An Analogy to the Finance Profession Fleet Management is similar to a Tax Professional A company can do it alone without professional advice But it’s likely to cost you more Tax Professionals implement proper cash flow planning techniques and ensure all of the proper deductions for a constantly-changing tax code A vehicle fleet manager designs a flexible fleet and strives for the best economics for a given business
Vehicle Expense Depreciation (Acquisition less resale) Interest Sales Tax & Registration Operating Expense Fuel Maintenance and Repairs (includes downtime) Insurance Additional Economic Considerations Income Tax Cost of Capital Inflation (budgeting) 6 Elements of Cost of Operating a Fleet
The Value of a Replacement Strategy One of the important elements of Fleet Management is knowing the economics and the customer’s business goals of when to replace vehicles A fleet manager monitors the following items: Used vehicle prices Maintenance and downtime considerations / customer service issues Fuel and fuel economy standards Appearance and branding Employee morale Administrative time Vehicle incentives The structure of the lease term provides an automatic trigger to analyze the hold versus replace decision.
Cost to HoldCost to Replace Vehicle Acquisition Price Sale of First Vehicle $0 $23,938 ($9,300) Vehicle Sales Price in 4 years($1,000)($9,300) Depreciation($1,000)$5,338 Sales Tax$0$1,436 Interest Expense Total Acquisition Cost $0 ($1,000) $2,088 $8,862 Fuel$25,159$21,018 Preventative Maintenance$7,029$5,565 Vehicle Breakdowns (Non-Preventative)$7,209$0 Insurance$4,800 Management Fee Total Operations Cost $0 $44,197 $1,736 $33,119 Total Cost$43,197$41,981 *Does not include any costs related to additional downtime. Replacement Analysis at 4 Years / 100,000 miles
Cost to ManageCost to Outsource Vehicle Acquisition Price$24,938$47,876 Vehicle Sales Price($1,000)($18,600) Depreciation$23,938$29,276 Sales Tax $1,496 $2,872 Interest Expense$2,618$4,176 Total Acquisition Cost$28,052$36,324 Fuel$44,243$40,098 Preventative Maintenance$12,800$11,130 Vehicle Breakdowns (Non-Preventative) $8,643 $0 Insurance Management Fee $9,600 $3,473 Total Operations Cost Administrative Time $75,286 $2,000 $64,301 $400 Total Cost: Pre-Tax$105,338$101,025 Average Annual Spend$13,167$12,628 Cents Per Mile52.7¢50.5¢ After-Tax NPV (discounted at 5%)$57,4002.3 X’s acquisition price$54,900 Total Cost for 1 Vehicle – with Replacement
Is an additional source of capital important to my business? Do I know my total spend for my fleet? Is it difficult to dispose of vehicles during a business downturn? Do I have idle vehicles at different points in time? Is vehicle downtime a significant detriment in my business? Who approves maintenance invoices and what experience does that person have with the automotive industry? At what mileage intervals are your vehicles being serviced for oil changes? Do I track maintenance expense on a vehicle-by-vehicle basis? What is my plan if fuel prices continue to rise? Is my business equipped to analyze the new products (i.e., Hybrids, compressed natural gas, electric, etc.) that are coming to market? Questions to Ask to Determine if Fleet Management Makes Sense to My Business:
The Value of Replacement One of the important elements of Fleet Management is knowing the economics and the customer’s business goals of when to replace vehicles A fleet manager monitors the following items: Used vehicle prices Maintenance and downtime considerations / customer service issues Fuel and fuel economy standards Appearance and branding Employee morale Administrative time Vehicle incentives The structure of the lease term provides an automatic trigger to analyze the hold versus replace decision.
4 Rules for Capital Lease Accounting Title passes to Lessee automatically by EOL Lease contains option to purchase at EOL for substantially less than FMV Term is > 75% of the useful life Present value of lease payments is greater the 90% of FMV Accounting Treatment - Capital Same as loan, Liability & Asset capitalized (PV of future Pmts) (is it?) Interest + depreciation expense equivalent to lease payment Cash payment maybe more than lease payment May have existing debt covenant / collateral restrictions Accounting Treatment - Operating Full Lease payment is expensed Off balance sheet, but PV of future payments required in disclosures Not in Loan covenant calculations
Fair Market Value lease End of lease options: Return, Renew, or Purchase at FMV Dollar Buyout Lease Capital Lease, purchase for $1 at end of lease, Wrap Lease Roll existing lease into new lease with added equipment Sale-Leaseback Within 90 days, provide proof of payments, invoices, titles – can be Dollar Buyout or FMV Open-End Lease Renewable with wrap
Term – Period over which regular payments are made End of Lease, Term (EOL, EOT) – Options for returning or acquiring assets Lease Rate Factor – multiple of Asset value that calculates payment Ex: lease rate factor of.021 x 1,000,000 = $21,000 monthly payment Indexing – lease rate is tied to interest rate for timing, ex: Libor or Fed Funds Bargain Purchase Option – substantially less than FMV Closed-End Lease – no purchase Option, Return only Finance Lease – Capital Lease Guaranteed Residual Value – Lessor receives fixed amount EOL Ex: TRAC lease – Terminal Rental Adjustment Clause – lessee guarateed Tax Lease – Lessor takes on Tax benefits of ownership e.g. Bonus Depreciation
