rusha_10k-123112.htm

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, 2012

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:
Class A and Class B Common Stock, $.01 par value
NASDAQ Global Select Market
Title of each class
Name of each exchange on which registered
   
 
Securities registered pursuant to Section 12(g) of the Act:
None

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 þ

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 þ
 
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 þ                  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes þ                  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, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o       Accelerated filer þ                                                                                        Non-accelerated filer o     Smaller Reporting Company  o
                                                                                                          (Do not check if a smaller reporting company.)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes o         No þ
 
 
 

 

The aggregate market value of common stock held by non-affiliates of the registrant as of June 29, 2012 was approximately $541,429,901 based upon the last sales price on June 29, 2012 on The NASDAQ Global Select MarketSM of $16.35 for the registrant’s Class A common stock and $13.54 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 28,387,201 shares Class A common stock and 10,792,223 shares of Class B common stock outstanding on March 1, 2013.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant’s definitive proxy statement for the registrant’s 2013 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission not later than April 30, 2013, are incorporated by reference into Part III of this Form 10-K.
 
 
 

 

RUSH ENTERPRISES, INC.

Index to Form 10-K

Year ended December 31, 2012

   
Page No.
     
Part I
Item 1
Business
2
Item 1A
Risk Factors
15
Item 1B
Unresolved Staff Comments
21
Item 2
Properties
21
Item 3
Legal Proceedings
21
Item 4
Mine Safety Disclosures
21
     
     
Part II
     
Item 5
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
21
Item 6
Selected Financial Data
23
Item 7
Management’s Discussion and Analysis of Financial Condition and Results of Operations
24
Item 7A
Quantitative and Qualitative Disclosures about Market Risk
37
Item 8
Financial Statements and Supplementary Data
39
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
72
Item 9A
Controls and Procedures
73
Item 9B
Other Information
75
     
Part III
     
Item 10
Directors, Executive Officers and Corporate Governance
75
Item 11
Executive Compensation
75
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
75
Item 13
Certain Relationships and Related Transactions, and Director Independence
77
Item 14
Principal Accountant Fees and Services
77
     
Part IV
     
Item 15
Exhibits and Financial Statement Schedules
78

 
 

 

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

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 COMMONLY USED IN THE COMPANY’S FILINGS

Peterbilt® is a registered trademark of Peterbilt Motors Company. PACCAR® is a registered trademark of PACCAR, Inc. GMC® is a registered trademark of General Motors Corporation. Hino® is a registered trademark of Hino Motors, Ltd. Isuzu® is a registered trademark of Isuzu Motors Limited. Kenworth® is a registered trademark of PACCAR, Inc. doing business as Kenworth Truck Company. Volvo® is a registered trademark of Volvo Trademark Holding AB. Freightliner® is a registered trademark of Freightliner Corporation. Mack® is a registered trademark of Mack Trucks, Inc. Navistar® is a registered trademark of Navistar International Corporation. Caterpillar® is a registered trademark of Caterpillar, Inc. PacLease® is a registered trademark of PACCAR Leasing Corporation. CitiCapital® is a registered trademark of Citicorp. Ford® is a registered trademark of Ford Motor Company.  Ford Motor Credit Company® is a registered trademark of Ford Motor Company. Cummins® is a registered trademark of Cummins Intellectual Property, Inc.  Eaton® is a registered trademark of Eaton Corporation.  Arvin Meritor® is a registered trademark of Meritor Technology, Inc. JPMorgan Chase® is a registered trademark of JP Morgan Chase & Co.  SAP® is a registered trademark of SAP Aktiengesellschaft.  International® is a registered trademark of Navistar International Transportation Corp. Blue Bird® is a registered trademark of Blue Bird Investment Corporation.  Autocar® is a registered trademark of Shem, LLC.  IC Bus® is a registered trademark of IC Bus, LLC.  Collins Bus Corporation® is a registered trademark of Collins Bus Corporation. Fuso® is a registered trademark of Mitsubishi Fuso Truck and Bus Corporation. Micro Bird® is a registered trademark of Blue Bird Body Company. Allison Transmission® is a registered trademark of Allison Transmission, Inc.
 
 
1

 

PART I

Item 1.  Business

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

Access to Company Information

Rush electronically files annual reports, quarterly reports, proxy statements and other reports and information statements 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 100 F Street NE, 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 our SEC filings available, free of charge, through our website, including 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 incorporated into this report or otherwise made part of this report.

General

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

The Company is a full-service, integrated retailer of commercial vehicles and related services.  The Truck Segment operates a regional network of commercial vehicle dealerships under the name “Rush Truck Centers.”  Rush Truck Centers primarily sell commercial vehicles manufactured by Peterbilt, International, Hino, Ford, Isuzu, Mitsubishi Fuso, IC Bus or Blue Bird.  Through its strategically located network of Rush Truck Centers, the Company provides one-stop service for the needs of its commercial vehicle customers, including retail sales of new and used commercial vehicles, aftermarket parts sales, service and repair facilities, and financing, leasing and rental, and insurance products.

The Company’s Rush Truck Centers are principally located in high traffic areas throughout the United States.  Since commencing operations as a Peterbilt heavy-duty truck dealer in 1966, the Company has grown to operate 78 Rush Truck Centers in 15 states.

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

The Construction Equipment Segment is no longer reported as a separate business segment because the Company sold its John Deere construction equipment business in September 2010.  Operating results of the Construction Equipment Segment have been classified as discontinued operations in the Company’s financial statements.
 
 
2

 

Rush Truck Centers.  Our Rush Truck Centers are located in Alabama, Arizona, California, Colorado, Florida, Georgia, Idaho, New Mexico, North Carolina, Ohio, Oklahoma, Oregon, Tennessee, Texas and Utah.  The following chart reflects our franchises and parts, service and body shop operations by location:

Rush Truck Center
Location
Heavy-Duty
Franchise(s)
Medium-Duty, Light-Duty and
Bus Franchise(s)
Parts
Service
Body
Shop
           
Alabama:
         
Mobile
Peterbilt
Peterbilt
Yes
Yes
Yes
           
Arizona:
         
Flagstaff
None
None
Yes
Yes
No
Phoenix
Peterbilt
Peterbilt, Hino
Yes
Yes
Yes
Tucson
Peterbilt
Peterbilt, Hino
Yes
Yes
No
Yuma
Peterbilt
Peterbilt
Yes
Yes
No
           
California:
         
Escondido
Peterbilt
Peterbilt, Hino
Yes
Yes
No
Fontana Heavy-Duty
Peterbilt
Peterbilt
Yes
Yes
Yes
Fontana Medium-Duty
None
Peterbilt, Hino, Isuzu
Yes
Yes
No
Pico Rivera
Peterbilt
Peterbilt
Yes
Yes
Yes
San Diego
Peterbilt
Peterbilt, Hino
Yes
Yes
Yes
Sylmar
Peterbilt
Peterbilt
Yes
Yes
No
Whittier
None
Ford, Isuzu
Yes
Yes
No
           
Colorado:
         
Denver Heavy-Duty
Peterbilt
Peterbilt
Yes
Yes
Yes
Denver Medium-Duty
None
Ford, Isuzu
Yes
Yes
No
Greeley
Peterbilt
Peterbilt
Yes
Yes
No
Pueblo
Peterbilt
Peterbilt
Yes
Yes
No
           
Florida:
         
Haines City
Peterbilt
Peterbilt
Yes
Yes
Yes
Jacksonville
Peterbilt
Peterbilt, Hino
Yes
Yes
Yes
Orlando Heavy-Duty
Peterbilt
Peterbilt, Isuzu
Yes
Yes
No
Orlando Light & Medium-Duty
None
Ford
Yes
Yes
No
Orlando South
None
Isuzu
Yes
Yes
No
Tampa
Peterbilt
Peterbilt
Yes
Yes
No
           
Georgia:
         
Atlanta
International
International, Hino, Isuzu, IC Bus
Yes
Yes
No
Atlanta Bus Center
None
IC Bus
Yes
Yes
Yes
Columbus
None
Isuzu
Yes
Yes
No
Doraville
International
International, Hino, Isuzu, IC Bus
Yes
Yes
No
Smyrna
International
International, Hino, Isuzu, IC Bus
Yes
Yes
No
           
Idaho:
         
Boise
International
International, IC Bus, Autocar, Kalmar
Yes
Yes
Yes
Idaho Falls
International
International, IC Bus, Kalmar
Yes
Yes
Yes
Lewiston
International
International
Yes
Yes
No
Twin Falls
International
International
Yes
Yes
No
           
New Mexico:
         
Albuquerque
Peterbilt
Peterbilt
Yes
Yes
Yes
Las Cruces
Peterbilt
Peterbilt
Yes
Yes
No
           
 
 
3

 
 
Rush Truck Center
Location
Heavy-Duty
Franchise(s)
Medium-Duty, Light-Duty and
Bus Franchise(s)
Parts
Service
Body
Shop
           
North Carolina:
         
Charlotte
Peterbilt
Peterbilt, Hino, Isuzu
Yes
Yes
No
Charlotte
International
International
Yes
Yes
Yes
           
Ohio:
         
Akron
International
International, IC Bus
Yes
Yes
No
Cincinnati
International
International, IC Bus, Isuzu
Yes
Yes
Yes
Cleveland
International
International, IC Bus
Yes
Yes
No
Columbus West
International
International, IC Bus, Isuzu
Yes
Yes
No
Dayton
International
International, IC Bus, Isuzu
Yes
Yes
No
Findlay
International
International, IC Bus
Yes
Yes
No
Lima
International
International, IC Bus
Yes
Yes
No
           
Oklahoma:
         
Ardmore
Peterbilt
Peterbilt
Yes
Yes
No
Oklahoma City
Peterbilt
Peterbilt, Hino, Ford, Isuzu
Yes
Yes
Yes
Tulsa
Peterbilt
Peterbilt, Hino
Yes
Yes
Yes
           
Oregon:
         
Ontario
International
International
Yes
Yes
No
           
Tennessee:
         
Nashville
Peterbilt
Peterbilt
Yes
Yes
Yes
           
Texas:
         
Abilene
Peterbilt
Peterbilt
Yes
Yes
No
Alice
Peterbilt
Peterbilt, Blue Bird, Micro Bird, Elkhart
Yes
Yes
No
Amarillo
Peterbilt
Peterbilt
Yes
Yes
No
Austin
Peterbilt
Peterbilt, Hino, Isuzu, Blue Bird, Micro Bird, Elkhart
Yes
Yes
No
Dalhart
Peterbilt
Peterbilt
Yes
Yes
No
Dallas Heavy-Duty
Peterbilt
Peterbilt, Blue Bird, Micro Bird, Elkhart
Yes
Yes
Yes
Dallas Medium-Duty
None
Peterbilt, Hino,Blue Bird, Micro Bird, Elkhart
Yes
Yes
No
Dallas Light & Medium-Duty
None
Ford, Isuzu, Blue Bird
Yes
Yes
No
El Paso
Peterbilt
Peterbilt, Hino, Isuzu
Yes
Yes
Yes
Fort Worth
Peterbilt
Peterbilt, Blue Bird, Micro Bird, Elkhart
Yes
Yes
No
Houston
Peterbilt
Peterbilt, Hino, Blue Bird, Micro Bird, Elkhart
Yes
Yes
Yes
Houston Northwest
Peterbilt
Peterbilt, Hino, Blue Bird, Micro Bird, Elkhart
Yes
Yes
No
Laredo
Peterbilt
Peterbilt, Blue Bird, Micro Bird, Elkhart
Yes
Yes
Yes
Lubbock
Peterbilt
Peterbilt
Yes
Yes
No
Lufkin
Peterbilt
Peterbilt, Blue Bird, Micro Bird, Elkhart
Yes
Yes
Yes
Odessa
Peterbilt
Peterbilt
Yes
Yes
No
Pharr
Peterbilt
Peterbilt, Hino, Blue Bird, Micro Bird, Elkhart
Yes
Yes
Yes
San Antonio
Peterbilt
Peterbilt, Hino, Blue Bird, Micro Bird, Elkhart
Yes
Yes
Yes
San Antonio Bus
None
Blue Bird, Micro Bird, Elkhart
Yes
Yes
Yes
 
 
4

 
 
Rush Truck Center
Location
Heavy-Duty
Franchise(s)
Medium-Duty, Light-Duty and
Bus Franchise(s)
Parts
Service
Body
Shop
Sealy
Peterbilt
Peterbilt, Isuzu, Blue Bird, Micro Bird, Elkhart
Yes
Yes
No
Texarkana
Peterbilt
Peterbilt, Hino, Isuzu, Blue Bird, Micro Bird, Elkhart
Yes
Yes
No
Tyler
Peterbilt
Peterbilt, Blue Bird, Micro Bird, Elkhart
Yes
Yes
No
Waco
Peterbilt
Peterbilt, Hino, Isuzu, Blue Bird, Micro Bird, Elkhart
Yes
Yes
No
           
Utah:
         
Helper
International
International
Yes
Yes
No
Farr West
International
International, IC Bus
Yes
Yes
No
Salt Lake City
International
International, IC Bus, Autocar, Mitsubishi Fuso
Yes
Yes
Yes
Springville
International
International, Mitsubishi Fuso
Yes
Yes
No
St. George
International
International, Mitsubishi Fuso
Yes
Yes
No
 
 
Leasing and Rental Services.  Through certain of our Rush Truck Centers and several stand-alone Rush Truck Leasing Centers, we provide a broad line of product selections for lease or rent, including Class 4, Class 5, Class 6, Class 7 and Class 8 trucks, heavy-duty cranes and refuse vehicles.  Our lease and rental fleets are offered on a daily, monthly or long-term basis. The following chart reflects our leasing franchises by location:

Rush Truck Leasing
Location
Franchise
Standalone or
in a Rush
Truck Center
     
Alabama:
   
Birmingham
PacLease
Standalone
     
Arizona:
   
Phoenix
PacLease
Standalone
     
California:
   
Pico Rivera
PacLease
Standalone
San Diego
PacLease
In RTC
Sylmar
PacLease
Standalone
     
Florida:
   
Orlando
PacLease
In RTC
Tampa
PacLease
In RTC
Jacksonville
PacLease
Standalone
     
Idaho:
   
Boise
Idealease
In RTC
     
North Carolina:
   
Charlotte
Idealease
Standalone
     
New Mexico:
   
Albuquerque
PacLease
In RTC
     
Ohio:
   
Cincinnati
Idealease
Standalone
Walton Hills
Idealease
Standalone
Columbus
Idealease
In RTC
Dayton
Idealease
In RTC
Lima
Idealease
Standalone
 
 
5

 
 
Rush Truck Leasing
Location
Franchise
Located in
Rush
Truck Center
Oklahoma:
   
Oklahoma City
PacLease
In RTC
     
Tennessee:
   
Nashville
PacLease
In RTC
     
Texas:
   
Austin
PacLease
In RTC
El Paso
PacLease
In RTC
Houston
PacLease
Standalone
Laredo
PacLease
Standalone
Lubbock
PacLease
Standalone
San Antonio
PacLease
In RTC
     
Utah:
   
Salt Lake City
Idealease
Standalone

 
In addition to the locations in the above table, Rush Truck Leasing also provides full-service maintenance on customers’ vehicles at several of its customers’ facilities.

