Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. OXFORD INDUSTRIES INC (75288) 10-Q published on Jun 13, 2019 at 3:21 pm
Reporting Period: May 03, 2019
In February 2016, the FASB issued revised lease accounting guidance. The guidance requires companies to record substantially all leases, including operating leases, as assets and liabilities on the balance sheet. For these leases, we are required to recognize (1) an operating lease asset which will represent our right to use, or control the use of, a specified asset for a lease term and (2) a lease liability equal to our obligation to make lease payments arising from a lease, measured on a discounted basis. The guidance was adopted on the first day of the First Quarter of Fiscal 2019 using a modified retrospective approach. The modified retrospective approach allows us to apply the standard and related disclosures to the financial statements for the period of adoption and apply the previous guidance in the prior year comparative periods. The adoption of the new guidance had a material impact on our condensed consolidated balance sheet as a result of the non-cash recognition of operating lease assets and operating lease liabilities, but did not have a material impact on our consolidated statements of operations or cash flows. At adoption of the revised lease accounting guidance, we elected to adopt the package of transition practical expedients and, therefore, have not reassessed (1) whether exiting or expired contracts contain a lease, (2) lease classification for existing or expired leases, or (3) the accounting for initial direct costs that were previously capitalized. We did not elect the practical expedient to use hindsight for leases existing at the adoption date. Refer to Note 5 for additional disclosures and information about accounting for leases.
5. Leases: We enter into real estate lease agreements for retail, food and beverage, office and warehouse/distribution space, as well as leases for certain equipment. Our leases have varying terms and expirations and frequently have provisions to extend, renew or terminate the lease agreement at our discretion, among other terms and conditions. Our retail and restaurant leases typically provide for contingent rent based on sales if certain sales thresholds are achieved. Most of our leases provide for payments of real estate taxes, insurance and other operating expenses applicable to the property, and certain of our leases require payment of sales taxes on rental payments. Payments for real estate taxes, sales taxes, insurance and other operating expenses are not included in lease expense. Our lease agreements do not include any material residual value guarantees or material restrictive financial covenants.
Pursuant to the revised lease accounting guidance adopted in the First Quarter of Fiscal 2019, we determine if an arrangement is a lease at contract inception. Operating lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The significant judgments in calculating the present value of lease obligations include determining the lease term and lease payment amounts, which are dependent upon our assessment of the likelihood of exercising renewal or termination options, as well as the discount rate applied to the unpaid lease payments. Operating leases are included in operating lease assets, current operating lease liabilities and non-current operating lease liabilities in our consolidated balance sheet. The operating lease asset at commencement reflects the operating lease liability reduced for any lease incentives, including tenant improvement allowances. Lease expense for operating leases is recognized on a straight-line basis over the lease term, which is consistent with the previous guidance. Variable rental payments based on a percentage of retail sales over contractual levels and variable incremental rental payments adjusted periodically for inflation are both recognized as incurred.
We account for the underlying operating lease asset at the individual lease level. Typically, we do not include renewal or termination options in the underlying lease term as the probability of exercise is not reasonably certain. The revised lease guidance requires us to discount our unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, our incremental borrowing rate. As our leases typically do not provide an implicit rate, we use an estimated incremental borrowing rate based on information available at commencement date, or as of February 3, 2019 for any leases in place at adoption of the revised guidance. Our incremental borrowing rate for a lease is the rate of interest we would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Finance leases are not material to our consolidated financial statements.
Current liabilities increased as of May 4, 2019 primarily due to the $54 million of current lease liabilities recognized as of May 4, 2019, as a result of the adoption of the revised lease accounting guidance during the First Quarter of Fiscal 2019. The decrease in long-term debt since May 5, 2018 was primarily due to $97 million of cash flow from operations which was partially offset by cash payments of $32 million for capital expenditures and $24 million for dividends. The non-current operating lease liabilities amount as of May 4, 2019 is a result of the adoption of the revised lease accounting guidance during the First Quarter of Fiscal 2019. Other non-current liabilities decreased as of May 4, 2019 primarily due to the amount as of May 5, 2018 including $60 million of deferred rent and deferred rent tenant improvement allowance liabilities which were classified as operating lease assets as of May 4, 2019, as a result of the adoption of the revised lease accounting guidance during the First Quarter of Fiscal 2019, which was partially offset by increases in the amounts for deferred compensation liabilities and the fair value of contingent consideration. Deferred taxes increased as of May 4, 2019 primarily due to timing differences associated with depreciation, amortization and prepaid expenses partially offset by timing differences associated with inventories.