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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to _______________________
Commission file number 0-20797
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RUSH ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Texas 74-1733016
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8810 I.H. 10 East
San Antonio, Texas 78219
(Address of principal executive offices)
(Zip Code)
(210) 661-4511
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicated below is the number of shares outstanding of the registrant's
only class of common stock, as of November 13, 1998.
Number of
Shares
Title of Class Outstanding
-------------- -----------
Common Stock, $.01 Par Value 6,643,730
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RUSH ENTERPRISES, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1998 (unaudited) and December 31, 1997 .... 3
Consolidated Statements of Income - For the Three and Nine months
Ended September 30, 1998 and 1997 (unaudited) ....................................... 4
Consolidated Statements of Cash Flows - For the Three and Nine months ended
September 30, 1998 and 1997 (unaudited) ............................................. 5
Notes to Consolidated Financial Statements ........................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ...................................................... 9
PART II. OTHER INFORMATION ........................................................................ 18
SIGNATURES ......................................................................................... 19
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3
RUSH ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1998 1997
ASSETS (UNAUDITED) (AUDITED)
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 23,121 $ 19,816
Accounts receivable, net
19,088 20,894
Inventories
92,979 66,757
Prepaid expenses and other
533 381
---------- ----------
Total current assets 135,721 107,848
PROPERTY AND EQUIPMENT, net 44,640 34,158
OTHER ASSETS, net 16,181 13,472
---------- ----------
Total assets $ 196,542 $ 155,478
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Floorplan notes payable $ 79,764 $ 63,268
Current maturities of long-term debt
5,103 2,439
Advances outstanding under lines of credit
10 20
Trade accounts payable
6,014 5,751
Accrued expenses
16,808 12,556
Note payable to shareholder
10,600 5,450
---------- ----------
Total current liabilities 118,299 89,484
DEFERRED INCOME TAX LIABILITY, net 1,682 1,180
LONG-TERM DEBT, net of current maturities 27,554 22,742
SHAREHOLDERS' EQUITY
Rush Enterprises, Inc., common stock, par value $.01 per share;
25,000,000 shares authorized; 6,643,730 outstanding at
September 30, 1998 and December 31, 1997 66 66
Additional paid-in-capital
33,342 33,342
Retained earnings
15,599 8,664
---------- ----------
Total shareholders' equity 49,007 42,072
---------- ----------
Total liabilities and shareholders' equity $ 196,542 $ 155,478
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
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RUSH ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE - UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
REVENUES:
New and used truck sales $ 105,864 $ 75,545 $ 308,243 $ 209,181
Parts and service 28,806 20,934 79,182 56,280
Construction equipment sales 6,828 -- 24,741 --
Lease and rental 4,665 3,605 13,640 10,262
Finance and insurance 2,743 1,732 8,140 3,812
Other 4,634 329 11,652 1,294
---------- ---------- ---------- ----------
Total revenues 153,540 102,145 445,598 280,829
COST OF PRODUCTS SOLD 126,366 85,473 370,193 236,521
---------- ---------- ---------- ----------
GROSS PROFIT 27,174 16,672 75,405 44,308
SELLING, GENERAL AND ADMINISTRATIVE 19,663 12,732 56,173 35,229
DEPRECIATION AND AMORTIZATION 1,266 730 3,340 2,071
---------- ---------- ---------- ----------
OPERATING INCOME 6,245 3,210 15,892 7,008
INTEREST EXPENSE 1,467 537 4,335 1,462
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 4,778 2,673 11,557 5,546
PROVISION FOR INCOME TAXES 1,910 1,015 4,622 2,107
---------- ---------- ---------- ----------
NET INCOME $ 2,868 $ 1,658 $ 6,935 $ 3,439
========== ========== ========== ==========
EARNINGS PER SHARE
Basic $ 0.43 $ 0.25 $ 1.04 $ 0.52
========== ========== ========== ==========
Diluted $ 0.43 $ 0.25 $ 1.04 $ 0.52
========== ========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 6,644 6,644 6,644 6,644
========== ========== ========== ==========
Diluted 6,664 6,656 6,664 6,656
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
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RUSH ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS - UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1998 1997
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,935 $ 3,439
Adjustments to reconcile net income to cash provided
by (used in) continuing operations
Depreciation and amortization 3,340 2,071
Gain on sale of property, plant and equipment (35) (266)
Provision for deferred income tax expense 502 242
Change in receivables 2,531 3,035
Change in inventories (10,845) 2,672
Change in other current assets (100) 1,122
Change in accounts payable 95 (1,044)
Change in accrued expenses 3,508 687
---------- ----------
Net cash provided by (used in) operating activities 5,931 11,958
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (11,621) (7,548)
Proceeds from the sale of property and equipment 288 426
Business Acquisitions (8,625) (7,915)
Changes in other assets 232 (130)
---------- ----------
Net cash used in investing activities (19,726) (15,167)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 15,070 6,063
Principal payments on notes payable (5,040) (1,562)
Draws (payments) on floor plan financing, net 7,070 (7,578)
---------- ----------
Net cash provided by (used in) financing activities 17,100 (3,077)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,305 (6,286)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 19,816 21,507
---------- ----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 23,121 $ 15,221
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during year for interest $ 4,394 $ 1,469
========== ==========
Cash paid during year for taxes $ 3,956 $ 1,523
========== ==========
Non-cash assignment of debt $ -- $ 1,061
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
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RUSH ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1 - PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The interim consolidated financial statements included herein have been
prepared by Rush Enterprises, Inc. and its subsidiaries (collectively referred
to as the "Company"), without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC"). All adjustments have been made
to the accompanying interim consolidated financial statements which are, in the
opinion of the Company's management, necessary for a fair presentation of the
Company's operating results. All adjustments are of a normal recurring nature.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. It is
recommended that these interim consolidated financial statements be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's Annual Report on form 10-K for the year ended December
31, 1997.
