rusha20210930_10q.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended September 30, 2021

 

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____________________ to _______________________

 

Commission File Number 0-20797

 

RUSH ENTERPRISES, INC.

(Exact name of registrant as specified in its charter)

 

Texas74-1733016

(State or other jurisdiction of 

incorporation or organization)

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

                                                                       

555 I.H. 35 South, Suite 500

New Braunfels, Texas 78130

(Address of principal executive offices)

(Zip Code)

 

(830) 302-5200

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑                  No ☐

 

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

Yes ☑                  No ☐

 

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

 

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

    

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

 

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

Yes                   No ☑

 

Indicated below is the number of shares outstanding of each of the issuer’s classes of common stock, as of October 28, 2021.

 

Title of Class 

Number of Shares 

Outstanding

Class A Common Stock, $.01 Par Value43,069,022
Class B Common Stock, $.01 Par Value12,443,504

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A Common Stock, $0.01 par value

RUSHA

NASDAQ Global Select Market

Class B Common Stock, $0.01 par value

RUSHB

NASDAQ Global Select Market

 

 

 

 

 

RUSH ENTERPRISES, INC. AND SUBSIDIARIES

 

INDEX

 

 

PART I.  FINANCIAL INFORMATION

Page
   
 

Item 1.   

Financial Statements

 
       
   

Consolidated Balance Sheets - September 30, 2021 (unaudited) and December 31, 2020

3

       
   

Consolidated Statements of Income and Comprehensive Income - For the Three and Nine Months Ended September 30, 2021 and 2020 (unaudited) 

4

       
   

Consolidated Statements of Shareholders’ Equity – For the Three and Nine Months Ended September 30, 2021 and 2020 (unaudited)

5

       
   

Consolidated Statements of Cash Flows - For the Nine Months Ended  September 30, 2021 and 2020 (unaudited)

7
       
   

Notes to Consolidated Financial Statements (unaudited)

8

       
 

Item 2.

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

15

       
 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

       
 

Item 4.

Controls and Procedures

29

       
       
       

PART II.  OTHER INFORMATION 

 
       
 

Item 1.

Legal Proceedings

29

       
 

Item 1A.

Risk Factors

29

       
 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

       
 

Item 3.

Defaults Upon Senior Securities

30

       
 

Item 4.

Mine Safety Disclosures

30

       
 

Item 5.

Other Information

30

       
 

Item 6.

Exhibits

30

       

SIGNATURES

32

 

2

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements.

 

RUSH ENTERPRISES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Shares)

 

  

September 30,

  

December 31,

 
  

2021

  

2020

 
  

(unaudited)

     

Assets

        

Current assets:

        

Cash and cash equivalents

 $259,693  $312,048 

Accounts receivable, net

  149,281   172,481 

Inventories, net

  754,006   858,291 

Prepaid expenses and other

  15,013   14,906 

Total current assets

  1,177,993   1,357,726 

Property and equipment, net

  1,166,191   1,203,719 

Operating lease right-of-use assets, net

  64,445   60,577 

Goodwill, net

  292,142   292,142 

Other assets, net

  76,558   71,229 

Total assets

 $2,777,329  $2,985,393 
         

Liabilities and shareholders equity

        

Current liabilities:

        

Floor plan notes payable

 $354,346  $511,786 

Current maturities of long-term debt

  64,854   141,672 

Current maturities of finance lease obligations

  26,787   26,373 

Current maturities of operating lease obligations

  10,680   10,196 

Trade accounts payable

  128,137   110,728 

Customer deposits

  43,823   74,209 

Accrued expenses

  144,098   151,830 

Total current liabilities

  772,725   1,026,794 

Long-term debt, net of current maturities

  309,014   387,982 

Finance lease obligations, net of current maturities

  88,870   90,740 

Operating lease obligations, net of current maturities

  54,732   51,155 

Other long-term liabilities

  35,795   34,246 

Deferred income taxes, net

  103,410   126,439 

Shareholders’ equity:

        

Preferred stock, par value $.01 per share; 1,000,000 shares authorized; 0 shares outstanding in 2021 and 2020

      

Common stock, par value $.01 per share; 60,000,000 Class A shares and 20,000,000 Class B shares authorized; 43,018,498 Class A shares and 12,474,589 Class B shares outstanding in 2021; and 42,503,925 Class A shares and 12,470,308 Class B shares outstanding in 2020

  561   551 

Additional paid-in capital

  462,406   437,646 

Treasury stock, at cost: 183,765 Class A shares and 416,069 Class B shares in 2021; and 10,335 Class A shares and 73,437 Class B shares in 2020

  (24,814)  (2,879)

Retained earnings

  973,665   831,850 

Accumulated other comprehensive income

  965   869 

Total shareholders’ equity

  1,412,783   1,268,037 

Total liabilities and shareholders equity

 $2,777,329  $2,985,393 

 

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

 

3

 

 

RUSH ENTERPRISES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(In Thousands, Except Per Share Amounts)

(Unaudited)

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2021

   

2020

   

2021

   

2020

 
                                 

Revenues

                               

