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United States
Securities and Exchange Commission
Washington, D.C. 20549
 

FORM 10-Q
 
 
 
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended: September 28, 2019
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                       to                      l

Commission File Number: 001-31410
 
 

COTT CORPORATION
(Exact name of registrant as specified in its charter)
 
 
Canada
 
98-0154711
(State or Other Jurisdiction of
Incorporation or Organization)
 
(IRS Employer
Identification No.)
 
 
 
1200 BRITANNIA ROAD EAST
 
 
MISSISSAUGA,
Ontario
 
L4W 4T5
Canada
 
 
 
 
 
4221 WEST BOY SCOUT BOULEVARD
 
 
SUITE 400
 
 
TAMPA,
Florida
 
33607
United States
 
 
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (905795-6500 and (813) 313-1732
 

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Shares, no par value per share
COT
New York Stock Exchange
BCB
Toronto Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
ý
 
 
Accelerated filer
Non-accelerated filer
 
 
Smaller reporting company
 
 
 
 
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No  
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at November 1, 2019
Common Shares, no par value per share
 
134,694,893





TABLE OF CONTENTS
 


2



PART I – FINANCIAL INFORMATION
 
Item 1.
Financial Statements (unaudited)

Cott Corporation
Consolidated Statements of Operations
(in millions of U.S. dollars, except share and per share amounts)
Unaudited
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Revenue, net
$
616.1

 
$
609.3

 
$
1,794.3

 
$
1,773.7

Cost of sales
289.9

 
298.8

 
872.1

 
888.3

Gross profit
326.2

 
310.5

 
922.2

 
885.4

Selling, general and administrative expenses
280.8

 
279.9

 
837.1

 
816.2

Loss on disposal of property, plant and equipment, net
1.1

 
1.2

 
4.6

 
3.8

Acquisition and integration expenses
2.7

 
1.6

 
10.2

 
10.8

Operating income
41.6

 
27.8

 
70.3

 
54.6

Other expense (income), net
3.8

 
(0.6
)
 
6.9

 
(33.0
)
Interest expense, net
20.2

 
18.9

 
58.6

 
58.3

Income from continuing operations before income taxes
17.6

 
9.5

 
4.8

 
29.3

Income tax expense
9.0

 
1.0

 
11.5

 
4.0

Net income (loss) from continuing operations
$
8.6

 
$
8.5

 
$
(6.7
)
 
$
25.3

Net income from discontinued operations, net of income taxes
1.5

 
1.5

 
1.5

 
357.5

Net income (loss)
$
10.1

 
$
10.0

 
$
(5.2
)
 
$
382.8

Less: Net income attributable to non-controlling interests - discontinued operations

 

 

 
0.6

Net income (loss) attributable to Cott Corporation
$
10.1

 
$
10.0

 
$
(5.2
)
 
$
382.2

Net income (loss) per common share attributable to Cott Corporation
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Continuing operations
$
0.06

 
$
0.06

 
$
(0.05
)
 
$
0.18

Discontinued operations
$
0.01

 
$
0.01

 
$
0.01

 
$
2.56

Net income (loss)
$
0.07

 
$
0.07

 
$
(0.04
)
 
$
2.74

Diluted:
 
 
 
 
 
 
 
Continuing operations
$
0.06

 
$
0.06

 
$
(0.05
)
 
$
0.18

Discontinued operations
$
0.01

 
$
0.01

 
$
0.01

 
$
2.51

Net income (loss)
$
0.07

 
$
0.07

 
$
(0.04
)
 
$
2.69

Weighted average common shares outstanding (in thousands)
 
 
 
 
 
 
 
Basic
134,667

 
138,787

 
135,395

 
139,503

Diluted
136,208

 
141,176

 
135,395

 
141,963


The accompanying notes are an integral part of these consolidated financial statements.


