Item 1B.
Unresolved Staff Comments
None
The Company’s corporate headquarters are located in New Braunfels, Texas. As of December 2010, the Company also owns or leases numerous facilities used in our operations in the following states: Alabama, Arizona, California, Colorado, Florida, Georgia, Idaho, New Mexico, North Carolina, Oklahoma, Oregon, Tennessee, Texas and Utah. A Rush Truck Center may be comprised of one or more locations, generally in close proximity, in the same metropolitan area. These facilities consist primarily of office space, display lots, service facilities and parking lots.
The Company’s truck leasing operations lease additional space in Phoenix, Arizona, Pico Rivera and Fontana, California, Gallup, New Mexico and Orlando, Florida.
The Company’s insurance agency leases space in San Antonio, Texas, Winter Garden, Florida, Austin, Texas, Laguna Niguel and Newport Beach, California, Clermont, Florida and Norman, Oklahoma.
The Company leases a hangar in New Braunfels, Texas for the corporate aircraft. The Company also owns and operates a guest ranch of approximately 9,500 acres near Cotulla, Texas. The Company uses the ranch for client development purposes and sells hunting trips on the ranch.
From time to time, we are involved in litigation arising out of the Company’s 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 Company’s financial condition. We believe that there are no claims or litigation pending, the outcome of which could have a material adverse effect on the Company’s 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 Company’s results of operations for the fiscal period in which such resolution occurred.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities
Our common stock trades on The NASDAQ Global Select MarketSM under the symbols RUSHA and RUSHB.
The following table sets forth the high and low sales prices for the Class A common stock and Class B common stock for the fiscal periods indicated and as quoted on The NASDAQ Global Select MarketSM.
As of March 2, 2011, there were approximately 39 record holders of the Class A common stock and approximately 47 record holders of the Class B common stock.
The Company did not pay dividends during the fiscal year ended December 31, 2010, or the fiscal year ended December 31, 2009. The Board of Directors intends to retain any earnings of the Company to support operations and to finance expansion and does not intend to pay cash dividends in the foreseeable future. Any future determination as to the payment of dividends will be at the discretion of the Board of Directors of the Company and will depend on the Company’s financial condition, results of operations, capital requirements and such other factors as the Board of Directors deems relevant.
The Company has not sold any securities in the last three years that were not registered under the Securities Act.
The Company did not repurchase any shares of its Class A Common Stock or Class B Common Stock during the fourth quarter of 2010.
Information regarding the Company’s equity compensation plans is incorporated by reference from Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters,” of this annual report on Form 10-K, and should be considered an integral part of this Item 5.
The information below was derived from the audited consolidated financial statements included in this report and reports we have previously filed with the SEC. This information should be read together with those consolidated financial statements and the notes to those consolidated financial statements. These historical results are not necessarily indicative of the results to be expected in the future. The selected financial data presented below may not be comparable between periods in all material respects or indicative of the Company’s future financial position or results of operations due primarily to acquisitions and discontinued operations which occurred during the periods presented. See Note 16 to the Company’s Consolidated Financial Statements for a discussion of such acquisitions. The selected financial data presented below should be read in conjunction with the Company’s other financial information included elsewhere herein.
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
Despite another year of weak truck sales, 2010 was a very significant year for the Company. The Company matched its record high annual absorption rate of 105.5% - previously achieved in 2008, expanded its network of Rush Truck Centers, established a new Navistar Division, extended the breadth of our product offerings in existing areas of responsibility and ended the year in a strong financial position.
During the spring of 2010, the Company’s parts, service and body shop business began accelerating from the depressed levels experienced throughout 2009, and continued to accelerate to record high levels at the end of the year. Parts, service and body shop revenues were up 23.8% in 2010 compared to 2009, primarily due to increased maintenance and repair on aging vehicles that were put back into service during the year as well as significant increases in oilfield services activity in the south central U.S. The Company expects parts, service and body shop operations to remain strong in 2011.
The Company completed the acquisition of the assets of Lake City International which added 11 International dealership locations in Utah, Idaho and Oregon. The Company opened a new flagship facility in Oklahoma City, replacing its existing Peterbilt and Hino dealership location there and added Isuzu and Ford commercial truck franchises to the newly opened location. The Company also added a Ford and Isuzu commercial truck dealership in Dallas, Texas and Isuzu commercial truck franchises to its Sealy, Texas and Orlando, Florida dealerships. Investment in the existing Rush Truck Centers network and the addition of medium-duty franchises allows the Company to better serve customers in its existing markets with more service capabilities and a broader medium-duty vehicle offering.
The Company is encouraged by the continuing improvement in Class 8 and medium-duty truck orders during the past several months. While U.S. Class 8 order intake has improved for three consecutive months, the Company does not expect retail sales of commercial vehicles to substantially increase until later in 2011, causing the new commercial vehicle sales market to remain competitive and challenging throughout the first half of the year. A.C.T. Research Co., LLC (“A.C.T. Research”), a truck industry data and forecasting service provider, currently predicts 2011 U.S. Class 8 truck sales to reach 179,000 units, up from 110,109 units sold in 2010. A.C.T. Research currently predicts U.S. Class 4-7 retail sales in 2011 to be 128,300 units, up from 117,572 units in 2010. If economic conditions continue to improve, the Company expects that activity will increase in automotive and capital goods manufacturing, as well as residential and commercial construction, which should result in strong truck sales markets in 2012 and 2013.
The Company earns federal income tax credits on the sale of alternative fuel vehicles to tax-exempt entities. These tax credits are reflected as tax benefits in the Company’s Consolidated Statements of Income. 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 quarter in which the commercial vehicles are sold. These alternative fuel tax credits and the amount passed back to the customers are directly attributable to the sale of a commercial vehicle. Accordingly, the Company believes the tax credits and the amounts passed back to customers should be considered operating items when analyzing the financial performance of the Company. The Company believes its history of serving municipalities and other tax-exempt customers that cannot claim these federal tax credits, its ability to utilize tax credits and pass back savings to these tax-exempt customers, and its position as a leading dealer of alternative fuel vehicles provide the Company with a distinct advantage over its competition when offering alternative fuel vehicles to tax-exempt entities.
Pending Acquisition
The Company has entered into agreements to purchase certain assets of Asbury Automotive Atlanta, LLC, a subsidiary of Asbury Automotive Group, Inc. (NYSE®: ABG), which operates commercial truck and bus dealerships representing International, Peterbilt, Isuzu, Hino, UD, IC Bus, and Workhorse in Atlanta, Doraville and Kennesaw, Georgia and a collision center in Atlanta under the “Nalley Motor Trucks” name. Peterbilt exercised its statutory right of first refusal to acquire the Peterbilt assets and the Kennesaw location that are subject to the asset purchase agreement between Asbury Automotive Atlanta, LLC and the Company. The proposed acquisition would expand the Company’s contiguous network of Rush Truck Centers in the southeast and would result in the Company operating 65 Rush Truck Center locations in 14 states. The Company anticipates that the purchase price for the assets of Asbury Automotive Atlanta, LLC will be paid in cash and partially financed under the Company’s floor plan and accounts receivable financing arrangements and the incurrence of long-term debt for the real estate. The Company expects the transaction to be accretive to future earnings. The completion of the acquisition is subject to several closing conditions, including the approval of the non-Peterbilt manufacturers currently represented by Nalley Motor Trucks, and is expected to close in the first quarter of 2011.
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 dealership’s 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 Company’s truck dealerships’ absorption rate was approximately 80%. The Company has made a concerted effort to increase its absorption rate since 1999. The Company’s truck dealerships achieved a 105.5% absorption rate for the year in 2010 and 95.7% absorption rate for the year in 2009.
Critical Accounting Policies and Estimates
The Company’s discussion and analysis of its financial condition and results of operations are based on the Company’s consolidated financial statements, which have been prepared in accordance with U.S. 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. There can be no assurance that actual results will not differ from those estimates. The Company believes the following accounting policies, which are also described in Note 2 of the Notes to the Consolidated Financial Statements, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
Inventories
Inventories are stated at the lower of cost or market value. Cost is determined by specific identification of new and used commercial vehicles 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 its segment 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 unit’s goodwill, the difference is recognized as an impairment loss.
The Company determines the fair value of its reporting unit 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 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.
The Company has historically performed an annual impairment review of goodwill during the fourth quarter of each year, however, an interim evaluation of goodwill was required during the second quarter of 2009 due to General Motors’ decision to terminate production of medium-duty GMC trucks, which resulted in the winding-down of the Company’s medium-duty GMC truck franchises. The goodwill allocation was based on the relative fair values of the medium-duty GMC truck franchises and the portion of the Company’s Truck Segment remaining. The Company’s Truck Segment recorded a non-cash charge of $0.8 million related to the impairment of the goodwill of its medium-duty GMC truck franchises. See Note 18 for further discussion of the wind-down of the Company’s medium-duty GMC truck franchise agreements.
Goodwill was tested for impairment during the fourth quarter of 2010 and no impairment write down was required. The fair value of each of our reporting units exceeded the carrying value of its net assets. As a result, we were not required to conduct the second step of the impairment test. The Company does not believe any of its reporting units are at risk of failing step one of the impairment test.
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. During 2010, 2009 and 2008, finance contracts were not retained by the Company for any significant length of time because finance contracts are generally sold to finance companies concurrent with the sale of the related unit. 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 Company’s 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 Company’s 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 Company’s estimates.
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 worker’s 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 Company’s 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. A 10% change in the Company’s estimate would have changed its reserve for these losses at December 31, 2010 by $0.4 million.
Accounting for Income Taxes
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 management’s judgment is applied to determine the amount of valuation allowance required, if any, in any given period.
The Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s effective income tax rate in the period of resolution. The Company’s income tax expense includes the impact of reserve provisions and changes to reserves that it considers appropriate, as well as related interest.
Derivative Instruments and Hedging Activities
The Company utilizes derivative financial instruments to manage its interest rate risk. The types of risks hedged are those relating to the variability of cash flows and changes in the fair value of the Company’s financial instruments caused by movements in interest rates. The Company assesses hedge effectiveness at the inception and during the term of each hedge. Derivatives are reported at fair value on the accompanying Consolidated Balance Sheets.
The effective portion of the gain or loss on the Company’s cash flow hedges are reported as a component of accumulated other comprehensive loss. Hedge effectiveness will be assessed quarterly by comparing the changes in cumulative gain or loss from the interest rate swap with the cumulative changes in the present value of the expected future cash flows of the interest rate swap that are attributable to changes in the LIBOR rate. If the interest rate swaps become ineffective, portions of these interest rate swaps would be reported as a component of interest expense in the accompanying Consolidated Statements of Income.
