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RUSHA > SEC Filings for RUSHA > Form 10-Q on 10-May-2013All Recent SEC Filings

Show all filings for RUSH ENTERPRISES INC \TX\ | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for RUSH ENTERPRISES INC \TX\


10-May-2013

Quarterly Report


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, 2012, 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. GMC® is a registered trademark of General Motors Corporation. Hino® is a registered trademark of Hino Motors, Ltd. Isuzu® is a registered trademark of Isuzu Motors Limited. Kenworth® is a registered trademark of PACCAR, Inc. doing business as Kenworth Truck Company. Volvo® is a registered trademark of Volvo Trademark Holding AB. Freightliner® is a registered trademark of Freightliner Corporation. Mack® is a registered trademark of Mack Trucks, Inc. Navistar® is a registered trademark of Navistar International Corporation. Caterpillar® is a registered trademark of Caterpillar, Inc. PacLease® is a registered trademark of PACCAR Leasing Corporation. CitiCapital® is a registered trademark of Citicorp. Ford® is a registered trademark of Ford Motor Company. Ford Motor Credit Company® is a registered trademark of Ford Motor Company. Cummins® is a registered trademark of Cummins Intellectual Property, Inc. Eaton® is a registered trademark of Eaton Corporation. Arvin Meritor® is a registered trademark of Meritor Technology, Inc. JPMorgan Chase® is a registered trademark of JP Morgan Chase & Co. SAP® is a registered trademark of SAP Aktiengesellschaft. International® is a registered trademark of Navistar International Transportation Corp. Blue Bird® is a registered trademark of Blue Bird Investment Corporation. Autocar® is a registered trademark of Shem, LLC. IC Bus® is a registered trademark of IC Bus,
LLC. Collins Bus Corporation® is a registered trademark of Collins Bus Corporation. Fuso® is a registered trademark of Mitsubishi Fuso Truck and Bus Corporation. Micro Bird® is a registered trademark of Blue Bird Body Company. Allison Transmission® is a registered trademark of Allison Transmission, Inc.


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, and financing, leasing and rental, and insurance products.

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 78 Rush Truck Centers in 15 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 expand product lines and extend our geographic reach through strategic acquisitions and expansion in our existing areas of responsibility.

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 and construction equipment inventory and by the first-in, first-out method for tires, parts and accessories. As the market value of our inventory typically declines over time, reserves are established based on historical loss experience and market trends. These reserves are charged to cost of sales and reduce the carrying value of our inventory on hand. An allowance is provided when it is anticipated that cost will exceed net realizable value.

Goodwill

Goodwill and other intangible assets that have indefinite lives are not amortized but instead are tested at least annually by reporting unit for impairment, or more frequently when events or changes in circumstances indicate that the asset might be impaired.

Goodwill is reviewed for impairment utilizing a two-step process. The first step requires the Company to compare the fair value of the reporting unit, which is the same as the segment, to the respective carrying value. The Company considers its segment to be a reporting unit for purposes of this analysis. If the fair value of the reporting unit exceeds its carrying value, the goodwill is not considered impaired. If the carrying value is greater than the fair value, there is an indication that impairment may exist and a second step is required. In the second step of the analysis, the implied fair value of the goodwill is calculated as the excess of the fair value of a reporting unit over the fair values assigned to its assets and liabilities. If the implied fair value of goodwill is less than the carrying value of the reporting unit's goodwill, the difference is recognized as an impairment loss.


The Company determines the fair value of its reporting unit using the discounted cash flow method. The discounted cash flow method uses various assumptions and estimates regarding revenue growth rates, future gross margins, future selling, general and administrative expenses and an estimated weighted average cost of capital. The analysis is based upon available information regarding expected future cash flows of each reporting unit discounted at rates consistent with the cost of capital specific to the reporting unit. This type of analysis contains uncertainties because it requires the Company to make assumptions and to apply judgment regarding its knowledge of its industry, information provided by industry analysts, and its current business strategy in light of present industry and economic conditions. If any of these assumptions change, or fails to materialize, the resulting decline in its estimated fair value could result in a material impairment charge to the goodwill associated with the reporting unit.

