rusha20140331_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

(X)     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2014

OR

 

( )     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________________________ to ____________________________________________

 

Commission File Number 0-20797

 

 

RUSH ENTERPRISES, INC.

(Exact name of registrant as specified in its charter)

 

Texas  

 

                  74-1733016

(State or other jurisdiction of

 

(I.R.S. Employer Identification No.)

incorporation or organization)  

 

 

                                                                           

555 I.H. 35 South, Suite 500

New Braunfels, Texas 78130

(Address of principal executive offices)

(Zip Code)

 

(830) 626-5200

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]                   No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes [X]                   No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  

 

Accelerated filer   ☐

 

 

 

Non-accelerated filer   

 

Smaller reporting company  ☐

(Do not check if a smaller reporting company)

   

                            

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ]                   No [X]

 

Indicated below is the number of shares outstanding of each of the issuer’s classes of common stock, as of May 2, 2014.

 

Title of Class 

 

Number of

Shares

Outstanding

Class A Common Stock, $.01 Par Value  

 

29,458,141

Class B Common Stock, $.01 Par Value  

 

10,235,222

                                           

 

 
 

 

 

 

RUSH ENTERPRISES, INC. AND SUBSIDIARIES

 

INDEX

 

 

 

 

 

PART I. FINANCIAL INFORMATION  

Page

         

 

Item 1.

 

Financial Statements

 

         

 

 

 

Consolidated Balance Sheets - March 31, 2014 (unaudited) and December 31, 2013   

3

         

 

 

 

Consolidated Statements of Income and Comprehensive Income - For the Three Months Ended March 31, 2014 and 2013 (unaudited)

4

         

 

 

 

Consolidated Statements of Cash Flows - For the Three Months Ended  March 31, 2014 and 2013 (unaudited)   

5

         

 

 

 

Notes to Consolidated Financial Statements (unaudited)

6

         

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations 

13

         

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

24

         

 

Item 4. 

 

Controls and Procedures

25

         
   
   
   

PART II. OTHER INFORMATION

 
         
  Item 1.   Legal Proceedings 25
         
  Item 1A.   Risk Factors  25
         
  Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds 25
         
  Item 3.     Defaults Upon Senior Securities 26
         
  Item 4.      Mine Safety Disclosures 26
         

 

Item 5.  

 

Other Information  

26

         
  Item 6.    Exhibits 27
         
SIGNATURES 28

 

 

 
2

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

RUSH ENTERPRISES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2014 AND DECEMBER 31, 2013

(In Thousands, Except Shares)

 

   

March 31,

2014

   

December 31,

2013

 
   

(Unaudited)

         

Assets

               

Current assets:

               

Cash and cash equivalents

  $ 94,369     $ 217,305  

Accounts receivable, net

    135,855       103,293  

Inventories, net

    865,685       802,220  

Prepaid expenses and other

    13,067       14,341  

Deferred income taxes, net

    15,567       16,277  

Total current assets

    1,124,543       1,153,436  

Investments

    6,628       6,628  

Property and equipment, net

    819,704       739,663  

Goodwill, net

    262,889       215,464  

Other assets, net

    49,956       52,607  

Total assets

  $ 2,263,720     $ 2,167,798  
                 
                 

Liabilities and shareholders’ equity

               

Current liabilities:

               

Floor plan notes payable

  $ 659,289     $ 593,649  

Current maturities of long-term debt

    103,725       97,243  

Current maturities of capital lease obligations

    10,697       10,268  

Trade accounts payable

    112,356       100,375  

Customer deposits

    31,249       58,319  

Accrued expenses

    61,751       69,321  

Total current liabilities

    979,067       929,175  

Long-term debt, net of current maturities

    416,011       385,538  

Capital lease obligations, net of current maturities

    35,246       35,199  

Other long-term liabilities

    4,429       4,683  

Deferred income taxes, net

    147,019       147,822  

Shareholders’ equity:

               

Preferred stock, par value $.01 per share; 1,000,000 shares authorized; 0 shares outstanding in 2014 and 2013

 

   

 

Common stock, par value $.01 per share; 60,000,000 class A shares and 20,000,000 class B shares authorized; 29,100,940 class A shares and 10,289,460 class B shares outstanding in 2014; and 28,910,505 Class A shares and 10,304,518 Class B shares outstanding in 2013

    417       414  

Additional paid-in capital

    250,216       243,154  

Treasury stock, at cost: 2,270,052 class B shares

    (33,447 )     (30,821 )

Retained earnings

    465,850       453,836  

Accumulated other comprehensive loss, net of tax

    (1,088 )     (1,202 )

Total shareholders’ equity

    681,948       665,381  

Total liabilities and shareholders’ equity

  $ 2,263,720     $ 2,167,798  

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 
3

 

 

 

RUSH ENTERPRISES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(In Thousands, Except Per Share Amounts)

(Unaudited)

 

   

Three Months Ended

March 31,

 
   

2014

   

2013

 
                 

Revenues:

               

New and used commercial vehicle sales

  $ 600,900     $ 489,610  

Parts and service sales

    308,974       231,479  

Lease and rental

    40,989       30,140  

Finance and insurance

    4,076       3,133  

Other

    3,728       2,426  

Total revenue

    958,667       756,788  

Cost of products sold:

               

New and used commercial vehicle sales

    558,142       452,574  

Parts and service sales

    198,703       145,713  

Lease and rental

    35,897       24,713  

Total cost of products sold

    792,742       623,000  

Gross profit

    165,925       133,788  

Selling, general and administrative

    134,445       102,106  

Depreciation and amortization

    8,818       7,110  

Gain on sale of assets

    84       41  

Operating income

    22,746       24,613  

Interest expense, net

    3,131       2,513  

Income before taxes

    19,615       22,100  

Provision for income taxes

    7,601       8,553  

Net income

  $ 12,014     $ 13,547  
                 

Earnings per common share:

               

Earnings per common share - Basic

  $ 0.31     $ 0.35  

Earnings per common share - Diluted

  $ 0.30     $ 0.34  
                 

Weighted average shares outstanding:

               

Basic

    39,332       39,119  

Diluted

    40,511       40,269  
                 

Comprehensive income

  $ 12,128     $ 13,718  

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 
4

 

 

 

RUSH ENTERPRISES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 

   

Three Months Ended

March 31,

 
   

2014

   

 

2013

 
                 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net income

  $ 12,014     $ 13,547  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

               

Depreciation and amortization

    29,056       21,683  

Gain on sale of property and equipment

    (84 )     (41 )

Stock-based compensation expense related to employee stock options and employee stock purchases

    3,269       3,251  

Provision (benefit) for deferred income tax expense

    (165 )     2,963  

Excess tax benefits from stock-based compensation

    (1,021 )     (1,679 )

Change in accounts receivable, net

    (25,387 )     13,017  

Change in inventories, net

    (24,282 )     20,602  

Change in prepaid expenses and other, net

    2,024       2,062  

Change in trade accounts payable

    11,981       18,501  

(Payments) draws on floor plan notes payable – trade, net

    20,463       (2,178 )

Change in customer deposits

    (27,432 )     (8,606 )

Change in accrued expenses

    (7,525 )     (26,050 )

Net cash (used in) provided by operating activities

    (7,089 )     57,072  

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Acquisition of property and equipment

    (53,202 )     (30,169 )

Proceeds from the sale of property and equipment

    134       192  

Business acquisitions

    (143,050 )     (25 )

Change in other assets

    1,892       573  

Net cash used in investing activities

    (194,226 )     (29,429 )

CASH FLOWS FROM FINANCING ACTIVITIES:

               

(Payments) draws on floor plan notes payable – non-trade, net

    45,177       (34,077 )

Proceeds from long-term debt

    61,929       30,621  

Principal payments on long-term debt

    (24,813 )     (22,795 )

Principal payments on capital lease obligations

    (3,086 )     (3,092 )

Issuance of shares relating to employee stock options and employee stock purchases

    1,947       6,297  

Excess tax benefits from stock-based compensation

    1,021       1,679  

Common stock repurchased

    (3,796 )      

Net cash provided by (used in) financing activities

    78,379       (21,367 )

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

    (122,936 )     6,276  

CASH AND CASH EQUIVALENTS, beginning of period

    217,305       198,773  

CASH AND CASH EQUIVALENTS, end of period

  $ 94,369     $ 205,049  

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

               

Cash paid during the period for:

               

Interest

  $ 7,343     $ 5,628  

Income taxes, net of refunds

  $ 1,578     $ 32  

Noncash investing and financing activities:

               

Goodwill related to business acquisition

  $ 2,000     $  

Assets acquired under capital leases

  $ 3,562     $ 2,284  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 
5

 

 

 

RUSH ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1 – Principles of Consolidation and Basis of Presentation

 

The interim consolidated financial statements included herein have been prepared by Rush Enterprises, Inc. and its subsidiaries (collectively referred to as the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). All adjustments have been made to the accompanying interim consolidated financial statements, which, in the opinion of the Company’s management, are necessary for a fair presentation of the Company’s operating results. All adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. It is recommended that these interim consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. Results of operations for interim periods are not necessarily indicative of results that may be expected for any other interim periods or the full fiscal year.