Results of Operations
The following discussion and analysis includes the Company’s historical results of operations for 2010, 2009 and 2008. The following table sets forth for the years indicated certain financial data as a percentage of total revenues:
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 for the years indicated (revenue in millions):
(1)
Includes sales of glider kits, truck bodies, trailers and other new equipment.
Industry
We currently operate in the commercial vehicle market. There has historically been a high correlation between new product sales in the commercial vehicle market and the rate of change in U.S. industrial production and the U.S. gross domestic product.
Heavy-Duty Truck Market
The Company serves the U.S. retail heavy-duty truck market, which is affected by a number of factors relating to general economic conditions, including fuel prices, government regulation, interest rate fluctuations, economic recessions, other methods of transportation and customer business cycles. In addition, unit sales of new commercial vehicles have historically been subject to substantial cyclical variation based on 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. Class 8 trucks are defined by the American Automobile Association as trucks with a minimum gross vehicle weight rating above 33,000 pounds. The Company’s share of the U.S. Class 8 truck sales market increased to 4.3% in 2010, up from 4.1% in 2009.
Typically, Class 8 trucks are assembled by manufacturers utilizing certain components manufactured by other companies, including engines, transmissions, axles, wheels and other components. As commercial vehicles and commercial vehicle components have become increasingly complex, the ability to provide state-of-the-art service for commercial vehicles has become a competitive factor in the industry. The ability to provide such service requires a significant capital investment in diagnostic and other equipment, parts inventory and highly trained service personnel. Environmental Protection Agency (“EPA”) and U.S. Department of Transportation (“DOT”) regulatory guidelines for service processes, including body shop, paint work and waste disposal, require sophisticated operating and testing equipment to ensure compliance with environmental and safety standards. Additionally, we believe that more of our customers will lease Class 8 trucks as fleets and seek to establish full-service leases or rental contracts, which provide for turnkey service including parts, maintenance and, potentially, fuel, fuel tax reporting and other services. Differentiation between commercial vehicle dealers has become less dependent on pure price competition and is increasingly based on a dealer’s ability to offer a wide variety of services to their clients. Such services include the following: efficient, conveniently located and easily accessible commercial vehicle service centers with an adequate supply of replacement parts; financing for commercial vehicle purchases; leasing and rental programs; and the ability to accept multiple unit trade-ins related to large fleet purchases. We believe our one-stop center concept and the size and geographic diversity of our dealer network gives us a competitive advantage in providing these services.
A.C.T. Research currently estimates approximately 179,000 new Class 8 trucks will be sold in the United States in 2011, compared to approximately 110,000 new Class 8 trucks sold in 2010. The Company believes that demand for new Class 8 trucks will gradually increase throughout 2011 due to the age of vehicles in operation and improving general economic conditions. A.C.T. Research currently forecasts sales of Class 8 trucks in the U.S. to be approximately 235,000 in 2012.
Medium-Duty Truck Market
Many of our Rush Truck Centers sell medium-duty trucks manufactured by Peterbilt, International, Hino, UD, Ford, Mitsubishi Fuso or Isuzu, and all of our Rush Truck Centers provide parts and service for medium-duty trucks. Medium-duty trucks are principally used in short-haul, local markets as delivery vehicles. Medium-duty trucks typically operate locally and generally do not venture out of their service areas overnight.
A.C.T. Research currently forecasts sales of Class 4 through 7 commercial vehicles in the U.S. to be approximately 128,000 in 2011 compared to 117,000 in 2010. A.C.T. Research currently forecasts sales of Class 4 through 7 commercial vehicles in the U.S. to be approximately 160,000 in 2012.
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Revenues
Revenues increased $297.5 million, or 24.8%, in 2010, compared to 2009. Sales of new and used commercial vehicles increased $187.9 million, or 25.4%, in 2010, compared to 2009. The Company believes that demand for its products and services will increase if general economic conditions in the United States continue to improve and credit is made available on reasonable terms to a wider range of buyers. Our parts, service and body shop revenues increased in 2010 compared to 2009, primarily due to increased maintenance and repair as commercial vehicle utilization continues to increase.
The Company sold 4,746 heavy-duty trucks in 2010, a 19.5% increase compared to 3,972 heavy-duty trucks in 2009. According to A.C.T. Research, the U.S. Class 8 truck market increased 13.5% in 2010, compared to 2009. The Company’s share of the U.S. Class 8 truck sales market was approximately 4.3% in 2010. The Company expects its market share to range between 4.1% and 4.4% of U.S. Class 8 truck sales in 2011. This market share percentage would result in the sale of approximately 7,300 to 7,700 of Class 8 trucks in 2011 based on A.C.T. Research’s estimate that U.S. retail sales will increase to 179,000 units.
The Company sold 2,934 medium-duty commercial vehicles, including 457 buses, in 2010, an 11.0% increase compared to 2,643 medium-duty commercial vehicles, including 368 buses, in 2009. A.C.T. Research estimates that unit sales of Class 4 through 7 commercial vehicles in the U.S. increased approximately 5.6% in 2010, compared to 2009. In 2010, the Company achieved a 2.5% share of the Class 4 through 7 commercial vehicle sales market in the U.S. As a result of acquisitions that occurred during 2010, the Company expects its market share to range between 2.8% and 3.0% of U.S. Class 4 through 7 commercial vehicle sales in 2011. This market share percentage would result in the sale of approximately 3,600 to 3,900 of Class 4 through 7 commercial vehicles in 2011 based on A.C.T. Research’s current U.S. retail sales estimates of 128,000 units.
The Company sold 3,461 used commercial vehicles in 2010, a 20.4% increase compared to 2,875 used commercial vehicles in 2009. The Company expects to sell approximately 3,500 to 3,700 used commercial vehicles in 2011. For 2011, the Company expects used truck sales to be largely dependent upon our ability to acquire quality used commercial vehicles and maintain an adequate used commercial vehicle inventory.
Parts and service sales increased $94.1 million, or 23.8%, in 2010, compared to 2009. Aftermarket parts, service and body shop sales remained strong throughout 2010 as freight movement increased and aging trucks were put back into service. The Company’s acquisition of Lake City International contributed $25.1 million of the increase. As commercial vehicle utilization remains high, the Company expects parts, service and body shop sales to continue to remain strong through 2011.
Truck lease and rental revenues increased $13.7 million, or 25.5%, in 2010, compared to 2009. The Company’s acquisition of Lake City International contributed $5.9 million of the increase. The remainder of the increase in lease and rental revenue is consistent with management’s expectations, which are based upon the increased number of units put into service in the lease and rental fleet during 2009 and 2010 and increasing rental fleet utilization. The Company expects lease and rental revenue to increase 10% to 13% during 2011, compared to 2010 based on the increase of units in the lease and rental fleet and the acquisition of Lake City International.
Finance and insurance revenues increased $0.5 million, or 6.1%, in 2010, compared to 2009. The increase in finance and insurance revenue is a direct result of the increase in new and use commercial vehicle sales. The Company expects finance and insurance revenue to fluctuate proportionately with the Company’s new and use commercial vehicle sales in 2011. Finance and insurance revenues have limited direct costs and, therefore, contribute a disproportionate share of the Company’s operating profits.
Other income increased $1.3 million, or 23.9% in 2010, compared to 2009. Other income consists primarily of the gain on sale realized on trucks from the lease and rental fleet, document fees related to commercial vehicle sales, mineral royalties, an adjustment of a liability related to retail finance contracts sold with recourse and purchase discounts.
Gross Profit
Gross profit increased $69.2 million, or 32.1%, in 2010, compared to 2009. Gross profit as a percentage of sales increased to 19.0% in 2010, from 18.0% in 2009. This increase is primarily a result of a change in our product sales mix.
Gross margins on Class 8 truck sales increased to 7.4% in 2010, from 5.8% in 2009. Gross margins on Class 8 truck sales in 2010 were impacted by a change in our product sales mix that included an increased demand for vocational trucks, which typically are higher margin sales, and a lower percentage of large fleet sales, which are typically lower margin sales. In 2011, the Company expects overall gross margins from Class 8 truck sales to return to historic levels of approximately 6.5% to 7.5%, but this will largely depend upon general economic conditions and the availability of credit to retail customers. The Company recorded expense of $1.9 million to increase its new heavy-duty truck valuation allowance in 2010 and $5.8 million in 2009.
Gross margins on medium-duty commercial vehicle sales increased to 5.6% in 2010, from 5.5% in 2009. For 2011, the Company expects overall gross margins from medium-duty commercial vehicle sales of approximately 5.5% to 6.2%, but this will largely depend upon general economic conditions and the availability of credit to retail customers. The Company recorded expense of $0.6 million to increase its new medium-duty commercial vehicle valuation allowance in 2010 and $2.5 million in 2009.
Gross margins on used commercial vehicle sales increased to 12.2% in 2010, from 6.9% in 2009. This increase is primarily a result of increased demand for quality used commercial vehicles and a decrease in the supply of quality used commercial vehicles. The Company expects margins on used commercial vehicles will return to the historical range of approximately 8.0% to 10.0% during 2011, but this will largely depend upon general economic conditions and the availability of credit to retail customers. The Company recorded expense of $1.5 million to increase its used commercial vehicle valuation allowance in 2010 and $5.0 million in 2009.
Gross margins from the Company’s parts, service and body shop operations decreased to 38.5% in 2010, from 38.8% in 2009. Gross profit for the parts, service and body shop departments increased to $188.5 million in 2010, from $153.2 million in 2009. The Company expects gross margins on parts, service and body shop operations to range 38.0% to 40.0% in 2011.
Gross margins from truck lease and rental sales increased to 14.9% in 2010, from approximately 11.5% in 2009. The increase in lease and rental revenue is primarily attributable to increased utilization of vehicles in the Company’s rental fleet and increased variable rental revenue that is based on the miles that vehicles being leased are driven. The Company expects gross margins from lease and rental sales of approximately 15.0% to 20.0% during 2011. The Company’s policy is to depreciate its lease and rental fleet using a straight line method over the customer’s 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 increased $35.2 million, or 18.3%, in 2010, compared to 2009. SG&A expenses as a percentage of sales decreased to 15.2% in 2010, from 16.0% in 2009. Prior to 2009, SG&A expenses as a percentage of total revenue 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 total revenue will be at, or exceed, the higher end of this range. Extremely low commercial vehicle revenue during 2009 and early 2010, caused SG&A expenses as a percentage of sales to fall outside this range. For 2011, the Company expects the selling portion of SG&A expenses to be approximately 25% to 30% of new and used commercial vehicle gross profit. The Company expects the general and administrative portion of SG&A expenses to increase approximately 10.0% to 15.0% primarily due to an expected increase in personnel costs related to increased parts and service business, the full year effect of acquisitions made in 2010, and the reinstatement of certain employee benefits. For 2011, the Company expects SG&A expenses as a percentage of total revenue to range from 13.0% to 15.0%.
