Leases

6 Months Ended

Jan. 31, 2020

Leases [Abstract]

Leases

Leases

On August 1, 2019, we adopted ASU No. 2016-02 - Leases (Topic 842), which requires the recognition of lease rights and obligations as assets and liabilities on the balance sheet. Previously, operating leases were not recognized on the balance sheet. As we elected the modified retrospective adoption method, prior-period information was not restated. We also elected the transition package of practical expedients available in the standard, which permits us to not reassess under the new standard our prior conclusions about lease identification, classification and initial direct costs. As part of our adoption, however, we did not elect to use the hindsight or land easements practical expedients.

On August 1, 2019, in connection with our adoption of Topic 842, we recognized $35,825,000 of operating lease right-of-use ("ROU") assets (net of a $3,023,000 deferred rent liability that existed as of August 1, 2019 under prior applicable GAAP) and $38,848,000 of related liabilities. Except for the recording of the ROU assets and lease liabilities on our Condensed Consolidated Balance Sheet, and the expanded disclosures about our leasing activities, our adoption did not have a material impact on our condensed consolidated financial statements. Our adoption also did not result in any cumulative-effect adjustment to opening retained earnings.

Our leases historically relate to the leasing of facilities and equipment. We determine at inception whether an arrangement is, or contains, a lease and whether the lease should be classified as an operating or a financing lease. At lease commencement, we recognize an ROU asset and lease liability based on the present value of the future lease payments over the estimated lease term. We have elected to not recognize an ROU asset or lease liability for any leases with terms of twelve months or less. Instead, for such short-term leases, we recognize lease expense on a straight-line basis over the lease term. Certain of our leases include options to extend the term of the lease or to terminate the lease early. When it is reasonably certain that we will exercise a renewal option or will not exercise a termination option, we include the impact of exercising or not exercising such option, respectively, in the estimate of the lease term. As our lease agreements do not explicitly state the discount rate implicit in the lease, we use our incremental borrowing rate ("IBR") on the commencement date to calculate the present value of future lease payments. Such IBR represents our estimated rate of interest to borrow on a collateralized basis over a term commensurate with the expected lease term.

Some of our leases include payments that are based on the Consumer Price Index ("CPI") or other similar indices. These variable lease payments are included in the calculation of the ROU asset and lease liability using the index as of the lease commencement date. Other variable lease payments, such as common area maintenance, property taxes, and usage-based amounts, are required by Topic 842 to be excluded from the ROU asset and lease liability and expensed as incurred. In addition to the present value of the future lease payments, the calculation of the ROU asset would also consider, to the extent applicable, any deferred rent upon adoption, lease pre-payments or initial direct costs of obtaining the lease (e.g., such as commissions).

For all classes of leased assets, we elected the practical expedient to not separate lease components (i.e., the actual item being leased, such as the facility or piece of equipment) from non-lease components (i.e., the distinct elements of a contract not related to securing the use of the leased asset, such as common area maintenance and consumable supplies).

Certain of our facility lease agreements (which are classified as operating leases) contain rent holidays or rent escalation clauses. For rent holidays and rent escalation clauses during the lease term, we record rental expense on a straight-line basis over the term of the lease. As of January 31, 2020, none of our leases contained a residual value guarantee and covenants included in our lease agreements are customary for the types of facilities and equipment being leased.

The components of lease expense are as follows:

	Three months ended January 31, 2020		Six months ended January 31, 2020
Finance lease expense:
Amortization of ROU assets	$	44,000	$	152,000
Interest on lease liabilities	1,000		3,000
Operating lease expense	2,699,000		5,336,000
Short-term lease expense	878,000		1,741,000
Variable lease expense	1,016,000		2,009,000
Sublease income	—		—
Total lease expense	$	4,638,000	$	9,241,000

Additional information related to leases is as follows:

	Six months ended January 31, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating leases - Operating cash outflows	$	5,725,000
Finance leases - Operating cash outflows	3,000
Finance leases - Financing cash outflows	300,000
ROU assets obtained in the exchange for lease liabilities:
Operating leases	$	1,823,000

