rusha20200930_10q.htm
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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended September 30, 2020

 

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)

 

Texas74-1733016
(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) 302-5200
(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 ☑          No ☐

 

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☑          No ☐

 

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

 

Large accelerated filerAccelerated filer ☐ Non-accelerated filer ☐Smaller Reporting company
    
   Emerging growth company 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 Yes           No ☑

 

Indicated below is the number of shares outstanding of each of the issuer’s classes of common stock, as of October 30, 2020.

 

 

 Number of Shares
Title of Class Outstanding
Class A Common Stock, $.01 Par Value42,228,096
Class B Common Stock, $.01 Par Value12,508,881

  

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A Common Stock, $0.01 par value

RUSHA

NASDAQ Global Select Market

Class B Common Stock, $0.01 par value

RUSHB

NASDAQ Global Select Market

 

 

 

RUSH ENTERPRISES, INC. AND SUBSIDIARIES

 

 

INDEX

 

 

 

 

    Page
PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements  
     
  Consolidated Balance Sheets - September 30, 2020 (unaudited) and December 31, 2019 3
     
  Consolidated Statements of Income and Comprehensive Income - For the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited) 4
     
  Consolidated Statements of Shareholders’ Equity – For the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited) 5
     
  Consolidated Statements of Cash Flows - For the Nine Months Ended September 30, 2020 and 2019 (unaudited) 7
     
  Notes to Consolidated Financial Statements (unaudited) 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
     
Item 4. Controls and Procedures 29
     
     
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 29
     
Item 1A. Risk Factors 29
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 30
     
Item 3. Defaults Upon Senior Securities 30
     
Item 4. Mine Safety Disclosures 30
     
Item 5. Other Information 30
     
Item 6. Exhibits 31
     
SIGNATURES 32

                         

 

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements.

 

 

RUSH ENTERPRISES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Shares)

 

  

September 30,

  

December 31,

 
  

2020

  

2019

 
  

(unaudited)

     

Assets

        

Current assets:

        

Cash and cash equivalents

 $259,543  $181,620 

Accounts receivable (less allowances for credit losses of $1,262 and $1,424, respectively)

  155,677   183,704 

Inventories, net

  937,878   1,326,080 

Prepaid expenses and other

  13,315   20,728 

Assets held for sale

     419 

Total current assets

  1,366,413   1,712,551 

Property and equipment, net

  1,227,275   1,279,931 

Operating lease right-of-use assets, net

  57,535   57,197 

Goodwill, net

  292,142   292,142 

Other assets, net

  67,324   65,508 

Total assets

 $3,010,689  $3,407,329 
         

Liabilities and shareholders’ equity

        

Current liabilities:

        

Floor plan notes payable

 $613,700  $996,336 

Current maturities of long-term debt

  179,450   189,265 

Current maturities of finance lease obligations

  23,940   22,892 

Current maturities of operating lease obligations

  9,986   10,114 

Trade accounts payable

  109,982   133,697 

Customer deposits

  36,584   42,695 

Accrued expenses

  115,621   112,390 

Total current liabilities

  1,089,263   1,507,389 

Long-term debt, net of current maturities

  385,408   438,413 

Finance lease obligations, net of current maturities

  85,268   69,478 

Operating lease obligations, net of current maturities

  48,212   47,555 

Other long-term liabilities

  22,765   20,704 

Deferred income taxes, net

  152,700   164,297 

Shareholders’ equity:

        

Preferred stock, par value $.01 per share; 1,000,000 shares authorized; 0 shares outstanding in 2020 and 2019

      

Common stock, par value $.01 per share; 60,000,000 Class A shares and 20,000,000 Class B shares authorized; 42,208,299 Class A shares and 12,518,877 Class B shares outstanding in 2020; and 41,930,472 Class A shares and 12,360,729 Class B shares outstanding in 2019

  547   465 

Additional paid-in capital

  428,823   397,267 

Treasury stock, at cost: 24,892 Class B shares in 2020 and 7,583,674 Class A shares and 7,959,511 Class B shares in 2019