New and used commercial vehicle sales

  $ 729,344     $ 711,754     $ 2,274,332     $ 2,060,370  

Aftermarket products and services sales

    463,020       400,260       1,324,283       1,205,791  

Lease and rental sales

    62,689       57,913       182,312       175,984  

Finance and insurance

    6,851       5,633       20,723       15,060  

Other

    4,617       3,008       12,692       10,538  

Total revenue

    1,266,521       1,178,568       3,814,342       3,467,743  

Cost of products sold

                               

New and used commercial vehicle sales

    656,411       658,192       2,053,271       1,908,225  

Aftermarket products and services sales

    280,866       258,379       819,786       766,990  

Lease and rental sales

    46,949       49,545       143,394       153,244  

Total cost of products sold

    984,226       966,116       3,016,451       2,828,459  

Gross profit

    282,295       212,452       797,891       639,284  

Selling, general and administrative expense

    179,890       155,487       539,579       496,756  

Depreciation and amortization expense

    13,137       14,423       40,284       43,269  

Gain on sale of assets

    901       326       1,157       1,807  

Operating income

    90,169       42,868       219,185       101,066  

Other income

    1,951       2,113       4,616       5,074  

Interest expense, net

    271       1,053       566       8,031  

Income before taxes

    91,849       43,928       223,235       98,109  

Income tax provision

    22,450       9,989       50,459       24,247  

Net income

  $ 69,399     $ 33,939     $ 172,776     $ 73,862  
                                 

Earnings per common share:

                               

Basic

  $ 1.24     $ 0.62     $ 3.09     $ 1.35  

Diluted

  $ 1.20     $ 0.60     $ 2.99     $ 1.32  
                                 

Weighted average shares outstanding:

                               

Basic

    56,007       55,033       55,882       54,734  

Diluted

    57,806       56,443       57,834       55,929  
                                 

Dividends declared per common share

  $ 0.19     $ 0.09     $ 0.55     $ 0.27  
                                 

Comprehensive income

  $ 68,928     $ 34,427     $ 172,872     $ 73,345  

 

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

 

4

 

 

RUSH ENTERPRISES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

(In Thousands)

(Unaudited)

 

  

Common Stock

                  

Accumulated

     
  

Shares

Outstanding

  

$0.01

Par

  

Additional

Paid-In

  

Treasury

  

Retained

  

Other

Comprehensive

     
  Class A  Class B  Value  Capital  Stock  Earnings  Income  Total 
                                 

Balance, December 31, 2020

  42,504   12,470  $551  $437,646  $(2,879) $831,850  $869  $1,268,037 

Stock options exercised and stock awards

  298      3   5,416            5,419 

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

           11,520            11,520 

Vesting of restricted share awards

     345   3   (6,780)           (6,777)

Issuance of common stock under employee stock purchase plan

  86      1   1,988            1,989 

Common stock repurchases

  (3)  (155)        (6,483)        (6,483)

Dividend Class A common stock

                 (7,684) 

––

   (7,684)

Dividend Class B common stock

                 (2,380) 

––

   (2,380)

Other comprehensive income

                    255   255 

Net income

                 45,333      45,333 

Balance, March 31, 2021

  42,885   12,660  $558  $449,790  $(9,362) $867,119  $1,124  $1,309,229 

Stock options exercised and stock awards

  219      2   3,926            3,928 

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

           3,683            3,683 

Vesting of restricted share awards

           (614)           (614)

Common stock repurchases

     (99)        (4,223)        (4,223)

Dividend Class A common stock

                 (7,735) 

––

   (7,735)

Dividend Class B common stock

                 (2,425) 

––

   (2,425)

Other comprehensive income

                    312   312 

Net income

                 58,044      58,044 

Balance, June 30, 2021

  43,104   12,561  $560  $456,785  $(13,585) $915,003  $1,436  $1,360,199 

Stock options exercised and stock awards

  22         371            371 

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

           3,144            3,144 

Vesting of restricted share awards

     2      (53)           (53)

Issuance of common stock under employee stock purchase plan

  63      1   2,159            2,160 

Common stock repurchases

  (171)  (88)        (11,229)        (11,229)

Dividend Class A common stock

                 (8,199) 

––

   (8,199)

Dividend Class B common stock

                 (2,538) 

––

   (2,538)

Other comprehensive loss

                    (471)  (471)

Net income

                 69,399      69,399 

Balance, September 30, 2021

  43,018   12,475  $561  $462,406  $(24,814) $973,665  $965  $1,412,783 

 

5

 

  

Common Stock

                  

Accumulated

     
  

Shares

Outstanding

  

$0.01

Par

  

Additional

Paid-In

  

Treasury

  

Retained

  

Other

Comprehensive

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

Balance, December 31, 2019

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

Stock options exercised and stock awards

  110      1   1,421            1,422 

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

           8,553            8,553 

Vesting of restricted share awards

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

Issuance of common stock under employee stock purchase plan

  92      1   1,900            1,901 

Common stock repurchases

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

Dividend Class A common stock

                 (3,646)     (3,646)

Dividend Class B common stock

                 (1,108)     (1,108)

Other comprehensive loss

                    (1,930)  (1,930)

Net income

                 23,107      23,107 

Balance, March 31, 2020

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

Stock options exercised and stock awards

  294      2   4,529            4,531 

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

           3,586            3,586 

Vesting of restricted share awards

           (28)           (28)