2 - ACQUISITION
In September 1998, the Company acquired all of the assets and assumed
certain liabilities of Klooster Equipment, Inc., for approximately $12.7
million. The acquisition was accounted for as a purchase. The results of
operations have been included in the Company's financial statements since the
date of acquisition. No pro forma financial information with regard to this
acquisition has been presented as the acquisition does not have a significant
impact on the Company's prior or current period financial position or results of
operations.
In March 1998 the Company acquired all of the issued and outstanding
capital stock of D & D Farm and Ranch Supermarket Inc., for approximately $10.5
million. The acquisition was accounted for as a purchase. The results of
operations have been included in the Company's financial statements since the
date of acquisition. No pro forma financial information with regard to this
acquisition has been presented as the acquisition does not have a significant
impact on the Company's prior or current period financial position or results of
operations.
3 - COMMITMENTS AND CONTINGENCIES
The Company is contingently liable to certain finance companies for
certain promissory notes and finance contracts, related to the sale of trucks,
sold to such finance companies. The Company's recourse liability related to sold
finance contracts is limited to 15 to 25 percent of the outstanding balance of
each note sold to a finance company, with the aggregate recourse liability for
1998 limited to $600,000.
The Company provides an allowance for repossession losses and early
repayment penalties.
The Company is involved in various claims and legal actions arising in
the ordinary course of business. The Company believes it is unlikely that the
final outcome of any of the claims or proceedings to which to Company is a party
would have a material adverse effect on the Company's financial position or
results of operations, however, due to the inherent uncertainty of litigation,
there can be no assurance that the resolution of any particular claim or
proceeding would not have a material adverse effect on the Company's results of
operations for the fiscal period in which such resolution occurred.
The Company has consulting agreements with certain individuals for an
aggregate monthly payment of $25,725. The agreements expire at various times
between 1999 through 2001.
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4 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Numerator:
Net income- numerator for basic and diluted
earnings per share $2,868,000 $1,658,000 $6,935,000 $3,349,000
Denominator:
Denominator for basic earnings per share-
weighted average shares 6,643,730 6,643,730 6,643,730 6,643,730
Effect of dilutive securities:
Employee and Director stock options 19,830 11,972 19,830 11,972
---------- ---------- ---------- ----------
Denominator for diluted earnings per
share-adjusted weighted average shares 6,663,560 6,655,702 6,663,560 6,655,702
========== ========== ========== ==========
Basic earnings per share $ .43 $ .25 $ 1.04 $ .52
========== ========== ========== ==========
Diluted earnings per share $ .43 $ .25 $ 1.04 $ .52
========== ========== ========== ==========
5 - SEGMENT INFORMATION
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and
Related Information" (SFAS 131). This statement requires that public business
enterprises report certain information about operating segments in complete sets
of financial statements of the enterprise and in condensed financial statements
of interim periods issued to shareholders. It also requires that public business
enterprises report certain information about their products and services, the
geographic areas in which they operate, and their major customers. The effective
date for SFAS No. 131 is for fiscal years beginning after December 15, 1997.
The Company has two reportable segments: the Heavy Duty Truck segment,
and the Construction Equipment segment. The Heavy Duty Truck segment operates a
regional network of truck centers that provides an integrated one-stop source
for the trucking needs of its customers, including retail sales of new Peterbilt
and used heavy-duty trucks; after-market parts, service and body shop
facilities; and a wide array of financial services, including the financing of
new and used truck purchases, insurance products and truck leasing and rentals.