 

2 – Other Assets

 

The total capitalized costs of the SAP enterprise software and SAP dealership management system of $39.8 million, including capitalized interest, are recorded on the Consolidated Balance Sheet in Other Assets, net of accumulated amortization of $7.9 million. The SAP software is being amortized over a period of 15 years. The Company is currently operating 55 Rush Truck Centers and most of its leasing operations on the SAP enterprise software and SAP dealership management system, which represent approximately 60% of total revenue for the three months ended March 31, 2014. The Company plans to convert all of its locations to the SAP enterprise software and SAP dealership management system by the end of the second quarter of 2015.

 

Amortization expense relating to the SAP software, which is recognized in depreciation and amortization expense in the Consolidated Statement of Income, was $0.8 million for the three months ended March 31, 2014, and $0.7 million for the three months ended March 31, 2013. The Company estimates that amortization expense relating to intangible assets will be approximately $3.3 million for each of the next five succeeding years.

 

The Company’s only significant identifiable intangible assets, other than goodwill, are rights under franchise agreements with manufacturers. The fair value of the franchise right is determined at the acquisition date by discounting the projected cash flows specific to each acquisition. The carrying value of the Company’s manufacturer franchise rights was $4.5 million at March 31, 2014 and December 31, 2013, and is included in Other Assets on the accompanying consolidated balance sheets. The Company has determined that manufacturer franchise rights have an indefinite life as there are no economic or other factors that limit their useful lives and they are expected to generate cash flows indefinitely due to the historically long lives of the manufacturers’ brand names. Furthermore, to the extent that any agreements evidencing manufacturer franchise rights have expiration dates, the Company expects that it will be able to renew those agreements in the ordinary course of business. Due to the fact that manufacturer franchise rights are specific to geographic region, the Company has determined that the geographic region is the appropriate level for purposes of testing franchise rights for impairment. The Company does not amortize manufacturer franchise rights.

 

Management reviews indefinite lived manufacturer franchise rights for impairment annually during the fourth quarter, or more often if events or circumstances indicate that impairment may have occurred. The Company is subject to financial statement risk to the extent that manufacturer franchise rights become impaired due to decreases in fair market value of its individual franchises.

 

The significant estimates and assumptions used by management in assessing the recoverability of manufacturer franchise rights are estimated future cash flows, present value discount rate, and other factors. Any changes in these estimates or assumptions could result in an impairment charge. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management’s subjective judgment. Depending on the assumptions and estimates used, the estimated future cash flows projected in the evaluations of manufacturer franchise rights can vary within a range of outcomes.

 

 

 
6

 

 

 

No impairment write down was required in the fourth quarter of 2013. However, the Company cannot predict the occurrence of certain events that might adversely affect the reported value of manufacturer franchise rights in the future.

 

3 – Commitments and Contingencies

 

From time to time, the Company is involved in litigation arising out of its operations in the ordinary course of business. The Company maintains 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 or results of operations. The Company believes that there are no claims or litigation pending, the outcome of which could have a material adverse effect on its 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 financial condition or results of operations for the fiscal period in which such resolution occurred.

 

4 – Earnings Per Share

 

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):

 

   

Three Months Ended

 
   

March 31,

2014

   

March 31,

2013

 

Numerator -

               

Numerator for basic and diluted earnings per share-

               

Net income available to common shareholders

  $ 12,014     $ 13,547  
                 

Denominator-

               

Denominator for basic earnings per share, weighted average shares outstanding

    39,332       39,119  

Effect of dilutive securities-

               

Employee and Director stock options and restricted stock awards

    1,179       1,150  

Denominator for diluted earnings per share, adjusted weighted average shares and assumed conversions

    40,511       40,269  
                 

Basic earnings per common share

  $ .31     $ .35  

Diluted earnings per common share and common share equivalents

  $ .30     $ .34  

 

Options to purchase shares of common stock that were outstanding for the three months ended March 31, 2014 and 2013 that were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive are as follows (in thousands):

 

   

March 31,

2014

   

March 31,

2013

 

Anti-dilutive options

    431       1,107  

 

5 – Stock Options and Restricted Stock Awards

 

Valuation and Expense Information

 

The Company accounts for stock-based compensation in accordance with Accounting Standards Codification (“ASC”) 718-10, “Compensation – Stock Compensation,” which requires the measurement and recognition of compensation expense for all share-based payment awards made to the Company’s employees and directors, including employee stock options, restricted share awards and employee stock purchases related to the Employee Stock Purchase Plan based on estimated fair values. Stock-based compensation expense, calculated using the Black-Scholes option-pricing model for employee stock options, and included in selling, general and administrative expense, was $3.3 million for the three months ended March 31, 2014, and 2013. As of March 31, 2014, there was $22.9 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements to be recognized over a weighted-average period of 3.2 years.

 

 

 
7

 

 

 

6 – Financial Instruments and Fair Value

 

The Company measures certain financial assets and liabilities at fair value on a recurring basis. Financial instruments consist primarily of cash, accounts receivable, accounts payable and floor plan notes payable. The carrying values of the Company’s financial instruments approximate fair value due either to their short-term nature or existence of variable interest rates, which approximate market rates. Certain methods and assumptions were used by the Company in estimating the fair value of financial instruments at March 31, 2014, and 2013. 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. Because the Company’s debt is not quoted, estimates are based on each obligation’s characteristics, including remaining maturities, interest rate, credit rating, collateral and liquidity. Accordingly, the Company concluded the valuation measurement inputs of its long-term debt to represent, at its lowest level, current market interest rates available to the Company for similar debt and the Company’s current credit standing and has categorized such debt within Level 2 of the hierarchy framework. 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 income.

 

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.

 

Auctions for investment grade securities held by the Company have failed. However, a failed auction does not represent a default by the issuer. The auction rate securities continue to pay interest in accordance with the terms of the underlying security; however, liquidity will be limited until there is a successful auction or until such time as other markets for these investments develop. The Company has the intent and ability to hold these auction rate securities until liquidity returns to the market. The Company does not believe that the lack of liquidity relating to its auction rate securities will have a material impact on its ability to fund operations.

 

As of March 31, 2014, and 2013, the Company held auction rate securities with underlying tax-exempt municipal bonds that mature in 2030 that have a fair value of $6.6 million and a cost basis of $7.6 million. These bonds have credit wrap insurance and a credit rating of A2 by a major credit rating agency.

 

The Company valued the auction rate securities at March 31, 2014 using a discounted cash flow model based on the characteristics of the individual securities, which the Company believes yields the best estimate of fair value. The first step in the valuation included a credit analysis of the security which considered various factors including the credit quality of the issuer, the instrument’s position within the capital structure of the issuing authority, and the composition of the authority’s assets including the effect of insurance and/or government guarantees. Next, the future cash flows of the instruments were projected based on certain assumptions regarding the auction rate market significant to the valuation including the auction rate market will remain illiquid and auctions will continue to fail causing the interest rate to be the maximum applicable rate. This assumption resulted in discounted cash flow analysis being performed through 2019, the point at which the Company estimates the securities will be redeemed by the municipality. The projected cash flows were then discounted using the applicable yield curve plus a 225 basis point liquidity premium added to the applicable discount rate.

 

The Company recorded a pre-tax impairment charge of $1.0 million on these investments in 2011. The Company believes that the impairment is temporary and has included the impairment in accumulated other comprehensive loss.

