Attached files
file | filename |
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EX-31.2 - EXHIBIT 31.2 - RUSH ENTERPRISES INC \TX\ | c00527exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - RUSH ENTERPRISES INC \TX\ | c00527exv31w1.htm |
EX-32.2 - EXHIBIT 32.2 - RUSH ENTERPRISES INC \TX\ | c00527exv32w2.htm |
EX-32.1 - EXHIBIT 32.1 - RUSH ENTERPRISES INC \TX\ | c00527exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 0-20797
RUSH ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Texas | 74-1733016 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) |
555 I.H. 35 South, Suite 500
New Braunfels, Texas 78130
(Address of principal executive offices)
(Zip Code)
New Braunfels, Texas 78130
(Address of principal executive offices)
(Zip Code)
(830) 626-5200
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No
þ
Indicated below is the number of shares outstanding of each of the issuers classes of common
stock, as of May 5, 2010.
Number of | ||
Shares | ||
Title of Class | Outstanding | |
Class A Common Stock, $.01 Par Value Class B Common Stock, $.01 Par Value |
26,592,389 10,692,141 |
RUSH ENTERPRISES, INC. AND SUBSIDIARIES
INDEX
Page | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
10 | ||||||||
23 | ||||||||
23 | ||||||||
24 | ||||||||
24 | ||||||||
24 | ||||||||
24 | ||||||||
24 | ||||||||
24 | ||||||||
25 | ||||||||
26 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
2
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
RUSH ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2010 AND DECEMBER 31, 2009
(In Thousands, Except Shares)
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 145,840 | $ | 149,095 | ||||
Accounts receivable, net |
48,449 | 38,869 | ||||||
Inventories, net |
294,269 | 269,955 | ||||||
Prepaid expenses and other |
3,917 | 3,650 | ||||||
Deferred income taxes, net |
9,687 | 11,414 | ||||||
Total current assets |
502,162 | 472,983 | ||||||
Investments |
7,575 | 7,575 | ||||||
Property and equipment, net |
355,636 | 354,749 | ||||||
Goodwill, net |
140,836 | 140,836 | ||||||
Other assets, net |
1,101 | 1,154 | ||||||
Total assets |
$ | 1,007,310 | $ | 977,297 | ||||
Liabilities and shareholders equity |
||||||||
Current liabilities: |
||||||||
Floor plan notes payable |
$ | 214,664 | $ | 189,256 | ||||
Current maturities of long-term debt |
59,402 | 55,545 | ||||||
Current maturities of capital lease obligations |
5,821 | 5,730 | ||||||
Trade accounts payable |
30,142 | 22,427 | ||||||
Accrued expenses |
39,232 | 40,843 | ||||||
Total current liabilities |
349,261 | 313,801 | ||||||
Long-term debt, net of current maturities |
144,999 | 153,957 | ||||||
Capital lease obligations, net of current maturities |
29,155 | 28,714 | ||||||
Deferred income taxes, net |
53,188 | 54,600 | ||||||
Shareholders equity: |
||||||||
Preferred stock, par value $.01 per share;
1,000,000 shares authorized; 0 shares
outstanding in 2010 and 2009 |
| | ||||||
Common stock, par value $.01 per share;
60,000,000 class A shares and 20,000,000 class B
shares authorized; 26,531,316 class A shares and
10,691,589 class B shares outstanding in 2010;
and 26,437,848 class A shares and 10,689,375
class B shares outstanding in 2009 |
389 | 388 | ||||||
Additional paid-in capital |
190,360 | 188,116 | ||||||
Treasury stock, at cost: 1,639,843 class B shares |
(17,948 | ) | (17,948 | ) | ||||
Retained earnings |
257,906 | 255,669 | ||||||
Total shareholders equity |
430,707 | 426,225 | ||||||
Total liabilities and shareholders equity |
$ | 1,007,310 | $ | 977,297 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
3
Table of Contents
RUSH ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Revenues: |
||||||||
New and used commercial vehicle sales |
$ | 180,604 | $ | 195,988 | ||||
Parts and service |
105,101 | 109,218 | ||||||
Construction equipment sales |
5,623 | 7,003 | ||||||
Lease and rental |
14,032 | 13,476 | ||||||
Finance and insurance |
1,542 | 1,715 | ||||||
Other |
1,494 | 1,686 | ||||||
Total revenue |
308,396 | 329,086 | ||||||
Cost of products sold: |
||||||||
New and used commercial vehicle sales |
166,346 | 182,827 | ||||||
Parts and service |
64,535 | 66,449 | ||||||
Construction equipment sales |
4,882 | 6,182 | ||||||
Lease and rental |
12,250 | 11,928 | ||||||
Total cost of products sold |
248,013 | 267,386 | ||||||
Gross profit |
60,383 | 61,700 | ||||||
Selling, general and administrative |
51,668 | 52,051 | ||||||
Depreciation and amortization |
3,685 | 3,978 | ||||||
(Loss) gain on sale of assets |
(8 | ) | 55 | |||||
Operating income |
5,022 | 5,726 | ||||||
Interest expense, net |
1,408 | 1,624 | ||||||
Income before taxes |
3,614 | 4,102 | ||||||
Provision for income taxes |
1,377 | 1,239 | ||||||
Net income |
$ | 2,237 | $ | 2,863 | ||||
Earnings per share: |
||||||||
Earnings per common share Basic |
$ | .06 | $ | .08 | ||||
Earnings per common share Diluted |
$ | .06 | $ | .08 | ||||
Weighted average shares outstanding: |
||||||||
Basic |
37,171 | 36,991 | ||||||
Diluted |
37,745 | 37,274 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
Table of Contents
RUSH ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 2,237 | $ | 2,863 | ||||
Adjustments to reconcile net income to net cash provided by (used in)
operating activities: |
||||||||
Depreciation and amortization |
10,248 | 10,071 | ||||||
Loss (gain) on sale of property and equipment |
8 | (55 | ) | |||||
Stock-based compensation expense related to employee stock options
and employee stock purchases |
1,856 | 1,274 | ||||||
(Benefit) provision for deferred income tax expense |
315 | (887 | ) | |||||
Excess tax benefits from stock-based compensation |
(24 | ) | (10 | ) | ||||
Change in accounts receivable, net |
(9,580 | ) | 2,717 | |||||
Change in inventories |
(22,602 | ) | 40,152 | |||||
Change in prepaid expenses and other, net |
(267 | ) | 909 | |||||
Change in trade accounts payable |
7,715 | (6,628 | ) | |||||
Change in accrued expenses |
(1,587 | ) | (8,579 | ) | ||||
Net cash (used in) provided by operating activities |
(11,681 | ) | 41,827 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Acquisition of property and equipment |
(9,921 | ) | (10,953 | ) | ||||
Proceeds from the sale of property and equipment |
12 | 61 | ||||||
Change in other assets |
11 | (1 | ) | |||||
Net cash (used in) investing activities |
(9,898 | ) | (10,893 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Draws (payments) on floor plan notes payable, net |
25,408 | (36,764 | ) | |||||
Proceeds from long-term debt |
3,080 | 2,685 | ||||||
Principal payments on long-term debt |
(8,181 | ) | (10,773 | ) | ||||
Principal payments on capital lease obligations |
(2,372 | ) | (1,248 | ) | ||||
Issuance of shares relating to employee stock options and
employee stock purchases |
365 | 376 | ||||||
Excess tax benefits from stock-based compensation |
24 | 10 | ||||||
Debt issuance costs |
| (17 | ) | |||||
Net cash provided by (used in) financing activities |
18,324 | (45,731 | ) | |||||
NET (DECREASE) IN CASH AND CASH EQUIVALENTS |
(3,255 | ) | (14,797 | ) | ||||
CASH AND CASH EQUIVALENTS, beginning of period |
149,095 | 146,411 | ||||||
CASH AND CASH EQUIVALENTS, end of period |
$ | 145,840 | $ | 131,614 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 3,194 | $ | 3,786 | ||||
Income taxes, net of refunds |
$ | (61 | ) | $ | (27 | ) | ||
Noncash investing activities: |
||||||||
Assets acquired under capital leases |
$ | 2,904 | $ | 4,751 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
5
Table of Contents
RUSH ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1 Principles of Consolidation and Basis of Presentation
The interim consolidated financial statements included herein have been prepared by Rush
Enterprises, Inc. and its subsidiaries (collectively referred to as the Company), without
audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the
SEC). All adjustments have been made to the accompanying interim consolidated financial
statements, which, in the opinion of the Companys management, are necessary for a fair
presentation of the Companys operating results. All adjustments are of a normal recurring
nature. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. It is recommended that these
interim consolidated financial statements be read in conjunction with the consolidated
financial statements and the notes thereto included in the Companys Annual Report on Form
10-K for the year ended December 31, 2009. Results of operations for interim periods are not
necessarily indicative of results that may be expected for any other interim periods or the
full fiscal year.
2 Goodwill and Other Intangible Assets
Goodwill is the excess of the purchase price over the fair value of identifiable net
assets acquired in business combinations accounted for under the purchase method. The Company
does not amortize goodwill, but tests goodwill for impairment annually in the fourth quarter,
or when indications of potential impairment exist. These indicators would include a
significant change in operating performance, or a planned sale or disposition of a significant
portion of the business, among other factors. The Company tests for goodwill impairment
utilizing a fair value approach at the reporting unit level. A reporting unit is an operating
segment, for which discrete financial information is prepared and regularly reviewed by
segment management. The Company has deemed its reporting units to be its operating segments,
the Truck segment and the Construction Equipment segment, which is the level at which segment
management regularly reviews operating results and makes resource allocation decisions.