The Heavy Duty Truck segment has locations in Texas, California, Colorado,
Oklahoma and Louisiana. The Construction Equipment segment, formed during 1997,
operates a network of full-service John Deere dealerships that are located in
Texas and Michigan. Dealership operations include the retail sale of new and
used construction equipment, after-market parts and service facilities,
equipment rentals, and the financing of new and used equipment. The Company had
only one segment prior to the October 1997 acquisition of such John Deere
dealership, thus for the three and nine month periods ended September 30, 1997
results depict only the Heavy Duty Truck segment.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997. The Company
evaluates performance based on income before income taxes not including
extraordinary items.
The Company accounts for intersegment sales and transfers at current
market prices as if the sales or transfers were to third parties. There were no
intersegment sales during the three and six month periods ended September 30,
1998.
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The Company's reportable segments are strategic business units that
offer different products and services. They are managed separately because each
business requires different technology and marketing strategies. Business units
were maintained through expansion and acquisitions. The following table contains
summarized information about reportable segment profit or loss and segment
assets, for the three and six month periods ended September 30, 1998: (in
thousands)
HEAVY-DUTY CONSTRUCTION
TRUCK EQUIPMENT
SEGMENT SEGMENT ALL OTHER TOTALS
---------- ------------ --------- --------
Three months ended September 30,
1998
Revenues from external customers $136,180 $ 10,644 $ 6,716 $153,540
Segment income before taxes 4,649 104 25 4,778
Segment assets 125,482 52,016 19,044 196,542
Nine months ended September 30,
1998
Revenues from external customers $393,839 $ 34,920 $ 16,839 $445,598
Segment income before taxes 10,901 328 328 11,557
Segment assets 125,482 52,016 19,044 196,542
Revenues from segments below the reportable quantitative thresholds are
attributable to four operating segments of the Company. Those segments include a
tire company, a farm and ranch retail center, an insurance company, and a
hunting lease operation. None of those segments has ever met any of the
quantitative thresholds for determining reportable segments.
6 - RECENTLY ISSUED PRONOUNCEMENTS
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 132, "Employers' Disclosures
about Pensions and Other Post-retirement Benefits" (FAS 132"). FAS 132
standardizes the disclosure requirements for pensions and other post-retirement
benefits to the extent practicable, requires additional information on changes
in the benefit obligations and fair values of plan assets, and eliminates
certain disclosures that are no longer useful. This statement is effective for
financial statements for periods beginning after December 15, 1997. The Company
does not provide post-retirement or post-employment benefits to its employees.
In April 1998, the Accounting Standards Executive Committee ("AsSEC")
issued Statement of Position 98-5 "Reporting on the Costs of Start-up
Activities" (SOP 98-5"). SOP 98-5 requires all start-up activities, as defined,
to be expensed as incurred. The SOP is effective for fiscal years beginning
after December 15, 1998. Earlier application is encouraged, initial application
will be reported as a cumulative effect of a change in accounting principle and
restatement of previously issued financial statements is not permitted. The SOP
will not have a material impact on the financial statements of the Company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements contained in this Form 10-Q are "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.
Specifically, all statements other than statements of historical fact included
in this Form 10-Q regarding the Company's financial position, business strategy
and plans and objectives of management of the Company for future operations are
forward-looking statements. These forward-looking statements are based on the
beliefs of the Company's management, as well as assumptions made by and
information currently available to the Company's management. When used in this
report, the words "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. Such statements reflect the current view of the Company with respect
to future events and are subject to certain risks, uncertainties and assumptions
related to certain factors including, without limitation, competitive factors,
general economic conditions, 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 Registration Statement on Form S-1 (File
No. 333-3346) and in the Company's annual, 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 herein as
anticipated, believed, estimated, expected, or intended. 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.
The following comments should be read in conjunction with the Company's
consolidated financial statements and related notes included elsewhere in this
Quarterly Report on Form 10-Q.
GENERAL
Rush Enterprises, Inc. was incorporated in Texas in 1965 and currently
consists of two reportable segments: the Heavy Duty Truck segment, and the
Construction Equipment segment.
The Heavy Duty Truck segment operates a regional network of truck
centers that provide an integrated one-stop source for the trucking needs of its
customers, including retail sales of new Peterbilt and used heavy-duty trucks;
after-market parts, service and body shop facilities; and a wide array of
financial services, including the financing of new and used truck purchases,
insurance products and truck leasing and rentals. The Company's truck centers
are strategically located in high truck traffic areas on or near major highways
in Texas, California, Oklahoma, Colorado and Louisiana. The Company is the
largest Peterbilt truck dealer in the United States, representing approximately
14.7% of all new Peterbilt truck sales in 1997, and is the sole authorized
vendor for new Peterbilt trucks and replacement parts in its market areas. The
Company was named Peterbilt Dealer of the Year for North America for the
1993-1994 year. The criteria used to determine the recipients of this award
include, among others, image, customer satisfaction, sales activity and
profitability.