 

 

 
8

 

 

 

The table below presents disclosures about the auction rate securities measured at fair value on a recurring basis in the Company’s financial statements as follows (in thousands):

 

   

At March 31, 2014

   

At December 31, 2013

 
   

Level 1
Inputs

   

Level 2
Inputs

   

Level 3
Inputs

   

Level 1
Inputs

   

Level 2

Inputs

   

Level 3

Inputs

 

Investment in auction rate securities

  $     $     $ 6,628     $     $     $ 6,628  

 

 

   

Cost Basis
Amount

   

Gross Unrealized

Loss In

Accumulated

OCI

   

Fair Value

 

March 31, 2014

                       

Investment in auction rate securities

  $ 7,575     $ 947     $ 6,628  
                         

December 31, 2013

                       

Investment in auction rate securities

  $ 7,575     $ 947     $ 6,628  

 

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 March 31, 2014, the Company had an aggregate $37.5 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 became 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. There was no ineffectiveness for these swaps during the three months ended March 31, 2014 and 2013.

 

The fair value of cash flow hedges 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 a liability of $0.8 million as of March 31, 2014. The carrying value of these swaps is included in Other Long-Term Liabilities on the accompanying Consolidated Balance Sheet as of March 31, 2014.

 

As of March 31, 2014 the Company was party to derivative financial instruments, as described in the following table (in thousands):

 

Agreement

 

Notional

Amount

   

Fixed

Interest

Rate

   

Underlying

Rate

Expiration Date

 

Fair Value

 

Interest Rate Swap

  $ 1,830       5.075%     3 month LIBOR

 

July 1, 2015

  $ (44 )

Interest Rate Swap

    3,780       5.075%     3 month LIBOR

 

July 1, 2015

    (92 )

Interest Rate Swap

    6,539       5.39%     1 month LIBOR

 

December 31, 2014

    (103 )

Interest Rate Swap

    1,264       5.39%     1 month LIBOR

 

December 31, 2014

    (20 )

Interest Rate Swap

    2,250       5.39%     1 month LIBOR

 

December 31, 2014

    (35 )

Interest Rate Swap

    5,091       5.39%     1 month LIBOR

 

December 31, 2014

    (80 )

Interest Rate Swap

    4,680       5.38%     1 month LIBOR

 

June 29, 2015

    (134 )

Interest Rate Swap

    720       5.29%     1 month LIBOR

 

June 30, 2015

    (20 )

Interest Rate Swap

    1,380       5.29%     1 month LIBOR

 

June 30, 2015

    (38 )

Interest Rate Swap

    6,960       5.29%     1 month LIBOR

 

June 30, 2015

    (189 )

Interest Rate Swap

    600       5.29%     1 month LIBOR

 

June 30, 2015

    (16 )

Interest Rate Swap

    2,412       5.29%     1 month LIBOR

 

June 30, 2015

    (66 )

 

 

 
9

 

 

 

Fair values of derivative instruments are on the accompanying Consolidated Balance Sheet (in thousands):

 

       

Fair Value at

 

Derivative Liabilities Designated as Hedging Instruments

 

Balance Sheet Location

 

 

March 31, 2014

   

December 31, 2013

 
                     

Interest Rate Swaps

 

Other Long-Term Liabilities

  $ 837     $ 1,024  

 

 

   

Gain (Loss) Recognized in
OCI on Derivatives
(Effective Portion)
during the
Three Months Ended

 

Location of Loss

 

Loss Reclassified
from Accumulated
OCI into Income
(Effective Portion)
during the
Three Months Ended

 
   

March 31,
2014

   

March 31,
2013

 

Reclassified into
Income

 

March 31,
2014

   

March 31,
2013

 

Interest rate swaps

  $ 187     $ 277  

Interest Expense

  $ (64 )   $ (86 )

 

7 – Segment Information

 

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 Company’s commercial vehicle dealerships are deemed 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 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 following table contains summarized information about reportable segment revenue, segment income or loss from continuing operations and segment assets for the periods ended March 31, 2014 and 2013 (in thousands):

 

   

Truck

Segment

   

All Other

   

Totals

 
                         

As of and for the three months ended March 31, 2014

                       
                         

Revenues from external customers

  $ 954,407     $ 4,260     $ 958,667  

Segment income (loss) before taxes

    19,759       (144 )     19,615  

Segment assets

    2,233,510       30,210       2,263,720  
                         

As of and for the three months ended March 31, 2013

                       
                         

Revenues from external customers

  $ 752,230     $ 4,558     $ 756,788  

Segment income (loss) before taxes

    22,148       (48 )     22,100  

Segment assets

    1,835,123       26,192       1,861,315  

 

Revenues from segments below the quantitative thresholds are attributable to three operating segments of the Company and are included in the All Other column. Those segments include a retail tire company, an insurance agency and a guest ranch operation. None of those segments has ever met any of the quantitative thresholds for determining reportable segments.

 

 

 
10

 

 

 

8 – Income Taxes

 

The Company included accruals for unrecognized income tax benefits totaling $1.5 million as a component of accrued liabilities as of March 31, 2014, and $1.4 million as of March 31, 2013. The unrecognized tax benefits, 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. The Company records interest and penalties related to unrecognized income tax benefits in income tax expense. The Company had accrued interest of $81,000 at March 31, 2014 and $49,000 at March 31, 2013 related to unrecognized tax benefits. No amounts were accrued for penalties.

 

The Company does not anticipate a significant change in the amount of unrecognized tax benefits in the next 12 months. As of March 31, 2014, the tax years ended December 31, 2010 through 2013 remained subject to audit by federal tax authorities and the tax years ended December 31, 2009 through 2013, remained subject to audit by state tax authorities.

 

9 – Accumulated Other Comprehensive Income

 

The following table shows the components of accumulated other comprehensive loss, net of tax, (in thousands):

 

 

   

Three Months Ended March 31, 2014

 
   

Cash Flow

Swaps

   

 Available

for Sale

Securities

   

Total

 

Balance as of December 31, 2013

  $ (624 )   $ (578 )   $ (1,202 )

Change in fair value

    187                

Income tax deferred

    (73 )                

Balance at March 31, 2014

  $ (510 )   $ (578 )   $ (1,088 )

 

   

Three Months Ended March 31, 2013

 
   

Cash Flow

Swaps

   

 Available

for Sale

Securities

   

Total

 

Balance as of December 31, 2012

  $ (1,178 )   $ (578 )   $ (1,756 )

Change in fair value

    277             277  

Income tax deferred

    (106 )             (106 )

Balance at March 31, 2013

  $ (1,007 )   $ (578 )   $ (1,585 )

 

The following table shows the amount of loss reclassified from accumulated other comprehensive loss into earnings (in thousands):

 

   

Three Months Ended

 
   

March 31,

2014

   

 March 31,

2013

 

Losses on cash flow swaps to:

               

Interest expense

  $ (64 )   $ (86 )

Income tax benefit

    25       33  

Total reclassifications

  $ (39 )   $ (53 )

 

10 – Acquisitions

 

On January 13, 2014, the Company acquired certain assets of CIT, Inc., which did business as Chicago International Trucks, Mcgrenho L.L.C., which did business as Indy Truck Sales, and Indiana Mack Leasing, LLC; and the membership interests of Idealease of Chicago, LLC. The acquisition included International commercial truck dealerships and Idealease commercial vehicle rental and leasing businesses in Carol Stream, Chicago, Grayslake, Huntley, Joliet, Kankakee and Ottawa, Illinois, and Brazil, Gary and Indianapolis, Indiana.

 

 

 
11

 

 

 

The purchase price for the assets, membership interests, goodwill and dealership properties was approximately $145.1 million, which was paid in cash and 83,091 shares of the Company’s Class B Common Stock with a total value of $2.0 million on the date of acquisition. The operations of CIT, Inc. are included in the accompanying consolidated financial statements from the date of the acquisition. The preliminary purchase price was allocated based on the fair values of the assets at the date of acquisition as follows (in thousands):

 

Property and equipment

  $ 60,066  

Goodwill

    47,425  

Inventory

    30,850  

Accounts receivable

    7,175  

Prepaid expenses

    750  

Other

    23  

Accrued expenses

    (1,226 )

Total

  $ 145,063  

 

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. Pro forma information is not included in accordance with ASC 805 because the acquisition was not considered material.