The following table is a reconciliation of future cash flows relating to operating lease liabilities presented on our Condensed Consolidated Balance Sheet as of January 31, 2020:

	Operating
Remaining portion of fiscal 2020	$	5,647,000
Fiscal 2021	9,138,000
Fiscal 2022	7,738,000
Fiscal 2023	5,987,000
Fiscal 2024	4,170,000
Thereafter	6,533,000
Total future undiscounted cash flows	39,213,000
Less: Present value discount	3,523,000
Lease liabilities	$	35,690,000
Weighted-average remaining lease terms (in years)	4.69
Weighted-average discount rate	4.04		%

We lease our Melville, New York production facility from a partnership controlled by our CEO and Chairman. Lease payments made during the six months ended January 31, 2020 were $322,000. The current lease provides for our use of the premises as they exist through December 2021 with an option for an additional ten years. The annual rent of the facility for calendar year 2020 is $657,000 and is subject to customary adjustments. We have a right of first refusal in the event of a sale of the facility.

As of January 31, 2020, we do not have any rental commitments that have not commenced.

As we have not restated prior year information given our method of adopting the new standard, the following represents our future minimum lease payments for operating leases and capital leases as of July 31, 2019 under ASC Topic 840 and as reported in our Form 10-K filed with the SEC on September 24, 2019:

	Operating		Capital		Total
Fiscal 2020	$	11,812,000	789,000		$	12,601,000
Fiscal 2021	8,723,000		—		8,723,000
Fiscal 2022	7,343,000		—		7,343,000
Fiscal 2023	5,776,000		—		5,776,000
Fiscal 2024	3,430,000		—		3,430,000
Thereafter	7,130,000		—		7,130,000
Total	$	44,214,000	789,000		$	45,003,000
Less amount representing interest	*		32,000		32,000
Present value of net minimum lease payments	*		$	757,000	$	44,971,000

*Not applicable for operating leases

Leases

Leases

On August 1, 2019, we adopted ASU No. 2016-02 - Leases (Topic 842), which requires the recognition of lease rights and obligations as assets and liabilities on the balance sheet. Previously, operating leases were not recognized on the balance sheet. As we elected the modified retrospective adoption method, prior-period information was not restated. We also elected the transition package of practical expedients available in the standard, which permits us to not reassess under the new standard our prior conclusions about lease identification, classification and initial direct costs. As part of our adoption, however, we did not elect to use the hindsight or land easements practical expedients.

On August 1, 2019, in connection with our adoption of Topic 842, we recognized $35,825,000 of operating lease right-of-use ("ROU") assets (net of a $3,023,000 deferred rent liability that existed as of August 1, 2019 under prior applicable GAAP) and $38,848,000 of related liabilities. Except for the recording of the ROU assets and lease liabilities on our Condensed Consolidated Balance Sheet, and the expanded disclosures about our leasing activities, our adoption did not have a material impact on our condensed consolidated financial statements. Our adoption also did not result in any cumulative-effect adjustment to opening retained earnings.

Our leases historically relate to the leasing of facilities and equipment. We determine at inception whether an arrangement is, or contains, a lease and whether the lease should be classified as an operating or a financing lease. At lease commencement, we recognize an ROU asset and lease liability based on the present value of the future lease payments over the estimated lease term. We have elected to not recognize an ROU asset or lease liability for any leases with terms of twelve months or less. Instead, for such short-term leases, we recognize lease expense on a straight-line basis over the lease term. Certain of our leases include options to extend the term of the lease or to terminate the lease early. When it is reasonably certain that we will exercise a renewal option or will not exercise a termination option, we include the impact of exercising or not exercising such option, respectively, in the estimate of the lease term. As our lease agreements do not explicitly state the discount rate implicit in the lease, we use our incremental borrowing rate ("IBR") on the commencement date to calculate the present value of future lease payments. Such IBR represents our estimated rate of interest to borrow on a collateralized basis over a term commensurate with the expected lease term.

