Leases

6 Months Ended

Apr. 04, 2020

The Company’s lease portfolio includes both real estate and non-real estate type leases which are accounted for as either finance or operating leases. Real estate leases generally include office, warehouse and manufacturing facilities and non-real estate leases generally include office equipment and vehicles. The Company determines if a contract is or contains a lease at inception. The Company’s leases have remaining lease terms of less than 1 year to 41 years. Renewal options that are deemed reasonably certain are included as part of the lease term for purposes of calculating the right-of-use (“ROU”) assets and lease liability. Variable lease payments are generally expensed as incurred and include certain index-based changes in rent, certain nonlease components, such as maintenance and other services provided by the lessor, and other charges included in the lease. The Company elected the practical expedient to not separate lease and nonlease components, as such nonlease components are included in the calculation of the ROU asset and lease liability and included in the lease expense over the term of the lease. The Company uses a discount rate to calculate the ROU asset and lease liability. When the implicit rate is known or provided in the lease documents, the Company is required to use this rate. In cases in which the implicit rate is not known, the Company uses an estimated incremental borrowing rate.

Operating lease ROU assets and lease liabilities are recorded on the date the Company takes possession of the leased assets with expense recognized on a straight-line basis over the lease term. Leases with an estimated total term of 12 months or less are not recorded on the balance sheet and the lease expense is recognized on a straight-line basis over the lease term. Generally, the Company's lease agreements do not contain material residual value guarantees or material restrictive covenants.

Upon adoption of ASU 2016-02, the Company recorded $45.5 million of right-of-use assets and lease liabilities, related to its existing operating lease portfolio. The Company also reclassified amounts previously held on the balance sheet to operating right-of-use assets and operating lease liabilities upon adoption due to existing arrangements subject to the new standard, including $30.2 million of prepaid leases in other non-current assets. The accounting for the Company’s finance leases remained substantially unchanged. In addition, the company recognized a $1.1 million reduction to retained earnings as a result of two existing build-to-suit arrangements for the facilities in Guadalajara, Mexico that were reassessed to be finance leases under the new standard. The adoption of this new standard did not have a material impact on the Condensed Consolidated Statements of Cash Flows or Condensed Consolidated Statements of Comprehensive (Loss) Income.

As a result of the adoption, the following adjustments were made to the opening balances of the Company's Condensed Consolidated Balance Sheets (in thousands):



	September 28, 2019		Impacts due to adoption of Topic 842			September 29, 2019
ASSETS
Prepaid expenses and other	$	31,974	$	(170	)	$	31,804
Operating right-of-use assets	—		75,790			75,790
Property, plant and equipment, net	384,224		(1,833		)	382,391
Deferred income taxes	13,654		432			14,086
Other non-current assets	64,714		(30,193		)	34,521
LIABILITIES AND SHAREHOLDERS' EQUITY
Other accrued liabilities	$	106,461	$	7,939		$	114,400
Long-term debt and finance lease obligations, net of current portion	187,278		(207		)	187,071
Long-term operating lease liabilities	—		37,371			37,371
Retained earnings	1,178,677		(1,077		)	1,177,600

The components of lease expense for three and six months ended April 4, 2020 were as follows (in thousands):



	Three Months Ended		Six Months Ended
	April 4, 2020		April 4, 2020
Finance lease expense:
Amortization of right-of-use assets	$	1,075	$	2,269
Interest on lease liabilities	1,211		2,502
Operating lease expense	2,898		6,079
Other lease expense	1,139		1,259
Total	$	6,323	$	12,109

Based on the nature of the ROU asset, amortization of finance right-of-use assets, operating lease expense and other lease expense are recorded within either cost of goods sold or selling and administrative expenses and interest on finance lease liabilities is recorded within interest expense on the Condensed Consolidated Statements of Comprehensive (Loss) Income. Other lease expense includes lease expense for leases with an estimated total term of twelve months or less and variable lease expense related to variations in lease payments as a result of a change in factors or circumstances occurring after the lease possession date.

The following tables sets forth the amount of lease assets and lease liabilities included in the Company’s Condensed Consolidated Balance Sheets (in thousands):



	Financial Statement Line Item	April 4, 2020
ASSETS
Finance lease assets	Property, plant and equipment, net	$	36,227
Operating lease assets	Right-of-use operating lease assets	74,371
Total lease assets		$	110,598

LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Finance lease liabilities	Current portion of long-term debt and finance lease obligations	$	2,372
Operating lease liabilities	Other accrued liabilities	8,545
Non-current
Finance lease liabilities	Long-term debt and finance lease obligations, net of current portion	36,532
Operating lease liabilities	Long-term operating lease liabilities	39,617
Total lease liabilities		$	87,066

Other information related to the Company’s leases was as follows:



	April 4, 2020
Weighted-average remaining lease term (in years)
Finance leases	13.4
Operating leases	18.3
Weighted-average discount rate
Finance leases	17.8	%
Operating leases	3.0	%



	Three Months Ended		Six Months Ended
	April 4, 2020		April 4, 2020
Cash paid for amounts included in the measurement of lease liabilities (in thousands)
Operating cash flows used in finance leases	$	1,125	$	2,249
Operating cash flows used in operating leases	2,659		5,838
Finance cash flows used in finance leases	845		1,564
ROU assets obtained in exchange for lease liabilities (in thousands)
Operating leases	$	6	$	7,509
Finance leases	83		357

Future minimum lease payments required under finance and operating leases as of April 4, 2020, were as follows (in thousands):



	Operating leases			Finance leases
Remaining 2020	$	5,241		$	3,602
2021	8,710			6,535
2022	7,950			6,068
2023	7,532			5,321
2024	5,936			4,993
2025 and thereafter	20,362			98,771
Total minimum lease payments	55,731			125,290
Less: imputed interest	(7,569		)	(86,386		)
Present value of lease liabilities	$	48,162		$	38,904

As of April 4, 2020, the Company’s future operating leases that have not yet commenced are immaterial.

Future minimum lease payments required under long-term operating and capital leases as of September 28, 2019, were as follows (in thousands):



	Operating leases		Capital leases
2020	$	10,395	$	6,734
2021	6,554		3,490
2022	5,584		2,884
2023	5,153		1,652
2024	3,713		958
Thereafter	9,426		34,143
Total	$	40,825	$	49,861