Financial and Insurance Products.  At our Rush Truck Centers, we offer third-party financing to assist customers in purchasing new and used commercial vehicles. Additionally, we sell, as agent, a complete line of property and casualty insurance, including collision and liability insurance on commercial vehicles, cargo insurance and credit life insurance.

Other Businesses.  Perfection Equipment offers installation of equipment, equipment repair, parts installation, and paint and body repair at its location in Oklahoma City.  Perfection Equipment specializes in up-fitting trucks used by oilfield service providers and other specialized service providers.

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

Custom Vehicle Solutions operates in two locations in Texas.  Custom Vehicle Solutions provides new vehicle pre-delivery inspections, truck modifications, natural gas fuel system installations, and body, chassis upfit and component installation.

Industry

See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Industry” for a description of our industry and the markets in which we operate.

Our Business Strategy

Operating Strategy.  Our strategy is to operate an integrated dealer network that provides service solutions to the commercial vehicle industry. Our strategy includes the following key elements:

 
·
One-Stop Centers. We have developed our commercial vehicle dealerships as “one-stop centers” where, at one convenient location, our customers can do the following: purchase new and used commercial vehicles; finance, lease or rent commercial vehicles; 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 commercial vehicle 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.
 
 
6

 

 
·
Management by Dealership Units. At each of our dealerships, we operate one or more of the following departments: new commercial vehicle sales, used commercial vehicle sales, financial services, parts, service or body shop. Our general managers measure and manage the operations of each of our dealerships according to the specific departments 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 department at each of our dealerships are established annually and managers are rewarded for performance.

 
·
Aftermarket Services. The Company’s aftermarket capabilities now include a wide range of services and products such as a fleet of mobile service units, mobile technicians who staff our customers’ facilities, a proprietary line of parts and accessories, new diagnostic and analysis capabilities, factory certified service for alternative fuel vehicles and assembly service for specialized bodies and equipment.

Growth Strategy.  Through our expansion and acquisition initiatives, we have grown to operate a large, multistate, full-service network of commercial vehicle 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 and service offerings and opening new dealerships in existing markets.

 
·
Expansion Into New Geographic Areas. We plan to continue to expand our dealership network by acquiring dealerships in areas of the U.S. where we do not already have dealerships.  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.

 
·
Expansion of Product and Service Offerings. We intend to continue to expand our product lines within our dealerships by adding product categories and service capabilities 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.  For example, in recent years we have significantly expanded our fleet of mobile service units and mobile technicians who staff our customers’ facilities.  We have also added two Custom Vehicle Solutions locations that are focused exclusively on pre-delivery modifications to vehicles sold at our dealerships and other dealerships around the country.

 
·
Open New Rush Truck Centers in Existing Areas of Operation. We continually evaluate opportunities to increase our market presence by adding new Rush Truck Centers to underserved markets within our current areas of operation.

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 commercial vehicles, as well as related parts and services.

Commercial Vehicle Parts and Service.  Commercial vehicle related parts and service revenues accounted for approximately $817.3 million, or 26.4%, of our total revenues for 2012, but 63.0% of our gross profit.  The parts and service business enhances our sales and service functions and is a source of recurring revenue.  Rush Truck Centers carry a wide variety of commercial vehicle parts in inventory.  Certain Rush Truck Centers also feature fully equipped service and body shop facilities, the combination and configuration of which varies by location, capable of handling a broad range of repairs on most makes and classes of commercial vehicles.  Each Rush Truck Center is a warranty service center for the commercial vehicle manufacturers represented at that location and most are also authorized service centers for other vehicle component manufacturers, including Cummins, Eaton and Allison. We have more than 1,450 service and body shop bays throughout our Rush Truck Center network.  We also have approximately 180 mobile service units and 300 mobile technicians who staff our mobile service units and our customers’ facilities.
 
 
7

 

           Our service departments perform warranty and non-warranty repairs on commercial vehicles.  The cost of warranty work is generally reimbursed by the applicable manufacturer at retail commercial rates.  Additionally, we provide a wide array of services, including assembly service for specialized truck bodies and truck mounted equipment.  Our goal is to provide our customer any service that they need related to their commercial vehicles.

As part of our leasing and rental operations, we also enter into contracts to provide full-service maintenance on some customers’ vehicles.  We had 851 vehicles under contract maintenance as of December 31, 2012, and 637 vehicles under contract maintenance as of December 31, 2011.  This revenue is included as parts and service revenue on the Consolidated Statement of Income.

New Commercial Vehicle Sales.   New heavy-duty truck sales represent the largest portion of our revenue, accounting for approximately $1,410.3 million, or 45.6%, of our total revenues in 2012. New Class 8 heavy-duty Peterbilt truck sales accounted for approximately 68.0% of our new commercial vehicle revenues for 2012.

Our Rush Truck Centers that sell new and used Class 8 heavy-duty trucks also sell medium-duty and light-duty commercial vehicles.  Certain Rush Truck Centers sell medium-duty commercial vehicles manufactured by Peterbilt, Hino, Isuzu, Ford, International or Mitsubishi Fuso and buses manufactured by Blue Bird, IC BUS and Elkhart and light-duty commercial vehicles manufactured by Ford (see Part I, Item 1, “General – Rush Truck Centers” for information on which brands we sell at each Rush Truck Center).  New medium-duty commercial vehicle sales, excluding new bus sales, accounted for approximately $425.8 million, or 13.8% of our total revenues for 2012, and 21.8% of our new commercial vehicle revenues for 2012.  New light-duty commercial vehicle sales accounted for approximately $45.4 million, or 1.5% of our total revenues for 2012, and 2.3% of our new commercial vehicle revenues for 2012.  New bus sales accounted for approximately $53.7 million, or 1.7% of our total revenues for 2012, and 2.8% of our new commercial vehicle revenues for 2012.

A significant portion of our new commercial vehicle sales are to fleet customers (customers who purchase more than five commercial vehicles in any 12-month period).  Because of the size and geographic scope of our Rush Truck Center network, our strong relationships with our fleet customers and our ability to handle large quantities of used commercial vehicle 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 multi-unit trade-ins often associated with fleet sales and effectively disperse the used commercial vehicles for resale throughout our dealership network.  We believe that the broad range of services we offer to purchasers of commercial vehicles at the time of purchase and post-purchase has resulted in a high level of customer loyalty.

Used Commercial Vehicle Sales.  Used commercial vehicle sales accounted for approximately $197.6 million, or 6.4%, of our total revenues for 2012.  We sell used commercial vehicles at most of our Rush Truck Centers.  We believe that we are well positioned to market used commercial vehicles 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 commercial vehicles between Rush Truck Centers to satisfy customer demand. The majority of our used commercial vehicle inventory consists of commercial vehicles taken as trade-ins from new truck customers or retired from our lease and rental fleet, but we supplement our used commercial vehicle inventory by purchasing used commercial vehicles from third parties for resale.

New and Used Commercial Vehicle Financing.  Our Rush Truck Centers have personnel responsible for arranging third-party financing for our product offerings.  Generally, commercial vehicle finance contracts are memorialized through the use of installment contracts, which are secured by the commercial vehicles financed, and require a down payment, with the remaining balance financed over a two to seven-year period. The majority of finance contracts are sold to third parties without recourse to the Company.  The Company provides an allowance for repossession losses and early repayment penalties.

Truck Leasing and Rental.   Truck leasing and rental revenues accounted for approximately $100.3 million, or 3.2%, of our total revenues for 2012.  At our Rush Truck Leasing locations, we engage in full-service truck leasing under the PacLease and Idealease trade names.  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 had 4,508 vehicles in our lease and rental fleet as of December 31, 2012 compared to 3,363 vehicles as of December 31, 2011.  Generally, we sell trucks that have been retired from our lease and rental fleet through the used sales operations at our Rush Truck Centers.  Historically, we have realized gains on the sale of used lease and rental trucks.
 
 
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Insurance Products

The sale of financial and insurance products accounted for approximately $13.6 million, or 0.4%, of our total revenue for 2012.  Finance and insurance revenues have minimal direct costs and, therefore, contribute a disproportionate share of our operating profits.

Insurance Products.  We sell, as agent, a complete line of property and casualty insurance to commercial vehicle owners.  Our agency is licensed to sell truck liability, collision and comprehensive, workers’ compensation, cargo, credit life and occupational accident insurance coverage offered by a number of leading insurance companies.   Our renewal rate in 2012 was 80%.  We also have licensed insurance agents at several Rush Truck Centers.

Sales and Marketing

Our established long history of operations in the commercial vehicle business has resulted in a strong customer base that is diverse in terms of geography, industry and scale of operations.  Our customers include owner operators, regional and national truck fleets, corporations and local governments.  During 2012, no single customer accounted for more than 10% of our 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.

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, we implement our “Rush” brand name concept at each of our dealerships.

Facility Management
 
Personnel.  Each of our facilities is typically managed by a general manager who oversees the operations, personnel and the financial performance of the location, subject to the direction of a regional manager and personnel at our corporate headquarters.  Additionally, each full-service Rush Truck Center is typically staffed by a sales manager, parts manager, service manager, body shop manager, sales representatives, parts employees, and other service and make-ready employees, as appropriate, given the services offered.  The sales staff of each Rush Truck Center is compensated on a salary plus commission or a commission only basis, while managers receive a combination of salary and performance bonus.  We believe that our employees are among the highest paid in their respective industry, which enables us to attract and retain qualified personnel.

On an annual basis, the regional managers work with the general managers to prepare detailed monthly profit and loss forecasts based upon historical information and projected trends.  During the year, the general managers regularly review their facility’s progress with their regional manager and senior management and make appropriate adjustments as needed.

We have been successful in retaining our senior management, regional managers and general managers.  To promote communication and efficiency in operating standards, regional managers and members of senior management attend company-wide strategy sessions each 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.

Each Rush Truck Center is audited regularly for compliance with corporate policies and procedures.  These routine unannounced internal audits, objectively measure dealership performance with respect to corporate expectations in the management and administration of sales, commercial vehicle inventory, parts inventory, parts sales, service sales, body shop sales, corporate policy compliance, human resources compliance, and environmental and safety compliance matters.
 
 
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Purchasing and Suppliers.  We believe that pricing is an important element of our marketing strategy.  Because of our size, we benefit from volume purchases at favorable prices that permit us to achieve a competitive pricing position in the industry. We purchase our commercial vehicle inventory and proprietary parts and accessories directly from the applicable vehicle manufacturer, wholesale distributors, or other sources that provide the most favorable pricing.  Most purchasing commitments are negotiated by personnel at our corporate headquarters. Historically, we have been able to negotiate favorable pricing levels and terms, which enable us to offer competitive prices for our products.
 
Management Information Systems.  We utilize our management information systems to monitor the inventory level of commercial vehicles and parts at each of our dealerships.  Management tracks historic sales levels of different product lines, which enables management to identify the appropriate level and combination of inventory and forms the basis of our operating plan.

Information received from industry analysts allows us to determine market share statistics and gross volume sales numbers for our products as well as those of competitors. Local management remains aware of changes within markets we service and are able to realign product lines and add new commercial vehicle models as demands of the market change.
 
Distribution and Inventory Management.  We utilize a real-time inventory tracking system that allows for the prompt transfer of inventory among various Rush Truck Centers. 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, 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 Disposition
 
On September 9, 2010, the Company sold the assets of its John Deere construction equipment business, including its Rush Equipment Centers in Houston and Beaumont, Texas, to Doggett Heavy Machinery Services, LLC.  The total purchase price for the Rush Equipment Centers was $31.0 million.  The Company received cash of $26.2 million at closing and a $4.8 million note receivable to be paid over four years.  Before closing, the Company paid liabilities, related to the assets sold, of approximately $14.6 million.  The Company recorded a gain on the transaction of $10.1 million.  The Construction Equipment segment will no longer be reported as a separate business segment.

On May 24, 2010, the Company acquired certain assets of Lake City Companies, LLC and certain of its subsidiaries and affiliates (collectively, "Lake City International"). Lake City International operated a commercial truck and bus sales, service, parts, finance and leasing business representing multiple brands at five locations in Utah, five locations in Idaho and one location in Oregon.  These locations now operate as Rush Truck Centers. Rush Truck Leasing operates Idealease truck rental and leasing franchises at locations in Salt Lake City, Utah, and Boise, Idaho.  The transaction, including the real estate, was valued at approximately $70.0 million.  The purchase price for the assets of the business was paid in cash and the purchase price for the real estate was partially paid in cash with the remainder financed with long-term debt.
 
On July 12, 2010, the Company acquired certain assets of Joe Cooper Truck Center LLC, which consisted of a Ford franchise in Oklahoma City, Oklahoma.  The newly acquired Ford franchise was added to the Company’s existing dealership in Oklahoma City, Oklahoma.  The transaction was valued at approximately $1.2 million, with the purchase price paid in cash.
 
On October 12, 2010, the Company acquired certain assets of Metro Ford Truck Sales, Inc., which consisted of a Ford and Isuzu commercial vehicle dealership in Dallas, Texas.  The Company is operating the facility as a full-service Rush Truck Center offering Ford and Isuzu medium-duty trucks, parts and service.  The transaction, including the real estate, was valued at approximately $5.6 million, with the purchase price paid in cash.
 