3



Cott Corporation
Condensed Consolidated Statements of Comprehensive Income
(in millions of U.S. dollars)
Unaudited
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Net income (loss)
$
10.1

 
$
10.0

 
$
(5.2
)
 
$
382.8

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Currency translation adjustment
(0.8
)
 
5.1

 
6.3

 
(3.6
)
Pension benefit plan, net of tax 1

 

 

 
16.9

(Loss) income on derivative instruments, net of tax 2
(1.0
)
 
(5.7
)
 
6.0

 
(10.0
)
Total other comprehensive (loss) income
(1.8
)
 
(0.6
)
 
12.3

 
3.3

Comprehensive income
$
8.3

 
$
9.4

 
$
7.1

 
$
386.1

Less: Comprehensive income attributable to non-controlling interests

 

 

 
0.6

Comprehensive income attributable to Cott Corporation
$
8.3

 
$
9.4

 
$
7.1

 
$
385.5

______________________
1
Net of $3.6 million of associated tax impact that resulted in an increase in the gain on sale of discontinued operations for the nine months ended September 29, 2018.
2 
Net of the effect of $1.1 million tax benefit and $2.2 million tax expense for the three and nine months ended September 28, 2019, respectively, and $2.0 million and $2.4 million tax benefit for the three and nine months ended September 29, 2018, respectively.

The accompanying notes are an integral part of these consolidated financial statements.

4



Cott Corporation
Consolidated Balance Sheets
(in millions of U.S. dollars, except share amounts)
Unaudited
 
September 28, 2019
 
December 29, 2018
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
143.6

 
$
170.8

Accounts receivable, net of allowance of $8.6 ($9.6 as of December 29, 2018)
312.6

 
308.3

Inventories
126.2

 
129.6

Prepaid expenses and other current assets
29.1

 
27.2

Total current assets
611.5

 
635.9

Property, plant and equipment, net
640.9

 
624.7

Operating lease right-of-use-assets
198.6

 

Goodwill
1,152.2

 
1,143.9

Intangible assets, net
696.4

 
739.2

Deferred tax assets
0.1

 
0.1

Other long-term assets, net
21.1

 
31.7

Total assets
$
3,320.8

 
$
3,175.5

LIABILITIES AND EQUITY
 
 
 
Current liabilities
 
 
 
Short-term borrowings
$
96.3

 
$
89.0

Current maturities of long-term debt
5.1

 
3.0

Accounts payable and accrued liabilities
445.6

 
469.0

Current operating lease obligations
37.7

 

Total current liabilities
584.7

 
561.0

Long-term debt
1,243.0

 
1,250.2

Operating lease obligations
166.2

 

Deferred tax liabilities
126.4

 
124.3

Other long-term liabilities
58.6

 
69.6

Total liabilities
2,178.9

 
2,005.1

Equity
 
 
 
Common shares, no par value - 134,670,538 (December 29, 2018 - 136,195,108) shares issued
890.5

 
899.4

Additional paid-in-capital
75.8

 
73.9

Retained earnings
265.0

 
298.8

Accumulated other comprehensive loss
(89.4
)
 
(101.7
)
Total Cott Corporation equity
1,141.9

 
1,170.4

Total liabilities and equity
$
3,320.8

 
$
3,175.5


The accompanying notes are an integral part of these consolidated financial statements.


5



Cott Corporation
Consolidated Statements of Cash Flows
(in millions of U.S. dollars)
Unaudited
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Cash flows from operating activities of continuing operations:
 
 
 
 
 
 
 
Net income (loss)
$
10.1

 
$
10.0

 
$
(5.2
)
 
$
382.8

Net income from discontinued operations, net of income taxes
1.5

 
1.5

 
1.5

 
357.5

Net income (loss) from continuing operations
8.6

 
8.5

 
(6.7
)
 
25.3

Adjustments to reconcile net income (loss) from continuing operations to cash flows from operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
48.0

 
49.6

 
142.1

 
145.7

Amortization of financing fees
0.9

 
0.9

 
2.6

 
2.6

Share-based compensation expense
1.7

 
6.8

 
8.5

 
14.6

Provision for deferred income taxes
6.0

 
0.1

 
0.8

 
2.8

Gain on extinguishment of debt

 

 

 
(7.1
)
Loss (gain) on sale of business

 

 
6.0

 
(6.0
)
Loss on disposal of property, plant and equipment, net
1.1

 
1.2

 
4.6

 
3.8

Other non-cash items
3.5

 
0.8

 
0.2

 
(1.4
)
Change in operating assets and liabilities, net of acquisitions:
 
