NOTE 5 – LEASES

We lease certain distribution centers, warehouses, office space, land, automobiles and equipment. The majority of these leases are classified as operating leases. We recognize operating fixed lease expense and finance lease amortization expense on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet.

Many of our facility leases include one or more options to renew, with renewal terms that can extend the lease term from one year to 15 years with a maximum lease term of 30 years, including renewals. The exercise of lease renewal options is at our sole discretion; therefore, renewals to extend the terms of most leases are not included in our right of use (“ROU”) assets and lease liabilities as they are not reasonably certain of exercise. In the case of our regional distribution centers and certain corporate offices, where the renewal is reasonably certain of exercise, we include the renewal period in our lease term. Leases with escalation adjustments based on an index, such as the consumer price index, are expensed based on current rates. Leases with specified escalation steps are expensed based on the total lease obligation ratably over the life of the lease. Leasehold improvements are depreciated over the expected lease term. Non-lease components, such as payment of real estate taxes, maintenance, insurance and other operating expenses, have been excluded from the determination of our lease liability.

As most of our leases do not provide an implicit rate, we use an incremental borrowing rate based on the information available at the commencement date in determining the present value of the lease payments using a portfolio approach. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Our leases are presented in our condensed consolidated balance sheets as follows:

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Expense associated with our operating leases was $12 million and $11 million for the three months ended March 31, 2025 and 2024, respectively, which we have classified in selling, general and administrative expenses. For the three months ended March 31, 2025, expense associated with our finance leases was $1 million related to the amortization of ROU Assets, which we have classified in cost of sales, and less than $1 million related to the interest on finance lease liabilities, which we have classified in interest expense. Cash paid for operating leases recognized as liabilities was $10 million and $11 million for the three months ended March 31, 2025 and 2024, respectively. Cash paid for finance leases was $1 million for the three months ended March 31, 2025.

The maturity of lease liabilities is as follows (in millions):

The term and discount rate associated with leases are as follows:

Amounts maturing after 2029 include expected renewals for leases of regional distribution centers and certain corporate offices through dates up to 2048. Excluding these optional renewals, our weighted-average remaining lease term for operating leases is 5 years and 6 years for the periods ended  March 31, 2025 and 2024, respectively. Excluding optional renewals, our weighted average remaining lease term for finance leases is 5 years for the period ended  March 31, 2025.

Canada Lease Agreements

In connection with the sale of the Canada business, three operating lease commitments were assigned to the buyers where the Company has not been released from the covenants, liabilities and responsibilities under the lease agreements. The Company is obligated to perform under these agreements if the buyers fail to perform at any time during the remainder of the lease, which are set to expire on or before December 31, 2030. At the date of sale and for the three months ended  March 31, 2025, the undiscounted remaining lease payments under the agreement totaled $8 million. The Company has not recorded a liability with respect to the obligations as of  March 31, 2025, as the Company concluded the provisions of these lease assignments were not probable.