UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2005

 

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 incorporation or organization)

 

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

 

 

 

555 IH 35 South, New Braunfels, TX

 

78130

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:  (830) 626-5200

 

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

None

 

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

 

Class A and Class B Common Stock, $.01 par value

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o

 

No ý

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

Yes o

 

No ý

 

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 ý

 

No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

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

Large accelerated filer o                                                             Accelerated filer  ý                                                     &# 160;                                 Non-accelerated filer  o

 

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

Yes o

 

No ý

 

The aggregate market value of common stock held by non-affiliates of the registrant as of June 30, 2005 was approximately $286,614,665 based upon the last sales price on June 30, 2005 on The NASDAQ National Market® of $13.40 for the registrant’s Class A Common Stock and $13.41 for the registrant’s Class B Common Stock.  Shares of common stock held by each executive officer and director and by each shareholder affiliated with a director or an executive officer have been excluded from this calculation because such persons may be deemed to be affiliates.  This determination of affiliate status is not necessarily a conclusive determination for other purposes.

 

The registrant had 16,795,765 shares of Class A Common Stock and 7,902,275 shares of Class B Common Stock outstanding on March 1, 2006.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of registrant’s definitive proxy statement for the registrant’s 2006 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission not later than April 30, 2006, are incorporated by reference into Part III of this Form 10-K.

 

 



 

RUSH ENTERPRISES, INC.

 

Index to Form 10-K

 

Year ended December 31, 2005

 

 

Part I

 

 

 

 

 

 

Item 1

Business

 

 

Item 1A

Risk Factors

 

 

Item 1B

Unresolved Staff Comments

 

 

Item 2

Properties

 

 

Item 3

Legal Proceedings

 

 

Item 4

Submission of Matters to a Vote of Security Holders

 

 

 

 

 

 

 

Part II

 

 

 

 

 

 

Item 5

Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

 

 

Item 6

Selected Financial Data

 

 

Item 7

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

 

 

Item 7A

Quantitative and Qualitative Disclosures about Market Risk

 

 

Item 8

Financial Statements and Supplementary Data

 

 

Item 9

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

 

Item 9A

Controls and Procedures

 

 

Item 9B

Other Information

 

 

 

 

 

 

 

Part III

 

 

 

 

 

 

Item 10

Directors and Executive Officers of the Registrant

 

 

Item 11

Executive Compensation

 

 

Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

 

 

Item 13

Certain Relationships and Related Transactions

 

 

Item 14

Principal Accountant Fees and Services

 

 

 

 

 

 

 

Part IV

 

 

 

 

 

 

Item 15

Exhibits and Financial Statement Schedules

 

 

 



 

NOTE REGARDING FORWARD LOOKING STATEMENTS

 

Certain statements contained in this Form 10-K (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 the Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended, 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 as well as future growth rates and margins for certain of our products and services, future demand for our products and services, competitive factors, general economic conditions, cyclicality, economic conditions in the new and used truck and equipment 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, onetime 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. The Company does not intend to update these forward-looking statements.

 

NOTE REGARDING INCORPORATION BY REFERENCE

 

The Securities and Exchange Commission (“SEC”) allows us to disclose important information to you by referring you to other documents we have filed with the SEC. The information we refer to is “incorporated by reference” into this Form 10-K. Please read that information.

 

NOTE REGARDING TRADEMARKS USED IN THIS FORM 10-K

 

Peterbilt® is a registered trademark of Peterbilt Motors Company. PACCAR® is a registered trademark of PACCAR, Inc. GMC® is as registered trademark of General Motors Corporation. Hino® is a registered trademark of Hino Motors, Ltd. UD® is a registered trademark of Nissan Diesel Motor Co., Ltd. Isuzu® is a registered trademark of Isuzu Motors Limited. John Deere® is a registered trademark of Deere & Company. Kenworth® is a registered trademark of PACCAR, Inc. doing business as Kenworth Truck Company. Volvo® is a registered trademark of Volvo Trademark Holding AB. Freightliner® is a registered trademark of Freightliner Corporation. Mack® is a registered trademark of Mack Trucks, Inc. Navistar® is a registered trademark of Navistar International Corporation. Caterpillar® is a registered trademark of Caterpillar, Inc. Cummins® is a registered trademark of Cummins Engine Company, Inc. PacLease® is a registered trademark of PACCAR Leasing Corporation. CitiCapital® is a registered trademark of Citicorp.

 

PART I

 

Item 1.  Business

 

References herein to “the Company,” “Rush Enterprises,” “Rush,” “we,” “our” or “us” mean Rush Enterprises, Inc., a Texas corporation, its subsidiaries and Associated Acceptance, Inc., the insurance agency affiliated with the Company, unless the context requires otherwise.

 

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Access to Company Information

 

Rush electronically files annual reports, quarterly reports, and special reports with the SEC. You may read and copy any of the materials that we have filed with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain information about the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our filings are also available to you on the SEC’s website at www.sec.gov.

 

Rush makes certain of its SEC filings available, free of charge, through its website, including its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports. These filings are available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Rush’s website address is www.rushenterprises.com. The information contained on our website, or on other websites linked to our website, is not part of this document.

 

General

 

Rush Enterprises, Inc. was incorporated in Texas in 1965 and currently consists of two reportable segments: the Truck Segment and the Construction Equipment Segment.

 

The Company is a full-service, integrated retailer of premium transportation and construction equipment and related services.  Our Rush Truck Centers primarily sell heavy-duty trucks manufactured by Peterbilt, a division of PACCAR, Inc..  Certain Rush Truck Centers sell medium-duty trucks manufactured by Peterbilt, GMC, Hino, UD or Isuzu. The Company also operates a John Deere construction equipment dealership at its Rush Equipment Center in Houston, Texas. Through its strategically located network of Rush Truck Centers and its Rush Equipment Center, the Company provides one-stop service for the needs of its customers, including retail sales of new and used trucks and construction equipment, aftermarket parts sales, service and repair facilities and financing, leasing and rental, and insurance services.

 

In January 2005, the Company acquired certain assets of American Truck Source, Inc., including its Peterbilt truck dealerships in Texas and Tennessee for a total purchase price of $132.4 million. The acquisition provides the Company with rights to sell Peterbilt trucks and parts from new locations in Dallas, Fort Worth, Abilene and Tyler, Texas and Nashville, Tennessee.  See Note 17 of the Notes to Consolidated Financial Statements for a detailed discussion of the allocation of the purchase price of the acquisition.

 

The Company also made several acquisitions of medium-duty truck stores during 2005.  See Note 17 of the Notes to Consolidated Financial Statements for a detailed discussion of the allocation of the purchase price of these acquisitions.

 

The Company’s Rush Truck Centers are principally located in high traffic areas throughout the southern United States. Since commencing operations as a Peterbilt heavy-duty truck dealer in 1966, the Company has grown to operate more than 40 Rush Truck Centers in Alabama, Arizona, California, Colorado, Florida, New Mexico, Oklahoma, Tennessee and Texas.

 

The Company’s Rush Equipment Center in Houston, Texas sells, leases and rents a full line of John Deere construction equipment as well as a variety of construction equipment trailers.

 

The Company currently conducts business through numerous subsidiaries, all of which are wholly owned, directly or indirectly, by it.  Its principal offices are located at 555 IH 35 South, New Braunfels, Texas 78130.

 

Industry

 

We currently operate in the heavy-duty truck, medium-duty truck and construction equipment markets. There has historically been a high correlation in both of these markets between new product sales and the rate of change in U.S. industrial production and the U.S. gross domestic product.

 

Heavy-Duty Truck Market

 

The Company serves the southern U.S. retail heavy-duty truck market, which is affected by a number of factors relating to general economic conditions, including fuel prices, government regulation, interest rate fluctuations, economic recessions and customer business cycles. In addition, unit sales of new trucks have historically been subject to substantial

 

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cyclical variation based on such general economic conditions. According to data published by A.C.T. Research Co., LLC (“A.C.T. Research”), a heavy-duty truck industry data and forecasting services provider, in recent years total domestic retail sales of new Class 8 trucks have ranged from a low of approximately 140,000 in 2001 to a high of approximately 262,000 in 1999.  Class 8 trucks are defined by the American Automobile Association as trucks with a minimum gross vehicle weight rating above 33,000 pounds.  Domestic Class 8 unit sales are expected to increase to approximately 266,000 units during 2006 according to A.C.T. Research.  The Company’s primary product line is Peterbilt heavy-duty trucks, which, according to A.C.T. Research, accounted for approximately 11.68% of all new heavy-duty truck sales in the U.S. during 2005.  The Company’s share of the U.S. Class 8 truck sales market was approximately 3.9% in 2005.

 

Typically, Class 8 trucks are assembled by manufacturers utilizing certain components manufactured by other companies, including engines, transmissions, axles, wheels and other components. As trucks and truck components have become increasingly complex, the ability to provide state-of-the-art service for a wide variety of truck equipment has become a competitive factor in the industry. The ability to provide such service requires a significant capital investment in diagnostic and other equipment, parts inventory and highly trained service personnel. Environmental Protection Agency (“EPA”) and U.S. Department of Transportation (“DOT”) regulatory guidelines for service processes, including body shop, paint work and waste disposal, require sophisticated operating and testing equipment to ensure compliance with environmental and safety standards. Additionally, we believe that more of our customers will lease or rent Class 8 trucks as fleets, particularly private fleets, and seek to establish full-service leases or rental contracts, which provide for turnkey service including parts, maintenance and, potentially, fuel, fuel tax reporting and other services. As a result, differentiation between truck dealers has become less dependent on pure price competition and is increasingly based on a dealer’s ability to offer a wide variety of services to their clients. Such services include: efficient, conveniently located and easily accessible truck service centers with an adequate supply of replacement parts; financing for truck purchases; leasing and rental programs; and the ability to accept multiple unit trade-ins related to large fleet purchases. We believe our one-stop center concept and the size and geographic diversity of our dealer network gives us a competitive advantage in providing these services.

 

The EPA mandated that heavy-duty engine manufacturers meet new, stricter emissions guidelines regarding nitrous oxides for all engines built subsequent to October 1, 2002. These new guidelines increased the price of new heavy-duty trucks by approximately $3,000 to $8,000 per unit and reduced the operating efficiency and life cycle of heavy-duty trucks. In 2002, the heavy-duty truck industry experienced an increased demand for trucks, as it historically has in the months preceding the effective date of a change in EPA engine emission guidelines; this period of increased demand was followed by a decrease in demand in the months subsequent to the change.

 

The EPA has placed additional guidelines, further restricting the emissions of nitrous oxides, for all engines built subsequent to January 1, 2007.  The Company believes that the 2007 change in emission guidelines will cause demand for heavy-duty trucks to remain high through 2006 as large fleets accelerate their normal purchase cycles to avoid purchasing 2007 engines.  The Company expects a fall-off in demand for trucks in 2007 due to the emissions guidelines.  The severity of the fall-off in demand for trucks in 2007 will depend upon several factors including, without limitation, new diesel engine prices, the results of tests on the new diesel engines designed to meet the 2007 standards, and projected maintenance and operation costs of the new diesel engines and general economic conditions.  Industry expectations are for the new engines to add $6,000 to $8,000 to the cost of a new Class 8 truck and increase maintenance and operating costs as well.

 

According to A.C.T. Research’s current estimates, approximately 266,000 new Class 8 trucks will be sold in the United States in 2006, compared to approximately 259,000 new trucks sold in 2005.  The 2005 new heavy-duty truck sales totals were the second highest new heavy-duty truck sales totals in history, falling just short of the 1999 record.  In 2007, A.C.T. Research currently forecasts sales of Class 8 trucks to fall off to 179,000 units.  However, A.C.T. Research and other industry experts expect Class 8 truck sales to rebound in 2008 and 2009.  A.C.T. Research currently forecasts sales of Class 8 trucks in the U.S. to be approximately 234,000 in 2008 and 265,000 in 2009.

 

Medium-Duty Truck Market

 

Several of our Rush Truck Centers sell medium-duty trucks manufactured by Peterbilt, GMC, Hino, UD or Isuzu, and provide parts and service for medium-duty trucks. Medium-duty trucks are principally used in short-haul, local markets as delivery vehicles. Medium-duty trucks typically operate locally and generally do not venture out of their service areas overnight. The nature of the medium-duty truck market promotes the use of our service facilities during our evening shift, which is traditionally a slow period for heavy-duty truck service.

 

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A.C.T. Research estimates that U.S. retail sales of Class 5 through 7 medium-duty trucks totaled approximately 216,000 units in 2005 and are forecasting 2006 U.S. retail sales to be approximately 213,000 units. The Company plans to continue to expand its share of the medium-duty market by adding new product lines to existing dealerships, adding dealership locations and adding sales personnel.  See Note 17 to the Company’s Consolidated Financial Statements for a discussion of the Company’s medium-duty acquisitions in 2005.

 

Construction Equipment Market

 

Our Rush Equipment Center is an authorized John Deere construction equipment dealer.  Our Rush Equipment Center serves Houston, Texas and the surrounding area. According to the data compiled by John Deere, approximately 2,700 units of construction equipment were put into use in our area of responsibility in 2005 compared to 2,256 in 2004. In 2006, we expect new construction equipment unit sales to increase approximately 5%, to 2,840 units, in our area of responsibility. John Deere’s market share in the Houston area was 19.9% in 2005 and 16.3% in 2004. Our Rush Equipment Center has the right to sell new John Deere construction equipment and parts within its assigned area of responsibility, which means competition within its market comes primarily from dealers of competing manufacturers and rental companies.

 

John Deere equipment users are a diverse group that includes residential and commercial construction businesses, independent rental companies, utility companies, government agencies, and various petrochemical, industrial and material supply businesses. Industry statistics suggest that a majority of all construction equipment is owned by a relatively small percentage of the customer base. Accordingly, John Deere and its dealer group, including the Rush Equipment Center, are aggressively developing more sophisticated ways to serve large equipment fleet owners.

 

Market factors affecting the construction equipment industry include the following:

 

                  levels of commercial, residential, and public construction activities; and

 

                  state and federal highway and road construction appropriations.

 

Our Business Strategy

 

Operating Strategy.  Our strategy is to operate an integrated dealer network that primarily markets Peterbilt heavy-duty trucks, medium-duty trucks from various manufacturers and John Deere construction equipment and provides complementary products and services. Our strategy includes the following key elements:

 

                  One-Stop Centers. We have developed our truck and construction equipment dealerships as “one-stop centers” where, at one convenient location, our customers can do the following: purchase new and used trucks or construction equipment; finance, lease or rent trucks or construction equipment; purchase aftermarket parts and accessories; and have service performed by certified technicians. We believe that this full-service strategy also helps to mitigate cyclical economic fluctuations because the parts and service sales at our dealerships generally tend to be less volatile than our new and used truck and construction equipment sales.

 

                  Branding Program. We employ a branding program for our dealerships through distinctive signage and uniform marketing programs to take advantage of our existing name recognition and to communicate the standardized high quality of our products and reliability of our services throughout our dealership network.

 

                  Management by Dealership Units. At each of our dealerships, we operate one or more of the following business units: new sales, used sales, parts, service, body shop, leasing, rental or financial services. Our general managers measure and manage the operations of each of our dealerships according to the specific business units operating at that location. We believe that this system enhances the profitability of all aspects of a dealership and increases our overall operating margins. Operating goals for each business unit at each of our dealerships are established annually and managers are rewarded for performance accordingly.

 

                  Integrated Management Information Systems. In order to efficiently operate separate business units within each dealership, we rely upon our management information systems to determine and monitor appropriate inventory levels and product mix at each Rush Truck Center. Each Rush Truck Center can access a centralized real-time inventory tracking system that is accessible simultaneously by all locations. Our automated parts reordering system assists each Rush Truck Center in maintaining the proper inventory levels and typically

 

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permits inventory delivery to each location, or directly to customers, within 24 hours from the time the order is placed. In addition, by actively monitoring market conditions, assessing product and expansion strategies and remaining abreast of changes within the market, we are able to proactively address market-by-market changes by realigning and, if necessary, adding product lines and models.

 

Growth Strategy.  Through our expansion and acquisition initiatives, we have grown to operate a large, multistate, full-service network of truck dealerships. As described below, we intend to continue to grow our business internally and through acquisitions by expanding into new geographic areas, expanding our product offerings and opening new one-stop truck and equipment centers in existing markets.