 
 
 
 
 
 
Accounts receivable
(6.4
)
 
(21.8
)
 
(21.0
)
 
(41.0
)
Inventories
3.9

 
4.3

 
(12.2
)
 
(9.4
)
Prepaid expenses and other current assets
(0.8
)
 
(0.8
)
 
(2.1
)
 
(7.4
)
Other assets
0.2

 
0.2

 
1.5

 
1.4

Accounts payable and accrued liabilities and other liabilities
15.4

 
28.4

 
(7.1
)
 
22.2

Net cash provided by operating activities from continuing operations
82.1

 
78.2

 
117.2

 
146.1

Cash flows from investing activities of continuing operations:
 
 
 
 
 
 
 
Acquisitions, net of cash received
(5.2
)
 
(0.4
)
 
(47.7
)
 
(67.0
)
Additions to property, plant and equipment
(35.9
)
 
(36.3
)
 
(87.5
)
 
(95.0
)
Additions to intangible assets
(3.3
)
 
(2.7
)
 
(7.6
)
 
(6.9
)
Proceeds from sale of property, plant and equipment
0.5

 
0.8

 
2.9

 
3.7

Proceeds from sale of business, net of cash sold

 

 
50.5

 
12.8

Proceeds from sale of equity securities

 
7.9

 

 
7.9

Other investing activities
0.5

 
0.1

 
0.6

 
0.4

Net cash used in investing activities from continuing operations
(43.4
)
 
(30.6
)
 
(88.8
)
 
(144.1
)

6



Cash flows from financing activities of continuing operations:
 
 
 
 
 
 
 
Payments of long-term debt
(1.5
)
 
(0.2
)
 
(4.5
)
 
(263.5
)
Borrowings under ABL
1.2

 
0.4

 
64.1

 
1.4

Payments under ABL
(1.2
)
 
(0.4
)
 
(63.1
)
 
(1.4
)
Premiums and costs paid upon extinguishment of long-term debt

 

 

 
(12.5
)
Issuance of common shares
0.2

 
1.8

 
0.9

 
6.0

Common shares repurchased and canceled
(0.1
)
 
(24.4
)
 
(31.1
)
 
(46.1
)
Financing fees

 

 

 
(1.5
)
Dividends paid to common shareholders
(8.2
)
 
(8.3
)
 
(24.4
)
 
(25.1
)
Payment of deferred consideration for acquisitions

 

 
(0.2
)
 
(2.8
)
Other financing activities
2.0

 
1.9

 
5.4

 
4.0

Net cash used in financing activities from continuing operations
(7.6
)
 
(29.2
)
 
(52.9
)
 
(341.5
)
Cash flows from discontinued operations:
 
 
 
 
 
 
 
Operating activities of discontinued operations

 
(5.6
)
 
(3.2
)
 
(93.6
)
Investing activities of discontinued operations

 

 

 
1,228.6

Financing activities of discontinued operations

 

 

 
(769.7
)
Net cash (used in) provided by discontinued operations

 
(5.6
)
 
(3.2
)
 
365.3

Effect of exchange rate changes on cash
(0.9
)
 
0.5

 
0.5

 
(8.0
)
Net increase (decrease) in cash, cash equivalents and restricted cash
30.2

 
13.3

 
(27.2
)
 
17.8

Cash and cash equivalents and restricted cash, beginning of period
113.4

 
162.4

 
170.8

 
157.9

Cash and cash equivalents and restricted cash from continuing operations, end of period
$
143.6

 
$
175.7

 
$
143.6

 
$
175.7

Supplemental Non-cash Investing and Financing Activities:
 
 
 
 
 
 
 
Dividends payable
$

 
$

 
$
0.1

 
$
0.4

Additions to property, plant and equipment through accounts payable and accrued liabilities and other liabilities
13.3

 
13.5

 
17.0

 
17.5

Supplemental Disclosures of Cash Flow Information:
 
 
 
 
 
 
 
Cash paid for interest
$
3.0

 
$
0.7

 
$
53.3

 
$
47.1

Cash paid for income taxes, net
1.4

 
4.2

 
6.7

 
6.4


The accompanying notes are an integral part of these consolidated financial statements.