 

 

 
12

 

 

 

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Certain statements contained in this Form 10-Q (or otherwise made by the Company or on the Company’s behalf from time to time in other reports, filings with the Securities and Exchange Commission, news releases, conferences, website postings or otherwise) that are not statements of historical fact constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended (the “Exchange Act”), notwithstanding that such statements are not specifically identified. Forward-looking statements include statements about the Company’s financial position, business strategy and plans and objectives of management of the Company for future operations. These forward-looking statements reflect the best judgments of the Company about the future events and trends based on the beliefs of the Company’s management as well as assumptions made by and information currently available to the Company’s management. Use of the words “may,” “should,” “continue,” “plan,” “potential,” “anticipate,” “believe,” “estimate,” “expect” and “intend” and words or phrases of similar import, as they relate to the Company or its subsidiaries or Company management, are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements reflect the current view of the Company with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from those in such statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those set forth under Item 1A—Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as well as future growth rates and margins for certain of our products and services, future supply and demand for our products and services, competitive factors, general economic conditions, cyclicality, market conditions in the new and used commercial vehicle markets, customer relations, relationships with vendors, the interest rate environment, governmental regulation and supervision, seasonality, distribution networks, product introductions and acceptance, technological change, changes in industry practices, one-time events and other factors described herein and in the Company’s quarterly and other reports filed with the Securities and Exchange Commission (collectively, “Cautionary Statements”). Although the Company believes that its expectations are reasonable, it can give no assurance that such expectations will prove to be correct. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described in any forward-looking statements. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the applicable Cautionary Statements. All forward-looking statements speak only as the date on which they are made and the Company undertakes no duty to update or revise any forward-looking statements.

 

The following comments should be read in conjunction with the Company’s consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.

 

Note Regarding Trademarks Commonly Used in the Company’s Filings

 

Peterbilt® is a registered trademark of Peterbilt Motors Company. PACCAR® is a registered trademark of PACCAR, Inc. PacLease® is a registered trademark of PACCAR Leasing Corporation. Navistar® is a registered trademark of Navistar International Corporation. International® is a registered trademark of Navistar International Transportation Corp. Idealease is a registered trademark of Idealease, Inc. aka Idealease of North America, Inc.. Blue Bird® is a registered trademark of Blue Bird Investment Corporation. IC Bus® is a registered trademark of IC Bus, LLC. Fuso® is a registered trademark of Mitsubishi Fuso Truck and Bus Corporation. Hino® is a registered trademark of Hino Motors, Ltd. Isuzu® is a registered trademark of Isuzu Motors Limited. Ford Motor Credit Company® is a registered trademark of Ford Motor Company. Mack® is a registered trademark of Mack Trucks, Inc. Ford® is a registered trademark of Ford Motor Company. SAP® is a registered trademark of SAP Aktiengesellschaft.

 

General

 

Rush Enterprises, Inc. was incorporated in Texas in 1965 and consists of one reportable segment, the Truck Segment. The Company conducts business through numerous subsidiaries, all of which it wholly owns, directly or indirectly. Its principal offices are located at 555 IH 35 South, Suite 500, New Braunfels, Texas 78130.

 

The Company is a full-service, integrated retailer of commercial vehicles and related services. The Truck Segment operates a regional network of commercial vehicle dealerships under the name “Rush Truck Centers.” Rush Truck Centers primarily sell commercial vehicles manufactured by Peterbilt, International, Hino, 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 commercial vehicle customers, including retail sales of new and used commercial vehicles, aftermarket parts sales, service and repair facilities, financing, leasing and rental, and insurance products.

 

 

 
13

 

 

 

The Company’s Rush Truck Centers are principally located in high traffic areas throughout the United States. Since commencing operations as a Peterbilt heavy-duty truck dealer in 1966, the Company has grown to operate 106 Rush Truck Centers in 20 states.

 

Our business strategy consists of providing our customers with competitively priced products supported with timely and reliable service through our integrated dealer network. We intend to continue to implement our business strategy, reinforce customer loyalty and remain a market leader by continuing to develop our Rush Truck Centers as we extend our geographic focus through strategic acquisitions of new locations and expansions of our existing facilities and product lines.

 

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 United States generally accepted accounting principles. The preparation of these consolidated financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. The Company believes the following accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

 

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 is tested for impairment by reporting unit utilizing a two-step process at least annually, or more frequently when events or changes in circumstances indicate that the asset might be impaired. 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 Truck 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 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 fail 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.

 

 

 
14

 

 

 

Goodwill was tested for impairment during the fourth quarter of 2013 and no impairment was required. The fair value of our reporting unit 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 its reporting unit is at risk of failing step one of the impairment test.

 

Insurance Accruals

 

The Company is partially self-insured for a portion of the claims related to its property and casualty insurance programs, requiring it to make estimates regarding expected losses to be incurred. The Company engages a third-party administrator to assess any open claims and the Company adjusts its accrual accordingly on an annual basis. The Company is also partially self-insured for a portion of the claims related to its workers’ compensation and medical insurance programs. The Company uses actuarial information provided from third-party administrators to calculate an accrual for claims incurred, but not reported, and for the remaining portion of claims that have been reported.

 

Changes in the frequency, severity, and development of existing claims could influence the 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.

 

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.

 

Stock-Based Compensation Expense

 

The Company applies the provisions of ASC 718-10, “Compensation – Stock Compensation,” which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including grants of employee stock options and restricted stock and employee stock purchases under the Employee Stock Purchase Plan based on estimated fair values.

 

The Company uses the Black-Scholes option-pricing model to estimate the fair value of share-based payment awards on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s Consolidated Statement of Income.

 

 

 
15

 

 

 

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 the three months ended March 31, 2014 and 2013.

 

The following table sets forth certain financial data as a percentage of total revenues:

 

   

Three Months Ended

March 31,

 
   

 2014

   

 2013

 
                 

New and used commercial vehicle sales

    62.7

%

    64.7

%

Parts and service sales

    32.2       30.6  

Lease and rental

    4.3       4.0  

Finance and insurance

    0.4       0.4  

Other

    0.4       0.3  

Total revenues

    100.0       100.0  

Cost of products sold

    82.7       82.3  

Gross profit

    17.3       17.7  

Selling, general and administrative

    14.0       13.5  

Depreciation and amortization

    0.9       1.0  

Gain on sale of assets

    0.0       0.0  

Operating income

    2.4       3.2  

Interest expense, net

    0.3       0.3  

Income before income taxes

    2.1       2.9  

Provision for income taxes

    0.8       1.1  

Net income

    1.3

%

    1.8

%

 

The following table sets forth for the periods indicated the percent of gross profit by revenue source:

 

   

Three Months Ended

March 31,

 
   

 2014

   

 2013

 

Gross Profit:

               

New and used commercial vehicle sales

    25.8

%

    27.7

%

Parts and service sales

    66.5       64.1  

Lease and rental

    3.1       4.1  

Finance and insurance

    2.4       2.3  

Other

    2.2       1.8  

Total gross profit

    100.0

%

    100.0

%

 

 

 
16

 

 

 

The following table sets forth the unit sales and revenue for new heavy-duty, new medium-duty, new light-duty and used commercial vehicles and the absorption ratio (revenue in millions):

 

     

Three Months Ended

March 31,

         
     

2014

   

2013

   

%

Change

 

Vehicle unit sales:

                       

New heavy-duty vehicles

    2,688       2,065       30.2 %

New medium-duty vehicles

    1,966       1,954       0.6 %

New light-duty vehicles

    486       395       23.0 %

Total new vehicle unit sales

    5,140       4,414       16.4 %

Used vehicles

    1,703       1,414       20.4 %

Vehicle revenue:

                       

New heavy-duty vehicles

  $ 373.1     $ 287.1       30.0 %

New medium-duty vehicles

    140.9       132.9       6.0 %

New light-duty vehicles

    15.7       12.0       30.8 %

Total new vehicle revenue

  $ 529.7     $ 432.0       22.6 %

Used vehicle revenue

  $ 67.2     $ 55.7       20.6 %

Other vehicle revenue:(1)

  $ 4.0     $ 1.9       110.5 %

Dealership absorption ratio:

    111.2 %     111.9 %     -0.6 %

(1) Includes sales of truck bodies, trailers and other new equipment.

 

 

Key Performance Indicator

 

Absorption Ratio

 

Management uses several performance metrics to evaluate the performance of its commercial vehicle dealerships, and considers Rush Truck Centers’ “absorption ratio” to be of critical importance. Absorption ratio 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, all of the 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 commercial vehicle dealerships’ absorption ratio was approximately 80%. The Company has made a concerted effort to increase its absorption ratio since 1999. The Company’s truck dealerships achieved a 111.2% absorption ratio for the first quarter of 2014 and 111.9% absorption ratio for the first quarter in 2013.