Interest Expense, Net
Net interest expense decreased $0.3 million, or 5.8%, in 2010, compared to 2009. The Company’s floor plan agreement with GE Capital was modified at the end of 2010, which increased interest rates related to floor plan notes payable, however, net interest expense in 2011 will vary based on inventory levels and cash available for prepayment of floor plan financing.
Income from Continuing Operations before Income Taxes
Income from continuing operations before income taxes increased $34.4 million in 2010, compared to 2009, as a result of the factors described above. The Company believes that income from continuing operations before income taxes in 2011 will increase compared to 2010 based on the factors described above.
Income Taxes
Income taxes increased $14.9 million in 2010, compared to 2009. Prior to the application of alternative fuel tax credits, the Company’s tax rate during 2010 was 39%. The Company expects its effective tax rate to be approximately 36% to 39% of pretax income in 2011. In 2010, the Company received $2.5 million in tax credits for sales of alternative fuel vehicles to tax-exempt entities, compared to $5.3 million in 2009. The federal tax law that extended tax credits for alternative fuel vehicles expired on December 31, 2010, therefore, the Company does not expect to receive tax benefits related to these credits in the future.
Income from Discontinued Operations, net
Income from discontinued operations, net of income taxes increased $5.9 million in 2010 compared to 2009. Income from discontinued operations includes operating results and a gain of $10.1 million on the disposition for the Company’s construction equipment business.
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Revenues
Revenues decreased $370.7 million, or 23.6%, in 2009, compared to 2008. Sales of new and used commercial vehicles decreased $302.5 million, or 29.1%, in 2009, compared to 2008. Uncertain economic conditions, the weak freight environment, slowing construction markets and tight credit markets contributed to decreased demand for commercial vehicles and construction equipment as well as aftermarket service in 2009.
The Company sold 3,972 heavy-duty trucks in 2009, a 28.0% decrease compared to 5,516 heavy-duty trucks in 2008. According to A.C.T. Research, the U.S. Class 8 truck market decreased 30.6% in 2009, compared to 2008. The Company’s share of the U.S. Class 8 truck sales market was approximately 4.1% in 2009.
The Company sold 2,643 medium-duty commercial vehicles, including 368 buses, in 2009, a 29.9% decrease compared to 3,773 medium-duty commercial vehicles, including 239 buses, in 2008. A.C.T. Research estimates that unit sales of Class 4 through 7 commercial vehicles in the U.S. decreased approximately 33.2% in 2009, compared to 2008. 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 sold 2,875 used commercial vehicles in 2009, an 11.1% decrease compared to 3,234 used commercial vehicles in 2009.
Parts and service sales decreased $62.5 million, or 13.7%, in 2009, compared to 2008. Aftermarket parts, service and body shop sales were negatively impacted by excess capacity during 2009, as many customers were able to put their excess new vehicle capacity into service, allowing them to delay repair and maintenance and use trucks not being utilized for replacement parts needs.
Truck lease and rental revenues decreased $1.1 million, or 2.0%, in 2009, compared to 2008. The decrease in lease and rental revenue is primarily attributable to decreased utilization of vehicles in the Company’s rental fleet and decreased variable lease revenue that is based on the miles that vehicles being leased are driven.
Finance and insurance revenues decreased $4.3 million, or 36.7%, in 2009, compared to 2008.
Other income decreased $0.3 million, or 5.0% in 2009, compared to 2008.
Gross Profit
Gross profit decreased $64.6 million, or 23.0%, in 2009, compared to 2008. Gross profit as a percentage of sales increased to 18.0% in 2009, from 17.8% in 2008. This increase was 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 59.6% in 2009, from 62.9% in 2008. Parts and service revenue, a higher margin revenue item, increased as a percentage of total revenue to 32.9% in 2009, from 29.1% in 2008.
Gross margins on Class 8 truck sales decreased to 5.8% in 2009, from 7.7% in 2008. Gross margins on Class 8 truck sales during 2009 were negatively impacted by a decreased demand for new trucks and a change in our product sales mix that included a higher percentage of large fleet sales, which are typically lower margin sales. The Company recorded expense of $5.8 million to increase its new heavy-duty truck valuation allowance in 2009 and $5.2 million in 2008.
Gross margins on medium-duty commercial vehicle sales increased to 5.5% in 2009, from 5.1% in 2008. The Company recorded expense of $2.5 million to increase its new medium-duty commercial vehicle valuation allowance in 2009 and $1.7 million in 2008.
Gross margins on used commercial vehicle sales increased to 6.9% in 2009, from 3.6% in 2008. This increase is primarily a result of write-downs of used commercial vehicle inventory values that caused gross margins on used commercial vehicle sales to decrease below normal levels in 2008. The Company recorded expense of $5.0 million to increase its used commercial vehicle valuation allowance in 2009 and $8.5 million in 2008.
Gross margins from the Company’s parts, service and body shop operations decreased to 38.8% in 2009, from 40.8% in 2008. Gross profit for the parts, service and body shop departments decreased to $153.2 million in 2009, from $186.9 million in 2008.
Gross margins from truck lease and rental sales decreased to 11.5% in 2009, from approximately 14.5% in 2008. The decrease in lease and rental revenue is primarily attributable to decreased utilization of vehicles in the Company’s rental fleet and decreased variable rental revenue that is based on the miles that vehicles being leased are driven.
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 $26.5 million, or 12.1%, in 2009, compared to 2008. SG&A expenses as a percentage of sales increased to 16.0% in 2009, from 13.9% in 2008. In 2009, the selling portion of SG&A expenses, which consists primarily of commissions on commercial vehicle sales, decreased 26.6% and the general and administrative portion of SG&A expenses decreased 10.7% compared to 2008.
Interest Expense, Net
Net interest expense decreased $1.5 million, or 21.2%, in 2009, compared to 2008.
Income from Continuing Operations before Income Taxes
Income before income taxes decreased $37.1 million, or 95.1%, in 2009, compared to 2008, as a result of the factors described above.
Income Taxes
Income taxes decreased $17.0 million, or 122.9%, in 2009, compared to 2008. In 2009, the Company received $5.3 million in tax credits for sales of alternative fuel vehicles to tax-exempt entities, compared to $0.7 million in 2008.
Income from Discontinued Operations, net
Income from discontinued operations, net of income taxes decreased $2.9 million in 2009 compared to 2008. Income from discontinued operations includes operating results for the Company’s construction equipment business.
Effects of Inflation
Inflationary factors such as increases in the cost of products and overhead costs may adversely affect the Company’s operating results. Although the Company does not believe that inflation has had a material impact on its financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on its ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of revenues if the selling prices of our products do not increase with these increased costs.
Liquidity and Capital Resources
The Company’s 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, borrowings under our floor plan arrangements and bank financings. The Company does not expect the absence of cash flows from discontinued operations to materially affect future liquidity and capital resources. As of December 31, 2010, the Company had working capital of approximately $143.8 million, including $169.0 million in cash available to fund our operations. The Company believes that these funds are sufficient to meet any operating requirements for at least the next twelve months.
Available cash is generally invested in variable interest rate instruments in accordance with the Company’s investment policy which is to invest excess funds in a manner that will provide maximum preservation and safety of principal. The portfolio is maintained to meet anticipated liquidity needs of the Company in order to ensure the availability of cash to meet the Company’s obligations and to minimize potential liquidation losses. As of December 31, 2010, the majority of excess cash is maintained in a depository account or invested in a money market fund that invests exclusively in U.S. Treasury bills, notes and other obligations issued or guaranteed by the U.S. Treasury, and repurchase agreements collateralized by such obligations.
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 December 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 December 31, 2010.
The Company’s long-term real estate debt agreements and floor plan credit agreement require the Company to satisfy various financial ratios such as the debt to worth ratio, leverage ratio and the fixed charge coverage ratio and certain requirements for tangible net worth and GAAP net worth. At December 31, 2010, the Company was in compliance with all debt covenants related to debt secured by real estate and its floor plan credit agreement. 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 $39.0 million. As of December 31, 2010, the Company had cumulative expenditures of $36.2 million related to the SAP project. The Company expects to spend approximately $2.5 million to $3.0 million related to the SAP project during 2011.
The Company also expects to make capital expenditures for recurring items such as computers, shop tools and equipment and vehicles of approximately $15.0 million during 2011.
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 Company’s cash and cash equivalents by that amount.
On February 21, 2011, the Company acquired certain assets of Heintzelman’s Truck Center, Inc., which consisted of a Ford commercial vehicle dealership in Orlando, Florida. The Company is operating the facility as a full-service Rush Truck Center offering medium-duty trucks, parts and service. The transaction was valued at approximately $4.7 million, with the purchase price paid in cash.
The Company is currently under contract to construct a dealership facility in Fort Worth, Texas at an estimated cost of $4.8 million. The construction project will continue throughout 2011.
As previously mentioned, the Company has entered into agreements to purchase certain assets of Asbury Automotive Atlanta, LLC. The Company anticipates that the purchase price for the assets of Asbury Automotive Atlanta, LLC, will be paid in cash and partially financed under the Company’s floor plan and accounts receivable financing arrangements and the incurrence of long-term debt for the real estate. The completion of the acquisition is subject to several closing conditions, including the approval of the non-Peterbilt manufacturers currently represented by Nalley Motor Trucks, and is expected to close in the first quarter of 2011.
The Company has no other material commitments for capital expenditures as of December 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 $55.0 million for its leasing operations in 2011, depending on customer demand, all of which will be financed.
Cash Flows
Cash and cash equivalents increased by $19.9 million during the year ended December 31, 2010, and decreased by $2.7 million during the year ended December 31, 2009. The major components of these changes are discussed below. Cash flows from discontinued operations are included in the components of the statement of cash flows as described 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 2010, operating activities resulted in net cash provided by operations of $66.4 million. Cash provided by operating activities was primarily impacted by the increased levels of inventory and the increase in other current assets, offset by increases in accounts payable and accrued expenses. The majority of commercial vehicle inventory is financed through the Company’s floor plan credit agreement. During 2009, operating activities resulted in net cash provided by operations of $150.3 million.
