REVENUE EARNING EQUIPMENT, NET

9 Months Ended

Sep. 30, 2019

Revenue Earning Equipment [Abstract]


	September 30, 2019						December 31, 2018
	Cost		Accumulated Depreciation	Net Book Value ⁽¹⁾	Cost	Accumulated Depreciation	Net Book Value ⁽¹⁾
	(In thousands)
Held for use:
ChoiceLease	$	12,041,619	(4,049,919)	7,991,700	10,824,989	(3,645,655)	7,179,334
Commercial rental	3,403,483		(1,093,663)	2,309,820	3,152,908	(1,047,346)	2,105,562
Held for sale	533,855		(406,924)	126,931	467,093	(336,028)	131,065
Total	$	15,978,957	(5,550,506)	10,428,451	14,444,990	(5,029,029)	9,415,961

————————————

(1)Revenue earning equipment, net includes vehicles under finance leases of $12 million, less accumulated depreciation of $7 million, at September 30, 2019, and $23 million, less accumulated depreciation of $13 million, at December 31, 2018.

We periodically review and adjust, as appropriate, the residual values and useful lives of revenue earning equipment for purposes of recording depreciation expense. Our review of the residual values and useful lives of revenue earning equipment is established with a long-term view based on vehicle class, generally subcategories of trucks, tractors and trailers by weight and usage, as well as other factors, which we refer to as "policy depreciation." These other factors include, but are not limited to, historical market prices, current and expected future market price trends, expected lives of vehicles, and expected sales in the wholesale and retail markets. Factors that could cause actual results to materially differ from estimates include, but are not limited to, unforeseen changes in technology; changes in supply and demand; competitor pricing; regulatory requirements; driver shortages, requirements and preferences; as well as changes in underlying assumption factors. We have disciplines related to the management and maintenance of our vehicles designed to manage the risk associated with the residual values of our revenue earning equipment. In addition, we monitor market trends throughout the year and assess estimates of residual values of vehicles expected to be made available for sale in the near-term (generally 12 to 24 months) and may adjust estimates of residual values for these vehicles to reflect current market rates, which we refer to as "accelerated depreciation."

At the end of the second quarter of 2019, we began to experience softening in used vehicle market conditions, which intensified through the third quarter of 2019 and we now expect to continue through 2020. In addition, our inventory of used vehicles that is expected to be made available for sale was higher than expected, which has and will impact the volume of used vehicle sales expected to be transacted through our wholesale channels. Due to these dynamics and our updated outlook, management concluded that our residual value estimates likely exceeded the expected future values that would be realized upon the sale of power vehicles in our fleet. As a result, we changed the estimates of residual values for our revenue earning equipment in the third quarter of 2019 to reflect more recent multi-year trends and our outlook for the expected used vehicle market. The increase in depreciation expense resulting from the change in estimate reduced income from continuing operations before income taxes and net income by approximately $177 million and $158 million, respectively, for both the three and nine months ended September 30, 2019. This amount included accelerated depreciation of approximately $117 million related to lower residual value estimates of vehicles expected to be sold in the near-term and additional policy depreciation of $52 million, as well as valuation adjustments of $8 million related to assets currently held for sale. The effect of the change in estimate decreased our diluted earnings per share by $3.01 for both the three and nine months ended September 30, 2019.

Revenue earning equipment held for sale is stated at the lower of carrying amount or fair value less costs to sell. Losses on vehicles held for sale for which carrying values exceeded fair value are recognized at the time they arrive at our used truck sales centers and are presented within “Used vehicle sales, net” in the Consolidated Condensed Statements of Earnings. For revenue earning equipment held for sale, we stratify our fleet by vehicle type (trucks, tractors and trailers), weight class, age and other relevant characteristics and create classes of similar assets for analysis purposes. For a certain population of our revenue earning equipment held for sale, fair value was determined based upon recent market prices obtained from our own sales experience for sales of each class of similar assets and vehicle condition. Expected declines in market prices were also considered when valuing the vehicles held for sale. These vehicles held for sale were classified within Level 3 of the fair value hierarchy.

The following table presents our assets held for sale that are measured at fair value on a nonrecurring basis and considered a Level 3 fair value measurement:



						Total Losses ⁽²⁾
						Three months ended September 30,				Nine months ended September 30,
	September 30, 2019		December 31, 2018	2019		2018	2019		2018
	(In thousands)
Assets held for sale:
Revenue earning equipment ⁽¹⁾:
Trucks	$	39,183	44,325	$	10,269	9,713	$	30,556	28,609
Tractors	44,285		35,397	14,430		1,317	34,451		6,795
Trailers	1,186		1,507	1,195		502	2,859		3,700
Total assets at fair value	$	84,654	81,229	$	25,894	11,532	$	67,866	39,104

————————————

(1)Assets held for sale in the table above only include the portion of revenue earning equipment held for sale where net book values exceeded fair values and fair value adjustments were recorded. The net book value of assets held for sale that were less than fair value was $42 million and $50 million as of September 30, 2019 and December 31, 2018, respectively.

(2)Total losses represent fair value adjustments for all vehicles reclassified to held for sale throughout the period for which fair value was less than net book value.

The components of used vehicle sales, net were as follows:


	Three months ended September 30,					Nine months ended September 30,
	2019		2018	2019		2018
	(In thousands)
Gains on vehicle sales, net	$	(3,160)	(8,329)	$	(18,775)	(22,911)
Losses from fair value adjustments	25,894		11,532	67,866		39,104
Used vehicle sales, net	$	22,734	3,203	$	49,091	16,193

We own the majority of our revenue earning equipment. Revenue earning equipment that we lease as a lessee are immaterial and are therefore not separately disclosed from owned revenue earning equipment.