The impairment test for goodwill involves comparing the fair value of a reporting unit to
its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds
its fair value, a second step is required to measure the goodwill impairment loss. The second
step includes hypothetically valuing all the tangible and intangible assets of the reporting
unit as if the reporting unit had been acquired in a business combination. Then, the implied
fair value of the reporting units goodwill is compared to the carrying amount of that
goodwill. If the carrying amount of the reporting units goodwill exceeds the implied fair
value of the goodwill, the Company would recognize an impairment loss in an amount equal to
the excess, not to exceed the carrying amount. The Company determines the fair values
calculated in an impairment test using the discounted cash flow method, which requires
assumptions and estimates regarding future revenue, expenses and cash flow projections. The
analysis is based upon available information regarding expected future cash flows of each
reporting unit discounted at rates consistent with the cost of capital specific to the
reporting unit.
Goodwill is tested for impairment during the fourth quarter of each year and no
impairment write down was required in the fourth quarter of 2009. However, the Company cannot
predict the occurrence of certain events that might adversely affect the reported value of
goodwill in the future. Such events may include, but are not limited to, strategic decisions
made in response to economic and competitive conditions or another significant decrease in
general economic conditions in the United States.
3 Commitments and Contingencies
The Company is contingently liable to finance companies for certain notes initiated on
behalf of such finance companies related to the sale of commercial vehicles and construction
equipment. The majority of finance contracts are sold without recourse against the Company. A
majority of the Companys liability related to finance contracts sold with recourse is
generally limited to 5% to 20% of the outstanding amount of each note initiated on behalf of
the finance company. The Company provides for an allowance for repossession losses and early
repayment penalties that it may be liable for under finance contracts sold without recourse.
The Company is involved in various claims and legal actions arising in the ordinary
course of business. The Company believes it is unlikely that the final outcome of any of the
claims or proceedings to which the Company is a party would have a material adverse effect on
the Companys financial position or results of operations; however, due to
the inherent uncertainty of litigation, there can be no assurance that the resolution of any
particular claim or proceeding would not have a material adverse effect on the Companys
results of operations for the fiscal period in which such resolution occurred.
6
Table of Contents
In 2006, the Company signed an agreement with Titan Technology Partners to implement SAP
enterprise software and a new SAP dealership management system. The cost of the SAP software
and implementation is estimated at approximately $34.0 million, of which $29.8 million was
expended at March 31, 2010.
4 Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended | ||||||||
March 31, 2010 | March 31, 2009 | |||||||
Numerator: |
||||||||
Numerator for basic and diluted earnings per share,
net income available to common shareholders |
$ | 2,237,000 | $ | 2,863,000 | ||||
Denominator: |
||||||||
Denominator for basic earnings per share, adjusted weighted
average shares outstanding |
37,170,720 | 36,991,417 | ||||||
Effect of dilutive securities: |
||||||||
Employee and Director stock options and restricted share awards |
573,888 | 282,434 | ||||||
Denominator for diluted earnings per share, adjusted weighted
average shares and assumed conversions |
37,744,608 | 37,273,851 | ||||||
Basic earnings per common share |
$ | .06 | $ | .08 | ||||
Diluted earnings per common share and common share equivalents |
$ | .06 | $ | .08 | ||||
Options to purchase shares of common stock that were outstanding for the periods ended
March 31, 2010 and 2009 that were not included in the computation of diluted earnings per
share because the effect would have been anti-dilutive are as follows:
March 31, 2010 | March 31, 2009 | |||||||
Options |
2,184,401 | 2,068,615 | ||||||
Total anti-dilutive securities |
2,184,401 | 2,068,615 | ||||||
5 Stock Options and Restricted Stock Awards
Valuation and Expense Information
The Company accounts for stock-based compensation in accordance with Accounting Standards
Codification (ASC) 718-10, Compensation Stock Compensation, which requires the
measurement and recognition of compensation expense for all share-based payment awards made to
the Companys employees and directors including employee stock options, restricted share
awards and employee stock purchases related to the Employee Stock Purchase Plan based on
estimated fair values. Stock-based compensation expense, calculated using the Black-Scholes
option-pricing model and included in Selling, General and Administrative (SG&A) expense, was
$1.9 million for the three months ended March 31, 2010 and $1.3 million for the three months
ended March 31, 2009. As of March 31, 2010, there was $6.9 million of total unrecognized
compensation cost related to non-vested share-based compensation arrangements granted under
the Rush Enterprises, Inc. Long-Term Incentive Plan to be recognized over a weighted-average
period of 3.4 years.
6 Investments
The Company assesses its investments for impairment on a quarterly basis. If the
investments are deemed to be impaired, the Company determines whether the impairment is
temporary or other than temporary. If the impairment is deemed to be temporary, the Company
records an unrealized loss in other comprehensive income. If the impairment is deemed other
than temporary, the Company records the impairment in the Companys consolidated statement of
operations.
7
Table of Contents
The Company historically invested in interest-bearing short-term investments primarily
consisting of investment-grade auction rate securities classified as available-for-sale and
reported at fair value. These types of investments were designed to provide liquidity through
an auction process that reset the applicable interest rates at predetermined periods ranging
from 1 to 35 days. This reset mechanism was intended to allow existing investors to continue
to own their respective interest in the auction rate security or to gain immediate liquidity
by selling their interests at par.
As a result of the liquidity issues experienced in the global capital markets, auctions
for investment grade securities held by the Company have failed. An auction fails when there
is insufficient demand. However, a failed auction does not represent a default by the issuer.
The auction rate securities continue to pay interest in accordance with the terms of the
underlying security; however, liquidity will be limited until there is a successful auction or
until such time as other markets for these investments develop. The Company has the intent
and ability to hold these auction rate securities until liquidity returns to the market. The
Company does not believe that the lack of liquidity relating to its auction rate securities
will have a material impact on its ability to fund operations.
As of March 31, 2010 and March 31, 2009, the Company held $7.6 million of auction rate
securities with underlying tax-exempt municipal bonds with stated maturities of 21 years.
These bonds have credit wrap insurance and a credit rating of A by Standard & Poors.
The Company believes that the credit quality and fair value of the auction rate
securities it holds has not been negatively impacted; therefore, no impairment charges have
been recorded as of March 31, 2010. As of March 31, 2010, the Company has valued these
investments at fair value, which approximates cost. The Company used observable inputs to
determine fair value, including consideration of broker quotes, the overall quality of the
underlying municipality, the credit quality of the insurance company, as well as successful
subsequent auctions. Accordingly, the Company has considered this fair value to be a Level 2
valuation under ASC 820-10, Fair Value Measurements and Disclosures. If the credit quality
of these investments deteriorates, or adverse developments occur in the bond insurance market,
the Company may be required to record an impairment charge on these investments in the future.
7 Segment Information
The Company currently has two reportable business segments: the Truck segment and the
Construction Equipment segment. The Truck segment operates a network of Rush Truck Centers
that provide an integrated one-stop source for the trucking needs of its customers, including
retail sales of new and used commercial vehicles; aftermarket parts, service and body shop
facilities; and a wide array of financial services, including the financing of new and used
commercial vehicle purchases, insurance products and truck leasing and rentals. The truck
centers are deemed as a single reporting unit because they have similar economic
characteristics. The Companys chief operating decision maker considers the entire Truck
segment, not individual dealerships when making decisions about resources to be allocated to
the segment and assess its performance.
The Construction Equipment segment operates two full-service John Deere dealerships that
serve the Southeast Texas area. Construction Equipment dealership operations include the
retail sale of new and used construction equipment, aftermarket parts and service facilities,
equipment rentals, and the financing of new and used construction equipment.
The accounting policies of the segments are the same as those described in the summary of
significant accounting policies. The Company evaluates performance based on income before
income taxes not including extraordinary items.
The Company accounts for intersegment sales and transfers as if the sales or transfers
were to third parties, that is, at current market prices. There were no material intersegment
sales during the quarters ended March 31, 2010 and 2009.
8
Table of Contents
The Companys reportable segments are strategic business units that offer different
products and services. They are managed separately because each business unit requires
different technology and marketing strategies. Business units were maintained through
expansion and acquisitions. The following table contains summarized information about
reportable segment profit or loss and segment assets for the periods ended March 31, 2010 and
2009 (in thousands):
Construction | ||||||||||||||||
Truck | Equipment | |||||||||||||||
Segment | Segment | All Other | Totals | |||||||||||||
As of and for the three months ended March 31, 2010 |
||||||||||||||||
Revenues from external customers |
$ | 295,758 | $ | 9,108 | $ | 3,530 | $ | 308,396 | ||||||||
Segment income (loss) before taxes |
3,490 | 543 | (419 | ) | 3,614 | |||||||||||
Segment assets |
955,181 | 26,900 | 25,229 | 1,007,310 | ||||||||||||
As of and for the three months ended March 31, 2009 |
||||||||||||||||
Revenues from external customers |
$ | 313,244 | $ | 11,595 | $ | 4,247 | $ | 329,086 | ||||||||
Segment income (loss) before taxes |
3,713 | 865 | (476 | ) | 4,102 | |||||||||||
Segment assets |
945,372 | 31,094 | 27,935 | 1,004,401 |
Revenues from segments below the quantitative thresholds are attributable to three
operating segments of the Company. Those segments include a tire retailing company, an
insurance company and a guest ranch operation. None of those segments has ever met any of the
quantitative thresholds for determining reportable segments.
8 Income Taxes
The Company included accruals for unrecognized income tax benefits totaling $1.8 million
as a component of accrued liabilities as of March 31, 2010 and December 31, 2009. The
unrecognized tax benefits of $1.8 million at March 31, 2010, if recognized, would impact the
Companys effective tax rate. An unfavorable settlement would require a charge to income tax
expense and a favorable resolution would be recognized as a reduction to income tax expense.
As of March 31, 2010, the Company accrued interest of $135,000 related to unrecognized tax
benefits in the current provision for income taxes. No amounts were accrued for penalties.