Management is not aware of any impairment charge that may currently be required; however, a change in economic conditions, if one occurs, could result in an impairment charge in future periods.

The Company does not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions it used to test for impairment losses on goodwill in the near term. 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, the discontinuance of operations by certain manufacturers the Company represents, strategic decisions made in response to economic and competitive conditions or the impact of the current economic environment.

Insurance Accruals

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

Changes in the frequency, severity, and development of existing claims could influence the Company's reserve for claims and financial position, results of operations and cash flows. The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions it used to calculate its self-insured liabilities. However, if actual results are not consistent with our estimates or assumptions, the Company may be exposed to losses or gains that could be material.

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 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.

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, 2013 and 2012.

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

                                                 Three Months Ended March 31,
                                                2013                    2012

   New and used commercial vehicle sales              64.7 %                  71.0 %
   Parts and service sales                            30.6                    25.3
   Lease and rental                                    4.0                     3.0
   Finance and insurance                               0.4                     0.4
   Other                                               0.3                     0.3
   Total revenues                                    100.0                   100.0
   Cost of products sold                              82.3                    83.5
   Gross profit                                       17.7                    16.5
   Selling, general and administrative                13.5                    12.0
   Depreciation and amortization                       1.0                     0.8
   Gain on sale of assets                              0.0                     0.0
   Operating income                                    3.2                     3.7
   Interest expense, net                               0.3                     0.4
   Income before income taxes                          2.9                     3.3
   Provision for income taxes                          1.1                     1.3
   Net income                                          1.8 %                   2.0 %

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

                                                 Three Months Ended March 31,
                                                2013                    2012
   Gross Profit:
   New and used commercial vehicle sales              27.7 %                  32.1 %
   Parts and service sales                            64.1                    61.1
   Lease and rental                                    4.1                     2.7
   Finance and insurance                               2.3                     2.4
   Other                                               1.8                     1.7
   Total gross profit                                100.0 %                 100.0 %


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,
                                               2013             2012        % Change
     Vehicle unit sales:
     New heavy-duty vehicles                       2,065         2,738          -24.6 %
     New medium-duty vehicles                      1,954         1,556           25.6 %
     New light-duty vehicles                         395           277           42.6 %
     Total new vehicle unit sales                  4,414         4,571           -3.4 %

     Used vehicles                                 1,414         1,252           12.9 %

     Vehicle revenue:
     New heavy-duty vehicles               $       287.1       $ 384.2          -25.3 %
     New medium-duty vehicles                      132.9         100.7           32.0 %
     New light-duty vehicles                        12.0           9.2           30.4 %
     Total new vehicle revenue             $       432.0       $ 494.1          -12.6 %

     Used vehicle revenue                  $        55.7       $  54.5            2.2 %

     Other vehicle revenue:(1)             $         1.9       $   3.3          -42.4 %

     Absorption ratio:                             111.9 %       116.7 %         -4.1 %


(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, then gross profit from the sale of a commercial vehicle, after sales commissions and inventory carrying costs, directly impacts operating profit. In 1999, the Company's truck dealerships' absorption 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 111.9% absorption ratio for the first quarter of 2013 and 116.7% absorption ratio for the first quarter in 2012.

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

The Company's financial performance remained strong this quarter despite a decrease in U.S. retail sales of Class 8 trucks and expected sluggishness in energy sector activity. Geographic expansion of the Company's dealership network, breadth of product offerings and a sustained focus on parts, service and body shop aftermarket operations continue to positively impact the Company's financial performance.