  (723)  (304,129)

Retained earnings

  798,606   1,065,553 

Accumulated other comprehensive (loss) income

  (180)  337 

Total shareholders’ equity

  1,227,073   1,159,493 

Total liabilities and shareholders’ equity

 $3,010,689  $3,407,329 

 

 

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

 

 

 

RUSH ENTERPRISES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(In Thousands, Except Per Share Amounts)

(Unaudited)

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Revenues

                               

New and used commercial vehicle sales

  $ 711,754     $ 1,070,868     $ 2,060,370     $ 2,933,952  

Aftermarket products and services sales

    400,260       454,785       1,205,791       1,341,305  

Lease and rental

    57,913       62,949       175,984       183,973  

Finance and insurance

    5,633       5,863       15,060       18,874  

Other

    3,008       4,800       10,538       14,039  

Total revenue

    1,178,568       1,599,265       3,467,743       4,492,143  

Cost of products sold

                               

New and used commercial vehicle sales

    658,192       997,946       1,908,225       2,717,484  

Aftermarket products and services sales

    258,379       284,328       766,990       830,153  

Lease and rental

    49,545       52,223       153,244       153,316  

Total cost of products sold

    966,116       1,334,497       2,828,459       3,700,953  

Gross profit

    212,452       264,768       639,284       791,190  

Selling, general and administrative expense

    155,487       192,482       496,756       573,644  

Depreciation and amortization expense

    14,423       14,033       43,269       40,552  

Gain (loss) on sale of assets

    326       70       1,807       (12 )

Operating income

    42,868       58,323       101,066       176,982  

Other income

    2,113       1,577       5,074       2,316  

Interest expense, net

    1,053       7,690       8,031       23,120  

Income before taxes

    43,928       52,210       98,109       156,178  

Income tax provision

    9,989       13,106       24,247       38,349  

Net income

  $ 33,939     $ 39,104     $ 73,862     $ 117,829  
                                 

Earnings per common share:

                               

Basic

  $ 0.62     $ 0.71     $ 1.35     $ 2.14  

Diluted

  $ 0.60     $ 0.70     $ 1.32     $ 2.09  
                                 

Weighted average shares outstanding:

                               

Basic

    55,033       54,817       54,734       55,116  

Diluted

    56,443       56,026       55,929       56,438  
                                 

Dividends declared per common share

  $ 0.14     $ 0.13     $ 0.40     $ 0.37  
                                 

Comprehensive income

  $ 34,427     $ 39,159     $ 73,345     $ 117,763  

 

 

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

 

 

 

RUSH ENTERPRISES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In Thousands)

(Unaudited)

 

   

Common Stock

                                   

Accumulated

         
   

Shares

    $0.01    

Additional

                   

Other

         
   

Outstanding

   

Par

   

Paid-In

   

Treasury

   

Retained

   

Comprehensive

         
    Class A     Class B     Value     Capital     Stock     Earnings     (Loss)Income     Total  
                                                                 

Balance, December 31, 2019

    41,930       12,361     $ 465     $ 397,267     $ (304,129 )   $ 1,065,553     $ 337     $ 1,159,493  

Stock options exercised and stock awards

    110             1       1,421                         1,422  

Stock-based compensation related to stock options, restricted shares and employee stock purchase plan

                      8,553                         8,553  

Vesting of restricted share awards

          337       2       (2,416 )                       (2,414 )

Issuance of common stock under employee stock purchase plan

    92             1       1,900                         1,901  

Common stock repurchases

    (833 )     (82 )                 (19,902 )                 (19,902 )

Dividend Class A common stock

                                  (3,646 )           (3,646 )

Dividend Class B common stock

                                  (1,108 )           (1,108 )

Other comprehensive loss

                                        (1,930 )     (1,930 )

