Leases

9 Months Ended

Sep. 30, 2019

Leases [Abstract]

Leases

Leases

Adoption of Accounting Standards Codification (“ASC”) Topic 842, “Leases”

In March 2016, the FASB issued guidance ("Topic 842") to increase transparency and comparability among organizations by requiring (1) recognition of lease assets and lease liabilities on the balance sheet and (2) disclosure of key information about leasing arrangements. Some changes to the lessor accounting guidance were made to align both of the following: (1) the lessor accounting guidance with certain changes made to the lessee accounting guidance and (2) key aspects of the lessor accounting model with revenue recognition guidance. We adopted Topic 842 at the required adoption date of January 1, 2019, using the transition method that allowed us to initially apply Topic 842 as of January 1, 2019 and recognize a cumulative-effect

adjustment to the opening balance of retained earnings in the period of adoption. We used the package of practical expedients permitted under the transition guidance that allowed us to not reassess: (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases. We additionally used, for our real estate operating leases, the practical expedient that allows lessees to treat the lease and non-lease components of leases as a single lease component. We did not recognize a material adjustment to the opening balance of retained earnings upon adoption. Because of the transition method we used to adopt Topic 842, Topic 842 was not applied to periods prior to adoption and the adoption of Topic 842 had no impact on our previously reported results.

As discussed in note 2 to the condensed consolidated financial statements, most of our equipment rental revenues, which accounted for 86 percent of total revenues for the nine months ended September 30, 2019, were accounted for under the previous lease accounting standard through December 31, 2018 and are accounted for under Topic 842 following adoption. There were no significant changes to our revenue accounting upon adoption of Topic 842. See note 2 to the condensed consolidated financial statements for a discussion of our revenue accounting (such discussion includes lessor disclosures required under Topic 842).

The adoption of Topic 842 had a material impact on our condensed consolidated balance sheet due to the recognition of right-of-use (“ROU”) assets and lease liabilities, as discussed further below. The adoption of Topic 842 did not have a material impact on our condensed consolidated income statement (as noted above, although a significant portion of our revenue is accounted for under Topic 842 following adoption, there were no significant changes to our revenue accounting upon adoption) or our condensed consolidated cash flow statement.

Lease Accounting

We determine if an arrangement is a lease at inception. Our material lease contracts are generally for real estate or vehicles, and the determination of whether such contracts contain leases generally does not require significant estimates or judgments. We lease real estate and equipment under operating leases. We lease a significant portion of our branch locations, and also lease other premises used for purposes such as district and regional offices and service centers. Our finance lease obligations consist primarily of rental equipment (primarily vehicles) and building leases.

Operating leases result in the recognition of ROU assets and lease liabilities on the balance sheet. ROU assets represent our right to use the leased asset for the lease term and lease liabilities represent our obligation to make lease payments. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our estimated incremental borrowing rate at the commencement date to determine the present value of lease payments. The operating lease ROU assets also include any lease payments made and exclude lease incentives. Our lease terms may include options, at our sole discretion, to extend or terminate the lease that we are reasonably certain to exercise. The amount of payments associated with such options reflected in the “Maturity of lease liabilities” table below is not material. Most real estate leases include one or more options to renew, with renewal terms that can extend the lease term from 1 to 5 years or more. Lease expense is recognized 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. Lease expense on such leases is recognized on a straight-line basis over the lease term. The primary leases we enter into with initial terms of 12 months or less are for equipment that we rent from vendors and then rent to our customers. We generate sublease revenue from such leases that we refer to as "re-rent revenue" as discussed in note 2 to the condensed consolidated financial statements. Apart from the re-rent revenue discussed in note 2, we do not generate material sublease income.

We have lease agreements with lease and non-lease components, and, for our real estate operating leases, we account for the lease and non-lease components as a single lease component. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The tables below present financial information associated with our leases. This information is only presented as of, and for the three and nine months ended, September 30, 2019 because, as noted above, we adopted Topic 842 using a transition method that does not require application to periods prior to adoption.