 

                  Expansion Into New Geographic Areas. We plan to continue to expand our Rush Truck Center network and build a Rush Equipment Center network by acquiring additional dealerships in geographic areas contiguous to our current operations. We have successfully expanded our presence from our Texas base into a coast-to-coast network of Rush Truck Centers. We believe the geographic diversity of our Rush Truck Center network has significantly expanded our customer base while reducing the effects of local economic cycles. Geographic diversification supports the sale of trucks and parts by allowing us to allocate our inventory among the geographic regions we serve based on market demand within these regions.

 

                  Expansion of Product Offerings. We intend to continue to expand our product lines within our Rush Truck Centers and our Rush Equipment Center by adding product categories that are both complementary to our existing product lines and well suited to our operating model.

 

We believe that there are many additional product and service offerings that would complement our primary product lines. We expect any product category expansion that we pursue to satisfy our requirements that:

 

                  the products are of a premium brand;

 

                  the products provide opportunities for incremental income through related aftermarket sales, service or financing; and

 

                  Rush operating controls can be implemented to enhance the financial performance of the business.

 

                  Open New Rush Truck and Equipment Centers in Existing Areas of Operation. We believe that there are opportunities to increase our share of the heavy-duty truck market by introducing our one-stop centers to underserved markets within our current areas of operation.  For example, we recently added a Rush Truck Center in Alice, Texas, to take better advantage of a high-density heavy-duty truck population within our existing area of operation. The introduction of additional one-stop centers enables us to enhance revenues from our existing customer base as well as increase the awareness of the “Rush” brand name for new customers.

 

In identifying new areas for expansion, we analyze the target market’s level of new truck registrations, customer buying and leasing trends and the existence of competing franchises. We also assess the potential performance of a parts and service center to determine whether a market is suitable for a Rush Truck Center. After a market has been strategically reviewed, we survey the region for a well-situated location. Whether we acquire existing dealerships or open a new Rush Truck Center, we will introduce our branding program and implement our integrated management system.

 

Management of Our Dealerships

 

We manage our dealerships as described below.

 

Rush Truck Centers

 

Our Rush Truck Centers are responsible for sales of new and used heavy-duty and medium-duty trucks, as well as related parts and services.

 

New Truck Sales.   New heavy-duty truck sales represent the largest portion of our revenue, accounting for approximately $1,074.4 million, or 57.6%, of our total revenues for 2005. Rush Truck Centers primarily sell new Class 8 heavy-duty Peterbilt trucks, which constitute more than 86% of all our new truck revenue. The average delivery time for a

 

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custom-ordered truck can vary between 14 days to six months depending on vehicle specifications and demand. We also sell Class 8 heavy-duty trucks manufactured by Volvo Trucks of North America, Inc. at our Tulsa Rush Truck Center.

 

Our Rush Truck Centers that sell new and used Class 8 heavy-duty trucks also sell Class 6 and Class 7 medium-duty Peterbilt trucks. Many Rush Truck Centers also sell medium-duty trucks manufactured by GMC, Hino, Isuzu and UD. Medium-duty truck sales accounted for approximately $158.0 million, or 8.5%, of our total revenues for 2005. Our customers use heavy-duty and medium-duty trucks to haul various materials, including general freight, petroleum, wood products, refuse and construction materials.

 

A significant portion of our new truck sales are to fleet customers (customers who purchase more than five trucks in any 12-month period). Because of the size of our Rush Truck Center network, our strong relationships with our fleet customers and our ability to handle large quantities of used truck trade-ins, we are able to successfully market and sell to fleet customers nationwide. We believe that we have a competitive advantage over most other dealers in that we can absorb multiunit trade-ins often associated with fleet sales and effectively disperse the used trucks for resale throughout our dealership network. We believe that our attention to customer service and our broad range of trucking services, including our ability to offer truck financing and insurance to our customers, has resulted in a high level of customer loyalty.

 

Used Truck Sales.  Used truck sales accounted for approximately $160.5 million, or 8.6%, of our total revenues for 2005. We primarily sell used Class 8 heavy-duty trucks, but we also sell used medium-duty trucks at several locations. We believe that we are well positioned to market used heavy-duty trucks due to our ability to recondition them for resale utilizing the parts and service departments of our Rush Truck Centers and our ability to move used trucks between Rush Truck Centers to satisfy customer demand. The majority of our used truck fleet consists of trucks taken as trade-ins from new truck customers, but we supplement our used truck fleet by purchasing used trucks from third parties for resale.

 

Truck Parts and Service.  Truck-related parts and service revenues accounted for approximately $351.4 million, or 18.8%, of our total revenues for 2005. We are the sole authorized Peterbilt parts and accessories supplier in each of the geographic territories served by our Rush Truck Centers. The parts business enhances our sales and service functions and is a source of recurring revenue. Each Rush Truck Center carries a wide variety of Peterbilt and other truck parts in its inventory.  Rush Truck Centers offer “menu” pricing of service and body shop functions.  We also have field service trucks and technicians who are capable of making on-site repairs at our customers’ locations.

 

Our Rush Truck Centers also feature various combinations of fully equipped service and body shop facilities, the combination and configuration of which varies by location, capable of handling a broad range of truck repairs on most makes and classes of trucks. Each Rush Truck Center is a Peterbilt designated warranty service center and most are also authorized service centers for other manufacturers, including the following: Caterpillar, Cummins, Eaton Corporation and ArvinMeritor, Inc. We have more than 750 service and body shop bays, including 26 paint booths, throughout our Rush Truck Center network.

 

We perform both warranty and nonwarranty service work. The cost of warranty work is reimbursed by the manufacturer at retail consumer rates. A majority of the service technicians at our Rush Truck Centers have been certified by various truck or component manufacturers.

 

Truck Leasing and Rental.   Truck leasing and rental revenues accounted for approximately $33.9 million, or 1.8%, of our total revenues for 2005.  We engage in full-service truck leasing under the PacLease trade name at nine of our Rush Truck Centers and are the largest PacLease dealer in the United States. Leasing and rental customers contribute to additional parts sales and service work at Rush Truck Centers because most of our leases require service and maintenance for the leased trucks to be performed at our facilities (or at facilities outside our service area, as we direct). Rented trucks are also generally serviced at our facilities. We have increased our lease and rental fleet from less than 100 trucks in 1993 to 1,798 trucks as of December 31, 2005. As of December 31, 2005, we owned approximately 55% of our lease and rental fleet, and leased the remaining trucks in our fleet primarily from PACCAR Financial Corporation (“PACCAR Financial”). Currently, the average age of the trucks in our lease and rental fleet is approximately 28 months. Generally, we hold trucks in our lease and rental fleet for approximately five years and then sell them through the used sales operations at our Rush Truck Centers. Historically, we have realized gains on the sale of used lease trucks in excess of the cost of the purchase option contained in our leases with PACCAR Financial or the book value of trucks owned by the Company.

 

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Rush Equipment Center

 

Our Rush Equipment Center in Houston, Texas is responsible for sales of new and used construction equipment and related parts and service.

 

New Construction Equipment Sales.   New construction equipment sales accounted for approximately $38.2 million, or 2.0%, of our total revenues for 2005. Our Rush Equipment Center carries a complete line of John Deere construction equipment. A new piece of John Deere construction equipment typically ranges in price from $50,000 for a backhoe to $500,000 for an excavator. We carry a full line of complementary construction equipment manufactured by other suppliers to enhance our John Deere product line. We sell construction equipment to a diverse customer base including residential and commercial construction contractors, utility companies, government agencies, and various petrochemical, industrial and material supply businesses.

 

We believe that John Deere’s reputation for manufacturing high quality construction equipment attracts new and repeat customers who value lower maintenance and repair costs and a higher residual value at trade-in. We attempt to increase this brand loyalty with an operating strategy that is similar to the operating strategy used by our Rush Truck Centers and focuses on providing fast, reliable service. We believe that our operating strategy will enable us to both increase our customer base and generate repeat business for all product offerings.

 

Used Construction Equipment Sales.   Used construction equipment sales accounted for approximately $3.5 million, or 0.2%, of our total revenues for 2005. We sell used construction equipment manufactured by several manufacturers, including John Deere, Case Corporation, Caterpillar, and Komatsu, Ltd. Our used construction equipment inventory is derived from trade-ins from our construction equipment customers and purchases from third parties.

 

Construction Equipment Parts and Service.   Construction equipment-related parts and service revenues accounted for approximately $14.5 million, or 0.8%, of our total revenues for 2005. Our Rush Equipment Center carries a wide variety of John Deere and other parts in its inventory, which consists of over 10,000 items from more than 15 suppliers. We are an authorized John Deere construction equipment parts and accessories supplier in the Houston, Texas area. We maintain a fully equipped service operation capable of handling repairs on John Deere construction equipment and most other brands of construction equipment at our Rush Equipment Center. We enhance our service presence with field service trucks and technicians who are capable of making on-site repairs at our customers’ locations.

 

Financial and Insurance Services

 

We sell a complete line of property and casualty insurance to our customers as well as to the general trucking public. Our agency is licensed to sell truck liability, general liability, collision and comprehensive, workers’ compensation, cargo, credit life and health and occupational accident insurance coverage throughout our operating territory. We serve as sales representatives for a number of leading insurance companies including the Great American Insurance Companies, Hartford Insurance Group and American General Financial Group. Our renewal rate during 2005 was 75%.

 

At our Rush Truck Centers and our Rush Equipment Center we have personnel responsible for arranging third-party financing for our product offerings. We also have licensed insurance agents at some of our dealerships in Arizona, California, Florida, New Mexico, Tennessee and Texas who arrange insurance for our customers.  The sale of financial and insurance products accounted for approximately $15.4 million, or 0.8%, of our total revenue for 2005. Finance and insurance revenues have minimal direct costs and, therefore, contribute a disproportionate share of our operating profits.

 

New and Used Truck Financing.   Primarily through General Electric Capital Corporation (“GE Capital”) and PACCAR Financial, we arranged customer financing of approximately $425.8 million in 2005, an increase of 77.6% from approximately $239.7 million in 2004. Generally, truck finance contracts are memorialized through the use of installment contracts, which are secured by the trucks financed, and require a down payment of 10% to 30% of the value of the financed truck, with the remaining balance financed over a two to five-year period. The majority of finance contracts are sold without recourse to the Company. The Company’s recourse liability related to finance contracts sold with recourse to the Company ranges from 5% to 100% of the outstanding amount of each note initiated on behalf of the finance company (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies”). The Company provides for an allowance for repossession losses and early repayment penalties.

 

New and Used Construction Equipment Financing.  Through The CIT Group, Inc., CitiCapital, John Deere Credit and others, we arranged customer financing for approximately $26.0 million in 2005, an increase of 28.7% from

 

7



 

approximately $20.2 million in 2004. Generally, construction equipment finance contracts are memorialized through the use of installment or lease contracts, which are secured by the construction equipment financed, and generally require a down payment of 0% to 10% of the value of the financed piece of construction equipment, with the remaining balance being financed over a three to five-year period. All finance contracts for construction equipment are assigned without recourse.

 

Sales and Marketing

 

Our established expansion and acquisition strategy and long history of operations in the heavy-duty truck business have resulted in a strong customer base that is diverse in terms of geography, industry and scale of operations. Rush Truck Centers’ customers include owner operators, regional and national truck fleets, corporations and local governments. During 2005, no single customer of our Rush Truck Centers accounted for more than 10% of our total truck sales by dollar volume. Our Rush Equipment Centers’ customer base is similarly diverse and, during 2005, no single Rush Equipment Center customer accounted for more than 10% of our total construction equipment sales by dollar volume. We generally promote our products and related services through direct customer contact by our sales personnel, advertisements in trade magazines and attendance at industry shows.

 

We believe that the consistently reliable service received by our customers, our longevity and our geographic diversity have resulted in increased market recognition of the “Rush” brand name and have served to reinforce customer loyalty.  In an effort to enhance our name recognition and to communicate the standardized high level of quality products and services provided at our Rush Truck Centers and our Rush Equipment Center, we implement our “Rush” brand name concept at each of our dealerships. Each of our dealerships is identified as either a Rush Truck Center or Rush Equipment Center.

 

Facility Management

 

Personnel.  Each Rush Truck Center and the Rush Equipment Center is managed by a general manager who oversees the operations, personnel and the financial performance of the location, subject to the direction of our corporate office. Additionally, each Rush Truck Center is typically staffed by a sales manager, parts manager, service manager, sales representatives, parts employees, and other service and makeready employees. The sales staff of each Rush Truck Center and the Rush Equipment Center is compensated on a salary plus commission basis, with a high percentage of their compensation consisting of commission, while the general manager, parts manager and service manager receive a combination of salary and performance bonus, with a high percentage of their compensation consisting of the performance bonus. We believe that our employees are among the highest paid in their respective industries which enables us to attract and retain qualified personnel.

 

On an annual basis, general managers prepare detailed monthly profit and loss forecasts based upon historical information and projected trends. A portion of each general manager’s performance bonus is based upon whether they meet or exceed their operating plans. During the year, general managers regularly review their facility’s progress with senior management and make appropriate adjustments as needed.  Most of our employees receive annual performance evaluations.

 

We have been successful in retaining our senior management and general managers.  To promote communication and efficiency in operating standards, general managers and members of senior management attend several company-wide strategy sessions per year. In addition, management personnel attend various industry-sponsored leadership and management seminars and receive continuing education on the products we distribute, marketing strategies and management information systems.

 

Members of senior management regularly travel to each location to provide on-site management and support. Each location is audited regularly for administrative record-keeping, human resources and environmental compliance matters. The Company has instituted succession planning pursuant to which employees in each Rush Truck Center and the Rush Equipment Center are groomed as assistant managers to assume management responsibilities in existing and future dealerships.

 

Purchasing and Suppliers.  We believe that pricing is an important element of our marketing strategy. Because of our size, our Rush Truck Centers benefit from volume purchases at favorable prices that permit them to achieve a competitive pricing position in the industry. We purchase our Peterbilt heavy-duty truck inventory and Peterbilt parts and accessories directly from PACCAR. All other manufacturers’ parts and accessories, including those of Caterpillar, Cummins and others, are purchased through wholesale vendors or from PACCAR, which buys such products in bulk for

 

8



 

resale to the Company and other Peterbilt dealers. All purchasing commitments are negotiated by personnel at our corporate headquarters. We have been able to negotiate favorable pricing levels and terms, which enables us to offer competitive prices for our products. We purchase all of our John Deere construction equipment inventory and John Deere parts directly from John Deere.

 

Management Information Systems.  Each Rush Truck Center and the Rush Equipment Center maintains a centralized real-time inventory tracking system which is accessible simultaneously by all locations and by our corporate office. We utilize our management information systems to monitor the inventory level of trucks and parts at each of our dealerships. From information assimilated from management information systems, management has developed a model reflecting historic sales levels of different product lines. This model enables management to identify the appropriate level and combination of inventory and forms the basis of our operating plan. Our management information systems and databases are also used to monitor market conditions and sales information and assess product and expansion strategies.

 

Information received from state and regulatory agencies, manufacturers, industry analysts and industry contacts allows us to determine market share statistics and gross volume sales numbers for our products as well as those of competitors. This information impacts ongoing operations because management remains aware of changes within the markets we service and is able to react accordingly by realigning product lines and by adding new product lines and models.

 

Distribution and Inventory Management.  We utilize a real-time inventory tracking system to maintain a close link between each Rush Truck Center.  This link allows for timely and cost-effective sharing of managerial and sales information as well as the prompt transfer of inventory among various locations. The transfer of inventory reduces delays in delivery, helps maximize inventory turns and assists in controlling problems created by overstock and understock situations. We are linked directly to our major suppliers, including PACCAR (Peterbilt), GMC, and John Deere, via real-time communication links for purposes of ordering and inventory management. These automated reordering and communication systems allow us to maintain proper inventory levels and permit us to have inventory delivered to our locations, or directly to customers, typically within 24 hours of an order being placed.

 

Recent Acquisitions and Dispositions

 

In October 2005, the Company purchased certain assets of TEC of California, Inc., which consisted of GMC, Isuzu and Hino medium-duty franchises.  The newly acquired lines were added to the Company’s existing medium-duty truck store in Fontana, California.   The transaction was valued at approximately $3.4 million, with the purchase price paid in cash.

