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Leases
9 Months Ended
Sep. 30, 2019
Leases [Abstract]  
Leases Leases
We adopted ASU No. 2016-02, Leases (Topic 842), as of January 1, 2019. We elected to use the adoption date as our date of initial application and thus have not restated comparative prior periods. We elected the ‘package of practical expedients’, which permits us not to reassess our prior conclusions about lease identification, lease classification and initial direct costs under the new standard. We did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us.
The new standard also provides practical expedients for an entity’s ongoing accounting. We elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize right-of-use assets or lease liabilities, and this includes not recognizing right-of-use assets or lease liabilities for existing short-term leases of those assets in transition. We also elected the practical expedient to not separate lease and non-lease components for all of our leases.
The adoption of the new standard resulted in the recording of operating lease assets and lease liabilities of approximately $197 million and $201 million, respectively, as of January 1, 2019. The standard did not materially impact our consolidated net income (loss) and had no impact on cash flows.
We enter into non-cancelable agreements to lease most of our office and warehouse facilities with remaining terms generally ranging from one to 20 years. Certain leases include renewal options, generally for one to five-year increments. The exercise of lease renewal options is at our sole discretion. We include options to renew (or terminate) in our lease term, and as part of our right-of-use assets and lease liabilities, when it is reasonably certain that we will exercise that option. We also lease some of our transportation and material handling equipment for terms generally ranging from three to 10 years. Leases with a term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. The depreciable life of right-of-use assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Our incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments. We use the implicit rate when readily determinable. The operating lease asset also includes adjustments for any lease payments made and lease incentives.
The components of lease expense were as follows:
 
Classification
 
Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
Operating lease cost
Distribution, selling and administrative expenses
 
$
22,358

 
$
56,597

Finance lease cost:
 
 
 
 
 
Amortization of lease assets
Distribution, selling and administrative expenses
 
1,946

 
3,157

Interest on lease liabilities
Interest expense, net
 
625

 
1,258

Total finance lease cost
 
 
2,571

 
4,415

Short-term lease cost
Distribution, selling and administrative expenses
 
180

 
570

Variable lease cost
Distribution, selling and administrative expenses
 
5,363

 
14,844

Total lease cost
 
 
$
30,472

 
$
76,426


Variable lease cost consists primarily of taxes, insurance, and common area or other maintenance costs for our leased facilities which are paid as incurred.

Supplemental balance sheet information is as follows:
 
Classification
 
As of September 30, 2019
Assets:
 
 
 
Operating lease assets
Operating lease assets
 
$
234,853

Finance lease assets
Property and equipment, net
 
12,561

Total lease assets
 
 
$
247,414

Liabilities:
 
 
 
Current
 
 

Operating
Other current liabilities
 
$
41,206

Finance
Other current liabilities
 
2,729

Noncurrent
 
 
 
Operating
Operating lease liabilities, excluding current portion
 
198,858

Finance
Long-term debt, excluding current portion
 
15,190

Total lease liabilities
 
 
$
257,983


Other information related to leases was as follows:
 
Nine Months Ended September 30, 2019
 
Supplemental cash flow information
 
 
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows from operating and finance leases
$
56,576

 
Financing cash flows from finance leases
$
3,036

 
 
 
 
Right-of-use assets obtained in exchange for new operating and finance lease liabilities
$
69,171

 
 
 
 
Weighted average remaining lease term (years)
 
 
Operating leases
6.5

 
Finance leases
8.0

 
 
 
 
Weighted average discount rate
 
 
Operating leases
11.8
%
 
Finance leases
9.9
%
 

Maturities of lease liabilities as of September 30, 2019 were as follows:
 
Operating Leases
 
Finance Leases
 
Total
2019 (remainder)
$
11,045

 
$
1,276

 
$
12,321

2020
72,839

 
3,832

 
76,671

2021
64,396

 
2,972

 
67,368

2022
46,674

 
2,722

 
49,396

2023
36,122

 
2,443

 
38,565

Thereafter
121,248

 
13,058

 
134,306

Total lease payments
352,324

 
26,303

 
378,627

Less: Interest
(112,260
)
 
(8,384
)
 
(120,644
)
Present value of lease liabilities
$
240,064

 
$
17,919

 
$
257,983


At December 31, 2018, future minimum annual payments under non-cancelable lease agreements with original terms in excess of one year, and including payments required under operating leases for facilities we have vacated, were as follows:
 