Dividend Class A common stock

                 (3,581)     (3,581)

Dividend Class B common stock

                 (1,165)     (1,165)

Other comprehensive income

                    925   925 

Net income

                 16,816      16,816 

Balance, June 30, 2020

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

Stock options exercised and stock awards

  537      3   8,701            8,704 

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

           3,324            3,324 

Vesting of restricted share awards

     2      (14)           (14)

Issuance of common stock under employee stock purchase plan

  85      1   2,000            2,001 

Common stock repurchases

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

Cancellation of treasury stock

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

Dividend Class A common stock

                 (3,922)     (3,922)

Dividend Class B common stock

                 (1,258)     (1,258)

Other comprehensive income

                    488   488 

Net income

                 33,939      33,939 

Balance, September 30, 2020

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

 

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

 

6

 

 

RUSH ENTERPRISES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 

   

Nine Months Ended

 
   

September 30,

 
   

2021

   

2020

 

Cash flows from operating activities:

               

Net income

  $ 172,776     $ 73,862  

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

               

Depreciation and amortization

    126,691       134,001  

Gain on sale of property and equipment

    (1,157 )     (1,807 )

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

    18,347       15,463  

Deferred income tax benefit

    (23,029 )     (11,597 )

Change in accounts receivable, net

    23,200       28,027  

Change in inventories, net

    147,254       439,226  

Change in prepaid expenses and other, net

    (107 )     7,413  

Change in trade accounts payable

    16,676       (24,883 )

Payments on floor plan notes payable – trade, net

          (62,329 )

Change in customer deposits

    (30,386 )     (6,111 )

Change in accrued expenses

    (8,403 )     2,985  

Other, net

    (3,217 )     (3,781 )

Net cash provided by operating activities

    438,645       590,469  

Cash flows from investing activities:

               

Acquisition of property and equipment

    (122,318 )     (107,839 )

Proceeds from the sale of property and equipment

    2,576       5,663  

Change in other assets

    (1,610 )     3,278  

Net cash used in investing activities

    (121,352 )     (98,898 )

Cash flows from financing activities:

               

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

    (157,440 )     (320,307 )

Proceeds from long-term debt

    66,430       139,870  

Principal payments on long-term debt

    (222,216 )     (202,690 )

Principal payments on finance lease obligations

    (10,620 )     (9,539 )

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

    6,423       16,103  

Payments of cash dividends

    (30,499 )     (14,680 )

Common stock repurchased

    (21,726 )     (22,405 )

Net cash used in financing activities

    (369,648 )     (413,648 )

Net (decrease) increase in cash and cash equivalents

    (52,355 )     77,923  

Cash and cash equivalents, beginning of period

    312,048       181,620  

Cash and cash equivalents, end of period

  $ 259,693     $ 259,543  

Supplemental disclosure of cash flow information:

               

Cash paid during the period for:

               

Interest

  $ 19,805     $ 31,153  

Income taxes, net of refunds

  $ 92,795     $ 26,934  

Noncash investing and financing activities:

               

Assets acquired under finance leases

  $ 21,442     $ 34,839  

 

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

 

7

 

 

RUSH ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1 Principles of Consolidation and Basis of Presentation

 

The interim consolidated financial statements included herein have been prepared by Rush Enterprises, Inc. and its subsidiaries (collectively referred to as the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). All adjustments have been made to the accompanying interim consolidated financial statements, which, in the opinion of the Company’s management, are necessary for a fair presentation of its operating results. All adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. It is recommended that these interim consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. Results of operations for interim periods are not necessarily indicative of results that may be expected for any other interim periods or the full fiscal year.

 

COVID-19 Risks and Uncertainties

 

In March 2020, the World Health Organization made the assessment that COVID-19 could be characterized as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The Company’s nationwide network of commercial vehicle dealerships are classified as “essential businesses” and have remained operational across the Company’s dealership network. While the COVID-19 pandemic is not over, business conditions have improved significantly since the second quarter of 2020. The Company is unable to predict the impact that the COVID-19 pandemic will have on its future business and operating results due to numerous uncertainties, including the duration and severity of the outbreak.

 

Recently Issued Accounting Pronouncements

 

In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04"). In January 2021, the FASB issued Accounting Standards Update No. 2021-01, Reference Rate Reform (Topic 848): Scope, which clarified the scope and application of the original guidance. The guidance in these standards applies to contract accounting, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met and provides optional expedients and exceptions for a limited time to ease the potential burden in accounting for reference rate reform. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. ASU 2020-04 is effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. LIBOR benchmarking is utilized in the Company’s working capital and floorplan facilities. The Company is in the process of completing its evaluation of the impact, if any, that the adoption of this standard will have on its Consolidated Financial Statements.