 

In September 2005, the Company purchased certain assets of Hayes Leasing Company, Inc., which consisted of GMC and UD medium-duty franchises.  The newly acquired lines were added to the Company’s existing medium-duty truck store in Dallas, Texas.   The transaction was valued at approximately $3.4 million, with the purchase price paid in cash.

 

In September 2005, the Company purchased certain assets of Barrett Trucks, LLC., which consisted of a GMC and Isuzu medium-duty dealership in Texarkana, Texas.  The Company added Peterbilt trucks to the dealership and is operating the facility as a full-service Rush Truck Center offering heavy-duty and medium-duty trucks, parts and service.  The transaction was valued at approximately $626,000, with the purchase price paid in cash.

 

In July 2005, the Company purchased certain assets of Fountain Motor Co., Inc., which consisted of a GMC and Isuzu medium-duty dealership in Orlando, Florida.  The Company added Peterbilt trucks and UD products to the dealership and is operating the facility as a full-service Rush Truck Center offering heavy-duty and medium-duty trucks, parts and service.  The transaction was valued at approximately $2.8 million, with the purchase price paid in cash.

 

In January 2005, the Company acquired certain assets of ATS, including its Peterbilt truck dealerships in Texas and Tennessee, for a total purchase price of $132.4 million. The acquisition provides the Company with rights to sell Peterbilt trucks and parts at new locations in Dallas, Fort Worth, Abilene and Tyler, Texas and Nashville, Tennessee. The transaction was financed with cash of $77.8 million, expansion of the Company’s existing floor plan agreement for truck inventory of $34.6 million, and the issuance of debt of approximately $20.0 million to finance the purchase of real estate and certain vehicles used in ATS’s leasing operations.  Of the $77.8 million paid in cash, $21.9 million was for the purchase of a note receivable from the selling shareholders of ATS. This $21.9 million was immediately repaid by the selling shareholders at closing, resulting in net cash used in the acquisition of $55.9 million.

 

9



 

In November 2003, the Company sold certain assets of our wholly owned subsidiary, Rush Truck Centers of Louisiana, Inc. The transaction was valued at approximately $5.5 million and paid in cash. The Company recognized a gain on sale of assets of approximately $1.6 million in the fourth quarter of 2003.

 

In April 2003, the Company purchased substantially all of the assets of Peterbilt of Mobile, Inc., a Peterbilt dealership in Mobile, Alabama.  The transaction was valued at approximately $1.4 million, with the purchase price paid in cash.

 

In February 2003, the Company acquired the common stock of Orange County Truck and Trailers, Inc., a Peterbilt dealer in central Florida. The acquisition provided Rush with the right to sell Peterbilt trucks and parts in central Florida from locations in Orlando, Haines City, and Tampa, Florida. The transaction was valued at approximately $5.4 million, with the purchase price paid in cash.

 

On November 12, 2002, the Company decided to discontinue its Retail Segment (“D&D”), which operated three farm and ranch retail stores in Seguin, Hockley and Denton, Texas.  The Company decided that the retail segment did not fit into its long-term plans of growing its core heavy-duty truck and construction equipment businesses.  The Denton store was closed in December 2002, the Hockley store began liquidating inventory during November 2002 and completed the liquidation on March 9, 2003. The Company sold the Seguin store and Hockley real estate during the fourth quarter of 2004.

 

Competition

 

There is, and will continue to be, significant competition both within our current markets and in new markets we may enter. We anticipate that competition between us and other dealers will continue to increase in our current markets and on a national level based on the following:

 

                  the accessibility of dealership locations;

 

                  the number of dealership locations;

 

                  price, value, quality and design of the products sold; and

 

                  attention to customer service (including technical service).

 

Our new truck products compete with trucks made by other manufacturers and sold through competing independent and factory-owned truck dealerships, including trucks manufactured by Navistar, Mack, Freightliner, Kenworth, Volvo, Ford Motor Company, Western Star Truck Holdings, Ltd., and other manufacturers. Kenworth heavy-duty trucks are also manufactured by PACCAR, Peterbilt’s parent company, but are distributed through a different network of competing dealers. Our construction equipment products compete with construction equipment manufactured by Case Corporation, Caterpillar, Komatsu Ltd. and other manufacturers. We believe that our dealerships are able to compete with manufacturer-dealers, independent dealers and wholesalers, rental service companies and industrial auctioneers in distributing our products because of the following: the overall quality and reputation of the products we sell; “Rush” brand name recognition and reputation for quality service; and our ability to provide comprehensive parts and service support, as sell as financing, insurance and other customer services.

 

Dealership Agreements

 

Peterbilt.  We have entered into nonexclusive dealership agreements with Peterbilt which authorize us to act as a dealer of Peterbilt heavy-duty trucks. Our areas of responsibility currently encompass areas in the states of Alabama, Arizona, California, Colorado, Florida, New Mexico, Oklahoma, Tennessee and Texas. These dealership agreements have current terms expiring between March 2006 and January 2008 and impose certain operational obligations and financial requirements upon us and our dealerships. The Company’s dealership agreements with Peterbilt may be terminable by Peterbilt in the event the aggregate voting power of W. Marvin Rush and his family decreases below 30% with respect to the election of directors.  These agreements also grant Peterbilt rights of first refusal under certain circumstances relating to any sale or transfer of our dealership locations or if certain Rush family members desire to sell more than 100,000 shares of our voting common stock within a 12-month period to anyone other than family members or certain other specified persons.

 

10



 

Any termination or non-renewal of these dealership agreements by Peterbilt must follow certain guidelines established by both state and federal legislation designed to protect dealers from arbitrary termination or non-renewal of franchise agreements. The Automobile Dealers Day in Court Act and other similar state laws provide that the termination or non-renewal of a dealership agreement must be done in “good faith” and upon a showing of “good cause” by the manufacturer for such termination or non-renewal, as such terms have been defined by statute and interpreted in case law.

 

Other Truck Suppliers.  In addition to our truck dealership agreements with Peterbilt, we are also an authorized dealer of trucks manufactured by various manufacturers at the following locations:

 

Rush Truck Center

 

Heavy-Duty
Truck Lines Sold

 

Medium-Duty
Truck Lines Sold

 

 

 

 

 

Alabama:

 

 

 

 

Mobile

 

Peterbilt

 

Peterbilt

 

 

 

 

 

Arizona:

 

 

 

 

Phoenix

 

Peterbilt

 

Peterbilt, GMC, HINO

Tucson

 

Peterbilt

 

Peterbilt, GMC, HINO

 

 

 

 

 

California:

 

 

 

 

El Centro

 

Peterbilt

 

Peterbilt

Escondido

 

Peterbilt

 

Peterbilt, HINO

Fontana Heavy-Duty

 

Peterbilt

 

Peterbilt

Fontana Medium-Duty

 

None

 

Peterbilt, HINO, UD, GMC, Isuzu

Pico Rivera

 

Peterbilt

 

Peterbilt, UD

San Diego

 

Peterbilt

 

Peterbilt, GMC, HINO

Sylmar

 

Peterbilt

 

Peterbilt, UD

 

 

 

 

 

Colorado:

 

 

 

 

Denver

 

Peterbilt

 

Peterbilt

Greeley

 

Peterbilt

 

Peterbilt

 

 

 

 

 

Florida:

 

 

 

 

Haines City

 

Peterbilt

 

Peterbilt

Orlando

 

Peterbilt

 

Peterbilt, UD, GMC, Isuzu

Tampa

 

Peterbilt

 

Peterbilt

Winter Garden

 

Peterbilt

 

Peterbilt, UD

 

 

 

 

 

New Mexico:

 

 

 

 

Albuquerque

 

Peterbilt

 

Peterbilt, UD

 

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Rush Truck Center

 

Heavy-Duty
Truck Lines Sold

 

Medium-Duty
Truck Lines Sold

 

 

 

 

 

Oklahoma:

 

 

 

 

Tulsa

 

Peterbilt, Volvo

 

Peterbilt, GMC, HINO

Oklahoma City

 

Peterbilt

 

Peterbilt, GMC, HINO

Ardmore

 

Peterbilt

 

Peterbilt

 

 

 

 

 

Tennessee:

 

 

 

 

Nashville

 

Peterbilt

 

Peterbilt

 

 

 

 

 

Texas:

 

 

 

 

Alice

 

Peterbilt

 

Peterbilt

Austin

 

Peterbilt

 

Peterbilt, HINO, UD, GMC, Isuzu

Dallas Heavy-Duty

 

Peterbilt

 

Peterbilt

Dallas Medium-Duty

 

None

 

Peterbilt, HINO, UD, GMC

El Paso

 

Peterbilt

 

Peterbilt, GMC

Fort Worth

 

Peterbilt

 

Peterbilt, UD

Houston

 

Peterbilt

 

Peterbilt, GMC, HINO

Laredo

 

Peterbilt

 

Peterbilt

Lufkin

 

Peterbilt

 

Peterbilt

Pharr

 

Peterbilt

 

Peterbilt, HINO

San Antonio

 

Peterbilt

 

Peterbilt, GMC, HINO

Sealy

 

Peterbilt

 

Peterbilt

Texarkana

 

Peterbilt

 

Peterbilt, GMC, Isuzu

Tyler

 

Peterbilt

 

Peterbilt

 

Sales of non-Peterbilt medium-duty trucks accounted for less than 3.7% of our total revenues for 2005. These dealership agreements have current terms expiring between June 2006 and October 2010. These dealership agreements impose operating requirements upon us and require consent from the affected supplier for sale or transfer of such dealership agreement.

 

John Deere.  We have entered into a nonexclusive dealership agreement with John Deere which authorizes us to act as a dealer of John Deere construction, utility and forestry equipment. This John Deere dealership agreement has no specified term or duration. Our current area of responsibility for the sale of John Deere construction equipment is the greater Houston, Texas metropolitan area. The John Deere dealership agreement imposes operational obligations and financial requirements of the Company. Like the dealership agreements with Peterbilt, the dealership agreement with John Deere is terminable if W. Marvin Rush’s percentage ownership of the Company falls below 25%, grants limited rights of first refusal and imposes certain financial requirements upon us and our dealership.

 

Other Construction Equipment Suppliers.  In addition to John Deere, we are an authorized dealer for suppliers of other construction equipment. The terms of such arrangements vary, but most of these dealership agreements contain termination provisions allowing the supplier to terminate the agreement after a specified notice period (usually 180 days).

 

Floor Plan Financing

 

Trucks.  We finance substantially all of our new truck inventory and the loan value of our used truck inventory under a floor plan arrangement with GE Capital.  As of December 31, 2005, we had approximately $302.8 million outstanding under our GE Capital floor plan arrangement. Our GE Capital floor plan financing agreement provides for a three-year revolving credit facility which expires in September 2008.  The current interest rate is the LIBOR rate plus 1.68%.

 

Construction Equipment.  We finance substantially all of our new construction equipment inventory under floor plan facilities with John Deere and CitiCapital.  Our John Deere facility has no set expiration date and its interest rate is the prime rate plus 1.5%.  Our CitiCapital facility expires February 2007 and the current interest rate is the 30-day LIBOR rate

 

12



 

plus 3.0%. As of December 31, 2005, we had $3.1 million outstanding under the floor plan arrangement with John Deere and $10.1 million outstanding under the floor plan arrangement with CitiCapital.

 

Product Warranties

 

The manufacturers we represent provide retail purchasers of their products with a limited warranty against defects in materials and workmanship, excluding certain specified components that are separately warranted by the suppliers of such components. We do not undertake to provide any warranty to our customers.

 

We generally sell used trucks and construction equipment in “as is” condition without manufacturer’s warranty, although manufacturers sometimes will provide a limited warranty on their used products if such products have been properly reconditioned prior to resale or if the manufacturer’s warranty on such product is transferable and has not expired. We do not provide any warranty on used trucks or used construction equipment.

 

Trademarks

 

The Peterbilt, John Deere, Volvo, GMC, Hino, Isuzu and UD trademarks and trade names, which are used in connection with our marketing and sales efforts, are subject to limited licenses included in our dealership agreements with each manufacturer. The licenses are for the same periods as our dealership agreements. These trademarks and trade names are recognized internationally and are important in the marketing of our products. Each licensor engages in a continuous program of trademark and trade name protection.  We hold registered trademarks from the U.S. Patent and Trademark Office for the names “Rush Enterprises,” “Rush Truck Center” and “Rush Equipment Center.”  We currently have a trademark application for “Chrome Country” pending before the U.S. Patent and Trademark Office.

 

Employees

 

On December 31, 2005, the Company had 2,507 employees. The Company has no contracts or collective bargaining agreements with labor unions and has never experienced work stoppages. The Company consider our relations with our employees to be good.

 

Seasonality

 

The Company’s heavy-duty truck business is moderately seasonal. Seasonal effects on new truck 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, truck parts and service operations historically have experienced higher sales volumes in the second and third quarters.

 

Seasonal effects in the construction equipment business are primarily driven by the weather.  Seasonal effects on construction equipment sales related to the seasonal purchasing patterns of any single customer type are mitigated by the Company’s diverse customer base that includes contractors for residential and commercial construction, utility companies, federal, state and local government agencies, and various petrochemical, industrial and material supply type businesses that require construction equipment in their daily operations.

 

Backlog

 

On December 31, 2005, the Company’s backlog of truck orders was approximately $584.0 million as compared to a backlog of truck orders of approximately $324.0 million on December 31, 2004. The Company includes only confirmed orders in its backlog.  It currently takes between 14 days and six months for the Company to receive delivery of a truck once a customer special order is placed depending on the truck specifications and demand for the particular model ordered. The Company sells the majority of its new trucks by customer special order, with the remainder sold out of inventory. Orders from a number of the Company’s major fleet customers are included in the Company’s backlog as of December 31, 2005.

 

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Environmental Standards and Other Governmental Regulations

 

Our operations are subject to numerous federal, state and local laws and regulations, including laws and regulations designed to protect the environment by regulating the discharge of materials into the environment. EPA emission guidelines have a major impact on our operations.  The EPA mandated that diesel engine manufacturers meet new, stricter emissions guidelines regarding nitrous oxides for all engines built subsequent to October 1, 2002 and the EPA has placed additional guidelines, further restricting the emissions of nitrous oxides for all diesel engines built subsequent to January 1, 2007. In early 2002, the heavy-duty truck industry experienced an increased demand for trucks, as it historically has in the months preceding the effective date of a change in EPA emission guidelines; this period of increased demand was followed by a decrease in demand in the months subsequent to the change.  The Company believes that the 2007 emission guidelines will cause demand for heavy-duty trucks to remain high through 2006 as some purchasers accelerate their normal purchase cycles to avoid purchasing 2007 engines.  The Company expects a decrease in demand for trucks in the first half of 2007 due to the emissions guidelines.  The severity of the decrease in demand for trucks in 2007 will depend upon several factors including, without limitation, new diesel engine prices, the results of tests on the new diesel engines designed to meet the 2007 standards and projected maintenance and operation costs of the new diesel engines and general economic conditions.  Industry expectations are for the new engines to add $6,000 to $8,000 to the cost of a new Class 8 truck and increase maintenance and operating costs.

 

Item 1A.  Risk Factors

 

An investment in our common stock is subject to risks inherent to our business.  In addition to the other information contained in this Form 10-K, we recommend that you carefully consider the following risk factors in evaluating our business.  If any of the following risks actually occur, our financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of our common stock could decline significantly, and you could lose all or part of your investment.  Please note that additional risks not presently known to us or that we currently deem immaterial may also impair our business and operations.  This report is qualified in its entirety by these risk factors.

 

Risks Related to Our Business

 

We are substantially dependent upon PACCAR for the supply of Peterbilt trucks and parts, the sale of which generate substantially all of our revenues.

 

We currently operate as a dealer of Peterbilt trucks and parts pursuant to dealership agreements with Peterbilt. Peterbilt is a division of PACCAR.  During 2005, a significant portion of our revenues resulted from sales of trucks purchased from Peterbilt and parts purchased from PACCAR. Due to our dependence on PACCAR and its Peterbilt division, we believe that the long-term success of our Rush Truck Centers depends, in large part, on the following:

 

                  maintaining our relationship with PACCAR;

 

                  the manufacture and delivery of competitively-priced, high quality Peterbilt trucks and parts by PACCAR in quantities sufficient to meet our requirements;

 

                  PACCAR’s consent to our future acquisition of Peterbilt dealerships;

 

                  the overall success of PACCAR and Peterbilt;

 

                  PACCAR’s promotion of its Peterbilt division;

 

                  the goodwill associated with the Peterbilt trademark, which can be adversely affected by decisions made by PACCAR and the owners of other Peterbilt dealerships; and

 

                  the management of the Peterbilt dealership system by PACCAR.