Total
2019
$
64,082

2020
53,138

2021
42,480

2022
26,445

2023
19,895

Thereafter
45,708

Total minimum payments
$
251,748


Rent expense for all operating leases for the year ended December 31, 2018 was $78.3 million.
Leases Leases
We adopted ASU No. 2016-02, Leases (Topic 842), as of January 1, 2019. We elected to use the adoption date as our date of initial application and thus have not restated comparative prior periods. We elected the ‘package of practical expedients’, which permits us not to reassess our prior conclusions about lease identification, lease classification and initial direct costs under the new standard. We did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us.
The new standard also provides practical expedients for an entity’s ongoing accounting. We elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize right-of-use assets or lease liabilities, and this includes not recognizing right-of-use assets or lease liabilities for existing short-term leases of those assets in transition. We also elected the practical expedient to not separate lease and non-lease components for all of our leases.
The adoption of the new standard resulted in the recording of operating lease assets and lease liabilities of approximately $197 million and $201 million, respectively, as of January 1, 2019. The standard did not materially impact our consolidated net income (loss) and had no impact on cash flows.
We enter into non-cancelable agreements to lease most of our office and warehouse facilities with remaining terms generally ranging from one to 20 years. Certain leases include renewal options, generally for one to five-year increments. The exercise of lease renewal options is at our sole discretion. We include options to renew (or terminate) in our lease term, and as part of our right-of-use assets and lease liabilities, when it is reasonably certain that we will exercise that option. We also lease some of our transportation and material handling equipment for terms generally ranging from three to 10 years. Leases with a term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. The depreciable life of right-of-use assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Our incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments. We use the implicit rate when readily determinable. The operating lease asset also includes adjustments for any lease payments made and lease incentives.
The components of lease expense were as follows:
 
Classification
 
Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
Operating lease cost
Distribution, selling and administrative expenses
 
$
22,358

 
$
56,597

Finance lease cost:
 
 
 
 
 
Amortization of lease assets
Distribution, selling and administrative expenses
 
1,946

 
3,157

Interest on lease liabilities
Interest expense, net
 
625

 
1,258

Total finance lease cost
 
 
2,571

 
4,415

Short-term lease cost
Distribution, selling and administrative expenses
 
180

 
570

Variable lease cost
Distribution, selling and administrative expenses
 
5,363

 
14,844

Total lease cost
 
 
$
30,472

 
$
76,426


Variable lease cost consists primarily of taxes, insurance, and common area or other maintenance costs for our leased facilities which are paid as incurred.

Supplemental balance sheet information is as follows:
 
Classification
 
As of September 30, 2019
Assets:
 
 
 
Operating lease assets
Operating lease assets
 
$
234,853

Finance lease assets
Property and equipment, net
 
12,561

Total lease assets
 
 
$
247,414

Liabilities:
 
 
 
Current
 
 

Operating
Other current liabilities
 
$
41,206

Finance
Other current liabilities
 
2,729

Noncurrent
 
 
 
Operating
Operating lease liabilities, excluding current portion
 
198,858

Finance
Long-term debt, excluding current portion
 
15,190

Total lease liabilities
 
 
$
257,983


Other information related to leases was as follows:
 
Nine Months Ended September 30, 2019
 
Supplemental cash flow information
 
 
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows from operating and finance leases
$
56,576

 
Financing cash flows from finance leases
$
3,036

 
 
 
 
Right-of-use assets obtained in exchange for new operating and finance lease liabilities
$
69,171

 
 
 
 
Weighted average remaining lease term (years)
 
 
Operating leases
6.5

 
Finance leases
8.0

 
 
 
 
Weighted average discount rate
 
 
Operating leases
11.8
%
 
Finance leases
9.9
%
 

Maturities of lease liabilities as of September 30, 2019 were as follows:
 
Operating Leases
 
Finance Leases
 
Total
2019 (remainder)
$
11,045

 
$
1,276

 
$
12,321

2020
72,839

 
3,832

 
76,671

2021
64,396

 
2,972

 
67,368

2022
46,674

 
2,722

 
49,396

2023
36,122

 
2,443

 
38,565

Thereafter
121,248

 
13,058

 
134,306

Total lease payments
352,324

 
26,303

 
378,627

Less: Interest
(112,260
)
 
(8,384
)
 
(120,644
)
Present value of lease liabilities
$
240,064

 
$
17,919

 
$
257,983


At December 31, 2018, future minimum annual payments under non-cancelable lease agreements with original terms in excess of one year, and including payments required under operating leases for facilities we have vacated, were as follows:
 
Total
2019
$
64,082

2020
53,138

2021
42,480

2022
26,445

2023
19,895

Thereafter
45,708

Total minimum payments
$
251,748


Rent expense for all operating leases for the year ended December 31, 2018 was $78.3 million.