The Construction Equipment segment, formed during 1997, operates two
full-service John Deere dealerships ("Rush Equipment Centers"), comprised of six
locations, that are located in Texas and Michigan. Dealership operations include
the retail sale of new and used construction equipment, after-market parts and
service facilities, equipment rentals, and the financing of new and used
construction equipment. The Company believes the construction equipment industry
is highly-fragmented and offers opportunities for consolidation. As a result,
the Company's growth strategy is to realize economies of scale,
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favorable purchasing power, and cost savings by continuing to develop a network
of John Deere dealerships through acquisitions and growth inside existing
territories. The Company currently operates two construction equipment
dealerships in Texas and Michigan. There can be no assurance that the Company
will be able to successfully develop a network of construction equipment
dealerships or, if such network of construction equipment dealerships is
established, that it will realize economies of scale, favorable purchasing power
or cost savings.
In March 1997, the Company acquired the assets of Denver Peterbilt,
Inc., which consisted of two full service Peterbilt dealerships in Denver and
Greeley, Colorado. The purchase price was approximately $7.9 million, funded by
cash and borrowings under the Company's floor plan financing arrangement.
In September 1997, the Company opened a Rush Truck Center in Pharr,
Texas. This full-service Peterbilt dealership serves the Texas Rio Grande Valley
area.
In October 1997, the Company acquired certain assets and assumed
certain liabilities from C. Jim Stewart & Stevenson, Inc., which consisted of
its full service John Deere construction equipment dealership serving the
Houston, Texas metropolitan and surrounding areas. The purchase price was
approximately $30.2 million funded by cash, borrowings from various creditors,
and a note payable issued to the seller.
In March 1998, the Company acquired all of the outstanding capital
stock of D & D Farm and Ranch Supermarket, Inc. ("D & D"), for consideration of
approximately $10.5 million. D & D operates a retail farm and ranch superstore
in the San Antonio, Texas metropolitan and surrounding area.
In August 1998, the Company opened a combined Rush Truck and
Construction Equipment Center in Beaumont, Texas. This full service Peterbilt
and John Deere dealership compliments our existing Houston dealerships in
serving the Texas Gulf Coast area.
In September 1998, the Company acquired all of the assets and assumed
certain liabilities of Klooster Equipment, Inc., which consisted of a full
service John Deere Construction equipment dealership with four locations
covering 54 counties in Western Michigan. The purchase price was approximately
$12.7 million funded by cash and borrowings from various creditors.
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RESULTS OF OPERATIONS
The following discussion and analysis includes the Company's historical
results of operations for the three and nine months ended September 30, 1998 and
1997.
The following table sets forth for the periods indicated certain
financial data as a percentage of total revenues:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
New and used truck sales 68.9% 74.0% 69.2% 74.5%
Parts and service 18.8 20.5 17.8 20.0
Construction equipment sales 4.5 -- 5.5 --
Lease and rental 3.0 3.5 3.1 3.7
Finance and insurance 1.8 1.7 1.8 1.4
Other 3.0 0.3 2.6 0.4
--------- --------- --------- ---------
Total revenues 100.0 100.0 100.0 100.0
Cost of products sold 82.3 83.7 83.1 84.2
--------- --------- --------- ---------
Gross profit 17.7 16.3 16.9 15.8
Selling, general and administrative
expenses 12.8 12.5 12.6 12.5
Depreciation and amortization 0.8 0.7 0.7 0.7
--------- --------- --------- ---------
Operating income 4.1 3.1 3.6 2.6
Interest expense 1.0 0.5 1.0 0.5
--------- --------- --------- ---------
Income before income taxes 3.1 2.6 2.6 2.1
Provision for income taxes 1.2 1.0 1.0 0.8
========= ========= ========= =========
Net income 1.9% 1.6% 1.6% 1.3%
========= ========= ========= =========
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
Revenues
Revenues increased by approximately $51.4 million, or 50.3%, from
$102.1 million to $153.5 million from the third quarter of 1997 to the third
quarter of 1998. Approximately, $27.0 million in sales is attributable to the
addition of the Pharr heavy-duty truck dealership, the John Deere construction
equipment dealerships, and D & D Farm and Ranch Supermarket, while the remaining
increase of $24.4 million, or 23.9%, is attributable to same store growth. Sales
of new and used trucks increased by approximately $30.4 million, or 40.3%, from
$75.5 million to $105.9 million from the third quarter of 1997 to the third
quarter of 1998. Unit sales of new and used trucks increased by 38.2% and 4.3%,
respectively, from the third quarter of 1997 to the third quarter of 1998, while
new truck average revenue per unit increased by 5.0% and used truck average
revenue per unit increased by 18.6%. Average new truck prices increased due to a
change in product mix and customary price increases. Used truck prices increased
due to product mix and increased demand for late model product.