 

 

2 Other Assets

 

Franchise Rights

 

The Company’s only significant identifiable intangible assets, other than goodwill, are rights under franchise agreements with manufacturers. The fair value of the franchise right is determined at the acquisition date by discounting the projected cash flows specific to each acquisition. The carrying value of the Company’s manufacturer franchise rights was $7.0 million as of September 30, 2021 and December 31, 2020, and is included in Other Assets on the accompanying Consolidated Balance Sheet. The Company has determined that manufacturer franchise rights have an indefinite life, as there are no economic or other factors that limit their useful lives and they are expected to generate cash flows indefinitely due to the historically long lives of the manufacturers’ brand names. Furthermore, to the extent that any agreements evidencing manufacturer franchise rights have expiration dates, the Company expects that it will be able to renew those agreements in the ordinary course of business. Accordingly, the Company does not amortize manufacturer franchise rights.

 

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

 

8

 

The significant estimates and assumptions used by management in assessing the recoverability of manufacturer franchise rights include estimated future cash flows, present value discount rate and other factors. Any changes in these estimates or assumptions could result in an impairment charge. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management’s subjective judgment. Depending on the assumptions and estimates used, the estimated future cash flows projected in the evaluations of manufacturer franchise rights can vary within a range of outcomes.

 

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

 

Equity Method Investment and Call Option

 

On February 25, 2019, the Company acquired 50% of the equity interest in Rush Truck Centres of Canada Limited (“RTC Canada”), which acquired the operating assets of Tallman Group, the largest International Truck dealer in Canada. The Company was also granted a call option in the purchase agreement that provides the Company with the right to acquire the remaining 50% equity interest in RTC Canada until the close of business on February 25, 2024. The value of the Company’s call option was $3.6 million as of September 30, 2021, and is reported in Other Assets on the Consolidated Balance Sheet.

 

On April 25, 2019, the Company entered into a Guaranty Agreement (“Guaranty”) with Bank of Montreal (“BMO”), pursuant to which the Company agreed to guaranty up to CAD250 million (the “Guaranty Cap”) of certain credit facilities entered into by and between Tallman Truck Centre Limited (“TTCL”) and BMO. The Company owned a 50% equity interest in TTCL, which was the sole owner of RTC Canada. Later in 2019, RTC Canada and TTCL were amalgamated into RTC Canada. Interest, fees and expenses incurred by BMO to enforce its rights with respect to the guaranteed obligations and its rights against the Company under the Guaranty are not subject to the Guaranty Cap. In exchange for the Guaranty, RTC Canada is receiving a reduced rate of interest on its credit facilities with BMO. The Guaranty was valued at $5.2 million as of September 30, 2021 and December 31, 2020, and is included in the investment in RTC Canada. As of September 30, 2021, the Company’s investment in RTC Canada is $35.1 million. The Company’s equity income in RTC Canada is included in Other income on the Consolidated Statements of Income.

 

ERP Platform

 

The total capitalized costs of the Company’s SAP enterprise resource planning software platform (“the ERP Platform”) of $5.8 million are recorded on the Consolidated Balance Sheet in Other Assets. Amortization expense relating to the ERP Platform, which is recognized in depreciation and amortization expense in the Consolidated Statements of Income and Comprehensive Income, was $0.3 million for the three months ended September 30, 2021 and $0.5 million for the three months ended September 30, 2020, and $1.2 million for the nine months ended September 30, 2021 and $1.4 million for the nine months ended September 30, 2020. The Company estimates that amortization expense relating to the ERP Platform will be approximately $1.5 million in 2021 and $1.2 million per year for the next four years.

 

 

3 Commitments and Contingencies

 

From time to time, the Company is involved in litigation arising out of its operations in the ordinary course of business. The Company maintains liability insurance, including product liability coverage, in amounts deemed adequate by management. To date, aggregate costs to the Company for claims, including product liability actions, have not been material. However, an uninsured or partially insured claim, or claim for which indemnification is not available, could have a material adverse effect on the Company’s financial condition or results of operations. The Company believes that there are no claims or litigation pending, the outcome of which could have a material adverse effect on its financial position or results of operations. However, due to the inherent uncertainty of litigation, there can be no assurance that the resolution of any particular claim or proceeding would not have a material adverse effect on the Company’s financial condition or results of operations for the fiscal period in which such resolution occurred.

 

9

 
 

4 Earnings Per Share

 

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share information):

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2021

   

2020

   

2021

   

2020

 

Numerator:

                               

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

  $ 69,399     $ 33,939     $ 172,776     $ 73,862  

Denominator:

                               

Denominator for basic earnings per share – weighted average shares outstanding

    56,007       55,033       55,882       54,734  

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

    1,799       1,410       1,952       1,195  

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

    57,806       56,443       57,834       55,929  

Basic earnings per common share

  $ 1.24     $ 0.62     $ 3.09     $ 1.35  

Diluted earnings per common share and common share equivalents

  $ 1.20     $ 0.60     $ 2.99     $ 1.32  

 

Options to purchase shares of common stock that were outstanding for the three months and nine months ended September 30, 2021 and 2020 that were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive are as follows (in thousands):

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2021

   

2020

   

2021

   

2020

 

Weighted average anti-dilutive options

    624       1,100       460       1,799  

 

 

5 Stock Options and Restricted Stock Awards

 

Valuation and Expense Information

 

The Company accounts for stock-based compensation in accordance with ASC 718-10, Compensation Stock Compensation, which requires the measurement and recognition of compensation expense for all share-based payment awards made to the Company’s employees and directors, including employee stock options, restricted stock unit awards, restricted stock awards and employee stock purchases related to the Employee Stock Purchase Plan based on estimated fair values.