7



Cott Corporation
Consolidated Statements of Equity
(in millions of U.S. dollars, except share and per share amounts)
Unaudited

Cott Corporation Equity





Number of
Common
Shares
(In thousands)

Common Shares

Additional Paid-in-Capital

Retained
Earnings

Accumulated Other Comprehensive Loss

Non-Controlling Interests

Total Equity
Balance at June 29, 2019
134,638


$
890.0


$
74.4


$
263.1


$
(87.6
)

$


$
1,139.9

Net income

 

 

 
10.1

 

 

 
10.1

Other comprehensive loss, net of tax

 

 

 

 
(1.8
)
 

 
(1.8
)
Common shares dividends ($0.06 per common share)

 

 

 
(8.2
)
 

 

 
(8.2
)
Share-based compensation

 

 
1.7

 

 

 

 
1.7

Common shares repurchased and canceled
(4
)

(0.1
)









(0.1
)
Common shares issued - Equity Incentive Plan
13


0.2


(0.2
)








Common shares issued - Employee Stock Purchase Plan
24


0.4


(0.1
)







0.3

Balance at September 28, 2019
134,671


$
890.5


$
75.8


$
265.0


$
(89.4
)

$


$
1,141.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cott Corporation Equity
 
 
 
 

Number of
Common
Shares
(In thousands)
 
Common Shares
 
Additional Paid-in-Capital
 
Retained
Earnings
 
Accumulated Other Comprehensive Loss

Non-Controlling Interests

Total Equity
Balance at December 29, 2018
136,195


899.4


73.9


298.8


(101.7
)



1,170.4

Cumulative effect of changes in accounting principle, net of taxes






10.5






10.5

Net loss

 

 

 
(5.2
)
 

 

 
(5.2
)
Other comprehensive income, net of tax

 

 

 

 
12.3

 

 
12.3

Common shares dividends ($0.18 per common share)

 

 

 
(24.5
)
 

 

 
(24.5
)
Share-based compensation

 

 
8.5

 

 

 

 
8.5

Common shares repurchased and canceled
(2,215
)
 
(16.5
)
 

 
(14.6
)
 

 

 
(31.1
)
Common shares issued - Equity Incentive Plan
618

 
6.5

 
(6.5
)
 

 

 

 

Common shares issued - Dividend Reinvestment Plan
3

 

 

 

 

 

 

Common shares issued - Employee Stock Purchase Plan
70

 
1.1

 
(0.1
)
 

 

 

 
1.0

Balance at September 28, 2019
134,671

 
$
890.5

 
$
75.8

 
$
265.0

 
$
(89.4
)
 
$

 
$
1,141.9



Cott Corporation
Consolidated Statements of Equity
(in millions of U.S. dollars, except share and per share amounts)
Unaudited
 
Cott Corporation Equity

 

 
 
Number of
Common
Shares
(In thousands)

Common
Shares

Additional
Paid-in-
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Loss

Non-
Controlling
Interests

Total
Equity
Balance at June 30, 2018
139,435


$
918.4


$
67.3


$
333.4


$
(90.5
)

$


$
1,228.6

Net income

 

 

 
10.0

 

 

 
10.0

Other comprehensive income, net of tax

 

 

 

 
(0.6
)
 

 
(0.6
)
Common shares dividends ($0.06 per common share)

 

 

 
(8.3
)
 

 

 
(8.3
)
Share-based compensation

 

 
6.8

 

 

 

 
6.8

Common shares repurchased and canceled
(1,574
)

(10.5
)



(13.9
)





(24.4
)
Common shares issued - Equity Incentive Plan
221


3.0


(1.4
)







1.6

Common shares issued - Dividend Reinvestment Plan
3


0.1










0.1

Common shares issued - Employee Stock Purchase Plan
21


0.3










0.3

Balance at September 29, 2018
138,106


$
911.3


$
72.7


$
321.2


$
(91.1
)

$


$
1,214.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cott Corporation Equity
 
 
 
 
 
Number of
Common
Shares
(In thousands)