Parts and service sales increased by approximately $7.9 million, or
37.8% from $20.9 million to $28.8 million. The increase was due to same store
growth of 22.7% and parts and service sales associated with the addition of the
Pharr and Beaumont heavy-duty truck dealerships, and the John Deere construction
equipment dealerships.
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Lease and rental revenues increased by approximately $1.1 million, or
30.6%, from $3.6 million to $4.7 million. The increase was due to $702,000 of
lease and rental revenues generated by the John Deere dealerships subsequent to
the third quarter of 1997, and same store growth in revenues of $358,000 or
9.9%.
Finance and insurance revenues increased by approximately $1.0 million,
or 58.8%, from $1.7 million to $2.7 million from the third quarter of 1997 to
the third quarter of 1998. The majority of the increase resulted from the
increase in new and used truck deliveries. Finance and insurance revenues have
limited direct costs and, therefore, contribute a disproportionate share of
operating profits.
Other income increased by approximately $4.3 million, or 1308.5%, from
$329,000 to $4.6 million from the third quarter of 1997 to the third quarter of
1998. The increase is due to the acquisition of D & D Farm and Ranch
Supermarket, Inc., in March 1998, which recorded sales of approximately $4.1
million during the third quarter of 1998.
Gross Profit
Gross profit increased by approximately $10.5 million, or 62.9%, from
$16.7 million to $27.2 million from the third quarter of 1997 to the third
quarter of 1998. Gross profit as a percentage of sales increased from 16.3% in
the third quarter of 1997 to 17.7% in the third quarter of 1998. The increase in
gross profit, as a percentage of sales, was a result of a change in sales mix as
well as increased gross margins in each of our profit centers. Additionally,
Rush Equipment Centers, the Company's John Deere dealerships, achieved a gross
margin of 27.2%, which is considerably higher than gross margins of
approximately 15-17% achieved in the truck stores.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by approximately
$7.0 million, from $12.7 million to $19.7 million, or 55.1%, from the third
quarter of 1997 to the third quarter of 1998. Selling, general and
administrative expenses as a percentage of revenue increased from 12.5% in the
third quarter of 1997 to 12.8% in the third quarter of 1998. The changes in
selling, general and administrative expenses are due mainly to the large
increase in sales commissions, due to the increases in revenues and gross
profit, in the third quarter of 1998.
Interest Expense
Interest expense increased by approximately $930,000 or 173.2%, from
$537,000 to $1.5 million, from the third quarter of 1997 to the third quarter of
1998, primarily as the result of increased levels of indebtedness due to higher
floor plan liability levels and the refinancing of certain real property owned
by the Company during the fourth quarter of 1997.
Income before Income Taxes
Income before income taxes increased by $2.1 million, or 77.8%, from
$2.7 million to $4.8 million from the third quarter of 1997 to the third quarter
of 1998, as a result of the factors described above.
Income Taxes
The Company has provided for taxes at a 40% effective rate.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Revenues
Revenues increased by approximately $164.8 million, or 58.7%, from
$280.8 million to $445.6 million from the first nine months of 1997 to the first
nine months of 1998. Sales of new and used trucks increased by approximately
$99.0 million, or 47.3%, from $209.2 million to $308.2 million from the first
nine months of 1997 to the first nine months of 1998. Unit sales of new and used
trucks increased by 41.7%
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and 18.1%, respectively, from the first nine months of 1997 to the first nine
months of 1998, while new and used truck average revenue per unit increased by
7.0% and 15.7%, respectively. Average new truck prices increased due to a
change in product mix and customary price increases. Used truck prices increased
due to product mix and increased demand for late model products.
Parts and service sales increased by approximately $22.9 million, or
40.7%, from $56.3 million to $79.2 million. The increase was due to incentive
pay plans implemented in the parts departments and the expansion of our outside
parts sales force. The increase consisted of same store growth of $13.7 million
or 24.4% and parts and service sales associated with addition of the Pharr and
Beaumont heavy-duty truck dealerships and the John Deere construction equipment
dealerships.
Lease and rental revenues increased by approximately $3.3 million, or
32.0% from $10.3 million to $13.6 million. The increase was due to $2.3 million
of lease and rental revenues generated by the John Deere dealerships acquired
subsequent to the third quarter of 1997, and same store growth in revenues of
$1.0 million or 9.7%.
Finance and insurance revenues increased by approximately $4.3 million,
or 113.2%, from $3.8 million to $8.1 million from the first nine months of 1997
to the first nine months of 1998. The majority of the increase resulted from the
increase in new and used truck deliveries. Finance and insurance revenues have
limited direct costs and, therefore, contribute a disproportionate share of
operating profits.
Other income increased by approximately $10.4 million, or 800.0%, from
$1.3 million to $11.7 million from the first nine months of 1997 to the first
nine months of 1998. The increase was primarily due to the acquisition of D & D
Farm and Ranch Supermarket, Inc., in March 1998, which recorded sales of
approximately $9.7 million during the first nine months of 1998.