 
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On February 21, 2011, the Company acquired certain assets of Heintzelman’s Truck Center, which consisted of a Ford commercial vehicle dealership in Orlando, Florida.  The Company is operating the facility as a full-service Rush Truck Center offering Ford trucks, parts, service, leasing, financing and insurance.  The transaction was valued at approximately $4.7 million, with the purchase price paid in cash.

On March 14, 2011, the Company acquired certain assets of Asbury Automotive Atlanta L.L.C., a subsidiary of Asbury Automotive Group, Inc., which operates commercial truck and bus dealerships in the metro Atlanta area under the "Nalley Motor Trucks" name.  The acquisition included the International, Hino, Isuzu, UD, IC Bus and Workhorse franchises in metro Atlanta, dealership locations in Atlanta and Doraville and a collision center in Atlanta.  These locations now operate as Rush Truck Centers.  The transaction was valued at approximately $55.3 million.  The purchase price for the assets of the business was paid in cash and the purchase price for the real estate was partially paid in cash with the remainder financed with long-term debt.

On November 5, 2011, the Company acquired certain assets of Peck Road Ford, which consisted of a Ford and Isuzu commercial vehicle dealership in Whittier, California.  The Company is operating the facility as a full-service Rush Truck Center offering Ford and Isuzu trucks, parts, service, financing and insurance.  This location also offers Peterbilt parts and service.  The transaction, including real estate, was valued at approximately $10.0 million. The purchase price for the assets of the business was paid in cash and the purchase price for the real estate was partially paid in cash with the remainder financed with long-term debt.

On December 5, 2011, the Company acquired certain assets of West Texas Peterbilt, which consisted of dealerships in Amarillo, Lubbock and Odessa, Texas that offer Peterbilt trucks, parts and service, a parts and service facility in Dalhart, Texas and a parts facility in Hereford, Texas.  These dealerships now operate as Rush Truck Centers.  Rush Truck Leasing operates a PacLease truck rental and leasing franchise in Lubbock, Texas.  The transaction, including real estate, was valued at approximately $24.6 million.  The purchase price for the assets of the business was paid in cash and the purchase price for the real estate was partially paid in cash with the remainder financed with long-term debt.

On December 31, 2012, the Company acquired certain assets of MVI Group, which operated commercial truck and bus dealerships in Ohio under the names of Miami Valley International, Center City International, CCI North Coast and Buckeye Truck Centers.  The acquisition included International, IC Bus, and Isuzu franchise locations in Akron, Cincinnati, Cleveland, Columbus, Dayton, Findlay and Lima, Ohio.  These dealerships now operate as Rush Truck Centers.  Rush Truck Leasing now operates Idealease truck rental and leasing franchises in Cincinnati, Cleveland, Columbus, Dayton and Lima, Ohio.  The transaction, including real estate, was valued at approximately $104.5 million.  The purchase price for the assets of the business was financed under the Company’s floor plan and lease and rental truck financing arrangements with the remainder paid in cash.

See Note 15 of the Notes to Consolidated Financial Statements for a detailed discussion of the allocation of the purchase price of these acquisitions.

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).
 
 
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Our dealerships compete with dealerships representing other manufacturers including commercial vehicles manufactured by Mack, Freightliner, Kenworth, Volvo, and Western Star.  We believe that our dealerships are able to compete with manufacturer-owned dealers, independent dealers, independent service centers, parts wholesalers, commercial vehicle wholesalers, rental service companies and industrial auctioneers in distributing our products and providing service because of the following: the overall quality and reputation of the products we sell; the “Rush” brand name recognition and reputation for quality service; and our ability to provide comprehensive parts and service support, as well 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- and medium-duty trucks. Our Peterbilt areas of responsibility currently encompass areas in the states of Alabama, Arizona, California, Colorado, Florida, New Mexico, North Carolina, Oklahoma, Tennessee and Texas. These dealership agreements currently have terms expiring between March 2013 and August 2015 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, W.M. “Rusty” Rush, other members of the Rush family and certain executives of the Company decreases below 22%.  Sales of new Peterbilt commercial vehicles accounted for approximately 47.4% of our total revenues for 2012.
 
Other Commercial Vehicle Suppliers.  In addition to our dealership agreements with Peterbilt, various Rush Truck Centers have entered into dealership agreements with other commercial vehicle manufacturers including Autocar, Blue Bird, Ford, Hino, IC, International, Isuzu, Micro Bird and Mitsubishi, which currently have terms expiring between March 2013 and December 2017.  These dealership agreements impose operating requirements upon us and require consent from the affected supplier for sale or transfer of such dealership agreement.  Sales of non-Peterbilt commercial vehicles accounted for approximately 15.2% of our total revenues for 2012.

Any termination or non-renewal of these dealership agreements must follow certain guidelines established by both state and federal legislation designed to protect motor vehicle 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 motor vehicle 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.

Floor Plan Financing
 
Commercial Vehicles.  During 2012, we financed substantially all new commercial vehicle inventory and the loan value of our used commercial vehicle inventory under a credit agreement with General Electric Capital Corporation (“GE Capital”).  Interest under the credit agreement is LIBOR plus 2.23% on inventory loans up to $500.0 million and LIBOR plus 2.95% on inventory loans exceeding $500.0 million and is payable monthly.  The credit agreement allows the Company to prepay inventory loans, provided that the prepayment does not exceed the sum of 38% of the aggregate inventory loans made up to $500.0 million plus 100% of the inventory loans above $500.0 million.  GE Capital may terminate this credit agreement without cause upon 120 days notice.  As of December 31, 2012, we had approximately $500.0 million outstanding under the credit agreement.
 
In June 2012, the Company entered into a wholesale financing agreement with Ford Motor Credit Company that provides for the financing of, and is collateralized by, the Company’s Ford new vehicle inventory.  This wholesale financing agreement bears interest at a rate of Prime plus 150 basis points minus certain incentives and rebates; however, the prime rate is defined to be a minimum of 3.75%.  As of December 31, 2012, the interest rate on the wholesale financing agreement was 5.25% before considering the applicable incentives. As of December 31, 2012, the Company had an outstanding balance of $34.5 million under the Ford Motor Credit Company wholesale financing agreement.

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.  The Company provides a warranty on the Company’s branded parts and related service.  The Company also provides an extended warranty beyond the manufacturer’s warranty on new school buses sold in the State of Texas, as required by state law.
 
 
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We generally sell used commercial vehicles 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 commercial vehicles.

Trademarks

The trademarks and trade names of the manufacturers we represent, 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 widely recognized 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,” “Associated Truck Insurance Services,” “Chrome Country” and “Rig Tough.”
 
Employees

On December 31, 2012, the Company had 4,372 employees. The Company has no contracts or collective bargaining agreements with labor unions and has never experienced work stoppages.  The Company considers its relations with its employees to be good.

Seasonality

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

Backlog

On December 31, 2012, the Company’s backlog of commercial vehicle orders was approximately $719.2 million as compared to a backlog of commercial vehicle orders of approximately $678.7 million on December 31, 2011. The Company includes only confirmed orders in its backlog.  The delivery time for a custom-ordered commercial vehicle varies depending on the commercial vehicle specifications and demand for the particular model ordered, however, the Company expects to fill all of its backlog orders during 2013.  The Company sells the majority of its new commercial vehicles 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, 2012.

Environmental Standards and Other Governmental Regulations

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

Our operations involving the handling and disposal of hazardous and nonhazardous materials are subject to the requirements of the federal Resource Conservation and Recovery Act, or RCRA, and comparable state statutes.  Pursuant to these laws, federal and state environmental agencies have established approved methods for handling, storage, treatment, transportation and disposal of regulated substances and wastes with which the Company must comply.  Our business also involves the operation and use of above ground and underground storage tanks.  These storage tanks are subject to periodic testing, containment, upgrading and removal under RCRA and comparable state statutes.  Furthermore, investigation or remediation may be necessary in the event of leaks or other discharges from current or former underground or aboveground storage tanks.
 
 
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The Company may also have liability in connection with materials that were sent to third-party recycling, treatment, or disposal facilities under the federal Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, and comparable state statutes.  These statutes impose liability for investigation and remediation of contamination without regard to fault or the legality of the conduct that contributed to the contamination.  Responsible parties under these statutes may include the owner or operator of the site where contamination occurred and companies that disposed or arranged for the disposal of the hazardous substances released at these sites.  These responsible parties also may be liable for damages to natural resources.  In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances or other pollutants into the environment.

The federal Clean Water Act and comparable state statutes prohibit discharges of pollutants into regulated waters without the necessary permits, require containment of potential discharges of oil or hazardous substances, and require preparation of spill contingency plans.  Water quality protection programs govern certain discharges from some of our operations.  Similarly, the federal Clean Air Act and comparable state statutes regulate emissions of various air pollutants through air emissions permitting programs and the imposition of other requirements. In addition, the U.S. Environmental Protection Agency, or EPA, has developed, and continues to develop, stringent regulations governing emissions of toxic air pollutants from specified sources.

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

In 2010, the EPA and the U.S. Department of Transportation (DOT) announced the first national standards to reduce greenhouse gas (GHG) emissions and improve fuel efficiency of heavy-duty trucks and buses beginning in model year 2014.  The final rules, which were issued on September 15, 2011, begin to apply in 2014 and are fully implemented in model year 2017.  It is not possible at this time to accurately predict how the foregoing proposed standards, future legislation or other new regulations that may be adopted to address greenhouse gas emissions will impact our business.  Any regulations will likely result in increased compliance costs, additional operating restrictions or changes in demand for our products and services, which could have a material adverse effect on our business, financial condition and results of operation.

 
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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 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.  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 generates the majority of our revenues.

At certain Rush Truck Centers, we operate as a dealer of Peterbilt trucks and parts pursuant to dealership agreements with Peterbilt, a division of PACCAR.  We have no control over the management or operation of Peterbilt or PACCAR.  During 2012, the majority of our revenues resulted from sales of trucks purchased from Peterbilt and parts purchased from PACCAR. Due to our dependence on PACCAR and Peterbilt, we believe that the long-term success of our Rush Truck Centers depends, in large part, on the following:

 
·
our ability to maintain our dealership agreements with Peterbilt;

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

 
·
the overall success of PACCAR and Peterbilt;

 
·
PACCAR’s continuation of its Peterbilt division;

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

 
·
Peterbilt’s ability to offer vehicles that meet federal and state emissions requirements.
 
 
A negative change in any of the preceding could have a material adverse affect on our operations, revenues and profitability.

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

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, Barbara Rush, Robin M. Rush, David C. Orf, James Thor, Martin A. Naegelin, Scott Anderson, Derrek Weaver, Steven Keller, Corey Lowe and Rich Ryan (collectively, the “Dealer Principals”) decreases below 22% (such persons controlled 28.3% of the aggregate voting power with respect to the election of directors as of December 31, 2012); or (ii) any person or entity other than the Dealer Principals and their respective associates or any person or entity who has been approved in writing by PACCAR, owns common stock with a greater percentage of the voting power with respect to the election of our directors than the Dealer Principals and their respective associates, in the aggregate, or any person other than W. Marvin Rush, W. M. “Rusty” Rush, Robin M. Rush or any person who has been approved in writing by PACCAR 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 or W.M. “Rusty” Rush were to sell their Class B common stock or bequest their Class B common stock to nonfamily members or if their estates are required to liquidate their 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.  If our dealership agreements with Peterbilt are terminated, we will lose the right to purchase Peterbilt products, which would have a material adverse effect on our operations, revenues and profitability.
 
 
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If state dealer laws are repealed or weakened, our dealerships will be more susceptible to termination, nonrenewal or renegotiation of their dealership agreements.

We depend on our vehicle dealership agreements for a substantial portion of our revenues and profitability. 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 motor vehicle dealer laws. If motor vehicle dealer laws are repealed in the states in which we operate dealerships, our manufacturers may be able to terminate our vehicle 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 vehicle dealership agreements. Termination or non-renewal of our vehicle dealership agreements could have a material adverse effect on our operations, revenues and profitability.

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

Our business requires inventories held for sale to be maintained at dealer locations in order to facilitate immediate sales to customers on demand. We generally purchase inventories with the assistance of floor plan financing agreements.  Our primary floor plan financing agreement may be terminated without cause upon 120 days notice.  In the event that our floor plan financing becomes insufficient to satisfy our future requirements or our floor plan providers are unable to continue to extend credit under our floor plan agreements, 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.
 
A significant percentage of our revenues come from customers in the oil and gas exploration and production industry, a historically cyclical industry.

Several of our large customers provide oil and gas production services.  The oil and gas exploration and production industry is a historically cyclical industry characterized by significant changes in the levels of exploration and development activities. Oil and gas prices, and market expectations of potential changes in those prices, significantly affect the levels of those activities. Any reduction in the overall level of exploration and development activities, whether resulting from changes in oil and gas prices or otherwise, could materially adversely affect our business, financial condition and results of operations.

Impairment in the carrying value of goodwill and other indefinite-lived intangible assets could negatively affect our operating results.
 
We have a substantial amount of goodwill on our balance sheet as a result of acquisitions we have completed.  Approximately 98% of this goodwill is concentrated in our Truck Segment. The carrying value of goodwill represents the fair value of an acquired business in excess of identifiable assets and liabilities as of the acquisition date.  Goodwill is not amortized, but instead is evaluated for impairment at least annually, or more frequently if potential interim indicators exist that could result in impairment.  In testing for impairment, if the carrying value of a reporting unit exceeds its current fair value as determined based on the discounted future cash flows of the reporting unit, the goodwill is considered impaired and is reduced to fair value via a non-cash charge to earnings.  Events and conditions that could result in impairment include a prolonged weak economic recovery, adverse changes in the regulatory environment, any matters that impact manufacturers’ ability to provide trucks to us, issues with our franchise rights, or other factors leading to reductions in expected long-term sales or profitability.  Determination of the fair value of a reporting unit includes developing estimates that are highly subjective and incorporate calculations that are sensitive to minor changes in underlying assumptions.  Management’s assumptions are subject to change as more information becomes available.  Changes in these assumptions could result in an impairment charge in the future, which could have a significant adverse impact on our reported earnings.   See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates — Goodwill” for more information regarding the potential impact of changes in assumptions.
 
 
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Changes in interest rates could have a material adverse effect on our profitability.
 
