RUSH ENTERPRISES INC \TX\ filed on Fri, May 10 10-Q Form

RUSH ENTERPRISES INC \TX\ filed 10-Q with SEC. Read ‘s full filing at 000143774919009475.

2 – Other Assets ERP Platform The total capitalized costs of the Company’s SAP enterprise resource planning software platform (‘ERP Platform’) of $10.3 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 $0.5 million for the three months ended March 31, 2019 and $11.1 million for the three months ended March 31, 2018 (see below). The Company estimates that amortization expense relating to the ERP Platform will be approximately $1.9 million for each of the next five years. In the first quarter of 2018, as part of an assessment that involved a technical feasibility study of the then current ERP Platform, the Company determined that a majority of the components of this ERP Platform would require replacement earlier than originally anticipated; in prior disclosures, the Company had referred to the ERP Platform separately as the SAP enterprise software and SAP dealership management system. In accordance with Accounting Standards Codification (‘ASC’) Topic 350-40, in the first quarter of 2018, the Company adjusted the useful life of these components that were replaced so that the respective net book values of the components were fully amortized upon replacement in May 2018. The Company amortized the remaining net book value of the components that were replaced on a straight-line basis in February 2018 through May 2018. The Company recognized $19.9 million of amortization expense in 2018 related to the components of the ERP Platform that were replaced. The ERP Platform asset and related amortization are reflected in the Truck Segment. 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 at March 31, 2019 and December 31, 2018, 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. 6 Table of Contents 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 of RTC Canada until the close of business on February 25, 2024. On March 31, 2019, the fair market value of the Company’s call option was $3.6 million and is reported in Other Assets on the Consolidated Balance Sheet. The determination of fair market value is based upon a number of assumptions, including the estimated fair value of the equity of RTC Canada and the risk free interest rate. As of March 31, 2019, the Company’s investment in RTC Canada is $19.4 million.

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 of RTC Canada until the close of business on February 25, 2024. On March 31, 2019, the fair market value of the Company’s call option was $3.6 million and is reported in Other Assets on the Consolidated Balance Sheet. The determination of fair market value is based upon a number of assumptions, including the estimated fair value of the equity of RTC Canada and the risk free interest rate. As of March 31, 2019, the Company’s investment in RTC Canada is $19.4 million.

On February 25, 2019, the Company acquired 50% of the equity interest in RTC Canada, which acquired the operating assets of Tallman Group, the largest International Truck dealer in Canada. RTC Canada operates a network of 14 International Truck full-service dealerships throughout the Province of Ontario. The Company does not consolidate RTC Canada. RTC Canada is accounted for as an equity method investment. As of March 31, 2019, the Company’s investment in RTC Canada is $19.4 million and is reported in Other Assets on the Consolidated Balance Sheet.

Pursuant to the terms of the Floor Plan Credit Agreement, the aggregate loan commitment is $1.0 billion. Borrowings under the Floor Plan Credit Agreement bear interest at an annual rate equal to the (A) the greater of (i) zero and (ii) one month LIBOR rate, determined on the last day of the prior month, plus (B) 1.25% and are payable monthly. Loans under the Floor Plan Credit Agreement for the purchase of used inventory are limited to $150.0 million and loans for working capital purposes are limited to $200.0 million. The Floor Plan Credit Agreement expires June 30, 2022, although the Agent has the right to terminate at any time upon 360 days written notice and the Company has the right to terminate at any time, subject to specified limited exceptions.

On April 25, 2019, the Company entered into an agreement (the ‘First Amendment’) to amend its $100 million working capital facility (the ‘Working Capital Facility’) with BMO Harris. The First Amendment (i) reduced the ‘Unused Fee Rate’ from a per annum rate equal to 0.37% to a per annum rate equal to 0.20% and (ii) conformed certain definitions and affirmative and negative covenants with certain terms of the Floor Plan Credit Agreement.

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 CAN$250 million (the ‘Guaranty Cap’) of certain credit facilities entered into by and between Tallman Truck Centre Limited (‘TTCL’) and BMO, plus interest, fees and expenses. Interest, fees and expenses incurred by BMO to enforce it rights with respect to the guaranteed obligations and its rights against the Company under the Guaranty are not subject to the Guaranty Cap. TTCL is a subsidiary of RTC Canada, which the Company owns a 50% equity interest in. In exchange for the Guaranty, TTCL is receiving a reduced rate of interest on its credit facilities with BMO.