 

Stock-based compensation expense, calculated using the Black-Scholes option-pricing model for employee stock options, and included in selling, general and administrative expense, was $3.1 million for the three months ended September 30, 2021, and $3.3 million for the three months ended September 30, 2020. Stock-based compensation expense was $18.3 million for the nine months ended September 30, 2021, and $15.5 million for the nine months ended September 30, 2020.

 

As of September 30, 2021, the Company had $10.3 million of unrecognized compensation expense related to non-vested employee stock options to be recognized over a weighted-average period of 2.3 years and $11.0 million of unrecognized compensation cost related to non-vested restricted stock awards to be recognized over a weighted-average period of 1.4 years.

 

 

6 Financial Instruments and Fair Value

 

The Company measures certain financial assets and liabilities at fair value on a recurring basis. Financial instruments consist primarily of cash, accounts receivable, accounts payable and floor plan notes payable. The carrying values of the Company’s financial instruments approximate fair value due either to their short-term nature or existence of variable interest rates, which approximate market rates. Certain methods and assumptions were used by the Company in estimating the fair value of financial instruments as of September 30, 2021, and December 31, 2020. The carrying value of current assets and current liabilities approximates the fair value due to the short maturity of these items.

 

The fair value of the Company’s long-term debt is based on secondary market indicators. Because the Company’s debt is not quoted, estimates are based on each obligation’s characteristics, including remaining maturities, interest rates, credit rating, collateral and liquidity. Accordingly, the Company concluded that the valuation measurement inputs of its long-term debt represent, at its lowest level, current market interest rates available to the Company for similar debt and the Company’s current credit standing. The carrying amount of such debt approximates fair value.

 

10

 
 

7 Segment Information

 

The Company currently has one reportable business segment - the Truck Segment. The Truck Segment includes the Company’s operation of a nationwide network of commercial vehicle dealerships that provide an integrated one-stop source for the commercial vehicle needs of its customers, including retail sales of new and used commercial vehicles; aftermarket parts, service and collision center facilities; and financial services, including the financing of new and used commercial vehicle purchases, insurance products and truck leasing and rentals. The commercial vehicle dealerships are deemed a single reporting unit because they have similar economic characteristics. The Company’s chief operating decision maker considers the entire Truck Segment, not individual dealerships or departments within its dealerships, when making decisions about resources to be allocated to the segment and assessing its performance.

 

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

 

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on income before income taxes, not including extraordinary items.

 

The following table contains summarized information about reportable segment revenues, segment income or loss from continuing operations and segment assets for the periods ended September 30, 2021 and 2020 (in thousands):

 

   

Truck

Segment

   

All Other

   

Total

 
                         

As of and for the three months ended September 30, 2021

                       
                         

Revenues from external customers

  $ 1,261,885     $ 4,636     $ 1,266,521  

Segment operating income

    89,841       328       90,169  

Segment income before taxes

    91,595       254       91,849  

Segment assets

    2,722,614       54,715       2,777,329  
                         

For the nine months ended September 30, 2021

                       
                         

Revenues from external customers

  $ 3,801,675     $ 12,667     $ 3,814,342  

Segment operating income

    217,953       1,232       219,185  

Segment income before taxes

    222,218       1,017       223,235  
                         

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

                       
                         

Revenues from external customers

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

Segment operating income

    42,714       154       42,868  

Segment income before taxes

    43,844       84       43,928  

Segment assets

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

For the nine months ended September 30, 2020

                       
                         

Revenues from external customers

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

Segment operating income

    100,842       224       101,066  

Segment income before taxes

    98,097       12       98,109  

 

 

8 Income Taxes

 

The Company had unrecognized income tax benefits totaling $4.5 million as a component of accrued liabilities as of September 30, 2021 and December 31, 2020, the total of which, if recognized, would impact the Company’s effective tax rate. An unfavorable settlement may require a charge to income tax expense and a favorable resolution would be recognized as a reduction to income tax expense. The Company recognizes interest accrued related to unrecognized tax benefits in income tax expense. The Company had approximately $150,000 accrued for the payment of interest as of September 30, 2021 and December 31, 2020. No amounts were accrued for penalties.

 

11

 

The Company does not anticipate a significant change in the amount of unrecognized tax benefits in the next 12 months. As of September 30, 2021, the tax years ended December 31, 2017 through 2020 remained subject to audit by federal tax authorities, and the tax years ended December 31, 2016 through 2020, remained subject to audit by state tax authorities.

 

 

9 Revenue

 

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

 

The following table summarizes the Company’s disaggregated revenue by revenue source for the three months and nine months ended September 30, 2021 and 2020 (in thousands):

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30, 2021

   

September 30, 2020

   

September 30, 2021

   

September 30, 2020

 

Commercial vehicle sales revenue

  $ 729,344     $ 711,754     $ 2,274,332     $ 2,060,370  

Parts revenue

    274,551       235,282       778,479       683,684  

Commercial vehicle repair service revenue

    188,469       164,978       545,804       522,107  

Finance revenue

    3,757       3,107       12,210       7,986  

Insurance revenue

    3,094       2,526       8,513       7,074  

Other revenue

    4,617       3,008       12,692       10,538  

Total

  $ 1,203,832     $ 1,120,655     $ 3,632,030     $ 3,291,759  

 

All of the Company's performance obligations and associated revenues are generally transferred to customers at a point in time. The Company did not have any material contract assets or contract liabilities on the balance sheet as of September 30, 2021. Revenues related to commercial vehicle sales, parts sales, commercial vehicle repair service, finance and the majority of the Company’s other revenues are related to the Truck Segment.