	Classification	September 30, 2019
Assets
Operating lease assets	Operating lease right-of-use assets	$	650
Finance lease assets	Rental equipment	276
	Less accumulated depreciation	(90		)
	Rental equipment, net	186
	Property and equipment, net:
	Non-rental vehicles	8
	Buildings	16
	Less accumulated depreciation and amortization	(19		)
	Property and equipment, net	5
Total leased assets		841
Liabilities
Current
Operating	Accrued expenses and other liabilities	174
Finance	Short-term debt and current maturities of long-term debt	38
Long-term
Operating	Operating lease liabilities	522
Finance	Long-term debt	82
Total lease liabilities		$	816

Lease cost	Classification	Three Months Ended September 30, 2019			Nine Months Ended September 30, 2019
Operating lease cost (1)	Cost of equipment rentals, excluding depreciation (1)	$	95		$	270
	Selling, general and administrative expenses	3			8
	Restructuring charge	1			14
Finance lease cost
Amortization of leased assets	Depreciation of rental equipment	7			21
	Non-rental depreciation and amortization	1			2
Interest on lease liabilities	Interest expense, net	2			5
Sublease income (2)		(42		)	(114		)
Net lease cost		$	67		$	206

_________________

(1)    Includes variable lease costs, which are immaterial. Cost of equipment rentals, excluding depreciation for the three and nine months ended, September 30, 2019 includes $40 and $103, respectively, of short-term lease costs associated with equipment that we rent from vendors and then rent to our customers, as discussed further above. Apart from these costs, short-term lease costs are immaterial.

(2)    Primarily reflects re-rent revenue as discussed further above.

Maturity of lease liabilities (as of September 30, 2019)	Operating leases (1)			Finance leases (2)
2019	$	53		$	12
2020	199			42
2021	170			42
2022	130			18
2023	96			6
Thereafter	137			7
Total	785			127
Less amount representing interest	(89		)	(7		)
Present value of lease liabilities	$	696		$	120

_________________

(1)    Reflects payments for non-cancelable operating leases with initial or remaining terms of one year or more as of September 30, 2019. The table above does not include any legally binding minimum lease payments for leases signed but not yet commenced, and such leases are not material in the aggregate.

(2)    The table above does not include any legally binding minimum lease payments for leases signed but not yet commenced, and such leases are not material in the aggregate.

Lease term and discount rate	September 30, 2019
Weighted-average remaining lease term (years)
Operating leases	4.8
Finance leases	3.4
Weighted-average discount rate
Operating leases	4.8	%
Finance leases	4.0	%

Other information	Nine Months Ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	151
Operating cash flows from finance leases	5
Financing cash flows from finance leases	35
Leased assets obtained in exchange for new operating lease liabilities	147
Leased assets obtained in exchange for new finance lease liabilities	$	36

Leases

Leases

Adoption of Accounting Standards Codification (“ASC”) Topic 842, “Leases”

In March 2016, the FASB issued guidance ("Topic 842") to increase transparency and comparability among organizations by requiring (1) recognition of lease assets and lease liabilities on the balance sheet and (2) disclosure of key information about leasing arrangements. Some changes to the lessor accounting guidance were made to align both of the following: (1) the lessor accounting guidance with certain changes made to the lessee accounting guidance and (2) key aspects of the lessor accounting model with revenue recognition guidance. We adopted Topic 842 at the required adoption date of January 1, 2019, using the transition method that allowed us to initially apply Topic 842 as of January 1, 2019 and recognize a cumulative-effect

adjustment to the opening balance of retained earnings in the period of adoption. We used the package of practical expedients permitted under the transition guidance that allowed us to not reassess: (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases. We additionally used, for our real estate operating leases, the practical expedient that allows lessees to treat the lease and non-lease components of leases as a single lease component. We did not recognize a material adjustment to the opening balance of retained earnings upon adoption. Because of the transition method we used to adopt Topic 842, Topic 842 was not applied to periods prior to adoption and the adoption of Topic 842 had no impact on our previously reported results.

As discussed in note 2 to the condensed consolidated financial statements, most of our equipment rental revenues, which accounted for 86 percent of total revenues for the nine months ended September 30, 2019, were accounted for under the previous lease accounting standard through December 31, 2018 and are accounted for under Topic 842 following adoption. There were no significant changes to our revenue accounting upon adoption of Topic 842. See note 2 to the condensed consolidated financial statements for a discussion of our revenue accounting (such discussion includes lessor disclosures required under Topic 842).

The adoption of Topic 842 had a material impact on our condensed consolidated balance sheet due to the recognition of right-of-use (“ROU”) assets and lease liabilities, as discussed further below. The adoption of Topic 842 did not have a material impact on our condensed consolidated income statement (as noted above, although a significant portion of our revenue is accounted for under Topic 842 following adoption, there were no significant changes to our revenue accounting upon adoption) or our condensed consolidated cash flow statement.

