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Leases

3 Months Ended

Jan. 31, 2020

14. Leases

The impact of applying ASC 842 effective as of November 1, 2019, to the Company’s condensed consolidated statements of operations and cash flows was not significant. The major impacts to the balance sheet were 1) the addition of $65.7 million in operating lease assets and $69.6 million of operating lease liabilities, 2) the removal of approximately $3.7 million and $1.2 million of deferred rent and other long-term obligations, respectively, and 3) a cumulative-effect

adjustment for the adoption of ASC 842 of $1.2 million was recorded to retained earnings, which relates to the gain previously recognized in accordance with ASC 840 on its sale and operating leaseback of the Temecula facility.

ASC 842 made changes to sale-leaseback accounting to result in the recognition of the gain on the transaction at the time of the sale instead of recognizing over the leaseback period, when the transaction is deemed to be a sale instead of a financing arrangement. ASC 842 further changes the assessment of sale accounting from a transfer of risk and rewards assessment to a transfer of control assessment.

We utilized the modified retrospective adoption method. Therefore, the Consolidated Financial Statements for 2020 are presented under the new standard, while the comparative periods presented are not adjusted and continue to be reported in accordance with the Company's historical accounting policy.

The standard provides a number of optional practical expedients and policy elections in transition. We have elected to apply the package of practical expedients under which we will not reassess under the standard our prior conclusions about lease classification and initial direct costs. We have elected the short-term lease recognition exemption for all leases that qualify, meaning we will recognize expense on a straight-line basis and will not include the recognition of a right-of-use asset or lease liability. We will account for lease and non-lease components as a single-lease component for all leases except building leases. Lease and non-lease components will be accounted for separately for building leases.

We lease property and equipment under finance and operating leases. For leases with terms greater than 12 months, we record the related asset and obligation at the present value of lease payments over the term. Many of our leases include rental escalation clauses, renewal options and/or termination options that are factored into our determination of lease payments when appropriate. As an accounting policy election, the Company will account for lease and non-lease components as a single-lease component for all leases except building leases. Lease and non-lease components will be accounted for separately for building leases.

Right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Right-of-use assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. When available, we use the rate implicit in the lease to discount lease payments to present value; however, most of our leases do not provide a readily determinable implicit rate. Therefore, we must estimate our incremental borrowing rate to discount the lease payments based on information available at lease commencement.

We lease certain property, plant and equipment, including office facilities, under operating leases. The lease term consists of the noncancellable period of the lease and the periods covered by options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options. The Company's lease agreements do not contain any residual value guarantees.

Lease Position

The following table presents the lease-related assets and liabilities recorded on the balance sheet as of January 31, 2020 (in thousands):


		January 31,
		2020

Assets
Current assets:
Operating lease assets	Operating lease right-of-use assets	$	64,159
Finance lease assets	Property, plant and equipment, net		6,039
		$	70,198
Liabilities
Current liabilities:
Operating	Current portion of operating leases	$	5,881
Finance	Current portion of long-term debt and finance leases		742
Long-term obligations
Operating	Long-term operating leases, less current portion		62,253
Finance	Long-term debt and finance leases, less current portion		5,410
		$	74,286


Weighted-average remaining lease term:
Operating leases	10.7 years
Finance leases	9.6 years

Weighted-average discount rate:
Operating leases	2.85	%
Finance leases	3.60	%

Lease Costs

The following table presents certain information related to the lease costs for finance and operating leases for the three months ended January 31, 2020 (in thousands):


	Three months ended
	January 31, 2020
Amortization of financing lease assets	$	218
Operating lease cost		2,062
Short-term lease cost		627
Interest on financing lease liabilities		56
Total lease cost	$	2,963

Other Information

The following table presents supplemental cash flow information related to the leases for the three months ended January 31, 2020 (in thousands):


	Three months ended
Cash paid for amounts included in the measurement of lease liabilities	January 31, 2020
Operating cash flows for operating leases	$	1,998
Financing cash flows for finance leases		198
Operating cash flows for finance leases		37

Undiscounted Cash Flows

The following table reconciles the undiscounted cash flows for each of the first five years and total remaining years to the finance lease liabilities and operating lease liabilities recorded on the balance sheet as of January 31, 2020 (in thousands):


	Operating		Finance
	Leases		Leases
Remainder of 2020	$	5,791	$	711
2021		7,738		955
2022		7,650		947
2023		7,657		943
2024		7,480		641
Thereafter		43,359		3,180
Total lease payments		79,675		7,377
Less: imputed interest		11,541		1,225
Total lease liability	$	68,134	$	6,152

Prior to the adoption of ASC 842, as of October 31, 2019, we were committed to make minimum cash payments under these agreements, as follows (in thousands):


2020	$	9,534
2021		9,007
2022		8,672
2023		8,603
2024		8,203
Thereafter		50,796
	$	94,815

Total rent expense amounted to approximately $10.7 million for the year ended October 31, 2019.

Prior to the adoption of ASC 842, as of October 31, 2019, capital lease payments are scheduled as follows (in thousands):


	Total
Year ending October 31:
2020	$	907
2021		915
2022		908
2023		900
2024		548
Thereafter		3,162
Minimum lease payments		7,340
Less interest		(1,166)
Present value of future minimum lease payments	$	6,174

Capital leases payments as of October 31, 2019 consist of $5.4 million included in long-term obligations and finance leases and $0.8 million included in current portion of long-term obligations and finance leases.