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Leases | 3 Months Ended
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Mar. 31, 2019
Leases [Abstract] |
Leases | Leases In February 2016 the FASB established Topic ASC 842, Leases, by issuing Accounting Standards Update 2016-02. Lawson adopted ASC 842 as of January 1, 2019. The Company leases property used for distribution centers, office space, and Bolt branch locations throughout the US and Canada, along with various equipment located in distribution centers and corporate headquarters. The Company is also a lessor of its Decatur, Alabama property previously used in conjunction with a discontinued operation, and is a sublessor of a portion of its corporate headquarters. Lawson Operating Leases Lawson MRO primarily has two types of leases: leases for real estate and leases for equipment. Operating real estate leases that have a material impact on the operations of the Company are related to the Company's distribution network and headquarters. The Company possesses several additional property leases that are month to month basis and are not material in nature. Lawson MRO does not possess any leases that have variable lease payments or residual value guarantees. Several property leases include renewal clauses which vary in length and may not include specific rent renewal amounts. The Company will revise the value of the right of use assets and associated lease liabilities upon agreement to renew a lease. The key change commencing in the first quarter of 2019 for the Company is the recognition of assets and liabilities of operating leases with lease terms longer than twelve months that were not previously capitalized on the balance sheet. The value of the Right Of Use ("ROU") assets and associated lease liabilities is calculated using the total cash payments over the course of the lease, discounted to the present value using the appropriate incremental borrowing rate. The right of use asset will be amortized over its useful life. Similar to deferred rent under ASC 840, the lease liability is reduced in conjunction with the lease payments made, with adjustments made to the lease liability in order to account for non-straight line cash payments through the life of the lease. Bolt primarily leases the real estate for its branch locations as well as its distribution center in Calgary, Alberta. Bolt possesses additional property leases that are month to month and not material in nature. Bolt property leases include renewal clauses which vary in length and may not include specific rent renewal amounts. The Company will revise the value of the right of use asset and associated lease liability upon agreement to renew a lease. Each Lawson MRO and Bolt property lease includes terms covering additional payments for common area maintenance expense. Common area maintenance is considered a non-lease component. Since it does not meet the requirements set forth in the practical expedients to be combined with the leases, the non-lease component is recognized separately from the leased assets and liabilities. Lawson Financing Leases The Company possesses financing leases for certain equipment located in our distribution centers and Company headquarters. This equipment includes primarily material handling equipment and copiers. These leases were categorized as capital leases under ASC 840 and the overall effect of the transition to ASC 842 for these leases is immaterial. Lease of McCook Distribution Facility Upon adoption of ASC 842, the previously capitalized financing asset and lease liability for the McCook distribution facility was removed from the balance sheet and re-established as a right of use asset and a lease liability as an operating lease. The Company did not include the lease renewal periods in its assessment of the McCook lease as it did not meet the reasonably certain threshold required under ASC 842. Changes in the value of the assets and liabilities associated with the property due to adoption of ASC 842 have been accounted for as an adjustment to beginning retained earnings of $1.9 million. Accounting Policy Elections As part of the transition to ASC 842, the Company elected the following practical expedients: The transitional package of practical expedients as prescribed by ASC 842. Per the practical expedient for the transition to ASC 842, the Company will not reassess expired leases, existing lease classifications or initial indirect costs for existing leases in the calculation of the right to use asset and lease liability. The Company elected the modified retrospective method of transition, which will result in no restatement of prior period results with the adoption impact being recorded to opening retained earnings. The Company will not capitalize short term leases, for all asset classes defined as leases with a term of shorter than twelve months, on the balance sheet. These leases have not been transitioned to ASC 842. As a practical expedient, the Company will not reassess the accounting for initial direct costs of current leases. The Company will elect not to use the hindsight practical expedient in determining the lease term. The Company recognizes lease components and non-lease components together and not as separate parts of a lease under for real estate leases. The Company is aware that the circumstances under which this would occur are rare. The Company will exercise this practical expedient in the future by asset class. Significant Assumptions The Company is required to determine a discount rate for the present value of lease payments. If the rate is not included in the lease or cannot be readily determined, the Company must estimate the incremental borrowing rate to be used for the discount rate. The Company determined that Lawson MRO and Bolt have different discount rates for leases, as both reporting units have separate borrowing agreements. The Lawson MRO segment will discount the present value of the total payments for the operating and financing leases using the incremental borrowing rate of 5.5%, given the