Note 18 - Equipment Leasing and Services Segment

(18)	EQUIPMENT LEASING AND SERVICES SEGMENT

We routinely enter into leases with independent contractors which we classify and record as operating leases. From time to time we will assign these leases and sell the underlying assets to third party financing companies. Total net proceeds and net gain as a result of these transactions during the year ended June 30, 2016 was $328.6 million and $22.4 million, respectively, compared to $329.0 million and $21.5 million during the year ended June 30, 2015. Total net proceeds and net gains are inclusive of the amounts recorded from 19

Capital as mentioned in note 17. The majority of the net proceeds and net gains are from the equipment we routinely sell to Element Financial Corp. ("Element") under our agreement with Element for use by independent contractors. The $8.2 million of net operating income reported under the equipment leasing and services segment for the year ended June 30, 2016 includes $22.4 million in gains recorded on a net basis for such period, less operating expenses associated with this segment.

We have recorded leased revenue equipment held for resale on our consolidated balance sheet of $24.9 million. These assets are current under lease with and independent contractor or fleet and our equipment leasing and services segment has a plan to sell these leased assets in their current

condition to a third party financing part and are currently marketing these units at a reasonable price compared to their fair value. The sale of these units is probable within one year.

We have recorded equipment held for resale of $44.9 million on our consolidated balance sheet. These units are not currently operating in the Celadon fleet, nor are they under a current lease with an independent contractor or fleet. Our equipment leasing and services segment plans to sell these assets in their current condition to a third party purchaser and is currently marketing these units at a reasonable price compared to their fair value. The sale is probable within one year.

We have recorded leased equipment on our consolidated balance sheet of $99.3 million. Our leasing and services segment leases this equipment to independent contractors and fleets. Assets in this balance that were previously classified as a current asset have changed classification due to a change in relationships with our third party leasing providers. We have reevaluated this equipment and no longer believe it is probable that those assets will be sold within the next year. Included in this balance is approximately $37 million of assets for which we received $30.0 million in proceeds from 19

Capital. Although we transferred title of these assets, we retained certain risks of ownership through a deferred payment stream associated with the ultimate disposition of the equipment at the end of the lease period. We deemed that this transaction did not qualify for sales treatment under ASC 840-20-40-3. As a result, these assets were not removed from our balance sheet. The remainder of the assets are currently under lease with an independent contractor or fleet or are open to be leased to an independent contractor or fleet.

We have recorded in our assets on our consolidated balance sheet an amount that represents advances made to Element relating to our Lease Shortfall Advance arrangement. These advances are for shortfalls between the required lease payments and the amount actually collected from the independent contractor or fleet. Element is required to reimburse us for Lease Shortfall Advance payments and, accordingly, we have accounted for the related receivable under other assets on our consolidated balance sheet, in the amount of $31.9 million as of June 30, 2016.

We entered into a

Letter Agreement Regarding Additional Reserve Account Contributions on December 29, 2015 with Element which makes us responsible for an additional $2.5 million of reserve funds to the extent that we are unable to recoup this amount from the reseating of trucks and sale proceeds for trucks pursuant to our agreements with Element. We have evaluated this contingency under ASC 450 – Contingencies and determined that it is not probable that we will incur this amount at this time and therefore have not reserved this amount.

(2)	PROPERTY, EQUIPMENT, AND LEASES

Property and equipment as of June 30, 2016 and 2015, respectively, consists of the following (in thousands):

	2016		2015
Revenue equipment owned	$	257,782	$	325,859
Revenue equipment under capital leases		352,910		478,606
Furniture and office equipment		17,648		12,516
Land and buildings		142,586		112,533
Service equipment		4,144		2,345
Leasehold improvements		4,086		4,117
		779,156		935,976
Accumulated depreciation and amortization		142,423		147,446
	$	636,733	$	788,530

Included in accumulated depreciation and amortization was $50.9 million and $54.8 million in 2016 and 2015, respectively, related to revenue equipment under capital leases.

In accordance with its policy, the Company reviews the estimated useful lives of its fixed assets on an ongoing basis. This review indicated that the actual lives of certain tractors and trailers were longer than the estimated useful lives used for depreciation purposes in the Company’s financial statements. As a result, effective October 1, 2015, the Company changed its estimates of the useful lives and salvage value of certain tractors and trailers to better reflect the estimated periods during which these assets will remain in service. The estimated useful lives of the tractors and trailers that previously were 3 years for tractors and 7 years for trailers were increased to 4 years for tractors and 10 years for trailers. The effect of this change in estimate was to reduce depreciation expense for the year ended June 30, 2016 by $7.0 million, increase net income by $4.5 million, and increase basic and diluted earnings per share by $0.16.