Net income

                                  23,107             23,107  

Balance, March 31, 2020

    41,299       12,616     $ 469     $ 406,725     $ (324,031 )   $ 1,083,906     $ (1,593 )   $ 1,165,476  

Stock options exercised and stock awards

    294             2       4,529                         4,531  

Stock-based compensation related to stock options, restricted shares and employee stock purchase plan

                      3,586                         3,586  

Vesting of restricted share awards

                      (28 )                       (28 )

Dividend Class A common stock

                                  (3,581 )           (3,581 )

Dividend Class B common stock

                                  (1,165 )           (1,165 )

Other comprehensive income

                                        925       925  

Net income

                                  16,816             16,816  

Balance, June 30, 2020

    41,593       12,616     $ 471     $ 414,812     $ (324,031 )   $ 1,095,976     $ (668 )   $ 1,186,560  

Stock options exercised and stock awards

    537             3       8,701                         8,704  

Stock-based compensation related to stock options, restricted shares and employee stock purchase plan

                      3,324                         3,324  

Vesting of restricted share awards

          2             (14 )                       (14 )

Issuance of common stock under employee stock purchase plan

    85             1       2,000                         2,001  

Common stock repurchases

          (95 )                 (2,749 )                 (2,749 )

Cancellation of treasury stock

    (7 )     (4 )     72             326,057       (326,129 )            

Dividend Class A common stock

                                  (3,922 )           (3,922 )

Dividend Class B common stock

                                  (1,258 )           (1,258 )

Other comprehensive income

                                        488       488  

Net income

                                  33,939             33,939  

Balance, September 30, 2020

    42,208       12,519     $ 547     $ 428,823     $ (723 )   $ 798,606     $ (180 )   $ 1,227,073  

 

 

  

Common Stock

                  

Accumulated

     
  

Shares

  $0.01  

Additional

          

Other

     
  

Outstanding

  

Par

  

Paid-In

  

Treasury

  

Retained

  

Comprehensive

     
  Class A  Class B  Value  Capital  Stock  Earnings  Income (Loss)  Total 
                                 

Balance, December 31, 2018

  43,064   12,435  $458  $370,025  $(245,842) $942,287  $  $1,066,928 

Stock options exercised and stock awards

  88      1   1,230            1,231 

Stock-based compensation related to stock options, restricted shares and employee stock purchase plan

           8,836            8,836 

Vesting of restricted share awards

  1   339   2   (2,317)           (2,315)

Issuance of common stock under employee stock purchase plan

  86      1   1,680            1,681 

Common stock repurchases

  (959)  (80)        (26,048)        (26,048)

Dividend Class A common stock

                 (3,389)     (3,389)

Dividend Class B common stock

                 (991)     (991)

Other comprehensive income

                    384   384 

Net income

                 37,104      37,104 

Balance, March 31, 2019

  42,280   12,694  $462  $379,454  $(271,890) $975,011  $384  $1,083,421 

Stock options exercised and stock awards

  131         1,745            1,745 

Stock-based compensation related to stock options, restricted shares and employee stock purchase plan

           4,258            4,258 

Vesting of restricted share awards

           (517)           (517)

Common stock repurchases

  (377)  (100)        (12,062)        (12,062)

Dividend Class A common stock

                 (3,387)     (3,387)

Dividend Class B common stock

                 (1,050)     (1,050)

Other comprehensive loss

                    (505)  (505)

Net income

                 41,621      41,621 

Balance, June 30, 2019

  42,034   12,594  $462  $384,940  $(283,952) $1,012,195  $(121) $1,113,524 

Stock options exercised and stock awards

  55         904            904 

Stock-based compensation related to stock options, restricted shares and employee stock purchase plan

           2,709            2,709 

Vesting of restricted share awards

                        

Issuance of common stock under employee stock purchase plan

  90      1   1,806            1,807 

Common stock repurchases

  (469)  (168)        (16,089)        (16,089)

Dividend Class A common stock

                 (3,637)     (3,637)

Dividend Class B common stock

                 (1,124)     (1,124)