Cash flows from operating activities as adjusted for all draws and (payments) on floor plan notes (“Adjusted Cash Flows from Operating Activities”) was $110.2 million for the year ended December 31, 2010, and $56.8 million for the year ended December 31, 2009. Generally, all vehicle dealers finance the purchase of vehicles with floor plan borrowings, and our agreements with our floor plan providers require us to repay amounts borrowed for the purchase of such vehicles immediately after they are sold. As a result, changes in floor plan notes payable are directly linked to changes in vehicle 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 Company’s 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).
Cash Flows from Investing Activities
During 2010, cash used in investing activities was $96.7 million. Cash flows used in investing activities consist primarily of cash used for capital expenditures and business acquisitions offset by proceeds from the sale of Rush Equipment Centers. Capital expenditures of $84.3 million consisted of purchases of property and equipment, improvements to our existing dealerships and the purchase of a dealership facility in Phoenix, Arizona. Property and equipment purchases during 2010 consisted of $47.5 million for additional units for the rental and leasing operations, which was directly offset by borrowings of long-term debt. The Company expects to purchase or lease trucks worth approximately $55.0 million for its leasing operations in 2011, depending on customer demand, all of which will be financed. Cash proceeds from the disposition of Rush Equipment Centers were $26.2 million. Cash used in business acquisitions was $39.3 million during the year ended December 31, 2010. During 2011, the Company expects to make capital expenditures for recurring items such as computers, shop equipment and vehicles of approximately $15.0 million, in addition to $2.5 million to $3.0 million for the SAP project described above. See Note 16 of the Notes to Consolidated Financial Statements for a detailed discussion of these acquisitions.
During 2009, cash used in investing activities was $49.8 million. Cash flows used in investing activities consist primarily of cash used for capital expenditures. Capital expenditures of $50.5 million consisted of purchases of property and equipment, improvements to our existing dealership facilities and construction of our new facility in Oklahoma City, Oklahoma. Property and equipment purchases during 2009 consisted of $21.2 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 used in financing activities include borrowings and repayments of long-term debt and net payments of floor plan notes payable. Cash provided by financing activities was $50.2 million during 2010. The Company had borrowings of long-term debt of $66.6 million and repayments of long-term debt and capital lease obligations of $63.2 million during 2010. The Company had net borrowings of floor plan notes payable of $43.7 million during 2010. The borrowings of long-term debt were primarily related to units for the rental and leasing operations, refinancing existing real estate.
Cash used in financing activities was $97.9 million during 2009. The Company had borrowings of long-term debt of $50.4 million and repayments of long-term debt and capital lease obligations of $55.3 million during 2009. The Company had net payments of floor plan notes payable of $93.4 million during 2009. The borrowings of long-term debt were primarily related to units for the rental and leasing operations, refinancing existing real estate and financing the new Rush Truck Center in Oklahoma City.
Substantially all of the Company’s 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. We financed substantially all of the purchases of commercial vehicle inventory under our wholesale security agreement with GE Capital. Interest under the wholesale security agreement was payable monthly and the rate varied 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 financing agreement. 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 financed for 12 months or is sold.
On December 31, 2010 the Company entered into a $450.0 million credit agreement with GE Capital to replace the wholesale security agreement. All principal amounts outstanding bear interest at a rate per annum equal to the sum of the LIBOR rate plus 2.95% which is payable monthly. The credit agreement allows for prepayment of the inventory loans, up to 65% of the aggregate inventory loans outstanding, with monthly adjustments to the interest due. On December 31, 2010, the Company had approximately $229.9 million outstanding under its credit agreement with GE Capital.
Cyclicality
The Company’s 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 Company’s earnings of adverse general economic conditions or cyclical trends affecting the heavy-duty truck industry.
Off-Balance Sheet Arrangements
Other than operating leases, the Company does not have any obligation under any transaction, agreement or other contractual arrangement to which an entity unconsolidated with the Company is a party, that has or is reasonably likely to have a material effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. A summary of our operating lease obligations by fiscal year is included in the “Contractual Obligations” section below.
Contractual Obligations
The Company has certain contractual obligations that will impact its short and long-term liquidity. At December 31, 2010, such obligations were as follows:
(1)
Refer to Note 8 of Notes to Consolidated Financial Statements.
(2)
Refer to Note 10 of Notes to Consolidated Financial Statements. Amounts include interest.
(3)
Refer to Note 10 of Notes to Consolidated Financial Statements.
(4)
In computing interest expense, the Company used its weighted average interest rate outstanding on fixed rate debt to estimate its interest expense on fixed rate debt. The Company used its weighted average variable interest rate on outstanding variable rate debt at December 31, 2010 and added 0.25 percent per year to estimate its interest expense on variable rate debt.
(5)
Purchase obligations represent non-cancelable contractual obligations at December 31, 2010 related to the Company’s SAP implementation and the construction contract for the dealership in Fort Worth, Texas.
Item 7A.
Item 7A.
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 December 31, 2010, the Company had floor plan borrowings and variable rate real estate debt of approximately $320.5 million. Assuming an increase or decrease in LIBOR of 100 basis points, annual interest expense could correspondingly increase or decrease by approximately $3.1 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 Company’s ability to pass discount rate increases to customers through higher financing rates.
The Company is exposed to some market risk through interest rate swaps on some of the Company’s variable real estate debt. As of December 31, 2010, the Company has interest rate swaps with a total notional amount of $45.0 million. The swaps were designed to provide a hedge against changes in interest rates on some of the Company’s variable real estate debt. The swaps are collateralized by the underlying real estate. These interest rate swaps qualify for cash flow hedge accounting treatment and are considered effective. For additional information about the effect of the Company’s derivative instruments on the accompanying consolidated financial statements, see Note 9 - Financial Instruments and Fair Value of the notes thereto.
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 $169.0 million on December 31, 2010. These funds are generally invested in variable interest rate instruments in accordance with the Company’s 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 management’s 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 Company’s annual interest income could correspondingly increase or decrease by approximately $1.7 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 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 December 31, 2010, the Company holds $7.6 million of auction rate securities with underlying tax-exempt municipal bonds that mature in 2030. 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 Company’s 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 9 - Financial Instruments and Fair Value of the Notes to Consolidated Financial Statements.
Item 8.
Item 8.
Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2010 and 2009
Consolidated Statements of Income for the Years Ended December 31, 2010, 2009 and 2008
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2010, 2009 and 2008
Consolidated Statements of Cash Flows for the Years Ended December 31, 2010, 2009 and 2008
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Rush Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of Rush Enterprises, Inc. and subsidiaries (“the Company”) as of December 31, 2010 and 2009, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Rush Enterprises, Inc. and subsidiaries at December 31, 2010 and 2009, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Rush Enterprises, Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 11, 2011 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
San Antonio, Texas
March 11, 2011
RUSH ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Shares and Per Share Amounts)
The accompanying notes are an integral part of these consolidated financial statements.
RUSH ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
The accompanying notes are an integral part of these consolidated financial statements.
RUSH ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In Thousands)
The accompanying notes are an integral part of these consolidated financial statements.
RUSH ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
The accompanying notes are an integral part of these consolidated financial statements.
RUSH ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS:
Rush Enterprises, Inc. (the “Company”) was incorporated in 1965 under the laws of the State of Texas. The Company operates a Truck Segment. The Truck Segment operates a regional network of Rush Truck Centers. Rush Truck Centers primarily sell commercial vehicles manufactured by Peterbilt, International, Hino, UD, Ford, Isuzu, Mitsubishi Fuso, IC Bus or Blue Bird. Through its strategically located network of Rush Truck Centers, the Company provides one-stop service for the needs of its customers, including retail sales of new and used commercial vehicles, aftermarket parts sales, service and repair facilities, financing, leasing and rental, and insurance products. The Company’s Rush Truck Centers are located in areas on or near major highways in Alabama, Arizona, California, Colorado, Florida, Georgia, Idaho, New Mexico, North Carolina, Oklahoma, Oregon, Tennessee, Texas and Utah. See Note 21 of the Notes to Consolidated Financial Statements for segment information.
Certain amounts reflected in the accompanying Consolidated Balance Sheet as of December 31, 2009, have been classified as Assets Held for Sale related to the sale of the construction equipment business in September 2010. Amounts in the accompanying Consolidated Statements of Income for the years ended December 31, 2009 and 2008, have been reclassified to reflect the results of the equipment center business sold during 2010, as if the Company had classified the equipment center business as discontinued operations for all years presented.
2. SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements presented herein include the accounts of Rush Enterprises, Inc. together with our consolidated subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.
Estimates in Financial Statements
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents generally consist of cash and other money market instruments. The Company considers all highly liquid investments with an original maturity of ninety days or less to be cash equivalents.
Allowance for Doubtful Receivables and Repossession Losses
The Company provides an allowance for doubtful receivables and repossession losses after considering historical loss experience and other factors that might affect the collection of accounts receivable and the ability of customers to meet their obligations on finance contracts sold by the Company.
Inventories
Inventories are stated at the lower of cost or market value. Cost is determined by specific identification of new and used truck and construction equipment inventory and by the first-in, first-out method for tires, parts and accessories. An allowance is provided when it is anticipated that cost will exceed net realizable value plus a reasonable profit margin.
Property and Equipment
Property and equipment are stated at cost and depreciated over their estimated useful lives. Leasehold improvements are amortized over the useful life of the improvement, or the term of the lease, whichever is shorter. Provision for depreciation of property and equipment is calculated primarily on a straight-line basis. The Company capitalizes interest on borrowings during the active construction period of major capital projects. Capitalized interest, when incurred, is added to the cost of underlying assets and is amortized over the estimated useful life of such assets. The Company capitalized interest of $0.5 million related to major capital projects during 2010. The cost, accumulated depreciation and amortization and estimated useful lives are summarized as follows (in thousands):
As of December 31, 2010, the Company had $53.5 million in lease and rental vehicles under various capital leases included in property and equipment, net of accumulated depreciation of $12.6 million. The Company recorded depreciation expense of $39.6 million and amortization expense of $6.3 million for the year ended December 31, 2010, and depreciation expense of $36.1 million and amortization expense of $4.6 million for the year ended December 31, 2009. Depreciation and amortization of vehicles related to lease and rental operations is included in lease and rental cost of products sold.
Goodwill
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 unit to be its operating segment, the Truck 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 unit’s goodwill is compared to the carrying amount of that goodwill. If the carrying amount of the reporting unit’s 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.
An interim evaluation of goodwill was required during the second quarter of 2009 due to General Motors’ decision to terminate production of medium-duty GMC trucks, which resulted in the winding-down of the Company’s medium-duty GMC truck franchises. The goodwill allocation was based on the relative fair values of the medium-duty GMC truck franchises and the portion of the Company’s Truck Segment remaining. The Company’s Truck Segment recorded a non-cash charge of $0.8 million related to the impairment of the goodwill of its medium-duty GMC truck franchises. See Note 18 for further discussion of the wind-down of the Company’s medium-duty GMC truck franchise agreements.