Our primary floor plan financing agreement and some of our other debt are subject to variable interest rates. Therefore, our interest expense would rise with any increase in interest rates. A rise in interest rates may also have the effect of depressing demand in the interest rate sensitive aspects of our business, particularly new and used commercial vehicle sales, because many of our customers finance these large purchases. As a result, a rise in interest rates may have the effect of simultaneously increasing our costs and reducing our revenues, which could materially affect our business, financial condition and results of operations. See “Quantitative and Qualitative Disclosures about Market Risk” for a discussion regarding our interest rate sensitivity.

Our growth is subject to a number of economic risks.

New and used commercial vehicle retail sales tend to experience periods of decline characterized by oversupply and weak demand. The commercial vehicle retail industries may experience sustained periods of decline in commercial vehicle sales in the future.  Any decline or change of this type could materially affect our business, financial condition and results of operations.

Adverse regional economic and competitive conditions in the geographic markets in which we operate could materially adversely affect our business, financial condition and results of operations. Our new commercial vehicle sales volume therefore may differ from industry sales fluctuations.

Economic conditions and the other factors described above also may materially adversely impact our sales of finance and insurance products, and parts and repair services.

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.  Additionally, our business is dependent upon our ability to continue to attract and retain qualified personnel, such as executive officers, managers and dealership personnel.  The loss of the services of one or more members of our senior management team 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 dealership 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.

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

We depend on 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 have a material adverse effect on our profitability.

We are dependent on the ongoing success of the manufacturers we represent and adverse conditions affecting the manufacturers we represent may negatively impact our revenues and profitability.

The success of our dealerships is dependent on the manufacturers represented at such dealerships in several ways.  Our ability to sell new vehicles and replacement parts is dependent on the ability of the manufacturers we represent to produce and deliver new vehicles and replacement parts to our dealerships. Additionally, our dealerships perform warranty work for vehicles under manufacturer product warranties, which are billed to the appropriate vehicle manufacturer or component supplier as opposed to invoicing the store customer. We generally have significant receivables from manufacturers for warranty and service work performed for customers. In addition, we rely on manufacturers to varying extents for product training, marketing materials, and other items for our stores. Our business, results of operations, and financial condition could be materially adversely affected as a result of any event that has a material adverse effect on the manufacturers we represent.
 
 
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The manufacturers we represent may be adversely impacted by economic downturns, significant declines in the sales of their new vehicles, labor strikes or similar disruptions (including within their major suppliers), rising raw materials costs, rising employee benefit costs, adverse publicity that may reduce consumer demand for their products (including due to bankruptcy), product defects, vehicle recall campaigns, litigation, poor product mix or unappealing vehicle design, governmental laws and regulations, or other adverse events.  Our results of operations, financial condition or cash flows could be adversely affected if one or more of the manufacturers we represent are impacted by any of the foregoing adverse events.
 
Actions taken in response to continued operational losses by manufacturers we represent, including bankruptcy or reorganizations, could have a material adverse effect on our sales volumes and profitability. In addition, such actions could lead to the impairment of one or more of our franchise rights, inventories, fixed assets and other related assets, which in turn could have a material adverse effect on our financial condition and results of operations. For example, during the second quarter of 2009, General Motors made the decision to terminate its medium-duty GMC truck production and wind-down the Company’s medium-duty GMC truck franchises, which forced the Company to take a significant pre-tax asset impairment charge in the second quarter of 2009.  Actions taken in response to continued operational losses by manufacturers we represent, including bankruptcy or reorganizations, could also eliminate or reduce such manufacturers’ indemnification obligations to our dealerships, which could increase our risk in products liability actions.

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

Our dealership agreements generally do not contractually provide us with exclusive dealerships in any territory.  The manufacturers we represent could elect to create additional dealers in our market areas in the future, subject to restrictions imposed by state laws. While dealership agreements typically 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 dealers engage in similar activities within our territories.

Our dealership agreements with Peterbilt, International, Autocar, Mitsubishi, Hino, Ford, Isuzu, Elkhart, Blue Bird and IC Bus have current terms expiring between March 2013 and May 2018.  Upon expiration of each agreement, we must 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.

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

As of December 31, 2012, our backlog of new commercial vehicle orders was approximately $719.2 million. Our backlog is determined quarterly by multiplying the number of new commercial vehicles for each particular type of commercial vehicle ordered by a customer at our Rush Truck Centers by the recent average selling price for that type of commercial vehicle.  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.

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 adversely affected.

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, petroleum and other materials; and the investigation and remediation of contamination.  As with commercial vehicle dealerships generally, and service, parts and body shop operations in particular, our business involves the generation, use, storage, handling and contracting for recycling or disposal of hazardous materials or wastes and other environmentally sensitive materials.  Any non-compliance with these laws and regulations could result in significant fines, penalties and remediation costs which could adversely affect our results of operations, financial condition or cash flows.
 
 
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We may also have liability in connection with materials that were sent to third-party recycling, treatment, or disposal facilities under federal and state statutes.  In that case, laws and regulations may make us responsible for liability relating to the investigation and remediation of contamination without regard to fault or the legality of the conduct that contributed to the contamination. In connection with our 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 dispositions of businesses, or dispositions previously made by companies we acquire, we may retain exposure for environmental costs and liabilities, some of which may be material.

Further, environmental laws and regulations are complex and subject to change. 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 which could materially adversely affect our results of operations, financial condition or cash flows.

Natural disasters and adverse weather events can disrupt our business.

Our dealerships are concentrated in states and regions in the United States in which actual or threatened natural disasters and severe weather events (such as hurricanes, earthquakes, fires, floods and hail storms) may disrupt our operations, which may adversely impact our business, results of operations, financial condition and cash flows. In addition to business interruption, our business is subject to substantial risk of property loss due to the significant concentration of property at dealership locations. Although we have, subject to certain limitations and exclusions, substantial insurance, we may be exposed to uninsured or underinsured losses that could have a material adverse effect on our business, financial condition, results of operations or cash flows.

Climate change legislation or regulations restricting emissions of “greenhouse gases” could result in increased costs and reduced demand for our products and services.

The EPA and the DOT’s National Highway Traffic Safety Administration (“NHTSA”) recently announced proposed rules to reduce greenhouse gas emissions and improve fuel efficiency of medium and heavy-duty vehicles.  The EPA and NHTSA are attempting to create a “heavy-duty national program,” designed to reduce oil consumption and address global climate change by each proposing complementary standards to reduce fuel use and greenhouse gas emissions from on-highway transportation sources.  The emissions and fuel consumption standards in the proposed rules would phase in with increasing stringency in each model year from 2014 to 2017.  The proposed rules are likely to increase the production costs of the manufacturers we represent.  Our manufacturers are likely to pass such costs on to us, which could increase the cost of the new vehicles we sell and, accordingly, reduce demand for such products.  Increased costs and reduced demand could materially adversely affect our ability to sell new vehicles, which would materially adversely affect our business, results of operations, and financial condition.

Our investments in auction rate securities may be further impaired.
 
Auction rate securities (“ARS”) are long-term debt instruments with interest rates that reset through periodic short-term auctions.  Holders of ARS can either sell into the auction, or bid, based on a desired interest rate, or hold and accept the reset rate.  If there are insufficient buyers, then the auction fails and holders are unable to liquidate their investment through the auction.  A failed auction is not a default of the debt instrument, but does set a new interest rate in accordance with the original terms of the debt instrument.  The result of a failed auction is that the ARS continues to pay interest in accordance with its terms; however, liquidity for holders is limited until there is a successful auction or until such time as another market for ARS develops.  ARS are generally callable at any time by the issuer.  Auctions continue to be held as scheduled until the ARS matures or until it is called.
 
 
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As a result of the conditions in the global credit markets, we have been unable to liquidate our holdings of certain ARS because the auctions for the ARS we hold have failed.  As of December 31, 2012, the Company held ARS with underlying tax-exempt municipal bonds that mature in 2030 that have a fair value of $6.6 million and a cost basis of $7.6 million.  This decrease in fair value is considered temporary and the impairment charge is recorded as other comprehensive income, a component of shareholder equity.  We continue to earn interest on these investments at the contractual rate.  In the event we need to access these funds, we will not be able to do so until a future auction is successful, the issuer redeems the securities, a buyer is found outside of the auction process or the securities mature.  If these ARS are unable to successfully clear at future auctions or issuers do not redeem the securities, we may be required to further adjust the carrying value of the securities and record additional impairment charges.  If we determine that the fair value of these ARS is further impaired, we will record a temporary impairment within other comprehensive income, a component of stockholders’ equity.  If it is determined that the fair value of these securities is other than temporarily impaired, we would recognize the credit loss portion of the other than temporary impairment in earnings, which could adversely impact our results of operations and financial condition.  Any noncredit loss would be recognized in other comprehensive income.  For further discussion of the risks related to our auction rate securities, see Note 9 – Financial Instruments and Fair Value of the Notes to Consolidated Financial Statements and Item 7A – Quantitative and Qualitative Disclosures about Market Risk.

Risks Related to Our Common Stock

We are controlled by two shareholders and their affiliates.

Collectively, W. Marvin Rush and W. M. “Rusty” Rush and their affiliates own approximately 0.33% of our issued and outstanding shares of Class A common stock and 31.9% of our issued and outstanding Class B common stock.  W. Marvin Rush and W. M. “Rusty” Rush collectively control more than 28.3% of the aggregate voting power of our outstanding shares and voting power which is superior to that of any other person or group. The interests of W. Marvin Rush and W.M. “Rusty” Rush may not be consistent with the interests of all shareholders.  As a result of such ownership, W. Marvin Rush and W. M. “Rusty” Rush have the power to effectively control the Company, including the election of directors, the determination of matters requiring shareholder approval and other matters pertaining to corporate governance.

Our dealership agreements could discourage another company from acquiring us.

Our dealership agreements with Peterbilt impose ownership requirements on officers of the Company.  All of our dealer agreements include restrictions on the sale or transfer of the underlying franchises. These ownership requirements and restrictions may prevent or deter prospective acquirers from acquiring control of us and, therefore, may adversely impact the value of our common stock.

Additionally, W. Marvin Rush and W. M. “Rusty” Rush have granted Peterbilt a right of first refusal to purchase their respective shares of common stock in the event that they 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 another Dealer Principal.  However, in the case of W. Marvin Rush, certain shares of his Class B common stock of the Company are exempt from his rights of first refusal agreement.  These rights of first refusal, the number of shares owned by W. Marvin Rush and W.M. “Rusty” Rush and their affiliates, the requirement in our dealership agreements that the Dealer Principals retain a controlling interest in us, the restrictions on the sale or transfer of our franchises contained in our dealer agreements 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.

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. These restrictions may also inhibit our ability to raise required capital or to issue our stock as consideration for future acquisitions.

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 any 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 Class B common stock has a low average daily trading volume.  As a result, sales of our Class B common stock could cause the market price of our Class B common stock to drop, and it may be difficult for a stockholder to liquidate its position in our Class B common stock quickly without adversely affecting the market price of such shares.
 
 
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The market price of our Class B common stock has historically been lower than the market price of our Class A common stock.  The volume of trading in our Class B common stock varies greatly and may often be light.  As of December 31, 2012, the three-month average daily trading volume of our Class B common stock was approximately 4,000 shares, with several days having a trading volume below 500 shares.  If any large shareholder were to begin selling shares in the market,  the added available supply of shares could cause the market price of our Class B common stock to drop.  In addition, the lack of a robust resale market may require a shareholder to sell a large number of shares of our Class B common stock in increments over time to mitigate any adverse impact of the sales on the market price of our Class B common stock.

Item 1B.  Unresolved Staff Comments

None

Item 2.  Properties

The Company’s corporate headquarters are located in New Braunfels, Texas.  As of December 2012, the Company also owns or leases numerous facilities used in our operations in the following states:  Alabama, Arizona, California, Colorado, Florida, Georgia, Idaho, New Mexico, North Carolina, Ohio, Oklahoma, Oregon, Tennessee, Texas and Utah.  A Rush Truck Center may be comprised of one or more locations, generally in close proximity, in the same metropolitan area.  These facilities consist primarily of office space, display lots, service facilities and parking lots.

The Company’s truck leasing operations lease additional space in Alabama, Arizona, California and Florida.

The Company’s insurance agency leases space in California, Florida, Oklahoma and Texas.

The Company leases a hangar in New Braunfels, Texas for the corporate aircraft.  The Company also owns and operates a guest ranch of approximately 9,500 acres near 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.  Mine Safety Disclosures

Not applicable.

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 Global Select MarketSM under the symbols RUSHA and RUSHB.
 
 
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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 Global Select MarketSM.

   
2012
   
2011
 
   
High
   
Low
   
 
High
   
Low
 
Class A Common Stock
                       
                         
First Quarter
  $ 24.66     $ 20.47     $ 21.25     $ 17.82  
Second Quarter
    21.70       15.01       21.99       17.43  
Third Quarter
    19.58       14.05       21.77       14.14  
Fourth Quarter
    20.75       15.98       21.47       12.76  
                                 
Class B Common Stock
                               
                                 
First Quarter
  $ 21.01     $ 16.48     $ 18.33     $ 15.60  
Second Quarter
    17.68       12.37       19.05       14.75  
Third Quarter
    17.00       11.58       17.89       11.67  
Fourth Quarter
    17.61       14.81       17.41       10.58  

 
As of March 1, 2013, there were approximately 39 record holders of the Class A common stock and approximately 50 record holders of the Class B common stock.

The Company did not pay dividends during the fiscal year ended December 31, 2012, or the fiscal year ended December 31, 2011.  The Board of Directors intends to retain any earnings of the Company to support operations and to finance expansion. 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.

The Company did not repurchase any shares of its Class A Common Stock or Class B Common Stock during the fourth quarter of 2012.

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.