 

We have no control over the management or operation of PACCAR or Peterbilt dealerships that we do not own.

 

Our dealership agreements may be terminable upon a change of control and we cannot control whether or not our largest shareholder and management maintain their current positions.

 

14



 

We have entered into nonexclusive dealership agreements with Peterbilt that authorize us to act as a dealer of Peterbilt trucks. Peterbilt may terminate our dealership agreements in the event of a change of control of the Company or if we violate any number of provisions in the dealership agreements. Under our Peterbilt dealership agreements, a change of control occurs if (i) with respect to the election of directors, the aggregate voting power held by W. Marvin Rush, W. M. “Rusty” Rush, W. Marvin Rush’s family members and other Rush executives decreases below 30% (such persons currently control 31.3% of the voting power with respect to the election of directors); or (ii) any person or entity other than W. Marvin Rush, W. M. “Rusty” Rush and other Rush executives or any person or entity who has been approved in writing by PACCAR, either (x) owns common stock with a greater percentage of the voting power with respect to the election of our directors than W. Marvin Rush and W. M. “Rusty” Rush and other Rush executives, in the aggregate, or (y) holds the office of Chairman of the Board, President or Chief Executive Officer of the Company. We have no control over the transfer or disposition by W. Marvin Rush or by his estate of his common stock. If W. Marvin Rush were to sell his class B common stock or bequest his class B common stock to nonfamily members or if his estate is required to liquidate his class B common stock to pay estate taxes or otherwise, the change of control provisions of the Peterbilt dealership agreements may be triggered and cause us to lose our critical right to sell Peterbilt products. Our John Deere dealership agreement and some of our medium-duty truck dealership agreements are also terminable if the voting power of W. Marvin Rush and his family falls below certain percentages, typically 25%.  If our dealership agreements with any manufacturer we currently represent are terminated, we will lose the right to purchase such manufacturer’s products and the right to use certain trademarks, which would have a material adverse effect on our operations, revenues and profitability.

 

If state dealer laws are repealed or weakened, our dealerships will be more susceptible to termination, nonrenewal or renegotiation of their dealership agreements.

 

Our dealership agreements impose certain operational obligations and financial requirements on us. State dealer laws generally provide that a manufacturer may not terminate or refuse to renew a dealership agreement unless it has first provided the dealer with written notice setting forth good cause and stating the grounds for termination or nonrenewal. Manufacturers’ lobbying efforts may lead to the repeal or revision of state dealer laws. If dealer laws are repealed in the states in which we operate dealerships, our manufacturers may be able to terminate our dealership agreements without providing advance notice, an opportunity to cure or a showing of good cause. Without the protection of state dealer laws, or if such laws are weakened, we will be subject to higher risk of termination or non-renewal of our dealership agreements. Termination or non-renewal of our dealership agreements could have a material adverse effect on our operations, revenues and profitability.

 

Our dealership agreements have relatively short terms which could result in non-renewal or imposition of less favorable terms upon renewal.

 

Our Peterbilt dealership agreements have current terms expiring between March 2006 and January 2008. Our Volvo dealership agreement has a current terms expiring August 2010.  Our dealership agreements with GMC, Hino, UD and Isuzu for the sale of medium-duty trucks have current terms expiring between June 2006 and October 2010.  Upon expiration of each agreement, we must request and negotiate a renewal. In many states state dealer franchise laws restrict the manufacturer’s ability to refuse to renew dealership agreements or to impose new terms upon renewal. To the extent such laws do permit non-renewal or imposition of new terms, the relatively short terms will give the manufacturers the opportunity to exercise such rights. Any non-renewal or imposition of less favorable terms upon renewal could have an adverse impact on our business.

 

We depend on relationships with component suppliers for sales incentives, discounts and similar programs which are material to our operations.

 

Each heavy-duty truck we sell is custom-built and each of our customers can choose components from any one of several component suppliers to construct their truck. Therefore, our dealerships depend on the component suppliers for sales incentives, discounts, warranties and other programs that are intended to promote our use of their components. Most of the incentives and discounts are individually negotiated and not always the same as those made available to our competitors. These incentives and discounts are material to our operations. A reduction or discontinuation of a component supplier’s incentive program could materially adversely affect our profitability.

 

15



 

Substantial competition may affect our profitability.

 

We face vigorous competition for customers and for suitable dealership locations. We compete with a large number of independent and factory-owned dealers, some of which operate in more than one location, but most of which operate in a single location. There is significant competition both within the markets we currently serve and in markets that we may enter. Moreover, our Peterbilt dealership arrangements with PACCAR do not contractually provide us with exclusive dealerships in any territory. PACCAR could elect to create additional Peterbilt dealers in our market areas in the future. While Peterbilt dealership agreements, including ours, restrict dealers from operating sales or service facilities outside their assigned territory, such agreements do not restrict fleet or other sales or marketing activity outside the assigned territory. Accordingly, we engage in fleet sales and other marketing activities outside our assigned territories and other Peterbilt dealers may engage in similar activities within our territories. Dealer competition continues to increase and is affected by a number of factors including the accessibility of dealership locations, the number of dealership locations, product pricing, product value, product quality, product design and customer service (including technical service). We anticipate that we will continue to face strong competition in the future.

 

We may be required to obtain additional financing to maintain adequate inventory levels.

 

The heavy-duty truck business requires inventories of trucks held for sale to be maintained at dealer locations in order to facilitate immediate sales to customers on demand. We generally purchase truck inventories with the assistance of a floor plan financing agreement through GE Capital that provides for payment at the earlier of the time of sale for each truck financed or at a fixed date following delivery. In the event that our financing becomes insufficient to satisfy its future requirements, we would need to obtain similar financing from other sources. There is no assurance that such additional floor plan financing or alternate financing could be obtained or, if obtained, that it will be on commercially reasonable terms.

 

If we lose key personnel or are unable to attract additional qualified personnel, our business could be adversely affected because we rely on the industry knowledge and relationships of our key personnel.

 

We believe that our success depends significantly upon the efforts and abilities of our executive management and key employees, including, in particular, W. Marvin Rush and W. M. ”Rusty” Rush. Additionally, our business is dependent upon our ability to continue to attract and retain qualified personnel, such as executive officers, managers and sales personnel. We have entered into employment agreements with certain executive officers. The loss of the services of one or more members of our senior management team, including, in particular, W. Marvin Rush or W. M. ”Rusty” Rush, could have a material adverse effect on us and materially impair the efficiency and productivity of our operations. In addition, the loss of any of our key employees or the failure to attract additional qualified executive officers, managers and sales personnel could have a material adverse effect on our business and may materially impact the ability of our dealerships to conduct their operations in accordance with our business strategy.

 

The dollar amount of our backlog, as stated at any given time, is not necessarily indicative of our future earnings.

 

As of December 31, 2005, our backlog of new truck orders was approximately $584.0 million. Our backlog is determined quarterly by multiplying the number of new trucks for each particular type of truck on order at our Rush Truck Centers by the recent average selling price for that type of truck.

 

We only include confirmed orders in our backlog.  However, such orders are subject to cancellation. In the event of order cancellation, we have no contractual right to the total revenues reflected in our backlog.  It currently takes between 14 days and six months for us to receive delivery of a truck once a customer special order is placed depending on the truck specifications and demand for the particular model ordered.  We sell the majority of our new heavy-duty trucks by customer special order, with the remainder sold out of inventory.  Orders from a number of our major fleet customers are included in our backlog as of December 31, 2005.  There can be no assurance that our major fleet customers will not cancel these orders.

 

Reductions in backlog due to cancellation by a customer or for other reasons adversely affect, potentially to a material extent, the revenue and profit we actually receive from orders projected in our backlog. If we were to experience significant cancellations of orders in our backlog, our financial condition could be significantly adversely affected.

 

16



 

If Texas law were changed to impose the Texas franchise tax or new taxes on the assets or income of our subsidiary limited partnership, the amount of taxes we pay could increase significantly.

 

Under current law, Texas imposes a franchise tax (which is based in part on net income) on corporations and limited liability companies that conduct business in Texas, but the Texas franchise tax is not currently imposed on limited partnerships that conduct business in Texas or on corporations and limited liability companies that are limited partners in such limited partnerships if the limited partners do not otherwise conduct business in Texas.  A substantial portion of our assets located in Texas are held in Rush Truck Centers of Texas, L.P., a limited partnership, the limited partners of whom are subsidiary corporations.  As a result, no Texas franchise tax is currently imposed on the assets or income of Rush Truck Centers of Texas, L.P.

 

On November 22, 2005, the Supreme Court of Texas held that the system for funding Texas public schools violates the provision of the Texas Constitution prohibiting a state property tax.  In response to this recent decision, the Governor of Texas has said that he will call a special session of the Texas Legislature to address the constitutional deficiencies in the current public school finance system and has further stated that the entire tax system needs substantial reform.  In past sessions of the Texas Legislature, several bills to address the public school finance system were introduced that would have subjected limited partnerships to the Texas franchise tax or would have subjected corporations and limited liability companies that are limited partners in limited partnerships to the Texas franchise tax, even if such corporations and limited liability companies did not otherwise conduct business in Texas.  If such a bill is enacted by the Texas Legislature or new laws are enacted that subject the assets or income of our subsidiary limited partnership to new taxes, whether enacted in the anticipated special session or in any later session, the amount of taxes we pay will increase significantly.

 

Our dealerships are subject to federal, state and local environmental regulations that may result in claims and liabilities, which could be material.

 

We are 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 and other materials; and the investigation and remediation of contamination. As with truck or construction equipment dealerships generally, and service, parts and body shop operations in particular, our business involves the use, storage, handling and contracting for recycling or disposal of hazardous materials or wastes and other environmentally sensitive materials. Operations involving the management of hazardous and nonhazardous materials are subject to requirements of the Resource Conservation and Recovery Act, or RCRA, and comparable state statutes. Our business also involves the operation of storage tanks containing such materials. Storage tanks are subject to periodic testing, containment, upgrading and removal under RCRA and comparable 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. We may also have liability in connection with materials that were sent to third-party recycling, treatment, or disposal facilities under the Comprehensive Environmental Response, Compensation and Liability Act, and comparable state statutes, which impose liability for investigation and remediation of contamination without regard to fault or the legality of the conduct that contributed to the contamination. Similar to many of our competitors, we have incurred and will continue to incur, capital and operating expenditures and other costs in complying with such laws and regulations.

 

Soil and groundwater contamination is known to exist at some of our current properties. Further, environmental laws and regulations are complex and subject to change. In addition, in connection with acquisitions, it is possible that we 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, we 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.

 

Risks Related to Our Common Stock

 

We are controlled by a single shareholder and his affiliates.

 

W. Marvin Rush owns approximately 0.01% of our issued and outstanding shares of class A common stock and 34.9% of our issued and outstanding class B common stock. As a result of such ownership, Mr. Rush will have the power to

 

17



 

effectively control us, including the election of directors, the determination of matters requiring shareholder approval and other matters pertaining to corporate governance.

 

The class A common stock has limited voting power.

 

Each share of class A common stock ranks substantially equal to each share of class B common stock with respect to receipt of any dividends or distributions declared on shares of common stock and the right to receive proceeds on liquidation or dissolution of us after payment of our indebtedness and liquidation preference payments to holders of preferred shares. However, holders of class A common stock have 1/20th of one vote per share on all matters requiring a shareholder vote, while holders of class B common stock have one full vote per share.

 

Our dealership agreements and our shareholder rights plan could discourage another company from acquiring us and impede our ability to issue additional stock to raise capital or as consideration for future acquisitions.

 

A number of our dealership agreements impose restrictions on the sale and transfer of our common stock. These restrictions also may prevent or deter prospective acquirers from acquiring control of us and, therefore, may adversely impact the value of our common stock. For example, under the Peterbilt dealership agreements, except as may be otherwise approved from time to time by Peterbilt, W. Marvin Rush, W. M. “Rusty” Rush, W. Marvin Rush’s family members and other of our executives, in the aggregate, are required to retain a control of at least 30% of the voting power of our outstanding shares and voting power equal or superior to that of any other person or group. To reduce the risk of a change of control that might materially adversely affect our business or rights under our Peterbilt dealership agreements, we have adopted a shareholder rights plan, commonly referred to as a “poison pill.”

 

In addition, W. Marvin Rush and members of his immediate family have granted Peterbilt a right of first refusal to purchase their respective shares of common stock in the event that any of such individuals desire to transfer in excess of 100,000 shares in any 12-month period to any person other than an immediate family member, an associate or a Dealer Principal (as defined in the Peterbilt dealership agreements). This right of first refusal, the number of shares owned by W. Marvin Rush, our adoption of the rights plan and the requirement in our dealership agreements that certain dealer principals retain a controlling interest in us, combined with the ability of the Board of Directors to issue shares of preferred stock without further vote or action by the shareholders, may discourage, delay or prevent a change in control without further action by our shareholders, which could adversely affect the market price of our common stock or prevent or delay a merger or acquisition that our shareholders may consider favorable. We do not have the right to waive the right of first refusal or the terms of its dealership agreements in order to accept a favorable offer, but our Board of Directors may redeem the rights under the rights plan to accept a favorable offer.

 

Actions by our shareholders or prospective shareholders that would violate any of the above restrictions on our dealership agreements are generally outside our control. If we are unable to renegotiate these restrictions, we may be forced to terminate or sell one or more of our dealerships, which could have a material adverse effect on us. This may also inhibit our ability to acquire additional dealerships. These restrictions also may impede our ability to raise required capital or to issue our stock as consideration for future acquisitions.