 

Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013

 

On January, 13, 2014, the Company completed the acquisition of CIT, Inc., which did business as Chicago International Trucks, Mcgrenho L.L.C., which did business as Indy Truck Sales, and Indiana Mack Leasing, LLC; and the membership interests of Idealease of Chicago, LLC. This acquisition added 10 dealership locations to our Rush Truck Centers network and expanded our leasing capabilities in Chicago and Indianapolis, two major leasing markets. Rush Truck Centers now has 106 locations in 20 states, allowing us to serve customers operating in markets where our dealerships are located as well as those whose operations route them through our market areas.

 

In less than 13 months, the Company added 37 dealerships to its network. As a result of these acquisitions and the Company’s ongoing implementation of a new dealer management system, the Company continued to make substantial investments necessary to support this growth and its long-term strategy in the first quarter.

 

The Company’s overall parts, service and body shop sales increased 33.5% in the first quarter of 2014 compared to the first quarter of 2013. This contributed to the Company achieving an absorption ratio of 111.2% for the quarter ended March 31, 2014.

 

 

 
17

 

 

 

Revenues

 

Revenues increased $201.9 million, or 26.7%, in the first quarter of 2014 compared to the first quarter of 2013.

 

Parts, service and body shop revenues increased $77.5 million, or 33.5%, in the first quarter of 2014 compared to the first quarter of 2013. This increase was primarily the result of acquisitions that occurred since the first quarter of 2013. The Company expects parts, service and body shop sales to continue to remain strong through 2014 and remains focused on expanding aftermarket product and service offerings.

 

Revenues from sales of new and used commercial vehicles increased $111.3 million, or 22.7%, in the first quarter of 2014 compared to the first quarter of 2013.

 

The Company sold 2,688 heavy-duty trucks in the first quarter of 2014, a 30.2% increase compared to 2,065 heavy-duty trucks in the first quarter of 2013. According to A.C.T. Research Co., LLC (“A.C.T. Research”), a truck industry data and forecasting service provider, the U.S. Class 8 truck market increased 15% in the first quarter of 2014 compared to the first quarter of 2013. A.C.T. Research currently predicts U.S. retail sales of Class 8 trucks of approximately 217,000 units in 2014, 223,000 units in 2015, and 215,000 units in 2016, compared to approximately 188,000 units in 2013. The Company’s share of the U.S. Class 8 truck sales market was approximately 5.1% in 2013. The Company expects its market share to range between 5.5% and 6.0% of U.S. Class 8 truck sales in 2014. This market share percentage would result in the sale of approximately 11,900 to 13,000 of Class 8 trucks in 2014 based on A.C.T. Research’s estimate of U.S. retail sales of 217,000 units.

 

The Company sold 1,966 Class 4 through 7 commercial vehicles, including 243 buses, in the first quarter of 2014, a 0.6% increase compared to 1,954 medium-duty commercial vehicles, including 190 buses, in 2013. A.C.T. Research estimates that unit sales of Class 4 through 7 commercial vehicles in the U.S. increased approximately 10.0% in the first quarter of 2014, compared to the first quarter of 2013. A.C.T. Research currently predicts U.S. retail sales of Class 4 through 7 medium-duty commercial vehicles of approximately 193,500 units in 2014, 201,500 units in 2015, and 198,700 in 2016. In 2013, the Company achieved a 4.7% share of the Class 4 through 7 commercial vehicle sales market in the U.S. The Company expects its market share to range between 4.7% and 5.0% of U.S. Class 4 through 7 commercial vehicle sales in 2014. This market share percentage would result in the sale of approximately 9,100 to 9,700 of Class 4 through 7 commercial vehicles in 2014 based on A.C.T. Research’s current U.S. retail sales estimates of 193,500 units.

 

The Company sold 486 light-duty vehicles in the first quarter of 2014, a 23.0% increase compared to 395 light-duty vehicles in the first quarter of 2013. The Company expects to sell approximately 2,000 light-duty vehicles in 2014.

 

The Company sold 1,703 used commercial vehicles in the first quarter of 2014, a 20.4% increase compared to 1,414 used commercial vehicles in the first quarter of 2013. This increase was primarily the result of acquisitions that occurred since the first quarter of 2013. The Company expects to sell 7,500 to 8,500 used commercial vehicles in 2014. The volume of used commercial vehicle sales will be largely dependent upon our ability to acquire quality used commercial vehicles and maintain an adequate used commercial vehicle inventory throughout 2014.

 

Truck lease and rental revenues increased $10.8 million, or 36.0%, in the first quarter of 2014 compared to the first quarter of 2013. The increase in lease and rental revenue is primarily due to acquisitions that occurred since the first quarter of 2013. The Company expects lease and rental revenue to increase 35% to 40% during 2014, compared to 2013.

 

Finance and insurance revenues increased $0.9 million, or 30.1%, in the first quarter of 2014 compared to the first quarter of 2013. The Company expects finance and insurance revenue to fluctuate proportionately with the Company’s new and used commercial vehicle sales in 2014. Finance and insurance revenues have limited direct costs and, therefore, contribute a disproportionate share of the Company’s operating profits.

 

Gross Profit

 

Gross profit increased $32.1 million, or 24.0%, in the first quarter of 2014, compared to the first quarter of 2013. Gross profit as a percentage of sales decreased to 17.3% in the first quarter of 2014 from 17.7% in the first quarter of 2013. This decrease in gross profit as a percentage of sales is a result of a decrease in margins in parts, service and body shop operations.

 

 

 
18

 

 

 

Gross margins from the Company’s parts, service and body shop operations decreased to 35.7% in the first quarter of 2014, from 37.1% in the first quarter of 2013. A portion of this decrease is attributable to an increase in gross profits derived from parts sales, a lower margin sale, relative to gross profits derived from service and body shop operations. Gross profit for the parts, service and body shop departments increased to $110.3 million in the first quarter of 2014 from $85.8 million in the first quarter of 2013. Historically, parts operations gross margins range from 27% to 28% and service and body shop operations range from 67% to 68%. Gross profits from parts sales represented 57% of total gross profit for parts, service and body shop operations in the first quarter of 2014, compared to 55% in the first quarter of 2013. Service and body shop operations represented 43% of total gross profit for parts, service and body shop operations in the first quarter of 2014, compared to 45% in the first quarter of 2013. The Company expects blended gross margins on parts, service and body shop operations to range from 35.0% to 37.0% in 2014.

 

Gross margins on Class 8 truck sales increased slightly to 7.5% in the first quarter of 2014 from 7.4% in the first quarter of 2013. In 2014, the Company expects overall gross margins from Class 8 truck sales of approximately 6.5% to 7.5%.

 

Gross margins on medium-duty commercial vehicle sales decreased to 5.6% in the first quarter of 2014, from 5.7% in the first quarter of 2013. It is difficult to accurately forecast gross margins on medium-duty commercial vehicles because gross margins vary significantly depending upon the mix of fleet and non-fleet purchasers and types of medium-duty commercial vehicles sold. For 2014, the Company expects overall gross margins from medium-duty commercial vehicle sales of approximately 5.1% to 5.6%, but this will largely depend upon the mix of purchasers and types of vehicles sold.

 

Gross margins on used commercial vehicle sales decreased to 9.3% in the first quarter of 2014, from 10.0% in the first quarter of 2013. The Company expects margins on used commercial vehicles to range between 8.0% and 10.0% during 2014 depending upon general economic conditions and the availability of quality used vehicles.

 

Gross margins from truck lease and rental sales decreased to 12.4% in the first quarter of 2014, from 18.0% in the first quarter of 2013. The decrease in gross margins is primarily due to the acquisitions in Illinois and Indiana and the impact of the harsh weather conditions on variable revenue in the first quarter of 2014. The Company expects gross margins from lease and rental sales of approximately 13.5% to 15.5% during 2014, as it expects to continue to grow its lease and rental fleet. 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 $32.3 million, or 31.7%, in the first quarter of 2014, compared to the first quarter of 2013. SG&A expenses as a percentage of total revenue increased to 14.0% in the first quarter of 2014, from 13.5% in the first quarter of 2013. SG&A expenses as a percentage of total revenue have historically ranged from 10.0% to 15.0%. For 2014, the Company expects SG&A expenses as a percentage of total revenue to range from 13.5% to 14.5% and the selling portion of SG&A expenses to be approximately 25% to 30% of new and used commercial vehicle gross profit. In 2014, the Company expects the general and administrative portion of SG&A expenses to increase by approximately 20.0% compared to 2013 due primarily to the full year effect of the acquisitions that occurred since the first quarter of 2013 and the addition of resources and technology to integrate the Company’s network of dealerships.

