Leases

9 Months Ended

Sep. 30, 2019

NOTE 3 – LEASES

Operating lease commitments:

The Company leases certain office space, retail stores, distribution centers and equipment under long-term, non-cancelable operating leases. Lease components are not accounted for separately from nonlease components. Leases generally include renewal options and some include options to purchase, provisions for percentage rent based on sales and/or incremental step increase provisions. The exercise of renewal options is typically at the Company’s sole discretion and all operating lease expense is recognized on a straight-line basis over the lease term. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company rents or subleases certain surplus real estate to third parties. Right-of-use assets and corresponding operating lease liabilities are recognized for all leases with an initial term greater than 12 months.

See Note 11 for further information concerning the Company’s adoption of Accounting Standard Codification 842 - Leases.

The following table summarizes Total lease cost for the three and nine months ended September 30, 2019, which was primarily included in “Selling, general and administrative expenses” on the accompanying Condensed Consolidated Statements of Income (in thousands):



	For the Three Months Ended September 30, 2019			For the Nine Months Ended September 30, 2019
Operating lease cost	$	80,767		$	239,672
Short-term operating lease cost	1,103			4,707
Variable operating lease cost	19,538			56,801
Sublease income	(1,062		)	(2,995		)
Total lease cost	$	100,346		$	298,185

The following table summarizes other lease related information for the nine months ended September 30, 2019:



		For the Nine Months Ended September 30, 2019
Cash paid for amounts included in the measurement of operating lease liabilities:
	Operating cash flows from operating leases (in thousands)	$	237,055
Right-of-use assets obtained in exchange for new operating lease liabilities (in thousands)		$	153,046
Weighted-average remaining lease term - operating leases		10.4 years
Weighted-average discount rate - operating leases		4.2		%

The following table identifies the future minimum lease payments under all of the Company’s operating leases for each of the next five years, and in the aggregate thereafter, and reconciles to the present value of the “Operating lease liabilities, less current portion” included in the accompanying Condensed Consolidated Balance Sheet as of September 30, 2019 (in thousands):



	September 30, 2019
	Related Parties		Non-Related Parties		Total
October 1, 2019 to December 31, 2019	$	1,188	$	70,629	$	71,817
2020	3,988		312,634		316,622
2021	3,521		286,047		289,568
2022	2,763		261,998		264,761
2023	2,540		231,473		234,013
Thereafter	3,543		1,246,605		1,250,148
Total operating lease payments	17,543		2,409,386		2,426,929
Less: present value discount	1,896		474,129		476,025
Total operating lease liabilities	15,647		1,935,257		1,950,904
Less: current portion of operating lease liabilities	4,215		304,511		308,726
Operating lease liabilities, less current portion	$	11,432	$	1,630,746	$	1,642,178

The Company leases certain land and buildings related to 74 of its O’Reilly Auto Parts stores under fifteen- or twenty-year operating lease agreements with entities that include one or more of the Company’s affiliated directors or members of an affiliated director’s immediate family. Generally, these lease agreements provide for renewal options for an additional five years at the option of the Company, and the lease agreements are periodically modified to further extend the lease term for specific stores under the agreements. Lease payments under these operating leases totaled $1.2 million and $3.6 million for the three and nine months ended September 30, 2019, respectively. The Company believes that the lease agreements with the affiliated entities are on terms comparable to those obtainable from third parties.

The future minimum lease payments under the Company’s operating leases, in the table above, do not include potential amounts for percentage rent and other variable operating lease related costs and have not been reduced by expected future minimum sublease income under non-cancelable subleases, which was approximately $19.1 million as of September 30, 2019. The present value discount component of the future minimum lease payments under the Company’s operating leases, in the table above, was primarily calculated using the Company’s incremental borrowing rate based on information available at the lease commencement or modification date; for leases that commenced prior to January 1, 2019, the incremental borrowing rate used was as of January 1, 2019. When the implicit rate of a lease is available, the implicit rate is used in the calculation and not the Company’s incremental borrowing rate.