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Leases

9 Months Ended

Sep. 30, 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:

	September 30, 2019
	As Reported				Balances Without Adoption of  ASC 842				Effect of Change Higher/(Lower)
	(thousands)
ASSETS
Property and equipment, net	$	464,373			$	487,432			$	(23,059	)
Operating lease right-of-use assets	65,571				—				65,571
Finance lease right-of-use assets	22,238				—				22,238
Prepaid expenses and other	14,156				14,436				(280		)
LIABILITIES
Accrued liabilities, other	80,996				71,753				9,243
Operating lease liabilities, net of current portion	59,591				—				59,591
Finance lease liabilities, net of current portion	23,661				—				23,661
Other long-term liabilities	12,932				40,957				(28,025		)

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. Most of our operating lease expense was recorded in "Selling and distribution expenses" in our Consolidated Statements of Operations.

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 September 30, 2019				Nine Months Ended September 30, 2019
	(thousands)
Operating lease cost	$	3,442			$	10,150
Finance lease cost
Amortization of right-of-use assets	410				1,170
Interest on lease liabilities	479				1,405
Variable lease cost	721				2,062
Short-term lease cost	1,338				3,407
Sublease income	(134		)		(438		)
Total lease cost	$	6,256			$	17,756

Other Information

Supplemental cash flow information related to leases was as follows:

	Nine Months Ended September 30, 2019
	(thousands)
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	10,026
Operating cash flows from finance leases	1,405
Financing cash flows from finance leases	571
Right-of-use assets obtained in exchange for lease obligations
Operating leases	3,243
Finance leases	2,655

Other information related to leases was as follows:

	September 30, 2019
Weighted-average remaining lease term (years)
Operating leases	9
Finance leases	15
Weighted-average discount rate
Operating leases (a)	6.5	%
Finance leases	8.5	%

___________________________________  

(a)    Upon adoption of the new lease standard, discount rates used for existing leases were established at January 1, 2019.

As of September 30, 2019, our minimum lease payment requirements for noncancelable operating and finance leases are as follows:

		Operating Leases				Finance Leases
		(thousands)
Remainder of 2019		$	3,371			$	726
2020		13,239				3,009
2021		12,102				3,048
2022		10,735				3,044
2023		10,406				3,071
Thereafter		41,880				31,917
Total future minimum lease payments		91,733				44,815
Less: interest		(22,899		)		(20,110		)
Total lease obligations		68,834				24,705
Less: current obligations		(9,243		)		(1,044		)
Long-term lease obligations		$	59,591			$	23,661

Disclosures Related to Periods Prior to Adoption of ASC Topic 842, "Leases"

Rental expense for operating leases was $4.6 million and $13.8 million for the three and nine months ended September 30, 2018, respectively. Sublease rental income was not material in any of the periods presented. During the nine months ended September 30, 2018, we recorded two capital leases for distribution centers with initial lease terms of 13 and 20 years, respectively, in the amount of $18.9 million, which represents non-cash investing and financing activities. 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:

	September 30, 2019
	As Reported				Balances Without Adoption of  ASC 842				Effect of Change Higher/(Lower)
	(thousands)
ASSETS
Property and equipment, net	$	464,373			$	487,432			$	(23,059	)
Operating lease right-of-use assets	65,571				—				65,571
Finance lease right-of-use assets	22,238				—				22,238
Prepaid expenses and other	14,156				14,436				(280		)
LIABILITIES
Accrued liabilities, other	80,996				71,753				9,243
Operating lease liabilities, net of current portion	59,591				—				59,591
Finance lease liabilities, net of current portion	23,661				—				23,661
Other long-term liabilities	12,932				40,957				(28,025		)

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. Most of our operating lease expense was recorded in "Selling and distribution expenses" in our Consolidated Statements of Operations.

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 September 30, 2019				Nine Months Ended September 30, 2019
	(thousands)
Operating lease cost	$	3,442			$	10,150
Finance lease cost
Amortization of right-of-use assets	410				1,170
Interest on lease liabilities	479				1,405
Variable lease cost	721				2,062
Short-term lease cost	1,338				3,407
Sublease income	(134		)		(438		)
Total lease cost	$	6,256			$	17,756

Other Information

Supplemental cash flow information related to leases was as follows:

	Nine Months Ended September 30, 2019
	(thousands)
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	10,026
Operating cash flows from finance leases	1,405
Financing cash flows from finance leases	571
Right-of-use assets obtained in exchange for lease obligations
Operating leases	3,243
Finance leases	2,655

Other information related to leases was as follows:

	September 30, 2019
Weighted-average remaining lease term (years)
Operating leases	9
Finance leases	15
Weighted-average discount rate
Operating leases (a)	6.5	%
Finance leases	8.5	%

___________________________________  

(a)    Upon adoption of the new lease standard, discount rates used for existing leases were established at January 1, 2019.

As of September 30, 2019, our minimum lease payment requirements for noncancelable operating and finance leases are as follows:

		Operating Leases				Finance Leases
		(thousands)
Remainder of 2019		$	3,371			$	726
2020		13,239				3,009
2021		12,102				3,048
2022		10,735				3,044
2023		10,406				3,071
Thereafter		41,880				31,917
Total future minimum lease payments		91,733				44,815
Less: interest		(22,899		)		(20,110		)
Total lease obligations		68,834				24,705
Less: current obligations		(9,243		)		(1,044		)
Long-term lease obligations		$	59,591			$	23,661

Disclosures Related to Periods Prior to Adoption of ASC Topic 842, "Leases"

Rental expense for operating leases was $4.6 million and $13.8 million for the three and nine months ended September 30, 2018, respectively. Sublease rental income was not material in any of the periods presented. During the nine months ended September 30, 2018, we recorded two capital leases for distribution centers with initial lease terms of 13 and 20 years, respectively, in the amount of $18.9 million, which represents non-cash investing and financing activities. 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.

X

- References

No definition available.

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- Definition

The entire disclosure for finance leases of lessee. Includes, but is not limited to, description of lessee's finance lease and maturity analysis of finance lease liability.

+ References

Reference 1: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 842
-SubTopic 20
-URI http://asc.fasb.org/subtopic&trid=77888251

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- Definition

The entire disclosure for operating leases of lessee. Includes, but is not limited to, description of operating lease and maturity analysis of operating lease liability.

+ References

Reference 1: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 842
-SubTopic 20
-URI http://asc.fasb.org/subtopic&trid=77888251

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