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Leases

9 Months Ended

Sep. 30, 2019

The Company leases most of its retail stores and mail order facilities and certain distribution centers and corporate offices under operating or finance leases, typically with initial terms of 15 to 25 years. The Company also leases certain equipment and other assets under operating or finance leases, typically with initial terms of 3 to 10 years.

The Company maintains certain lease agreements for which the noncancelable contractual term of the pharmacy lease arrangement exceeds the remaining estimated economic life of the buildings being leased. For these pharmacy lease agreements, the Company concluded that for accounting purposes the lease term was the remaining economic life of the buildings. Consequently, most of these individual pharmacy leases are finance leases.

The following table is a summary of the Company’s components of net lease cost for the three and nine months ended September 30, 2019:



In millions	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Operating lease cost	$	681	$	2,044
Finance lease cost:
Amortization of right-of-use assets	9		27
Interest on lease liabilities	11		32
Total finance lease costs	20		59
Short-term lease costs	5		17
Variable lease costs	148		434
Less: sublease income	13		35
Net lease cost	$	841	$	2,519

Supplemental cash flow information related to leases for the nine months ended September 30, 2019 is as follows:



In millions
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows paid for operating leases	$	2,023
Operating cash flows paid for interest portion of finance leases	32
Financing cash flows paid for principal portion of finance leases	19
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	1,203
Finance leases	82

Supplemental balance sheet information related to leases as of September 30, 2019 is as follows:



In millions, except lease term and discount rate
Operating leases:
Operating lease right-of-use assets	$	20,757

Current portion of operating lease liabilities	$	1,798
Long-term operating lease liabilities	18,826
Total operating lease liabilities	$	20,624

Finance leases:⁽¹⁾
Property and equipment, net	$	560

Current portion of long-term debt	$	27
Long-term debt	591
Total finance lease liabilities	$	618

Weighted average remaining lease term
Operating leases	13.8
Finance leases	20.6

Weighted average discount rate
Operating leases	4.6		%
Finance leases	7.3		%

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(1)	Finance lease right-of-use assets are included within property and equipment, net and the respective finance lease liabilities are included in current portion of long-term debt and long-term debt on the unaudited condensed consolidated balance sheets.

The following table summarizes the maturity of lease liabilities under finance and operating leases as of September 30, 2019:



In millions	Finance Leases			Operating Leases ⁽¹⁾			Total
2019 (remaining three months)	$	18		$	679		$	697
2020	70			2,688			2,758
2021	68			2,567			2,635
2022	64			2,408			2,472
2023	62			2,297			2,359
Thereafter	883			17,165			18,048
Total lease payments ⁽²⁾	1,165			27,804			28,969
Less: imputed interest	(547		)	(7,180		)	(7,727		)
Total lease liabilities	$	618		$	20,624		$	21,242

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(1)	Future operating lease payments have not been reduced by minimum sublease rentals of $320 million due in the future under noncancelable subleases.

(2)

The Company leases pharmacy and clinic space from Target Corporation. Amounts related to such finance and operating leases are reflected above. Pharmacy lease amounts due in excess of the remaining estimated economic life of the buildings of approximately $2.3 billion are not reflected in this table since the estimated economic life of the buildings is shorter than the contractual term of the pharmacy lease arrangement.

The Company finances a portion of its store development program through sale-leaseback transactions. The properties are generally sold at net book value, which generally approximates fair value, and the resulting leases generally qualify and are accounted for as operating leases. The operating leases that resulted from these transactions are included in the table above. The Company does not have any retained or contingent interests in the stores and does not provide any guarantees, other than a guarantee of lease payments, in connection with the sale-leaseback transactions. Sale-leaseback transactions resulted in an

immaterial gain and proceeds of $5 million in the nine months ended September 30, 2019. There were no sale-leaseback transactions in the three months ended September 30, 2019 or the three and nine months ended September 30, 2018.

Store Rationalization Charges

During the first quarter of 2019, the Company performed a review of its retail stores and determined it would close 46 underperforming retail pharmacy stores during the second quarter of 2019. As a result, management determined that there were indicators of impairment with respect to the impacted stores, including the associated operating lease right-of-use assets. Accordingly, an interim long-lived asset impairment test was performed. The results of the impairment test indicated that the fair value of each store asset group was lower than the carrying value. The fair value was determined using a discounted cash flow method based on estimated sublease income. In the three months ended March 31, 2019, the Company recorded a store rationalization charge of $135 million, primarily related to these operating lease right-of-use asset impairment charges, which was recorded within operating expenses in the Retail/LTC segment.

During the third quarter of 2019, in connection with its annual budgeting process, the Company performed an updated review of its retail stores and determined it would close an additional 22 underperforming retail pharmacy stores during the first quarter of 2020. As a result, management determined that there were indicators of impairment with respect to the impacted stores, including the associated operating lease right-of-use assets. Accordingly, an interim long-lived asset impairment test was performed. The results of the impairment test indicated that the fair value of each store asset group was lower than the carrying value. The fair value was determined using a discounted cash flow method based on estimated sublease income. In the three months ended September 30, 2019, the Company recorded a store rationalization charge of $96 million, primarily related to these operating lease right-of-use asset impairment charges, which was recorded within operating expenses in the Retail/LTC segment.

Leases

The following table is a summary of the Company’s components of net lease cost for the three and nine months ended September 30, 2019:



In millions	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Operating lease cost	$	681	$	2,044
Finance lease cost:
Amortization of right-of-use assets	9		27
Interest on lease liabilities	11		32
Total finance lease costs	20		59
Short-term lease costs	5		17
Variable lease costs	148		434
Less: sublease income	13		35
Net lease cost	$	841	$	2,519

Supplemental cash flow information related to leases for the nine months ended September 30, 2019 is as follows:



In millions
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows paid for operating leases	$	2,023
Operating cash flows paid for interest portion of finance leases	32
Financing cash flows paid for principal portion of finance leases	19
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	1,203
Finance leases	82

Supplemental balance sheet information related to leases as of September 30, 2019 is as follows:



In millions, except lease term and discount rate
Operating leases:
Operating lease right-of-use assets	$	20,757

Current portion of operating lease liabilities	$	1,798
Long-term operating lease liabilities	18,826
Total operating lease liabilities	$	20,624

Finance leases:⁽¹⁾
Property and equipment, net	$	560

Current portion of long-term debt	$	27
Long-term debt	591
Total finance lease liabilities	$	618

Weighted average remaining lease term
Operating leases	13.8
Finance leases	20.6

Weighted average discount rate
Operating leases	4.6		%
Finance leases	7.3		%

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(1)	Finance lease right-of-use assets are included within property and equipment, net and the respective finance lease liabilities are included in current portion of long-term debt and long-term debt on the unaudited condensed consolidated balance sheets.

The following table summarizes the maturity of lease liabilities under finance and operating leases as of September 30, 2019:



In millions	Finance Leases			Operating Leases ⁽¹⁾			Total
2019 (remaining three months)	$	18		$	679		$	697
2020	70			2,688			2,758
2021	68			2,567			2,635
2022	64			2,408			2,472
2023	62			2,297			2,359
Thereafter	883			17,165			18,048
Total lease payments ⁽²⁾	1,165			27,804			28,969
Less: imputed interest	(547		)	(7,180		)	(7,727		)
Total lease liabilities	$	618		$	20,624		$	21,242

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(1)	Future operating lease payments have not been reduced by minimum sublease rentals of $320 million due in the future under noncancelable subleases.

(2)

Store Rationalization Charges