Three Months Ended March 31, 2019 2018 % Change Vehicle unit sales: New heavy-duty vehicles 3,558 3,312 7.4 % New medium-duty vehicles 2,614 2,705 -3.4 % New light-duty vehicles 539 431 25.1 % Total new vehicle unit sales 6,711 6,448 4.1 % Used vehicles 1,840 1,859 -1.0 % Vehicle revenues: New heavy-duty vehicles $ 530.9 $ 472.1 12.5 % New medium-duty vehicles 199.7 199.2 0.3 % New light-duty vehicles 22.0 16.6 32.5 % Total new vehicle revenue $ 752.6 $ 687.9 9.4 % Used vehicle revenue $ 83.0 $ 80.6 3.0 % Other vehicle revenues:(1) $ 2.7 $ 4.6 -41.3 % Dealership absorption ratio: 121.5 % 120.0 % 1.3 % (1) Includes sales of truck bodies, trailers and other new equipment.

Management uses several performance metrics to evaluate the performance of our 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 collision center (collectively, ‘Aftermarket Products and Services’) 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. Our commercial vehicle dealerships achieved a 121.5% absorption ratio for the first quarter of 2019 and a 120.0% absorption ratio for the first quarter of 2018.

Aftermarket Products and Services revenues totaled $438.0 million in the first quarter of 2019, up 9.5% from the first quarter of 2018. We believe aftermarket market activity will remain strong throughout the year and that our Aftermarket Products and Services revenues growth will remain consistent with our first quarter performance.

On February 25, 2019, we acquired 50% of the equity interest in RTC Canada, which acquired the operating assets of Tallman Group, the largest International Truck dealer in Canada. RTC Canada operates a network of 14 International Truck full-service dealerships throughout the Province of Ontario. We do not consolidate RTC Canada as part of our Truck Segment for financial reporting purposes. RTC Canada is accounted for as an equity method investment.

Total revenues increased $107.5 million, or 8.7%, in the first quarter of 2019, compared to the first quarter of 2018.

Our Aftermarket Products and Services revenues increased $38.1 million, or 9.5%, in the first quarter of 2019, compared to the first quarter of 2018. The growth in Aftermarket Products and Services revenues during the first quarter was primarily driven by continued strong demand for aftermarket parts and services throughout the country and the successful execution of several of our strategic initiatives. We expect our Aftermarket Products and Services revenues to increase 9% to 11% in 2019, compared to 2018.

Revenues from sales of new and used commercial vehicles increased $65.2 million, or 8.4%, in the first quarter of 2019, compared to the first quarter of 2018, primarily as a result of increased sales of new Class 8 trucks to virtually all of the market segments that we serve.

We sold 3,558 new Class 8 heavy-duty trucks in the first quarter of 2019, a 7.4% increase compared to 3,312 new Class 8 heavy-duty trucks in the first quarter of 2018. According to A.C.T. Research Co., LLC (‘A.C.T. Research’), a truck industry data and forecasting service provider, the U.S. Class 8 truck market increased 24.5% in the first quarter of 2019, compared to the first quarter of 2018. A.C.T. Research currently forecasts U.S. retail sales of new Class 8 trucks of approximately 264,000 units in 2019, 198,000 units in 2020 and 211,500 units in 2021, compared to approximately 255,711 units in 2018. Our share of the U.S. new Class 8 truck sales market was approximately 5.7% in 2018. We expect our U.S. new Class 8 commercial vehicle sales market share to be between 5.6% and 6.0% in 2019. This market share percentage would result in the sale of approximately 14,800 to 15,800 of new Class 8 trucks in 2019, based on A.C.T. Research’s current U.S. retail sales estimate of 264,000 units.

We sold 2,614 new Class 4 through 7 commercial vehicles, including 160 buses, in the first quarter of 2019, a 3.4% decrease compared to 2,705 new medium-duty commercial vehicles, including 288 buses, in the first quarter of 2018. A.C.T. Research estimates that unit sales of new Class 4 through 7 commercial vehicles in the U.S. increased approximately 3.5% in the first quarter of 2019, compared to the first quarter of 2018. A.C.T. Research currently forecasts U.S. retail sales of new Class 4 through 7 medium-duty commercial vehicles of approximately 262,300 units in 2019, 267,000 units in 2020 and 260,400 in 2021. In 2018, we achieved a 5.0% share of the new Class 4 through 7 commercial vehicle market in the U.S. In 2019, we expect our market share to range between 5.1% and 5.4% of the U.S. new Class 4 through 7 commercial vehicle market. This market share percentage would result in the sale of approximately 13,400 to 14,200 of new Class 4 through 7 commercial vehicles in 2019, based on A.C.T. Research’s current U.S. retail sales estimates of 262,300 units.

We sold 539 new light-duty vehicles in the first quarter of 2019, a 25.1% increase compared to 431 new light-duty vehicles in the first quarter of 2018. We expect to sell approximately 2,200 new light-duty vehicles in 2019.

We sold 1,840 used commercial vehicles in the first quarter of 2019, a 1.0% decrease compared to 1,859 used commercial vehicles in the first quarter of 2018. We expect to sell approximately 9,000 to 9,300 used commercial vehicles in 2019.

Commercial vehicle lease and rental revenues increased $1.9 million, or 3.3%, in the first quarter of 2019, compared to the first quarter of 2018. We expect lease and rental revenue to increase 3% to 8% during 2019, compared to 2018.

Finance and insurance revenues increased $1.9 million, or 39.4%, in the first quarter of 2019, compared to the first quarter of 2018. We expect finance and insurance revenues to fluctuate proportionately with our new and used commercial vehicle sales in 2019. Finance and insurance revenues have limited direct costs and, therefore, contribute a disproportionate share of our operating profits.

Other income increased $0.5 million, or 10.1%, in the first quarter of 2019, compared to the first quarter of 2018. Other income consists primarily of document fees related to commercial vehicle sales.

Gross profit increased $29.9 million, or 13.2%, in the first quarter of 2019, compared to the first quarter of 2018. Gross profit as a percentage of sales increased to 19.1% in the first quarter of 2019, from 18.3% in the first quarter of 2018. The increase in gross profit as a percentage of sales is a result of increased gross margins in our Aftermarket Products and Services operations, commercial vehicle sales and truck lease and rental sales.

Gross margins from our Aftermarket Products and Services operations increased to 37.7% in the first quarter of 2019, compared to 36.4% in the first quarter of 2018. Gross profit from our Aftermarket Products and Services operations increased to $165.2 million in the first quarter of 2019, from $145.9 million in the first quarter of 2018. Historically, gross margins on parts sales range from 27% to 28% and gross margins on service and collision center operations range from 67% to 68%. Gross profits from parts sales represented 60.3% of total gross profit for Aftermarket Products and Services operations in the first quarter of 2019 and 57.4% in the first quarter of 2018. Service and collision center operations represented 39.7% of total gross profit for Aftermarket Products and Services operations in the first quarter of 2019 and 42.6% in the first quarter of 2018. We expect blended gross margins on Aftermarket Products and Services operations to range from approximately 37.5% to 38.5% in 2019.

Gross margins on new Class 8 truck sales increased to 8.9% in the first quarter of 2019, from 8.1% in the first quarter of 2018. This increase is primarily due to the mix of purchasers during the first quarter of 2019. In 2019, we expect overall gross margins from new Class 8 truck sales of approximately 7.0% to 8.0%.

Gross margins on new Class 4 through 7 commercial vehicle sales decreased to 5.9% in the first quarter of 2019, from 6.8% in the first quarter of 2018. This decrease is primarily due to the mix of purchasers during the first quarter of 2019. In 2019, we expect overall gross margins from new Class 4 through 7 commercial vehicle sales of approximately 5.7% to 6.2%, but this will largely depend upon the mix of purchasers and types of vehicles sold.

Gross margins on used commercial vehicle sales decreased to 10.6% in the first quarter of 2019, from 11.2% in the first quarter of 2018. This decrease is primarily due to increased availability of quality used commercial vehicles as a result of increased new commercial vehicle sales. We expect margins on used commercial vehicles to range between 8.0% and 10.0% during 2019.

Gross margins from truck lease and rental sales increased to 16.2% in the first quarter of 2019, from 15.8% in the first quarter of 2018. This increase is primarily related to increased rental fleet utilization. We expect gross margins from lease and rental sales of approximately 16.0% to 18.0% during 2019. Our policy is to depreciate our lease and rental fleet using a straight line method over each 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 us 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.

Selling, General and Administrative (‘SG&A’) expenses increased $15.5 million, or 9.0%, in the first quarter of 2019, compared to the first quarter of 2018. This increase is primarily related to increased headcount in the first quarter of 2019, compared to the first quarter of 2018, the increase in employee benefits and payroll taxes that we normally recognize during the first quarter of each year and increased commissions resulting from increased sales of commercial vehicles and aftermarket services. SG&A expenses as a percentage of total revenues increased to 13.9% in the first quarter of 2019, from 13.8% in the first quarter of 2018. SG&A expenses as a percentage of total revenues have recently ranged from 12.1% to 13.9%. In general, when new and used commercial vehicle revenues decrease as a percentage of total revenues, SG&A expenses as a percentage of total revenues will be at, or exceed, the higher end of this range. For 2019, we expect SG&A expenses as a percentage of total revenues to range from 12.5% to 13.0% and the selling portion of SG&A expenses to be approximately 25.0% to 30.0% of new and used commercial vehicle gross profit.

Depreciation and amortization expense decreased $10.0 million, or 43.6%, in the first quarter of 2019, compared to the first quarter of 2018. This was the result of the additional amortization expense of $10.2 million related to the replacement of our ERP Platform components in the first quarter of 2018.

Net interest expense increased $3.1 million, or 70.9%, in the first quarter of 2019, compared to the first quarter of 2018. This increase is a result of the increase in the LIBOR rate over the last year and increased inventory levels, compared to the first quarter of 2018. Net interest expense in 2019 will depend on inventory levels, interest rate fluctuations and the amount of cash available to make prepayments on our floor plan arrangements.

As a result of the factors described above, income from continuing operations before income taxes increased $21.4 million, or 76.3%, in the first quarter of 2019, compared to the first quarter of 2018.

Income taxes increased $5.4 million, or 76.8%, in the first quarter of 2019, compared to the first quarter of 2018. In the first quarter of 2019, we recorded $76,000 of tax expense related to an excess tax deficiency with respect to equity compensation. In the first quarter of 2018, we recorded $22,000 of tax expense related to an excess tax deficiency with respect to equity compensation. We provided for taxes at a 25.0% effective rate in the first quarter of 2019 and the first quarter of 2018. We expect our effective tax rate to be approximately 24% to 26% of pretax income in 2019.

In June 2012, we entered into a wholesale financing agreement with Ford Motor Credit Company that provides for the financing of, and is collateralized by, our Ford new vehicle inventory. This wholesale financing agreement bears interest at a rate of Prime plus 150 basis points minus certain incentives and rebates. As of March 31, 2019, the interest rate on the wholesale financing agreement was 7.0% before applying incentives that we are qualified to receive. As of March 31, 2019, we had an outstanding balance of approximately $142.2 million under the Ford Motor Credit Company wholesale financing agreement.

During the first quarter of 2019, cash used in investing activities was $89.2 million. Cash flows used in investing activities consist primarily of cash used for capital expenditures. Capital expenditures of $63.6 million consisted primarily of $24.3 million for purchases of property and equipment and improvements to our existing dealership facilities and $39.3 million for additional units for the rental and leasing operations, which were directly offset by borrowings of long-term debt. Business acquisitions of $7.9 million consist of the purchase of a Ford dealership in Ceres, California, including the real estate. The Company purchased an equity method investment for $22.6 million for 50% of the equity interest in RTC Canada. We expect to purchase or lease commercial vehicles worth approximately $165.0 million to $190.0 million for our leasing operations in 2019, depending on customer demand, all of which will be financed. During 2019, we expect to make capital expenditures for recurring items such as computers, shop equipment and vehicles of $30.0 million to $40.0 million.

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 April 25, 2019, we entered into the Floor Plan Credit Agreement with BMO Harris. Prior to the Floor Plan Credit Agreement, we financed the majority of all new commercial vehicle inventory and the loan value of our used commercial vehicle inventory under the Third Amended and Restated Floor Plan Credit Agreement and going forward, the majority of such financings will occur under the Floor Plan Credit Agreement. The Floor Plan Credit Agreement includes an aggregate loan commitment that increased to $1.0 billion from $875.0 million under the Third Amended and Restated Floor Plan Credit Agreement. Borrowings under the Floor Plan Credit Agreement bear interest at an annual rate equal to (A) the greater of (i) zero and (ii) one month LIBOR rate, determined on the last day of the prior month, plus (B) 1.25% and are payable monthly. Loans under the Floor Plan Credit Agreement for the purchase of used inventory are limited to $150.0 million and loans for working capital purposes are limited to $200.0 million. The Floor Plan Credit Agreement expires June 30, 2022, although BMO Harris has the right to terminate at any time upon 360 days written notice and we may terminate at any time, subject to specified limited exceptions. On March 31, 2019, we had approximately $875.0 million outstanding under the Third Amended and Restated Floor Plan Credit Agreement. The average daily outstanding borrowings under the Third Amended and Restated Floor Plan Credit Agreement were $809.7 million during the three months ended March 31, 2019. We utilize our excess cash on hand to pay down our outstanding borrowings under the Floor Plan Credit Agreement, and the resulting interest earned is recognized as an offset to our gross interest expense under the Floor Plan Credit Agreement.

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