Gross Profit
Gross profit increased by approximately $31.1 million, or 70.2%, from
$44.3 million to $75.4 million from the first nine months of 1997 to the first
nine months of 1998. Gross profit as a percentage of sales increased from 15.8%
to 16.9% from the first nine months of 1997 to the first nine months of 1998.
The increase in gross profit, as a percentage of sales, was a result of a change
in sales mix as well as increased gross margins in each of our profit centers.
Additionally, Rush Equipment Centers, the Company's John Deere dealerships,
achieved a gross margin of 22.6%, which is considerably higher than gross
margins of approximately 15-17% achieved in the truck stores.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by approximately
$21.0 million, from $35.2 million to $56.2 million, or 60.0%, from the first
nine months of 1997 to the first nine months of 1998. The increase resulted from
approximately $10.1 million of selling, general and administrative expenses
related to the acquisition and integration of Denver Peterbilt Inc., the newly
opened Pharr heavy-duty truck dealership, the John Deere construction equipment
dealerships, and D & D Farm and Ranch Supermarket, Inc. Additionally,
commissions increased due to increased gross margins. Selling, general and
administrative expenses as a percentage of revenue increased from 12.5% in the
first nine months of 1997 to 12.6% in the first nine months of 1998.
Interest Expense
Interest expense increased by approximately $2.8 million from $1.5
million to $4.3 million, or 186.7%, from the first nine months of 1997 to the
first nine months of 1998, primarily as the result of increased levels of
indebtedness due to higher floor plan liability levels and the refinancing of
certain real property owned by the Company during the fourth quarter of 1997.
13
14
Income before Income Taxes
Income before income taxes increased by $6.0 million, or 107.1% from
$5.6 million to $11.6 million from the first nine months of 1997 to the first
nine months of 1998, as a result of the factors described above.
Income Taxes
The Company has provided for taxes at a 40% effective rate.
Inventories
Inventories increased by $26.2 million from $66.8 million to $93.0
million from December 31, 1997 to September 30, 1998. The acquisitions of D & D
Farm and Ranch Supermarket, Inc. and Klooster Equipment, Inc. accounted for
$15.3 million of the increase. The remaining increase of $10.9 million is due
mainly to the seasonal purchasing patterns in the heavy duty truck and
construction equipment industries.
Note Payable to Shareholder
Note payable to shareholder is a short-term note that is payable on
demand and bears interest equal to one percent per annum less than the rate of
interest received by the Company under its agreement to deposit overnight funds
in interest bearing accounts with one of the Company's floor plan lenders.
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. These short-term cash needs have historically been financed with
retained earnings and borrowings under credit facilities available to the
Company.
In June 1996, the Company completed an initial public offering of
2,875,000 shares of common stock and received net proceeds of approximately
$32.1 million.
As a result of the initial public offering, working capital levels have
generally increased. At September 30, 1998, the Company had working capital of
approximately $17.3 million, including $23.1 million in cash and cash
equivalents, $19.1 million in accounts receivable, $93.0 million in inventories,
and $533,000 in prepaid expenses, less $23.0 million of accounts payable and
accrued expenses, $5.1 million of current maturities on long-term debt, $10.6
million in a note payable to a shareholder, and $79.7 million outstanding under
floor plan financing. The aggregate maximum borrowing limits under working
capital lines of credit with various lending institutions are approximately $8.0
million. The Company's floor plan agreements with its primary lender limit the
aggregate amount of borrowings based on the number of new and used trucks and
the book value of construction equipment inventory.
For the first nine months of 1998, operating activities provided $5.9
million of cash. Operating increases resulted from net income of $6.9 million, a
decrease in accounts receivable of $2.5 million, an increase in accounts payable
of $95,000, an increase in accrued expenses of $3.7 million and provisions for
depreciation, amortization, and deferred taxes totaling $3.7 million. Operating
decreases resulted from a decrease in other current assets of $100,000 and
increases in inventories of $10.9 million.
For the first nine months of 1997, operating activities provided $12.0
million of cash. Net income of $3.4 million, decreases in accounts receivable,
inventories and other assets of $3.0 million, $2.7 million, and $1.1
respectively, and increases in depreciation and amortization and accrued
expenses of $2.1 million and $687,000, respectively, more than offset a decrease
in accounts payable of $1.1 million.
During the first nine months of 1998, the Company used $19.7 million
for investing activities, primarily due to property and equipment additions and
the acquisitions of D & D Farm and Ranch Supermarket, Inc. and Klooster
Equipment, Inc.
14
15
During the first nine months of 1997, the Company used $15.2 million
for investing activities, primarily due to the acquisition of Denver Peterbilt,
Inc., property and equipment additions related to the construction of the Pharr
Peterbilt facility, and renovations of several existing facilities.