CMFA Direct to equipment end users Direct Territory Managers National Contractor Program Equipment distributors Direct Territory Managers Inventory Territory Managers National Account Territory Managers Manufacturer programs National Accounts – Over 25 active programs Retail Loans & Leases Inventory Private Label Target Markets Wells Fargo Construction specialists regularly finance equipment used for the following applications: Highway/street construction Site preparation and excavation Concrete /asphalt production and paving Utility construction Bridge and tunnel construction Sand and gravel production/quarry operations Crane and equipment rental Dealer inventory and rental fleet Distribution Channel 20 Wells Fargo Equipment Finance, Construction Group Business Overview Work with construction specialists who have in-depth knowledge of the industry and extensive experience creating customized equipment financing solutions
CMFA 21 Products for Equipment End Users Product CategoryDetails Term Debt Fixed and floating rate loans Installment sale contracts Cap Ex Lines of Credit Refinances Working Capital Loans Transaction sizes from $75 Thousand to over $100 Million Leases Operating and Capital leases Walk away options Fixed price purchase options Early buyout options TRAC & Split Trac Leases Sale and leasebacks Synthetic Leases Transaction Sizes from $150 Thousand to over $100 Million
CMFA 22 Products for Equipment Distributors Product CategoryDetails Inventory /Rental Fleet Fixed and floating rate products 3 to 12 months interest only with term out extensions Rental Fleet Installment Transactions Rental Fleet Leases Manufacturer and bank roll over lines Refinances Non Inventory Loans & Leases Loans and Leases for capital equipment including: Service and Delivery Trucks Shop Equipment Computer and IT Systems Company Vehicles
CMFA Down payment Typically 100% financing Risk of obsolescence Transfers risk of obsolescence to a Lessor No obligation to purchase asset at end of term Tax deductions and budgeting A Lessee may claim the entire lease payment as an expense, thereby reducing taxable income Flexible payment terms and interim financing Financial reporting If the lease qualifies, neither the asset nor the corresponding liability appears on the balance sheet, which can improve financial ratios Loan Down payment May require some down payment (varies by equipment type) Risk of obsolescence Through ownership, a borrower bears risk of asset devaluation as a result of technological advances Tax deductions & budgeting The borrower may claim a tax deduction for depreciation as well as the interest portion of the loan payment Payments can be based on fixed or floating rates, fixed principal and interest or fixed principal plus interest Financial reporting FASB 13 requires that an owned asset appear as an asset with a corresponding liability on the balance sheet Lease 23 Wells Fargo Equipment Finance Know your options
CMFA Lessee/Borrower Background: Time in business, Key management stability Customers Position in the industry Industry: What’s currently going on in the industry Financial Analysis: Quality of Financials Statements, Cash flow/debt service, Trends (Balance Sheet and Income Statement), D & B reports, Credit Bureau Reports, Pay history with Lender 24 Lender considerations when reviewing a financing request Financial Package Typically Required by Lender Most recent 3 years annual financial statements (would need associated tax returns if statements are not a CPA review or audit) Most recent YTD interim financial statement with comparable to the same period for the previous year Most recent Work In Progress report Equipment to be purchased and reason for acquiring (manufacturer, make and model, and cost, itemized) Company and ownership background & structure
Getting Cost from the Left side to the right side Each piece is a business
Methods for charging pieces >> LEFT SIDE Direct costs – Charge to Piece or to WO which charges piece ? Fuel (Gas cards) Repair workorders PM workorders Labor timesheets charge WO or Equipment Depreciation Financing Licenses, Fees, Registrations Indirect Cost – Allocate costs to pieces based on…? Fuel (without reporting) Insurance – Auto maybe direct, yellow iron not so much Dispatch Labor Unapplied Mechanic time Unapplied Yard costs
Methods for charging jobs >> RIGHT SIDE Usage & Ownership rates Which hours count? Who owns it when it’s off site? Minimum hours per day Don’t overthink it Labor-Based OH Rate Allocations How well does equipment match your crews and work type? Material Based OH Rate Allocations What is the Equipment and how well does it match? Unit Based costing Uniformity of work unit – LF of Asphalt Pavement?
State of California AB-32 - Low Carbon Fuel Standard Affects all carbon fuel consuming industries Multiple regulations affecting the construction industry Enforcement and fines are issued by local ARB districts Fines can be as high as $10,000 per day for violations Scheduling of equipment replacement or retro-fitting is critical New regulations coming into effect will increase equipment budgets by as much as 50% Series of deadlines which vary by Fleet size and Equipment size
The Construction Industry is subject to many regulations under AB-32, but mainly these 6: Periodic Smoke Inspection Program (effective 7/1/1999) – On-Road Diesel Vehicles Tire Inflation Regulation (effective 9/1/2010) – On-Road Vehicles MRS - Truck and Bus Regulation (effective 1/1/2012) - On-Road Diesel Vehicles Heavier vs Lighter – 26,000lb GVWR LSI - Large Spark Ignition Engine Regulation (effective 1/1/2009) - Off-Road Gas, Propane & CNG Engines. Forklifts et al. PERP - Portable Equipment Registration Program (effective 1/1/2006) - Portable Diesel Vehicles (non-self-propelled). Air Compressors et al. In-Use Off-Road Diesel Vehicle Regulation (effective 1/1/2014) - Off-Road Diesel Vehicles. Backhoes et al. Idling Policy (effective 6/1/2008) & 5 minute limit Fleet Labeling & Reporting (effective 1/1/2009) Fleet size – Small 5,000 hp
For More Information: www.arb.ca.gov/html/lawsregs.htm www.arb.ca.gov/html/lawsregs.htm