Common
Shares

Additional
Paid-in-
Capital

Retained
Earnings
(Accumulated
Deficit)

Accumulated
Other
Comprehensive
Loss

Non-
Controlling
Interests

Total
Equity
Balance at December 30, 2017
139,489


917.1


69.1


(12.2
)

(94.4
)

6.1


885.7

Net income

 

 

 
382.2

 

 
0.6

 
382.8

Other comprehensive income, net of tax

 

 

 

 
3.3

 

 
3.3

Common shares dividends ($0.18 per common share)

 

 

 
(25.5
)
 

 

 
(25.5
)
Share-based compensation

 

 
14.6

 

 

 

 
14.6

Common shares repurchased and canceled
(2,930
)

(22.8
)



(23.3
)





(46.1
)
Common shares issued - Equity Incentive Plan
1,462


15.8


(10.9
)







4.9

Common shares issued - Dividend Reinvestment Plan
17


0.2










0.2

Common shares issued - Employee Stock Purchase Plan
68


1.0


(0.1
)







0.9

Distributions to non-controlling interests










(0.9
)

(0.9
)
Sale of subsidiary shares of non-controlling interests










(5.8
)

(5.8
)
Balance at September 29, 2018
138,106


$
911.3


$
72.7


$
321.2


$
(91.1
)

$


$
1,214.1

The accompanying notes are an integral part of these consolidated financial statements.

8



Cott Corporation
Notes to the Consolidated Financial Statements
Unaudited
Note 1—Business and Recent Accounting Pronouncements
Description of Business
As used herein, “Cott,” “the Company,” “our Company,” “Cott Corporation,” “we,” “us,” or “our” refers to Cott Corporation, together with its consolidated subsidiaries. Cott is a water, coffee, tea, extracts and filtration service company with a leading volume-based national presence in the North American and European home and office delivery industry for bottled water, and a leader in custom coffee roasting, iced tea blending, and extract solutions for the U.S. foodservice industry. Our platform reaches over 2.5 million customers or delivery points across North America and Europe and is supported by strategically located sales and distribution facilities and fleets, as well as wholesalers and distributors. This enables us to efficiently service residences, businesses, restaurant chains, hotels and motels, small and large retailers, and healthcare facilities.
On February 8, 2019, we sold all of the outstanding equity of Cott Beverages LLC, which operated our soft drink concentrate production business and our Royal Crown International (“RCI”) division, to Refresco Group B.V., a Dutch beverage manufacturer (“Refresco”). The aggregate deal consideration paid at closing was $50.0 million, subject to post-closing adjustments for working capital, indebtedness and other customary items. The sale of Cott Beverages LLC resulted in a loss of approximately $6.0 million that was recorded to other expense (income), net in the Consolidated Statement of Operations for the nine months ended September 28, 2019. The Company used the proceeds of this transaction to repay a portion of the outstanding borrowings under our asset-based lending credit facility (the “ABL facility”).
Basis of Presentation
The accompanying interim unaudited Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of our results of operations for the interim periods reported and of our financial condition as of the date of the interim balance sheet have been included. The Consolidated Balance Sheet as of December 29, 2018 included herein was derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2018 (our “2018 Annual Report”). This Quarterly Report on Form 10-Q should be read in conjunction with the annual audited Consolidated Financial Statements and accompanying notes in our 2018 Annual Report. The accounting policies used in these interim Consolidated Financial Statements are consistent with those used in the annual Consolidated Financial Statements.
The presentation of these interim Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes.
Changes in Presentation
Certain prior period amounts have been reclassified to conform to the current period presentation in the accompanying Consolidated Statements of Cash Flows. These reclassifications had no effect on net cash provided by operating activities.
During the first quarter of 2019, we reviewed and realigned our reporting segments to reflect how the business will be managed and the results will be reviewed by the Chief Executive Officer, who is the Company’s chief operating decision maker. Following such review, we realigned our three reporting segments as follows: Route Based Services (which includes our DS Services of America, Inc. (“DSS”), Aquaterra Corporation (“Aquaterra”), Mountain Valley Spring Company (“Mountain Valley”), Eden Springs Europe B.V. (“Eden”) and Aimia Foods (“Aimia”) businesses); Coffee, Tea & Extract Solutions (which includes our S. & D. Coffee, Inc. (“S&D”) business); and All Other (which includes miscellaneous expenses and our Cott Beverages LLC business, which was sold in the first quarter of 2019). Our segment reporting results have been recast to reflect these changes for all periods presented.