 

 

10 Leases

 

Lease of Vehicles as Lessor

 

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

 

The Company’s policy is to depreciate its lease fleet using a straight-line method over each customer’s contractual lease term. The lease unit is depreciated to a residual value that is the estimated fair value of the lease unit at the expiration of the lease term. This policy results in the Company realizing reasonable gross margins while the unit is in service and a corresponding gain or loss on sale when the unit is sold at the end of the lease term.

 

Sales-type leases are recognized by the Company as lease receivables. The lessee obtains control of the underlying asset and the Company recognizes sales revenue upon lease commencement. The receivable for sales-type leases was $5.4 million as of September 30, 2021, and $5.6 million as of December 31, 2020, and is reflected in Other Assets on the Consolidated Balance Sheet.

 

12

 

Lease and rental income during the three and nine months ended September 30, 2021, and September 30, 2020, consisted of the following (in thousands):

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

2021

   

September 30,

2020

   

September 30,

2021

   

September 30,

2020

 

Minimum rental payments

  $ 54,267     $ 50,085     $ 157,919     $ 153,453  

Nonlease payments

    8,422       7,828       24,393       22,531  

Total

  $ 62,689     $ 57,913     $ 182,312     $ 175,984  

 

 

11 Accumulated Other Comprehensive Income (Loss)

 

The following table shows the components of accumulated other comprehensive income (loss) (in thousands):

 

Balance as of December 31, 2020

  $ 869  

Foreign currency translation adjustment

    255  

Balance as of March 31, 2021

    1,124  

Foreign currency translation adjustment

    312  

Balance as of June 30, 2021

    1,436  

Foreign currency translation adjustment

    (471 )

Balance as of September 30, 2021

  $ 965  

 

The equity method investment in RTC Canada was valued using the exchange rate of one US Dollar equals 1.2648 Canadian dollars as of September 30, 2021. The adjustment is reflected in Other Assets on the Consolidated Balance Sheet.

 

 

12 Accounts Receivable and Allowance for Credit Losses

 

The Company establishes an allowance for credit losses to present the net amount of accounts receivable expected to be collected. Under Topic 326: Measurement of Credit Losses on Financial Instruments, the Company is required to remeasure expected credit losses for financial instruments held on the reporting date based on historical experience, current conditions and reasonable forecasts.

 

Accounts receivable consists primarily of commercial vehicle sales receivables, manufacturers’ receivables, leasing and parts and service receivables and other trade receivables. The Company maintains an allowance for credit losses based on the probability of default, its historical rate of losses, aging and current economic conditions. The Company writes off account balances when it has exhausted reasonable collection efforts and determined that the likelihood of collection is remote. These write-offs are charged against the allowance for credit losses.

 

The following table summarizes the changes in the allowance for credit losses (in thousands):

 

   

Balance

December 31,

2020

   

Provision for

the Nine

Months Ended

September 30,

2021

   

Write offs

Against

Allowance,

net of

Recoveries

   

Balance

September 30,

2021

 
                                 

Commercial vehicle receivables

  $ 172     $ (101 )   $     $ 71  

Manufacturers’ receivables

    136       906       (625 )     417  

Leasing, parts and service receivables

    1,278       886       (1,071 )     1,093  

Other receivables

    19       8             27  

Total

  $ 1,605     $ 1,699     $ (1,696 )   $ 1,608  

 

13

 
 

13 Asset Purchase Agreement

 

On September 7, 2021, the Company entered into an Asset Purchase Agreement with certain subsidiaries and affiliates of The Summit Truck Group (“Summit”) to acquire full-service commercial vehicle dealerships and Idealease franchises in Arkansas, Kansas, Mississippi, Missouri, Oklahoma, Tennessee and Texas. The acquisition includes Summit’s dealerships representing International, IC Bus, Idealease, Isuzu and other commercial vehicle manufacturers. The Company estimates that the purchase price will be approximately $223.0 million, excluding the anticipated purchase of certain real property of the Seller for approximately $60.0 million pursuant to one or more real property purchase agreements. At the closing, the Company anticipates that it will finance approximately $114.0 million of the purchase price. The closing of the transaction, expected in December 2021, is subject to, amongst other things, manufacturers’ approval, various regulatory approvals and the satisfaction of the closing conditions set forth in the asset purchase agreement. The Company does not expect to ultimately own Summit’s dealerships in Oklahoma or Mississippi.