Goodwill was tested for impairment during the fourth quarter of 2010 and no impairment write down was required. 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.
The following table sets forth the change in the carrying amount of goodwill for the Company for the period ended December 31, 2010:
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 management’s judgment is applied to determine the amount of valuation allowance required, if any, in any given period.
In determining our provision for income taxes, the Company uses an annual effective income tax rate based on annual income, permanent differences between book and tax income, and statutory income tax rates. The effective income tax rate also reflects our assessment of the ultimate outcome of tax audits. The Company adjusts its annual effective income tax rate as additional information on outcomes or events becomes available. Discrete events such as audit settlements or changes in tax laws are recognized in the period in which they occur.
The Company’s income tax returns, like those of most companies, are periodically audited by U.S. federal, state and local tax authorities. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions. At any one time, multiple tax years are subject to audit by the various tax authorities. In evaluating the tax benefits associated with the Company’s various tax filing positions, it records a tax benefit for uncertain tax positions. A number of years may elapse before a particular matter, for which the Company has established a liability, is audited and effectively settled. The Company adjusts its liability for unrecognized tax benefits in the period in which it determines the issue is effectively settled with the tax authorities, the statute of limitations expires for the relevant taxing authority to examine the tax position, or when more information becomes available. The Company includes its liability for unrecognized tax benefits, including accrued interest, in accrued liabilities on the Company’s Consolidated Balance Sheet and in income tax expense in the Company’s Consolidated Statement of Income.
Additionally, despite the Company’s belief that its tax return positions are consistent with applicable tax law, management believes that certain positions may be challenged by taxing authorities. Settlement of any challenge can result in no change, a complete disallowance, or some partial adjustment reached through negotiations.
Effective January 1, 2007, the Company adopted ASC topic 740-10, “Income Taxes.” ASC topic 740-10 clarified the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. ASC topic 740-10 provides guidance regarding the recognition, measurement, presentation and disclosure in the financial statements of tax positions taken or expected to be taken on a tax return. ASC topic 740-10 requires that only income tax benefits that meet the “more likely than not” recognition threshold be recognized or continue to be recognized on its effective date. The Company’s income tax expense includes the impact of reserve provisions and changes to reserves that it considers appropriate, as well as related interest. Unfavorable settlement of any particular issue would require use of the Company’s cash and a charge to income tax expense. Favorable resolution would be recognized as a reduction to income tax expense at the time of resolution.
Revenue Recognition Policies
Income on the sale of a vehicle (a “unit”) is recognized when the seller and customer execute a purchase contract, delivery has occurred and there are no significant uncertainties related to financing or collectibility. Finance income related to the sale of a unit is recognized over the period of the respective finance contract, based on the effective interest rate method, if the finance contract is retained by the Company. During 2010, 2009 and 2008, no finance contracts were retained for any significant length of time by the Company but were generally sold, with limited recourse, to certain finance companies concurrent with the sale of the related unit. Gain or loss is recognized by the Company upon the sale of such finance contracts to the finance companies, net of a provision for estimated repossession losses and early repayment penalties. Lease and rental income is recognized over the period of the related lease or rental agreement. Contingent rental income is recognized when it is earned. Parts and services revenue is earned at the time the Company sells the parts to its customers or at the time the Company completes the service work order related to service provided to the customer’s unit. Payments received on prepaid maintenance plans are deferred as a component of accrued expenses and recognized as income when the maintenance is performed.
Cost of Sales
For the Company’s new and used commercial vehicle operations and its parts operations, cost of sales consists primarily of the Company’s actual purchase price, less manufacturer’s incentives, for new and used commercial vehicles and parts. The Company is subject to a chargeback of manufacturer incentives for commercial vehicles that are not sold to the customer for which they were ordered. The Company records a liability for a potential chargeback of manufacturer incentives in its financial statements. For the Company’s service and body shop operations, technician labor cost is the primary component of cost of sales. For the Company’s rental and leasing operations, cost of sales consists primarily of depreciation and amortization, rent, and interest expense on the lease and rental fleet owned and leased by the Company, and the maintenance cost of the lease and rental fleet. There are no costs of sales associated with the Company’s finance and insurance revenue or other revenue.
Taxes Assessed by a Governmental Authority
The Company accounts for sales taxes assessed by a governmental authority, that are directly imposed on a revenue-producing transaction, on a net (excluded from revenues) basis.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of incentive-based compensation for sales, finance and general management personnel, salaries for administrative personnel and expenses for rent, marketing, insurance, utilities, shipping and handling costs and other general operating purposes.
Stock Based Compensation
The Company applies the provisions of ASC topic 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 Company’s Consolidated Statements of Income.
Stock-based compensation expense recognized is based on the fair value of the portion of share-based payment awards that is ultimately expected to vest during the period. Compensation expense for all share-based payment awards is recognized using the straight-line single-option method. As stock-based compensation expense recognized in the Consolidated Statements of Income is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards and actual and projected stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because the Company’s stock options have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, in management’s opinion, the existing valuation models may not provide an accurate measure of the fair value of the Company’s stock options. Although the fair value of stock options is determined in accordance with ASC topic 718-10 using an option-pricing model, that value may not be indicative of the fair value observed in a market transaction between a willing buyer and a willing seller.
The following table reflects the weighted-average fair value of stock options granted during each period using the Black-Scholes option valuation model with the following weighted-average assumptions used:
The Company computes its historical stock price volatility in accordance with ASC topic 718-10. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts. The expected life of stock options represents the weighted-average period the stock options are expected to remain outstanding.
Advertising Costs
Advertising costs are expensed as incurred. Advertising and marketing expense was $2.9 million for 2010, $2.1 million for 2009 and $3.6 million for 2008. Advertising and marketing expense is included in selling, general and administrative expense.
Accounting for Internal Use Software
The Company’s accounting policy with respect to accounting for computer software developed or obtained for internal use is consistent with ASC topic 350-40 which provides guidance on accounting for the costs of computer software developed or obtained for internal use and identifies characteristics of internal-use software. The Company has capitalized software costs, including capitalized interest, of approximately $36.7 million at December 31, 2010, and $28.5 million at December 31, 2009.
Insurance
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 worker’s 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.
Derivative Instruments and Hedging Activities
The Company utilizes derivative financial instruments to manage its interest rate risk. The types of risks hedged are those relating to the variability of cash flows and changes in the fair value of the Company’s financial instruments caused by movements in interest rates. The Company assesses hedge effectiveness at the inception and during the term of each hedge. Derivatives are reported at fair value on the accompanying Consolidated Balance Sheets.
At December 31, 2010, the Company had an aggregate $45.0 million notional amount of interest rate swap contracts, which have been designated as cash flow hedges, to pay fixed rates of interest and receive a floating interest rate based on LIBOR. The fixed interest rates specified in the interest rate swap contracts become effective on or about January 1, 2012.
3. SUPPLIER AND CUSTOMER CONCENTRATION:
Major Suppliers and Dealership Agreements
The Company has entered into dealership agreements with various manufacturers of vehicles (“Manufacturers”). These agreements are nonexclusive agreements that allow the Company to stock, sell at retail and service commercial vehicles and products of the Manufacturers in the Company’s defined market. The agreements allow the Company to use the Manufacturers’ names, trade symbols and intellectual property and expire as follows:
These agreements, as well as agreements with various other Manufacturers, impose a number of restrictions and obligations on the Company, including restrictions on a change in control of the Company and the maintenance of certain required levels of working capital. Violation of these restrictions could result in the loss of the Company’s right to purchase the Manufacturers’ products and use the Manufacturers’ trademarks.
The Company purchases its new Peterbilt vehicles and most of its parts from PACCAR, the maker of Peterbilt trucks and parts, at prevailing prices charged to all franchised dealers. Sales of new Peterbilt trucks accounted for approximately 77.1% of the Company’s new vehicle sales for the year ended December 31, 2010, and 80.5% of the Company’s new vehicle sales for the year ended December 31, 2009.
Primary Lenders
The Company purchases its new and used commercial vehicle inventories with the assistance of floor plan financing programs. The Company’s floor plan financing agreements provide that the occurrence of certain events will be considered events of default. There were no known events of default as of December 31, 2010. In the event that the Company’s floor plan financing becomes insufficient, or its relationship with any of its current primary lenders terminates, the Company would need to obtain similar financing from other sources. Management believes it can obtain additional floor plan financing or alternative financing if necessary.
The Company’s long-term real estate debt agreements and floor plan financing arrangements require the Company to satisfy various financial ratios such as the debt to worth ratio, leverage ratio, the fixed charge coverage ratio and certain requirements for tangible net worth and GAAP net worth. At December 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.
Concentrations of Credit Risks
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company places its cash and cash equivalents with what it considers to be quality financial institutions. As of December 31, 2010, the Company had deposits in excess of federal insurance protection totaling approximately $42.5 million.
The Company controls credit risk through credit approvals and by selling a majority of its trade receivables without recourse. Concentrations of credit risk with respect to trade receivables are reduced because a large number of geographically diverse customers make up the Company’s customer base, thus spreading the trade credit risk. A majority of the Company’s business, however, is concentrated in the United States commercial vehicle markets and related aftermarkets.
The Company generally sells finance contracts it enters into with customers to finance the purchase of commercial vehicles to third parties. These finance contracts are sold both with and without recourse. A majority of the Company’s finance contracts are sold without recourse. The Company provides an allowance for doubtful receivables and a reserve for repossession losses related to finance contracts sold. Historically, the Company’s allowance and reserve have covered losses inherent in these receivables.
4. ACCOUNTS RECEIVABLE:
The Company’s accounts receivable, net, consisted of the following (in thousands):
5. INVENTORIES:
The Company’s inventories consisted of the following (in thousands):
6. VALUATION ACCOUNTS:
Valuation and allowance accounts include the following (in thousands):
Allowance for Doubtful Receivables
The Company provides an allowance for uncollectible warranty receivables. The Company evaluates the collectibility of its warranty claims receivable based on a combination of factors, including aging and correspondence with the applicable manufacturer. Management reviews the warranty claims receivable aging and adjusts the allowance based on historical experience. The Company records charge-offs related to warranty receivables on an as-needed basis.
The Company sells a majority of its customer accounts receivable on a non-recourse basis to a third party that is responsible for qualifying the customer for credit at the point of sale. If the third party approves the customer for credit, then the third party assumes all credit risk related to the transaction. The Company provides an allowance for doubtful receivables after considering historical loss experience and other factors that might affect the collection of accounts receivable.