9



Significant Accounting Policies
Included in Note 1 of our 2018 Annual Report is a summary of the Company’s significant accounting policies. Provided below is a summary of additional accounting policies that are significant to the financial results of the Company.
Cost of sales
We record costs associated with the manufacturing of our products in cost of sales. Shipping and handling costs incurred to store, prepare and move products between production facilities or from production facilities to branch locations or storage facilities are recorded in cost of sales. Shipping and handling costs incurred to deliver products from our Route Based Services and Coffee, Tea and Extract Solutions reporting segment branch locations to the end-user consumer of those products are recorded in selling, general and administrative (“SG&A”) expenses. All other costs incurred in the shipment of products from our production facilities to customer locations are reflected in cost of sales. Shipping and handling costs included in SG&A expenses were $130.5 million and $372.8 million for the three and nine months ended September 28, 2019, respectively, and $121.8 million and $358.6 million for the three and nine months ended September 29, 2018, respectively. Finished goods inventory costs include the cost of direct labor and materials and the applicable share of overhead expense chargeable to production.
Leases
We have operating and finance leases for manufacturing and production facilities, branch distribution and warehouse facilities, vehicles and machinery and equipment. At inception, we determine whether an agreement represents a lease and, at commencement, we evaluate each lease agreement to determine whether the lease constitutes an operating or financing lease. Some of our lease agreements have renewal options, tenant improvement allowances, rent holidays and rent escalation clauses. As described below under “Recently adopted accounting pronouncements,” we adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02 - Leases as of December 30, 2018.
With the adoption of ASU 2016-02, we recorded operating lease right-of-use assets and operating lease obligations on our balance sheet. Right-of-use lease assets represent our right to use the underlying asset for the lease term, and the operating lease obligation represents our commitment to make the lease payments arising from the lease. We have elected not to recognize on the balance sheet leases with terms of one year or less. Lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such, we utilize our appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received. The lease term may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Operating lease expense is recognized on a straight-line basis over the lease term, subject to any changes in the lease or expectations regarding the terms.
Recently adopted accounting pronouncements
Update ASU 2016-02 – Leases (Topic 842), amended by Update ASU 2018-11 – Leases—Targeted Improvements (Topic 842) and Update ASU 2019-01 – Leases—Codification Improvements (Topic 842)
In February 2016, the FASB issued an update to its guidance on lease accounting for lessees and lessors. This update revises accounting for operating leases by a lessee, among other changes, and requires a lessee to recognize a liability to make lease payments and an asset representing its right to use the underlying asset for the lease term in the balance sheet. The distinction between finance and operating leases has not changed, and the update does not significantly change the effect of finance and operating leases on the Consolidated Statements of Operations and the Consolidated Statements of Cash Flows. Additionally, this update requires both qualitative and specific quantitative disclosures. For public entities, the amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The update requires adoption using a modified retrospective transition approach, with certain practical expedients available, with either 1) periods prior to the adoption date being recast or 2) a cumulative-effect adjustment recognized to the opening balance of retained earnings on the adoption date with prior periods not recast.
The amended guidance also provides lessors with a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease component, but instead to account for those components as a single component if the non-lease components otherwise would be accounted for under ASC Topic 606 and both of the following are met: 1) the timing and pattern of transfer of the non-lease component or components and associated lease component are the same; and 2) the lease component, if accounted for separately, would be classified as an operating lease. If the non-lease component or components associated with the lease component are the predominant component of the combined component, an entity is required to account for the combined component in accordance with ASC Topic 606. Otherwise, the entity must account for the combined component as an operating lease in accordance with ASC Topic 842.