 

 

14 Lease and Rental Debt

 

On September 14, 2021, the Company entered into a credit agreement (“the WF Credit Agreement”) with the Lenders signatory thereto (the “WF Lenders”) and Wells Fargo Bank, National Association (“WF”), as administrative agent (in such capacity, the “WF Agent”). Pursuant to the terms of the WF Credit Agreement, the WF Lenders have agreed to make up to $250.0 million of revolving credit loans for certain of the Company’s capital expenditures, including commercial vehicle purchases for the Company’s Idealease lease and rental fleet, and general working capital needs. The Company expects to use the revolving credit loans available under the WF Credit Agreement primarily for the purpose of purchasing commercial vehicles for the Company’s Idealease lease and rental fleet.

 

The interest associated with the WF Credit Agreement was $1.2 million in the third quarter of 2021 and is recorded in interest expense on the financial statements. The WF Credit Agreement is a general borrowing facility, whereas prior to the WF Credit Agreement, interest expense associated with the Company’s Idealease lease and rental fleet was recorded in cost of sales as the borrowings were directly related to each lease and rental vehicle. This change in presentation of interest expense will result in increased gross margins from the Company’s Idealease lease and rental sales.

 

 

15 Subsequent Event

 

On October 1, 2021, the Company entered into that certain Amended and Restated Inventory Financing and Purchase Money Security Agreement with PLC, a division of PACCAR Financial Corp. (the “PLC Agreement”). Pursuant to the terms of the PLC Agreement, PLC agreed to make up to $300.0 million of revolving credit loans to finance certain of our capital expenditures, including commercial vehicle purchases and other equipment to be leased or rented through the Company’s PacLease franchises. The interest associated with the PLC Agreement will be recorded in interest expense on the financial statements because the PLC Agreement is a general borrowing facility. This change in presentation of interest expense will result in increased gross margins from the Company’s PacLease lease and rental sales.

 

14

 
 

ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.

 

Certain statements contained in this Form 10-Q (or otherwise made by the Company or on the Companys behalf from time to time in other reports, filings with the Securities and Exchange Commission (SEC), news releases, conferences, website postings or otherwise) that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the Securities Act), 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 Companys financial position, business strategy and plans and objectives of management of the Company for future operations, as well as statements regarding the effects COVID-19 may have on our business and financial results. These forward-looking statements reflect the best judgments of the Company about the future events and trends based on the beliefs of the Companys management as well as assumptions made by and information currently available to the Companys 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 our 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. Please read Item 1A. Risk Factors in the Companys Annual Report on Form 10-K for the year ended December 31, 2020, for a discussion of certain of those risks. Other unknown or unpredictable factors could also have a material adverse effect on future results. Although the Company believes that its expectations are reasonable as of the date of this Form 10-Q, it can give no assurance that such expectations will prove to be correct. The Company does not intend to update or revise any forward-looking statements unless securities laws require it to do so, and the Company undertakes no obligation to publicly release any revisions to forward-looking statements, whether because of new information, future events or otherwise.

 

The following comments should be read in conjunction with the Company’s consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.

 

Note Regarding Trademarks Commonly Used in the Companys Filings

 

Peterbilt® is a registered trademark of Peterbilt Motors Company. PACCAR® is a registered trademark of PACCAR, Inc. PacLease® is a registered trademark of PACCAR Leasing Corporation. Navistar® is a registered trademark of Navistar International Corporation. International® is a registered trademark of Navistar International Transportation Corp. Idealease is a registered trademark of Idealease, Inc. aka Idealease of North America, Inc. Blue Bird® is a registered trademark of Blue Bird Investment Corporation. IC Bus® is a registered trademark of IC Bus, LLC. Hino® is a registered trademark of Hino Motors, Ltd. Isuzu® is a registered trademark of Isuzu Motors Limited. Ford Motor Credit Company® is a registered trademark of Ford Motor Company. Ford® is a registered trademark of Ford Motor Company. SAP® is a registered trademark of SAP Aktiengesellschaft. This report contains additional trade names or trademarks of other companies. Our use of such trade names or trademarks should not imply any endorsement or relationship with such companies.

 

General

 

Rush Enterprises, Inc. was incorporated in Texas in 1965 and consists of one reportable segment, the Truck Segment, and conducts business through its subsidiaries. Our principal offices are located at 555 IH 35 South, Suite 500, New Braunfels, Texas 78130.

 

We are a full-service, integrated retailer of commercial vehicles and related services. The Truck Segment includes our operation of a 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, IC Bus or Blue Bird. Through our strategically located network of Rush Truck Centers, we provide one-stop service for the needs of our commercial vehicle customers, including retail sales of new and used commercial vehicles, aftermarket parts sales, service and repair facilities, financing, leasing and rental, and insurance products.

 

Our 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, we have grown to operate over 100 Rush Truck Centers in 22 states.

 

Our business strategy consists of providing solutions to the commercial vehicle industry through our network of commercial vehicle dealerships. We offer an integrated approach to meeting customer needs by providing service, parts and collision repairs in addition to new and used commercial vehicle sales and leasing, plus financial services, vehicle upfitting, CNG fuel systems and vehicle telematics products. We intend to continue to implement our business strategy, reinforce customer loyalty and remain a market leader by continuing to develop our Rush Truck Centers as we expand our product offerings and extend our dealership network through strategic acquisitions of new locations and opening new dealerships to enable us to better serve our customers.

