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Leases

9 Months Ended

Sep. 28, 2019

Effective January 1, 2019 the Company adopted ASC 842, which requires recognition of right of use (“ROU”) assets and lease liabilities on the balance sheet, based on the present value of the future minimum rental payments for existing operating leases. The Company adopted the provisions of ASC 842 on January 1, 2019 using a modified retrospective approach through a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption in line with the new transition method allowed under ASU 2018-11. ASC 842 provides a number of optional practical expedients in transition. The Company elected the “package of practical expedients” which permits the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of-hindsight and elected the practical expedient pertaining to land easements. The new standard also provides practical expedients for an entity’s ongoing accounting for leases. The Company elected the short-term lease exemption for all leases that qualify, meaning the Company will not recognize ROU assets or lease liabilities for leases with terms shorter than twelve months. The Company also elected the practical expedient to not separate lease and non-lease components for a majority of its asset classes, including real estate and most equipment.

The Company measures the ROU assets and liabilities based on the present value of the future minimum lease payments over the lease term at the commencement date. Minimum lease payments include the fixed lease and non-lease components of the agreement, as well as any variable rent payments that depend on an index, initially measured using the index at the lease commencement date. The ROU assets are adjusted for any initial direct costs incurred less any lease incentives received, in addition to payments made on or before the commencement date of the lease. The Company recognizes lease expense for leases on a straight-line basis over the lease term.

As the implicit rate is not readily determinable for most of the Company’s lease agreements, the Company uses an estimated incremental borrowing rate to determine the initial present value of lease payments. These discount rates for leases are calculated using the Company’s credit spread adjusted for current market factors and foreign currency rates. The Company also made a policy election to determine its incremental borrowing rate, at the initial application date, using the total lease term and the total minimum rental payments, as the Company believes this rate is more indicative of the implied financing cost.

The Company determines if a contract is or contains a lease at inception. The Company has operating and finance leases for service centers, warehouses, showrooms, and machinery and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company enters into lease contracts ranging from 1 to 60 years with a majority of the Company’s lease terms ranging from 1 to 8 years.

Some leases include one or more options to renew, with renewal terms that can extend the lease term from 3 to 10 years or more. The exercise of these lease renewal options is at the Company’s sole discretion. An insignificant number of our leases include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term.

Certain of our leases include rental payments that will adjust periodically for inflation or certain adjustments based on step increases. An insignificant number of our leases contain residual value guarantees and none of our agreements contain material restrictive covenants. Variable rent expenses consist primarily of maintenance, property taxes and charges based on usage.

We rent or sublease certain real estate to third parties. Our sublease portfolio consists mainly of operating leases.

The components of lease costs are as follows:



	Three Months Ended September 28, 2019							Nine Months Ended September 28, 2019
	Cost of Goods Sold			Selling, General and Administrative		Total		Cost of Goods Sold		Selling, General and Administrative		Total
Operating lease costs
Fixed	$	8,068		25,316		33,384		23,925		72,578		96,503
Short-term	1,092			2,640		3,732		4,083		9,126		13,209
Variable	1,475			7,053		8,528		5,846		21,601		27,447
Sub-leases	(114		)	(113	)	(227	)	(239	)	(397	)	(636	)
	10,521			34,896		45,417		33,615		102,908		136,523
Finance lease costs
Amortization of leased assets	—			404		404		—		1,228		1,228
Interest on lease liabilities	—			102		102		—		191		191
	—			506		506		—		1,419		1,419
Net lease costs	$	10,521		35,402		45,923		33,615		104,327		137,942

Supplemental balance sheet information related to leases is as follows:



	Classification	At September 28, 2019
Assets
Operating Leases
Right of use operating lease assets	Right of use operating lease assets	$	334,083
Finance Leases
Property, plant and equipment, gross	Property, plant and equipment	14,727
Accumulated depreciation	Accumulated depreciation	(2,809		)
Property, plant and equipment, net	Property, plant and equipment, net	11,918
Total lease assets		$	346,001

Liabilities
Operating Leases
Other current	Current operating lease liabilities	$	102,682
Non-current	Non-current operating lease liabilities	238,560
Total operating liabilities		341,242
Finance Leases
Short-term debt	Short-term debt and current portion of long-term debt	1,351
Long-term debt	Long-term debt, less current portion	11,319
Total finance liabilities		12,670
Total lease liabilities		$	353,912

Maturities of lease liabilities are as follows:



Year ending December 31,	Finance Leases		Operating Leases	Total
2019 (excluding the nine months ended September 28, 2019)	$	432	31,316	31,748
2020	1,647		116,032	117,679
2021	1,258		88,122	89,380
2022	1,022		59,951	60,973
2023	926		32,688	33,614
Thereafter	8,987		42,182	51,169
Total lease payments	14,272		370,291	384,563
Less imputed interest	1,602		29,049
Present value, Total	$	12,670	341,242

The Company had approximately $2,709 of leases that commenced after September 28, 2019 that created rights and obligations to the Company. These leases are not included in the above maturity schedule.

For additional information regarding the Company’s Commitments and Contingencies as of December 31, 2018 as disclosed for capital and operating leases, see Note 14 in its 2018 Annual Report filed on Form 10-K.

Lease term and discount rate are as follows:



	At September 28, 2019
Weighted Average Remaining Lease Term
Operating Leases	4.37
Finance Leases	12.32

Weighted Average Discount Rate
Operating Leases	3.3	%
Finance Leases	2.4	%

Supplemental cash flow information related to leases was as follows:



	Nine Months Ended
	September 28, 2019
Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows from operating leases	$	96,752
Operating cash flows from finance leases	123
Financing cash flows from finance leases	1,224
Right-of-use assets obtained in exchange for lease obligations:
Operating Leases	113,253
Finance Leases	7,636
Amortization:
Amortization of Right of use operating lease assets ⁽¹⁾	85,061

⁽¹⁾ Amortization of Right of use operating lease assets during the period is reflected in Other assets and prepaid expenses on the Condensed Consolidated Statements of Cash Flows.

Leases