 

Item 1B.  Unresolved Staff Comments

 

None

 

18



 

Item 2.  Properties

 

A Rush Truck Center or Rush Equipment Center may be comprised of one or more locations, generally in close proximity, in the same metropolitan area. The following is a list of the Company’s Rush Truck Center and Rush Equipment Center locations as of January 1, 2006:

 

Property

 

Location

 

Owned or
Leased

 

Date
Acquired or
Occupied

 

Description of Activity and
Material Lease Expiration Dates

Rush Truck Centers

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Alabama:

 

 

 

 

 

 

 

 

Rush Truck Center of Mobile

 

Theodore, Alabama

 

Owned

 

2005

 

New, used, parts, service, body and financial

 

 

 

 

 

 

 

 

 

Arizona:

 

 

 

 

 

 

 

 

Rush Truck Center of Phoenix

 

Phoenix, Arizona

 

Owned

 

1999

 

New, used, parts, service, body, financial

Rush Truck Leasing, Phoenix

 

Phoenix, Arizona

 

Leased

 

2005

 

Leasing, parts and service

Rush Truck Center of Tucson

 

Tucson, Arizona

 

Owned

 

1999

 

New, used, parts, service and financial

Rush Truck Center of Flagstaff

 

Flagstaff, Arizona

 

Leased

 

1999

 

Parts and service

Rush Truck Center of Chandler

 

Chandler, Arizona

 

Leased

 

1999

 

Parts

 

 

 

 

 

 

 

 

 

California:

 

 

 

 

 

 

 

 

Rush Truck Center of Pico Rivera

 

Pico Rivera, California

 

Leased

 

1994

 

New, used, parts, service, body and financial (lease term expires 6/30/2007)

Rush Truck Leasing, Pico Rivera

 

Pico Rivera, California

 

Leased

 

1999

 

Leasing, parts and service

Rush Truck Center of Fontana

 

Fontana, California

 

Owned

 

1994

 

New, used, parts, service, financial and leasing (heavy-duty only)

Rush Truck Center of Fontana

 

Fontana, California

 

Leased

 

2003

 

New, used parts, service, body and financial (medium-duty only) (lease term expires 9/1/2023)

Rush Truck Center of Sylmar

 

Sylmar, California

 

Owned

 

1999

 

New, used, parts, service and financial

Rush Truck Center of San Diego

 

San Diego, California

 

Leased

 

1999

 

New, used, parts, service body and financial (lease term expires 5/31/2009)

Rush Truck Leasing, San Diego

 

San Diego, California

 

Leased

 

1999

 

Leasing, parts and service

Rush Truck Center of Escondido

 

Escondido, California

 

Leased

 

1999

 

New, used, parts, service, financial and leasing

Rush Truck Center of El Centro

 

El Centro, California

 

Leased

 

1999

 

New, used, parts, service, financial and leasing

 

 

 

 

 

 

 

 

 

Colorado:

 

 

 

 

 

 

 

 

Rush Truck Center of Denver

 

Denver, Colorado

 

Owned

 

2000

 

New, used, parts, service, body, and financial

Rush Truck Center of Greeley

 

Greeley, Colorado

 

Leased

 

1997

 

New, used, parts, service and financial

 

 

 

 

 

 

 

 

 

Florida:

 

 

 

 

 

 

 

 

Rush Truck Center of Winter Garden

 

Winter Garden, Florida

 

Leased

 

2003

 

New, used, parts, service and financial (lease term expires 9/14/2009)

Rush Truck Center of Haines City

 

Lake Hamilton, Florida

 

Leased

 

2003

 

New, used, parts, service, body and financial (lease term expires 1/31/2014)

Rush Truck Center of Tampa

 

Tampa, Florida

 

Leased

 

2003

 

New, used, parts, service and financial (lease term expires 5/31/2009)

Rush Truck Center of Orlando

 

Orlando, Florida

 

Leased

 

2005

 

New, used, parts, service, body and financial (lease term expires 7/31/07)

 

19



 

Property

 

Location

 

Owned or
Leased

 

Date
Acquired or
Occupied

 

Description of Activity and
Material Lease Expiration Dates

New Mexico:

 

 

 

 

 

 

 

 

Rush Truck Center of Albuquerque

 

Albuquerque, New Mexico

 

Owned

 

2003

 

New, used, parts, service, body and financial

Rush Truck Center of Las Cruces

 

Las Cruces, New Mexico

 

Leased

 

2001

 

Parts and service

 

 

 

 

 

 

 

 

 

Oklahoma:

 

 

 

 

 

 

 

 

Rush Truck Center of Tulsa

 

Tulsa, Oklahoma

 

Leased

 

1998

 

New, used, parts, service, body and financial (lease term expires 10/1/2023)

Rush Truck Center of Oklahoma City

 

Oklahoma City, Oklahoma

 

Owned

 

1995

 

New, used, parts, service, body and financial

Rush Truck Center of Ardmore

 

Ardmore, Oklahoma

 

Leased

 

2003

 

New, used, parts and service

Perfection Equipment, Inc.

 

Oklahoma City, Oklahoma

 

Owned

 

2001

 

Truck parts, service and upfitting

Perfection Equipment, Inc.

 

Oklahoma City, Oklahoma

 

Leased

 

2005

 

Truck parts, service and upfitting

 

 

 

 

 

 

 

 

 

Tennessee:

 

 

 

 

 

 

 

 

Rush Truck Center of Nashville

 

Smyrna, Tennessee

 

Owned

 

2005

 

New, used, parts, service, body, financial and leasing

 

 

 

 

 

 

 

 

 

Texas:

 

 

 

 

 

 

 

 

Rush Truck Center of San Antonio

 

San Antonio, Texas

 

Owned

 

1973

 

New, used, parts, service, body, financial and leasing

Rush Truck Center of Houston

 

Houston, Texas

 

Owned

 

2000

 

New, used, parts, service, body and financial

Rush Truck Leasing, Houston

 

Houston, Texas

 

Owned

 

1988

 

Leasing, parts, service and World Wide Tires

Rush Truck Center of Sealy

 

Sealy, Texas

 

Owned

 

2000

 

New, used, parts, service and financial

Rush Truck Center of Laredo

 

Laredo, Texas

 

Owned

 

1999

 

New, parts, service, body and financial

Rush Truck Center of Lufkin

 

Lufkin, Texas

 

Leased

 

1992

 

New, used, parts, service, body and financial (lease term expires 9/30/2006)

Rush Truck Center of Pharr

 

Pharr, Texas

 

Owned

 

1997

 

New, used, parts, service, body and financial

Rush Truck Center of Austin

 

Austin, Texas

 

Owned

 

2004

 

New, used, parts, service and financial

Rush Truck Center of El Paso

 

El Paso, Texas

 

Owned

 

2001

 

New, used, parts, service, body and financial

Rush Truck Center of Dallas

 

Dallas, Texas

 

Leased

 

2004

 

New, used, parts, service, financial (medium-duty only)

Rush Truck Center of Dallas

 

Irving, Texas

 

Owned

 

2005

 

New, used, parts, service, body and financial (heavy-duty only)

Rush Truck Center of Fort Worth

 

Fort Worth, Texas

 

Leased

 

2005

 

New, used, parts and service

Rush Truck Center of Tyler

 

Tyler, Texas

 

Leased

 

2005

 

New, used, parts, service and financial

Rush Truck Center of Abilene

 

Abilene, Texas

 

Leased

 

2005

 

Parts

Rush Truck Center of Texarkana

 

Texarkana, Texas

 

Leased

 

2005

 

New, used, parts, service and financial

Rush Truck Center of Alice

 

Alice, Texas

 

Leased

 

2006

 

New, used, parts, service and financial

World Wide Tires

 

Kyle, Texas

 

Leased

 

2004

 

Tires

World Wide Tires

 

Crockett, Texas

 

Leased

 

1999

 

Tires

 

 

 

 

 

 

 

 

 

Rush Equipment Center

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rush Equipment Center of Houston

 

Houston, Texas

 

Owned

 

1997

 

New, used, parts, service, leasing and rental, and financial

 

The Company’s administrative offices are currently situated in approximately 38,000 square feet of leased space in New Braunfels, Texas. The Company leases a hangar in New Braunfels, Texas for the corporate aircraft.  The Company

 

20



 

also acquired undeveloped land in Fort Worth and Temple, Texas and two residential properties from ATS in January 2005.  The administrative offices of the Company’s insurance services division occupy 3,750 square feet of leased space in San Antonio, Texas and 2,000 square feet of leased space in Winter Garden, Florida. The Company also owns and operates a hunting ranch of approximately 6,500 acres in Cotulla, Texas. The Company uses the ranch for client development purposes and sells hunting trips on the ranch.

 

Item 3.  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. We believe that there are no claims or litigation pending, the outcome of which could have a material adverse effect on the Company’s financial position or results of operations. However, due to the inherent uncertainty of litigation, there can be no assurance that the resolution of any particular claim or proceeding would not have a material adverse effect on the Company’s results of operations for the fiscal period in which such resolution occurred.

 

Item 4.  Submission of Matters to a Vote of Security Holders

 

No matters were submitted to a vote of the Company’s shareholders during the fourth quarter of the fiscal year ended December 31, 2005.

 

21



 

PART II

 

Item 5.  Market for Registrant’s Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities

 

Our common stock trades on The NASDAQ National Market® under the symbols RUSHA and RUSHB.

 

The following table sets forth the high and low sales prices for the Class A Common Stock and Class B Common Stock for the fiscal periods indicated and as quoted on The NASDAQ National Market®.

 

 

 

High

 

Low

 

Fiscal 2005:

 

 

 

 

 

 

 

 

 

 

 

Class A Common Stock

 

 

 

 

 

First Quarter

 

$

16.65

 

$

14.00

 

Second Quarter

 

$

16.58

 

$

12.84

 

Third Quarter

 

$

16.82

 

$

13.25

 

Fourth Quarter

 

$

15.87

 

$

13.95

 

 

 

 

 

 

 

Class B Common Stock

 

 

 

 

 

First Quarter

 

$

17.45

 

$

14.91

 

Second Quarter

 

$

16.89

 

$

12.85

 

Third Quarter

 

$

16.64

 

$

13.25

 

Fourth Quarter

 

$

15.16

 

$

13.70

 

 

 

 

 

 

 

Fiscal 2004:

 

 

 

 

 

 

 

 

 

 

 

Class A Common Stock

 

 

 

 

 

First Quarter

 

$

12.30

 

$

9.04

 

Second Quarter

 

$

13.79

 

$

10.77

 

Third Quarter

 

$

14.08

 

$

10.00

 

Fourth Quarter

 

$

16.50

 

$

10.27

 

 

 

 

 

 

 

Class B Common Stock

 

 

 

 

 

First Quarter

 

$

12.40

 

$

9.06

 

Second Quarter

 

$

14.05

 

$

10.61

 

Third Quarter

 

$

14.00

 

$

11.05

 

Fourth Quarter

 

$

17.72

 

$

11.27

 

 

As of March 3, 2006, there were approximately 53 record holders of the Class A Common Stock and approximately 58 record holders of the Class B Common Stock and approximately 3,460 beneficial holders of the Class A Common Stock and approximately 670 beneficial holders of the Class B Common Stock.

 

The Board of Directors intends to retain any earnings of the Company to support operations and to finance expansion and does not intend to pay cash dividends in the foreseeable future. Any future determination as to the payment of dividends will be at the discretion of the Board of Directors of the Company and will depend on the Company’s financial condition, results of operations, capital requirements and such other factors as the Board of Directors deems relevant.

 

The Company has not sold any securities in the last three years that were not registered under the Securities Act.

 

No shares of the Company’s Class A Common Stock or Class B Common Stock were purchased by or on behalf of the Company or any affiliated purchaser in the fourth quarter of 2005.

 

Information regarding the Company’s equity compensation plans is incorporated by reference from Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters,” of this annual report on Form 10-K, and should be considered an integral part of this Item 5.

 

22



 

Item 6.  Selected Financial Data

 

The information below was derived from the audited consolidated financial statements included in this report and reports we have previously filed with the SEC. This information should be read together with those consolidated financial statements and the notes to those consolidated financial statements. These historical results are not necessarily indicative of the results to be expected in the future. The selected financial data presented below may not be comparable between periods in all material respects or indicative of the Company’s future financial position or results of operations due primarily to acquisitions and discontinued operations which occurred during the periods presented. See Note 17 to the Company’s Consolidated Financial Statements for a discussion of such acquisitions and Note 3 to the Company’s Consolidated Financial Statements for a discussion of such discontinued operations. The selected financial data presented below should be read in conjunction with the Company’s other financial information included elsewhere herein.

 

 

 

Year Ended December 31,

 

 

 

2001

 

2002

 

2003

 

2004

 

2005

 

 

 

(in thousands, except per share amounts)

 

SUMMARY OF INCOME STATEMENT DATA

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

New and used truck sales

 

$

438,143

 

$

488,456

 

$

501,757

 

$

738,225

 

$

1,400,736

 

Parts and service

 

188,566

 

211,478

 

249,818

 

285,206

 

365,908

 

Construction equipment sales

 

31,666

 

24,324

 

28,263

 

32,305

 

41,692

 

Lease and rental

 

25,040

 

25,277

 

25,847

 

27,193

 

33,975

 

Finance and insurance

 

5,251

 

5,448

 

6,286

 

7,909

 

15,356

 

Other

 

2,847

 

2,164

 

3,361

 

4,141

 

7,103

 

Total revenues

 

691,513

 

757,147

 

815,332

 

1,094,979

 

1,864,770

 

Cost of products sold

 

562,316

 

615,942

 

662,082

 

909,837

 

1,582,078

 

Gross profit

 

129,197

 

141,205

 

153,250

 

185,142

 

282,692

 

Selling, general and administrative

 

101,832

 

111,721

 

124,207

 

141,947

 

188,667

 

Depreciation and amortization

 

9,176

 

8,594

 

8,929

 

9,119

 

10,487

 

Operating income from continuing operations

 

18,189

 

20,890

 

20,114

 

34,076

 

83,538

 

Interest expense, net

 

9,267

 

6,499

 

6,348

 

5,950

 

12,895

 

Gain on sale of assets

 

1,067

 

155

 

1,984

 

624

 

495

 

Income from continuing operations before income taxes

 

9,989

 

14,546

 

15,750

 

28,750

 

71,138

 

Provision for income taxes

 

3,996

 

5,818

 

6,300

 

11,574

 

26,513

 

Income from continuing operations

 

5,993

 

8,728

 

9,450

 

17,176

 

44,625

 

Income (loss) from discontinued operations, net

 

(2,731

)

(10,472

)

(621

)

(260

)

0

 

Net income

 

$

3,262

 

$

(1,744

)

$

8,829

 

$

16,916

 

$

44,625

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Share:

 

 

 

 

 

 

 

 

 

 

 

Earnings per Common Share – Basic

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.43

 

$

0.62

 

$

0.67

 

$

1.10

 

$

1.84

 

Net income (loss)

 

$

0.23

 

$

(0.12

)

$

0.63

 

$

1.08

 

$

1.84

 

Earnings per Common Share – Diluted

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.42

 

$

0.60

 

$

0.63

 

$

1.03

 

$

1.79

 

Net income (loss)

 

$

0.23

 

$

(0.12

)

$

0.59

 

$

1.02

 

$

1.79

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares

 

14,004

 

14,004

 

14,042

 

15,684

 

24,202

 

Diluted weighted average shares and assumed conversions

 

14,166

 

14,461

 

15,024

 

16,607

 

24,957

 

 

23



 

 

 

Year Ended December 31,

 

 

 

2001

 

2002

 

2003

 

2004

 

2005

 

OPERATING DATA

 

 

 

 

 

 

 

 

 

 

 

Number of locations —

 

44

 

41

 

38

 

39

 

48

 

Unit truck sales —

 

 

 

 

 

 

 

 

 

 

 

New trucks

 

4,245

 

4,717

 

4,535

 

7,140

 

12,918

 

Used trucks

 

1,907

 

2,111

 

2,421

 

2,716

 

3,677

 

Total unit trucks sales

 

6,152

 

6,828

 

6,956

 

9,856

 

16,595

 

Total finance contracts sold (in thousands)

 

$

149,906

 

$

144,134

 

$

165,137

 

$

259,898

 

$

451,807

 

Truck lease and rental units

 

1,403

 

1,363

 

1,397

 

1,427

 

1,798

 

 

 

 

Year Ended December 31,

 

 

 

2001

 

2002

 

2003

 

2004

 

2005

 

 

 

(in thousands)

 

BALANCE SHEET DATA

 

 

 

 

 

 

 

 

 

 

 

Working capital

 

$

7,050

 

$

7,995

 

$

14,113

 

$

138,241

 

$

126,137

 

Inventories

 

84,155

 

115,333

 

137,423

 

189,792

 

338,212

 

Inventory included in assets held for sale

 

30,150

 

10,218

 

2,496

 

 

 

Fixed assets included in assets held for sale

 

13,821

 

6,744

 

6,328

 

 

 

Total assets

 

338,811

 

345,110

 

366,878

 

565,933

 

840,234

 

Floor plan financing

 

85,300

 

89,288

 

108,235

 

168,002

 

315,985

 

Line-of-credit Borrowings

 

22,459

 

22,395

 

17,732

 

2,434

 

2,755

 

Long-term debt, including Current portion

 

98,170

 

94,916

 

90,028

 

96,056

 

133,152

 

Capital lease obligations, including Current portion

 

 

 

 

 

16,905

 

Shareholders’ equity

 

81,439

 

79,695

 

88,706

 

222,807

 

273,620

 

 

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Acquisition of American Truck Source, Inc.

 

In January 2005, the Company acquired certain assets of ATS, including its Peterbilt truck dealerships in Texas and Tennessee, for a total purchase price of $132.4 million. The acquisition provides the Company with rights to sell Peterbilt trucks and parts at new locations in Dallas, Fort Worth, Abilene and Tyler, Texas and Nashville, Tennessee. The transaction was financed with cash of $77.8 million, expansion of the Company’s existing floor plan agreement for truck inventory of $34.6 million, and the issuance of debt of approximately $20.0 million to finance the purchase of real estate and certain vehicles used in ATS’s leasing operations.  Of the $77.8 million paid in cash, $21.9 million was for the purchase of a note receivable from the selling shareholders of ATS. This $21.9 million was immediately repaid by the selling shareholders at closing, resulting in net cash used in the acquisition of $55.9 million.

