Leases (Notes)

12 Months Ended

Dec. 31, 2019

Leases

We lease certain warehouses, distribution centers, retail stores, office space, land, vehicles and equipment. We determine if an arrangement is a lease at inception. Operating lease right-of-use ("ROU") assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. As the implicit rate for most of our leases is not readily determinable, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. Upon adoption of the new lease standard, we utilized our incremental borrowing rate as of the date of adoption. We determine our incremental borrowing rate by analyzing yield curves with consideration of lease term, and country and company specific factors. The operating lease ROU asset also includes any lease prepayments and excludes lease incentives.

Many of our leases include one or more options to renew, with renewal terms that can extend the lease term from 1 to 40 years or more. For each lease, we consider whether we are reasonably certain to exercise these options to extend. Other contracts may contain termination options that we assess to determine whether we are reasonably certain not to exercise those options. Certain leases also include options to purchase the leased property. The depreciable life of 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.

Some of our lease agreements include rental payments adjusted periodically for inflation. Most of these adjustments are considered variable lease costs. Other variable lease costs consist of certain non-lease components that are disclosed as lease costs due to our election of the practical expedient to combine lease and non-lease components and include items such as variable payments for utilities, property taxes, common area maintenance, sales taxes, and insurance.

For leases with an initial term of 12 months or less, we have not recognized an operating lease ROU asset or operating lease liability on the Consolidated Balance Sheets; we recognize lease expense for these leases on a straight-line basis over the lease terms.

We guarantee the residual values for the majority of our vehicles. The residual values decline over the lease terms to a defined percentage of original cost. In the event the lessor does not realize the residual value when a vehicle is sold, we would be responsible for a portion of the shortfall. Similarly, if the lessor realizes more than the residual value when a vehicle is sold, we would be paid the amount realized over the residual value. Had we terminated all of our operating leases subject to these guarantees at December 31, 2019, our portion of the guaranteed residual value would have totaled approximately $67 million. Other than the residual value guarantees associated with our vehicles discussed above, we do not have any other material residual value guarantees or restrictive covenants.

The amounts recorded on the Consolidated Balance Sheet as of December 31, 2019 related to our lease agreements are as follows (in thousands):



Leases	Classification	December 31, 2019

Assets
Operating lease assets, net	Operating lease assets, net	$	1,308,511
Finance lease assets, net	Property, plant and equipment, net	39,077
Total leased assets		$	1,347,588
Liabilities
Current
Operating	Current portion of operating lease liabilities	$	221,527
Finance	Current portion of long-term obligations	9,409
Noncurrent
Operating	Long-term operating lease liabilities, excluding current portion	1,137,597
Finance	Long-term obligations, excluding current portion	31,428
Total lease liabilities		$	1,399,961

The components of lease expense are as follows (in thousands):



		Year Ended
Lease Cost	Classification	December 31, 2019

Operating lease cost	Cost of goods sold	$	13,416
Operating lease cost	Selling, general and administrative expenses	303,619
Short-term lease cost	Selling, general and administrative expenses	9,392
Variable lease cost	Selling, general and administrative expenses	95,899
Finance lease cost
Amortization of leased assets	Depreciation and amortization	10,277
Interest on lease liabilities	Interest expense	1,546
Sublease income	Selling, general and administrative expenses	(1,640		)
Net lease cost		$	432,509

The future minimum lease commitments under our noncancelable operating leases at December 31, 2018 were as follows (in thousands):



Years ending December 31:
2019	$	294,269
2020	256,172
2021	210,632
2022	158,763
2023	131,518
Thereafter	777,165
Future Minimum Lease Payments	$	1,828,519

The future minimum lease commitments under our leases at December 31, 2019 are as follows (in thousands):



	Operating leases		Finance leases ⁽¹⁾		Total
Years ending December 31:
2020	$	288,726	$	10,121	$	298,847
2021	249,168		8,743		257,911
2022	200,546		7,166		207,712
2023	167,858		3,591		171,449
2024	138,502		3,138		141,640
Thereafter	760,030		19,381		779,411
Future minimum lease payments	1,804,830		52,140		1,856,970
Less: Interest	445,706		11,303		457,009
Present value of lease liabilities	$	1,359,124	$	40,837	$	1,399,961


(1)	Amounts are included in the scheduled maturities of long-term obligations in "Note 10, "Long-Term Obligations" and in the “Liquidity and Capital Resources” section of Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of this Annual Report on Form 10-K.

As of December 31, 2019, we have additional minimum operating lease payments for leases that have not yet commenced of $144 million. These operating leases will commence in the next 18 months with lease terms of 1 to 25 years. Most of these leases have not commenced as the assets are in the process of being constructed. The amount includes payments expected to be made under the Benelux region central distribution center lease commencing in early 2021 after construction is completed. The lease has a term of 15 years with two renewal options of 5 years each.

Other information related to leases was as follows:



Lease Term and Discount Rate	December 31, 2019

Weighted-average remaining lease term (years)
Operating leases	9.5
Finance leases	9.2
Weighted-average discount rate
Operating leases	5.2	%
Finance leases	4.1	%



	Year Ended
Supplemental cash flows information (in thousands)	December 31, 2019

Cash paid for amounts included in the measurement of lease liabilities
Operating cash outflows from operating leases	$	297,712
Financing cash outflows from finance leases	11,744
Leased assets obtained in exchange for new finance lease liabilities	13,326
Leased assets obtained in exchange for new operating lease liabilities	144,142