Other comprehensive income

                    55   55 

Net income

                 39,104      39,104 

Balance, September 30, 2019

  41,710   12,426  $463  $390,359  $(300,041) $1,046,538  $(66) $1,137,253 

 

 

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

 

 

 

RUSH ENTERPRISES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 

  

Nine Months Ended

 
  

September 30,

 
  

2020

  

2019

 

Cash flows from operating activities:

        

Net income

 $73,862  $117,829 

Adjustments to reconcile net income to net cash provided by operating activities:

        

Depreciation and amortization

  134,001   129,618 

(Gain) loss on sale of property and equipment

  (1,807)  12 

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

  15,463   15,803 

Deferred income tax (benefit) expense

  (11,597)  21,603 

Change in accounts receivable, net

  28,027   (29,153)

Change in inventories, net

  439,226   5,709 

Change in prepaid expenses and other, net

  7,413   (13,928)

Change in trade accounts payable

  (24,883)  9,848 

Payments on floor plan notes payable – trade, net

  (62,329)  (14,148)

Change in customer deposits

  (6,111)  (2,630)

Change in accrued expenses

  2,985   (18,715)

Other, net

  (3,781)  (227)

Net cash provided by operating activities

  590,469   221,621 

Cash flows from investing activities:

        

Acquisition of property and equipment

  (107,839)  (230,595)

Proceeds from the sale of property and equipment

  5,663   2,100 

Business acquisitions

     (10,168)

Purchase of equity method investment and call option

     (22,499)

Change in other assets

  3,278   2,412 

Net cash used in investing activities

  (98,898)  (258,750)

Cash flows from financing activities:

        

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

  (320,307)  42,370 

Proceeds from long-term debt

  139,870   162,039 

Draws on line of credit

     135,000 

Principal payments on long-term debt

  (202,690)  (141,844)

Principal payments on finance lease obligations

  (9,539)  (7,508)

Payments on line of credit

     (135,000)

Proceeds from issuance of shares relating to employee stock options and employee stock purchases

  16,103   4,536 

Payments of cash dividends

  (14,680)  (13,578)

Common stock repurchased

  (22,405)  (53,764)

Debt issuance costs

     (731)

Net cash used in financing activities

  (413,648)  (8,480)

Net increase (decrease) in cash and cash equivalents

  77,923   (45,609)

Cash and cash equivalents, beginning of period

  181,620   131,726 

Cash and cash equivalents, end of period

 $259,543  $86,117 

Supplemental disclosure of cash flow information:

        

Cash paid during the period for:

        

Interest

 $31,153  $43,909 

Income taxes, net of refunds

 $26,934  $41,197 

Noncash investing and financing activities:

        

Assets acquired under finance leases

 $34,839  $24,754 

Common stock repurchased

 $246  $435 

Guaranty agreement

 $  $5,025 

 

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

 

 

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 its 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, 2019. 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.

 

Stock Split

 

On September 15, 2020, the Board of Directors of the Company declared a 3-for-2 stock split of the Company’s Class A common stock and Class B common stock, to be effected in the form of a stock dividend. On October 12, 2020, the Company distributed one additional share of stock for every two shares of Class A common stock, par value $0.01 per share, and Class B common stock, par value $0.01 per share, held by shareholders of record as of September 28, 2020. All share and per share data in this Form 10-Q have been adjusted and restated to reflect the stock split as if it occurred on the first day of the earliest period presented.

 

Adoption of New Accounting Pronouncements

 

Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments - Credit Losses (“Topic 326”): Measurement of Credit Losses on Financial Instruments, was issued in June 2016. Under Topic 326, existing guidance on reporting credit losses for trade and other receivables, held-to-maturity debt securities and other instruments have been replaced with a new forward-looking "expected loss" model that results in the earlier recognition of allowances for losses. Under Topic 326, the Company is required to use a current expected credit loss (“CECL”) model that immediately recognizes an estimate of credit losses that are expected to occur over the life of the financial instruments that are within the scope of Topic 326. The CECL model uses a broader range of reasonable and supportable information in the development of credit loss estimates. The Company adopted Topic 326 on January 1, 2020, and the new standard did not result in a material impact on its consolidated financial statements. For a complete discussion of accounting for credit losses, see Note 12 – Accounts Receivable and Allowance for Credit Losses of the Notes to Consolidated Financial Statements.

