Lease Arrangements

12 Months Ended

Dec. 31, 2012

Lease Arrangements

Lease Arrangements

13.          Lease Arrangements

We lease certain residential and operating facilities, office space and equipment under operating leases which expire at various dates. Rent expense for the successor periods ended December 31, 2012, December 31, 2011 and December 31, 2010, was approximately $68.6 million, $74.2 million and $9.8 million, respectively.  Rent expense for the predecessor period ended November 15, 2010 was $66.8 million. Facility rent, defined as land and building lease expense less amortization of any deferred gain on applicable lease transactions for the successor periods ended December 31, 2012, December 31, 2011 and December 31, 2010 was approximately $65.9 million, $64.8 million and $8.4 million, respectively. Facility rent for the predecessor period ended November 15, 2010 was $57.4 million. We also lease certain land and buildings and vehicles used in operations under capital leases. These leases expire at various dates through 2022 (including renewal options) and generally require us to pay property taxes, insurance and maintenance costs.

The Company (lessee) has leased its vehicles through a master lease agreement with PHH Vehicle Management Services Corporation (PHH) since 1993.  The lease term per vehicle is a minimum of 12 months and thereafter the minimum term may be continued at the lessee’s election for successive monthly renewal periods until the vehicle is returned to PHH.  This master lease was initially accounted for as an operating lease.  Our lease term per vehicle has gradually increased over the years to a current term of at least 60 months.  A review of this activity was performed during 2012, at which time we determined that we had been incorrectly classifying these leases as operating leases and that capital lease treatment was appropriate due to the increase in the lease term per vehicle.  During 2012, we recorded an out-of-period adjustment relating to capital lease accounting which decreased pre-tax income by approximately $0.7 million ($0.4 million after tax) and increased net property and equipment and capital lease obligations by $16.5 million and $17.3 million, respectively, to correct the accounting treatment for our leased vehicles.  The impact to the cash flow statement was an increase to cash flows from operations and financing activities of $5.9 million due to increased depreciation and payments on capital lease obligations.  We evaluated the total out-of-period adjustment in relation to the current period, as well as the prior periods being presented and concluded that the adjustment is not material any prior consolidated quarterly and annual financial statement periods.  We have revised the 2012 quarterly data footnote (Note 18), and will revise quarterly information in the 2013 Form 10-Qs when filed.  From a comparability perspective, the prior years’ impact to the consolidated balance sheets and the consolidated statements of cash flows are similar to the impact for 2012.  We also determined that this did not affect our compliance with debt covenants.

Future minimum lease payments under capital leases, together with the minimum lease payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year at December 31, 2012, are as follows:

	Capital		Operating
Year Ending December 31:	Leases		Leases
2013	$	6,287	$	59,837
2014	3,147		46,964
2015	3,146		38,134
2016	3,127		24,063
2017	3,089		14,401
Thereafter	—		14,456
Total minimum lease payments	18,796		$	197,855
Less amounts representing interest	1,112
Present value of minimum lease payments	17,684
Less current maturities	6,052
Total long-term obligations under capital leases	$	11,632

Assets capitalized under capital leases as reflected in the accompanying consolidated balance sheets were $1.2 million of buildings and $0.5 million of equipment as of December 31, 2012 and 2011. In addition,  there were $23.3 million of vehicles as of December 31, 2012 due to the change from operating lease treatment to capital lease treatment in 2012. The accumulated depreciation related to assets under capital leases was $7.6 million and $0.4 million as of December 31, 2012 and 2011, respectively.