Lease Accounting

We determine if an arrangement is a lease at inception. Our material lease contracts are generally for real estate or vehicles, and the determination of whether such contracts contain leases generally does not require significant estimates or judgments. We lease real estate and equipment under operating leases. We lease a significant portion of our branch locations, and also lease other premises used for purposes such as district and regional offices and service centers. Our finance lease obligations consist primarily of rental equipment (primarily vehicles) and building leases.

Operating leases result in the recognition of ROU assets and lease liabilities on the balance sheet. ROU assets represent our right to use the leased asset for the lease term and lease liabilities represent our obligation to make lease payments. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our estimated incremental borrowing rate at the commencement date to determine the present value of lease payments. The operating lease ROU assets also include any lease payments made and exclude lease incentives. Our lease terms may include options, at our sole discretion, to extend or terminate the lease that we are reasonably certain to exercise. The amount of payments associated with such options reflected in the “Maturity of lease liabilities” table below is not material. Most real estate leases include one or more options to renew, with renewal terms that can extend the lease term from 1 to 5 years or more. Lease expense is recognized 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. Lease expense on such leases is recognized on a straight-line basis over the lease term. The primary leases we enter into with initial terms of 12 months or less are for equipment that we rent from vendors and then rent to our customers. We generate sublease revenue from such leases that we refer to as "re-rent revenue" as discussed in note 2 to the condensed consolidated financial statements. Apart from the re-rent revenue discussed in note 2, we do not generate material sublease income.

We have lease agreements with lease and non-lease components, and, for our real estate operating leases, we account for the lease and non-lease components as a single lease component. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The tables below present financial information associated with our leases. This information is only presented as of, and for the three and nine months ended, September 30, 2019 because, as noted above, we adopted Topic 842 using a transition method that does not require application to periods prior to adoption.

	Classification	September 30, 2019
Assets
Operating lease assets	Operating lease right-of-use assets	$	650
Finance lease assets	Rental equipment	276
	Less accumulated depreciation	(90		)
	Rental equipment, net	186
	Property and equipment, net:
	Non-rental vehicles	8
	Buildings	16
	Less accumulated depreciation and amortization	(19		)
	Property and equipment, net	5
Total leased assets		841
Liabilities
Current
Operating	Accrued expenses and other liabilities	174
Finance	Short-term debt and current maturities of long-term debt	38
Long-term
Operating	Operating lease liabilities	522
Finance	Long-term debt	82
Total lease liabilities		$	816

Lease cost	Classification	Three Months Ended September 30, 2019			Nine Months Ended September 30, 2019
Operating lease cost (1)	Cost of equipment rentals, excluding depreciation (1)	$	95		$	270
	Selling, general and administrative expenses	3			8
	Restructuring charge	1			14
Finance lease cost
Amortization of leased assets	Depreciation of rental equipment	7			21
	Non-rental depreciation and amortization	1			2
Interest on lease liabilities	Interest expense, net	2			5
Sublease income (2)		(42		)	(114		)
Net lease cost		$	67		$	206

_________________

(1)    Includes variable lease costs, which are immaterial. Cost of equipment rentals, excluding depreciation for the three and nine months ended, September 30, 2019 includes $40 and $103, respectively, of short-term lease costs associated with equipment that we rent from vendors and then rent to our customers, as discussed further above. Apart from these costs, short-term lease costs are immaterial.

(2)    Primarily reflects re-rent revenue as discussed further above.

Maturity of lease liabilities (as of September 30, 2019)	Operating leases (1)			Finance leases (2)
2019	$	53		$	12
2020	199			42
2021	170			42
2022	130			18
2023	96			6
Thereafter	137			7
Total	785			127
Less amount representing interest	(89		)	(7		)
Present value of lease liabilities	$	696		$	120

_________________

(1)    Reflects payments for non-cancelable operating leases with initial or remaining terms of one year or more as of September 30, 2019. The table above does not include any legally binding minimum lease payments for leases signed but not yet commenced, and such leases are not material in the aggregate.

(2)    The table above does not include any legally binding minimum lease payments for leases signed but not yet commenced, and such leases are not material in the aggregate.

Lease term and discount rate	September 30, 2019
Weighted-average remaining lease term (years)
Operating leases	4.8
Finance leases	3.4
Weighted-average discount rate
Operating leases	4.8	%
Finance leases	4.0	%

Other information	Nine Months Ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	151
Operating cash flows from finance leases	5
Financing cash flows from finance leases	35
Leased assets obtained in exchange for new operating lease liabilities	147
Leased assets obtained in exchange for new finance lease liabilities	$	36