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Leases

9 Months Ended

Sep. 29, 2019

9.Leases

The Company leases office and warehouse space, machinery and other equipment under noncancelable operating lease agreements and also leases certain warehouse space under financing lease agreements. The Company adopted the lease standard using the optional transition method on December 31, 2018, the transition date, and elected to adopt the following practical expedients as accounting policy upon initial adoption of the lease standard:

•	Short-term lease exception: Allows the Company to not recognize leases with a contractual term of less than 12 months on its condensed consolidated balance sheets.

•	Election to not separate non-lease components: Allows the Company to not separate lease and non-lease components and to account for both components as a single component, recognized on its condensed consolidated balance sheets.

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Package of practical expedients for transition: Allows the Company to not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) any initial direct costs for any existing leases as of the transition date.

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Additional transition method/relief: Allows the Company to apply the transition requirements in the lease standard as of the transition date, with any impact of initially applying the lease standard recognized as a cumulative effect adjustment to retained earnings in the period of adoption. This also requires the Company to maintain previous disclosure requirements for comparative periods.

Upon adoption of the lease standard on December 31, 2018, the Company recorded right of use assets for operating leases of $88.0 million and associated lease liabilities of $88.2 million. The adoption of the lease standard did not change previously reported condensed consolidated statements of operations, did not result in a cumulative effect adjustment to retained earnings in the period of adoption and did not impact cash flows.

The Company used the following policies and assumptions to evaluate its population of leases:

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Determining a lease: The Company assesses contracts at inception to determine whether an arrangement is or includes a lease, which conveys the Company’s right to control the use of an identified asset for a period of time in exchange for consideration. Operating lease right of use assets and associated liabilities are recognized at the commencement date and initially measured based on the present value of lease payments over the defined lease term.

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Allocating lease and non-lease components: The Company has elected the practical expedient to not separate lease and non-lease components for certain classes of underlying assets. The Company has equipment and vehicle lease agreements, which generally have the lease and associated non-lease components accounted for as a single lease component. The Company has real estate lease agreements with lease and non-lease components, which are generally accounted for separately where applicable.

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Discount rate: The Company calculates the discount rate based on the discount rate implicit in the lease, or if the implicit rate is not readily determinable from the lease, then the Company calculates an incremental borrowing rate using a portfolio approach. The incremental borrowing rate is calculated using the contractual lease term and the Company’s borrowing rate.

•	Lease term: The Company does not recognize leases with a contractual term of less than 12 months on its condensed consolidated balance sheets. Lease expense for these short-term leases is expensed on a straight-line basis over the lease term.

•	Rent increases or escalation clauses: Certain leases contain scheduled rent increases or escalation clauses, which can be based on the CPI or other rates. The Company assesses each contract individually and applies the appropriate variable payments based on the terms of the agreement.

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Renewal options and/or purchase options: Certain leases include renewal options to extend the lease term and/or purchase options to purchase the leased asset. The Company assesses these options using a threshold of reasonably certain, which is a high threshold and, therefore, the majority of the Company’s leases do not include renewal periods or purchase options for the measurement of the right of use asset and the associated lease liability. For leases the Company is reasonably certain to renew or purchase, those options are included within the lease term and, therefore, included in the measurement of the right of use asset and the associated lease liability.

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Option to terminate: Certain leases include the option to terminate the lease prior to its scheduled expiration. This allows a contractually bound party to terminate its obligation under the lease contract, typically in return for an agreed-upon financial consideration. The terms and conditions of the termination options vary by contract.

•	Residual value guarantees, restrictions or covenants: The Company’s lease agreements do not contain residual value guarantees, restrictions or covenants.

Following is a summary of the weighted average remaining lease term and weighted average discount rate for the Company’s population of leases as of September 29, 2019:

	Operating Leases			Financing Leases
Weighted average remaining lease term	10.2 years			4.9 years
Weighted average discount rate		4.1	%		5.7	%

As of September 29, 2019, the Company had one real estate operating lease commitment that had not yet commenced. This lease commitment is expected to commence during the fourth quarter of 2019 and have a lease term of five years. The additional lease liability associated with this lease commitment is expected to be approximately $0.3 million.