 

General

 

The Company is a full-service, integrated retailer of premium transportation and construction equipment and related services.  The Company’s Rush Truck Centers sell heavy-duty trucks manufactured by Peterbilt Motors Company, a division of PACCAR, Inc.  Certain Rush Truck Centers sell medium-duty trucks manufactured by Peterbilt, GMC, Hino, UD or Isuzu. The Company also operates a John Deere construction equipment dealership at its Rush Equipment Center in Houston, Texas. Through its strategically located network of Rush Truck Centers and its Rush Equipment Center, the Company provides one-stop service for the needs of its customers, including retail sales of new and used trucks and construction equipment, aftermarket parts sales, service and repair facilities, and financing, leasing and rental, and insurance services.

 

24



 

The Company’s Rush Truck Centers are principally located in high traffic areas throughout the southern United States. Since commencing operations as a Peterbilt heavy-duty truck dealer in 1966, the Company has grown to operate more than 40 Rush Truck Centers in Alabama, Arizona, California, Colorado, Florida, New Mexico, Oklahoma, Tennessee and Texas.

 

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

 

Rush Truck Centers.  Since commencing operations as a Peterbilt heavy-duty truck dealer over 39 years ago, we have grown to operate 35 full-service Rush Truck Centers, two Rush Truck Centers that offer parts and service, and two Rush Truck Centers that only sell parts.  Our Rush Truck Centers are located in Alabama, Arizona, California, Colorado, Florida, New Mexico, Oklahoma, Tennessee and Texas. Our full-service Rush Truck Centers sell new Peterbilt Class 8 trucks and provide parts and service, including body shop service at certain locations, to owners of Class 8 trucks.  Our full-service Rush Truck Centers also sell Peterbilt medium-duty trucks and medium-duty trucks manufactured by GMC, Hino, UD, or Isuzu, depending upon the location of the Rush Truck Center, and provide parts and service, including body shop service at certain locations, to owners of medium-duty trucks. Our Rush Truck Centers are strategically located to serve customers traveling from California to Florida across the southern U.S. and to take advantage of ever increasing cross-border traffic between the United States and Mexico resulting from implementation of NAFTA.

 

Rush Equipment Center. Our Rush Equipment Center in Houston, Texas, provides a full line of construction equipment, including John Deere backhoe loaders, hydraulic excavators, crawler-dozers and four-wheel drive loaders.

 

Leasing and Rental Services.  Through certain of our Rush Truck Centers and four stand-alone Rush Truck Leasing stores, we provide a broad line of product selections for lease or rent, including Class 6, Class 7 and Class 8 trucks, heavy-duty cranes and refuse haulers.  Our lease and rental fleets are offered on a daily, monthly or long-term basis.

 

Financial and Insurance Services.  Through our dealerships we offer third-party financing to assist customers in purchasing new and used trucks and construction equipment. Additionally, we sell a complete line of property and casualty insurance, including collision and liability insurance on trucks, cargo insurance and credit life insurance.

 

Perfection Equipment.  Our Perfection Equipment subsidiary operates out of two locations in Oklahoma City.  Perfection Equipment offers installation of equipment, equipment repair, parts installation, and paint and body repair.  Perfection carries over 120 lines of truck and industrial parts and over 100 lines of equipment.  Perfection Equipment specializes in up-fitting trucks used by oilfield service providers and other specialized service providers.

 

World Wide Tires.  We operate World Wide Tires stores in three locations.  World Wide Tires primarily sells tires for use on Class 8 trucks.

 

Critical Accounting Policies

 

The Company’s discussion and analysis of its financial condition and results of operations are based on the Company’s consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates. The Company believes the following accounting policies, which are also described in Note 2 of Notes to Consolidated Financial Statements, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

 

Inventories.  Inventories are stated at the lower of cost or market value. Cost is determined by specific identification for new and used truck and construction equipment inventory and by the first-in, first-out method for tires, parts and accessories. An allowance is provided when it is anticipated that cost will exceed net realizable value.

 

Other Assets.  Other assets consist primarily of goodwill related to acquisitions and other intangible assets. As stated in Note 2 of Notes to Consolidated Financial Statements, Financial Accounting Standards Board Statement No. 142

 

25



 

(“SFAS 142”) provides that goodwill and other intangible assets that have indefinite useful lives will not be amortized, but instead must be tested at least annually for impairment, and intangible assets that have finite useful lives should continue to be amortized over their useful lives. SFAS 142 also provides specific guidance for testing goodwill and other nonamortized intangible assets for impairment. SFAS 142 requires management to make certain estimates and assumptions in order to allocate goodwill to reporting units and to determine the fair value of a reporting unit’s net assets and liabilities, including, among other things, an assessment of market condition, projected cash flows, interest rates and growth rates, which could significantly impact the reported value of goodwill and other intangible assets. SFAS 142 requires, in lieu of amortization, an annual impairment review of goodwill. The Company did not record an impairment charge related to the goodwill for its continuing operations as a result of its December 31, 2005 impairment review.

 

Revenue Recognition Policies.  Income on the sale of a vehicle or a piece of construction equipment is recognized when the customer executes a purchase contract with us, the unit has been delivered to the customer and there are no significant uncertainties related to financing or collectibility. Lease and rental income is recognized over the period of the related lease or rental agreement. Parts and service revenue is earned at the time the Company sells the parts to its customers or at the time the Company completes the service work order related to service provided to the customer’s unit. Payments received on prepaid maintenance plans are deferred as a component of accrued expenses and recognized as income when the maintenance is performed.

 

Finance and Insurance Revenue Recognition.  Finance income related to the sale of a unit is recognized when the finance contract is sold to a finance company.  During 2003, 2004 and 2005, finance contracts were not retained by the Company for any significant length of time because finance contracts are generally sold to finance companies concurrent with the sale of the related unit. The majority of finance contracts are sold without recourse against the Company. A majority of the Company’s liability related to finance contracts sold with recourse is generally limited to 5% to 20% of the outstanding amount of each note initiated on behalf of the finance company. However, in 2003 the Company instituted a finance program that accepts 100% liability, with some restrictions, for the outstanding amount of each note initiated on behalf of the finance company.  In order for a contract to be accepted into this finance program, a customer must meet strict credit requirements or maintain a significant equity position in the truck being financed; consequently, approximately 1% of the Company’s portfolio balance related to finance contracts sold by the Company are under this 100% liability finance program and the Company does not expect to finance a significant percentage of its truck sales under this 100% liability finance program in the future. The Company provides for an allowance for repossession losses and early repayment penalties that it may be liable for under finance contracts sold without recourse.

 

As part of the acquisition of certain assets of ATS, the Company assumed contingent liabilities to finance companies for notes that ATS initiated on behalf of such finance companies related to the sale of trucks.  ATS’s portfolio to which the contingent liability relates is made up of contracts sold with and without recourse, and the Company expects a majority of the portfolio to be liquidated by January 1, 2008.  The Company has provided a specific allowance for repossession losses and early repayment penalties related to ATS’s portfolio.

 

The Company arranges financing for customers through various financial institutions and receives a commission from the lender equal to either the difference between the interest rates charged to customers over the predetermined interest rates set by the financing institution or a commission for the placement of contracts. The Company also receives commissions from the sale of various insurance products and extended service contracts to customers.  Revenue is recognized by the Company upon the sale of such finance and insurance contracts to the finance and insurance companies net of a provision for estimated repossession losses and interest charge backs. The Company is not the obligor under any of these contracts. In the case of finance contracts, a customer may prepay, or fail to pay, thereby terminating the contract. If the customer terminates a retail finance contract or insurance contract prior to scheduled maturity, a portion of the commissions previously paid to the Company may be charged back to the Company depending on the terms of the relevant contracts. The estimate of ultimate charge back exposure is based on the Company’s historical charge back expense arising from similar contracts, including the impact of refinance and default rates on retail finance contracts and cancellation rates on insurance contracts. The actual amount of historical charge backs has not been significantly different from the Company’s estimates.

 

Insurance Accruals.  The Company is partially self-insured for medical, workers compensation, and property and casualty insurance and calculates a reserve for those claims that have been incurred but not reported and for the remaining portion of those claims that have been reported. The Company uses information provided by third-party administrators to determine the reasonableness of the calculations they perform.

 

26



 

Accounting for Income Taxes. Significant management judgment is required to determine the provisions for income taxes and to determine whether deferred income taxes 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.  The Company recorded a valuation allowance related to deferred income taxes in certain states.  Accordingly, the facts and financial circumstances impacting the state deferred income tax assets are reviewed quarterly and management’s judgment is applied to determine the amount of valuation allowance required in any given period.

 

Additionally, despite the Company’s belief that its tax return positions are consistent with applicable tax law, management believes that certain positions may be challenged by taxing authorities.  Settlement of any challenge can result in no change, a complete disallowance, or some partial adjustment reached through negotiations.  Significant judgment is required in evaluating the Company’s tax contingencies.  The Company’s tax contingencies are adjusted in light of changing facts and circumstances.  The Company’s income tax expense includes the impact of reserve provisions and changes to reserves that it considers appropriate, as well as related interest.  Unfavorable settlement of any particular issue would require use of the Company’s cash.  Favorable resolution would be recognized as a reduction to income tax expense at the time of resolution.

 

Key Performance Indicator

 

Absorption Rate. The management of the Company uses several performance metrics to evaluate the performance of its dealerships.  The Company considers its “absorption rate” to be of critical importance.  Absorption rate is calculated by dividing the gross profit from the parts, service and body shop departments by the overhead expenses of all of a dealership’s departments, except for the selling expenses of the new and used truck departments and carrying costs of new and used truck inventory.  When 100% absorption is achieved, then gross profit from the sale of a truck, after sales commissions and inventory carrying costs, directly impacts operating profit.  In 1999, the Company’s absorption rate was approximately 80%.  The Company has made a concerted effort to increase its absorption rate since then.  Management believes that maintaining an absorption rate in excess of 100% is critical to the Company’s ability to generate consistent earnings in a cyclical business.  The Company achieved a 100.4% absorption rate in 2005.

 

27



 

Results of Operations

 

The following discussion and analysis includes the Company’s historical results of operations for 2003, 2004 and 2005.

 

The following table sets forth for the years indicated certain financial data as a percentage of total revenues:

 

 

 

Year Ended December 31,

 

 

 

2003

 

2004

 

2005

 

 

 

 

 

 

 

 

 

New and used truck sales

 

61.5

%

67.4

%

75.1

%

Parts and service

 

30.6

 

26.0

 

19.6

 

Construction equipment sales

 

3.5

 

3.0

 

2.3

 

Lease and rental

 

3.2

 

2.5

 

1.8

 

Finance and insurance

 

0.8

 

0.7

 

0.8

 

Other

 

0.4

 

0.4

 

0.4

 

Total revenues

 

100.0

 

100.0

 

100.0

 

Cost of products sold

 

81.2

 

83.1

 

84.8

 

Gross profit

 

18.8

 

16.9

 

15.2

 

Selling, general and administrative

 

15.2

 

13.0

 

10.1

 

Depreciation and amortization

 

1.1

 

0.8

 

0.6

 

Operating income from continuing operations

 

2.5

 

3.1

 

4.5

 

Interest expense, net

 

0.8

 

0.6

 

0.7

 

Gain on sale of assets

 

0.2

 

0.1

 

0.0

 

Income before income taxes from continuing operations

 

1.9

 

2.6

 

3.8

 

Income taxes

 

0.8

 

1.1

 

1.4

 

Income from continuing operations

 

1.1

 

1.5

 

2.4

 

(Loss) from discontinued operations, net of taxes

 

(0.1

)

0.0

 

0.0

 

Net income

 

1.0

%

1.5

%

2.4

%

 

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

 

Revenues

 

Revenues increased $769.8 million, or 70.3%, from $1,095.0 million in 2004 to $1,864.8 million in 2005.  Sales of new and used trucks increased $662.5 million, or 89.7%, from $738.2 million in 2004 to $1,400.7 million in 2005.

 

Unit sales of new Class 8 trucks increased 88.1%, from 5,374 units in 2004 to 10,111 units in 2005 due to increasing demand and the ATS acquisition.  The increase in Class 8 unit sales is being driven by the industry’s need to replace aging equipment after U.S. truck sales lagged behind the normal replacement cycle during 2001, 2002, and 2003. The Company’s average sales price per Class 8 truck increased from $101,200 in 2004 to $106,300 in 2005.  This price increase is primarily attributable to an increase in the manufacturing costs.  Based on estimates from A.C.T. Research, the Company believes that the sales of Class 8 trucks in the United States will increase from approximately 259,000 units in 2005 to approximately 266,000 units in 2006. In 2005, the Company retained a 3.9% share of the U.S. Class 8 truck sales market. Based on internal expansion and communication with our customers, the Company expects to increase this share to approximately 4.1% in 2006, which would result in sale of approximately 11,000 Class 8 trucks based on retail sales of 266,000 units as estimated by A.C.T. Research.  Industry expectations are for Class 8 truck sales to decline in 2007 primarily due to new diesel emissions laws, which are expected to increase the cost and reduce the fuel efficiency of diesel engines built on or after January 1, 2007.  Some industry experts believe that the drop-off of truck sales in 2007 will begin to recover in the second half of 2007.  A.C.T. Research currently estimates U.S. Class 8 retail sales to total approximately 179,000 units in 2007.

 

Unit sales of new medium-duty trucks increased 58.9%, from 1,766 units in 2004 to 2,807 units in 2005. In 2004, the Company continued its concerted effort to improve its medium-duty truck sales by adding experienced medium-duty sales personnel and introducing new medium-duty franchises at some of our Rush Truck Centers to complement the existing medium-duty lines sold at such dealerships.  During the last half of 2005, the Company made acquisitions of

 

28



 

medium-duty truck franchises in Dallas and Texarkana, Texas, Orlando, Florida and Fontana, California.  Overall, new medium-duty truck sales revenue increased $64.5 million in 2005 compared to 2004. In 2006, the Company expects to continue to add medium-duty franchises to certain dealerships and to increase medium-duty sales and market share compared to 2005.   The Company expects to sell approximately 4,000 medium–duty trucks in 2006.  A.C.T. Research currently expects demand for class 5, 6, and 7 medium-duty trucks to remain flat in 2006 and decrease approximately 7.5% in 2007.

 

Unit sales of used trucks increased 35.4%, from 2,716 units in 2004 to 3,677 units in 2005. Used truck average revenue per unit increased by 22.3%. Historically, used truck demand is consistent with new truck demand. The Company expects used truck demand to remain high; however, our ability to sell used trucks is ultimately dependent upon our ability to acquire used trucks for resale.

 

Parts and service sales increased $80.7 million, or 28.3%, from $285.2 million in 2004 to $365.9 million in 2005. The parts and service sales increase in 2005 was due to business development activities combined with price increases for parts and labor and acquisitions throughout the year.  The Company expects parts and service revenue to increase by approximately 12.0% in 2006.

 

Sales of new and used construction equipment increased $9.4 million, or 29.1%, from $32.3 million in 2004 to $41.7 million in 2005.  Currently, the construction equipment sales increase is primarily attributable to the improved market conditions in Houston, Texas and the need to replace aging equipment.  Approximately 2,700 units of construction equipment were put into use in our area of responsibility in 2005, and the construction equipment industry expects to sell approximately 2,840 units of new construction equipment in the Houston area in 2006.  John Deere’s market share in the Houston area construction equipment market increased from 16.3% in 2004 to 19.9% in 2005.  The Company believes it can increase John Deere’s market share, in the Houston area, to approximately 25% in 2006.  Because the Company operates only one construction equipment location, new and used construction equipment revenue can fluctuate significantly from quarter to quarter depending on the mix of product sold and the timing of deliveries.

 

Lease and rental revenues increased 25.0%, from $27.2 million in 2004 to $34.0 million in 2005. The increase in truck lease and rental revenue was due to the increase in our customer base during 2005. The Company expects lease and rental revenue to increase approximately 17.0% during 2006 compared to 2005 in part due to the acquisition of units in the lease and rental fleet during the fourth quarter of 2005.

 

Finance and insurance revenues increased 94.9%, from $7.9 million in 2004 to $15.4 million in 2005. Finance and insurance revenues typically increase as sales of new and used trucks increase.  Finance and insurance revenues have minimal direct costs and, therefore, contribute a disproportionate share of operating profits.