The Company does not anticipate a significant change in the amount of unrecognized tax
benefits in the next 12 months. As of March 31, 2010, the tax years ended December 31, 2008
through 2009 remained subject to audit by federal tax authorities and the tax years ended
December 31, 2005 through 2009, remained subject to audit by state tax authorities.
9 Fair Value of Financial Instruments
Certain methods and assumptions were used by the Company in estimating the fair value of
financial instruments at March 31, 2010. The carrying value of current assets and current
liabilities approximates the fair value due to the short maturity of these items.
The fair value of the Companys long-term debt is based on secondary market indicators.
Since the Companys debt is not quoted, estimates are based on each obligations
characteristics, including remaining maturities, interest rate, credit rating, collateral,
amortization schedule and liquidity. The carrying amount approximates fair value.
10 Recent Accounting Pronouncements
On January 21, 2010, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) 2010-06. ASU 2010-06 amends ASC 820, Fair Value Measurements, and
adds new requirements for disclosures about transfers into and out of Levels 1 and 2 in the
fair value hierarchy and additional disclosures about purchases, sales, issuances and
settlements relating to Level 3 fair value measurements. Additionally, it clarifies existing
fair value disclosures about the level of disaggregation about inputs and valuation techniques
used to measure fair value. ASU 2010-06 is generally effective for the first reporting period
beginning after December 15, 2009. The adoption of ASU 2010-06 did not have an impact on the
Companys consolidated results of operations and financial position.
The Company adopted the provisions of ASC 855, Subsequent Events, during the third
quarter of 2009. ASC 855 establishes standards of accounting for and disclosure of
transactions and events that occur after the balance sheet date but before the financial
statements are issued and requires the disclosure, among other things, of the date through
which an entity has evaluated subsequent events. In February 2010, the FASB issued ASU No.
2010-09 which amended ASC 855. This amendment, which was effective upon issuance, removed the
requirement for SEC registrants to disclose the date through which such registrants have
evaluated subsequent events.
9
Table of Contents
ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
Certain statements contained in this Form 10-Q (or otherwise made by the Company or on
the Companys behalf from time to time in other reports, filings with the Securities and
Exchange Commission, news releases, conferences, website postings or otherwise) that are not
statements of historical fact constitute forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of
1934, as amended(the Exchange Act), notwithstanding that such statements are not
specifically identified. Forward-looking statements include statements about the Companys
financial position, business strategy and plans and objectives of management of the Company
for future operations. These forward-looking statements reflect the best judgments of the
Company about the future events and trends based on the beliefs of the Companys management as
well as assumptions made by and information currently available to the Companys management.
Use of the words may, should, continue, plan, potential, anticipate, believe,
estimate, expect and intend and words or phrases of similar import, as they relate to
the Company or its subsidiaries or Company management, are intended to identify
forward-looking statements but are not the exclusive means of identifying such statements.
Forward-looking statements reflect the current view of the Company with respect to future
events and are subject to risks and uncertainties that could cause actual results to differ
materially from those in such statements. Important factors that could cause actual results to
differ materially from those in the forward-looking statements include, but are not limited
to, those set forth under Item 1ARisk Factors in the Companys Annual Report on Form 10-K
for the year ended December 31, 2009 as well as future growth rates and margins for certain of
our products and services, future demand for our products and services, risks associated with
the current recession and its impact on capital markets and liquidity, competitive factors,
general economic conditions, cyclicality, market conditions in the new and used commercial
vehicle and equipment markets, customer relations, relationships with vendors, approval by
various manufacturers and governmental agencies of the acquisition of Lake City International,
the interest rate environment, governmental regulation and supervision, seasonality,
distribution networks, product introductions and acceptance, technological change, changes in
industry practices, one-time events and other factors described herein and in the Companys
quarterly and other reports filed with the Securities and Exchange Commission (collectively,
Cautionary Statements). Although the Company believes that its expectations are reasonable,
it can give no assurance that such expectations will prove to be correct. Based upon changing
conditions, should any one or more of these risks or uncertainties materialize, or should any
underlying assumptions prove incorrect, actual results may vary materially from those
described in any forward-looking statements. All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf are expressly qualified
in their entirety by the applicable Cautionary Statements. All forward-looking statements
speak only as the date on which they are made and the Company undertakes no duty to update or
revise any forward-looking statements.
The following comments should be read in conjunction with the Companys consolidated
financial statements and related notes included elsewhere in this Quarterly Report on Form
10-Q.
Note Regarding Trademarks Used in This Form 10-Q
Peterbilt® is a registered trademark of Peterbilt Motors Company.
PACCAR® is a registered trademark of PACCAR, Inc. GMC® is a registered
trademark of General Motors Corporation. Hino® is a registered trademark of Hino
Motors, Ltd. UD® is a registered trademark of Nissan Diesel Motor Co., Ltd.
Isuzu® is a registered trademark of Isuzu Motors Limited. John Deere® is
a registered trademark of Deere & Company. Kenworth® is a registered trademark of
PACCAR, Inc. doing business as Kenworth Truck Company. Volvo® is a registered
trademark of Volvo Trademark Holding AB. Freightliner® is a registered trademark of
Freightliner Corporation. Mack® is a registered trademark of Mack Trucks, Inc.
Navistar® is a registered trademark of Navistar International Corporation.
Caterpillar® is a registered trademark of Caterpillar, Inc. Cummins® is
a registered trademark of Cummins Engine Company, Inc. PacLease® is a registered
trademark of PACCAR Leasing Corporation. CitiCapital® is a registered trademark of
Citicorp. Ford® is a registered trademark of Ford Motor Company.
Cummins® is a registered trademark of Cummins Intellectual Property, Inc. Eaton is
a registered trademark of Eaton Corporation. Arvin Meritor® is a registered
trademark of Meritor Technology, Inc. Case® is a registered trademark
of Case Corporation. Komatsu® is a registered trademark of Kabushiki Kaisha
Komatsu Seisakusho Corporation Japan. The CIT Group® is a registered trademark of
CIT Group Holdings, Inc. JPMorgan Chase® is a registered trademark of JP Morgan
Chase & Co. SAP® is a registered trademark of SAP Aktiengesellschaft.
International® is a registered trademark of Navistar International Transportation
Corp. Blue Bird® is a registered trademark of Blue Bird Investment Corporation.
Autocar® is a registered trademark of Shem, LLC. IC Bus® is a
registered trademark of IC Bus, LLC. Collins Bus Corporation® is a registered
trademark of Collins Bus Corporation.
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General
Rush Enterprises, Inc. was incorporated in 1965 under the laws of the State of Texas.
The Company operates a Truck segment and a Construction Equipment segment. The Company
conducts business through numerous subsidiaries, all of which it wholly owns, directly or
indirectly. Its principal offices are located at 555 IH 35 South, New Braunfels, Texas 78130.
The Company is a full-service, integrated retailer of premium transportation and
construction equipment and related services. The Truck segment operates a regional network of
Rush Truck Centers. Rush Truck Centers primarily sell commercial vehicles manufactured by
Peterbilt, International, GMC, Hino, UD, Ford, Isuzu or Blue Bird. The Construction Equipment
segment operates two John Deere equipment centers in Southeast Texas. Through its
strategically located network of Rush Truck Centers and its Rush Equipment Centers, the
Company provides one-stop service for the needs of its customers, including retail sales of
new and used commercial vehicles and construction equipment, aftermarket parts sales, service
and repair facilities, and financing, leasing and rental, and insurance products.
The Companys Rush Truck Centers are principally located in high traffic areas throughout
the southern United States. Since commencing operations as a Peterbilt heavy-duty truck
dealer in 1966, the Company has grown to operate more than 50 Rush Truck Centers in Alabama,
Arizona, California, Colorado, Florida, Georgia, New Mexico, North Carolina, Oklahoma,
Tennessee and Texas.
Our business strategy consists of providing our customers with competitively priced
products supported with timely and reliable service through our integrated dealer network. We
intend to continue to implement our business strategy, reinforce customer loyalty and remain a
market leader by continuing to develop our Rush Truck Centers and Rush Equipment Centers as we
extend our geographic focus through strategic acquisitions of new locations and expansions of
our existing facilities and product lines.
Planned Acquisition of Lake City International
On March 19, 2010, the Company entered into a definitive asset purchase agreement with
Lake City Companies, LLC and certain of its subsidiaries and affiliates (collectively Lake
City International) to acquire certain assets of Lake City International. Lake City
International operates a commercial truck, bus and agricultural equipment sales, service,
parts, finance and leasing business representing multiple brands, including International,
Autocar, Mitsubishi Fuso, IC Bus and Collins Bus Corporation. Lake City International
currently operates five dealerships in Utah, five dealerships in Idaho and a dealership in
Oregon. A copy of the asset purchase agreement is available in our Current Report on Form 8-K
filed on March 25, 2010.
The purchase price for the assets of Lake City International will be approximately $76.5
million, comprised of approximately $44.0 million for assets and goodwill and $34.5 million
for real estate less a $2.0 million payment from an affiliate of Lake City International for
Rush assuming contingent liabilities of the affiliate. At closing, the Company anticipates
that it will finance approximately $28.5 million of the purchase price under its floor plan,
accounts receivable and lease and rental truck financing arrangements. The Company intends to
finance a portion of the purchase price of the real estate shortly after the closing of the
acquisition.
The completion of the Lake City International acquisition is subject to a number of
conditions, including the approval of the Company to act as an authorized dealer of the
products sold by Lake City International and our ability to obtain motor vehicle dealer
licenses for the dealerships we are acquiring.
The parties have the right to terminate the Lake City International acquisition if it is
not completed by August 31, 2010.