Inventory
The Company provides a reserve for obsolete and slow moving parts. The reserve is reviewed and, if necessary, adjustments are made on a quarterly basis. The Company relies on historical information to support its reserve. Once the inventory is written down, the Company does not adjust the reserve balance until the inventory is sold.
The valuation for new and used commercial vehicle inventory is based on specific identification. A detail of new and used commercial vehicle is reviewed and, if necessary, adjustments to the value of specific units are made on a quarterly basis.
7. FLOOR PLAN NOTES PAYABLE AND LINES OF CREDIT:
Floor Plan Notes Payable
Floor plan notes are financing agreements to facilitate the Company’s purchase of new and used commercial vehicles. These notes are collateralized by the inventory purchased and accounts receivable arising from the sale thereof. The Company’s wholesale security agreement with GE Capital has the interest rate benchmarked to LIBOR, as defined in the agreement.
The interest rate applicable to the GE Capital wholesale security agreement was approximately 1.41% as of December 31, 2010. The Company’s weighted average interest rate for floor plan notes payable was 1.09% for the year ended December 31, 2010, and 1.28% for the year ended December 31, 2009. The wholesale security agreement allowed for prepayments with monthly adjustments to the interest due on outstanding advances, which reduced the Company’s weighted average interest rate.
On December 31, 2010, the Company entered into a new credit agreement with GE Capital. The interest rate under the new credit agreement is LIBOR plus 2.95%. The GE Capital credit agreement allows for prepayment of the inventory loans, up to 65% of the aggregate inventory loans outstanding, with monthly adjustments to the interest due. Amounts borrowed under the agreement are due when the related commercial vehicle inventory (collateral) is sold and the sales proceeds are collected by the Company. This agreement may be modified, suspended or terminated by the lender as described in Note 3.
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 credit agreement with GE Capital, under which GE Capital pays the manufacturer directly with respect to new commercial vehicles. On December 31, 2010, the Company had approximately $229.9 million outstanding under its credit agreement with GE Capital.
Navistar Financial Corporation offers a floor plan program that provides an interest free financing period, which varies depending on the commercial vehicle purchased. If the commercial vehicle financed by Navistar is not sold within the interest free finance period, the Company transfers the financed commercial vehicle to the GE Capital credit agreement. On December 31, 2010, the Company had approximately $7.9 million outstanding under its floor plan program with Navistar Financial Corporation.
Pursuant to the disposition of Rush Equipment Centers, the Company’s floor plan agreement with Chase and the dealership agreement John Deere were terminated. At December 31, 2010, there was not a balance outstanding under the floor plan agreement with Chase or the dealership agreement John Deere.
Assets pledged as collateral as of December 31, 2010 and 2009 were as follows (in thousands):
Lines of Credit
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 December 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 December 31, 2010.
8. LONG-TERM DEBT:
Long-term debt was comprised of the following (in thousands):
As of December 31, 2010, debt maturities were as follows (in thousands):
The interest rates on the Company’s variable interest rate notes are based on LIBOR. The interest rates on the notes range from approximately 1.55% to 3.375% on December 31, 2010. Payments on the notes range from $1,910 to $50,300 per month, plus interest. Maturities of these notes range from December 2012 to September 2015.
The Company’s fixed interest rate notes are with financial institutions and had interest rates that ranged from approximately 3.04% to 8.60% on December 31, 2010. Payments on the notes range from $302 to $76,196 per month, plus interest. Maturities of these notes range from January 2011, to May 2019.
The proceeds from the issuance of the notes were used primarily to acquire land, buildings and improvements, transportation equipment and leasing vehicles. The notes are secured by the assets acquired with the proceeds of such notes.
The Company’s long-term real estate debt agreements and floor plan arrangement require the Company to satisfy various financial ratios such as the debt to worth ratio, leverage ratio, the fixed charge coverage ratio and certain requirements for tangible net worth and GAAP net worth. At December 31, 2010, the Company was in compliance with all debt covenants related to debt secured by real estate. The Company does not anticipate any breach of the covenants in the foreseeable future.
9. FINANCIAL INSTRUMENTS AND FAIR VALUE:
Certain methods and assumptions were used by the Company in estimating the fair value of financial instruments at December 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 Company’s long-term debt is based on secondary market indicators. Since the Company’s debt is not quoted, estimates are based on each obligation’s characteristics, including remaining maturities, interest rate, credit rating, collateral, amortization schedule and liquidity. The carrying amount approximates fair value.
If 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 Company’s consolidated statement of operations.
In prior years, the Company 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 December 31, 2010 and December 31, 2009, the Company held $7.6 million of auction rate securities with underlying tax-exempt municipal bonds that mature in 2030. These bonds have credit wrap insurance and a credit rating of A by Standard & Poor’s.
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 December 31, 2010. As of December 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.
Interest Rate Swap Agreements
The Company has entered into swap agreements to hedge against the potential impact of increases in interest rates on its floating-rate debt instruments. Swap agreements that hedge exposures to changes in interest rates expose us to credit risk and market risk. Credit risk is the potential failure of the counterparty to perform under the terms of the swap agreement. The Company attempts to minimize this risk by entering into transactions with high-quality counterparties. Market risk is the potential adverse effect on the value of the swap agreement that results from a decline in interest rates. The market risk associated with interest-rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
At December 31, 2010, the Company had an aggregate $45.0 million notional amount of interest rate swap contracts, which have been designated as cash flow hedges, to pay fixed rates of interest and receive a floating interest rate based on LIBOR. The fixed interest rates specified in the interest rate swap contracts become effective on or about January 1, 2012. The Company’s interest rate swaps qualify for cash flow hedge accounting treatment. Unrealized gains or losses are recorded in accumulated other comprehensive income. Realized gains and losses will be recognized in interest expense, if they occur. Amounts to be received or paid under the contracts will be recognized as interest expense over the life of the contracts. The Company did not have any interest rate swap contracts in place as of December 31, 2009. There was no ineffectiveness for these swaps during the year ended December 31, 2010.
The fair value of cash flow swaps is calculated as the present value of expected future cash flows, determined on the basis of forward interest rates and present value factors. As such, the carrying amounts for these swaps are designated to be level 2 fair values and totaled $0.4 million as of December 31, 2010. The carrying value of these swaps is included in Other Long-Term Liabilities on the accompanying Consolidated Balance Sheet as of December 31, 2010.
As of December 31, 2010 the Company was party to derivative financial instruments, as described in the following table (in thousands):
Fair values of derivative instruments are on the accompanying Consolidated Balance Sheet as of December 31, 2010 (in thousands):
10. LEASING ACTIVITIES:
Vehicle Leases as Lessee
The Company leases vehicles, as lessee, primarily over periods ranging from one to ten years under operating lease and capital lease arrangements. Generally, the Company is required to incur all operating costs and pay a minimum rental. The Company guarantees the residual value of vehicles under operating lease and capital lease arrangements. At December 31, 2010, the Company guaranteed vehicle residual values of $4.9 million under operating lease arrangements and $17.4 million under capital lease arrangements. Historically, the Company purchases these vehicles at the end of the lease term and recognizes a gain on the subsequent sale of the vehicle. The residual values are not reflected in the future minimum lease payments for operating leases. Vehicle lease expenses were approximately $3.8 million for the year ended December 31, 2010, $3.8 million for the year ended December 31, 2009, and $4.4 million for the year ended December 31, 2008.
As discussed below, these vehicles are then subleased by the Company to customers under various agreements. Future minimum sublease rentals to be received by the Company under non-cancelable subleases, as described below, are $48.5 million.
Future minimum lease payments under capital and non-cancelable vehicle leases as of December 31, 2010, are as follows (in thousands):
Customer Vehicle Leases as Lessor
The Company leases both owned and leased trucks to customers primarily over periods of one to ten years under operating lease arrangements. These leases require a minimum rental payment and a contingent rental payment based on mileage. Rental income during the year ended December 31, 2010, consisted of minimum rental payments of approximately $53.4 million and contingent rental payments of $7.5 million. Rental income during the year ended December 31, 2009, consisted of minimum rental payments of approximately $47.2 million and contingent rental payments of $6.3 million. Rental income during the year ended December 31, 2008, consisted of minimum rental payments of approximately $41.9 million and contingent rental payments of $6.9 million. Minimum rental payments to be received for non-cancelable leases and subleases in effect at December 31, 2010, are as follows (in thousands):
As of December 31, 2010, the Company had $258.8 million of lease vehicles included in property and equipment, net of accumulated depreciation of $81.3 million. As of December 31, 2009, the Company had $207.8 million of lease vehicles included in property and equipment, net of accumulated depreciation of $65.4 million.
Other Leases - Land and Buildings
The Company leases various assets under operating leases with expiration dates ranging from January 2011, through November 2027. Monthly rental payments range from approximately $375 per month to $36,926 per month. Rental expense was $4.6 million for the year ended December 31, 2010, $4.2 million for the year ended December 31, 2009, and $4.8 million for the year ended December 31, 2008. Future minimum lease payments under non-cancelable leases at December 31, 2010, are as follows (in thousands):
11. SHARE BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS:
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan that allows eligible employees to contribute up to 10% of their base earnings toward the semi-annual purchase of the Company’s Class A common stock. The employee’s purchase price is 85% of the lesser of the closing price of the Class A common stock on the first business day or the last business day of the semi-annual offering period, as reported by The NASDAQ Global Select MarketSM. Employees may purchase shares having a fair market value of up to $25,000 (measured as of the first day of each semi-annual offering period) for each calendar year. Under the Employee Stock Purchase Plan, there are approximately 527,000 shares remaining of the 900,000 shares of the Company’s Class A common stock that have been reserved for issuance. The Company issued 65,757 shares under the Employee Stock Purchase Plan during the year ended December 31, 2010 and 91,355 shares during the year ended December 31, 2009. Of the 3,010 employees eligible to participate, 315 were participants in the plan as of December 31, 2010.
Non-Employee Director Stock Option Plan
On May 16, 2006, the Board of Directors and shareholders adopted the Rush Enterprises, Inc. 2006 Non-Employee Director Stock Option Plan (the “Director Plan”), reserving 1,500,000 shares of Class A common stock for issuance upon exercise of any awards granted under the plan. This Director Plan was Amended and Restated on May 20, 2008 to expand the type of award that may be granted under the plan to include Class A common stock awards. The Director Plan was also amended on May 18, 2010 to reduce the number of shares reserved for issuance under the plan by 1,000,000 shares of Class A common stock.
