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Leases and Right of Use Assets

6 Months Ended

Jun. 30, 2019

LEASES AND RIGHT OF USE ASSETS

The Company adopted ASU 2016-02 on January 1, 2019. The standard requires lessees to recognize a ROU asset and lease liability for all leases. Some of our leases contain both lease and non-lease components, which we have elected to treat as a single lease component. We have also elected not to recognize in our consolidated balance sheets leases that have an original lease term, including reasonably certain renewal or purchase options, of twelve months or less for all classes of underlying assets. Lease costs for short-term leases are recognized on a straight-line basis over the lease term. We elected the package of transition practical expedients for existing contracts, which allowed us to carry forward our historical assessments of whether contracts are or contain leases, lease classification and determination of initial direct costs.

The Company leases property and equipment under finance and operating leases. The Company has operating and finance leases for revenue equipment, real estate, information technology equipment (primarily servers and copiers), and various other equipment used in operating our business. Certain leases for revenue equipment and information technology include options to purchase or extend, guarantee residual values, or early termination rights. Determining the lease term and amount of lease payments to include in the calculation of the ROU asset and lease liability for leases containing options requires the use of judgment to determine whether the exercise of an option or feature is reasonably certain, and if the optional period and payments should be included in the calculation of the associated ROU asset and liability. In making this determination, we consider all relevant economic factors that would compel us to exercise or not exercise an option or feature.

When available, we use the rate implicit in the lease to discount lease payments; however, the rate implicit in the lease is not readily determinable for all of our leases. In such cases, we use an estimate of our incremental borrowing rate to discount lease payments based on information available at lease commencement.

As of June 30, 2019, the Company has entered into leases with lessors who do not participate in the Credit Facility. Currently, such leases do not contain cross-default provisions with the Credit Facility.

Revenue Equipment

In addition to the revenue equipment owned by the Company, we currently lease 1,012 tractors and 810 trailers. Of the leased revenue equipment, 664 tractors and 761 trailers are classified as finance leases and 348 tractors and 49 trailers are classified as operating leases. Some of these assets are leased on a month-to-month basis and the leases can be terminated without penalty. The lease term for these types of leases is determined by the length of the underlying customer contract or based on the judgment of management. These leases are treated as short-term as the cumulative ROU is less than 12 months over the term of the contract. The Company uses the leased revenue equipment for the same operational purposes as its owned equipment.

Real Estate

We have operating and finance leases for office space, terminal facilities, and drop yards. Many of our leases contain charges for common area maintenance or other miscellaneous expenses that are updated based on landlord estimates. Due to this variability, the cash flows associated with these charges are not included in the minimum lease payments used in determining the ROU asset and associated lease liability.

Some of our real estate leases contain options to renew or extend the lease or terminate the lease before the expiration date. These options are factored into the determination of the lease term and lease payments when their exercise is considered to be reasonably certain.

Information Technology and Other Equipment

The Company leases information technology and other equipment, primarily servers and copiers, in the course of our operations.

The components of lease expense for the three and six months ended June 30, 2019 are as follows:



	Three Months Ended		Six Months Ended
	June 30, 2019		June 30, 2019
	(in thousands)
Operating lease costs	$	2,356	$	4,515
Finance lease costs:
Amortization of assets	2,959		5,650
Interest on lease liabilities	603		1,149
Total finance lease costs	3,562		6,799
Variable and short-term lease costs	212		773
Total lease costs	$	6,130	$	12,087

Supplemental information and balance sheet location related to leases is as follows:




Operating leases:	June 30, 2019
	(in thousands)
Operating lease right-of-use assets	$	13,574

Current operating lease obligations	7,578
Long-term operating lease obligations	6,037
Total operating lease liabilities	$	13,615

Finance leases:
Property, plant and equipment, at cost	102,074
Accumulated amortization	(21,913)
Property, plant and equipment, net	$	80,161

Current finance lease obligations	21,665
Long-term finance lease obligations	59,012
	$	80,677

Weighted average remaining lease term:	(in months)
Operating leases	42 months
Finance leases	45 months

Weighted average discount rate:
Operating leases	3.87		%
Finance leases	3.41		%

Supplemental cash flow information related to leases is as follows:




Cash paid for amounts included in measurement of liabilities:	June 30, 2019
	(in thousands)
Operating cash flows from operating leases	$	3,885
Operating cash flows from finance leases	603
Financing cash flows from finance leases	6,202

ROU assets obtained in exchange for lease liabilities:
Operating leases	931
Finance leases	16,303

Maturities of lease liabilities as of June 30, 2019 are as follows:



	Finance Leases		Operating Leases
	(in thousands)
2019 (remaining)	$	13,617	$	3,667
2020	25,393		5,911
2021	9,959		1,575
2022	9,959		1,010
2023	20,817		706
Thereafter	8,110		1,394
Total lease payments	87,855		14,263
Less: Imputed interest	(7,178)		(648)
Total lease obligations	80,677		13,615
Less: Current obligations	(21,665)		(7,578)
Long-term lease obligations	$	59,012	$	6,037

OTHER COMMITMENTS

As of June 30, 2019, the Company had $26.1 million in noncancellable commitments for purchases of revenue equipment. We anticipate funding these commitments with cash flows from operating and financing activities.

RELATED PARTY LEASE

In the normal course of business, the Company leases office and shop space from a related party under a monthly operating lease. Rent expense for this space was approximately $0.04 million and $0.08 million for the three and six months ended June 30, 2019. This expense is included in the "Operations and maintenance" line item in the accompanying consolidated statement of income and comprehensive income.

SALE-LEASEBACK TRANSACTION

In April 2019, the Company entered into a sale-leaseback transaction whereby it sold tractors for approximately $10.5 million and concurrently entered into a finance lease agreement for the sold tractors with a five year term. Under the lease agreement, the Company will pay an initial monthly payment of approximately $0.1 million. At the end of the lease, the Company has the option to purchase the tractors for the greater of fair market value or 32.5% of the original cost. This transaction does not qualify for sale-leaseback accounting due to the option to repurchase the tractors and is therefore treated as a financing obligation.

Leases and Right of Use Assets