Critical Accounting Policies and Estimates
The Companys discussion and analysis of its financial condition and results of
operations are based on the Companys consolidated financial statements, which have been
prepared in accordance with United States generally accepted accounting principles. The
preparation of these consolidated financial statements requires the Company to make estimates
and assumptions that affect the reported amounts of assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates. The Company believes the
following accounting policies affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements.
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Inventories
Inventories are stated at the lower of cost or market value. Cost is determined by
specific identification of new and used commercial vehicles and construction equipment
inventory and by the first-in, first-out method for tires, parts and accessories. As the
market value of our inventory typically declines over time, reserves are established based on
historical loss experience and market trends. These reserves are charged to cost of sales and
reduce the carrying value of our inventory on hand. An allowance is provided when it is
anticipated that cost will exceed net realizable value plus a reasonable profit margin.
Goodwill
Goodwill and other intangible assets that have indefinite lives are not amortized but
instead are tested at least annually by reporting unit for impairment, or more frequently when
events or changes in circumstances indicate that the asset might be impaired.
Goodwill is reviewed for impairment utilizing a two-step process. The first step
requires the Company to compare the fair value of the reporting unit, which is the same as the
segment, to the respective carrying value. The Company considers each of its segments to be a
reporting unit for purposes of this analysis. If the fair value of the reporting unit exceeds
its carrying value, the goodwill is not considered impaired. If the carrying value is greater
than the fair value, there is an indication that an impairment may exist and a second step is
required. In the second step of the analysis, the implied fair value of the goodwill is
calculated as the excess of the fair value of a reporting unit over the fair values assigned
to its assets and liabilities. If the implied fair value of goodwill is less than the
carrying value of the reporting units goodwill, the difference is recognized as an impairment
loss.
The Company determines the fair value of its reporting units using the discounted cash
flow method. The discounted cash flow method uses various assumptions and estimates regarding
revenue growth rates, future gross margins, future selling, general and administrative
expenses and an estimated weighted average cost of capital. The analysis is based upon
available information regarding expected future cash flows of each reporting unit discounted
at rates consistent with the cost of capital specific to the reporting unit. This type of
analysis contains uncertainties because it requires the Company to make assumptions and to
apply judgment regarding its knowledge of its industry, information provided by industry
analysts, and its current business strategy in light of present industry and economic
conditions. If any of these assumptions change, or fails to materialize, the resulting
decline in its estimated fair value could result in a material impairment charge to the
goodwill associated with the reporting unit.
The Company performs an annual impairment review of goodwill during the fourth quarter of
each year. Management is not aware of any impairment charge that may currently be required;
however, a change in economic conditions, if one occurs, could result in an impairment charge
in future periods.
The Company does not believe there is a reasonable likelihood that there will be a
material change in the future estimates or assumptions it used to test for impairment losses
on goodwill. However, if actual results are not consistent with our estimates or assumptions,
or certain events occur that might adversely affect the reported value of goodwill in the
future, the Company may be exposed to an impairment charge that could be material. Such
events may include, but are not limited to, strategic decisions made in response to economic
and competitive conditions or the impact of the current economic environment.
Finance and Insurance Revenue Recognition
Finance income related to the sale of a unit is recognized when the finance contract is
sold to a finance company. The Company arranges financing for customers through various
institutions and receives financing fees from the lender equal to either the difference
between the interest rates charged to customers over the predetermined interest rates set by
the financing institution or a commission for the placement of contracts. The Company also
receives commissions from the sale of various insurance products to customers.
The Company may be charged back for unearned financing or insurance contract fees in the
event of early termination of the contracts by customers. In the case of finance contracts, a
customer may prepay, or fail to pay, thereby terminating the underlying contract. Revenues
from these fees are recorded at the time of the sale of a unit and a reserve for future
amounts which might be charged back is established based on historical chargeback results and
the termination provisions of the applicable contracts, including the impact of refinance and
default rates on retail finance contracts and cancellation rates on other insurance products.
The Companys finance and insurance revenue recognition accounting methodology contains
uncertainties because it requires management to make assumptions and to apply judgment to
estimate future charge-backs. The Companys estimate of future charge-backs is based
primarily on
historical experience. The actual amount of historical charge-backs has not been
significantly different than the Companys estimates.
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Insurance Accruals
The Company is partially self-insured for a portion of the claims related to its property
and casualty insurance programs, requiring it to make estimates regarding expected losses to
be incurred. The Company engages a third party administrator to assess any open claims and
the Company adjusts its accrual accordingly on an annual basis. The Company is also partially
self-insured for a portion of the claims related to its workers compensation and medical
insurance programs. The Company uses actuarial information provided from third party
administrators to calculate an accrual for claims incurred, but not reported, and for the
remaining portion of claims that have been reported.
Changes in the frequency, severity, and development of existing claims could influence
the Companys reserve for claims and financial position, results of operations and cash flows.
The Company does not believe there is a reasonable likelihood that there will be a material
change in the estimates or assumptions it used to calculate its self-insured liabilities.
However, if actual results are not consistent with our estimates or assumptions, the Company
may be exposed to losses or gains that could be material.
Accounting for Income Taxes
Significant management judgment is required to determine the provisions for income taxes
and to determine whether deferred tax assets will be realized in full or in part. Deferred
income tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered
or settled. When it is more likely than not that all or some portion of specific deferred
income tax assets will not be realized, a valuation allowance must be established for the
amount of deferred income tax assets that are determined not to be realizable. Accordingly,
the facts and financial circumstances impacting state deferred income tax assets are reviewed
quarterly and managements judgment is applied to determine the amount of valuation allowance
required, if any, in any given period.
The Companys income tax returns are periodically audited by tax authorities. These
audits include questions regarding our tax filing positions, including the timing and amount
of deductions. In evaluating the exposures associated with the Companys various tax filing
positions, the Company adjusts its liability for unrecognized tax benefits and income tax
provision in the period in which an uncertain tax position is effectively settled, the statute
of limitations expires for the relevant taxing authority to examine the tax position, or when
more information becomes available.
The Companys liability for unrecognized tax benefits contains uncertainties because
management is required to make assumptions and to apply judgment to estimate the exposures
associated with its various filing positions. The Companys effective income tax rate is also
affected by changes in tax law, the level of earnings and the results of tax audits. Although
the Company believes that the judgments and estimates are reasonable, actual results could
differ, and the Company may be exposed to losses or gains that could be material. An
unfavorable tax settlement generally would require use of the Companys cash and result in an
increase in its effective income tax rate in the period of resolution. A favorable tax
settlement would be recognized as a reduction in the Companys effective income tax rate in
the period of resolution. The Companys income tax expense includes the impact of reserve
provisions and changes to reserves that it considers appropriate, as well as related interest.
Stock-Based Compensation Expense
The Company applies the provisions of ASC 718-10, Compensation Stock Compensation,
which requires the measurement and recognition of compensation expense for all share-based
payment awards made to employees and directors including grants of employee stock options and
restricted stock and employee stock purchases under the Employee Stock Purchase Plan based on
estimated fair values.
The Company uses the Black-Scholes option-pricing model to estimate the fair value of
share-based payment awards on the date of grant. The value of the portion of the award that
is ultimately expected to vest is recognized as expense over the requisite service periods in
the Companys Consolidated Statement of Operations.
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Results of Operations
The following discussion and analysis includes the Companys historical results of
operations for the three months ended March 31, 2010 and 2009.
The following table sets forth certain financial data as a percentage of total revenues:
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
New and used commercial vehicle sales |
58.6 | % | 59.6 | % | ||||
Parts and service |
34.1 | 33.2 | ||||||
Construction equipment sales |
1.8 | 2.1 | ||||||
Lease and rental |
4.5 | 4.1 | ||||||
Finance and insurance |
0.5 | 0.5 | ||||||
Other |
0.5 | 0.5 | ||||||
Total revenues |
100.0 | 100.0 | ||||||
Cost of products sold |
80.4 | 81.3 | ||||||
Gross profit |
19.6 | 18.7 | ||||||
Selling, general and administrative |
16.8 | 15.8 | ||||||
Depreciation and amortization |
1.2 | 1.2 | ||||||
Operating income |
1.6 | 1.7 | ||||||
Interest expense, net |
0.5 | 0.5 | ||||||
Income before income taxes |
1.1 | 1.2 | ||||||
Provision for income taxes |
0.4 | 0.4 | ||||||
Net income |
0.7 | % | 0.8 | % | ||||
The following table sets forth the unit sales and revenue for new heavy-duty, new
medium-duty and used commercial vehicles and the absorption rate (revenue in millions):
% Change | ||||||||||||
Three Months Ended | 2010 | |||||||||||
March 31, | vs | |||||||||||
2010 | 2009 | 2009 | ||||||||||
Vehicle unit sales: |
||||||||||||
New heavy-duty vehicles |
969 | 1,032 | (6.1 | %) | ||||||||
New medium-duty vehicles |
611 | 754 | (19.0 | %) | ||||||||
Total new vehicle unit sales |
1,580 | 1,786 | (11.5 | %) | ||||||||
Used vehicles |
686 | 577 | 18.9 | % | ||||||||
Vehicle revenue: |
||||||||||||
New heavy-duty vehicles |
$ | 118.1 | $ | 124.0 | (4.8 | %) | ||||||
New medium-duty vehicles |
37.4 | 48.8 | (23.4 | %) | ||||||||
Total new vehicle revenue |
$ | 155.5 | $ | 172.8 | (10.0 | %) | ||||||
Used vehicle revenue |
$ | 24.7 | $ | 22.7 | 8.8 | % | ||||||
Other vehicle revenue:(1) |
$ | 0.4 | $ | 0.5 | (20.0 | %) | ||||||
Absorption rate: |
97.0 | % | 97.2 | % | (0.2 | %) | ||||||
(1) | Includes sales of truck bodies, trailers and other new equipment. |
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Key Performance Indicator
Absorption Rate
Management uses several performance metrics to evaluate the performance of its commercial
vehicle dealerships, and considers Rush Truck Centers absorption rate to be of critical
importance. Absorption rate is calculated by dividing the gross profit from the parts,
service and body shop departments by the overhead expenses of all of a dealerships
departments, except for the selling expenses of the new and used commercial vehicle
departments and carrying costs of new and used commercial vehicle inventory. When 100%
absorption is achieved, then gross profit from the sale of a commercial vehicle, after sales
commissions and inventory carrying costs, directly impacts operating profit. In 1999, the
Companys truck dealerships absorption rate was approximately 80%. The Company has made a
concerted effort to increase its absorption rate since 1999. The Companys truck dealerships
achieved a 97.0% absorption rate for the first quarter of 2010 and 97.2% absorption rate for
the first quarter in 2009.
Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009
The Company expects that 2010 will be another difficult year for commercial vehicle
sales. Trucks with engines that meet the 2010 diesel emissions regulations are now beginning
to reach dealership lots. This new technology comes with a significant price increase, which
will limit demand. As a result, the Company believes that commercial vehicle sales will
remain sluggish in the second and third quarters of this year. However, if general economic
conditions continue to improve and credit is made available on more favorable terms,
commercial vehicle demand should increase.
The Company and industry analysts expect a strong recovery in commercial vehicle retail
sales in 2011, 2012 and 2013. A.C.T. Research Co., LLC (A.C.T. Research), a truck industry
data and forecasting service provider, currently predicts U.S. retail sales of Class 8 trucks
of approximately 105,700 units in 2010, a 9.0% increase from the number of deliveries in 2009,
and 174,800 units in 2011. A.C.T. Research currently predicts U.S. retail sales of Class 4,
5, 6, and 7 medium-duty commercial vehicles of approximately 123,500 units in 2010, a 10.9%
increase from the number of deliveries in 2009, and 151,000 units in 2011.
We are beginning to see some encouraging signs of recovery in our industry. Parts,
service and body shop revenues in the Truck segment increased 10.0% compared to the fourth
quarter of 2009. This resulted in the Companys dealership absorption rate increasing from
92.4% to 97.0% for the same time period. As excess truck capacity and freight demand
equalize, more trucks are being put into service, which is increasing the need for maintenance
and repair. The Company is optimistic that the increase in our parts and service operations
is an early indicator that a sustainable recovery has begun and should continue throughout the
year. The Companys overall parts, service and body shop sales decreased 3.8% in the first
quarter of 2010 compared to the first quarter of 2009.
In the first quarter of 2010, the Companys construction equipment segment revenue
decreased by 21.4% compared to the first quarter of 2009. This decrease was largely
attributable to the continued weak construction market in the Houston area. Current industry
forecasts suggest that construction equipment sales in 2010 will decline approximately 26%
compared to 2009 in the Companys area of responsibility during 2010.
The Company recently entered into an agreement to acquire certain assets of Lake City
International a dealer group with 11 locations in Utah, Idaho and Oregon. This will
provide the Company with a significant entry into three western states and expand its network
to 60 truck centers. More importantly it provides an excellent platform for the Company to
build its Navistar Division.
Revenues
Revenues decreased $20.7 million, or 6.3%, in the first quarter of 2010 compared to the
first quarter of 2009. Sales of new and used commercial vehicles decreased $15.4 million, or
7.8%, in the first quarter of 2010 compared to the first quarter of 2009. The Company expects
commercial vehicle sales to remain sluggish in the second and third quarters of 2010 as new
technology begins to gradually gain acceptance in the marketplace and excess commercial
vehicle capacity is absorbed by increasing freight volumes. The Company does not believe any
significant increase in retail commercial vehicle sales will occur until late in 2010 at the
earliest.
The Company sold 969 heavy-duty units in the first quarter of 2010, a 6.1% decrease
compared to 1,032 heavy-duty trucks in the first quarter of 2009. According to A.C.T.
Research, the U.S. Class 8 truck market increased 9.0% in the first quarter of 2010 compared
to the first quarter of 2009. The Companys share of the U.S. Class 8 truck sales market was
approximately 4.1% in 2009. The Company expects its share to range between 4.1% and 4.4% of
the U.S.
Class 8 truck market in 2010, which would result in the sale of approximately 4,300 to 4,700
Class 8 trucks based on current U.S. retail sales estimates of 105,700 units.
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The Company sold 611 medium-duty commercial vehicles, including 98 buses, in the first
quarter of 2010, a 19.0% decrease compared to 754 medium-duty commercial vehicles in the first
quarter of 2009. A.C.T. Research estimates that unit sales of Class 4 through 7 commercial
vehicles in the U.S. increased approximately 3.0% in the first quarter of 2010 compared to the
first quarter of 2009. In 2009, the Company achieved a 2.4% share of the Class 4 through 7
commercial vehicle sales market in the U.S. The Company expects its share to range between
2.4% and 2.5% of the U.S. Class 4 through 7 commercial vehicle sales market in 2010. This
market share percentage would result in the sale of approximately 2,900 to 3,100 of Class 4
through 7 commercial vehicles in 2010 based on current U.S. retail sales estimates of
approximately 123,500 units.
The Company sold 686 used commercial vehicles in the first quarter of 2010, an 18.9%
increase compared to 577 used commercial vehicles in the first quarter of 2009. The Company
expects demand for used commercial vehicles to remain high in 2010, but sales will be largely
dependent upon our ability to acquire quality used trucks and maintain an adequate used truck
inventory. The Company expects to sell approximately 2,900 to 3,200 used commercial vehicles
in 2010.
Parts and service sales decreased $4.1 million, or 3.8%, in the first quarter of 2010
compared to the first quarter of 2009. The Company expects parts and service sales to begin
to increase in 2010 if general economic conditions in the United States continue to improve.
As excess truck capacity equalizes with freight demand, more trucks are being put into
service, therefore increasing the need for maintenance and repair.
Sales of new and used construction equipment decreased $1.4 million, or 19.7%, in the
first quarter of 2010 compared to the first quarter of 2009. This decrease was largely
attributable to the continued weakness of the construction market in the Houston area. John
Deeres rolling twelve month average market share in the Houston area construction equipment
market increased to 23.5% as of March 31, 2010, from a rolling twelve month average of 17.6%
as of March 31, 2009. In 2010, the Company expects new construction equipment unit sales in
our area of responsibility to decrease approximately 25% to 28%, compared to 2009.
Truck lease and rental revenues increased $0.6 million, or 4.1%, in the first quarter of
2010 compared to the first quarter of 2009. This increase in lease and rental revenue is
consistent with managements expectations, considering the increased number of units put into
service in the lease and rental fleet during 2009 and 2010. The Company expects lease and
rental revenue to increase 8% to 12% during 2010, compared to 2009 based on the increase of
units in the lease and rental fleet.
Finance and insurance revenues decreased $0.2 million, or 10.1%, in the first quarter of
2010 compared to the first quarter of 2009. The decrease in finance and insurance revenue is
a direct result of the decline in commercial vehicle sales and the tight credit market. The
Company expects finance and insurance revenue to fluctuate proportionately with the new Class
8 truck market in 2010. Finance and insurance revenues have limited direct costs and,
therefore, contribute a disproportionate share of the Companys operating profits.
Other income decreased $0.2 million, or 11.4% in the first quarter of 2010 compared to
the first quarter of 2009. Other income consists primarily of the gain on sale realized on
trucks from the lease and rental fleet, commissions earned from John Deere for direct
manufacturer sales into our area of responsibility, document fees related to commercial
vehicle sales, mineral royalties and purchase discounts.
Gross Profit
Gross profit decreased $1.3 million, or 2.1%, in the first quarter of 2010 compared to
the first quarter of 2009. Gross profit as a percentage of sales increased to 19.6% in the
first quarter of 2010 from 18.7% in the first quarter of 2009. This slight increase in gross
profit as a percentage of sales is primarily a result of a change in our product sales mix.
Commercial vehicle sales, a lower margin revenue item, decreased as a percentage of total
revenue to 58.6% in 2010, from 59.6% in 2009. Parts and service revenue, a higher margin
revenue item, increased as a percentage of total revenue to 34.1% in 2010, from 33.2% in 2009.
Gross margins on Class 8 truck sales slightly increased to 7.2% in the first quarter of
2010 from 7.0% in the first quarter of 2009. In 2010, the Company expects overall gross
margins from Class 8 truck sales of approximately 5.0% to 7.0%, but this will largely depend
upon general economic conditions and the availability of credit to retail customers.
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Gross margins on medium-duty commercial vehicle sales slightly decreased to 6.3% in the
first quarter of 2010 from 6.4% in the first quarter of 2009. Gross margins on medium-duty
commercial vehicles are difficult to forecast accurately because gross margins vary
significantly depending upon the mix of fleet and non-fleet purchasers and types
of medium-duty commercial vehicles sold. For 2010, the Company expects overall gross margins
from medium-duty commercial vehicle sales of approximately 5.0% to 7.0%, but this will largely
depend upon general economic conditions and the availability of credit to retail customers.
Gross margins on used commercial vehicle sales increased to 13.8% in the first quarter of
2010 from 5.7% in the first quarter of 2009. This increase was largely attributable to
increased demand for high quality used commercial vehicles due to the increased cost of new
commercial vehicles and increased availability of credit. The Company expects margins on used
commercial vehicles will be in the range of approximately 8.5% to 10.5% during 2010, but this
will largely depend upon general economic conditions and the availability of credit to retail
customers.
Gross margins from the Companys parts, service and body shop operations decreased to
38.6% in the first quarter of 2010 from 39.2% in the first quarter of 2009. Gross profit for
the parts, service and body shop departments decreased slightly to $40.6 million in the first
quarter of 2010 from $42.8 million in the first quarter of 2009. The Company expects gross
margins on parts, service and body shop operations of approximately 39.0% to 41.0% during
2010.