The Director Plan is designed to attract and retain highly qualified non-employee directors. Prior to 2008, each non-employee director received options to purchase 20,000 shares of the Company’s Class A common stock upon their respective date of appointment and each year on the date that they are elected or reelected by the shareholders to serve on the Board of Directors. Each option has a ten year term from the grant date and vested immediately. Beginning in 2008, each non-employee director received a grant of the Company’s Class A common stock equivalent to a compensation value of $125,000 and in 2009 the compensation value was reduced to $100,000. Each non-employee director received a grant of 8,756 shares of the Company’s Class A common stock in 2009. In 2010, two non-employee directors received a grant of 6,527 shares of the Company’s Class A common stock and three non-employee directors received a grant of 4,242 shares of the Company’s Class A common stock and $35,000 cash, for total compensation equivalent to $100,000. Under the Director Plan, there are approximately 310,000 shares remaining for issuance of the 500,000 shares of the Company’s Class A common stock that have been reserved for issuance. The Company granted 25,780 shares of Class A common stock under the Director Plan during the year ended December 31, 2010 and 43,780 shares of Class A common stock under the Director Plan during the year ended December 31, 2009.
Employee Incentive Plans
In May 2007, the Board of Directors and shareholders adopted the Rush Enterprises, Inc. 2007 Long-Term Incentive Plan (the “2007 Incentive Plan”). The 2007 Incentive Plan provides for the grant of stock options (which may be nonqualified stock options or incentive stock options for tax purposes), stock appreciation rights issued independent of or in tandem with such options (“SARs”), restricted stock awards and performance awards. The 2007 Incentive Plan replaced the Rush Enterprises, Inc. Long-Term Incentive Plan (“Incentive Plan”) effective May 22, 2007. The 2007 Incentive Plan was Amended and Restated on May 18, 2010 to increase the number of shares available for issuance under the plan to 4,550,000 shares of Class A common stock.
The aggregate number of shares of common stock subject to stock options or SARs that may be granted to any one participant in any year under the 2007 Incentive Plan is 100,000 shares of Class A common stock or 100,000 shares of Class B common stock. Each option, granted pursuant to the 2007 Incentive Plan, has a ten year term from the grant date and vests in three equal annual installments beginning on the third anniversary of the grant date. The Company has 4,550,000 shares of Class A common stock and 450,000 shares of Class B common stock reserved for issuance upon exercise of any awards granted under the Company’s 2007 Incentive Plan. As of December 31, 2010, approximately 2,625,000 shares of Class A common stock and 450,000 shares of Class B common stock are available for issuance upon exercise of any awards granted under the Company’s 2007 Incentive Plan. During the year ended December 31, 2010, the Company granted 627,045 options to purchase Class A common stock and 99,465 restricted Class A common stock awards under the 2007 Incentive Plan. During the year ended December 31, 2009, the Company granted 617,430 options to purchase Class A common stock and 100,775 restricted Class A common stock awards under the 2007 Incentive Plan.
Valuation and Expense Information
Stock-based compensation expense related to stock options, restricted stock awards and employee stock purchases was $4.5 million for the year ended December 31, 2010, $3.7 million for the year ended December 31, 2009, and $3.6 million for the year ended December 31, 2008.
Cash received from options exercised and shares purchased under all share-based payment arrangements was $2.3 million for the year ended December 31, 2010, $0.8 million for the year ended December 31, 2009, and $1.1 million for the year ended December 31, 2008.
A summary of the Company’s stock option activity and related information for the year ended December 31, 2010, follows:
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the weighted-average of the closing price as of December 31, 2010, of the Company’s Class A common stock and Class B common stock of $20.33. The total intrinsic value of options exercised was $2.3 million during the year ended December 31, 2010, $0.2 million during the year ended December 31, 2009, and $1.7 million during the year ended December 31, 2008.
A summary of the status of the number of shares underlying Company’s non-vested options as of December 31, 2010, and changes during the year ended December 31, 2010, follows:
The total fair value of vested options was $2.4 million during the year ended December 31, 2010, $1.8 million during the year ended December 31, 2009, and $1.4 million during the year ended December 31, 2008. The weighted-average grant date fair value of options granted was $5.80 during the year ended December 31, 2010, $3.25 during the year ended December 31, 2009, and $5.62 during the year ended December 31, 2008.
Stock Awards
The Company granted restricted stock awards to its employees under the 2007 Incentive Plan and unrestricted stock awards to its non-employee directors under the Director Plan during the year ended December 31, 2010. The shares granted to employees vest in three equal installments on the first, second and third anniversary of the grant date and are forfeited in the event the recipient’s employment or relationship with the Company is terminated prior to vesting. The fair value of the restricted stock awards to the Company’s employees is amortized to expense on a straight-line basis over the restricted stock’s vesting period. The shares granted to non-employee directors are expensed on the grant date.
The following table presents a summary of the Company’s non-vested stock awards outstanding at December 31, 2010:
The total fair market value of the shares issued upon the vesting of stock awards during the year ended December 31, 2010 was $1.0 million. The weighted-average grant date fair value of stock awards granted was $13.08 during the year ended December 31, 2010, $8.81 during the year ended December 31, 2009, and $15.90 during the year ended December 31, 2008.
As of December 31, 2010, there was $5.1 million of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the Incentive Plan and the 2007 Incentive Plan. That cost is expected to be recognized over a weighted-average period of 3.0 years.
Defined Contribution Plan
The Company has a defined contribution plan (the “Rush 401k Plan”), which is available to all Company employees and the employees of certain affiliates. Each employee who has completed 90 days of continuous service is entitled to enter the Rush 401k Plan on the first day of the following month. Participating employees may contribute from 1% to 50% of total gross compensation. However, certain higher paid employees are limited to a maximum contribution of 15% of total gross compensation. In March 2009, the Company discontinued its matching contributions to the Rush 401k plan. On April 1, 2010 the Company reinstated its matching contributions. For the first 10% of an employee’s contribution, the Company, at its discretion, may contribute an amount equal to 5% of the employees’ contributions for those employees with less than five years of service and an amount equal to 10% of the employees’ contributions for those employees with more than five years of service. The Company incurred expenses related to the Rush 401k Plan of approximately $0.4 million during the year ended December 31, 2010, $0.6 million during the year ended December 31, 2009, and $3.4 million during the year ended December 31, 2008.
Deferred Compensation Plan
On November 6, 2010 the Board of Directors of the Company adopted the Rush Enterprises, Inc. Deferred Compensation Plan (the “Deferred Compensation Plan”) wherein selected employees and directors may elect to defer a portion of their annual compensation. The Deferred Compensation Plan also provides the Company with the discretion to make matching contributions to participants’ accounts. The Company has established a rabbi trust to finance obligations under the Deferred Compensation Plan with corporate-owned variable life insurance contracts. Participants are 100% vested in their respective deferrals and the earnings thereon. The first deferral election period began on January 1, 2011.
The Company currently does not provide any postretirement benefits nor does it provide any post employment benefits.
12. STOCK REPURCHASE PLAN:
Stock Repurchase Plan
On July 22, 2008, the Company’s 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.
During the year ended December 31, 2008, the Company repurchased 1,639,843 shares of Class B common stock at a cost of $17.9 million. The Company is holding the repurchased shares of the common stock as treasury stock and is accounting for the treasury stock pursuant to the cost method. The Company includes treasury stock as a component of stockholders’ equity. On November 6, 2010, the Board of Directors of the Company approved the termination of the stock repurchase program.
13. EARNINGS PER SHARE:
Basic earnings per share (“EPS”) were computed by dividing income from continuing operations by the weighted average number of shares of common stock outstanding during the period. Diluted EPS differs from basic EPS due to the assumed conversions of potentially dilutive options and restricted shares that were outstanding during the period. The Company’s Class A common stock and Class B common stock have equal claims on earnings of the Company. The following is a reconciliation of the numerators and the denominators of the basic and diluted per share computations for income from continuing operations.
Options to purchase shares of common stock that were outstanding for the years ended December 31, 2010, 2009 and 2008 that were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive are as follows:
14. INCOME TAXES:
Provision for Income Taxes
The tax provisions (benefits) are summarized as follows (in thousands):
A reconciliation of taxes based on the federal statutory rates and the provisions (benefits) for income taxes are summarized as follows (in thousands):
Following is a summary of the Company’s income tax provision for the years ended December 31, 2010, 2009 and 2008 (in thousands):
The following summarizes the components of deferred tax assets and liabilities included in the balance sheet (in thousands):
The Company’s various state net operating loss carry forwards expire from 2011 through 2024.
The Company included accruals for unrecognized income tax benefits totaling $1.5 million as a component of accrued liabilities as of December 31, 2010, and $1.8 million as of December 31, 2009. The unrecognized tax benefits of $1.5 million at December 31, 2010, and $1.8 million as of December 31, 2009, if recognized, would impact the Company’s 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 December 31, 2010, the Company accrued interest of $130,000 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 December 31, 2010, the tax years ended December 31, 2008 through 2010 remained subject to audit by federal tax authorities and the tax years ended December 31, 2006 through 2010, remained subject to audit by state tax authorities.
A reconciliation of the change in the unrecognized tax benefits from January 1, 2008, to December 31, 2010, is as follows:
15. 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. The majority of finance contracts are sold without recourse against the Company. A majority of the Company’s 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 Company’s 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 Company’s results of operations for the fiscal period in which such resolution occurred.
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 $39.0 million, of which $36.2 million was expended at December 31, 2010.
16. ACQUISITIONS:
All of the following acquisitions, unless otherwise noted, were considered business combinations accounted for under ASC 805 “Business Combinations.” Pro forma information is not included in accordance with ASC 805 since no acquisitions were considered material individually or in the aggregate.
On October 12, 2010, the Company acquired certain assets of Metro Ford Truck Sales, Inc., which consisted of a Ford and Isuzu commercial vehicle dealership in Dallas, Texas. The Company is operating the facility as a full-service Rush Medium-Duty Truck Center offering medium-duty trucks, parts and service. The transaction was valued at approximately $5.6 million, with the purchase price paid in cash. The operations of Metro Ford Truck Sales, Inc. are included in the accompanying consolidated financial statements from the date of the acquisition. The purchase price was allocated based on the fair values of the assets at the date of acquisition as follows (in thousands):
All of the goodwill acquired in the Metro Ford Truck Sales, Inc. acquisition will be amortized over 15 years for tax purposes.
