’s lease agreements have terms that include both lease and non-lease components. Lease component fees are included in the present value of future minimum lease payments. Conversely, non-lease components are not subject to capitalization and are expensed as incurred. Per Topic 842, the contractual interest rate is used to calculate the present value of the future minimum lease payments. However, the majority of the Company’s leases do not provide an implicit rate. Therefore, the Company's significant assumption and judgments in determining the discount rate include determining the incremental borrowing rate. The Company’s incremental borrowing rates are based on the term of the lease, the economic environment of the lease and the effect of collateralization. The valuation of the ROU asset also includes lease payments made in advance of the lease commencement date and initial direct costs incurred to secure the lease and is reduced for lease incentives. The lease terms include options to extend or terminate the lease when it is reasonably certain the Company will exercise the options.

The Company has certain leasing agreements, related to leased vehicles available to our sales personnel, that contain guaranteed residual value terms, which are not expected to be triggered. The Company’s leasing portfolio does not contain any material restrictive covenants.

Leases

(in thousands)	March 27, 2020
Assets
Operating lease assets	$	39,900
Finance lease assets	3,564
Total right-of-use assets, gross	$	43,464
Less: accumulated depreciation	(1,835		)
Right-of-use assets, net	$	41,629
Liabilities
Current liabilities:
Current portion of operating lease liabilities	$	11,556
Current portion of finance lease liabilities	492
Lease obligations	$	12,048
Noncurrent liabilities:
Operating lease liabilities	$	29,476
Finance lease liabilities	935
Long-term lease obligations	$	30,411
Total lease obligations	$	42,459

Lease Cost

The following table summarizes lease costs by type of cost for the three months ended March 27, 2020. In the condensed consolidated statements of operations, cost of sales and selling, general and administrative expenses included lease costs of $3,194 and $967, respectively.

(in thousands)	Three months ended March 27, 2020
Condensed Consolidated Statement of Operations Classification	Total
Amortization of right-of-use assets	$	3,757
Interest on lease liabilities	14
Variable lease costs	43
Short term lease costs	347
Total lease costs	$	4,161

The following table summarizes lease costs by type of cost for the six months ended March 27, 2020. In the condensed consolidated statements of operations, cost of sales and selling, general and administrative expenses included lease costs of $5,950 and $2,125, respectively.

(in thousands)	Six months ended March 27, 2020
Condensed Consolidated Statement of Operations Classification	Total
Amortization of right-of-use assets	$	7,384
Interest on lease liabilities	22
Variable lease costs	82
Short term lease costs	587
Total lease costs	$	8,075

Maturity of Lease Liabilities

The Company's maturity analysis of its lease liabilities as of March 27, 2020 is as follows:

(in thousands)	Financing Leases			Operating Leases
2020	$	462		$	13,274
2021	388			10,366
2022	382			8,202
2023	237			6,010
2024	16			4,826
2025 and after	—			4,919
Total lease payments	$	1,485		$	47,597
Less: Interest	(59		)	(6,565		)
Present value of lease liabilities	$	1,426		$	41,032

The following represents the Company's future minimum rental payments at September 30, 2019 for agreements classified as operating leases under ASC 840 with non-cancelable terms in excess of one year:

2020	$	13,526
2021	11,592
2022	8,666
2023	6,362
2024	5,097
2025 and thereafter	6,938
Total	$	52,181

Lease Term and Discount Rate

	March 27, 2020
Weighted-average remaining lease term (years)
Operating leases	4.74
Finance leases	3.52
Weighted-average discount rate
Operating leases	4.34	%
Finance leases	3.16	%

Other Information

(in thousands)	Six months ended March 27, 2020
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	6,517
Operating cash flows from finance leases	14
Financing cash flows from finance leases	267