 
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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 15 to the Company’s Consolidated Financial Statements for a discussion of such acquisitions.  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,
 
   
2012
   
2011
   
2010
   
2009
   
2008
 
   
(in thousands, except per share amounts)
 
SUMMARY OF INCOME STATEMENT DATA
     
Revenues
                             
New and used commercial vehicle sales
  $ 2,149,335     $ 1,801,964     $ 926,584     $ 738,705     $ 1,041,189  
Parts and service sales
    817,280       675,277       489,259       395,133       457,669  
Lease and rental
    100,247       83,426       67,423       53,710       54,813  
Finance and insurance
    13,638       10,867       7,922       7,468       11,801  
Other
    10,067       9,077       6,739       5,437       5,721  
Total revenues
    3,090,567       2,580,611       1,497,927       1,200,453       1,571,193  
Cost of products sold
    2,589,800       2,157,334       1,213,037       984,812       1,291,001  
Gross profit
    500,767       423,277       284,890       215,641       280,192  
Selling, general and administrative
    361,727       306,273       227,467       192,296       218,775  
Depreciation and amortization
    25,016       20,084       15,720       15,890       15,273  
Gain (loss) on sale of assets
    176       418       (36 )     162       128  
Operating income
    114,200       97,338       41,667       7,617       46,272  
Interest expense, net
    13,017       7,161       5,363       5,695       7,230  
Income from continuing operations before income taxes
    101,183       90,177       36,304       1,922       39,042  
Provision (benefit) for income taxes
    38,728       34,964       11,737       (3,173 )     13,864  
Income from continuing operations
    62,455       55,213       24,567       5,095       25,178  
Income from discontinued operations, net of taxes
                6,715       789       3,687  
Net income
  $ 62,455     $ 55,213     $ 31,282     $ 5,884     $ 28,865  
                                         
Earnings per common share - Basic:
                                       
Income from continuing operations
  $ 1.62     $ 1.46     $ 0.66     $ 0.14     $ 0.66  
Net income
  $ 1.62     $ 1.46     $ 0.84     $ 0.16     $ 0.76  
                                         
Earnings per common share - Diluted:
                                       
Income from continuing operations
  $ 1.57     $ 1.42     $ 0.64     $ 0.14     $ 0.65  
Net income
  $ 1.57     $ 1.42     $ 0.82     $ 0.16     $ 0.75  
                                         
Weighted average shares outstanding:
                                       
Basic
    38,643       37,861       37,307       37,066       38,089  
Diluted
    39,688       39,014       38,218       37,597       38,587  


 
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Year Ended December 31,
 
   
2012
   
2011
   
2010
   
2009
   
2008
 
OPERATING DATA
                             
Unit vehicle sales −
                             
New vehicles
    18,427       15,540       7,680       6,615       9,289  
Used vehicles
    4,744       4,649       3,461       2,875       3,234  
Total unit vehicles sales
    23,171       20,189       11,141       9,490       12,523  
Truck lease and rental units (including units under contract maintenance)
    5,359       4,000       3,809       3,033       2,570  

 
   
December 31,
 
   
2012
   
2011
   
2010
   
2009
   
2008
 
   
(in thousands)
 
BALANCE SHEET DATA
                             
Working capital
  $ 217,613     $ 189,214     $ 143,778     $ 164,165     $ 177,117  
Inventories
    690,953       649,626       321,933       252,219       343,032  
Assets held for sale
                      22,719       24,479  
Total assets
    1,881,566       1,717,701       1,167,933       977,297       1,056,790  
                                         
Floor plan notes payable
    534,520       520,693       237,810       189,256       282,702  
Long-term debt, including current portion
    399,664       328,287       252,129       209,502       209,677  
Capital lease obligations, including current portion
    49,973       45,554       42,202       34,444       14,820  
Total shareholders’ equity
    607,946       531,234       464,919       426,225       416,041  

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

General

The Company’s record results in 2012 validate our sustained efforts to build an organization with a diversified earnings base.  The Company continues to work to position itself as a service solutions provider to the commercial vehicle industry by implementing our growth strategy to expand our portfolio of aftermarket services, broadening the diversity of our commercial vehicle product offerings and extending our network of service points across the United States.  The Company’s commitment to provide innovative solutions to service its customers’ business needs continues to drive its strong parts, service and body shop revenues.  The service needs of an aged fleet also contributed to the growth in our aftermarket revenues in 2012.

The Company’s aftermarket capabilities include a wide range of services and products such as a fleet of mobile service units, mobile technicians who staff customers’ facilities, a proprietary line of commercial vehicle parts and accessories, new diagnostic and analysis capabilities, factory certified service for alternative fuel vehicles and assembly service for specialized bodies and equipment.  As a result of the Company’s efforts to expand aftermarket capabilities, aftermarket operations now account for more than 60% of the Company’s total gross profits.

The Company continues to offer a commercial vehicle product line to include medium-duty and light-duty trucks, buses and vocational specialty vehicles such as refuse trucks, tow trucks and truck-mounted cranes.  The Company has developed relationships with a more diverse customer base across a wide range of market segments, resulting in our ability to offer a complete range of solutions from sales of new vehicles to aftermarket support for vehicles in operation.

The Company continues to invest in its infrastructure to better serve its customers operating natural gas vehicles in anticipation of continued adoption of this technology.  Substantial investments have been made at six Rush Truck Center locations to enable technicians to perform certified CNG and LNG service, with plans in place to bring additional facilities online as needed in key markets.   Approximately 85 technicians have been factory-certified to service natural gas fuel systems.  The Company believes that natural gas-powered vehicles will grow in popularity and could represent up to 10% of the Class 8 new truck sales market by 2017.

The Company has a track record of growth through acquisitions and additions of dealerships within its current areas of responsibility.  It now operates a contiguous network of 78 Rush Truck Centers across the United States.  The Company believes that this geographic diversity will more effectively allow the Company to withstand regional economic downturns and expand service capabilities that better match the footprint of its customer base.
 
 
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On December 31, 2012, the Company acquired certain assets of MVI Group, which operated commercial truck and bus dealerships in Ohio under the names of Miami Valley International, Center City International, CCI North Coast and Buckeye Truck Centers.  The acquisition included International, IC Bus, and Isuzu franchise locations in Akron, Cincinnati, Cleveland, Columbus, Dayton, Findlay and Lima, Ohio.  These dealerships now operate as Rush Truck Centers.  Rush Truck Leasing now operates Idealease truck rental and leasing franchises in Cincinnati, Cleveland, Columbus, Dayton and Lima, Ohio.  The transaction, including real estate, was valued at approximately $104.5 million.  The purchase price for the assets of the business was financed under the Company’s floor plan and lease and rental truck financing arrangements with the remainder paid in cash.  The Company now operates 24 full service Navistar locations and one collision center in 6 states.

On February 1, 2013, the Company’s Board of Directors approved a stock repurchase program authorizing the Company to repurchase, from time to time, up to an aggregate of $40.0 million of its shares of Class A common stock and/or Class B common stock.  Repurchases will be made at times and in amounts as the Company deems appropriate and will be made through open market transactions, privately negotiated transactions and other lawful means. The manner, timing and amount of any repurchases will be determined by the Company based on an evaluation of market conditions, stock price and other factors.  The stock repurchase program expires on February 12, 2014 and may be suspended or discontinued at any time.  While the stock repurchase program does not obligate the Company to acquire any particular amount or class of common stock, the Company anticipates that it will be repurchasing primarily shares of its Class B common stock.

Key Performance Indicator

Absorption Ratio. Management uses several performance metrics to evaluate the performance of its commercial vehicle dealerships, and considers Rush Truck Centers’ “absorption ratio” to be of critical importance.  Absorption ratio is calculated by dividing the gross profit from the parts, service and body shop departments by the overhead expenses of all of a dealership’s departments, except for the selling expenses of the new and used commercial vehicle departments and carrying costs of new and used commercial vehicle inventory.  When 100% absorption is achieved, all of the gross profit from the sale of a commercial vehicle, after sales commissions and inventory carrying costs, directly impacts operating profit.  In 1999, the Company’s commercial vehicle dealerships’ absorption ratio was approximately 80%.  The Company has made a concerted effort to increase its absorption ratio since 1999.  The Company’s commercial vehicle dealerships achieved a 115.9% absorption ratio for the year in 2012 and 113.9% absorption ratio for the year in 2011.

Critical Accounting Policies and Estimates

The Company’s discussion and analysis of its financial condition and results of operations are based on the Company’s consolidated financial statements, which have been prepared in accordance with 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 the Notes to the 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 of new and used commercial vehicles inventory and by the first-in, first-out method for tires, parts and accessories.  As the market value of our inventory typically declines over time, reserves are established based on historical loss experience and market trends.  These reserves are charged to cost of sales and reduce the carrying value of our inventory on hand.  An allowance is provided when it is anticipated that cost will exceed net realizable value plus a reasonable profit margin.
 
 
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Goodwill

Goodwill is not amortized but instead is tested at least annually by reporting unit for impairment, or more frequently when events or changes in circumstances indicate that the asset might be impaired.

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

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

The Company does not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions it used to test for impairment losses on goodwill.  However, if actual results are not consistent with our estimates or assumptions, or certain events occur that might adversely affect the reported value of goodwill in the future, the Company may be exposed to an impairment charge that could be material.  Such events may include, but are not limited to, strategic decisions made in response to economic and competitive conditions or the impact of the current economic environment.

Goodwill was tested for impairment during the fourth quarter of 2012 and no impairment write down was required.  The fair value of our reporting unit exceeded the carrying value of its net assets.  As a result, we were not required to conduct the second step of the impairment test.  The Company does not believe its reporting unit is at risk of failing step one of the impairment test.

Insurance Accruals

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

Changes in the frequency, severity, and development of existing claims could influence the Company’s reserve for claims and financial position, results of operations and cash flows.  The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions it used to calculate its self-insured liabilities.  However, if actual results are not consistent with our estimates or assumptions, the Company may be exposed to losses or gains that could be material.  A 10% change in the Company’s estimate would have changed its reserve for these losses at December 31, 2012 by $0.6 million.
 
 
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Accounting for Income Taxes

Management judgment is required to determine the provisions for income taxes and to determine whether deferred tax assets will be realized in full or in part.  Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  When it is more likely than not that all or some portion of specific deferred income tax assets will not be realized, a valuation allowance must be established for the amount of deferred income tax assets that are determined not to be realizable.  Accordingly, the facts and financial circumstances impacting state deferred income tax assets are reviewed quarterly and management’s judgment is applied to determine the amount of valuation allowance required, if any, in any given period.
 
The Company’s income tax returns are periodically audited by tax authorities.  These audits include questions regarding our tax filing positions, including the timing and amount of deductions.  In evaluating the exposures associated with the Company’s various tax filing positions, the Company adjusts its liability for unrecognized tax benefits and income tax provision in the period in which an uncertain tax position is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the tax position, or when more information becomes available.

The Company’s liability for unrecognized tax benefits contains uncertainties because management is required to make assumptions and to apply judgment to estimate the exposures associated with its various filing positions.  The Company’s effective income tax rate is also affected by changes in tax law, the level of earnings and the results of tax audits.  Although the Company believes that the judgments and estimates are reasonable, actual results could differ, and the Company may be exposed to losses or gains that could be material.  An unfavorable tax settlement generally would require use of the Company’s cash and result in an increase in its effective income tax rate in the period of resolution.  A favorable tax settlement would be recognized as a reduction in the Company’s effective income tax rate in the period of resolution.  The Company’s income tax expense includes the impact of reserve provisions and changes to reserves that it considers appropriate, as well as related interest.

Derivative Instruments and Hedging Activities

The Company utilizes derivative financial instruments to manage its interest rate risk. The types of risks hedged are those relating to the variability of cash flows and changes in the fair value of the Company’s financial instruments caused by movements in interest rates. The Company assesses hedge effectiveness at the inception and during the term of each hedge. Derivatives are reported at fair value on the accompanying Consolidated Balance Sheets.
 
The effective portion of the gain or loss on the Company’s cash flow hedges are reported as a component of accumulated other comprehensive loss.  Hedge effectiveness will be assessed quarterly by comparing the changes in cumulative gain or loss from the interest rate swap with the cumulative changes in the present value of the expected future cash flows of the interest rate swap that are attributable to changes in the LIBOR rate. If the interest rate swaps become ineffective, portions of these interest rate swaps would be reported as a component of interest expense in the accompanying Consolidated Statements of Income.

New Accounting Standards
 
In June 2011, the Financial Accounting Standards Board (“FASB”) issued an amendment to the existing guidance on the presentation of comprehensive income.  Under the amended guidance, entities have the option to present the components of net income and other comprehensive income in either a single continuous statement of comprehensive income or in two separate but consecutive statements.  Entities no longer have the option of presenting the components of other comprehensive income within the statement of changes in stockholders’ equity.  This amendment was effective on a retrospective basis for fiscal years, and interim periods within those years, beginning after December 15, 2011, which was the first quarter of 2012 for the Company.  The adoption of this amendment resulted in a change to the Company’s current presentation of comprehensive income, but did not have any impact on the Company’s consolidated financial statements and related disclosures.

The FASB amended existing guidance by requiring that additional information be disclosed about items reclassified ("reclassification adjustments") out of accumulated other comprehensive income. The additional information includes separately stating the total change for each component of other comprehensive and separately disclosing both current-period other comprehensive income and reclassification adjustments. Entities are also required to present, either on the face of the income statement or in the notes to the financial statements, significant amounts reclassified out of accumulated other comprehensive income as separate line items of net income but only if the entire amount reclassified must be reclassified to net income in the same reporting period.  For amounts that are not required to be reclassified in their entirety to net income, an entity must cross-reference to other disclosures that provide additional detail about those amounts. This accounting standard will be effective for interim and annual periods beginning after December 15, 2012.   The Company does not believe the adoption of this update will have a material impact on its financial statements.
 