 

Depreciation and Amortization Expense

 

Depreciation and amortization expense increased $1.7 million, or 24.0%, in the first quarter of 2014 compared to 2013. This increase is primarily due to acquisitions that occurred since the first quarter of 2013, the construction of new dealerships and dealership renovations and expansions.

 

 

 
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 Interest Expense, Net

 

Net interest expense increased $0.6 million, or 24.5%, in the first quarter of 2014 compared to the first quarter of 2013. The increase in net interest expense is primarily due to the increased levels of commercial vehicle inventory. Net interest expense in 2014 will depend on inventory levels and the amount of cash available to make prepayments on the Company’s floor plan agreement with GE Capital Commercial, Inc. (“GE Capital”).

 

Income before Income Taxes

 

As a result of the factors described above, income from continuing operations before income taxes decreased $2.5 million, or 11.2%, in the first quarter of 2014 compared to the first quarter of 2013.

 

Income Taxes

 

Income taxes decreased $1.0 million, or 11.1%, in the first quarter of 2014, compared to the first quarter of 2013. The Company provided for taxes at a 38.75% effective rate in the first quarter of 2014 compared to an effective rate of 38.7% in the first quarter of 2013. The Company expects its effective tax rate to be approximately 38% to 39% of pretax income in 2014.

 

Liquidity and Capital Resources

 

The Company’s short-term cash requirements are primarily for working capital, inventory financing, the renovation and expansion of existing facilities and the construction or purchase of new facilities. Historically, these cash requirements have been met through the retention of profits, borrowings under our floor plan arrangements and bank financings. As of March 31, 2014, the Company had working capital of approximately $145.5 million, including $94.4 million in cash available to fund our operations. The Company believes that these funds are sufficient to meet its operating requirements for at least the next twelve months. From time to time, the Company utilizes its excess cash on hand to pay down its outstanding borrowings under its credit agreement with GE Capital, and the resulting interest earned is recognized as an offset to the Company’s gross interest expense under the credit agreement.

 

The Company has a secured line of credit that provides for a maximum borrowing of $15.0 million. There were no advances outstanding under this secured line of credit at March 31, 2014, however, $11.8 million was pledged to secure various letters of credit related to self-insurance products, leaving $3.2 million available for future borrowings as of March 31, 2014.

 

The Company’s long-term real estate debt agreements 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. As of March 31, 2014, the Company was in compliance with all debt covenants related to debt secured by real estate and lease and rental units and its floor plan credit agreement. The Company does not anticipate any breach of the covenants in the foreseeable future.

 

The Company expects to purchase or lease trucks worth approximately $170.0 million for its leasing operations during 2014, depending on customer demand, all of which will be financed. The Company also expects to make capital expenditures for recurring items such as computers, shop tools and equipment and vehicles of approximately $16.0 million to $18.0 million during 2014.

 

The Company is currently under contracts to construct dealership facilities in San Antonio, Texas, at an estimated cost of $12.0 million, Abilene, Texas at an estimated cost of $1.8 million and Orlando, Florida, at an estimated cost of $4.1 million. These construction projects are estimated to continue through the first quarter of 2015.

 

The Company anticipates funding its capital expenditures relating to the improvement and expansion of existing facilities and recurring expenses through its operating cash flow. The Company expects to fund the construction or purchase of new facilities through either its operating cash flow or by financing 70% to 80% of the appraised value of such facility.

 

 

 
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In January 2014, the Company acquired certain assets of CIT, Inc., which did business as Chicago International Trucks, Mcgrenho L.L.C., which did business as Indy Truck Sales, and Indiana Mack Leasing, LLC; and the membership interests of Idealease of Chicago, LLC. The acquisition included International commercial truck dealerships and Idealease commercial vehicle rental and leasing businesses in Carol Stream, Chicago, Grayslake, Huntley, Joliet, Kankakee and Ottawa, Illinois, and Brazil, Gary and Indianapolis, Indiana. The purchase price for the assets, membership interests, goodwill and dealership properties was approximately $145.1 million, which was paid in cash and 83,091 shares of the Company’s Class B Common Stock with a total value of $2.0 million on the date of acquisition.

 

On February 4, 2014, the Company announced that its Board of Directors approved a new stock repurchase program authorizing the Company to repurchase, from time to time, up to an aggregate of $40.0 million shares of Class A Common Stock and/or Class B Common Stock. The new stock repurchase program replaces the previous $40 million stock repurchase program that was set to expire on February 11, 2014. 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. The stock repurchase program expires on February 3, 2015, 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.

 

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 or purchase of new facilities based on market opportunities. The Company has no other material commitments for capital expenditures as of March 31, 2014.

 

Cash Flows

 

Cash and cash equivalents decreased by $122.9 million during the three months ended March 31, 2014, and increased by $6.3 million during the three months ended March 31, 2013. The major components of these changes are discussed below.

 

Cash Flows from Operating Activities

 

Cash flows from operating activities include net income adjusted for non-cash items and the effects of changes in working capital. During the first quarter of 2014, operating activities resulted in net cash used by operations of $7.1 million. Cash used by operating activities was primarily impacted by the increase in inventories and receivables and the decrease in customer deposits and accrued liabilities, which was offset by the increase in trade payables and floor plan financing trade, net.

 

During the first quarter of 2013, operating activities resulted in net cash provided by operations of $57.1 million. Cash provided by operating activities was primarily impacted by the decrease in inventories and receivables and the increase in accounts payable, which was offset by the decrease in accrued liabilities.

 

In June 2012, the Company entered into a wholesale financing agreement with Ford Motor Credit Company that provides for the financing of, and is collateralized by, the Company’s Ford new vehicle inventory. This wholesale financing agreement bears interest at a rate of Prime plus 150 basis points minus certain incentives and rebates; however, the prime rate is defined to be a minimum of 3.75%. As of March 31, 2014, the interest rate on the wholesale financing agreement was 5.25% before considering the applicable incentives. As of March 31, 2014, the Company had an outstanding balance of $55.0 million under the Ford Motor Credit Company wholesale financing agreement.

 

Cash Flows from Investing Activities

 

Cash flows used in investing activities consist primarily of cash used for capital expenditures and business acquisitions. During the first quarter of 2014, cash used in investing activities was $194.2 million. Capital expenditures consisted of purchases of property and equipment and improvements to our existing dealership facilities of $53.2 million. Property and equipment purchases during the first quarter of 2014 consisted of $38.1 million for additional units for rental and leasing operations, which was directly offset by borrowings of long-term debt. The Company expects to purchase or lease trucks worth approximately $170.0 million for its leasing operations in 2014, depending on customer demand, all of which will be financed. Cash used in business acquisitions was $143.1 million during the first quarter of 2014. See Note 10 of the Notes to Consolidated Financial Statements for a detailed discussion of the business acquisitions. During 2014, the Company expects to make capital expenditures for recurring items such as computers, shop equipment and vehicles of $16.0 million to $18.0 million.

 

 

 
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During the first quarter of 2013, cash used in investing activities was $29.4 million. Capital expenditures consisted of purchases of property and equipment and improvements to our existing dealership facilities of $30.2 million. Property and equipment purchases during the first quarter of 2013 consisted of $22.2 million for additional units for rental and leasing operations, which was directly offset by borrowings of long-term debt.

 

Cash Flows from Financing Activities

 

Cash flows from financing activities include borrowings and repayments of long-term debt and net proceeds of floor plan notes payable, non-trade. Cash provided by financing activities was $78.4 million during the first quarter of 2014. The Company had borrowings of long-term debt of $61.9 million and repayments of long-term debt and capital lease obligations of $27.9 million during the first quarter of 2014. The Company had net draws on floor plan notes payable, non-trade of $45.2 million during the first quarter of 2014. The borrowings of long-term debt were primarily related to units for the rental and leasing operations.