 

COVID-19 Risks and Uncertainties

 

In March 2020, the World Health Organization made the assessment that COVID-19 could be characterized as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The Company’s nationwide network of commercial vehicle dealerships are classified as “essential businesses” and have remained operational across the Company’s dealership network. Despite the dealerships remaining open, the COVID-19 pandemic had a significant negative impact on our financial results during the quarter ended September 30, 2020. The Company is unable to predict the impact that the COVID-19 pandemic will have on its future business and operating results due to numerous uncertainties, including the duration and severity of the outbreak.

 

 

2 –Other Assets

 

ERP Platform

 

The total capitalized costs of the Company’s SAP enterprise resource planning software platform (“the ERP Platform”) of $7.4 million are recorded on the Consolidated Balance Sheet in Other Assets. Amortization expense relating to the ERP Platform, which is recognized in depreciation and amortization expense in the Consolidated Statements of Income and Comprehensive Income, was $0.5 million for the three months ended September 30, 2020 and the three months ended September 30, 2019, and $1.4 million for the nine months ended September 30, 2020 and the nine months ended September 30, 2019. The Company estimates that amortization expense relating to the ERP Platform will be approximately $1.5 million for 2021 and $1.2 million for each of the next four years.

 

 

Franchise Rights

 

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 $7.0 million as of September 30, 2020 and December 31, 2019, and is included in Other Assets on the accompanying Consolidated Balance Sheet. 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. Accordingly, the Company does not amortize manufacturer franchise rights.

 

Due to the fact that manufacturer franchise rights are specific to geographic region, the Company has determined that evaluating and including all locations acquired in the geographic region is the appropriate level for purposes of testing franchise rights for impairment. Management reviews indefinite-lived manufacturer franchise rights for impairment annually during the fourth quarter, or more often if events or circumstances indicate that an 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 the fair market value of its individual franchises.

 

The significant estimates and assumptions used by management in assessing the recoverability of manufacturer franchise rights include 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.

 

No impairment write-down was required in the period presented. The Company cannot predict the occurrence of certain events that might adversely affect the reported value of manufacturer franchise rights in the future.

 

Equity Method Investment and Call Option

 

On February 25, 2019, the Company acquired 50% of the equity interest in Rush Truck Centres of Canada Limited (“RTC Canada”), which acquired the operating assets of Tallman Group, the largest International Truck dealer in Canada. The Company was also granted a call option in the purchase agreement that provides the Company with the right to acquire the remaining 50% equity interest in RTC Canada until the close of business on February 25, 2024. The value of the Company’s call option was $3.6 million as of September 30, 2020, and is reported in Other Assets on the Consolidated Balance Sheet.

 

On April 25, 2019, the Company entered into a Guaranty Agreement (“Guaranty”) with Bank of Montreal (“BMO”), pursuant to which the Company agreed to guaranty up to CAD250 million (the “Guaranty Cap”) of certain credit facilities entered into by and between Tallman Truck Centre Limited (“TTCL”) and BMO. The Company owned a 50% equity interest in TTCL, which was the sole owner of RTC Canada. Later in 2019, RTC Canada and TTCL were amalgamated into RTC Canada. Interest, fees and expenses incurred by BMO to enforce its rights with respect to the guaranteed obligations and its rights against the Company under the Guaranty are not subject to the Guaranty Cap. In exchange for the Guaranty, RTC Canada is receiving a reduced rate of interest on its credit facilities with BMO. The Guaranty was valued at $5.0 million as of September 30, 2020 and $5.1 million as of December 31, 2019, and is included in the investment in RTC Canada. As of September 30, 2020, the Company’s investment in RTC Canada is $29.6 million. The Company’s equity income in RTC Canada is included in Other income on the Consolidated Statements of Income.