 
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Results of Operations

The following discussion and analysis includes the Company’s historical results of operations for 2012, 2011 and 2010.  The following table sets forth for the years indicated certain financial data as a percentage of total revenues:

   
Year Ended December 31,
 
   
2012
   
2011
   
2010
 
                   
New and used commercial vehicle sales
    69.6 %     69.8 %     61.9 %
Parts and service sales
    26.5       26.2       32.7  
Lease and rental
    3.2       3.2       4.5  
Finance and insurance
    0.4       0.4       0.5  
Other
    0.3       0.4       0.4  
Total revenues
    100.0       100.0       100.0  
                         
Cost of products sold
    83.8       83.6       81.0  
Gross profit
    16.2       16.4       19.0  
                         
Selling, general and administrative
    11.7       11.9       15.2  
Depreciation and amortization
    0.8       0.7       1.0  
Operating income
    3.7       3.8       2.8  
Interest expense, net
    0.4       0.3       0.4  
Income from continuing operations before income taxes
    3.3       3.5       2.4  
Provision for income taxes
    1.3       1.4       0.8  
Income from continuing operations
    2.0       2.1       1.6  
Income from discontinued operations
    0.0       0.0       0.4  
Net income
    2.0 %     2.1 %     2.0 %

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

                     
% Change
 
   
2012
   
2011
   
2010
   
2012
vs
2011
   
2011
vs
2010
 
Vehicle unit sales:
                             
New heavy-duty vehicles
    9,925       9,052       4,746       9.6 %     90.7 %
New medium-duty vehicles
    7,126       5,469       2,820       30.3 %     93.9 %
New light-duty vehicles
    1,376       1,019       114       35.0 %     793.9 %
Total new vehicle unit sales
    18,427       15,540       7,680       18.6 %     102.3 %
                                         
Used vehicles sales
    4,744       4,649       3,461       2.0 %     34.3 %
                                         
Vehicle revenue:
                                       
New heavy-duty vehicles
  $ 1,410.3     $ 1,186.5     $ 595.4       18.9 %     99.3 %
New medium-duty vehicles
    479.5       380.7       185.9       26.0 %     104.8 %
New light-duty vehicles
    45.4       33.3       4.2       36.3 %     692.9 %
Total new vehicle revenue
  $ 1,935.2     $ 1,600.5     $ 785.5       20.9 %     103.8 %
                                         
Used vehicle revenue
  $ 197.6     $ 193.3     $ 139.0       2.2 %     39.1 %
                                         
Other vehicle revenue:(1)
  $ 16.5     $ 8.2     $ 2.1       101.2 %     290.5 %
                                         
Dealership absorption ratio:
    115.9 %     113.9 %     105.5 %     1.8 %     8.0 %
 
(1) Includes sales of glider kits, truck bodies, trailers and other new equipment.
 
 
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The following table sets forth for the periods indicated the percent of gross profit by revenue source:

   
2012
   
2011
   
2010
 
Gross Profit:
                 
New and used commercial vehicle sales
    28.7 %     29.0 %     25.2 %
Parts and service sales
    63.4       63.0       66.1  
Lease and rental
    3.2       3.3       3.5  
Finance and insurance
    2.7       2.6       2.8  
Other
    2.0       2.1       2.4  
Total gross profit
    100.0 %     100.0 %     100.0 %

Industry

We currently operate in the commercial vehicle market. There has historically been a high correlation between new product sales in the commercial vehicle market and the rate of change in U.S. industrial production and the U.S. gross domestic product.

Heavy-Duty Truck Market

The U.S. retail heavy-duty truck market is affected by a number of factors relating to general economic conditions, including fuel prices, government regulation, interest rate fluctuations, economic recessions, other methods of transportation and customer business cycles. In addition, unit sales of new commercial vehicles have historically been subject to substantial cyclical variation based on general economic conditions.  According to data published by A.C.T. Research, in recent years total U.S. retail sales of new Class 8 trucks have ranged from a low of approximately 97,000 in 2009 to a high of approximately 291,000 in 2006.  Class 8 trucks are defined by the American Automobile Association as trucks with a minimum gross vehicle weight rating above 33,000 pounds.

Typically, Class 8 trucks are assembled by manufacturers utilizing certain components that may be manufactured by other companies, including engines, transmissions, axles, wheels and other components. As commercial vehicles and commercial vehicle components have become increasingly complex, the ability to provide state-of-the-art service for commercial vehicles 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, in the future we believe that more of our customers will lease Class 8 trucks as 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. Differentiation between commercial vehicle dealers has become less dependent on price competition and is increasingly based on a dealer’s ability to offer a wide variety of services to their clients in a timely manner to minimize vehicle downtime. Such services include the following: efficient, conveniently located and easily accessible commercial vehicle service centers with an adequate supply of replacement parts; financing for commercial vehicle 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.

A.C.T. Research currently estimates approximately 198,000 new Class 8 trucks will be sold in the United States in 2013, compared to approximately 198,700 new Class 8 trucks sold in 2012.  A.C.T. Research currently forecasts sales of new Class 8 trucks in the U.S. to be approximately 228,000 in 2014.

Medium-Duty Truck Market

Many of our Rush Truck Centers sell medium-duty commercial vehicles manufactured by Peterbilt, International, Hino, Ford, Mitsubishi Fuso or Isuzu, and all of our Rush Truck Centers provide parts and service for medium-duty commercial vehicles.  Medium-duty commercial vehicles are principally used in short-haul, local markets as delivery vehicles.  Medium-duty commercial vehicles typically operate locally and generally do not leave their service areas overnight.  The Company also sells light-duty vehicles (Class 3 and under) at three of its Ford dealerships.
 
 
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A.C.T. Research currently forecasts sales of new Class 4 through 7 commercial vehicles in the U.S. to be approximately 186,000 in 2013, compared to 164,000 in 2012.  A.C.T. Research currently forecasts sales of new Class 4 through 7 commercial vehicles in the U.S. to be approximately 200,000 in 2014.

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Revenues

Revenues increased $510.0 million, or 19.8%, in 2012, compared to 2011.

Our parts, service and body shop revenues increased $142.0 million, or 21.0%, in 2012, compared to 2011. This increase is the result of increased service needs of aging vehicles, continued service activity related to the energy sector, expanded product and service offerings and acquisitions that occurred in the fourth quarter of 2011.  The Company expects parts, service and body shop sales to continue to remain strong through 2013 and remains focused on expanding aftermarket product and service offerings.

Revenues for the sale of new and used commercial vehicles increased $347.4 million, or 19.3%, in 2012, compared to 2011.  Demand for commercial vehicles increased as general economic conditions in the United States continued to improve and credit was being made available on reasonable terms to a wider range of buyers.

The Company sold 9,925 heavy-duty trucks in 2012, a 9.6% increase compared to 9,052 heavy-duty trucks in 2011.  According to A.C.T. Research, the U.S. Class 8 truck market increased 14.0% in 2012, compared to 2011.  The Company’s share of the U.S. Class 8 truck sales market decreased to approximately 5.0% in 2012, from 5.2% in 2011.  This decrease in market share is primarily the result of a decrease in International’s U.S. Class 8 market share.  Navistar was forced to change its Class 8 engine strategy in 2012, which had a significant negative impact on sales of Class 8 International trucks in the U.S.  International’s U.S. Class 8 market share decreased from 20.7% in 2011 to 17.5% in 2012.  The Company anticipates International’s new Class 8 truck market share to increase by 2014.  The Company expects its market share to range between 5.2% and 5.5% of U.S. Class 8 truck sales in 2013.  This market share percentage would result in the sale of approximately 10,300 to 10,800 of Class 8 trucks in 2013 based on A.C.T. Research’s U.S. retail sales estimate of 198,000 units.
 
The Company sold 7,126 medium-duty commercial vehicles, including 597 buses, in 2012, a 30.3% increase compared to 5,469 medium-duty commercial vehicles, including 1,074 buses, in 2011.  A.C.T. Research estimates that unit sales of Class 4 through 7 commercial vehicles in the U.S. increased approximately 14.0% in 2012, compared to 2011.  In 2012, the Company achieved a 4.3% share of the Class 4 through 7 commercial vehicle sales market in the U.S.  The Company expects its market share to range between 4.1% and 4.6% of U.S. Class 4 through 7 commercial vehicle sales in 2013.  This market share percentage would result in the sale of approximately 7,500 to 8,500 of Class 4 through 7 commercial vehicles in 2012 based on A.C.T. Research’s current U.S. retail sales estimates of 184,000 units.

The Company sold 1,376 light-duty vehicles in 2012, a 35.0% increase compared to 1,019 light-duty vehicles in 2011.  The Company expects to sell approximately 1,500 light-duty vehicles in 2013.
 
The Company sold 4,744 used commercial vehicles in 2012, a 2.0% increase compared to 4,649 used commercial vehicles in 2011.  The Company expects to sell approximately 4,800 to 5,300 used commercial vehicles in 2013.  The volume of used commercial vehicle sales will be largely dependent upon our ability to acquire quality used commercial vehicles and maintain an adequate used commercial vehicle inventory throughout 2013.
 
Truck lease and rental revenues increased $16.8 million, or 20.2%, in 2012, compared to 2011.  The increase in lease and rental revenue is primarily due to the increased number of units put into service in our lease and rental fleet during 2011 and 2012.  The Company expects lease and rental revenue to increase 20% to 25% during 2013, compared to 2012.

Finance and insurance revenues increased $2.8 million, or 25.5%, in 2012, compared to 2011.  The increase in finance and insurance revenue is primarily a result of the increase in finance penetration rates and increased activity in the Company’s insurance business.  The Company expects finance and insurance revenue to fluctuate proportionately with the Company’s new and used commercial vehicle sales in 2013.  Finance and insurance revenues have limited direct costs and, therefore, contribute a disproportionate share of the Company’s operating profits.
 
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Other income increased $1.0 million, or 10.9% in 2012, compared to 2011.  Other income consists primarily of the gain on sale realized on trucks from the lease and rental fleet, document fees related to commercial vehicle sales and mineral royalties.

Gross Profit

Gross profit increased $77.5 million, or 18.3%, in 2012, compared to 2011.  Gross profit as a percentage of sales decreased slightly to 16.2% in 2012, from 16.4% in 2011.  This decrease in gross profit as a percentage of sales is a result of a slight decrease in gross margins from commercial vehicle sales and parts and service revenue.

Gross margins from the Company’s parts, service and body shop operations decreased to 38.8% in 2012, from 39.5% in 2011.   Gross profit for the parts, service and body shop departments increased to $317.4 million in 2012, from $266.7 million in 2011.  Historically, parts operations gross margins range from 27% to 28% and service and body shop operations range from 67% to 68%.  Gross profits from parts sales represented 53% of total gross profit for parts, service and body shop operations in 2012, compared to 52% in 2011. Service and body shop operations represented 47% of total gross profit for parts, service and body shop operations in 2012, compared to 48% in 2011.  The Company expects blended gross margins on parts, service and body shop operations to range 38.0% to 40.0% in 2013.

Gross margins on Class 8 truck sales decreased to 6.9% in 2012, from 7.1% in 2011.  In 2013, the Company expects overall gross margins from Class 8 truck sales of approximately 6.5% to 7.0%.  The Company recorded expense of $3.3 million to increase its new heavy-duty truck valuation allowance in 2012 and $1.6 million in 2011.

Gross margins on medium-duty commercial vehicle sales decreased to 4.6% in 2012, from 4.8% in 2011.  Gross margins on medium-duty commercial vehicles are difficult to forecast accurately because gross margins vary significantly depending upon the mix of fleet and non-fleet purchasers and types of medium-duty commercial vehicles sold. For 2013, the Company expects overall gross margins from medium-duty commercial vehicle sales of approximately 4.5% to 5.0%, but this will largely depend upon general economic conditions and the mix of purchasers and types of vehicles sold.  The Company recorded expense of $3.9 million to increase its new medium-duty commercial vehicle valuation allowance in 2012, compared to $1.9 million in 2011.
 
Gross margins on used commercial vehicle sales decreased to 8.3% in 2012, from 9.4% in 2011.  The decrease in the margin is primarily due to a softening used truck market and the mix of products sold in 2012.  The Company expects margins on used commercial vehicles to range between 8.0% and 10.0% during 2013 depending upon general economic conditions and the availability of quality used vehicles.  The Company recorded expense of $5.7 million to increase its used commercial vehicle valuation allowance in 2012, compared to $2.3 million in 2011.

Gross margins from truck lease and rental sales decreased to 16.0% in 2012, from approximately 16.5% in 2011.  The Company expects gross margins from lease and rental sales of approximately 16.0% to 18.0% during 2013, as it expects to continue to grow its lease and rental fleet.  The Company’s policy is to depreciate its lease and rental fleet using a straight line method over the customer’s contractual lease term.  The lease unit is depreciated to a residual value that approximates fair value at the expiration of the lease term.  This policy results in the Company realizing reasonable gross margins while the unit is in service and a corresponding gain or loss on sale when the unit is sold at the end of the lease term.

Finance and insurance revenues and other income, as described above, have limited direct costs and, therefore, contribute a disproportionate share of gross profit.
 
 
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Selling, General and Administrative Expenses

Selling, General and Administrative (“SG&A”) expenses increased $55.5 million, or 18.1%, in 2012, compared to 2011.  SG&A expenses as a percentage of total revenue decreased to 11.7% in 2012, from 11.9% in 2011.  SG&A expenses as a percentage of total revenue have historically ranged from 10.0% to 15.0%.  In general, when new and used commercial vehicle revenue decreases as a percentage of total revenue, SG&A expenses as a percentage of total revenue will be at, or exceed, the higher end of this range.  For 2013, the Company expects SG&A expenses as a percentage of total revenue to range from 11.0% to 12.0% and the selling portion of SG&A expenses to be approximately 25% to 30% of new and used commercial vehicle gross profit.  In 2013, the Company expects the general and administrative portion of SG&A expenses to increase by approximately 10.0% to 15.0% compared to 2012 due primarily to the full year effect of the acquisition that occurred in 2012.

Depreciation and Amortization Expense

Depreciation and amortization expense increased $4.9 million, or 24.6%, in 2012 compared to 2011.  The Company incurred additional amortization expense related to the SAP software that was placed into service in August 2011.

Interest Expense, Net

Net interest expense increased $5.9 million, or 81.8%, in 2012, compared to 2011.  The increase in net interest expense is primarily due to increased truck inventory levels and the fixed interest rates on interest rate swap contracts.  In January 2012, the Company’s floor plan agreement with GE Capital was amended to decrease interest rates related to floor plan notes payable.  Net interest expense in 2013 will depend on inventory levels and cash available for prepayment of floor plan financing.

Income from Continuing Operations before Income Taxes

Income from continuing operations before income taxes increased $11.0 million in 2012, compared to 2011, as a result of the factors described above.

Income Taxes

Income taxes increased $3.8 million in 2012, compared to 2011. The Company provided for taxes at a 38.3% effective rate in 2012 compared to an effective rate of 38.8% in 2011.  The Company expects its effective tax rate to be approximately 37% to 39% of pretax income in 2013.