Following is a summary of balances related to the Company’s lease portfolio within the Company’s condensed consolidated statements of operations for the third quarter and the first nine months of 2019:

(in thousands)	Third Quarter 2019		First Nine Months 2019
Cost of sales impact:
Operating leases costs	$	1,356	$	4,039
Short-term and variable leases		2,814		7,393
Depreciation expense from financing leases⁽¹⁾		353		1,060
Total cost of sales impact	$	4,523	$	12,492

Selling, delivery and administrative expenses impact:
Operating leases costs	$	3,717	$	9,639
Short-term and variable leases		838		2,676
Depreciation expense from financing leases⁽¹⁾		1,139		3,415
Total selling, delivery and administrative expenses impact	$	5,694	$	15,730

Interest expense, net impact:
Interest expense on financing lease obligations⁽²⁾	$	666	$	2,083
Total interest expense, net impact	$	666	$	2,083

Total lease cost	$	10,883	$	30,305

(1)

During the third quarter of 2018, the Company had depreciation expense from capital leases of $0.3 million and $1.1 million in cost of sales and SD&A expenses, respectively. During the first nine months of 2018, the Company had depreciation expense from capital leases of $1.0 million and $3.4 million in cost of sales and SD&A expenses, respectively.

(2)	The Company had interest expense on capital lease obligations of $0.8 million during the third quarter of 2018 and $2.6 million during the first nine months of 2018.

The future minimum lease payments related to the Company’s lease portfolio include renewal options the Company has determined to be reasonably assured and exclude payments to landlords for real estate taxes and common area maintenance. Following is a summary of future minimum lease payments for all noncancelable operating leases and financing leases as of September 29, 2019:

(in thousands)	Operating Leases		Financing Leases		Total
Remainder of 2019	$	4,556	$	2,612	$	7,168
2020		19,387		10,611		29,998
2021		17,386		6,215		23,601
2022		13,965		2,694		16,659
2023		11,702		2,750		14,452
Thereafter		78,543		8,213		86,756
Total minimum lease payments including interest	$	145,539	$	33,095	$	178,634
Less: Amounts representing interest		28,726		4,074		32,800
Present value of minimum lease principal payments		116,813		29,021		145,834
Less: Current portion of lease liabilities - operating and financing leases		14,929		9,209		24,138
Noncurrent portion of lease liabilities - operating and financing leases	$	101,884	$	19,812	$	121,696

Following is a summary of future minimum lease payments for all noncancelable operating leases and capital leases as of December 30, 2018:

(in thousands)	Operating Leases		Capital Leases		Total
2019	$	14,146	$	10,434	$	24,580
2020		13,526		10,613		24,139
2021		12,568		6,218		18,786
2022		11,161		2,697		13,858
2023		10,055		2,753		12,808
Thereafter		33,805		8,106		41,911
Total minimum lease payments including interest	$	95,261	$	40,821	$	136,082
Less: Amounts representing interest				5,573
Present value of minimum lease principal payments				35,248
Less: Current portion of lease liabilities - capital leases				8,617
Noncurrent portion of lease liabilities - capital leases			$	26,631

Following is a summary of balances related to the Company’s lease portfolio within the Company’s condensed consolidated statement of cash flows for the first nine months of 2019:

(in thousands)	First Nine Months 2019
Cash flows from operating activities impact:
Operating leases	$	13,576
Interest payments on financing lease obligations⁽¹⁾		2,083
Total cash flows from operating activities impact	$	15,659

Cash flows from financing activities impact:
Principal payments on financing lease obligations⁽¹⁾	$	6,441
Total cash flows from financing activities impact	$	6,441

(1)	During the first nine months of 2018, the Company had interest payments on capital lease obligations of $2.6 million and principal payments on capital lease obligations of $6.0 million.