Gross margins on new and used construction equipment sales increased to 13.2% in the
first quarter of 2010 from 11.7% in the first quarter of 2009. This increase in gross margin
is primarily attributable to a change in our product sales mix. The Company expects gross
margins for 2010 to range from approximately 9.0% to 11.0% due to the dramatic decrease in
demand for construction equipment in the Houston market, but this will largely depend upon
general economic conditions and the availability of credit to retail customers.
Gross margins from truck lease and rental sales increased to 12.7% in the first quarter
of 2010 from approximately 11.5% in the first quarter of 2009. The increase in the gross
margin from lease and rental sales is primarily due to the increased utilization of trucks in
our rental fleet. The Company expects gross margins from lease and rental sales of
approximately 11.0% to 15.0% during 2010 depending upon whether general economic conditions
continue to improve. The Companys policy is to depreciate its lease and rental fleet using a
straight line method over the customers contractual lease term. The lease unit is
depreciated to a residual value that approximates fair value at the expiration of the lease
term. This policy results in the Company realizing reasonable gross margins while the unit is
in service and a corresponding gain or loss on sale when the unit is sold at the end of the
lease term.
Finance and insurance revenues and other income, as described above, have limited direct
costs and, therefore, contribute a disproportionate share of gross profit.
Selling, General and Administrative Expenses
Selling, General and Administrative (SG&A) expenses decreased $0.4 million, or 0.7%, in
the first quarter of 2010 compared to the first quarter of 2009. SG&A expenses as a
percentage of sales increased to 16.8% in the first quarter of 2010 from 15.8% in the first
quarter of 2009. Prior to 2009, SG&A expenses as a percentage of sales historically ranged
from 10.0% to 15.0%. In general, when new and used commercial vehicle revenue decreases as a
percentage of revenue, SG&A expenses as a percentage of revenue will be at, or exceed, the
higher end of this range. The Company earns federal income tax credits on the sale of
alternative fuel vehicles to tax-exempt entities. A portion of these tax credits are passed
back to the tax-exempt customer and are reflected as SG&A expense to the Company. In the
first quarter of 2010, the selling portion of SG&A expenses, which consists primarily of
commissions on commercial vehicle and construction equipment sales, increased 7.8% and the
general and administrative portion of SG&A expenses decreased 1.4% compared to the first
quarter of 2009. For 2010, the Company expects the selling portion of SG&A expenses to be
approximately 25% to 28% of new and used commercial vehicle gross profit. The selling portion
of SG&A expenses varies based on the gross profit derived from commercial vehicle sales.
Interest Expense, Net
Net interest expense decreased $0.2 million, or 13.3%, in the first quarter of 2010
compared to the first quarter of 2009. The Company expects net interest expense for the
remainder of 2010 to increase compared to 2009 based on anticipated increases in inventory
levels and impending modification to the Companys floor plan agreement in the second half of
2010, which may result in increased floor plan interest.
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Income Before Income Taxes
Income before income taxes decreased $0.5 million, or 11.9%, in the first quarter of 2010
compared to the first quarter of 2009, as a result of the factors described above. The
Company believes that income before income taxes in 2010 will increase slightly compared to
2009 based on the factors described above.
Income Taxes
Income taxes increased $0.1 million, or 11.1%, in the first quarter of 2010 compared to
the first quarter of 2009. The Company provided for taxes at a 42.0% effective rate in the
first quarter of 2010 compared to an effective rate of 39.0% in the first quarter of 2009.
Prior to the application of alternative fuel tax credits, the Companys tax rate during the
first quarter of 2010 increased primarily due to state regulations that assess taxes based on
gross profit and non-deductible expenses. Historically, the Companys effective tax rate has
been approximately 36% to 38% of pretax income. When pretax income is low, state taxes that
are calculated based on gross profit and non-deductible expenses become a larger percentage of
pretax income, thereby increasing the Companys effective tax rate in relation to its
historical rates. If pretax income for 2010 is similar to pretax income in 2009, the Company
expects its effective tax rate to be approximately 40.0% to 42.0% before the application of
alternative fuel tax credits. In the first quarter of 2010, the Company received $0.1 million
in tax credits for sales of alternative fuel vehicles to tax-exempt entities, compared to $0.4
million in the first quarter of 2009. The Companys effective tax rate may vary significantly
depending on the number of alternative fuel vehicles sold to tax-exempt entities.
Liquidity and Capital Resources
The Companys short-term cash requirements are primarily for working capital, inventory
financing, the improvement and expansion of existing facilities, the development and
implementation of SAP enterprise software and dealership management system, and the
construction of new facilities. Historically, these cash requirements have been met through
the retention of profits and borrowings under our floor plan arrangements. As of March 31,
2010, the Company had working capital of approximately $152.9 million, including $145.8
million in cash available to fund our operations. The Company believes that these funds are
sufficient to meet its short-term and long-term cash requirements.
The Company has a secured line of credit that provides for a maximum borrowing of $8.0
million. There were no advances outstanding under this secured line of credit at March 31,
2010, however, $7.1 million was pledged to secure various letters of credit related to
self-insurance products, leaving $0.9 million available for future borrowings as of March 31,
2010.
The Companys long-term real estate debt agreements require the Company to satisfy
various financial ratios such as the debt to worth ratio and the fixed charge coverage ratio.
The Companys floor plan financing agreement with GE Capital does not contain financial
covenants. At March 31, 2010, the Company was in compliance with all debt covenants. The
Company does not anticipate any breach of the covenants in the foreseeable future.
Titan Technology Partners is currently implementing SAP enterprise software and a new SAP
dealership management system for the Company. The total cost of the SAP software and
implementation is estimated to be approximately $34.0 million. As of March 31, 2010, the
Company had cumulative expenditures of $29.8 million related to the SAP project. The Company
expects to spend approximately $4.0 million to $4.5 million related to the SAP project during
the remainder of 2010.
The Company also expects to make capital expenditures for recurring items such as
computers, shop tools and equipment and vehicles of approximately $8.0 million during 2010.
On July 22, 2008, the Companys Board of Directors approved a stock repurchase program
authorizing the Company to repurchase, from time to time, up to an aggregate of $20,000,000 of
its shares of Class A common stock and/or Class B common stock. Repurchases will be made at
times and in amounts as the Company deems appropriate and will be made through open market
transactions, privately negotiated transactions and other lawful means. The manner, timing and
amount of any repurchases will be determined by the Company based on an evaluation of market
conditions, stock price and other factors, including those related to the ownership
requirements of its dealership agreements with manufacturers it represents. The stock
repurchase program has no expiration date and may be suspended or discontinued at any time.
While the stock repurchase program does not obligate the Company to acquire any particular
amount or class of common stock, the Company anticipates that it will be repurchasing
primarily shares of its Class B common stock. As of March 31, 2010, the Company has
repurchased 1,639,843 shares of its Class B common stock at an aggregate cost of $17.9
million, none of which occurred during the first quarter of 2010.
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The Company currently anticipates funding its capital expenditures relating to the
implementation of the SAP enterprise software and SAP dealership management system,
improvement and expansion of existing facilities, construction of new facilities, recurring
expenses and any stock repurchases through its operating cash flow. The Company expects to
finance 70% to 80% of the appraised value of any newly constructed or purchased facilities,
which will increase the Companys cash and cash equivalents by that amount.
The purchase price for the assets of Lake City International will be approximately $76.5
million. At closing, the Company anticipates that it will finance approximately $28.5 million
of the purchase price under its floor plan, accounts receivable and lease and rental truck
financing arrangements. Shortly after the closing of the acquisition, the Company anticipates
that it will finance approximately $20.0 million of the purchase price of the real estate.
The Company has no other material commitments for capital expenditures as of March 31,
2010, except that the Company will continue to purchase vehicles for its lease and rental
division and authorize capital expenditures for improvement and expansion of its existing
dealership facilities and construction of new facilities based on market opportunities. The
Company expects to purchase or lease trucks worth approximately $35.0 million for its leasing
operations in 2010, depending on customer demand, all of which will be financed.
Cash Flows
Cash and cash equivalents decreased by $3.3 million during the three months ended March
31, 2010 and decreased by $14.8 million during the three months ended March 31, 2009. The
major components of these changes are discussed below.
Cash Flows from Operating Activities
Cash flows from operating activities include net income adjusted for non-cash items and
the effects of changes in working capital. During the first quarter of 2010, operating
activities resulted in net cash used in operations of $11.7 million. Cash used in operating
activities was primarily impacted by the increase in inventories and accounts receivable which
was offset by the increase in accounts payable. During the first quarter of 2009, operating
activities resulted in provided by operations of $41.8 million.
Cash flows from operating activities as adjusted for all draws and (payments) on floor
plan notes (Adjusted Cash Flows from Operating Activities) was $13.7 million for the three
months ended March 31, 2010 and $5.1 million for the three months ended March 31, 2009.
Generally, all vehicle and construction equipment dealers finance the purchase of vehicles and
construction equipment with floor plan borrowings, and our agreements with our floor plan
providers require us to repay amounts borrowed for the purchase of such vehicles and equipment
immediately after they are sold. As a result, changes in floor plan notes payable are
directly linked to changes in vehicle and construction equipment inventory. However, as
reflected in our consolidated statements of cash flows, changes in inventory are recorded as
cash flows from operating activities, and draws and (payments) on floor plan notes are
recorded as cash flows from financing activities.
Management believes that information about Adjusted Cash Flows from Operating Activities
provides investors with a relevant measure of liquidity and a useful basis for assessing the
Companys ability to fund its activities and obligations from operating activities. Floor
plan notes payable is classified as a current liability and, therefore, is included in the
working capital amounts discussed above.
