NOTE 2 – LEASES

Change in Accounting Principle

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which created Topic 842 (ASC 842), Leases. On January 1, 2019, the Company adopted ASC 842, which is effective for interim and annual reporting periods beginning on or after December 15, 2018. This Topic requires balance sheet recognition of lease assets and lease liabilities for leases classified as operating leases under GAAP. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.

The Company has completed its evaluation of the requirements of ASC 842 and related amendments. As part of the Company’s evaluation, management compiled and analyzed contracts, identified the full lease population, implemented and populated leasing software and implemented new controls associated with adopting and adhering to the standard, and reviewed its accounting practices for revenue equipment that it leased to certain of its owner-operators.

The Company adopted this guidance as of January 1, 2019, using the optional transition method and elected the option to not apply ASC 842 to comparative periods, which continue to be presented under the accounting standards in effect for those periods.

Lessee

The adoption of this standard had a material impact on the Company’s financial position. Adoption of the new standard resulted in the recording of right-of-use assets and lease liabilities on the Company’s consolidated balance sheet of approximately $96.9 million and $96.9 million, respectively, as of January 1, 2019. The right-of-use assets recorded on the balance sheet include primarily trucking facilities and terminals and revenue equipment leases. The standard did not have a material impact on the Company’s consolidated statements of operations and comprehensive income (loss), however, there have been additions and modifications to its existing financial disclosures.

The Company has designated the following preferences and practical expedients:

To not reassess whether any expired or existing contracts contain a lease;

Carryforward previous conclusions related to prior lease classification under the prior lease accounting standard to lease classification for existing leases under ASC 842;

To not reassess initial indirect costs;

Elect the hindsight practical expedient related to lease term and impairment;

Adopt the land easement practical expedient;

To not separate the non-lease components of a contract from the lease component for its office equipment asset class;

To not apply the recognition requirements to leases with terms of twelve months or less; and

To apply the portfolio approach in determination of the incremental borrowing rate.

The Company has capitalized operating and finance leases for various real estate including corporate offices, trucking facilities and terminals, warehouses, and tractor parking as well as various types of equipment including tractors, trailers, forklifts, and office equipment. New real estate lease agreements will typically have initial terms between 3 to 15 years and new equipment lease agreements will typically have initial terms of 3 to 9 years. Leases with an initial term of 12 months or less (short term leases) across all asset classes are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term.

Some of the Company’s leases include one or more options to renew, with renewals that can extend the lease term from 1 to 5 years. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The exercise of lease renewal options is at the Company’s sole discretion. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. Rights and obligations related to lease agreements the Company has signed but that have not yet commenced are not material. The Company has certain lease agreements related to its revenue equipment that contain residual value guarantees. These residual value guarantees require the Company to return the revenue equipment at the end of the lease term in a certain condition as specified by the lessor in the lease agreement.

The Company determines whether an arrangement is classified as a lease at inception. The right-of-use assets and lease liabilities relating to operating leases are included in right-of-use assets, other current liabilities, and other long-term liabilities on the Company's consolidated balance sheets. The right-of-use assets and lease liabilities relating to finance leases are included in other long-term assets, current portion of long-term debt, and long-term debt, net of current portion on the Company's consolidated balance sheets. The Company's right-of-use assets represent its right to use the underlying assets for the lease term and the Company's lease liabilities represent its obligation to make lease payments arising from the leases. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company's capitalized operating lease agreements generally do not provide an implicit rate. The Company develops an incremental borrowing rate based on the information available at the commencement date regarding the interest rate applicable to collateralized borrowings for a period similar to the original lease period. The incremental borrowing rates were used in determining the present value of lease payments which is reflected as the lease liability.

The Company follows ASC 360, “Impairment or Disposal of Long-Lived Assets” guidance to determine whether right-of-use assets relating to operating and finance leases are impaired. Due to triggering events identified in the third quarter of 2019, the Company recorded impairment charges of $10.0 million to right-of-use assets relating to operating leases and $0.8 million to right-of-use assets relating to finance leases for the year ended December 31, 2019. See Note 6 for discussion on the triggering events.

The following table reflects the Company’s components of lease expenses for the year ended December 31, 2019 (in millions):


		Year Ended
	Classification	December 31, 2019
Operating lease cost
Revenue equipment	Operations and maintenance	$	22.2
Real estate	Administrative expense		13.8
Total operating lease cost		$	36.0

Finance lease cost
Amortization of right-of-use assets	Depreciation and amortization	$	5.4
Interest on lease liabilities	Interest expense		0.9
Total finance lease cost		$	6.3

Total lease cost(a)		$	42.3

(a)

Short-term lease expense and variable lease expense are immaterial.