 

15

 

The COVID-19 Pandemic and Its Impact on Our Business

 

Our dealership network has remained operational since the beginning of the COVID-19 pandemic. While the COVID-19 pandemic is not over, business conditions have improved significantly since the second quarter of 2020. However, our industry continues to be impacted by supply chain issues generally believed to be attributable to the COVID-19 pandemic that are negatively affecting new commercial vehicle production and the availability of aftermarket parts.

 

Commercial Vehicle Sales

 

All of the commercial vehicle manufacturers that we represent resumed operations following any COVID-19 related shutdowns in 2020. However, supply chain delays related to commercial vehicle components have forced some of the manufacturers we represent to temporarily cease production at times and will limit the commercial vehicle industry’s ability to meet demand for commercial vehicles throughout the remainder of 2021 and into 2022. The decrease in the supply of new commercial vehicles has resulted in increased demand for used commercial vehicles.

 

Aftermarket Products and Services

 

With respect to our parts, service and collision center (collectively, “Aftermarket Products and Services”) departments, with some minor exceptions, our parts supply chain has remained relatively uninterrupted and our parts sales are back to pre-pandemic levels. We believe that the investments we made over the years with respect to our aftermarket strategic initiatives enabled us to mitigate some of the impact of the COVID-19 pandemic on our Aftermarket Products and Service business. However, with respect to parts availability going forward, we are dependent on our manufacturers and future production levels of certain parts and components are uncertain at this time. Although the supply chain disruptions are only impacting a small percentage of the parts we sell, any delay we experience in receiving a part has a corresponding delay in our completion of services on the commercial vehicle for which the part was ordered.

 

Rental and Leasing Operations

 

With respect to our rental and leasing operations, in 2020, we allowed certain credit-worthy customers serving industries that were dramatically impacted by the COVID-19 pandemic to skip up to three months of lease payments and either extend the lease term by three months or increase the remaining payments to keep the same lease term.  These customers have resumed payments. Revenues from our rental and leasing operations are back to pre-pandemic levels.

 

Liquidity

 

As of September 30, 2021, we had $259.7 million in cash. For further discussion of our liquidity, see the Liquidity and Capital Resources discussion set forth herein.

 

Outlook

 

A.C.T. Research Co., LLC (“A.C.T. Research”), a commercial vehicle industry data and forecasting service provider, currently forecasts new U.S. Class 8 retail truck sales to be 228,500 units in 2021, which would represent a 16.8% increase compared to 2020. While demand for new commercial vehicles is currently strong, we believe that component supply chain issues will continue to delay production, pushing new Class 8 truck deliveries into 2022, and negatively impacting our new Class 8 truck sales in the fourth quarter of this year. In addition, we have been informed by our manufacturers that production of commercial vehicles in 2022 will be allocated to all of their dealers based on historical purchases. While we do not yet know our allocation for 2022, we believe that our allocation of commercial vehicles will not be less than the number of commercial vehicles we expect to sell in 2021.

 

We expect our market share of new Class 8 truck sales to range between 5.0% and 5.2% in 2021. This market share percentage would result in the sale of approximately 11,400 to 11,900 of new Class 8 trucks in 2021, based on A.C.T. Research’s current U.S. retail sales estimate of 228,500 units.

 

With respect to new U.S. Class 4 through 7 retail commercial vehicle sales, A.C.T. Research currently forecasts sales to be 251,000 units in 2021, which would represent an 8.2% increase compared to 2020.  We expect our market share of new Class 4 through 7 commercial vehicle sales to range between 4.0% and 4.3% in 2021. This market share percentage would result in the sale of approximately 10,000 to 10,800 of new Class 4 through 7 commercial vehicles in 2021, based on A.C.T. Research’s current U.S. retail sales estimates of 251,000 units.

 

16

 

We expect to sell approximately 1,600 light-duty vehicles and approximately 7,200 to 7,400 used commercial vehicles in 2021. We expect lease and rental revenue to increase 5% to 7% during 2021, compared to 2020.

 

While parts supply chain constraints are expected to negatively impact the Aftermarket Products and Services industry for the remainder of 2021, we do not believe these constraints will have a significant overall effect on our Aftermarket Products and Services revenues. We believe our Aftermarket Products and Services revenues will increase 10% to 12% in 2021, compared to 2020.

 

In October 2021, we acquired an independent parts and service facility in Victorville, California that will be converted into a full service Peterbilt dealership. We also plan to acquire a full-service Hino and Isuzu dealership in Elk Grove, Illinois in November 2021. Additionally, on September 7, 2021, we entered into an agreement with certain subsidiaries and affiliates of The Summit Truck Group (“Summit”) to acquire full-service commercial vehicle dealerships and Idealease franchises in Arkansas, Kansas, Mississippi, Missouri, Oklahoma, Tennessee and Texas. The acquisition includes Summit’s dealerships representing International, IC Bus, Idealease, Isuzu and other commercial vehicle manufacturers. The closing of the transaction is subject to, amongst other things, manufacturers’ approval, various regulatory approvals and the satisfaction of the closing conditions set forth in the asset purchase agreement, but we expect the transaction to close in December 2021. We do not expect to ultimately own Summit’s dealerships in Oklahoma or Mississippi.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and t