 

 

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 information):

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
  

2020

  

2019

  

2020

  

2019

 

Numerator:

                

Numerator for basic and diluted earnings per share – Net income available to common shareholders

 $33,939  $39,104  $73,862  $117,829 

Denominator:

                

Denominator for basic earnings per share – weighted average shares outstanding

  55,033   54,817   54,734   55,116 

Effect of dilutive securities– Employee and director stock options and restricted share awards

  1,410   1,209   1,195   1,322 

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

  56,443   56,026   55,929   56,438 

Basic earnings per common share

 $0.62  $0.71  $1.35  $2.14 

Diluted earnings per common share and common share equivalents

 $0.60  $0.70  $1.32  $2.09 

 

Options to purchase shares of common stock that were outstanding for the three months and nine months ended September 30, 2020 and 2019 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):

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
  

2020

  

2019

  

2020

  

2019

 

Weighted average anti-dilutive options

  1,100   2,065   1,799   1,874 

 

 

5 Stock Options and Restricted Stock Awards

 

Valuation and Expense Information

 

The Company accounts for stock-based compensation in accordance with ASC 718-10, Compensation – Stock Compensation, which requires the measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors, including employee stock options, restricted stock unit awards, restricted stock 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 September 30, 2020, and $2.7 million for the three months ended September 30, 2019. Stock-based compensation expense was $15.5 million for the nine months ended September 30, 2020, and $15.8 million for the nine months ended September 30, 2019.

 

As of September 30, 2020, the Company had $9.0 million of unrecognized compensation expense related to non-vested employee stock options to be recognized over a weighted-average period of 2.2 years and $9.7 million of unrecognized compensation cost related to non-vested restricted stock units and non-vested restricted stock awards to be recognized over a weighted-average period of 1.3 years.

 

 

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 September 30, 2020, and December 31, 2019. 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 that the valuation measurement inputs of its long-term debt represent, at its lowest level, current market interest rates available to the Company for similar debt and the Company’s current credit standing. The carrying amount of such debt approximates fair value.

 

 

 

7 – Segment Information

 

The Company currently has one reportable business segment - the Truck Segment. The Truck Segment includes the Company’s operation of a nationwide 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 collision center facilities; and financial services, including the financing of new and used commercial vehicle purchases, insurance products and truck leasing and rentals. The commercial vehicle dealerships are deemed 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 or departments within its dealerships, when making decisions about resources to be allocated to the segment and assessing its performance.

 

The Company also has revenues attributable to three other operating segments. These segments include a retail tire company, an insurance agency and a guest ranch operation and are included in the All Other column below. None of these segments has ever met any of the quantitative thresholds for determining reportable segments.

 

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 operating income.

 

The following table contains summarized information about reportable segment revenues, segment income or loss from continuing operations and segment assets for the periods ended September 30, 2020 and 2019 (in thousands):

 

   

Truck

Segment

   

 

All Other

   

 

Total

 
                         

As of and for the three months ended September 30, 2020

                       
                         

Revenues from external customers

  $ 1,174,662     $ 3,906     $ 1,178,568  

Segment operating income

    42,714       154       42,868  

Segment income before taxes

    43,844       84       43,928  

Segment assets

    2,965,188       45,501       3,010,689  
                         

For the nine months ended September 30, 2020

                       
                         

Revenues from external customers

  $ 3,456,780     $ 10,963     $ 3,467,743  

Segment operating income

    100,842       224       101,066  

Segment income before taxes

    98,097       12       98,109  
                         

As of and for the three months ended September 30, 2019

                       
                         

Revenues from external customers

  $ 1,595,285     $ 3,980     $ 1,599,265  

Segment operating income (loss)