The components of assets and liabilities for operating and finance leases are as follows as of December 31, 2019 (in millions):



	Classification	December 31, 2019
Assets
Capitalized operating lease right-of-use assets	Right-of-use assets	$	95.9
Finance lease right-of-use assets	Other long-term assets		25.3
Total lease assets		$	121.2

Liabilities
Capitalized operating lease liabilities:
Current	Other current liabilities	$	27.3
Non-current	Other long-term liabilities		77.8
Total capitalized operating lease liabilities		$	105.1

Finance lease liabilities:
Current	Current portion of long-term debt	$	6.2
Non-current	Long-term debt, net of current portion		19.3
Total finance lease liabilities		$	25.5

Total lease liabilities		$	130.6

The following table is a summary of supplemental cash flows related to leases for the year ended December 31, 2019 (in millions):


	Year Ended
	December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from capitalized operating leases	$	(35.6)
Operating cash flows from finance leases		(0.9)
Financing cash flows from finance leases		(5.9)
Right-of-use assets obtained in exchange for lease obligations:
Capitalized operating lease right-of-use assets	$	39.2
Finance lease right-of-use assets		13.1

Related Party Leases

The Company leases certain office facilities, terminals and revenue equipment from entities owned or partially owned by stockholders or employees on month-to-month operating and capitalized operating leases. Total lease expense related to these leases was $4.8 million, $4.7 million and $2.9 million for the years ended December 31, 2019, 2018 and 2017, respectively. Future minimum lease payments under non-cancelable related party operating leases are as follows (in millions):


	Revenue		Office and
Year ending December 31,	Equipment		Terminals
2020	$	0.4	$	4.1
2021		0.2		4.1
2022		0.2		4.1
2023		0.1		4.0
2024		—		4.0
Thereafter		—		10.4
Total	$	0.9	$	30.7

The following table is the future payments on leases as of December 31, 2019 (in millions):


	Capitalized
	Operating		Finance
Year ending December 31,	leases		leases		Total
2020	$	27.3	$	7.3	$	34.6
2021		25.5		7.1		32.6
2022		20.7		5.1		25.8
2023		15.1		5.5		20.6
2024		9.0		2.9		11.9
Thereafter		23.0		0.6		23.6
Total lease payments		120.6		28.5		149.1
Less: interest		(15.5)		(3.0)		(18.5)
Present value of lease liabilities	$	105.1	$	25.5	$	130.6

The following table is a summary of weighted average lease terms and discount rates for leases as of December 31, 2019:


	2019
Weighted-average remaining lease term (years)
Capitalized operating leases		5.01
Finance leases		3.83
Weighted-average discount rate
Capitalized operating leases		5.54	%
Finance leases		4.51	%

The following table is the future payments under lease agreements as of December 31, 2018 prior to adoption of ASC 842 (in millions):


	Capital Leases		Operating Leases
			Revenue		Office
Year ending December 31,			Equipment		and Terminals
2019	$	5.7	$	19.5	$	11.9
2020		4.5		13.0		11.2
2021		4.3		5.7		9.5
2022		2.4		3.2		8.5
2023		2.9		0.3		6.6
Thereafter		0.8		—		23.0
Total minimum lease payments	$	20.6	$	41.7	$	70.7
Loan amount attributable to interest		(2.4)
Total (Present value of minimum lease payments on capital leases)		18.2
Less: current portion		(4.8)
Long-term capital leases	$	13.4

Lessor

The adoption of this standard had a material impact on the Company’s financial position, resulting in recording of additional property and equipment and reductions to net investment in sales-type leases and prepaid and other current assets on its consolidated balance sheets of approximately $59.4 million, $55.8 million, and $3.6 million, respectively. The additional assets recorded on the balance sheet in property and equipment include tractors and trailers leased or available for lease to owner-operators. The standard did not have a material impact on the Company’s consolidated statements of operations and comprehensive income (loss), however, there have been additions and modifications to its existing financial disclosures.

The Company leases tractors and trailers to certain of its owner-operators and accounts for these transactions as operating leases. Historically, the Company had accounted for these equipment leases as sales-type leases. Under the new guidance, the Company's equipment leases no longer qualify for sales-type lease treatment and are accounted for as operating leases. This change in accounting treatment resulted in the derecognition of net investment in sales-type leases and recording the associated assets as if the agreements were always operating leases. The Company no longer recognizes a lease receivable, unearned interest income, or deferred gain related to sales-type leases and recognizes income from operating leases as payments are received. These leases typically have terms of 30 to 72 months and are collateralized by a security interest in the related revenue equipment. The Company recognizes income for these leases as payments are received over the lease term, which are reported in purchased freight on the consolidated statements of operations and comprehensive income (loss). The Company's equipment leases may include options for the lessee to purchase the equipment at the end of the lease term or terminate the lease prior to the end of the lease term. When an asset reaches the end of its useful economic life, the Company disposes of the asset.

The Company recorded depreciation expense of $20.5 million on its assets leased under operating leases for the year ended December 31, 2019. Lease income from lease payments related to the Company's operating leases for the year ended December 31, 2019, was $24.2 million.

The following table is the future minimum receipts on leases as of December 31, 2019 (in millions):


Year ending December 31,	Amount
2020	$	23.8
2021		17.3
2022		9.8
2023		4.9
2024		1.3
Thereafter		0.3
Total minimum lease receipts	$	57.4

The components of the net investment in sales-type leases as of December 31, 2018 prior to the adoption of ASC 842 are as follows (in millions):


	2018
Minimum lease receivable	$	78.1
Deferred gain		(10.1)
Net minimum lease receivable		68.0
Unearned interest income		(12.3)
Net investment in sales-type leases		55.7
Current portion		(16.2)
	$	39.5

The following table is the future minimum receipts on leases as of December 31, 2018 prior to the adoption of ASC 842 (in millions):


Year ending December 31,	Amount
2019	$	16.2
2020		14.5
2021		11.0
2022		11.2
2023		2.6
Thereafter		0.2
Total	$	55.7