Adjusted Cash Flows from Operating Activities is a non-GAAP financial measure and should
be considered in addition to, and not as a substitute for, cash flows from operating
activities as reported in our consolidated statements of cash flows in accordance with U.S.
GAAP. Additionally, this measure may vary among other companies; thus, Adjusted Cash Flows
from Operating Activities as presented herein may not be comparable to similarly titled
non-GAAP financial measures of other companies. Set forth below is a reconciliation of cash
flow from operating activities as reported in our consolidated statement of cash flows, as if
all changes in floor plan notes payable were classified as an operating activity (in
thousands).
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Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Net cash (used in) provided by operating activities (GAAP) |
$ | (11,681 | ) | $ | 41,827 | |||
Draws (payments) on floor plan notes payable |
25,408 | $ | (36,764 | ) | ||||
Adjusted Cash Flows from Operating Activities (Non-GAAP) |
$ | 13,727 | $ | 5,063 | ||||
Cash Flows from Investing Activities
Cash flows used in investing activities consist primarily of cash used for capital
expenditures. During the first quarter of 2010, cash used in investing activities was $9.9
million. Capital expenditures consisted of purchases of property and equipment and
improvements to our existing dealership facilities of $9.9 million. Property and equipment
purchases during the first quarter of 2010 consisted of $4.9 million for additional units for
rental and leasing operations, which was directly offset by borrowings of long-term debt. The
Company expects to purchase or lease trucks worth approximately $35.0 million for its leasing
operations in 2010, depending on customer demand, all of which will be financed. During the
remainder of 2010, the Company expects to make capital expenditures for recurring items such
as computers, shop equipment and vehicles of approximately $6.2 million, in addition to $4.0
million to $4.5 million for the SAP project described above.
During the first quarter of 2009, cash used in investing activities was $10.9 million.
Capital expenditures consisted of purchases of property and equipment, and improvements to our
existing dealership facilities and construction of our facility in Oklahoma City, Oklahoma of
$11.0 million. Property and equipment purchases during the first quarter of 2009 consisted of
$3.1 million for additional units for the rental and leasing operations, which was directly
offset by borrowings of long-term debt.
Cash Flows from Financing Activities
Cash flows from financing activities include borrowings and repayments of long-term debt
and net proceeds of floor plan notes payable. Cash used in financing activities was $18.3
million during the first quarter of 2010. The Company had borrowings of long-term debt of $3.1
million and repayments of long-term debt of $8.2 million during the first quarter of 2010.
The Company had net draws on floor plan notes payable of $25.4 million during the first
quarter of 2010. The borrowings of long-term debt were primarily related to units for the
rental and leasing operations.
Cash used in financing activities was $45.7 million during the first quarter of 2009. The
Company had borrowings of long-term debt of $2.7 million and repayments of long-term debt of
$10.8 million during the first quarter of 2009. The Company had net payments of floor plan
notes payable of $36.8 million during the first quarter of 2009. The borrowings of long-term
debt were primarily related to units for the rental and leasing operations.
Substantially all of the Companys commercial vehicle purchases are made on terms
requiring payment within 15 days or less from the date the commercial vehicles are invoiced
from the factory. Effective August 1, 2007, the Company entered into an Amended and Restated
Wholesale Security Agreement with GE Capital. Interest under the floor plan financing
agreement is payable monthly and the rate varies from LIBOR plus 1.15% to LIBOR plus 1.50%
depending on the month-end average aggregate amount outstanding under our GE Capital floor
plan arrangement. The Company finances substantially all of the purchase price of its new
commercial vehicle inventory, and the loan value of its used commercial vehicle inventory
under the floor plan financing agreement with GE Capital, under which GE Capital pays the
manufacturer directly with respect to new commercial vehicles. The Company makes monthly
interest payments to GE Capital on the amount financed, but is not required to commence loan
principal repayments on any vehicle until such vehicle has been floor planned for 12 months or
is sold. The floor plan financing agreement allows for prepayments with monthly adjustments
to the interest due on outstanding advances. On March 31, 2010, the Company had approximately
$198.9 million outstanding under its floor plan financing agreement with GE Capital. In
connection with the Amended and Restated Wholesale Agreement with GE Capital, the Company
executed a Continuing Guaranty in favor of GE Capital to a maximum principal amount of $600
million, plus unpaid interest and reasonable costs of collection. Except for the procedures
and other terms and conditions set forth in the Amended and Restated Wholesale Agreement, the
Company is not aware of any limitation on the Companys ability to access capital through this
facility.
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Substantially all of the Companys new construction equipment purchases are financed by
John Deere and JPMorgan Chase (Chase). The agreement with John Deere provides for interest
at prime plus 1.5%, however, there is an interest free financing period, after which time the
amount financed is required to be paid in full. When construction equipment is sold prior to
the expiration of the interest free finance period, the Company is required to repay the
principal within approximately ten days of the sale. If the construction equipment financed by
John Deere is not sold
within the interest free finance period, the Company transfers the financed equipment to the
Chase floor plan
arrangement. New and used construction equipment is financed to a maximum of book value under
a floor plan arrangement with Chase. The Company makes monthly interest payments on the
amount financed and is required to commence loan principal repayments on construction
equipment as book value is reduced. Principal payments for sold new and used construction
equipment are made to Chase no later than the 15th day of each month following the
sale. The loans are collateralized by a lien on the construction equipment. As of March 31,
2010, the Companys floor plan arrangement with Chase permitted the financing of up to $20.0
million in construction equipment. The facility with Chase expires in June 2010 and the
interest rate is the prime rate less 0.65%. On March 31, 2010, the Company had $0.7 million
outstanding under its floor plan financing arrangements with John Deere and $15.0 million
outstanding under its floor plan financing arrangement with Chase.
Backlog
On March 31, 2010, the Companys backlog of commercial vehicle orders was approximately
$83.5 million as compared to a backlog of commercial vehicle orders of approximately $61.0
million on March 31, 2009. The Company includes only confirmed orders in its backlog. The
delivery time for a custom-ordered commercial vehicle varies depending on the truck
specifications and demand for the particular model ordered, however, the Company expects to
fill all of its backlog orders during 2010. The Company sells the majority of its new
commercial vehicles by customer special order, with the remainder sold out of inventory.
Orders from a number of the Companys major fleet customers are included in the Companys
backlog as of March 31, 2010.
Seasonality
The Companys Truck segment is moderately seasonal. Seasonal effects on new commercial
vehicle sales related to the seasonal purchasing patterns of any single customer type are
mitigated by the diverse geographic locations of our dealerships and the Companys diverse
customer base, including regional and national fleets, local governments, corporations and
owner operators. However, commercial vehicle parts and service operations historically have
experienced higher sales volumes in the second and third quarters.
Seasonal effects in the Companys Construction Equipment segment are primarily driven by
the weather. Seasonal effects on construction equipment sales related to the seasonal
purchasing patterns of any single customer type are mitigated by the Companys diverse
customer base that includes contractors for residential and commercial construction, utility
companies, federal, state and local government agencies, and various petrochemical, industrial
and material supply type businesses that require construction equipment in their daily
operations.
Cyclicality
The Companys business is dependent on a number of factors relating to general economic
conditions, including fuel prices, interest rate fluctuations, credit availability, economic
recessions, environmental and other government regulations and customer business cycles. Unit
sales of new commercial vehicles have historically been subject to substantial cyclical
variation based on these general economic conditions. According to data published by A.C.T.
Research, in recent years total U.S. retail sales of new Class 8 trucks have ranged from a low
of approximately 97,000 in 2009 to a high of approximately 291,000 in 2006. Through
geographic expansion, concentration on higher margin parts and service operations and
diversification of its customer base, the Company believes it has reduced the negative impact
on the Companys earnings of adverse general economic conditions or cyclical trends affecting
the heavy-duty truck industry.
Environmental Standards and Other Governmental Regulations
The Company is subject to a wide range of federal, state and local environmental laws and
regulations, including those governing discharges into the air and water; the operation and
removal of underground and aboveground storage tanks; the use, handling, storage and disposal
of hazardous substances, petroleum and other materials; and the investigation and remediation
of contamination. As with commercial vehicle or construction equipment dealerships generally,
and service, parts and body shop operations in particular, our business involves the
generation, use, storage, handling and contracting for recycling or disposal of hazardous
materials or wastes and other environmentally sensitive materials. The Company has incurred,
and will continue to incur, capital and operating expenditures and other costs in complying
with such laws and regulations.
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Our operations involving the management of hazardous and nonhazardous materials are
subject to the requirements of the federal Resource Conservation and Recovery Act, or RCRA,
and comparable state statutes. Pursuant
to these laws, federal and state environmental agencies have established approved methods
for handling, storage, treatment, transportation and disposal of regulated substances and
wastes with which the Company must comply. Our business also involves the operation and use
of above ground and underground storage tanks. These storage tanks are subject to periodic
testing, containment, upgrading and removal under RCRA and comparable state statutes.
Furthermore, investigation or remediation may be necessary in the event of leaks or other
discharges from current or former underground or aboveground storage tanks.
The Company may also have liability in connection with materials that were sent to
third-party recycling, treatment, or disposal facilities under the federal Comprehensive
Environmental Response, Compensation and Liability Act, or CERCLA, and comparable state
statutes. These statutes impose liability for investigation and remediation of contamination
without regard to fault or the legality of the conduct that contributed to the contamination.
Responsible parties under these statutes may include the owner or operator of the site where
contamination occurred and companies that disposed or arranged for the disposal of the
hazardous substances released at these sites. These responsible parties also may be liable
for damages to natural resources. In addition, it is not uncommon for neighboring landowners
and other third parties to file claims for personal injury and property damage allegedly
caused by the release of hazardous substances or other pollutants into the environment.