For the first nine months of 1998, net cash provided by financing
activities amounted to $17.1 million. Increases in notes payable and floor plan
liability of $15.1 million and $7.1 million, respectively, more than offset
principal payments on notes payable of $5.1 million.
For the nine months of 1997, net cash used in financing activities
amounted to $3.1 million. Payments on floor plan financing and notes payable of
$7.6 million and $1.6 million, respectively, more than offset borrowings on
notes payable of $6.1 million.
Substantially all of the Company's truck purchases from PACCAR are made
on terms requiring payment within 15 days or less from the date of shipment from
the factory. The Company finances all, or substantially all, of the purchase
price of its new truck inventory, and 75% of the loan value of its used truck
inventory, under a floor plan arrangement with GMAC under which GMAC pays PACCAR
directly with respect to new trucks. The Company makes monthly interest payments
on the amount financed but is not required to commence loan principal repayments
to GMAC prior to the sale of new vehicles for a period of 12 months and for used
vehicles for a period of three months. At September 30, 1998, the Company had
approximately $46.7 million outstanding under its floor plan financing
arrangement with GMAC. GMAC permits the Company to earn, for up to 62.5% of the
amount borrowed under its floor plan financing arrangement with GMAC, interest
at the prime rate less one-half percent on overnight funds deposited by the
Company with GMAC.
The Company finances all, or substantially all, of the purchase price
of its new construction equipment inventory under its floor plan facilities with
John Deere and Associates Commercial Corp. The agreement with John Deere
provides for an immediate 3% discount if the equipment is paid for within 30
days from the date of purchase, or interest free financing for five months,
after which time the amount financed is required to be paid in full. When the
equipment is sold prior to the expiration of the five month period, the Company
is required to repay the principal within approximately 15 days of date of the
sale. Should the equipment financed by John Deere not be sold within the five
month period, such financing is transferred to the Associates Commercial Corp.
floor plan arrangement. The Company makes principal payments to Associates
Commercial Corp., for sold inventory, and interest payments for all inventory,
on the 15th day of each month. Used and rental equipment, to a maximum of book
value, is financed under a floor plan arrangement with Associates Commercial
Corp. The Company makes monthly interest payments on the amount financed and is
required to commence loan principal repayments on rental equipment as book value
reduces. Principal payments, for sold inventory, on used equipment are made the
15th day of each month following the sale. The loans are collateralized by a
lien on the equipment. The Company's floor plan agreements limit the aggregate
amount of borrowings based on the book value of new and used equipment units. As
of September 30, 1998, the Company's floor plan arrangement with Associates
Commercial Corp. permits the financing with Associates Commercial Corp. of up to
$25 million in construction equipment. At September 30, 1998, the Company had
$5.0 million and $28.1 million, outstanding under its floor plan financing
arrangements with John Deere and Associates Commercial Corp., respectively.
15
16
Backlogs
The Company enters firm orders into its backlog at the time the order
is received. Currently, customer orders are being filled in approximately six to
nine months and customers have historically placed orders expecting delivery
within three to nine months. However, certain customers, including fleets and
governments, typically place orders up to one year in advance of their desired
delivery date. Certain employees of the Company's supplier of new Peterbilt
trucks, commenced a work stoppage in May 1998 and were subsequently replaced by
new, non-union workers by such supplier. At September 30, 1998, such labor
relations issues of such supplier have had no material effect on the Company's
business, financial condition, or results of operations. Such supplier has
advised the company that it does not anticipate its labor relations to cause a
material adverse effect on the Company's business, operations or financial
condition. However, no assurances can be made that future developments in this
matter, which are beyond the control of the Company, will not occur and which
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company in the past has typically
allowed customers to cancel orders at any time prior to delivery, and the
Company's level of cancellations is affected by general economic conditions,
economic recessions and customer business cycles. As a percentage of orders,
cancellations historically have ranged from 5% to 12% of annual order volume.
The Company's backlogs as of September 30, 1998, and 1997, were approximately
$175 million and $125.0 million, respectively. Backlogs increased principally
due to increased order volume at September 30, 1998, compared to September 30,
1997.
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 Company's diverse customer
base, which includes small and large fleets, governments, corporations and owner
operators. However, truck, parts and service operations historically have
experienced higher volumes of sales in the second and third quarters. The
Company has historically received benefits from volume purchases and meeting
vendor sales targets in the form of cash rebates, which are typically recognized
when received. Approximately 40% of such rebates are typically received in the
fourth quarter, resulting in a seasonal increase in gross profit.
Seasonal effects in the construction equipment business are primarily driven
by weather conditions. As approximately 68% of Rush Equipment Center's revenue
is produced in Texas, where winters are mild, seasonality currently does not
have a material effect on the Company's construction equipment segment.