 

Other income increased $3.0 million, or 73.2%, from $4.1 million in 2004 to $7.1 million in 2005. The increase in other income revenue is primarily related to the gain on sale realized on trucks from the lease and rental fleet and commissions earned from John Deere for direct manufacturer sales into our area of responsibility.  Other income also consists of document fees related to truck sales and purchase discounts.

 

Gross Profit

 

Gross profit increased $97.6 million, or 52.7%, from $185.1 million in 2004 to $282.7 million in 2005. Gross profit as a percentage of sales decreased from 16.9% in 2004 to 15.2% in 2005. This decrease is primarily a result of a change in our product mix. Truck sales, a lower margin revenue item, increased as a percentage of total revenue from 67.4% in 2004 to 75.1% in 2005. Parts and service revenue, a higher margin revenue item, decreased as a percentage of total revenue from 26.0% in 2004 to 19.6% in 2005.

 

Gross margins on Class 8 truck sales decreased from 7.0% in 2004 to 6.7% in 2005.  This decrease in gross margin is primarily a result of an increase in truck sales to large fleet customers in 2005 compared to 2004.  Large fleet sales typically result in lower margins than small fleet sales and sales to owner operators.  Manufacturers’ incentives for Class 8 trucks accounted for 27.0% of the gross margin in 2004 and 23.7% in 2005. Historically, manufacturers’ incentives have varied depending on market conditions and demand for Class 8 trucks.  The Company expects 2006 margins to approximate those achieved in 2005.  Each year the Company evaluates its reserve for new truck valuation losses. The Company did not record a loss provision in 2004 or 2005.

 

29



 

Gross margins on medium-duty truck sales remained constant at 6.2% in 2004 and 2005. Manufacturers’ incentives for medium-duty trucks accounted for 3.8% of the gross margin in 2004 and 2005.  We expect sales of lower margin Class 4 through 6 models to continue to grow as a percentage of the total medium-duty sales mix which will slightly decrease margins.

 

Gross margins on used truck sales decreased from 9.8% in 2004 to 9.2% in 2005.  Margins on used trucks will vary depending on the mix of used trucks that are acquired from either owner-operators or fleet owners at trade-in.  Used trucks acquired as trade-ins from fleet owners normally result in lower margins when the truck is sold.  The current challenge for the used truck business is procuring a sufficient quantity of quality used trucks for resale at an acceptable price, in a market where demand is exceeding supply.  Each year the Company evaluates its reserve for used truck valuation losses. The Company recorded a $150,000 loss provision to the Company’s reserve for used truck valuation in 2005 and recognized a $350,000 loss provision during 2004.  In 2006, the Company expects to maintain the margins achieved in 2005.

 

Gross margins from the Company’s parts, service and body shop operations increased from 37.9% in 2004 to 41.1% in 2005. Gross profit dollars for the parts, service and body shop departments increased from $108.0 million in 2004 to $150.5 million in 2005.  The Company expects 2006 gross margins on parts, service and body shop revenue to approximate those achieved in 2005.

 

Gross margins on new and used construction equipment sales decreased from 13.0% in 2004 to 12.4% in 2005. The decrease was attributable to a change in the mix of products sold during 2005. The Company expects 2006 gross margins on new and used construction equipment sales to be consistent with those achieved in 2005 and overall gross profit growth on new and used construction equipment sales to be directly correlated to sales growth.

 

Gross profit generated from lease and rental sales decreased from 27.4% in 2004 to 23.9% in 2005. The decrease in gross margin from lease and rental sales is primarily due to the increase in interest rates and the increase in the cost of new trucks for use in the lease and rental fleet.  The Company expects to maintain gross margins from lease and rental sales of approximately 22.0% to 24.0% for 2006.  The Company’s policy is to depreciate its lease and rental fleet using the shortest depreciable life established by generally accepted accounting principles.  This policy results in the Company realizing small gross margins while the unit is in service and a corresponding larger gain on sale when the unit is sold at the end of the lease term.

 

The increase in finance and insurance revenues and other income, as described above, has minimal direct cost and, therefore, contributes a disproportionate share of gross profit. The Company expects gross profit from finance and insurance sales and other income in 2006 to be directly related to truck revenue.

 

Selling, General and Administrative Expenses

 

Selling General and Administrative (“SG&A”) expenses increased $46.8 million, or 33.0%, from $141.9 million in 2004 to $188.7 million in 2005.  The increase in SG&A is attributable in part to increased commissions resulting from increased truck sales and the current year acquisitions.  SG&A expenses as a percentage of sales decreased from 13.0% in 2004 to 10.1% in 2005.  SG&A expenses as a percentage of sales have historically ranged from 10.0% to 16.0%. The Company expects SG&A expenses as a percentage of sales to remain low while the demand for trucks remains high.  The Company estimates that the implementation of Statement No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”) will increase our SG&A expenses by approximately $2.1 million in 2006. The Company’s management continually monitors SG&A expenses.

 

Interest Expense, Net

 

Net interest expense increased $6.9 million, or 115.0%, from $6.0 million in 2004 to $12.9 million in 2005. Net interest expense increased as a result of increased floor plan interest rates, increased truck inventory and floor plan debt due to increased demand for trucks and the increased levels of indebtedness associated with the real estate acquired from ATS and other real estate financings.  Based on increased truck inventory and floor plan debt, the Company expects net interest expense to increase to approximately $17.5 million in 2006.

 

30



 

Income From Continuing Operations Before Income Taxes

 

Income from continuing operations before income taxes increased by $42.3 million, or 146.9%, from $28.8 million in 2004 to $71.1 million in 2005, as a result of the factors described above. Industry experts predict an increase in Class 8 truck sales for 2006. The Company believes that income from continuing operations in 2006 will increase compared to 2005 based on the expectations discussed above.

 

Income Taxes From Continuing Operations

 

Income taxes from continuing operations increased $14.9 million, or 128.4%, from $11.6 million in 2004 to $26.5 million in 2005.  The Company has provided for taxes at a 37.27% effective rate in 2005 and expects the effective tax rate to be approximately 37.25% in 2006.

 

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

 

Revenues

 

Revenues increased $279.6 million, or 34.3%, from $815.3 million in 2003 to $1.1 billion in 2004. Sales of new and used trucks increased $236.4 million, or 47.1%, from $501.8 million in 2003 to $738.2 million in 2004.

 

Unit sales of new Class 8 trucks increased 47.8%, from 3,636 units in 2003 to 5,374 units in 2004. The increase in Class 8 units sales was driven by the industry’s need to replace aging equipment after three consecutive years of U.S. truck sales lagging behind the normal replacement cycle. The Company’s average sales price per Class 8 truck remained relatively flat from 2003 to 2004 at $101,200.

 

Unit sales of new medium-duty trucks increased 96.4%, from 899 units in 2003 to 1,766 units in 2004. In 2004, the Company continued its concerted effort to improve its medium-duty truck sales by adding experienced medium-duty sales personnel, and introducing new Class 4 through 6 medium-duty franchises at some of our Rush Truck Centers to complement the previously existing Peterbilt medium-duty line, which consists primarily of Class 7 trucks. Class 4 through 6 unit truck sales accounted for 55% of the Company’s medium-duty unit sales in 2004 compared to 44% in 2003. The average sales price for Class 4 through 6 models during 2004 was $40,500 compared to $68,200 for the Class 7 Peterbilt medium-duty model. The increase in the percentage of Class 4 through 6 trucks sold by the Company in 2004 resulted in a 2.6% decrease in our average medium-duty truck sales price in 2004 compared to 2003. Overall, new medium-duty truck sales revenue increased $44.6 million in 2004 compared to 2003.

 

Unit sales of used trucks increased 12.2%, from 2,421 units in 2003 to 2,716 units in 2004. Used truck average revenue per unit increased by 7.0%. Historically, used truck demand is consistent with new truck demand.

 

Parts and service sales increased $35.4 million, or 14.2%, from $249.8 million in 2003 to $285.2 million in 2004. Same store parts and service sales increased $37.9 million, or 15.5%, in 2004 compared to 2003. The increase in parts and service sales was due to a combination of new business development, price increases for parts and labor, extension of our business hours and expansion of capacity made possible by the addition of service bays and technicians to certain locations.

 

Sales of new and used construction equipment increased $4.0 million, or 14.1%, from $28.3 million in 2003 to $32.3 million in 2004. This increase was primarily due to a change in product mix and price increases. According to John Deere, the Company’s market share in the Houston area construction equipment market was 16.7% in 2004 compared to 19.1% in 2003. In 2004, we focused on increasing our margins, which had an adverse effect on our market share. According to data compiled by John Deere, approximately 2,200 units of construction equipment were put into use in our area of responsibility in 2004 compared to 1,678 in 2003.

 

Lease and rental revenues increased 5.4%, from $25.8 million in 2003 to $27.2 million in 2004. The increase in truck lease and rental revenue was due to the increase in our customer base during 2004.

 

Finance and insurance revenues increased 25.4%, from $6.3 million in 2003 to $7.9 million in 2004. This increase was directly related to the increase in new and used truck revenue.

 

Other income increased $0.8 million, or 23.5%, from $3.4 million in 2003 to $4.2 million in 2004. Other income revenue was primarily related to the gain on sale realized on trucks from the lease and rental fleet, commissions earned from John Deere for direct manufacturer sales into our area of responsibility, document fees related to truck sales and

 

31



 

purchase discounts. The increase in other income during 2004 was primarily related to gains realized from the sales of trucks that were previously used in the Company’s leasing operations.

 

Gross Profit

 

Gross profit increased $31.8 million, or 20.7%, from $153.3 million in 2003 to $185.1 million in 2004. Gross profit as a percentage of sales decreased from 18.8% in 2003 to 16.9% in 2004. This decrease was primarily a result of a change in our product mix. Truck sales, a lower margin revenue item, increased as a percentage of total revenue from 61.5% in 2003 to 67.4% in 2004. Parts and service revenue, a higher margin revenue item, decreased as a percentage of total revenue from 30.6% in 2003 to 26.0% in 2004.

 

Gross margins on Class 8 truck sales decreased from 7.4% in 2003 to 7.0% in 2004. Manufacturers’ incentives for Class 8 trucks accounted for 35.8% of the gross margin in 2003 and 27.0% in 2004.  The Company recorded a $0.3 million loss provision to increase the Company’s reserve for new truck inventory valuation in 2003 and did not record a loss provision in 2004.

 

Gross margins on medium-duty truck sales increased from 5.8% in 2003 to 6.2% in 2004. Manufacturers’ incentives for medium-duty trucks accounted for 3.9% of the gross margin in 2003 and 3.8% in 2004.

 

Gross margins on used truck sales increased from 6.2% in 2003 to 9.8% in 2004. During 2003, the Company experienced lower than normal margins on used trucks sales because the Company was required to wholesale a large number of trade-in units from new fleet customers. The Company did not purchase as many used trucks from first time new truck fleet customers in 2004, which resulted in increased gross margins on used truck sales compared to 2003.  The Company recorded a $350,000 loss provision to the Company’s reserve for used truck valuation losses in 2004 compared to a $1.0 million loss provision recognized during 2003.

 

Gross margins from the Company’s parts, service and body shop operations decreased from 39.4% in 2003 to 37.9% in 2004. The decrease in gross margins was primarily due to parts sales becoming a larger percentage of the Company’s overall parts and service revenues. Historically, gross margins on parts sales are approximately 60% lower than gross margins on service sales. Additionally, the Company increased preventative maintenance services that are provided at lower margins than traditional repair work, and selectively provided discounted labor rates to garner additional sales at certain locations. Gross profit dollars for the parts, service and body shop departments increased from $98.5 million in 2003 to $108.0 million in 2004.

 

Gross margins on new and used construction equipment sales increased from 9.9% in 2003 to 13.0% in 2004. The increase was attributable to price increases and a change in the types of products sold during 2004.

 

Gross profit generated from lease and rental sales increased from 25.9% in 2003 to 27.4% in 2004.

 

Selling, General and Administrative Expenses

 

Selling General and Administrative (“SG&A”) expenses increased $17.7 million, or 14.3%, from $124.2 million in 2003 to $141.9 million in 2004. Same store SG&A expenses increased $18.8 million, or 15.1%, from 2003 to 2004. This increase was primarily due to increased salary expense and increased commissions corresponding to the increase in gross profit. SG&A expenses as a percentage of sales decreased from 15.2% in 2003 to 13.0% in 2004.

 

Interest Expense, Net

 

Net interest expense decreased $0.3 million, or 4.7%, from $6.3 million in 2003 to $6.0 million in 2004. Net interest expense decreased primarily as the result of the increase in interest income earned on the net proceeds of our public offering of Class A Common Stock, which closed in November 2004.

 

Gain on Sale of Assets

 

Gain on sale of assets decreased $1.4 million, from $2.0 million in 2003 to $0.6 million in 2004. The gain in 2004 was primarily related to the replacement of fixed assets used in the operation of the business. The gain recognized in 2003 was primarily related to the sale of the assets of Rush Truck Centers of Louisiana, Inc.

 

32



 

Income From Continuing Operations Before Income Taxes

 

Income from continuing operations before income taxes increased by $13.0 million, or 82.3%, from $15.8 million in 2003 to $28.8 million in 2004, as a result of the factors described above.

 

Income Taxes From Continuing Operations

 

Income taxes from continuing operations increased $5.3 million, or 84.1%, from $6.3 million in 2003 to $11.6 million in 2004.

 

Loss From Discontinued Operations, Net of Income Taxes

 

Loss from discontinued operations, net of income taxes, decreased from a loss of $0.6 million in 2003 to a loss of $0.3 million in 2004. The loss recorded during 2003 represented the net operating results of D&D and included costs of $983,000 related to the liquidation of the Hockley, Texas store. The loss recorded during 2004 included net operating profit of D&D of $0.3 million, a net charge of $0.2 million related to the valuation of the Hockley, Texas real estate and a $0.4 million income tax adjustment. The Company sold all assets related to its discontinued operations during 2004.

 

Liquidity and Capital Resources

 

The Company’s short-term cash needs are primarily for working capital, including inventory requirements, expansion of existing facilities and acquisitions of new facilities. These short-term cash needs have historically been financed with retention of profits and borrowings under credit facilities available to the Company.

 

At December 31, 2005, the Company had working capital of approximately $126.1 million, including $133.1 million in cash, $63.5 million in accounts receivable, $338.2 million in inventories, $1.8 million in prepaid expenses and other, and $3.9 million in deferred tax assets, offset by $316.0 million outstanding under floor plan notes payable, $18.8 million in current maturities of long-term debt, $2.3 million in current maturities of capital lease obligations, $2.8 million in advances outstanding under lines of credit, $23.3 million of trade accounts payable and $51.2 million in accrued expenses. The Company may request working capital advances in the minimum amount of $100,000 from GE Capital, its primary truck lender.  However, such working capital advances may not cause the total indebtedness owed GE Capital to exceed an amount equal to the wholesale advances made against the then current inventory less any payment reductions then due.  There were no working capital advances outstanding under this agreement at December 31, 2005.  The Company has three separate secured lines of credit that provide for an aggregate maximum borrowing of $16.7 million.  Advances outstanding under these secured lines of credit in aggregate were $2.8 million, with an additional $5.4 million pledged to secure various letters of credit related to self-insurance products, leaving $8.5 million available for future borrowings as of December 31, 2005.

 

The Company has no material commitments for capital expenditures as of December 31, 2005. However, the Company will continue to purchase vehicles that are necessary to operate its lease and rental division. Furthermore, management will continue to authorize capital expenditures for new buildings and expansion of dealership facilities based on market opportunities.

 

During 2005, operating activities resulted in net cash used in operations of $52.2 million. Cash provided by operations was primarily due to income from continuing operations of $44.6 million coupled with provisions for depreciation and amortization of $21.0 million, an increase in provisions for deferred income tax of $1.3 million, an increase of $3.1 million in the tax benefit realized from exercise of employee stock options and an increase of accounts payable and accrued expenses of $14.9 million, which was offset by increases in inventories of $102.3 million, an increase in accounts receivable and other current assets of $33.1 million and a gain on sale of property plant and equipment of $1.7 million.

