REVENUE EARNING EQUIPMENT, NET

6 Months Ended

Jun. 30, 2020

Revenue Earning Equipment [Abstract]


	June 30, 2020										December 31, 2019
	Cost		Accumulated Depreciation		Net Book Value ⁽¹⁾		Cost		Accumulated Depreciation		Net Book Value ⁽¹⁾
	(In thousands)
Held for use:
ChoiceLease	$	11,681,853	$	(4,188,226)	$	7,493,627	$	12,223,179	$	(4,125,342)	$	8,097,837
Commercial rental	2,795,894		(954,648)		1,841,246		3,200,403		(1,049,850)		2,150,553
Held for sale	1,136,016		(901,050)		234,966		748,435		(569,161)		179,274
Total	$	15,613,763	$	(6,043,924)	$	9,569,839	$	16,172,017	$	(5,744,353)	$	10,427,664

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(1)Revenue earning equipment, net includes vehicles under finance leases of $10 million, less accumulated depreciation of $8 million, as of June 30, 2020, and $12 million, less accumulated depreciation of $8 million, as of December 31, 2019.

We periodically review and adjust, as appropriate, the estimated residual values and useful lives of existing revenue earning equipment for the purposes of recording depreciation expense. Our review of the estimated residual values and useful lives of revenue earning equipment is established with a long-term view, which we refer to as "policy depreciation," based on vehicle class, generally subcategories of trucks, tractors and trailers by weight and usage, as well as other factors. These other factors include, but are not limited to, historical market prices, current and expected future market prices, expected lives of vehicles, and expected sales of used vehicles in the wholesale and retail markets. Reductions in estimated residual values or useful lives will result in an increase in depreciation expense over the remaining life of the vehicle.

We also assess estimates of residual values of vehicles expected to be made available for sale in the near-term (generally 12 to 24 months) based on near-term market rates and conditions and may adjust residual values for these vehicles, which we refer to as “accelerated depreciation.”

Due to the COVID-19 pandemic and the impact on current and expected used vehicle market conditions, we performed a review of the estimated residual values of our FMS revenue earning equipment in the second quarter of 2020 for both accelerated and policy depreciation.

Accelerated Depreciation

In the first quarter of 2020, we revised our residual value estimates for vehicles that are expected to be sold in the near-term (through mid-2021) and recorded valuation adjustments on our vehicles held for sale due to the expected negative impacts of the COVID-19 pandemic on pricing and volume of used vehicle sales. At that time, we expected lower used vehicle pricing in the second half of 2020 due to lower demand rather than our previous expectations of a modest increase. As a result, we recorded accelerated depreciation of $27 million and recognized losses of $21 million for used vehicle sales results in the first quarter. We recorded additional accelerated depreciation of $31 million in the second quarter of 2020 related to the first quarter change.

In the second quarter of 2020, we revised our residual value estimates further as we now expect a delayed recovery in the used vehicle market beyond our previous expectation of mid-2021. Due to the expected delayed recovery, we primarily extended accelerated depreciation by an additional year to now include vehicles expected to be sold through mid-2022. As a result of these changes in estimated residual values, we recorded additional accelerated depreciation of $31 million in the second quarter of 2020, which also included losses of $9 million for used vehicle sales results discussed further below.

Policy Depreciation

As a result of these factors related to COVID-19 and our lowered longer term outlook, we concluded that our residual value estimates likely exceeded the expected future values that would be realized upon the sale of vehicles in our fleet for vehicles expected to be sold after mid-2022. Therefore, we lowered our estimated residual values primarily for our truck fleet, and to a lesser extent, our tractor fleet, effective April 1, 2020. In evaluating our residual value estimates, we reviewed recent multi-year trends; management and third-party longer-term outlook for the used vehicle market, including impacts of COVID-19 and the demand and pricing of our used vehicles; expected sales volumes through our retail and wholesale channels; inventory levels; and other factors that management deemed necessary to appropriately reflect our expected long-term sales proceeds. Due to this change, we recorded additional policy depreciation of $18 million in the second quarter of 2020.

The first quarter and second quarter changes in our residual value estimates and resulting increase in depreciation expense and impact on used vehicle results in 2020 resulted in the following negative impacts on our Condensed Consolidated Statement of Operations:


	Three months ended June 30, 2020		Six months ended June 30, 2020
	(In millions, except for per share data)
Pre-tax earnings (loss) from continuing operations	$	80	$	128
Net earnings (loss)	$	59	$	95
Diluted EPS	$	1.13	$	1.81

Used Vehicle Sales and Valuation Adjustments

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, which we refer to as "valuation adjustments," are recognized at the time they are deemed to meet the held for sale criteria and are presented within “Used vehicle sales, net” in the Condensed Consolidated 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 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. In addition, we also consider expected declines in market prices when valuing the vehicles held for sale, as well as the forecasted sales channel (retail/wholesale). As a result of the changes in our residual value estimates described above for accelerated and policy depreciation, we recorded valuation adjustments on our vehicles held for sale for the three and six months ended June 30, 2020 as noted in the table below.

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 June 30,						Six months ended June 30,
	June 30, 2020		December 31, 2019		2020		2019		2020		2019
	(In thousands)
Revenue earning equipment held for sale ⁽¹⁾:

Trucks	$	48,744	$	39,009	$	5,389	$	8,740	$	16,451	$	20,287
Tractors	84,707		73,359		3,035		14,053		11,488		19,021
Trailers	3,256		2,206		2,592		1,485		4,585		1,664
Total assets at fair value	$	136,707	$	114,574	$	11,016	$	24,278	$	32,524	$	40,972

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(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 valuation adjustments were recorded. The net book value of assets held for sale that were less than fair value was $98 million and $65 million as of June 30, 2020 and December 31, 2019, respectively.

(2)Total losses represent fair value valuation 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 June 30,						Six months ended June 30,
	2020		2019		2020		2019
	(In thousands)
Losses (gains) on vehicle sales, net	$	(1,528)	$	(6,138)	$	(2,352)	$	(14,615)
Losses from valuation adjustments	11,016		24,278		32,524		40,972
Used vehicle sales, net	$	9,488	$	18,140	$	30,172	$	26,357