On July 12, 2010, the Company acquired certain assets of Joe Cooper Truck Center, LLC, which consisted of a Ford franchise in Oklahoma City, Oklahoma. The newly acquired Ford franchise was added to the Company’s existing dealership in Oklahoma City, Oklahoma. The transaction was valued at approximately $1.2 million, with the purchase price paid in cash, and $1.1 million of the purchase price was allocated to goodwill based on the fair value of the assets at the date of acquisition. The operations of Joe Cooper Truck Center, LLC are included in the accompanying consolidated financial statements from the date of the acquisition. All of the goodwill acquired in the Joe Cooper Truck Center, LLC acquisition will be amortized over 15 years for tax purposes.
On May 24, 2010, the Company acquired certain assets of Lake City Companies, LLC and certain of its subsidiaries and affiliates (collectively, “Lake City International”). Lake City International operated a commercial truck and bus sales, service, parts, finance and leasing business representing multiple brands. The newly acquired dealerships include five locations in Utah, five locations in Idaho and one location in Oregon. These locations are operating as Rush Truck Centers and offer commercial vehicles manufactured by International, Autocar, Mitsubishi Fuso, IC Bus and now Workhorse Custom Chassis in addition to parts, service, body shop, financing and insurance capabilities. Rush Truck Leasing operates Idealease truck rental and leasing franchises at existing locations in Salt Lake City, Utah, and Boise, Idaho. The transaction, including the real estate, was valued at approximately $70.0 million. The purchase price for the assets of the business was paid in cash and the purchase price for the real estate was partially paid in cash with the remainder financed with long-term debt.
The operations of Lake City International are included in the accompanying consolidated financial statements from the date of the acquisition. The preliminary purchase price has been allocated based on the fair values of the assets at the date of acquisition as follows (in thousands):
As the value of certain assets and liabilities are preliminary in nature, they are subject to adjustment as additional information is obtained about the facts and circumstances that existed at the acquisition date. When the valuation is final, any changes to the preliminary valuation of acquired assets and liabilities could result in adjustments to identified intangibles and goodwill. The Company financed approximately $37.5 million of the purchase price under its floor plan, accounts receivable, lease and rental truck financing arrangements and a real estate loan. As part of the Lake City International acquisition, the Company assumed certain contingent liabilities for notes initiated on behalf of Lake City International related to the sale of commercial vehicles. The contingent liability had an estimated fair value of $2.0 million and was recorded as an accrued liability. For federal tax purposes the goodwill will be amortized over 15 years.
In June 2008, the Company acquired certain assets of Capital Bus Sales and Service of Texas, Inc., which included a Blue Bird bus franchise for the majority of Texas. As a result, the Company now sells and provides factory service for Blue Bird buses at most Rush Truck Centers in Texas. The transaction was valued at approximately $5.6 million, with the purchase price paid in cash.
The Capital Bus Sales and Service of Texas, Inc. acquisition was accounted for as a purchase; operations of the business acquired are included in the accompanying consolidated financial statements from the date of the acquisition. The purchase price was allocated based on the fair values of the assets at the date of acquisition as follows (in thousands):
All of the goodwill acquired in the Capital Bus Sales and Service of Texas, Inc. acquisition will be amortized over 15 years for tax purposes.
In May 2008, the Company acquired certain assets of Peterbilt Carolina, Inc. which consisted of a Peterbilt, Hino and Isuzu heavy- and medium-duty truck dealership in Charlotte, North Carolina. The Company is operating the facility as a full-service Rush Truck Center offering Peterbilt heavy- and medium-duty trucks as well as medium-duty trucks manufactured by Hino and Isuzu, and parts and service. The transaction was valued at approximately $13.4 million, with the purchase price paid in cash.
The operations of Peterbilt Carolina, Inc. are included in the accompanying consolidated financial statements from the date of the acquisition. The purchase price was allocated based on the fair values of the assets at the date of acquisition as follows (in thousands):
All of the goodwill acquired in the Peterbilt Carolina, Inc. acquisition will be amortized over 15 years for tax purposes.
In May 2008, the Company executed agreements to acquire the common stock of Adams International Trucks, Inc., an International heavy- and medium-duty truck dealership in Charlotte, North Carolina. The Company is operating the facility as a full-service Rush Truck Center offering International heavy- and medium-duty trucks, parts and service as well as leasing. The transaction was valued at approximately $20.1 million, with the purchase price paid in cash.
The operations of Adams International Trucks, Inc. are included in the accompanying consolidated financial statements from the date of the acquisition. The purchase price was allocated based on the fair values of the assets at the date of acquisition as follows (in thousands):
The portion of goodwill related to the stock purchase of Adams International Trucks, Inc. will not be amortized for tax purposes, while the portion of goodwill related to the acquisition of the International franchise rights will be amortized over 15 years for tax purposes.
In May 2008, in addition to the stock and asset purchases described above, the Company purchased the real estate of the North Carolina dealership operations for $6.2 million. The real estate transaction was financed by a financial institution with a $5.0 million note payable.
17. DISCONTINUED OPERATIONS:
On September 9, 2010, the Company sold the assets of its John Deere construction equipment business, including its Rush Equipment Centers in Houston and Beaumont, Texas, to Doggett Heavy Machinery Services, LLC. The total purchase price for the Rush Equipment Centers was $31.0 million. The Company received cash of $26.2 million at closing and a $4.8 million note receivable to be paid over four years. Before closing, the Company paid liabilities, related to the assets sold, of approximately $14.6 million. The Company recorded a gain on the transaction of $10.1 million. The Construction Equipment segment will no longer be reported as a separate business segment.
At closing, Doggett Heavy Machinery Services, LLC entered into a lease agreement to lease the facility where Rush Equipment Center, Houston was located from an affiliate of the Company. The lease provides for an initial three year term with the option for lessee to terminate the lease with 30 days notice. The Company’s continuing involvement in the operations of the construction equipment business is not significant and will be limited to the facility lease agreement.
The results of operations of the construction equipment business have been classified as discontinued operations in the Company’s consolidated statements of operations for all periods presented, and excluded from business segment information.
Net sales and earnings before income taxes related to the discontinued business were as follows (in thousands):
The major classes of assets of the discontinued operations classified as held for sale and included in the consolidated balance sheet were as follows (in thousands):
18. MEDIUM-DUTY GMC TRUCK FRANCHISES:
During the second quarter of 2009, General Motors made the decision to terminate its medium-duty GMC truck production and wind-down the Company’s medium-duty GMC truck franchises, which forced the Company to take a $6.7 million pre-tax asset impairment charge. The impairment charge was offset by $1.8 million in assistance from General Motors. In the second quarter of 2009, this impairment charge resulted in a net charge to cost of sales of $4.0 million, a net charge to SG&A expense of $0.1 million and a charge to amortization expense of $0.8 million. During the third and fourth quarters of 2009, the Company adjusted the estimated impairment charge related to the medium-duty GMC truck and parts inventories, which resulted in a net credit to cost of sales of $1.9 million.
19. COMPREHENSIVE INCOME:
The following table provides a reconciliation of net income to comprehensive income (in thousands):
20. UNAUDITED QUARTERLY FINANCIAL DATA:
(In thousands, except per share amounts.)
21. SEGMENTS:
The Company currently has one reportable business segment, the Truck segment. The Truck segment operates a network of commercial vehicle dealerships that provide an integrated one-stop source for the commercial vehicle 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 commercial vehicle dealerships are deemed as a single reporting unit because they have similar economic characteristics. The Company’s 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 is no longer reported as a separate business segment due to the sale of Company’s construction equipment business. See Note 17 for further discussion of the sale of the construction equipment business. The assets of the construction equipment business have been included in the All Other segment assets in the table below for 2009 and 2008.
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 from continuing operations 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 years ended December 31, 2010, 2009 and 2008.
The following table contains summarized information about reportable segment revenue, segment income or loss from continuing operations and segment assets for the periods ended December 31, 2010, 2009 and 2008 (in thousands):
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.
Item 9.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There were no changes or disagreements on any matters of accounting principles or financial statement disclosure between the Company and its independent registered public accounting firm during the two most recent fiscal years or any subsequent interim period.
Item 9A.
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2010, to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (2) accumulated and communicated to the Company’s management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 2010, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s President and Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with generally accepted accounting principles.
As of December 31, 2010, management assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria for effective internal control over financial reporting established in “Internal Control - Integrated Framework,” issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on the assessment, management determined that the Company maintained effective internal control over financial reporting as of December 31, 2010, based on those criteria.
Ernst & Young LLP, the independent registered public accounting firm that audited the consolidated financial statements of the Company included in this annual report on Form 10-K, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010. The report, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010, is included in this Item 9A under the heading “Attestation Report of Independent Registered Public Accounting Firm.”
Attestation Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Rush Enterprises, Inc.
We have audited Rush Enterprises, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Rush Enterprises, Inc. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Rush Enterprises, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Rush Enterprises, Inc. and subsidiaries as of December 31, 2010, and 2009, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010, of Rush Enterprises, Inc. and subsidiaries and our report dated March 11, 2011, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
San Antonio, Texas
March 11, 2011
None.
PART III
Item 10.
Item 10.
Directors and Executive Officers of the Registrant
The information called for by Item 10 of Form 10-K is incorporated herein by reference to such information included in the Company’s Proxy Statement for the 2011 Annual Meeting of Shareholders.
Code of Ethics
We maintain a code of ethics applicable to our principal executive officer, principal financial officer, principal accounting officer or controller, and other persons performing similar functions. To view this code of ethics free of charge, please visit our website at www.rushenterprises.com (This website address is not intended to function as a hyperlink, and the information contained in our website is not intended to be a part of this filing). We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of this code of ethics, if any, by posting such information on our website set forth above.
The information called for by Item 11
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The information called for by Item 12 of Form 10-K is incorporated herein by reference to such information included in the Company’s Proxy Statement for the 2011 Annual Meeting of Shareholders.
Item 13.
Item 13.
Certain Relationships and Related Transactions
The information called for by Item 13 of Form 10-K is incorporated herein by reference to such information included in the Company’s Proxy Statement for the 2011 Annual Meeting of Shareholders.
Item 14.
Item 14.
Principal Accountant Fees and Services
The information called for by Item 14 of Form 10-K is incorporated herein by reference to such information included in the Company’s Proxy Statement for the 2011 Annual Meeting of Shareholders.
PART IV
Item 15.
Item 15.
Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
Included in Item 8 of Part II of this annual report on Form 10-K are the following: Report of Independent Registered Public Accounting Firm; Consolidated Balance Sheets as of December 31, 2010, and 2009; Consolidated Statements of Income for the years ended December 31, 2010, 2009, and 2008; Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2010, 2009, and 2008; Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009, and 2008; and Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
These schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes.
(a)(3) Exhibits
Index to Exhibits:
*
Filed herewith.
+
Management contract or compensatory plan or arrangement.
++
This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities on the dates indicated: