RUSH ENTERPRISES, INC. Certain statements contained in this Form 10-Q (or otherwise made by the Company
or on the Company's behalf from time to time in other reports, filings with the
The following comments should be read in conjunction with the Company's consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.
Note Regarding Trademarks Commonly Used in the Company's Filings
Peterbilt® is a registered trademark of
General
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 "
Our
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 through
our joint venture with Cummins 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
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The COVID-19 Pandemic and Its Impact on Our Business
While the COVID-19 pandemic may not be over, business conditions have improved significantly since the onset of the pandemic in 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.
Outlook
With respect to new
We expect to sell approximately 1,700 light-duty vehicles and approximately 7,800 to 8,200 used commercial vehicles in 2022. We expect lease and rental revenue to increase 25% to 30% during 2022, compared to 2021.
We believe our Aftermarket Products and Services revenues will increase 20% to 25% in 2022, compared to 2021.
The above projections for new commercial vehicle sales will depend on our ability to obtain commercial vehicles from the manufacturers we represent based on allocations from the manufacturers and supply chain issues affecting manufacturers. In addition, we are beginning to see elevated fuel prices and lower spot market rates and believe inflation and rising interest rates may begin to negatively impact consumer spending and capital expenditures across a variety of industries we support. We are monitoring these and other economic factors that may impact industry demand moving forward. However, with the ongoing integration of our strategic initiatives into our newly acquired dealership locations, and our continued disciplined approach to expense management, we believe our financial results will continue to be strong in 2022.
In addition, all of the above projections for new commercial vehicle sales,
lease and rental revenues and Aftermarket Products and Services revenues include
the dealership and
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
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined by specific identification of new and used commercial vehicle 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 less a reasonable profit margin.
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Purchase Price Allocation, Intangible Assets and
Purchase price allocation for business combinations and asset acquisitions requires the use of accounting estimates and judgments to allocate the purchase price to the identifiable tangible and intangible assets acquired and liabilities assumed based on their respective fair values. We determine whether substantially all the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If so, the single asset or group of assets, as applicable, is not a business. If not, we determine whether the single asset or group of assets, as applicable, meets the definition of a business.
In connection with our business combinations, we recorded certain intangible assets, including franchise rights. We periodically review the estimated useful lives and fair values of our identifiable intangible assets, taking into consideration any events or circumstances that might result in a diminished fair value or revised useful life.
The excess purchase price over the fair value of assets acquired is recorded as goodwill. We test goodwill for impairment annually in the fourth quarter, or whenever events or changes in circumstances indicate an impairment may have occurred. Because we operate a single reporting unit, the Truck Segment, the impairment test is performed at that level by comparing the estimated fair value of the reporting unit to the carrying value of the reporting unit. We estimate the fair value of the reporting unit using a "step one" analysis utilizing a fair-value-based approach that uses a discounted cash flow analysis of projected future results to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Determining the fair value of goodwill is subjective in nature and often involves the use of estimates and assumptions including, without limitation, use of estimates of future prices and volumes for our products, capital needs, economic trends and other factors which are inherently difficult to forecast. If actual results, or the plans and estimates used in future impairment analyses are lower than the original estimates used to assess the recoverability of these assets, we could incur impairment charges in a future period. The annual impairment test was performed in the fourth quarter of 2021. No impairment of goodwill was identified during 2021 and no circumstances or events occurred in the first quarter of 2022 that would require a test for impairment.
Insurance Accruals
We are partially self-insured for a portion of the claims related to our property and casualty insurance programs, which requires us to make estimates regarding expected losses to be incurred. We engage a third-party administrator to assess any open claims and we adjust our accrual accordingly on a periodic basis. We are also partially self-insured for a portion of the claims related to our workers' compensation and medical insurance programs. We use 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 our reserve for claims and financial position, results of operations and cash flows. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we used to calculate our self-insured liabilities. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.
Accounting for Income Taxes
Management's judgment is required to determine the provisions for income taxes and to determine whether deferred tax assets will be realized in full or in part. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. When it is more likely than not that all or some portion of specific deferred income tax assets will not be realized, a valuation allowance must be established for the amount of deferred income tax assets that are determined not to be realizable. Accordingly, the facts and financial circumstances impacting deferred income tax assets are reviewed quarterly and management's judgment is applied to determine the amount of valuation allowance required, if any, in any given period.
Our 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 our various tax filing positions, we adjust our 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.
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Our liability for unrecognized tax benefits contains uncertainties because management is required to make assumptions and to apply judgment to estimate the exposures associated with our various filing positions. Our effective income tax rate is also affected by changes in tax law, the level of earnings and the results of tax audits. Although we believe that the judgments and estimates are reasonable, actual results could differ, and we may be exposed to losses or gains that could be material. An unfavorable tax settlement would generally require use of our cash and result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement would be recognized as a reduction in our effective income tax rate in the period of resolution. Our income tax expense includes the impact of reserve provisions and changes to reserves that we consider appropriate, as well as related interest.
Revenue Recognition
We recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of ASU 2014-09, "Revenue from Contracts with Customers ("Topic 606"), we perform the following five steps: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, we assess the goods or services promised within each contract and determine those that are performance obligations. We then assess whether each promised good or service is distinct and recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Leases
We lease commercial vehicles and real estate under finance and operating leases. We determine whether an arrangement is a lease at its inception. For leases with terms greater than twelve months, we record a lease asset and liability at the present value of lease payments over the term. Many of our leases include renewal options and termination options that are factored into our determination of lease payments when appropriate.
When available, we use the rate implicit in the lease to discount lease payments to present value; however, most of our leases do not provide a readily determinable implicit rate. Therefore, we must estimate our incremental borrowing rate to discount the lease payments based on information available at lease commencement.
We lease commercial vehicles that we own to customers. Lease and rental revenue is recognized over the period of the related lease or rental agreement. Variable rental revenue is recognized when it is earned.
Allowance for Credit Losses
All trade receivables are reported on the consolidated balance sheet at their cost basis adjusted for any write-offs and net of allowances for credit losses. We maintain allowances for credit losses, which represent an estimate of expected losses over the remaining contractual life of our receivables after considering current market conditions and estimates for supportable forecasts, when appropriate. The estimate is a result of our ongoing assessments and evaluations of collectability, historical loss experience, and future expectations in estimating credit losses in each of our receivable portfolios (commercial vehicle receivables, manufacturers' receivables, parts and service receivables, leasing receivables and other trade receivables). For trade receivables, we use the probability of default and our historical loss experience rates by portfolio and apply them to a related aging analysis while also considering customer and economic risk where appropriate. Determination of the proper amount of allowances by portfolio requires us to exercise our judgment about the timing, frequency and severity of credit losses that could materially affect the provision for credit losses and, as a result, net earnings. The allowances take into consideration numerous quantitative and qualitative factors that include receivable type, historical loss experience, collection experience, current economic conditions, estimates for supportable forecasts (when appropriate) and credit risk characteristics.
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Table of Contents Results of Operations
The following discussion and analysis includes our historical results of
operations for the three months ended
The following table sets forth certain financial data as a percentage of total
revenues:
Three Months Ended March 31,
2022 2021
New and used commercial vehicle sales 59.9 % 60.7 %
Parts and service sales 34.7 33.8
Lease and rental 4.6 4.7
Finance and insurance 0.5 0.5
Other 0.3 0.3
Total revenues 100.0 100.0
Cost of products sold 77.9 80.1
Gross profit 22.1 19.9
Selling, general and administrative 14.4 14.2
Depreciation and amortization 0.8 1.1
Gain on sale of assets 0.0 0.0
Operating income 6.8 4.6
Other income 0.9 0.0
Interest expense, net 0.1 0.0
Income before income taxes 7.7 4.6
Provision for income taxes 1.8 0.9
Net income 5.9 % 3.7 %
The following table sets forth for the periods indicated the percent of gross
profit by revenue source:
Three Months Ended March 31,
2022 2021
Gross Profit:
New and used commercial vehicle sales 29.2 % 28.9 %
Parts and service sales 60.5 62.9
Lease and rental 6.6 4.1
Finance and insurance 2.2 2.6
Other 1.5 1.5
Total gross profit 100.0 % 100.0 %
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The following table sets forth the unit sales and revenues for new heavy-duty,
new medium-duty, new light-duty and used commercial vehicles and the absorption
ratio (revenue in millions):
Three Months Ended
March 31,
2022 2021 % Change
Vehicle unit sales:
New heavy-duty vehicles 3,528 2,995 17.8 %
New medium-duty vehicles 2,141 2,334 -8.3 %
New light-duty vehicles 481 395 21.8 %
Total new vehicle unit sales 6,150 5,724 7.4 %
Used vehicles 2,395 1,924 24.5 %
Vehicle revenues:
New heavy-duty vehicles $ 546.1 $ 450.0 21.4 %
New medium-duty vehicles 178.0 188.2 -5.4 %
New light-duty vehicles 23.8 18.4 29.3 %
Total new vehicle revenue $ 747.9 $ 656.6 13.9 %
Used vehicle revenue $ 185.7 $ 88.3 110.3 %
Other vehicle revenues:(1) $ 2.1 $ 2.8 -25.0 %
Dealership absorption ratio: 136.3 % 122.6 % 11.4 %
(1) Includes sales of truck bodies, trailers and other new equipment.
Key Performance Indicator Absorption Ratio
Management uses several performance metrics to evaluate the performance of our
commercial vehicle dealerships and considers
Three Months Ended
Revenues
Total revenues increased
Our Aftermarket Products and Services revenues increased
Revenues from sales of new and used commercial vehicles increased
We sold 3,528 new Class 8 trucks in the first quarter of 2022, a 17.8% increase compared to 2,995 new Class 8 trucks in the first quarter of 2021. This increase in new Class 8 truck sales was primarily a result of the Summit Acquisition.
We sold 2,141 new Class 4 through 7 commercial vehicles, including 193 buses, in the first quarter of 2022, a 8.3% decrease compared to 2,334 new medium-duty commercial vehicles, including 140 buses, in the first quarter of 2021. Our new Class 4 through 7 commercial vehicle sales were negatively impacted by new commercial vehicle production constraints that affected the manufacturers we represent.
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We sold 481 new light-duty vehicles in the first quarter of 2022, a 21.8%
increase compared to 395 new light-duty vehicles in the first quarter of 2021.
Our light-duty vehicle sales benefited from the increased demand for light-duty
vehicles in the
We sold 2,395 used commercial vehicles in the first quarter of 2022, a 24.5% increase compared to 1,924 used commercial vehicles in the first quarter of 2021. Demand for used commercial vehicles remained strong in the first quarter of 2022. However, the number of used commercial vehicles we will be able to sell in 2022 depends on our ability to acquire quality used commercial vehicle inventory. We believe used truck demand and values will decrease when new truck production increases to a level adequate to meet customer demand; however, we believe demand for used trucks will remain strong throughout 2022.
Commercial vehicle lease and rental revenues increased
Finance and insurance revenues increased
Other income increased
Gross Profit
Gross profit increased
Gross margins from our Aftermarket Products and Services operations increased to
38.5% in the first quarter of 2022, compared to 37.0% in the first quarter of
2021. This increase is primarily related increases in parts pricing and
increases in parts rebates from parts suppliers. Gross profit from our
Aftermarket Products and Services operations increased to
Gross margins on new Class 8 truck sales increased to 9.7% in the first quarter of 2022, from 8.9% in the first quarter of 2021. This increase is primarily due to strong demand for new Class 8 trucks and the mix of purchasers during the first quarter of 2022. In 2022, we expect overall gross margins from new heavy-duty truck sales of approximately 8.0% to 9.5%.
Gross margins on new Class 4 through 7 commercial vehicle sales increased to 8.6% in the first quarter of 2022, from 7.1% in the first quarter of 2021. This increase is primarily due to the mix of purchasers during the first quarter of 2022 and strong demand for new Class 4 through 7 commercial vehicles. For 2022, we expect overall gross margins from new medium-duty commercial vehicle sales of approximately 7.5% to 8.5%, but this will largely depend upon the mix of purchasers and types of vehicles sold.
Gross margins on used commercial vehicle sales decreased to 15.9% in the first quarter of 2022, from 18.1% in the first quarter of 2021. This decrease is primarily due to a softening in used truck values as new Class 8 vehicle production begins to increase. We expect margins on used commercial vehicles to gradually decrease throughout 2022 as new commercial vehicle production increases and reach their historical range between 8.0% and 10.0% by the end of 2022.
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Gross margins from truck lease and rental sales increased to 31.9% in the first
quarter of 2022, from 17.5% in the first quarter of 2021. This increase is
primarily related to increased rental fleet utilization and changes to the way
we finance commercial vehicles for our lease and rental fleet. In September of
2021, we entered into a credit agreement ("the WF Credit Agreement") with the
lenders signatory thereto (the "WF Lenders") and
Finance and insurance revenues and other income, as described above, have limited direct costs and, therefore, contribute a disproportionate share of gross profit.
Selling, General and Administrative Expenses
Selling, General and Administrative ("SG&A") expenses increased
Interest Expense, Net
Net interest expense increased
Income before Income Taxes
As a result of the factors described above, income from continuing operations
before income taxes increased
Income Taxes
Income taxes increased
Liquidity and Capital Resources
Our short-term cash requirements are primarily for working capital, inventory
financing, the renovation 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
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We continually evaluate our liquidity and capital resources based upon: (i) our cash and cash equivalents on hand; (ii) the funds that we expect to generate through future operations; (iii) current and expected borrowing availability under our secured line of credit, working capital lines of credit available under certain of our credit agreements and our Floor Plan Credit Agreement; and (iv) the potential impact of our capital allocation strategy and any contemplated or pending future transactions, including, but not limited to, acquisitions, equity repurchases, dividends, or other capital expenditures. We believe we will have sufficient liquidity to meet our debt service and working capital requirements, commitments and contingencies, debt repayments, acquisitions, capital expenditures and any operating requirements for at least the next twelve months.
We have a secured line of credit that provides for a maximum borrowing of
Our long-term debt, floor plan financing agreements and the WF Credit Agreement
require us to satisfy various financial ratios such as the leverage ratio, the
asset coverage ratio and the fixed charge coverage ratio. As of
We expect to purchase or lease commercial vehicles worth approximately
During the first quarter of 2022, we paid a cash dividend of
On
We anticipate funding the capital expenditures for the improvement and expansion of existing facilities and recurring expenses through our operating cash flows. We have the ability to fund the construction or purchase of new facilities through our operating cash flows or by financing.
We have no other material commitments for capital expenditures as of
Cash Flows
Cash and cash equivalents increased by
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 the first quarter of
2022, operating activities resulted in net cash provided by operations of
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During the first quarter of 2021, operating activities resulted in net cash
provided by operations of
Cash Flows from Investing Activities
During the first quarter of 2022, cash used in investing activities totaled
During the first quarter of 2021, cash used in investing activities was
Cash Flows from Financing Activities
Cash flows from financing activities include borrowings and repayments of
long-term debt and net proceeds of floor plan notes payable, non-trade. During
the first quarter of 2022, financing activities provided
Cash flows from financing activities include borrowings and repayments of
long-term debt and net proceeds of floor plan notes payable, non-trade. During
the first quarter of 2021, financing activities used
On
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On
Most of our 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
Backlog
On
Seasonality
Our 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 our diverse customer base, including regional and national fleets, local and state governments, corporations and owner-operators. However, commercial vehicle Aftermarket Products and Services operations historically have experienced higher sales volumes in the second and third quarters.
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Table of Contents Cyclicality
Our business is dependent on a number of factors including general economic
conditions, fuel prices, interest rate fluctuations, credit availability,
environmental and other government regulations and customer business cycles.
Unit sales of new commercial vehicles have historically been subject to
substantial cyclical variation based on these general economic conditions.
According to data published by
Environmental Standards and Other Governmental Regulations
We are subject to federal, state and local environmental laws and regulations governing the following: 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 environmental impacts. As with commercial vehicle dealerships generally, and vehicle service, parts and collision center 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. We have incurred, and will continue to incur, capital and operating expenditures and other costs in complying with such laws and regulations.
Our operations involving the use, handling, storage 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 with which we must comply. Our business also involves the operation and use of aboveground 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.
We may also have liability in connection with materials that were sent to thirdparty 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 environmental impacts without regard to fault or the legality of the conduct that contributed to the impacts. Responsible parties under these statutes may include the owner or operator of the site where impacts 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 materials into the environment.
The federal Clean Water Act and comparable state statutes 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 emissions through permitting programs and the imposition of standards and other requirements.
The
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We do not believe that we currently have any material environmental liabilities or that compliance with environmental laws and regulations will have a material adverse effect on our results of operations, financial condition or cash flows. However, soil and groundwater impacts are known to exist at some of our dealerships. Further, environmental laws and regulations are complex and subject to change. In addition, in connection with acquisitions, it is possible that we will assume or become subject to new or unforeseen environmental costs or liabilities, some of which may be material. In connection with our dispositions, or prior dispositions made by companies we acquire, we may retain exposure for environmental costs and liabilities, some of which may be material. Compliance with current or amended, or new or more stringent, laws or regulations, stricter interpretations of existing laws or the future discovery of environmental conditions could require additional expenditures by us, which could materially adversely affect our results of operations, financial condition or cash flows. In addition, such laws could affect demand for the products that we sell.
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