 

Cash used in financing activities was $21.4 million during the first quarter of 2013. The Company had borrowings of long-term debt of $30.6 million and repayments of long-term debt and capital lease obligations of $25.9 million during the first quarter of 2013. The Company had net payment on floor plan notes payable, non-trade of $34.1 million during the first quarter of 2013. The borrowings of long-term debt were primarily related to units for the rental and leasing operations.

 

Most of the Company’s commercial vehicle purchases are made on terms requiring payment to the manufacturer within 15 days or less from the date the commercial vehicles are invoiced from the factory. On July 11, 2013, the Company entered into the third amendment to its credit agreement with GE Capital. The amendment increased the aggregate loan commitment to $750.0 million. Borrowings under the amended credit agreement will now bear interest per annum, payable monthly, at the three month LIBOR rate, determined on the last day of the prior month, plus 2.03%.  In addition, the Company is required to pay the lenders a monthly working capital fee equal to 0.35% per annum multiplied by the amount of voluntary prepayments of new and used inventory loans. Loans under the credit agreement for the purchase of used inventory are limited to $150.0 million. Pursuant to the third amendment, the credit agreement expires July 11, 2016, although GE Capital has the right to terminate the credit agreement at any time upon 120 days’ written notice. The Company may terminate the credit agreement at any time, although if it does so it must pay the lenders a prepayment processing fee of (i) $15,000,000 if it terminates on or prior to January 11, 2015, (ii) $7,500,000 if it terminates after January 11, 2015 but on or prior to July 11, 2015 and (iii) $300,000 if it terminates thereafter, subject in each case to specified limited exceptions. On March 31, 2014, the Company had approximately $604.3 million outstanding under its credit agreement with GE Capital. The average daily outstanding borrowings under the credit agreement with GE Capital during the three months ended March 31, 2014 were $529.7 million. From time to time, the Company utilizes its excess cash on hand to pay down its outstanding borrowings under its credit agreement with GE Capital, and the resulting interest earned is recognized as an offset to the Company’s gross interest expense under the credit agreement.

 

Navistar Financial Corporation and Peterbilt offer trade terms that provide an interest free inventory stocking period for certain new commercial vehicles.  If the commercial vehicle is not sold within the interest free period, the Company then finances the commercial vehicle under the GE Capital credit agreement. 

 

Backlog

 

On March 31, 2014, the Company’s backlog of commercial vehicle orders was approximately $1,219.3 million as compared to a backlog of commercial vehicle orders of approximately $770.8 million on March 31, 2013. The Company includes only confirmed orders in its backlog. The delivery time for a custom-ordered commercial vehicle varies depending on the truck specifications and demand for the particular model ordered, however, the Company expects to fill the majority of its backlog orders during 2014. The Company sells the majority of its new heavy-duty commercial vehicles by customer special order. The Company sells the majority of its medium- and light-duty commercial vehicles out of inventory. Orders from a number of the Company’s major fleet customers are included in the Company’s backlog as of March 31, 2014.

 

Seasonality

 

The Company’s Truck Segment is moderately seasonal. Seasonal effects on new commercial vehicle sales related to the seasonal purchasing patterns of any single customer type are mitigated by the diverse geographic locations of our dealerships and the Company’s diverse customer base, including regional and national fleets, local governments, corporations and owner operators. However, commercial vehicle parts and service operations historically have experienced higher sales volumes in the second and third quarters.

 

 

 
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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.

 

Environmental Standards and Other Governmental Regulations

 

The Company is subject to a wide range of federal, state and local environmental laws and regulations, including those governing discharges into the air and water; the operation and removal of underground and aboveground storage tanks; the use, handling, storage and disposal of hazardous substances, petroleum and other materials; and the investigation and remediation of environmental impacts. As with commercial vehicle dealerships generally, and service, parts and body shop operations in particular, our business involves the generation, use, storage, handling and contracting for recycling or disposal of hazardous materials or wastes and other environmentally sensitive materials. The Company has incurred, and will continue to incur, capital and operating expenditures and other costs in complying with such laws and regulations.

 

Our operations involving the use, handling, storage and disposal of hazardous and nonhazardous materials are subject to the requirements of the federal Resource Conservation and Recovery Act, or RCRA, and comparable state statutes. Pursuant to these laws, federal and state environmental agencies have established approved methods for handling, storage, treatment, transportation and disposal of regulated substances and wastes with which the Company must comply. Our business also involves the operation and use of above ground and underground storage tanks. These storage tanks are subject to periodic testing, containment, upgrading and removal under RCRA and comparable state statutes. Furthermore, investigation or remediation may be necessary in the event of leaks or other discharges from current or former underground or aboveground storage tanks.

 

The Company may also have liability in connection with materials that were sent to third-party recycling, treatment, or disposal facilities under the federal Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, and comparable state statutes. These statutes impose liability for investigation and remediation of environmental impacts without regard to fault or the legality of the conduct that contributed to the impacts. Responsible parties under these statutes may include the owner or operator of the site where impacts occurred and companies that disposed or arranged for the disposal of the hazardous substances released at these sites. These responsible parties also may be liable for damages to natural resources. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances or other materials into the environment.

 

The federal Clean Water Act and comparable state statutes prohibit discharges into regulated waters without the necessary permits, require containment of potential discharges of oil or hazardous substances, and require preparation of spill contingency plans. Water quality protection programs govern certain discharges from some of our operations. Similarly, the federal Clean Air Act and comparable state statutes regulate emissions of various air emissions through permitting programs and the imposition of standards and other requirements.

 

 

 
23

 

 

 

The Company believes that it does not currently have any material environmental liabilities and that compliance with environmental laws and regulations will not, individually or in the aggregate, have a material adverse effect on our results of operations, financial condition or cash flows. However, soil and groundwater impacts are known to exist at some of our current properties. Further, environmental laws and regulations are complex and subject to change. In addition, in connection with acquisitions, it is possible that the Company will assume or become subject to new or unforeseen environmental costs or liabilities, some of which may be material. In connection with our dispositions, or prior dispositions made by companies we acquire, the Company may retain exposure for environmental costs and liabilities, some of which may be material. Compliance with current or amended, or new or more stringent, laws or regulations, stricter interpretations of existing laws or the future discovery of environmental conditions could require additional expenditures by us, and those expenditures could be material.

 

In 2010, the EPA and the U.S. Department of Transportation (DOT) announced the first national standards to reduce greenhouse gas (GHG) emissions and improve fuel efficiency of heavy-duty trucks and buses beginning in model year 2014. The final rules, which were issued on September 15, 2011, begin to apply in 2014 and are fully implemented in model year 2017. The EPA and DOT have announced plans to extend these standards beyond model year 2018, but have not yet proposed regulations. We do not believe that the foregoing standards will negatively impact our business, however, future legislation or other new regulations that may be adopted to address greenhouse gas emissions may negatively impact our business. Regulations could result in increased compliance costs, additional operating restrictions or changes in demand for our products and services, which could have a material adverse effect on our business, financial condition and results of operation.

 

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Market risk represents the risk of loss that may impact the financial position, results of operations, or cash flows of the Company due to adverse changes in financial market prices, including interest rate risk, and other relevant market rate or price risks.

 

The Company is exposed to some market risk through interest rates related to our floor plan financing agreements, variable rate real estate debt and discount rates related to finance sales. The majority of floor plan debt and variable rate real estate debt is based on LIBOR. As of March 31, 2014, the Company had floor plan borrowings and variable interest rate real estate debt of approximately $733.3 million. Assuming an increase or decrease in LIBOR of 100 basis points, annual interest expense could correspondingly increase or decrease by approximately $7.3 million.

 

The Company offers 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 interest rate real estate debt. As of March 31, 2014, the Company had interest rate swaps with a total notional amount of $37.5 million. The swaps were designed to provide a hedge against changes in interest rates on some of the Company’s variable interest rate 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 6 – Financial Instruments and Fair Value of the Notes to Consolidated Financial Statements.

 

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 $94.4 million on March 31, 2014. 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 $0.9 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. Auctions for investment grade securities held by the Company have failed. The auction rate securities continue to pay interest in accordance with the terms of the underlying security; however, liquidity will be limited until there is a successful auction or until such time as other markets for these investments develop. As of March 31, 2014, the Company holds auction rate securities, with underlying tax-exempt municipal bonds that mature in 2030, that have a fair value of $6.6 million. Given the current market conditions in the auction rate securities market, if the Company determines that the fair value of these securities temporarily decreases by an additional 10%, the Company’s equity could correspondingly decrease by approximately $0.7 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 $0.7 million. For further discussion of the risks related to our auction rate securities, see Note 6 – Financial Instruments and Fair Value of the Notes to Consolidated Financial Statements.

