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Leases

3 Months Ended

Oct. 31, 2019

Adoption of “Leases (ASC 842)”

We adopted ASC 842, effective August 1, 2019, using the modified retrospective transition approach with optional transition relief, and recognized the cumulative effect of applying the new leasing standard to existing contracts on our condensed consolidated balance sheet on August 1, 2019. Results for reporting beginning after August 1, 2019 are presented under ASC 842, while prior period amounts are not adjusted and will continue to be reported in accordance with our historical accounting under ASC 840.

We elected a package of practical expedients that were consequently applied to all leases. We did not reassess whether expired or existing contracts contain leases under the new definition of a lease, lease classification for expired or existing leases, nor whether previously capitalized initial direct costs would qualify for capitalization under the new standard. Upon transition, we did not elect to use hindsight with respect to lease renewals and purchase options when accounting for existing leases, as well as assessing the impairment of right-of-use assets. Therefore, lease terms largely remained unchanged. In addition, we elected the short-term lease recognition exemption and did not recognize a lease liability and right-of-use asset on our condensed consolidated balance sheet for all leases with terms of 12 months or less. We elected the practical expedient to combine lease and non-lease components in total gross rent for all of our leases which resulted in larger lease liabilities recorded on our condensed consolidated balance sheet.

Our lease portfolio consists primarily of real estate, equipment and vehicles. We have approximately 90 real estate leases with lease terms ranging from 1 year to 16 years, which include our corporate headquarters, regional headquarters, and other facilities for sales and administration, warehousing, manufacturing and training. Our equipment leases primarily consist of furniture, computers and other office equipment.

Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. At lease commencement, we record a liability for our lease obligation measured at the present value of future lease payments and a right-of-use asset equal to the lease liability adjusted for prepayments and lease incentives. We use our collateralized incremental borrowing rate to calculate the present value of lease liabilities as most of our leases do not provide an implicit rate that is readily determinable. We do not recognize a lease liability and right-of-use asset on our condensed consolidated balance sheet for any leases with an initial term of 12 months or less. Some real estate leases include one or more options to renew or terminate a lease. The exercise of a lease renewal or termination option is assessed at commencement of the lease and only reflected in the lease term if we are reasonably certain to exercise the option. We have lease agreements that contain both lease and non-lease components, such as common area maintenance fees, and we have made a policy election to

combine both fixed lease and non-lease components in total gross rent for all of our leases. Operating lease expense is recognized on a straight-line basis over the respective lease term.

Supplemental balance sheet information related to our leases follows:



Lease Type	October 31, 2019
Assets:
Operating lease assets	$	46,718
Finance lease assets	4,886
Right-of-use assets, net	$	51,604

Liabilities:
Operating lease liabilities	$	9,425
Finance lease liabilities	327
Current portion of lease liabilities	9,752

Operating lease liabilities	38,803
Finance lease liabilities	4,347
Long-term lease liabilities	43,150
Total lease liabilities	$	52,902

Weighted average remaining lease term:
Operating leases	6.64 years
Finance leases	6.52 years
Weighted average discount rate:
Operating leases	2.75		%
Finance leases	23.67		%

At October 31, 2019, maturities of lease liabilities for the periods set forth below were as follows:



Fiscal year	Operating			Finance			Total
Remaining 2020	$	7,997		$	1,064		$	9,061
2021	9,436			1,425			10,861
2022	7,498			1,411			8,909
2023	6,664			1,399			8,063
2024	5,934			1,407			7,341
Thereafter	15,868			2,444			18,312
Total lease payments	53,397			9,150			62,547
Less: interest	(5,169		)	(4,476		)	(9,645		)
Present value of lease liabilities	$	48,228		$	4,674		$	52,902

As previously disclosed in our 2019 Annual Report on Form 10-K and in accordance with our historical accounting under ASC 840, future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) for the periods set forth below were as follows:



Fiscal year	Total
2020	$	9,099
2021	7,671
2022	6,021
2023	5,659
2024	5,159
Thereafter	15,251
Total	$	48,860

Supplemental income statement information related to our leases follows:



	Three Months Ended October 31, 2019
Operating lease costs	$	2,651
Finance lease costs:
Amortization of right-of-use assets	71
Interest on lease obligations	90
Variable lease costs	846
Short-term lease costs	248
Net lease cost	$	3,906

Supplemental cash flow information related to leases follows:



	Three Months Ended October 31, 2019
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases⁽¹⁾	$	14,153
Finance leases⁽²⁾	$	4,798

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(1) Primarily relates to new warehouse facility included in our Dental segment and operating leases acquired in the Hu-Friedy acquisition.

(2) Includes finance leases acquired in the Hu-Friedy acquisition.

Leases