– Leases

February 2016,

the Financial Accounting Standards Board issued ASU

No.

2016

02,

“

Leases (

“

Topic

842

”

” which was intended to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The standard requires lessees to record assets and liabilities on the balance sheet for all leases with terms longer than

twelve

months. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.

The Company determines whether the leases should be classified as an operating lease or finance lease. A lease is classified as a finance lease if any of the following conditions exist on the date of lease commencement:

	●	The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.
	●	The lease provides the lessee an option to purchase the underlying asset, and that option is reasonably certain to be exercised.
	●	The lease term is for the major part of the remaining economic life of the underlying asset.
	●	The present value of the lease payments equals or exceeds substantially all of the fair value of the underlying asset.
	●	The underlying asset is of such a specialized nature that only the lessee can use it without major modifications. The lessor expects to have no alternative use for the leased asset at the end of the lease.

The Company adopted Topic

842

January 1, 2019.

The Company applied a modified retrospective transition approach for all leases existing at, or entered into after,

January 1, 2019.

The Consolidated Financial Statements for the quarter ended

March 31, 2019

are presented under the new standard, while the comparative quarter presented is

not

adjusted and continues to be reported in accordance with the Company’s historical accounting policy. The Company applied the practical expedients permitted within Topic

842,

which among other things, allows it to retain its existing assessment of whether an arrangement is, or contains, a lease and whether such lease is classified as an operating or finance lease. The Company made an accounting policy election that keeps leases with an initial term of

twelve

months or less off of the balance sheet and results in recognizing those lease payments in the Consolidated Statements of Income and Comprehensive Income on a straight-line basis over the lease term.

The Company leases commercial vehicles and real estate under finance and operating leases. The Company determines whether an arrangement is a lease at its inception. For leases with terms greater than

twelve

months, the Company records the related asset and obligation at the present value of lease payments over the term. Many of the Company’s leases include renewal options and/or termination options that are factored into its determination of lease payments when appropriate. The Company has elected

not

to account for lease and nonlease components as a single combined lease component as lessee.

When available, the Company uses the rate implicit in the lease to discount lease payments to present value; however, most of its leases do

not

provide a readily determinable implicit rate. Therefore, the Company must estimate its incremental borrowing rate to discount the lease payments based on information available at lease commencement.

ase

of Vehicles

as Lessee

The Company leases commercial vehicles as the lessee under finance leases and operating leases. The lease terms vary from

one

month to

ten

years. Commercial vehicle finance leases continue to be reported on the Consolidated Balance Sheet, while operating leases were added to the Consolidated Balance Sheet in

2019

with the adoption of Topic

842.

These vehicles are then subleased or rented by the Company to customers under various agreements. For the

three

months ended

March 31, 2019,

the Company received sublease income of

$6.0

million under non-cancelable subleases.

The Company usually guarantees the residual value of vehicles under operating lease and finance lease arrangements. At

March 31, 2019,

the Company guaranteed commercial vehicle residual values of approximately

$39.0

million under operating lease and finance lease arrangements.

se of

Facilities

as Lessee

The Company’s facility leases are classified as operating leases and primarily reflect its use of dealership facilities and office space. The lease terms vary from

one

year to

years, some of which include options to extend the lease term, and some of which include options to terminate the lease within

one

year. The Company considers these options in determining the lease term used to establish its right-of-use assets and lease liabilities.

Components of lease cost are as follows (in thousands):

		Three Months Ended
	Classification	March 31, 2019
Operating lease cost	SG&A expense	$	3,278
Finance lease cost - amortization of right-of-use assets	Depreciation and amortization		3,322
Finance lease cost – interest on lease liabilities	Interest expense		712
Short-term lease cost	SG&A expense		334

Supplemental cash flow information and non-cash activity related to operating and finance leases are as follows (in thousands):

	Three Months Ended
	March 31, 2019
Operating cash flow information:
Cash paid for amounts included in the measurement of lease liabilities	$	3,990
Financing cash flow information:
Cash paid for amounts included in the measurement of lease liabilities	$	2,408
Non-cash activity:
Right-of-use assets obtained in exchange for lease obligations	$	53,274

Weighted-average remaining lease term and discount rate for operating and finance leases are as follows:

	March 31, 2019
Weighted-average remaining lease term (months)	69
Weighted-average discount rate		4.5	%

Maturities of lease liabilities by fiscal year for finance leases and operating leases are as follows (in thousands):

	Finance Leases			Operating Leases
2019 (a)	$	17,372		$	9,229
2020		19,995			10,889
2021		15,538			8,820
2022		11,819			7,687
2023		5,899			6,341
2024 and beyond		5,571			26,766
Total lease payments	$	76,195		$	69,732
Less: Imputed interest		(6,539	)		(16,458	)
Present value of lease liabilities	$	69,656		$	53,274
(a)Excluding the three months ended March 31, 2019

Lease

of Vehicles

as Lessor

The Company leases vehicles that the Company owns to customers primarily over periods of

one

ten

years. The Company applied the practical expedient permitted within Topic

842

that allows it

not

to separate lease and nonlease components. Nonlease components typically consist of maintenance and licensing for the commercial vehicle. Some leases contain an option for the lessee to purchase the commercial vehicle.

Our policy is to depreciate our lease and rental fleet using a straight line method over each customer’s contractual lease term. The lease unit is depreciated to a residual value that approximates fair value at the expiration of the lease term. This policy results in us realizing reasonable gross margins while the unit is in service and a corresponding gain or loss on sale when the unit is sold at the end of the lease term.

Sales-type leases are recognized by the Company as lease receivables. The lessee obtains control of the underlying asset and the Company recognizes sales revenue upon lease commencement. The receivable for sales-type leases at

March 31, 2019

in the amount of

$5.3

million is reflected in Other Assets on the Consolidated Balance Sheet.

Minimum rental payments to be received for non-cancelable leases and subleases in effect as of

March

31,

2019,

are as follows (in thousands):

2019 (a)	$	92,240
2020		104,569
2021		76,584
2022		52,348
2023		32,056
Thereafter		22,173
Total	$	379,970
(a)Excluding the three months ended March 31, 2019

Rental income during the

three

months ended

March 31, 2019

and

March 31, 2018

consisted of the following (in thousands):

	Three Months Ended March 31, 2019		Three Months Ended March 31, 2018
Minimum rental payments	$	52,423	$	50,904
Nonlease payments		7,258		6,966
Total	$	59,681	$	57,870

As of

December 31, 2018,

minimum lease payments under non-cancelable finance leases and operating leases by period were expected to be as follows (in thousands):

	Finance Leases			Operating Leases
2019	$	22,033		$	12,295
2020		19,113			10,466
2021		14,894			8,190
2022		11,062			7,078
2023		5,095			5,196
Thereafter		2,963			22,463
Total lease payments	$	75,160		$	65,688
Less: Imputed interest		(6,046	)
Present value of lease liabilities	$	69,114