similarity of the lease terms amongst asset classes. The Bolt segment will discount the present value of the total payments of each operating and financing lease at its incremental borrowing rate of 4.2%. The discount rate of Lawson MRO and Bolt will be reviewed on a periodic basis and updated as needed. As part of the transition to the new standard, the Company has reviewed agreements with suppliers, vendors, customers, and other outside parties to determine if any agreements meet the definition of an embedded lease. Based on the nature of the contracts reviewed, and various factors, including identified assets included in the agreement to which the Company has exclusive rights of control as described by ASC 842, were considered. The Company has concluded that these are not material agreements with parties that would constitute an embedded lease. The Company will conduct reviews on a periodic basis for the existence of embedded leases in future agreements. The expenses and income generated by the leasing activity of Lawson as lessee for the three months ending March 31, 2019 are as follows (Dollars in thousands):
Lease Type |  | Classification |  | Amount
Consolidated Operating Lease Expense (1) |  | Operating expenses |  | $ | 1,024 |
Consolidated Financing Lease Amortization |  | Operating expenses |  | 48 |
Consolidated Financing Lease Interest |  | Interest expense |  | 6 |
Consolidated Financing Lease Expense |  |  |  | 54 |
Sublease Income (2) |  | Operating expenses |  | (80 | )
Net Lease Cost |  |  |  | $ | 998 |
(1) Includes short term lease expense, which is immaterial (2) Sublease income from sublease of a portion of the Company headquarters The value of the net assets and liabilities generated by the leasing activity of Lawson as lessee as of March 31, 2019 are as follows (Dollars in thousands):
Lease Type |  | Amount
Total ROU operating lease assets (1) |  | $ | 11,742 |
Total ROU financing lease assets (2) |  | 520 |
Total lease assets |  | $ | 12,262 |
Total current operating lease obligation |  | $ | 3,890 |
Total current financing lease obligation |  | 200 |
Total current lease obligations |  | $ | 4,090 |
Total long term operating lease obligation |  | $ | 10,917 |
Total long term financing lease obligation |  | 321 |
Total long term lease obligation |  | $ | 11,238 |
The adoption of ASC 842 resulted in the removal of property, plant and equipment of $4.5 million and capital lease obligations and deferred rent of $6.4 million. Additionally, the Company included in its balance sheet as of March 31, 2019 ROU assets of $12.3 million and lease obligations of $15.3 million. On a pro-forma basis, as if the previously accounting was in effect, the Company's total assets, liabilities and shareholders equity as of March 31, 2019 would have been $193.2 million, $88.4 million and $104.7 million, respectively. (1) Operating lease assets are recorded net of accumulated amortization of $0.8 million as of March 31, 2019 (2) Financing lease assets are recorded net of accumulated amortization less than $0.1 million as of March 31, 2019 The value of the lease liabilities generated by the leasing activities of Lawson as lessee as of March 31, 2019 are as follows (Dollars in thousands):
Maturity Date of Lease Liabilities |  | Operating Leases |  | Financing Leases |  | Total
Year one |  | $ | 4,529 |  |  | $ | 222 |  |  | $ | 4,751 |
Year two |  | 4,017 |  |  | 190 |  |  | 4,207 |
Year three |  | 4,025 |  |  | 100 |  |  | 4,125 |
Year four |  | 2,542 |  |  | 38 |  |  | 2,580 |
Year five |  | 973 |  |  | 11 |  |  | 984 |
Subsequent years |  | 203 |  |  | — |  |  | 203 |
Total lease payments |  | 16,289 |  |  | 561 |  |  | 16,850 |
Less: Interest |  | 1,482 |  |  | 40 |  |  | 1,522 |
Present value of lease liabilities |  | $ | 14,807 |  |  | $ | 521 |  |  | $ | 15,328 |
Note: Minimum lease payments exclude payments to landlord for real estate taxes and common area maintenance The weighted average lease terms and interest rates of the leases held by Lawson as of March 31, 2019 are as follows:
Lease Type |  | Weighted Average Term in Years |  | Weighted Average Interest Rate
Operating Leases |  | 3.9 |  | 5.2%
Financing Leases |  | 2.9 |  | 5.5%
The cash outflows of the leasing activity of Lawson as lessee for the three months ending March 31, 2019 are as follows (Dollars in thousands):
Cash Flow Source |  | Classification |  | Amount
Operating cash flows from operating leases |  | Operating activities |  | $ | 808 |
Operating cash flows from financing leases |  | Operating activities |  | 6 |
Financing cash flows from financing leases |  | Financing activities |  | 52 |
Lawson as Lessor The Company is a lessor of its facility in Decatur, Alabama, which was previously used in conjunction with a discontinued operation. The lease expires in February, 2024. Both the lessor and lessee have a put option to each other upon the completion of the remediation of the environmental matter at a pre-negotiated price less 50% of the rent paid upon the put option being exercised. The net book value at March 31, 2019 is $0.5 million. The Company classifies this lease as an operating lease. The income generated by Lawson as lessor for the three months ending March 31, 2019 are as follows (Dollars in thousands):
Lease Income Related To Lease Payments |  | Amount
Operating Leases |  | $ | 42 |
Financing Leases |  | — |
Total lease payments |  | $ | 42 |

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- Definition The entire disclosure for lessee entity's leasing arrangements including, but not limited to, all of the following: (a.) The basis on which contingent rental payments are determined, (b.) The existence and terms of renewal or purchase options and escalation clauses, (c.) Restrictions imposed by lease agreements, such as those concerning dividends, additional debt, and further leasing. + 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 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 840 -URI http://asc.fasb.org/topic&trid=2208923 + Details
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