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Revenues

Revenues increased $1,082.7 million, or 72.3%, in 2011, compared to 2010.  Sales of new and used commercial vehicles increased $875.4 million, or 94.5%, in 2011, compared to 2010.  Our parts, service and body shop revenues increased $186.0 million, or 38.0%, in 2011, compared to 2010, primarily due to continued aging of commercial vehicles in operation, strong activity by our energy sector customers and acquisitions that occurred during 2010 and 2011.

The Company sold 9,052 heavy-duty trucks in 2011, a 90.7% increase compared to 4,746 heavy-duty trucks in 2010.  The U.S. Class 8 truck market increased 58.0% in 2011, compared to 2010.  The Company’s share of the U.S. Class 8 truck sales market was approximately 5.2% in 2011.
 
The Company sold 5,469 medium-duty commercial vehicles, including 1,074 buses, in 2011, a 93.9% increase compared to 2,820 medium-duty commercial vehicles, including 457 buses, in 2010.  Unit sales of Class 4 through 7 commercial vehicles in the U.S. increased approximately 23.0% in 2011, compared to 2010.  In 2011, the Company achieved a 3.8% share of the Class 4 through 7 commercial vehicle sales market in the U.S.

The Company sold 1,019 light-duty vehicles in 2011, a 793.9% increase compared to 114 light-duty vehicles in 2010.

The Company sold 4,649 used commercial vehicles in 2011, a 34.3% increase compared to 3,461 used commercial vehicles in 2010.
 
 
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Truck lease and rental revenues increased $16.0 million, or 23.7%, in 2011, compared to 2010.  The increase in lease and rental revenue is consistent with management’s expectations, which are based upon the increased number of units put into service in the lease and rental fleet during 2010 and 2011 and increasing rental fleet utilization.

Finance and insurance revenues increased $2.9 million, or 37.2%, in 2011, compared to 2010.  The increase in finance and insurance revenue is primarily a result of the increase in new and used commercial vehicle sales.  Finance and insurance revenues have limited direct costs and, therefore, contribute a disproportionate share of the Company’s operating profits.

Other income increased $2.3 million, or 34.7% in 2011, compared to 2010.  Other income consists primarily of the gain on sale realized on trucks from the lease and rental fleet, document fees related to commercial vehicle sales and mineral royalties.

Gross Profit

Gross profit increased $138.4 million, or 48.6%, in 2011, compared to 2010.  Gross profit as a percentage of sales decreased to 16.4% in 2011, from 19.0% in 2010.  This decrease in gross profit as a percentage of sales is primarily a result of a change in our product sales mix.  Commercial vehicle sales, a lower margin revenue item, increased as a percentage of total revenue to 69.8% in 2011, from 61.9% in 2010.  Parts and service revenue, a higher margin revenue item, decreased as a percentage of total revenue to 26.2% in 2011, from 32.7% in 2010.

Gross margins from the Company’s parts, service and body shop operations increased to 39.5% in 2011, from 38.5% in 2010.  Gross profit for the parts, service and body shop departments increased to $266.7 million in 2011, from $188.5 million in 2010.  Gross profits from parts sales represented 52% of total gross profit for parts, service and body shop operations in 2011, compared to 53% in 2010.  Service and body shop operations represented 48% of total gross profit for parts, service and body shop operations in 2011, compared to 47% in 2010.

Gross margins on Class 8 truck sales decreased to 7.1% in 2011, from 7.4% in 2010.  The Company recorded expense of $1.6 million to increase its new heavy-duty truck valuation allowance in 2011, compared to $1.9 million in 2010.

Gross margins on medium-duty commercial vehicle sales decreased to 4.8% in 2011, from 5.6% in 2010.  Gross margins on medium-duty commercial vehicles are difficult to forecast accurately because gross margins vary significantly depending upon the mix of fleet and non-fleet purchasers and types of medium-duty commercial vehicles sold.  The Company recorded expense of $1.9 million to increase its new medium-duty commercial vehicle valuation allowance in 2011, compared to $0.6 million in 2010.
 
Gross margins on used commercial vehicle sales decreased to 9.4% in 2011, from 12.2% in 2010.  The Company recorded expense of $2.3 million to increase its used commercial vehicle valuation allowance in 2011, compared to $1.5 million in 2010.

Gross margins from truck lease and rental sales increased to 16.5% in 2011, from approximately 14.9% in 2010.  The increase in lease and rental gross profit was primarily attributable to increased utilization of vehicles in the Company’s rental fleet and increased variable rental revenue that is based on the miles that vehicles being leased are driven.

Selling, General and Administrative Expenses

SG&A expenses increased $78.8 million, or 34.6%, in 2011, compared to 2010.  SG&A expenses as a percentage of total revenue decreased to 11.9% in 2011, from 15.2% in 2010.

Depreciation and Amortization Expense

Depreciation and amortization expense increased $4.4 million, or 27.8%, in 2011 compared to 2010.  The increase in depreciation and amortization expense in 2011 was partially due to the acceleration of depreciation of the leasehold improvements related to the relocation of the Company’s dealership in Orlando, Florida.  The Company incurred additional amortization expense of approximately $1.2 million during the third and fourth quarter of 2011 related to the SAP software that was placed into service in August 2011.
 
 
33

 

Interest Expense, Net

Net interest expense increased $1.8 million, or 33.5%, in 2011, compared to 2010.  The increase in net interest expense is primarily due to increased truck inventory levels and the Company entering into a new floor plan agreement with GE Capital at the end of 2010, which increased interest rates related to floor plan notes payable during 2011.

Income from Continuing Operations before Income Taxes

Income from continuing operations before income taxes increased $53.9 million in 2011, compared to 2010, as a result of the factors described above.

Income Taxes

Income taxes increased $23.2 million in 2011, compared to 2010. The Company provided for taxes at a 38.8% effective rate in 2011 compared to an effective rate of 39.0% in 2010, prior to the application of alternative fuel tax credits.  In 2010, the Company received $2.5 million in tax credits for sales of alternative fuel vehicles to tax-exempt entities.

Income from Discontinued Operations, Net

Income from discontinued operations, net of income taxes decreased $6.7 million in 2011 compared to 2010.  Income from discontinued operations during 2010 included operating results and a gain of $10.1 million on the disposition for the Company’s construction equipment business, which was sold in September 2010.
 
Effects of Inflation
 
Inflationary factors such as increases in the cost of products and overhead costs may adversely affect the Company’s operating results.  Although the Company does not believe that inflation had a material impact on its financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on its ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of revenues if the selling prices of our products do not increase with these increased costs.
 
Liquidity and Capital Resources

The Company’s short-term cash requirements are primarily for working capital, inventory financing, the improvement and expansion of existing facilities and the construction or purchase of new facilities.  Historically, these cash requirements have been met through the retention of profits, borrowings under our floor plan arrangements and bank financings.  As of December 31, 2012, the Company had working capital of approximately $217.6 million, including $198.8 million in cash available to fund our operations.  The Company believes that these funds are sufficient to meet its operating requirements for at least the next twelve months.

The Company has a secured line of credit that provides for a maximum borrowing of $10.0 million.  There were no advances outstanding under this secured line of credit at December 31, 2012, however, $7.6 million was pledged to secure various letters of credit related to self-insurance products, leaving $2.4 million available for future borrowings as of December 31, 2012.

The Company’s long-term real estate debt agreements require the Company to satisfy various financial ratios such as the debt to worth ratio, leverage ratio and the fixed charge coverage ratio and certain requirements for tangible net worth and GAAP net worth.  As of December 31, 2012, the Company was in compliance with all debt covenants related to debt secured by real estate and lease and rental units and its floor plan credit agreement.  The Company does not anticipate any breach of the covenants in the foreseeable future.

The Company expects to purchase or lease trucks worth approximately $125.0 million for its leasing operations during 2013, depending on customer demand, all of which will be financed.  The Company also expects to make capital expenditures for recurring items such as computers, shop tools and equipment and vehicles of approximately $15.0 million to $18.0 million during 2013.
 
 
34

 

The Company is currently under contract to construct a dealership facility in Ardmore, Oklahoma at an estimated cost of $4.9 million.  The construction project is estimated to continue through the first quarter of 2013.

The Company is currently under contract to construct a dealership facility in Corpus Christi, Texas at an estimated cost of $6.6 million.  The construction project is estimated to continue through the third quarter of 2013.

The Company currently anticipates funding its capital expenditures relating to the improvement and expansion of existing facilities and recurring expenses, as well as a portion of the construction or purchase of new facilities, through its operating cash flow.  The Company may finance 70% to 80% of the appraised value of any newly constructed or purchased facilities, which would increase the Company’s cash and cash equivalents by that amount.

On February 1, 2013, the Company’s Board of Directors approved a stock repurchase program authorizing the Company to repurchase, from time to time, up to an aggregate of $40.0 million of its shares of Class A common stock and/or Class B common stock.  Repurchases will be made at times and in amounts as the Company deems appropriate and will be made through open market transactions, privately negotiated transactions and other lawful means. The manner, timing and amount of any repurchases will be determined by the Company based on an evaluation of market conditions, stock price and other factors. The stock repurchase program expires on February 12, 2014, and may be suspended or discontinued at any time.  While the stock repurchase program does not obligate the Company to acquire any particular amount or class of common stock, the Company anticipates that it will be repurchasing primarily shares of its Class B common stock.

The Company has no other material commitments for capital expenditures as of December 31, 2012, except that the Company will continue to purchase vehicles for its lease and rental division and authorize capital expenditures for improvement and expansion of its existing dealership facilities and construction or purchase of new facilities based on market opportunities.

Cash Flows

Cash and cash equivalents decreased by $9.0 million during the year ended December 31, 2012, and increased by $38.8 million during the year ended December 31, 2011.  The major components of these changes are discussed below.  Cash flows from discontinued operations are included in the components of the statement of cash flows as described below.

Cash Flows from Operating Activities

Cash flows from operating activities include net income adjusted for non-cash items and the effects of changes in working capital.  During 2012, operating activities resulted in net cash provided by operations of $219.3 million.  Cash provided by operating activities was primarily a result of the decreased levels of inventory, net of acquisitions, the decrease in accounts receivable, the increase in the provision for deferred taxes and the increase in floor plan notes payable, trade, offset by the decrease in accrued expenses.  The majority of commercial vehicle inventory is financed through the Company’s floor plan credit agreements.
 
In June 2012, the Company entered into a wholesale financing agreement with Ford Motor Credit Company that provides for the financing of, and is collateralized by, the Company’s Ford new vehicle inventory.  This wholesale financing agreement bears interest at a rate of Prime plus 150 basis points minus certain incentives and rebates; however, the prime rate is defined to be a minimum of 3.75%.  As of December 31, 2012, the interest rate on the wholesale financing agreement was 5.25% before considering the applicable incentives. As of December 31, 2012, the Company had an outstanding balance of $34.5 million under the Ford Motor Credit Company wholesale financing agreement.
 
During 2011, operating activities resulted in net cash used in operations of $81.4 million.  Cash used in operating activities was primarily impacted by the increased levels of inventory and the increase in accounts receivable, offset by increases in accounts payable and accrued expenses.
 
 
35

 

Cash Flows from Investing Activities

During 2012, cash used in investing activities was $274.3 million.  Cash flows used in investing activities consist primarily of cash used for capital expenditures and a business acquisition.  Capital expenditures of $171.0 million consisted of purchases of property and equipment and improvements to our existing dealership facilities.  Property and equipment purchases during 2012 consisted of $128.1 million for additional units for the rental and leasing operations, which was directly offset by borrowings of long-term debt.  The Company expects to purchase or lease trucks worth approximately $125.0 million for its leasing operations in 2013, depending on customer demand, all of which will be financed.  Cash used in the business acquisition was $104.6 million during the year ended December 31, 2012.  See Note 15 of the Notes to Consolidated Financial Statements for a detailed discussion of the business acquisition.  During 2013, the Company expects to make capital expenditures for recurring items such as computers, shop equipment and vehicles of $15.0 million to $18.0 million.

During 2011, cash used in investing activities was $231.8 million.  Capital expenditures of $148.5 million consisted of purchases of property and equipment and improvements to our existing dealership facilities.  Property and equipment purchases during 2011 consisted of $97.3 million for additional units for the rental and leasing operations, which was directly offset by borrowings of long-term debt.  Cash used in business acquisitions was $94.7 million during the year ended December 31, 2011.  See Note 15 of the Notes to Consolidated Financial Statements for a detailed discussion of these acquisitions.

Cash Flows from Financing Activities

Cash flows used in financing activities include borrowings and repayments of long-term debt and net payments of floor plan notes payable.  Cash provided by financing activities was $46.0 million during 2012. The Company had borrowings of long-term debt of $144.6 million and repayments of long-term debt and capital lease obligations of $84.7 million during 2012.  The Company had net payments of floor plan notes payable, non-trade of $20.7 million during 2012.  The borrowings of long-term debt were primarily related to units for the rental and leasing operations.

Cash provided by financing activities was $352.0 million during 2011. The Company had borrowings of long-term debt of $144.5 million and repayments of long-term debt and capital lease obligations of $82.3 million during 2011.  The Company had net borrowings of floor plan notes payable of $282.9 million during 2011.  The borrowings of long-term debt were primarily related to units for the rental and leasing operations and purchase and refinancing of real estate.

Substantially all of the Company’s commercial vehicle purchases are made on terms requiring payment to the manufacturer within 15 days or less from the date the commercial vehicles are invoiced from the factory.  On January 31, 2012, the Company entered into an amended and restated $600.0 million credit agreement with GE Capital.  The interest rate under the amended credit agreement is LIBOR plus 2.23% on inventory loans up to $500.0 million and LIBOR plus 2.95% on inventory loans exceeding $500.0 million. The amended credit agreement allows the Company to prepay inventory loans, provided that the prepayment does not exceed the sum of 38% of the aggregate inventory loans made up to $500.0 million plus 100% of the inventory loans above $500.0 million.  GE Capital may terminate this credit agreement without cause upon 120 days notice.  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 had been financed for 12 months or was sold, whichever occurs first.  On December 31, 2012, the Company had approximately $500.0 million outstanding under its credit agreement with GE Capital.
 
Navistar Financial Corporation and Peterbilt offer trade terms that provide an interest free inventory stocking period for certain new commercial vehicles.  If the commercial vehicle is not sold within the interest free period, the Company then finances the commercial vehicle under the GE Capital credit agreement. 
 
