13. RENTAL AND LEASES

Lessee

The Company leases sales and administrative office facilities, distribution centers, research and manufacturing facilities, as well as vehicles and other equipment under operating leases. The Company also enters into insignificant finance leases.

The Company determines whether a lease exists at the inception of the arrangement. In assessing whether a contract is or contains a lease, the Company considers a lease a contract that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company accounts for lease components separately from the nonlease components (e.g., common-area maintenance costs). Operating leases are recorded in operating lease assets, other current liabilities, and operating lease liabilities in the Consolidated Balance Sheet.

Operating lease assets and operating lease liabilities are measured and recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The Company uses the rate implicit in the lease when available or determinable and when the rate implicit in the lease is not determinable, the Company’s incremental borrowing rate based on the information available at commencement date is used in determining the present value of future payments. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Variable lease payments are not included in the lease liability and are recognized as incurred. The Company identified real estate, vehicles and other equipment as the primary classes of leases. Certain leases with a similar class of underlying assets are accounted for as a portfolio of leases.

The Company elected to not apply the recognition requirements of the new standard to leases with terms of twelve months or less. Those lease payments will continue to be recognized in the Consolidated Statement of Income on a straight-line basis over the lease term and are not recorded on the Consolidated Balance Sheet.

Most leases include one or more options to renew, which is at the Company’s sole discretion, with renewal terms that can extend the lease term from one month to multiple years. The lease start date is when the asset is available for use and in possession of the Company. The lease end date, which includes any options to renew that are reasonably certain to be exercised, is based on the terms of the contract. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. The Company’s lease agreements do not contain any material restrictive covenants.

The Company’s operating lease cost was as follows:



	First Quarter Ended
	March 31
(millions)	2019
Operating lease cost*		$54.4

*Includes immaterial short-term and variable lease costs

Future maturity of operating lease liabilities as of March 31, 2019 is as follows:



(millions)
Remainder of 2019			$ 132
2020			153
2021			114
2022			80
2023			40
2024			27
Thereafter			89
Total lease payments			635
Less: imputed interest			64
Present value of lease liabilities			$ 571

As of December 31, 2018, identifiable future minimum payments with non-cancelable terms in excess of one year were:


(millions)
2019			$ 172
2020			141
2021			108
2022			72
2023			37
Thereafter			104
Total			$ 634

The Company’s operating leases term and discount rate were as follows:



	March 31
	2019

Weighted-average remaining lease terms (years)		5.6

Weighted-average discount rate		4.01%

The Company’s other lease information was as follows:



	First Quarter Ended
	March 31
(millions)	2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases		$49.1

Leased assets obtained in exchange for new operating lease liabilities		39.6

Lessor

The Company leases warewashing and water treatment equipment to customers under operating leases. The Company’s accounting policy for these leases is to account for lease and nonlease components separately. The nonlease components, such as product and service revenue, are accounted for under Topic 606 Revenue from Contracts with Customers, see Note 15. Revenue from leasing equipment is recognized on a straight-line basis over the life of the lease. Cost of sales includes the depreciation expense for assets under operating leases. The assets are depreciated over their estimated useful lives. Initial lease terms range from one year to five years and most leases include annual renewal options.

Lease contracts convey the right for the customer to control the equipment for a period of time as defined by the contract. There are no options for the customer to purchase the equipment and therefore the equipment remains the property of the Company at the end of the lease term.

The gross assets under operating leases recorded in Property, plant and equipment, net is $1,049.9 million and related accumulated depreciation is $602.1 million as of March 31, 2019.

The Company’s operating lease revenue was as follows:



	First Quarter Ended
	March 31
(millions)	2019
Operating lease revenue*		$102.9

*Includes immaterial variable lease revenue

Revenue from operating leases for existing contracts as of March 31, 2019 is as follows:



(millions)
Remainder of 2019			$ 265
2020			290
2021			220
2022			148
2023			71
2024			21
Thereafter			8
Total lease revenue			$ 1,023

The Company mitigates the risk of residual value subsequent to the lease term by redeploying assets. As such, the Company expects to receive revenue from the operating lease assets through the remaining useful life and therefore subsequent to the initial contract termination date.