Additionally, any 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 both
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.
Cyclicality
The Company's business, as well as the entire retail heavy-duty truck
and construction equipment industries, are dependent on a number of factors
relating to general economic conditions, including fuel prices, interest rate
fluctuations, economic recessions and customer business cycles. In addition,
unit sales of new trucks and construction equipment have historically been
subject to substantial cyclical variation based on such general economic
conditions. Although the Company believes that its geographic expansion and
diversification into truck and construction equipment related services,
including financial services, leasing, rentals and service and parts, will
reduce the overall impact to the Company resulting from general economic
conditions affecting heavy-duty truck sales, the Company's operations may be
materially and adversely affected by any continuation or renewal of general
downward economic pressures or adverse cyclical trends.
16
17
Effects of Inflation
The Company believes that the relatively moderate inflation over the
last few years has not had a significant impact on the Company's revenue or
profitability. The Company does not expect inflation to have any near-term
material effect on the sales of its products, although there can be no assurance
that such an effect will not occur in the future.
Year 2000
The efficient operation of the Company's business is dependent on its
computer software programs and operating systems (collectively, "Programs and
Systems"). These Programs and Systems are used in several key areas of the
Company's business, including information management services and financial
reporting, as well as in various administrative functions. The Company has been
evaluating its Programs and Systems to identify potential year 2000 compliance
problems, as well as manual processes, external interfaces with customers, and
services supplied by vendors to coordinate year 2000 compliance and conversion.
The year 2000 problem refers to the limitations of the programming code in
certain existing software programs to recognize date sensitive information for
the year 2000 and beyond. Unless modified prior to the year 2000, such systems
may not properly recognize such information and could generate erroneous data or
cause a system to fail to operate properly.
Based on current information, the Company expects to attain year 2000
compliance and institute appropriate testing of its modifications and
replacements in a timely fashion and in advance of the year 2000 date change. It
is anticipated that modification or replacement of the Company's Programs and
Systems will be performed by Company and/or contract personnel. The Company
believes that, with modifications to existing software and conversions to new
software, the year 2000 problem will not pose a significant operational problem
for the Company. However, because most computer systems are, by their very
nature, interdependent, it is possible that non-compliant third party computers
may not interface properly with the Company's computer systems. The Company
could be adversely affected by the year 2000 problem if it or unrelated parties
fail to successfully address this issue. Management of the Company currently
anticipates that the expenses and capital expenditures associated with its year
2000 compliance project, including costs associated with modifying the Programs
and Systems as well as the cost of purchasing or leasing certain hardware and
software, will not have a material effect on its business, financial position or
results of operations and are expenses and capital expenditures the Company
anticipated incurring in the ordinary course of business regardless of the year
2000 problem. Purchased hardware and software has been and will continue to be
capitalized in accordance with normal accounting policy. Personnel and other
costs related to this process are being expensed as incurred.
The costs of year 2000 compliance and the expected completion dates are
the best estimates of Company management and are believed to be reasonably
accurate. In the event the Company's plan to address the year 2000 problem is
not successfully or timely implemented, the Company may need to devote more
resources to the process and additional costs may be incurred, which could have
a material adverse effect on the Company's financial condition and results of
operations. Problems encountered by the Company's vendors, customers and other
third parties also may have a material adverse effect on the Company's financial
condition and results of operations.
In the event the Company determines following the year 2000 date change
that its Programs and Systems are not year 2000 compliant, the Company will
likely experience considerable delays in processing customer orders and
invoices, compiling information required for financial reporting and performing
various administrative functions. In the event of such occurrence, the Company's
contingency plans call for it to switch vendors to obtain hardware and/or
software that is 2000 compliant, and until such hardware and/or software can be
obtained, the Company will plan to use non-computer systems for its business,
including information management services and financial reporting, as well as
its various administrative functions.
17
18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit
Number
27.1* Financial data schedule
* Filed herewith
b) Reports on Form 8-K
None
18
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
RUSH ENTERPRISES, INC.
Date: November 13, 1998 By: /S/ W. MARVIN RUSH
-----------------------------------
Name: W. Marvin Rush
Title: Chairman and Chief Executive
Officer
(Principal Executive Officer)
Date: November 13, 1998 By: /S/ Martin A. Naegelin, Jr.
-----------------------------------
Name: Martin A. Naegelin, Jr.
Title: Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
19
20
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule
5
1,000
9-MOS
DEC-31-1998
JAN-01-1998
SEP-30-1998
23,121
0
19,088
0
92,979
135,721
54,305
(9,665)
196,542
118,299
27,554
0
0
66
48,941
196,542
445,598
445,598
370,193
429,706
0
0
4,335
11,557
4,622
6,935
0
0
0
6,935
1.04
1.04