Increased maintenance of aged vehicles, incremental revenues generated from newly acquired dealerships and innovative aftermarket services continue to result in strong financial performance for the Company's aftermarket operations. The Company has invested in personnel, facility enhancements, advanced diagnostic technology, mobile service offerings, custom vehicle modifications services and alternative fuel capabilities that expand its portfolio of aftermarket customer solutions. These investments allow the Company to efficiently support its customers in the Company's shops or its customers' job sites and are a key factor in its ability to increase aftermarket revenues. The Company expects parts, service and body shop revenues to remain strong throughout 2013.

In April 2013, the Company relocated its Ardmore, Oklahoma dealership to a new facility that increased new truck and parts inventory and expanded service capabilities, including the ability to safely service vehicles fueled by natural gas. We expect to complete construction of a new dealerships in Corpus Christi, Texas in 2013. Additionally, the Company intends to complete construction of replacement facilities for its dealerships in San Antonio, Texas, Denver, Colorado, Cincinnati, Ohio and Columbus, Ohio in 2014.


The Company has a track record of growth through acquisitions and additions of dealerships within its current areas of responsibility. It now operates a network of 78 Rush Truck Centers across the United States. The Company believes that this geographic diversity allows it to more effectively withstand regional economic downturns and expand service capabilities to match the footprint of its customer base.

The Company's overall parts, service and body shop sales increased 17.7% in the first quarter of 2013 compared to the first quarter of 2012. This contributed to the Company achieving an absorption ratio of 111.9% for the quarter ended March 31, 2013. Our absorption ratio decreased approximately 4.1% from the first quarter of 2012 due to a decrease in energy sector activity and the acquisition of nine dealerships in Ohio on December 31, 2012, which operated with absorption ratios well below the Company average.

Revenues

Revenues decreased $20.5 million, or 2.6%, in the first quarter of 2013 compared to the first quarter of 2012.

Parts, service and body shop revenues increased $34.8 million, or 17.7%, in the first quarter of 2013 compared to the first quarter of 2012. This increase is the result of increased service needs of aging vehicles, expanded product and service offerings and the Company's acquisition of nine dealerships in Ohio on December 31, 2012. The Company expects parts, service and body shop sales to continue to remain strong through 2013 and remains focused on expanding aftermarket product and service offerings.

Revenues from sales of new and used commercial vehicles decreased $62.3 million, or 11.3%, in the first quarter of 2013 compared to the first quarter of 2012.

The Company sold 2,065 heavy-duty trucks in the first quarter of 2013, a 24.6% decrease compared to 2,738 heavy-duty trucks in the first quarter of 2012. 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 decreased 17% in the first quarter of 2013 compared to the first quarter of 2012. A.C.T. Research currently predicts U.S. retail sales of Class 8 trucks of approximately 198,000 units in 2013, 227,000 units in 2014, and 213,000 units in 2015, compared to approximately 198,000 units in 2012. The Company's share of the U.S. Class 8 truck sales market was approximately 5.0% in 2012. The Company expects its market share to range between 5.2% and 5.5% of U.S. Class 8 truck sales in 2013. This market share percentage would result in the sale of approximately 10,300 to 10,800 of Class 8 trucks in 2013 based on A.C.T. Research's estimate of U.S. retail sales of 198,000 units.

The Company sold 1,954 Class 4 through 7 commercial vehicles, including 190 buses, in the first quarter of 2013, a 25.6% increase compared to 1,556 medium-duty commercial vehicles, including 136 buses, in 2012. A.C.T. Research estimates that unit sales of Class 4 through 7 commercial vehicles in the U.S. decreased approximately 2.0% in the first quarter of 2013, compared to the first quarter of 2012. A.C.T. Research currently predicts U.S. retail sales of Class 4 through 7 medium-duty commercial vehicles of approximately 182,000 units in 2013, 196,000 units in 2014, and 209,000 in 2015. In 2012, the Company achieved a 4.3% share of the Class 4 through 7 commercial vehicle sales market in the . . .

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