LEASES AND RIGHT OF USE ASSETS

9 Months Ended

Sep. 30, 2019

LEASES AND RIGHT OF USE ASSETS

LEASES AND RIGHT OF USE ASSETS

NOTE 10 – 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 September 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 1,112 tractors and 808 trailers.  Of the leased revenue equipment, 764 tractors and 759 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.

Components of Lease Expense

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

	Three Months Ended		Nine Months Ended
	September 30, 2019		September 30, 2019
	(in thousands)
Operating lease costs	$	2,355	$	6,870
Finance lease costs:
Amortization of assets		3,903		9,553
Interest on lease liabilities		671		1,820
Total finance lease costs		4,574		11,373
Variable and short-term lease costs		71		844
Total lease costs	$	7,000	$	19,087

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

	Nine Months Ended
	September 30, 2019
Operating leases:	(in thousands)
Operating lease right-of-use assets	$	12,077
Current operating lease obligations		7,556
Long-term operating lease obligations		4,568
Total operating lease liabilities	$	12,124
Finance leases:
Property and equipment, at cost		127,798
Accumulated amortization		(27,851)
Property and equipment, net	$	99,947
Current finance lease obligations		19,469
Long-term finance lease obligations		68,610
	$	88,079
Weighted average remaining lease term:		(in months)
Operating leases		41 months
Finance leases		45 months
Weighted average discount rate:
Operating leases		4.07	%
Finance leases		3.37	%

Supplemental cash flow information related to leases is as follows:

	Nine Months Ended
	September 30, 2019
Cash paid for amounts included in measurement of liabilities:	(in thousands)
Operating cash flows from operating leases	$	48
Operating cash flows from finance leases		1,820
Financing cash flows from finance leases		10,021
ROU assets obtained in exchange for lease liabilities:
Operating leases		1,393
Finance leases		27,348

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

	Finance Leases		Operating Leases
	(in thousands)
2019 (remaining)	$	4,690	$	1,381
2020		32,539		6,016
2021		11,777		1,680
2022		11,777		1,115
2023		22,635		789
Thereafter		12,297		1,394
Total lease payments		95,715		12,375
Less: Imputed interest		(7,636)		(251)
Total lease obligations		88,079		12,124
Less: Current obligations		(19,469)		(7,556)
Long-term lease obligations	$	68,610	$	4,568

OTHER COMMITMENTS

As of September 30, 2019, the Company had $29.2 million in noncancellable commitments for purchases of revenue and non-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 $0.03 million and $0.1 million for the three and nine months ended September 30, 2019.  This expense is included in the "Operations and maintenance" line item in the accompanying consolidated statement of (loss) income and comprehensive (loss) income.

SALE-LEASEBACK TRANSACTIONS

In July 2019, the Company entered into a sale-leaseback transaction whereby it sold tractors for approximately $2.3 million and concurrently entered into a finance lease agreement for the sold tractors with a five year term.  Under the lease agreement, the Company paid an initial monthly payment of approximately $0.03 million.  At the end of the lease, the Company has the option to purchase the tractors.  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.

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 paid 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.