Note 10 - Leases

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Leases of Lessee and Lessor Disclosure [Text Block]

10 – Leases

In February 2016, the Financial Accounting Standards Board issued ASU No. 2016-02, “Leases (“Topic 842”),” which was intended to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The standard requires lessees to record assets and liabilities on the balance sheet for all leases with terms longer than twelve months. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.

A lease is classified as a finance lease if any of the following conditions exist on the date of lease commencement:

● The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.

● The lease provides the lessee an option to purchase the underlying asset, and that option is reasonably certain to be exercised.

● The lease term is for the major part of the remaining economic life of the underlying asset.

● The present value of the lease payments equals or exceeds substantially all of the fair value of the underlying asset.

● The underlying asset is of such a specialized nature that only the lessee can use it without major modifications.

● The lessor expects to have no alternative use for the leased asset at the end of the lease.

The Company adopted Topic 842 on January 1, 2019. The Company applied a modified retrospective transition approach for all leases existing at, or entered into after, January 1, 2019. The Consolidated Financial Statements for the three and nine months ended September 30, 2019 are presented under the new standard, while the comparative three and nine months ended September 30, 2018 are not adjusted and continue to be reported in accordance with the Company’s historical accounting policy. The Company applied the practical expedients permitted within Topic 842, which among other things, allows it to retain its existing assessment of whether an arrangement is, or contains, a lease and whether such lease is classified as an operating or finance lease. The Company made an accounting policy election that keeps leases with an initial term of twelve months or less off of the balance sheet and results in recognizing those lease payments in the Consolidated Statements of Income and Comprehensive Income on a straight-line basis over the lease term.

The Company leases commercial vehicles and real estate under finance and operating leases. The Company determines whether an arrangement is a lease at its inception. For leases with terms greater than twelve months, the Company records the related asset and obligation at the present value of lease payments over the term. Many of the Company’s leases include renewal options and/or termination options that are factored into its determination of lease payments when appropriate. The Company has elected not to account for lease and nonlease components as a single combined lease component as lessee.

When available, the Company uses the rate implicit in the lease to discount lease payments to present value; however, most of its leases do not provide a readily determinable implicit rate. Therefore, the Company must estimate its incremental borrowing rate to discount the lease payments based on information available at lease commencement.

Lease of Vehicles as Lessee

The Company leases commercial vehicles as the lessee under finance leases and operating leases. The lease terms vary from one month to ten years. Commercial vehicle finance leases continue to be reported on the Consolidated Balance Sheet, while operating leases were added to the Consolidated Balance Sheet in 2019 with the adoption of Topic 842. These vehicles are then subleased or rented by the Company to customers under various agreements. The Company received sublease income under non-cancelable subleases of $5.9 million for the three months ended September 30, 2019, and $17.7 million for the nine months ended September 30, 2019.

The Company usually guarantees the residual value of vehicles under operating lease and finance lease arrangements. At September 30, 2019, the Company guaranteed commercial vehicle residual values of approximately $43.5 million under operating lease and finance lease arrangements.

Lease of Facilities as Lessee

The Company’s facility leases are classified as operating leases and primarily reflect its use of dealership facilities and office space. The lease terms vary from one year to 88 years, some of which include options to extend the lease term, and some of which include options to terminate the lease within one year. The Company considers these options in determining the lease term used to establish its right-of-use assets and lease liabilities.

Components of lease cost are as follows (in thousands):

		Three Months Ended		Nine Months Ended
Component	Classification	September 30, 2019		September 30, 2019
Operating lease cost	SG&A expense	$	3,524	$	10,102
Finance lease cost – amortization of right-of-use assets	Depreciation and amortization		3,614		10,477
Finance lease cost – interest on lease liabilities	Interest expense		910		2,386
Short-term lease cost	SG&A expense		32		566

Supplemental cash flow information and non-cash activity related to operating and finance leases are as follows (in thousands):

	Nine Months Ended
	September 30, 2019
Operating cash flow information:
Cash paid for amounts included in the measurement of lease liabilities	$	12,488
Financing cash flow information:
Cash paid for amounts included in the measurement of lease liabilities	$	7,508
Non-cash activity:
Operating lease right-of-use assets obtained in exchange for lease obligations	$	56,372

Weighted-average remaining lease term and discount rate for operating and finance leases are as follows:

	September 30, 2019
Weighted-average remaining lease term (in months)	70
Weighted-average discount rate		4.5	%

Maturities of lease liabilities by fiscal year for finance leases and operating leases are as follows (in thousands):

	Finance Leases			Operating Leases
2019 (a)	$	7,810		$	3,391
2020		22,559			12,025
2021		17,928			10,097
2022		14,114			8,974
2023		8,850			7,611
2024 and beyond		14,996			31,424
Total lease payments	$	86,257		$	73,522
Less: Imputed interest		(8,185	)		(16,836	)
Present value of lease liabilities	$	78,072		$	56,686

(a)  Excluding the nine months ended September 30, 2019

Lease of Vehicles as Lessor 

The Company leases commercial vehicles that the Company owns to customers primarily over periods of one to ten years. The Company applied the practical expedient permitted within Topic 842 that allows it not to separate lease and nonlease components. Nonlease components typically consist of maintenance and licensing for the commercial vehicle. Some leases contain an option for the lessee to purchase the commercial vehicle.

The Company’s policy is to depreciate its lease and rental fleet using a straight-line method over each customer’s contractual lease term. The lease unit is depreciated to a residual value that approximates fair value at the expiration of the lease term. This policy results in the Company realizing reasonable gross margins while the unit is in service and a corresponding gain or loss on sale when the unit is sold at the end of the lease term.

Sales-type leases are recognized by the Company as lease receivables. The lessee obtains control of the underlying asset and the Company recognizes sales revenue upon lease commencement. The receivable for sales-type leases at September 30, 2019 in the amount of $5.2 million is reflected in Other Assets on the Consolidated Balance Sheet.

Minimum rental payments to be received for non-cancelable leases and subleases in effect as of September 30, 2019, are as follows (in thousands):

2019 (a)	$	33,641
2020		119,913
2021		92,496
2022		68,141
2023		46,656
Thereafter		41,986
Total	$	402,833

(a)  Excluding the nine months ended September 30, 2019

Rental income during the three and nine months ended September 30, 2019, and September 30, 2018, consisted of the following (in thousands):

	Three Months Ended				Nine Months Ended
	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Minimum rental payments	$	55,139	$	53,312	$	161,708	$	155,726
Nonlease payments		7,970		7,641		22,848		22,360
Total	$	63,109	$	60,953	$	184,556	$	178,086

As of December 31, 2018, minimum lease payments under non-cancelable finance leases and operating leases by period were expected to be as follows (in thousands):

	Finance Leases			Operating Leases
2019	$	22,033		$	12,295
2020		19,113			10,466
2021		14,894			8,190
2022		11,062			7,078
2023		5,095			5,196
Thereafter		2,963			22,463
Total lease payments	$	75,160		$	65,688
Less: Imputed interest		(6,046	)
Present value of lease liabilities	$	69,114