 

 

 
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ITEM 4. Controls and Procedures.

 

The Company, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2014 to ensure that information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) is accumulated and communicated to Company management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

There has been no change in the Company’s internal control over financial reporting that occurred during the three months ended March 31, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

ITEM 1. Legal Proceedings.

 

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 or results of operations. We believe that there are no claims or litigation pending, the outcome of which could have a material adverse effect on the 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 financial condition or results of operations for the fiscal period in which such resolution occurred.

 

ITEM 1A. Risk Factors.

 

While we attempt to identify, manage and mitigate risks and uncertainties associated with our business to the extent practical under the circumstances, some level of risk and uncertainty will always be present. Item 1A, Part I of our 2013 Annual Report on Form 10-K (the “2013 Annual Report”) describes some of the risks and uncertainties associated with our business that have the potential to materially affect our business, financial condition or results of operations.

 

There has been no material change in our risk factors disclosed in our 2013 Annual Report.

 

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

On January 13, 2014, the Company completed its previously announced acquisition of certain assets of CIT, Inc., which does business as Chicago International Trucks, Mcgrenho L.L.C., which does business as Indy Truck Sales, and Indiana Mack Leasing, LLC; and the membership interests of Idealease of Chicago, LLC. The purchase price for the assets, membership interests, goodwill and dealership properties was approximately $145.0 million, which was paid in cash and 83,091 shares of the Company’s Class B Common Stock with a total value of $2.0 million on the date of acquisition, which were issued to one of the selling parties. Based in part on representations from the selling party regarding its sophistication, net worth and access to information concerning us, the issuance of the Company’s Class B Common Stock was exempt from registration requirements under Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D thereunder.

 

Except as described above, we did not make any other unregistered sales of equity securities during the first quarter of 2014.

 

 

 
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A summary of the repurchase activity for the Company’s first quarter of 2014 is as follows:

 

Period

 

Total Number

of Shares

Purchased

(1)(2)(3)

   

Average

Price Paid

Per Share

(1)

   

Total Number of Shares Purchased

as Part of Publicly Announced Plans

or Programs (2)

   

Approximate

Dollar Value of Shares that May

Yet be Purchased Under the Plans

 or Programs (3)

 

January 1 – January 31, 2014

 

22,489

    $ 23.96       577,165     $ 26,604,790  

February 1 – February 28, 2014

    129,510       23.87       706,675       36,977,252  

March 1 – March 31, 2014

    6,625       24.52       713,300       36,814,776  

Total

    158,624               713,300       36,814,776  

 ______________

(1)

The calculation of the average price paid per share does not give effect to any fees, commissions or other costs associated with the repurchase of such shares.

(2)  The shares represent Class B Common Stock repurchased by the Company.
(3) The Company repurchased shares under a stock repurchase program announced on February 12, 2013, which authorized the repurchase of up to $40.0 million of its shares of Class A Common Stock and/or Class B Common Stock. This stock repurchase program expired on February 3, 2014. A total of 580,126 shares of Class B Common Stock were repurchased under this program prior to its expiration. On February 4, 2014, the Company announced a new stock repurchase program, which authorized the repurchase of up to $40.0 million of its shares of Class A Common Stock and/or Class B Common Stock. Through March 31, 2014, 133,174 shares of Class B Common Stock have been repurchased under the new program.

    

ITEM 3. Defaults Upon Senior Securities.

 

Not Applicable

 

ITEM 4. Mine Safety Disclosures.

 

Not Applicable

 

ITEM 5. Other Information.

 

Not Applicable

 

 

 
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ITEM 6. Exhibits.

 

Exhibit

 Number

 

Exhibit Title

3.1

 

Restated Articles of Incorporation of Rush Enterprises, Inc. (incorporated herein by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q (File No. 000-20797) for the quarter ended June 30, 2008)

3.2

 

Rush Enterprises, Inc. Amended and Restated Bylaws (incorporated herein by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K (File No. 000-20797) filed May 21,2013)

31.1*

 

Certification of CEO pursuant to Rules 13a-14(a) and 15d-14(a) adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*

 

Certification of CFO pursuant to Rules 13a-14(a) and 15d-14(a) adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**

 

Certification of CEO pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**

 

Certification of CFO pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*

 

XBRL Instance Document.

101.SCH*

 

XBRL Taxonomy Extension Schema Document.

101.CAL*

 

XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF*

 

XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB*

 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE*

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

*     Filed herewith    

**

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.

 

 

 
27

 

 

 

SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   

RUSH ENTERPRISES, INC.

 
         
         
         
         

 Date:     May 12, 2014 

 

By:

 /S/ W.M. “RUSTY” RUSH

 

 

 

 

 W.M. “Rusty” Rush

 

     

Chairman, President and Chief Executive Officer

 
     

(Principal Executive Officer)

 
         
         
         
Date:     May 12, 2014  

By:

/S/ STEVEN L. KELLER  
     

Steven L. Keller

 
     

Senior Vice President and Chief Financial Officer

 
     

(Principal Financial and Accounting Officer)

 

   

 

 

 

 

 

         

 
28

 

 

 

EXHIBIT INDEX

 

 

 

Exhibit

Number

Exhibit Title

31.1*

Certification of CEO pursuant to Rules 13a-14(a) and 15d-14(a) adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*

Certification of CFO pursuant to Rules 13a-14(a) and 15d-14(a) adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*

Certification of CEO pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**

Certification of CFO pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*

XBRL Instance Document.

101.SCH*

XBRL Taxonomy Extension Schema Document.

101.CAL*

XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF*

XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB*

XBRL Taxonomy Extension Label Linkbase Document

101.PRE*

XBRL Taxonomy Extension Presentation Linkbase Document

 

Filed herewith    

**

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.

 

 

 

 

 

 

  

 29

 

ex31-1.htm

 

EXHIBIT 31.1

 

CERTIFICATION

 

I, W.M. “Rusty” Rush, certify that:

 

1.     I have reviewed this quarterly report on Form 10-Q of Rush Enterprises, Inc.;

 

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.     The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

(c)      Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)      Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.     The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

 

(a)      All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

(b)      Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

 

 

 

Date:     May 12, 2014   

 

 By:

/S/ W.M. “RUSTY” RUSH

 

 

 

W.M. “Rusty” Rush

 

 

 

Chairman, President and Chief Executive Officer

     

(Principal Executive Officer)

                                                                                                                                                                               

 

 

 

ex31-2.htm

EXHIBIT 31.2

 

CERTIFICATION

 

I, Steven L. Keller, certify that:

 

1.     I have reviewed this quarterly report on Form 10-Q of Rush Enterprises, Inc.;

 

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.     The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

(c)      Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)      Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.     The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

 

(a)      All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

(b)      Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

 

 

Date:     May 12, 2014 

 

By:

/S/ STEVEN L. KELLER

 

 

 

Steven L. Keller

 

 

 

Senior Vice President and Chief Financial Officer

      (Principal Financial and Accounting Officer)

                                                                                                                                                                                    

 

                       

 

 

ex32-1.htm

EXHIBIT 32.1

 

 

 

certification pursuant to
18 u.s.c. section 1350,
as adopted pursuant to
section 906 of the sarbanes-oxley act of 2002

 

In connection with this quarterly report of Rush Enterprises, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, W.M. “Rusty” Rush, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

 

1.

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

 

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

 

 

By:

   /S/ W.M. “RUSTY” RUSH

 

Name:

W.M. “Rusty” Rush

 

Title: 

Chairman, President and Chief Executive Officer

  Date:  May 12, 2014

 

 

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

 

 

 

ex32-2.htm

EXHIBIT 32.2

 

 

certification pursuant to
18 u.s.c. section 1350,
as adopted pursuant to
section 906 of the sarbanes-oxley act of 2002

 

In connection with this quarterly report of Rush Enterprises, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steven L. Keller, Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

 

1.

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

 

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

 

 

 

By:

/S/ STEVEN L. KELLER

 

 

Name:

Steven L. Keller

 

 

Title:

Senior Vice President and Chief Financial Officer

 

  Date: May 12, 2014  

                                                                 

                                                                                                                                      

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.