The federal Clean Water Act and comparable state statutes prohibit discharges of
pollutants into regulated waters without the necessary permits, require containment of
potential discharges of oil or hazardous substances, and require preparation of spill
contingency plans. Water quality protection programs govern certain discharges from some of
our operations. Similarly, the federal Clean Air Act and comparable state statutes regulate
emissions of various air pollutants through air emissions permitting programs and the
imposition of other requirements. In addition, the U.S. Environmental Protection Agency, or
EPA, has developed, and continues to develop, stringent regulations governing emissions of
toxic air pollutants from specified sources. For example, EPA emissions guidelines regarding
nitrous oxides recently came into effect for all diesel engines built subsequent to January 1,
2010, which could adversely affect demand for our products and services, which may in turn
adversely affect our future results of operations.
The Company believes that it does not currently have any material environmental
liabilities and that compliance with environmental laws and regulations will not, individually
or in the aggregate, have a material adverse effect on our results of operations, financial
condition or cash flows. However, soil and groundwater contamination is known to exist at
some of our current properties. Further, environmental laws and regulations are complex and
subject to change. In addition, in connection with acquisitions, it is possible that the
Company will assume or become subject to new or unforeseen environmental costs or liabilities,
some of which may be material. In connection with our dispositions, or prior dispositions made
by companies acquire, the Company may retain exposure for environmental costs and liabilities,
some of which may be material. Compliance with current or amended, or new or more stringent,
laws or regulations, stricter interpretations of existing laws or the future discovery of
environmental conditions could require additional expenditures by us, and those expenditures
could be material.
It is not possible at this time to predict how legislation or new regulations that may be
adopted to address greenhouse gas emissions would impact our business. Any such future laws
and regulations could result in increased compliance costs, additional operating restrictions
or changes in demand for our products and services which could have a material adverse effect
on our business, financial condition and results of operation.
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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.
Market risk represents the risk of loss that may impact the financial position, results
of operations, or cash flows of the Company due to adverse changes in financial market prices,
including interest rate risk, and other relevant market rate or price risks.
The Company is exposed to some market risk through interest rates related to our floor
plan financing agreements, variable rate real estate debt and discount rates related to
finance sales. The majority of floor plan debt and variable rate real estate debt is based on
LIBOR. As of March 31, 2010, the Company had floor plan borrowings and variable rate real
estate debt of approximately $258.5 million. Assuming an increase or decrease in LIBOR of 100
basis points, annual interest expense could correspondingly increase or decrease by
approximately $2.6 million. The Company provides all customer financing opportunities to
various finance providers. The Company receives all finance charges in excess of a negotiated
discount rate from the finance providers in the month following the date of the financing. The
negotiated discount rate is variable, thus subject to interest rate fluctuations. This
interest rate risk is mitigated by the Companys ability to pass discount rate increases to
customers through higher financing rates.
The Company is also exposed to some market risk through interest rates related to the
investment of our current cash and cash equivalents which totaled $145.8 million on March 31,
2010. These funds are generally invested in variable interest rate instruments in accordance
with the Companys investment policy. As such instruments mature and the funds are
reinvested, we are exposed to changes in market interest rates. This risk is mitigated by
managements ongoing evaluation of the best investment rates available for current and
noncurrent high quality investments. If market interest rates were to increase or decrease
immediately and uniformly by 100 basis points, the Companys annual interest income could
correspondingly increase or decrease by approximately $1.5 million.
In the past, the Company invested in interest-bearing short-term investments consisting
of investment-grade auction rate securities classified as available-for-sale. As a result of
the recent liquidity issues experienced in the global credit and capital markets, auctions for
investment grade securities held by the Company have failed. The auction rate securities
continue to pay interest in accordance with the terms of the underlying security; however,
liquidity will be limited until there is a successful auction or until such time as other
markets for these investments develop.
As of March 31, 2010, the Company holds $7.6 million of auction rate securities with
underlying tax-exempt municipal bonds with stated maturities of 21 years. Given the current
market conditions in the auction rate securities market, if the Company determines that the
fair value of these securities has temporarily decreased by 10%, the Companys equity could
correspondingly decrease by approximately $0.8 million. If it is determined that the fair
value of these securities is other-than-temporarily impaired by 10%, the Company could record
a loss on its Consolidated Statements of Operations of approximately $0.8 million. For
further discussion of the risks related to our auction rate securities, see Note 6
Investments of the Notes to Consolidated Financial Statements.
The Company has not used derivative financial instruments in our investment portfolio.
ITEM 4. Controls and Procedures.
The Company, under the supervision and with the participation of management, including
the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the
Companys disclosure controls and procedures as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Companys disclosure controls and procedures were effective as of March 31,
2010 to ensure that information required to be disclosed in the reports filed or submitted
under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commissions rules and forms,
and (ii) is accumulated and communicated to Company management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.
There has been no change in the Companys internal control over financial reporting that
occurred during the three months ended March 31, 2010 that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over financial
reporting.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
From time to time, we are involved in litigation arising out of the Companys operations
in the ordinary course of business. We maintain liability insurance, including product
liability coverage, in amounts deemed adequate by management. To date, aggregate costs to us
for claims, including product liability actions, have not been material. However, an uninsured
or partially insured claim, or claim for which indemnification is not available, could have a
material adverse effect on the Companys financial condition or results of operations. We
believe that there are no claims or litigation pending, the outcome of which could have a
material adverse effect on the Companys financial position or results of operations. However,
due to the inherent uncertainty of litigation, there can be no assurance that the resolution
of any particular claim or proceeding would not have a material adverse effect on the
Companys financial condition or results of operations for the fiscal period in which such
resolution occurred.
ITEM 1A. Risk Factors.
While we attempt to identify, manage and mitigate risks and uncertainties associated with
our business to the extent practical under the circumstances, some level of risk and
uncertainty will always be present. Item 1A, Part I of our 2009 Annual Report on Form 10-K
(the 2009 Annual Report) describes some of the risks and uncertainties associated with our
business that have the potential to materially affect our business, financial condition or
results of operations.
There has been no material change in our risk factors disclosed in our 2009 Annual
Report.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The Company did not make any unregistered sales of equity securities during the first
quarter of 2010.
The Company did not repurchase any shares of its Class A Common Stock or Class B Common
Stock during the first quarter of 2010.
Total Number of | Maximum Number | |||||||||||||||
Shares | (or Approximate | |||||||||||||||
Purchased as | Dollar Value) of | |||||||||||||||
Total | Average | Part of Publicly | Shares that May | |||||||||||||
Number of | Price | Announced | Yet Be Purchased | |||||||||||||
Shares | Paid Per | Plans or | Under the Plans or | |||||||||||||
Period | Purchased | Share | Programs | Programs (1)(2) | ||||||||||||
January 1 31, 2010 |
| $ | 0.00 | | $ | 2,093,321 | ||||||||||
February 1 28, 2010 |
| 0.00 | | 2,093,321 | ||||||||||||
March 1 31, 2010 |
| 0.00 | | 2,093,321 | ||||||||||||
1st Quarter Total |
| $ | 0.00 | | $ | 2,093,321 |
(1) | On July 22, 2008, the Companys Board of Directors approved a stock repurchase program
authorizing the Company to repurchase, from time to time, up to an aggregate of $20,000,000 of
its shares of Class A Common Stock and/or Class B Common Stock. The stock repurchase program
has no expiration date and may be suspended or discontinued at any time. |
|
(2) | As of March 31, 2010, the Company has repurchased 1,639,843 shares of its Class B common
stock at a cost of $17.9 million, none of which occurred during the first quarter of 2010. |
ITEM 3. Defaults Upon Senior Securities.
Not Applicable
ITEM 4. Submission of Matters to a Vote of Security Holders.
Not Applicable
ITEM 5. Other Information.
Not Applicable
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ITEM 6. Exhibits
Exhibit | ||||
Number | Exhibit Title | |||
2.1 | Asset Purchase Agreement, dated as of March 19, 2010 (incorporated
herein by reference to Exhibit 2.1 of the Companys Current Report
on Form 8-K (File No. 000-20797) filed March 25, 2010) |
|||
3.1 | Restated Articles of Incorporation of Rush Enterprises, Inc.
(incorporated herein by reference to Exhibit 3.1 of the Companys
Quarterly Report on Form 10-Q (File No. 000-20797) for the quarter
ended June 30, 2008) |
|||
3.2 | Rush Enterprises, Inc. Amended and Restated Bylaws (incorporated
herein by reference to Exhibit 3.1 of the Companys Current Report
on Form 8-K (File No. 000-20797) filed December 9, 2008) |
|||
31.1 | * | Certification of CEO pursuant to Rules 13a-14(a) and 15d-14(a)
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
||
31.2 | * | Certification of CFO pursuant to Rules 13a-14(a) and 15d-14(a)
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
||
32.1 | ** | Certification of CEO pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
||
32.2 | ** | Certification of CFO pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | filed herewith |
|
** | furnished herewith |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
RUSH ENTERPRISES, INC. |
||||
Date: May 10, 2010 | By: | /S/ W.M. RUSTY RUSH | ||
W.M. Rusty Rush | ||||
President and Chief Executive Officer (Principal Executive Officer) | ||||
Date: May 10, 2010 | By: | /S/ STEVEN L. KELLER | ||
Steven L. Keller | ||||
Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
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EXHIBIT INDEX
Exhibit | |||
Number | Exhibit Title | ||
31.1* | Certification of CEO pursuant to Rules 13a-14(a) and 15d-14(a)
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
||
31.2* | Certification of CFO pursuant to Rules 13a-14(a) and 15d-14(a)
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
||
32.1** | Certification of CEO pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
||
32.2** | Certification of CFO pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | filed herewith |
|
** | furnished herewith |
27