 

During 2005, the Company used $123.5 million in investing activities. This consisted of purchases of property and equipment of $65.8 million and business acquisitions of $66.0 million which were offset by proceeds from the sale of property and equipment of $8.5 million. Property and equipment purchases are primarily related to the purchase of additional units for the rental and leasing operations for $46.2 million during 2005.  The Company expects to purchase more trucks for its leasing operations in 2006 based on expected increases in customer demand.  The Company expects to make capital expenditures for recurring items such as computers, shop equipment and vehicles of approximately $8.0 million in 2006.

 

33



 

Net cash provided by financing activities in 2005 amounted to $150.6 million. Net cash provided by financing activities primarily consisted of an increase in notes payable of $52.1 million, an increase in capital lease obligations of $18.4 million, issuance of shares related to the exercise of employee stock options and purchases under the employee stock purchase plan of $3.2 million and net draws of floor plan notes payable of $113.3 million, offset by principal payments on notes payable and lines of credit of $36.5 million. The proceeds from notes payable are primarily related to the increase in the lease and rental fleet, real estate financing and debt acquired as part of the ATS acquisition.

 

During 2004, operating activities resulted in net cash used in operations of $5.6 million. Cash provided by operations was primarily due to income from continuing operations of $17.2 million coupled with provisions for depreciation and amortization of $15.9 million, an increase in provisions for deferred income tax of $4.1 million, an increase of $3.4 million in the tax benefit realized from exercise of employee stock options and an increase of accounts payable and accrued expenses of $11.2 million, which was offset by increases in inventories of $49.7 million, an increase in accounts receivable of $5.8 million and a gain on sale of property plant and equipment of $1.8 million.

 

During 2004, the Company used $34.8 million in investing activities. This consisted of purchases of property and equipment of $44.6 million, business acquisitions of $3.5 million and an increase in other assets of $0.9 million, which were offset by proceeds from the sale of property and equipment of $14.1 million. Property and equipment purchases are partially related to the purchase of 201 additional units for the leasing operations for $18.5 million during 2004. Approximately $7.1 million of property and equipment expenditures was for the replacement of capital equipment and $7.1 million was for the replacement of the corporate aircraft. Additionally, the Company acquired building, land and leasehold improvements of $11.9 million.

 

Net cash provided by financing activities in 2004 amounted to $164.3 million. Net cash provided by financing activities primarily consisted of proceeds from the issuance of shares in the November 2004 public offering and exercises of employee stock options totaling $113.8 million, an increase in notes payable of $40.5 million and net draws of floor plan notes payable of $59.8 million, offset by principal payments on notes payable of $34.4 million and net payments on lines of credit of $15.3 million. The proceeds from notes payable are primarily related to the increase in the lease and rental fleet and real estate financing. $76.9 million of the proceeds from the stock offering were used in January 2005 to purchase certain assets of ATS.

 

The Company arranges financing for customers through various financial institutions including GE Capital and PACCAR Financial. The Company financed approximately $425.8 million of new and used truck sales in 2005. The Company receives a commission from the lender equal to either the difference between the interest rates charged to customers over the predetermined interest rates set by the financing institution or a commission for the placement of contracts.  A majority of finance contracts are sold without recourse to the Company. A majority of the Company’s liability related to finance contracts sold with recourse is generally limited to 5% to 20% of the outstanding amount of each note initiated on behalf of the finance company.  However, in 2003 the Company instituted finance program that accepts 100% liability, with some restrictions, for the outstanding amount of each note initiated on behalf of the finance company. In order for a contract to be accepted into this finance program, a customer must meet strict credit requirements or maintain a significant equity position in the truck being financed; consequently, approximately 1% of the Company’s portfolio balance related to finance contracts sold by the Company are under this 100% liability finance program and the Company does not expect to finance a significant percentage of its truck sales under this 100% liability finance program in the future. The Company provides an allowance for repossession losses and early repayment penalties that it may be liable for under finance contracts sold without recourse.

 

In addition, through The CIT Group, Inc., CitiCapital, John Deere Credit and others, the Company arranged customer financing for approximately $26.0 million of our new and used construction equipment sales in 2005. Generally, construction equipment financings are memorialized through the use of installment or lease contracts, which are secured by the construction equipment financed, and generally require a down payment up to 10% of the value of the financed piece of construction equipment, with the remaining balance being financed over a three to five-year period. The Company experiences no repossession loss on construction equipment financings because such financings are sold to third parties without recourse.

 

Substantially all of the Company’s truck purchases are made on terms requiring payment within 15 days or less from the date the trucks are invoiced from the factory.  On September 20, 2005, the Company entered into a three-year floor plan financing agreement with GE Capital.  Interest under the floor plan financing agreement is payable monthly at a rate equal to LIBOR plus 1.68%.  The Company finances substantially all of the purchase price of its new truck inventory,

 

34



 

and the loan value of its used truck inventory under the floor plan financing agreement with GE Capital, under which GE Capital pays the manufacturer directly with respect to new trucks. The Company makes monthly interest payments to GE Capital on the amount financed, but is not required to commence loan principal repayments on any vehicle until such vehicle has been floor planned for 12 months or is sold.  The agreement allows for prepayments and working capital advances with monthly adjustments to the interest due on outstanding advances.  On December 31, 2005, the Company had approximately $302.8 million outstanding under its floor plan financing agreement with GE Capital.

 

Substantially all of the Company’s new construction equipment purchases are financed by John Deere and CitiCapital. The Company finances substantially all of the purchase price of its new construction equipment inventory under its floor plan facilities. The agreement with John Deere provides an interest free financing period after which time the amount financed is required to be paid in full. When construction equipment is sold prior to the expiration of the interest free finance period, the Company is required to repay the principal within approximately ten days of the sale. If the construction equipment financed by John Deere is not sold within the interest free finance period, it is transferred to the CitiCapital floor plan arrangement.  The Company makes principal payments for sold inventory to CitiCapital on the 15th day of each month.  Used and rental construction equipment is financed to a maximum of book value under a floor plan arrangement with CitiCapital.  The Company makes monthly interest payments on the amount financed and is required to commence loan principal repayments on rental construction equipment as book value reduces.  Principal payments for sold used construction equipment are made no later than the 15th day of each month following the sale. The loans are collateralized by a lien on the construction equipment.  The Company’s floor plan agreements limit the aggregate amount of borrowings based on the book value of new and used construction equipment units.  As of December 31, 2005, the Company’s floor plan arrangement with CitiCapital permits the financing of up to $10.5 million in construction equipment.  On December 31, 2005, the Company had $3.1 million outstanding under its floor plan financing arrangements with John Deere and $10.1 million outstanding under its floor plan financing arrangement with CitiCapital.

 

Cyclicality

 

The Company’s business is dependent on a number of factors relating to general economic conditions, including fuel prices, interest rate fluctuations, economic recessions, environmental and other government regulations and customer business cycles. Unit sales of new trucks have historically been subject to substantial cyclical variation based on these general economic conditions. According to A.C.T. Research, industry-wide domestic retail sales of Class 8 trucks in 2005 totaled approximately 259,000 units.  A.C.T. Research currently forecasts U.S. heavy-duty new truck sales to increase to approximately 266,000 units in 2006 and decrease to 179,000 units in 2007.  Through geographic expansion, concentration on higher margin parts and service operations and diversification of its customer base, the Company believes it can reduce the negative impact on the Company’s earnings of adverse general economic conditions or cyclical trends affecting the heavy-duty truck industry.

 

Effects of Inflation

 

The Company believes that the relatively moderate rates of inflation over the last few years have not had a significant impact on revenues or profitability. The Company does not expect inflation to have any near-term material effects on the sale of its products and services.

 

Off-Balance Sheet Arrangements

 

The Company does not have off-balance sheet arrangements as of December 31, 2005.

 

35



 

Contractual Obligations

 

The Company has certain contractual obligations that will impact its short and long-term liquidity. At December 31, 2005, such obligations were as follows:

 

 

 

Payments Due by Period

 

Contractual Obligations

 

Total

 

Less than 1
year

 

1-3
years

 

3-5
years

 

More than 5
years

 

 

 

(in thousands)

 

Long-Term Debt Obligations(1)

 

$

133,152

 

$

18,807

 

$

41,826

 

$

55,165

 

$

17,354

 

Capital Lease Obligations(2)

 

$

16,905

 

$

2,277

 

$

5,351

 

$

5,636

 

$

3,641

 

Operating Lease Obligations(2)

 

39,887

 

8,831

 

13,180

 

8,140

 

9,736

 

Interest expense on fixed rate debt(3)

 

22,840

 

6,994

 

10,537

 

4,951

 

358

 

Interest expense on variable rate debt(3)

 

3,409

 

760

 

1,380

 

1,041

 

228

 

Total

 

$

216,193

 

$

37,669

 

$

72,274

 

$

74,933

 

$

31,317

 

 


(1)                                  Refer to Note 9 of Notes to Consolidated Financial Statements.

 

(2)                                  Refer to Note 12 of Notes to Consolidated Financial Statements.

 

(3)                                  In computing interest expense, the Company used its weighted average interest rate outstanding on fixed rate debt to estimate its interest expense on fixed rate debt. The Company used its weighted average variable rate outstanding on variable rate debt and added 0.25 percent per year to estimate its interest expense on variable rate debt.

 

36



 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

 

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

 

The Company is exposed to some market risk through interest rates related to our floor plan borrowing arrangements, variable rate debt and discount rates related to finance sales. Floor plan borrowings are based on the LIBOR rate of interest and are used to meet working capital needs. As of December 31, 2005, the Company had floor plan borrowings of approximately $316.0 million.  Assuming an increase in the LIBOR rate of interest of 100 basis points, interest expense could increase by approximately $3.2 million. The interest rate variability on all other debt would not have a material adverse effect on the Company’s financial position. The Company provides all customer financing opportunities to various finance providers. The Company receives all finance charges in excess of a negotiated discount rate from the finance providers in the month following the date of the financing. The negotiated discount rate is variable, thus subject to interest rate fluctuations. This interest rate risk is mitigated by the Company’s ability to pass discount rate increases to customers through higher financing rates.

 

The Company is also exposed to some market risk through interest rates related to the investment of our current cash and cash equivalents of $133.1 million at December 31, 2005.  These funds are generally invested in highly liquid money market accounts, government-sponsored enterprises and corporate bonds that do not expose the Company to a loss of principal.  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 interest income could correspondingly increase or decrease by approximately $1.3 million. We have not used derivative financial instruments in our investment portfolio.

 

37



 

Item 8.  Financial Statements and Supplementary Data

 

Report of Independent Registered Public Accounting Firm

 

 

 

 

 

Consolidated Balance Sheets as of December 31, 2004 and 2005

 

 

 

 

 

Consolidated Statements of Operations for the Years Ended December 31, 2003, 2004 and 2005

 

 

 

 

 

Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2003, 2004 and 2005

 

 

 

 

 

Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2004 and 2005

 

 

 

 

 

Notes to Consolidated Financial Statements

 

 

 

38



 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Shareholders of Rush Enterprises, Inc.:

 

We have audited the accompanying consolidated balance sheets of Rush Enterprises, Inc. (a Texas corporation) and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Rush Enterprises, Inc. and subsidiaries at December 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Rush Enterprises, Inc.’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2006 expressed an unqualified opinion thereon.

 

 

 

/s/ Ernst & Young LLP

 

 

San Antonio, Texas

February 24, 2006

 

39



 

RUSH ENTERPRISES, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

DECEMBER 31, 2004 AND 2005

 

(In Thousands, Except Shares and Per Share Amounts)

 

 

 

December 31,

 

December 31,

 

 

 

2004

 

2005

 

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

158,175

 

$

133,069

 

Accounts receivable

 

30,296

 

63,473

 

Inventories

 

189,792

 

338,212

 

Prepaid expenses and other

 

1,418

 

1,829

 

Deferred income taxes

 

1,544

 

3,856

 

 

 

 

 

 

 

Total current assets

 

381,225

 

540,439

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT, net

 

138,953

 

196,161

 

 

 

 

 

 

 

OTHER ASSETS, net

 

45,327

 

103,634

 

 

 

 

 

 

 

Total assets

 

$

565,505

 

$

840,234

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Floor plan notes payable

 

$

168,002

 

$

315,985

 

Current maturities of long-term debt

 

16,083

 

18,807

 

Current maturities of capital lease obligations

 

 

2,277

 

Advances outstanding under lines of credit

 

2,434

 

2,755

 

Trade accounts payable

 

16,970

 

23,327

 

Accrued expenses

 

39,495

 

51,151

 

Total current liabilities

 

242,984

 

414,302

 

 

 

 

 

 

 

LONG-TERM DEBT, net of current maturities

 

79,973

 

114,345

 

 

 

 

 

 

 

CAPITAL LEASE OBLIGATIONS, net of current maturities

 

 

14,628

 

 

 

 

 

 

 

DEFERRED INCOME TAXES, net

 

19,741

 

23,339

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

Preferred stock, par value $.01 per share; 1,000,000 shares authorized; 0 shares outstanding in 2004 and 2005

 

 

 

Common stock, par value $.01 per share; 40,000,000 class A shares and 10,000,000 class B shares authorized; 16,342,320 class A shares and 7,554,656 class B shares outstanding in 2004; 16,770,060 class A shares and 7,895,863 class B shares outstanding in 2005

 

239

 

247

 

Additional paid-in capital

 

156,423

 

162,603

 

Retained earnings

 

66,145

 

110,770

 

 

 

 

 

 

 

Total shareholders’ equity

 

222,807

 

273,620

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

565,505

 

$

840,234

 

 

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

 

40



 

RUSH ENTERPRISES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

FOR THE YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005

 

(In Thousands, Except Per Share Amounts)

 

 

 

2003

 

2004

 

2005

 

 

 

 

 

 

 

 

 

REVENUES:

 

 

 

 

 

 

 

New and used truck sales

 

$

501,757

 

$

738,225

 

$

1,400,736

 

Parts and service

 

249,818

 

285,206

 

365,908

 

Construction equipment sales

 

28,263

 

32,305

 

41,692

 

Lease and rental

 

25,847

 

27,193

 

33,975

 

Finance and insurance

 

6,286

 

7,909

 

15,356

 

Other

 

3,361

 

4,141

 

7,103

 

 

 

 

 

 

 

 

 

Total revenues

 

815,332

 

1,094,979

 

1,864,770

 

 

 

 

 

 

 

 

 

COST OF PRODUCTS SOLD:

 

 

 

 

 

 

 

New and used truck sales

 

466,396

 

684,724

 

1,304,290

 

Parts and service

 

151,373

 

177,250

 

215,419

 

Construction equipment sales

 

25,158

 

28,114

 

36,509

 

Lease and rental

 

19,155

 

19,749

 

25,860

 

 

 

 

 

 

 

 

 

Total cost of products sold

 

662,082

 

909,837

 

1,582,078

 

 

 

 

 

 

 

 

 

GROSS PROFIT

 

153,250

 

185,142

 

282,692

 

 

 

 

 

 

 

 

 

SELLING, GENERAL AND ADMINISTRATIVE

 

124,207

 

141,947

 

188,667

 

 

 

 

 

 

 

 

 

DEPRECIATION AND AMORTIZATION

 

8,929

 

9,119

 

10,487

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

20,114

 

34,076

 

83,538

 

 

 

 

 

 

 

 

 

INTEREST INCOME (EXPENSE):

 

 

 

 

 

 

 

Interest income

 

290

 

782

 

2,508

 

Interest expense

 

(6,638

)

(6,732

)

(15,403

)

 

 

 

 

 

 

 

 

Total interest expense, net

 

(6,348

)

(5,950

)

(12,895

)

 

 

 

 

 

 

 

 

GAIN ON SALE OF ASSETS

 

1,984

 

624

 

495

 

 

 

 

 

 

 

 

 

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

 

15,750

 

28,750

 

71,138

 

 

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

6,300

 

11,574

 

26,513

 

 

 

 

 

 

 

 

 

INCOME FROM CONTINUING OPERATIONS

 

9,450

 

17,176

 

44,625

 

 

 

 

 

 

 

 

 

LOSS FROM DISCONTINUED OPERATIONS, NET

 

(621

)

(260

)

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

8,829

 

$

16,916

 

$

44,625

 

 

 

 

 

 

 

 

 

EARNINGS PER SHARE:

 

 

 

 

 

 

 

EARNINGS PER COMMON SHARE - BASIC

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.67

 

$

1.10

 

$

1.84

 

Net income

 

$

0.63

 

$

1.08

 

$

1.84