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Leases | 3 Months Ended
--- | ---
Mar. 31, 2019
Leases [Abstract] |
Lessee, Operating Leases | Leases Adoption of ASC Topic 842, "Leases" On January 1, 2019, we adopted Topic 842 using the modified retrospective transition method and used the effective date as our date of initial application. Consequently, leases for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 840. The new standard provides a number of optional practical expedients in transition. We elected the ‘package of practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification, and initial direct costs. We did not elect the use-of-hindsight practical expedient. We recorded additional lease liabilities for operating leases of $72.4 million, with an offsetting increase to ROU assets of approximately $69.2 million as of January 1, 2019, substantially all of which are real estate leases. The difference between these amounts is related to the reclassification of accrued straight-line rent upon adoption. Capital leases were also reclassified from "Property and equipment, net" to "Finance lease right-of-use assets" and from "Other long-term liabilities" to "Finance lease liabilities" on our consolidated balance sheet. The standard did not have a material impact on our consolidated net earnings and cash flows. There was no cumulative effect adjustment recorded to opening retained earnings as of January 1, 2019, upon adoption of Topic 842. The effect of the changes made to our consolidated balance sheet as of January 1, 2019, for the adoption of the new lease standard was as follows:
| Balance at December 31, 2018 |  | Adjustments Due to ASC 842 |  | Balance at January 1, 2019
| (thousands)
ASSETS |  |  |  |  |
Property and equipment, net | $ | 487,224 |  |  | $ | (21,732 | ) |  | $ | 465,492 |
Operating lease right-of-use assets | — |  |  | 69,155 |  |  | 69,155 |
Finance lease right-of-use assets | — |  |  | 20,872 |  |  | 20,872 |
Prepaid expenses and other | 31,818 |  |  | (246 | ) |  | 31,572 |
LIABILITIES |  |  |  |  |
Accrued liabilities, other | 63,509 |  |  | 8,863 |  |  | 72,372 |
Operating lease liabilities, net of current portion | — |  |  | 63,498 |  |  | 63,498 |
Finance lease liabilities, net of current portion | — |  |  | 21,921 |  |  | 21,921 |
Other long-term liabilities | 38,904 |  |  | (26,233 | ) |  | 12,671 |
In accordance with the new lease standard requirements, the disclosure of the impact of adoption on our consolidated balance sheet was as follows:
| March 31, 2019
| As Reported |  | Balances Without Adoption of ASC 842 |  | Effect of Change Higher/(Lower)
| (thousands)
ASSETS |  |  |  |  |
Property and equipment, net | $ | 460,650 |  |  | $ | 481,873 |  |  | $ | (21,223 | )
Operating lease right-of-use assets | 67,493 |  |  | — |  |  | 67,493 |
Finance lease right-of-use assets | 20,376 |  |  | — |  |  | 20,376 |
Prepaid expenses and other | 19,109 |  |  | 19,355 |  |  | (246 | )
LIABILITIES |  |  |  |  |
Accrued liabilities, other | 70,298 |  |  | 61,460 |  |  | 8,838 |
Operating lease liabilities, net of current portion | 61,902 |  |  | — |  |  | 61,902 |
Finance lease liabilities, net of current portion | 21,687 |  |  | — |  |  | 21,687 |
Other long-term liabilities | 14,091 |  |  | 40,118 |  |  | (26,027 | )
Leases We primarily lease land, building, and equipment under operating and finance leases. We determine if an arrangement is a lease at inception and assess lease classification as either operating or finance at lease inception or upon modification. Substantially all of our leases with initial terms greater than one year are for real estate, including distribution centers, corporate headquarters, land, and other office space. Substantially all of these lease agreements have fixed payment terms based on the passage of time and are recorded in our Building Materials Distribution segment. Many of our leases include fixed escalation clauses, renewal options and/or termination options that are factored into our determination of lease term and lease payments when appropriate. Renewal options generally range from one to ten years with fixed payment terms similar to those in the original lease agreements. Some lease agreements provide us with the option to purchase the leased property at market value. Our lease agreements do not contain any residual value guarantees. ROU 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. ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of fixed lease payments over the lease term. The current portion of our operating and finance lease liabilities are recorded in "Accrued liabilities, Other" on our Consolidated Balance Sheets. We use our estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments. In determining our incremental borrowing rates, we give consideration to publicly available interest rates for instruments with similar characteristics. For purposes of determining straight-line rent expense, the lease term is calculated from the date we first take possession of the facility, including any periods of free rent and any renewal option periods we are reasonably certain of exercising. Variable lease expense generally includes reimbursement of actual costs for common area maintenance, property taxes, and insurance on leased real estate and are recorded as incurred. The new standard provides practical expedients for an entity’s ongoing accounting. We elected the practical expedient to not separate lease and non-lease components for all of our leases. We also elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases in transition. Our short-term leases primarily include equipment rentals with lease terms on a month-to-month basis, which provide for our seasonal needs and flexibility in the use of equipment. Our short-term leases also include certain real estate for which either party has the right to cancel upon providing notice of 30 to 90 days. Lease Costs The components of lease expense were as follows:
| Three Months Ended March 31, 2019
| (thousands)
Operating lease cost | $ | 3,341 |
Finance lease cost |
Amortization of right-of-use assets | 375 |
Interest on lease liabilities | 461 |
Variable lease cost | 619 |
Short-term lease cost | 994 |
Sublease income | (132 | )
Total lease cost | $ | 5,658 |
Other Information Supplemental cash flow information related to leases was as follows:
| Three Months Ended March 31, 2019
| (thousands)
Cash paid for amounts included in the measurement of lease liabilities |
Operating cash flows from operating leases | $ | 3,301 |
Operating cash flows from finance leases | 461 |
Financing cash flows from finance leases | 181 |
Right-of-use assets obtained in exchange for lease obligations |
Operating leases | 585 |
Finance leases | — |
Other information related to leases was as follows:
| March 31, 2019
Weighted-average remaining lease term (years) |
Operating leases | 9 |
Finance leases | 16 |
Weighted-average discount rate |
Operating leases (a) | 6.5 | %
Finance leases | 8.8 | %
___________________________________ (a) Upon adoption of the new lease standard, discount rates used for existing leases were established at January 1, 2019. As of March 31, 2019, our minimum lease payment requirements for noncancelable operating and finance leases are as follows (in thousands):
|  | Operating Leases |  | Finance Leases
|  | (thousands)
Remainder of 2019 |  | $ | 9,859 |  |  | $ | 1,937 |
2020 |  | 12,737 |  |  | 2,617 |
2021 |  | 11,598 |  |  | 2,656 |
2022 |  | 10,211 |  |  | 2,694 |
2023 |  | 9,881 |  |  | 2,740 |
Thereafter |  | 41,189 |  |  | 30,177 |
Total future minimum lease payments |  | 95,475 |  |  | 42,821 |
Less imputed interest |  | (24,735 | ) |  | (20,390 | )
Total lease obligations |  | 70,740 |  |  | 22,431 |
Less current obligations |  | (8,838 | ) |  | (744 | )
Long-term lease obligations |  | $ | 61,902 |  |  | $ | 21,687 |
Disclosures Related to Periods Prior to Adoption of ASC Topic 842, "Leases" Rental expense for operating leases was $4.6 million for the three months ended March 31, 2018. Sublease rental income was not material. During the three months ended March 31, 2018, we recorded a capital lease for a distribution center with an initial lease term of 20 years in the amount of $14.3 million, which represents a non-cash investing and financing activity. At December 31, 2018, capital lease obligations are recorded in "Other long-term liabilities" on our Consolidated Balance Sheets. As of December 31, 2018, our minimum lease payment requirements for noncancelable operating and capital leases with terms of more than one year are as follows:
|  | Operating Leases |  | Capital Leases
|  | (thousands)
2019 |  | $ | 13,222 |  |  | $ | 2,578 |
2020 |  | 12,734 |  |  | 2,617 |
2021 |  | 11,595 |  |  | 2,656 |
2022 |  | 10,208 |  |  | 2,694 |
2023 |  | 9,800 |  |  | 2,740 |
Thereafter |  | 40,381 |  |  | 30,177 |
Total |  | $ | 97,940 |  |  | 43,462 |
Less - interest on capital lease obligations |  |  |  | (20,838 | )
Total principal payable on capital lease obligations |  |  |  | 22,624 |
Less - current obligations |  |  |  | (703 | )
Long-term capital lease obligations |  |  |  | $ | 21,921 |
These future minimum lease payment requirements have not been reduced by sublease income due in the future under noncancelable subleases. Minimum sublease income expected to be received in the future is not material.