Some of our leases include payments that are based on the Consumer Price Index ("CPI") or other similar indices. These variable lease payments are included in the calculation of the ROU asset and lease liability using the index as of the lease commencement date. Other variable lease payments, such as common area maintenance, property taxes, and usage-based amounts, are required by Topic 842 to be excluded from the ROU asset and lease liability and expensed as incurred. In addition to the present value of the future lease payments, the calculation of the ROU asset would also consider, to the extent applicable, any deferred rent upon adoption, lease pre-payments or initial direct costs of obtaining the lease (e.g., such as commissions).

For all classes of leased assets, we elected the practical expedient to not separate lease components (i.e., the actual item being leased, such as the facility or piece of equipment) from non-lease components (i.e., the distinct elements of a contract not related to securing the use of the leased asset, such as common area maintenance and consumable supplies).

Certain of our facility lease agreements (which are classified as operating leases) contain rent holidays or rent escalation clauses. For rent holidays and rent escalation clauses during the lease term, we record rental expense on a straight-line basis over the term of the lease. As of January 31, 2020, none of our leases contained a residual value guarantee and covenants included in our lease agreements are customary for the types of facilities and equipment being leased.

The components of lease expense are as follows:

	Three months ended January 31, 2020		Six months ended January 31, 2020
Finance lease expense:
Amortization of ROU assets	$	44,000	$	152,000
Interest on lease liabilities	1,000		3,000
Operating lease expense	2,699,000		5,336,000
Short-term lease expense	878,000		1,741,000
Variable lease expense	1,016,000		2,009,000
Sublease income	—		—
Total lease expense	$	4,638,000	$	9,241,000

Additional information related to leases is as follows:

	Six months ended January 31, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating leases - Operating cash outflows	$	5,725,000
Finance leases - Operating cash outflows	3,000
Finance leases - Financing cash outflows	300,000
ROU assets obtained in the exchange for lease liabilities:
Operating leases	$	1,823,000

The following table is a reconciliation of future cash flows relating to operating lease liabilities presented on our Condensed Consolidated Balance Sheet as of January 31, 2020:

	Operating
Remaining portion of fiscal 2020	$	5,647,000
Fiscal 2021	9,138,000
Fiscal 2022	7,738,000
Fiscal 2023	5,987,000
Fiscal 2024	4,170,000
Thereafter	6,533,000
Total future undiscounted cash flows	39,213,000
Less: Present value discount	3,523,000
Lease liabilities	$	35,690,000
Weighted-average remaining lease terms (in years)	4.69
Weighted-average discount rate	4.04		%

We lease our Melville, New York production facility from a partnership controlled by our CEO and Chairman. Lease payments made during the six months ended January 31, 2020 were $322,000. The current lease provides for our use of the premises as they exist through December 2021 with an option for an additional ten years. The annual rent of the facility for calendar year 2020 is $657,000 and is subject to customary adjustments. We have a right of first refusal in the event of a sale of the facility.

As of January 31, 2020, we do not have any rental commitments that have not commenced.

As we have not restated prior year information given our method of adopting the new standard, the following represents our future minimum lease payments for operating leases and capital leases as of July 31, 2019 under ASC Topic 840 and as reported in our Form 10-K filed with the SEC on September 24, 2019:

	Operating		Capital		Total
Fiscal 2020	$	11,812,000	789,000		$	12,601,000
Fiscal 2021	8,723,000		—		8,723,000
Fiscal 2022	7,343,000		—		7,343,000
Fiscal 2023	5,776,000		—		5,776,000
Fiscal 2024	3,430,000		—		3,430,000
Thereafter	7,130,000		—		7,130,000
Total	$	44,214,000	789,000		$	45,003,000
Less amount representing interest	*		32,000		32,000
Present value of net minimum lease payments	*		$	757,000	$	44,971,000

*Not applicable for operating leases