    58,642       (319 )     58,323  

Segment income before taxes

    51,250       960       52,210  

Segment assets

    3,364,895       40,359       3,405,254  
                         

For the nine months ended September 30, 2019

                       
                         

Revenues from external customers

  $ 4,479,972     $ 12,171     $ 4,492,143  

Segment operating income

    176,963       19       176,982  

Segment income before taxes

    155,024       1,154       156,178  

 

 

8 – Income Taxes

 

The Company had unrecognized income tax benefits totaling $3.0 million as a component of accrued liabilities as of September 30, 2020 and December 31, 2019, the total of which, if recognized, would impact the Company’s effective tax rate. An unfavorable settlement may require a charge to income tax expense and a favorable resolution would be recognized as a reduction to income tax expense. The Company recognizes accrued interest related to unrecognized tax benefits in income tax expense. The Company had approximately $144,000 accrued for the payment of interest as of September 30, 2020 and December 31, 2019. 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 September 30, 2020, the tax years ended December 31, 2016 through 2019 remained subject to audit by federal tax authorities, and the tax years ended December 31, 2015 through 2019 remained subject to audit by state tax authorities.

 

Coronavirus Aid, Relief, and Economic Security Act (the CARES Act)

 

In response to the COVID-19 pandemic, on March 27, 2020, President Donald Trump signed into law the CARES Act. The Company evaluated the provisions of the CARES Act as of September 30, 2020, with no material effect on the financial statements. Provisions of the CARES Act may result in deferral of payment of certain taxes.

 

 

9 – Revenue

 

The Company’s revenues are primarily generated from the sale of finished products to customers. Those sales predominantly contain a single delivery element and revenue for such sales is recognized when the customer obtains control, which is typically when the finished product is delivered to the customer. The Company’s material revenue streams have been identified as the following: the sale of new and used commercial vehicles, arrangement of associated commercial vehicle financing and insurance contracts, the performance of commercial vehicle repair services and the sale of commercial vehicle parts. Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenues.  

 

The following table summarizes the Company’s disaggregated revenue by revenue source for the three months and nine months ended September 30, 2020 and 2019 (in thousands):

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

2020

  

September 30,

2019

  

September 30,

2020

  

September 30,

2019

 

Commercial vehicle sales revenue

 $711,754  $1,070,868  $2,060,370  $2,933,952 

Parts revenue

  235,282   258,513   683,684   760,495 

Commercial vehicle repair service revenue

  164,978   196,272   522,107   580,810 

Finance revenue

  3,107   3,570   7,986   11,223 

Insurance revenue

  2,526   2,293   7,074   7,651 

Other revenue

  3,008   4,800   10,538   14,039 

Total

 $1,120,655  $1,536,316  $3,291,759  $4,308,170 

 

All of the Company's performance obligations are generally transferred to customers at a point in time. The Company does not have any material contract assets or contract liabilities on the balance sheet as of September 30, 2020 or December 31, 2019. Revenues related to commercial vehicle sales, parts sales, commercial vehicle repair service, finance and the majority of other revenues are related to the Truck Segment.

 

 

10 – Leases

 

Lease of Vehicles as Lessor 

 

The Company leases commercial vehicles to customers primarily over periods of one to ten years. The Company does not separate lease and nonlease components. Nonlease components typically consist of maintenance and licensing for the commercial vehicle. The variable nonlease components are generally based on mileage. Some leases contain an option for the lessee to purchase the commercial vehicle.

 

The Company’s policy is to depreciate its lease fleet using a straight-line method over each 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.

 

Sales-type leases are recognized by the Company as lease receivables. The lessee obtains control of the underlying asset and the Company recognizes sales revenue upon lease commencement. The receivable for sales-type leases was $5.6 million as of September 30, 2020 and December 31, 2019, and is reflected in Other Assets on the Consolidated Balance Sheet.

 

 

Lease and rental income during the three and nine months ended September 30, 2020, and September 30, 2019, consisted of the following (in thousands):

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

2020

  

September 30,

2019