Leases, Finance Leases | Leases Adoption of ASC Topic 842, "Leases" On January 1, 2019, we adopted Topic 842 using the modified retrospective transition method and used the effective date as our date of initial application. Consequently, leases for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 840. The new standard provides a number of optional practical expedients in transition. We elected the ‘package of practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification, and initial direct costs. We did not elect the use-of-hindsight practical expedient. We recorded additional lease liabilities for operating leases of $72.4 million, with an offsetting increase to ROU assets of approximately $69.2 million as of January 1, 2019, substantially all of which are real estate leases. The difference between these amounts is related to the reclassification of accrued straight-line rent upon adoption. Capital leases were also reclassified from "Property and equipment, net" to "Finance lease right-of-use assets" and from "Other long-term liabilities" to "Finance lease liabilities" on our consolidated balance sheet. The standard did not have a material impact on our consolidated net earnings and cash flows. There was no cumulative effect adjustment recorded to opening retained earnings as of January 1, 2019, upon adoption of Topic 842. The effect of the changes made to our consolidated balance sheet as of January 1, 2019, for the adoption of the new lease standard was as follows:
| Balance at December 31, 2018 |  | Adjustments Due to ASC 842 |  | Balance at January 1, 2019
| (thousands)
ASSETS |  |  |  |  |
Property and equipment, net | $ | 487,224 |  |  | $ | (21,732 | ) |  | $ | 465,492 |
Operating lease right-of-use assets | — |  |  | 69,155 |  |  | 69,155 |
Finance lease right-of-use assets | — |  |  | 20,872 |  |  | 20,872 |
Prepaid expenses and other | 31,818 |  |  | (246 | ) |  | 31,572 |
LIABILITIES |  |  |  |  |
Accrued liabilities, other | 63,509 |  |  | 8,863 |  |  | 72,372 |
Operating lease liabilities, net of current portion | — |  |  | 63,498 |  |  | 63,498 |
Finance lease liabilities, net of current portion | — |  |  | 21,921 |  |  | 21,921 |
Other long-term liabilities | 38,904 |  |  | (26,233 | ) |  | 12,671 |
In accordance with the new lease standard requirements, the disclosure of the impact of adoption on our consolidated balance sheet was as follows:
| March 31, 2019
| As Reported |  | Balances Without Adoption of ASC 842 |  | Effect of Change Higher/(Lower)
| (thousands)
ASSETS |  |  |  |  |
Property and equipment, net | $ | 460,650 |  |  | $ | 481,873 |  |  | $ | (21,223 | )
Operating lease right-of-use assets | 67,493 |  |  | — |  |  | 67,493 |
Finance lease right-of-use assets | 20,376 |  |  | — |  |  | 20,376 |
Prepaid expenses and other | 19,109 |  |  | 19,355 |  |  | (246 | )
LIABILITIES |  |  |  |  |
Accrued liabilities, other | 70,298 |  |  | 61,460 |  |  | 8,838 |
Operating lease liabilities, net of current portion | 61,902 |  |  | — |  |  | 61,902 |
Finance lease liabilities, net of current portion | 21,687 |  |  | — |  |  | 21,687 |
Other long-term liabilities | 14,091 |  |  | 40,118 |  |  | (26,027 | )
Leases We primarily lease land, building, and equipment under operating and finance leases. We determine if an arrangement is a lease at inception and assess lease classification as either operating or finance at lease inception or upon modification. Substantially all of our leases with initial terms greater than one year are for real estate, including distribution centers, corporate headquarters, land, and other office space. Substantially all of these lease agreements have fixed payment terms based on the passage of time and are recorded in our Building Materials Distribution segment. Many of our leases include fixed escalation clauses, renewal options and/or termination options that are factored into our determination of lease term and lease payments when appropriate. Renewal options generally range from one to ten years with fixed payment terms similar to those in the original lease agreements. Some lease agreements provide us with the option to purchase the leased property at market value. Our lease agreements do not contain any residual value guarantees. ROU 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. ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of fixed lease payments over the lease term. The current portion of our operating and finance lease liabilities are recorded in "Accrued liabilities, Other" on our Consolidated Balance Sheets. We use our estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments. In determining our incremental borrowing rates, we give consideration to publicly available interest rates for instruments with similar characteristics. For purposes of determining straight-line rent expense, the lease term is calculated from the date we first take possession of the facility, including any periods of free rent and any renewal option periods we are reasonably certain of exercising. Variable lease expense generally includes reimbursement of actual costs for common area maintenance, property taxes, and insurance on leased real estate and are recorded as incurred. The new standard provides practical expedients for an entity’s ongoing accounting. We elected the practical expedient to not separate lease and non-lease components for all of our leases. We also elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases in transition. Our short-term leases primarily include equipment rentals with lease terms on a month-to-month basis, which provide for our seasonal needs and flexibility in the use of equipment. Our short-term leases also include certain real estate for which either party has the right to cancel upon providing notice of 30 to 90 days. Lease Costs The components of lease expense were as follows:
| Three Months Ended March 31, 2019
| (thousands)
Operating lease cost | $ | 3,341 |
Finance lease cost |
Amortization of right-of-use assets | 375 |
Interest on lease liabilities | 461 |
Variable lease cost | 619 |
Short-term lease cost | 994 |
Sublease income | (132 | )
Total lease cost | $ | 5,658 |
Other Information Supplemental cash flow information related to leases was as follows:
| Three Months Ended March 31, 2019
| (thousands)
Cash paid for amounts included in the measurement of lease liabilities |
Operating cash flows from operating leases | $ | 3,301 |
Operating cash flows from finance leases | 461 |
Financing cash flows from finance leases | 181 |
Right-of-use assets obtained in exchange for lease obligations |
Operating leases | 585 |
Finance leases | — |
Other information related to leases was as follows:
| March 31, 2019
Weighted-average remaining lease term (years) |
Operating leases | 9 |
Finance leases | 16 |
Weighted-average discount rate |
Operating leases (a) | 6.5 | %
Finance leases | 8.8 | %
___________________________________ (a) Upon adoption of the new lease standard, discount rates used for existing leases were established at January 1, 2019. As of March 31, 2019, our minimum lease payment requirements for noncancelable operating and finance leases are as follows (in thousands):
|  | Operating Leases |  | Finance Leases
|  | (thousands)
Remainder of 2019 |  | $ | 9,859 |  |  | $ | 1,937 |
2020 |  | 12,737 |  |  | 2,617 |
2021 |  | 11,598 |  |  | 2,656 |
2022 |  | 10,211 |  |  | 2,694 |
2023 |  | 9,881 |  |  | 2,740 |
Thereafter |  | 41,189 |  |  | 30,177 |
Total future minimum lease payments |  | 95,475 |  |  | 42,821 |
Less imputed interest |  | (24,735 | ) |  | (20,390 | )
Total lease obligations |  | 70,740 |  |  | 22,431 |
Less current obligations |  | (8,838 | ) |  | (744 | )
Long-term lease obligations |  | $ | 61,902 |  |  | $ | 21,687 |
Disclosures Related to Periods Prior to Adoption of ASC Topic 842, "Leases" Rental expense for operating leases was $4.6 million for the three months ended March 31, 2018. Sublease rental income was not material. During the three months ended March 31, 2018, we recorded a capital lease for a distribution center with an initial lease term of 20 years in the amount of $14.3 million, which represents a non-cash investing and financing activity. At December 31, 2018, capital lease obligations are recorded in "Other long-term liabilities" on our Consolidated Balance Sheets. As of December 31, 2018, our minimum lease payment requirements for noncancelable operating and capital leases with terms of more than one year are as follows:
|  | Operating Leases |  | Capital Leases
|  | (thousands)
2019 |  | $ | 13,222 |  |  | $ | 2,578 |
2020 |  | 12,734 |  |  | 2,617 |
2021 |  | 11,595 |  |  | 2,656 |
2022 |  | 10,208 |  |  | 2,694 |
2023 |  | 9,800 |  |  | 2,740 |
Thereafter |  | 40,381 |  |  | 30,177 |
Total |  | $ | 97,940 |  |  | 43,462 |
Less - interest on capital lease obligations |  |  |  | (20,838 | )
Total principal payable on capital lease obligations |  |  |  | 22,624 |
Less - current obligations |  |  |  | (703 | )
Long-term capital lease obligations |  |  |  | $ | 21,921 |
These future minimum lease payment requirements have not been reduced by sublease income due in the future under noncancelable subleases. Minimum sublease income expected to be received in the future is not material.

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