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Good Morning!. Equipment Cost Characteristic Fleet Management Basics (Enterprise) Cost, Flexibility, Replacement, Industry knowledge Job Cost Equipment Financing (Wells Fargo Equipment Finance) Glossary of Terms Lenders, Loans vs leases, Tax issues CARB Regulations. Agenda.

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Good morning

Good Morning!


Agenda

  • Equipment Cost Characteristic

  • Fleet Management Basics (Enterprise)

    • Cost, Flexibility, Replacement, Industry knowledge

  • Job Cost

  • Equipment Financing (Wells Fargo Equipment Finance)

    • Glossary of Terms

    • Lenders, Loans vs leases, Tax issues

  • CARB Regulations

Agenda


Equipment costing fleet management

* Equipment Cost and Characteristic

  • How big is the impact?

Equipment Costing & Fleet Management


Equipment costing and fleet management

  • Equipment Cost Characteristic and Strategy II

    • What Characteristic?

      • Ownership vs Operation

    • What goes into the cost pool?

      • Operation Costs -

        • Scheduling/Staffing

        • Preventative Maintenance

        • Fuel, Oil, Parts, Tires, Wash

        • Repairs

        • Major Maintenance

      • Ownership Costs – (no active jobs)

        • Depreciation

        • Purchase, Lease/Financing costs

        • License, Insurance, Fees, Registrations

        • Labeling, Setup

        • STORAGE – Yard costs

      • Additional Costs / Benefits

        • Income Tax

        • Inflation

        • Opportunity Cost

Equipment Costing and Fleet Management

Do you need to managejust costs or an entire fleet?


Fleet management

Fleet Management

  • Does Fleet Management make sense for your business?


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The Basics of Fleet Management


An analogy to the finance profession

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


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6 Elements of Cost of Operating a Fleet


Additional considerations

Additional Considerations

Decision Maker’s Time

Employee/Admin Involvement

Image of Fleet Vehicles/Company

Driver Satisfaction/Productivity

Safety Concerns

Downtime


The building blocks of fleet management

The Building Blocks of Fleet Management


The value of a replacement strategy

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.


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Replacement Analysis at 4 Years / 100,000 miles


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Total Cost for 1 Vehicle – with Replacement


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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

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.

Fleet vs Costs? Buy vs Lease? Some things to know…


Lease accounting operating vs capital

  • 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

Lease Accounting: Operating vs Capital


Some common forms of equipment leasing

  • 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

Some Common Forms of Equipment Leasing


Glossary of lease terms

  • 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

Glossary of Lease Terms

What are some financing options and their advantages?


Wells fargo equipment finance construction group business overview

Wells Fargo Equipment Finance, Construction Group Business Overview

Target Markets

Distribution Channel

Work with construction specialists who have in-depth knowledge of the industry and extensive experience creating customized equipment financing solutions

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

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


Products for equipment end users

Products for Equipment End Users


Products for equipment distributors

Products for Equipment Distributors


Wells fargo equipment finance

Wells Fargo Equipment Finance

Loan

Lease

Know your options

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

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


Lender considerations when reviewing a financing request

Lender considerations when reviewing a financing request

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

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

Now that you have equipment, how do you charge jobs for it?


Equipment project costing

  • Getting Cost from the Left side to the right side

    • Each piece is a business

Equipment Project Costing

ROAD

Rubber


Equipment project costing1

  • 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

Equipment Project Costing


Equipment project costing2

  • 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?

Equipment Project Costing

And now for something completely different…


Carb rules and issues for contractors

  • 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

CARB Rules and Issues for Contractors


Carb rules and issues for contractors1

  • 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 < 2,500 hp; Large >5,000 hp

  • CARB Rules and Issues for Contractors


    Carb rules and issues for contractors2

    • For More Information:

    • www.arb.ca.gov/html/lawsregs.htm

    CARB Rules and Issues for Contractors

    Thank You for coming


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