Kontoor Brands, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

LEASES

LEASES

6 Months Ended

Jun. 29, 2019

The Company enters into operating leases for offices, operational facilities, retail locations, vehicles and other assets that expire at various dates through 2031. Leases for real estate typically have initial terms ranging from 3 to 15 years, generally with renewal options. Leases for equipment typically have initial terms ranging from 2 to 7 years. Most leases have fixed rentals, with many of the real estate leases requiring additional payments for real estate taxes and occupancy-related costs. These lease terms may include optional renewals, terminations or purchases, which are considered in the Company’s assessments when such options are reasonably certain to be exercised.

For retail real estate leases, the Company does not typically include renewal options in the underlying lease term. For non-retail real estate leases, when renewal options are reasonably certain to be exercised, the Company includes the renewal options in the underlying lease term, up to a maximum of ten years. Renewals for all other leases are determined on a lease-by-lease basis.

Upon adoption of ASU 2016-02, the Company elected the package of practical expedients permitted under the new lease standard, which allows the Company to not reassess whether a contract contains a lease, how the lease is classified, and if initial direct costs can be capitalized. The Company elected to combine non-lease components with the related lease components for real estate, vehicles and other significant asset arrangements. The Company treats the combined items as a single lease component for accounting purposes. Lastly, the Company elected not to recognize a right-of-use asset and related lease liability for leases with a lease term of 12 months or less for all classes of underlying assets.

Certain of the Company’s leases contain fixed, indexed, or market-based escalation clauses which impact future payments. Certain arrangements contain variable payment provisions, such as payments based on sales volumes or amounts and mileage, or excess mileage. The Company’s leases typically contain customary covenants and restrictions.

The Company determines whether a contract is a lease at inception. This typically requires more judgment in storage and service arrangements where the Company must determine whether its rights to specific physical or production capacity may represent substantially all of the available capacity.

The Company measures right-of-use assets and related lease liabilities based on the present value of remaining lease payments, including in-substance fixed payments, the current payment amount when payments depend on an index or rate (e.g., inflation adjustments, market renewals), and the amount the Company believes is probable to be paid to the lessor under residual value guarantees, when applicable. Lease contracts may include fixed payments for non-lease components, such as maintenance, which are included in the measurement of lease liabilities for certain asset classes based on the Company’s election to combine lease and non-lease components.

As applicable borrowing rates are not typically implied within our lease arrangements, the Company discounts lease payments based on its estimated incremental borrowing rate at lease commencement, or modification, which is based on the Company’s estimated credit rating, the lease term at commencement and the contract currency of the lease arrangement.

The following table presents the lease-related assets and liabilities recorded in the Company's balance sheet:



(in thousands)	June 2019
Assets
Operating lease assets, noncurrent	$	90,416
Total lease assets	$	90,416

Liabilities
Operating lease liabilities, current	$	34,439
Operating lease liabilities, noncurrent	58,594
Total lease liabilities	$	93,033

Weighted-average remaining lease term (in years)
Operating leases	4.08
Weighted-average discount rate
Operating leases	2.46		%

Lease costs

The following table presents certain information related to the lease costs for operating leases:



(in thousands)	Three Months Ended June 2019		Six Months Ended June 2019
Operating lease cost	$	11,343	$	18,956
Short-term lease cost (excluding leases of one month or less)	1,015		1,506
Variable lease cost	735		3,551
Total lease costs	$	13,093	$	24,013

Rent expense associated with operating leases for the three and six months ended June 2018 totaled approximately $10.6 million and $21.2 million, respectively.

Other information

The following table presents supplemental cash flow information related to leases:



(in thousands)	Six Months Ended June 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows impact - operating leases	$	22,950
Right-of-use assets obtained in exchange for new operating leases	$	23,446

The following table reconciles maturities of operating lease liabilities as of June 2019 to the lease liabilities reflected in the Company's balance sheet:



(in thousands)	Lease Obligations
2019 (excluding the six months ended June 2019)	$	29,732
2020	29,141
2021	17,358
2022	8,285
2023	5,379
Thereafter	9,647
Total future minimum lease payments	99,542
Less: amounts related to imputed interest	(6,509		)
Present value of future minimum lease payments	93,033
Less: operating lease liabilities, current	(34,439		)
Operating lease liabilities, noncurrent	$	58,594

As of June 2019, the Company has entered into approximately $1.3 million of operating lease arrangements, on an undiscounted basis, that have not yet commenced. The Company continuously monitors and may negotiate contract amendments that include extensions or modifications to existing leases.

The following table presents the future minimum lease payments during the noncancelable lease terms as presented under ASC 840:



(in thousands)	December 2018
2019	$	33,562
2020	29,246
2021	17,810
2022	7,932
2023	4,353
Thereafter	4,582
Total future minimum lease payments	$	97,485