 
36

 

Cyclicality

The Company’s business is dependent on a number of factors relating to general economic conditions, including fuel prices, interest rate fluctuations, credit availability, economic recessions and customer business cycles. Unit sales of new commercial vehicles have historically been subject to substantial cyclical variation based on these general economic conditions and environmental and other government regulations. For example, according to data published by A.C.T. Research, in recent years total U.S. retail sales of new Class 8 trucks have ranged from a low of approximately 97,000 in 2009 to a high of approximately 291,000 in 2006.  Through geographic expansion, concentration on higher margin parts and service operations and diversification of its customer base, the Company continues to try to reduce the negative impact that adverse general economic conditions or cyclical trends affecting the commercial vehicle industry could have.

Off-Balance Sheet Arrangements

Other than operating leases, the Company does not have any obligation under any transaction, agreement or other contractual arrangement to which an entity unconsolidated with the Company is a party, that has or is reasonably likely to have a material effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.  A summary of our operating lease obligations by fiscal year is included in the “Contractual Obligations” section below.

Contractual Obligations

The Company has certain contractual obligations that will impact its short and long-term liquidity. At December 31, 2012, such obligations were as follows (in thousands):
 
   
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)
  $ 399,664     $ 80,029     $ 155,588     $ 133,584     $ 30,463  
Capital lease obligations(2)
    54,609       12,177       20,826       12,234       9,372  
Operating lease obligations(3)
    32,438       8,888       10,636       5,865       7,049  
Floor plan debt obligation
    534,520       534,520                    
Interest obligations (4)
    53,719       27,084       19,027       6,977       631  
Purchase obligations(5)
    16,878       10,778       2,520       1,080       2,500  
Total
  $ 1,091,828     $ 673,476     $ 208,597     $ 159,740     $ 50,015  
 

(1)           Refer to Note 8 of Notes to Consolidated Financial Statements.
(2)           Refer to Note 10 of Notes to Consolidated Financial Statements.  Amounts include interest.
(3)           Refer to Note 10 of Notes to Consolidated Financial Statements.
(4)           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 interest rate on outstanding variable rate debt at December 31, 2012, and added 0.25 percent per year to estimate its interest expense on variable rate debt.
(5)           Purchase obligations represent non-cancelable contractual obligations at December 31, 2012 related to the Company’s construction contracts for facilities in Ardmore, Oklahoma and Corpus Christi, Texas, the Company’s contract with Titan Technology Partners for integration and management services related to the SAP enterprise software and dealership management system implementation and SAP America, Inc. with respect to the Software License Agreement for the SAP enterprise software and dealership management system.

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 financing agreements, variable rate real estate debt and discount rates related to finance sales.  The majority of the Company’s floor plan debt and variable rate real estate debt is based on LIBOR.  As of December 31, 2012, the Company had floor plan borrowings and variable interest rate real estate debt of approximately $615.0 million.  Assuming an increase or decrease in LIBOR of 100 basis points, annual interest expense could correspondingly increase or decrease by approximately $6.2 million.
 
 
37

 

The Company submits all customer financing opportunities to various finance providers that offer financing to the Company’s customers. The Company receives all finance charges in excess of a negotiated discount rate from the finance providers in the month following the date of the financing. The negotiated discount rate is variable, thus subject to interest rate fluctuations. This interest rate risk is mitigated by the Company’s ability to pass discount rate increases to customers through higher financing rates.

The Company is exposed to some market risk through interest rate swaps on some of the Company’s variable interest rate real estate debt.  As of December 31, 2012, the Company had interest rate swaps with a total notional amount of $41.7 million.  The swaps were designed to provide a hedge against changes in interest rates on some of the Company’s variable interest rate real estate debt.  The swaps are collateralized by the underlying real estate.  These interest rate swaps qualify for cash flow hedge accounting treatment and are considered effective.  For additional information about the effect of the Company’s derivative instruments on the accompanying consolidated financial statements, see Note 9 – Financial Instruments and Fair Value of the Notes to Consolidated Financial Statements.

The Company is also exposed to some market risk through interest rates related to the investment of our current cash and cash equivalents which totaled $198.8 million on December 31, 2012.  These funds are generally invested in variable interest rate instruments in accordance with the Company’s investment policy.  As such instruments mature and the funds are reinvested, we are exposed to changes in market interest rates. This risk is mitigated by management’s ongoing evaluation of the best investment rates available for current and noncurrent high quality investments. If market interest rates were to increase or decrease immediately and uniformly by 100 basis points, the Company’s annual interest income could correspondingly increase or decrease by approximately $2.0 million.

In the past, the Company invested in interest-bearing short-term investments consisting of investment-grade auction rate securities classified as available-for-sale.  Auctions for investment grade securities held by the Company have failed.  The auction rate securities continue to pay interest in accordance with the terms of the underlying security; however, liquidity will be limited until there is a successful auction or until such time as other markets for these investments develop.

As of December 31, 2012, the Company holds auction rate securities, with underlying tax-exempt municipal bonds that mature in 2030, that have a fair value of $6.6 million.  Given the current market conditions in the auction rate securities market, if the Company determines that the fair value of these securities temporarily decreases by an additional 10%, the Company’s equity could correspondingly decrease by approximately $0.7 million.  If it is determined that the fair value of these securities is other-than-temporarily impaired by 10%, the Company could record a loss on its Consolidated Statements of Operations of approximately $0.7 million.  For further discussion of the risks related to our auction rate securities, see Note 9 – Financial Instruments and Fair Value of the Notes to Consolidated Financial Statements.
 
 
38

 
 
Item 8.  Financial Statements and Supplementary Data
 
   
   
Report of Independent Registered Public Accounting Firm
40
   
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
74
   
Consolidated Balance Sheets as of December 31, 2012 and 2011
41
   
Consolidated Statements of Income for the Years Ended December 31, 2012, 2011 and 2010
42
   
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2012, 2011 and 2010
43
   
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2012, 2011 and 2010
44
   
Consolidated Statements of Cash Flows for the Years Ended December 31, 2012, 2011 and 2010
45
   
Notes to Consolidated Financial Statements
46
   

                                                                                                                                 
 
39

 


Report of Independent Registered Public Accounting Firm


The Board of Directors and Shareholders of
 Rush Enterprises, Inc.

We have audited the accompanying consolidated balance sheets of Rush Enterprises, Inc. and subsidiaries (“the Company”) as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2012.  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, 2012 and 2011, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2012, 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), Rush Enterprises, Inc.’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 15, 2013 expressed an unqualified opinion thereon.



/s/ Ernst & Young LLP
San Antonio, Texas
March 15, 2013

 
40

 

RUSH ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Shares and Per Share Amounts)

   
December 31,
 
   
2012
   
2011
 
             
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 198,773     $ 207,775  
Accounts receivable, net
    89,615       98,160  
Inventories, net
    690,953       649,626  
Prepaid expenses and other
    12,088       12,158  
Deferred income taxes, net
    14,630       12,286  
                 
Total current assets
    1,006,059       980,005  
                 
Investments
    6,628       6,628  
                 
Property and equipment, net
    622,112       499,667  
                 
Goodwill, net
    198,257       182,612  
                 
Other assets, net
    48,510       48,789  
                 
Total assets
  $ 1,881,566     $ 1,717,701  
                 
                 
Liabilities and shareholders’ equity
               
Current liabilities:
               
Floor plan notes payable
  $ 534,520     $ 520,693  
Current maturities of long-term debt
    80,030       63,465  
Current maturities of capital lease obligations
    10,673       10,056  
Trade accounts payable
    62,270       62,299  
Accrued expenses
    100,953       134,278  
Total current liabilities
    788,446       790,791  
                 
Long-term debt, net of current maturities
    319,634       264,822  
Capital lease obligations, net of current maturities
    39,300       35,498  
Other long-term liabilities
    2,484       2,233  
Deferred income taxes, net
    123,756       93,123  
                 
Shareholders’ equity:
               
Preferred stock, par value $.01 per share; 1,000,000 shares authorized; 0 shares outstanding in 2012 and 2011
           
Common stock, par value $.01 per share; 60,000,000 class A shares and 20,000,000 class B shares authorized; 27,999,068 class A shares and 10,792,223 class B shares outstanding in 2012; and 27,406,424 class A shares and 10,776,697 class B shares outstanding in 2011
    404       398  
Additional paid-in capital
    222,627       208,569  
Treasury stock, at cost: 1,639,843 class B shares
    (17,948 )     (17,948 )
Retained earnings
    404,619       342,164  
Accumulated other comprehensive loss, net of tax
    (1,756 )     (1,949 )
                 
Total shareholders’ equity
    607,946       531,234  
                 
Total liabilities and shareholders’ equity
  $ 1,881,566     $ 1,717,701  


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

 
41

 

RUSH ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)

   
Year Ended December 31,
 
   
2012
   
2011
   
2010
 
                   
Revenues:
                 
New and used commercial vehicle sales
  $ 2,149,335     $ 1,801,964     $ 926,584  
Parts and service sales
    817,280       675,277       489,259  
Lease and rental
    100,247       83,426       67,423  
Finance and insurance
    13,638       10,867       7,922  
Other
    10,067       9,077       6,739  
Total revenue
    3,090,567       2,580,611       1,497,927  
Cost of products sold:
                       
New and used commercial vehicle sales
    2,005,776       1,679,170       854,879  
Parts and service sales
    499,850       408,544       300,783  
Lease and rental
    84,174       69,620       57,375  
Total cost of products sold
    2,589,800       2,157,334       1,213,037  
Gross profit
    500,767       423,277       284,890  
Selling, general and administrative
    361,727       306,273       227,467  
Depreciation and amortization
    25,016       20,084       15,720  
Gain (loss) on sale of assets
    176       418       (36 )
Operating income
    114,200       97,338       41,667  
Interest income (expense):
                       
Interest income
    21       20       127  
Interest expense
    (13,038 )     (7,181 )     (5,490 )
Total interest expense, net
    13,017       7,161       5,363  
Income from continuing operations before taxes
    101,183       90,177       36,304  
Provision for income taxes
    38,728       34,964       11,737  
Income from continuing operations
    62,455       55,213       24,567  
Income from discontinued operations, net of tax
                6,715  
Net income
  $ 62,455     $ 55,213     $ 31,282  
Earnings per common share - Basic:
                       
Income from continuing operations
  $ 1.62     $ 1.46     $ 0.66  
Net income
  $ 1.62     $ 1.46     $ 0.84  
Earnings per common share - Diluted:
                       
Income from continuing operations
  $ 1.57     $ 1.42     $ 0.64  
Net income
  $ 1.57     $ 1.42     $ 0.82  


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

 
42

 

RUSH ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)

   
Year Ended December 31,
 
   
2012
   
2011
   
2010
 
                   
Net income
  $ 62,455     $ 55,213     $ 31,282  
Other comprehensive income (loss) before tax and net of reclassification adjustments:
                       
Change in fair value of interest rate swaps
    317       (1,868 )     (364 )
Unrealized loss on available-for-sale securities
          (947 )      
Other comprehensive income (loss), before tax
    317       (2,815 )     (364 )
Income tax expense (benefit) related to components of other comprehensive income
    124       (1,088 )     (142 )
Other comprehensive income (loss), net of tax
    193       (1,727 )     (222 )
Comprehensive income
  $ 62,648     $ 53,486     $ 31,060  

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

 
43

 

RUSH ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In Thousands)


   
Common Stock
Shares
Outstanding
   
$0.01
Par
   
Additional
Paid-In
   
Treasury
   
Retained
   
Accumulated
Other
Comprehensive
   
 
 
   
Class A
    Class B    
Value
   
Capital
   
Stock
   
Earnings
   
Loss
   
Total
 
                                                 
Balance, December 31, 2009
    26,438       10,689     $ 388     $ 188,116     $ (17,948 )   $ 255,669     $     $ 426,225  
                                                                 
Stock options exercised (including tax benefit of $885)
    212       11       2       2,486                               2,488  
Stock-based compensation related to stock options, restricted shares and employee stock purchase plan
                            4,468                               4,468  
Vesting of restricted share awards
    83               1       (1 )                              
Issuance of common stock under employee stock purchase plan
    66                       678                               678  
Other comprehensive income (loss)
                                                    (222 )     (222 )
Net income
                                            31,282               31,282  
                                                                 
Balance, December 31, 2010
    26,799       10,700     $ 391     $ 195,747     $ (17,948 )   $ 286,951     $ (222 )   $ 464,919  
                                                                 
Stock options exercised (including tax benefit of $1,993)
    455       77       5       6,303                               6,308  
Stock-based compensation related to stock options, restricted shares and employee stock purchase plan
                            5,683                               5,683  
Vesting of restricted share awards
    90               1       (1 )                              
Issuance of common stock under employee stock purchase plan
    62               1       837                               838  
Other comprehensive income (loss)
                                                    (1,727 )     (1,727 )
Net income
                                            55,213               55,213  
                                                                 
Balance, December 31, 2011
    27,406       10,777     $ 398     $ 208,569     $ (17,948 )   $ 342,164     $ (1,949 )   $ 531,234  
                                                                 
Stock options exercised and stock awards (including tax benefit of $1,668)
    439       15       4       5,722                               5,726  
Stock-based compensation related to stock options, restricted shares and employee stock purchase plan
                            7,332                               7,332  
Vesting of restricted share awards
    83               1       (62 )                             (61 )
Issuance of common stock under employee stock purchase plan
    71               1       1,066                               1,067  
Other comprehensive income (loss)
                                                    193       193  
Net income
                                            62,455               62,455  
                                                                 
Balance, December 31, 2012
    27,999       10,792     $ 404     $ 222,627     $ (17,948 )   $ 404,619     $ (1,756 )   $ 607,946  


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

 
44

 

RUSH ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)

   
Year Ended December 31,
 
   
2012
   
2011
   
2010
 
                   
Cash flows from operating activities:
                 
Net income
  $ 62,455     $ 55,213     $ 31,282  
Adjustments to reconcile net income to net cash provided by (used in) operating activities-
                       
Depreciation and amortization
    73,289       56,934       45,920  
Gain on sale of property and equipment, net
    (176 )     (418 )     (36 )
Gain on disposition of equipment centers
                (10,091 )
Stock-based compensation expense related to employee stock options and employee stock purchases
    7,332       5,683       4,468  
Provision for deferred income tax expense
    28,164       28,680       10,215