10



Effective December 30, 2018, we adopted the guidance in this amendment using the cumulative-effect adjustment method and elected the package of practical expedients permitted in ASC Topic 842. Accordingly, we accounted for our existing leases as operating or finance leases under the new guidance, without reassessing (a) whether the contracts contain a lease under ASC Topic 842, (b) whether classification of the leases would be different in accordance with ASC Topic 842, or (c) whether the unamortized initial direct costs before transition adjustments (as of December 29, 2018) would have met the definition of initial direct costs in ASC Topic 842 at lease commencement. We also elected to not separate lease components from non-lease components for all fixed payments.
Adoption of the new standard resulted in total operating lease obligations of $234.3 million and operating lease right-of-use assets of $228.0 million as of December 30, 2018. The difference between the initial operating lease obligation and the right-of-use assets is related to previously existing lease liabilities. In addition, the cumulative-effect adjustment recognized to the opening balance of retained earnings was $10.5 million related to unamortized deferred gains associated with sale-leaseback transactions that were previously being amortized over the leaseback term and deferred tax assets associated with these deferred gains. This standard did not have a material impact on the Company’s cash flows from operations and had no impact on the Company’s operating results. The most significant impact was the recognition of the right-of-use assets and right-of-use liabilities for operating leases. See Note 2 to the Consolidated Financial Statements for additional information on leases.
The standard also requires lessors to classify leases as sales-type, direct financing or operating leases, similar to existing guidance. We concluded that all of our lessor lease arrangements will continue to be classified as operating leases under the new standard.
Update ASU 2017-08 – Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20)
In March 2017, the FASB amended its guidance on accounting for debt securities. The amendments shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. We adopted the guidance in this amendment effective December 30, 2018. Adoption of the new standard did not have a material impact on our Consolidated Financial Statements.
Update ASU 2018-02 – Income Statement—Reporting Comprehensive Income (Topic 220)
In February 2018, the FASB amended its guidance that allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the comprehensive tax legislation enacted by the U.S. government on December 22, 2017 commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) and requires certain disclosures about stranded tax effects. For public entities, the amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted, and may be applied in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate tax rate in the Tax Act is recognized. We adopted the guidance in this amendment effective December 30, 2018. Adoption of the new standard did not have a material impact on our Consolidated Financial Statements.
Update ASU 2018-07 – Compensation—Improvements to Nonemployee Share-Based Payment Accounting (Topic 718)
In June 2018, the FASB amended its guidance to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The amended guidance also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC Topic 606. We adopted the guidance in this amendment effective December 30, 2018. Adoption of the new standard did not have a material impact on our Consolidated Financial Statements.

11



Recently issued accounting pronouncements
Update ASU 2016-13 – Financial Instruments—Credit Losses (Topic 326) and Update ASU 2019-05 – Financial Instruments—Credit Losses—Targeted Transition Relief (Topic 326)
In June 2016, the FASB amended its guidance to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Entities will now use forward-looking information to better form their credit loss estimates. The amended guidance also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. In May 2019, the FASB amended the original guidance by providing an option to irrevocably elect the fair value option for certain financial instruments previously measured at amortized cost basis. The amendments in these updates are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption will be permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. This guidance will be applied using a prospective or modified retrospective transition method, depending on the area covered in this update. We are currently assessing the impact of adoption of these standards on our Consolidated Financial Statements.
Update ASU 2018-13 – Fair Value Measurement (Topic 820)
    In August 2018, the FASB amended its guidance on disclosure requirements for fair value measurement. The update amends existing fair value measurement disclosure requirements by adding, changing, or removing certain disclosures. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Implementation on a prospective or retrospective basis varies by specific disclosure requirement. Early adoption is permitted. The standard also allows for early adoption of any removed or modified disclosures upon issuance of this update while delaying adoption of the additional disclosures until their effective date. We are currently assessing the impact of adoption of this standard on our Consolidated Financial Statements.
Update ASU 2018-14 – Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20)
In August 2018, the FASB amended its guidance on disclosure requirements for defined benefit plans. The update amends existing annual disclosure requirements applicable to all employers that sponsor defined benefit pension and other postretirement plans by adding, removing, and clarifying certain disclosures. The amendments in this update are effective for fiscal years beginning after December 15, 2020, with early adoption permitted, and are to be applied on a retrospective basis to all periods presented. We are currently assessing the impact of adoption of this standard on our Consolidated Financial Statements.